CORE-MARK HOLDING COMPANY, INC. The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the accompanying audited consolidated financial statements and notes thereto that are included under Part II, Item 8, of this Form 10-K. Also refer to "Special Note Regarding Forward-Looking Statements," which is included after the Table of Contents in this Form 10-K. This discussion and analysis also includes non-GAAP financial measures that we believe provide important perspective in understanding trends that may impact our business. These non-GAAP financial measures are discussed, including reconciliation of these measures to GAAP, under "Non-GAAP Financial Information." This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 are not included in this Form 10-K and can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and filed with theSecurities and Exchange Commission onMarch 2, 2020 . Our BusinessCore-Mark is one of the largest marketers of fresh, food and broad-line supply solutions to the convenience retail industry inNorth America . We offer a full range of products, marketing programs and technology solutions to approximately 40,000 customer locations in theU.S. andCanada . 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, other tobacco products ("OTP"), alternative nicotine products, candy, snacks, food, including fresh products, groceries, dairy, bread, beverages, general merchandise and health and beauty care products. We operate a network of 32 distribution centers in theU.S. andCanada (excluding two distribution facilities we operate as a third-party logistics provider). 23 -------------------------------------------------------------------------------- Table of Contents Business Strategy OverviewCore-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 industry remains highly fragmented, supporting significant opportunities for both organic growth and growth through strategic acquisitions.Core-Mark is one of the largest wholesale distributors to the convenience retail industry inNorth America , one of two national convenience distributors in theU.S. and the largest inCanada , and represents an estimated 7% market share of the in-store sales of convenience stores inNorth America . Our growth initiatives include elevating same store sales, gaining share of North American convenience stores 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. Driving growth through these alternative convenience retail formats and channels is a core component of our strategy and we see significant opportunities to drive growth organically, through acquisitions and strategic partnerships. Our focus on providing industry-leading category management solutions to our customers positions us to partner with retailers to help increase their sales and profits. We offer a wide array of marketing programs, innovative product alternatives, data aggregation and loyalty solutions to our customers in pursuit of category management excellence.Core-Mark is also actively engaged in efforts to increase the leverage of our operating cost structure 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 positionCore-Mark as the leader in convenience retail distribution and provides a strong pathway to achieve sustainable shareholder returns. Other Business Developments The effects of the COVID-19 pandemic had an impact on our operating results during the year endedDecember 31, 2020 , and we expect the pandemic will continue to affect our business for some period of time. While the vast majority of our customers are convenience retailers that continue to operate as essential businesses, the unprecedented impact of the COVID-19 pandemic since the second quarter of 2020, including shelter-in-place orders by states, provinces, cities and counties resulted in a significant downturn in miles driven, resulting in a decline in convenience retail store visits acrossNorth America . Although we are seeing recovery as consumer purchase trends improve, we expect future results to continue to be impacted by the effects of the COVID-19 pandemic.
Dividends
The Board of Directors approved the following cash dividends in 2020 (in millions, except per share data):
Declaration Date Dividend Per Share Record Date Cash Payment Amount(1)(2) Payment Date
February 24, 2020 $0.12 March 16, 2020 $5.5 March 27, 2020
May 7, 2020 $0.12 May 22, 2020 $5.4 June 19, 2020
August 6, 2020 $0.12 August 21, 2020 $5.4 September 18, 2020
November 5, 2020 $0.13 November 20, 2020 $5.7 December 18, 2020
______________________________________________
(1) Includes cash payments on declared dividends and payments made on
time-based restricted stock units ("RSUs") and performance share awards that
vested subsequent to the payment date.
(2) Amounts have been rounded for presentation purposes and may differ from
unrounded amounts.
We paid dividends of $22.0 million and $20.8 million in 2020 and 2019,
respectively.
Share Repurchase Program
On February 24, 2020 , our Board of Directors authorized a $60.0 million stock
repurchase program (the "2020 Program"), replacing our prior stock repurchase
program (the "Prior Program"). At the time of approval, we had funds totaling
$0.4 million remaining under the Prior Program which were subsequently retired
unused. The timing, price and volume of purchases under the 2020 Program are
based on market conditions, cash and liquidity requirements, relevant securities
laws and other factors. The 2020 Program may be discontinued or amended at any
time. The 2020 Program has no expiration date and terminates when the amount
authorized has been expended or the Board of Directors withdraws its
authorization.
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In 2020, all stock repurchases were made under the 2020 Program, and we
repurchased 407,971 shares of common stock for a total cost of $10.4 million , or
an average price of $25.62 per share. As of December 31, 2020 , $49.6 million
remained available for future share repurchases under the 2020 Program. In 2019,
under the Prior Program, we repurchased 767,681 shares of common stock for a
total cost of $22.0 million , or an average price of $28.66 per share.
Overview of 2020 Results
During 2020, we continued to build on our sales and operational capabilities, as
well as our financial foundation, to drive our long-term growth strategy. We
delivered strong financial results and further enhanced our industry-leading
offering of products and services despite the backdrop of the COVID-19 pandemic.
