Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

OR

 

o                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-33274

 

TRAVELCENTERS OF AMERICA LLC

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-5701514

(State or Other Jurisdiction of Incorporation or

 

(I.R.S. Employer Identification No.)

Organization)

 

 

 

24601 Center Ridge Road, Suite 200, Westlake, OH  44145-5639

(Address of Principal Executive Offices)

 

(440) 808-9100

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Number of Common Shares outstanding at November 3, 2011: 28,052,296 common shares.

 

 

 



Table of Contents

 

TRAVELCENTERS OF AMERICA LLC

 

FORM 10-Q

 

September 30, 2011

 

INDEX

 

 

 

 

Page

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2011 and December 31, 2010

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the three months ended September 30, 2011 and 2010

 

2

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the nine months ended September 30, 2011 and 2010

 

3

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2011 and 2010

 

4

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

5

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

Item 4.

Controls and Procedures

 

29

 

 

 

 

 

Warning Concerning Forward Looking Statements

 

30

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

33

 

 

 

 

Item 1A.

Risk Factors

 

33

 

 

 

 

Item 6.

Exhibits

 

33

 

 

 

 

SIGNATURE

 

 

34

 

As used herein the terms “we”, “us”, “our” and “TA” include TravelCenters of America LLC and its consolidated subsidiaries unless otherwise expressly stated or the context otherwise requires.

 



Table of Contents

 

Part I.  Financial Information

 

Item 1.  Financial Statements

 

TravelCenters of America LLC

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

130,541

 

$

125,396

 

Accounts receivable (less allowance for doubtful accounts of $2,320 and $2,023 as of September 30, 2011, and December 31, 2010, respectively)

 

153,453

 

82,374

 

Inventories

 

156,596

 

139,810

 

Other current assets

 

63,529

 

54,596

 

Total current assets

 

504,119

 

402,176

 

 

 

 

 

 

 

Property and equipment, net

 

469,309

 

438,649

 

Intangible assets, net

 

23,380

 

25,749

 

Other noncurrent assets

 

29,342

 

27,515

 

Total assets

 

$

1,026,150

 

$

894,089

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

149,243

 

$

110,228

 

Current HPT Leases liabilities

 

24,662

 

25,660

 

Other current liabilities

 

119,593

 

104,283

 

Total current liabilities

 

293,498

 

240,171

 

 

 

 

 

 

 

Noncurrent HPT Leases liabilities

 

363,367

 

367,845

 

Other noncurrent liabilities

 

38,024

 

34,768

 

Total liabilities

 

694,889

 

642,784

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares, no par value, 31,683,666 and 18,683,666 shares authorized at September 30, 2011, and December 31, 2010, respectively, and 28,052,296 and 18,016,196 shares issued and outstanding at September 30, 2011, and December 31, 2010, respectively

 

601,703

 

547,066

 

Accumulated other comprehensive income

 

926

 

1,193

 

Accumulated deficit

 

(271,368

)

(296,954

)

Total shareholders’ equity

 

331,261

 

251,305

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,026,150

 

$

894,089

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1



Table of Contents

 

TravelCenters of America LLC

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Fuel

 

$

1,734,621

 

$

1,192,949

 

Nonfuel

 

348,790

 

316,639

 

Rent and royalties

 

3,874

 

3,522

 

Total revenues

 

2,087,285

 

1,513,110

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

Fuel

 

1,653,299

 

1,118,307

 

Nonfuel

 

152,780

 

134,520

 

Total cost of goods sold (excluding depreciation)

 

1,806,079

 

1,252,827

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Site level operating

 

176,274

 

160,500

 

Selling, general & administrative

 

22,360

 

20,465

 

Real estate rent

 

48,202

 

58,595

 

Depreciation and amortization

 

11,831

 

10,611

 

Total operating expenses

 

258,667

 

250,171

 

 

 

 

 

 

 

Income from operations

 

22,539

 

10,112

 

 

 

 

 

 

 

Income from equity investees

 

497

 

467

 

Interest income

 

319

 

311

 

Interest expense

 

(2,438

)

(6,181

)

Income before income taxes

 

20,917

 

4,709

 

Provision for income taxes

 

259

 

243

 

Net income

 

$

20,658

 

$

4,466

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic and diluted

 

$

0.74

 

$

0.26

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2



Table of Contents

 

TravelCenters of America LLC

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Fuel

 

$

4,989,927

 

$

3,512,206

 

Nonfuel

 

963,676

 

878,821

 

Rent and royalties

 

10,753

 

10,193

 

Total revenues

 

5,964,356

 

4,401,220

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

Fuel

 

4,761,943

 

3,312,619

 

Nonfuel

 

415,348

 

370,279

 

Total cost of goods sold (excluding depreciation)

 

5,177,291

 

3,682,898

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Site level operating

 

511,035

 

470,487

 

Selling, general & administrative

 

65,768

 

59,844

 

Real estate rent

 

143,339

 

175,675

 

Depreciation and amortization

 

34,640

 

31,310

 

Total operating expenses

 

754,782

 

737,316

 

 

 

 

 

 

 

Income (loss) from operations

 

32,283

 

(18,994

)

 

 

 

 

 

 

Income from equity investees

 

714

 

768

 

Acquisition costs

 

(446

)

 

Interest income

 

655

 

912

 

Interest expense

 

(6,910

)

(17,576

)

Income (loss) before income taxes

 

26,296

 

(34,890

)

Provision for income taxes

 

710

 

687

 

Net income (loss)

 

$

25,586

 

$

(35,577

)

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

Basic and diluted

 

$

1.13

 

$

(2.06

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

TravelCenters of America LLC

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

25,586

 

$

(35,577

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Noncash rent expense adjustments

 

(3,770

)

44,714

 

Share based compensation expense

 

1,502

 

1,018

 

Depreciation and amortization

 

34,640

 

31,310

 

Income from equity investees

 

(714

)

(768

)

Amortization of deferred financing costs

 

214

 

214

 

Deferred income tax provision

 

156

 

 

Provision for doubtful accounts

 

300

 

422

 

Cash received for tenant improvements

 

 

7,015

 

Changes in assets and liabilities, net of effects of acquired businesses:

 

 

 

 

 

Accounts receivable

 

(71,504

)

(26,676

)

Inventories

 

(15,397

)

614

 

Other current assets

 

(8,747

)

(3,576

)

Accounts payable and other current liabilities

 

50,573

 

32,297

 

Other, net

 

(245

)

(834

)

Net cash provided by operating activities

 

12,594

 

50,173

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sales of improvements to HPT

 

45,563

 

 

Acquisitions of businesses, net of cash acquired

 

(31,216

)

 

Capital expenditures

 

(73,643

)

(34,630

)

Proceeds from asset sales

 

103

 

11

 

Distribution received from equity investee

 

 

960

 

Investment in equity investee

 

 

(76

)

Net cash used in investing activities

 

(59,193

)

(33,735

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common shares, net

 

53,135

 

 

Proceeds from borrowings on revolving credit facility

 

1,000

 

 

Repayment of borrowings on revolving credit facility

 

(1,000

)

 

Payment of deferred financing fees

 

(13

)

 

Sale/leaseback financing obligation payments

 

(1,313

)

(2,088

)

Net cash provided by (used in) financing activities

 

51,809

 

(2,088

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(65

)

2

 

 

 

 

 

 

 

Net increase in cash

 

5,145

 

14,352

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

125,396

 

155,632

 

Cash and cash equivalents at the end of the period

 

$

130,541

 

$

169,984

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Interest paid (including rent classified as interest)

 

$

8,188

 

$

16,638

 

Income taxes paid (net of refunds)

 

647

 

811

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

1.                                     Basis of Presentation, Business Description and Organization

 

TravelCenters of America LLC, which we refer to as the Company or we, us and our, operates and franchises travel centers under the “TravelCenters of America,” “TA” and “Petro” brands primarily along the U.S. interstate highway system.  Our customers include trucking fleets and their drivers, independent truck drivers and motorists.

 

Our travel centers typically include over 20 acres of land and provide our customers with diesel fuel and gasoline as well as nonfuel products and services, such as truck repair and maintenance services, full service restaurants, quick service restaurants, travel and convenience stores and other driver services.  We also collect rents and franchise royalties from our franchisees.

 

At September 30, 2011, our business included 235 travel centers in 41 states and in Canada, 167 of which were operated under the “Travel Centers of America” or “TA” brand names and 68 of which were operated under the “Petro” brand name.  We operated 194 of these travel centers, which we refer to as Company operated travel centers, and our franchisees operated 41 of these travel centers, including 10 travel centers which our franchisees sublease from us and 31 travel centers which our franchisees own or lease from other lessors.  We lease 145 of our TA branded travel centers and 40 of our Petro branded travel centers under leases with subsidiaries of Hospitality Properties Trust, or HPT, which we refer to as the TA Lease and Petro Lease, respectively, and which we refer to collectively as the HPT Leases.  See Note 8 for a further description of the HPT Leases.

 

The accompanying condensed consolidated financial statements are unaudited.  These unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, applicable for interim financial statements.  Therefore, the disclosures do not include all the information necessary for complete financial statements in accordance with GAAP.  These unaudited interim financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2010, or our Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  While our revenues are modestly seasonal, the quarterly variations in our operating results may reflect greater seasonal differences because our rent and certain other costs do not vary seasonally.  For this and other reasons, our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.  We have reclassified certain prior year amounts to be consistent with the current year presentation.

 

2.                                      Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board, or FASB, issued new accounting guidance that requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements and eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The guidance does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This guidance will become effective for interim and annual periods beginning after December 15, 2011. Because this guidance only impacts the presentation of other comprehensive income, it will have no material effect on our financial condition, results of operations or cash flows.

