Core-Mark Holding Company, Inc.
Core-Mark Holding Company, Inc. (Form: 10-K, Received: 03/01/2017 06:17:34)
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, 2016
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, 2016 , the last business day of the registrant's most recently completed second fiscal quarter:   $2,117,773,783
As of February 24, 2017 , the registrant had 46,315,364 shares of its common stock outstanding.
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 2017 definitive proxy statement to be filed pursuant to Regulation 14A.



FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



i


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

SEC Regulation - Non-GAAP Information

The financial statements in this Annual Report on Form 10-K are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Core-Mark Holding Company, Inc. ("Core-Mark") uses certain non-GAAP financial measures including Adjusted EBITDA, net income excluding LIFO expense, net sales less excise taxes, remaining gross profit, remaining gross profit margin, remaining gross profit margin less excise taxes and cigarette remaining gross profit per carton. We believe these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitate a meaningful period to period evaluation. Management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in Core-Mark’s underlying business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. More information about such measures are included in Item 7 - Adjusted EBITDA and Item 7- Non GAAP Financial Information .


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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 43,000 customer locations across the United States (U.S.) and Canada through 30 distribution centers (excluding two distribution facilities we operate as a third party logistics provider). Our origins date back to 1888, when Glaser Bros., a family-owned-and-operated candy and tobacco distribution business, was founded in San Francisco, California.
Our mission is to be the most valued marketer of fresh and broad-line supply solutions to the convenience retail industry. While the past century has brought incredible changes to our business and the world in which we operate, our goal is the same today as it was over 125 years ago - to provide customers with the best possible service and to help them grow their sales and profits. We have grown our business organically and through acquisitions which have expanded our distribution network, product selection and customer base.
Core-Mark has become one of two national distributors to the convenience store industry in the U.S. and is the largest in Canada. The national market presence we have established rests primarily with our ability to service customers in every geographic region within the U.S. through 25 distribution centers and servicing customers in Canada with our five Canadian distribution centers.
We operate in an industry where, in 2015 , based on the National Association of Convenience Stores ("NACS") State of the Industry ("SOI") report, total in-store sales at convenience retail locations in the U.S. increased 5.8% to approximately $225.8 billion and were generated through approximately 154,000 stores. Over the ten years from 2006 through the end of 2015 , U.S. convenience in-store sales have increased by a compounded annual growth rate of approximately 3.3% . Based on the Canadian Convenience Store Association ("CCSA") 2015 Industry report, we estimate that total Canadian in-store sales at convenience locations were approximately CAD $40.0 billion generated through approximately 26,000 stores.
Company Highlights
Net income grew from $26.2 million in 2011 to $54.2 million in 2016 , or approximately 16% compounded annually. Our net sales grew from $8.1 billion in 2011 to $14.5 billion in 2016 , yielding an annual compounded growth rate of approximately 12% , while our annual Adjusted EBITDA (1) increased from $91.9 million to $152.3 million , or approximately 11% , compounded annually. Our growth has been driven primarily by our business strategies described more fully below. We believe these strategies have positioned us to continue to grow our approximate 6% market share of total in-store sales within the convenience store channel in North America and to take advantage of growth opportunities with other retail store formats. Below are key highlights of 2016 :
In December 2016, we signed a three-year supply agreement to service approximately 530 Walmart Neighborhood Markets and Supercenter stores in five western states (Arizona, California, New Mexico, Nevada and Utah). We will be the primary distributor to these stores for candy, tobacco and certain snack foods. We expect to begin service under this agreement in May 2017.
In June 2016, we acquired substantially all of the assets of Pine State Convenience, a division of Pine State Trading Company, located in Gardiner, Maine, for cash consideration of approximately $88 million.
In October 2015, we signed a five-year agreement with Murphy U.S.A. to be the primary wholesale distributor to over 1,400 stores located in 24 states across the Southwest, Southeast and Midwest United States. Services under this contract began in the first quarter of 2016. We believe our services have created efficiencies and a strategic supply chain relationship for Murphy U.S.A.
In October 2015, we signed a five-year supply agreement with 7-Eleven, Inc. to service approximately 900 stores in three western regions. We began servicing 7-Eleven in October 2016 and we became the primary wholesale distributor delivering a wide range of products to these stores out of three of our divisions - Las Vegas, NV, Salt Lake City, UT and Sacramento, CA.
________________________________________
(1)
Adjusted EBITDA is a non-GAAP measure. See reconciliation of Adjusted EBITDA to net income in Item 7- Adjusted EBITDA .

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Business Strategy
Our objective is to increase overall return to stockholders by growing our revenues and leveraging operating costs to increase profitability. As one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America with a track record of effectively selling into other retail channels, we believe we are well-positioned to continue meeting this objective. Our business strategy also includes the following initiatives, designed to further enhance the value we provide to our retail customers:
Vendor Consolidation Initiative ("VCI"). We expect our VCI program will allow us to continue to grow our sales by capitalizing on the highly fragmented supply chain that services the convenience retail industry. A convenience retailer generally receives store merchandise through a large number of direct-store deliveries. This represents a highly inefficient and costly process for retailers. Our VCI program targets inefficiencies in the convenience store supply chain by offering the retailer the ability to receive multiple weekly deliveries for the bulk of their products, including dairy and other merchandise they purchased from direct-store delivery companies. This simplifies the supply chain and provides retailers with an opportunity to improve inventory turns and working capital, reduce operational and transaction costs, and greatly diminish their out-of-stocks.
Fresh Products ("Fresh"). There is an increasing trend among consumers to purchase fresh food from convenience and other retail store formats. To meet this demand, we have modified and upgraded our refrigerated capacity, including investing in chill docks, and tri-temperature ("tri-temp") trailers, which provide the infrastructure to deliver a significant range of chilled items including milk, produce and other fresh foods to retail outlets. We have established partnerships with strategically-located dairies, fresh kitchens and bakeries to further enable us to deliver premium consumer items such as sandwiches, wraps, cut-fruit, parfaits, pastries, doughnuts, bread and home meal replacement solutions. We continue to promote our fresh products through the development of unique and comprehensive marketing and equipment programs that assist the retailer in showcasing their fresh product offering. We believe our investments in infrastructure, combined with our strategically located suppliers and in-house expertise, position us as the leader in providing fresh products and programs to the convenience retail industry. Proper execution of VCI, the cornerstone being dairy distribution, provides Core-Mark the critical mass necessary to offer retailers a multiple weekly delivery platform, which facilitates the proper handling and dating of fresh products. We believe that fresh items are increasingly driving consumer decisions, and will continue to be an important category.
Focused Marketing Initiative ("FMI"). Designed to enhance our relationship with our independent customer base and to further differentiate us in the market place, our FMI program is centered on increasing the sales and profitability of the independent store through improved category insights, optimized retail price strategy and demographic decision-making, along with providing Core-Mark’s marketing solutions to create a comprehensive retail marketing strategy. We believe our innovative approach, which focuses on building a trusted partnership with our customers, has established us as the market leader in providing valuable marketing and supply chain solutions to the convenience retail industry.
Acquisitions and Expansion. We believe there is significant opportunity to increase our market presence and revenue growth through strategic and opportunistic acquisitions and the continued expansion of our credit facility infrastructure. We completed seven acquisitions and added three additional warehouses between 2006 and 2016 , which expanded our distribution network, product selection and customer base. We will continue to be opportunistic in pursuing acquisitions that allow further leveraging of our geographic footprint and bring Fresh and VCI to a broader customer base.

Competitive Strengths
We believe we have the following fundamental competitive strengths, which form the foundation for our business strategy:
Innovation and Flexibility. Wholesale distributors typically provide convenience retailers access to a broad product line, the ability to place small quantity orders, inventory management and access to trade credit. Our capability to increase sales and profitability with existing and new customers is based on our ability to deliver consistently high levels of service, innovative marketing programs, technology solutions and logistics support. We believe we are one of the first to recognize emerging trends and to offer retailers our unique strategic solutions such as VCI, Fresh and FMI.
Distribution Capabilities. The wholesale distribution industry is highly fragmented and historically has consisted of a large number of small, privately-owned businesses and a small number of large, full-service wholesale distributors serving multiple geographic regions. Relative to smaller competitors, large national distributors such as Core-Mark benefit from several competitive advantages including: increased purchasing power, the ability to service large national chain accounts, economies of scale in sales and operations, and the resources to invest in information technology and other productivity-enhancing technologies. Our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management, efficiency in processing small orders and frequency of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing inventory management and accessing trade credit.

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Customers
We service over 43,000 customer locations in 50 states in the U.S. and five Canadian provinces. Our primary customer base consists of traditional convenience stores as well as alternative outlets selling consumer packaged goods. Our traditional convenience store customers include many of the major national and super-regional convenience store operators, as well as independently owned convenience stores. Our alternative outlet customers comprise a variety of store formats, including grocery stores, drug stores, liquor stores, cigarette and tobacco shops, hotel gift shops, military exchanges, college and corporate campuses, casinos, hardware stores, airport concessions and other specialty and small format stores that carry convenience products.
Our top ten customers accounted for 43.2% of our net sales in 2016 . Our largest customers were Murphy U.S.A., which the Company began servicing in the first quarter of 2016, and Alimentation Couche-Tard, Inc. ("Couche-Tard"). Murphy U.S.A and Couche-Tard accounted for 12.0% and 11.4% of our total net sales, respectively.
Products
We purchase a variety of brand name and private label products, in excess of 53,000 stock keeping units ("SKUs"), from suppliers and manufacturers. Cigarette products represent less than 5% of our total SKUs purchased. We offer customers a variety of food/non-food products, including fast food, candy, snacks, groceries, fresh products, dairy, bread, beverages, other tobacco products, general merchandise and health and beauty care products.
Below is a comparison of our net sales mix by primary product category for the last three years (in millions):
 
Year Ended December 31,
 
2016
 
2015
 
2014
Product Category
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Cigarettes
$
10,335.7

 
71.1
%
 
$
7,528.5

 
68.0
%
 
$
6,942.0

 
67.5
%
Food (1)
1,422.5

 
9.8

 
1,251.1

 
11.3

 
1,180.9

 
11.5

Fresh (1)
389.8

 
2.7

 
335.0

 
3.0

 
281.1

 
2.7

Candy
620.0

 
4.3

 
557.0

 
5.0

 
534.3

 
5.2

Other tobacco products ("OTP")
1,133.8

 
7.8

 
870.3

 
8.0

 
827.5

 
8.1

Health, beauty & general
446.7

 
3.1

 
368.8

 
3.3

 
361.0

 
3.5

Beverages
176.5

 
1.2

 
156.6

 
1.4

 
151.8

 
1.5

Equipment/other
4.4

 

 
2.1

 

 
1.5

 

Total food/non-food products
4,193.7

 
28.9
%
 
3,540.9

 
32.0
%
 
3,338.1

 
32.5
%
Total net sales
$
14,529.4

 
100.0
%
 
$
11,069.4

 
100.0
%
 
$
10,280.1

 
100.0
%
_____________________________________________
(1)
In 2016, the Fresh category was separated from the Food category to better highlight the growth in the Fresh commodity. The 2015 and 2014 presentations have been realigned to reflect these changes.
Cigarette Products . We purchase cigarette products from major U.S. and Canadian manufacturers. We have no long-term cigarette purchase agreements and buy substantially all of our products on an as-needed basis. Cigarette manufacturers historically offer structured incentive programs to wholesalers based on maintaining market share and executing promotional programs. Net sales of the cigarettes category grew 37.3% in 2016 to $10,335.7 million , accounting for approximately 71.1% of our total net sales and 29.9% of our total gross profit in 2016 . We control major purchases of cigarettes centrally to optimize inventory levels and purchasing opportunities, and the daily replenishment of inventory and brand selection is controlled by our distribution centers.
In 2016 our cigarette carton sales in the U.S. and Canada increased 34.5% and 13.8% , respectively, benefiting from market share gains, including the addition of Murphy U.S.A, and the acquisition of Pine State Convenience. In the industry overall, U.S. and Canadian cigarette consumption steadily declined over the last decade. Based on data compiled from the U.S. Department of Agriculture - Economic Research Service and provided by the Tobacco Merchants Association ("TMA"), total cigarette consumption in the U.S declined from 389 billion cigarettes in 2006 to 275 billion cigarettes in 2015 , or a compounded annual decline of approximately 3.8% . Total cigarette consumption declined in Canada from 32 billion cigarettes in 2006 to 27 billion cigarettes in 2015 , or a compounded annual decline of approximately 1.9% based on statistics provided by the TMA. Although we anticipate overall cigarette consumption will continue to decline, we expect to offset these declines through market share expansion, growth in our non-cigarette categories and incremental gross profit from cigarette manufacturer price increases.

