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| CORE > SEC Filings for CORE > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
You should read the following discussion together with the condensed consolidated financial statements, including the related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. See "Forward Looking Statements" at the end of Management's Discussion and Analysis of Financial Condition and Results of Operations.
Our Business
Core-Mark is one of the leading wholesale distributors to the convenience retail industry in North America in terms of annual sales, providing sales and marketing, distribution and logistics services to customer locations across the United States and Canada. We operate a network of 26 distribution centers (including two distribution facilities we operate as a third-party logistics provider) in the United States and Canada, distributing a diverse line of national and private label convenience store products to over 24,000 customer locations. The products we distribute include cigarettes, tobacco, candy, snacks, fast food, groceries, fresh products, dairy, non-alcoholic beverages, general merchandise, and health and beauty care products. We service a variety of stores, including traditional convenience stores, grocery stores, drug stores, liquor stores and other stores that carry convenience products.
First Quarter Overview
Net sales for the first quarter of 2009 increased 3.5% to $1.4 billion compared to the first quarter last year. On a constant currency basis, net sales increased approximately 6.8% for the quarter. This increase was driven primarily by the addition of our New England division, inflation in cigarette prices offset by declines in carton sales and an increase in food/non-food sales. Cigarette sales increased in absolute dollars, compared with the first quarter of 2008, as a result of price increases by cigarette manufacturers in response to the federal excise tax levied on manufacturers by the SCHIP legislation, offset by a 3.9% decrease in overall cigarette carton sales. In the U.S., carton sales declined 9.5% for the quarter excluding the New England division. We believe this decrease in U.S. carton sales was negatively impacted by retailers who curtailed their purchases at the end of the quarter in order to minimize the Federal Excise Tax (FET) liability that would be levied on their inventories. Cigarette carton sales in Canada increased approximately 13.9% in the first quarter of 2009, driven primarily by market share gains, sales from additional product lines and the addition of our Toronto division in late January 2008.
Curtailed customer purchases, in response to the FET tax, compounded the existing decline in overall consumer demand which we believe is influenced by, among other factors, manufacturer price and state tax increases and legislative actions to regulate where a consumer can smoke. We expect consumption trends will continue to be impacted by these factors which may adversely impact our cigarette carton sales, primarily in the U.S., for the remainder of 2009. Further, we believe declines in consumer spending had some impact on our sales for the first quarter of 2009. We continue to monitor current macroeconomic conditions including consumer confidence and spending levels. If consumer spending declines further and/or the current decline persists for a prolonged period of time, our sales and associated gross profit may be materially impacted in future quarters.
Gross profit for the first quarter of 2009 increased 45.4% to $118.1 million compared with $81.2 million for the same period last year due largely to $34.9 million of cigarette inventory holding profits realized from manufacturers' price increases in response to the increase in federal excise tax mandated by the SCHIP legislation. Excluding cigarette holding profits and changes in LIFO reserves, gross profit increased $3.4 million, or 4.1%, compared with the first quarter of 2008. As a percentage of sales, remaining gross profit was 6.19% for this first quarter compared with 6.15% for last year's first quarter.
Operating expenses increased 2.6% to $82.6 million for the first quarter of 2009 compared with $80.5 million for 2008. This increase was due primarily to the addition of our New England division, higher employee healthcare costs, and an increase in bad debt reserves, partially offset by lower fuel costs. The impact of fuel
costs was significantly lower in the first quarter of 2009 compared with the first quarter of 2008 due primarily to lower average fuel costs and increases in fuel surcharges passed on to our customers. However, inflation in future fuel costs or reductions in our fuel surcharges may materially impact our financial results depending on the extent and timing of these changes.
Operating income was $35.5 million for the first quarter of 2009 compared with $0.7 million for 2008. Excluding cigarette holding profits and changes in LIFO reserves from both periods, operating income for the first quarter of 2009 increased by $1.3 million to $3.6 million as compared to $2.3 million for 2008.
