Form 10-Q PANTRY INC For: Dec 25
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E-mailUNITED 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�25, 2014
Commission file number: 000-25813
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 No.) |
P.O. Box 8019
305 Gregson Drive
Cary, North Carolina 27511
(Address of principal executive offices and zip code)
(919) 774-6700
(Registrants telephone number, including area code)
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���������No���
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).� Yes ������ No ��
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer � | Accelerated filer����� | ||
Non-accelerated filer �� �(Do not check if a smaller reporting company) | Smaller reporting company �� | ||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).��Yes������� No���
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
COMMON STOCK, $0.01 PAR VALUE | � | 23,504,174�SHARES |
(Class) | � | (Outstanding at January 22, 2015) |
THE PANTRY, INC.
TABLE OF CONTENTS�
Page | ||
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���Item 1. | ||
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���Item 2. | ||
���Item 3. | ||
���Item 4. | ||
���Item 1. | ||
���Item 1A. | ||
���Item 2. | ||
���Item 6. | ||
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INTRODUCTORY NOTE
As previously announced, on December 18, 2014, The Pantry, Inc. ("the Company") entered into an Agreement and Plan of Merger (the Merger Agreement ) with Couche-Tard U.S. Inc. ( Parent ) and CT-US Acquisition Corp. ( Merger Sub ). Pursuant to the Merger Agreement and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving company and a wholly owned subsidiary of Parent (the Merger ). The closing of the Merger is subject to certain conditions, including (i) the approval and adoption of the Merger Agreement and the Merger by the Companys stockholders, (ii) the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) there being no material adverse effect on the Company prior to the closing of the Merger and (vi) other customary conditions. On January 12, 2015, we filed a preliminary proxy statement in connection with a special meeting of our stockholders to seek approval and adoption of the Merger Agreement and the Merger. Unless stated otherwise, all forward-looking information contained in this report does not take into account or give any effect to the impact of the proposed Merger.�
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PART I FINANCIAL INFORMATION
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Item 1.��Financial Statements.
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THE PANTRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
� | (Unaudited) | � | |||||
(in thousands, except par value and shares) | December�25, 2014 | September�25, 2014 | |||||
ASSETS | � | � | |||||
Current assets: | � | � | |||||
Cash and cash equivalents | $ | 123,003 | $ | 81,652 | |||
Receivables | 67,164 | 65,666 | |||||
Inventories | 113,256 | 133,904 | |||||
Prepaid expenses and other current assets | 14,527 | 17,593 | |||||
Deferred income taxes | 22,895 | 35,836 | |||||
Total current assets | 340,845 | 334,651 | |||||
Property and equipment, net | 862,356 | 873,197 | |||||
Other assets: | � | � | |||||
Goodwill and other intangible assets | 440,544 | 440,628 | |||||
Other noncurrent assets | 84,538 | 85,278 | |||||
Total other assets | 525,082 | 525,906 | |||||
TOTAL ASSETS | $ | 1,728,283 | $ | 1,733,754 | |||
LIABILITIES AND SHAREHOLDERS EQUITY | � | � | |||||
Current liabilities: | � | � | |||||
Current maturities of long-term debt | $ | 2,715 | $ | 2,715 | |||
Current maturities of lease finance obligations | 11,302 | 11,555 | |||||
Accounts payable | 133,978 | 149,388 | |||||
Accrued compensation and related taxes | 12,279 | 14,538 | |||||
Other accrued taxes | 18,654 | 27,084 | |||||
Self-insurance reserves | 29,750 | 28,812 | |||||
Other accrued liabilities | 40,312 | 34,183 | |||||
Total current liabilities | 248,990 | 268,275 | |||||
Other liabilities: | � | � | |||||
Long-term debt | 495,517 | 496,063 | |||||
Lease finance obligations | 420,551 | 423,073 | |||||
Deferred income taxes | 81,530 | 83,545 | |||||
Deferred vendor rebates | 8,496 | 8,629 | |||||
Other noncurrent liabilities | 114,475 | 114,712 | |||||
Total other liabilities | 1,120,569 | 1,126,022 | |||||
Commitments and contingencies (Note 8) | |||||||
Shareholders equity: | � | � | |||||
Common stock, $.01 par value, 50,000,000 shares authorized; 23,404,208 and 23,445,826 issued and | � | � | |||||
outstanding at December 25, 2014 and September�25, 2014, respectively | 234 | 234 | |||||
Additional paid-in capital | 221,508 | 221,181 | |||||
Accumulated other comprehensive loss, net of deferred income taxes of $0 and $0 at December 25, 2014 and | � | � | |||||
September�25, 2014, respectively | |||||||
Retained earnings | 136,982 | 118,042 | |||||
Total shareholders equity | 358,724 | 339,457 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 1,728,283 | $ | 1,733,754 | |||
See Notes to Condensed Consolidated Financial Statements
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THE PANTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
� | Three Months Ended | ||||||
(in thousands, except per share data) | December�25, 2014 | December�26, 2013 | |||||
Revenues: | � | � | |||||
Merchandise | $ | 451,962 | $ | 440,780 | |||
Fuel | 1,224,874 | 1,363,299 | |||||
Total revenues | 1,676,836 | 1,804,079 | |||||
Costs and operating expenses: | � | � | |||||
Merchandise cost of goods sold (exclusive of items shown separately below) | 299,193 | 293,001 | |||||
Fuel cost of goods sold (exclusive of items shown separately below) | 1,147,645 | 1,314,617 | |||||
Store operating | 126,739 | 128,069 | |||||
General and administrative | 25,305 | 25,977 | |||||
Impairment charges | 1,115 | 829 | |||||
Depreciation and amortization | 25,282 | 28,679 | |||||
Total costs and operating expenses | 1,625,279 | 1,791,172 | |||||
Income from operations | 51,557 | 12,907 | |||||
Interest expense | 21,075 | 21,372 | |||||
Income (loss) before income taxes | 30,482 | (8,465 | ) | ||||
Income tax expense (benefit) | 11,541 | (3,321 | ) | ||||
Net income (loss) | $ | 18,941 | $ | (5,144 | ) | ||
Earnings (loss) per share: | � | � | |||||
Basic | $ | 0.83 | $ | (0.23 | ) | ||
Diluted | $ | 0.81 | $ | (0.23 | ) | ||
See Notes to Condensed Consolidated Financial Statements
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THE PANTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
� | Three Months Ended | ||||||
(in thousands) | December�25, 2014 | December�26, 2013 | |||||
Net income (loss) | $ | 18,941 | $ | (5,144 | ) | ||
Other comprehensive income (loss), net of tax: | � | � | |||||
������Amortization of accumulated other comprehensive loss on�terminated interest �������������rate swap agreements, net of deferred income taxes of $63 in the three �������������months ended December 26, 2013 | 98 | ||||||
Comprehensive income (loss) | $ | 18,941 | $ | (5,046 | ) | ||
See Notes to Condensed Consolidated Financial Statements
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THE PANTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
� | Three Months Ended | ||||||
(in thousands) | December�25, 2014 | December�26, 2013 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES | � | � | |||||
Net income (loss) | $ | 18,941 | $ | (5,144 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | � | � | |||||
Depreciation and amortization | 25,282 | 28,679 | |||||
Impairment charges | 1,115 | 829 | |||||
Benefit (provision) for deferred income taxes | 11,567 | (2,983 | ) | ||||
Stock-based compensation expense | 1,054 | 924 | |||||
Other | 528 | 1,404 | |||||
Changes in operating assets and liabilities: | � | � | |||||
Receivables | (1,674 | ) | 5,787 | ||||
Inventories | 20,648 | (1,898 | ) | ||||
Prepaid expenses and other current assets | 1,815 | 448 | |||||
Accounts payable | (11,465 | ) | (10,973 | ) | |||
Other current liabilities | (5,914 | ) | (5,272 | ) | |||
Other noncurrent assets and liabilities, net | (263 | ) | (1,168 | ) | |||
Net cash provided by operating activities | 61,634 | 10,633 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | � | � | |||||
Additions to property and equipment | (17,393 | ) | (31,748 | ) | |||
Proceeds from sales of property and equipment | 1,326 | 2,003 | |||||
Other | (1,673 | ) | |||||
Net cash used in investing activities | (17,740 | ) | (29,745 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | � | � | |||||
Repayments of long-term debt, including redemption premiums | (638 | ) | (638 | ) | |||
Repayments of lease finance obligations | (2,853 | ) | (4,511 | ) | |||
Other� | 948 | (401 | ) | ||||
Net cash used in financing activities | (2,543 | ) | (5,550 | ) | |||
Net increase (decrease) in cash and cash equivalents | 41,351 | (24,662 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 81,652 | 57,168 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 123,003 | $ | 32,506 | |||
Cash paid (received) during the period: | � | � | |||||
Interest | $ | 15,237 | $ | 16,962 | |||
Income taxes | $ | (148 | ) | $ | (51 | ) | |
Non-cash investing and financing activities: | � | � | |||||
Capital expenditures financed through capital leases | $ | 650 | $ | 415 | |||
Accrued purchases of property and equipment | $ | 10,223 | $ | 10,705 | |||
See Notes to Condensed Consolidated Financial Statements
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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NOTE 1 - BASIS OF PRESENTATION
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The Pantry
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As of December�25, 2014, we operated 1,511 convenience stores primarily in the southeastern United States. Our stores offer a broad selection of merchandise, fuel and ancillary products and services designed to appeal to the convenience needs of our customers, including fuel, 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 Alabama and Mississippi, we also sell lottery products. As of December�25, 2014, we operated 233 quick service restaurants and 231 of our stores included car wash facilities. Self-service fuel is sold at 1,502 locations, of which 1,031 sell fuel under major oil company brand names including BP� Products North America, Inc. ("BP"), CITGO�, ConocoPhillips�, ExxonMobil�, Marathon� Petroleum Company, LLC ("Marathon"), Shell� and Valero�.
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The accompanying unaudited condensed consolidated financial statements include the accounts of The Pantry, Inc. and its wholly owned subsidiary. References in this report to "the Company," "Pantry," "The Pantry," "we," "us" and "our" refer to The Pantry, Inc. and its wholly owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation. Transactions and balances of our wholly owned subsidiary are immaterial to the condensed consolidated financial statements.
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Merger Agreement
On December�18, 2014, The Pantry, Inc., a Delaware corporation, entered into an Agreement and Plan of Merger (the Merger Agreement ) with Couche-Tard U.S. Inc. ( Parent ) and CT-US Acquisition Corp. ( Merger Sub ). Pursuant to the Merger Agreement and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving company and a wholly owned subsidiary of Parent (the Merger ).
