UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT
TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the third quarter results ended January 29, 2006
Commission File Number: 333-10100
ALIMENTATION COUCHE-TARD INC.
1600 St-Martin Boulevard East
Tower B, Suite 200
Laval, Quebec, Canada
H7G 4S7
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40 F. Form 20-F |_| Form 40-F |X|
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes |_| No |X|
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes |_| No |X|
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g-3 under the Securities Exchange Act of 1934.
Yes |_| No |X|
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
SIGNATURES:
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.
| | ALIMENTATION COUCHE-TARD INC. |
| | |
| March 7, 2006 | |
| | Per: /s/ Sylvain Aubry |
| | Sylvain Aubry |
| | Corporate Secretary |
The purpose of this Management's Discussion and Analysis (MD&A) is, as required by regulators, to explain management's point of view on Alimentation Couche-Tard Inc.'s (Couche-Tard) financial condition and results of operations as well as past performance. More specifically, it outlines our development strategy, performance in relation to objectives, future expectations and how we address risk and manage our financial resources. This MD&A also provides information to improve the reader's understanding of the consolidated financial statements and related notes. It should therefore be read in conjunction with those documents. To facilitate the reading of this report, the terms "We", "our", "us" and "the Company" refer collectively to Couche-Tard and its subsidiaries.
Except where otherwise indicated, all financial information reflected herein is expressed in US dollars and determined on the basis of Canadian generally accepted accounting principles (Canadian GAAP). You should read the following MD&A in conjunction with the interim consolidated financial statements and with Couche-Tard's 2005 Annual Report. Additional information relating to Couche-Tard, including the latest Annual Information Form, is available on SEDAR at www.sedar.com and on the SEC's website at www.sec.gov.
Forward-Looking Statements
This MD&A includes certain statements that are "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Any statement in this MD&A that is not a statement of historical fact may be deemed to be a forward-looking statement. When used in this MD&A, the words "believe", "intend", "expect", "estimate" and other similar expressions are generally intended to identify forward-looking statements.
It is important to know that the forward-looking statements in this MD&A describe our expectations as at March 7, 2006 and are not guarantees of future performance of Couche-Tard or its industry and involve known and unknown risks and uncertainties which may cause the Company's or the industry's outlook, actual results or performance to be materially different from any future results or performance expressed or implied by such statements. Our actual results could be materially different from what we expect if known or unknown risks affect our business, or if our estimates or assumptions turn out to be inaccurate. As a result, we cannot guarantee that any forward-looking statement will materialize and, accordingly, you are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements do not take into account the effect that transactions or special items announced or occurring after the statements are made may have on our business. For example, they do not include the effect of sales of assets, monetizations, mergers, acquisitions, other business combinations or transactions, asset write-downs or other charges announced or occurring after forward-looking statements are made.
Unless otherwise required by applicable securities laws, Couche-Tard disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The foregoing risks and uncertainties include the risks set forth under "Business Risks" in the 2005 Annual Report as well as other risks detailed from time to time in reports filed by Couche-Tard with securities regulators in Canada and the United States.
Change in Reporting Currency
Since our first quarter of fiscal 2006, we are reporting our financial results and financial position in United States currency and accordingly, our Canadian assets and liabilities are translated into US dollars using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate in effect during the period. Gains and losses are included in the cumulative translation adjustments account in the shareholders' equity. The functional currencies of the Company and each of its subsidiaries remain unchanged. All comparative amounts for prior periods have been restated and are presented in US dollars.
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Our Business
We are the leader in the Canadian convenience store industry. In North America, we are the third-largest convenience store operator, the second-largest independent convenience store operator (not integrated with a petroleum company) and the most profitable one within such category. We currently operate a network of 4,909 convenience stores, 3,028 of which include motor fuel dispensing, located in eight large geographic markets, including three in Canada and five in the United States covering 23 States. Some 36,000 people are employed throughout Couche-Tard's retail convenience network and executive offices in North America.
We sell food and beverage items, motor fuel and other products and services targeted to meet our customers' demand for convenience and quality in a clean and welcoming environment. We believe that our business model has differentiated Couche-Tard from its competition through its decentralized management structure, commitment to operational expertise, focus on in-store merchandise, particularly the higher growth and higher margin foodservice category, and continued investment in store modernization and technology.
In light of improvements made to the Store 2000 differentiation concept in recent years through the addition of various marketing and merchandizing approaches and components, we have renamed our various concepts under one acronym – IMPACT (Innovation, Marketing and People at Alimentation Couche-Tard). This acronym reflects not only the impact our differentiation strategies have on our customers, sales and earnings but also the diversity of the dynamic concepts designed by the Couche-Tard teams in order to create a unique, warm, friendly and inviting environment for customers.
We conduct our business through different modes of operations. Although the majority of our stores are Company-operated, some are part of our affiliate program, which includes franchised and licensed stores. The amount of operating income generated from the affiliates amounted to $11.2 million or 4.1% of our total operating income for the 40-week period ending January 29, 2006, including $2.2 million or 0.8% of our total operating income generated by licensees outside North America.
The convenience store industry is fragmented, with the top ten operators representing only approximately 25% of the estimated total of 138,200 stores in the United States. Industry consolidation by highly leveraged operators in the 1990s, combined with competition and fluctuations in motor fuel margins, has led to numerous corporate restructurings and rationalizations in recent years. As a result, we believe the opportunity exists for well-capitalized, established industry participants to grow through mergers and acquisitions.
Overview
We announced another outstanding quarter with net earnings of $54.5 million, up 50.1% from $36.3 million compared with the same period of the previous year. This performance primarily reflects growth in merchandise and service revenues and motor fuel revenues as well as an increase in the corresponding gross margins in our Canadian and American markets.
The average retail price of motor fuel in our U.S. markets amounted to $2.33 per gallon for the 16-week period ended January 29, 2006 compared with $1.91 per gallon for the 16-week period ended January 30, 2005. The gross margin on motor fuel revenues varies primarily as a result of product cost volatility and competition. Although motor fuel gross margins can be volatile from one quarter to the next, they generally even out on an annual basis. For each of the last four quarters commencing with the fourth quarter of fiscal 2005, motor fuel gross margins for the Company-operated stores in the U.S. markets stood at 11.26¢, 14.86¢, 17.05¢ and 17.63¢ per gallon respectively – with a weighted average of 15.43¢ per gallon for the year ended January 29, 2006 compared with 14.44¢ per gallon for the previous twelve-month period ended January 30, 2005. Net of credit card expense, these same gross margins were 7.90¢, 11.23¢, 12.78¢ and 13.67¢ per gallon, with a weighted average of 11.61¢ per gallon for the 12-month period ended January 29, 2006 compared with 11.16¢ per gallon for the 12-month period ended January 30, 2005. The motor fuel gross margin for the U.S. Company-operated stores was 17.63¢ per gallon for the third quarter this year compared with 16.30¢ per gallon for the same period last year.
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For the third quarter of the current year, this increase in the motor fuel gross margin had a positive impact of $8.1 million on our operating income. Net of the increase in credit card expenses generated by the rise in retail prices of motor fuel, the positive impact is only $4.0 million.
On November 15, 2005, the Company's Board of Directors adopted a quarterly dividend policy of Cdn2.5¢ per share on Class A multiple voting shares and Class B subordinate voting shares (the shares). On the same day, the Board of Directors declared and approved a dividend payment to all shareholders registered on November 24, 2005, in accordance with the new policy and payable on December 1st, 2005. Following the announcement by the federal government at the end of November 2005 regarding a tax relief proposal with respect to the taxation of dividends, the Board of Directors decided to delay the dividend payment date until January 3, 2006.
