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CORE > SEC Filings for CORE > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for CORE-MARK HOLDING COMPANY, INC.

Form 10-K for CORE-MARK HOLDING COMPANY, INC.


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the accompanying audited consolidated financial statements and notes thereto that are included under Part II, Item 8, of this Form 10-K. Also refer to "Special Note Regarding Forward-Looking Statements," which is included after Table of Contents in this Form 10-K.
Our Business
Core-Mark is one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America. We offer a full range of products, marketing programs and technology solutions to over 30,000 customer locations in the U.S. and Canada. Our customers include traditional convenience stores, grocery stores, drug stores, liquor stores and other specialty and small format stores that carry convenience products. Our product offering includes cigarettes, other tobacco products, candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health and beauty care products. We operate a network of 28 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third party logistics provider). Our core business objective is to help our customers increase their sales and profitability.

Overview of 2013 Results
In 2013, we remained focused on growing market share and increasing our food/non-food revenues and gross profit by leveraging our "Fresh" product offering, driving our Vendor Consolidation Initiative ("VCI"), and providing customer category management expertise in order to make our independent retailers more relevant and profitable. We experienced sales growth and market share gains in 2013, resulting primarily from our acquisition of J.T. Davenport & Sons, Inc. ("Davenport"), the establishment of a distribution arrangement with a major customer and the execution of our core strategies. Further, we added approximately 1,000 new customer locations which now exceed 30,000 across the 50 states in the U.S. and five Canadian provinces, and we continue to expand into other retail channels.
Net sales in 2013 increased 9.8% or $875.2 million, to $9,767.6 million compared to $8,892.4 million for 2012, driven primarily by the addition of Davenport, market share gains and an increase in food/non-food sales in the remaining business.
Gross profit in 2013 increased $60.3 million, or 12.6%, to $537.1 million from $476.8 million during 2012. Remaining gross profit (1) increased $55.5 million, or 11.5%, to $536.8 million in 2013 from $481.3 million for 2012. The increase in remaining gross profit was due primarily to increased sales attributable to Davenport and sales growth in our food/non-food products driven primarily by increased sales in our food and e-cigarette categories.
Remaining gross profit margin increased nine basis points to 5.50% in 2013 from 5.41% in 2012. The increase in remaining gross profit margin was driven primarily by a shift in sales mix toward higher margin food/non-food items, which increased overall remaining gross profit margin by 26 basis points, offset by the addition of Davenport and a new major customer, which collectively reduced margins by 12 basis points. In addition, increases in cigarette manufacturers' prices compressed remaining gross profit margin by approximately five basis points in 2013.
Operating expenses as a percentage of net sales were 4.79% in 2013 compared to 4.72% for 2012. We continue to see upward pressure on operating expenses as a percent of sales due to a shift in net sales to food/non-food categories. This is due, in part, to the lower selling price points for these categories as well as an increase in the cubic feet of product we are processing through our warehouses and delivering to our customers, which drives operating costs higher as a percent of sales. To the extent our food/non-food sales continue to increase at a higher rate year-over-year than cigarettes, our operating expenses, especially warehouse and distribution expenses, may increase as a percentage of total net sales.
Income before income taxes increased by $10.6 million, or approximately 19.1%, to $66.0 million for 2013, driven primarily by the addition of Davenport, sales growth in our food/non-food categories and a $3.6 million decrease in LIFO expense compared to 2012. Net income increased by 22.7% to $41.6 million from $33.9 million in 2012. Adjusted EBITDA(2 ) was $109.5 million in 2013 compared to $100.8 million for 2012.

(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).

(2) Adjusted EBITDA is a non-GAAP financial measure and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States of America ("GAAP") (see the calculation of Adjusted EBITDA in "Liquidity and Capital Resources" below).


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Business and Supply Expansion
We continue to benefit from the expansion of our business and the execution of our core strategies focused primarily on enhancing our fresh product offering, leveraging VCI and providing category management expertise to our customers. Our strategies take costs and inefficiencies out of the supply chain, bringing our customers an avenue to offer high quality fresh foods and optimize their consumer product offering. We believe each of these, when adopted, will increase the retailers' profits.
Some of our more recent expansion activities include:
• In March 2013, we signed a five year agreement with Imperial Oil to service approximately 500 Esso branded stores located in Ontario and the Western Provinces of Canada. We successfully rolled out service to all the Esso stores in October 2013.

