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 |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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⌧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 690,486564,878 shares of its $.01 par value common stock outstanding as of January 15, 2018.July 17, 2020.
Form 10-Q
1st3rd Quarter
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June 30, 2020 | PAGE |
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Notes to condensed consolidated unaudited financial statements | 7 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | 24 |
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25 | |
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26 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
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27 |
2
PART I — FINANCIAL INFORMATION
Item 1.Financial Statements Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 2017June 30, 2020 and September 30, 20172019
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| December |
| September |
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| 2017 |
| 2017 |
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| (Unaudited) |
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| | June | | September | |||||||||
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| 2020 |
| 2019 | |||||||||
| | (Unaudited) | | | | ||||||||
ASSETS |
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| | | | | | |
Current assets: |
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|
|
|
|
|
| | | | | | |
Cash |
| $ | 570,560 |
| $ | 523,065 |
| | $ | 596,564 | | $ | 337,704 |
Accounts receivable, less allowance for doubtful accounts of $0.8 million at both December 2017 and September 2017 |
|
| 30,511,104 |
|
| 30,690,403 |
| ||||||
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 |
|
| 49,699,948 |
|
| 72,909,996 |
| |
| 82,009,219 | |
| 102,343,517 |
Income taxes receivable | | | — | | | 350,378 | |||||||
Prepaid and other current assets |
|
| 7,982,638 |
|
| 4,218,811 |
| |
| 7,259,528 | |
| 7,148,459 |
Total current assets |
|
| 88,764,250 |
|
| 108,342,275 |
| |
| 123,491,353 | |
| 134,845,678 |
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| | | | | | | |||||||
Property and equipment, net |
|
| 13,014,903 |
|
| 13,307,986 |
| |
| 18,236,033 | |
| 17,655,415 |
Operating lease right-of-use assets, net | | | 19,705,044 | | | — | |||||||
Note receivable | | | 3,500,000 | | | — | |||||||
Goodwill |
|
| 6,349,827 |
|
| 6,349,827 |
| |
| 4,436,950 | |
| 4,436,950 |
Other intangible assets, net |
|
| 3,461,811 |
|
| 3,494,311 |
| |
| 500,000 | |
| 500,000 |
Equity method investment | | | 6,648,666 | | | — | |||||||
Other assets |
|
| 323,643 |
|
| 310,488 |
| |
| 399,943 | |
| 273,579 |
Total assets |
| $ | 111,914,434 |
| $ | 131,804,887 |
| | $ | 176,917,989 | | $ | 157,711,622 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 15,022,223 |
| $ | 17,631,552 |
| | $ | 20,719,129 | | $ | 18,647,572 |
Accrued expenses |
|
| 6,735,349 |
|
| 7,553,089 |
| |
| 7,067,083 | |
| 8,577,972 |
Accrued wages, salaries and bonuses |
|
| 1,555,176 |
|
| 3,477,966 |
| |
| 2,968,148 | |
| 3,828,847 |
Income taxes payable |
|
| 657,095 |
|
| 544,069 |
| |
| 480,649 | |
| — |
Current operating lease liabilities | | | 5,486,963 | | | — | |||||||
Current maturities of long-term debt |
|
| 376,478 |
|
| 373,645 |
| |
| 546,657 | |
| 532,747 |
Total current liabilities |
|
| 24,346,321 |
|
| 29,580,321 |
| |
| 37,268,629 | |
| 31,587,138 |
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Credit facility |
|
| 12,638,221 |
|
| 29,037,182 |
| |
| 56,384,002 | |
| 60,376,714 |
Deferred income tax liability, net |
|
| 1,854,151 |
|
| 2,336,263 |
| |
| 1,820,511 | |
| 1,823,373 |
Long-term operating lease liabilities | | | 14,578,728 | | | — | |||||||
Long-term debt, less current maturities |
|
| 2,552,935 |
|
| 2,648,179 |
| |
| 2,713,798 | |
| 3,125,644 |
Other long-term liabilities |
|
| 35,089 |
|
| 34,100 |
| |
| 167,755 | |
| 42,011 |
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Shareholders’ equity: |
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Preferred stock, $.01 par value, 1,000,000 shares authorized |
|
| — |
|
| — |
| |
| — | |
| — |
Common stock, $.01 par value, 3,000,000 shares authorized, 690,486 shares outstanding at December 2017 and 678,006 shares outstanding at September 2017 |
|
| 8,441 |
|
| 8,314 |
| ||||||
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 |
|
| 22,009,620 |
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| 20,825,919 |
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| 24,250,873 | |
| 23,165,639 |
Retained earnings |
|
| 62,086,133 |
|
| 60,935,911 |
| |
| 68,657,375 | |
| 66,414,397 |
Treasury stock at cost |
|
| (13,616,477) |
|
| (13,601,302) |
| |
| (28,932,379) | |
| (28,831,855) |
Total shareholders’ equity |
|
| 70,487,717 |
|
| 68,168,842 |
| |
| 63,984,566 | |
| 60,756,742 |
Total liabilities and shareholders' equity |
| $ | 111,914,434 |
| $ | 131,804,887 |
| ||||||
Total liabilities and shareholders’ equity | | $ | 176,917,989 | | $ | 157,711,622 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
3
AMCON Distributing Company and Subsidiaries
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 | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
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 | |
| — | |
| 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 | | $ | 0.18 | | $ | 0.82 | | $ | 0.82 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
34
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of OperationsShareholders’ Equity
for the three and nine months ended December 31, 2017June 30, 2020 and 20162019
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| For the three months ended December |
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| 2017 |
| 2016 |
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Sales (including excise taxes of $88.6 million and $91.0 million, respectively) |
| $ | 315,513,209 |
| $ | 310,104,229 |
|
Cost of sales |
|
| 297,321,447 |
|
| 291,788,243 |
|
Gross profit |
|
| 18,191,762 |
|
| 18,315,986 |
|
Selling, general and administrative expenses |
|
| 16,353,608 |
|
| 15,698,319 |
|
Depreciation and amortization |
|
| 531,005 |
|
| 526,433 |
|
|
|
| 16,884,613 |
|
| 16,224,752 |
|
Operating income |
|
| 1,307,149 |
|
| 2,091,234 |
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|
|
|
|
|
|
|
|
Other expense (income): |
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|
|
|
|
|
|
Interest expense |
|
| 202,191 |
|
| 217,543 |
|
Other (income), net |
|
| (5,133) |
|
| (5,773) |
|
|
|
| 197,058 |
|
| 211,770 |
|
Income from operations before income tax expense |
|
| 1,110,091 |
|
| 1,879,464 |
|
Income tax expense (benefit) |
|
| (370,000) |
|
| 833,000 |
|
Net income available to common shareholders |
| $ | 1,480,091 |
| $ | 1,046,464 |
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|
Basic earnings per share available to common shareholders |
| $ | 2.15 |
| $ | 1.54 |
|
Diluted earnings per share available to common shareholders |
| $ | 2.13 |
| $ | 1.52 |
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
| 687,679 |
|
| 681,668 |
|
Diluted weighted average shares outstanding |
|
| 695,950 |
|
| 688,676 |
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|
Dividends declared and paid per common share |
| $ | 0.18 |
| $ | 0.18 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | |
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | | | ||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Total | |||||
THREE MONTHS ENDED JUNE 2019 | | | | | | | | | | | | | | | | | | | |
Balance, April 1, 2019 |
| 856,039 | | $ | 8,561 |
| (263,271) | | $ | (24,511,598) | | $ | 23,148,372 | | $ | 66,203,466 | | $ | 64,848,801 |
Dividends on common stock, $0.18 per share |
| — | | | — | | — | | | — | | | — | | | (111,766) | | | (111,766) |
Compensation expense and issuance of stock in connection with equity-based awards |
| — | | | — | | — | | | — | | | 36,801 | | | — | | | 36,801 |
Repurchase of common stock | | — | | | — | | (1) | | | (141) | | | — | | | — | | | (141) |
