FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to_____________________
Commission file number 333-14217
============
Core-Mark International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 91-1295550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
395 Oyster Point Boulevard, Suite 415
South San Francisco, CA 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 589-9445
============
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. _x_ Yes ___ No
At October 31, 2001, Registrant had outstanding
5,500,000 shares of Common Stock.
===============================================
Core-Mark International, Inc. and Subsidiaries
FORWARD-LOOKING STATEMENTS OR INFORMATION
Certain statements contained in this quarterly report on Form 10-Q under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere herein and in the documents (if any)
incorporated herein by reference are not statements of historical fact but are
future-looking or forward-looking statements that may constitute
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of such forward-looking
terminology as the words "believes," "expects," "may," "will," "should," or
"anticipates" (or the negative of such terms) or other variations thereon or
comparable terminology, or because they involve discussions of Core-Mark
International, Inc.'s (the "Company's") strategy. Such forward-looking
statements are based upon a number of assumptions concerning future conditions
that may ultimately prove to be inaccurate. The ability of the Company to
achieve the results anticipated in such statements is subject to various risks
and uncertainties and other factors which may cause the actual results, level of
activity, performance or achievements of the Company or the industry in which it
operates to be materially different from any future results, level of activity,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the general state of the economy
and business conditions in the United States and Canada; adverse changes in
consumer spending; the ability of the Company to implement its business
strategy, including the ability to integrate recently acquired businesses into
the Company; the ability of the Company to obtain financing; competition; the
level of retail sales of cigarettes and other tobacco products; possible effects
of legal proceedings against manufacturers and sellers of tobacco products and
the effect of government regulations affecting such products. As a result of the
foregoing and other factors affecting the Company's business beyond the
Company's control, no assurance can be given as to future results, levels of
activity, performance or achievements and neither the Company nor any other
person assumes responsibility for the accuracy and completeness of these
statements.
Page
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2000
and September 30, 2001................................................ 3
Condensed Consolidated Statements of Income for the three
and nine months ended September 30, 2000 and 2001..................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 2001.............................. 5
Notes to Condensed Consolidated Financial Statements.................. 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................. ........................ 8
Item 3: Quantitative and Qualitative Disclosures About Market
Risk............................................................... 12
PART II - OTHER INFORMATION
Item 1: Legal Proceedings................................................. 13
Item 2: Changes in Securities and Use of Proceeds......................... 13
Item 3: Defaults Upon Senior Securities................................... 13
Item 4: Submission of Matters to a Vote of Security Holders............... 13
Item 5: Other Information................................................. 13
Item 6: Exhibits and Reports on Form 8-K.................................. 13
Signature.................................................................. 14
-2-
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In Thousands of Dollars)
December 31, September 30,
2000 2001
-------- --------
Assets (Unaudited)
Current assets:
Cash....................................................................... $ 28,129 $ 32,452
Receivables:
Trade accounts, less allowance for doubtful accounts of $2,660 and
$3,029, respectively.............................................. 109,594 120,994
Other.................................................................. 17,055 18,161
Inventories, net of LIFO allowance of $46,319 and $51,486, respectively.... 111,983 62,575
Prepaid expenses and other................................................. 7,694 8,401
-------- --------
Total current assets................................................... 274,455 242,583
Property and equipment.......................................................... 72,954 74,879
Less accumulated depreciation.............................................. (41,888) (43,795)
-------- --------
Net property and equipment................................................. 31,066 31,084
Other assets.................................................................... 9,588 6,886
Goodwill, net of accumulated amortization of $23,540 and $25,102,
respectively............................................................... 59,767 58,205
-------- --------
Total assets.................................................................... $374,876 $338,758
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable..................................................... $ 51,791 $ 66,666
Cigarette and tobacco taxes payable........................................ 52,933 47,735
Income taxes payable....................................................... 3,476 3,824
Deferred income taxes...................................................... 3,759 4,313
Other accrued liabilities.................................................. 31,851 30,611
-------- --------
Total current liabilities.............................................. 143,810 153,149
Long-term debt.................................................................. 186,617 130,000
Other accrued liabilities and deferred income taxes............................. 8,591 10,084
-------- -------
Total liabilities.......................................................... 339,018 293,233
Commitments and contingencies:
Shareholders' equity:
Common stock; $.01 par value; 10,000,000 shares authorized;
5,500,000 shares issued and outstanding................................ 55 55
Additional paid-in capital................................................. 26,121 26,121
Retained earnings.......................................................... 16,178 27,105
Accumulated comprehensive loss:
Cumulative currency translation adjustments............................ (3,836) (5,096)
Additional minimum pension liability................................... (2,660) (2,660)
-------- --------
Total shareholders' equity............................................. 35,858 45,525
-------- --------
Total liabilities and shareholders' equity...................................... $374,876 $338,758
======== ========
See Notes to Condensed Consolidated Financial Statements.