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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 related to state, local and provincial excise taxes were approximately $3.0 billion , $2.2 billion and $2.1 billion in 2016 , 2015 and 2014 , respectively.
Food/Non-food Products. Our food products include fast food, candy, snacks, groceries, beverages and fresh products such as sandwiches, juices, salads, produce, dairy and bread. Our non-food products include cigars, tobacco, health and beauty care products, general merchandise and equipment. Net sales of the combined food/non-food product categories grew 18.4% in 2016 to $4,193.7 million , which was 28.9% of our total net sales driven primarily by incremental sales to existing customers and market share gains including the acquisition of Pine State Convenience. Sales generated from VCI, Fresh and FMI were the primary drivers of the increased sales to existing customers. Gross profit for food/non-food categories grew $59.5 million , or 13.0% , to $516.9 million in 2016 , which was 70.1% of our total gross profit. In order to take advantage of the significantly higher margins earned by food/non-food products, two of our key business strategies, VCI and Fresh, focus primarily on the highest margin categories in the food/non-food group. We believe there is an increasing trend toward purchases of fresh food from convenience and other retail store formats. Combined sales of our Food and Fresh categories grew $226.2 million , or 14.3% , to $1,812.3 million . We also believe there is an overall trend toward the increased use of other tobacco products. Sales of OTP increased $263.5 million , or 30.3% , driven primarily by this trend, as well as market share gains. Our strategy is to continue to grow food/non-food products through our VCI, Fresh, and FMI strategies.

Suppliers

We purchase products for resale from approximately 5,000 trade suppliers and manufacturers located across the U.S. and Canada. In 2016 , we purchased approximately 79% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris USA, Inc. and R.J. Reynolds Tobacco Company, accounting for approximately 35% and 23% of our purchases, respectively. We coordinate our purchasing from suppliers by negotiating, on a corporate-wide basis, special arrangements to obtain volume discounts and additional incentives, while also taking advantage of promotional and marketing incentives offered to us as a wholesale distributor. In addition, buyers in each of our distribution facilities purchase products directly from the manufacturers, improving product mix and availability for individual markets.


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Operations
As of December 31, 2016 , we operated a network of 30 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third party logistics provider). Twenty-five of our distribution centers are located in the U.S. and five are located in Canada.
The map below depicts the scope of our operations and the names of our distribution centers.

COREMARKPRESMAP201701.JPG

We operate four consolidation centers which buy products from our suppliers in bulk quantities and then re-distribute the products to many of our other distribution centers. The products purchased by our consolidation centers include frozen and chilled items, candy, snacks, beverages, health and beauty care and general merchandise products. We operate two additional facilities as a third party logistics provider. One distribution facility located in Phoenix, Arizona, referred to as the Arizona Distribution Center ("ADC"), is dedicated solely to supporting the logistics and management requirements of one of our major customers, Couche-Tard. The second distribution facility located in San Antonio, Texas, referred to as the Retail Distribution Center ("RDC"), is dedicated solely to supporting another major customer, CST Brands, Inc.
Our proprietary Distribution Center Management System platform provides our distribution centers with the flexibility to adapt rapidly to changing business needs and allows them to provide our customers with necessary information technology requirements and integration capabilities.

Distribution
At December 31, 2016 , we had approximately 1,800 transportation department personnel, including delivery drivers, shuttle drivers, routers, training supervisors and managers who focus on achieving safe, on-time deliveries. Our daily orders are picked and loaded nightly in reverse order of scheduled delivery. At December 31, 2016 , our distribution fleet primarily consisted of nearly 1,500 leased tractors and trailers with over 500 additional owned trailers. We have made a significant investment over the past few years in upgrading our trailer fleet to tri-temp, which gives us the capability to deliver frozen, chilled and non-refrigerated goods in one delivery. As of December 31, 2016 , approximately 97% of our trailers were tri-temp, with the remainder capable of

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delivering refrigerated and non-refrigerated foods. This provides us the multiple temperature zone capability needed to support our focus on delivering fresh products to our customers. We have transitioned a portion of our truck fleet to Compressed Natural Gas ("CNG"), which allows us to reduce our carbon footprint and lower our transportation costs. As of December 31, 2016 , approximately 20% of our trucks ran on CNG. To date, we have opened seven CNG stations, two of which we own, located in Wilkes-Barre, Pennsylvania and Corona, California, and the other five are operated in partnership with U.S. Oil and are located in Aurora, Colorado, Forrest City, Arkansas, Sanford, North Carolina, Atlanta, Georgia and Tampa, Florida under the name GAIN Clean Fuel ("GAIN"). In addition to providing fuel to our fleet, the GAIN stations are also open to other public fleets for fueling.

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

Working Capital Practices
We sell products on credit terms to our customers that averaged, as measured by days sales outstanding, about nine days for each of 2016 , 2015 and 2014 . Credit terms may impact pricing and are competitive within our industry. Many of our customers remit payment electronically, which facilitates efficient and timely monitoring of payment risk. Canadian days sales outstanding in receivables tend to be lower as Canadian industry practice is for shorter credit terms than in the U.S.
We maintain our inventory of products based on the level of sales of the particular product and manufacturer replenishment cycles. The number of days a particular item of inventory remains in our distribution centers varies by product and is principally driven by the turnover of that product and economic order quantities. We typically order and carry in inventory additional amounts of certain critical products to assure high order fulfillment levels for these items. Periodically, we may carry higher levels of inventory to take advantage of anticipated manufacturer price increases. The number of days of cost of sales in inventory averaged about 15 days in 2016 , and 16 days in both 2015 and 2014 . The cigarette category averaged nine days , ten days , and nine days , in 2016 , 2015 and 2014 , respectively. The food/non-food categories averaged 27 days in 2016 , and 29 days in both 2015 and 2014 .
We obtain terms from our vendors and certain taxing jurisdictions based on industry practices, consistent with our credit standing. We take advantage of the full complement of term offerings, which may include enhanced cash discounts for earlier payment or prepayment. Terms for our accounts payable and cigarette and tobacco taxes payable range anywhere from one day prepaid to 60 days credit. Days payable outstanding for both categories, excluding the impact of prepayments, during each of 2016 , 2015 and 2014 averaged about 11 days .


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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, 2016 :
TOTAL EMPLOYEES BY BUSINESS FUNCTION
 
 
U.S.
 
Canada
 
Total
Sales and Marketing
1,465

 
108

 
1,573

Warehousing and Distribution
4,766

 
367

 
5,133

Management, Administration, Finance and Purchasing
834

 
148

 
982

Total Categories
7,065

 
623

 
7,688

 
Three of our distribution centers, Hayward, Las Vegas and Calgary, have employees who are covered by collective bargaining agreements with local affiliates of The International Brotherhood of Teamsters (Hayward and Las Vegas) and the United Food and Commercial Workers International Union (Calgary). Approximately 325 employees, or 4% of our workforce, are unionized. There have been no disruptions in customer service, strikes, work stoppages or slowdowns as a result of union activities, and we believe we have satisfactory relations with our employees.

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

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

Segment and Geographic Information
We have two operating segments which aggregate into one reportable segment. We also present certain financial information by segment region -- the U.S. and Canada. See Note 16 - Segment and Geographic Information to our consolidated financial statements.
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.

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


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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
Our ability to operate effectively could be impaired by the risks and costs associated with expansion activities.
Our business has expanded rapidly and market share growth is one of our key company initiatives. To accomplish this growth we have focused on strategic acquisitions and securing large regional and national customers as key elements of success. Any significant expansion activity comes with inherent risks. Acquisitions may entail various risks such as identifying suitable candidates, realizing acceptable rates of return on the investment, identifying potential liabilities, obtaining adequate financing, negotiating acceptable terms and conditions, and successfully integrating operations and converting systems post acquisition. Integrating a large new customer has similar risks of realizing acceptable returns on invested working capital, negotiating acceptable pricing and service levels, while managing resources and business interruptions as we integrate the new business into our current infrastructure. We may realize higher costs, lower margins or fewer benefits than originally anticipated and may experience disruption to our base business in connection with such acquisitions and other new customer integration activities.
We depend on attracting and retaining qualified labor including our senior management and other key personnel.
We substantially depend on the continued services and performance of our senior executive officers as named in our Proxy Statement and other key employees. We do not maintain key person life insurance policies on these individuals, and we do not have employment agreements with any of them. The loss of the services of any of our senior executive officers or other key personnel could harm our business.
We compete with other businesses in each of our markets with respect to attracting and retaining qualified employees. A shortage of qualified employees, especially drivers, in a market could require us to enhance our wage and benefit packages in order to compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees. Any such shortage of qualified employees could decrease our ability to effectively serve our customers and might lead to lower profits because of higher labor costs.
Our ability to meet our labor needs is generally subject to numerous other external factors, including prevailing wage rates, changing demographics, health and other insurance costs, and adoption of new or revised employment and labor laws and regulations. These external factors could prevent us from locating, attracting or retaining qualified personnel, which would impact the quality of the services which provide to our customers, and our financial performance may be adversely affected.
We are dependent on the convenience retail industry, and our results of operations could suffer if it experiences an overall decline or consolidation.
The majority of our sales are made under purchase orders and short-term contracts with convenience retail stores which inherently involve significant risks. These risks include declining sales in the convenience retail industry due to general economic conditions, including rising gasoline prices, which may impact “in-store” retail sales, competition from grocery stores and other retail outlets, termination of customer relationships and consolidation of our customer base. Such events could cause us to experience decreases in revenues and put pressure on our margins and increase our credit risk and potential bad debt exposure.
Many of the markets in which we compete are highly competitive and we may lose market share and suffer a decline in sales and profitability in these markets if we are unable to outperform our competition.
Our distribution centers operate in highly competitive markets. We face competition from local, regional and national tobacco and consumable products distributors on the basis of service, price, reliability, delivery schedules, and variety of products offered. We also face competition from club stores and alternate sources that sell consumable products to convenience retailers. Some of our competitors, including McLane Company, Inc. (a subsidiary of Berkshire Hathaway Inc.), have substantial financial resources and long-standing customer relationships. In addition, heightened competition among our existing competitors, or by new entrants into the distribution market, could create additional competitive pressures that may result in the loss of major customers, reduced margins, or have other adverse effects on our business. If we fail to successfully respond to these competitive pressures or to implement our strategies effectively, we may lose market share and our results of operations could suffer.
Our failure to maintain relationships with large customers could potentially harm our business.
We have relationships with many large regional and national convenience and other store chains. While we expect to maintain these relationships for the foreseeable future, any termination, non-renewal or reduction in services that we provide to such customers could cause our revenues and operating results to suffer.

