Business context and reporting period
Casey’s General Stores, Inc. filed this unaudited Form 10-Q for the fiscal quarter ended January 31, 2019. The company operated 2,123 stores in 16 states and reported as one operating segment. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended Jan. 31, 2019 | Nine months ended Jan. 31, 2019 |
|---|---|---|
| Revenue | $2,048.1; down 0.3% | $7,174.5; up 13.8% |
| Income before taxes | $54.1 | $233.8 |
| Net income | $41.8 | $178.7 |
| Diluted EPS | $1.13 | $4.83 |
| Adjusted EBITDA (non-GAAP) | $128.8; up 31.7% | $458.4; up 14.9% |
Quarterly revenue less cost of goods sold, excluding depreciation and amortization, was 23.0% of revenue, versus 20.4% a year earlier. For the nine-month period it was 20.9%, versus 21.6%. Quarterly fuel margin was 22.1 cents per gallon versus 18.6 cents; nine-month fuel margin was 20.8 cents versus 19.2 cents.
For the nine months, operating cash flow was $377.8, investing cash outflow was $328.0, and financing cash outflow was $69.2. Cash declined $19.5 to $34.2. Capital expenditures and business acquisitions used $332.2 in total.
At January 31, 2019, current assets were $351.3 and current liabilities were $463.7, a current ratio of 0.76. Long-term debt, net of current maturities and issuance costs, was $1,289.0; current maturities were $16.6. The company had $50.0 outstanding under a new $300.0 revolving facility and none under its separate $25.0 bank line.
Changes versus comparable periods
- Quarterly net income fell 78.3% from $193.0 and diluted EPS fell from $5.08. Management attributed the decline primarily to the prior-year one-time benefit from adopting the Tax Reform Act; prior-year quarterly tax expense was a benefit of $166.6.
- Nine-month net income fell 40.2% from $298.6, also primarily reflecting that prior-year tax benefit. The 2019 effective tax rates were 22.7% for the quarter and 23.6% for nine months.
- Quarterly same-store fuel gallons sold declined 3.4%, while fuel margin improved. Management cited its fuel-price optimization strategy and softer Midwest demand. Same-store grocery and other merchandise sales rose 3.4%, and prepared food and fountain sales rose 1.5%.
- Across the nine months, revenue growth reflected higher fuel prices and volume, as well as additional stores. Operating expenses rose 8.1% for the period, mainly because the company operated 103 more stores; same-store operating expenses excluding credit card fees declined 0.1%.
- The company opened 41 new stores and acquired 13 during the nine months; eight stores closed. It repurchased $37.5 of stock during the period, but none in the quarter under the current authorization.
Outlook, risks and notable items
- Management budgeted $466 million for fiscal 2019 store construction, acquisitions and remodeling. It said cash, operating cash flow, the bank line and the new credit facility were expected to meet working-capital needs; future capital needs may also be funded with additional debt or securities.
- The January 2019 credit agreement provides a $300 million unsecured revolving facility maturing January 11, 2024, with variable-rate borrowings. The company had $50 million drawn at quarter-end.
- Key stated risks include fuel-margin and supply volatility, competition, tobacco regulation and demand, environmental compliance and remediation costs, seasonality and weather, and the sufficiency of future liquidity. The filing reports an estimated $0.4 million environmental remediation liability and $8.3 million in gross unrecognized tax benefits; the IRS was examining tax year 2012.
- Management said pending or threatened legal matters were not expected to have a material adverse effect. It cautioned that environmental accruals may prove insufficient and that additional remediation costs or regulatory requirements may arise.
- The first phase of a new ERP system was completed in November 2018. The filing identifies implementation delays, cost overruns, system deficiencies and potential effects on operations or financial reporting controls as risks. Management reported disclosure controls were effective and no other material control changes during the quarter.
- Revenue accounting changes adopted under Topic 606 affected gift-card breakage and pizza box-top coupon recognition. The filing reports a $4.1 million net reduction to retained earnings upon adoption; other specified accounting-standard adoptions had no material impact.
Important facts for investors to verify
- How fuel-price optimization and market conditions affect same-store fuel volume and fuel margins.
- Whether store growth and planned fiscal 2019 capital spending generate returns sufficient to support cash flow and debt service.
- Liquidity and borrowing capacity, including variable interest costs and the company’s working-capital position.
- Progress and costs of the ERP rollout, and whether it affects operating continuity or financial reporting controls.
- Developments in tax examinations, unrecognized tax benefits, and environmental remediation obligations.