UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x | Annual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended December 31, 2012
o | 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 | 20-1489747 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
395 Oyster Point Boulevard, Suite 415 South San Francisco, California 94080 | (650) 589-9445 |
(Address of Principal Executive Offices, including Zip Code) | (Registrant's Telephone Number, including Area Code) |
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
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 o No x
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 x No o
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 x No o
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. o
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 o | Accelerated filer x |
Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
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 29, 2012, the last business day of the registrant's most recently completed second fiscal quarter: $537,841,165
As of February 28, 2013, the registrant had 11,500,301 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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 2013 definitive proxy statement to be filed pursuant to Regulation 14A.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2012
TABLE OF CONTENTS
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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. Except as required by law, 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 G - Non-GAAP Information
The financial statements in this Annual Report are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Core-Mark Holding Company, Inc. (“Core-Mark”) uses certain non-GAAP financial measures including remaining gross profit, remaining gross profit margin, Adjusted EBITDA and net sales, less excise taxes. We believe these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful period to period evaluation. 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.
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PART I
ITEM 1. BUSINESS
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 marketers of fresh and broad-line supply solutions to the convenience retail industry in North America in terms of annual sales, providing sales and marketing, distribution and logistics services to customer locations across the U.S. and Canada. 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.
Core-Mark offers retailers the ability to take advantage of manufacturer and Company-sponsored sales and marketing programs, merchandising and product category management services and the use of information systems and data services that are focused on minimizing retailers' investment in inventory, while seeking to maximize their sales and profits. In addition, 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.
We operate in an industry where, in 2011, based on the NACS Association for Convenience and Fuel Retailing 2012 State of the Industry (“SOI”) Report, total in-store sales at convenience retail locations in the U.S. increased 2.4% to approximately $195.0 billion and were generated through approximately 148,000 stores. According to a more recent report from NACS, the number of convenience stores in the U.S. grew 0.7% in 2012 to approximately 149,000 stores. The U.S. convenience retail industry gross profit for in-store sales increased 5.3% to approximately $63.3 billion in 2011 from $60.1 billion in 2010. Over the ten years from 2001 through 2011, U.S. convenience in-store sales increased by a compounded annual growth rate of 5.7%. In Canada, based on the CCSA Canadian Convenience Store Association 2012 Industry Report, we estimate that total in-store sales at convenience locations were approximately $23.0 billion generated through approximately 23,000 stores. The Canadian convenience retail industry gross profit for in-store sales was approximately $6.3 billion.
We operate a network of 28 distribution centers (excluding two distribution facilities we operate as a third party logistics provider) in the U.S. and Canada, which distribute a diverse line of national, regional and private label convenience store products to over 29,000 customer locations in 50 states in the U.S. and five Canadian provinces. The products we distribute include cigarettes, other tobacco products, candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health and beauty care products. Cigarettes comprised approximately 69.0% of total net sales in 2012, while approximately 68.3% of our gross profit in 2012 was generated from our food/non-food products.
We service traditional convenience stores as well as alternative outlets selling consumer packaged goods in a convenient setting. We estimate that between 45% to 50% of the products sold in convenience stores are supplied by broad-line wholesale distributors such as Core-Mark. Our traditional convenience store customers include many of the major national and super-regional convenience store operators, as well as thousands of multi- and single-store customers. 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 bookstores, casinos, movie theaters, hardware stores, airport concessions and other specialty and small format stores that carry convenience products.
Our net sales have grown from $7.3 billion in 2010 to $8.9 billion in 2012, yielding an annual compounded growth rate of approximately 10%, while our Adjusted EBITDA(1) increased from $70.0 million to $100.8 million, or 20%, compounded annually during the same period. 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 4% market share of total in-store sales within the convenience store channel and to take advantage of growth opportunities with other retail store formats.
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(1) | Adjusted EBITDA is a non-GAAP financial measure and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Adjusted EBITDA is equal to net income adding back interest expense, net, provision for income taxes, depreciation and amortization, LIFO expense, stock-based compensation expense and foreign currency transaction losses (gains), net. |
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Competitive Strengths
We believe we have the following fundamental competitive strengths which form the foundation for our business strategy:
Experience in the Industry. 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. The executive management team, as of the end of 2012, comprised of our CEO and 14 senior managers, has an average tenure of 20 years and applies its expertise to critical functional areas including logistics, sales and marketing, purchasing, information technology, finance, business development, human resources and retail store support.
Innovation & 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. As a large, full-service wholesale distributor we offer retailers a wide array of manufacturer and Company-sponsored sales and marketing programs, merchandising and product category management services and the use of information systems that are focused on minimizing retailers' investment in inventory, while seeking to maximize their sales and profit.
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 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, the ability to spread fixed costs over a larger revenue base and the resources to invest in information technology and other productivity enhancing technology.
Business Strategy
Our objective is to increase overall return to shareholders by growing market share, revenues and profitability. To achieve that objective, we have become one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America and have continued to expand sales into other retail channels. In order to further enhance our value to retailers, we plan to:
Leverage our Vendor Consolidation Initiative (“VCI”). We expect our VCI program will allow us to grow 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 unique deliveries. This represents a highly inefficient and costly process for the individual stores. Today, we estimate that Core-Mark sells between 45% to 50% of what a convenience retailer purchases from their vendors. Our VCI program offers the retailer the ability to receive multiple weekly deliveries for the bulk of their products, including dairy and other merchandise they would historically purchase from direct-store-delivery companies. This simplifies the supply chain and provides retailers with an opportunity to improve inventory turns and working capital, eliminate operational and transaction costs, and greatly diminish their out-of-stocks on best-selling items.
Deliver Fresh Products. We believe there is an increasing trend among consumers to purchase fresh food and dairy products from convenience and other stores. To meet this expected demand, we have modified and upgraded our refrigerated capacity, including investing in chill docks and tri-temperature trailers, which provides 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, commissaries and bakeries to further enable us to deliver the freshest product possible, with premium consumer items such as sandwiches, wraps, cut-fruit, parfaits, pastries, doughnuts, bread and home meal replacement solutions. We continue to expand the array of fresh products through the development of unique and comprehensive marketing programs, including 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 convenience stores. Proper execution of VCI, with the cornerstone being dairy distribution, affords Core-Mark the critical mass necessary to offer retailers a multiple weekly delivery platform, which facilitates the proper handling and dating of "Fresh" products.
Expand our Presence Eastward. We believe there is significant opportunity for us to enhance the products and services that we offer to our customers, increase our market presence and revenue growth by continuing to expand our presence east of Mississippi River. According to the 2012 SOI Report, during 2011, aggregate U.S. traditional convenience retail in-store sales were approximately $195.0 billion through approximately 148,000 stores with the majority of those stores located in the eastern portion of the country. We believe our expansion eastward will be accomplished by gaining new customers, both national and regional, through a combination of exemplary service, VCI programs, fresh product deliveries, innovative marketing strategies, competitive pricing and acquisitions of regional distributors.
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Recent examples of our eastward expansion include:
• | On December 17, 2012, we acquired J.T. Davenport & Sons, Inc. (“Davenport”), a large convenience wholesaler, located in North Carolina, which services approximately 1,800 customers in the eight states of North Carolina, South Carolina, Georgia, Maryland, Ohio, Kentucky, West Virginia and Virginia. This acquisition increased Core-Mark's market presence primarily in the Southeastern United States and further supported our ability to cost effectively service national and regional retailers (see Note 3 -- Acquisitions to our consolidated financial statements). |
• | On September 7, 2011, we signed a distribution agreement (“the Customer Agreement”) with Alimentation Couche-Tard Inc. ("Couche-Tard") to service Couche-Tard corporate stores, under the Circle K brand, within Couche-Tard's Southeast, Gulf Coast and Florida markets. As of December 31, 2012, we serviced approximately 990 Circle K stores in these markets. This Customer Agreement led to the addition of a new distribution facility located in Tampa, Florida. |
• | In May 2011, we acquired Forrest City Grocery Company (“FCGC”), a regional wholesale distributor which has provided Core-Mark with additional infrastructure and market share by servicing customers in Arkansas, Mississippi, Tennessee and the surrounding states (See Note 3 - Acquisitions to our consolidated financial statements). |
Continue Building Sustainable Competitive Advantage. We believe our ability to increase sales and profitability with existing and new customers is highly dependent upon our ability to deliver consistently high levels of service, innovative marketing programs, technology solutions and logistics support. To that fundamental end, we are committed to further improving operational efficiencies in our distribution centers while containing our costs in order to enhance profitability. To further enhance our competitive advantage, we have been one of the first to recognize emerging trends and to offer retailers our unique marketing programs such as VCI and Fresh. In addition, we continue to leverage our Focused Marketing Initiative (“FMI”). This program is designed to drive deeper entrenchment with our customer base and to further differentiate ourselves in the market place. The FMI program is centered on increasing the sales and profitability of the independent store through improved category insights, optimized retail price strategy, demographic decision making along with providing Core-Mark's marketing solutions to create a complete 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.
Customers, Products and Suppliers
We service over 29,000 customer locations in 50 states in the U.S. and five Canadian provinces. Our customers represent many of the large national and regional convenience retailers in the U.S. and Canada and leading alternative outlet customers. Our top ten customers accounted for 37.5% of our net sales in 2012 including Couche-Tard, our largest customer, which accounted for 13.7% of our total net sales.
Below is a comparison of our net sales mix by primary product category for the last three years (in millions):
Year Ended December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||
Product Category | Net Sales | % of Net Sales | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||||
Cigarettes | $ | 6,139.4 | 69.0 | % | $ | 5,710.6 | 70.4 | % | $ | 5,119.7 | 70.5 | % | ||||||||
Food | 1,178.6 | 13.4 | 995.7 | 12.3 | 840.9 | 11.6 | ||||||||||||||
Candy | 489.5 | 5.5 | 459.8 | 5.7 | 426.0 | 5.8 | ||||||||||||||
Other tobacco products | 687.8 | 7.7 | 607.9 | 7.5 | 503.6 | 6.9 | ||||||||||||||
Health, beauty & general | 269.2 | 3.0 | 237.5 | 2.9 | 220.6 | 3.0 | ||||||||||||||
Beverages | 125.6 | 1.4 | 100.9 | 1.2 | 152.0 | 2.1 | ||||||||||||||
Equipment/other | 2.3 | — | 2.5 | — | 4.0 | 0.1 | ||||||||||||||
Total food/non-food products | 2,753.0 | 31.0 | 2,404.3 | 29.6 | 2,147.1 | 29.5 | ||||||||||||||
Total net sales | $ | 8,892.4 | 100.0 | % | $ | 8,114.9 | 100.0 | % | $ | 7,266.8 | 100.0 | % | ||||||||
Cigarette Products. We purchase cigarette products from major U.S. and Canadian manufacturers. With cigarettes accounting for approximately $6,139.4 million, or 69.0% of our total net sales, and 31.7% of our total gross profit in 2012, we control major purchases of cigarettes centrally in order to optimize inventory levels and purchasing opportunities. The daily replenishment of inventory and brand selection is controlled by our distribution centers.