Our net sales in 2020 increased 1.7%, or $287.4 million , to $16,957.9 million
compared to $16,670.5 million for 2019. The increase in net sales for the year
was driven primarily by strong cigarette sales, including increases in cigarette
manufacturers' prices and growth in cigarette carton sales, partially offset by
a 2.3% decrease in sales of food/non-food. Sales of cigarettes and food/non-food
products for the year were impacted by changes in consumer buying habits as a
result of the COVID-19 pandemic.
Gross profit in 2020 decreased $35.9 million , or 3.9%, to $888.3 million from
$924.2 million in 2019, driven primarily by a shift in overall sales mix to
cigarettes, which have lower margins compared with food/non-food products, and
higher LIFO expense, partially offset by $1.9 million of incremental net
inventory holding gains.
Gross profit margin was 5.24% of total net sales for 2020 compared to 5.54% in
2019. Remaining gross profit margin(1) decreased to 5.23% for 2020 from 5.53% in
2019. The decline in remaining gross profit margin was driven primarily by the
change in the sales mix between cigarettes and food/non-food and a decline in
margins within the food/non-food category resulting from a shift in sales mix
and lower gross profit margins in certain categories. We expect our gross profit
margin to continue to be impacted by both sales mix and lower margins in certain
product categories for some period of time as a direct result of the impacts of
the COVID-19 pandemic.
Operating expenses in 2020 decreased 4.6%, or $38.0 million , to $793.6 million
from $831.6 million in 2019. The decrease was driven primarily by increased
productivity and cost savings initiatives, implemented mainly in response to the
COVID-19 pandemic. As outlined in our press release on April 14, 2020 , we took
steps during the second quarter to reduce operating costs to better align them
with sales volume trends and to preserve liquidity. We also achieved cost
savings through actions to reduce other non-essential costs including travel,
meetings and events and other discretionary expenditures. Operating expenses
were 4.7% of total net sales for 2020 compared to 5.0% in 2019. Operating
expenses were 89.4% of remaining gross profit(1) for 2020, compared to 90.2% of
remaining gross profit in 2019.
Net income in 2020 increased 9.5%, or $5.5 million , to $63.2 million from $57.7
million in 2019. Adjusted EBITDA(1) increased $11.5 million , or 6.0%, to $202.2
million in 2020 from $190.7 million in 2019.
________________________________________
(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 in the United States of America ("GAAP"). See "Non-GAAP Financial
Information" for reconciliation.
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Results of Operations
Comparison of 2020 and 2019 (in millions, except percentages)(1):
2020 2019
% of Net % of Net
Increase sales, less sales, less
(Decrease) Amounts % of Net sales excise taxes Amounts % of Net sales excise taxes
Net sales $ 287.4 $ 16,957.9 100.0 % - % $ 16,670.5 100.0 % - %
Net sales - Cigarettes 417.8 11,310.5 66.7 61.7 10,892.7 65.3 59.7
Net sales - Food/Non-food (130.4) 5,647.4 33.3 38.3 5,777.8 34.7 40.3
Net sales, less excise
taxes (non-GAAP)(2) 287.9 13,617.1 80.3 100.0 13,329.2 80.0 100.0
Gross profit(3)(4) (35.9) 888.3 5.2 6.5 924.2 5.5 6.9
Warehousing and
distribution expenses (24.5) 541.7 3.2 4.0 566.2 3.4 4.2
Selling, general and
administrative expenses (13.2) 242.2 1.4 1.8 255.4 1.5 1.9
Amortization of intangible
assets (0.3) 9.7 0.1 0.1 10.0 0.1 0.1
Income from operations 2.1 94.7 0.6 0.7 92.6 0.6 0.7
Interest expense, net (3.9) (10.5) 0.1 0.1 (14.4) 0.1 0.1
Foreign currency
transaction gains
(losses), net (0.1) (0.9) - - (0.8) - -
Income before taxes 5.9 83.3 0.5 0.6 77.4 0.5 0.6
Provision for income taxes 0.4 (20.1) 0.1 0.1 (19.7) 0.1 0.1
Net income 5.5 63.2 0.4 0.5 57.7 0.3 0.4
Adjusted EBITDA
(non-GAAP)(5) 11.5 202.2 1.2 1.5 190.7 1.1 1.4
______________________________________________
(1) Amounts and percentages have been rounded for presentation purposes and might 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) Gross profit for 2020 includes LIFO expense of$30.7 million compared to$27.6 million in 2019. (5) See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Financial Information."Net Sales . Net sales increased by$287.4 million , or 1.7%, to$16,957.9 million in 2020 from$16,670.5 million in 2019. The increase in net sales was driven primarily by strong cigarette sales, including increases in cigarette manufacturers' prices and growth in cigarette carton sales, partially offset by a decrease in food/non-food sales to existing customers and a net decrease in the number of stores serviced during the year. Sales of both cigarettes and food/non-food products in 2020 were impacted by changes in consumer buying habits as a result of the COVID-19 pandemic.Net Sales of Cigarettes. Net sales of cigarettes in 2020 increased by$417.8 million , or 3.8%, to$11,310.5 million from$10,892.7 million in 2019. The increase in cigarette sales was driven primarily by a 3.6% increase in the average sales price per carton due to cigarette manufacturers' price increases and a 0.3% increase in carton sales. Cigarette carton sales increased by 0.2% and 0.7% in theU.S. andCanada , respectively, driven by a 2.3% increase in carton sales to existing customers, partially offset by a net decrease in the number of stores serviced during the year. Cigarette carton sales to existing customers in 2020 outperformed recent downward trends, due primarily to changes in consumer buying behavior as a result of the COVID-19 pandemic. 