Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
⌧
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
◻
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission File Number 1-15589
(Exact name of registrant as specified in its charter)
Delaware
47-0702918
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
7405 Irvington Road, Omaha NE
68122
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (402) 331-3727
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value
DIT
NYSE American
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻
Accelerated filer ◻
Non-accelerated filer ⌧
Smaller reporting company ⌧Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ◻ No ⌧
The Registrant had 564,878 shares of its $.01 par value common stock outstanding as of July 17, 2020.
Form 10-Q
3rd Quarter
INDEX
June 30, 2020
PAGE
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed consolidated balance sheets at June 30, 2020 (unaudited) and September 30, 2019
3
Condensed consolidated unaudited statements of operations for the three and nine months ended June 30, 2020 and 2019
4
Condensed consolidated unaudited statements of shareholders’ equity for the three and nine months ended June 30, 2020 and 2019
5
Condensed consolidated unaudited statements of cash flows for the nine months ended June 30, 2020 and 2019
6
Notes to condensed consolidated unaudited financial statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
24
Item 4. Controls and Procedures
25
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
26
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
27
2
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2020 and September 30, 2019
June
September
2020
2019
(Unaudited)
ASSETS
Current assets:
Cash
$
596,564
337,704
Accounts receivable, less allowance for doubtful accounts of $1.2 million at June 2020 and $0.9 million at September 2019
33,626,042
24,665,620
Inventories, net
82,009,219
102,343,517
Income taxes receivable
—
350,378
Prepaid and other current assets
7,259,528
7,148,459
Total current assets
123,491,353
134,845,678
Property and equipment, net
18,236,033
17,655,415
Operating lease right-of-use assets, net
19,705,044
Note receivable
3,500,000
Goodwill
4,436,950
Other intangible assets, net
500,000
Equity method investment
6,648,666
Other assets
399,943
273,579
Total assets
176,917,989
157,711,622
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
20,719,129
18,647,572
Accrued expenses
7,067,083
8,577,972
Accrued wages, salaries and bonuses
2,968,148
3,828,847
Income taxes payable
480,649
Current operating lease liabilities
5,486,963
Current maturities of long-term debt
546,657
532,747
Total current liabilities
37,268,629
31,587,138
Credit facility
56,384,002
60,376,714
Deferred income tax liability, net
1,820,511
1,823,373
Long-term operating lease liabilities
14,578,728
Long-term debt, less current maturities
2,713,798
3,125,644
Other long-term liabilities
167,755
42,011
Shareholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized
Common stock, $.01 par value, 3,000,000 shares authorized, 564,878 shares outstanding at June 2020 and 552,614 shares outstanding at September 2019
8,697
8,561
Additional paid-in capital
24,250,873
23,165,639
Retained earnings
68,657,375
66,414,397
Treasury stock at cost
(28,932,379)
(28,831,855)
Total shareholders’ equity
63,984,566
60,756,742
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
Condensed Consolidated Unaudited Statements of Operations
for the three and nine months ended June 30, 2020 and 2019
For the three months ended June
For the nine months ended June
Sales (including excise taxes of $103.6 million and $98.0 million, and $285.1 million and $274.0 million, respectively)
396,854,324
369,981,516
1,094,841,943
1,025,431,309
Cost of sales
375,202,044
349,455,624
1,031,651,499
963,683,859
Gross profit
21,652,280
20,525,892
63,190,444
61,747,450
Selling, general and administrative expenses
18,377,641
18,513,048
55,843,266
53,861,943
Depreciation and amortization
801,683
620,142
2,318,045
1,869,378
19,179,324
19,133,190
58,161,311
55,731,321
Operating income
2,472,956
1,392,702
5,029,133
6,016,129
Other expense (income):
Interest expense
461,581
381,469
1,321,267
1,100,995
Other (income), net
(42,525)
(15,446)
(79,222)
(55,081)
419,056
366,023
1,242,045
1,045,914
Income from operations before income taxes
2,053,900
1,026,679
3,787,088
4,970,215
Income tax expense
586,000
361,000
1,168,000
1,536,000
Equity method investment earnings, net of tax
111,666
Net income available to common shareholders
1,579,566
665,679
2,730,754
3,434,215
Basic earnings per share available to common shareholders
2.79
1.12
4.84
5.65
Diluted earnings per share available to common shareholders
2.77
1.10
4.79
5.56
Basic weighted average shares outstanding
