UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification No.) | |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ◻ | ||
Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ◻ No
The Registrant had
Form 10-Q
2nd Quarter
INDEX
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2024 and September 30, 2023
March | September | |||||
| 2024 |
| 2023 | |||
(Unaudited) | ||||||
ASSETS | ||||||
Current assets: | ||||||
Cash | $ | | $ | | ||
Accounts receivable, less allowance for credit losses of $ |
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Inventories, net |
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Income taxes receivable | | | ||||
Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets, net | | | ||||
Goodwill |
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Other intangible assets, net |
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Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued expenses |
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Accrued wages, salaries and bonuses |
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Current operating lease liabilities | | | ||||
Current maturities of long-term debt |
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Current mandatorily redeemable non-controlling interest | | | ||||
Total current liabilities |
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Credit facilities |
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Deferred income tax liability, net |
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Long-term operating lease liabilities | | | ||||
Long-term debt, less current maturities |
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Mandatorily redeemable non-controlling interest, less current portion | | | ||||
Other long-term liabilities |
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Shareholders’ equity: | ||||||
Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Treasury stock at cost |
| ( |
| ( | ||
Total shareholders’ equity | | | ||||
Total liabilities and shareholders’ equity | $ | | $ | | ||
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 six months ended March 31, 2024 and 2023
For the three months ended March | For the six months ended March | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Sales (including excise taxes of $ | $ | | $ | | $ | | $ | | ||||
Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Depreciation and amortization |
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Operating income |
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Other expense (income): | ||||||||||||
Interest expense |
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Change in fair value of mandatorily redeemable non-controlling interest | | | | | ||||||||
Other (income), net |
| ( |
| ( |
| ( |
| ( | ||||
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Income from operations before income taxes |
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Income tax expense |
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Net income available to common shareholders | $ | | $ | | $ | | $ | | ||||
Basic earnings per share available to common shareholders | $ | | $ | | $ | | $ | | ||||
Diluted earnings per share available to common shareholders | $ | | $ | | $ | | $ | | ||||
Basic weighted average shares outstanding |
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Diluted weighted average shares outstanding |
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| |
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| ||||||||||||
Dividends paid per common share | $ | | $ | | $ | | $ | | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Shareholders’ Equity
for the three and six months ended March 31, 2024 and 2023
Additional | |||||||||||||||||||
Common Stock | Treasury Stock | Paid-in | Retained | ||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Total | ||||||
THREE MONTHS ENDED MARCH 2023 | |||||||||||||||||||
Balance, January 1, 2023 | | $ | | ( | $ | ( | $ | | $ | | $ | | |||||||
Dividends on common stock, $ | — | — | — | — | — | ( | ( | ||||||||||||
Compensation expense related to equity-based awards | — | — | — | — | | — | | ||||||||||||
Net income available to common shareholders | — |
| — | — | — | — | | | |||||||||||
Balance, March 31, 2023 | | $ | | ( | $ | ( | $ | | $ | | $ | | |||||||
THREE MONTHS ENDED MARCH 2024 | |||||||||||||||||||
Balance, January 1, 2024 | | $ | | ( | $ | ( | $ | | $ | | $ | | |||||||
Dividends on common stock, $ | — | — | — | — | — | ( | ( | ||||||||||||
Compensation expense related to equity-based awards | — | — | — | — | | — | | ||||||||||||
Net income available to common shareholders | — |
| — | — | — | — | | | |||||||||||
Balance, March 31, 2024 | | $ | | ( | $ | ( | $ | | $ | | $ | | |||||||
Additional | |||||||||||||||||||
Common Stock | Treasury Stock | Paid-in | Retained | ||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Total | ||||||
SIX MONTHS ENDED MARCH 2023 | |||||||||||||||||||
Balance, October 1, 2022 | | $ | | ( | $ | ( | $ | | $ | | $ | | |||||||
Dividends on common stock, $ | — | — | — | — | — | ( | ( | ||||||||||||
Compensation expense and issuance of stock in connection with equity-based awards | | | — | — | | — | | ||||||||||||
Net income available to common shareholders | — |
| — | — | — | — | | | |||||||||||
Balance, March 31, 2023 | | $ | | ( | $ | ( | $ | | $ | | $ | | |||||||
SIX MONTHS ENDED MARCH 2024 | |||||||||||||||||||
Balance, October 1, 2023 | | $ | | ( | $ | ( | $ | | $ | | $ | | |||||||
Dividends on common stock, $ | — | — | — | — | — | ( | ( | ||||||||||||
Compensation expense and issuance of stock in connection with equity-based awards | | | — | — | | — | | ||||||||||||
Net income available to common shareholders | — |
| — | — | — | — | | | |||||||||||
Balance, March 31, 2024 | | $ | | ( | $ | ( | $ | | $ | | $ | | |||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5
AMCON Distributing Company and Subsidiaries
Condensed Consolidated Unaudited Statements of Cash Flows
for the six months ended March 31, 2024 and 2023
March | March | |||||
| 2024 |
| 2023 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income available to common shareholders | $ | | $ | | ||
Adjustments to reconcile net income available to common shareholders to net cash flows from (used in) operating activities: | ||||||
Depreciation | | | ||||
Amortization | | | ||||
(Gain) loss on sales of property and equipment | ( | ( | ||||
Equity-based compensation | | | ||||
Deferred income taxes | | | ||||
Provision for credit losses | ( | ( | ||||
Inventory allowance | | ( | ||||
Change in fair value of mandatorily redeemable non-controlling interest | | | ||||
