ARKO Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. ARKO operated 1,388 convenience-store sites and supplied fuel to 1,620 independent dealer locations across 33 states and the District of Columbia. Its segments were retail, wholesale and GPMP.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2,540.3 million | $1,909.8 million | $4,513.1 million | $3,394.2 million |
| Operating income | $48.3 million | $45.8 million | $67.6 million | $59.0 million |
| Net income | $31.8 million | $25.6 million | $34.1 million | $10.9 million |
| Net income attributable to common shareholders | $30.3 million | $24.1 million | $31.1 million | $7.9 million |
| Adjusted EBITDA | $79.0 million | $75.7 million | $129.2 million | $118.0 million |
- Q2 revenue grew 33%; fuel revenue rose 42.8%, mainly from higher average fuel prices, while fuel gallons sold fell 7.2%. Six-month revenue increased 33% and fuel gallons sold declined 3.0%.
- Q2 consolidated fuel margin was 27.0 cents per gallon, versus 21.8 cents; merchandise contribution was $131.4 million and merchandise margin was 30.4%, versus 28.7%. Six-month fuel margin was 25.9 cents per gallon and merchandise margin was 30.0%, versus 21.0 cents and 28.1%, respectively.
- Q2 operating income increased 5.5%; net income increased 24.4%. Six-month operating income rose 14.5% and net income rose to $34.1 million. Lower net interest and financial expense, including favorable fair-value changes in warrants and other instruments, contributed to the six-month earnings increase.
- Six-month operating cash flow was $72.2 million, compared with $59.0 million. Investing cash outflow was $22.6 million, including $45.2 million of capital expenditures and a $5.0 million Quarles acquisition deposit; financing cash outflow was $59.4 million, including $40.0 million of share repurchases and $7.7 million of common and preferred dividends.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $248.5 million, restricted cash $14.1 million and short-term investments $33.9 million. Total current assets were $706.9 million and current liabilities $454.7 million.
- Total debt, net, was $714.5 million, including $443.3 million of 5.125% senior notes due 2029 and $195.8 million drawn on the Capital One line. The company also had $100 million of redeemable preferred stock. Operating lease liabilities totaled approximately $1.11 billion and finance lease liabilities $234.8 million.
- Management reported approximately $727 million of liquidity: $282 million of cash and short-term investments and $445 million of credit availability. This was the position before the July Quarles acquisition financing; ARKO subsequently drew approximately $40 million on its Capital One line.
Material changes, outlook and risks
- Management attributed improved results to stronger fuel and merchandise contribution, higher fuel margins and contributions from the 2021 acquisitions. Acquisition-related gains were partly offset by lower same-store fuel volumes, weaker same-store merchandise sales, higher personnel costs, credit-card fees and general and administrative expenses.
- Fuel prices were historically high and volatile. ARKO cautioned that continued price increases could weaken consumer demand and dealer purchasing volumes, while raising credit-card fees. Inflation, labor and supply-chain pressures, competition, seasonality, weather and COVID-19 developments were also cited as risks.
- On July 22, 2022, ARKO completed the Quarles acquisition for approximately $170 million plus inventory. It added cardlock and fleet-fueling operations, 46 independent dealer locations and a small transportation fleet; approximately $130 million was funded through Oak Street real-estate ownership and a lease arrangement, with about $40 million borrowed. Fleet fueling was expected to become a fourth reportable segment.
- Management planned to repay the $32.4 million GPMP PNC term loan in Q3 using proceeds from selling pledged securities and cash. The filing gives no formal earnings or revenue guidance. ARKO expected approximately $16 million of fuel-dispenser EMV upgrades across 2022 and 2023.
- A Q3 internal restructuring was expected to result in an approximately $8.5 million one-time, non-cash tax expense. The company had environmental obligations of $12.6 million, partly offset by $5.1 million of expected insurance and state-fund recoveries. Management did not expect ordinary-course legal matters to have a material adverse impact.
- About 4.5 million shares were repurchased for approximately $39 million during the first half under a $50 million authorization. The board declared a $0.02-per-share dividend for September; future dividends remain discretionary.
Investor verification points
- Assess whether elevated fuel margins and higher fuel prices can persist as same-store fuel volumes and merchandise sales weaken.
- Review cash generation and working-capital needs alongside capital expenditures, the Quarles acquisition, lease commitments and planned term-loan repayment.
- Verify the post-acquisition draw, Oak Street lease economics and the operating contribution of the new fleet-fueling segment.
- Track the expected $8.5 million restructuring tax charge, variable-rate exposure and fair-value effects on reported earnings. The filing estimates a 1% rate increase would add about $2.6 million to annual debt service.
- Consider that Adjusted EBITDA and same-store measures are non-GAAP measures and may not be comparable across companies; the filing reports effective disclosure controls as of June 30, 2022.