AMCON Distributing Company — FY2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2015, compared with fiscal 2014. AMCON operates a wholesale consumer-products distributor serving approximately 4,500 retail outlets and a retail health-food business with 16 stores. Wholesale accounted for most of the business; cigarettes represented 72% of consolidated revenue.
Financial performance and liquidity
- Revenue: $1.282 billion, up 3.6% from $1.237 billion. Revenue includes cigarette excise taxes of $390.8 million; sales are reported net of customer incentives.
- Profitability: Gross profit was $76.6 million, nearly flat year over year, while gross margin narrowed to 6.0% from 6.2%. Operating income increased to $11.5 million from $9.4 million. Net income rose 28.3% to $6.4 million; net income available to common shareholders was $6.2 million, or $9.96 basic and $8.59 diluted per share.
- Cash flow: Operating activities used $2.6 million, versus $7.7 million generated in FY2014, principally reflecting a $17.2 million increase in inventory. Investing activities used $1.0 million, primarily for capital expenditures. Financing activities provided $3.7 million, including $5.8 million in net credit-facility borrowings.
- Liquidity: Cash was $0.2 million and working capital was $68.8 million at year-end, compared with $0.1 million and $55.8 million, respectively, a year earlier. The $70.0 million revolving facility had $20.9 million outstanding and $48.7 million available at September 30, 2015, subject to borrowing-base limits. Reported facility interest was 2.20% at year-end.
- Debt and capital returns: Long-term debt, including current maturities, was $3.7 million; revolving credit borrowings were $20.9 million. The facility matures in July 2018. Common dividends were $0.72 per share ($0.5 million total), preferred dividends were $0.2 million, and the Company repurchased 19,718 common shares for approximately $1.7 million.
Material changes versus FY2014
- Wholesale sales rose 4.0% to $1.251 billion, primarily from manufacturer cigarette price increases ($24.9 million) and growth in other product categories ($19.0 million); cigarette volume and mix added $4.2 million. Wholesale gross margin was flat at 5.1%.
- Retail sales fell 8.7% to $31.3 million and retail gross profit declined 10.7% to $13.2 million. Management attributed the pressure primarily to increased competition; retail gross margin decreased to 42.0% from 43.0%.
- Operating expenses declined $2.1 million, with lower retail costs, health-insurance claims, and wholesale delivery costs partly offset by higher compensation and other operating costs.
- Cash from operations weakened from a $7.7 million inflow to a $2.6 million outflow as inventory rose to $60.8 million from $43.6 million. Facility borrowings increased by $5.8 million during FY2015.
Outlook, commentary, risks, and unusual items
- No quantified earnings or revenue guidance was provided. Management expects wholesale margin pressure to remain intense and plans targeted investment in refrigerated trucking and technology, with emphasis on foodservice programs and customer technology. Longer-term priorities include strategic acquisitions and growth.
- Management described natural-food retail competition as increasingly challenging, including from conventional grocers and expanding national chains. It plans to differentiate stores through specialized products and higher-margin natural personal-care categories.
- Key risks include cigarette dependence and declining category demand; tobacco regulation and excise taxes; manufacturer pricing and incentive changes; wholesale competition and customer consolidation; fuel and product-cost volatility; customer credit risk; and retail competition and perishable inventory exposure.
- The credit facility includes collateral and financial covenants, dividend restrictions, and cross-default links to the real-estate loan. Management reported that availability had not fallen below the covenant trigger and the fixed-charge coverage ratio was above 1.0. The Company did not hedge interest-rate or fuel-cost exposure.
- No impairment charges were recorded in FY2015 or FY2014, and no legal proceedings were reported. Operating lease commitments totaled $17.1 million. The Company disclosed $1.6 million of accrued self-insured claims and a $0.4 million workers’ compensation letter of credit. A related-party retail warehouse lease cost approximately $0.1 million annually.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal control over financial reporting.
Most important facts for investors to verify
- Whether the inventory build and negative operating cash flow reversed after year-end, and whether inventory levels and working-capital needs remain elevated.
- Whether cigarette sales and manufacturer price changes continue to support revenue despite declining category demand, and how tobacco concentration affects gross profit.
- Whether wholesale margins withstand competitive pressure and whether retail sales stabilize amid strong competition.
- Actual borrowing availability under the facility’s changing receivables and inventory borrowing base, covenant headroom, and the July 2018 facility maturity.
- The potential effects of preferred-stock dividends, conversion and related-party ownership, alongside share repurchases and common dividends.