UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
xAnnual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
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| x | Annual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended December 31, 20102012
oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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| 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)
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| Delaware | 20-1489747 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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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:
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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 ox 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. |
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Large accelerated filer o | Accelerated filer x |
Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company) |
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 30, 201029, 2012, the last business day of the registrant's most recently completed second fiscal quarter: $289,526,950.$537,841,165
As of February 28, 20112013, the Registrantregistrant had 11,282,05611,500,301 shares of its common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
See PartsThe information called for by Part III and IV. Registrant's Proxy Statement for the 2011 Annual Meeting of Stockholders isthis Form 10-K will be included in an amendment to this Form 10-K or incorporated by reference to Part III in this Form 10-K.the registrant's 2013 definitive proxy statement to be filed pursuant to Regulation 14A.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2012
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information, the statements madeStatements 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 Private Securities Litigation ReformExchange Act of 1995. Forward-looking statements are based on certain assumptions or estimates, discuss future expectations, describe future plans1934 and strategies, contain projectionsthe Securities Act of results of operations or of financial conditions or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.1933.
Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, actual results and performance could differ materially from those set forth in the forward-looking statements. 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. These forward-lookingForward-looking statements are made only as of the date of this Form 10-K and are based on theour current intent, beliefs, plans and expectations of our management and are subject to certainexpectations. They involve risks and uncertainties that could cause actual results to differ materially from historical results or those discusseddescribed in or implied by such forward-looking statements.
FactorsA detailed discussion of risks and uncertainties that mightcould cause or contributeactual results and events to differ materially from such differences include, but are not limited to, our dependence on the convenience retail industry for our revenues; uncertain economic conditions; competition; price increases; our dependence on relatively few suppliers; the low-margin nature of cigarette and consumable goods distribution; certain distribution centers' dependence on a few relatively large customers; competitionforward-looking statements is included in the labor market; product liability claims and manufacturer recalls of products; fuel price increases; our dependence on our senior management; our ability to successfully integrate acquired businesses; currency exchange rate fluctuations; our ability to borrow additional capital; governmental regulations and changes thereto, including the Family Smoking Prevention and Tobacco Control Act which was signed into law in June 2009 and granted the U.S. Food & Drug Administration the authority to regulate the production and marketing of tobacco products in the U.S.; earthquake and natural disaster damage; failure or disruptions to our information systems; a greater decline than anticipated in cigarette sales volume; our ability to implement marketing strategies; our reliance on manufacturer discount and incentive programs; tobacco and other product liability claims; and competition from sales of deep-discount cigarette brands and illicit and other low priced sales of cigarettes. Refer to Part I, Item 1A, “Risk Factors” of this Form 10-K. Except as providedrequired by law, we undertake no obligation to publicly 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.
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 participate intake advantage of manufacturer and Company-sponsored sales and marketing programs, merchandising and product category management services as well asand the use of information systems and data services that are focused on minimizing retailers' investment in inventory, while seeking to maximize their sales.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 efficient processingfrequency of small orders.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 2009,2011, based on the NACS Association for Convenience and PetroleumFuel Retailing 20102012 State of the Industry (“SOI”) Report, total in-store sales at convenience retail locations in the U.S. increased 4.9%2.4% to approximately $182.4$195.0 billion and were generated through an estimated 145,000approximately 148,000 stores. According to a more recent report from NACS, the number of convenience stores acrossin the U.S. We estimate thatgrew 0.7% in 2012 to approximately 50% of the products that these stores sell are supplied by wholesale distributors such as Core-Mark.149,000 stores. The U.S. convenience retail industry gross profit for in-store sales wasincreased 5.3% to approximately $58.6$63.3 billion in 2009 and $55.62011 from $60.1 billion in 2008.2010. Over the ten years from 19992001 through 2009,2011, U.S. convenience in-store sales increased by a compounded annual growth rate of 6.2%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 approximatelyover 26,00029,000 customer locations in all 50 states ofin 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, non-alcoholic 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 products.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 druggrocery stores, grocerydrug stores, liquor stores, cigarette and tobacco shops, hotel gift shops, military exchanges, college bookstores, casinos, movie theaters, hardware stores, airport concessions and airport concessions.other specialty and small format stores that carry convenience products.
We operate a network of 24 distribution centers (excluding two distribution facilities we operate as a third party logistics provider) in the U.S. and Canada. We distribute approximately 43,000 Stock Keeping Units ("SKUs") of packaged consumable goods to our customers and also provide an array of information and data services that enable our customers to better manage retail product sales and marketing functions.
In 2010, our consolidatedOur net sales increased 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 EBITDA11.3%(1) increased from $70.0 million to $7,266.8$100.8 million, from $6,531.6 million in 2009. Cigarettes comprised approximately 70.5%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 netin-store sales in 2010, while approximately 69.0%within the convenience store channel and to take advantage of our gross profit was generated from food/non-food products.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. |
Competitive Strengths
We believe we have the following fundamental competitive strengths which areform the foundation offor 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 over 1520 years and applies theirits 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 the ability to participate ina wide array of manufacturer and Company-sponsored sales and marketing programs, merchandising and product category management services as well asand the use of information systems that are focused on minimizing retailers' investment in inventory, while seeking to maximize their sales.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.America and have continued to expand sales into other retail channels. In order to further enhance our value to the retailer,retailers, we plan to:
DriveLeverage our Vendor Consolidation Initiative (“VCI”). We expect our VCI program will allow us to grow by capitalizing on the highly fragmented nature of the distribution channelsupply 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 convenience retailersthe retailer the ability to receive one deliverymultiple weekly deliveries for the bulk of their products, including dairy and other perishable items, thus simplifyingmerchandise they would historically purchase from direct-store-delivery companies. This simplifies the supply chain and eliminatingprovides retailers with an opportunity to improve inventory turns and working capital, eliminate operational costs.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 state-of-the-art ordering devices and tri-temperature trailers, which enables usprovides the infrastructure to deliver a significant range of chilled items including milk, produce and other fresh foods to retail outlets. We have also established partnerships with strategically located bakeriesdairies, commissaries and commissariesbakeries to further enable us to deliver the freshest product possible.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 deliveryarray of fresh products through the development of unique and comprehensive marketing programs, and we have rebrandedincluding equipment programs that assist the Company to properly reflect the role this freshretailer in showcasing their “fresh” product line will play in our and the industry's future.offering. We believe our investments in infrastructure, and branding, 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 sharepresence and revenue growth by continuing to expand our presence east of the Mississippi.Mississippi River. According to The Association for Convenience & Petroleum Retailing 2010the 2012 SOI Report, during 2009,2011, aggregate U.S. traditional convenience retail in-store sales were approximately $182.4$195.0 billion through approximately 145,000148,000 stores with the majority of those stores located eastin the eastern portion of the Mississippi.country. We believe our expansion eastward will be accomplished by acquiringgaining new customers, both national and regional, through a combination of exemplary service, VCI programs, fresh product deliveries, innovative marketing strategies, and competitive pricing.
In January 2008, we opened a distribution facility near Toronto, Ontario. This facility expanded our existing market geography in Canada. In addition to organic growth, we intend to explore selectpricing and acquisitions of other wholesale distributors which complementregional distributors.
Recent examples of our business. In June 2008,eastward expansion include:
On December 17, 2012, we acquired Auburn Merchandise Distributors,J.T. Davenport & Sons, Inc. (“AMD” or “New England”) to further expand our presence and infrastructure in the Northeastern region of the U.S. In August 2010, we acquired Finkle Distributors, Inc. (“FDI”Davenport”), a large convenience wholesaler, servicinglocated in North Carolina, which services approximately 1,800 customers in New York, Pennsylvaniathe eight states of North Carolina, South Carolina, Georgia, Maryland, Ohio, Kentucky, West Virginia and the surrounding states, to continue to expand ourVirginia. This acquisition increased Core-Mark's market sharepresence primarily in the Northeastern region of the U.S.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 - Acquisitionsto 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, and information 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 this innovationour 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 into the convenience retail industry.
Customers, Products and Suppliers
We service approximatelyover 26,00029,000 customer locations in all 50 states ofin 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 approximately 32.6%37.5% of our net sales in 20102012 including Couche-Tard, and no singleour largest customer, which accounted for 10% or more13.7% of our total sales in 2010.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, | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | 2009 | | 2008 | Year Ended December 31, |
| | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales | 2012 | | 2011 | | 2010 |
| Product Category | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales | | Net Sales | | % of Net Sales |
| Cigarettes | | $ | 5,119.7 | | | 70.5 | % | | $ | 4,589.1 | | | 70.3 | % | | $ | 4,124.8 | | | 68.2 | % | $ | 6,139.4 |
| | 69.0 | % | | $ | 5,710.6 |
| | 70.4 | % | | $ | 5,119.7 |
| | 70.5 | % |
| Food | | 840.9 | | | 11.6 | % | | 738.0 | | | 11.3 | % | | 710.1 | | | 11.7 | % | 1,178.6 |
| | 13.4 |
| | 995.7 |
| | 12.3 |
| | 840.9 |
| | 11.6 |
|
| Candy | | 426.0 | | | 5.8 | % | | 405.0 | | | 6.2 | % | | 401.3 | | | 6.7 | % | 489.5 |
| | 5.5 |
| | 459.8 |
| | 5.7 |
| | 426.0 |
| | 5.8 |
|
| Other tobacco products | | 503.6 | | | 6.9 | % | | 434.0 | | | 6.6 | % | | 402.7 | | | 6.7 | % | 687.8 |
| | 7.7 |
| | 607.9 |
| | 7.5 |
| | 503.6 |
| | 6.9 |
|
| Health, beauty & general | | 220.6 | | | 3.0 | % | | 209.5 | | | 3.2 | % | | 220.1 | | | 3.6 | % | 269.2 |
| | 3.0 |
| | 237.5 |
| | 2.9 |
| | 220.6 |
| | 3.0 |
|
| Non-alcoholic beverages | | 152.0 | | | 2.1 | % | | 151.7 | | | 2.3 | % | | 180.9 | | | 3.0 | % | |
| Beverages | | 125.6 |
| | 1.4 |
| | 100.9 |
| | 1.2 |
| | 152.0 |
| | 2.1 |
|
| Equipment/other | | 4.0 | | | 0.1 | % | | 4.3 | | | 0.1 | % | | 5.0 | | | 0.1 | % | 2.3 |
| | — |
| | 2.5 |
| | — |
| | 4.0 |
| | 0.1 |
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| Total food/non-food products | | 2,147.1 | | | 29.5 | % | | 1,942.5 | | | 29.7 | % | | 1,920.1 | | | 31.8 | % | 2,753.0 |
| | 31.0 |
| | 2,404.3 |
| | 29.6 |
| | 2,147.1 |
| | 29.5 |
|
| Total net sales | | $ | 7,266.8 | | | 100.0 | % | | $ | 6,531.6 | | | 100.0 | % | | $ | 6,044.9 | | | 100.0 | % | $ | 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 $5,119.7$6,139.4 million million, or 70.5%69.0% of our total net sales, and 31.0%31.7% of our total gross profit in 20102012, 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.
In the U.S., legislation was introduced in 2008 to fund the State Children's Health Insurance Program (“SCHIP”) by raising the federal cigarette excise tax from 39¢ to $1.01 per pack. Federal excise tax is included as a component3
U.S. and Canadian cigarette consumption has generally declined over the last ten years. Based on 20102012 statistics provided by the Tobacco Merchants Association (“TMA”) published in early 20112013 and compiled from the U.S. Department of Agriculture-EconomicAgriculture - Economic Research Service, total cigarette consumption in the U.S. declined from 456425 billion cigarettes in 20002002 to 299294 billion cigarettes in 2010,2012, or 34%a compounded annual decline of approximately 3.6%. PriorTotal cigarette consumption also declined in Canada from 37 billion cigarettes in 2002 to 2007, we had benefited from25 billion cigarettes in 2012, or a shiftcompounded annual decline of approximately 3.8% in cigarette and tobacco sales to the convenience retail segmentconsumption, based on the statistics reportedprovided by NACS. In 2010, convenience retailers were the largest trade class for cigarette sales accounting for approximately 70% ofTMA. Our total industry volume according to the R.J. Reynolds' 2010 Industry Report. The shift in cigarette carton sales from other channelsincreased 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 convenience retail segment may no longer be adequateloss of one customer, representing less than 0.3% of total cartons sold by the Company, and a focused reduction in service to compensatecertain customers which resulted in improved profitability for the Canadian region in 2012. Although we anticipate overall cigarette consumption declines. However,will continue to decline, we expect to offset the majority of the impact from 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.
Total cigarette consumption also declined in Canada from 43 billion cigarettes in 2000 to 25 billion cigarettes in 2010, or a 42% reduction in consumption, based on the 2010 statistics provided by TMA.
In 2010, our carton sales in the U.S. increased 1.1%, excluding the impact resulting from the acquisition of Finkle Distributors, Inc., in August 2010. Our carton sales in Canada increased 7.5% primarily through market share gains driven by our expansion in the Toronto market.
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.
In addition to exciseExcise taxes are levied by the federal government, excise taxes 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 revenuenet sales and cost of sales. During 20102012, we included in net sales approximately $1,756.51,987.0 million million of state, local and provincial excise taxes. As of December 31, 20102012, 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$5.485.72 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, non-alcoholic 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. SalesNet sales of the combined food/non-food product categories grew 10.5%14.5% in 20102012 to $2,147.12,753.0 million million,, which was 29.5%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 $6.729.1 million million,, or 2.6%9.8%, to $265.9325.8 million million,in 2012, which was 69.0%68.3% of our total gross profit. Food/non-food products generated gross margins of 13.40%12.78% excluding excise taxes in 20102012, while the cigarette category generated gross margins of 3.39%3.47% excluding excise taxes. Gross margin growthThe significant differences in our food/non-food categories was negatively impacted by a $5.3 million reduction in floor stock income duethese margins is part of what we considered when developing these strategies. In order to lower manufacturers' price inflation.
Due totake advantage of the significantly higher margins earned by food/non-food products, two of our key business strategies, VCI and ourthe delivery of fresh initiative,products, focus primarily on the higherhighest margin categories in the foodfood/non-food group. These categories include milk, fresh bread, fresh sandwiches, fresh fruit, fresh produce, fresh baked goods, healthy snackshome meal replacements and home replacement meals. This drive toward more healthyother fresh and fresh foods being sold in the convenience markets is a recognized major trend in the industry.natural products. We have invested a significant amount of capital to position our Company to havewith the proper infrastructure to successfully deliver these highly perishable items. Our objective
Another primary aspect of our VCI strategy is to consolidatetake cost out of the current fragmented naturesupply chain by putting more of convenience store vendor distribution by consolidating suchthe 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 as dairy and bread and to grow “fresh food”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 forover the customers we service as they fight for consumer “share of stomach” for fresh foods with other retailers. Ultimatelylast several years assisted by our best in class offering. We believe Core-Mark is considered the defragmentation of vendor deliveries coupled with market share gainsleader in the industry for our capability to deliver fresh foodsand 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 the storesCore-Mark. In addition, we service will increase our customers' salesare seeing certain retail locations that do not historically sell highly perishable items, now doing so, and profits and in turn improve our sales and profits.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.
Our Suppliers. We purchase products for resale from approximately 4,400 trade suppliers and manufacturers located across the U.S. and Canada. In 20102012, we purchased approximately 62%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 28%27% and 13%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 revenuesnet 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 vacationvacations and travel. Duringtravel by consumers. We generated approximately 52% of our net sales during the second and third quarters of 20102012, and 53% during the second and third quarters of both 20092011 and 20082010, we generated approximately 53% of our net sales for each fiscal year..
Operations
We operate a network of 2428 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third party logistics provider). TwentyIn 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
TwoThree of the facilities we operate in the U.S., Artic Cascade, and 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. Allied Merchandising Industry,AMI, located in Corona, California, purchases the majoritya portion of our non-foodnon-cigarette products, other than cigarettesprimarily health and tobacco products,beauty care and general merchandise items for our distribution centers enabling us to reduceoptimize our overall general merchandiseinventory 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 healthAMI and beauty care product inventory.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, Alimentation Couche-Tard Inc.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.
We purchase a variety of brand name and private label products, totaling approximately 43,000in excess of 48,000 SKUs, including approximately 1,700over 1,900 cigarette products, from our suppliers and manufacturers. We offer customers a variety of food and food/non-food products, including fast food, candy, snacks, groceries, fresh products, dairy, bread, non-alcoholic 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 454551 million, 426476 million and 435454 million items (a carton of 10 packs of cigarettes is one item) or 86 million, 71 million 65 million and 6671 million cubic feet of product, during the years ended December 31, 20102012, 20092011 and 20082010, respectively, while limiting the service error rate to approximately twoless than 3 errors per thousand items shipped in 2010.2012.
Our proprietary Distribution Center Management System ("DCMS") 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, 20102012, we had approximately 9911,174 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, 20102012, our trucking fleet consisted of approximately 700860 tractors, trucks and vans, of which nearlymostly 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, 20102012, 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 20102012 totaled approximately $9.5$14.6 million, net of fuel surcharges passed on to customers, which represented an increase of approximately $4.6$1.6 million, from $4.9$13.0 million in 20092011, due primarily to higher fuel prices, a 6.9%13.3% increase in miles driven excluding FDI,to support the growth in our business and the acquisition of FDI.slightly higher fuel prices.
Competition
We estimate that, as of December 31, 20102012, there were overapproximately 300 wholesale distributors serving traditional convenience retailers in the U.S. and Canada. We believe that McLane Company, Inc., a subsidiary of Berkshire Hathaway, Inc., and Core-Mark are the two largest convenience wholesale distributors measured(measured by annual sales,sales) in North America. There are alsotwo other large regional companies that provide products to specific regionsareas of the country, such as The H.T. Hackney Company in the Southeast and Eby-Brown Company in the Midwest and Mid-Atlantic and Southeast and GSC Enterprises, Inc. in Texas and surrounding states, andregions. In addition there are several hundred local distributors serving small regional chains and independent convenience retailers. In Canada, there are fewertwo large regional players, aside from Core-Mark, that make up the competitive landscape, Karrys Bros., Limited and Wallace & Carey, Inc.
Beyond the traditional wholesale distributors compared to the U.S. In addition,supply channels, we face potential competition from at least three other supply avenues. First, certain manufacturers such as The Coca Cola Company, Hostess Brands, Inc., Frito- Lay North America, Inc.Budweiser, Miller-Coors, Coca-Cola, Frito-Lay and PepsiCo Inc. 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, variety of products offeredproduct selection and the reliability of deliveries.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 whothat 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 also providing competitive order fulfillment rates and pricing. Thestores. While this emphasis on thea standardized logistics approach while responsive toallows for competitive pricing, iswe do not in our opinionbelieve it is best suited for retailers looking for more customized solutions and support from their supply partners in addition to competitive pricing. SomeAlternatively, some small competitors focus on customer service and long standinglong-standing customer relationships but often times lack the range of offerings of the larger distributor.distributors. We believe that our unique combination of service, marketing solutions and price is a compelling combination that is highly attractive to customersretailers and mayhelps to enhance their growth and profitability.
WeIn 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
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 also 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, including the saletaxes. The competitive environment has been characterized by a continued influx of cigarettes in non-taxable jurisdictions, importscheap products that challenge sales of foreign, low-priced brandshigher priced and the diversion into the U.S. market of cigarettes intended for sale outside the U.S. fully taxed cigarettes.
We also believe the competitive environment has been impacted by alternative smoking products, such as snus, snuff and snuff, higherelectronic cigarettes. In addition, cigarette prices continue to rise due to higher federal and statecontinuing pressure on taxing jurisdictions to raise revenues through excise taxes andtaxes. Further, cigarette list price increasesprices have historically increased for cigarettes manufactured bythose manufacturers who are parties to the MSA, and the impact of restrictions on marketing imposed by the U.S. Food and Drug Administration ("FDA").MSA. As a result, the lowestlower priced products of numerous small share brands manufactured by companies that are not parties to the MSAnon-MSA participants have held their market share, putting profitability pressure on the profitability of premium cigarettes.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 20102012, 20092011 and 20082010. 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 1516 days duringin each of 2010, 20092012 and 20082011, respectively, and about 15 days in 2010.
We obtain terms from our vendors and certain taxing jurisdictions based on industry practices, and 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 20102012, 2011 and 20092010 averaged about 11 days, compared to 12 days in 2008.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, 20102012:
TOTAL EMPLOYEES BY BUSINESS FUNCTIONS
| | | | | U.S. | | Canada | | Total | | U.S. | | Canada | | Total |
| Sales and Marketing | | 1,091 | | | 83 | | | 1,174 | | | 1,204 |
| | 61 |
| | 1,265 |
|
| Warehousing and Distribution | | 2,376 | | | 267 | | | 2,643 | | | 3,001 |
| | 244 |
| | 3,245 |
|
| Management, Administration, Finance and Purchasing | | 478 | | | 104 | | | 582 | | | 605 |
| | 110 |
| | 715 |
|
| Total Categories | | 3,945 | | | 454 | | | 4,399 | | | 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 213198 employees, or 4.8%4% of our workforce, are unionized. There have been no disruptions in customer service, strikes, work stoppages or slowdowns as a result of union activities, and we believe we have satisfactory relations with our employees.
Regulation
As a distributor of food products in the U.S., we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated by the FDA.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. AIB's independent evaluation is summarized and posted on its website for our customers' review. In 20102012, nearly 97%92% of the audits of our distribution centers received the highest rating from the AIB with the remaining 3% receiving the second highest rating.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 ValleyTMValley™, SmartStock® and, Tastefully Yours® and COASTERS®..
Segment and Geographic Information
We operate in two reportable geographic segmentsareas -- the U.S. and Canada. See Note 15 --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, and Corporate Governance Guidelines and Principles.Principles and other corporate information. Copies of these documents may also be requested from:
Core-Mark International
395 Oyster Point Blvd, Suite 415
South San Francisco, CA 94080
Attention: Investor Relations
Corporate Governance-Governance-Code--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 postedavailable 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 inon our website address at www.core-mark.com under Corporate Governance in the “Investor Relations” section.
ITEM 1. A. RISK FACTORS
You should carefully consider the following risks together with allOur business is subject to a variety of risks. Set forth below are certain of the other information contained in this Annual Reportimportant risks that we face, the occurrence of which may have a material adverse effect on Form 10-K. Additional risks and uncertainties not currently known to us may also materially adversely affect our business, financial condition or results of operations.
This Annual Report on Form 10-K contains forward-looking statements that involve These risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limitedthe only ones we face. We could also be affected by additional factors that are presently unknown to the risk factors set forth below(see Special Note Regarding Forward-Looking Statements priorus or that we currently believe to Item 1. Business).be immaterial to our business.
Risks Related to the EconomyOur Business and Market ConditionsIndustry
Current difficultProtracted challenging economic conditions may reduce demand for our products and increase credit risks.
Continuing difficultProtracted challenging economic conditions, including increasedhigh unemployment and underemployment rates, significant declines indepressed real estate values, large losses to consumer retirement and investment accounts, and increases in food and other commodity prices have resultedand the outcome of political events (e.g. resolution of the national debt ceiling) may result in reducedweakened consumer confidence and curtailed consumer spending.spending in certain sectors. If these economic conditions are severe and/or persist or deteriorate further,for a prolonged period, we expect that convenience retail operators willour customers would experience continued weakness and further reductions in same storereduced sales, which, willin turn, would adversely affect demand for our products and could lead to reduced sales and increased pressures on our margins. In addition, ongoing uncertainty in the financial markets and the resulting pressures on liquiditysevere 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 gasolinefuel 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. Our retailers have reported to us that when gasoline prices increased they have experienced a decrease in the proportion of their customers' expenditures on food/non-food products compared to customers' expenditures on cigarettes. The shift in expenditures may place pressure on our sales and gross margins since sales of food/non-food products result in higher margins than sales of cigarettes do.
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 a result of recent recessionary economic conditions, 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 statuspart of our pension plans whenefforts to minimize the benefit obligation exceeds the fair valueadverse impact of the plan assets. Includedincreases in claims liabilities on our balance sheet as of December 31, 2010 is $8.5 million relateddiesel fuel prices, we expect to the underfunded pension obligation compared with $11.6 million as of December 31, 2009. The decrease in the underfunded statusconvert a large percentage of our pension plans from 2009trucks to 2010 is due primarily to an increase in Company contributions and a higher return than expectedoperate on invested plan assets for 2010. Ifnatural gas over 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. We contributed $3.4 million to our plan in 2010, compared to $0.2 million and $0.4 million in 2009 and 2008, respectively. 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.
Risks Related to Our Business and Industry
We are dependent on the convenience retail industry for our revenues, and our results of operations would 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, credit exposure from our customers, termination of customer relationships without notice, consolidation of our customer base and consumer movement toward purchasing from club stores. Any of these factors could negatively affect our results of operations.next two years.
We face competition in our distribution markets and, if we are unable to compete effectively in any distribution market, we may lose market share and suffer a decline in sales and profitability.
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, schedules and reliability of deliveries and the range and quality of services provided. Some of our competitors, including a subsidiary of Berkshire Hathaway Inc., McLane Company, Inc., the largest convenience wholesale distributor in the U.S., 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.
Increasing the growth and profitability of our distribution business is particularly dependent upon our ability to retain existing customers and attract additional customers. The ability to attract additional customers through our existing network of distribution centers is especially important because it enables us to leverage our distribution centers and other fixed assets. Our ability to retain existing customers and attract new customers is dependent upon our ability to provide industry-leading customer service, offer competitive products at low prices, maintain high levels of productivity and efficiency in distributing products to our customers while integrating new customers into our distribution system, and offer marketing, merchandising and ancillary services that provide value to our customers. If we are unable to execute these tasks effectively, we may not be able to attract a significant number of new customers and our existing customer base could decrease, either or both of which could have an adverse impact on our results of operations.
We may lose business if cigarette or other manufacturers decide to engage in 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 decisions in the future, our revenues and profits would be adversely affected and there can be no assurance that we will be able to take action to compensate for such losses.
Cigarette and consumable goods distribution is a low-margin business sensitive to economic conditions.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, non-alcoholic beverages, general merchandise and health and beauty care products. Our industry is characterized by a high volume of sales with relatively low profit margins. Our food/non-food sales are at prices that aregenerally 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. Alternatively,In addition, periods of product cost inflation may also have a negative impact on our gross profit margins and earnings with respect to sales of cigarettes. Grosscigarettes 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 percentpercentage 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.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 funding from manufacturer discount and incentive programs and cigarette excise stamping allowances;allowances, and any material changes in these programs could adversely affect our results of operations.
We receive payments from the manufacturers ofon 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 statescertain taxing jurisdictions in connection with the purchasecollection of excise stamps for cigarettes.taxes. If the manufacturers or statestaxing 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, 20102012, we had approximately 4,400 vendors, and during 20102012 we purchased approximately 62%64% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris USA, Inc.and R. J.R.J. Reynolds Tobacco Company, representing approximately 28%27% and 13%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 job actionsslow-downs or strikes by employees of suppliers, inclement weather, transportation
interruptions, regulatory requirements and natural disasters or other catastrophic events.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.
SomeOur 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 distribution centers are dependentkey 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 a few relatively large customers,the investment, obtaining adequate financing, negotiating acceptable terms and our failureconditions and successfully integrating operations post-acquisition. We may not realize the anticipated benefits or savings from an acquisition to maintain our relationships with these customers could substantially harm our businessthe 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 prospects.
Someunknown liabilities as part of our distribution centers are dependent on relationships with a single customer or a few customers,an acquisition, which may increase the associated costs and we expect our reliance on these relationshipsrisks related to continue for the foreseeable future. Any termination or non-renewal of customer relationships could severely and adversely affect the revenues generated by certain of our distribution centers. Any future termination, non-renewal or reduction in services that we provide to these select customers would cause our revenues to decline and our operating results to suffer.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 with other distributorsa 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. With respect to product liability claims, we believeIn addition, certain products that we have sufficient liability insurance coveragedistribute may be subject to counterfeiting. Our business could be adversely affected if consumers lose confidence in the safety and indemnities from manufacturers. However, product liability insurancequality of the food and other products we distribute. This risk may notincrease as we continue to be available at a reasonable cost, or, if available, may not be adequate to cover allexpand our distribution of our liabilities. We generally seek contractual indemnification and insurance coverage from parties supplying the products we distribute, but this indemnification or insurance coverage is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by suppliers. Some of our local suppliers are relatively small companies with limited financial resources.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 partysupplier or manufacturer cannot fulfill its indemnification obligation, productobligations to us, the liability relating to defectivesuch 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
associated with a potential product recall, whichto the extent they are not reimbursable by the supplier or manufacturer, could materially adversely affect our ability to provide quality service to our customers.
Adverse publicity or lack of confidence in our products could adversely affect reputation and reduce earnings.
Our business could be adversely affected if consumers lose confidence in the safety and quality of certain food products and services we distribute. Adverse publicity may discourage consumers from buying our products or using our services. In addition, such adverse publicity may result in product liability claims, a loss of reputation, and product recalls which would have a material adverse effect on our sales and operations.
Unexpected outcome in legal proceedings may result in adverse effect on results of operations.
On occasion, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims and other proceedings arising in the ordinary course of business. Furthermore, there are an increasing number of cases being filed against companies generally, which include class-action allegations under federal and state wage and hour laws. We estimate our exposure to these legal proceedings and establish reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings, or changes in our evaluation of the proceedings, could have a material adverse impact on our finances and results of operations.
Our ability to operate effectively could be impaired by the risks and costs associated with the efforts to grow our business through acquisitions.
Efforts to grow our distribution business may include acquisitions. Acquisitions entail various risks such as identifying suitable candidates, effecting acquisitions at acceptable rates of return, obtaining adequate financing and acceptable terms and conditions. Successful integration of new operations will depend on our ability to manage those operations, fully assimilate the operations into our distribution network, realize opportunities for revenue growth presented by strengthened product offerings and expanded geographic market coverage, maintain the customer base and eliminate redundant and excess costs. We may not realize the anticipated benefits or savings from an acquisition to the extent or in the time frame anticipated, if at all, or such benefits and savings may include higher costs than anticipated.operating results.
We may not be able to achieve the expected benefits from the implementation of new marketing initiatives.
We are taking action to improvecontinuously 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, increaseincreasing our market position within the industry and ultimately createcreating increased shareholder value.
We may not be able to successfully execute our new marketing initiatives to realize the intended synergies, business opportunities and growth prospects. Many of the risk factors previously mentioned, such as increased competition, may limit our ability to capitalize on business opportunities andor expand our business. Our efforts to capitalize on business opportunities may not bring the intended result. Assumptions underlying estimates of expected revenue growth or overall cost savings may not be met or economic conditions may deteriorate. Customer acceptance of new distribution formats developedthat we implement may not be executed as anticipated, hampering our ability to attract new customers or maintain our existing customer base. Additionally, our management may have its attention diverted from other important activities while trying to execute new marketing initiatives. 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 disruptions,security breaches which could compromise our ability to conduct business, seriously harm our business.business and adversely affect our financial results.
Our business is highly dependent on DCMS. The convenience retail industry does not have a standardour customized enterprise information technology ("IT") platform. Therefore, actively integrating our customers into our IT platform is a priority, and our DCMS platform provides our distribution centers with the flexibility to adapt to our customers' IT requirements.systems. We also rely on DCMSour 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 ITinformation technology systems and have disaster recovery plans in place to mitigate unforeseen events that could disrupt our systems' service. However, if our DCMS failssystems fail or isare 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.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.Statement and other key employees. We do not maintain key person life insurance policies on these individuals, and we do not have employment agreements with any of them. The loss of the services of any of our senior executive officers or other key personnel could harm our business.
We operate in a competitiveShortages of qualified labor marketcould negatively impact our business and a portion of our employees are covered by collective bargaining agreements.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. While current market conditions have provided us with a surplus of qualified employee candidates, in the future, aA 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. In addition, at 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, 20102012, 213,198, or 4.8%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,increase. In addition, the National Labor Relations Board is becoming more active with the passage of administrative rules that we will be ablecould impact our ability to recover any increases inmanage our labor costs through increased prices charged to customers or thatforce. To the extent we will not suffer business interruptions as a result of strikes or other work stoppages. If we fail to attract and retain qualified employees, to controlstoppages
or slow downs, or our labor costs orincrease and we are not able to recover any increased labor costssuch increases through increased prices charged to our customers or offsets by productivity gains, our results of operations could be materially adversely affected.
Risks Related to the Distribution of Cigarettes
Our sales volume is largely dependent upon the distribution of cigarette products, sales of which are declining.
The distribution of cigarette and other tobacco products is currentlyEmployee health benefit costs represent a significant portion ofexpense to us and may negatively affect our business.profitability.
With over 3,100 employees participating in our health benefits, our expenses relating to employee health benefits are substantial. In 2010, approximately 70.5% of our revenues came from the distribution of cigarettes and 31.0% of our gross profit was generated from cigarettes. Due topast years, we have experienced significant increases in the pricescertain of cigarettes and other tobacco products, 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, the U.S. and Canadian cigarette and tobacco market has generally been declining since 1980 and is expected to continue to decline.
Prior to 2007 our cigarette sales had benefited from a shift in sales to the convenience retail segment, andthese costs, largely as a result of this shift, convenience store cigarette sales had not declined in proportion to the decline in overall consumption. However, our cigarette carton sales began to decline in 2007, experienced further declines in 2008 and 2009 and increased modestly in 2010. We expect consumption trends of legal cigarette and tobacco products will continue to be negatively impacted by rising prices, diminishing social acceptance and legislative and regulatory actions that create limitations on where a consumer can smoke, and how products can be promoted and produced. In addition, we expect rising prices will stimulate a higher percentage of consumers to purchase from illicit markets to fulfill consumer demand. We believe this may adversely impact our cigarette carton volume, primarily in
the U.S., in future periods.
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, sale, taxation and use of tobacco products imposed by local, state, federal and foreign governments. Various state and provincial governments 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. For example, the U.S. Supreme Court has recently determined that lawsuits may proceed against tobacco manufacturers based on alleged deceptive advertising in the marketing of so-called “light” cigarettes. In June 2009, the Family Smoking Prevention and Tobacco Control Act was signed into law, which granted the FDA the authority to regulate the production and marketing of tobacco products in the U.S. The new legislation establishes a new FDA office that will regulate changes to nicotine yields and the chemicals and flavors used in tobacco 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. This new FDA office is to be financed through user fees paid by tobacco companies prorated based on market share. This new legislation and related regulation could adversely impact the market for tobacco products and, accordingly, our sales of such products. In Canada, many provincial legislatures have enacted legislation authorizing and facilitating the recovery of tobacco-related health care costs from the tobacco industry by way of lawsuit. The Supreme Court of Canada has upheld the constitutionality of such legislation and a province's right to sue the tobacco industry pursuant to such legislation. British Columbia, Ontario, Quebec, Alberta, New Brunswick, and Newfoundland and Labrador have all enacted similar statutes in this regard. British Columbia, New Brunswick, Quebec and Ontario have also initiated lawsuits to recover health care costs and in Alberta, the government has promised that a lawsuit is being prepared for filing. All Canadian provinces have legislation that controls the usage and sale of tobacco products and typically these restrict or prevent the sale of cigarette and tobacco products from health care facilities, public post-secondary campuses and certain public use facilities. Some of these laws also prohibit sales from pharmacies and stores containing a pharmacy.
Cigarettes and other tobacco products are subject to substantial excise taxes and, if these taxes are increased, our sales of cigarettes and other tobacco products could decline.
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 within the U.S. and Canada. States continue to pass ballot measures that may result in increasing excise taxes on cigarettes and other tobacco products. In February 2009, U.S. legislation was signed into law which funds the SCHIP program by raising the federal cigarette excise tax from 39¢ to $1.01 per pack. This legislation was effective April 1, 2009.
These tax increases are expected to continue to have an adverse impact on sales of cigarettes due to lower consumption levels and a shift in sales from the premium to the non-premium or discount cigarette segments or to sales outside of legitimate channels. In addition, state and local governments may require us to prepay for excise tax stamps placed on packages of cigarettes and other tobacco products that we sell. If these excise taxes are substantially increased, 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 inability to prepay the excise taxes may prevent or delay our purchase of cigarettes and other tobacco products, which could materially adversely affect our ability to supply our customers.
In the U.S. we purchase cigarettes primarily from manufacturers covered by the tobacco industry's Master Settlement Agreement (“MSA”), which results in our facing certain potential liabilities and financial risks including competition from lower priced sales of cigarettes produced by manufacturers who do not participate in the MSA.
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. The cigarette manufacturer defendants settled the first four of these cases with Mississippi, Florida, Texas and Minnesota by separate agreements. These states are referred to as non-MSA states. In November 1998, the major U.S. tobacco product manufacturers entered into the MSA with 46 states, the District of Columbia and certain U.S. territories. 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 order to limit our potential tobacco related liabilities, we try to limit our purchases of cigarettes from non-MSA manufacturers for sale in MSA states. The benefits of liability limitations and indemnities we are entitled to under the MSA do
not apply to sales of cigarettes manufactured by non-MSA manufacturers. From time to time, however, we find it necessary to purchase a limited amount of cigarettes from non-MSA manufacturers. For example, during a transition period while integrating distribution operations from an acquisition we may need to purchase and distribute cigarettes manufactured by non-MSA manufacturers to satisfy the demands of customers of the acquired business. With respect to sales of such non-MSA cigarettes, we could be subject to litigation that could expose us to liabilities for which we would not be indemnified.
If the tobacco industry's MSA is invalidated, or tobacco manufacturers cannot meet their obligations to indemnify us, we could be subject to substantial litigation liability.
In connection with the MSA, we are 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. To date, litigation challenging the validity of the MSA, including claims that the MSA violates antitrust laws, has not been successful. However, if such litigation were to be successful and the MSA is invalidated, we could be subject to substantial litigation due to our sales of cigarettes and other tobacco products, and we may not be indemnified for such costs by the tobacco product manufacturers in the future. In addition, even if we continue to be 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.
We face competition from sales of discount brands and illicit and other low priced sales of cigarettes.
In the U.S., we purchase cigarettes for sale in MSA states primarily from manufacturers that are parties to the MSA. As a result, we are adversely impacted by sales of brands from non-MSA manufacturers and discount brands manufactured by small manufacturers that are not participants to the MSA. The cigarettes subject to the MSA that we sell have been burdened by MSA related payments and are thus negatively impacted by widening price gaps between those brands and discount brands for the past several years. Growth in market share of discount brands since the MSA was signed in 1998 has had an adverse impact on the volume of the cigarettes that we sell.
We also face competition from the diversion into the U.S. market of cigarettes intended for sale outside the U.S., the sale of cigarettes in non-taxable jurisdictions, inter-state and international smuggling of cigarettes, 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 taxed cigarettes manufactured by parties to the MSA. In Canada, we face competitive pressures as well, primarily from discount brands and the sale of counterfeit cigarettes by third parties. Increased sales of counterfeit cigarettes, sales by third parties over the internet, or sales by means to avoid the collection of applicable taxes, could have an adverse effect on our total results of operations.
Risks Related to Foreign Exchange and Financing
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 16% in 2010 and 15% in 2009. 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 (“U.S. 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, or at all.
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 limit 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 breachincluding, in particular, ongoing increases in health care costs well in excess of the covenantrate 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 result in an event of default undernegatively impact 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.
Risks Related to Government Regulation and Environmentprofitability.
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, or regulations become more stringent, 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.
Earthquake and naturalNatural 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.
Tax legislationInsurance and claims expenses could impact future cash flows.have a material adverse effect on us.
The 2012 U.S. budget proposal that was released in February 2011includes potential changes to current tax law, includingWe have a combination of both self-insurance and high-deductible insurance programs for the repealrisks arising out of the LIFO (Last-In, First-Out) methodservices we provide and the nature of inventory accounting. As currently drafted, LIFO would be repealed for tax years beginning after 2012 and LIFO reserves existing at that time would be taxed ratably over a ten year period. Should LIFO be repealed, the payment of income taxes, and any future tax deferral prior to the date of repeal, over the ten year period, would reduce the amount of money that we have for our operations working capital, capital expenditures, expansions, acquisitionsthroughout 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 general corporate or other business activities,severity of claims for which could materially and adversely affectwe are retaining risk increases, our business, 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.
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.
New accounting standardsIf 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
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.
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 changesan event of default under our Credit Facility, which would permit the lenders to our methodsdeclare all amounts incurred thereunder to be immediately due and payable and terminate their commitments to make further extensions of quantifying and recordingcredit.
Changes to accounting transactions, and couldrules or regulations may adversely affect our financialoperating results and financial position.
Changes to U.S. GAAP arise from new and revised standards, interpretations and other guidance issued by the Financial Accounting Standards Board (“FASB”), the SEC and others. In addition,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 is considering a potential requirement for U.S. issuersregulations and those who are required to report future financial results in accordance withfollow International Financial Reporting Standards ("IFRS"(“IFRS”) rather thanoutside of the U.S. GAAP. The U.S. Government may also issue new or revised Cost Accounting Standards or Cost Principles. 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.
ITEM 1. B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in South San Francisco, California, and consist of approximately 26,00027,000 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, and approximately 6,000 square feet for use by our information technology personnel in Plano, Texas.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 2.83.4 million square feet and own approximately 0.40.7 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 |
Atlanta, GeorgiaBakersfield, California | Los Angeles, California | Wilkes-Barre, Pennsylvania |
Bakersfield, California | Leitchfield, Kentucky | Calgary, Alberta |
Corona, California(2) | Minneapolis, Minnesota | Toronto, OntarioCalgary, Alberta |
| Denver, Colorado | Portland, Oregon | Toronto, Ontario |
Forrest City, Arkansas(4) | Sacramento, California(3) | Vancouver, British Columbia |
| Fort Worth, Texas | Sacramento, California(3)
Salt Lake City, Utah | Winnipeg, Manitoba |
| Grants Pass, Oregon | Salt Lake City, UtahSanford, North Carolina | |
| Hayward, California | Spokane, Washington | |
(1) Excluding outside storage facilities or depots and two facilities that we operate as 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 Leitchfield, Kentucky and Wilkes-Barre, Pennsylvania. All other facilities listed are leased. The facilities we own are subject to encumbrances under our principal credit facility.
