Susser Holdings 10-Q 2011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the Quarterly Period Ended: April 3, 2011
For the transition period from to
Commission File Number: 001-33084
SUSSER HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
4525 Ayers Street
Corpus Christi, Texas 78415
(Address of principal executive offices)
(Registrants telephone number, including area code)
(Former Name, former address and former fiscal year, if changed since last report)
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 x 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 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, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 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 x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
TABLE OF CONTENTS
Item 1. Financial Statements
Susser Holdings Corporation
Consolidated Balance Sheets
See accompanying notes
Susser Holdings Corporation
Consolidated Statements of Operations
See accompanying notes
Susser Holdings Corporation
Consolidated Statement of Cash Flows
See accompanying notes
Susser Holdings Corporation
Notes to Consolidated Financial Statements
The consolidated financial statements are composed of Susser Holdings Corporation (Susser or the Company), a Delaware corporation, and its consolidated subsidiaries, which operate convenience stores and distribute motor fuels in Texas, New Mexico, Oklahoma and Louisiana. The Company was formed in May 2006, and in October 2006 completed an initial public offering (IPO). Susser, through its subsidiaries and predecessors, has been acquiring, operating, and supplying motor fuel to service stations and convenience stores since the 1930s.
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. The Companys primary operations are conducted by the following consolidated subsidiaries:
The Company also offers environmental, maintenance, and construction management services to the petroleum industry (including its own sites) through its subsidiary, Applied Petroleum Technologies, Ltd. (APT), a Texas limited partnership. Two wholly owned subsidiaries, Susser Holdings, L.L.C. and Susser Finance Corporation, are the issuers of the $425 million of senior notes outstanding at April 3, 2011 but do not conduct any operations (See Note 7). A subsidiary, C&G Investments, LLC, owns a 50% interest in Cash & Go, Ltd. and Cash & Go Management, LLC. Cash & Go, Ltd. currently operates 39 units, located primarily inside Stripes retail stores, which provide short-term loan services and check cashing services. The Company accounts for this investment under the equity method, and reflects its share of net earnings in other miscellaneous income and its investment in other noncurrent assets.
All significant intercompany accounts and transactions have been eliminated in consolidation. Transactions and balances of other subsidiaries are not material to the consolidated financial statements. The Companys fiscal year is 52 or 53 weeks and ends on the Sunday closest to December 31. All references to fiscal 2010 refer to the 52-week period ended January 2, 2011. All references to the first quarter of 2010 and 2011 refer to the 13-week periods ended April 4, 2010 and April 3, 2011, respectively. Stripes and APT follow the same accounting calendar as the Company. SPC uses calendar month accounting periods, and end their fiscal year on December 31.
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The interim consolidated financial statements have been prepared from the accounting records of the Company and its subsidiaries, and all amounts at April 3, 2011 and for the three months ended April 4, 2010 and April 3, 2011 are unaudited. Pursuant to Regulation S-X, certain information and note disclosures normally included in annual financial statements have been condensed or omitted. The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented, and which are of a normal, recurring nature.
Our results of operations for the three months ended April 4, 2010 and April 3, 2011 are not necessarily indicative of results to be expected for the full fiscal year. Our business is seasonal and we generally experience higher levels of revenues during the summer months than during the winter months.
The interim consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2011.
In preparing the accompanying unaudited condensed consolidated financial statements, the Company has reviewed, as determined necessary by the Companys management, events that have occurred after April 3, 2011, up until the issuance of these financial statements.
FASB ASU No. 2010-06. In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820 Improving Disclosures about Fair Value Measurements). This guidance requires reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy established by ASC 820 and provide a reconciliation of purchases, sales, issuance, and settlements of financial instruments valued with a Level 3 method, which is used to price the hardest to value instruments. The ASU was generally effective for interim and annual reporting periods beginning after December 15, 2009; however the requirement to disclose separately purchases, sales, issuances and settlements in the Level 3 reconciliation are effective for fiscal years beginning after December 15, 2010 (and for interim period within such years). Our adoption of the applicable sections of this ASU did not have a material impact on our financial statements.
FASB ASU No. 2010-29. In December 2010, the FASB issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805 Business Combinations). This guidance requires that disclosure for pro forma revenue and earnings must be as of the beginning of the comparative period presented and adds additional disclosure related to the nature and amount of material, nonrecurring pro forma adjustments. It is effective for public companies only, for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, but early adoption is permitted. Our adoption in January 2011 will impact our disclosure of any future acquisitions.
Accounts receivable consisted of the following:
Inventories consisted of the following:
Property and equipment consisted of the following:
Goodwill is not being amortized, but is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. The annual impairment test is performed as of the first day of the fourth quarter of the fiscal year. At January 2, 2011 and April 3, 2011, we had $240.2 million of goodwill recorded in conjunction with past business combinations. The 2010 impairment analysis indicated no impairment in goodwill. As of April 3, 2011 we evaluated potential impairment indicators pursuant to the requirements of ASC 350-20-35-30. We believe no indicators of impairment occurred during the first quarter of 2011, and believe the assumptions used in the analysis performed in 2010 are still relevant and indicative of our current operating environment. As a result, no impairment was recorded to goodwill during the first quarter of 2011 and no additions were recorded during this period.