565,483
592,768
564,578
607,505
Diluted weighted average shares outstanding
569,902
606,278
569,873
617,887
Dividends declared and paid per common share
0.18
0.82
Condensed Consolidated Unaudited Statements of Shareholders’ Equity
Additional
Common Stock
Treasury Stock
Paid-in
Retained
Shares
Amount
Capital
Earnings
Total
THREE MONTHS ENDED JUNE 2019
Balance, April 1, 2019
856,039
(263,271)
(24,511,598)
23,148,372
66,203,466
64,848,801
Dividends on common stock, $0.18 per share
(111,766)
Compensation expense and issuance of stock in connection with equity-based awards
36,801
Repurchase of common stock
(1)
(141)
Net income
Balance, June 30, 2019
(263,272)
(24,511,739)
23,185,173
66,757,379
65,439,374
THREE MONTHS ENDED JUNE 2020
Balance, April 1, 2020
869,367
8,692
(303,841)
(28,863,654)
24,224,145
67,184,900
62,554,083
(107,091)
500
26,728
26,733
(1,148)
(68,725)
Balance, June 30, 2020
869,867
(304,989)
NINE MONTHS ENDED JUNE 2019
Balance, October 1, 2018
844,089
8,441
(228,312)
(21,324,752)
22,069,098
63,848,030
64,600,817
Dividends on common stock, $0.82 per share
(524,866)
11,950
120
1,116,075
1,116,195
(34,960)
(3,186,987)
NINE MONTHS ENDED JUNE 2020
Balance, October 1, 2019
(303,425)
(487,776)
13,828
136
1,085,234
1,085,370
(1,564)
(100,524)
Condensed Consolidated Unaudited Statements of Cash Flows
for the nine months ended June 30, 2020 and 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income from operations to net cash flows from (used in)operating activities:
Depreciation
1,827,711
Amortization
41,667
Equity method investment earnings, net of income tax
(111,666)
Loss (gain) on sales of property and equipment
17,042
(15,376)
Equity-based compensation
765,704
1,035,128
Deferred income taxes
(2,862)
112,439
Provision for losses on doubtful accounts
349,000
179,000
Inventory allowance
182,218
454,357
Changes in assets and liabilities:
Accounts receivable
(9,309,422)
(3,209,941)
Inventories
20,152,080
11,468,718
(373,414)
(5,698,021)
(126,364)
19,712
2,040,386
2,485,721
Accrued expenses and accrued wages, salaries and bonuses
(1,424,472)
(1,460,935)
125,744
2,967
Income taxes payable and receivable
794,027
157,836
Net cash flows from (used in) operating activities
18,126,800
10,835,198
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
(2,901,134)
(3,385,977)
Proceeds from sales of property and equipment
16,600
56,200
Investment in equity method investee
(6,500,000)
Issuance of note receivable
(3,500,000)
Net cash flows from (used in) investing activities
(12,884,534)
(3,329,777)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility
1,083,878,207
1,022,309,940
Repayments under revolving credit facility
(1,087,870,919)
(1,025,624,006)
Principal payments on long-term debt
(397,936)
(686,139)
Proceeds from exercise of stock options
25,750
Dividends on common stock
Settlement and withholdings of equity-based awards
(30,208)
Net cash flows from (used in) financing activities
(4,983,406)
(7,712,058)
Net change in cash
258,860
(206,637)
Cash, beginning of period
520,644
Cash, end of period
314,007
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
1,387,381
1,140,562
Cash paid during the period for income taxes
376,835
1,265,725
Supplemental disclosure of non-cash information:
Equipment acquisitions classified in accounts payable
100,424
91,838
Issuance of common stock in connection with the vesting and exercise ofequity-based awards
990,653
1,005,792
Notes to Condensed Consolidated Unaudited Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
AMCON Distributing Company and Subsidiaries (“AMCON” or the “Company”) operate two business segments:
WHOLESALE SEGMENT
Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,100 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 17,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and refrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In November 2019, Convenience Store News ranked us as the eighth (8th) largest convenience store distributor in the United States based on annual sales.
Our Wholesale Segment offers retailers the ability to take advantage of manufacturer and Company sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, inventory optimization and merchandising expertise, information systems, and access to trade credit.
Our Wholesale Segment operates six distribution centers located in Illinois, Missouri, Nebraska, North Dakota, South Dakota, and Tennessee. These distribution centers, combined with cross-dock facilities, include approximately 685,000 square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kelloggs, Kraft, and Mars. We also market private label lines of water, candy products, batteries, and other products. We do not maintain any long-term purchase contracts with our suppliers.