-3-
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In Thousands of Dollars)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------------
2000 2001 2000 2001
-------- ------------ ---------- ----------
Net sales............................................ $782,723 $904,380 $2,277,342 $2,537,207
Cost of goods sold................................... 730,774 849,042 2,128,653 2,378,948
-------- -------- ---------- ----------
Gross profit..................................... 51,949 55,338 148,689 158,259
Operating and administrative expenses................ 41,461 43,222 120,395 128,530
-------- -------- ---------- ----------
Operating income................................. 10,488 12,116 28,294 29,729
Interest expense, net................................ 3,290 2,656 9,551 8,539
Debt refinancing costs............................... 318 318 955 955
-------- -------- ---------- ----------
Income before income taxes....................... 6,880 9,142 17,788 20,235
Income tax expense................................... 3,262 4,205 8,434 9,308
-------- -------- ---------- ----------
Net income....................................... $ 3,618 $ 4,937 $ 9,354 $ 10,927
======== ======== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
-4-
CORE-MARK INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands of Dollars)
(Unaudited)
Nine Months
Ended September 30,
---------------------
2000 2001
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income...................................................................... $ 9,354 $ 10,927
Adjustments to reconcile net income to net cash provided by operating
activities:
LIFO expense............................................................... 1,650 5,167
Amortization of goodwill................................................... 1,562 1,562
Depreciation and amortization.............................................. 4,863 5,687
Amortization of debt refinancing fees...................................... 955 955
Deferred income taxes...................................................... 947 1,974
Other...................................................................... 1,516 501
Changes in operating assets and liabilities................................ 19,994 39,747
-------- --------
Net cash provided by operating activities....................................... 40,841 66,520
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment........................................ (6,023) (4,559)
-------- --------
Net cash used in investing activities........................................... (6,023) (4,559)
-------- --------
FINANCING ACTIVITIES:
Net payments under accounts receivable securitization...................... (25,000) (30,000)
Net payments under revolving credit agreement.............................. (7,733) (26,617)
-------- --------
Net cash used in financing activities........................................... (32,733) (56,617)
-------- --------
Effects of changes in foreign exchange rates.................................... (711) (1,021)
-------- --------
Increase in cash................................................................ 1,374 4,323
Cash, beginning of period....................................................... 17,279 28,129
-------- --------
CASH, END OF PERIOD............................................................. $ 18,653 $ 32,452
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during the period for:
Interest................................................................... $ 11,270 $ 10,679
Income taxes............................................................... 9,712 7,054
See Notes to Condensed Consolidated Financial Statements.
-5-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 2001, the
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 2000 and 2001, and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 2000 and
2001 have been prepared by Core-Mark International, Inc. and subsidiaries (the
"Company"). In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company at September 30, 2001, and of the results of its operations and
cash flows for the interim periods then ended, have been included. The results
of operations for the interim periods are not necessarily indicative of the
operating results for the full year.
The condensed consolidated balance sheet as of December 31, 2000, is
derived from the audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. The notes accompanying the consolidated financial statements
of the Company included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 ("2000 Form 10-K") include a description of the
Company's significant accounting policies and additional information pertinent
to an understanding of both the December 31, 2000 balance sheet and the interim
financial statements included herein.
2. INVENTORIES
The condensed consolidated financial statements have been prepared using
the LIFO method of accounting for inventories. The use of the LIFO method
resulted in an increase in cost of goods sold and a corresponding decrease in
inventories of $0.8 million and $0.2 million for the three months ended
September 30, 2000 and 2001, respectively, and $1.7 million and $5.2 million for
the nine months ended September 30, 2000 and 2001, respectively. Interim LIFO
calculations are based on management's estimates of year-end inventory levels
and inflation rates for the year.