Changes in assets and liabilities: | ||||||
Accounts receivable | | | ||||
Inventories | | | ||||
Prepaid and other current assets | ( | ( | ||||
Other assets | | ( | ||||
Accounts payable | | | ||||
Accrued expenses and accrued wages, salaries and bonuses | ( | ( | ||||
Other long-term liabilities | | | ||||
Income taxes payable and receivable | | ( | ||||
Net cash flows from (used in) operating activities | | | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Purchase of property and equipment | ( | ( | ||||
Proceeds from sales of property and equipment | | | ||||
Acquisition of Henry's | — | ( | ||||
Net cash flows from (used in) investing activities | ( | ( | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Borrowings under revolving credit facilities | | | ||||
Repayments under revolving credit facilities | ( | ( | ||||
Proceeds from borrowings on long-term debt | — | | ||||
Principal payments on long-term debt | ( | ( | ||||
Dividends on common stock | ( | ( | ||||
Net cash flows from (used in) financing activities | ( | | ||||
Net change in cash | | | ||||
Cash, beginning of period | | | ||||
Cash, end of period | $ | | $ | | ||
Supplemental disclosure of cash flow information: | ||||||
Cash paid during the period for interest, net of amounts capitalized | $ | | $ | | ||
Cash paid during the period for income taxes, net of refunds |
| |
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Supplemental disclosure of non-cash information: | ||||||
Equipment acquisitions classified in accounts payable | $ | | $ | | ||
Purchase of property financed with debt |
| |
| — | ||
Issuance of common stock in connection with the vesting of | |
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The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
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”) serves customers in
| ● | 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 primarily in the Central, Rocky Mountain, Mid-South and Mid-Atlantic regions of the United States. |
| ● | 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
Our Wholesale Segment offers retailers the ability to take advantage of manufacturer- and Company-sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distribution capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, inventory optimization and merchandising expertise, information systems, and accessing trade credit.
Our Wholesale Segment operates
During Q2 2024, the Company purchased a distribution facility in Colorado City, Colorado for $
RETAIL SEGMENT
Our Retail Segment, through our Healthy Edge Retail Group 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 United States grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health
7
food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.
Our Retail Segment operates
FINANCIAL STATEMENTS
The Company’s fiscal year ends on September 30th, except for one non-wholly owned subsidiary whose fiscal year ends on the last Friday of September. The results for the interim period included with this Quarterly Report may not be indicative of the results which could be expected for the entire fiscal year. All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated unaudited financial statements (“financial statements”) contain all adjustments necessary to fairly present the financial information included herein. The Company believes that although the disclosures contained herein are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements for the fiscal year ended September 30, 2023, 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 consolidated subsidiaries. Additionally, the three-month fiscal periods ended March 31, 2024 and March 31, 2023 have been referred to throughout this Quarterly Report as Q2 2024 and Q2 2023, respectively. The fiscal balance sheet dates as of March 31, 2024 and September 30, 2023 have been referred to as March 2024 and September 2023, respectively.
ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncement Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses requires 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. The Company adopted ASU 2016-13 on October 1, 2023. The adoption of ASU 2016-13 did not have a material effect on the Company’s consolidated financial statements.
Accounts Receivable:
In accordance with the Company’s accounts receivable policy, accounts receivable primarily consists of customer trade receivables arising in the ordinary course of business. These receivables are recorded net of an allowance for expected credit losses. The Company evaluates the expected uncollectibility of accounts receivable based on a combination of factors, including but not limited to, past collection history, customer credit terms, industry, regulatory and economic conditions, and any customer specific risks, including credit concentration risks. The Company determines the past due status of trade receivables based on our payment terms with each customer. If the Company becomes aware of a specific customer’s inability to meet its financial obligations, such as bankruptcy filings or deterioration in the customer’s operating results or financial position, the Company may record a specific reserve for expected credit losses to reduce the related receivable to the amount it reasonably believes is collectible. Account balances are charged off against the allowance for credit losses when collection efforts have been exhausted and the account receivable is deemed worthless. Any subsequent recoveries of charged off account balances are recorded as income in the period received.
8
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures”, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This ASU also expands disclosure requirements to enable users of financial statements to better understand the entity’s measurement and assessment of segment performance and resource allocation. This guidance is effective for fiscal years beginning after December 15, 2023 (fiscal 2025 for the Company), and interim periods within fiscal years beginning after December 15, 2024 (fiscal 2026 for the Company), with early adoption permitted.
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740) – Improvements to Income Tax Disclosures”, which enhances the transparency, effectiveness and comparability of income tax disclosures by requiring consistent categories and greater disaggregation of information related to income tax rate reconciliations and the jurisdictions in which income taxes are paid. This guidance is effective for annual periods beginning after December 15, 2024 (fiscal 2026 for the Company), with early adoption permitted.
