AMCON Distributing Company — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; comparative period is the three months ended December 31, 2021. AMCON distributes consumer products through its wholesale segment and operates 19 natural-food retail stores.
Financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Sales | $566.0 million | $422.6 million | +33.9% |
| Gross profit | $35.0 million | $26.9 million | +29.8% |
| Gross margin | 6.2% | 6.4% | Down 0.2 percentage points |
| Operating income | $5.5 million | $3.8 million | +46.9% |
| Interest expense | $1.7 million | $0.3 million | Up $1.4 million |
| Net income attributable to common shareholders | $2.6 million | $3.0 million | −12.4% |
| Diluted EPS | $4.46 | $5.18 | −13.9% |
| Operating cash flow | −$48.5 million | −$0.6 million | Greater cash use |
| Capital expenditures | $1.5 million | $0.3 million |
Reported sales include excise taxes of $130.3 million, versus $97.1 million in the prior-year quarter. Wholesale sales increased 35.3%, to $555.7 million, while retail sales declined 13.9%, to $10.3 million. Wholesale gross margin improved to 5.6% from 5.4%; retail gross margin fell to 36.0% from 38.2%.
Balance sheet, debt and liquidity
- At December 31, 2022, cash was $0.45 million, inventory $185.2 million, total current assets $253.5 million and total assets $330.9 million. Inventory was $134.7 million at September 30, 2022.
- Credit-facility borrowings were $141.5 million, up from $91.3 million at September 30. Additional long-term debt was $8.8 million, including current maturities. The facilities’ average rate was 6.45% at quarter-end.
- Available facility capacity was reported as $89.3 million, based on a collateral-dependent credit limit of $230.8 million. Combined stated borrowing capacity is $250 million, subject to borrowing-base limits.
- Operating cash use principally reflected a $50.7 million inventory increase. Financing cash flow was positive $49.9 million, largely reflecting net revolving-credit borrowings. Cash ended the quarter at $0.45 million.
- The company reported compliance with all facility financial covenants and no cross-defaults. Facilities mature in 2027. AMCON does not hedge interest-rate or fuel-cost exposure.
Material changes and management commentary
- Wholesale growth primarily reflected the acquisition of Team Sledd in Q3 FY2022, which contributed $159.9 million of year-over-year sales growth and $9.0 million of gross-profit growth. Manufacturer cigarette price increases also lifted sales, while lower cigarette carton volume and mix partly offset growth.
- Operating expenses rose $6.3 million, including $6.9 million associated with Team Sledd and $0.5 million in higher fuel costs. Despite higher operating income, net income declined as interest expense increased and the prior-year quarter included $0.8 million of equity-method investment earnings.
- Retail revenue and gross profit declined. Management cited Hurricane Ian damage and temporary closure of the Port Charlotte store, lower sales and margins at existing stores, and a prior-year Florida store closure.
- Management described ongoing supply-chain and product-availability disruption, inflation in product, labor, fuel and financing costs, and pressure on consumer discretionary spending and retail demand.
Outlook, risks and unusual items
- AMCON agreed to acquire substantially all of Henry’s Foods’ wholesale distribution assets for approximately $30.3 million plus working-capital adjustments. The filing expected closing in Q2 FY2023 and stated the purchase would be funded with existing-bank-group borrowings; completion and final purchase price were not yet established.
- No quantified financial guidance was provided. Management said it believed liquidity would be adequate in the short and long term, while cautioning that a sharp operating change could affect revenue, customer collections and access to credit.
- Potential FDA, state or local restrictions on menthol cigarettes and flavored tobacco or vaping products could adversely affect results. Other identified risks include inflation, supply-chain and labor disruptions, interest rates, customer credit, competition, product-demand changes, and acquisition integration.
- AMCON declared a $5.00-per-share special dividend in Q1 FY2023, approximately $3.1 million, payable in Q2; it also paid a regular $0.18-per-share dividend. The filing’s operations table reports dividends paid per share of $0.18 for 2022 and $5.18 for 2021, while the equity statement lists $5.18 per share for the 2022 quarter despite the special dividend being unpaid at quarter-end. The cash-flow statement reports $0.1 million of dividends paid and $3.1 million declared but unpaid. These presentations warrant reconciliation.
- The fair value of mandatorily redeemable non-controlling interest was $11.1 million, including $1.8 million classified as current; its valuation uses significant unobservable assumptions. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Henry’s acquisition closed as expected, its final working-capital adjustment, financing and integration effects.
- How the special-dividend amounts and per-share disclosures reconcile across the statements and notes.
- Whether inventory levels and the related working-capital cash outflow normalize, and how much borrowing-base capacity remains available.
- The effect of higher variable-rate borrowing costs and potential tobacco-product regulation on earnings and liquidity.