c
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023.
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 001-39828
ARKO Corp.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
85-2784337
(State or Other Jurisdiction ofIncorporation or Organization)
(I.R.S. EmployerIdentification No.)
8565 Magellan Parkway
Suite 400
Richmond, Virginia 23227-1150
(Address of Principal Executive Offices) (Zip Code)
(804) 730-1568
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share
ARKO
Nasdaq Capital Market
Warrants to purchase common stock
ARKOW
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ YES ☒ NO
As of August 4, 2023, the registrant had 118,656,855 shares of its common stock, par value $0.0001 per share (“common stock”) outstanding.
Table of Contents
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
5
Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (unaudited)
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 (unaudited)
6
Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2023 and 2022 (unaudited)
7
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited)
8
Notes to Condensed Consolidated Financial Statements (unaudited)
11
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
46
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
47
Signatures
48
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. 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 described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q, and described from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). We do not undertake any obligation to update forward-looking statements, except to the extent required by applicable law. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:
3
4
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company,” “ARKO,” “we,” “our,” “ours,” and “us” refer to ARKO Corp., a Delaware corporation, including our consolidated subsidiaries.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
June 30, 2023
December 31, 2022
Assets
Current assets:
Cash and cash equivalents
$
220,142
298,529
Restricted cash
15,136
18,240
Short-term investments
3,319
2,400
Trade receivables, net
135,663
118,140
Inventory
256,116
221,951
Other current assets
101,435
87,873
Total current assets
731,811
747,133
Non-current assets:
Property and equipment, net
748,697
645,809
Right-of-use assets under operating leases
1,418,902
1,203,188
Right-of-use assets under financing leases, net
174,221
182,113
Goodwill
277,795
217,297
Intangible assets, net
219,598
197,123
Equity investment
2,861
2,924
Deferred tax asset
57,007
22,728
Other non-current assets
40,565
36,855
Total assets
3,671,457
3,255,170
Liabilities
Current liabilities:
Long-term debt, current portion
13,369
11,944
Accounts payable
233,459
217,370
Other current liabilities
166,056
154,097
Operating leases, current portion
63,811
57,563
Financing leases, current portion
4,916
5,457
Total current liabilities
481,611
446,431
Non-current liabilities:
Long-term debt, net
810,302
740,043
Asset retirement obligation
79,837
64,909
Operating leases
1,422,736
1,218,045
Financing leases
223,871
225,907
Other non-current liabilities
275,584
178,945
Total liabilities
3,293,941
2,874,280
Commitments and contingencies - see Note 12
Series A redeemable preferred stock (no par value) - authorized: 1,000 shares; issued and outstanding: 1,000 and 1,000 shares, respectively; redemption value: $100,000 and $100,000, in the aggregate respectively
100,000
Shareholders' equity:
Common stock (par value $0.0001) - authorized: 400,000 shares; issued: 125,269 and 124,727 shares, respectively; outstanding: 118,843 and 120,074 shares, respectively
12
Treasury stock, at cost - 6,426 and 4,653 shares, respectively
(53,804
)
(40,042
Additional paid-in capital
238,617
229,995
Accumulated other comprehensive income
9,119
Retained earnings
83,533
81,750
Total shareholders' equity
277,477
280,834
Non-controlling interest
39
56
Total equity
277,516
280,890
Total liabilities, redeemable preferred stock and equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
For the Three MonthsEnded June 30,
For the Six MonthsEnded June 30,
2023
2022
Revenues:
Fuel revenue
1,957,100
2,085,854
3,618,764
3,669,380
Merchandise revenue
484,561
431,751
884,849
798,736
Other revenues, net
27,480
22,658
53,904
44,958
Total revenues
2,469,141
2,540,263
4,557,517
4,513,074
Operating expenses:
Fuel costs
1,801,103
1,955,019
3,338,985
3,425,668
Merchandise costs
329,903
300,387
607,226
559,180
Store operating expenses
218,002
178,077
410,685
344,615
General and administrative expenses
42,660
32,956
83,076
64,741
Depreciation and amortization
32,837
24,353
61,236
48,989
Total operating expenses
2,424,505
2,490,792
4,501,208
4,443,193
Other expenses, net
4,956
1,197
7,676
2,318
Operating income
39,680
48,274
48,633
67,563
Interest and other financial income
2,428
8,997
9,630
6,710
Interest and other financial expenses
(22,588
(16,336
(43,392
(30,024
Income before income taxes
19,520
40,935
14,871
44,249
Income tax expense
(5,014
(9,157
(2,856
(10,162
(Loss) income from equity investment
(27
28
(63
37
Net income
14,479
31,806
11,952
34,124
Less: Net income attributable to non-controlling interests
52
101
131
Net income attributable to ARKO Corp.
14,431
31,754
11,851
33,993
Series A redeemable preferred stock dividends
(1,434
(2,852
Net income attributable to common shareholders
12,997
30,320
8,999
31,141
Net income per share attributable to common shareholders - basic
0.11
0.25
0.07
Net income per share attributable to common shareholders - diluted
0.24
Weighted average shares outstanding:
Basic
119,893
121,529
120,073
122,909
Diluted
121,280
130,558
120,767
123,245
Condensed Consolidated Statements of Changes in Equity
Common Stock
Treasury
Additional
AccumulatedOther
Retained
Total
Non-
Shares
Par Value
Stock, at Cost
Paid-in Capital
Comprehensive Income
Earnings
Shareholders' Equity
Controlling Interests
Total Equity
Balance at April 1, 2022
123,190
(13,084
220,449
24,993
241,489
243
241,732
Share-based compensation
—
3,108
Distributions to non-controlling interests
(60
Dividends on redeemable preferred stock
Dividends declared (2 cents per share)
(2,415
Common stock repurchased
(3,115
(26,954
Balance at June 30, 2022
120,075
(40,038
223,557
52,898
245,548
235
245,783
Balance at April 1, 2023
120,305
(42,352
234,158
74,143
275,080
(45
275,035
4,555
Transactions with non-controlling interests
(96
96
Dividends declared (3 cents per share)
(3,607
(1,499
(11,452
Vesting and settlement of restricted share units
Balance at June 30, 2023
118,843
Balance at January 1, 2022
124,428
217,675
26,646
253,452
224
253,676
5,882
(120
Dividends declared (4 cents per share)
(4,889
(4,652
Vesting of restricted share units
286
Issuance of shares
13
Balance at January 1, 2023
120,074
8,624
(2
Dividends declared (6 cents per share)
(7,216
(1,773
(13,762
542
Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes
(14,115
2,671
Loss on disposal of assets and impairment charges
3,278
1,971
Foreign currency loss
58
228
Amortization of deferred financing costs and debt discount
1,213
1,262
Amortization of deferred income
(3,929
(5,292
Accretion of asset retirement obligation
1,118
829
Non-cash rent
6,558
3,737
Charges to allowance for credit losses
573
351
Loss (income) from equity investment
63
(37
Fair value adjustment of financial assets and liabilities
(5,248
(6,590
Other operating activities, net
976
707
Changes in assets and liabilities:
Increase in trade receivables
(18,173
(31,491
Increase in inventory
(8,208
(35,947
(Increase) decrease in other assets
(10,965
7,607
Increase in accounts payable
14,580
46,407
Decrease in other current liabilities
(7,651
(11,324
Increase (decrease) in asset retirement obligation
(34
Increase in non-current liabilities
4,000
8,112
Net cash provided by operating activities
45,986
72,162
Condensed Consolidated Statements of Cash Flows (cont’d)
Cash flows from investing activities:
Purchase of property and equipment
(50,038
(45,168
Purchase of intangible assets
(35
(125
Proceeds from sale of property and equipment
296,485
7,261
Prepayment for business acquisition
(5,000
Business acquisitions, net of cash
(481,636
(6,853
Decrease in investments, net
27,109
Repayment of loans to equity investment
174
Net cash used in investing activities
(235,224
(22,602
Cash flows from financing activities:
Receipt of long-term debt, net
74,233
Repayment of debt
(10,511
(6,093
Principal payments on financing leases
(2,912
(3,304
Proceeds from sale-leaseback
80,397
Payment of Additional Consideration
(2,085
Payment of Ares Put Option
(9,808
(13,563
Dividends paid on common stock
Dividends paid on redeemable preferred stock
Net cash provided by (used in) financing activities
107,768
(59,381
Net decrease in cash and cash equivalents and restricted cash
(81,470
(9,821
Effect of exchange rate on cash and cash equivalents and restricted cash
(21
(121
Cash and cash equivalents and restricted cash, beginning of period
316,769
272,543
Cash and cash equivalents and restricted cash, end of period
235,278
262,601
Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents, beginning of period
252,141
Restricted cash, beginning of period
20,402
Cash and cash equivalents, end of period
248,518
Restricted cash, end of period
14,083
9
Supplementary cash flow information:
Cash received for interest
4,274
107
Cash paid for interest
38,402
27,740
Cash received for taxes
512
78
Cash paid for taxes
20,845
4,797
Supplementary noncash activities:
Prepaid insurance premiums financed through notes payable
5,619
2,279
Purchases of equipment in accounts payable and accrued expenses
9,367
10,857
Purchase of property and equipment under leases
3,034
10,363
Disposals of leases of property and equipment
2,669
404
Deferred consideration related to business acquisition
45,845
10
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. General
ARKO Corp. (the “Company”) is a Delaware corporation whose common stock, par value $0.0001 per share (“common stock”), and publicly-traded warrants are listed on the Nasdaq Stock Market (“Nasdaq”) under the symbols “ARKO” and “ARKOW,” respectively.
The Company’s operations are primarily performed by its subsidiary, GPM Investments, LLC (“GPM”), a Delaware limited liability company. GPM is primarily engaged directly and through fully owned and controlled subsidiaries (directly or indirectly) in retail activity, which includes the operations of a chain of convenience stores, most of which include adjacent gas stations. The Company is also engaged in wholesale activity, which includes the supply of fuel to gas stations operated by third parties, and in fleet fueling, 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. As of June 30, 2023, GPM’s activity included the operation of 1,547 retail convenience stores, the supply of fuel to 1,824 gas stations operated by dealers and the operation of 293 cardlock locations, throughout more than 30 states and the District of Columbia in the Mid-Atlantic, Midwestern, Northeastern, Southeastern and Southwestern United States (“U.S.”).
The Company has four reportable segments: retail, wholesale, fleet fueling, and GPMP. Refer to Note 11 below for further information with respect to the segments.
2. Summary of Significant Accounting Policies
Basis of Presentation
All significant intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Interim Financial Statements
The accompanying condensed consolidated financial statements (“interim financial statements”) as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022 are unaudited and have been prepared in accordance with GAAP for interim financial information and Regulation S-X set forth by the Securities and Exchange Commission (the “SEC”) for interim reporting. In the opinion of management, all adjustments (consisting of normal and recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included in the accompanying interim financial statements. However, they do not include all of the information and disclosures required by GAAP for complete financial statements. Therefore, the interim financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “annual financial statements”).
The same significant accounting policies, presentation and methods of computation have been followed in these interim financial statements as were applied in the preparation of the annual financial statements.
