Core-Mark Holding Company, Inc.
Core-Mark Holding Company, Inc. (Form: 10-K, Received: 02/26/2016 06:33:09)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
x
Annual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2015
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     .  
Commission File Number: 000-51515
Core-Mark Holding Company, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
20-1489747
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
395 Oyster Point Boulevard, Suite 415
South San Francisco, California 94080
(650) 589-9445
(Address of Principal Executive Offices, including Zip Code)
(Registrant's Telephone Number, including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:  
Title of each class
 
Name of each exchange
on which registered
 
Common Stock, par value $0.01 per share
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
Yes   x No   o  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   o     No   x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   x     No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  
Large accelerated filer   x
Accelerated filer   o
Non-accelerated filer   o   
Smaller reporting company   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   o     No   x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2015 , the last business day of the registrant's most recently completed second fiscal quarter:   $1,331,526,257
As of February 12, 2016 , the registrant had 23,142,308 shares of its common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this Form 10-K will be included in an amendment to this Form 10-K or incorporated by reference to the registrant’s 2016 definitive proxy statement to be filed pursuant to Regulation 14A.



FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2015
TABLE OF CONTENTS
 
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K that are not statements of historical fact are forward-looking statements made pursuant to the safe-harbor provisions of the Exchange Act of 1934 and the Securities Act of 1933.
Forward-looking statements in some cases can be identified by the use of words such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “would,” “project,” “predict,” “continue,” “plan,” “propose” or other similar words or expressions. Forward-looking statements are made only as of the date of this Form 10-K and are based on our current intent, beliefs, plans and expectations. They involve risks and uncertainties that could cause actual results to differ materially from historical results or those described in or implied by such forward-looking statements.
A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in Part I, Item 1A, “Risk Factors” of this Form 10-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

SEC Regulation - Non-GAAP Information

The financial statements in this Annual Report are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Core-Mark Holding Company, Inc. (Core-Mark) uses certain non-GAAP financial measures including 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 facilitate a meaningful period to period evaluation. Management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in Core-Mark’s underlying business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.


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PART I
ITEM 1.      BUSINESS
Unless the context indicates otherwise, all references in this Annual Report on Form 10-K to “Core-Mark,” “the Company,” “we,” “us,” or “our” refer to Core-Mark Holding Company, Inc. and its subsidiaries.
Company Overview
Core-Mark is one of the largest wholesale distributors to the convenience retail industry in North America, providing sales, marketing, distribution and logistics services to over 36,500 customer locations across the United States (U.S.) and Canada through 28 distribution centers (excluding two distribution facilities we operate as a third party logistics provider). Our origins date back to 1888, when Glaser Bros., a family-owned-and-operated candy and tobacco distribution business, was founded in San Francisco, California.
Our mission is to be the most valued marketer of fresh and broad-line supply solutions to the convenience retail industry. While the past century has brought incredible changes to our business and the world in which we operate, our goal is the same today as it was over 125 years ago - to provide customers with the best possible service and to help them grow their sales and profits. We have grown our business organically and through acquisitions which have expanded our distribution network, product selection and customer base.
Core-Mark has become one of two national distributors to the convenience store industry in the U.S. and is the largest in Canada. The national market presence we have established rests primarily with our ability to service customers in every geographic region within the U.S. through 24 distribution centers and servicing customers in Canada with our four Canadian distribution centers.
We operate in an industry where, in 2014 , based on the National Association of Convenience Stores (NACS) State of the Industry (SOI) report, total in-store sales at convenience retail locations in the U.S. increased 4.7% to approximately $213.5 billion and were generated through approximately 153,000 stores. Over the ten years from 2005 through the end of 2014, U.S. convenience in-store sales have increased by a compounded annual growth rate of approximately 3.5%. Based on the Canadian Convenience Store Association (CCSA) 2014 Industry report, we estimate that total Canadian in-store sales at convenience locations were approximately C$25.1 billion generated through approximately 25,000 stores.
2015 Company Highlights
Net income grew from $33.9 million in 2012 to $51.5 million in 2015 , or approximately 15% compounded annually. Our net sales grew from $8.9 billion in 2012 to $11.1 billion in 2015 , yielding an annual compounded growth rate of approximately 8%, while our annual Adjusted EBITDA (1) increased from $100.8 million to $135.2 million , or approximately 10%, 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 5% market share of total in-store sales within the convenience store channel in North America and to take advantage of growth opportunities with other retail store formats. Below are key highlights of the year:
In October 2015, we signed a five year agreement with Murphy USA to be the primary wholesale distributor to over 1,300 stores located in 23 states across the Southwest, Southeast and Midwest United States. We expect services under this contract will create efficiencies and a strategic supply chain relationship for Murphy USA.
In October 2015, we signed a five year supply agreement with 7-Eleven, Inc. to service approximately 900 stores in three western regions. Core-Mark will be the primary wholesale distributor delivering a wide range of products to these stores out of three of our divisions - Las Vegas, Nevada, Salt Lake City, Utah and Sacramento, California.
In July 2015, we amended our contract with Rite Aid to expand our service to include other product categories in addition to the frozen, refrigerated, bakery and fresh food categories, which we began delivering in June 2014.
In February 2015, we acquired substantially all the assets of Karrys Bros., Limited (Karrys Bros.), a regional distributor servicing customers in Ontario, Canada, and the surrounding provinces. The acquisition of Karrys Bros. has provided the opportunity to expand our market share in eastern Canada and contribute to the leverage of fixed costs and improved profitability in our Toronto division.
We continue to transition portions of our fleet to Compressed Natural Gas (CNG), which allows us to reduce our carbon footprint and lower our transportation costs. To date, we have opened seven CNG stations, two of which we own, located in Wilkes-Barre, Pennsylvania and Corona, California, and the other five are operated in partnership with U.S. Oil and

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are located in Aurora, Colorado, Forrest City, Arkansas, Sanford, North Carolina, Atlanta, Georgia and Tampa, Florida under the name GAIN Clean Fuel (GAIN). In addition to providing fuel to our fleet, the GAIN stations are also open to other public fleets for fueling.
________________________________________
(1)
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 net interest expense, provision for income taxes, depreciation and amortization, LIFO expense, stock-based compensation expense and net foreign currency transaction gains or losses. See Item 6 - Selected Financial Data for the reconciliation of Adjusted EBITDA to net income.

Business Strategy
Our objective is to increase overall return to stockholders by growing our market share, revenues and profitability. As one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America, with the proven capability of effectively selling into other retail channels, we believe we are well-positioned to continue meeting this objective. Our business strategy also includes the following initiatives, designed to further enhance the value we provide to our retail customers:
Leverage our Vendor Consolidation Initiative (VCI). We expect our VCI program will allow us to continue to grow our sales by capitalizing on the highly fragmented supply chain that services the convenience retail industry. A convenience retailer generally receives store merchandise through a large number of direct-store deliveries. This represents a highly inefficient and costly process for retailers. Our VCI program targets inefficiencies in the convenience store supply chain by offering the retailer the ability to receive multiple weekly deliveries for the bulk of their products, including dairy and other merchandise they purchased from direct-store delivery companies. This simplifies the supply chain and provides retailers with an opportunity to improve inventory turns and working capital, reduce operational and transaction costs, and greatly diminish their out-of-stocks on best-selling items.
Deliver Fresh Products (Fresh). We believe there is an increasing trend among consumers to purchase fresh food from convenience and other retail store formats. To meet this demand, we have modified and upgraded our refrigerated capacity, including investing in chill docks, which is a temperature controlled environment, and tri-temperature (tri-temp) trailers, which provide the infrastructure to deliver a significant range of chilled items including milk, produce and other fresh foods to retail outlets. We have established partnerships with strategically-located dairies, fresh kitchens and bakeries to further enable us to deliver the freshest product possible, with premium consumer items such as sandwiches, wraps, cut-fruit, parfaits, pastries, doughnuts, bread and home meal replacement solutions. We continue to expand the array of fresh products through the development of unique and comprehensive marketing and equipment programs that assist the retailer in showcasing their fresh product offering. We believe our investments in infrastructure, combined with our strategically located suppliers and in-house expertise, position us as the leader in providing fresh products and programs to the convenience retail industry. Proper execution of VCI, the cornerstone being dairy distribution, provides Core-Mark the critical mass necessary to offer retailers a multiple weekly delivery platform, which facilitates the proper handling and dating of fresh products. We believe that fresh items are increasingly driving consumer decisions, and will continue to be an important category.
Leverage our Focused Marketing Initiative (FMI). Designed to enhance our relationship with our independent customer base and to further differentiate us in the market place, our FMI program is centered on increasing the sales and profitability of the independent store through improved category insights, optimized retail price strategy and demographic decision-making, along with providing Core-Mark’s marketing solutions to create a comprehensive retail marketing strategy. We believe our innovative approach, which focuses on building a trusted partnership with our customers, has established us as the market leader in providing valuable marketing and supply chain solutions to the convenience retail industry.
Acquisitions and Expansion. We believe there is significant opportunity to increase our market presence and revenue growth through strategic and opportunistic acquisitions, including continued expansion of our presence nationally. We completed six acquisitions and added three additional warehouses between 2006 and 2015 , which expanded our distribution network, product selection and customer base. We will continue to be opportunistic in pursuing acquisitions that allow further leveraging of our geographic footprint and bring Fresh and VCI to a broader customer base.

Competitive Strengths
We believe we have the following fundamental competitive strengths, which form the foundation for our business strategy:
Innovation and Flexibility. Wholesale distributors typically provide convenience retailers access to a broad product line, the ability to place small quantity orders, inventory management and access to trade credit. Our capability to increase sales and profitability with existing and new customers is based on our ability to deliver consistently high levels of service, innovative

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marketing programs, technology solutions and logistics support. We believe we are one of the first to recognize emerging trends and to offer retailers our unique strategic solutions such as VCI, Fresh and FMI.
Distribution Capabilities. The wholesale distribution industry is highly fragmented and historically has consisted of a large number of small, privately-owned businesses and a small number of large, full-service wholesale distributors serving multiple geographic regions. Relative to smaller competitors, large national distributors such as Core-Mark benefit from several competitive advantages including: increased purchasing power, the ability to service large national chain accounts, economies of scale in sales and operations, and the resources to invest in information technology and other productivity-enhancing technologies. Our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing inventory management and accessing trade credit.

Customers
We service over 36,500 customer locations in 50 states in the U.S. and five Canadian provinces. Our primary customer base consists of traditional convenience stores as well as alternative outlets selling consumer packaged goods. Our traditional convenience store customers include many of the major national and super-regional convenience store operators, as well as independently owned convenience stores. Our alternative outlet customers comprise a variety of store formats, including grocery stores, drug stores, liquor stores, cigarette and tobacco shops, hotel gift shops, military exchanges, college and corporate campuses, casinos, hardware stores, airport concessions and other specialty and small format stores that carry convenience products.
Our top ten customers accounted for 37.4% of our net sales in 2015 including Alimentation Couche-Tard, Inc. (Couche-Tard), our largest customer, which accounted for 14.2% of our total net sales.
Products
We purchase a variety of brand name and private label products, in excess of 54,000 stock keeping units (SKUs), from suppliers and manufacturers. Cigarette products represent less than 5% of our total SKUs purchased. We offer customers a variety of food/non-food products, including fast food, candy, snacks, groceries, fresh products, dairy, bread, beverages, other tobacco products, general merchandise and health and beauty care products.
Below is a comparison of our net sales mix by primary product category for the last three years (in millions):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Product Category
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Cigarettes
$
7,528.5

 
68.0
%
 
$
6,942.0

 
67.5
%
 
$
6,642.0

 
68.0
%
Food
1,586.1

 
14.3

 
1,462.0

 
14.2

 
1,342.3

 
13.7

Candy (1)
557.0

 
5.0

 
534.3

 
5.2

 
513.2

 
5.3

Other tobacco products
870.3

 
8.0

 
827.5

 
8.1

 
787.8

 
8.1

Health, beauty & general (1)
368.8

 
3.3

 
361.0

 
3.5

 
341.3

 
3.5

Beverages
156.6

 
1.4

 
151.8

 
1.5

 
139.1

 
1.4

Equipment/other
2.1

 

 
1.5

 

 
1.9

 

Total food/non-food products
3,540.9

 
32.0
%
 
3,338.1

 
32.5
%
 
3,125.6

 
32.0
%
Total net sales
$
11,069.4

 
100.0
%
 
$
10,280.1

 
100.0
%
 
$
9,767.6

 
100.0
%
_____________________________________________
(1)
In 2014 , certain products were moved from the Candy category to the Health, beauty & general category to align them with the industry classifications used by the NACS. The 2013 presentation has been realigned to reflect these changes. Without the changes, net sales for Candy would have been $527.2 million for the year ended December 31, 2013 . Net sales for Health, beauty & general products would have been $327.3 million for the year ended December 31, 2013 .
Cigarette Products . We purchase cigarette products from major U.S. and Canadian manufacturers. We have no long-term cigarette purchase agreements and buy substantially all of our products on an as-needed basis. Cigarette manufacturers historically offer structured incentive programs to wholesalers based on maintaining market share and executing promotional programs. Net sales of the cigarettes category grew 8.4% in 2015 to $7,528.5 million , accounting for approximately 68.0% of our total net sales