(2) This facility includes a distribution center and our Allied Merchandising Industry consolidating warehouse.
(3) | |
| (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 Alimentation Couche-Tard, Inc., 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 PROCEEDINGSThe 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.
As of December 31, 2010, we were not involved in any material legal proceedings.
ITEM 4. (REMOVED AND RESERVED)MINE SAFETY DISCLOSURES
Not applicable.
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 3,0192,127 stockholders of record as of February 28, 20112013.
The following table provides the range of high and low sales prices of our common stock as reported by the NASDAQ Global Market for the periods indicated:
| | | | | | | | |
| | | Low Price | | High Price |
| Fiscal 2010 | | | | |
| 4th Quarter | | $ | 30.14 | | | $ | 37.19 | |
| 3rd Quarter | | 25.61 | | | 31.85 | |
| 2nd Quarter | | 26.25 | | | 31.88 | |
| 1st Quarter | | 29.21 | | | 34.51 | |
| | | | | |
| | | Low Price | | High Price |
| Fiscal 2009 | | | | |
| 4th Quarter | | $ | 25.93 | | | $ | 33.20 | |
| 3rd Quarter | | 24.73 | | | 30.12 | |
| 2nd Quarter | | 17.55 | | | 27.35 | |
| 1st Quarter | | 15.60 | | | 22.01 | |
We have not declared or paid any cash dividends on our common stock. The credit agreement for our Credit Facility places limitations 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.
|
| | | | | | | | |
| | | 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 |
|
PERFORMANCE COMPARISON
The graph below presents a comparison of cumulative total return to stockholders for Core-Mark's stock at the period Core-Mark had securities trading on the NASDAQ Global Market,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 30, 2005,31, 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 |
| | | 12/30/05 | | 03/31/06 | | 06/30/06 | | 09/29/06 | | 12/29/06 | | 03/30/07 | | 06/29/07 | | 09/28/07 | | 12/31/07 | | 03/31/08 | | 06/30/08 |
| CORE | | $ | 100.00 | | | $ | 119.94 | | | $ | 112.23 | | | $ | 98.24 | | | $ | 104.86 | | | $ | 111.85 | | | $ | 112.79 | | | $ | 110.44 | | | $ | 90.03 | | | $ | 90.09 | | | $ | 82.13 | |
| NASDAQ Index | | $ | 100.00 | | | $ | 106.25 | | | $ | 98.14 | | | $ | 102.11 | | | $ | 109.66 | | | $ | 110.66 | | | $ | 120.05 | | | $ | 125.84 | | | $ | 124.39 | | | $ | 106.45 | | | $ | 108.77 | |
| Russell 2000 | | $ | 100.00 | | | $ | 113.94 | | | $ | 108.21 | | | $ | 108.69 | | | $ | 118.37 | | | $ | 120.67 | | | $ | 126.00 | | | $ | 122.10 | | | $ | 116.51 | | | $ | 104.98 | | | $ | 105.59 | |
| Performance Peer Group | | $ | 100.00 | | | $ | 105.72 | | | $ | 100.69 | | | $ | 109.74 | | | $ | 121.70 | | | $ | 112.81 | | | $ | 111.16 | | | $ | 119.19 | | | $ | 106.87 | | | $ | 97.84 | | | $ | 93.99 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | 09/30/08 | | 12/31/08 | | 03/31/09 | | 06/30/09 | | 09/30/09 | | 12/31/09 | | 03/31/10 | | 06/30/10 | | 09/30/10 | | 12/31/10 | | |
| CORE | | $ | 78.34 | | | $ | 67.46 | | | $ | 57.12 | | | $ | 81.69 | | | $ | 89.75 | | | $ | 103.32 | | | $ | 95.96 | | | $ | 85.89 | | | $ | 97.05 | | | $ | 111.57 | | | |
| NASDAQ Index | | $ | 97.16 | | | $ | 56.94 | | | $ | 56.42 | | | $ | 68.45 | | | $ | 79.67 | | | $ | 85.86 | | | $ | 90.74 | | | $ | 80.06 | | | $ | 90.83 | | | $ | 101.80 | | | |
| Russell 2000 | | $ | 104.42 | | | $ | 77.15 | | | $ | 65.61 | | | $ | 79.18 | | | $ | 94.45 | | | $ | 98.11 | | | $ | 106.79 | | | $ | 96.20 | | | $ | 107.06 | | | $ | 124.46 | | | |
| Performance Peer Group | | $ | 107.15 | | | $ | 81.34 | | | $ | 80.50 | | | $ | 81.81 | | | $ | 90.01 | | | $ | 102.54 | | | $ | 108.65 | | | $ | 106.72 | | | $ | 108.81 | | | $ | 113.52 | | | |
Sales of Unregistered Securities
Common Stock and Warrants Issued Pursuant to the Plan of Reorganization in 2004
Pursuant to the plan of reorganization (May 2004) described in Exhibit 2.1 and incorporated by reference (see Part IV, Item 15, Exhibit Index of this Form 10-K), herein referred to as “Fleming's bankruptcy” or “plan of reorganization,” on August 23, 2004 we issued an aggregate of 9,800,000 shares of our common stock and warrants to purchase an aggregate of 990,616 shares of our common stock to the Class 6(B) creditors of Fleming (our former parent company). We refer to the warrants we issued to the Class 6(B) creditors as the Class 6(B) warrants. We received no cash consideration at the time we issued the Class 6(B) warrants. The Class 6(B) warrants have an exercise price of $20.93 per share. The shares of common stock and the Class 6(B) warrants were issued pursuant to an exemption from registration under Section 1145(a) of the Bankruptcy Code. We also issued warrants to purchase an aggregate of 247,654 shares of our common stock to the holders of our Tranche B Notes, which we refer to as the Tranche B warrants. The Tranche B warrants have an exercise price of $15.50 per share. Shares of our common stock issued upon exercise of the Tranche B warrants are issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933. Both the Class 6(B) and Tranche B warrants may be exercised at the election of the holder at any time prior to August 23, 2011, at which time any outstanding warrants will be net issued. Instructions for exercising warrants can be found in the “Investor Relations” section of our website at www.core-mark.com.
During 2010, 246,912 of the Class 6(B) warrants were exercised in cash and cashless transactions, and a total of 233,380 shares of common stock have been issued since inception pursuant to exercises of Class 6(B) warrants. The exercise of such warrants was also done pursuant to an exemption from registration under Section 1145(a) of the Bankruptcy Code. During 2010, there were no Tranche B warrants exercised in cash or cashless transactions, and the total number of shares of common stock issued since inception pursuant to Tranche B warrants as of December 31, 2010 remained at 73,507 shares.
Issuer Purchases of Equity Securities
There were no repurchases of our common stock during the three months ended December 31, 2010.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 |
|
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. |
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 2010, 2009,from 2008, to 2007 and 20062012 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. and Subsidiaries | | Core-Mark Holding Company, Inc. |
| | | Year Ended December 31, | | Year Ended December 31, |
| (in millions except per share amounts) | | 2010(a) | | 2009(b) | | 2008(c) | | 2007 | | 2006(d) | | 2012(a) | | 2011(b) | | 2010(c) | | 2009(d) | | 2008(e) |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 7,266.8 | | | $ | 6,531.6 | | | $ | 6,044.9 | | | $ | 5,560.9 | | | $ | 5,314.4 | | | $ | 8,892.4 |
| | $ | 8,114.9 |
| | $ | 7,266.8 |
| | $ | 6,531.6 |
| | $ | 6,044.9 |
|
Gross profit (e) | | 385.3 | | | 401.6 | | | 359.1 | | | 332.6 | | | 297.7 | | |
Warehousing and distribution expenses (e) | | 211.8 | | | 197.3 | | | 197.6 | | | 174.1 | | | 151.1 | | |
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 | | 142.5 | | | 137.3 | | | 129.4 | | | 119.0 | | | 106.6 | | | 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 | | 28.9 | | | 65.0 | | | 30.1 | | | 37.7 | | | 38.5 | | | 57.4 |
| | 45.7 |
| | 28.9 |
| | 65.0 |
| | 30.1 |
|
Interest expense, net (f) | | 2.2 | | | 1.4 | | | 1.2 | | | 1.0 | | | 4.2 | | |
Interest expense, net (g) | | | 1.8 |
| | 2.0 |
| | 2.2 |
| | 1.4 |
| | 1.2 |
|
| Net income | | 17.7 | | | 47.3 | | | 17.9 | | | 24.1 | | | 20.6 | | | 33.9 |
| | 26.2 |
| | 17.7 |
| | 47.3 |
| | 17.9 |
|
| Per share data: | | | | | | | | | | | | | | | | | | | | |
| Basic net income per common share | | $ | 1.64 | | | $ | 4.53 | | | $ | 1.71 | | | $ | 2.30 | | | $ | 2.05 | | | $ | 2.96 |
| | $ | 2.30 |
| | $ | 1.64 |
| | $ | 4.53 |
| | $ | 1.71 |
|
| Diluted net income per common share | | $ | 1.55 | | | $ | 4.35 | | | $ | 1.64 | | | $ | 2.15 | | | $ | 1.87 | | | $ | 2.91 |
| | $ | 2.23 |
| | $ | 1.55 |
| | $ | 4.35 |
| | $ | 1.64 |
|
| Shares used to compute net income per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | 10.8 | | | 10.5 | | | 10.5 | | | 10.5 | | | 10.0 | | | 11.5 |
| | 11.4 |
| | 10.8 |
| | 10.5 |
| | 10.5 |
|
| Diluted | | 11.4 | | | 10.9 | | | 10.9 | | | 11.2 | | | 11.0 | | | 11.6 |
| | 11.7 |
| | 11.4 |
| | 10.9 |
| | 10.9 |
|
| Other Financial Data: | | | | | | | | | | | | | | | | | | | | |
Excise taxes (g) | | $ | 1,756.5 | | | $ | 1,516.0 | | | $ | 1,474.4 | | | $ | 1,349.4 | | | $ | 1,313.3 | | |
Cigarette inventory holding profits/FET (h) | | 6.1 | | | 25.2 | | | 3.1 | | | 7.3 | | | 4.1 | | |
OTP tax items (i) | | 0.6 | | | 0.6 | | | 1.4 | | | 13.3 | | | — | | |
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 | | 16.6 | | | 6.7 | | | 11.0 | | | 13.1 | | | 2.9 | | | 12.3 |
| | 18.3 |
| | 16.6 |
| | 6.7 |
| | 11.0 |
|
Depreciation and amortization (j) | | 19.7 | | | 18.7 | | | 17.4 | | | 14.9 | | | 13.2 | | |
Depreciation and amortization (k) | | | 25.3 |
| | 22.4 |
| | 19.7 |
| | 18.7 |
| | 17.4 |
|
| Stock-based compensation | | 4.8 | | | 5.1 | | | 3.9 | | | 5.3 | | | 4.4 | | | 5.8 |
| | 5.5 |
| | 4.8 |
| | 5.1 |
| | 3.9 |
|
| Capital expenditures | | 13.9 | | | 21.1 | | | 19.9 | | | 20.8 | | | 12.8 | | | 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, | | December 31, |
| | | 2010 | | 2009 | | 2008 | | 2007 | | 2006 | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 |
| Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 708.8 | | | $ | 677.9 | | | $ | 612.6 | | | $ | 577.1 | | | $ | 555.6 | | | $ | 919.2 |
| | $ | 870.2 |
| | $ | 708.8 |
| | $ | 677.9 |
| | $ | 612.6 |
|
| Total debt, including current maturities | | 1.0 | | | 20.0 | | | 30.8 | | | 29.7 | | | 78.0 | | | 85.6 |
| | 63.3 |
| | 1.0 |
| | 20.0 |
| | 30.8 |
|
(a) 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 SCHIP legislation. The 2010 data also includes the results of operations of FDI, which was acquired in August 2010.
(b) 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 profits, offset by $11.5 million of net floor stock tax.
(c) The selected consolidated financial data for 2008 includes the results of operations of the Toronto division, which started operations in late January 2008, and also the New England division following its acquisition in June 2008.
(d) The selected consolidated financial data for 2006 includes the results of operations of the Pennsylvania division following its acquisition in June 2006.
(e) Gross margins 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.
(f) Interest expense, net, is reported net of interest income and includes amortization of debt issuance costs. | |
| (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. (g) State, local and provincial excise taxes (predominantly cigarettes and tobacco) paid by the Company are included in net sales and cost of goods sold.
(h) Cigarette inventory holding profits 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. 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 profits due to the price increases in response to the federal excise taxes ("FET") levied on manufacturers by the SCHIP legislation.
(i) We received an OTP (Other Tobacco Products) tax gain resulting from a state tax method change in the amount of $0.6 million in 2010. We received OTP tax refunds of $0.6 million in 2009, $1.4 million in 2008 and $13.3 million in 2007.
(j) Depreciation and amortization includes depreciation on property and equipment and amortization of purchased intangibles.
|
| |
| (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. |
| |
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 approximatelyover 26,00029,000 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, non-alcoholic beverages, general merchandise and health and beauty care products. We operate a network of 2428 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 Canada.
We derivein 2011 through our net sales primarily from sales to convenience store customers. Our gross profit is derived primarily by applying a markupexpanded agreement (“the Customer Agreement”) with Alimentation Couche-Tard, Inc. (“Couche-Tard”) which led to the costestablishment of an operating division in Tampa, Florida. In addition we benefited from the addition of the product at the time of the sale and from cost reductions derived from vendor credit term discounts received and other vendor incentive programs. Our operating expenses are comprised primarily of sales personnel costs; warehouse personnel costs related to receiving, stocking and selecting product for delivery; delivery costs such as delivery personnel, truck leases and fuel; costs relating to the rental and maintenance ofForrest City Grocery Company (“FCGC”) which we acquired in May 2011. We believe our facilities; and other general and administrative costs.
Overview of 2010 Resultssuccess in driving market share growth will continue in 2013.
Net sales for 20102012increased9.6%, 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). |
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 2012increased$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) increased11.3%9.7% to $7.27100.8 billion compared to $6.53 billionmillion in 20092012, 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 an11.6% increase in our cigarette sales and a 10.5% increasegross profit in our food/non-food sales.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 both categories benefited from favorable foreign exchange ratesthese 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). |
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 acquisitionexercise of Finkle Distributors, Inc. ("FDI")stock options. During the year ended December 31, 2012 and 2011, which we acquired inrepurchased 118,800 and 542,415 shares of common stock, respectively, under the third quartershare repurchase program at an average price of 2010. $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. |
| |
| (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 2012increased 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 net sales was led by our food and other tobacco products (“OTP”) categories. This increase was a result of deeper sales to existing customers driven by the success of our marketing initiatives that focus on fresh foods and vendor consolidation (“VCI”). We added over 2,000 stores to our “Fresh and Local” food program during 2010, which drove a 38% increase in our fresh product, dairy and bread line items within our food category. In addition, we benefited from new customers, favorable foreign exchange rates and the FDI acquisition previously mentioned.
Cigarette net sales for 2010 increased due to price and excise tax inflation and a 3.0% increase in carton volume including FDI, or a 1.8% increase without. During 2010, carton sales in the U.S. increased 1.1% excluding FDI, driven primarily by market share gains. Cartonhigher sales to new and existing customers.
Net Sales of Cigarettes. Net sales of cigarettes for 2012increased 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 a2.4% 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 increased 7.5%, ledrelated primarily to the loss of one customer, representing less than 0.3% of total cartons sold by customer growththe Company, and a focused reduction in our Toronto division. Longer term,service to certain customers which resulted in improved profitability for the Canadian region in 2012. While we continue to expect that overallhave experienced only slight declines in carton sales on a comparative basis, we believe long-term cigarette consumption maywill be negatively impacted by rising prices, legislative actions, diminishing social acceptance and sales through illicit markets. However, we expect to offset the majority of the impact from these declines through market share expansion, growth in our non-cigarette categories and incremental gross profitthat resultsfrom cigarette manufacturer price increases. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability.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.
Despite the growth in ourNet Sales of Food/Non-food Products. Net sales during 2010, we continue to monitor current macroeconomic conditions, including consumer confidence, spending, employment, fuel costs, and inflation/deflation levels. We believe these macroeconomic factors may have put pressure on other wholesalers and influenced the competitive landscape which ultimately impacted our margins. A significant change in macroeconomic conditions could materially impact our operating results.
Our remaining gross profitof food/non-food products for 12012increased increased $12.7348.7 million million,, or 3.3%14.5%, to $395.22,753.0 million during 2010 from $382.52,404.3 million million last year. Remaining gross profit marginin 2011. The following table provides net sales by product category for our food/non-food products (in millions) 1 (1)decreased :
|
| | | | | | | | | | | | | | |
| | 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. |
42 basis points from 5.86% last year to 5.44% this year.Sales associated with the Southeastern Expansion and FCGC represented approximately 59% of the increase in food/non-food sales for 2012. The net declineremaining 41% increase in food/non-food sales was due primarily to competitive pricing pressures which were most severe earlier this year. Remaining gross profit margins did improve somewhathigher sales in the second halfour food category driven by our sales and marketing initiatives with existing and new customers and higher sales of the year,smokeless tobacco products included in our OTP and we expect to make continued progress toward growing margins over time. We believe the margins in the fresh food line items will continue to improve and were not significantly impacted by the competitive pricing pressures affecting the more traditional categories. A return of meaningfulhealth, beauty & general product inflation and/or manufacturer promotions, coupled with market share expansion and deeper selling into existing accounts, is expected to help improve margins in the future. The convenience retail industry continues to move towards fresh foods, a more efficient supply chain and flexibility of service. We believe we are in a strong position to capitalize on these market trends.
1 Remaining gross profit and remaining gross profit margin are non-GAAP financial measurescategories, which we providebelieve was driven primarily by increased restrictions on where people are allowed to segregate the effectssmoke in public. Total net sales of LIFO expense, cigarette inventory holding profits and other major non-recurring items that significantly affect the comparabilityfood/non-food products as a percentage of gross profit and related margins.total net sales increased to 31.0% for 2012 compared to 29.6% in 2011.
Operating incomeGross 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 20102012increased 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 $28.9 million5.36% of total net sales for 2012 compared to $65.05.35% 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 last 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. |
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| (5) | We received an OTP tax settlement of $0.8 million in 2011. |
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| (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 declineincrease 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 increased8.3% 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
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 $19.1percentage 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 2012increased$28.1 million reduction, or 12.0%, to $262.7 million from $234.6 million in cigarette holding gains, net2011. 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 federal excise taxes ("FET"),FCGC and a $9.9$2.5 million increase in LIFO expense, a $5.3 million reduction in income earned primarily from manufacturer price increases,healthcare claims and approximately $5.5 million of additional operating expenses which are more fully discussed in our MD&A.workers compensation costs. In addition, competitive pressures on margins previously discussedwarehousing and distribution expenses for 2012 were offsetimpacted by temporary operational inefficiencies at certain divisions resulting primarily in part by operating expense leverage of approximately 25 basis points. Improved health carehigher labor costs, and workers' compensation costs helped to offset a $4.6$1.0 million increase in net fuel costs, duringdue largely to an increase in miles driven. Although the year, along with improved productivity and leverageprice we pay for fuel increased only modestly in our other labor costs. Increases2012, future increases or decreases in future 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.
Business and Supply Expansion
We continue to expand our presence eastward, expand our fresh product delivery and drive our vendor consolidation initiative. Some of our expansion activities include:
| |
• | In 2010, as part of our selling strategy of providing “fresh” product to our retailers to meet consumer demand, we grew the number of stores participating in our proprietary “Fresh and Local” program by over 2,000 locations, increasing total participation to approximately 4,100 stores. A main component of the program is to assist independent convenience store operators in obtaining equipment solutions to properly implement a “fresh” program. Once the equipment solution is in place, we turn our focus to providing fresh product solutions to the convenience retailer, and we also add additional deliveries in order for them to stock the freshest possible product including fresh sandwiches, fresh bakery items, fruits, salads, vegetables and dairy products. We have partnered with local bakeries and commissaries to further enable us to deliver the freshest product possible aligned with geographical preferences. This program was in addition to our other sales and marketing initiatives focused on increasing sales for fresh products. |
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• | On August 2, 2010, we acquired substantially all of the assets of FDI, located in Johnstown, New York, for approximately $36.0 million. FDI is a regional, convenience wholesaler servicing customers in New York, Pennsylvania and the surrounding states. The acquired assets consist primarily of accounts receivable, inventory and fixed assets. Results of operations have been included in our consolidated statements of operations since the date of acquisition. Upon completion of the acquisition, we transitioned warehouse operations to our New England and Pennsylvania divisions. As a result of the acquisition, we expect to bring our industry leading Vendor Consolidation and Fresh initiatives to a larger population of convenience retailers primarily in the Northeast (see Note 3 -- Acquisitions to our consolidated financial statements).
|
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• | We entered into a five-year contract with BP Products North America in February 2010 to provide all of the ampm® proprietary products to its 1,200 stores nationwide. This agreement expands our existing relationship with BP Products North America from a focus in western states to a national basis. In addition, Core-Mark is now designated as the approved supplier for traditional nonproprietary products, in a move designed to further advance ampm®'s ongoing progress in supply chain efficiencies, marketing program effectiveness and consistency of offerings. |
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• | During the latter part of 2010, Core-Mark began marketing and distributing Jamba Juice's proprietary line of fresh deli wraps, salads and sandwiches. This "Grab 'n Go" line placed a face on fresh items which typically are marketed and sold without the benefit of brand recognition from the consumer within the convenience store channel. Over 150 convenience stores accepted this Core-Mark exclusive marketing opportunity and began merchandising and selling the product. In 2011 Core-Mark expects to expand the number of stores participating in the fresh Jamba Juice "Grab 'n Go" offering and also expects to considerably expand on the breadth of the Jamba Juice labeled product in areas such as fruit cups, yogurts, trail mix, nuts and others. The co-developed items will provide health-oriented food items for the convenience channel. |
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• | In June 2008, we acquired substantially all of the assets of Auburn Merchandise Distributors, Inc. (“AMD”), located in Whitinsville, Massachusetts, a wholly-owned subsidiary of Warren Equities, Inc., for approximately $28.7 million. The assets purchased included primarily accounts receivable, inventory and fixed assets. The AMD acquisition expanded our presence and infrastructure in the Northeastern region of the U.S., as its facility and the majority of its customers are located there (see Note 3 -- Acquisitions to our consolidated financial statements).
|
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• | We opened a distribution facility near Toronto, Ontario, in January 2008, to expand our existing market geography in Canada, and we signed a long-term supply agreement with Couche-Tard, a Canadian retailer that operates over 600 stores in the province of Ontario. |
Other Business Developments
Impact of the Passage of Family Smoking Prevention and Tobacco Control Act
In June 2009, the Family Smoking Prevention and Tobacco Control Act was signed into law, which granted the FDA the authority to regulate the production and marketing of tobacco products in the U.S. The new legislation established a new FDA office that has the authority to regulate changes to nicotine yields and the chemicals and flavors used in tobacco 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, and limit or otherwise impact the advertising and marketing of tobacco products by requiring additional labels or warnings, as well as pre-approval by the FDA. This new FDA office is to be financed through user fees paid by tobacco companies prorated based on market share. To date, this legislation and its associated regulations have not had a material impact on our business.
Federal Excise Tax Liability Impact for the State Children's Health Insurance Program
In February 2009, the State Children's Health Insurance Program (“SCHIP”) was signed into law, which increased federal cigarette excise taxes levied on manufacturers of cigarettes from 39¢ to $1.01 per pack effective April 1, 2009. In March 2009, most U.S. manufacturers increased their list prices which resulted in an increase of approximately 28% on Core-Mark's product purchases in response to the passage of the SCHIP legislation. Net cigarette sales for 2010 and 2009 include approximately $105.9 million and $534.0 million, respectively, of increased sales from these price increases. Cigarette inventory holding profits were $6.1 million for 2010 compared to cigarette inventory holding profits of $36.7 million, partially offset by a net federal floor stock tax of $11.5 million, for the same period in 2009. The significant cigarette inventory holding profits in 2009 were due primarily to increases in cigarette prices by manufacturers in response to the anticipated increase in federal excise taxes mandated by the SCHIP legislation. We paid approximately $12.7 million of federal excise floor taxes and received $1.2 million in reimbursements from cigarette and tobacco manufacturers for a net floor stock tax amount of $11.5 million, which was reflected as an increase to our cost of goods sold in 2009.
Share Repurchase Program
During the year ended December 31, 2010, no shares of common stock were repurchased under our share repurchase program. During the year ended December 31, 2009, we repurchased 98,646 shares of common stock at an average price of $22.77 per share for a total cost of $2.2 million. During the year ended December 31, 2008, we repurchased 396,716 shares of common stock at an average price of $27.66 per share for a total cost of $11.0 million.
As of December 31, 2010 there was $16.8 million available for future share repurchases under our share repurchase program. Our available funds for future share repurchases were re-established at $30 million under the February 2010 amendment to our Credit Facility (see Note 7 -- Long-Term Debt to our consolidated financial statements).
Results of Operations
Comparison of 2010 and 2009 (1)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2010 | | 2009 |
| | | 2010 | | Amounts (in millions) | | % of Net sales | | % of Net sales, less excise taxes | | Amounts (in millions) | | % of Net sales | | % of Net sales, less excise taxes |
| | | Increase (Decrease) (in millions) | | | | | | |
| Net sales | | $ | 735.2 | | | $ | 7,266.8 | | | 100.0 | % | | — | % | | $ | 6,531.6 | | | 100.0 | % | | — | % |
| Net sales — Cigarettes | | 530.6 | | | 5,119.7 | | | 70.5 | | | 64.0 | | | 4,589.1 | | | 70.3 | | | 64.0 | |
| Net sales — Food/non-food | | 204.6 | | | 2,147.1 | | | 29.5 | | | 36.0 | | | 1,942.5 | | | 29.7 | | | 36.0 | |
Net sales, less excise taxes (2) | | 494.7 | | | 5,510.3 | | | 75.8 | | | 100.0 | | | 5,015.6 | | | 76.8 | | | 100.0 | |
Gross profit (3) | | (16.3 | ) | | 385.3 | | | 5.3 | | | 7.0 | | | 401.6 | | | 6.1 | | | 8.0 | |
| Warehousing and | | | | | | | | | | | | | | |
| distribution expenses | | 14.5 | | | 211.8 | | | 2.9 | | | 3.8 | | | 197.3 | | | 3.0 | | | 3.9 | |
| Selling, general and | | | | | | | | | | | | | | |
| administrative expenses | | 5.2 | | | 142.5 | | | 2.0 | | | 2.6 | | | 137.3 | | | 2.1 | | | 2.7 | |
| Income from operations | | (36.1 | ) | | 28.9 | | | 0.4 | | | 0.5 | | | 65.0 | | | 1.0 | | | 1.3 | |
| Interest expense | | 0.9 | | | (2.6 | ) | | — | | | — | | | (1.7 | ) | | — | | | — | |
| Interest income | | 0.1 | | | 0.4 | | | — | | | — | | | 0.3 | | | — | | | — | |
| Foreign currency transaction | | | | | | | | | | | | | | |
| gains (losses), net | | (1.7 | ) | | 0.5 | | | — | | | — | | | 2.2 | | | — | | | — | |
| Income before taxes | | (38.6 | ) | | 27.2 | | | 0.4 | | | 0.5 | | | 65.8 | | | 1.0 | | | 1.3 | |
Net income (4) | | (29.6 | ) | | 17.7 | | | 0.2 | | | 0.3 | | | 47.3 | | | 0.7 | | | 0.9 | |
(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 actual 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 decrease as a result of increases in excise taxes since gross profit dollars generally remain the same (see Comparison of Sales and Gross Profit by Product Category, page 32).
(3) Gross margins 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) The decrease in net income compared to 2009 was due primarily to a $19.1 million reduction in cigarette holding gains, a $5.3 million reduction in income earned primarily from manufacturer price increases, an increase in LIFO expense of $9.9 million and $5.5 million of additional expenses in 2010.
Consolidated Net Sales. Net sales for 2010 increased by $735.2 million, or 11.3%, to $7,266.8 million from $6,531.6 million in 2009. Excluding the effects of foreign currency fluctuations, sales from the FDI acquisition and approximately $105.9 million of incremental sales resulting from manufacturers' cigarette price increases in response to the SCHIP legislation, net sales increased by 6.1% in 2010 compared to 2009. This increase was the result of sales gains from new and existing customers and inflation of cigarette prices and excise taxes.
Net Sales of Cigarettes. Net sales of cigarettes for 2010 increased by $530.6 million, or 11.6%, to $5,119.7 million from $4,589.1 million in 2009. Net cigarette sales for 2010 increased 10.0%, excluding the effects of foreign currency fluctuations. The increase in net cigarette sales in 2010 was driven by an 8.3% increase in the average sales price per carton, due primarily to manufacturer price and excise tax increases, and an overall increase in carton sales of 3.0%, or 1.8% excluding sales from the FDI acquisition. Our carton sales in 2010 increased 1.1% in the U.S., excluding FDI, and increased 7.5% in Canada, attributable primarily to market share gains in our Toronto division. Total net cigarette sales as a percentage of total net sales were 70.5% in 2010 compared to 70.3% in 2009.
Net Sales of Food/Non-food Products. Net sales of food and non-food products for 2010 increased $204.6 million, or 10.5%, to $2,147.1 million from $1,942.5 million in 2009. The following table provides net sales by product category for our food/non-food products (in millions)(1):
| | | | | | | | | | | | | | |
| | 2010 | | 2009 | | Increase / (Decrease) |
| Product Category | Net Sales | | Net Sales | | Dollars | | Percentage |
| Food | $ | 840.9 | | | $ | 738.0 | | | $ | 102.9 | | | 13.9 | % |
| Candy | 426.0 | | | 405.0 | | | 21.0 | | | 5.2 | % |
| Other tobacco products | 503.6 | | | 434.0 | | | 69.6 | | | 16.0 | % |
| Health, beauty & general | 220.6 | | | 209.5 | | | 11.1 | | | 5.3 | % |
| Non-alcoholic beverages | 152.0 | | | 151.7 | | | 0.3 | | | 0.1 | % |
| Equipment/other | 4.0 | | | 4.3 | | | (0.3 | ) | | (5.5 | )% |
| | | | | | | | |
| Total Food/Non-food Products | $ | 2,147.1 | | | $ | 1,942.5 | | | $ | 204.6 | | | 10.5 | % |
(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
Excluding the effects of foreign currency fluctuations, net sales of food/non-food products increased 9.0% in 2010 compared to 2009. The increase, primarily in our food and other tobacco products categories, was driven by our sales and marketing initiatives, sales gains from new customers and sales from the FDI acquisition. Total net sales of food and non-food products as a percentage of total net sales was 29.5% for 2010 compared to 29.7% for 2009.
Gross Profit. Gross profit represents the portion of sales remaining after deducting the cost of goods sold during the period. Vendor incentives, cigarette holding profits, federal floor stock taxes and changes in LIFO reserves are classified as elements of cost of goods sold. Gross profit for 2010 decreased by $16.3 million, or 4.1%, to $385.3 million from $401.6 million in 2009. This decrease in gross profit was due primarily to realizing $19.1 million more of cigarette inventory holding profits, net of floor stock tax, during 2009 largely related to the increase in federal excise tax mandated by the SCHIP legislation. In addition, LIFO expense increased by $9.9 million compared to the prior year, due primarily to the cigarette category, which reflected multiple price increases during the year.
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2010 and 2009(1):
| | | | | | | | | | | | | | | | | | | |
| | 2010 | | 2009 |
| | Amounts (in millions) | | % of Net sales | | % of Net sales, less excise taxes | | Amounts (in millions) | | % of Net sales | | % of Net sales, less excise taxes |
| Net sales | $ | 7,266.8 | | | 100.0 | % | | — | | | $ | 6,531.6 | | | 100.0 | % | | — | |
Net sales, less excise taxes (2) | 5,510.3 | | | 75.8 | | | 100.0 | % | | 5,015.6 | | | 76.8 | | | 100.0 | % |
| Components of gross profit: | | | | | | | | | | | |
| Cigarette inventory holding profits | $ | 6.1 | | | 0.08 | % | | 0.11 | % | | $ | 36.7 | | | 0.56 | % | | 0.73 | % |
Net federal floor stock tax (3) | — | | | — | | | — | | | (11.5 | ) | | (0.18 | ) | | (0.23 | ) |
OTP tax items (4) | 0.6 | | | 0.01 | | | 0.01 | | | 0.6 | | | 0.01 | | | 0.01 | |
| LIFO expense | (16.6 | ) | | (0.23 | ) | | (0.30 | ) | | (6.7 | ) | | (0.10 | ) | | (0.13 | ) |
Remaining gross profit (5) | 395.2 | | | 5.44 | | | 7.17 | | | 382.5 | | | 5.86 | | | 7.63 | |
| Gross profit | $ | 385.3 | | | 5.30 | % | | 6.99 | % | | $ | 401.6 | | | 6.15 | % | | 8.01 | % |
(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 actual 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 decrease since gross profit dollars generally remain the same (see Comparison of Sales and Gross Profit by Product Category, page 32).
(3) In February 2009, SCHIP was signed into law and imposed a floor stock tax on tobacco products held for sale on April 1,
2009. The net floor stock tax was recorded as an increase to our cost of goods sold in the second quarter of 2009.
(4) We recognized a $0.6 million Other Tobacco Products ("OTP ") tax gain resulting from a state tax method change in 2010. We recognized an OTP tax refund of $0.6 million in 2009.
(5) Remaining gross profit is a non-GAAP financial measure which we provide to segregate the effects of LIFO expense, cigarette inventory holding profits, FET associated with the SCHIP legislation and other major non-recurring items that significantly affect the comparability of gross profit.
Our remaining gross profit was 5.44% of total net sales for 2010 compared with 5.86% in 2009. The incremental sales related to the cigarette price increases associated with SCHIP reduced our remaining gross profit margins by approximately eight basis points in 2010.
Cigarette remaining gross profit decreased approximately 1.6% on a cents per carton basis in 2010 compared with 2009 due primarily to the effect of competitive pricing pressures. Remaining gross profit for our food/non-food category decreased approximately 76 basis points in 2010 to 12.60% compared to 13.36% in 2009. The decrease in total remaining gross profit was attributable primarily to contract renewals, competitive pricing pressures and a net reduction of $5.3 million related to income earned primarily from manufacturer price increases. In 2010, our remaining gross profit for food/non-food products increased to approximately 68.5% of our total remaining gross profit compared to 67.9% in 2009.
Operating Expenses. Our operating expenses include costs related to warehousing, distribution, and selling, general and administrative activities. In 2010, operating expenses increased $19.8 million, or 5.9%, to $356.4 million from $336.6 million in 2009. As a percentage of net sales, total operating expenses declined to 4.9% in 2010 compared to 5.2% in 2009. Our operating expenses in 2010 included $5.5 million of additional expenses consisting of $2.8 million of integration expenses associated with the FDI acquisition, $1.6 million of costs related to the settlement of insurance claims we inherited from Fleming, our former parent, and $1.1 million of expenses for advisory and due diligence activities necessary to analyze multiple offers from potential acquirers. Operating expenses also included $7.1 million of expenses related to the operations of FDI. Our operating expenses in 2009 included $0.9 million of costs to convert our New England division onto our information systems platform. Excluding the items above, operating expenses in 2010 increased $8.1 million, or 2.4%, to $343.8 million.
Warehousing and Distribution Expenses. Warehousing and distribution expenses increased $14.5 million, or 7.3%, to $211.8 million in 2010 from $197.3 million in 2009. Included in warehousing and distribution expenses for 2010 were $4.3 million of incremental net fuel costs, excluding FDI, and $4.0 million of expenses related to the operations of FDI which we acquired this year. The increase in net fuel costs was due primarily to higher fuel prices and an increase in mileage due primarily to market share expansion. As a percentage of net sales, warehousing and distribution expenses were 3.0% for 2012 compared to 2.9% for 2010 compared with 3.0% for 20092011.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $in 5.22012increased$2.9 million million,, or 3.8%1.9%, to $153.7 million from $150.8 millionin 20102011. The increase to $142.5 million from $137.3 million in2009. 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 2010expenses resulting from the favorable resolution of legacy workers' compensation and insurance claims. SG&A expenses for 2011 included $3.1$2.7 million of acquisition and start-up costs related to the operations of FDI, $2.8 million of integration expenses associated with the FDI acquisition, $1.6FCGC and $1.8 million of costs related to the settlementstart-up of insurance claims we inherited from Fleming, our former parent,the Florida distribution center and $1.1 million of expenses for advisory and due diligence activities necessaryother infrastructure costs to analyze multiple offers from potential acquirers. SG&A expenses for 2009 included $0.9 million of costs related tosupport the integration of our New England division onto our information systems platform. Excluding the items above, SG&A expenses decreased $2.5 million, or 1.8%, to $133.9 million. The decrease is due primarily to reductions in health care and workers' compensation costs and cost savings initiatives.Customer Agreement. As a percentage of net sales, SG&A expenses declined to 2.0%1.7% for 20102012 compared withto 2.1%1.9% for the same period in 20092011.
Interest Expense. Interest expense includes both debt interest and loan amortization fees related to borrowings.borrowings and facility fees. Interest expense was $2.6$2.2 million million for 20102012 compared to $1.7$2.4 million million for the same period in 20092011. The increasedecrease was due primarily to higherlower fees for unused facility and letter of credit participation, fees that resulted from increased rates with the extension of our revolving Credit Facility in February 2010, partially offset by a reductionan increase in average borrowings in the current period versus the prior year period.during 2012. Average borrowings for 20102012 were $3.126.3 million million with an average interest rate of 2.9%2.1%, compared to average borrowings of $8.221.1 million million and an average interest rate of 2.0%2.2% for the same period in 20092011.
Interest Income. In 2010, interestInterest income was $$0.4 million million compared to $for both 0.32012 million forand 20092011. Our interest income was derived primarily from earnings on cash balances kept in trust, checking accounts and overnight deposits.
Foreign Currency Transaction Gains (Losses),Losses, Net. We realized foreign currency transaction gainslosses of $0.5$0.2 million million for 20102012 compared to gains of $2.2$0.5 million million in 20092011. The fluctuationchange was due primarily to the level of investment in our Canadian operations and to changesthe fluctuation in the Canadian/U.S. exchange rate.
Income Taxes. Our effective tax rate was 34.9%38.8% for 20102012 compared to 28.1%39.4% for 20092011. 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 9 --10 - Income Taxesto our consolidated financial statements for a reconciliation of the differences between the federal statutory tax rate and the effective tax rate). Included in
In both 2012 and 2011, the provision for income taxes for 2010 was a $0.7 million net benefit, including $0.1 million of interest recovery, compared toincluded a net benefit of $6.7$0.5 million including $2.1 million of interest recovery, for the same period in 2009. The net benefits related primarily to the expiration of the statute of limitations for uncertain tax positions and revisions toadjustments of prior year estimates based upon the finalization of our tax returns.year's estimates.
Results of Operations
Comparison of 20092011 and 20082010 (in millions)(1)
:
| | | | | | 2009 | | 2008 | | | | | | | | | | | | | | | |
| | | 2009 | | Amounts (in millions) | | % of Net sales | | % of Net sales, less excise taxes | | Amounts (in millions) | | % of Net sales | | % of Net sales, less excise taxes | | | | 2011 | | 2010 |
| | | Increase (Decrease) (in millions) | | | Increase (Decrease) | | Amounts | | % of Net sales | | % of Net sales, less excise taxes | | Amounts | | % of Net sales | | % of Net sales, less excise taxes |
| Net sales | | $ | 486.7 | | | $ | 6,531.6 | | | 100.0 | % | | — | % | | $ | 6,044.9 | | | 100.0 | % | | — | % | | $ | 848.1 |
| | $ | 8,114.9 |
| | 100.0 | % | | — | % | | $ | 7,266.8 |
| | 100.0 | % | | — | % |
| Net sales — Cigarettes | | 464.3 | | | 4,589.1 | | | 70.3 | | | 64.0 | | | 4,124.8 | | | 68.2 | | | 60.7 | | | 590.9 |
| | 5,710.6 |
| | 70.4 |
| | 64.1 |
| | 5,119.7 |
| | 70.5 |
| | 64.0 |
|
| Net sales — Food/non-food | | 22.4 | | | 1,942.5 | | | 29.7 | | | 36.0 | | | 1,920.1 | | | 31.8 | | | 39.3 | | | 257.2 |
| | 2,404.3 |
| | 29.6 |
| | 35.9 |
| | 2,147.1 |
| | 29.5 |
| | 36.0 |
|
Net sales, less excise taxes (2) | | 445.1 | | | 5,015.6 | | | 76.8 | | | 100.0 | | | 4,570.5 | | | 75.6 | | | 100.0 | | | 653.1 |
| | 6,163.4 |
| | 76.0 |
| | 100.0 |
| | 5,510.3 |
| | 75.8 |
| | 100.0 |
|
Gross profit (3) | | 42.5 | | | 401.6 | | | 6.1 | | | 8.0 | | | 359.1 | | | 5.9 | | | 7.9 | | | 48.8 |
| | 434.1 |
| | 5.3 |
| | 7.0 |
| | 385.3 |
| | 5.3 |
| | 7.0 |
|
| Warehousing and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| distribution expenses | | (0.3 | ) | | 197.3 | | | 3.0 | | | 3.9 | | | 197.6 | | | 3.3 | | | 4.3 | | | 22.8 |
| | 234.6 |
| | 2.9 |
| | 3.8 |
| | 211.8 |
| | 2.9 |
| | 3.8 |
|
| Selling, general and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| administrative expenses | | 7.9 | | | 137.3 | | | 2.1 | | | 2.7 | | | 129.4 | | | 2.1 | | | 2.8 | | | 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 | | 34.9 | | | 65.0 | | | 1.0 | | | 1.3 | | | 30.1 | | | 0.5 | | | 0.7 | | | 16.8 |
| | 45.7 |
| | 0.6 |
| | 0.7 |
| | 28.9 |
| | 0.4 |
| | 0.5 |
|
| Interest expense | | (0.5 | ) | | (1.7 | ) | | — | | | — | | | (2.2 | ) | | — | | | (0.1 | ) | | (0.2 | ) | | (2.4 | ) | | — |
| | — |
| | (2.6 | ) | | — |
| | — |
|
| Interest income | | (0.7 | ) | | 0.3 | | | — | | | — | | | 1.0 | | | — | | | — | | | — |
| | 0.4 |
| | — |
| | — |
| | 0.4 |
| | — |
| | — |
|
| Foreign currency transaction | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| gains (losses), net | | 8.5 | | | 2.2 | | | — | | | — | | | (6.3 | ) | | (0.1 | ) | | (0.1 | ) | |
| (losses) gains, net | | | (1.0 | ) | | (0.5 | ) | | — |
| | — |
| | 0.5 |
| | — |
| | — |
|
| Income before taxes | | 43.2 | | | 65.8 | | | 1.0 | | | 1.3 | | | 22.6 | | | 0.4 | | | 0.5 | | | 16.0 |
| | 43.2 |
| | 0.5 |
| | 0.7 |
| | 27.2 |
| | 0.4 |
| | 0.5 |
|
| Net income | | 29.4 | | | 47.3 | | | 0.7 | | | 0.9 | | | 17.9 | | | 0.3 | | | 0.4 | | | 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) | |
| (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). |
(2) Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to actual 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 decrease as a result of increases in excise taxes since gross profit dollars generally remain the same (see Comparison of Sales and Gross Profit by Product Category, page 32).