Accounting Periods
The Company’s fiscal periods end on the last day of the month, and its fiscal year ends on December 31. This results in the Company experiencing fluctuations in current assets and current liabilities due to purchasing and payment patterns which change based upon the day of the week. As a result, working capital can change from period to period not only due to changing business operations, but also due to a change in the day of the week on which each period ends. The Company earns a disproportionate amount of its annual operating income in the second and third quarters as a result of the climate and seasonal buying patterns of its customers. Inclement weather, especially in the Midwest and Northeast regions of the U.S. during the winter months, can negatively impact financial results.
Use of Estimates
In the preparation of interim condensed consolidated financial statements, management may make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates include right-of-use assets and lease liabilities; impairment of goodwill, intangible, right-of-use and fixed assets; environmental assets and liabilities; deferred tax assets; and asset retirement obligations.
Cash and Cash Equivalents
The Company considers all unrestricted highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents are maintained at several financial institutions, and in order to have sufficient working capital on hand, the Company maintains concentrations of cash in several financial institutions in amounts that are above the FDIC standard deposit insurance limit of $250,000.
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to the customers. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a single point in time or over time, based on when control of goods and services transfers to a customer. Control is transferred to the customer over time if the customer simultaneously receives and consumes the benefits provided by the Company’s performance. If a performance obligation is not satisfied over time, the Company satisfies the performance obligation at a single point in time.
Revenue is recognized in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services.
When the Company satisfies a performance obligation by transferring control of goods or services to the customer, revenue is recognized against contract assets in the amount of consideration to which the Company is entitled. When the consideration amount received from the customer exceeds the amounts recognized as revenue, the Company recognizes a contract liability for the excess.
An asset is recognized related to the costs incurred to obtain a contract (e.g. sales commissions) if the costs are specifically identifiable to a contract, the costs will result in enhancing resources that will be used in satisfying performance obligations in the future and the costs are expected to be recovered. These capitalized costs are recorded as a part of other current assets and other non-current assets and are amortized on a systematic basis consistent with the pattern of transfer of the goods or services to which such costs relate. The Company expenses the costs to obtain a contract, as and when they are incurred, in cases where the expected amortization period is one year or less.
The Company evaluates if it is a principal or an agent in a transaction to determine whether revenue should be recorded on a gross or a net basis. In performing this analysis, the Company considers first whether it controls the goods before they are transferred to the customers and if it has the ability to direct the use of the goods or obtain benefits from them. The Company also considers the following indicators: (1) the primary obligor, (2) the latitude in establishing prices and selecting suppliers, and (3) the inventory risk borne by the Company before and after the goods have been transferred to the customer. When the Company acts as principal, revenue is recorded on a gross basis. When the Company acts as agent, revenue is recorded on a net basis.
Fuel revenue and fuel cost of revenue included fuel taxes of $307.2 million, $243.7 million, $571.5 million and $475.5 million for the three and six months ended June 30, 2023 and 2022, respectively.
Refer to Note 11 for disclosure of the revenue disaggregated by segment and product line, as well as a description of the reportable segment operations.
3. Acquisitions
Transit Energy Group, LLC
On March 1, 2023, the Company completed the acquisition of certain assets from Transit Energy Group, LLC and certain of its affiliated entities (collectively, “TEG”) pursuant to a purchase agreement entered on September 9, 2022, as amended (the “TEG Purchase Agreement”), including (i) 135 Company-operated convenience stores and gas stations, (ii) fuel supply rights to 181 dealer locations, (iii) a commercial, government, and industrial business, including certain bulk plants, and (iv) certain distribution and transportation assets, all in the southeastern United States (the “TEG Acquisition”).
The purchase price for the TEG Acquisition was approximately $370 million, as adjusted in accordance with the terms of the TEG Purchase Agreement, plus the value of inventory at the closing, of which $50 million was deferred and payable in two annual payments of $25 million, which the Company may elect to pay in either cash or, subject to the satisfaction of certain conditions, shares of common stock (the “Installment Shares”), on the first and second anniversaries of the closing. Pursuant to the TEG Purchase Agreement, at closing, ARKO and TEG entered into a registration rights agreement, pursuant to which ARKO agreed to prepare and file a registration statement with the SEC, registering the Installment Shares, if any, for resale by TEG.
The Company paid approximately $81.7 million of the non-deferred purchase price including the value of inventory and other closing adjustments, of which $55.0 million was financed with the Capital One Line of Credit (as defined in Note 4 below). An affiliate of Oak Street Real Estate Capital Net Lease Property Fund, LP (including its affiliates, “Oak Street”), under the Company’s standby real estate purchase, designation and lease program agreement with Oak Street, dated as of May 3, 2021 (as amended, the “Program Agreement”), paid the balance of the non-deferred purchase price for fee simple ownership in 104 sites. At the closing, pursuant to the Program Agreement, the Company entered into a master lease with Oak Street for the sites Oak Street acquired in the transaction under customary lease terms. For accounting purposes, the transaction with Oak Street was treated as a sale-leaseback. Because the sale-leaseback was off-market, a financial liability of $51.6 million was recorded, resulting in interest expense recognized over the lease term. Additionally, right-of-use assets and operating lease liabilities of approximately $131.3 million were recorded in connection with the operating lease, after reducing for accounting purposes from the contractual lease payments the amount attributable to the repayment of the additional financing.
The details of the TEG Acquisition were as follows:
Amount
(in thousands)
Fair value of consideration transferred:
Cash
26,702
GPMP Capital One Line of Credit
55,000
Liability resulting from deferred purchase price
Receivable from TEG
(62
Consideration provided by Oak Street
258,019
Total consideration
385,504
Assets acquired and liabilities:
379
20,259
Other assets
1,304
268,879
Intangible assets
20,000
69,254
Environmental receivables
2,664
19,135
401,874
Other liabilities
(2,087
Environmental liabilities
(2,939
Asset retirement obligations
(11,187
(57,569
(73,782
Total identifiable net assets
328,092
57,412
Consideration paid in cash
81,702
Less: cash and cash equivalent balances acquired
(379
Net cash outflow
339,342
The initial accounting treatment of the TEG Acquisition reflected in these interim financial statements is provisional as the Company has not yet finalized the initial accounting treatment of the business combination, and, in this regard, has not finalized the valuation of some of the assets and liabilities acquired and the goodwill resulting from the TEG Acquisition, mainly due to the limited period of time between the TEG Acquisition closing date and the date of these interim financial statements. Therefore, some of the financial information presented with respect to the TEG Acquisition in these interim financial statements remains subject to change.
The Company included identifiable tangible assets and identifiable liabilities at their respective fair values based on the information available to the Company’s management on the TEG Acquisition closing date, including, among other things, a preliminary valuation performed by external consultants for this purpose. The useful life of both the wholesale fuel supply contracts and the trade name was estimated at five years.
As a result of the preliminary accounting treatment of the TEG Acquisition, the Company recorded goodwill of approximately $57.4 million, of which $55.0 million was allocated to the GPMP segment and the remainder to the retail segment, and attributable to
the opportunities to expand into new geographic locations and add a significant amount of volume to the GPMP segment. None of the goodwill recognized is tax deductible for U.S. income tax purposes.
Acquisition-related costs amounting to approximately $0.7 million and $2.9 million have been excluded from the consideration transferred and have been recognized as an expense within other expenses, net in the condensed consolidated statements of operations for the three and six months ended June 30, 2023, respectively. No acquisition-related costs were recognized for the three and six months ended June 30, 2022.
Results of operations for the TEG Acquisition for the period subsequent to the acquisition closing date were included in the condensed consolidated statement of operations for the three and six months ended June 30, 2023. For the period from the TEG Acquisition closing date through June 30, 2023, the Company recognized $317.1 million in revenues and $2.7 million of net loss related to the TEG Acquisition. For the three months ended June 30, 2023, the Company recognized $240.2 million in revenues and $2.7 million of net loss related to the TEG Acquisition.
WTG Fuels Holdings, LLC
On June 6, 2023, certain of the Company’s subsidiaries completed the acquisition of certain assets from WTG Fuels Holdings, LLC and certain other sellers party thereto (collectively, “WTG”) pursuant to an asset purchase agreement entered on December 6, 2022, including (i) 24 company-operated Uncle’s convenience stores located across Western Texas, and (ii) 68 proprietary GASCARD-branded cardlock sites and 43 private cardlock sites for fleet fueling operations located in Western Texas and Southeastern New Mexico (the “WTG Acquisition”).
The purchase price for the WTG Acquisition was approximately $140.0 million, plus the value of inventory at the closing. The Company paid approximately $29.9 million of the purchase price including the value of inventory and other closing adjustments, of which $19.2 million was financed with the Capital One Line of Credit (as defined in Note 4 below). Oak Street, under the Program Agreement, paid the balance of the purchase price for fee simple ownership in 33 properties. At the closing, pursuant to the Program Agreement, the Company entered into master leases with Oak Street for the sites Oak Street acquired in the transaction under customary lease terms. For accounting purposes, the transaction with Oak Street was treated as a sale-leaseback. Because the sale-leaseback was off-market, a financial liability of $28.8 million was recorded, resulting in interest expense recognized over the lease term. Additionally, right-of-use assets and operating lease liabilities of approximately $49.0 million were recorded in connection with the operating lease, after reducing for accounting purposes from the contractual lease payments the amount attributable to the repayment of the additional financing.
The details of the WTG Acquisition were as follows:
14
10,653
19,200
Payable to WTG
818
115,041
145,712
60
5,694
149
128,396
14,800
1,812
150,915
(598
(136
(2,730
(1,739
(5,203
29,853
144,834
The initial accounting treatment of the WTG Acquisition reflected in these interim financial statements is provisional as the Company has not yet finalized the initial accounting treatment of the business combination, and, in this regard, has not finalized the valuation of some of the assets and liabilities acquired and the goodwill resulting from the WTG Acquisition, mainly due to the limited period of time between the WTG Acquisition closing date and the date of these interim financial statements. Therefore, some of the financial information presented with respect to the WTG Acquisition in these interim financial statements remains subject to change.
The Company included identifiable tangible assets and identifiable liabilities at their respective fair values based on the information available to the Company’s management on the WTG Acquisition closing date, including, among other things, a preliminary valuation performed by management. The useful life of the contracts related to the third-party cardlock sites, the customer relationships related to the proprietary cardlock sites and the proprietary fuel cards, the wholesale fuel supply contracts and the trade name was each estimated at five years.
The Company’s preliminary accounting treatment of the WTG Acquisition resulted in no goodwill being recorded.
Acquisition-related costs amounting to approximately $1.8 million and $2.1 million have been excluded from the consideration transferred and have been recognized as an expense within other expenses, net in the condensed consolidated statements of operations for the three and six months ended June 30, 2023, respectively. No acquisition-related costs were recognized for the three and six months ended June 30, 2022.
Results of operations for the WTG Acquisition for the period subsequent to the acquisition closing date were included in the condensed consolidated statement of operations for the three and six months ended June 30, 2023. For the period from the WTG Acquisition closing date through June 30, 2023, the Company recognized $14.9 million in revenues and $0.2 million of net income related to the WTG Acquisition.
