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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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: 000-51515
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13186599&doc=11
Core-Mark Holding Company, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
20-1489747
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
1500 Solana Boulevard, Suite 3400
76262
Westlake,
Texas
 
(Address of principal executive offices)
(Zip Code)
(940) 293-8600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CORE
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     Yes      No  
As of November 1, 2019, 45,567,274 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.



FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS

CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
(Unaudited)
 
September 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
26.0

 
$
27.3

Accounts receivable, net of allowance for doubtful accounts of $13.0 and $8.3 as of September 30, 2019 and December 31, 2018, respectively
428.7

 
403.5

Other receivables, net
111.2

 
89.4

Inventories, net (Note 3)
870.0

 
689.0

Deposits and prepayments
95.7

 
78.8

Total current assets
1,531.6

 
1,288.0

Property and equipment, net
239.6

 
229.0

Operating lease right-of-use assets (Note 4)
208.5

 

Goodwill
72.8

 
72.8

Other intangible assets, net
46.7

 
51.1

Other non-current assets, net
30.1

 
25.2

Total assets
$
2,129.3

 
$
1,666.1

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
274.4

 
$
199.8

Book overdrafts
41.7

 
49.4

Cigarette and tobacco taxes payable
238.0

 
297.8

Operating lease liabilities (Note 4)
40.3

 

Accrued liabilities
157.8

 
134.0

Total current liabilities
752.2

 
681.0

Long-term debt (Note 5)
535.9

 
346.2

Deferred income taxes
27.8

 
27.1

Long-term operating lease liabilities (Note 4)
181.2

 

Other long-term liabilities
5.8

 
14.6

Claims liabilities
34.8

 
30.2

Total liabilities
1,537.7

 
1,099.1

Contingencies (Note 6)

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value (150,000,000 shares authorized; 52,700,663 and 52,524,853 shares issued; 45,645,090 and 45,703,705 shares outstanding at September 30, 2019 and December 31, 2018, respectively)
0.5

 
0.5

Additional paid-in capital
288.3

 
283.3

Treasury stock at cost (7,055,573 and 6,821,148 shares of common stock at September 30, 2019 and December 31, 2018, respectively)
(98.7
)
 
(90.6
)
Retained earnings
407.8

 
381.6

Accumulated other comprehensive loss
(6.3
)
 
(7.8
)
Total stockholders’ equity
591.6

 
567.0

Total liabilities and stockholders’ equity
$
2,129.3

 
$
1,666.1

______________________________________________
See accompanying notes to condensed consolidated financial statements.

1

Table of Contents

CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019

2018
 
2019
 
2018
Net sales
$
4,422.6

 
$
4,273.2

 
$
12,515.7

 
$
12,305.6

Cost of goods sold
4,176.0

 
4,039.4

 
11,822.0

 
11,655.1

Gross profit
246.6

 
233.8

 
693.7

 
650.5

Warehousing and distribution expenses
148.6

 
137.6

 
426.0

 
404.2

Selling, general and administrative expenses
61.8

 
58.8

 
192.3

 
183.9

Amortization of intangible assets
2.3

 
2.5

 
7.7

 
7.6

Total operating expenses
212.7

 
198.9

 
626.0

 
595.7

Income from operations
33.9

 
34.9

 
67.7

 
54.8

Interest expense, net
(4.2
)
 
(3.4
)
 
(10.8
)
 
(10.6
)
Foreign currency transaction gains (losses), net
0.9

 
(0.4
)
 
(0.3
)
 
0.5

Income before income taxes
30.6

 
31.1

 
56.6

 
44.7

Provision for income taxes
(8.1
)
 
(7.4
)
 
(15.1
)
 
(11.3
)
Net income
$
22.5

 
$
23.7

 
$
41.5

 
$
33.4

 
 
 
 
 
 
 
 
Basic earnings per share (Note 7)
$
0.49

 
$
0.52

 
$
0.91

 
$
0.72

 
 
 
 
 
 
 
 
Diluted earnings per share (Note 7)
$
0.49

 
$
0.51

 
$
0.90

 
$
0.72

 
 
 
 
 
 
