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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
Annual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2019
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
https://cdn.kscope.io/4fa1f616e74e1280f3ace2a544357755-cormarklogo2a02a01a01a08.jpg
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)
(IRS Employer
Identification No.)
 
 
1500 Solana Boulevard, Suite 3400
76262
Westlake,
Texas
 
(Address of principal executive offices)
(Zip Code)
(940) 293-8600
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:  
Title of each class
 
Trading symbol
Name of each exchange
on which registered
 
Common Stock, par value $0.01 per share
CORE
NASDAQ Global Select 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   No   
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      No  
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      No  
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). Yes      No  
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.  
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
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

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, 2019, the last business day of the registrant’s most recently completed second fiscal quarter: $1,788,319,319.
As of February 24, 2020, the registrant had 45,319,522 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 2020 definitive proxy statement to be filed pursuant to Regulation 14A.



FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K that are not statements of historical fact are forward-looking statements made pursuant to the safe-harbor provisions of the Securities 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 future results, performance or developments 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. Management of Core-Mark Holding Company, Inc. (“Core-Mark”) 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 uses certain non-GAAP financial measures including (i) Adjusted EBITDA, (ii) net sales, less excise taxes, (iii) remaining gross profit (including cigarette remaining gross profit and food/non-food remaining gross profit), (iv) remaining gross profit margin (including cigarette remaining gross profit margin and food/non-food remaining gross profit margin), (v) remaining gross profit margin less excise taxes (including cigarette remaining gross profit margin less excise taxes and food/non-food remaining gross profit margin less excise taxes), (vi) cigarette remaining gross profit per carton, and (vii) operating expenses (and the components thereof) as a percentage of remaining gross profit. 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. We also believe these measures allow investors to view the results in a manner similar to the method used by our management. 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. These measures may be defined differently than other companies and therefore, such measures used by other companies may not be comparable to ours. We strongly encourage readers to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure. More information about such measures are included in 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 approximately 42,000 customer locations across the United States (“U.S.”) and Canada through 32 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, food and broad-line supply solutions to the convenience retail industry. Consistent with this mission, our strategic framework is centered around three key initiatives: growing sales and margins faster than the industry, providing industry-leading category management solutions and leveraging our cost structure. We have also been successful in growing our business organically and through strategic acquisitions which have allowed us to expand our distribution network, product selection and customer base.
We operate in an industry where, in 2018, total in-store sales at convenience retail locations across both the U.S. and Canada were approximately $283.9 billion. In the U.S., total in-store sales at convenience locations in 2018 were approximately $242.2 billion, an increase of 2.2% over the prior year, based on the National Association of Convenience Stores (“NACS”) State of the Industry (“SOI”) report. Over the ten years from 2009 through the end of 2018, U.S. convenience in-store sales have increased by a compounded annual growth rate of approximately 2.9%. The most recent NACS Convenience Industry Store Count noted that the U.S. had approximately 153,000 convenience store locations as of December 31, 2018. Approximately 100,000, or 65%, of the convenience stores in the U.S. are considered independents with ten or fewer stores. In Canada, we estimate that total in-store sales at convenience locations in 2018 were approximately CAD $55.3 billion generated through approximately 26,000 stores, based on the Convenience Industry Council of Canada 2019 SOI report.
Core-Mark is one of two national distributors to the convenience store industry in the U.S. and is the largest in Canada. Our established national market presence rests primarily with our ability to service customers in every geographic region within the U.S. through 27 distribution centers and to service customers in Canada through our five Canadian distribution centers. We offer a wide array of products, marketing programs and services that leverage our scale to assist our customers in growing their business. Our leading category management strategies including our Vendor Consolidation Initiative (“VCI”), Focused Marketing Initiative (“FMI”) and “Fresh” products and food service programs have a proven track record of helping our customers grow their sales and profits at an accelerated rate. We believe this gives us a strong competitive advantage in the North American convenience retail industry.
Company Highlights
In 2019, we achieved the following significant accomplishments:
Record net sales of $16.7 billion.
Our net income increased 26.8% to $57.7 million.
Adjusted EBITDA increased 15.8% to $190.7 million.
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 7% market share of North American in-store convenience store sales, and to take advantage of growth opportunities with other retail store formats.

Business Strategy Overview
Our objective is to increase overall return to stockholders by growing faster and more profitable than our industry, being the industry leader in category management solutions and leveraging operating costs to increase profitability. As one of the largest marketers of fresh, food 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 meet this objective moving forward. Our business strategy includes the following initiatives, designed to further enhance the value we provide to our retail customers:

1


Fresh Products and Food Service. There is an increasing trend among consumers to purchase fresh food and food service products 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, fresh and food service items to retail outlets. We have established partnerships with strategically-located dairies, fresh kitchens, food service providers and bakeries to further enable us to deliver premium consumer items such as fresh pizza, fried chicken, fresh made 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 retailers in showcasing their fresh product offerings. We believe our investments in infrastructure, combined with our strategically located suppliers and in-house expertise, positions us as a leader in providing fresh food and food service products and programs to the convenience retail industry. Proper execution of our VCI program, 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.
Vendor Consolidation Initiative. 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 previously purchased from multiple direct-store delivery companies. This simplifies the customer 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.
Focused Marketing Initiative. 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.
Center of Excellence (“COE”). During the first quarter of 2020, we will open the COE at our Westlake, Texas campus. The COE is a dynamic collaboration space for leaders in the convenience retail channel designed to inspire, educate and challenge visitors to think big. Within the 14,000 sq. ft. space, we have created an environment that combines forward-looking consumer trends with real time data, which will allow us to align with our customers and define the future of convenience. The COE is physically designed with five unique hubs – Insights and Data Center, Collaboration Hub, Store Innovation, Culinary Test Kitchen and People Training Facility – to deliver an immersive experience for convenience retailers and strategic vendors.
Acquisitions and Expansion. We believe there remains a significant opportunity to increase our market presence and revenue growth through strategic and opportunistic acquisitions and the continued expansion of our facility infrastructure. We completed six acquisitions and added three primary distribution centers between 2010 and 2019, 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 Products, Food Service and our other category management solutions 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 category management and marketing programs, technology solutions and logistics support. We believe we are the best in class at capitalizing on emerging trends and bringing retailers our unique category management solutions such as fresh foods, food service solutions and healthier options, as well as our VCI and FMI initiatives.
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

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of deliveries. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing inventory management and accessing trade credit.
Customers
We service approximately 42,000 customer locations in all 50 states in the U.S., five Canadian provinces and two Canadian territories. 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, mass merchants, 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 approximately 40% of our net sales in 2019 including Murphy U.S.A., our largest customer, which accounted for 12.5% of our total net sales.
Products
We purchase a variety of brand name and private label products, representing approximately 62,000 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, candy, snacks, groceries, food, including fresh products, dairy, bread, beverages, other tobacco products, alternative nicotine 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, except percentages):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Product Category
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Cigarettes
$
10,892.7

 
65.3
%
 
$
10,974.5

 
66.9
%
 
$
10,887.4

 
69.4
%
Food
1,746.4

 
10.5

 
1,659.0

 
10.1

 
1,561.1

 
10.0

Fresh
502.8

 
3.0

 
474.2

 
2.9

 
436.3

 
2.8

Candy
1,039.0

 
6.2

 
992.0

 
6.1

 
833.4

 
5.3

Other tobacco products (“OTP”)
1,438.9

 
8.6

 
1,387.2

 
8.5

 
1,272.3

 
8.1

Health, beauty & general
847.2

 
5.1

 
711.5

 
4.3

 
513.3

 
3.3

Beverages
202.1

 
1.2

 
191.0

 
1.2

 
183.4

 
1.1

Equipment/other
1.4

 

 
5.9

 

 
0.4

 

Total food/non-food products
5,777.8

 
34.7
%
 
5,420.8

 
33.1
%
 
4,800.2

 
30.6
%
Total net sales
$
16,670.5

 
100.0
%
 
$
16,395.3

 
100.0
%
 
$
15,687.6

 
100.0
%
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 declined 0.7% in 2019 to $10,892.7 million, accounting for approximately 65.3% of our total net sales and 23.0% of our total gross profit. We control major purchases of cigarettes centrally to optimize inventory levels and purchasing opportunities. Daily replenishment of inventory and brand selection is controlled by our distribution centers.
In 2019, our cigarette carton sales in the U.S. and Canada decreased 3.6% and 6.9%, respectively, which was partially offset by a 3.2% increase in the average sales price per carton. The decrease in carton sales in the U.S. was driven primarily by a decline in the general consumption of cigarettes, and the transition of certain Rite-Aid stores in the first half of 2018, partially offset by market share gains. The increase in the average sales price per carton was due primarily to increases in cigarette manufacturers’ prices and increases in excise taxes in certain jurisdictions.
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 316 billion cigarettes in 2009 to 239 billion cigarettes in 2018, or a compounded annual decline of approximately 2.8%. Total cigarette consumption declined in Canada from 27 billion cigarettes in 2009 to 23 billion cigarettes in 2018, or a compounded annual decline of approximately 1.6% based on statistics