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U.S. and Canadian cigarette consumption has generally declined over the last ten years. Based on 2012 statistics provided by the Tobacco Merchants Association (“TMA”) published in early 2013 and compiled from the U.S. Department of Agriculture - Economic Research Service, total cigarette consumption in the U.S. declined from 425 billion cigarettes in 2002 to 294 billion cigarettes in 2012, or a compounded annual decline of approximately 3.6%. Total cigarette consumption also declined in Canada from 37 billion cigarettes in 2002 to 25 billion cigarettes in 2012, or a compounded annual decline of approximately 3.8% in consumption, based on the statistics provided by TMA. Our total cigarette carton sales increased 5.9% in 2012 attributable primarily to our expansion in the Southeastern U.S. in the later part of 2011, driven by our new Customer Agreement, the establishment of a new operating division in Tampa, Florida and incremental sales associated with FCGC. Excluding these items, our carton sales in the U.S. declined 1.4%. Our carton sales in Canada decreased 7.5% in 2012 on a comparative basis to last year due primarily to the loss of one customer, representing less than 0.3% of total cartons sold by the Company, and a focused reduction in service to certain customers which resulted in improved profitability for the Canadian region in 2012. 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 that results from cigarette manufacturer price increases. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability.
We have no long-term cigarette purchase agreements and buy substantially all of our products on an as needed basis. Cigarette manufacturers historically have offered structured incentive programs to wholesalers based on maintaining market share and executing promotional programs. These programs are subject to change by the manufacturers without notice.
Excise taxes are levied on cigarettes and other tobacco products by the U.S. and Canadian federal governments and are also imposed by the various states, localities and provinces. We collect state, local and provincial excise taxes from our customers and remit these amounts to the appropriate authorities. Excise taxes are a significant component of our net sales and cost of sales. During 2012, we included in net sales approximately $1,987.0 million of state, local and provincial excise taxes. As of December 31, 2012, state cigarette excise taxes in the U.S. jurisdictions we serve ranged from $0.17 per pack of 20 cigarettes in the state of Missouri to $4.35 per pack of 20 cigarettes in the state of New York. In the Canadian jurisdictions we serve, provincial excise taxes ranged from C$2.47 per pack of 20 cigarettes in Ontario to C$5.72 per pack of 20 cigarettes in the Northwest Territories. 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.
Food/Non-food Products. Our food products include fast food, candy, snacks, groceries, beverages, 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 14.5% in 2012 to $2,753.0 million, which was 31.0% of our total net sales. More specifically, food grew 18.4% to $1,178.6 million, by far the largest contributor to our overall food/non-food sales improvement. This is consistent with our strategy to grow food/non-food products at a faster pace than cigarettes through a combination of market share gains and execution of our VCI, Fresh, FMI and acquisitions strategies.
Gross profits for food/non-food categories grew $29.1 million, or 9.8%, to $325.8 million in 2012, which was 68.3% of our total gross profit. Food/non-food products generated gross margins of 12.78% excluding excise taxes in 2012, while the cigarette category generated gross margins of 3.47% excluding excise taxes. The significant differences in these margins is part of what we considered when developing these strategies. In order to take advantage of the significantly higher margins earned by food/non-food products, two of our key business strategies, VCI and the delivery of fresh products, focus primarily on the highest margin categories in the food/non-food group. These categories include milk, fresh bread, fresh sandwiches, fresh fruit, fresh produce, fresh baked goods, home meal replacements and other fresh and natural products. We have invested a significant amount of capital to position our Company with the proper infrastructure to successfully deliver these highly perishable items.
Another primary aspect of our VCI strategy is to take cost out of the supply chain by putting more of the product that the retailer purchases on our trucks. We have targeted $100 million of incremental sales for the last five years, and this has contributed to the growth in our food/non-food sales and gross profit dollars. In addition, our FMI strategy was created to assist our independent retailer to sell more food/non-food items and to increase profitability.
We have completed five acquisitions since 2006. This has allowed us to bring our strategies to more stores. While these businesses contribute to our food/non-food sales growth, their sales mix toward higher margin food/non-food items increases as they implement our marketing programs. In addition, we have taken considerable market share over the last several years assisted by our best in class offering. We believe Core-Mark is considered the market share leader in the industry for our capability to deliver fresh and perishable categories. We believe, based on industry indications, that fresh items are driving consumer decisions, and fresh is, therefore, an important category going forward. We are seeing some channel blurring in different types of retail locations that present an opportunity for Core-Mark. In addition, we are seeing certain retail locations that do not historically sell highly perishable items, now doing so, and we see retail locations that historically have not sold cigarettes, now selling them. We believe these developments may provide very sizable opportunities for Core-Mark.
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Our Suppliers. We purchase products for resale from approximately 4,400 trade suppliers and manufacturers located across the U.S. and Canada. In 2012, we purchased approximately 64% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris USA, Inc. and R.J. Reynolds Tobacco Company, representing approximately 27% and 14% 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, particularly food, directly from the manufacturers, improving product mix and availability for individual markets.
Seasonality
We typically generate slightly higher net sales and higher gross profits during the warm weather months (May through September) than in other times throughout the year. We believe this occurs because the convenience store industry which we serve tends to be busier during this period due to vacations and travel by consumers. We generated approximately 52% of our net sales during the second and third quarters of 2012 and 53% during the second and third quarters of both 2011 and 2010.
Operations
We operate a network of 28 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third party logistics provider). In 2012, as a result of the Davenport acquisition, we added one distribution center in North Carolina. Twenty-four of our distribution centers are located in the U.S. and four are located in Canada. The map below depicts the scope of our operations and the names of our distribution centers.
Map of Operations
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Three of the facilities we operate in the U.S., Artic Cascade, Allied Merchandising Industry (AMI) and AMI-Artic East, are consolidating warehouses which buy products from our suppliers in bulk quantities and then distribute the products to many of our other distribution centers. By using Artic Cascade, located in Sacramento, California, to obtain products at lower cost from frozen product vendors, we are able to offer a broader selection of quality products to retailers at more competitive prices. AMI, located in Corona, California, purchases a portion of our non-cigarette products, primarily health and beauty care and general merchandise items for our distribution centers enabling us to optimize our inventory to meet the needs of our customers. In 2012 we opened a third consolidating warehouse, AMI-Artic East located in Forrest City, Arkansas. AMI-Artic East purchases similar products to both Artic Cascade and AMI and distributes those products primarily to distribution centers in the Eastern United States. 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, Valero Energy Corporation.
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We purchase a variety of brand name and private label products, in excess of 48,000 SKUs, including over 1,900 cigarette products, from our suppliers and manufacturers. 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.
A typical convenience store order consists of a mix of dry, frozen and chilled products. Our receivers, stockers, order selectors, stampers, forklift drivers and loaders received, stored and picked approximately 551 million, 476 million and 454 million items (a carton of 10 packs of cigarettes is one item) or 86 million, 71 million and 71 million cubic feet of product, during the years ended December 31, 2012, 2011 and 2010, respectively, while limiting the service error rate to less than 3 errors per thousand items shipped in 2012.
Our proprietary Distribution Center Management System platform provides our distribution centers with the flexibility to adapt to our customers' information technology requirements in an industry that does not have a standard information technology platform. Actively integrating our customers onto our platform is a priority which enables fast, efficient and reliable service.
Distribution
At December 31, 2012, we had 1,174 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, 2012, our trucking fleet consisted of approximately 860 tractors, trucks and vans, of which mostly all were leased. We have made a significant investment over the past few years in upgrading our trailer fleet to tri-temperature (“tri-temp”) which gives us the capability to deliver frozen, chilled and non-refrigerated goods in one delivery. As of December 31, 2012, approximately 70% 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. Our fuel consumption costs for 2012 totaled approximately $14.6 million, net of fuel surcharges passed on to customers, which represented an increase of approximately $1.6 million, from $13.0 million in 2011, due primarily to a 13.3% increase in miles driven to support the growth in our business and slightly higher fuel prices.
Competition
We estimate that, as of December 31, 2012, there were approximately 300 wholesale distributors serving traditional convenience retailers in the U.S. and Canada. 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 regional companies that provide products to specific areas of the country, H.T. Hackney Company in the Southeast and Eby-Brown Company in the Midwest and Mid-Atlantic regions. In addition there are several hundred local distributors serving small regional chains and independent convenience retailers. In Canada, there are two large regional players, aside from Core-Mark, that make up the competitive landscape, Karrys Bros., Limited and Wallace & Carey, Inc.
Beyond the traditional wholesale supply channels, we face potential competition from at least three other supply avenues. First, certain manufacturers such as Budweiser, Miller-Coors, Coca-Cola, Frito-Lay and PepsiCo deliver their products directly to convenience retailers. Secondly, club wholesalers such as Costco and Sam's Club provide a limited selection of products at generally competitive prices, however, they often have limited delivery options and often no services. Finally, some large convenience retail chains have chosen self-distribution due to the geographic density of their stores and their belief that they can economically service such locations.
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. 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 performance using delivery equipment sized for the small format store, innovative marketing solutions and merchandising support, as well as competitive pricing. We believe this represents a contrast to some large competitors that offer a standardized logistics approach, with emphasis on uniformity of product lines, and company determined delivery schedules using large delivery equipment designed for large format stores. While this emphasis on a standardized logistics approach allows for competitive pricing, we do not believe it is best suited for retailers looking for more customized solutions and support from their supply partners in addition to competitive pricing. Alternatively, some small competitors focus on customer service and long-standing customer relationships but often lack the range of offerings of the larger distributors. We believe that our unique combination of service, marketing solutions and price is a compelling combination that is highly attractive to retailers and helps to enhance their growth and profitability.
In the U.S. we purchase cigarettes primarily from manufacturers covered by the tobacco industry's Master Settlement Agreement (“MSA”), which was signed in November 1998. Competition amongst cigarette wholesalers is based primarily on service, price and variety, whereas competition amongst manufacturers for cigarette sales is based primarily on brand positioning, price, product attributes, consumer loyalty, promotions, marketing and retail presence. Cigarette brands produced by the major
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tobacco product manufacturers generally require competitive pricing, substantial marketing support, retail programs and other financial incentives to maintain or improve a brand's market position. Historically, major tobacco product manufacturers have had a competitive advantage in the U.S. because significant cigarette marketing restrictions and the scale of investment required to compete made gaining consumer awareness and trial of new brands difficult.
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 that challenge sales of higher priced and fully taxed cigarettes.
We also believe the competitive environment has been impacted by alternative smoking products, such as snus, snuff and electronic cigarettes. In addition, cigarette prices continue to rise due to continuing pressure on taxing jurisdictions to raise revenues through excise taxes. Further, cigarette list prices have historically increased for those manufacturers who are parties to the MSA. As a result, the lower priced products of numerous small share brands manufactured by non-MSA participants have held their market share, putting profitability pressure on MSA products.
Working Capital Practices
We sell products on credit terms to our customers that averaged, as measured by days sales outstanding, about nine days for 2012, 2011 and 2010. Credit terms may impact pricing and are competitive within our industry. An increasing number 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.
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 manufacturer price increases. The number of days of cost of sales in inventory averaged about 16 days in each of 2012 and 2011, respectively, and about 15 days in 2010.
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. Terms for our accounts payable and cigarette and tobacco taxes payable range anywhere from three days prepaid to 60 days credit. Days payable outstanding for both categories, excluding the impact of prepayments, during 2012, 2011 and 2010 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 logistic facilities) as of December 31, 2012:
TOTAL EMPLOYEES BY BUSINESS FUNCTIONS
U.S. | Canada | Total | |||||||
Sales and Marketing | 1,204 | 61 | 1,265 | ||||||
Warehousing and Distribution | 3,001 | 244 | 3,245 | ||||||
Management, Administration, Finance and Purchasing | 605 | 110 | 715 | ||||||
Total Categories | 4,810 | 415 | 5,225 | ||||||
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 United Food and Commercial Workers (Calgary). Approximately 198 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.
