CORE-MARK HOLDING COMPANY, INC.
The following discussion and analysis should be read together with the unaudited
condensed consolidated interim financial statements, including the related
notes, and the other financial information appearing elsewhere in this Quarterly
Report on Form 10-Q.
FORWARD-LOOKING STATEMENTSStatements in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements made pursuant to the safe-harbor provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933.
Forward-looking statements in some cases can be identified by the use of words
such as "may," "will," "should," "potential," "intend," "expect," "seek,"
"anticipate," "estimate," "believe," "could," "would," "project," "predict,"
"continue," "plan," "propose" or other similar words or expressions.
Forward-looking statements are made only as of the date of this Form 10-Q and
are based on our current intent, beliefs, plans and expectations. They involve
risks and uncertainties that could cause actual future results, performance or
developments to differ materially from historical results or those described in
or implied by such forward-looking statements.
Factors that might cause or contribute to such differences include, but are not
limited to, the extent and duration of the disruption to business activities
caused by the global health crisis associated with the novel coronavirus
("COVID-19") pandemic outbreak, including labor availability and the effects on
vehicle miles driven, on the financial health of our business partners, on
supply chains, and on financial and capital markets; declining cigarette sales
volumes; our dependence on the convenience retail industry for our revenues; our
dependence on qualified labor, senior management and other key personnel;
competition in our distribution markets, including product, service and pricing
pressures related to the COVID-19 pandemic; uncertainties relating to the timing
of the completion of our pending merger with Performance Food Group Company and
the ability of each party to complete the merger; risks and costs associated
with efforts to grow our business through acquisitions; the dependence of some
of our distribution centers on a few relatively large customers; manufacturers
or retail customers adopting direct distribution channels; fuel and other
transportation costs; failure, disruptions or security breaches of our
information technology systems; the low-margin nature of cigarette and
consumable goods distribution; our reliance on manufacturer discount and
incentive programs and cigarette excise stamping allowances; our dependence on
relatively few suppliers and our ability to maintain favorable supplier
arrangements; disruptions in suppliers' operations, including the impact of the
COVID-19 pandemic on our suppliers as well as supply chain, including potential
problems with inventory availability and the potential result of higher cost of
product and freight due to high demand of products and low supply for an
unpredictable period of time; product liability and counterfeit product claims
and manufacturer recalls of products, including ongoing litigation related to
Juul products; our ability to achieve the expected benefits of implementation of
marketing initiatives; failing to maintain our brand and reputation; unexpected
outcomes in legal proceedings; attempts by unions to organize our employees;
increasing expenses related to employee health benefits; changes to minimum wage
laws; failure to comply with governmental regulations or substantial changes to
governmental regulations, including increased regulation of cigarettes, tobacco
and alternative nicotine products including vape; risks related to changes to
our workforce, including reductions to hours, headcount and benefits as a result
of the COVID-19 pandemic; earthquake and natural disaster damage; increases in
the number or severity of insurance and claims expenses; legislation,
regulations and other matters negatively affecting the cigarette, tobacco and
alternative nicotine industry; increases in excise taxes or reduction in credit
terms by taxing jurisdictions; potential liabilities associated with sales of
cigarettes and other tobacco products ("OTP"); changes to federal, state or
provincial income tax legislation; reduction in the payment of dividends;
currency exchange rate fluctuations; our ability to borrow additional capital;
restrictive covenants in our Credit Facility; and changes to accounting rules or
regulations. For a more detailed discussion of such factors, please refer to
Part II, Item 1A, "Risk Factors" of any quarterly report on Form 10-Q and to
Part I, Item 1A of our Annual Report on Form 10-K, for the year ended
December 31, 2020 filed with the SEC on March 1, 2021 . We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
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Our Business
Core-Mark is one of the largest marketers of fresh, food and broad-line supply
solutions to the convenience retail industry in North America . We offer a full
range of products, marketing programs and technology solutions to approximately
41,000 customer locations in the U.S. and Canada . Our customers include
traditional convenience stores, drug stores, mass merchants, grocery stores,
liquor stores and other specialty and small format stores that carry convenience
products. Our product offering includes cigarettes, OTP, alternative nicotine
products, candy, snacks, food, including fresh products, groceries, dairy,
bread, beverages, general merchandise and health and beauty care products. As of
June 30, 2021 , we operated a network of thirty-two distribution centers in the
U.S. and Canada (excluding two distribution facilities we operate as a
third-party logistics provider).
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Business Strategy Overview
Core-Mark's mission is to be the most valued marketer of fresh, food and
broad-line supply solutions to the convenience retail industry. Consistent with
this mission, our strategic framework is centered around three key initiatives:
growing sales and margins faster than the industry, providing industry-leading
category management solutions and leveraging our cost structure. The convenience
wholesale and retail landscape remains highly fragmented, supporting significant
opportunities for growth organically and through strategic acquisitions.
Core-Mark is one of the largest wholesale distributors to the convenience retail
industry in North America , one of two national convenience distributors in the
U.S. and the largest in Canada , and represents an estimated 7% market share of
the in-store sales of convenience stores in North America .
Headlining our growth initiatives are the ability to assist retailers in growing
same store sales, advancing market share by bringing our value proposition to
new customers and being opportunistic with traditional and industry-adjacent
acquisition opportunities. While serving traditional convenience retailers
remains the primary driver for our business, we serve a wide variety of
alternative convenience retail formats including mass merchandisers, casinos,
colleges and airports to name a few. Driving growth through these alternative
convenience retail formats and channels is also core to our strategy. Beyond
growth, our focus on providing industry-leading category management solutions to
our customers positions us to help our retail partners increase their sales and
profits. We offer a wide array of marketing programs, innovative product
alternatives, and technology solutions to customers in an effort to create
differentiation through our category management expertise. The final major
component of our strategic framework is focused on leveraging costs. Core-Mark
is actively engaged in efforts to further leverage our operating costs through a
range of initiatives, including technology investments, centralizing
transactional processes and employee engagement aimed at increasing
productivity.
We believe consistent execution on the aforementioned strategic priorities will
position Core-Mark as the leader in convenience retail distribution and provides
a strong pathway to achieve sustainable shareholder returns.