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and 28.3% of our total gross profit in 2015 . We control major purchases of cigarettes centrally to optimize inventory levels and purchasing opportunities, and the daily replenishment of inventory and brand selection is controlled by our distribution centers.
In 2015 our cigarette carton sales in the U.S. and Canada, increased 6.4% and 9.1%, respectively, benefiting from market share gains, including the addition of Karrys Bros. In the industry overall, U.S. and Canadian cigarette consumption steadily declined over the last decade. Based on data compiled from the U.S. Department of Agriculture - Economic Research Service and provided by the Tobacco Merchants Association (TMA), total cigarette consumption in the U.S declined from 394 billion cigarettes in 2005 to 269 billion cigarettes in 2014, or a compounded annual decline of approximately 4.2%. Total cigarette consumption declined in Canada from 33 billion cigarettes in 2005 to 27 billion cigarettes in 2014, or a compounded annual decline of approximately 2.2% based on statistics provided by the TMA. Although we anticipate overall cigarette consumption will continue to decline, we expect to offset these declines through market share expansion, growth in our non-cigarette categories and incremental gross profit from cigarette manufacturer price increases. We expect cigarette manufacturers will continue to raise prices as carton sales decline in order to maintain or enhance their overall profitability.
Excise taxes are levied on cigarettes and other tobacco products by the U.S. and Canadian federal governments and are also imposed by various states, localities and provinces. We collect state, local, and provincial excise taxes from our customers and remit these amounts to the appropriate authorities based on the credit terms, if applicable, extended by each jurisdiction. Net sales and cost of sales included offsetting amounts of approximately $2.2 billion related to state, local and provincial excise taxes in 2015 , and approximately $2.1 billion in 2014 and 2013 .
Food/Non-food Products. Our food products include fast food, candy, snacks, groceries, beverages and fresh products such as sandwiches, juices, salads, produce, dairy and bread. Our non-food products include cigars, tobacco, health and beauty care products, general merchandise and equipment. Net sales of the combined food/non-food product categories grew 6.1% in 2015 to $3,540.9 million , which was 32.0% of our total net sales driven primarily by incremental sales to existing customers and market share gains including the acquisition of Karrys Bros. Sales generated from VCI, Fresh and FMI were the primary drivers of the increased sales to existing customers. Gross profit for food/non-food categories grew $39.1 million , or 9.3% , to $457.4 million in 2015 , which was 71.7% of our total gross profit. In order to take advantage of the significantly higher margins earned by food/non-food products, two of our key business strategies, VCI and Fresh, focus primarily on the highest margin categories in the food/non-food group. More specifically, sales in the food category grew 8.5% to $1,586.1 million , the largest contributor to our overall food/non-food sales improvement. Our strategy is to continue to grow food/non-food products through our VCI, Fresh, and FMI strategies.

Our Suppliers

We purchase products for resale from approximately 4,400 trade suppliers and manufacturers located across the U.S. and Canada. In 2015 , we purchased approximately 64% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris USA, Inc. and R.J. Reynolds Tobacco Company, accounting for approximately 29% and 17% of our purchases, respectively. We coordinate our purchasing from suppliers by negotiating, on a corporate-wide basis, special arrangements to obtain volume discounts and additional incentives, while also taking advantage of promotional and marketing incentives offered to us as a wholesale distributor. In addition, buyers in each of our distribution facilities purchase products directly from the manufacturers, improving product mix and availability for individual markets.


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Operations
As of December 31, 2015 , we operated a network of 28 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third party logistics provider). Twenty-four of our distribution centers are located in the U.S. and four are located in Canada. During 2015, we transitioned customers from our U.S. distribution center at Grants Pass, Oregon to two of our existing U.S. distribution centers to maximize supply chain efficiencies and optimize product sales.
The map below depicts the scope of our operations and the names of our distribution centers.
We operate four consolidation centers which buy products from our suppliers in bulk quantities and then re-distribute the products to many of our other distribution centers. The products purchased by our consolidation centers include frozen and chilled items, candy, snacks, beverages, health and beauty care and general merchandise products. We operate two additional facilities as a third party logistics provider. One distribution facility located in Phoenix, Arizona, referred to as the Arizona Distribution Center (ADC), is dedicated solely to supporting the logistics and management requirements of one of our major customers, Couche-Tard. The second distribution facility located in San Antonio, Texas, referred to as the Retail Distribution Center (RDC), is dedicated solely to supporting another major customer, CST Brands, Inc.
Our proprietary Distribution Center Management System platform provides our distribution centers with the flexibility to adapt rapidly to changing business needs and allows them to provide our customers with necessary information technology requirements and integration capabilities.

Distribution
At December 31, 2015 , we had approximately 1,600 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, 2015 , our trucking fleet consisted of over 870 tractors, trucks and vans, most of which were leased. We have made a significant investment over the past few years in upgrading our trailer fleet to tri-temp, which gives us the capability to deliver frozen, chilled and non-refrigerated goods in one delivery. As of December 31, 2015 , approximately 86% of our trailers were tri-temp, with the remainder capable of delivering refrigerated and non-refrigerated foods. This provides us the multiple temperature zone capability needed to support our focus on delivering fresh products to our customers. We continue to convert a portion of our fleet to CNG tractors which will allow us to purchase more environmentally friendly fuel, reduce our carbon footprint and lower our transportation costs. At December 31, 2015 , we had 210 CNG tractors.


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Competition
Competition within the industry is based primarily on the range and quality of the services provided, price, product selection and the reliability of wholesalers’ logistics. We operate from a perspective that focuses heavily on flexibility and providing outstanding customer service through our distribution centers, order fulfillment rates, on-time delivery, innovative marketing solutions and merchandising support as well as competitive pricing.
We believe McLane Company, Inc., a subsidiary of Berkshire Hathaway Inc., and Core-Mark are the two largest convenience wholesale distributors (measured by annual sales) in North America. There are two other large regional companies that provide products to specific areas of the country: The H.T. Hackney Company in the Southeast and the Eby-Brown Company in the Midwest and Mid-Atlantic regions. In addition, there are hundreds of local distributors serving small regional chains and independent convenience retailers. In Canada, in addition to Core-Mark, there is one large national company, Wallace & Carey, Inc., one regional company which services the Manitoba, Saskatchewan and Alberta markets, Pratts Wholesale Limited, and one large national convenience store and grocery wholesaler, Sobeys Inc., aside from Core-Mark, that make up the competitive landscape.
Beyond the traditional wholesale supply channels, we face potential competition from at least three other supply avenues. First, certain manufacturers such as Anheuser-Busch Companies, Inc., MillerCoors LLC, The Coca-Cola Company, Frito-Lay, Inc., a division of PepsiCo, Inc. (PepsiCo) and PepsiCo deliver their products directly to convenience retailers. Secondly, club wholesalers such as Costco Wholesale Corporation (Costco) and Sam’s West, Inc. (Sam’s Club) provide a limited selection of products at generally competitive prices; however, they often have limited delivery options and limited services. Finally, some large convenience retail chains self-distribute products due to the geographic density of their stores and their belief that they can economically service such locations.
We face competition from the diversion into the U.S. and Canadian markets of cigarettes intended for sale outside of such markets, including the sale of cigarettes in non-taxable jurisdictions, inter-state/provincial and international smuggling of cigarettes, the sale of counterfeit cigarettes by third parties, increased imports of foreign low priced brands, the sale of cigarettes by third parties over the internet and by other means designed to avoid collection of applicable taxes. The competitive environment has been characterized by a continued influx of cheap products and tobacco alternatives, including electronic cigarettes that challenge sales of higher priced and fully taxed cigarettes.

Working Capital Practices
We sell products on credit terms to our customers that averaged, as measured by days sales outstanding, about nine days for each of 2015 , 2014 and 2013 . Credit terms may impact pricing and are competitive within our industry. Many of our customers remit payment electronically, which facilitates efficient and timely monitoring of payment risk. Canadian days sales outstanding in receivables tend to be lower as Canadian industry practice is for shorter credit terms than in the U.S.
We maintain our inventory of products based on the level of sales of the particular product and manufacturer replenishment cycles. The number of days a particular item of inventory remains in our distribution centers varies by product and is principally driven by the turnover of that product and economic order quantities. We typically order and carry in inventory additional amounts of certain critical products to assure high order fulfillment levels for these items. Periodically, we may carry higher levels of inventory to take advantage of anticipated manufacturer price increases. The number of days of cost of sales in inventory averaged about 16 days in each of 2015 , 2014 and 2013 with the cigarette category averaging ten days and food/non-food categories averaging 29 days.
We obtain terms from our vendors and certain taxing jurisdictions based on industry practices, consistent with our credit standing. We take advantage of the full complement of term offerings, which may include enhanced cash discounts for earlier payment or prepayment. Terms for our accounts payable and cigarette and tobacco taxes payable range anywhere from three days prepaid to 60 days credit. Days payable outstanding for both categories, excluding the impact of prepayments, during each of 2015 , 2014 and 2013 averaged about 11 days.


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Employees
The following chart provides a breakdown of our employees by function and geographic region (including employees at our third party logistics facilities) as of December 31, 2015 :
TOTAL EMPLOYEES BY BUSINESS FUNCTION
 
 
U.S.
 
Canada
 
Total
Sales and Marketing
1,325

 
93

 
1,418

Warehousing and Distribution
4,032

 
362

 
4,394

Management, Administration, Finance and Purchasing
697

 
146

 
843

Total Categories
6,054

 
601

 
6,655

 
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 276 employees, or 4% of our workforce, are unionized. There have been no disruptions in customer service, strikes, work stoppages or slowdowns as a result of union activities, and we believe we have satisfactory relations with our employees.

Regulation
As a distributor of food products in the U.S., we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated by the U.S. Food and Drug Administration (FDA). In Canada, similar standards related to food and over-the-counter medications are governed by Health Canada. The products we distribute are also subject to federal, state, provincial and local regulation through such measures as the licensing of our facilities, enforcement by state, provincial and local health agencies of relevant standards for the products we distribute and regulation of our trade practices in connection with the sale of our products. Our facilities are inspected periodically by federal, state, provincial and local authorities, including the Occupational Safety and Health Administration under the U.S. Department of Labor (OSHA), which require us to comply with certain health and safety standards to protect our employees.
We are also subject to regulation by the U.S. and Canadian Departments of Transportation, which regulate transportation of perishable goods, and similar state, provincial and local agencies. Our distribution centers in the U.S. and Canada are subject to a broad spectrum of federal, state, provincial and local environmental protection statutes including those that govern the emissions to air, soil and water, and the disposal of hazardous substances.
Our policy is to comply with all regulatory and legal requirements and management is not aware of any related issues that may have a material effect upon our business, financial condition or results of operations.

Registered Trademarks
We have registered trademarks including the following: Arcadia Bay ® , Arcadia Bay Coffee Company ® , Cable Car ® , Core-Mark ® , Core-Mark International ® , Core Solutions Group ® , EMERALD ® , Java Street ® , and SmartStock ® .

Segment and Geographic Information
We have two operating and geographic segments -- the U.S. and Canada. See Note 16 - Segment and Geographic Information to our consolidated financial statements.
Seasonality
We typically generate slightly higher net sales and gross profits during the warm weather months (April through September) than in other times throughout the year. We believe this occurs because the convenience store industry tends to be busier due to timing of vacations and increase in travel during this period.

Corporate and Available Information
Our corporate headquarters is located at 395 Oyster Point Boulevard, Suite 415, South San Francisco, California, 94080 and our telephone number is (650) 589-9445.
Our internet website address is www.core-mark.com . We provide free access to various reports that we file with or furnish to the U.S. Securities and Exchange Commission (SEC) through our website, as soon as reasonably practicable after they have

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been filed or furnished. These reports include, but are not limited to, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. Our SEC reports can be accessed through the “Investor Relations” section of our website under “Financials and Filings,” or through www.sec.gov . Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Also available on our website are printable versions of Core-Mark’s Audit Committee Charter, Compensation Committee Charter, Nominating and Corporate Governance Committee Charter, Code of Business Conduct and Ethics, Corporate Governance Guidelines and Principles and other corporate information. Copies of these documents may also be requested from:
Core-Mark International
395 Oyster Point Blvd, Suite 415
South San Francisco, CA 94080
Attention: Investor Relations
Corporate Governance-- Code of Business Conduct and Ethics and Whistle Blower Policy:
Our Code of Business Conduct and Ethics is designed to promote honest, ethical and lawful conduct by all employees, officers and directors and is available on the “Investor Relations” section of our website at www.core-mark.com under “Corporate Governance.”
Additionally, the Audit Committee of the Board of Directors (Audit Committee) of Core-Mark has established procedures to receive, retain, investigate and act on complaints and concerns of employees, stockholders and others regarding accounting, internal accounting controls and auditing matters, including complaints regarding attempted or actual circumvention of internal accounting controls or complaints regarding violations of our accounting policies. The procedures are also described on our website at www.core-mark.com under “Corporate Governance” in the “Investor Relations” section.