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 26 -------------------------------------------------------------------------------- Table of Contents 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 were 66.7% in 2020 compared to 65.3% in 2019. The increase in the percentage of net cigarette sales in 2020 was due primarily to changes in consumer buying behavior as a result of the COVID-19 pandemic.Net Sales of Food/Non-food Products. Net sales of food/non-food products in 2020 decreased$130.4 million , or 2.3%, to$5,647.4 million from$5,777.8 million in 2019. The following table provides net sales by product category for our food/non-food products (in millions, except percentages) (1): 2020 2019 Increase (Decrease) Product Category Net Sales Net Sales Amounts Percentage Food$ 1,575.8 $ 1,746.4 $ (170.6) (9.8) % Fresh 509.3 502.8 6.5 1.3 % Candy 1,004.0 1,039.0 (35.0) (3.4) % OTP 1,558.6 1,438.9 119.7 8.3 % Health, beauty & general ("HB&G") 801.3 847.2 (45.9) (5.4) % Beverages 197.2 202.1 (4.9) (2.4) % Equipment/other 1.2 1.4 (0.2) N/A Total food/non-food products$ 5,647.4 $ 5,777.8 $ (130.4) (2.3) %
______________________________________________
(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
The decrease in food/non-food sales in 2020 was driven primarily by a decrease
in sales to existing customers and a net decrease in the number of stores
serviced during the year due primarily to the changes in consumer buying
behavior as a result of the COVID-19 pandemic. The largest sales declines were
in the food, HB&G and candy categories, partially offset by growth in OTP sales
to existing customers. Our HB&G category was also impacted by a decline in sales
of alternative nicotine products, which was impacted by both the changes in
consumer buying behavior due to the COVID-19 pandemic and the enactment of
regulations governing the sale of flavored product categories.
Total net sales of food/non-food products as a percentage of total net sales
were 33.3% in 2020 compared to 34.7% in 2019.
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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 changes in LIFO reserves
are components of cost of goods sold. Gross profit in 2020 decreased $35.9
million , or 3.9%, to $888.3 million from $924.2 million in 2019, driven
primarily by the overall shift in sales mix to cigarettes, which have lower
margins than food/non-food products, and higher LIFO expense, partially offset
by $1.9 million of incremental inventory holding gains.
The following table provides the components comprising the change in gross
profit as a percentage of net sales for 2020 and 2019 (in millions, except
percentages)(1):
2020 2019
Increase % of Net % of Net
(Decrease) in sales, less sales, less
Gross Profit Amounts % of Net sales excise taxes Amounts % of Net sales excise taxes
Net sales $ 287.4 $ 16,957.9 100.0 % - % $ 16,670.5 100.0 % - %
Net sales, less excise taxes
(non-GAAP)(2) 287.9 13,617.1 80.3 100.0 13,329.2 80.0 100.0
Components of gross profit:
Cigarette inventory holding
gains(3) $ 8.8 $ 31.8 0.19 % 0.23 % $ 23.0 0.14 % 0.17 %
Other inventory holding gains(4) (6.9) - - - 6.9 0.04 0.05
LIFO expense(5) (3.1) (30.7) (0.18) (0.23) (27.6) (0.17) (0.21)
Remaining gross profit
(non-GAAP)(6) (34.7) 887.2 5.23 6.52 921.9 5.53 6.92
Gross profit $ (35.9) $ 888.3 5.24 % 6.52 % $ 924.2 5.54 % 6.93 %
______________________________________________
(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. (2) See the reconciliation of net sales, less excise taxes to net sales in "Non-GAAP Financial Information." (3) In 2020,$29.8 million and$2.0 million of the cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. In 2019,$21.3 million and$1.7 million of the cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. (4) In 2019, all$6.9 million of candy inventory holding gains were attributable to theU.S. (5) The increase of$3.1 million in LIFO expense in 2020 was due primarily to an increase in the Producer Price Index ("PPI") for cigarettes and an increase in inventory levels (see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements). (6) 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 (see reconciliation of remaining gross profit to gross profit in "Non-GAAP Financial Information.") Gross profit margin decreased 30 basis points to 5.24% of total net sales during 2020 from 5.54% in 2019. The change in the sales mix between cigarettes and food/non-food contributed to approximately 47% of the gross profit margin decline. In addition, the decrease in gross profit margin for 2020 was driven primarily by an overall decline in food/non-food margins as a result of a shift in sales mix toward lower margin items, such as OTP, due primarily to changes in consumer buying habits as a result of the COVID-19 pandemic. In addition, lower margins within the HB&G category, primarily in alternative nicotine products, also contributed to the decline in overall food/non-food gross profit margin. Distributors such asCore-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. In 2020, we had$1.9 million higher inventory holding gains compared to 2019. Cigarette inventory holding gains, which were impacted by the timing and amount of cigarette manufacturers' price increases, increased$8.8 million in 2020, offset by$6.9 million in inventory holding gains related to a candy price increase in 2019. Historically, significant price increases from candy manufacturers have only occurred every three to four years. 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
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deflation in manufacturer prices as reported in the Bureau of Labor Statistics
PPI used to estimate and record our book LIFO expense (see Note 2 - Summary of
Significant Accounting Policies to our consolidated financial statements).