3. EXCISE TAXES
State and provincial excise taxes on cigarettes included in sales and cost
of goods sold were $153.2 million and $162.3 million for the three months ended
September 30, 2000 and 2001, respectively, and $449.3 million and $464.7 million
for the nine months ended September 30, 2000 and 2001, respectively.
4. NEW ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires entities that have
securitized financial assets to provide specific disclosures. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The Company adopted the standard
effective April 1, 2001, as required. The adoption of SFAS No. 140 did not have
a material impact on the Company's consolidated financial statements.
In June 2001, the FASB approved for issuance SFAS No. 141, "Business
Combinations" and SFAS No.142, "Goodwill and Other Intangible Assets". SFAS No.
141 addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination and SFAS No. 142 addresses
the initial recognition and measurement of intangibles assets acquired outside
of a business combination whether acquired individually or with a group of other
assets. SFAS No. 142 also addresses the recognition and measurement of goodwill
and other intangibles assets subsequent to their acquisition. SFAS No. 141 is
applicable to business combinations beginning July 1, 2001. The Company is
required to adopt SFAS No. 142 no later than its fiscal year beginning January
1, 2002 at which time goodwill will no longer be amortized but will be required
to be tested for impairment at least annually at the reporting unit level.
Intangible assets are required to be tested for impairment. Intangible assets
with definitive useful lives will be amortized over their useful life and
intangible assets with an indefinite useful life are not amortized until a
definitive useful life is determined. The Company is evaluating the impact that
the adoption of SFAS No. 141 and SFAS No. 142 will have on its financial
position, results of operations and cash flows. Upon implementation of the
statement, the Company will cease to record amortization expense, which will
total $2.1 million for the fiscal year ended December 31, 2001.
-6-
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 will become effective for Core-Mark on
January 1, 2002. The Company is currently analyzing the effect that this
standard will have on its financial statements, but does not expect a material
impact.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 will become effective
for Core-Mark on January 1, 2002. The Company is currently analyzing the effect
that this standard will have on its financial statements, but does not expect a
material impact.
5. COMPREHENSIVE INCOME
The Company's total comprehensive income was $3.3 million and $4.0 million
for the three months ended September 30, 2000 and 2001 respectively, and $8.6
million and $9.7 million for the nine months ended September 30, 2000 and 2001
respectively, which included net income and other comprehensive income and
losses related to foreign currency translation adjustments.
6. SEGMENT INFORMATION
Management has determined that the only reportable segment of the Company
is its wholesale distribution segment, based on the level at which executive
management reviews the results of operations in order to make decisions
regarding performance assessment and resource allocation. There has been no
change in the segment reported or the basis of measurement of segment profit or
loss from that which was reported in the Company's 2000 Form 10-K. Wholesale
distribution segment information for the three-month and nine-month periods
ended September 30, and asset information as of December 31, 2000 and September
30, 2001 is set forth below (dollars in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- ------------------------
2000 2001 2000 2001
-------- -------- ---------- ----------
Net sales to external customers............................... $782,723 $904,380 $2,277,342 $2,537,207
Segment pretax operating income (1).......................... $ 7,476 $ 8,579 $ 19,960 $ 19,422
Less: Goodwill and other unallocated amortization ............ 594 592 1,776 1,768
Interest income: unallocated and other.................. (316) (1,473) (559) (3,536)
Amortization of debt refinancing costs.................. 318 318 955 955
-------- -------- ---------- ----------
Consolidated income before income taxes....................... $ 6,880 $ 9,142 $ 17,788 $ 20,235
======== ======== ========== ==========
Assets December 31, September 30,
2000 2001
-------- --------
Segment information........................................... $362,593 $325,376
Add: Corporate and other...................................... 12,283 13,382
-------- --------
Consolidated assets........................................... $374,876 $338,758
======== ========
- -----------------------------------------------------------------------
(1) Represents operating income, including allocated interest expense, but
excluding amortization of goodwill and debt refinancing costs, and income
taxes.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Management's
Discussion and Analysis and the discussion under the heading "Legal Proceedings
- - Regulatory and Legislative Matters" included in the Company's 2000 Form 10-K.
GENERAL
The Company is one of the largest broad-line, full-service wholesale
distributors of packaged consumer products to the convenience retail industry in
western North America. The products distributed by the Company include
cigarettes, food products such as candy, fast food, snacks, groceries and
non-alcoholic beverages, and non-food products such as film, batteries and other
sundries, health and beauty care products and tobacco products other than
cigarettes. For the nine months ended September 30, 2001, approximately 72%, 19%
and 9% of the Company's net sales were derived from cigarettes, food products
and non-food products, respectively.