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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”). The FDA regulates the holding requirements for foods through its current good manufacturing practice regulations, specifies the standards of identity for certain foods and prescribes the format and content of certain information required to appear on food product labels. A limited number of the over-the-counter medications that we distribute are subject to the regulations of the U.S. Drug Enforcement Administration. 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 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 numerous other federal, state, provincial and local regulatory agencies including, but not limited to, the U.S. Department of Labor, which sets employment practice standards for workers, the U.S. and Canadian Departments of Transportation, which regulate transportation of perishable goods, and similar state, provincial and local agencies. Non-compliance with, or significant changes to, these laws or the implementation of new laws, could have a material effect on our results of operations.
In September 2011, the Tobacco Products Labeling Regulations (Cigarettes and Little Cigars) came into force in Canada with strengthened labeling requirements for cigarettes and little cigar packages. The requirements include graphic health warnings and health information messages which are prominently displayed on the front and back of most tobacco packages and primarily focus on the health hazards posed by tobacco use.
We voluntarily participate in random quality inspections of all of our distribution centers, conducted by the American Institute of Baking (“AIB”). The AIB publishes standards as a tool to permit operators of distribution centers to evaluate the food safety risks within their operations and determine the levels of compliance with the standards. AIB conducts an inspection which is composed of food safety and quality criteria. AIB conducts its inspections based on five categories: adequacy of the company's food safety program, pest control, operational methods and personnel practices, maintenance of food safety and cleaning practices. Within these five categories, the AIB evaluates over 100 criteria items. In 2012, 92% of the audits of our distribution centers received a score of 900 or greater (on a possible 1,000 point scale).
Registered Trademarks
We have registered trademarks including the following: Arcadia Bay®, Arcadia Bay Coffee Company®, Cable Car®, Core-Mark®, Core-Mark International®, EMERALD®, Fresh and Local™, Java Street®, QUICKEATS®, Richland Valley™, SmartStock®, Tastefully Yours® and COASTERS®..
Segment and Geographic Information
We operate in two geographic areas -- the U.S. and Canada. See Note 16 - Segment and Geographic Information to our consolidated financial statements.
Corporate and Available Information
The office of our corporate headquarters is located at 395 Oyster Point Boulevard, Suite 415, South San Francisco, California, 94080 and the 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 and any amendments to those reports. Our SEC reports can be accessed through the “Investor Relations” section of our website under “Corporate Governance”, or through www.sec.gov. 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
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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 (“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, shareholders 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 the Company's accounting policies. The procedures are also described on our website at www.core-mark.com under Corporate Governance in the “Investor Relations” section.
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ITEM 1. A. 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 adverse effect on our business, financial condition or results of operations. These risks are not the only ones we face. We could also be affected by additional factors that are presently unknown to us or that we currently believe to be immaterial to our business.
Risks Related to Our Business and Industry
Protracted challenging economic conditions may reduce demand for our products and increase credit risks.
Protracted challenging economic conditions, including high unemployment and underemployment rates, depressed real estate values, losses to consumer retirement and investment accounts, increases in food and other commodity prices and the outcome of political events (e.g. resolution of the national debt ceiling) may result in weakened consumer confidence and curtailed consumer spending in certain sectors. If these economic conditions are severe and/or persist for a prolonged period, we expect that our customers would experience reduced sales, which, in turn, would adversely affect demand for our products and could lead to reduced sales and increased pressures on our margins. In addition, severe adverse economic conditions may place a number of our convenience retail customers under financial stress, which could increase our credit risk and potential bad debt exposure. These economic and market conditions may have a material adverse effect on our business and operating results.
We are dependent on the convenience retail industry for our revenues, and our results of operations could suffer if there is an overall decline or consolidation in the convenience retail industry.
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, credit exposure from our customers, termination of customer relationships without notice and consolidation of our customer base. Any of these factors could negatively affect our results of operations.
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 and variety of products offered, and schedules and reliability of deliveries. We also face competition from club stores and alternate sources of consumable products that sell 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 reduce our margins and adversely affect 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.
We may lose business if manufacturers convert to direct distribution of their products.
In the past, certain large manufacturers have elected to engage in direct distribution of their products and eliminate distributors such as Core-Mark. If other manufacturers 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.
Some of our distribution centers are dependent on a few relatively large customers, and our failure to maintain our relationships with these customers could substantially harm our business and prospects.
Some of our distribution centers are dependent on relationships with a single customer or a few major customers, and we expect our reliance on these relationships to continue for the foreseeable future. Any termination, non-renewal or reduction in services that we provide to such customers could cause revenues generated by certain of our distribution centers to decline and our operating results to suffer.
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 surcharges, but our ability to continue to pass through price increases, either from manufacturers or costs incurred in the business, including fuel costs, is not assured. If we are unable to continue to pass on fuel and transportation-related cost increases to our customers, our operating results could be materially and adversely affected. As part of our efforts to minimize the adverse impact of increases in diesel fuel prices, we expect to convert a large percentage of our trucks to operate on natural gas over the next two years.
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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 pressuring our need to fund working capital. To the extent that we are unable to pass on product cost increases and underlying carrying costs to our customers, our profit margins and earnings could be negatively impacted.
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 benefit to us. 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, 2012, we had approximately 4,400 vendors, and during 2012 we purchased approximately 64% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris USA, Inc. and R.J. Reynolds Tobacco Company, representing approximately 27% and 14% 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 obligations to our customers and reduce the volume of our sales and profitability.
Our ability to operate effectively could be impaired by the risks and costs associated with the efforts to grow our business through acquisitions.
One of our key business strategies is to grow our market share through acquisitions. This entails various risks such as identifying suitable candidates, realizing acceptable rates of return on the investment, obtaining adequate financing, negotiating acceptable terms and conditions and successfully integrating operations post-acquisition. We may not realize the anticipated benefits or savings from an acquisition to the extent or in the time frame anticipated, if at all. Further, we may realize higher costs than anticipated, including the potential impairment of assets. In addition, we may assume both known and unknown liabilities as part of an acquisition, which may increase the associated costs and risks related to those liabilities.
We may be subject to product liability claims and counterfeit product claims which could materially adversely affect our business, and our operations could be subject to disruptions as a result of manufacturer recalls of products.
Core-Mark, as a distributor of food and consumer products, faces the risk of exposure to product liability claims in the event that the use of products 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. 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 products could materially adversely impact our results of operations.
In addition, we may be required to manage a recall of products on behalf of a supplier or manufacturer. Managing a recall could disrupt our operations as we might be required to devote substantial resources toward implementing the recall. Costs
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associated with a potential product recall, to the extent they are not reimbursable by the supplier or manufacturer, could adversely affect our operating results.
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 shareholder value.
We may not be able to successfully execute our marketing initiatives to realize the intended synergies, business opportunities and growth prospects. Many of the risk factors mentioned, such as increased competition, may limit our ability to capitalize on business opportunities or expand our business. Customer acceptance of new distribution formats that we implement may not be executed as anticipated, hampering our ability to attract new customers or maintain our existing customer base. If these or other factors limit our ability to execute our strategic initiatives, our efforts may not bring the intended results and expectations of future results of operations, including expected revenue growth and cost savings, may not be met.
Our information technology systems may be subject to failure, disruptions or security breaches 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 customized 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 unforeseen 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.
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 hackers or other disruptive problems. Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of our, our customers', our business partners' or our employees' intellectual property, proprietary business information or personally identifiable information.
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.
We depend on 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.
Shortages of qualified labor could negatively impact our business and profitability.
Our continued success will depend partly on our ability to attract and retain qualified personnel. 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 earnings because of higher labor costs.
Unions may attempt to organize our employees.
As of December 31, 2012, 198, or 4%, of our employees were covered by collective bargaining agreements with labor organizations, which expire at various times. We cannot assure you that we will be able to renew our respective collective bargaining agreements on favorable terms that employees at other facilities will not unionize and that our labor costs will not increase. In addition, the National Labor Relations Board is becoming more active with the passage of administrative rules that could impact our ability to manage our labor force. To the extent we suffer business interruptions as a result of strikes or other work stoppages
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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.
Employee health benefit costs represent a significant expense to us and may negatively affect our profitability.
With over 3,100 employees participating in our health benefits, 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. While we have been successful in controlling these costs in recent years through modifications to insurance coverage, including increasing co-pays and deductibles, there can be no assurance that we will be as successful in controlling such costs in the future. 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 as well as other healthcare reform legislation being considered by Congress and state legislatures may increase our employee healthcare-related costs. While the most significant costs of the recent healthcare legislation enacted will not occur until after 2013 due to provisions of the legislation being phased in over time, changes to our healthcare costs structure could negatively impact our profitability.
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 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 the Occupational Safety and Health Administration, the Drug Enforcement Agency and 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 operations in California, as well as one of our data centers located in Richmond, British Columbia, Canada, are located in or near high hazard earthquake zones. In addition, one of our data centers is located in Plano, Texas, which is susceptible to wind storms. We also have operations in areas that have been affected by natural disasters such as hurricanes, tornados, flooding, ice and snow storms. While we maintain insurance to cover us for such 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 impact our sales.
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.
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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 2012, approximately 69.0% of our net sales (which includes excise taxes) and 31.7% of our gross profit were generated from the distribution of cigarettes. Due to increases in the prices of cigarettes, restrictions on marketing and promotions by cigarette manufacturers, increases in cigarette regulation and excise taxes, health concerns, increased pressure from anti-tobacco groups and other factors, cigarette consumption in the U.S. and Canada has been declining gradually over the past few decades. 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 from illicit markets. If we are unable to sell other products to make up for these declines in cigarette unit sales, our operating results may suffer.
Legislation 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 and pipe 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 of the FDA. Such legislation and related regulation could adversely impact 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 are expected to continue and are expected to negatively impact consumption. Additionally, they may cause a shift in sales from premium brands to discount brands or illicit channels 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 (the “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.
In connection with the MSA, we were indemnified by most of the tobacco product manufacturers from which we purchase cigarettes and other tobacco products for liabilities arising from our sale of the tobacco products that they supply to us. Should the MSA ever be invalidated, we could be subject to substantial litigation due to our distribution of cigarettes and other tobacco
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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 and our Company could be so large as to eliminate the ability of the manufacturers to satisfy their indemnification obligations.
Should the MSA ever be invalidated or challenged, we could be subject to substantial litigation due to our distribution of cigarettes and other tobacco products. In such an event, we would seek indemnification from the MSA manufacturers. However, we cannot give any assurances that such indemnification would be available or sufficient. Even if we are indemnified by cigarette manufacturers that are parties to the MSA, future litigation awards against such cigarette manufacturers and us could be so large as to eliminate the ability of the manufacturers to satisfy their indemnification obligations.
We face competition from sales of illicit and other low priced sales of cigarettes.
We also face competition from the diversion into the U.S. and Canadian markets of cigarettes intended for sale outside of such markets, 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 lower cost brands from non-MSA manufacturers who are not burdened with MSA related payments, and 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 that challenge sales of higher priced and fully taxed cigarettes. Increased sales of illicit or other low priced alternatives by third parties, or sales by means to avoid the collection of applicable taxes, could have an adverse effect on our results of operations.
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 proposed legislation which effectively could limit, or even eliminate, use of the LIFO inventory method for financial and income tax purposes. Although the final outcome of these proposals cannot be ascertained at this time, the ultimate impact to us of the transition from LIFO to another inventory method could be material.
Our pension plan is currently underfunded and we will be required to make cash payments to the plan, reducing the cash available for our business.