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

3.                                     Earnings Per Share

 

Unvested shares issued under our share award plan are deemed participating securities because they participate equally in earnings with all of our other common shares.   On May 27, 2011, we issued 10,000,000 shares in a public offering.  The following table presents the weighted average common shares and weighted average unvested common shares included as participating securities.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares(1)

 

26,661,920

 

16,273,936

 

21,288,306

 

16,247,312

 

Weighted average unvested common shares included as participating securities

 

1,390,739

 

1,049,640

 

1,398,968

 

1,050,044

 

Total weighted average common shares and participating securities included in the earnings per share computation

 

28,052,659

 

17,323,576

 

22,687,274

 

17,297,356

 

 


(1)  Includes only vested shares granted under our share award plan and excludes the unvested shares granted under that plan.

 

4.                                     Other Comprehensive Income (Loss)

 

The following table summarizes the components of other comprehensive income (loss):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

20,658

 

$

4,466

 

$

25,586

 

$

(35,577

)

Foreign currency translation adjustment, net of taxes of $(204) and $80, for the three months ended September 30, 2011 and 2010, respectively, and $(127) and $50 for the nine months ended September 30, 2011 and 2010, respectively

 

(536

)

227

 

(325

)

140

 

Other

 

15

 

 

58

 

 

Other comprehensive income (loss)

 

$

20,137

 

$

4,693

 

$

25,319

 

$

(35,437

)

 

5.                                     Inventories

 

Inventories consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Nonfuel merchandise

 

$

120,661

 

$

105,196

 

Petroleum products

 

35,935

 

34,614

 

Total inventories

 

$

156,596

 

$

139,810

 

 

6.                                     Shareholders’ Equity

 

In May 2011, we issued 10,000,000 common shares in a public offering, raising proceeds of approximately $53,135 after underwriters’ discounts and commissions and other costs of the offering.  HPT purchased 1,000,000 shares in this offering at the public offering price.

 

During May 2011, we awarded a total of 37,500 common shares to our Directors under our Amended and Restated 2007 Equity Compensation Plan, all of which shares were fully vested upon issuance.

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

7.                                     Acquisitions

 

In May 2011, we acquired six travel centers located in Indiana and Illinois in a bankruptcy auction.  We purchased these six travel centers for an aggregate of $25,521, and we accounted for this transaction as a business combination.  One of these travel centers had been operated as a Petro Stopping Center franchise since 1990 and we have continued its operation as a company operated Petro Stopping Center.  During the third quarter of 2011, one of these travel centers was rebranded as a TA and two of these travel centers were rebranded as Petro Stopping Centers.  Two of the acquired sites function as ancillary operations to existing TA travel centers.

 

In June 2011, we purchased a former Petro franchisee’s travel center in Kansas for $5,695.  We accounted for this transaction as a business combination.  This travel center had been operated as a Petro Stopping Center franchise through December 2010 when the related franchise agreement expired and the Petro Stopping Center brand was removed.

 

During the nine months ended September 30, 2011, we incurred $446 of acquisition costs related to the two business combinations described above, which amount is included in our consolidated statements of operations.  We have included the results of these sites in our consolidated financial statements from the dates of their acquisitions.  The pro forma impact of including the results of operations of the acquired businesses from the beginning of the period is not material to our consolidated results of operations.  The following table summarizes the amounts assigned, based on their fair values, to the assets we acquired and liabilities we assumed in the business combinations described above.

 

Inventories

 

$

1,425

 

Property and equipment

 

30,727

 

Intangible assets

 

105

 

Other noncurrent assets

 

290

 

Other current liabilities

 

(748

)

Other noncurrent liabilities

 

(583

)

Total purchase price

 

$

31,216

 

 

In March 2011, we purchased for $6,604 at a foreclosure auction a travel center in Texas that we opened for business as a Petro Stopping Center on May 1, 2011.  This transaction was accounted for as an asset purchase.

 

8.                                     Related Party Transactions

 

Relationship with HPT

 

We were created as a separate public company in 2007 as a result of our spin off from HPT.  HPT is our largest shareholder, owning 2,540,000 of our shares (approximately 9.1% of our outstanding shares at September 30, 2011).  One of our Managing Directors is a managing trustee of HPT and there are other current and historical relationships between us and our Directors and officers and HPT, including those further described below under “Relationship with RMR.”

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

The following table summarizes the various amounts related to our HPT Leases that are reflected in our operating results and a reconciliation of those amounts to our consolidated financial statements:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Cash payments for rent under the HPT Leases and interest on the deferred rent obligation

 

$

49,313

 

$

47,646

 

$

148,278

 

$

140,063

 

Required straight line rent adjustments

 

408

 

1,628

 

1,144

 

5,430

 

Rent deferred under rent deferral agreement

 

 

15,000

 

 

45,000

 

Less interest paid on deferred rent

 

 

(3,600

)

(1,450

)

(8,600

)

Less sale/leaseback financing obligation amortization

 

(438

)

(696

)

(1,313

)

(2,088

)

Less portion of rent payments recognized as interest expense

 

(1,921

)

(2,186

)

(5,763

)

(6,558

)

Less deferred tenant improvements allowance amortization

 

(1,692

)

(1,692

)

(5,077

)

(5,077

)

Rent expense related to HPT Leases

 

45,670

 

56,100

 

135,819

 

168,170

 

Rent paid to others (1) 

 

2,465

 

2,438

 

7,357

 

7,320

 

Straight line rent adjustments for other leases

 

67

 

57

 

163

 

185

 

Total real estate rent expense

 

$

48,202

 

$

58,595

 

$

143,339

 

$

175,675

 

 


(1)  Includes rent paid directly to HPT’s landlords under leases for properties we sublease from HPT.

 

During the three and nine months ended September 30, 2010, we recognized $3,750 and $9,900, respectively, of interest expense on the deferred rent obligation.  We made interest payments of $3,600 and $8,600 to HPT during the three and nine months ended September 30, 2010, respectively.  Effective January 1, 2011, interest on the deferred rent obligation ceased to accrue and in January 2011 we paid the $1,450 of interest accrued in December 2010.

 

The following table summarizes the various amounts related to our HPT Leases that are included in our balance sheets.

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Current HPT Leases liabilities:

 

 

 

 

 

Accrued rent

 

$

16,032

 

$

14,279

 

Current portion of sale/leaseback financing obligation (1) 

 

1,861

 

3,162

 

Interest payable on deferred rent obligation (2) 

 

 

1,450

 

Total Current HPT Leases obligations

 

17,893

 

18,891

 

Current portion of deferred tenant improvements allowance(3) 

 

6,769

 

6,769

 

Total Current HPT Leases liabilities

 

$

24,662

 

$

25,660

 

 

 

 

 

 

 

Noncurrent HPT Leases liabilities:

 

 

 

 

 

Deferred rent obligation (2) 

 

$

150,000

 

$

150,000

 

Sale/leaseback financing obligation (1) 

 

95,288

 

95,302

 

Straight line rent accrual (4) 

 

48,703

 

48,090

 

Total Noncurrent HPT Leases obligations

 

293,991

 

293,392

 

Deferred tenant improvements allowance (3) 

 

69,376

 

74,453

 

Total Noncurrent HPT Leases liabilities

 

$

363,367

 

$

367,845

 

 


(1)                                     Sale/leaseback Financing Obligation.  GAAP governing the transactions related to our entering the TA Lease required us to recognize in our consolidated balance sheet the leased assets at thirteen of the travel centers previously owned by our predecessor that we now lease from HPT because we sublease more than a minor portion of those travel centers to third parties, and one travel center that did not qualify for operating lease treatment for other reasons.  We recorded the leased assets at these travel centers at an amount equal to HPT’s recorded initial carrying amounts, which were equal to their fair values, and recognized an equal amount of liability that is presented as sale/leaseback financing obligation in our consolidated balance sheet.  We recognize a portion of the total rent payments to HPT related to these assets as a reduction of the sale/leaseback financing obligation and a portion as

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

interest expense in our consolidated statements of operations.  We determined the allocation of these rent payments to the liability and to interest expense using the effective interest method.

 

(2)                                     Deferred Rent Obligation.  Under the original terms of our rent deferral agreement with HPT that we entered in August 2008, we deferred $5,000 of rent payable to HPT each month through December 31, 2010.  Through December 31, 2010, we had deferred a total of $150,000 of rent payments.  All deferred rent obligation not previously paid (and related interest thereon) was contractually due no later than July 1, 2011.  Beginning in January 2010, interest on the deferred rent obligation began to accrue and become payable monthly in arrears at a rate of 1% per month.  In January 2011, the deferral agreement was amended and, among other things, interest ceased to accrue on the deferred rent obligation and the payment date of the deferred rent obligation was revised so that $107,085 is now due in December 2022 and $42,915 is now due in June 2024.

 

(3)                                     Deferred Tenant Improvements Allowance.  In connection with the commitment by HPT to fund up to $125,000 of capital projects at the sites we lease under the TA Lease without an increase in rent payable by us, we recognized a liability for the deferred rent related to this tenant improvements allowance.  This deferred tenant improvements allowance was initially recorded at an amount equal to the leasehold improvements receivable we recognized for the discounted value of the then expected future amounts to be received from HPT, based upon our then expected timing of receipt of those tenant improvements funding payments.  We amortize the deferred tenant improvements allowance on a straight line basis over the term of the TA Lease as a reduction of rent expense.

 

(4)                                     Straight Line Rent Accrual.  The TA Lease includes scheduled rent increases over the lease term, as do certain of the leases for properties we sublease from HPT but pay the rent directly to HPT’s landlord.  We recognize the effects of those scheduled rent increases in rent expense over the lease terms on a straight line basis, with offsetting entries to this accrual balance.

 

In January 2011, we and HPT entered an Amendment Agreement that amended the TA Lease, the Petro Lease and our rent deferral agreement with HPT.  This agreement provided for the following:

 

·                The minimum annual rent payable under the TA Lease was reduced effective January 1, 2011, by approximately $29,983, so that rent was reduced to $135,139 per year until February 1, 2012, when it will increase to $140,139 per year through the end of the lease term in December 2022.

 

·                A $5,000 increase in annual minimum rent payable under the TA Lease that was scheduled to begin on February 1, 2011, was eliminated.

 

·                The minimum annual rent payable under the Petro Lease was reduced effective January 1, 2011, by approximately $12,017, so that the annual rent was reduced to $54,160 through the end of the lease term in June 2024.