2. INVENTORIES
Inventories in our Wholesale Segment consisted of finished goods and are stated at the lower of cost or net realizable value, utilizing FIFO and average cost methods. Inventories in our Retail Segment consisted of finished goods and are stated at the lower of cost or market using the retail method. 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 $
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at March 2024 and September 2023 was as follows:
| March |
| September | |||
2024 | 2023 | |||||
Wholesale Segment | $ | | $ | | ||
Other intangible assets at March 2024 and September 2023 consisted of the following:
| March |
| September | |||
2024 | 2023 | |||||
Customer lists (Wholesale Segment) (less accumulated amortization of $ | $ | | $ | | ||
Non-competition agreements (Wholesale Segment) (less accumulated amortization of $ | | | ||||
Tradename (Wholesale Segment) (less accumulated amortization of $ | | | ||||
Trademarks and tradenames (Retail Segment) | | | ||||
$ | | $ | | |||
Goodwill and Retail Segment trademarks and tradenames are considered to have indefinite useful lives and therefore no amortization has been taken on these assets. Goodwill recorded on the Company’s consolidated balance sheets represent amounts allocated to its wholesale reporting unit which totaled approximately $
9
At March 2024, identifiable intangible assets considered to have finite lives were represented by customer lists which are being amortized over
Estimated future amortization expense related to identifiable intangible assets with finite lives was as follows at March 2024:
March | |||
| 2024 | ||
Fiscal 2024 (1) | $ | | |
Fiscal 2025 | | ||
Fiscal 2026 | | ||
Fiscal 2027 | | ||
Fiscal 2028 | | ||
Fiscal 2029 and thereafter | | ||
$ | | ||
| (1) | Represents amortization for the remaining six months of Fiscal 2024. |
4. DIVIDENDS
The Company paid cash dividends on its common stock totaling $
5. EARNINGS PER SHARE
Basic earnings per share available to common shareholders is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for each period. Diluted earnings per share available to common shareholders is calculated by dividing net income available to common shareholders by the sum of the weighted average number of common shares outstanding and the weighted average dilutive equity awards.
For the three months ended March | ||||||||||||
2024 | 2023 | |||||||||||
| Basic |
| Diluted |
| Basic |
| Diluted | |||||
Weighted average number of common shares outstanding | | | | | ||||||||
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1) | — | | — | | ||||||||
Weighted average number of shares outstanding | | | | | ||||||||
Net income available to common shareholders | $ | | $ | | $ | | $ | | ||||
Net earnings per share available to common shareholders | $ | | $ | | $ | | $ | | ||||
10
For the six months ended March | ||||||||||||
2024 | 2023 | |||||||||||
| Basic |
| Diluted |
| Basic |
| Diluted | |||||
Weighted average number of common shares outstanding | | | | | ||||||||
Weighted average net additional shares outstanding assuming dilutive options exercised and proceeds used to purchase treasury stock (1) | — | | — | | ||||||||
Weighted average number of shares outstanding | | | | | ||||||||
Net income available to common shareholders | $ | | $ | | $ | | $ | | ||||
Net earnings per share available to common shareholders | $ | | $ | | $ | | $ | | ||||
6. DEBT
The Company primarily finances its operations through
At March 2024, the Facilities had a total combined borrowing capacity of $
The amount available for use from the Facilities at any given time is subject to a number of factors, including eligible accounts receivable and inventory balances that fluctuate day-to-day, as well as the value of certain real estate collateral. Based on the collateral and loan limits as defined in the Facility agreements, the credit limit of the combined Facilities at March 2024 was $
The average interest rate of the Facilities was
11
LONG-TERM DEBT
In addition to the Facilities, the Company also had the following long-term debt obligations at March 2024 and September 2023.
| March 2024 |
| September 2023 | |||
Note payable, interest payable at a fixed rate of | | | ||||
Note payable, interest payable at a fixed rate of | | | ||||
Note payable with monthly installments of principal and interest of $ | | | ||||
Note payable, interest payable at a fixed rate of |
| |
| | ||
Unsecured note payable, interest payable at a fixed rate of | | — | ||||
| |
| | |||
Less current maturities |
| ( |
| ( | ||
$ | | $ | | |||
The aggregate minimum principal maturities of the long-term debt for each of the next five fiscal years are as follows:
Fiscal Year Ending |
| ||
2024 (1) | $ | | |
2025 | | ||
2026 | | ||
2027 |
| | |
2028 | | ||
2029 and thereafter |
| | |
$ | |
(1) Represents payments for the remaining six months of Fiscal 2024.
Cross Default and Co-Terminus Provisions
Team Sledd’s three notes payable and the Team Sledd Facility contain cross default provisions. The Henry’s note payable and the Henry’s Facility contain cross default provisions. There were no such cross defaults for either Team Sledd or Henry’s at March 2024. Additionally, the Team Sledd Facility and the Henry’s Facility are non-recourse to AMCON Distributing Company, are not guaranteed by AMCON Distributing Company and have no cross default provisions applicable to AMCON Distributing Company. The Company and its subsidiaries, including Team Sledd and Henry’s, were in compliance with all of the financial covenants under the respective Facilities at March 2024.
Other
The Company has issued a letter of credit for $
12
7. INCOME TAXES
The change in the Company’s effective income tax rate for the three- and six-month periods ended March 2024 as compared to the respective prior year periods was primarily related to non-deductible compensation expense in relation to the amount of income from operations before income tax expense and higher effective state income tax rates between the comparative periods.