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ITEM 1A.      RISK FACTORS
Our business is subject to a variety of risks. Set forth below are certain of the important risks that we face, the occurrence of which may have a material effect on our business, financial condition or results of operations.
Risks Related to Our Business and Industry
We are dependent on the convenience retail industry, and our results of operations could suffer if it experiences an overall decline or consolidation.
The majority of our sales are made under purchase orders and short-term contracts with convenience retail stores which inherently involve significant risks. These risks include declining sales in the convenience retail industry due to general economic conditions, including rising gasoline prices, which may impact “in-store” retail sales, competition from grocery stores and other retail outlets, termination of customer relationships and consolidation of our customer base. Such events could cause us to experience decreases in revenues and put pressure on our margins. In addition, any decline in the convenience store industry may place a number of our convenience retail customers under financial stress, which could increase our credit risk and potential bad debt exposure.
Many of the markets in which we compete are highly competitive and we may lose market share and suffer a decline in sales and profitability in these markets if we are unable to outperform our competition.
Our distribution centers operate in highly competitive markets. We face competition from local, regional and national tobacco and consumable products distributors on the basis of service, price, reliability, delivery schedules, and variety of products offered. We also face competition from club stores and alternate sources that sell consumable products to convenience retailers. Some of our competitors, including McLane Company, Inc. (a subsidiary of Berkshire Hathaway Inc.), have substantial financial resources and long-standing customer relationships. In addition, heightened competition among our existing competitors, or by new entrants into the distribution market, could create additional competitive pressures that may 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.
Our failure to maintain relationships with large customers could potentially harm our business.
We have relationships with many large regional and national convenience store chains. While we expect to maintain these relationships for the foreseeable future, any termination, non-renewal or reduction in services that we provide to such customers could cause our revenues and operating results to suffer.
We may lose business if manufacturers or large retail customers convert to direct distribution of their products.
In the past, certain large manufacturers and customers have elected to engage in direct distribution or third party distribution of their products and eliminate wholesale distributors such as Core-Mark. If other manufacturers or retail customers make similar elections in the future, our revenues and profits would be adversely affected and there can be no assurance that we will be able to mitigate such losses.
Our business is sensitive to fuel prices and related transportation costs, which could adversely affect our business.
Our operating results are sensitive to, and may be adversely affected by, unexpected increases in fuel or other transportation-related costs, including costs from the use of third party carriers, temporary staff and overtime. Historically, we have been able to pass on a substantial portion of increases in our own fuel or other transportation costs to our customers in the form of fuel or delivery surcharges, but our ability to continue to pass through these increases, is not assured. If we are unable to continue to pass on fuel and transportation-related cost increases to our customers or do not realize the benefits we expect from converting a large percentage of our trucks to operate on natural gas or incur higher expenses if the price of diesel fuel decreases but the price of natural gas does not similarly decrease, our operating results could be materially and adversely affected.
Cigarette and consumable goods distribution is a low-margin business sensitive to inflation and deflation.
We derive most of our revenues from the distribution of cigarettes, other tobacco products, candy, snacks, fast food, groceries, fresh products, dairy, beverages, general merchandise and health and beauty care products. Our industry is characterized by a high volume of sales with low profit margins. Our food/non-food sales are generally priced based on the manufacturer’s cost of the product plus a percentage markup. As a result, our profit levels may be negatively impacted during periods of cost deflation or stagnation for these products, even though our gross profit as a percentage of the price of goods sold may remain relatively constant. In addition, periods of product cost inflation may have a negative impact on our gross profit margins with respect to sales of cigarettes because gross profit on cigarette sales are generally fixed on a cents per carton basis. Therefore, as cigarette prices increase, gross profit generally decreases as a percentage of sales. In addition, if the cost of the cigarettes that we purchase increases due to manufacturer price increases, reduced or eliminated manufacturer discounts and incentive programs or increases in applicable

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excise tax rates, our inventory carrying costs and accounts receivable could rise, placing pressure on our working capital requirements.
We rely on manufacturer discount and incentive programs and cigarette excise stamping allowances, and any material changes in these programs could adversely affect our results of operations.
We receive payments from the manufacturers on the products we distribute for allowances, discounts, volume rebates and other merchandising and incentive programs. These payments are a substantial benefit to our gross profit. The amount and timing of these payments are affected by changes in the programs by the manufacturers, our ability to sell specified volumes of a particular product, attaining specified levels of purchases by our customers and the duration of carrying a specified product. In addition, we receive discounts from certain taxing jurisdictions in connection with the collection of excise taxes. If the manufacturers or taxing jurisdictions change or discontinue these programs or change the timing of payments, or if we are unable to maintain the volume of our sales required by such programs, our results of operations could be negatively affected.
We depend on relatively few suppliers for a large portion of our products, and any interruptions in the supply of the products that we distribute could adversely affect our results of operations.
We obtain the products we distribute from third party suppliers. At December 31, 2015 , we had approximately 4,400 vendors and during 2015 we purchased approximately 64% of our products from our top 20 suppliers, with purchases from our top two suppliers, Philip Morris USA, Inc. and R.J. Reynolds Tobacco Company, representing approximately 29% and 17% of our purchases, respectively. We do not have any long-term contracts with our suppliers committing them to provide products to us. Our suppliers may not provide the products we distribute in the quantities we request on favorable terms, or at all. We are also subject to delays caused by interruption in production due to conditions outside our control, such as slow-downs or strikes by employees of suppliers, inclement weather, transportation interruptions, regulatory requirements and natural disasters. Our inability to obtain adequate supplies of the products we distribute could cause us to fail to meet our obligations to our customers and reduce the volume of our sales and profitability.
Our ability to operate effectively could be impaired by the risks and costs associated with expansion activities.
Market share growth is one of our key company initiatives. To accomplish this growth we have focused on strategic acquisitions and securing large regional and national customers as key elements of success. Any significant expansion activity comes with inherent risks. Acquisitions may entail various risks such as identifying suitable candidates, realizing acceptable rates of return on the investment, identifying potential liabilities, obtaining adequate financing, negotiating acceptable terms and conditions, and successfully integrating operations and converting systems post acquisition. Integrating a large new customer has similar risks of realizing acceptable returns on invested working capital, negotiating acceptable pricing and service levels, while managing resources and business interruptions as we integrate the new business into our current infrastructure. We may realize higher costs or lower margins than originally anticipated and may experience disruption to our base business, and may not realize the anticipated benefits or savings from expansion activities to the extent or in the time frame expected.
We may be subject to product liability claims and counterfeit product claims which could materially adversely affect our business.
As a distributor of food and consumer products, we face the risk of exposure to product liability claims in the event that the use of a product sold by us causes injury or illness. In addition, certain products that we distribute may be subject to counterfeiting. Our business could be adversely affected if consumers lose confidence in the safety and quality of the food and other products we distribute. Further, our operations could be subject to disruptions as a result of manufacturer recalls. This risk may increase as we continue to expand our distribution of fresh products. If we do not have adequate insurance, if contractual indemnification from the supplier or manufacturer of the defective, contaminated or counterfeit product is not available, or if a supplier or manufacturer cannot fulfill its indemnification obligations to us, the liability relating to such product claims or disruption as a result of recall efforts could materially adversely impact our results of operations.
We may not be able to achieve the expected benefits from the implementation of marketing initiatives.
We are continuously improving our competitive performance through a series of strategic marketing initiatives. The goal of this effort is to develop and implement a comprehensive and competitive business strategy, addressing the special needs of the convenience industry environment, increasing our market position within the industry and ultimately creating increased stockholder value. Customer acceptance of new marketing initiatives that we implement may not be as anticipated or competitive pressures may cause us to curtail or abandon these initiatives, resulting in lower revenue growth and unachieved cost savings.

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Maintaining our brand and reputation is necessary for the success of our business.
Our established brand and reputation within the market largely contributes to our success. Our current and future business could be negatively impacted if we were poorly represented or garnered negative publicity through various media channels, which include but are not limited to, print, broadcast, web-based, and social media. Brand value is based in large part on perceptions of subjective qualities, and even isolated incidents can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation. Even if the aforementioned situations were unfounded or not material to our business, these events could still diminish demand for our products and services and erode customer confidence. In the event that any of these events occur, they could have a negative impact on our results of operations and financial condition.
Our information technology systems may be subject to failure, disruptions, security breaches, malware, viruses, hacking or other cyber-attacks or we may fail to implement upgrades in a timely manner, which could compromise our ability to conduct business, seriously harm our business and adversely affect our financial results.
Our business is highly dependent on our customized enterprise information technology systems. We rely on our information technology systems and our internal information technology staff to maintain the information required to operate our distribution centers and to provide our customers with fast, efficient and reliable deliveries. We have taken steps to increase redundancy in our information technology systems and have disaster recovery plans in place to mitigate unforeseen events that could disrupt our systems’ service. However, if our systems fail or are not reliable, we may suffer disruptions in service to our customers and our results of operations could suffer.
We may upgrade and replace various components of our proprietary enterprise resource planning (ERP) system periodically with the goal of maintaining and improving overall functionality, performance and service. Beginning in 2014, we started the process of upgrading the financial component of our proprietary ERP system, and completed the implementation in February 2016. Some of our ERP system upgrades may include the implementation of leading software solutions or enhanced customizations to our existing systems. There are inherent risks associated with any system project and there can be no guarantee any implementation will be free of disruptions or other operational problems. As technology-based solutions become more integrated with our service offerings, our ability to service our customers could be impacted, creating additional competitive pressure and causing us to lose market share.
In addition, we retain sensitive data, including intellectual property, proprietary business information and personally identifiable information, in our secure data centers and on our networks. We may face threats to our data centers and networks of unauthorized access, security breaches and other system disruptions. Despite our security measures, our infrastructure may be vulnerable to attacks by experienced hackers or other disruptive events.
Computer malware, viruses, hacking and other cyber-attacks have become more prevalent and may occur on our systems in the future. Intruders may also take the form of parties that attempt to fraudulently induce employees or other users of our systems to disclose sensitive or confidential information or otherwise disrupt operations. Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of intellectual property, proprietary business information or personally identifiable information belonging to us or our customers, business partners or employees. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability and security affects the availability of our technical infrastructure and technology-based services. Any such failure may harm our reputation and our ability to retain existing customers and attract new customers and could impact our results of operation.
We may be subject to various claims and lawsuits that could result in significant expenditures.
The nature of our business exposes us to the potential for various claims and litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters. Any material litigation or a catastrophic accident or series of accidents could have a material adverse effect on our business, financial position and results of operations and cash flows.
We depend on attracting and retaining qualified labor including our senior management and other key personnel.
We substantially depend on the continued services and performance of our senior executive officers as named in our Proxy Statement and other key employees. We do not maintain key person life insurance policies on these individuals, and we do not have employment agreements with any of them. The loss of the services of any of our senior executive officers or other key personnel could harm our business.
We compete with other businesses in each of our markets with respect to attracting and retaining qualified employees. A shortage of qualified employees, especially drivers, in a market could require us to enhance our wage and benefit packages in order to compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees.

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Any such shortage of qualified employees could decrease our ability to effectively serve our customers and might lead to lower profits because of higher labor costs.
Unions may attempt to organize our employees.
As of December 31, 2015 , 276 , or 4% , of our employees were covered by collective bargaining agreements with labor organizations, which expire at various times. We cannot assure that we will be able to renew our respective collective bargaining agreements on favorable terms, that employees at other facilities will not unionize or that our labor costs will not increase. In addition, the United States National Labor Relations Board (NLRB) is becoming more active with the passage of administrative rules that could impact our ability to manage our labor force and wage successful campaigns preventing further unionization of our employees. To the extent we suffer business interruptions as a result of strikes or other work stoppages or slow-downs, or our labor costs increase and we are not able to recover such increases through increased prices charged to customers or offsets by productivity gains, our results of operations could be materially adversely affected.
Labor Costs, Shortages and Labor Relations.
Several recent decisions by the United States NLRB, have found employers who are franchisers and companies who use contract employees could be found to be "joint employers" with the franchisee or staffing firm, respectively. If this expanded definition of "joint employer" is upheld in the expected appeals of these decisions, it could result in us having responsibility for damages, reinstatement, back pay and penalties in connection with labor law violations by our use of workers provided by third-party staffing firms.
Employee health benefit costs represent a significant expense to us and may negatively affect our profitability.
With over 4,400 employees and their families participating in our health plans, our expenses relating to employee health benefits are substantial. In past years, we have experienced significant increases in certain of these costs, largely as a result of economic factors beyond our control, including, in particular, ongoing increases in health care costs well in excess of the rate of inflation. Increased participation in our health plans, continued increasing health care costs, as well as changes in laws, regulations and assumptions used to calculate health and benefit expenses, may adversely affect our business, financial position and results of operations. In addition, the Patient Protection and Affordable Care Act (ACA) may continue to increase our employee healthcare-related costs. The company has migrated a significant number of employees to our high deductible plan resulting in a reduction in our claims exposure and offsetting other costs related to ACA. While we have taken steps to minimize the impact of ACA, there is no guarantee our efforts will be successful.
Changes to minimum wage laws and other governmental legislation or regulations could increase our costs substantially.
As of December 31, 2015 , we had no employees who were paid under the minimum wage in their respective locations. Several bills have been introduced in the U.S. legislature over the past few years to increase the federal minimum wage. In addition, certain states have adopted or are considering adopting minimum wage statutes that exceed the federal minimum wage rate. Any increases in federal or state minimum wages could require us to increase the wages paid to our minimum wage employees and create pressure to raise wages for other employees who already earn above-minimum wages. If we are unable to pass these additional labor costs on to our customers in the form of increased prices or surcharges, our business and results of operations would be adversely affected.
If we are unable to comply with governmental regulations that affect our business or if there are substantial changes in these regulations, our business could be adversely affected.
As a distributor of food and other consumable products, we are subject to regulation by the FDA, Health Canada and similar regulatory authorities at the state, provincial and local levels. In addition, our employees operate tractor trailers, trucks, forklifts and various other powered material handling equipment and we are therefore subject to regulation by the U.S. and Canadian Departments of Transportation. Our operations are also subject to regulation by OSHA, the U.S. Drug Enforcement Administration and a myriad of other federal, state, provincial and local agencies. Each of these regulatory authorities has broad administrative powers with respect to our operations. Regulations, and the costs of complying with those regulations, have been increasing in recent years. If we fail to adequately comply with government regulations, we could experience increased inspections or audits, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased compliance costs. If any of these events were to occur, our results of operations would be adversely affected.
Natural disaster damage could have a material adverse effect on our business.
Our headquarters and several of our warehouses in California, as well as one of our data centers and one warehouse located near Vancouver, British Columbia, Canada, are 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, floods, and ice and snow storms. While we maintain insurance to cover us for such potential