Pride Convenience Holdings, LLC
On December 6, 2022, the Company acquired all of the issued and outstanding membership interests in Pride Convenience Holdings, LLC, which operated at closing 31 convenience stores and gas stations in Connecticut and Massachusetts (the “Pride
15
Acquisition”). In the second quarter of 2023, the Company updated the initial accounting treatment of the Pride Acquisition, including the valuation of some of the assets acquired, liabilities assumed and the goodwill resulting from the acquisition. As a result, the Company primarily reduced property and equipment by approximately $4.7 million, increased accounts payable and other liabilities by a net $1.0 million, and increased the deferred tax asset by approximately $1.0 million. The adjustments to the assets acquired and liabilities assumed resulted in an increase in goodwill of approximately $3.1 million, of which $0.4 million was allocated to the GPMP segment and the remainder was allocated to the retail segment attributable to the opportunities to expand into new geographic locations. These adjustments resulted in a reduction in depreciation and amortization expenses recorded, approximately $0.2 million that related to amounts recorded for the year ended December 31, 2022 and approximately $0.6 million that related to the three months ended March 31, 2023.
Impact of Acquisitions (unaudited)
The unaudited supplemental pro forma financial information presented below was prepared based on the historical information of the Company and the acquired operations and gives pro forma effect to the acquisitions using the assumption that the WTG Acquisition, the TEG Acquisition, the Pride Acquisition and the acquisition of 184 Quarles cardlock sites and 46 dealer locations on July 22, 2022 (the “Quarles Acquisition”) had occurred at the beginning of each period presented below. The unaudited supplemental pro forma financial information does not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the acquisitions or any integration costs. The unaudited pro forma financial information is not necessarily indicative of what the actual results of operations would have been had the acquisitions occurred at the beginning of each period presented below nor is it indicative of future results.
(unaudited)
Total revenue
4,969,737
5,938,441
10,398
36,523
4. Debt
The components of debt were as follows:
June 30,2023
December 31,2022
Senior Notes
444,033
443,648
M&T debt
44,380
49,023
Capital One line of credit
331,303
256,430
Insurance premium notes
3,955
2,886
Total debt, net
823,671
751,987
Less current portion
(13,369
(11,944
Total long-term debt, net
On May 5, 2023, GPM Petroleum LP (“GPMP”) renewed the credit agreement governing its revolving credit facility with a syndicate of banks led by Capital One, National Association, to increase the aggregate principal amount of availability thereunder from $500 million to $800 million (as amended, the “Capital One Line of Credit”) and extend the maturity date from July 15, 2024 to May 5, 2028. At GPMP’s request, availability under the Capital One Line of Credit can be increased up to $1.0 billion, subject to obtaining additional financing commitments from current lenders or from other banks, and subject to certain other terms as detailed in the Capital One Line of Credit.
5. Leases
As of June 30, 2023, the Company leased 1,278 of the convenience stores that it operates, 209 dealer locations, 157 cardlock locations and certain office and storage spaces, including land and buildings in certain cases. Most of the lease agreements are for
16
long-term periods, ranging from 15 to 20 years, and generally include several renewal options for extension periods for five to 25 years each. Additionally, the Company leases certain store equipment, office equipment, automatic tank gauges and fuel dispensers.
The components of lease cost recorded on the condensed consolidated statements of operations were as follows:
Finance lease cost:
Depreciation of right-of-use assets
2,785
3,037
5,638
6,084
Interest on lease liabilities
4,142
4,260
8,304
8,631
Operating lease costs included in store operating expenses
45,752
34,358
87,336
68,653
Operating lease costs included in general and administrative expenses
587
1,121
738
Lease cost related to variable lease payments, short-term leases and leases of low value assets
711
569
1,401
Right-of-use asset impairment charges and loss (gain) on disposals of leases
1,994
1,454
Total lease costs
55,971
42,575
105,254
85,319
Supplemental balance sheet date related to leases was as follows:
Weighted average remaining lease term (in years)
14.4
14.1
Weighted average discount rate
7.8
%
7.7
23.1
23.4
7.2
As of June 30, 2023, maturities of lease liabilities for operating lease obligations and financing lease obligations having an initial or remaining non-cancellable lease terms in excess of one year were presented in the table below. The minimum lease payments presented below include periods where an option is reasonably certain to be exercised and do not take into consideration any future consumer price index adjustments for these agreements.
Operating
Financing
July 2023 through June 2024
174,609
21,279
July 2024 through June 2025
176,244
21,046
July 2025 through June 2026
176,841
20,914
July 2026 through June 2027
174,535
20,772
July 2027 through June 2028
171,421
20,860
Thereafter
1,688,912
414,378
Gross lease payments
2,562,562
519,249
Less: imputed interest
(1,076,015
(290,462
Total lease liabilities
1,486,547
228,787
6. Financial Derivative Instruments
The Company makes limited use of derivative instruments (futures contracts) to manage certain risks related to diesel fuel prices. The Company does not hold any derivatives for speculative purposes and it does not use derivatives with leveraged or complex features. The Company currently uses derivative instruments that are traded primarily over national exchanges such as the New York Mercantile Exchange (“NYMEX”). For accounting purposes, the Company has designated its derivative contracts as fair value hedges of firm commitments.
As of June 30, 2023, the Company had fuel futures contracts in place to hedge approximately 3.2 million gallons of diesel fuel for which the Company had a firm commitment to purchase. As of June 30, 2023 and December 31, 2022, the Company had asset derivatives with fair values of approximately $0.2 million and $0.5 million, respectively, recorded in other current assets and firm
17
commitments with fair values of approximately $0.2 million and $0.5 million, respectively, recorded in other current liabilities on the condensed consolidated balance sheets.
As of June 30, 2023 and December 31, 2022, there was $0.2 million and $0.5 million, respectively, of cash collateral provided to counterparties that was classified as restricted cash on the condensed consolidated balance sheet. All cash flows associated with purchasing and selling fuel derivative instruments are classified as other operating activities, net cash flows in the condensed consolidated statements of cash flows.
7. Equity
The Company’s board of directors (the “Board”) declared and the Company paid a quarterly dividend of $0.03 per share of common stock on March 21, 2023 and on June 1, 2023, totaling $3.6 million each. The amount and timing of dividends payable on the common stock are within the sole discretion of the Board, which will evaluate dividend payments within the context of the Company’s overall capital allocation strategy on an ongoing basis, giving consideration to its current and forecast earnings, financial condition, cash requirements and other factors. As a result of the aggregate amount of dividends paid on the common stock through June 30, 2023, the conversion price of the Company’s Series A convertible preferred stock has been adjusted from $12.00 to $11.85 per share, as were the threshold share prices in the Deferred Shares agreement (as defined in Note 10). The Board declared a quarterly dividend of $0.03 per share of common stock, to be paid on September 1, 2023 to stockholders of record as of August 15, 2023.
In February 2022, the Board authorized a share repurchase program for up to an aggregate of $50 million of outstanding shares of common stock and in May 2023, the Board increased the size of the share repurchase program to $100.0 million. The share repurchase program does not have an expiration date. In the three and six months ended June 30, 2023, the Company repurchased approximately 1.5 million and 1.6 million shares of common stock, respectively, under the repurchase program for approximately $11.2 million and $11.9 million, or an average share price of $7.55 and $7.57, respectively.
8. Share-Based Compensation
The Compensation Committee of the Board has approved the grant of non-qualified stock options, restricted stock units (“RSUs”), and shares to certain employees, non-employees and members of the Board under the ARKO Corp. 2020 Incentive Compensation Plan (the “Plan”). Stock options granted under the Plan expire no later than ten years from the date of grant and the exercise price may not be less than the fair market value of the shares on the date of grant. Vesting periods are assigned to stock options and restricted share units on a grant-by-grant basis at the discretion of the Board. The Company issues new shares of common stock upon exercise of stock options and vesting of RSUs.
Additionally, a non-employee director may receive RSUs in lieu of up to 100% of his or her cash fees, which RSUs will be settled in common stock upon the director’s departure from the Board or an earlier change in control of the Company.
Stock Options
The following table summarizes share activity related to stock options:
Weighted Average Exercise Price
Weighted Average Fair Value
Remaining Average Contractual Term (Years)
Aggregate Intrinsic Value
Options Outstanding, December 31, 2022
897
9.24
9.0
77
Granted
409
8.58
3.27
Options Outstanding, June 30, 2023
1,306
9.03
8.9
The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s common stock on June 30, 2023 and December 31, 2022.
In the six months ended June 30, 2023, 352 thousand stock options vested.
As of June 30, 2023, total unrecognized compensation cost related to unvested stock options was approximately $2.3 million, which is expected to be recognized over a weighted average period of approximately 2.0 years.
The fair value of each stock option award is estimated by management on the date of the grant using the Black-Scholes option pricing model. The following table summarizes the assumptions utilized in the valuation of the stock option awards granted in the six months ended June 30, 2023:
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Expected dividend rate
1.4
Expected stock price volatility
28.8
Risk-free interest rate
4.0
Expected term of options (years)
10.0
The expected stock price volatility is based on the historical volatility of the Company’s stock price plus the Company’s peer group’s stock price for the period prior to the Company’s listing on Nasdaq. The volatilities are estimated for a period of time equal to the expected term of the related option. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is determined by considering the contractual terms, vesting schedule and expectations of future employee behavior.
Restricted Stock Units
The following table summarizes share activity related to RSUs:
Weighted Average Grant Date Fair Value
Nonvested RSUs, December 31, 2022
3,115
8.90
1,676
8.49
Released
(615
9.00
Forfeited
9.22
Performance-based share adjustment
144
8.13
Nonvested RSUs, June 30, 2023
4,283
8.70
In the six months ended June 30, 2023, 110,390 RSUs were issued to non-employee directors. These awards are included in the table above under restricted stock units. There were 272,476 and 198,170 RSUs issued to non-employee directors outstanding as of June 30, 2023 and December 31, 2022, respectively.
The fair value of RSUs released during the six months ended June 30, 2023 was $5.3 million.
In the six months ended June 30, 2023, the Company granted a target of 1,097,740 performance-based RSUs (“PSUs”). The PSUs were awarded to certain members of senior management and provide for cliff vesting, generally at the end of a three-year period, subject to the achievement of specific key financial metrics measured over such period. The number of PSUs that will ultimately vest is contingent upon the achievement of these key financial metrics at the end of the relevant performance period. The Company assesses the probability of achieving these metrics on a quarterly basis.
Given the Company’s strong performance in 2022, in the first quarter of 2023, the Compensation Committee of the Board approved the adjustment of the performance criteria for 2022 such that the percentage of PSUs that vest with respect to the target amount for 2022 would be 125% instead of 100% and would be applied to all PSUs granted as part of the 2021 and 2022 long-term incentives. As a result, the number of PSUs was adjusted for the probability of achieving these metrics, resulting in additional expense of $0.1 million being recorded in the first quarter of 2023, based on the fair value at the adjustment approval date. For PSUs with market conditions, the Company recognizes the fair value expense ratably over the performance and vesting period.
As of June 30, 2023, total unrecognized compensation cost related to RSUs and PSUs was approximately $23.1 million, which is expected to be recognized over a weighted average period of approximately 1.9 years.
Compensation Cost
Total compensation cost recorded collectively for employees, non-employees and members of the Board for the three and six months ended June 30, 2023 and 2022 was $4.6 million, $3.1 million, $8.6 million and $5.9 million, respectively, and included in general and administrative expenses on the condensed consolidated statements of operations.
