UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 30, 2004
Commission File: Number 33-72574
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 56-1574463 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
1801 Douglas Drive
Sanford, North Carolina 27330
(Address of principal executive office and zip code)
(919) 774-6700
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| COMMON STOCK, $0.01 PAR VALUE | 20,322,242 SHARES | |
| (Class) | (Outstanding at February 2, 2005) |
THE PANTRY, INC.
FORM 10-Q
DECEMBER 30, 2004
| Page | ||
| Part I—Financial Information |
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| Item 1. Financial Statements |
||
| 3 | ||
| 4 | ||
| 5 | ||
| 6 | ||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
33 | |
| Item 4. Controls and Procedures |
33 | |
| Part II—Other Information |
||
| Item 1. Legal Proceedings |
34 | |
| Item 6. Exhibits |
34 | |
2
PART I-FINANCIAL INFORMATION.
| Item 1. | Financial Statements. |
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
| December 30, 2004 |
September 30, 2004 | |||||
| ASSETS |
||||||
| Current assets: |
||||||
| Cash and cash equivalents |
$ | 112,109 | $ | 108,048 | ||
| Receivables, net |
38,852 | 43,664 | ||||
| Inventories |
94,645 | 95,228 | ||||
| Prepaid expenses |
12,929 | 13,446 | ||||
| Property held for sale |
5,592 | 5,939 | ||||
| Deferred income taxes |
9,549 | 7,507 | ||||
| Total current assets |
273,676 | 273,832 | ||||
| Property and equipment, net |
406,337 | 411,501 | ||||
| Other assets: |
||||||
| Goodwill (Note 2) |
341,652 | 341,652 | ||||
| Other (Notes 2, 3, 5, and 7) |
35,688 | 35,155 | ||||
| Total other assets |
377,340 | 376,807 | ||||
| Total assets |
$ | 1,057,353 | $ | 1,062,140 | ||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||
| Current liabilities: |
||||||
| Current maturities of long-term debt (Note 4) |
$ | 16,029 | $ | 16,029 | ||
| Current maturities of capital lease obligations |
1,197 | 1,197 | ||||
| Accounts payable |
102,369 | 121,151 | ||||
| Accrued interest (Note 4) |
8,725 | 2,742 | ||||
| Accrued compensation and related taxes |
12,293 | 14,369 | ||||
| Income and other accrued taxes |
15,676 | 18,849 | ||||
| Accrued insurance |
18,674 | 17,228 | ||||
| Other accrued liabilities |
11,456 | 19,393 | ||||
| Total current liabilities |
186,419 | 210,958 | ||||
| Long-term debt (Note 4) |
551,003 | 551,010 | ||||
| Other liabilities: |
||||||
| Deferred income taxes |
66,488 | 63,257 | ||||
| Deferred revenue |
34,963 | 35,051 | ||||
| Capital lease obligations |
14,275 | 14,582 | ||||
| Other noncurrent liabilities (Note 3) |
37,061 | 35,096 | ||||
| Total other liabilities |
152,787 | 147,986 | ||||
| Commitments and contingencies (Notes 3 and 4) |
||||||
| Shareholders’ equity (Notes 5, 6, and 9) |
||||||
| Common stock, $.01 par value, 50,000,000 shares authorized; 20,322,242 and 20,271,757 issued and outstanding at December 30, 2004 and September 30, 2004, respectively |
203 | 204 | ||||
| Additional paid-in capital |
135,232 | 132,879 | ||||
| Accumulated other comprehensive income, net (Note 6) |
660 | 206 | ||||
| Accumulated earnings |
31,049 | 18,897 | ||||
| Total shareholders’ equity |
167,144 | 152,186 | ||||
| Total liabilities and shareholders’ equity |
$ | 1,057,353 | $ | 1,062,140 | ||
See Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
| Three Months Ended |
||||||||
| December 30, 2004 |
December 25, 2003 |
|||||||
| (13 weeks) | (13 weeks) | |||||||
| Revenues: |
||||||||
| Merchandise |
$ | 287,067 | $ | 270,149 | ||||
| Gasoline |
654,476 | 474,292 | ||||||
| Total revenues |
941,543 | 744,441 | ||||||
| Cost of sales: |
||||||||
| Merchandise |
182,975 | 170,975 | ||||||
| Gasoline |
604,589 | 433,356 | ||||||
| Total cost of sales |
787,564 | 604,331 | ||||||
| Gross profit |
153,979 | 140,110 | ||||||
| Operating expenses: |
||||||||
| Operating, general and administrative expenses |
111,270 | 105,126 | ||||||
| Depreciation and amortization |
14,386 | 14,075 | ||||||
| Total operating expenses |
125,656 | 119,201 | ||||||
| Income from operations |
28,323 | 20,909 | ||||||
| Other income (expense): |
||||||||
| Interest expense (Note 7) |
(8,986 | ) | (13,141 | ) | ||||
| Miscellaneous |
422 | 261 | ||||||
| Total other expense |
(8,564 | ) | (12,880 | ) | ||||
| Income before income taxes |
19,759 | 8,029 | ||||||
| Income tax expense |
(7,607 | ) | (3,092 | ) | ||||
| Net Income |
$ | 12,152 | $ | 4,937 | ||||
| Earnings per share (Note 8): |
||||||||
| Basic |
$ | 0.60 | $ | 0.27 | ||||
| Diluted |
0.58 | 0.24 | ||||||
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
| Three Months Ended |
||||||||
| December 30, 2004 |
December 25, 2003 |
|||||||
| (13 weeks) | (13 weeks) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
| Net income |
$ | 12,152 | $ | 4,937 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
14,386 | 14,075 | ||||||
| Provision for income taxes |
3,231 | 3,092 | ||||||
| Fair market value change in non-qualifying derivatives |
(486 | ) | (755 | ) | ||||
| Amortization of deferred loan costs |
258 | 853 | ||||||
| Amortization of long-term debt discount |
— | 288 | ||||||
| Other |
(73 | ) | 505 | |||||
| Changes in operating assets and liabilities (net of effects of acquisitions): |
||||||||
| Receivables |
2,034 | (555 | ) | |||||
| Inventories |
583 | (820 | ) | |||||
| Prepaid expenses |
518 | 780 | ||||||
| Other noncurrent assets |
(294 | ) | (58 | ) | ||||
| Accounts payable |
(18,782 | ) | (4,047 | ) | ||||
| Other current liabilities and accrued expenses |
42 | (13,938 | ) | |||||
| Other noncurrent liabilities |
2,572 | (3,155 | ) | |||||