 
 
Basic weighted-average shares (Note 7)
45.8

 
45.9

 
45.8

 
46.1

 
 
 
 
 
 
 
 
Diluted weighted-average shares (Note 7)
46.1

 
46.2

 
46.1

 
46.2

______________________________________________
See accompanying notes to condensed consolidated financial statements.


2

Table of Contents

CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
22.5

 
$
23.7

 
$
41.5

 
$
33.4

 
 
 
 
 
 
 
 
Foreign currency translation (losses) gains, net
(1.5
)
 
1.2

 
1.5

 
(1.9
)
           Other comprehensive (loss) income, net of tax
(1.5
)
 
1.2

 
1.5

 
(1.9
)
Comprehensive income
$
21.0

 
$
24.9

 
$
43.0

 
$
31.5

______________________________________________
See accompanying notes to condensed consolidated financial statements.


3

Table of Contents

CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except per share amounts)
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
Total stockholders’ equity, beginning balances
 
$
580.8

 
$
547.9

 
$
567.0

 
$
555.2

 
 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
 
Beginning and ending balances
 
$
0.5

 
$
0.5

 
$
0.5

 
$
0.5

 
 
 
 
 
 
 
 
 
Additional paid-in capital:
 
 
 
 
 
 
 
 
Beginning balances
 
$
285.3

 
$
279.6

 
$
283.3

 
$
276.8

Common stock issued, net of shares withheld for employee taxes
 
(0.1
)
 
(0.2
)
 
(2.2
)
 
(1.8
)
Stock-based compensation expense
 
3.1

 
2.0

 
7.2

 
6.4

Ending balances
 
$
288.3

 
$
281.4

 
$
288.3

 
$
281.4

 
 
 
 
 
 
 
 
 
Treasury stock:
 
 
 
 
 
 
 
 
Beginning balances
 
$
(90.6
)
 
$
(82.6
)
 
$
(90.6
)
 
$
(75.1
)
Repurchase of common stock
 
(8.1
)
 
(5.0
)
 
(8.1
)
 
(12.5
)
Ending balances
 
$
(98.7
)
 
$
(87.6
)
 
$
(98.7
)
 
$
(87.6
)
 
 
 
 
 
 
 
 
 
Retained earnings:
 
 
 
 
 
 
 
 
Beginning balances
 
$
390.4

 
$
355.6

 
$
381.6

 
$
355.1

Net income
 
22.5

 
23.7

 
41.5

 
33.4

Dividends declared
 
(5.1
)
 
(4.8
)
 
(15.3
)
 
(14.0
)
Ending balances
 
$
407.8

 
$
374.5

 
$
407.8

 
$
374.5

 
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss:
 
 
 
 
 
 
 
 
Beginning balances
 
$
(4.8
)
 
$
(5.2
)
 
$
(7.8
)
 
$
(2.1
)
Other comprehensive (loss) gain
 
(1.5
)
 
1.2

 
1.5

 
(1.9
)
Ending balances
 
$
(6.3
)
 
$
(4.0
)
 
$
(6.3
)
 
$
(4.0
)
 
 
 
 
 
 
 
 
 
Total stockholders’ equity, ending balances
 
$
591.6

 
$
564.8

 
$
591.6

 
$
564.8

 
 
 
 
 
 
 
 
 
Common stock shares:
 
 
 
 
 
 
 
 
Beginning share balance
 
52.7

 
52.5

 
52.5

 
52.4

Common stock issued, net of shares withheld for employee taxes
 

 

 
0.2

 
0.1

Ending share balance
 
52.7

 
52.5

 
52.7

 
52.5

 
 
 
 
 
 
 
 
 
Treasury stock shares:
 
 
 
 
 
 
 
 
Beginning share balance
 
(6.8
)
 
(6.5
)
 
(6.8
)
 
(6.2
)
Repurchase of common stock
 
(0.3
)
 
(0.2
)
 
(0.3
)
 
(0.5
)
Ending share balance
 
(7.1
)
 
(6.7
)
 
(7.1
)
 
(6.7
)
 
 
 
 
 
 
 
 
 