TOBACCO INDUSTRY BUSINESS ENVIRONMENT
Manufacturers and distributors of cigarettes and other tobacco products are
currently facing a number of significant issues that affect the business
environment in which they operate including proposed additional governmental
regulation; actual and proposed excise tax increases (see "Impact of Tobacco
Taxes " below); increased litigation involving health and other effects of
cigarette smoking and other uses of tobacco; and litigation by the U.S.
Department of Justice to recover federal Medicare costs allegedly connected to
smoking. The tobacco industry is also currently subject to significant
regulatory restrictions, such as the requirement that product packages display
warning labels, a prohibition on television and radio advertising and
prohibitions on sales to minors.
In August 1996, the United States Food and Drug Administration (the "FDA")
determined that it had jurisdiction over cigarettes and smokeless tobacco
products and issued regulations restricting the sale, distribution and
advertising of cigarettes and smokeless tobacco products, especially to minors.
The FDA regulations are significant not only because of their substance, but
also because the FDA determined that it has jurisdiction over cigarettes and
smokeless tobacco as "combination products having both a drug component,
including nicotine, and device components." The regulations regulate such
products as "devices." The major U.S. tobacco manufacturers challenged the
jurisdiction of the FDA to regulate tobacco products as "drugs" or "devices" and
in April 1997 the U.S. District Court for the Middle District of North Carolina
held that the FDA could impose restrictions on access to and labeling of tobacco
products, but did not have authority to restrict the promotion and advertisement
of such products. The court stayed implementation of the FDA regulations except
for those establishing a federal minimum age of 18 for the sale of tobacco
products and requiring proof of age for anyone under the age of 27. On August
14, 1998, however, the United States Court of Appeals for the Fourth Circuit
reversed the decision of the District Court, finding that the FDA lacked
statutory authority to regulate tobacco products altogether. The FDA's petition
for review was granted by the Supreme Court, and on March 21, 2000, the Supreme
Court ruled 5-4 that the FDA did not have authority to regulate tobacco
products.
In response to the Supreme Court ruling, legislation has recently been
introduced in Congress that would grant authority to the FDA to regulate tobacco
products. One cigarette manufacturer expressed interest in such legislation but
the remaining companies have stated their opposition. The prospects for this
legislation are uncertain.
In June 1997, a so called "national settlement" of many of these issues was
proposed following negotiations among major U.S. tobacco manufacturers, state
attorneys general, representatives of the public health community and attorneys
representing plaintiffs in certain smoking and health litigation. The national
settlement required implementation by federal legislation, however, and such
legislation was considered but not passed by the Congress in 1998.
-8-
In light of the failure of the national settlement legislation, in November
1998, 46 states, five territories and the District of Columbia entered into a
settlement of approximately $250 billion with four major tobacco companies to
resolve litigation over smoking-related costs incurred by state Medicaid
programs. The settlement - which takes effect in each settling jurisdiction when
the courts in each such jurisdiction enter a final consent decree and any
appeals of such decree are disposed of or become time-barred - allows for
payment of the agreed sum by the cigarette manufacturers over 25 years, settles
the state and territory health-care claims against the tobacco industry and
imposes a number of new marketing, advertising, sales and other restrictions on
tobacco products.
Included in the terms of the settlement are conditions that tobacco
companies participating in the settlement may not: target youth in the
advertising, promotion or marketing of tobacco products (including the use of
cartoons in such promotion); use tobacco brand names to sponsor concerts,
athletics events or other events in which a significant percentage of the
audience is under 18 years of age; advertise products in conspicuous places
outdoors (such as billboards) or on transit vehicles; merchandise a tobacco
brand name through the marketing, distribution or sale of apparel or other
merchandise; provide free samples of tobacco products in any area except an
adults-only facility; distribute or sell cigarettes in pack sizes of less than
20; or lobby state legislatures on certain anti-tobacco initiatives (such as
limitations on youth access to vending machines). These provisions took effect
by April 23, 1999.
