10-Q 1 d10q.htm FOR THE FISCAL QUARTER ENDED OCTOBER 31, 2004 For The Fiscal Quarter Ended October 31, 2004
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the Fiscal Quarter Ended October 31, 2004

 

Commission File Number 0-12788

 


 

CASEY’S GENERAL STORES, INC.

(Exact name of registrant as specified in its charter)

 


 

IOWA   42-0935283

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

ONE CONVENIENCE BOULEVARD, ANKENY, IOWA

(Address of principal executive offices)

 

50021

(Zip Code)

 

(515) 965-6100

(Registrant’s telephone number, including area code)

 

NONE

(Former name, former address and former fiscal year,

if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    YES  x    NO  ¨

 

As of December 2, 2004, the registrant had outstanding 50,131,862 shares of Common Stock, no par value.

 



Table of Contents

CASEY’S GENERAL STORES, INC.

 

INDEX

 

                   Page

PART I - FINANCIAL INFORMATION     
       Item 1. Consolidated Financial Statements.     
              Consolidated condensed balance sheets - October 31, 2004 and April 30, 2004    2
              Consolidated condensed statements of income - three and six months ended October 31, 2004 and 2003    4
              Consolidated condensed statements of cash flows - six months ended October 31, 2004 and 2003    5
              Notes to consolidated condensed financial statements    7
       Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.    11
       Item 3. Quantitative and Qualitative Disclosure about Market Risk.    19
       Item 4. Controls and Procedures.    20
PART II - OTHER INFORMATION     
       Item 1. Legal Proceedings.    21
       Item 4. Submission of Matters to a Vote of Security Holders.    21
       Item 6. Exhibits and Reports on Form 8-K.    22
SIGNATURE    24

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements.

 

CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(Dollars in Thousands)

 

     October 31,
2004


   April 30,
2004


ASSETS            

Current assets:

           

Cash and cash equivalents

   $ 59,476    45,887

Receivables

     7,722    5,751

Inventories

     78,365    77,895

Prepaid expenses

     6,879    6,392

Income tax receivable

     13,868    10,882
    

  

Total current assets

     166,310    146,807
    

  

Other assets

     1,195    1,154

Property and equipment, net of accumulated depreciation
October 31, 2004, $432,815
April 30, 2004, $409,969

     702,974    686,625
    

  
     $ 870,479    834,586
    

  

 

See notes to unaudited consolidated condensed financial statements.

 

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CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(Continued)

(Dollars in Thousands)

 

     October 31,
2004


   April 30,
2004


LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Current liabilities:

           

Current maturities of long-term debt

   $ 33,275    28,345

Accounts payable

     97,159    83,388

Accrued expenses

     38,685    34,107
    

  

Total current liabilities

     169,119    145,840
    

  

Long-term debt, net of current maturities

     127,473    144,158

Deferred income taxes

     106,031    99,159

Deferred compensation

     5,846    5,635
    

  

Total liabilities

     408,469    394,792
    

  

Shareholders’ equity:

           

Preferred stock, no par value

     —      —  

Common Stock, no par

     45,183    44,155

Retained earnings

     416,827    395,639
    

  

Total shareholders’ equity

     462,010    439,794
    

  
     $ 870,479    834,586
    

  

 

See notes to unaudited consolidated condensed financial statements.

 

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CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(Dollars in Thousands, except per share amounts)

 

     Three Months Ended
October 31,


   Six Months Ended
October 31,


     2004

   2003

   2004

   2003

Net sales

   $ 717,027    611,103    1,451,508    1,220,858

Franchise revenue

     302    463    630    966
    

  
  
  
       717,329    611,566    1,452,138    1,221,824
    

  
  
  

Cost of goods sold

     600,664    493,634    1,211,316    988,874

Operating expenses

     84,105    77,723    168,044    155,257

Depreciation and amortization

     12,897    12,317    25,566    24,482

Interest, net

     2,572    3,056    5,371    6,301
    

  
  
  
       700,238    586,730    1,410,297    1,174,914
    

  
  
  

Income before income taxes

     17,091    24,836    41,841    46,910

Federal and state income taxes

     6,085    9,066    14,896    17,123
    

  
  
  

Net income

   $ 11,006    15,770    26,945    29,787
    

  
  
  

Earnings per share

                     

Basic

   $ .22    .32    .54    .60
    

  
  
  

Diluted

   $ .22    .32    .54    .60
    

  
  
  

 

See notes to unaudited consolidated condensed financial statements.