In accordance with ASC 350 Intangibles Goodwill and Other, the Company has finite-lived intangible assets recorded that are amortized and indefinite-lived assets that do not amortize. The finite-lived assets consist of supply agreements, favorable/unfavorable leasehold arrangements, loan origination costs, trade names and certain franchise rights, all of which are amortized over the respective lives of the agreements or over the period of time the assets are expected to contribute directly or indirectly to the Companys future cash flows. Supply agreements are being amortized over a weighted average period of approximately nine years. Favorable/unfavorable leasehold arrangements are being amortized over a weighted average period of approximately eleven years. The Laredo Taco Company trade name is being amortized over fifteen years. The Town & Country Food Stores trade name is being amortized over fifty months. Loan origination costs are amortized over the life of the underlying debt as an increase to interest expense.
The following table presents the gross carrying amount and accumulated amortization for each major class of intangible assets, excluding goodwill, at January 2, 2011 and April 3, 2011:
Long-term debt consisted of the following:
The fair value of debt as of April 3, 2011 is estimated to be approximately $469.6 million, based on the reported trading activity of the senior unsecured notes at that time, and the par value of the revolving credit facility and other notes payable.
Senior Unsecured Notes
On May 7, 2010, the Company, through its subsidiaries Susser Holdings, L.L.C. and Susser Finance Corporation, issued $425 million 8.50% Senior Notes due 2016 (the 2016 Notes). The 2016 Notes pay interest semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2010. The 2016 Notes mature on May 15, 2016 and are guaranteed by the Company and each existing and future domestic subsidiary of the Company other than certain non-operating subsidiaries and Susser Company, Ltd. The net proceeds from the sale of the 2016 Notes, together with cash on hand and borrowings under the Amended and Restated Credit Agreement, were used to redeem and discharge all of the outstanding 10 5/8 % senior unsecured notes due 2013 (the 2013 Notes) including a call premium of $15.9 million, to repay the outstanding indebtedness under the term credit facility and to pay other related fees and expenses.
At any time prior to May 15, 2013, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 2016 Notes at a redemption price of 108.500% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date, with the net cash proceeds of
certain public equity offerings. The 2016 Notes may also be redeemed prior to May 15, 2013, in whole or in part, at the option of the Company at a redemption price equal to 100% of the principal amount of the 2016 Notes redeemed plus a make-whole premium and accrued and unpaid interest and liquidated damages, if any, to the applicable redemption date.
On or after May 15, 2013, the Company may redeem all or any part of the 2016 Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and liquidated damages, if any, to the applicable redemption date, if redeemed during the twelve month period beginning on May 15 of the years indicated below:
The Company must offer to purchase the 2016 Notes at 101% of the aggregate principal amount of the notes, plus accrued and unpaid interest, in the event of certain kinds of changes of control. The Company must offer to purchase the Notes at 100% of the aggregate principal amount of the notes, plus accrued and unpaid interest, if excess proceeds remain after the consummation of asset sales.
The 2016 Notes indenture contains customary covenants that limit, among other things, the ability of the Company and its restricted subsidiaries to: incur additional debt; make restricted payments (including paying dividends on, redeeming or repurchasing their capital stock); dispose of its assets; grant liens on its assets; engage in transactions with affiliates; merge or consolidate or transfer substantially all of its assets; and enter into certain sale/leaseback transactions. The indenture also includes certain customary events of default (subject to customary exceptions, baskets and qualifications) including, but not limited to: failure to pay principal, interest, premium or liquidated damages when due; failure to comply with certain covenants; default on certain other indebtedness; certain monetary judgment defaults; bankruptcy and insolvency defaults; and actual or asserted impairment of any note guarantee.
On May 7, 2010, Susser Holdings, L.L.C. entered into an Amended and Restated Credit Agreement (the Credit Agreement) with a syndicate of financial institutions providing for a new four year revolving credit facility (the Revolver) in an aggregate principal amount of up to $120 million. The Credit Agreement changed certain terms of the existing credit facilities, among others: cancellation of the term loan facility (of which $89.3 million was outstanding) and release of a majority of the real property securing the term loan (with the remainder to continue to secure the new Revolver); addition of a $40 million facility increase option; extension of maturity date from November 2012 until May 2014; reduction in fixed charge coverage ratio; increase in senior secured leverage ratio; and increase in margins and commitment fees, subject, in the case of the margins for loans and letters of credit, to adjustment based on leverage grids. The Company and each of its existing and future direct and indirect subsidiaries (other than (i) any subsidiary that is a controlled foreign corporation under the Internal Revenue Code or a subsidiary that is held directly or indirectly by a controlled foreign corporation, (ii) Susser Company, Ltd. and (iii) certain future non-operating subsidiaries) will be guarantors under the Credit Agreement.
Availability under the Revolver is subject to a borrowing base equal to the lesser of (x) (a) 85% of eligible accounts receivable plus (b) 55% of eligible inventory plus (c) 60% of the fair market value of certain designated eligible real property, which shall not exceed 45% of the aggregate borrowing base amount, minus (d) such reserves as the administrative agent may establish in its reasonable credit judgment acting in good faith (including, without limitation, reserves for exposure under swap contracts and obligations relating to treasury management products) and (y) the greater of (i) $160 million and (ii) (A) 85% of gross accounts receivable plus (B) 60% of gross inventory.
