AMCON Distributing Company — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018; comparisons are with the fiscal year ended September 30, 2017. This is an annual filing, not a standalone fourth-quarter report.
Business context
AMCON operates a wholesale distribution business serving about 4,000 retail outlets and a retail health-food business operating 22 stores. Wholesale sales are heavily exposed to cigarettes: cigarettes were 71% of consolidated revenue and about 20% of consolidated gross profit in both years.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,322.3 million | $1,275.0 million |
| Gross profit / margin | $76.9 million / 5.8% | $72.4 million / 5.7% |
| Operating income | $5.9 million | $6.2 million |
| Net income | $3.6 million | $2.9 million |
| Diluted earnings per share | $5.38 | $4.26 |
| Cash from operating activities | $5.9 million | $(13.8) million |
- Wholesale revenue increased $43.1 million; gross profit rose $2.5 million to $64.2 million, with gross margin of 5.0% versus 4.9%. Price increases contributed $33.2 million to sales, other-product volume $18.7 million, partly offset by an $8.8 million decline from cigarette carton volume and mix.
- Retail revenue increased $4.2 million to $29.6 million, mainly due to acquired Earth Origins stores and a new Chamberlin’s location. Retail gross profit was $12.7 million, or 42.9% of sales. The segment reported a $3.1 million operating loss versus $1.8 million.
- Operating income declined despite higher gross profit, reflecting higher operating expenses, including a $1.9 million goodwill impairment charge. Net income rose partly because income tax expense fell to $1.2 million from $2.5 million, including an approximately $0.8 million benefit from federal tax-rate changes.
- Cash at year-end was $0.5 million. Inventory was $78.9 million, up from $72.9 million. The company attributed elevated inventory and borrowing to opportunistic purchases and expected them to normalize in fiscal 2019’s first quarter.
- At September 30, 2018, the $70 million revolving facility had $35.4 million outstanding and $34.1 million available under the borrowing base. The average facility interest rate was 3.83%. Long-term debt, including current maturities, totaled $4.8 million; revolving credit plus long-term debt was approximately $40.2 million.
- Total assets were $140.0 million and shareholders’ equity was $64.6 million. Capital expenditures were $3.2 million. Dividends were $1.00 per share, and the company repurchased 74,880 shares for approximately $7.7 million.
Material changes, outlook and risks
- Consolidated revenue grew 3.7%, while operating income declined. Operating cash flow improved substantially from the prior-year outflow, with inventory changes a major factor in both periods.
- AMCON continued its multi-year retail repositioning: it closed two underperforming Midwest stores, remodeled two stores, acquired assets—primarily inventory—of eight Florida stores operated as Earth Origins, and opened a replacement Florida store after year-end. Management cautioned that retail conditions remain challenging; the strategy’s success is not assured.
- Management’s stated priorities include preserving liquidity, reducing debt, investing in technology, foodservice and the retail business, and pursuing longer-term organic growth, acquisitions and geographic expansion. It said liquidity should be adequate to sustain operations, while noting that a sharp deterioration in conditions could affect revenue, customer collections and access to credit. No quantified earnings or revenue guidance is provided.
- Key exposures include declining cigarette demand, tobacco excise taxes and regulation, intense wholesale and natural-food retail competition, fuel and labor costs, customer credit risk, supplier dependence, and the ability to comply with facility covenants. The retail goodwill impairment fully eliminated goodwill in that reporting unit; management warned further impairment could occur if performance or conditions worsen.
- The credit facility’s fixed-charge covenant applies if availability falls below 10% of its maximum loan limit. The real-estate loan has cross-default and co-terminus provisions tied to other BMO loans. No cross-default existed at year-end. The filing reports no legal proceedings and no off-balance-sheet arrangements.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether cigarette volume and mix continue to decline, and how price changes affect revenue, gross profit and working-capital needs.
- Whether retail-store changes improve comparable-store sales and profitability, and whether additional impairment charges or store closures follow.
- Whether inventory and revolving borrowings normalized as management expected in fiscal 2019’s first quarter, and how much facility availability remains under the borrowing-base calculation.
- Debt maturities, interest-rate exposure, covenant headroom and the cross-default implications of the real-estate loan.
- The sustainability of cash generation alongside capital spending, dividends and share repurchases; the filing also notes that the shareholder-of-record count was below 300 at September 30, 2018, which could affect Exchange Act reporting and NYSE American listing if the company elects to suspend reporting.