d e l i ve r i n g a
MILK
2016 Annual Report
freshvision C O R E - M A R K A N N U A L R E P O R T 2 0 1 6
Core-Mark was the very first to bring FRESH to the Convenience
Store Industry. Along with convenience, today’s shoppers are looking
for fresh items for their families. Their demands for fresh produce,
bakery, sandwiches and coffee have increased steadily year over year.
The rise in interest in health-conscious snacks and beverages has also
increased. Core-Mark has programs and solutions to meet our customers’
needs. We partner with our customers using advanced systems to
ensure that there is a sustainable supply chain, unsurpassed quality,
total satisfaction and increased profitability.
Core-Mark delivers FRESH. We understand it and live by it.
Core-Mark delivers the best-in-class choices in fresh produce, dairy, bakery, beverages as
well as health-conscious snacks and beverages to the Convenience Store Industry.
delivering fresh C O R E - M A R K A N N U A L R E P O R T 2 0 1 6
Dear Fellow Shareholders,
For Core-Mark, 2016 was a year of tremendous growth and excellent progress on the key
strategies that we believe will drive long-term, profitable growth and create shareholder
value. We posted record results in revenue, which grew over 30%, and Adjusted EBITDA,
which grew approximately 13%. We achieved these results due, in large part, to the
absorption of two large new customers: Murphy U.S.A. and 7-Eleven, and the successful
acquisition of Pine State Convenience. We also successfully implemented both a human
resource system and a financial system. Our ability to execute on these many fronts
reflects the strength of our people and our culture, as well as our commitment to serving
our customers with excellence and integrity. I am proud of our results and excited about
our future.
The Industry We Serve
The convenience retail industry is one of the most vital industries in North America,
representing over 30% of all retail locations in the country. Our industry is highly
fragmented and competitive, but our approach to the market has proven over time that
we have a competitive advantage, demonstrated by our significant long-term market
share gains. Our advantage is our focus on providing value-added services to our
customers that differentiate us in the marketplace, and help our customers outperform
their competition. It is important to understand that single store owners continue to
dominate our industry, comprising over 60% of the convenience stores in the country.
This requires us to offer a very wide range of products and services to meet the needs of
our diverse customer base. Our industry continues to grow, evolve and adapt to changes
in consumer demands; we are constantly evaluating the products and services we offer
our customers to align with those changes. This ensures that we are offering the right
products to the right consumers at the right price. These dynamics help to drive both
our strategy and our market opportunity.
Long Term Vision
Our Company’s mission statement is to be the market leader in the convenience industry.
We have invested in systems, technology and people to ensure we deliver on our
mission. Given the fragmented nature of our industry and our small market share, we
believe that we should be able to grow our business long-term and we have invested in
our company to prepare for that future growth.
In 2016, we made investments in a number of areas of our business, while also focusing
on the generation of strong financial results. We acquired Pine State Convenience, which
we purchased for $88 million and will integrate onto our systems in the fourth quarter of
2017. We also invested in new systems, which we expect to create efficiencies and
savings in our future. In addition, we invested in a new building for our Las Vegas
division and continue to invest in our frozen and chill capacity to better service those
fast growing and important categories. Finally, we continue to invest in leadership
development to ensure we are prepared to become a larger organization servicing an
evolving industry.
[continued on next page]
Net Sales ($ billions)
$1 5.0
$1 4.0
$13.0
$12.0
$11.0
$10.0
$14.5
$11.1
2015
2016
Adjusted EBITDA* ($ millions)
$160.0
$150.0
$140.0
$1 30.0
$120.0
$152.3
$135.2
2015
2016
Diluted Earnings
$1.17
$1.11
$1.20
$1.15
$1.10
$1.05
$1.00
$.95
2015
2016
Cash Dividends ($ millions)
$16.0
$15.0
$14.0
$13.0
$12.0
$15.5
$12.8
2015
2016
*Adjusted EBITDA, which is a non-GAAP
measure, is equal to net income adding back
net interest expense, provision for income
taxes, depreciation and amortization,
LIFO expense, stock-based compensation
expense and net foreign currency
transaction gains or losses.
Letter to our Shareholders
C O R E - M A R K A N N U A L R E P O R T 2 0 1 6
[continued]
Our Fresh and Vendor Consolidation Initiative (VCI) strategies had its best year ever in 2016 with aggregate incremental sales of $160
million. These two strategies are essential to growing our profits at a higher rate than our revenues while also contributing to our
customers’ profitable growth. VCI helps our customers take costs out of the very inefficient supply chain in our industry. Customers of
all sizes increasingly recognize it is simply more logical and cost effective to have us provide more product on our trucks than to have
multiple vendors making multiple deliveries to their stores. These strategies were also developed in anticipation of trends in “Fresh
and Good For you” products which are now the fastest growing categories in the industry and reflect important changes in consumer
preferences toward healthier eating. Collaborating with our customers to make sure they offer products that appeal to this growing
consumer segment increases their relevance in a competitive retail marketplace while also improving their bottom lines.
Our third strategy addresses the differential in net profits earned between our independent retailers and our chain customers. We
discovered this discrepancy was due largely to a lack of marketing and category management expertise. Our Core Solutions Group
developed category management and marketing expertise for these customers through our FMI surveys. These surveys help the
independent store increase their profits by targeting what the consumer is demanding and selling those products at the right price.
This initiative has been one of the most successful in the Company’s history.
Our last core strategy is one of geographic expansion, primarily through acquisitions. We have completed seven acquisitions and
expanded into three new warehouses since 2006. We believe our approach to the market is resonating among the c-store
industry and beyond, and it is our strategy to have a wider network of warehouses to service a broader market and expand our
core strategies to more retailers.
Overall, we believe we have significant opportunity to grow our business through delivering innovative new solutions, capturing
additional market share and making opportunistic strategic acquisitions.
The Year Ahead
For 2017, we are expecting to return to more historical levels of growth with revenues growing between 5-7% and Adjusted EBITDA
growing at 9-14%. Compared to the significant period of growth and investment in 2016, we see 2017 as a year of relative stability,
where we focus on leveraging our operating costs, executing on the fundamentals and generating positive free cash flow. Of
course, we also have exciting new opportunities, including our initial engagement with Walmart, where we are rolling out deliveries
to over 500 of their stores in the spring.
We will also continue to invest in our business in 2017 by expanding our frozen and chill capacity, growing our fleet to service
additional volume and focusing on training the current and future leaders of the company. I view these investments as critical to
our future success.
Increasing shareholder value through excellent operational execution and smart capital allocation decisions is very important to
us. While we invested in our business during 2016, we also spent nearly $9 million purchasing our shares and spent nearly $16
million on dividend payments. These decisions reflect our belief in the continued financial strength of our business and manage-
ment’s commitment to returning value to our shareholders. We plan to continue to invest in our business to prepare for the
future and to ensure that our vision is realized and to continue to make smart capital allocation decisions.
I am confident that our focus on our core strategies paired with our commitment to execution on the fundamentals will generate
excellent results in 2017 and additional successes over the coming years. I thank you, our shareholders, for your continued support.
Thomas B. Perkins
President and Chief Executive Officer
INTEGRITY PIONEERING FAMILY COMMITTED CUSTOMER
CENTRIC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2016
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
Core-Mark Holding Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
20-1489747
(I.R.S. Employer Identification No.)
395 Oyster Point Boulevard, Suite 415
South San Francisco, California 94080
(Address of Principal Executive Offices, including Zip Code)
(650) 589-9445
(Registrant’s Telephone Number, including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange
on which registered
NASDAQ Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2016, the
last business day of the registrant’s most recently completed second fiscal quarter: $2,117,773,783
As of February 24, 2017, the registrant had 46,315,364 shares of its common stock outstanding.
The information called for by Part III of this Form 10-K will be included in an amendment to this Form 10-K or incorporated by
reference to the registrant’s 2017 definitive proxy statement to be filed pursuant to Regulation 14A.
DOCUMENTS INCORPORATED BY REFERENCE
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
PART I
Page
ITEM 1.
BUSINESS
ITEM 1A.
RISK FACTORS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4.
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
ITEM 9B.
OTHER INFORMATION
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
PART III
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
i
1
8
14
15
16
16
17
20
22
41
42
75
75
75
76
76
76
76
76
77
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K that are not statements of historical fact are forward-looking statements
made pursuant to the safe-harbor provisions of the Exchange Act of 1934 and the Securities Act of 1933.
Forward-looking statements in some cases can be identified by the use of words such as “may,” “will,” “should,” “potential,”
“intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “would,” “project,” “predict,” “continue,” “plan,” “propose”
or other similar words or expressions. Forward-looking statements are made only as of the date of this Form 10-K and are based on
our current intent, beliefs, plans and expectations. They involve risks and uncertainties that could cause actual results to differ
materially from historical results or those described in or implied by such forward-looking statements.
A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such
forward-looking statements is included in Part I, Item 1A, “Risk Factors” of this Form 10-K. We undertake no obligation to update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise.
SEC Regulation - Non-GAAP Information
The financial statements in this Annual Report on Form 10-K are prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). Core-Mark Holding Company, Inc. (“Core-Mark”) uses certain non-
GAAP financial measures including Adjusted EBITDA, net income excluding LIFO expense, net sales less excise taxes, remaining
gross profit, remaining gross profit margin, remaining gross profit margin less excise taxes and cigarette remaining gross profit per
carton. 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. Management uses these non-GAAP financial
measures in order to have comparable financial results to analyze changes in Core-Mark’s 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. More information about such measures are included in Item 7 - Adjusted EBITDA and Item 7- Non GAAP
Financial Information.
ii
ITEM 1.
BUSINESS
PART I
Unless the context indicates otherwise, all references in this Annual Report on Form 10-K to “Core-Mark,” “the Company,”
“we,” “us,” or “our” refer to Core-Mark Holding Company, Inc. and its subsidiaries.
Company Overview
Core-Mark is one of the largest wholesale distributors to the convenience retail industry in North America, providing sales,
marketing, distribution and logistics services to over 43,000 customer locations across the United States (U.S.) and Canada through 30
distribution centers (excluding two distribution facilities we operate as a third party logistics provider). Our origins date back to 1888,
when Glaser Bros., a family-owned-and-operated candy and tobacco distribution business, was founded in San Francisco, California.
Our mission is to be the most valued marketer of fresh and broad-line supply solutions to the convenience retail industry.
While the past century has brought incredible changes to our business and the world in which we operate, our goal is the same today
as it was over 125 years ago - to provide customers with the best possible service and to help them grow their sales and profits. We
have grown our business organically and through acquisitions which have expanded our distribution network, product selection and
customer base.
Core-Mark has become one of two national distributors to the convenience store industry in the U.S. and is the largest in
Canada. The national market presence we have established rests primarily with our ability to service customers in every geographic
region within the U.S. through 25 distribution centers and servicing customers in Canada with our five Canadian distribution centers.
We operate in an industry where, in 2015, based on the National Association of Convenience Stores (“NACS”) State of the
Industry (“SOI”) report, total in-store sales at convenience retail locations in the U.S. increased 5.8% to approximately $225.8 billion
and were generated through approximately 154,000 stores. Over the ten years from 2006 through the end of 2015, U.S. convenience
in-store sales have increased by a compounded annual growth rate of approximately 3.3%. Based on the Canadian Convenience Store
Association (“CCSA”) 2015 Industry report, we estimate that total Canadian in-store sales at convenience locations were
approximately CAD$40.0 billion generated through approximately 26,000 stores.
Company Highlights
Net income grew from $26.2 million in 2011 to $54.2 million in 2016, or approximately 16% compounded annually. Our net
sales grew from $8.1 billion in 2011 to $14.5 billion in 2016, yielding an annual compounded growth rate of approximately 12%,
while our annual Adjusted EBITDA(1) increased from $91.9 million to $152.3 million, or approximately 11%, compounded annually.
Our growth has been driven primarily by our business strategies described more fully below. We believe these strategies have
positioned us to continue to grow our approximate 6% market share of total in-store sales within the convenience store channel in
North America and to take advantage of growth opportunities with other retail store formats. Below are key highlights of 2016:
•
•
•
•
In December 2016, we signed a three-year supply agreement to service approximately 530 Walmart Neighborhood
Markets and Supercenter stores in five western states (Arizona, California, New Mexico, Nevada and Utah). We will
be the primary distributor to these stores for candy, tobacco and certain snack foods. We expect to begin service
under this agreement in May 2017.
In June 2016, we acquired substantially all of the assets of Pine State Convenience, a division of Pine State Trading
Company, located in Gardiner, Maine, for cash consideration of approximately $88 million.
In October 2015, we signed a five-year agreement with Murphy U.S.A. to be the primary wholesale distributor to
over 1,400 stores located in 24 states across the Southwest, Southeast and Midwest United States. Services under
this contract began in the first quarter of 2016. We believe our services have created efficiencies and a strategic
supply chain relationship for Murphy U.S.A.
In October 2015, we signed a five-year supply agreement with 7-Eleven, Inc. to service approximately 900 stores in
three western regions. We began servicing 7-Eleven in October 2016 and we became the primary wholesale
distributor delivering a wide range of products to these stores out of three of our divisions - Las Vegas, NV, Salt
Lake City, UT and Sacramento, CA.
(1) Adjusted EBITDA is a non-GAAP measure. See reconciliation of Adjusted EBITDA to net income in Item 7- Adjusted EBITDA.
1
Business Strategy
Our objective is to increase overall return to stockholders by growing our revenues and leveraging operating costs to increase
profitability. As one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North
America with a track record of effectively selling into other retail channels, we believe we are well-positioned to continue meeting this
objective. Our business strategy also includes the following initiatives, designed to further enhance the value we provide to our retail
customers:
Vendor Consolidation Initiative (“VCI”). We expect our VCI program will allow us to continue to grow our sales by
capitalizing on the highly fragmented supply chain that services the convenience retail industry. A convenience retailer generally
receives store merchandise through a large number of direct-store deliveries. This represents a highly inefficient and costly process for
retailers. Our VCI program targets inefficiencies in the convenience store supply chain by offering the retailer the ability to receive
multiple weekly deliveries for the bulk of their products, including dairy and other merchandise they purchased from direct-store
delivery companies. This simplifies the supply chain and provides retailers with an opportunity to improve inventory turns and
working capital, reduce operational and transaction costs, and greatly diminish their out-of-stocks.
Fresh Products (“Fresh”). There is an increasing trend among consumers to purchase fresh food from convenience and
other retail store formats. To meet this demand, we have modified and upgraded our refrigerated capacity, including investing in chill
docks, and tri-temperature (“tri-temp”) trailers, which provide the infrastructure to deliver a significant range of chilled items
including milk, produce and other fresh foods to retail outlets. We have established partnerships with strategically-located dairies,
fresh kitchens and bakeries to further enable us to deliver premium consumer items such as sandwiches, wraps, cut-fruit, parfaits,
pastries, doughnuts, bread and home meal replacement solutions. We continue to promote our fresh products through the development
of unique and comprehensive marketing and equipment programs that assist the retailer in showcasing their fresh product offering. We
believe our investments in infrastructure, combined with our strategically located suppliers and in-house expertise, position us as the
leader in providing fresh products and programs to the convenience retail industry. Proper execution of VCI, the cornerstone being
dairy distribution, provides Core-Mark the critical mass necessary to offer retailers a multiple weekly delivery platform, which
facilitates the proper handling and dating of fresh products. We believe that fresh items are increasingly driving consumer decisions,
and will continue to be an important category.
Focused Marketing Initiative (“FMI”). Designed to enhance our relationship with our independent customer base and to
further differentiate us in the market place, our FMI program is centered on increasing the sales and profitability of the independent
store through improved category insights, optimized retail price strategy and demographic decision-making, along with providing
Core-Mark’s marketing solutions to create a comprehensive retail marketing strategy. We believe our innovative approach, which
focuses on building a trusted partnership with our customers, has established us as the market leader in providing valuable marketing
and supply chain solutions to the convenience retail industry.
Acquisitions and Expansion. We believe there is significant opportunity to increase our market presence and revenue growth
through strategic and opportunistic acquisitions and the continued expansion of our credit facility infrastructure. We completed seven
acquisitions and added three additional warehouses between 2006 and 2016, which expanded our distribution network, product
selection and customer base. We will continue to be opportunistic in pursuing acquisitions that allow further leveraging of our
geographic footprint and bring Fresh and VCI to a broader customer base.
Competitive Strengths
We believe we have the following fundamental competitive strengths, which form the foundation for our business strategy:
Innovation and Flexibility. Wholesale distributors typically provide convenience retailers access to a broad product line, the
ability to place small quantity orders, inventory management and access to trade credit. Our capability to increase sales and
profitability with existing and new customers is based on our ability to deliver consistently high levels of service, innovative
marketing programs, technology solutions and logistics support. We believe we are one of the first to recognize emerging trends and
to offer retailers our unique strategic solutions such as VCI, Fresh and FMI.
Distribution Capabilities. The wholesale distribution industry is highly fragmented and historically has consisted of a large
number of small, privately-owned businesses and a small number of large, full-service wholesale distributors serving multiple
geographic regions. Relative to smaller competitors, large national distributors such as Core-Mark benefit from several competitive
advantages including: increased purchasing power, the ability to service large national chain accounts, economies of scale in sales and
operations, and the resources to invest in information technology and other productivity-enhancing technologies. Our wholesale
distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers.
Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders and frequency of
deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing
inventory management and accessing trade credit.
2
Customers
We service over 43,000 customer locations in 50 states in the U.S. and five Canadian provinces. Our primary customer base
consists of traditional convenience stores as well as alternative outlets selling consumer packaged goods. Our traditional convenience
store customers include many of the major national and super-regional convenience store operators, as well as independently owned
convenience stores. Our alternative outlet customers comprise a variety of store formats, including grocery stores, drug stores, liquor
stores, cigarette and tobacco shops, hotel gift shops, military exchanges, college and corporate campuses, casinos, hardware stores,
airport concessions and other specialty and small format stores that carry convenience products.
Our top ten customers accounted for 43.2% of our net sales in 2016. Our largest customers were Murphy U.S.A., which the
Company began servicing in the first quarter of 2016, and Alimentation Couche-Tard, Inc. (“Couche-Tard”). Murphy U.S.A and
Couche-Tard accounted for 12.0% and 11.4% of our total net sales, respectively.
Products
We purchase a variety of brand name and private label products, in excess of 53,000 stock keeping units (“SKUs”), from
suppliers and manufacturers. Cigarette products represent less than 5% of our total SKUs purchased. We offer customers a variety of
food/non-food products, including fast food, candy, snacks, groceries, fresh products, dairy, bread, beverages, other tobacco products,
general merchandise and health and beauty care products.
Below is a comparison of our net sales mix by primary product category for the last three years (in millions):
Product Category
Cigarettes
Food (1)
Fresh (1)
Candy
Other tobacco products
(“OTP”)
Health, beauty & general
Beverages
Equipment/other
Total food/non-food
Net Sales
$ 10,335.7
1,422.5
389.8
620.0
1,133.8
446.7
176.5
4.4
2016
% of
Net Sales
71.1% $
9.8
2.7
4.3
7.8
3.1
1.2
—
Year Ended December 31,
2015
% of Net
Net Sales
Sales
7,528.5
1,251.1
335.0
557.0
870.3
368.8
156.6
2.1
68.0% $
11.3
3.0
5.0
8.0
3.3
1.4
—
Net Sales
6,942.0
1,180.9
281.1
534.3
827.5
361.0
151.8
1.5
products
Total net sales
4,193.7
$ 14,529.4
28.9%
100.0% $
3,540.9
11,069.4
32.0%
100.0% $
3,338.1
10,280.1
2014
% of
Net Sales
67.5%
11.5
2.7
5.2
8.1
3.5
1.5
—
32.5%
100.0%
(1)
In 2016, the Fresh category was separated from the Food category to better highlight the growth in the Fresh commodity. The 2015 and 2014 presentations
have been realigned to reflect these changes.
Cigarette Products. We purchase cigarette products from major U.S. and Canadian manufacturers. We have no long-term
cigarette purchase agreements and buy substantially all of our products on an as-needed basis. Cigarette manufacturers historically
offer structured incentive programs to wholesalers based on maintaining market share and executing promotional programs. Net sales
of the cigarettes category grew 37.3% in 2016 to $10,335.7 million, accounting for approximately 71.1% of our total net sales and
29.9% of our total gross profit in 2016. We control major purchases of cigarettes centrally to optimize inventory levels and purchasing
opportunities, and the daily replenishment of inventory and brand selection is controlled by our distribution centers.
In 2016 our cigarette carton sales in the U.S. and Canada increased 34.5% and 13.8%, respectively, benefiting from market
share gains, including the addition of Murphy U.S.A, and the acquisition of Pine State Convenience. In the industry overall, U.S. and
Canadian cigarette consumption steadily declined over the last decade. Based on data compiled from the U.S. Department of
Agriculture - Economic Research Service and provided by the Tobacco Merchants Association (“TMA”), total cigarette consumption
in the U.S declined from 389 billion cigarettes in 2006 to 275 billion cigarettes in 2015, or a compounded annual decline of
approximately 3.8%. Total cigarette consumption declined in Canada from 32 billion cigarettes in 2006 to 27 billion cigarettes in
2015, or a compounded annual decline of approximately 1.9% based on statistics provided by the TMA. Although we anticipate
overall cigarette consumption will continue to decline, we expect to offset these declines through market share expansion, growth in
our non-cigarette categories and incremental gross profit from cigarette manufacturer price increases.
We expect cigarette manufacturers will continue to raise prices as carton sales decline in order to maintain or enhance their
overall profitability.
3
Excise taxes are levied on cigarettes and other tobacco products by the U.S. and Canadian federal governments and are also
imposed by various states, localities and provinces. We collect state, local, and provincial excise taxes from our customers and remit
these amounts to the appropriate authorities based on the credit terms, if applicable, extended by each jurisdiction. Net sales and cost
of sales included offsetting amounts related to state, local and provincial excise taxes were approximately $3.0 billion, $2.2 billion and
$2.1 billion in 2016, 2015 and 2014, respectively.
Food/Non-food Products. Our food products include fast food, candy, snacks, groceries, beverages and fresh products such
as sandwiches, juices, salads, produce, dairy and bread. Our non-food products include cigars, tobacco, health and beauty care
products, general merchandise and equipment. Net sales of the combined food/non-food product categories grew 18.4% in 2016 to
$4,193.7 million, which was 28.9% of our total net sales driven primarily by incremental sales to existing customers and market share
gains including the acquisition of Pine State Convenience. Sales generated from VCI, Fresh and FMI were the primary drivers of the
increased sales to existing customers. Gross profit for food/non-food categories grew $59.5 million, or 13.0%, to $516.9 million in
2016, which was 70.1% of our total gross profit. In order to take advantage of the significantly higher margins earned by food/non-
food products, two of our key business strategies, VCI and Fresh, focus primarily on the highest margin categories in the food/non-
food group. We believe there is an increasing trend toward purchases of fresh food from convenience and other retail store formats.
Combined sales of our Food and Fresh categories grew $226.2 million, or 14.3%, to $1,812.3 million. We also believe there is an
overall trend toward the increased use of other tobacco products. Sales of OTP increased $263.5 million, or 30.3%, driven primarily
by this trend, as well as market share gains. Our strategy is to continue to grow food/non-food products through our VCI, Fresh, and
FMI strategies.
Suppliers
We purchase products for resale from approximately 5,000 trade suppliers and manufacturers located across the U.S. and
Canada. In 2016, we purchased approximately 79% of our products from our top 20 suppliers, with our top two suppliers, Philip
Morris USA, Inc. and R.J. Reynolds Tobacco Company, accounting for approximately 35% and 23% of our purchases, respectively.
We coordinate our purchasing from suppliers by negotiating, on a corporate-wide basis, special arrangements to obtain volume
discounts and additional incentives, while also taking advantage of promotional and marketing incentives offered to us as a wholesale
distributor. In addition, buyers in each of our distribution facilities purchase products directly from the manufacturers, improving
product mix and availability for individual markets.
Operations
As of December 31, 2016, we operated a network of 30 distribution centers in the U.S. and Canada (excluding two
distribution facilities we operate as a third party logistics provider). Twenty-five of our distribution centers are located in the U.S. and
five are located in Canada.
The map below depicts the scope of our operations and the names of our distribution centers.
4
We operate four consolidation centers which buy products from our suppliers in bulk quantities and then re-distribute the
products to many of our other distribution centers. The products purchased by our consolidation centers include frozen and chilled
items, candy, snacks, beverages, health and beauty care and general merchandise products. We operate two additional facilities as a
third party logistics provider. One distribution facility located in Phoenix, Arizona, referred to as the Arizona Distribution Center
(“ADC”), is dedicated solely to supporting the logistics and management requirements of one of our major customers, Couche-Tard.
The second distribution facility located in San Antonio, Texas, referred to as the Retail Distribution Center (“RDC”), is dedicated
solely to supporting another major customer, CST Brands, Inc.
Our proprietary Distribution Center Management System platform provides our distribution centers with the flexibility to
adapt rapidly to changing business needs and allows them to provide our customers with necessary information technology
requirements and integration capabilities.
Distribution
At December 31, 2016, we had approximately 1,800 transportation department personnel, including delivery drivers, shuttle
drivers, routers, training supervisors and managers who focus on achieving safe, on-time deliveries. Our daily orders are picked and
loaded nightly in reverse order of scheduled delivery. At December 31, 2016, our distribution fleet primarily consisted of nearly 1,500
leased tractors and trailers with over 500 additional owned trailers. We have made a significant investment over the past few years in
upgrading our trailer fleet to tri-temp, which gives us the capability to deliver frozen, chilled and non-refrigerated goods in one
delivery. As of December 31, 2016, approximately 97% of our trailers were tri-temp, with the remainder capable of delivering
refrigerated and non-refrigerated foods. This provides us the multiple temperature zone capability needed to support our focus on
delivering fresh products to our customers. We have transitioned a portion of our truck fleet to Compressed Natural Gas (“CNG”),
which allows us to reduce our carbon footprint and lower our transportation costs. As of December 31, 2016, approximately 20% of
our trucks ran on CNG. To date, we have opened seven CNG stations, two of which we own, located in Wilkes-Barre, Pennsylvania
and Corona, California, and the other five are operated in partnership with U.S. Oil and are located in Aurora, Colorado, Forrest City,
Arkansas, Sanford, North Carolina, Atlanta, Georgia and Tampa, Florida under the name GAIN Clean Fuel (“GAIN”). In addition to
providing fuel to our fleet, the GAIN stations are also open to other public fleets for fueling.
Competition
Competition within the industry is based primarily on the range and quality of the services provided, price, product selection
and the reliability of wholesalers’ logistics as well as proximity to the customer’s stores. We operate from a perspective that focuses
heavily on flexibility and providing outstanding customer service through our distribution centers, order fulfillment rates, on-time
delivery, innovative marketing solutions and merchandising support as well as competitive pricing.
We believe McLane Company, Inc., a subsidiary of Berkshire Hathaway Inc., and Core-Mark are the two largest convenience
wholesale distributors (measured by annual sales) in North America. There are two other large companies that cover the eastern half
of the U.S: The H.T. Hackney Company and the Eby Brown Company. In addition, there are hundreds of local distributors serving
small regional chains and independent convenience retailers. In Canada, in addition to Core-Mark, there is one large national
company, Wallace & Carey, Inc., one regional company which services the Manitoba, Saskatchewan and Alberta markets, Pratts
Wholesale Limited, and one large national convenience store and grocery wholesaler, Sobeys Inc., aside from Core-Mark, that make
up the competitive landscape.
Beyond the traditional wholesale supply channels, we face potential competition from at least three other supply avenues.
First, certain manufacturers such as Anheuser-Busch Companies, Inc., MillerCoors LLC, The Coca-Cola Company, Frito-Lay, Inc., a
division of PepsiCo, Inc. (“PepsiCo”) and PepsiCo deliver their products directly to convenience retailers. Secondly, club wholesalers
such as Costco Wholesale Corporation (“Costco”) and Sam’s West, Inc. (“Sam’s Club”) provide a limited selection of products at
generally competitive prices; however, they often have limited delivery options and limited services. Finally, some large convenience
retail chains self-distribute products due to the geographic density of their stores and their belief that they can economically service
such locations.
We face competition from the diversion into the U.S. and Canadian markets of cigarettes intended for sale outside of such
markets, including the sale of cigarettes in non-taxable jurisdictions, inter-state/provincial and international smuggling of cigarettes,
the sale of counterfeit cigarettes by third parties, increased imports of foreign low priced brands, the sale of cigarettes by third parties
over the internet and by other means designed to avoid collection of applicable taxes. The competitive environment has been
characterized by a continued influx of cheap products and tobacco alternatives, including electronic cigarettes that challenge sales of
higher priced and fully taxed cigarettes.
Working Capital Practices
We sell products on credit terms to our customers that averaged, as measured by days sales outstanding, about nine days for
each of 2016, 2015 and 2014. Credit terms may impact pricing and are competitive within our industry. Many of our customers remit
payment electronically, which facilitates efficient and timely monitoring of payment risk. Canadian days sales outstanding in
receivables tend to be lower as Canadian industry practice is for shorter credit terms than in the U.S.
5
We maintain our inventory of products based on the level of sales of the particular product and manufacturer replenishment
cycles. The number of days a particular item of inventory remains in our distribution centers varies by product and is principally
driven by the turnover of that product and economic order quantities. We typically order and carry in inventory additional amounts of
certain critical products to assure high order fulfillment levels for these items. Periodically, we may carry higher levels of inventory to
take advantage of anticipated manufacturer price increases. The number of days of cost of sales in inventory averaged about 15 days in
2016, and 16 days in both 2015 and 2014. The cigarette category averaged nine days, ten days, and nine days, in 2016, 2015 and 2014,
respectively. The food/non-food categories averaged 27 days in 2016, and 29 days in both 2015 and 2014.
We obtain terms from our vendors and certain taxing jurisdictions based on industry practices, consistent with our credit
standing. We take advantage of the full complement of term offerings, which may include enhanced cash discounts for earlier
payment or prepayment. Terms for our accounts payable and cigarette and tobacco taxes payable range anywhere from one day
prepaid to 60 days credit. Days payable outstanding for both categories, excluding the impact of prepayments, during each of 2016,
2015 and 2014 averaged about 11 days.
Employees
The following chart provides a breakdown of our employees by function and geographic region (including employees at our
third party logistics facilities) as of December 31, 2016:
TOTAL EMPLOYEES BY BUSINESS FUNCTION
Sales and Marketing
Warehousing and Distribution
Management, Administration, Finance and Purchasing
Total Categories
U.S.
