filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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(Dollars and gallons in thousands, except per share amounts)
Please read the following discussion of the Company’s financial condition and results of operations in conjunction with the selected historical consolidated financial data and consolidated financial statements and accompanying notes presented elsewhere in this Form 10-K.
Overview
The Company operates convenience stores under the name “Casey’s General Store” in fourteen Midwestern states, primarily in Iowa, Missouri and Illinois. On April 30, 2014, there were a total of 1,808 stores in operation. All but one store offer fuel for sale on a self-serve basis and carry a broad selection of food (including freshly prepared foods such as pizza, donuts and sandwiches), beverages, tobacco products, health and beauty aids, automotive products and other non-food items. We derive our revenue from the retail sale of fuel and the products offered in our stores.
Approximately 58% of all Casey’s General Stores are located in areas with populations of fewer than 5,000 persons, while approximately 16% of all stores are located in communities with populations exceeding 20,000 persons. We operate a central warehouse, the Casey’s Distribution Center, adjacent to our Corporate Headquarters facility in Ankeny, Iowa, through which we supply grocery and general merchandise items to our stores. At April 30, 2014, the Company owned the land at 1,787 store locations and the buildings at 1,792 locations, and leased the land at 21 locations and the buildings at 16 locations.
During the fourth quarter of fiscal 2014, the Company earned $0.59 in diluted earnings per share compared to $0.60 per share for the same quarter a year ago. Fiscal 2014 diluted earnings per share were $3.46 versus $2.86 for the prior year. The Company’s business is seasonal, and generally the Company experiences higher sales and profitability during the first and second fiscal quarters (May-October), when customers tend to purchase greater quantities of fuel and certain convenience items such as beer and soft drinks.
During the 2014 fiscal year, we acquired and opened 25 convenience stores from other parties and completed 44 new store constructions. In addition to this activity, the Company also replaced 20 stores and closed 12 stores during the year.
The fourth quarter results reflected a 1.8% increase in same-store fuel gallons sold, with an average margin of approximately 13.8 cents per gallon. The Company’s fourth quarter fuel margin was helped by our ability to sell approximately 12.1 million renewable fuel credits for $5,700. For the fiscal year, same-store gallons increased 3.1% with an average margin of 16.8 cents per gallon. The Company’s policy is to price to the competition, so the timing of retail price changes is driven by local competitive conditions.
Same store sales of grocery and other merchandise increased 7.2% and prepared foods and fountain increased 12.1% during the fourth quarter of fiscal 2014.
The Company has several energy initiatives designed to reduce operating expenses associated with energy consumption. The Company believes that reducing energy consumption where feasible is a sound long-term business strategy. While individually and in aggregate the financial impact of these initiatives may not be material, implementing them throughout our operations is a part of our overall expense management. Below is a list of some of the energy initiatives the Company is currently undertaking:
| • | All newly constructed stores use 100 percent high efficiency LED lighting. Also, when we perform a major remodel of an existing store, the fluorescent lighting is replaced with LED lighting. Furthermore, new canopies over the fuel pumps are installed with time systems and photo eyes to help control the canopy lighting. |
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| • | Multiple paperless initiatives are going on throughout the Company, including going to paperless paystubs and W-2’s where state law allows. |
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| • | Electric fuel tank heaters have been installed in our fleet of trucks, significantly reducing idle time. Furthermore, timers have been installed that automatically turn off the engine if it is idling for more than ten minutes. |
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| • | All of our store managers receive a portion of their pay in the form of incentive compensation. This encourages store managers to efficiently manage operating expenses, including utility expenses. All levels of supervision, including executive officers and supervisory personnel within the store operations department receive some form of incentive compensation, and operating expenses have a direct impact on the amount of annual incentive compensation payments made to these employees. |
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For further information concerning the Company’s operating environment and certain conditions that may affect future performance, see the “Forward-looking Statements” at the end of this Item 7.