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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 and results of operations.
Insurance and claims expenses could have a material adverse effect on us.
We have a combination of both self-insurance and high-deductible insurance programs for the risks arising out of the services we provide and the nature of our operations throughout North America, including claims exposure resulting from personal injury, property damage, business interruption and workers’ compensation. Workers’ compensation, automobile and general liabilities are determined using actuarial estimates of the aggregate liability for claims incurred and an estimate of incurred but not reported claims. Our accruals for insurance reserves reflect certain actuarial assumptions and management judgments, which are subject to a high degree of variability. If the number or severity of claims for which we are retaining risk increases, our financial condition and results of operations could be adversely affected. If we lose our ability to self-insure these risks, our insurance costs could materially increase and we may find it difficult to obtain adequate levels of insurance coverage.

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 2015 , approximately 68.0% of our net sales (which includes excise taxes) and 28.3% of our gross profit were generated from the distribution of cigarettes. Due to increases in the prices of cigarettes, restrictions on cigarette manufacturers’ marketing and promotions, increases in cigarette regulation and excise taxes, health concerns, increased pressure from anti-tobacco groups, the rise in popularity of tobacco alternatives, including electronic cigarettes, and other factors, cigarette consumption in the U.S. and Canada has been declining gradually over the past few decades. In most instances, tobacco alternatives, such as electronic cigarettes, are not subject to federal, state, provincial and local excise taxes like the sale of conventional cigarettes or other tobacco products. We expect consumption trends of legal cigarette products will continue to be negatively impacted by the factors described above. In addition, we expect rising prices may lead to a higher percentage of consumers purchasing cigarettes through illicit markets, over the internet and by other means designed to avoid payment of cigarette taxes. If we are unable to sell other products to make up for these declines in cigarette unit sales, our operating results may suffer.
Legislation, regulation and other matters are negatively affecting the cigarette and tobacco industry.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, distribution, sale, taxation and use of tobacco products imposed by governmental entities. Various jurisdictions have adopted or are considering legislation and regulations restricting displays and marketing of tobacco products, establishing fire safety standards for cigarettes, raising the minimum age to possess or purchase tobacco products, requiring the disclosure of ingredients used in the manufacture of tobacco products, imposing restrictions on public smoking, restricting the sale of tobacco products directly to consumers or other recipients over the internet and other tobacco product regulation. In addition, the FDA has been empowered to regulate changes to nicotine yields and the chemicals and flavors used in tobacco products (including cigars, pipe and e-cigarette products), require ingredient listings be displayed on tobacco products, prohibit the use of certain terms which may attract youth or mislead users as to the risks involved with using tobacco products, as well as limit or otherwise impact the marketing of tobacco products by requiring additional labels or warnings as well as pre-approval by the FDA. Such legislation and related regulation is likely to continue adversely impacting the market for tobacco products and, accordingly, our sales of such products. However, some state, local, municipal governments and agencies have not adopted legislation, regulations or policies which prohibit, restrict or discourage tobacco alternatives, such as electronic cigarettes, or the sale of such products to minors. Such disparate legislation and regulation for tobacco alternatives could adversely impact the market for regulated tobacco products.
In Canada, many provinces have enacted legislation authorizing and facilitating the recovery by provincial governments of tobacco-related health care costs from the tobacco industry by way of lawsuit. Some Canadian provincial governments have either already initiated lawsuits or indicated an intention that such lawsuits will be filed. It is unclear at this time how such restrictions and lawsuits may affect Core-Mark and its Canadian operations.
If excise taxes are increased or credit terms are reduced, our sales of cigarettes and other tobacco products could decline and our liquidity could be negatively impacted.
Cigarettes and tobacco products are subject to substantial excise taxes in the U.S. and Canada. Significant increases in cigarette-related taxes and/or fees have been proposed or enacted and are likely to continue to be proposed or enacted by various taxing jurisdictions within the U.S. and Canada as a means of increasing government revenues. These tax increases negatively impact consumption. Additionally, they may cause a shift in sales from premium brands to discount brands, illicit channels or tobacco alternatives, such as electronic cigarettes, as smokers seek lower priced options.

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Taxing jurisdictions have the ability to change or rescind credit terms currently extended for the remittance of tax that we collect on their behalf. If these excise taxes are substantially increased or credit terms are substantially reduced, it could have a negative impact on our liquidity. Accordingly, we may be required to obtain additional debt financing, which we may not be able to obtain on satisfactory terms or at all.
Our distribution of cigarettes and other tobacco products exposes us to potential liabilities.
In June 1994, the Mississippi attorney general brought an action against various tobacco industry members on behalf of the state to recover state funds paid for health care costs related to tobacco use. Most other states sued the major U.S. cigarette manufacturers based on similar theories. In November 1998, the major U.S. tobacco product manufacturers entered into a Master Settlement Agreement (MSA) with 46 states, the District of Columbia and certain U.S. territories. The other four states--Mississippi, Florida, Texas and Minnesota (non-MSA states)--settled their litigations with the major cigarette manufacturers by separate agreements. The MSA and the other state settlement agreements settled health care cost recovery actions and monetary claims relating to future conduct arising out of the use of, or exposure to, tobacco products, imposed a stream of future payment obligations on major U.S. cigarette manufacturers and placed significant restrictions on the ability to market and sell cigarettes. The payments required under the MSA result in the products sold by the participating manufacturers to be priced at higher levels than non-MSA manufacturers. In addition, the growth in market share of discount brands since the MSA was signed has had an adverse impact on the total volume of the cigarettes that we sell.
In connection with the MSA, we were indemnified by most of the tobacco product manufacturers from which we purchased cigarettes and other tobacco products for liabilities arising from our sale of the tobacco products that they supplied to us. Should the MSA ever be invalidated, we could be subject to substantial litigation due to our distribution of cigarettes and other tobacco products, and we may not be indemnified for such costs by the tobacco product manufacturers in the future. In addition, even if we are indemnified by cigarette manufacturers that are parties to the MSA, future litigation awards against such cigarette manufacturers could be so large as to prevent the manufacturers from satisfying their indemnification obligations.
T
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 had proposed legislation, which effectively could limit, or even eliminate, use of the last-in, first-out (LIFO) inventory method for financial and income tax purposes. Although the final outcome of any such proposals cannot be ascertained, the ultimate financial impact to us of the transition from LIFO to another inventory method could be material to our operating results.
Our pension plan is currently underfunded and we may 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 plan when the benefit obligation exceeds the fair value of the plan assets. As of December 31, 2015 , our pension plan was 87% funded and our balance sheet included $4.7 million in pension liabilities related to underfunded pension obligations. In 2013, we adopted a strategy to reduce the plan’s investment risk by reducing the allocation to return seeking assets and increasing the allocation to liability hedging assets over time with the intention of reducing volatility of the funded status and pension costs. Despite our expectation that this strategy will reduce the risk associated with the funding level of our pension plan, if the performance of the assets in our pension plan do not meet our expectations, or if other actuarial assumptions are modified, our future cash payments to our pension 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.
Since the fourth quarter of 2011, we have paid a quarterly cash dividend to our stockholders. We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are

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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 11% in 2015 and 12% in 2014 . We also incur a significant portion of our expenses in Canadian dollars. To the extent that we are unable to match revenues received in Canadian dollars with costs paid in the same currency, exchange rate fluctuations in Canadian dollars could have an adverse effect on our financial results. During times of a strengthening U.S. dollar, our reported sales and earnings from our Canadian operations will be reduced because the Canadian currency will be translated into fewer U.S. dollars. Conversely, during times of a weakening U.S. dollar, our reported sales and earnings from our Canadian operations will be increased because the Canadian currency will be translated into more U.S. dollars. U.S. GAAP requires that foreign currency transaction gains or losses on short-term intercompany transactions be recorded currently as gains or losses within the statement of operations. To the extent we incur losses on such transactions, our net income will be reduced. We currently do not hedge our Canadian foreign currency cash flows.
We may not be able to borrow additional capital to provide us with sufficient liquidity and capital resources necessary to meet our future financial obligations.
We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under a $200 million revolving credit facility (Credit Facility) as of December 31, 2015. On January 11, 2016, we entered into a seventh amendment to the Credit Facility which increased our Credit Facility from $200 million to $300 million. The Credit Facility, initially dated as of October 12, 2005, as amended or otherwise modified from time to time, is between us, as Borrowers, the Lenders named therein, and JPMorgan Chase Bank, N.A., as administrative agent (Credit Facility). The Credit Facility expires in May 2020 . While we believe our sources of liquidity are adequate, we cannot assure that these sources will be available or continue to provide us with sufficient liquidity and capital resources required to meet our future financial obligations, or to provide funds for our working capital, capital expenditures and other needs. As such, additional equity or debt financing 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, issue stock of subsidiaries, make investments, repurchase stock, create liens, enter into transactions with affiliates, merge or consolidate, or transfer and sell our assets. In addition, under our Credit Facility, under certain circumstances we are required to meet a fixed charge coverage ratio. Our ability to comply with this covenant may be affected by factors beyond our control and a breach of the covenant could result in an event of default under our Credit Facility, which would permit the lenders to declare all amounts incurred thereunder to be immediately due and payable and terminate their commitments to make further extensions of credit.
Our actual business and financial results could differ as a result of the accounting methods, estimates and assumptions that we use in preparing our financial statements, which may negatively impact our results of operations and financial condition.
To prepare financial statements in conformity with GAAP, management is required to exercise judgment in selecting and applying accounting methodologies and making estimates and assumptions. These methods, estimates, and assumptions are subject to uncertainties and changes, which affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include but are not limited to the following: allowance for doubtful accounts, provisions for income taxes, vendor rebates and promotional allowances, valuation of goodwill and long-lived assets, valuation of assets and liabilities in connection with business combinations, valuation of pension assets and obligations, stock-based compensation expense and accruals for estimated liabilities, including litigation and insurance reserves.

ITEM 1B.      UNRESOLVED STAFF COMMENTS
None.


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ITEM 2.      PROPERTIES
Our headquarters are located in South San Francisco, California, and consist of approximately 30,000 square feet of leased office space. We also lease approximately 20,000 square feet for use by our information technology and tax personnel in Richmond, British Columbia, approximately 6,000 square feet for use by our information technology personnel in Plano, Texas, and approximately 3,600 and 2,000 square feet of additional office space in Fort Worth, Texas and Phoenix, AZ, respectively. We lease approximately 4.1 million square feet and own approximately 0.6 million  square feet of distribution space.
Distribution Center Facilities by City and State of Location (1)  
Albuquerque, New Mexico
Las Vegas, Nevada
Spokane, Washington
Atlanta, Georgia
Leitchfield, Kentucky
Tampa, Florida
Bakersfield, California
Los Angeles, California
Whitinsville, Massachusetts
Corona, California (2)
Minneapolis, Minnesota
Wilkes-Barre, Pennsylvania
Denver, Colorado
Portland, Oregon
Calgary, Alberta
Forrest City, Arkansas (4)
Sacramento, California (3)
Toronto, Ontario (5)
Fort Worth, Texas
Salt Lake City, Utah
Vancouver, British Columbia
Glenwillow, Ohio
Sanford, North Carolina
Winnipeg, Manitoba
Hayward, California
 
 
 
(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 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.
(5)
This facility includes a distribution center and our Canadian consolidation operations.
We also operate distribution centers on behalf of two of our major customers: one in Phoenix, Arizona (for Couche-Tard), and one in San Antonio, Texas (for CST Brands, Inc.). Each facility is leased or owned by the specific customer solely for their use and operated by Core-Mark.
During 2015, we transitioned our customers from our U.S. distribution center at Grants Pass, Oregon to two of our existing U.S. distribution centers to maximize supply chain efficiencies and optimize product sales.