| Net cash provided by operating activities |
16,141 | 1,202 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
| Additions to property held for sale |
(147 | ) | (513 | ) | ||||
| Additions to property and equipment |
(15,065 | ) | (9,336 | ) | ||||
| Proceeds from sale of land, building and equipment |
4,567 | 97,721 | ||||||
| Acquisitions of related businesses, net of cash acquired |
(1,431 | ) | (184,849 | ) | ||||
| Net cash used in investing activities |
(12,076 | ) | (96,977 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
| Principal repayments under capital leases |
(307 | ) | (337 | ) | ||||
| Principal repayments of long-term debt |
(7 | ) | (2,517 | ) | ||||
| Proceeds from issuance of long-term borrowings |
— | 80,000 | ||||||
| Proceeds from exercise of stock options |
310 | 205 | ||||||
| Repayments of shareholder loans |
— | 104 | ||||||
| Other financing costs |
— | (2,581 | ) | |||||
| Net cash provided by (used in) financing activities |
(4 | ) | 74,874 | |||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
4,061 | (20,901 | ) | |||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
108,048 | 72,901 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 112,109 | $ | 52,000 | ||||
| Cash paid during the period: |
||||||||
| Interest |
$ | 3,231 | $ | 14,177 | ||||
| Income taxes |
$ | 497 | $ | 200 | ||||
See Notes to Consolidated Financial Statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1—BASIS OF PRESENTATION
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of The Pantry, Inc. and its wholly owned subsidiaries (references to “the Company,” “Pantry,” “The Pantry,” “we,” “us,” and “our” mean The Pantry, Inc. and our consolidated subsidiaries). All inter-company transactions and balances have been eliminated in consolidation. Transactions and balances of each of these wholly owned subsidiaries are immaterial to the consolidated financial statements.
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The interim consolidated financial statements have been prepared from the accounting records of The Pantry, Inc. and its subsidiaries and all amounts at December 30, 2004 and for the three months ended December 30, 2004 and December 25, 2003 are unaudited. References herein to “The Pantry” or “the Company” include all subsidiaries. Pursuant to Regulation S-X, certain information and note disclosures normally included in annual financial statements have been condensed or omitted. The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented, and which are of a normal, recurring nature.
We suggest that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004.
Our results of operations for the three months ended December 30, 2004 and December 25, 2003 are not necessarily indicative of results to be expected for the full fiscal year. The convenience store industry in our marketing areas generally experiences higher levels of revenues and profit margins during the summer months than during the winter months. As a result, we have historically achieved higher revenues and earnings in our third and fourth fiscal quarters.
Accounting Period
We operate on a 52-53 week fiscal year ending on the last Thursday in September. Our 2005 fiscal year ends on September 29, 2005 and is a 52 week year. Fiscal 2004 was a 53 week year.
The Pantry
As of December 30, 2004, we operated 1,353 convenience stores located in Florida (457), North Carolina (321), South Carolina (237), Tennessee (103), Georgia (98), Mississippi (51), Kentucky (37), Virginia (30), Indiana (11), and Louisiana (8). Our stores offer a broad selection of merchandise, gasoline and ancillary products and services designed to appeal to the convenience needs of our customers, including gasoline, car care products and services, tobacco products, beer, soft drinks, self-service fast food and beverages, publications, dairy products, groceries, health and beauty aids, money orders and other ancillary services. In all states, except North Carolina and Mississippi, we also sell lottery products. Self-service gasoline is sold at 1,327 locations, 889 of which sell gasoline under major oil company brand names including Amoco®, BP®, Chevron®, Citgo®, Mobil®, Shell®, Exxon® and Texaco®.
Recently Issued Accounting Standards
On December 16, 2004 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. This new standard eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires such transactions be accounted for using a fair-value-based method and the resulting cost recognized in our financial statements. This new standard is effective for awards that are granted, modified or settled
6
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
in cash in interim and annual periods beginning after June 15, 2005. In addition, this new standard will apply to unvested options granted prior to the effective date. We will adopt this new standard effective for the fourth fiscal quarter of 2005, and have not yet determined what impact this standard will have on our financial position or results of operations.
Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
Stock-Based Compensation
We account for stock options under the intrinsic value method recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in the consolidated statements of operations, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:
| Three Months Ended |
||||||||
| December 30, 2004 |
December 25, 2003 |
|||||||
| Net income (in thousands): |
||||||||
| As reported |
$ | 12,152 | $ | 4,937 | ||||
| Deduct—Total stock-based compensation expense determined under fair value method for all awards, net of tax |
(180 | ) | ||||||