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Fiscal 2014 Compared with Fiscal 2013
Total revenue for fiscal 2014 increased 8.1% to $7,840,255, primarily due to an increase in the number of gallons sold (which generated an additional $435,070), and an increase in inside sales (grocery & other merchandise and prepared food & fountain) (a $258,775 increase). This was partially offset by a 2.1% decrease in average fuel prices (amounting to a $109,647 decrease). Retail fuel sales for the fiscal year were $5,554,580, an increase of 6.2%, and gallons sold increased 8.5% to 1,665,600. Inside sales increased 13% to $2,242,410, primarily a result of an $83,454 increase from the rollout and expansion of our operating initiatives in our stores (expanded hours at select locations, stores with pizza delivery, and major remodels), and a $79,743 increase from stores that were built or acquired after April 30, 2012.
Total gross profit margin was 15.7% for fiscal 2014 compared with 14.9% for the prior year. The fuel margin increased to 5.0% in fiscal 2014 from 4.5% in fiscal 2013 primarily due to the increase in the value of the renewable fuel credits sold. The grocery & other merchandise margin decreased to 32.1% in fiscal 2014 from 32.6% in fiscal 2013 primarily due to the cigarette retail price adjustments made during last fiscal year. The prepared food & fountain margin decreased to 61.1% from 61.8% primarily due to the higher costs of cheese and meat during fiscal 2014.
Operating expenses increased 12.7% ($96,932) in fiscal 2014 primarily due to an increase from stores built or acquired after April 30, 2012 ($31,061), and the expansion of our operating initiatives noted above ($29,511). The operating expense ratio also increased to 10.9% of total revenue in fiscal 2014 from 10.5% in the prior year.
Depreciation and amortization expense increased 17.3% to $131,160 in fiscal 2014 from $111,823 in fiscal 2013. The increase was due to capital expenditures made in fiscal 2014.
The effective tax rate decreased 190 basis points to 34.9% in fiscal 2014 from 36.8% in fiscal 2013. The decrease in the effective tax rate was primarily due to out of period adjustments to correct accumulated variances in deferred taxes ($2,760).
Net income increased to $134,514 in fiscal 2014 from $110,625 in fiscal 2013. The increase was due primarily to the increase in inside sales, the increase in the number of fuel gallons sold and the increase in the fuel gross profit margin due to the increase of the renewable fuel credits sold. However, this was partially offset by the decreases in gross profit margins from inside sales, an increase in the operating expenses, and an increase in depreciation and amortization.
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Fiscal 2013 Compared with Fiscal 2012
Total revenue for fiscal 2013 increased 3.8% to $7,250,840, primarily due to an increase in the number of gallons sold (which generated an additional $200,924), and an increase in inside sales (grocery & other merchandise and prepared food & fountain) (a $118,928 increase). This was partially offset by a 1.3% decrease in average fuel prices (amounting to a $64,078 decrease). Retail fuel sales for the fiscal year were $5,229,157, an increase of 2.7%, and gallons sold increased 4% to 1,535,140. Inside sales increased 6.4% to $1,983,635, primarily the result of a $62,608 increase from stores that were built or acquired after April 30, 2011, and a $46,867 increase from the rollout and expansion of our operating initiatives in our stores (expanded hours at select locations, stores with pizza delivery, and major remodels).
Total gross profit margin was 14.9% for fiscal 2013 compared with 14.4% for the prior year. The fuel margin increased slightly to 4.5% in fiscal 2013 from 4.4% in fiscal 2012 primarily due to the increase in the value of the renewable fuel credits sold. The grocery & other merchandise margin increased slightly to 32.6% in fiscal 2013 from 32.5% in fiscal 2012. The prepared food & fountain margin increased to 61.8% from 60.7% primarily due to the lower commodity costs during fiscal 2013.
Operating expenses increased 10.4% ($71,934) in fiscal 2013 primarily due to the expansion of our operating initiatives noted above ($27,996) along with an increase from stores built or acquired after April 30, 2011 ($23,303). The operating expense ratio also increased to 10.5% of total revenue in fiscal 2013 from 9.9% in the prior year.