 

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CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

     Six Months Ended
October 31,


 
     2004

    2003

 

Cash flows from operations:

              

Net income

   $ 26,945     29,787  

Adjustments to reconcile net income to net cash provided by operations:

              

Depreciation and amortization

     25,566     24,482  

Loss on sale of property and equipment

     1,783     543  

Deferred income taxes

     6,000     5,500  

Changes in assets and liabilities:

              

Receivables

     (1,971 )   529  

Inventories

     (470 )   (5,574 )

Prepaid expenses

     (684 )   (681 )

Accounts payable

     13,771     3,711  

Accrued expenses

     4,578     (1,924 )

Income taxes receivable

     (1,917 )   4,459  

Other, net

     170     273  
    


 

Net cash provided by operations

     73,771     61,105  
    


 

Cash flows from investing:

              

Purchase of property and equipment

     (40,702 )   (40,854 )

Proceeds from sale of property and equipment

     700     2,516  
    


 

Net cash used in investing activities

     (40,002 )   (38,338 )
    


 

 

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CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(Continued)

 

     Six Months Ended
October 31,


 
     2004

    2003

 

Cash flows from financing:

              

Payments on long-term debt

     (15,451 )   (4,246 )

Proceeds from exercise of stock options

     1,028     1,678  

Payment of cash dividends

     (5,757 )   (2,985 )
    


 

Net cash used in financing activities

     (20,180 )   (5,553 )
    


 

Net increase in cash and cash equivalents

     13,589     17,214  

Cash and cash equivalents at beginning of the period

     45,887     40,544  
    


 

Cash and cash equivalents at end of the period

   $ 59,476     57,758  
    


 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION

 

     Six Months Ended
October 31,


     2004

   2003

Cash paid during the year for Interest, net of amount capitalized

   $ 6,057    6,506

Income taxes

     10,813    7,164

Noncash investing and financing activities

           

Property and equipment acquired through installment purchases or capitalized lease obligations

     3,696    670

 

See notes to unaudited consolidated condensed financial statements.

 

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CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED

FINANCIAL STATEMENTS

 

1. The accompanying consolidated condensed financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. All material inter-company balances and transactions have been eliminated in consolidation.

 

2. The accompanying consolidated condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated condensed financial statements be read in conjunction with the Company’s most recent audited financial statements and notes thereto. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of October 31, 2004, and the results of operations for the six and three months ended October 31, 2004 and 2003, and changes in the cash flows for the six months ended October 31, 2004 and 2003. Certain reclassifications were made to balances for the prior year to conform to current year presentation.

 

3. The Company recognizes retail sales of gasoline, grocery and general merchandise, and prepared food at the time of the sale to the customer. Wholesale sales to franchisees are recognized at the time of delivery to the franchise location. Franchise fees, license fees from franchisees, and rent for franchise signage and facades are recognized monthly when billed to the franchisees. Other maintenance services and transportation charges are recognized at the time the service is provided. Vendor rebates in the form of rack display allowances are treated as a reduction in cost of sales and are recognized incrementally over the period covered by the applicable rebate agreement. Vendor rebates in the form of billbacks are treated as a reduction in cost of sales and are recognized at the time the product is sold.

 

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4. The Company accounts for environmental contamination costs in accordance with the Emerging Issues Task Force (EITF) Issue No. 90-8, Capitalization of Costs to Treat Environmental Contamination. EITF No. 90-8 allows these costs to be capitalized if the costs extend the life of the asset or if the costs mitigate or prevent environmental contamination that has yet to occur. The Company also offsets these capitalized costs by any refunds received under the reimbursement programs described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition and Results of Operations” herein.

 

5. During the third quarter of fiscal 2004, the Company implemented a change in accounting principle from valuing retail gasoline inventories at the lower of cost or market utilizing the last-in, first-out (LIFO) method to valuing retail gasoline inventories at the lower of cost or market utilizing the first-in, first-out (FIFO) method. This change was adopted because the FIFO method better measures the current value of gasoline inventory, provides a more accurate reflection of the Company’s financial position and more closely matches the actual costs and revenues associated with the sale of gasoline. The six months ended October 31, 2003 Consolidated Statement of Operations and six month ended Consolidated Statement of Cash Flows have been restated to apply the new method retroactively. The three months ended October 31, 2003 Consolidated Statement of Operations and Consolidated Statement of Cash Flows was not restated due to the fact that there was no change during the quarter.