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provided by the TMA. More recently, a greater decline in total cigarette consumption has been offset by consumption of alternative nicotine products and OTP. Although we anticipate overall cigarette consumption will continue to decline, we expect to offset these declines through continued growth in our non-cigarette categories including alternative nicotine products and OTP, market share expansion and incremental gross profit from cigarette manufacturer price increases. We expect cigarette manufacturers will continue to raise prices for the foreseeable future 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 includes amounts related to state, local and provincial excise taxes which were $3.3 billion for 2019, and $3.5 billion in both 2018 and 2017.
Food/Non-food Products. Our food products include food, candy, snacks, groceries, beverages and fresh products such as sandwiches, juices, salads, produce, dairy and bread. Our non-food products include cigars, tobacco, alternative nicotine products, health and beauty care products, general merchandise and equipment. Net sales of the combined food/non-food product categories grew 6.6% in 2019 to $5,777.8 million, which was 34.7% of our total net sales. The increase was driven primarily by incremental sales to existing customers and net market share gains. Sales generated from Fresh, VCI and FMI were the primary drivers of increased sales to existing customers. Our health, beauty & general category continued to benefit from the increasing popularity of alternative nicotine delivery products, which are included in this category. We believe, in the near term, the overall trend toward the increased use of alternative nicotine delivery products and other tobacco products will continue and offset the impact of the expected long-term decline of cigarette consumption. However, the regulatory environment surrounding alternative nicotine products is uncertain and the enactment of regulations and other laws at the federal, state and local level could have a material impact on the availability of and our ability to sell such products.
Gross profit for food/non-food categories grew $69.9 million, or 10.9%, to $711.8 million in 2019, which was 77.0% of our total gross profit. Our strategy is to continue to grow sales of food/non-food products through our category management solutions including Fresh and Food Service, VCI and FMI. In order to take advantage of the significantly higher margins earned by food/non-food products, two of our key business strategies, Fresh and VCI, focus primarily on the highest margin categories in the food/non-food group. We believe there is an increasing trend toward purchases of quality fresh food, “healthy for you” and food service items from convenience and other retail store formats. Combined sales of our Food and Fresh categories grew $116.0 million, or 5.4%, to $2,249.2 million in 2019 driven primarily by this trend, as well as net market share gains. Sales of OTP increased $51.7 million, or 3.7%, while the health, beauty & general category increased $135.7 million or 19.1%, driven primarily by the increasing popularity of alternative nicotine products.
Suppliers
We purchase products for resale from approximately 3,300 active trade suppliers and manufacturers located across the U.S. and Canada. In 2019, we purchased approximately 79% of our products from our top 20 suppliers, with our top two suppliers, Altria Group, Inc. (the parent company of Philip Morris USA, Inc.) and R.J. Reynolds Tobacco Company, accounting for approximately 32% and 22% of our purchases, respectively. We coordinate our purchasing from suppliers by negotiating, on a company-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 manufacturers, improving product mix and availability for individual markets.

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Operations
As of December 31, 2019, we operated a network of 32 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third-party logistics provider). Twenty-seven 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.
https://cdn.kscope.io/4fa1f616e74e1280f3ace2a544357755-coremarkmap2019a01.jpg
We operate five consolidation centers which buy products from our suppliers in bulk quantities and then redistribute the products to many of our other distribution centers. The products purchased by our consolidation centers may 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 dedicated solely to supporting the logistics and management requirements of one of our major customers, Alimentation Couche-Tard, Inc. (“Couche-Tard”). These distribution facilities are located near Phoenix, Arizona and San Antonio, Texas.
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
As of December 31, 2019, we employed approximately 2,300 personnel in our transportation department, including delivery drivers, shuttle drivers, routers, training supervisors and managers, all of whom focus on achieving safe, on-time deliveries. Our daily orders are picked and loaded nightly in route sequence, with the majority reaching their destination within 24 hours. At December 31, 2019, our distribution fleet consisted of approximately 1,600 leased tractors and trailers and approximately 1,200 additional owned tractors and trailers. Our “tri-temp” trailer fleet gives us the capability to deliver frozen, chilled and non-refrigerated goods in one delivery and provides us the multiple temperature zone capability needed to support our focus on delivering fresh products to our customers. Substantially all of our trailers were “tri-temp” as of December 31, 2019.
As of December 31, 2019, approximately 16% of our trucks ran on Compressed Natural Gas (“CNG”), which allows us to reduce our carbon footprint and lower our transportation costs. We utilize seven CNG stations, two of which we own (located in Wilkes-Barre, Pennsylvania and Corona, California). The other five are owned and operated by U.S. Oil (a division of U.S. Venture, Inc.) under the name GAIN Clean Fuel (“GAIN”) and are located in Aurora, Colorado; Forrest City, Arkansas; Sanford, North

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Carolina; Atlanta, Georgia; and Tampa, Florida. 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, order fulfillment rates, on-time delivery, innovative marketing solutions and merchandising support as well as competitive pricing.
Core-Mark is one of the two largest wholesale convenience distributors (measured by annual sales) serving North America. We service both convenience store chain customers and independent operators with ten or fewer stores which comprise approximately 65% of the convenience retail store market. The McLane Company, Inc., a subsidiary of Berkshire Hathaway Inc., our largest competitor, focuses primarily on servicing large regional or national convenience store chains as well as chain customers in other trade channels. There are two other large companies that primarily cover the eastern half of the U.S.: H.T. Hackney Company and Eby-Brown Company, a division of Performance Food Group. In addition, there are many local distributors serving small regional chains and independent convenience retailers. In Canada, in addition to Core-Mark, several companies make-up the competitive landscape. Wallace & Carey, Inc., has national distribution capabilities. Pratts Wholesale Limited, regionally serves the Manitoba, Saskatchewan, and Alberta markets. Sobeys Inc. is a large national convenience store and grocery wholesaler.
Beyond the traditional wholesale supply channels, we face potential competition from at least three other supply avenues. First, certain consumer product manufacturers such as Anheuser-Busch Companies, Inc., MillerCoors LLC, The Coca-Cola Company, and PepsiCo (including its Frito-Lay, Inc. division) deliver their products directly to convenience retailers. Secondly, club wholesalers such as Costco Wholesale Corporation 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 certain U.S. and Canadian markets of cigarettes intended for sale outside of these 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 heightened by a continued influx of generic products, tobacco, and nicotine alternatives that challenge sales of higher priced 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 2019, 2018 and 2017. 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 17 days, 14 days and 16 days, in 2019, 2018 and 2017, respectively. The cigarette category averaged 12 days, 7 days and 11 days, in 2019, 2018 and 2017, respectively. The food/non-food categories averaged 27 days, 25 days and 29 days in 2019, 2018 and 2017, respectively.
We obtain terms from our vendors and certain taxing jurisdictions based on industry practices, consistent with our credit standing. We take advantage of the full complement of term offerings, which may include enhanced cash discounts for earlier payment or prepayment. Terms for our accounts payable and cigarette and tobacco taxes payable range anywhere from three days prepaid to 120 days credit. Days payable outstanding for both categories, excluding the impact of prepayments, during 2019 averaged 10 days, while each of 2018 and 2017 averaged 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, 2019:
TOTAL EMPLOYEES BY BUSINESS FUNCTION
 
U.S.
 
Canada
 
Total
Sales and marketing
1,505

 
105

 
1,610

Warehousing and distribution
5,461

 
424

 
5,885

Management, administration, finance and purchasing
900

 
160

 
1,060

Total for all categories
7,866

 
689

 
8,555

Four of our distribution centers, Hayward, Las Vegas, Los Angeles and Calgary, have employees who are covered by collective bargaining agreements with local affiliates of The International Brotherhood of Teamsters (Hayward, Las Vegas and Los Angeles) and the United Food and Commercial Workers International Union (Calgary). Approximately 450 employees, or 5% 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, nicotine and health-related 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, 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 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.
Trademarks
We have trademarks including the following: Arcadia Bay®, Arcadia Bay Coffee Company®, Cable Car®, Core-Mark®, Core Solutions Group®, EMERALD®, Java Street®, SmartStock®, Pine State Convenience™, Taco Depot® and Farner-Bocken™.
Segment and Geographic Information
We have two operating segments which aggregate into one reportable segment. We also present certain financial information by operating segment region — the U.S. and Canada. See Note 17 - Segment and Geographic Information to our consolidated financial statements.
Seasonality
We typically generate higher net sales and gross profits during the warm weather months (April through September) than other times of the year. We believe this occurs because the convenience store industry tends to be busier due to timing of vacations and an increase in travel during this period.