Canada
Total
1,465
4,766
834
7,065
108
367
148
623
1,573
5,133
982
7,688
Three of our distribution centers, Hayward, Las Vegas and Calgary, have employees who are covered by collective
bargaining agreements with local affiliates of The International Brotherhood of Teamsters (Hayward and Las Vegas) and the United
Food and Commercial Workers International Union (Calgary). Approximately 325 employees, or 4% of our workforce, are unionized.
There have been no disruptions in customer service, strikes, work stoppages or slowdowns as a result of union activities, and we
believe we have satisfactory relations with our employees.
Regulation
As a distributor of food products in the U.S., we are subject to the Federal Food, Drug and Cosmetic Act and regulations
promulgated by the U.S. Food and Drug Administration (“FDA”). In Canada, similar standards related to food and over-the-counter
medications are governed by Health Canada. The products we distribute are also subject to federal, state, provincial and local
regulation through such measures as the licensing of our facilities, enforcement by state, provincial and local health agencies of
relevant standards for the products we distribute and regulation of our trade practices in connection with the sale of our products. Our
facilities are inspected periodically by federal, state, provincial and local authorities, including the Occupational Safety and Health
Administration (“OSHA”) under the U.S. Department of Labor, which require us to comply with certain health and safety standards to
protect our employees.
We are also subject to regulation by the U.S. and Canadian Departments of Transportation, which regulate transportation of
perishable goods, and similar state, provincial and local agencies. Our distribution centers in the U.S. and Canada are subject to a
broad spectrum of federal, state, provincial and local environmental protection statutes including those that govern the emissions to
air, soil and water, and the disposal of hazardous substances.
Our policy is to comply with all regulatory and legal requirements and management is not aware of any related issues that
may have a material effect upon our business, financial condition or results of operations.
Registered Trademarks
We have registered trademarks including the following: Arcadia Bay®, Arcadia Bay Coffee Company®, Cable Car®, Core-
Mark®, Core Solutions Group®, EMERALD®, Java Street®, SmartStock® and Pine State Convenience®.
Segment and Geographic Information
We have two operating segments which aggregate into one reportable segment. We also present certain financial information
by segment region -- the U.S. and Canada. See Note 16 - Segment and Geographic Information to our consolidated financial
statements.
6
Seasonality
We typically generate slightly higher net sales and gross profits during the warm weather months (April through September)
than in other times throughout the year. We believe this occurs because the convenience store industry tends to be busier due to timing
of vacations and increase in travel during this period.
Corporate and Available Information
Our corporate headquarters is located at 395 Oyster Point Boulevard, Suite 415, South San Francisco, California, 94080 and
our telephone number is (650) 589-9445.
Our internet website address is www.core-mark.com. We provide free access to various reports that we file with or furnish to
the U.S. Securities and Exchange Commission (“SEC”) through our website, as soon as reasonably practicable after they have been
filed or furnished. These reports include, but are not limited to, our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and any amendments to those reports. Our SEC reports can be accessed through the “Investor Relations”
section of our website under “Financials and Filings,” or through www.sec.gov. Further, a copy of this Annual Report on Form 10-K
is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the
Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Also available on our website are printable versions of Core-Mark’s Audit Committee Charter, Compensation Committee
Charter, Nominating and Corporate Governance Committee Charter, Code of Business Conduct and Ethics, Corporate Governance
Guidelines and Principles and other corporate information. Copies of these documents may also be requested from:
Core-Mark International
395 Oyster Point Blvd, Suite 415
South San Francisco, CA 94080
Attention: Investor Relations
Corporate Governance--Code of Business Conduct and Ethics and Whistle Blower Policy:
Our Code of Business Conduct and Ethics is designed to promote honest, ethical and lawful conduct by all employees,
officers and directors and is available on the “Investor Relations” section of our website at www.core-mark.com under “Corporate
Governance.”
Additionally, the Audit Committee of the Board of Directors of Core-Mark has established procedures to receive, retain,
investigate and act on complaints and concerns of employees, stockholders and others regarding accounting, internal accounting
controls and auditing matters, including complaints regarding attempted or actual circumvention of internal accounting controls or
complaints regarding violations of our accounting policies. The procedures are also described on our website at www.core-mark.com
under “Corporate Governance” in the “Investor Relations” section.
7
ITEM 1A.
RISK FACTORS
Our business is subject to a variety of risks. Set forth below are certain of the important risks that we face, the occurrence of
which may have a material effect on our business, financial condition or results of operations.
Risks Related to Our Business and Industry
Our ability to operate effectively could be impaired by the risks and costs associated with expansion activities.
Our business has expanded rapidly and market share growth is one of our key company initiatives. To accomplish this growth
we have focused on strategic acquisitions and securing large regional and national customers as key elements of success. Any
significant expansion activity comes with inherent risks. Acquisitions may entail various risks such as identifying suitable candidates,
realizing acceptable rates of return on the investment, identifying potential liabilities, obtaining adequate financing, negotiating
acceptable terms and conditions, and successfully integrating operations and converting systems post acquisition. Integrating a large
new customer has similar risks of realizing acceptable returns on invested working capital, negotiating acceptable pricing and service
levels, while managing resources and business interruptions as we integrate the new business into our current infrastructure. We may
realize higher costs, lower margins or fewer benefits than originally anticipated and may experience disruption to our base business in
connection with such acquisitions and other new customer integration activities.
We depend on attracting and retaining qualified labor including our senior management and other key personnel.
We substantially depend on the continued services and performance of our senior executive officers as named in our Proxy
Statement and other key employees. We do not maintain key person life insurance policies on these individuals, and we do not have
employment agreements with any of them. The loss of the services of any of our senior executive officers or other key personnel could
harm our business.
We compete with other businesses in each of our markets with respect to attracting and retaining qualified employees. A
shortage of qualified employees, especially drivers, in a market could require us to enhance our wage and benefit packages in order to
compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees. Any such
shortage of qualified employees could decrease our ability to effectively serve our customers and might lead to lower profits because
of higher labor costs.
Our ability to meet our labor needs is generally subject to numerous other external factors, including prevailing wage rates,
changing demographics, health and other insurance costs, and adoption of new or revised employment and labor laws and regulations.
These external factors could prevent us from locating, attracting or retaining qualified personnel, which would impact the quality of
the services which provide to our customers, and our financial performance may be adversely affected.
We are dependent on the convenience retail industry, and our results of operations could suffer if it experiences an overall
decline or consolidation.
The majority of our sales are made under purchase orders and short-term contracts with convenience retail stores which
inherently involve significant risks. These risks include declining sales in the convenience retail industry due to general economic
conditions, including rising gasoline prices, which may impact “in-store” retail sales, competition from grocery stores and other retail
outlets, termination of customer relationships and consolidation of our customer base. Such events could cause us to experience
decreases in revenues and put pressure on our margins and increase our credit risk and potential bad debt exposure.
Many of the markets in which we compete are highly competitive and we may lose market share and suffer a decline in sales
and profitability in these markets if we are unable to outperform our competition.
Our distribution centers operate in highly competitive markets. We face competition from local, regional and national
tobacco and consumable products distributors on the basis of service, price, reliability, delivery schedules, and variety of products
offered. We also face competition from club stores and alternate sources that sell consumable products to convenience retailers. Some
of our competitors, including McLane Company, Inc. (a subsidiary of Berkshire Hathaway Inc.), have substantial financial resources
and long-standing customer relationships. In addition, heightened competition among our existing competitors, or by new entrants into
the distribution market, could create additional competitive pressures that may result in the loss of major customers, reduced margins,
or have other adverse effects on our business. If we fail to successfully respond to these competitive pressures or to implement our
strategies effectively, we may lose market share and our results of operations could suffer.
Our failure to maintain relationships with large customers could potentially harm our business.
We have relationships with many large regional and national convenience and other store chains. While we expect to
maintain these relationships for the foreseeable future, any termination, non-renewal or reduction in services that we provide to such
customers could cause our revenues and operating results to suffer.
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We may lose business if manufacturers or large retail customers convert to direct distribution of their products.
In the past, certain large manufacturers and customers have elected to engage in direct distribution or third party distribution
of their products and eliminate wholesale distributors such as Core-Mark. If other manufacturers or retail customers make similar
elections in the future, our revenues and profits would be adversely affected and there can be no assurance that we will be able to
mitigate such losses.
Our business is sensitive to fuel prices and related transportation costs, which could adversely affect our business.
Our operating results are sensitive to, and may be adversely affected by, unexpected increases in fuel or other transportation-
related costs, including costs from the use of third party carriers, temporary staff and overtime. Historically, we have been able to pass
on a substantial portion of increases in our own fuel or other transportation costs to our customers in the form of fuel or delivery
surcharges, but our ability to continue to pass through these increases, is not assured. If we are unable to continue to pass on fuel and
transportation-related cost increases to our customers or do not realize the benefits we expect from converting a large percentage of
our trucks to operate on natural gas or incur higher expenses if the price of diesel fuel decreases but the price of natural gas does not
similarly decrease, our operating results could be negatively affected.
Cigarette and consumable goods distribution is a low-margin business sensitive to inflation and deflation.
We derive most of our revenues from the distribution of cigarettes, other tobacco products, candy, snacks, fast food,
groceries, fresh products, dairy, beverages, general merchandise and health and beauty care products. Our industry is characterized by
a high volume of sales with low profit margins. Our food/non-food sales are generally priced based on the manufacturer’s cost of the
product plus a percentage markup. As a result, our profit levels may be negatively impacted during periods of cost deflation or
stagnation for these products, even though our gross profit as a percentage of the price of goods sold may remain relatively constant.
In addition, periods of product cost inflation may have a negative impact on our gross profit margins with respect to sales of cigarettes
because gross profit on cigarette sales are generally fixed on a cents per carton basis. Therefore, as cigarette prices increase, gross
profit generally decreases as a percentage of sales. In addition, if the cost of the cigarettes that we purchase increases due to
manufacturer price increases, reduced or eliminated manufacturer discounts and incentive programs or increases in applicable excise
tax rates, our inventory carrying costs and accounts receivable could rise, placing pressure on our working capital requirements.
We rely on manufacturer discount and incentive programs and cigarette excise stamping allowances, and any material
changes in these programs could adversely affect our results of operations.
We receive payments from the manufacturers on the products we distribute for allowances, discounts, volume rebates and
other merchandising and incentive programs. These payments are a substantial contributor to our gross profit. The amount and timing
of these payments are affected by changes in the programs by the manufacturers, our ability to sell specified volumes of a particular
product, attaining specified levels of purchases by our customers and the duration of carrying a specified product. In addition, we
receive discounts from certain taxing jurisdictions in connection with the collection of excise taxes. If the manufacturers or taxing
jurisdictions change or discontinue these programs or change the timing of payments, or if we are unable to maintain the volume of
our sales required by such programs, our results of operations could be negatively affected.
We depend on relatively few suppliers for a large portion of our products, and any interruptions in the supply of the products
that we distribute could adversely affect our results of operations.
We obtain the products we distribute from third party suppliers. At December 31, 2016, we had approximately 5,000 vendors
and during 2016 we purchased approximately 79% of our products from our top 20 suppliers, with purchases from our top two
suppliers, Philip Morris USA, Inc. and R.J. Reynolds Tobacco Company, representing approximately 35% and 23% of our purchases,
respectively. We do not have any long-term contracts with our suppliers committing them to provide products to us. Our suppliers
may not provide the products we distribute in the quantities we request on favorable terms, or at all. We are also subject to delays
caused by interruption in production due to conditions outside our control, such as slow-downs or strikes by employees of suppliers,
inclement weather, transportation interruptions, regulatory requirements and natural disasters. Our inability to obtain adequate
supplies of the products we distribute could cause us to fail to meet our contractual and other obligations to our customers and reduce
the volume of our sales and profitability.
We may be subject to product liability claims and counterfeit product claims which could materially adversely affect our
business.
As a distributor of food and consumer products, we face the risk of exposure to product liability claims in the event that the
use of a product sold by us causes injury or illness. In addition, certain products that we distribute may be subject to counterfeiting.
Our business could be adversely affected if consumers lose confidence in the safety and quality of the food and other products we
distribute. Further, our operations could be subject to disruptions as a result of manufacturer recalls. This risk may increase as we
continue to expand our distribution of fresh products. If we do not have adequate insurance, if contractual indemnification from the
supplier or manufacturer of the defective, contaminated or counterfeit product is not available, or if a supplier or manufacturer cannot
fulfill its indemnification obligations to us, the liability relating to such product claims or disruption as a result of recall efforts could
materially adversely impact our results of operations.
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We may not be able to achieve the expected benefits from the implementation of marketing initiatives.
We are continuously improving our competitive performance through a series of strategic marketing initiatives. The goal of
this effort is to develop and implement a comprehensive and competitive business strategy, addressing the special needs of the
convenience industry environment, increasing our market position within the industry and ultimately creating increased stockholder
value. Customer acceptance of our new marketing initiatives may not be as anticipated or competitive pressures may cause us to
curtail or abandon these initiatives, resulting in lower revenue growth and unachieved cost savings.
Maintaining our brand and reputation is necessary for the success of our business.
Our established brand and reputation within the market largely contributes to our success. Our current and future business
could be negatively impacted if we were poorly represented or garnered negative publicity through various media channels, which
include but are not limited to, print, broadcast, web-based, and social media. Brand value is based in large part on perceptions of
subjective qualities, and even isolated incidents can erode trust and confidence, particularly if they result in adverse publicity,
governmental investigations or litigation. Even if the aforementioned situations were unfounded or not material to our business, these
events could still diminish demand for our products and services and erode customer confidence. If any of these events were to occur,
they could have a negative impact on our results of operations and financial condition.
Our information technology systems may be subject to failure, disruptions, security breaches (such as malware, viruses,
hacking or other cyber-attacks) which could compromise our ability to conduct business, seriously harm our business and
adversely affect our financial results.
Our business is highly dependent on our enterprise information technology systems. We rely on our information technology
systems and our internal information technology staff to maintain the information required to operate our distribution centers and to
provide our customers with fast, efficient and reliable deliveries. We have taken steps to increase redundancy in our information
technology systems and have disaster recovery plans in place to mitigate events that could disrupt our systems’ service. However, if
our systems fail or are not reliable, we may suffer disruptions in service to our customers and our results of operations could suffer.
We may upgrade and replace various components of our proprietary enterprise resource planning (“ERP”) system
periodically with the goal of maintaining and improving overall functionality, performance and service. As technology-based solutions
become more integrated with our service offerings, our ability to service our customers could be impacted, creating additional
competitive pressure and causing us to lose market share.
In addition, we retain sensitive data, including intellectual property, proprietary business information and personally
identifiable information, in our secure data centers and on our networks. We may face threats to our data centers and networks of
unauthorized access, security breaches and other system disruptions. Despite our security measures, our infrastructure may be
vulnerable to attacks by experienced hackers or other disruptive events.
Computer malware, viruses, hacking and other cyber-attacks have become more prevalent and may occur on our systems in
the future. Intruders may also take the form of parties that attempt to fraudulently induce employees or other users of our systems to
disclose sensitive or confidential information or otherwise disrupt operations. Any such security breach may compromise information
stored on our networks and may result in significant data losses or theft of intellectual property, proprietary business information or
personally identifiable information belonging to us or our customers, business partners or employees. Though it is difficult to
determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance,
reliability and security affects the availability of our technical infrastructure and technology-based services. Any such failure may
harm our reputation and our ability to retain existing customers and attract new customers and could impact our results of operation.
We may be subject to various claims and lawsuits that could result in significant expenditures.
The nature of our business exposes us to the potential for various claims and litigation related to labor and employment,
personal injury, property damage, business practices, environmental liability and other matters. Any material litigation or a
catastrophic accident or series of accidents could have a material adverse effect on our business, financial position and results of
operations and cash flows.
Unions may attempt to organize our employees.
As of December 31, 2016, 325, or approximately 4%, of our employees were covered by collective bargaining agreements
with labor organizations, which agreements expire at various times. We cannot assure that we will be able to renew our respective
collective bargaining agreements on favorable terms, that employees at other facilities will not unionize or that our labor costs will not
increase. In addition, the United States National Labor Relations Board (“NLRB”) is becoming more active with the passage of
administrative rules that could impact our ability to manage our labor force and wage successful campaigns preventing further
unionization of our employees. To the extent we suffer business interruptions as a result of strikes or other work stoppages or slow-
downs, or our labor costs increase and we are not able to recover such increases through increased prices charged to customers or
offsets by productivity gains, our results of operations could be materially adversely affected.
10
Employee health benefit costs represent a significant expense to us and may negatively affect our profitability.
With over 5,000 employees and their families participating in our health plans, our expenses relating to employee health
benefits are substantial. In past years, we have experienced significant increases in certain of these costs, largely as a result of
economic factors beyond our control, including, in particular, ongoing increases in health care costs well in excess of the rate of
inflation. Increased participation in our health plans, continued increasing health care costs, as well as changes in laws, regulations and
assumptions used to calculate health and benefit expenses, may adversely affect our business, financial position and results of
operations. In addition, the Patient Protection and Affordable Care Act (“ACA”) may continue to increase our employee healthcare-
related costs. We have migrated a significant number of employees to our high deductible plan resulting in a reduction in our claims
exposure and offsetting other costs related to ACA. While we have taken steps to minimize the impact of ACA, there is no guarantee
our efforts will be successful.
Changes to minimum wage laws and other governmental legislation or regulations could increase our costs substantially.
As of December 31, 2016, we had no employees who were paid under the minimum wage in their respective locations.
Several bills have been introduced in the U.S. legislature over the past few years to increase the federal minimum wage. In addition,
certain states have adopted or are considering adopting minimum wage statutes that exceed the federal minimum wage rate. Any
increases in federal or state minimum wages could require us to increase the wages paid to our minimum wage employees and create
pressure to raise wages for other employees who already earn above-minimum wages. If we are unable to pass these additional labor
costs on to our customers in the form of increased prices or surcharges, our business and results of operations would be adversely
affected.
If we are unable to comply with governmental regulations that affect our business or if there are substantial changes in these
regulations, our business could be adversely affected.
As a distributor of food and other consumable products, we are subject to regulation by the FDA, Health Canada and similar
regulatory authorities at the federal, state, provincial and local levels. In addition, our employees operate tractor trailers, trucks,
forklifts and various other powered material handling equipment and we are therefore subject to regulation by the U.S. and Canadian
Departments of Transportation. Our operations are also subject to regulation by OSHA, the U.S. Drug Enforcement Administration
and a myriad of other federal, state, provincial and local agencies. Each of these regulatory authorities has broad administrative
powers with respect to our operations. Regulations, and the costs of complying with those regulations, have been increasing in recent
years. If we fail to adequately comply with government regulations, we could experience increased inspections or audits, regulatory
authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased
compliance costs. If any of these events were to occur, our results of operations would be adversely affected.
Natural disaster damage could have a material adverse effect on our business.
Our headquarters and several of our warehouses in California, and one warehouse located near Vancouver, British Columbia,
Canada, are in or near high hazard earthquake zones. We also have operations in areas that have been affected by natural disasters
such as hurricanes, tornados, floods, and ice and snow storms. While we maintain insurance to cover us for certain potential losses,
our insurance may not be sufficient in the event of a significant natural disaster or payments under our policies may not be received
timely enough to prevent adverse impacts on our business. Our customers could also be affected by like events, which could adversely
affect our sales and results of operations.
Insurance and claims expenses could have a material adverse effect on us.
We have a combination of both self-insurance and high-deductible insurance programs for the risks arising out of the services
we provide and the nature of our operations throughout North America, including claims exposure resulting from personal injury,
property damage, business interruption and workers’ compensation. Workers’ compensation, automobile and general liabilities are
determined using actuarial estimates of the aggregate liability for claims incurred and an estimate of incurred but not reported claims.
Our accruals for insurance reserves reflect certain actuarial assumptions and management judgments, which are subject to a high
degree of variability. If the number or severity of claims for which we are retaining risk increases, our financial condition and results
of operations could be adversely affected. If we lose our ability to self-insure these risks, our insurance costs could materially increase
and we may find it difficult to obtain adequate levels of insurance coverage.
11
Risks Related to the Distribution of Cigarettes and Other Tobacco Products
Our sales volume is largely dependent upon the distribution of cigarettes, sales of which are declining generally.
The distribution of cigarettes is currently a significant portion of our business. In 2016, approximately 71.1% of our net sales
(which includes excise taxes) and 29.9% of our gross profit were generated from the distribution of cigarettes. Due to increases in the
prices of cigarettes, restrictions on cigarette manufacturers’ marketing and promotions, increases in cigarette regulation and excise
taxes, health concerns, increased pressure from anti-tobacco groups, the rise in popularity of tobacco alternatives, including electronic
cigarettes, and other factors, cigarette consumption in the U.S. and Canada has been declining gradually over the past few decades. In
most instances, tobacco alternatives, such as electronic cigarettes, are not subject to federal, state, provincial and local excise taxes like
the sale of conventional cigarettes or other tobacco products. We expect consumption trends of legal cigarette products will continue
to be negatively impacted by the factors described above. In addition, we expect rising prices may lead to a higher percentage of
consumers purchasing cigarettes through illicit markets, over the internet and by other means designed to avoid payment of cigarette
taxes. If we are unable to sell other products to make up for these declines in cigarette unit sales, our operating results may suffer.
Legislation, regulation and other matters are negatively affecting the cigarette and tobacco industry.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, distribution, sale, taxation
and use of tobacco products imposed by governmental entities. Various jurisdictions have adopted or are considering legislation and
regulations restricting displays and marketing of tobacco products, establishing fire safety standards for cigarettes, raising the
minimum age to possess or purchase tobacco products, requiring the disclosure of ingredients used in the manufacture of tobacco
products, imposing restrictions on public smoking, restricting the sale of tobacco products directly to consumers or other recipients
over the internet and other tobacco product regulation. In addition, the FDA has been empowered to regulate changes to nicotine
yields and the chemicals and flavors used in tobacco products (including cigars, pipe and e-cigarette products), require ingredient
listings be displayed on tobacco products, prohibit the use of certain terms which may attract youth or mislead users as to the risks
involved with using tobacco products, as well as limit or otherwise impact the marketing of tobacco products by requiring additional
labels or warnings as well as pre-approval by the FDA. Such legislation and related regulation is likely to continue adversely
impacting the market for tobacco products and, accordingly, our sales of such products.
In Canada, many provinces have enacted legislation authorizing and facilitating the recovery by provincial governments of
tobacco-related health care costs from the tobacco industry by way of lawsuit. Some Canadian provincial governments have either
already initiated lawsuits or indicated an intention that such lawsuits will be filed. It is unclear at this time how such restrictions and
lawsuits may affect Core-Mark and its Canadian operations.
If excise taxes are increased or credit terms are reduced, our sales of cigarettes and other tobacco products could decline and
our liquidity could be negatively impacted.
Cigarettes and tobacco products are subject to substantial excise taxes in the U.S. and Canada. Significant increases in
cigarette-related taxes and/or fees have been proposed or enacted and are likely to continue to be proposed or enacted by various
taxing jurisdictions within the U.S. and Canada as a means of increasing government revenues. These tax increases negatively impact
consumption. Additionally, they may cause a shift in sales from premium brands to discount brands, illicit channels or tobacco
alternatives, such as electronic cigarettes, as smokers seek lower priced options.
Taxing jurisdictions have the ability to change or rescind credit terms currently extended for the remittance of tax that we
collect on their behalf. If these excise taxes are substantially increased or credit terms are substantially reduced, it could have a
negative impact on our liquidity. Accordingly, we may be required to obtain additional debt financing, which we may not be able to
obtain on satisfactory terms or at all.
Our distribution of cigarettes and other tobacco products exposes us to potential liabilities.
In June 1994, the Mississippi attorney general brought an action against various tobacco industry members on behalf of the
state to recover state funds paid for health care costs related to tobacco use. Most other states sued the major U.S. cigarette
manufacturers based on similar theories. In November 1998, the major U.S. tobacco product manufacturers entered into a Master
Settlement Agreement (“MSA”) with 46 states, the District of Columbia and certain U.S. territories. The other four states--Mississippi,
Florida, Texas and Minnesota (non-MSA states)--settled their litigations with the major cigarette manufacturers by separate
agreements. The MSA and the other state settlement agreements settled health care cost recovery actions and monetary claims relating
to future conduct arising out of the use of, or exposure to, tobacco products, imposed a stream of future payment obligations on major
U.S. cigarette manufacturers and placed significant restrictions on the ability to market and sell cigarettes. The payments required
under the MSA result in the products sold by the participating manufacturers to be priced at higher levels than non-MSA
manufacturers. In addition, the growth in market share of discount brands since the MSA was signed has had an adverse impact on the
total volume of the cigarettes that we sell.
12
In connection with the MSA, we were indemnified by most of the tobacco product manufacturers from which we purchased
cigarettes and other tobacco products for liabilities arising from our sale of the tobacco products that they supplied to us. Should the
MSA ever be invalidated, we could be subject to substantial litigation due to our distribution of cigarettes and other tobacco products,
and we may not be indemnified for such costs by the tobacco product manufacturers in the future. In addition, even if we are
indemnified by cigarette manufacturers that are parties to the MSA, future litigation awards against such cigarette manufacturers could
be so large as to prevent the manufacturers from satisfying their indemnification obligations.
Risks Related to Financial Matters, Financing and Foreign Exchange
Changes to federal, state or provincial income tax legislation could have a material adverse effect on our business and results
of operations.
From time to time, new tax legislation is adopted by the federal government and various states or other regulatory bodies.
Significant changes in tax legislation could adversely affect our business or results of operations in a material way. For example, in the
U.S. the federal government has in the past proposed legislation which effectively could limit, or even eliminate, use of the last-in,
first-out (“LIFO”) inventory method for financial and income tax purposes. Although the final outcome of any such proposals cannot
be ascertained, the ultimate financial impact to us of the transition from LIFO to another inventory method could be material to our
operating results.
We may not be able to settle our qualified defined benefit pension plan on terms or pricing which is satisfactory to us.
We record a liability associated with the underfunded status of our pension plan when the benefit obligation exceeds the fair
value of the plan assets. As of December 31, 2016, our pension plan was 88% funded and our consolidated balance sheet included
$4.3 million in pension liabilities related to underfunded pension obligations. On September 14, 2016, our Board of Directors
approved termination of our qualified defined-benefit pension plan. We expect to complete the settlement before the end of 2017. Our
pension liabilities are expected to be settled through either lump sum payments or purchasing annuities from an insurance Company.
We may not be able to consummate the sale or purchase of annuities with counterparties on terms or pricing suitable to us.
There can be no assurance that we will continue to declare cash dividends in the future or in any particular amounts and if
there is a reduction in dividend payments, our stock price may be harmed.
Since the fourth quarter of 2011, we have paid a quarterly cash dividend to our stockholders. We intend to continue to pay
quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the
best interest of our stockholders and are in compliance with all applicable laws and agreements to which we are a party. Future
dividends may be affected by a variety of factors such as available cash, anticipated working capital requirements, overall financial
condition, credit agreement restrictions, future prospects for earnings and cash flows, capital requirements for acquisitions, stock
repurchase programs, reserves for legal risks and changes in federal and state income tax laws or corporate laws. Our Board of
Directors may, at its discretion, decrease or entirely discontinue the payment of dividends at any time. Any such action could have a
material, negative effect on our stock price.
Currency exchange rate fluctuations could have an adverse effect on our revenues and financial results.
We generate a significant portion of our revenues in Canadian dollars, approximately 10% in 2016 and 11% in 2015. We also
incur a significant portion of our expenses in Canadian dollars. To the extent that we are unable to match revenues received in
Canadian dollars with costs paid in the same currency, exchange rate fluctuations in Canadian dollars could have an adverse effect on
our financial results. During times of a strengthening U.S. dollar, our reported sales and earnings from our Canadian operations will be
reduced because the Canadian currency will be translated into fewer U.S. dollars. Conversely, during times of a weakening U.S.
dollar, our reported sales and earnings from our Canadian operations will be increased because the Canadian currency will be
translated into more U.S. dollars. U.S. GAAP requires that foreign currency transaction gains or losses on short-term intercompany
transactions be recorded currently as gains or losses within the statement of operations. To the extent we incur losses on such
transactions, our net income will be reduced. We currently do not hedge our Canadian foreign currency cash flows.
We may not be able to borrow additional capital to provide us with sufficient liquidity and capital resources necessary to meet
our future financial obligations.
We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under
a $600 million revolving credit facility (“Credit Facility”) as of December 31, 2016. On November 4, 2016, we entered into a ninth
amendment to the Credit Facility which increased our Credit Facility from $450 million to $600 million. The Credit Facility, initially
dated as of October 12, 2005, as amended or otherwise modified from time to time, is between us, as Borrowers, the Lenders named
therein, and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Facility expires in May 2020. While we believe our
sources of liquidity are adequate, we cannot assure that these sources will be available or continue to provide us with sufficient
liquidity and capital resources required to meet our future financial obligations, or to provide funds for our working capital, capital
expenditures and other needs. As such, additional equity or debt financing sources may be necessary, in addition we may not be able
to expand our existing Credit Facility or obtain new financing on terms satisfactory to us.
13
Our operating flexibility is limited in significant respects by the restrictive covenants in our Credit Facility.
Our Credit Facility imposes restrictions on us that could increase our vulnerability to general adverse economic and industry
conditions by limiting our flexibility in planning for and reacting to changes in our business and industry. Specifically, these
restrictions place limits on our ability, among other things, to: incur additional indebtedness, pay dividends, issue stock of subsidiaries,
make investments, repurchase stock, create liens, enter into transactions with affiliates, merge or consolidate, or transfer and sell our
assets. In addition, under our Credit Facility, under certain circumstances we are required to meet a fixed charge coverage ratio. Our
ability to comply with this covenant may be affected by factors beyond our control and a breach of the covenant could result in an
event of default under our Credit Facility, which would permit the lenders to declare all amounts incurred thereunder to be
immediately due and payable and terminate their commitments to make further extensions of credit.
Our actual business and financial results could differ as a result of the accounting methods, estimates and assumptions that we
use in preparing our financial statements, which may negatively impact our results of operations and financial condition.
To prepare financial statements in conformity with GAAP, management is required to exercise judgment in selecting and
applying accounting methodologies and making estimates and assumptions. These methods, estimates, and assumptions are subject to
uncertainties and changes, which affect the reported values of assets and liabilities, revenues and expenses, and disclosures of
contingent assets and liabilities. Areas requiring significant estimates by our management include but are not limited to the following:
allowance for doubtful accounts, provisions for income taxes, vendor rebates and promotional allowances, valuation of goodwill and
long-lived assets, valuation of assets and liabilities in connection with business combinations, valuation of pension assets and
obligations, stock-based compensation expense and accruals for estimated liabilities, including litigation and insurance reserves.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
14
ITEM 2.