Remaining gross profit, a non-GAAP financial measure (see reconciliation of
remaining gross profit to gross profit in "Non-GAAP Financial Information"),
decreased $34.7 million , or 3.8%, to $887.2 million in 2020 from $921.9 million
in 2019. 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") decreased to 5.23% in
2020 compared to 5.53% in 2019, driven primarily by the impact of a shift in
sales mix towards lower margin cigarettes, a shift in the sales mix within
food/non-food towards lower margin categories and lower margins within the HB&G
category, primarily in alternative nicotine products.
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"), increased $7.3 million , or 3.4%, to
$220.9 million in 2020 from $213.6 million for the same period in 2019. The
increase in cigarette remaining gross profit was driven primarily by a 3.1%
increase in remaining gross profit per carton and a 0.3% increase in cigarette
carton sales.
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"), decreased $42.0 million or 5.9% to
$666.3 million , in 2020 from $708.3 million in 2019. 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"), decreased to 11.80% in 2020 from 12.26% in 2019, driven primarily
by a decrease in sales in certain higher margin categories including food and
HB&G, an increase in sales in our lower margin OTP category, and a decline in
margin rate, primarily in alternative nicotine products within the HB&G
category.
In 2020, our remaining gross profit for food/non-food products was 75.1% of our
total remaining gross profit compared to 76.8% for 2019.
Operating Expenses. Our operating expenses include costs related to warehousing
and distribution, SG&A expenses and amortization of intangible assets. In 2020,
operating expenses decreased by $38.0 million , or 4.6%,
to $793.6 million from $831.6 million in 2019. The decrease was driven primarily
by increased productivity and cost savings initiatives implemented mainly in
response to the COVID-19 pandemic. As a percentage of total net sales, operating
expenses were 4.7% in 2020 compared to 5.0% in 2019. Operating expenses
were 89.4% 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") in 2020, compared to 90.2% of remaining gross profit in 2019. The
decrease in operating expenses as a percentage of remaining gross profit was due
primarily to operating expense reductions that more than offset the decline in
remaining gross profit.
Warehousing and Distribution Expenses. Warehousing and distribution expenses
decreased $24.5 million , or 4.3%, to $541.7 million in 2020 from $566.2 million
in 2019. The decrease in warehousing and distribution expenses was due primarily
to cost reductions, an increase in productivity and fewer deliveries.
Warehousing and distribution expenses were 3.2% of total net sales in 2020
compared to 3.4% of total net sales in 2019. Warehousing and distribution
expenses were 61.1% 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"), in 2020, compared to 61.4% of remaining gross profit in 2019.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses decreased
$13.2 million , or 5.2%, to $242.2 million in 2020 from $255.4 million in 2019.
The reduction in SG&A expenses was due primarily to cost savings initiatives.
SG&A expenses for 2019 included $2.3 million of incremental costs related to the
relocation of our headquarters. SG&A expenses were 1.4% of total net sales in
2020 compared to 1.5% of total net sales in 2019. SG&A was 27.3% 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"), in 2020, compared
to 27.7% of remaining gross profit in 2019.
Amortization Expense. Amortization expense decreased $0.3 million , or 3.0%, to
$9.7 million in 2020 from $10.0 million in 2019.
Interest Expense, Net. Interest expense, net decreased $3.9 million , or 27.1%,
to $10.5 million in 2020 compared to $14.4 million in 2019. Interest expense,
net, includes interest, amortization of loan origination costs related to
borrowings and facility fees and interest on finance lease obligations. The
decrease in net interest expense was due primarily to a decrease in the average
borrowing rate and lower average borrowings. Average borrowings
in 2020 were $259.5 million with a weighted-average interest rate
of 1.8% compared to average borrowings of $303.2 million and a weighted-average
interest rate of 3.4% in 2019.
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Foreign Currency Transaction Losses, Net. We recognized a foreign currency
transaction loss of $0.9 million in 2020 compared to a loss of $0.8 million in
2019. During times of a strengthening U.S. dollar, we generally record foreign
currency losses from our Canadian operations. Conversely, during times of a
weakening U.S. dollar, we generally record foreign currency gains.
Income Taxes. For the year ended December 31, 2020 , our effective tax rate was
a provision of 24.1% in 2020 compared to a provision of 25.5% in 2019.
Adjusted EBITDA. Adjusted EBITDA, a non-GAAP financial measure (see
reconciliation of Adjusted EBITDA to net income in "Non-GAAP Financial
Information"), increased $11.5 million , or 6.0%, to $202.2 million in
2020 from $190.7 million for the same period in 2019. The increase in Adjusted
EBITDA was driven primarily by higher operating income in 2020 attained through
cost leverage and an increase in inventory holding gains.
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Non-GAAP Financial Information
The financial statements in this Annual Report on Form 10-K 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 used by other companies 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, net foreign currency transaction
gains or losses. See the table below 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 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.