Depreciation and amortization expense increased 15.8% to $111,823 in fiscal 2013 from $96,552 in fiscal 2012. The increase was due to capital expenditures made in fiscal 2013.
The effective tax rate increased 40 basis points to 36.8% in fiscal 2013 from 36.4% in fiscal 2012. The increase in the effective tax rate was primarily due to lower federal tax credits for the current year.
Net income decreased to $110,625 in fiscal 2013 from $116,791 in fiscal 2012. The decrease was due primarily to the increase in the operating expenses and an increase in depreciation and amortization expenses. However, this was partially offset by an increase in inside sales and an increase in the number of fuel gallons sold.
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COMPANY TOTAL REVENUE AND GROSS PROFIT BY CATEGORY
| Years ended April 30, | ||||||||||||||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Total revenue by category | ||||||||||||||||||||||||
| Fuel | $ | 5,554,580 | $ | 5,229,157 | $ | 5,092,311 | ||||||||||||||||||
| Grocery & other merchandise | 1,583,234 | 1,418,711 | 1,364,995 | |||||||||||||||||||||
| Prepared food & fountain | 659,176 | 564,924 | 499,712 | |||||||||||||||||||||
| Other | 43,265 | 38,048 | 30,786 | |||||||||||||||||||||
| $ | 7,840,255 | $ | 7,250,840 | $ | 6,987,804 | |||||||||||||||||||
| Gross profit by category (1) | ||||||||||||||||||||||||
| Fuel | $ | 280,115 | $ | 232,718 | $ | 226,559 | ||||||||||||||||||
| Grocery & other merchandise | 507,936 | 462,663 | 443,245 | |||||||||||||||||||||
| Prepared food & fountain | 402,996 | 348,993 | 303,159 | |||||||||||||||||||||
| Other | 43,212 | 37,991 | 30,727 | |||||||||||||||||||||
| $ | 1,234,259 | $ | 1,082,365 | $ | 1,003,690 | |||||||||||||||||||
INDIVIDUAL STORE COMPARISONS (2)
| Years ended April 30, | ||||||||||||||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Average retail sales | $ | 4,376 | $ | 4,159 | $ | 4,117 | ||||||||||||||||||
| Average retail inside sales | 1,270 | 1,152 | 1,117 | |||||||||||||||||||||
| Average gross profit on inside items | 512 | 467 | 448 | |||||||||||||||||||||
| Average retail sales of fuel | 3,105 | 3,007 | 3,000 | |||||||||||||||||||||
| Average gross profit on fuel (3) | 159 | 134 | 134 | |||||||||||||||||||||
| Average operating income (4) | 207 | 181 | 191 | |||||||||||||||||||||
| Average number of gallons sold | 932 | 883 | 870 |
| (1) | Gross profits represent total revenue less cost of goods sold. Gross profit is given before charges for depreciation, amortization, and credit card fees. Cost of goods sold includes the costs we incur to acquire fuel and merchandise, including excise taxes, less vendor allowances and rebates and renewable fuel credits (RINs). |
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| (2) | Individual store comparisons include only those stores that had been in operation for at least one full year and remained open on April 30 of the fiscal year indicated. |
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| (3) | Retail fuel profit margins have a substantial impact on our net income. Profit margins on fuel sales can be adversely affected by factors beyond our control, including oversupply in the retail fuel market, uncertainty or volatility in the wholesale fuel market, and price competition from other fuel marketers. Any substantial decrease in profit margins on retail fuel sales or the number of gallons sold could have a material adverse effect on our earnings. |
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| (4) | Average operating income represents retail sales less cost of goods sold and operating expenses attributable to a particular store; it excludes federal and state income taxes, Company operating expenses not attributable to a particular store, and our matching contribution paid to the 401(k) Plan. |
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SAME STORE SALES GROWTH BY CATEGORY
| Years ended April 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Fuel gallons (1) | 3.1% | 0.1% | -1.5% | |||||||||
| Grocery & other merchandise (2) | 7.4 | 0.8 | 6.7 | |||||||||
| Prepared food & fountain (3) | 11.8 | 8.6 | 14.3% |
| (1) | The 3.1% growth in the fuel gallons in 2014 as compared to 2013 was due primarily to the growth in the fuel saver program. |
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| (2) | The increase in same store grocery and other merchandise in 2014 is due primarily to the continued rollout of store initiatives, expanded hours and major store remodels. In comparing grocery and other merchandise same store sales growth from 2013 to 2012, the primary reason for the 5.9% decrease was due to a challenging cigarette environment driven by updates to vendor pricing programs and an increase in certain state excise taxes. |
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| (3) | The increase in same store prepared food and fountain in 2014 compared to 2013 is due primarily to the continued rollout of the expanded hour, pizza delivery and major store remodel initiatives. In comparing prepared food and fountain from 2013 to 2012, the primary reason for the decrease of 5.7% relates to challenging weather conditions in multiple quarters of 2013 as compared to 2012. |
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The same store sales comparison includes aggregated individual store results for all stores open throughout both periods presented. When comparing quarterly data the store must be open for each entire quarter. When comparing annual data, the store must be open for each entire fiscal year being compared.