The interest rates under the Revolver are calculated, at the Companys option, at either a base rate or a LIBOR rate plus, in each case, a margin. With respect to LIBOR rate loans, interest will be payable at the end of each selected interest period, but no less frequently than quarterly. With respect to base rate loans, interest will be
payable quarterly in arrears. The Revolver may be prepaid at any time in whole or in part without premium or penalty, other than breakage costs if applicable, and requires the maintenance of a maximum senior secured leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with the required leverage and fixed charge coverage ratios as of April 3, 2011.
The Revolver contains customary representations, warranties and certain customary covenants (subject to customary exceptions, thresholds and qualifications) that impose certain affirmative obligations upon and restrict the ability of the Company and its subsidiaries to, among other things: incur liens; incur additional indebtedness, guarantees or other contingent obligations; engage in mergers and consolidations; make sales, transfers and other dispositions of property and assets; make loans, acquisitions, joint ventures and other investments; declare dividends; redeem and repurchase shares of equity holders; create new subsidiaries; become a general partner in any partnership; prepay, redeem or repurchase debt; make capital expenditures; grant negative pledges; change the nature of business; amend organizational documents and other material agreements; change accounting policies or reporting practices; and permit Stripes Holdings LLC to be other than a passive holding company.
The Revolver also includes certain customary events of default (subject to customary exceptions, baskets and qualifications) including, but not limited to: failure to pay principal, interest, fees or other amounts when due; any representation or warranty proving to have been materially incorrect when made or confirmed; failure to perform or observe covenants set forth in the loan documentation; default on certain other indebtedness; certain monetary judgment defaults and material non-monetary judgment defaults; bankruptcy and insolvency defaults; actual or asserted impairment of loan documentation or security; a change of control; and customary ERISA defaults.
As of April 3, 2011, we had no outstanding borrowings under the Revolver and $18.7 million in standby letters of credit. Our borrowing base in effect at April 3, 2011 allowed a maximum borrowing, including outstanding letters of credit, of $120.0 million. Our unused availability on the revolver at April 3, 2011 was $101.3 million.
Fair Value Measurements
We use fair value measurements to measure, among other items, purchased assets and investments, leases and derivative contracts. We also use them to assess impairment of properties, equipment, intangible assets and goodwill. Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liabilitys fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters, or are derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued.
ASC 820 Fair Value Measurements and Disclosures prioritizes the inputs used in measuring fair value into the following hierarchy:
From time to time, the Company enters into interest rate swaps to either reduce the impact of changes in interest rates on its floating rate long-term debt or to take advantage of favorable variable interest rates compared to its fixed rate long-term debt in order to manage interest rate risk exposure. We had no interest rate swaps outstanding at January 2, 2011 or April 3, 2011.
The Company also periodically enters into derivatives, such as futures and options, to manage its fuel price risk, primarily related to bulk purchases of fuel. We hedge this inventory risk through the use of fuel futures contracts which are matched in quantity and timing to the anticipated usage of the inventory. Bulk fuel purchases
and fuel hedging positions have not been material to our operations. These positions have been designated as fair value hedges. The fair value of our derivative contracts are measured using Level 2 inputs, and are determined by either market prices on an active market for similar assets or by prices quoted by a broker or other market-corroborated prices. This price does not differ materially from the amount that would be paid to transfer the liability to a new obligor due to the short term nature of these contracts. At January 2, 2011, the Company held fuel futures contracts with a fair value of ($14,300) (six contracts representing 0.3 million gallons). At April 3, 2011, the Company held fuel futures contracts with a fair value of ($270,000) (58 contracts representing 2.4 million gallons), which is classified in other current assets in the Companys consolidated balance sheets. The Company recognized a loss during the first quarter of 2011 related to these contracts of $0.9 million. The loss realized on hedging contracts is substantially offset by increased profitability on sale of fuel inventory.
The Company leases a portion of its convenience store properties under non-cancellable operating leases, whose initial terms are typically 10 to 20 years, along with options that permit renewals for additional periods. Minimum rent is expensed on a straight-line basis over the term of the lease. In addition to minimum rental payments, certain leases require additional payments based on sales or motor fuel volume. The Company is typically responsible for payment of real estate taxes, maintenance expenses and insurance.
The components of net rent expense are as follows:
Letters of Credit
We were contingently liable for $18.7 million related to irrevocable letters of credit required by various insurers and suppliers at April 3, 2011.
The components of net interest expense are as follows:
A reconciliation of the statutory federal income tax rate to the Companys effective tax rate for the three months ended April 3, 2011 and April 4, 2010 is as follows:
Included in our provision for income tax is a tax imposed by the state of Texas of 0.5% of gross margin in Texas (margin tax). The margin tax accrued for the three months ended April 4, 2010 and April 3, 2011 was $0.4 million and $0.7 million, respectively. The accrued margin tax in 2011 first quarter includes $0.2 million related to a clarification in the margin tax rules.