Total shares outstanding
 
45.6

 
45.8

 
45.6

 
45.8

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.11

 
$
0.10

 
$
0.33

 
$
0.30



4

Table of Contents

CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
41.5

 
$
33.4

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
LIFO and inventory provisions
21.4

 
20.5

Amortization of debt issuance costs
0.6

 
0.6

Stock-based compensation expense
7.2

 
6.4

Bad debt expense, net
5.4

 
1.8

Loss on disposals
0.1

 
0.6

Depreciation and amortization
45.8

 
44.5

Foreign currency losses (gains), net
0.3

 
(0.5
)
Deferred income taxes
0.5

 
2.0

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(29.9
)
 
9.9

Other receivables, net
(21.6
)
 
(2.1
)
Inventories, net
(199.5
)
 
14.1

Deposits, prepayments and other non-current assets
(22.9
)
 
53.9

Accounts payable
74.2

 
49.2

Cigarette and tobacco taxes payable
(61.3
)
 
(71.9
)
Claims, accrued and other long-term liabilities
27.1

 
29.7

Net cash (used in) provided by operating activities
(111.1
)
 
192.1

Cash flows from investing activities:
 
 
 
Acquisition of business
(2.5
)
 
(2.5
)
Additions to property and equipment, net
(15.3
)
 
(14.9
)
Capitalization of software and related development costs
(3.3
)
 
(1.6
)
Proceeds from sale of property and equipment, net
0.2

 
0.1

Net cash used in investing activities
(20.9
)
 
(18.9
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
1,334.6

 
1,276.1

Repayments under revolving credit facility
(1,166.6
)

(1,414.3
)
Payments on finance leases
(3.6
)
 
(2.0
)
Dividends paid
(15.2
)
 
(13.9
)
Repurchases of common stock
(8.1
)
 
(12.5
)
Tax withholdings related to net share settlements of restricted stock units
(2.2
)
 
(1.6
)
Decrease in book overdrafts
(7.7
)
 
(9.5
)
Net cash provided by (used in) financing activities
131.2

 
(177.7
)
Effects of changes in foreign exchange rates
(0.5
)
 
0.7

Change in cash and cash equivalents
(1.3
)
 
(3.8
)
Cash and cash equivalents, beginning of period
27.3

 
41.6

Cash and cash equivalents, end of period
$
26.0

 
$
37.8

Supplemental disclosures:
 
 
 
Cash (paid) received during the period for:
 
 
 
Income taxes, net
$
(13.6
)
 
$
9.7

Interest
$
(9.1
)
 
$
(9.2
)
Unpaid property and equipment purchases included in accrued liabilities
$

 
$
0.6

Non-cash transactions between other non-current assets and other long-term liabilities
$
4.7