Business acquisitions
During the quarter, the Company made the following business acquisitions:
- Effective December 14, 2005: purchase of 16 sites operating under the Winners banner in New Mexico, United States, from Conway Oil Company and Conway Estate Company;
- Effective December 8, 2005: purchase of 26 sites operating under the BP banner in the Memphis area of Tennessee, United States, from BP Products North America, Inc.;
- Effective November 3, 2005: purchase of seven sites operating under the Fuel Mart banner in Ohio, United States, from Ports Petroleum Co.
We expect those 49 new stores to represent additional annual sales of approximately $180.0 million and to contribute to our net earnings on an annual basis.
These three acquisitions were settled for a total cash consideration of $54.4 million financed from the Company's available cash. The net assets acquired included working capital of $2.3 million, fixed assets of $51.1 million and goodwill of $1.0 million. Most of the goodwill related to these transactions is deductible for tax purposes.
Franchises and licences
During the current quarter, we entered into an agreement with ConocoPhillips Company resulting in the addition of 75 new franchises operating under the Circle K banner in Western United States. Also during the quarter, we decided not to renew the agreement with the licence holder of 800 stores operated in Taiwan under the Circle K banner since we did not agree on conditions of renewal. In this case, the impact on our financial position and operating results will not be significant.
Hurricanes
Second and third quarters of fiscal 2006
During the second and third quarters of this year, Florida and the Gulf of Mexico were affected by three hurricanes, which resulted in some damages to certain of our sites. We estimate that assets and leased properties that were damaged had a total replacement value of approximately $19.0 million, which will result in a net claim of about $15.0 million. Since that the damaged assets had a book value lower than the net claim, we do not expect these events to have a significant effect on our financial position and operating results. As at January 29, 2006, we had received $2.0 million in insurance proceeds.
In total, 163 sites were affected to various degrees, 20 of which are still closed as of today. Of these sites, we expect that approximately 13 will remain permanently closed because they did not have the potential to meet our contribution expectations, five sites should be reopened within six months while the other two should
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reopen in fiscal year 2008. As at January 29, 2006, and from the date of occurrence of those events, we estimate that we have lost approximately 4,100 store-days.
As part of our risk management process, we have decided not to renew our insurance coverage for material damage related to hurricanes. This decision is based on the fact that the renewal conditions proposed by the insurance companies were considered to be unacceptable from an economic perspective. In fact, based on the proposals received, we would have had to assume the majority of the risk. In addition, we believe that we have the financial strength and available funds to absorb the risk. This decision will be reviewed and re-evaluated on a regular basis in light of changing market conditions.
Second quarter of fiscal 2005
During the second quarter of fiscal 2005, certain areas of the Company's business in Florida experienced damages resulting from four hurricanes. Assets and leased properties that were damaged had a total replacement value of $22.9 million, which resulted in a net claim of about $16.6 million. Since that the damaged assets had a book value lower than the net claim, these events had no significant effect on our financial position and operating results. As at January 29, 2006, we had received $15.9 million in insurance proceeds.
In total, 92 sites were affected to various degrees, five of which are still closed as of today. Of these sites, four will be permanently closed because they did not have the potential to meet our contribution expectations while the other one should reopen within a few months. As at January 29, 2006, and from the date of occurrence of those events, we estimate that we have lost approximately 4,800 store-days.
Subsequent event
At the beginning of the fourth quarter of fiscal 2006, we announced the signing of an agreement with Shell Oil Product US to acquire a total of 40 sites and assume an additional 13 motor fuel supply contracts within the Indianapolis region in the Midwest of the U.S. The sites are operated under the Shell banner and the 13 contracts are for the motor fuel supply of Shell motor fuel to independent store operators.
Should this transaction be completed by the end of March 2006 as planned, it would represent additional annual sales of approximately $160.0 million and contribute to our net earnings on an annual basis.
Pursuant to a confidentiality agreement, the transaction amount cannot be disclosed at this stage but should be financed from our available cash.
Outstanding shares and stock options
As at February 28, 2006, Couche-Tard had 56,388,652 Class A multiple voting shares and 145,648,632 Class B subordinate voting shares issued and outstanding. In addition, as at the same date, Couche-Tard had 9,230,982 outstanding stock options for the purchase of Class B subordinate voting shares.
Income Statement Categories
Merchandise and Service Revenues. In-store merchandise revenues are comprised primarily of the sale of tobacco products, grocery items, candy and snacks, beverages, beer/wine and fresh food offerings, including quick service restaurants (QSRs). Service revenues include the commission on sale of lottery tickets and issuance of money orders, fees from automatic teller machines, calling card and gift card commissions, fees for cashing cheques and sales of postage stamps and bus tickets. Merchandise and service revenues also include franchise fees, license fees from affiliates, royalties from franchisees and a portion of vendor rebates related to certain purchases by franchisees and affiliates.
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Motor Fuel Revenues. We include in our revenues the total dollar amount of motor fuel sales, including any imbedded taxes, if we take ownership of the motor fuel inventory. In the United States, we purchase motor fuel and sell it to approximately 93 independent store operators at cost plus a mark-up. We record the full value of these revenues (cost plus mark-up) as motor fuel revenues. Where we act as a selling agent for a petroleum distributor, only the commission we have earned is recorded as revenues. Gross profit from motor fuel is derived by deducting the cost of the motor fuel from the motor fuel revenues, except for commission stores where the gross profit is equal to the recorded commission from the sale.
Gross Profit. Gross profit consists mainly of revenues less the related cost of the inventories. For in-store merchandise, the cost of inventory is generally determined using the retail method (retail price less a normal margin), and for motor fuel, it is determined using the average cost method.
Operating, Selling, Administrative and General Expenses. The primary components of operating, selling, administrative and general expenses are labour, occupancy costs, commissions to dealers and overhead and include advertising expenses that are charged as incurred.
Key performance indicators used by management, which can be found under "Results of Operations-Other Operating Data", are merchandise and service gross margin, growth of same-store merchandise revenues, motor fuel gross margin and growth of same-store motor fuel volume.
Exchange Rate Data
The Company's US dollar reporting currency provides shareholders with more relevant information giving consideration to the predominance of our operations in the United States and our US dollar denominated debt.
The following table sets forth information about exchange rates based upon the Bank of Canada closing rates expressed as US dollars per Cdn$1.00 :
| | 16-week periods ended | 40-week periods ended |
| | January 29, | January 30, | January 29, | January 30, |
| | 2006 | 2005 | 2006 | 2005 |
| Average for period (1) | 0.8551 | 0.8194 | 0.8337 | 0.7693 |
| Period end | 0.8699 | 0.8059 | 0.8699 | 0.8059 |
____________
(1) Calculated by taking the average of the closing exchange rates of each day in the applicable period.