Remodeled stores that remained open or were closed for just a very brief period of time (less than a week) during the period being compared remain in the same store sales comparison. If a store is replaced, either at the same location (razed and rebuilt) or relocated to a new location, it is removed from the comparison until the new store has been open for each entire period being compared. Newly constructed and acquired stores do not enter the calculation until they are open for each entire period being compared as well.
Use of Non-GAAP Measures
We define EBITDA as net income before net interest expense, depreciation and amortization, and income taxes. Adjusted EBITDA further adjusts EBITDA by excluding the gain or loss on disposal of assets as well as impairment charges. Both EBITDA and Adjusted EBITDA are not presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because securities analysts and other interested parties use such calculations as a measure of financial performance and debt service capabilities, and they are regularly used by management for internal purposes including our capital budgeting process, evaluating acquisition targets, and assessing store performance.
EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be considered as a substitute for net income, cash flows from operating activities or other income or cash flow statement data. 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, EBITDA and Adjusted EBITDA, 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.
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The following table contains a reconciliation of net income to EBITDA and Adjusted EBITDA for the three months and years ended April 30, 2014 and 2013, respectively:
| Three months ended | Years ended | |||||||||||||||||||
| April 30, 2014 | April 30, 2013 | April 30, 2014 | April 30, 2013 | |||||||||||||||||
| Net income | $ | 22,816 | 23,272 | 134,514 | 110,625 | |||||||||||||||
| Interest, net | 10,119 | 8,743 | 39,270 | 35,048 | ||||||||||||||||
| Depreciation and amortization | 35,556 | 29,910 | 131,160 | 111,823 | ||||||||||||||||
| Federal and state income taxes | 7,961 | 13,413 | 72,018 | 64,504 | ||||||||||||||||
| EBITDA | $ | 76,452 | 75,338 | 376,962 | 322,000 | |||||||||||||||
| (Gain) loss on disposal of assets and impairment charges | (34 | ) | 516 | 2,846 | 4,788 | |||||||||||||||
| Adjusted EBITDA | $ | 76,418 | 75,854 | 379,808 | 326,788 | |||||||||||||||
For the three months ended April 30, 2014, EBITDA and Adjusted EBITDA were up 1.5% and .7% respectively, when compared to the same period a year ago. The increase was due to operating 59 more stores than the same period a year ago, the results from the implementation of expanded hours, major remodels and pizza delivery, as well as operating more replacement stores. These gains were offset by a reduction in fuel margin compared to the fourth quarter a year ago. For the year ended, April 30, 2014, EBITDA and Adjusted EBITDA were up 17.1% and 16.2% respectively. The primary reason for the increase was attributable to a higher fuel margin from an increase in renewable fuel credit sales, operating 59 more stores than the same period a year ago, the results from the implementation of expanded hours, major remodels and pizza delivery, as well as operating more replacement stores.
