ARKO Corp. (ARKO) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs, plans and intentions regarding our product development efforts, business, financial condition, results of operations, strategies and prospects. You can identify forward-looking statements by the fact that these statements do not relate to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in “Item 1A — Risk Factors” of this Annual Report on Form 10-K. Forward-looking statements reflect our views only as of the date they are made. We do not undertake any obligation to update forward-looking statements except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA.
Overview
Based in Richmond, VA, we are a leading independent convenience store operator and, as of December 31, 2022, we were the sixth largest convenience store chain in the United States (“U.S.”) ranked by store count, operating 1,404 retail convenience stores. As of December 31, 2022, we operated the stores under more than 20 regional store brands, including 1-Stop, Admiral, Apple Market®, BreadBox, ExpressStop, E-Z Mart®, fas mart®, fastmarket®, Handy Mart, Jetz, Jiffi Stop®, Jiffy Stop, Li’l Cricket, Next Door Store®, Pride, Roadrunner Markets, Rstore, Scotchman®, shore stop®, Town Star, Village Pantry® and Young’s. As of December 31, 2022, we also supplied fuel to 1,674 independent dealers and operated 183 cardlock locations (unstaffed fueling locations) acquired in the Quarles Acquisition (as defined below), which closed on July 22, 2022. We are well diversified geographically and, as of December 31, 2022, operated across 34 states and the District of Columbia in the Mid-Atlantic, Midwestern, Northeastern, Southeastern and Southwestern U.S.
Our primary business is the operation of convenience stores. As such, we derive a significant portion of our revenue from the retail sale of fuel and the products offered in our stores, resulting in our retail stores generating a large proportion of our profitability. Our retail stores offer a wide array of cold and hot foodservice, beverages, cigarettes and other tobacco products, candy, salty snacks, grocery, beer and general merchandise. We have foodservice offerings at approximately 1,150 company-operated stores. The foodservice category includes hot and fresh grab-n-go foods, deli, fried chicken, bakery, pizza, roller grill items and other prepared foods. In addition, at our stores, we operate over 120 branded quick service restaurants consisting of major national brands. We have 18 new Sbarro, the Original New York Pizza, locations and are currently working on additional new food offerings of this kind. Additionally, we provide a number of traditional convenience store services that generate additional income, including lottery, prepaid products, gift cards, money orders, ATMs, gaming, and other ancillary product and service offerings. We also generate revenues from car washes at approximately 80 of our locations. Our high value fas REWARDS® loyalty program with approximately 1.3 million currently enrolled members is available in the majority of our stores and offers exclusive savings on merchandise and gas to our customers.
We also derive revenue from the wholesale distribution of fuel and the sale of fuel at cardlock locations, and we earn commissions from the sales of fuel using proprietary fuel cards that provide customers access to a nationwide network of fueling sites. We believe these revenues result in stable, ratable cash flows which can quickly be deployed to pursue accretive acquisitions and investments in our retail stores. Additionally, these locations contribute to our overall size, which leads to economies of scale with our fuel and merchandise vendors.
Description of Segments
Our reportable segments are described below.
Retail Segment
The retail segment includes the operation of a chain of retail stores, which includes convenience stores selling fuel products and other merchandise to retail customers. At our convenience stores, we own the merchandise and fuel inventory and employ personnel to manage the store.
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Wholesale Segment
The wholesale segment supplies fuel to independent dealers, on either a cost plus or consignment basis. For consignment arrangements, we retain ownership of the fuel inventory at the site, are responsible for the pricing of the fuel to the end consumer and share a portion of the gross profit earned from the sale of fuel by the consignment dealers. For cost plus arrangements, we sell fuel to independent dealers and bulk and spot purchasers on a fixed-fee basis. The sales price to the independent dealer is determined according to the terms of the relevant agreement with the independent dealer, which typically reflects our total fuel costs plus the cost of transportation and a margin, with us generally retaining the prompt pay discounts and rebates.
Fleet Fueling Segment
The Quarles Acquisition, which closed on July 22, 2022, added fleet fueling to our business, which includes the operation of proprietary and third-party cardlock locations (unstaffed fueling locations), and issuance of proprietary fuel cards that provide customers access to a nationwide network of fueling sites.
GPMP Segment
The GPMP segment includes the operations of GPM Petroleum LP, referred to as GPMP, which primarily sells and supplies fuel to GPM and substantially all of its subsidiaries that sell fuel in the retail and wholesale segments at GPMP’s cost of fuel (including taxes and transportation) plus a fixed margin and a fixed fee charged to sites in the fleet fueling segment.
Trends Impacting Our Business
We achieved strong store growth over the last several years, primarily by implementing a highly successful acquisition strategy. From 2013 through 2022, we completed 22 acquisitions. In July 2022, we completed our acquisition from Quarles of certain assets (the “Quarles Acquisition”), which included 121 proprietary Quarles-branded cardlock sites and 63 third-party cardlock sites for fleet fueling operations, and 46 independent dealer locations, including certain lessee-dealer sites, which comprises a complementary business from which we believe we can grow and expand the Company’s fleet fueling platform. On December 6, 2022, we completed our acquisition of all of the issued and outstanding membership interests of Pride Convenience Holdings, LLC, which operates 31 convenience stores and gas stations (the “Pride Acquisition” and together with the Quarles Acquisition, the “2022 Acquisitions”). Please see Note 4 to our consolidated financial statements contained in this Annual Report on Form 10-K for additional information on the 2022 Acquisitions. Our store count has grown from 320 sites in 2011 to 3,261 sites as of December 31, 2022, of which 1,404 were operated as retail convenience stores, 1,674 were locations at which we supplied fuel to independent dealers and 183 were cardlock locations. These strategic acquisitions have had, and we expect will continue to have, a significant impact on our reported results and can make period to period comparisons of results difficult. In November 2021, we completed our acquisition of 36 Handy Mart retail convenience stores, and, in May 2021, we completed our acquisition of 60 ExpressStop retail convenience stores (collectively, the “2021 Acquisitions”). In October 2020, we completed our acquisition of the business of Empire Petroleum Partners, LLC, which business we refer to as Empire, which added 84 retail sites and 1,453 wholesale sites to our business (the “Empire Acquisition”). With our achievement of significant size and scale, we have enhanced our focus on organic growth, including implementing company-wide marketing and merchandising initiatives, which we believe will result in significant value accretion to our acquired assets.
The following table provides a history of our acquisitions, site conversions and site closings for each of the last three years, for the retail, wholesale and fleet fueling segments:
| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Retail Segment | 2022 | 2021 | 2020 | |||||||||
| Number of sites at beginning of period | 1,406 | 1,330 | 1,272 | |||||||||
| Acquired sites | 32 | 97 | 84 | |||||||||
| Newly opened or reopened sites | — | 1 | 3 | |||||||||
| Company-controlled sites converted to consignment or fuel supply locations, net | (17 | ) | (9 | ) | (14 | ) | ||||||
| Closed, relocated or divested sites | (17 | ) | (13 | ) | (15 | ) | ||||||
| Number of sites at end of period | 1,404 | 1,406 | 1,330 |
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| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Wholesale Segment 1 | 2022 | 2021 | 2020 | |||||||||
| Number of sites at beginning of period | 1,628 | 1,597 | 128 | |||||||||
| Acquired sites | 46 | — | 1,453 | |||||||||
| Newly opened or reopened sites 2 | 74 | 76 | 20 | |||||||||
| Consignment or fuel supply locations converted from Company-controlled sites, net | 17 | 9 | 14 | |||||||||