As a result of the Merger, each issued and outstanding share of the Companys common stock, par value $0.01 per share (the Company Common Stock ) (other than shares (a)�owned by the Company as treasury stock or owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent or (b)�held by a stockholder who has properly exercised and perfected such holders appraisal rights under Section�262 of the General Corporation Law of the State of Delaware (the DGCL )), will be converted into the right to receive, in respect of each share of Company Common Stock, $36.75 in cash, without interest (the Merger Consideration ). The Merger Agreement also provides that (a)�each issued and outstanding option to purchase Company Common Stock, whether vested or unvested, will be exchanged for the Merger Consideration less the applicable exercise price, (b)�each issued and outstanding restricted share award covering Company Common Stock will vest and be exchanged for the Merger Consideration and (c)�each issued and outstanding restricted stock unit will vest and be exchanged for the Merger Consideration. For each restricted share award that is subject to performance-based vesting and for which performance is incomplete as of the effective time of the Merger, the number of shares of Company Common Stock subject to such award shall be determined based on the greater of (a)�the target number of shares of Company Common Stock subject to such award and (b)�actual performance achieved during the twelve (12)�month period ending on the last day of the fiscal month most recently completed on or prior to the effective time of the Merger.
The Company and Parent have each agreed to customary representations, warranties and covenants in the Merger Agreement, including, among others, agreements by the Company to (i)�continue conducting its businesses in the ordinary course of business consistent with past practice during the interim period between the execution of the Merger Agreement and consummation of the Merger and (ii)�not engage in certain specified kinds of transactions during that period.�In addition, the Company has agreed that, subject to certain exceptions, its board of directors (the Board ) will recommend the approval and adoption of the Merger Agreement and the Merger by its stockholders. The Company has also made certain additional customary covenants, including, among others, not to (i)�solicit or knowingly encourage inquiries or proposals relating to alternative business combination transactions or (ii)�subject to certain exceptions, engage in discussions or negotiations regarding, or provide any non-public information in connection with, alternative business combination transactions.
The closing of the Merger is subject to certain conditions, including (i)�the approval and adoption of the Merger Agreement and the Merger by the Companys stockholders, (ii)�the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii)�there being no material adverse effect on the Company prior to the closing of the Merger and (vi)�other customary conditions.
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Either the Company or Parent may terminate the Merger Agreement if, among certain other circumstances, (i)�the Merger has not become effective on or before December�18, 2015 or (ii)�the Companys stockholders fail to approve the Merger Agreement and the Merger.�In addition, the Company may terminate the Merger Agreement under certain other circumstances, including�to allow the Company to enter into a definitive agreement for an alternative business combination transaction that constitutes a superior proposal. �Parent may terminate the Merger Agreement under certain other circumstances, including�if the Board withdraws or adversely changes its recommendation of the Merger or if the Company intentionally and materially breaches its non-solicitation covenant.
The Merger Agreement also provides that upon termination under specified circumstances, including, among others, a change in the recommendation of the Board or termination of the Merger Agreement by the Company to allow the Company to enter into a definitive agreement for an alternative business combination transaction that constitutes a superior proposal, the Company would be required to pay Parent a termination fee of $39.5 million.
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The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which is attached as Exhibit�2.1 to the Form 8-K filed on December 18, 2014.
During the three months ended December 25, 2014, we recorded $2.7 million of expenses related to the proposed Merger which are included in general and administrative expenses, net in the Condensed Consolidated Statements of Operations.
Unaudited Condensed Consolidated Financial Statements
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The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated financial statements have been prepared from the accounting records and all amounts as of December�25, 2014 are unaudited. Pursuant to Regulation S-X, certain information and note disclosures normally included in our 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.
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The condensed consolidated financial statements included herein should 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�25, 2014.
Our results of operations for the three months ended December�25, 2014 and December�26, 2013 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 sales volumes during the summer months than during the winter months.
References in this report to "fiscal 2015" refer to our current fiscal year, which ends September 24, 2015, references to "fiscal 2014" refer to our prior fiscal year, which ended on September 25, 2014, and references to "fiscal 2013" refer to our fiscal year, which ended September 26, 2013, all of which are 52 week years.
Excise and Other Taxes
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We pay federal and state excise taxes on petroleum products. Fuel revenues and cost of goods sold included excise and other taxes of approximately $198.3 million and $195.3 million for the three months ended December�25, 2014 and December�26, 2013, respectively.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out method for merchandise inventories and using the weighted-average method for fuel inventories. The fuel we purchase from our vendors is temperature adjusted. The fuel we sell at retail is sold at ambient temperatures. The volume of fuel we maintain in inventory can expand or contract with changes in temperature. Depending on the actual temperature experience and other factors, we may realize a net increase or decrease in the volume of our fuel inventory during our fiscal year. At interim periods, we record any projected increases or decreases through fuel cost of goods sold ratably over the fiscal year, which we believe more fairly reflects our results by better matching our costs to our retail sales. As of December�25, 2014 and December�26, 2013, we increased inventory by capitalizing fuel expansion variances of approximately $256 thousand and $2.6 million, respectively. At the end of any fiscal year, the entire variance is absorbed into fuel cost of goods sold.
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NOTE 2 - GOODWILL AND OTHER INTANGIBLE ASSETS
We test goodwill for possible impairment in the second quarter of each fiscal year and more frequently if impairment indicators arise. A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. An impairment indicator represents an event or change in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
In accordance with our policy, we are in the process of performing our annual goodwill impairment assessment as of January 22, 2015 and we will complete our step one of the goodwill impairment test in the second quarter of fiscal 2015. We operate as one reporting unit and as of our annual testing date, our market capitalization was significantly greater than our book value.
Our other intangible assets have finite lives and are amortized over their estimated useful lives using the straight-line method. We review our other intangible assets for impairment whenever events or circumstances indicate that it is more likely than not that fair value of the asset is below its carrying amount.
No impairment charges related to goodwill and other intangible assets were recognized during the first three months of fiscal 2015 or fiscal 2014.
The following table reflects goodwill and other intangible asset balances for the periods presented:
(in thousands) | December�25, 2014 | September�25, 2014 | |||||||||||||||||||||||||
� | Weighted Average Useful Life | Gross Amount | Accumulated Amortization | Net Book Value | Weighted Average Useful Life | Gross Amount | Accumulated Amortization | Net Book Value | |||||||||||||||||||
Unamortized | � | � | � | � | � | � | � | � | |||||||||||||||||||
Goodwill | N/A | $ | 436,102 | N/A | $ | 436,102 | N/A | $ | 436,102 | N/A | $ | 436,102 | |||||||||||||||
Amortized | � | � | � | � | � | � | � | � | |||||||||||||||||||
Customer agreements | 13.3 | 1,356 | (1,028 | ) | 328 | 13.3 | 1,335 | (986 | ) | 349 | |||||||||||||||||
Non-compete agreements | 33.3 | 7,974 | (3,860 | ) | 4,114 | 33.3 | 7,911 | (3,734 | ) | 4,177 | |||||||||||||||||
� | � | $ | 9,330 | $ | (4,888 | ) | $ | 4,442 | � | $ | 9,246 | $ | (4,720 | ) | $ | 4,526 | |||||||||||
Total goodwill and other ���intangible assets | � | $ | 445,432 | $ | (4,888 | ) | $ | 440,544 | � | $ | 445,348 | $ | (4,720 | ) | $ | 440,628 | |||||||||||
NOTE 3 IMPAIRMENT CHARGES
The following table reflects asset impairment charges for the periods presented:
� | Three Months Ended | ||||||
(in thousands) | December�25, 2014 | December�26, 2013 | |||||
Operating stores | $ | 1,115 | $ | 742 | |||
Surplus properties | 87 | ||||||
Total impairment charges | $ | 1,115 | $ | 829 | |||
Operating Stores. �We test our operating stores for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We compared the carrying amount of these operating store assets to their estimated future undiscounted cash flows to determine recoverability. If the sum of the estimated undiscounted cash flows did not exceed the carrying value, we then estimated the fair value of these operating stores to measure the impairment, if any. We recorded impairment charges related to operating stores as detailed in the table above. There were no operating stores classified as held for sale as of December�25, 2014 and September�25, 2014.
Surplus Properties. �We test our surplus properties for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Periodically management determines that certain surplus properties should be classified as held for sale or reclassified from held for sale back to held for use because of a change in facts and circumstances, including changes in marketing and bid activity. We estimate the fair value of these and other surplus properties where events or changes in circumstances�indicated, based on marketing and bid activity, that the carrying amount of the assets
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may not be recoverable. Based on these estimates, we determined that the carrying values of certain surplus properties exceeded fair value resulting in the impairment charges as detailed above. Surplus properties classified as held for sale and included in prepaid expenses and other current assets on the accompanying Condensed Consolidated Balance Sheets were�$969 thousand and $2.3 million as of December�25, 2014 and September�25, 2014, respectively.
The impairment evaluation process requires management to make estimates and assumptions with regard to fair value. Actual values may differ significantly from these estimates. Such differences could result in future impairment that could have a material impact on our consolidated financial statements.
Refer to Note 9, Fair Value Measurements, for additional information regarding the determination of fair value.
NOTE 4 - DEBT
The components of long-term debt for the periods presented consisted of the following:
(in thousands) | December�25, 2014 | September�25, 2014 | |||||
Senior secured term loan | $ | 249,900 | $ | 250,537 | |||
Senior unsecured notes | 250,000 | 250,000 | |||||
Total long-term debt | 499,900 | 500,537 | |||||
Lesscurrent maturities | (2,715 | ) | (2,715 | ) | |||
Lessunamortized debt discount | (1,668 | ) | (1,759 | ) | |||
Long-term debt, net of current maturities and unamortized debt discount | $ | 495,517 | $ | 496,063 | |||
We are party to the Fourth Amended and Restated Credit Agreement, as amended, which provides for a $480.0 million senior secured credit facility ("credit facility"). Our credit facility includes�a $225.0 million senior secured revolving credit facility which expires in 2017 and a $255.0 million senior secured term loan which matures in 2019. In addition, the credit facility provides for the ability to incur additional term loans and increases in the secured revolving credit facility in an aggregate principal amount of up to $200.0 million provided certain conditions are satisfied. Interest payments on our credit facility are payable in quarterly installments until maturity.�The interest rate on borrowings under the revolving credit facility is dependent on our consolidated total leverage ratio, and at our option, is either the base rate (generally the applicable prime lending rate of Wells Fargo Bank, National Association, as announced from time to time) plus 250 to 350 basis points or LIBOR plus 350 to 450 basis points. Our current interest rate under the revolving credit facility is, at our option, either the base rate plus 300 basis points or LIBOR plus 400 basis points, with an unused commitment fee of 50 basis points. The interest rate on the senior secured term loan is also dependent on our consolidated total leverage ratio and ranges between LIBOR plus 350 to 375 basis points, with a LIBOR floor of 100 basis points. Based on our current consolidated leverage ratio, the interest rate is LIBOR plus 375 basis points with a LIBOR floor of 100 basis points.
