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SUSS > SEC Filings for SUSS > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for SUSSER HOLDINGS CORP


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. Additional discussion and analysis related to our company is contained in our Annual Report on Form 10-K, including the audited consolidated financial statements for the fiscal year ended January 1, 2012. Our fiscal year contains either 52 or 53 weeks and ends on the Sunday closest to December 31. All references to the third quarter and first nine months of 2011 and 2012 refer to the 13-week and 39-week periods ended October 2, 2011 and September 30, 2012, respectively. EBITDA, Adjusted EBITDA, and Adjusted EBITDAR are non-GAAP financial measures of performance and liquidity, and Fuel-Neutral Adjusted EBITDAR is a non-GAAP measure of performance, each of which have limitations and should not be considered as a substitute for net income and/or cash provided by (used in) operating activities. Please see footnote (3) under "Key Operating Metrics" below for a discussion of our use of EBITDA, Adjusted EBITDA, Adjusted EBITDAR, and Fuel-Neutral Adjusted EBITDAR in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and a reconciliation to net income and/or cash provided by (used in) operating activities for the periods presented.
Forward-Looking Statements
This report, including without limitation, our discussion and analysis of our financial condition and results of operations, contains statements that we believe are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and are intended to enjoy protection under the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by use of phrases such as "believe," "plan," "expect," "anticipate," "intend," "forecast" or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs,


anticipated capital expenditures, expected cost savings and benefits are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:
• Competitive pressures from convenience stores, gasoline stations, other non-traditional retailers located in our markets and other wholesale fuel distributors;

• Volatility in crude oil and wholesale petroleum costs;

• Increasing consumer preferences for alternative motor fuels, or improvements in fuel efficiency;

• Intense competition and fragmentation in the wholesale motor fuel distribution industry;

• The operation of our retail stores in close proximity to stores of our dealers;

• Seasonal trends in the industries in which we operate;

• Severe or unfavorable weather conditions;

• Cross-border risks associated with the concentration of our stores in markets bordering Mexico;

• Inability to build or acquire and successfully integrate new stores;

• Our ability to comply with federal and state regulations including those related to environmental matters and the sale of alcohol and cigarettes and employment laws and health benefits;

• Dangers inherent in storing and transporting motor fuel;

• Pending or future consumer or other litigation;

• Wholesale cost increases of tobacco products or future legislation or campaigns to discourage smoking;

• Litigation or adverse publicity concerning food quality, food safety or other health concerns related to our restaurant facilities;

• Dependence on two principal suppliers for merchandise;

• Dependence on two principal suppliers for motor fuel;

• Dependence on suppliers for credit terms;

• Dependence on senior management and the ability to attract qualified employees;

• Acts of war and terrorism;

• Risks relating to our substantial indebtedness and dependence on our subsidiaries for cash flow generation;

• Dependence on our information technology systems;

• Changes in accounting standards, policies or estimates;

• Impairment of goodwill or indefinite lived assets; and

• Other unforeseen factors.

For a full discussion of these and other risks and uncertainties, please refer to "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the year ended January 1, 2012, and in each subsequent quarterly report on Form 10-Q, including this filing. The list of factors that could affect future performance and the accuracy of forward-looking statements are illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of the date hereof. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available in the future.

Overview
Our operations include retail convenience stores and wholesale motor fuel distribution. We operate the largest independent chain of convenience stores in Texas based on store count and retail motor fuel volumes sold. As of September 30, 2012, our retail segment operated 552 convenience stores in Texas, New Mexico and Oklahoma offering merchandise, food service, motor fuel and other services.
On September 25, 2012 our subsidiary SUSP completed its initial public offering of common units representing limited partner interests. In connection with the initial public offering, substantially all of our wholesale motor fuel distribution business was contributed to the Partnership. SUSS owns the general partner of the Partnership as well as all of the Partnership's incentive distribution rights and 50.1% of the common and subordinated units representing limited partner interest. SUSP received net proceeds from the offering of $206 million, after underwriter discounts, fees and offering expenses. SUSP made distributions to SUSS totaling $206 million following completion of its initial public offering. We will continue to consolidate