 

    

Six Months Ended

October 31, 2003


(Dollars in thousands

except per share amounts)

 

   As previously
reported


   As restated for
LIFO to FIFO


Net income

   $ 29,597    29,787

Earnings per common share

           

Basic

   $ .59    .60

Diluted

   $ .59    .60

Weighted average shares outstanding

           

Basic

     49,798,529     

Diluted

     49,966,033     

 

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6. The Company has elected the pro forma disclosure option of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company will continue applying the accounting treatment prescribed by the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees. Pro forma net earnings and pro forma net earnings per common share have been provided as if SFAS No. 123 were adopted for all stock-based compensation plans.

 

The Company applies APB Opinion No. 25 in accounting for its incentive stock option plan; accordingly, the financial statements recognize no compensation cost for stock options. Had the Company determined compensation cost of its stock options based on the fair value at the grant date under SFAS No. 123, the Company’s net income would have been reduced to the pro forma amounts shown in the following table:

 

     Three Months Ended
October 31,


   Six Months Ended
October 31,


     2004

   2003

   2004

   2003

Net income, as reported

   $ 11,006    15,770    26,945    29,787

Deducted amount

                     

Total stock-based employee compensation expense determined by fair-value method for all awards, net of related tax effects

     66    51    170    102

Pro forma net income

   $ 10,940    15,719    26,775    29,685

Basic earnings per share

                     

As reported

   $ .22    .32    .54    .60

Pro forma

   $ .22    .32    .53    .60

Diluted earnings per share

                     

As reported

   $ .22    .32    .54    .60

Pro forma

   $ .22    .31    .53    .59

 

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The weighted average fair value of the stock options granted during the six months ended October 31, 2004 and 2003 was $4.36 and $3.98 per share, respectively, on the date of grant. Fair value was calculated using the Black Scholes option-pricing model with the following weighted average assumptions: for the quarter ended July 31, 2004 - expected dividend yield of 0.95%, risk-free interest rate of 3.8%, estimated volatility of 24%, and an expected life of 5.8 years; for the quarter ended July 31, 2003 - expected dividend yield of 0.89%, risk-free interest rate of 3.9%, estimated volatility of 24%, and an expected life of 5.8 years. There were no stock options granted during the second quarter of 2004 and 2003. For purposes of pro forma disclosures, the estimated fair value of options granted is amortized to expense over the options’ vesting periods.

 

7. Computations for basic and diluted earnings per common share are presented below (in thousands, except share and per share amounts):

 

    

Three Months Ended

October 31,


  

Six Months Ended

October 31,


     2004

   2003

   2004

   2003

Basic earnings per share

                     

Weighted average number of shares outstanding

     50,086,529    49,832,912    50,061,695    49,798,529
    

  
  
  

Net income

   $ 11,006    15,770    26,945    29,787
    

  
  
  

Basic earnings per common share

   $ .22    .32    .54    .60
    

  
  
  

Diluted earnings per share

                     

Weighted average number of shares outstanding

     50,086,529    49,832,912    50,061,695    49,798,529

Shares applicable to stock options

     190,748    184,277    185,325    167,504
    

  
  
  
       50,277,277    50,017,189    50,247,020    49,966,033
    

  
  
  

Net income

   $ 11,006    15,770    26,945    29,787
    

  
  
  

Diluted earnings per common share

   $ .22    .32    .54    .60
    

  
  
  

 

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8. The Company’s financial condition and results of operations are affected by a variety of factors and business influences, certain of which are described in the Cautionary Statement Relating to Forward-Looking Statements filed as Exhibit 99 to the Annual Report on Form 10-K for the fiscal year ended April 30, 2004. These interim consolidated condensed financial statements should be read in conjunction with that Cautionary Statement.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Thousands).

 

Overview

 

Casey’s General Stores, Inc. (“Casey’s”) and its wholly-owned subsidiaries (Casey’s, together with its subsidiaries, are referred to herein as the “Company”), operate convenience stores under the name “Casey’s General Store” in nine Midwestern states, primarily Iowa, Missouri and Illinois. All stores offer gasoline for sale on a self-serve basis and carry a broad selection of food (including freshly prepared foods such as pizza, donuts and sandwiches), beverages, tobacco products, health and beauty aids, automotive products and other non-food items. On October 31, 2004, there were a total of 1,366 Casey’s General Stores in operation, of which 1,332 were owned by the Company and 34 stores were operated by franchisees. A typical store is generally not profitable for its first year of operation due to start-up costs and will usually attain representative levels of sales and profits during its third year of operation.

 

The Company derives its revenue primarily from the retail sale of gasoline and the products offered in Company stores. The Company also generates a small amount of its revenues from the Company’s franchisees and from the wholesale sale of certain grocery and general merchandise items and gasoline to franchised stores.