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Results of Operations
The following table highlights certain information regarding our operations for the 16-week periods ended January 29, 2006 and January 30, 2005 and for the 40-week periods ended January 29, 2006 and January 30, 2005:
| (In millions of US dollars, unless otherwise stated) | 16-week periods ended | 40-week periods ended |
| | January 29, | January 30, | January 29, | January 30, |
| | 2006 | 2005 | 2006 | 2005 |
| | | restated | | restated |
| Statement of Operations Data: | | | | |
| Merchandise and service revenues (1): | | | | |
| Canada | 407.1 | 372.2 | 1,088.3 | 958.7 |
| United States | 811.4 | 749.4 | 2,111.3 | 1,966.3 |
| Total merchandise and service revenues | 1,218.5 | 1,121.6 | 3,199.6 | 2,925.0 |
| Motor fuel revenues | | | | |
| Canada | 255.6 | 205.2 | 656.3 | 507.4 |
| United States | 1,470.1 | 1,073.4 | 3,662.5 | 2,642.7 |
| Total motor fuel revenues | 1,725.7 | 1,278.6 | 4,318.8 | 3,150.1 |
| Total revenues | 2,994.2 | 2,400.2 | 7,518.4 | 6,075.1 |
| Merchandise and service gross profit (1): | | | | |
| Canada | 135.9 | 122.7 | 366.3 | 320.1 |
| United States | 268.9 | 241.8 | 694.1 | 640.7 |
| Total merchandise and service gross profit | 404.8 | 364.5 | 1,060.4 | 960.8 |
| Motor fuel gross profit: | | | | |
| Canada | 16.7 | 14.9 | 47.5 | 39.5 |
| United States | 108.8 | 89.7 | 252.0 | 206.3 |
| Total motor fuel gross profit | 125.5 | 104.6 | 299.5 | 245.8 |
| Total gross profit | 530.3 | 469.1 | 1,359.9 | 1,206.6 |
| Operating, selling, administrative and general expenses | 402.1 | 376.5 | 1,005.3 | 932.2 |
| Depreciation and amortization of fixed and other assets | 33.4 | 26.4 | 80.1 | 62.3 |
| Operating income | 94.8 | 66.2 | 274.5 | 212.1 |
| Financial expenses | 10.8 | 10.3 | 25.5 | 23.3 |
| Earnings before income taxes | 84.0 | 55.9 | 249.0 | 188.8 |
| Income taxes | 29.5 | 19.6 | 84.9 | 66.1 |
| Net earnings | 54.5 | 36.3 | 164.1 | 122.7 |
| Other Operating Data: | | | | |
| Merchandise and service gross margin (1): | | | | |
| Consolidated | 33.2% | 32.5% | 33.1% | 32.8% |
| Canada | 33.4% | 33.0% | 33.7% | 33.4% |
| United States | 33.1% | 32.3% | 32.9% | 32.6% |
| Growth of same-store merchandise revenues (2) (5): | | | | |
| Canada | 2.9% | 2.8%(6) | 4.1% | 2.4%(6) |
| United States | 6.0% | 10.2%(6) | 5.6% | 10.2%(6) |
| Motor fuel gross margin: | | | | |
| Canada (Cdn cents per litre) | 4.31 | 4.15 | 4.96 | 4.61 |
| United States (US cents per gallon) (3) | 17.63 | 16.30 | 16.63 | 15.11 |
| Volume of motor fuel sold (4): | | | | |
| Canada (millions of litres) | 452.9 | 434.5 | 1,148.3 | 1,099.6 |
| United States (millions of gallons) | 634.4 | 569.6 | 1,556.6 | 1,407.5 |
| Growth of same-store motor fuel volume (5): | | | | |
| Canada | 2.0% | 7.3%(6) | 2.8% | 6.3%(6) |
| United States | 6.9% | 5.5%(6) | 6.0% | 7.5%(6) |
________________
(1) Includes other revenues derived from franchise fees, royalties and rebates on some purchases by franchisees and licensees.
(2) Does not include services and other revenues (as described in footnote 1). Growth in Canada is calculated based on Canadian dollars.
(3) For Company-operated stores only.
(4) Includes volumes of franchisees and dealers.
(5) Since our first quarter of fiscal 2006, growth in both merchandise revenues and motor fuel volumes are reported on a same-store basis.
(6) For both comparative periods, growth in merchandise revenues and motor fuel volumes are reported on an average per store basis to be constant with our prior practices. Growth in the United States excludes the Circle K acquisition.
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16-Week Period Ended January 29, 2006 Compared to the 16-Week Period Ended January 30, 2005
During the 16-week period ended January 29, 2006, we acquired 49 sites in the U.S., including 41 Company-operated stores and eight affiliated stores. We also added 20 new Company-operated stores and ten QSRs and implemented our IMPACT concepts in 109 stores, including 13 new stores. One affiliated store was converted into a Company-operated store and two Company-operated stores were converted into affiliated stores. We also added 33 affiliated stores to our network whereas 16 other stores were removed. Finally, the number of our Company-operated stores was reduced by 31, including two that were closed on a permanent basis due to hurricane-related damages.
For the 16-week period ended January 29, 2006, we achieved revenues of $2.94 billion, compared with $2.40 billion for the same period in fiscal 2005, an increase of 22.7% or $544.0 million. We recorded 77.5% of our revenues in the United States, compared with 75.9% in the third quarter last year.
In the United States, revenues totalled $2.28 billion, an increase of 25.2% or $458.7 million, of which $396.7 million or 86.5% was generated from motor fuel revenues. The growth of same-store motor fuel volume was 6.9%, which reflects the positive impact of certain pricing strategies designed to increase volume. Growth of same-store merchandise revenues was 6.0% over the same period last year. This growth reflects efforts made to increase revenues and gross margins by implementing new pricing strategies on certain product categories designed to increase volume and by modifying product mix, as well as the results from investment in our IMPACT concepts conversions and the increase in tobacco tax in some regions with the resultant increase in the selling price of tobacco products.
In Canada, revenues amounted to $662.7 million, up 14.8%, or $85.3 million, of which $50.4 million or 59.1% was generated from motor fuel revenues. The growth of same-store motor fuel volume stood at 2.0% compared with the same quarter in the previous year, which reflects pressure on consumer spending caused by the sharp jump in the retail price of motor fuel. Growth of same-store merchandise revenues was 2.9% compared with the same period in the previous year, reflecting the launch of new products that were well received by the customers as well as the results from investment in our IMPACT concepts conversions.
Gross profit grew by 13.0% or $61.2 million to $530.3 million, compared with $469.1 million for the same quarter last year. This increase is mainly due to higher sales overall, higher gross margins on merchandise and service and high motor fuel margins.
The consolidated merchandise and service gross margin was 33.2%, up from 32.5% in the same period last year. The gross margin in Canada was 33.4%, up from 33.0% in the third quarter of the previous year. In the United States, the gross margin was 33.1%, up from 32.3% for the third quarter of 2005. In both Canada and the U.S., the increase in gross margin is due to improvements in purchasing terms and product mix. However, in the U.S., the increase in gross margin was restricted by certain pricing strategies in the western U.S. markets and by competitive pressure on tobacco gross margins in certain regions.
- The motor fuel gross margin increased to Cdn4.31¢ the third quarter of the previous year. The motor fuel gross margin in the United States also increased to 17.63¢ per gallon, compared with 16. year. These increases primarily reflect the volatile nature of the motor fuel business and the selective pricing strategy implemented in certain areas of the U.S. to stimulate sales volume.
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Operating, selling, administrative and general expenses increased by $25.6 million or 6.8% over the third quarter of the previous year. This includes an increase of $7.1 million in credit card expense, which relates primarily to the increase in the retail price of motor fuel. As a percentage of total revenues, operating, selling, administrative and general expenses declined by 2.0% due to lower operating costs associated with higher motor fuel revenues, which account for a larger proportion of total revenues. As a percentage of merchandise and service revenues, operating, selling, administrative and general expenses declined by 0.6%.
Depreciation and amortization of fixed and other assets increased by $7.0 million to $33.4 million in the third quarter of fiscal 2006. This increase is due mainly to the impact of the capital expenditures made during fiscal 2005.