RETAIL SEGMENT
Our Retail Segment, through our Healthy Edge, Inc. subsidiary, is a specialty retailer of natural/organic groceries and dietary supplements which focuses on providing high quality products at affordable prices, with an exceptional level of customer service and nutritional consultation. All of the products carried in our stores must meet strict quality and ingredient guidelines, and include offerings such as gluten-free and antibiotic-free groceries and meat products, as well as products containing no artificial colors, flavors, preservatives, or partially hydrogenated oils. We design our retail sites in an efficient and flexible small-store format, which emphasizes a high energy and shopper-friendly environment.
We operate within the natural products retail industry, which is a subset of the U.S. grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.
Our Retail Segment operates twenty-one retail health food stores as Chamberlin’s Natural Foods (“Chamberlin’s”), Akin’s Natural Foods (“Akins”), and Earth Origins Market (“EOM”). These stores carry over 33,000 different national and regionally branded and private label products including high-quality natural, organic, and specialty foods consisting of produce, baked goods, frozen foods, nutritional supplements, personal care items, and general merchandise. Chamberlin’s, which was established in 1935, has a total of seven locations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of six locations in Arkansas, Missouri, and Oklahoma. Earth Origins Market has a total of eight locations in Florida.
FINANCIAL STATEMENTS
The Company’s fiscal year ends on September 30. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included herein. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the fiscal year ended September 30, 2019, as filed with the Securities and Exchange Commission on Form 10-K. For purposes of this report, unless the context indicates otherwise, all references to “we”, “us”, “our”, the “Company”, and “AMCON” shall mean AMCON Distributing Company and its subsidiaries. Additionally, the three month fiscal periods ended June 30, 2020 and June 30, 2019 have been referred to throughout this quarterly report as Q3 2020 and Q3 2019, respectively. The fiscal balance sheet dates as of June 30, 2020 and September 30, 2019 have been referred to as June 2020 and September 2019, respectively.
SIGNIFICANT ACCOUNTING POLICIES
Equity Method Investment
The Company uses the equity method to account for its investment in an investee if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or loss (net of income taxes) of the investee is included in consolidated net earnings. Judgment regarding the level of influence over its equity method investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company evaluates its equity method investment for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing its equity method investment for impairment include the length of time (duration) and the extent (severity) to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and future prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified. See Note 5 (Equity Method Investment) for further information relating to the Company’s equity method investment.
ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncement Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 “Leases (Topic 842)”. Accounting Standards Codification Topic (“ASC”) 842 superseded the lease accounting requirements in “ASC 840 - Leases”. The most significant among the changes in ASU 2016-02 is the recognition of right-of-use (“ROU”) assets and corresponding lease liabilities for leases classified as operating leases. The accounting for finance leases, which were classified as capital leases under historical GAAP, remains substantially unchanged. The lease liabilities are equal to the present value of the remaining lease payments while the ROU asset is determined based on the amount of the lease liability, plus initial direct costs incurred less lease incentives. The Company elected the optional transition method to apply ASU 2016-02 prospectively at adoption during the Company’s first quarter of fiscal year 2020 (“Q1 2020”), which resulted in recognition of ROU assets of approximately $21.9 million, lease
8
liabilities of $22.2 million, and a decrease of deferred rent recorded under ASC 840 of $0.3 million. The adoption of ASC 842 did not have a material effect on the Company’s consolidated statements of operations or cash flows. Comparative periods presented in the financial statements prior to Q1 2020 continue to be presented under ASC 840. The adoption of ASC 842 did not have a material impact on the Company’s debt-covenant compliance under its revolving credit facility.
In accordance with an accounting policy election under ASC 842, the Company does not recognize assets or liabilities for leases with an initial term of twelve months or less as these short-term lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term. The Company elected the package of practical expedients within ASC 842 that allows an entity to not reassess, prior to the effective date, (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases. The Company also elected the practical expedient to account for non-lease components as part of the lease for all asset classes.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information, and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models, and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2022 (fiscal 2024 for the Company) with early adoption permitted. The Company is currently reviewing this ASU and its potential impact on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as the market transitions from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The amendments in this update were effective upon issuance for all entities through December 31, 2022. The Company is currently reviewing this ASU and its potential impact on our consolidated financial statements.
2. INVENTORIES
Inventories consisted of finished goods and are stated at the lower of cost (determined on a FIFO basis for our wholesale segment and using the retail method for our retail segment) or net realizable value. The wholesale distribution and retail health food segment inventories consist of finished products purchased in bulk quantities to be redistributed to the Company’s customers or sold at retail. Finished goods included total reserves of approximately $1.2 million at June 2020 and $1.0 million at September 2019. These reserves include the Company’s obsolescence allowance, which reflects estimated unsalable or non-refundable inventory based upon an evaluation of slow moving and discontinued products.
