AMCON Distributing Company — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018; comparable period is the three months ended December 31, 2017. AMCON operates a wholesale consumer-products distribution business and a 22-store natural and health food retail business.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Sales, including excise taxes | $344.7 million | $315.5 million | +9.3% |
| Gross profit / margin | $20.6 million / 6.0% | $18.2 million / 5.8% | +13.4% |
| Operating income | $2.1 million | $1.3 million | +58.1% |
| Interest expense | $0.32 million | $0.20 million | +59.7% |
| Income tax expense (benefit) | $0.50 million expense | $0.37 million benefit | Increase of $0.87 million in expense |
| Net income | $1.25 million | $1.48 million | -15.9% |
| Diluted EPS | $1.99 | $2.13 | -6.6% |
| Operating cash flow | $14.64 million | $17.05 million | -$2.41 million |
Net income fell despite higher operating income, principally against the prior-year period’s approximately $0.8 million tax benefit from the Tax Cuts and Jobs Act. Revenue includes cigarette and tobacco excise taxes ($93.0 million in Q1 FY2019 versus $88.6 million in Q1 FY2018). Sales are reported net of retailer incentives.
Segments and operating drivers
- Wholesale: Sales rose 7.9% to $333.7 million, while gross profit increased 3.8% to $16.1 million. Gross margin declined to 4.8% from 5.0%. Management attributed sales growth to cigarette manufacturer price increases, higher volumes in tobacco, confectionery, foodservice and other products, cigarette carton volume/mix, and higher excise taxes. Higher other-product volume supported gross profit; cigarette mix partly offset it.
- Retail: Sales rose 74.7% to $11.0 million and gross profit increased 68.1% to $4.6 million; gross margin declined to 41.5% from 43.1%. Growth primarily reflected Earth Origins Market stores acquired near the end of FY2018. Lower existing-store volumes and prior-period Midwest store closures were offsets. Retail reported an operating loss of $45,000, improved from a $473,000 loss.
- Costs: Operating expenses increased 10.0% to $18.6 million, including acquisition-related retail costs and higher compensation, fuel and other operating costs. Lower health-insurance costs partly offset these increases.
Cash flow, debt and liquidity
- Operating cash flow was $14.6 million, primarily supported by a $22.2 million inventory reduction; cash from operations was lower than the prior-year $17.1 million. Investing used $1.0 million, including property and equipment purchases. Financing used $13.4 million, including net revolving-facility repayments, debt principal payments and $0.9 million of share repurchases.
- Cash was $0.82 million at December 31, 2018, versus $0.52 million at September 30, 2018. Current assets were $97.4 million and current liabilities $27.2 million. Inventories declined to $56.6 million from $78.9 million, consistent with the company’s stated seasonal and purchasing-related working-capital variability.
- Credit-facility borrowings were $23.3 million, down from $35.4 million at September 30. The facility had a $69.5 million borrowing limit based on collateral and loan limits, leaving $46.2 million available. The stated average interest rate was 4.33%; peak quarterly borrowings were $41.2 million. The facility matures in November 2022 and is secured by company assets.
- Total reported current and long-term debt, including the credit facility, was approximately $27.8 million. AMCON reported no covenant cross-defaults; availability had not fallen below the 10% threshold that triggers testing, and the trailing-twelve-month fixed-charge coverage ratio was above 1.0.
Outlook, risks and other notable items
- The filing provides no specific financial guidance. Management said it believes liquidity will be adequate to sustain operations, while cautioning that a sharp change in operating conditions could affect revenue, collections and access to bank credit.
- Key disclosed risks include competition and retail repositioning, online retail disruption, tobacco demand and regulation, excise taxes, supplier pricing and incentives, fuel and labor costs, customer credit, inventory carrying costs, tariffs, weather and access to capital. The company said risk factors had not materially changed from its FY2018 Form 10-K.
- AMCON adopted the new revenue recognition standard in Q1 FY2019; management reported no material impact. It was evaluating the lease standard, which could result in capitalization of operating leases, and the expected-credit-loss standard.
- The company repurchased 10,432 shares for approximately $0.9 million and renewed authority to repurchase up to 75,000 shares. It reported a $0.5 million workers’ compensation letter of credit, no off-balance-sheet arrangements and no legal proceedings. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting.
Investor verification priorities
- Reconcile the dividend disclosures: the operations statement reports $0.18 per share declared and paid, while the equity statement labels dividends as $0.46 per share. Confirm the correct amount and period treatment.
- Verify share-count presentation across the balance sheet, equity statement and EPS disclosures, including the distinction between issued shares, treasury shares and shares outstanding.
- Assess whether wholesale gross-margin pressure and higher interest expense offset the operating improvement, and whether acquired-store growth translates into sustainable retail performance.
- Review working-capital seasonality, borrowing availability and sensitivity to rates, fuel costs, customer collections and inventory requirements.
- Check subsequent filings for lease-standard effects, repurchase activity and changes in the company’s risk or liquidity outlook.