8. MANDATORILY REDEEMABLE NON-CONTROLLING INTEREST
Mandatorily redeemable non-controlling interest (“MRNCI”) recorded on the Company’s condensed consolidated balance sheets represents the fair value of the non-controlling interest in the Company’s strategic investment in Team Sledd. The Company owned approximately
Fair value of MRNCI as of September 2023 |
| $ | |
Redemption of non-controlling interests | | ||
Distributions to non-controlling interest | | ||
Change in fair value | | ||
Fair value of MRNCI as of March 2024 | $ | | |
Less current portion at fair value | ( | ||
$ | |
During April 2024, subsequent to Q2 2024, certain membership interests in Team Sledd were redeemed, which resulted in AMCON’s ownership of Team Sledd’s outstanding equity increasing to approximately
13
9. BUSINESS SEGMENTS
The Company has
Wholesale | Retail | |||||||||||
| Segment |
| Segment |
| Other |
| Consolidated | |||||
THREE MONTHS ENDED MARCH 2024 | ||||||||||||
External revenue: | ||||||||||||
Cigarettes | $ | | $ | — | $ | — | $ | | ||||
Tobacco | | — | — | | ||||||||
Confectionery | | — | — | | ||||||||
Health food | — | | — | | ||||||||
Foodservice & other | | — | — | | ||||||||
Total external revenue | | | — | | ||||||||
Depreciation | | | — | | ||||||||
Amortization | | — | — | | ||||||||
Operating income (loss) | | | ( | | ||||||||
Interest expense | — | — | | | ||||||||
Income (loss) from operations before taxes | | | ( | | ||||||||
Total assets | | | | | ||||||||
Capital expenditures (1) | | | — | | ||||||||
(1) Includes $
Wholesale | Retail | |||||||||||
| Segment |
| Segment |
| Other |
| Consolidated | |||||
THREE MONTHS ENDED MARCH 2023 | ||||||||||||
External revenue: | ||||||||||||
Cigarettes | $ | | $ | — | $ | — | $ | | ||||
Tobacco | | — | — | | ||||||||
Confectionery | | — | — | | ||||||||
Health food | — | | — | | ||||||||
Foodservice & other | | — | — | | ||||||||
Total external revenue | | | — | | ||||||||
Depreciation | | | — | | ||||||||
Amortization | | — | — | | ||||||||
Operating income (loss) | | | ( | | ||||||||
Interest expense | — | — | | | ||||||||
Income (loss) from operations before taxes | | | ( | | ||||||||
Total assets | | | | | ||||||||
Capital expenditures | | | — | | ||||||||
14
Wholesale | Retail | |||||||||||
| Segment |
| Segment |
| Other |
| Consolidated | |||||
SIX MONTHS ENDED MARCH 2024 | ||||||||||||
External revenue: | ||||||||||||
Cigarettes | $ | | $ | — | $ | — | $ | | ||||
Tobacco | | — | — | | ||||||||
Confectionery | | — | — | | ||||||||
Health food | — | | — | | ||||||||
Foodservice & other | | — | — | | ||||||||
Total external revenue | | | — | | ||||||||
Depreciation | | | — | | ||||||||
Amortization | | — | — | | ||||||||
Operating income (loss) | | | ( | | ||||||||
Interest expense | — | — | | | ||||||||
Income (loss) from operations before taxes | | | ( | | ||||||||
Total assets | | | | | ||||||||
Capital expenditures (1) | | | — | | ||||||||
(1) Includes $
Wholesale | Retail | |||||||||||
| Segment |
| Segment |
| Other |
| Consolidated | |||||
SIX MONTHS ENDED MARCH 2023 | ||||||||||||
External revenue: | ||||||||||||
Cigarettes | $ | | $ | — | $ | — | $ | | ||||
Tobacco | | — | — | | ||||||||
Confectionery | | — | — | | ||||||||
Health food | — | | — | | ||||||||
Foodservice & other | | — | — | | ||||||||
Total external revenue | | | — | | ||||||||
Depreciation | | | — | | ||||||||
Amortization | | — | — | | ||||||||
Operating income (loss) | | ( | ( | | ||||||||
Interest expense | — | — | | | ||||||||
Income (loss) from operations before taxes | | ( | ( | | ||||||||
Total assets | | | | | ||||||||
Capital expenditures | | | — | | ||||||||
10. SUBSEQUENT EVENT
On April 5, 2024, the Company closed on its previously announced acquisition of Burklund Distributors, Inc. (“Burklund”), purchasing substantially all of Burklund’s net operating assets for approximately $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS UPDATE
Our business continues to be impacted by macroeconomic factors, supply chain disruptions, and an extended period of high inflation. These factors have decreased consumer discretionary spending and related retail level demand and have also resulted in sustained cost pressures across our entire business including equipment, labor, interest, product, and other operating costs.
We continue to closely monitor regulatory actions and proposals from federal and state governmental and regulatory bodies, including the United States Food and Drug Administration (“FDA”), which is evaluating the possible prohibition and/or limitations on the sale of certain cigarette, e-cigarette, tobacco, and vaping products, including menthol cigarettes. If such further regulations or further product sale limitations were to be implemented, they may limit the range of products we are able to sell in related product categories and decrease overall consumer demand. Any such changes may negatively impact our revenues, gross margins, and financial results.
The Company continues to make targeted investments in conjunction with its long-term growth strategy. In this regard, during Q2 2024, the Company purchased a 250,000 square foot distribution facility in Colorado City, Colorado, which we are actively building out to operational status. This facility will play a central role in the Company’s long-term geographic expansion initiatives. In addition, work continues on the completion of the Company’s new 175,000 square foot distribution facility located in Springfield, Missouri. This new facility will enhance our foodservice capabilities in that region.
Finally, as previously disclosed, in early April 2024 the Company closed on its acquisition of Burklund Distributors, Inc. (“Burklund”) headquartered in East Peoria, Illinois, purchasing substantially all of Burklund’s net operating assets. The acquisition will expand the Company’s regional footprint and provide customers with an enhanced range of products and services over time.
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 reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results. Forward-looking statements include information concerning the possible or assumed future results of operations of the Company and those statements preceded by, followed by or that include the words “future,” “position,” “anticipate(s),” “expect(s),” “believe(s),” “see,” “plan,” “further improve,” “outlook,” “should” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions.