It is the Companys policy to recognize interest and penalties related to uncertain tax positions in general and administrative expense. The Company became a taxpayer at October 24, 2006 with the conversion to a C corporation, and the statute of limitations remains open on all years since then. The Company files income and gross margin tax returns in the U.S. federal jurisdiction, Texas, Oklahoma, New Mexico and Louisiana. The Company is subject to examinations in all jurisdictions for all returns filed since October 24, 2006.
As of April 3, 2011, all tax positions taken by the Company are considered highly certain. There are no positions the Company reasonably anticipates will significantly increase or decrease within 12 months of the reporting date, and therefore no adjustments have been recorded related to unrecognized tax benefits.
On October 24, 2006, Susser Holdings Corporation completed an IPO of 7,475,000 shares of its common stock at a price of $16.50 per share. A total of 125,000,000 shares of common stock have been authorized, $0.01 par value, of which 17,402,934 were issued and 17,361,406 were outstanding as of January 2, 2011, and 17,482,543 were issued and 17,436,234 were outstanding as of April 3, 2011. Included in these amounts are 297,919 and 338,664 shares, respectively, which represent restricted shares that are not yet vested and have no voting rights. Treasury shares consist of 41,528 and 46,309 shares, respectively, issued as restricted shares which were forfeited prior to vesting or were withheld to pay taxes upon vesting. A total of 25,000,000 preferred shares have also been authorized, par value $0.01 per share, although none have been issued. Options to purchase 819,205 shares of common stock are outstanding as of April 3, 2011, 91,745 of which are vested (See Note 12).
The Company has granted options, restricted stock and restricted stock units subject to vesting requirements under its 2006 Equity Incentive Plan. Vesting of most grants are over two to five years. The restricted stock units are subject to performance criteria in addition to time vesting requirements. Following is a summary of options, restricted stock and restricted stock units which have been granted under the Companys plan:
During the first quarter of 2011, we granted 21,000 options to purchase stock at an exercise price equal to the closing price of the related common stock on the date the options were granted. These options had an aggregate fair value of $0.1 million, which will be amortized to expense over the options requisite service periods. During the first quarter of 2011, we granted 74,731 shares of restricted stock with an aggregate fair value of $1.0 million, which will be amortized to expense over the requisite service period. In addition, we granted 194,000 shares of restricted stock units with an aggregate fair value of $2.6 million, which will be amortized to expense over the requisite service period. These restricted stock units are subject to performance criteria based on 2011 results, in addition to time vesting. Performance criteria for the 2010 restricted stock awards were deemed met as of March 18, 2011, with the 111,000 units remaining subject to time vesting on November 1, 2011 and November 1, 2012.
We adopted ASC 718 Compensation Stock Compensation at the beginning of fiscal 2006 when we were still a private company. Because we used the minimum value method for pro forma disclosures under ASC 718, we have applied ASC 718 prospectively to newly issued stock options. Stock options granted during 2005 have been accounted for in accordance with APB Opinion No. 25 through June 2010, at which time most of these options were tendered in the stock option exchange program and cancelled. Replacement options and restricted stock are being accounted for in accordance with ASC 718. Stock options initially granted during 2005 that were not tendered will continue to be accounted for under APB Opinion No. 25. We recognized non-cash stock compensation expense of $0.7 million and $0.9 million during the three months ended April 4, 2010 and April 3, 2011, respectively, which is included in general and administrative expense.
Had compensation cost for the options granted in 2005 been determined based on the grant-date fair value of awards consistent with the method set forth in ASC 718 the Companys net profits and losses for the periods presented would have been affected as follows:
Accumulated other comprehensive loss is comprised of the following:
Other comprehensive loss is comprised of the following:
The Company operates its business in two primary operating segments, both of which are included as reportable segments. No operating segments have been aggregated in identifying the two reportable segments. The retail segment, Stripes, operates retail convenience stores in Texas, New Mexico and Oklahoma that sell merchandise, prepared food and motor fuel, and also offer a variety of services including car washes, lottery, ATM, money orders, prepaid phone cards and wireless services, and movie rentals. The wholesale segment, SPC, purchases fuel from a number of refiners and supplies it to the Companys retail stores, to independently-owned dealer stations under long-term supply agreements and to other end users of motor fuel. Sales of fuel from the wholesale to retail segment are at delivered cost, including tax and freight. This amount is reflected in intercompany eliminations of fuel revenue. There are no customers who are individually material. Amounts in the All Other column include APT, corporate overhead and other costs not allocated to the two primary segments.
Segment Financial Data for the Three Months Ended April 4, 2010
(dollars and gallons in thousands)
The Company is presenting earnings per share for the historical periods using the guidance provided in ASC 260, Earnings per Share (EPS). Under ASC 260, basic EPS, which excludes dilution, is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common units. Dilutive EPS includes in-the-money stock options and unvested stock using the treasury stock method. During a net loss period, the assumed exercise of in-the-money stock options and unvested stock has an anti-dilutive effect, and therefore such options are excluded from the diluted EPS computation.
Per share information is based on the weighted average number of common shares outstanding during each period for the basic computation and, if dilutive, the weighted average number of potential common shares resulting from the assumed conversion of outstanding stock options for the diluted computation. Units not included in the denominator for basic EPS, but evaluated for inclusion in the denominator for diluted EPS, included options and restricted stock granted under the 2006 Equity Incentive Plan (See Note 12). Restricted stock units are not considered for inclusion in diluted EPS until the relevant performance criteria has been satisfied.