PROPERTIES
Our headquarters are located in South San Francisco, California, and consist of approximately 31,800 square feet of leased
office space. We also lease approximately 20,000 square feet for use by our information technology and tax personnel in Richmond,
British Columbia, approximately 6,000 square feet for use by our information technology personnel in Plano, Texas, and
approximately 3,600 and 2,000 square feet of additional office space in Fort Worth, Texas and Phoenix, AZ, respectively. We lease
approximately 4.9 million square feet and own approximately 0.6 million square feet of distribution space.
Distribution Center Facilities by City and State of Location(1)
Albuquerque, New Mexico
Atlanta, Georgia
Bakersfield, California
Corona, California(2)
Denver, Colorado
Forrest City, Arkansas(3)
Fort Worth, Texas
Gardiner, Maine
Glenwillow, Ohio
Hayward, California
Las Vegas, Nevada
Leitchfield, Kentucky
Los Angeles, California
Minneapolis, Minnesota
Portland, Oregon
Sacramento, California(4)
Salt Lake City, Utah
Sanford, North Carolina
Spokane, Washington
Tampa, Florida
Whitinsville, Massachusetts
Wilkes-Barre, Pennsylvania
Calgary, Alberta
Toronto, Ontario
Vancouver, British Columbia
Winnipeg, Manitoba
Mississauga, Ontario(5)
(1)
(2)
(3)
(4)
(5)
Excluding outside storage facilities or depots and two distribution facilities that we operate as a third party logistics provider. Depots are defined as a
secondary location for a division which may include any combination of sales offices, operational departments and/or storage. We own distribution center
facilities located in Wilkes-Barre, Pennsylvania; Leitchfield, Kentucky; and Forrest City, Arkansas. All other facilities listed are leased. The facilities we
own are subject to encumbrances under our Credit Facility.
This location includes two facilities, a distribution center and our AMI consolidating warehouse.
This facility includes a distribution center and our AMI-Artic East consolidating warehouse.
This facility includes a distribution center and our Artic Cascade consolidating warehouse.
This facility is our Canadian consolidating warehouse.
We also operate distribution centers on behalf of two of our major customers: one in Phoenix, Arizona (for Couche-Tard),
and one in San Antonio, Texas (for CST Brands, Inc.). Each facility is leased or owned by the specific customer solely for their use
and operated by Core-Mark.
15
ITEM 3.
LEGAL PROCEEDINGS
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 both probable that the liability has been incurred and
that 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.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
16
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market and Stockholders
Our common stock trades on the NASDAQ Global Market under the symbol “CORE.” According to the records of our
transfer agent, we had 1,803 stockholders of record as of February 24, 2017.
On May 25, 2016, the Board of Directors approved a two-for-one stock split of the Company’s outstanding common stock,
effected through a stock dividend. The additional shares were distributed on June 27, 2016 to stockholders of record at the close of
business on June 9, 2016. All references made to share or per share amounts in the accompanying consolidated financial statements
and applicable disclosures have been retroactively adjusted to reflect this two-for-one stock split for all periods presented.
The following table provides the range of high and low sales prices of our common stock as reported by NASDAQ and
dividends declared per share for the periods indicated:
Market Prices
Dividend Declared
2016
2015
Year
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
Low
Price
High
Price
Low
Price
High
Price
$ 33.24 $ 43.46 $ 32.22 $ 45.30 $
33.26
32.72
35.68
29.48
26.31
29.26
48.96
46.86
41.60
35.16
38.26
35.99
2016
2015
0.09 $
0.08
0.08
0.08
0.08
0.07
0.07
0.07
We paid dividends of $15.5 million and $12.8 million in 2016 and 2015, respectively. Our Credit Facility, as of
December 31, 2016, allows for unlimited dividends, as long as the Company meets certain credit availability percentages and fixed
charge coverage ratios. (See Note 8 - Long-term Debt to our consolidated financial statements included in this Form 10-K for
additional details on the Credit Facility). We intend to continue increasing our dividends per share over time; however, the payment of
any future dividends will be determined by our Board of Directors in light of then existing conditions, including our earnings,
financial condition and capital requirements, strategic alternatives, restrictions in financing agreements, business conditions and other
factors.
17
PERFORMANCE COMPARISON
The graph below presents a comparison of cumulative total return to stockholders for Core-Mark’s common stock at the end
of each year from 2011 through 2016, as well as the cumulative total returns of the NASDAQ Non-Financial Stock Index, the Russell
2000 Index, the Standard and Poor’s Small Cap 600 Index, and a peer group of companies (“Performance Peer Group”).
Cumulative total return to stockholders is measured by the change in the share price for the period, plus any dividends,
divided by the share price at the beginning of the measurement period. Core-Mark’s cumulative stockholder return is based on an
investment of $100 on December 31, 2011, and is compared to the total return of the NASDAQ Non-Financial Stock Index, the
Russell 2000 Index, the Standard and Poor’s Small Cap 600 Index, and the weighted-average performance of the Performance Peer
Group over the same period with a like amount invested, including the assumption that any dividends have been reinvested. We
regularly compare our performance to the Russell 2000 Index and the Standard and Poor’s Small Cap 600 Index since it includes
primarily companies with relatively small market capitalization similar to us.
The companies composing the Performance Peer Group are Sysco Corp. (“SYY”), The Chef’s Warehouse, Inc. (“CHEF”),
United Natural Foods, Inc. (“UNFI”) and AMCON Distributing Co. (“DIT”).
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CORE-MARK, NASDAQ NON-FINANCIAL STOCK, S&P SMALLCAP 600, RUSSELL 2000 INDEXES AND
THE PERFORMANCE PEER GROUP
CORE
Russell 2000
NASDAQ Non-financial Index
S&P SmallCap 600
Performance Peer Group
Investment Value at
12/31/14
12/31/13
12/31/12
12/31/11
$ 100.00 $ 121.99 $ 197.47 $ 325.76 $ 434.86 $ 460.97
$ 100.00 $ 116.35 $ 161.52 $ 169.42 $ 161.95 $ 196.45
$ 100.00 $ 117.21 $ 164.20 $ 188.95 $ 202.50 $ 217.97
$ 100.00 $ 116.33 $ 164.38 $ 173.84 $ 170.41 $ 215.67
$ 100.00 $ 113.63 $ 139.22 $ 154.28 $ 150.40 $ 205.50
12/31/16
12/31/15
18
Issuer Purchases of Equity Securities
Our Board of Directors authorized a share repurchase program that may be discontinued or amended at any time. Shares
repurchased under the program were made in the open market and the timing and amount of the purchases are based on market
conditions, our cash and liquidity requirements, relevant securities laws and other factors. The program has no expiration date and
expires when the amount authorized has been expended or the Board of Directors withdraws its authorization.
In 2016, we repurchased 237,869 shares of common stock for a total cost of $8.9 million, or an average price of $37.76 per
share. In 2015, we repurchased 302,366 shares of common stock for a total cost of $9.2 million, or an average price of $30.35 per
share. As of December 31, 2016, we had $2.6 million available for future share repurchases under the program.
The following table provides the repurchases of shares of common stock during the three months ended December 31, 2016:
Calendar Month in which
purchases were made:
October 1, 2016 to October 31, 2016
November 1, 2016 to November 30, 2016
December 1, 2016 to December 31, 2016
Total repurchases for the three months ended
December 31, 2016
(1)
Includes related transaction fees.
Total Number
of Shares
Repurchased
Average
Price Paid
per Share(1)
49,743 $
—
—
34.91
—
—
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Approximate
Dollar Value of
Shares that May
Yet be Purchased
Under the Plans or
Programs
(in millions)
49,743 $
—
—
2.6
—
—
2.6
49,743 $
34.91
49,743 $
19
ITEM 6.
SELECTED FINANCIAL DATA
Basis of Presentation
The selected consolidated financial data for the five years from 2012 to 2016 are derived from our audited consolidated
financial statements included in our Annual Reports on Form 10-K or Form 10-K/A. The following financial data should be read in
conjunction with the consolidated financial statements and notes thereto and with Item 7 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
SELECTED CONSOLIDATED FINANCIAL DATA
2012(3)
8,892.4
476.8
262.7
153.7
3.0
57.4
1.8
0.2
33.9
0.74
0.73
46.0
46.4
0.23
1,987.0
7.8
—
—
—
12.3
25.3
5.8
28.6
100.8
(in millions except per share amounts)
Statement of Operations Data:
Net sales
Gross profit (4)
Warehousing and distribution expenses (4)
Selling, general and administrative expenses
Amortization of intangible assets
Income from operations
Interest expense, net (5)
Foreign currency transaction (gains) losses
Net income
Per Share Data:
Basic net income per common share (6)
Diluted net income per common share (6)
Shares Used to Compute Net Income Per Share:
Basic (6)
Diluted (6)
2016(1)
Core-Mark Holding Company, Inc.
Year Ended December 31,
2014
2013
2015(2)
$
$ 14,529.4 $ 11,069.4 $ 10,280.1 $ 9,767.6
537.1
297.1
168.3
2.7
69.0
2.2
0.8
41.6
736.9
431.2
210.3
5.3
90.1
5.1
(0.5)
54.2
637.9
352.6
196.0
2.6
86.7
2.0
1.8
51.5
573.7
318.4
184.4
2.6
68.3
1.8
0.1
42.7
$
$
1.17 $
1.17 $
1.12 $
1.11 $
0.93 $
0.92 $
0.91
0.90
$
$
$
$
Cash Dividends Declared Per Common Share (7)
Other Financial Data:
Excise taxes (8)
Cigarette inventory holding gains (9)
Candy inventory holding gains (10)
Cigarette tax stamp inventory holding gains, net (11)
OTP tax items, net (12)
LIFO expense (13)
Depreciation and amortization (14)
Stock-based compensation
Capital expenditures (15)
Adjusted EBITDA (non-GAAP)(16)
$
$
46.3
46.5
0.33 $
46.2
46.6
0.29 $
46.2
46.6
0.23 $
46.0
46.4
0.15
3,022.0 $
15.3
—
—
—
13.2
42.9
6.1
54.3
152.3
2,211.7 $
10.1
—
8.5
1.7
1.9
37.9
8.7
30.3
135.2
2,110.3 $ 2,050.8
9.0
—
—
—
8.7
27.2
4.6
18.0
109.5
8.2
6.0
—
7.5
16.3
32.0
6.1
53.9
122.7
Balance Sheet Data:
Total assets
Long-term obligations (17)
2016
2015
December 31,
2014
2013
2012
$
1,497.0 $ 1,077.3 $
347.7
60.4
1,029.6
68.2
$
956.8 $
57.6
919.2
84.7
(1) Pine State Convenience was acquired in June 2016 and the results of operations have been included in the selected consolidated financial data since the date of the
acquisition.
(2) Karrys Bros., Limited was acquired in February 2015 and the results of operations have been included in the selected consolidated financial data since the date of
(3)
the acquisition.
J.T. Davenport & Sons, Inc. was acquired in December 2012 and the results of operations have been included in the selected consolidated financial data from that
point forward.
(4) 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.
Interest expense, net, is reported net of interest income.
(5)
20
(6) On May 25, 2016, the Board of Directors approved a two-for-one stock split of the Company’s outstanding common stock, effected through a stock dividend. The
additional shares were distributed on June 27, 2016 to stockholders of record at the close of business on June 9, 2016. All references made to share or per share
amounts have been retroactively adjusted to reflect this two-for-one stock split for all periods presented.
(7) On October 19, 2011, we announced the commencement of a quarterly dividend program. In lieu of the first quarter 2013 dividend, the Board of Directors
declared an accelerated cash dividend of $0.05 per common share on December 20, 2012.
(8) State, local and provincial excise taxes (predominantly cigarettes and tobacco) paid by us are included in net sales and cost of goods sold.
(9) Cigarette inventory holding gains represent income related to cigarette inventories on hand at the time cigarette manufacturers increase their prices. Such increases
are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The higher gross profits are referred to
as inventory holding gains. This income is not predictable and is dependent on inventory levels and the timing of manufacturer price increases.
(10) Candy inventory holding gains represent income related to candy inventories on hand at the time candy manufacturers increase their prices. Such increases are
reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The higher gross profits are referred to as
inventory holding gains. Although we have realized candy inventory holding gains in one of the last five years, this income is not predictable and is dependent on
inventory levels and the timing of manufacturer price increases.
(11) Cigarette tax stamp inventory holding gains represent income related to tax stamp inventories on hand that may be realized at the time taxing jurisdictions increase
their excise taxes, depending on the statutory requirements relating to the inventory on hand at the time such excise tax increases. Such tax increases are reflected
in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The incremental gross profits resulting from such tax
increases are referred to as inventory holding gains. Although we have realized a cigarette tax stamp inventory holding gain of $9.0 million, offset by $0.5 million
in associated fees, in 2015, this income is not predictable and is dependent on inventory levels and the aforementioned statutory requirements.
(12) In 2015, we received OTP tax refunds of $1.8 million related to prior years’ taxes, offset by $0.1 million related expenses. In 2014, we received OTP tax refunds
of $9.0 million related to prior years’ taxes, offset by $1.0 million of related expenses and a probable OTP tax assessment of $0.5 million. OTP tax settlements
were zero for 2013 and 2012.
(13) The decrease in LIFO expense in 2015 was due primarily to a decrease in the Producer Price Index (“PPI”) for certain product categories we use to measure
food/non-food LIFO expense as published by the Bureau of Labor Statistics.
(14) Depreciation and amortization includes depreciation on property and equipment and amortization of purchased intangible assets.
(15) Capital expenditures in 2016 include leasehold improvements for a new building for our Las Vegas division and other building upgrades, as well as logistical
equipment to accommodate new business. Capital expenditures in 2014 include costs for our new distribution center in Ohio.
(16) The following table provides the components of Adjusted EBITDA for each year presented (in millions):
Year Ended December 31,
2014
2013
2015
51.5 $
2.0
31.4
37.9
1.9
8.7
1.8
135.2 $
42.7 $
1.8
23.7
32.0
16.3
6.1
0.1
122.7 $
41.6 $
2.2
24.4
27.2
8.7
4.6
0.8
109.5 $
2012
33.9
1.8
21.5
25.3
12.3
5.8
0.2
100.8
Net income
Interest expense, net
Provision for income taxes
Depreciation and amortization
LIFO expense
Stock-based compensation expense
Foreign currency transaction (gains) losses, net
$
Adjusted EBITDA (non-GAAP)
$
2016
54.2 $
5.1
31.3
42.9
13.2
6.1
(0.5)
152.3 $
(17) Includes amounts borrowed and long-term capital lease obligations.
21
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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” in this Item 7.
Our Business
Core-Mark is one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North
America. We offer a full range of products, marketing programs and technology solutions to approximately 43,000 customer locations
in the U.S. and Canada. Our customers include traditional convenience stores, drug stores, grocery stores, liquor stores and other
specialty and small format stores that carry convenience products. Our product offering includes cigarettes, other tobacco products
(OTP), candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health and beauty care
products. We operate a network of 30 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a
third party logistics provider). Our core business objective is to help our customers increase their sales and profitability.
Overview of 2016 Results
During 2016, we continued to grow market share and increase our food/non-food sales and gross profit through our core
strategies by driving our Vendor Consolidation Initiative (VCI), leveraging our “Fresh” product solutions, and providing category
management expertise in order to make our customers more relevant and profitable.
Our net sales in 2016 increased 31.3%, or $3,460.0 million, to $14,529.4 million compared to $11,069.4 million for 2015.
The increase in net sales was driven primarily by market share gains, including the addition of Murphy U.S.A., which the Company
began servicing during the first quarter of 2016, the acquisition of Pine State Convenience (Pine State) in June 2016, and the
continued success of our core strategies.
Gross profit in 2016 increased $99.0 million, or 15.5%, to $736.9 million from $637.9 million in 2015, driven primarily by
the increase in sales. LIFO expense increased $11.3 million in 2016 compared to 2015, due primarily to an increase in the Producer
Price Index (PPI) for certain food/non-food product categories. Since we value our inventory in the U.S. on a LIFO basis, our gross
profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices.
Gross profit in 2015 included cigarette tax stamp holding gains of $9.0 million and refunds of excise taxes on OTP of $1.8 million
related to prior years.
Gross profit margin was 5.1% of total net sales in 2016 compared to 5.8% in 2015. The decrease in gross profit margin was
due primarily to market share gains, including the addition of Murphy U.S.A., which have a higher sales mix of tobacco products, and
generally lower margins compared to the rest of our business.
To the extent we capture large chain customers, our gross profit margins may be negatively impacted. However, large chain
customers generally require less working capital, allowing us in most cases, to offer lower prices and still achieve a favorable return
on our investment. Our focus is to strike a balance between large chain business, which generally has lower gross profit margins, and
independently-owned convenience stores, which according to the 2015 National Association of Convenience Stores (NACS) State of
the Industry (SOI) report, comprise approximately 67% of the overall convenience store market and generally have higher gross profit
margins.
Operating expenses in 2016 increased 17.3%, or $95.6 million, to $646.8 million from $551.2 million in 2015. Increases in
the amount of cubic feet of product handled, incremental customer deliveries, the acquisition of Pine State and costs related to the on-
boarding of significant new customers contributed to higher operating expenses in 2016.
Net income in 2016 was $54.2 million compared to $51.5 million in 2015. Net income excluding LIFO expense(1) increased
$9.6 million, or 18.2%, to $62.3 million in 2016 compared to $52.7 million in 2015. Adjusted EBITDA(1) increased $17.1 million, or
12.6%, to $152.3 million in 2016 from $135.2 million in 2015. The increase in net income excluding LIFO expense and Adjusted
EBITDA was due primarily to the growth in gross profit resulting from market share gains and the acquisition of Pine State, offset by
incremental expenses related to the on-boarding of significant new customers. Net income and Adjusted EBITDA for 2015 included
cigarette tax stamp holding gains of $8.5 million (pre-tax), net of expenses and OTP tax refunds of $1.7 million, net of expenses.
(1)
Net income excluding LIFO expense and Adjusted EBITDA 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 the reconciliation of net income excluding LIFO expense to net income in Item 7 - “Non GAAP Financial Information”. See the reconciliation
of Adjusted EBITDA to net income in Item 7 “Adjusted EBITDA”.
22
Business and Supply Expansion
We continue to benefit from the expansion of our business and the execution of our core strategies, focused primarily on
enhancing our fresh product offering, leveraging VCI and providing category management expertise to our customers. Our strategies
take costs and inefficiencies out of supply chains, bringing our customers an avenue to offer high quality fresh foods and optimize
their consumer product offering. We believe each of these strategies, when adopted, will increase our customers’ profits.
Some of our more recent expansion activities include:
•
•
•
•
In December 2016, we signed a three-year supply agreement to service approximately 530 Walmart stores in five
western states (Arizona, California, New Mexico, Nevada and Utah). We will be the primary distributor to these
stores for candy, tobacco and certain snack foods. Candy will be the largest product category serviced under the new
arrangement and is expected to increase our annualized sales for this category by approximately 40%-50%. We
expect to begin servicing the stores under this agreement in May 2017.
In June 2016, we acquired substantially all of the assets of Pine State Convenience, a division of Pine State Trading
Company, located in Gardiner, Maine, for cash consideration of approximately $88 million. We incurred $2.2
million in start-up and due diligence costs in 2016 and we expect to incur another $1.5 million in integration costs in
2017.
In October 2015, we signed a five-year agreement with Murphy U.S.A. to be the primary wholesale distributor to
over 1,400 stores located in 24 states across the Southwest, Southeast and Midwest United States. Services under
this contract began in the first quarter of 2016 and have created efficiencies and a strategic supply chain relationship
for Murphy U.S.A.
In October 2015, we signed a five-year supply agreement with 7-Eleven, Inc. to be the primary wholesale distributor
to approximately 900 stores located in three western regions. We began servicing these stores in October 2016, from
three of our divisions - Las Vegas, NV, Salt Lake City, UT and Sacramento, CA.
During 2016, we continued to grow sales and margins in our “Fresh” categories, as a result of improving our customers’
product assortment and in-store marketing efforts. Sales of our Fresh categories grew 16.4% in 2016 compared to the same period in
2015. We continue to focus on fresh and healthy offerings because we believe that over the long-term, the trend is for the convenience
consumer to shift buying preferences to these types of items. We benefit from this shift due to the higher margins of these products
compared to the other merchandise we distribute. Industry experts have indicated that consumers are making more shopping trips
related to fresh food and that perishable foods will serve a more important role in the convenience retail channel in the future. We
believe our strategies have helped position us and our customers to benefit from these trends.
Other Business Developments
As of December 31, 2016, we serviced approximately 3,000 Alimentation Couche-Tard, Inc. (Couche-Tard) locations in the
U.S. and Canada. A portion of these locations were subject to renewals during the third quarter of 2016. Consequently, our agreement
to service approximately 1,100 Circle K stores in the Southeastern Region of the U.S. expired in January 2017. We will continue to
service approximately 1,900 stores including both company and franchise operated stores located in the Western and Southwestern
regions of the U.S. and Canada. We will also continue to operate a third party distribution center dedicated to supplying over 500
Circle K branded convenience stores across Arizona and Nevada.
In January 2017, we announced the expiration of our supply agreement with Kroger Convenience (Kroger) effective April
2017. The expiring agreement covers approximately 680 stores.
The expiration of the Couche-Tard and Kroger contracts described above will reduce our sales and net income from these
large chain customers in 2017. However, we expect new business from other customers in the U.S. and Canada and other organic
growth, some of which are described in “Business and Supply Expansion” above, to more than offset the loss.
Dividends
On May 25, 2016, the Board of Directors approved a two-for-one stock split of the Company’s outstanding common stock,
effected through a stock dividend. The additional shares were distributed on June 27, 2016 to stockholders of record at the close of
business on June 9, 2016. All references made to share or per share amounts in the accompanying consolidated financial statements
and applicable disclosures have been retroactively adjusted to reflect this two-for-one stock split for all periods presented.
23
The Board of Directors approved the following cash dividends in 2016 (in millions, except per share data)
Declaration Date
February 24, 2016
May 9, 2016
August 8, 2016
November 4, 2016
Dividends Per Share
$0.08
$0.08
$0.08
$0.09
Record Date
March 11, 2016
May 25, 2016
August 24, 2016
November 23, 2016
Cash Payment
Amount (1)
$3.8
$3.7
$3.8
$4.2
Payment Date
March 28, 2016
June 15, 2016
September 15, 2016
December 15, 2016
(1)
Includes cash payments on declared dividends and payments made on Restricted Stock Units (RSUs) vested subsequent to the payment
date.
We paid dividends of $15.5 million and $12.8 million in 2016 and 2015, respectively.
Share Repurchase Program
In May 2013, our Board of Directors authorized a $30 million increase to our stock repurchase program which may be
discontinued or amended at any time. The program will expire when the amount authorized has been expended or the Board of
Directors withdraws its authorization. In 2016, we repurchased 237,869 shares of common stock at an average price of $37.76
compared to repurchases of 302,366 shares of common stock at an average price of $30.35 in 2015. As of December 31, 2016 and
2015, we had $2.6 million and $11.5 million, respectively, available for future share repurchases under the program.
Results of Operations
Comparison of 2016 and 2015 (in millions) (1):
Net sales
Net sales — Cigarettes
Net sales — Food/non-food
Net sales, less excise taxes
$
(non-GAAP) (2)
Gross profit (3)
Warehousing and
distribution expenses
Selling, general and
administrative expenses
Amortization of intangible
assets
Income from operations (4)
Interest expense
Interest income
Foreign currency transaction
gains (losses), net
Income before taxes
Net income
Adjusted EBITDA (non-
GAAP) (5)
2016
Increase
(Decrease)
Amounts
3,460.0 $ 14,529.4
10,335.7
2,807.2
4,193.7
652.8
% of Net
sales
100.0%
71.1
28.9
% of Net
sales, less
excise taxes
Amounts
—% $ 11,069.4
7,528.5
3,540.9
66.2
33.8
2015
% of Net
sales
100.0%
68.0
32.0
2,649.7
99.0
11,507.4
736.9
79.2
5.1
100.0
6.4
8,857.7
637.9
80.0
5.8
78.6
431.2
14.3
210.3
2.7
3.4
2.8
(0.3)
2.3
2.6
2.7
5.3
90.1
(5.3)
0.2
0.5
85.5
54.2
17.1
152.3
3.0
1.4
—
0.6
—
—
—
0.6
0.4
1.0
3.7
1.8
—
0.8
—
—
—
0.7
0.5
1.3
352.6
196.0
2.6
86.7
(2.5)
0.5
(1.8)
82.9
51.5
135.2
3.2
1.8
—
0.8
—
—
—
0.7
0.5
1.2
% of Net
sales, less
excise taxes
—%
62.7
37.3
100.0
7.2
4.0
2.2
—
1.0
—
—
—
0.9
0.6
1.5
(1)
(2)
(3)
(4)
(5)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
See the reconciliation of net sales less excise taxes to net sales in “Comparison of Sales and Gross Profit by Product Category” and in “Non-GAAP Financial
Information”.
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.
Income from operations for 2016 includes LIFO expense of $13.2 million compared to $1.9 million in 2015. In addition, income from operations in 2015
includes cigarette tax stamp inventory holding gains in the U.S. of $8.5 million, net of expenses, resulting from the increase in the excise tax rates of certain
jurisdictions.
See the reconciliation of Adjusted EBITDA to net income in “Adjusted EBITDA”.
24
Net Sales. Net sales increased by $3,460.0 million, or 31.3% to $14,529.4 million in 2016 from $11,069.4 million in 2015
driven primarily by significant market share gains, including the addition of Murphy U.S.A., which the Company began servicing
during the first quarter of 2016, and the acquisition of Pine State in June 2016. In addition, net sales in 2016 also benefited from
increases in cigarette manufacturers’ prices and incremental food/non-food sales driven by the continued success of our core
strategies.
Net Sales of Cigarettes. Net sales of cigarettes in 2016 increased by $2,807.2 million or 37.3% to $10,335.7 million from
$7,528.5 million in 2015 driven primarily by a 27.5% increase in carton sales, the acquisition of Pine State, and a 2.7% increase in the
average sales price per carton mainly as a result of increases in manufacturers’ prices. Cigarette carton sales in the U.S. increased by
34.5% during the same period driven primarily by market share gains, including the addition of Murphy U.S.A., and the acquisition of
Pine State in June 2016. Carton sales in Canada increased 13.8%, also driven by market share gains.
Total net cigarette sales as a percentage of total net sales were 71.1% in 2016 compared to 68.0% in 2015. The increase in
cigarette sales as a percentage of total net sales was due primarily to market share gains in 2016, including the addition of Murphy
U.S.A., which have a higher sales mix of cigarettes compared to the rest of our business.
Despite the significant increase in our cigarette sales in 2016, we believe long-term cigarette consumption will continue to be
impacted by rising prices, legislative actions, diminishing social acceptance and sales through illicit markets. We expect cigarette
manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability, thus mitigating the
effects of the declines to distributors. In addition, industry data indicates that convenience retailers are more than offsetting cigarette
volume profit declines through higher sales of food/non-food products and food services. We expect this trend to continue as the
convenience industry adjusts to consumer demands.
Net Sales of Food/Non-food Products. Net sales of food/non-food products in 2016 increased $652.8 million, or 18.4%, to
$4,193.7 million from $3,540.9 million in 2015.
The following table provides net sales by product category for our food/non-food products (in millions)(1):
Product Category
Food (2)
Fresh (2)
Candy
Other tobacco products
Health, beauty & general
Beverages
Equipment/other
$
Total Food/Non-food Products
$
2016
Net Sales
2015
Net Sales
Increase
Amounts
Percentage
1,422.5 $
389.8
620.0
1,133.8
446.7
176.5
4.4
4,193.7 $
1,251.1 $
335.0
557.0
870.3
368.8
156.6
2.1
3,540.9 $
171.4
54.8
63.0
263.5
77.9
19.9
2.3
652.8
13.7%
16.4%
11.3%
30.3%
21.1%
12.7%
N/A
18.4%
(1)
(2)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
In 2016, the Fresh category was separated from the Food category to better highlight the growth in the Fresh commodity. The 2015 presentation has been
realigned to reflect these changes.
The increase in food/non-food sales in 2016 was driven primarily by market share gains, the acquisition of Pine State and an
increase in sales to existing customers. Sales generated from VCI, Fresh and our Focused Marketing Initiative (FMI) were the primary
drivers of the increase in net sales to existing customers. The increase in sales in our OTP category was due primarily to market share
gains, including the addition of Murphy U.S.A. and higher sales of smokeless tobacco products. We believe the overall trend toward
the increased use of smokeless tobacco products will continue and will help offset the impact of the expected long-term decline of
cigarette consumption.
Total net sales of food/non-food products as a percentage of total net sales were 28.9% in 2016 compared to 32.0% for the
same period in 2015.
Gross Profit. Gross profit represents the amount of 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 and therefore part of our gross profit. Gross profit in 2016 increased $99.0 million or 15.5% to
$736.9 million from $637.9 million in 2015 driven primarily by the increase in sales, including the acquisition of Pine State in June
2016. Gross profit in 2016 also benefited from a $5.2 million increase in cigarette inventory holding gains driven primarily by the
increase in carton sales and higher cigarette inflation in 2016.
The increase in gross profit in 2016 was offset by an increase in LIFO expense of $11.3 million compared to 2015, due
primarily to an increase in the Producer Price Index (PPI) for certain food/non-food product categories. In addition, gross profit in
2015 included cigarette tax stamp inventory holding gains of $9.0 million which resulted from an increase in excise taxes by certain
jurisdictions and $1.8 million in OTP tax refunds, related to the overpayment of taxes in prior years.
25
Distributors such as Core-Mark may, from time to time, earn higher gross profits on inventory and excise tax stamp
quantities on hand at the time manufacturers’ increase their prices or when states, localities or provinces increase their excise taxes.
Such increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the
increase. The higher gross profits are referred to as inventory holding gains. However, significant increases in cigarette product costs
and cigarette excise taxes adversely impact our gross profit as a percentage of net sales, because we are paid on a cents per carton
basis for cigarette sales. Conversely, we generally benefit from food/non-food price increases because product costs for these
categories are usually marked up using a percentage of cost of goods sold.
Gross profit margin was 5.07% of total net sales in 2016 compared to 5.76% in 2015. The decrease in gross profit margins
was due primarily to the addition of Murphy U.S.A., which has a higher sales mix of tobacco products and generally lower margins
compared to the rest of our business.
Our cigarette inventory holding gains were $15.3 million in 2016 compared to $10.1 million for the same period in 2015. 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 $13.2 million in 2016 compared to $1.9 million in 2015. Since we value our inventory in the U.S. on a
LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in
manufacturer prices as reported in the Bureau of Labor Statistics PPI used to estimate and record our book LIFO expense (see Note 2 -
Summary of Significant Accounting Policies to our consolidated financial statements).