3. LEASES
The Company’s wholesale segment leases certain warehouse facilities, office space, vehicles and office equipment. The Company’s retail segment leases store space in various shopping center complexes. Certain of the warehouse and retail store leases include one or more options to renew or terminate the applicable lease agreement, with the exercise of such options at the Company’s discretion. The Company’s leases do not contain any significant residual value guarantees nor do they impose any significant restrictions or covenants other than those customarily found in similar types of leases.
The operating right-of-use (ROU) lease assets and liabilities recorded on the Company’s consolidated balance sheet consist of fixed lease payments. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet and are expensed on a straight-line basis over the lease term. Additionally, certain leases contain variable payments such as vehicle leases with per-mile charges or retail leases with an additional rent payment based on store performance. These variable payments are expensed as incurred. The Company combines lease components and non-lease components for all asset classes for purposes of recognizing lease assets and liabilities. The Company determines its incremental
9
borrowing rates based on information available at the lease commencement date in calculating the present value of lease payments.
Leases consist of the following:
Assets
Classification
June 2020
Operating
Operating lease right-of-use assets
Liabilities
Current:
Operating lease liabilities
Non-current:
Total lease liabilities
20,065,691
The components of lease costs were as follows:
Operating lease cost
1,674,003
Short-term lease cost
79,334
Variable lease cost
82,092
Net lease cost
1,835,429
5,005,627
246,776
251,319
5,503,722
Maturities of lease liabilities as of June 2020 were as follows:
Operating Leases
6,177,926
2021
5,223,564
2022
4,031,833
2023
3,200,980
2024
1,878,839
2025 and thereafter
1,345,755
Total lease payments
21,858,897
Less: interest
(1,793,206)
Present value of lease liabilities
Weighted-average remaining lease term and weighted-average discount rate information regarding the Company’s leases were as follows:
Lease Term
Weighted-average remaining lease term (years):
4.4
Discount Rate
Weighted-average discount rate:
4.04
%
10
Other information regarding the Company’s leases were as follows:
For the nine months ended June 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used by operating leases
4,949,672
Lease liabilities arising from obtaining new ROU assets:
Operating leases
2,188,685
Future minimum operating lease payments as of September 2019, as reported in the 2019 Form 10-K under ASC 840, were as follows:
Fiscal Year Ending
Leases
6,468,837
5,418,617
4,299,261
3,216,671
2,456,810
Thereafter
2,387,618
Total minimum lease payments
24,247,814
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill by reporting segment of the Company consisted of the following:
Wholesale Segment
Other intangible assets of the Company consisted of the following:
Trademarks and tradenames (Retail Segment)
Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. Goodwill recorded on the Company’s consolidated balance sheet represents amounts allocated to its wholesale reporting unit which totaled $4.4 million at both June 2020 and September 2019. The Company performs its annual impairment testing during the fourth fiscal quarter of each year or as circumstances change or necessitate. There have been no material changes to the Company’s impairment assessments since its fiscal year ended September 2019.
5. EQUITY METHOD INVESTMENT
In April 2020, the Company completed its previously announced transaction with Chas. M. Sledd Company (“Sledd”), a West Virginia wholesale distributor serving the convenience store industry, to jointly own and operate a limited liability company (“Team Sledd”) formed for the purpose of owning and operating Sledd’s wholesale distribution business. In conjunction with the transaction, Sledd contributed substantially all of its assets and stated liabilities to Team Sledd, while the Company contributed $10.0 million in cash, of which $6.5 million was structured as equity and $3.5 million was structured as a secured loan to Team Sledd which is subordinate to the liens of Team Sledd's existing secured lenders.
At June 2020, AMCON owned approximately 44% of Team Sledd’s outstanding equity, with a carrying value of $6.6 million. For the three months ended June 2020, the Company recognized $0.1 million in equity in earnings (net of income
11
taxes) from its investment in Team Sledd. The Company’s secured loan to Team Sledd had a carrying value of $3.5 million as of June 2020.
6. DIVIDENDS
The Company paid cash dividends on its common stock totaling $0.1 million and $0.5 million for the three and nine month periods ended June 2020, respectively, and $0.1 million and $0.5 million for the three and nine month periods ended June 2019, respectively.