 
$



______________________________________________
See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Summary of Company Information and Basis of Presentation
Business
Core-Mark Holding Company, Inc., and its subsidiaries (collectively referred to herein as “the Company” or “Core-Mark”), are one of the largest marketers of fresh, food and broad-line supply solutions to the convenience retail industry in North America. The Company offers a full range of products, marketing programs and technology solutions to approximately 43,000 customer locations in the United States (“U.S.”) and Canada. The Company’s customers include traditional convenience stores, drug stores, mass merchants, grocery stores, liquor stores and other specialty and small format stores that carry convenience products. The Company’s product offering includes cigarettes, other tobacco products, alternative nicotine products, candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health and beauty care products. The Company operates a network of thirty-two distribution centers in the U.S. and Canada (excluding two distribution facilities it operates as a third-party logistics provider). Twenty-seven distribution centers are located in the U.S. and five are located in Canada.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated balance sheet as of September 30, 2019, the unaudited condensed consolidated statements of operations and comprehensive income, the unaudited condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2019 and 2018, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. Accordingly, certain footnotes and other financial information that are normally required by generally accepted accounting principles in the U.S. (“GAAP”) have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2018 has been derived from the Company’s audited financial statements, which are included in its 2018 Annual Report on Form 10-K, filed with the SEC on March 1, 2019.
The consolidated financial statements include Core-Mark and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
The unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements in its Annual Report on Form 10-K, for the year ended December 31, 2018.
The unaudited condensed consolidated interim financial statements include all adjustments necessary for the fair presentation of the Company’s consolidated results of operations, financial position, comprehensive income, changes in stockholders’ equity and cash flows.  Results for the interim periods are not necessarily indicative of results to be expected for the full year or any other future periods.
Subsequent to the issuance of the Company’s interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018, management determined that the amount of foreign currency translation loss disclosed for the nine months ended September 30, 2018 was overstated by $0.9 million in the condensed consolidated statement of comprehensive income, which also impacted retained earnings and accumulated other comprehensive loss by the same amount as of September 30, 2018, as currently presented in the condensed consolidated statement of stockholders’ equity.  The impacted financial statement line items have been adjusted in the prior periods presented to correct for this overstatement.
2.
Summary of Significant Accounting Policies
Adoption of Other Accounting Pronouncements
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes the lease accounting requirements in ASC 840. The most significant among the changes in ASU 2016-02 is the recognition of right-of-use (“ROU”) assets and corresponding lease liabilities for leases classified as operating leases. The accounting for finance leases, which were classified as capital leases under historical GAAP, remains substantially unchanged. The lease liabilities are equal to the present value of the remaining lease payments while the ROU asset is determined based on the amount of the lease liability, plus initial direct costs incurred less lease incentives. The Company elected the optional transition method to apply ASU 2016-02 prospectively at adoption effective January 1, 2019, which resulted in recognition of additional lease assets of approximately $232.1 million, lease liabilities of $244.9 million, and a decrease of deferred rent recorded under ASC 840 of $12.8 million. Comparative periods presented in the Consolidated Financial Statements prior to January 1, 2019 continue to be

6

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presented under ASC 840. The Company has implemented internal controls and new lease software to assist with future reporting. ASU 2016-02 does not have an impact on the Company’s debt-covenant compliance under its current revolving credit facility.
In accordance with an accounting policy election under ASU 2016-02, the Company does not recognize assets or liabilities for leases with an initial term of twelve months or less; these short-term lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term. The Company elected the package of practical expedients within ASU 2016-02 that allows an entity to not reassess, prior to the effective date, (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases. The Company also elected the practical expedient to combine lease and non-lease components for all asset classes.
Recent Accounting Standards or Updates Not Yet Effective
On January 26, 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”).  The new guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  ASU 2017-04 requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill.  ASU 2017-04 requires prospective application and is effective for annual periods beginning after December 15, 2019.  ASU 2017-04 will require the Company to amend its methodology for determining any goodwill impairment calculations beginning in 2020.
Concentration of Credit Risks
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash investments, accounts receivable and other receivables. The Company places its cash and cash equivalents in short-term instruments with high-quality financial institutions and limits the amount of credit exposure in any one financial instrument.
A credit review is completed for new customers and ongoing credit evaluations of each customer’s financial condition are performed periodically, with reserves maintained for potential credit losses. Credit limits given to customers are based on a risk assessment of their ability to pay and other factors. Accounts receivables are typically not collateralized, but the Company may require prepayments or other guarantees whenever deemed necessary.
Murphy U.S.A., the Company’s largest customer, accounted for approximately 13% of the Company’s net sales for the three and nine months ended September 30, 2019 and approximately 12% of the Company’s net sales for the three and nine months ended September 30, 2018. No other customers individually accounted for more than 10% of sales for these periods. No single customer accounted for 10% or more of the Company’s accounts receivables as of September 30, 2019 or December 31, 2018.
3.
Inventories, net
Inventories consist of the following (in millions):
 
September 30,
2019
 
December 31,
2018
Inventories at FIFO, net of reserves
$
1,068.8

 
$
866.1

Less: LIFO reserve
(198.8
)
 