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2016 and
2015 (in millions)(1):
Net sales
Net sales, less excise taxes (non-
GAAP)(2)
Components of gross profit:
Cigarette inventory holding gains(3)
Cigarette tax stamp inventory holding
gains (4)
OTP tax items(5)
LIFO expense(6)
Remaining gross profit (non-
GAAP)(7)
Gross profit
2016
Increase
(Decrease)
Amounts
% of
Net sales
% of Net
sales, less
excise taxes Amounts
2015
% of
Net sales
$ 3,460.0 $ 14,529.4
100.0%
— % $ 11,069.4
100.0%
% of Net
sales, less
excise taxes
—%
2,649.7 11,507.4
79.2
100.0
8,857.7
80.0
100.0
$
5.2 $
15.3
0.11%
0.13 % $
10.1
0.09%
0.11%
(9.0)
(1.8)
11.3
—
—
(13.2)
—
—
(0.09)
—
—
(0.11 )
9.0
1.8
(1.9)
0.08
0.02
(0.02)
0.10
0.02
(0.02)
115.9
99.0 $
734.8
736.9
5.06
5.07%
6.39
6.40 % $
618.9
637.9
5.59
5.76%
6.99
7.20%
$
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales 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 excise taxes result in higher net
sales, our overall gross profit percentage may be reduced; however we do not expect increases in excise taxes to negatively impact gross profit per carton
(see reconciliation of net sales less excise taxes to net sales in “Comparison of Sales and Gross Profit by Product Category” and in “Non-GAAP Financial
Information”).
The amount of cigarette inventory holding gains attributable to the U.S. and Canada were $13.7 million and $1.6 million, respectively, in 2016, compared to
$8.7 million and $1.4 million, respectively, in 2015.
In 2015, we recognized cigarette tax stamp inventory holding gains in the U.S. of $9.0 million, resulting from the increase in the excise tax rates of certain
jurisdictions.
In 2015, we received OTP tax refunds of $1.8 million related to prior years’ taxes.
The increase of $11.3 million in LIFO expense in 2016 was due primarily to an increase in the Production Price Index (PPI) for certain Food/ Non Food
commodities. Since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative
level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor Statistics PPI used to estimate and record our book LIFO
expense (see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements).
See the reconciliation of remaining gross profit to gross profit in “Non-GAAP Financial Information”.
Remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross profit in “Non-
GAAP financial information”), increased $115.9 million, or 18.7%, to $734.8 million in 2016 from $618.9 million for the same period
in 2015. Remaining gross profit margin was 5.06% in 2016 compared to 5.59% in 2015. The decrease in remaining gross profit
margin in 2016 was due primarily to market share gains, including Murphy U.S.A., which have a higher sales mix of cigarettes and
other tobacco products. In addition, increases in cigarette manufacturers’ prices compressed remaining gross profit margins by
approximately five basis points in 2016.
26
Cigarette remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross profit
in “Non-GAAP financial information”), increased $44.0 million, or 25.5%, to $216.4 million in 2016 from $172.4 million for the
same period in 2015. Cigarette remaining gross profit per carton decreased by approximately 5.0% in 2016 compared to 2015 due
primarily to the addition of Murphy U.S.A., offset partially by higher manufacturers’ discounts earned as a result of price increases.
Food/non-food remaining gross profit, a non-GAAP financial measure, (see reconciliation of remaining gross profit to gross
profit in “Non-GAAP financial information”) increased $71.9 million or 16.1% to $518.4 million, in 2016 from $446.5 million in
2015. Food/non-food remaining gross profit margin decreased 25 basis points to 12.36% in 2016 compared to 12.61% in 2015 due
primarily to the addition of Murphy U.S.A., which has generally lower overall food/non-food margins compared to the rest of our
business and a higher sales mix of OTP, which have lower gross profit margins relative to other food/non-food products.
To the extent we capture large chain business, our gross profit margins may be negatively impacted. However, large chain
customers generally require less working capital, allowing us in most cases to offer lower prices to achieve a favorable return on our
investment. Our focus is to strike a balance between large chain business, which generally has lower gross profit margins, and
independently-owned convenience stores, which per the NACS SOI report, comprise approximately 67% of the overall convenience
store market and generally have higher gross profit margins.
In 2016, our remaining gross profit for food/non-food products was approximately 70.6% of our total remaining gross profit
compared to 72.1% for the same period in 2015.
Operating Expenses. Our operating expenses include costs related to Warehousing and Distribution, Selling, General and
Administrative Expenses and Amortization of Intangible Assets. In 2016, operating expenses increased by $95.6 million or 17.3%, to
$646.8 million from $551.2 million in 2015. Increases in the amount of comparable cubic feet of product handled, incremental
deliveries made, and costs related to the on-boarding of new customers, contributed to higher operating expenses in 2016. In addition,
operating expenses in 2016 include expenses of approximately $29.5 million related to Pine State, including $2.2 million of
acquisition costs. As a percentage of net sales, total operating expenses were 4.5% in 2016 compared to 5.0% for the same period in
2015. Operating expenses as a percentage of total net sales in 2016 benefited from an increase in cigarette sales, which grew faster
than food/non-food sales. The shift in sales to cigarettes, which have higher price points than our food/non-food products, decreased
operating expenses as a percentage of total net sales by approximately 40 basis points in 2016 compared to 2015.
Warehousing and Distribution Expenses. Warehousing and Distribution expenses increased $78.6 million or 22.3% to
$431.2 million in 2016 from $352.6 million in 2015. The increase in warehouse and distribution expenses was driven primarily by a
12.6% increase in comparable cubic feet of product handled and a 14.7% increase in incremental deliveries, the addition of Pine State
and approximately $5.3 million of identifiable costs related to the on-boarding of significant new customers in 2016. In addition,
warehousing and distribution expenses in certain of our operating divisions were higher due to temporary inefficiencies driven
primarily by the hiring and training of new employees to support significant increases in sales volume. As a percentage of total net
sales, warehousing and distribution expenses were 3.0% in 2016 compared with 3.2% for the same period in 2015. The shift in sales to
cigarettes decreased warehousing and distribution expenses as a percentage of total net sales by approximately 30 basis points in 2016
compared to 2015.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased $14.3 million, or 7.3%, to $210.3
million in 2016 from $196.0 million in 2015. As a percentage of net sales, SG&A expenses were 1.4% in 2016 compared to 1.8% in
2015. The decline as a percentage of net sales was driven primarily by leverage of our fixed expenses in 2016 compared to 2015 and
by the shift in sales to cigarettes, which have higher price points than our food/non-food products, which decreased SG&A expenses
as a percentage of total net sales by approximately 10 basis points. In addition, SG&A expenses for 2016 included a gain of $2.0
million related to the settlement of a legacy lawsuit with Sonitrol Corporation, which was recognized in the first quarter of 2016 and
offset by $2.2 million of acquisition costs for Pine State. SG&A expenses in 2015 included $1.7 million of costs related to the
acquisition of Karrys Bros.
Amortization Expenses. Amortization expenses increased $2.7 million, to $5.3 million, in 2016 compared to $2.6 million for
the same period in 2015. The increase was primarily due to the amortization costs for our new financial system which commenced in
February 2016, and amortization of intangible assets related to the acquisition of Pine State.
Interest Expense. Interest expense includes interest and amortization of loan origination costs related to borrowings and
facility fees and interest on capital lease obligations. Interest expense was $5.3 million and $2.5 million for 2016 and 2015,
respectively. Average borrowings in 2016 were $184.4 million with a weighted average interest rate of 1.7% compared to average
borrowings of $39.6 million and a weighted average interest rate of 1.6% in 2015. The increase in average borrowings in 2016 was
due primarily to our acquisition of Pine State for $88.4 million, as well as increased working capital requirements to support our
business expansion activities.
Foreign Currency Transaction Gains and Losses, Net. We recognized a foreign currency transaction gain of $0.5 million
for the year ended December 31, 2016 compared to a loss of $1.8 million for the same period in 2015. The change was due to the
fluctuation in the Canadian/U.S. exchange rate. During times of a strengthening U.S. dollar, we generally record transaction losses
from our Canadian operations. Conversely, during times of a weakening U.S. dollar, we generally record transaction gains.
27
Income Taxes. Our effective tax rate was 36.6% for the year ended December 31, 2016 compared to 37.9% for the same
period in 2015. The decrease in the effective tax rate for the year ended December 31, 2016 is due primarily to the effects of prior
years’ estimates for foreign operations, as well as benefits in the current year related to the expiration of statute of limitations for
uncertain tax positions and related interest recovery.
Adjusted EBITDA. Adjusted EBITDA increased $17.1 million, or 12.6%, to $152.3 million for the year ended December 31,
2016 from $135.2 million for the same period last year. The increase in Adjusted EBITDA was due primarily to growth in our gross
profit resulting from market share gains and the acquisition of Pine State, offset by incremental expenses related to the on-boarding of
significant new customers. In addition, Adjusted EBITDA in 2015 included cigarette tax stamp holding gains of $8.5 million, net of
expenses, and $1.7 million, net of expenses, in refunds of excise taxes on OTP from prior years (see the reconciliation of Adjusted
EBITDA to net income in “Adjusted EBITDA”).
Results of Operations
Comparison of 2015 and 2014 (in millions) (1):
Increase
(Decrease)
789.3
586.5
202.8
Amounts
$ 11,069.4
7,528.5
3,540.9
2015
% of Net
sales
100.0%
68.0
32.0
% of Net
sales, less
excise taxes
Amounts
—% $ 10,280.1
6,942.0
3,338.1
62.7
37.3
2014
% of Net
sales
100.0%
67.5
32.5
8,857.7
637.9
80.0
5.8
100.0
7.2
8,169.8
573.7
79.5
5.6
Net sales
Net sales — Cigarettes
Net sales — Food/non-food
Net sales, less excise taxes
$
(non-GAAP) (2)
Gross profit (3)
Warehousing and
distribution expenses
Selling, general and
administrative expenses
Amortization of intangible
assets
Income from operations
Interest expense
Interest income
Foreign currency transaction
losses, net
Income before taxes
Net income
Adjusted EBITDA (non-
GAAP) (4)
687.9
64.2
34.2
11.6
—
18.4
0.1
(0.1)
(1.7)
16.5
8.8
352.6
196.0
2.6
86.7
(2.5)
0.5
(1.8)
82.9
51.5
12.5
135.2
3.2
1.8
—
0.8
—
—
—
0.7
0.5
1.2
4.0
2.2
—
1.0
—
—
—
0.9
0.6
1.5
318.4
184.4
2.6
68.3
(2.4)
0.6
(0.1)
66.4
42.7
122.7
3.1
1.8
—
0.7
—
—
—
0.6
0.4
1.2
% of Net
sales, less
excise taxes
—%
61.9
38.1
100.0
7.0
3.9
2.3
—
0.8
—
—
—
0.8
0.5
1.5
(1)
(2)
(3)
(4)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
See the reconciliation of net sales less excise taxes to net sales in “Comparison of Sales and Gross Profit by Product Category” and in “Non-GAAP Financial
Information”.
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.
See the reconciliation of Adjusted EBITDA to net income in “Adjusted EBITDA”.
Net Sales. Net sales for 2015 increased by $789.3 million, or 7.7%, to $11,069.4 million from $10,280.1 million in 2014. Net
sales increased primarily due to a 6.6% increase in cigarette carton sales, an increase in the average sales price per carton, and
incremental food/non-food sales driven primarily by the continued success of our core strategies, offset by impacts of foreign currency
fluctuations and one additional selling day of approximately 1.4%. In addition, net sales in 2015 benefited from lower fuel prices,
which we believe contributed to higher sales in the convenience industry.
Net Sales of Cigarettes. Net sales of cigarettes for 2015 increased by $586.5 million, or 8.4%, to $7,528.5 million from
$6,942.0 million in 2014. Net sales of cigarettes increased primarily due to a 6.6% increase in carton sales and a 3.5% increase in the
average sales price per carton due primarily to increases in manufacturers’ prices, offset by impacts of foreign currency fluctuations
and one additional selling day of approximately 1.5%. Cigarette carton sales increased by 6.4% in the U.S. and by 9.1% in Canada.
The increase in cigarette carton sales was due primarily to market share gains, including the acquisition of Karrys Bros. in Canada,
and an increase in cartons sold to existing customers.
Total net cigarette sales as a percentage of total net sales were 68.0% in 2015 compared to 67.5% for 2014.
28
Despite recent increases in our cigarette sales, we believe long-term cigarette consumption will continue to be impacted by
rising prices, legislative actions, diminishing social acceptance and sales through illicit markets. We expect cigarette manufacturers
will raise prices as carton sales decline in order to maintain or enhance their overall profitability, thus mitigating the effects of the
decline to the distributor. In addition, industry data indicates that convenience retailers are more than offsetting cigarette volume profit
declines through higher sales of food/non-food products. We expect this trend to continue as the convenience industry adjusts to
consumer demands.
Net Sales of Food/Non-food Products. Net sales of food/non-food products for 2015 increased $202.8 million, or 6.1%, to
$3,540.9 million from $3,338.1 million in 2014.
The following table provides net sales by product category for our food/non-food products (in millions)(1):
Product Category
Food (2)
Fresh (2)
Candy
Other tobacco products
Health, beauty & general
Beverages
Equipment/other
$
Total Food/Non-food Products
$
2015
Net Sales
2014
Net Sales
Increase
Amounts
Percentage
1,251.1 $
335.0
557.0
870.3
368.8
156.6
2.1
3,540.9 $
1,180.9 $
281.1
534.3
827.5
361.0
151.8
1.5
3,338.1 $
70.2
53.9
22.7
42.8
7.8
4.8
0.6
202.8
5.9%
19.2%
4.2%
5.2%
2.2%
3.2%
40.0%
6.1%
(1)
(2)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
In 2016, the Fresh category was moved from the Food category to better present our Fresh growth. The 2015 and 2014 presentation has been realigned to
reflect these changes.
Food/non-food sales for 2015 increased primarily due to incremental sales to existing customers and market share gains
including the acquisition of Karrys Bros, offset by impacts of foreign currency fluctuations and one additional selling day by
approximately 1.4%. Sales generated from VCI, Fresh and Focused Marketing Initiatives (FMI) were the primary drivers of the
increase in net sales to existing customers. Net sales in our Food category, which increased 5.9% for 2015, contributed over 30% of
the 6.1% increase in food/non-food sales. Net sales in our Fresh category, which increased 19.2% for 2015, contributed over 25% of
the 6.1% increase in food/non-food sales. In addition, sales of smokeless tobacco products were the primary driver of the increase in
sales in our OTP category. We believe the overall trend toward the increased use of smokeless tobacco products will continue and will
help offset the impact of the expected continued decline in cigarette consumption over the long term. This shift could potentially result
in improved profitability over time due to the profit margins associated with smokeless tobacco products, which are generally higher
than those we earn on cigarette sales.
Total net food/non-food product sales as a percentage of total net sales decreased to 32.0% in 2015 compared to 32.5% in
2014.
Gross Profit. Gross profit represents the amount of 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 and therefore part of our gross profit. Gross profit in 2015 increased by $64.2 million, or 11.2% to
$637.9 million from $573.7 million for 2014 due primarily to increases in sales and gross margins in our food/non-food category.
Gross profit for 2015 also benefited from a $14.4 million decrease in LIFO expense, cigarette tax stamp inventory holding gains of
approximately $9.0 million related to increases in excise taxes by certain jurisdictions in 2015 and $1.8 million in refunds of excise
taxes on OTP from prior years. The decrease in LIFO expense was due primarily to a decrease in the PPI for certain product categories
we use to measure food/non-food LIFO expense as published by the Bureau of Labor Statistics. Since we value our inventory in the
U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or
deflation in manufacturer prices as reported in the Bureau of Labor Statistics PPI used to estimate and record our book LIFO expense
(see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements). In 2014, gross profit included
$8.5 million in OTP tax refunds, net of tax assessments, and $6.0 million of candy inventory holding gains.
Gross profit margin was 5.76% and 5.58% of total net sales for 2015 and 2014, respectively.
Distributors such as Core-Mark may, from time to time, earn higher gross profits on inventory and excise tax stamp
quantities on hand at the time manufacturers’ increase their prices or when states, localities or provinces increase their excise taxes.
Such increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the
increase. The higher gross profits are referred to as inventory holding gains. However, significant increases in cigarette product costs
and cigarette excise taxes adversely impact our gross profit as a percentage of net sales, because we are paid on a cents per carton
basis for cigarette sales. Conversely, we generally benefit from food/non-food price increases, because product costs for these
categories are usually marked up using a percentage of cost of goods sold.
29
Our cigarette and cigarette tax stamp inventory holding gains were $19.1 million, or 3.0%, of our gross profit for 2015
compared to $8.2 million, or 1.4%, of our gross profit for 2014. 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.
In addition, in 2014, we recognized $6.0 million, or 1.1%, of our gross profit for candy inventory holding gains resulting
from manufacturer price increases. These gains were recognized as the inventory was sold. Although we have realized significant
candy inventory holding gains in two of the last five years, this income is not predictable and is dependent on inventory levels and the
timing of manufacturer price increases.
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2015 and
2014 (in millions)(1):
2015
Increase
(Decrease)
Amounts
$
789.3 $ 11,069.4
% of Net
sales
100.0%
% of Net
sales, less
excise taxes
Amounts
— % $ 10,280.1
2014
% of Net
sales
100.0%
% of Net
sales, less
excise taxes
—%
687.9
8,857.7
80.0
100.0
8,169.8
79.5
100.0
$
1.9 $
10.1
0.09%
0.11 % $
8.2
0.08%
0.10%
Net sales
Net sales, less excise taxes
(non-GAAP)(2)
Components of gross
profit:
Cigarette inventory holding
gains(3)
Candy inventory holding
gains(4)
Cigarette tax stamp
inventory holding gains (5)
OTP tax items(6)
LIFO expense(7)
Remaining gross profit
(non-GAAP)(8)
Gross profit
(6.0)
—
—
—
6.0
0.06
0.08
9.0
(6.7)
(14.4)
9.0
1.8
(1.9)
0.08
0.02
(0.02)
0.10
0.02
(0.02 )
—
8.5
(16.3)
—
0.08
(0.16)
—
0.10
(0.20)
$
51.6
64.2 $
618.9
637.9
5.59
5.76%
6.99
7.20 % $
567.3
573.7
5.52
5.58%
6.94
7.02%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales 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 excise taxes result in higher net
sales, our overall gross profit percentage may be reduced; however we do not expect increases in excise taxes to negatively impact gross profit per carton
(see the reconciliation of Net Sales, less excise taxes to Net Sales in “Comparison of Sales and Gross Profit by Product Category” and in “Non-GAAP
Financial Information”).
The amount of cigarette inventory holding gains attributable to the U.S. and Canada were $8.7 million and $1.4 million, respectively, for 2015, compared to
$7.2 million and $1.0 million, respectively, for 2014.
For 2014, we recognized approximately $6.0 million in candy inventory holding gains resulting from manufacturer price increases. The amount of candy
inventory holding gains attributable to the U.S. and Canada for 2014 were $5.4 million and $0.6 million, respectively.
For 2015, we recognized cigarette tax stamp inventory holding gains in the U.S. of $9.0 million, resulting from the increase in the excise tax rates of certain
jurisdictions.
For 2015, we received OTP tax refunds of $1.8 million related to prior years’ taxes. For 2014, we received OTP tax refunds of $9.0 million related to prior
years’ taxes, offset by an OTP tax assessment of $0.5 million.
The decrease in LIFO expense was due primarily to a decrease in the PPI for certain product categories we use to measure food/non-food LIFO expense as
published by the Bureau of Labor Statistics. Since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively
impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor Statistics PPI used to
estimate and record our book LIFO expense (see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements).
See the reconciliation of remaining gross profit to gross profit in “Non-GAAP Financial Information”.
Remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross profit in “Non-
GAAP financial information”), increased $51.6 million, or 9.1%, to $618.9 million for 2015 from $567.3 million for 2014. In 2015,
remaining gross profit margin was 5.59% of total net sales compared to 5.52% in 2014. The seven basis points increase in remaining
gross profit margin was driven primarily by an increase in food/non-food margins, resulting largely from the continued success of our
marketing strategies, which improved overall margins by 10 basis points, together with an increase in cigarette margins, which
contributed two basis points and offset by five basis points related primarily to increases in cigarette manufacturers’ prices.
Cigarette remaining gross profit per carton, a non-GAAP financial measure, increased by 2.5% in 2015 compared to 2014
due primarily to a shift in carton sales to more profitable geographies and higher manufacturers’ discounts earned as a result of price
increases, offset partially by the unfavorable impact of foreign currency fluctuations.
30
Food/non-food remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross
profit in “Non-GAAP financial information”), increased $36.5 million, or 8.9% in 2015 compared to 2014. Food/non-food remaining
gross profit margin increased 33 basis points to 12.61% in 2015 compared with 12.28% for the same period in 2014 driven primarily
by sales growth in our Food category and a sales shift towards higher margin items. Our remaining gross profit for food/non-food
products was approximately 72% of our total remaining gross profit for both 2015 and 2014.
To the extent we capture large chain business, our gross profit margins may be negatively impacted. However, large chain
customers generally require less working capital, allowing us, in most cases, to offer lower prices to achieve a favorable return on our
investment. Our focus is to strike a balance between large chain business, which generally has lower gross profit margins, and
independently-owned convenience stores, which comprise approximately 67% of the overall convenience store market and generally
have higher gross profit margins.
Operating Expenses. Our operating expenses include costs related to warehousing and distribution, selling, general and
administrative and amortization of intangible assets. In 2015, operating expenses increased by $45.8 million, or 9.1%, to $551.2
million from $505.4 million in 2014. As a percentage of net sales, total operating expenses were 5.0% in 2015 compared to 4.9% in
2014. Operating expenses for 2015 include approximately $15.9 million in incremental expenses for our new Ohio division and the
addition of the Karrys Bros. operations. In addition, increases in the amount of cubic feet of product handled, incremental customer
deliveries, approximately $6.0 million of additional costs associated with information technology, infrastructure and people to support
future growth, and $1.1 million of identifiable costs related to the on-boarding of new customers, contributed to higher operating costs
in 2015.
Warehousing and Distribution Expenses. Warehousing and distribution expenses increased by $34.2 million, or 10.7%, to
$352.6 million in 2015 from $318.4 million in 2014. As a percentage of total net sales, warehousing and distribution expenses were
3.2% for 2015 compared with 3.1% for 2014. The increase in warehouse and distribution expenses was primarily attributable to a
5.9% increase in comparable cubic feet of product sold driven largely by our food/non-food category, a 9.4% increase in deliveries to
customers, and approximately $11.8 million in incremental expenses for our new Ohio division and the addition of the Karrys Bros.
operations. In addition, workers’ compensation costs increased $2.5 million, and we incurred $1.1 million of identifiable costs related
to the on-boarding of new customers. These increases were offset partially by a $7.7 million decrease in net fuel costs. The increase in
workers’ compensation costs related primarily to the adverse development of certain claims from prior years.
The decrease in our fuel costs was driven by lower diesel fuel prices and in part by our conversion to vehicles that use
compressed natural gas (CNG), offset by an increase in miles driven. As of December 31, 2015, we had converted approximately 24%
of our fleet to CNG tractors. Future increases or decreases in fuel costs and fuel surcharges we collect from our customers may
materially impact our financial results depending on the extent and timing of these changes.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased by $11.6 million, or 6.3% in 2015 to
$196.0 million from $184.4 million in 2014. SG&A expenses for 2015 included approximately $4.1 million of incremental expenses
for our new Ohio division and the addition of the Karrys Bros. operations, a $2.8 million increase in employee bonus and stock
compensation expense, $1.6 million related to the lump sum settlement of pension liabilities and approximately $6.0 million of
additional costs associated with information technology, infrastructure and people to support future growth. SG&A expenses for 2014
included $1.5 million for a product liability settlement and related legal expenses and $1.0 million in professional fees associated with
the collection of the OTP tax refunds in 2014. As a percentage of net sales, SG&A expenses were 1.8% for both 2015 and 2014.
Interest Expense. Interest expense includes both interest and amortization of loan origination costs related to borrowings and
facility fees and interest on capital lease obligations. Interest expense was $2.5 million and $2.4 million in 2015 and 2014,
respectively. Average borrowings were $39.6 million and $14.8 million in 2015 and 2014, respectively, with an average interest rate
of 1.6% for both years.
Foreign Currency Transaction Losses, Net. Foreign currency transaction losses were $1.8 million in 2015 compared to $0.1
million in 2014. The change was due primarily to the fluctuation in the Canadian/U.S. dollar exchange rate. During times of a
strengthening U.S. dollar, we will record transaction losses from our Canadian operations. Conversely we will record transaction gains
during times of a weakening U.S. dollar.
Income Taxes. Our effective tax rate was 37.9% for 2015 compared to 35.7% for 2014. The provision for income taxes for
2015 included a net benefit of $0.3 million, compared to a net benefit of $1.8 million in 2014, related primarily to adjustments of prior
years’ estimates and the expiration of statute of limitations for uncertain tax positions which reduced our effective tax rates by
approximately 0.4% and 2.7%, respectively.
Adjusted EBITDA. Adjusted EBITDA for 2015 increased 10.2% to $135.2 million compared to $122.7 million for 2014. The
increase in Adjusted EBITDA was driven primarily by an increase in gross profit (see the reconciliation of Adjusted EBITDA to net
income in “Adjusted EBITDA”).
31
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure used by management to measure operating performance. We believe
Adjusted EBITDA provides meaningful supplemental information for investors regarding the performance of our business and allows
investors to view results in a manner similar to the method used by our management. Adjusted EBITDA is also among 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. Adjusted EBITDA is not defined by GAAP and the discussion of Adjusted EBITDA should be considered as a
supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. We may define
Adjusted EBITDA differently than other companies and therefore such measures may not be comparable to ours.
The following table provides the components of Adjusted EBITDA for years ended December 31, 2016, 2015 and 2014 (in
millions):
Net income
Interest expense, net (1)
Provision for income taxes
Depreciation and amortization
LIFO expense
Stock-based compensation expense
Foreign currency transaction (gains) losses, net
Adjusted EBITDA (non-GAAP)
(1)
Interest expense, net, is reported net of interest income.
Year Ended December 31,
2015
2014
2016
$
$
54.2 $
5.1
31.3
42.9
13.2
6.1
(0.5)
152.3 $
51.5 $
2.0
31.4
37.9
1.9
8.7
1.8
135.2 $
42.7
1.8
23.7
32.0
16.3
6.1
0.1
122.7
32
Comparison of Sales and Gross Profit by Product Category
The following table summarizes our cigarette and food/non-food product sales, LIFO expense, gross profit and other relevant
financial data for 2016, 2015 and 2014 (in millions)(1):
2016
2015
2014
Cigarettes
Net sales
Excise taxes in sales (2)
Net sales, less excise taxes (non-GAAP)(3)
LIFO expense (4)
Gross profit (5)
Gross profit %
Gross profit % less excise taxes (non-GAAP)
Remaining gross profit (non-GAAP)(7)
Remaining gross profit % (non-GAAP)
Remaining gross profit % less excise taxes (non-GAAP)
Food/Non-food
Net sales
Excise taxes in sales (2)
Net sales, less excise taxes (non-GAAP)(3)
LIFO expense (income) (4)
Gross profit (6)
Gross profit %
Gross profit % less excise taxes (non-GAAP)
Remaining gross profit (non-GAAP)(7)
Remaining gross profit % (non-GAAP)
Remaining gross profit % less excise taxes (non-GAAP)
Totals
Net sales
Excise taxes in sales (2)
Net sales, less excise taxes (non-GAAP)(3)
LIFO expense (4)
Gross profit (5) (6)
Gross profit %
Gross profit % less excise taxes (non-GAAP)
Remaining gross profit (non-GAAP)(7)
Remaining gross profit % (non-GAAP)
Remaining gross profit % less excise taxes (non-GAAP)
$
$
$
$
$
$
$
$
10,335.7
2,716.2
7,619.5
11.7
220.0
2.13%
2.89%
216.4
2.09%
2.84%
4,193.7
305.8
3,887.9
1.5
516.9
12.33%
13.30%
518.4
12.36%
13.33%
14,529.4
3,022.0
11,507.4
13.2
736.9
5.07%
6.40%
734.8
5.06%
6.39%
$
$
$
$
7,528.5
1,977.5
5,551.0
11.0
180.5
2.40%
3.25%
172.4
2.29%
3.11%
3,540.9
234.2
3,306.7
(9.1)
457.4
12.92%
13.83%
446.5
12.61%
13.50%
11,069.4
2,211.7
8,857.7
1.9
637.9
5.76%
7.20%
618.9
5.59%
6.99%
$
$
$
$
$
$
6,942.0
1,881.1
5,060.9
10.1
155.4
2.24%
3.07%
157.3
2.27%
3.11%
3,338.1
229.2
3,108.9
6.2
418.3
12.53%
13.45%
410.0
12.28%
13.19%
10,280.1
2,110.3
8,169.8
16.3
573.7
5.58%
7.02%
567.3
5.52%
6.94%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
Excise taxes included in our net sales consist of 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 excise taxes result in higher net sales, our overall gross profit percentage may be reduced since gross profit dollars generally remain the
same.
See the reconciliation of net sales less excise taxes to net sales in “Comparison of Sales and Gross Profit by Product Category” and in “Non-GAAP Financial
Information”.
LIFO expense increased $11.3 million in 2016 compared to 2015, due primarily to an increase in the PPI for certain product categories we use to measure
food/non-food LIFO expense as published by the Bureau of Labor Statistics. Since we value our inventory in the U.S. on a LIFO basis, our gross profit can
be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor
Statistics PPI used to estimate and record our book LIFO expense (see Note 2 - Summary of Significant Accounting Policies to our consolidated financial
statements).
Cigarette gross profit includes (i) cigarette inventory holding gains related to manufacturer price increases, (ii) increases in state, local and provincial excise
taxes and (iii) LIFO effects. Cigarette inventory holding gains for the years 2016, 2015 and 2014 were $15.3 million, $10.1 million and $8.2 million,
respectively. For 2015, we recognized cigarette tax stamp inventory holding gains in the U.S. of $9.0 million, resulting from the increase in the excise tax
rates of certain jurisdictions.
Food/non-food gross profit includes (i) inventory holding gains related to manufacturer price increases, (ii) increases in state, local and provincial excise
taxes, (iii) LIFO effects, (iv) OTP tax refunds of $1.8 million in 2015 and $8.5 million in 2014, net of an OTP assessment of $0.5 million related to prior
years’ taxes, and (v) a $6.0 million net candy holding gain in 2014.