7. EARNINGS PER SHARE
Basic earnings per share available to common shareholders is calculated by dividing net income by the weighted average common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing income from operations by the sum of the weighted average common shares outstanding and the weighted average dilutive equity awards.
Basic
Diluted
Weighted average common shares outstanding
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1)
4,419
13,510
Weighted average number of shares outstanding
Net earnings per share available to common shareholders
5,295
10,382
8. DEBT
The Company primarily finances its operations through a credit facility agreement (the “Facility”) and long-term debt agreements with banks. The Facility is provided through Bank of America acting as the senior agent and with BMO Harris Bank participating in a loan syndication.
The Facility included the following significant terms at June 2020:
12
The amount available for use on the Facility at any given time is subject to a number of factors including eligible accounts receivable and inventory balances that fluctuate day-to-day. Based on our collateral and loan limits as defined in the Facility agreement, the credit limit of the Facility at June 2020 was $95.0 million, of which $56.4 million was outstanding, leaving $38.6 million available.
At June 2020, the revolving portion of the Company’s Facility balance bore interest based on the bank’s prime rate and various short-term LIBOR rate elections made by the Company. The average interest rate was 2.42% at June 2020. For the nine months ended June 2020, our peak borrowings under the Facility were $72.7 million, and our average borrowings and average availability under the Facility were $50.1 million and $30.8 million, respectively.
Cross Default and Co-Terminus Provisions
The Company owns real estate in Bismarck, ND, Quincy, IL, and Rapid City, SD, which is financed through a single term loan with BMO Harris Bank (the “Real Estate Loan”) which is also a participant lender on the Company’s revolving line of credit. The Real Estate Loan contains cross default provisions which cause the loan to be considered in default if the loans where BMO is a lender, including the revolving credit facility, are in default. There were no such cross defaults at June 2020. In addition, the Real Estate Loan contains co-terminus provisions which require all loans with BMO to be paid in full if any of the loans are paid in full prior to the end of their specified terms.
Other
The Company has issued a letter of credit for $0.5 million to its workers’ compensation insurance carrier as part of its self-insured loss control program.
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9. BUSINESS SEGMENTS
The Company has two reportable business segments: the wholesale distribution of consumer products and the retail sale of health and natural food products. The retail health food stores’ operations are aggregated to comprise the Retail Segment because such operations have similar economic characteristics, as well as similar characteristics with respect to the nature of products sold, the type and class of customers for the health food products and the methods used to sell the products. Included in the “Other” column are intercompany eliminations, and assets held and charges incurred and income earned by our holding company. The segments are evaluated on revenues, gross margins, operating income (loss), and income (loss) before taxes.
Wholesale
Retail
Segment
Consolidated
External revenues:
Cigarettes
276,348,474
Tobacco
59,487,110
Confectionery
20,614,034
Health food
11,538,319
Foodservice & other
28,866,387
Total external revenue
385,316,005
452,025
349,658
Operating income (loss)
4,350,347
(159,706)
(1,717,685)
31,623
429,958
Income (loss) from operations before taxes
4,329,679
(157,273)
(2,118,506)
146,782,772
19,584,013
10,551,204
Capital expenditures
575,462
174,374
749,836
External revenue:
255,049,572
52,014,713
22,541,448
11,037,533
29,338,250
358,943,983
350,701
259,024
609,725
10,417
3,592,787
(702,888)
(1,497,197)
36,240
345,229
3,569,182
(700,076)
(1,842,427)
120,567,974
17,187,420
186,822
137,942,216
757,993
347,790
1,105,783
14
750,264,131
165,443,803
59,477,946
34,629,465
85,026,598
1,060,212,478
1,327,431
990,614
10,907,179
(1,216,491)
(4,661,555)
98,187
1,223,080
10,852,250
(1,209,665)
(5,855,497)
1,808,162
1,124,143
2,932,305
704,983,203
144,875,098
60,352,104
34,001,611
81,219,293
991,429,698
1,093,005
734,706
11,093,779
(489,288)
(4,588,362)
110,837
990,158
11,030,865
(482,128)
(5,578,522)
2,366,666
1,109,896
3,476,562
10. COMMON STOCK REPURCHASES
The Company repurchased a total of 1,148 and 1,564 shares of its common stock during the three and nine months ended June 2020, respectively, for cash totaling approximately $0.1 million in each respective period. For the nine months ended June 2019, the Company repurchased a total of 34,960 shares of its common stock for approximately $3.2 million. All repurchased shares were recorded in treasury stock at cost.