It should be understood that the following important factors, in addition to those discussed elsewhere in this document, could affect the future results of the Company and could cause those results to differ materially from those expressed in our forward-looking statements:
| ● | risks associated with unrest in certain global regions which could further disrupt world supply chains, manufacturing centers, and shipping routes, impacting commodity/product availability and/or cost, as well as consumer demand trends, |
| ● | risks associated with higher interest rates or prolonged periods of higher interest rates and the related impact on demand, customer credit risk, profitability and cash flows for both the Company and its customer base, particularly as it relates to variable interest rate borrowings, as well as the risk that such borrowings may not be renewed in the future on favorable terms or at all, |
| ● | risks associated with any systemic pressures in the banking system, particularly as they relate to customer credit risk and any resulting impact on our cash flow and our ability to collect on our receivables, |
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| ● | risks associated with an inflationary operating environment, particularly as it relates to wages, fuel, interest, commodity prices, and customer credit risk, which impact our operating cost structure and could impact food ingredient costs and demand for many of the products we sell, |
| ● | regulations, potential bans, limitations and/or litigation related to the manufacturing, distribution, and sale of certain cigarette, e-cigarette, tobacco, and vaping products imposed by the FDA, state or local governmental agencies, or other parties, including proposed and pending regulations and/or product approvals/authorizations related to the manufacturing, distribution, and sale of certain menthol, vaping, and flavored tobacco products, |
| ● | risks associated with the threat or occurrence of epidemics or pandemics (such as COVID-19 or its variants) or other public health issues, including the continued health of our employees and management, the reduced demand for our goods and services or increased credit risk from customer credit defaults resulting from an economic downturn, |
| ● | risks associated with the imposition of governmental orders restricting our operations and the operations of our suppliers and customers, in particular, disruptions to our supply chain or our ability to procure products or fulfill orders due to labor shortages in our warehouse operations, |
| ● | risks associated with the Company’s business model which experienced both higher sales volumes and labor costs during the COVID-19 pandemic, and the risk of sales returning to pre-pandemic levels without the Company being able to offset increases in its cost structure, |
| ● | risks associated with the acquisition of assets, new businesses or equity investments by either of our business segments including, but not limited to, risks associated with consummating such transactions on expected terms or timing, purchase price and business valuation and recording risks, and risks related to the assumption of certain liabilities or obligations, |
| ● | risks associated with the integration of new businesses or equity investments by either of our business segments including, but not limited to, risks associated with vendor and customer retention, technology integration, and the potential loss of any key management personnel or employees, |
| ● | 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 assets) within those businesses, |
| ● | risk that our repositioning strategy for our retail business will not be successful, |
| ● | risks associated with opening new retail stores, |
| ● | risks to our brick and mortar retail business and potentially to our wholesale distribution business if online shopping formats such as Amazon™ continue to grow in popularity and further disrupt traditional sales channels, |
| ● | the potential impact that ongoing, decreasing, or changing trade tariff and trade policies may have on our product costs or on consumer disposable income and demand, |
| ● | increasing product and operational costs resulting from ongoing supply chain disruptions, an intensely competitive labor market with a limited pool of qualified workers, and higher incremental costs associated with the handling and transportation of certain product categories such as foodservice, |
| ● | increases in state and federal excise taxes on cigarette and tobacco products and the potential impact on demand, particularly as it relates to current legislation under consideration which could significantly increase such taxes, |
| ● | risks associated with disruptions to our technology systems or those of third parties upon which we rely, including security breaches, cyber and ransomware attacks, malware, or other methods by which such information systems could or may have been compromised or impacted, |
| ● | increases in inventory carrying costs and customer credit risks, |
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| ● | changes in pricing strategies and/or promotional/incentive programs offered by cigarette and tobacco manufacturers, |
| ● | changing demand for the Company’s products, particularly cigarette, tobacco and vaping products, |
| ● | risks that product manufacturers may begin selling directly to convenience stores and bypass wholesale distributors, |
| ● | changes in laws and regulations and ongoing compliance related to health care and associated insurance, |
| ● | increasing health care costs for both the Company and consumers and its potential impact on discretionary consumer spending, |
| ● | decreased availability of capital resources, |
| ● | domestic regulatory and legislative risks, |
| ● | poor weather conditions, and the adverse effects of climate change, |
| ● | consolidation trends within the convenience store, wholesale distribution, and retail health food industries, |
| ● | risks associated with labor disputes (strikes), natural disasters, domestic/political unrest and incidents of violence, or any restrictions, regulations, or security measures implemented by governmental bodies in response to these items, and |
| ● | other risks over which the Company has little or no control, and any other factors not identified herein. |
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.
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, 2023, as filed with the Securities and Exchange Commission. Other than the adoption of ASU 2016-13 as described in Note 1 of Part I, Item 1 of this quarterly report on Form 10-Q, there have been no significant changes with respect to these estimates and related policies during the six months ended March 2024.
SECOND FISCAL QUARTER 2024 (Q2 2024)
The following discussion and analysis includes the Company’s results of operations for the three and six months ended March 2024 and March 2023:
Wholesale Segment
Our Wholesale Segment is one of the largest wholesale distributors in the United States, serving approximately 7,000 retail outlets including convenience stores, grocery stores, liquor stores, drug stores, and tobacco shops. We currently distribute over 20,000 different consumer products, including cigarettes and tobacco products, candy and other confectionery products, beverages, groceries, paper products, health and beauty care products, frozen and refrigerated products and institutional foodservice products. Convenience stores represent our largest customer category. In December 2023, Convenience Store News ranked us as the sixth (6th) largest convenience store distributor in the United States based on annual sales.
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Our Wholesale Segment offers retailers the ability to take advantage of manufacturer- and Company-sponsored sales and marketing programs, merchandising and product category management services, and the use of information systems and data services that are focused on minimizing retailers’ investment in inventory, while seeking to maximize their sales and profits. In addition, our wholesale distribution capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders, and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, inventory optimization and merchandising expertise, information systems, and accessing trade credit.