See the reconciliation of remaining gross profit to gross profit in “Non-GAAP Financial Information”.
33
Liquidity and Capital Resources
Our cash and cash equivalents as of December 31, 2016 were $26.4 million compared to $12.5 million at December 31,
2015. Our restricted cash at December 31, 2016 was $15.3 million compared to $8.5 million at December 31, 2015. Restricted cash
represents primarily funds that have been set aside in trust as required by one of the Canadian provincial taxing authorities to secure
amounts payable for cigarette and tobacco excise taxes.
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 ended December 31,
2016, our cash flows from operating activities used $98.0 million, and on December 31, 2016, we had $224.8 million of borrowing
capacity available under our Credit Facility.
Based on our anticipated cash needs, availability under our Credit Facility and the scheduled maturity of our debt, we expect
that our current liquidity will be sufficient to meet all of our anticipated operating needs during the next twelve months.
On September 14, 2016, our Board of Directors approved a motion to terminate the Company’s qualified defined-benefit
pension plan. Pension liabilities will be settled through either lump sum payments or purchasing annuities from an insurance company.
We expect to make cash contributions between $4.0 million and $6.0 million to settle our pension obligations in 2017. Settling the
plan will eliminate cash contributions, lower future expenses and eliminate the risk of rising Pension Benefit Guaranty Corporation
premiums.
Cash flows from operating activities
Year ended December 31, 2016
Net cash used in operating activities was $98.0 million for the year ended December 31, 2016 compared to $77.2 million of
cash provided for the same period in 2015.
Significant new operating agreements with Murphy U.S.A. and 7-Eleven Inc., both of which commenced in 2016,
significantly contributed to increases in working capital requirements during the year. Changes in operating assets and liabilities
caused net cash used in operating activities of $226.1 million. Specifically, inventories, accounts receivable, and other receivables,
increased $180.4 million, $59.2 million, and $37.0 million, respectively, utilizing working capital, and using cash. Offsetting this
usage was an increase of cigarette and tobacco taxes payables, which provided cash of $65.5 million. Other net working capital
movements used cash of $15.0 million.
Offsetting the working capital requirements of $226.1 million was net income of $54.2 million plus non-cash additions to net
income from Depreciation, LIFO and inventory provision, of $42.9 million, and $13.2 million, respectively. Other non-cash
adjustments to net income were $17.8 million.
Year ended December 31, 2015
Net cash provided by operating activities increased by $10.7 million to $77.2 million for the year ended December 31, 2015
compared to $66.5 million for the same period in 2014. This increase was due primarily to an increase of $17.6 million in net income
adjusted for non-cash items, offset by an increase in cash used in working capital of $6.9 million. The increase in cash used in working
capital was due primarily to an increase in receivables resulting primarily from higher sales and the timing of inventory purchases
including prepayments to certain vendors.
Cash flows from investing activities
Year ended December 31, 2016
Net cash used in investing activities increased by $114.0 million to $157.2 million for the year ended December 31, 2016
compared to $43.2 million for the same period in 2015. The increase in cash used was primarily driven by the acquisition of Pine State
for $88.4 million compared to $8.0 million for the acquisition of Karrys Bros. in the prior year. Significant capital expenditures for the
year included $16.8 million in leasehold improvements for a new building for our Las Vegas division and other building upgrades, as
well as $13.7 million in logistics equipment to accommodate new business. Capital expenditures for 2017 are expected to be
approximately $50 million, which will be utilized for expansion projects, including investments costs associated with our supply
agreement with Walmart.
34
Year ended December 31, 2015
Net cash used in investing activities decreased by $17.9 million to $43.2 million for the year ended December 31, 2015
compared to $61.1 million for the same period in 2014. The reduction in cash used was due primarily to a decrease in capital
expenditures of approximately $23.6 million and a decrease in restricted cash of $5.4 million, offset by $8.0 million used for the
acquisition of Karrys Bros. The decrease in capital expenditures is attributable primarily to higher spending in 2014 attributable
primarily to a distribution center in Ohio, and an investment in advanced ordering technology for customers.
Cash flows from financing activities
Year ended December 31, 2016
Net cash provided by financing activities increased by $300.9 million to $266.7 million for the year ended December 31,
2016 compared to net cash used of $34.2 million for the same period in 2015. This increase was due primarily to a $297.9 million
increase in net borrowings made under our Credit Facility, partially in support of our acquisition of Pine State for $88.4 million, as
well as to fund increased working capital requirements to support our business expansion activities. Book overdrafts increased $8.6
million caused by the level of cash on hand in relation to the timing of vendor payments and outstanding checks.
Year ended December 31, 2015
Net cash used in financing activities increased by $32.8 million to $34.2 million for the year ended December 31, 2015
compared to $1.4 million for the same period in 2014. This increase was due primarily to net repayments on our Credit Facility of $9.3
million in 2015 compared to net borrowings of $9.6 million in 2014, a decrease in book overdrafts of $6.1 million caused by the level
of cash on hand in relation to the timing of vendor payments and outstanding checks, and an increase of $3.3 million for dividends and
stock repurchases.
Our Credit Facility
We have a Credit Facility with a borrowing capacity of $600 million, as of December 31, 2016. On November 4, 2016, we
entered into a ninth amendment to the Credit Facility (the Ninth Amendment), which increased the Credit Facility from $450 million
to $600 million. The Credit Facility has an expansion feature which can be increased up to an additional $100 million, limited by a
borrowing base primarily consisting of eligible accounts receivable and inventories. 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 London Interbank Offer Rate (LIBOR) or Canadian
Dollar Offer Rate (CDOR) based loans prepaid prior to the end of an interest period). This will be subject to the same borrowing base
limitations as the Eighth amendment.
On May 16, 2016, we entered into an Eighth amendment, which increased the size of the Credit Facility from $300 million to
$450 million. In addition, the Eighth amendment allows for unlimited stock repurchases and dividends, as long as we meet certain
credit availability percentages and fixed charge coverage ratios.
The Credit Facility matures in May 2020. We incurred fees of approximately $1.3 million in connection with the
amendments. As of December 31, 2016, we were in compliance with all of the covenants under the Credit Facility. See Note 8 - Long-
Term Debt to our consolidated financial statements included in this Form 10-K for additional details on the Credit Facility.
Amounts borrowed, outstanding letters of credit and amounts available to borrow, net of certain reserves required under the
Credit Facility, were as follows (in millions):
Amounts borrowed, net
Outstanding letters of credit
Amounts available to borrow (1)
(1)
Excluding $100 million expansion feature.
December 31,
2016
2015
$
$
336.0
17.4
224.8
47.0
18.5
123.9
Average borrowings during the years ended December 31, 2016 and 2015 were $184.4 million and $39.6 million,
respectively, with amounts borrowed at any one time during the years then ended ranging from zero to $428.0 million and zero to
$120.9 million, respectively. See Liquidity and Capital Resources for additional details on the increase to average borrowings details.
35
Contractual Obligations and Commitments
Contractual Obligations. The following table presents information regarding our contractual obligations that existed as of
December 31, 2016 (in millions):
Credit Facility (1)
Purchase obligations (2)
Letters of credit
Operating leases
Capitalized leases (3)
$
Total contractual obligations (4)(5)(6)
$
Total
Less than 1
Year
1 - 3 Years
3 - 5 Years
More than 5
Years
336.0
47.8
17.4
350.0
16.8
768.0
$
$
—
23.3
17.4
54.3
2.6
97.6
$
$
—
10.0
—
99.3
4.6
113.9
$
$
336.0
14.5
—
75.1
3.2
428.8
$
$
—
—
—
121.3
6.4
127.7
(1)
(2)
(3)
(4)
(5)
(6)
Represents amounts borrowed under our Credit Facility and does not include interest costs associated with the Credit Facility.
Our purchase obligations at December 31, 2016 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).
Represents net future minimum lease payments for warehouse facility, refrigeration and other office and warehouse equipment. Current maturities of capital
leases are included in accrued liabilities, and non-current maturities are included in long-term debt. Interest costs associated with the capitalized leases are
included in the table above.
We have not included in the table above claims liabilities of $40.2 million, which includes health and welfare, workers’ compensation and general and auto
liabilities because they do not have a definite payout by year. Claims liabilities are discussed in Note 2 - Summary of Significant Accounting Policies to our
consolidated financial statements.
As discussed in Note 11 - Employee Benefit Plans to our consolidated financial statements, we have $4.3 million and $0.2 million, respectively, in short-
term obligation arising from an underfunded pension plan and other post-retirement benefit plan and $2.4 million long-term obligation arising from
underfunded other post-retirement benefit plan. Cash contributions of approximately $4.0 million to $6.0 million to settle pension obligations in 2017 in
conjunction with the termination of our pension plan are not included in the schedule above.
The table excludes unrecognized tax liabilities of $0.2 million because a reasonable and reliable estimate of the timing of future tax payments or settlements,
if any, cannot be determined (see Note 10 - Income Taxes to our consolidated financial statements).
Off-Balance Sheet Arrangements
Letters of Credit. As of December 31, 2016, our standby letters of credit issued under our Credit Facility were $17.4 million
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.
Operating Leases. The majority of our sales offices, warehouse facilities and trucks are subject to lease agreements which
expire at various dates through 2032, 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.
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 the U.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 doubtful accounts, vendor rebates and promotional allowances, claims liabilities and insurance
recoverables, valuation of pension assets and obligations, valuation of long-lived assets and goodwill, realizability of deferred income
taxes and uncertain tax positions 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 financial statements.
36
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for 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 doubtful
accounts based on historical experience 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 doubtful accounts at December 31, 2016 and 2015 amounted to 1.9% and 3.9%, respectively, of gross
trade accounts receivable.
Bad debt expense associated with our trade customer receivables was $2.0 million, $1.3 million and $2.2 million in 2016,
2015 and 2014, respectively. As a percentage of net sales, our bad debt expense was less than 0.1% for 2016, 2015 and 2014.
Vendor Rebates and Promotional Allowances
Periodic payments from vendors in various forms including rebates, promotional allowances and volume discounts are
reflected in the carrying value of the related inventory when earned and as cost of goods sold as the related merchandise is sold. Up-
front consideration received from vendors linked to purchase or other commitments is initially deferred and amortized ratably to cost
of goods sold as the performance of the activities specified by the vendor to earn the fee is completed. Cooperative marketing
incentives from suppliers are recorded as reductions to cost of goods sold to the extent the vendor considerations exceed the costs
relating to the programs. These amounts are recorded in the period the related promotional or merchandising programs are provided.
Certain vendor incentive promotions require that we make assumptions and judgments regarding, for example, the likelihood of
achieving market share levels or attaining specified levels of purchases. Vendor incentives are at the discretion of our vendors and can
fluctuate due to changes in vendor strategies and market requirements.
Claims Liabilities and Insurance Recoverables
We maintain reserves related to workers’ compensation, general and auto liability and health and welfare programs that are
principally self-insured. Our workers’ compensation, general and auto 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 $250,000 per
person per year.
Our reserves for workers’ compensation, general and auto 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. Actuarial projections
of losses concerning workers’ compensation, general and auto 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 as of December 31, 2016 and 2015 (in millions):
Gross claims liabilities:
Workers’ compensation
Auto & general insurance
Health & welfare
Total gross claims liabilities
Insurance recoverables
Reserves (net):
Workers’ compensation
Auto & general insurance
Health & welfare
Reserves (net)
$
$
$
$
$
Current
2016
Long-Term
Total
Current
2015
Long-Term
Total
6.6
3.1
3.7
13.4
$
$
22.3
4.5
—
26.8
$
$
28.9
7.6
3.7
40.2
$
$
5.9
2.3
3.7
11.9
$
$
23.5
3.1
—
26.6
$
$
29.4
5.4
3.7
38.5
(2.1) $
(12.9 ) $
(15.0) $
(1.5) $
(14.4) $
(15.9)
5.7
1.9
3.7
11.3
$
$
11.3
2.6
—
13.9
$
$
17.0
4.5
3.7
25.2
$
$
4.8
1.9
3.7
10.4
$
$
10.0
2.2
—
12.2
$
$
14.8
4.1
3.7
22.6
37
The increase in these reserves for 2016 was due primarily to a higher number of claims and reported losses for our workers
compensation, general and auto insurance liability. A 10% change in our incurred but not reported estimates would increase or
decrease the estimated reserves for our workers’ compensation liability, general and auto insurance liability, and health and welfare
liability as of December 31, 2016 by $1.0 million, $0.2 million and $0.3 million, respectively.
Valuation of Pension Assets and Obligations
We sponsored a qualified defined-benefit pension plan and a post-retirement benefit plan (collectively, “the Pension Plans”)
for employees hired before September 1986 and certain employees of Fleming, our former parent company. As discussed in Note 11 -
Employee Benefit Plans to our consolidated financial statements, our qualified defined-benefit pension plan was underfunded by $4.3
million and $4.7 million at December 31, 2016 and 2015, respectively. There have been no new entrants to the pension or non-pension
post-retirement benefit plans after those benefit plans were frozen on September 30, 1986.
The determination of the obligation and expense associated with our Pension Plans is dependent, in part, on our selection of
certain assumptions used by our independent actuaries in calculating these amounts. These assumptions are disclosed in Note 11 to the
consolidated financial statements and include, among other things, the weighted-average discount rate and the expected weighted-
average long-term rate of return on plan assets. Actual results in any given year will often differ from actuarial assumptions because of
economic and other factors. In accordance with U.S. GAAP, actual results that differ from actuarial assumptions are accumulated and
amortized over future periods and therefore, affect recognized expense and the recorded obligation in such future periods. While we
believe our assumptions are appropriate, significant differences in actual results or changes in our assumptions may materially affect
our pension and other post-retirement obligations and associated future expense.
On September 14, 2016, the Board of Directors approved a motion to terminate the Company’s qualified defined-benefit
pension plan. We expect to complete the settlement of our pension liabilities through either lump sum payments or purchased
annuities by December 31, 2017 (see Note 11 - Employee Benefit Plans).
We select the weighted-average discount rates for each benefit plan as the rate at which the benefits could be effectively
settled as of the measurement date. In selecting an appropriate weighted-average discount rate we use a yield curve methodology,
matching the expected benefits at each duration to the available high quality yields at that duration and calculating an equivalent yield,
which is the ultimate discount rate used. The weighted-average discount rates used to determine the pension obligation and pension
expense were 3.30% and 4.13%, respectively for 2016, and 4.32% and 4.05%, respectively for 2015. A lower weighted-average
discount rate increases pension expense and the present value of benefit obligations. Expected return on pension plan assets is based
on historical experience of our portfolio and the review of projected returns by asset class on broad, publicly traded equity and fixed-
income indices, as well as target asset allocation. In 2016, our target allocation was adjusted to 100% fixed income with the objective
of hedging the obligation in anticipation of the pension plan termination. Our assumed weighted-average rate of return on our assets
was 3.6% and 6.0% for 2016 and 2015, respectively.
Sensitivity analysis for changes in the major assumptions of our pension plans as of December 31, 2016 is as follows (in
millions):
Expected return on plan assets
Discount rate -- Pension
Discount rate -- Post-retirement
Valuation of Long-Lived Assets
Percentage
Point
Change
+/- .25 pt
+/- .25 pt
+/- .25 pt
Projected Benefit
Obligation
Decrease
(Increase)
N/A
$1.0 / (1.0)
$0.1 / (0.1)
Expense
Decrease (Increase)
$0.1 / (0.1)
$0.0 / (0.0)
$0.0 / (0.0)
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 five asset groups. We did not record impairment
losses related to long-lived assets in any of the years ended December 31, 2016, 2015 and 2014.
38
Valuation of Goodwill
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 of October 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. The Company’s reporting
units, which are the United States and Canada, also represent the Company’s operating segments. Whenever events or circumstances
change, we assess the related qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill
impairment test. The tests to evaluate goodwill for impairment are performed at the reporting unit level. In the first step of 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, we perform a second step to determine the implied fair value of goodwill associated with the reporting
unit. If the carrying value of goodwill exceeds the implied fair value of goodwill, 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 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 ended December 31, 2016, 2015 and 2014.
In connection with our annual goodwill impairment testing performed during 2016, the first step of the 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.
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 income excluding LIFO expense, (iii) net sales, less
excise taxes, (iv) remaining gross profit, (v) remaining gross profit margin, (vi) remaining gross profit margin less excise taxes, and
(vii) cigarette remaining gross profit per carton. We believe these non-GAAP financial measures provide meaningful supplemental
information for investors regarding the performance of our business and facilitate a meaningful period to period evaluation. We also
believe these measures allow investors to view results in a manner similar to the method used by our management. Management uses
these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business.
These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures
calculated in accordance with GAAP. These measures may be defined differently than other companies and therefore, such measures
may not be comparable to ours. We strongly encourage investors and stockholders to review our financial statements and publicly
filed reports in their entirety and not to rely on any single financial measure. These non-GAAP measures are defined as follows:
(i) Adjusted EBITDA is a measure used by management to measure operating performance. Adjusted EBITDA is also among
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. Adjusted EBITDA is equal to net income adding back net interest expense, provision for income taxes,
depreciation and amortization, LIFO expense, stock-based compensation expense and net foreign currency transaction gains or losses.
See Adjusted EBITDA tables to our Management’s Discussion and Analysis for additional details on the components of Adjusted
EBITDA.
(ii) Net income excluding LIFO expense is a non-GAAP financial measure which is net income excluding LIFO expense and
tax effects of LIFO expense. We provide this measure to show increases in net income for a more comparable analysis between
periods, without LIFO expenses, due to fluctuations in LIFO expenses resulting from inflation.
The following table reconciles net income excluding LIFO expense to net income, its most comparable financial measure
under GAAP (in millions) (1):
2016
Amounts
2015
Amounts
Increase
Amounts
Percentage
Net income
LIFO expense
Provision for tax on LIFO expense
LIFO expense, net of taxes
Net income excluding LIFO expense (non-GAAP)
$
$
54.2
13.2
(5.1)
8.1
62.3
$
$
51.5
1.9
(0.7)
1.2
52.7
$
$
2.7
11.3
4.4
6.9
9.6
5.2 %
N/A
N/A
N/A
18.2 %
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
39
(iii) Net sales less excise taxes is 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.
(iv) Remaining gross profit (including cigarette remaining gross profit and Food/Non-Food remaining gross profit), (v)
remaining gross profit margin, (vi) remaining gross profit margin less excise taxes, and (vii) cigarette remaining gross profit per
carton, are non-GAAP financial measures, which we provide to segregate the effects of LIFO expense, cigarette and candy inventory
holding gains and certain other items that significantly affect the comparability of gross profit.
The following tables reconcile net sales less excise taxes to net sales and remaining gross profit to gross profit, their most comparable
financial measures under U.S. GAAP (in millions) (1):
2016
Amounts
2015
Amounts
2014
Amounts
Net sales
Excise taxes
Net sales, less excise taxes (non-GAAP)
Gross profit
Cigarette inventory holding gains
Candy inventory holding gains
Cigarette tax stamp holding gains
OTP tax refunds
LIFO expense
Remaining gross profit (non-GAAP)
$
$
$
$
14,529.4
(3,022.0)
11,507.4
$
$
$
11,069.4
(2,211.7)
8,857.7
$
$
$
736.9
(15.3)
—
—
—
13.2
734.8
637.9
(10.1)
—
(9.0)
(1.8)
1.9
618.9
$
$
Remaining gross profit % less excise taxes (non-GAAP)
Gross profit %
Gross profit % less excise taxes (non-GAAP)
6.39%
5.07%
6.40%
6.99%
5.76%
7.20%
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
10,280.1
(2,110.3)
8,169.8
573.7
(8.2)
(6.0)
—
(8.5)
16.3
567.3
6.94%
5.58%
7.02%
2016
Amounts
2015
Amounts
2014
Amounts
Cigarettes:
Net sales
Excise taxes
Net sales, less excise taxes (non-GAAP)
Gross profit
Cigarette inventory holding gains
Cigarette tax stamp holding gains
LIFO expense
Remaining gross profit (non-GAAP)
$
$
$
$
10,335.7
(2,716.2)
7,619.5
7,528.5
(1,977.5)
5,551.0
$
$
$
$
220.0
(15.3)
—
11.7
216.4
$
$
$
$
180.5
(10.1)
(9.0)
11.0
172.4
Remaining gross profit % less excise taxes (non-GAAP)
Gross profit %
Gross profit % less excise taxes (non-GAAP)
2.84%
2.13%
2.89%
3.11%
2.40%
3.25%
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
40
6,942.0
(1,881.1)
5,060.9
155.4
(8.2)
—
10.1
157.3
3.11%
2.24%
3.07%
2016
Amounts
2015
Amounts
2014
Amounts
Food/Non-food:
Net sales
Excise taxes
Net sales, less excise taxes (non-GAAP)
Gross profit
OTP tax refunds
Candy inventory holding gains
LIFO expense
Remaining gross profit (non-GAAP)
Remaining gross profit % less excise taxes (non-GAAP)
Gross profit %
Gross profit % less excise taxes (non-GAAP)
$
$
$
$
4,193.7
(305.8)
3,887.9
$
$
3,540.9
(234.2)
3,306.7
$
$
516.9
—
—
1.5
518.4
$
457.4
$
(1.8)
—
(9.1)
$
446.5
$
13.33%
12.33%
13.30%
13.50%
12.92%
13.83%
3,338.1
(229.2)
3,108.9
418.3
(8.5)
(6.0)
6.2
410.0
13.19%
12.53%
13.45%
(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our most significant exposure to market risk comes from changes in short-term interest rates on our variable rate debt.
Depending upon the borrowing option chosen, the interest charged is generally based upon the prime rate or LIBOR plus an applicable
margin. If interest rates increased 17 basis points (which approximates 10% of the weighted-average interest rate on our average
borrowings during the year ended December 31, 2016), our results of operations and cash flows would not be materially affected.
We are exposed to foreign currency risk, primarily through our operations in Canada which conduct business in Canadian
dollars. We record gains and losses within our stockholders’ equity due to the translation of the Canadian branches’ financial
statements into U.S. dollars. A 10% unfavorable change in the weighted average Canadian/U.S. dollar exchange rate for 2016 would
have reduced our net sales for 2016 by 0.9% and would not have materially impacted our operating income. Additionally, we incur
foreign currency transaction gains and losses related to the level of activity between the U.S. and Canada. In 2016, we realized foreign
currency transaction losses of $0.5 million. A 10% unfavorable change in the Canadian/U.S. dollar noon exchange rate on
December 31, 2016 would have had an immaterial impact on foreign currency transaction losses for 2016. We did not engage in
hedging transactions during 2016, 2015 or 2014.
41
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements filed as part of this Annual Report on Form 10-K
1. Financial Statements
A. Audited Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets -- at December 31, 2016 and 2015
Consolidated Statements of Operations -- for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income -- for the Years Ended December 31, 2016, 2015 and
2014
Consolidated Statements of Stockholders’ Equity -- for the Years Ended December 31, 2016, 2015 and
2014
Consolidated Statements of Cash Flows -- for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
43
44
45
46
47
48
49
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Core-Mark Holding Company, Inc.
South San Francisco, California:
We have audited the accompanying consolidated balance sheets of Core-Mark Holding Company, Inc. and subsidiaries (the
“Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the
financial statement schedule in Item 15. We also have audited the Company’s internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control over Financial
Reporting, management excluded from its assessment the internal control over financial reporting at Pine State Convenience (“Pine
State”), which was acquired on June 6, 2016 and whose financial statements constitute approximately 9% of total assets,
approximately 4% of total revenue, and approximately 8% of income before income taxes of the consolidated financial statement
amounts as of and for the year ended December 31, 2016. Accordingly, our audit did not include the internal control over financial
reporting at Pine State. The Company’s management is responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on
the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
/s/ Deloitte & Touche LLP
San Francisco, California
March 1, 2017
43
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
December 31,
2016
2015
Current assets:
Assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $7.1 and $10.9 at December
$
$
26.4
15.3
31, 2016 and December 31, 2015, respectively (Note 4)
Other receivables, net (Note 4)
Inventories, net (Note 5)
Deposits and prepayments (Note 4)
Deferred income taxes (Note 10)
Total current assets
Property and equipment, net (Note 6)
Goodwill (Note 7)
Other intangible assets, net (Note 7)
Other non-current assets, net (Note 4)
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Book overdrafts (Note 2)
Cigarette and tobacco taxes payable
Accrued liabilities (Note 4)
Deferred income taxes (Note 10)
Total current liabilities
Long-term debt (Note 8)
Deferred income taxes (Note 10)
Other long-term liabilities
Claims liabilities (Note 2)
Pension liabilities (Note 11)
Total liabilities
Commitments and contingencies (Note 9)
Stockholders’ equity (Note 14):
Common stock, $0.01 par value (100,000,000 shares authorized, 52,227,511 and 51,953,354
shares issued; 46,152,958 and 46,116,670 shares outstanding at December 31, 2016 and
December 31, 2015, respectively)
Additional paid-in capital
Treasury stock at cost (6,074,553 and 5,836,684 shares of common stock at December 31,
2016 and December 31, 2015, respectively)
Retained earnings
Accumulated other comprehensive loss (Note 15)
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
365.9
106.5
596.6
82.8
4.7
1,198.2
194.7
36.0
41.5
26.6
1,497.0
119.2
37.9
259.8
131.8
0.1
548.8
347.7
30.0
11.5
26.8
2.4
967.2
0.5
275.5
(70.7)
338.7
(14.2)
529.8
1,497.0
$
$
12.5
8.5
272.7
69.4
407.4
65.0
1.8
837.3
159.5
22.9
29.5
28.1
1,077.3
129.6
29.2
193.6
106.9
0.3
459.6
60.4
18.6
10.6
26.6
7.5
583.3
0.5
271.6
(61.8)
300.0
(16.3)
494.0
1,077.3
The accompanying notes are an integral part of these consolidated financial statements.
44
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Net sales
Cost of goods sold
Gross profit
Warehousing and distribution expenses
Selling, general and administrative expenses
Amortization of intangible assets
Total operating expenses
Income from operations
Interest expense
Interest income
Foreign currency transaction gains (losses), net
Income before income taxes
Provision for income taxes (Note 10)
Net income
Basic net income per common share (Note 12)
Diluted net income per common share (Note 12)
Basic weighted-average shares (Note 12)
Diluted weighted-average shares (Note 12)
$
$
$
$
$
$
2016
14,529.4
13,792.5
736.9
431.2
210.3
5.3
646.8
90.1
(5.3)
0.2
0.5
85.5
(31.3)
54.2
Year Ended December 31,
2015
11,069.4
10,431.5
637.9
352.6
196.0
2.6
551.2
86.7
(2.5)
0.5
(1.8)
82.9
(31.4)
51.5
$
$
2014
10,280.1
9,706.4
573.7
318.4
184.4
2.6
505.4
68.3
(2.4)
0.6
(0.1)
66.4
(23.7)
42.7
1.17
1.17
$
$
1.12
1.11
$
$
46.3
46.5
46.2
46.6
0.93
0.92
46.2
46.6
The accompanying notes are an integral part of these consolidated financial statements.
45
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Net income
Other comprehensive income (loss), net of tax:
Defined benefit plan adjustments (Note 15)
Foreign currency translation gain (loss)
Other comprehensive income (loss), net of tax
Comprehensive income
2016
Year Ended December 31,
2015
2014
$
54.2
$
51.5
$
0.2
1.9
2.1
56.3
$
0.2
(4.9)
(4.7)
46.8
$
$
42.7
(2.9)
(3.0)
(5.9)
36.8
The accompanying notes are an integral part of these consolidated financial statements.
46
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions (1))
Common Stock Issued
Amount
Shares
Additional
Paid-in
Capital
Treasury Stock
Shares
Amount
Retained
Earnings
Comprehensive
(Loss) Income
Accumulated
Other
Total
Stockholders’
Equity
Balance, December 31, 2013
Net income
Other comprehensive loss, net of
tax
Dividends declared
Stock-based compensation
expense
Cash proceeds from exercise of
common stock options
Excess tax deductions associated
with stock-based compensation
Issuance of stock based
instruments, net of shares
withheld for employee taxes
Repurchase of common stock
Balance, December 31, 2014
Net income
Other comprehensive loss, net of
tax
Dividends declared
Stock-based compensation
expense
Cash proceeds from exercise of
common stock options
Excess tax deductions associated
with stock-based compensation
Issuance of stock based
instruments, net of shares
withheld for employee taxes
Repurchase of common stock
Balance, December 31, 2015
Net income
Other comprehensive income, net
of tax
Dividends declared
Stock-based compensation
expense
Cash proceeds from exercise of
common stock options
Excess tax deductions associated
with stock-based compensation
Issuance of stock based
instruments, net of shares
withheld for employee taxes
Repurchase of common stock
Balance, December 31, 2016
51.2 $
—
0.5 $
—
254.3
—
(5.2) $
—
(44.6) $
—
229.5 $
42.7
—
—
—
—
—
—
—
—
—
—
—
—
(10.8)
—
6.1
—
—
0.2
—
2.1
—
—
—
—
(5.7) $
—
(5.9)
—
—
—
—
—
2.8
—
—
—
—
0.2
—
51.6
—
—
—
—
—
0.5
—
—
—
(1.7)
—
263.6
—
—
—
—
(0.4)
(5.6)
—
—
—
—
(8.0)
(52.6)
—
—
—
261.4
51.5
—
—
—
(12.9)
—
—
8.7
—
—
0.2
—
0.4
—
—
—
—
—
—
(11.6)
—
(4.7)
—
—
—
—
—
2.2
—
—
—
—
0.2
—
52.0
—
—
—
—
—
0.5
—
—
—
(3.3)
—
271.6
—
—
—
—
(0.2)
(5.8)
—
—
—
—
(9.2)
(61.8)
—
—
—
300.0
54.2
—
—
—
(15.5)
—
—
6.1
—
—
0.1
—
0.3
—
—
—
—
—
—
(16.3)
—
2.1
—
—
—
—
—
2.9
—
—
—
—
434.0
42.7
(5.9)
(10.8)
6.1
2.1
2.8
(1.7)
(8.0)
461.3
51.5
(4.7)
(12.9)
8.7
0.4
2.2
(3.3)
(9.2)
494.0
54.2
2.1
(15.5)
6.1
0.3
2.9
0.1
—
52.2 $
—
—
0.5 $
(5.4)
—
275.5
—
(0.2)
(6.0) $
—
(8.9)
(70.7) $
—
—
338.7 $
—
—
(14.2) $
(5.4)
(8.9)
529.8
(1) Amounts have been rounded for presentation purposes and might differ from unrounded results.