 

·                The due date for the $150,000 of rent we had deferred as of December 31, 2010, was extended from July 1, 2011, so that $107,085 is due and payable on December 31, 2022, and the remaining $42,915 is due and payable on June 30, 2024.  Interest ceased to accrue on the deferred rent obligation effective January 1, 2011.  The full amount of the deferred rent obligation shall be due and begin to accrue interest if certain events provided in the Amendment Agreement occur, including a change of control of us.

 

·                HPT will waive payment of the first $2,500 of percentage rent that may become due under the Petro Lease beginning in 2013.

 

Under the TA Lease, we received funding from HPT for certain tenant improvements we made to properties owned by HPT with no increase in our rent payable to HPT.  All improvements funded by HPT under this tenant improvements allowance are owned by HPT.  The amount of such funding was limited to $125,000.  During the nine months ended September 30, 2010, we received funding of $7,015 from HPT for qualifying tenant improvements.  As of September 30, 2010, we had received all of the $125,000 tenant improvements allowance available under our lease from HPT without an increase in rent payments.  Portions of this amount were discounted because we elected to receive those funds on an accelerated basis.

 

Under the HPT Leases, we may request that HPT fund approved amounts for renovations, improvements and equipment at the leased travel centers, in addition to the $125,000 described above, in return for annual rent increases according to a formula: the

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

rent per year will be increased by an amount equal to the amount funded by HPT times the greater of (i) 8.5% or (ii) a benchmark U.S. Treasury interest rate plus 3.5%.  During the first nine months of 2011, pursuant to the terms of the HPT Leases, we sold to HPT $45,563 of improvements we previously made to properties leased from HPT, and, as a result, our annual rent payable to HPT increased by approximately $3,873.  As of September 30, 2011, our property and equipment balance included $6,931 for similar improvements we have made to HPT owned sites that we expect to request that HPT purchase from us for an increase in future rent, however, we are not obligated to make such requests and HPT is not obligated to fund such amounts.

 

Relationship with RMR

 

Reit Management & Research LLC, or RMR, provides management services to both us and HPT, and our President, Chief Executive Officer and Managing Director, our Executive Vice President, Chief Financial Officer and Treasurer and our Executive Vice President and General Counsel are also officers of RMR; our other Managing Director is RMR’s Chairman and majority owner, and his son is an owner, President, Chief Executive Officer and a director of RMR and a managing trustee of HPT; and our Independent Directors also serve as independent directors or independent trustees of other companies to which RMR provides management services.

 

Under our business management and shared services agreement, we pay RMR an annual business management fee equal to 0.6% of the sum of our gross fuel margin (which is our fuel sales revenues less our cost of fuel sales) plus our total nonfuel revenues.  In addition, RMR provides internal audit services to us in return for our pro rata share of the total internal audit costs incurred by RMR for us and other companies to which RMR provides management services, which amounts are subject to determination by our Compensation Committee.  Effective July 2011, we entered a property management agreement with RMR under which RMR provides building management services related to our headquarters office building and the expense payable under this property management agreement was also subject to determination by our Compensation Committee.  These fees and expenses under our agreements with RMR totaled $2,659 and $2,401 for the three months ended September 30, 2011 and 2010, respectively.  During the nine months ended September 30, 2011 and 2010, these fees and expenses totaled $7,340 and $6,629, respectively.  We are responsible for certain other expenses incurred by RMR on our behalf.  The amounts incurred under these agreements are included in selling, general and administrative expenses.

 

Relationship with AIC

 

We, RMR, HPT and four other companies to which RMR provides management services each currently owns approximately 14.29% of Affiliates Insurance Company, or AIC, an Indiana insurance company.  All of our Directors, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC.  RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Directors are also directors of AIC.   As of September 30, 2011, we have invested approximately $5,228 in AIC.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  Our investment had a carrying value of $5,244 and $5,075 as of September 30, 2011, and December 31, 2010, respectively.  During the three months ended September 30, 2011 and 2010, we recognized income of $28 and $25, respectively, related to this investment.  During the nine months ended September 30, 2011 and 2010, we recognized income of $111 and a loss of $27, respectively, related to this investment. In 2010, AIC designed a combination property insurance program for us and other AIC shareholders in which AIC participated as a reinsurer.  This program was modified and extended in 2011 for a one year term.  Our total premiums under this program for the policy years expiring May 31, 2011 and 2012, were approximately $2,308 and $1,664, respectively.  The amount expensed in relation to these insurance premiums for the nine month periods ended September 30, 2011 and 2010, were $1,516 and $769, respectively.  We are currently investigating possibilities to expand our insurance relationships with AIC to include other types of insurance. By participating in this insurance business with RMR and other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.

 

Relationship with PTP

 

We own a 40% interest in Petro Travel Plaza Holdings LLC, or PTP, and operate the two travel centers PTP owns for which we receive management and accounting fees.  Tejon Development Corporation, or Tejon, the 60% owner of PTP, is an unrelated party.  During the three months ended September 30, 2011 and 2010, we recognized management and accounting fee income of $200.  During the nine months ended September 30, 2011 and 2010, we recognized management and accounting fee income of $600 and $525, respectively.  The carrying value of our investment in PTP as of September 30, 2011, and December 31, 2010, was $18,145 and

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

$17,542, respectively.  At September 30, 2011, and December 31, 2010, we had a net payable to PTP of $410 and $353, respectively.  During the three months ended September 30, 2011 and 2010, we recognized income of $469 and $442, respectively, as our share of PTP’s net income.  During the nine months ended September 30, 2011, and 2010, we recognized $603 and $795, respectively, as our share of PTP’s net income.

 

9.                                      Commitments and Contingencies

 

Guarantees

 

In the normal course of our business we periodically enter into agreements that contain guarantees or indemnification provisions.  While we cannot estimate the maximum amount to which we may be exposed under such agreements, we do not believe that any potential guaranty or indemnification will have a material adverse effect on our consolidated financial position or results of operations.

 

We offer a warranty of our workmanship in our truck service facilities, but we believe the annual warranty expense and corresponding liability are not material to us.

 

Environmental Matters

 

Extensive environmental laws regulate our operations and properties.  These laws may require us to investigate and clean up hazardous substances, including petroleum products, released at our owned and leased properties.  Governmental entities or third parties may hold us liable for property damage and personal injuries, and for investigation, remediation and monitoring costs incurred in connection with any contamination and regulatory compliance.  We use both underground storage tanks and above ground storage tanks to store petroleum products and waste at our travel centers.  We must comply with environmental laws regarding tank construction, integrity testing, leak detection and monitoring, overfill and spill control, release reporting and financial assurance for corrective action in the event of a release.  At some locations we must also comply with environmental laws relative to vapor recovery or discharges to water.  Under the terms of our leases, we generally have agreed to indemnify HPT for any environmental liabilities related to travel centers that we lease from HPT and we are required to pay all environmental related expenses incurred in the operation of the travel centers.

 

From time to time we have received, and in the future likely will receive, notices of alleged violations of environmental laws or otherwise have become or will become aware of the need to undertake corrective actions to comply with environmental laws at our travel centers.  Investigatory and remedial actions were, and regularly are, undertaken with respect to releases of hazardous substances at our travel centers.  In some cases contributions were, and may be, received by us to partially offset environmental costs from insurers, from state funds established for environmental clean up associated with the sale of petroleum products or from indemnitors who agreed to fund certain environmental related costs at travel centers purchased from those indemnitors.  To the extent we incur material amounts for environmental matters for which we do not receive insurance or other third party reimbursement or for which we have not previously recorded a reserve, our operating results may be materially adversely affected and our obligations to fund these amounts could materially impact our liquidity.  In addition, to the extent we fail to comply with environmental laws and regulations, or we become subject to costs and requirements not similarly experienced by our competitors, our competitive position may be harmed.

 

At September 30, 2011, we had a gross accrued liability of $8,721 for environmental matters as well as a receivable for expected recoveries of certain of these estimated future expenditures of $3,423, resulting in an estimated net amount of $5,298 that we expect to need to fund from future cash flows.  We do not have a reserve for unknown current or potential future environmental matters.  Accrued liabilities related to environmental matters are recorded on an undiscounted basis because of the uncertainty associated with the timing of the related future payments.  We cannot precisely know the ultimate costs we will incur in connection with currently known or future potential environmental related violations, corrective actions, investigation and remediation; however, based on our current knowledge we do not expect that our net costs for such matters to be incurred at our travel centers, individually or in the aggregate, would be material to our financial condition or results of operations.

 

We have insurance of up to $35,000 for environmental liabilities at certain of our travel centers that were known at the time the policies were issued, and up to $60,000 for environmental liabilities not known by us at the time the policies were issued, subject, in each case, to certain limitations and deductibles.  However, we can provide no assurance that we will be able to maintain similar environmental insurance coverage in the future on acceptable terms.

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

While the costs of our environmental compliance in the past have not had a material adverse impact on us, it is impossible to predict the ultimate effect changing circumstances and changing environmental laws may have on us in the future.  We cannot be certain that additional contamination presently unknown to us does not exist at our sites, or that material liability will not be imposed on us in the future.  If we discover additional environmental problems, or if government agencies impose additional environmental requirements, increased environmental compliance or remediation expenditures may be required, which could have a material adverse effect on us.  In addition, legislation and regulation regarding climate change, including greenhouse gas emissions, and other environmental matters may be adopted or administered and enforced differently in the future, which could require us to expend significant amounts.  For instance, federal and state governmental requirements addressing emissions from trucks and other motor vehicles, such as the U.S. Environmental Protection Agency’s gasoline and diesel sulfur control requirements that limit the concentration of sulfur in motor gasoline and diesel fuel, could negatively impact our business.  Further, legislation and regulations that limit carbon emissions also may cause our energy costs at our travel centers to increase.