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Corporate and Contact Information
Our corporate headquarters is located at 1500 Solana Boulevard, Suite 3400, Westlake, Texas, 76262 and our telephone number is (940) 293-8600.
Our 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 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 “Investors” section of our website under “Financials & Filings,” or through www.sec.gov.
Also available on our website are printable versions of Core-Mark’s Audit Committee Charter, Compensation Committee Charter, Nominating and Corporate Governance Committee Charter, Code of Business Conduct and Ethics, Corporate Governance Guidelines and Principles and other corporate information. Copies of these documents may also be requested from the address above.
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 “Investors” 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 “Investors” 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
A significant portion of our sales volume is dependent upon the distribution of cigarettes, sales of which are generally declining.
The distribution of cigarettes is currently a significant portion of our business. In 2019, approximately 65.3% of our net sales (including excise taxes) and 23.0% of our gross profit were generated from the distribution of cigarettes. Due to increases in the prices of cigarettes, 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, other alternative nicotine products, and other factors, cigarette consumption in the U.S. and Canada has been declining gradually over the past few decades, with a recent increase in the rate of such decline. In many 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, rising prices may lead to a higher percentage of consumers purchasing cigarettes through illicit markets, or 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.
We are largely 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 generated from convenience retail stores which inherently involve industry-specific risks. These risks include: declining sales in the convenience retail industry due to general economic conditions, including rising energy and fuel costs, which may impact “in-store” retail sales; competition from internet retailers such as Amazon.com, Inc. (“Amazon”), club stores, 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, put pressure on our margins and increase our credit risk and potential bad debt exposure.
We depend on attracting and retaining qualified labor including our senior management and other key personnel.
We 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 one or more of our senior executive officers or other key personnel could harm our business.
We compete with other businesses in each of our markets to attract and retain qualified employees. A shortage of qualified employees, especially drivers, in any given market could require us to enhance our wage and benefit packages in order to compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees in the affected market. Any such shortage of qualified employees could decrease our ability to effectively serve our customers and might lead to lower profits due to 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 could adversely impact the quality of the services we provide to our customers, as well as our financial performance.
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. A substantial amount of our sales are made under non-binding agreements or short-term contracts with convenience retail stores which inherently involve potential risks. 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 The 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 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.

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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 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 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 related to realizing acceptable returns on invested working capital and 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.
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.
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 ceased relying on wholesale distributors such as Core-Mark. Similarly, manufacturers or other providers may choose to move their product distribution to Amazon or other e-commerce providers. 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 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, do not realize the benefits we expect from converting a large percentage of our trucks to operate on natural gas or incur higher expenses due to decreases in diesel fuel prices that are not matched by similar decreases in natural gas prices, our operating results could be negatively affected.
Information technology systems may be subject to failure, disruptions, security breaches (such as malware, viruses, hacking, break-ins, business e-mail compromises, phishing attacks, attempts to overload our services 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 these systems and our information technology staff to maintain the information required to operate our distribution centers and support corporate departments in providing our customers with fast, efficient and reliable services. We continue to take steps to increase redundancy in our information technology systems and have resiliency and 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.
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. As the number of global cyber-attacks continue to escalate, we may face increased threats of unauthorized access, security breaches and other system disruptions to our environment. To help mitigate the risk, we utilize the expertise of internal and external security resources to monitor our environment and install/upgrade tools that protect our systems and data. We strive to maintain a sustainable security program that balances the need to protect against the needs to run our business, however, despite these measures, our infrastructure may be vulnerable to attacks by experienced hackers or other disruptive events as “perfect protection” is unfortunately not possible.
Computer malware, viruses, hacking, break-ins, business e-mail compromises, phishing attacks, attempts to overload our servers 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, make unauthorized cash payments or funds transfers, 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.

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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 attempt to address these risks, in part, by continuously providing communications to our employees regarding the threats and characteristics of phishing attempts and have established a formal ongoing security training program to increase the level of awareness across the Company.
In many cases our systems are integrated with customers and vendors, through enterprise resource planning, electronic data interchange or other integration. Accordingly, if our customers’ or vendors’ systems are compromised, fail, or are not reliable, we may suffer disruptions in services to customers, our payments to vendors may be delayed or could be misappropriated, and our results of operations and cash flows could suffer.
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 profits 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 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 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 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, 2019, we had approximately 3,300 vendors and during 2019 we purchased approximately 79% of our products from our top 20 suppliers, with purchases from our top two suppliers, Altria Group, Inc. (parent of Philip Morris USA, Inc.) and R.J. Reynolds Tobacco Company, representing approximately 32% and 22% 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 interruptions 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 food products. If we do not have adequate insurance, if contractual indemnification from the supplier or manufacturer of the defective, contaminated or counterfeit product is not available, or if a supplier or manufacturer cannot fulfill its indemnification obligations to us, the liability relating to such product claims or disruption as a result of recall efforts could adversely impact our results of operations.

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We may not be able to achieve the expected benefits from the implementation of marketing and category management initiatives.
We are continuously improving our competitive performance through a series of strategic marketing and category management initiatives, such as our Focused Marketing Initiative, SmartStock and Vendor Consolidation Initiative. The goal of this effort is to develop and implement a comprehensive and competitive business strategy, addressing the special needs of the convenience industry environment, increasing our market position within the industry and ultimately creating increased stockholder value. Customer acceptance of new marketing or category management initiatives may not be as anticipated or competitive pressures may cause us to curtail or abandon these initiatives, resulting in lower revenue and profit growth.
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 decrease 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.
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, results of operations and cash flows.
Unions may attempt to organize our employees.
As of December 31, 2019, approximately 450 or 5%, of our employees were covered by collective bargaining agreements with labor organizations, under agreements that expire at various times. We cannot assure that we will be able to renew our respective collective bargaining agreements on favorable terms, that employees at other facilities will not unionize or that our labor costs will not increase. In addition, we are subject to changes in rules, regulations, and laws 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 approximately 6,000 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.

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Changes to minimum wage laws and other governmental legislation or regulations could increase our costs substantially.
As of December 31, 2019, we believe 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, several 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. Further, changes to wage and hour laws and/or new legislation increasing mandatory paid leave can add costs to our business. 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, tobacco and nicotine items, products containing Cannabidiol (“CBD”) and other consumer goods, 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, the uncertainty and pace of regulatory change 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, suspending or canceling our licenses, 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.
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 similar events, which could adversely affect our sales and results of operations. While we maintain insurance to cover us for certain potential losses and maintain two data centers in geographically disparate locations, each of which can provide core services for the other if required, in the event of a natural disaster our insurance may not be sufficient to cover our losses, insurance payments may be delayed and our business may nevertheless be interrupted and adversely affected.
Insurance and claims expenses could have a material adverse effect on us.
We have a combination of both self-insurance and high-deductible insurance programs for the risks arising out of the services we provide and the nature of our operations throughout North America, including claims exposure resulting from personal injury, property damage, business interruption and workers’ compensation. Workers’ compensation, automobile and general liabilities are determined using actuarial estimates of the aggregate liability for claims incurred and an estimate of incurred but not reported claims. Our accruals for insurance reserves reflect certain actuarial assumptions and management judgments, which are subject to a high degree of variability. If the number or severity of claims for which we are retaining risk increases, our financial condition and results of operations could be adversely affected. If we lose our ability to self-insure these risks, our insurance costs could materially increase and we may find it difficult to obtain adequate levels of insurance coverage.
Risks Related to the Distribution of Cigarettes and Other Tobacco Products
Legislation, regulation and other matters are negatively affecting the cigarette, tobacco and alternative nicotine industries.
The cigarette, tobacco and alternative nicotine industries are subject to a wide range of laws and regulations regarding the marketing, distribution, sale, taxation and use of their products imposed by governmental entities. Effective December 20, 2019, the U.S. raised the legal age to buy cigarettes, tobacco and alternative nicotine products to 21 years. On January 2, 2020, the FDA issued final guidance that banned most flavored cartridge-based e-cigarettes, except for tobacco and menthol flavors. The guidance temporarily permits the sale of e-liquid flavors used in open vaping systems and in disposable, single-use vape products. In addition, various jurisdictions have adopted or are considering legislation and regulations restricting displays and marketing of tobacco and alternative nicotine products, requiring the disclosure of ingredients used in the manufacture of tobacco and alternative nicotine products, and imposing restrictions on public smoking and vaping. The FDA has been empowered to regulate changes to nicotine yields and the chemicals and flavors used in tobacco and alternative nicotine products (including cigars, pipe and e-