 

Approximately 62% of all Casey’s General Stores are located in areas with populations of fewer than 5,000 persons, while approximately 11% of all stores are located in communities with populations exceeding 20,000 persons. The Company operates a central warehouse, the Casey’s Distribution Center, adjacent to its Corporate Headquarters facility in Ankeny, Iowa, through which it supplies grocery and general merchandise items to Company and franchised stores.

 

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Three Months Ended October 31, 2004 Compared to Three Months Ended October 31, 2003 (Dollars and Amounts in Thousands)

 

     Gasoline

    Grocery & other
merchandise


    Prepared food
& fountain


    Other

    Total

 

Three months ended

10/31/04

                              

Sales

   469,800     188,078     53,731     5,418     717,027  

Gross profit

   25,230     57,967     32,460     706     116,363  

Margin

   5.4 %   30.8 %   60.4 %   13.0 %   16.2 %

Gasoline Gallons

   260,475                          

Three months ended

10/31/03

                              

Sales

   380,773     176,187     47,398     6,745     611,103  

Gross profit

   30,003     56,845     29,773     848     117,469  

Margin

   7.9 %   32.3 %   62.8 %   12.6 %   19.2 %

Gasoline Gallons

   251,887                          

 

Net sales for the second quarter of fiscal 2005 increased by $105,924 (17.3%) over the comparable period in fiscal 2004. Retail gasoline sales increased by $89,027 (23.4%) as the number of gallons sold increased by 8,588 (3.4%) while the average retail price per gallon increased 19.3%. During this same period, retail sales of grocery and general merchandise and prepared foods increased by $18,224 (8.2%) due to the addition of 31 new Company Stores and a greater number of stores in operation for at least three years.

 

Cost of goods sold as a percentage of net sales was 83.8% for the second quarter of fiscal 2005, compared to 80.8% for the comparable period in the prior year. The gross profit margins on retail gasoline sales decreased (to 5.4%) during the second quarter of fiscal 2005 from the second quarter of the prior year (7.9%). The gross profit margin per gallon also decreased (to $.0969) in the second quarter of fiscal 2005 from the comparable period in the prior year ($.1191) due to the raising price of wholesale gasoline. The gross margin on retail sales of grocery and general merchandise decreased (to 30.8%) from the comparable period in the prior year (32.3%) due primarily to the reduction in vendor rebates. The gross margin on prepared food and fountain decreased (to 60.4%) from the comparable period in the prior year (62.8%) due primarily to higher wholesale cheese prices.

 

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Operating expenses as a percentage of net sales were 11.7% for the second quarter of fiscal 2005 compared to 12.7% for the comparable period in the prior year. The decrease in operating expenses as a percentage of net sales was caused primarily by a increase in the average retail price per gallon of gasoline sold. Operating expenses increased 8.2% in the second quarter of 2005 from the comparable period in the prior year, primarily due to a 32% increase in bank fees resulting from customers’ greater use of credit cards to purchase more expensive gasoline, an increase in the loss on sale of property and equipment of $1,002, and the larger number of corporate stores.

 

Net income decreased by $4,764 (30.2%). The decrease in net income was attributable primarily to the decrease in the gross profit margins on retail gasoline sales and inside sales.

 

Six Months Ended October 31, 2004 Compared to Six Months Ended October 31, 2003 (Dollars and Amounts in Thousands)

 

     Gasoline

    Grocery & other
merchandise


    Prepared food
& fountain


    Other

    Total

 

Six months ended

10/31/04

                              

Sales

   950,264     384,221     105,919     11,104     1,451,508  

Gross profit

   56,267     119,279     63,101     1,545     240,192  

Margin

   5.9 %   31.0 %   59.6 %   13.9 %   16.5 %

Gasoline Gallons

   522,863                          

Six months ended

10/31/03

                              

Sales

   747,783     364,098     94,830     14,147     1,220,858  

Gross profit

   55,534     116,060     58,609     1,781     231,984  

Margin

   7.4 %   31.9 %   61.8 %   12.6 %   19.0 %

Gasoline Gallons

   511,156                          

 

Net sales for the first six months of fiscal 2005 increased by $230,650 (18.9%) over the comparable period in fiscal 2004. Retail gasoline sales increased by $202,481 (27.1%) as the number of gallons sold increased by 11,707 (2.3%) and the average retail price per gallon increased 24.2%. During this same period, retail sales of grocery and general merchandise and prepared foods increased by $31,212 (6.8%) due to the addition of 31 new Company stores and a greater number of stores in operation for at least three years.