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Critical Accounting Policies
Critical accounting policies are those accounting policies that management believes are important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective judgments, often because of the need to estimate the effects of inherently uncertain factors.
Inventory
Inventories, which consist of merchandise and gasoline, are stated at the lower of cost or market. For fuel, cost is determined through the use of the first-in, first-out (FIFO) method. For merchandise inventories, cost is determined through the use of the last-in, first-out (LIFO) method for financial and income tax reporting applied to inventory values determined primarily by our FIFO accounting system for warehouse inventories.
Vendor allowances include rebates and other funds received from vendors to promote their products. The Company often receives such allowances on the basis of quantitative contract terms that vary by product and vendor or directly on the basis of purchases made. Vendor rebates in the form of rack display allowances (RDAs) are funds that we receive from various vendors for allocating certain shelf space to carry their specific products or to introduce new products in our stores for a particular period of time. The RDAs are treated as a reduction in cost of goods sold and are recognized incrementally over the period covered by the applicable rebate agreement. These funds do not represent reimbursements of specific, incremental, identifiable costs incurred by us in selling the vendor’s products. Vendor rebates in the form of billbacks are treated as a reduction in cost of goods sold and are recognized at the time the product is sold. Reimbursements of an operating expense (e.g., advertising) are recorded as reductions of the related expense. The Company takes title to RINs when we purchase clear unleaded gasoline or diesel fuel, and purchase ethanol separately. The ethanol is blended in the tanker during transit to the store and the blending is the event that enables the RIN to be separated from the ethanol it identifies and allows it to be sold to third parties. The RINs are recorded as a reduction in the cost of goods sold in the period when the Company commits to a price and agrees to sell all of the RINs acquired during a specified period.
Long-lived Assets
The Company periodically monitors closed and underperforming stores for an indication that the carrying amount of assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recognized to the extent the carrying value of the assets exceeds their estimated fair value. The Company bases the estimated net realizable value of property and equipment on its experience in utilizing and/or disposing of similar assets and on estimates provided by its own and/or third-party real estate experts. Fair value is based on management’s estimate of the future cash flows to be generated and the amount that could be realized from the sale of assets in a current transaction between willing parties, which are considered Level 3 inputs. The estimate is derived from offers, actual sale or disposition of assets subsequent to year-end, and other indications of fair value. In determining whether an asset is impaired, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which for the Company is generally on a store-by-store basis. The Company recorded impairment charges of $2,542 in fiscal 2014, $3,680 in fiscal 2013, and $226 in fiscal 2012, the majority of which was related to replacement store and acquisition activities. Impairment charges are a component of operating expenses.
Self-insurance
We are primarily self-insured for employee healthcare, workers’ compensation, general liability, and automobile claims. The self-insurance claim liability is determined actuarially at each year end based on claims filed and an estimate of claims incurred but not yet reported. Actuarial projections of the losses are employed due to the high degree of variability in the liability estimates. Some factors affecting the uncertainty of claims include the development time frame, settlement patterns, litigation and adjudication direction, and medical treatment and cost trends. The liability is not discounted. The balances of our self-insurance reserves were $28,429 and $24,039 for the years ended April 30, 2014 and 2013, respectively.
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Goodwill
Goodwill and intangible assets with indefinite lives are tested for impairment at least annually. The Company assesses impairment annually at year-end using a market based approach to establish fair value. All of the goodwill assigned to the individual stores is aggregated into a single reporting unit due to the similar economic characteristics of the stores. As of April 30, 2014, there was $120,406 of goodwill and management’s analysis of recoverability completed as of the fiscal year-end yielded no evidence of impairment and no events have occurred since the annual test indicating a potential impairment.
Liquidity and Capital Resources
Due to the nature of our business, cash provided by operations is our primary source of liquidity. We finance our inventory purchases primarily from normal trade credit aided by relatively rapid inventory turnover. This turnover allows us to conduct operations without large amounts of cash and working capital. As of April 30, 2014, the Company’s ratio of current assets to current liabilities was 1.04 to 1. The ratio at April 30, 2013 and at April 30, 2012 was .69 to 1 and .91 to 1 respectively. We believe our current bank line of credit and the cash flow from operations will be sufficient to satisfy the working capital needs of our business.
