ARKO Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet figures are as of March 31, 2021. Amounts below are in U.S. dollars. ARKO operates retail convenience stores and supplies fuel to independent dealers. At quarter-end it operated 1,324 retail sites and supplied 1,625 dealer-operated stations across 33 states and the District of Columbia.
Business context and comparability
The quarter includes the effects of the October 2020 Empire acquisition, which added 84 retail sites and 1,453 wholesale sites. ARKO’s December 2020 business combination was accounted for as a reverse recapitalization; historical results are those of Arko Holdings before the closing. Consequently, year-over-year comparisons are affected by the acquisition and differing business scale. The pandemic continued to weigh on fuel volumes, while management said higher fuel margins more than offset that impact.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $1,484.4 million | $899.9 million |
| Operating income (loss) | $13.2 million | ($8.0) million |
| Net loss | ($14.7) million | ($12.9) million |
| Net loss attributable to ARKO | ($14.7) million | ($10.5) million |
| Adjusted EBITDA, non-GAAP | $42.3 million | $16.9 million |
| Cash from operating activities | $11.3 million | $23.9 million |
- Fuel revenue was $1,102.9 million, up 95.9%; merchandise revenue was $359.3 million, up 11.0%. Higher fuel prices and Empire materially affected revenue growth.
- Fuel gallons sold were 448.3 million versus 248.7 million. Consolidated fuel margin declined to 20.1 cents per gallon from 25.4 cents. Retail same-store fuel gallons fell 13.8%, while same-store merchandise sales rose 6.0% and merchandise margin improved to 27.4% from 26.1%.
- Adjusted EBITDA increased by $25.4 million; management attributed approximately $13 million to Empire, with higher fuel margins and same-store merchandise contribution also contributing. This non-GAAP measure is not a substitute for GAAP results.
- Operating cash flow fell despite improved segment operating results, reflecting higher interest payments, annual incentive payments and a favorable supplier-payment timing effect in Q1 2020.
Debt, liquidity and cash flow
- Cash and cash equivalents were $205.0 million at quarter-end, down from $293.7 million at December 31, 2020. Cash, restricted cash and restricted investments totaled approximately $254.8 million.
- Total debt, net, was $674.3 million, compared with $749.8 million at year-end; this followed repayment of approximately $76 million of debt, including redemption of Series C bonds for approximately $79 million. Debt excludes substantial lease liabilities.
- Management reported approximately $457 million of liquidity, including cash, restricted investments and roughly $220 million of line availability. It also reported $101 million unused under the Capital One line and no borrowings under the PNC line.
- Investing cash outflow was $16.6 million, including $17.5 million of property and equipment purchases. Financing cash outflow was $83.1 million, principally debt repayments, preferred dividends and merger-related issuance costs.
- Series A redeemable preferred stock had a $100 million redemption value; Q1 dividends were $1.4 million. Total liabilities were $2.37 billion, including operating and financing lease obligations.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management described liquidity as adequate for foreseeable needs and expected capital spending to focus on acquisitions, store remodeling and maintenance. Estimated 2021 gross cost for EMV fuel-dispenser upgrades was approximately $30 million, partly offset by supplier incentives and lease financing.
- A proposed acquisition of approximately 60 Midwestern stores for about $102 million plus inventory was expected to close in Q2 2021, subject to conditions; the filing states there was no certainty it would close. A subsequent Oak Street agreement provides for potential purchases of up to $1.0 billion of property under sale-leaseback terms; ARKO is not obligated to sell properties.
- Net loss included increased financing expense, including approximately $12.1 million of fair-value expense for warrants and deferred shares, $4.5 million of additional interest for early bond redemption, and higher interest expense. These items help explain why GAAP net loss worsened despite improved operating income.
- Key risks include fuel-price and margin volatility, persistent pandemic effects, competition, acquisition integration and execution, dependence on major fuel and merchandise suppliers, variable-rate debt and credit-facility covenants, environmental obligations, and seasonality. Management reported environmental obligations of $13.3 million, with estimated recoveries of $5.4 million. Routine legal matters were not expected to have a material adverse effect.
- Approximately 95% of debt was reported as variable-rate debt; management estimated that a 1 percentage-point rate increase would raise annual debt service by approximately $4.7 million. LIBOR transition effects remained uncertain. Management said disclosure controls were effective and reported no material change in internal control or risk factors during the quarter.
Important facts for investors to verify
- How much of the revenue and Adjusted EBITDA increase reflects Empire and higher fuel prices, versus sustainable same-store performance.
- Whether fuel volumes recover and fuel margins remain resilient as mobility and competitive conditions change.
- Actual available borrowing capacity, debt-rate exposure and covenant headroom; distinguish funded debt from lease obligations and preferred-stock claims.
- Whether the proposed 60-store acquisition closes and its financing, lease commitments and expected returns; assess the economics of the Oak Street sale-leaseback program.
- The recurring versus fair-value and other unusual components of financing expense, and the limitations of management’s non-GAAP Adjusted EBITDA measure.