We record a liability associated with the underfunded status of our pension plans when the benefit obligation exceeds the fair value of the plan assets. Included in pension liabilities on our balance sheet as of December 31, 2012 is $10.0 million related to the underfunded pension obligation compared with $9.3 million as of December 31, 2011. The Company contributed $3.7 million to its pension plans in 2012 compared with $3.2 million in 2011. If the performance of the assets in the plan does not meet our expectations, or if other actuarial assumptions are modified, our future cash payments to the plan could be substantially higher than we expect. The pension plan is subject to the Employee Retirement Income Security Act of 1974 (“ERISA”). Under ERISA, the Pension Benefit Guaranty Corporation (“PBGC”) has the authority to terminate an underfunded pension plan under limited circumstances. In the event our pension plan is terminated for any reason while it is underfunded, we will incur a liability to the PBGC that may be equal to the entire amount of the underfunding in the pension plan. If this were to occur, our working capital and results of operations could be adversely impacted.
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.
In October 2011, our Board of Directors approved the commencement of a quarterly cash dividend. 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.
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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 13% in 2012 and 15% in 2011. 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 revenues and 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. Accounting principles generally accepted in the United States of America (“GAAP”) require that foreign currency transaction gains or losses on short-term intercompany transactions be recorded currently as gains or losses within the income statement. To the extent we incur losses on such transactions, our net income and earnings per share will be reduced.
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 our $200 million Credit Facility. While we believe our sources of liquidity are adequate, we cannot assure you 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 may be necessary, but we may not be able to expand our existing Credit Facility or obtain new financing on terms satisfactory to us.
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 and make distributions, 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.
Changes to accounting rules or regulations may adversely affect our operating results and financial position.
Changes to GAAP arise from new and revised standards, interpretations and other guidance issued by the Financial Accounting Standards Board (“FASB”), the SEC and others. For example, the U.S.-based FASB is currently working together with the International Accounting Standards Board (“IASB”) on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow GAAP under SEC regulations and those who are required to follow International Financial Reporting Standards (“IFRS”) outside of the U.S. The effects of such changes may include prescribing an accounting method where none had been previously specified, prescribing a single acceptable method of accounting from among several acceptable methods that currently exist or revoking the acceptability of a current method and replacing it with an entirely different method, among others. Such changes could result in unanticipated effects on our results of operations, financial position and other financial measures, including significant additional costs to implement and maintain the new accounting standards.
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 generally accepted accounting principles of the United States, management is required to exercise judgment in selecting and applying accounting methodologies and making estimates and assumptions. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in our reporting materially different results than would have been reported under a different alternative. 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, impairment of goodwill, impairment of long-lived and other intangible assets, valuation of assets and liabilities in connection with business combinations, pension obligations, stock-based compensation expense and accruals for estimated liabilities, including litigation and insurance reserves.
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ITEM 1. B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in South San Francisco, California, and consist of approximately 27,000 square feet of leased office space. We also lease approximately 13,000 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 3,000 and 2,000 square feet of additional office space in Fort Worth, Texas and Phoenix, AZ, respectively. We lease approximately 3.4 million square feet and own approximately 0.7 million square feet of distribution space.
Distribution Center Facilities by City and State of Location(1) | ||
Albuquerque, New Mexico | Las Vegas, Nevada | Tampa, Florida |
Atlanta, Georgia | Leitchfield, Kentucky | Whitinsville, Massachusetts |
Bakersfield, California | Los Angeles, California | Wilkes-Barre, Pennsylvania |
Corona, California(2) | Minneapolis, Minnesota | Calgary, Alberta |
Denver, Colorado | Portland, Oregon | Toronto, Ontario |
Forrest City, Arkansas(4) | Sacramento, California(3) | Vancouver, British Columbia |
Fort Worth, Texas | Salt Lake City, Utah | Winnipeg, Manitoba |
Grants Pass, Oregon | Sanford, North Carolina | |
Hayward, California | Spokane, Washington | |
(1) | 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 principal credit facility. |
(2) | This location includes two facilities, a distribution center and our AMI consolidating warehouse. |
(3) | This facility includes a distribution center and our Artic Cascade consolidating warehouse. |
(4) This facility includes a distribution center and our AMI-Artic East 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 Valero Energy Corporation. Each facility is leased by the specific customer solely for their use and operated by Core-Mark.
ITEM 3. | LEGAL PROCEEDINGS |
The Company is a plaintiff in a lawsuit against Sonitrol Corporation. The case arose from the December 21, 2002 arson fire at the Denver warehouse in which Sonitrol failed to detect and respond to a four-hour burglary and subsequent arson. In 2010, a jury found in favor of the Company and our insurers. Sonitrol appealed the judgment to the Colorado Appellate Court and on July 19, 2012, the Appellate Court upheld the trial court's ruling on two of the three issues being appealed but set aside the judgment and remanded the case back to the District Court for trial on the sole issue of damages. The Appellate Court's ruling was appealed by Sonitrol to the Colorado Supreme Court on September 21, 2012. We are unable to predict when this litigation will be finally resolved and the ultimate outcome. Any monetary recovery from the lawsuit would be recognized only if and when it is finally paid to the Company.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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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 2,127 stockholders of record as of February 28, 2013.
The following table provides the range of high and low sales prices of our common stock as reported by NASDAQ for the periods indicated:
Low Price | High Price | |||||||
Fiscal 2012 | ||||||||
4th Quarter | $ | 40.06 | $ | 49.24 | ||||
3rd Quarter | 43.29 | 50.56 | ||||||
2nd Quarter | 34.78 | 48.17 | ||||||
1st Quarter | 37.01 | 42.74 | ||||||
Low Price | High Price | |||||||
Fiscal 2011 | ||||||||
4th Quarter | $ | 29.57 | $ | 40.52 | ||||
3rd Quarter | 30.33 | 38.69 | ||||||
2nd Quarter | 32.41 | 35.84 | ||||||
1st Quarter | 31.61 | 36.10 | ||||||
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PERFORMANCE COMPARISON
The graph below presents a comparison of cumulative total return to stockholders for Core-Mark's stock at the end of each year from 2007 through 2012, as well as the cumulative total returns of the NASDAQ Non-Financial Stock Index, the Russell 2000 Index and a peer group of companies (“the 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, 2007, and is compared to the total return of the NASDAQ Non-Financial Stock Index, the Russell 2000 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 since it includes primarily companies with relatively small market capitalization similar to us.
The companies composing the Performance Peer Group are Sysco Corp. (SYY), Nash Finch Company (NAFC), United Natural Foods, Inc. (UNFI) and AMCON Distributing Co. (DIT).
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CORE-MARK, NASDAQ NON-FINANCIAL STOCK AND RUSSELL 2000 INDEXES AND THE PERFORMANCE PEER GROUP
Investment Value at | ||||||||||||||||||||||||
12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | 12/30/11 | 12/31/12 | |||||||||||||||||||
CORE | $ | 100.00 | $ | 74.93 | $ | 114.76 | $ | 123.92 | $ | 138.48 | $ | 168.86 | ||||||||||||
NASDAQ Index | $ | 100.00 | $ | 58.78 | $ | 88.64 | $ | 105.21 | $ | 105.08 | $ | 122.88 | ||||||||||||
Russell 2000 | $ | 100.00 | $ | 66.21 | $ | 84.20 | $ | 106.82 | $ | 102.36 | $ | 119.09 | ||||||||||||
Performance Peer Group | $ | 100.00 | $ | 75.27 | $ | 95.17 | $ | 105.35 | $ | 108.32 | $ | 122.28 | ||||||||||||
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Dividends
On October 19, 2011, we announced the commencement of a quarterly dividend program. On the same day, the Board of Directors declared a quarterly cash dividend of $0.17 per common share, which resulted in a total payment of approximately $1.9 million during 2011. In 2012, the Board of Directors declared quarterly cash dividends of $0.17 per common share on February 3, 2012, May 3, 2012 and August 3, 2012, and a cash dividend of $0.19 per common share on November 1, 2012. On December 6, 2012, in lieu of our first quarter of 2013 dividend, the Board of Directors declared an accelerated cash dividend of $0.19 per common share that was paid on December 31, 2012. We paid total dividends of $10.3 million during 2012. Our Credit Facility places certain limits on our ability to pay cash dividends on our common stock. 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.
Issuer Purchases of Equity Securities
The following table provides the repurchases of common stock shares during the three months ended December 31, 2012:
Issuer Purchases of Equity Securities | |||||||||||||||
Approximate | |||||||||||||||
Total Cost | Dollar Value | ||||||||||||||
of Shares | of Shares that | ||||||||||||||
Purchased as | May Yet be | ||||||||||||||
Total | Part of Publicly | Purchased Under | |||||||||||||
Number | Average | Announced Plans | the Plans | ||||||||||||
Calendar month | of Shares | Price Paid | or Programs | or Programs | |||||||||||
in which purchases were made: | Repurchased (1) | per Share (2) | (in millions)(1) | (in millions) (3) (4) | |||||||||||
October 1, 2012 to October 31, 2012 | — | $ | — | $ | — | $ | 10.3 | ||||||||
November 1, 2012 to November 30, 2012 | 82,000 | 43.43 | 3.6 | 6.7 | |||||||||||
December 1, 2012 to December 31, 2012 | 19,000 | 46.54 | 0.9 | 5.8 | |||||||||||
Total repurchases for the three months ended December 31, 2012 | 101,000 | $ | 44.02 | $ | 4.5 | $ | 5.8 | ||||||||
_____________________________________________
(1) | All purchases were made as part of the share repurchase program announced on May 25, 2011. |
(2) | Includes related transaction fees. |
(3) | On May 24, 2011, our Board of Directors authorized the repurchase of up to $30 million of our common stock. The timing and amount of the purchases are based on market conditions, our cash and liquidity requirements, relevant securities laws and other factors. 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 withdraws its authorization. |
(4) | During the year ended December 31, 2012 we repurchased 118,800 shares of common stock under the share repurchase program at an average price of $43.34 per share for a total cost of $5.2 million. |
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ITEM 6. SELECTED FINANCIAL DATA
Core-Mark Holding Company, Inc., or Core-Mark, is the ultimate parent holding company for Core-Mark International, Inc. and our wholly-owned subsidiaries.
