2011 Form 10K
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
x
Annual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2011
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                     to                    
Commission File Number:
000-51515
CORE-MARK HOLDING COMPANY, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
20-1489747
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
395 Oyster Point Boulevard, Suite 415
South San Francisco, California 94080
(650) 589-9445
(Address of Principal Executive Offices, including Zip Code)
(Registrant's Telephone Number, including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:  
Title of each class
 
Name of each exchange
on which registered
 
Common Stock, par value $0.01 per share
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  
Large accelerated filer o
Accelerated filer  x
Non-accelerated filer  o  
Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2011, the last business day of the registrant's most recently completed second fiscal quarter:    $397,712,744.
As of February 29, 2012, the registrant had 11,398,254 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 2012 definitive proxy statement to be filed pursuant to Regulation 14A.

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

SEC Regulation G - Non-GAAP Information

The financial statements in this Annual Report are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Core-Mark uses certain non-GAAP financial measures including remaining gross profit, remaining gross profit margin, adjusted EBITDA and net sales, less excise taxes. We believe these non-GAAP financial measures provide meaningful supplemental information for investors regarding the performance of our business and facilitates a meaningful period to period evaluation. Management uses these non-GAAP financial measures in order to have comparable financial results to analyze changes in our underlying business. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.


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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 marketers of fresh and broad-line supply solutions to the convenience retail industry in North America in terms of annual sales, providing sales and marketing, distribution and logistics services to customer locations across the U.S. and Canada. Our origins date back to 1888, when Glaser Bros., a family-owned-and-operated candy and tobacco distribution business, was founded in San Francisco, California.
Core-Mark offers retailers the ability to participate in manufacturer and Company-sponsored sales and marketing programs, merchandising and product category management services, as well as the use of information systems that are focused on minimizing retailers' investment in inventory, while seeking to maximize their sales. In addition, our wholesale distributing capabilities provide valuable services to both manufacturers of consumer products and convenience retailers. Manufacturers benefit from our broad retail coverage, inventory management and efficient processing of small orders. Convenience retailers benefit from our distribution capabilities by gaining access to a broad product line, optimizing inventory management and accessing trade credit.
We operate in an industry where, in 2010, based on the NACS Association for Convenience and Fuel Retailing 2011 State of the Industry (“SOI”) Report, total in-store sales at convenience retail locations increased 4.4% to approximately $190.4 billion and were generated through an estimated 146,000 stores across the U.S. According to a more recent report from NACS, the number of convenience stores in the U.S. grew 1.2% in 2011 to approximately 148,000 stores. We estimate that approximately 50% of the products that these stores sell are supplied by wholesale distributors such as Core-Mark. The convenience retail industry gross profit for in-store sales was approximately $60.1 billion in 2010 and $58.6 billion in 2009. Over the ten years from 2000 through 2010, convenience in-store sales increased by a compounded annual growth rate of 6.2%.
We distribute a diverse line of national and private label convenience store products to over 28,000 customer locations in all 50 states of the U.S. and five Canadian provinces. The products we distribute include cigarettes, other tobacco products, candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health and beauty care products. We service traditional convenience stores as well as alternative outlets selling convenience products. Our traditional convenience store customers include many of the major national and super-regional convenience store operators, as well as thousands of multi- and single-store customers. Our alternative outlet customers comprise a variety of store formats, including grocery stores, drug stores, liquor stores, cigarette and tobacco shops, hotel gift shops, military exchanges, college bookstores, casinos, movie theaters, hardware stores, airport concessions and other specialty and small format stores that carry convenience products.
We operate a network of 26 distribution centers (excluding two distribution facilities we operate as a third party logistics provider) in the U.S. and Canada. We distribute in excess of 45,000 Stock Keeping Units ("SKUs") of packaged consumable goods to our customers and also provide an array of information and data services that enable our customers to better manage retail product sales and marketing functions.
In 2011, our consolidated net sales increased 11.7% to $8.1 billion from $7.3 billion in 2010. Cigarettes comprised approximately 70.4% of total net sales in 2011, while approximately 68.3% of our gross profit was generated from food/non-food products.

Competitive Strengths
We believe we have the following fundamental competitive strengths which are the foundation of our business strategy:
Experience in the Industry. Our origins date back to 1888, when Glaser Bros., a family-owned-and-operated candy and tobacco distribution business, was founded in San Francisco, California. The executive management team, comprised of our CEO and 14 senior managers, has an average tenure of over 16 years and applies its expertise to critical functional areas including logistics, sales and marketing, purchasing, information technology, finance, business development, human resources and retail store support.
Innovation & Flexibility. Wholesale distributors typically provide convenience retailers access to a broad product line, the ability to place small quantity orders, inventory management and access to trade credit. As a large, full-service wholesale distributor we offer retailers the ability to participate in manufacturer and Company-sponsored sales and marketing programs, merchandising

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and product category management services, as well as the use of information systems that are focused on minimizing retailers' investment in inventory, while seeking to maximize their sales.
Distribution Capabilities. The wholesale distribution industry is highly fragmented and historically has consisted of a large number of small, privately-owned businesses and a small number of large, full-service wholesale distributors serving multiple geographic regions. Relative to smaller competitors, large distributors such as Core-Mark benefit from several competitive advantages including: increased purchasing power, the ability to service large national chain accounts, economies of scale in sales and operations, the ability to spread fixed costs over a larger revenue base and the resources to invest in information technology and other productivity enhancing technology.