Our Wholesale Segment operates 12 distribution centers located in Colorado, Illinois, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, Tennessee and West Virginia. These distribution centers, combined with cross-dock facilities, include approximately 1.7 million square feet of permanent floor space. Our principal suppliers include Altria, RJ Reynolds, ITG Brands, Hershey, Kellanova, Kraft Heinz, and Mars Wrigley. 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 Retail Group 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 grocery 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 United States grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers.
Our Retail Segment operates 14 retail health food stores as Chamberlin’s Natural Foods, Akin’s Natural Foods, and Earth Origins Market. These stores carry over 36,000 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.
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RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH:
| 2024 |
| 2023 |
| Incr (Decr) |
| % Change | ||||
CONSOLIDATED: | |||||||||||
Sales (1) | $ | 601,877,306 | $ | 584,993,848 | $ | 16,883,458 |
| 2.9 | |||
Cost of sales |
| 559,566,439 |
| 543,861,287 |
| 15,705,152 |
| 2.9 | |||
Gross profit |
| 42,310,867 |
| 41,132,561 |
| 1,178,306 |
| 2.9 | |||
Gross profit percentage |
| 7.0 | % |
| 7.0 | % |
| ||||
Operating expense | $ | 38,967,204 | $ | 35,804,741 | $ | 3,162,463 |
| 8.8 | |||
Operating income |
| 3,343,663 |
| 5,327,820 |
| (1,984,157) |
| (37.2) | |||
Interest expense |
| 2,247,737 |
| 2,169,541 |
| 78,196 |
| 3.6 | |||
Change in fair value of mandatorily redeemable non-controlling interest | 134,389 | 221,030 | (86,641) | (39.2) | |||||||
Income tax expense |
| 613,000 |
| 1,045,400 |
| (432,400) |
| (41.4) | |||
Net income available to common shareholders |
| 539,543 |
| 2,065,574 |
| (1,526,031) |
| (73.9) | |||
BUSINESS SEGMENTS: | |||||||||||
Wholesale | |||||||||||
Sales | $ | 590,652,977 | $ | 573,645,837 | $ | 17,007,140 |
| 3.0 | |||
Gross profit |
| 38,155,508 |
| 37,096,448 |
| 1,059,060 |
| 2.9 | |||
Gross profit percentage |
| 6.5 | % |
| 6.5 | % |
| ||||
Retail | |||||||||||
Sales | $ | 11,224,329 | $ | 11,348,011 | $ | (123,682) |
| (1.1) | |||
Gross profit |
| 4,155,359 |
| 4,036,113 |
| 119,246 |
| 3.0 | |||
Gross profit percentage |
| 37.0 | % |
| 35.6 | % |
| ||||
| (1) | Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $11.3 million in Q2 2024 and $10.3 million in Q2 2023. |
SALES
Changes in sales are primarily driven by:
| (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; |
| (ii) | changes in the volume and mix of products sold to our customers, either due to a change in purchasing patterns resulting from shifting consumer preferences or the fluctuation in the comparable number of business days in our reporting period; and |
SALES – Q2 2024 vs. Q2 2023
Sales in our Wholesale Segment increased $17.0 million during Q2 2024 as compared to Q2 2023. Significant items impacting sales during Q2 2024 included a $24.4 million increase in sales related to the acquisition of Henry’s Foods, Inc. (“Henry’s”) during Q2 2023 and a $26.2 million increase in sales related to price increases implemented by cigarette manufacturers, partially offset by a $33.0 million decrease in sales related to the volume and mix of cigarette cartons sold, and a $0.6 million decrease in sales related to the volume and mix of products in our tobacco, confectionery, foodservice, and other categories (“Other Products”). Sales in our Retail Segment decreased $0.1 million during Q2 2024 as compared to Q2 2023. This decrease was due to approximately $1.6 million related to the closure of five stores between the comparative periods, partially offset by a $0.8 million increase related to higher sales volumes in our existing stores and a $0.7 million increase related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian.
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GROSS PROFIT – Q2 2024 vs. Q2 2023
Our gross profit does not include fulfillment costs and costs related to the distribution network, which are included in selling, general and administrative costs, and may not be comparable to those of other entities. Some entities may classify such costs as a component of cost of sales. Cost of sales, a component used in determining gross profit, for the wholesale and retail segments includes the cost of products purchased from manufacturers, less incentives we receive which are netted against such costs.
Gross profit in our Wholesale Segment increased $1.1 million during Q2 2024 as compared to Q2 2023. Significant items impacting gross profit during Q2 2024 included a $2.9 million increase in gross profit related to the acquisition of Henry’s in Q2 2023, partially offset by a $0.8 million decrease in gross profit due to the timing and related benefits of cigarette manufacturer price increases, a $0.5 million decrease in gross profit related to the volume and mix of cigarette cartons sold between the comparative periods and a $0.5 million decrease in gross profit related to the mix of volumes and promotions in our Other Products category. Gross profit in our Retail Segment increased approximately $0.1 million during Q2 2024 as compared to Q2 2023. This change was primarily related to a $0.4 million increase in realized margins in our existing stores and a $0.3 million increase related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian, partially offset by a $0.6 million decrease related to the closure of five stores between the comparative periods.