Basis of Presentation
The selected consolidated financial data for the five years from 2008 to 2012 are derived from Core-Mark's audited consolidated financial statements included in our Annual Reports on Form 10-K. 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
Core-Mark Holding Company, Inc. | ||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
(in millions except per share amounts) | 2012(a) | 2011(b) | 2010(c) | 2009(d) | 2008(e) | |||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Net sales | $ | 8,892.4 | $ | 8,114.9 | $ | 7,266.8 | $ | 6,531.6 | $ | 6,044.9 | ||||||||||
Gross profit (f) | 476.8 | 434.1 | 385.3 | 401.6 | 359.1 | |||||||||||||||
Warehousing and distribution expenses (f) | 262.7 | 234.6 | 211.8 | 197.3 | 197.6 | |||||||||||||||
Selling, general and administrative expenses | 153.7 | 150.8 | 142.5 | 137.3 | 129.4 | |||||||||||||||
Amortization of intangible assets | 3.0 | 3.0 | 2.1 | 2.0 | 2.0 | |||||||||||||||
Income from operations | 57.4 | 45.7 | 28.9 | 65.0 | 30.1 | |||||||||||||||
Interest expense, net (g) | 1.8 | 2.0 | 2.2 | 1.4 | 1.2 | |||||||||||||||
Net income | 33.9 | 26.2 | 17.7 | 47.3 | 17.9 | |||||||||||||||
Per share data: | ||||||||||||||||||||
Basic net income per common share | $ | 2.96 | $ | 2.30 | $ | 1.64 | $ | 4.53 | $ | 1.71 | ||||||||||
Diluted net income per common share | $ | 2.91 | $ | 2.23 | $ | 1.55 | $ | 4.35 | $ | 1.64 | ||||||||||
Shares used to compute net income per share: | ||||||||||||||||||||
Basic | 11.5 | 11.4 | 10.8 | 10.5 | 10.5 | |||||||||||||||
Diluted | 11.6 | 11.7 | 11.4 | 10.9 | 10.9 | |||||||||||||||
Other Financial Data: | ||||||||||||||||||||
Excise taxes (h) | $ | 1,987.0 | $ | 1,951.5 | $ | 1,756.5 | $ | 1,516.0 | $ | 1,474.4 | ||||||||||
Cigarette inventory holding gains/FET (i) | 7.8 | 8.2 | 6.1 | 25.2 | 3.1 | |||||||||||||||
OTP tax items (j) | — | 0.8 | 0.6 | 0.6 | 1.4 | |||||||||||||||
LIFO expense | 12.3 | 18.3 | 16.6 | 6.7 | 11.0 | |||||||||||||||
Depreciation and amortization (k) | 25.3 | 22.4 | 19.7 | 18.7 | 17.4 | |||||||||||||||
Stock-based compensation | 5.8 | 5.5 | 4.8 | 5.1 | 3.9 | |||||||||||||||
Capital expenditures | 28.6 | 24.1 | 13.9 | 21.1 | 19.9 | |||||||||||||||
Adjusted EBITDA (l) | 100.8 | 91.9 | 70.0 | 95.5 | 62.4 | |||||||||||||||
December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Total assets | $ | 919.2 | $ | 870.2 | $ | 708.8 | $ | 677.9 | $ | 612.6 | ||||||||||
Total debt, including current maturities | 85.6 | 63.3 | 1.0 | 20.0 | 30.8 | |||||||||||||||
______________________________________________
(a) | The selected consolidated financial data for 2012 includes the results of operations of J.T. Davenport & Sons, Inc., which was acquired on December 17, 2012. |
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(b) | The selected consolidated financial data for 2011 includes the results of operations of FCGC, which was acquired in May 2011, and the Tampa, Florida division, which commenced operations in September 2011. |
(c) | The selected consolidated financial data for 2010 includes approximately $105.9 million of incremental sales related to increased cigarette prices by manufacturers in response to the increase in federal excise taxes mandated by the State Children's Health Insurance Program (“SCHIP”) legislation. The 2010 data also includes the results of operations of Finkle Distributors, Inc., which was acquired in August 2010. |
(d) | The selected consolidated financial data for 2009 includes approximately $534.0 million of incremental sales related to increased cigarette prices by manufacturers in response to the increase in federal excise taxes mandated by the SCHIP legislation and $36.7 million of related cigarette inventory holding gains, offset by $11.5 million of net floor stock tax. |
(e) | The selected consolidated financial data for 2008 includes the results of operations of the Toronto division, which commenced operations in late January 2008, and also the New England division following its acquisition in June 2008. |
(f) | 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. |
(g) | Interest expense, net, is reported net of interest income. |
(h) | State, local and provincial excise taxes (predominantly cigarettes and tobacco) paid by the Company are included in net sales and cost of goods sold. |
(i) | Cigarette inventory holding gains represent income related to cigarette and excise tax stamp inventories on hand at the time either cigarette manufacturers increase their prices or states increase their excise taxes, for which the Company is able to pass such increases on to its customers. This income is recorded as an offset to cost of goods sold and recognized as the inventory is sold. Although we have realized cigarette inventory holding gains in each of the last five years, this income is not predictable and is dependent on inventory levels and the timing of manufacturer price increases or state excise tax increases. In 2009, we realized significant cigarette inventory holding gains due to the price increases in response to the federal excise taxes (“FET”) levied on manufacturers by the SCHIP legislation. |
(j) | We received an Other Tobacco Products (“OTP”) tax settlement of $0.8 million in 2011. We recognized a $0.6 million OTP tax gain resulting from a state tax method change in 2010 and received OTP tax refunds of $0.6 million in 2009 and $1.4 million in 2008. |
(k) | Depreciation and amortization includes depreciation on property and equipment and amortization of purchased intangibles. |
(l) | Adjusted EBITDA is a non-GAAP measure and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Adjusted EBITDA is equal to net income adding back interest expense, net, provision for income taxes, depreciation and amortization, LIFO expense, stock-based compensation expense and foreign currency transaction losses (gains), net. |
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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.
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 over 29,000 customer locations in the U.S. and Canada. Our customers include traditional convenience stores, grocery stores, drug stores, liquor stores and other specialty and small format stores that carry convenience products. Our product offering includes cigarettes, other tobacco products, candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health and beauty care products. We operate a network of 28 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third party logistics provider).
Our objective is to help our customers increase their sales and profitability, which will increase our overall return to shareholders by growing our market share, revenues and profitability. To that end, we remained focused during 2012 on enhancing our “Fresh” product offering, driving our Vendor Consolidation Initiative (“VCI”), providing category management consultations and expanding our market presence.
Overview of 2012 Results
In 2012 we continued to benefit from our marketing initiatives as well as market share gains primarily in the Southeastern U.S. (“Southeastern Expansion”), most recently with the acquisition of J.T. Davenport & Sons, Inc (“Davenport”) in December 2012, and in 2011 through our expanded agreement (“the Customer Agreement”) with Alimentation Couche-Tard, Inc. (“Couche-Tard”) which led to the establishment of an operating division in Tampa, Florida. In addition we benefited from the addition of the Forrest City Grocery Company (“FCGC”) which we acquired in May 2011. We believe our success in driving market share growth will continue in 2013.
Net sales for 2012 increased 9.6%, or $777.5 million, to $8,892.4 million compared to $8,114.9 million for 2011. The primary drivers of the increase were sales attributable to the aforementioned market share expansion, an additional 6.4% increase in food/non-food sales and inflation in cigarette prices offset by a 2.1% decline in comparable cigarette carton sales which was below the U.S. national consumption decline of 3.0%.
We believe food/non-food sales and gross profit were negatively impacted by the lack of price inflation in underlying manufacturer costs during 2012 compared to prior year and historical levels. We believe food/non-food manufacturers will need to raise prices at some point in the future. In addition to the level of inflation, our operating results may be impacted by significant changes in other macroeconomic conditions including consumer confidence, spending, cigarette consumption, unemployment and fuel prices.
Gross profit increased $42.7 million, or 9.8% to $476.8 million for 2012. Remaining gross profit(1) increased $43.8 million, or 10.0%, to $481.3 million for 2012 from $437.5 million for 2011. The increase in remaining gross profit was driven by a $32.2 million, or 10.8%, increase in food/non-food remaining gross profit and a 2.3% per carton increase in cigarette remaining gross profit. Remaining gross profit margin for 2012 increased slightly to 5.41% from 5.39% for 2011. The increase in remaining gross profit margin was driven by our marketing strategies focused primarily on our food/non-food products offset by lower profit margins under the Customer Agreement, lower income from manufacturer price increases as well as margin compression resulting from price increases by cigarette manufacturers in 2012.
Our gross profit can be positively or negatively impacted on a comparable basis depending on the relative level of price inflation or deflation period over period. Our cigarette categories are priced on cents-per-carton, whereas our food/non-food categories are generally priced as a percentage mark-up on our cost. When cigarette product or tobacco tax increases, the gross
________________________________________
(1) | Remaining gross profit and remaining gross profit margin are non-GAAP financial measures which we provide to segregate the effects of cigarette inventory holding gains, LIFO expense and other items that significantly affect the comparability of gross profit and related margins (see the calculation of remaining gross profit and remaining gross profit margin in “Comparison of Sales and Gross Profit by Product Category” below). |
23
profit expansion is disproportionate to the selling price point and thus our overall gross margins are compressed due to the large weighting of our cigarette volume. In addition, we tend to realize lower gross margins from large chain business; however, in both cases we earn an overall favorable return as chain customers and our cigarette categories generally require a lower level of investment in working capital.
Net income for 2012 increased $7.7 million, or 29.4% to $33.9 million, compared to $26.2 million for 2011. The increase in net income resulted from a 9.8% increase in gross profit driven primarily by higher sales and margins in food/non-food, offset partially by an increase in operating expenses of 8.0%. Operating expenses as a percentage of net sales improved to 4.7% in 2012 compared to 4.8% in 2011. Inflation from cigarette price increases in 2012 compressed operating expenses as a percent of sales by five basis points.
Adjusted EBITDA(2) increased 9.7% to $100.8 million in 2012, including $1.3 million of Davenport acquisition costs, from $91.9 million in 2011. Adjusted EBITDA for 2011 included $4.5 million of acquisition and start-up costs for FCGC and our Florida distribution center. The increase in Adjusted EBITDA in 2012 was driven primarily by the Southeastern Expansion and an increase in gross profit in our food/non-food commodities offset by a reduction in inventory holding profits of $9.9 million compared with 2011.
Business and Supply Expansion
We continued to benefit from the expansion of our business in the Southeastern U.S. during 2012. In addition, we continue to execute our core strategies of enhancing our fresh product offering, leveraging our vendor consolidation initiative (“VCI”), and providing category management expertise to our customers. Our strategies are designed to take cost and inefficiencies out of our customers' supply chains, to provide them a means of offering fresh and attractive foods that consumers are demanding and partner with the independent retailer to optimize how they manage what they bring to their customers. We believe each of these strategies, when adopted, will provide an opportunity for the retailer to increase its profits.
Some of our more recent expansion activities include:
• | On December 17, 2012, we acquired J.T. Davenport & Sons, Inc. (“Davenport”), a large convenience wholesaler, located in North Carolina, which services approximately 1,800 customers in the eight states of North Carolina, South Carolina, Georgia, Maryland, Ohio, Kentucky, West Virginia and Virginia. This acquisition increased Core-Mark's market presence in the Southeastern United States and further supported our ability to cost effectively service national and regional retailers (see Note 3 -- Acquisitions to our consolidated financial statements). |
• | Our sales of “Fresh” products increased 32% in 2012 compared to 2011. In part, we accomplished this by increasing the number of stores participating in our proprietary “Fresh and Local™” program to over 8,800 participating stores as of December 31, 2012. In 2012, we added breadth to the program by offering new fresh item solutions and we realized positive margin growth in 2012 for “Fresh” by improving product assortment, in-store marketing efforts and spoils management. |
• | On September 7, 2011, we signed the Customer Agreement with Couche-Tard to service their Couche-Tard corporate stores, under the Circle K brand, within Couche-Tard's Southeast, Gulf Coast and Florida markets. As of December 31, 2012, we serviced approximately 990 Circle K stores in these markets. We began supplying the additional Circle K stores in September 2011 through a new distribution center in Tampa, Florida and certain of our existing facilities. Effective October 31, 2011, Core-Mark became an authorized wholesaler for the Couche-Tard chain of Circle K franchised stores located throughout the eastern U.S. which allows us the opportunity to carry all Circle K franchise proprietary products. On December 15, 2011, we finalized the renewal of our existing distribution agreements with Couche-Tard for stores located in western Canada and the western U.S. Sales to Couche-Tard accounted for approximately 13.7% of our total net sales for 2012. |
• | On May 2, 2011, we acquired FCGC, located in Forrest City, Arkansas. FCGC was a regional wholesale distributor servicing customers in Arkansas, Mississippi, Tennessee and the surrounding states. This acquisition has allowed us to increase our infrastructure and market share in the Southeastern U.S. FCGC's customers are located primarily in states where cigarette pricing is regulated. Sales in these states, known as “fair trade” states, will likely result in higher cigarette gross profits, in terms of cents per carton, and lower food/non-food gross profit margins. (see Note 3 -- Acquisitions to our consolidated financial statements). |
____________________________________________
(2) | Adjusted EBITDA is a non-GAAP financial measure 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 calculation of Adjusted EBITDA in “Liquidity and Capital Resources” below). |
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Other Business Developments
Dividends
On October 19, 2011, we announced the commencement of a quarterly dividend program. On the same day, the Board of Directors declared a quarterly cash dividend of $0.17 per common share, which resulted in a total payment of approximately $1.9 million during 2011. In 2012, the Board of Directors declared a quarterly cash dividend of $0.17 per common share on February 3, 2012, May 3, 2012 and August 3, 2012, and a cash dividend of $0.19 per common share on November 1, 2012. On December 6, 2012, in lieu of our first quarter of 2013 dividend, the Board of Directors declared an accelerated cash dividend of $0.19 per common share that was paid on December 31, 2012. We paid total dividends of $10.3 million during 2012.