Over the past decade, various state and local governments have imposed
significant regulatory restrictions on tobacco products, including sampling and
advertising bans or restrictions, packaging regulations and prohibitions on
smoking in restaurants, office buildings and public places. With a limited
number of exceptions, the state Medicaid litigation settlement prohibits the
participating tobacco manufacturers from challenging any restriction relating to
tobacco control enacted prior to June 1, 1998. Additional state and local
legislative and regulatory actions are being considered and are likely to be
promulgated in the future. The Company is unable to assess the future effects
that these various proposals may have on the sale of the Company's products.
On September 22, 1999, the U.S. Department of Justice filed "an action to
recover health care costs paid for and furnished...by the federal government for
lung cancer, heart disease, emphysema and other tobacco-related illnesses caused
by the fraudulent and tortious conduct of..." the major tobacco manufacturers.
The defendant companies announced that they would fight the litigation, and on
December 27, 1999 moved to dismiss the government's complaint. On September 28,
2000, the U.S. District Court for the District of Columbia dismissed some of the
government's claims but allowed the case to precede on two "civil RICO" grounds,
on which all parties have filed procedural motions that the court continues to
review. A recent offer by the Justice Department to settle the litigation has
not been accepted to date and the parties are engaging in discovery and
pre-trial motions. If the Justice Department prevails in the litigation, or if
the litigation is settled, there can be no assurance that the litigation will
not result in increased cigarette prices and/or a material reduction of the
consumption of tobacco products in the United States; such circumstances could
have a material adverse affect on the Company's business and financial position.
In addition, proposals have been made in Congress in recent years to
require additional warning notices on tobacco products, to disallow advertising
and promotional expenses as deductions under federal tax law and to further
regulate the production and distribution of cigarettes and smokeless tobacco.
While neither the FDA regulations, the state Medicaid litigation settlement, nor
recent legislation would impose restrictions on the sale of cigarettes and
smokeless tobacco products to adults, there can be no assurance such
restrictions will not be proposed in the future or that any such proposed
legislation or regulations would not result in a material reduction of the
consumption of tobacco products in the United States or would not have a
material adverse effect on the Company's business and financial position.
On July 14, 2000, a Florida state court jury awarded $145 billion in
punitive damages against the major U.S. tobacco companies to a class of Florida
smokers who allegedly died or became ill due to cigarette smoking. The tobacco
companies have moved to set aside the award and remove the case to federal
court. On November 3, 2000, U.S. District Judge Ursula Ungaro - Benages of the
Southern District of Florida denied the defendants motion to remove the case to
federal court. The $145 billion judgment was returned to the state court for
further proceedings. On November 6, 2000, the Florida state court denied the
defendants' motion to set aside the punitive damage award and rejected the
tobacco companies request for a new trial. The tobacco companies appealed the
judgment. The appeal is pending in the Third District Court of Appeals, 11th and
16th Circuits, in Miami, Florida.
-9-
The Company is subject to various federal, state and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and the presence of hazardous substances in the
workplace and establish standards for vehicle and employee safety and for the
handling of solid and hazardous wastes. These laws include the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Air Act, the Hazardous Materials
Transportation Act and the Occupational Safety and Health Act. Future
developments, such as stricter environmental or employee health and safety laws
and regulations thereunder, could affect the Company's operations. The Company
does not currently anticipate that the cost of its compliance with or of any
foreseeable liabilities under environmental and employee health and safety laws
and regulations will have a material adverse effect on its business and
financial condition.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2000
NET SALES. Net sales for the three months ended September 30, 2001 were
$904.4 million, an increase of $121.7 million or 15.5% over the same period in
2000. The increase in net sales was primarily due to an increase in net sales of
cigarettes, as well as increased sales of food and non-food products in 2001
compared to 2000. While sales increased within the Company's existing customer
base, a significant portion of the increase was attributed to new customer
relationships commencing since September 30, 2000.
Net sales of cigarettes for the three months ended September 30, 2001 were
$645.3 million, an increase of $88.9 million or 16.0% over the same period in
2000. The increase in net sales of cigarettes was principally due to increases
in manufacturers' list prices, which have been passed on to the Company's
customers in the form of higher prices and an increase in carton sales. The
Company's total cigarette unit sales for the three months ended September 30,
2001 were 22.5 million cartons, an increase of 2.0 million cartons or 9.7% from
the same period of 2000. The increase in carton sales was attributable to
increased volume with new and existing customers. Net sales of food and non-food
products for the three months ended September 30, 2001 were $259.1 million, an
increase of $32.7 million or 14.5% over the same period in 2000.