Borrowings under our senior secured term loan are required to be paid in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount, with the remainder due on the maturity date. In addition, borrowings under our credit facility are required to be prepaid with: (a) 100% of the net cash proceeds of the issuance or incurrence of debt by the Company or any of its subsidiaries, subject to certain exceptions; (b) 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries and other asset dispositions by the Company or its subsidiaries, if any, subject to reinvestment provisions and certain other exceptions; and (c) to the extent the total leverage ratio is greater than 3.5 to 1.0 at the end of any fiscal year, the lesser of (i) 50% of excess cash flow during such fiscal year minus voluntary prepayments of our senior secured term loan or senior unsecured notes or (ii) the amount of prepayment necessary to lower the total leverage ratio to 3.5 to 1.0, after giving pro forma effect to such prepayment.
Our credit facility is secured by substantially all of our assets and is required to be fully and unconditionally guaranteed by any material, direct and indirect, domestic subsidiaries. Our credit facility contains customary affirmative and negative covenants for financings of its type, including the following financial covenants: maximum total adjusted leverage ratio and minimum interest coverage ratio (as defined in our credit agreement). Additionally, our credit facility contains restrictive covenants regarding our ability to incur indebtedness, make capital expenditures, enter into mergers, acquisitions, and joint ventures, pay dividends or change our line of business, among other things. If we are able to satisfy a leverage ratio incurrence test and no default under our credit facility is continuing or would result therefrom, we are permitted under the credit facility to pay dividends in an aggregate amount not to exceed $35.0 million per fiscal year, plus the sum of (i) any unused amount from
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preceding years beginning with fiscal year 2012 and (ii) the amount of excess cash flow, if any, not required to be utilized to prepay outstanding amounts under our credit facility for the previous fiscal year.
In addition, a change of control of our company, which includes among other things, the majority of the directors on our Board consisting of new directors whose nomination was not recommended by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities or a change of control occurring under the indenture governing our senior unsecured notes, would constitute an event of default, upon which, the lenders holding a majority of the outstanding term loans and revolving credit commitments under the credit facility would be able to accelerate any unpaid loan amounts requiring us to immediately repay all such amounts (plus accrued interest to the date of repayment).
As of December�25, 2014, we had approximately $84.9 million of standby letters of credit issued under the credit facility. After taking into account outstanding letters of credit and the consolidated total adjusted leverage ratio constraint to availability, approximately $140.1 million was available for future borrowing under the revolving credit facility, of which $75.1 million was available for the issuances of letters of credit. The standby letters of credit primarily relate to vendor contracts, self-insurance programs and regulatory requirements.
We have outstanding $250.0 million of 8.375% senior unsecured notes ("senior notes") maturing in 2020.�Interest on the senior notes is payable semi-annually in February and August of each year until maturity. If a change of control occurs under the indenture governing our senior notes, which includes among other things, the majority of the directors on our Board consisting of new directors whose election or nomination for election was not approved by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities, certain mergers or consolidations, and the sale of all or substantially all of our assets, we must give holders of the senior notes an opportunity to sell their senior notes to us at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest, if any, to the purchase date, subject to certain conditions. Failure to make or comply with the repurchase offer would be an event of default under the indenture governing our senior notes, which would also trigger a cross-default under our credit facility. Additionally, an event of default under our credit facility that results in the acceleration of indebtedness thereunder would result in an event of default under the indenture governing our senior notes. Upon an event of default under the indenture governing our senior notes, the requisite noteholders would be able to accelerate and require us to immediately repay all unpaid senior unsecured note amounts (plus accrued interest to the date of repayment).
The indenture governing our senior notes contains restrictive covenants that are similar to those contained in our credit facility. If we are able to satisfy a fixed charge coverage ratio incurrence test and no default under our indenture is continuing or would result therefrom, we are permitted to pay dividends, subject to certain exceptions and qualifications, not exceeding 50% of our consolidated net income (as defined in our indenture) from June 29, 2012 to the end of our most recently ended fiscal quarter, plus proceeds received from certain equity issuances and returns or dispositions of certain investments made from August 3, 2012, less the aggregate amount of dividends or other restricted payments made under this provision and the amount of certain other restricted payments that our indenture permits us to make. Notwithstanding the indenture provision described in the prior sentence, so long as no default under our indenture is continuing or would result therefrom, we are permitted to pay dividends in an aggregate amount not to exceed $20.0 million since August 3, 2012.
Under the indenture governing our senior notes the maximum total adjusted leverage ratio (generally the ratio of our consolidated debt to specified earnings) is 6.0 for the fiscal quarter ending December 25, 2014 and the minimum interest coverage ratio (generally the ratio of specified earnings to interest expense) is 2.25 for the fiscal quarter ending�December�25, 2014�and each fiscal quarter ending thereafter. We believe that we will be able to continue to satisfy these ratios; however, certain factors could result in our failure to comply with our covenants. In the event we are unable to comply with our covenants, or our performance suggests an impending inability to comply, we would attempt to negotiate with our lenders to obtain loan modifications or, if necessary, waivers of compliance with required ratios under our credit facility.
As of December�25, 2014, we were in compliance with all covenants and restrictions. Our ability to access our credit facility is subject to our compliance with the terms and conditions of the credit agreement governing our credit facility, including financial and negative covenants.
After giving effect to the applicable restrictions on the payment of dividends under our credit facility and indenture, subject to compliance with applicable law, as of�December�25, 2014, there was�$20.0 million�free of restriction, which was available for the payment of dividends. We do not expect to pay dividends in the foreseeable future.
The fair value of our long-term debt is disclosed in Note 9, Fair Value Measurements.
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The remaining annual maturities of our long-term debt as of December�25, 2014 are as follows:
(in thousands) | � | ||
Fiscal year | � | ||
2015 | $ | 2,078 | |
2016 | 2,550 | ||
2017 | 2,550 | ||
2018 | 2,550 | ||
2019 | 240,172 | ||
2020 | 250,000 | ||
������Total principal payments | $ | 499,900 | |
NOTE 5 STOCK-BASED COMPENSATION
We account for stock-based compensation by estimating the fair value of stock options using the Black-Scholes option pricing model.�Restricted stock awards and restricted stock units (collectively time-based restricted stock) and performance-based restricted stock are valued at the market price of a share of our common stock on the date of grant. We recognize this fair value as an expense in general and administrative expenses in our Condensed Consolidated Statements of Operations over the requisite service period using the straight-line method. We adjust the expense recognized on performance-based restricted stock based on the probability of achieving performance metrics.
Stock-based compensation grants, for the periods presented are as follows:
� | Three Months Ended | ||||||
(in thousands) | December�25, 2014 | December�26, 2013 | |||||
Shares granted | � | � | |||||
Stock options | 121 | ||||||
Time-based restricted stock | 56 | 96 | |||||
Performance-based restricted stock | 47 | 191 | |||||
Total shares granted | 103 | 408 | |||||
Fair value of shares granted | � | � | |||||
Stock options | $ | $ | 547 | ||||
Time-based restricted stock | 2,059 | 1,528 | |||||
Performance-based restricted stock | 1,703 | 3,033 | |||||
Total fair value of shares granted | $ | 3,762 | $ | 5,108 | |||
The components of stock-based compensation expense in general and administrative expenses in our Condensed Consolidated Statements of Operations for the periods presented are as follows:
� | Three Months Ended | ||||||
(in thousands) | December�25, 2014 | December�26, 2013 | |||||
Stock options | $ | 144 | $ | 128 | |||
Time-based restricted stock | 597 | 761 | |||||
Performance-based restricted stock | 313 | 35 | |||||
Total stock-based compensation expense | $ | 1,054 | $ | 924 | |||
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NOTE 6 - INTEREST EXPENSE
The components of interest expense for the periods presented are as follows:
� | Three Months Ended | ||||||
(in thousands) | December�25, 2014 | December�26, 2013 | |||||
Interest on long-term debt, including amortization of deferred ���financing costs | $ | 9,935 | $ | 9,933 | |||
Interest on lease finance obligations | 10,894 | 10,988 | |||||
Miscellaneous | 246 | 451 | |||||
Interest expense | $ | 21,075 | $ | 21,372 | |||
NOTE 7 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss)�per share is computed on the basis of the weighted-average number of common shares available to common shareholders. Diluted earnings (loss) per share is computed on the basis of the weighted-average number of common shares available to common shareholders, plus the effect of unvested restricted stock and stock options using the "treasury stock" method.
Stock options and restricted stock representing two thousand and 1.3 million shares for the three months ended December�25, 2014 and December�26, 2013, respectively, were anti-dilutive and were not included in the diluted earnings per share calculation. In periods in which a net loss is incurred, no common stock equivalents are included since they are anti-dilutive. As such, all stock options and restricted stock outstanding are excluded from the computation of diluted loss per share in those periods.
The following table reflects the calculation of basic and diluted earnings (loss) per share for the periods presented:
� | Three Months Ended | ||||||
(in thousands, except per share data) | December�25, 2014 | December�26, 2013 | |||||
Net earnings (loss) | $ | 18,941 | $ | (5,144 | ) | ||
Earnings (loss) per sharebasic: | � | � | |||||
Weighted-average shares outstanding | 22,930 | 22,791 | |||||
Earnings (loss) per sharebasic | $ | 0.83 | $ | (0.23 | ) | ||
Earnings (loss) per sharediluted: | � | � | |||||
Weighted-average shares outstanding | 22,930 | 22,791 | |||||
Weighted-average potential dilutive shares outstanding | 345 | ||||||
Weighted-average shares and potential dilutive shares outstanding | 23,275 | 22,791 | |||||
Earnings (loss) per sharediluted | $ | 0.81 | $ | (0.23 | ) | ||
NOTE 8 - COMMITMENTS AND CONTINGENCIES
As of December�25, 2014, we were contingently liable for outstanding letters of credit in the amount of approximately $84.9 million primarily related to vendor contracts, self-insurance programs and regulatory requirements. The letters of credit are not to be drawn against unless we default on the timely payment of related liabilities.