Net income |
| — | |
| — | | — | | | — | | | — | | | 665,679 | | | 665,679 |
Balance, June 30, 2019 |
| 856,039 | | $ | 8,561 |
| (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 |
Dividends on common stock, $0.18 per share |
| — | | | — | | — | | | — | | | — | | | (107,091) | | | (107,091) |
Compensation expense and issuance of stock in connection with equity-based awards |
| 500 | | | 5 | | — | | | — | | | 26,728 | | | — | | | 26,733 |
Repurchase of common stock | | — | | | — | | (1,148) | | | (68,725) | | | — | | | — | | | (68,725) |
Net income |
| — | |
| — | | — | | | — | | | — | | | 1,579,566 | | | 1,579,566 |
Balance, June 30, 2020 |
| 869,867 | | $ | 8,697 |
| (304,989) | | $ | (28,932,379) | | $ | 24,250,873 | | $ | 68,657,375 | | $ | 63,984,566 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | | | |
| | Common Stock | | Treasury Stock | | Paid-in | | Retained | | | | ||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Total | |||||
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) | | | (524,866) |
Compensation expense and issuance of stock in connection with equity-based awards | | 11,950 | | | 120 | | — | | | — | | | 1,116,075 | | | — | | | 1,116,195 |
Repurchase of common stock | | — | | | — | | (34,960) | | | (3,186,987) | | | — | | | — | | | (3,186,987) |
Net income | | — | |
| — | | — | | | — | | | — | | | 3,434,215 | | | 3,434,215 |
Balance, June 30, 2019 | | 856,039 | | $ | 8,561 | | (263,272) | | $ | (24,511,739) | | $ | 23,185,173 | | $ | 66,757,379 | | $ | 65,439,374 |
| | | | | | | | | | | | | | | | | | | |
NINE MONTHS ENDED JUNE 2020 | | | | | | | | | | | | | | | | | | | |
Balance, October 1, 2019 | | 856,039 | | $ | 8,561 | | (303,425) | | $ | (28,831,855) | | $ | 23,165,639 | | $ | 66,414,397 | | $ | 60,756,742 |
Dividends on common stock, $0.82 per share | | — | | | — | | — | | | — | | | — | | | (487,776) | | | (487,776) |
Compensation expense and issuance of stock in connection with equity-based awards | | 13,828 | | | 136 | | — | | | — | | | 1,085,234 | | | — | | | 1,085,370 |
Repurchase of common stock | | — | | | — | | (1,564) | | | (100,524) | | | — | | | — | | | (100,524) |
Net income | | — | |
| — | | — | | | — | | | — | | | 2,730,754 | | | 2,730,754 |
Balance, June 30, 2020 | | 869,867 | | $ | 8,697 | | (304,989) | | $ | (28,932,379) | | $ | 24,250,873 | | $ | 68,657,375 | | $ | 63,984,566 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
45
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Cash Flows
for the threenine months ended December 31, 2017June 30, 2020 and 20162019
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| December |
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| December |
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| 2017 |
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| 2016 |
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| | | | | | | |||||||
| | June | | June | |||||||||
|
| 2020 |
| 2019 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
| | | | | | |
Net income |
| $ | 1,480,091 |
| $ | 1,046,464 |
| | $ | 2,730,754 | | $ | 3,434,215 |
Adjustments to reconcile net income from operations to net cash flows from operating activities: |
|
|
|
|
|
|
| ||||||
Adjustments to reconcile net income from operations to net cash flows from (used in) | | | | | | | |||||||
Depreciation |
|
| 498,505 |
|
| 460,183 |
| | | 2,318,045 | | | 1,827,711 |
Amortization |
|
| 32,500 |
|
| 66,250 |
| | | — | | | 41,667 |
Gain on sale of property and equipment |
|
| (300) |
|
| (23,559) |
| ||||||
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 |
|
| 334,256 |
|
| 459,278 |
| | | 765,704 | | | 1,035,128 |
Deferred income taxes |
|
| (482,112) |
|
| 406,972 |
| | | (2,862) | | | 112,439 |
Provision (recovery) for losses on doubtful accounts |
|
| (3,000) |
|
| 183 |
| ||||||
Provision for losses on inventory obsolescence |
|
| 30,660 |
|
| 58,776 |
| ||||||
Other |
|
| 989 |
|
| 319 |
| ||||||
Provision for losses on doubtful accounts | | | 349,000 | | | 179,000 | |||||||
Inventory allowance | | | 182,218 | | | 454,357 | |||||||
| | | | | | | |||||||
Changes in assets and liabilities: |
|
|
|
|
|
|
| | | | | | |
Accounts receivable |
|
| 182,299 |
|
| 3,605,673 |
| | | (9,309,422) | | | (3,209,941) |
Inventories |
|
| 23,179,388 |
|
| (1,385,731) |
| | | 20,152,080 | | | 11,468,718 |
Prepaid and other current assets |
|
| (3,763,827) |
|
| 1,969,853 |
| | | (373,414) | | | (5,698,021) |
Other assets |
|
| (13,155) |
|
| 24,074 |
| | | (126,364) | | | 19,712 |
Accounts payable |
|
| (2,523,433) |
|
| (2,179,939) |
| | | 2,040,386 | | | 2,485,721 |
Accrued expenses and accrued wages, salaries and bonuses |
|
| (2,011,951) |
|
| (2,370,918) |
| | | (1,424,472) | | | (1,460,935) |
Income taxes payable |
|
| 113,026 |
|
| 28,134 |
| ||||||
Net cash flows from operating activities |
|
| 17,053,936 |
|
| 2,166,012 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Other long-term liabilities | | | 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 |
|
| (291,318) |
|
| (400,778) |
| | | (2,901,134) | | | (3,385,977) |
Proceeds from sales of property and equipment |
|
| 300 |
|
| 31,478 |
| | | 16,600 | | | 56,200 |
Net cash flows from investing activities |
|
| (291,018) |
|
| (369,300) |
| ||||||
|
|
|
|
|
|
|
| ||||||
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 |
|
| 305,522,554 |
|
| 319,265,456 |
| | | 1,083,878,207 | | | 1,022,309,940 |
Repayments under revolving credit facility |
|
| (321,921,515) |
|
| (319,998,237) |
| | | (1,087,870,919) | | | (1,025,624,006) |
Principal payments on long-term debt |
|
| (92,411) |
|
| (89,662) |
| | | (397,936) | | | (686,139) |
Proceeds from exercise of stock options | | | 25,750 | | | — | |||||||
Repurchase of common stock |
|
| (15,175) |
|
| (1,038,060) |
| | | (100,524) | | | (3,186,987) |
Dividends on common stock |
|
| (129,026) |
|
| (127,713) |
| | | (487,776) | | | (524,866) |
Withholdings on the exercise of equity-based awards |
|
| (79,850) |
|
| (82,456) |
| ||||||
Net cash flows from financing activities |
|
| (16,715,423) |
|
| (2,070,672) |
| ||||||
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 |
|
| 47,495 |
|
| (273,960) |
| | | 258,860 | | | (206,637) |
Cash, beginning of period |
|
| 523,065 |
|
| 605,380 |
| | | 337,704 | | | 520,644 |
Cash, end of period |
| $ | 570,560 |
| $ | 331,420 |
| | $ | 596,564 | | $ | 314,007 |
|
|
|
|
|
|
|
| ||||||
| | | | | | | |||||||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
| | | | | | |
Cash paid during the period for interest |
| $ | 199,423 |
| $ | 223,802 |
| | $ | 1,387,381 | | $ | 1,140,562 |
Cash paid during the period for income taxes |
|
| — |
|
| 397,894 |
| |
| 376,835 | |
| 1,265,725 |
|
|
|
|
|
|
|
| ||||||
| | | | | | | |||||||
Supplemental disclosure of non-cash information: |
|
|
|
|
|
|
| | | | | | |
Equipment acquisitions classified in accounts payable |
|
| 15,465 |
|
| 2,128 |
| | $ | 100,424 | | $ | 91,838 |
Dividends declared, not paid |
|
| 200,843 |
|
| 194,173 |
| ||||||
Issuance of common stock in connection with the vesting and exercise of equity-based awards |
|
| 1,183,091 |
|
| 1,262,763 |
| |
| 990,653 | |
| 1,005,792 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
56
AMCON Distributing Company and Subsidiaries
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:
| Our wholesale distribution segment (“Wholesale Segment”) distributes consumer products and provides a full range of programs and services to our customers that are focused on helping them manage their business and increase their profitability. We serve customers in 26 states and primarily operate in the Central, Rocky Mountain, and |
| Our retail health food segment (“Retail Segment”) operates |
WHOLESALE SEGMENT
Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,0004,100 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 16,00017,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilledrefrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In November 2017,2019, Convenience Store News ranked us as the seventh (7th)eighth (8th) largest convenience store distributor in the United States based on annual sales.