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Table of Contents

ITEM 3.
LEGAL PROCEEDINGS
The Company and its insurers are plaintiffs 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 its 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. On April 29, 2013, the Colorado Supreme Court denied Sonitrol’s appeal and the case was returned to the District Court to resolve the sole issue of damages. On April 11, 2014, the damages trial concluded with a jury award of $2.75 million in favor of the Company and its insurers, finding that Sonitrol was liable for damages related only to the burglary and not the subsequent arson.  The District Court denied the Company’s motion for post-judgment relief on June 26, 2014.  The Company and its insurers appealed the District Court’s decision and on February 11, 2016 , the Appellate Court denied the Company's and its insurers' appeal and dismissed Sonitrol’s cross-appeal, upholding the jury award of $2.75 million in favor of the Company and its insurers. The Company is unable to predict when this litigation will be finally resolved and its ultimate outcome.  Any monetary recovery from this lawsuit will be recognized only if and when it is finally paid to the Company.

ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.


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Table of Contents

PART II

ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

Market and Stockholders
Our common stock trades on the NASDAQ Global Market under the symbol “CORE.” According to the records of our transfer agent, we had 1,866 stockholders of record as of February 12, 2016 .
The following table provides the range of high and low sales prices of our common stock as reported by NASDAQ and dividends declared per share for the periods indicated:
 
Market Prices
 
Dividend Declared
 
2015
 
2014
 
Year
 
Low
Price
 
High
Price
 
Low
Price
 
High
Price
 
2015
 
2014
4th Quarter
$
64.44

 
$
90.60

 
$
50.67

 
$
64.01

 
$
0.16

 
$
0.13

3rd Quarter
58.96

 
66.52

 
43.47

 
54.57

 
0.13

 
0.11

2nd Quarter
52.61

 
65.43

 
37.03

 
46.59

 
0.13

 
0.11

1st Quarter
58.51

 
71.36

 
35.00

 
39.53

 
0.13

 
0.11

We paid dividends of $12.8 million and $10.7 million in 2015 and 2014 , respectively. Our Credit Facility, as of December 31, 2015 , places certain limits on our ability to pay cash dividends on our common stock, including a $100.0 million maximum payment over the term of the Credit Facility (see  Note 8 - Long-term Debt to our consolidated financial statements included in this Form 10-K for additional details on the Credit Facility). Our intentions are to continue increasing our dividends per share over time; however, the payment of any future dividends will be determined by our Board of Directors in light of then existing conditions, including our earnings, financial condition and capital requirements, strategic alternatives, restrictions in financing agreements, business conditions and other factors.

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Table of Contents

PERFORMANCE COMPARISON
The graph below presents a comparison of cumulative total return to stockholders for Core-Mark’s common stock at the end of each year from 2010 through 2015 , as well as the cumulative total returns of the NASDAQ Non-Financial Stock Index, the Russell 2000 Index, the Standard and Poor's (S&P) SmallCap 600 Index and a peer group of companies (Performance Peer Group). During the third quarter of 2015, the Company was added to the S&P SmallCap 600 Index. The Company also remains on the Russell 2000 Index.
Cumulative total return to stockholders is measured by the change in the share price for the period, plus any dividends, divided by the share price at the beginning of the measurement period. Core-Mark’s cumulative stockholder return is based on an investment of $100 on December 31, 2010 , and is compared to the total return of the NASDAQ Non-Financial Stock Index, the S&P SmallCap 600 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 and the S&P SmallCap 600 Index since it includes primarily companies with relatively small market capitalization similar to us.
The companies composing the Performance Peer Group are Sysco Corp. (SYY), The Chef’s Warehouse, Inc. (CHEF), United Natural Foods, Inc. (UNFI) and AMCON Distributing Co. (DIT).

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CORE-MARK, NASDAQ NON-FINANCIAL STOCK, S&P SMALLCAP 600, RUSSELL 2000 INDEXES AND THE PERFORMANCE PEER GROUP

 
 
Investment Value at
 
 
12/31/10
 
12/31/11
 
12/31/12
 
12/31/13
 
12/31/14
 
12/31/15
CORE
 
$
100.00

 
$
111.81

 
$
136.58

 
$
221.09

 
$
364.24

 
$
486.07

Russell 2000
 
$
100.00

 
$
95.82

 
$
111.49

 
$
154.78

 
$
162.35

 
$
155.18

NASDAQ Non-financial Index
 
$
100.00

 
$
99.87

 
$
117.06

 
$
163.99

 
$
188.70

 
$
202.24

S&P SmallCap 600
 
$
100.00

 
$
101.02

 
$
117.51

 
$
166.05

 
$
175.61

 
$
172.15

Performance Peer Group
 
$
100.00

 
$
103.87

 
$
118.02

 
$
144.60

 
$
160.25

 
$
156.22


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Table of Contents

Issuer Purchases of Equity Securities
Our Board of Directors authorized a share repurchase program that may be discontinued or amended at any time. Shares repurchased under the program were made in open market and the timing and amount of the purchases are based on market conditions, our cash and liquidity requirements, relevant securities laws and other factors. The program has no expiration date and expires when the amount authorized has been expended or the Board withdraws its authorization.
In 2015 , we repurchased 151,183 shares of common stock for a total cost of $9.2 million , or an average price of $60.70 per share. In 2014 , we repurchased 175,917 shares of common stock for a total cost of $8.0 million , or an average price of $45.49 per share. As of December 31, 2015 , we had $ 11.5 million available for future share repurchases under the program.
The following table provides the repurchases of common stock shares during the three months ended December 31, 2015 :
Calendar Month in which
purchases were made:
 
Total Number of Shares Repurchased
 
Average Price Paid per Share (1)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
(in millions)
October 1, 2015 to October 31, 2015
 
2,764

 
$
64.88

 
2,764

 
$
11.5

November 1, 2015 to November 30, 2015
 

 

 

 

December 1, 2015 to December 31, 2015
 

 

 

 

Total repurchases for the three months ended December 31, 2015
 
2,764

 
$
64.88

 
2,764

 
$
11.5

 
 
 
 
 
 
 
 
 
_____________________________________________
(1)
Includes related transaction fees.


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Table of Contents

ITEM 6.      SELECTED FINANCIAL DATA
Basis of Presentation
The selected consolidated financial data for the five years from 2011 to 2015 are derived from our audited consolidated financial statements included in our Annual Reports on Form 10-K or Form 10-K/A. The following financial data should be read in conjunction with the consolidated financial statements and notes thereto and with Item 7 - Management s Discussion and Analysis of Financial Condition and Results of Operations.
SELECTED CONSOLIDATED FINANCIAL DATA
 
Core-Mark Holding Company, Inc.
 
Year Ended December 31,
(in millions except per share amounts)
2015 (1)
 
2014 (2)
 
2013
 
2012 (3)
 
2011 (4)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
11,069.4

 
$
10,280.1

 
$
9,767.6

 
$
8,892.4

 
$
8,114.9

Gross profit (5)
637.9

 
573.7

 
537.1

 
476.8

 
434.1

Warehousing and distribution expenses (5)
352.6

 
318.4

 
297.1

 
262.7

 
234.6

Selling, general and administrative expenses
196.0

 
184.4

 
168.3

 
153.7

 
150.8

Amortization of intangible assets
2.6

 
2.6

 
2.7

 
3.0

 
3.0

Income from operations
86.7

 
68.3

 
69.0

 
57.4

 
45.7

Interest expense, net (6)
2.0

 
1.8

 
2.2

 
1.8

 
2.0

Foreign currency transaction losses
1.8

 
0.1

 
0.8

 
0.2

 
0.5

Net income
51.5

 
42.7

 
41.6

 
33.9

 
26.2

Per Share Data:
 
 
 
 
 
 
 
 
 
Basic net income per common share
$
2.23

 
$
1.85

 
$
1.81

 
$
1.48

 
$
1.15

Diluted net income per common share
$
2.21

 
$
1.83

 
$
1.79

 
$
1.46

 
$
1.12

Shares Used to Compute Net Income Per Share:
 
 
 
 
 
 
 
 
 
Basic
23.1

 
23.1

 
23.0

 
23.0

 
22.8

Diluted
23.3

 
23.3

 
23.2

 
23.2

 
23.4

Cash Dividends Declared Per Common Share (7)
$
0.55

 
$
0.46

 
$
0.30

 
$
0.45

 
$
0.09

Other Financial Data:
 
 
 
 
 
 
 
 
 
Excise taxes (8)
$
2,211.7

 
$
2,110.3

 
$
2,050.8

 
$
1,987.0

 
$
1,951.5

Cigarette inventory holding gains (9)
10.1

 
8.2

 
9.0

 
7.8

 
8.2

Candy inventory holding gains (10)

 
6.0

 

 

 
5.9

Cigarette tax stamp inventory holding gains, net (11)
8.5

 

 

 

 

OTP tax items, net (12)
1.7

 
7.5

 

 

 
0.7

LIFO expense (13)
1.9

 
16.3

 
8.7

 
12.3

 
18.3

Depreciation and amortization (14)
37.9

 
32.0

 
27.2

 
25.3

 
22.4

Stock-based compensation
8.7

 
6.1

 
4.6

 
5.8

 
5.5

Capital expenditures (15)
30.3

 
53.9

 
18.0

 
28.6

 
24.1

Adjusted EBITDA  (16)
135.2

 
122.7

 
109.5

 
100.8

 
91.9

 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
1,077.3

 
$
1,029.6

 
$
956.8

 
$
919.2

 
$
870.2

Long-term obligations (17)
60.4

 
68.2

 
57.6

 
84.7

 
63.1

______________________________________________

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(1)
Karrys Bros., Limited was acquired in February 2015 and the results of operations have been included in the selected consolidated financial data since the date of the acquisition.
(2)
The selected consolidated financial data includes the results of operations of the Glenwillow, Ohio division, which commenced operations in August 2014.
(3)
J.T. Davenport & Sons, Inc. was acquired in December 2012 and the results of operations have been included in the selected consolidated financial data from that point forward.
(4)
Forrest City Grocery Company was acquired in May 2011 and the results of operations have been included in the selected consolidated financial data from that point forward. The selected consolidated financial data also includes the results of operations of the Tampa, Florida division, which commenced operations in September 2011.
(5)
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.
(6)
Interest expense, net, is reported net of interest income.
(7)
On October 19, 2011, we announced the commencement of a quarterly dividend program. In lieu of the first quarter 2013 dividend, the Board of Directors declared an accelerated cash dividend of $0.10 per common share on December 20, 2012.
(8)
State, local and provincial excise taxes (predominantly cigarettes and tobacco) paid by us are included in net sales and cost of goods sold.
(9)
Cigarette inventory holding gains represent income related to cigarette inventories on hand at the time cigarette manufacturers increase their prices. Such increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The higher gross profits are referred to as inventory holding gains. 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.
(10)
Candy inventory holding gains represent income related to candy inventories on hand at the time candy manufacturers increase their prices. Such increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The higher gross profits are referred to as inventory holding gains. Although we have realized candy inventory holding gains in two of the last five years, this income is not predictable and is dependent on inventory levels and the timing of manufacturer price increases.
(11)
Cigarette tax stamp inventory holding gains represent income related to tax stamp inventories on hand that may be realized at the time taxing jurisdictions increase their excise taxes, depending on the statutory requirements relating to the inventory on hand at the time such excise tax increases. Such tax increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The incremental gross profits resulting from such tax increases are referred to as inventory holding gains. Although we have realized a cigarette tax stamp inventory holding gain of $9.0 million , offset by $0.5 million in associated fees, in the current year, this income is not predictable and is dependent on inventory levels and the aforementioned statutory requirements.
(12)
In 2015 , we received Other Tobacco Products (OTP) tax refunds of $1.8 million related to prior years’ taxes, offset by $0.1 million related expenses. In 2014 , we received OTP tax refunds of $9.0 million related to prior years’ taxes, offset by $1.0 million related expenses and a probable OTP tax assessment of $0.5 million . We received an OTP tax settlement of $0.8 million in 2011, offset by $0.1 million related expenses. OTP tax settlements were zero for both 2013 and 2012.
(13)
The decrease in LIFO expense for 2015 was due primarily to a decrease in the PPI for certain product categories we use to measure food/non-food LIFO expense as published by the Bureau of Labor Statistics.
(14)
Depreciation and amortization includes depreciation on property and equipment and amortization of purchased intangible assets.
(15)
Capital expenditures in 2014 include expenses for our new distribution center in Ohio and an investment in advanced ordering technology for customers.
(16)
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 net interest expense, provision for income taxes, depreciation and amortization, LIFO expense, stock-based compensation expense and net foreign currency transaction gains or losses.
Below is a reconciliation of Adjusted EBITDA to net income (in millions):
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Net income
$
51.5

 
$
42.7

 
$
41.6

 
$
33.9

 
$
26.2

Interest expense, net
2.0

 
1.8

 
2.2

 
1.8

 
2.0

Provision for income taxes
31.4

 
23.7

 
24.4

 
21.5

 
17.0

Depreciation and amortization
37.9

 
32.0

 
27.2

 
25.3

 
22.4

LIFO expense
1.9

 
16.3

 
8.7

 
12.3

 
18.3

Stock-based compensation expense
8.7

 
6.1

 
4.6

 
5.8

 
5.5

Foreign currency transaction losses, net
1.8

 
0.1

 
0.8

 
0.2

 
0.5

Adjusted EBITDA
$
135.2

 
$
122.7

 
$
109.5

 
$
100.8

 
$
91.9


(17)
Includes amounts borrowed and long-term capital lease obligations.