the operations of the Partnership in our financial statements, with the 49.9% share of the Partnership's net income allocated to public limited partners reflected as attributable to noncontrolling interest.
For the three and nine months ended September 30, 2012, we sold 368.3 million and 1.1 billion gallons, respectively, of branded and unbranded motor fuel. We purchase fuel directly from refiners and distribute it to our Stripesฎ convenience stores, contracted independent operators of convenience stores ("dealers"), unbranded convenience stores and other commercial users. We believe our combined retail/wholesale business model makes it possible for us to pursue strategic acquisition opportunities and operate acquired properties under either format, providing an optimized return on investment. Our market share and scale allows the integration of new or acquired stores while minimizing overhead costs. In addition, we believe our food service and merchandising offerings distinguish us from our competition, providing the opportunity for increased traffic in our stores.
We opened eight new retail stores during the third quarter and closed one for a total of 552 retail stores operated at the end of the quarter. We have converted two retail stores to dealer locations so far in the fourth quarter. We have 14 retail stores currently under construction, and expect to open a total of 25 to 26 new retail stores during 2012. We added 12 dealer sites and discontinued seven during the third quarter, for a total of 572 dealer sites as of the end of the quarter in our wholesale segment. We expect to add a total of 32 to 37 new dealer sites during 2012.
Our total revenues, net income attributable to Susser Holdings Corporation and Adjusted EBITDA were $1.5 billion, $6.8 million and $41.3 million, respectively, for third quarter 2012, compared to $1.4 billion, $18.5 million and $51.4 million, respectively, for third quarter 2011. Our first nine months of 2012 total revenues, net income attributable to Susser Holdings Corporation and Adjusted EBITDA were $4.4 billion, $36.1 million and $137.1 million, respectively, compared to $3.9 billion, $42.2 million and $135.4 million, respectively, for the first nine months of 2011. We recorded a one-time non-cash deferred tax expense of $3.6 million during the third quarter of 2012, relating to the contribution of $10.3 million of goodwill from SUSS to SUSP in connection with the IPO. Excluding this one-time charge, we would have reported net income attributable to Susser Holdings Corporation for the third quarter 2012 of $10.5 million, or $0.49 per diluted share, and $39.8 million, or $1.87 per diluted share, for the first nine months of 2012.
Our business is seasonal, and we generally experience higher sales and profitability in the second and third quarters during the summer activity months and lowest during the first and fourth quarters. For a description of our results of operations on a quarterly basis see "Quarterly Results of Operations and Seasonality."
We typically experience lower fuel margins in periods when the cost of fuel increases gradually, and higher fuel margins in periods when the cost of fuel declines or is more volatile. We report retail fuel margins before credit card fees, but higher fuel prices result in higher credit card costs, which tends to drive fuel margins higher to cover the additional credit card fees.
Additionally, our fuel margins have historically exhibited seasonal differences, with lower fuel margins during the first and fourth quarters and the highest fuel margins in the second or third quarter of the year. After experiencing sharp declines throughout second quarter of 2012, both crude oil and wholesale gasoline costs increased during most of the third quarter, with a $15 per barrel increase in crude oil cost from the beginning of the quarter to the peak price in mid-September. Crude oil costs increased by approximately $8 per barrel or 10% from the beginning to the end of the third quarter of 2012, with a $92 average price that was 3% higher than in the third quarter of 2011, and 1% lower than in the second quarter of 2012, based on West Texas Intermediate ("WTI") spot prices. Wholesale gasoline costs followed a similar pattern as crude oil this quarter.
Our retail fuel margin for the third quarter and first nine months of 2012 averaged 20.1 cents and 22.0 cents per gallon, respectively, compared to 27.7 cents and 24.8 cents per gallon for the third quarter and first nine months of 2011, and an average of 21.7 cents per gallon for the third quarter of the previous five years. Concurrent with the completion of the SUSP IPO, SUSP began charging the retail segment a three-cent per gallon profit margin on gallons sold to it. After deducting credit card fees, our retail fuel margin for the third quarter and first nine months of 2012 was 14.5 cents and 16.5 cents per gallon, respectively, compared to 21.9 cents and 19.2 cents a year ago. Fuel gross profit represented 35.6% of our consolidated gross profit for the third quarter of 2012 versus 41.5% for the third quarter of 2011. Fuel gross profit represented 37.5% of our consolidated gross profit for the first nine months of 2012 versus 39.5% in the first nine months of 2011. For our retail division, fuel represented 31.5% of retail gross profit for the third quarter of 2012 and 33.8% of retail gross profit for the first nine months of 2012. The economy in Texas, where the majority of our operations are conducted, continues to fare better than many other parts of the nation. Additionally, our business has remained generally more resilient through economic cycles than many other retail formats. We have reported positive comparable merchandise results in 19 of the last 20 quarters, and expect 2012 to produce our 24th consecutive annual increase in same-store merchandise sales, with third quarter growth of 5.8% and 6.8% for the nine months. We also saw a 6.6% increase in average gallons sold per retail store for the third quarter and 6.8% for the nine months, driven partly by growth in diesel volume, which we believe is primarily attributable to increased manufacturing, oil and gas


activity, increased construction and continued improvement in the number of people working in the markets in which we operate. Diesel volumes are also growing as we add new stores and add diesel to selected older stores. We believe we have adequate liquidity and financial flexibility to continue to operate and grow our business. Our liquidity position continued to strengthen during the third quarter. We reduced the amount of our revolving credit facility from $120 million to $100 million in connection with the SUSP IPO, and entered into a new $250 million revolving credit facility at the Partnership. We had no borrowings on either facility at the end of the quarter, with combined availability of $322.0 million in addition to $493.7 million of cash and marketable securities on the balance sheet. At the end of the third quarter, our consolidated net debt (total debt less cash and marketable securities) to last 12 months EBITDA was less than 1.0 times.