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cigarette products), require ingredient listings be displayed on tobacco and alternative nicotine products, prohibit the use of certain terms which may attract youth or mislead users as to the risks involved with using tobacco and alternative nicotine products, as well as limit or otherwise impact the marketing of tobacco and alternative nicotine products by requiring additional labels or warnings that must be pre-approved by the FDA. Such legislation and related regulation is likely to continue adversely impacting the market for tobacco and alternative nicotine products and, accordingly, our sales of such products.
In Canada, several 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.
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 higher pricing of products sold by the participating manufacturers than those sold by non-MSA state manufacturers. In addition, the growth in market share of discount brands since the MSA was signed has had an adverse impact on the total volume of the cigarettes that we sell.
In connection with the MSA, we were indemnified by most of the tobacco product manufacturers from which we purchased cigarettes and other tobacco products, for liabilities arising from our sale of the tobacco products that they supplied to us. Should the MSA ever be invalidated, we could be subject to substantial litigation due to our distribution of cigarettes and other tobacco products, and we may not be indemnified for such costs by the tobacco product manufacturers in the future. In addition, even if we are indemnified by cigarette manufacturers that are parties to the MSA, future litigation awards against such cigarette manufacturers could be so large as to prevent the manufacturers from satisfying their indemnification obligations.
Risks Related to Financial Matters, Financing and Foreign Exchange
If a tax jurisdiction changes its tax legislation or a material change occurs in our credit terms, it 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 or administrative policies in any taxing jurisdiction could adversely affect our business or results of operations in a material way.  Increases in federal or state excise taxes, differing interpretation of tax law, final determination of a tax audit or a reduction in credit terms could materially impact our financial results and restrict our working capital.
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 may 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.
In addition, 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. Given the unpredictability of possible changes and their potential interdependency, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our financial results.
Taxing jurisdictions have the ability to change or rescind credit terms currently extended for the remittance of taxes 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.


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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 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 portion of our revenues in Canadian dollars, approximately 9% in 2019 and 2018. 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 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 consolidated 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 $750 million revolving credit facility (“Credit Facility”) as of December 31, 2019. 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 March 2022. While we believe our sources of liquidity are adequate, we cannot guarantee 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 and 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 to, among other things, 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 to 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 estimation by our management include but are not limited to the following: allowance for doubtful accounts, provisions for income taxes, valuation of goodwill and long-lived assets, valuation of assets and liabilities in connection with business combinations, stock-based compensation expense and accruals for estimated liabilities including litigation and self-insurance reserves.

ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

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ITEM 2.    PROPERTIES
Effective May 18, 2019, our headquarters relocated from South San Francisco, California to Westlake, Texas, and currently consists of approximately 40,000 square feet of 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 2,000 square feet of additional office space in Phoenix, AZ. We lease approximately 5.5 million square feet and own approximately 0.6 million square feet of distribution space.
Distribution Center Facilities by City and State/Province of Location(1) 
Albuquerque, New Mexico
Hayward, California
Tampa, Florida
Atlanta, Georgia
Henderson, Nevada
Whitinsville, Massachusetts
Aurora, Colorado
Leitchfield, Kentucky
Wilkes-Barre, Pennsylvania(5)
Bakersfield, California
Los Angeles, California
Burnaby, British Columbia
Carroll, Iowa
Minneapolis, Minnesota
Calgary, Alberta
Corona, California(2)
Portland, Oregon
Mississauga, Ontario(6)
Forrest City, Arkansas(3)
Sacramento, California(4)
Milton, Ontario
Fort Worth, Texas
Salt Lake City, Utah
Winnipeg, Manitoba
Gardiner, Maine
Sanford, North Carolina
 
Glenwillow, Ohio
Spokane, Washington
 
(1)
Excluding outside storage facilities or depots and two distribution facilities that we operate as a third-party logistics provider. Depots are defined as a secondary location for a division which may include any combination of sales offices, operational departments and/or storage. We own distribution center facilities located in Wilkes-Barre, Pennsylvania; Leitchfield, Kentucky; and Forrest City, Arkansas. All other facilities listed are leased. The facilities we own are subject to encumbrances under our Credit Facility.
(2)
This location includes two facilities, a distribution center and our AMI/Artic West consolidating warehouse.
(3)
This facility includes a distribution center and our AMI/Artic East consolidating warehouse.
(4)
This location includes a distribution center and our Artic Cascade consolidating warehouse.
(5)
This location includes a distribution center and our AMI/Artic Northeast consolidating warehouse.
(6)
This facility is our Canadian consolidating warehouse.
We also operate distribution centers on behalf of one of our major customers, Couche-Tard: one in Phoenix, Arizona and one in San Antonio, Texas. Each facility is leased or owned by Couche-Tard for their use.
ITEM 3.    LEGAL PROCEEDINGS
We are subject to certain legal proceedings, claims, investigations and administrative proceedings in the ordinary course of our business. We record 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. In the opinion of management, the outcome of pending litigation is not expected to have a material effect on our results of operations, financial condition or liquidity.

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 1,413 stockholders of record as of February 24, 2020.
We paid cash dividends of $20.8 million and $18.9 million in 2019 and 2018, respectively. Our Credit Facility, as of December 31, 2019, allows for unlimited dividends, as long as we meet certain credit availability percentages and fixed charge coverage ratios. (See Note 9 - 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 2014 through 2019, as well as the cumulative total returns of the Russell 2000 Index, the NASDAQ Non-financial Stock Index, the Standard and Poor’s (“S&P”) SmallCap 600 Index, a new peer group of companies (“New Peer Group”) and an old peer group of companies (“Old Peer Group”).
In 2019, we revised our peer group, as we believe that this New Peer Group represents the majority of the market value of publicly traded companies in the same industry or relatively similar size.
The companies composing the New Peer Group are: United Natural Foods, Inc. (“UNFI”), Performance Food Group Co. (“PFGC”), AMCON Distributing Co. (“DIT”), and SpartanNash Co. (“SPTN”).
The companies composing the Old Peer Group are: The Chef’s Warehouse, Inc. (“CHEF”), United Natural Foods, Inc. (“UNFI”), Sysco Corp (“SYY”) and AMCON Distributing Co. (“DIT”).
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, 2014, and is compared to the total return of the Russell 2000 Index, the NASDAQ Non-financial Index, the S&P SmallCap 600 Index, and the weighted-average performance of the New and Old Peer Groups over the same period with a like amount invested, including the assumption that any dividends have been reinvested. We regularly compare our performance to the Russell 2000 Index since it includes primarily companies with relatively small market capitalization similar to us.

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

https://cdn.kscope.io/4fa1f616e74e1280f3ace2a544357755-zacksgraphv3.jpg

 
 
Investment Value at December 31,
 
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
CORE
 
$
100.00

 
$
133.49

 
$
141.51

 
$
105.02

 
$
78.61

 
$
93.20

Russell 2000 Index
 
100.00

 
95.59

 
115.95

 
132.94

 
118.30

 
148.49

NASDAQ Non-financial Index
 
100.00

 
107.20

 
115.40

 
151.42

 
147.55

 
202.94

S&P SmallCap 600
 
100.00

 
98.03

 
124.06

 
140.48

 
128.56

 
157.85

New Peer Group
 
100.00

 
58.15

 
72.05

 
77.91

 
51.35

 
71.69

Old Peer Group
 
100.00

 
97.48

 
133.20

 
149.06

 
149.53

 
206.39


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Issuer Purchases of Equity Securities
In February of 2020, our Board of Directors authorized a $60.0 million stock repurchase program (the “2020 Program”), replacing our prior stock repurchase program (the “2017 Program”). At the time of approval, we had funds totaling $0.4 million remaining under the 2017 Program which were subsequently retired unused. The timing, price and volume of purchases under the 2020 Program are based on market conditions, cash and liquidity requirements, relevant securities laws and other factors.  The 2020 Program may be discontinued or amended at any time. The 2020 Program has no expiration date and terminates when the amount authorized has been expended or the Board of Directors withdraws its authorization.
In 2019, under the 2017 Program, we repurchased 767,681 shares of common stock for a total cost of $22.0 million, or an average price of $28.66 per share. In 2018, also under the 2017 Program, we repurchased 588,489 shares of common stock for a total cost of $15.5 million, or an average price of $26.20 per share.
The following table provides the repurchases of shares of common stock during the three months ended December 31, 2019 (in millions, except share and per share data):
Calendar month in which
purchases were made:
 