(3) Gross margins 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.
Consolidated Net Sales. Net sales for 2011increased by $486.7848.1 million, or 8.1%11.7%, to $6,531.68,114.9 million for 2009 from $6,044.97,266.8 million million in 20082010. Excluding the effects of foreign currency fluctuations, net sales increased by 9.1%11.0% in 20092011 compared to 2008. The increase in net2010, driven primarily by sales was attributable primarily to approximately $534.0 million from manufacturer pricethe FCGC and Finkle Distributors, Inc. ("FDI") acquisitions, sales associated with the Customer Agreement and increases in responsefood/non-food sales to the SCHIP legislation and incremental sales of $136.9 million from our New England and Toronto divisions, which were acquired or became operational in 2008, partially offset by a reduction in the volume of cigarette carton sales and one less selling day in 2009 compared to 2008. The significant cigarette price increasesand the resulting increase in our net sales impact certain year over year comparisons on a percent of net sales basis.existing customers.
Net Sales of Cigarettes. Net sales of cigarettes for 20092011increased increased by $464.3590.9 million, or 11.3%11.5%, to $4,589.15,710.6 million from $4,124.85,119.7 million in 20082010. Net cigarette sales for 20092011 increased 12.4%10.9%, excluding the effects of foreign currency fluctuations. TheThis increase in net cigarette sales in 2009 was driven by sales attributable to the FCGC and FDI acquisitions and sales associated with the Customer Agreement. In addition, there was a 19.1%3.3% increase in the average sales price per carton due primarily to manufacturercigarette price inflation and increases and incremental sales of $115.5 million from our New England and Toronto divisions, partially offset by a decline in average dailyexcise taxes. Total carton sales in the U.S. of 9.9%, excluding the New England division. We believe the decline in average daily carton sales2011 increased 9.2% in the U.S. is dueand increased 1.3% in partCanada. Excluding incremental carton sales attributable to the significant price increases during 2009 which led to reduced carton sales. Average dailyFCGC and FDI acquisitions, carton sales associated with the Customer Agreement and one additional selling day in Canada increased 14.4% primarily2011, 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-
term cigarette consumption will be negatively impacted by rising prices, legislative actions, diminishing social acceptance and sales through market share gains.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 increased to 70.3%were 70.4% in 20092011 compared to 68.2%70.5% in 2008.This increase was due primarily to the significant price increases from the manufacturers in response to the SCHIP legislation.2010.
Net Sales of Food/Non-food Products. Net sales of food and food/non-food products for 20092011increased increased $22.4257.2 million, or 1.2%12.0%, to $1,942.52,404.3 million from $1,920.12,147.1 million million in 20082010. 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):
| | | | 2009 | | 2008 | | Increase / (Decrease) | 2011 | | 2010 | | Increase / (Decrease) |
| Product Category | Net Sales | | Net Sales | | Dollars | | Percentage | Net Sales | | Net Sales | | Amounts | | Percentage |
| Food | $ | 738.0 | | | $ | 710.1 | | | $ | 27.9 | | | 3.9 | % | $ | 995.7 |
| | $ | 840.9 |
| | $ | 154.8 |
| | 18.4 | % |
| Candy | 405.0 | | | 401.3 | | | 3.7 | | | 0.9 | % | 459.8 |
| | 426.0 |
| | 33.8 |
| | 7.9 |
|
| Other tobacco products | 434.0 | | | 402.7 | | | 31.3 | | | 7.8 | % | 607.9 |
| | 503.6 |
| | 104.3 |
| | 20.7 |
|
| Health, beauty & general | 209.5 | | | 220.1 | | | (10.6 | ) | | (4.8 | )% | 237.5 |
| | 220.6 |
| | 16.9 |
| | 7.7 |
|
| Non-alcoholic beverages | 151.7 | | | 180.9 | | | (29.2 | ) | | (16.1 | )% | |
| Beverages | | 100.9 |
| | 152.0 |
| | (51.1 | ) | | (33.6 | ) |
| Equipment/other | 4.3 | | | 5.0 | | | (0.7 | ) | | (14.0 | )% | 2.5 |
| | 4.0 |
| | (1.5 | ) | | (37.5 | ) |
| | | | | | | | | |
| Total Food/Non-food Products | $ | 1,942.5 | | | $ | 1,920.1 | | | $ | 22.4 | | | 1.2 | % | $ | 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.
| |
| (1) | Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. |
Excluding the effects of foreign currency fluctuations, netNet sales of food and food/non-food products increased 2.2% in 2009 compared15.6% excluding sales of Gatorade, which was moved to 2008.a direct-store-delivery ("DSD") format during the first quarter of 2011. The increase in net food/non-food sales was driven primarily by sales attributable to the FCGC and FDI acquisitions, the Customer Agreement and incremental sales of $21.4 million from our New England and Toronto divisions,driven by our sales and marketing initiatives primarily impacting primarily theour food category, and price inflationcategory. In addition, sales in theour Other Tobacco Products ("OTP") category related primarily to SCHIP. Thewere positively impacted by an increase was offset partiallyin sales of smokeless tobacco products, which we believe is driven by a reductionincreased regulation of where people can smoke and an increase in non-alcoholic beverages resulting from a change in the marketing and distribution methods of some beverage manufacturers.excise taxes. Total net sales of food and food/non-food products as a percentage of total net sales wereincreased slightly to 29.7%29.6% for 20092011 compared to 31.8%29.5% for 20082010., despite the addition of FCGC which has a lower percentage of food/non-food net sales.
Gross Profit. Gross profit represents the portionamount of sales remainingprofit after deducting the cost of goods sold from net sales during the period. Vendor incentives, cigaretteinventory holding profits, the federal floor stock taxgains and changes in LIFO reserves are classified as elementscomponents of cost of goods sold.sold and therefore part of our gross profit. Gross profit for 20092011increased increased by $42.548.8 million, or 11.8%12.7%, to $401.6434.1 million million from $359.1385.3 million million in 20082010. GrossThe increase in gross profit for 20092011 was significantly higher compared to 2008 as we realized $36.7driven primarily by a $42.3 million of increase in remaining gross profit, incremental cigarette inventory holding profitsgains 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 increased cigarette prices by manufacturersthe addition of FCGC, the Customer Agreement and sales increases in response to the increase in federal excise taxes mandated by the SCHIP legislation, partially offset by $11.5 millionour food/non-food category.
The following table provides the components comprising the change in gross profit as a percentage of net sales for 20092011 and 20082010 (in millions)(1):
| | | | 2009 | | 2008 | | | 2011 | | 2010 |
| | Amounts (in millions) | | % of Net sales | | % of Net sales, less excise taxes | | Amounts (in millions) | | % of Net sales | | % of Net sales, less excise taxes | Increase (Decrease) | | Amounts | | % of Net sales | | % of Net sales, less excise taxes | | Amounts | | % of Net sales | | % of Net sales, less excise |
| Net sales | $ | 6,531.6 | | | 100.0 | % | | — | | | $ | 6,044.9 | | | 100.0 | % | | — | | $ | 848.1 |
| | $ | 8,114.9 |
| | 100.0 | % | | — | % | | $ | 7,266.8 |
| | 100.0 | % | | — | % |
Net sales, less excise taxes (2) | 5,015.6 | | | 76.8 | | | 100.0 | % | | 4,570.5 | | | 75.6 | | | 100.0 | % | 653.1 |
| | 6,163.4 |
| | 76.0 |
| | 100.0 |
| | 5,510.3 |
| | 75.8 |
| | 100.0 |
|
| Components of gross profit: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cigarette inventory holding profits | $ | 36.7 | | | 0.56 | % | | 0.73 | % | | $ | 3.1 | | | 0.05 | % | | 0.07 | % | |
Net federal floor stock tax (3) | (11.5 | ) | | (0.18 | ) | | (0.23 | ) | | — | | | — | | | — | | |
OTP tax items (4) | 0.6 | | | 0.01 | | | 0.01 | | | 1.4 | | | 0.02 | | | 0.03 | | |
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 | (6.7 | ) | | (0.10 | ) | | (0.13 | ) | | (11.0 | ) | | (0.18 | ) | | (0.24 | ) | (1.7 | ) | | (18.3 | ) | | (0.22 | ) | | (0.30 | ) | | (16.6 | ) | | (0.23 | ) | | (0.30 | ) |
Remaining gross profit (5) | 382.5 | | | 5.86 | | | 7.63 | | | 365.6 | | | 6.05 | | | 8.00 | | |
Remaining gross profit (6) | | 42.3 |
| | 437.5 |
| | 5.39 |
| | 7.10 |
| | 395.2 |
| | 5.44 |
| | 7.17 |
|
| Gross profit | $ | 401.6 | | | 6.15 | % | | 8.01 | % | | $ | 359.1 | | | 5.94 | % | | 7.86 | % | $ | 48.8 |
| | $ | 434.1 |
| | 5.35 | % | | 7.04 | % | | $ | 385.3 |
| | 5.30 | % | | 6.99 | % |
(1) | |
| (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. |
(2) Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to actual 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 decrease since gross profit dollars generally remain the same (see Comparison of Sales and Gross Profit by Product Category, page 32).
(3) In February 2009, SCHIP was signed into law and imposed a floor stock tax on tobacco products held for sale on April 1, 2009. The net floor stock tax was recorded as an increase to our cost of goods sold in the second quarter of 2009.
(4) We received OTP (Other Tobacco Products) tax refunds of $0.6 million and $1.4 million in 2009 and 2008, respectively.
(5) Remaining gross profit is a non-GAAP financial measure which we provideincreased $42.3 million, or 10.7%, to segregate the effects of LIFO expense, cigarette inventory holding profits, FET associated with the SCHIP legislation and other major non-recurring items that significantly affect the comparability of gross profit.
Our remaining$437.5 million for 2011 from $395.2 million in 2010. Remaining gross profit margin was 5.86%5.39% of total net sales for 20092011 compared with 6.05%5.44% in 20082010. The addition of FCGC and the new Couche-Tard business reduced remaining gross profit margin by five basis points in 2011. Inflation in cigarette price increases associated with SCHIP that increased our total net sales also reducedprices compressed our remaining gross profit marginsmargin by approximately 52eight basis points in 2009.2011.
Cigarette remaining gross profit increased approximately 24.5%12.0%, or 3.4% on a cents per carton basis, in 20092011 compared withto 20082010 due primarily to increased margins as a result of the manufacturers' price increases. We believehigher 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 may revert closerwill 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 normal historical margins over time.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 categoriescategory decreased approximately 1721 basis points in 20092011 to 13.36%12.39% compared to 13.53%12.60% in 20082010, due primarily to an $8.1 million reduction in floor stock income earned from manufacturer price increases. . 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 20092011, our remaining gross profit for food/non-food products declined to approximatelywas 67.9%68.1% of our total remaining gross profit compared to 71.1%68.5% in 20082010. The declinedecrease in 2011 was due primarily to the impactaddition of SCHIPFCGC, which resulted inderives a higher cigarettepercentage of its remaining gross profit in 2009.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.
Operating Expenses. Our operating expenses include costs related to warehousing, distribution,Warehousing and selling, generalDistribution, and administrativeSelling, General and Administrative activities. In 20092011, operating expenses increased $7.632.0 million, or 2.3%9.0%, to $336.6388.4 million million from $329.0356.4 million million in 20082010. The majority of the increase in operating expenses was driven by aattributable 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 6.1%December 31, 2011 increase in selling, general and administrative expenses.are discussed below. As a percentage of net sales, total operating expenses weredeclined to 5.2%4.8% in 20092011 compared to 5.4%4.9% in 20082010. Operating expenses, as a percent to total net sales, were favorably impacted by approximately 46 basis points due to the SCHIP related cigarette price increases which increased our total net sales.
Warehousing and Distribution Expenses. Warehousing and distribution expenses decreased byincreased $0.322.8 million, or 0.2%10.8%, to $197.3234.6 million million in 20092011 from $197.6211.8 million million in 20082010. The decreaseincrease in warehousing and distribution expenses compared with 2010 was due primarily to the addition of FCGC, FDI, the new Florida distribution center and a decrease$2.7 million increase in net fuel costs of $4.5 millionexcluding FCGC and increases in warehousing efficiencies at certain divisions offset by incremental expenses of $3.4 million from our New England division, acquired in June 2008, and an increase in health care and workers' compensation costs of $3.6 million. The increase in health care and workers' compensation costs for 2009 was due primarily to higher overall medical costs and an increase in the severity of certain claims.Florida. As a percentage of net sales, warehousing and distribution expenses were 3.0%2.9% for 2009 compared with 3.3% for 2008. Theboth years, including the impact of SCHIP related cigarette pricehigher 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 total net sales favorably impacted warehousingto our customers may materially impact our financial results depending on the extent and distribution expenses as a percenttiming of sales by approximately 27 basis points.these changes.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $7.98.3 million, or 6.1%5.8%, in 20092011 to $137.3150.8 million million from $129.4142.5 million million in 20082010. 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 20092010 was due primarily to $3.6included $2.8 million of incremental expenses from our New England and Toronto divisions, salary merit increases of $2.0 million and an increase in employee incentives consisting of $1.3 million and $1.2FDI integration costs, $1.6 million of bonuscosts related to the settlement of insurance claims we inherited from Fleming, our former parent company, and stock compensation, respectively.$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 2.1%1.9% for both 20092011 andcompared with 20082.0% for 2010. The impact of price increases associated with SCHIP favorably impacted SG&A expenses as a percent to total net sales by approximately 19 basis points.
Interest Expense. Interest expense includes both debt interest and loan amortization of fees related to borrowings.borrowings and facility fees. Interest expense was $1.72.4 million million for 20092011 compared to $2.22.6 million millionfor 2010. Lower fees for unused facility and letter of credit participation were offset in part by higher interest expense due to higher borrowings during 20082011. Average borrowings for 20092011 were $8.2$21.1 million with an average interest rate of 2.2%, compared to $21.1average borrowings of $3.1 million for 2008. During 2009, the weighted-average and an average interest rate on borrowings from our revolving credit facility was 2.0% compared to 3.8%of 2.9% for the same period in 20082010. The decline in interest rates was the result of general decreases in both bank prime and LIBOR borrowing rates. Interest expense declined period over period due to lower average interest rates and lower average borrowings.
Interest Income. In 2009, interestInterest income was $0.30.4 million million compared to $for both 1.02011 million forand 20082010. Our interest income was derived primarily from earnings on cash balances kept in trust, checking accounts and overnight deposits. Interest income was lower in 2009 due primarily to a reduction in prevailing interest rates.
Foreign Currency Transaction (Losses) Gains, (Losses), Net. We incurredrealized foreign currency transaction losses of $0.5 million for 2011 compared to gains of $2.20.5 million million for 2009 compared to losses of $6.3 million in 20082010. 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 28.1%39.4% for 20092011 compared to 20.8%34.9% for 20082010. 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 9 --10 - Income Taxesto our consolidated financial statements for a reconciliation of the differences between the federal statutory tax rate and the effective tax rate). Included inrate.)
In 2011, the provision for income taxes for 2009 wasincluded a $6.7$0.5 million net benefit, inclusiveincluding $0.1 million of a net interest recovery, of $2.1 million related to unrecognized tax benefits, compared to a net benefit of $3.2$0.5 million, inclusive of net interest expense ofincluding $0.1 million of interest recovery, for 2008. The net benefits2010 related primarily to the expiration of the statute of limitations for uncertain tax positions, revisions to prior year estimates based upon finalization of tax returns and state tax credits claimed for prior years.positions.
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 20102012, 20092011 and 20082010 (dollars in(in millions)(1):
| | | | 2010 | | 2009 | | 2008 | 2012 | | 2011 | | 2010 |
| Cigarettes | | | | | | | | | | |
Net sales (2) | $ | 5,119.7 | | | $ | 4,589.1 | | | $ | 4,124.8 | | |
Excise taxes in sales (3) | $ | 1,594.2 | | | $ | 1,381.0 | | | $ | 1,350.9 | | |
Net sales, less excise taxes (4) | $ | 3,525.5 | | | $ | 3,208.1 | | | $ | 2,773.9 | | |
| 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 | $ | 11.3 | | | $ | 6.6 | | | $ | 4.7 | | 4.3 |
| | 7.9 |
| | 5.3 |
|
Gross profit (5) | $ | 119.4 | | | $ | 142.4 | | | $ | 104.1 | | 325.8 |
| | 296.7 |
| | 265.9 |
|
| Gross profit % | 2.33 | % | | 3.10 | % | | 2.52 | % | 11.83 | % | | 12.34 | % | | 12.38 | % |
| Gross profit % less excise taxes | 3.39 | % | | 4.44 | % | | 3.75 | % | 12.78 | % | | 13.40 | % | | 13.40 | % |
Remaining gross profit (6) | $ | 124.6 | | | $ | 122.9 | | | $ | 105.7 | | $ | 330.1 |
| | $ | 297.9 |
| | $ | 270.6 |
|
| Remaining gross profit % | 2.43 | % | | 2.68 | % | | 2.56 | % | 11.99 | % | | 12.39 | % | | 12.60 | % |
| Remaining gross profit % less excise taxes | 3.53 | % | | 3.83 | % | | 3.81 | % | 12.95 | % | | 13.45 | % | | 13.63 | % |
| | | | | | | | | | | |
| Food/Non-food Products | | | | | | |
| Totals | | | | | | |
| Net sales | $ | 2,147.1 | | | $ | 1,942.5 | | | $ | 1,920.1 | | $ | 8,892.4 |
| | $ | 8,114.9 |
| | $ | 7,266.8 |
|
Excise taxes in sales (3) | $ | 162.3 | | | $ | 135.0 | | | $ | 123.5 | | |
Net sales, less excise taxes (4) | $ | 1,984.8 | | | $ | 1,807.5 | | | $ | 1,796.6 | | |
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 | $ | 5.3 | | | $ | 0.1 | | | $ | 6.3 | | 12.3 |
| | 18.3 |
| | 16.6 |
|
Gross profit (7) | $ | 265.9 | | | $ | 259.2 | | | $ | 255.0 | | |
Gross profit (4) (5) | | 476.8 |
| | 434.1 |
| | 385.3 |
|
| Gross profit % | 12.38 | % | | 13.34 | % | | 13.28 | % | 5.36 | % | | 5.35 | % | | 5.30 | % |
| Gross profit % less excise taxes | 13.40 | % | | 14.34 | % | | 14.19 | % | 6.90 | % | | 7.04 | % | | 6.99 | % |
Remaining gross profit (6) | $ | 270.6 | | | $ | 259.6 | | | $ | 259.9 | | $ | 481.3 |
| | $ | 437.5 |
| | $ | 395.2 |
|
| Remaining gross profit % | 12.60 | % | | 13.36 | % | | 13.53 | % | 5.41 | % | | 5.39 | % | | 5.44 | % |
| Remaining gross profit % less excise taxes | 13.63 | % | | 14.36 | % | | 14.46 | % | 6.97 | % | | 7.10 | % | | 7.17 | % |
| | | | | | | |
| Totals | | | | | | |
Net sales (2) | $ | 7,266.8 | | | $ | 6,531.6 | | | $ | 6,044.9 | | |
Excise taxes in sales (3) | $ | 1,756.5 | | | $ | 1,516.0 | | | $ | 1,474.4 | | |
Net sales, less excise taxes (4) | $ | 5,510.3 | | | $ | 5,015.6 | | | $ | 4,570.5 | | |
| LIFO expense | $ | 16.6 | | | $ | 6.7 | | | $ | 11.0 | | |
Gross profit (5),(7) | $ | 385.3 | | | $ | 401.6 | | | $ | 359.1 | | |
| Gross profit % | 5.30 | % | | 6.15 | % | | 5.94 | % | |
| Gross profit % less excise taxes | 6.99 | % | | 8.01 | % | | 7.86 | % | |
Remaining gross profit (6) | $ | 395.2 | | | $ | 382.5 | | | $ | 365.6 | | |
| Remaining gross profit % | 5.44 | % | | 5.86 | % | | 6.05 | % | |
| Remaining gross profit % less excise taxes | 7.17 | % | | 7.63 | % | | 8.00 | % | |
(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2) Cigarette net sales include $105.9 million and $534.0 million of incremental sales for 2010 and 2009, respectively, from price increases primarily associated with the implementation of SCHIP, which was signed into law in February 2009. Our gross profit percentage for the year ended December 31, 2009 was negatively impacted by SCHIP price increases.
(3) Excise taxes included in our net sales consist of state, local and provincial excise taxes which we are responsible for collecting and remitting. Federal excise taxes are levied on the manufacturers who pass the tax on to us as part of the product cost and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage may decrease since gross profit dollars generally remain the same.
| |
| (1) | Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results. |
| |
| (2) | Excise taxes included in our net sales consist of state, local and provincial excise taxes which we are responsible for collecting and remitting. Federal excise taxes are levied on the manufacturers who pass the tax on to us as part of the product cost and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage may be reduced since gross profit dollars generally remain the same. |
| |
| (3) | 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 excise taxes. |
| |
| (4) | Cigarette gross profit includes (i) cigarette inventory holding gains related to manufacturer price increases, (ii) increases in state, local and provincial excise taxes and (iii) LIFO effects. Cigarette inventory holding gains for the years 2012, 2011 and 2010 were $7.8 million, $8.2 million and $6.1 million, respectively. |
| |
| (5) | Food/non-food gross profit includes (i) inventory holding gains related to manufacturer price increases, (ii) increases in state, local and provincial excise taxes, (iii) LIFO effects, (iv) OTP tax items and (v) a net candy holding gain. Included in food/non-food gross profit for 2011 was $5.9 million net candy holding gain and an OTP tax settlement of $0.8 million. Included in food/non-food gross profit for 2010 is an OTP tax gain of $0.6 million resulting from a state tax method change, which was recorded as a reduction to our costs of goods sold 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. Excluding a net candy holding gain of $5.9 million in 2011, inventory holding gains for our food/non-food commodities decreased by $3.6 million for 2012 compared to 2011 and increased by $3.2 million for 2011 compared to 2010. |
(4) Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to actual sales growth and increases in excise taxes.
(5) Cigarette gross profit includes (i) cigarette holding profits related to manufacturer price increases and increases in state, local and provincial excise taxes, (ii) federal excise floor taxes and (iii) LIFO effects. Cigarette holding profits for the years 2010, 2009 and 2008 were $6.1 million, $36.7 million and $3.1 million, respectively. The increase in cigarette inventory holding profits for the year ended December 31, 2009 was due primarily to increases in cigarette prices by manufacturers in response to the increases in federal excise taxes mandated by the SCHIP legislation. Cigarette gross profit for the year ended December 31, 2009 was negatively impacted by $10.6 million of federal excise floor tax net of manufacturer reimbursements related to SCHIP.
(6) Remaining gross profit is a non-GAAP financial measure which we provide to segregate the effects of LIFO expense, cigarette inventory holding profits and other major non-recurring items, such as FET associated with the SCHIP legislation and OTP tax items, that significantly affect the comparability of gross profit.
(7) Food/non-food gross profit includes (i) holding profits related to manufacturer price increases, (ii) increases in state, local and provincial excise taxes, (iii) federal excise floor taxes and (iv) LIFO effects. Included in food/non-food gross profit for the year ended December 31, 2009 is $0.9 million of federal excise floor taxes related to SCHIP. In addition, included in food/non-food gross profit for 2010, 2009 and 2008 is an OTP tax gain of $0.6 million resulting from a state tax method change and OTP tax refunds of $0.6 million and $1.4 million, respectively, all of which were recorded as a reduction to our costs of goods sold in the applicable year.
Liquidity and Capital Resources
Our cash and cash equivalents as of December 31, 20102012 were $16.119.1 million compared to $17.715.2 million as of December 31, 20092011. Our restricted cash as of December 31, 20102012 was $12.810.9 million compared to $12.412.6 million as of December 31, 20092011. Restricted cash represents primarily represents funds that have been set aside in trust as required by one of the Canadian provincial taxing authorities to secure amounts payable for cigarette and tobacco excise taxes.
Our liquidity requirements arise primarily from the funding of our working capital, capital expenditures, and debt service requirements of our credit facilities.Credit Facility, income taxes, repurchases of common stock and dividend payments. We have historically funded our liquidity requirements through our currentcash flows from operations and external borrowings. For the year ended December 31, 20102012, our cash flows from operating activities provided $74.971.2 million and at December 31, 2012, we had $161.497.7 million million of borrowing capacity available inunder our revolving credit facility as of December 31, 2010.Credit Facility.
Based on our anticipated cash needs, availability under our revolving credit facilityCredit Facility and the scheduled maturity of our debt, we expect that our current liquidity will be sufficient to meet all of our anticipated operating needs during the next twelve months.
Cash flows from operating activities
Year ended December 31, 2012
Net cash provided by operating activities increased by $59.9 million to $71.2 million for the year ended December 31, 2012 compared to $11.3 million for the same period in 2011. This increase was due to a $52.8 million increase in net cash provided by working capital and a $7.1 million increase in net income adjusted for non-cash items. The increase in net cash provided by working capital was due primarily to a decrease in inventory and accounts receivable levels during 2012, excluding the impact of the Davenport acquisition. Accounts and other receivables, net, were lower at the end of 2012, due to the timing of collections. The decrease in inventory was due primarily to lower levels of year-end purchases related to seasonal promotional opportunities, new business and holiday timing. Inventory purchases at the end of 2011 were higher to support these activities as more fully described below. Conversely, in 2012 we generated less working capital from accounts payable and cigarette and tobacco taxes payable, which declined consistent with the lower levels of inventory.
Year ended December 31, 20102011
Net cash provided by operating activities increased by $41.8 million to $74.9 million for the year ended December 31, 2010 compared to $33.1 million for the same period in 2009. The increase in cash provided by operating activities was due primarily to a $68.6 million increase in cash provided by working capital.
A significant use of cash occurred in 2009 as a result of the SCHIP legislation which increased accounts receivable, prepayments and inventory by approximately $35 million, and did not recur in 2010. This was partially offset by an increase in cash used to buy inventory at the end of 2010 in order to maintain appropriate LIFO levels. In addition, prepayments decreased due to the timing of purchases and cigarette and tobacco taxes payable increased due primarily to the FDI acquisition and the establishment of credit terms in one additional state earlier this year.
The increase in cash provided by working capital was offset by a $26.8 million decrease in net income adjusted for non-cash items due primarily to a $19.1 million reduction in cigarette holding profits included in prior year net income related to the SCHIP legislation and a $5.3 million reduction in income earned primarily from manufacturer price increases.
Year ended December 31, 2009
Net cash provided by operating activities decreased by $22.5$63.6 million to $33.1$11.3 million for the year ended December 31, 20092011 compared with $55.6to net cash provided of $74.9 million for the same period in 2008. The2010. This decrease in cash provided by operating activities was due primarily to a $61.6an increase of $71.1 million in net decreasecash used to fund working capital. Inventory levels and prepaid inventory at December 31, 2011, net of related accounts payable, used $37.5 million more in working capital, driven by the timing of vendor prepaymentscash in 2011 compared to 2010 due primarily to investments at year-end to capitalize on promotional opportunities, support new business, maximize LIFO tax strategy, and increased cigarette prices resultingfund increases in inventory to support holiday timing. In addition, tobacco taxes payable used $24.6 million more cash in 2011 compared to 2010, as 2010 benefited from the SCHIP legislation, which resultedestablishment of credit terms related to both the FDI acquisition, and one additional taxing jurisdiction, and tax increases in higher accounts receivable and inventory balances. This decrease in working capital was partially offset by a $39.1several states. A $7.5 million increase in net income plus adjustmentsadjusted for non-cash items such as depreciation, amortization and LIFO expense, which was driven primarily by income from cigarette price increases relatedoffset partially the increase in net cash used to the SCHIP legislation.
fund working capital.
Cash flows from investing activities
Year ended December 31, 20102012
Net cash used in investing activities increaseddecreased by $29.9$14.5 million to $50.5$60.6 million for the year ended December 31, 2012 compared to $75.1 million for the same period in 2011. This decrease was due primarily to a $16.8 million reduction in cash used for acquisitions. In 2012 we acquired Davenport for $34.0 million, net of acquired cash, compared with the acquisition of FCGC in 2011 for which we paid $50.8 million, net of acquired cash. Capital expenditures increased by $4.5 million to $28.6 million in 2012 compared with $24.1 million in 2011. The increase in capital expenditures was due primarily to expansion projects at certain warehouses.
Year ended December 31, 2011
Net cash used in investing activities increased by $24.6 million to $75.1 million for the year ended December 31, 20102011 compared withto $20.650.5 million million for the same period in 20092010. This increase was due primarily to the acquisition of FDI. WeFCGC in 2011 for which we paid approximately$50.8 million, net of acquired cash, compared with the acquisition of FDI in the same period in 2010 for which we paid $35.9 million, net of cash received, for the acquired assets, which consisted primarily of purchased accounts receivable, inventory and fixed assets.cash. Capital expenditures decreasedincreased by $7.210.2 million million to $13.924.1 million million in 20102011 compared with $21.113.9 million million for 20092010. CapitalThe increase in capital expenditures was due primarily to the opening of our Florida distribution center and IT and other equipment for FCGC. The remainder of our capital expenditures during 20102011 consisted primarily of additions to our trucking fleet, freezer and cooler expansion and other warehouse equipment. We estimate that fiscal 2011 capital expenditures will not exceed $24 million.
Year ended December 31, 2009
Net cash used in investing activities decreased by $28.5 million to $20.6 million for the year ended December 31, 2009 compared with $49.1 million for the same period 2008. In June 2008, we acquired AMD and paid approximately $28.0 million which consisted primarily of purchased accounts receivable, inventory and fixed assets, offset by approximately $1.6 million of cash received in the acquisition. Capital expenditures increased by $1.2 million to $21.1 million in 2009 compared with $19.9 million for 2008.
Cash flows from financing activities
Year ended December 31, 20102012
Net cash used in financing activities increased by $was 16.1 million to $25.36.1 million for 20102012 compared with $to net cash provided of 9.2$62.9 million for the same period in 20092011. The increase in net cash used in financing activities, a change of $69.0 million. This change was due primarily to a $14.5decrease in net borrowings under our Credit Facility of $50.7 million, a decrease of $21.9 million in book overdrafts, and an increase of $8.5 million in net repayments under our revolving credit facility, partially offsetcaused by a $6.1 million increase in proceeds received from the exercise of stock options and warrants. The decrease in book overdrafts was due primarily to the level of cash on hand andin relation to the timing of vendor payments comparedand an $8.4 million increase in cash used to the same periodpay dividends to shareholders, all of which were offset by a $13.8 million decrease in 2009.cash used to repurchase common stock in 2012.
Year ended December 31, 20092011
Net cash used inprovided from financing activities decreasedincreased by $1.8$88.2 million to $62.9 million for 2011 compared to a net cash use of $25.3 million for the same period in 2010. This increase was due primarily to an increase in net borrowings under our Credit Facility of $81.2 million to $9.2 million for 2009 compared with $11.0 million for 2008. We had net repayments onfund the acquisition of FCGC and our revolving lineworking capital requirements primarily resulting from the timing of credit of $10.7 million during 2009 compared to $0.1 million of borrowings during 2008. Additionally, cash payments to repurchase our common stock pursuant to our share repurchase program decreased from $11.0 million in 2008 to $2.2 million in 2009. The decrease in net cash used in financing activities was also offset by anyear-end inventory purchases. An increase in book overdrafts dueof $30.0 million, which was caused by the level of cash on hand in relation to the timing of excise tax payments.vendor payments, also contributed to the increase in net cash provided, partially offset by $19.0 million used to repurchase common stock in 2011.
Adjusted EBITDA
Adjusted EBITDA is a measure used by management to measure operating performance. We believe Adjusted EBITDA provides meaningful supplemental information for investors regarding the performance of our business and allows investors to view results in a manner similar to the method used by our management. Adjusted EBITDA is also among the primary measures used externally by our investors, analysts and peers in our industry for purposes of valuation and comparing our results to other companies in our industry. Adjusted EBITDA is not defined by GAAP and the discussion of Adjusted EBITDA should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. We may define Adjusted EBITDA differently than other companies and therefore such measures may not be comparable to ours.
The following table provides the components of Adjusted EBITDA for years ended December 31, 2012, 2011 and 2010 (in millions):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| Net income | $ | 33.9 |
| | $ | 26.2 |
| | $ | 17.7 |
|
Interest expense, net (1) | 1.8 |
| | 2.0 |
| | 2.2 |
|
| Provision for income taxes | 21.5 |
| | 17.0 |
| | 9.5 |
|
| Depreciation and amortization | 25.3 |
| | 22.4 |
| | 19.7 |
|
| LIFO expense | 12.3 |
| | 18.3 |
| | 16.6 |
|
| Stock-based compensation expense | 5.8 |
| | 5.5 |
| | 4.8 |
|
| Foreign currency transaction losses (gains), net | 0.2 |
| | 0.5 |
| | (0.5 | ) |
| Adjusted EBITDA | $ | 100.8 |
| | $ | 91.9 |
| | $ | 70.0 |
|
| |
| (1) | Interest expense, net, is reported net of interest income. |
Adjusted EBITDA in 2012increased 9.7% to $100.8 million, 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.
Adjusted EBITDA in 2011 increased $21.9 million, or 31%, to $91.9 million from $70.0 million in 2010. The increase in Adjusted EBITDA for 2011 was driven primarily by the acquisition of FCGC and our Southeastern Expansion, gross profit expansion in our food/non-food commodities, incremental inventory holding gains and operating expense leverage.
Our Credit Facility
In October 2005, we entered intoWe have a five-year revolving credit facility (“Credit Facility”) with a capacity of $250$200 million and an expiration date of October 2010.
In February 2010, we entered into a third amendment to our Credit Facility (the “Third Amendment”), which extended our credit facility for four years, to February 2014, and decreased the lenders' revolving loan commitments by $50 million to $200 million, at our request. The Third Amendment also provides for up to an additional $100$100 million of lenders' revolving commitments, (formerly $75 million), subject to certain provisions contained therein. Pricing underprovisions. On May 5, 2011, we entered into a fourth amendment to our Credit Facility (the "Fourth Amendment"), which extended our Credit Facility from February 2014 to May 2016 and reduced the new facility increased as a result of generally higher prices in the bank loan market. The basis points added to LIBOR increased to a range of 275 to 350 basis points, up from a range of 100 to 175 basis points, tied to achieving certain operating results as defined in the Credit Facility. Additionally, unused facility fees and letterthe margin on LIBOR or CDOR borrowings. The margin added to LIBOR or CDOR is a range of 175 to 225 basis points. The Fourth Amendment ties the LIBOR or CDOR margin to the amount of available credit participation fees increased. The Third Amendment also increased our basket for permitted acquisitions followingunder the date of the Third Amendment to $125 million and re-established our basket for permitted stock repurchases at $30 million.revolving Credit Facility. At the date of signing the Fourth Amendment, we incurred fees of approximately $1.8$0.7 million, which will beare being amortized over the term of the amendment.
All obligations under the Credit Facility are secured by first priority liens upon substantially all of our present and future assets. The terms of the Credit Facility permit prepayment without penalty at any time (subject to customary breakage costs with respect to LIBOR-LIBOR or CDOR-basedCDOR based loans prepaid prior to the end of an interest period).
The Credit Facility contains restrictive covenants, including among others, limitations on dividends and other restricted payments, other indebtedness, liens, investments and acquisitions and certain asset sales. WeAs of December 31, 2012, we were in compliance with all of the covenants under the Credit Facility as of December 31, 2010.Facility.
Amounts borrowed, outstanding letters of credit and amounts available to borrow, net of certain reserves required under the Credit Facility, were as follows (in millions):
| | | | | | | | | | December 31, | | December 31, |
| | December 31, 2010 | | December 31, 2009 | 2012 | | 2011 |
| Amounts borrowed | $ | — | | | $ | 19.2 | | $ | 73.3 |
| | $ | 62.0 |
|
| Outstanding letters of credit | $ | 26.2 | | | $ | 26.1 | | 19.8 |
| | 23.7 |
|
| Amounts available to borrow | $ | 161.4 | | | $ | 196.9 | | |
Amounts available to borrow (1) | | 97.7 |
| | 106.2 |
|
| |
| (1) | Excluding $100 million expansion feature. |
The decrease in amounts available to borrow is primarily the result36
Average borrowings during the yearyears ended December 31, 20122010 and 2011 were $3.1$26.3 million and $21.1 million , respectively, with amounts borrowed, at any one time outstanding, ranging from zero to a high of $34.8 million. For the same period in 2009, average borrowings were $8.2$91.5 million million, with amounts borrowed ranging from and zero to a high of $61.1 million.$89.5 million, respectively.
Our weighted-average interest rate was calculated based on our daily cost of borrowing, which was computed on a blend of prime and LIBOR rates. The weighted-average interest rate on our revolving credit facility for the years ended December 31, 20102012 and 20092011 was and 2.9%2.1% and 2.0%2.2%, respectively. We paid total unused facility fees and letter of credit participation fees, which are included in interest expense, of $1.8$0.9 million, $1.3 million, and $0.8$1.8 million million for 20102012, 2011 and 20092010., respectively. Amortization of debt issuance costs is included in interest expense. Unamortized debt issuance costs were $1.7$1.5 million and $1.9 million as of December 31, 20102012 and $0.42011 million as of December 31, 2009., respectively.
Contractual Obligations and Commitments
Contractual Obligations. The following table presents information regarding our contractual obligations that existed as of December 31, 20102012 (in millions):
| | | | Total | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 and Thereafter | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
Credit Facility (1) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | $ | 73.3 |
| | $ | — |
| | $ | — |
| | $ | 73.3 |
| | $ | — |
|
Purchase obligations (2) | — | | | — | | | — | | | — | | | — | | | — | | | — | | 1.2 |
| | 1.2 |
| | — |
| | — |
| | — |
|
| Letters of credit | 26.2 | | | 26.2 | | | — | | | — | | | — | | | — | | | — | | 19.8 |
| | 19.8 |
| | — |
| | — |
| | — |
|
| Operating leases | 173.2 | | | 29.3 | | | 25.7 | | | 20.5 | | | 15.8 | | | 13.5 | | | 68.4 | | 216.8 |
| | 35.1 |
| | 55.5 |
| | 44.9 |
| | 81.3 |
|
Capitalized leases (3) | 1.0 | | | 0.2 | | | 0.1 | | | 0.1 | | | 0.1 | | | 0.1 | | | 0.4 | | 12.3 |
| | 0.9 |
| | 1.6 |
| | 1.5 |
| | 8.3 |
|
Total contractual obligation (4)(5)(6) | $ | 200.4 | | | $ | 55.7 | | | $ | 25.8 | | | $ | 20.6 | | | $ | 15.9 | | | $ | 13.6 | | | $ | 68.8 | | |
Total contractual obligations (4)(5)(6) | | $ | 323.4 |
| | $ | 57.0 |
| | $ | 57.1 |
| | $ | 119.7 |
| | $ | 89.6 |
|
| |
| (1) | DoesRepresents amounts borrowed under our revolving Credit Facility and does not include interest costs associated with the Credit Facility which had a weighted-average interest rate of 2.9%2.1% for the year ended December 31, 20102012.
|
(2) Purchase orders for the purchase of inventory and other services are not included in the table above because purchase orders represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions, and the approximate timing of the transaction. Our purchase orders are based on our current inventory needs and are fulfilled by our suppliers within short time periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.
(3) Represents refrigeration and other equipment. Current maturities of capital leases are included in accrued liabilities, and non-current maturities are included in long-term debt.