9. Earnings per Share
The following table sets forth the computation of basic and diluted net income per share of common stock:
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Net income available to common stockholders
1,434
Net income available to common stockholders after assumed conversions
Weighted average common shares outstanding — Basic
Effect of dilutive securities:
Restricted share units
1,387
668
694
336
Redeemable preferred stock
8,361
Weighted average common shares outstanding — Diluted
Net income per share available to common stockholders — Basic
Net income per share available to common stockholders — Diluted
The following potential shares of common stock have been excluded from the computation of diluted net income per share because their effect would have been antidilutive:
As of June 30,
Stock options
Ares warrants
1,100
Public and Private warrants
17,333
Series A redeemable preferred stock
8,439
Ares Put Option
*
* Refer to the description of this instrument in Note 10.
The effect of the potential shares of common stock issuable upon conversion of the redeemable preferred stock was antidilutive for the three months ended June 30, 2023 and the six months ended June 30, 2023 and 2022, and such shares were excluded from the computation of diluted net income per share.
10. Fair Value Measurements and Financial Instruments
The fair value of cash and cash equivalents, restricted cash, short-term investments, trade receivables, accounts payable and other current liabilities approximated their carrying values as of June 30, 2023 and December 31, 2022 primarily due to the short-term maturity of these instruments. 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”). Based on market trades of the Senior Notes close to June 30, 2023 and December 31, 2022 (Level 1 fair value measurement), the fair value of the Senior Notes was estimated at approximately $367.0 million and $354.7 million, respectively, compared to a gross carrying value of $450 million at June 30, 2023 and December 31, 2022. The fair value of the other long-term debt approximated their carrying values as of June 30, 2023 and December 31, 2022 due to the frequency with which interest rates are reset based on changes in prevailing interest rates. The fair value of fuel futures contracts was determined using NYMEX quoted values.
The contingent consideration from the acquisition of the business of Empire Petroleum Partners, LLC is measured at fair value at the end of each reporting period and amounted to $2.2 million and $3.7 million as of June 30, 2023 and December 31, 2022, respectively. The fair value methodology for the contingent consideration liability is categorized as Level 3 because inputs to the valuation methodology are unobservable and significant to the fair value adjustment. Approximately $0.1 million, $(0.5) million, $0.2 million and $(0.4) million were recorded as components of interest and other financial expenses (income) in the condensed consolidated statements of operations for the change in the fair value of the contingent consideration for the three and six months ended June 30, 2023 and 2022, respectively, and approximately $0.9 million, $0.5 million, $1.6 million and $0.5 million of income
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were recorded as components of other expenses, net in the condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022, respectively.
The public warrants to purchase the Company’s common stock (the “Public Warrants”), of which approximately 14.8 million were outstanding as of June 30, 2023, are measured at fair value at the end of each reporting period and amounted to $22.1 million and $25.9 million as of June 30, 2023 and December 31, 2022, respectively. The fair value methodology for the Public Warrants is categorized as Level 1. Approximately $0, $7.1 million, $3.8 million and $5.2 million were recorded as components of interest and other financial income in the condensed consolidated statements of operations for the change in the fair value of the Public Warrants for the three and six months ended June 30, 2023 and 2022, respectively.
The private warrants to purchase the Company’s common stock (the “Private Warrants”), of which approximately 2.5 million were outstanding as of June 30, 2023, are measured at fair value at the end of each reporting period and amounted to $3.4 million and $4.5 million as of June 30, 2023 and December 31, 2022, respectively. The fair value methodology for the Private Warrants is categorized as Level 2 because certain inputs to the valuation methodology are unobservable and significant to the fair value adjustment. The Private Warrants have been recorded at fair value based on a Black-Scholes option pricing model with the following material assumptions based on observable and unobservable inputs:
Expected term (in years)
2.5
1.5
Volatility
44.5
4.7
Strike price
11.50
For the change in the fair value of the Private Warrants, approximately $0.1 million, $1.2 million, $1.1 million and $0.9 million were recorded as components of interest and other financial income in the condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022, respectively.
The Haymaker Founders (as defined in Note 17 to the annual financial statements) will be entitled to up to 200 thousand shares of common stock to be issued subject to the number of incremental shares of common stock issued to the holders of the Series A redeemable preferred stock not being higher than certain thresholds (the “Deferred Shares”). The Deferred Shares are measured at fair value at the end of each reporting period and amounted to $1.3 million and $1.4 million as of June 30, 2023 and December 31, 2022, respectively. The fair value methodology for the Deferred Shares is categorized as Level 3 because inputs to the valuation methodology are unobservable and significant to the fair value adjustment. The Deferred Shares have been recorded at fair value based on a Monte Carlo pricing model with the following material assumptions based on observable and unobservable inputs:
3.9
36.2
4.3
Stock price
7.95
Approximately $0.1 million, $0.2 million, $0.1 million and $0.2 million were recorded as components of interest and other financial income in the condensed consolidated statements of operations for the change in the fair value of the Deferred Shares for the three and six months ended June 30, 2023 and 2022, respectively.
The Company entered into an agreement with Ares Capital Corporation (“Ares”) and certain of its affiliates (the “Ares Put Option”), which guaranteed Ares a value of approximately $27.3 million (including all dividend payments received by Ares) at the end of February 2023 for the shares of common stock that the Company issued in consideration for its acquisition in December 2020 of equity in GPM (the “Ares Shares”). The Company and Ares agreed that in lieu of the Company issuing to Ares additional shares of common stock in accordance with the Ares Put Option or purchasing the Ares Shares, Ares would retain the Ares Shares, and the Company would pay approximately $9.8 million in cash to Ares in full satisfaction of the Company’s obligations related to the Ares
21
Put Option. This payment was made on April 14, 2023 and the Ares Put Option agreement was terminated. The Ares Put Option was measured at fair value at the end of each reporting period and amounted to $8.6 million as of December 31, 2022.
Approximately $0, $1.6 million, $1.2 million and $0.5 million were recorded as components of interest and other financial expenses in the condensed consolidated statements of operations for the change in the fair value of the Ares Put Option for the three and six months ended June 30, 2023 and 2022, respectively.
11. Segment Reporting
The reportable segments were determined based on information reviewed by the chief operating decision maker for operational decision-making purposes and the segment information is prepared on the same basis that the Company’s chief operating decision maker reviews such financial information. The Company’s reportable segments are retail, wholesale, fleet fueling and GPMP. The Company defines segment earnings as operating income.
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 its Company operated convenience stores, the Company owns the merchandise and fuel inventory and employs personnel to manage the store.
The wholesale segment supplies fuel to dealers, sub-wholesalers and bulk and spot purchasers, on either a cost plus or consignment basis. For consignment arrangements, the Company retains ownership of the fuel inventory at the site, is responsible for the pricing of the fuel to the end consumer, and shares the gross profit with the dealers.
The fleet fueling segment includes the operation of proprietary and third-party cardlock locations (unstaffed fueling locations), and commissions from the sales of fuel using proprietary fuel cards that provide customers access to a nationwide network of fueling sites.
The GPMP segment includes GPMP and primarily includes its sale and supply of fuel to GPM and its subsidiaries related to substantially all of its sites that sell fuel in the retail and wholesale segments, at GPMP’s cost of fuel (including taxes and transportation) plus a fixed margin (currently 5.0 cents per gallon), and charges a fixed fee to sites in the fleet fueling segment and certain Company sites which are not supplied by GPMP (currently 5.0 cents per gallon sold). GPMP also supplies fuel to a small number of dealers and bulk and spot purchasers.
The “All Other” segment includes the results of non-reportable segments which do not meet both quantitative and qualitive criteria as defined under ASC 280, Segment Reporting. The Company revised the composition of the “All Other” segment in the third quarter of 2022 in conjunction with the closing of the Quarles Acquisition.
The majority of general and administrative expenses, depreciation and amortization, net other expenses, net interest and other financial expenses, income taxes and minor other income items including intercompany operating leases are not allocated to the segments.
With the exception of goodwill, assets and liabilities relevant to the reportable segments are not assigned to any particular segment, but rather, managed at the consolidated level. All reportable segment revenues were generated from sites within the U.S. and substantially all of the Company’s assets were within the U.S.
Inter-segment transactions primarily included the distribution of fuel by GPMP to GPM and substantially all of its sites that sell fuel (both in the retail and wholesale segments) and charges by GPMP to sites that sell fuel in the fleet fueling segment. The effect of these inter-segment transactions was eliminated in the condensed consolidated financial statements.
22
Retail
Wholesale
Fleet Fueling
GPMP
All Other
For the Three Months Ended June 30, 2023
Revenues
1,015,365
811,139
121,146
1,057
8,393
18,997
6,110
277
420
Total revenues from external customers
1,518,923
817,249
122,822
1,334
8,813
Inter-segment
1,366,786
4,545
1,371,331
Total revenues from reportable segments
1,368,120
13,358
3,840,472
77,857
6,767
9,344
27,008
138
121,114
Interest and financial expenses, net
(6,840
Loss from equity investment
Net income from reportable segments
114,247
For the Three Months Ended June 30, 2022
1,117,849
966,434
1,571
16,667
5,733
258
1,566,267
972,167
1,829
1,738,243
302
1,738,545
1,740,072
4,278,808
71,847
9,786
21,799
103,734
(1,819
Income from equity investment
101,943
For the Six Months Ended June 30, 2023
1,858,838
1,495,987
248,640
1,798
13,501
37,552
12,601
2,627
447
677
2,781,239
1,508,588
251,267
2,245
14,178
2,509,408
7,603
2,517,011
2,511,653
21,781
7,074,528
119,488
14,317
17,768
49,630
462
201,665
(12,090
189,512
23
For the Six Months Ended June 30, 2022
1,972,516
1,694,131
2,733
32,991
11,455
2,804,243
1,705,586
3,245
3,013,964
604
3,014,568
3,017,209
7,527,642
117,526
17,199
42,406
177,735
(4,264
Income tax benefit
177
173,685
A reconciliation of total revenues from reportable segments to total revenues on the condensed consolidated statements of operations was as follows:
Elimination of inter-segment revenues
(1,371,331
(1,738,545
(2,517,011
(3,014,568
A reconciliation of net income from reportable segments to net income on the condensed consolidated statements of operations was as follows:
Amounts not allocated to segments:
(3,604
747
(6,281
1,331
(41,879
(32,197
(81,523
(63,276
(30,995
(22,511
(57,552
(45,305
(4,956
(1,197
(7,676
(2,318
Interest and other financial expenses, net
(13,320
(5,822
(21,672
(19,654
(10,339
12. Commitments and Contingencies
Environmental Liabilities and Contingencies
The Company is subject to certain federal and state environmental laws and regulations associated with sites at which it stores and sells fuel and other fuel products, as well as at owned and leased locations leased or subleased to dealers. As of June 30, 2023 and December 31, 2022, environmental obligations totaled $14.5 million and $12.1 million, respectively. These amounts were recorded as other current and non-current liabilities in the condensed consolidated balance sheets. Environmental reserves have been established on an undiscounted basis based upon internal and external estimates in regard to each site. It is reasonably possible that these amounts will be adjusted in the future due to changes in estimates of environmental remediation costs, the timing of the payments or changes in federal and/or state environmental regulations.