 

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Cost of goods sold as a percentage of net sales was 83.5% for the first six months of fiscal 2005 compared to 81.0% for the comparable period in the prior year. This result occurred because the gross profit margins on retail gasoline sales decreased (to 5.9%) during the first six months of fiscal 2005 from the comparable period in the prior year (7.4%). The gross profit margin per gallon also decreased in the first six months of fiscal 2005 (to $.1076) from the comparable period in the prior year ($.1086). The gross profits on retail sales of grocery and general merchandise decreased (to 37.2%) from the comparable period in the prior year (38.1%) due primarily to the decrease in the prepared food margin (to 59.6%) from the comparable period in the prior year (61.8%) and a reduction in vendor rebates. The decrease in the prepared food margin was caused primarily by higher wholesale cheese prices.

 

Operating expenses as a percentage of net sales were 11.6% for the first six months of fiscal 2005 compared to 12.7% for the comparable period in the prior year. The decrease in operating expenses as a percentage of net sales was caused primarily by a increase in the average retail price per gallon of gasoline sold. Operating expenses increased 8.2% in the first six months of 2005 from the comparable period in the prior year, primarily due to a 29.3% increase in bank fees resulting from customers’ greater use of credit cards to purchase more expensive gasoline, an increase in the loss on sale of property and equipment of $1,240, and the larger number of corporate stores.

 

Net income decreased by $2,842 (9.5%). The decrease in net income was attributable primarily to the decrease in the gross profit margins on inside sales and retail gasoline sales.

 

Critical Accounting Policies

 

Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective judgments, often because of the need to estimate the effects of inherently uncertain factors.

 

Inventory. Inventories are stated at the lower of cost or market. Gasoline inventories are valued using the first-in, first-out (FIFO) method. Merchandise inventories are valued using the last-in, first-out (LIFO) method, applied to inventory values determined by the retail inventory method (RIM) for store inventories and the FIFO method for warehouse inventories. RIM is an averaging method widely used in the retail industry because of its practicality.

 

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Under RIM, inventory valuations are at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to sales. Inherent in the RIM calculations are certain management judgments and estimates, which could affect the ending inventory valuation at cost and the resulting gross margins.

 

Long-lived Assets. The Company periodically monitors under-performing stores for an indication that the carrying amount of assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets, including goodwill where applicable, an impairment loss is recognized. Impairment is based on the estimated fair value of the asset. Fair value is based on management’s estimate of the amount that could be realized from the sale of assets in a current transaction between willing parties. The estimate is derived from professional appraisals, offers, actual sale or disposition of assets subsequent to period end, and other indications of asset value. In determining whether an asset is impaired, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which for the Company is generally on a store-by-store basis.

 

Self-insurance. The Company is primarily self-insured for workers’ compensation, general liability, and automobile claims. The self-insurance claim liability is determined actuarially based on claims filed and an estimate of claims incurred but not yet reported. Actuarial projections of the losses are employed due to the high degree of variability in the liability estimates. Some factors affecting the uncertainty of claims include the time frame of development, settlement patterns, litigation and adjudication direction, and medical treatment and cost trends. The liability is not discounted.

 

Liquidity and Capital Resources (Dollars in Thousands)

 

Due to the nature of the Company’s business, most sales are for cash, and cash provided by operations is the Company’s primary source of liquidity. The Company finances its inventory purchases primarily from normal trade credit aided by the relatively rapid turnover of inventory. This turnover allows the Company to conduct its operations without large amounts of cash and working capital. As of October 31, 2004, the Company’s ratio of current assets to current liabilities was .98 to 1. The ratio at October 31, 2003 and April 30, 2004 was 1.04 to 1 and 1.01 to 1, respectively. Management believes that the Company’s current bank line of credit of $35,000 ($0 outstanding at October 31, 2004), together with cash flow from operations, will be sufficient to satisfy the working capital needs of its business.

 

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Net cash provided by operations increased $12,666 (20.7%) in the six months ended October 31, 2004 from the comparable period in the prior year, primarily as a result of a large increase in accounts payable, a smaller increase in inventories and an increase in accrued expenses. Cash used in investing in the three months ended October 31, 2004 decreased due to the reduction in the proceeds from sale of property and equipment. Cash used in financing increased, primarily as a result of the increased payments of long-term debt and an increase in the payment of cash dividends.

 

Capital expenditures represent the single largest use of Company funds. Management believes that by reinvesting in Company stores, the Company will be better able to respond to competitive challenges and increase operating efficiencies. During the first six months of fiscal 2005, the Company expended $40,702 for property and equipment, primarily for the construction, acquisition and remodeling of Company stores, compared to $40,854 for the comparable period in the prior year. The Company anticipates expending approximately $100,000 in fiscal 2005 for construction, acquisition and remodeling of Company stores, primarily from existing cash and funds generated by operations.