(177.1
)
Total inventories, net of reserves
$
870.0

 
$
689.0


Cost of goods sold reflects the application of the last-in, first-out (“LIFO”) method of valuing inventories in the U.S. based upon estimated annual producer price indexes. Inventories in Canada are valued on a first-in, first-out (“FIFO”) basis, as LIFO is not a permitted inventory valuation method in Canada. During periods of rising prices, the LIFO method of costing inventories generally results in higher current costs being charged against income while lower costs are retained in inventories. Conversely, during periods of decreasing prices, the LIFO method of costing inventories generally results in lower current costs being charged against income and higher stated inventories. If the FIFO method had been used for valuing inventories in the U.S., inventories would have been approximately $198.8 million and $177.1 million higher as of September 30, 2019 and December 31, 2018, respectively. The Company recorded LIFO expense of $7.3 million and $7.2 million for the three months ended September 30, 2019 and 2018, respectively, and $21.7 million and $20.0 million for the nine months ended September 30, 2019 and 2018, respectively.
4.
Leases
The Company leases warehouse facilities, trucks, office equipment and certain sales offices. Certain of the Company’s real estate leases include one or more options to renew the applicable lease agreement, with the exercise of renewal options at the Company’s sole discretion; the Company generally includes only one real estate lease extension option in the recognition of ROU assets and lease liabilities. Certain of the Company’s vehicle leases have residual value guarantees.

7

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Leases with an initial term of twelve months or less are not recorded on the balance sheet; the Company recognizes lease expenses for such leases on a straight-line basis over the lease term. The majority of the Company’s lease payments are fixed and are incorporated into the ROU lease assets and liabilities. However, certain vehicle leases have variable payments, such as per-mile charges, which are expensed as incurred. The Company combines lease components and non-lease components for all asset classes for purposes of recognizing lease assets and liabilities.
Leases consist of the following (in millions):
Assets
Classification
 
September 30,
2019
Operating
Operating lease ROU assets
 
$
208.5

Finance
Property and equipment, net
 
49.1

Total leases
 
 
$
257.6

 
 
 
 
Liabilities
 
 
 
Current:
 
 
 
Operating
Operating lease liabilities
 
$
40.3

Finance
Accrued liabilities
 
6.9

Non-current:
 
 
 
Operating
Long-term operating lease liabilities
 
181.2

Finance
Long-term debt
 
47.9

Total lease liabilities
 
 
$
276.3


The components of lease costs were as follows (in millions):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2019
 
September 30, 2019
Operating lease cost
 
$
13.0

 
$
38.9

Finance lease cost:
 
 
 
 
Amortization of leased assets
 
1.6

 
3.9

Interest on lease liabilities
 
0.6

 
1.5

Short-term lease cost
 
0.4

 
1.2

Variable lease cost
 
4.9

 
16.3

Net lease cost
 
$
20.5

 
$
61.8


Maturity of lease liabilities as of September 30, 2019, were as follows (in millions):
 
Operating leases
 
Finance leases
 
Total
2019
$
12.8

 
$
2.4

 
$
15.2

2020
48.7

 
9.2

 
57.9

2021
41.8

 
8.6

 
50.4

2022
33.5

 
8.5

 
42.0

2023
26.2

 
8.2

 
34.4

2024 and thereafter
103.4

 
29.5

 
132.9

Total lease payments
266.4

 
66.4

 
332.8

Less: interest
(44.9
)
 
(11.6
)
 
(56.5
)
Present value of lease liabilities
$
221.5

 
$
54.8

 
$
276.3



8

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Weighted-average remaining lease term and weighted-average discount rate regarding the Company’s leases were as follows:
Lease term
 
 
 
September 30,
2019
Weighted-average remaining lease term (years):
 
 
 
 
Operating
 
 
 
7.3

Finance
 
 
 
8.0

Discount rate
 
 
 
 
Weighted-average discount rate:
 
 
 
 
Operating
 
 
 
4.8
%
Finance
 
 
 
4.8
%
Other information regarding the Company’s leases were as follows (in millions):
 
Nine Months Ended
 
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows used by operating leases
$
38.5

Operating cash flows used by finance leases
$
1.5

Financing cash flows used by finance leases
$
3.6

Lease liabilities arising from obtaining new ROU assets:
 
