ARKO Corp. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing; results below are full-year figures. ARKO operates convenience stores and distributes fuel through GPM. At year-end it operated 1,406 stores and supplied fuel to 1,628 independent dealer locations across 33 states and the District of Columbia.
Financial and operating results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $7.417 billion | $4.010 billion |
| Operating income | $142.1 million | $80.3 million |
| Net income | $59.4 million | $30.6 million |
| Net income attributable to ARKO | $59.2 million | $13.7 million |
| Net income attributable to common shareholders | $53.5 million; $0.43 diluted EPS | $10.4 million; $0.15 diluted EPS |
| Adjusted EBITDA, net of incremental bonuses (non-GAAP) | $256.6 million | $183.4 million |
| Operating cash flow | $159.2 million | $173.8 million |
| Cash used in investing activities | $171.8 million | $407.6 million |
| Cash used in financing activities | $26.4 million | Cash provided: $491.0 million |
Revenue rose 85% year over year, reflecting acquisitions, higher average fuel prices and higher merchandise sales. Fuel revenue was $5.714 billion and merchandise revenue was $1.616 billion. Fuel represented about 77% of revenue; fuel gallons sold increased to 2.019 billion from 1.207 billion, largely due to the Empire acquisition. Consolidated fuel margin was 21.7 cents per gallon versus 26.6 cents; merchandise contribution was $472.9 million and merchandise margin was 29.3% versus 27.2%.
Retail operating income increased to $240.2 million from $200.0 million; wholesale operating income rose to $22.0 million from $3.5 million; and GPMP operating income increased to $91.6 million from $47.0 million. Segment operating income is before substantial corporate and other unallocated expenses, so it does not equal consolidated operating income.
At December 31, 2021, cash and cash equivalents were $252.1 million, short-term investments $58.8 million, and total current assets $683.6 million against current liabilities of $408.4 million. Management reported approximately $754 million of liquidity, comprising about $310 million of cash and short-term investments and $444 million of available credit. Long-term debt, net of current portion, was $676.6 million; total debt, net, was $717.0 million. The company also reported $1.128 billion of operating lease liabilities and $235.6 million of finance lease liabilities. Approximately 36% of debt bore variable rates, down from 96% in 2020.
Changes versus the prior comparable period
- Revenue increased from $4.010 billion to $7.417 billion, with the Empire acquisition contributing materially to wholesale scale and the 2021 Handy Mart and ExpressStop acquisitions adding stores.
- Operating income increased by $61.8 million and net income by $28.8 million. Common-shareholder earnings rose to $53.5 million from $10.4 million.
- Adjusted EBITDA, net of incremental bonuses, increased by $73.2 million. Acquisitions contributed approximately $78 million; stronger same-store merchandise contribution was partly offset by lower same-store fuel profit and higher credit-card fees and overhead.
- Operating cash flow decreased by $14.7 million, principally due to higher tax and interest payments, working-capital changes and incentive payments.
- In October 2021 ARKO issued $450 million of 5.125% senior notes due 2029, repaid the Ares credit agreement and used proceeds to reduce its Capital One line balance. It also redeemed its Series C bonds in March 2021.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no quantified revenue, earnings or cash-flow guidance. Management plans to pursue acquisitions and organic growth, including foodservice, merchandising, delivery, store remodels, new stores and EMV upgrades. It expected approximately $15 million of spending in subsequent years to upgrade fuel dispensers for EMV compliance.
- Capital allocation and subsequent events: In February 2022, the board declared a $0.02-per-share quarterly dividend and authorized a share-repurchase program of up to $50 million. A proposed Quarles transaction, announced after year-end, carried approximately $170 million of consideration plus inventory and was expected to close in second-quarter 2022, subject to conditions; closing was not assured.
- Business conditions: Management said fuel margins were historically high in 2020 and 2021 amid fuel-price volatility. COVID-19 reduced foodservice sales and same-store fuel volumes, while merchandise basket and fuel margins helped offset impacts. Labor shortages, wage pressure and supply-chain disruption increased costs. The business is seasonal, typically stronger in the second and third quarters.
- Principal risks: Fuel-price and margin volatility, dependence on major fuel and merchandise suppliers, acquisition and integration execution, competition, declining tobacco consumption, labor availability and costs, environmental and underground-tank obligations, cybersecurity and payment-card fraud, variable-rate debt, covenant restrictions, and the transition from LIBOR. Fuel and tobacco were approximately 77% and 10% of FY2021 revenue, respectively.
- Debt and obligations: The company disclosed $3.431 billion of contractual obligations, including $939.0 million of debt obligations and substantial operating and finance lease commitments. Fuel purchase agreements require minimum volumes; management stated it did not anticipate penalties for shortfalls, subject to isolated immaterial exceptions. Environmental obligations were $12.9 million, with estimated recoveries of $5.1 million.
- Unusual/reporting items: 2020 comparative statements were revised for warrant and deferred-share liability accounting and gross presentation of certain fuel taxes; the company deemed the adjustments immaterial. A wholesale-site count error was corrected, with no effect on gallons or financial results. FY2021 included acquisition costs, debt-refinancing costs and fair-value changes in warrants and other instruments. The independent auditor issued an unqualified opinion and reported effective internal control over financial reporting; no critical audit matters were identified.
Key facts investors should verify
- How much of the revenue and Adjusted EBITDA improvement is attributable to acquisitions and higher fuel prices, and how same-store performance develops as conditions normalize.
- The sustainability of fuel margins and merchandise margin gains, including the effects of fuel-price volatility, credit-card fees and consumer demand.
- Debt service capacity and covenant headroom, including exposure to variable rates and the scale of lease obligations.
- Execution, funding and returns for planned acquisitions, store remodeling, EMV upgrades and the proposed Quarles transaction.
- Whether labor, supply-chain, environmental and fuel-supplier risks result in higher costs or operating disruption.
- Dividend and repurchase decisions against capital needs, debt restrictions and the company’s stated growth strategy.