(4) We have not included in the table above Claims Liabilities of $30.6 million, net of current portion, which includes health and welfare, workers' compensation and general and auto liabilities because it does not have a definite payout by year. They are included in a separate line in the Consolidated Balance Sheet and discussed in Note 2 -- Summary of Significant Accounting Policies to our consolidated financial statements.
(5) As discussed in Note 12 -- Employee Benefit Plans to our consolidated financial statements, we have an $8.5 million long-term obligation arising from an underfunded pension plan. Future minimum pension funding requirements are not included in the schedule above as they are not available for all periods presented.
(6) The table excludes unrecognized tax liabilities of $1.2 million because a reasonable and reliable estimate of the timing of
future tax payments or settlements, if any, cannot be determined (see Note 9 -- Income Taxes | |
| (2) | Our purchase obligations at December 31, 2012 were primarily related to delivery equipment. Purchase orders for the purchase of inventory and other services are not included in the table above because purchase orders represent authorizations to purchase rather than binding agreements. For purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current inventory needs and are fulfilled by our suppliers within short time periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. |
| |
| (3) | Represents warehouse facility, refrigeration and other office and warehouse equipment. Current maturities of capital leases are included in accrued liabilities, and non-current maturities are included in long-term debt. Interest costs associated with the capitalized leases are not included in the table above. |
| |
| (4) | We have not included in the table above claims liabilities of $28.1 million, net of current portion, which includes health and welfare, workers' compensation and general and auto liabilities because it does not have a definite payout by year. They are included in a separate line in the Consolidated Balance Sheet and discussed in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements. |
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| (5) | As discussed in Note 11 - Employee Benefit Plans to our consolidated financial statements, we have a $10.0 million long-term obligation arising from an underfunded pension plan. Future minimum pension funding requirements are not included in the schedule above as they are not available for all periods presented. |
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| (6) | The table excludes unrecognized tax liabilities of $1.6 million because a reasonable and reliable estimate of the timing of future tax payments or settlements, if any, cannot be determined (see Note 10 - Income Taxesto our consolidated financial statements). |
Off-Balance Sheet Arrangements
Letter of Credit Commitments. As of December 31, 20102012, our standby letters of credit issued under our Credit Facility were $26.219.8 million million related primarily to casualty insurance and tax obligations. The majority of the standby letters of credit mature in one year. However, in the ordinary course of our business, we will continue to renew or modify the terms of the letters of credit to support business requirements. The liabilities underlying the letters of credit are reflected on our consolidated balance sheets.
Operating Leases. The majority of our sales offices, warehouse facilities and trucks are subject to lease agreements which expire at various dates through 2022,2027, excluding renewal options. These leases generally require us to maintain, insure and pay any related taxes. In most instances, we expect the leases that expire will be renewed or replaced in the normal course of our business.
Third Party Distribution Centers. We currently manage two regional distribution centers for third party convenience store operators who engage in self-distribution. Under the agreement relating to one of these facilities, the third party has a “put” right under which it may require us to acquire the facility. If the put right is exercised, we will be required to (1) purchase the inventory in the facilities at cost, (2) purchase the physical assets of the facilities at fully depreciated cost and (3) assume the obligations of the third party as lessees under the leases related to those facilities. While we believe the likelihood that this put option will be exercised is remote, if it were exercised, we would be required to make aggregate capital expenditures of approximately $4.0$2.7 million based on current estimates. The amount of capital expenditures would vary depending on the timing of any exercise of such put right and does not include an estimate of the cost to purchase inventory because such purchases would simply replace other planned inventory purchases and would not represent an incremental cost. In the event the third party terminates self-distribution, they are required to enter into a five year distribution agreement with us to supply their stores.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of our Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. The critical accounting polices used in the preparation of the consolidated financial statements are those that are important both to the presentation of financial condition and results of operations and require significant judgments with regards to estimates. We base our estimates on historical experience and on various assumptions we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate; however, actual results could differ from these estimates.
We believe that the following represent the more critical accounting policies, which are subject to estimates and assumptions used in the preparation of our financial statements.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for losses we estimate will arise from our trade customers' inability to make required payments. We evaluate the collectability of accounts receivable and determine the appropriate allowance for doubtful accounts based on historical experience and a review of specific customer accounts. In determining the adequacy of allowances for customer receivables, we analyze factors such as the value of any collateral, customer financial statements, historical collection experience, aging of receivables, general economic conditions and other factors. It is possible that the accuracy of the estimation process could be materially affected by different judgments as to the collectability based on information considered and further deterioration of accounts. If circumstances change (i.e., further evidence of material adverse creditworthiness, additional accounts become credit risks, store closures or deterioration in general economic conditions), our estimates of the recoverability of amounts due us could be reduced by a material amount.
The allowance for doubtful accounts at December 31, 20102012, 20092011 and 20082010 amounted to 4.8%4.5%, 5.6%4.2% and 6.0%4.5%, respectively, of netgross trade accounts receivable.
Bad debt expense associated with our trade customer receivables was $1.4$2.0 million for both 2012 and 2011 and $1.4 million for 2010, $1.8 million for 2009 and $1.6 million for 2008. As a percentage of net sales, our bad debt expense was less than 0.1% for 20102012, 20092011 and 20082010.
Vendor and Sales Incentives
Vendors' Discounts,Vendor Rebates and Promotional Allowances -- Periodic payments from vendors in various forms including rebates, promotional allowances and volume or other purchase discounts are reflected in the carrying value of the related inventory when earned and as cost of goods sold as the related merchandise is sold. Up-front consideration received from vendors linked to purchase or other commitments is initially deferred and amortized ratably to cost of goods sold or as the performance of the activities specified by the vendor to earn the fee is completed. Cooperative marketing incentives from suppliers are recorded as reductions to cost of goods sold to the extent the vendor considerations exceed the costs relating to the programs. These amounts are recorded in the period the related promotional or merchandising programs were provided. Some of theCertain vendor incentive promotions require that we make assumptions and judgments regarding, for example, the likelihood of achieving market share levels or attaining specified levels of purchases. Vendor incentives are at the discretion of our vendors and can fluctuate due to changes in vendor strategies and market requirements.
Customers' Sales Incentives -- We also provide sales rebates or discounts to our customers on a regular basis. The customers' sales incentives are recorded as a reduction to net sales revenue as the “sales incentive”sales incentive is earned by the customer. Additionally, we may provide racking allowances for the customers' commitments to continue using us as the supplier of their products. These allowances may be paid at the inception of the contract or on a periodic basis. Allowances paid at the inception of the contract are capitalized and amortized over the period of the distribution agreement as a reduction to sales.
Claims Liabilities and Insurance Recoverables
We maintain reserves related to workers' compensation, general and auto liability and health and welfare programs that are principally self-insured. Our workers' compensation, general and auto liability insurance policies currently include a deductible of $500,000$500,000 per occurrence and we maintain excess loss insurance that covers any health and welfare costs in excess of $200,000$200,000 per person per year.
Our reserves for workers' compensation, general and auto insurance liabilities are estimated based on applying an actuarially derived loss development factor to our incurred losses, including losses for claims incurred but not yet reported. Actuarial projections of losses concerning workers' compensation, general and auto insurance liabilities are subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, health care costs, litigation trends, legal interpretations, legislative reforms, benefit level changes and claim settlement patterns. Our reserve for health and welfare claims includes an estimate of claims incurred but not yet reported which is derived primarily from historical experience.
Our claim liabilities and the related recoverables from insurance carriers for estimated claims in excess of the deductible amounts and other insured events are presented in their gross amounts because there is no right of offset. The following is a summary of our net reserves as of December 31, 20102012 and December 31, 20092011 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 | | 2009 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| Gross claims liabilities: | | | | | | | | | | | |
| Workers' compensation liability | $ | 5.5 | | | $ | 29.4 | | | $ | 34.9 | | | $ | 5.8 | | | $ | 31.3 | | | $ | 37.1 | |
| Auto & general liability | 0.9 | | | 0.9 | | | 1.8 | | | 0.9 | | | 1.0 | | | 1.9 | |
| Health & welfare liability | 2.3 | | | 0.3 | | | 2.6 | | | 1.7 | | | 0.3 | | | 2.0 | |
| Total gross claims liabilities | $ | 8.7 | | | $ | 30.6 | | | $ | 39.3 | | | $ | 8.4 | | | $ | 32.6 | | | $ | 41.0 | |
| | | | | | | | | | | | |
| Insurance recoverables | $ | (2.5 | ) | | $ | (19.5 | ) | | $ | (22.0 | ) | | $ | (2.7 | ) | | $ | (21.0 | ) | | $ | (23.7 | ) |
| | | | | | | | | | | | |
| Reserves (net): | | | | | | | | | | | |
| Workers' compensation liability | $ | 3.3 | | | $ | 10.3 | | | $ | 13.6 | | | $ | 3.5 | | | $ | 10.8 | | | $ | 14.3 | |
| Auto & general liability | 0.6 | | | 0.5 | | | 1.1 | | | 0.5 | | | 0.5 | | | 1.0 | |
| Health & welfare liability | 2.3 | | | 0.3 | | | 2.6 | | | 1.7 | | | 0.3 | | | 2.0 | |
| Reserves (net): | $ | 6.2 | | | $ | 11.1 | | | $ | 17.3 | | | $ | 5.7 | | | $ | 11.6 | | | $ | 17.3 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2012 | | 2011 |
| | Current | | Long-Term | | Total | | Current | | Long-Term | | Total |
| Gross claims liabilities: | | | | | | | | | | | |
| Workers' compensation | $ | 4.8 |
| | $ | 26.2 |
| | $ | 31.0 |
| | $ | 5.2 |
| | $ | 26.5 |
| | $ | 31.7 |
|
| Auto & general insurance | 1.1 |
| | 1.6 |
| | 2.7 |
| | 1.1 |
| | 1.0 |
| | 2.1 |
|
| Health & welfare | 2.6 |
| | 0.3 |
| | 2.9 |
| | 1.6 |
| | 0.3 |
| | 1.9 |
|
| Total gross claims liabilities | $ | 8.5 |
| | $ | 28.1 |
| | $ | 36.6 |
| | $ | 7.9 |
| | $ | 27.8 |
| | $ | 35.7 |
|
| | | | | | | | | | | | |
| Insurance recoverables | $ | (2.1 | ) | | $ | (17.6 | ) | | $ | (19.7 | ) | | $ | (2.2 | ) | | $ | (17.8 | ) | | $ | (20.0 | ) |
| | | | | | | | | | | | |
| Reserves (net): | | | | | | | | | | | |
| Workers' compensation | $ | 2.9 |
| | $ | 9.1 |
| | $ | 12.0 |
| | $ | 3.3 |
| | $ | 9.2 |
| | $ | 12.5 |
|
| Auto & general insurance | 0.9 |
| | 1.1 |
| | 2.0 |
| | 0.8 |
| | 0.5 |
| | 1.3 |
|
| Health & welfare | 2.6 |
| | 0.3 |
| | 2.9 |
| | 1.6 |
| | 0.3 |
| | 1.9 |
|
| Reserves (net): | $ | 6.4 |
| | $ | 10.5 |
| | $ | 16.9 |
| | $ | 5.7 |
| | $ | 10.0 |
| | $ | 15.7 |
|
The decreaseincrease in these reserves for 20102012 iswas due primarily to better workers compensationa higher number of claims experience and settlementreported losses for our general and auto insurance liability and health and welfare liability, combined with the addition of several large dollar claims.our new division in North Carolina. A 10% change in our incurred but not reported estimates would increase or decrease the estimated reserves for our workers' compensation liability, general and auto insurance liability and health and welfare liability as of December 31, 20102012 by $0.8$0.7 million, $0.1 million and $0.2 million, respectively.
Pension Liabilities
We sponsored a qualified defined-benefit pension plan and a post-retirement benefit plan (collectively, "the Pension Plans") for employees hired before September 1986.1986 and certain employees of Fleming, our former parent company. As discussed in Note 12 --11 - Employee Benefit Plans to our consolidated financial statements, our qualified defined-benefit pension plan was underfunded by $8.5$10.0 million and $11.6$9.3 million at December 31, 20102012 and 2009,2011, respectively. There have been no new entrants to the pension or non-pension post-retirement benefit plans after those benefit plans were frozen on September 30, 1989. Pursuant to the plan of reorganization (May 2004) described in Exhibit 2.1 and incorporated by reference (see Part IV, Item 15, Exhibit Index of this Form 10-K), we were assigned the obligations for three former Fleming defined-benefit pension plans, and these plans were merged into our defined benefit pension plan effective December 2007. All of the pension and post-retirement benefit plans are collectively referred to as the “Pension Plans.”
The determination of the obligation and expense associated with our Pension Plans are dependent, in part, on our selection of certain assumptions used by our independent actuaries in calculating these amounts. These assumptions are disclosed in Note 1211 to the consolidated financial statements and include, among other things, the weighted-average discount rate, the expected weighted-average long-term rate of return on plan assets and the rate of compensation increases. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. In accordance with U.S. GAAP, actual results that differ from the actuarial assumptions are accumulated and amortized over future periods and, therefore, affect recognized expense and the recorded obligation in such future periods. While we believe our assumptions are appropriate, significant differences in actual results or changes in our assumptions may materially affect our pension and other post-retirement obligations and the future expense.
We select the weighted-average discount rates for each benefit plan as the rate at which the benefits could be effectively settled as of the measurement date. In selecting an appropriate weighted-average discount rate we use a yield curve methodology, matching the expected benefits at each duration to the available high quality yields at that duration and calculating an equivalent yield, which is the ultimate discount rate used. The weighted-average discount rate used to determine the pension obligation and pension expense waswere 5.73%3.80% and 6.26%4.72% in, respectively, for 20102012 and 2009, respectively.4.72% and 5.04%, respectively, for 2011. A lower weighted-average discount rate increases the present value of benefit obligations and increases pension expense. Expected return on pension plan assets is based on historical experience of our portfolio and the review of projected returns by asset class on broad, publicly traded equity and fixed-income indices, as well as target asset allocation. Our target asset allocation mix is designed to meet our long-term pension and post-retirement benefit plan requirements. Our assumed weighted-average rate of return on our assets was 7.25% and7.35%for both 20102012 and 2009.2011, respectively.
Sensitivity to changes in the major assumptions for our pension plans as of December 31, 20102012 is as follows (dollars in(in millions):
|
| | | | | |
| | Percentage Point Change | | Projected Benefit Obligation Decrease (Increase) | | Expense Decrease (Increase) |
| Expected return on plan assets | +/- .25 pt | | $0.0 /(0.0)N/A | | $0.1 / (0.1) |
| Discount rate -- Pension | +/- .25 pt | | $0.8 /(0.8)0.9 / (1.0) | | $0.0 / (0.0) |
| Discount rate -- Post-retirement | +/- .25 pt | | $0.1 /(0.1)/ (0.1) | | $0.0 / (0.0) |
Stock-Based CompensationLong-Lived and Other Intangible Assets Impairment
We accountreview our intangible and other long-lived assets for stock-based compensation expensepotential impairment at least quarterly. Long-lived and other intangible assets may also be tested for impairment when events and circumstances exist that indicate the carrying amounts of those assets may not be recoverable. Long-lived assets consist primarily of land, buildings, furniture, fixtures and equipment, leasehold improvements and other intangible assets. An impairment of long-lived assets exists when the carrying amount of a long-lived asset, or asset group, exceeds its fair value. Impairment losses are recorded when the carrying amount of the impaired asset is not recoverable. Recoverability is determined by estimatingcomparing the fair valuescarrying amount of awards at their grant dates and expensing the fair values, netasset (or asset group) to the undiscounted cash flows which are expected to be generated from its use. Our estimates of estimated forfeitures, using the straight-line amortization method for awards with vesting based on service and ratably for awards based on performance conditions. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected life of share awards and forfeiture rates. We develop our estimatesfuture cash flows are based on historical dataexperience and market information whichmanagement's expectations of relevant customers and markets and other operational factors. These estimates project future cash flows several years into the future and can change significantly over time. Currently we usebe affected by factors such as competition, inflation and other economic conditions. Assets to be disposed of are reported at the Black-Scholes option valuation model to value stock option awards. If we were to use alternative valuation methodologies, thelower of carrying amount we expense for stock-based payments could be significantly different (see Note 11 -- Stock-Based Compensation Plans to our consolidated financial statements).
Recent Accounting Pronouncements
Disclosures about Fair Value Measurements
In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-06,Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires additional disclosures aboutor fair value measurements, including transfers inless the cost to sell such assets. During 2012, 2011 and out2010, we did not record impairment losses related to long-lived and other intangible assets or assets identified for abandonment as a result of the fair value hierarchy Levels 1 and 2 and a higher level of disaggregation basedfacility closures or facility relocation.
on nature and riskGoodwill Impairment
We test goodwill for impairment at the different typesend of financial instruments. Foreach year, or whenever events or circumstances indicate that it is more likely than not that the reconciliation of Level 3 fair value measurements, informationof a reporting unit is below its carrying amount. We first assess the related qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The tests to evaluate for impairment are performed at the operating division level. In the first step of the quantitative impairment test, we compare the fair value of the operating division to its carrying value. If the fair value of the division is less than its carrying value, we perform a second step to determine the implied fair value of goodwill associated with the division. If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment for which an impairment loss would be recorded. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimated fair value of each division is based on the discounted cash flow method. This method is based on historical and forecasted amounts specific to each reporting unit and considers sales, gross profit, operating profit and cash flows and general economic and market conditions, as well as the impact of planned business and operational strategies.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about purchases, sales, issuances and settlements should be presented separately.those amounts. This ASU is effective for annual and interim reporting periods beginning after December 15, 2009 for most of the new disclosures and for periods beginning after December 15, 2010 for the new Level 3 disclosures. Comparative disclosures are2012. We do not required in the first year the disclosures are required. Weexpect this update to have incorporated ASU 2010-06 into the disclosures that accompanya material effect on our consolidated financial statements.
In June 2011, the FASB ASU No. 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The Company adopted this pronouncement upon its effective date beginning January 1, 2012.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This pronouncement was effective for the Company beginning January 1, 2012.
Forward-Looking TrendTrends and Other Information
Cigarette Industry Trends
Cigarette Consumption
Aggregate cigarette consumption
Cigarette carton sales for the industry have been in North America has declined steadily since 1980. Prior to 2007, our cigarette sales had benefited fromdecline in the U.S. and Canada for more than a decade and in recent years we have seen a shift in sales to the convenience retail segment, and as a result of this shift, our carton sales had not declined in proportion to the decline in overall consumption. However, our cigarette carton sales started declining in 2007, experienced further declines in 2008 and 2009 and increased modestly in 2010.other tobacco products including smokeless products. We believe overall cigarette consumption will continue to decline in the foreseeable future due to factors such as increasing legislative controls which regulate cigarette sales and where consumers may or may not smoke, the accelerationincreases in the frequencyprices of cigarettes, increases in cigarette regulation and amount of excise tax increases which reduces demand, manufacturer price increases andtaxes, health concerns, increased pressure from anti-tobacco groups and other factors, all of which may lead to reduced consumption or consumers purchasing cigarettes from illicit markets.
Consistent with the industry, our cigarette carton sales have declined on average over the part of consumers. The shiftlast five years on a comparable basis. However, these declines in cigarette carton sales from other channels tohave been mitigated by increases in cigarette prices by the convenience retail segment may no longer be adequate to compensate for consumption declines. However, we expect to offset the majority of the impact from these declines throughmanufacturers. In addition, our same store carton decline is often masked by market share expansion, growth ingains. These market share gains, and equally important, price increases have driven our non-cigarette categories and incremental grossability to make more profitthat results dollars from cigarette manufacturer price increases. We expectsales during this long secular decline in demand. Despite our belief that this secular decline will continue at about the same pace, we also believe that we will continue to grow our gross profit dollars from cigarette sales based on our expectation that cigarette manufacturers will continue to raise prices as carton sales decline in order to maintain or enhance their overall profitability.
Cigarette Regulation
In June 2009, the Family Smoking Prevention and Tobacco Control Act was signed into law, which granted the U.S. Food & Drug Administration (“FDA”) the authority to regulate the production and marketing of tobacco products in the U.S. The new legislation established a new FDA office that has the authority to regulate changes to nicotine yields and the chemicals and flavors used in tobacco 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, and limit or otherwise impact the advertising and marketing of tobacco products by requiring additional labels or warnings, as well as pre-approval by the FDA. This new FDA office is to be financed through user fees paid by tobacco companies prorated based on market share. To date, this legislation and its associated regulations have not had a material impact on our business.
Excise Taxes
Cigarette 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 levied by the taxing authorities in the past and are likely towe will continue to be levied in the future especially as these governmental jurisdictions come under additional pressure to raise revenues. Federal excise taxes are levied on the cigarette manufacturer, whereas state, provincial and local excise taxes are levied on the wholesaler. We increase cigarette prices as state, provincial and local excise tax increases are assessed on cigarette products that we sell. As a result, generally, increases in excise taxes do not increase overall gross profit dollars in the same proportion, but increases may result in a decline in overall gross profit percentage. In February 2009, SCHIP was signed into law and increased federal cigarette excise taxes levied on manufacturers from 39¢ to $1.01 per packtake market share.
Cigarette Inventory Holding ProfitsGains
Distributors such as Core-Mark may, from time to time, may earn higher gross profits on cigarette inventory and excise tax stamp quantities on hand either at the time cigarette manufacturers increase their prices or when states, localities or provinces increase their excise taxes and allow us to recognize inventory holding profits.gains. These profitsgains are recorded as an offset to cost of goods sold as the inventory is sold. Our cigarette holding profits prior to 2009 averaged approximately $5.1 million per year from 2005 to 2008 and represent a normal historical trend. For the year ended December 31, 2009 our cigarette inventory holding profits, net of FET associated with the SCHIP legislation, were $25.2 million, or 6.3%, of our gross profit, as compared to $3.1 million, or 0.9%, of our gross profit for the same period in 2008. The significant holding profits in 2009 were attributable to an average increase of approximately 28% of our cigarette manufacturer list prices, one of the largest increases we have seen in recent history. We believe these price increases were in response to the passage of the SCHIP legislation, and we have not included them in our average trends since they distort an average that we believe is more indicative of future trends. For the year ended December 31, 2010, our cigarette inventory holding profitsgains were $6.17.8 million million,, or 1.6%, of our gross profit.profit for 2012 and $8.2 million, or 1.9%, of our gross profit, for 2011 and $6.1 million, or 1.6% of our gross profit for 2010. We expect cigarette manufacturers will continue to raise prices as carton sales decline in order to maintain or enhance their overall profitability.
Food and Food/Non-food Product Trends
We focus virtually all our marketing efforts primarily on growing our food/non-food product sales. These products typically earnhave significantly higher profit margins than cigarettes and ourcigarette products. Our goal is to continue to increase food/non-food product sales in the future to potentially offset the potential
decline in cigarette carton salescartons as well as enhance our profits and the associated gross profits.
Since the endthose of 2008, manufacturer pricing trends have reflected a lack of inflation and in some cases deflation for the cost of non-tobaccoproducts. As a result, we experienced below average floor stock income during 2010 and 2009 compared to prior periods. Some indications suggest inflation trends are changing, but it is unknown at what pace prices will return to more normal levels of inflation.our customers.
We believe, over the long termbased upon recent industry trends, that the convenience industry is moving toward aselling more of these food/non-food items. We have specifically focused more heavily weighted offering ofon fresh and healthier foods.healthy offerings because we believe that over the long-term the convenience shopper is trending toward these type items. These products tend to earn somewhat higher margins than most other food/non-food products we distribute. Industry experts have indicated that fresh food is driving more and more shopping trips among consumers, and we are positioning ourselves and our customers to benefit from that trend. Ultimately, the consumer will determine what products are sold in the convenience store, but trends indicate that perishable foods will serve a more dominantimportant role in the convenience retail channel in the future.
Generally we benefit from inflation in products, however we did not see much inflation in 2012 food/non-food product categories compared to 2011. Price is controlled by the manufacturer and thus future levels of price inflation cannot be estimated by us. Historically we have seen inflation in non-cigarette categories during times of steep commodity price increases and steep fuel price inflation.
General Economic Trends
Uncertain Economic Conditions
While somewhat recently improved,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 global financial economic downturn that beganoutcome of political events (e.g. resolution of the national debt ceiling) may result in 2008 continues to negatively affectweakened consumer confidence and spending. Economic pressures in the U.S. and Canada, including reduced access to credit, high levels and fear of unemployment, increases in energy and fuel costs, and housing market volatility, have resulted in curtailed consumer retail spending. Reducedspending 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 liquidity concerns due to such factorsincreased pressures on our margins. In addition, severe adverse economic conditions may place a number of our convenience store ownersretail customers under financial stress, which maycould increase our credit risk and potential bad debt exposure. ShouldThese economic and market conditions in our key markets not show continued improvement,may have a material adverse effect on our business financial condition and operating results could be negatively impacted.results.
InflationInflation/Deflation
Historically, we have generally benefited from manufacturer price increases, both as a result of inventory floor stockholding gains and our cost plus pricing structure. However, significant increases in cigarette product costs and cigarette excise taxes adversely impact our gross profit as a percentage of sales, because for cigarettes we are paid on a cents per carton basis.basis for cigarette sales. As a result, cigarette gross profit percentages typically decline from marked increases in the underlying product costs or excise tax increases, regardless of the fact that absolute gross profit dollars on a cents per carton basis may have increased. This is due to the disparity in the absolute dollars of the underlying product costs and excise taxes compared to the cents per carton that we make in gross profit. Inversely,
Our food/non-food sales are generally priced based on the manufacturer's cost of the product plus a percentage markup. As a result, we generally benefit from food/non-food price increasesincreases. However, becauseduring periods of cost deflation or stagnation for these categories, we mostly mark up product costs usingproducts our profit levels may be negatively impacted, even though our gross profit as a percentage of the price of goods sold may remain relatively constant. To the extent that we are unable to pass on product cost of good sold.increases and underlying carrying costs to our customers, our profit margins and earnings could be negatively impacted.
Inflation can also result in increases in LIFO expense, adversely impacting our gross profit percentage (see Note 2 --- Summary of Significant Accounting Policiesto our consolidated financial statements).
ITEM 7. A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our majormost significant exposure to market risk comes from changes in short-term interest rates on our variable rate debt. Depending upon the borrowing option chosen, the interest charged is generally based upon the prime rate or LIBOR plus an applicable margin. If interest rates increased 32.921 basis points (which approximates 10% of the weighted-average interest rate on our average borrowings during the year ended December 31, 2010)2012), our results fromof operations and cash flows would not be materially affected.
We are exposed to foreign currency risk, primarily through our operations in Canada which conduct business in Canadian dollars. We record gains and losses within our shareholders' equity due to the translation of the Canadian branches' financial statements into U.S. dollars. A 10% unfavorable change in the weighted average Canadian/U.S. dollar exchange rate for 20102012 would have negatively impacted our net sales for 20102012 by 1.6%1.3% and would not have materially impacted our operating income. Additionally, we incur foreign currency transaction gains and losses related to the level of activity between the U.S. and Canada. A 10% unfavorable change in the Canadian/U.S. dollar noon exchange rate on December 31, 20102012 would have resulted in a $2.6$0.9 million increase in foreign currency transaction losses for 20102012 which are included in our Consolidated Statements of Operations. We did not engage in hedging transactions during 2010, 20092012, 2011 or 2008.2010.
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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| (a) Financial Statements filed as part of this Annual Report on Form 10-K | |
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| 1. Financial Statements | |
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| A. Audited Financial Statements | |
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| 2. Financial Statement Schedule | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Core-Mark Holding Company, Inc.:
We have audited the accompanying consolidated balance sheets of Core-Mark Holding Company, Inc. and subsidiaries (the “Company”) as of December 31, 20102012 and 2009,2011, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010.2012. Our audits also included the financial statement schedule listed in the Index at Item 8(a)(2). We also have audited the Company's internal control over financial reporting as of December 31, 2010,2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management's Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the J.T. Davenport division, which was acquired on December 17, 2012 and whose financial statements constitute less than 8% of total assets, and less than 1% of income before income taxes of the consolidated financial statement amounts as of and for the year ended December 31, 2012. Accordingly, our audit did not include the internal control over financial reporting at the J.T. Davenport division. The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 20102012 and 2009,2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010,2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Commission.
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| /s/ Deloitte & Touche LLP |
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| San Francisco, California |
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March 15, 201114, 2013 |
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
| | | | December 31, | | December 31, | December 31, | | December 31, |
| | 2010 | | 2009 | 2012 | | 2011 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 16.1 | | | $ | 17.7 | | $ | 19.1 |
| | $ | 15.2 |
|
| Restricted cash | 12.8 | | | 12.4 | | 10.9 |
| | 12.6 |
|
| Accounts receivable, net of allowance for doubtful accounts of $8.7 and $9.1, | | | | |
| respectively (Note 4) | 179.3 | | | 161.1 | | |
| Accounts receivable, net of allowance for doubtful accounts of $10.9 and $9.6 | | | | |
| at December 31, 2012 and December 31, 2011, respectively (Note 4) | | 228.1 |
| | 215.7 |
|
| Other receivables, net (Note 4) | 43.5 | | | 39.6 | | 53.8 |
| | 42.0 |
|
| Inventories, net (Note 5) | 290.7 | | | 275.5 | | 366.4 |
| | 362.3 |
|
| Deposits and prepayments (Note 4) | 42.2 | | | 42.2 | | 40.3 |
| | 48.2 |
|
| Deferred income taxes (Note 9) | 3.6 | | | 3.6 | | |
| Deferred income taxes (Note 10) | | 8.2 |
| | 6.2 |
|
| Total current assets | 588.2 | | | 552.1 | | 726.8 |
| | 702.2 |
|
| Property and equipment, net (Note 6) | 84.7 | | | 83.8 | | 114.7 |
| | 99.5 |
|
| Deferred income taxes (Note 9) | — | | | 5.3 | | |
| Goodwill | 4.6 | | | 3.7 | | |
| Goodwill (Note 7) | | 22.8 |
| | 16.2 |
|
| Other intangible assets, net (Note 7) | | 21.4 |
| | 21.3 |
|
| Other non-current assets, net (Note 4) | 31.3 | | | 33.0 | | 33.5 |
| | 31.0 |
|
| Total assets | $ | 708.8 | | | $ | 677.9 | | $ | 919.2 |
| | $ | 870.2 |
|
| Liabilities and Stockholders’ Equity | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 57.3 | | | $ | 63.2 | | $ | 94.4 |
| | $ | 91.5 |
|
| Book overdrafts | 6.5 | | | 19.4 | | |
| Book overdrafts (Note 2) | | 24.7 |
| | 27.1 |
|
| Cigarette and tobacco taxes payable | 166.8 | | | 132.3 | | 165.6 |
| | 173.4 |
|
| Accrued liabilities (Note 4) | 66.8 | | | 59.6 | | 79.5 |
| | 78.6 |
|
| Deferred income taxes (Note 9) | 0.3 | | | 0.6 | | |
| Deferred income taxes (Note 10) | | 3.4 |
| | 0.3 |
|
| Total current liabilities | 297.7 | | | 275.1 | | 367.6 |
| | 370.9 |
|
| Long-term debt (Note 7) | 0.8 | | | 20.0 | | |
| Long-term debt (Note 8) | | 84.7 |
| | 63.1 |
|
| Deferred income taxes (Note 10) | | 11.7 |
| | 9.8 |
|
| Other long-term liabilities | 4.7 | | | 4.3 | | 12.1 |
| | 9.5 |
|
| Claims liabilities, net (Note 2) | 30.6 | | | 32.6 | | 28.1 |
| | 27.8 |
|
| Pension liabilities | 12.3 | | | 15.7 | | |
| Pension liabilities (Note 11) | | 14.8 |
| | 13.6 |
|
| Total liabilities | 346.1 | | | 347.7 | | 519.0 |
| | 494.7 |
|
| Commitments and contingencies (Note 8) | | | | |
| Commitments and contingencies (Note 9) | |
| |
|
| Stockholders’ equity: | | | | | | |
| Common stock; $0.01 par value (50,000,000 shares authorized, 11,613,525 and | | | | |
| 11,001,632 shares issued; 11,118,163 and 10,506,270 shares outstanding at | | | | |
| December 31, 2010 and 2009, respectively) | 0.1 | | | 0.1 | | |
| Common stock, $0.01 par value (50,000,000 shares authorized, 12,602,806 and | | | | |
| 12,382,724 shares issued; 11,446,229 and 11,344,947 shares outstanding at | | | | |
| December 31, 2012 and December 31, 2011, respectively) | | 0.1 |
| | 0.1 |
|
| Additional paid-in capital | 229.6 | | | 216.2 | | 249.2 |
| | 240.1 |
|
| Treasury stock at cost (495,362 shares of common stock at December 31, 2010 and 2009) | (13.2 | ) | | (13.2 | ) | |
| Treasury stock at cost (1,156,577 and 1,037,777 shares of common stock at | | | | |
| December 31, 2012 and December 31, 2011, respectively) | | (37.4 | ) | | (32.2 | ) |
| Retained earnings | 147.3 | | | 129.6 | | 194.9 |
| | 171.6 |
|
| Accumulated other comprehensive loss | (1.1 | ) | | (2.5 | ) | (6.6 | ) | | (4.1 | ) |
| Total stockholders’ equity | 362.7 | | | 330.2 | | 400.2 |
| | 375.5 |
|
| Total liabilities and stockholders’ equity | $ | 708.8 | | | $ | 677.9 | | $ | 919.2 |
| | $ | 870.2 |
|
The accompanying notes are an integralintegral part of these consolidated financial statements.
