AMCON Distributing Company — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017, compared with the three months ended December 31, 2016. Balance-sheet comparisons are against September 30, 2017. AMCON distributes consumer products to retail outlets and operates 16 natural and health-food stores.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Sales, including excise taxes | $315.5 million | $310.1 million | Up 1.7% |
| Gross profit | $18.2 million | $18.3 million | Down 0.7% |
| Gross margin | 5.8% | 5.9% | Down 0.1 percentage point |
| Operating income | $1.31 million | $2.09 million | Down 37.5% |
| Net income | $1.48 million | $1.05 million | Up 41.4% |
| Diluted EPS | $2.13 | $1.52 | Up |
| Operating cash flow | $17.05 million | $2.17 million | Up substantially |
| Capital expenditures | $0.29 million | $0.40 million | Down |
- Sales growth reflected $9.2 million of cigarette manufacturer price increases and $3.9 million of growth in other wholesale product categories, partly offset by a $7.7 million decline from cigarette carton volume and mix. Retail sales increased 0.8%.
- Wholesale gross profit declined 0.6%; wholesale gross margin eased to 5.0% from 5.1%. Retail gross profit declined 1.2%, and retail gross margin fell to 43.1% from 44.0%.
- Operating expenses increased 4.1% to $16.9 million, driven principally by employee compensation and benefits, fuel, and costs associated with the new Florida store.
- Net income included an approximately $0.9 million benefit from remeasuring deferred taxes after enactment of the Tax Cuts and Jobs Act. The reported income-tax line was a $370,000 benefit, versus $833,000 of expense a year earlier; operating income and pretax income both fell.
- Operating cash flow benefited heavily from a $23.2 million inventory reduction. Cash was $0.57 million at quarter-end, versus $0.52 million at September 30, 2017.
Debt and liquidity
- At December 31, the revolving credit facility balance was $12.6 million, down from $29.0 million at September 30. The facility had a $70 million stated limit; borrowing capacity based on collateral was $64.2 million, with $51.6 million available.
- Total long-term debt, including current maturities, was approximately $2.93 million. The facility’s average interest rate was 3.49% at quarter-end. Peak quarterly borrowings were $35.6 million.
- Management reported that availability had not fallen below the 10% threshold that triggers the fixed-charge coverage covenant; the trailing-twelve-month ratio was above 1.0. The company said liquidity should be adequate, while noting potential effects from a sharp deterioration in operating conditions, collections, or access to bank credit.
- Current assets were $88.8 million and current liabilities were $24.3 million at December 31. The company paid $0.1 million in dividends during the quarter.
Management outlook, risks, and other matters
- No quantified financial guidance was provided. Management expressed optimism about wholesale opportunities, including demand for distributors’ foodservice and technology capabilities and possible industry consolidation.
- Retail remains under repositioning: the company opened one Florida store in Q1 and anticipated two additional store remodels during FY2018. Its strategy includes closing underperforming stores, remodeling and selectively adding locations, improving merchandising, and expanding branding and marketing.
- Risks highlighted include declining cigarette demand, competition and channel disruption from online and other retailers, fuel and health-care costs, tobacco regulation and excise taxes, customer credit risk, and the execution of the retail repositioning plan. The company does not hedge interest-rate or fuel-cost exposure.
- The company reported no legal proceedings, no material changes to previously disclosed risk factors, and no material changes in internal control over financial reporting. Disclosure controls were assessed as effective. A Quincy, Illinois delivery-worker labor agreement was renewed through December 2020 on substantially similar terms.
- Management was assessing the effects of new accounting standards, including revenue recognition, leases, and expected credit losses. The filing states that the interim results may not indicate full-year performance.
Most important facts for investors to verify
- How much of the earnings increase is attributable to the approximately $0.9 million tax-reform benefit, and what earnings look like excluding it.
- Whether the inventory-related cash-flow inflow and lower facility borrowing levels persist as working-capital needs change seasonally.
- Whether cigarette volume and mix pressure continues, and whether growth in other wholesale categories offsets it.
- Whether the retail turnaround improves existing-store sales and margins, and whether new stores and remodels meet management’s objectives.
- Credit-facility availability, covenant headroom, and exposure to fuel costs, interest rates, customer credit risk, and tobacco-related regulation.