Key Operating Metrics
The following table sets forth, for the periods indicated, information
concerning key measures we rely on to gauge our operating performance:
                                                          Three Months Ended                        Nine Months Ended
                                                  October 2,          September 30,         October 2,         September 30,
                                                     2011                 2012                 2011                 2012
                                                 (dollars and gallons in thousands, except motor fuel pricing and gross profit
                                                                                  per gallon)
Revenue:
Merchandise sales                               $    233,464       $        256,419       $    662,922       $        735,614
Motor fuel-retail                                    711,203                767,208          2,054,316              2,277,728
Motor fuel-wholesale                                 397,201                464,665          1,145,631              1,370,209
Other                                                 11,646                 12,524             36,166                 38,159
Total revenue                                   $  1,353,514       $      1,500,816       $  3,899,035       $      4,421,710
Gross profit:
Merchandise                                     $     78,391       $         86,681       $    224,496       $        248,769
Motor fuel-retail segment                             55,306                 43,887            145,338                141,413
Motor fuel-wholesale segment                           8,410                  9,576             23,640                 27,715
Other, including intercompany eliminations            11,308                 12,070             34,590                 37,063
Total gross profit                              $    153,415       $        152,214       $    428,064       $        454,960
Adjusted EBITDA (3):
Retail                                          $     46,006       $         35,316       $    121,384       $        120,966
Wholesale                                              7,055                  8,289             19,086                 21,811
Other                                                 (1,702 )               (2,300 )           (5,086 )               (5,657 )
Total Adjusted EBITDA                           $     51,359       $         41,305       $    135,384       $        137,120
Retail merchandise margin                               33.6 %                 33.8 %             33.9 %                 33.8 %
Merchandise same-store sales growth (1)                  7.4 %                  5.8 %              6.3 %                  6.8 %
Average per retail store per week:
Merchandise sales                               $       33.7       $           36.0       $       32.1       $           34.7
Motor fuel gallons                                      29.0                   30.9               28.6                   30.5
Motor fuel gallons sold:
Retail                                               199,650                218,507            585,490                641,905
Wholesale                                            129,950                149,828            379,027                444,974
Average retail price of motor fuel per gallon   $       3.56       $           3.51       $       3.51       $           3.55
Motor fuel gross profit cents per gallon (2):
Retail                                                  27.7 ข                 20.1 ข             24.8 ข                 22.0 ข
Wholesale - third parties                                6.5 ข                  6.1 ข              6.2 ข                  6.1 ข
Retail credit card cents per gallon                      5.8 ข                  5.6 ข              5.6 ข                  5.6 ข

(1) We include a store in the same store sales base in its thirteenth full month of our operation.

(2) Effective September 25, 2012, the retail fuel margin will reflect a reduction of approximately three cents per gallon to give effect to the imposition of a transfer price on gallons sold to SUSS by SUSP. Prior to this date, no gross profit mark-up


was charged by the wholesale segment to the retail segment. The wholesale margin to third parties excludes sales to the retail segment.
(3) We define EBITDA as net income (loss) attributable to Susser Holdings Corporation before net interest expense, income taxes and depreciation, amortization and accretion. Adjusted EBITDA further adjusts EBITDA by excluding non-cash stock-based compensation expense and certain other operating expenses that are reflected in our net income (loss) that we do not believe are indicative of our ongoing core operations, such as significant non-recurring transaction expenses and the gain or loss on disposal of assets and impairment charges. Adjusted EBITDAR adds back rent to Adjusted EBITDA. In addition, those expenses that we have excluded from our presentation of Adjusted EBITDA and Adjusted EBITDAR are also excluded in measuring our covenants under our revolving credit facility and the indenture governing our debt agreements and indentures. EBITDA, Adjusted EBITDA and Adjusted EBITDAR are not presented in accordance with GAAP.

We believe EBITDA, Adjusted EBITDA and Adjusted EBITDAR are useful to investors in evaluating our operating performance because:
• they are used as performance and liquidity measures under our existing revolving credit facility and the indenture governing our notes, including for purposes of determining whether we have satisfied certain financial performance maintenance covenants and our ability to borrow additional indebtedness and pay dividends;

• securities analysts and other interested parties use such calculations as a measure of financial performance and debt service capabilities;

• they facilitate management's ability to measure the operating performance of our business on a consistent basis by excluding the impact of items not directly resulting from our retail convenience stores and wholesale motor fuel distribution operations;

• they are used by our management for internal planning purposes, including aspects of our consolidated operating budget, capital expenditures, and for segment and individual site operating targets; and

• they are used by our Board and management for determining certain management compensation targets and thresholds.