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We may lose business if manufacturers or large retail customers convert to direct distribution of their products.
In the past, certain large manufacturers and customers have elected to engage in direct distribution or third party distribution of their products and eliminate wholesale distributors such as Core-Mark. If other manufacturers or retail customers make similar elections in the future, our revenues and profits would be adversely affected and there can be no assurance that we will be able to mitigate such losses.
Our business is sensitive to fuel prices and related transportation costs, which could adversely affect our business.
Our operating results are sensitive to, and may be adversely affected by, unexpected increases in fuel or other transportation-related costs, including costs from the use of third party carriers, temporary staff and overtime. Historically, we have been able to pass on a substantial portion of increases in our own fuel or other transportation costs to our customers in the form of fuel or delivery surcharges, but our ability to continue to pass through these increases, is not assured. If we are unable to continue to pass on fuel and transportation-related cost increases to our customers or do not realize the benefits we expect from converting a large percentage of our trucks to operate on natural gas or incur higher expenses if the price of diesel fuel decreases but the price of natural gas does not similarly decrease, our operating results could be negatively affected.
Cigarette and consumable goods distribution is a low-margin business sensitive to inflation and deflation.
We derive most of our revenues from the distribution of cigarettes, other tobacco products, candy, snacks, fast food, groceries, fresh products, dairy, beverages, general merchandise and health and beauty care products. Our industry is characterized by a high volume of sales with low profit margins. Our food/non-food sales are generally priced based on the manufacturer’s cost of the product plus a percentage markup. As a result, our profit levels may be negatively impacted during periods of cost deflation or stagnation for these products, even though our gross profit as a percentage of the price of goods sold may remain relatively constant. In addition, periods of product cost inflation may have a negative impact on our gross profit margins with respect to sales of cigarettes because gross profit on cigarette sales are generally fixed on a cents per carton basis. Therefore, as cigarette prices increase, gross profit generally decreases as a percentage of sales. In addition, if the cost of the cigarettes that we purchase increases due to manufacturer price increases, reduced or eliminated manufacturer discounts and incentive programs or increases in applicable excise tax rates, our inventory carrying costs and accounts receivable could rise, placing pressure on our working capital requirements.
We rely on manufacturer discount and incentive programs and cigarette excise stamping allowances, and any material changes in these programs could adversely affect our results of operations.
We receive payments from the manufacturers on the products we distribute for allowances, discounts, volume rebates and other merchandising and incentive programs. These payments are a substantial contributor to our gross profit. The amount and timing of these payments are affected by changes in the programs by the manufacturers, our ability to sell specified volumes of a particular product, attaining specified levels of purchases by our customers and the duration of carrying a specified product. In addition, we receive discounts from certain taxing jurisdictions in connection with the collection of excise taxes. If the manufacturers or taxing jurisdictions change or discontinue these programs or change the timing of payments, or if we are unable to maintain the volume of our sales required by such programs, our results of operations could be negatively affected.
We depend on relatively few suppliers for a large portion of our products, and any interruptions in the supply of the products that we distribute could adversely affect our results of operations.
We obtain the products we distribute from third party suppliers. At December 31, 2016 , we had approximately 5,000 vendors and during 2016 we purchased approximately 79% of our products from our top 20 suppliers, with purchases from our top two suppliers, Philip Morris USA, Inc. and R.J. Reynolds Tobacco Company, representing approximately 35% and 23% of our purchases, respectively. We do not have any long-term contracts with our suppliers committing them to provide products to us. Our suppliers may not provide the products we distribute in the quantities we request on favorable terms, or at all. We are also subject to delays caused by interruption in production due to conditions outside our control, such as slow-downs or strikes by employees of suppliers, inclement weather, transportation interruptions, regulatory requirements and natural disasters. Our inability to obtain adequate supplies of the products we distribute could cause us to fail to meet our contractual and other obligations to our customers and reduce the volume of our sales and profitability.
We may be subject to product liability claims and counterfeit product claims which could materially adversely affect our business.
As a distributor of food and consumer products, we face the risk of exposure to product liability claims in the event that the use of a product sold by us causes injury or illness. In addition, certain products that we distribute may be subject to counterfeiting. Our business could be adversely affected if consumers lose confidence in the safety and quality of the food and other products we distribute. Further, our operations could be subject to disruptions as a result of manufacturer recalls. This risk may increase as we continue to expand our distribution of fresh products. If we do not have adequate insurance, if contractual indemnification

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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 our new marketing initiatives may not be as anticipated or competitive pressures may cause us to curtail or abandon these initiatives, resulting in lower revenue growth and unachieved cost savings.
Maintaining our brand and reputation is necessary for the success of our business.
Our established brand and reputation within the market largely contributes to our success. Our current and future business could be negatively impacted if we were poorly represented or garnered negative publicity through various media channels, which include but are not limited to, print, broadcast, web-based, and social media. Brand value is based in large part on perceptions of subjective qualities, and even isolated incidents can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation. Even if the aforementioned situations were unfounded or not material to our business, these events could still diminish demand for our products and services and erode customer confidence. If any of these events were to occur, they could have a negative impact on our results of operations and financial condition.
Our information technology systems may be subject to failure, disruptions, security breaches (such as malware, viruses, hacking or other cyber-attacks) which could compromise our ability to conduct business, seriously harm our business and adversely affect our financial results.
Our business is highly dependent on our enterprise information technology systems. We rely on our information technology systems and our internal information technology staff to maintain the information required to operate our distribution centers and to provide our customers with fast, efficient and reliable deliveries. We have taken steps to increase redundancy in our information technology systems and have disaster recovery plans in place to mitigate events that could disrupt our systems’ service. However, if our systems fail or are not reliable, we may suffer disruptions in service to our customers and our results of operations could suffer.
We may upgrade and replace various components of our proprietary enterprise resource planning ("ERP") system periodically with the goal of maintaining and improving overall functionality, performance and service. As technology-based solutions become more integrated with our service offerings, our ability to service our customers could be impacted, creating additional competitive pressure and causing us to lose market share.
In addition, we retain sensitive data, including intellectual property, proprietary business information and personally identifiable information, in our secure data centers and on our networks. We may face threats to our data centers and networks of unauthorized access, security breaches and other system disruptions. Despite our security measures, our infrastructure may be vulnerable to attacks by experienced hackers or other disruptive events.
Computer malware, viruses, hacking and other cyber-attacks have become more prevalent and may occur on our systems in the future. Intruders may also take the form of parties that attempt to fraudulently induce employees or other users of our systems to disclose sensitive or confidential information or otherwise disrupt operations. Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of intellectual property, proprietary business information or personally identifiable information belonging to us or our customers, business partners or employees. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability and security affects the availability of our technical infrastructure and technology-based services. Any such failure may harm our reputation and our ability to retain existing customers and attract new customers and could impact our results of operation.
We may be subject to various claims and lawsuits that could result in significant expenditures.
The nature of our business exposes us to the potential for various claims and litigation related to labor and employment, personal injury, property damage, business practices, environmental liability and other matters. Any material litigation or a catastrophic accident or series of accidents could have a material adverse effect on our business, financial position and results of operations and cash flows.
Unions may attempt to organize our employees.
As of December 31, 2016 , 325 , or approximately 4% , of our employees were covered by collective bargaining agreements with labor organizations, which agreements expire at various times. We cannot assure that we will be able to renew our respective

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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.
Employee health benefit costs represent a significant expense to us and may negatively affect our profitability.
With over 5,000 employees and their families participating in our health plans, our expenses relating to employee health benefits are substantial. In past years, we have experienced significant increases in certain of these costs, largely as a result of economic factors beyond our control, including, in particular, ongoing increases in health care costs well in excess of the rate of inflation. Increased participation in our health plans, continued increasing health care costs, as well as changes in laws, regulations and assumptions used to calculate health and benefit expenses, may adversely affect our business, financial position and results of operations. In addition, the Patient Protection and Affordable Care Act ("ACA") may continue to increase our employee healthcare-related costs. We have migrated a significant number of employees to our high deductible plan resulting in a reduction in our claims exposure and offsetting other costs related to ACA. While we have taken steps to minimize the impact of ACA, there is no guarantee our efforts will be successful.
Changes to minimum wage laws and other governmental legislation or regulations could increase our costs substantially.
As of December 31, 2016 , we had no employees who were paid under the minimum wage in their respective locations. Several bills have been introduced in the U.S. legislature over the past few years to increase the federal minimum wage. In addition, certain states have adopted or are considering adopting minimum wage statutes that exceed the federal minimum wage rate. Any increases in federal or state minimum wages could require us to increase the wages paid to our minimum wage employees and create pressure to raise wages for other employees who already earn above-minimum wages. If we are unable to pass these additional labor costs on to our customers in the form of increased prices or surcharges, our business and results of operations would be adversely affected.
If we are unable to comply with governmental regulations that affect our business or if there are substantial changes in these regulations, our business could be adversely affected.
As a distributor of food and other consumable products, we are subject to regulation by the FDA, Health Canada and similar regulatory authorities at the federal,state, provincial and local levels. In addition, our employees operate tractor trailers, trucks, forklifts and various other powered material handling equipment and we are therefore subject to regulation by the U.S. and Canadian Departments of Transportation. Our operations are also subject to regulation by OSHA, the U.S. Drug Enforcement Administration and a myriad of other federal, state, provincial and local agencies. Each of these regulatory authorities has broad administrative powers with respect to our operations. Regulations, and the costs of complying with those regulations, have been increasing in recent years. If we fail to adequately comply with government regulations, we could experience increased inspections or audits, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased compliance costs. If any of these events were to occur, our results of operations would be adversely affected.
Natural disaster damage could have a material adverse effect on our business.
Our headquarters and several of our warehouses in California, and one warehouse located near Vancouver, British Columbia, Canada, are in or near high hazard earthquake zones. We also have operations in areas that have been affected by natural disasters such as hurricanes, tornados, floods, and ice and snow storms. While we maintain insurance to cover us for certain potential losses, our insurance may not be sufficient in the event of a significant natural disaster or payments under our policies may not be received timely enough to prevent adverse impacts on our business. Our customers could also be affected by like events, which could adversely affect our sales and results of operations.
Insurance and claims expenses could have a material adverse effect on us.
We have a combination of both self-insurance and high-deductible insurance programs for the risks arising out of the services we provide and the nature of our operations throughout North America, including claims exposure resulting from personal injury, property damage, business interruption and workers’ compensation. Workers’ compensation, automobile and general liabilities are determined using actuarial estimates of the aggregate liability for claims incurred and an estimate of incurred but not reported claims. Our accruals for insurance reserves reflect certain actuarial assumptions and management judgments, which are subject to a high degree of variability. If the number or severity of claims for which we are retaining risk increases, our financial condition and results of operations could be adversely affected. If we lose our ability to self-insure these risks, our insurance costs could materially increase and we may find it difficult to obtain adequate levels of insurance coverage.