• On May 7, 2013, we signed a three year distribution agreement with Turkey Hill, a subsidiary of the Kroger Co. ("Kroger") and the largest of Kroger's convenience divisions, to service all their convenience stores, which are located across Pennsylvania, Ohio and Indiana. With the addition of the Turkey Hill stores, we serviced approximately 700 Kroger convenience locations as of December 31, 2013.

• On December 17, 2012, we acquired Davenport, a large convenience wholesaler based in North Carolina, which services 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 enhanced our ability to cost effectively service national and regional retailers (see Note 3 - Acquisitions).

We continue to add breadth to our proprietary "Fresh and Local™" program by expanding our fresh item solutions. During 2013, we realized sales and margin growth in our "Fresh" categories resulting from improving our customers' product assortment, in-store marketing efforts and spoils management. As of December 31, 2013, there were approximately 9,200 participating stores in our "Fresh and Local™" program and sales for our Fresh categories grew by approximately 26% in 2013 compared to 2012.
Other Business Developments
Dividends
In 2013, our Board of Directors declared quarterly cash dividends of $0.19 per common share on May 2, 2013 and August 1, 2013 and declared a quarterly cash dividend of $0.22 per common share on November 1, 2013. In lieu of the first quarter 2013 dividend, our Board of Directors declared an accelerated cash dividend of $0.19 per common share on December 20, 2012, which resulted in a dividend payment of approximately $2.2 million on December 31, 2012. We paid dividends of approximately $7.1 million in 2013 compared to $10.3 million in 2012.
Share Repurchase Program
In May 2013, our Board of Directors authorized a $30 million increase to our stock repurchase plan. At the time of increase, we had $2.3 million remaining under our stock repurchase plan that was then in place. In 2013, we repurchased 126,872 shares of common stock at an average price of $56.60 compared to repurchases of 118,800 shares of common stock at an average price of $43.34 in 2012. As of December 31, 2013 and 2012, we had $28.7 million and $5.8 million, respectively, available for future share repurchases under the program.


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Results of Operations

Comparison of 2013 and 2012 (in millions) (1):
                                                          2013                                         2012
                                                                     % of Net                                        % of Net
                         Increase                      % of Net     sales, less                                     sales, less
                        (Decrease)        Amounts       sales      excise taxes      Amounts     % of Net sales    excise taxes
Net sales            $      875.2       $ 9,767.6      100.0 %          - %        $ 8,892.4          100.0  %          - %
Net sales -
Cigarettes                  502.6         6,642.0       68.0         62.3            6,139.4           69.0          63.1
Net sales -
Food/non-food               372.6         3,125.6       32.0         37.7            2,753.0           31.0          36.9
Net sales, less
excise taxes (2)            811.4         7,716.8       79.0        100.0            6,905.4           77.7         100.0
Gross profit (3)             60.3           537.1        5.5          7.0              476.8            5.4           6.9
Warehousing and
  distribution
expenses                     34.4           297.1        3.1          3.9              262.7            3.0           3.8
Selling, general and
  administrative
expenses                     14.6           168.3        1.7          2.2              153.7            1.7           2.2
Amortization of
  intangible assets          (0.3 )           2.7          -            -                3.0              -             -
Income from
operations                   11.6            69.0        0.7          0.9               57.4            0.6           0.8
Interest expense              0.5            (2.7 )        -            -               (2.2 )            -             -
Interest income               0.1             0.5          -            -                0.4              -             -
Foreign currency
transaction
 losses, net                  0.6            (0.8 )        -            -               (0.2 )            -             -
Income before taxes          10.6            66.0        0.7          0.9               55.4            0.6           0.8
Net income                    7.7            41.6        0.4          0.5               33.9            0.4           0.5
Adjusted EBITDA (4)           8.7           109.5        1.1          1.4              100.8            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).

(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 2013 increased by $875.2 million, or 9.8%, to $9,767.6 million from $8,892.4 million in 2012. Excluding excise taxes, net sales increased by 11.8% in 2013 due primarily to the addition of Davenport, net market share gains and incremental net sales to existing customers driven primarily by the success of our core strategies.
Net Sales of Cigarettes. Net sales of cigarettes for 2013 increased by $502.6 million, or 8.2%, to $6,642.0 million from $6,139.4 million in 2012. Net sales of cigarettes, excluding excise taxes, increased by 10.4% for the same periods. The increase in net cigarette sales was driven primarily by sales from Davenport, net market share gains and a 2.3% increase in the average price per carton, offset by a 1.8% decrease in carton sales. In the U.S., cigarette carton sales decreased by 1.2% excluding incremental carton sales from Davenport. Carton sales in Canada decreased by 7.5% due primarily to the loss of two non-major customers in the fourth quarter of 2012. Total net cigarette sales as a percentage of total net sales were 68.0% in 2013 compared to 69.0% for 2012. We believe long-term cigarette consumption will be negatively impacted by rising prices, legislative actions, diminishing social acceptance and sales through illicit markets. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability, thus mitigating the effects of the decline to the distributor. In addition,