The Company maintains certain environmental insurance policies and participates in various state underground storage tank funds that entitle it to be reimbursed for environmental loss mitigation. Estimated amounts that will be recovered from its insurance
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policies and various state funds for the exposures totaled $7.8 million and $4.9 million as of June 30, 2023 and December 31, 2022, respectively, and were recorded as other current and non-current assets in the condensed consolidated balance sheets.
Asset Retirement Obligation
As part of the fuel operations at its operated convenience stores, at most of the other owned and leased locations leased to dealers, certain other dealer locations and proprietary cardlock locations, there are aboveground and underground storage tanks for which the Company is responsible. The future cost to remove a storage tank is recognized over the estimated remaining useful life of the storage tank or the termination of the applicable lease. A liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset is recorded at the time a storage tank is installed. The estimated liability is based upon historical experience in removing storage tanks, estimated tank useful lives, external estimates as to the cost to remove the tanks in the future and current and anticipated federal and state regulatory requirements governing the removal of tanks, and discounted. The Company has recorded an asset retirement obligation of $80.4 million and $65.3 million at June 30, 2023 and December 31, 2022, respectively. The current portion of the asset retirement obligation is included in other current liabilities in the condensed consolidated balance sheets.
Program Agreement
On May 2, 2023, GPM, together with Oak Street, entered into a third amendment to the Program Agreement, which, among other things, (i) extended the term of the Program Agreement and the exclusivity period thereunder through September 30, 2024 and (ii) provides for up to $1.5 billion of capacity under the Program Agreement from the date of the third amendment through September 30, 2024, not including the funding for the WTG Acquisition.
Legal Matters
The Company is a party to various legal actions, as both plaintiff and defendant, in the ordinary course of business. The Company’s management believes, based on estimations with support from legal counsel for these matters, that these legal actions are routine in nature and incidental to the operation of the Company’s business and that it is not reasonably possible that the ultimate resolution of these matters will have a material adverse impact on the Company’s business, financial condition, results of operations and cash flows.
13. Related Party Transactions
There have been no material changes to the description of related party transactions as set forth in the annual financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read this discussion together with the unaudited Condensed Consolidated Financial Statements, related notes, and other financial information included elsewhere in this Quarterly Report on Form 10-Q together with our audited consolidated financial statements, related notes, and other information contained in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”). The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors,” in Part I, Item 1A of the Form 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q and as described from time to time in our other filings with the Securities and Exchange Commission. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
ARKO Corp. was incorporated under the laws of Delaware on August 26, 2020. Our shares of common stock, $0.0001 par value per share (“common stock”), and publicly-traded warrants are listed on the Nasdaq Stock Market (“Nasdaq”) and trade under the symbols “ARKO” and “ARKOW,” respectively. GPM Investments, LLC, a Delaware limited liability company, which we refer to as GPM, is our operating entity and our indirect wholly owned subsidiary.
Based in Richmond, VA, we are a leading independent convenience store operator and, as of June 30, 2023, we were the sixth largest convenience store chain in the United States (“U.S.”) ranked by store count, operating 1,547 retail convenience stores. As of June 30, 2023, we operated the stores under more than 25 regional store brands including 1-Stop, Admiral, Apple Market®, BreadBox, Corner Mart, Dixie Mart, ExpressStop, E-Z Mart®, fas mart®, fastmarket®, Flash Market, Handy Mart, Jetz, Jiffi Stop®, Jiffy Stop, Li’l Cricket, Market Express, Next Door Store®, Pride, Roadrunner Markets, Rose Mart, Rstore, Scotchman®, shore stop®, Town Star, Uncle’s, Village Pantry® and Young’s. As of June 30, 2023, we also supplied fuel to 1,824 dealers and operated 293 cardlock locations (unstaffed fueling locations). We are well diversified geographically and as of June 30, 2023, operated in more than 30 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 1,260 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 approximately 150 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 90 of our locations. Our high value fas REWARDS® loyalty program with approximately 1.48 million currently enrolled members is available in the majority of our stores and offers exclusive savings on merchandise and gas to our customers. In the first quarter of 2023, we launched our new fas REWARDS app, which offers enrolled loyalty members a variety of new features, including exclusive in-app member only HOT deals not available in stores, order and delivery, age verified offers on tobacco and alcohol, and a store locator with current gas prices at GPM stores close to members. We believe that these features contributed significantly to the approximately 10.5% increase in our enrolled marketable membership since the end of the first quarter of 2023.
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.
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.
Wholesale Segment
The wholesale segment supplies fuel to 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 dealers and bulk and spot purchasers on a fixed-fee basis. The sales price to the dealer is determined according to the terms of the relevant agreement with the 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 fleet fueling segment 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 and certain Company sites which are not supplied by GPMP.
Trends Impacting Our Business
We have achieved strong store growth over the last decade, primarily by implementing a highly successful acquisition strategy. From 2013 through June 30, 2023, we completed 24 acquisitions. On June 6, 2023, we completed our acquisition from WTG Fuels Holdings, LLC of 24 company-operated Uncle’s convenience stores located across Western Texas, 68 proprietary GASCARD-branded cardlock sites and 43 private cardlock sites for fleet fueling operations located in Western Texas and Southeastern New Mexico (the “WTG Acquisition”). On March 1, 2023, we completed our acquisition from Transit Energy Group, LLC of 135 Company-operated convenience stores and gas stations, 181 dealer locations, a commercial, government, and industrial business, and certain distribution and transportation assets (the “TEG Acquisition” and, together with the WTG Acquisition, the “2023 Acquisitions”). For additional information regarding the 2023 Acquisitions, please see Note 3 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. In December 2022, we completed our acquisition of Pride Convenience Holdings, LLC, which operated at closing, 31 Pride retail convenience stores and had one store under construction at closing which is now opened (the “Pride Acquisition”), and in July 2022, we completed our acquisition of certain assets from Quarles Petroleum, Incorporated (the “Quarles Acquisition”), which included 121 proprietary Quarles-branded cardlock sites and 63 third-party cardlock sites for fleet fueling operations, and 46 dealer locations (collectively, the “2022 Acquisitions”). Our store count has grown from 320 sites in 2011 to 3,664 sites as of June 30, 2023, of which 1,547 were operated as retail convenience stores, 1,824 were locations at which we supplied fuel to dealers and 293 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. 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 the periods noted, for the retail, wholesale and fleet fueling segments:
Number of sites at beginning of period
1,531
1,396
1,404
1,406
Acquired sites
159
Newly opened or reopened sites
Company-controlled sites converted to consignment or fuel supply locations, net
(6
(1
(11
(7
Closed, relocated or divested sites
(4
(8
Number of sites at end of period
1,547
1,388
27
Wholesale Segment 1
Number of sites at beginning of period 2
1,841
1,625
1,674
1,628
Acquired sites 2
190
Newly opened or reopened sites 3
40
Consignment or fuel supply locations converted from Company-controlled sites, net
1
(49
(75
(55
1,824
1,620
1 Excludes bulk and spot purchasers.
2 As part of our review of the initial accounting for the TEG Acquisition, we have adjusted the number of sites acquired in the first quarter of 2023 to exclude 11 spot purchasers acquired, consistent with our historical methodology. There was no impact on our previously reported gallons sold or financial results.
3 Includes all signed fuel supply agreements irrespective of fuel distribution commencement date.
For the Three and Six Months Ended June 30,
183
111
293
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 year ended December 31, 2022, we experienced historically high fuel margins as a result of the volatile market for gasoline and diesel fuel. In particular, in the first quarter of 2022, the war in Ukraine significantly affected market conditions and resulted in substantially higher fuel margins. Depending on future market and geopolitical conditions, the supply of fuel, including diesel fuel in particular, may become constrained. As such, we maintain terminal storage of diesel fuel for short-term supply needs for our fleet fueling sites.
Additionally, throughout 2022 and continuing in the first half of 2023, the U.S. economy continued to experience inflationary pressures, which increase the cost of the merchandise we purchase and reduce consumer purchasing power. We have mitigated a portion of these higher costs with retail price increases. If this trend continues or increases, it could negatively 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 has 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.
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
Our focus on our retail organic store growth strategy and the continuation of our accretive acquisition strategy positively impacted our results of operations for the second quarter of 2023. Merchandise contribution at same stores, the 2023 Acquisitions and the 2022 Acquisitions all contributed to the improvement in our results of operations for the second quarter of 2023, as compared to the second quarter of 2022 which was partially offset by less fuel contribution on a same store basis, primarily due to market conditions in the second quarter of 2022. Store operating expenses increased in the second quarter of 2023 as compared to the second quarter of 2022, primarily due to higher personnel costs. General and administrative expenses also increased in the second quarter of 2023 as compared to the second quarter of 2022, primarily as a result of expenses associated with the 2023 Acquisitions and the 2022 Acquisitions, wage increases, and an increase in share-based compensation expense.
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 three and six months ended June 30, 2023 and 2022
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 condensed consolidated interim financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with such condensed interim consolidated financial statements and related notes.
Consolidated Results
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The table below shows our consolidated results for the three and six months ended June 30, 2023 and 2022, together with certain key metrics.
(20,160
(7,339
(33,762
(23,314
Fuel gallons sold
588,174
484,834
1,091,434
941,726
Fuel margin, cents per gallon1
26.5
27.0
25.6
25.9
Merchandise contribution2
154,658
131,364
277,623
239,556
Merchandise margin3
31.9
30.4
31.4
30.0
Adjusted EBITDA4
86,242
79,045
133,726
129,153
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.
Three Months Ended June 30, 2023 versus Three Months Ended June 30, 2022
For the three months ended June 30, 2023, fuel revenue decreased by $128.8 million, or 6.2%, compared to the second quarter of 2022. The decrease in fuel revenue was primarily attributable to a decrease in the average price of fuel compared to the second quarter of 2022 and fewer gallons sold at same stores in the second quarter of 2023 compared to the second quarter of 2022, which was partially offset by incremental gallons sold related to the 2023 Acquisitions and the 2022 Acquisitions.
For the three months ended June 30, 2023, merchandise revenue increased by $52.8 million, or 12.2%, compared to the second quarter of 2022, primarily due to the 2023 Acquisitions and the Pride Acquisition and an increase in same store merchandise revenues. Offsetting these increases was a decrease in merchandise revenue from underperforming retail stores that were closed or converted to dealers.
For the three months ended June 30, 2023, other revenue increased by $4.8 million, or 21.3%, compared to the second quarter of 2022, primarily due to additional revenue from the 2023 Acquisitions, the 2022 Acquisitions and greater lottery commissions.
For the three months ended June 30, 2023, total operating expenses decreased by $66.3 million, or 2.7%, compared to the second quarter of 2022. Fuel costs decreased $153.9 million, or 7.9%, compared to the second quarter of 2022 due to both fewer gallons sold and a lower average cost of fuel on a same store basis which were partially offset by incremental gallons related to the 2023 Acquisitions and the 2022 Acquisitions. Merchandise costs increased $29.5 million, or 9.8%, compared to the second quarter of 2022, primarily due to increased costs related to the 2023 Acquisitions and the Pride Acquisition and a corresponding increase in same store merchandise sales. For the three months ended June 30, 2023, store operating expenses increased $39.9 million, or 22.4%,
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compared to the second quarter of 2022 due to incremental expenses as a result of the 2023 Acquisitions, the 2022 Acquisitions and an increase in expenses at same stores.