OPERATING EXPENSE – Q2 2024 vs. Q2 2023
Operating expense includes selling, general and administrative expenses and depreciation and amortization. Selling, general, and administrative expenses primarily consist of costs related to our sales, warehouse, delivery and administrative departments, including purchasing and receiving costs, warehousing costs and costs of picking and loading customer orders. Our most significant expenses relate to costs associated with employees, facility and equipment leases, transportation, fuel, and insurance. Our Q2 2024 operating expenses increased $3.2 million as compared to Q2 2023. Significant items impacting operating expenses during Q2 2024 included a $2.7 million increase in operating expenses related to the acquisition of Henry’s during Q2 2023 and a $0.9 million increase related to employee compensation and benefit costs, partially offset by a $0.2 million decrease in other Wholesale Segment operating costs, and a $0.2 million decrease in operating expense costs in our Retail Segment. The decrease in our Retail Segment was primarily due to a $0.7 million decrease related to the closure of five stores between the comparative periods, partially offset by an increase of $0.3 million in our existing stores and a $0.2 million increase related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian.
INTEREST EXPENSE – Q2 2024 vs. Q2 2023
Interest expense increased $0.1 million in Q2 2024 as compared to Q2 2023, primarily related to higher interest rates, increased capital expenditures, and higher outstanding debt balances in the current period related to the acquisition of Henry’s in Q2 2023.
INCOME TAX EXPENSE – Q2 2024 vs. Q2 2023
The change in the Q2 2024 income tax rate as compared to Q2 2023 was primarily related to non-deductible compensation expense in relation to the amount of income from operations before income tax expense and higher effective state income tax rates between the comparative periods.
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RESULTS OF OPERATIONS – SIX MONTHS ENDED MARCH:
| 2024 |
| 2023 |
| Incr (Decr) |
| % Change | ||||
CONSOLIDATED: | |||||||||||
Sales (1) | $ | 1,246,836,380 | $ | 1,150,983,356 | $ | 95,853,024 |
| 8.3 | |||
Cost of sales | 1,161,224,591 | 1,074,881,211 | 86,343,380 |
| 8.0 | ||||||
Gross profit | 85,611,789 | 76,102,145 | 9,509,644 |
| 12.5 | ||||||
Gross profit percentage | 6.9 | % | 6.6 | % | |||||||
Operating expense | $ | 78,445,049 | $ | 65,254,815 | $ | 13,190,234 |
| 20.2 | |||
Operating income | 7,166,740 | 10,847,330 | (3,680,590) |
| (33.9) | ||||||
Interest expense | 4,559,250 | 3,863,698 | 695,552 |
| 18.0 | ||||||
Change in fair value of mandatorily redeemable non-controlling interest | 334,133 | 166,114 | 168,019 | 101.1 | |||||||
Income tax expense | 1,417,000 | 2,350,200 | (933,200) |
| (39.7) | ||||||
Net income available to common shareholders | 1,610,504 | 4,694,575 | (3,084,071) |
| (65.7) | ||||||
BUSINESS SEGMENTS: | |||||||||||
Wholesale | |||||||||||
Sales | $ | 1,224,922,622 | $ | 1,129,373,472 | $ | 95,549,150 |
| 8.5 | |||
Gross profit | 77,509,067 | 68,371,710 | 9,137,357 |
| 13.4 | ||||||
Gross profit percentage | 6.3 | % | 6.1 | % | |||||||
Retail | |||||||||||
Sales | $ | 21,913,758 | $ | 21,609,884 | $ | 303,874 |
| 1.4 | |||
Gross profit |
| 8,102,722 |
| 7,730,435 |
| 372,287 |
| 4.8 | |||
Gross profit percentage |
| 37.0 | % |
| 35.8 | % | |||||
| (1) | Sales are reported net of costs associated with incentives provided to retailers. These incentives totaled $20.8 million for the six months ended March 2024 and $19.3 million for the six months ended March 2023. |
SALES – Six months ended March 2024
Sales in our Wholesale Segment increased $95.5 million during the six months ended March 2024 as compared to the same prior year period. Significant items impacting sales during the period included a $103.1 million increase in sales related to the acquisition of Henry’s during Q2 2023, a $52.5 million increase in sales related to price increases implemented by cigarette manufacturers, and a $4.4 million increase in sales related to the volume and mix of products in our Other Products category, partially offset by a $64.5 million decrease in sales related to the volume and mix of cigarette cartons sold. Sales in our Retail Segment increased $0.3 million during the six months ended March 2024 as compared to the same prior year period. This increase was due to approximately $1.6 million related to higher sales volumes in our existing stores and approximately $1.5 million related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian, partially offset by a $2.8 million decrease related to the closure of five stores between the comparative periods.
GROSS PROFIT – Six months ended March 2024
Gross profit in our Wholesale Segment increased $9.1 million for the six months ended March 2024 as compared to the same prior year period. Significant items impacting gross profit during the period included a $11.9 million increase in gross profit related to the acquisition of Henry’s in Q2 2023, partially offset by a $1.3 million decrease in gross profit related to the mix of volumes and promotions in our Other Products category, a $0.8 million decrease in gross profit related to the volume and mix of cigarette cartons sold between the comparative periods, and a $0.7 million decrease in gross profit due to the timing and related benefits of cigarette manufacturer price increases. Gross profit in our Retail Segment increased approximately $0.4 million for the six months ended March 2024 as compared to the same prior year period. This change was primarily related to a $0.8 million increase in realized margins in our existing stores and a $0.6 million increase related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian, partially offset by a $1.0 million decrease related to the closure of five stores between the comparative periods.
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OPERATING EXPENSE – Six months ended March 2024
Operating expenses increased $13.2 million during the six months ended March 2024 as compared to the same prior year period. Significant items impacting operating expenses during the period included a $10.6 million increase in operating expenses related to the acquisition of Henry’s during Q2 2023, a $2.4 million increase related to employee compensation and benefit costs, and a $0.6 million increase in insurance costs, partially offset by a $0.2 million decrease in other Wholesale Segment operating expenses, and a $0.2 million decrease in operating expense costs in our Retail Segment. The decrease in our Retail Segment was primarily due to a $1.2 million decrease related to the closure of five stores between the comparative periods, partially offset by an increase of $0.7 million in our existing stores and a $0.3 million increase related to the re-opening of our Port Charlotte store that was damaged during Hurricane Ian.