A reconciliation of the numerators and denominators of the basic and diluted per share computations is as follows:
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. Additional discussion and analysis related to our company is contained in our Annual Report on Form 10-K, including the audited consolidated financial statements for the fiscal year ended January 2, 2011. Our fiscal year contains either 52 or 53 weeks and ends on the Sunday closest to December 31. All references to the first quarter of 2010 and 2011 refer to the 13-week periods ended April 4, 2010 and April 3, 2011, respectively. EBITDA and Adjusted EBITDA are non-GAAP financial measures of performance and liquidity that have limitations and should not be considered as a substitute for net income or cash provided by (used in) operating activities. Please see footnote 1 under Key Operating Metrics below for a discussion of our use of EBITDA and Adjusted EBITDA in this Managements Discussion and Analysis of Financial Condition and Results of Operations and a reconciliation to net income and cash provided by (used in) operating activities for the periods presented.
This report, including without limitation, our discussion and analysis of our financial condition and results of operations, contains statements that we believe are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are intended to enjoy protection under the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by use of phrases such as believe, plan, expect, anticipate, intend, forecast or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs, anticipated capital expenditures, expected cost savings and benefits are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:
For a full discussion of these and other risks and uncertainties, please refer to Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended January 2, 2011, and in each subsequent quarterly report on Form 10-Q, including this filing. The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of the date hereof. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available in the future.
We are the largest non-refining operator in Texas of convenience stores based on store count and we believe we are the largest non-refining motor fuel distributor by gallons in Texas. Our operations include retail convenience stores and wholesale motor fuel distribution. As of April 3, 2011, our retail segment operated 527 convenience stores in Texas, New Mexico and Oklahoma offering merchandise, food service, motor fuel and other services.
For the three months ended April 3, 2011, we sold 312.3 million gallons of branded and unbranded motor fuel. We purchase fuel directly from refiners and distribute it to our retail convenience stores, contracted independent operators of convenience stores (dealers), unbranded convenience stores and other end users. We believe our combined retail/wholesale business model makes it possible for us to pursue strategic acquisition opportunities and operate acquired properties under either format, providing an optimized return on investment. Our market share and scale allows the integration of new or acquired stores while minimizing overhead costs. In addition, we believe our foodservice and merchandising offerings distinguish us from our competition, providing the opportunity for increased traffic in our stores.
We opened two new retail stores during the first quarter and closed one, for a total of 527 retail stores operated at the end of the quarter. Three additional stores have been opened and one smaller store has been closed to date in the second quarter, with another five retail stores currently under construction. We expect to open a total of 18 to 22 new retail stores during fiscal 2011. We added five dealer sites and discontinued four during the first quarter, for a total of 432 dealer sites as of the end of the quarter in our wholesale segment.
Our total revenues, net loss attributable to Susser Holdings Corporation and Adjusted EBITDA were $1,169.1 million, $(23,000) and $23.1 million, respectively, for first quarter 2011, compared to $938.1 million, $(5.0) million and $13.9 million, respectively, for first quarter 2010. Our business is seasonal, and we generally experience higher sales and profitability in the second and third quarters during the summer activity months and lowest during the winter months. For a description of our results of operations on a quarterly basis see Quarterly Results of Operations and Seasonality.
We typically experience lower fuel margins in periods when the cost of fuel increases gradually, and higher fuel margins in periods when the cost of fuel declines or is more volatile. Fuel costs continued their generally upward trend during the first quarter of 2011, with crude oil prices averaging approximately $94 per barrel, compared to approximately $85 during the fourth quarter of 2010 and $79 during the first quarter of 2010. However, our first quarter retail fuel margin of 15.3 cents per gallon exceeded our five-year average first quarter margin of 11.2 cents, in part due to relatively higher fuel cost volatility experienced during the quarter, compared to the first quarter of 2010. We report retail fuel margins before credit card fees, but higher fuel prices result in higher credit card costs. Historically, we tend to experience higher fuel margins during periods of higher prices. After deducting credit card fees, our retail fuel margin for the first quarter of 2011 was 10.3 cents per gallon compared to 7.0 cents a year ago.
The economy in Texas, where the majority of our operations are conducted, continues to fare better than many other parts of the nation, partly buoyed by a relatively stable housing market, a healthy regional banking market and relatively strong population growth. Additionally, our business has remained generally more resilient than many other retail formats. After a soft fourth quarter 2009, we began to see stabilization and/or improvement in certain key economic indicators in our markets in early 2010 and have reported positive comparable merchandise results in each quarter of 2010 and 2011 to date. The strongest markets are benefiting from increased oil and gas drilling, which affects approximately 20% of our retail stores. There has also been an increase in diesel volume, primarily attributable to increased freight driven by manufacturing, agriculture and oil and gas activity. New home construction remains soft across many of our core markets.
We believe we have adequate liquidity and financial flexibility to continue to operate and grow our business. Our liquidity position continued to strengthen during the first quarter. We have had no borrowings on our $120 million revolving credit facility since June 2010, and at the end of the first quarter had $101.3 million of unused availability. We also had $34.4 million of cash on the balance sheet at the end of the quarter. Subsequent to quarter-end, we completed a $3.7 million sale/leaseback transaction and closed on a $20 million mortgage note with a regional bank to finance new stores completed in late 2010 and early 2011.