| Closed, relocated or divested sites | (91 | ) | (54 | ) | (18 | ) | ||||||
| Number of sites at end of period | 1,674 | 1,628 | 1,597 |
1 Excludes bulk and spot purchasers.
2 Includes all signed fuel supply agreements irrespective of fuel distribution commencement date.
| For the Year Ended December 31, | ||||
|---|---|---|---|---|
| Fleet Fueling Segment | 2022 | |||
| Number of sites at beginning of period | — | |||
| Acquired sites | 184 | |||
| Closed, relocated or divested sites | (1 | ) | ||
| Number of sites at end of period | 183 |
In recent years, the convenience store industry has focused on increasing and improving in-store foodservice offerings, including fresh foods, quick service restaurants or proprietary food offerings. We believe consumers may be more likely to patronize convenience stores that include such new and improved food offerings, which may also lead to increased inside merchandise sales or fuel sales for such stores. Our current foodservice offering, which varies by store, primarily consists of hot and fresh grab-n-go foods, deli, fried chicken, bakery, pizza, roller grill items and other prepared foods. We have historically relied upon a limited number of franchised quick service restaurants and in-store delis to drive customer traffic rather than other types of foodservice offerings. As a result, we believe that our under-penetration of foodservice presents an opportunity to expand foodservice offerings and margin in response to changing consumer behavior. In addition, we believe that continued investment in new technology platforms and applications to adapt to evolving consumer eating preferences, including contactless checkout, order ahead service, and delivery, will further drive growth in profitability.
Our results of operation are significantly impacted by the retail fuel margins we earn on gallons sold. These fuel margins can change rapidly as they are influenced by many factors including: the price of refined products; interruptions in supply caused by severe weather; supply chain disruptions; refinery mechanical failures; and competition in the local markets in which we operate.
The cost of our main products, gasoline and diesel fuel, is greatly impacted by the wholesale cost of fuel in the United States. We attempt to pass wholesale fuel cost changes through to our customers through retail price changes; however, we are not always able to do so. Competitive conditions primarily affect the timing of any related increase or decrease in retail prices. As a result, we tend to experience lower fuel margins when the cost of fuel is increasing gradually over a longer period and higher fuel margins when the cost of fuel is declining or more volatile over a shorter period of time. For the years ended December 31, 2022 and 2021, we experienced historically high fuel margins as a result of the volatile market for gasoline and diesel fuel. Depending on future market and geopolitical conditions, the supply of fuel, including diesel fuel in particular, may become constrained. We maintain terminal storage of diesel fuel for short-term supply needs.
Additionally, in 2022, the U.S. economy has continued to experience inflationary pressures, which increase the cost of the merchandise we purchase and reduces consumer purchasing power. We have mitigated a portion of these higher costs with retail price increases. If this trend continues or increases, it could impact demand for our products and services, as well as seasonal travel patterns, which could reduce future sales volumes. Additionally, because of current labor market conditions and the prevailing wage rates in the markets in which we operate, we have voluntarily increased wages, which have increased our costs associated with recruiting and retaining qualified personnel, and may continue to do so in the future.
We also operate in a highly competitive retail convenience market that includes businesses with operations and services that are similar to those that we provide. We face significant competition from other large chain operators. In particular, large convenience store chains have increased their number of locations and remodeled their existing locations in recent years, enhancing their competitive position. We believe that convenience stores managed by individual operators who offer branded or non-branded fuel are also significant competitors in the market. The convenience store industry is also experiencing competition from other retail sectors including grocery stores, large warehouse retail stores, dollar stores and pharmacies.
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We believe that we have a significant opportunity to increase our sales and profitability by continuing to execute our operating strategy, growing our store base in existing and contiguous markets through acquisitions, and enhancing the performance of current stores.
Business Highlights
Increased merchandise contribution and fuel contribution at same stores combined with an increase in fuel contribution in our wholesale segment positively impacted our results of operations during 2022. In addition, the 2022 Acquisitions and the 2021 Acquisitions contributed to the improvement in our results of operations for 2022, as compared to 2021, particularly the strong fuel contribution of our fleet fueling business resulting from fuel price volatility in the second half of 2022 since the closing of the Quarles Acquisition. Store operating expenses increased in 2022 as compared to 2021, primarily due to higher personnel costs and credit card fees. General and administrative expenses also increased in 2022 as compared to 2021, primarily as a result of expenses associated with the Quarles Acquisition, wage increases and share-based compensation expense.
COVID-19
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Throughout the pandemic, our locations have continued to operate and have remained open to the public because convenience store operations and gas stations have been deemed essential businesses by numerous federal and state authorities, including the U.S. Department of Homeland Security, and therefore were exempt from many of the closure orders that were imposed on other U.S. businesses. The COVID-19 pandemic has subsided with the normalization of the living with COVID-19 following the increase in accessibility to COVID-19 vaccines and antiviral treatments.
The COVID-19 pandemic reduced the frequency of customer visits and the number of gallons sold at our sites, however, we experienced increases in fuel margin and merchandise basket which more than offset this reduction. Additionally, our corporate offices transitioned primarily to remote work, and we believe this has allowed us to maintain or increase productivity since March 2020 while expanding the hiring universe for corporate roles nationwide. While we have seen shortages in labor and supply chain disruptions that have increased our operating costs, we have addressed these shortages and disruptions through several hiring initiatives and leveraging our strong partnerships with our suppliers. Although the COVID-19 pandemic has subsided, there continues to be a high level of uncertainty relating to how the pandemic will evolve, and how governments and consumers will react. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, a resumption of high levels of infection and hospitalization, new variants of the virus, the resulting impact on our employees, customers, suppliers, and vendors, supply chain disruptions and the remedial actions and any stimulus measures adopted by federal, state, and local governments, and to what extent normal economic and operating conditions are impacted. Therefore, we cannot reasonably estimate the future impact at this time.
Seasonality
Our business is seasonal, and our operating income in the second and third quarters has historically been significantly greater than in the first and fourth quarters as a result of the generally improved climate and seasonal buying patterns of our customers. Inclement weather, especially in the Midwest and Northeast regions of the U.S. during the winter months, can negatively impact our financial results.
Results of Operations for the years ended December 31, 2022, 2021 and 2020
The period-to-period comparisons of our results of operations contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operation have been prepared using our audited consolidated annual financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion should be read in conjunction with such audited annual consolidated financial statements and related notes.
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Consolidated Results
The table below shows our consolidated results for the years ended December 31, 2022, 2021 and 2020, together with certain key metrics.
| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Revenues: | (in thousands) | |||||||||||
| Fuel revenue | $ | 7,401,090 | $ | 5,714,333 | $ | 2,452,401 | ||||||
| Merchandise revenue | 1,647,642 | 1,616,404 | 1,494,342 | |||||||||
| Other revenues, net | 94,067 | 86,661 | 63,489 | |||||||||
| Total revenues | 9,142,799 | 7,417,398 | 4,010,232 | |||||||||
| Operating expenses: | ||||||||||||
| Fuel costs | 6,856,651 | 5,275,907 | 2,131,416 | |||||||||
| Merchandise costs | 1,146,423 | 1,143,494 | 1,088,032 | |||||||||
| Store operating expenses | 721,174 | 630,518 | 532,422 | |||||||||
| General and administrative expenses | 139,969 | 124,667 | 94,424 | |||||||||
| Depreciation and amortization | 101,752 | 97,194 | 74,396 | |||||||||
| Total operating expenses | 8,965,969 | 7,271,780 | 3,920,690 | |||||||||
| Other expenses, net | 9,816 | 3,536 | 9,228 | |||||||||
| Operating income | 167,014 | 142,082 | 80,314 | |||||||||
| Interest and other financial expenses, net | (59,405 | ) | (71,207 | ) | (49,905 | ) | ||||||
| Income before income taxes | 107,609 | 70,875 | 30,409 | |||||||||
| Income tax (expense) benefit | (35,557 | ) | (11,634 | ) | 1,499 | |||||||
| (Loss) income from equity investment | (74 | ) | 186 | (1,269 | ) | |||||||
| Net income | $ | 71,978 | $ | 59,427 | $ | 30,639 | ||||||
| Less: Net income attributable to non-controlling interests | 231 | 229 | 16,929 | |||||||||
| Net income attributable to ARKO Corp. | $ | 71,747 | $ | 59,198 | $ | 13,710 | ||||||
| Less: Accretion and dividends of Series A redeemable preferred stock | (5,750 | ) | (5,735 | ) | (3,277 | ) | ||||||
| Net income attributable to common shareholders | $ | 65,997 | $ | 53,463 | $ | 10,433 | ||||||
| Fuel gallons sold | 1,971,011 | 2,019,206 | 1,207,296 | |||||||||
| Fuel margin, cents per gallon 1 | 27.6 | 21.7 | 26.6 | |||||||||
| Merchandise contribution 2 | $ | 501,219 | $ | 472,910 | $ | 406,310 | ||||||
| Merchandise margin 3 | 30.4 | % | 29.3 | % | 27.2 | % | ||||||
| Adjusted EBITDA, net of incremental bonuses 4 | $ | 301,054 | $ | 256,575 | $ | 183,392 |
1 Calculated as fuel revenue less fuel costs divided by fuel gallons sold.
2 Calculated as merchandise revenue less merchandise costs.
3 Calculated as merchandise contribution divided by merchandise revenue.
4 Refer to “Use of Non-GAAP Measures” below for discussion of this non-GAAP performance measure and related reconciliation to net income.
For the year ended December 31, 2022 compared to the year ended December 31, 2021
For the year ended December 31, 2022, fuel revenue increased by $1,686.8 million, or 29.5%, compared to the year ended December 31, 2021. The increase in fuel revenue was attributable primarily to a significant increase in the average price of fuel compared to 2021, as well as incremental gallons sold related to the 2022 Acquisitions and the 2021 Acquisitions, which were partially offset by fewer gallons sold at same stores in 2022 compared to 2021.
For the year ended December 31, 2022, merchandise revenue increased by $31.2 million, or 1.9%, compared to the year ended December 31, 2021, primarily due to the 2021 Acquisitions and the Pride Acquisition. Offsetting these increases were decreases in same store merchandise revenues and merchandise revenue from underperforming retail stores that we closed or converted to dealer-operated sites.
For the year ended December 31, 2022, other revenues, net increased by $7.4 million, or 8.5%, compared to the year ended December 31, 2021, primarily due to additional revenue from the 2022 Acquisitions and the 2021 Acquisitions and an increase in income from gaming machines.
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For the year ended December 31, 2022, total operating expenses increased by $1,694.2 million, or 23.3%, as compared to the year ended December 31, 2021. Fuel costs increased $1,580.7 million, or 30.0% as compared to 2021 due to fuel sold at higher average cost, partially offset by lower volumes. Merchandise costs increased $2.9 million, or 0.3%, as compared to 2021, as the decrease in same store merchandise sales was offset by increased costs related to the 2021 Acquisitions and the Pride Acquisition. For the year ended December 31, 2022, store operating expenses increased $90.7 million, or 14.4%, as compared to 2021 due to incremental expenses as a result of the 2022 Acquisitions and the 2021 Acquisitions and an increase in expenses at same stores, including higher personnel costs and credit card fees.
For the year ended December 31, 2022, general and administrative expenses increased $15.3 million, or 12.3%, as compared to the year ended December 31, 2021, primarily due to expenses associated with the 2022 Acquisitions, annual wage increases, share-based compensation expense, higher transportation costs and non-recurring costs related to the internal entity realignment and streamlining.
For the year ended December 31, 2022, depreciation and amortization expenses increased $4.6 million, or 4.7%, as compared to the year ended December 31, 2021 primarily due to assets acquired during 2022 and 2021, largely in connection with the 2022 Acquisitions and the 2021 Acquisitions.
For the year ended December 31, 2022, other expenses, net increased by $6.3 million, as compared to the year ended December 31, 2021 primarily due to higher acquisition costs and greater losses on disposal of assets and impairment charges in 2022, which were partially offset by greater income recorded for the fair value adjustment of contingent consideration in 2022.
Operating income was $167.0 million for the year ended December 31, 2022, as compared to $142.1 million for the year ended December 31, 2021. The increase was primarily due to strong fuel and merchandise results along with incremental income from the 2022 Acquisitions and the 2021 Acquisitions, which was partially offset by an increase in store operating expenses and general and administrative expenses.
For the year ended December 31, 2022, interest and other financial expenses, net decreased by $11.8 million compared to the year ended December 31, 2021 primarily related to a reduction of $6.5 million in expenses recorded for fair value adjustments for our public and private warrants and Deferred Shares (as defined in Note 11 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K) and $6.3 million of deferred financing costs written off in 2021 due to the early repayment of debt, which were partially offset by a net period-over-period decrease of $1.5 million in foreign currency gains recorded and lower rate debt outstanding in 2021. In addition, $4.5 million of additional interest expense was recorded in 2021 for the early redemption of the Bonds (Series C).
For the year ended December 31, 2022, income tax expense was $35.6 million compared to $11.6 million for the year ended December 31, 2021, and our effective tax rate for the years ended December 31, 2022 and 2021 was 33.1% and 16.3%, respectively. The increase was due in part to a one-time non-cash tax expense in the amount of approximately $8.9 million for the year ended December 31, 2022 the Company recorded in connection with the internal entity realignment and streamlining and recording of a tax benefit for the year ended December 31, 2021 of approximately $5.5 million as a result of releasing a valuation allowance previously recorded.
For the year ended December 31, 2022, net income attributable to the Company was $71.7 million compared to $59.2 million for the year ended December 31, 2021.
For the year ended December 31, 2022, Adjusted EBITDA was $301.1 million, as compared to $256.6 million for the year ended December 31, 2021. The recent acquisitions contributed to Adjusted EBITDA for the year ended December 31, 2022 as follows: the Quarles Acquisition – $20 million; the Pride Acquisition – $1.8 million; and the 2021 Acquisitions – an incremental $13.3 million. Increased merchandise contribution and fuel contribution in both the retail and wholesale segments also positively impacted Adjusted EBITDA for 2022, as compared to 2021, which was partially offset by higher personnel costs, higher credit card fees related to an increase in the retail price of fuel and an increase in general and administrative expenses primarily related to annual wage increases and expenses associated with the 2022 Acquisitions. Refer to “Use of Non-GAAP Measures” below for discussion of this non-GAAP performance measure and related reconciliation to net income.
For the year ended December 31, 2021 compared to the year ended December 31, 2020
For a discussion of the comparative results of operations for the years ended December 31, 2021 and 2020, refer to Part II, Item 7“Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form
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10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022, under the subheading “Consolidated Results – For the year ended December 31, 2021 compared to the year ended December 31, 2020.”