GROSS PROFIT. Gross profit for the three months ended September 30, 2001
was $55.3 million, an increase of $3.4 million or 6.5% over the same period in
2000. The gross profit margin for the three months ended September 30, 2001
decreased to 6.1% of net sales as compared to 6.6% of net sales for the
comparable period in 2000.
For the three months ended September 30, 2001, the Company recognized LIFO
expense of $0.2 million compared to $0.8 million for the comparable period in
2000. The decrease in LIFO expense for the three months ended September 30,
2001, was primarily the result of a cigarette price increase that occurred in
the third quarter of 2000, whereas no such increase occurred in the third
quarter of 2001.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the three months ended September 30, 2001 were $43.2 million, an
increase of $1.8 million or 4.3% over the same period in 2000, which was at a
slower rate than real growth in volume. Such expenses for the three months ended
September 30, 2001 decreased to 4.8% of net sales as compared to 5.3% of net
sales for the same period in 2000, primarily due to the fact that the Company
continues to exert tight control over expenses.
OPERATING INCOME. As a result of the foregoing factors, operating income
for the three months ended September 30, 2001 was $12.1 million, an increase of
$1.6 million or 15.5% over the same period in 2000. As a percentage of net
sales, operating income for the three months ended September 30, 2001 and
September 30, 2000 was 1.3%.
NET INTEREST EXPENSE. Net interest expense for the three months ended
September 30, 2001 was $2.7 million, a decrease of $0.6 million or 19.3% as
compared to the same period in 2000, which resulted from a decrease in the
Company's average debt levels and a decrease in average borrowing rates.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2000
NET SALES. Net sales for the nine months ended September 30, 2001 were
$2,537.2 million, an increase of $259.9 million or 11.4% over the same period in
2000. The increase in net sales was primarily due to an increase in net sales of
cigarettes, as well as increased sales of food and non-food products in 2001
compared to 2000. While sales increased within the Company's existing customer
base, a significant portion of the increase was attributed to new customer
relationships commencing since September 30, 2000.
-10-
Net sales of cigarettes for the nine months ended September 30, 2001 were
$1,821.7 million, an increase of $197.6 million or 12.2% over the same period in
2000. The increase in net sales of cigarettes was principally due to increases
in manufacturers' list prices, which have been passed on to the Company's
customers in the form of higher prices, and an increase in carton sales. The
Company's total cigarette unit sales for the nine months ended September 30,
2001 were 64.2 million cartons, an increase of 4.1 million cartons or 6.8% from
the same period of 2000. Cigarette carton sales in the U.S. increased by 3.8
million cartons or 7.7% compared to the same period in 2000. The increase in
carton sales was attributable to increased volume with new and existing
customers. Net sales of food and non-food products for the nine months ended
September 30, 2001 were $715.5 million, an increase of $62.2 million or 9.5%
over the same period in 2000.
GROSS PROFIT. Gross profit for the nine months ended September 30, 2001 was
$158.3 million, an increase of $9.6 million or 6.4% over the same period in
2000. The gross profit margin for the nine months ended September 30, 2001
decreased to 6.2% of net sales as compared to 6.5% of net sales for the
comparable period in 2000.
For the nine months ended September 30, 2001, the Company recognized LIFO
expense of $5.2 million compared to $1.7 million for the comparable period in
2000. The increase in LIFO expense for the nine months ended September 30, 2001,
was primarily the result of a cigarette price increase that occurred in the
first nine months of 2001, which was substantially in excess of the increases
occurring in the first nine months of 2000.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses for the nine months ended September 30, 2001 were $128.5 million, an
increase of $8.1 million or 6.8% over the same period in 2000. However, such
expenses for the nine months ended September 30, 2001 decreased to 5.1% of net
sales as compared to 5.3% for the same period in 2000, primarily due to the fact
that the Company continues to exert tight control over expenses.
OPERATING INCOME. As a result of the foregoing factors, operating income
for the nine months ended September 30, 2001 was $29.7 million, an increase of
$1.4 million or 5.1% as compared to the same period in 2000. As a percentage of
net sales, operating income for the nine months ended September 30, 2001 and
September 30, 2000 was 1.2%.