22


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 approximately 36,500 customer locations in the U.S. and Canada. Our customers include traditional convenience stores, drug stores, grocery stores, liquor stores and other specialty and small format stores that carry convenience products. Our product offering includes cigarettes, other tobacco products (OTP), candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health and beauty care products. We operate a network of 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 2015 Results
In 2015 , we continued to grow market share and increase our food/non-food sales and gross profit by leveraging our “Fresh” product solutions, driving our Vendor Consolidation Initiative (VCI) and providing category management expertise in order to make our customers more relevant and profitable. In addition, during 2015 we secured supply agreements with two significant customers and several other regional customers which we will begin servicing in 2016.
Net sales in 2015 increased 7.7% or $ 789.3 million , to $ 11,069.4 million compared to $10,280.1 million for 2014 . Excluding the effects of foreign currency fluctuations and one additional selling day in 2015 , net sales increased by approximately 9.1% driven primarily by market share gains, including the acquisition of Karrys Bros., Limited (Karrys Bros.), and sales growth from existing customers.
We believe lower fuel prices contributed to higher sales in the convenience industry during 2015.
Cigarette sales, which increased 8.4% , benefitted from market share gains and cigarette price inflation, whereas the success of our core strategies continued to drive the increase in our food/non-food sales, which increased 6.1% in 2015 compared to the same period in 2014 . However, we believe that the growth in our food/non-food sales during 2015 was impacted by a shift in consumer spending preferences away from certain traditional product categories, such as candy and grocery, and the effects of foreign currency changes.
Gross profit in 2015 increased $ 64.2 million , or 11.2% , to $ 637.9 million from $573.7 million during 2014 , driven primarily by an increase in food/non-food sales and gross margins. LIFO expense decreased $14.4 million in 2015 compared to 2014 , due primarily to a decrease in the Producer Price Index (PPI) for certain product categories. Since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices. Remaining gross profit (1) , which excludes LIFO expense, inventory holding gains and OTP tax refunds, increased $51.6 million , or 9.1% , in 2015 .
Operating expenses increased $45.8 million , or 9.1% , in 2015 to $551.2 million from $505.4 million in 2014. This increase includes $15.9 million in incremental expenses, primarily for our Ohio division and Karrys Bros. In addition, we saw a 5.9% increase in the amount of cubic feet of product handled and a 9.4% increase in the number of customer deliveries. We also incurred approximately $6.0 million in costs associated with infrastructure, people and systems to support future growth and $1.1 million related to on-boarding our new customers we began servicing in the first quarter of 2016.
Net income was $ 51.5 million in 2015 compared to $42.7 million in 2014 . Net income excluding LIFO expense (1) was $52.7 million for both 2015 and 2014. Pre-tax income for 2015 includes incremental inventory holding gains of $4.4 million, offset by a reduction in pre-tax income from OTP tax refunds of $5.8 million, net of fees, compared with 2014. In addition, pre-tax income for 2015 includes incremental start-up and integration costs and additional investment spending to support our growth, as discussed above, and a $1.7 million increase in foreign currency transaction losses. In addition our provision for income taxes was higher in 2015, stemming primarily from lower LIFO expense compared to 2014. Adjusted EBITDA (1) increased $12.5 million , or 10.2% , to $135.2 million in 2015 from $122.7 million in 2014 .
________________________________________  
(1)
Remaining gross profit, net income excluding LIFO expense and Adjusted EBITDA are non-GAAP financial measures and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the

23

Table of Contents

United States of America (GAAP) (see the calculation of Remaining Gross Profit in "Results of Operations" and Adjusted EBITDA in “Liquidity and Capital Resources” below). Net income excluding LIFO expense represents FIFO net income adjusted for related tax expense effects.

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 a supply channel to offer high quality fresh foods and optimize their consumer product offering. We believe each of these strategies, when adopted, will increase the retailers’ profits.
Some of our more recent expansion activities include:
In October 2015, we signed a five year agreement with Murphy USA to be the primary wholesale distributor to over 1,300 stores located in 23 states across the southwest, southeast and midwest United States. Services under this contract began in the first quarter of 2016 and are expected to create efficiencies and a strategic supply chain relationship for Murphy USA.
In October 2015, we signed a five year supply agreement with 7-Eleven, Inc. to service approximately 900 stores in three western regions. Core-Mark will be the primary wholesale distributor delivering a wide range of products to these stores out of three of our divisions - Las Vegas, Nevada; Salt Lake City, Utah; and Sacramento, California.
In July 2015, we amended our contract with Rite Aid to expand our service to include other product categories in addition to the frozen, refrigerated, bakery and fresh food categories, which we began delivering in June 2014. We are committed to our long-term partnership with Rite Aid to help them maximize supply chain efficiencies and optimize product sales to meet the needs of their customers.
In February 2015, we acquired substantially all the assets of Karrys Bros., a regional distributor servicing customers in Ontario, Canada, and the surrounding provinces. The acquisition of Karrys Bros. has provided the opportunity to expand our market share in eastern Canada and is expected to contribute to the leverage of fixed costs and improved profitability in our Toronto division.
In September 2014, we opened a new distribution facility in Glenwillow, Ohio to support customer growth in this region. This facility currently services approximately 800 Rite Aid stores, 500 stores transferred from other Core-Mark distribution centers to gain transportation efficiencies and approximately 100 new customer locations.
During 2015, we continued to grow sales and margins in our “Fresh” categories resulting from improving our customers’ product assortment and in-store marketing efforts. Sales of our fresh categories grew approximately 17% in 2015 compared to the same period in 2014. We continue to focus on fresh and healthy offerings because we believe that over the long-term, the trend is for the convenience consumer to shift buying preferences to these types of items. We benefit from this shift due to the higher margins of these products compared to the other merchandise we distribute. Industry experts have indicated that consumers are making more shopping trips related to fresh food and that perishable foods will serve a more important role in the convenience retail channel in the future. We believe our strategies have helped position us and our customers to benefit from these trends.

Other Business Developments
Dividends
The Board of Directors approved the following cash dividends in 2015 (in millions, except per share data)
Declaration Date
 
Dividends Per Share
 
Record Date
 
Cash Payment Amount (1)
 
Payment Date
February 27, 2015
 
$0.13
 
March 12, 2015
 
$3.1
 
March 26, 2015
May 7, 2015
 
$0.13
 
May 22, 2015
 
$3.0
 
June 15, 2015
August 6, 2015
 
$0.13
 
August 21, 2015
 
$3.0
 
September 14, 2015
November 5, 2015
 
$0.16
 
November 20, 2015
 
$3.7
 
December 15, 2015
______________________________________________
(1) Includes cash payments on declared dividends and payments made on RSUs vested subsequent to the payment date.

24

Table of Contents

We paid dividends of $12.8 million and $10.7 million in 2015 and 2014 , respectively.
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 2015 , we repurchased 151,183 shares of common stock at an average price of $60.70 compared to repurchases of 175,917 shares of common stock at an average price of $45.49 in 2014 . As of December 31, 2015 and 2014 , we had $11.5 million and $20.7 million , respectively, available for future share repurchases under the program.

Results of Operations
Comparison of 2015 and 2014 (in millions) (1) :
 
 
 
2015
 
2014
 
Increase (Decrease)
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
789.3

 
$
11,069.4

 
100.0
 %
 
 %
 
$
10,280.1

 
100.0
 %
 
 %
Net sales — Cigarettes
586.5

 
7,528.5

 
68.0

 
62.7

 
6,942.0

 
67.5

 
61.9

Net sales — Food/non-food
202.8

 
3,540.9

 
32.0

 
37.3

 
3,338.1

 
32.5

 
38.1

Net sales, less excise taxes (2)
687.9

 
8,857.7

 
80.0

 
100.0

 
8,169.8

 
79.5

 
100.0

Gross profit (3)
64.2

 
637.9

 
5.8

 
7.2

 
573.7

 
5.6

 
7.0

Warehousing and
 
 
 
 
 
 
 
 
 
 
 
 
 
    distribution expenses
34.2

 
352.6

 
3.2

 
4.0

 
318.4

 
3.1

 
3.9

Selling, general and
 
 
 
 
 
 
 
 
 
 
 
 
 
    administrative expenses
11.6

 
196.0

 
1.8

 
2.2

 
184.4

 
1.8

 
2.3

Amortization of
 
 
 
 
 
 
 
 
 
 
 
 
 
    intangible assets

 
2.6

 

 

 
2.6

 

 

Income from operations
18.4

 
86.7

 
0.8

 
1.0

 
68.3

 
0.7

 
0.8

Interest expense
0.1

 
(2.5
)
 

 

 
(2.4
)
 

 

Interest income
(0.1
)
 
0.5

 

 

 
0.6

 

 

Foreign currency transaction
 
 
 
 
 
 
 
 
 
 
 
 
 
    losses, net
1.7

 
(1.8
)
 

 

 
(0.1
)
 

 

Income before taxes
16.5

 
82.9

 
0.7

 
0.9

 
66.4

 
0.6

 
0.8

Net income
8.8

 
51.5

 
0.5

 
0.6

 
42.7

 
0.4

 
0.5

Adjusted EBITDA  (4)
12.5

 
135.2

 
1.2

 
1.5

 
122.7

 
1.2

 
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”).
Net Sales. Net sales for 2015 increased by $789.3 million , or 7.7% , to $11,069.4 million from $10,280.1 million in 2014 . Excluding the effects of foreign currency fluctuations and one additional selling day, net sales increased approximately 9.1%, due primarily to a 6.6% increase in cigarette carton sales, an increase in the average sales price per carton, and incremental food/non-

25


food sales driven primarily by the continued success of our core strategies. In addition, net sales in 2015 benefited from lower fuel prices, which we believe contributed to higher sales in the convenience industry.
Net Sales of Cigarettes. Net sales of cigarettes for 2015 increased by $586.5 million , or 8.4% , to $7,528.5 million from $6,942.0 million in 2014 . Excluding the effects of foreign currency fluctuations and one additional selling day, cigarette sales increased by approximately 9.9% driven primarily by a 6.6% increase in carton sales and a 3.5% increase in the average sales price per carton due primarily to increases in manufacturers' prices. Cigarette carton sales increased by 6.4% in the U.S. and by 9.1% in Canada. The increase in cigarette carton sales was due primarily to market share gains, including the acquisition of Karrys Bros. in Canada, and an increase in cartons sold to existing customers.
Total net cigarette sales as a percentage of total net sales were 68.0% in 2015 compared to 67.5% for 2014 .
Despite recent increases in our cigarette sales, we believe long-term cigarette consumption will continue to be impacted by rising prices, legislative actions, diminishing social acceptance and sales through illicit markets. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability, thus mitigating the effects of the decline to the distributor. In addition, industry data indicates that convenience retailers are more than offsetting cigarette volume profit declines through higher sales of food/non-food products. We expect this trend to continue as the convenience industry adjusts to consumer demands.
Net Sales of Food/Non-food Products. Net sales of food/non-food products for 2015 increased $202.8 million , or 6.1% , to $3,540.9 million from $3,338.1 million in 2014 .
The following table provides net sales by product category for our food/non-food products (in millions) (1) :
 
2015
 
2014
 
Increase
Product Category
Net Sales
 
Net Sales
 
Amounts
 
Percentage
Food
$
1,586.1

 
$
1,462.0

 
$
124.1

 
8.5
%
Candy
557.0

 
534.3

 
22.7

 
4.2
%
Other tobacco products
870.3

 
827.5

 
42.8

 
5.2
%
Health, beauty & general
368.8

 
361.0

 
7.8

 
2.2
%
Beverages
156.6

 
151.8

 
4.8

 
3.2
%
Equipment/other
2.1

 
1.5

 
0.6

 
40.0
%
Total Food/Non-food Products
$
3,540.9

 
$
3,338.1

 
$
202.8

 
6.1
%
______________________________________________
( 1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
Excluding the effects of foreign currency fluctuations and one additional selling day, food/non-food sales for 2015 increased by approximately 7.5%, driven primarily by incremental sales to existing customers and market share gains including the acquisition of Karrys Bros. Sales generated from VCI, Fresh and Focused Marketing Initiatives (FMI) were the primary drivers of the increase in net sales to existing customers. Net sales in our Food category, which increased 8.5% for 2015 , contributed over 60% of the 6.1% increase in food/non-food sales. In addition, sales of smokeless tobacco products continue to be the primary driver of the increase in sales in our OTP category.  We believe the overall trend toward the increased use of smokeless tobacco products will continue and will help offset the impact of the expected continued decline in cigarette consumption over the long term.  This shift could potentially result in improved profitability over time due to the profit margins associated with smokeless tobacco products, which are generally higher than those we earn on cigarette sales.
Total net food/non-food product sales as a percentage of total net sales decreased to 32.0% in 2015 compared to 32.5% in 2014 .