Segment Results
Retail Segment
The table below shows the results of the retail segment for the years ended December 31, 2022, 2021 and 2020, together with certain key metrics for the segment.
| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Revenues: | (in thousands) | |||||||||||
| Fuel revenue | $ | 3,887,549 | $ | 3,048,893 | $ | 1,940,303 | ||||||
| Merchandise revenue | 1,647,642 | 1,616,404 | 1,494,342 | |||||||||
| Other revenues, net | 67,280 | 63,271 | 53,424 | |||||||||
| Total revenues | 5,602,471 | 4,728,568 | 3,488,069 | |||||||||
| Operating expenses: | ||||||||||||
| Fuel costs | 3,521,648 | 2,750,940 | 1,684,611 | |||||||||
| Merchandise costs | 1,146,423 | 1,143,494 | 1,088,032 | |||||||||
| Store operating expenses | 669,848 | 593,901 | 515,426 | |||||||||
| Total operating expenses | 5,337,919 | 4,488,335 | 3,288,069 | |||||||||
| Operating income | $ | 264,552 | $ | 240,233 | $ | 200,000 | ||||||
| Fuel gallons sold | 1,006,469 | 1,038,561 | 937,095 | |||||||||
| Same store fuel gallons sold decrease (%) 1 | (8.1 | %) | (1.3 | %) | (16.5 | %) | ||||||
| Fuel margin, cents per gallon 2 | 41.4 | 33.7 | 31.9 | |||||||||
| Same store merchandise sales (decrease) increase (%) 1 | (1.0 | %) | 1.6 | % | 3.5 | % | ||||||
| Same store merchandise sales excluding cigarettes increase (%) 1 | 2.6 | % | 4.8 | % | 4.6 | % | ||||||
| Merchandise contribution 3 | $ | 501,219 | $ | 472,910 | $ | 406,310 | ||||||
| Merchandise margin 4 | 30.4 | % | 29.3 | % | 27.2 | % |
1 Same store is a common metric used in the convenience store industry. We consider a store a same store beginning in the first quarter in which the store had a full quarter of activity in the prior year. Refer to “Use of Non-GAAP Measures” below for discussion of this measure.
2 Calculated as fuel revenue less fuel costs divided by fuel gallons sold; excludes the estimated fixed margin or fixed fee paid to GPMP for the cost of fuel.
3 Calculated as merchandise revenue less merchandise costs.
4 Calculated as merchandise contribution divided by merchandise revenue.
For the year ended December 31, 2022 compared to the year ended December 31, 2021
Retail Revenues
For the year ended December 31, 2022, fuel revenue increased by $838.7 million, or 27.5%, as compared to the year ended December 31, 2021. The increase in fuel revenue was attributable to a $0.92 per gallon increase in the average retail price of fuel in 2022 as compared to 2021, which was offset by a decrease in gallons sold at same stores of approximately 8.1%, or 80.7 million gallons, primarily due to managing both volume and margin to optimize overall fuel margin dollars. Additionally, the Pride Acquisition and 2021 Acquisitions contributed an incremental 64.6 million gallons sold, or $260.6 million in fuel revenue. Underperforming retail stores, which were closed or converted to independent dealers during 2022 in order to optimize profitability, negatively impacted gallons sold during 2022.
For the year ended December 31, 2022, merchandise revenue increased by $31.2 million, or 1.9%, as compared to the year ended December 31, 2021. The Pride Acquisition and 2021 Acquisitions contributed approximately $71.7 million of incremental merchandise revenue. Same store merchandise sales decreased $16.2 million, or 1.0%, for 2022 compared to 2021. Same store merchandise sales decreased primarily due to lower revenue from cigarettes and reduced demand for essential products given the lessening impacts of the pandemic, which were partially offset by higher packaged beverages, center-store items, frozen food, beer and wine, other tobacco products and franchise revenue as a result of marketing initiatives, including expanded category assortments, new franchise locations and investments in coolers and freezers. In addition, there was a decrease in merchandise revenue from underperforming retail stores that were closed or converted to independent dealers.
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For the year ended December 31, 2022, other revenues, net increased by $4.0 million, or 6.3%, from the year ended December 31, 2021, primarily related to an increase in income from gaming machines and additional revenue from the Pride Acquisition and 2021 Acquisitions, partially offset by lower lottery commissions.
Retail Operating Income
For the year ended December 31, 2022, fuel margin increased as compared to the year ended December 31, 2021, primarily related to incremental fuel profit from the Pride Acquisition and 2021 Acquisitions of approximately $23.3 million and an increase in same store fuel profit of $47.4 million (excluding intercompany charges by GPMP). Fuel margin per gallon at same stores for 2022 was 42.0 cents per gallon, as compared to 33.9 cents per gallon for 2021.
For the year ended December 31, 2022, merchandise contribution increased $28.3 million, or 6.0%, as compared to the year ended December 31, 2021, and merchandise margin increased to 30.4% in 2022 as compared to 29.3% in 2021. The increase was due to $22.1 million in incremental merchandise contribution from the Pride Acquisition and the 2021 Acquisitions and an increase in merchandise contribution at same stores of $12.5 million. Merchandise contribution at same stores increased in 2022 primarily due to higher contribution from packaged beverages, center-store items, beer and wine, other tobacco products and franchises which were partially offset by lower contribution from cigarettes. Merchandise margin at same stores was 30.2% in 2022 compared to 29.1% in 2021.
For the year ended December 31, 2022, store operating expenses increased $75.9 million, or 12.8%, as compared to the year ended December 31, 2021, due to approximately $36 million of incremental expenses related to the Pride Acquisition and the 2021 Acquisitions and an increases in expenses at same stores, including $32.0 million of higher personnel costs, or 14.2%, and $10.4 million of higher credit card fees, or 14.5%, due to higher retail prices. The increase in store operating expenses were partially offset by underperforming retail stores that we closed or converted to independent dealers.
For the year ended December 31, 2021 compared to the year ended December 31, 2020
For a discussion of the comparative results of operations for the years ended December 31, 2021 and 2020, refer to Part II, Item 7“Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022, under the subheading “Retail Segment – For the year ended December 31, 2021 compared to the year ended December 31, 2020.”
Wholesale Segment
The table below shows the results of the wholesale segment for the years ended December 31, 2022, 2021 and 2020, together with certain key metrics for the segment.
| For the Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| Revenues: | (in thousands) | ||||||||||
| Fuel revenue | $ | 3,234,145 | $ | 2,659,706 | $ | 508,175 | |||||
| Other revenues, net | 23,451 | 22,298 | 9,335 | ||||||||
| Total revenues | 3,257,596 | 2,682,004 | 517,510 | ||||||||
| Operating expenses: | |||||||||||
| Fuel costs | 3,181,189 | 2,620,102 | 499,371 | ||||||||
| Store operating expenses | 42,543 | 39,904 | 14,616 | ||||||||
| Total operating expenses | 3,223,732 | 2,660,006 | 513,987 | ||||||||
| Operating income | $ | 33,864 | $ | 21,998 | $ | 3,523 | |||||
| Fuel gallons sold - fuel supply locations | 746,513 | 814,628 | 210,085 | ||||||||
| Fuel gallons sold - consignment agent locations | 156,059 | 163,391 | 57,224 | ||||||||
| Fuel margin, cents per gallon 1 - fuel supply locations | 6.8 | 5.8 | 4.5 | ||||||||
| Fuel margin, cents per gallon 1 - consignment agent locations | 30.2 | 25.4 | 21.9 |
1 Calculated as fuel revenue less fuel costs, divided by fuel gallons sold; excludes the estimated fixed margin or fixed fee paid to GPMP for the cost of fuel.
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For the year ended December 31, 2022 compared to the year ended December 31, 2021
Wholesale Revenues
For the year ended December 31, 2022, fuel revenue increased by $574.4 million, or 21.6%, compared to the year ended December 31, 2021. Wholesale revenues benefited from a significant increase in the average price of fuel in 2022 as compared to 2021, which was partially offset by a 7.7% reduction in gallons sold. The Quarles Acquisition contributed 11.1 million of our total gallons sold. Of the total increase in fuel revenue, approximately $460.3 million of the increase, or 80.1%, was attributable to fuel supply locations.