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Risks Related to the Distribution of Cigarettes and Other Tobacco Products
Our sales volume is largely dependent upon the distribution of cigarettes, sales of which are declining generally.
The distribution of cigarettes is currently a significant portion of our business. In 2016 , approximately 71.1% of our net sales (which includes excise taxes) and 29.9% of our gross profit were generated from the distribution of cigarettes. Due to increases in the prices of cigarettes, restrictions on cigarette manufacturers’ marketing and promotions, increases in cigarette regulation and excise taxes, health concerns, increased pressure from anti-tobacco groups, the rise in popularity of tobacco alternatives, including electronic cigarettes, and other factors, cigarette consumption in the U.S. and Canada has been declining gradually over the past few decades. In most instances, tobacco alternatives, such as electronic cigarettes, are not subject to federal, state, provincial and local excise taxes like the sale of conventional cigarettes or other tobacco products. We expect consumption trends of legal cigarette products will continue to be negatively impacted by the factors described above. In addition, we expect rising prices may lead to a higher percentage of consumers purchasing cigarettes through illicit markets, over the internet and by other means designed to avoid payment of cigarette taxes. If we are unable to sell other products to make up for these declines in cigarette unit sales, our operating results may suffer.
Legislation, regulation and other matters are negatively affecting the cigarette and tobacco industry.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, distribution, sale, taxation and use of tobacco products imposed by governmental entities. Various jurisdictions have adopted or are considering legislation and regulations restricting displays and marketing of tobacco products, establishing fire safety standards for cigarettes, raising the minimum age to possess or purchase tobacco products, requiring the disclosure of ingredients used in the manufacture of tobacco products, imposing restrictions on public smoking, restricting the sale of tobacco products directly to consumers or other recipients over the internet and other tobacco product regulation. In addition, the FDA has been empowered to regulate changes to nicotine yields and the chemicals and flavors used in tobacco products (including cigars, pipe and e-cigarette products), require ingredient listings be displayed on tobacco products, prohibit the use of certain terms which may attract youth or mislead users as to the risks involved with using tobacco products, as well as limit or otherwise impact the marketing of tobacco products by requiring additional labels or warnings as well as pre-approval by the FDA. Such legislation and related regulation is likely to continue adversely impacting the market for tobacco products and, accordingly, our sales of such products.
In Canada, many provinces have enacted legislation authorizing and facilitating the recovery by provincial governments of tobacco-related health care costs from the tobacco industry by way of lawsuit. Some Canadian provincial governments have either already initiated lawsuits or indicated an intention that such lawsuits will be filed. It is unclear at this time how such restrictions and lawsuits may affect Core-Mark and its Canadian operations.
If excise taxes are increased or credit terms are reduced, our sales of cigarettes and other tobacco products could decline and our liquidity could be negatively impacted.
Cigarettes and tobacco products are subject to substantial excise taxes in the U.S. and Canada. Significant increases in cigarette-related taxes and/or fees have been proposed or enacted and are likely to continue to be proposed or enacted by various taxing jurisdictions within the U.S. and Canada as a means of increasing government revenues. These tax increases negatively impact consumption. Additionally, they may cause a shift in sales from premium brands to discount brands, illicit channels or tobacco alternatives, such as electronic cigarettes, as smokers seek lower priced options.
Taxing jurisdictions have the ability to change or rescind credit terms currently extended for the remittance of tax that we collect on their behalf. If these excise taxes are substantially increased or credit terms are substantially reduced, it could have a negative impact on our liquidity. Accordingly, we may be required to obtain additional debt financing, which we may not be able to obtain on satisfactory terms or at all.
Our distribution of cigarettes and other tobacco products exposes us to potential liabilities.
In June 1994, the Mississippi attorney general brought an action against various tobacco industry members on behalf of the state to recover state funds paid for health care costs related to tobacco use. Most other states sued the major U.S. cigarette manufacturers based on similar theories. In November 1998, the major U.S. tobacco product manufacturers entered into a Master Settlement Agreement ("MSA") with 46 states, the District of Columbia and certain U.S. territories. The other four states--Mississippi, Florida, Texas and Minnesota (non-MSA states)--settled their litigations with the major cigarette manufacturers by separate agreements. The MSA and the other state settlement agreements settled health care cost recovery actions and monetary claims relating to future conduct arising out of the use of, or exposure to, tobacco products, imposed a stream of future payment obligations on major U.S. cigarette manufacturers and placed significant restrictions on the ability to market and sell cigarettes. The payments required under the MSA result in the products sold by the participating manufacturers to be priced at higher levels than non-MSA manufacturers. In addition, the growth in market share of discount brands since the MSA was signed has had an adverse impact on the total volume of the cigarettes that we sell.

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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 has in the past proposed legislation which effectively could limit, or even eliminate, use of the last-in, first-out ("LIFO") inventory method for financial and income tax purposes. Although the final outcome of any such proposals cannot be ascertained, the ultimate financial impact to us of the transition from LIFO to another inventory method could be material to our operating results.
We may not be able to settle our qualified defined benefit pension plan on terms or pricing which is satisfactory to us.
We record a liability associated with the underfunded status of our pension plan when the benefit obligation exceeds the fair value of the plan assets. As of December 31, 2016 , our pension plan was 88% funded and our consolidated balance sheet included $4.3 million in pension liabilities related to underfunded pension obligations. On September 14, 2016, our Board of Directors approved termination of our qualified defined-benefit pension plan.  We expect to complete the settlement before the end of 2017.  Our pension liabilities are expected to be settled through either lump sum payments or purchasing annuities from an insurance Company.  We may not be able to consummate the sale or purchase of annuities with counterparties on terms or pricing suitable to us.  
There can be no assurance that we will continue to declare cash dividends in the future or in any particular amounts and if there is a reduction in dividend payments, our stock price may be harmed.
Since the fourth quarter of 2011, we have paid a quarterly cash dividend to our stockholders. We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all applicable laws and agreements to which we are a party. Future dividends may be affected by a variety of factors such as available cash, anticipated working capital requirements, overall financial condition, credit agreement restrictions, future prospects for earnings and cash flows, capital requirements for acquisitions, stock repurchase programs, reserves for legal risks and changes in federal and state income tax laws or corporate laws. Our Board of Directors may, at its discretion, decrease or entirely discontinue the payment of dividends at any time. Any such action could have a material, negative effect on our stock price.
Currency exchange rate fluctuations could have an adverse effect on our revenues and financial results.     
We generate a significant portion of our revenues in Canadian dollars, approximately 10% in 2016 and 11% in 2015 . We also incur a significant portion of our expenses in Canadian dollars. To the extent that we are unable to match revenues received in Canadian dollars with costs paid in the same currency, exchange rate fluctuations in Canadian dollars could have an adverse effect on our financial results. During times of a strengthening U.S. dollar, our reported sales and earnings from our Canadian operations will be reduced because the Canadian currency will be translated into fewer U.S. dollars. Conversely, during times of a weakening U.S. dollar, our reported sales and earnings from our Canadian operations will be increased because the Canadian currency will be translated into more U.S. dollars. U.S. GAAP requires that foreign currency transaction gains or losses on short-term intercompany transactions be recorded currently as gains or losses within the statement of operations. To the extent we incur losses on such transactions, our net income will be reduced. We currently do not hedge our Canadian foreign currency cash flows.
We may not be able to borrow additional capital to provide us with sufficient liquidity and capital resources necessary to meet our future financial obligations.
We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under a $600 million revolving credit facility ("Credit Facility") as of December 31, 2016. On November 4, 2016 , we entered into a ninth amendment to the Credit Facility which increased our Credit Facility from $450 million to $600 million . The Credit Facility, initially dated as of October 12, 2005, as amended or otherwise modified from time to time, is between us, as Borrowers, the Lenders named therein, and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Facility expires in May 2020 . While

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we believe our sources of liquidity are adequate, we cannot assure that these sources will be available or continue to provide us with sufficient liquidity and capital resources required to meet our future financial obligations, or to provide funds for our working capital, capital expenditures and other needs. As such, additional equity or debt financing sources may be necessary, in addition we may not be able to expand our existing Credit Facility or obtain new financing on terms satisfactory to us.
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.

ITEM 2.      PROPERTIES
Our headquarters are located in South San Francisco, California, and consist of approximately 31,800 square feet of leased office space. We also lease approximately 20,000 square feet for use by our information technology and tax personnel in Richmond, British Columbia, approximately 6,000 square feet for use by our information technology personnel in Plano, Texas, and approximately 3,600 and 2,000 square feet of additional office space in Fort Worth, Texas and Phoenix, AZ, respectively. We lease approximately 4.9 million square feet and own approximately 0.6 million  square feet of distribution space.
Distribution Center Facilities by City and State of Location (1)  
Albuquerque, New Mexico
Hayward, California
Spokane, Washington
Atlanta, Georgia
Las Vegas, Nevada
Tampa, Florida
Bakersfield, California
Leitchfield, Kentucky
Whitinsville, Massachusetts
Corona, California (2)
Los Angeles, California
Wilkes-Barre, Pennsylvania
Denver, Colorado
Minneapolis, Minnesota
Calgary, Alberta
Forrest City, Arkansas (3)
Portland, Oregon
Toronto, Ontario
Fort Worth, Texas
Sacramento, California (4)
Vancouver, British Columbia
Gardiner, Maine
Salt Lake City, Utah
Winnipeg, Manitoba
Glenwillow, Ohio
Sanford, North Carolina
Mississauga, Ontario (5)
 
(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 AMI-Artic East consolidating warehouse.
(4)
This facility includes a distribution center and our Artic Cascade consolidating warehouse.

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(5)
This facility is our Canadian consolidating warehouse.
We also operate distribution centers on behalf of two of our major customers: one in Phoenix, Arizona (for Couche-Tard), and one in San Antonio, Texas (for CST Brands, Inc.). Each facility is leased or owned by the specific customer solely for their use and operated by Core-Mark.


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ITEM 3.
LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings, claims, investigations and administrative proceedings in the ordinary course of its business. The Company records a provision for a liability when it is both probable that the liability has been incurred and that the amount of the liability can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.