 

Legal Proceedings

 

On February 1, 2008, a purported holder of our shares, Alan R. Kahn, filed a purported derivative action in the Delaware Court of Chancery on behalf of us against members of our Board of Directors, HPT and RMR.  This action alleged that our Directors breached their fiduciary duties in connection with our acquisition in 2007 of Petro Stopping Centers, L.P., or the Petro Acquisition, and our entering into the Petro Lease, and sought an award of unspecified damages and other relief.  This action also appeared to allege that RMR and HPT aided and abetted our Directors.  Under our limited liability company agreement and agreements with RMR and HPT, we are liable to indemnify our Directors, HPT and RMR for liabilities, costs and expenses incurred by them in connection with this litigation.  In January 2011, the parties involved in the litigation agreed to settle the lawsuit.  At a hearing on June 28, 2011, the Delaware Court of Chancery approved the proposed settlement. During the third quarter of 2011, we and our insurer paid $675 as an award for attorney’s fees and expenses for plaintiff’s counsel pursuant to the Court’s order approving the settlement.  In July 2011, we also paid $119 to HPT and $51 to RMR pursuant to our indemnity obligations in connection with this litigation.

 

In July 2008, Riverside County in the State of California filed litigation against us in the Superior Court of California for Riverside County, seeking civil penalties and injunctive relief for alleged past violations of various state laws and regulations relating to management of underground storage tanks.  In April 2009, the California Attorney General intervened in the action.  In December 2010, the Attorney General and the Riverside County District Attorney filed a consolidated complaint in which they combined the allegations of their previous separate complaints into a single complaint and added as an additional defendant HPT TA Properties Trust, which is a subsidiary of HPT and a landlord under the TA Lease.  Under the TA Lease, we are liable to indemnify HPT TA Properties Trust for any liabilities, costs and expenses it incurs in connection with this litigation.  In October 2011, the parties reached preliminary agreement to settle these claims for $1,200, with a credit to us in the amount of $250 for certain improvements that we have made to our Riverside County facility, such that the cash amount to be paid by us is $950.  Final settlement is contingent upon the execution by the parties of a mutually satisfactory form of Stipulated Judgment which will include injunctive relief provisions requiring that TA comply with certain California environmental laws applicable to underground storage tank systems.  Contingent upon reaching agreement with respect to the form of Stipulated Judgment, we expect to pay this amount in the fourth quarter of 2011.

 

In May 2010, the California Attorney General filed a separate litigation against us, HPT TA Properties Trust, PTP and affiliates of Tejon in the Superior Court of California for Alameda County seeking civil penalties and injunctive relief for alleged violations of underground storage tank laws and regulations at various facilities in Kern and Merced counties.  On July 26, 2010, the California Attorney General voluntarily dismissed this litigation against us and the other named defendants, and on September 2, 2010, refiled its complaint against the same defendants in the Superior Court of California for Merced County.  The complaint does not identify the amount of civil penalties sought.  Under the TA Lease and our agreements with Tejon, we are liable to indemnify HPT TA Properties Trust and Tejon for any liabilities, costs and expenses they incur in connection with this litigation.  We disagree with the Attorney General’s allegations and intend to defend this lawsuit.  The parties are presently engaged in discovery and the court has not yet set a date for a trial.

 

Beginning in December 2006, a series of class action lawsuits was filed against numerous companies in the petroleum industry, including our predecessor and our subsidiaries, in U.S. district courts in over 20 states.  Major petroleum refineries and retailers have been named as defendants in one or more of these lawsuits.  The plaintiffs in the lawsuits generally allege that they are retail purchasers who purchased motor fuel at temperatures greater than 60 degrees Fahrenheit at the time of sale.  One theory alleges that the plaintiffs purchased smaller amounts of motor fuel than the amount for which defendants charged them because the defendants measured the amount of motor fuel they delivered by volumes which, at higher temperatures, contain less energy.  A

 

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TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

second theory alleges that fuel taxes are calculated in temperature adjusted 60 degree gallons and are collected by governmental agencies from suppliers and wholesalers, who are reimbursed in the amount of the tax by the defendant retailers before the fuel is sold to consumers.  These “tax” cases allege that, when the fuel is subsequently sold to consumers at temperatures above 60 degrees, the retailers sell a greater volume of fuel than the amount on which they paid tax, and therefore reap unjust benefit because the customers pay more tax than the retailer pays.  We believe that there are substantial factual and legal defenses to the theories alleged in these so called “hot fuel” lawsuits.  The “temperature” cases seek nonmonetary relief in the form of an order requiring the defendants to install temperature correcting equipment on their retail fuel pumps and monetary relief in the form of damages, but the plaintiffs have not quantified the damages they seek.  The “tax” cases also seek monetary relief.  Plaintiffs have proposed a formula (which we dispute) to measure these damages as the difference between the amount of fuel excise taxes paid by defendants and the amount collected by defendants on motor fuel sales.  Plaintiffs have taken the position in filings with the Court that under this approach, our damages for an eight-year period for one state would be approximately $10,700.  We deny liability and disagree with the plaintiffs’ positions.  All of these cases have been consolidated in the U.S. District Court for the District of Kansas pursuant to multi-district litigation procedures.  On May 28, 2010, that Court ruled that, with respect to two cases originally filed in the U.S. District Court for the District of Kansas, it would grant plaintiffs’ motion to certify a class of plaintiffs seeking injunctive relief (implementation of fuel temperature equipment and/or posting of notices regarding the effect of temperature on fuel), and that it would defer plaintiffs’ motion to certify a class with respect to damages.  A TA entity was named in one of those two Kansas cases, but the Court ruled that the named plaintiffs were not sufficient to represent a class as to TA, and as a result, there has been no class certified as to TA.  The U.S. Court of Appeals for the Tenth Circuit has denied a request for interlocutory review of the Court’s class certification decision, and the litigation in the Kansas cases is proceeding.  The U.S. District Court for the District of Kansas has not issued a decision on class certification with respect to the remaining cases that have been consolidated in the multi-district.  Because these various motions are pending, we cannot estimate our ultimate exposure to loss or liability, if any, related to these lawsuits.  However, the continued cost of litigating these cases could be significant.

 

On April 6, 2009, five independent truck stop owners, who are plaintiffs in a purported class action suit against Comdata Network, Inc., or Comdata, in the U.S. District Court for the Eastern District of Pennsylvania, filed a motion to amend their complaint to add us as a defendant, which was allowed on March 25, 2010.  The amended complaint also added as defendants Ceridian Corporation, Pilot Travel Centers LLC and Love’s Travel Stops & Country Stores, Inc.  Comdata markets fuel cards which are used for payments by trucking companies at truck stops.  The amended complaint alleged antitrust violations arising out of Comdata’s contractual relationships with truck stops in connection with its fuel cards.  The plaintiffs have sought unspecified damages and injunctive relief.  On March 24, 2011, the Court dismissed the claims against TA in the amended complaint, but granted plaintiffs leave to file a new amended complaint.  Four independent truck stop owners, as plaintiffs, filed a new amended complaint against us on April 21, 2011, repleading their claims.  On May 6, 2011, we renewed our motion to dismiss the complaint with prejudice.  Briefing on the motion is complete and the parties await the Court’s decision while discovery otherwise proceeds.  We believe that there are substantial factual and legal defenses to the plaintiffs’ claims against us, but that the costs to defend this case could be significant.

 

In addition to the legal proceedings referenced above, we are involved from time to time in various other legal and administrative proceedings, including tax audits, and threatened legal and administrative proceedings incidental to the ordinary course of our business, none of which we expect, individually or in the aggregate, to have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

10.                               Income Taxes

 

Because we have previously incurred operating losses we do not currently recognize the benefit of all of our deferred tax assets, including the tax benefit associated with our loss carry forwards from prior years.  We will continue to assess our ability to generate taxable income during future periods in which our deferred tax assets may be realized.  If and when we believe it is more likely than not that we will recover our deferred tax assets, we will reverse the valuation allowance as an income tax benefit in our consolidated statement of operations, which will affect our results of operations.  As a result of certain trading in our shares during 2007, our 2007 federal net operating loss of $50,346 and other tax credit carry forwards are generally not available to us for the purpose of offsetting future taxable income because of certain Internal Revenue Code provisions regarding changes in ownership of our common shares.  As of December 31, 2010, we had an unrestricted federal net operating loss carry forward of approximately $169,311.  Our net operating loss carry forwards will begin to expire in 2027.

 

For the nine months ended September 30, 2011, we recognized tax expenses of $710, which includes tax expense of $555 for state taxes on operating income that are payable without regard to our tax loss carry forwards.  Tax expense also includes $155 related

 

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Table of Contents

 

TravelCenters of America LLC

Notes to Condensed Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share amounts)

 

to a non-cash deferred liability arising from the amortization of indefinite lived intangible assets for tax purposes but not for book purposes.

 

11.                               Other Information

 

Interest expense consisted of the following:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

HPT rent classified as interest

 

$

1,921

 

$

2,186

 

$

5,763

 

$

6,558

 

Interest on deferred rent obligation to HPT

 

 

3,750

 

 

9,900

 

Amortization of deferred financing costs

 

72

 

72

 

214

 

214

 

Other

 

445

 

173

 

933

 

904

 

Interest expense

 

$

2,438

 

$

6,181

 

$

6,910

 

$

17,576

 

 

12.                               Subsequent Event

 

On October 25, 2011, we entered into an amended and restated loan and security agreement, or the credit facility, with a group of commercial banks.  The credit facility amended and restated our preexisting credit facility.  Under the credit facility, a maximum of $200,000 may be drawn, repaid and redrawn until maturity on October 25, 2016.  The availability of this maximum amount is subject to limits based on qualified collateral.  Subject to available collateral and lender participation, the maximum amount may be increased to $300,000.  The credit facility may be used for general business purposes and provides for the issuance of letters of credit.  Generally, no principal payments are due until maturity.  Borrowings under the credit facility bear interest at a rate based on, at our option, LIBOR or a base rate plus a spread (initially 225 basis points in the case of LIBOR or 125 basis points in the case of the base rate, subject to adjustment based upon facility availability, utilization and other matters).  Pursuant to the credit facility, we pay a monthly unused line fee equal to an applicable fee rate, which is initially 50 basis points, times the average daily principal amount of unused commitments under the credit facility.  The unused line fee applicable rate is subject to adjustment according to the average daily principal amount of unused commitment under the credit facility each month.