Key Operating Metrics
The following table sets forth, for the periods indicated, information concerning key measures we rely on to gauge our operating performance:
We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because:
EBITDA and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be alternatives to net income (loss) as measures of operating performance or to cash flows from operating activities as a measure of liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations include:
The following table presents a reconciliation of net loss attributable to Susser Holdings Corporation to EBITDA and Adjusted EBITDA:
The following table presents a reconciliation of net cash provided by operating activities to EBITDA and Adjusted EBITDA:
Refer to Note 14 of the accompanying Notes to Consolidated Financial Statements for a description of our segment reporting. The following tables present a reconciliation of our segment operating income to EBITDA and Adjusted EBITDA:
First Quarter 2011 Compared to First Quarter 2010
The following discussion of results for first quarter 2011 compared to first quarter 2010 compares the 13-week period of operations ended April 4, 2010 to the 13-week period of operations ended April 3, 2011. During 2010, we constructed or acquired 14 stores of which 12 opened after the first quarter of 2010 and therefore those stores did not contribute to results in the first quarter of 2010. In addition, we opened two stores during the first quarter of 2011.
Total Revenue. Total revenue for first quarter 2011 was $1.2 billion, an increase of $231.0 million, or 24.6%, from 2010. The increase in total revenue was driven by a 29.1% increase in retail fuel revenue and a 30.3% increase in wholesale fuel revenue, and an increase in merchandise sales of 6.3%, as further discussed below.
Total Gross Profit. Total gross profit for first quarter 2011 was $115.7 million, an increase of $18.1 million, or 18.5% over 2010. The increase was primarily due to the increase in retail fuel gross profit of $9.0 million, the increase in wholesale fuel gross profit of $1.2 million and the increase in merchandise gross profit of $6.6 million, as further discussed below. Included in these increases is the impact of new stores constructed or acquired during 2011 and 2010 ($3.7 million of growth in gross profit).
Merchandise Sales and Gross Profit. Merchandise sales were $203.0 million for first quarter 2011, a $12.0 million, or 6.3% increase over 2010. Our performance was due to a 5.6% merchandise same store sales increase, accounting for $10.4 million of the increase, with the balance due to new stores built or acquired in 2010 and 2011. Merchandise same-store sales include food service sales but do not include motor fuel sales. Key categories contributing to the merchandise same store sales increase were cigarettes, packaged drinks and food service. Food service includes sales from restaurant operations, hot dogs, fountain beverages, coffee and other foods prepared in the store.
Merchandise gross profit was $69.0 million for the first quarter of 2011, a 10.6% increase over 2010, which was driven by an increase in gross profit margin from 32.7% to 34.0% and the increase in merchandise sales. Our reported merchandise margins do not include other income from services such as ATMs, lottery, prepaid phone cards and car washes. Food service gross profit accounted for 32% of non-fuel gross profit for the first quarter of 2011 compared to 31% for the first quarter of 2010.
Retail Motor Fuel Sales, Gallons, and Gross Profit. Retail sales of motor fuel for 2011 were $618.1 million, an increase of $139.5 million, or 29.1% over 2010, primarily driven by a 23.6% increase in the average retail price of motor fuel and a 4.5% increase in retail gallons sold. We sold an average of 28,200 gallons per retail store per week, 3.2% more than last year. Retail motor fuel gross profit increased by $9.0 million or 44.5% over 2010 due to an increase in the gross profit per gallon and the increase in gallons sold. The average retail fuel margin increased from 11.1 cents per gallon to 15.3 cents per gallon for 2010 and 2011, respectively. This increase in fuel margin increased retail fuel gross profit by $8.1 million. After deducting credit card fees, the net margin increased from 7.0 cents per gallon to 10.3 cents per gallon from first quarter 2010 to first quarter 2011.
Wholesale Motor Fuel Sales, Gallons, and Gross Profit. Wholesale motor fuel revenues to third parties for the first quarter of 2011 were $336.4 million, a 30.3% increase over 2010. The increase was primarily driven by a 29.2% increase in the wholesale selling price per gallon and a slight 0.8% increase in gallons sold. Wholesale motor fuel gross profit of $6.2 million increased $1.2 million or 23.5% from 2010, due to a 22.5% increase in the gross profit per gallon from 4.2 to 5.1 cents per gallon (responsible for a $1.1 million increase).
Other Revenue and Gross Profit. Other revenue of $11.6 million for first quarter 2011 increased by $1.4 million or 13.2% from 2010, with a 12.7% increase in associated gross profit, primarily attributable to growth in lottery income, ATM fees, movie rental income and wholesale segment lease transfer fee income.
Personnel Expense. For the first quarter of 2011, personnel expense increased $2.4 million or 6.7% over 2010. Of the increase in personnel expense, $1.6 million was attributable to the new stores acquired and constructed during 2010 and 2011.