Operating leases
$
7.0

Finance leases
$
29.3


As of September 30, 2019, the Company had approximately $22 million of leases, primarily for trailers, that had not yet commenced.
Future minimum operating lease payments as of December 31, 2018, as reported in the 2018 Form 10-K under ASC 840, were as follows (in millions):
Operating Leases
Year ending December 31,
 
2019
$
61.6

2020
56.8

2021
48.4

2022
38.3

2023
29.8

2024 and thereafter
108.6

Total
$
343.5



9

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Future minimum capital lease payments as of December 31, 2018, as reported in the 2018 Form 10-K under ASC 840, were as follows (in millions):
Capital Leases
Year ending December 31,
 
2019
$
4.7

2020
4.3

2021
3.5

2022
3.4

2023
3.2

2024 and thereafter
18.9

Total
38.0

Less: interest
(8.6
)
Present value of future minimum lease payments
29.4

Less: current portion
(3.2
)
Non-current portion
$
26.2



5.
Long-term Debt
Long-term debt consists of the following (in millions):
 
September 30,
2019

December 31,
2018
Amounts borrowed (Credit Facility)
$
488.0

 
$
320.0

Obligations under finance leases
47.9

 
26.2

Total long-term debt
$
535.9

 
$
346.2


The Company has a revolving credit facility (the “Credit Facility”) with a capacity of $750.0 million as of September 30, 2019, limited by a borrowing base consisting of eligible accounts receivables and inventories. The Credit Facility expires in March 2022 and has an expansion feature which permits an increase of $200.0 million, subject to borrowing base requirements. 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 to London Interbank Offered Rate (“LIBOR”) or Canadian Dollar Offered Rate (“CDOR”) based loans prepaid prior to the end of an interest period).
Amounts related to the Credit Facility are as follows (in millions, except interest rate data):
 
September 30,
2019
 
December 31,
2018
Amounts borrowed, net
$
488.0

 
$
320.0

Outstanding letters of credit
16.7

 
16.7

Amounts available to borrow(1)
231.9

 
328.9

Unamortized debt issuance costs
1.9

 
2.5

___________________________________________
(1)
Subject to borrowing base limitations, and excluding expansion feature of $200.0 million.

10

Table of Contents

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Average borrowings
$
371.1

 
$
326.9

 
$
295.0

 
$
367.9

Range of borrowings
252.8 - 489.0

 
255.7 - 445.0

 
141.7 - 489.0

 
232.0 - 575.0

Unused Credit Facility and letter of credit participation fees(1)
0.3

 
0.3

 
0.9

 
0.8

Amortization of debt issuance costs(1)
0.2

 
0.2

 
0.6

 
0.6

Weighted-average interest rate(2)
3.5
%
 
3.3
%
 
3.6
%
 
3.0
%
___________________________________________
(1)
Included in interest expense, net.
(2)
Calculated based on the daily cost of borrowing, reflecting a blend of prime and LIBOR rates.
6.
Contingencies
Litigation
The Company is subject to certain legal proceedings, claims, investigations and administrative proceedings in the ordinary course of its business. The Company records a provision for a liability when it is probable that the liability has been incurred and the amount of the liability can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. In the opinion of management, the outcome of pending litigation is not expected to have a material effect on the Company’s results of operations, financial condition or liquidity.
7.
Earnings Per Share
The following table sets forth the computation of basic and diluted net earnings per share (dollars and shares in millions, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,

2019
 
2018
 
2019

2018
Earnings
 
 
 
 
 
 
 
Net income
$
22.5

 
$
23.7

 
$
41.5

 
$
33.4

Shares
 
 
 
 
 
 
 
Weighted-average common shares outstanding
(basic shares)
45.8

 
45.9

 
45.8

 
46.1

Adjustment for assumed dilution:
 
 
 
 
 
 
 
Restricted stock units
0.2

 
0.2

 
0.2

 
0.1

Performance shares
0.1

 
0.1

 
0.1

 

Weighted-average shares assuming dilution
(diluted shares)
46.1

 
46.2

 
46.1

 
46.2

Earnings per share
 
 
 
 
 
 
 
Basic(1)
$
0.49

 
$
0.52

 
$
0.91

 
$
0.72

Diluted(1)
$
0.49

 
$
0.51

 
$
0.90

 
$
0.72

___________________________________________
(1)
Basic and diluted earnings per share are calculated based on unrounded actual amounts.
The number of common shares that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive were 10,279 and 205,748, for the three and nine months ended September 30, 2019, respectively, and zero and 243,426, for the same periods in 2018, respectively.