 

As of October 31, 2004, the Company had long-term debt of $127,473, consisting of $30,000 in principal amount of 7.38% Senior Notes, $36,000 in principal amount of Senior Notes, Series A through Series F, with interest rates ranging from 6.18% to 7.23%, $57,142 in principal amount of 7.89% Senior Notes, Series A, $2,167 of mortgage notes payable, and $2,164 of capital lease obligations.

 

To date, the Company has funded capital expenditures primarily from the proceeds of the sale of Common Stock, issuance of 6-1/4% Convertible Subordinated Debentures (which were converted into shares of Common Stock in 1994), the above-described Senior Notes, a mortgage note, and through funds generated from operations. Future capital needs required to finance operations, improvements and the anticipated growth in the number of Company stores are expected to be met from cash generated by operations, the bank line of credit, and additional long-term debt or other securities as circumstances may dictate, and are not expected to adversely affect liquidity.

 

Cautionary Statements (Dollars in Thousands)

 

The foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the

 

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Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company’s expectations or beliefs concerning future events, including (i) any statements regarding future sales and gross profit percentages, (ii) any statements regarding the continuation of historical trends and (iii) any statements regarding the sufficiency of the Company’s cash balances and cash generated from operations and financing activities for the Company’s future liquidity and capital resource needs. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitations, the following factors described more completely in the Form 10-K for the fiscal year ended April 30, 2004:

 

Competition. The Company’s business is highly competitive, and marked by ease of entry and constant change in terms of the numbers and type of retailers offering the products and services found in Company stores. Many of the food (including prepared foods) and non-food items similar or identical to those sold by the Company are generally available from a variety of competitors in the communities served by Company stores, and the Company competes with other convenience store chains, gasoline stations, supermarkets, drug stores, discount stores, club stores, mass merchants and “fast-food” outlets (with respect to the sale of prepared foods). Sales of such non-gasoline items (particularly prepared food items) have contributed substantially to the Company’s gross profits from retail sales in recent years. Gasoline sales are also intensely competitive. The Company competes with both independent and national brand gasoline stations in the sale of gasoline, other convenience store chains and several non-traditional gasoline retailers such as supermarkets in specific markets. Some of these other gasoline retailers may have access to more favorable arrangements for gasoline supply then do the Company or the firms that supply its stores. Some of the Company’s competitors have greater financial, marketing and other resources than the Company, and, as a result, may be able to respond better to changes in the economy and new opportunities within the industry.

 

Gasoline operations. Gasoline sales are an important part of the Company’s sales and earnings, and retail gasoline profit margins have a substantial impact on the Company’s net income. Profit margins on gasoline sales can be adversely affected by factors beyond the control of the Company, including the supply of gasoline available in the retail gasoline market, uncertainty or volatility in the wholesale gasoline market, increases in wholesale gasoline costs generally during a period and price competition from other gasoline marketers. The market for crude oil and domestic wholesale petroleum products is marked by significant volatility, and is affected by general political conditions and instability in oil producing regions such as the Middle East and

 

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Venezuela. The volatility of the wholesale gasoline market makes it extremely difficult to predict the impact of future wholesale cost fluctuation on the Company’s operating results and financial conditions. These factors could materially impact the Company’s gasoline gallon volume, gasoline gross profit and overall customer traffic levels at Company stores. Any substantial decrease in profit margins on gasoline sales or in the number of gallons sold by Company stores could have a material adverse effect on the Company’s earnings.

 

The Company purchases its gasoline from a variety of independent national and regional petroleum distributors. Although in recent years the Company’s suppliers have not experienced any difficulties in obtaining sufficient amounts of gasoline to meet the Company’s needs, unanticipated national and international events could result in a reduction of gasoline supplies available for distribution to the Company. Any substantial curtailment in gasoline supplied to the Company could adversely affect the Company by reducing its gasoline sales. Further, management believes that a significant amount of the Company’s business results from the patronage of customers primarily desiring to purchase gasoline and, accordingly, reduced gasoline supplies could adversely affect the sale of non-gasoline items. Such factors could have a material adverse impact upon the Company’s earnings and operations.

 

Tobacco Products. Sales of tobacco products represent a significant portion of the Company’s revenues. Significant increases in wholesale cigarette costs and tax increases on tobacco products, as well as national and local campaigns to discourage smoking in the United States, could have an adverse affect on the demand for cigarettes sold by Company stores. The Company attempts to pass price increases onto its customers, but competitive pressures in specific markets may prevent it from doing so. These factors could materially impact the retail price of cigarettes, the volume of cigarettes sold by Company stores and overall customer traffic.