Wholesale Operating Income
For the year ended December 31, 2022, fuel contribution increased by $9.7 million (excluding intercompany charges by GPMP), of which approximately $2.0 million was attributable to the Quarles Acquisition. At fuel supply locations, fuel contribution increased by $4.2 million (excluding intercompany charges by GPMP), and fuel margin increased over 2021 primarily due to greater prompt pay discounts related to higher fuel costs, greater fuel rebates and contribution from the Quarles Acquisition. At consignment agent locations, fuel contribution increased $5.5 million (excluding intercompany charges by GPMP) and fuel margin also increased over 2021 primarily due to greater prompt pay discounts related to higher fuel costs, greater fuel rebates, improved rack-to-retail margins and contribution from the Quarles Acquisition.
For the year ended December 31, 2022, store operating expenses increased $2.6 million compared to the year ended December 31, 2021 primarily related to higher credit card fees and rent expenses in the current year, as well as incremental expenses as a result of the Quarles Acquisition.
For the year ended December 31, 2021 compared to the year ended December 31, 2020
For a discussion of the comparative results of operations for the years ended December 31, 2021 and 2020, refer to Part II, Item 7“Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022, under the subheading “Wholesale Segment – For the year ended December 31, 2021 compared to the year ended December 31, 2020.”
Fleet Fueling Segment
The table below shows the results of the fleet fueling segment for the year ended December 31, 2022, together with certain key metrics for the segment. Because we added the fleet fueling segment only upon consummation of the Quarles Acquisition in July 2022, there are no comparable periods results for the years ended December 31, 2021 or 2020.
| For the Year Ended December 31, | |||
|---|---|---|---|
| 2022 | |||
| Revenues: | (in thousands) | ||
| Fuel revenue | $ | 270,670 | |
| Other revenues, net | 2,178 | ||
| Total revenues | 272,848 | ||
| Operating expenses: | |||
| Fuel costs | 245,733 | ||
| Store operating expenses | 8,733 | ||
| Total operating expenses | 254,466 | ||
| Operating income | $ | 18,382 | |
| Fuel gallons sold – proprietary cardlock locations | 57,104 | ||
| Fuel gallons sold – third-party cardlock locations | 2,882 | ||
| Fuel margin, cents per gallon1 – proprietary cardlock locations | 48.4 | ||
| Fuel margin, cents per gallon1 – third-party cardlock locations | 6.5 |
1 Calculated as fuel revenue less fuel costs divided by fuel gallons sold; excludes the estimated fixed fee charged by GPMP to sites in the fleet fueling segment.
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For the year ended December 31, 2022
Fleet Fueling Revenues
For the year ended December 31, 2022, fuel revenue was positively impacted by a high average price of diesel fuel in 2022 following the closing of the Quarles Acquisition.
Fleet Fueling Operating Income
For the year ended December 31, 2022, fuel contribution was approximately $27.8 million (excluding intercompany charges by GPMP), and was positively impacted by historically high rack-to-retail margins, as well as fuel price volatility in the second half of 2022 following the closing of the Quarles Acquisition.
GPMP Segment
The table below shows the results of the GPMP segment for the years ended December 31, 2022, 2021 and 2020, together with certain key metrics for the segment.
| For the Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||||||
| Revenues: | (in thousands) | ||||||||||
| Fuel revenue – inter-segment | $ | 5,674,516 | $ | 4,384,227 | $ | 1,706,233 | |||||
| Fuel revenue – external customers | 5,160 | 5,734 | 3,923 | ||||||||
| Other revenues, net | 1,024 | 1,092 | 897 | ||||||||
| Other revenues, net – inter-segment | 3,651 | — | — | ||||||||
| Total revenues | 5,684,351 | 4,391,053 | 1,711,053 | ||||||||
| Operating expenses: | |||||||||||
| Fuel costs | 5,585,050 | 4,289,092 | 1,653,667 | ||||||||
| General and administrative expenses | 2,897 | 2,970 | 2,977 | ||||||||
| Depreciation and amortization | 7,369 | 7,372 | 7,373 | ||||||||
| Total operating expenses | 5,595,316 | 4,299,434 | 1,664,017 | ||||||||
| Operating income | $ | 89,035 | $ | 91,619 | $ | 47,036 | |||||
| Fuel gallons sold – inter-segment | 1,890,946 | 2,015,907 | 1,200,658 | ||||||||
| Fuel gallons sold – external customers | 1,592 | 2,626 | 2,892 | ||||||||
| Fuel margin, cents per gallon 1 | 5.0 | 5.0 | 4.7 |
1 Calculated as fuel revenue less fuel costs divided by fuel gallons sold.
For the year ended December 31, 2022 compared to the year ended December 31, 2021
GPMP Revenues
For the year ended December 31, 2022, fuel revenue increased by $1,289.7 million, or 29.4%, as compared to the year ended December 31, 2021. The increase in fuel revenue was attributable to a significant increase in the average price of fuel, which was partially offset by a decrease in gallons sold as compared to 2021.
For the years ended December 31, 2022 and 2021, other revenues, net were $1.0 million and $1.1 million, respectively, and primarily related to rental income from certain sites leased to independent dealers. Inter-segment other revenues, net related to the fixed fee primarily charged to sites in the fleet fueling segment (currently 5.0 cents per gallon sold), which began in July 2022 and were $3.7 million for the year ended December 31, 2022.
GPMP Operating Income
Fuel margin decreased by $6.2 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to fewer gallons sold to the retail and wholesale segments at a fixed margin.
For the year ended December 31, 2022, total general, administrative, depreciation and amortization expenses were similar with those in the prior year.
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For the year ended December 31, 2021 compared to the year ended December 31, 2020
For a discussion of the comparable results of operations for the years ended December 31, 2021 and 2020, refer to Part II, Item 7“Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022, under the subheading “GPMP Segment – For the year ended December 31, 2021 compared to the year ended December 31, 2020.”
Use of Non-GAAP Measures
We disclose certain measures on a “same store basis,” which is a non-GAAP measure. Information disclosed on a “same store basis” excludes the results of any store that is not a “same store” for the applicable period. A store is considered a same store beginning in the first quarter in which the store had a full quarter of activity in the prior year. We believe that this information provides greater comparability regarding our ongoing operating performance. Neither this measure nor those described below should be considered an alternative to measurements presented in accordance with generally accepted accounting principles in the United States (“GAAP”).
We define EBITDA as net income before net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA further adjusts EBITDA by excluding the gain or loss on disposal of assets, impairment charges, acquisition costs, other non-cash items, and other unusual or non-recurring charges. Adjusted EBITDA, net of incremental bonuses further adjusts Adjusted EBITDA by excluding incremental bonuses incurred for 2020 based on 2020 performance. Each of EBITDA, Adjusted EBITDA and Adjusted EBITDA, net of incremental bonuses is a non-GAAP financial measure.
We use EBITDA, Adjusted EBITDA and Adjusted EBITDA, net of incremental bonuses for operational and financial decision-making and believe these measures are useful in evaluating our performance because they eliminate certain items that we do not consider indicators of our operating performance. EBITDA, Adjusted EBITDA and Adjusted EBITDA, net of incremental bonuses are also used by many of our investors, securities analysts, and other interested parties in evaluating our operational and financial performance across reporting periods. We believe that the presentation of EBITDA, Adjusted EBITDA and Adjusted EBITDA, net of incremental bonuses provides useful information to investors by allowing an understanding of key measures that we use internally for operational decision-making, budgeting, evaluating acquisition targets, and assessing our operating performance.