Our wholesale businessWholesale 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, optimizing inventory optimization and merchandising expertise, information systems, and accessingaccess 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 dockcross-dock facilities, include approximately 641,000685,000 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.
67
Our Retail Segment operates sixteentwenty-one retail health food stores as Chamberlin’s Market & Café andNatural Foods (“Chamberlin’s”), Akin’s Natural Foods Market.(“Akins”), and Earth Origins Market (“EOM”). These stores carry over 32,00033,000 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, operateshas a total of seven storeslocations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of ninesix locations in Arkansas, Missouri, Nebraska, 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, such as adjustments consisting of normal recurring items.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, 2017,2019, 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 December 31, 2017June 30, 2020 and December 31, 2016June 30, 2019 have been referred to throughout this quarterly report as Q1 2018Q3 2020 and Q1 2017,Q3 2019, respectively. The fiscal balance sheet dates as of December 31, 2017June 30, 2020 and September 30, 20172019 have been referred to as December 2017June 2020 and September 2017,2019, 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 PronouncementsPronouncement Adopted
In July 2015,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11, "Simplifying2016-02 “Leases (Topic 842)”. Accounting Standards Codification Topic (“ASC”) 842 superseded the Measurement of Inventory" ("lease accounting requirements in “ASC 840 - Leases”. The most significant among the changes in ASU 2015-11"). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value2016-02 is the estimated selling prices inrecognition 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 ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. This ASU is effective for fiscal years beginning after December 15, 2016 (Fiscal 2018 for the Company). The amendments should be applied prospectively with earlier application permitted aspresent value of the beginningremaining lease payments while the ROU asset is determined based on the amount of an interim or annual reporting period.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 this ASUASC 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 our consolidated financial statements.the Company’s debt-covenant compliance under its revolving credit facility.
In March 2016, FASB issued ASU No. 2016-09, “Compensation - Stock Compensation: Improvementsaccordance 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 Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of how companiesnot 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 share-based compensation, includingnon-lease components as part of the accountinglease for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statements of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 (Fiscal 2018 for the Company) and early adoption is permitted. The adoption of this ASU did not have a material impact on our consolidated financial statements.all asset classes.
7
New Accounting Pronouncements
In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This ASU and related amendments supersedes the revenue recognition requirements in "Accounting Standard Codification 605 - Revenue Recognition" and most industry-specific guidance. The standard requires that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2017 (Fiscal 2019 for the Company), and for interim periods within that fiscal year. The Company is in the data aggregation and quantification phase of its review of this new standard, and is working to assess the impact and our approach towards adopting this ASU.
In February 2016, FASB issued ASU No. 2016-02 "Leases” ("ASU 2016-02"). ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for all leases greater than one year in duration and classified as operating leases under previous GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (Fiscal 2020 for the Company), and for interim periods within that fiscal year. The Company is currently evaluating this ASU and its potential impact on our consolidated financial statements including the potential capitalization of all operating leases on the Company’s balance sheet.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), 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, 20192022 (fiscal 20212024 for the Company) with early adoption permitted. The Company is currently reviewing this ASU and its potential impact on our consolidated financial statements.
In January 2017,March 2020, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other2020-04, “Reference Rate Reform (Topic 350)848): SimplifyingFacilitation of the TestEffects of Reference Rate Reform on Financial Reporting.” The amendments in this update provide optional guidance for Goodwill Impairment” (“ASU 2017-04”). The new guidance simplifiesa limited period of time to ease the subsequent measurement of goodwill by eliminating Step 2potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as the market transitions from the goodwill impairment test. ASU 2017-04 requires goodwill impairmentLondon Interbank Offered Rate (LIBOR) and other interbank offered rates to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. ASU 2017-04 requires prospective application and isalternative reference rates. The amendments in this update were effective upon issuance for annual periods beginning afterall entities through December 15, 2019 (Fiscal 2021 for the Company) with early adoption permitted.31, 2022. The Company is currently evaluatingreviewing this ASU and its potential impact on our consolidated financial statements.
2. INVENTORIES
At December 2017 and September 2017, inventoriesInventories 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 $0.8$1.2 million at both December 2017June 2020 and $1.0 million at September 2017.2019. 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
89
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 | | $ | 19,705,044 |
| | | | | |
Liabilities | | | | | |
Current: | | | | | |
Operating | | Operating lease liabilities | | $ | 5,486,963 |
Non-current: | | | | | |
Operating | | Long-term operating lease liabilities | | | 14,578,728 |
Total lease liabilities | | | | $ | 20,065,691 |
The components of lease costs were as follows:
| | | |
|
| | |
| | Total | |
THREE MONTHS ENDED JUNE 2020 | | | |
Operating lease cost | | $ | 1,674,003 |
Short-term lease cost | | | 79,334 |
Variable lease cost | | | 82,092 |
Net lease cost | | $ | 1,835,429 |
| | | |
| | | |
| | Total | |
NINE MONTHS ENDED JUNE 2020 | | | |
Operating lease cost | | $ | 5,005,627 |
Short-term lease cost | | | 246,776 |
Variable lease cost | | | 251,319 |
Net lease cost | | $ | 5,503,722 |
Maturities of lease liabilities as of June 2020 were as follows:
| | | |
|
| Operating Leases | |
2020 | | $ | 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 | | $ | 20,065,691 |
Weighted-average remaining lease term and weighted-average discount rate information regarding the Company’s leases were as follows:
| | | |
Lease Term | | June 2020 | |
Weighted-average remaining lease term (years): | | | |
Operating | | 4.4 | |
Discount Rate | | | |
Weighted-average discount rate: | | | |
Operating | | 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 |
3.Future minimum operating lease payments as of September 2019, as reported in the 2019 Form 10-K under ASC 840, were as follows:
| | | |
|
| Operating | |
Fiscal Year Ending | | Leases | |
2020 | | $ | 6,468,837 |
2021 | |
| 5,418,617 |
2022 | |
| 4,299,261 |
2023 | |
| 3,216,671 |
2024 | |
| 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:
|
|
|
|
|
|
|
| ||||||
|
| December |
| September |
| ||||||||
|
| 2017 |
| 2017 |
| ||||||||
| | | | | | | |||||||
|
| June |
| September | |||||||||
| | 2020 | | 2019 | |||||||||
Wholesale Segment |
| $ | 4,436,950 |
| $ | 4,436,950 |
| | $ | 4,436,950 | | $ | 4,436,950 |
Retail Segment |
|
| 1,912,877 |
|
| 1,912,877 |
| ||||||
|
| $ | 6,349,827 |
| $ | 6,349,827 |
|
Other intangible assets of the Company consisted of the following:
|
|
|
|
|
|
|
| ||||||
|
| December |
| September |
| ||||||||
|
| 2017 |
| 2017 |
| ||||||||
| | | | | | | |||||||
|
| June |
| September | |||||||||
| | 2020 |
| 2019 | |||||||||
Trademarks and tradenames (Retail Segment) |
| $ | 3,373,269 |
| $ | 3,373,269 |
| | $ | 500,000 | | $ | 500,000 |
Customer relationships (Wholesale Segment) (less accumulated amortization of approximately $2.0 million at both December 2017 and September 2017) |
|
| 88,542 |
|
| 121,042 |
| ||||||
|
| $ | 3,461,811 |
| $ | 3,494,311 |
|
Goodwill, trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. At December 2017, identifiable intangible assets consideredGoodwill 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 finite lives were represented by customer relationships which are being amortized over eight years. These intangible assets are evaluated for accelerated attrition or amortization adjustments if warranted.been no material changes to the Company’s impairment assessments since its fiscal year ended September 2019.