Business Developments
Federal Excise Tax Liability Impact for the State Children's Health Insurance Program
In February 2009, the State Children's Health Insurance Program (SCHIP) was signed into law, which increased federal cigarette excise taxes (FET) levied on manufacturers of cigarettes from 39¢ to $1.01 per pack effective April 1, 2009. In March 2009, most U.S. manufacturers increased their list prices charged to distributors such as Core-Mark by approximately 28.0% which contributed to us recognizing $34.9 million of cigarette inventory holding profits in our first quarter of 2009. We believe these price increases were in response to the passage of the SCHIP legislation. As of March 31, 2009, we included in our consolidated balance sheet in inventory and accrued liabilities the impact of the federal floor stock tax liability in the amount of approximately $12.6 million, which is due and payable by July 31, 2009. We recorded in other receivables approximately $1.8 million in reimbursements from cigarette and tobacco manufacturers to offset part of the federal floor stock tax. The net floor stock tax amount of $10.8 million will be reflected in our results of operations for the second quarter of 2009 as the related inventory is sold.
Asset Acquisition of Auburn Merchandise Distributors, Inc.
In June 2008, we acquired substantially all of the assets of Auburn Merchandise Distributors, Inc., ("AMD") located in Whitinsville, Massachusetts, a wholly-owned subsidiary of Warren Equities, Inc., for approximately $28.7 million, including transaction costs. The assets purchased include primarily accounts receivable, inventory and fixed assets. The AMD acquisition has expanded our presence and infrastructure in the Northeastern region of the United States, as its 130,000 sq. ft. facility and the majority of its customers are located there. The purchase price of approximately $28.7 million, including transaction costs, exceeded the estimated fair value of net assets acquired by approximately $0.9 million, which has been recorded as goodwill. AMD conducts operations as the "New England" division of Core-Mark. Results of operations of AMD have been included in Core-Mark's consolidated statements of operations since June 2008.
Share Repurchase Program
In March 2008, our Board of Directors authorized a share repurchase program of up to $30 million to repurchase shares of our common stock in the open market or in privately negotiated transactions subject to market conditions. The number of shares to be repurchased and the timing of the purchases will be based on market conditions, our cash and liquidity requirements, relevant securities laws and other factors. The share repurchase program may be discontinued or amended at any time. We funded repurchases during 2008, and plan to fund any future repurchases, from available cash. Our Credit Facility was amended to allow us to execute the share repurchase program. We repurchased 396,716 shares of common stock under the share repurchase program as of December 31, 2008 at a total cost of $11.0 million. We did not repurchase any shares of our common stock during the three months ended March 31, 2009.
Expansion to Eastern Canada
In January 2008, we opened a new distribution facility near Toronto, Ontario. This facility expanded our existing market geography in Canada. We signed a long-term supply agreement with Couche-Tard, a Canadian
retailer that operates over 600 stores in the province of Ontario. The total cost of the facility was approximately $9.6 million, including $1.8 million of start-up costs.
Results of Operations
Comparison of the three months ended March 31, 2009 and 2008(1)
Three Months Ended Three Months Ended
2009 March 31, 2009 March 31, 2008
Increase % of Net % of Net
(Decrease) Amounts % of Net sales, less Amounts % of Net sales, less
(in millions) (in millions) sales excise taxes (in millions) sales excise taxes
Net sales $ 46.4 $ 1,391.8 100.0 - $ 1,345.4 100.0 -
Net sales-Cigarettes 37.2 956.2 68.7 61.7 919.0 68.3 61.0
Net sales-Food/Non-food 9.2 435.6 31.3 38.3 426.4 31.7 39.0
Net sales, less excise taxes (2) 43.4 1,063.9 76.4 100.0 1,020.5 75.9 100.0
Gross profit 36.9 118.1 8.5 11.1 81.2 6.0 8.0
Warehousing and distribution expenses (3) (0.9 ) 45.0 3.2 4.2 45.9 3.4 4.5
Selling, general and administrative expenses 2.9 37.0 2.7 3.5 34.1 2.5 3.3
Income from operations 34.8 35.5 2.6 3.3 0.7 0.1 0.1
Interest expense - 0.5 - 0.1 0.5 - -
Interest income (0.2 ) (0.1 ) - - (0.3 ) - -
Foreign currency transaction losses, net (0.2 ) 0.8 0.1 0.1 1.0 0.1 0.1
Income (loss) before income taxes 34.8 34.3 2.5 3.2 (0.5 ) - -
Net income (loss) 23.8 23.3 1.7 2.2 (0.5 ) - -
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(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2) Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to actual sales growth and increases in state and provincial excise taxes which we are responsible for collecting and remitting. Federal excise taxes are levied on the manufacturers who pass the tax on to us as part of the product cost, and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage will decrease since our gross profit dollars generally remain the same. (See-Comparison of Sales and Gross Profit by Product Category).