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2010 | | 2009 | | 2008 | 2012 | | 2011 | | 2010 |
| Net sales | $ | 7,266.8 | | | $ | 6,531.6 | | | $ | 6,044.9 | | $ | 8,892.4 |
| | $ | 8,114.9 |
| | $ | 7,266.8 |
|
| Cost of goods sold | 6,881.5 | | | 6,130.0 | | | 5,685.8 | | 8,415.6 |
| | 7,680.8 |
| | 6,881.5 |
|
| Gross profit | 385.3 | | | 401.6 | | | 359.1 | | 476.8 |
| | 434.1 |
| | 385.3 |
|
| Warehousing and distribution expenses | 211.8 | | | 197.3 | | | 197.6 | | 262.7 |
| | 234.6 |
| | 211.8 |
|
| Selling, general and administrative expenses | 142.5 | | | 137.3 | | | 129.4 | | 153.7 |
| | 150.8 |
| | 142.5 |
|
| Amortization of intangible assets | 2.1 | | | 2.0 | | | 2.0 | | 3.0 |
| | 3.0 |
| | 2.1 |
|
| Total operating expenses | 356.4 | | | 336.6 | | | 329.0 | | 419.4 |
| | 388.4 |
| | 356.4 |
|
| Income from operations | 28.9 | | | 65.0 | | | 30.1 | | 57.4 |
| | 45.7 |
| | 28.9 |
|
| Interest expense | (2.6 | ) | | (1.7 | ) | | (2.2 | ) | (2.2 | ) | | (2.4 | ) | | (2.6 | ) |
| Interest income | 0.4 | | | 0.3 | | | 1.0 | | 0.4 |
| | 0.4 |
| | 0.4 |
|
| Foreign currency transaction gains (losses), net | 0.5 | | | 2.2 | | | (6.3 | ) | |
| Foreign currency transaction (losses) gains, net | | (0.2 | ) | | (0.5 | ) | | 0.5 |
|
| Income before income taxes | 27.2 | | | 65.8 | | | 22.6 | | 55.4 |
| | 43.2 |
| | 27.2 |
|
| Provision for income taxes (Note 9) | (9.5 | ) | | (18.5 | ) | | (4.7 | ) | |
| Provision for income taxes (Note 10) | | (21.5 | ) | | (17.0 | ) | | (9.5 | ) |
| Net income | $ | 17.7 | | | $ | 47.3 | | | $ | 17.9 | | $ | 33.9 |
| | $ | 26.2 |
| | $ | 17.7 |
|
| | | | | | | | | | | |
| Basic net income per common share (Note 10) | $ | 1.64 | | | $ | 4.53 | | | $ | 1.71 | | |
| Diluted net income per common share (Note 10) | $ | 1.55 | | | $ | 4.35 | | | $ | 1.64 | | |
| Basic net income per common share (Note 12) | | $ | 2.96 |
| | $ | 2.30 |
| | $ | 1.64 |
|
| Diluted net income per common share (Note 12) | | $ | 2.91 |
| | $ | 2.23 |
| | $ | 1.55 |
|
| | | | | | | | | | | |
| Basic weighted-average shares (Note 10) | 10.8 | | | 10.5 | | | 10.5 | | |
| Diluted weighted-average shares (Note 10) | 11.4 | | | 10.9 | | | 10.9 | | |
| Basic weighted-average shares (Note 12) | | 11.5 |
| | 11.4 |
| | 10.8 |
|
| Diluted weighted-average shares (Note 12) | | 11.6 |
| | 11.7 |
| | 11.4 |
|
| | | | | | | |
| Dividends declared and paid per common share | | $ | 0.89 |
| | $ | 0.17 |
| | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Additional | | | | | | Accumulated Other | | Total | | Total |
| | Common Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders' | | Comprehensive |
| | Shares | | Amount | | Capital | | Stock | | Earnings | | Income (Loss) | | Equity | | Income (Loss) |
| Balance, December 31, 2007 | 10.4 | | | $ | 0.1 | | | $ | 202.6 | | | $ | — | | | $ | 64.4 | | | $ | (0.6 | ) | | $ | 266.5 | | | |
| Net income | — | | | — | | | — | | | — | | | 17.9 | | | — | | | 17.9 | | | $ | 17.9 | |
| Amortization of stock-based compensation | — | | | — | | | 3.9 | | | — | | | — | | | — | | | 3.9 | | | — | |
| Cash proceeds from exercise of common | | | | | | | | | | | | | | | |
| stock options | — | | | — | | | 2.5 | | | — | | | — | | | — | | | 2.5 | | | — | |
| Minimum pension liability adjustment, net | | | | | | | | | | | | | | | |
| of taxes of $3.8 | — | | | — | | | — | | | — | | | — | | | (5.9 | ) | | (5.9 | ) | | (5.9 | ) |
| Excess tax deductions associated with | | | | | | | | | | | | | | | |
| stock-based compensation | — | | | — | | | 0.3 | | | — | | | — | | | — | | | 0.3 | | | — | |
| Issuance of stock based instruments | 0.7 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Repurchases of common stock | (0.4 | ) | | — | | | — | | | (11.0 | ) | | — | | | — | | | (11.0 | ) | | — | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | (0.6 | ) | | (0.6 | ) | | (0.6 | ) |
| Total comprehensive income | | | | | | | | | | | | | | | $ | 11.4 | |
| Balance, December 31, 2008 | 10.7 | | | 0.1 | | | 209.3 | | | (11.0 | ) | | 82.3 | | | (7.1 | ) | | 273.6 | | | |
| Net income | — | | | — | | | — | | | — | | | 47.3 | | | — | | | 47.3 | | | $ | 47.3 | |
| Amortization of stock-based compensation | — | | | — | | | 5.1 | | | — | | | — | | | — | | | 5.1 | | | — | |
| Cash proceeds from exercise of common | | | | | | | | | | | | | | | |
| stock options and warrants | — | | | — | | | 2.2 | | | — | | | — | | | — | | | 2.2 | | | — | |
| Minimum pension liability adjustment, net | | | | | | | | | | | | | | | |
| of taxes of $(1.5) | — | | | — | | | — | | | — | | | — | | | 2.4 | | | 2.4 | | | 2.4 | |
| Excess tax deductions associated with | | | | | | | | | | | | | | | |
| stock-based compensation | — | | | — | | | 0.1 | | | — | | | — | | | — | | | 0.1 | | | — | |
| Issuance of stock based instruments, net of | | | | | | | | | | | | | | | |
| shares withheld for employee taxes | 0.4 | | | — | | | (0.5 | ) | | — | | | — | | | — | | | (0.5 | ) | | — | |
| Repurchases of common stock | (0.1 | ) | | — | | | — | | | (2.2 | ) | | — | | | — | | | (2.2 | ) | | — | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 2.2 | | | 2.2 | | | 2.2 | |
| Total comprehensive income | | | | | | | | | | | | | | | $ | 51.9 | |
| Balance, December 31, 2009 | 11.0 | | | 0.1 | | | 216.2 | | | (13.2 | ) | | 129.6 | | | (2.5 | ) | | 330.2 | | | |
| Net income | — | | | — | | | — | | | — | | | 17.7 | | | — | | | 17.7 | | | $ | 17.7 | |
| Amortization of stock-based compensation | — | | | — | | | 4.8 | | | — | | | — | | | — | | | 4.8 | | | — | |
| Cash proceeds from exercise of common | | | | | | | | | | | | | | | |
| stock options and warrants | 0.5 | | | — | | | 8.3 | | | — | | | — | | | — | | | 8.3 | | | — | |
| Minimum pension liability adjustment, net | | | | | | | | | | | | | | | |
| of taxes of $(0.1) | — | | | — | | | — | | | — | | | — | | | 0.2 | | | 0.2 | | | 0.2 | |
| Excess tax deductions associated with | | | | | | | | | | | | | | | |
| stock-based compensation | — | | | — | | | 2.0 | | | — | | | — | | | — | | | 2.0 | | | — | |
| Issuance of stock based instruments, net of | | | | | | | | | | | | | | | |
| shares withheld for employee taxes | 0.1 | | | — | | | (1.7 | ) | | — | | | — | | | — | | | (1.7 | ) | | — | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | — | | | 1.2 | | | 1.2 | | | 1.2 | |
| Total comprehensive income | | | | | | | | | | | | | | | $ | 19.1 | |
| Balance, December 31, 2010 | 11.6 | | | $ | 0.1 | | | $ | 229.6 | | | $ | (13.2 | ) | | $ | 147.3 | | | $ | (1.1 | ) | | $ | 362.7 | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| Net income | $ | 33.9 |
| | $ | 26.2 |
| | $ | 17.7 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Defined benefit plans adjustments (Note 15) | (2.9 | ) | | (2.7 | ) | | 0.2 |
|
| Foreign currency translation adjustment gain (loss) | 0.4 |
| | (0.3 | ) | | 1.2 |
|
| Other comprehensive (loss) income, net of tax | (2.5 | ) | | (3.0 | ) | | 1.4 |
|
| Comprehensive income | $ | 31.4 |
| | $ | 23.2 |
| | $ | 19.1 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional | | | | | | | | Accumulated Other | | Total |
| | Issued | | Paid-In | | Treasury Stock | | Retained | | Comprehensive | | Stockholders' |
| | Shares | | Amount | | Capital | | Shares | | Amount | | Earnings | | Income (Loss) | | Equity |
| Balance, December 31, 2009 | 11.0 |
| | $ | 0.1 |
| | $ | 216.2 |
| | (0.5 | ) | | $ | (13.2 | ) | | $ | 129.6 |
| | $ | (2.5 | ) | | $ | 330.2 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 17.7 |
| | — |
| | 17.7 |
|
| Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1.4 |
| | 1.4 |
|
| Stock-based compensation expense | — |
| | — |
| | 4.8 |
| | — |
| | — |
| | — |
| | — |
| | 4.8 |
|
| Cash proceeds from exercise of | | | | | | | | | | | | | | |
|
| common stock options and warrants | 0.5 |
| | — |
| | 8.3 |
| | — |
| | — |
| | — |
| | — |
| | 8.3 |
|
| Excess tax deductions associated with | | | | | | | | | | | | | | | |
| stock-based compensation | — |
| | — |
| | 2.0 |
| | — |
| | — |
| | — |
| | — |
| | 2.0 |
|
| Issuance of stock based instruments, net | | | | | | | | | | | | | | | |
| of shares withheld for employee taxes | 0.1 |
| | — |
| | (1.7 | ) | | — |
| | — |
| | — |
| | — |
| | (1.7 | ) |
| Balance, December 31, 2010 | 11.6 |
| | 0.1 |
| | 229.6 |
| | (0.5 | ) | | (13.2 | ) | | 147.3 |
| | (1.1 | ) | | 362.7 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 26.2 |
| | — |
| | 26.2 |
|
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3.0 | ) | | (3.0 | ) |
| Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (1.9 | ) | | — |
| | (1.9 | ) |
| Stock-based compensation expense | — |
| | — |
| | 5.1 |
| | — |
| | — |
| | — |
| | — |
| | 5.1 |
|
| Cash proceeds from exercise of | | | | | | | | | | | | | | | |
| common stock options and warrants | 0.7 |
| | — |
| | 5.4 |
| | — |
| | — |
| | — |
| | — |
| | 5.4 |
|
| Excess tax deductions associated with | | | | | | | | | | | | | | | |
| stock-based compensation | — |
| | — |
| | 1.7 |
| | — |
| | — |
| | — |
| | — |
| | 1.7 |
|
| Issuance of stock based instruments, net | | | | | | | | | | | | | | | |
| of shares withheld for employee taxes | 0.1 |
| | — |
| | (1.7 | ) | | — |
| | — |
| | — |
| | — |
| | (1.7 | ) |
| Repurchase of common stock | — |
| | — |
| | — |
| | (0.5 | ) | | (19.0 | ) | | — |
| | — |
| | (19.0 | ) |
| Balance, December 31, 2011 | 12.4 |
| | 0.1 |
| | 240.1 |
| | (1.0 | ) | | (32.2 | ) | | 171.6 |
| | (4.1 | ) | | 375.5 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 33.9 |
| | — |
| | 33.9 |
|
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2.5 | ) | | (2.5 | ) |
| Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (10.6 | ) | | — |
| | (10.6 | ) |
| Stock-based compensation expense | — |
| | — |
| | 6.2 |
| | — |
| | — |
| | — |
| | — |
| | 6.2 |
|
| Cash proceeds from exercise of | | | | | | | | | | | | | | | |
| common stock options | 0.1 |
| | — |
| | 3.8 |
| | — |
| | — |
| | — |
| | — |
| | 3.8 |
|
| Excess tax deductions associated with | | | | | | | | | | | | | | | |
| stock-based compensation | — |
| | — |
| | 1.1 |
| | — |
| | — |
| | — |
| | — |
| | 1.1 |
|
| Issuance of stock based instruments, net | | | | | | | | | | | | | | | |
| of shares withheld for employee taxes | 0.1 |
| | — |
| | (2.0 | ) | | — |
| | — |
| | — |
| | — |
| | (2.0 | ) |
| Repurchase of common stock | | | — |
| | — |
| | (0.1 | ) | | (5.2 | ) | | — |
| | — |
| | (5.2 | ) |
| Balance, December 31, 2012 | 12.6 |
| | $ | 0.1 |
| | $ | 249.2 |
| | (1.1 | ) | | $ | (37.4 | ) | | $ | 194.9 |
| | $ | (6.6 | ) | | $ | 400.2 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2010 | | 2009 | | 2008 | 2012 | | 2011 | | 2010 |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 17.7 | | | $ | 47.3 | | | $ | 17.9 | | $ | 33.9 |
| | $ | 26.2 |
| | $ | 17.7 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| LIFO and inventory provisions | 16.5 | | | 7.1 | | | 11.0 | | 12.1 |
| | 18.2 |
| | 16.5 |
|
| Amortization of debt issuance costs | 0.5 | | | 0.5 | | | 0.5 | | 0.4 |
| | 0.5 |
| | 0.5 |
|
| Amortization of stock-based compensation | 4.8 | | | 5.1 | | | 3.9 | | |
| Stock-based compensation expense | | 5.8 |
| | 5.5 |
| | 4.8 |
|
| Bad debt expense, net | 1.4 | | | 1.8 | | | 1.6 | | 2.0 |
| | 2.0 |
| | 1.4 |
|
| Loss on disposals | 0.7 | | | — | | | — | | — |
| | 0.2 |
| | 0.7 |
|
| Depreciation and amortization | 19.7 | | | 18.7 | | | 17.4 | | 25.3 |
| | 22.4 |
| | 19.7 |
|
| Foreign currency transaction (gains) losses, net | (0.5 | ) | | (2.2 | ) | | 6.3 | | |
| Foreign currency transaction losses (gains), net | | 0.2 |
| | 0.5 |
| | (0.5 | ) |
| Deferred income taxes | 5.2 | | | 14.5 | | | (4.9 | ) | 0.9 |
| | (2.0 | ) | | 5.2 |
|
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Accounts receivable | 2.5 | | | (13.8 | ) | | (2.9 | ) | |
| Other receivables | (3.5 | ) | | (4.3 | ) | | (4.2 | ) | |
| Inventories | (18.8 | ) | | (36.7 | ) | | (31.9 | ) | |
| Accounts receivable, net | | 7.1 |
| | (20.0 | ) | | 2.5 |
|
| Other receivables, net | | (10.6 | ) | | 1.9 |
| | (3.5 | ) |
| Inventories, net | | 5.3 |
| | (78.0 | ) | | (18.8 | ) |
| Deposits, prepayments and other non-current assets | 2.3 | | | (16.7 | ) | | 4.4 | | 3.9 |
| | (12.4 | ) | | 2.3 |
|
| Accounts payable | (6.4 | ) | | (4.4 | ) | | 13.8 | | 0.6 |
| | 30.0 |
| | (6.4 | ) |
| Cigarette and tobacco taxes payable | 32.1 | | | 22.8 | | | 16.2 | | (10.3 | ) | | 7.5 |
| | 32.1 |
|
| Pension, claims and other accrued liabilities | 0.6 | | | (6.6 | ) | | 6.2 | | |
| Pension, claims, accrued and other long-term liabilities | | (5.4 | ) | | 10.3 |
| | 0.6 |
|
| Income taxes payable | 0.1 | | | — | | | 0.3 | | — |
| | (1.5 | ) | | 0.1 |
|
| Net cash provided by operating activities | 74.9 | | | 33.1 | | | 55.6 | | 71.2 |
| | 11.3 |
| | 74.9 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Acquisition of business, net of cash acquired | (35.9 | ) | | — | | | (26.4 | ) | (34.0 | ) | | (50.8 | ) | | (35.9 | ) |
| Restricted cash | 0.2 | | | 0.7 | | | (2.2 | ) | |
| Change in restricted cash | | 2.0 |
| | (0.1 | ) | | 0.2 |
|
| Additions to property and equipment, net | (13.9 | ) | | (21.1 | ) | | (19.9 | ) | (28.6 | ) | | (24.1 | ) | | (13.9 | ) |
| Capitalization of software | (1.0 | ) | | (0.3 | ) | | (0.7 | ) | (0.2 | ) | | (0.2 | ) | | (1.0 | ) |
| Proceeds from sale of fixed assets | 0.1 | | | 0.1 | | | 0.1 | | 0.2 |
| | 0.1 |
| | 0.1 |
|
| Net cash used in investing activities | (50.5 | ) | | (20.6 | ) | | (49.1 | ) | (60.6 | ) | | (75.1 | ) | | (50.5 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| (Repayments) borrowings under revolving credit facility, net | (19.2 | ) | | (10.7 | ) | | 0.1 | | |
| Borrowings (repayments) under revolving credit facility, net | | 11.3 |
| | 62.0 |
| | (19.2 | ) |
| Dividends paid | | (10.3 | ) | | (1.9 | ) | | — |
|
| Payments of financing costs | (1.8 | ) | | — | | | — | | — |
| | (0.7 | ) | | (1.8 | ) |
| Repurchases of common stock (treasury stock) | — | | | (2.2 | ) | | (11.0 | ) | |
| Repurchases of common stock | | (5.2 | ) | | (19.0 | ) | | — |
|
| Proceeds from exercise of common stock options and warrants | 8.3 | | | 2.2 | | | 2.5 | | 3.8 |
| | 5.4 |
| | 8.3 |
|
| Tax withholdings related to net share settlements of restricted stock units | (1.7 | ) | | (0.5 | ) | | — | | (2.0 | ) | | (1.7 | ) | | (1.7 | ) |
| Excess tax deductions associated with stock-based compensation | 2.0 | | | 0.4 | | | 0.6 | | 1.1 |
| | 1.7 |
| | 2.0 |
|
| (Decrease) increase in book overdrafts | (12.9 | ) | | 1.6 | | | (3.2 | ) | (4.8 | ) | | 17.1 |
| | (12.9 | ) |
| Net cash used in financing activities | (25.3 | ) | | (9.2 | ) | | (11.0 | ) | |
| Net cash (used in) provided by financing activities | | (6.1 | ) |
| 62.9 |
| | (25.3 | ) |
| Effects of changes in foreign exchange rates | (0.7 | ) | | (1.3 | ) | | (1.1 | ) | (0.6 | ) | | — |
| | (0.7 | ) |
| (Decrease) increase in cash and cash equivalents | (1.6 | ) | | 2.0 | | | (5.6 | ) | |
| Increase (decrease) in cash and cash equivalents | | 3.9 |
| | (0.9 | ) | | (1.6 | ) |
| Cash and cash equivalents, beginning of period | 17.7 | | | 15.7 | | | 21.3 | | 15.2 |
| | 16.1 |
| | 17.7 |
|
| Cash and cash equivalents, end of period | $ | 16.1 | | | $ | 17.7 | | | $ | 15.7 | | $ | 19.1 |
| | $ | 15.2 |
| | $ | 16.1 |
|
| Supplemental disclosures: | | | | | | | | | | |
| Cash paid during the period for: | | | | | | | | | | |
| Income taxes, net of refunds | $ | 10.6 | | | $ | 11.7 | | | $ | 7.5 | | |
| Interest | 1.7 | | | 1.0 | | | 1.7 | | |
| Non-cash investing activities: | | | | | | |
| Income taxes paid, net of refunds | | $ | 11.7 |
| | $ | 11.8 |
| | $ | 10.6 |
|
| Interest paid | | 1.6 |
| | 2.0 |
| | 1.7 |
|
| Non-cash capital lease obligations incurred | | $ | 11.4 |
| | $ | 0.4 |
| | $ | 0.2 |
|
| Non-cash indemnification holdback | | $ | 4.0 |
| | $ | — |
| | $ | — |
|
| Contingent consideration related to acquisition of business | $ | 1.0 | | | $ | — | | | $ | — | | $ | 0.6 |
| | $ | — |
| | $ | 1.0 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| 1. | Summary of Company Information |
1.BusinesSummary of Company Informations
Business
Core-Mark Holding Company, Inc. and subsidiaries (referred herein as “we,” “us,” “our,” “the Company” or “Core-Mark”) is one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America. We offer a full range of products, marketing programs and technology solutions to approximatelyover 26,00029,000 customer locations in the United States (“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, non-alcoholicbread, beverages, general merchandise and health and beauty care products. We operate a network of 2428 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third party logistics provider) in the U.S. and Canada..
| |
| 2. | Summary of Significant Accounting Policies |
2.Summary of Significant Accounting Policies
Basis of ConsolidationPresentation and PresentationPrinciples of Consolidation
The consolidated financial statements include Core-Mark and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidated financial statements. Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year's presentation.
Use of Estimates
These financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the U.S. This requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We consider the allowance for doubtful accounts, LIFO valuation, inventory reserves, LIFO valuation recoverability of goodwill and other long-lived assets, stock-based compensation expense, the realizability of deferred income taxes, uncertain tax positions, pension benefitsobligations and self-insurance reserves to be those estimates which involve a higher degree of judgment and complexity. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue at the point at which the product is delivered and title passes to the customer. Revenues are reported net of customer incentives, discounts and returns, including an allowance for estimated returns. The allowance for sales returns is calculated based on our returns experience which has historically not been significant. We also earn management service fee revenue from operating third party distribution centers belonging to certain customers. These revenues represented less than 1% of our total revenuesnet sales for each of those years.2012, 2011 and 2010. Service fee revenue is recognized as earned on a monthly basis in accordance with the terms of the management service fee contracts and is included in net sales on the accompanying consolidated statements of operations.
Business Combinations
We account for all business combinations using the acquisition method of accounting. Under this method of accounting, we allocate the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. Management may further adjust the acquisition date fair values for a period of up to one year from the date of acquisition. Acquisition related expenses and transaction costs associated with business combinations are expensed as incurred.
Vendor and Sales Incentives
Vendors' Discounts,Vendor Rebates and Promotional Allowances -- Periodic payments from vendors in various forms including rebates, promotional allowances and volume or other purchase discounts are reflected in the carrying value of the related inventory when earned and as cost of goods sold as the related merchandise is sold. Up-front consideration received from vendors linked to purchase or other commitments is initially deferred and amortized ratably to cost of goods sold or as the performance of the activities specified by the vendor to earn the fee is completed. Cooperative marketing incentives from suppliers are recorded as reductions to cost of goods sold to the extent the vendor considerations exceed the costs relating to the programs. These amounts are recorded in the period the related promotional or merchandising programs were provided. Some of theCertain vendor incentive promotions require that we
make assumptions and judgments regarding, for example, the likelihood of achieving market share levels or attaining specified levels of purchases. Vendor incentives are at the discretion of our vendors and can fluctuate due to changes in vendor strategies and market requirements. Vendor rebates and promotional allowances earned totaled $128.0 million, $108.3 million and $103.2 million in 2012, 2011 and 2010, respectively.
Customers' Sales Incentives -- We also provide sales rebates or discounts to our customers on a regular basis. These customers' sales incentives are recorded as a reduction to net sales revenue as the sales incentive is earned by the customer. Additionally, we may provide racking allowances for the customer's commitment to continue using us as the supplier of their products. These allowances may be paid at the inception of the contract or on a periodic basis. Allowances paid at the inception of the contract are capitalized and amortized over the period of the distribution agreement as a reduction to sales.
Excise Taxes
ExciseWe are responsible for collecting and remitting state, local and provincial excise taxes on cigarettescigarette and other tobacco productsproducts. As such, these excise taxes are a significant component of our net sales and our cost of sales. In 20102012, 20092011 and 20082010, approximately 24%22%, 23%24% and 24% of our net sales, and approximately 26%24%, 25% and 26% of our cost of goods sold, respectively, represented excise taxes. ExciseFederal excise taxes are included inlevied on product manufacturers who pass the tax on to us as part of the product cost and are not a component of our net sales and cost of sales as we are responsible for collecting and remitting such state, local and provincial taxes on the applicable sales.excise taxes.
Foreign Currency Translation
The operating assets and liabilities of our Canadian operations, whose functional currency is the Canadian dollar, are translated to U.S. dollars at exchange rates in effect at period-end. Adjustments resulting from such translation are presented as foreign currency translation adjustments, net of applicable income taxes, and are included in other comprehensive income. The statements of operations, including income and expenses, of our Canadian operations are translated to U.S. dollars at average exchange rates for the period for financial reporting purposes. We also recognize the gaingains or losslosses on foreign currency exchange transactions between our Canadian and U.S. operations, net of applicable income taxes, in the consolidated statements of operations.
Cash, Cash Equivalents, and Restricted Cash and Book Overdrafts
Cash and cash equivalents include cash, money market funds and all highly liquid investments with original maturities of three months or less. Restricted cash represents funds collected and set aside in trust as required by one of the Canadian provincial taxing authorities. As of December 31, 20102012, we had cash book overdrafts of $6.5$24.7 million million compared to $19.4$27.1 million million as of December 31, 20092011, reflecting issued. Book overdrafts consist primarily of outstanding checks that have not cleared through our banking systemin excess of cash on hand in the ordinary coursecorresponding bank accounts at the end of business for accounts payable.the period. Our policy has been to fund these outstanding checks as they clear with cash held on deposit with other financial institutions or with borrowings under our line of credit.
Fair Value Measurements
The carrying amount for our cash, cash equivalents, restricted cash, trade accounts receivable, other receivables, trade accounts payable, cigarette and tobacco taxes payable and other accrued liabilities approximates fair value because of the short maturity of these financial instruments. The carrying amount of our variable rate debt approximates fair value.
We calculate the fair value of our pension plan assets based on assumptions that market participants would use in pricing the assets or liabilities. We use a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and give precedence to observable inputs in determining fair value. An instrument's level within the hierarchy is based on the lowest level of any significant input to the fair value measurement. The following levels were established for each input:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs for the asset or liability, which reflect the Company's own assumptions about what market participants would assume when pricing the asset or liability.
(See Note 12 --11 - Employee Benefit Plans.Plans.)
Risks and Concentrations
Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash investments, accounts receivable and other receivables. We place our cash and cash equivalents in short-term instruments with high quality financial institutions and limit the amount of credit exposure in any one financial instrument. We pursue amounts and incentives due from vendors in the normal course of business and are often allowed to deduct these amounts and incentives from payments made to our vendors.
A credit review is completed for new customers and ongoing credit evaluations of each customer's financial condition are performed and prepayment or other guarantees are required whenever deemed necessary. Credit limits given to customers are based on a risk assessment of their ability to pay and other factors. We do not have individual customers that accountAlimentation Couche-Tard, Inc. (“Couche-Tard”), our largest customer, accounted for 13.7% of total net sales during 2012. No single customer accounted for 10% or more than 10% of our total net sales during 2011 and 2010. In addition, no single customer accounted for 10% or for more than 10% of total accounts receivable. However, some of our distribution centers are dependent on relationships with a single customeraccounts receivables as of December 31, 2012 or a few large customers.December 31, 2011.
We have two significant suppliers: Philip Morris USA, Inc. and R.J. Reynolds Tobacco Company.Company. Product purchases from Philip Morris USA, Inc. represented approximately 28%27% of our total product purchases for each of the years 20102012 and 20092011 and 27%28% for 20082010. Product purchases from R.J. Reynolds Tobacco Company were approximately 13%14% for 2010 and 14% for each of the years 20092012 and 20082011 and 13% for 2010.
Cigarette sales represented approximately 70.5%69.0%, 70.3%70.4% and 68.2%70.5% of our revenuesnet sales in 2012, 2011 and 2010, respectively, and contributed approximately 31.0%,
35.4% and 29.0%31.7% of our gross profit in each of 2010, 20092012 and 20082011, respectively. The increase and 31.0% in the percentage2010. Although cigarettes represent a significant portion of our revenues andtotal net sales, the majority of our gross profit attributable to cigarettes beginning in 2009 was due primarily to manufacturer price increases in response to the enactment of the State Children's Health Insurance Program (“SCHIP”), which increased the federal cigarette excise taxis generated from 39¢ to $1.01 per pack. U.S. cigarette consumption has declined since 1980. If cigarette consumption continues to decline and we do not make up for lost cigarette carton sales through cigarette price increases or by increasing our food/non-food sales, our results of operations could be materially and adversely affected.products.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consists of trade receivables from customers. We evaluate the collectability of accounts receivable and determine the appropriate allowance for doubtful accounts based on historical experience and a review of specific customer accounts. Account balances are charged off against the allowance when collection efforts have been exhausted and the receivable is deemed worthless (see Note 4 --- Other Consolidated Balance Sheet Accounts Detail).
Other Receivables
Other receivables consist primarily of amounts due from vendors for promotional and other incentives, which are accrued as earned. We evaluate the collectability of amounts due from vendors and determine the appropriate allowance for doubtful accounts due from vendors based on historical experience and on a review of specific amounts outstanding. While we believe that such allowances are adequate, these estimates could change in the future depending upon our ability to collect these vendor receivables.
Inventories
Inventories consist of finished goods, including cigarettes and other tobacco products, food and other products and related consumable products held for re-sale, and are valued at the lower of cost or market. In the U.S., cost is primarily determined on a last-in, first-out (“LIFO”) basis using producer price indices as determined by the Department of Labor, adjusted based on more current information if necessary. When we are aware of material price increases or decreases from manufacturers, we will estimate the producer price index for the respective period in order to more accurately reflect inflation rates. Under the LIFO method, current costs of goods sold are matched against current sales. Inventories in Canada are valued on a first-in, first-out ("FIFO"(“FIFO”) basis, as LIFO is not a permitted inventory valuation method in Canada. Approximately 81%87% and 82%86% of our FIFO inventory was valued on a LIFO basis at December 31, 20102012 and 20092011, respectively.
During periods of rising prices, the LIFO method of costing inventories generally results in higher current costs being charged against income while lower costs are retained in inventories. Conversely, during periods of decreasing prices, the LIFO method of costing inventories generally results in lower current costs being charged against income and higher stated inventories. Liquidations of inventory may also result in the sale of low-cost inventory and a decrease of cost of goods sold. We reduce inventory value for spoiled, aged and unrecoverable inventory based on amounts on-hand and historical experience. We had a decrement in certain of our LIFO layerinventory layers of $3.7$23.2 million in 20102012 and $5.1$2.4 million in 20092011., which had the effect of reducing our LIFO expense on our consolidated statements of operations by $1.6 million in 2012 and $0.6 million in 2011. Approximately $20.0 million of the $23.2 million decrement in 2012 was the result of a reduction in LIFO layers created in 2011, due to a temporary increase in inventory to support new business and holiday timing at the end of 2011.
Property and Equipment
Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization on new purchases are computed using the straight-line method over the assets' estimated useful lives. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the property or the term of the lease including available renewal option terms if it is reasonably assured that those termsoptions will be exercised. Upon retirement or sale, the cost and related accumulated depreciation of the assets are removed and any related gain or loss is reflected in the consolidated statements of operations. Maintenance and repairs are charged to operationsexpense as incurred.
We have determined the following usefuldepreciable lives for our fixed assets:property and equipment:
|
| |
| | Useful Life in Years |
| Office furniture and equipment | 3 to 10 |
| Delivery equipment | 4 to 10 |
| Warehouse equipment | 35 to 15 |
| Leasehold improvements | 3 to 25 |
| Buildings | 15 to 25 |
Impairment of Long-lived and Other Intangible Assets
We review our intangible and other long-lived assets for potential impairment at least annually.quarterly. Long-lived and other intangible assets may also be included intested for impairment testing when events and circumstances exist that indicate the carrying amounts of those assets may not be recoverable. Long-lived assets consist primarily of land, buildings, furniture, fixtures and equipment, leasehold improvements and other intangible assets. An impairment of long-lived assets exists when the carrying amount of a long livedlong-lived asset, or asset group, exceeds its fair value. Impairment losses are only recorded when the carrying amount of the impaired asset is not recoverable. Recoverability is determined by comparing the carrying amount of the asset (or asset group) to the undiscounted cash flows which are expected to be generated from its use. An asset's carrying value can exceed its fair value, thus being impaired; however an impairment loss is not required to be recorded if the carrying value is recoverable from expected future cash flows from its use. Assets to be disposed of are reported at the lower of carrying amount or fair value less the cost to sell such assets. During 2010, 20092012, 2011 and 2008,2010, we did not haverecord impairment losses related to long-lived and other intangible assets or assets identified for abandonment as a result of facility closures or facility relocation.
Goodwill
Goodwill represents the excess of the purchase consideration of an acquired business over the fair value of the identifiable tangible and Intangible Assets
intangible assets acquired and liabilities assumed in a business combination. Goodwill is not subject to amortization but must be evaluated for impairment. We reviewtest goodwill for impairment on an annual basisat the end of each year, or whenever significant events or changes occur in our business.circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying amount. We first assess the related qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The reviewstests to evaluate for impairment are performed at the operating division level, which comprise our reporting units. Thelevel. In the first step of the quantitative impairment test, we compare the fair value of the operating division to its carrying value. If the fair value of the division is less than its carrying value, we perform a second step to determine the implied fair value of goodwill associated with the reporting unit's goodwill must be determined and compared to the carrying value of the goodwill.division. If the carrying value of a reporting unit's goodwill exceeds itsthe implied fair value of goodwill, such excess represents the amount of goodwill impairment for which an impairment loss equal to the difference willwould be recorded. BasedDetermining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimated fair value of each division is based on the impairment tests performeddiscounted cash flow method. This method is based on historical and forecasted amounts specific to each reporting unit and considers sales, gross profit, operating profit and cash flows and general economic and market conditions, as well as the impact of December 31, 2010planned business and December 31, 2009, there was no impairmentoperational strategies and other estimates and assumptions for future growth rates, working capital and capital expenditures. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Measuring the fair value of goodwill in 2010 or 2009. There can be no assurance that future goodwill tests will not result inreporting units would constitute a charge to earnings. We do not amortize those intangible assets that have been determined to have indefinite useful livesLevel 3 measurement under the fair value hierarchy (seeNote 4 --7 - Goodwill and Other Consolidated Balance Sheet Accounts DetailIntangible Assets).
Computer Software Developed or Obtained for Internal Use
We account for proprietary computer software systems, namely our Distribution Center Management System (“DCMS”), using certain criteria under which costs associated with this software are either expensed or capitalized and amortized over periods from three to eight years. DuringIn each of 2012 and 2011 we capitalized approximately $0.2 million and in 2010, approximately 2009 and 2008$1.0 million, we capitalized approximately $1.0 million, $0.3 million and $0.7 million, respectively, primarily for enhancements to DCMS and other non-proprietary systems.
Debt Issuance Costs
Debt issuance costs have been deferred and are being amortized as interest expense over the term of the related debt agreement on a straight-line basis.basis which approximates the effective interest method. Debt issuance costs, net of current portion, are included in other non-current assets net, on the accompanying consolidated balance sheets. UnamortizedTotal unamortized debt issuance costs were $1.7$1.5 million million as of December 31, 20102012 and $0.4$1.9 million million as of December 31, 2009.2011.
Claims Liabilities and Insurance Recoverables
We maintain reserves related to health and welfare, workers' compensation, auto and general liability programs that are principally self-insured. We currently have a per-claim ceilingdeductible of $500,000$500,000 for our workers' compensation, general and auto liability self-insurance programs and a per-claim limitper person annual claim deductible of $200,000$200,000 for our health and welfare program. We purchase insurance to cover the claims that exceed the ceilingdeductible up to policy limits. Self-insured reserves are for pending or future claims that fall outside the policy and reserves include an estimate of expected settlements on pending claims and a provision for claims incurred but not reported. Estimates for workers' compensation, auto and general liability insurance are based on our assessment of potential liability using an annual actuarial analysis of available information with respect to pending claims, historical experience and current cost trends. Reserves for claims under these programs are included in accrued liabilities (current portion) and claims liabilities, net of current portion.
Claims liabilities and the related recoverables from insurance carriers for estimated claims in excess of the deductible amounts and other insured events are presented in their gross amounts on the accompanying consolidated balance sheets because there is no right of offset. The carrying values of claims liabilities and insurance recoverables are not discounted. Insurance recoverables are included in other receivables, net and other non-current assets, net. We had gross liabilities for health and welfare, workers' compensation, auto and general liability related to both Core-Mark and Fleming (former owner of Core-Mark, related to emergence from bankruptcy in 2004) self-insurance obligations at December 31, 20102012 and 20092011 in the amounts of $30.6$28.1 million long-term and $8.7$8.5 million short-term, and $32.6$27.8 million long-term and $8.4$7.9 million short-term, respectively. Our liabilities net of insurance recoverables at December 31, 20102012 and 20092011 were $11.1$10.5 million long-term and $6.2$6.4 million short-term, and $11.6$10.0 million long-term and $5.7$5.7 million short-term, respectivelyrespectively.
Pension Costs and Other Post-retirement Benefit Costs
Pension costs and other post-retirement benefit costs charged to operations are estimated on the basis of annual valuations by an independent actuary. Adjustments arising from plan amendments, changes in assumptions and experience gains and losses
are amortized over the expected average remaining service life of the employee group. We recognize in the consolidated balance sheets an asset for a plan's overfunded status or a liability for a plan's underfunded status as of the end of each fiscal year. We determine the plan's funded status by measuring its assets and its obligations, and we recognize changes in the funded status of our defined benefit post-retirement plan in the year in which the change occurred (see Note 12 --11 - Employee Benefit Plans).
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when we do not consider it more likely than not that some portion or all of the deferred tax assets will be realized.
A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. We have established an estimated liability for income tax exposures that arise and meet the criteria for accrual. We prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates based on these judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law resulting from legislation, regulation and/or as concluded through the various jurisdictions' tax court systems. We classify interest and penalties related to income taxes as income tax expense (see Note 9 --10 - Income Taxes).
Stock-Based Compensation
We account for stock-based compensation expense for restricted stock unit awards, performance shares and stock options by estimating the fair values of awards at their grant dates and amortizing these amounts as expense using a straight-line method for awards with vesting based on service and ratably for awards based on performance conditions. Currently,The fair value of restricted stock unit awards and performance shares earned is based upon our stock price on the grant date.
For stock option awards, we use the Black-Scholes option valuation model to valuedetermine the stock awardsfair value (see Note 11 --13 - Stock-Based Compensation Plans).
Determining the appropriate fair value model and calculating the fair value of stock-basedstock option awards at the grant date requires considerable judgment, including estimating stock price volatility, expected life of share awards and forfeiture rates. We develop our estimates based on historical data and market information which can change significantly over time.
Total Comprehensive Income
Total comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenues, expenses, gainstransactions and lossesadjustments that under generally accepted accounting principles are recorded directly as an element of stockholders' equity, but are excluded from net income. Other comprehensive income is comprised of minimum pension liabilitydefined benefit plan adjustments and foreign currency translation adjustments relating to our foreign operations in Canada whose functional currency is not the U.S. dollar (see Note 15 - Other Comprehensive Income (Loss) and Consolidated Statements of Stockholders' Equity and Comprehensive Income).
Segment Information
We report our segment information using established standards for reporting by public enterprises on information about product lines, geographical areas and major customers. The method of determining what information to report is based on the way we are organized for operational decisions and assessment of the aggregate financial performance. From the perspective of our chief operating decision makers, we are engaged in the business of distributing packaged consumer products to convenience retail stores in the U.S. and Canada.Canada (Collectively "North America"). Therefore, we have determined that we have twoone reportable segments based onsegment and operate our business in two geographical areaareas -- U.S. and Canada. We present our segment reporting information based on business operations and by major product category for each of the two geographic segmentsareas in which we operate our business and also by major product category (see Note 15 --16 - Segment and Geographic Information).
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during each period, excluding unvested restricted stock.stock units and performance shares. Diluted earnings per share assumes the exercise of stock options and common stock warrants, and the impact of restricted stock units and performance shares, when dilutive, using the treasury stock method (see Note 10 --12 - Earnings Per Share).
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This ASU is effective beginning after December 15, 2012. We do not expect this update to have a material effect on our consolidated financial statements.
In June 2011, the FASB ASU No. 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The Company adopted this pronouncement upon its effective date beginning January 1, 2012.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This pronouncement was effective for the Company beginning January 1, 2012.
3. Acquisitions
Acquisition of J.T. Davenport & Sons, Inc.
On December 17, 2012, we acquired J.T. Davenport & Sons, Inc. (“Davenport”), a large convenience wholesaler, located in North Carolina, which thereafter became a subsidiary of Core-Mark. Davenport 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 Southeast U.S. and further supported our ability to cost effectively service national and regional retailers. Total purchase consideration to acquire Davenport was approximately $38.9 million of which $34.3 million was paid at closing. The acquisition was funded with a combination of cash on hand and borrowings under our revolving credit facility.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-06,Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires additional disclosures about fair value measurements, including transfers in and out of the fair value hierarchy Levels 1 and 2 and a higher level of disaggregation based on nature and risk for the different types of financial instruments. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements should be presented separately. This ASU is effective for annual and interim reporting periods beginning after December 15, 2009 for most of the new disclosures and for periods beginning after December 15, 2010 for the new Level 3 disclosures. Comparative disclosures are not required in the first year the disclosures are required. We have incorporated ASU 2010-06 into the disclosures that accompany our consolidated financial statements.
3. Acquisitions
On August 2, 2010, we acquired substantially all ofThe following table presents the assets of Finkle Distributors, Inc. (“FDI”), a regional convenience
wholesaler servicing customers in New York, Pennsylvania and the surrounding states, for cash consideration of approximately $36.0 million. The FDI operations were integrated into two of our existing distribution centers and are providing us opportunities to expand our market share.
The purchase price allocation of the acquired assets and liabilities assumed based on their estimated fair values atand purchase consideration as of the acquisition date, was as followswhich are considered preliminary and subject to change for up to one year from the acquisition date (in millions):
.
| | | | | | | December 17, 2012 |
|
| Cash | | $ | 0.1 | | $ | 0.3 |
|
| Accounts receivable | | 21.1 | | 21.2 |
|
| Other receivables | | 1.2 |
|
| Inventory | | 9.9 | | 20.3 |
|
| Prepaid expenses | | 0.3 | | |
| Prepaid expenses / other assets | | 2.5 |
|
| Property, plant and equipment | | 2.4 | | 5.9 |
|
| Intangible assets | | 3.6 | | 2.8 |
|
| Liabilities | | (1.4 | ) | |
| Cash paid at closing | | $ | 36.0 | | |
| Contingent payments | | 1.0 | | |
| Goodwill | | 6.6 |
|
| Net deferred tax liabilities | | (1.9 | ) |
| Capital lease liability | | (10.9 | ) |
| Other liabilities | | (9.1 | ) |
| Total consideration | | $ | 37.0 | | $ | 38.9 |
|
WeThe purchase price allocation presented herein is based on a preliminary valuation and the purchase price is subject to the completion of a closing adjustment period under the agreement. In addition, there is a $4.0 million indemnity holdback for any post-closing liabilities in connection with the acquisition, which will be released, less indemnity claims, to the former owners in equal installments over the next four years. Total purchase consideration includes $0.6 million in contingent payments related to non-competition agreements. While we do not expect any futurematerial changes in the fair value analysisof assets and liabilities, any changes in the purchase price or the estimated fair values upon completion of the assetsfinal valuation may change the amount allocable to be material.goodwill.
Intangible assets include $2.0$2.1 million for customer relationships which will beis being amortized over ten10 years $0.9and $0.7 million for non-competition agreements, the majority of which is being amortized over 5 years. The estimated fair value of the intangible assets was determined using the income approach, which discounts expected future cash flows to present value.
The acquisition resulted in $6.6 million of non-amortizing goodwill and $0.7 million forwhich represents the non-competition agreement which will be amortizedexcess of the cash paid over five years. Goodwill is measured as the difference between the purchase price and the fair value of net assets acquired and liabilities assumed.assumed, net of deferred tax liabilities. The intangible assets, including goodwill are expectedarising from the acquisition reflects the synergies the Company expects to berealize as a result of the business combination. The goodwill is not deductible for tax purposes. The contingent payments relate$1.9 million of net deferred tax liabilities resulting from the acquisition were related primarily to the difference between the book and tax bases of the assets, whose estimated fair value was determined by the valuation. Simultaneous with the closing of the acquisition, we executed a non-competition agreementcapital lease for a warehouse facility in Sanford, North Carolina with some of the former owners of Davenport who are now employees of the Company. The lease has an initial 10 year term and a former owner and were recorded at the present valuecapital lease obligation of contractual payments. $10.9 million as of December 31, 2012.
Results of operations of FDIDavenport have been included in Core-Mark’s consolidated statementstatements of operations and comprehensive income since the date of acquisition tothrough December 31, 2010.2012. In addition, we incurred $1.3 million of acquisition related costs which are included in our selling, general and administrative expenses for 2012.
Pro formaWe did not consider the Davenport acquisition to be a material business combination and therefore have not disclosed pro-forma results of operations for the acquired business have not been presented as the results were not material to our consolidated financial statements for all periods presented and would not have been material had the acquisition occurred at the beginningbusiness.
Acquisition of Forrest City Grocery Company
the year.
On June 23, 2008, weMay 2, 2011, Core-Mark acquired substantially all of the assets of Auburn Merchandise Distributors, Inc.Forrest City Grocery Company (“AMD”FCGC”), located in Whitinsville, Massachusetts,Forrest City, Arkansas, and FCGC thereafter became a wholly-owned subsidiary of Warren Equities, Inc., for approximately $28.7 million.Core-Mark. FCGC was a regional wholesale distributor servicing customers in Arkansas, Mississippi, Tennessee and the surrounding states. The assets purchased include primarily accounts receivable, inventory, fixed assetsacquisition provided Core-Mark with additional infrastructure and other intangibles, with no significant liabilities. AMD conducts business primarilyincreased its market share in the Northeastern regionSoutheastern U.S.
Total consideration to acquire FCGC was approximately $54.0 million. The total consideration increased by $1.0 million during 2012 due primarily to the reduction of the U.S.certain pre-acquisition tax liabilities. The purchase price exceeded the estimated fair valueacquisition was funded with a combination of net assets acquired by approximately $0.9 million, which has been recordedcash on hand and borrowings under our revolving credit facility. The FCGC acquisition was accounted for as goodwill. AMD conducts operations as the “New England” division of Core-Mark. Results of operations of AMD are included in Core-Mark's consolidated statements of operations since the date of acquisition.
a business combination.
The following table summarizes the allocation of the consideration paid for the acquisition and the estimated fair values of assets acquired, liabilities assumed and recognized at the acquisition date (in millions):
|
| | | | | |
| | | | May 2, 2011 |
| Cash | | | $ | 3.5 |
|
| Accounts receivable | | | 18.4 |
|
| Other receivables | | | 0.4 |
|
| Inventory | | | 13.0 |
|
| Prepaid expenses / other assets | | | 2.0 |
|
| Property, plant and equipment | | | 6.0 |
|
| Intangible assets | | | 18.4 |
|
| Goodwill | | | 11.6 |
|
| Net deferred tax liabilities | | | (7.0 | ) |
| Other liabilities | | | (12.3 | ) |
| Total consideration | | | $ | 54.0 |
|
4.Intangible assets include Other Consolidated Balance Sheet Accounts Detail$16.4 million for customer relationships which is being amortized over 15 years and $2.0 million for non-competition agreements, the majority of which is being amortized over 5 years. The estimated fair value of the intangible assets was determined using the income approach, which discounts expected future cash flows to present value.
The acquisition resulted in $11.6 million of non-amortizing goodwill which represents the excess of the cash paid over the fair value of net assets acquired and liabilities assumed, net of deferred tax liabilities. The goodwill is not deductible for tax purposes. The $7.0 million of net deferred tax liabilities resulting from the acquisition were related primarily to the difference between the book and tax bases of the intangible assets, whose estimated fair value was determined by the valuation.
The purchase price allocation presented herein is based on a final valuation; however, as of December 31, 2012, there is a remaining escrow reserve of approximately $17.0 million for indemnifiable claims in connection with the acquisition. The escrow reserve, subject to adjustment, is available for claims through May 2015.
Results of operations of FCGC have been included in Core-Mark’s consolidated statements of operations and comprehensive income since the date of acquisition. We did not consider the FCGC acquisition to be a material business combination in 2011 and therefore have not disclosed pro-forma results of operations for the acquired business.
| |
| 4. | Other Consolidated Balance Sheet Accounts Detail |
Allowance for Doubtful Accounts, Accounts Receivable
The changes in the allowance for doubtful accounts due from customers consist of the following (in millions):
| | | 2010 | | 2009 | | | | | | | |
| Balance, beginning of period | $ | 9.1 | | | $ | 8.8 | | |
| | | 2012 | | 2011 | | 2010 |
| Balance, beginning of year | | $ | 9.6 |
| | $ | 8.7 |
| | $ | 9.1 |
|
| Net additions charged to operations | 1.4 | | | 1.8 | | 2.0 |
| | 2.0 |
| | 1.4 |
|
| Less: Write-offs and adjustments | (1.8 | ) | | (1.5 | ) | (0.7 | ) | | (1.1 | ) | | (1.8 | ) |
| Balance, end of period | $ | 8.7 | | | $ | 9.1 | | |
| Balance, end of year | | $ | 10.9 |
| | $ | 9.6 |
| | $ | 8.7 |
|
The net additions to the allowance for doubtful accounts waswere recognized in the consolidated statements of operations as a component of our selling, general and administrative expenses which is included in our operating expenses. We continually assess our collection risks and make appropriate adjustments, as deemed necessary, to the allowance for doubtful accounts to ensure that reserves for accounts receivable are adequate.