11. IMPACT OF COVID-19
In March 2020, the World Health Organization (WHO) declared the novel strain of coronavirus (COVID-19) a global pandemic. The Company is designated as a critical infrastructure supplier to the Convenience Store Industry. Both of the Company’s business segments have continued to operate during the pandemic as essential suppliers of goods and services and the Company has taken certain proactive and precautionary steps to ensure the safety of its employees, customers and suppliers, including frequent cleaning and disinfection of workspaces, property and equipment, instituting social distancing measures and mandating remote working environments for certain employees.
The Company continues to monitor medical, regulatory and consumer developments as more communities reopen, however, we cannot predict the long-term effects on our business, including our financial position or results of operations, if governmental restrictions such as Stay-At-Home orders or other such directives continue or are reinstated for a prolonged period of time and materially disrupt our supply chain or our ability to procure products or fulfill orders due to disruptions in our warehouse operations.
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections, contains forward-looking statements that are subject to risks and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results. Forward-looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words “future,” “position,” “anticipate(s),” “expect(s),” “believe(s),” “see,” “plan,” “further improve,” “outlook,” “should” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions.
It should be understood that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements:
Changes in these factors could result in significantly different results. Consequently, future results may differ from management’s expectations. Moreover, past financial performance should not be considered a reliable indicator of future performance. Any forward-looking statement contained herein is made as of the date of this document. Except as required by law, the Company undertakes no obligation to publicly update or correct any of these forward-looking statements in the future to reflect changed assumptions, the occurrence of material events or changes in future operating results, financial conditions or business over time.
IMPACT OF COVID-19 (CORONAVIRUS) ON OUR BUSINESS
As of June 2020, most retailers served by the Company’s wholesale segment had reopened and been experiencing improved store traffic and sales attributable to consumers re-emerging from Stay-At-Home orders, however the sales mix, including foodservice sales, remain challenging. Our retail health food segment did experience an increase in customer traffic during Q3 2020 related to home-pantry building in response to the COVID-19 pandemic and the closure of competitors.
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CRITICAL ACCOUNTING ESTIMATES
Certain accounting estimates used in the preparation of the Company’s condensed consolidated unaudited financial statements (“financial statements”) require us to make judgments and estimates and the financial results we report may vary depending on how we make these judgments and estimates. Our critical accounting estimates are set forth in our annual report on Form 10-K for the fiscal year ended September 30, 2019, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during the nine months ended June 2020 other than the adoption of ASC 842 which did have a material impact on the Company’s consolidated balance sheet.
THIRD FISCAL QUARTER 2020 (Q3 2020)
The following discussion and analysis includes the Company’s results of operations for the three and nine months ended June 2020 and June 2019:
Retail Segment
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RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 2020:
Incr (Decr)
% Change
CONSOLIDATED:
Sales(1)
26,872,808
7.3
25,746,420
7.4
1,126,388
5.5
Gross profit percentage
Operating expense
46,134
0.2
1,080,254
77.6
80,112
21.0
225,000
62.3
913,887
137.3
BUSINESS SEGMENTS:
Sales
26,372,022
17,564,000
16,609,828
954,172
5.7
4.6
500,786
4.5
4,088,280
3,916,064
172,216
35.4
35.5
SALES
Changes in sales are driven by two primary components:
SALES – Q3 2020 vs. Q3 2019
Sales in our Wholesale Segment increased $26.4 million during Q3 2020 as compared to Q3 2019. Significant items impacting sales during Q3 2020 included a $10.2 million increase in sales related to price increases implemented by cigarette manufacturers, a $6.6 million increase in sales related to the volume and mix of cigarette cartons sold, a $5.1 million increase in sales related to higher sales volumes in our tobacco, confectionery, foodservice, and other categories (“Other Products”), and a $4.5 million increase in sales related to an increase in cigarette state excise taxes. Sales in our Retail Segment increased $0.5 million for Q3 2020 as compared to Q3 2019. Of this increase, approximately $0.8 million related to higher sales volumes in our existing stores which have experienced an increase in customer traffic related to
19
home-pantry building in response to the COVID-19 pandemic and the closure of competitors. This increase was partially offset by a $0.3 million decrease in sales volume related to the closure of one non-performing store in our Midwest market which was nearing the end of its lease term.
GROSS PROFIT – Q3 2020 vs. Q3 2019
Our gross profit does not include fulfillment costs and costs related to the distribution network which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives we receive which are netted against such costs.