General and Administrative Expenses. For first quarter 2011, general and administrative expenses increased by $1.1 million, or 13.2% from 2010, approximately half of which is due to higher bonus accrual and the balance was due to other personnel costs and professional fees. G&A expenses include non-cash stock based compensation expenses which were $0.9 million for the quarter.
Other Operating Expenses. Other operating expenses increased by $4.2 million or 14.2% over 2010. The increase was primarily due to an increase in credit card expense of $2.3 million from 2010, an increase in utilities expense of $0.7 million and increased maintenance expense of $0.6 million. Credit card costs are directly related to the cost of fuel. Operating expenses related to credit card fees, utilities and maintenance for new stores accounted for $0.9 million of increased costs.
Rent Expense. Rent expense for first quarter 2011 of $11.3 million was $1.3 million or 12.6% higher than 2010 due primarily to rent expense on additional leased stores.
Depreciation, Amortization, and Accretion. Depreciation, amortization and accretion expense for first quarter 2011 of $10.9 million was down $0.3 million or 2.7% from 2010. Most of our 2010 new stores were either build-to-suit or sale/leaseback transactions, therefore having a minimal impact on depreciation expense.
Income from Operations. Income from operations for first quarter 2011 was $10.7 million, compared to $1.7 million for 2010. The increase is primarily attributed to higher retail fuel gross profit of $9.0 million, higher wholesale fuel gross profit of $1.2 million and increased merchandise gross profit of $6.6 million partly offset by an increase in operating expenses as described above.
Income Tax. The income tax expense accrued for first quarter 2011 was $0.8 million, which consisted of $0.7 million of expense attributable to the Texas margin tax and $0.1 million of income tax expense related to federal and state income tax. The income tax benefit accrued for first quarter 2010 was $3.0 million, which consisted of $0.4 million of expense attributable to the Texas margin tax and $3.4 million of income tax benefit related to federal and state income tax. See Note 10 of the accompanying Notes to Consolidated Financial Statements for further discussion of our income tax provision.
Net income attributable to Susser Holdings Corporation. We recorded net loss attributable to Susser Holdings Corporation for the first quarter 2011 of $23,000, compared to net loss attributable to Susser Holdings Corporation of $5.0 million for 2010. The increase is primarily due to the same factors impacting operating income, as described above.
Adjusted EBITDA. Adjusted EBITDA for first quarter 2011 was $23.1 million, an increase of $9.2 million, or 66.5% compared to 2010. Retail segment Adjusted EBITDA of $20.4 million increased by $8.8 million, or 76.7% compared to 2010, primarily due to higher fuel margins slightly offset by increased credit card expense. Wholesale segment Adjusted EBITDA of $4.6 million increased by $0.7 million, or 17.9% from 2010, primarily resulting from the higher fuel gross profit. Other segment Adjusted EBITDA reflects net expenses of $1.9 million for the quarter, compared to $1.6 million for the same period in 2010.
Liquidity and Capital Resources
Cash Flows from Operations. Cash flows from operations are our main source of liquidity. We rely primarily on cash provided by operating activities, supplemented as necessary from time to time by borrowings under our revolving credit facility, sale leaseback transactions, and other financing transactions to finance our operations, to service our debt obligations, and to fund our capital expenditures. Due to the seasonal nature of our business, our operating cash flow is typically the lowest during the first quarter of the year since (i) sales tend to be lower during the winter months; (ii) we are building inventory in preparation for spring break and summer; and (iii) we pay certain annual operating expenses during the first quarter. The summer months are our peak sales months, and therefore our operating cash flow tends to be the highest during the third quarter.
Cash flows from operations were $20.8 million and $18.0 million for the first three months of 2011 and 2010, respectively. The change in our cash provided from operating activities for the respective periods was primarily attributable to improved operating results and changes in working capital. Our daily working capital requirements fluctuate within each month, primarily in response to the timing of motor fuel tax, sales tax and rent payments. We had $34.4 million of cash and cash equivalents on hand at April 3, 2011 compared to $20.2 million at April 4, 2010, and $47.9 million at January 2, 2011, of which $1.2 million was restricted at January 2, 2011 and April 3, 2011.
Capital Expenditures. Capital expenditures, before any sale/leasebacks and asset dispositions were $34.1 million and $9.2 million during the first three months of 2011 and 2010, respectively. We opened two new retail stores and closed one retail store through April 3, 2011. We have opened three additional retail stores and closed one in the second quarter and currently have another five stores under construction.
Following is a summary of our recent operating site additions and closures by segment:
During fiscal 2011, we plan to invest approximately $80 to $120 million (net of anticipated lease financing and asset sales) in new retail stores, new dealer projects and maintenance, and upgrade of our existing facilities. We plan to finance our capital spending plan with cash flow from operations, cash balances, borrowings under the revolving credit facility, long-term mortgage debt and additional lease financing. We currently expect we will be able to access financing for a portion of our new store program. However, if we are not able to obtain sale/leaseback, long-term mortgage debt or other financing during 2011, or if our actual cash flows from operations are lower than expected, we may defer a portion of our new store expansion program or other discretionary capital spending.