For the three months ended June 30, 2023, general and administrative expenses increased $9.7 million, or 29.4%, compared to the second quarter of 2022, primarily due to approximately $7.1 million of expenses associated with the 2023 Acquisitions and the 2022 Acquisitions, annual wage increases and an increase of $1.4 million in share-based compensation expense primarily related to equity grants in the first quarter of 2023.
For the three months ended June 30, 2023, depreciation and amortization expenses increased $8.5 million, or 34.8%, compared to the second quarter of 2022 primarily due to assets acquired in the previous twelve month period, largely in connection with the 2023 Acquisitions and the 2022 Acquisitions.
For the three months ended June 30, 2023, other expenses, net increased by $3.8 million, compared to the second quarter of 2022 primarily due to an increase in acquisition costs and greater losses on disposal of assets and impairment charges in the second quarter of 2023, which was partially offset by higher income recorded for the fair value adjustment of contingent consideration in the second quarter of 2023.
Operating income was $39.7 million for the second quarter of 2023 compared to $48.3 million for the second quarter of 2022. The decrease was primarily due to an increase in depreciation and amortization expenses, share-based compensation expenses and other expenses, net.
For the three months ended June 30, 2023, interest and other financial expenses, net increased by $12.8 million compared to the second quarter of 2022, primarily related to a decrease of $6.6 million in income, net, recorded in the second quarter of 2023 compared to the prior year period, for fair value adjustments for the Ares Put Option, Public Warrants, Private Warrants and Deferred Shares (each as defined in Note 10 to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q) and greater debt at higher rates outstanding in 2023, which was partially offset by additional interest income generated in the second quarter of 2023.
For the three months ended June 30, 2023, income tax expense was $5.0 million compared to income tax expense of $9.2 million for the three months ended June 30, 2022.
For the three months ended June 30, 2023 and 2022, net income attributable to the Company was $14.4 million and $31.8 million, respectively.
For the three months ended June 30, 2023, Adjusted EBITDA was $86.2 million compared to $79.0 million for the three months ended June 30, 2022. Incremental Adjusted EBITDA from the 2023 Acquisitions and the 2022 Acquisitions and increased merchandise contribution positively impacted Adjusted EBITDA for the second quarter of 2023, as compared to the second quarter of 2022, which was partially offset by approximately $13.3 million of lower fuel contribution from retail same stores and legacy wholesale sites. In addition, higher personnel costs at same stores and an increase in general and administrative expenses reduced Adjusted EBITDA for the second quarter of 2023. Refer to “Use of Non-GAAP Measures” below for discussion of this non-GAAP performance measure and related reconciliation to net income.
Six Months Ended June 30, 2023 versus Six Months Ended June 30, 2022
For the six months ended June 30, 2023, fuel revenue decreased by $50.6 million, or 1.4%, compared to the first half of 2022. The decrease in fuel revenue was primarily attributable to a decrease in the average price of fuel compared to the first half of 2022 and fewer gallons sold at same stores in the first half of 2023 compared to the first half of 2022, which was partially offset by incremental gallons sold related to the 2023 Acquisitions and the 2022 Acquisitions.
For the six months ended June 30, 2023, merchandise revenue increased by $86.1 million, or 10.8%, compared to the first half of 2022, primarily due to the 2023 Acquisitions and the Pride Acquisition and an increase in same store merchandise revenues. Offsetting these increases was a decrease in merchandise revenue from underperforming retail stores that were closed or converted to dealers.
For the six months ended June 30, 2023, other revenue increased by $8.9 million, or 19.9%, compared to the first half of 2022, primarily due to additional revenue from the 2023 Acquisitions, the 2022 Acquisitions and greater lottery commissions.
For the six months ended June 30, 2023, total operating expenses increased by $58.0 million, or 1.3%, compared to the first half of 2022. Fuel costs decreased $86.7 million, or 2.5%, compared to the first half of 2022 due to both fewer gallons sold and a lower average cost of fuel on a same store basis, which were partially offset by incremental gallons related to the 2023 Acquisitions and the 2022 Acquisitions. Merchandise costs increased $48.0 million, or 8.6%, compared to the first half of 2022, primarily due to increased
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costs related to the 2023 Acquisitions and the Pride Acquisition and a corresponding increase in same store merchandise sales. For the six months ended June 30, 2023, store operating expenses increased $66.1 million, or 19.2%, compared to the first half of 2022 due to incremental expenses as a result of the 2023 Acquisitions, the 2022 Acquisitions and an increase in expenses at same stores.
For the six months ended June 30, 2023, general and administrative expenses increased $18.3 million, or 28.3%, compared to the first half of 2022, primarily due to approximately $11.5 million in expenses associated with the 2023 Acquisitions and the 2022 Acquisitions, annual wage increases and an increase of $2.7 million in share-based compensation expense primarily related to equity grants in the first quarters of 2023 and 2022.
For the six months ended June 30, 2023, depreciation and amortization expenses increased $12.2 million, or 25.0%, compared to the first half of 2022 primarily due to assets acquired in the previous twelve month period, largely in connection with the 2023 Acquisitions and the 2022 Acquisitions.
For the six months ended June 30, 2023, other expenses, net increased by $5.4 million, compared to the first half of 2022 primarily due to an increase in acquisition costs and greater losses on disposal of assets and impairment charges in the first half of 2023 which was partially offset by higher income recorded for the fair value adjustment of contingent consideration in the first half of 2023.
Operating income was $48.6 million for the first half of 2023 compared to $67.6 million for the first half of 2022. The decrease was primarily due to an increase in depreciation and amortization expenses, share-based compensation expenses and other expenses, net.
For the six months ended June 30, 2023, interest and other financial expenses, net increased by $10.4 million compared to the first half of 2022, primarily related to a decrease of $1.9 million in income, net recorded for fair value adjustments for the Ares Put Option, Public Warrants, Private Warrants and Deferred Shares (each as defined in Note 10 to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q) and greater debt at higher rates outstanding in 2023, which was partially offset by additional interest income generated in the first half of 2023.
For the six months ended June 30, 2023, income tax expense was $2.9 million compared to income tax expense of $10.2 million for the six months ended June 30, 2022.
For the six months ended June 30, 2023 and 2022, net income attributable to the Company was $11.9 million and $34.0 million, respectively.
For the six months ended June 30, 2023, Adjusted EBITDA was $133.7 million compared to $129.2 million for the six months ended June 30, 2022. Incremental Adjusted EBITDA from the 2023 Acquisitions and the 2022 Acquisitions and increased merchandise contribution positively impacted Adjusted EBITDA for the first half of 2023, as compared to the first half of 2022. These benefits were partially offset by approximately $27.9 million of lower fuel contribution from retail same stores and legacy wholesale sites, of which approximately $12.8 million was incurred in March 2023. In addition, higher personnel costs at same stores and an increase in general and administrative expenses reduced Adjusted EBITDA for the first half of 2023. Refer to “Use of Non-GAAP Measures” below for discussion of this non-GAAP performance measure and related reconciliation to net income.
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Segment Results
The table below shows the results of the retail segment for the three and six months ended June 30, 2023 and 2022, together with certain key metrics for the segment.
913,437
1,025,811
1,681,245
1,802,696
197,726
168,222
373,280
324,841
1,441,066
1,494,420
2,661,751
2,686,717
293,584
253,243
542,490
492,801
Same store fuel gallons sold decrease (%)1
(2.6
%)
(10.6
(4.2
(7.1
Fuel margin, cents per gallon2
39.7
41.3
37.7
39.4
Same store merchandise sales increase (decrease) (%)1
0.7
(2.7
2.1
(3.1
Same store merchandise sales excluding cigarettes increase (%)1
3.8
5.6
0.8
Merchandise contribution3
Merchandise margin4
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.
The table below shows financial information and certain key metrics of recent acquisitions in the retail segment that do not have comparable information for the prior periods.
33
Pride 1
TEG 2
Uncle's (WTG) 3
Date of Acquisition:
Dec 6, 2022
Mar 1, 2023
Jun 6, 2023
71,388
99,128
6,098
176,614
139,425
131,202
276,725
15,629
39,381
2,846
57,856
29,143
52,324
84,313
1,397
1,322
54
2,773
2,784
1,731
4,569
88,414
139,831
8,998
237,243
171,352
185,257
365,607
64,335
90,832
5,020
160,187
125,299
120,617
250,936
10,185
27,189
1,927
39,301
19,383
36,126
57,436
10,495
18,064
1,225
29,784
20,030
23,576
44,831
85,015
136,085
8,172
229,272
164,712
180,319
353,203
3,399
3,746
826
7,971
6,640
4,938
12,404
19,387
30,165
1,714
51,266
37,278
40,057
79,049
Merchandise contribution 4
5,444
12,192
919
18,555
9,760
16,198
26,877
Merchandise margin 5
34.8
31.0
32.3
33.5
1 Pride Acquisition.
2 Includes only the retail stores acquired in the TEG Acquisition.
3 Includes only the retail stores acquired in the WTG Acquisition.
4 Calculated as merchandise revenue less merchandise costs.
5 Calculated as merchandise contribution divided by merchandise revenue.
Retail Revenues
For the three months ended June 30, 2023, fuel revenue decreased by $102.5 million, or 9.2%, compared to the second quarter of 2022. The decrease in fuel revenue was attributable to a $0.95 per gallon decrease in the average retail price of fuel in the second quarter of 2023 as compared to the second quarter of 2022, primarily due to market factors, as well as a decrease in gallons sold at same stores. For the second quarter of 2023, gallons at same stores decreased approximately 2.6%, or 6.4 million gallons. Partially offsetting these decreases, the 2023 Acquisitions and the Pride Acquisition contributed 51.3 million gallons sold, or $176.6 million in fuel revenue. Underperforming retail stores, which were closed or converted to dealers over the last 12 months in order to optimize profitability, also negatively impacted gallons sold during the second quarter of 2023.
For the three months ended June 30, 2023, merchandise revenue increased by $52.8 million, or 12.2%, compared to the second quarter of 2022. The 2023 Acquisitions and the Pride Acquisition contributed approximately $57.9 million of merchandise revenue. Same store merchandise sales increased $3.0 million, or 0.7%, for the second quarter of 2023 compared to the second quarter of 2022. Same store merchandise sales increased primarily due to higher revenue from the Company’s six core destination categories (packaged beverages, candy, salty snacks, packaged sweet snacks, alternative snacks and beer), other tobacco products and franchises as a result of marketing initiatives, including expanded category assortments, new franchise food offerings and investments in coolers and freezers, which was partially offset by lower revenue from cigarettes. In addition, there was a decrease in merchandise revenue from underperforming retail stores that were closed or converted to dealers.
For the three months ended June 30, 2023, other revenues, net increased by $2.3 million, or 14.0%, compared to the second quarter of 2022, primarily related to additional income from the 2023 Acquisitions and the Pride Acquisition and greater lottery commissions.