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PART II

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

Market and Stockholders
Our common stock trades on the NASDAQ Global Market under the symbol “CORE.” According to the records of our transfer agent, we had 1,803 stockholders of record as of February 24, 2017 .
On May 25, 2016 , the Board of Directors approved a two-for-one stock split of the Company’s outstanding common stock, effected through a stock dividend. The additional shares were distributed on June 27, 2016 to stockholders of record at the close of business on June 9, 2016 . All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect this two-for-one stock split for all periods presented.
The following table provides the range of high and low sales prices of our common stock as reported by NASDAQ and dividends declared per share for the periods indicated:
 
Market Prices
 
Dividend Declared
 
2016
 
2015
 
Year
 
Low
Price
 
High
Price
 
Low
Price
 
High
Price
 
2016
 
2015
4th Quarter
$
33.24

 
$
43.46

 
$
32.22

 
$
45.30

 
$
0.09

 
$
0.08

3rd Quarter
35.16

 
48.96

 
29.48

 
33.26

 
0.08

 
0.07

2nd Quarter
38.26

 
46.86

 
26.31

 
32.72

 
0.08

 
0.07

1st Quarter
35.99

 
41.60

 
29.26

 
35.68

 
0.08

 
0.07

We paid dividends of $15.5 million and $12.8 million in 2016 and 2015 , respectively. Our Credit Facility, as of December 31, 2016 , allows for unlimited dividends, as long as the Company meets certain credit availability percentages and fixed charge coverage ratios. (See  Note 8 - Long-term Debt to our consolidated financial statements included in this Form 10-K for additional details on the Credit Facility). We intend to continue increasing our dividends per share over time; however, the payment of any future dividends will be determined by our Board of Directors in light of then existing conditions, including our earnings, financial condition and capital requirements, strategic alternatives, restrictions in financing agreements, business conditions and other factors.

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PERFORMANCE COMPARISON
The graph below presents a comparison of cumulative total return to stockholders for Core-Mark’s common stock at the end of each year from 2011 through 2016, as well as the cumulative total returns of the NASDAQ Non-Financial Stock Index, the Russell 2000 Index, the Standard and Poor’s Small Cap 600 Index, and a peer group of companies ("Performance Peer Group").
Cumulative total return to stockholders is measured by the change in the share price for the period, plus any dividends, divided by the share price at the beginning of the measurement period. Core-Mark’s cumulative stockholder return is based on an investment of $100 on December 31, 2011, and is compared to the total return of the NASDAQ Non-Financial Stock Index, the Russell 2000 Index, the Standard and Poor’s Small Cap 600 Index, and the weighted-average performance of the Performance Peer Group over the same period with a like amount invested, including the assumption that any dividends have been reinvested. We regularly compare our performance to the Russell 2000 Index and the Standard and Poor's Small Cap 600 Index since it includes primarily companies with relatively small market capitalization similar to us.
The companies composing the Performance Peer Group are Sysco Corp. ("SYY"), The Chef’s Warehouse, Inc. ("CHEF"), United Natural Foods, Inc. ("UNFI") and AMCON Distributing Co. ("DIT").

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CORE-MARK, NASDAQ NON-FINANCIAL STOCK, S&P SMALLCAP 600, RUSSELL 2000 INDEXES AND THE PERFORMANCE PEER GROUP
A142016PERFORMANCEGRAPH.JPG
 
 
Investment Value at
 
 
12/31/11
 
12/31/12
 
12/31/13
 
12/31/14
 
12/31/15
 
12/31/16
CORE
 
$
100.00

 
$
121.99

 
$
197.47

 
$
325.76

 
$
434.86

 
$
460.97

Russell 2000
 
$
100.00

 
$
116.35

 
$
161.52

 
$
169.42

 
$
161.95

 
$
196.45

NASDAQ Non-financial Index
 
$
100.00

 
$
117.21

 
$
164.20

 
$
188.95

 
$
202.50

 
$
217.97

S&P SmallCap 600
 
$
100.00

 
$
116.33

 
$
164.38

 
$
173.84

 
$
170.41

 
$
215.67

Performance Peer Group
 
$
100.00

 
$
113.63

 
$
139.22

 
$
154.28

 
$
150.40

 
$
205.50


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Issuer Purchases of Equity Securities
Our Board of Directors authorized a share repurchase program that may be discontinued or amended at any time. Shares repurchased under the program were made in the open market and the timing and amount of the purchases are based on market conditions, our cash and liquidity requirements, relevant securities laws and other factors. The program has no expiration date and expires when the amount authorized has been expended or the Board of Directors withdraws its authorization.
In 2016 , we repurchased 237,869 shares of common stock for a total cost of $8.9 million , or an average price of $37.76 per share. In 2015 , we repurchased 302,366 shares of common stock for a total cost of $9.2 million , or an average price of $30.35 per share. As of December 31, 2016 , we had $2.6 million available for future share repurchases under the program.
The following table provides the repurchases of shares of common stock during the three months ended December 31, 2016 :
Calendar Month in which
purchases were made:
 
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, 2016 to October 31, 2016
 
49,743

 
$
34.91

 
49,743

 
$
2.6

November 1, 2016 to November 30, 2016
 

 

 

 

December 1, 2016 to December 31, 2016
 

 

 

 

Total repurchases for the three months ended December 31, 2016
 
49,743

 
$
34.91

 
49,743

 
$
2.6

 
 
 
 
 
 
 
 
 
_____________________________________________
(1)
Includes related transaction fees.


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ITEM 6.      SELECTED FINANCIAL DATA
Basis of Presentation
The selected consolidated financial data for the five years from 2012 to 2016 are derived from our audited consolidated financial statements included in our Annual Reports on Form 10-K or Form 10-K/A. The following financial data should be read in conjunction with the consolidated financial statements and notes thereto and with Item 7 - Management s Discussion and Analysis of Financial Condition and Results of Operations.
SELECTED CONSOLIDATED FINANCIAL DATA
 
Core-Mark Holding Company, Inc.
 
Year Ended December 31,
(in millions except per share amounts)
2016 (1)
 
2015 (2)
 
2014
 
2013
 
2012 (3)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
14,529.4

 
$
11,069.4

 
$
10,280.1

 
$
9,767.6

 
$
8,892.4

Gross profit (4)
736.9

 
637.9

 
573.7

 
537.1

 
476.8

Warehousing and distribution expenses (4)
431.2

 
352.6

 
318.4

 
297.1

 
262.7

Selling, general and administrative expenses
210.3

 
196.0

 
184.4

 
168.3

 
153.7

Amortization of intangible assets
5.3

 
2.6

 
2.6

 
2.7

 
3.0

Income from operations
90.1

 
86.7

 
68.3

 
69.0

 
57.4

Interest expense, net (5)
5.1

 
2.0

 
1.8

 
2.2

 
1.8

Foreign currency transaction (gains) losses
(0.5
)
 
1.8

 
0.1

 
0.8

 
0.2

Net income
54.2

 
51.5

 
42.7

 
41.6

 
33.9

Per Share Data:
 
 
 
 
 
 
 
 
 
Basic net income per common share (6)
$
1.17

 
$
1.12

 
$
0.93

 
$
0.91

 
$
0.74

Diluted net income per common share (6)
$
1.17

 
$
1.11

 
$
0.92

 
$
0.90

 
$
0.73

Shares Used to Compute Net Income Per Share:
 
 
 
 
 
 
 
 
 
Basic (6)
46.3

 
46.2

 
46.2

 
46.0

 
46.0

Diluted (6)
46.5

 
46.6

 
46.6

 
46.4

 
46.4

Cash Dividends Declared Per Common Share (7)
$
0.33

 
$
0.29

 
$
0.23

 
$
0.15

 
$
0.23

Other Financial Data:
 
 
 
 
 
 
 
 
 
Excise taxes (8)
$
3,022.0

 
$
2,211.7

 
$
2,110.3

 
$
2,050.8

 
$
1,987.0

Cigarette inventory holding gains (9)
15.3

 
10.1

 
8.2

 
9.0

 
7.8

Candy inventory holding gains (10)

 

 
6.0

 

 

Cigarette tax stamp inventory holding gains, net (11)

 
8.5

 

 

 

OTP tax items, net (12)

 
1.7

 
7.5

 

 

LIFO expense (13)
13.2

 
1.9

 
16.3

 
8.7

 
12.3

Depreciation and amortization (14)
42.9

 
37.9

 
32.0

 
27.2

 
25.3

Stock-based compensation
6.1

 
8.7

 
6.1

 
4.6

 
5.8

Capital expenditures (15)
54.3

 
30.3

 
53.9

 
18.0

 
28.6

Adjusted EBITDA   (non-GAAP) (16)
152.3

 
135.2

 
122.7

 
109.5

 
100.8

 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
1,497.0

 
$
1,077.3

 
$
1,029.6

 
$
956.8

 
$
919.2

Long-term obligations (17)
347.7

 
60.4

 
68.2

 
57.6

 
84.7



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______________________________________________
(1)
Pine State Convenience was acquired in June 2016 and the results of operations have been included in the selected consolidated financial data since the date of the acquisition.
(2)
Karrys Bros., Limited was acquired in February 2015 and the results of operations have been included in the selected consolidated financial data since the date of the acquisition.
(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)
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.
(5)
Interest expense, net, is reported net of interest income.
(6)
On May 25, 2016, the Board of Directors approved a two-for-one stock split of the Company's outstanding common stock, effected through a stock dividend. The additional shares were distributed on June 27, 2016 to stockholders of record at the close of business on June 9, 2016. All references made to share or per share amounts have been retroactively adjusted to reflect this two-for-one stock split for all periods presented.
(7)
On October 19, 2011, we announced the commencement of a quarterly dividend program. In lieu of the first quarter 2013 dividend, the Board of Directors declared an accelerated cash dividend of $0.05 per common share on December 20, 2012.
(8)
State, local and provincial excise taxes (predominantly cigarettes and tobacco) paid by us are included in net sales and cost of goods sold.
(9)
Cigarette inventory holding gains represent income related to cigarette inventories on hand at the time cigarette manufacturers increase their prices. Such increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The higher gross profits are referred to as inventory holding gains. This income is not predictable and is dependent on inventory levels and the timing of manufacturer price increases.
(10)
Candy inventory holding gains represent income related to candy inventories on hand at the time candy manufacturers increase their prices. Such increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The higher gross profits are referred to as inventory holding gains. Although we have realized candy inventory holding gains in one of the last five years, this income is not predictable and is dependent on inventory levels and the timing of manufacturer price increases.
(11)
Cigarette tax stamp inventory holding gains represent income related to tax stamp inventories on hand that may be realized at the time taxing jurisdictions increase their excise taxes, depending on the statutory requirements relating to the inventory on hand at the time such excise tax increases. Such tax increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The incremental gross profits resulting from such tax increases are referred to as inventory holding gains. Although we have realized a cigarette tax stamp inventory holding gain of $ 9.0 million , offset by $ 0.5 million in associated fees, in 2015, this income is not predictable and is dependent on inventory levels and the aforementioned statutory requirements.
(12)
In 2015 , we received OTP tax refunds of $ 1.8 million related to prior years’ taxes, offset by $ 0.1 million related expenses. In 2014 , we received OTP tax refunds of $9.0 million related to prior years’ taxes, offset by $1.0 million of related expenses and a probable OTP tax assessment of $0.5 million . OTP tax settlements were zero for 2013 and 2012.
(13)
The decrease in LIFO expense in 2015 was due primarily to a decrease in the Producer Price Index ("PPI") for certain product categories we use to measure food/non-food LIFO expense as published by the Bureau of Labor Statistics.
(14)
Depreciation and amortization includes depreciation on property and equipment and amortization of purchased intangible assets.
(15)
Capital expenditures in 2016 include leasehold improvements for a new building for our Las Vegas division and other building upgrades, as well as logistical equipment to accommodate new business. Capital expenditures in 2014 include costs for our new distribution center in Ohio.
(16)
The following table provides the components of Adjusted EBITDA for each year presented (in millions):
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Net income
$
54.2