Cash Flows from Financing Activities. On May 7, 2010, Susser Holdings, L.L.C. entered into an Amended and Restated Credit Agreement (the Credit Agreement) with a syndicate of financial institutions providing for a new four year revolving credit facility (the Revolver) in an aggregate principal amount of up to $120 million. On May 7, 2010, the Company, through its subsidiaries Susser Holdings, L.L.C. and Susser Finance Corporation, also issued $425 million 8.50% Senior Notes due 2016 (the 2016 Notes). For more information regarding the terms of the Credit Agreement, including the Revolver, and the 2016 Notes, please see Note 7 in the accompanying Notes to Consolidated Financial Statements. We also entered into a $10 million mortgage loan with a regional bank in February 2010, with a five-year term, 15-year amortization and variable interest based on prime rate.
At April 3, 2011, our outstanding debt was $435.6 million, excluding $4.3 million unamortized issuance discount. As of April 3, 2011, we had no outstanding borrowings under the revolving credit facility and $18.7 million in standby letters of credit. Our borrowing base in effect at April 3, 2011, allowed a maximum borrowing, including outstanding letters of credit, of $120.0 million. Our unused availability on the revolver at April 3, 2011 was $101.3 million. Our unrestricted cash on our balance sheet was $33.2 million and total debt was $431.3 million, leaving debt net of cash of $398.1 million as of April 3, 2011.
Subsequent to quarter-end, we completed a $3.7 million sale/leaseback transaction and closed on a $20 million mortgage note with a regional bank to finance new stores completed in late 2010 and early 2011.
Long Term Liquidity. We expect that our cash flows from operations, cash on hand, lease and mortgage financing, and our revolving credit facility will be adequate to provide for our short-term and long-term liquidity needs. Our ability to meet our debt service obligations and other capital requirements, including capital expenditures, as well as the cost of potential acquisitions and new store openings, will depend on our future performance which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. As a normal part of our business, depending on market conditions, we from time to time consider opportunities to refinance our existing indebtedness, and although we may refinance all or part of our indebtedness in the future, including our existing notes and our revolving credit and mortgage facility, there can be no assurances that we will do so. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may cause us to need to seek additional debt or equity financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions. In addition, any of the items discussed in detail under Risk Factors may also significantly impact our liquidity.
Contractual Obligations and Commitments
Properties. Most of our leases are net leases requiring us to pay taxes, insurance, and maintenance costs. We believe that no individual site is material to us. The following table summarizes the number of owned and leased properties:
We lease our corporate and retail segment headquarters facility, which consists of approximately 83,000 square feet of office and warehouse space located in Corpus Christi. The annual lease expense is approximately $144,000 net of taxes, insurance and maintenance. We own the headquarters of our wholesale segment, which consists of approximately 43,000 square feet of office and warehouse space in Houston.
Quarterly Results of Operations and Seasonality
The following table sets forth certain unaudited financial and operating data for each of the last nine quarters. Each quarter consists of 13 weeks, unless noted otherwise. Our business is seasonal and we generally experience higher levels of revenues during the summer months than during the winter months.
Summary of Significant Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and results of operations, and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. Our significant accounting policies are described in our Annual Report on Form 10-K for the year ended January 2, 2011. As discussed in Note 2 to our Consolidated Financial Statements included elsewhere in this report, certain new financial accounting pronouncements have been issued which either have already been reflected in the accompanying consolidated financial statements, or will become effective for our financial statements at various dates in the future.
Goodwill is not being amortized, but is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. There are no indicators of impairment as of April 3, 2011 (See Note 6).
We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities. We currently have a $120.0 million revolving credit facility which bears interest at variable rates, but which had no outstanding borrowings at April 3, 2011. We had $9.5 million outstanding in other notes payable that is subject to a variable interest rate. The annualized effect of a one percentage point change in floating interest rates on our variable rate debt obligations outstanding at April 3, 2011 would be to change interest expense by approximately $0.1 million.
Our primary exposure relates to:
We manage interest rate risk on our outstanding long-term and short-term debt through the use of fixed and variable rate debt. While we cannot predict or manage our ability to refinance existing debt or the impact interest rate movements will have on our existing debt, management evaluates our financial position on an ongoing basis.
From time to time, we enter into interest rate swaps to either reduce the impact of changes in interest rates on our floating rate long-term debt or to take advantage of favorable variable interest rates compared to our fixed rate long-term debt.
We also periodically purchase motor fuel in bulk and hold in inventory or transport it to West Texas or Houston via pipeline. We hedge this inventory risk through the use of fuel futures contracts which are matched in quantity and timing to the anticipated usage of the pipeline inventory. These fuel hedging positions have not been material to our operations.
For more information on our hedging activity, please see Note 7 in the accompanying Notes to Consolidated Financial Statements.
As required by paragraph (b) of Rules 13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate.
PART II OTHER INFORMATION
We are parties to various legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, we believe that the ultimate resolutions of these matters will not have a material adverse effect on our business, financial condition or prospects.
You should carefully consider the risks described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended January 2, 2011, as well as the section within this report entitled Forward-Looking Statements under Part I. Financial InformationItem 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, before making any investment decision with respect to our securities. The risks and uncertainties described in our annual report are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could negatively impact our results of operations or financial condition in the future. If any of such risks actually occur, our business, financial condition or results of operations could be materially adversely affected.
The list of exhibits attached to this Quarterly Report on Form 10-Q is incorporated herein by reference.
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.