 

Environmental Compliance Costs. The United States Environmental Protection Agency and several states, including Iowa, have established requirements for owners and operators of underground gasoline storage tanks (USTs) with regard to (i) maintenance of leak detection, corrosion protection and overfill/spill protection systems; (ii) upgrade of existing tanks; (iii) actions required in the event of a detected leak; (iv) prevention of leakage through tank closings; and (v) required gasoline inventory recordkeeping. Since 1984, new Company stores have been equipped with non-corroding fiberglass USTs. The Company currently has 2,679 USTs, of which 2,369 are fiberglass and 310 are steel, including many with double-wall construction, over-fill protection and electronic tank monitoring, and the Company has an active inspection program with respect to its USTs.

 

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Management believes that its existing gasoline procedures and planned capital expenditures will continue to keep the Company in substantial compliance with all current federal and state UST regulations.

 

Several of the states in which the Company does business have trust fund programs with provisions for sharing or reimbursing corrective action or remediation costs incurred by UST owners, including the Company. The extent of available coverage or reimbursement under such programs for costs incurred by the Company is not fully known at this time. In each of the years ended April 30, 2004 and 2003, the Company spent approximately $1,827 and $1,138, respectively, for assessments and remediation. During the six months ended October 31, 2004, the Company expended approximately $720 for such purposes. Substantially all of these expenditures have been submitted for reimbursement from state-sponsored trust fund programs and as of October 31, 2004, approximately $8,000 has been received from such programs since their inception. Such amounts are typically subject to statutory provisions requiring repayment of the reimbursed funds for non-compliance with upgrade provisions or other applicable laws. The Company has an accrued liability at October 31, 2004 of approximately $200 for estimated expenses related to anticipated corrective actions or remediation efforts, including relevant legal and consulting costs. Management believes the Company has no material joint and several environmental liability with other parties.

 

Although the Company regularly accrues expenses for the estimated costs related to its future corrective action or remediation efforts, there can be no assurance that such accrued amounts will be sufficient to pay such costs, or that the Company has identified all environmental liabilities at all of its current store locations. In addition, there can be no assurance that the Company will not incur substantial expenditures in the future for remediation of contamination or related claims that have not been discovered or asserted with respect to existing store locations or locations that the Company may acquire in the future, or that the Company will not be subject to any claims for reimbursement of funds disbursed to the Company under the various state programs or that additional regulations, or amendments to existing regulations, will not require additional expenditures beyond those presently anticipated.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

The Company’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio and long-term debt obligations. The Company

 

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places its investments with high quality credit issuers and, by policy, limits the amount of credit exposure to any one issuer. As stated in its policy, the Company’s first priority is to reduce the risk of principal loss. Consequently, the Company seeks to preserve its invested funds by limiting default risk, market risk and reinvestment risk. The Company mitigates default risk by investing in only high quality credit securities that it believes to be low risk and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The Company believes that an immediate 100 basis point move in interest rates affecting the Company’s floating and fixed rate financial instruments as of October 31, 2004 would have an immaterial effect on the Company’s pretax earnings.

 

The Company uses a variety of derivative instruments such as options and futures to hedge against the volatility of gasoline cost. The Company is at risk for possible changes in the market value for these derivative instruments. It is anticipated that such risk would be mitigated by price changes in the underlying hedged items. Market risks associated with all of the Company’s derivative contracts are reviewed regularly by management.

 

At October 31, 2004, the Company had accumulated net hedging gains before income taxes of $20 on its open options and future contracts. The amount represented their fair value as determined using various indices and dealer quotes. The Company had net hedging losses before income taxes of $539 at October 31, 2004 on closed options and futures contracts related to hedged transactions occurring in the six months. These derivative contracts are not linked to specific assets or liabilities on the balance sheet or to forecasted transactions in an accounting hedge relationship and therefore do not qualify for hedge accounting. They are carried at fair value with any changes in fair value recorded as part of cost of goods sold in the income statement.

 

Item 4. Controls and Procedures.

 

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

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There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The Company from time to time is a party to legal proceedings arising from the conduct of its business operations, including proceedings relating to personal injury and employment claims, environmental remediation or contamination, disputes under franchise agreements and claims by state and federal regulatory authorities relating to the sale of products pursuant to state or federal licenses or permits. Management does not believe that the potential liability of the Company with respect to such proceedings pending as of the date of this Form 10-Q is material in the aggregate.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

At the Annual Meeting of shareholders held on September 17, 2004, nine directors were elected for a term of one year. Each of the nominees so elected previously has served as a director of the Company.