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The following table reconciles Adjusted EBITDA to net income, as net income is
the most comparable financial measure under U.S. GAAP (in millions):
Year Ended December 31,
2020 2019 2018
Net income $ 63.2 $ 57.7 $ 45.5
Interest expense, net(1) 10.5 14.4 13.7
Provision for income taxes 20.1 19.7 14.4
Depreciation and amortization 66.6 60.9 59.5
LIFO expense 30.7 27.6
25.2
Stock-based compensation expense 10.2 9.6
8.2
Foreign currency transaction losses (gains), net 0.9 0.8
(1.8)
Adjusted EBITDA (non-GAAP) $ 202.2 $ 190.7 $ 164.7 ______________________________________________
(1) Interest expense, net, is reported net of interest income.
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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 under U.S. GAAP (in millions, except percentages)(1):
Year Ended December 31,
2020 2019 2018
Net sales $ 16,957.9 $ 16,670.5 $ 16,395.3
Excise taxes(2) (3,340.8) (3,341.3) (3,491.4)
Net sales, less excise taxes (non-GAAP) $ 13,617.1 $ 13,329.2 $ 12,903.9
Gross profit(3)(4) $ 888.3 $ 924.2 $ 867.5
Cigarette inventory holding gains (31.8) (23.0) (19.6)
Other inventory holding gains(5) - (6.9) (7.4)
LIFO expense 30.7 27.6 25.2
Remaining gross profit (non-GAAP) $ 887.2 $ 921.9 $ 865.7
Gross profit % 5.24 % 5.54 % 5.29 %
Gross profit % less excise taxes (non-GAAP) 6.52 % 6.93 % 6.72 %
Remaining gross profit % (non-GAAP) 5.23 % 5.53 % 5.28 %
Remaining gross profit % less excise taxes
(non-GAAP) 6.52 % 6.92 % 6.71 %
Year Ended December 31,
Cigarettes: 2020 2019 2018
Net sales $ 11,310.5 $ 10,892.7 $ 10,974.5
Excise taxes(2) (2,909.0) (2,929.6) (3,082.4)
Net sales, less excise taxes (non-GAAP) $ 8,401.5 Gross profit(3)$ 223.6 $ 212.4 $ 225.6 Cigarette inventory holding gains (31.8) (23.0) (19.6) Other inventory holding gains(5) - - (7.4) LIFO expense 29.1 24.2 22.1 Remaining gross profit (non-GAAP)$ 220.9
Gross profit % 1.98 % 1.95 % 2.06 %
Gross profit % less excise taxes (non-GAAP) 2.66 % 2.67 % 2.86 %
Remaining gross profit % (non-GAAP) 1.95 % 1.96 % 2.01 %
Remaining gross profit % less excise taxes
(non-GAAP) 2.63 % 2.68 % 2.80 %
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Table of Contents
Year Ended December 31,
Food/Non-food: 2020 2019 2018
Net sales $ 5,647.4 $ 5,777.8 $ 5,420.8
Excise taxes(2) (431.8) (411.7) (409.0)
Net sales, less excise taxes (non-GAAP) $ 5,215.6 Gross profit(4)$ 664.7 $ 711.8 $ 641.9 Other inventory holding gains(5) - (6.9) - LIFO expense 1.6 3.4 3.1 Remaining gross profit (non-GAAP)$ 666.3
Gross profit % 11.77 % 12.32 % 11.84 % Gross profit % less excise taxes (non-GAAP) 12.74 % 13.26 % 12.81 % Remaining gross profit % (non-GAAP) 11.80 % 12.26 % 11.90 % Remaining gross profit % less excise taxes (non-GAAP) 12.78 % 13.20 % 12.87 %
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(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. (2) Excise taxes included in our net sales consist of state, local and provincial excise taxes, for which we are the primary obligor and held responsible for remitting to the appropriate tax authorities. Federal excise taxes are levied on the manufacturers who pass the tax on to us as part of the product cost and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage may be reduced since gross profit dollars generally remain the same. (3) Cigarette gross profit includes (i) cigarette inventory holding gains related to manufacturers' price increases, (ii) increases in state, local and provincial excise taxes and (iii) LIFO effects. Cigarette inventory holding gains for the years 2020, 2019 and 2018 were$31.8 million ,$23.0 million and$19.6 million , respectively. For 2018, we recognized cigarette tax stamp inventory holding gains, in theU.S. of$7.4 million . (4) Food/non-food gross profit includes (i) inventory holding gains related to manufacturers' price increases, (ii) increases in state, local and provincial excise taxes, and (iii) LIFO effects. (5) In 2019, we recognized$6.9 million of candy inventory holding gains attributable to theU.S. In 2018, other inventory holding gains consisted of$7.4 million cigarette tax stamp inventory holding gains attributable to theU.S. 34 -------------------------------------------------------------------------------- Table of Contents The following table provides operating expenses as a percentage of remaining gross profit (in millions, except percentages)(1): Year Ended December 31, 2020 2019 2018 Gross profit$ 888.3 $ 924.2 $ 867.5 Cigarette inventory holding gains(2) (31.8) (23.0) (19.6) Other inventory holding gains(3) - (6.9) (7.4) LIFO expense 30.7 27.6 25.2 Remaining gross profit (non-GAAP)$ 887.2
Warehousing and distribution expenses$ 541.7 $ 566.2 $ 540.6 Selling, general and administrative expenses 242.2 255.4 245.1 Amortization of intangible assets 9.7 10.0 10.0 Total operating expenses$ 793.6
Warehouse and distribution expense as a percentage of remaining gross profit (non-GAAP)
61.1 % 61.4 % 62.4 %
Selling, general and administrative expense as a
percentage of remaining gross profit (non-GAAP) 27.3 % 27.7 % 28.3 %
Amortization of intangible assets as a percentage of remaining gross profit (non-GAAP)
1.1 % 1.1 % 1.2 %
Total operating expense as a percentage of remaining gross profit (non-GAAP)
89.4 % 90.2 % 91.9 %