Other Receivables, Net
Other receivables, net consist of the following (in millions):
| | | | | | | |
| | December 31, 2010 | | December 31, 2009 |
| Vendor receivables, net | $ | 31.1 | | | $ | 30.4 | |
| Insurance recoverables, current | 2.5 | | | 2.7 | |
| Other | 9.9 | | | 6.5 | |
| Total | $ | 43.5 | | | $ | 39.6 | |
The allowance for doubtful accounts due from vendors was $0.1 million as of December 31, 2010 and 2009, respectively. |
| | | | | | | |
| | December 31, 2012 | | December 31, 2011 |
| Vendor receivables, net | $ | 41.2 |
| | $ | 29.2 |
|
| Insurance recoverables, current | 2.2 |
| | 2.2 |
|
| Other | 10.4 |
| | 10.6 |
|
| Total other receivables, net | $ | 53.8 |
| | $ | 42.0 |
|
Deposits and Prepayments
Deposits and prepayments consist of the following (in millions):
| | | | | | | |
| | December 31, 2010 | | December 31, 2009 |
| Deposits | $ | 4.4 | | | $ | 3.3 | |
| Prepayments | 37.8 | | | 38.9 | |
| Total | $ | 42.2 | | | $ | 42.2 | |
|
| | | | | | | |
| | December 31, 2012 | | December 31, 2011 |
| Deposits | $ | 4.8 |
| | $ | 3.8 |
|
| Prepaid taxes | 3.7 |
| | 8.8 |
|
| Vendor prepayments | 18.8 |
| | 22.7 |
|
| Other prepayments | 13.0 |
| | 12.9 |
|
| Total deposits and prepayments | $ | 40.3 |
| | $ | 48.2 |
|
Our depositsDeposits include amounts related primarily to cigarette stamps and workers' compensation claims. Other prepayments include deposits related to workers' compensation claims, prepayments relating primarily to product purchases, as well as insurance policies, income taxes, prepaid rent and rental deposits and up-front consideration to customers.
Other Non-Current Assets, Net
Other non-current assets, net, consist of the following (in millions):
| | | | | | | |
| | December 31, 2010 | | December 31, 2009 |
| Internally developed and other purchased software, net | $ | 2.6 | | | $ | 3.3 | |
| Insurance recoverables, net of current portion | 19.5 | | | 21.0 | |
| Debt issuance costs, net of current portion | 1.2 | | | 0.3 | |
| Insurance deposits, net of current portion | 2.7 | | | 4.5 | |
| Other amortizable intangibles | 4.5 | | | 2.2 | |
| Other assets | 0.8 | | | 1.7 | |
| Total | $ | 31.3 | | | $ | 33.0 | |
The amortization of intangible assets, inclusive of non-compete agreements and customers' lists, recorded in the consolidated statement of operations was $2.1 million for 2010 and $2.0 million for both 2009 and 2008. |
| | | | | | | |
| | December 31, 2012 | | December 31, 2011 |
| Insurance recoverables, net of current portion | $ | 17.6 |
| | $ | 17.7 |
|
| Debt issuance costs, net of current portion | 1.0 |
| | 1.5 |
|
| Insurance deposits, net of current portion | 3.6 |
| | 2.9 |
|
| Racking allowances, net | 4.4 |
| | 5.9 |
|
| Other assets | 6.9 |
| | 3.0 |
|
| Total other non-current assets, net | $ | 33.5 |
| | $ | 31.0 |
|
Accrued Liabilities
Accrued liabilities consist of the following (in millions):
| | | | December 31, 2010 | | December 31, 2009 | December 31, 2012 | | December 31, 2011 |
| Accrued payroll, retirement and other benefits | $ | 22.2 | | | $ | 21.1 | | $ | 27.7 |
| | $ | 26.6 |
|
| Claims liabilities, current | 8.7 | | | 8.4 | | 8.5 |
| | 7.9 |
|
| Other accrued expenses | 24.8 | | | 20.4 | | 28.4 |
| | 31.6 |
|
| Accrued customer incentives payable | 11.1 | | | 9.7 | | 14.9 |
| | 12.5 |
|
| Total | $ | 66.8 | | | $ | 59.6 | | |
| Total accrued liabilities | | $ | 79.5 |
| | $ | 78.6 |
|
Our accrued payroll, retirement and other benefits include accruals for vacation, bonus, wages, 401(k) benefit matching and the current portion of pension and post-retirement benefit obligations. Our other accrued expenses include accruals for goods and services taxes, vendor advances, legal expenses, interest and other miscellaneous accruals.
5.Inventories
Inventories consist of the following (in millions):
| | | | December 31, 2010 | | December 31, 2009 | December 31, 2012 | | December 31, 2011 |
| Inventories at FIFO, net of reserves | $ | 350.4 | | | $ | 318.5 | | $ | 456.7 |
| | $ | 440.3 |
|
| Less: LIFO reserve | (59.7 | ) | | (43.0 | ) | (90.3 | ) | | (78.0 | ) |
| Total inventories at LIFO, net of reserves | $ | 290.7 | | | $ | 275.5 | | $ | 366.4 |
| | $ | 362.3 |
|
Cost of goods sold reflects the application of the last-in, first-out (“LIFO”) method of valuing inventories in the U.S. based upon estimated annual producer price indices. Inventories in Canada are valued on a first-in, first-out (“FIFO”) basis, as LIFO is not a permitted inventory valuation method in Canada. During periods of rising prices, the LIFO method of costing inventories generally results in higher current costs being charged against income while lower costs are retained in inventories. Conversely, during periods of decreasing prices, the LIFO method of costing inventories generally results in lower current costs being charged against income and higher stated inventories. If the FIFO method had been used for valuing inventories in the U.S., inventories would have been approximately $90.3 million higher at December 31, 2012, compared to $78.0 million higher at December 31, 2011. We recorded LIFO expense of $12.3 million, $18.3 million and $16.6 million for the years ended December 31,2012, 2011 and 2010, respectively.
6. Property and Equipment
Property and equipment consist of the following (in millions):
| | | December 31, 2010 | | December 31, 2009 | | | | | |
| Delivery, warehouse and office equipment | $ | 118.5 | | | $ | 109.0 | | |
| Equipment under capital leases | 1.2 | | | 1.0 | | |
| | | December 31, 2012 | | December 31, 2011 |
Delivery, warehouse and office equipment (1) | | $ | 156.2 |
| | $ | 138.1 |
|
| Leasehold improvements | 20.4 | | | 17.4 | | 32.3 |
| | 28.7 |
|
Land and buildings | 12.8 | | | 12.7 | | 24.9 |
| | 15.2 |
|
| Construction in progress | | 1.4 |
| | — |
|
| | 152.9 | | | 140.1 | | 214.8 |
| | 182.0 |
|
| Less: Accumulated depreciation and amortization | (68.2 | ) | | (56.3 | ) | (100.1 | ) | | (82.5 | ) |
| Total | $ | 84.7 | | | $ | 83.8 | | |
| Total property and equipment, net | | $ | 114.7 |
| | $ | 99.5 |
|
(1) Includes $2.1 million of equipment capital leases for 2012 and $1.6 million for 2011.
(2) Includes $4.8 million for a warehouse facility capital lease entered into in 2012.
For 20102012, 20092011 and 20082010, depreciation and amortization expenses related to property and equipment were $15.0$18.5 million $14.2, $16.2 million and $12.8$15.0 million, respectively. Property and equipment includes accruals for construction in progress of $0.5$0.2 million in 20102012 and $0.7$1.5 million in 20092011.
7. Long-TermGoodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill during 2012 and 2011 are as follows (in millions): |
| | | | | | | |
| | 2012 | | 2011 |
| Goodwill, beginning of year | $ | 16.2 |
| | $ | 4.6 |
|
| FCGC Acquisition | — |
| | 11.6 |
|
| Davenport Acquisition | 6.6 |
| | — |
|
| Goodwill, end of year | $ | 22.8 |
| | $ | 16.2 |
|
We test goodwill for impairment at the end of each year, or whenever events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is below its carrying amount. Based on the goodwill impairment tests performed as of December 31, 2012 and 2011, there was no impairment of goodwill for each of the respective years.
Other Intangible Assets
The carrying amount and accumulated amortization of other intangible assets as of December 31, 2012 and 2011 are as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2012 | | December 31, 2011 |
| | Gross | | | | Net | | Gross | | | | Net |
| | Carrying | | Accumulated | | Carrying | | Carrying | | Accumulated | | Carrying |
| | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
| Customer relationships | $ | 21.6 |
| | $ | (3.0 | ) | | $ | 18.6 |
| | $ | 19.5 |
| | $ | (1.6 | ) | | $ | 17.9 |
|
| Non-competition agreements | 3.2 |
| | (1.0 | ) | | 2.2 |
| | 2.5 |
| | (0.5 | ) | | 2.0 |
|
| Internally developed and other purchased software | 9.9 |
| | (9.3 | ) | | 0.6 |
| | 9.6 |
| | (8.2 | ) | | 1.4 |
|
| Total other intangible assets | $ | 34.7 |
| | $ | (13.3 | ) | | $ | 21.4 |
| | $ | 31.6 |
| | $ | (10.3 | ) | | $ | 21.3 |
|
The gross carrying amount of other intangible assets increased due primarily to the addition of the customer relationships valued at $2.1 million and non-compete agreements of $0.7 million related to the acquisition of Davenport in 2012. The amortization of intangible assets, inclusive of non-compete agreements, customer lists and internally developed and other purchased software, recorded in the consolidated statements of operations was $3.0 million for both 2012 and 2011 and $2.1 million for 2010.
Intangible assets and software with definite useful lives are amortized over the following useful lives: |
| |
| Useful Life in Years |
| Customer relationships | 10-15 |
| Non-competition agreements | 1-5 |
| Software | 3-8 |
Estimated future amortization expense for intangible assets are as follows (in millions): |
| | | |
| Year ending December 31, | |
| 2013 | $ | 2.7 |
|
| 2014 | 2.4 |
|
| 2015 | 2.2 |
|
| 2016 | 1.8 |
|
| 2017 | 1.6 |
|
8. Long-term Debt
Total long-term debt consists of the following (in millions):
| | | | | | | |
| | December 31, 2010 | | December 31, 2009 |
| Amounts borrowed (Credit Facility) | $ | — | | | $ | 19.2 | |
| Obligations under capital leases | 0.8 | | | 0.8 | |
| Total | $ | 0.8 | | | $ | 20.0 | |
|
| | | | | | | |
| | December 31, | | December 31, |
| | 2012 | | 2011 |
| Amounts borrowed (Credit Facility) | $ | 73.3 |
| | $ | 62.0 |
|
| Obligations under capital leases | 11.4 |
| | 1.1 |
|
| Total long-term debt | $ | 84.7 |
| | $ | 63.1 |
|
In October 2005, we entered intoWe have a five-year revolving credit facility (“Credit Facility”) with a capacity of $250$200 million and an expiration date of October 2010. In February 2010, we entered into a third amendment to our Credit Facility (the “Third Amendment”), which extended our credit facility for four years, to February 2014, and decreased the lenders' revolving loan commitments by $50 million to $200 million, at our request. The Third Amendment also provides for up to an additional $100$100 million of lenders' revolving commitments, (formerly $75 million), subject to certain provisions contained therein. Pricing underprovisions. On May 5, 2011, we entered into a fourth amendment to our Credit Facility (the "Fourth Amendment"), which extended our Credit Facility from February 2014 to May 2016 and reduced the new facility increased as a result of generally higher prices in the bank loan market. The basis points added to LIBOR increased to a range of 275 to 350 basis points, up from a range of 100 to 175 basis points, tied to achieving certain operating results as defined in the Credit Facility. Additionally, unused facility fees and letterthe margin on LIBOR or CDOR borrowings. The margin added to LIBOR or CDOR is a range of 175 to 225 basis points. The Fourth Amendment ties the LIBOR or CDOR margin to the amount of available credit participation fees increased. The Third Amendment also increased our basket for permitted acquisitions followingunder the date of the Third Amendment to $125 million and re-established our basket for permitted stock repurchases at $30 million.revolving Credit Facility. At the date of signing the Fourth Amendment, we incurred fees of approximately $1.8$0.7 million, which are being amortized over the term of the amendment.
All obligations under the Credit Facility are secured by first priority liens upon substantially all of our present and future assets. The terms of the Credit Facility permit prepayment without penalty at any time (subject to customary breakage costs with respect to LIBOR-LIBOR or CDOR-basedCDOR based loans prepaid prior to the end of an interest period).
The Credit Facility contains restrictive covenants, including among others, limitations on dividends and other restricted payments, other indebtedness, liens, investments and acquisitions and certain asset sales. As of December 31, 20102012, we were in compliance with all of the covenants under the Credit Facility.
Amounts borrowed, outstanding letters of credit and amounts available to borrow, net of certain reserves required under the Credit Facility, were as follows (in millions):
| | | | | | | | | | December 31, | | December 31, |
| | December 31, 2010 | | December 31, 2009 | 2012 | | 2011 |
| Amounts borrowed | $ | — | | | $ | 19.2 | | $ | 73.3 |
| | $ | 62.0 |
|
| Outstanding letters of credit | $ | 26.2 | | | $ | 26.1 | | 19.8 |
| | 23.7 |
|
| Amounts available to borrow | $ | 161.4 | | | $ | 196.9 | | |
Amounts available to borrow (1) | | 97.7 |
| | 106.2 |
|
| |
| (1) | Excluding $100 million expansion feature. |
Average borrowings during the yearyears ended December 31, 20122010 and 2011 were $3.1$26.3 million and $21.1 million , respectively, with amounts borrowed, at any one time outstanding, ranging from zero to a high of $34.8 million. For the same period in 2009, average borrowings were $8.2$91.5 million million, with amounts borrowed ranging from and zero to a high of $61.1 million.$89.5 million, respectively.
Our weighted-average interest rate was calculated based on our daily cost of borrowing, which was computed on a blend of prime and LIBOR rates. The weighted-average interest rate on our revolving credit facility for the years ended December 31, 2010 and 2009 was 2.9%2012 and 2.0%2011was 2.1% and 2.2%, respectively. We paid total unused facility fees and letter of credit participation fees, which are included in interest expense, of $$0.9 million, $1.3 million, and $1.8 million million for 2010 compared to $0.82012, 2011 million for 2009.and 2010, respectively. Amortization of debt issuance costs is included in interest expense. Unamortized debt issuance costs were $1.7$1.5 million and $1.9 million as of December 31, 20102012 and $0.42011 million as of December 31, 2009., respectively.
8.Commitments and Contingencies
| |
| 9. | Commitments and Contingencies |
Purchase Commitments
We enter into purchase commitments in the ordinary course of businessbusiness. As of December 31, 2012 and 2011, we had $1.2 million in purchase obligations primarily related to transportationdelivery equipment.
Operating Leases
We lease nearly allmost of our sales and warehouse facilities as well as tractors,and a significant number of trucks, vans and certain equipment under operating lease agreements expiring at various dates through 2022,2027, excluding renewal options. Rent expense is recorded on a straight-line basis over the term of the lease, including available renewal option terms, if it is reasonably assured that the renewal options will be exercised. The operating leases generally require us to pay taxes, maintenance and insurance. In most instances, we expect the operating leases that expire will be renewed or replaced in the normal course of business.
Future minimum rental payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year and excluding contracted vehicle maintenance costs) were as follows as of December 31, 20102012 (in millions):
| | | |
Year Ending December 31, | |
| 2011 | $ | 29.3 | |
| 2012 | 25.7 | |
| 2013 | 20.5 | |
| 2014 | 15.8 | |
| 2015 | 13.5 | |
| 2016 and Thereafter | 68.4 | |
| | $ | 173.2 | |
|
| | | |
| Year ending December 31, | |
| 2013 | $ | 35.1 |
|
| 2014 | 29.5 |
|
| 2015 | 26.0 |
|
| 2016 | 23.8 |
|
| 2017 | 21.1 |
|
| 2018 and Thereafter | 81.3 |
|
| Total | $ | 216.8 |
|
For 20102012, 20092011 and 20082010, rental expenses for operating and month-to-month leases, including contracted vehicle maintenance costs, were $35.8$41.8 million $34.7, $38.7 million and $33.8$35.8 million, respectively.
Capital Leases
As of December 31, 2012 and 2011, we had approximately $12.3 million and $1.3 million, respectively, in capital lease obligations, related to a warehouse facility, refrigeration and other office and warehouse equipment with lease agreements expiring
at various dates through 2022, excluding renewal options. Capital lease obligations increased in 2012 compared with 2011 due primarily to the execution of a $10.9 million warehouse facility lease associated with the acquisition of Davenport. (See Note 3 - Acquisitions).
Future minimum lease payments under non-cancelable capital leases were as follows as of December 31, 2012 (in millions):
|
| | | |
| Year ending December 31, | |
| 2013 | $ | 1.4 |
|
| 2014 | 1.4 |
|
| 2015 | 1.3 |
|
| 2016 | 1.3 |
|
| 2017 | 1.2 |
|
| 2018 and Thereafter | 10.3 |
|
| Total | 16.9 |
|
| Less: Interest | (4.6 | ) |
| Present value of future minimum lease payments | 12.3 |
|
| Less: current portion | (0.9 | ) |
| Non-current portion | $ | 11.4 |
|
Contingencies
Off-Balance Sheet Arrangements
Letter of Credit Commitments.As of December 31, 20102012, our standby letters of credit issued under our Credit Facility were $19.8 million related primarily to casualty insurance and 2009,tax obligations. The majority of the standby letters of credit mature in one year. However, in the ordinary course of our business, we hadwill continue to renew or modify the terms of the letters of credit to support business requirements. The liabilities underlying the letters of credit are reflected on our consolidated balance sheets.
Operating Leases. The majority of our sales offices, warehouse facilities and trucks are subject to lease agreements which expire at various dates through 2027, excluding renewal options. These leases generally require us to maintain, insure and pay any related taxes. In most instances, we expect the leases that expire will be renewed or replaced in the normal course of our business.
Third Party Distribution Centers. We currently manage two regional distribution centers for third party convenience store operators who engage in self-distribution. Under the agreement relating to one of these facilities, the third party has a “put” right under which it may require us to acquire the facility. If the put right is exercised, we will be required to (1) purchase the inventory in the facilities at cost, (2) purchase the physical assets of the facilities at fully depreciated cost and (3) assume the obligations of the third party as lessees under the leases related to those facilities. While we believe the likelihood that this put option will be exercised is remote, if it were exercised, we would be required to make aggregate capital expenditures of approximately $1.0$2.7 million based on current estimates. The amount of capital expenditures would vary depending on the timing of any exercise of such put right and $0.8 million, respectively,does not include an estimate of refrigerationthe cost to purchase inventory because such purchases would simply replace other planned inventory purchases and other equipment leased under capital leases, including current maturities.
Contingencieswould not represent an incremental cost. In the event the third party terminates self-distribution, they are required to enter into a five year distribution agreement with us to supply their stores.
Litigation
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.
We are subject to certain legal proceedings, claims, investigations and administrative proceedings in the ordinary course of our business. We make a provision for a liability when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. At December 31, 2010, we were not involved in any material litigation.
9.10. Income Taxes
Our income tax provision consists of the following (in millions):
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2010 | | 2009 | | 2008 | 2012 | | 2011 | | 2010 |
| Current: | | | | | | | | | | |
| Federal | $ | 3.8 | | | $ | 7.6 | | | $ | 6.8 | | $ | 16.2 |
| | $ | 13.7 |
| | $ | 3.8 |
|
| State | 0.5 | | | (1.9 | ) | | 0.6 | | 2.5 |
| | 3.6 |
| | 0.5 |
|
| Foreign | — | | | — | | | (0.1 | ) | — |
| | — |
| | — |
|
| Total current tax provision | $ | 4.3 | | | $ | 5.7 | | | $ | 7.3 | | $ | 18.7 |
| | $ | 17.3 |
| | $ | 4.3 |
|
| | | | | | | | | | | |
| Deferred: | | | | | | | | |
| | |
|
| Federal | 5.1 | | | 11.6 | | | (1.6 | ) | $ | 2.5 |
| | $ | 0.3 |
| | $ | 5.1 |
|
| State | 0.9 | | | 2.3 | | | (1.0 | ) | 0.5 |
| | (0.5 | ) | | 0.9 |
|
| Foreign | (0.8 | ) | | (1.1 | ) | | — | | (0.2 | ) | | (0.1 | ) | | (0.8 | ) |
| Total deferred tax (benefit) provision | $ | 5.2 | | | $ | 12.8 | | | $ | (2.6 | ) | $ | 2.8 |
| | $ | (0.3 | ) | | $ | 5.2 |
|
| | | | | | | | | | | |
| Total income tax provision | $ | 9.5 | | | $ | 18.5 | | | $ | 4.7 | | $ | 21.5 |
| | $ | 17.0 |
| | $ | 9.5 |
|
A reconciliation of the statutory federal income tax rate to our effective income tax rate and income tax provision is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| Federal income tax provision at the statutory rate | $ | 19.4 |
| | 35.0 | % | | $ | 15.1 |
| | 35.0 | % | | $ | 9.5 |
| | 35.0 | % |
| Increase (decrease) resulting from: | | | | | | | | | | | |
| State income taxes, net of federal benefit | 2.3 |
| | 4.2 |
| | 2.1 |
| | 4.9 |
| | 1.2 |
| | 4.4 |
|
| Decrease in unrecognized tax benefits (inclusive of | | | | | | | | | | | |
| related interest and penalty) | (0.2 | ) | | (0.4 | ) | | (0.3 | ) | | (0.7 | ) | | (0.5 | ) | | (1.8 | ) |
| Effect of foreign operations | (0.2 | ) | | (0.4 | ) | | (0.1 | ) | | (0.2 | ) | | (0.8 | ) | | (2.9 | ) |
Non-deductible acquisition costs
| 0.2 |
| | 0.4 |
| | 0.3 |
| | 0.7 |
| | — |
| | — |
|
Tax credits and other, net
| — |
| | — |
| | (0.1 | ) | | (0.3 | ) | | 0.1 |
| | 0.2 |
|
| Income tax provision | $ | 21.5 |
| | 38.8 | % | | $ | 17.0 |
| | 39.4 | % | | $ | 9.5 |
| | 34.9 | % |
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.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2010 | | 2009 | | 2008 |
| Federal income tax provision at the statutory rate | $ | 9.5 | | | 35.0 | % | | $ | 23.0 | | | 35.0 | % | | $ | 7.9 | | | 35.0 | % |
| Increase (decrease) resulting from: | | | | | | | | | | | | | |
| State income taxes, net of federal benefit | 1.2 | | | 4.4 | | | 2.9 | | | 4.4 | | | 1.0 | | | 4.4 | |
| Decrease in unrecognized tax benefits (inclusive of | | | | | | | | | | | |
| related interest and penalty) | (0.5 | ) | | (1.8 | ) | | (6.0 | ) | | (9.1 | ) | | (2.5 | ) | | (11.1 | ) |
| Effect of foreign operations | (0.8 | ) | | (2.9 | ) | | (1.1 | ) | | (1.7 | ) | | (0.1 | ) | | (0.4 | ) |
| Change in valuation allowances | — | | | — | | | — | | | — | | | (1.6 | ) | | (7.1 | ) |
| Other, net | 0.1 | | | 0.2 | | | (0.3 | ) | | (0.5 | ) | | — | | | — | |
| Income tax provision | $ | 9.5 | | | 34.9 | % | | $ | 18.5 | | | 28.1 | % | | $ | 4.7 | | | 20.8 | % |
In 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The tax effects of significant temporary differences which comprise deferred tax assets and liabilities are as follows (in millions):
| | | | December 31, 2010 | | December 31, 2009 | December 31, 2012 | | December 31, 2011 |
| Deferred tax assets: | | | | | | |
| Employee benefits, including post-retirement benefits | $ | 15.5 | | | $ | 16.8 | | $ | 15.3 |
| | $ | 15.6 |
|
| Trade and other receivables | 3.4 | | | 3.6 | | 4.3 |
| | 3.9 |
|
| Goodwill and intangibles | 1.7 | | | 1.3 | | 2.7 |
| | 2.6 |
|
| Self-insurance reserves | 0.6 | | | 0.6 | | 0.9 |
| | 0.6 |
|
| Minimum tax credits | 2.1 | | | — | | |
| Other | 2.9 | | | 2.2 | | 3.4 |
| | 3.3 |
|
| Subtotal | 26.2 | | | 24.5 | | 26.6 |
| | 26.0 |
|
| Less: valuation allowance | (0.1 | ) | | (0.1 | ) | (0.1 | ) | | (0.1 | ) |
| Net deferred tax assets | $ | 26.1 | | | $ | 24.4 | | $ | 26.5 |
| | $ | 25.9 |
|
| Deferred tax liabilities: | | | | | | |
|
| Inventories | $ | 7.1 | | | $ | 5.1 | | $ | 4.0 |
| | $ | 2.8 |
|
| Property and equipment | 14.8 | | | 10.0 | | 19.5 |
| | 17.8 |
|
| Prepaid and deposits | 0.5 | | | 0.5 | | 0.5 |
| | 0.5 |
|
| Deferred income | 0.3 | | | 0.6 | | 0.2 |
| | 0.2 |
|
Goodwill and intangibles
| | 7.9 |
| | 7.2 |
|
| Other | 2.3 | | | 1.7 | | 1.3 |
| | 1.3 |
|
| Total deferred tax liabilities | $ | 25.0 | | | $ | 17.9 | | $ | 33.4 |
| | $ | 29.8 |
|
| | | | | | | |
| Total net deferred tax assets | $ | 1.1 | | | $ | 6.5 | | |
| Total net deferred tax liabilities | | $ | (6.9 | ) | | $ | (3.9 | ) |
| Net current deferred tax assets | 3.3 | | | 3.0 | | 4.8 |
| | 5.9 |
|
| Net non-current deferred tax (liabilities) assets | $ | (2.2 | ) | | $ | 3.5 | | |
| Net non-current deferred tax liabilities | | $ | (11.7 | ) | | $ | (9.8 | ) |
At each balance sheet date, a valuation allowance was established against the deferred tax assets based on management's assessment of whether it is more likely than not that these deferred tax assets would not be realized. We had a valuation allowance of $0.1$0.1 million at December 31, 20102012 and 20092011 related to foreign tax credits, which will expire at various times between 2014 and 2016.
At December 31, 2010, theThe total gross amount of unrecognized tax benefits which was included in other tax liabilities related to federal, state and foreign taxes, was approximately $1.2$1.6 million and $1.8 million at December 31, 2012 and 2011, respectively, all of which would impact theour effective tax rate, if recognized. The expiration of the statute of limitations for certain tax positions in future years and expected settlement of certain tax audit issues could impact the total gross amount of unrecognized tax benefits by
in future years, including $0.2$1.1 million through the year ending December 31, 2011.2013. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 20102012, 20092011 and 20082010 is as follows (in millions):
| | | | 2010 | | 2009 | | 2008 | 2012 | | 2011 | | 2010 |
| Balance at beginning of year | $ | 1.5 | | | $ | 6.1 | | | $ | 10.2 | | $ | 1.8 |
| | $ | 1.2 |
| | $ | 1.5 |
|
Increase in unrecognized tax benefits on acquisition
| | — |
| | 0.9 |
| | — |
|
| Lapse of statute of limitations | (0.4 | ) | | (4.7 | ) | | (3.4 | ) | (0.2 | ) | | (0.2 | ) | | (0.4 | ) |
| Other | 0.1 | | | 0.1 | | | (0.7 | ) | — |
| | (0.1 | ) | | 0.1 |
|
| Balance at end of year | $ | 1.2 | | | $ | 1.5 | | | $ | 6.1 | | $ | 1.6 |
| | $ | 1.8 |
| | $ | 1.2 |
|
We file U.S. federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 20072009 to
2010 2012 tax years remain subject to examination by federal and state tax authorities. The 20062008 tax year is still open for certain state tax authorities. The 20032005 to 20102012 tax years remain subject to examination by the tax authorities in certain foreign jurisdictions.
We recognize interest and penalties on income taxes in income tax expense. AtFor the years ended December 31, 2012, 2011 and 2010 we recognized a net benefit in our provision for income taxes of $0.1 million related primarily to the recovery of interest
associated with the expiration of the statute of limitations for certain unrecognized tax position. As of December 31, 2012 and 2011, we havehad a liability of $0.7$0.7 million for estimated interest and penalties related to unrecognized tax benefits, consisting of $0.4$0.4 million for interest and $0.3$0.3 million of for penalties.
| |
| 11. | Employee Benefit Plans |
Pension Plans
We sponsored a qualified defined-benefit pension plan and a post-retirement benefit plan (collectively, “the Pension Plans”) consisting of a Core-Mark pension plan, which was frozen on September 30, 1986 and three plans we inherited from Fleming, our former parent company. The Fleming plans were frozen on, or prior to, August 20, 1998. There have been no new entrants to the Pension Plans after those benefit plans were frozen.
Our defined-benefit 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. Our post-retirement benefit plan is not subject to ERISA. As a result, the post-retirement benefit plan is not required to be pre-funded, and, accordingly, has no plan assets.
Pension costs and other post-retirement benefit costs charged to operations are estimated on the basis of annual valuations with the assistance of an independent actuary. Adjustments arising from plan amendments, changes in assumptions and experience gains and losses, are amortized over the average future life expectancy of inactive participants for the defined-benefit plan, and the average remaining future service of active employees expected to receive benefits for the post-retirement benefit plan.
The following tables provide a reconciliation of the changes in the Pension Plans' benefit obligation and fair value of assets, the funded status of the plans and the amounts recognized in the balance sheets and accumulated other comprehensive loss as of December 31, 2012 and 2011 (in millions):
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Post-retirement Benefits |
| | December 31, 2012 | | December 31, 2011 | | | December 31, 2012 | | December 31, 2011 |
| Change in Benefit Obligation: | | | | | | | | |
| Obligation at beginning of year | $ | 38.0 |
| | $ | 35.4 |
| | | $ | 4.6 |
| | $ | 4.1 |
|
| Interest cost | 1.8 |
| | 1.8 |
| | | 0.2 |
| | 0.2 |
|
| Actuarial loss | 5.6 |
| | 2.9 |
| | | 0.4 |
| | 0.5 |
|
| Benefit payments | (2.4 | ) | | (2.1 | ) | | | (0.1 | ) | | (0.2 | ) |
| Benefit obligation at end of year | $ | 43.0 |
| | $ | 38.0 |
| | | $ | 5.1 |
| | $ | 4.6 |
|
| | | | |
| | | | | |
|
| Change in Plan Assets: | | | |
| | | | | |
|
| Fair value of plan assets at beginning of year | $ | 28.7 |
| | $ | 26.9 |
| | | $ | — |
| | $ | — |
|
| Actual return on plan assets | 3.0 |
| | 0.7 |
| | | — |
| | — |
|
| Employer contributions | 3.7 |
| | 3.2 |
| | | 0.1 |
| | 0.2 |
|
| Benefit payments | (2.4 | ) | | (2.1 | ) | | | (0.1 | ) | | (0.2 | ) |
| Fair value of plan assets at end of year | $ | 33.0 |
| | $ | 28.7 |
| | | $ | — |
| | $ | — |
|
| | | | |
| | | | | |
|
| | | | |
| | | | | |
|
| Funded status at end of year | $ | (10.0 | ) | | $ | (9.3 | ) | | | $ | (5.1 | ) | | $ | (4.6 | ) |
| | | | | | | | | |
| Amounts recognized in the balance sheet consist of: | | | | | | | | |
| Current liabilities | $ | — |
| | $ | — |
| | | $ | (0.3 | ) | | $ | (0.3 | ) |
| Non-current liabilities | (10.0 | ) | | (9.3 | ) | | | (4.8 | ) | | (4.3 | ) |
| Total liability | $ | (10.0 | ) | | $ | (9.3 | ) | | | $ | (5.1 | ) | | $ | (4.6 | ) |
| | | | | | | | | |
| Amounts recognized in accumulated other comprehensive loss consist of: | | | | | | | | |
| Prior service credit | $ | — |
| | $ | — |
| | | $ | (0.1 | ) | | $ | (0.2 | ) |
| Net actuarial loss | 16.5 |
| | 12.2 |
| | | 0.7 |
| | 0.3 |
|
| Total | $ | 16.5 |
| | $ | 12.2 |
| | | $ | 0.6 |
| | $ | 0.1 |
|
| | | | | | | | | |
| Additional Information: | | | | | | | | |
| Accumulated benefit obligation | $ | 43.0 |
| | $ | 38.0 |
| | | | | |
10.During 2012, the underfunded status of the defined-benefit pension plan increased Earnings Per Share$0.7 million to $10.0 million, due primarily to an actuarial loss of $5.6 million resulting primarily from lower discount rates and a greater number of plan participants taking benefits later than expected. The actuarial loss was offset by $0.9 million in higher than expected returns on our pension plan assets and $3.7 million of contributions made by the Company in 2012.
The following table provides components of net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other comprehensive income (in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Post-retirement Benefits |
| | 2012 | | 2011 | | 2010 | | | 2012 | | 2011 | | 2010 |
| Net Periodic Benefit Cost: | | | | | | | | | | | | |
| Interest cost | $ | 1.8 |
| | $ | 1.8 |
| | $ | 1.9 |
| | | $ | 0.2 |
| | $ | 0.2 |
| | $ | 0.2 |
|
| Expected return on plan assets | (2.1 | ) | | (1.9 | ) | | (1.7 | ) | | | — |
| | — |
| | — |
|
| Amortization of prior service credit | — |
| | — |
| | — |
| | | (0.1 | ) | | (0.1 | ) | | (0.1 | ) |
| Amortization of net actuarial loss | 0.4 |
| | 0.3 |
| | 0.2 |
| | | — |
| | — |
| | — |
|
| Net periodic benefit cost | $ | 0.1 |
| | $ | 0.2 |
| | $ | 0.4 |
| | | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.1 |
|
| | | | | | | | | | | | | |
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income: | | | | | | | | | | | | |
| Net actuarial loss/(gain) | $ | 4.7 |
| | $ | 4.1 |
| | $ | (0.2 | ) | | | $ | 0.4 |
| | $ | 0.5 |
| | $ | (0.2 | ) |
| Amortization of prior service cost | — |
| | — |
| | — |
| | | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Amortization of actuarial gain | (0.4 | ) | | (0.3 | ) | | (0.2 | ) | | | — |
| | — |
| | — |
|
| Total recognized in other comprehensive | | | | | | | | | | | | |
| income | $ | 4.3 |
| | $ | 3.8 |
| | $ | (0.4 | ) | | | $ | 0.5 |
| | $ | 0.6 |
| | $ | (0.1 | ) |
| | | | | | | | | | | | | |
| Total recognized in net periodic benefit cost and | | | | | | | | | | | | |
| other comprehensive income | $ | 4.4 |
| | $ | 4.0 |
| | $ | — |
| | | $ | 0.6 |
| | $ | 0.7 |
| | $ | — |
|
For both the pension and other post-retirement benefits plans, prior service cost are amortized on a straight-line basis over the average remaining future service of active employees expected to receive benefits under the plan. For the pension benefits plan, gains and losses in excess of 10% of the greater of the benefit obligation and market-related value of assets are amortized over the average future life expectancy of inactive participants. For the post-retirement benefit plan, gains and losses in excess of 10% of the greater of the benefit obligation and market-related value of assets are amortized over the average remaining future service of active employees expected to receive benefits under the plan. We use our fiscal year-end date as the measurement date for our plans. We estimated that average future life expectancy is 22.5 years for the pension benefits plan and remaining service life of active participants is 6.2 years for the post-retirement benefits plan.
Assumptions Used:
The following table shows the weighted-average assumptions used in the measurement of:
|
| | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Post-retirement Benefits |
| | December 31, | | | December 31, |
| | 2012 | | 2011 | | 2010 | | | 2012 | | 2011 | | 2010 |
| Benefit Obligations: | | | | | | | | | | | | |
| Discount rate | 3.80 | % | | 4.72 | % | | 5.04 | % | | | 3.85 | % | | 4.74 | % | | 5.08 | % |
| Expected return on assets | 7.00 | % | | 7.25 | % | | 7.35 | % | | | N/A |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | | |
| Net Periodic Benefit Costs: | | | | | | | | | | | | |
| Discount rate | 4.72 | % | | 5.04 | % | | 5.73 | % | | | 4.74 | % | | 5.08 | % | | 5.88 | % |
| Expected return on assets | 7.25 | % | | 7.35 | % | | 7.35 | % | | | N/A |
| | N/A |
| | N/A |
|
The weighted-average discount rates used to determine the Pension Plans' obligations and expenses are based on a yield curve methodology which matches the expected benefits at each duration to the available high quality yields at that duration and calculating an equivalent yield. The decrease in discount rates in 2012, 2011 and 2010 of our benefit obligations for both our pension benefits plan and other post-retirement benefits plan was due primarily to lower bond yields. The decrease in the expected long-term return on asset assumption in 2012, 2011 and 2010 for our pension plan is primarily due to a decrease in expected future returns for most asset classes.
We use a building block approach in determining the overall expected long-term return on assets. Under this approach, a weighted-average expected rate of return is developed based on historical and expected future returns for each major asset class and the proportion of assets of the class held by the Pension Plans. We then review the results and may make adjustments to reflect the expected additional return gained through active investment management.
Assumed health care cost trend rates have an effect on the amounts reported for the post-retirement health care plans. The health care cost trend rates assumed for the end of year benefit obligation for the post-retirement benefit plans are as follows:
|
| | | |
| | December 31, 2012 | | December 31, 2011 |
| Assumed current trend rate for next year for participants under 65 | 7.00% | | 7.50% |
| Assumed current trend rate for next year for participants 65 and over | 6.00% | | 6.50% |
| Ultimate year trend rate | 5.00% | | 5.00% |
| Year that ultimate trend rate is reached for participants under 65 | 2017 | | 2016 |
| Year that ultimate trend rate is reached for participants 65 and over | 2017 | | 2015 |
An one percent point change in assumed health care cost trend rates would have the following effects (in millions):
|
| | | | | | | |
| | 1% Increase | | 1% Decrease |
| Effect on total of service and interest cost components of net periodic post-retirement | | | |
| health care benefit cost | $ | — |
| | $ | — |
|
| Effect on the health care component of the accumulated post-retirement benefit | | | |
| obligation | $ | 0.5 |
| | $ | (0.5 | ) |
Plan Assets:
The Company's overall investment strategy is to produce a total investment return which will satisfy future annual cash benefit payments to participants, while minimizing future contributions from the Company. Additionally, our asset allocation strategy is intended to diversify plan assets to minimize non-systematic risk and provide reasonable assurance that no single security or class of security will have a disproportionate impact on the Pension Plans.
Our target investment allocation ranges are: 0-20% cash, 50-70% equity and 30-50% fixed income. Our investment target also set forth the requirement for diversification within asset class, types and classes for investments prohibited and permitted, specific indices to be used for benchmark in investment decisions and criteria for individual securities.
The fair value measurements of the Pension Plans' assets by asset category at December 31, 2012 are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Asset Category | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Cash and cash equivalents | $ | 1.1 |
| | $ | 0.4 |
| | $ | 0.7 |
| | $ | — |
|
| Equity securities: | | | | | | | |
| Mutual funds | 8.1 |
| | 8.1 |
| | — |
| | — |
|
| Other equity securities, primarily U.S. companies | 10.1 |
| | 10.1 |
| | — |
| | — |
|
| Government securities | 3.7 |
| | 2.1 |
| | 1.6 |
| | — |
|
| Corporate and muni bonds: | | | | | | | |
| Other bonds | 5.9 |
| | — |
| | 5.9 |
| | — |
|
| Muni bonds | 0.3 |
| | — |
| | 0.3 |
| | — |
|
| Group annuity contract | 3.8 |
| | — |
| | 3.8 |
| | — |
|
| Total | $ | 33.0 |
| | $ | 20.7 |
| | $ | 12.3 |
| | $ | — |
|
The fair value measurements of the Pension Plans' assets by asset category at December 31, 2011 are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Asset Category | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Cash and cash equivalents | $ | 1.5 |
| | $ | — |
| | $ | 1.5 |
| | $ | — |
|
| Equity securities: | | | | | | | |
| Mutual funds | 6.4 |
| | 6.4 |
| | — |
| | — |
|
| Other equity securities, primarily U.S. companies | 8.7 |
| | 8.7 |
| | — |
| | — |
|
| Government securities | 3.4 |
| | 1.2 |
| | 2.2 |
| | — |
|
| Corporate and muni bonds: | | | | | | | |
| Other bonds | 4.8 |
| | — |
| | 4.8 |
| | — |
|
| Muni bonds | 0.3 |
| | — |
| | 0.3 |
| | — |
|
| Group annuity contract | 3.6 |
| | — |
| | 3.6 |
| | — |
|
| Total | $ | 28.7 |
| | $ | 16.3 |
| | $ | 12.4 |
| | $ | — |
|
Subsequent to the issuance of the 2011 consolidated financial statements, we determined that $1.5 million in cash equivalents, $2.2 million of government securities, $4.8 million of corporate bonds and $0.3 million of municipal bonds classified as Level 1 investments as of December 31, 2011 should have been classified as Level 2 as these specific investments do not have quoted prices in active markets for identical assets. Accordingly, we have corrected the classification of these securities and bonds from Level 1 to Level 2 in the table of fair value measurements as of December 31, 2011.