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industry data indicates that convenience retailers are more than offsetting cigarette volume profit declines through higher sales of food/non-food products. We expect this trend to continue as the convenience industry adjusts to consumer demands.
Net Sales of Food/Non-food Products. Net sales of food/non-food products for 2013 increased $372.6 million, or 13.5%, to $3,125.6 million from $2,753.0 million in 2012. The following table provides net sales by product category for our food/non-food products (in millions)(1):

                                2013          2012          Increase / (Decrease)
Product Category              Net Sales     Net Sales       Amounts       Percentage
Food                         $  1,342.3    $  1,178.6    $    163.7           13.9  %
Candy                             527.2         489.5          37.7            7.7
Other tobacco products            787.8         687.8         100.0           14.5
Health, beauty & general          327.3         269.2          58.1           21.6
Beverages                         139.1         125.6          13.5           10.7
Equipment/other                     1.9           2.3          (0.4 )        (17.4 )
Total Food/Non-food Products $  3,125.6    $  2,753.0    $    372.6           13.5  %


______________________________________________


(1) Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.

The increase in food/non-food sales in 2013 was driven primarily by sales from Davenport, net market share gains and incremental net sales from existing customers. Continued success in implementing our core strategies, benefiting primarily the food category, was a meaningful driver to the improvement in net sales to existing customers during 2013. In addition, we continued to see higher sales of smokeless tobacco products in our other tobacco products category ("OTP") and e-cigarettes included in our health, beauty & general product category. We believe the trend toward increased use of smokeless tobacco products and e-cigarettes by consumers will continue and will help offset the impact of expected continued declines in cigarette consumption. This shift could potentially result in improved profitability over time due to the profit margins associated with smokeless tobacco products and e-cigarettes, being generally higher than the profit margins we earn on cigarette carton sales. Total net sales of food/non-food products as a percentage of total net sales increased to 32.0% in 2013 compared to 31.0% in 2012.
Gross Profit. Gross profit represents the amount of profit after deducting cost of goods sold from net sales during the period. Vendor incentives, inventory holding gains and changes in LIFO reserves are components of cost of goods sold and therefore part of our gross profit. Gross profit for 2013 increased by $60.3 million, or 12.6%, to $537.1 million from $476.8 million in 2012 due primarily to the addition of Davenport, an increase in sales of higher margin food and e-cigarette products and a $3.6 million decrease in LIFO expense. Gross profit margin was 5.50% of total net sales for 2013 compared to 5.36% for 2012. The following table provides the components comprising the change in gross profit as a percentage of net sales for 2013 and 2012 (in millions)(1):

                                                              2013                                        2012
                                                                            % of Net                                    % of Net
                                                                             sales,                                      sales,
                                                                              less                                        less
                             Increase                                        excise                                      excise
                            (Decrease)        Amounts     % of Net sales      taxes       Amounts     % of Net sales      taxes
Net sales                $        875.2     $ 9,767.6          100.0  %          -  %   $ 8,892.4          100.0  %          -  %
Net sales, less excise
taxes (2)                         811.4       7,716.8           79.0         100.0        6,905.4           77.7         100.0
Components of gross
profit:
Cigarette inventory
holding gains(3)         $          1.2     $     9.0           0.09  %       0.12  %   $     7.8           0.09  %       0.11  %
LIFO expense                        3.6          (8.7 )        (0.09 )       (0.12 )        (12.3 )        (0.14 )       (0.18 )
Remaining gross profit
(4)                                55.5         536.8           5.50          6.96          481.3           5.41          6.97
Gross profit             $         60.3     $   537.1           5.50  %       6.96  %   $   476.8           5.36  %       6.90  %