 
$
51.5

 
$
42.7

 
$
41.6

 
$
33.9

Interest expense, net
5.1

 
2.0

 
1.8

 
2.2

 
1.8

Provision for income taxes
31.3

 
31.4

 
23.7

 
24.4

 
21.5

Depreciation and amortization
42.9

 
37.9

 
32.0

 
27.2

 
25.3

LIFO expense
13.2

 
1.9

 
16.3

 
8.7

 
12.3

Stock-based compensation expense
6.1

 
8.7

 
6.1

 
4.6

 
5.8

Foreign currency transaction (gains) losses, net
(0.5
)
 
1.8

 
0.1

 
0.8

 
0.2

Adjusted EBITDA (non-GAAP)
$
152.3

 
$
135.2

 
$
122.7

 
$
109.5

 
$
100.8


(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. This discussion and analysis also includes non-GAAP financial measures that we believe provide important perspective in understanding trends that may impact our business. These non-GAAP financial measures are discussed, including reconciliation of these measures to GAAP, under "non-GAAP Financial Information" in this Item 7.
Our Business

Core-Mark is one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America. We offer a full range of products, marketing programs and technology solutions to approximately 43,000 customer locations in the U.S. and Canada. Our customers include traditional convenience stores, drug stores, grocery stores, liquor stores and other specialty and small format stores that carry convenience products. Our product offering includes cigarettes, other tobacco products (OTP), candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health and beauty care products. We operate a network of 30 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third party logistics provider). Our core business objective is to help our customers increase their sales and profitability.

Overview of 2016 Results
During 2016 , we continued to grow market share and increase our food/non-food sales and gross profit through our core strategies by driving our Vendor Consolidation Initiative (VCI), leveraging our “Fresh” product solutions, and providing category management expertise in order to make our customers more relevant and profitable.
Our net sales in 2016 increased 31.3% , or $ 3,460.0 million , to $ 14,529.4 million compared to $11,069.4 million for 2015 . The increase in net sales was driven primarily by market share gains, including the addition of Murphy U.S.A., which the Company began servicing during the first quarter of 2016, the acquisition of Pine State Convenience (Pine State) in June 2016, and the continued success of our core strategies.
Gross profit in 2016 increased $ 99.0 million , or 15.5% , to $ 736.9 million from $637.9 million in 2015 , driven primarily by the increase in sales. LIFO expense increased $11.3 million in 2016 compared to 2015 , due primarily to an increase in the Producer Price Index (PPI) for certain food/non-food product categories. Since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices. Gross profit in 2015 included cigarette tax stamp holding gains of $ 9.0 million and refunds of excise taxes on OTP of $1.8 million related to prior years.
Gross profit margin was 5.1% of total net sales in 2016 compared to 5.8% in 2015. The decrease in gross profit margin was due primarily to market share gains, including the addition of Murphy U.S.A., which have a higher sales mix of tobacco products, and generally lower margins compared to the rest of our business.
To the extent we capture large chain customers, our gross profit margins may be negatively impacted. However, large chain customers generally require less working capital, allowing us in most cases, to offer lower prices and still achieve a favorable return on our investment. Our focus is to strike a balance between large chain business, which generally has lower gross profit margins, and independently-owned convenience stores, which according to the 2015 National Association of Convenience Stores (NACS) State of the Industry (SOI) report, comprise approximately 67% of the overall convenience store market and generally have higher gross profit margins.
Operating expenses in 2016 increased 17.3% , or $95.6 million , to $646.8 million from $551.2 million in 2015 . Increases in the amount of cubic feet of product handled, incremental customer deliveries, the acquisition of Pine State and costs related to the on-boarding of significant new customers contributed to higher operating expenses in 2016 .
Net income in 2016 was $ 54.2 million compared to $51.5 million in 2015 . Net income excluding LIFO expense (1) increased $9.6 million , or 18.2% , to $62.3 million in 2016 compared to $52.7 million in 2015 . Adjusted EBITDA (1) increased $17.1 million , or 12.6% , to $152.3 million in 2016 from $135.2 million in 2015 . The increase in net income excluding LIFO expense and Adjusted EBITDA was due primarily to the growth in gross profit resulting from market share gains and the acquisition of Pine State, offset by incremental expenses related to the on-boarding of significant new customers. Net income and Adjusted EBITDA for 2015 included cigarette tax stamp holding gains of $8.5 million (pre-tax), net of expenses and OTP tax refunds of $1.7 million, net of expenses.

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________________________________________  
(1)
Net income excluding LIFO expense and Adjusted EBITDA are non-GAAP financial measures and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States of America (GAAP). See the reconciliation of net income excluding LIFO expense to net income in Item 7 - "Non GAAP Financial Information". See the reconciliation of Adjusted EBITDA to net income in Item 7 "Adjusted EBITDA".

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Table of Contents

Business and Supply Expansion
We continue to benefit from the expansion of our business and the execution of our core strategies, focused primarily on enhancing our fresh product offering, leveraging VCI and providing category management expertise to our customers. Our strategies take costs and inefficiencies out of supply chains, bringing our customers an avenue to offer high quality fresh foods and optimize their consumer product offering. We believe each of these strategies, when adopted, will increase our customers’ profits.
Some of our more recent expansion activities include:
In December 2016, we signed a three-year supply agreement to service approximately 530 Walmart stores in five western states (Arizona, California, New Mexico, Nevada and Utah). We will be the primary distributor to these stores for candy, tobacco and certain snack foods. Candy will be the largest product category serviced under the new arrangement and is expected to increase our annualized sales for this category by approximately 40%-50%. We expect to begin servicing the stores under this agreement in May 2017.
In June 2016, we acquired substantially all of the assets of Pine State Convenience, a division of Pine State Trading Company, located in Gardiner, Maine, for cash consideration of approximately $88 million. We incurred $2.2 million in start-up and due diligence costs in 2016 and we expect to incur another $1.5 million in integration costs in 2017.
In October 2015, we signed a five-year agreement with Murphy U.S.A. to be the primary wholesale distributor to over 1,400 stores located in 24 states across the Southwest, Southeast and Midwest United States. Services under this contract began in the first quarter of 2016 and have created efficiencies and a strategic supply chain relationship for Murphy U.S.A.
In October 2015, we signed a five-year supply agreement with 7-Eleven, Inc. to be the primary wholesale distributor to approximately 900 stores located in three western regions. We began servicing these stores in October 2016, from three of our divisions - Las Vegas, NV, Salt Lake City, UT and Sacramento, CA.
During 2016 , we continued to grow sales and margins in our “Fresh” categories, as a result of improving our customers’ product assortment and in-store marketing efforts. Sales of our Fresh categories grew 16.4% in 2016 compared to the same period in 2015 . We continue to focus on fresh and healthy offerings because we believe that over the long-term, the trend is for the convenience consumer to shift buying preferences to these types of items. We benefit from this shift due to the higher margins of these products compared to the other merchandise we distribute. Industry experts have indicated that consumers are making more shopping trips related to fresh food and that perishable foods will serve a more important role in the convenience retail channel in the future. We believe our strategies have helped position us and our customers to benefit from these trends.

Other Business Developments
As of December 31, 2016 , we serviced approximately 3,000 Alimentation Couche-Tard, Inc. (Couche-Tard) locations in the U.S. and Canada. A portion of these locations were subject to renewals during the third quarter of 2016. Consequently, our agreement to service approximately 1,100 Circle K stores in the Southeastern Region of the U.S. expired in January 2017. We will continue to service approximately 1,900 stores including both company and franchise operated stores located in the Western and Southwestern regions of the U.S. and Canada. We will also continue to operate a third party distribution center dedicated to supplying over 500 Circle K branded convenience stores across Arizona and Nevada.
In January 2017, we announced the expiration of our supply agreement with Kroger Convenience (Kroger) effective April 2017. The expiring agreement covers approximately 680 stores.
The expiration of the Couche-Tard and Kroger contracts described above will reduce our sales and net income from these large chain customers in 2017. However, we expect new business from other customers in the U.S. and Canada and other organic growth, some of which are described in "Business and Supply Expansion" above, to more than offset the loss.
Dividends
On May 25, 2016 , the Board of Directors approved a two-for-one stock split of the Company’s outstanding common stock, effected through a stock dividend. The additional shares were distributed on June 27, 2016 to stockholders of record at the close of business on June 9, 2016 . All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect this two-for-one stock split for all periods presented.

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The Board of Directors approved the following cash dividends in 2016 (in millions, except per share data)
Declaration Date
 
Dividends Per Share
 
Record Date
 
Cash Payment Amount (1)
 
Payment Date
February 24, 2016
 
$0.08
 
March 11, 2016
 
$3.8
 
March 28, 2016
May 9, 2016
 
$0.08
 
May 25, 2016
 
$3.7
 
June 15, 2016
August 8, 2016
 
$0.08
 
August 24, 2016
 
$3.8
 
September 15, 2016
November 4, 2016
 
$0.09
 
November 23, 2016
 
$4.2
 
December 15, 2016
______________________________________________
(1) Includes cash payments on declared dividends and payments made on Restricted Stock Units (RSUs) vested subsequent to the payment date.
We paid dividends of $15.5 million and $12.8 million in 2016 and 2015 , respectively.
Share Repurchase Program
In May 2013 , our Board of Directors authorized a $30 million increase to our stock repurchase program which may be discontinued or amended at any time. The program will expire when the amount authorized has been expended or the Board of Directors withdraws its authorization. In 2016 , we repurchased 237,869 shares of common stock at an average price of $37.76 compared to repurchases of 302,366 shares of common stock at an average price of $30.35 in 2015 . As of December 31, 2016 and 2015 , we had $2.6 million and $11.5 million , respectively, available for future share repurchases under the program.