Equity securities are recorded at their fair market value each year-end as determined by quoted closing market prices on national securities exchanges or other markets, as applicable. Most of our debt securities are classified as Level 2, with the exception of some of our U.S. government obligations, which are classified as Level 1. The group annuity consists primarily of investment grade fixed income securities. The participating annuity contract is valued based on discounted cash flows of current yields of similar securities with comparable duration based on the underlying fixed income investments.
Estimated Future Contributions and Benefit Payments
We expect to contribute $3.1 million and $0.3 million to our pension benefits plan and other post-retirements benefits plan, respectively, in 2013.
Estimated future benefit payments reflecting future service are as follows (in millions):
|
| | | | | | | |
Year ending December 31, | Pension Benefits | | Other Post-retirement Benefits |
| 2013 | $ | 2.6 |
| | $ | 0.3 |
|
| 2014 | 3.0 |
| | 0.3 |
|
| 2015 | 2.7 |
| | 0.3 |
|
| 2016 | 2.9 |
| | 0.3 |
|
| 2017 | 2.8 |
| | 0.4 |
|
| 2018 through 2022 | 14.5 |
| | 1.7 |
|
Expected amortizations from accumulated other comprehensive income into net periodic benefit cost for the year ending December 31, 2013 (in millions):
|
| | | | | | | |
| | Pension Benefits | | Other Post-retirement Benefits |
| Expected amortization of net actuarial loss | $ | 0.5 |
| | $ | — |
|
| Expected amortization of prior service credit | — |
| | (0.1 | ) |
| Total expected amortizations for the year ending December 31, 2013 | $ | 0.5 |
| | $ | (0.1 | ) |
Multi-employer Defined Benefit Plan
The Company contributed $0.3 million in each of 2012, 2011 and 2010 to multi-employer defined benefit plans under the terms of a collective-bargaining agreement that covers its union represented employees.
Savings Plans
We maintain defined-contribution plans in the U.S., subject to Section 401(k) of the Internal Revenue Code, and in Canada, subject to the Income Tax Act. For the year ended December 31, 2012, eligible U.S. employees could elect to contribute, on a tax-deferred basis, from 1% to 75% of their compensation to a maximum of $17,000. Eligible U.S. employees over 50 years of age could also contribute an additional $5,500 on a tax-deferred basis. In Canada, employees can elect to contribute up to a maximum of $22,970 Canadian dollars. Under the 401(k) plan, we match 100% of U.S. employee contributions up to 2% of base salary and match 25% of employee contributions from 2% to 6% of base salary. For Canadian employees,we match 50% of employee contributions up to 3% of base salary. For the years ended December 31, 2012, 2011 and 2010, we made matching payments of $2.3 million, $2.5 million and $2.3 million, respectively.
The following table sets forth the computation of basic and diluted net earnings per share (in(dollars and shares in millions, except per share amounts):
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2010 | | 2009 | | 2008 | 2012 | | 2011 | | 2010 |
| | Net Income | | Weighted-Average Shares Outstanding | | Net Income Per Common Share | | Net Income | | Weighted-Average Shares Outstanding | | Net Income Per Common Share | | Net Income | | Weighted-Average Shares Outstanding | | Net Income Per Common Share | Net Income | | Weighted-Average Shares Outstanding | | Net Income Per Common Share | | Net Income | | Weighted-Average Shares Outstanding | | Net Income Per Common Share | | Net Income | | Weighted-Average Shares Outstanding | | Net Income Per Common Share |
| Basic EPS | $ | 17.7 | | | 10.8 | | | $ | 1.64 | | | $ | 47.3 | | | 10.5 | | | $ | 4.53 | | | $ | 17.9 | | | 10.5 | | | $ | 1.71 | | $ | 33.9 |
| | 11.5 |
| | $ | 2.96 |
| | $ | 26.2 |
| | 11.4 |
| | $ | 2.30 |
| | $ | 17.7 |
| | 10.8 |
| | $ | 1.64 |
|
| Effect of dilutive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| common share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| equivalents: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unvested restricted | | | | | | | | | | | | | | | | | | |
| Restricted | | | | | | | | | | | | | | | | | | |
| stock units | | | 0.1 | | | (0.01 | ) | | | | — | | | (0.02 | ) | | | | — | | | — | | | | 0.1 |
| | (0.02 | ) | | | | — |
| | (0.01 | ) | | | | 0.1 |
| | (0.01 | ) |
| Stock options | | | 0.2 | | | (0.03 | ) | | | | 0.2 | | | (0.07 | ) | | | | 0.2 | | | (0.03 | ) | | | — |
| | (0.02 | ) | | | | 0.1 |
| | (0.02 | ) | | | | 0.2 |
| | (0.03 | ) |
| Performance shares | | | | — |
| | (0.01 | ) | | | | — |
| | — |
| | | | — |
| | — |
|
| Warrants | | | 0.3 | | | (0.05 | ) | | | | 0.2 | | | (0.08 | ) | | | | 0.2 | | | (0.04 | ) | | | — |
| | — |
| | | | 0.2 |
| | (0.04 | ) | | | | 0.3 |
| | (0.05 | ) |
| Performance shares | | | — | | | — | | | | | — | | | (0.01 | ) | | | | — | | | — | | |
| Diluted EPS | $ | 17.7 | | | 11.4 | | | $ | 1.55 | | | $ | 47.3 | | | 10.9 | | | $ | 4.35 | | | $ | 17.9 | | | 10.9 | | | $ | 1.64 | | $ | 33.9 |
| | 11.6 |
| | $ | 2.91 |
| | $ | 26.2 |
| | 11.7 |
| | $ | 2.23 |
| | $ | 17.7 |
| | 11.4 |
| | $ | 1.55 |
|
Note: Basic and diluted earnings per share are calculated based on unrounded actual amounts.
CertainStock options and warrants to purchase common stock were outstanding but wereare not included in the computation of diluted earnings per share because theif their effect would be anti-dilutive. ForThere were no anti-dilutive stock options outstanding for 2012 and 91,770 and 104,020 anti-dilutive stock options outstanding for 2011 and 2010, 2009 and 2008 there were 104,020, 259,777 and 249,453 anti-dilutive options, respectively. There were no anti-dilutive warrants in 2011 and 2010, and there were 2010, 2009no orwarrants outstanding in 20082012.
In 2004, we issued an aggregate of 9,800,000 shares of our common stock and warrants to purchase an aggregate of 990,616 shares of our common stock to the Class 6(B) creditors of Fleming (our former parent company) pursuant to its plan of reorganization. We refer to the warrants we issued to the Class 6(B) creditors as the Class 6(B) warrants. We received no cash consideration at the time we issued the Class 6(B) warrants. The Class 6(B) warrants have an exercise price of $20.93 per share. The shares of common stock and the Class 6(B) warrants were issued pursuant to an exemption from registration under Section 1145(a) of the Bankruptcy Code. We also issued warrants to purchase an aggregate of 247,654 shares of our common stock to the holders of our Tranche B Notes, which we refer to as Tranche B warrants. The Tranche B warrants have an exercise price of $15.50 per share. Both the Class 6(B) and Tranche B warrants may be exercised at the election of the holder at any time prior to August 23, 2011, at which time any outstanding warrants will be net issued.
The number of Class 6(B) warrants outstanding was 705,894 at the end of 2010, 952,806 at the end of 2009 and 968,628 at the end of 2008. The number of Tranche B warrants outstanding was 126,716 at the end of 2010, 2009 and 2008. The Class 6(B) warrants and the Tranche B warrants have been classified as permanent equity. We use the treasury stock method to determine the shares of common stock due to conversion of outstanding warrants asAs of December 31, 20102011., 696,385 shares had been net issued upon cash and cashless exercises of the Company's warrants and no Class 6(B) warrants or Tranche B warrants remain outstanding.
11.Stock-Based Compensation Plans
| |
| 13. | Stock-Based Compensation Plans |
Total stock-based compensation cost recognized in the consolidated statements of operations as a component of selling, general and administrative expenses was $5.8 million, $5.5 million and $4.8 millionfor the years ended December 31, 2012, 2011 and 2010,2009 and 2008 was $4.8 million, $5.1 million and $3.9 million, respectively. Total unrecognized compensation cost related to non-vested share-based compensation arrangements was $4.2$4.6 million at December 31, 20122010. This balance, which is expected to be recognized over a weighted-average period of 1.7 years.
Employee stock-based compensation expense recognized in 20102012 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Our forfeiture experience since inception of our plans has been approximately 4% of the total grants. The historical rate of forfeiture is a component of the basis for predicting the future rate of forfeitures, which
are also dependent on the remaining service period related to grants and on the limited number of approximately 8284 plan participants that have been awarded grants since the inception of our plans. We issue new shares to satisfy stock option exercises.
Historically,In 2010, we have maintained five stock-based compensation plans: the 2004 Long-Term Incentive Plan, the 2004 Directors' Equity Incentive Plan, the 2005 Long-Term Incentive Plan, the 2005 Directors' Equity Incentive Plan and the 2007 Long-Term Incentive Plan. During 2010,established the 2010 Long-Term Incentive Plan was established.Plan. All shares available for issuance under our historical fiveprevious plans have been transferred to the 2010 Long-Term Incentive Plan, from which all future awards will be made. The following table summarizes the number of securities to be issued and remaining available for future issuance under all of the plans as of December 31, 2012:
| | | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column 1) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column 1) |
| 2004 Long-Term Incentive Plan | | | | | | | | | | |
| -Restricted stock units and options | 219,476 | | | $ | 20.32 | | | — | | |
| -options | | 17,376 |
| | $ | 34.94 |
| | — |
|
| 2005 Long-Term Incentive Plan | | | | | | | | | | |
| -Restricted stock units | 15,772 | | | $ | 0.01 | | | — | | 3,053 |
| | $ | 0.01 |
| | — |
|
| 2004 Directors' Equity Incentive Plan | 30,000 | | | $ | 15.50 | | | — | | |
| 2005 Directors' Equity Incentive Plan | 15,000 | | | $ | 27.03 | | | — | | |
2007 Long-Term Incentive Plan(1) | 559,186 | | | $ | 13.96 | | | — | | 202,480 |
| | $ | 21.40 |
| | — |
|
2010 Long-Term Incentive Plan (1) | — | | | $ | — | | | 660,952 | | 204,673 |
| | $ | 1.21 |
| | 370,271 |
|
(1) Includes non-qualified stock options, restricted stock units and performance shares.
| |
| (1) | Includes non-qualified stock options, restricted stock units and performance shares. |
2004 Long-Term Incentive Plan
The 2004 Long-Term Incentive Plan (“2004 LTIP”) providesprovided for issuance of up to 1,314,444 shares of non-qualified stock options and restricted stock units to officers and key employees. For option grants, the exercise price equals the fair value of the Company's common stock on the date of grant. For restricted stock grants, the exercise price is fixed at $0.01. Options and restricted stock units vestvested over a three-yearthree-year period; one-third of the options and restricted stock units cliff-vest on the first anniversary of the vesting commencement date and the remaining options and restricted stock units vest in equal monthly and quarterly installments respectively, over the two-yeartwo-year period following the first anniversary of the vesting commencement date. Stock options expire seven years after the date of grant. Restricted stock units do not have an expiration date. Stock-based compensation is being recognized ratably over the three-year vesting period of the stock options or restricted stock units using the straight-line method. No further grants will be made under the 2004 LTIP.
2004 Directors' Equity Incentive Plan
The 2004 Directors' Equity Incentive Plan (“2004 Directors' Plan”) consists of 30,000 non-qualified stock options that have been granted to non-employee Directors of the Company. This plan has terms and vesting requirements similar to those of the 2004 LTIP, except options vest quarterly after the first anniversary of the vesting commencement date. No stock options are
available for future issuance.
2005 Long-Term Incentive Plan
The 2005 Long-Term Incentive Plan (“2005 LTIP”) providesprovided for the granting of restricted stock units to officers and key employees. The majority of restricted stock units issued under the 2005 LTIP generally vest over three years: one-third of the restricted stock units cliff vest on the first anniversary of the vesting commencement date and the remaining restricted stock units vest in equal quarterly installments over the two-yeartwo-year period following the first anniversary of the vesting commencement date. Restricted stock units do not have an expiration date. No further grants will be made under the 2005 LTIP.
2005 Directors' Equity Incentive Plan
The 2005 Directors' Equity Incentive Plan (“2005 Directors' Plan”) consists of 15,000 non-qualified stock options that
have been granted to non-employee Directors of the Company. The terms and vesting requirements of the 2005 Directors' Plan are similar to those of the 2004 Directors' Plan.LTIP, except options vest quarterly after the first anniversary of the vesting commencement date. No stock options are available for future issuance.
2007 Long-Term Incentive Plan
The 2007 Long-Term Incentive Plan (“2007 LTIP”) providesprovided for the granting of stock options, restricted stock units and performance share awards of up to 1,202,350 shares of our common stock (including treasury shares) to officers, employees and non-employee directors. The majority of awards issued under the 2007 LTIP generally vest over three years: one-third of the awards cliff vest on the first anniversary of the vesting commencement date and the remaining awards vest in equal quarterly installments over the two-year period following the first anniversary of the vesting commencement date. Stock options expire seven years after the date of grant. Restricted stock units do not have an expiration date. No further grants will be made under the 2007 LTIP.
2010 Long-Term Incentive Plan
The 2010 Long-Term Incentive Plan (“2010 LTIP”) provides for the granting of awards of up to 1,115,952 shares of our common stock to officers, employees and non-employee directors. The 2010 LTIP became effective on April 1, 2010 and awards may be made under the plan through March 31, 2020. The available awards under the 2010 LTIP include: stock options, stock appreciation rights, restricted stock units, other stock-based awards and performance shares. The 2010 LTIP limits awards to 100,000 shares to any one participant in any one year. The majority of awards issued under the 2010 LTIP through December 31, 2012, have been restricted stock units which generally vest over three years: one-third of the restricted stock units cliff vest on the first anniversary of the vesting commencement date and the remaining restricted stock units vest in equal quarterly installments over the two-yeartwo-year period following the first anniversary of the vesting commencement date. Stock options expire seven years after the date of grant. Restricted stock units do not have an expiration date. No further grants will be made under the 2007 LTIP.
2010 Long-Term Incentive Plan
The 2010 Long-Term Incentive Plan (“2010 LTIP”) provides for the granting of awards of up to 1,115,952 shares of our common stock to officers, employees and non-employee directors. The 2010 LTIP became effective on April 1, 2010. Awards may be made under the 2010 LTIP through March 31, 2020, which is 10 years from the effective date of the 2010 LTIP. The available awards under the 2010 LTIP include: stock options, stock appreciation rights, restricted stock units, other stock-based awards and performance shares. The annual award limits of the 2010 LTIP provide for awards which are limited in any one plan year to 100,000 shares to any one participant. There were no issuances from the 2010 LTIP as of December 31, 2010.
Assumptions Used for Fair Value
WeRestricted stock units and performance shares are valued at the fair market value of our stock at date of grant. For stock options we use the Black-Scholes option-pricing model to determine the grant date fair value for each stock option.value. Option-pricing models require the input of assumptions that are estimated at the date of grant.
There were no stock options granted in 2012 and 2010. The following table presents the assumptions used in the Black-Scholes option-pricing model to value the stock options granted during 20082011 and 2009. There were no stock options granted in 2010. Restrictedthe fair value of restricted stock units and performance shares were valued atgranted during the fair market value of our stock at date of grant. periods.
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2010 | | 2009 | | 2008 | 2012 | | 2011 | | 2010 |
| Expected life (years) | — | | | 4.0 | | | 4.0 | | N/A |
| | 5.3 |
| | N/A |
|
| Risk-free interest rate | — | | | 1.12 | % | | 2.55 | % | N/A |
| | 0.48 | % | | N/A |
|
| Volatility | — | | | 44 | % | | 35 | % | N/A |
| | 41 | % | | N/A |
|
| Dividend yield | — | | | — | | | — | | N/A |
| | 2 | % | | N/A |
|
| Weighted-average fair value per share of grants: | | | | | | | | | | | | |
| Stock options | $ | — | | | $ | 7.14 | | | $ | 8.45 | | N/A |
| | $ | 9.88 |
| | N/A |
|
| Restricted stock units | $ | 31.57 | | | $ | 19.18 | | | $ | 25.80 | | $ | 39.98 |
| | $ | 34.12 |
| | $ | 31.57 |
|
| Performance shares | $ | — | | | $ | 19.18 | | | $ | 25.80 | | $ | 39.59 |
| | $ | 34.12 |
| | $ | — |
|
The expected volatility is based on the historical implied volatility of our stock is based on the implied volatilities of publicly traded options to buy our stock.price. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted represents the period of time we estimate that options granted are expected to be outstanding.
The following table summarizes the activity for all stock options, restricted stock units and performance shares under all of the plansLong-Term Incentive Plans ("LTIPs") for the year endedDecember 31, 20102012:
| | | | | | | December 31, 2009 | | Activity during 2010 | | December 31, 2010 | | | | December 31, 2011 | | Activity during 2012 | | December 31, 2012 |
| | | | | Outstanding | | Granted | | Exercised | | Canceled/Reclass | | Outstanding | | Exercisable | | | | Outstanding | | Granted | | Exercised | | Canceled | | Outstanding | | Exercisable |
| Plans | | Securities | | Number | | Price | | Number | | Price | | Number | | Price | | Number | | Price | | Number | | Price | | Number | | Price | | Securities | | Number | | Price | | Number | | Price | | Number | | Price | | Number | | Price | | Number | | Price | | Number | | Price |
| 2004 LTIP | | RSUs | | 11,929 | | | $ | 0.01 | | | — | | | $ | — | | | (10,708 | ) | | $ | 0.01 | | | — | | | $ | — | | | 1,221 | | | $ | 0.01 | | | 1,221 | | | $ | 0.01 | | | RSUs | | 188 |
| | $ | 0.01 |
| | — |
| | $ | — |
| | (188 | ) | | $ | 0.01 |
| | — |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| | | Options | | 480,267 | | | 17.81 | | | — | | | — | | | (261,012 | ) | | 15.54 | | | (1,000 | ) | | 36.03 | | | 218,255 | | | 20.44 | | | 217,404 | | | 20.44 | | | Options | | 41,077 |
| | 35.08 |
| | — |
| | — |
| | (23,701 | ) | | 35.18 |
| | — |
| | — |
| | 17,376 |
| | 34.94 |
| | 17,376 |
| | 34.94 |
|
| 2004 Directors’ Plan | | Options | | 30,000 | | | 15.50 | | | — | | | — | | | — | | | — | | | — | | | — | | | 30,000 | | | 15.50 | | | 30,000 | | | 15.50 | | |
| 2005 LTIP | | RSUs | | 22,111 | | | 0.01 | | | — | | | — | | | (6,339 | ) | | 0.01 | | | — | | | — | | | 15,772 | | | 0.01 | | | 15,727 | | | 0.01 | | | RSUs | | 3,053 |
| | 0.01 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,053 |
| | 0.01 |
| | 3,053 |
| | 0.01 |
|
| 2005 Directors’ Plan | | Options | | 15,000 | | | 27.03 | | | — | | | — | | | — | | | — | | | — | | | — | | | 15,000 | | | 27.03 | | | 15,000 | | | 27.03 | | | Options | | 7,500 |
| | 27.03 |
| | — |
| | — |
| | (7,500 | ) | | 27.03 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
2007 LTIP (1) | | RSUs | | 192,164 | | | 0.01 | | | 148,586 | | | 0.01 | | | (119,965 | ) | | 0.01 | | | (2,836 | ) | | 0.01 | | | 217,949 | | | 0.01 | | | 30,421 | | | 0.01 | | | RSUs | | 78,509 |
| | 0.01 |
| | — |
| | — |
| | (51,922 | ) | | 0.01 |
| | (1,667 | ) | | 0.01 |
| | 24,920 |
| | 0.01 |
| | 24,920 |
| | 0.01 |
|
| | | Options | | 332,905 | | | 25.01 | | | — | | | — | | | (21,057 | ) | | 21.30 | | | (3,065 | ) | | 24.10 | | | 308,783 | | | 25.28 | | | 266,113 | | | 26.25 | | | Options | | 274,034 |
| | 25.71 |
| | — |
| | — |
| | (104,927 | ) | | 25.86 |
| | — |
| | — |
| | 169,107 |
| | 25.62 |
| | 169,107 |
| | 25.62 |
|
| | | Perf. shares | | 80,665 | | | 0.01 | | | — | | | — | | | (48,211 | ) | | 0.01 | | | — | | | — | | | 32,454 | | | 0.01 | | | 8,456 | | | 0.01 | | | Perf. shares | | 11,271 |
| | 0.01 |
| | — |
| | — |
| | (2,818 | ) | | 0.01 |
| | — |
| | — |
| | 8,453 |
| | 0.01 |
| | 8,453 |
| | 0.01 |
|
| 2010 LTIP (1) | | | RSUs | | 137,532 |
| | 0.01 |
| | 84,468 |
| | 0.01 |
| | (91,499 | ) | | 0.01 |
| | (10,375 | ) | | 0.01 |
| | 120,126 |
| | 0.01 |
| | 1,733 |
| | 0.01 |
|
| | | | Options | | 7,500 |
| | 32.78 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,500 |
| | 32.78 |
| | 2,500 |
| | 32.78 |
|
| | | | Perf. shares | | 28,192 |
| | 0.01 |
| | 85,252 |
| (2) | 0.01 |
| | (25,967 | ) | | 0.01 |
| | (10,430 | ) | | 0.01 |
| | 77,047 |
| | 0.01 |
| | 1,366 |
| | 0.01 |
|
| Total | | | | 1,165,041 | | | | | 148,586 | | | | | (467,292 | ) | | | | (6,901 | ) | | | | 839,434 | | | | | 584,342 | | | | | | | 588,856 |
| | | | 169,720 |
| | | | (308,522 | ) | | | | (22,472 | ) | | | | 427,582 |
| | | | 228,508 |
| | |
Note: Price is weighted-average price per share.
| |
| (1) | The 2007 LTIP isand 2010 LTIPs are for officers, employees and non-employee directors. |
| |
| (2) | This number consists of 13,375 shares of one-time special incentive awards granted in 2012 and 71,877 performance shares granted during 2012 of which 45,493 performance shares were determined to be earned subsequent to December 31, 2012 based upon achievement of 2012 performance criteria. |
The aggregate intrinsic value of stock options exercised in 20102012, 20092011 and 20082010 was approximately $4.7$2.2 million $1.4, $4.3 million and $2.1$4.7 million, respectively. The aggregate intrinsic value of restricted stock units exercised in 20102012, 20092011 and 20082010 was approximately $4.2$6.4 million $2.9, $5.3 million and $3.1$4.2 million, respectively. The aggregate intrinsic value of performance shares exercised in 20102012, 20092011 and 20082010 was approximately $1.5$1.1 million $0.4, $0.7 million and less than $0.1$1.5 million, respectively.
The following table summarizes stock options, restricted stock units and performance shares that have vested and are expected to vest as of December 31, 20102012:
| | | | | | | December 31, 2010 | | | | December 31, 2012 |
| | | | | Outstanding | | Weighted-Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value(1) (in thousands) | | | | Outstanding | | Weighted-Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value(1) (dollars in thousands) |
| Plans | | Securities | | Vested | | Expected to vest(2) | | Vested | | Expected to vest(2) | | Vested | | Expected to vest(2) | | Securities | | Vested | | Expected to vest(2) | | Vested | | Expected to vest(2) | | Vested | | Expected to vest(2) |
| 2004 LTIP | | RSUs | | 1,221 | | | — | | | — | | | — | | | $ | 43 | | | $ | — | | | Options | | 17,376 |
| | — |
| | 1.3 |
| | — |
| | $ | 216 |
| | $ | — |
|
| | | Options | | 217,404 | | | 820 | | | 1.3 | | | 5.1 | | | 3,315 | | | 13 | | |
| 2004 Directors’ Plan | | Options | | 30,000 | | | — | | | 0.6 | | | — | | | 603 | | | — | | |
| 2005 LTIP | | RSUs | | 15,727 | | | 43 | | | — | | | — | | | 560 | | | 2 | | | RSUs | | 3,053 |
| | — |
| | — |
| | — |
| | 145 |
| | — |
|
| 2005 Directors’ Plan | | Options | | 15,000 | | | — | | | 1.6 | | | — | | | 128 | | | — | | |
| 2007 LTIP | | RSUs | | 30,421 | | | 180,702 | | | — | | | — | | | 1,082 | | | 6,429 | | | RSUs | | 24,920 |
| | — |
| | — |
| | — |
| | 1,180 |
| | — |
|
| | | Options | | 266,113 | | | 41,117 | | | 4.3 | | | 5.1 | | | 2,569 | | | 674 | | | Options | | 169,107 |
| | — |
| | 2.5 |
| | — |
| | 3,675 |
| | — |
|
| | | Perf. shares | | 8,456 | | | 23,124 | | | — | | | — | | | 301 | | | 823 | | | Perf. shares | | 8,453 |
| | — |
| | — |
| | — |
| | 400 |
| | — |
|
| 2010 LTIP | | | RSUs | | 1,733 |
| | 118,393 |
| | — |
| | — |
| | 82 |
| | 5,605 |
|
| | | | Options | | 2,500 |
| | 5,000 |
| | 5.8 |
| | 5.8 |
| | 36 |
| | 73 |
|
| | | | Perf. shares | | 1,366 |
| | 49,297 |
| | — |
| | — |
| | 65 |
| | 2,334 |
|
| Total | | | | 584,342 | | | 245,806 | | | | | | | $ | 8,601 | | | $ | 7,941 | | | | | 228,508 |
| | 172,690 |
| | | | | | $ | 5,799 |
| | $ | 8,012 |
|
(1) Aggregate intrinsic value is calculated based upon the difference between the exercise prices of options or restricted stock units and our closing common stock price on December 31, 2010 of $35.59, | |
| (1) | Aggregate intrinsic value is calculated based upon the difference between the exercise prices of options or restricted stock units and our closing common stock price on December 31, 2012 of $47.35, multiplied by the number of instruments that are vested or expected to vest. Options and restricted stock units having exercise prices greater than the closing stock price noted above are excluded from this calculation. (2) Options and restricted stock units that are expected to vest are net of estimated future forfeitures.
|
| |
| (2) | Options, restricted stock units and performance shares that are expected to vest are net of estimated future forfeitures. |
The aggregate fair value of options vested in 20102012, 20092011 and 20082010 was approximately $5.5$0.1 million $4.3, $1.7 million and $1.6$5.5 million, respectively. The aggregate fair value of restricted stock units vested in 20102012, 20092011 and 20082010 was approximately $4.7$6.4 million $3.6, $6.1 million and $1.4$4.7 million, respectively. The aggregate fair value of performance shares vested in 20102012, 20092011 and2008 was approximately $2.0 million, $0.6 million and $0.1 million, respectively.
12.Employee Benefit Plans
Pension Plans
We sponsored a qualified defined-benefit pension plan and a post-retirement benefit plan (collectively, "the Pension Plans") for employees hired before September 1986. There have been no new entrants to the Pension Plans after those benefit plans were frozen on September 30, 1989.
Our defined-benefit 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. Our post-retirement benefit plan is not subject to ERISA. As a result, the post-retirement benefit plan is not required to be pre-funded, and, accordingly, has no plan assets.
Pension costs and other post-retirement benefit costs charged to operations are estimated on the basis of annual valuations with the assistance of an independent actuary. Adjustments arising from plan amendments, changes in assumptions and experience gains and losses, are amortized over the average future life expectancy of inactive participants for the defined-benefit plan, and expected average remaining service life of active participants for the post-retirement benefit plan.
The following tables provide a reconciliation of the changes in the Pension Plans' benefit obligation and fair value of assets over the two-year period ending December 31, 2010 and a statement of the funded status for the year ended December 31, 2010 and 2009 (in millions):
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Post-retirement Benefits |
| | December 31, 2010 | | December 31, 2009 | | | December 31, 2010 | | December 31, 2009 |
| Change in Benefit Obligation: | | | | | | | | |
| Obligation at beginning of period | $ | 35.2 | | | $ | 34.9 | | | | $ | 4.4 | | | $ | 6.6 | |
| Interest cost | 1.9 | | | 2.0 | | | | 0.2 | | | 0.5 | |
| Actuarial loss (gain) | 0.3 | | | 1.5 | | | | (0.2 | ) | | 1.2 | |
| Benefit payments | (2.3 | ) | | (3.2 | ) | | | (0.3 | ) | | (0.1 | ) |
| Change in plan provision | 0.3 | | | — | | | | — | | | (0.4 | ) |
| Curtailment gain | — | | | — | | | | — | | | (3.4 | ) |
| Benefit obligation at end of period | $ | 35.4 | | | $ | 35.2 | | | | $ | 4.1 | | | $ | 4.4 | |
| | | | | | | | | |
| Change in Pension Plan Assets: | | | | | | | | |
| Fair value of pension plan assets at beginning of period | $ | 23.6 | | | $ | 22.1 | | | | $ | — | | | $ | — | |
| Actual return on plan assets | 2.2 | | | 4.5 | | | | — | | | — | |
| Employer contributions | 3.4 | | | 0.2 | | | | 0.3 | | | 0.1 | |
| Benefit payments | (2.3 | ) | | (3.2 | ) | | | (0.3 | ) | | (0.1 | ) |
| Fair value of pension plan assets at end of period | $ | 26.9 | | | $ | 23.6 | | | | $ | — | | | $ | — | |
| | | | | | | | | |
| Funded Status: | | | | | | | | |
| Funded status | $ | (8.5 | ) | | $ | (11.6 | ) | | | $ | (4.1 | ) | | $ | (4.4 | ) |
During 2010, the Company made contributions of $3.4 million to the defined-benefit pension plan, which was the primary reason for the decrease in the underfunded status of the pension plan from 2009 to 2010. In addition, the actual return on our pension plan assets was $2.2 million in 2010, which exceeded the $1.7 million expected return. In 2009, the expected return on pension plan assets was a gain of $1.5 million compared to a realized gain of $4.5 million due primarily to an improvement in the financial markets following the economic recession in 2008.
In addition, during 2009 the Company implemented changes to medical benefits in the post-retirement benefit plan. The most significant change to the plan was the removal of the Company's subsidy of medical premiums for future retirees which curtailed future benefits for those participants. As a result of this change, the future obligations related to the plan were reduced by $3.4 million and we recorded a net curtailment gain of $0.8 million in 2009.
The following table provides information for Pension Plans with an accumulated benefit obligation in excess of plan assets (in millions):
| | | | | | | |
| | December 31, 2010 | | December 31, 2009 |
| Projected benefit obligation | $ | 35.4 | | | $ | 35.2 | |
| Accumulated benefit obligation | 35.4 | | | 35.2 | |
| Fair value of pension plan assets | 26.9 | | | 23.6 | |
The following table provides components of the net periodic pension cost (in millions):
| | | | | | | | | | | |
| | 2010 | | 2009 | | 2008 |
| Interest cost | $ | 1.9 | | | $ | 2.0 | | | $ | 2.2 | |
| Expected return on plan assets | (1.7 | ) | | (1.5 | ) | | (2.3 | ) |
| Amortization of net actuarial loss | 0.2 | | | 0.3 | | | — | |
| Net periodic benefit cost | $ | 0.4 | | | $ | 0.8 | | | $ | (0.1 | ) |
The following table provides components of the net periodic other benefit cost (in millions):
| | | | | | | | | | | |
| | 2010 | | 2009 | | 2008 |
| Interest cost | $ | 0.2 | | | $ | 0.5 | | | $ | 0.4 | |
| Amortization of net actuarial loss | — | | | 0.3 | | | 0.1 | |
| Amortization of prior service cost | (0.1 | ) | | — | | | — | |
| Curtailment gain, net | — | | | (0.8 | ) | | — | |
| Net periodic other benefit cost | $ | 0.1 | | | $ | — | | | $ | 0.5 | |
The prior-service costs, which include interest, are amortized on a straight-line basis over the average future life expectancy of inactive participants. Gains and losses in excess of 10% of the greater of the benefit obligation and market-related value of assets are amortized over the average future life expectancy of inactive participants. Our measurement date was on December 31, 2010. We estimated that average future life expectancy is 23.3 years for the pension benefit plan and remaining service life of active participants is 6.0 years for the post-retirement benefit plan.
Assumptions Used:
The following table shows the weighted-average assumptions used in the measurement of:
| | | | | | | | | | | | |
| | Pension Benefits | | | Other Post-retirement Benefits |
| | December 31, 2010 | | December 31, 2009 | | | December 31, 2010 | | December 31, 2009 |
| Benefit Obligations: | | | | | | | | |
| Discount rate | 5.04 | % | | 5.58 | % | | | 5.08 | % | | 5.88 | % |
| | | | | | | | | |
| Net Periodic Benefit Costs: | | | | | | | | |
| Discount rate | 5.73 | % | | 6.26 | % | | | 5.88 | % | | 6.07 | % |
| Expected return on assets | 7.35 | % | | 7.35 | % | | | — | % | | — | % |
The weighted-average discount rates used to determine the Pension Plan's obligations and expenses are based on a yield curve methodology which matches the expected benefits at each duration to the available high quality yields at that duration and calculating an equivalent yield. At December 31, 2010, our discount rates were 5.04% and 5.08% related to our pension and post-retirement plan benefit obligations, respectively, compared with 5.58% and 5.88%, respectively, at December 31, 2009. The decrease in the discount rate for 2010 was due primarily to lower bond yields.$1.1 million, $0.8 million and $2.0 million, respectively.
We use a building block approach in determining the overall expected long-term return on assets. Under this approach, a weighted-average expected rate of return is developed based on historical returns for each major asset class and the proportion of assets of the class held by the Pension Plans. We then review the results and may make adjustments in subsequent years to reflect expectations of future rates of return that may differ from those experienced in the past.Dividends
Assumed health care cost trend rates have an effect onOn October 19, 2011, we announced the amounts reported forcommencement of a quarterly dividend program. On the post-retirement health care plans. The health care cost trend rates assumed forsame day, the post-retirement benefit plans are as follows:
| | | | | |
| | December 31, 2010 | | December 31, 2009 |
| Assumed current trend rate for next year | 6.50 | % | | 7.00 | % |
| Ultimate year trend rate | 5.00 | % | | 5.00 | % |
| Year that ultimate trend rate is reached | 2014 | | | 2011 | |
Directors declared a quarterly cash dividend of A 1% change$0.17 per common share, which resulted in assumed health care cost trend rates would have the following effects (in millions):
| | | | | | | |
| | 1% Increase | | 1% Decrease |
| Effect on total of service and interest cost components of net periodic post-retirement | | | |
| health care benefit cost | $ | — | | | $ | — | |
| Effect on the health care component of the accumulated post-retirement benefit | | | |
| obligation | $ | 0.4 | | | $ | (0.3 | ) |
Plan Assets:
The Company's overall investment strategy is to produce a total investment return which will satisfy future annualpayment of approximately $1.9 million during 2011. In 2012, the Board of Directors declared quarterly cash benefit payments to participants, while minimizing future contributions fromdividends 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 Company. Additionally, our asset allocation strategy is intended to diversify plan assets to minimize non-systematic risk and provide reasonable assuranceBoard of Directors declared an accelerated cash dividend of $0.19 per common share that no single security or class of security will have a disproportionate impactwas paid on the Pension Plans.
Our investment guidelines allocation ranges are: 0-20% cash, 50-70% equity and 30-50% fixed income. Our investment guidelines also set forth the requirement for diversification within asset class, types and classes for investments prohibited and permitted, specific indices to be used for benchmark in investment decisions and criteria for individual security.
The fair value measurements of the Pension Plans' assets by asset category at December 31, 2012. We paid total cash dividends of 2010$10.3 million are as follows (in millions):
| | | | | | | | | | | | | | | |
| Asset Category | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Cash | $ | 3.1 | | | $ | 3.1 | | | $ | — | | | $ | — | |
| Equity securities | | | | | | | |
| Mutual funds | 6.5 | | | 6.5 | | | — | | | — | |
| Other equity securities, primarily U.S. companies | 8.5 | | | 8.5 | | | — | | | — | |
| Government securities | 2.4 | | | 2.4 | | | — | | | — | |
| Corporate and muni bonds | | | | | | | |
| Other bonds | 2.5 | | | 2.5 | | | — | | | — | |
| Mutual funds | 0.5 | | | 0.5 | | | — | | | — | |
| Group annuity contract | 3.4 | | | — | | | 3.4 | | | — | |
| Total | $ | 26.9 | | | $ | 23.5 | | | $ | 3.4 | | | $ | — | |
Debt and equity securities are recorded at their fair market value each year-end as determined by quoted closing market prices on national securities exchanges or other markets, as applicable. The group annuity consists primarily of investment grade fixed income securities. The participating annuity contract is valued based on discounted cash flows of current yields of similar securities with comparable duration based on the underlying fixed income investments.
We expect to contribute at least $1.2 million and $0.3 million to our pension plan and post-retirements benefits plan, respectively, induring 20112012.
Estimated future benefit payments reflecting future service are as follows (in millions):
| | | | | | | |
Year ended December 31, | Pension | | Other Post-retirement |
| 2011 | $ | 2.6 | | | $ | 0.3 | |
| 2012 | 2.8 | | | 0.3 | |
| 2013 | 2.6 | | | 0.3 | |
| 2014 | 2.8 | | | 0.3 | |
| 2015 | 2.6 | | | 0.3 | |
| 2016 through 2020 | 14.1 | | | 1.5 | |
Amounts recognized in the consolidated statements of stockholders' equity and comprehensive income (in millions):
| | | | | | | | |
| | Pension After Tax | | | Other Post-retirement Benefits After Tax |
| Net (loss) during 2008 | $ | (5.6 | ) | | | $ | (0.2 | ) |
| Net gain during 2009 | 1.1 | | | | 1.3 | |
| Net gain during 2010 | 0.2 | | | | — | |
Amounts recognized in the consolidated balance sheets (in millions):
| | | | | | | | |
Year ended December 31, 2009 | Pension | | | Other Post-retirement |
| Current liabilities | $ | — | | | | $ | (0.3 | ) |
| Non-current liabilities | (11.6 | ) | | | (4.1 | ) |
| Total | $ | (11.6 | ) | | | $ | (4.4 | ) |
| | | | | | | | |
| Year ended December 31, 2010 | Pension | | | Other Post-retirement |
| Current liabilities | $ | — | | | | $ | (0.3 | ) |
| Non-current liabilities | (8.5 | ) | | | (3.8 | ) |
| Total | $ | (8.5 | ) | | | $ | (4.1 | ) |
Expected amortizations for the year ending December 31, 2011 (in millions):
| | | | | | | | |
| | Pension | | | Other Post-retirement |
| Expected amortization of net loss | $ | 0.2 | | | | $ | — | |
| Expected amortization of prior service cost (credit) | — | | | | (0.1 | ) |
| Total expected amortizations for the year ending December 31, 2011 | $ | 0.2 | | | | $ | (0.1 | ) |
Savings Plans
We maintain defined-contribution plans in the U.S., subject to Section 401(k) of the Internal Revenue Code, and in Canada, subject to the Income Tax Act. For the fiscal year ended December 31, 2010, eligible U.S. employees could elect to contribute, on a tax-deferred basis, from 1% to 75% of their compensation to a maximum of $16,500. Eligible U.S. employees over 50 years of age could also contribute an additional $5,500 on a tax-deferred basis. In Canada, employees could elect to contribute up to a maximum of $22,000 Canadian dollars. Under the 401(k) plan, we match 100% of U.S. employee contributions up to 2% of base salary and match 25% of employee contributions from 2% to 6% of base salary. For Canadian employees,we match 50% of employee contributions up to 3% of base salary. For the year ended December 31, 2010, we made matching payments of approximately $2.3 million.
13.Repurchase of Common Stock
In March 2008,May 2011, our Board of Directors authorized athe repurchase of up to $30 million of our common stock. Our available funds for future share repurchases were re-established at $30 million under the February 2010 amendment to our Credit Facility. 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 upoffsetting the dilution associated with new share issuances due to $30 million to repurchase sharesvesting of our commonrestricted stock in the open market or in privately negotiated transactions subject to market conditions. The number of shares to be repurchased and the exercise of stock options. The timing and amount of the purchases will beare 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. We funded repurchases under the program and plan to fund any future repurchases, from available cash. As of December 31, 2010, there was $16.8 million availableaccount for future share repurchases underusing the program. Upon execution of the Third Amendment to our Credit Facility in February 2010, our limit for future share repurchases was re-established at $30 million.cost method.
During the year ended December 31, 20122010 and 2011, nowe repurchased 118,800 and 542,415 shares of common stock, were repurchased. During the year ended December 31, 2009, we repurchased 98,646 shares of common stockrespectively, under the share repurchase program at an average price of $22.77$43.34 and $35.03 per share for a total cost of $2.2 million. During the year ended December 31, 2008, we repurchased 396,716 shares of common stock under the share repurchase program at an average price of $27.66 per share for a total cost of $11.0 million.