Estimated future amortization expense related
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 identifiable intangiblejointly 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 finite lives isa 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 follows at December 2017:of June 2020.
|
|
|
|
| ||||
|
| December | ||||||
|
| 2017 | ||||||
Fiscal 2018 (1) |
| $ | 46,875 |
| ||||
Fiscal 2019 |
|
| 41,667 |
| ||||
|
| $ | 88,542 |
|
|
|
4.6. DIVIDENDS
The Company paid cash dividends on its common stock totaling $0.1 million in each ofand $0.5 million for the three and nine month periods ended December 2017June 2020, respectively, and December 2016.$0.1 million and $0.5 million for the three and nine month periods ended June 2019, respectively.
9
5.7. EARNINGS PER SHARE
Basic earnings per share available to common shareholders is calculated by dividing net income less preferred stock dividend requirements 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 less preferred stock dividend requirements (when anti-dilutive) by the sum of the weighted average common shares outstanding and the weighted average dilutive options.equity awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| For the three months ended December |
| ||||||||||||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||||||||||||
|
| Basic |
| Diluted |
| Basic |
| Diluted |
| ||||||||||||||||
| | | | | | | | | | | | | |||||||||||||
| | For the three months ended June | |||||||||||||||||||||||
| | 2020 | | 2019 | |||||||||||||||||||||
|
| Basic |
| Diluted |
| Basic |
| Diluted | |||||||||||||||||
Weighted average common shares outstanding |
|
| 687,679 |
|
| 687,679 |
|
| 681,668 |
|
| 681,668 |
| | | 565,483 | | | 565,483 | | | 592,768 | | | 592,768 |
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock and conversion of preferred stock (1) |
|
| — |
|
| 8,271 |
|
| — |
|
| 7,008 |
| ||||||||||||
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 |
|
| 687,679 |
|
| 695,950 |
|
| 681,668 |
|
| 688,676 |
| | | 565,483 | | | 569,902 | | | 592,768 | | | 606,278 |
Net income available to common shareholders |
| $ | 1,480,091 |
| $ | 1,480,091 |
| $ | 1,046,464 |
| $ | 1,046,464 |
| | $ | 1,579,566 | | $ | 1,579,566 | | $ | 665,679 | | $ | 665,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | |||||||||||||
Net earnings per share available to common shareholders |
| $ | 2.15 |
| $ | 2.13 |
| $ | 1.54 |
| $ | 1.52 |
| | $ | 2.79 | | $ | 2.77 | | $ | 1.12 | | $ | 1.10 |
(1) |
| Diluted earnings per share calculation includes all stock options and restricted stock units deemed to be dilutive. |
| | | | | | | | | | | | |
| | For the nine months ended June | ||||||||||
| | 2020 | | 2019 | ||||||||
|
| Basic |
| Diluted |
| Basic |
| Diluted | ||||
Weighted average common shares outstanding | | | 564,578 | | | 564,578 | | | 607,505 | | | 607,505 |
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1) | | | — | | | 5,295 | | | — | | | 10,382 |
Weighted average number of shares outstanding | | | 564,578 | | | 569,873 | | | 607,505 | | | 617,887 |
Net income available to common shareholders | | $ | 2,730,754 | | $ | 2,730,754 | | $ | 3,434,215 | | $ | 3,434,215 |
| | | | | | | | | | | | |
Net earnings per share available to common shareholders | | $ | 4.84 | | $ | 4.79 | | $ | 5.65 | | $ | 5.56 |
(1) | Diluted earnings per share calculation includes all stock options and restricted stock units deemed to be dilutive. |
6.
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 December 2017:June 2020:
| A |
| $ |
12
| Loan accordion allowing the Company to increase the size of the credit facility agreement by $25.0 million. |
| A provision providing an additional $10.0 million of credit advances for certain inventory purchases. |
| Evergreen renewal clause automatically renewing the agreement for one year unless either the borrower or lender provides written notice terminating the agreement at least 90 days prior to the end of any original or renewal term of the agreement. |
| The Facility bears interest at either the bank’s prime rate, or at LIBOR (or equivalent successor rate index) plus 125 - 150 basis points depending on certain credit facility utilization measures, at the election of the Company. In no event shall LIBOR be less than 100 basis points. |
| Lending limits subject to accounts receivable and inventory limitations. |
| An unused commitment fee equal to one-quarter of one percent (1/4%) per annum on the difference between the maximum loan limit and average monthly borrowings. |
| Secured by collateral including all of the Company’s equipment, intangibles, inventories, and accounts receivable. |
10
| A financial covenant requiring a fixed charge coverage ratio of at least 1.0 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the credit agreement. The Company’s |
| Provides that the Company may |
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 itthe loan to be considered in default if the loans where BMO is a lender, including the revolving credit facility, isare in default. There were no such cross defaults at December 2017.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
AMCONThe Company has issued a $0.5 million letter of credit for $0.5 million to its workers’ compensation insurance carrier as part of its self‑insuredself-insured loss control program.
7. EQUITY-BASED INCENTIVE AWARDS
Omnibus Plan
The Company has two equity-based incentive plans, the 2007 Omnibus Incentive Plan and 2014 Omnibus Incentive Plan (collectively “the Omnibus Plans”), which provide for equity incentives to employees. Each Omnibus Plan was designed with the intent of encouraging employees to acquire a vested interest in the growth and performance of the Company. The Omnibus Plans together permit the issuance of up to 225,000 shares of the Company’s common stock in the form of stock options, restricted stock awards, restricted stock units, performance share awards as well as awards such as stock appreciation rights, performance units, performance shares, bonus shares, and dividend share awards payable in the form of common stock or cash. The number of shares issuable under the Omnibus Plans is subject to customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock. At December 2017, awards with respect to a total of 208,815 shares, net of forfeitures, had been awarded pursuant to the Omnibus Plans and awards with respect to another 16,185 shares may be awarded under the Omnibus Plans.
1113
Stock Options
The Company issued 6,000 incentive stock options during both Q1 2018 and Q1 2017 to various employees pursuant to the provisions of the Company’s 2014 Omnibus Plan. The stock options issued by the Company expire ten years from the grant date and include a five year graded annual vesting schedule. The awards had an estimated grant date fair value of approximately $0.2 million in Q1 2018 and $0.1 million in Q1 2017 using the Black‑Scholes option pricing model. The following assumptions were used in connection with the Black‑Scholes option pricing calculation as it relates to the Q1 2018 and Q1 2017 incentive stock option awards:
|
|
|
|
|
|
|
|
| Stock Option |
| Stock Option | ||
|
| Pricing |
| Pricing | ||
|
| Assumptions |
| Assumptions | ||
|
| 2018 |
| 2017 | ||
Risk-free interest rate |
| 2.41 | % |
| 2.12 | % |
Dividend yield |
| 0.8 | % |
| 0.6 | % |
Expected volatility |
| 33.00 | % |
| 22.40 | % |
Expected life in years |
| 6 |
|
| 6 |
|
The following is a summary of stock option activity during Q1 2018:
|
|
|
|
|
|
|
|
|
|
| Weighted |
| |
|
| Number |
| Average |
| |
|
| of |
| Exercise |
| |
|
| Shares |
| Price |
| |
Outstanding at September 2017 |
| 28,300 |
| $ | 74.75 |
|
Granted |
| 6,000 |
|
| 90.50 |
|
Exercised |
| — |
|
| — |
|
Forfeited/Expired |
| — |
|
| — |
|
Outstanding at December 2017 |
| 34,300 |
| $ | 77.50 |
|
12
Restricted Stock Units
At December 2017, the Compensation Committee of the Board of Directors had authorized and approved the following restricted stock unit awards to members of the Company’s management team pursuant to the provisions of the Company’s Omnibus Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Restricted |
| Restricted |
| Restricted |
| Restricted | ||||
Date of award: |
|
| October 2013 |
|
| October 2015 |
|
| October 2016 |
|
| October 2017 |
Original number of awards issued: |
|
| 17,600 |
|
| 13,250 |
|
| 13,000 |
|
| 13,000 |
Service period: |
|
| 36 - 60 months |
|
| 36 - 60 months |
|
| 36 months |
|
| 36 months |
Estimated fair value of award at grant date: |
| $ | 1,486,000 |
| $ | 1,112,000 |
| $ | 1,191,000 |
| $ | 1,177,000 |
Non-vested awards outstanding at December 31, 2017: |
|
| 660 |
|
| 4,484 |
|
| 8,667 |
|
| 13,000 |
Fair value of non-vested awards at |
| $ | 65,000 |
| $ | 439,000 |
| $ | 848,000 |
| $ | 1,272,000 |
(1)16,940 restricted stock units were vested as of December 2017. The remaining 660 restricted stock units will vest in October 2018.