Legal and Regulatory Matters
On January 22, 2015, a purported shareholder of The Pantry, Dennis J. Krystek, filed a putative class action complaint challenging the Merger in the Court of Chancery of the State of Delaware. The complaint names as defendants The Pantry, Couche-Tard, Merger Sub and the members of the board of directors of The Pantry. The complaint seeks, among other relief, an order enjoining the Merger, compensatory damages, and an award of attorney's fees and costs on the grounds that, among other things, the board of directors of The Pantry breached their fiduciary duty in connection with entering into the Merger Agreement and approving the Merger as well as failing to disclose material
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information relating to the process leading to the execution of the Merger Agreement. The complaint further alleges that Couche-Tard and Merger Sub aided and abetted the alleged breaches of fiduciary duties. It is possible that these complaints will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the Merger will be brought.
We are party to various other legal actions in the ordinary course of our business. We believe these other actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, managements present judgment is that the resolution of these matters will not have a material impact on our business, financial condition, results of operations and cash flows. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations and cash flows could be materially affected.�
Our Board of Directors has approved employment agreements for our executives, which create certain liabilities in the event of the termination of these executives, including termination following a change of control. These agreements have original terms of at least one year and specify the executives current compensation, benefits and perquisites, the executives entitlements upon termination of employment and other employment rights and responsibilities.
In the first quarter of fiscal 2015, we received proceeds of $4.2 million from a class action settlement fund related to a lawsuit regarding percentage-based transaction fees charged to truck stops and other retail fueling facilities. These proceeds are included as a reduction in general and administrative expenses for the three months ended December�25, 2014.
Environmental Liabilities and Contingencies
We are subject to various federal, state and local environmental laws and regulations. We make financial expenditures in order to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. In particular, at the federal level, the Resource Conservation and Recovery Act of 1976, as amended, requires the U.S. Environmental Protection Agency ("EPA") to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking underground storage tanks (e.g., overfills, spills and underground storage tank releases).
Federal and state laws and regulations require us to provide and maintain evidence that we are taking financial responsibility for corrective action and compensating third parties in the event of a release from our underground storage tank systems. In order to comply with these requirements, as of December�25, 2014, we maintained letters of credit in the aggregate amount of approximately $1.4 million in favor of state environmental agencies in North Carolina, South Carolina, Virginia, Georgia, Indiana, Tennessee, Kentucky and Louisiana.
We also rely upon the reimbursement provisions of applicable state trust funds. In Florida, we meet our financial responsibility requirements by state trust fund coverage for releases occurring through December 31, 1998 and meet such requirements for releases thereafter through private commercial liability insurance. In Georgia, we meet our financial responsibility requirements by a combination of state trust fund coverage, private commercial liability insurance and a letter of credit.
As of December�25, 2014, environmental reserves of approximately $5.1 million and $73.5 million are included in other accrued liabilities and other noncurrent liabilities, respectively. As of September�25, 2014, environmental liabilities of approximately $5.1 million and $73.4 million are included in other accrued liabilities and other noncurrent liabilities, respectively. These environmental liabilities represent our estimates for future expenditures for remediation associated with 546 and 548 known contaminated sites as of December�25, 2014 and September�25, 2014, respectively, as a result of releases (e.g., overfills, spills and underground storage tank releases) and are based on current regulations, historical results and certain other factors. We estimate that approximately $70.2 million of our environmental obligations will be funded by state trust funds and third-party insurance; as a result we estimate we will spend approximately $8.4 million for remediation.
As of December�25, 2014, anticipated reimbursements of $1.6 million are recorded as current receivables and $70.2 million are recorded as other noncurrent assets. As of September�25, 2014, anticipated reimbursements of $2.0 million were recorded as current receivables and $70.3 million were recorded as other noncurrent assets. Remediation costs for known sites are expected to be incurred over the next one to ten years. Environmental liabilities have been established with remediation costs based on internal and external estimates for each site. Future remediation costs are not discounted unless the timing and amounts are fixed or reliably determinable. There are no sites for which the timing and amounts for future remediation are fixed or reliably determinable as of December�25, 2014 and September�25, 2014.
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Although we anticipate that we will be reimbursed for certain expenditures from state trust funds and private insurance, until such time as a claim for reimbursement has been formally accepted for coverage and payment, there is a risk of our reimbursement claims being rejected by a state trust fund or insurer. In Florida, remediation of such contamination reported before January�1, 1999 will be performed by the state (or state approved independent contractors) and substantially all of the remediation costs, less any applicable deductibles, will be paid by the state trust fund. We will perform remediation in other states through the use of independent contractor firms. For certain sites, the state trust fund does not cover a deductible or has a co-pay which may be less than the cost of such remediation. Although we are not aware of releases or contamination at other locations where we currently operate or have operated stores, any such releases or contamination could require substantial remediation expenditures, some or all of which may not be eligible for reimbursement from state trust funds or private insurance.�
As of December�25, 2014 and September�25, 2014, there are 108 and 107 sites, respectively, identified as contaminated that are being remediated by third parties who have indemnified us as to responsibility for cleanup matters. These sites are not included in our environmental liabilities. Additionally, we are awaiting closure notices on several other locations that will release us from responsibility related to known contamination at those sites. These sites continue to be considered in our environmental liabilities until a final closure notice is received.�
Unamortized Liabilities Associated with Vendor Payments
Service and supply allowances are amortized over the life of each service or supply agreement, respectively, in accordance with the agreements specific terms. As of December�25, 2014, other accrued liabilities and deferred vendor rebates included the unamortized liabilities associated with these payments of $1.0 million and $8.5 million, respectively. As of September�25, 2014, other accrued liabilities and deferred vendor rebates included the unamortized liabilities associated with these payments of $2.6 million and $8.6 million, respectively.
We purchase over 50% of our general merchandise from a single wholesaler, McLane Company, Inc. ("McLane"). Our arrangement with McLane is governed by a distribution service agreement which expires in December 2019.
We have entered into product brand imaging agreements with numerous oil companies to buy fuel at market prices. The initial terms of these agreements have expiration dates ranging from 2015 to 2019 as of December�25, 2014. In connection with these agreements, we may receive upfront vendor allowances, volume incentive payments and other vendor assistance payments. If we default under the terms of any contract or terminate any supply agreement prior to the end of the initial term, we must reimburse the respective oil company for the unearned, unamortized portion of the payments received to date. These payments are amortized and recognized as a reduction to fuel cost of goods sold using the specific amortization periods based on the terms of each agreement, either using the straight-line method or based on fuel volume purchased.�Therefore, the contractual obligation we must reimburse the respective oil company if we default may be different than the unamortized balance recorded as deferred vendor rebates.
Fuel Contractual Contingencies
Our Product Supply Agreement, Guaranteed Supply Agreement and Master Conversion Agreement with Marathon provides for Marathon to supply, and us to purchase, certain minimum amounts of motor fuel for our specified convenience store locations. Subject to certain adjustments, Marathon may terminate the agreements if we do not purchase a minimum volume of a combination of Marathon branded and unbranded gasoline and distillates annually. Based on current forecasts, we anticipate attaining the annual minimum fuel requirements. If Marathon terminates our agreement due to a failure to purchase the annual minimum amounts, Marathon is entitled to receive the unamortized balance of the investment provided for under the Master Conversion Agreement.
Our Branded Jobber Contract with BP provides for BP to supply, and us to purchase, certain minimum amounts of motor fuel for our specified convenience store locations. Our obligation to purchase a minimum volume of BP branded fuel is measured each year over a one-year period during the remaining term of the agreement. Subject to certain adjustments, in any year in which we fail to meet our minimum volume purchase obligation, we have agreed to pay BP two cents per gallon times the difference between the actual volume of BP branded product purchased and the minimum volume requirement. We have attained the minimum volume requirements for the one-year period ending December 31, 2014. The agreement expires on December 31, 2019.
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We have agreements with other fuel suppliers that contain minimum volume provisions. A failure to purchase the minimum volumes could result in an increase in our fuel costs and/or other remedies available to the supplier. Based on our current forecasts, we do not expect these requirements to have a material effect on our results of operations, financial position or cash flows.
NOTE 9 - FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance for accounting for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.�The three levels of inputs are defined as follows:
Tier | Description | |
Level 1 | Defined as observable inputs such as quoted prices in active markets. | |
Level 2 | Defined as inputs other than quoted prices in active markets that are either directly or indirectly observable. | |
Level 3 | Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. | |
Our financial instruments not measured at fair value on a recurring basis includes cash and cash equivalents, receivables, accounts payable, accrued liabilities and long-term debt and are reflected in the condensed consolidated financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. We believe the fair value determination of these short-term financial instruments is a Level 1 measure. Estimated fair values for long-term debt have been determined using available market information, including reported trades and benchmark yields. The fair value of our indebtedness was approximately $524.0 million and $513.5 million as of December�25, 2014 and September�25, 2014, respectively. We believe the fair value determination of long-term debt is a Level 2 measure.�
Significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition included long-lived tangible assets as described in Note 3, Impairment Charges.�
In determining the impairment of operating stores and surplus properties, we determined the fair values by estimating selling prices of the assets. We generally determine the estimated selling prices using information from comparable sales of similar assets and assumptions about demand in the market for these assets. Significant judgment was required to select certain inputs from observed market data. We believe the fair value determination of surplus properties and operating stores are Level 2 measures.
For non-financial assets and liabilities measured at fair value on a non-recurring basis, quantitative disclosure of the fair value for each major category and any resulting realized losses included in earnings is presented below. Because these assets are not measured at fair value on a recurring basis, certain carrying amounts and fair value measurements presented in the table below may reflect values at earlier measurement dates and may no longer represent their fair values as of the three months ended December�25, 2014 and December�26, 2013.
� | Three Months Ended | ||||||||||||||
� | December�25, 2014 | December�26, 2013 | |||||||||||||
(in thousands) | Operating Stores | Surplus Properties | Operating Stores | Surplus Properties | |||||||||||
Non-recurring basis | � | � | � | � | |||||||||||
Fair value measurement | $ | 3,008 | $ | $ | 530 | $ | 512 | ||||||||
Carrying amount | 4,123 | 1,272 | 599 | ||||||||||||
Realized loss | $ | (1,115 | ) | $ | $ | (742 | ) | $ | (87 | ) | |||||
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Item 2.��Managements Discussion and Analysis of Financial Condition and Results of Operations.
�
This discussion and analysis of our financial condition and results of operations is provided to increase the understanding of, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes appearing elsewhere in this report. Additional discussion and analysis related to our business is contained in our Annual Report on Form 10-K for the fiscal year ended September�25, 2014. References in this report to "the Company," "Pantry," "The Pantry," "we," "us" and "our" refer to The Pantry, Inc. and its subsidiary.