NET INTEREST EXPENSE. Net interest expense for the nine months ended
September 30, 2001 was $8.5 million, a decrease of $1.0 million or 10.6%
compared to 2000, which resulted from a decrease in the Company's average debt
levels and a decrease in average borrowing rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise primarily from the funding of
its working capital needs, capital expenditure programs and debt service
requirements with respect to its credit facilities. The Company has no mandatory
reductions of principal on its Revolving Credit Facility, its Accounts
Receivable Facility or its $75 million Senior Subordinated Notes prior to their
final maturities in 2003. The Company has historically financed its operations
through internally generated funds and borrowings under its credit facilities.
The Company's debt obligations totaled $130.0 million at September 30,
2001, a decrease of $56.6 million or 30.3% from $186.6 million at December 31,
2000. The net decrease in outstanding debt is primarily due to decreased
borrowings needed to finance working capital funding requirements. Debt
requirements are generally the highest at December 31, when the Company
historically carries higher inventory.
The Company's principal sources of liquidity are net cash provided by
operating activities and its credit facilities. At year end the Company
typically carries higher inventories which are then liquidated in future
periods. Therefore, net cash provided by operating activities is typically
higher at interim periods than at the end of any fiscal year.
The Company made capital expenditures of $4.6 million for the nine months
ended September 30, 2001, primarily related to warehouse and equipment
purchases. For the remainder of 2001, the Company estimates it will spend
approximately $3 to $4 million on similar capital requirements.
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IMPACT OF TOBACCO TAXES
State and Canadian provincial tobacco taxes represent a significant portion
of the Company's net sales and cost of goods sold attributable to cigarettes and
other tobacco products. In the first nine months of 2001, such taxes on
cigarettes represented approximately 23% of cigarette net sales in the U.S. and
43% in Canada. In general, such taxes have been increasing, and many states and
Canadian provinces are currently weighing proposals for higher excise taxes on
cigarettes and other tobacco products.
Under current law, almost all state and Canadian provincial taxes are
payable by the Company under credit terms which, on the average, exceed the
credit terms the Company has approved for its customers to pay for products
which include such taxes. This practice has benefited the Company's cash flow.
If the Company were required to pay such taxes at the time such obligation was
incurred without the benefit of credit terms, the Company would incur a
substantial permanent increase in its working capital requirements and might be
required to seek additional financing in order to meet such higher working
capital requirements. Consistent with industry practices, the Company has
secured a bond to guarantee its tax obligations to those states and provinces
requiring such a surety (a majority of states in the Company's operating areas).
The U.S. federal excise tax on cigarettes is currently $3.40 per carton of
cigarettes. The federal excise tax will increase by $.50 per carton of
cigarettes in 2002. Unlike the state and provincial taxes described above, U.S.
federal excise taxes on cigarettes are paid by the cigarette manufacturers and
passed through to the Company as a component of the cost of cigarettes. Such
increases in U.S. federal taxes will increase the Company's working capital
requirements by increasing the balances of its inventories and accounts
receivable. Legislation has been introduced in Congress in 2001 to further
increase the federal excise tax on cigarettes, but prospects for its passage are
uncertain.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no material change in its exposure to
market risk from that discussed in the Company's 2000 Consolidated Financial
Statements.
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PART II - OTHER INFORMATION
Item 1: Legal Proceedings
As previously reported, in November 1999, the Company was named in two
separate law suits filed in State Court in New Mexico by two individual
plaintiffs. The other defendants include the principal U.S. tobacco
manufacturers, as well as other distributors. The complaints seek compensatory
and punitive damages for injuries allegedly caused by the use of tobacco
products. During the first quarter of 2001, the Company was dismissed from one
of the above cases.
The Company does not believe the remaining suit above will have a material
adverse effect on the Company's financial condition. The Company has been
indemnified with respect to certain claims alleged in the remaining suit above.
In addition, the Company is a party to other lawsuits incurred in the
ordinary course of its business. The Company believes it is adequately insured
with respect to such lawsuits or that such lawsuits will not result in losses
material to its consolidated financial position or results of operations.
Item 2: Changes in Securities and Use of Proceeds
Not applicable
Item 3: Defaults Upon Senior Securities
Not applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable
Item 5: Other Information
Not applicable
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K:
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of South San Francisco,
California, on November 12, 2001.
CORE-MARK INTERNATIONAL, INC.
By /s/ Leo F. Korman
-----------------------------------
Leo F. Korman, Senior Vice President and
Chief Financial Officer
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