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Table of Contents

Results of Operations
Comparison of 2016 and 2015 (in millions) (1) :
 
 
 
2016
 
2015
 
Increase (Decrease)
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
3,460.0

 
$
14,529.4

 
100.0
 %
 
 %
 
$
11,069.4

 
100.0
 %
 
 %
Net sales — Cigarettes
2,807.2

 
10,335.7

 
71.1

 
66.2

 
7,528.5

 
68.0

 
62.7

Net sales — Food/non-food
652.8

 
4,193.7

 
28.9

 
33.8

 
3,540.9

 
32.0

 
37.3

Net sales, less excise taxes (non-GAAP) (2)
2,649.7

 
11,507.4

 
79.2

 
100.0

 
8,857.7

 
80.0

 
100.0

Gross profit (3)
99.0

 
736.9

 
5.1

 
6.4

 
637.9

 
5.8

 
7.2

Warehousing and
 
 
 
 
 
 
 
 
 
 
 
 
 
    distribution expenses
78.6

 
431.2

 
3.0

 
3.7

 
352.6

 
3.2

 
4.0

Selling, general and
 
 
 
 
 
 
 
 
 
 
 
 
 
    administrative expenses
14.3

 
210.3

 
1.4

 
1.8

 
196.0

 
1.8

 
2.2

Amortization of
 
 
 
 
 
 
 
 
 
 
 
 
 
    intangible assets
2.7

 
5.3

 

 

 
2.6

 

 

Income from operations  (4)
3.4

 
90.1

 
0.6

 
0.8

 
86.7

 
0.8

 
1.0

Interest expense
2.8

 
(5.3
)
 

 

 
(2.5
)
 

 

Interest income
(0.3
)
 
0.2

 

 

 
0.5

 

 

Foreign currency transaction
 
 
 
 
 
 
 
 
 
 
 
 
 
    gains (losses), net
2.3

 
0.5

 

 

 
(1.8
)
 

 

Income before taxes
2.6

 
85.5

 
0.6

 
0.7

 
82.9

 
0.7

 
0.9

Net income
2.7

 
54.2

 
0.4

 
0.5

 
51.5

 
0.5

 
0.6

Adjusted EBITDA   (non-GAAP)  (5)
17.1

 
152.3

 
1.0

 
1.3

 
135.2

 
1.2

 
1.5

______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2)
See the reconciliation of net sales less excise taxes to net sales in "Comparison of Sales and Gross Profit by Product Category" and in "Non-GAAP Financial Information".
(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)
Income from operations for 2016 includes LIFO expense of $ 13.2 million compared to $ 1.9 million in 2015. In addition, income from operations in 2015 includes cigarette tax stamp inventory holding gains in the U.S. of $8.5 million , net of expenses, resulting from the increase in the excise tax rates of certain jurisdictions.
(5)
See the reconciliation of Adjusted EBITDA to net income in "Adjusted EBITDA".

Net Sales. Net sales increased by $3,460.0 million , or 31.3% to $14,529.4 million in 2016 from $11,069.4 million in 2015 driven primarily by significant market share gains, including the addition of Murphy U.S.A., which the Company began servicing during the first quarter of 2016, and the acquisition of Pine State in June 2016. In addition, net sales in 2016 also benefited from increases in cigarette manufacturers' prices and incremental food/non-food sales driven by the continued success of our core strategies.
Net Sales of Cigarettes. Net sales of cigarettes in 2016 increased by $2,807.2 million or 37.3% to $10,335.7 million from $7,528.5 million in 2015 driven primarily by a 27.5% increase in carton sales, the acquisition of Pine State, and a 2.7% increase in the average sales price per carton mainly as a result of increases in manufacturers' prices. Cigarette carton sales in the U.S. increased by 34.5% during the same period driven primarily by market share gains, including the addition of Murphy U.S.A., and the acquisition of Pine State in June 2016. Carton sales in Canada increased 13.8%, also driven by market share gains.

27


Total net cigarette sales as a percentage of total net sales were 71.1% in 2016 compared to 68.0% in 2015 . The increase in cigarette sales as a percentage of total net sales was due primarily to market share gains in 2016, including the addition of Murphy U.S.A., which have a higher sales mix of cigarettes compared to the rest of our business.
Despite the significant increase in our cigarette sales in 2016 , we believe long-term cigarette consumption will continue to be impacted by rising prices, legislative actions, diminishing social acceptance and sales through illicit markets. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability, thus mitigating the effects of the declines to distributors. In addition, industry data indicates that convenience retailers are more than offsetting cigarette volume profit declines through higher sales of food/non-food products and food services. We expect this trend to continue as the convenience industry adjusts to consumer demands.
Net Sales of Food/Non-food Products. Net sales of food/non-food products in 2016 increased $652.8 million , or 18.4% , to $4,193.7 million from $3,540.9 million in 2015 .
The following table provides net sales by product category for our food/non-food products (in millions) (1) :
 
2016
 
2015
 
Increase
Product Category
Net Sales
 
Net Sales
 
Amounts
 
Percentage
Food (2)
$
1,422.5

 
$
1,251.1

 
$
171.4

 
13.7
%
Fresh (2)
389.8

 
335.0

 
54.8

 
16.4
%
Candy
620.0

 
557.0

 
63.0

 
11.3
%
Other tobacco products
1,133.8

 
870.3

 
263.5

 
30.3
%
Health, beauty & general
446.7

 
368.8

 
77.9

 
21.1
%
Beverages
176.5

 
156.6

 
19.9

 
12.7
%
Equipment/other
4.4

 
2.1

 
2.3

 
N/A

Total Food/Non-food Products
$
4,193.7

 
$
3,540.9

 
$
652.8

 
18.4
%
______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2)
In 2016, the Fresh category was separated from the Food category to better highlight the growth in the Fresh commodity. The 2015 presentation has been realigned to reflect these changes.
The increase in food/non-food sales in 2016 was driven primarily by market share gains, the acquisition of Pine State and an increase in sales to existing customers. Sales generated from VCI, Fresh and our Focused Marketing Initiative (FMI) were the primary drivers of the increase in net sales to existing customers. The increase in sales in our OTP category was due primarily to market share gains, including the addition of Murphy U.S.A. and higher sales of smokeless tobacco products.  We believe the overall trend toward the increased use of smokeless tobacco products will continue and will help offset the impact of the expected long-term decline of cigarette consumption.
Total net sales of food/non-food products as a percentage of total net sales were 28.9% in 2016 compared to 32.0% for the same period in 2015 .
Gross Profit. Gross profit represents the amount of profit after deducting cost of goods sold from net sales during the period. Inventory holding gains represent incremental revenues whereas vendor incentives, OTP tax refunds and changes in LIFO reserves are components of cost of goods sold and therefore part of our gross profit. Gross profit in 2016 increased $99.0 million or 15.5% to $736.9 million from $637.9 million in 2015 driven primarily by the increase in sales, including the acquisition of Pine State in June 2016. Gross profit in 2016 also benefited from a $5.2 million increase in cigarette inventory holding gains driven primarily by the increase in carton sales and higher cigarette inflation in 2016.
The increase in gross profit in 2016 was offset by an increase in LIFO expense of $ 11.3 million compared to 2015, due primarily to an increase in the Producer Price Index (PPI) for certain food/non-food product categories. In addition, gross profit in 2015 included cigarette tax stamp inventory holding gains of $ 9.0 million which resulted from an increase in excise taxes by certain jurisdictions and $ 1.8 million in OTP tax refunds, related to the overpayment of taxes in prior years.
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

28


for cigarette sales. Conversely, we generally benefit from food/non-food price increases because product costs for these categories are usually marked up using a percentage of cost of goods sold.
Gross profit margin was 5.07% of total net sales in 2016 compared to 5.76% in 2015. The decrease in gross profit margins was due primarily to the addition of Murphy U.S.A., which has a higher sales mix of tobacco products and generally lower margins compared to the rest of our business.
Our cigarette inventory holding gains were $ 15.3 million in 2016 compared to $ 10.1 million for the same period in 2015 . We expect cigarette manufacturers will continue to raise prices as carton sales decline in order to maintain or enhance their overall profitability and the various taxing jurisdictions will raise excise taxes to make up for lost tax dollars related to consumption declines.
LIFO expense was $ 13.2 million in 2016 compared to $ 1.9 million in 2015 . Since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor Statistics PPI used to estimate and record our book LIFO expense ( see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements).
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2016 and 2015 (in millions) (1) :
 
 
 
2016
 
2015
 
Increase (Decrease)
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
3,460.0

 
$
14,529.4

 
100.0
 %
 
 %
 
$
11,069.4

 
100.0
 %
 
 %
Net sales, less excise taxes (non-GAAP) (2)
2,649.7

 
11,507.4

 
79.2

 
100.0

 
8,857.7

 
80.0

 
100.0

Components of gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cigarette inventory holding gains (3)
$
5.2

 
$
15.3

 
0.11
 %
 
0.13
 %
 
$
10.1

 
0.09
 %
 
0.11
 %
Cigarette tax stamp inventory holding gains (4)
(9.0
)
 

 

 

 
9.0

 
0.08

 
0.10

OTP tax items (5)
(1.8
)
 

 

 

 
1.8

 
0.02

 
0.02

LIFO expense (6)
11.3

 
(13.2
)
 
(0.09
)
 
(0.11
)
 
(1.9
)
 
(0.02
)
 
(0.02
)
Remaining gross profit (non-GAAP) (7)
115.9

 
734.8

 
5.06

 
6.39

 
618.9

 
5.59

 
6.99

Gross profit
$
99.0

 
$
736.9

 
5.07
 %
 
6.40
 %
 
$
637.9

 
5.76
 %
 
7.20
 %
______________________________________________
(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 reconciliation of net sales less excise taxes to net sales in "Comparison of Sales and Gross Profit by Product Category" and in "Non-GAAP Financial Information").
(3)
The amount of cigarette inventory holding gains attributable to the U.S. and Canada were $13.7 million and $1.6 million , respectively, in 2016 , compared to $8.7 million and $1.4 million , respectively, in 2015 .
(4)
In 2015 , we recognized cigarette tax stamp inventory holding gains in the U.S. of $ 9.0 million , resulting from the increase in the excise tax rates of certain jurisdictions.
(5)
In 2015 , we received OTP tax refunds of $ 1.8 million related to prior years’ taxes.
(6)
The increase of $11.3 million in LIFO expense in 2016 was due primarily to an increase in the Production Price Index (PPI) for certain Food/ Non Food commodities. Since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor Statistics PPI used to estimate and record our book LIFO expense ( see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements).
(7)
S ee the reconciliation of remaining gross profit to gross profit in "Non-GAAP Financial Information".
Remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross profit in "Non-GAAP financial information"), increased $115.9 million , or 18.7% , to $734.8 million in 2016 from $618.9 million for the same period in 2015 . Remaining gross profit margin was 5.06% in 2016 compared to 5.59% in 2015 . The decrease in remaining gross profit margin in 2016 was due primarily to market share gains, including Murphy U.S.A., which have a higher sales mix of cigarettes

