CrossAmerica Partners LP — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the same 2018 periods. CrossAmerica distributes motor fuel wholesale, operates some retail sites, and owns or leases sites that generate rental income.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $605.5 million | $673.3 million | $1,077.3 million | $1,227.9 million |
| Gross profit | $41.4 million | $44.0 million | $78.4 million | $83.9 million |
| Operating income (loss) | $13.9 million | $(1.6) million | $21.5 million | $5.9 million |
| Net income (loss) | $6.4 million | $(6.9) million | $6.7 million | $(7.7) million |
| Adjusted EBITDA (non-GAAP) | $27.7 million | $28.2 million | $49.2 million | $54.2 million |
| Distributable cash flow (non-GAAP) | $22.3 million | $20.0 million | $35.6 million | $36.6 million |
| Distribution coverage (non-GAAP) | 1.24x | 1.11x | 0.98x | 0.93x |
- Gross margin was approximately 6.8% in Q2 2019 versus 6.5% in Q2 2018, and approximately 7.3% for the first half versus 6.8% in 2018.
- First-half operating cash flow was $34.2 million, down from $37.2 million. Investing activities used $6.4 million; financing activities used $28.7 million. Capital expenditures were $10.7 million, including $9.9 million classified as growth spending.
- At June 30, cash was $2.3 million. Debt and finance lease obligations totaled $534.1 million, including $510.3 million drawn on the revolving facility. The facility’s weighted-average rate was 4.66%; covenant-adjusted availability was $93.2 million at June 30 and $84.5 million at August 1.
- Current assets of $53.4 million were below current liabilities of $121.6 million. The filing describes this as typical for the business, reflecting settlement timing.
Material changes versus prior periods
- Revenue fell 10% in Q2 and 12% in the first half, largely reflecting lower fuel prices and reduced volumes. WTI prices were down 12% in each comparison; management also cited FTC-related divestitures, contract exits and site conversions.
- Gross profit declined 6% in Q2 and 7% in the first half. Wholesale fuel gross profit increased, but rent and other wholesale gross profit and retail gross profit declined. Retail segment Adjusted EBITDA was $1.3 million in Q2 versus $1.9 million and $1.9 million for the first half versus $3.2 million.
- Operating income improved against 2018, which included substantial impairment and site disposition/lease-termination charges. Lower depreciation and amortization also helped; therefore, the improvement does not by itself indicate stronger underlying segment earnings.
- ASC 842 lease accounting was adopted January 1, 2019. Certain prior sale-leaseback payments now appear as rent expense rather than principal and interest, reducing reported gross profit and operating income and making year-over-year comparisons less direct. Management’s illustrative no-ASC-842 adjustment raises first-half distributable cash flow to $36.5 million and coverage to 1.01x, versus reported $35.6 million and 0.98x.
Outlook, management commentary and risks
- The Circle K asset exchange is expected to occur in tranches; the first closed May 21, 2019, transferring 60 Circle K stores to CrossAmerica in exchange for properties with approximately equivalent stated fair value. Management estimates a positive annual EBITDA impact of $7–$8 million after all tranches close. The next tranche was expected in Q3 2019 and all exchanges by the end of Q1 2020, subject to approvals and closing conditions.
- CrossAmerica planned to dealerize its remaining 46 company-operated Upper Midwest sites with Applegreen in Q3 2019. Management expected the transition to reduce retail fuel and merchandise margins and operating expenses while increasing wholesale rental margin. Afterward, it expected to have no company-operated sites.
- Management anticipated improved fuel margins from new supply contracts and Jet-Pep site rebranding and dispenser upgrades. No quantified full-year earnings or distribution guidance is provided.
- The new $750 million secured revolving credit facility matures in April 2024, replacing a facility that matured in April 2020. It permits up to $300 million of additional commitments subject to conditions. CrossAmerica reported compliance with financial covenants at June 30; leverage and interest-coverage requirements remain relevant, and cash distributions are restricted upon certain defaults.
- Interest-rate exposure is material: management estimated a one-percentage-point rate change would affect annual interest expense by approximately $5.1 million. Fuel prices, demand, weather, competition, supplier discounts and environmental costs may also affect results.
- Related-party exposure includes Circle K and DMS. In March, DMS severed 17 leased sites; CrossAmerica also agreed to lower certain rent and fuel markups and fund $1.25 million of site capital expenditures. The Circle K exchange includes environmental allocation provisions and a fuel-supply agreement for acquired sites.
- Recorded environmental liabilities were $3.5 million, with $3.0 million of related indemnification assets. Management said ordinary-course legal matters were not expected to have a material adverse effect. Circle K accepted sole responsibility for any FTC penalties associated with late divestiture of nine sites; CrossAmerica recorded no related liability.
- The quarterly distribution remained $0.525 per unit. The Board approved the Q2 distribution for payment August 6, 2019, but distributions are discretionary and not guaranteed.
Important facts for investors to verify
- Progress, approvals and final economics of the Circle K asset-exchange tranches, including whether the projected $7–$8 million annual EBITDA benefit is realized.
- Completion and financial effects of the Applegreen dealerization and the planned conversion of the remaining company-operated sites.
- Debt covenant headroom, revolving-credit availability, floating-rate exposure and the sustainability of distributions given first-half coverage below 1.0x on the reported basis.
- Underlying segment performance after separating fuel-price and volume effects, prior-period one-time charges, and the ASC 842 accounting change.
- Related-party contract terms and environmental liabilities, indemnification recoveries and any developments in the FTC matter.