AMCON Distributing Company (DIT) — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; compared with the three months ended December 31, 2018. AMCON distributes consumer products through its wholesale segment and operates 22 natural-food stores through its retail segment.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $360.1 million | $344.7 million | Up 4.5% |
| Gross profit | $20.8 million | $20.6 million | Up 1.0% |
| Gross margin | 5.8% | 6.0% | Down 0.2 percentage points |
| Operating income | $1.2 million | $2.1 million | Down 43.6% |
| Interest expense | $472,423 | $322,950 | Up 46.3% |
| Net income | $451,870 | $1.2 million | Down 63.7% |
| Diluted EPS | $0.80 | $1.99 | Down |
| Operating cash flow | $28.4 million | $14.6 million | Up |
Wholesale revenue rose 4.9% to $350.0 million and gross profit increased 9.4% to $17.6 million; wholesale gross margin improved to 5.0% from 4.8%. Retail revenue fell 8.1% to $10.1 million, gross profit declined 28.6% to $3.3 million, and retail gross margin fell to 32.3% from 41.5%. The retail segment recorded a $1.1 million operating loss, versus a $45,443 loss a year earlier.
Consolidated operating expenses increased 6.0% to $19.7 million, exceeding gross-profit growth. Management cited higher employee compensation and benefits, a larger doubtful-account provision, and other operating costs. The doubtful-account provision increased to $371,000 from $11,000. Lower income tax expense partly offset the decline in pretax income.
Financial position and liquidity
At December 31, 2019, cash was $440,000. Current assets were $103.6 million and current liabilities were $31.8 million. Accounts receivable totaled $31.5 million and inventory was $63.0 million, down from $102.3 million at September 30, 2019. Operating cash flow benefited substantially from the $39.3 million inventory reduction, partly offset by a $7.2 million increase in receivables.
Revolving credit borrowings were $33.5 million, compared with $60.4 million at September 30, 2019. Including current and long-term debt, reported borrowings totaled approximately $37.1 million. The facility had a $69.5 million borrowing limit based on collateral, with $36.0 million available at quarter-end. The average facility interest rate was 3.46%; peak borrowings during the quarter were $71.6 million. The company reported a trailing-twelve-month fixed-charge coverage ratio above the 1.0 covenant threshold. The facility matures in November 2022.
Operating lease right-of-use assets were $20.5 million and lease liabilities totaled $20.9 million following adoption of ASC 842. Management said adoption materially affected the balance sheet but did not materially affect operating results or cash flows. Capital expenditures were $1.2 million in cash-flow reporting; segment disclosures report $1.4 million, including equipment acquisitions classified in accounts payable.
Changes, outlook, risks and unusual items
- Wholesale sales growth reflected cigarette manufacturer price increases, higher cigarette excise taxes, and higher volumes in tobacco, confectionery, foodservice and other products; these gains were partly offset by lower cigarette carton volume and mix.
- Management provided no quantified financial guidance. It said liquidity should be adequate to sustain operations, while noting that a sharp change in operating conditions could affect revenue, collections and access to bank credit.
- In January 2020, AMCON agreed to contribute $10.0 million to a jointly owned entity with Chas. M. Sledd Company: $6.5 million as equity and $3.5 million as a secured line of credit. AMCON expects to fund the contribution through its revolving facility. The transaction was expected to close in Q2, subject to customary conditions.
- Key stated risks include competition and retail repositioning, online-channel disruption, tobacco regulation and taxes, supplier pricing, fuel and labor costs, customer credit risk, inventory carrying costs, and access to capital. 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 off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether wholesale profitability can offset the continued deterioration in retail sales and margins.
- Whether the large year-over-year operating-profit decline and increased doubtful-account provision persist.
- How seasonal inventory and receivables movements affect operating cash flow and revolving-credit availability.
- The final terms, funding, closing, and financial impact of the planned Sledd transaction, including its effect on facility borrowings.
- The dividend disclosures: the statements report $0.18 per share declared and paid, while the shareholders’ equity statement reports dividends of $0.46 per share. The filing text does not reconcile these figures clearly.