Safe Harbor Discussion
This report, including, without limitation, our MD&A, contains statements that are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by the use of phrases such as "believe," "plan," "expect," "anticipate," "will," "may," "intend," "outlook," "target", "forecast," "goal," "guidance" or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, anticipated financial performance, projected costs and burdens of environmental remediation, anticipated capital expenditures, expected cost savings and benefits and anticipated synergies, the ability to divest non-core assets, and expectations regarding remodeling, re-branding, re-imaging or otherwise converting our stores or opening new stores are forward-looking statements, as are our statements relating to our anticipated liquidity, financial position and compliance with our covenants under our credit and other agreements, our pricing and merchandising strategies and their anticipated impact and our intentions with respect to acquisitions, the construction of new stores, including additional quick service restaurants, the remodeling of our existing stores and store closures. 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.
The following factors, among others, could cause actual results and events to differ materially from those expressed or implied in the forward-looking statements: (1) the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; (2) the inability to complete the transactions contemplated by the Merger Agreement due to the failure to obtain the required stockholder approval; (3) the inability to satisfy the other conditions specified in the Merger Agreement, including, without limitation, the receipt of necessary governmental or regulatory approvals required to complete the transactions contemplated by the Merger Agreement; (4) the risk that the proposed transactions disrupt current plans and operations, increase operating costs and the potential difficulties in customer loss and employee retention as a result of the announcement and consummation of such transactions; (5) the outcome of any legal proceedings that may be instituted against the Company following announcement of the Merger Agreement and transactions contemplated therein; and (6) the possibility that the Company may be adversely affected by other economic, business, and/or competitive factors.
Any number of other factors could affect actual results and events, including, without limitation:
" | Competitive pressures from convenience stores, fuel stations and other non-traditional retailers located in our markets; |
" | Inability to enhance our operating performance through in-store initiatives, store remodel program and the addition of new equipment and products to our stores; |
" | Failure to realize the expected benefits from our fuel supply agreements, including our ability to satisfy minimum fuel provisions; |
" | Financial difficulties of suppliers, including our principal suppliers of fuel and merchandise, and their ability to continue to supply our stores; |
" | Volatility in domestic and global petroleum and fuel markets; |
" | Political conditions in oil producing regions and global demand; |
" | Changes in credit card expenses; |
" | Changes in economic conditions generally and in the markets we serve; |
" | Consumer behavior, travel and tourism trends; |
" | Legal, technological, political and scientific developments regarding climate change; |
" | Wholesale cost increases of, tax increases on and campaigns to discourage the use of tobacco products; |
" | Federal and state regulation of tobacco products; |
" | Unfavorable weather conditions, the impact of climate change or other trends or developments in the southeastern United States; |
" | Inability to identify, acquire and integrate new stores or to divest our non-core stores to qualified buyers or operators on acceptable terms; |
" | Financial leverage and debt covenants, including increases in interest rates; |
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" | Inability to identify suitable acquisition targets and to take advantage of expected synergies in connection with acquisitions; |
" | Federal and state environmental, tobacco and other laws and regulations; |
" | Dependence on one principal supplier for merchandise and three principal suppliers for fuel; |
" | Dependence on senior management; |
" | Litigation risks, including with respect to food quality, health and other related issues; |
" | Inability to maintain an effective system of internal control over financial reporting; |
" | Disruption of our information technology systems or a failure to protect sensitive customer, employee or vendor data; |
" | Inability to effectively implement our store improvement strategies |
" | Unanticipated expenses including those related to mandated health care laws; and |
" | Other unforeseen factors. |
For a discussion of these and other risks and uncertainties, please refer to the Risk Factors and Critical Accounting Policies and Estimates included in our Annual Report on Form 10-K and the description of material changes therein, if any, included in our Quarterly Reports on Form 10-Q. The list of factors that could affect future performance and the accuracy of forward-looking statements is 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 January�29, 2015. 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.
Merger Agreement
As previously announced, on December 18, 2014, the Company entered into an Agreement and Plan of Merger (the Merger Agreement ) with Couche-Tard U.S. Inc. ( Parent ) and CT-US Acquisition Corp. ( Merger Sub ). Pursuant to the Merger Agreement and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving company and a wholly owned subsidiary of Parent (the Merger ). The transaction is expected to close in the first half of 2015, subject to the approval of The Pantry shareholders and customary regulatory approvals.
Our Business
We are a leading independently operated convenience store chain in the southeastern United States. As of December�25, 2014, we operated 1,511 stores in 13 states primarily under the Kangaroo Express� operating banner. All but our smallest stores offer a wide selection of merchandise, fuel and ancillary products and services designed to appeal to the convenience needs of our customers. A limited number of stores do not offer fuel.
Business Strategy
Our strategy is to grow revenue and profitability by focusing�on prioritizing our markets and improving the stores within those markets. We then remodel stores, selectively�open� new stores and restaurants�and acquire stores. In addition we have seven initiatives designed to improve the performance of our company.�This strategy is intended to allow us to reinvest in our business and maintain sufficient liquidity and financial flexibility. Our initiatives are as follows:
" | Invest in the development of the best and most energized people; |
" | Increase merchandise sales and gross margin with targeted merchandising and food service initiatives; |
" | Optimize fuel gallons sold and fuel margin; |
" | Reduce our corporate general and administrative and�store operating expenses as a percent of revenue; |
" | Generate�strong operating cash flow to reinvest in our business and reduce our leverage; |
" | Divest underperforming store assets and non-productive surplus properties; and |
" | Utilize technology throughout the business to improve the customer experience, our performance, and our people. |
Executive Overview
Our net income for the first quarter of fiscal 2015 was $18.9 million, or $0.81 per share, compared to a net loss of $5.1 million, or $0.23 per share, in the first quarter of fiscal 2014. Adjusted EBITDA for the first quarter of fiscal 2015 was $78.0 million, an increase of $35.5 million, or 83.8%, from the first quarter of fiscal 2014. For the definition and
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reconciliation of Adjusted EBITDA, see our discussion of the Three Months Ended December�25, 2014 Compared to the Three Months Ended December�26, 2013.
Our total revenue for the current year quarter decreased 7.1% to�$1.7 billion�primarily driven by a decrease in fuel revenue of�10.2% as a result of the significant decline in the average retail price per gallon of 12.5% to $2.87. Fuel gross profit and comparable store fuel volumes improved significantly as we benefited from a continued decline in fuel costs and our focus on a balanced approach to fuel pricing. Comparable store retail fuel gallons sold increased 3.7% and we were able to grow fuel margin by 54.2% during the same period to 18.2 cents per gallon.� Merchandise revenue increased�2.5%�while merchandise margin increased 30 basis points to 33.8%. Improved merchandising effectiveness drove a 3.6% increase in comparable store merchandise sales, and a 5.0% increase in sales per customer. Additionally, revenue from the sales of cigarettes were positive on a comparable store basis, reversing historical trends.
Market and Industry Trends
Wholesale fuel costs, as measured by the Gulf Spot price, continued a downward trend during the first quarter of fiscal 2015. Wholesale fuel costs reached a high of $2.65 early in the quarter on September 29, 2014 and declined steadily to a low of $1.16 late in the quarter on December 22, 2014. In comparison, wholesale fuel costs were volatile in the first quarter of fiscal 2014 trading in a range of approximately $0.38 with no sustained trends. These changes in wholesale fuel costs yielded a retail margin per gallon of 18.2 cents in the first quarter of fiscal 2015 compared to 11.8 cents in the same period of fiscal 2014. We attempt to pass along wholesale fuel cost changes to our customers through retail price changes; however, we are not always able to do so. The timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience higher fuel margins when the cost of fuel is declining gradually over a longer period and lower fuel margins when the cost of fuel is increasing or more volatile over a shorter period of time.
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Results of Operations
The table below provides a summary of our selected financial data for the three months ended December�25, 2014 and December�26, 2013:
� | Three Months Ended | ||||
(in thousands, except per gallon and store count data) | December�25, 2014 | December�26, 2013 | Percent Change | ||
Merchandise data: | � | � | � | ||
Merchandise revenue | $451,962 | $440,780 | 2.5% | ||
�� Merchandise gross profit (1) | $152,769 | $147,779 | 3.4% | ||
Merchandise margin | 33.8% | 33.5% | N/A | ||
Fuel data: | � | � | � | ||
Financial data: | � | � | � | ||
Fuel revenue | $1,224,874 | $1,363,299 | (10.2)% | ||
���Fuel gross profit (1)(2) | $77,229 | $48,682 | 58.6% | ||
Retail fuel data: | � | � | � | ||
���Gallons (in millions) | 421.6 | 408.7 | 3.2% | ||
���Margin per gallon (2) | $0.182 | $0.118 | 54.2% | ||
���Retail price per gallon | $2.87 | $3.28 | (12.5)% | ||
Financial data: | � | � | � | ||
Store operating expenses | $126,739 | $128,069 | (1.0)% | ||
General and administrative expenses | $25,305 | $25,977 | (2.6)% | ||
Impairment charges | $1,115 | $829 | 34.5% | ||
Depreciation and amortization | $25,282 | $28,679 | (11.8)% | ||
Interest expense | $21,075 | $21,372 | (1.4)% | ||
Income tax expense (benefit) | $11,541 | $(3,321) | NM | ||
�� Adjusted EBITDA (3) | $77,954 | $42,415 | 83.8% | ||
Comparable store data�(4): | � | � | � | ||
Merchandise sales increase (%) | 3.6% | 3.5% | N/A | ||
Merchandise sales increase | $15,795 | $14,721 | NM | ||
Retail fuel gallons increase (decrease) (%) | 3.7% | (4.0)% | N/A | ||
Retail fuel gallons increase (decrease) | 15,167 | (16,961) | NM | ||
Number of stores: | � | � | � | ||
End of period | 1,511 | 1,538 | (1.8)% | ||
Weighted-average store count | 1,515 | 1,544 | (1.9)% | ||
NM = Not meaningful
(1) | We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. |
(2) | Fuel gross profit per gallon represents fuel revenue less cost of product and expenses associated with credit card processing fees, environmental remediation expenses and repairs and maintenance on fuel equipment. Fuel gross profit per gallon as presented may not be comparable to similarly titled measures reported by other companies. |
(3) | For the definition of Adjusted EBITDA, see our discussion of the Three Months Ended December�25, 2014 Compared to the Three Months Ended December�26, 2013. |
(4) | The stores included in calculating comparable store data are existing or replacement retail stores, which were in operation during the entire comparable period of all fiscal years. Remodeling, adding or remodeling restaurants, physical expansion or changes in store square footage are not considered when computing comparable store data as amounts have no meaningful impact on measures. Comparable store data as defined by us may not be comparable to similarly titled measures reported by other companies. |
Three Months Ended December�25, 2014 Compared to the Three Months Ended December�26, 2013
Merchandise Revenue and Gross Profit. Merchandise revenue in the first quarter of fiscal 2015 increased $11.2 million from the first quarter of fiscal 2014. Our comparable store merchandise revenue increased 3.6%, or $15.8 million driven by a 5.0% increase in merchandise revenue per customer. We experienced stronger comparable store merchandise revenue growth in packaged beverage products and proprietary food service categories. Cigarette sales, which have been declining for an extended period, strengthened during the first quarter of fiscal 2015, contributing $2.0 million to the overall increase in merchandise revenues through a 2.6% increase in cigarette sales on a comparable
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store basis. Merchandise revenue also increased $700 thousand from the first quarter of fiscal 2014 as a result of new convenience store openings since the beginning of the first quarter of fiscal 2014. These increases were partially offset by lost merchandise revenue from stores closed since the beginning of the first quarter of fiscal 2014 of $4.7 million.