EBITDA, Adjusted EBITDA and Adjusted EBITDA, net of incremental bonuses are not recognized terms under GAAP and should not be considered as a substitute for net income or any other financial measure presented in accordance with GAAP. These measures have limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. We strongly encourage investors to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
Because non-GAAP financial measures are not standardized, same store measures, EBITDA, Adjusted EBITDA and Adjusted EBITDA, net of incremental bonuses, as defined by us, may not be comparable to similarly titled measures reported by other companies. It therefore may not be possible to compare our use of these non-GAAP financial measures with those used by other companies.
The following table contains a reconciliation of net income to EBITDA, Adjusted EBITDA and Adjusted EBITDA, net of incremental bonuses for the years ended December 31, 2022, 2021 and 2020.
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| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Net income | $ | 71,978 | $ | 59,427 | $ | 30,639 | ||||||
| Interest and other financing expenses, net | 59,405 | 71,207 | 49,905 | |||||||||
| Income tax expense (benefit) | 35,557 | 11,634 | (1,499 | ) | ||||||||
| Depreciation and amortization | 101,752 | 97,194 | 74,396 | |||||||||
| EBITDA | 268,692 | 239,462 | 153,441 | |||||||||
| Non-cash rent expense (a) | 7,903 | 6,359 | 7,051 | |||||||||
| Acquisition costs (b) | 8,162 | 5,366 | 6,031 | |||||||||
| Loss on disposal of assets and impairment charges (c) | 5,731 | 1,384 | 6,060 | |||||||||
| Share-based compensation expense (d) | 12,161 | 5,804 | 1,891 | |||||||||
| Loss (income) from equity investment (e) | 74 | (186 | ) | 1,269 | ||||||||
| Fuel taxes paid in arrears (f) | — | — | 819 | |||||||||
| Adjustment to contingent consideration (g) | (2,204 | ) | (1,740 | ) | (1,287 | ) | ||||||
| Internal entity realignment and streamlining (h) | 475 | — | — | |||||||||
| Other (i) | 60 | 126 | 302 | |||||||||
| Adjusted EBITDA | $ | 301,054 | $ | 256,575 | $ | 175,577 | ||||||
| Incremental bonuses (j) | — | — | 7,815 | |||||||||
| Adjusted EBITDA, net of incremental bonuses | $ | 301,054 | $ | 256,575 | $ | 183,392 |
(a)
Eliminates the non-cash portion of rent, which reflects the extent to which our GAAP rent expense recognized exceeds (or is less than) our cash rent payments. The GAAP rent expense adjustment can vary depending on the terms of our lease portfolio, which has been impacted by our recent acquisitions. For newer leases, our rent expense recognized typically exceeds our cash rent payments, while for more mature leases, rent expense recognized is typically less than our cash rent payments.
(b)
Eliminates costs incurred that are directly attributable to historical business acquisitions and salaries of employees whose primary job function is to execute our acquisition strategy and facilitate integration of acquired operations.
(c)
Eliminates the non-cash loss (gain) from the sale of property and equipment, the loss (gain) recognized upon the sale of related leased assets and impairment charges on property and equipment and right-of-use assets related to closed and non-performing sites.
(d)
Eliminates non-cash share-based compensation expense related to the equity incentive program in place to incentivize, retain, and motivate our employees, certain non-employees, and members of our board of directors (the “Board”).
(e)
Eliminates our share of loss (income) attributable to our unconsolidated equity investment.
(f)
Eliminates the payment of historical fuel tax liabilities owed for multiple prior periods.
(g)
Eliminates fair value adjustments to the contingent consideration owed to the seller for the 2020 Empire Acquisition and owed by the seller in the 2019 acquisition of 64 sites from a third party (“Riiser”).
(h)
Eliminates non-recurring charges related to our internal entity realignment and streamlining.
(i)
Eliminates other unusual or non-recurring items that we do not consider to be meaningful in assessing operating performance.
(j)
Eliminates incremental bonuses based on 2020 performance.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations, availability under our credit facilities and our cash balances. Our principal liquidity requirements are the financing of current operations, funding capital expenditures, including acquisitions, and servicing debt. We finance our inventory purchases primarily from customary trade credit aided by relatively rapid inventory turnover, as well as cash generated from operations. Rapid inventory turnover allows us to conduct operations without the need for large amounts of cash and working capital. We largely rely on internally generated cash flows and borrowings, which we believe are sufficient to meet our liquidity needs for the foreseeable future.
Our ability to meet our debt service obligations and other capital requirements, including capital expenditures, as well as the cost of acquisitions, will depend on our future operating 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 will from time to time consider opportunities to repay, redeem, repurchase or refinance our indebtedness. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions, or other events may
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cause us to seek additional debt or equity financing in future periods. Additional debt financing could impose increased cash payment obligations, as well as covenants that may restrict our operations. There can be no guarantee that financing will be available on acceptable terms or at all.
As of December 31, 2022, we were in a strong liquidity position of approximately $675 million, consisting of approximately $299 million of cash and cash equivalents and approximately $376 million of availability under our lines of credit. This liquidity position currently provides us with adequate funding to satisfy our contractual and other obligations from our existing cash balances. As of December 31, 2022, we had no outstanding borrowings under our $140.0 million PNC Line of Credit (as defined below), $0.9 million of unused availability under the M&T equipment line of credit, described below, and $241.0 million of unused availability under our $500.0 million Capital One Line of Credit (as defined below), which we can seek to increase up to $700.0 million, subject to obtaining additional financing commitments from current lenders or other banks, and subject to certain other terms.
In 2022, we fully prepaid and terminated the GPMP PNC Term Loan (as defined below), using cash on hand and the proceeds from the sale of U.S. Treasuries that had previously been used to secure approximately 98% of the outstanding principal amount of such term loan.
The Board declared, and the Company paid, dividends of $0.09 per share of common stock in 2022, totaling approximately $10.9 million. The Board declared a quarterly dividend of $0.03 per share of common stock, to be paid on March 21, 2023 to stockholders of record as of March 9, 2023. The amount and timing of dividends payable on our common stock are within the sole discretion of our Board, which will evaluate dividend payments within the context of our overall capital allocation strategy on an ongoing basis, giving consideration to our current and forecast earnings, financial condition, cash requirements and other factors. There can be no assurance that we will continue to pay such dividends or the amounts of such dividends.
In February 2022, we announced that our Board had authorized a share repurchase program for up to an aggregate of $50 million of our outstanding shares of common stock. During the year ended December 31, 2022, we repurchased approximately 4.5 million shares of common stock under the repurchase program for approximately $39.0 million, or an average share price of $8.60. The share repurchase program does not have a stated expiration date. Whether and the extent to which we repurchase shares depends on a number of factors, including our financial condition, capital requirements, cash flows, results of operations, future business prospects and other factors management may deem relevant. The timing, volume, and nature of repurchases are subject to market conditions, applicable securities laws, and other factors, and the program may be amended, suspended or discontinued at any time. Repurchases may be effected from time to time through open market purchases, including pursuant to a pre-set trading plan meeting the requirements of Rule 10b5-1(c)of the Exchange Act, privately negotiated transactions, pursuant to accelerated share repurchase agreements entered into with one or more counterparties, or otherwise. In August 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”), which includes, among other provisions, a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022; in consideration of any further stock repurchases under our repurchase program, we intend to evaluate the impact of the IRA’s 1% excise tax on stock repurchases in tax years beginning after December 31, 2022.
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To date, we have funded capital expenditures primarily through funds generated from operations, funds received from vendors, sale-leaseback transactions, the issuance of debt, and existing cash. Future capital required to finance operations, acquisitions, and raze-and-rebuild, functionally and fully remodel and update stores is expected to come from cash on hand, cash generated by operations, availability under lines of credit, and additional long-term debt and equipment leases, as circumstances may dictate. In both the short-term and long-term, we currently expect that our capital spending program will be primarily focused on expanding our store base through acquisitions, razing-and-rebuilding, remodeling and updating stores, and maintaining our owned properties and equipment, including upgrading all fuel dispensers to be EMV-compliant. We expect to spend a total of approximately $14 million in 2023 to upgrade substantially all our fuel dispensers to be EMV-compliant. We do not expect such capital needs to adversely affect liquidity.