26


Gross Profit. Gross profit represents the amount of profit after deducting cost of goods sold from net sales during the period. Inventory holding gains represent incremental revenues whereas vendor incentives, OTP tax refunds and changes in LIFO reserves are components of cost of goods sold and therefore part of our gross profit. Gross profit in 2015 increased by $64.2 million , or 11.2% to $637.9 million from $573.7 million for 2014 due primarily to increases in sales and gross margins in our food/non-food category. Gross profit for 2015 also benefitted from a $14.4 million decrease in LIFO expense, cigarette tax stamp inventory holding gains of approximately $9.0 million related to increases in excise taxes by certain jurisdictions in the third quarter this year and $1.8 million in refunds of excise taxes on OTP from prior years. The decrease in LIFO expense was due primarily to a decrease in the PPI for certain product categories we use to measure food/non-food LIFO expense as published by the Bureau of Labor Statistics. Since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor Statistics PPI used to estimate and record our book LIFO expense ( see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements). In 2014 , gross profit included $8.5 million in OTP tax refunds, net of tax assessments, and $6.0 million of candy inventory holding gains.
Gross profit margin was 5.76% and 5.58% of total net sales for 2015 and 2014 , respectively.
Distributors such as Core-Mark may, from time to time, earn higher gross profits on inventory and excise tax stamp quantities on hand at the time manufacturers' increase their prices or when states, localities or provinces increase their excise taxes. Such increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The higher gross profits are referred to as inventory holding gains. However, significant increases in cigarette product costs and cigarette excise taxes adversely impact our gross profit as a percentage of net sales, because we are paid on a cents per carton basis for cigarette sales. Conversely, we generally benefit from food/non-food price increases, because product prices for these categories are usually determined using a percentage markup on cost of goods sold.
Our cigarette and cigarette tax stamp inventory holding gains were $19.1 million , or 3.0% , of our gross profit for 2015 compared to $8.2 million , or 1.4% , of our gross profit for 2014 . We expect cigarette manufacturers will continue to raise prices as carton sales decline in order to maintain or enhance their overall profitability and the various taxing jurisdictions will raise excise taxes to make up for lost tax dollars related to consumption declines.
In addition, in 2014 , we recognized $6.0 million , or 1.1% , of our gross profit for candy inventory holding gains resulting from manufacturer price increases. These gains were recognized as the inventory was sold. Although we have realized significant candy inventory holding gains in two of the last five years, this income is not predictable and is dependent on inventory levels and the timing of manufacturer price increases.
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2015 and 2014 (in millions) (1) :
 
 
 
2015
 
2014
 
Increase (Decrease)
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
789.3

 
$
11,069.4

 
100.0
 %
 
 %
 
$
10,280.1

 
100.0
 %
 
 %
Net sales, less excise taxes (2)
687.9

 
8,857.7

 
80.0

 
100.0

 
8,169.8

 
79.5

 
100.0

Components of gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cigarette inventory holding gains (3)
$
1.9

 
$
10.1

 
0.09
 %
 
0.11
 %
 
$
8.2

 
0.08
 %
 
0.10
 %
Candy inventory holding gains (4)
(6.0
)
 

 

 

 
6.0

 
0.06

 
0.08

Cigarette tax stamp inventory holding gains (5)
9.0

 
9.0

 
0.08

 
0.10

 

 

 

OTP tax items (6)
(6.7
)
 
1.8

 
0.02

 
0.02

 
8.5

 
0.08

 
0.10

LIFO expense (7)
(14.4
)
 
(1.9
)
 
(0.02
)
 
(0.02
)
 
(16.3
)
 
(0.16
)
 
(0.20
)
Remaining gross profit (8)
51.6

 
618.9

 
5.59

 
6.99

 
567.3

 
5.52

 
6.94

Gross profit
$
64.2

 
$
637.9

 
5.76
 %
 
7.20
 %
 
$
573.7

 
5.58
 %
 
7.02
 %
______________________________________________
(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

27


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 $8.7 million and $1.4 million , respectively, for 2015 , compared to $7.2 million and $1.0 million , respectively, for 2014 .
(4)
For 2014 , we recognized approximately $6.0 million in candy inventory holding gains resulting from manufacturer price increases. The amount of candy inventory holding gains attributable to the U.S. and Canada for 2014 were $5.4 million and $0.6 million , respectively.
(5)
For 2015 , we recognized cigarette tax stamp inventory holding gains in the U.S. of $9.0 million , resulting from the increase in the excise tax rates of certain jurisdictions.
(6)
For 2015 , we received OTP tax refunds of $1.8 million related to prior years’ taxes. For 2014 , we received OTP tax refunds of $9.0 million related to prior years’ taxes, offset by an OTP tax assessment of $0.5 million .
(7)
The decrease in LIFO expense was due primarily to a decrease in the PPI for certain product categories we use to measure food/non-food LIFO expense as published by the Bureau of Labor Statistics. Since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor Statistics PPI used to estimate and record our book LIFO expense ( see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements).
(8)
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 $51.6 million , or 9.1% , to $618.9 million for 2015 from $567.3 million for 2014 . In 2015 , remaining gross profit margin was 5.59% of total net sales compared to 5.52% in 2014 . The seven basis points increase in remaining gross profit margin was driven primarily by an increase in food/non-food margins, resulting largely from the continued success of our marketing strategies, which improved overall margins by 10 basis points, together with an increase in cigarette margins, which contributed two basis points and offset by five basis points related primarily to increases in cigarette manufacturers' prices.
Cigarette remaining gross profit per carton increased by 2.5% in 2015 compared to 2014 due primarily to a shift in carton sales to more profitable geographies and higher manufacturers’ discounts earned as a result of price increases, offset partially by the unfavorable impact of foreign currency fluctuations.
Food/non-food remaining gross profit increased $36.5 million , or 8.9% in 2015 compared to 2014 . Food/non-food remaining gross profit margin increased 33 basis points to 12.61% in 2015 compared with 12.28% for the same period in 2014 driven primarily by sales growth in our Food category and a sales shift towards higher margin items. Our remaining gross profit for food/non-food products was approximately 72% of our total remaining gross profit for both 2015 and 2014.
To the extent we capture large chain business, our gross profit margins may be negatively impacted. Although our gross profit margins in 2015 were not negatively impacted on a comparable basis due to large chain customer additions, we do expect our gross profit margins to be negatively impacted in 2016 due to large chain customer additions. However, large chain customers generally require less working capital, allowing us, in most cases, to offer lower prices to achieve a favorable return on our investment. Our focus is to strike a balance between large chain business, which generally has lower gross profit margins, and independently-owned convenience stores, which comprise approximately 67% of the overall convenience store market and generally have higher gross profit margins.
Operating Expenses . Our operating expenses include costs related to Warehousing and Distribution, Selling, General and Administrative and Amortization of Intangible Assets. In 2015 , operating expenses increased by $45.8 million , or 9.1% , to $551.2 million from $505.4 million in 2014 . As a percentage of net sales, total operating expenses were 5.0% in 2015 compared to 4.9% in 2014 . Operating expenses for 2015 include approximately $15.9 million in incremental expenses for our new Ohio division and the addition of the Karrys Bros. operations. In addition, increases in the amount of cubic feet of product handled, incremental customer deliveries, approximately $6.0 million of additional costs associated with information technology, infrastructure and people to support future growth, and $1.1 million of identifiable costs related to the on-boarding of new customers in the first quarter of 2016, contributed to higher operating costs in 2015.
Warehousing and Distribution Expenses . Warehousing and distribution expenses increased by $34.2 million , or 10.7% , to $352.6 million in 2015 from $318.4 million in 2014 . As a percentage of total net sales, warehousing and distribution expenses were 3.2% for 2015 compared with 3.1% for 2014 . The increase in warehouse and distribution expenses was primarily attributable to a 5.9% increase in comparable cubic feet of product sold driven largely by our food/non-food category, a 9.4% increase in deliveries to customers, and approximately $11.8 million in incremental expenses for our new Ohio division and the addition of the Karrys Bros. operations. In addition, workers’ compensation costs increased $2.5 million, and we incurred $1.1 million of identifiable costs related to the on-boarding of new customers in the first quarter of 2016. These increases were offset partially by a $7.7 million decrease in net fuel costs. The increase in workers’ compensation costs related primarily to the adverse development of certain claims from prior years.
The decrease in our fuel costs was driven by lower diesel fuel prices and in part by our conversion to vehicles that use compressed natural gas (CNG), offset by an increase in miles driven. As of December 31, 2015, we had converted approximately

28


24% of our fleet to CNG tractors. Future increases or decreases in fuel costs and fuel surcharges we collect from our customers may materially impact our financial results depending on the extent and timing of these changes.
Selling, General and Administrative (SG&A) Expenses . SG&A expenses increased by $11.6 million , or 6.3% in 2015 to $196.0 million from $184.4 million in 2014 . SG&A expenses for 2015 included approximately $4.1 million of incremental expenses for our new Ohio division and the addition of the Karrys Bros. operations, a $2.8 million increase in employee bonus and stock compensation expense, $1.6 million related to the lump sum settlement of pension liabilities and approximately $6.0 million of additional costs associated with information technology, infrastructure and people to support future growth. SG&A expenses for 2014 included $1.5 million for a product liability settlement and related legal expenses and $1.0 million in professional fees associated with the collection of the OTP tax refunds in 2014. As a percentage of net sales, SG&A expenses were 1.8% for both 2015 and 2014 .
Interest Expense . Interest expense includes both interest and loan amortization fees related to borrowings and facility fees and interest on capital lease obligations. Interest expense was $2.5 million and $2.4 million in 2015 and 2014 , respectively. Average borrowings were $39.6 million and $14.8 million in 2015 and 2014 , respectively, with an average interest rate of 1.6% for both years.
Foreign Currency Transaction Losses, Net . Foreign currency transaction losses were $1.8 million in 2015 compared to $0.1 million in 2014 . The change was due primarily to the fluctuation in the Canadian/U.S. dollar exchange rate. During times of a strengthening U.S. dollar, we will record transaction losses from our Canadian operations. Conversely we will record transaction gains during times of a weakening U.S. dollar.
Income Taxes. Our effective tax rate was 37.9% for 2015 compared to 35.7% for 2014 . The provision for income taxes for 2015 included a net benefit of $0.3 million , compared to a net benefit of $1.8 million in 2014 , related primarily to adjustments of prior years' estimates and the expiration of statute of limitations for uncertain tax positions which reduced our effective tax rates by approximately 0.4% and 2.7%, respectively.


29


Results of Operations
Comparison of 2014 and 2013 (in millions) (1) :
 
 
 
2014
 
2013
 
Increase (Decrease)
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
512.5

 
$
10,280.1

 
100.0
 %
 
 %
 
$
9,767.6

 
100.0
 %
 
 %
Net sales — Cigarettes
300.0

 
6,942.0

 
67.5

 
61.9

 
6,642.0

 
68.0

 
62.3

Net sales — Food/non-food
212.5

 
3,338.1

 
32.5

 
38.1

 
3,125.6

 
32.0

 
37.7

Net sales, less excise taxes (2)
453.0

 
8,169.8

 
79.5

 
100.0

 
7,716.8

 
79.0

 
100.0

Gross profit (3)
36.6

 
573.7

 
5.6

 
7.0

 
537.1

 
5.5

 
7.0

Warehousing and
 
 
 
 
 
 
 
 
 
 
 
 
 
    distribution expenses
21.3

 
318.4

 
3.1

 
3.9

 
297.1

 
3.1

 
3.9

Selling, general and
 
 
 
 
 
 
 
 
 
 
 
 
 
    administrative expenses
16.1

 
184.4

 
1.8

 
2.3

 
168.3

 
1.7

 
2.2

Amortization of
 
 
 
 
 
 
 
 
 
 
 
 
 
    intangible assets
(0.1
)
 
2.6

 

 

 
2.7

 

 

Income from operations
(0.7
)
 
68.3

 
0.7

 
0.8

 
69.0

 
0.7

 
0.9

Interest expense
(0.3
)
 
(2.4
)
 

 

 
(2.7
)
 

 

Interest income
0.1

 
0.6

 

 

 
0.5

 

 

Foreign currency transaction
 
 
 
 
 
 
 
 
 
 
 
 
 
    losses, net
(0.7
)
 
(0.1
)
 

 

 
(0.8
)
 

 

Income before taxes
0.4

 
66.4

 
0.6

 
0.8

 
66.0

 
0.7

 
0.9

Net income
1.1

 
42.7

 
0.4

 
0.5

 
41.6

 
0.4

 
0.5

Adjusted EBITDA  (4)
13.2

 
122.7

 
1.2

 
1.5

 
109.5

 
1.1

 
1.4

______________________________________________
(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”).
Net Sales. Net sales for 2014 increased by $512.5 million, or 5.2%, to $10,280.1 million from $9,767.6 million in 2013. Excluding the effects of foreign currency fluctuations, net sales increased approximately 6.2%, due primarily to market share gains, incremental food/non-food sales to existing customers and an increase in the average price per carton of cigarettes, offset by a modest decline in carton sales, excluding market share gains. The incremental food/non-food sales to existing customers was driven primarily by the continued success of our core strategies. The increase in the average price per carton of cigarettes was related mainly to increases in manufacturers’ prices. Net sales in our Food category, which increased 8.9% in 2014, contributed over half of the 6.8% increase in food/non-food sales.
Net Sales of Cigarettes. Net sales of cigarettes for 2014 increased by $300.0 million, or 4.5%, to $6,942.0 million from $6,642.0 million in 2013. The increase in net cigarette sales was driven primarily by a 3.0% increase in the average price per carton and the addition of two major customers in the second half of 2013, offset by a decline of 0.8% in carton sales for the remainder of the business. Excluding the two major customers, cigarette cartons decreased by 1.1% in the U.S. and increased by 2.0% in Canada, driven primarily by market share gains. Total net cigarette sales as a percentage of total net sales were 67.5% in 2014 compared to 68.0% for 2013.