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Critical Accounting Policies and Estimates In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary. Due to the COVID-19 pandemic, there has been increased uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as ofAugust 5, 2021 , the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. For further information about our critical accounting policies and estimates, see the discussion in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC onMarch 1, 2021 . Plan of Merger with Performance Food Group Company OnMay 17, 2021 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Performance Food Group Company ("PFG") and certain of its subsidiaries, pursuant to which, subject to the terms and conditions set forth in the Merger Agreement,Core-Mark will be acquired by PFG and will thereafter be a wholly-owned subsidiary of PFG (the "PFG Merger"). On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the PFG Merger, each share of common stock, par value$0.01 per share, of the Company will be automatically canceled and converted into the right to receive (i) 0.44 validly issued, fully paid and nonassessable shares of common stock, par value$0.01 per share, of PFG and (ii)$23.875 in cash, without interest. The Company has also agreed to various covenants in the Merger Agreement, including a restriction on future share repurchases and a$50 million annual limit for capital expenditures. The boards of directors of bothCore-Mark and PFG have approved the PFG Merger. The completion of the transactions contemplated by the Merger Agreement are subject to customary closing conditions, including approval by the holders of a majority of the outstanding shares of the Company's capital stock and the receipt of various regulatory approvals. The Company incurred approximately$4.9 million and$5.2 million in transaction expenses related to the Merger Agreement and the Mergers for the three and six months endedJune 30, 2021 , respectively. 17 -------------------------------------------------------------------------------- Table o f C ontents Second Quarter Overview and COVID-19 Update The sales and margin effects of the COVID-19 pandemic, which had a material impact on our operating results for the first half of 2020, continue to return to 2019 levels and in many cases have exceeded those benchmarks. As shelter-in-place orders by states, provinces, cities and counties have eased or lifted, our retailers have quickly recovered, which is a strong signal to the strength of the convenience retail industry inNorth America . Despite COVID-19's impact on sales and margins retreating, the pandemic's effect on worldwide and domestic supply chains continues to negatively impact our operating results. Specifically, our ability to provide historical fill rates and operations service levels to our customers has been impaired by widespread product shortages from our manufacturers and our ability to adequately staff our facilities in certain areas of the country, both direct impacts of the pandemic's lingering issues. Despite these headwinds we continue to find success by focusing on the customer and leveraging our strategic priorities to bring value to our shareholders. Our net sales in the second quarter of 2021 were$4,495.9 million compared to$4,263.9 million for the same period in 2020, an increase of 5.4%, or$232.0 million , driven primarily by strong food/non-food sales to existing customers. Sales trends in the second quarter of 2021 reflected increased normalization of consumer behavior towards pre-COVID levels. Gross profit in the second quarter of 2021 increased 14.4%, or$30.6 million , to$243.7 million from$213.1 million for the same period in 2020, driven by higher food/non-food sales and a shift in sales mix within our food/non-food category to higher margin products driven primarily by changes in consumer behavior related to the pandemic recovery, offset by an increase in LIFO expense and slightly lower inventory holding gains. Gross profit margin was 5.42% of total net sales during the second quarter of 2021 compared to 5.00% for the same period in 2020. Remaining gross profit margin(1) increased to 5.52% for the second quarter of 2021 from 5.01% for the same period in 2020. The increase in remaining gross profit margin was driven primarily by a change in the sales mix between the food/non-food and cigarette categories, and an increase in margins within food/non-food as a result of a shift in sales mix toward higher margin categories. We expect our gross profit margin to continue to be impacted by both sales mix and higher margins in certain product categories for some period of time resulting from the impacts of the COVID-19 pandemic recovery. Operating expenses in the second quarter of 2021 increased 16.0%, or$30.0 million , to$217.7 million from$187.7 million for the same period in 2020. The increase in operating expenses was driven primarily by higher food/non-food sales volumes, increased labor costs associated with a labor shortage across the industry related to COVID-19, fuel inflation and approximately$4.9 million in transaction expenses related to the Merger Agreement. Operating expenses were 4.8% of total net sales for the second quarter of 2021 compared to 4.4% of total net sales for the same period in 2020. Operating expenses were 87.7% of remaining gross profit(1) for the second quarter of 2021, compared to 87.8% of remaining gross profit for the same period in 2020. Net income in the second quarter of 2021 decreased$1.4 million to$15.5 million compared to$16.9 million for the same period in 2020. Adjusted EBITDA(1) was$57.3 million for the second quarter of 2021 compared to$52.5 million for the same period in 2020. Adjusted EBITDA for the second quarter of 2021 included the impact of approximately$4.9 million in transaction expenses related to the Merger Agreement. ___________________________________________ (1) Remaining gross profit margin, Adjusted EBITDA and operating expenses as a percentage of remaining gross profit are non-GAAP financial measures and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles inthe United States of America ("GAAP"). See "Non-GAAP Financial Information." 18 -------------------------------------------------------------------------------- Table o f C ontents Results of Operations Comparison of the Three Months EndedJune 30, 2021 and 2020 (in millions, except percentages)(1): Three Months Ended Three Months Ended June 30, 2021 June 30, 2020 % of Net % of Net Increase sales, less sales, less (Decrease) Amounts % of Net sales excise taxes Amounts % of Net sales excise taxes Net sales$ 232.0 $ 4,495.9 100.0 % - %$ 4,263.9 100.0 % - % Net sales - Cigarettes 7.3 2,899.9 64.5 59.4 2,892.6 67.8 63.0 Net sales - Food/Non-food 224.7 1,596.0 35.5 40.6 1,371.3 32.2 37.0 Net sales, less excise taxes (non-GAAP)(2) 229.9 3,636.4 80.9 100.0 3,406.5 79.9 100.0 Gross profit(3) 30.6 243.7 5.4 6.7 213.1 5.0 6.3 Warehousing and distribution expenses 21.5 147.0 3.3 4.0 125.5 2.9 3.7 Selling, general and administrative expenses 8.3 68.1 1.5 1.9 59.8 1.4 1.8 Amortization of intangible assets 0.2 2.6 0.1 0.1 2.4 0.1 0.1 Income from operations 0.6 26.0 0.6 0.7 25.4 0.6 0.7 Interest expense, net (0.4) (2.4) (0.1) (0.1) (2.8) (0.1) (0.1) Foreign currency transaction gains, net 0.2 0.2 - - - - - Income before income taxes 1.2 23.8 0.5 0.7 22.6 0.5 0.7 Net income (1.4) 15.5 0.3 0.4 16.9 0.4 0.5 Adjusted EBITDA (non-GAAP)(4) 4.8 57.3 1.3 1.6 52.5 1.2 1.5
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) See the reconciliation of net sales, less excise taxes to net sales in "Non-GAAP Financial Information." (3) Gross profit may not be comparable to those of other entities because warehousing and distribution expenses are not included as a component of our cost of goods sold. (4) See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Financial Information."Net Sales . Net sales in the second quarter of 2021 increased by$232.0 million , or 5.4%, to$4,495.9 million , from$4,263.9 million for the same period in 2020. The increase in net sales was driven primarily by cigarette price inflation, an increase in food/non-food sales to existing customers and a 1.1% positive impact from foreign exchange. These increases were partially offset by a decline in cigarette carton sales to existing customers. Sales trends in the second quarter of 2021 reflected increased normalization of consumer behavior towards pre-COVID levels.Net Sales of Cigarettes. Net sales of cigarettes in the second quarter of 2021 increased by$7.3 million , or 0.3%, to$2,899.9 million from$2,892.6 million for the same period in 2020. The increase was driven primarily by a 8.6% increase in the average sales price per carton due primarily to cigarette manufacturers' price increases, partially offset by a 7.7% decrease in carton sales. Cigarette carton sales decreased by 7.8% and 7.0% in theU.S. andCanada , respectively, primarily reflecting a decrease in carton sales to existing customers. The second quarter of 2020 benefited from a 3.1% increase in cigarette carton sales to existing customers, reflecting the impact of changes in consumer buying habits during the periods more heavily impacted by the COVID-19 pandemic. Consistent with historical trends, we believe long-term cigarette consumption will be adversely impacted by rising prices, increases in excise taxes and other legislative actions, diminishing social acceptance, sales through illicit markets and increasing use of alternative nicotine products. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability, thus partially mitigating the effect of the declines to distributors. Historical industry data indicates that convenience retailers have more than offset cigarette profit declines through sales growth in food/non-food products. Net cigarette sales as a percentage of total net sales was 64.5% in the second quarter of 2021 compared to 67.8% for the same period last year. 19 -------------------------------------------------------------------------------- Table o f C ontentsNet Sales of Food/Non-food Products. Net sales of food/non-food products in the second quarter of 2021 increased$224.7 million , or 16.4%, to$1,596.0 million from$1,371.3 million for the same period in 2020. The following table provides net sales by product category for our food/non-food products (in millions, except percentages)(1): Three Months Ended June 30, Increase (Decrease) Product Category 2021 2020 Amounts Percentage Food$ 456.9 $ 363.0 $ 93.9 25.9 % Fresh 148.6 121.9 26.7 21.9 % Candy 294.0 243.8 50.2 20.6 % OTP 422.3 390.9 31.4 8.0 % Health, beauty & general ("HB&G") 210.1 202.3 7.8 3.9 % Beverages 63.2 49.4 13.8 27.9 % Equipment/other 0.9 - 0.9 - % Total food/non-food products$ 1,596.0 $ 1,371.3 $ 224.7 16.4 %
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results.