Operating income of $94.8 million for the third quarter of fiscal 2006 increased by 43.2%, or $28.6 million, over the $66.2 million earned in the same period of the previous fiscal year.
Financial expenses of $10.8 million were up by $0.5 million or 4.9% over the same period last year due to a general increase in interest rates. The average interest rate applied to our borrowings rose to 7.5% compared with 5.6% for the same quarter of the previous year. Interest rate swaps entered into in March 2004 increased financial expenses by $0.4 million compared with a decrease of $1.5 million in the third quarter of fiscal 2005. In addition, financial expenses were reduced in the third quarter of this year by $2.7 million of interest income earned from the investing of excess cash compared with $0.5 million in the third quarter of the previous year.
Income taxes increased by $9.9 million, to $29.5 million, primarily due to increased pre-tax earnings.
Net earnings increased by $18.2 million, or 50.1%, to $54.5 million or $0.27 per share ($0.26 per share on a diluted basis), compared with $36.3 million or $0.18 per share ($0.18 per share on a diluted basis) in the same period of the previous year.
40-Week Period Ended January 29, 2006 Compared to the 40-Week Period Ended January 30, 2005
During the 40-week period ended January 29, 2006, we acquired 49 sites in the U.S., including 41 Company-operated stores and eight affiliated stores. We also added 57 new Company-operated stores and 43 QSRs and implemented our IMPACT concepts in 264 stores, including 29 new stores. One affiliated store was converted into a Company-operated store and eight Company-operated stores were converted into affiliated stores. We also added 86 affiliated stores to our network whereas 61 other stores were removed. Finally, the number of our Company-operated stores was reduced by 74, including 13 stores that were closed on a permanent basis due to hurricane-related damages.
For the 40-week period ended January 29, 2006, we achieved revenues of $7.52 billion compared with $6.08 billion for the same period in fiscal 2005, an increase of 23.8% or $1.44 billion. We recorded 76.8% of our revenues in the United States, compared with 75.9% for the first 40 weeks of last year.
In the United States, revenues totalled $5.77 billion, an increase of 25.3% or $1.16 billion, of which $1.02 billion or 87.6% was generated by motor fuel revenues. The growth of same-store motor fuel volume was 6.0%, which reflects the positive impact of certain pricing strategies designed to increase volume. Growth of same-store merchandise revenues was 5.6% over the same period last year. This growth reflects efforts made to increase revenues and gross margins by implementing new pricing strategies on certain product categories designed to increase volume and by changing product mix, as well as the results from investment in our IMPACT concepts conversions and the increase in tobacco tax in some regions with the resultant increase in the selling price of tobacco products.
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In Canada, revenues amounted to $1.74 billion, up 19.0%, or $278.5 million, of which $148.9 million or 53.5% was generated from motor fuel revenues. Growth of same-store motor fuel revenues was 2.8% compared with the first three quarters of the previous year due in part to the negative impact of the pressure on consumer spending caused by the sharp jump in the retail price of motor fuel. Merchandise and service revenues increased by $129.6 million over the same period in fiscal 2005. Growth of same-store merchandise revenues was 4.1% compared with the same period in the previous year, reflecting the launch of new products that were well received by the customers as well as our pricing strategies on certain product categories designed to increase volume and the results from investment in our IMPACT concepts conversions.
Gross profit grew by 12.7% or $153.3 million to $1.36 billion, compared with $1.21 billion for the same nine-month period of the previous year. This increase is mainly due to higher sales and high motor fuel margins.
The consolidated merchandise and service gross margin was 33.1%, up from 32.8% in the same period last year. The gross margin in Canada was 33.7%, up from 33.4% in the first three quarters of the previous year reflecting the impact of improvements in purchasing terms and changes in product mix with a focus on higher margin items. The increase in gross margin in Canada was partially offset by our pricing strategies on certain product categories designed to increase sales. In the United States, we maintained our efforts regarding price optimization and changes to the product mix in higher margin categories. As a result, gross margins were higher in certain categories and lower in other categories where revenues rose. Overall, these strategies resulted in an increase in gross margin in the U.S. to 32.9% compared with 32.6% for the first three quarters of fiscal 2005. However, the positive impact of our strategies was partially offset by competitive pressure on tobacco gross margins in certain regions.
The motor fuel gross margin increased to Cdn4.96¢ per litre in Canada from Cdn4.61¢ per litre in the first three quarters of the previous year. The motor fuel gross margin in the United States also increased, reaching 16.63¢per gallon compared with 15.11¢ per gallon for the corresponding period of the previous year. These increases primarily reflect the volatile nature of the motor fuel business, partially offset by our selective pricing strategy implemented in certain areas of the U.S. to increase sales volume and by strong competition in some regions.
Operating, selling, administrative and general expenses increased by $73.1 million or 7.8% over the first three quarters of the previous year. This includes an increase of $18.1 million in credit card expense, which relates primarily to the increase in the retail price of motor fuel. As a percentage of total revenues, operating, selling, administrative and general expenses declined by 2.0% due to lower operating costs associated with higher motor fuel revenues, which account for a larger proportion of total revenues. As a percentage of merchandise and service revenues, operating, selling, administrative and general expenses declined by 0.5%.
Depreciation and amortization of fixed and other assets increased by $17.8 million to $80.1 million in the first three quarters of fiscal 2006. This increase is due mainly to the impact of the capital expenditures made during fiscal 2005.
Operating income of $274.5 million for the first three quarters of this year increased by 29.4%, or $62.4 million over the $212.1 million earned in the same period of the previous fiscal year.
Financial expenses of $25.5 million were up by $2.2 million or 9.4% over the same period last year due to a general increase in interest rates. The average interest rate applied to our borrowings rose to 6.8% compared with 5.0% for the same period of the previous year. Interest rate swaps entered into in March 2004 increased financial expenses by $0.3 million compared with a decrease of $4.9 million in the first three quarters of fiscal 2005. In addition, financial expenses were reduced in the first three quarters of this year by $5.5 million of interest income earned from the investing of excess cash compared with $1.2 million in the same period of the previous year.
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Income taxes increased by $18.8 million to $84.9 million, primarily due to increased pre-tax earnings.
Net earnings increased by $41.4 million, or 33.7%, to $164.1 million or $0.81 per share ($0.79 per share on a diluted basis), compared with $122.7 million or $0.61 per share ($0.60 per share on a diluted basis) in the same period of the previous year.
Liquidity and Capital Resources
Our principal source of liquidity is cash flows generated from operating activities. Our principal uses of cash are to meet debt service requirements, pay dividends, finance our capital expenditures, make acquisitions and provide for working capital. We expect that cash available from operations together with borrowings available under our revolving credit facilities will be adequate to meet our liquidity needs in the foreseeable future.
As at January 29, 2006, our total debt was $526.0 million (of which $350.0 million consisted of 7.5% Subordinated unsecured debt due in 2013, $168.2 million consisted of borrowings under our Secured term loans and $7.8 million consisted of other long-term debt).
In addition to the above, we have interest rate swap agreements with three banks under which we incur interest on $350.0 million at a rate of LIBOR plus an aggregate weighted average rate factor of 2.95%. The interest rate is reset every six months over the term of the agreements. The swap agreements, which expire on December 15, 2013, provide that, after December 15,2008, each bank has the right to terminate its arrangement with the payment of a termination fee if terminated before December 15, 2011 and, if terminated after that date, without payment of a termination fee. In addition, both parties to each agreement have a mutual right to terminate the arrangement on the 5th anniversary date of the effective date of each of the three agreements. If such right was exercised by either party, that party would be required to pay the other party the mark to market value of the interest rate swap. We formally document and designate each derivative financial instrument as a hedge of our Subordinated unsecured debt. We determine that derivative financial instruments are effective hedges, at the time of the establishment of the hedge and for the duration of the instrument, since the date to maturity, the reference amount and interest rate of the instruments correspond to all the conditions of the debt.