Retail Operating Income
For the three months ended June 30, 2023, fuel margin increased compared to the same period in 2022. Incremental fuel profit from the 2023 Acquisitions and the Pride Acquisition of approximately $19.0 million (excluding intercompany charges by GPMP) was partially offset by a decrease in same store fuel profit of $5.2 million (excluding intercompany charges by GPMP). Fuel margin
34
per gallon at same stores for the second quarter of 2023 decreased to 40.3 cents per gallon from 41.4 cents per gallon for the second quarter of 2022 primarily due historically high fuel margins in 2022 principally as a result of the volatile market for gasoline and diesel fuel. A decrease in fuel profit related to underperforming retail stores that were closed or converted to dealers decreased fuel profit compared to the second quarter of 2022.
For the three months ended June 30, 2023, merchandise contribution increased $23.3 million, or 17.7%, compared to the same period in 2022, and merchandise margin increased to 31.9% as compared to 30.4% in the prior period. The increase was due to $18.6 million in merchandise contribution from the 2023 Acquisitions and the Pride Acquisition and an increase in merchandise contribution at same stores of $6.5 million. Merchandise contribution at same stores increased in the second quarter of 2023 primarily due to higher contribution from the Company’s six core destination categories and franchises. Merchandise margin at same stores was 31.9% in the second quarter of 2023 compared to 30.6% in the second quarter of 2022.
For the three months ended June 30, 2023, store operating expenses increased $29.5 million, or 17.5%, compared to the three months ended June 30, 2022 primarily due to $29.8 million of expenses related to the 2023 Acquisitions and the Pride Acquisition and an increase of $3.2 million in expenses at same stores, mainly driven by approximately $4.2 million, or 6.5%, of higher personnel costs. The increase in store operating expenses was partially offset by underperforming retail stores that were closed or converted to dealers.
For the six months ended June 30, 2023, fuel revenue decreased by $113.7 million, or 5.8%, compared to the first half of 2022. The decrease in fuel revenue was attributable to a $0.57 per gallon decrease in the average retail price of fuel in the first half of 2023 as compared to the first half of 2022, primarily due to market factors, as well as a decrease in gallons sold at same stores. For the first half of 2023, gallons at same stores decreased approximately 4.2%, or 20.0 million gallons. Offsetting these decreases, the 2023 Acquisitions and the Pride Acquisition contributed 79.0 million gallons sold, or $276.7 million in fuel revenue. Underperforming retail stores, which were closed or converted to dealers over the last 12 months in order to optimize profitability, also negatively impacted gallons sold during the first half of 2023.
For the six months ended June 30, 2023, merchandise revenue increased by $86.1 million, or 10.8%, compared to the first half of 2022. The 2023 Acquisitions and the Pride Acquisition contributed approximately $84.3 million of merchandise revenue. Same store merchandise sales increased $16.7 million, or 2.1%, for the first half of 2023 compared to the first half of 2022. Same store merchandise sales increased primarily due to higher revenue from the Company’s six core destination categories, other tobacco products and franchises as a result of marketing initiatives, including expanded category assortments, new franchise food offerings and investments in coolers and freezers, which was partially offset by lower revenue from cigarettes. In addition, there was a decrease in merchandise revenue from underperforming retail stores that were closed or converted to dealers.
For the six months ended June 30, 2023, other revenues, net increased by $4.6 million, or 13.8%, compared to the first half of 2022, primarily related to additional income from the 2023 Acquisitions, the Pride Acquisition and greater lottery commissions.
For the six months ended June 30, 2023, fuel margin increased compared to the same period in 2022. Incremental fuel profit from the 2023 Acquisitions and the Pride Acquisition of approximately $29.7 million (excluding intercompany charges by GPMP) was partially offset by a decrease in same store fuel profit of $15.9 million (excluding intercompany charges by GPMP). Fuel margin per gallon at same stores for the first half of 2023 decreased to 37.8 cents per gallon from 39.5 cents per gallon for the first half of 2022 primarily due to historically high fuel margins in 2022 principally as a result of the volatile market for gasoline and diesel fuel, with the first quarter of 2022 particularly impacted by the war in Ukraine, which significantly affected market conditions and resulted in substantially higher fuel margins. A decrease in fuel profit related to underperforming retail stores that were closed or converted to dealers also partially offset the increase in fuel profit compared to the first half of 2022.
For the six months ended June 30, 2023, merchandise contribution increased $38.1 million, or 15.9%, compared to the same period in 2022, and merchandise margin increased to 31.4% as compared to 30.0% in the prior period. The increase was due to $26.9 million in merchandise contribution from the 2023 Acquisitions and the Pride Acquisition and an increase in merchandise contribution at same stores of $14.6 million. Merchandise contribution at same stores increased in the first half of 2023 primarily due to higher contribution from the Company’s six core destination categories and franchises. Merchandise margin at same stores was 31.3% in the first half of 2023 compared to 30.1% in the first half of 2022.
For the six months ended June 30, 2023, store operating expenses increased $48.4 million, or 14.9%, compared to the six months ended June 30, 2022 primarily due to $44.8 million of expenses related to the 2023 Acquisitions and the Pride Acquisition and
35
an increase of $9.2 million in expenses at same stores, including approximately $10.3 million or 8.0%, of higher personnel costs. The increase in store operating expenses was partially offset by underperforming retail stores that were closed or converted to dealers.
The table below shows the results of the wholesale segment for the three and six months ended June 30, 2023 and 2022, together with certain key metrics for the segment.
800,286
951,779
1,474,977
1,667,282
10,196
10,602
19,294
21,105
810,482
962,381
1,494,271
1,688,387
Fuel gallons sold – fuel supply locations
213,136
193,164
395,563
374,105
Fuel gallons sold – consignment agent locations
44,534
37,996
82,496
73,993
Fuel margin, cents per gallon1 – fuel supply locations
5.9
6.0
7.1
Fuel margin, cents per gallon1 – consignment agent locations
25.3
25.8
30.7
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.
The table below shows financial information and certain key metrics of recent acquisitions in the wholesale segment that do not have comparable information for the prior periods.
Quarles 1
WTG 3
Jul 22, 2022
19,564
93,660
648
113,872
37,327
122,054
160,029
310
667
978
588
854
1,443
19,874
94,327
649
114,850
37,915
122,908
161,472
18,912
92,267
622
111,801
36,064
119,779
156,465
488
850
1,355
937
1,094
2,048
19,400
93,117
639
113,156
37,001
120,873
158,513
474
1,210
1,694
914
2,035
2,959
5,936
35,508
218
41,662
11,443
45,987
57,648
1 Quarles Acquisition; includes only the wholesale business acquired in the Quarles Acquisition.
2 Includes only the wholesale business acquired in the TEG Acquisition.
3 Includes only the wholesale business acquired in the WTG Acquisition.
Wholesale Revenues
For the three months ended June 30, 2023, fuel revenue decreased by $155.3 million, or 16.1%, compared to the second quarter of 2022, of which the majority was attributable to fuel supply locations. Wholesale revenues were negatively impacted by a decrease in the average price of fuel in the second quarter of 2023 as compared to the second quarter of 2022, which was partially offset by an
36
11.5% increase in gallons sold. Of total gallons sold, the 2023 Acquisitions and the Quarles Acquisition contributed approximately 41.7 million, which were offset by lower volumes at legacy wholesale sites.
Wholesale Operating Income
For the three months ended June 30, 2023, fuel contribution decreased approximately $2.5 million (excluding intercompany charges by GPMP). Approximately $5.4 million of total fuel contribution was attributable to the 2023 Acquisitions and the Quarles Acquisition. At fuel supply locations, fuel contribution decreased by $1.5 million (excluding intercompany charges by GPMP), and fuel margin decreased for the second quarter of 2023 as compared to the second quarter of 2022, primarily due to decreased prompt pay discounts related to lower fuel costs and lower volumes at legacy wholesale sites, which was partially offset by the contribution from the 2023 Acquisitions and the Quarles Acquisition. At consignment agent locations, fuel contribution decreased $1.0 million (excluding intercompany charges by GPMP), and fuel margin also decreased for the second quarter of 2023 as compared to the second quarter of 2022, primarily due to lower rack-to-retail margins and decreased prompt pay discounts related to lower fuel costs, which was partially offset by the contribution from the 2023 Acquisitions and the Quarles Acquisition.
For the three months ended June 30, 2023, store operating expenses decreased $0.4 million compared to the three months ended June 30, 2022.
For the six months ended June 30, 2023, fuel revenue decreased by $198.1 million, or 11.7%, compared to the first half of 2022, of which the majority was attributable to fuel supply locations. Wholesale revenues were negatively impacted by a decrease in the average price of fuel in the first half of 2023 as compared to the first half of 2022, which was partially offset by a 6.7% increase in gallons sold. Of total gallons sold, the 2023 Acquisitions and the Quarles Acquisition contributed approximately 57.6 million, which were offset by lower volumes at legacy wholesale sites.
For the six months ended June 30, 2023, fuel contribution decreased approximately $4.3 million (excluding intercompany charges by GPMP). Approximately $7.7 million of total fuel contribution was attributable to the 2023 Acquisitions and the Quarles Acquisition. At fuel supply locations, fuel contribution decreased by $2.9 million (excluding intercompany charges by GPMP), and fuel margin decreased for the first half of 2023 as compared to the first half of 2022, primarily due to decreased prompt pay discounts related to lower fuel costs and lower volumes at legacy wholesale sites, which was partially offset by the contribution from the 2023 Acquisitions and the Quarles Acquisition. At consignment agent locations, fuel contribution decreased $1.4 million (excluding intercompany charges by GPMP) and fuel margin also decreased for the first half of 2023 as compared to the first half of 2022, primarily due to lower rack-to-retail margins and decreased prompt pay discounts related to lower fuel costs, which was partially offset by the contribution from the 2023 Acquisitions and the Quarles Acquisition.
For the six months ended June 30, 2023, store operating expenses decreased $1.8 million compared to the six months ended June 30, 2022.
The table below shows the results of the fleet fueling segment for the three and six months ended June 30, 2023, 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 period results for three and six months ended June 30, 2022.
108,435
223,666
5,043
9,833
113,478
233,499
Fuel gallons sold – proprietary cardlock locations
32,417
63,433
Fuel gallons sold – third-party cardlock locations
2,036
3,646
Fuel margin, cents per gallon1 – proprietary cardlock locations
43.9
44.2
Fuel margin, cents per gallon1 – third-party cardlock locations
4.9
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.
The table below shows financial information and certain key metrics of recent acquisitions in the fleet fueling segment that do not have comparable information for the prior periods.
WTG 2
115,986
5,160
243,480
1,640
2,591
117,626
5,196
246,071
104,063
4,372
219,294
4,915
128
9,705
108,978
4,500
228,999
8,648
696
17,072
32,988
1,465
34,453
65,614
67,079
1 Includes only the fleet fueling business acquired in the Quarles Acquisition.
2 Includes only the fleet fueling business acquired in the WTG Acquisition.
Three Months Ended June 30, 2023
Fleet Fueling Revenues
For the three months ended June 30, 2023, fuel revenue was primarily driven by the average price of diesel fuel in the second quarter of 2023.
Fleet Fueling Operating Income
For the three months ended June 30, 2023, fuel contribution was approximately $14.4 million (excluding intercompany charges by GPMP).
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Six Months Ended June 30, 2023
For the six months ended June 30, 2023, fuel revenue was primarily driven by the average price of diesel fuel in the first half of 2023.
For the six months ended June 30, 2023, fuel contribution was approximately $28.2 million (excluding intercompany charges by GPMP).