 

The credit facility is secured by substantially all of our cash, accounts receivable, inventory, equipment and intangible assets, and the amount available to us is determined by reference to a borrowing base calculation based on eligible cash, accounts receivable and inventory.  The credit facility requires us to maintain certain levels of collateral, limits our ability to incur debt and liens, restricts us from making certain investments and paying dividends and other distributions, requires us to maintain a minimum fixed charge ratio under certain circumstances and contains other customary covenants and conditions.  The credit facility provides for the acceleration of principal and interest payments upon an event of default including, but not limited to, failure to pay interest or other amounts due, a change in control of us, as defined in the credit facility, and our default under certain contracts, including the HPT Leases and our business management and shared services agreement with RMR.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview (dollars in thousands)

 

The following discussion should be read in conjunction with the financial statements included elsewhere in this Quarterly Report on Form 10-Q, or this Quarterly Report, and in our Annual Report on Form 10-K for the year ended December 31, 2010, or our Annual Report.

 

Our revenues and income are subject to potentially material changes as a result of changes in the market prices of diesel fuel and gasoline, as well as the availability of these products.  These factors are subject to the worldwide petroleum products supply chain, which historically has incurred price and supply volatility and, in some cases, shocks as a result of, among other things, severe weather, terrorism, political crises, wars and other military actions, and variations in demand, which are often the result of changes in the macroeconomic environment.  Over the past few years there has been significant volatility in the cost of fuel.  During 2010, fuel prices generally declined during the second and third quarters, then rose during the fourth quarter and those increases continued during the first quarter of 2011 due in part to the political unrest in Northern Africa and the Middle East.  Fuel prices began to decline during the second quarter of 2011, and during the third quarter of 2011 fuel prices generally continued to decline due to, among other reasons, concerns the U.S. and global economies may be sliding into a recession, although prices remained at a higher level than those experienced during the first nine months of 2010.  Additionally, fuel prices were more volatile during the first nine months of 2011 than during the comparable period of 2010.  We expect that these significant changes in our costs for these products can largely be passed on to our customers, but often there are delays in passing on price changes that can affect our fuel gross margins.  Although other factors have an effect, fuel gross margins per gallon tend to be lower during periods of rising fuel prices and higher during periods of falling fuel prices.  Also, fuel price increases and volatility can have negative effects on our sales and profitability and increase our working capital requirements.  We expect that the fuel markets will continue to be volatile for the foreseeable future.

 

The trucking industry is the primary customer for our goods and services.  Freight and trucking demand in the U.S. historically has often reflected the level of commercial activity in the U.S. economy.  The condition of the U.S. economy generally, and the financial condition and activity of the trucking industry in the U.S. specifically, impacted our financial results during the first nine months of 2010 and 2011 and we expect that they will continue to impact our financial results in future periods.  While the U.S. economy has been slowly growing over the past several quarters and trucking activity measures reflect continued growth in that industry, recent economic activity is still below pre-recession levels and the strength and sustainability of any economic recovery is uncertain; in fact, concerns that the U.S. economy may be entering another recession have increased recently.  If the U.S. economy continues to operate as it has over the past few years or if it worsens, our financial results may not improve and may decline, resulting in our experiencing losses from our operations.

 

The following charts compare changes in our fuel sales volumes on a percentage basis, both in total and on a same site basis, for the periods indicated.

 

Change in Total Fuel Sales Volume (1)

 

2011
compared
to 2010

 

2010
compared
to 2009

 

2009
compared
to 2008

 

2008
compared
to 2007

 

 

 

 

 

 

 

 

 

 

 

First quarter ended March 31

 

-0.5

%

8.9

%

-17.3

%

22.7

%

Second quarter ended June 30

 

4.3

%

6.4

%

-9.7

%

0.2

%

Third quarter ended September 30

 

4.8

%

4.8

%

-2.5

%

-19.0

%

Fourth quarter ended December 31

 

 

 

1.6

%

3.3

%

-15.4

%

Full year

 

 

 

5.3

%

-7.0

%

-4.7

%

 

Same Site Change in Fuel Sales Volume (2)

 

2011
compared to
2010

 

2010
compared to
2009

 

2009
compared to
2008

 

2008
compared to
2007

 

 

 

 

 

 

 

 

 

 

 

First quarter ended March 31

 

-1.4

%

9.1

%

-16.3

%

-12.9

%

Second quarter ended June 30

 

2.1

%

7.1

%

-10.7

%

-16.3

%

Third quarter ended September 30

 

1.8

%

5.6

%

-3.6

%

-17.2

%

Fourth quarter ended December 31

 

 

 

2.3

%

2.4

%

-13.8

%

Full year

 

 

 

6.0

%

-7.4

%

-15.0

%

 


(1)  Includes volumes sold by TA’s predecessor prior to January 31, 2007, and excludes volumes sold at Petro sites prior to the May 30, 2007 acquisition by TA.

 

15



Table of Contents

 

(2)  Includes travel centers that were continuously operated by TA, by its predecessor (prior to January 31, 2007) or by the previous owner of the Petro sites (prior to the acquisition by TA on May 30, 2007) during the periods compared.

 

On January 31, 2011, we entered into an amendment to our leases and rent deferral agreement with HPT, which reduced our rent payments to HPT, as well as the associated expenses for both rent and interest on our deferred rent obligation.  That amendment is further described below under “Related Party Transactions.”

 

There can be no assurance that industry conditions affecting us will not deteriorate or that any one or more of the risks identified under the section “Risk Factors,” “Warning Regarding Forward Looking Statements” or elsewhere in our Annual Report, under “Warning Regarding Forward Looking Statements” or elsewhere in this Quarterly Report, or some other unidentified risk will not manifest itself in a manner which is material and adverse to our results of operations, cash flow or financial position.

 

Number of Travel Center Sites

 

The following table summarizes the changes in the number of travel centers (company operated, franchisee leased and operated or franchisee owned and operated) from December 31, 2009, through September 30, 2011:

 

 

 

 

 

 

 

Franchisee

 

 

 

 

 

 

 

 

 

Owned

 

 

 

 

 

Company

 

Franchisee

 

and

 

 

 

 

 

Operated

 

Operated

 

Operated

 

Total

 

Number of travel centers at December 31, 2009

 

188

 

10

 

35

 

233

 

 

 

 

 

 

 

 

 

 

 

January - September 2010 Activity:

 

 

 

 

 

 

 

 

 

Terminated franchised travel centers

 

 

 

(4

)

(4

)

Number of travel centers at September 30, 2010

 

188

 

10

 

31

 

229

 

 

 

 

 

 

 

 

 

 

 

September - December 2010 Activity:

 

 

 

 

 

 

 

 

 

Terminated franchised travel center

 

 

 

(1

)

(1

)

Number of travel centers at December 31, 2010

 

188

 

10

 

30

 

228

 

 

 

 

 

 

 

 

 

 

 

January — September 2011 Activity:

 

 

 

 

 

 

 

 

 

Acquired travel centers

 

6

 

 

(1

)

5

 

New franchised travel center

 

 

 

2

 

2

 

Number of travel centers at September 30, 2011

 

194

 

10

 

31

 

235

 

 

During the third quarter of 2011, we entered into franchise agreements with operators of two additional travel centers, one in Alabama and one in Virginia.  We currently expect that these two additional franchisee owned and operated travel centers will begin operating under the TA and Petro Stopping Centers brands during December 2011.

 

Relevance of Fuel Revenues

 

Due to volatile pricing of fuel products and our pricing to fuel customers, we believe that fuel revenue is not a reliable metric for analyzing our results of operations from period to period.  As a result solely of changes in fuel prices, our fuel revenue may materially increase or decrease, in both absolute amounts and on a percentage basis, without a comparable change in fuel sales volumes or in fuel gross margin per gallon.  We consider fuel volumes and fuel gross margin to be better measures of comparative performance than fuel revenues.  However, fuel pricing and revenues can impact our working capital requirements; see “Liquidity and Capital Resources” below.

 

16



Table of Contents

 

Results of Operations (dollars in thousands)

 

Three months ended September 30, 2011, compared to September 30, 2010

 

The following table sets forth changes in our results for the three month period ended September 30, 2011, as compared to the three month period ended September 30, 2010.

 

 

 

Three Months Ended
September 30,

 

$

 

%

 

(dollars in thousands)

 

2011

 

2010

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Fuel

 

$

1,734,621

 

$

1,192,949

 

$

541,672

 

45.4

%

Nonfuel

 

348,790

 

316,639

 

32,151

 

10.2

%

Rent and royalties

 

3,874

 

3,522

 

352

 

10.0

%

Total revenues

 

2,087,285

 

1,513,110

 

574,175

 

37.9

%

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

 

 

 

 

Fuel

 

1,653,299

 

1,118,307

 

534,992

 

47.8

%

Nonfuel

 

152,780

 

134,520

 

18,260

 

13.6

%

Total cost of goods sold (excluding depreciation)

 

1,806,079

 

1,252,827

 

553,252

 

44.2

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Site level operating expenses

 

176,274

 

160,500

 

15,774

 

9.8

%

Selling, general & administrative expense

 

22,360

 

20,465

 

1,895

 

9.3

%

Real estate rent

 

48,202

 

58,595

 

(10,393

)

-17.7

%

Depreciation and amortization expense

 

11,831

 

10,611

 

1,220

 

11.5

%

Total operating expenses

 

258,667

 

250,171

 

8,496

 

3.4

%

 

 

 

 

 

 

 

 

 

 

Income from operations

 

22,539

 

10,112

 

12,427

 

122.9

%

Income from equity investees

 

497

 

467

 

30

 

6.4

%

Interest income

 

319

 

311

 

8

 

2.6

%

Interest expense

 

(2,438

)

(6,181

)

3,743

 

-60.6

%

Income before income taxes

 

20,917

 

4,709

 

16,208

 

344.2

%

Provision for income taxes

 

259

 

243

 

16

 

6.6

%

Net income

 

$

20,658

 

$

4,466

 

$

16,192

 

362.6

%

 

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Table of Contents

 

Same Site Comparisons. As part of the discussion and analysis of our operating results we sometimes refer to increases and decreases in results on a same site basis.  For purposes of these comparisons, we include a travel center in the following same site comparisons only if we or a franchisee of ours continuously operated it from July 1, 2010, through September 30, 2011.  We do not exclude travel centers from the same site comparisons as a result of expansions in their size or changes in the services offered. We excluded from the same site comparisons the two travel centers we operate for Petro Travel Plaza Holdings LLC, or PTP, because we account for this investment using the equity method of accounting and, therefore, the related revenues and expenses are not included in the respective line items in our consolidated results of operations.  Two company operated travel centers were excluded from this same site comparison because they were temporarily closed during significant portions of the 2010 or 2011 periods as a result of flooding.