INTEREST EXPENSE – Six months ended March 2024
Interest expense increased $0.7 million for the six months ended March 2024 as compared to the same prior year period, primarily related to higher interest rates, increased capital expenditures, and higher outstanding debt balances in the current period related to the acquisition of Henry’s in Q2 2023.
OTHER INCOME – Six months ended March 2024
The change in other income between the comparative periods was primarily related to an insurance recovery in the current year period.
INCOME TAX EXPENSE – Six months ended March 2024
The change in the Company’s effective tax rate during the six-month period ended March 2024 as compared to the respective prior year period was primarily related to non-deductible compensation expense in relation to the amount of income from operations before income tax expense and higher effective state income tax rates between the comparative periods.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company’s variability in cash flows from operating activities is dependent on the timing of inventory purchases and seasonal fluctuations. For example, periodically we have inventory “buy-in” opportunities which offer more favorable pricing terms. As a result, we may have to hold inventory for a period longer than the payment terms. This generates a cash outflow from operating activities that we expect to reverse in later periods. Additionally, during our peak time of operations in the warm weather months, we generally carry higher amounts of inventory to ensure high fill rates and customer satisfaction.
The Company primarily finances its operations through three credit facility agreements (a) a facility that is an obligation of AMCON Distributing Company (the “AMCON Facility”), (b) a facility that is an obligation of Team Sledd, LLC (“Team Sledd” and, the “Team Sledd Facility”) and (c) a facility that is the obligation of Henry’s (the “Henry’s Facility”) (collectively, the “Facilities”) and long-term debt agreements with banks. The Team Sledd Facility and the Henry’s Facility are non-recourse to AMCON Distributing Company, are not guaranteed by AMCON Distributing Company and have no cross default provisions applicable to AMCON Distributing Company.
At March 2024, the Facilities had a total combined borrowing capacity of $300.0 million, which includes provisions for up to $30.0 million in credit advances for certain inventory purchases, which are limited by accounts receivable and inventory qualifications, and the value of certain real estate collateral. The Henry’s Facility matures in February 2026, the AMCON Facility matures in June 2027, and the Team Sledd Facility matures in March 2028, each without a penalty for prepayment. Obligations under the Facilities are collateralized by substantially all of the Company’s respective equipment, intangibles, inventories, accounts receivable, and certain real estate. The Facilities each feature an unused commitment fee
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and springing financial covenants. Borrowings under the Facilities bear interest at either the bank’s prime rate or the Secured Overnight Financing Rate (“SOFR”), plus any applicable spreads.
The amount available for use from the Facilities at any given time is subject to a number of factors, including eligible accounts receivable and inventory balances that fluctuate day-to-day, as well as the value of certain real estate collateral. Based on the collateral and loan limits as defined in the Facility agreements, the credit limit of the combined Facilities at March 2024 was $191.2 million, of which $99.2 million was outstanding, leaving $92.0 million available.
The average interest rate of the Facilities was 6.97% at March 2024. For the six months ended March 2024, the peak borrowings under the Facilities was $156.8 million, and the average borrowings and average availability under the Facilities was $120.1 million and $83.5 million, respectively.
Cross Default and Co-Terminus Provisions
Team Sledd’s three notes payable and the Team Sledd Facility contain cross default provisions. The Henry’s note payable and the Henry’s Facility contain cross default provisions. There were no such cross defaults for either Team Sledd or Henry’s at March 2024. Additionally, the Team Sledd Facility and the Henry’s Facility are non-recourse to AMCON Distributing Company, are not guaranteed by AMCON Distributing Company and have no cross default provisions applicable to AMCON Distributing Company. The Company and its subsidiaries, including Team Sledd and Henry’s, were in compliance with all of the financial covenants under the Facilities at March 2024.
Dividend Payments
The Company paid cash dividends on its common stock totaling $0.3 million and $0.4 million for the three- and six-month periods ended March 2024, respectively, and $3.2 million and $3.3 million for the three- and six-month periods ended March 2023, respectively.
Other
The Company has issued a letter of credit for $1.5 million to its workers’ compensation insurance carriers 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 our industry in general, customer credit risk and ongoing access to bank credit heavily influence liquidity positions.
The Company does not currently hedge its exposure to interest rate risk or fuel costs. Accordingly, significant price movements in these areas can and do impact the Company’s profitability.
While the Company believes its liquidity position going forward will be adequate to sustain operations in both the short- and long-term, a precipitous change in operating environment could materially impact the Company’s future revenue streams as well as its ability to collect on customer accounts receivable or secure bank credit.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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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 (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2024 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 is also 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.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 2024, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no 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, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended March 31, 2024, none of the Company’s directors or officers
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Item 6. Exhibits
(a) Exhibits
3.1 | ||
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101 | Interactive Data File (filed herewith electronically) | |
104 | Cover Page Interactive Data File – formatted in Inline XBRL and included as Exhibit 101 |
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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: April 18, 2024 | /s/ Christopher H. Atayan |
Christopher H. Atayan, | |
Chief Executive Officer and Chairman | |
Date: April 18, 2024 | /s/ Charles J. Schmaderer |
Charles J. Schmaderer, | |
Vice President, Chief Financial Officer and Secretary | |
(Principal Financial and Accounting Officer) |
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