Merchandise gross profit increased $5.0 million or 3.4% from the first quarter of fiscal 2014 primarily due to the increase in sales described above and a 30 basis point improvement in merchandise margin to 33.8% from 33.5% in the first quarter of fiscal 2014. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.
Fuel Revenue, Gallons and Gross Profit. Fuel revenue in the first quarter of fiscal 2015 decreased $138.4 million or 10.2% as a result of a decrease in our average retail fuel price per gallon of 12.5% to $2.87 in the first quarter of fiscal 2015, largely due to declining wholesale fuel costs as demonstrated by the changes in Gulf Spot prices. The impact of the lower average fuel price was partially offset by an increase in retail fuel gallons sold for the first quarter of fiscal 2015, up 3.2%, or 12.9 million gallons compared to the first quarter of fiscal 2014. The significant improvement of gallons sold is primarily due to a 3.7%, or 15.2 million gallon increase in comparable store retail fuel gallons sold. We believe the comparable store gallon improvement was driven by lower year over year retail prices and our balanced approach to fuel pricing.
Fuel gross profit increased $28.5 million or 58.6% as a result of an increase in our retail margin per gallon to 18.2 cents in the first quarter of fiscal 2015 from 11.8 cents in the first quarter of fiscal 2014. The continued decline in wholesale costs and increase in gallons sold led to our substantial improvement in fuel gross profit. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses and inclusive of credit card processing fees and cost of repairs and maintenance on fuel equipment. These fees totaled 6.4 cents and 6.6 cents per retail gallon for the three months ended December�25, 2014 and December�26, 2013, respectively.
Store Operating. Store operating expenses for the first quarter of fiscal 2015 decreased $1.3 million, or 1.0%, from the first quarter of fiscal 2014. The decrease is primarily due to a decrease in purchases of non-capital equipment and lower equipment rental fees, as a result of less activity in our store remodel, quick service restaurants and new store initiatives.
General and Administrative. General and administrative expenses for the first quarter of fiscal 2015 decreased $672 thousand or 2.6% from the first quarter of fiscal 2014. A gain of $4.2 million recognized in connection with proceeds received from a class action settlement fund was partially offset by the increase in professional fees incurred in the first quarter of fiscal 2015 related to the Merger Agreement announced in December 2014.
Impairment Charges. Impairment charges related to operating stores and surplus properties were $1.1 million and $829 thousand for the three months ended December�25, 2014 and December�26, 2013, respectively, as a result of changes in expected cash flows at certain operating stores and management determining that certain facts and circumstances changed regarding specific surplus properties. See Note 3, Impairment Charges and Note 9, Fair Value Measurements in Part I, Item 1, Financial Statements, Notes to Condensed Consolidated Financial Statements.
Interest Expense. Interest expense is primarily comprised of interest on our long-term debt and lease finance obligations. Interest expense for the first quarter of fiscal 2015 was $21.1 million compared to $21.4 million for the first quarter of fiscal 2014. The decrease is primarily due to lower interest rates on our term loan and lower average outstanding borrowings.
Income Tax Expense. Our effective tax rate for the first quarter of fiscal 2015 was 37.9% compared to 39.2% in the first quarter of fiscal 2014. The decrease in our effective tax rate is primarily the result of the increase in pre-tax income and the related impact of federal tax credits for fiscal 2015 compared to fiscal 2014. We anticipate our effective tax rate will be approximately 37.8% for fiscal 2015.
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Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before interest expense, gain (loss) on extinguishment of debt, income taxes, impairment charges and depreciation and amortization. Adjusted EBITDA for the first quarter of fiscal 2015 increased $35.5 million, or 83.8%, from the first quarter of fiscal 2014. This increase is primarily attributable to the increase in fuel gross profit and higher merchandise gross profit noted above.
Adjusted EBITDA is not a measure of operating performance or liquidity under generally accepted accounting principles ("GAAP") and should not be considered as a substitute for net income, cash flows from operating activities or other income or cash flow statement data. We have included information concerning Adjusted EBITDA because we believe investors find this information useful as a reflection of the resources available for strategic opportunities including, among others, to invest in our business, make strategic acquisitions and to service debt. Management also uses Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for
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budgeting compensation targets. Adjusted EBITDA does not include impairment of long-lived assets and other charges. We excluded the effect of impairment losses because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our remaining assets.
Any measure that excludes interest expense, gain (loss) on extinguishment of debt, depreciation and amortization, impairment charges or income taxes has material limitations because we use debt and lease financing in order to finance our operations and acquisitions, we use capital and intangible assets in our business and the payment of income taxes is a necessary element of our operations. Due to these limitations, we use Adjusted EBITDA only in addition to and in conjunction with results and cash flows presented in accordance with GAAP. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
Because non-GAAP financial measures are not standardized, Adjusted EBITDA, as defined by us, may not be comparable to similarly titled measures reported by other companies. It therefore may not be possible to compare our use of Adjusted EBITDA with non-GAAP financial measures having the same or similar names used by other companies.
The following table contains a reconciliation of Adjusted EBITDA to net income for the periods presented:
� | Three Months Ended | ||||||
(in thousands) | December�25, 2014 | December�26, 2013 | |||||
Adjusted EBITDA | $ | 77,954 | $ | 42,415 | |||
Impairment charges | (1,115 | ) | (829 | ) | |||
Interest expense | (21,075 | ) | (21,372 | ) | |||
Depreciation and amortization | (25,282 | ) | (28,679 | ) | |||
Income tax (expense) benefit | (11,541 | ) | 3,321 | ||||
Net income (loss) | $ | 18,941 | $ | (5,144 | ) | ||
The following table contains a reconciliation of Adjusted EBITDA to net cash provided by operating activities for the periods presented:
� | Three Months Ended | ||||||
(in thousands) | December�25, 2014 | December�26, 2013 | |||||
Adjusted EBITDA | $ | 77,954 | $ | 42,415 | |||
Interest expense | (21,075 | ) | (21,372 | ) | |||
Income tax (expense) benefit | (11,541 | ) | 3,321 | ||||
Stock-based compensation expense | 1,054 | 924 | |||||
Changes in operating assets and liabilities | 3,147 | (13,076 | ) | ||||
� �Provision (benefit) for deferred income taxes | 11,567 | (2,983 | ) | ||||
Other | 528 | 1,404 | |||||
Net cash provided by operating activities | $ | 61,634 | $ | 10,633 | |||
Net cash used in investing activities | $ | (17,740 | ) | $ | (29,745 | ) | |
Net cash used in financing activities | $ | (2,543 | ) | $ | (5,550 | ) | |
Liquidity and Capital Resources
Three Months Ended | |||||||
(in thousands) | December�25, 2014 | December�26, 2013 | |||||
Cash and cash equivalents at beginning of year | $ | 81,652 | $ | 57,168 | |||
Net cash provided by operating activities | 61,634 | 10,633 | |||||
Net cash used in investing activities | (17,740 | ) | (29,745 | ) | |||
Net cash used in financing activities | (2,543 | ) | (5,550 | ) | |||
Cash and cash equivalents at end of period | $ | 123,003 | $ | 32,506 | |||
Consolidated total adjusted leverage ratio (1) | 4.18 | 5.56 | |||||
Consolidated interest coverage ratio (1) | 3.15 | 2.34 | |||||
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(1)� | As defined by the senior credit facility agreement. |
Due to the nature of our business, substantially all sales are for cash and credit cards which are converted to cash shortly after the transaction. Cash provided by operations is our primary source of liquidity. We rely primarily on cash provided by operating activities, supplemented as necessary from time to time by borrowings under our revolving credit facility to finance our operations, pay principal and interest on our debt and fund capital expenditures. We generally experience higher sales volumes during the summer months, and therefore our cash flow from operations tends to be higher during our third and fourth fiscal quarters. We had approximately $84.9 million of standby letters of credit issued under our revolving credit facility as of December�25, 2014.
Cash Flows provided by Operating Activities. Cash provided by operating activities was $61.6 million for the first three months of fiscal 2015 compared to $10.6 million for the first three months of fiscal 2014. The increase in cash flow from operations is primarily due to an increase in Adjusted EBITDA of $35.5 million and a $15.3 million improvement in working capital, which was a $3.4 million source of cash in the first three months of fiscal 2015 versus an $11.9 million use of cash in the first three months of fiscal 2014. For the definition and reconciliation of Adjusted EBITDA, see our discussion of the Three Months Ended December�25, 2014 Compared to the Three Months Ended December�26, 2013. The significant decline in wholesale fuel costs during the first three months of fiscal 2015 drove the improvement in both Adjusted EBITDA and working capital as fuel gross profit increased $28.5 million and fuel inventory declined $22.9 million during the quarter versus an increase of $1.9 million in the first three months of fiscal 2014.
Cash Flows used in Investing Activities. Cash used in investing activities was $17.7 million for the first three months of fiscal 2015 compared to $29.7 million for the first three months of fiscal 2014. Capital expenditures for the first three months of fiscal 2015 were $17.4 million which was partially offset by proceeds from the sale of property and equipment of $1.3 million. Capital expenditures for the first three months of fiscal 2014 were $31.7 million which was partially offset by proceeds from the sale of property and equipment of $2.0 million. Capital expenditures primarily relate to store improvements, store equipment, new store development including quick service restaurants, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters. The decrease in capital expenditures in the first three months of fiscal 2015 compared to the first three months of fiscal 2014 is primarily due to less activity in our store remodel, quick service restaurants and new store initiatives. The proceeds from the sale of property and equipment relate to our ongoing initiative to divest our under-performing store assets and non-productive surplus properties. We finance substantially all capital expenditures through cash flows from operations, asset dispositions and vendor reimbursements.
Cash Flows used in Financing Activities. Cash used in financing activities was $2.5 million for the first three months of fiscal 2015 compared to $5.6 million for the first three months of fiscal 2014. The change in cash flows from financing activities is primarily related to the decrease in repayments of our lease finance obligations in the first three months of fiscal 2015.
