AMCON Distributing Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020; comparisons are with the same periods in 2019. AMCON distributes consumer products to retail outlets and operates 21 natural-food stores. Dollar amounts below are in millions unless otherwise noted. Sales include excise taxes.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $337.9 | $310.7 | $698.0 | $655.4 |
| Gross profit | $20.7 | $20.6 | $41.5 | $41.2 |
| Gross margin | 6.1% | 6.6% | 6.0% | 6.3% |
| Operating income | $1.4 | $2.6 | $2.6 | $4.6 |
| Net income | $0.7 | $1.5 | $1.2 | $2.8 |
| Diluted EPS | $1.22 | $2.45 | $2.02 | $4.44 |
- Cash flow: Six-month operating cash flow was $20.4, versus $24.6 in 2019. Investing cash outflow was $2.2, mainly property and equipment purchases; financing cash outflow was $17.8. Cash rose by $0.3 to $0.7.
- Balance sheet and liquidity: At March 31, cash was $0.7 and current assets were $120.5, including $84.9 of inventory. The revolving facility had $43.2 outstanding and $46.4 available against a collateral-based limit of $89.6. The company reported average facility borrowings of $42.9 and average availability of $30.0 for the six months.
- Debt and leases: Long-term debt, including current maturities, totaled approximately $3.4, in addition to the $43.2 credit-facility balance. Operating lease liabilities totaled $20.0. The facility was amended in March, extending maturity to March 2025; its stated revolving commitment is $110.0, subject to borrowing-base limits. The company reported a 2.63% average facility interest rate at March 31 and a fixed-charge coverage ratio above the 1.0 covenant threshold.
Material changes and management commentary
- Q2 sales increased 8.7%, but gross profit rose only 0.5%; operating expenses increased 7.0%, contributing to a 45.6% decline in operating income and a 54.1% drop in net income. For the six months, sales rose 6.5%, while net income fell 58.4%.
- Wholesale sales growth reflected cigarette manufacturer price increases, higher sales in tobacco and other product categories, and higher cigarette excise taxes. Wholesale gross profit increased, but margin declined in Q2 to 5.0% from 5.3%.
- Retail Q2 sales rose 8.5%, including a temporary increase in pantry-restocking demand attributed to COVID-19. Retail gross profit fell 3.7% in Q2 and 16.0% for the six months; six-month retail gross margin declined to 33.7% from 40.4%. Management cited product mix, lower margins, and the closure of one underperforming Midwest store.
- Six-month operating expenses rose $2.4, including higher compensation, insurance, doubtful-account provisions, and other operating costs. Interest expense increased 19.5% for the six months.
- AMCON adopted lease accounting standard ASC 842 in fiscal Q1 2020, recording approximately $21.9 of right-of-use assets and $22.2 of lease liabilities at adoption. The filing says this materially affected the balance sheet but not operations or cash flows; comparative periods were not recast.
Outlook, risks, and unusual items
- The company provided no numerical earnings or revenue guidance. It said both segments continued operating as essential suppliers during the COVID-19 pandemic, but the duration and financial effects remained uncertain. Risks include supply-chain or warehouse disruption, labor availability, customer credit deterioration, and reduced demand.
- Management stated that it believed liquidity and access to capital were sufficient, while warning that worsening economic conditions could affect revenue, collections, and access to bank credit. AMCON does not hedge interest-rate or fuel-cost exposure.
- In April 2020, after quarter-end, AMCON contributed $10.0 to Team Sledd: $6.5 for equity and $3.5 as a secured loan subordinated to the venture’s existing secured lenders. AMCON initially held approximately 45% of the venture; anticipated redemptions of other interests could increase its ownership over time.
- The filing reported no legal proceedings, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors other than adding pandemic-related risks. Disclosure controls were deemed effective as of March 31.
Important facts for investors to verify
- Whether COVID-related demand and supply conditions persisted or reversed after the temporary pantry-restocking boost.
- Retail segment margin recovery, store performance, and the effect of the store repositioning strategy.
- Customer receivable quality and credit-loss exposure; the six-month doubtful-account provision increased to $0.4 from $0.1.
- Borrowing-base availability and covenant headroom as working-capital needs and customer collections change.
- Team Sledd’s operating performance, AMCON’s exposure under the subordinated loan, and the terms and funding of any future ownership redemptions.
- The effect of lease obligations and the new facility terms on ongoing cash needs and shareholder distributions.