Share Repurchase Program
The share repurchase program was approved by our Board to enable the company to buy shares when we believe our stock price is undervalued. Repurchases under the program also have the positive effect of offsetting the dilution associated with new share issuances due to vesting of restricted stock and the exercise of stock options. During the year ended December 31, 2012 and 2011, we repurchased 118,800 and 542,415 shares of common stock, respectively, under the share repurchase program at an average price of $43.34 and $35.03 per share for a total cost of $5.2 million and $19.0 million. No shares of common stock were repurchased under our share repurchase program for the year ended December 31, 2010. As of December 31, 2012 there was $5.8 million available for future share repurchases under our share repurchase program.
Results of Operations
Comparison of 2012 and 2011 (in millions) (1):
2012 | 2011 | |||||||||||||||||||||||
Increase (Decrease) | Amounts | % of Net sales | % of Net sales, less excise taxes | Amounts | % of Net sales | % of Net sales, less excise taxes | ||||||||||||||||||
Net sales | $ | 777.5 | $ | 8,892.4 | 100.0 | % | — | % | $ | 8,114.9 | 100.0 | % | — | % | ||||||||||
Net sales — Cigarettes | 428.8 | 6,139.4 | 69.0 | 63.1 | 5,710.6 | 70.4 | 64.1 | |||||||||||||||||
Net sales — Food/non-food | 348.7 | 2,753.0 | 31.0 | 36.9 | 2,404.3 | 29.6 | 35.9 | |||||||||||||||||
Net sales, less excise taxes (2) | 742.0 | 6,905.4 | 77.7 | 100.0 | 6,163.4 | 76.0 | 100.0 | |||||||||||||||||
Gross profit (3) | 42.7 | 476.8 | 5.4 | 6.9 | 434.1 | 5.3 | 7.0 | |||||||||||||||||
Warehousing and | ||||||||||||||||||||||||
distribution expenses | 28.1 | 262.7 | 3.0 | 3.8 | 234.6 | 2.9 | 3.8 | |||||||||||||||||
Selling, general and | ||||||||||||||||||||||||
administrative expenses | 2.9 | 153.7 | 1.7 | 2.2 | 150.8 | 1.9 | 2.4 | |||||||||||||||||
Amortization of | ||||||||||||||||||||||||
intangible assets | — | 3.0 | — | — | 3.0 | — | — | |||||||||||||||||
Income from operations | 11.7 | 57.4 | 0.6 | 0.8 | 45.7 | 0.6 | 0.7 | |||||||||||||||||
Interest expense | (0.2 | ) | (2.2 | ) | — | — | (2.4 | ) | — | — | ||||||||||||||
Interest income | — | 0.4 | — | — | 0.4 | — | — | |||||||||||||||||
Foreign currency transaction | ||||||||||||||||||||||||
losses, net | (0.3 | ) | (0.2 | ) | — | — | (0.5 | ) | — | — | ||||||||||||||
Income before taxes | 12.2 | 55.4 | 0.6 | 0.8 | 43.2 | 0.5 | 0.7 | |||||||||||||||||
Net income | 7.7 | 33.9 | 0.4 | 0.5 | 26.2 | 0.3 | 0.4 | |||||||||||||||||
Adjusted EBITDA (4) | 8.9 | 100.8 | 1.1 | 1.5 | 91.9 | 1.1 | 1.5 | |||||||||||||||||
______________________________________________
(1) | Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. |
25
(2) | 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 taxes 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 Comparison of Sales and Gross Profit by Product Category, page 33). |
(3) | Gross profit may not be comparable to those of other entities because warehousing and distribution expenses are not included as a component of our cost of goods sold. |
(4) | Adjusted EBITDA is a non-GAAP financial measure and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP (see calculation of Adjusted EBITDA in “Liquidity and Capital Resources” below). |
Net Sales. Net sales for 2012 increased by $777.5 million, or 9.6%, to $8,892.4 million from $8,114.9 million in 2011. The increase was due primarily to our Southeastern Expansion, sales attributable to FCGC, cigarette price inflation and an additional 6.4% increase in food/non-food sales driven primarily by higher sales to new and existing customers.
Net Sales of Cigarettes. Net sales of cigarettes for 2012 increased by $428.8 million, or 7.5%, to $6,139.4 million from $5,710.6 million in 2011. This increase in net cigarette sales in 2012 was driven by sales attributable to our Southeastern Expansion and FCGC in 2012. In addition, there was a 2.4% increase in the average sales price per carton due primarily to cigarette manufacturer price increases. Total carton sales during 2012 increased 5.9%, consisting of an increase of 7.5% in the U.S., offset by a decrease of 7.5% in Canada. Excluding incremental carton sales attributable to the Southeastern Expansion and FCGC, carton sales declined by 1.4% in the U.S., which was less than the overall industry decline of approximately 3.0%. The decline in Canada related primarily to the loss of one customer, representing less than 0.3% of total cartons sold by the Company, and a focused reduction in service to certain customers which resulted in improved profitability for the Canadian region in 2012. While we have experienced only slight declines in carton sales on a comparative basis, we believe long-term cigarette consumption will be negatively 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 to continue as the convenience industry adjusts to consumer demands. Total net cigarette sales as a percentage of total net sales were 69.0% in 2012 compared to 70.4% in 2011.
Net Sales of Food/Non-food Products. Net sales of food/non-food products for 2012 increased $348.7 million, or 14.5%, to $2,753.0 million from $2,404.3 million in 2011. The following table provides net sales by product category for our food/non-food products (in millions) (1):
2012 | 2011 | Increase / (Decrease) | ||||||||||||
Product Category | Net Sales | Net Sales | Amounts | Percentage | ||||||||||
Food | $ | 1,178.6 | $ | 995.7 | $ | 182.9 | 18.4 | % | ||||||
Candy | 489.5 | 459.8 | 29.7 | 6.5 | ||||||||||
Other tobacco products | 687.8 | 607.9 | 79.9 | 13.1 | ||||||||||
Health, beauty & general | 269.2 | 237.5 | 31.7 | 13.3 | ||||||||||
Beverages | 125.6 | 100.9 | 24.7 | 24.5 | ||||||||||
Equipment/other | 2.3 | 2.5 | (0.2 | ) | (8.0 | ) | ||||||||
Total Food/Non-food Products | $ | 2,753.0 | $ | 2,404.3 | $ | 348.7 | 14.5 | % | ||||||
______________________________________________
(1) | Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. |
Sales associated with the Southeastern Expansion and FCGC represented approximately 59% of the increase in food/non-food sales for 2012. The remaining 41% increase in food/non-food sales was due primarily to higher sales in our food category driven by our sales and marketing initiatives with existing and new customers and higher sales of smokeless tobacco products included in our OTP and health, beauty & general product categories, which we believe was driven primarily by increased restrictions on where people are allowed to smoke in public. Total net sales of food/non-food products as a percentage of total net sales increased to 31.0% for 2012 compared to 29.6% in 2011.
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Gross Profit. Gross profit represents the amount of profit after deducting cost of goods sold from net sales during the period. Vendor incentives, inventory holding gains and changes in LIFO reserves are components of cost of goods sold and therefore part of our gross profit. Gross profit for 2012 increased by $42.7 million, or 9.8%, to $476.8 million from $434.1 million in 2011 due primarily to our Southeastern Expansion, FCGC and an increase in sales in our food/non-food category. Gross profit margin was 5.36% of total net sales for 2012 compared to 5.35% for 2011. Inflation from cigarette price increases in 2012 compressed our gross profit margin by approximately four basis points.
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2012 and 2011 (in millions)(1):
2012 | 2011 | ||||||||||||||||||||||
Increase (Decrease) | Amounts | % of Net sales | % of Net sales, less excise taxes | Amounts | % of Net sales | % of Net sales, less excise taxes | |||||||||||||||||
Net sales | $ | 777.5 | $ | 8,892.4 | 100.0 | % | — | % | $ | 8,114.9 | 100.0 | % | — | % | |||||||||
Net sales, less excise taxes (2) | 742.0 | 6,905.4 | 77.7 | 100.0 | 6,163.4 | 76.0 | 100.0 | ||||||||||||||||
Components of gross profit: | |||||||||||||||||||||||
Cigarette inventory holding gains(3) | $ | (0.4 | ) | $ | 7.8 | 0.09 | % | 0.11 | % | $ | 8.2 | 0.10 | % | 0.13 | % | ||||||||
Net candy holding gain (4) | (5.9 | ) | — | — | — | 5.9 | 0.07 | 0.10 | |||||||||||||||
OTP tax items (5) | (0.8 | ) | — | — | — | 0.8 | 0.01 | 0.01 | |||||||||||||||
LIFO expense | 6.0 | (12.3 | ) | (0.14 | ) | (0.18 | ) | (18.3 | ) | (0.22 | ) | (0.30 | ) | ||||||||||
Remaining gross profit (6) | 43.8 | 481.3 | 5.41 | 6.97 | 437.5 | 5.39 | 7.10 | ||||||||||||||||
Gross profit | $ | 42.7 | $ | 476.8 | 5.36 | % | 6.90 | % | $ | 434.1 | 5.35 | % | 7.04 | % | |||||||||
______________________________________________
(1) | Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. |
(2) | 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 Comparison of Sales and Gross Profit by Product Category, page 33). |
(3) The amount of cigarette inventory holding gains attributable to the U.S. and Canada were $7.0 million and $0.8 million, respectively, for 2012, compared to $7.4 million and $0.8 million, respectively, for 2011.
(4) | In 2011, we recognized a $5.9 million net candy holding gain resulting from U.S. manufacturer price increases. The net candy holding gain was estimated as the amount in excess of our normal manufacturer incentives for those products sold during the year. |
(5) | We received an OTP tax settlement of $0.8 million in 2011. |
(6) | Remaining gross profit is a non-GAAP financial measure which we provide to segregate the effects of LIFO expense, cigarette inventory holding gains and other items that significantly affect the comparability of gross profit. |
Remaining gross profit increased $43.8 million, or 10.0%, to $481.3 million for 2012 from $437.5 million in 2011. The increase in remaining gross profit was driven by a $32.2 million, or 10.8%, increase in food/non-food remaining gross profit and a 2.3% per carton increase in cigarette remaining gross profit. Remaining gross profit margin for 2012 increased slightly to 5.41% from 5.39% for 2011. The increase in remaining gross profit margin was driven by our marketing strategies focused primarily on our food/non-food commodities offset by lower profit margins under the Customer Agreement, lower income from manufacturer price increases, as well as margin compression resulting from price increases by cigarette manufacturers in 2012.