 

 

 

 

 

 

 

%

 

 

 

Three Months Ended September 30,

 

$

 

Change

 

(gallons and dollars in thousands)

 

2011

 

2010

 

Change

 

Fav/(Unfav)

 

 

 

 

 

 

 

 

 

 

 

Number of company operated travel centers

 

184

 

184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel: (1)

 

 

 

 

 

 

 

 

 

Sales volume (gallons)

 

506,746

 

497,971

 

8,775

 

1.8

%

Revenues

 

$

1,618,129

 

$

1,147,752

 

$

470,377

 

41.0

%

Gross margin

 

$

78,570

 

$

74,695

 

$

3,875

 

5.2

%

Gross margin per gallon

 

$

0.155

 

$

0.150

 

$

0.005

 

3.3

%

 

 

 

 

 

 

 

 

 

 

Nonfuel: (1)

 

 

 

 

 

 

 

 

 

Revenues

 

$

341,310

 

$

315,695

 

$

25,615

 

8.1

%

Gross margin

 

$

192,214

 

$

181,557

 

$

10,657

 

5.9

%

Gross margin percentage

 

56.3

%

57.5

%

 

 

-120

b.p.

 

 

 

 

 

 

 

 

 

 

Total gross margin(1) 

 

$

270,784

 

$

256,252

 

$

14,532

 

5.7

%

 

 

 

 

 

 

 

 

 

 

Site level operating expenses (1) (2) 

 

$

169,546

 

$

159,529

 

$

10,017

 

6.3

%

Site level operating expenses as a percentage of nonfuel revenues(1) (2) 

 

49.7

%

50.5

%

 

 

80

b.p.

 

 

 

 

 

 

 

 

 

 

Net site level gross margin in excess of site level operating expenses(1) (2) 

 

$

101,238

 

$

96,723

 

$

4,515

 

4.7

%

 

 

 

 

 

 

 

 

 

 

Number of franchisee operated travel centers

 

39

 

39

 

 

 

 

Rent and royalty revenues

 

$

3,580

 

$

3,441

 

$

139

 

4.0

%

 


(1)         Includes fuel volume, gross margin, revenues and expenses of company operated travel centers only.

(2)         Excludes real estate rent expense.

 

Revenues.  Revenues for the three month period ended September 30, 2011, were $2,087,285, which represented an increase from the quarter ended September 30, 2010, of $574,175, or 37.9%, primarily related to an increase in fuel revenue.

 

Fuel revenues were 83.1% of total revenues for the quarter ended September 30, 2011, compared to 78.8% for the same period in 2010.  Fuel revenues for the quarter ended September 30, 2011, were $1,734,621, an increase of $541,672, or 45.4%, compared to the same period in 2010.  This increase was principally the result of increases in fuel prices and also resulted from increased fuel sales volume.  The table below shows the changes in fuel revenues between periods that resulted from price and volume changes:

 

18



Table of Contents

 

 

 

Gallons

 

Fuel

 

(gallons and dollars in thousands)

 

Sold

 

Revenues

 

 

 

 

 

 

 

Results for three months ended September 30, 2010

 

518,922

 

$

1,192,949

 

 

 

 

 

 

 

Increase due to petroleum products price changes

 

 

461,994

 

Increase due to same site volume changes

 

8,775

 

27,936

 

Increase due to travel centers opened

 

9,765

 

31,125

 

Other changes, net

 

6,497

 

20,617

 

Net change from prior year period

 

25,037

 

541,672

 

 

 

 

 

 

 

Results for three months ended September 30, 2011

 

543,959

 

$

1,734,621

 

 

On a same site basis, fuel sales volume for our company operated travel centers increased by 8,775 gallons, or 1.8%, during the three months ended September 30, 2011, compared to the same period in 2010.  We believe our same site fuel sales volume increased primarily as a result of increased trucking activity in the U.S. during the third quarter of 2011 and certain successful marketing efforts.  These increases were partially offset by the impact of capital projects in 2011 to replace fuel dispensers and install diesel exhaust fluid dispensers, which required us to take certain diesel dispensers out of service during the period.

 

Nonfuel revenues were 16.7% of total revenues for the quarter ended September 30, 2011, compared to 20.9% for the same period in 2010.  Nonfuel revenues for the three months ended September 30, 2011, were $348,790, an increase of $32,151, or 10.2%, compared to the same period in 2010.  The change between years primarily resulted from sales at our travel centers we opened during the second quarter, an increase in unit sales at those travel centers we operated continuously during both periods and sales price increases.  On a same site basis for our company operated travel centers, nonfuel revenues increased by $25,615, or 8.1%, during the three months ended September 30, 2011, compared to the same period in 2010.  We believe the same site nonfuel revenue increase reflects increased customer spending due to increased customer traffic, certain price increases we have instituted as a result of increased prices we paid for nonfuel inventory purchases and the effects of certain of our marketing initiatives.

 

Rent and royalty revenues for the three months ended September 30, 2011, were $3,874, an increase of $352, or 10.0%, compared to the same period in 2010.  Rent and royalties revenue increased as a result of increased nonfuel revenues at our franchisee locations and as a result of increases in rents at the ten franchisee operated locations we sublease to franchisees. These increases were partially offset by the effects of the termination of one franchise travel center in December 2010 and our acquisition in May 2011 of one franchise travel center that we now operate.

 

Cost of goods sold (excluding depreciation). Cost of goods sold for the three months ended September 30, 2011, was $1,806,079, an increase of $553,252, or 44.2%, compared to the same period in 2010.  Fuel cost of goods sold for the quarter ended September 30, 2011, of $1,653,299 increased by $534,992, or 47.8%, compared to the same period in 2010.  This increase in fuel cost of goods sold primarily resulted from the increases in fuel prices and fuel sales volumes.  The fuel gross margin per gallon of $0.155 on a same site basis for the three months ended September 30, 2011, was $0.005 per gallon higher than for the same period of 2010, primarily as a result of variations in market prices for fuel and our decisions regarding pricing.

 

Nonfuel cost of goods sold for the three months ended September 30, 2011, was $152,780, an increase of $18,260, or 13.6%, compared to the same period in 2010.  Nonfuel cost of goods sold increased due to the nonfuel sales increases discussed above, combined with increases in product unit costs we incurred.  Nonfuel gross margin for the three months ended September 30, 2011, was $196,010 compared to $182,119 during the same period of 2010.  Nonfuel gross margin for the three months ended September 30, 2011, on a same site basis was 56.3% of nonfuel revenues, compared to 57.5% during the same period of 2010.  The decline in the nonfuel gross margin percentage between periods primarily resulted from our decision to lower our retail prices for certain products in July 2010 and again in May 2011, in order to encourage higher sales volumes of store products, as well as some delays in passing on a portion of product cost increases we incurred to our customers.

 

Site level operating expenses.  Site level operating expenses for the three months ended September 30, 2011, were $176,274, an increase of $15,774, or 9.8%, compared to the same period in 2010.  For the three months ended September 30, 2011, site level

 

19



Table of Contents

 

operating expenses as a percentage of nonfuel sales improved to 50.5% from 50.6% during the same period of 2010.  The increase in site level operating expenses was primarily attributable to the additional travel centers in operation during the 2011 third quarter as compared to the 2010 third quarter.  The increase in site level operating expenses was also due to increased labor costs we incurred at continuing travel centers, which principally increased to support the increases in our nonfuel sales levels.  Further, we experienced an increase of $2,729 in transaction fees primarily as a result of the significant increase in per gallon fuel prices as compared to the prior year period and an increase in the transaction fee rates charged by Comdata Network, Inc., or Comdata, that became effective during the first quarter of 2011 for fuel purchases made by our customers with Comdata’s fuel payment cards.  During the three month period ended September 30, 2011, we also experienced increases in costs as a result of increases in utilities and maintenance expenses, increases in other expenses that primarily resulted from the increased level of sales activity and in accruals for certain litigation matters.

 

On a same site basis, site level operating expenses for our company operated travel centers increased by $10,017, or 6.3%, for the three months ended September 30, 2011, compared to the same period in 2010 and site level operating expenses as a percentage of nonfuel revenues for the quarter ended September 30, 2011, were 49.7%, compared to 50.5% for the same period in 2010.  The decrease in operating expenses as a percentage of nonfuel revenues primarily was because certain of our expenses are fixed in nature, or otherwise do not vary directly with sales, so that increases in our revenues did not result in corresponding increases in those site level operating expenses.

 

Selling, general and administrative expenses.  Selling, general and administrative expenses for the three months ended September 30, 2011, were $22,360, an increase of $1,895, or 9.3%, compared to the same period in 2010.  This increase primarily resulted from increases in legal expenses and personnel costs including recognition of share based compensation expense that increased based on the increase in our share price and the number of unvested share grants outstanding.

 

Real estate rent expense.  Rent expense for the three months ended September 30, 2011, was $48,202, a decrease of $10,393 compared to the same period in 2010.  This decrease resulted from the amendment to our HPT Leases and rent deferral agreement entered in January 2011, as further described below under “Related Party Transactions.”

 

Depreciation and amortization expense.  Depreciation and amortization expense for the three months ended September 30, 2011, was $11,831, an increase of $1,220, or 11.5%, compared to the same period in 2010 that primarily resulted from our site acquisitions in 2011.