The table below shows the results of the GPMP segment for the three and six months ended June 30, 2023 and 2022, together with certain key metrics for the segment.
Fuel revenue - inter-segment
1,364,041
2,504,106
Fuel revenue - external customers
Other revenues, net - inter-segment
2,745
5,302
1,338,489
1,715,672
2,456,786
2,969,654
781
759
1,553
1,842
3,684
1,341,112
1,718,273
2,462,023
2,974,803
Fuel gallons sold - inter-segment
532,050
481,794
982,269
939,467
Fuel gallons sold - external customers
397
431
680
827
5.0
GPMP Revenues
For the three months ended June 30, 2023, fuel revenue decreased by $374.7 million compared to the second quarter of 2022. The decrease in fuel revenue was attributable to a decrease in the average price of fuel, which was partially offset by an increase in gallons sold as compared to the second quarter of 2022.
For the three months ended June 30, 2023 and 2022, other revenues, net were each $0.3 million and primarily related to rental income from certain sites leased to 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.
GPMP Operating Income
Fuel margin increased by $2.5 million for the second quarter of 2023, as compared to the second quarter of 2022, primarily due to greater gallons sold to the retail and wholesale segments at a fixed margin.
For the three months ended June 30, 2023, total general, administrative, depreciation and amortization expenses were similar with those in the comparable prior year period.
For the six months ended June 30, 2023, fuel revenue decreased by $510.8 million compared to the first half of 2022. The decrease in fuel revenue was attributable to a decrease in the average price of fuel, which was partially offset by an increase in gallons sold as compared to the first half of 2022.
For the six months ended June 30, 2023 and 2022, other revenues, net were $0.4 million and $0.5 million, respectively, and primarily related to rental income from certain sites leased to 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.
Fuel margin increased by $2.1 million for the first half of 2023, as compared to the first half of 2022, primarily due to greater gallons sold to the retail and wholesale segments at a fixed margin.
For the six months ended June 30, 2023, total general, administrative, depreciation and amortization expenses were similar with those in the comparable prior year period.
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. Each of EBITDA and Adjusted EBITDA is a non-GAAP financial measure.
We use EBITDA and Adjusted EBITDA 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 and Adjusted EBITDA 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 and Adjusted EBITDA 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 and Adjusted EBITDA 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 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.
The following table contains a reconciliation of net income to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2023 and 2022.
Interest and other financing expenses, net
20,160
7,339
33,762
23,314
5,014
9,157
2,856
10,162
EBITDA
72,490
72,655
109,806
116,589
Non-cash rent expense (a)
3,760
1,791
Acquisition costs (b)
3,277
823
6,853
1,504
Loss on disposal of assets and impairment charges (c)
2,991
1,207
Share-based compensation expense (d)
Loss (income) from equity investment (e)
(28
Adjustment to contingent consideration (f)
(922
(526
(1,624
Other (g)
64
168
Adjusted EBITDA
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 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.
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As of June 30, 2023, we were in a strong liquidity position of approximately $822 million, consisting of approximately $220 million of cash and cash equivalents and approximately $602 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 June 30, 2023, we had no outstanding borrowings under our $140 million PNC Line of Credit (as defined below), $7.7 million of unused availability under the M&T equipment line of credit, described below, and $461.2 million of unused availability under our $800 million Capital One Line of Credit (as defined below), which may increase to $1.0 billion, subject to obtaining additional financing commitments from current lenders or other banks, and subject to certain other terms.
The Board declared, and the Company paid, dividends of $0.03 per share of common stock on both March 21, 2023 and June 1, 2023, totaling approximately $7.2 million. Additionally, the Board declared a quarterly dividend of $0.03 per share of common stock, to be paid on September 1, 2023 to stockholders of record as of August 15, 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 May 2023, we announced that our Board authorized an increase to our share repurchase program from $50.0 million to up to an aggregate of $100.0 million of our outstanding shares of common stock. During the six months ended June 30, 2023, we repurchased approximately 1.6 million shares of common stock under the repurchase program for approximately $11.9 million, or an average share price of $7.57. 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.
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 $8 million in the current year 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 Six Months Ended June 30, 2023 and 2022
Net cash provided by (used in) operating activities, investing activities and financing activities for the six months ended June 30, 2023 and 2022 were as follows:
For the Six Months Ended June 30,
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rates
(81,491
(9,942
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.
42
For the six months ended June 30, 2023, cash flows provided by operating activities were $46.0 million compared to $72.2 million for the six months ended June 30, 2022. The decrease was primarily the result of approximately $6.5 million of higher net interest payments, approximately $15.6 million of higher net tax payments and the investment in working capital associated with the WTG Acquisition, which was partially offset by an increase in Adjusted EBITDA.
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 six months ended June 30, 2023, cash used in investing activities increased by $212.6 million compared to the six months ended June 30, 2022. For the six months ended June 30, 2023, we spent $50.0 million for capital expenditures, including the purchase of certain fee properties, upgrades to fuel dispensers and other investments in our stores. The net consideration paid for the recent acquisitions was $481.6 million, which included $373.0 million paid by Oak Street, reflecting our net cash outflow of $108.6 million.
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 six months ended June 30, 2023, financing activities consisted primarily of net receipts of $63.7 million for long-term debt, $80.4 million of consideration paid by Oak Street related to the 2023 Acquisitions, which transactions with Oak Street were accounted for as sale-leasebacks (see Note 3 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q), payment of $9.8 million for the Ares Put Option, repayments of $2.9 million for financing leases, $7.2 million for dividend payments on common stock, $2.9 million for dividend payments on the Series A redeemable preferred stock and $13.6 million for common stock repurchases.
Credit Facilities and Senior Notes
The Company has $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.
Financing Agreement 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”).
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 June 30, 2023, $7.3 million of letters of credit were outstanding under the PNC Credit Agreement.
Financing Agreements with M&T Bank
43
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 June 30, 2023, approximately $7.7 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 SOFR Adjusted (as defined in the agreement) plus 3.00%, matures 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 $800 million (the “Capital One Line of Credit”). At GPMP’s request, the Capital One Line of Credit can be increased up to $1.0 billion, 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. The revolving credit facility matures on May 5, 2028. As of June 30, 2023, approximately $338.3 million was drawn on the Capital One Line of Credit, and approximately $461.2 million was available thereunder.
The Capital One Line of Credit 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 June 30, 2023, $0.5 million of letters of credit were outstanding under the Capital One Line of Credit.
Critical Accounting Policies and Estimates
For the six months ended June 30, 2023, there were no material changes to our critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 that have had a material impact on our condensed consolidated financial statements and related notes.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
We have limited exposure to commodity price risk as a result of the payment and volume-related discounts in certain of our fuel supply contracts with our fuel suppliers, which are based on the market price of motor fuel. Significant increases in fuel prices could result in significant increases in the retail price of fuel and in lower sales to consumers and dealers. When fuel prices rise, some of our dealers may have insufficient credit to purchase fuel from us at their historical volumes. In addition, significant and persistent increases in the retail price of fuel could also diminish consumer demand, which could subsequently diminish the volume of fuel we distribute. A significant percentage of our sales are made with the use of credit cards. Because the interchange fees we pay when credit cards are used to make purchases are based on transaction amounts, higher fuel prices at the pump and higher gallon movements result in higher credit card expenses. These additional fees increase operating expenses. In connection with the Quarles Acquisition, we began to make use of derivative commodity instruments to manage risks associated with an immaterial number of gallons designed to offset changes in the price of fuel that are directly tied to firm commitments to purchase diesel fuel.
Interest Rate Risk
We may be subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities. The Senior Notes bear a fixed interest rate, therefore, an increase or decrease in prevailing interest rates has no impact on our debt service for the Senior Notes. As of June 30, 2023, the interest rate on our Capital One Line of Credit was 7.7% and the interest rate on our M&T Term Loan was 8.3%. As of June 30, 2022, the interest rate on our Capital One Line of Credit was 3.6% and the interest rate on our M&T Term Loan was 4.8%. As of June 30, 2023, approximately 44% of our debt bore interest at variable rates, therefore, our exposure was marginally low. If our applicable interest rates increase by 1%, then our debt service on an annual basis would increase by approximately $3.7 million. Interest rates on commercial bank borrowings and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. Although this could limit our ability to raise funds in the debt capital markets, we expect to remain competitive with respect to acquisitions and capital projects, as our competitors would likely face similar circumstances.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on management’s evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023.
Changes to the Company’s Internal Control Over Financial Reporting
There have been no changes to the Company’s internal control over financial reporting that occurred during the calendar quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
45
Item 1. Legal Proceedings
During the reporting period covered by this Quarterly Report on Form 10-Q, there have been no material changes to the description of legal proceedings as set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 1A. Risk Factors
During the reporting period covered by this Quarterly Report on Form 10-Q, there have been no material changes to our risk factors as set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents our share repurchase activity for the quarter ended June 30, 2023 (dollars in thousands, except per share amounts):
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Maximum Dollar Value that May Yet Be Purchased Under the Plans or Programs (1)
April 1, 2023 to April 30, 2023
10,295
May 1, 2023 to May 31, 2023
642,461
7.36
55,566
June 1, 2023 to June 30, 2023
844,888
7.69
49,071
1,487,349
7.55
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
During the three months ended June 30, 2023, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any “non-Rule 10b5-1 trading arrangement”, as defined in Item 408 of Regulation S-K.
Item 6. Exhibits
Exhibit 3.1
Composite Amended and Restated Certificate of Incorporation of ARKO Corp.
Exhibit 10.1+
Second Amended and Restated Credit Agreement, dated May 5, 2023, by and among GPM Petroleum LP, the guarantors party thereto, Capital One, National Association, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on May 8, 2023).
Exhibit 10.2*+
Third Amendment dated as of May 2, 2023 to Standby Real Estate Purchase, Designation and Lease Program by and between GPM Investments, LLC and GPM Portfolio Owner LLC and Oak Street Real Estate Capital Fund VI OP, LP (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on May 8, 2023).
Exhibit 31.1
Certification by Arie Kotler, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30, 2023.
Exhibit 31.2
Certification by Donald Bassell, Chief Financial Officer, pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30, 2023.
Exhibit 32.1
Certification by Arie Kotler, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30, 2023.
Exhibit 32.2
Certification by Donald Bassell, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the quarterly period ended June 30, 2023.
The following financial statements from the Company’s Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
+ Pursuant to Item 601(a)(5) of Regulation S-K, schedules and similar attachments to this exhibit have been omitted because they do not contain information material to an investment or voting decision and such information is not otherwise disclosed in such exhibit. The Company will supplementally provide a copy of any omitted schedule or similar attachment to the U.S. Securities and Exchange Commission or its staff upon request.
* Pursuant to Item 601(b)(10)(iv) of Regulation S-K, portions of this exhibit have been omitted because the Company customarily and actually treats the omitted portions as private or confidential, and such portions are not material. The Company will supplementally provide a copy of an unredacted copy of this exhibit to the U.S. Securities and Exchange Commission or its staff upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 7, 2023
By:
/s/ Arie Kotler
Name:
Arie Kotler
Title:
President, Chief Executive Officer and Chairman of the Board
(on behalf of the Registrant and as Principal Executive Officer)