30


We believe long-term cigarette consumption will be negatively impacted by rising prices, legislative actions, tobacco alternatives, including electronic cigarettes, diminishing social acceptance and sales through illicit markets. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability, thus mitigating the effects of the decline to the distributor. In addition, industry data indicates that convenience retailers are more than offsetting cigarette volume profit declines through higher sales of food/non-food products. We expect this trend to continue as the convenience industry adjusts to consumer demands.
Net Sales of Food/Non-food Products. Net sales of food/non-food products for 2014 increased $212.5 million, or 6.8%, to $3,338.1 million from $3,125.6 million in 2013.
The following table provides net sales by product category for our food/non-food products (in millions) (1) :
 
2014
 
2013
 
Increase (Decrease)
Product Category
Net Sales
 
Net Sales
 
Amounts
 
Percentage
Food
$
1,462.0

 
$
1,342.3

 
$
119.7

 
8.9
 %
Candy (2)
534.3

 
513.2

 
21.1

 
4.1
 %
Other tobacco products
827.5

 
787.8

 
39.7

 
5.0
 %
Health, beauty & general (2)
361.0

 
341.3

 
19.7

 
5.8
 %
Beverages
151.8

 
139.1

 
12.7

 
9.1
 %
Equipment/other
1.5

 
1.9

 
(0.4
)
 
(21.1
)%
Total Food/Non-food Products
$
3,338.1

 
$
3,125.6

 
$
212.5

 
6.8
 %
______________________________________________
( 1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2)
In 2014 , certain products were moved from the Candy category to the Health, beauty & general category to align them with the industry classifications used by NACS. The 2013 presentation has been realigned to reflect these changes. Without the changes, net sales for Candy would have been $527.2 million for the year ended December 31, 2013 . Net sales for Health, beauty & general products would have been $327.3 million for the year ended December 31, 2013 .
The increase in food/non-food sales was driven by incremental sales to existing customers, market share gains and price inflation, offset partially by the impact of a weaker Canadian dollar in 2014. Sales generated from VCI, Fresh and FMI contributed to this improvement in net sales. In addition, we also continued to see higher sales of smokeless tobacco products in our OTP category.  We believe the overall trend toward increased use of smokeless tobacco products 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, which are generally higher than those we earn on cigarette carton sales.
Total net sales of food/non-food products as a percentage of total net sales increased to 32.5% in 2014 compared to 32.0% in 2013.
Gross Profit. Gross profit represents the amount of profit after deducting cost of goods sold from net sales during the period. Inventory holding gains represent incremental revenues whereas vendor incentives, OTP tax refunds and changes in LIFO reserves are components of cost of goods sold and therefore part of our gross profit. Gross profit in 2014 increased by $36.6 million, or 6.8% to $573.7 million from $537.1 million for 2013 due primarily to increases in sales and profit margins in our food/non-food category. This increase includes $8.5 million in refunds, net of tax assessments, related primarily to the over payment of excise taxes on OTP from prior years. Gross profit in 2014 also benefitted from candy inventory holding gains of $6.0 million, offset by a $7.6 million increase in LIFO expense, driven largely by inflation in the cigarette, confection and grocery categories as measured by the PPI published by the Bureau of Labor Statistics. Gross profit margin was 5.58% and 5.50% of total net sales for 2014 and 2013, respectively.
Distributors such as Core-Mark may, from time to time, earn higher gross profits on inventory and excise tax stamp quantities on hand at the time manufacturers' increase their prices or when states, localities or provinces increase their excise taxes. Such increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The higher gross profits are referred to as inventory holding gains. However, significant increases in cigarette product costs and cigarette excise taxes adversely impact our gross profit as a percentage of net sales, because we are paid on a cents per carton basis for cigarette sales. Conversely, we generally benefit from food/non-food price increases, because product costs for these categories are usually marked up using a percentage of cost of goods sold.
Our cigarette inventory holding gains were $8.2 million, or 1.4%, of our gross profit for 2014, $9.0 million, or 1.7%, of our gross profit for 2013.

31


In addition, we recognized $6.0 million, or 1.1%, of our gross profit for 2014, for candy inventory holding gains resulting from manufacturer price increases. These gains were recognized as the inventory was sold.
Lastly, since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor Statistics Producer Price Index used to estimate and accrue for our book LIFO expense (see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements).
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2014 and 2013 (in millions) (1) :
 
 
 
2014
 
2013
 
Increase (Decrease)
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
512.5

 
$
10,280.1

 
100.0
 %
 
 %
 
$
9,767.6

 
100.0
 %
 
 %
Net sales, less excise taxes (2)
453.0

 
8,169.8

 
79.5

 
100.0

 
7,716.8

 
79.0

 
100.0

Components of gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cigarette inventory holding gains (3)
$
(0.8
)
 
$
8.2

 
0.08
 %
 
0.10
 %
 
$
9.0

 
0.09
 %
 
0.12
 %
Candy inventory holding gains (4)
6.0

 
6.0

 
0.06

 
0.08

 

 

 

OTP tax items (5)
8.5

 
8.5

 
0.08

 
0.10

 

 

 

LIFO expense (6)
7.6

 
(16.3
)
 
(0.16
)
 
(0.20
)
 
(8.7
)
 
(0.09
)
 
(0.12
)
Remaining gross profit (7)
30.5

 
567.3

 
5.52

 
6.94

 
536.8

 
5.50

 
6.96

Gross profit
$
36.6

 
$
573.7

 
5.58
 %
 
7.02
 %
 
$
537.1

 
5.50
 %
 
6.96
 %
______________________________________________
(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) .
(3)
The amount of cigarette inventory holding gains attributable to the U.S. and Canada were $7.2 million and $1.0 million, respectively, for 2014, compared to $8.3 million and $0.7 million, respectively, for 2013.
(4)
For 2014, we recognized approximately $6.0 million in candy inventory holding gains resulting from manufacturer price increases. The amount of candy inventory holding gains attributable to the U.S. and Canada for 2014 were $5.4 million and $0.6 million, respectively.
(5)
For 2014, we received OTP tax refunds of $9.0 million related to prior years’ taxes, offset by an OTP tax assessment of $0.5 million.
(6)
The increase in LIFO expense was driven largely by inflation in the cigarette, confection and grocery categories as measured by the PPI published by the Bureau of Labor Statistics. We value our inventory in the U.S. on a LIFO basis, therefore our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor Statistics Producer Price Index used to estimate and accrue for our book LIFO expense ( see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements).
(7)
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 $30.5 million, or 5.7%, to $567.3 million for 2014 from $536.8 million for 2013. In 2014, remaining gross profit margin was 5.52% of total net sales compared to 5.50% in 2013. The shift in sales mix towards higher margin food/non-food items increased overall remaining gross profit margin by 13 basis points, offset by the addition of two new major customers in 2013, which reduced margins by six basis points. In addition, increases in cigarette manufacturers’ prices compressed remaining gross profit margin by approximately six basis points in 2014.
Cigarette remaining gross profit per carton decreased by 0.8% in 2014 compared to 2013 due primarily to the compressing impact of the two major customers gained during 2013.
Food/non-food remaining gross profit increased $30.2 million, or 8.0% in 2014 compared to 2013. Food/non-food remaining gross profit margin increased 13 basis points to 12.28% in 2014 compared with 12.15% in 2013. Excluding the two new major customers, food/non-food remaining gross profit margin increased by 20 basis points driven by sales growth in our Food category and the shift toward higher margin items primarily as a result of the continued success of our marketing programs, offset by OTP, which had higher sales in 2014 but lower gross profit margins relative to other food/non-food products.


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To the extent we capture large chain business, our gross profit margins may be negatively impacted. However, large chain customers generally require less working capital, allowing us, in most cases, to offer lower prices to achieve a favorable return on our investment. Our focus is to strike a balance between large chain business, which generally has lower gross profit margins, and independently-owned convenience stores, which comprise approximately 67% of the overall convenience store market and generally have higher gross profit margins.
Operating Expenses . Our operating expenses include costs related to Warehousing and Distribution, Selling, General and Administrative and Amortization of Intangible Assets. In 2014, operating expenses increased by $37.3 million, or 8.0%, to $505.4 million from $468.1 million in 2013. As a percentage of net sales, total operating expenses were 4.9% in 2014 compared to 4.8% in 2013. Increases in the amount of cubic feet of product handled in the warehouse and by our drivers, contributed to higher operating costs. In addition, we continue to see upward pressure on operating expenses as a percentage of net sales due to a shift in sales to food/non-food categories. This is due, in part, to the lower selling price point for these categories, compared to cigarettes. The shift in sales to food/non-food products increased operating expenses as a percentage of net sales by approximately 14 basis points in 2014 compared to 2013.
Warehousing and Distribution Expenses . Warehousing and distribution expenses increased by $21.3 million, or 7.2%, to $318.4 million in 2014 from $297.1 million in 2013. The increase in warehousing and distribution expenses was due primarily to a 7.2% increase in comparable cubic feet of product sold driven largely by our food/non-food category. In addition, we experienced higher delivery salaries and healthcare costs, offset partially by a decrease in fuel costs.
Delivery salaries increased approximately 11% driven primarily by the increase in cubic feet of product shipped, a 6.1% increase in miles driven and higher costs resulting from the continued tightness of the driver labor pool in certain markets, consistent with national trucking industry trends.
Fuel costs decreased $1.2 million, or 5.6%, due primarily to lower diesel fuel prices and in part our conversion to vehicles that use compressed natural gas (CNG).  As of December 31, 2014, we had converted approximately 20% of our fleet to CNG.
As a percentage of total net sales, warehousing and distribution expenses were 3.1% for both 2014 and 2013. The shift in sales to food/non-food products increased warehouse and delivery expenses as a percentage of net sales by approximately nine basis points in 2014 compared to 2013, since food/non-food products have lower sales price points than the cigarette category.
Selling, General and Administrative (SG&A) Expenses . SG&A expenses increased by $16.1 million, or 9.6% in 2014 to $184.4 million from $168.3 million in 2013. SG&A expenses in 2014 included a $4.5 million increase for employee bonus and stock-based compensation expense, a $1.9 million increase in employee healthcare costs, $1.5 million for a product liability settlement and related legal expenses, $1.4 million of transitional expenses related to our business expansion activities and $1.0 million in professional fees associated with the collection of the OTP tax refunds in 2014. SG&A expenses in 2013 included $2.5 million of integration and other expenses related to our business expansion activities.
As a percentage of net sales, SG&A expenses were 1.8% in 2014 compared to 1.7% for 2013. Excluding the aforementioned items, SG&A expenses as a percentage of sales were 1.5% for both 2014 and 2013. The shift in sales to food/non-food products increased SG&A expenses as a percentage of net sales by approximately five basis points in 2014 compared to 2013.
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 $2.4 million and $2.7 million in 2014 and 2013, respectively. Average borrowings in 2014 were $14.8 million with an average interest rate of 1.6%, compared to average borrowings of $35.3 million and an average interest rate of 1.8% in 2013. Lower average borrowings and interest rates for 2014 were offset by an increase in interest expense related to capital lease arrangements.
Foreign Currency Transaction Losses, Net . Foreign currency transaction losses were $0.1 million in 2014 compared to $0.8 million in 2013. The change was due primarily to the fluctuation in the Canadian/U.S. dollar exchange rate.
Income Taxes. Our effective tax rate was 35.7% for 2014 compared to 37.0% for 2013. The provision for income taxes for 2014 included a net benefit of $1.8 million, compared to a net benefit of $0.9 million in 2013, related primarily to adjustments of prior years' estimates and the expiration of statute of limitations for uncertain tax positions which reduced our effective tax rates by approximately 2.7% and 1.4%, respectively.


33


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 2015 , 2014 and 2013 (in millions) (1) :
 
2015
 
2014
 
2013
Cigarettes