April 17, 2014

Trying to put Pilot Flying J’s $4 billion debt in perspective

Pilot Flying JThere’s no denying that Jimmy Haslam’s Cleveland Browns ownership has gotten off to a less-than-ideal start for Browns fans since his family’s business was raided in April. The ensuing news stories about the lawsuits and guilty pleas of various employees has trickled out like a bad news Chinese water torture. The most recent of these stories was from the Wall Street Journal detailing the turmoil at the company in the last few months since the raid. Inside that story, there was talk of a $4 billion debt that’s been thrown around the news cycle for the last couple days. Some have considered it a major problem, and it might be, but let’s try to put the debt into a bit of perspective before we panic about how it could hurt our favorite football team.

First of all, this shouldn’t come off like a defense of Pilot Flying J. I don’t know what they’re ultimately guilty of or how high any wrongdoing might have gone in the company. I also can’t possibly vouch for other bits of their business or business practices. This is merely a discussion of debt. So here’s what we know.

  • The company’s debt nearly doubled to $4 billion in a two-year period through last year
  • The debt is (was?) due to be paid or refinanced between 2016 and 2019
  • As of November 2012 PFJ had annual revenue of $29.23 billion
  • They’re frequently described as having revenues “over $30 billion”
  • Operating Income was reportedly $635 million (about 2.17% of sales)
  • Profit was reportedly $442 million (about 1.5% of sales)

Now, it is kind of a ham-handed analysis, but I looked at CST Brands Inc (NYSE:CST) just to put a sanity check on some of the margins and percentages. CST bills itself as “the largest independent retailer of transportation fuels and convenience goods in North America. It was a spin-off company from Valero Energy Corporation. CST’s profit margin was 1.6% compared to PFJ’s reported 1.5% so that matches up. Higher up the income statement the “Operating Income” percentages vary a bit more as CST’s is 8.64% and PFJ’s is reported to be 2.17%, but the nature of “Operating Income” is kind of ambiguous anyway. You just never know where expenses are going to hit, particularly non-cash expenses like depreciation and amortization.

The bottom line for many companies, even below profit is cash flow. Pilot Flying J’s cash flow isn’t known, but let’s pretend that it is similar to CST’s from a percentage standpoint. If PFJ’s cash flow as a percent of revenue is the same as CST’s then it runs about 2.77%. It makes sense that actual cash flow would be higher than profit because of non-cash expenses like depreciation. If you take that number and apply it to PFJ’s $29.23 billion that’s $810 million for a year. All $810 million probably couldn’t be available to pay off debt, but having debts about five times cash doesn’t sound that terrifying does it?

So let’s take it to a worse case now that they’re having P.R. issues at best and real business issues at worst with all the fraud talk and lawsuits. Even if PFJ’s sales free-fall 25% to $22 billion, if everything else stayed the same, PFJ’s operating cash flow would still be somewhere in the $600 million ballpark for a year. All things probably wouldn’t stay the same of course, but there will always be wiggle room between reported profit and actual cash generation.

I know this is all speculation and I have nothing concrete to back it up, but it’s important to recognize just how big a financial playing field we’re dealing with here. Also keep in mind that PFJ’s assets were listed at $4.39 billion. We have no idea how much of that is liquid, of course and it’s not the best time to try and sell a bunch of buildings and real estate. I also wouldn’t guess they have a cash position relative to their total assets like Apple’s more than $10 billion on hand. Still, there are a few financially fundamental reasons that $4 billion isn’t necessarily the most terrifying debt number in the world.

That doesn’t mean that it couldn’t become a problem either, of course. If the company further falls into trouble with the investigation and the allegations climb the organizational chart and Jimmy Haslam gets indicted, well, we’ll cross that bridge if we must. Just know that $4 billion isn’t $4 billion isn’t $4 billion depending on which company it is that owes that money and to whom.

So as always we’ll see, but we don’t know yet the true meaning of the $4 billion in debt.

  • http://www.waitingfornextyear.com Craig Lyndall

    Agree with Kanick. They allegedly illegally inflated their profits on the backs of customers via fraud, but there’s no indication that they overstated them to the IRS or anyone else.

  • Jason Hurley

    You missed the opportunity to correct his clear “your” vs. “you’re” mistake as well.

  • Jason Hurley

    The Enron comparison isn’t exactly accurate, either. Enron was guilty of non-GAAP accounting (namely, revenue recognition) on (either real or imaginary) complex energy contracts. It would appear that Pilot Flying J is alleged to have under-recorded rebates to customers, which is far less complex and totally different. Pilot Flying J didn’t make up entire lines of business, or accelerate revenue recognition on decades-long contracts into one year.

  • Ben Frambaugh

    I can understand where Cleveland Frowns is coming from…I just disagree with his overall point. And that’s OK…we’re all entitled to our opinions.

  • Ben Frambaugh

    Wow…can’t believe I missed that. Can’t let that happen again! LOL

  • Ben Frambaugh

    You realize that there can technically only be one “worst” right?