We experienced sales growth within all food/non-food categories, especially the
food, fresh, candy and beverage categories. The strong year-over-year growth was
due in part to the fact that the second quarter of 2020 was negatively impacted
by a change in consumer buying behavior related to the COVID-19 pandemic.
Net sales of food/non-food products as a percentage of total net sales was 35.5%
for the second quarter of 2021 compared to 32.2% for the same period in 2020.
Gross Profit. Gross profit represents profit after deducting cost of goods sold
from net sales during the period. Inventory holding gains represent incremental
revenues, whereas vendor incentives, OTP tax refunds and expenses, and changes
in last-in, first-out ("LIFO") reserves are components of cost of goods sold.
Gross profit in the second quarter of 2021 increased $30.6 million , or 14.4%, to
$243.7 million from $213.1 million for the same period in 2020, driven primarily
by strong food/non-food sales and a shift in sales mix within our food/non-food
category to higher margin products and changes in consumer behavior related to
the pandemic recovery, partially offset by an increase in LIFO expense and
slightly lower inventory holding gains.
Distributors such as Core-Mark , may from time to time, earn higher gross profits
on inventory and excise tax stamp quantities on hand at the time manufacturers
increase their prices or when states, localities or provinces increase their
excise taxes. Such increases are reflected in customer pricing for all
subsequent sales, including sales of inventory on hand at the time of the
increase. The resulting higher gross profits are referred to as inventory
holding gains. Cigarette inventory holding gains, which were impacted by the
timing and amount of cigarette manufacturers' price increases, decreased $0.8
million for the second quarter of 2021 compared to the same period in 2020.
We expect cigarette manufacturers will continue to raise prices as carton sales
decline in order to maintain or enhance their overall profitability and the
various taxing jurisdictions will raise excise taxes to make up for lost tax
dollars related to consumption declines.
LIFO expense was $11.3 million for the second quarter of 2021 compared to $8.3
million for the same period of 2020. Since we value our inventory in the U.S. on
a LIFO basis, our gross profit can be positively or negatively impacted
depending on the relative level of price inflation or deflation in manufacturer
prices as reported in the Bureau of Labor Statistics Purchase Price Index
("PPI") used to estimate and record our book LIFO expense. The increase in LIFO
expense for the second quarter of 2021 was due primarily to an increase in
expected price inflation for cigarettes, OTP, food, candy and HB&G categories.
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The following table provides the components of gross profit (in millions, except
percentages)(1):
Three Months Ended Three Months Ended
June 30, 2021 June 30, 2020
% of Net % of Net
Increase % of Net sales, less % of Net sales, less
(Decrease) Amounts sales excise taxes Amounts sales excise taxes
Net sales $ 232.0 $ 4,495.9 100.0 % - % $ 4,263.9 100.0 % - %
Net sales, less excise taxes
(non-GAAP)(2) 229.9 3,636.4 80.9 100.0 3,406.5 79.9 100.0
Components of gross profit: Cigarette inventory holding gains(3)$ (0.8) $ 6.9 0.15 % 0.19 %$ 7.7 0.18 % 0.23 % LIFO expense(4) (3.0) (11.3) (0.25) (0.31) (8.3) (0.19) (0.24) Remaining gross profit (non-GAAP)(5) 34.4 248.1 5.52 6.82 213.7 5.01 6.27 Gross profit$ 30.6 $ 243.7 5.42 % 6.70 %$ 213.1 5.00 % 6.26 %
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) See reconciliation of net sales to net sales, less excise taxes in "Non-GAAP Financial Information." (3) For the second quarter of 2021,$6.6 million and$0.3 million of cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. For the second quarter of 2020, the$7.7 million of cigarette inventory holding gains were all attributable to theU.S. (4) The increase of$3.0 million in LIFO expense in 2021 was due primarily to an increase in the Producer Price Index ("PPI") for the cigarettes, OTP, food, candy and HB&G categories. (5) Remaining gross profit is a non-GAAP financial measure, which we provide to segregate the effects of LIFO expense, cigarette inventory holding gains and other items that significantly affect the comparability of gross profit. Gross profit margin was 5.42% of total net sales during the second quarter of 2021 compared to 5.00% for the same period in 2020. Remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross profit in "Non-GAAP Financial Information"), increased$34.4 million , or 16.1%, to$248.1 million for the second quarter of 2021 from$213.7 million for the same period in 2020. Remaining gross profit margin, a non-GAAP financial measure (see reconciliation of remaining gross profit margin, as well as an explanation of its significance, in "Non-GAAP Financial Information") increased to 5.52% for the second quarter of 2021 from 5.01% for the same period in 2020, driven primarily by the change in our overall sales mix toward more food/non-food sales, an increase in the gross margin for food/non-food as a result of a shift in sales mix toward higher margin categories and higher gross profit margins in certain food/non-food categories. Cigarette remaining gross profit, a non-GAAP financial measure (see reconciliation of cigarette remaining gross profit to cigarette gross profit in "Non-GAAP Financial Information"), decreased$1.0 million , or 1.8%, to$55.1 million for the second quarter of 2021 from$56.1 million for the same period in 2020. The decrease in cigarette remaining gross profit was driven primarily by a decrease in cigarette carton sales during the second quarter of 2021. Cigarette remaining gross profit margin, a non-GAAP financial measure (see reconciliation of cigarette remaining gross profit margin, as well as an explanation of its significance, in "Non-GAAP Financial Information") decreased to 1.90% for the second quarter of 2021 from 1.94% for the same period in 2020. The decrease in cigarette remaining gross profit margin was driven primarily by the impact of cigarette price inflation, partially offset by a 6.4% increase in remaining gross profit per carton. Food/non-food remaining gross profit, a non-GAAP financial measure (see reconciliation of food/non-food remaining gross profit to food/non-food gross profit in "Non-GAAP Financial Information"), increased$35.4 million , or 22.5%, to$193.0 million for the second quarter of 2021 from$157.6 million the same period in 2020. Food/non-food remaining gross profit margin, a non-GAAP financial measure (see reconciliation of food/non-food remaining gross profit margin in "Non-GAAP Financial Information") in the second quarter of 2021 increased to 12.09% from 11.49% for the same period in 2020. The increase in food/non-food remaining gross profit margin was driven primarily by an increase in sales of certain higher margin categories and an increase in margin rate in certain product categories. For the second quarter of 2021, our remaining gross profit for food/non-food products was 77.8% of our total remaining gross profit compared to 73.7% for the same period in 2020. Operating Expenses. Our operating expenses include costs related to warehousing and distribution, selling, general and administrative ("SG&A") expenses and amortization of intangible assets. In the second quarter of 2021, operating expenses increased by$30.0 million , or 16.0%, to$217.7 million from$187.7 million for the same period in 2020. The increase in operating expenses was driven primarily by higher food/non-food sales volumes, increased labor costs associated with a labor 21 -------------------------------------------------------------------------------- Table o f C ontents shortage across the industry related to COVID-19, fuel inflation and approximately$4.9 million in transaction expenses related to the Merger Agreement. As a percentage of total net sales, operating expenses were 4.8% for the second quarter of 2021 compared to 4.4% for the same period in 2020. Operating expenses were 87.7% of remaining gross profit, a non-GAAP financial ratio, (see reconciliation of operating expenses as a percentage of remaining gross profit, as well as an explanation of its significance, in "Non-GAAP Financial Information") for the second quarter of 2021, compared to 87.8% of remaining gross profit for the same period in 2020. Warehousing and Distribution Expenses. Warehousing and