Net cash provided by operating activities increased $27,832 (9.7%) in the year ended April 30, 2014, primarily because of an increase in net income, and larger increases in depreciation and amortization and accrued expenses. This result was partially offset by a smaller increase in deferred income taxes. Cash used in investing activities in the year ended April 30, 2014 increased $5,605 (1.7%) primarily due to the increase in the purchase of property and equipment from the prior year. Cash flows from financing activities increased $72,791 (240.2%), primarily due to the proceeds from long-term debt.
Capital expenditures represent the single largest use of Company funds. We believe that by reinvesting in stores, we will be better able to respond to competitive challenges and increase operating efficiencies. During fiscal 2014, we expended $340,217 for property and equipment, primarily for construction, acquisition, and remodeling of stores compared with $334,828 in the prior year. In fiscal 2015, we anticipate expending between $360,000 and $410,000, primarily from existing cash, funds generated by operations, and recent long-term debt proceeds for our construction, acquisition, and remodeling of stores.
As of April 30, 2014, we had long-term debt, net of current maturities, of $853,642 consisting of $569,000 in principal amount of 5.22% Senior notes, $75,000 in principal amount of 5.72% Senior notes, Series A and B; $150,000 in principal amount of 3.67% Senior Notes, Series A, $50,000 in principal amount of 3.75% Senior Notes, Series B, and $9,642 of capital lease obligations.
Interest on the 5.22% Senior notes is payable on the 9th day of each February and August. Principal on the 5.22% Senior notes is payable in full on August 9, 2020. We may prepay the 5.22% notes in whole or in part at any time in an amount of not less than $2,000 at a redemption price calculated in accordance with the Note Agreement dated August 9, 2010 between the Company and the purchasers of the 5.22% Senior notes.
Interest on the 5.72% Senior notes Series A and Series B is payable on the 30th day of each March and September. Principal on the Senior notes Series A and Series B is payable in various installments beginning September 30, 2012. We may prepay the 5.72% Senior notes Series A and Series B in whole or in part at any time in an amount of not less than $2,000 at a redemption price calculated in accordance with the Note Agreement dated September 29, 2006 between the Company and the purchasers of the 5.72% Senior notes Series A and Series B.
Interest on the 3.67% Senior notes Series A and 3.75% Series B is payable on the 17th day of each June and December. Principal on the Senior notes Series A and Series B is payable in various installments beginning June 17, 2022 (Series A) and December 17, 2022 (Series B). We may prepay the 3.67% and 3.75% Senior notes in whole or in part at any time in an amount of not less than $2,000 at a redemption price calculated in accordance with the Note Agreement dated June 17, 2013, between the Company and the purchasers of the Senior notes Series A and Series B.
To date, we have funded capital expenditures primarily through funds generated from operations, the proceeds of the sale of common stock, issuance of 6.25% convertible subordinated debentures (converted into shares of common stock in 1994), the previously described Senior notes, and a mortgage note. Future capital required to finance operations, improvements, and the anticipated growth in the number of stores is expected to come from cash generated by operations, the bank line of credit, and additional long-term debt or other securities as circumstances may dictate. We do not expect such capital needs to adversely affect liquidity.
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The table below presents our significant contractual obligations, including interest, at April 30, 2014:
| Contractual obligations | Payments due by period | |||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||
| Senior notes | $ | 1,129,530 | 41,372 | 111,456 | 108,025 | 868,677 | ||||||||||||||||||
| Capital lease obligations | 17,471 | 1,078 | 1,772 | 1,746 | 12,875 | |||||||||||||||||||
| Operating lease obligations | 3,227 | 872 | 1,177 | 917 | 261 | |||||||||||||||||||
| Unrecognized tax benefits | 9,244 | ------- | ------- | ------- | ------- | |||||||||||||||||||
| Deferred compensation | 16,558 | ------- | ------- | ------- | ------- | |||||||||||||||||||
| Total | $ | 1,176,030 | 43,322 | 114,405 | 110,688 | 881,813 | ||||||||||||||||||
Unrecognized tax benefits relate to uncertain tax positions and since we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the “Payments due by period” section of the table.
