AMCON Distributing Company — Q3 FY2019 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2019. AMCON distributes consumer products through its wholesale business and operates 22 natural-food retail stores. The filing is unaudited; the fiscal year ends September 30.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Sales | $370.0 million | $349.0 million | $1,025.4 million | $959.8 million |
| Gross profit | $20.5 million | $19.1 million | $61.7 million | $54.4 million |
| Gross margin | 5.5% | 5.5% | 6.0% | 5.7% |
| Operating income | $1.4 million | $1.5 million | $6.0 million | $3.7 million |
| Net income | $0.7 million | $0.8 million | $3.4 million | $2.6 million |
| Diluted EPS | $1.10 | $1.18 | $5.56 | $3.79 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $10.8 million | $19.1 million |
- Quarterly comparison: Sales rose 6.0%, but operating income fell 6.5% and net income fell 15.2%. Higher operating expenses and interest expense more than offset gross-profit growth.
- Nine-month comparison: Sales grew 6.8%, gross profit 13.6%, operating income 62.3%, and net income 31.9%. Prior-year results included an approximately $0.8 million tax benefit from federal tax-rate changes, contributing to the increase in current-year tax expense.
- Segment trends: Q3 wholesale sales increased 4.7%, while wholesale gross profit declined 0.8%; cigarette volume and mix and the timing of manufacturer price increases weighed on gross profit. Retail sales rose 76.7%, primarily reflecting the Earth Origins Market stores acquired in Q4 FY2018. Retail remained loss-making at the operating level, though its loss narrowed. For the nine months, retail sales increased 75.7%, also primarily from the acquisition.
- Cash flow and investment: Nine-month operating cash flow was $10.8 million, down from $19.1 million; the inventory-related cash inflow was lower year over year. Capital expenditures were $3.4 million. Financing activities used $7.7 million, including $3.2 million for share repurchases and $0.5 million for dividends.
- Liquidity and debt: At June 30, cash was $0.3 million and working capital was approximately $77.3 million. The revolving facility had $32.1 million outstanding and $37.4 million available under a $69.5 million borrowing limit; its average interest rate was 4.57%. Total reported credit-facility and long-term debt, including current maturities, was approximately $36.2 million, compared with $40.2 million at September 30, 2018. Facility maturity is November 2022. The company reported covenant availability above the 10% threshold and a trailing fixed-charge coverage ratio above 1.0.
- Shareholder returns: Dividends were $0.18 per share in Q3 and $0.82 per share for the nine months, unchanged from the comparable periods. AMCON repurchased 34,960 shares for approximately $3.2 million during the nine months.
Outlook, risks, and other notable items
- The filing provides no specific financial guidance or quantified forecast. Management stated it believes liquidity will be adequate to sustain operations, while cautioning that a sharp change in operating conditions could affect revenue, receivables collection, or access to bank credit.
- Risks highlighted include competition and retail repositioning, online-channel disruption, labor and fuel costs, tobacco demand and regulation, excise taxes, supplier pricing, customer credit, tariffs, inflation, and weather or other disruptions. Management reported no material changes to previously disclosed risk factors.
- The adoption of ASC 606 had no material effect. The company was evaluating the impact of the lease accounting standard, expected to apply in fiscal 2020. No off-balance-sheet arrangements or legal proceedings were reported.
- Management concluded disclosure controls were effective as of June 30, 2019, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue and retail improvement reflects the Earth Origins acquisition versus performance at existing stores.
- Whether wholesale gross-profit trends, especially cigarette volume and mix and manufacturer pricing effects, improve or worsen.
- Why operating cash flow declined and whether working-capital movements reverse in later periods.
- Facility availability, borrowing costs, covenant headroom, and debt reduction as operating and seasonal working-capital needs change.
- The eventual balance-sheet impact of lease accounting and any subsequent developments in the listed competitive, regulatory, labor, and cost risks.