11

Table of Contents

8.
Stock-based Compensation Plans
2019 Long-Term Incentive Plan
On May 21, 2019, the Company’s stockholders approved the 2019 Long-Term Incentive Plan (“2019 LTIP”) which, among other things, replaces the Company’s 2010 Long-Term Incentive Plan (as amended, the “2010 LTIP”) and reserves for awards an aggregate of up to 4,236,959 shares, consisting of 3,523,862 shares of the Company’s common stock currently available for future issuance under the 2019 LTIP, and 713,097 shares that may become available for future issuance under the 2019 LTIP in the event of forfeitures of currently outstanding awards. The 2019 LTIP allows the Company to grant, among other things, time-vesting and performance-vesting restricted stock unit awards. Awards may be made under the 2019 LTIP through May 21, 2029.
Grant Activities
During the nine months ended September 30, 2019 and 2018, the Company granted 230,235 and 350,757, respectively, of time-vesting restricted stock units to certain of its employees and non-employee directors at a weighted-average grant date fair value of $29.67 and $23.66, respectively.
During the nine months ended September 30, 2019, the Company granted 154,511 performance-based restricted stock units to certain of its employees at a weighted-average grant date fair value of $29.90. The 154,511 performance shares represent the maximum number that can be earned. The number of performance shares that employees ultimately earn will be based on the Company’s achievement of certain specified performance targets for the full year of 2019. During the nine months ended September 30, 2018, the Company granted 175,581 performance-based shares to certain of its employees at a weighted-average grant date fair value of $23.78, of which 141,406 were ultimately earned, based upon 2018 performance criteria achieved.
Stock-based Compensation Cost
Total stock-based compensation cost included in selling, general and administrative expenses was $3.1 million and $2.0 million for the three months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019 and 2018, the Company recognized stock-based compensation cost of $7.2 million and $6.4 million, respectively. Total unrecognized stock-based compensation cost related to unvested share-based compensation arrangements was $12.8 million at September 30, 2019, which is expected to be recognized over a weighted-average period of 1.7 years. Total unrecognized stock-based compensation cost is adjusted for any unearned performance shares or forfeited shares.
9.
Stockholders’ Equity
Dividends
The Board of Directors approved the following cash dividends in 2019 (in millions, except per share data):
Declaration Date
 
Dividend Per Share
 
Record Date
 
Cash Payment Amount
 
Payment Date
February 28, 2019
 
$0.11
 
March 12, 2019
 
$5.1
 
March 22, 2019
May 7, 2019
 
$0.11
 
May 23, 2019
 
$5.1
 
June 14, 2019
August 6, 2019
 
$0.11
 
August 22, 2019
 
$5.1
 
September 13, 2019
November 6, 2019
 
$0.12
 
November 19, 2019
 
N/A(1)
 
December 13, 2019
___________________________________________
(1)
Amount will be determined based on common stock outstanding as of the record date.
Repurchase of Common Stock

On August 28, 2017, the Company’s Board of Directors authorized a $40.0 million stock repurchase program (the “Program”), replacing the Company’s prior stock repurchase program. The timing, price and volume of purchases under the Program are based on market conditions, cash and liquidity requirements, relevant securities laws and other factors. The Program may be discontinued or amended at any time. The Program has no stated expiration date and terminates when the amount authorized has been expended or the Board of Directors withdraws its authorization.