At April 30, 2014, the Company had a total of $9,244 in gross unrecognized tax benefits. Of this amount, $6,131 represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate. The total amount of accrued interest and penalties for such unrecognized tax benefits was $402 as of April 30, 2014. Interest and penalties related to income taxes are classified as income tax expense in our consolidated financial statements. The federal statute of limitations remains open for the years 2010 and forward. Tax years 2009 and forward are subject to audit by state tax authorities depending on open statute of limitations waivers and the tax code of each state.
A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. These changes could result from the expiration of the statute of limitations, examinations or other unforeseen circumstances. As of April 30, 2014, the Company has no ongoing federal or state income tax examinations. The Company did not have any outstanding litigation related to tax matters. At this time, management believes it is reasonably possible the aggregate amount of unrecognized tax benefits will decrease by $2,661 within the next 12 months. This expected decrease is due to the expiration of statute of limitations related to certain state income tax filing positions.
Included in long-term liabilities on our consolidated balance sheet at April 30, 2014, was a $16,558 obligation for deferred compensation. As the specific payment dates for the deferred compensation are unknown due to the unknown retirement dates of many of the participants, the related balances have not been reflected in the “Payments due by period” section of the table. However, known payments of $5,273 will be due during the next 5 years.
At April 30, 2014, we were partially self-insured for workers’ compensation claims in all 14 states of our marketing territory; we also were partially self-insured for general liability and auto liability under an agreement that provides for annual stop-loss limits equal to or exceeding approximately $1,000. To facilitate this agreement, letters of credit approximating $15,000 and $15,500, respectively, were issued and outstanding at April 30, 2014 and 2013, on the insurance company’s behalf. We renew the letters of credit on an annual basis.
Forward-looking Statements
This Form 10-K contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements represent our expectations or beliefs concerning future events, including (i) any statements regarding future sales and gross profit percentages, (ii) any statements regarding the continuation of historical trends, and (iii) any statements regarding the sufficiency of the Company’s cash balances and cash generated from operations and financing activities for the Company’s future liquidity and capital resource needs. The words believe, expect, anticipate, intend, estimate, project and similar expressions are intended to identify forward-looking statements. We caution you that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including without limitations the factors described in this Form 10-K.
We ask you not to place undue reliance on such forward-looking statements because they speak only of our views as of the statement dates. Although we have attempted to list the important factors that presently affect the Company’s
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business and operating results, we further caution you that other factors may in the future prove to be important in affecting the Company’s results of operations. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company’s actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following:
Competition
Our business is highly competitive and marked by ease of entry and constant change in terms of the numbers and type of retailers offering the products and services found in stores. Many of the food (including prepared foods) and nonfood items similar or identical to those we sell are generally available from a variety of competitors in the communities served by our stores, and we compete with other convenience store chains, gasoline stations, supermarkets, drug stores, discount stores, club stores, mass merchants, and fast-food outlets (with respect to the sale of prepared foods). Sales of nonfuel items (particularly prepared food items) have contributed substantially to our gross profit on retail sales in recent years. Fuel sales are also intensely competitive. We compete for fuel sales with both independent and national brand gasoline stations, other convenience store chains, and several nontraditional fuel retailers such as supermarkets in specific markets. Some of these other fuel retailers may have access to more favorable arrangements for fuel supply than do we or the firms that supply our stores. Some of our competitors have greater financial, marketing, and other resources than we have and therefore may be able to respond better to changes in the economy and new opportunities within the industry.
