AMCON Distributing Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; financial statements are unaudited. AMCON operates a wholesale consumer-products distribution business and a 14-store natural-food retail business during the reported period.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $349.0 million | $332.8 million | $959.8 million | $937.0 million |
| Gross profit / margin | $19.1 million / 5.5% | $18.0 million / 5.4% | $54.4 million / 5.7% | $53.8 million / 5.7% |
| Operating income | $1.49 million | $0.96 million | $3.71 million | $4.18 million |
| Net income | $0.79 million | $0.39 million | $2.60 million | $1.92 million |
| Diluted EPS | $1.18 | $0.56 | $3.79 | $2.78 |
Reported sales include cigarette and tobacco excise taxes and are net of retailer incentives. Q3 sales rose 4.9%; nine-month sales rose 2.4%. The filing does not provide a consolidated operating or net margin table; calculated operating margins were approximately 0.43% and 0.29% for Q3 2018 and 2017, and 0.39% and 0.45% for the respective nine-month periods.
- Segment trends: Q3 wholesale sales increased 5.0% and gross profit increased 8.6%; retail sales declined 2.0% and gross profit declined 9.3%. For nine months, wholesale sales increased 2.5% and gross profit 1.9%; retail sales were nearly flat while gross profit fell 3.5%.
- Cash flow: Nine-month operating cash flow was $19.1 million, versus $3.4 million a year earlier. Inventory reductions provided $22.2 million of cash, partly offset by a $5.8 million increase in prepaid and other current assets. Capital expenditures were $2.1 million.
- Balance sheet at June 30: Cash was $0.28 million; current assets $95.3 million and current liabilities $30.9 million. Credit-facility borrowings were $20.5 million; long-term debt including current maturities totaled $2.74 million. Total assets were $119.1 million and shareholders’ equity $63.7 million.
- Credit availability: The $70 million revolving facility had a borrowing base limit of $69.6 million, with $20.5 million outstanding and $49.1 million available. Average facility borrowings for the nine months were $23.5 million; the June average interest rate was 3.98%. The company said availability remained above the 10% threshold relevant to its fixed-charge covenant and the trailing-twelve-month ratio exceeded 1.0.
Changes, outlook, and notable items
- Q3 wholesale sales growth reflected cigarette manufacturer price increases, higher sales in other product categories, and cigarette carton volume and mix. Nine-month cigarette price increases added sales, partly offset by lower cigarette carton volume and mix.
- Q3 operating income improved year over year, but nine-month operating income declined 11.3%, while interest expense rose 42.4%. Nine-month net income increased 35.6%, helped by lower income tax expense.
- The Tax Cuts and Jobs Act reduced the federal corporate rate from 35% to 21%; AMCON recorded a $0.9 million tax benefit in the nine-month period from remeasuring deferred tax liabilities. Fiscal 2018 was expected to be taxed at a blended federal rate of approximately 24%.
- Retail repositioning included opening one Florida store in Q1 and closing two underperforming Midwest stores in Q3. In July 2018, a subsidiary acquired and began operating eight leased Florida health-food stores for approximately $0.7 million, payable in installments through July 2019 and funded by the credit facility.
- AMCON repurchased 74,669 shares for approximately $7.7 million during the nine months, including 68,016 shares for approximately $7.1 million in Q3. Dividends declared and paid were $0.82 per share for the nine months.
- Management stated liquidity should be adequate to sustain operations, but warned that adverse operating changes could affect revenue, collections, or access to bank credit. Risks include competition and online retail disruption, tobacco demand, taxes and regulation, fuel and health-care costs, customer credit, and integration of the Florida acquisition. The company does not hedge interest-rate or fuel-cost exposure.
- No legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether wholesale margin gains can persist given dependence on cigarette pricing and volume, and whether retail performance improves after store closures and the Florida expansion.
- How much of the nine-month cash-flow increase reflects sustainable operating performance versus inventory timing and working-capital movements.
- The continuing impact of higher interest expense and the company’s borrowing-base availability, covenant headroom, and debt obligations.
- The final tax effects of the Tax Cuts and Jobs Act and the financial and integration outcomes of the eight-store acquisition.
- The filing reports both $0.82 per share of nine-month dividends and approximately $0.6 million of cash dividends; investors may wish to reconcile per-share amounts with the reduced share count following repurchases.