 

Interest income and expense.  The decline in interest expense was primarily related to the amendment to our HPT Leases and rent deferral agreement we entered with HPT effective January 1, 2011, which ceased the accrual of interest on the deferred rent amounts we owe HPT.  Interest income and expense consisted of the following:

 

 

 

Three Months Ended September 30,

 

$

 

(dollars in thousands)

 

2011

 

2010

 

Change

 

 

 

 

 

 

 

 

 

Accretion of leasehold improvement receivable

 

$

 

$

47

 

$

(47

)

Other interest income

 

319

 

264

 

55

 

Total interest income

 

$

319

 

$

311

 

$

8

 

 

 

 

 

 

 

 

 

HPT rent classified as interest

 

$

1,921

 

$

2,186

 

$

(265

)

Interest accrued on deferred rent obligation to HPT

 

 

3,750

 

(3,750

)

Amortization of deferred financing costs

 

72

 

72

 

 

Other

 

445

 

173

 

272

 

Total interest expense

 

$

2,438

 

$

6,181

 

$

(3,743

)

 

Income tax provision.  Our provision for income taxes was $259 and $243 for the three months ended September 30, 2011 and 2010, respectively.  We do not currently recognize the benefit of all of our deferred tax assets, including the tax benefit associated with our tax loss carry forwards from prior years but our tax loss carry forwards do offset any federal tax associated with our current taxable income.  Our income tax provision represents certain minimum income based state taxes payable without regard to our tax loss carry forwards as well as the recognition of deferred tax liabilities related to the tax amortization of indefinite lived intangible assets that cannot be used to reduce existing deferred tax assets.

 

20



Table of Contents

 

Nine months ended September 30, 2011, compared to September 30, 2010

 

The following table sets forth changes in our results for the nine month period ended September 30, 2011, as compared to the nine month period ended September 30, 2010.

 

 

 

Nine Months Ended
September 30,

 

$

 

%

 

(dollars in thousands)

 

2011

 

2010

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Fuel

 

$

4,989,927

 

$

3,512,206

 

$

1,477,721

 

42.1

%

Nonfuel

 

963,676

 

878,821

 

84,855

 

9.7

%

Rent and royalties

 

10,753

 

10,193

 

560

 

5.5

%

Total revenues

 

5,964,356

 

4,401,220

 

1,563,136

 

35.5

%

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding depreciation):

 

 

 

 

 

 

 

 

 

Fuel

 

4,761,943

 

3,312,619

 

1,449,324

 

43.8

%

Nonfuel

 

415,348

 

370,279

 

45,069

 

12.2

%

Total cost of goods sold (excluding depreciation)

 

5,177,291

 

3,682,898

 

1,494,393

 

40.6

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Site level operating expenses

 

511,035

 

470,487

 

40,548

 

8.6

%

Selling, general & administrative expense

 

65,768

 

59,844

 

5,924

 

9.9

%

Real estate rent

 

143,339

 

175,675

 

(32,336

)

-18.4

%

Depreciation and amortization expense

 

34,640

 

31,310

 

3,330

 

10.6

%

Total operating expenses

 

754,782

 

737,316

 

17,466

 

2.4

%

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

32,283

 

(18,994

)

51,277

 

-270.0

%

Income from equity investees

 

714

 

768

 

(54

)

-7.0

%

Acquisition costs

 

(446

)

 

(446

)

100.0

%

Interest income

 

655

 

912

 

(257

)

-28.2

%

Interest expense

 

(6,910

)

(17,576

)

10,666

 

-60.7

%

Income (loss) before income taxes

 

26,296

 

(34,890

)

61,186

 

-175.4

%

Provision for income taxes

 

710

 

687

 

23

 

3.3

%

Net income (loss)

 

$

25,586

 

$

(35,577

)

$

61,163

 

-171.9

%

 

21



Table of Contents

 

Same Site Comparisons. As part of the discussion and analysis of our operating results we sometimes refer to increases and decreases in results on a same site basis.  For purposes of these comparisons, we include a travel center in the following same site comparisons only if we or a franchisee of ours continuously operated it from January 1, 2010, through September 30, 2011.  We do not exclude travel centers from the same site comparisons as a result of expansions in their size or changes in the services offered.  We excluded from the same site comparisons the two travel centers we operate for PTP because we account for this investment using the equity method of accounting and, therefore, the related revenues and expenses are not included in the respective line items in our consolidated results of operations.  Two company operated travel centers were excluded from this same site comparison because they were temporarily closed during significant portions of the 2010 or 2011 periods as a result of flooding.

 

 

 

 

 

 

 

 

 

%

 

 

 

Nine Months Ended September 30,

 

$

 

Change

 

(gallons and dollars in thousands)

 

2011

 

2010

 

Change

 

Fav/(Unfav)

 

 

 

 

 

 

 

 

 

 

 

Number of company operated travel centers

 

184

 

184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel: (1)

 

 

 

 

 

 

 

 

 

Sales volume (gallons)

 

1,476,869

 

1,464,404

 

12,465

 

0.9

%

Revenues

 

$

4,687,655

 

$

3,370,717

 

$

1,316,938

 

39.1

%

Gross margin

 

$

222,454

 

$

198,441

 

$

24,013

 

12.1

%

Gross margin per gallon

 

$

0.151

 

$

0.136

 

$

0.015

 

11.0

%

 

 

 

 

 

 

 

 

 

 

Nonfuel: (1)

 

 

 

 

 

 

 

 

 

Revenues

 

$

949,764

 

$

874,380

 

$

75,384

 

8.6

%

Gross margin

 

$

540,980

 

$

505,831

 

$

35,149

 

6.9

%

Gross margin percentage

 

57.0

%

57.9

%

 

 

-90

b.p.

 

 

 

 

 

 

 

 

 

 

Total gross margin(1) 

 

$

763,434

 

$

704,272

 

$

59,162

 

8.4

%

 

 

 

 

 

 

 

 

 

 

Site level operating expenses (1) (2) 

 

$

499,477

 

$

466,804

 

$

32,673

 

7.0

%

Site level operating expenses as a percentage of nonfuel revenues(1) (2) 

 

52.6

%

53.4

%

 

 

80

b.p.

 

 

 

 

 

 

 

 

 

 

Net site level gross margin in excess of site level operating expenses(1) (2) 

 

$

263,957

 

$

237,468

 

$

26,489

 

11.2

%

 

 

 

 

 

 

 

 

 

 

Number of franchisee operated travel centers

 

39

 

39

 

 

 

 

Rent and royalty revenues

 

$

10,086

 

$

9,733

 

$

353

 

3.6

%

 


(1)         Includes fuel volume, gross margin, revenues and expenses of company operated travel centers only.

(2)         Excludes real estate rent expense.

 

Revenues.  Revenues for the nine month period ended September 30, 2011, were $5,964,356, which represented an increase from the nine months ended September 30, 2010, of $1,563,136, or 35.5%, primarily related to an increase in fuel revenue.

 

Fuel revenues were 83.7% of total revenues for the nine months ended September 30, 2011, compared to 79.8% for the same period in 2010.  Fuel revenues for the nine months ended September 30, 2011, were $4,989,927, an increase of $1,477,721, or 42.1%, compared to the same period in 2010.  This increase was principally the result of increases in fuel prices and also resulted from increased fuel sales volume.  The table below shows the changes in fuel revenues between periods that resulted from price and volume changes:

 

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Table of Contents

 

 

 

Gallons

 

Fuel

 

(gallons and dollars in thousands)

 

Sold

 

Revenues

 

 

 

 

 

 

 

Results for nine months ended September 30, 2010

 

1,529,695

 

$

3,512,206

 

 

 

 

 

 

 

Increase due to petroleum products price changes

 

 

1,337,564

 

Increase due to same site volume changes

 

12,465

 

38,255

 

Increase due to travel centers opened

 

14,663

 

46,451

 

Other changes, net

 

17,571

 

55,451

 

Net change from prior year period

 

44,699

 

1,477,721

 

 

 

 

 

 

 

Results for nine months ended September 30, 2011

 

1,574,394

 

$

4,989,927

 

 

On a same site basis, fuel sales volume for our company operated travel centers increased by 12,465 gallons, or 0.9%, during the nine months ended September 30, 2011, compared to the same period in 2010.  We believe our same site fuel sales volume was favorably impacted by increased trucking activity in the U.S. during the first nine months of 2011 and certain successful marketing efforts.  These increases were partially offset by severe weather experienced across the nation during the first quarter of 2011 as compared to the first quarter of 2010, with severe storms affecting significant portions of the country and resulting in lost days of shipping activity (one calendar day represents approximately 0.4% of the nine month period), as well as the loss of fuel sales opportunity due to the impact of capital projects in 2011 to replace fuel dispensers and install diesel exhaust fluid dispensers, which required us to take certain diesel dispensers out of service during the period.

 

Nonfuel revenues were 16.2% of total revenues for the nine months ended September 30, 2011, compared to 20.0% for the same period in 2010.  Nonfuel revenues for the nine months ended September 30, 2011, were $963,676, an increase of $84,855, or 9.7%, compared to the same period in 2010.  The change between years primarily resulted from sales at our travel centers opened during the second quarter, an increase in unit sales at those travel centers we operated continuously during both periods and sales price increases.  On a same site basis for our company operated travel centers, nonfuel revenues increased by $75,384, or 8.6% during the nine months ended September 30, 2011, compared to the same period in 2010.  We believe the same site nonfuel revenue increase reflects increased customer spending due to increased customer traffic, certain price increases we have instituted as a result of increased prices we paid for nonfuel purchases and the effects of certain of our marketing efforts.

 

Rent and royalty revenues for the nine months ended September 30, 2011, were $10,753, an increase of $560, or 5.5%, compared to the same period in 2010.  Rent and royalties increased as a result of increased nonfuel revenues at our franchisee locations and as a result of increases in rents at the ten franchisee operated locations we sublease to franchisees. These increases were partially offset by the effects of the termination of one franchise travel center in December 2010 and our acquisition in May 2011 of one franchise travel center that we now operate.