______________________________________________


(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


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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).
(3) The amount of cigarette inventory holding gains attributable to the U.S. and Canada were $8.3 million and $0.7 million, respectively, for 2013, compared to $7.0 million and $0.8 million, respectively, for 2012.
(4) 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 $55.5 million, or 11.5%, to $536.8 million for 2013 from $481.3 million in 2012. In 2013, our remaining gross profit for food/non-food products was approximately 70.8% of our total remaining gross profit compared to 68.6% for 2012.
Remaining gross profit margin was 5.50% of total net sales in 2013 compared to 5.41% in 2012. The increase in remaining gross profit margin was driven primarily by a shift in sales mix toward higher margin food/non-food items, which increased overall remaining gross profit margin by 26 basis points, offset by the addition of Davenport and a new major customer which reduced margins collectively by 12 basis points. In addition, increases in cigarette manufacturer prices lowered remaining gross profit margin by five basis points in 2013 compared with 2012.
Cigarette remaining gross profit per carton decreased by 3.5% in 2013 compared to 2012 due primarily to carton sales of Davenport and to the new major customer.
Food/non-food remaining gross profit increased by $49.7 million, or 15.1%, in 2013 compared to 2012. Food/non-food remaining gross profit margin increased 16 basis points to 12.15% in 2013 compared with 11.99% in 2012. Excluding Davenport and the new major customer, food/non-food remaining gross profit margin increased by 23 basis points driven primarily by sales growth in our food category and e-cigarette products, offset by OTP, which had higher sales in 2013 but lower gross profit margins relative to other food/non-food products. To the extent we capture large chain business, our gross profit margins may be negatively impacted. However, large chain customers generally require less working capital, allowing us, in most cases, to offer lower prices to achieve a favorable return on our investment. Our focus is to strike a balance between large chain business, which generally has lower gross profit margins, and independently-owned convenience stores, which comprise over 64% of the overall convenience store market and generally have higher gross profit margins. In addition, although price inflation did not materially impact our results from operations on a comparable basis in 2013, 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.
Operating Expenses. Our operating expenses include costs related to Warehousing and Distribution, Selling, General and Administrative and Amortization of Intangible Assets. In 2013, operating expenses increased by $48.7 million, or 11.6%, to $468.1 million from $419.4 million in 2012. The increase in operating expenses was due primarily to the addition of Davenport and an increase in sales volume of food/non-food products. As a percentage of net sales, total operating expenses was 4.8% in 2013 compared to 4.7% in 2012. A shift in sales to food/non-food products increased operating expenses as a percentage of net sales in 2013 since food/non-food products have lower sales price points than the cigarette category.
Warehousing and Distribution Expenses. Warehousing and distribution expenses increased by $34.4 million, or 13.1%, to $297.1 million in 2013 from $262.7 million in 2012. The increase in warehousing and distribution expenses was due primarily to the addition of Davenport and a 7.6% increase in cubic feet of product handled for the remainder of the business compared to the prior year. As a percentage of total net sales, warehousing and distribution expenses were 3.1% and 3.0% for 2013 and 2012, respectively, yet on a cost per cubic foot basis, decreased 0.7% on a comparable basis.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses increased by $14.6 million, or 9.5% in 2013 to $168.3 million from $153.7 million in 2012. The increase in SG&A expenses was due primarily to expenses attributable to Davenport and an increase of approximately $1.2 million related to integration and business expansion activities in the Eastern U.S. In addition, SG&A expenses in 2012 include a $1.8 million benefit related to the favorable resolution of legacy worker's compensation and insurance claims. As a percentage of net sales, SG&A expenses were 1.7% for both 2013 and 2012.
Interest Expense. Interest expense includes both interest and loan amortization fees related to borrowings and facility fees and interest on capital lease obligations. Interest expense was $2.7 million and $2.2 million in 2013 and 2012, respectively. The increase in interest expense was due primarily to expenses related to a capital lease arrangement for a warehouse facility entered into in December 2012. Average borrowings in 2013 were $35.3 million with an average interest rate of 1.8%, compared to average borrowings of $26.3 million and an average interest rate of 2.1% in 2012.
Foreign Currency Transaction Losses, Net. Foreign currency transaction losses were $0.8 million in 2013 compared to $0.2 million in 2012. The change was due primarily to the fluctuation in the Canadian/U.S. dollar exchange rate.


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Income Taxes. Our effective tax rate was 37.0% for 2013 compared to 38.8% for 2012. The decrease in our effective tax rate for 2013 was due primarily to a higher proportion of earnings from states with lower tax rates and a net benefit of $0.9 million, compared to a net benefit of $0.5 million in 2012, related primarily to adjustments of prior year's estimates and the expiration of the statute of limitations for uncertain tax positions.


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Results of Operations
Comparison 2012 and 2011 (in millions) (1):
                                                            2012                                          2011
                                                                                                                        % of Net
                                                                                                                         sales,
                                                                          % of Net                                        less
                         Increase                                        sales, less                                     excise
                        (Decrease)        Amounts     % of Net sales    excise taxes      Amounts     % of Net sales      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
. . .
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