Gross profit in our Wholesale Segment increased $1.0 million during Q3 2020 as compared to Q3 2019. Significant items impacting gross profit during Q3 2020 included a $0.3 million increase in gross profit related to the volume and mix of cigarette cartons sold, a $0.3 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods, and a $0.4 million increase in gross profit related to higher sales volumes and promotions in our Other Products category. Gross profit in our Retail Segment increased $0.2 million during Q3 2020 as compared to Q3 2019 primarily related to higher gross margins in our existing stores as a result of variations in volume and product mix between the comparative periods, partially offset by the closure of one non-performing store in our Midwest market.
OPERATING EXPENSE – Q3 2020 vs. Q3 2019
Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses primarily consist of costs related to our sales, warehouse, delivery and administrative departments, including purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders. Our most significant expenses relate to costs associated with employees, facility and equipment leases, transportation, fuel, and insurance. Our Q3 2020 operating expenses were even with Q3 2019. Significant items impacting operating expenses during Q3 2020 included a $0.4 million increase in employee compensation and benefit costs and a $0.4 million increase in health insurance costs. These increases were offset by a $0.4 million decrease in other operational expenses and a $0.4 million decrease in expenses in our Retail Segment. The change in our Retail Segment operating expenses was primarily related to reduced payroll and compensation costs and the closure of one non-performing store in our Midwest market.
INCOME TAX EXPENSE – Q3 2020 vs. Q3 2019
The change in the Q3 2020 income tax rate as compared to Q3 2019, was primarily related to nondeductible compensation expense in relation to the amount of income from operations before income tax expense between the comparative periods.
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RESULTS OF OPERATIONS – NINE MONTHS ENDED JUNE 2020
69,410,634
6.8
67,967,640
7.1
1,442,994
2.3
5.8
6.0
Operating expenses
2,429,990
(986,996)
(16.4)
220,272
20.0
(368,000)
(24.0)
(703,461)
(20.5)
68,782,780
6.9
51,309,852
48,559,911
2,749,941
4.8
4.9
627,854
1.8
11,880,592
13,187,539
(1,306,947)
(9.9)
34.3
38.8
SALES – Nine Months Ended June 2020
Sales in our Wholesale Segment increased $68.8 million for the nine months ended June 2020 as compared to the same prior year period. Significant items impacting sales during the period included a $29.0 million increase in sales related to price increases implemented by cigarette manufacturers, a $23.5 million increase in sales related to higher sales volumes in our Other Products categories, a $11.8 million increase in sales related to an increase in cigarette state excise taxes and a $4.5 million increase in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.6 million for the nine months ended June 2020 as compared to the same prior year period. Of this increase, approximately $1.1 million related to higher sales volumes in our existing stores which have experienced an increase in customer traffic related to home-pantry building in response to the COVID-19 pandemic and the closure of competitors. This increase was partially offset by a $0.5 million decrease in sales volume related to the closure of one non-performing store in our Midwest market which was nearing the end of its lease term.
GROSS PROFIT – Nine Months Ended June 2020
Gross profit in our Wholesale Segment increased $2.7 million for the nine months ended June 2020 as compared to the same prior year period. Significant items impacting gross profit during the period included a $2.3 million increase in gross profit related to higher sales volumes and promotions in our Other Products category, a $0.3 million increase in gross profit due to the timing and related benefits of cigarette manufacturer price increases between the comparative periods and a $0.1 million increase in gross profit related to the volume and mix of cigarette cartons sold. Gross profit in our Retail Segment decreased $1.3 million for the nine months ended June 2020 as compared to the same prior year period primarily related to lower gross margins in our existing stores as a result of variations in volume and product mix between the comparative periods and the closure of one non-performing store in our Midwest market.
21
OPERATING EXPENSE – Nine Months Ended June 2020
Operating expenses increased $2.4 million during the nine months ended June 2020 as compared to the same prior year period. Significant items impacting operating expenses during the period included a $1.6 million increase in employee compensation and benefit costs, a $0.5 million increase in health insurance costs, a $0.7 million increase in other insurance costs, and a $0.2 million increase in our provision for doubtful accounts, partially offset by a $0.6 million decrease in expenses in our Retail Segment. The change in our Retail Segment operating expenses was primarily related to $0.4 million of reduced payroll and compensation costs and $0.2 million related to the closure of one non-performing store in our Midwest market.
INCOME TAX EXPENSE – Nine Months Ended June 2020
The change in the income tax rate for the nine months ended June 2020 as compared to the same prior year period was primarily related to nondeductible compensation expense in relation to the amount of income from operations before income tax expense between the comparative periods.