There is no direct cost to the recipients of the restricted stock units, except for any applicable taxes. The restricted stock units are subject to the customary adjustments in the event of stock splits, stock dividends, and certain other distributions on the Company’s common stock. All cash dividends and/or distributions payable to restricted stock recipients will be held in escrow until all the conditions of vesting have been met.
The restricted stock units provide that the recipients can elect, at their option, to receive either common stock in the Company, or a cash settlement based upon the closing price of the Company’s shares, at the time of vesting. Based on these award provisions, the compensation expense recorded in the Company’s Statement of Operations reflects the straight‑line amortized fair value based on the period end closing price under the liability method.
13
The following summarizes restricted stock unit activity under the Omnibus Plans during Q1 2018:
|
|
|
|
|
|
|
|
| Number |
| Weighted |
| |
|
| of |
| Average |
| |
|
| Shares |
| Fair Value |
| |
Nonvested restricted stocks units at September 2017 |
| 27,521 |
| $ | 92.25 |
|
Granted |
| 13,000 |
|
| 90.50 |
|
Vested |
| (13,710) |
|
| 90.97 |
|
Expired |
| — |
|
| — |
|
Nonvested restricted stocks units at December 2017 |
| 26,811 |
| $ | 97.85 |
|
All Equity-Based Awards (stock options and restricted stock units)
Net income before income taxes included compensation expense of approximately $0.3 million and $0.5 million during Q1 2018 and Q1 2017, respectively, related to the amortization of all equity-based compensation awards. Total unamortized compensation expense related to these awards at December 2017 and September 2017 was approximately $2.7 million and $1.5 million, respectively.
8. INCOME TAXES
The Company’s Q1 2018 results of operations included the impact of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”), which was signed into law on December 22, 2017. Among numerous provisions included in the new law was the reduction of the corporate federal income tax rate from 35% to 21%. In Q1 2018, the Company applied the newly enacted corporate federal income tax rate of 21% resulting in approximately a $0.9 million income tax benefit which is reflected in the Company’s Q1 2018 Statement Of Operations. This tax benefit was primarily the result of applying the new lower income tax rates to the Company’s net long term deferred tax liabilities recorded on its Consolidated Balance Sheet. The final impact of Tax Reform may differ due to and among other things, changes in interpretations, assumptions made by the Company, the issuance of additional guidance, and actions Company may take as a result of Tax Reform.
14
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 |
| Segment |
| Other |
| Consolidated |
| ||||||||||||||||
THREE MONTHS ENDED DECEMBER 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | |||||||||||||
| | Wholesale | | Retail | | | | | |||||||||||||||||
|
| Segment |
| Segment |
| Other |
| Consolidated | |||||||||||||||||
THREE MONTHS ENDED JUNE 2020 | | | | | | | | | | | | | |||||||||||||
External revenues: | | | | | | | | | | | | | |||||||||||||
Cigarettes | | $ | 276,348,474 | | $ | — | | $ | — | | $ | 276,348,474 | |||||||||||||
Tobacco | | | 59,487,110 | | | — | | | — | | | 59,487,110 | |||||||||||||
Confectionery | | | 20,614,034 | | | — | | | — | | | 20,614,034 | |||||||||||||
Health food | | | — | | | 11,538,319 | | | — | | | 11,538,319 | |||||||||||||
Foodservice & other | | | 28,866,387 | | | — | | | — | | | 28,866,387 | |||||||||||||
Total external revenue | | | 385,316,005 | | | 11,538,319 | | | — | | | 396,854,324 | |||||||||||||
Depreciation | | | 452,025 | | | 349,658 | | | — | | | 801,683 | |||||||||||||
Amortization | | | — | | | — | | | — | | | — | |||||||||||||
Operating income (loss) | | | 4,350,347 | | | (159,706) | | | (1,717,685) | | | 2,472,956 | |||||||||||||
Interest expense | | | 31,623 | | | — | | | 429,958 | | | 461,581 | |||||||||||||
Income (loss) from operations before taxes | | | 4,329,679 | | | (157,273) | | | (2,118,506) | | | 2,053,900 | |||||||||||||
Equity method investment earnings, net of tax | | | — | | | — | | | 111,666 | | | 111,666 | |||||||||||||
Total assets | | | 146,782,772 | | | 19,584,013 | | | 10,551,204 | | | 176,917,989 | |||||||||||||
Capital expenditures | | | 575,462 | | | 174,374 | | | — | | | 749,836 | |||||||||||||
| | | | | | | | | | | | | |||||||||||||
THREE MONTHS ENDED JUNE 2019 | | | | | | | | | | | | | |||||||||||||
External revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Cigarettes |
| $ | 223,265,578 |
| $ | — |
| $ | — |
| $ | 223,265,578 |
| | $ | 255,049,572 | | $ | — | | $ | — | | $ | 255,049,572 |
Tobacco |
|
| 41,641,678 |
|
| — |
|
| — |
|
| 41,641,678 |
| | | 52,014,713 | | | — | | | — | | | 52,014,713 |
Confectionery |
|
| 18,516,318 |
|
| — |
|
| — |
|
| 18,516,318 |
| | | 22,541,448 | | | — | | | — | | | 22,541,448 |
Health food |
|
| — |
|
| 6,289,897 |
|
| — |
|
| 6,289,897 |
| | | — | | | 11,037,533 | | | — | | | 11,037,533 |
Foodservice & other |
|
| 25,799,738 |
|
| — |
|
| — |
|
| 25,799,738 |
| | | 29,338,250 | | | — | | | — | | | 29,338,250 |
Total external revenue |
|
| 309,223,312 |
|
| 6,289,897 |
|
| — |
|
| 315,513,209 |
| | | 358,943,983 | | | 11,037,533 | | | — | | | 369,981,516 |
Depreciation |
|
| 310,485 |
|
| 188,020 |
|
| — |
|
| 498,505 |
| | | 350,701 | | | 259,024 | | | — | | | 609,725 |
Amortization |
|
| 32,500 |
|
| — |
|
| — |
|
| 32,500 |
| | | 10,417 | | | — | | | — | | | 10,417 |
Operating income (loss) |
|
| 3,188,983 |
|
| (472,981) |
|
| (1,408,853) |
|
| 1,307,149 |
| | | 3,592,787 | | | (702,888) | | | (1,497,197) | | | 1,392,702 |
Interest expense |
|
| 23,708 |
|
| — |
|
| 178,483 |
|
| 202,191 |
| | | 36,240 | | | — | | | 345,229 | | | 381,469 |
Income (loss) from operations before taxes |
|
| 3,167,932 |
|
| (470,505) |
|
| (1,587,336) |
|
| 1,110,091 |
| | | 3,569,182 | | | (700,076) | | | (1,842,427) | | | 1,026,679 |
Total assets |
|
| 97,487,611 |
|
| 14,302,363 |
|
| 124,460 |
|
| 111,914,434 |
| | | 120,567,974 | | | 17,187,420 | | | 186,822 | | | 137,942,216 |
Capital expenditures |
|
| 54,646 |
|
| 236,672 |
|
| — |
|
| 291,318 |
| | | 757,993 | | | 347,790 | | | — | | | 1,105,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
THREE MONTHS ENDED DECEMBER 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
External revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cigarettes |
| $ | 221,769,023 |
| $ | — |
| $ | — |
| $ | 221,769,023 |
| ||||||||||||
Tobacco |
|
| 38,685,826 |
|
| — |
|
| — |
|
| 38,685,826 |
| ||||||||||||
Confectionery |
|
| 18,600,447 |
|
| — |
|
| — |
|
| 18,600,447 |
| ||||||||||||
Health food |
|
| — |
|
| 6,239,304 |
|
| — |
|
| 6,239,304 |
| ||||||||||||
Foodservice & other |
|
| 24,809,629 |
|
| — |
|
| — |
|
| 24,809,629 |
| ||||||||||||
Total external revenue |
|
| 303,864,925 |
|
| 6,239,304 |
|
| — |
|
| 310,104,229 |
| ||||||||||||
Depreciation |
|
| 342,674 |
|
| 117,509 |
|
| — |
|
| 460,183 |
| ||||||||||||
Amortization |
|
| 66,250 |
|
| — |
|
| — |
|
| 66,250 |
| ||||||||||||
Operating income (loss) |
|
| 3,968,792 |
|
| (298,486) |
|
| (1,579,072) |
|
| 2,091,234 |
| ||||||||||||
Interest expense |
|
| 26,393 |
|
| — |
|
| 191,150 |
|
| 217,543 |
| ||||||||||||
Income (loss) from operations before taxes |
|
| 3,943,902 |
|
| (294,215) |
|
| (1,770,223) |
|
| 1,879,464 |
| ||||||||||||
Total assets |
|
| 93,912,144 |
|
| 13,038,299 |
|
| 85,364 |
|
| 107,035,807 |
| ||||||||||||
Capital expenditures |
|
| 166,775 |
|
| 234,003 |
|
| — |
|
| 400,778 |
|
14
| | | | | | | | | | | | | |||||||
| | Wholesale | | Retail | | | | | |||||||||||
|
| Segment |
| Segment |
| Other |
| Consolidated | |||||||||||
NINE MONTHS ENDED JUNE 2020 | | | | | | | | | | | | | |||||||
External revenue: | | | | | | | | | | | | | |||||||
Cigarettes | | $ | 750,264,131 | | $ | — | | $ | — | | $ | 750,264,131 | |||||||
Tobacco | | | 165,443,803 | | | — | | | — | | | 165,443,803 | |||||||
Confectionery | | | 59,477,946 | | | — | | | — | | | 59,477,946 | |||||||
Health food | | | — | | | 34,629,465 | | | — | | | 34,629,465 | |||||||
Foodservice & other | | | 85,026,598 | | | — | | | — | | | 85,026,598 | |||||||
Total external revenue | | | 1,060,212,478 | | | 34,629,465 | | | — | | | 1,094,841,943 | |||||||
Depreciation | | | 1,327,431 | | | 990,614 | | | — | | | 2,318,045 | |||||||
Amortization | | | — | | | — | | | — | | | — | |||||||