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(1) Amounts and percentages have been rounded for presentation purposes and may differ from unrounded results. (2) For the year endedDecember 31, 2020 ,$29.8 million and$2.0 million of the cigarette inventory holding gains were attributable to theU.S. andCanada , respectively. For the year endedDecember 31, 2019 ,$21.3 million and$1.7 million of the cigarette holding gains were attributable to theU.S. andCanada , respectively. For the year endedDecember 31, 2018 ,$17.3 million and$2.3 million of the cigarette holding gains were attributable to theU.S. andCanada , respectively. (3) For the year endedDecember 31, 2019 ,$6.9 million of the other inventory holding gains consisted of candy inventory holding gains attributable to theU.S. For the year endedDecember 31, 2018 ,$7.4 million of the other inventory holding gains consisted of cigarette tax stamp inventory holding gains attributable to theU.S. 35 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our cash and cash equivalents were$22.8 million and$14.1 million as ofDecember 31, 2020 and 2019, 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 year endedDecember 31, 2020 , our cash flows provided by operating activities were$147.8 million . Subject to borrowing base limitations, we had$402.4 million of borrowing capacity available under our Credit Facility, excluding the expansion feature of$200.0 million , as ofDecember 31, 2020 . We are potentially exposed to increased credit risk as a result of the COVID-19 crisis. 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. We have taken actions to help preserve liquidity, including reducing operating costs to better align with the current sales volume trends and closely managing our accounts receivable and capital expenditures. Given our financial strength coming into the pandemic and ample availability of capital, we expect to be able to maintain adequate liquidity through the current environment, subject to the severity and duration of the COVID-19 pandemic. Cash Flows from Operating Activities Our cash flows from operating activities provided net cash of$147.8 million for the year endedDecember 31, 2020 compared to net cash provided of$89.7 million for the same period in 2019, an increase of$58.1 million . The increase was primarily attributable to changes in working capital, which was a cash use of$16.2 million or$54.0 million lower than the comparative period, and an increase in Adjusted EBITDA (see reconciliation of Adjusted EBITDA to net income in "Non-GAAP Financial Information"). Our cash flows from operating activities were impacted by the following movements in working capital (in millions): Year Ended
2020 2019 Change
Accounts receivable, net $ 33.1 $ (5.2) $ 38.3
Other receivables, net (9.0) (6.2) (2.8)
Inventories, net (119.8) (5.0) (114.8)
Deposits, prepayments and other non-current
assets 20.2 (42.9) 63.1
Accounts payable (1.2) (8.6) 7.4
Cigarette and tobacco taxes payable 21.5 (20.0) 41.5
Pension, claims, accrued and other long-term
liabilities 39.0 17.7 21.3
Net cash (used in) provided by changes in
operating assets and liabilities $ (16.2) Working capital contributions used cash of$16.2 million for 2020, compared to cash used of$70.2 million for 2019. These contributions for the comparative periods were impacted by, among other items, an increase of inventory levels and cigarette and tobacco taxes payable, partially offset by a decrease of deposits, prepayments and other non-current assets due primarily to the timing of prepayments to cigarette vendors. Cash Flows from Investing Activities Our investing activities used net cash of$29.6 million for the year endedDecember 31, 2020 compared to$31.0 million for the same period in 2019, a decrease in cash use of$1.4 million . Capitalization of software and related development costs were$3.5 million for 2020 compared to$6.0 million for 2019. Additions to property and equipment were$27.2 million for 2020 compared to$22.8 million for the same period in 2019, an increase in cash use of$4.4 million . We expect capital expenditures for 2021 to be approximately$45 million , 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. 36 -------------------------------------------------------------------------------- Table of Contents Cash Flows from Financing Activities Our financing activities used net cash of$107.9 million for the year endedDecember 31, 2020 compared to$71.2 million of net cash used for the same period in 2019, a change of$36.7 million . Net repayments under our Credit Facility during the year endedDecember 31, 2020 , were$66.8 million compared to net borrowings of$4.8 million in 2019. Book overdrafts increased$7.2 million , caused by the level of cash on hand in relation to the timing of accounts payable and vendor prepayments. During the year endedDecember 31, 2020 , we repurchased$10.4 million of our common stock under the 2020 Program, compared to repurchases of$22.0 million in 2019 under the Prior Program. Our Credit Facility We have a Credit Facility with a borrowing capacity of$750 million as ofDecember 31, 2020 , limited by a borrowing base consisting of eligible accounts receivable and inventories. The Credit Facility expires inFebruary 2026 and has an expansion feature which permits an increase up to an additional$200 million , subject to borrowing base requirements. All obligations under the Credit Facility are secured by first-priority liens on substantially all of our present and future assets. The terms of the Credit Facility permit prepayment without penalty at any time (subject to customary breakage costs with respect to the London Interbank Offer Rate ("LIBOR") or Canadian DollarOffer Rate based loans prepaid prior to the end of an interest period). The Credit Facility contains customary affirmative and restrictive covenants. In addition, the Credit Facility allows for unlimited stock repurchases and dividends as long as we meet certain credit availability percentages and fixed charge coverage ratios. As ofDecember 31, 2020 , we were in compliance with all of the covenants under the Credit Facility. See Note 18 - Subsequent Events for changes to our Credit Facility. Amounts related to the Credit Facility are as follows (in millions): December 31, 2020 2019 Amounts borrowed, net$ 258.0 $ 324.8 Outstanding letters of credit 19.5 16.7 Amounts available to borrow(1) 402.4 341.7 Average borrowings for the year(2) 259.5 303.2 Range of borrowings for the year 69.0 - 499.3 141.7 - 508.0