Capital Expenditures. Gross capital expenditures for the 16 and 40-week periods ended January 29, 2006 were $60.0 million and $143.3 million, respectively. Our capital expenditures primarily relate to expenditures on the implementation of our IMPACT concepts, investment in new stores, the replacement of equipment in some of our stores, including upgrading of petroleum infrastructure at a number of locations, and the installation of point of sales (POS) systems, including scanning, at the Circle K Company-operated stores that did not yet have this technology. In connection with the Circle K acquisition, we expect to make certain capital improvements of up to $18.6 million at the CircleK stores until December 2008 in order to comply with the requirements of the Americans with Disabilities Act. We expect to fund these improvements with cash flows generated from operations. Over the past number of years, we have expended funds for maintaining stores to operating standards, renovated certain stores with our IMPACT concepts, opened new stores and invested in small acquisitions. We have funded these expenditures with cash flows from operating activities.
We believe that we will be able to continue to fund future expenditures of this nature with cash flows from operating activities. Major acquisitions will be financed through a combination of debt, sale and leaseback transactions and equity.
Credit Facilities. We have five-year renewable operating credits, maturing in December 2008 in the amount of Cdn$50.0 million available in Canadian dollars or US dollars to the Canadian borrowers and in the amount of $75.0 million available in US dollars to the U.S. borrowers, which bear interest at the Canadian prime rate, or the Canadian or U.S. base rate (as applicable) or LIBOR, plus a certain margin varying on the basis of our leverage ratio. The operating credits are also available in the form of bankers' acceptances (for Canadian dollar advances) and in the form of letters of credit not exceeding Cdn$10.0 million or the US dollar
11
equivalent in respect of the Canadian facility and $30.0 million in respect of the U.S. facility. As at January 29, 2006, the facilities were undrawn, except for letters of credit of approximately Cdn$0.8 million for the Canadian facility and $15.5 million for the U.S. facility.
Virtually all of our assets secure our senior credit facility. We must meet certain commitments and achieve certain financial ratios under the credit agreement. In addition, the credit agreement imposes certain restrictions on capital spending, if a certain ratio is not achieved, business acquisitions, debt repayments and payment of dividends. As well, the indenture governing the subordinated debt also contains certain restrictions on business acquisitions and the payment of dividends. Compliance with the ratios, commitments and restrictions described above is tested at the end of each quarter. As at January 29, 2006, the Company was in compliance with all of these covenants.
Principal Cash Flows for the 16 and 40-Week Periods Ended January 29, 2006
Cash Flows from Operating Activities. Cash provided from operating activities amounted to $43.8 million in the 16-week period ended January 29, 2006 compared with cash used in operating activities of $7.5 million in the 16-week period ended January 30, 2005. This represents an increase of $51.3 million, which is primarily due to an increase of $18.2 million in net earnings and to changes in non-cash working capital in the third quarter of 2005. The change in non-cash working capital was primarily attributable to income tax instalments of $47.1 million, most of which was subsequently recovered. Cash flows at the level of net earnings plus depreciation and amortization, loss on disposal of fixed and other assets and future income taxes amounted to $95.4 million (1) (or $0.47 per share (1)), an increase of $37.1 million or 63.6% over the $58.3 million (or $0.29 per share) generated during the 16-week period ended January 30, 2005.
Cash provided from operating activities amounted to $257.9 million in the 40-week period ended January 29, 2006 compared with $130.9 million in the 40-week period ended January 30, 2005. This represents an increase of $127.0 million, which is primarily due to the increase in net earnings of $41.4 million, the receipt of income taxes receivable in the first three quarters of 2006 and the fact that in the first three quarters of 2005, we had made significant income tax instalments, most of which was subsequently recovered. Cash flows at the level of net earnings plus depreciation and amortization, loss on disposal of fixed and other assets and future income taxes amounted to $253.9 million (1) (or $1.26 per share (1)), an increase of $64.2 million or 33.8% over the $189.7 million (or $0.94 per share) generated during the 40-week period ended January 30, 2005.
Cash Flows from Investing Activities. Net cash used in investing activities for the 16-week period ended January 29, 2006 amounted to $99.6 million, including an amount of $54.4 million to acquire 49 sites in the U.S. Net cash used in investing activities amounted to $79.6 million for the 16-week period ended January 30, 2005, including $34.2 million for the acquisition of 21 sites in the U.S. Investment in fixed assets amounted to $60.0 million, compared with $50.6 million for the 16-week period ended January 30, 2005. These capital expenditures were primarily related to the implementation of our IMPACT concepts, investment in new stores, the replacement of equipment in some of our stores, including upgrading of petroleum infrastructure at a number of locations, and the replacement of fixed assets damaged by the hurricanes. Cash generated from sale and leaseback transactions amounted to $12.1 million in the 16-week period ended January 29, 2006.
Net cash used in investing activities for the 40-week period ended January 29,2006 amounted to $158.3 million, including an amount of $54.4 million for the acquisition of 49 sites in the U.S. Net cash used in investing activities amounted to $129.0 million for the 40-week period ended January 30, 2005, including $34.2 million for the acquisition of 21 sites in the U.S. Capital expenditures amounted to $143.3 million,
_______________
(1) These cash flows and cash flows per share are presented for information purposes only and represent performance measures used especially in financial circles. They do not have a standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures presented by other public companies.
12
compared with $103.0 million for the same 40-week period of the previous year. This amount was primarily allocated for the implementation of our IMPACT concepts, investment in new stores, the replacement of equipment in some of our stores, including upgrading of petroleum infrastructure at a number of locations, the installation of POS systems, including scanning, at the Circle K Company-operated stores that did not yet have this technology and the replacement of fixed assets damaged by the hurricanes. During the current 40-week period, cash generated from sale and leaseback transactions amounted to $30.8 million.
Cash Flows from Financing Activities. Cash used in financing activities amounted to $6.6 million for the 16-week period ended January 29, 2006. This amount was allocated to the repayment of long-term debt of $2.2 million and to a $4.4 million cash dividend payment to shareholders. In the same period of the previous year, cash of $1.9 million was used, essentially for the repayment of the debt of $2.1 million, offset by the $0.2 million of proceeds from the issue of shares on exercise of stock options.
Cash used in financing activities amounted to $9.4 million for the 40-week period ended January 29, 2006, including repayment of long-term debt of $5.2 million, a $4.4 million cash dividend payment to shareholders and the receipt of $0.2 million in cash from the issue of shares on exercise of stock options. In the first three quarters of the previous year, cash of $3.4 million was generated, essentially from the $8.4 million of proceeds from the issue of shares on exercise of stock options, which was offset by the repayment of long-term debt of $5.1 million.
Financial Position as at January 29, 2006
Our total consolidated assets of $2.19 billion as at January 29, 2006 increased by $215.9 million compared with April 24, 2005. The change is primarily represented by the $96.7 million increase in cash and cash equivalents, the rise in the Canadian dollar against the U.S. dollar and our investments in fixed assets. Total cash and cash equivalents amounted to $349.4 million as at January 29, 2006. Shareholders' equity of $921.8 million as at January 29, 2006 increased by $188.6 million resulting mainly from net earnings of $164.1 million in addition to the increase in cumulative translation adjustments for the 40-week period ended January 29, 2006. The increase in cumulative translation adjustments was generated by significant exchange rate fluctuations. The net interest-bearing debt to total capitalization ratio stood at 0.16:1 (1) versus 0.28:1 as at April 24, 2005.