 

Cost of goods sold (excluding depreciation). Cost of goods sold for the nine months ended September 30, 2011, was $5,177,291, an increase of $1,494,393, or 40.6%, compared to the same period in 2010.  Fuel cost of goods sold for the nine months ended September 30, 2011, of $4,761,943 increased by $1,449,324, or 43.8%, compared to the same period in 2010.  This increase in fuel cost of goods sold primarily resulted from the increases in fuel prices and fuel sales volumes.  The fuel gross margin per gallon of $0.151 per gallon on a same site basis for the nine months ended September 30, 2011, was $0.015 per gallon higher than for the same period of 2010 primarily as a result of variations in market prices for fuel and our decisions regarding pricing.

 

Nonfuel cost of goods sold for the nine months ended September 30, 2011, was $415,348, an increase of $45,069, or 12.2%, compared to the same period in 2010.  Nonfuel cost of goods sold increased due to the nonfuel sales increases discussed above, combined with increases in product unit costs we incurred.  Nonfuel gross margin for the nine months ended September 30, 2011, was $548,328, compared to $508,542 during the same period of 2010.    Nonfuel gross margin for the nine months ended September 30, 2011, on a same site basis was 57.0% of nonfuel revenues, compared to 57.9% during the same period of 2010.  The decline in the nonfuel gross margin percentage between periods primarily resulted from our decision to lower our retail prices for certain products in July 2010 and again in May 2011, in order to encourage higher sales volumes of store products as well as some delays in passing on a portion of product cost increases we incurred to our customers.

 

Site level operating expenses.  Site level operating expenses for the nine months ended September 30, 2011, were $511,035, an increase of $40,548, or 8.6%, compared to the same period in 2010.  For the nine months ended September 30, 2011, site level operating expenses as a percentage of nonfuel sales improved to 53.0% from 53.5% during the same period of 2010.  The increase in site level operating expenses was largely attributable to the additional travel centers in operation during 2011 as compared to 2010.  The remaining increase in site level operating expenses was primarily attributable to increased labor costs we incurred at continuing

 

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travel centers, which principally increased to support the increases in our nonfuel sales levels.  Further, we experienced an increase of $7,172 in transaction fees primarily as a result of the significant increase in per gallon fuel prices as compared to the prior year period and an increase in the transaction fee rates charged by Comdata that became effective during the first quarter of 2011 for fuel purchases made by our customers with Comdata’s fuel payment cards.  During the nine month period ended September 30, 2011, we also experienced increases in maintenance and utilities expenses and in other expenses that primarily resulted from the increased level of sales activity and an increase in accruals for certain litigation matters.

 

On a same site basis, site level operating expenses for our company operated travel centers increased by $32,673, or 7.0%, for the nine months ended September 30, 2011, compared to the same period in 2010 and site level operating expenses as a percentage of nonfuel revenues for the nine months ended September 30, 2011, were 52.6%, compared to 53.4% for the same period in 2010.  The decrease in operating expenses as a percentage of nonfuel revenues primarily was because certain of our expenses are fixed in nature, or otherwise do not vary directly with sales, so that increases in our revenues did not result in corresponding increases in those site level operating expenses.

 

Selling, general and administrative expenses.  Selling, general and administrative expenses for the nine months ended September 30, 2011, were $65,768, an increase of $5,924, or 9.9%, compared to the same period in 2010.  This increase primarily resulted from increases in legal expenses, personnel costs, including recognition of share based compensation expense that increased based on the increase in our share price and the number of unvested share grants outstanding, and advertising expenses.

 

Real estate rent expense.  Rent expense for the nine months ended September 30, 2011, was $143,339, a decrease of $32,336 compared to the same period in 2010.  This decrease resulted from the amendment to our HPT Leases and rent deferral agreement entered in January 2011, as further described below under “Related Party Transactions.”

 

Depreciation and amortization expense.  Depreciation and amortization expense for the nine months ended September 30, 2011, was $34,640, an increase of $3,330, or 10.6%, compared to the same period in 2010 that primarily resulted from our site acquisitions in 2011.

 

Interest income and expense.  The decline in interest expense was primarily related to the amendment to our HPT Leases and rent deferral agreement we entered with HPT effective January 1, 2011, which ceased the accrual of interest on the deferred rent amounts we owe to HPT.  Interest income and expense consisted of the following:

 

 

 

Nine Months Ended September 30,

 

$

 

(dollars in thousands)

 

2011

 

2010

 

Change

 

 

 

 

 

 

 

 

 

Accretion of leasehold improvement receivable

 

$

 

$

248

 

$

(248

)

Other interest income

 

655

 

664

 

(9

)

Total interest income

 

$

655

 

$

912

 

$

(257

)

 

 

 

 

 

 

 

 

HPT rent classified as interest

 

$

5,763

 

$

6,558

 

$

(795

)

Interest accrued on deferred rent obligation to HPT

 

 

9,900

 

(9,900

)

Amortization of deferred financing costs

 

214

 

214

 

 

Other

 

933

 

904

 

29

 

Total interest expense

 

$

6,910

 

$

17,576

 

$

(10,666

)

 

Income tax provision.  Our provision for income taxes of $710 and $687 for the nine months ended September 30, 2011 and 2010, respectively. We do not currently recognize the benefit of all of our deferred tax assets, including the tax benefit associated with our tax loss carry forwards from prior years but our tax loss carry forwards do offset any federal tax associated with our current taxable income.  Our income tax provision represents certain minimum income based state taxes payable without regard to our tax loss carry forwards as well as the recognition of deferred tax liabilities related to the tax amortization of indefinite lived intangible assets that cannot be used to reduce existing deferred tax assets.

 

Seasonality

 

Assuming little variation in fuel prices, our revenues are usually lowest in the first quarter of the year when movement of freight by professional truck drivers and motorist travel are typically at their lowest levels of the year.  Assuming little variation in fuel prices, our revenues in the fourth quarter of a year are often somewhat lower than those of the second and third quarters because, while the beginning of the fourth quarter is often positively impacted by increased movement of freight in preparation for various

 

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Table of Contents

 

national holidays, that positive impact is often more than offset by a reduction in freight movement caused by vacation time associated with those holidays taken by professional truck drivers toward the end of the year.  While our revenues are modestly seasonal, the quarterly variations in our operating results may reflect greater seasonal differences because our rent and certain other costs do not vary seasonally.

 

Inflation and Deflation

 

Inflation, or a general increase in all prices, including labor expenses, will likely have more negative than positive impacts on our business.  Rising prices may allow us to increase revenues, but also will likely increase our operating costs.  Also, rising prices for fuel and other products we sell increase our working capital requirements and have in the past caused some of our customers to reduce their purchases of our goods and services.  Because significant components of our expenses are fixed, we may not be able to realize expense reductions that match declines in general price levels, or deflation.

 

Liquidity and Capital Resources (dollars in thousands)

 

Our business requires substantial amounts of working capital, including cash liquidity.  Also, our working capital requirements are especially large because of the currently high level of fuel prices and the volatility of fuel prices that has occurred in the past three years and which we expect will continue.  Our principal liquidity requirements are to fund our working capital requirements, to meet our operating expenses, including rent, and to fund our capital expenditures.  Our principal sources of liquidity to meet these requirements are:

 

·                  our cash balance;

·                  our operating cash flow;

·                  our credit facility;

·                  our ability to offer to sell to HPT improvements we make to the travel centers we lease from HPT, as further described below under “Related Party Transactions”; and

·                  our ability to issue new debt and equity securities. We have an effective shelf registration statement that allows us to issue securities in public offerings on an expedited basis, but it does not assure that there will be buyers for such securities.

 

Additionally, the operating real estate and developable land that we own may be financed or sold as a source of additional liquidity over time.

 

We believe the primary risks we face with respect to our operating cash flow are:

 

·                  the current depressed demand for our products and services as compared to the time prior to when the U.S. economy began to enter into recession in 2007;

·                  decreased demand for our products and services we may experience as a result of competition, particularly competition from the recently combined Pilot Flying J;

·                  the potential negative impacts of the volatility and high level of prices for petroleum products on our gross margins and working capital requirements;

·                  the potential negative impacts of inflation on our nonfuel cost of goods sold on our nonfuel gross margins and working capital requirements; and

·                  the present difficult economic conditions in the U.S. and the trucking industry.

 

A reduction in our revenue without an offsetting reduction in our operating expenses may cause us to use our cash at a rate that we cannot sustain for extended periods.  Further, certain of our expenses are fixed in nature, which may restrict us from realizing a reduction in our operating expenses that may offset a reduction in our revenues.  Also, most of our trucking customers transact business with us by use of fuel cards, which are issued by third party fuel card companies.  The fuel card industry has only a few significant participants, including Comdata, the largest issuer of third party fuel cards to trucking companies, and Transportation Clearing House LLC, or TCH, a company affiliated with Pilot Flying J, the largest retailer of diesel fuel.  Fuel card companies facilitate aggregation of payments to us, often faster than we might be able to achieve if we collected directly from our customers, and charge us fees for these services.  Competition, or lack thereof, between Comdata and TCH in particular, may result in future increases in our transaction fee expenses or working capital requirements, or both.  Effective January 2011, we entered a new contract with Comdata that increased our operating expenses and our working capital requirements during the first nine months of 2011 and that we expect also will increase our operating expenses for the remainder of 2011 as compared to the same periods of 2010.  In addition, the increases in the prices of fuel and nonfuel goods experienced during the first nine months of 2011 materially increased our required

 

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Table of Contents

 

investments in working capital to carry our inventory and receivables.  Additional increases in the prices we must pay to obtain inventory items, a decrease in the amount of time we have to pay our trade creditors, or an increase in the security required by our suppliers for our fuel and nonfuel purchases on credit, may increase our working capital requirements materially.  Also, because of the recent and current economic, industry and global credit market conditions and our historical operating losses, additional credit may be expensive and difficult for us to obtain.

 

In May 2011, we issued 10,000,000 common shares in a public offering, raising net proceeds of $53,135.

 

Assets and Liabilities

 

At September 30, 2011 and D