Sources of Liquidity
As of December�25, 2014, we had approximately $123.0 million in cash and cash equivalents and approximately $140.1 million in available borrowing capacity under our revolving credit facility after taking into account outstanding letters of credit and the consolidated total adjusted leverage ratio constraint to availability. Approximately $75.1 million was available for the issuances of letters of credit.
Due to the nature of our business, substantially all sales are for cash and credit cards which are converted to cash shortly after the transaction. Funds generated by operating activities, available cash and cash equivalents, our credit facility and asset dispositions continue to be our most significant sources of liquidity.
We believe our sources of liquidity will be sufficient to sustain operations and to finance anticipated strategic initiatives for the next twelve months. However, in the event our liquidity is insufficient, we may be required to limit our spending on future initiatives or other business opportunities. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms.
Our financing strategy is to maintain liquidity and access to capital markets while reducing our leverage. We expect to continue to have access to capital markets on both short and long-term bases when needed for liquidity purposes. Our continued access to these markets depends on multiple factors including the condition of debt capital markets, our operating performance and maintaining our credit ratings. Our credit ratings and outlooks issued by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Services ("Standard & Poor's") as of December�25, 2014, are summarized below:
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Rating Agency | Senior Secured Credit Facility | Senior Unsecured Notes due 2020 | Corporate Rating | Corporate Outlook | ||||
Moody's | B1 | Caa1 | B2 | Stable | ||||
Standard & Poor's | BB | B+ | B+ | CreditWatch Positive | ||||
Credit rating agencies review their ratings periodically and therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the convenience store industry, our financial position and changes in our business strategy. If further changes in our credit ratings were to occur, they could impact, among other things, our future borrowing costs, access to capital markets and vendor financing terms.
Capital Resources
Capital Expenditures
Our capital expenditures typically include store improvements, store equipment, new store development including quick service restaurants, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters. Refer to Note�8, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements, included in Item�1, Financial Statements, of this Quarterly Report on Form�10-Q for further information regarding our significant commitments.
Debt
Our credit facility includes a $225.0 million senior secured revolving credit facility which expires in 2017 and a $255.0 million senior secured term loan which matures in 2019. The senior secured revolving credit facility is available for working capital and general corporate purposes, and a maximum of $160.0 million is available for issuance of letters of credit. The issuance of letters of credit will reduce the amount otherwise available for borrowing under the senior secured revolving credit facility. In addition, the credit facility provides for the ability to incur additional senior secured term loans and/or increases in the senior secured revolving credit facility in an aggregate principal amount of up to $200.0 million provided certain conditions are satisfied, and provided that the aggregate principal amount for all increases in the senior secured revolving credit facility cannot exceed $100.0 million.
The interest rate on borrowings under the revolving credit facility is dependent on our consolidated total leverage ratio, and at our option, is either the base rate (generally the applicable prime lending rate of Wells Fargo Bank, National Association, as announced from time to time) plus 250 to 350 basis points or LIBOR plus 350 to 450 basis points. Our current interest rate under the revolving credit facility is, at our option, either the base rate plus 300 basis points or LIBOR plus 400 basis points, with an unused commitment fee of 50 basis points. The interest rate on the senior secured term loan is also dependent on our consolidated total leverage ratio and ranges between LIBOR plus 350 to 375 basis points, with a LIBOR floor of 100 basis points. Our current interest rate under the senior secured term loan is LIBOR (with a floor of 100 basis points) plus 375 basis points. Interest under the credit facility is paid on the last day of each LIBOR interest period, but no less than every three months.
Borrowings under our senior secured term loan are required to be paid in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount, with the remainder due on the maturity date. In addition, borrowings under our credit facility are required to be prepaid with: (a) 100% of the net cash proceeds of the issuance or incurrence of debt by the Company or any of its subsidiaries, subject to certain exceptions; (b) 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries and other asset dispositions by the Company or its subsidiaries, if any, subject to reinvestment provisions and certain other exceptions; and (c) to the extent the total leverage ratio is greater than 3.5 to 1.0 at the end of any fiscal year, the lesser of (i) 50% of excess cash flow during such fiscal year minus voluntary prepayments of our senior secured term loan or senior unsecured notes or (ii) the amount of prepayment necessary to lower the total leverage ratio to 3.5 to 1.0, after giving pro forma effect to such prepayment.
Our ability to access our credit facility is subject to our compliance with the terms and conditions of the credit agreement governing our credit facility, including financial and negative covenants.
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The financial covenants under our credit facility currently include the following: (a) maximum total adjusted leverage ratio, which is the maximum ratio of debt (net of cash and cash equivalents in excess of $40.0 million) plus eight times rent expenses to EBITDAR (which represents EBITDA plus rental expenses for operating leases); and (b) minimum interest coverage ratio. The financial covenants apply to the Company and its subsidiaries, if any, on a consolidated basis.
The negative covenants under our credit facility include, without limitation, restrictions on the following: capital expenditures; indebtedness; liens and related matters; investments and joint ventures; contingent obligations; dividends and other restricted payments; fundamental changes, asset sales and acquisitions; sales and leasebacks; sale or discount of receivables; transactions with shareholders and affiliates; disposal of subsidiary capital stock and formation of new subsidiaries; conduct of business; certain amendments; senior debt status; fiscal year, state of organization and accounting practices; and management fees.
In addition, a change of control of our company, which includes among other things, the majority of the directors on our Board consisting of new directors whose nomination was not recommended by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities or a change of control occurring under the indenture governing our senior unsecured notes, would constitute an event of default, upon which, the lenders holding a majority of the outstanding term loans and revolving credit commitments under the credit facility would be able to accelerate any unpaid loan amounts requiring us to immediately repay all such amounts (plus accrued interest to the date of repayment).
We have outstanding $250.0 million of 8.375% senior unsecured notes ( senior notes ) maturing in 2020. Interest on the notes is payable semiannually in February and August of each year until maturity. If a change of control occurs under the indenture governing our senior notes, which includes among other things, the majority of the directors on our Board consisting of new directors whose election or nomination for election was not approved by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities, certain mergers or consolidations, and the sale of all or substantially all of our assets, we must give holders of the senior notes an opportunity to sell their senior notes to us at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest, if any, to the purchase date, subject to certain conditions. Failure to make or comply with the repurchase offer would be an event of default under the indenture governing our senior notes, which would also trigger a cross-default under our credit facility. Additionally, an event of default under our credit facility that results in the acceleration of indebtedness thereunder would result in an event of default under the indenture governing our senior notes. Upon an event of default under the indenture governing our senior notes, the requisite noteholders would be able to accelerate and require us to immediately repay all unpaid senior unsecured note amounts (plus accrued interest to the date of repayment).
In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the senior notes at 100% of their principal amount, together with accrued and unpaid interest and additional interest, if any, to the date of purchase. Failure to make or comply with the repurchase offer would be an event of default under the indenture governing our senior notes, which would also trigger a cross-default under our credit facility.
The negative covenants under the indenture governing our senior notes are similar to those under our credit facility and include, without limitation, the following: restricted payments; dividend and other payment restrictions affecting subsidiaries; incurrence of indebtedness and issuance of preferred stock; asset sales; transactions with affiliates; liens; corporate existence; and no layering of debt.
As of December�25, 2014, we were in compliance with all covenants under our credit facility and senior notes.
If we default under our credit facility or the indenture governing our senior notes because of a covenant breach or otherwise, all outstanding amounts thereunder could become immediately due and payable. Any acceleration of amounts due would have a material adverse effect on our liquidity and financial condition, and we cannot assure you that we would be able to obtain a waiver of any such default, that we would have sufficient funds to repay all of the outstanding amounts, or that we would be able to obtain alternative financing to satisfy such obligations on commercially reasonable terms or at all.
We use capital leases and sale leaseback transactions to finance a portion of our stores. The net present value of our capital lease obligations and sale leaseback transactions are reflected in our Condensed Consolidated Balance Sheets in lease finance obligations and current maturities of lease finance obligations.
Refer to Note 4, Debt, of the Notes to Condensed Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for further information on our debt obligations.
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Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and commercial commitments outside the ordinary course of business since the end of fiscal 2014. Refer to our Annual Report on Form 10-K for the fiscal year ended September�25, 2014 for additional information regarding our contractual obligations and commercial commitments.
Critical Accounting Policies
As discussed in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended September�25, 2014, we consider our accounting policies on store closing and impairment charges, goodwill, asset retirement obligations and self-insurance liabilities to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. There have been no material changes in our critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September�25, 2014.
Item 3.� Quantitative and Qualitative Disclosures About Market Risk.
�
We are subject to interest rate risk on our existing long-term debt and any future financing requirements. Our fixed rate debt consists primarily of outstanding balances on our senior notes due in 2020 and our variable rate debt relates to borrowings under our senior credit facility. We are exposed to market risks inherent in our financial instruments. These instruments arise from transactions entered into in the normal course of business and, in some cases, relate to our acquisitions of related businesses.
Our primary exposure relates to:
" | Interest rate risk on long-term and short-term borrowings resulting from changes in LIBOR; |
" | Our ability to pay or refinance long-term borrowings at maturity at market rates; |
" | The impact of interest rate movements on our ability to meet interest expense requirements and exceed financial covenants; and |
" | The impact of interest rate movements on our ability to obtain adequate financing to fund future strategic business initiatives. |
As of December�25, 2014 and September�25, 2014, we had fixed-rate debt outstanding of $250.0 million, and we had variable-rate debt outstanding of $249.9 million and $250.5 million, respectively. Variable-rate debt excludes original issuance discounts of $1.7 million as of December�25, 2014 and September 25, 2014, respectively. The following table presents the future principal cash flows and weighted-average interest rates by fiscal year on our existing long-term debt instruments based on rates in effect as of December�25, 2014. Fair values have been determined based on quoted market prices as of December�25, 2014.
� | Expected Maturity Date | � | |||||||||||||||||||||||||||||
(in thousands) | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | Fair Value | |||||||||||||||||||||||
Long-term debt (fixed rate) | $ | $ | $ | $ | $ | $ | 250,000 | $ | 250,000 | $ | 275,000 | ||||||||||||||||||||
Weighted-average interest rate | 8.38 | % | 8.38 | % | 8.38 | % | 8.38 | % | 8.38 | % | 8.38 | % | |||||||||||||||||||
Long-term debt (variable rate) | $ | 2,078 | $ | 2,550 | $ | 2,550 | $ | 2,550 | $ | 240,172 | $ | $ | 249,900 | $ | 248,963 | ||||||||||||||||
Weighted-average interest rate | 4.75 | % | 4.75 | % | 4.75 | % | 4.75 | % | 4.75 | % | % | � | � | ||||||||||||||||||
At December�25, 2014 and September�25, 2014, the interest rate on approximately 50.0% of our debt was fixed by the nature of the obligation. The annualized effect of a one percentage point change in our floating rate debt obligations at December�25, 2014 would result in an increase to interest expense of approximately $2.5 million.