Cash Flows for the Years Ended December 31, 2022, 2021 and 2020
Net cash provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2022, 2021 and 2020 were as follows:
| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Net cash provided by (used in): | (in thousands) | |||||||||||
| Operating activities | $ | 209,256 | $ | 159,191 | $ | 173,842 | ||||||
| Investing activities | (175,488 | ) | (171,777 | ) | (407,551 | ) | ||||||
| Financing activities | 10,555 | (26,384 | ) | 491,048 | ||||||||
| Effect of exchange rates | (97 | ) | (1,464 | ) | 2,875 | |||||||
| Total | $ | 44,226 | $ | (40,434 | ) | $ | 260,214 |
For the comparison of our cash flows for the years ended December 31, 2021 and 2020, refer to Part II, Item 7“Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022, under the subheading “Cash Flows for the Years Ended December 31, 2021, 2020 and 2019.”
Operating Activities
Cash flows provided by operations are our main source of liquidity. We have historically relied primarily on cash provided by operating activities, supplemented as necessary from time to time by borrowings on our credit facilities and other debt or equity transactions to finance our operations and to fund our capital expenditures. Cash flow provided by operating activities is primarily impacted by our net income and changes in working capital.
For the year ended December 31, 2022, cash flows provided by operating activities were $209.3 million compared to $159.2 million for the year ended December 31, 2021. The increase was primarily the result of approximately $8.2 million of lower net tax payments and an increase in Adjusted EBITDA primarily generated from an increase in merchandise and fuel contribution at same stores, as well as from the 2022 Acquisitions and the 2021 Acquisitions, which were partially offset by approximately $4.6 million of higher net interest payments and changes in working capital primarily as a result of higher fuel costs.
Investing Activities
Cash flows used in investing activities primarily reflect capital expenditures for acquisitions and replacing and maintaining existing facilities and equipment used in the business.
For the year ended December 31, 2022, cash used for investing activities increased by $3.7 million to $175.5 million from $171.8 million for the year ended December 31, 2021. For the year ended December 31, 2022, we spent $98.6 million for capital expenditures, including the purchase of certain fee properties, bean-to-cup coffee equipment, upgrades to fuel dispensers and other investments in our stores. The net consideration paid for the 2022 Acquisitions was $412.9 million, which included the $331.0 million paid by the real estate fund involved in these transactions, of which $55.0 million was included in financing activity, reflecting our net cash outflow of $81.9 million. This decrease was partially offset by a $58.9 million decrease in short-term investments of which $31.8 million was used to repay long-term debt and the remainder converted into cash on hand.
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Financing Activities
Cash flows from financing activities primarily consist of increases and decreases in the principal amount of our lines of credit and debt, distributions to non-controlling interests and issuance of common and preferred stock, net of dividends paid and common stock repurchases.
For the year ended December 31, 2022, financing activities consisted primarily of net borrowings of $24.9 million for long-term debt, $55.0 million of consideration paid by the real estate fund involved in the 2022 Acquisitions related to sale-leaseback transactions (see Note 4 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K), repayments of $6.5 million for financing leases, $5.9 million for additional consideration payments related to the 2020 Empire Acquisition, $10.9 million for dividend payments on common stock, $5.8 million for dividend payments on the Series A redeemable preferred stock and $40.0 million for common stock repurchases.
Contractual Obligations and Indebtedness
Contractual Obligations
The table below presents our significant contractual obligations as of December 31, 2022:
| Obligations due by Period | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual Obligations (1) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||
| (in thousands) | |||||||||||||||||||
| Debt obligations (2) | $ | 957,211 | $ | 55,395 | $ | 332,891 | $ | 72,302 | $ | 496,623 | |||||||||
| Additional and contingent consideration related to the Empire Acquisition (non-discounted) | 14,390 | 5,969 | 8,421 | — | — | ||||||||||||||
| Other financial obligations (3) | 178,773 | 8,783 | 17,753 | 18,177 | 134,060 | ||||||||||||||
| Operating lease obligations | 2,162,803 | 151,974 | 307,458 | 305,183 | 1,398,188 | ||||||||||||||
| Financing lease obligations | 530,105 | 21,974 | 41,961 | 41,383 | 424,787 | ||||||||||||||
| $ | 3,843,282 | $ | 244,095 | $ | 708,484 | $ | 437,045 | $ | 2,453,658 | ||||||||||
| Purchase commitments (in gallons) (4) | 1,909,001 | 407,570 | 484,358 | 339,024 | 678,049 |
(1)
Excludes asset retirement obligations due to the uncertain nature of the timing of these liabilities.
(2)
Includes principal and interest payments. Assumes an interest rate of 6.6% on the $258.3 million of the GPMP Capital One Line of Credit utilized as of December 31, 2022 and a zero balance on the PNC Line of Credit.
(3)
Includes financial liabilities related to the 2022 Acquisitions and the 2021 acquisition of ExpressStop stores, assuming lease purchase option is not exercised.
(4)
Our fuel vendor agreements with suppliers require minimum volume purchase commitments of branded and unbranded gasoline and distillates annually. The future minimum volume purchase requirements under the existing supply agreements are based on gallons, with a purchase price at prevailing market rates for wholesale distribution.
Credit Facilities and Senior Notes
Senior Notes
On October 21, 2021, the Company completed a private offering of $450 million aggregate principal amount of 5.125% Senior Notes due 2029 (the “Senior Notes”). The Senior Notes are guaranteed, on an unsecured senior basis, by certain of the Company's wholly owned domestic subsidiaries (the “Guarantors”). The indenture governing the Senior Notes contains customary restrictive covenants that, among other things, generally limit the ability of the Company and substantially all of its subsidiaries to (i) create liens, (ii) pay dividends, acquire shares of capital stock and make payments on subordinated debt, (iii) place limitations on distributions from certain subsidiaries, (iv) issue or sell the capital stock of certain subsidiaries, (v) sell assets, (vi) enter into transactions with affiliates, (vii) effect mergers and (viii) incur indebtedness. The Senior Notes and the guarantees rank equally in right of payment with all of the Company’s and the Guarantors’ respective existing and future senior unsubordinated indebtedness and are effectively subordinated to all of the Company’s and the Guarantors’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness; and are structurally subordinated to any existing and future obligations of subsidiaries of the Company that are not Guarantors.
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Financing Agreements with PNC
GPM and certain subsidiaries have a financing arrangement (as amended, the “PNC Credit Agreement”) with PNC Bank National Association (“PNC”) to provide a line of credit with an aggregate principal amount of up to $140 million for purposes of financing working capital (the “PNC Line of Credit”).
On December 20, 2022, GPM entered into an eighth amendment to the PNC Credit Agreement (the “Eighth Amendment”) to effect the following primary changes: (1) extended the maturity date by five years to December 22, 2027; (2) replaced the London Interbank Offered Rate (“LIBOR”) with the CME Group’s forward-looking SOFR (as defined in the Eighth Amendment) as an interest rate benchmark, including the replacement of LIBOR Rate Loans, with interest periods of one, two and three months, with adjusted Term SOFR Rate Loans (as defined in the Eighth Amendment), with interest periods of one and three months; (3) revised certain negative covenants to provide additional flexibility, including increased fixed dollar baskets and introduction of basket increases based on average undrawn availability; (4) added cardlock receivables as a portion of the borrowing base under certain circumstances; and (5) increased certain thresholds for events of default.
