AMCON Distributing Company — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017; comparisons are with the year ended September 30, 2016. This is an annual report, not a standalone fourth-quarter report. AMCON distributes consumer products through six wholesale centers and operates 15 natural-food retail stores.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,275.0 million | $1,294.6 million |
| Gross profit / margin | $72.4 million / 5.7% | $74.8 million / 5.8% |
| Operating income / margin | $6.2 million / 0.5% | $10.9 million / 0.8% |
| Net income | $2.95 million | $5.98 million |
| Diluted EPS | $4.26 | $8.38 |
| Cash from operations | $(13.8) million | $18.4 million |
| Capital expenditures | $2.6 million | $1.6 million |
- Wholesale revenue was $1,249.6 million, down $17.6 million; segment gross profit was $61.7 million, down $1.2 million. Retail revenue was $25.4 million, down $2.0 million, and the segment reported an operating loss of $1.8 million, versus $0.05 million operating income in FY2016.
- Cigarettes generated 71% of consolidated revenue but approximately 20% of gross profit in FY2017. Cigarette sales fell $47.4 million on volume and mix; manufacturer price increases added $27.5 million. Sales incentives to retailers were $24.1 million, compared with $23.1 million.
- Operating expenses increased $2.3 million, including higher wholesale health-insurance, fuel and employee-benefit costs and spending on the retail repositioning effort.
- Cash flow from operations declined to negative $13.8 million, principally reflecting a $24.4 million inventory cash outflow. Inventory rose to $72.9 million from $48.4 million, with management attributing the increase largely to opportunistic purchases and expecting normalization in Q1 FY2018.
- At year-end, cash was $0.5 million, current assets $108.3 million and current liabilities $29.6 million. Revolver borrowings were $29.0 million, with $40.6 million available under the stated borrowing base; long-term debt was $3.0 million, including current maturities. The revolver’s reported average interest rate was 3.56%.
- Common dividends were $1.00 per share, totaling approximately $0.7 million. The company repurchased 12,036 shares for approximately $1.1 million.
Material changes and outlook
- Revenue decreased 1.5%, while net income fell approximately 51% and diluted EPS fell approximately 49%. Lower gross profit and higher operating expenses drove the decline.
- Management described wholesale distribution as highly competitive, with declining cigarette demand, customer and distributor consolidation, and growing demand for foodservice solutions. Its stated strategy includes geographic expansion, foodservice investment and technology development.
- Retail management is repositioning the business through store closures, remodeling, merchandising changes, refreshed branding and new store prototypes. One underperforming Midwest store closed; a remodeled store and two enhancement projects were completed, and a Florida store opened in October 2017. Management said it may add one or more prototype stores annually, subject to execution and market conditions; this is not a firm financial forecast.
- After year-end, in November 2017, AMCON renewed its revolving credit facility on substantially similar terms, extending maturity to November 2022. The company reported no covenant default; availability had not fallen below the threshold that activates its fixed-charge coverage covenant.
Risks, contingencies and unusual items
- Concentration in cigarettes exposes sales and profitability to secular volume declines, excise-tax increases, regulation and product restrictions. Cigarettes contribute much less to gross profit than to revenue.
- Retail faces intensified competition from national chains, conventional grocers and online sellers. Management warned an unsuccessful repositioning could adversely affect results and could lead to asset impairment.
- Liquidity is sensitive to inventory requirements, customer collections, access to bank credit and seasonal working capital. The company does not hedge fuel or interest-rate exposure.
- The credit facility is secured by major operating assets and contains restrictions and conditional covenants. The real-estate loan has cross-default and co-terminus provisions with BMO lending arrangements.
- Operating lease commitments totaled $22.0 million at year-end. The company also self-insures or uses high-deductible coverage for certain employee, workers’ compensation and liability claims; recorded reserves were $1.5 million.
- No legal proceedings or goodwill/intangible impairment charges were reported. The independent auditor gave an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting. The auditor did not attest to internal-control effectiveness.
- The filing disclosed approximately 132 shareholders of record as of October 31, 2017, below the 300-record-holder threshold discussed in its risk factors. If reporting obligations were suspended, the company said its NYSE American listing could be lost; the filing does not state that suspension or delisting had occurred.
Investor verification priorities
- Verify whether the inventory build unwound as expected in Q1 FY2018 and how operating cash flow and revolver borrowings subsequently changed.
- Track cigarette carton volumes, category mix and gross-profit contribution, as well as wholesale customer retention and pricing.
- Assess whether retail remodeling, new-store openings and repositioning improved comparable sales, margins and cash returns.
- Review the November 2017 facility amendment, borrowing-base availability, covenant headroom and the real-estate loan’s cross-default terms.
- Confirm shareholder-of-record counts, NYSE American listing status and any resulting changes to the company’s reporting obligations.