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(1) Subject to borrowing base limitations, and excluding expansion feature of$200.0 million . (2) See Liquidity and Capital Resources for additional details on the decrease in average borrowings. Contractual Obligations and Commitments Contractual Obligations. The following table presents information regarding our contractual obligations that existed as ofDecember 31, 2020 (in millions): Less than 1 More than 5 Total Year 1 - 3 Years 3 - 5 Years Years Credit Facility(1)$ 258.0 $ - $
258.0 $ - $ - Purchase obligations(2)
18.2 6.9 10.0 1.3 -
Letters of credit 19.5 19.5 - - -
Operating leases(3) 256.9 41.8 70.4 52.9 91.8
Finance leases(4) 116.6 19.0 36.4 32.3 28.9
Total contractual obligations(5)
374.8
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(1) Represents amounts borrowed under our Credit Facility and does not include interest costs associated with the Credit Facility due to the variation of outstanding debt at Prime-based or LIBOR-based interest rates. See Our Credit Facility above. (2) Our purchase obligations atDecember 31, 2020 were related primarily to purchases of compressed natural gas for our trucking fleet, delivery and warehouse equipment, computer software and services, and leasehold improvements (see Note 9 - Commitments and Contingencies to our consolidated financial statements). (3) The majority of our sales offices, warehouse facilities and trucks are subject to lease agreements which expire at various dates through 2037, excluding renewal options. We are generally required to incur maintenance, insurance and property tax expenses in connection with our lease agreements. In most instances, we expect the leases that expire will be renewed or replaced in the normal course of our business. 37 -------------------------------------------------------------------------------- Table of Contents (4) Represents net future minimum lease payments for warehouse facilities and other office, vehicle and warehouse equipment. Current maturities of finance leases are included in accrued liabilities and non-current maturities are included in long-term debt. Interest costs associated with the finance leases are included in the table above. (5) We have not included in the table above gross claims liabilities of$60.7 million , which includes workers' compensation, health and welfare, and general and auto liabilities because they do not have a definite payout by year. See Critical Accounting Policies and Estimates - Claims Liabilities and Insurance Recoverables. See also Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements. Off-Balance Sheet Arrangements Letters of Credit. As ofDecember 31, 2020 , our standby letters of credit issued under our Credit Facility were$19.5 million and related primarily to casualty insurance. The majority of the standby letters of credit mature in one year. However, in the ordinary course of our business, we will continue to renew or modify the terms of the letters of credit to support business requirements. The liabilities underlying the letters of credit are reflected on our consolidated balance sheets. Critical Accounting Policies and Estimates Management's Discussion and Analysis of our Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. The preparation of our consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. The critical accounting polices used in the preparation of the consolidated financial statements are those that are important both to the presentation of financial condition and results of operations and require significant judgments with regards to estimates. We base our estimates on historical experience and on various assumptions we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate; however, actual results could differ from these estimates. We consider the allowance for credit losses, claims liabilities and insurance recoverables and valuation of long-lived assets and goodwill to be those estimates which involve a higher degree of judgment and complexity. We believe that the following represent the more critical accounting policies, which are subject to estimates and assumptions used in the preparation of our consolidated financial statements. 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 ofDecember 31, 2020 . Allowance for Credit Losses We maintain an allowance for credit losses we estimate will arise from our trade customers' inability to make required payments. We evaluate the collectability of accounts receivable and determine the appropriate allowance for credit losses based on historical experience, economic conditions and a review of specific customer accounts. In determining the adequacy of allowances for customer receivables, we analyze factors such as the value of any collateral, customer financial statements, historical collection experience, aging of receivables, general economic conditions and other factors. It is possible that the accuracy of the estimation process could be materially affected by different judgments as to the collectability based on information considered and further deterioration of accounts. If circumstances change (i.e., further evidence of material adverse creditworthiness, additional accounts become credit risks, store closures or deterioration in general economic conditions), our estimates of the recoverability of amounts due us could be reduced by a material amount. The allowance for credit losses atDecember 31, 2020 and 2019 amounted to 4.3% and 3.5%, respectively, of gross trade accounts receivable. Credit loss expense associated with our trade customer receivables was$7.6 million and$7.1 million in 2020 and 2019, respectively. As a percentage of net sales, our credit loss expense was less than 0.1% for each of 2020 and 2019. Claims Liabilities and Insurance Recoverables We maintain reserves related to workers' compensation, auto and general liability and health and welfare programs that are principally self-insured. Our workers' compensation, auto and general liability insurance policies currently include a deductible of$500,000 per occurrence and we maintain excess loss insurance that covers any health and welfare costs in excess of$400,000 per person per year. Our reserves for workers' compensation, auto and general insurance liabilities are estimated based on applying an actuarially derived loss development factor to our incurred losses, including losses for claims incurred but not yet reported. 