 

The votes cast or withheld for each nominee were as follows:

 

Name


   Number of Shares
Voting For


   Number of Shares That
Withheld Authority


Donald F. Lamberti

   46,751,664    775,945

John R. Fitzgibbon

   35,529,796    11,997,813

Ronald M. Lamb

   46,486,880    1,040,729

Patricia Clare Sullivan

   35,106,498    12,421,111

John G. Harmon

   45,941,903    1,585,706

Kenneth H. Haynie

   44,848,495    2,679,114

Jack P. Taylor

   34,993,403    12,534,206

William C. Kimball

   45,179,674    2,347,935

Johnny Danos

   45,179,951    2,347,658

 

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Item 6. Exhibits and Reports on Form 8-K.

 

(a) The following exhibits are filed with this Report or, if so indicated, incorporated by reference:

 

Exhibit No.

 

Description


4.2   Rights Agreement between Casey’s General Stores, Inc. and United Missouri Bank of Kansas City, N.A., as Rights Agent (incorporated by reference from the Registration Statement on Form 8-A (0-12788) filed June 19, 1989 relating to Common Share Purchase Rights), and amendments thereto (incorporated by reference from the Form 8 (Amendment No. 1 to the Registration Statement on Form 8-A filed June 19, 1989) filed September 10, 1990; the Form 8-A/A (Amendment No. 3 to the Registration Statement on Form 8-A filed June 19, 1989) filed March 30, 1994; the Form 8-A12G/A (Amendment No. 2 to the Registration Statement on Form 8-A filed June 19, 1989) filed July 29, 1994; the Current Report on Form 8-K filed May 10, 1999; and the Current Report on Form 8-K filed September 27, 1999.)
4.3   Note Agreement dated as of February 1, 1993 between Casey’s General Stores, Inc. and Principal Mutual Life Insurance Company and Nippon Life Insurance Company of America (incorporated by reference from the Current Report on Form 8-K filed February 18, 1993) and First Amendment thereto (incorporated by reference from the Current Report on Form 8-K filed January 11, 1996).
4.4   Note Agreement dated as of December 1, 1995 between Casey’s General Stores, Inc. and Principal Mutual Life Insurance Company (incorporated by reference from the Current Report on Form 8-K filed January 11, 1996).
4.6   Note Agreement dated as of April 15, 1999 among the Company and Principal Life Insurance Company and other purchasers of the 6.18% to 7.23% Senior Notes, Series A through Series F (incorporated by reference from the Current Report on Form 8-K filed May 10, 1999).

 

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4.7   Note Purchase Agreement dated as of May 1, 2000 among the Company and the purchasers of the 7.89% Senior Notes, Series 2000-A (incorporated by reference from the Current Report on Form 8-K filed May 23, 2000).
31.1   Certification of Ronald M. Lamb under Section 302 of the Sarbanes Oxley Act of 2002
31.2   Certification of William J. Walljasper under Section 302 of the Sarbanes Oxley Act of 2002
32.1   Certificate of Ronald M. Lamb under Section 906 of Sarbanes-Oxley Act of 2002
32.2   Certificate of William J. Walljasper under Section 906 of Sarbanes-Oxley Act of 2002

 

(b) Reports on Form 8-K. On September 1, 2004 and September 2, 2004, the Company filed Form 8-K reports with respect to the press release and transcript of the related conference call concerning the fiscal 2004 first quarter financial results. On August 16, 2004, September 15, 2004 and October 14, 2004, the Company filed Form 8-K reports with respect to the monthly same-store sales results for July, August and September 2004, respectively.

 

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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.

 

   

CASEY’S GENERAL STORES, INC.

Date: December 7, 2004   By:  

/s/ William J. Walljasper


        William J. Walljasper
        Vice President and Chief Financial Officer
        (Authorized Officer and Principal Financial Officer)

 

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EXHIBIT INDEX

 

The following exhibits are filed herewith:

 

Exhibit No.

 

Description


31.1   Certification of Ronald M. Lamb under Section 302 of the Sarbanes Oxley Act of 2002
31.2   Certification of William J. Walljasper under Section 302 of the Sarbanes Oxley Act of 2002
32.1   Certificate of Ronald M. Lamb under Section 906 of Sarbanes-Oxley Act of 2002
32.2   Certificate of William J. Walljasper under Section 906 of Sarbanes-Oxley Act of 2002

 

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