(3) Gross margins may not be comparable to those of other entities because warehouse and distribution expenses are not included as a component of our cost of goods sold.
Net Sales. Net sales increased by $46.4 million, or 3.5%, to $1,391.8 million for the three months ended March 31, 2009 from $1,345.4 million for the same period in 2008. On a constant currency basis, net sales increased by 6.8% during the first quarter of 2009 as compared to 2008. The increase in net sales was also impacted by one less workday in this year's first quarter compared with the first quarter last year. This increase was attributable primarily to approximately $36.3 million in price inflation due to manufacturer price increases and sales from the New England division.
Net Sales of Cigarettes. Net sales of cigarettes for the three months ended March 31, 2009 increased by $37.2 million, or 4.1%, to $956.2 million from $919.0 million for the same period in 2008. The increase in net cigarette sales for the first quarter of 2009 was driven by an 8.3% increase in the average sales price per carton due primarily to manufacturer price increases arising late in the quarter, and sales from our New England division, offset by a decline in cigarette carton sales of 3.9%. Carton sales in the United States declined 9.5% in the first quarter of 2009, excluding the New England division, due in part to the significant price increases during the quarter and we believe in part due to retailers curtailing purchases in order to minimize the federal floor stock tax liability that would be imposed on their inventories. Carton sales in Canada increased 13.9%. The increase in carton sales in Canada was attributable to market share gains and the distribution of new products, sales from additional product lines and the addition of our Toronto division in late January 2008. Total net cigarette sales as a percentage of total net sales was 68.7% for the three months ended March 31, 2009 compared to 68.3% for the same period in 2008.
Net Sales of Food/Non-Food Products. Net sales of food and non-food products for the three months ended March 31, 2009 increased $9.2 million, or 2.2%, to $435.6 million from $426.4 million for the same period in 2008. On a constant currency basis, net sales of food and non-food products increased 5.6% during the first quarter of 2009 as compared to 2008. This increase was due primarily to sales from our New England division and increases in net sales from the food, candy and other tobacco products categories somewhat offset by declines in the health and beauty, general and beverages categories. Total net sales of food and non-food products as a percentage of total net sales were 31.3% for three months ended March 31, 2009 compared to 31.7% for the same period in 2008.
Gross Profit. Gross profit represents the portion of net sales remaining after deducting the cost of goods sold during the period. Vendor incentives, cigarette holding profits and changes in LIFO reserves are classified as elements of cost of goods sold. Gross profit for the three months ended March 31, 2009 increased by $36.9 million, or 45.4%, to $118.1 million from $81.2 million for the same period in 2008. Gross profit for the three months ended March 31, 2009 was significantly higher compared to the same period in 2008 as we realized significant cigarette inventory holding profits from increased cigarette prices by manufacturers in response to the increase in federal excise tax mandated by the SCHIP legislation.
The following table provides the components comprising the change in gross profit as a percentage of net sales for the three months ended March 31, 2009 and 2008(1).