The accompanying notes are an integral part of these consolidated financial statements.
47
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
LIFO and inventory provisions
Amortization of debt issuance costs
Stock-based compensation expense
Bad debt expense, net
Depreciation and amortization
Foreign currency transaction (gains) losses, net
Deferred income taxes
Settlement charge
Changes in operating assets and liabilities:
Accounts receivable, net
Other receivables, net
Inventories, net
Deposits, prepayments and other non-current assets
Excess tax deductions associated with stock-based compensation
Accounts payable
Cigarette and tobacco taxes payable
Pension, claims, accrued and other long-term liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Acquisition of business, net of cash acquired
Change of restricted cash
Additions to property and equipment, net
Capitalization of software and related development costs
Proceeds from sale of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Borrowings under revolving credit facility
Repayments under revolving credit facility
Payments of financing costs
Dividends paid
Payments of capital leases
Repurchases of common stock
Proceeds from exercise of common stock options
Tax withholdings related to net share settlements of restricted
stock units
Excess tax deductions associated with stock-based compensation
Book overdrafts, net
Net cash provided by (used in) financing activities
Effects of changes in foreign exchange rates
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures:
Cash paid during the period for:
Income taxes paid, net
Interest paid
Unpaid property and equipment purchases included in accrued liabilities
Non-cash capital lease obligations incurred
Year Ended December 31,
2015
2016
2014
$
54.2
$
51.5
$
42.7
13.2
0.5
6.1
2.0
42.9
(0.5)
8.4
1.3
(59.2)
(37.0)
(180.4)
(19.9)
(2.9)
(11.0)
65.5
18.8
(98.0)
(88.4)
(6.8)
(54.3)
(7.7)
—
(157.2)
1,638.7
(1,349.7)
(2.0)
(15.5)
(2.4)
(8.9)
0.3
2.0
0.3
8.7
1.3
37.9
1.8
8.9
1.6
(28.1)
(8.9)
1.5
(25.9)
(2.2)
4.0
13.8
9.0
77.2
(9.0)
4.5
(30.3)
(8.7)
0.3
(43.2)
936.2
(945.1)
(0.4)
(12.8)
(2.3)
(9.2)
0.4
(5.4)
2.9
8.7
266.7
2.4
13.9
12.5
26.4
$
20.9
3.7
$
$
2.9
0.1
$
$
(3.3)
2.2
0.1
(34.2)
(1.7)
(1.9)
14.4
12.5
$
26.8
1.3
$
$
5.1
5.4
$
$
$
$
$
$
$
16.0
0.3
6.1
2.2
32.0
0.1
(3.0)
—
(13.8)
(3.0)
(50.6)
5.7
(2.8)
20.6
9.1
4.9
66.5
(1.0)
(0.9)
(53.9)
(5.3)
—
(61.1)
488.3
(478.7)
—
(10.7)
(1.7)
(8.0)
2.1
(1.7)
2.8
6.2
(1.4)
(0.6)
3.4
11.0
14.4
22.0
1.1
1.4
4.7
The accompanying notes are an integral part of these consolidated financial statements.
48
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Company Information
Business
Core-Mark Holding Company, Inc. and subsidiaries (referred to herein as “the Company” or “Core-Mark”) is one of the
largest marketers of fresh 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, 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 (“OTP”), candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health
and beauty care products. The Company operates a network of 30 distribution centers in the U.S. and Canada (excluding two
distribution facilities it operates as a third party logistics provider). Twenty-five of the Company’s distribution centers are located in
the U.S. and five are located in Canada.
2.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
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.
On May 25, 2016, the Board of Directors approved a two-for-one stock split of the Company’s outstanding common stock,
effected through a stock dividend. The additional shares were distributed on June 27, 2016 to stockholders of record at the close of
business on June 9, 2016. All references made to share or per share amounts in the accompanying consolidated financial statements
and applicable disclosures have been retroactively adjusted to reflect this two-for-one stock split for all periods presented.
During 2016, the Company identified an error in the presentation of borrowings and repayments of the Company’s revolving
credit facility in the previously issued consolidated statements of cash flows. The Company corrected the presentation of borrowings
and repayments on the revolving credit facility to reflect them on a gross basis, rather than on a net basis, within the financing
activities section of the consolidated statements of cash flows. The correction did not change previously reported total cash provided
by (or used from) financing activities.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. (“U.S.
GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company considers the allowance for doubtful accounts, vendor rebates and promotional
allowances, claims liabilities and insurance recoverables, valuation of pension assets and obligations, valuation of long-lived assets
and goodwill, realizability of deferred income taxes and uncertain tax positions to be those estimates which involve a higher degree of
judgment and complexity. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue at the point at which the product is delivered and title passes to the customer. The
Company includes fees charged to customers for shipping and handling activities in net sales and the related costs in cost of goods
sold. Revenues are reported net of customer incentives, discounts and returns, including an allowance for estimated returns. The
allowance for sales returns is calculated based on the Company’s returns experience, which has historically not been significant. The
Company also earns management service fee revenue from operating third party distribution centers belonging to certain customers.
These revenues represented less than 1% of the Company’s total net sales for 2016, 2015 and 2014. Service fee revenue is recognized
as earned on a monthly basis in accordance with the terms of the management service fee contracts and is included in net sales on the
accompanying consolidated statements of operations.
Customers’ Sales Incentives
The Company also provides sales allowances or discounts to its customers on a regular basis. These customers’ sales incentives are
recorded as a reduction to net sales as the sales incentive is earned by the customer. Additionally, the Company may provide
allowances for the customers’ commitments to continue using Core-Mark as the supplier. These incentives are known as racking
allowances. These allowances may be paid at the inception of the contract or on a periodic basis. Allowances paid at the inception of
the contract are deferred and amortized over the period of the distribution agreement as a reduction to sales.
49
Vendor Rebates and Promotional Allowances
Periodic payments from vendors in various forms including rebates, promotional allowances and volume discounts, are
reflected in the carrying value of the related inventory when earned and in cost of goods sold when the related merchandise is sold.
Up-front consideration received from vendors for purchase or other commitments is initially deferred and amortized ratably to cost of
goods sold as the performance of the activities specified by the vendor is completed.
Cooperative marketing incentives received from vendors to fund specific programs first offset the costs of the program, and
to the extent the consideration exceeds the costs relating to the program, the excess funds are recorded as reductions to cost of goods
sold. These amounts are recorded in the period the related promotional or merchandising programs are provided. Certain vendor
incentive promotions require the Company to make assumptions and judgments regarding, for example, the likelihood of achieving
market share levels or attaining specified levels of purchases. Vendor incentives are at the discretion of the Company’s vendors and
can fluctuate due to changes in vendor strategies and market requirements. Vendor rebates and promotional allowances earned totaled
$221.2 million, $191.4 million and $162.8 million in 2016, 2015 and 2014, respectively.
Excise Taxes
The Company is responsible for collecting and remitting state, local and provincial excise taxes on cigarette and other
tobacco products. These excise taxes are a significant component of the Company’s net sales and cost of goods sold. In 2016, 2015
and 2014, approximately $3.0 billion, $2.2 billion and $2.1 billion, or 21%, 20% and 21% of the Company’s net sales, and
approximately 22%, 21% and 22% of its cost of goods sold, respectively, represented excise taxes. Federal excise taxes are levied on
the manufacturers who, in turn, pass the tax on to the Company as part of the product cost. As a result, federal excise taxes are not a
component of the Company’s excise taxes.
Stock-based Compensation
The Company accounts for stock-based compensation expense related to restricted stock unit (“RSU”) awards, performance
shares and stock options based on the grant-date fair value of the awards. For service based awards, the Company recognizes the
expense using a straight-line method. For performance based awards, the Company recognizes the expense ratably based on the
achievement of performance conditions.
Although the Company has not granted stock options since 2011, the Company uses the Black-Scholes option valuation
model to determine the fair value of stock option awards (see Note 13 - Stock Incentive Plans). Determining the appropriate fair value
model and calculating the fair value of stock option awards at the grant date requires considerable judgment, including estimating
stock price volatility, expected life of share awards and forfeiture rates. The Company develops its estimates based on historical data
and market information, which can change significantly over time.
Pension and Other Post-retirement Benefit Costs
Pension and other post-retirement benefit costs are estimated on the basis of annual valuations by an independent actuary.
Adjustments arising from plan amendments, changes in assumptions, and experience gains and losses are amortized over the expected
average remaining service life of the employee group. The Company offers certain plan participants the option to receive a lump sum
payment in lieu of future annuity pension benefits. Acceptance of the lump sum payment by plan participants may result in the
Company recognizing a settlement charge and an adjustment in the projected benefit plan obligation.
The Company recognizes an asset for the plan’s overfunded status or a liability for the plan’s underfunded status on its
consolidated balance sheet as of the end of each fiscal year. The Company determines the plan’s funded status by measuring its assets
and its obligations and recognizes changes in the funded status of its defined benefit post-retirement plan in the year in which the
change occurred.
On September 14, 2016, the Board of Directors approved a motion to terminate the Company’s qualified defined-benefit
pension plan. The Company expects its pension liabilities will be settled through either lump sum payments or purchased annuities by
December 31, 2017 (see Note 11 - Employee Benefit Plans).
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are
reduced by a valuation allowance when the Company does not consider it more likely than not that some portion or all of the deferred
tax assets will be realized.
50
A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be
sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The
Company has established an estimated liability for income tax exposures that arise and meet the criteria for accrual. The Company
prepares and files tax returns based on its interpretation of tax laws and regulations and records estimates based on these judgments
and interpretations. In the normal course of business, the Company’s tax returns are subject to examination by various taxing
authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. Inherent uncertainties exist
in estimates of tax contingencies due to changes in tax law resulting from legislation, regulation and/or as concluded through the
various jurisdictions’ tax court systems. The Company classifies interest and penalties related to income taxes as income tax expense
(see Note 10 - Income Taxes).
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding
during each period, excluding unvested RSUs and performance shares. Diluted earnings per share is calculated by dividing net income
by weighted-average shares outstanding including common stock equivalents. Common stock equivalents include stock options, RSUs
and performance based awards if the impact is dilutive, using the treasury stock method (see Note 12 - Earnings Per Share).
Cash, Cash Equivalents, Restricted Cash and Book Overdrafts
Cash and cash equivalents include cash, money market funds and highly liquid investments with original maturities of three
months or less. Restricted cash represents funds collected and set aside in trust as required by one of the Canadian provincial taxing
authorities to secure amounts payable for cigarette and tobacco excise taxes. The Company had book overdrafts of $37.9 million and
$29.2 million at December 31, 2016 and 2015, respectively. Book overdrafts consist primarily of outstanding checks in excess of cash
on hand in the corresponding bank accounts at the end of the period. The Company’s policy has been to fund these outstanding checks
as they clear with cash held on deposit with other financial institutions or with borrowings under the Company’s revolving credit
facility.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consists of trade receivables from customers. The Company evaluates the collectability of accounts
receivable and determines the appropriate allowance for doubtful accounts based on historical experience and a review of specific
customer accounts. Account balances are charged against the allowance when collection efforts have been exhausted and the
receivable is deemed uncollectible (see Note 4 - Other Consolidated Balance Sheet Accounts Detail).
Other Receivables
Other receivables consist primarily of amounts due from vendors for promotional and other incentives, which are accrued as
earned. The Company evaluates the collectability of amounts due from vendors and determines the appropriate allowance for doubtful
accounts based on historical experience and a review of specific amounts outstanding (see Note 4 - Other Consolidated Balance
Sheet Accounts Detail).
Inventories
Inventories consist of finished goods, including cigarettes and other tobacco products, food and other consumable products
held for re-sale and are valued at the lower of cost or market. In the Company’s U.S. divisions, cost is determined primarily on a last-
in, first-out (“LIFO”) basis. The Company uses the link-chain dollar value LIFO method. The inventory price index computation
(“IPIC”) is used to calculate LIFO inflation indices for which the LIFO inflation source is the producer price indices (“PPI”) published
by the US Bureau of Labor Statistics (“BLS”). The Company uses the IPIC pooling method for which LIFO pools are established for
each PPI in accordance with current regulations. When the Company is aware of material price increases or decreases from
manufacturers, the Company estimates the PPI for the respective period if it determines the price increase is not fully reflected in the
PPI in order to more accurately reflect inflation rates. Under the LIFO method, current costs of goods sold are matched against current
sales. Inventories in the Company’s Canadian divisions are valued on a first-in, first-out (“FIFO”) basis, as LIFO is not a permitted
inventory valuation method in Canada. Approximately 82% and 88% of the Company’s inventory was valued on a LIFO basis at
December 31, 2016 and 2015, respectively. The Company reduces inventory value for spoiled, aged and unrecoverable inventory
based on amounts on-hand and historical experience (see Note 5 - Inventories, Net).
Property and Equipment
Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation and
amortization on new purchases are computed using the straight-line method over the assets’ estimated useful lives. Leasehold
improvements are amortized using the straight-line method over the shorter of the estimated useful life of the property or the term of
the lease including available renewal option terms if it is reasonably assured that those options will be exercised. Upon retirement or
sale, the cost and related accumulated depreciation of the assets are removed and any related gain or loss is reflected in the
consolidated statements of operations. Maintenance and repairs are charged to expense as incurred (see Note 6 - Property and
Equipment, Net).
51
The Company uses the following depreciable lives for its property and equipment:
Office furniture and equipment
Delivery equipment
Warehouse equipment
Leasehold improvements
Buildings
Other Long-lived Assets
Useful Life in Years
3-10
4-10
5-15
3-25
15-25
Intangible assets with definite lives are generally amortized on a straight-line basis over the following lives:
Customer relationships
Non-competition agreements
Trade names
Internally developed and other purchased software
Useful Life in Years
10-15
1-5
1-2
3-7
The Company reviews its long-lived assets for indicators of impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. An impairment of long-lived assets exists when the carrying
amount of a long-lived asset, or asset group, exceeds its fair value, and 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. The Company has determined that it has five asset
groupings based on a review of its assets and liabilities at the lowest level for which identifiable cash flows are largely independent of
the cash flows of other assets and liabilities. During 2016, 2015 and 2014, the Company did not record impairment charges related to
long-lived assets (see Note 6 - Property and Equipment, Net and Note 7 - Goodwill and Other Intangible Assets, Net).
Goodwill
Goodwill represents the excess of cost over the fair value of net assets acquired in a business combination. Goodwill is not
amortized.
The Company tests goodwill for impairment annually as of October 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. The Company’s reporting units are its U.S.
operations and Canadian operations. Whenever events or circumstances change, the Company assesses the related qualitative factors
to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The tests to evaluate goodwill for
impairment are performed at the reporting unit level. In the first step of the quantitative impairment test, the Company compares 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, the Company
performs a second step to determine the implied fair value of goodwill associated with the reporting unit. If the carrying value of
goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill for which an impairment loss
would be recorded. Determining the fair value of a reporting unit involves the use of significant estimates and 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 net sales, gross profit, income from operations 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. The Company bases its fair value estimates on
assumptions it believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Measuring the fair value
of reporting units constitutes a Level 3 measurement under the fair value hierarchy. There has been no impairment of goodwill for any
periods presented (see Note 7 - Goodwill and Other Intangible Assets, Net).
Computer Software Developed or Obtained for Internal Use
The Company accounts for computer software systems, namely SAP Enterprise Resource Planning modules, the Company’s
proprietary Distribution Center Management System (“DCMS”), and software purchased from third-party vendors, using certain
criteria under which costs associated with this software are either expensed or capitalized and amortized over periods from three to
seven years. During 2016, 2015 and 2014 the Company capitalized approximately $7.2 million, $9.5 million and $4.4 million,
respectively, of costs related to software developed or obtained for internal use (see Note 7 - Goodwill and Other Intangible Assets,
Net).
52
Debt Issuance Costs
Debt issuance costs related to the Company’s revolving credit facility (“Credit Facility”) are deferred and amortized as
interest expense over the term of the related debt agreement on a straight-line basis, which approximates the effective interest method.
Debt issuance costs are included in deposits and prepayments and other non-current assets on the accompanying consolidated balance
sheets. Total unamortized debt issuance costs were $2.3 million and $1.2 million at December 31, 2016 and 2015, respectively (see
Note 8 - Long-term Debt).
Claims Liabilities and Insurance Recoverables
The Company maintains reserves related to health and welfare, workers’ compensation, auto and general liability programs
that are principally self-insured. The Company currently has a per-claim deductible of $500,000 for its workers’ compensation,
general and auto liability self-insurance programs and a per-person annual claim deductible of $250,000 for its health and welfare
program. The Company purchases insurance to cover the claims that exceed the deductible up to policy limits. Self-insured reserves
are for pending or future claims that fall outside the policy and reserves include an estimate of expected settlements on pending claims
and a provision for claims incurred but not reported. Estimates for workers’ compensation, auto and general liability insurance are
based on the Company’s assessment of potential liability using an annual actuarial analysis of available information with respect to
pending claims, historical experience and current cost trends. Reserves for claims under these programs are included in accrued
liabilities (current portion) and claims liabilities, net of current portion on the accompanying consolidated balance sheets.
Claims 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 on the accompanying consolidated balance sheets because there is no right of
offset. The carrying values of claims liabilities and insurance recoverables are not discounted. Insurance recoverables are included in
other receivables, net and other non-current assets, net. The Company had gross liabilities for health and welfare, workers’
compensation, auto and general liability self-insurance obligations in the amounts of $26.8 million long-term and $13.4 million short-
term at December 31, 2016, and $26.6 million long-term and $11.9 million short-term at December 31, 2015. The Company’s
liabilities net of insurance recoverables were $13.9 million long-term and $11.3 million short-term at December 31, 2016, and $12.2
million long-term and $10.4 million short-term at December 31, 2015.
Foreign Currency Translation
The operating assets and liabilities of the Company’s Canadian operations, whose functional currency is the Canadian dollar,
are translated to U.S. dollars at exchange rates in effect at period-end. Translation gains and losses are recorded in Accumulated Other
Comprehensive Income (“AOCI”) as a component of stockholders’ equity. Revenue and expenses from Canadian operations are
translated using the monthly average exchange rates in effect during the period in which the transactions occur. The Company also
recognizes gains or losses on foreign currency exchange transactions between its Canadian and U.S. operations, net of applicable
income taxes, in the consolidated statements of operations. The Company currently does not hedge our Canadian foreign currency
cash flow.
Total Comprehensive Income
Comprehensive income consists of net income and other transactions recorded directly to stockholders’ equity that are
excluded from net income. Other comprehensive income is comprised of defined benefit plan adjustments and foreign currency
translation adjustments related to the Company’s foreign operations in Canada, whose functional currency is not the U.S. dollar (see
Note 15 - Other Comprehensive Income (Loss)).
Fair Value Measurements
The Company’s financial assets and liabilities are recognized or disclosed at fair value in the financial statements on a
recurring basis. The carrying amount of cash equivalents, restricted cash, trade accounts receivable, other receivables, trade accounts
payable, cigarette and tobacco taxes payable and other accrued liabilities approximates fair value because of the short maturity of
these financial instruments. The carrying amount of the Company’s variable rate debt approximates fair value.
The Company calculates the fair value of certain assets related to acquisitions and cash based pension plan assets using
assumptions that market participants would use in pricing these assets (see Note 11 - Employee Benefit Plans). The Company uses a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and gives precedence to observable
inputs in determining fair value. An instrument’s level within the hierarchy is based on the lowest level of any significant input to the
fair value measurement. The following levels were established for each input:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data.
53
Level 3 - Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about what market
participants would assume when pricing the asset or liability.
Business Combinations
The Company accounts for all business combinations using the acquisition method of accounting, which allocates the fair
value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair
values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and
assumptions. Management may further adjust the acquisition date fair values for a period of up to one year from the date of
acquisition. Acquisition related expenses and transaction costs associated with business combinations are expensed as incurred (see
Note 3 - Acquisition).
Risks and Concentrations
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. The Company pursues
amounts and incentives due from vendors in the normal course of business and is often allowed to deduct these amounts and
incentives from payments made to vendors.
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 receivable are typically not collateralized, but the Company may require
prepayments or other guarantees whenever deemed necessary.
Murphy U.S.A., who the Company began servicing in 2016, is the Company’s largest customer and accounted for 12.0% of
total net sales in 2016. Alimentation Couche-Tard, Inc. (“Couche-Tard”), the Company’s second largest customer, accounted for
11.4%, 14.2% and 14.5% of total net sales in 2016, 2015 and 2014, respectively. In addition, no single customer accounted for 10% or
more of accounts receivable at December 31, 2016 and 2015.
The Company has two significant suppliers: Philip Morris USA, Inc. and R.J. Reynolds Tobacco Company. Product
purchases from Philip Morris USA, Inc. accounted for approximately 35%, 29% and 28% of total product purchases in 2016, 2015
and 2014, respectively. Product purchases from R.J. Reynolds Tobacco Company were approximately 23%, 17% and 14% of total
product purchases in 2016, 2015 and 2014, respectively.
Cigarette sales represented 71.1%, 68.0% and 67.5% of net sales in 2016, 2015 and 2014, respectively, and contributed
29.9%, 28.3% and 27.1% of gross profit in 2016, 2015 and 2014, respectively. The increase in cigarette sales as a percentage of total
net sales and gross profit was due primarily to market share gains in 2016, including the addition of Murphy U.S.A., which has a
higher sales mix of tobacco products compared to the rest of our business. Although cigarettes represent a significant portion of the
Company’s total net sales, the majority of its gross profit is generated from food/non-food products.
Recent Accounting Standards or Updates Not Yet Effective
On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2014-09 (ASU 2014-09), Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”), to supersede nearly all existing
revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods
or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or
services. This standard is effective for the Company in the first quarter of 2018. The Company’s preliminary assessment supports that
financial statement impacts may include: capitalization of successful contract costs, recognition of contract assets and liabilities for
certain contracts that are performed but not completed, and the timing of recognition of variable consideration received from vendors
and paid to customers. The Company expects to finalize its assessment and approach to adopting ASU 2014-09 on its consolidated
financial statements by June 30, 2017.
On November 20, 2015, the FASB issued ASU No.2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes:
Topic 740 (“ASU 2015-17”). The new guidance requires entities with a classified balance sheet to present all deferred tax assets and
liabilities as non-current. ASU 2015-17 requires either prospective or retrospective application and is effective for annual periods
beginning after December 15, 2016. The adoption of ASU 2015-17 will not have a material impact on the presentation of its
consolidated financial statements.
54
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes existing
lease guidance. The new guidance increases transparency by requiring lessees to recognize right-of-use assets and corresponding lease
liabilities on the balance sheet. This standard is effective for annual periods beginning after December 15, 2018, although early
adoption is permitted. The Company believes the new standard will have a material impact on its consolidated balance sheets. The
Company is currently quantifying the impact and evaluating its approach to adopting ASU 2016-02 on its consolidated financial
statements.
On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting (“ASU 2016-09”). The new guidance simplifies several aspects of how companies
account for share-based compensation, including the accounting for income taxes, forfeitures, and statutory tax withholding
requirements, as well as classification in the statements of cash flows. ASU 2016-09 is effective for annual periods beginning after
December 15, 2016. ASU 2016-09 will result in the Company recognizing excess tax benefits or deficiencies in net income instead of
being capitalized as additional paid-in capital. We expect such impact to be approximately $1.6 million in 2017.
On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (“ASU 2016-13”). The new guidance replaces the current incurred loss impairment approach
with a methodology that incorporates all expected credit loss estimates, resulting in more timely recognition of losses. ASU 2016-13 is
effective for fiscal years beginning after December 15, 2019, although early adoption is permitted. The Company has determined the
adoption of ASU 2016-13 will not have a material impact on its consolidated financial statements.
On August 26, 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments (“ASU 2016-15”). The new guidance addresses eight specific cash flow presentation and
classification issues in the statement of cash flows to reduce existing diversity in practice. ASU 2016-15 is effective for annual periods
beginning after December 15, 2017, although early adoption is permitted. The Company has determined the adoption of ASU 2016-15
will not have a material impact on its consolidated financial statements.
On November 17, 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU
2016-18”). The new guidance requires the Statements of Cash Flows to reconcile the changes in the total of cash, cash equivalents,
and restricted cash. As a result, transfers between cash and cash equivalents, and restricted cash and restricted cash equivalents will no
longer be presented in the Statement of Cash Flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017,
although early adoption is permitted. As a result of this pronouncement, the Company expects that it will combine its movements of
restricted cash, with those of non-restricted cash and cash equivalents, as reflected in the Company’s Consolidated Statements of Cash
Flows.
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. The Company has determined
the adoption of ASU 2017-04 will not have a material impact on its consolidated financial statements.
3. Acquisition
Acquisition of Pine State Convenience
On June 6, 2016, the Company acquired substantially all of the assets of Pine State Convenience (“Pine State”), a division of
Pine State Trading Company, located in Gardiner, Maine. The acquisition was accounted for as a business combination in accordance
with ASC 805 - Business Combinations. The acquisition increased the Company’s market presence primarily in the Northeastern U.S.
and further enhanced the Company’s ability to cost effectively service national and regional retailers. The total purchase consideration
was $88.4 million which was paid at closing and funded through borrowings under the Company’s revolving credit facility.
The following table presents the assets acquired and liabilities assumed, based on their fair values and purchase consideration
(in millions):
Accounts receivable
Inventories
Deposits and prepayments, and other
Property and equipment
Goodwill
Other intangible assets
Less: Accrued liabilities, and other
Total consideration
55
June 6, 2016
$
$
35.5
21.2
0.9
10.3
13.1
10.2
(2.8)
88.4
The Company determined the estimated fair values of intangible assets acquired with the assistance of independent valuation
consultants. The Company finalized its valuation of its beginning goodwill and intangible assets during the fourth quarter ended
December 31, 2016. Based on the valuation, intangible assets acquired include the following (in millions):
Customer relationships
Non-competition agreements
Trade names
Favorable lease terms
Total intangible assets
Fair Value
$
$
7.2
1.9
1.0
0.1
10.2
Useful Life in
Years
12
5
2
2
The results of Pine State operations have been included in the Company’s consolidated financial statements since the date of
acquisition. The Company incurred $2.2 million of acquisition-related costs, which are included in selling, general and administrative
expenses for the year ended December 31, 2016. The Company did not consider the Pine State acquisition to be a material business
combination and therefore has not disclosed pro-forma results of operations for the acquired business. Simultaneously with the closing
of the acquisition, the Company entered into two operating lease arrangements with certain former owners of Pine State. One
operating lease bears a fifteen year term for a facility in Maine and the second operating lease bears a two year term for a facility in
Vermont.
Acquisition of Karrys Bros., Limited.
On February 23, 2015, the Company acquired substantially all of the assets of Karrys Bros., Limited (“Karrys Bros.”), a
regional convenience wholesaler servicing customers in Ontario, Canada, and the surrounding provinces, for cash consideration of
approximately $8.0 million, or $10.0 million (Canadian dollars). Transaction and integration costs in connection with the acquisition
of Karrys Bros. were approximately $1.7 million for the year ended December 31, 2015. The Karrys Bros. operations have been
integrated into the Company’s existing distribution center in Toronto and have provided the Company with the opportunity to increase
its market share in eastern Canada. The results of operations of Karrys Bros. have been included in the Company’s consolidated
statements of operations and comprehensive income since the date of acquisition. The Company did not consider the Karrys Bros.
acquisition to be a material business combination and therefore has not disclosed pro-forma results of operations for the acquired
business.
4.
Other Consolidated Balance Sheet Accounts Detail
Allowance for Doubtful Accounts, Accounts Receivable
The changes in the allowance for doubtful accounts due from customers consist of the following (in millions):
Balance, beginning of year
Net additions charged to operations (1)
Less: Write-offs and adjustments
Balance, end of year
2016
Year Ended December 31,
2015
2014
$
$
10.9
2.0
(5.8)
7.1
$
$
10.8 $
1.3
(1.2 )
10.9 $
9.4
2.2
(0.8)
10.8
(1)
The net additions to the allowance for doubtful accounts were recognized in the consolidated statements of operations as a component of the Company’s
selling, general and administrative expenses.
Other Receivables, Net
Other receivables, net consist of the following (in millions):
Vendor receivables, net
Insurance recoverables, current
Other miscellaneous receivables (1)
Total other receivables, net
December 31,
2016
December 31,
2015
$
$
90.6 $
2.1
13.8
106.5 $
59.0
1.5
8.9
69.4
(1)
Other miscellaneous receivables include amounts related primarily to notes receivables, miscellaneous tax receivables, receivables from the Company’s third
party logistics customers, and other miscellaneous receivables.
56
Deposits and Prepayments
Deposits and prepayments consist of the following (in millions):
Vendor prepayments
Deposits (1)
Prepaid taxes
Racking allowances, current
Other prepayments (2)
Total deposits and prepayments
December 31,
2016
December 31,
2015
$
$
44.7 $
8.5
10.5
5.7
13.4
82.8 $
34.1
4.7
10.6
6.4
9.2
65.0
(1)
(2)
Deposits include amounts related primarily to cigarette stamps and workers’ compensation claims.
Other prepayments include prepayments relating to insurance policies, software licenses, rent and other miscellaneous prepayments.
Other Non-current Assets, Net
Other non-current assets, net of current portion, consist of the following (in millions):
Insurance recoverables
Debt issuance costs
Insurance deposits
Racking allowances, net
Other assets
Total other non-current assets, net
Accrued Liabilities
Accrued liabilities consist of the following (in millions):
Accrued payroll, retirement and other benefits (1)
Claims liabilities, current
Accrued customer incentives payable
Indirect taxes
Vendor advances
Other accrued expenses (2)
Total accrued liabilities
December 31,
2016
December 31,
2015
$
$
12.9 $
1.6
3.4
5.0
3.7
26.6 $
14.4
0.9
2.9
6.5
3.4
28.1
December 31,
2016
December 31,
2015
$
$
35.7 $
13.4
40.1
6.2
10.9
25.5
131.8 $
29.9
11.9
20.3
7.3
11.0
26.5
106.9
(1)
(2)
5.
The Company’s accrued payroll, retirement and other benefits include accruals for vacation, bonuses, wages, 401(k) benefit matching and the current portion
of pension and post-retirement benefit obligations.
The Company’s other accrued expenses include accruals for goods and services, lease liabilities, construction in process, legal expenses, and other
miscellaneous accruals.
Inventories, Net
Inventories consist of the following (in millions):
Inventories at FIFO, net of reserves
Less: LIFO reserve
Total inventories at LIFO, net of reserves
December 31,
2016
December 31,
2015
$
$
727.0 $
(130.4)
596.6 $
524.6
(117.2)
407.4
57
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 $130.4 million and
$117.2 million higher at December 31, 2016 and 2015, respectively. The Company recorded LIFO expense of $13.2 million, $1.9
million and $16.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. The Company had a decrement in
certain of its LIFO inventory layers of $4.8 million and $12.2 million in 2016 and 2015, respectively, which had the effect of reducing
its LIFO expense by $0.6 million in 2016 and $0.7 million in 2015.