distribution expenses increased$21.5 million , or 17.1%, to$147.0 million in the second quarter of 2021 from$125.5 million for the same period in 2020. The increase in warehousing and distribution expenses was due primarily to higher food/non-food sales volumes, higher labor costs associated with a labor shortage across the industry related to COVID-19 and an increase in the cost of fuel per gallon. Warehousing and distribution expenses were 3.3% of total net sales for the second quarter of 2021 compared to 2.9% of total net sales for the same period in 2020. Warehousing and distribution expenses were 59.3% of remaining gross profit, a non-GAAP financial ratio, (see reconciliation of operating expenses as a percentage of remaining gross profit, as well as an explanation of its significance, in "Non-GAAP Financial Information") for the second quarter of 2021, compared to 58.7% of remaining gross profit in 2020. SG&A Expenses. SG&A expenses increased$8.3 million , or 13.9%, to$68.1 million in the second quarter of 2021 from$59.8 million for the same period in 2020. The increase in SG&A expenses was due primarily to approximately$4.9 million in transaction expenses related to the Merger Agreement and higher employee bonus and stock compensation expense in the second quarter of 2021 as compared to the same period last year. SG&A expenses were 1.5% of total net sales for the second quarter of 2021 as compared to 1.4% of total net sales for the same period in 2020. SG&A expenses were 27.4% of remaining gross profit, a non-GAAP financial ratio (see reconciliation of operating expenses as a percentage of remaining gross profit, as well as an explanation of its significance, in "Non-GAAP Financial Information"), for the second quarter of 2021 compared to 28.0% for the same period in 2020. Amortization Expense. Amortization expense increased$0.2 million , or 8.3%, in the second quarter of 2021 to$2.6 million from$2.4 million for the same period in 2020. Interest Expense, Net. Interest expense, net includes interest income and expense, amortization of loan origination costs related to borrowings, facility fees and interest on finance lease obligations. Interest expense, net decreased to$2.4 million in the second quarter of 2021 from$2.8 million for the same period in 2020. The decrease in net interest expense was due primarily to lower average borrowings during the second quarter of 2021. Average borrowings in the second quarter of 2021 were$221.2 million with a weighted-average interest rate of 1.4% compared to average borrowings of$354.3 million with a weighted-average interest rate of 1.4% for the same period in 2020. Foreign Currency Transaction Gains, Net. We recognized a foreign currency gain of$0.2 million in the second quarter of 2021 compared to no net foreign currency gain or loss for the same period in 2020. During times of a strengtheningU.S. dollar, we generally record foreign currency losses from our Canadian operations. Conversely, during times of a weakeningU.S. dollar, we generally record foreign currency gains. Income Taxes. For the second quarter of 2021, our effective tax rate was 34.9% compared to 25.2% for the same period in 2020. The increase in our effective tax rate was due primarily to the transaction costs pertaining to the Merger Agreement, that are not deductible for income tax purposes and an increase in non-deductible compensation expenses in accordance with Section 162(m) of the internal revenue code. We expect our effective full-year tax rate to be approximately 32.7% for 2021 due primarily to the anticipated transaction costs pertaining to the Merger Agreement. Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure (see the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Financial Information"), was$57.3 million for the second quarter of 2021 compared to$52.5 million for the same period last year. Adjusted EBITDA for the second quarter of 2021 included the impact of approximately$4.9 million in transaction expenses related to the Merger Agreement. 22 -------------------------------------------------------------------------------- Table o f C ontents Results of Operations Comparison of the Six Months EndedJune 30, 2021 and 2020 (in millions, except percentages)(1): Six Months Ended Six Months Ended June 30, 2021 June 30, 2020 % of Net % of Net Increase sales, less sales, less (Decrease) Amounts % of Net sales excise taxes Amounts % of Net sales excise taxes Net sales$ 224.9 $ 8,428.1 100.0 % - %$ 8,203.2 100.0 % - % Net sales - Cigarettes 12.3 5,487.6 65.1 60.1 5,475.3 66.7 61.7 Net sales - Food/Non-food 212.6 2,940.5 34.9 39.9 2,727.9 33.3 38.3 Net sales, less excise taxes (non-GAAP)(2) 221.9 6,797.4 80.7 100.0 6,575.5 80.2 100.0 Gross profit(3) 29.6 461.1 5.5 6.8 431.5 5.3 6.6 Warehousing and distribution expenses 16.4 284.3 3.4 4.2 267.9 3.3 4.1 Selling, general and administrative expenses 7.8 131.5 1.6 1.9 123.7 1.5 1.9 Amortization of intangible assets 0.6 5.3 0.1 0.1 4.7 0.1 0.1 Income from operations 4.8 40.0 0.5 0.6 35.2 0.4 0.5 Interest expense, net (0.8) (5.5) (0.1) (0.1) (6.3) (0.1) (0.1) Foreign currency transaction gains (losses), net 0.6 0.4 - - (0.2) - - Income before income taxes 6.2 34.9 0.4 0.5 28.7 0.3 0.4 Net income 2.8 24.0 0.3 0.4 21.2 0.3 0.3 Adjusted EBITDA (non-GAAP)(4) 13.8 101.6 1.2 1.5 87.8 1.1 1.3
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) See the reconciliation of net sales, less excise taxes to net sales in "Non-GAAP Financial Information." (3) Gross profit may not be comparable to those of other entities because warehousing and distribution expenses are not included as a component of our cost of goods sold. (4) See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Financial Information."Net Sales . Net sales for the six months endedJune 30, 2021 increased by$224.9 million , or 2.7%, to$8,428.1 million , from$8,203.2 million for the same period in 2020. Adjusting for the impacts of foreign exchange, total net sales increased approximately 1.9% compared to the same period in 2020. The increase in net sales was driven primarily by cigarette manufacturers' price increases and an increase in food/non-food sales to existing customers. These increases were partially offset by a decrease in sales of cigarette cartons to existing customers and one less selling day during the six months endedJune 30, 2021 compared to the same period in 2020. Sales of cigarettes and food/non-food products in 2021 continued to reflect increased normalization of consumer behavior towards pre-COVID levels.Net Sales of Cigarettes. Net sales of cigarettes for the six months endedJune 30, 2021 increased by$12.3 million , or 0.2%, to$5,487.6 million from$5,475.3 million for the same period in 2020. The increase in net sales of cigarettes was driven primarily by a 8.0% increase in the average sales price per carton due to cigarette manufacturers' price increases, partially offset by a 6.5% decrease in carton sales and one less selling day during the six months endedJune 30, 2021 compared to the corresponding period in 2020. Cigarette carton sales decreased by 7.3% and 5.4% in theU.S. andCanada , respectively, driven primarily by one less selling day and a decrease in carton sales to existing customers. The first six months endedJune 30, 2020 benefited from a 2.4% increase in cigarette carton sales to existing customers leading into the height of the COVID-19 pandemic. Sales trends in the first half of 2021 reflected increased normalization of consumer behavior towards pre-COVID levels. Net cigarette sales as a percentage of total net sales was 65.1% for the six months endedJune 30, 2021 compared to 66.7% for the same period last year. 23 -------------------------------------------------------------------------------- Table o f C ontentsNet Sales of Food/Non-food Products. Net sales of food/non-food products for the six months endedJune 30, 2021 increased$212.6 million , or 7.8%, to$2,940.5 million from$2,727.9 million for the same period in 2020. The following table provides net sales by product category for our food/non-food products (in millions, except percentages)(1): Six Months Ended June 30, Increase (Decrease) Product Category 2021 2020 Amounts Percentage Food$ 822.6 $ 762.5 $ 60.1 7.9 % Fresh 268.7 242.4 26.3 10.8 % Candy 538.6 500.2 38.4 7.7 % OTP 809.9 750.9 59.0 7.9 % HB&G 394.8 382.3 12.5 3.3 % Beverages 104.9 89.1 15.8 17.7 % Equipment/other 1.0 0.5 0.5 100.0 % Total food/non-food products$ 2,940.5 $ 2,727.9 $ 212.6 7.8 %
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results.
