Improvement in net income driven by sale of assets and an increase in both the U.S. and Canadian merchandise and services gross profit.
CST Brands Inc. reported solid financial results for the third quarter ended Sept. 30, 2016, ahead of its pending merger with Circle K.
“We performed well during the quarter despite the comparison with a very strong fuel margin in the third quarter 2015,” said Kim Lubel, chairman and CEO of CST Brands. “Our U.S. business grew merchandise and services gross profit 19% on increased sales and margins, while our Canadian stores grew merchandise and services gross profits 5% with a 3% improvement in same store sales. We also continued to execute on our organic growth plans with the addition of 13 new-to-industry stores during the quarter and 29 stores year-to-date.”
Lubel added, “We continue to work toward completing our merger with Circle K and we currently anticipate closing on the transaction in early 2017.”
Third Quarter Results
For the three month period ended Sept. 30, 2016, the CST Brands reported net income of $260 million, or $3.41 per diluted share compared to net income of $85 million, or $1.12 per diluted share, for the same period in 2015. This improvement in net income was driven by a gain on the sale of assets and an increase in both the U.S. and Canadian merchandise and services gross profit during the quarter.
For the three month period ended Sept. 30, 2016, included in net income are certain special items consisting of a gain from the Company’s sale of its California and Wyoming convenience stores, offset by certain acquisition expenses, merger-related expenses, legal expenses and professional fees totaling approximately $221 million, net of tax, or $2.90 per share. Excluding these special items, net income would have been $39 million, or $0.51 per diluted share, for the three-month period ended September 30, 2016. There were no such special items in the 2015 period.
EBITDA was $461 million for the three month period ended September 30, 2016 compared to $174 million for the same period in 2015, or a 165% increase. The increase in EBITDA was due primarily to a $347 million gain on the sale of the Company’s California and Wyoming convenience stores during the quarter.
U.S. merchandise and services gross profit increased 19% when compared to the third quarter of 2015, primarily driven by an overall increase in merchandise and services sales and gross profits in the Company’s U.S. core and New-to-Industry (“NTI”) store sales, aided by acquisition and organic growth, including the Company’s acquisition of the Flash Foods stores. Same store merchandise and services sales per store per day declined 3% during the third quarter of 2016, primarily due to softness in parts of South Texas caused by a decrease in economic activity in the energy related sector.
Motor fuel gross profit in the U.S. for the third quarter of 2016 was $95 million versus $150 million in the same quarter of 2015. The decline in motor fuel gross profit was primarily attributable to a decline in motor fuel gross profit, net per gallon (“cents per gallon” or “CPG”), which was partially offset by a 13% increase in motor fuel gallons sold, due to the Company’s expanded core network, which includes Flash Foods.
Crude oil prices were more volatile during the third quarter of 2015 than the third quarter of 2016, as the daily spot price of West Texas Intermediate crude oil decreased approximately 20% during the third quarter of 2015 compared to approximately 3% during the third quarter of 2016.
In Canada, motor fuel gross profit increased 3% and merchandise and services gross profit increased 5% when compared to the third quarter of 2015, primarily driven by an increase in volume of motor fuel sold along with an improvement in merchandise and services sales driven by an increase in the average number of retail sites. On a same-store basis, merchandise and services sales per site per day increased 3% in Canada when compared to the third quarter of 2015, primarily due to growth in the grocery and packaged beverage business.
Nine Months Results
For the nine month period ended Sept. 30, 2016, the Company reported net income of $306 million, diluted earnings per common share of $4.02 and EBITDA of $638 million. For the nine month period ended Sept. 30, 2015, the Company reported net income of $124 million, diluted earnings per common share of $1.61 and EBITDA of $320 million. The 99% growth in year-to-date EBITDA in 2016 over 2015 was driven by a gain on the sale of the Company’s California and Wyoming convenience stores during the third quarter and by continued improvement in the Company’s merchandise and services gross profits.
Liquidity and Capital Resources
For the nine months ended Sept. 30, 2016, cash flow provided by operating activities totaled $250 million. Cash flow used in investing activities was $308 million, primarily related to capital expenditures and the Flash Foods acquisition. Total capital expenditures, excluding acquisitions, for the nine months ended Sept. 30, 2016 and 2015 were $239 million and $203 million, respectively.
Cash flow used in financing activities was $65 million, including net payments on CST Brands’ revolving credit facility of $10 million, dividends paid of $15 million and payments of $50 million on CST Brands’ term loan. The effect of foreign currency exchange rates was a decrease in cash of $1 million. Overall, cash decreased by $124 million. Cash, as of Sept. 30, 2016, was $189 million.
As of Nov. 4, 2016, approximately $349 million was available for future borrowings under CST Brands’ revolving credit facility.