Total Number of Shares Repurchased
 
Average Price Paid per Share(1)
 
Total Cost of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
October 1, 2019 to October 31, 2019
 
63,204

 
$
29.49

 
$
1.9

 
$
12.4

November 1, 2019 to November 30, 2019
 
453,552

 
26.46

 
12.0

 
0.4

December 1, 2019 to December 31, 2019
 

 

 

 
0.4

Total repurchases for the three months ended December 31, 2019
 
516,756

 
26.83

 
$
13.9

 
0.4

_____________________________________________
(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 2015 to 2019 are derived from our audited consolidated financial statements included in our Annual Reports on Form 10-K. The following financial data should be read in conjunction with the consolidated financial statements and notes thereto and with Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations.
SELECTED CONSOLIDATED FINANCIAL DATA
 
Year Ended December 31,
(In millions except per share amounts)
2019
 
2018
 
2017(1)
 
2016(2)
 
2015(3)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net sales
$
16,670.5

 
$
16,395.3

 
$
15,687.6

 
$
14,529.4

 
$
11,069.4

Gross profit(4)
924.2

 
867.5

 
791.7

 
736.9

 
637.9

Warehousing and distribution expenses(4)
566.2

 
540.6

 
504.1

 
431.2

 
352.6

Selling, general and administrative expenses
255.4

 
245.1

 
224.3

 
210.3

 
196.0

Amortization of intangible assets
10.0

 
10.0

 
8.5

 
5.3

 
2.6

Income from operations
92.6

 
71.8

 
54.8

 
90.1

 
86.7

Interest expense, net(5)
14.4

 
13.7

 
11.0

 
5.1

 
2.0

Foreign currency transaction losses (gains), net
0.8

 
(1.8
)
 
(1.8
)
 
(0.5
)
 
1.8

Pension termination settlement

 

 
17.2

 

 

(Provision) benefit for income taxes(6)
(19.7
)
 
(14.4
)
 
5.1

 
(31.3
)
 
(31.4
)
Net income
57.7

 
45.5

 
33.5

 
54.2

 
51.5

Per Share Data:
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
1.26

 
$
0.99

 
$
0.72

 
$
1.17

 
$
1.12

Diluted earnings per share
$
1.25

 
$
0.99

 
$
0.72

 
$
1.17

 
$
1.11

Shares Used to Compute Earnings Per Share:
 
 
 
 
 
 
 
 
 
Basic
45.7

 
46.0

 
46.3

 
46.3

 
46.2

Diluted
46.0

 
46.1

 
46.4

 
46.5

 
46.6

Cash Dividends Declared Per Share
$
0.45

 
$
0.41

 
$
0.37

 
$
0.33

 
$
0.29

Other Financial Data:
 
 
 
 
 
 
 
 
 
Excise taxes(7)
$
3,341.3

 
$
3,491.4

 
$
3,462.6

 
$
3,022.0

 
$
2,211.7

Cigarette inventory holding gains(8)
23.0

 
19.6

 
16.1

 
15.3

 
10.1

Other inventory holding gains(9)(10)
6.9

 
7.4

 

 

 
8.5

OTP tax items(11)

 

 
3.3

 

 
1.7

LIFO expense(12)
27.6

 
25.2

 
21.5

 
13.2

 
1.9

Capital expenditures(13)
22.8

 
20.1

 
48.2

 
54.3

 
30.3

Adjusted EBITDA (non-GAAP)(14)
190.7

 
164.7

 
135.7

 
152.3

 
135.2

 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
1,898.4

 
$
1,666.1

 
$
1,782.5

 
$
1,492.2

 
$
1,077.3

Long-term debt(15)
382.1

 
346.2

 
512.9

 
347.7

 
60.4

______________________________________________
(1)
Farner-Bocken Company was acquired in July 2017 and the results of operations have been included in the selected consolidated financial data since the date of the acquisition.
(2)
Pine State Convenience (“Pine State”) 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.

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(3)
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.
(4)
Gross profit represents the amount of profit after deducting cost of goods sold, certain surcharges and other items from net sales. Warehousing and distribution expenses are not included as a component of our cost of goods sold. Accordingly, gross profit may not be comparable to those of other entities.
(5)
Interest expense, net, is reported net of interest income.
(6)
Benefit for income taxes for 2017 included a $14.6 million net income tax benefit as a result of the impacts of the 2017 Tax Cuts and Jobs Act. See Note 11 - Income Taxes to our consolidated financial statements for further discussion.
(7)
State, local and provincial excise taxes (predominantly cigarettes and tobacco) paid by us are included in net sales and cost of goods sold.
(8)
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.
(9)
In 2019, we recognized $6.9 million in candy inventory holding gains. 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. This income is not predictable and is dependent on inventory levels and the timing of manufacturer price increases.
(10)
We realized net cigarette tax stamp inventory holding gains of $7.4 million and $8.5 million, offset by associated fees, in 2018 and 2015, respectively. 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. This income is not predictable and is dependent on inventory levels and the aforementioned statutory requirements.
(11)
In 2017, we received OTP tax refunds of $3.9 million related to prior years’ taxes, offset by $0.6 million of related expenses. In 2015, we received OTP tax refunds of $1.8 million related to prior years’ taxes, offset by $0.1 million of related expenses.
(12)
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.
(13)
Capital expenditures in 2017 include expansion projects, including investments associated with our supply agreement with Walmart and maintenance investments. 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.
(14)
The following table provides the components of Adjusted EBITDA for each year presented (in millions):
 
Year Ended December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
Net income
$
57.7

 
$
45.5

 
$
33.5

 
$
54.2

 
$
51.5

Interest expense, net
14.4

 
13.7

 
11.0

 
5.1

 
2.0

Provision (benefit) for income taxes(a)
19.7

 
14.4

 
(5.1
)
 
31.3

 
31.4

Depreciation and amortization
60.9

 
59.5

 
54.4

 
42.9

 
37.9

LIFO expense
27.6

 
25.2

 
21.5

 
13.2

 
1.9

Stock-based compensation expense
9.6

 
8.2

 
5.0

 
6.1

 
8.7

Foreign currency transaction (gains) losses, net
0.8

 
(1.8
)
 
(1.8
)
 
(0.5
)
 
1.8

Pension termination settlement(b)

 

 
17.2

 

 

Adjusted EBITDA (non-GAAP)
$
190.7

 
$
164.7

 
$
135.7

 
$
152.3

 
$
135.2

______________________________________________
(a) Benefit for income taxes for 2017 included a $14.6 million net income tax benefit as a result of the impacts of the 2017 Tax Cuts and Jobs Act (“TCJA”). See Note 11 - Income Taxes to our consolidated financial statements for further discussion.
(b) In December 2017, we settled our qualified defined-benefit pension obligation which resulted in a non-cash charge within the consolidated statements of operations related to unrecognized actuarial losses in accumulated other comprehensive income.
(15)
Includes amounts borrowed under our Credit Facility and long-term finance lease obligations.