The increase in food/non-food sales for the six months endedJune 30, 2021 was driven primarily by an increase in sales to existing customers, partially offset by one less selling day during the six months endedJune 30, 2021 compared to the corresponding period in 2020. Sales trends in the first half of 2021 reflected increased normalization of consumer behavior towards pre-COVID levels. Net sales of food/non-food products as a percentage of total net sales was 34.9% for the six months endedJune 30, 2021 compared to 33.3% for the same period in 2020. Gross Profit. Gross profit for the six months endedJune 30, 2021 increased$29.6 million , or 6.9%, to$461.1 million from$431.5 million for the same period in 2020. The increase in gross profit was driven by an increase in food/non-food sales, a shift in sales mix within our food/non-food category to higher margin products driven primarily by changes in consumer behavior towards pre-COVID levels and$10.9 million of net incremental inventory holding gains during the six months endedJune 30, 2021 as compared to the same period in 2020. These increases were offset by a$3.1 million OTP tax claim, an increase in LIFO expense of$5.7 million and the impact of one less selling day during the six months endedJune 30, 2021 . Gross profit margin was 5.47% of total net sales for the six months endedJune 30, 2021 compared to 5.26% for the same period in 2020. The change in the sales mix between cigarettes and food/non-food contributed to approximately 76% of the gross profit margin increase. In addition, the increase in gross profit margin was also driven by an increase in margins within food/non-food as a result of a shift in sales mix toward higher margin items and higher margins in certain categories. Our inventory holding gains were$27.7 million for the six months endedJune 30, 2021 compared to$16.8 million for the same period in 2020. The increase in inventory holding gains was due primarily to the timing and amount of cigarette manufacturers' price increases and a tax stamp inventory holding gain of$8.3 million . LIFO expense was$21.8 million for the six months endedJune 30, 2021 compared to$16.1 million for the same period in 2020. Because we value our inventory in theU.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in theBureau of Labor Statistics PPI used to estimate and record our book LIFO expense. The increase in LIFO expense for the six months endedJune 30, 2021 was due primarily to an increase in expected price inflation for cigarettes, OTP, food, candy and HB&G categories. 24 -------------------------------------------------------------------------------- Table o f C ontents The following table provides the components of gross profit (in millions, except percentages)(1): Six Months Ended Six Months Ended June 30, 2021 June 30, 2020 % of Net % of Net Increase % of Net sales, less % of Net sales, less (Decrease) Amounts sales excise taxes Amounts sales excise taxes Net sales$ 224.9 $ 8,428.1 100.0 % - %$ 8,203.2 100.0 % - % Net sales, less excise taxes (non-GAAP)(2) 221.9 6,797.4 80.7 100.0 6,575.5 80.2 100.0 Components of gross profit: Cigarette inventory holding gains(3)$ 2.6 $ 19.4 0.23 % 0.29 % $ 16.8 0.20 % 0.26 % Cigarette tax stamp inventory holding gain(4) 8.3 8.3 0.10 0.12 - - - OTP tax claim(5) (3.1) (3.1) (0.04) (0.05) - - - LIFO expense(6) (5.7) (21.8) (0.26) (0.32) (16.1) (0.19) (0.24) Remaining gross profit (non-GAAP)(7) 27.5 458.3 5.44 6.74 430.8 5.25 6.55 Gross profit$ 29.6 $ 461.1 5.47 % 6.78 %$ 431.5 5.26 % 6.56 %
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) See reconciliation of net sales, less excise taxes to net sales in "Non-GAAP Financial Information." (3) For the six months endedJune 30, 2021 ,$17.6 million and$1.8 million of the cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. For the same period in 2020,$15.4 million and$1.4 million of the cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. (4) For the six months endedJune 30, 2021 , the$8.3 million of cigarette tax stamp inventory holding gains were all attributable to theU.S. (5) For the six months endedJune 30, 2021 , the$3.1 million of OTP tax claim was related to a Canadian provincial tax assessment and excludes$0.7 million of interest expense. (6) The increase of$5.7 million in LIFO expense in 2021 was due primarily to an increase in the Producer Price Index ("PPI") for cigarettes, OTP, food, candy and HB&G categories. (7) Remaining gross profit is a non-GAAP financial measure, which we provide to segregate the effects of LIFO expense, cigarette inventory holding gains and other items that significantly affect the comparability of gross profit. Remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross profit in "Non-GAAP Financial Information"), increased$27.5 million , or 6.4%, to$458.3 million for the six months endedJune 30, 2021 from$430.8 million for the same period in 2020. Remaining gross profit margin, a non-GAAP financial measure (see reconciliation of remaining gross profit margin, as well as an explanation of its significance, in "Non-GAAP Financial Information") was 5.44% for the six months endedJune 30, 2021 compared to 5.25% for the same period in 2020. Cigarette remaining gross profit, a non-GAAP financial measure (see reconciliation of cigarette remaining gross profit to cigarette gross profit in "Non-GAAP Financial Information"), decreased$2.4 million , or 2.3%, to$103.4 million for the six months endedJune 30, 2021 from$105.8 million for the same period in 2020. The decrease in cigarette remaining gross profit was driven primarily by a decrease in cigarette carton sales, including the impact of one less selling day during the six months endedJune 30, 2021 . The decrease in cigarette remaining gross profit margin was driven primarily by the impact of cigarette price inflation, partially offset by a 5.3% increase in remaining gross profit per carton. Food/non-food remaining gross profit, a non-GAAP financial measure (see reconciliation of food/non-food remaining gross profit to food/non-food gross profit in "Non-GAAP Financial Information"), increased$29.9 million , or 9.2%, to$354.9 million for the six months endedJune 30, 2021 from$325.0 million the same period in 2020. Food/non-food remaining gross profit margin, a non-GAAP financial measure (see reconciliation of food/non-food remaining gross profit margin in "Non-GAAP Financial Information") for the six months endedJune 30, 2021 was 12.07% compared to 11.91% for the same period in 2020. The increase in remaining gross profit margin was driven primarily by an increase in sales of certain higher margin categories and an increase in margin rate across certain product categories. For the six months endedJune 30, 2021 , our remaining gross profit for food/non-food products was 77.4% of our total remaining gross profit compared to 75.4% for the same period in 2020. 