EBITDA, Adjusted EBITDA and Adjusted EBITDAR are not recognized terms under GAAP and do not purport to be alternatives to net income (loss) as measures of operating performance or to cash flows from operating activities as a measure of liquidity. EBITDA, Adjusted EBITDA and Adjusted EBITDAR have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations include:
• they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

• they do not reflect changes in, or cash requirements for, working capital;

• they do not reflect significant interest expense, or the cash requirements necessary to service interest or principal payments on our existing revolving credit facility or existing notes;

• they do not reflect payments made or future requirements for income taxes;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, Adjusted EBITDA and Adjusted EBITDAR do not reflect cash requirements for such replacements; and

• because not all companies use identical calculations, our presentation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR may not be comparable to similarly titled measures of other companies.

The following table presents a reconciliation of net income (loss) attributable to Susser Holdings Corporation to EBITDA, Adjusted EBITDA and Adjusted EBITDAR:


                                               Three Months Ended                   Nine Months Ended
                                         October 2,       September 30,       October 2,       September 30,
                                            2011              2012               2011              2012
                                                                   (in thousands)
Net income attributable to Susser
Holdings Corporation                   $     18,516     $         6,847     $     42,158     $        36,136
Depreciation, amortization and
accretion                                    12,420              13,184           34,807              38,299
Interest expense, net                        10,332              10,653           30,391              31,080
Income tax expense                            8,629               8,579           23,171              26,449
EBITDA                                       49,897              39,263          130,527             131,964
Non-cash stock-based compensation             1,043               1,462            3,015               4,337
Loss on disposal of assets and
impairment charge                               312                 455            1,621                 489
Other miscellaneous expense                     107                 125              221                 330
Adjusted EBITDA                              51,359              41,305          135,384             137,120
Rent                                         11,492              11,579           34,181              34,668
Adjusted EBITDAR                       $     62,851     $        52,884     $    169,565     $       171,788




                                                             Fiscal Year Ended                                               Twelve Months
                                                                January 3,                                                  Ended September
                    December 30, 2007     December 28, 2008        2010          January 2, 2011       January 1, 2012       30, 2012 (1)
Net income
attributable to
Susser Holdings
Corporation        $          16,252     $          16,477     $     2,068     $             786     $          47,457     $        41,435
Depreciation,
amortization and
accretion                     29,469                40,842          44,382                43,998                47,320              50,812
Interest expense,
net                           16,152                39,256          38,103                64,039                40,726              41,415
Income tax expense
(benefit)                     (5,753 )              10,396           1,805                 4,994                26,347              29,625
EBITDA                        56,120               106,971          86,358               113,817               161,850             163,287
Non-cash
stock-based
compensation                   2,429                 3,946           3,433                 2,825                 3,588               4,910
Loss on disposal
of assets and
impairment charge                190                     9           2,402                 3,193                 1,220                  88
Other
miscellaneous
expense                         (435 )                (278 )            55                   174                   346                 455
Adjusted EBITDA               58,304               110,648          92,248               120,009               167,004             168,740
Rent                          25,822                34,620          36,899                42,623                45,738              46,225
Adjusted EBITDAR   $          84,126     $         145,268     $   129,147     $         162,632     $         212,742     $       214,965

(1) Each of the line items for the twelve month period ended September 30, 2012 reflects the corresponding items for the fiscal year ended January 1, 2012, plus the items for the nine months ended September 30, 2012, less the items for the nine months ended October 2, 2011.

The following table presents a reconciliation of net cash provided by operating activities to EBITDA, Adjusted EBITDA and Adjusted EBITDAR:


                                                                   Nine Months Ended
                                                             October 2,      September 30,
                                                                2011              2012
                                                                     (in thousands)
Net cash provided by operating activities                   $   101,870     $      115,211
Changes in operating assets & liabilities                          (463 )          (16,660 )
Amortization of deferred financing fees/debt discount, net       (2,490 )           (2,864 )
Loss on disposal of assets and impairment charge                 (1,621 )             (489 )
Non-cash stock-based compensation                                (3,015 )           (4,337 )
Noncontrolling interest                                              (4 )             (289 )
Deferred income tax                                             (17,544 )          (17,133 )
Excess tax benefits from stock-based compensation                   232                996
Interest expense, net                                            30,391             31,080
Income tax expense                                               23,171             26,449
EBITDA                                                          130,527            131,964
Non-cash stock-based compensation                                 3,015              4,337
Loss on disposal of assets and impairment charge                  1,621                489
Other miscellaneous                                                 221                330
. . .
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