Operating income (loss) | | | 10,907,179 | | | (1,216,491) | | | (4,661,555) | | | 5,029,133 | |||||||
Interest expense | | | 98,187 | | | — | | | 1,223,080 | | | 1,321,267 | |||||||
Income (loss) from operations before taxes | | | 10,852,250 | | | (1,209,665) | | | (5,855,497) | | | 3,787,088 | |||||||
Equity method investment earnings, net of tax | | | — | | | — | | | 111,666 | | | 111,666 | |||||||
Total assets | | | 146,782,772 | | | 19,584,013 | | | 10,551,204 | | | 176,917,989 | |||||||
Capital expenditures | | | 1,808,162 | | | 1,124,143 | | | — | | | 2,932,305 | |||||||
| | | | | | | | | | | | | |||||||
NINE MONTHS ENDED JUNE 2019 | | | | | | | | | | | | | |||||||
External revenue: | | | | | | | | | | | | | |||||||
Cigarettes | | $ | 704,983,203 | | $ | — | | $ | — | | $ | 704,983,203 | |||||||
Tobacco | | | 144,875,098 | | | — | | | — | | | 144,875,098 | |||||||
Confectionery | | | 60,352,104 | | | — | | | — | | | 60,352,104 | |||||||
Health food | | | — | | | 34,001,611 | | | — | | | 34,001,611 | |||||||
Foodservice & other | | | 81,219,293 | | | — | | | — | | | 81,219,293 | |||||||
Total external revenue | | | 991,429,698 | | | 34,001,611 | | | — | | | 1,025,431,309 | |||||||
Depreciation | | | 1,093,005 | | | 734,706 | | | — | | | 1,827,711 | |||||||
Amortization | | | 41,667 | | | — | | | — | | | 41,667 | |||||||
Operating income (loss) | | | 11,093,779 | | | (489,288) | | | (4,588,362) | | | 6,016,129 | |||||||
Interest expense | | | 110,837 | | | — | | | 990,158 | | | 1,100,995 | |||||||
Income (loss) from operations before taxes | | | 11,030,865 | | | (482,128) | | | (5,578,522) | | | 4,970,215 | |||||||
Total assets | | | 120,567,974 | | | 17,187,420 | | | 186,822 | | | 137,942,216 | |||||||
Capital expenditures | | | 2,366,666 | | | 1,109,896 | | | — | | | 3,476,562 |
10. COMMON STOCK REPURCHASEREPURCHASES
The Company repurchased a total of 1711,148 and 11,1041,564 shares of its common stock during Q1 2018the three and Q1 2017,nine months ended June 2020, respectively, for cash totaling approximately $0.1 million and $1.0 million, respectively.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 arewere 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.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, companyCompany 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,“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.
YouIt should understandbe 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:
● |
|
● | increasing competition and market conditions in our wholesale and retail health food businesses and any associated impact on the carrying value and any potential impairment of assets (including intangible |
● |
| that our repositioning strategy for our retail business will not be successful, |
● |
|
● | risks associated with the acquisition of assets or new businesses or investments in equity investees by either of our business segments including, but not limited to, risks associated with purchase price and business valuation risks, vendor and customer retention risks, employee and technology integration risks, and risks related to the assumption of certain liabilities or obligations, |
● | if online shopping formats such as |
● |
|
● | increases in |
● |
|
● | increases in state and federal excise taxes on cigarette and tobacco products and the potential impact on demand, |
● |
| higher commodity prices and general inflation which could impact food ingredient costs and demand for many of the products we sell, |
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| potential bans and/or |
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| increases in manufacturer prices, |
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| increases in inventory carrying costs and customer credit |
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| changes in promotional and incentive programs offered by manufacturers, |
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| demand for the Company’s products, particularly cigarette, tobacco and |
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| risks that product manufacturers may begin selling directly to convenience stores and bypass wholesale distributors, |
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| changes in laws and regulations and ongoing compliance related to health care and associated insurance, |
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| increasing health care costs for both the Company and consumers and |
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| decreased availability of capital resources, |
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| domestic regulatory and legislative risks, |
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| poor weather conditions, and the adverse effects of climate change, |
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| consolidation trends within the convenience store, wholesale distribution, and retail health food industries, |
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| natural disasters and domestic or political unrest, |
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| other risks over which the Company has little or no control, and any other factors not identified |
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
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.
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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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.
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, 2017,2019, as filed with the Securities and Exchange Commission. There have been no significant changes with respect to these policies during our fiscal quarterthe nine months ended December 2017.June 2020 other than the adoption of ASC 842 which did have a material impact on the Company’s consolidated balance sheet.
FIRSTTHIRD FISCAL QUARTER 2017 (Q1 2018)2020 (Q3 2020)
The following discussion and analysis includes the Company’s results of operations for the three and nine months ended December 2017June 2020 and December 2016:June 2019:
Wholesale Segment
Our Wholesale Segment is one of the largest wholesale distributors in the United States serving approximately 4,0004,100 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 16,00017,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery, beverages, groceries, paper products, health and beauty care products, frozen and chilledrefrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In November 2017,2019, Convenience Store News ranked us as the seventh (7th)eighth (8th) largest convenience store distributor in the United States based on annual sales.
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Our wholesale businessWholesale 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, optimizing inventory optimization and merchandising expertise, information systems, and accessingaccess 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 dockcross-dock facilities, include approximately 641,000685,000 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.
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Our Retail Segment operates sixteentwenty-one retail health food stores as Chamberlin’s Market & Café andNatural Foods (“Chamberlin’s”), Akin’s Natural Foods Market.(“Akins”), and Earth Origins Market (“EOM”). These stores carry over 32,00033,000 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, operateshas a total of seven storeslocations in and around Orlando, Florida. Akin’s, which was also established in 1935, has a total of ninesix locations in Arkansas, Missouri, Nebraska, and Oklahoma. Earth Origins Market has a total of eight locations in Florida.
Business Update - Wholesale Segment
A number of trends continue to impact the convenience store industry. First, the long term demand trend for cigarettes continues to decline as fewer individuals smoke, in part because of the impact of higher excise taxes. Most recently, one of the world’s largest tobacco product manufacturers (Philip Morris), announced a long term strategic plan to primarily focus on alternative smoking products (i.e. vaporized tobacco delivery systems) and to reduce its long term reliance on the sale of cigarettes. Secondly, the lines between convenience stores and other retail formats continues to blur as quick serve restaurants (“QSRs”), drugstores, dollar stores, and smaller footprint grocery stores all add competing products and services.