6.
Property and Equipment, Net
Property and equipment consist of the following (in millions):
Delivery, warehouse and office equipment (1)
Leasehold improvements
Land and buildings (2)
Construction in progress
Less: Accumulated depreciation and amortization
Total property and equipment, net
December 31,
2016
December 31,
2015
$
$
280.4 $
68.6
32.0
3.0
384.0
(189.3)
194.7 $
235.3
54.4
28.9
0.8
319.4
(159.9)
159.5
(1)
(2)
Includes equipment capital leases of $13.5 million for 2016 and $13.4 million for 2015.
Includes $4.8 million for a capital lease related to a warehouse facility in both 2016 and 2015.
Depreciation and amortization expenses related to property and equipment were $28.9 million, $26.0 million and $21.5
million for 2016, 2015 and 2014, respectively.
7.
Goodwill and Other Intangible Assets, Net
Goodwill
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 certain business combinations. The carrying amount of goodwill
during 2016 and 2015 were as follows (in millions):
Goodwill, beginning of year
Pine State acquisition
Goodwill, end of year
Year Ended December 31,
2015
2016
$
$
22.9 $
13.1
36.0 $
22.9
—
22.9
The Company did not record any impairment charges related to goodwill during the years ended December 31, 2016 and
2015.
Other Intangible Assets, Net
The carrying amount and accumulated amortization of other intangible assets as of December 31, 2016 and 2015 are as
follows (in millions):
December 31, 2016
December 31, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Customer relationships
Non-competition agreements
Trade names
Favorable lease terms
Internally developed and other purchased
software
Total other intangible assets
$
28.3 $
5.0
1.0
0.1
(9.4) $
(3.1)
(0.3)
—
18.9 $
1.9
0.7
0.1
21.1 $
3.2
—
—
(7.3) $
(2.9)
—
—
33.0
67.4 $
(13.1)
(25.9) $
19.9
41.5 $
25.8
50.1 $
(10.4)
(20.6) $
$
13.8
0.3
—
—
15.4
29.5
58
The amortization of intangible assets recorded in the consolidated statements of operations was $5.3 million for 2016, and
$2.6 million for both 2015 and 2014.
Estimated future amortization expense for intangible assets is as follows (in millions):
Year ending December 31,
2017
2018
2019
2020
2021
2022 and thereafter
Total
8.
Long-term Debt
$
$
6.5
5.9
5.6
5.5
5.1
12.9
41.5
Total long-term debt consists of the following (in millions):
Amounts borrowed (Credit Facility)
Obligations under capital leases (Note 9)
Total long-term debt
December 31,
2016
December 31,
2015
$
$
336.0 $
11.7
347.7 $
47.0
13.4
60.4
The Company has a Credit Facility with a borrowing capacity of $600 million, as of December 31, 2016. On November 4,
2016, the Company entered into a ninth amendment to the Credit Facility (the “Ninth Amendment”), which increased its Credit
Facility from $450 million to $600 million. The Credit Facility has an expansion feature which can be increased up to an additional
$100 million, limited by a borrowing base primarily consisting of eligible accounts receivable and inventories. 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
Offer Rate (“LIBOR”) or Canadian Dollar Offer Rate (“CDOR”) based loans prepaid prior to the end of an interest period). This will
be subject to the same borrowing base limitations as the Eighth amendment.
On May 16, 2016, the Company entered into an eighth amendment to the Credit Facility (“Eighth amendment”), which
increased the size of the Credit Facility from $300 million to $450 million. In addition, the Eighth amendment allows for unlimited
stock repurchases and dividends, as long as the Company meets certain credit availability percentages and fixed charge coverage
ratios.
The Credit Facility matures in May 2020. The Company incurred fees of approximately $1.3 million in connection with the
amendments.
Amounts borrowed, outstanding letters of credit and amounts available to borrow, net of certain reserves required under the
Credit Facility, were as follows (in millions):
Amounts borrowed
Outstanding letters of credit
Amounts available to borrow (1)
(1)
Excluding $100 million expansion feature.
December 31,
2016
December 31,
2015
$
336.0 $
17.4
224.8
47.0
18.5
123.9
Average borrowings during the years ended December 31, 2016 and 2015 were $184.4 million and $39.6 million,
respectively, with amounts borrowed at any one time during the years then ended ranging from zero to $428.0 million and zero to
$120.9 million, respectively.
The weighted-average interest rate on the Credit Facility for the years ended December 31, 2016 and 2015 were 1.7%, and
1.6%, respectively. The weighted-average interest rate is calculated based on the daily cost of borrowing, reflecting a blend of prime
and LIBOR rates. The Company paid fees for unused credit facility and letter of credit participation, which are included in interest
expense, of $0.7 million, $0.6 million, and $0.7 million for December 31, 2016, 2015 and 2014, respectively. The Company recorded
charges related to amortization of debt issuance costs, which are included in interest expense, of $0.5 million, $0.3 million, and $0.3
million for the years ended December 31, 2016, 2015 and 2014, respectively. Unamortized debt issuance costs were $2.3 million and
$1.2 million as of December 31, 2016 and 2015, respectively.
59
9.
Commitments and Contingencies
Purchase Commitments
The Company enters into purchase commitments in the ordinary course of business. The Company had purchase obligations
of $47.8 million and $43.1 million as of December 31, 2016 and 2015, respectively, related primarily to purchases of compressed
natural gas for its trucking fleet, delivery and warehouse equipment, computer software and services and leasehold improvements.
Purchase orders for the purchase of inventory and other services are not included in the purchase obligations as of December 31, 2016
and 2015, respectively, because purchase orders represent authorizations to purchase rather than binding agreements. For purposes of
this commitment, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally
binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable
price provisions; and the approximate timing of the transaction. The Company’s purchase orders are based on its current inventory
needs and are fulfilled by its suppliers within short time periods. The Company also enters into contracts for outsourced services;
however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation
without significant penalty.
Operating Leases
The Company leases most of its sales and warehouse facilities and a significant number of trucks, vans and certain equipment
under operating lease agreements expiring at various dates through 2032, excluding renewal options. Rent expense is recorded on a
straight-line basis over the term of the lease, including available renewal option terms, if it is reasonably assured that the renewal
options will be exercised. The operating leases generally require the Company to pay taxes, maintenance and insurance. In most
instances, the Company expects the operating leases that expire will be renewed or replaced in the normal course of business.
Future minimum rental payments under non-cancelable operating leases (with initial or remaining lease terms in excess of
one year and excluding contracted vehicle maintenance costs) were as follows as of December 31, 2016 (in millions):
Year ending December 31,
2017
2018
2019
2020
2021
2022 and thereafter
Total
$
$
54.3
51.9
47.4
41.9
33.2
121.3
350.0
For 2016, 2015 and 2014, rental expenses for operating and month-to-month leases, including contracted vehicle
maintenance costs, were $66.8 million, $57.9 million and $50.4 million, respectively.
Capital Leases
As of December 31, 2016 and 2015, the Company had approximately $13.6 million and $15.6 million, respectively, in capital
lease obligations, related to a warehouse facility, refrigeration and other office and warehouse equipment with lease agreements
expiring at various dates through 2027, excluding renewal options.
Future minimum lease payments under non-cancelable capital leases were as follows as of December 31, 2016 (in millions):
Year ending December 31,
2017
2018
2019
2020
2021
2022 and thereafter
Total
Less: Interest
Present value of future minimum lease payments
Less: current portion
Non-current portion
60
$
$
2.6
2.4
2.2
1.9
1.3
6.4
16.8
(3.2)
13.6
(1.9)
11.7
Contingencies
Off-Balance Sheet Arrangements
Letters of Credit. As of December 31, 2016, the Company’s standby letters of credit issued under the Company’s Credit
Facility were $17.4 million related primarily to casualty insurance. The majority of the standby letters of credit mature in one year.
However, in the ordinary course of business, the Company will continue to renew or modify the terms of the letters of credit to
support business requirements. The letters of credit are contingent liabilities, supported by the Company’s line of credit, and are not
reflected on the consolidated balance sheets.
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 both 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 or financial condition.
10. Income Taxes
The Company’s income tax provision consists of the following (in millions):
Current:
Federal
State
Total current tax provision
Deferred:
Federal
State
Foreign
Total deferred tax provision (benefit)
2016
Year Ended December 31,
2015
2014
$
$
21.4
3.1
24.5
$
19.4
3.2
22.6
6.7
0.8
(0.7)
6.8
7.8
1.1
(0.1)
8.8
22.0
3.1
25.1
(0.6)
(0.5)
(0.3)
(1.4)
Total income tax provision
$
31.3
$
31.4
$
23.7
A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate and income tax provision
is as follows (in millions):
Federal income tax provision at the statutory rate
Increase (decrease) resulting from:
$
State income taxes, net of federal benefit
Decrease in unrecognized tax benefits (inclusive
2016
29.9
Year Ended December 31,
2015
29.0
35.0% $
35.0% $
2014
23.2
35.0 %
2.9
3.4
2.9
3.5
2.3
3.5
of related interest and penalty)
Effect of foreign operations
Change in valuation allowance
Tax credits and other, net
Income tax provision
(0.3)
(0.7)
—
(0.5)
31.3
(0.4)
(0.8)
—
(0.6)
36.6% $
—
(0.1)
(0.1)
(0.3)
31.4
—
(0.1)
(0.1)
(0.4)
37.9% $
(0.9)
(0.3)
—
(0.6)
23.7
(1.4 )
(0.5 )
—
(0.9 )
35.7 %
$
The Company’s effective tax rate was 36.6% for 2016 compared to 37.9% for 2015. The decrease in effective tax rate for
2016 was due primarily to the effects of prior years’ estimates for foreign operations, as well as benefits in the current year related to
the expiration of statute of limitations for uncertain tax positions and related interest recovery.
The provision for income taxes included a net benefit of $1.5 million and $0.3 million for 2016 and 2015, respectively,
related primarily to the expiration of the statute of limitations for uncertain tax positions and adjustments of prior years’ estimates.
61
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The tax effects of significant temporary differences which
comprise deferred tax assets and liabilities are as follows (in millions):
December 31, 2016
December 31, 2015
Deferred tax assets:
Employee benefits, including post-retirement benefits
Trade and other receivables
Goodwill and intangibles
Self-insurance reserves
Other
Subtotal
Less: valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Inventories
Property and equipment
Goodwill and intangibles
Other
Total deferred tax liabilities
Total net deferred tax liabilities
Net current deferred tax assets
Net non-current deferred tax liabilities
$
$
$
$
$
$
15.4
2.9
0.2
1.7
6.1
26.3
—
26.3
7.0
36.2
5.6
1.8
50.6
(24.3 )
4.6
(28.9 )
$
$
$
$
$
$
15.2
4.1
2.0
1.5
4.0
26.8
—
26.8
9.0
27.2
6.0
1.6
43.8
(17.0)
1.6
(18.6)
At each balance sheet date, management assesses whether it is more likely than not that these deferred tax assets would not
be realized. The Company had no valuation allowance at December 31, 2016 and 2015.
The total gross amount of unrecognized tax benefits related to federal, state and foreign taxes was approximately $0.2 million
and $0.4 million at December 31, 2016 and 2015, respectively, all of which would impact the Company’s effective tax rate, if
recognized. The expiration of the statute of limitation in future years could impact the total gross amount of unrecognized tax benefits
by $0.2 million through the year ended December 31, 2017 as a result of the statute limitations for certain tax positions in future years
and expected settlement of certain tax audit issues. A reconciliation of the beginning and ending amounts of unrecognized tax benefits
for 2016, 2015 and 2014 is as follows (in millions):
Balance at beginning of year
Lapse of statute of limitations
Balance at end of year
$
$
0.4
(0.2)
0.2
$
$
0.4
—
0.4
2016
Year Ended December 31,
2015
2014
$
$
0.6
(0.2)
0.4
The Company files U.S. federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The
2013 to 2016 tax years remain subject to examination by federal and state tax authorities. The 2012 tax year is still open for certain
state tax authorities. The 2009 to 2016 tax years remain subject to examination by the tax authorities in Canada.
For the year ended December 31, 2016, the Company recognized a net benefit in its provision for income taxes of $0.1
million related primarily to the interest associated with certain unrecognized tax positions. For the year ended December 31, 2015 the
Company did not recognize any net benefit and in 2014 recognized a net benefit of $0.2 million As of December 31, 2016 and
December 31, 2015, the Company had a liability of $0.1 million and $0.3 million, respectively, for estimated interest and penalties
related to unrecognized tax benefits.
11.
Employee Benefit Plans
Pension Plans
The Company sponsored a qualified defined-benefit pension plan and a post-retirement benefit plan (collectively, “the
Pension Plans”). The Pension Plans were frozen on September 30, 1986 and since then there have been no new entrants to the Pension
Plans.
62
On September 14, 2016, the Board of Directors approved a motion to terminate the Company’s qualified defined-benefit
pension plan. The Company expects its pension liabilities will be settled through either lump sum payments or purchased annuities by
December 31, 2017. At settlement, the Company expects to recognize a non-cash charge related to unrecognized actuarial losses in
AOCI estimated between $17.0 million and $19.0 million. The Company expects to make additional cash contributions of
approximately $4.0 million to $6.0 million to settle its pension obligations in 2017. Settling the plan will eliminate cash contributions,
lower future expenses and eliminate the risk of rising Pension Benefit Guaranty Corporation (“PBGC”) premiums.
The Company’s defined-benefit pension plan is subject to the Employee Retirement Income Security Act of 1974
(“ERISA”). Under ERISA, the PBGC has the authority to terminate an underfunded pension plan under limited circumstances. In the
event the Company’s pension plan is terminated for any reason while it is underfunded, the Company would incur a liability to the
PBGC that may be equal to the entire amount of the underfunding. The Company’s post-retirement benefit plan is not subject to
ERISA. As a result, the post-retirement benefit plan is not required to be pre-funded, and, accordingly, has no plan assets.
Pension costs and other post-retirement benefit costs charged to operations are estimated on the basis of annual valuations
with the assistance of an independent actuary. Adjustments arising from plan amendments, changes in assumptions and experience
gains and losses, are amortized over the average future life expectancy of inactive participants for the defined-benefit plan, and the
average remaining future service of active employees expected to receive benefits for the post-retirement benefit plan.
The following tables provide a reconciliation of the changes in the Pension Plans’ benefit obligation and fair value of assets,
the funded status of the plans and the amounts recognized in the consolidated balance sheets and AOCI as of December 31, 2016 and
2015 (in millions):
Pension Benefits
Other Post-retirement
Benefits
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
Change in Benefit Obligation:
Obligation at beginning of year
Interest cost
Actuarial loss (gain)
Benefit payments
Group annuity contract discontinuance
Settlement of accumulated benefits
Benefit obligation at end of year
Change in Plan Assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefit payments
Group annuity contract discontinuance
Settlement of accumulated benefits
Fair value of plan assets at end of year
Funded status at end of year
$
$
$
$
$
Amounts recognized in the balance sheet consist of:
$
Current liabilities
Non-current liabilities
Total liabilities
Amounts recognized in AOCI consist of:
Net actuarial loss (gain)
Total
Additional Information:
Accumulated benefit obligation
$
$
$
37.0 $
1.2
1.7
(2.4)
—
(2.7)
34.8 $
32.3 $
1.4
1.9
(2.4)
—
(2.7)
30.5 $
43.6
1.7
(2.0)
(2.8)
(1.3)
(2.2)
37.0
40.4
(1.8)
—
(2.8)
(1.3)
(2.2)
32.3
$
$
$
$
3.0 $
0.2
(0.5)
(0.1)
—
—
2.6 $
— $
—
0.1
(0.1)
—
—
— $
(4.3) $
(4.7)
$
(2.6) $
(4.3) $
—
(4.3) $
—
(4.7)
(4.7)
$
$
(0.2) $
(2.4)
(2.6) $
17.7 $
17.7 $
17.5
17.5
$
$
(0.7) $
(0.7) $
3.0
0.1
0.1
(0.2)
—
—
3.0
—
—
0.2
(0.2)
—
—
—
(3.0)
(0.2)
(2.8)
(3.0)
(0.2)
(0.2)
$
34.8 $
37.0
63
During 2016, the underfunded status of the defined-benefit pension plan decreased $0.4 million to $4.3 million, due primarily
to a contribution of $1.9 million made to the plan during 2016, return on plan assets of $1.4 million, offset by interest costs of $1.2
million and an actuarial loss of $1.7 million. The actuarial loss of $1.7 million for the year ended December 31, 2016 includes an
increase in the plan’s Projected Benefit Obligation of $2.0 million pursuant to the Company’s decision to terminate the plan, offset by
$0.3 million related to favorable demographic experience since the prior year end. The Company offers certain plan participants the
option to receive a lump sum payment in lieu of future annuity pension benefits. During 2016, the Company settled accumulated
benefits of $2.7 million (pre-tax) for participants who received lump sum payments. The Company incurred settlement charges of $1.3
million during 2016 due to lump sum payments.
The following table provides components of net periodic benefit cost and other changes in plan assets and benefit obligations
recognized in other comprehensive income (in millions):
Net Periodic Benefit Cost:
Interest cost
Expected return on plan assets
Amortization of net actuarial loss (gain)
Settlement charge
$
Net periodic benefit cost (income)
$
Other Changes in Plan Assets and Benefit
Obligations Recognized in Other
Comprehensive Income:
Net actuarial loss (gain)
Settlement charge
Amortization of actuarial (loss) gain
$
Total net loss (gain) recognized in other
Pension Benefits
December 31,
2015
2016
2014
2016
Other Post-retirement
Benefits
December 31,
2015
2014
1.2 $
(1.8)
0.6
1.3
1.3 $
1.7 $
(2.1 )
0.6
1.6
1.8 $
1.8 $
(2.5 )
0.4
—
(0.3 ) $
0.2 $
—
—
—
0.2 $
0.1 $
—
—
—
0.1 $
0.1
—
(0.1)
—
—
2.1 $
(1.3)
(0.6)
1.9 $
(1.6 )
(0.6 )
5.2 $
—
(0.4 )
(0.5) $
—
—
0.2 $
—
—
(0.4)
—
0.1
comprehensive income
$
0.2 $
(0.3 ) $
4.8 $
(0.5) $
0.2 $
(0.3)
For both the pension and other post-retirement benefit plans, prior service costs are amortized on a straight-line basis over the
average remaining future service of active employees expected to receive benefits under the plans. For the pension benefit plan, gains
and losses in excess of 10% of the greater of the benefit obligation and market-related value of assets are amortized over the average
future life expectancy of inactive participants. For the post-retirement benefit plan, gains and losses in excess of 10% of the greater of
the benefit obligation and market-related value of assets are amortized over the average remaining future service of active employees
expected to receive benefits under the plan. The Company uses its fiscal year-end date as the measurement date for the plans. The
Company estimated that average future life expectancy is 20.4 years for the pension benefits plan and remaining service life of active
participants is 4.6 years for the post-retirement benefits plan.
Assumptions Used:
The following table shows the weighted-average assumptions used in the measurement of:
Pension Benefits
December 31,
2015
2016
2014
Other Post-retirement Benefits
December 31,
2015
2016
2014
Benefit Obligations:
Discount rate
Expected return on assets
Net Periodic Benefit Costs:
Discount rate
Expected return on assets
3.30%
3.25%
4.32%
6.00%
4.00%
5.50%
3.98%
N/A
4.32%
N/A
3.99 %
N/A
4.13%
3.57%
4.05%
5.95%
4.60%
6.55%
4.29%
3.47%
3.99%
N/A
4.6 %
N/A
64
The weighted-average discount rates used to determine the Pension Plans’ obligations and expenses are based on a yield
curve methodology, which matches the expected benefits at each duration to the available high quality yields at that duration and
calculating an equivalent yield. The net periodic benefit cost was re-measured at September 30, 2016 and December 31, 2016 to
reflect settlement accounting due to lump sum payments. During 2016, a discount rate of 4.32% was used from January 1 to
September 30, a discount rate of 3.57% was used from October 1 to December 31, and a discount rate of 3.98% was used at December
31. The decrease in discount rate in 2016 compared to 2015 was due to a decrease in bond yields during 2016 and the plan valuation
shifting from an ongoing to termination liability basis. The decrease in the expected long-term return on assets assumption in 2016
compared to 2015 was due to shifting to a more conservative asset allocation in 2016.
Assumed health care cost trend rates have an effect on the amounts reported for the post-retirement health care plans. The
health care cost trend rates assumed for the end of year benefit obligation for the post-retirement benefit plans are as follows:
Assumed current trend rate for next year for participants under 65
Assumed current trend rate for next year for participants 65 and over
Ultimate year trend rate
Year that ultimate trend rate is reached for participants under 65
Year that ultimate trend rate is reached for participants 65 and over
December 31, 2016
6.62%
7.73%
4.50%
2025
2025
December 31, 2015
6.80%
7.85%
5.00%
2024
2023
A one percent point change in assumed health care cost trend rates would have the following effects (in millions):
Effect on total of service and interest cost components of net periodic post-retirement health
care benefit cost
Effect on the health care component of the accumulated post-retirement benefit obligation
$
$
— $
0.2 $
—
0.3
1% Increase
1% Decrease
Plan Assets:
During 2016, the Company shifted the target asset allocation to 100% fixed income assets as a result of the Company’s
decision to terminate the qualified defined-benefit pension plan. The Company’s current target allocations are: 0% cash, 0% equity
and 100% fixed income. The Company’s investment target also sets forth the requirement for diversification within asset class, types
and classes for investments prohibited and permitted, specific indices to be used for benchmark in investment decisions and criteria for
individual securities. The Group Trust is valued at the net asset value provided by the administrator of the fund. The net asset fair
value is based on the value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units
outstanding. Certain investments that are valued using the net asset value per share have not been classified in the fair value hierarchy
and are included in the below tables to permit reconciliation of the fair value hierarchy to the aggregate plan assets.
The fair value measurements of the Pension Plans’ assets by asset category at December 31, 2016 are as follows (in
Investments
Measured at Net
Asset Value
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Observable Inputs
(Level 2)
Total
$
$
1.6 $
28.9
30.5 $
— $
28.9
28.9 $
1.6 $
—
1.6 $
Significant
Unobservable
Inputs (Level 3)
—
—
—
— $
—
— $
The fair value measurements of the Pension Plans’ assets by asset category at December 31, 2015 are as follows (in
Investments
Measured at Net
Asset Value
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Observable Inputs
(Level 2)
Total
$
$
1.0 $
31.3
32.3 $
— $
31.3
31.3 $
1.0 $
—
1.0 $
Significant
Unobservable
Inputs (Level 3)
—
—
—
— $
—
— $
The Company adopted ASU 2015-07 in 2016 and applied its provisions on a retrospective basis.
During 2015, the Company discontinued its group annuity contract which consisted primarily of investment grade fixed
income securities. The Company settled the contract liability for $1.3 million and the excess assets were transferred to the Group
Trust, comprised of diversified portfolio of investments across various asset classes, including U.S. and foreign equities and U.S. high
yield and investment grade corporate bonds.
65
millions):
Asset Category
Cash and cash equivalents
Group trust
Total
millions):
Asset Category
Cash and cash equivalents
Group trust
Total
Estimated Future Contributions and Benefit Payments
In conjunction with the termination of the Company’s qualified defined-benefit pension plan, the Company expects to make
additional cash contributions of approximately $4.0 million to $6.0 million to settle its pension obligations in 2017 and to contribute a
minimum of $0.2 million to its other post-retirements benefits plan.
Estimated future benefit payments reflecting future service are as follows (in millions):
Year ending December 31,
2017
2018
2019
2020
2021
2021 through 2025
Pension Benefits
Other
Post-retirement
Benefits
$
35.8 $
—
—
—
—
—
0.2
0.2
0.2
0.2
0.2
0.9
Expected amortization from AOCI into net periodic benefit cost for the year ending December 31, 2017 (in millions):
Expected amortization of net actuarial loss
Pension Benefits
Other
Post-retirement
Benefits
$
0.7 $
(0.1)
At settlement, the Company expects to recognize a non-cash charge related to unrecognized actuarial losses in accumulated other
comprehensive income estimated between $17.0 million and $19.0 million.
Multi-employer Defined Benefit Plan
The Company contributed $0.5 million in the year ended December 31, 2016, $0.4 million in the year ended December 31,
2015, and $0.4 million in the year ended December 31, 2014, respectively, to multi-employer defined benefit plans under the terms of
a collective-bargaining agreement that covers its union represented employees.
Savings Plans
The Company maintains defined-contribution plans in the U.S., subject to Section 401(k) of the Internal Revenue Code, and
in Canada, subject to the Income Tax Act. For the year ended December 31, 2016, eligible U.S. employees could elect to contribute,
on a tax-deferred basis, from 1% to 75% of their compensation to a maximum of $18,000. Eligible U.S. employees over 50 years of
age could also contribute an additional $6,000 on a tax-deferred basis. In Canada, employees can elect to contribute up to a maximum
of $25,370 Canadian dollars. As of December 31, 2016, the Company matches 50% of U.S. and Canada employee contributions up to
6% of base salary for a total maximum company contribution of 3%. Effective January 1, 2017, the maximum contribution available
to employees in Canada increased to $26,010. For the years ended December 31, 2016, 2015 and 2014, the Company made matching
payments of $3.9 million, $3.1 million and $3.0 million, respectively.
12.
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):
2016
Years Ended December 31,
2015
2014
Weighted-
Average
Shares
Outstanding
46.3
Net
Income
Per
Common
Share
Net
Income
$ 1.17 $ 51.5
Net
Income
$ 54.2
Basic EPS
Effect of dilutive
common share
equivalents:
Weighted-
Average
Shares
Outstanding
Net
Income
Per
Common
Share
Net
Income
46.2 $ 1.12 $ 42.7
Weighted-
Average
Shares
Outstanding
46.2
Net
Income
Per
Common
Share
$ 0.93
Restricted stock units
Stock options
Performance shares
Diluted EPS
—
—
—
$ 54.2
0.1
—
0.1
46.5
— —
— —
— —
$ 1.17 $ 51.5
—
0.2
—
—
0.2
—
46.6 $ 1.11 $ 42.7
(0.01)
—
—
0.2
0.2
—
46.6
(0.01)
—
—
$ 0.92
Note: Basic and diluted earnings per share are calculated based on unrounded actual amounts.
66
Stock options and RSU’s to purchase common stock are not included in the computation of diluted earnings per share if their
effect would be anti-dilutive. There were no anti-dilutive stock options and RSU’s excluded in the computation of diluted earnings per
share for 2016, 2015 and 2014.
13.
Stock Incentive Plans
2010 Long-Term Incentive Plan
On May 25, 2010, the Company’s stockholders approved the 2010 Long-Term Incentive Plan (“2010 LTIP”) which provided
for the granting of awards of the Company’s common stock to officers, employees and non-employee directors. On May 20, 2014, the
Company’s stockholders approved an amendment to the 2010 LTIP increasing the shares reserved for issuance by 1,800,000 shares of
the Company’s common stock and reapproved the performance measures that may apply to awards granted thereunder. As of
December 31, 2016, the total number of shares available for issuance under the 2010 LTIP was 2,684,821. The 2010 LTIP became
effective on April 1, 2010 and awards may be made under the plan through March 31, 2020. The available awards under the 2010
LTIP include: stock options, stock appreciation rights, RSUs, other stock-based awards and performance shares. The 2010 LTIP limits
awards to 200,000 shares to any one participant in any one year. The majority of awards issued under the 2010 LTIP through
December 31, 2016, have been RSUs and performance shares, which generally vest over three years. The Company issues new shares
upon stock option exercises and vesting of RSUs and performance shares.
Prior Long-Term Incentive Plans
The 2004 Long-Term Incentive Plan (“2004 LTIP”) provided for issuance of shares of non-qualified stock options and RSUs
to officers and key employees. The 2005 Long-Term Incentive Plan (“2005 LTIP”) provided for the granting of RSUs to officers and
key employees. The 2007 Long-Term Incentive Plan (“2007 LTIP”) provided for the granting of stock options, RSUs and
performance share awards of the Company’s common stock to officers, employees and non-employee directors.
The majority of awards granted by the Company vested over a three-year period: one-third of the awards cliff-vested on the
first anniversary of the vesting commencement date and the remaining awards vested in equal monthly installments for the 2004 LTIP
and equal quarterly installments for the 2005 LTIP and the 2007 LTIP, over the two-year period following the first anniversary of the
vesting commencement date.
For option grants, the exercise price equaled the fair value of the Company’s common stock on the date of grant. Stock
options expire seven years after the date of grant. RSUs do not have an expiration date. No further grants will be made under the 2004
LTIP, the 2005 LTIP, or the 2007 LTIP.
The following table summarizes the number of securities to be issued and remaining available for future issuance under all of
the Company’s stock incentive plans as of December 31, 2016:
2007 Long-Term Incentive Plan(1)
2010 Long-Term Incentive Plan(2)
(1)
(2)
Includes RSUs.
Includes RSUs and performance shares.
Number of securities
to be issued upon
exercise of
outstanding options
and vesting of RSUs
1,624
399,568
Weighted-average
exercise price of
outstanding options
and vesting of RSUs
0.01
$
0.01
$
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column 1)
—
2,684,821
The following table summarizes the activity for all stock options, RSUs and performance shares under all of the Long-Term
Incentive Plans (“LTIPs”) for the year ended December 31, 2016:
December 31, 2015
Outstanding
Granted
Securities
Plans
2005 LTIP RSUs
2007 LTIP RSUs
Options
2010 LTIP RSUs
Options
Number Price
12,208
1,624
21,206
328,578
30,000
Number
—
—
—
0.01
0.01
4.80
0.01 124,077(1)
8.20
—
Activity during 2016
December 31, 2016
Vested / Exercised
Number Price
Price
(12,208 ) 0.01
—
— —
—
—
(12,370 ) 4.80
0.01 (219,237 ) 0.01
(30,000 ) 8.20
—
Number
Canceled
Outstanding
Number
Price
Price
— —
— —
1,624 0.01
— —
4.80
— —
0.01 230,858 0.01
— —
— —
(8,836)
(2,560)
Exercisable
Number Price
— —
1,624 0.01
— —
— —
— —
Performance
shares
336,268
729,884
Total
0.01 156,576(2)
280,653
0.01 (128,522 ) 0.01 (195,612)
(207,008)
(402,337 )
0.01 168,710 0.01
— —
401,192
1,624
Note: Price is weighted-average price per share.