25 -------------------------------------------------------------------------------- Table o f C ontents Operating Expenses. Our operating expenses include costs related to warehousing and distribution, SG&A expenses and amortization of intangible assets. For the six months endedJune 30, 2021 , operating expenses increased by$24.8 million , or 6.3%, to$421.1 million from$396.3 million for the same period in 2020. The increase in operating expenses was driven primarily by higher food/non-food sales volume, higher labor costs associated with a labor shortage across the industry related to COVID-19 as well as approximately$5.2 million in transaction expenses related to the Merger Agreement and an increase in the cost of fuel per gallon. As a percentage of total net sales, total operating expenses were 5.0% for the six months endedJune 30, 2021 compared to 4.8% for the same period in 2020. Operating expenses were 91.9% of remaining gross profit, a non-GAAP financial ratio (see reconciliation of operating expenses as a percentage of remaining gross profit, as well as an explanation of its significance, in "Non-GAAP Financial Information") for the six months endedJune 30, 2021 , compared to 92.0% of remaining gross profit for the same period in 2020. The decrease in operating expenses as a percentage of remaining gross profit was due primarily to our ability to manage expenses despite higher labor and fuel costs for the six months endedJune 30, 2021 , compared to the same period in 2020. Warehousing and Distribution Expenses. Warehousing and distribution expenses increased$16.4 million , or 6.1%, to$284.3 million for the six months endedJune 30, 2021 from$267.9 million for the same period in 2020. The increase in warehousing and distribution expenses was driven primarily by higher food/non-food sales volume, higher labor costs associated with a labor shortage across the industry related to COVID-19 and an increase in the cost of fuel per gallon. As a percentage of total net sales, warehousing and distribution expenses were 3.4% for the six months endedJune 30, 2021 compared to 3.3% for the same period in 2020. Warehousing and distribution expenses were 62.0% of remaining gross profit, a non-GAAP financial ratio (see reconciliation of operating expenses as a percentage of remaining gross profit, as well as an explanation of its significance, in "Non-GAAP Financial Information") for the six months endedJune 30, 2021 , compared to 62.2% of remaining gross profit for the same period in 2020. SG&A Expenses. SG&A expenses increased$7.8 million , or 6.3%, for the six months endedJune 30, 2021 , to$131.5 million from$123.7 million for the same period in 2020. The increase in SG&A expenses was due primarily to approximately$5.2 million in transaction expenses related to the Merger Agreement and higher employee bonus and stock compensation expense in the six months endedJune 30, 2021 compared to the same period last year. As a percentage of net sales, SG&A expenses were 1.6% for the six months endedJune 30, 2021 compared to 1.5% for the same period in 2020. SG&A was 28.7% of remaining gross profit, a non-GAAP financial ratio (see reconciliation of operating expenses as a percentage of remaining gross profit, as well as an explanation of its significance, in "Non-GAAP Financial Information") for both of the six months endedJune 30, 2021 and 2020. Amortization Expense. Amortization expense increased$0.6 million , or 12.8%, for the six months endedJune 30, 2021 , to$5.3 million from$4.7 million for the same period in 2020. Interest Expense, Net. Interest expense, net decreased$0.8 million to$5.5 million for the six months endedJune 30, 2021 , from$6.3 million for the same period in 2020. The decrease in net interest expense was due primarily to a decrease in the average borrowing rate, and lower average borrowings. Average borrowings for the six months endedJune 30, 2021 were$211.9 million , with a weighted-average interest rate of 1.4%, compared to average borrowings of$345.3 million and a weighted-average interest rate of 2.1% for the same period in 2020. Foreign Currency Transaction Gains (Losses), Net. We recognized a foreign currency gain of$0.4 million for the six months endedJune 30, 2021 compared to a loss of$0.2 million for the same period in 2020. The change was due primarily to fluctuations in our net intercompany borrowing positions and the Canadian/U.S. exchange rate. Income Taxes. The effective tax rate for the six months endedJune 30, 2021 was 31.2% compared to 26.1% for the same period in 2020. The increase in our effective tax rate was due primarily to the transaction costs pertaining to the Merger Agreement which are not deductible for income tax purposes and an increase in non-deductible compensation expenses in accordance with Section 162(m) of the internal revenue code. We expect our effective tax rate to be approximately 32.7% for 2021 due primarily to the anticipated transaction costs pertaining to the Merger Agreement. Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure (see reconciliation of Adjusted EBITDA to net income in "Non-GAAP Financial Information"), increased$13.8 million , or 15.7%, to$101.6 million for the six months endedJune 30, 2021 from$87.8 million for the same period last year. The increase was driven primarily by strong sales and margins. 26
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Table o f C ontents
Non-GAAP Financial Information The financial statements in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP.Core-Mark uses certain non-GAAP financial measures including (i) Adjusted EBITDA, (ii) net sales, less excise taxes, (iii) remaining gross profit (including cigarette remaining gross profit and food/non-food remaining gross profit), (iv) remaining gross profit margin (including cigarette remaining gross profit margin and food/non-food remaining gross profit margin), (v) remaining gross profit margin less excise taxes (including cigarette remaining gross profit margin less excise taxes and food/non-food remaining gross profit margin less excise taxes), (vi) cigarette remaining gross profit per carton and (vii) operating expenses (and the components thereof) as a percentage of remaining gross profit. We believe these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful period to period evaluation. We also believe these measures allow investors to view results in a manner similar to the method used by our management. Management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. These measures may be defined differently than other companies and therefore, such measures may not be comparable to ours. We strongly encourage investors and stockholders to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure. These non-GAAP measures are defined as follows: (i) Adjusted EBITDA is a measure used by management to measure operating performance. Adjusted EBITDA is equal to net income adding back net interest expense, provision for income taxes, depreciation and amortization, LIFO expense, stock-based compensation expense and net foreign currency transaction gains or losses. See the Adjusted EBITDA tables in our Management's Discussion and Analysis for additional details on the components of Adjusted EBITDA. We believe Adjusted EBITDA is one of the primary measures used externally by our investors, analysts and peers in our industry for purposes of valuation and comparing our results to other companies. (ii) Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales and gross profits due to product sales growth and increases in state, local 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 taxes result in higher net sales, our overall gross profit percentage may be reduced. (iii) Remaining gross profit (including cigarette remaining gross profit and food/non-food remaining gross profit), (iv) remaining gross profit margin (including cigarette remaining gross profit margin and food/non-food remaining gross profit margin), (v) remaining gross profit margin less excise taxes (including cigarette remaining gross profit margin less excise taxes and food/non-food remaining gross profit margin less excise taxes), and (vi) cigarette remaining gross profit per carton, are non-GAAP financial measures, which we provide to segregate the effects of LIFO expense, cigarette inventory holding gains and certain other items that significantly affect the comparability of gross profit. (vii) Operating expenses (and the components thereof) as a percentage of remaining gross profit is a non-GAAP financial measure, which is used by management to measure operating leverage. Although management also uses operating expenses as a percentage of net sales, this metric may be impacted on a comparable basis by, among other items, excise taxes, changes in manufacturers' prices (including inflation), and our continuing trend in sales mix shift from cigarettes to higher-margin food/non-food items which have substantially lower selling prices. 