In response, the convenience store industry is migrating towards higher end offerings such as foodservice and is increasingly using digital technologies to help run and promote their businesses. Long term, we believe these trends benefit larger distributors such as our Company which have built robust foodservice and technology platforms. We also believe these trends will result in additional consolidation amongst industry distributors which may provide the Company with opportunities to expand its geographic footprint via strategic acquisitions.
Forward looking, we remain optimistic about the opportunities available to the Company. While retailers across all consumer sectors face a challenging operating environment, many of the trends impacting independent convenience stores operators will likely only heighten the demand for the services offered by the most progressive distributors.
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Business Update - Retail Segment
The food retailing sector continues to undergo significant change, creating a highly competitive operating environment. Specific to the health and natural products sector, conventional grocery stores and mass merchants such as Krogers, Albertsons, and Costco have all aggressively moved into certain product lines traditionally dominated by health food retailers. Additionally, both regional and national health food stores such as Whole Foods Market (now owned by AMAZON), Trader Joe’s, Sprouts Farmers Market, Natural Grocers, Vitamin Shoppe, Lucky’s Market, and Fresh Thyme Farmers Market continue to expand.
In response to this operating environment, we previously disclosed as long term strategic plan to reposition our retail business. The core of this repositioning strategy is focused on four functional areas: 1) targeted closure of non-performing stores, 2) selectively remodeling existing stores and adding new stores which incorporate modern design themes and convenience shopping attributes, 3) the implementation of a comprehensive program to optimize our merchandising strategy, and 4) the use of a new multi-channel branding and marketing program.
An important long term element of our turnaround plan will be the deployment of a flexible store operating model for each location. As consumer shopping habits and preferences change, we are also exploring a range of programs and initiatives to enhance the level of engagement with customers.
In connection with the aforementioned strategic plan, during Q1 2018 we opened one new store in our Florida market. We also anticipate completing two additional remodeling projects in existing stores during fiscal 2018.
RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 2017:JUNE 2020:
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| For the three months ended December |
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| 2017 |
| 2016 |
| Incr (Decr) |
| % Change |
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| 2020 |
| 2019 |
| Incr (Decr) |
| % Change | |||||||||||||||
CONSOLIDATED: |
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Sales(1) |
| $ | 315,513,209 |
| $ | 310,104,229 |
| $ | 5,408,980 |
| 1.7 |
| | $ | 396,854,324 | | $ | 369,981,516 | | $ | 26,872,808 |
| 7.3 |
Cost of sales |
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| 297,321,447 |
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| 291,788,243 |
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| 5,533,204 |
| 1.9 |
| |
| 375,202,044 | |
| 349,455,624 | |
| 25,746,420 |
| 7.4 |
Gross profit |
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| 18,191,762 |
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| 18,315,986 |
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| (124,224) |
| (0.7) |
| |
| 21,652,280 | |
| 20,525,892 | |
| 1,126,388 |
| 5.5 |
Gross profit percentage |
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| 5.8 | % |
| 5.9 | % |
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| 5.5 | % |
| 5.5 | % |
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Operating expense |
| $ | 16,884,613 |
| $ | 16,224,752 |
| $ | 659,861 |
| 4.1 |
| | $ | 19,179,324 | | $ | 19,133,190 | | $ | 46,134 |
| 0.2 |
Operating income |
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| 1,307,149 |
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| 2,091,234 |
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| (784,085) |
| (37.5) |
| |
| 2,472,956 | |
| 1,392,702 | |
| 1,080,254 |
| 77.6 |
Interest expense |
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| 202,191 |
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| 217,543 |
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| (15,352) |
| (7.1) |
| |
| 461,581 | |
| 381,469 | |
| 80,112 |
| 21.0 |
Income tax expense (benefit) |
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| (370,000) |
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| 833,000 |
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| (1,203,000) |
| (144.4) |
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Income tax expense | |
| 586,000 | |
| 361,000 | |
| 225,000 |
| 62.3 | ||||||||||||
Net income |
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| 1,480,091 |
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| 1,046,464 |
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| 433,627 |
| 41.4 |
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| 1,579,566 | |
| 665,679 | |
| 913,887 |
| 137.3 |
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BUSINESS SEGMENTS: |
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Wholesale |
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Sales |
| $ | 309,223,312 |
| $ | 303,864,925 |
| $ | 5,358,387 |
| 1.8 |
| | $ | 385,316,005 | | $ | 358,943,983 | | $ | 26,372,022 |
| 7.3 |
Gross profit |
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| 15,478,295 |
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| 15,568,583 |
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| (90,288) |
| (0.6) |
| |
| 17,564,000 | |
| 16,609,828 | |
| 954,172 |
| 5.7 |
Gross profit percentage |
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| 5.0 | % |
| 5.1 | % |
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| 4.6 | % |
| 4.6 | % |
| | | |
Retail |
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Sales |
| $ | 6,289,897 |
| $ | 6,239,304 |
| $ | 50,593 |
| 0.8 |
| | $ | 11,538,319 | | $ | 11,037,533 | | $ | 500,786 |
| 4.5 |
Gross profit |
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| 2,713,467 |
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| 2,747,403 |
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| (33,936) |
| (1.2) |
| |
| 4,088,280 | |
| 3,916,064 | |
| 172,216 |
| 4.4 |
Gross profit percentage |
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| 43.1 | % |
| 44.0 | % |
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| 35.4 | % |
| 35.5 | % |
| | | |
(1) |
| Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled |
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SALES
Changes in sales are driven by two primary components:
(i) | changes to selling prices, which are largely controlled by our product suppliers, and excise taxes imposed on cigarettes and tobacco products by various states; and |
(ii) | changes in the volume of products sold to our customers, either due to a change in purchasing patterns resulting from consumer preferences or the fluctuation in the comparable number of business days in our reporting period. |
SALES – Q1 2018Q3 2020 vs. Q1 2017Q3 2019
Sales in our Wholesale Segment increased $5.4$26.4 million during Q1 2018Q3 2020 as compared to Q1 2017.Q3 2019. Significant items impacting sales during Q3 2020 included $9.2a $10.2 million increase in sales related to price increases implemented by cigarette manufacturers, and a $3.9$6.6 million increase in sales in our tobacco, beverage, snacks, candy, grocery, health & beauty products, automotive, foodservice, and store supplies categories (“Other Products”). These increases were partially offset by a $7.7 million decrease in sales related to the volume and mix of cigarette cartons sold.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 $0.1$0.5 million in Q1 2018for Q3 2020 as compared to Q1 2017. Significant items impacting our Q1 2018 Retail Segment sales included a 0.4Q3 2019. Of this increase, approximately $0.8 million increase in sales related to the opening of a new store in our Florida market, which was partially offset by lowerhigher sales volumes in our existing stores which have experienced increased competition.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 – Q1 2018Q3 2020 vs. Q1 2017Q3 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 decreased $0.1increased $1.0 million during Q1 2018Q3 2020 as compared to Q1 2017.Q3 2019. Significant items impacting gross marginsprofit during Q1 2018Q3 2020 included a $0.3 million decreaseincrease in gross profit primarily related to the volume and mix of cigarette cartons sold, partially offset by a $0.2$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. Q1 2018 grossGross profit in our Retail Segment was even with Q1 2017. Significant items impacting our Q1 2018 Retail Segment gross profit included aincreased $0.2 million increase in gross profitduring Q3 2020 as compared to Q3 2019 primarily related to the opening of our new Florida market store which was offset by the impact of lower sales andhigher gross profitmargins in our existing stores as previously discussed. 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 – Q1 2018Q3 2020 vs. Q1 2017Q3 2019
Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses includeprimarily consist of costs related to our sales, warehouse, delivery and administrative departments, for all segments. Specifically,including purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders are all classified as selling, general and administrative expenses.orders. Our most significant expenses relate to employee costs associated with employees, facility and equipment leases, transportation, costs, 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. Our Q1 2018These 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 increased $0.7 millionwas 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 Q1 2017.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
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| 2020 |
| 2019 |
| Incr (Decr) |
| % Change | |||
CONSOLIDATED: | | | | | | | | | | | |
Sales(1) | | $ | 1,094,841,943 | | $ | 1,025,431,309 | | $ | 69,410,634 |
| 6.8 |
Cost of sales | | | 1,031,651,499 | | | 963,683,859 | | | 67,967,640 |
| 7.1 |
Gross profit | | | 63,190,444 | | | 61,747,450 | | | 1,442,994 |
| 2.3 |
Gross profit percentage | | | 5.8 | % | | 6.0 | % | | | | |
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Operating expenses | | | 58,161,311 | | | 55,731,321 | | | 2,429,990 |
| 4.4 |
Operating income | | | 5,029,133 | | | 6,016,129 | | | (986,996) |
| (16.4) |
Interest expense | | | 1,321,267 | | | 1,100,995 | | | 220,272 |
| 20.0 |
Income tax expense | | | 1,168,000 | | | 1,536,000 | | | (368,000) |
| (24.0) |
Net income | | | 2,730,754 | | | 3,434,215 | | | (703,461) |
| (20.5) |
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BUSINESS SEGMENTS: | | | | | | | | | | | |
Wholesale | | | | | | | | | | | |
Sales | | $ | 1,060,212,478 | | $ | 991,429,698 | | $ | 68,782,780 |
| 6.9 |
Gross profit | | | 51,309,852 | | | 48,559,911 | | | 2,749,941 |
| 5.7 |
Gross profit percentage | | | 4.8 | % | | 4.9 | % | | | | |
Retail | | | | | | | | | | | |
Sales | | $ | 34,629,465 | | $ | 34,001,611 | | $ | 627,854 |
| 1.8 |
Gross profit | |
| 11,880,592 | |
| 13,187,539 | |
| (1,306,947) |
| (9.9) |
Gross profit percentage | |
| 34.3 | % |
| 38.8 | % | | | | |
(1) | Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $19.8 million for the nine month period ended June 2020 and $19.0 million for the nine month period ended June 2019. |
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.
