Casey’s General Stores, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Fiscal quarter and nine months ended January 31, 2015. Unless otherwise noted, financial amounts below are in millions of dollars; the filing reports statements in thousands. Casey’s operated 1,869 stores in 14 states. Balance-sheet comparisons are with April 30, 2014.
Financial results
| Metric | Three months ended Jan. 31, 2015 | Prior-year quarter | Nine months ended Jan. 31, 2015 | Prior-year period |
|---|---|---|---|---|
| Revenue | $1,672.0 | $1,790.1 | $6,113.4 | $5,920.7 |
| Gross profit | $351.0 | $276.7 | $1,093.2 | $938.4 |
| Gross margin | 21.0% | 15.5% | 17.9% | 15.8% |
| Operating expenses | $238.8 | $214.7 | $727.9 | $647.2 |
| Income before income taxes | $61.6 | $19.2 | $220.3 | $166.0 |
| Net income | $39.3 | $12.7 | $139.3 | $105.9 |
| Diluted EPS | $1.01 | $0.33 | $3.57 | $2.73 |
- Cash flow, nine months: Operating cash flow was $239.9 million, versus $210.7 million. Investing used $327.1 million, including $292.1 million for property and equipment and $37.1 million for acquisitions. Financing provided $9.2 million. Cash declined $78.0 million to $43.6 million.
- Liquidity and debt: Current assets were $256.4 million and current liabilities $324.9 million; the current ratio was 0.79. Long-term debt, including current maturities, was $853.7 million, and bank-line borrowings were $18.5 million. The company had a $100 million credit line. Management said cash, operating cash flow and the line should meet working-capital needs.
- Margins and sales: Quarterly same-store fuel gallons rose 2.2%; fuel margin averaged 22.0 cents per gallon. Same-store grocery and other merchandise sales grew 7.7%, and prepared food and fountain sales grew 14.1%. For the nine-month period, those same-store categories grew 7.3% and 12.0%, respectively.
Changes versus prior periods
- Quarterly revenue decreased 6.6%, primarily because lower average fuel prices reduced fuel revenue by 15.9%, despite higher gallons sold. Nine-month revenue increased 3.3%.
- Quarterly earnings increased substantially, mainly due to stronger fuel margins amid falling wholesale fuel costs and higher same-store sales. Fuel gross margin per gallon rose to 22.03 cents from 13.59 cents for the quarter. YTD fuel margin per gallon was 20.11 cents, versus 17.03 cents.
- Operating expenses rose 11.2% in the quarter and 12.5% year to date, reflecting more stores and expanded operating initiatives; depreciation and amortization also increased due to recent capital investment. Prepared-food margins declined, attributed to higher input costs and increased stales.
- Compared with April 30, 2014, cash decreased from $121.6 million, while property and equipment, net, increased to $1,986.9 million from $1,779.0 million. Goodwill rose to $127.0 million from $120.4 million.
Outlook, risks and unusual items
- Investment and expansion: Fiscal 2015 capital spending was originally expected to be $360 million–$410 million. The annual store objective was to build or acquire 72–108 stores and replace 25 locations. In the first nine months, Casey’s opened 33 new stores, completed 25 replacements, acquired 32 stores, opened one store from an earlier acquisition and closed five.
- Controls and prior-period corrections: Management concluded disclosure controls were ineffective at January 31, 2015 because of a material weakness in controls over federal excise tax return review and related tax liabilities. The identified errors were described as immaterial and were corrected in amended filings. Remediation steps include tax-department oversight, qualified management review and improved systems. The independent auditor’s prior-year internal-control report was adverse.
- Legal and tax matters: A proposed settlement of the “hot fuel” litigation was preliminarily approved; class notice began in February 2015, with a fairness hearing scheduled for June 9, 2015. Gross unrecognized tax benefits were $10.3 million; management expected a decrease of about $2.4 million within 12 months. Illinois was examining tax years 2011 and 2012.
- Environmental and operating risks: Environmental remediation costs were $1.1 million for the nine months, with an accrued liability of about $0.4 million. The filing highlights fuel-margin volatility and supply, competition, tobacco demand, environmental compliance, seasonality, weather, taxes and indebtedness as risks. Management reported no material change in disclosed risk factors.
- The company reported no material effect on pretax earnings from an immediate 100-basis-point interest-rate move. It also noted forward purchases of certain commodities, primarily cheese and coffee.
Important facts for investors to verify
- Whether unusually favorable fuel margins persist, and how fuel pricing, gallons and wholesale costs affect earnings.
- Whether same-store merchandise and prepared-food growth continues while prepared-food margins and operating costs remain under pressure.
- Progress against store-growth and capital-spending objectives, and the resulting effects on cash, debt and liquidity.
- Whether the federal excise-tax control weakness is fully remediated and whether subsequent filings show effective controls.
- Final court approval and financial terms of the hot-fuel settlement, and developments in tax examinations or environmental obligations.