(1)
(2)
Consists of non-performance RSUs.
In January 2016, the Company awarded a maximum of 156,576 performance shares that would have been received if the highest level of performance was
achieved. The shares were ultimately canceled as the Company did not achieve the related performance targets for fiscal 2016.
67
The aggregate intrinsic value of stock options exercised in 2016, 2015 and 2014 was $1.3 million, $1.8 million and $5.2
million, respectively. The aggregate intrinsic value of RSUs exercised in 2016, 2015 and 2014 was $9.3 million, $5.8 million and $5.3
million, respectively. The aggregate intrinsic value of performance shares exercised in 2016, 2015 and 2014 was $5.1 million, $2.7
million and $1.1 million, respectively.
The following table summarizes RSUs and performance shares that have vested and are expected to vest as of December 31,
2016:
Plans
2007 LTIP
2010 LTIP
Total
(1)
(2)
Securities
RSUs
RSUs
Performance shares
Outstanding
December 31, 2016
Weighted-Average
Remaining Contractual
Term (years)
Vested
Expected to
vest(2)
Vested
Expected to
vest(2)
Aggregate Intrinsic
Value(1)
(dollars in thousands)
Expected
to vest(2)
Vested
1,624
—
—
1,624
—
222,963
167,023
389,986
—
—
—
—
—
—
$
—
70
9,601
—
—
7,192
70 $ 16,793
Aggregate intrinsic value is calculated based upon the difference between the exercise price of RSUs and the Company’s closing common stock price on
December 31, 2016 of $43.07, multiplied by the number of instruments that are vested or expected to vest. RSUs having exercise prices greater than the
closing stock price noted above are excluded from this calculation.
RSUs and performance shares that are expected to vest are net of estimated future forfeitures.
The aggregate fair value of options vested in 2016 and 2015 were zero and $0.3 million in 2014. The aggregate fair value of
RSUs vested in 2016, 2015 and 2014 was $9.3 million, $5.8 million and $5.4 million, respectively. The aggregate fair value of
performance shares vested in 2016, 2015 and 2014 was $5.1 million, $2.7 million and $1.1 million, respectively.
Assumptions Used for Fair Value
The fair values for RSUs and performance shares, which are based on the fair market value of the Company’s stock at date of
grant, are included below for shares granted during 2016, 2015 and 2014. For stock options, the Company uses the Black-Scholes
option-pricing model to determine the grant date fair value. Option-pricing models require the input of assumptions that are estimated
at the date of grant. The Company did not grant stock options in 2016, 2015, or 2014.
Weighted-average fair value per share of grants:
RSUs
Performance shares (1)
Year Ended December 31,
2015
2014
2016
$
38.21 $
N/A $
32.47 $
32.60 $
18.57
18.40
(1)
Performance shares awarded in 2016 were ultimately canceled as the Company did not achieve the related performance targets for 2016.
Stock-based Compensation Expense
The Company recognized stock-based compensation expense of $6.1 million, $8.7 million and $6.1 million for the years
ended December 31, 2016, 2015 and 2014, respectively. Stock-based compensation expense is included in selling, general and
administrative expenses on the consolidated statements of operations. Stock-based compensation expense recognized for 2016 was
calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. The Company’s forfeiture
experience since inception of its plans has been approximately 4% of the total grants. The historical rate of forfeiture is a component
of the basis for predicting the future rate of forfeitures, which are also dependent on the remaining service period related to grants and
on the limited number of approximately 94 plan participants that have been awarded grants since the inception of the Company’s
plans.
As of December 31, 2016, total unrecognized compensation cost related to non-vested share-based compensation
arrangements was $3.7 million, which is expected to be recognized over a weighted-average period of 1.2 years.
68
14.
Stockholders’ Equity
Amendment to the Certificate of Incorporation
On May 19, 2015, the Company’s stockholders approved an amendment to the Certificate of Incorporation increasing the
total number of authorized shares of common stock from 50,000,000 to 100,000,000.
Dividends
On May 25, 2016, the Board of Directors approved a two-for-one stock split of the Company’s outstanding common stock,
effected through a stock dividend. The additional shares were distributed on June 27, 2016 to stockholders of record at the close of
business on June 9, 2016. All references made to share or per share amounts in the accompanying consolidated financial statements
and applicable disclosures have been retroactively adjusted to reflect this two-for-one stock split for all periods presented.
On October 19, 2011, the Company announced the commencement of a quarterly dividend program. The Company’s
intentions are to continue increasing its dividends per share over time; however, the payment of any future dividends will be
determined by the Company’s Board of Directors in light of then existing conditions, including the Company’s earnings, financial
condition and capital requirements, strategic alternatives, restrictions in financing agreements, business conditions and other factors.
The Credit Facility places certain limits on the Company’s ability to pay cash dividends on its common stock. (See Note 8 - Long-
term Debt.)
The Board of Directors approved the following cash dividends in 2016 (in millions, except per share data):
Declaration Date
February 24, 2016
May 9, 2016
August 8, 2016
November 4, 2016
Dividends Per Share
$0.08
$0.08
$0.08
$0.09
Record Date
March 11, 2016
May 25, 2016
August 24, 2016
November 23, 2016
Cash Payment
Amount (1)
$3.8
$3.7
$3.8
$4.2
Payment Date
March 28, 2016
June 15, 2016
September 15, 2016
December 15, 2016
(1)
Includes cash payments on declared dividends and payments made on RSUs vested subsequent to the payment date.
The Company paid total dividends of $15.5 million, $12.8 million and $10.7 million in 2016, 2015 and 2014, respectively.
Dividends declared and paid per common share were $0.33, $0.29 and $0.23 in 2016, 2015 and 2014, respectively.
On February 28, 2017 the Board of Directors declared a quarterly cash dividend of $0.09 per common share, which is
payable on March 28, 2017 to shareholders of record as of close of business on March 13, 2017.
Repurchase of Common Stock
In May 2013, the Company’s Board of Directors authorized a $30 million increase to its stock repurchase plan. At the time of
increase, the Company had $2.3 million remaining under its stock repurchase plan. The share repurchase program may be
discontinued or amended at any time. The program has no expiration date and expires when the amount authorized has been expended
or the Board of Directors withdraws its authorization. As of December 31, 2016 and 2015, the Company had $2.6 million and $11.5
million, respectively, available for future share repurchases under the program.
The following table summarizes the Company’s stock repurchase activities for the years ended December 31, 2016 and 2015:
Number of shares repurchased
Average price per share
Total repurchase costs (in millions)
Year Ended December 31,
2015
2016
237,869
37.76
8.9
$
$
302,366
30.35
9.2
$
$
69
15.
Other Comprehensive Income (Loss)
The components of other comprehensive income (“OCI”) and the related tax effects were as follows (in millions):
2016
Before
Tax
Tax
Effect
Net
of
Tax
Year Ended December 31,
2015
Before
Tax
Tax
Effect
Net
of
Tax
2014
Before
Tax
Tax
Effect
Net
of
Tax
$
(1.6) $
1.3
0.6 $ (1.0) $
0.8
(0.5)
(2.1) $
1.6
0.9 $
(0.6)
(1.2) $
1.0
(4.8) $
—
1.7 $ (3.1)
— —
0.6
0.3
(0.2)
(0.1)
0.4
0.2
0.6
0.1
(0.2)
0.1
0.4
0.2
0.3
(4.5)
(0.1)
1.6
0.2
(2.9)
Defined benefit plan adjustments:
Net actuarial loss during the year
Settlement charge
Amortization of net actuarial loss
included in net income
Net gain (loss) during the year
Foreign currency translation gain
(loss)
Other comprehensive income (loss) $
1.9 —
2.2 $
(0.1) $ 2.1 $
1.9
(4.9) —
0.1 $
(4.8) $
(4.9)
(4.7) $
(3.0)
(7.5) $
(3.0)
—
1.6 $ (5.9)
The following table provides a summary of the changes in AOCI for the years presented (in millions):
Balance as of December 31, 2013
Other comprehensive loss
Balance as of December 31, 2014
Other comprehensive income (loss)
Balance as of December 31, 2015
Other comprehensive income
Balance as of December 31, 2016
16.
Segment and Geographic Information
Defined
Benefit Plan
(7.9)
(2.9)
(10.8)
0.2
(10.6)
0.2
(10.4)
$
$
Foreign
Currency
Translation
$
$
2.2
(3.0)
(0.8)
(4.9)
(5.7)
1.9
(3.8)
$
$
Total
(5.7)
(5.9)
(11.6)
(4.7)
(16.3)
2.1
(14.2)
The Company identifies its operating segments based primarily on the way the Chief Operating Decision Maker (“CODM”)
evaluates performance and makes decisions. 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”), which
consists of customers that have similar characteristics. Therefore, the Company has determined that it has two operating segments -
U.S. and Canada that aggregates 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.
70
Information about the Company’s business operations based on geographic areas is as follows (in millions):
Net sales:
United States
Canada
Corporate (1)
Total
Income (loss) before income taxes:
United States
Canada
Corporate (2)
Total
Interest expense:
United States
Canada
Corporate (3)
Total
Depreciation and amortization:
United States
Canada
Corporate (4)
Total
Capital expenditures:
United States
Canada
Total
Year Ended December 31,
2015
2014
2016
13,133.0 $
1,356.4
40.0
14,529.4 $
9,829.7 $
1,203.5
36.2
11,069.4 $
8,989.0
1,250.9
40.2
10,280.1
90.7 $
6.4
(11.6)
85.5 $
40.8 $
1.1
(36.6)
5.3 $
31.0 $
2.5
9.4
42.9 $
52.4 $
1.9
54.3 $
79.4 $
1.7
1.8
82.9 $
35.0 $
0.7
(33.2)
2.5 $
29.3 $
2.4
6.2
37.9 $
28.6 $
1.7
30.3 $
70.8
3.2
(7.6)
66.4
32.0
0.7
(30.3)
2.4
24.9
2.8
4.3
32.0
53.3
0.6
53.9
$
$
$
$
$
$
$
$
$
$
(1)
(2)
(3)
(4)
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.
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. The change from 2016 to 2015 is primarily attributable
to lower LIFO expenses and lower payroll costs in 2015.
Consists primarily of intercompany eliminations for interest.
Consists primarily of depreciation for the consolidation centers and amortization of intangible assets. The change from 2016 to 2015 is primarily attributable
to the implementation of a new ERP system in February 2016 and amortization of intangible assets related to acquisition of Pine State Convenience.
Identifiable assets by geographic area are as follows (in millions):
Identifiable assets:
United States
Canada
Total
December 31,
2016
December 31,
2015
December 31,
2014
$
$
1,317.2 $
179.8
1,497.0 $
981.4 $
95.9
1,077.3 $
913.8
115.8
1,029.6
71
The net sales for the Company’s product categories are as follows (in millions):
Product Category
Cigarettes
Food (1)
Fresh (1)
Candy
Other tobacco products
Health, beauty & general
Beverages
Equipment/other
Total food/non-food products
Total net sales
2016
Net Sales
Year Ended December 31,
2015
Net Sales
2014
Net Sales
$
$
$
10,335.7 $
1,422.5
389.8
620.0
1,133.8
446.7
176.5
4.4
4,193.7 $
14,529.4 $
7,528.5 $
1,251.1
335.0
557.0
870.3
368.8
156.6
2.1
3,540.9 $
11,069.4 $
6,942.0
1,180.9
281.1
534.3
827.5
361.0
151.8
1.5
3,338.1
10,280.1
(1)
In 2016, the Fresh category was separated from the Food category to better highlight the growth in the Fresh commodity. The 2015 and 2014 presentations
have been realigned to reflect these changes.
72
17.
Quarterly Financial Data (Unaudited)
The tables below provide the Company’s unaudited consolidated results of operations for each of the four quarters in 2016
and 2015:
Three Months Ended
(in millions, except per share data)
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
Net sales — Cigarettes (1)
Net sales — Food/non-food (1)
Net sales (1)
Cost of goods sold (1)
Gross profit
Warehousing and distribution expenses (2)
Selling, general and administrative expenses (3)
Amortization of intangible assets
Total operating expenses
Income from operations
Interest expense
Interest income
Foreign currency gains (losses), net
Income before income taxes
Income tax provision
Net income
Basic net income per common share (4)
Diluted net income per common share (4)
Shares used to compute basic net income per common share
Shares used to compute diluted net income per common share
$ 2,734.7
1,102.1
3,836.8
3,637.8
199.0
116.2
50.3
1.5
168.0
31.0
(2.0 )
0.1
0.6
29.7
(11.0 )
18.7
0.41
0.41
46.2
46.4
$ 2,855.3
1,138.6
3,993.9
3,795.0
198.9
117.4
57.6
1.7
176.7
22.2
(1.5 )
—
(0.5 )
20.2
(6.7 )
13.5
0.29
0.29
46.3
46.5
$
$
$
$
$ 2,631.1 $ 2,114.6
896.7
3,011.3
2,860.2
151.1
91.6
49.4
0.9
141.9
9.2
(0.8)
0.1
0.7
9.2
(3.5)
5.7
0.12
0.12
46.4
46.6
1,056.3
3,687.4
3,499.5
187.9
106.0
53.0
1.2
160.2
27.7
(1.0)
—
(0.3)
26.4
(10.1)
16.3
0.35 $
0.35 $
46.3
46.5
$
$
Excise taxes (1)
Cigarette inventory holding gains (5)
LIFO expense
Depreciation and amortization
Stock-based compensation
Capital expenditures
$
$
$
815.4
6.9
3.2
11.7
0.6
9.8
879.1
0.4
3.7
11.4
1.9
21.7
729.5 $
7.0
2.9
10.2
1.7
14.0
598.0
1.0
3.4
9.6
1.9
8.8
(1)
(2)
(3)
(4)
(5)
Excise taxes are included as a component of net sales and cost of goods sold.
Warehousing and distribution expenses are not included as a component of the Company’s cost of goods sold. This presentation may differ from that of
other registrants.
Selling, general and administrative (“SG&A”) expenses include acquisition related expenses and transaction costs of $2.2 million, related primarily to the
addition of Pine State consisting of $0.3 million in Q4, $0.5 million in Q3, $0.8 million in Q2, and $0.6 million in Q1. SG&A expenses also include $1.3
million related to pension settlements, consisting of $0.1 million in Q4 and $1.2 million in Q3 and a $2.0 million gain, net of legal costs, related to the
settlement of a legacy legal proceeding with Sonitrol Corporation in Q1.
Totals may not agree with full year amounts due to rounding.
Cigarette inventory holding gains represent income related to cigarette inventories on hand at the time cigarette manufacturers increase their prices. Such
increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase.
73
Net sales — Cigarettes (1)
Net sales — Food/non-food (1)
Net sales (1)
Cost of goods sold (1)
Gross profit (2)
Warehousing and distribution expenses (3)
Selling, general and administrative expenses (4)
Amortization of intangible assets
Total operating expenses
Income from operations
Interest expense
Interest income
Foreign currency gains (losses), net
Income before income taxes
Income tax provision
Net income
Basic net income per common share (5)
Diluted net income per common share (5)
Shares used to compute basic net income per common
share
Shares used to compute diluted net income per common
share
Excise taxes (1)
Cigarette inventory holding gains (6)
Cigarette tax stamp inventory holding gains (7)
LIFO expense (8)
Depreciation and amortization
Stock-based compensation
Capital expenditures
$
$
$
$
$
$
December 31,
2015
1,934.5
880.6
2,815.1
2,645.0
170.1
91.7
48.4
0.8
140.9
29.2
(0.6)
0.1
(0.5)
28.2
(10.5)
17.7
0.39
0.38
$
$
$
Three Months Ended
(in millions, except per share data)
September 30,
2015
2,049.6
942.0
2,991.6
2,820.0
171.6
92.8
52.8
0.6
146.2
25.4
(0.6)
0.1
(0.7)
24.2
(9.1)
15.1
0.33
0.33
June 30,
2015
1,899.1
911.3
2,810.4
2,651.5
158.9
88.6
47.5
0.6
136.7
22.2
(0.7)
0.1
(0.2)
21.4
(8.2)
13.2
0.29
0.29
$
$
$
$
March 31,
2015
1,645.3
807.0
2,452.3
2,315.0
137.3
79.5
47.3
0.6
127.4
9.9
(0.6)
0.2
(0.4)
9.1
(3.6)
5.5
0.12
0.12
46.4
46.8
$
566.7
4.7
0.7
(7.3)
9.6
2.0
5.6
$
46.2
46.6
607.1
0.6
8.3
3.3
9.9
2.7
10.3
$
46.2
46.6
554.2
3.8
—
3.5
9.7
2.1
11.7
46.4
46.6
483.7
1.0
—
2.4
8.7
1.9
2.7
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Excise taxes are included as a component of net sales and cost of goods sold.
Includes OTP tax refunds, net of tax assessments, of $0.8 million in Q2 and $0.9 million in Q1 2015.
Warehousing and distribution expenses are not included as a component of the Company’s cost of goods sold. This presentation may differ from that of
other registrants.
Selling, general and administrative (“SG&A”) expenses include acquisition and integration expenses of $1.8 million related primarily to the addition of
Karrys Bros., consisting of $0.3 million in Q4, $0.4 million in Q3, $0.8 million in Q2, and $0.3 million in Q1. SG&A expenses also include $1.6 million
related to pension settlements, consisting of $0.7 million in Q4 and $0.9 million in Q3.
Totals may not agree with full year amounts due to rounding.
Cigarette inventory holding gains represent income related to cigarette inventories on hand at the time cigarette manufacturers increase their prices. Such
increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase.
Cigarette tax stamp inventory holding gains relate to income earned on cigarette tax stamp inventory quantities on hand at the time taxing jurisdictions
increase their excise taxes.
LIFO expense decrease in 2015 was due primarily to a decrease in the PPI for certain product categories we use to measure food/non-food LIFO expense as
published by the Bureau of Labor Statistics.
74
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted, under the supervision and with the participation of our management, including the chief executive officer and
chief financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on our evaluation, the chief
executive officer and chief financial officer concluded that, as of December 31, 2016, our disclosure controls and procedures were
effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rule 13a-15(f) of the Securities Exchange Act of 1934. We assessed the effectiveness of our internal control over financial
reporting as of December 31, 2016. In making this assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013), issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Based on this assessment, we concluded that our internal control over financial reporting was effective as of December 31,
2016. Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2016 did not include the
internal controls of Pine State Convenience, which we acquired on June 6, 2016, as permitted by Securities and Exchange
Commission guidelines that allow companies to exclude certain acquisitions from their assessment of internal control over financial
reporting during the first year of an acquisition. The total assets and total revenues of Pine State Convenience represented
approximately 9% of the Company’s total assets as of December 31, 2016, approximately 4% of its total revenues, and approximately
8% of income before income taxes of the consolidated financial statement amounts for the year ended December 31, 2016.
Our internal control over financial reporting as of December 31, 2016 has been audited by Deloitte & Touche LLP, our
independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
In February 2016, we migrated certain of our accounting and financial systems, including underlying processes, to SAP
software. This conversion impacted internal processes and controls for business activities including, but not limited to, processing
vendor payments and customer receipts as well as financial reporting. There were no other changes in our internal control over
financial reporting that occurred during the fourth quarter ended December 31, 2016 that have materially affected, or are reasonably
likely to materially affect our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
75
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is included in our Proxy Statement for the 2017 Annual Meeting of Stockholders under
the following captions and is incorporated herein by reference thereto: “Nominees for Director,” “Board of Directors,” “Our Executive
Officers,” and “Ownership of Core-Mark Common Stock-Section 16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in our Proxy Statement for the 2017 Annual Meeting of Stockholders under
the following captions and is incorporated herein by reference thereto: “Board of Directors-Director Compensation,” “Board of
Directors-Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation
Committee Report,” and “Compensation of Named Executives.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is included in our Proxy Statement for the 2017 Annual Meeting of Stockholders under
the captions “Ownership of Core-Mark Common Stock” and “Equity Compensation Plan Information” and is incorporated herein by
reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is included in our Proxy Statement for the 2017 Annual Meeting of Stockholders under
the following caption and is incorporated by reference herein by reference thereto: “Board of Directors-Certain Relationships and
Related Transactions,” “Board of Directors-Committees of the Board of Directors” and “Board of Directors-Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is included in our Proxy Statement for the 2017 Annual Meeting of Stockholders under
the caption “Ratification of Selection of Independent Registered Public Accounting Firm-Auditor Fees” and is incorporated herein by
reference thereto.
76
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
PART IV
1.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Balance at
Beginning of
Period
Charged to Costs
and Expenses
Deductions
Charged to
Other Accounts
Balance at End
of Period
Year Ended December 31, 2016
Allowances for:
Trade receivables
Inventory reserves
Year Ended December 31, 2015
Allowances for:
Trade receivables
Inventory reserves
Year Ended December 31, 2014
Allowances for:
Trade receivables
Inventory reserves
$
$
$
$
$
$
10.9
0.7
11.6
$
$
2.0
20.9
22.9
$
$
(6.0) $
(20.8)
(26.8) $
0.2
—
0.2
$
$
10.8
0.6
11.4
$
$
1.3
18.6
19.9
$
$
(1.3) $
(18.5)
(19.8) $
0.1
—
0.1
$
$
9.4
0.8
10.2
$
$
2.2
16.4
18.6
$
$
(0.7) $
(16.6)
(17.3) $
(0.1) $
—
(0.1) $
7.1
0.8
7.9
10.9
0.7
11.6
10.8
0.6
11.4
All other schedules have been omitted because they are not required, not applicable, or the required information is otherwise
included.
77
3.
Exhibits
The following exhibits are filed as part of this Annual Report on Form 10-K:
EXHIBIT INDEX
Exhibit
No.
2.1
3.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Description
Third Amended and Revised Joint Plan of Reorganization of Fleming Companies, Inc. and its Subsidiaries Under
Chapter 11 of the Bankruptcy Code, dated May 25, 2004 (incorporated by reference to Exhibit 2.1 of the Company’s
Registration Statement on Form 10 filed on September 6, 2005).
Certificate of Incorporation of Core-Mark Holding Company, Inc. (incorporated by reference to Exhibit 3.1 of the
Company’s Registration Statement on Form 10 filed on September 6, 2005).
Certificate of Amendment to Certificate of Incorporation of Core-Mark Holding Company, Inc. (incorporated by
reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on May 21, 2015).
Second Amended and Restated Bylaws of Core-Mark Holding Company, Inc. (incorporated by reference to Exhibit 3.2
of the Company’s Current Report on Form 8-K filed on August 18, 2008).
2007 Long-Term Incentive Plan (incorporated by reference to Annex A of the Company’s Proxy Statement on Schedule
14A filed on April 23, 2007).
Statement of Policy Regarding 2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 of the
Company’s Current Report on Form 8-K filed on May 9, 2007).
2010 Long-Term Incentive Plan (as amended, effective May 20, 2014) (incorporated by reference to Annex II of the
Company’s Proxy Statement on Schedule 14A filed on April 8, 2014).
Form of Management Option Award Agreement for Awards under the Core-Mark Holding Company, Inc. 2004 Long-
Term Incentive Plan (incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K filed on
March 13, 2009).
Form of Non-Employee Director RSU Award Agreement under the Core-Mark Holding Company, Inc. 2010 Long-Term
Incentive Plan. (Incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K filed on
February 26, 2016.)
Form of Management RSU Award Agreement under the Core-Mark Holding Company, Inc. 2010 Long-Term Incentive
Plan. (Incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K filed on February 26,
2016.)
Form of Performance RSU Award Agreement under the Core- Mark Holding Company, Inc. 2010 Long-Term Incentive
Plan. (Incorporated by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10-K filed on February 26,
2016.)
Form of Indemnification Agreement for Officers and Directors (incorporated by reference to Exhibit 10.5 of the
Company’s Registration Statement on Form 10 filed on September 6, 2005).
Registration Rights Agreement, dated August 20, 2004, among Core-Mark Holding Company, Inc. and the parties listed
on Schedule I attached thereto (incorporated by reference to Exhibit 10.10 of the Company’s Registration Statement on
Form 10 filed on September 6, 2005).
10.10 Credit Agreement, dated October 12, 2005, among Core-Mark Holding Company, Inc., Core-Mark International, Inc.,
Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark Midcontinent, Inc.,
Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as Borrowers, the
Lenders Signatory Thereto as Lenders, JPMorgan Chase Bank, N.A., as Administrative Agent, General Electric Capital
Corporation and Wachovia Capital Finance Corporation (Western), as Co-Syndication Agents and Bank of America,
N.A. and Wells Fargo Foothill, LLC, as Co-Documentation Agents (incorporated by reference to Exhibit 10.13 of the
Company’s Registration Statement on Form 10 filed on October 21, 2005).
78
Exhibit
No.
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Description
First Amendment to Credit Agreement, dated December 4, 2007, among Core-Mark Holding Company, Inc., Core-Mark
International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark
Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as
Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K filed on March 12, 2009).
Second Amendment to Credit Agreement, dated March 12, 2008, among Core-Mark Holding Company, Inc., Core-Mark
International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark
Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as
Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 18, 2008).
Third Amendment to Credit Agreement, dated February 2, 2010, among Core-Mark Holding Company, Inc., Core-Mark
International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark
Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as
Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on February 5, 2010).
Fourth Amendment to Credit Agreement, dated May 5, 2011, among Core-Mark Holding Company, Inc., Core-Mark
International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark
Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as
Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on May 9, 2011).
Fifth Amendment to Credit Agreement, dated May 30, 2013, among Core-Mark Holding Company, Inc., Core-Mark
International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark
Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as
Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on August 7, 2013).
Sixth Amendment to Credit Agreement, dated May 21, 2015, among Core-Mark Holding Company, Inc., Core-Mark
International, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Core-Mark Distributors, Inc.
and Minter-Weisman Co., as Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as
Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on
May 22, 2015).
Seventh Amendment to Credit Agreement, dated January 11, 2016, among Core-Mark Holding Company, Inc., Core-
Mark International, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Core-Mark
Distributors, Inc. and Minter-Weisman Co., as Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan
Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed on January 12, 2016).
Eighth Amendment to Credit Agreement, dated May 16, 2016, among Core-Mark Holding Company, Inc., Core-Mark
International, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Core-Mark Distributors, Inc.
and Minter-Weisman Co., as Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as
Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on
May 17, 2016).
10.19 Ninth Amendment to Credit Agreement, dated November 4, 2016, among Core-Mark Holding Company, Inc., Core-
Mark International, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Core-Mark
Distributors, Inc. and Minter-Weisman Co., as Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan
Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly
Report on Form 10-Q filed on November 11, 2016).
10.20
Pledge and Security Agreement, dated October 12, 2005, among Core-Mark Holding Company, Inc., Core-Mark
Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark International, Inc., Core-Mark
Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company, Inc. and Minter-Weisman Co.,
Inc., as Grantors and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.13
of the Company’s Registration Statement on Form 10 filed on October 21, 2005).
79
Exhibit
No.
Description
11.1
Statement of Computation of Earnings Per Share (required information contained within this Annual Report on Form 10-
K).
21.1
List of Subsidiaries of Core-Mark Holding Company, Inc.
23.1
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
80
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 1, 2017
CORE-MARK HOLDING COMPANY, INC.
By: /s/ THOMAS B. PERKINS
Thomas B. Perkins
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ THOMAS B. PERKINS
Thomas B. Perkins
President, Chief Executive Officer and Director
March 1, 2017
(Principal Executive Officer)
/s/ CHRISTOPHER M. MILLER
Christopher M. Miller
Senior Vice President and Chief Financial Officer
(Principal Financial & Accounting Officer)
March 1, 2017
/ S / RANDOLPH I. THORNTON
Randolph I. Thornton
Chairman of the Board of Directors
March 1, 2017
/ S / ROBERT A. ALLEN
Robert A. Allen
/ S / STUART W. BOOTH
Stuart W. Booth
/ S / GARY F. COLTER
Gary F. Colter
/s/ LAURA FLANAGAN
Laura Flanagan
/ S / ROBERT G. GROSS
Robert G. Gross
/ S / HARVEY L. TEPNER
Harvey L. Tepner
/S/ J. MICHAEL WALSH
J. Michael Walsh
Director
Director
Director
Director
Director
Director
Director
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
81
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C O R E - M A R K A N N U A L R E P O R T 2 0 1 6
Corporate Directory & Information
Executive Management
Board of Directors
Thomas B. Perkins
President & Chief Executive
Officer
Christopher M. Miller
Senior Vice President
& Chief Financial Officer
Christopher K. Hobson
Senior Vice President,
Sales & Marketing
Scott E. McPherson
Senior Vice President,
Business Operations
& Strategic Opportunities
William G. Stein
Senior Vice President,
Eastern Divisions
Christopher L. Walsh
Senior Vice President,
Western Divisions
Eric J. Rolheiser
Senior Vice President,
Northern Divisions
& President of Canada
Randolph I. Thornton
Chairman of the Board
Comdisco Holding Company, Inc.,
President & Chief Executive
Officer
Thomas B. Perkins
Core-Mark Holding Company, Inc.,
President & Chief Executive
Officer
Robert A. Allen
Core-Mark Holding Company, Inc.,
Retired Chief Executive Officer
Stuart W. Booth
Central Garden & Pet Company,
Retired Chief Financial Officer
Gary F. Colter
CRS, Inc.,
President
Laura Flanagan
Foster Farms,
Chief Executive Officer
Robert G. Gross
Monro Muffler Brake, Inc.,
Executive Chairman
Harvey L. Tepner
WL Ross & Company, LLC,
Former Principal
J. Michael Walsh
Core-Mark Holding Company, Inc.,
Former President &
Chief Executive Officer
Headquarters
Core-Mark Holding Company, Inc.
395 Oyster Point Boulevard, Suite 415
South San Francisco, CA 94080
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
Transfer Agent
Wells Fargo Shareowner Services
1 1 10 Centre Pointe Curve
Mendota Heights, MN 55120
1-800-468-971 6
Annual Shareholders Meeting
The Annual Meeting will be held on May
23rd at 10:00 a.m. at the Hyatt Regency
San Francisco Airport Hotel located at
1333 Bayshore Hwy, Burlingame, CA 94010
Common Stock Trades
NASDAQ – Global Select under the
symbol CORE
Legal Counsel
Weil, Gotshal & Manges, LLP
Redwood Shores, CA
Investor Relations
For further information about Core-Mark
Holding Company, Inc. including additional
copies of this report, Form 10-K or other
financial information, please contact:
Ms. Milton Gray Draper
Core-Mark Holding Company, Inc.
395 Oyster Point Boulevard, Suite 415
South San Francisco, CA 94080
650-589-9445
Additional Information
www.core-mark.com
395 Oyster Point Boulevard, Suite 415
South San Francisco, CA 94080
www.core-mark.com