38 -------------------------------------------------------------------------------- Table of Contents Actuarial projections of losses concerning workers' compensation, auto and general insurance liabilities are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, health care costs, litigation trends, legal interpretations, legislative reforms, benefit level changes and claim settlement patterns. Our reserve for health and welfare claims includes an estimate of claims incurred but not yet reported, which is derived primarily from historical experience. Our claim liabilities and the related recoverables from insurance carriers for estimated claims in excess of the deductible and other insured events are presented in their gross amounts because there is no right of offset. The following is a summary of our net reserves (in millions): December 31, 2020 December 31, 2019 Current Long-Term Total Current Long-Term Total Gross claims liabilities: Workers' compensation$ 9.7 $ 28.8 $ 38.5 $ 8.5 $ 26.6 $ 35.1 Auto and general insurance 7.6 9.4 17.0 6.8 9.5 16.3 Health and welfare 5.2 - 5.2 5.1 - 5.1 Total gross claims liabilities$ 22.5 $ 38.2 $ 60.7 $ 20.4 $ 36.1 $ 56.5 Insurance recoverables$ (4.1) $ (15.4) $ (19.5) $ (3.1) $ (14.4) $ (17.5) Reserves, net: Workers' compensation$ 8.4 $ 18.1 $ 26.5 $ 7.3 $ 16.4 $ 23.7 Auto and general insurance 4.8 4.7 9.5 4.9 5.3 10.2 Health and welfare 5.2 - 5.2 5.1 - 5.1 Reserves, net$ 18.4 $ 22.8 $ 41.2 $ 17.3 $ 21.7 $ 39.0 The increase in these reserves for 2020 was due primarily to new claims in 2020 as well as growth of older claims for our workers compensation, auto and general insurance. A 10% change in our incurred but not reported estimates would increase or decrease the estimated reserves for our workers' compensation, auto and general insurance, and health and welfare liabilities by$1.4 million ,$0.5 million and$0.4 million as ofDecember 31, 2020 , respectively. Valuation of Long-lived Assets We review our long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. Long-lived assets consist primarily of land, buildings, delivery, warehouse and office equipment, leasehold improvements and intangible assets with definite useful lives. An impairment of long-lived assets exists when the carrying amount of a long-lived asset, or asset group, exceeds its fair value. Impairment losses are recorded when the carrying amount of the impaired asset is not recoverable. Recoverability is determined by comparing the carrying amount of the asset (or asset group) to the undiscounted cash flows which are expected to be generated from its use. Our estimates of future cash flows are based on historical experience and management's expectations of relevant customers and markets and other operational factors. These estimates project future cash flows several years into the future and can be affected by factors such as competition, inflation and other economic conditions. We have assessed our asset groups and determined we have six asset groups. The determination of asset groups primarily considers revenue inter-dependencies related to larger chain customer agreements which are serviced by multiple distribution centers. We did not record impairment losses related to long-lived assets in any of the years endedDecember 31, 2020 and 2019. Valuation ofGoodwill Goodwill represents the excess of the purchase consideration of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination.Goodwill is not subject to amortization but must be evaluated for impairment. We test goodwill for impairment annually as ofOctober 1 , or whenever events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying amount. Our reporting units, which are theU.S. andCanada , also represent our operating segments. Whenever events or circumstances change, we assess the related qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The tests to evaluate goodwill for impairment are performed at the reporting unit level. In the quantitative impairment test, we compare the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit is less than its carrying value, such excess represents the amount of goodwill impairment for which an impairment loss would be recorded. Determining the fair value of a reporting unit involves the use of significant estimates and 39
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Table of Contents assumptions. The estimated fair value of each reporting unit is based on the discounted cash flow method, which is based on historical and forecasted amounts specific to each reporting unit and considers sales, gross profit, operating profit and cash flows and general economic and market conditions, as well as the impact of planned business and operational strategies and other estimates and assumptions for future growth rates, working capital and capital expenditures. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. We did not record any impairment charges related to goodwill during the years endedDecember 31, 2020 and 2019. In connection with our annual goodwill impairment testing performed during 2020, the quantitative test indicated that the fair values of the applicable reporting units significantly exceeded their carrying values, and accordingly, no further testing of goodwill was required. However, changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including expected future cash flows and discount rate, could result in a significantly different estimate of the fair value of the reporting units in the future and could result in impairment of goodwill.
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