21


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 the 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.”
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and filed with the Securities and Exchange Commission on March 1, 2019.
Our Business
Core-Mark is one of the largest marketers of fresh, food 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 42,000 customer locations in the U.S. and Canada. Our customers include traditional convenience stores, drug stores, mass merchants, grocery stores, liquor stores, and other specialty and small format stores that carry convenience products. Our product offering includes cigarettes, other tobacco products (“OTP”), alternative nicotine products, candy, snacks, food, including fresh products, groceries, dairy, bread, beverages, general merchandise and health and beauty care products. We operate a network of 32 distribution centers in the U.S. and Canada (excluding two distribution facilities we operate as a third-party logistics provider).
Overview of 2019 Results
During 2019, we continued to grow our food/non-food sales primarily by leveraging our category management expertise in order to make our customers more relevant and profitable. The increase in food/non-food sales was partially offset by a decline in cigarette consumption, which decreased in 2019 at a rate greater than historical norms and adversely impacted our growth in net sales.
Our net sales in 2019 increased 1.7%, or $275.2 million, to $16,670.5 million compared to $16,395.3 million for 2018. The increase in net sales for the year was due primarily to a 6.6% increase in sales of food/non-food to existing customers, increases in cigarette prices and net market share gains, partially offset by a decline in carton sales. The increase in food/non-food sales to existing customers was driven primarily by strong growth in alternative nicotine products and increases in the fresh, food, beverages and candy categories. Sales of alternative nicotine products, which exhibited strong growth in 2019, may be impacted going forward by recent regulatory actions.
Gross profit in 2019 increased $56.7 million, or 6.5%, to $924.2 million from $867.5 million in 2018, driven primarily by the increase in sales of food/non-food to existing customers, including strong growth in alternative nicotine products and net market share gains, partially offset by a decline in cigarette cartons sold.
Gross profit margin increased 25 basis points to 5.54% of total net sales for 2019 from 5.29% in 2018. Remaining gross profit margin(1) increased 25 basis points to 5.53% from 5.28%. Gross profit margin benefited from a shift in sales mix toward higher margin food/non-food items and the success of our strategic pricing initiatives.
Operating expenses in 2019 increased 4.5%, or $35.9 million, to $831.6 million from $795.7 million in 2018. The increase was due primarily to higher warehousing and distribution expenses related to the growth in sales, costs related to the relocation of our headquarters and higher bad debt expense. Operating expenses were 5.0% of total net sales for 2019 compared to 4.9% in 2018. Operating expenses were 90.2% of remaining gross profit(1) for 2019, compared to 91.9% of remaining gross profit in 2018. The decrease in operating expenses as a percentage of remaining gross profit was due to operating expense leverage and the increase in gross profit for the year.

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Net income in 2019 was $57.7 million compared to $45.5 million in 2018. Adjusted EBITDA(1) increased $26.0 million, or 15.8%, to $190.7 million in 2019 from $164.7 million in 2018. The increases in net income and Adjusted EBITDA in 2019 were due primarily to the growth in gross profit, resulting from increases in food/non-food sales and margins and operating expense leverage.
________________________________________ 
(1)
Remaining gross profit margin, Adjusted EBITDA and operating expenses as a percentage of remaining gross profit 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 “Non-GAAP Financial Information” for reconciliation.

23

Table of Contents

Business Strategy Overview
Core-Mark’s mission is to be the most valued marketer of fresh, food and broad-line supply solutions to the convenience retail industry. Consistent with this mission, our strategic framework is centered around three key initiatives: growing sales and margins faster than the industry, providing industry-leading category management solutions and leveraging our cost structure. The wholesale convenience retail industry remains highly fragmented, supporting significant opportunities for both organic growth and growth through strategic acquisitions. Core-Mark is one of the largest wholesale distributors to the convenience retail industry in North America, one of two national convenience retail distributors in the U.S. and the largest in Canada, and represents an estimated 7% market share of the in-store sales of convenience stores in North America.
Our growth initiatives include growing same store sales, gaining share of the more than 180,000 North American convenience stores and being opportunistic with acquisition opportunities. Our focus on providing industry-leading category management solutions to our customers positions us to partner with retailers in an effort to increase their sales and profits. We offer a wide array of innovative, data-based marketing solutions for our customers to leverage in their pursuit of satisfying consumer demand. Whether it be our fresh or food offerings, the benefits of our store specific marketing recommendations or the latest in ordering technologies, we are constantly working to lead the industry in the category management space. The final major component of our strategic framework is focused on leveraging our operating cost structure through a range of initiatives, including technology investments, process improvement and employee engagement.
We believe consistent execution on the aforementioned strategic priorities will position Core-Mark as the leader in convenience retail distribution and provides a strong pathway to achieve sustainable shareholder returns.
Other Business Developments
During 2018, we were impacted by the loss of the distribution business with Kum & Go, which covered 450 stores.
Dividends
The Board of Directors approved the following cash dividends in 2019 (in millions, except per share data):
Declaration Date
 
Dividend Per Share
 
Record Date
 
Cash Payment Amount(1)
 
Payment Date
February 28, 2019
 
$0.11
 
March 12, 2019
 
$5.1
 
March 22, 2019
May 7, 2019
 
0.11
 
May 23, 2019
 
5.1
 
June 14, 2019
August 6, 2019
 
0.11
 
August 22, 2019
 
5.1
 
September 13, 2019
November 6, 2019
 
0.12
 
November 19, 2019
 
5.5
 
December 13, 2019
______________________________________________
(1)
Includes cash payments on declared dividends and payments made on time-based restricted stock units (“RSUs”) and performance share awards that vested subsequent to the payment date.
We paid dividends of $20.8 million and $18.9 million in 2019 and 2018, respectively.
Share Repurchase Program
In February of 2020, our Board of Directors authorized a $60.0 million stock repurchase program (the “2020 Program”), replacing our prior stock repurchase program (the “2017 Program”). At the time of approval, we had funds totaling $0.4 million remaining under the 2017 Program which were subsequently retired unused. The timing, price and volume of purchases under the 2020 Program are based on market conditions, cash and liquidity requirements, relevant securities laws and other factors.  The 2020 Program may be discontinued or amended at any time. The 2020 Program has no expiration date and terminates when the amount authorized has been expended or the Board of Directors withdraws its authorization.
In 2019, under the 2017 Program, we repurchased 767,681 shares of common stock for a total cost of $22.0 million, or an average price of $28.66 per share. In 2018, also under the 2017 Program, we repurchased 588,489 shares of common stock for a total cost of $15.5 million, or an average price of $26.20 per share.

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Table of Contents

Results of Operations
Comparison of 2019 and 2018 (in millions, except percentages)(1):
 
 
 
2019
 
2018
 
Increase (Decrease)
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
275.2

 
$
16,670.5

 
100.0
 %
 
 %
 
$
16,395.3

 
100.0
%
 
%
Net sales — Cigarettes
(81.8
)
 
10,892.7

 
65.3

 
59.7

 
10,974.5

 
66.9

 
61.2

Net sales — Food/Non-food
357.0

 
5,777.8

 
34.7

 
40.3

 
5,420.8

 
33.1

 
38.8

Net sales, less excise taxes (non-GAAP)(2)
425.3

 
13,329.2

 
80.0

 
100.0

 
12,903.9

 
78.7

 
100.0

Gross profit(3)(4)
56.7

 
924.2

 
5.5

 
6.9

 
867.5

 
5.3

 
6.7

Warehousing and distribution expenses
25.6

 
566.2

 
3.4

 
4.2

 
540.6

 
3.3

 
4.2

Selling, general and administrative expenses
10.3

 
255.4

 
1.5

 
1.9

 
245.1

 
1.5

 
1.9

Amortization of intangible assets

 
10.0

 
0.1

 
0.1

 
10.0

 
0.1

 
0.1

Income from operations
20.8

 
92.6

 
0.6

 
0.7

 
71.8

 
0.4

 
0.6

Interest expense, net
0.7

 
(14.4
)
 
0.1

 
0.1

 
(13.7
)
 
0.1

 
0.1

Foreign currency transaction (losses) gains, net
(2.6
)
 
(0.8
)
 

 

 
1.8

 

 

Income before taxes
17.5

 
77.4

 
0.5

 
0.6

 
59.9


0.4


0.5

Provision for income taxes
5.3

 
(19.7
)
 
0.1

 
0.1

 
(14.4
)

0.1


0.1

Net income
12.2

 
57.7

 
0.3

 
0.4

 
45.5


0.3


0.4

Adjusted EBITDA
(non-GAAP)(5)
26.0

 
190.7

 
1.1

 
1.4

 
164.7


1.0


1.3

______________________________________________
(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 “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)
Gross profit for 2019 includes LIFO expense of $27.6 million compared to $25.2 million in 2018.
(5)
See the reconciliation of Adjusted EBITDA to net income in “Non-GAAP Financial Information.”
Net Sales. Net sales increased by $275.2 million, or 1.7%, to $16,670.5 million in 2019 from $16,395.3 million in 2018. The increase in net sales was driven primarily by growth in sales of food/non-food to existing customers, increases in cigarette prices and net market share gains, partially offset by a decline in carton sales. The increase in food/non-food sales to existing customers was driven primarily by strong growth in alternative nicotine products and increases in the fresh, food, beverages and candy categories. Sales of alternative nicotine products, which exhibited strong growth in 2019, may be impacted going forward by recent regulatory actions.
Net Sales of Cigarettes. Net sales of cigarettes in 2019 decreased by $81.8 million, or 0.7%, to $10,892.7 million from $10,974.5 million in 2018. The decrease in cigarette net sales was driven primarily by a 3.9% decline in carton sales, partially offset by a 3.2% increase in the average sales price per carton due primarily to increases in cigarette manufacturers’ prices. Cigarette carton sales decreased by 3.6% and 6.9% in the U.S. and Canada, respectively, driven by a decline in the general consumption of cigarettes, partially offset by net market share gains.
We believe long-term cigarette consumption will continue to be adversely impacted by rising prices, increases in excise taxes and other legislative actions, diminishing social acceptance, sales through illicit markets and increasing use of alternative nicotine products. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability, thus partially mitigating the effect of the declines to distributors. Historically, industry data indicates that convenience

