AMCON Distributing Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2018; filed April 18, 2018. The company operates a wholesale consumer-products distribution business and 16 natural/health-food stores. Sales include substantial cigarette and tobacco excise taxes.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Sales | $295.2 million, up 0.4% | $610.7 million, up 1.1% |
| Gross profit / margin | $17.1 million / 5.8%; prior year $17.5 million / 5.9% | $35.3 million / 5.8%; prior year $35.8 million / 5.9% |
| Operating income | $0.9 million, down 19.1% | $2.2 million, down 31.1% |
| Net income | $0.34 million, down 30.6%; diluted EPS $0.49 | $1.82 million, up 18.5%; diluted EPS $2.61 |
| Operating cash flow | Not provided for the quarter | $1.3 million, versus $7.7 million |
For the six-month period, cash capital expenditures were $1.37 million, dividends paid were $0.46 million, and common-stock repurchases were $0.64 million. Cash at March 31 was $0.56 million.
Liquidity, debt, and balance sheet
- At March 31, total assets were $132.6 million and shareholders’ equity was $70.1 million. Current assets were $108.9 million versus current liabilities of $27.6 million; inventories were $76.1 million.
- The revolving facility had a $69.5 million borrowing limit based on eligible collateral, $30.5 million outstanding, and $39.0 million available. The stated contractual revolving limit is $70 million, with possible accordion capacity and additional inventory advances subject to terms.
- The revolving balance’s average interest rate was 3.34% at quarter-end. Total long-term debt, including current maturities, was approximately $2.84 million. The facility matures in November 2022 and is secured by company assets.
- Management said availability had not fallen below the 10% threshold that triggers the facility’s fixed-charge coverage covenant; the trailing-twelve-month ratio was above 1.0. The company reported no defaults or cross-defaults.
Changes and management commentary
- Wholesale sales grew modestly, but wholesale gross profit declined. Cigarette manufacturer price increases and growth in other product categories were offset by lower cigarette carton volume and mix. Cigarette demand remains under long-term pressure.
- Retail sales rose slightly, helped by a new Florida store, but existing-store sales faced increased competition; one underperforming Midwest store had closed. Retail gross profit was roughly flat.
- Quarterly operating expenses fell $0.2 million, primarily due to lower health-insurance costs, partly offset by higher benefits and fuel costs. Six-month operating expenses rose $0.5 million, including higher employee-benefit and fuel costs.
- Interest expense increased 112% in the quarter and 41% for six months. The filing does not attribute the increase to a single cause.
- The six-month income-tax result included a $0.9 million benefit from the Tax Cuts and Jobs Act’s reduction of the federal corporate rate from 35% to 21%. This helped lift six-month net income despite lower operating income. Management noted the final tax impact could change with interpretations, assumptions, or further guidance.
- Management’s wholesale priorities include geographic expansion, growing foodservice, and technology investment; it is evaluating acquisition opportunities. Retail is undergoing a multi-year repositioning involving selective store closures, remodeling and new stores, merchandising changes, and marketing. Management cautioned that success is not assured.
Outlook, risks, and other matters
No quantified earnings or revenue guidance is provided. Management believes liquidity is adequate to sustain operations but warns that a sharp deterioration in conditions could affect revenue, collections, and access to bank credit. Risks identified include competition and online shopping, declining cigarette demand, tobacco regulation and excise taxes, fuel and commodity costs, customer credit risk, manufacturer pricing and promotions, and execution of the retail repositioning. The company does not hedge interest-rate or fuel-cost exposure. It reported no off-balance-sheet arrangements, no legal proceedings, and no material changes to previously disclosed risk factors. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether wholesale gross-profit pressure and declining cigarette volumes continue, and whether growth in other categories offsets them.
- Whether the retail repositioning improves existing-store performance and store-level profitability amid strong competition.
- How much of six-month net-income growth came from the one-time $0.9 million tax benefit versus underlying operations.
- Why operating cash flow fell to $1.3 million from $7.7 million, including the effects of inventory and working-capital timing.
- Facility availability, borrowing costs, covenant headroom, and the impact of interest-rate or fuel-cost changes.
- The eventual financial-statement effects of the forthcoming revenue-recognition, lease, and credit-loss accounting standards; management was still assessing their impacts.