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LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company’s variability in cash flows from operating activities is dependent on the timing of inventory purchases and seasonal fluctuations. For example, periodically we have inventory “buy-in” opportunities which offer more favorable pricing terms. As a result, we may have to hold inventory for a period longer than the payment terms. This generates a cash outflow from operating activities which we expect to reverse in later periods. Additionally, during our peak time of operations in the warm weather months, we generally carry higher amounts of inventory to ensure high fill rates and customer satisfaction.
In general, the Company finances its operations through a credit facility agreement (the “Facility”) with Bank of America acting as the senior agent and with BMO Harris Bank participating in the loan syndication. The Facility included the following significant terms at June 2020:
23
Dividend Payments
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Liquidity Risk
The Company’s liquidity position is significantly influenced by its ability to maintain sufficient levels of working capital. For our Company and industry in general, customer credit risk and ongoing access to bank credit heavily influence liquidity positions.
The recent COVID-19 pandemic has fundamentally changed the operating environment for the foreseeable future. While both of our businesses are considered essential services and remain open, the Company cannot predict the long term impact on its workforce, supply chain, or customer base, particularly as it relates to trade credit risk and customer liquidity/solvency.
Additionally, the Company does not currently hedge its exposure to interest rate risk or fuel costs and significant price movements in these areas can and do impact the Company’s profitability.
The Company believes it has sufficient liquidity and access to capital. The operating environment, however, is fluid and changing on a daily basis and it remains unclear how costs, revenues, profitability, or cash flows in future periods will be impacted. Accordingly, a further deterioration in economic conditions could materially impact the Company’s future revenue streams as well as its ability to collect on customer accounts receivable or secure bank credit.
Not applicable.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2020 was made under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As permitted by the SEC, our assessment of internal control over financial reporting excludes (i) internal control over financial reporting of equity method investees and (ii) internal control over the preparation of any financial statement schedules which would be required by Article 12 of Regulation S-X. However, our assessment of internal control over financial reporting with respect to equity method investees did include controls over the recording of amounts related to our investment that are recorded in the consolidated financial statements, including controls over the selection of accounting methods for our investments, the recognition of equity method earnings and losses and the determination, valuation and recording of our investment account balances.
Changes in Internal Control Over Financial Reporting
Except as described above under “Other” in Part I, Item 4., there were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
The emergence and spread of a major epidemic or pandemic (such as the recent COVID-19 or coronavirus) or other widespread public health issue could affect our employees, suppliers and/or customers and cause disruption in our operations including, but not limited to, travel restrictions, temporary closing of one or more of our distribution warehouses or retail stores, labor shortages, business shutdowns, or regional quarantines. These disruptions could negatively affect our ability to service our customers, could contribute to adverse economic conditions including decreases in demand for the products we distribute, resulting in lower sales and profitability, or could present increased credit risk to the Company from customer credit defaults resulting from an economic downturn. In addition to the potential operational risks described above, disruptions caused by a widespread public health issue could present increased reputational risk to the Company or result in legal claims or costly response measures.
There have been no other material changes to the Company’s risk factors as previously disclosed in Item 1A “Risk Factors” of the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2019.
The following table summarizes the purchases made by or on behalf of our Company or certain affiliated purchasers of shares of our common stock during the quarterly period ended June 2020:
Period
Total Number of Shares (or Units) Purchased
Average Price Paid per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs*
April 1 - 30, 2020
38
62.98
74,962
May 1 - 31, 2020
317
56.99
74,645
June 1 - 30, 2020
793
59.48
73,852
1,148
58.91
*
In April 2020, the Company’s Board of Directors replenished the existing share repurchase authority to authorize purchases of up to 75,000 shares of the Company’s common stock in open market or negotiated transactions. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.
(a) Exhibits
31.1
Certification by Christopher H. Atayan, Chief Executive Officer and Chairman, pursuant to section 302 of the Sarbanes-Oxley Act
31.2
Certification by Andrew C. Plummer, President and Chief Financial Officer, pursuant to section 302 of the Sarbanes-Oxley Act
32.1
Certification by Christopher H. Atayan, Chief Executive Officer and Chairman, furnished pursuant to section 906 of the Sarbanes-Oxley Act
32.2
Certification by Andrew C. Plummer, President and Chief Financial Officer, furnished pursuant to section 906 of the Sarbanes-Oxley Act
101
Interactive Data File (filed herewith electronically)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(registrant)
Date: July 20, 2020
/s/ Christopher H. Atayan
Christopher H. Atayan,
Chief Executive Officer and Chairman
/s/ Andrew C. Plummer
Andrew C. Plummer,
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
28