14.Quarterly Financial Data (Unaudited)
The tables below provide our unaudited consolidated results of operations for each of the four quarters in 2010$5.2 million and 2009$19.0 million, respectively. As of December 31, 2012, there was $5.8 million available for future share repurchases under the program.
| |
| 15. | Other Comprehensive Income (Loss) |
The components of other comprehensive income ("OCI") and the related tax effects were as follows (in millions):
| | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | (unaudited) |
| | (in millions, except per share data) |
| | December 31, | | September 30, | | June 30, | | March 31, | |
| | 2010 | | 2010 | | 2010 | | 2010 | |
Net sales — Cigarettes (1) | $ | 1,321.5 | | | $ | 1,400.9 | | | $ | 1,283.5 | | | $ | 1,113.8 | | |
Net sales — Food/non-food (1) | 535.3 | | | 592.7 | | | 550.8 | | | 468.3 | | |
Net sales (1) | 1,856.8 | | | 1,993.6 | | | 1,834.3 | | | 1,582.1 | | |
| Cost of goods sold | 1,762.5 | | | 1,887.5 | | | 1,737.2 | | | 1,494.3 | | |
| Gross profit | 94.3 | | | 106.1 | | (2) | 97.1 | | | 87.8 | | (3) |
Warehousing and distribution expenses (4) | 54.8 | | | 55.8 | | | 52.1 | | | 49.1 | | |
Selling, general and administrative expenses (5) | 38.7 | | (5) | 36.2 | | (5) | 32.2 | | (5) | 35.4 | | |
| Amortization of intangible assets | 0.6 | | | 0.5 | | | 0.5 | | | 0.5 | | |
| Total operating expenses | 94.1 | | | 92.5 | | | 84.8 | | | 85.0 | | |
| Income from operations | 0.2 | | | 13.6 | | | 12.3 | | | 2.8 | | |
Interest expense (6) | (0.7 | ) | | (0.8 | ) | | (0.5 | ) | | (0.6 | ) | |
| Interest income | 0.1 | | | 0.2 | | | 0.1 | | | — | | |
| Foreign currency gains (losses), net | 0.7 | | | 0.4 | | | (0.8 | ) | | 0.2 | | |
| Income before income taxes | 0.3 | | | 13.4 | | | 11.1 | | | 2.4 | | |
| Income tax (provision) benefit | 0.6 | | | (4.7 | ) | | (4.4 | ) | | (1.0 | ) | |
| Net income | 0.9 | | | 8.7 | | | 6.7 | | | 1.4 | | |
Basic net income per share (7) | $ | 0.08 | | | $ | 0.81 | | | $ | 0.62 | | | $ | 0.13 | | |
Diluted net income per share (7) | $ | 0.08 | | | $ | 0.78 | | | $ | 0.59 | | | $ | 0.12 | | |
| Shares used to compute basic net income | | | | | | | | |
| per share | 11.0 | | | 10.8 | | | 10.8 | | | 10.7 | | |
| Shares used to compute diluted net income | | | | | | | | |
| per share | 11.7 | | | 11.3 | | | 11.3 | | | 11.4 | | |
| | | | | | | | | |
Excise taxes (1) | $ | 464.8 | | | $ | 492.7 | | | $ | 429.4 | | | $ | 369.6 | | |
Cigarette inventory holding profits (8) | 3.1 | | | — | | | 2.4 | | | 0.6 | | |
| LIFO expense | 8.8 | | | 2.9 | | | 3.6 | | | 1.3 | | |
| Depreciation and amortization | 5.3 | | | 4.9 | | | 4.8 | | | 4.7 | | |
| Stock-based compensation | 1.1 | | | 1.1 | | | 1.2 | | | 1.4 | | |
| Capital expenditures | 4.6 | | | 3.8 | | | 2.5 | | | 3.0 | | |
(1) Excise taxes are included as a component of net sales. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| | | | | | Net | | | | | | Net | | | | | | Net |
| | Before | | Tax | | of | | Before | | Tax | | of | | Before | | Tax | | of |
| | Tax | | Effect | | Tax | | Tax | | Effect | | Tax | | Tax | | Effect |
| | Tax |
| Defined benefit plan adjustments: | | | | | | | | | | | | | | | | | |
| Net actuarial (loss) gain during the year | $ | (5.1 | ) | | $ | 2.0 |
| | $ | (3.1 | ) | | $ | (4.6 | ) | | $ | 1.8 |
| | $ | (2.8 | ) | | $ | 0.4 |
| | $ | (0.2 | ) | | $ | 0.2 |
|
| Amortization of prior service cost | | | | | | | | | | | | | | | | | |
| included in net income | (0.1 | ) | | — |
| | (0.1 | ) | | (0.1 | ) | | — |
| | (0.1 | ) | | (0.1 | ) | | — |
| | (0.1 | ) |
| Amortization of net actuarial gain (loss) | | | | | | | | | | | | | | | | | |
| included in net income | 0.4 |
| | (0.1 | ) | | 0.3 |
| | 0.3 |
| | (0.1 | ) | | 0.2 |
| | 0.2 |
| | (0.1 | ) | | 0.1 |
|
| Net (loss) gain during the year | (4.8 | ) | | 1.9 |
| | (2.9 | ) | | (4.4 | ) | | 1.7 |
| | (2.7 | ) | | 0.5 |
| | (0.3 | ) | | 0.2 |
|
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | |
| gain (loss) | 0.4 |
| | — |
| | 0.4 |
| | (0.3 | ) | | — |
| | (0.3 | ) | | 1.2 |
| | — |
| | 1.2 |
|
| Other comprehensive (loss) income | $ | (4.4 | ) | | $ | 1.9 |
| | $ | (2.5 | ) | | $ | (4.7 | ) | | $ | 1.7 |
| | $ | (3.0 | ) | | $ | 1.7 |
| | $ | (0.3 | ) | | $ | 1.4 |
|
(2) Includes an out of period adjustment of $1.1 million related to the recognition of deferred vendor income, of which $0.7 million related to prior years. The adjustment is immaterial to any prior period.
(3) Includes a $0.6 million OTP tax gain resulting from a state tax method change which was recorded as a reduction of cost of goods sold during the first quarter of 2010.
(4) Warehousing and distribution expenses are not included as a component of the Company's cost of goods sold which presentation may differ from that of other registrants.
(5) SG&A expenses include integration costs related to the acquisition of FDI, consisting of $1.5 million in Q4, $1.2 million in Q3 and $0.1 million in Q2. SG&A expenses also include costs related to the settlement of Fleming legacy insurance claims of $0.6 million in Q4 and $1.0 million in Q2, as well as $0.3 million and $0.8 million of expenses for advisory and due diligence activities necessary to analyze multiple offers from potential acquirers in Q3 and Q4, respectively.
(6) Includes amortization of debt issuance costs, of approximately $0.1 million for each quarter in 2010.
(7) Totals may not agree with full year amounts due to rounding and separate calculations for each quarter.
(8) Cigarette inventory holding profits relate to increases in manufacturer prices.
| | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | (unaudited) |
| | (in millions, except per share data) |
| | December 31, | | September 30, | | June 30, | | March 31, | |
| | 2009 | | 2009 | | 2009 | | 2009 | |
Net sales — Cigarettes (1) | $ | 1,173.7 | | | $ | 1,250.1 | | | $ | 1,209.1 | | | $ | 956.2 | | |
Net sales — Food/non-food (1) | 478.2 | | | 526.0 | | | 502.7 | | | 435.6 | | |
Net sales (1) | 1,651.9 | | | 1,776.1 | | | 1,711.8 | | | 1,391.8 | | |
| Cost of goods sold | 1,557.8 | | | 1,674.2 | | | 1,624.3 | | | 1,273.7 | | |
| Gross profit | 94.1 | | | 101.9 | | (2) | 87.5 | | (3) | 118.1 | | |
Warehousing and distribution expenses (4) | 51.0 | | | 51.1 | | | 50.2 | | | 45.0 | | |
Selling, general and administrative expenses (5) | 34.0 | | | 34.2 | | | 32.1 | | (5) | 37.0 | | (5) |
| Amortization of intangible assets | 0.4 | | | 0.5 | | | 0.5 | | | 0.6 | | |
| Total operating expenses | 85.4 | | | 85.8 | | | 82.8 | | | 82.6 | | |
| Income from operations | 8.7 | | | 16.1 | | | 4.7 | | | 35.5 | | |
Interest expense (6) | (0.4 | ) | | (0.4 | ) | | (0.4 | ) | | (0.5 | ) | |
| Interest income | 0.1 | | | — | | | 0.1 | | | 0.1 | | |
| Foreign currency gains (losses), net | 0.2 | | | 0.4 | | | 2.4 | | | (0.8 | ) | |
| Income before income taxes | 8.6 | | | 16.1 | | | 6.8 | | | 34.3 | | |
| Income tax provision | (0.1 | ) | | (4.8 | ) | | (2.6 | ) | | (11.0 | ) | |
| Net income | 8.5 | | | 11.3 | | | 4.2 | | (3) | 23.3 | | (7) |
Basic net income per share (8) | $ | 0.82 | | | $ | 1.08 | | | $ | 0.40 | | (3) | $ | 2.22 | | (7) |
Diluted net income per share (8) | $ | 0.76 | | | $ | 1.02 | | | $ | 0.39 | | (3) | $ | 2.20 | | (7) |
| Shares used to compute basic net income | | | | | | | | |
| per share | 10.5 | | | 10.5 | | | 10.5 | | | 10.5 | | |
| Shares used to compute diluted net income | | | | | | | | |
| per share | 11.1 | | | 11.0 | | | 10.8 | | | 10.6 | | |
| | | | | | | | | |
Excise taxes (1) | $ | 390.2 | | | $ | 412.1 | | | $ | 385.8 | | | $ | 327.9 | | |
Cigarette inventory holding profits (losses) (9) | 1.5 | | | (0.1 | ) | | 0.4 | | | 34.9 | | (7) |
| LIFO expense | 1.4 | | | 0.2 | | | 2.1 | | | 3.0 | | |
| Depreciation and amortization | 5.1 | | | 4.5 | | | 4.6 | | | 4.5 | | |
| Stock-based compensation | 1.2 | | | 1.4 | | | 1.3 | | | 1.2 | | |
| Capital expenditures | 7.6 | | | 5.2 | | | 3.5 | | | 4.8 | | |
(1) Excise taxes are included as a component of net sales.
(2) Includes a $0.6 million OTP net tax refund which was recorded as a reduction of cost of goods sold during the third quarter of 2009.
(3) Gross profit for the second quarter ended June 30, 2009 was negatively impacted by $11.5 million of federal excise floor tax net of manufacturer reimbursements related to SCHIP.
(4) Warehousing and distribution expenses are not included as a component of the Company's cost of goods sold which presentation may differ from that of other registrants.
(5) SG&A expenses include $0.8 million and $0.1 million of costs related to the integration of our New England division onto our information systems platform in Q1 and Q2, respectively.
(6) Includes amortization of debt issuance costs, of approximately $0.1 million for each quarter in 2009.
(7) We realized significant cigarette holding profits in the first quarter ended March 31, 2009, due primarily to increases in cigarette prices by manufacturers in response to the anticipated increase in federal tax mandated by the SCHIP legislation.
(8) Totals may not agree with full year amounts due to rounding and separate calculations for each quarter.
(9) Cigarette inventory holding profits relate to increases in manufacturer prices and excise taxes.
15.16. Segment and Geographic Information
We are 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 approximatelyover 26,00029,000 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, non-alcoholicbread, beverages, general merchandise and health and beauty care products.
As of December 31, 20102012, we operated a network of 2428 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third party logistics provider) which support our wholesale distribution business. TwentyTwenty-four of our distribution centers are located in the U.S., including three consolidating warehouses, and four are located in Canada. Two of the facilities we operate in the U.S. are consolidating warehouses which buy products from our suppliers in bulk quantities and then distribute the products to our other distribution centers.
All of ourOur distribution centers (operating divisions) which produce almost all of our revenues have similar historical economic characteristics and are expected to have similar economic characteristics in the future. The principal measures and factors we considered in determining whether the economic characteristics are similar are sales,been aggregated into one reporting segment. Couche-Tard, our largest customer, accounted for approximately 13.7% of our total net sales income (which is comparable to our reported gross profit adjusted for LIFO expense), operating expenses and pre-tax net profit. In addition, each operating division carries similar products, which they sell to similar customers by using similar operating procedures. Therefore, in our judgment, our 24 operating divisions aggregate into one reportable segment.
Corporate adjustments and eliminations include the net results after intercompany eliminations for our consolidating warehouses, service fee revenue, LIFO and reclassifying adjustments, corporate allocations and elimination of intercompany interest charges.2012. Accounting policies for measuring segment assets and earnings before income taxes are substantially consistent with those described in Note 2 --- Summary of Significant Accounting Policies. Inter-segment revenues are not significant and no single customer accounted for 10% or more of our total revenues.
Information about our business operations based on the two geographic reporting segmentsareas is as follows (in millions):
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2010 | | 2009 | | 2008 | 2012 | | 2011 | | 2010 |
| Net sales: | | | | | | | | | | |
United States (1) | $ | 6,086.3 | | | $ | 5,519.2 | | | $ | 5,082.3 | | |
| United States | | $ | 7,716.3 |
| | $ | 6,865.5 |
| | $ | 6,086.3 |
|
| Canada | 1,158.0 | | | 992.9 | | | 935.8 | | 1,148.6 |
| | 1,220.5 |
| | 1,158.0 |
|
| Corporate adjustments and eliminations | 22.5 | | | 19.5 | | | 26.8 | | |
Corporate (1) | | 27.5 |
| | 28.9 |
| | 22.5 |
|
| Total | $ | 7,266.8 | | | $ | 6,531.6 | | | $ | 6,044.9 | | $ | 8,892.4 |
| | $ | 8,114.9 |
| | $ | 7,266.8 |
|
| | | | | | | | | | | |
| Income (loss) before income taxes: | | | | | | | | | | |
United States (2) | $ | 35.6 | | | $ | 70.0 | | | $ | 34.9 | | |
| United States | | $ | 48.6 |
| | $ | 50.4 |
| | $ | 35.6 |
|
| Canada | (4.7 | ) | | (3.2 | ) | | (5.6 | ) | 2.3 |
| | (1.4 | ) | | (4.7 | ) |
| Corporate adjustments and eliminations | (3.7 | ) | | (1.0 | ) | | (6.7 | ) | |
Corporate (1) | | 4.5 |
| | (5.8 | ) | | (3.7 | ) |
| Total | $ | 27.2 | | | $ | 65.8 | | | $ | 22.6 | | $ | 55.4 |
| | $ | 43.2 |
| | $ | 27.2 |
|
| | | | | | | | | | | |
| Interest expense: | | | | | | | | | | |
| United States | $ | 24.3 | | | $ | 20.9 | | | $ | 20.6 | | $ | 27.4 |
| | $ | 23.5 |
| | $ | 24.3 |
|
| Canada | 0.9 | | | 0.8 | | | 0.9 | | 0.7 |
| | 0.9 |
| | 0.9 |
|
| Corporate adjustments and eliminations | (22.6 | ) | | (20.0 | ) | | (19.3 | ) | |
| Total | $ | 2.6 | | | $ | 1.7 | | | $ | 2.2 | | |
| | | | | | | |
| Interest income: | | | | | | |
| United States | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | |
| Canada | 0.1 | | | 0.1 | | | 0.1 | | |
| Corporate adjustments and eliminations | 0.2 | | | 0.1 | | | 0.8 | | |
Corporate (1) | | (25.9 | ) | | (22.0 | ) | | (22.6 | ) |
| Total | $ | 0.4 | | | $ | 0.3 | | | $ | 1.0 | | $ | 2.2 |
| | $ | 2.4 |
| | $ | 2.6 |
|
| | | | | | | | | | | |
| Depreciation and amortization: | | | | | | | | | | |
| United States | $ | 13.9 | | | $ | 13.3 | | | $ | 12.4 | | $ | 17.7 |
| | $ | 15.4 |
| | $ | 13.9 |
|
| Canada | 2.7 | | | 2.4 | | | 2.0 | | 2.9 |
| | 3.0 |
| | 2.7 |
|
| Corporate adjustments and eliminations | 3.1 | | | 3.0 | | | 3.0 | | |
Corporate (1) | | 4.7 |
| | 4.0 |
| | 3.1 |
|
| Total | $ | 19.7 | | | $ | 18.7 | | | $ | 17.4 | | $ | 25.3 |
| | $ | 22.4 |
| | $ | 19.7 |
|
(1) Net cigarette sales for 2010 include approximately $105.9 million Corporate consists of increased sales resulting from manufacturers' cigarette price increases in response to SCHIP legislation, comparednet expenses and other income that is not allocated to the same period in 2009. Net cigarette salesU.S. and Canada, intercompany eliminations for 2009 include approximately $534.0 millioninterest and allocations of increased sales related to SCHIP legislation, compared to the same period in 2008.
(2) Includes $25.2 million ofoverhead, service fee revenue for our consolidating warehouses, LIFO income for 2009, consisting of $36.7 million of cigarette holding profits due primarily to
manufacturers' price increases in response to the SCHIP legislation, less $11.5 million of federal excise floor taxes.
or expense and reclassifying adjustments.
Identifiable assets by geographic reporting segmentsarea are as follows (in millions):
| | | | | | | | | | December 31, | | December 31, |
| | December 31, 2010 | | December 31, 2009 | 2012 | | 2011 |
| Identifiable assets: | | | | | | |
| United States | $ | 590.2 | | | $ | 575.8 | | $ | 821.7 |
| | $ | 768.6 |
|
| Canada | 118.6 | | | 102.1 | | 97.5 |
| | 101.6 |
|
| Total | $ | 708.8 | | | $ | 677.9 | | $ | 919.2 |
| | $ | 870.2 |
|
The net sales mix for our primary product categoriescategory is as follows (in millions): |
| | | | | | | | | | | |
| |
|
| | Year Ended December 31, |
| | 2012 | | 2011 | | 2010 |
| Product Category | Net Sales | | Net Sales | | Net Sales |
| Cigarettes | $ | 6,139.4 |
| | $ | 5,710.6 |
| | $ | 5,119.7 |
|
| Food | 1,178.6 |
| | 995.7 |
| | 840.9 |
|
| Candy | 489.5 |
| | 459.8 |
| | 426.0 |
|
| Other tobacco products | 687.8 |
| | 607.9 |
| | 503.6 |
|
| Health, beauty & general | 269.2 |
| | 237.5 |
| | 220.6 |
|
| Beverages | 125.6 |
| | 100.9 |
| | 152.0 |
|
| Equipment/other | 2.3 |
| | 2.5 |
| | 4.0 |
|
| Total food/non-food products | $ | 2,753.0 |
| | $ | 2,404.3 |
| | $ | 2,147.1 |
|
| Total net sales | $ | 8,892.4 |
| | $ | 8,114.9 |
| | $ | 7,266.8 |
|
| |
| 17. | Quarterly Financial Data (Unaudited) |
The tables below provide our unaudited consolidated results of operations for each of the four quarters in 2012 and 2011:
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2010 | | 2009 | | 2008 |
| Product Category | Net Sales | | Net Sales | | Net Sales |
Cigarettes (1) | $ | 5,119.7 | | | $ | 4,589.1 | | | $ | 4,124.8 | |
| Food | 840.9 | | | 738.0 | | | 710.1 | |
| Candy | 426.0 | | | 405.0 | | | 401.3 | |
| Other tobacco products | 503.6 | | | 434.0 | | | 402.7 | |
| Health, beauty & general | 220.6 | | | 209.5 | | | 220.1 | |
| Non-alcoholic beverages | 152.0 | | | 151.7 | | | 180.9 | |
| Equipment/other | 4.0 | | | 4.3 | | | 5.0 | |
| Total food/non-food products | 2,147.1 | | | 1,942.5 | | | 1,920.1 | |
| Total net sales | $ | 7,266.8 | | | $ | 6,531.6 | | | $ | 6,044.9 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | (in millions, except per share data) |
| | December 31, | | September 30, | | June 30, | | March 31, | |
| | 2012 | | 2012 | | 2012 | | 2012 | |
Net sales — Cigarettes (1) | $ | 1,513.2 |
| | $ | 1,596.5 |
| | $ | 1,577.3 |
| | $ | 1,452.4 |
| |
Net sales — Food/non-food (1) | 676.3 |
| | 718.4 |
| | 710.0 |
| | 648.3 |
| |
Net sales (1) | 2,189.5 |
| | 2,314.9 |
| | 2,287.3 |
| | 2,100.7 |
| |
| Cost of goods sold | 2,067.6 |
| | 2,192.7 |
| | 2,164.7 |
| | 1,990.6 |
| |
| Gross profit | 121.9 |
|
| 122.2 |
| | 122.6 |
| | 110.1 |
| |
Warehousing and distribution expenses (2) | 64.7 |
| | 68.4 |
| | 66.2 |
| | 63.4 |
| |
Selling, general and administrative expenses (3) | 40.3 |
| (3) | 35.9 |
| (3) | 37.8 |
| (3) | 39.7 |
| |
| Amortization of intangible assets | 0.6 |
| | 0.7 |
| | 0.8 |
| | 0.9 |
| |
| Total operating expenses | 105.6 |
| | 105.0 |
| | 104.8 |
| | 104.0 |
| |
| Income from operations | 16.3 |
| | 17.2 |
| | 17.8 |
| | 6.1 |
| |
| Interest expense | (0.6 | ) | | (0.4 | ) | | (0.6 | ) | | (0.6 | ) | |
| Interest income | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
| |
| Foreign currency gains (losses), net | (0.1 | ) | | — |
| | (0.2 | ) | | 0.1 |
| |
| Income before income taxes | 15.7 |
| | 16.9 |
| | 17.1 |
| | 5.7 |
| |
| Income tax provision | (6.0 | ) | | (6.4 | ) | | (7.0 | ) | | (2.1 | ) | |
| Net income | 9.7 |
| | 10.5 |
| | 10.1 |
| | 3.6 |
| |
Basic net income per common share (4) | $ | 0.84 |
| | $ | 0.92 |
| | $ | 0.89 |
| | $ | 0.31 |
| |
Diluted net income per common share (4) | $ | 0.83 |
| | $ | 0.90 |
| | $ | 0.87 |
| | $ | 0.31 |
| |
| Shares used to compute basic net income | | | | | | | | |
| per common share | 11.5 |
| | 11.5 |
| | 11.4 |
| | 11.4 |
| |
| Shares used to compute diluted net income | | | | | | | | |
| per common share | 11.7 |
| | 11.7 |
| | 11.6 |
| | 11.6 |
| |
| | | | | | | | | |
Excise taxes (1) | $ | 482.2 |
| | $ | 519.1 |
| | $ | 511.5 |
| | $ | 474.2 |
| |
Cigarette inventory holding gains (5) | 3.3 |
| | 0.2 |
| | 3.2 |
| | 1.1 |
| |
| LIFO expense | 1.3 |
| | 3.8 |
| | 4.3 |
| | 2.9 |
| |
| Depreciation and amortization | 6.3 |
| | 6.3 |
| | 6.4 |
| | 6.3 |
| |
| Stock-based compensation | 1.7 |
| | 1.4 |
| | 1.3 |
| | 1.4 |
| |
| Capital expenditures | 8.3 |
| | 7.1 |
| | 7.7 |
| | 5.5 |
| |
| |
| (1) | Excise taxes are included as a component of net sales. |
| |
| (2) | Warehousing and distribution expenses are not included as a component of the Company's cost of goods sold which presentation may differ from that of other registrants. |
| |
| (3) | SG&A expenses include acquisition costs related to Davenport consisting of $1.3 million in Q4. SG&A expenses also include a reduction in expenses resulting from the favorable resolution of legacy workers' compensation and insurance claims of $1.4 million in Q3 and $0.4 million in Q2. |
| |
| (4) | Totals may not agree with full year amounts due to rounding and separate calculations for each quarter. |
| |
| (5) | Cigarette inventory holding gains relate to income we earn on cigarette and excise tax stamp quantities on hand at the time cigarette manufacturers increase their prices or when states, localities or provinces increase their excise taxes and allow us to recognize cigarette inventory holding gains. |
(1) Net cigarette sales for 2010 include approximately $105.9 million79
resulting from manufacturers' cigarette price increases in March |
| | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | (in millions, except per share data) |
| | December 31, | | September 30, | | June 30, | | March 31, | |
| | 2011 | | 2011 | | 2011 | | 2011 | |
Net sales — Cigarettes (1) | $ | 1,490.7 |
| | $ | 1,566.4 |
| | $ | 1,430.5 |
| | $ | 1,223.0 |
| |
Net sales — Food/non-food (1) | 636.8 |
| | 658.7 |
| | 609.3 |
| | 499.5 |
| |
Net sales (1) | 2,127.5 |
| | 2,225.1 |
| | 2,039.8 |
| | 1,722.5 |
| |
| Cost of goods sold | 2,017.7 |
| | 2,102.9 |
| | 1,930.0 |
| | 1,630.2 |
| |
Gross profit (2) (3) | 109.8 |
| | 122.2 |
| (2) | 109.8 |
| (2) | 92.3 |
| (3) |
Warehousing and distribution expenses (4) | 61.2 |
| | 61.7 |
| | 57.8 |
| | 53.9 |
| |
Selling, general and administrative expenses (5) | 39.0 |
| (5) | 38.6 |
| (5) | 36.5 |
| (5) | 36.7 |
| (5) |
| Amortization of intangible assets | 0.9 |
| | 0.8 |
| | 0.8 |
| | 0.5 |
| |
| Total operating expenses | 101.1 |
| | 101.1 |
| | 95.1 |
| | 91.1 |
| |
| Income from operations | 8.7 |
| | 21.1 |
| | 14.7 |
| | 1.2 |
| |
| Interest expense | (0.6 | ) | | (0.6 | ) | | (0.6 | ) | | (0.6 | ) | |
| Interest income | — |
| | 0.2 |
| | 0.1 |
| | 0.1 |
| |
| Foreign currency gains (losses), net | 0.1 |
| | (1.4 | ) | | 0.2 |
| | 0.6 |
| |
| Income before income taxes | 8.2 |
| | 19.3 |
| | 14.4 |
| | 1.3 |
| |
| Income tax provision | (3.0 | ) | | (7.3 | ) | | (5.9 | ) | | (0.8 | ) | |
| Net income | 5.2 |
| | 12.0 |
| | 8.5 |
| | 0.5 |
| |
Basic net income per common share (6) | $ | 0.46 |
| | $ | 1.05 |
| | $ | 0.74 |
| | $ | 0.04 |
| |
Diluted net income per common share (6) | $ | 0.45 |
| | $ | 1.03 |
| | $ | 0.72 |
| | $ | 0.04 |
| |
| Shares used to compute basic net income | | | | | | | | |
| per common share | 11.4 |
| | 11.4 |
| | 11.5 |
| | 11.3 |
| |
| Shares used to compute diluted net income | | | | | | | | |
| per common share | 11.5 |
| | 11.7 |
| | 11.9 |
| | 11.8 |
| |
| | | | | | | | | |
Excise taxes (1) | $ | 494.0 |
| | $ | 534.0 |
| | $ | 496.5 |
| | $ | 427.0 |
| |
Cigarette inventory holding gains (7) | 2.9 |
| | 4.4 |
| | — |
| | 0.9 |
| |
| LIFO expense | 5.8 |
| | 5.0 |
| | 4.6 |
| | 2.9 |
| |
| Depreciation and amortization | 6.3 |
| | 5.4 |
| | 5.6 |
| | 5.1 |
| |
| Stock-based compensation | 1.4 |
| | 1.6 |
| | 1.2 |
| | 1.3 |
| |
| Capital expenditures | 13.0 |
| | 5.3 |
| | 4.5 |
| | 1.3 |
| |
| |
| (1) | Excise taxes are included as a component of net sales. |
| |
| (2) | Includes for Q3 and Q2 respectively, $1.7 million and $4.2 million of candy inventory holding gains resulting from manufacturer price increases. The candy inventory holding gains were estimated as the amount in excess of our normal manufacturer incentives for those products sold in 2011. |
| |
| (3) | Includes a $0.8 million OTP tax settlement which was recorded as a decrease to cost of goods sold during Q1. |
| |
| (4) | Warehousing and distribution expenses are not included as a component of the Company's cost of goods sold which presentation may differ from that of other registrants. |
| |
| (5) | SG&A expenses include acquisition and transition costs related to FCGC, consisting of $0.8 million in Q4, $0.4 million in Q3, $0.8 million in Q2 and $0.7 million in Q1. SG&A expenses also include start-up costs of $0.4 million in Q4 and $1.4 million in Q3 related to the start-up of the Florida distribution center and other infrastructure costs to support the new distribution agreement with Couche-Tard. |
| |
| (6) | Totals may not agree with full year amounts due to rounding and separate calculations for each quarter. |
| |
| (7) | Cigarette inventory holding gains relate to income we earn on cigarette and excise tax stamp quantities on hand at the time cigarette manufacturers increase their prices or when states, localities or provinces increase their excise taxes and allow us to recognize cigarette inventory holding gains. |
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND |
FINANCIAL DISCLOSURE
None.
ITEM 9. A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on our evaluation, the chief executive officer and chief financial officer concluded that, as of December 31, 20102012, our disclosure controls and procedures were effective.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. We assessed the effectiveness of our internal control over financial reporting as of December 31, 20102012. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)(COSO) in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management did not assess the internal control over financial reporting at our J.T. Davenport division, which we acquired on December 17, 2012 and which represented less than 8% of our total assets, and less than 1% of income before income taxes of the consolidated financial statement amounts as of and for the year ended December 31, 2012.
Based on this assessment, we concluded that our internal control over financial reporting was effective as of December 31, 20102012.
Our internal control over financial reporting as of December 31, 20102012 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of the year ended December 31, 20102012 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.
ITEM 9. B. OTHER INFORMATION
None.
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
| |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this item is included in our Proxy Statement for the 20112013 Annual Meeting of Stockholders under the following captions and is incorporated herein by reference thereto: “Nominees for Director,” “Board of Directors,” “Our Executive Officers,” and “Ownership of Core-Mark Common Stock-Section 16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in our Proxy Statement for the 20112013 Annual Meeting of Stockholders under the following captions and is incorporated herein by reference thereto: “Board of Directors-Director Compensation,” “Board of Directors-Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” and “Compensation of Named Executives.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is included (i) in our Proxy Statement for the 20112013 Annual Meeting of Stockholders under the caption “Ownership of Core-Mark Common Stock” and is incorporated herein by reference thereto and (ii) in Item 5 of this Annual Report on Form 10-K and is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is included in our Proxy Statement for the 20112013 Annual Meeting of Stockholders under the following caption and is incorporated by reference herein by reference thereto: “Board of Directors-Certain Relationships and Related Transactions,” “Board of Directors-Committees of the Board of Directors” and “Board of Directors-Corporate Governance.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is included in our Proxy Statement for the 20112013 Annual Meeting of Stockholders under the caption “Independent“Ratification of Selection of Independent Registered Public Accountants”Accounting Firm-Auditor Fees” and is incorporated herein by reference thereto.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of this Annual Report on Form 10-K:
EXHIBIT INDEX
|
| |
Exhibit No. | Description |
| 2.1 | Third Amended and Revised Joint Plan of Reorganization of Fleming Companies, Inc. and its Subsidiaries Under Chapter 11 of the Bankruptcy Code, dated May 25, 2004 (incorporated by reference to Exhibit 2.1 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| | |
| 3.1 | Certificate of Incorporation of Core-Mark Holding Company, Inc. (incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| | |
| 3.2 | Second Amended and Restated Bylaws of Core-Mark Holding Company, Inc. (incorporated by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K filed on August 18, 2008). |
| | |
4.1 | Form of Class 6(B) Warrant (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| |
| 10.1 | 2004 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| | |
| 10.2 | 2004 Directors Equity Incentive Plan (incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| |
10.3 | 2005 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| | |
10.4 | 2005 Directors Equity Incentive Plan (incorporated by reference to Exhibit 10.4 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| |
10.510.3 | 2007 Long-Term Incentive Plan (incorporated by reference to Annex A of the Company's Proxy Statement on Schedule 14A filed on April 23, 2007). |
| | |
10.610.4 | Statement of Policy Regarding 2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K filed on May 9, 2007). |
| | |
10.710.5 | 2010 Long-Term Incentive Plan (incorporated by reference to Annex A of the Company's Proxy Statement on Schedule 14A filed on April 13, 2010). |
| | |
10.810.6 | Form of Management Option Award Agreement for Awards under the Core-Mark Holding Company, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K filed on March 12, 2009). |
| | |
10.910.7 | Form of Management Option Award Agreement for Awards under the Core-Mark Holding Company, Inc. 2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company's Current Report on Form 8-K filed on July 6, 2007).
|
| | |
10.1010.8 | Form of Management Option Award Agreement for January 2009 Awards under the Core-Mark Holding Company, Inc. 2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q filed on May 8, 2009). |
| | |
10.1110.09 | Form of Management Performance Share Award Agreement for January 2009 Awards under the Core-Mark Holding Company, Inc. 2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q filed on May 8, 2009). |
| | |
10.1210.10 | Form of Management Restricted Stock Unit Award Agreement for January 2009 and 2010 Awards under the Core-Mark Holding Company, Inc. 2007 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q filed on May 8, 2009). |
| |
| |
Exhibit
No.
| Description
|
10.1310.11 | Form of Management Option Award Agreement for Awards under the Core-Mark Holding Company, Inc. 2010 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K filed on January 25, 2011). |
| | |
10.1410.12 | Form of Management Performance Share Award Agreement for January 2011 Awards under the Core-Mark Holding Company, Inc. 2010 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company's Current Report on Form 8-K filed on January 25, 2011). |
| |
10.15 | |
Exhibit No. | Description |
| 10.13 | Form of Management Restricted Stock Unit Award Agreement for Awards under the Core-Mark Holding Company, Inc. 2010 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed on January 25, 2011). |
| | |
| 10.14 | Form of Management Performance Share Award Agreement under the Core-Mark Holding Company, Inc. 2010 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company's Current Report on Form 8-K/A filed on March 7, 2012). |
| |
| 10.15 | Form of Management Special Incentive Share Award Agreement under the Core-Mark Holding Company, Inc. 2010 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K/A filed on March 7, 2012). |
| |
| 10.16 | Form of Indemnification Agreement for Officers and Directors (incorporated by reference to Exhibit 10.5 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| | |
| 10.17 | Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.12 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| |
10.18 | Registration Rights Agreement, dated August 20, 2004, among Core-Mark Holding Company, Inc. and the parties listed on Schedule I attached thereto (incorporated by reference to Exhibit 10.10 of the Company's Registration Statement on Form 10 filed on September 6, 2005). |
| | |
10.1910.18 | Credit Agreement, dated October 12, 2005, among Core-Mark Holding Company, Inc., Core-Mark International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as Borrowers, the Lenders Signatory Thereto as Lenders, JPMorgan Chase Bank, N.A., as Administrative Agent, General Electric Capital Corporation and Wachovia Capital Finance Corporation (Western), as Co-Syndication Agents and Bank of America, N.A. and Wells Fargo Foothill, LLC, as Co-Documentation Agents (incorporated by reference to Exhibit 10.13 of the Company's Registration Statement on Form 10 filed on October 21, 2005). |
| | |
10.2010.19 | First Amendment to Credit Agreement, dated December 4, 2007, among Core-Mark Holding Company, Inc., Core-Mark International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K filed on March 12, 2009). |
| | |
10.2110.20 | Second Amendment to Credit Agreement, dated March 12, 2008, among Core-Mark Holding Company, Inc., Core-Mark International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on March 18, 2008). |
| | |
10.2210.21 | Third Amendment to Credit Agreement, dated February 2, 2010, among Core-Mark Holding Company, Inc., Core-Mark International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on February 5, 2010). |
| | |
| 10.22 | Fourth Amendment to Credit Agreement, dated May 5, 2011, among Core-Mark Holding Company, Inc., Core-Mark International, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company and Minter-Weisman Co., as Borrowers, the Lenders Signatory Thereto as Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q filed on May 9, 2011). |
| |
| 10.23 | Pledge and Security Agreement, dated October 12, 2005, among Core-Mark Holding Company, Inc., Core-Mark Holdings I, Inc., Core-Mark Holdings II, Inc., Core-Mark Holdings III, Inc., Core-Mark International, Inc., Core-Mark Midcontinent, Inc., Core-Mark Interrelated Companies, Inc., Head Distributing Company, Inc. and Minter-Weisman Co., Inc., as Grantors and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.13 of the Company's Registration Statement on Form 10 filed on October 21, 2005). |
| |
10.24 | Waiver Letter, dated March 29, 2006 (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on April 3, 2006). |
Exhibit No. | Description |
| 11.1 | Statement of Computation of Earnings Per Share (required information contained within this Annual Report on Form 10-K). |
| |
Exhibit
No.
| Description |
14.1 | Core-Mark Code of Ethics (incorporated by reference to Exhibit 14.1 of the Company's Annual Report on Form 10-K filed on April 14, 2006). |
| | |
| 21.1 | List of Subsidiaries of Core-Mark Holding Company, Inc. |
| | |
| 23.1 | Consent of Deloitte & Touche LLP.LLP, Independent Registered Public Accounting Firm |
| | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. |
| | |
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
| |
| 101.INS | XBRL Instance Document |
| |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | |
| | | | | | |
| | | | | | CORE-MARK HOLDING COMPANY, INC. |
| | | | | | |
Date: March 15, 201114, 2013 | | | | By: | /s/ J. MICHAEL WALSHTHOMAS B. PERKINS |
| | | | | | J. Michael WalshThomas B. Perkins
|
| | | | | | President, Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
SIGNATURE | | TITLE | | DATE |
| | | | | |
/S/ J. MICHAEL WALSHTHOMAS B. PERKINS | | President, Chief Executive Officer and | | March 15, 201114, 2013 |
J. Michael WalshThomas B. Perkins
| | Director (Principal Executive Officer) | | |
| | | | | |
/S/ STACY LORETZ-CONGDON | | Senior Vice President and Chief Financial Officer (Principal | | March 15, 201114, 2013 |
| Stacy Loretz-Congdon | | Officer (Principal Financial Officer) | | |
| | | | | |
/S/ CHRISTOPHER MILLER | | Vice President, Chief Accounting Officer | | March 15, 201114, 2013 |
| Christopher Miller | | (Principal Accounting Officer) | | |
| | | | | |
/S/ RANDOLPH I. THORNTON | | Chairman of the Board of Directors | | March 15, 201114, 2013 |
| Randolph I. Thornton | | | | |
| | | | | |
/S/ ROBERT A. ALLEN | | Director | | March 15, 201114, 2013 |
| Robert A. Allen | | | | |
| | | | | |
/S/ STUART W. BOOTH | | Director | | March 15, 201114, 2013 |
| Stuart W. Booth | | | | |
| | | | | |
/S/ GARY F. COLTER | | Director | | March 15, 201114, 2013 |
| Gary F. Colter | | | | |
| | | | |
/S/ ROBERT G. GROSS | | Director | | March 14, 2013 |
| Robert G. Gross | | | | |
| | | | | |
/S/ L. WILLIAM KRAUSE | | Director | | March 15, 201114, 2013 |
| L. William Krause | | | | |
| | | | | |
/S/ HARVEY L. TEPNER | | Director | | March 15, 201114, 2013 |
| Harvey L. Tepner | | | | |
| | | | |
/S/ J. MICHAEL WALSH | | Director | | March 14, 2013 |
| J. Michael Walsh | | | | |
| | | | |
CORE-MARK HOLDING COMPANY, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
| | | | Balance at Beginning of Period | | Charged (Credited) to Costs and Expenses | | Deductions | | Charged to Other Accounts | | Balance at End of Period | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2008 | | | | | | | | | | | |
| | | | Balance at Beginning of Period | | Charged to Costs and Expenses | | Deductions | | Charged to Other Accounts | | Balance at End of Period |
| Year Ended December 31, 2012 | | | | | | | | | | | |
| Allowances for: | | | | | | | | | | | | | | | | | | | | |
| Trade receivables | | $ | 9,292 | | | $ | 1,641 | | | $ | (2,313 | ) | | $ | 197 | | | $ | 8,817 | | | $ | 9,578 |
| | $ | 1,975 |
| | $ | (899 | ) | | $ | 212 |
| | $ | 10,866 |
|
| Inventory reserves | | 757 | | | 9,731 | | | (9,859 | ) | | — | | | 629 | | | 1,029 |
| | 11,517 |
| | (11,676 | ) | | — |
| | 870 |
|
| | | $ | 10,049 | | | $ | 11,372 | | | $ | (12,172 | ) | | $ | 197 | | | $ | 9,446 | | | $ | 10,607 |
| | $ | 13,492 |
| | $ | (12,575 | ) | | $ | 212 |
| | $ | 11,736 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2009 | | | | | | | | | | | |
| Year Ended December 31, 2011 | | | | | | | | | | | |
| Allowances for: | | | | | | | | | | | | | | | | | | | | |
| Trade receivables | | $ | 8,817 | | | $ | 1,751 | | | $ | (1,508 | ) | | $ | 34 | | | $ | 9,094 | | | $ | 8,660 |
| | $ | 1,970 |
| | $ | (1,470 | ) | | $ | 418 |
| | $ | 9,578 |
|
| Inventory reserves | | 629 | | | 10,158 | | | (9,628 | ) | | — | | | 1,159 | | | 1,144 |
| | 10,461 |
| | (10,576 | ) | | — |
| | 1,029 |
|
| | | $ | 9,446 | | | $ | 11,909 | | | $ | (11,136 | ) | | $ | 34 | | | $ | 10,253 | | | $ | 9,804 |
| | $ | 12,431 |
| | $ | (12,046 | ) | | $ | 418 |
| | $ | 10,607 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2010 | | | | | | | | | | | | | | | | | | | | |
| Allowances for: | | | | | | | | | | | | | | | | | | | | |
| Trade receivables | | $ | 9,094 | | | $ | 1,371 | | | $ | (2,420 | ) | | $ | 615 | | | $ | 8,660 | | | $ | 9,094 |
| | $ | 1,371 |
| | $ | (2,420 | ) | | $ | 615 |
| | $ | 8,660 |
|
| Inventory reserves | | 1,159 | | | 9,893 | | | (9,940 | ) | | 32 | | | 1,144 | | | 1,159 |
| | 9,893 |
| | (9,940 | ) | | 32 |
| | 1,144 |
|
| | | $ | 10,253 | | | $ | 11,264 | | | $ | (12,360 | ) | | $ | 647 | | | $ | 9,804 | | | $ | 10,253 |
| | $ | 11,264 |
| | $ | (12,360 | ) | | $ | 647 |
| | $ | 9,804 |
|