�
While we cannot predict or manage our ability to refinance existing debt or the impact interest rate movements will have on our existing debt, management evaluates our financial position on an ongoing basis.
Item 4.� Controls and Procedures.
As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
27
Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective in that they provide reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission ("SEC") rules and forms and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of fiscal 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate.
PART II - OTHER INFORMATION
Item 1.��Legal Proceedings.
For a description of legal proceedings, see Note 8, Commitments and Contingencies - Legal and Regulatory Matters of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 1A.��Risk Factors.
Except for the risk factors indicated below, there have been no material changes to the risk factors described in our annual report on Form 10-K for the fiscal year ended September�25, 2014.
We may not be able to obtain satisfaction of all conditions to complete the Merger.
The consummation of the Merger is subject to customary closing conditions. A number of the conditions are not within our control, and may prevent, delay or otherwise materially adversely affect the completion of the transaction. These conditions include, among other things, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the absence of legal restraints prohibiting the completion of the Merger. It also is possible that an event, change, circumstance, occurrence, effect or state of facts that could result in a material adverse effect to the Company may occur, which may give Couche-Tard the ability to avoid completing the Merger. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise. If the Merger does not receive, or timely receive, the required regulatory approvals and clearances, or if another event occurs delaying or preventing the Merger, such delay or failure to complete the Merger may cause uncertainty or other negative consequences that may materially and adversely affect our sales, financial performance and operating results, and the price per share for our common stock and perceived acquisition value.
In the event that the pending Merger is not completed, the trading price of the Company's common stock and the Company's future business and financial results may be negatively affected.
There is no assurance that the closing of the Merger will occur. The closing of the Merger is subject to certain conditions, including the approval and adoption of the Merger Agreement and the Merger by the Company's stockholders, the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, there being no material adverse effect on the Company prior to the closing of the Merger and other customary conditions. If the proposed Merger is not completed, our stock price may fall from the current market price which we believe reflects an assumption that a transaction will be completed. In addition, as described below, we may be required to pay a termination fee under the circumstances described in the Merger Agreement and would remain liable for significant transaction costs. Further, the failure of the proposed Merger to be completed may result in negative publicity and/or a negative impression of us in the investment community and may affect our relationship with employees, customers and other partners in the business community.
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While the Merger is pending, we are subject to business uncertainties and contractual restrictions that could disrupt our business.
Whether or not the pending Merger is completed, the pending Merger may disrupt the current plans and operations of the Company, which could have an adverse effect on our business and financial results. The pendency of the Merger may also divert management's attention and our resources from ongoing business and operations and our employees and other key personnel may have uncertainties about the effect of the pending Merger and the uncertainties may impact our ability to retain, recruit and hire key personnel while the Merger is pending or if it fails to close. We may incur significant costs, charges or expenses relating to the Merger, regardless of whether or not it is completed. Furthermore, we cannot predict how our suppliers, customers and others with whom we do business will view or react to the pending Merger. If we are unable to maintain our normal relationships as a result of the pending Merger, our financial results may be adversely affected.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities and must generally operate our business in the ordinary course (subject to certain exceptions). These restrictions could prevent us from pursuing attractive business opportunities that arise prior to the completion of the Merger, could result in our inability to respond effectively to competitive pressures and industry developments and may otherwise have a material adverse effect on our future results of operations or financial condition.
The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire us prior to the completion of the proposed Merger.
The Merger Agreement contains provisions that restrict our ability to entertain a third-party proposal to acquire us. These provisions include the general prohibition on our soliciting or engaging in discussions or negotiations regarding any alternative acquisition proposal, subject to certain exceptions, the requirement to provide Couche-Tard with the right to match any third-party proposal, and the requirement that we pay a termination fee of $39.5 million if the Merger Agreement is terminated in specified circumstances. These provisions might discourage an otherwise-interested third party from considering or proposing to acquire us, even one that may be deemed of greater value than the proposed Merger to our stockholders. Furthermore, even if a third party elects to propose an acquisition, the termination fee payable in certain circumstances may result in that third party offering a lower value to our stockholders than such third party might otherwise have offered.
A putative shareholder class action challenging the Merger has been filed, and an unfavorable judgment or ruling could prevent or delay the consummation of the Merger and result in substantial costs.
A putative class action challenging the Merger has been filed on behalf of our stockholders. It is possible that these complaints will be amended to make additional claims and/or that additional lawsuits making similar or additional claims relating to the Merger will be brought. If dismissals are not obtained or a settlement is not reached, these lawsuits could prevent or delay completion of the Merger and/or result in substantial costs to us, including any costs associated with the indemnification of our directors.
Item 2.� Unregistered Sales of Equity Securities and Use of Proceeds.
There were no sales of unregistered equity securities during the first quarter of fiscal 2015.
The following table lists all repurchases during the first quarter of fiscal 2015 of any of our securities registered under Section 12 of the Exchange Act by or on behalf of us or any affiliated purchaser.
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||
September 26, 2014 - October 23, 2014 | $ | $ | ||||||||||||
October 24, 2014 - November 27, 2014 | $ | |||||||||||||
November 28, 2014 - December 25, 2014 | 50,928 | $ | 28.86 | |||||||||||
� �Total | 50,928 | $ | 28.86 | $ | ||||||||||
(1)� | Represents shares repurchased in connection with tax withholding obligations under The Pantry, Inc. 2007 Omnibus Plan. |
(2)� | Represents the average price paid per share for the shares repurchased in connection with tax withholding obligations under the Omnibus Plan. |
29
Item 6.��Exhibits.
Exhibit Number | Description of Document | |
2.1 | Agreement and Plan of Merger dated December 18, 2014, by and among Couche-Tard U.S. Inc., CT-US Acquisition Corp. and The Pantry, Inc. (incorporated by reference to Exhibit 2.1 to The Pantrys Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2014). | |
3.1 | Amended and Restated Certificate of Incorporation of The Pantry (incorporated by reference to Exhibit 3.3 to The Pantrys Registration Statement on Form S-1, as amended (Registration No. 333-74221)). | |
3.2 | Amended and Restated By-Laws of The Pantry (incorporated by reference to Exhibit 3.2 to The Pantrys Quarterly Report on Form 10-Q for the quarterly period ended June 25, 2009). | |
3.3 | First Amendment to the Amended and Restated Bylaws of The Pantry, Inc., as of December 17, 2014 (incorporated by reference to Exhibit 3.1 to The Pantrys Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2014). | |
4.1 | Indenture dated August 3, 2012 by The Pantry and U.S. National Association, as Trustee, with respect to the 8.375% Senior Notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantrys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012). | |
4.2 | Supplemental Indenture dated April 23, 2013 by The Pantry and U.S. Bank National Association, as Trustee, with respect to the 8.375% senior notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantrys Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2013). | |
31.1 | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]. | |
32.2 | Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
30
SIGNATURE
�
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
�
� | � | |
� | THE PANTRY, INC. | |
� | By:�� ������������������� /s/ B. Clyde Preslar ������������������������ | |
� | �� B. Clyde Preslar | |
� | � | |
� | Senior Vice President and�Chief Financial Officer | |
� | � | |
� | (Authorized Officer and Principal | |
� | Financial Officer) | |
� | � | |
� | Date:� | January 29, 2015 |
31
EXHIBIT INDEX
Exhibit Number | Description of Document | |
2.1 | Agreement and Plan of Merger dated December 18, 2014, by and among Couche-Tard U.S. Inc., CT-US Acquisition Corp. and The Pantry, Inc. (incorporated by reference to Exhibit 2.1 to The Pantrys Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2014). | |
3.1 | Amended and Restated Certificate of Incorporation of The Pantry (incorporated by reference to Exhibit 3.3 to The Pantrys Registration Statement on Form S-1, as amended (Registration No. 333-74221)). | |
3.2 | Amended and Restated By-Laws of The Pantry (incorporated by reference to Exhibit 3.2 to The Pantrys Quarterly Report on Form 10-Q for the quarterly period ended June 25, 2009). | |
3.3 | First Amendment to the Amended and Restated Bylaws of The Pantry, Inc., as of December 17, 2014 (incorporated by reference to Exhibit 3.1 to The Pantrys Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2014). | |
4.1 | Indenture dated August 3, 2012 by The Pantry and U.S. National Association, as Trustee, with respect to the 8.375% Senior Notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantrys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012). | |
4.2 | Supplemental Indenture dated April 23, 2013 by The Pantry and U.S. Bank National Association, as Trustee, with respect to the 8.375% senior notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantrys Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2013). | |
31.1 | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]. | |
32.2 | Certification by Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.]. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
Exhibit 31.1
Certification by Chief Executive Officer
pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dennis G. Hatchell, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of The Pantry, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: January 29, 2015
/s/�Dennis G. Hatchell | |
Dennis G. Hatchell | |
President and Chief Executive Officer | |
Exhibit 31.2
Certification by Chief Financial Officer
pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, B. Clyde Preslar, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of The Pantry, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: January 29, 2015
/s/�B. Clyde Preslar | |
B. Clyde Preslar | |
Senior Vice President, Chief Financial Officer | |
Exhibit 32.1
Certification by Chief Executive Officer pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section�906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of The Pantry, Inc. (the Company ) on Form 10-Q for the fiscal quarter ended December 25, 2014, as filed with the Securities and Exchange Commission on the date hereof (the Report ), I, Dennis G. Hatchell, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
1. | The Report fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934, and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
� | |
/s/ Dennis G. Hatchell | |
Dennis G. Hatchell | |
President and Chief Executive Officer | |
� | |
Date: January 29, 2015 | |
This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. �1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed filed by the Company for purposes of Section�18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.
A signed original of this written statement required by Section�906, or other documents authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section�906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification by Chief Financial Officer pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section�906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of The Pantry, Inc. (the Company ) on Form 10-Q for the fiscal quarter ended December 25, 2014, as filed with the Securities and Exchange Commission on the date hereof (the Report ), I, B. Clyde Preslar, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
1. | The Report fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934, and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
� | |
/s/ B. Clyde Preslar | |
B. Clyde Preslar | |
Senior Vice President and Chief Financial Officer | |
� | |
Date: January 29, 2015 | |
This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. �1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed filed by the Company for purposes of Section�18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.
A signed original of this written statement required by Section�906, or other documents authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section�906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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