Outlook
With the integration of Circle K operations successfully completed last year, we are focused on our priorities as set out in our last Annual Report, namely to invest in our existing store base by implementing our IMPACT concepts on approximately 400 sites and by adding approximately 60 QSRs and approximately 100 new store locations through new store development and small acquisitions. In addition, we will focus on executing our plans for improvement to sales and margins through a variety of actions, including price optimization. With the successful integration of Circle K behind us and considering our strong financial position, we will seek out a larger-scale acquisition opportunity.
March 7, 2006
_______________
(1) This ratio is presented for information purposes only and represents a measure of financial condition used especially in financial circles. It represents the following calculation: long-term interest-bearing debt, net of cash and cash equivalents divided by the addition of shareholders' equity and long-term interest-bearing debt, net of cash and cash equivalents. It does not have a standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures presented by other public companies.
13
CONSOLIDATED EARNINGS
(in millions of US dollars, except per share amounts, unaudited)
| | 16 weeks | 40 weeks |
| For the periods ended | January 29, | January 30, | January 29, | January 30, |
| | 2006 | 2005 | 2006 | 2005 |
| | | restated | | restated |
| | | (Note 2) | | (Note 2) |
| | $ | $ | $ | $ |
| Revenues | 2,944.2 | 2,400.2 | 7,518.4 | 6,075.1 |
| Cost of sales | 2,413.9 | 1,931.1 | 6,158.5 | 4,868.5 |
| Gross profit | 530.3 | 469.1 | 1,359.9 | 1,206.6 |
| | | | | |
| Operating, selling, administrative and general expenses | 402.1 | 376.5 | 1,005.3 | 932.2 |
| Depreciation and amortization of fixed and other assets | 33.4 | 26.4 | 80.1 | 62.3 |
| | 435.5 | 402.9 | 1,085.4 | 994.5 |
| Operating income | 94.8 | 66.2 | 274.5 | 212.1 |
| Financial expenses | 10.8 | 10.3 | 25.5 | 23.3 |
| Earnings before income taxes | 84.0 | 55.9 | 249.0 | 188.8 |
| Income taxes | 29.5 | 19.6 | 84.9 | 66.1 |
| Net earnings | 54.5 | 36.3 | 164.1 | 122.7 |
| | | | | |
| Net earnings per share (Note 4) | | | | |
| Basic | 0.27 | 0.18 | 0.81 | 0.61 |
| Diluted | 0.26 | 0.18 | 0.79 | 0.60 |
| Weighted average number of shares (in thousands) | 202,036 | 201,570 | 202,027 | 201,195 |
| Weighted average number of shares – diluted (in thousands) | 207,768 | 206,669 | 207,492 | 206,115 |
| Number of shares outstanding at end of period (in thousands) | 202,037 | 201,668 | 202,037 | 201,668 |
| | | | | |
| CONSOLIDATED CONTRIBUTED SURPLUS | | | | |
| (in millions of US dollars, unaudited) | | | | |
| | | | | |
| For the 40-week periods ended | | | January 29, | January 30, |
| | | | 2006 | 2005 |
| | | | $ | $ |
| Balance, beginning of period | | | 5.6 | 3.2 |
| Stock-based compensation | | | 3.0 | 1.9 |
| Fair value of stock options exercised | | | - | (0.1) |
| Balance, end of period | | | 8.6 | 5.0 |
| | | | | |
| CONSOLIDATED RETAINED EARNINGS | | | | |
| (in millions of US dollars, unaudited) | | | | |
| | | | | |
| For the 40-week periods ended | | | January 29, | January 30, |
| | | | 2006 | 2005 |
| | | | | restated |
| | | | | (Note 2) |
| | | | $ | $ |
| Balance, beginning of period | | | 317.5 | 162.3 |
| Net earnings | | | 164.1 | 122.7 |
| | | | 481.6 | 285.0 |
| Dividends | | | (4.4) | - |
| Balance, end of period | | | 477.2 | 285.0 |
| The accompanying notes are an integral part of the consolidated financial statements. | | |
14
CONSOLIDATED CASH FLOWS
(in millions of US dollars, unaudited)
| | 16 weeks | 40 weeks |
| For the periods ended | January 29, | January 30, | January 29, | January 30, |
| | 2006 | 2005 | 2006 | 2005 |
| | | restated | | restated |
| | | (Note 2) | | (Note 2) |
| | $ | $ | $ | $ |
| Operating activities | | | | |
| Net earnings | 54.5 | 36.3 | 164.1 | 122.7 |
| Adjustments to reconcile net earnings to cash flows from operating activities | | | | |
| Depreciation and amortization of fixed and other assets, net of | | | | |
| amortization of deferred credits | 28.3 | 24.1 | 72.3 | 56.0 |
| (Gain) loss on disposal of fixed and other assets | (0.5) | 0.3 | (2.4) | 1.6 |
| Future income taxes | 13.1 | (2.4) | 19.9 | 9.4 |
| Deferred credits | 5.4 | 4.0 | 11.6 | 9.0 |
| Other | (1.6) | 1.1 | (3.5) | 1.7 |
| Changes in non-cash working capital items | (55.4) | (70.9) | (4.1) | (69.5) |
| Cash flows from (used in) operating activities | 43.8 | (7.5) | 257.9 | 130.9 |
| | | | | |
| Investing activities | | | | |
| Business acquisitions (Note 3) | (54.4) | (34.2) | (54.4) | (34.2) |
| Deposit on business acquisitions | - | 1.6 | - | - |
| Liabilities assumed on business acquisitions | (4.0) | (0.3) | (4.0) | (3.9) |
| Purchase of fixed assets | (60.0) | (50.6) | (143.3) | (103.0) |
| Proceeds from sale and leaseback transactions | 12.1 | - | 30.8 | 1.8 |
| Proceeds from disposal of fixed and other assets | 7.7 | 5.5 | 15.9 | 15.0 |
| Other assets | (1.0) | (1.6) | (3.3) | (4.7) |
| Cash flows used in investing activities | (99.6) | (79.6) | (158.3) | (129.0) |
| | | | | |
| Financing activities | | | | |
| Issuance of long-term debt, net of financing costs | - | - | - | 0.1 |
| Repayment of long-term debt | (2.2) | (2.1) | (5.2) | (5.1) |
| Issuance of shares, net of share issue expenses | - | 0.2 | 0.2 | 8.4 |
| Dividends | (4.4) | - | (4.4) | - |
| Cash flows (used in) from financing activities | (6.6) | (1.9) | (9.4) | 3.4 |
| Effect of exchange rate fluctuations on cash and cash equivalents | 3.0 | (0.1) | 6.5 | 5.5 |
| Net (decrease) increase in cash and cash equivalents | (59.4) | (89.1) | 96.7 | 10.8 |
| Cash and cash equivalents, beginning of period | 408.8 | 253.7 | 252.7 | 153.8 |
| Cash and cash equivalents, end of period | 349.4 | 164.6 | 349.4 | 164.6 |
| | | | | |
| Supplemental information: | | | | |
| Interest paid | 17.8 | 12.8 | 34.1 | 27.7 |
| Income taxes paid | 19.2 | 48.9 | 31.3 | 104.4 |
The accompanying notes are an integral part of the consolidated financial statements.