27 -------------------------------------------------------------------------------- Table o f C ontents The following table reconciles Adjusted EBITDA to net income, as net income is the most comparable financial measure underU.S. GAAP (in millions, except percentages)(1): Three Months Ended Six Months Ended June 30, % June 30, % 2021 2020 Change 2021 2020 Change Net income$ 15.5 $ 16.9 (8.3)%$ 24.0 $ 21.2 13.2% Interest expense, net(2) 2.4 2.8 5.5 6.3 Provision for income taxes 8.3 5.7 10.9 7.5 Depreciation and amortization 17.5 16.7 34.9 32.4 LIFO expense 11.3 8.3 21.8 16.1 Stock-based compensation expense 2.5 2.1 4.9 4.1 Foreign currency transaction (gains) losses, net (0.2) - (0.4) 0.2 Adjusted EBITDA (non-GAAP)$ 57.3 $ 52.5 9.1%$ 101.6 $ 87.8 15.7%
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) Interest expense, net, is reported net of interest income. The following tables reconcile net sales, less excise taxes to net sales, and remaining gross profit to gross profit (including cigarette remaining gross profit and food/non-food remaining gross profit), their most comparable financial measures underU.S. GAAP (in millions, except percentages)(1): Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Net sales$ 4,495.9 $ 4,263.9 $ 8,428.1 $ 8,203.2 Excise taxes (859.5)
(857.4) (1,630.7) (1,627.7)
Net sales, less excise taxes (non-GAAP)
Gross profit$ 243.7 $ 213.1 $ 461.1 $ 431.5 Cigarette inventory holding gains(2) (6.9) (7.7) (19.4) (16.8) Cigarette tax stamp inventory holding gains(3) - - (8.3) - OTP tax claim(4) - - 3.1 - LIFO expense 11.3 8.3 21.8 16.1 Remaining gross profit (non-GAAP)$ 248.1 $
213.7
Gross profit % 5.42 % 5.00 % 5.47 % 5.26 % Gross profit % less excise taxes (non-GAAP) 6.70 % 6.26 % 6.78 % 6.56 % Remaining gross profit % (non-GAAP) 5.52 % 5.01 % 5.44 % 5.25 % Remaining gross profit % less excise taxes (non-GAAP) 6.82 % 6.27 % 6.74 % 6.55 %
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) For the three months endedJune 30, 2021 ,$6.6 million and$0.3 million of cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. For the three months endedJune 30, 2020 , the$7.7 million of the cigarette inventory holding gains were all attributable to theU.S. For the six months endedJune 30, 2021 ,$17.6 million and$1.8 million of cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. For the same period in 2020,$15.4 million and$1.4 million of the cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. (3) For the six months endedJune 30, 2021 , all$8.3 million of cigarette tax stamp inventory holding gains were attributable to theU.S. (4) For the six months endedJune 30, 2021 , the$3.1 million of OTP tax claim was related to a Canadian provincial tax assessment. 28
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Table o f C ontents
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Cigarettes:
Net sales $ 2,899.9 $ 2,892.6 $ 5,487.6 $ 5,475.3
Excise taxes (739.4) (747.8) (1,400.8) (1,420.0)
Net sales, less excise taxes (non-GAAP) $ 2,160.5 $
2,144.8
Gross profit$ 54.6 $ 58.3 $ 114.5 $ 110.2 Cigarette inventory holding gains(2) (6.9) (7.7) (19.4) (16.8) Cigarette tax stamp inventory holding gains(3) - - (8.3) - LIFO expense 7.4 5.5 16.6 12.4 Remaining gross profit (non-GAAP)$ 55.1 $
56.1
Gross profit % 1.88 % 2.02 % 2.09 % 2.01 % Gross profit % less excise taxes (non-GAAP) 2.53 % 2.72 % 2.80 % 2.72 % Remaining gross profit % (non-GAAP) 1.90 % 1.94 % 1.88 % 1.93 % Remaining gross profit % less excise taxes (non-GAAP) 2.55 % 2.62 % 2.53 % 2.61 %
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) For the three months endedJune 30, 2021 ,$6.6 million and$0.3 million of cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. For the three months endedJune 30, 2020 , the$7.7 million of cigarette inventory holding gains were all attributable to theU.S. For the six months endedJune 30, 2021 ,$17.6 million and$1.8 million of cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. For the same period in 2020,$15.4 million and$1.4 million of cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. (3) For the six months endedJune 30, 2021 , all$8.3 million of cigarette tax stamp inventory holding gains were attributable to theU.S. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Food/Non-food: Net sales$ 1,596.0 $ 1,371.3 $ 2,940.5 $ 2,727.9 Excise taxes (120.1) (109.6) (229.9) (207.7) Net sales, less excise taxes (non-GAAP)$ 1,475.9 $ 1,261.7 $ 2,710.6 $ 2,520.2 Gross profit$ 189.1 $ 154.8 $ 346.6 $ 321.3 OTP tax claim(2) - - 3.1 - LIFO expense 3.9 2.8 5.2 3.7 Remaining gross profit (non-GAAP)$ 193.0 $
157.6
Gross profit % 11.85 % 11.29 % 11.79 % 11.78 % Gross profit % less excise taxes (non-GAAP) 12.81 % 12.27 % 12.79 % 12.75 % Remaining gross profit % (non-GAAP) 12.09 % 11.49 % 12.07 % 11.91 % Remaining gross profit % less excise taxes (non-GAAP) 13.08 % 12.49 % 13.09 % 12.90 %
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) For the six months endedJune 30, 2021 , the$3.1 million of OTP tax claim was related to a Canadian provincial tax assessment. 29 -------------------------------------------------------------------------------- Table o f C ontents The following table provides operating expenses as a percentage of remaining gross profit (in millions, except percentages)(1): Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Gross profit$ 243.7 $ 213.1 $ 461.1 $ 431.5 Cigarette inventory holding gains(2) (6.9) (7.7) (19.4) (16.8) Cigarette tax stamp inventory holding gains(3) - - (8.3) - OTP tax claim(4) - - 3.1 - LIFO expense 11.3 8.3 21.8 16.1 Remaining gross profit (non-GAAP)$ 248.1 $
213.7
Warehousing and distribution expenses$ 147.0 $ 125.5 $ 284.3 $ 267.9 Selling, general and administrative expenses 68.1 59.8 131.5 123.7 Amortization of intangible assets 2.6 2.4 5.3 4.7 Total operating expenses$ 217.7 $
187.7
Warehousing and distribution expense as a percentage of remaining gross profit (non-GAAP) 59.3 % 58.7 % 62.0 % 62.2 % Selling, general and administrative expense as a percentage of remaining gross profit (non-GAAP) 27.4 % 28.0 % 28.7 % 28.7 % Amortization of intangible assets as a percentage of remaining gross profit (non-GAAP) 1.0 % 1.1 % 1.2 % 1.1 % Total operating expense as a percentage of remaining gross profit (non-GAAP) 87.7 % 87.8 % 91.9 % 92.0 %