Pursuant to the Eighth Amendment, the PNC Line of Credit bears interest, as elected by GPM at: (a) SOFR Adjusted plus Term SOFR (as defined in the agreement) plus a margin of 1.25% to 1.75% or (b) a rate per annum equal to the alternate base rate (as defined in the agreement) plus a margin of 0% to 0.50%. Every quarter, the SOFR margin rate and the alternate base rate margin rate are updated based on the quarterly average undrawn availability of the line of credit. The calculation of the availability under the PNC Line of Credit is determined monthly subject to terms and limitations as set forth in the PNC Credit Agreement, taking into account the balances of receivables, inventory and letters of credit, among other things. As of December 31, 2022, $5.8 million of letters of credit were outstanding under the PNC Credit Agreement.
GPMP had a term loan with PNC in the aggregate principal amount of $32.4 million (the “GPMP PNC Term Loan”), which was secured by U.S. Treasury or other investment grade securities equal to approximately 98% of the outstanding principal amount of the GPMP PNC Term Loan. The Company fully prepaid this term loan in the third quarter of 2022 utilizing proceeds from the sale of these securities and other cash on hand and terminated the term loan and security agreement governing such term loan.
Financing agreements with M&T Bank
GPM has a financing arrangement with M&T Bank to provide a three-year $20.0 million line of credit for purchases of equipment, which line may be borrowed in tranches, as described below, and an aggregate principal amount of $35.0 million of a real estate loan (the “M&T Term Loan”). As of December 31, 2022, approximately $0.9 million remained available under the line of credit.
Each additional equipment loan tranche will have a three-year term, payable in equal monthly payments of principal plus interest, and will accrue a fixed rate of interest equal to M&T Bank’s three-year cost of funds as of the applicable date of such tranche, plus 3.00%. The M&T Term Loan bears interest at LIBOR plus 3.00%, mature in June 2026 and is payable in monthly installments based on a fifteen-year amortization schedule, with the balance of the loan payable at maturity.
Financing agreement with a syndicate of banks led by Capital One, National Association (“Capital One”)
GPMP has a revolving credit facility with a syndicate of banks led by Capital One, National Association, in an aggregate principal amount of up to $500 million (as amended, the “Capital One Line of Credit”). At GPMP’s request, the Capital One Line of Credit can be increased up to $700 million, subject to obtaining additional financing commitments from current lenders or from other banks, and subject to certain terms as detailed in the Capital One Line of Credit. As of December 31, 2022, approximately $258.3 million was drawn on the Capital One Line of Credit, and approximately $241.0 million was available thereunder.
On December 9, 2022, GPM entered into an amendment to the Capital One Line of Credit to replace LIBOR with SOFR as an interest rate benchmark. Pursuant to the amendment, the Capital One Line of Credit generally bears interest, as elected by GPMP at: (a) Adjusted Term SOFR (as defined in the agreement) plus a margin of 2.25% to 3.25% or (b) a rate per annum equal to the alternate base rate (as defined in the agreement) plus a margin of 1.25% to 2.25%. The margin is determined according to a formula in the Capital One Line of Credit that depends on GPMP’s leverage. As of December 31, 2022, $0.7 million of letters of credit were outstanding under the Capital One Line of Credit.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with GAAP and the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated
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Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe the following critical accounting estimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Application of ASC 842, Leases (“ASC 842”)
The lease liabilities and right-of-use assets are significantly impacted by the following:
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Our determination of whether it is reasonably certain that an extension option will be exercised.
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Our determination of whether it is reasonably certain a purchase option will be exercised.
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Some of the lease agreements include an increase in the consumer price index coupled with a multiplier and a percentage increase cap effectively assures the cap will be reached each year. We determine, based on past experience and consumer price index increase expectations, if these types of variable payments are in-substance fixed payments, in which case such payments are included in the lease payments and measurement of the lease liabilities.
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The discount rates used in the calculations of the right-of-use assets and lease liabilities are based on our incremental borrowing rates and are primarily affected by economic environment, differences in the duration of each lease and the nature of the leased asset.
Environmental provision and reimbursement assets
We estimate the anticipated environmental costs with respect to contamination arising from the operation of gasoline marketing operations and the use of aboveground and underground storage tanks as well as the costs of other exposures and recognize a liability when these losses are anticipated and can be reasonably estimated. Reimbursement for these expenses from various state underground storage tank trust funds or from insurance companies is recognized as an asset and included in other current assets or non-current assets, as appropriate. The scope of the reimbursement asset and liability is estimated by a third party at least twice a year and adjustments are made according to past experience, changing conditions and changes in governmental policies.
Liability for dismantling and removing aboveground and underground storage tanks and restoring the site on which the storage tanks are located
The liability is based on our estimates with respect to the external costs which will be necessary to remove the aboveground and underground storage tanks in the future, regulatory requirements, discount rate and an estimate of the length of the useful life of the storage tanks.
Property and equipment and amortizable intangible assets
We evaluate property and equipment and amortizable intangible assets for impairment when facts and circumstances indicate that the carrying values of such assets may not be recoverable. When evaluating for impairment, we first compare the carrying value of the asset to the asset’s estimated future undiscounted cash flows. If the estimated undiscounted future cash flows are less than the carrying value of the asset, we determine if we have an impairment loss by comparing the carrying value of the asset to the asset's estimated fair value and recognize an impairment charge when the asset’s carrying value exceeds its estimated fair value. The adjusted carrying amount of the asset becomes its new cost basis and is depreciated over the asset’s remaining useful life.
Impairment of goodwill
We evaluate the need for impairment with regard to goodwill once a year or with greater frequency if there are indicators of impairment exist. Goodwill is tested for impairment by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of a reporting unit is determined according to assumptions and computations we set.
We perform an annual assessment to evaluate whether an impairment of goodwill exists. We performed the evaluation with the assistance of independent assessor which, for purposes of determining the fair value of the retail and GPMP reporting units to which the goodwill was attributed, utilized the income approach, namely, the present value of the future cash flows forecasted to be derived from the reporting units, as well as the market approach.
For the 2022 annual impairment test, the data used for the income approach was directly linked to our internal projections for 2023 through 2027. The long-term growth rate used in the terminal year was 1.1% for the GPMP reporting unit, and was 2.2% for the
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retail reporting unit, in accordance with the relevant weighted average long-term nominal growth rate. The cash flows used assumed an unlevered, debt-free basis with no deduction for interest of debt principal to present the cash flows available for debt and equity holders. The discount rate for each reporting unit was determined based on the risk profile of each of the reporting units, and was derived from its weighted average cost of capital (“WACC”) as assessed by management with the assistance of an independent assessor. The WACC took into account both debt and equity. The discount rate applied to the cash flow projections for the GPMP and the retail reporting units was approximately 9.0% and 10.5%, respectively.
The impairment review was sensitive to changes in the key assumptions used. Our key assumptions included revenue and profit growth, capital expenditures, external industry data and past experiences. The major assumptions that could result in significant sensitivities were the discount rate, the long-term growth rate and capital expenditures. Sensitivity analyses were performed by applying various reasonable scenarios whereby the long-term growth rate and discount rate were adjusted within a reasonable range. None of the sensitivity scenarios indicated a potential impairment in any of the reporting units.
Deferred tax assets
We account for income taxes and the related accounts in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Deferred tax assets are recognized for future tax benefits and credit carryforwards to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes in estimates in the valuation allowance. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.
We are required to make judgments, estimates and assumptions to establish the amount of deferred tax assets to be recognized based on timing differences, the expected taxable income and its sources and the tax planning strategy.