15
CONSOLIDATED BALANCE SHEETS
(in millions of US dollars)
| | As at January 29, | As at April 24, |
| | 2006 | 2005 |
| | (unaudited) | (audited) |
| | $ | $ |
| Assets | | |
| Current assets | | |
| Cash and cash equivalents | 349.4 | 252.7 |
| Accounts receivable | 120.8 | 109.7 |
| Income taxes receivable | - | 31.6 |
| Inventories | 316.2 | 295.4 |
| Prepaid expenses | 10.9 | 10.0 |
| Future income taxes | 13.3 | 17.2 |
| | 810.6 | 716.6 |
| Fixed assets | 902.0 | 812.0 |
| Trademarks and licenses | 172.2 | 172.5 |
| Goodwill | 237.7 | 224.9 |
| Deferred charges | 28.2 | 30.7 |
| Other assets | 38.6 | 15.8 |
| Future income taxes | 0.7 | 1.6 |
| | 2,190.0 | 1,974.1 |
| | | |
| Liabilities | | |
| Current liabilities | | |
| Accounts payable and accrued liabilities | 584.3 | 604.9 |
| Income taxes payable | 3.6 | - |
| Future income taxes | - | 0.1 |
| Current portion of long-term debt | 7.7 | 7.0 |
| | 595.6 | 612.0 |
| Long-term debt | 518.3 | 523.9 |
| Deferred credits and other liabilities | 99.2 | 72.7 |
| Future income taxes | 55.1 | 32.3 |
| | 1,268.2 | 1,240.9 |
| | | |
| Shareholders' equity | | |
| Capital stock | 351.0 | 350.8 |
| Contributed surplus | 8.6 | 5.6 |
| Retained earnings | 477.2 | 317.5 |
| Cumulative translation adjustments | 85.0 | 59.3 |
| | 921.8 | 733.2 |
| | 2,190.0 | 1,974.1 |
The accompanying notes are an integral part of the consolidated financial statements.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of US dollars, except per share amounts, unaudited)
1. FINANCIAL STATEMENTS PRESENTATION
The unaudited interim consolidated financial statements have been prepared by the Company in accordance with Canadian generally accepted accounting principles. These financial statements were prepared in accordance with the same accounting policies and methods as the audited annual consolidated financial statements for the year ended April 24,2005. The unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto in the Company's 2005 Annual Report (the 2005 Annual Report). The results of operations for the interim periods presented do not necessarily reflect results for the full year.
Effective April 25,2005, the Company changed its reporting currency from Canadian dollars to US dollars to provide more relevant information considering its predominant operations in the United States and its US dollar denominated debt. The Company used the current rate method to translate the Canadian dollars financial statements into US dollars for both the current and prior periods. Under this method, assets and liabilities are translated into US dollars using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate in effect during the period. Gains and losses are included in the cumulative translation adjustments account in the shareholders' equity. The functional currencies of the Company and each of its subsidiaries remained unchanged.
2. ACCOUNTING CHANGES
Non-monetary transactions
On June 1st, 2005, the Canadian Institute of Chartered Accountants (CICA) issued Handbook Section 3831, "Non-Monetary Transactions", replacing Section 3830 of the same name. Under these new standards, all non-monetary transactions initiated in periods beginning on or after January 1st, 2006 have to be measured at fair value unless:
the transaction lacks commercial substance;
the transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange;
neither the fair value of the assets received nor the fair value of the asset given up is reliably measurable; or
the transaction is a non-monetary, non-reciprocal transfer to owners that represents a spin-off or other form of restructuring or liquidation.
The Company adopted these new recommendations both early and prospectively on July 18, 2005. The implementation of these new recommendations did not have any impact on the Company's financial statements.
Accounting for fixed assets and lease accounting
During fiscal year 2005, the Company undertook a review of its depreciation and amortization policies for all of its fixed assets and of its lease accounting policies. Previously, the Company used the diminishing balance method at various rates to calculate depreciation, except for Circle K where the straight-line method was used. In addition, leasehold improvements were amortized over the shorter of the term of the lease plus renewal periods or their useful lives and rent expense was recorded over the committed lease period, and did not take into account future rent escalations included in the lease term.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of US dollars, except per share amounts, unaudited)
As a result of the review and an in depth study of the useful lives of its fixed assets, the Company decided to change its accounting policy for depreciation and amortization of fixed assets to use the straight-line method throughout the Company. This method is more representative of the actual useful lives of the assets and provides uniformity within the Company. This change has been applied retroactively and prior years financial statements have been restated.
Following a review of its lease accounting policies and the relevant accounting literature, the Company has determined it should amortize its leasehold improvements over the shorter of their useful lives or the lease term. Moreover, the Company decided it should record lease expense using the straight-line method. Accordingly, the Company has restated previously reported financial statements to reflect these changes.
The impact of those changes as of April 25,2004 is a decrease in fixed assets of $10.0, an increase in net future income tax assets of $6.5, an increase in accounts payable and accrued liabilities of $0.6, an increase in deferred credits and other liabilities of $8.1, a reduction in retained earnings of $11.5 and a decrease to the cumulative translation adjustments balance of $0.7.
For the 16 and 40-week periods ended January 29,2006, the impact on net earnings is a decrease of $2.1 and $5.7, respectively ($0.01 and $0.03 per share on a diluted basis). For the 16 and 40-week periods ended January 30, 2005, the impact on net earnings is a decrease of $1.5 and $3.2, respectively ($0.01 and $0.02 per share on a diluted basis).
3. BUSINESS ACQUISITIONS
During the quarter, the Company made the following business acquisitions:
- Effective December 14, 2005: purchase of 16 sites operating under the Winners banner in New Mexico, United States, from Conway Oil Company and Conway Estate Company;
- Effective December 8, 2005: purchase of 26 sites operating under the BP banner in the Memphis area of Tennessee, United States, from BP Products North America, Inc.;
- Effective November 3, 2005: purchase of seven sites operating under the Fuel Mart banner in Ohio, United States, from Ports Petroleum Co.
These three acquisitions were settled for a total cash consideration of $54.4 financed from the Company's available cash. The net assets acquired included working capital of $2.3, fixed assets of $51.1 and goodwill of $1.0. Most of the goodwill related to these transactions is deductible for tax purposes.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of US dollars, except per share amounts, unaudited)
4. NET EARNINGS PER SHARE
| | 16-week period | 16-week period |
| | ended January 29, 2006 | ended January 30, 2005 |
| | | | | restated (Note 2) |
| | | Weighted average | Net | | Weighted average | Net |
| | Net | number of shares | earnings | Net | number of shares | earnings |
| | earnings | (in thousands) | per share | earnings | (in thousands) | per share |
| | $ | | $ | $ | | $ |
| Basic net earnings attributable to | | | | | | |
| Class A and B shares | 54.5 | 202,036 | 0.27 | 36.3 | 201,570 | 0.18 |
| | | | | | | |
| Dilutive effect of stock options | | 5,732 | (0.01) | | 5,099 | - |
| | | | | | | |
| Diluted net earnings available for | | | | | | |
| Class A and B shares | 54.5 | 207,768 | 0.26 | 36.3 | 206,669 | 0.18 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | 40-week period | 40-week period |
| | ended January 29, 2006 | ended January 30, 2005 |
| | | | | restated (Note 2) |
| | | Weighted average | Net | | Weighted average | Net |
| | Net | number of shares | earnings | Net | number of shares | earnings |
| | earnings | (in thousands) | per share | earnings | (in thousands) | per share |
| | $ | | $ | $ | | $ |
| Basic net earnings attributable to | | | | | | |
| Class A and B shares | 164.1 | 202,027 | 0.81 | 122.7 | 201,195 | 0.61 |
| | | | | | | |
| Dilutive effect of stock options | | 5,465 | (0.02) | | 4,920 | (0.01) |
| | | | | | | |
| Diluted net earnings available for | | | | | | |
| Class A and B shares | 164.1 | 207,492 | 0.79 | 122.7 | 206,115 | 0.60 |
A total of 570,000 stock options were excluded from the calculation of the diluted earnings per share due to their antidilutive effect for the 16 and 40-week periods ended January 29,2006. There were 400,000 stock options excluded from the calculation for the corresponding periods ended January 30, 2005.