During the three and nine months ended September 30, 2019, the Company spent $8.1 million to repurchase 250,925 shares of common stock under the Program. During the three months ended September 30, 2018, the Company spent $5.0 million to repurchase 145,572 shares of common stock under the Program. During the nine months ended September 30, 2018, the Company

12

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spent $12.5 million to repurchase 501,680 shares of common stock under the Program. As of September 30, 2019, there was $14.3 million available for future share repurchases under the Program.
10.
Segment and Geographic Information
The Company identifies its operating segments based primarily on the way the Chief Operating Decision Maker (“CODM”) evaluates performance and makes decisions. The Chief Executive Officer of the Company has been identified as the CODM. From the perspective of the CODM, the Company is engaged primarily in the business of distributing packaged consumer products to convenience retail stores in the U.S. and Canada (collectively “North America”), each of which consists of customers that have similar characteristics. Therefore, the Company has determined that it has two operating segments, U.S. and Canada, which aggregate to one reportable segment. Additionally, the Company presents its segment reporting information based on business operations for each of the two geographic areas in which it operates and also by major product category.
Information about the Company’s business operations based on geographic areas is as follows (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net sales:
 
 
 
 
 
 
 
United States
$
3,999.3

 
$
3,852.7

 
$
11,348.2

 
$
11,136.0

Canada
415.7

 
404.4

 
1,132.4

 
1,127.2

Corporate(1)
7.6

 
16.1

 
35.1

 
42.4

Total
$
4,422.6

 
$
4,273.2

 
$
12,515.7

 
$
12,305.6

 
 
 
 
 
 
 
 
 Income before income taxes:
 
 
 
 
 
 
 
United States
$
33.5

 
$
39.5

 
$
74.1

 
$
68.3

Canada
3.8

 
2.1

 
7.7

 
5.3

Corporate(2)
(6.7
)
 
(10.5
)
 
(25.2
)
 
(28.9
)
Total
$
30.6

 
$
31.1

 
$
56.6

 
$
44.7

 
 
 
 
 
 
 
 
Interest expense, net:(3)
 
 
 
 
 
 
 
United States
$
15.6

 
$
14.3

 
$
41.4

 
$
41.5

Canada
0.2

 
0.1

 
1.0

 
0.7

Corporate(4)
(11.6
)
 
(11.0
)
 
(31.6
)
 
(31.6
)
Total
$
4.2

 
$
3.4

 
$
10.8

 
$
10.6

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
United States
$
10.6

 
$
10.7

 
$
32.0

 
$
31.4

Canada
0.7

 
0.5

 
1.9

 
1.7

Corporate(5)
3.6

 
3.7

 
11.9

 
11.4

Total
$
14.9

 
$
14.9

 
$
45.8

 
$
44.5

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
United States
$
5.4

 
$
5.6

 
$
13.9

 
$
14.1

Canada
0.7

 
0.1

 
1.4

 
0.8

Total
$
6.1

 
$
5.7

 
$
15.3

 
$
14.9

___________________________________________
(1)
Consists primarily of external sales made by the Company’s consolidating warehouses, management service fee revenue, allowance for sales returns and certain other sales adjustments.
(2)
Consists primarily of expenses and other income, such as corporate incentives and salaries, LIFO expense, health care costs, insurance and workers’ compensation adjustments, elimination of overhead allocations and foreign exchange gains or losses.
(3)
Includes $0.1 million and $0.3 million of interest income for the three and nine months ended September 30, 2019, respectively.

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(4)
Consists primarily of intercompany eliminations for interest.
(5)
Consists primarily of depreciation for the consolidation centers and amortization of intangible assets.
Identifiable assets by geographic area are as follows (in millions):
 
September 30,
2019
 
December 31,
2018
Identifiable assets:
 
 
 
United States
$
2,003.8

 
$
1,528.6

Canada
125.5

 
137.5

Total
$
2,129.3

 
$
1,666.1


The net sales mix for the Company’s primary product categories is as follows (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Product Category
2019
 
2018
 
2019
 
2018
Cigarettes
$
2,880.0

 
$
2,874.6

 
$
8,181.5

 
$
8,254.8

Food
476.8

 
436.4

 
1,314.6

 
1,254.8

Fresh
135.8

 
125.8

 
376.1

 
358.1

Candy
269.7

 
248.1

 
782.8

 
749.3

Other tobacco products
370.4

 
352.8

 
1,068.9

 
1,044.2

Health, beauty & general
226.0

 
177.1

 
630.3

 
489.1

Beverages
63.9

 
57.6