25

Table of Contents

retailers have more than offset cigarette volume profit declines through higher sales of other nicotine products, fresh and food service, and other food/non-food products.
Net cigarette sales as a percentage of total net sales was 65.3% in 2019 compared to 66.9% in 2018.
Net Sales of Food/Non-food Products. Net sales of food/non-food products in 2019 increased $357.0 million, or 6.6%, to $5,777.8 million from $5,420.8 million in 2018.
The following table provides net sales by product category for our food/non-food products (in millions, except percentages) (1):
 
2019
 
2018
 
Increase
Product Category
Net Sales
 
Net Sales
 
Amounts
 
Percentage
Food
$
1,746.4

 
$
1,659.0

 
$
87.4

 
5.3
%
Fresh
502.8

 
474.2

 
28.6

 
6.0
%
Candy
1,039.0

 
992.0

 
47.0

 
4.7
%
OTP
1,438.9

 
1,387.2

 
51.7

 
3.7
%
Health, beauty & general
847.2

 
711.5

 
135.7

 
19.1
%
Beverages
202.1

 
191.0

 
11.1

 
5.8
%
Equipment/other
1.4

 
5.9

 
(4.5
)
 
N/A

Total food/non-food products
$
5,777.8

 
$
5,420.8

 
$
357.0

 
6.6
%
______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.

The increase in food/non-food sales in 2019 was driven primarily by a 6.2% increase in sales to existing customers, as well as net market share gains. Our health, beauty & general category sales benefited from increased sales of alternative nicotine products. However, the regulatory environment surrounding alternative nicotine products is uncertain and the enactment of regulations and other laws at the federal, state and local levels could have a material impact on the availability of and our ability to sell such products. Sales growth in our OTP category was impacted by a manufacturer shortage of cigars in 2019; excluding cigars, OTP sales increased 6.4% compared to 2018.
Total net sales of food/non-food products as a percentage of total net sales were 34.7% in 2019 compared to 33.1% in 2018.

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Gross Profit. Gross profit represents 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. Gross profit in 2019 increased $56.7 million, or 6.5%, to $924.2 million from $867.5 million in 2018, driven primarily by an increase in food/non-food sales to existing customers.
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2019 and 2018 (in millions, except percentages)(1):
 
 
 
2019
 
2018
 
Increase (Decrease) in Gross Profit
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
275.2

 
$
16,670.5

 
100.0
 %
 
 %
 
$
16,395.3

 
100.0
 %
 
 %
Net sales, less excise taxes
(non-GAAP)(2)
425.3

 
13,329.2

 
80.0

 
100.0

 
12,903.9

 
78.7

 
100.0

Components of gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cigarette inventory holding gains(3)
$
3.4

 
$
23.0

 
0.14
 %
 
0.17
 %
 
$
19.6

 
0.12
 %
 
0.15
 %
Other inventory holding gains(4)
(0.5
)
 
6.9

 
0.04

 
0.05

 
7.4

 
0.05

 
0.06

LIFO expense(5)
(2.4
)
 
(27.6
)
 
(0.17
)
 
(0.21
)
 
(25.2
)
 
(0.15
)
 
(0.20
)
Remaining gross profit
(non-GAAP)(6)
56.2

 
921.9

 
5.53

 
6.92

 
865.7

 
5.28

 
6.71

Gross profit
$
56.7

 
$
924.2

 
5.54
 %
 
6.93
 %
 
$
867.5

 
5.29
 %
 
6.72
 %
______________________________________________
(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 “Non-GAAP Financial Information.”
(3)
In 2019, $21.3 million and $1.7 million of the cigarette inventory holding gains were attributable to the U.S. and Canada, respectively. In 2018, $17.3 million and $2.3 million of the cigarette inventory holding gains were attributable to the U.S. and Canada, respectively.
(4)
In 2019, we recognized $6.9 million of candy inventory holding gains which were attributable to the U.S. In 2018, other holding gains consisted of a $7.4 million cigarette tax stamp inventory holding gain attributable to the U.S.
(5)
The increase of $2.4 million in LIFO expense in 2019 was due primarily to an increase in the Producer Price Index (“PPI”) for cigarettes and an increase in inventory levels (see Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements).
(6)
Remaining gross profit is a non-GAAP financial measure, which we provide to segregate the effects of LIFO expense, cigarette inventory holding gains, cigarette tax stamp inventory holding gains and other items that significantly affect the comparability of gross profit (see reconciliation of remaining gross profit to gross profit in “Non-GAAP Financial Information.”)

Gross profit margin increased 25 basis points to 5.54% of total net sales during 2019 from 5.29% in 2018. The increase in gross profit margin was driven primarily by the overall shift in sales mix toward higher margin food/non-food items, driven in part by strong growth of alternative nicotine product sales and higher margins in the food category, partially offset by cigarette price inflation.
Distributors such as Core-Mark may, from time to time, earn higher gross profits on inventory 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 resulting higher gross profits are referred to as inventory holding gains. Our cigarette, candy and excise tax holding gains were $29.9 million in 2019 compared to $27.0 million in 2018. 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.
Notwithstanding the aforementioned holding gains, increases in cigarette prices and excise taxes typically have a negative impact on our gross profit margins with respect to sales because gross profit on cigarette sales is generally fixed on a cents-per-carton basis. Therefore, as cigarette prices and taxes increase, gross profit generally decreases as a percentage of 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.
LIFO expense was $27.6 million in 2019 compared to $25.2 million in 2018. 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).

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Remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross profit in “Non-GAAP financial information”), increased $56.2 million, or 6.5%, to $921.9 million in 2019 from $865.7 million in 2018. Remaining gross profit margin, a non-GAAP financial measure (see reconciliation of remaining gross profit margin, as well as an explanation of its significance, in “Non-GAAP Financial Information”) increased to 5.53% in 2019 compared to 5.28% in 2018.
Cigarette remaining gross profit, a non-GAAP financial measure (see reconciliation of remaining gross profit to gross profit in “Non-GAAP financial information”), decreased $7.1 million, or 3.2%, to $213.6 million in 2019 from $220.7 million for the same period in 2018. A reduction in cigarette remaining gross profit, resulting from a 3.9% decline in cigarette carton sales, was offset by a 0.9% increase in remaining gross profit per carton.
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 $63.3 million or 9.8% to $708.3 million, in 2019 from $645.0 million in 2018. Food/non-food remaining gross profit margin, a non-GAAP financial measure (see reconciliation of food/non-food remaining gross profit margin in “Non-GAAP Financial Information”), increased to 12.26% in 2019 from 11.90% in 2018, driven primarily by an increase in sales of higher-margin alternative nicotine products, higher margins in our food and candy categories and our strategic pricing initiatives.
In 2019, our remaining gross profit for food/non-food products was 76.8% of our total remaining gross profit compared to 74.5% for 2018.
Operating Expenses.  Our operating expenses include costs related to warehousing and distribution, selling, general and administrative expenses and amortization of intangible assets. In 2019, operating expenses increased by $35.9 million, or 4.5%, to $831.6 million from $795.7 million in 2018. The increase was due primarily to higher warehousing and distribution expenses, costs related to the relocation of our headquarters and higher bad debt expense. As a percentage of net sales, operating expenses were 5.0% in 2019 compared to 4.9% in 2018. Operating expenses were 90.2% of remaining gross profit, a non-GAAP financial ratio (see reconciliation of operating expenses as a percentage of remaining gross profit, as well as an explanation of its significance, in “Non-GAAP Financial Information”) in 2019, compared to 91.9% of remaining gross profit in 2018. Operating expenses as a percentage of remaining gross profit was favorably impacted by the sales mix shift to higher-margin food/non-food products.
Warehousing and Distribution Expenses.  Warehousing and distribution expenses increased $25.6 million, or 4.7%, to $566.2 million in 2019 from $540.6 million in 2018. The increase in warehousing and distribution expenses was due primarily to increased food/non-food volume. Warehouse and distribution expenses were 3.4% of total net sales in 2019 compared to 3.3% of total net sales in 2018. Warehousing and distribution expenses were 61.4% of remaining gross profit, a non-GAAP financial ratio (see reconciliation, as well as an explanation of its significance, in “Non-GAAP Financial Information”), in 2019, compared to 62.4% of remaining gross profit in 2018.
Selling, General and Administrative (“SG&A”) Expenses.  SG&A expenses increased $10.3 million, or 4.2%, to $255.4 million in 2019 from $245.1 million in 2018. The increase was due primarily to costs related to the relocation of our headquarters and higher bad debt expense. SG&A expenses were 1.5% of total net sales in both 2019 and 2018. SG&A was 27.7% of remaining gross profit, a non-GAAP financial ratio (see reconciliation, as well as an explanation of its significance, in “Non-GAAP Financial Information”), in 2019, compared to 28.3% of remaining gross profit in 2018.
Amortization Expenses.  Amortization expenses were $10.0 million in both 2019 and 2018.
Interest Expense, Net.  Interest expense, net increased $0.7 million, or 5.1%, to $14.4 million in 2019 compared to $13.7 million in 2018. Interest expense, net, includes interest, amortization of loan origination costs related to borrowings and facility fees and interest on finance lease obligations. The increase in net interest expense was due primarily to an increase in the average borrowing rate, partially offset by lower average borrowings. Average borrowings in 2019 were $303.2 million with a weighted-average interest rate of 3.4% compared to average borrowings of $336.8 million and a weighted-average interest rate of 3.1% in 2018.
Foreign Currency Transaction (Losses) Gains, Net.  We recognized a foreign currency transaction loss of $0.8 million in 2019 compared to a gain of $1.8 million in 2018. The change was due primarily to fluctuations in our net intercompany borrowing positions and the Canadian/U.S. exchange rate. During times of a strengthening U.S. dollar, we generally record foreign currency losses from our Canadian operations. Conversely, during times of a weakening U.S. dollar, we generally record foreign currency gains.
Income Taxes.  For the year ended December 31, 2019, our effective tax rate was a provision of 25.5% in 2019 compared to a provision of 24.0% in 2018. The increase in effective tax rate was due primarily to higher foreign taxes.
Adjusted EBITDA.  Adjusted EBITDA, a non-GAAP financial measure (see reconciliation of Adjusted EBITDA to net income in “Non-GAAP Financial Information”), increased $26.0 million, or 15.8%, to $190.7 million in