Cigarette remaining gross profit increased 8.3% in 2012 compared to 2011 due primarily to a 5.9% increase in cartons sold, driven by our Southeastern Expansion and sales by FCGC. On a per carton basis, cigarette remaining gross profit increased 2.3% in 2012 compared to 2011.
Food/non-food remaining gross profit increased $32.2 million, or 10.8%, for 2012 compared to 2011, despite a decrease of $3.6 million in inventory holding gains. The increase in food/non-food remaining gross profit was driven by our Southeastern Expansion, FCGC and growth in sales to existing customers. Remaining gross profit margin for our food/non-food category for 2012 was 11.99% compared to 12.39% for 2011. The new Customer Agreement and business acquired with other larger chain customers in 2012 compressed remaining gross profit for food/non-food by approximately 39 basis points. In addition, lower
27
income from manufacturer price increases for food/non-food in 2012 reduced remaining gross profit margin by 17 basis points compared to 2011. Our gross profit can be positively or negatively impacted on a comparable basis depending on the relative level of price inflation or deflation period over period and the timing of certain vendor incentives. In addition, to the extent that we continue to capture additional 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 have lower gross profit margins and independently owned convenience stores, which generally have higher gross profit margins and comprise over 65% of the overall convenience store market in the U.S.
In 2012, our remaining gross profit for food/non-food products was approximately 68.6% of our total remaining gross profit compared to 68.1% in 2011.
Operating Expenses. Our operating expenses include costs related to Warehousing and Distribution, and Selling, General and Administrative activities. In 2012, operating expenses increased $31.0 million, or 8.0%, to $419.4 million from $388.4 million in 2011. The increase in operating expenses was due primarily to the new Florida distribution center, additional costs to support the increased sales volume and the acquisition of FCGC in May 2011. Additional items impacting operating expenses for the year ended December 31, 2012 are discussed below. As a percentage of net sales, total operating expenses declined to 4.7% for 2012 compared to 4.8% for 2011.
Warehousing and Distribution Expenses. Warehousing and distribution expenses in 2012 increased $28.1 million, or 12.0%, to $262.7 million from $234.6 million in 2011. The increase in warehousing and distribution expenses was due primarily to the new Florida distribution center, additional costs to support the increased sales volume, the addition of FCGC and a $2.5 million increase in healthcare claims and workers compensation costs. In addition, warehousing and distribution expenses for 2012 were impacted by temporary operational inefficiencies at certain divisions resulting primarily in higher labor costs, and a $1.0 million increase in net fuel costs, due largely to an increase in miles driven. Although the price we pay for fuel increased only modestly in 2012, future increases or decreases in fuel costs, or in the fuel surcharges we pass on to our customers, may materially impact our financial results depending on the extent and timing of these changes. As a percentage of net sales, warehousing and distribution expenses were 3.0% for 2012 compared to 2.9% for 2011.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses in 2012 increased $2.9 million, or 1.9%, to $153.7 million from $150.8 million in 2011. The increase in SG&A expenses was due primarily to the addition of the Florida distribution center, the acquisition of FCGC and $1.3 million of Davenport acquisition costs, partially offset by a $1.8 million reduction in expenses resulting from the favorable resolution of legacy workers' compensation and insurance claims. SG&A expenses for 2011 included $2.7 million of acquisition and start-up costs related to FCGC and $1.8 million of costs related to the start-up of the Florida distribution center and other infrastructure costs to support the Customer Agreement. As a percentage of net sales, SG&A expenses declined to 1.7% for 2012 compared to 1.9% for 2011.
Interest Expense. Interest expense includes both interest and loan amortization fees related to borrowings and facility fees. Interest expense was $2.2 million for 2012 compared to $2.4 million for 2011. The decrease was due primarily to lower fees for unused facility and letter of credit participation, partially offset by an increase in average borrowings during 2012. Average borrowings for 2012 were $26.3 million with an average interest rate of 2.1%, compared to average borrowings of $21.1 million and an average interest rate of 2.2% for 2011.
Interest Income. Interest income was $0.4 million for both 2012 and 2011. Our interest income was derived primarily from earnings on cash balances kept in trust, checking accounts and overnight deposits.
Foreign Currency Transaction Losses, Net. We realized foreign currency transaction losses of $0.2 million for 2012 compared to $0.5 million in 2011. The change was due primarily to the level of investment in our Canadian operations and the fluctuation in the Canadian/U.S. exchange rate.
Income Taxes. Our effective tax rate was 38.8% for 2012 compared to 39.4% for 2011. The decrease in our effective tax rate for 2012 was due primarily to a higher proportion of earnings from states with lower tax rates and the impact of non-deductible acquisition related costs recognized in each period (see Note 10 - Income Taxes to our consolidated financial statements for a reconciliation of the differences between the federal statutory tax rate and the effective tax rate).
In both 2012 and 2011, the provision for income taxes included a net benefit of $0.5 million related primarily to the expiration of the statute of limitations for uncertain tax positions and adjustments of prior year's estimates.
28
Results of Operations
Comparison 2011 and 2010 (in millions) (1):
2011 | 2010 | |||||||||||||||||||||||
Increase (Decrease) | Amounts | % of Net sales | % of Net sales, less excise taxes | Amounts | % of Net sales | % of Net sales, less excise taxes | ||||||||||||||||||
Net sales | $ | 848.1 | $ | 8,114.9 | 100.0 | % | — | % | $ | 7,266.8 | 100.0 | % | — | % | ||||||||||
Net sales — Cigarettes | 590.9 | 5,710.6 | 70.4 | 64.1 | 5,119.7 | 70.5 | 64.0 | |||||||||||||||||
Net sales — Food/non-food | 257.2 | 2,404.3 | 29.6 | 35.9 | 2,147.1 | 29.5 | 36.0 | |||||||||||||||||
Net sales, less excise taxes (2) | 653.1 | 6,163.4 | 76.0 | 100.0 | 5,510.3 | 75.8 | 100.0 | |||||||||||||||||
Gross profit (3) | 48.8 | 434.1 | 5.3 | 7.0 | 385.3 | 5.3 | 7.0 | |||||||||||||||||
Warehousing and | ||||||||||||||||||||||||
distribution expenses | 22.8 | 234.6 | 2.9 | 3.8 | 211.8 | 2.9 | 3.8 | |||||||||||||||||
Selling, general and | ||||||||||||||||||||||||
administrative expenses | 8.3 | 150.8 | 1.9 | 2.4 | 142.5 | 2.0 | 2.6 | |||||||||||||||||
Amortization of | ||||||||||||||||||||||||
intangible assets | 0.9 | 3.0 | — | — | 2.1 | — | — | |||||||||||||||||
Income from operations | 16.8 | 45.7 | 0.6 | 0.7 | 28.9 | 0.4 | 0.5 | |||||||||||||||||
Interest expense | (0.2 | ) | (2.4 | ) | — | — | (2.6 | ) | — | — | ||||||||||||||
Interest income | — | 0.4 | — | — | 0.4 | — | — | |||||||||||||||||
Foreign currency transaction | ||||||||||||||||||||||||
(losses) gains, net | (1.0 | ) | (0.5 | ) | — | — | 0.5 | — | — | |||||||||||||||
Income before taxes | 16.0 | 43.2 | 0.5 | 0.7 | 27.2 | 0.4 | 0.5 | |||||||||||||||||
Net income | 8.5 | 26.2 | 0.3 | 0.4 | 17.7 | 0.2 | 0.3 | |||||||||||||||||
Adjusted EBITDA (4) | 21.9 | 91.9 | 1.1 | 1.5 | 70.0 | 1.0 | 1.3 | |||||||||||||||||
______________________________________________
(1) | Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. |
(2) | 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 taxes 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 Comparison of Sales and Gross Profit by Product Category, page 33). |
(3) | Gross profit may not be comparable to those of other entities because warehousing and distribution expenses are not included as a component of our cost of goods sold. |
(4) | Adjusted EBITDA is a non-GAAP financial measure and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP (see calculation of adjusted EBITDA in “Liquidity and Capital Resources” below). |
Net Sales. Net sales for 2011 increased by $848.1 million, or 11.7%, to $8,114.9 million from $7,266.8 million in 2010. Excluding the effects of foreign currency fluctuations, net sales increased 11.0% in 2011 compared to 2010, driven primarily by sales attributable to the FCGC and Finkle Distributors, Inc. ("FDI") acquisitions, sales associated with the Customer Agreement and increases in food/non-food sales to existing customers.
Net Sales of Cigarettes. Net sales of cigarettes for 2011 increased by $590.9 million, or 11.5%, to $5,710.6 million from $5,119.7 million in 2010. Net cigarette sales for 2011 increased 10.9%, excluding the effects of foreign currency fluctuations. This increase in net cigarette sales was driven by sales attributable to the FCGC and FDI acquisitions and sales associated with the Customer Agreement. In addition, there was a 3.3% increase in the average sales price per carton due primarily to cigarette price inflation and increases in excise taxes. Total carton sales in 2011 increased 9.2% in the U.S. and increased 1.3% in Canada. Excluding incremental carton sales attributable to the FCGC and FDI acquisitions, carton sales associated with the Customer Agreement and one additional selling day in 2011, carton sales declined by 1.9% in the U.S. While we have experienced only slight declines in carton sales on a comparative basis, consistent with industry trends over the last several years, we believe long-
29
term cigarette consumption will be negatively 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. Total net cigarette sales as a percentage of total net sales were 70.4% in 2011 compared to 70.5% in 2010.
Net Sales of Food/Non-food Products. Net sales of food/non-food products for 2011 increased $257.2 million, or 12.0%, to $2,404.3 million from $2,147.1 million in 2010. Excluding the effects of foreign currency fluctuations, net sales of our food/non-food products increased 11.3% in 2011. The following table provides net sales by product category for our food/non-food products (in millions) (1):
2011 | 2010 | Increase / (Decrease) | ||||||||||||
Product Category | Net Sales | Net Sales | Amounts | Percentage | ||||||||||
Food | $ | 995.7 | $ | 840.9 | $ | 154.8 | 18.4 | % | ||||||
Candy | 459.8 | 426.0 | 33.8 | 7.9 | ||||||||||
Other tobacco products | 607.9 | 503.6 | 104.3 | 20.7 | ||||||||||
Health, beauty & general | 237.5 | 220.6 | 16.9 | 7.7 | ||||||||||
Beverages | 100.9 | 152.0 | (51.1 | ) | (33.6 | ) | ||||||||
Equipment/other | 2.5 | 4.0 | (1.5 | ) | (37.5 | ) | ||||||||
Total Food/Non-food Products | $ | 2,404.3 | $ | 2,147.1 | $ | 257.2 | 12.0 | % | ||||||
______________________________________________
(1) | Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. |
Net sales of food/non-food products increased 15.6% excluding sales of Gatorade, which was moved to a direct-store-delivery ("DSD") format during the first quarter of 2011. The increase in food/non-food sales was driven primarily by sales attributable to the FCGC and FDI acquisitions, the Customer Agreement and incremental sales driven by our sales and marketing initiatives primarily impacting our food category. In addition, sales in our Other Tobacco Products ("OTP") category were positively impacted by an increase in sales of smokeless tobacco products, which we believe is driven by increased regulation of where people can smoke and an increase in excise taxes. Total net sales of food/non-food products as a percentage of total net sales increased slightly to 29.6% for 2011 compared to 29.5% for 2010, despite the addition of FCGC which has a lower percentage of food/non-food net sales.
