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SUSS > SEC Filings for SUSS > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for SUSSER HOLDINGS CORP


8-Nov-2013

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 December 30, 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 nine months of 2012 and 2013 refer to the 13-week and 39-week periods ended September 30, 2012 and September 29, 2013, respectively. EBITDA, Adjusted EBITDA, Adjusted EBITDAR and fuel-margin-neutral Adjusted EBITDAR are non-GAAP financial measures of performance, each of which have limitations and should not be considered as a substitute for net income. Please see footnote (4) under "Key Operating Metrics" below for a discussion of our use of EBITDA, Adjusted EBITDA, Adjusted EBITDAR and fuel-margin-neutral Adjusted EBITDAR in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and a reconciliation to net income 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;

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

• Dependence on our subsidiaries, including the Partnership, for cash flow generation;

• Indirect exposure to the Partnership's business risks, by virtue of our significant relationships with the Partnership;

• Operational limitations arising from our contractual agreements with the Partnership;

• Our substantial indebtedness, and the restrictions imposed by the covenants in respect of that indebtedness;

• Our ability to comply with federal and state regulations including those related to environmental matters and the sale of alcohol and tobacco;

• Dangers inherent in storing and transporting motor fuel;

• Pending or future consumer or other litigation or adverse publicity concerning food quality, food safety or other health concerns related to our restaurant facilities;

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

• Healthcare reform legislation and regulation;

• Compliance with, or changes in, tax laws-including those impacting the tax treatment of the Partnership;

• Dependence on two principal suppliers for merchandise;

• Dependence on suppliers for credit terms;

• Seasonal trends in the industries in which we operate;

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

• Acts of war and terrorism;

• Dependence on our information technology systems;

• Severe or unfavorable weather conditions;

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

• 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 December 30, 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 are a leading operator of convenience stores in Texas based on store count and one of the largest distributors of motor fuel by volume in Texas. As of September 29, 2013, our retail segment operated 576 convenience stores in Texas, New Mexico and Oklahoma offering merchandise, food service, motor fuel and other services. Our consolidated results include the operations of Susser Petroleum Partners LP ("SUSP"), of which we currently own 50.2% of the limited partner interests and 100% of SUSP's general partner. The share of SUSP's net income allocated to public limited partners is reflected as income attributable to noncontrolling interest.


For the three and nine months ended September 29, 2013, we sold 401.5 million and 1.2 billion gallons of motor fuel, respectively. We purchase branded and unbranded 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 ten new retail stores during the third quarter of 2013 and closed one, for a total of 576 retail stores operated at the end of the quarter. We have opened one additional retail store and converted one to a dealer to date in the fourth quarter of 2013, and currently have 10 under construction, with a total of 28 to 30 new retail stores expected to be completed during 2013. Our wholesale segment added nine dealer and consignment sites and discontinued five during the third quarter of 2013, for a total of 587 independently operated sites supplied under long-term contracts at the end of the quarter. We expect to add a total of 28 to 40 new dealer sites during 2013. Additionally, we completed the acquisition of a wholesale fuel distribution company which was contributed to SUSP in September 2013. This acquisition is expected to add annual commercial fuel sales of approximately 60 million gallons.

Our total revenues, net income attributable to Susser Holdings Corporation and Adjusted EBITDA were $1.6 billion, $12.9 million and $49.4 million, respectively, for third quarter 2013, compared to $1.5 billion, $6.8 million and $41.6 million, respectively, for third quarter 2012. For the first nine months of 2013, our total revenues, net income attributable to Susser Holdings Corporation and Adjusted EBITDA were $4.6 billion, $8.4 million and $131.7 million, respectively, compared to $4.4 billion, $36.1 million and $137.4 million during 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."

Included in net income for the three and nine months ended September 29, 2013, is a non-cash deferred tax charge of $3.5 million related to the contribution of acquisition-related goodwill from SUSS to SUSP. Additionally, included in net income for the nine months ended September 29, 2013 is a $26.2 million pre-tax loss ($16.7 million after tax) on early extinguishment of debt related to the redemption of our 2016 Notes in May 2013. Excluding these charges our net income attributable to Susser Holdings Corporation was $16.4 million and $28.6 million respectively for the three and nine months ended September 29, 2013, and diluted EPS was $0.76 and $1.32 respectively for the three and nine month periods. For the nine months ended September 30, 2012, net income and diluted EPS excluding a $3.6 million deferred tax charge related to the SUSP IPO were $39.8 million and $1.87, respectively.