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) For the three months endedJune 30, 2021 ,$6.6 million and$0.3 million of cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. For the three months endedJune 30, 2020 , the$7.7 million of cigarette inventory holding gains were all attributable to theU.S. For the six months endedJune 30, 2021 ,$17.6 million and$1.8 million of cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. For the six months endedJune 30, 2020 ,$15.4 million and$1.4 million of cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. (3) For the six months endedJune 30, 2021 , all$8.3 million of cigarette tax stamp inventory holding gains were attributable to theU.S. (4) For the six months endedJune 30, 2021 , the$3.1 million of OTP tax claim was related to a Canadian provincial tax assessment. Liquidity and Capital Resources Our cash and cash equivalents were$34.3 million and$22.8 million as ofJune 30, 2021 andDecember 31, 2020 , respectively. Our liquidity requirements arise primarily from our working capital, capital expenditures, debt service requirements for our revolving credit facility ("Credit Facility"), income taxes, repurchases of common stock and dividend payments. We have historically funded our liquidity requirements through our cash flows from operations and external borrowings. For the six months endedJune 30, 2021 , our cash flows used in operating activities were$50.1 million . Subject to borrowing base limitations, we had$347.3 million of borrowing capacity available under our Credit Facility, excluding our expansion feature of$200.0 million , as ofJune 30, 2021 . We are potentially exposed to increased credit risk as a result of the COVID-19 pandemic. While the vast majority of our customers are convenience retailers that continue to operate as essential businesses, our customers include smaller independent convenience retailers that may face liquidity constraints as a result of reduced store traffic. Our customers also include non-convenience store formats including hotel gift shops, casinos, tobacco shops, schools, airport concessions and other specialty and small format stores that carry convenience products. Some of these customers may have temporarily ceased, or significantly reduced, operations due to government-imposed restrictions while others have seen a material decline in store traffic. 30 -------------------------------------------------------------------------------- Table o f C ontents Cash Flows from Operating Activities Our cash flows from operating activities, including net income, net non-cash additions to net income and changes in operating assets and liabilities (working capital), used net cash of$50.1 million for the six months endedJune 30, 2021 compared to$219.0 million of net cash provided for the same period in 2020, a decrease of$269.1 million . The decrease was primarily attributable to changes in working capital during the comparative periods. Working capital used$153.3 million of cash for the six months endedJune 30, 2021 , compared to$139.7 million of cash provided for the six months endedJune 30, 2020 , a decrease of$293.0 million . These contributions for the comparative periods were impacted primarily by increases in inventories, net, and deposits, prepayments and other non-current assets and a decrease in cigarette and tobacco taxes payable. The increased cash use in working capital was due primarily to the timing of cigarette manufacturers' price increases and larger ending inventory and associated prepayments during the respective periods. Our cash flows from operating activities were impacted by the following movements in working capital (in millions): Six Months Ended June 30, 2021 2020 Change Accounts receivable, net$ (51.0) $ (86.1) $ 35.1 Other receivables, net (2.6) (5.1) 2.5 Inventories, net (108.6) 12.4 (121.0) Deposits, prepayments and other non-current assets (29.4) 48.1 (77.5) Accounts payable 86.6 114.1 (27.5) Cigarette and tobacco taxes payable (32.2) 49.0 (81.2) Claims, accrued and other long-term liabilities (16.1) 7.3 (23.4) Net cash (used in) provided by changes in working capital$ (153.3) $
139.7
Cash Flows from Investing Activities Our investing activities used net cash of$11.7 million for the six months endedJune 30, 2021 compared to net cash used of$9.6 million for the same period in 2020. Capitalization of software and related development costs were$1.7 million and$0.9 million for the six months endedJune 30, 2021 and 2020, respectively. Additions to property, plant and equipment were$10.0 million and$9.8 million for the six months endedJune 30, 2021 and 2020, respectively. We expect our capital expenditures for 2021 to be approximately$30 million for the year, which will be utilized primarily for maintenance and technology initiatives, as well as upgrades to certain distribution facilities and the relocation of one distribution facility. Cash Flows from Financing Activities Our financing activities provided net cash of$73.5 million for the six months endedJune 30, 2021 compared to net cash used of$116.3 million for the same period in 2020, an increase of$189.8 million . Net borrowings of our Credit Facility during the six months endedJune 30, 2021 were$74.0 million compared to net repayments of$99.8 million for the same period in 2020. Our Credit Facility We have a Credit Facility with a capacity of$750 million as ofJune 30, 2021 and expansion feature of$200.0 million , limited by a borrowing base consisting of eligible accounts receivables and inventories. OnFebruary 26, 2021 , the Company entered into an Eleventh Amendment to its Credit Facility, which primarily extends the maturity date fromMarch 28, 2022 toFebruary 26, 2026 . With the Eleventh Amendment, the size and expansion feature of the Credit Facility remain unchanged and certain threshold amounts for reporting and notices as well as the size of certain baskets were increased. The Eleventh Amendment also added certain additional covenant baskets and incorporated customary language regarding London Interbank Offered Rate ("LIBOR") replacement, defaulting lenders, electronic execution, Bail-in acknowledgement and letters of credit. All obligations under the Credit Facility are secured by first-priority liens on substantially all of the Company's present and future assets. The terms of the Credit Facility permit prepayment without penalty at any time (subject to customary breakage costs with respect LIBOR or CDOR based loans prepaid prior to the end of an interest period). 31 -------------------------------------------------------------------------------- Table o f C ontents Amounts related to the Credit Facility are as follows (in millions): June 30, December 31, 2021 2020 Amounts borrowed, net$ 332.0 $ 258.0 Outstanding letters of credit 43.8 19.5 Amounts available to borrow(1) 347.3 402.4
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(1) Subject to borrowing base limitations, and excluding expansion feature of$200.0 million . Average borrowings during the three and six months endedJune 30, 2021 were$221.2 million and$211.9 million , respectively, with outstanding amounts borrowed at any one time ranging from$126.0 million to$378.0 million over the six-month period. For the three and six months endedJune 30, 2020 , average borrowings were$354.3 million and$345.3 million , respectively, with outstanding amounts borrowed at any one time ranging from$151.5 million to$499.3 million over the six-month period. The increase in the outstanding letters of credit as ofJune 30, 2021 , is due primarily to a change in insurance carriers for casualty coverage. The increased letters of credit supports potential run-off claims under the previous insurance policy and is expected to decline over time as potential claims are resolved. 32
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Table o f C ontents Off-Balance Sheet Arrangements There have been no material changes to the information provided in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC onMarch 1, 2021 , regarding off-balance sheet arrangements.
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