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
% of Net % of Net
Amounts % of Net sales, less Amounts % of Net sales, less
(in millions) sales excise taxes (in millions) sales excise taxes
Net sales $ 1,391.8 100.0 % - $ 1,345.4 100.0 % -
Net sales, less excise
taxes (2) 1,063.9 76.4 100.0 % 1,020.5 75.9 100.0 %
LIFO expense (3.0 ) (0.22 ) (0.28 ) (1.7 ) (0.13 ) (0.17 )
Cigarette inventory holding
profits 34.9 2.51 3.28 0.1 0.01 0.01
Remaining gross profit 86.2 6.19 8.10 82.8 6.15 8.11
Gross profit $ 118.1 8.48 % 11.10 % $ 81.2 6.03 % 7.95 %
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(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2) Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to actual sales growth and increases in state and provincial excise taxes which we are responsible for collecting and remitting. Federal excise taxes are levied on the manufacturers who pass the tax on to us as part of the product cost, and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage will decrease since our gross profit dollars generally remain the same. (See-Comparison of Sales and Gross Profit by Product Category).
Our remaining cigarette gross profit increased approximately 13.7% on a cents per carton basis from 2008 due primarily to increased margins as a result of the manufacturers' price increases. As a percentage of sales, remaining gross profit for our food/non-food category for the first quarter of 2009 was approximately 13.8% which was consistent with 2008. Remaining gross profit for the food/non-food category included lower floor gains during the first quarter of 2009 compared to the same period last year.
For the three months ended March 31, 2009, approximately 69.7% of our remaining gross profit was derived from food/non-food products compared to 71.1% for the same period in 2008.
Operating Expenses. Our operating expenses include costs related to warehousing, distribution, and selling, general and administrative activities. For the three months ended March 31, 2009, operating expenses increased $2.1 million, or 2.6%, to $82.6 million from $80.5 million for the same period in 2008. This increase in operating expenses was driven primarily by an 8.5% increase in selling, general and administrative expenses, offset by a
2.0% decrease in warehousing and distribution expenses. As a percentage of net sales, total operating expenses were 5.9% for the three months ended March 31, 2009 compared to 6.0% for the same period in 2008.
Warehousing and Distribution Expenses. Warehousing and distribution expenses decreased by $0.9 million, or 2.0%, to $45.0 million for the three months ended March 31, 2009 from $45.9 million for the same period in 2008. The decrease in warehousing and distribution expenses was due primarily to lower salaries and benefits and lower net fuel costs of $1.5 million, partially offset by the addition of the New England division. Additionally, in the first quarter of 2008, we incurred approximately $0.3 million of start-up costs related to the completion of a new Toronto distribution facility in late January 2008. As a percentage of net sales, these warehousing and distribution expenses were 3.2% for the three months ended March 31, 2009 compared to 3.4% for the same period in 2008.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses increased $2.9 million, or 8.5%, to $37.0 million for the three months ended March 31, 2009 from $34.1 million for the same period in 2008. The increase in SG&A expenses was due primarily to the addition of the New England division, including $0.8 million related to their integration onto our information technology platform during the first quarter of this year. Additionally, healthcare benefit costs increased approximately $0.8 million due primarily to increased medical costs and higher claims experience, and we also increased our bad debt provision in the first quarter of 2009. In the first quarter of last year, we incurred approximately $0.4 million of start-up costs related to the completion of a new Toronto distribution facility in late January 2008. As a percentage of net sales, SG&A expenses were 2.7% for the three months ended March 31, 2009 compared to 2.5% for the same period in 2008.
Interest Expense. Interest expense includes both debt interest and amortization of fees related to borrowings. Interest expense was $0.5 million for the three months ended March 31, 2009 and for the same period in 2008. Average borrowings for the three months ended March 31, 2009 were $23.6 million compared to $8.4 million for the same period in 2008. During the first quarter of 2009, the weighted-average interest rate on borrowings from our revolving credit facility was 1.9% compared to 5.1% in the first quarter of 2008. The decline in interest rates is the result of general decreases in rates charged to us for both prime and LIBOR borrowings.