29


and other tobacco products. In addition, increases in cigarette manufacturers' prices compressed remaining gross profit margins by approximately five basis points in 2016 .
Cigarette remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross profit in "Non-GAAP financial information"), increased $ 44.0 million , or 25.5% , to $ 216.4 million in 2016 from $ 172.4 million for the same period in 2015. Cigarette remaining gross profit per carton decreased by approximately 5.0% in 2016 compared to 2015 due primarily to the addition of Murphy U.S.A., offset partially by higher manufacturers’ discounts earned as a result of price increases.
Food/non-food remaining gross profit, a non-GAAP financial measure, (see reconciliation of remaining gross profit to gross profit in "Non-GAAP financial information") increased $71.9 million or 16.1% to $ 518.4 million , in 2016 from $ 446.5 million in 2015 . Food/non-food remaining gross profit margin decreased 25 basis points to 12.36% in 2016 compared to 12.61% in 2015 due primarily to the addition of Murphy U.S.A., which has generally lower overall food/non-food margins compared to the rest of our business and a higher sales mix of OTP, which have lower gross profit margins relative to other food/non-food products.
To the extent we capture large chain business, our gross profit margins may be negatively impacted. However, large chain customers generally require less working capital, allowing us in most cases to offer lower prices to achieve a favorable return on our investment. Our focus is to strike a balance between large chain business, which generally has lower gross profit margins, and independently-owned convenience stores, which per the NACS SOI report, comprise approximately 67% of the overall convenience store market and generally have higher gross profit margins.
In 2016 , our remaining gross profit for food/non-food products was approximately 70.6% of our total remaining gross profit compared to 72.1% for the same period in 2015 .
Operating Expenses.   Our operating expenses include costs related to Warehousing and Distribution, Selling, General and Administrative Expenses and Amortization of Intangible Assets. In 2016 , operating expenses increased by $95.6 million or 17.3% , to $646.8 million from $551.2 million in 2015 . Increases in the amount of comparable cubic feet of product handled, incremental deliveries made, and costs related to the on-boarding of new customers, contributed to higher operating expenses in 2016. In addition, operating expenses in 2016 include expenses of approximately $29.5 million related to Pine State, including $2.2 million of acquisition costs. As a percentage of net sales, total operating expenses were 4.5% in 2016 compared to 5.0% for the same period in 2015 . Operating expenses as a percentage of total net sales in 2016 benefited from an increase in cigarette sales, which grew faster than food/non-food sales. The shift in sales to cigarettes, which have higher price points than our food/non-food products, decreased operating expenses as a percentage of total net sales by approximately 40 basis points in 2016 compared to 2015 .
Warehousing and Distribution Expenses .   Warehousing and Distribution expenses increased $78.6 million or 22.3% to $431.2 million in 2016 from $352.6 million in 2015 . The increase in warehouse and distribution expenses was driven primarily by a 12.6% increase in comparable cubic feet of product handled and a 14.7% increase in incremental deliveries, the addition of Pine State and approximately $5.3 million of identifiable costs related to the on-boarding of significant new customers in 2016 . In addition, warehousing and distribution expenses in certain of our operating divisions were higher due to temporary inefficiencies driven primarily by the hiring and training of new employees to support significant increases in sales volume. As a percentage of total net sales, warehousing and distribution expenses were 3.0% in 2016 compared with 3.2% for the same period in 2015 . The shift in sales to cigarettes decreased warehousing and distribution expenses as a percentage of total net sales by approximately 30 basis points in 2016 compared to 2015.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased $14.3 million , or 7.3% , to $210.3 million in 2016 from $196.0 million in 2015 . As a percentage of net sales, SG&A expenses were 1.4% in 2016 compared to 1.8% in 2015 . The decline as a percentage of net sales was driven primarily by leverage of our fixed expenses in 2016 compared to 2015 and by the shift in sales to cigarettes, which have higher price points than our food/non-food products, which decreased SG&A expenses as a percentage of total net sales by approximately 10 basis points. In addition, SG&A expenses for 2016 included a gain of $2.0 million related to the settlement of a legacy lawsuit with Sonitrol Corporation, which was recognized in the first quarter of 2016 and offset by $2.2 million of acquisition costs for Pine State. SG&A expenses in 2015 included $1.7 million of costs related to the acquisition of Karrys Bros.
Amortization Expenses. Amortization expenses increased $ 2.7 million , to $ 5.3 million , in 2016 compared to $ 2.6 million for the same period in 2015. The increase was primarily due to the amortization costs for our new financial system which commenced in February 2016, and amortization of intangible assets related to the acquisition of Pine State.
Interest Expense. Interest expense includes interest and amortization of loan origination costs related to borrowings and facility fees and interest on capital lease obligations. Interest expense was $5.3 million and $2.5 million for 2016 and 2015 , respectively. Average borrowings in 2016 were $184.4 million with a weighted average interest rate of 1.7% compared to average borrowings of $39.6 million and a weighted average interest rate of 1.6% in 2015 . The increase in average borrowings in 2016

30


was due primarily to our acquisition of Pine State f or $88.4 million, as well as increased working capital requirements to support our business expansion activities. 
Foreign Currency Transaction Gains and Losses, Net.   We recognized a foreign currency transaction gain of $0.5 million for the year ended December 31, 2016 compared to a loss of $1.8 million for the same period in 2015 . The change was due to the fluctuation in the Canadian/U.S. exchange rate. During times of a strengthening U.S. dollar, we generally record transaction losses from our Canadian operations. Conversely, during times of a weakening U.S. dollar, we generally record transaction gains.
Income Taxes. Our effective tax rate was 36.6% for the year ended December 31, 2016 compared to 37.9% for the same period in 2015 . T he decrease in the effective tax rate for the year ended December 31, 2016 is due primarily to the effects of prior years' estimates for foreign operations, as well as benefits in the current year related to the expiration of statute of limitations for uncertain tax positions and related interest recovery.
Adjusted EBITDA. Adjusted EBITDA increased $ 17.1 million , or 12.6% , to $152.3 million for the year ended December 31, 2016 from $135.2 million for the same period last year. The increase in Adjusted EBITDA was due primarily to growth in our gross profit resulting from market share gains and the acquisition of Pine State, offset by incremental expenses related to the on-boarding of significant new customers. In addition, Adjusted EBITDA in 2015 included cigarette tax stamp holding gains of $8.5 million , net of expenses, and $1.7 million, net of expenses, in refunds of excise taxes on OTP from prior years (see the reconciliation of Adjusted EBITDA to net income in "Adjusted EBITDA").

Results of Operations
Comparison of 2015 and 2014 (in millions) (1) :
 
 
 
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 (non-GAAP) (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 (non-GAAP)  (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.

31


(2)
See the reconciliation of net sales less excise taxes to net sales in “Comparison of Sales and Gross Profit by Product Category” and in "Non-GAAP Financial Information".
(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)
S ee the reconciliation of Adjusted EBITDA to net income in "Adjusted EBITDA".

Net Sales. Net sales for 2015 increased by $ 789.3 million , or 7.7% , to $ 11,069.4 million from $ 10,280.1 million in 2014. Net sales increased primarily due to a 6.6% increase in cigarette carton sales, an increase in the average sales price per carton, and incremental food/non-food sales driven primarily by the continued success of our core strategies, offset by impacts of foreign currency fluctuations and one additional selling day of approximately 1.4%. In addition, net sales in 2015 benefited from lower fuel prices, which we believe contributed to higher sales in the convenience industry.
Net Sales of Cigarettes. Net sales of cigarettes for 2015 increased by $ 586.5 million , or 8.4% , to $ 7,528.5 million from $ 6,942.0 million in 2014. Net sales of cigarettes increased primarily due to a 6.6% increase in carton sales and a 3.5% increase in the average sales price per carton due primarily to increases in manufacturers' prices, offset by impacts of foreign currency fluctuations and one additional selling day of approximately 1.5%. Cigarette carton sales increased by 6.4% in the U.S. and by 9.1% in Canada. The increase in cigarette carton sales was due primarily to market share gains, including the acquisition of Karrys Bros. in Canada, and an increase in cartons sold to existing customers.
Total net cigarette sales as a percentage of total net sales were 68.0% in 2015 compared to 67.5% for 2014.
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 (2)
$
1,251.1

 
$
1,180.9

 
$
70.2

 
5.9
%
Fresh (2)
335.0

 
281.1

 
53.9

 
19.2
%
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.
(2)
In 2016, the Fresh category was moved from the Food category to better present our Fresh growth. The 2015 and 2014 presentation has been realigned to reflect these changes.

Food/non-food sales for 2015 increased primarily due to incremental sales to existing customers and market share gains including the acquisition of Karrys Bros, offset by impacts of foreign currency fluctuations and one additional selling day by approximately 1.4%. Sales generated from VCI, Fresh and Focused Marketing Initiatives (FMI) were the primary drivers of the increase in net sales to existing customers. Net sales in our Food category, which increased 5.9% for 2015, contributed over 30% of the 6.1% increase in food/non-food sales. Net sales in our Fresh category, which increased 19.2% for 2015, contributed over 25% of the 6.1% increase in food/non-food sales. In addition, sales of smokeless tobacco products were the primary driver of the increase in sales in our OTP category.  We believe the overall trend toward the increased use of smokeless tobacco products will continue and will help offset the impact of the expected continued decline in cigarette consumption over the long term.  This shift

32


could potentially result in improved profitability over time due to the profit margins associated with smokeless tobacco products, which are generally higher than those we earn on cigarette sales.
Total net food/non-food product sales as a percentage of total net sales decreased to 32.0% in 2015 compared to 32.5% in 2014.
Gross Profit. Gross profit represents the amount of profit after deducting cost of goods sold from net sales during the period. Inventory holding gains represent incremental revenues whereas vendor incentives, OTP tax refunds and changes in LIFO reserves are components of cost of goods sold and therefore part of our gross profit. Gross profit in 2015 increased by $ 64.2 million , or 11.2% to $ 637.9 million from $ 573.7 million for 2014 due primarily to increases in sales and gross margins in our food/non-food category. Gross profit for 2015 also benefited from a $ 14.4 million decrease in LIFO expense, cigarette tax stamp inventory holding gains of approximately $ 9.0 million related to increases in excise taxes by certain jurisdictions in 2015 and $ 1.8 million in refunds of excise taxes on OTP from prior years. The decrease in LIFO expense was due primarily to a decrease in the PPI for certain product categories we use to measure food/non-food LIFO expense as published by the Bureau of Labor Statistics. Since we value our inventory in the U.S. on a LIFO basis, our gross profit can be positively or negatively impacted depending on the relative level of price inflation or deflation in manufacturer prices as reported in the Bureau of Labor Statistics PPI used to estimate and record our book LIFO expense ( see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements). In 2014, gross profit included $ 8.5 million in OTP tax refunds, net of tax assessments, and $ 6.0 million of candy inventory holding gains.
Gross profit margin was 5.76% and 5.58% of total net sales for 2015 and 2014, respectively.
Distributors such as Core-Mark may, from time to time, earn higher gross profits on inventory and excise tax stamp quantities on hand at the time manufacturers' increase their prices or when states, localities or provinces increase their excise taxes. Such increases are reflected in customer pricing for all subsequent sales, including sales of inventory on hand at the time of the increase. The higher gross profits are referred to as inventory holding gains. However, significant increases in cigarette product costs and cigarette excise taxes adversely impact our gross profit as a percentage of net sales, because we are paid on a cents per carton basis for cigarette sales. Conversely, we generally benefit from food/non-food price increases, because product costs for these categories are usually marked up using a percentage of cost of goods sold.
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.

33


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 (non-GAAP) (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 (non-GAAP) (8)
51.6

 
618.9

 
5.59

 
6.99

 
567.3

 
5.52

 
6.94

Gross profit
$
64.2

 
$
637.9 <