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. Crude oil costs averaged approximately $106 per barrel during the third quarter of 2013, a 15% increase over the third quarter of 2012 based on West Texas intermediate spot prices. Our motor fuel costs typically follow a similar pattern to crude oil movements, although for the third quarter of 2013 the average cost of motor fuel declined slightly compared to the prior year, contributing to a slight improvement in comparable retail fuel margins for the quarter.

Concurrent with the completion of the SUSP IPO in September 2012, SUSP began charging the retail segment a per-gallon profit margin of approximately three cents, which is reflected as a reduction to the retail fuel margin but recorded as an increase in the wholesale segment gross profit. The following table reflects our average retail fuel margins in cents per gallon for 2013, compared to 2012 fuel margins and the five-year average margins as if the three-cent mark-up had been in place for all periods presented:

                                                       Three Months Ended
                                     September 30,                           Prior Five-Year
                                         2012          September 29, 2013    Average for Q3
Retail Fuel Margin, before credit            17.1                   18.3              19.5
card expense
Retail Fuel Margin, after credit             11.5                   12.6              14.6
card expense


Wholesale segment third-party fuel margin averaged 7.8 cents per gallon for the third quarter of 2013, compared to 6.1 cents per gallon for the third quarter of 2012. Fuel gross profit represented 36.1% of our consolidated gross profit for the nine months ending September 29, 2013 versus 37.2% for the nine months ending September 30, 2012.

The economy in Texas, where the majority of our operations are conducted, continues to fare better than many other parts of the United States. Additionally, we believe our business has generally remained more resilient through economic cycles than many other retail formats. We have reported positive comparable annual merchandise results for each of the last 24 years, and expect 2013 to produce our 25th consecutive annual increase in same-store merchandise sales, with third quarter 2013 growth of 3.4%. We also saw a 5.6% increase in average gallons sold per retail store for the third quarter 2013.

We believe we have adequate liquidity and financial flexibility to continue to operate and grow our business. At the end of the third quarter 2013, we had borrowings of $185.0 million on the 2013 SUSS Revolver and $142.8 million on the SUSP Revolver. Our combined availability on both revolving facilities was $410.8 million at the end of the third quarter 2013, in addition to $34.7 million of cash on the balance sheet. At the end of the third quarter 2013, our consolidated net debt (total debt less cash and marketable securities) to last 12 months EBITDA was 1.7 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
                                          September 30,          September 29,          September 30,        September 29,
                                              2012                   2013                   2012                  2013
                                         (dollars and gallons in thousands, except motor fuel pricing and gross profit per
                                                                              gallon)
Revenue:
Merchandise sales                      $        256,419       $        281,610       $        735,614       $      803,815
Motor fuel-retail                               767,208                825,440              2,277,728            2,414,269
Motor fuel-wholesale                            464,665                478,943              1,370,209            1,380,917
Other                                            12,524                 13,550                 38,159               40,779
Total revenue                          $      1,500,816       $      1,599,543       $      4,421,710       $    4,639,780
Gross profit:
Merchandise                            $         86,681       $         95,195       $        248,769       $      271,159
Motor fuel-retail (2)                            43,887                 43,708                141,413              123,706
Motor fuel-wholesale to third parties
(3)                                               9,172                 12,724                 27,311               31,547
Motor fuel-wholesale to Stripes (3)                 404                  7,225                    404               20,648
Other, including intercompany
eliminations                                     12,070                 13,367                 37,063               40,207
Total gross profit                     $        152,214       $        172,219       $        454,960       $      487,267
Adjusted EBITDA (4):
Retail                                 $         35,316       $         34,335       $        120,966       $       93,972
Wholesale                                         8,289                 18,394                 21,811               46,090
Other                                            (2,013 )               (3,324 )               (5,368 )             (8,330 )
Total Adjusted EBITDA                  $         41,592       $         49,405       $        137,409       $      131,732
Retail merchandise margin                          33.8 %                 33.8 %                 33.8 %               33.7 %
Merchandise same-store sales growth
(1)                                                 5.8 %                  3.4 %                  6.8 %                3.3 %
Average per retail store per week:
Merchandise sales                      $           36.0       $           38.1       $           34.7       $         36.6
Motor fuel gallons sold                            30.9                   32.7                   30.5                 32.1
Motor fuel gallons sold:
Retail                                          218,507                239,387                641,905              698,939
Wholesale - third party                         149,828                162,117                444,974              464,934
Average retail price of motor fuel per
gallon                                 $           3.51       $           3.45       $           3.55       $         3.45
Motor fuel gross profit (cents per
gallon):
Retail (2)                                         20.1 ข                 18.3 ข                 22.0 ข               17.7 ข
Wholesale - third party (3)                         6.1 ข                  7.8 ข                  6.1 ข                6.8 ข
Retail credit card expense (cents per
gallon)                                             5.6 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 reflects a reduction of approximately three cents per gallon as SUSP began charging a mark-up on gallons sold to our retail segment. Prior to this date, no mark-up was charged by the wholesale segment to the retail segment. Had this mark-up to SUSP been in effect for all of 2012, the average retail margin for the three and nine months ended September 30, 2012, respectively would have been reported as 17.1 and 19.0 cents per gallon.