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2019 from $164.7 million for the same period in 2018. The increase in Adjusted EBITDA was due primarily to incremental gross profit generated from an increase in food/non-food sales to existing customers and higher food/non-food margins.
Non-GAAP Financial Information
The financial statements in this Annual Report on Form 10-K are prepared in accordance with GAAP. Core-Mark uses certain non-GAAP financial measures including (i) Adjusted EBITDA, (ii) net sales, less excise taxes, (iii) remaining gross profit (including cigarette remaining gross profit and food/non-food remaining gross profit), (iv) remaining gross profit margin (including cigarette remaining gross profit margin and food/non-food remaining gross profit margin), (v) remaining gross profit margin less excise taxes (including cigarette remaining gross profit margin less excise taxes and food/non-food remaining gross profit margin less excise taxes), (vi) cigarette remaining gross profit per carton and (vii) operating expenses (and the components thereof) as a percentage of remaining gross profit. 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. We also believe these measures allow investors to view results in a manner similar to the method used by our management. Management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. These measures may be defined differently than other companies and therefore, such measures used by other companies may not be comparable to ours. We strongly encourage investors and stockholders to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure. These non-GAAP measures are defined as follows:
(i) Adjusted EBITDA is a measure used by management to measure operating performance. Adjusted EBITDA is equal to net income adding back net interest expense, provision (benefit) for income taxes, depreciation and amortization, LIFO expense, stock-based compensation expense, net foreign currency transaction gains or losses and pension termination settlement expenses. See table below for additional details on the components of Adjusted EBITDA. We believe Adjusted EBITDA is one of the primary measures used externally by our investors, analysts and peers in our industry for purposes of valuation and comparing our results to other companies.
(ii) Net sales less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales and gross profits 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 taxes result in higher net sales, our overall gross profit percentage may be reduced.
(iii) Remaining gross profit (including cigarette remaining gross profit and food/non-food remaining gross profit), (iv) remaining gross profit margin (including cigarette remaining gross profit margin and food/non-food remaining gross profit margin), (v) remaining gross profit margin less excise taxes (including cigarette remaining gross profit margin less excise taxes and food/non-food remaining gross profit margin less excise taxes), and (vi) cigarette remaining gross profit per carton, are non-GAAP financial measures, which we provide to segregate the effects of LIFO expense, cigarette holding gains and certain other items that significantly affect the comparability of gross profit.
(vii) Operating expenses (and the components thereof) as a percentage of remaining gross profit is a non-GAAP financial measure, which is used by management to measure operating leverage. Although management also uses operating expenses as a percentage of net sales, this metric may be impacted on a comparable basis by, among other items, excise taxes, changes in manufacturers’ prices (including inflation), and our continuing trend in sales mix shift from cigarettes to higher-margin food/non-food items which have substantially lower selling prices.

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The following table provides the components of Adjusted EBITDA for years ended December 31, 2019, 2018 and 2017 (in millions):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Net income
$
57.7

 
$
45.5

 
$
33.5

Interest expense, net(1)
14.4

 
13.7

 
11.0

Provision (benefit) for income taxes
19.7

 
14.4

 
(5.1
)
Depreciation and amortization
60.9

 
59.5

 
54.4

LIFO expense
27.6

 
25.2

 
21.5

Stock-based compensation expense
9.6

 
8.2

 
5.0

Foreign currency transaction losses (gains), net
0.8

 
(1.8
)
 
(1.8
)
Pension termination settlement

 

 
17.2

Adjusted EBITDA (non-GAAP)
$
190.7

 
$
164.7

 
$
135.7

______________________________________________
(1)
Interest expense, net, is reported net of interest income.


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The following tables reconcile net sales less excise taxes to net sales and remaining gross profit to gross profit, their most comparable financial measures under U.S. GAAP (in millions, except percentages)(1):
 
 
Year Ended December 31,
 
 
2019
 
2018
 
2017
Net sales
 
$
16,670.5

 
$
16,395.3

 
$
15,687.6

Excise taxes(2)
 
(3,341.3
)
 
(3,491.4
)
 
(3,462.6
)
Net sales, less excise taxes (non-GAAP)
 
$
13,329.2

 
$
12,903.9

 
$
12,225.0

 
 
 
 
 
 
 
Gross profit(3)(4)
 
$
924.2

 
$
867.5

 
$
791.7

Cigarette inventory holding gains
 
(23.0
)
 
(19.6
)
 
(16.1
)
Other inventory holding gains(5)
 
(6.9
)
 
(7.4
)
 

OTP tax items(6)
 

 

 
(3.9
)
LIFO expense
 
27.6

 
25.2

 
21.5

Remaining gross profit (non-GAAP)
 
$
921.9

 
$
865.7

 
$
793.2

 
 
 
 
 
 
 
Gross profit %
 
5.54
%
 
5.29
%
 
5.05
%
Gross profit % less excise taxes (non-GAAP)
 
6.93
%
 
6.72
%
 
6.48
%
Remaining gross profit % (non-GAAP)
 
5.53
%
 
5.28
%
 
5.06
%
Remaining gross profit % less excise taxes (non-GAAP)
 
6.92
%
 
6.71
%
 
6.49
%

 
 
Year Ended December 31,
Cigarettes:
 
2019
 
2018
 
2017
Net sales
 
$
10,892.7

 
$
10,974.5

 
$
10,887.4

Excise taxes(2)
 
(2,929.6
)
 
(3,082.4
)
 
(3,094.3
)
Net sales, less excise taxes (non-GAAP)
 
$
7,963.1

 
$
7,892.1

 
$
7,793.1

 
 
 
 
 
 
 
Gross profit(3)
 
$
212.4

 
$
225.6

 
$
213.8

Cigarette inventory holding gains
 
(23.0
)
 
(19.6
)
 
(16.1
)
Other inventory holding gains(5)
 

 
(7.4
)
 

LIFO expense
 
24.2

 
22.1

 
17.5

Remaining gross profit (non-GAAP)
 
$
213.6

 
$
220.7

 
$
215.2

 
 
 
 
 
 
 
Gross profit %
 
1.95
%
 
2.06
%
 
1.96
%
Gross profit % less excise taxes (non-GAAP)
 
2.67
%
 
2.86
%
 
2.74
%
Remaining gross profit % (non-GAAP)
 
1.96
%
 
2.01
%
 
1.98
%
Remaining gross profit % less excise taxes (non-GAAP)
 
2.68
%
 
2.80
%
 
2.76
%