Interest Income. For the three months ended March 31, 2009 interest income was $0.1 million compared to $0.3 million for the same period in 2008. Our interest income was derived primarily from earnings on cash balances kept in trust, checking accounts and overnight deposits. The interest income was lower in 2009 due primarily to a reduction in prevailing rates.
Foreign Currency Transaction Losses, net. We incurred foreign currency transaction losses of $0.8 million for the three months ended March 31, 2009 compared to $1.0 million for the same period in 2008. The fluctuation was due primarily to the weakening of the Canadian dollar against the US dollar. For the three months ended March 31, 2009, the average Canadian/United States exchange rate was $1.2453 as compared to $1.0042 for the same period in 2008.
Income Taxes. Our effective tax rate was 32.1% for the three months ended March 31, 2009. Included in the provision for income taxes this quarter was a $1.8 million benefit related primarily to the expiration of the statute of limitations for uncertain tax positions and related interest of $1.0 million. For the three months ended March 31, 2008, we recognized a net income tax benefit of $0.2 million offset by $0.2 million of interest expense, net of tax, related to our uncertain tax positions.
Comparison of Sales and Gross Profit by Product Category. The following table summarizes our cigarette and other product sales, LIFO expense, gross profit and other relevant financial data for the three months ended March 31, 2009 and March 31, 2008 (dollars in millions) (1):
Three Months Ended
March 31,
2009 2008
Cigarettes
Net sales $ 956.2 $ 919.0
Excise taxes in sales (2) $ 300.2 $ 296.6
Net sales, less excise taxes (3) $ 656.0 $ 622.4
LIFO expense $ 3.0 $ 0.6
Gross Profit (4) $ 58.0 $ 23.4
Gross Profit % 6.07 % 2.55 %
Gross Profit % less excise taxes 8.84 % 3.76 %
Remaining Gross Profit (5) $ 26.1 $ 23.9
Remaining Gross Profit % 2.73 % 2.60 %
Food/Non-food Products
Net sales $ 435.6 $ 426.4
Excise taxes in sales (2) $ 27.7 $ 28.3
Net sales, less excise taxes (3) $ 407.9 $ 398.1
LIFO expense $ - $ 1.1
Gross Profit (6) $ 60.1 $ 57.8
Gross Profit % 13.79 % 13.55 %
Gross Profit % less excise taxes 14.73 % 14.51 %
Remaining Gross Profit (5) $ 60.1 $ 58.9
Remaining Gross Profit % 13.79 % 13.81 %
Totals
Net sales $ 1,391.8 $ 1,345.4
Excise taxes in sales (2) $ 327.9 $ 324.9
Net sales, less excise taxes (3) $ 1,063.9 $ 1,020.5
LIFO expense $ 3.0 $ 1.7
Gross Profit (4)(6) $ 118.1 $ 81.2
Gross Profit % 8.48 % 6.03 %
Gross Profit % less excise taxes 11.10 % 7.95 %
Remaining Gross Profit (5) $ 86.2 $ 82.8
Remaining Gross Profit % 6.19 % 6.15 %
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(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2) Excise taxes included in our net sales consist of state and provincial excise taxes which we are responsible for collecting and remitting. Federal excise taxes are levied on the manufacturers who pass the tax on to us as part of the product cost, and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage will decrease since our gross profit dollars generally remain the same.
(3) Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to actual sales growth and increases in excise taxes.
(4) Cigarettes gross profit includes (i) cigarette holding profits related to manufacturer price increases and increases in excise taxes and (ii) LIFO effects. Cigarette holding profits for the three months ended March 31, 2009 were $34.9 million compared to $0.1 million for the same period in 2008. The increase in cigarette inventory holding profits for three months ended March 31, 2009 is due primarily to increases in cigarette prices by manufacturers in response to the anticipated increase in federal excise taxes mandated by the SCHIP legislation.
(5) Remaining gross profit is a non-GAAP financial measure which we provide to . . .
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