Fuel Operations
Fuel sales are an important part of our revenue and earnings, and retail fuel profit margins have a substantial impact on our net income. Profit margins on fuel sales can be adversely affected by factors beyond our control, including the supply of fuel available in the retail fuel market, uncertainty or volatility in the wholesale fuel market, increases in wholesale fuel costs generally during a period, and price competition from other fuel marketers. The market for crude oil and domestic wholesale petroleum products is marked by significant volatility and is affected by general political conditions and instability in oil producing regions such as the Middle East and South America. The volatility of the wholesale fuel market makes it extremely difficult to predict the impact of future wholesale cost fluctuation on our operating results and financial conditions. These factors could materially affect our fuel gallon volume, fuel gross profit, and overall customer traffic levels at stores. Any substantial decrease in profit margins on fuel sales or in the number of gallons sold by stores could have a material adverse effect on our earnings.
The Company purchases its fuel from a variety of independent national and regional petroleum distributors. Although in recent years suppliers have not experienced any difficulties in obtaining sufficient amounts of fuel to meet our needs, unanticipated national and international events could result in a reduction of fuel supplies available for distribution. Any substantial curtailment in our fuel supply could reduce fuel sales. Further, we believe a significant amount of our business results from the patronage of customers primarily desiring to purchase fuel; accordingly, reduced fuel supplies could adversely affect the sale of nonfuel items. Such factors could have a material adverse effect on our earnings and operations.
Tobacco Products
Sales of tobacco products represent a significant portion of our revenues. Significant increases in wholesale cigarette costs and tax increases on tobacco products (such as the past tax increase in Illinois) as well as national and local campaigns to further regulate and discourage smoking in the United States have had and are expected to continue having an adverse effect on the demand for cigarettes sold in our stores. We attempt to pass price increases on to our customers, but competitive pressures in specific markets may prevent us from doing so. These factors could materially impact the retail price of cigarettes, the gross profit obtained from the cigarette category, the volume of cigarettes sold by stores, and overall customer traffic, and have a material adverse effect on the Company’s earnings and profits.
Environmental Compliance Costs
The United States Environmental Protection Agency and several of the states in which we do business have adopted laws and regulations relating to underground storage tanks used for petroleum products. In the past, we have incurred substantial costs to comply with such regulations, and additional substantial costs may be necessary in the future. Several states in which we do business have trust fund programs with provisions for sharing or reimbursing corrective action or remediation costs. Any reimbursements received in respect to such costs typically are subject to statutory provisions requiring repayment of the reimbursed funds for any future noncompliance with upgrade provisions or other applicable laws. Although we regularly accrue expenses for the estimated costs related to future corrective action or remediation efforts, there can be no assurance that the accrued amounts will be sufficient to pay such costs or that we have identified all environmental liabilities at all of our current store locations. In addition, there can be no assurance that we will not incur
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substantial expenditures in the future for remediation of contamination or related claims that have not been discovered or asserted with respect to existing store locations or locations that we may acquire in the future, that we will not be subject to any claims for reimbursement of funds disbursed to us under the various state programs, and/or that additional regulations or amendments to existing regulations will not require additional expenditures beyond those presently anticipated.
Seasonality of Sales
Company sales generally are strongest during its first two fiscal quarters (May–October) and weakest during the third and fourth fiscal quarters (November–April). In the warmer months, customers tend to purchase greater quantities of fuel and certain convenience items such as beer, pop, and ice. Difficult weather conditions (such as flooding, prolonged rain, or snowstorms) in any quarter, however, may adversely reduce sales at affected stores and may have an adverse impact on our earnings for that period.
Other Factors
Other factors and risks that may cause actual results to differ materially from those in the forward-looking statements include the risk that our cash balances and cash generated from operations and financing activities will not be sufficient for our future liquidity and capital resource needs, tax increases, potential liabilities and expenditures related to compliance with environmental and other laws and regulations, the seasonality of demand patterns, and weather conditions; the increased indebtedness that the Company has incurred to purchase shares of our common stock in our self-tender offer; and the other risks and uncertainities included from time to time in our filings with the SEC. We further caution you that other factors we have not identified may in the future prove to be important in affecting our business and results of operations.
Please see Item 1A. of this Form 10-K, entitled “Risk Factors,” for further information on these and other factors that may affect our business and financial results.
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