(3) The wholesale margin from third parties excludes sales and gross profit to the retail segment. Wholesale margin to Stripes reflects the markup of approximately three cents per gallon beginning September 25, 2012. Prior to this date, no profit margin was recognized in the wholesale segment on sales to Stripes stores.

(4) We define EBITDA as net income (loss) attributable to Susser Holdings Corporation before net interest expense, income taxes, net income attributable to noncontrolling interest 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 that we do not believe are indicative of our ongoing core operations, such as significant non-cash 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 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:
• 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, as well as 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. 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 facilities 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.

Subsequent to the SUSP IPO, we revised our definition of EBITDA to exclude the impact of noncontrolling interest, in order to present a consolidated amount for EBITDA, Adjusted EBITDA and Adjusted EBITDAR which is consistent with the metrics used by our management and in our credit agreement covenants. Prior to the SUSP IPO, the amount of noncontrolling interest was not material.

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
                                         September 30,        September 29,       September 30,       September 29,
                                              2012                2013                2012                2013
                                                                       (in thousands)
Net income attributable to Susser
Holdings Corporation                   $          6,847     $        12,897     $        36,136     $         8,405
Net income attributable to
noncontrolling interest                             287               4,789                 289              13,731
Depreciation, amortization and
accretion                                        13,184              15,482              38,299              44,808
Interest expense, net                            10,653               2,380              31,080              45,152
Income tax expense                                8,579              10,756              26,449              12,351
EBITDA                                           39,550              46,304             132,253             124,447
Non-cash stock based compensation                 1,462               2,500               4,337               5,318
Loss on disposal of assets and
impairment charge                                   455                 380                 489               1,507
Other miscellaneous expense                         125                 221                 330                 460
Adjusted EBITDA                                  41,592              49,405             137,409             131,732
Rent                                             11,579              11,762              34,668              35,666
Adjusted EBITDAR                       $         53,171     $        61,167     $       172,077     $       167,398



                                              Fiscal Year Ended                               Twelve Months Ended
                          January 3,     January 2,     January 1,     December 30,      September 30,      September 29,
                             2010           2011           2012            2012               2012            2013 (1)
                                                                  (in thousands)
Net income attributable
to Susser Holdings
Corporation              $    2,068     $      786     $   47,457     $     46,725     $         41,435     $    18,994
Net income attributable
to noncontrolling
interest                         39              3             14            4,572                  299          18,014
Depreciation,
amortization and
accretion                    44,382         43,998         47,320           51,434               50,812          57,943
Interest expense, net        38,103         64,039         40,726           41,019               41,415          55,091
Income tax expense            1,805          4,994         26,347           33,645               29,625          19,547
EBITDA                       86,397        113,820        161,864          177,395              163,586         169,589
Non-cash stock based
compensation                  3,433          2,825          3,588            4,337                4,910           5,318
Loss on disposal of
assets and impairment
charge                        2,402          3,193          1,220              694                   88           1,712
Other miscellaneous
expense                          55            174            346              471                  455             601
Adjusted EBITDA              92,287        120,012        167,018          182,897              169,039         177,220
Rent                         36,899         42,623         45,738           46,407               46,225          47,405
Adjusted EBITDAR         $  129,186     $  162,635     $  212,756     $    229,304     $        215,264     $   224,625


________________


(1) Each of the line items for the twelve month period ended September 29, 2013 reflects the corresponding items for the fiscal year ended December 30, 2012, plus the items for the nine months ended September 29, 2013, less the items for the nine months ended September 30, 2012.


Refer to Note 14 of the accompanying Notes to Consolidated Financial Statements for a description of our segment reporting. The following table presents a reconciliation of our segment operating income to EBITDA, Adjusted EBITDA and Adjusted EBITDAR:

                                           Retail Segment                                   Wholesale Segment                                   All Other                                       Total
                                         Three Months Ended                                Three Months Ended                              Three Months Ended                            Three Months Ended
                             September 30, 2012       September 29, 2013       September 30, 2012       September 29, 2013      September 30, 2012     September 29, 2013     September 30, 2012     September 29, 2013
                                                                                                                  (in thousands)
Operating income (loss)    $             24,114     $             21,255     $              6,073     $             14,243     $          (3,696 )    $           (4,455 )   $          26,491      $           31,043
. . .
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