5. CAPITAL STOCK
As at January 29, 2006, the Company had 56,388,652 (56,594,692 as at January 30, 2005) issued and outstanding Class A multiple voting shares each comprising ten votes per share and 145,648,632 (145,073,070 as at January 30,2005) outstanding Class B subordinate voting shares each comprising one vote per share.
Share Split
Effective March 18, 2005, the Company split of all its issued and outstanding Class A and B shares on a two-for-one basis. All share and per-share information in these consolidated financial statements has been adjusted retroactively to reflect this stock split.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of US dollars, except per share amounts, unaudited)
6. STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
As at January 29,2006, 9,232,390 (8,983,200 as at January 30,2005) stock options for the purchase of Class B subordinate voting shares were outstanding. These stock options can be gradually exercised at various dates until December 17, 2015, at an exercise price varying from Cdn$2.38 to Cdn$23.19. Five series of stock options totaling 555,100 stock options at exercise prices ranging from Cdn$16.48 to Cdn$23.19 were granted since the beginning of the fiscal year.
For the 16 and 40-week periods ended January 29, 2006, the stock-based compensation costs amounted to $1.1 and $3.0, respectively. For the corresponding periods ended January 30,2005, the stock-based compensation costs amounted to $1.0 and $1.8, respectively.
The fair value of stock options granted is estimated at the grant date using the Black & Scholes option pricing model on the basis of the following weighted average assumptions for the stock options granted during the year:
- risk-free interest rate ranging from 3.87% to 4.01%;
- expected life of 8 years;
- expected volatility of 35%;
- expected quarterly dividend rate ranging from 0.43% to 0.50% (for stock options granted since the beginning of the third quarter).
The weighted average fair value of stock options granted since the beginning of the year is Cdn$8.53 (Cdn$7.53 as at January 30, 2005). A description of the Company's stock-based compensation plan is included in Note 19 of the consolidated financial statements presented in the 2005 Annual Report.
7. EMPLOYEE FUTURE BENEFITS
For the 16 and 40-week periods ended January 29, 2006, the Company's total net pension expense included in consolidated earnings amounted to $1.4 and $3.5, respectively. For the corresponding 16 and 40-week periods ended January 30,2005, the expense was $1.4 and $3.4, respectively. The Company's pension plans are described in Note 21 of the consolidated financial statements presented in the 2005 Annual Report.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of US dollars, except per share amounts, unaudited)
8. SEGMENTED INFORMATION
The Company operates convenience stores in Canada and in the United States. It essentially operates in one reportable segment, the sale of goods for immediate consumption and motor fuel through corporate stores or franchise and affiliated operations. It operates a convenience store chain mainly under the Couche-Tard, Mac's and Circle K banners. Revenues from outside sources mainly fall into two categories: merchandise and services and motor fuel.
The following table provides the information on the principal revenue classes as well as geographic information:
| | 16-week period | 16-week period |
| | ended January 29, 2006 | ended January 30, 2005 |
| | | | | restated (Note 2) |
| | Canada | United States | Total | Canada | United States | Total |
| | $ | $ | $ | $ | $ | $ |
| External customer | | | | | | |
| revenues (a) | | | | | | |
| Merchandise and services | 407.1 | 811.4 | 1,218.5 | 372.2 | 749.4 | 1,121.6 |
| Motor fuel | 255.6 | 1,470.1 | 1,725.7 | 205.2 | 1,073.4 | 1,278.6 |
| | 662.7 | 2,281.5 | 2,944.2 | 577.4 | 1,822.8 | 2,400.2 |
| Gross Profit | | | | | | |
| Merchandise and services | 135.9 | 268.9 | 404.8 | 122.7 | 241.8 | 364.5 |
| Motor fuel | 16.7 | 108.8 | 125.5 | 14.9 | 89.7 | 104.6 |
| | 152.6 | 377.7 | 530.3 | 137.6 | 331.5 | 469.1 |
| | | | | | | |
| Fixed assets and goodwill (a) | 437.7 | 702.0 | 1,139.7 | 388.4 | 574.9 | 963.3 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | 40-week period | 40-week period |
| | ended January 29, 2006 | ended January 30, 2005 |
| | Canada | United States | Total | Canada | United States | Total |
| | $ | $ | $ | $ | $ | $ |
| External customer | | | | | | |
| revenues (a) | | | | | | |
| Merchandise and services | 1,088.3 | 2,111.3 | 3,199.6 | 958.7 | 1,966.3 | 2,925.0 |
| Motor fuel | 656.3 | 3,662.5 | 4,318.8 | 507.4 | 2,642.7 | 3,150.1 |
| | 1,744.6 | 5,773.8 | 7,518.4 | 1,466.1 | 4,609.0 | 6,075.1 |
| Gross Profit | | | | | | |
| Merchandise and services | 366.3 | 694.1 | 1,060.4 | 320.1 | 640.7 | 960.8 |
| Motor fuel | 47.5 | 252.0 | 299.5 | 39.5 | 206.3 | 245.8 |
| | 413.8 | 946.1 | 1,359.9 | 359.6 | 847.0 | 1,206.6 |
(a) Geographic areas are determined according to where the Company generates operating income (where the sale takes place) and according to the location of the fixed assets and goodwill.
9. HURRICANES
Second and third quarters of fiscal 2006
During the second and third quarters of this year, Florida and the Gulf of Mexico were affected by three hurricanes, which resulted in some damages to certain of the Company's sites. The Company estimates that assets and leased properties that were damaged had a total replacement value of approximately $19.0, which will result in a net claim of about $15.0. Since that the damaged assets had a book value lower than the net claim, the Company does not expect these events to have a significant effect on its financial position and operating results. As at January 29, 2006, the Company had received $2.0 in insurance proceeds.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of US dollars, except per share amounts, unaudited)
Second quarter of fiscal 2005
During the second quarter of fiscal 2005, certain areas of the Company's business in Florida experienced damages resulting from four hurricanes. Assets and leased properties that were damaged had a total replacement value of $22.9, which resulted in a net claim of about $16.6. Since that the damaged assets had a book value lower than the net claim, these events had no significant effect on the Company's financial position and operating results. As at January 29,2006, the Company had received $15.9 in insurance proceeds.
10. SUBSEQUENT EVENT
At the beginning of the fourth quarter of fiscal 2006, the Company announced the signing of an agreement with Shell Oil Product US to acquire a total of 40 sites and assume an additional 13 motor fuel supply contracts within the Indianapolis region in the Midwest of the U.S. The sites are operated under the Shell banner and the 13 contracts are for the motor fuel supply of Shell motor fuel to independent store operators.
This transaction is expected to be completed by the end of March 2006. The transaction amount will be determined at closing.
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