ARKO Corp. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021; unaudited. ARKO operates convenience stores and supplies fuel to independent dealers. At quarter-end it operated 1,381 retail sites and supplied 1,647 dealer-operated stations across 33 states and the District of Columbia.
Financial performance
Amounts below are in millions of dollars except per-share data and margins.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $1,909.8 | $814.3 | $3,394.2 | $1,714.2 |
| Operating income | $45.8 | $47.7 | $59.0 | $39.7 |
| Net income | $25.6 | $32.5 | $10.9 | $19.7 |
| Net income attributable to ARKO | $25.5 | $21.9 | $10.8 | $11.4 |
| Net income per common share, diluted | $0.19 | $0.32 | $0.06 | $0.17 |
| Adjusted EBITDA | $75.7 | $68.5 | $118.0 | $85.5 |
- Revenue growth reflected acquisitions, higher fuel prices and, in Q2, recovery in fuel volumes from pandemic-affected 2020. Fuel revenue was $1,460.8 million in Q2 and $2,563.7 million for the half year; merchandise revenue was $426.4 million and $785.6 million, respectively.
- Q2 fuel margin was 21.8 cents per gallon versus 40.9 cents a year earlier; merchandise margin improved to 28.7% from 27.3%. For the half year, fuel margin was 21.0 cents per gallon versus 32.7 cents, while merchandise margin rose to 28.1% from 26.8%.
- Operating cash flow was $59.0 million for the first half, down from $101.9 million. Investing cash outflow was $90.3 million and financing cash outflow was $35.3 million. Cash and cash equivalents were $229.4 million at June 30, down from $293.7 million at year-end.
- Debt, excluding lease liabilities, totaled $685.7 million, down from $749.8 million at December 31, 2020. The company reported approximately $509 million of liquidity, including cash, restricted investments and borrowing availability. Operating and finance lease liabilities totaled approximately $1.27 billion.
Material changes and unusual items
- ARKO acquired 60 ExpressStop convenience stores and gas stations in May for total consideration of approximately $93.8 million, including real estate funding; the reported net cash outlay was approximately $15.6 million. The acquisition contributed $26.2 million of revenue and $0.8 million of net income after closing through June 30. The valuation remained provisional.
- The Empire acquisition, completed in October 2020, materially expanded wholesale operations and makes year-over-year comparisons less comparable. Management cited approximately $22 million of incremental Q2 Adjusted EBITDA and $35 million for the first half from Empire.
- ARKO redeemed its Series C bonds in March for approximately $79 million, including early-redemption interest. In June it refinanced M&T real-estate loans and added a $20 million equipment credit line, with $17.5 million available at quarter-end.
- Q2 operating income declined despite higher revenue and Adjusted EBITDA, as higher G&A and depreciation partially offset stronger fuel and merchandise results. First-half interest and financial expense increased, including early-redemption charges and fair-value changes in warrants and other instruments. Preferred-stock dividends were $2.8 million for the half year.
- The company revised comparative December 2020 balance-sheet figures to account for warrants and deferred shares as fair-value liabilities; it said the adjustment was immaterial to prior periods.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said liquidity was adequate for foreseeable needs and expected capital spending to focus on acquisitions, store remodeling and maintenance. It estimated approximately $10 million of gross 2021 spending to upgrade fuel dispensers for EMV compliance, with some costs expected to be offset or financed.
- Management reported increased fuel volumes as activity recovered, but lower fuel margins than the exceptional 2020 levels. Labor shortages and supply-chain disruptions were ongoing; COVID-19 variants could again affect the company, customers or suppliers.
- Approximately 99% of debt bore variable rates. Management estimated that a 1 percentage-point rate increase would raise annual debt service by approximately $4.9 million. LIBOR replacement could affect future borrowing costs.
- Construction labor, material and building-supply shortages could delay or raise the cost of remodels and maintenance. Other disclosed exposures include fuel-price and demand volatility, supplier concentration, competition, environmental regulation and acquisition integration.
- Environmental obligations were $13.0 million, with estimated insurance and state-fund recoveries of $5.3 million. Management described ordinary-course legal matters as not reasonably likely to have a material adverse impact. No material change to other previously disclosed risk factors was reported.
Most important facts to verify
- How much of revenue and Adjusted EBITDA growth is sustainable and attributable to same-store performance versus acquisitions and fuel-price changes.
- Fuel margin, gallons sold and merchandise margin trends, including the effects of higher fuel prices and credit-card fees.
- Cash-flow conversion and liquidity after acquisition spending, debt service, preferred dividends and planned capital expenditures.
- Variable-rate debt exposure, credit-facility availability and compliance with financial covenants.
- Final purchase accounting for ExpressStop, and the continuing costs or obligations associated with leases, environmental remediation and the real-estate program.