Gross Profit. Gross profit represents the amount of profit after deducting cost of goods sold from net sales during the period. Vendor incentives, inventory holding gains and changes in LIFO reserves are components of cost of goods sold and therefore part of our gross profit. Gross profit for 2011 increased by $48.8 million, or 12.7%, to $434.1 million from $385.3 million in 2010. The increase in gross profit for 2011 was driven primarily by a $42.3 million increase in remaining gross profit, incremental cigarette inventory holding gains of $2.1 million and a net candy holding gain of $5.9 million, both resulting from manufacturer price increases, which also contributed to a $1.7 million increase in LIFO expense. The increase in remaining gross profit was due primarily to the addition of FCGC, the Customer Agreement and sales increases in our food/non-food category.
30
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2011 and 2010 (in millions)(1):
2011 | 2010 | ||||||||||||||||||||||
Increase (Decrease) | Amounts | % of Net sales | % of Net sales, less excise taxes | Amounts | % of Net sales | % of Net sales, less excise | |||||||||||||||||
Net sales | $ | 848.1 | $ | 8,114.9 | 100.0 | % | — | % | $ | 7,266.8 | 100.0 | % | — | % | |||||||||
Net sales, less excise taxes (2) | 653.1 | 6,163.4 | 76.0 | 100.0 | 5,510.3 | 75.8 | 100.0 | ||||||||||||||||
Components of gross profit: | |||||||||||||||||||||||
Cigarette inventory holding gains(3) | $ | 2.1 | $ | 8.2 | 0.10 | % | 0.13 | % | $ | 6.1 | 0.08 | % | 0.11 | % | |||||||||
Net candy holding gain (4) | 5.9 | 5.9 | 0.07 | 0.10 | — | — | — | ||||||||||||||||
OTP tax items (5) | 0.2 | 0.8 | 0.01 | 0.01 | 0.6 | 0.01 | 0.01 | ||||||||||||||||
LIFO expense | (1.7 | ) | (18.3 | ) | (0.22 | ) | (0.30 | ) | (16.6 | ) | (0.23 | ) | (0.30 | ) | |||||||||
Remaining gross profit (6) | 42.3 | 437.5 | 5.39 | 7.10 | 395.2 | 5.44 | 7.17 | ||||||||||||||||
Gross profit | $ | 48.8 | $ | 434.1 | 5.35 | % | 7.04 | % | $ | 385.3 | 5.30 | % | 6.99 | % | |||||||||
______________________________________________
(1) | Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. |
(2) | 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 Comparison of Sales and Gross Profit by Product Category, page 33). |
(3) | The amount of cigarette inventory holding gains attributable to the U.S. and Canada were $7.4 million and $0.8 million, respectively, for 2011, compared to $5.6 million and $0.5 million, respectively, for 2010. |
(4) | We recognized a $5.9 million net candy holding gain resulting from U.S. manufacturer price increases during 2011. The net candy holding gain was estimated as the amount in excess of our normal manufacturer incentives for those products sold during 2011. |
(5) | We received an OTP tax settlement of $0.8 million in 2011 and recognized a $0.6 million OTP tax gain resulting from a state tax method change in 2010. |
(6) | Remaining gross profit is a non-GAAP financial measure which we provide to segregate the effects of LIFO expense, cigarette inventory holding gains and other items that significantly affect the comparability of gross profit. |
Remaining gross profit increased $42.3 million, or 10.7%, to $437.5 million for 2011 from $395.2 million in 2010. Remaining gross profit margin was 5.39% of total net sales for 2011 compared with 5.44% in 2010. The addition of FCGC and the new Couche-Tard business reduced remaining gross profit margin by five basis points in 2011. Inflation in cigarette prices compressed our remaining gross profit margin by approximately eight basis points in 2011.
Cigarette remaining gross profit increased 12.0%, or 3.4% on a per carton basis, in 2011 compared to 2010 due primarily to higher remaining gross profit per carton from FCGC, which operates primarily in fair trade states. As we expand our presence into fair trade states cigarette margins will be positively impacted and food/non-food margins will generally be negatively impacted.
Food/non-food remaining gross profit increased $27.3 million, or 10.1%, for 2011 compared to 2010. The increase was driven by the addition of FCGC, the new Couche-Tard business and by our sales and marketing initiatives. Remaining gross profit margin for our food/non-food category decreased approximately 21 basis points in 2011 to 12.39% compared to 12.60% in 2010. Excluding FCGC and the Customer Agreement, which have lower food/non-food margins than the rest of our business, food/non-food remaining gross profit margins increased approximately 22 basis points.
In 2011, our remaining gross profit for food/non-food products was 68.1% of our total remaining gross profit compared to 68.5% in 2010. The decrease in 2011 was due primarily to the addition of FCGC, which derives a higher percentage of its remaining gross profit from cigarettes.We expect FCGC's food/non-food remaining gross profit margin to increase over time as we introduce and implement our marketing programs, including VCI and Fresh, to its customers.
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Operating Expenses. Our operating expenses include costs related to Warehousing and Distribution, and Selling, General and Administrative activities. In 2011, operating expenses increased $32.0 million, or 9.0%, to $388.4 million from $356.4 million in 2010. The majority of the increase in operating expenses was attributable to the addition of FCGC, FDI, the new Florida distribution center and other infrastructure costs to support the Customer Agreement. Additional items impacting operating expenses for the year ended December 31, 2011 are discussed below. As a percentage of net sales, total operating expenses declined to 4.8% in 2011 compared to 4.9% in 2010.
Warehousing and Distribution Expenses. Warehousing and distribution expenses increased $22.8 million, or 10.8%, to $234.6 million in 2011 from $211.8 million in 2010. The increase in warehousing and distribution expenses compared with 2010 was due primarily to the addition of FCGC, FDI, the new Florida distribution center and a $2.7 million increase in net fuel costs excluding FCGC and Florida. As a percentage of net sales, warehousing and distribution expenses were 2.9% for both years, including the impact of higher fuel costs. While the impact of fuel costs lessened in the second half of 2011 as prices stabilized, future increases or decreases in fuel costs or in the fuel surcharges we pass on to 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 $8.3 million, or 5.8%, in 2011 to $150.8 million from $142.5 million in 2010. The increase in SG&A expenses in 2011 was due primarily to the addition of FCGC including $2.7 million of transition costs, the addition of the Florida distribution center including $1.8 million of start-up costs, other infrastructure costs to support the Customer Agreement and an increase of $2.7 million for employee bonus and stock-based compensation expense, partially offset by a $1.2 million decrease in health and welfare costs. SG&A expenses for 2010 included $2.8 million of FDI integration costs, $1.6 million of costs related to the settlement of insurance claims we inherited from Fleming, our former parent company, and $1.1 million of expenses for advisory and due diligence activities necessary to analyze multiple offers from potential acquirers. As a percentage of net sales, SG&A expenses were 1.9% for 2011 compared with 2.0% for 2010.
Interest Expense. Interest expense includes both interest and loan amortization fees related to borrowings and facility fees. Interest expense was $2.4 million for 2011 compared to $2.6 million for 2010. Lower fees for unused facility and letter of credit participation were offset in part by higher interest expense due to higher borrowings during 2011. Average borrowings for 2011 were $21.1 million with an average interest rate of 2.2%, compared to average borrowings of $3.1 million and an average interest rate of 2.9% for the same period in 2010.
Interest Income. Interest income was $0.4 million for both 2011 and 2010. Our interest income was derived primarily from earnings on cash balances kept in trust, checking accounts and overnight deposits.
Foreign Currency Transaction (Losses) Gains, Net. We realized foreign currency transaction losses of $0.5 million for 2011 compared to gains of $0.5 million in 2010. The fluctuation was due primarily to the level of investment in our Canadian operations and to changes in the Canadian/U.S. exchange rate.
Income Taxes. Our effective tax rate was 39.4% for 2011 compared to 34.9% for 2010. The increase in our effective tax rate for 2011 was due primarily to a higher proportion of earnings from our Canadian operations in 2011, the impact of uncertain tax positions recognized in each period and non-deductible transaction costs related to our recent acquisition of FCGC (see Note 10 - Income Taxes to our consolidated financial statements for a reconciliation of the differences between the federal statutory tax rate and the effective tax rate.)
In 2011, the provision for income taxes included a $0.5 million net benefit, including $0.1 million of interest recovery, compared to a net benefit of $0.5 million, including $0.1 million of interest recovery, for 2010 related to the expiration of the statute of limitations for uncertain tax positions.
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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 2012, 2011 and 2010 (in millions)(1):
2012 | 2011 | 2010 | |||||||||
Cigarettes | |||||||||||
Net sales | $ | 6,139.4 | $ | 5,710.6 | $ | 5,119.7 | |||||
Excise taxes in sales (2) | 1,782.4 | 1,762.1 | 1,594.2 | ||||||||
Net sales, less excise taxes (3) | 4,357.0 | 3,948.5 | 3,525.5 | ||||||||
LIFO expense | 8.0 | 10.4 | 11.3 | ||||||||
Gross profit (4) | 151.0 | 137.4 | 119.4 | ||||||||
Gross profit % | 2.46 | % | 2.41 | % | 2.33 | % | |||||
Gross profit % less excise taxes | 3.47 | % | 3.48 | % | 3.39 | % | |||||
Remaining gross profit (6) | $ | 151.2 | $ | 139.6 | $ | 124.6 | |||||
Remaining gross profit % | 2.46 | % | 2.44 | % | 2.43 | % | |||||
Remaining gross profit % less excise taxes | 3.47 | % | 3.54 | % | 3.53 | % | |||||
Food/Non-food Products | |||||||||||
Net sales | $ | 2,753.0 | $ | 2,404.3 | $ | 2,147.1 | |||||
Excise taxes in sales (2) | 204.6 | 189.4 | 162.3 | ||||||||
Net sales, less excise taxes (3) | 2,548.4 | 2,214.9 | 1,984.8 | ||||||||
LIFO expense | 4.3 | 7.9 | 5.3 | ||||||||
Gross profit (5) | 325.8 | 296.7 | 265.9 | ||||||||
Gross profit % | 11.83 | % | 12.34 | % | 12.38 | % | |||||
Gross profit % less excise taxes | 12.78 | % | 13.40 | % | 13.40 | % | |||||
Remaining gross profit (6) | $ | 330.1 | $ | 297.9 | $ | 270.6 | |||||
Remaining gross profit % | 11.99 | % | 12.39 | % | 12.60 | % | |||||
Remaining gross profit % less excise taxes | 12.95 | % | 13.45 | % | 13.63 | % | |||||
Totals | |||||||||||
Net sales | $ | 8,892.4 | $ | 8,114.9 | $ | 7,266.8 | |||||
Excise taxes in sales (2) | 1,987.0 | 1,951.5 | 1,756.5 | ||||||||
Net sales, less excise taxes (3) | 6,905.4 | 6,163.4 | 5,510.3 | ||||||||
LIFO expense | 12.3 | 18.3 | 16.6 | ||||||||
Gross profit (4) (5) | 476.8 | 434.1 | 385.3 | ||||||||
Gross profit % | 5.36 | % | 5.35 | % | 5.30 | % | |||||
Gross profit % less excise taxes | 6.90 | % | 7.04 | % | 6.99 | % | |||||
Remaining gross profit (6) | $ | 481.3 | $ | 437.5 | $ | 395.2 | |||||
Remaining gross profit % | 5.41 | % | 5.39 | % | |||||||