AMCON Distributing Company (NYSE American: DIT) — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019, compared with fiscal 2018. This is an annual report, not a standalone fourth-quarter report.
Business context
AMCON operates a wholesale consumer-products distribution business serving approximately 4,100 retail outlets across 26 states, and a retail health-food business with 22 stores. Cigarettes accounted for 69% of consolidated revenue and 17% of consolidated gross profit in FY2019. The financial statements received an unqualified audit opinion.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,392.4 million | $1,322.3 million |
| Gross profit / margin | $84.0 million / 6.0% | $76.9 million / 5.8% |
| Operating income | $6.35 million | $5.92 million |
| Net income | $3.20 million | $3.61 million |
| Diluted earnings per share | $5.25 | $5.38 |
| Cash flow from operations | $(11.45) million | $5.90 million |
Revenue includes cigarette and tobacco excise taxes: $370.2 million in FY2019 versus $368.4 million in FY2018. Gross profit excludes fulfillment and distribution-network costs, which are included in operating expenses.
Segments and changes versus prior year
- Wholesale: Revenue rose $55.5 million to $1,348.2 million. Cigarette manufacturer price increases and excise taxes lifted reported sales, while cigarette carton volume and mix reduced sales by $30.4 million. Segment gross margin remained 5.0%; segment operating income was $17.3 million.
- Retail: Revenue increased $14.6 million to $44.2 million, primarily reflecting the acquired Earth Origins Market stores. Segment gross margin fell to 36.9% from 42.9%, and the segment reported an operating loss of $4.7 million.
- Consolidated gross margin improved, but higher operating expenses, interest expense and income taxes accompanied lower net income. The retail segment recorded a $2.9 million non-cash intangible-asset impairment in FY2019; FY2018 included a $1.9 million goodwill impairment.
Liquidity, debt and capital allocation
- Cash was $0.34 million at year-end, versus $0.52 million a year earlier. Inventories increased to $102.3 million from $78.9 million, contributing to negative operating cash flow; management attributed the increase largely to opportunistic purchases and expected inventory and facility borrowings to normalize during FY2020’s first quarter.
- Revolving credit-facility borrowings were $60.4 million, up from $35.4 million. The borrowing base provided $19.1 million of availability at year-end. The facility’s stated maturity is November 2022; the company reported a trailing-twelve-month fixed-charge coverage ratio above 1.0.
- Long-term debt, including current maturities, was $3.7 million, down from $4.8 million. Total debt including the revolver was approximately $64.0 million.
- Capital expenditures were $4.4 million. The company paid $1.00 per share in dividends and repurchased approximately 75,100 shares for $7.5 million during the year.
Outlook, risks and unusual items
No quantitative earnings or revenue guidance was provided. Management’s stated priorities include maximizing liquidity, investing in technology, foodservice and infrastructure, and pursuing longer-term growth through acquisitions and geographic expansion. Retail repositioning efforts include merchandising changes, selective remodels and new stores, branding initiatives, and closure of underperforming locations; management cautioned that success is not assured.
Key risks include declining cigarette demand and tobacco regulation; competitive pressure on the health-food stores, including online and mass-market retailers; customer credit and working-capital needs; supplier, fuel and labor costs; and credit-facility covenant and availability constraints. The company reported no legal proceedings and no off-balance-sheet arrangements. It expects adoption of the new lease standard in FY2020 to add approximately $20–$25 million each to lease assets and liabilities, with no material impact expected on operating results or cash flows.
Important facts for investors to verify
- Whether elevated inventory converts to sales and revolving borrowings decline as management expected in FY2020’s first quarter.
- Retail-segment sales, margins, store closures and results of the repositioning strategy, including the risk of further impairment.
- Wholesale performance as cigarette volumes decline, and the extent to which growth in other product categories offsets that decline.
- Revolver availability, borrowing-base changes and compliance with facility covenants, including cross-default exposure on real-estate debt.
- Cash generation relative to dividends, share repurchases, capital spending and debt needs.