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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 current period included a $0.4$1.6 million increase in employee benefitscompensation and compensationbenefit costs, includinga $0.5 million increase in health insurance costs, a $0.7 million increase in other insurance costs, and a $0.2 million increase in fuel costs, andour provision for doubtful accounts, partially offset by a $0.1$0.6 million increasedecrease in operating costsexpenses 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 openingclosure of one non-performing store in our new Florida market store.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.
2022
INCOME TAX EXPENSE – Q1 2018 vs. Q1 2017
The Company’s Q1 2018 results of operations included the impact of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”), which was signed into law on December 22, 2017. Among numerous provisions included in the new law was the reduction of the corporate federal income tax rate from 35% to 21%. In Q1 2018, the Company applied the newly enacted corporate federal income tax rate of 21% resulting in approximately a $0.9 million income tax benefit which is reflected in the Company’s Q1 2018 Statement Of Operations. This tax benefit was primarily the result of applying the new lower income tax rates to the Company’s net long term deferred tax liabilities recorded on its Consolidated Balance Sheet. The final impact of Tax Reform may differ due to and among other things, changes in interpretations, assumptions made by the Company, the issuance of additional guidance, and actions Company may take as a result of Tax Reform.
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”“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 the warm weather months which is 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 December 2017:June 2020:
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| A |
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| $ |
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| Loan accordion allowing the Company to increase the size of the credit facility agreement by $25.0 million. |
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| A provision providing an additional $10.0 million of credit advances for certain inventory purchases. |
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| Evergreen renewal clause automatically renewing the agreement for one year unless either the borrower or lender provides written notice terminating the agreement at least 90 days prior to the end of any original or renewal term of the agreement. |
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| The Facility bears interest at either the bank’s prime rate, or at LIBOR (or equivalent rate index) plus 125 - 150 basis points depending on certain credit facility utilization measures, at the election of the Company. In no event shall LIBOR be less than 100 basis points. |
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| Lending limits subject to accounts receivable and inventory limitations. |
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| An unused commitment fee equal to one-quarter of one percent (1/4%) per annum on the difference between the maximum loan limit and average monthly borrowings. |
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| Secured by collateral including all of the Company’s equipment, intangibles, inventories, and accounts receivable. |
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| A financial covenant requiring a fixed charge coverage ratio of at least 1.0 as measured by the previous twelve month period then ended only if excess availability falls below 10% of the maximum loan limit as defined in the credit agreement. The Company’s |
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| Provides that the Company may |
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 December 2017June 2020 was $64.2$95.0 million, of which $12.6$56.4 million was outstanding, leaving $51.6$38.6 million available.
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At December 2017,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 3.49%2.42% at December 2017.June 2020. For the threenine months ended December 2017,June 2020, our peak borrowings under the Facility were $35.6$72.7 million, and our average borrowings and average availability under the Facility were $17.3$50.1 million and $50.9$30.8 million, respectively.
Cross Default and Co-Terminus Provisions
The Company’s ownedCompany 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, isare in default. There were no such cross defaults at December 2017.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.
DividendsDividend Payments
The Company paid cash dividends on its common stock totaling $0.1 million in each ofand $0.5 million for the three and nine month periods ended December 2017June 2020, respectively, and December 2016.
Contractual Obligations
There have been no significant changes to the Company’s contractual obligations as set forth in the Company’s annual report on Form 10-K$0.1 million and $0.5 million for the fiscal periodthree and nine month periods ended September 30, 2017.June 2019, respectively.
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.
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. Accordingly,costs and significant price movements in these areas can and do impact the Company’s profitability.
The Company believes itsit has sufficient liquidity position going forwardand 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 adequate to sustain operations. However,impacted. Accordingly, a precipitous changefurther deterioration in operating environmenteconomic conditions could materially impact the Company’s future revenue streamstreams as well as its ability to collect on customer accounts receivable or secure bank credit.
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Item 4. Controls and Procedures
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(e)13a-15(b) and 15d-15(e)15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2017June 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.
Other
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
ThereExcept 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 December 31, 2017,June 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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None.
● | A Major Epidemic or Pandemic or other Widespread Public Health Issue Could Adversely Affect Our Results of Operations and Financial Condition. |
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, 2017.2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 December 2017:June 2020:
|
|
|
|
|
|
|
|
|
|
|
Period |
| (a) Total Number of Shares (or Units) Purchased |
| (b) Average Price Paid per Share (or Unit) |
| (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
| (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs* |
| |
October 1 - 31, 2017 |
| — |
|
| — |
| — |
| 49,068 |
|
November 1 - 30, 2017 |
| 171 |
| $ | 88.70 |
| 171 |
| 48,897 |
|
December 1 - 31, 2017 |
| — |
|
| — |
| — |
| 50,000 |
|
Total |
| 171 |
| $ | 88.70 |
| 171 |
| 50,000 |
|
| | | | | | | | | |
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 |
| 38 |
| 74,962 |
May 1 - 31, 2020 |
| 317 |
| $ | 56.99 |
| 317 |
| 74,645 |
June 1 - 30, 2020 |
| 793 | | $ | 59.48 |
| 793 |
| 73,852 |
Total |
| 1,148 | | $ | 58.91 |
| 1,148 |
| 73,852 |
* | 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. |
*In December 2017, the Company’s Board of Directors authorized purchases of up to 50,000 shares of our 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.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
During Q1 2018, the Company renewed a labor agreement with approximately thirty wholesale delivery employees in its Quincy, Illinois distribution center who are represented by the International Association of Machinists and Aerospace Workers (“IAMAW”) which was due to expire at the end of December 2017. The new labor agreement was renewed on substantially the same terms as the expiring agreement and is effective through December 2020.Not applicable.
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(a) Exhibits
| ||
| | |
| 31.1 | |
| | |
| 31.2 | |
| | |
| 32.1 | |
| | |
| 32.2 | |
| | |
| 101 | Interactive Data File (filed herewith electronically) |
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SIGNATURES
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: | /s/ Christopher H. Atayan |
| Christopher H. Atayan, |
| Chief Executive Officer and Chairman |
| |
Date: | /s/ Andrew C. Plummer |
| Andrew C. Plummer, |
|
|
| (Principal Financial and Accounting Officer) |
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