Business Strategy
Our objective is to increase overall return to shareholders by growing market share, revenues and profitability. To achieve that objective, we have become one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America. In order to further enhance our value to the retailer, we plan to:
Drive our Vendor Consolidation Initiative (“VCI”). We expect our VCI program will allow us to grow by capitalizing on the highly fragmented nature of the distribution channel that services the convenience retail industry. A convenience retailer generally receives store merchandise through a large number of unique deliveries. This represents a highly inefficient and costly process for the individual stores. Today, we estimate that Core-Mark sells about 50% of what a convenience retailer purchases from their vendors. Our VCI program offers the retailer the ability to receive multiple weekly deliveries for the bulk of their products, including dairy and other merchandise they would historically purchase from direct-store-delivery companies. This simplifies the supply chain and as a by-product, retailers will improve inventory turns and working capital, eliminate operational and transaction costs, and they will also greatly diminish their out-of-stocks on best-selling items.
Deliver Fresh Products. We believe there is an increasing trend among consumers to purchase fresh food and dairy products from convenience stores. To meet this expected demand, we have modified and upgraded our refrigerated capacity, including investing in chill docks and tri-temperature trailers, which enables us to deliver a significant range of chilled items including milk, produce and other fresh foods to retail outlets. We have established partnerships with strategically located bakeries and commissaries to further enable us to deliver the freshest product possible, with premium consumer items such as sandwiches, wraps, cut-fruit, parfaits, pastry, doughnuts, bread and some home meal replacement entrées (“HMR”). We continue to expand the array of fresh products through the development of unique and comprehensive marketing programs, including equipment programs that assist the retailer in obtaining the proper equipment to showcase their “fresh” product offering. We believe our investments in infrastructure, combined with our strategically located suppliers and in-house expertise, position us as the leader in providing fresh products and programs to convenience stores. Proper execution of VCI, with the cornerstone being dairy distribution, affords Core-Mark the critical mass necessary to offer retailers a multiple weekly delivery platform, which ensures the proper handling and dating of "Fresh" products.
Expand our Presence Eastward. We believe there is significant opportunity for us to increase our market share by continuing to expand our presence east of the Mississippi. According to The Association for Convenience & Fuel Retailing 2011 SOI Report, during 2010, aggregate U.S. traditional convenience retail in-store sales were approximately $190.4 billion through approximately 146,000 stores with the majority of those stores located east of the Mississippi. We believe our expansion eastward will be accomplished by gaining new customers, both national and regional, through a combination of exemplary service, VCI programs, fresh product deliveries, innovative marketing strategies, competitive pricing and acquisitions of smaller distributors.
Recent examples of our eastward expansion include:
In September 2011, we signed a distribution agreement with Alimentation Couche-Tard, Inc. ("Couche-Tard") to service approximately 970 additional Couche-Tard corporate stores within Couche-Tard's Southeast, Gulf Coast and Florida markets. This distribution agreement led to the addition of our newest distribution facility located in Tampa, Florida.
In May 2011, we acquired Forrest City Grocery Company ("FCGC"), a regional wholesale distributor servicing customers in Arkansas, Mississippi, Tennessee and the surrounding states, which has provided Core-Mark with additional infrastructure and market share in the Southeastern region of the U.S. (See Note 3 -- Acquisitions to our consolidated financial statements).
In August 2010, we acquired Finkle Distributors, Inc. (“FDI”), a convenience wholesaler servicing customers in New York, Pennsylvania and the surrounding states, to continue to expand our market share in the Northeastern region of the U.S. (See Note 3 -- Acquisitions to our consolidated financial statements).

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Continue Building Sustainable Competitive Advantage. We believe our ability to increase sales and profitability with existing and new customers is highly dependent upon our ability to deliver consistently high levels of service, innovative marketing programs and information technology and logistics support. To that fundamental end, we are committed to further improving operational efficiencies in our distribution centers while containing our costs in order to enhance profitability. To further enhance our competitive advantage, we have been one of the first to recognize emerging trends and to offer retailers our unique marketing programs such as VCI and Fresh. In addition, we continue to roll out our Focused Marketing Initiative (“FMI”).  This program is designed to drive deeper entrenchment with our customer base and to further differentiate ourselves in the market place.  The FMI program is centered on increasing the profitability of the independent store through improved category insights and store management, maximizing geographic specific consumer preferences and habits as well as other available data resources.  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.

Customers, Products and Suppliers
We service over 28,000 customer locations in all 50 states of the U.S. and five Canadian provinces. Our customers represent many of the large national and regional convenience retailers in the U.S. and Canada and leading alternative outlet customers. Our top ten customers accounted for approximately 31.5% of our net sales in 2011. While no single customer accounted for 10% or more of our total net sales in 2011, Couche-Tard grew to approximately 13% of our net sales in the fourth quarter of 2011 due largely to sales under the new distribution agreement.
Below is a comparison of our net sales mix by primary product category for the last three years (dollars in millions):
 
 
Year ended December 31,
 
 
2011
 
2010
 
2009
 
 
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
 
Net Sales
 
% of Net Sales
Cigarettes
 
$
5,710.6

 
70.4
%
 
$
5,119.7

 
70.5
%
 
$
4,589.1

 
70.3
%
Food
 
995.7

 
12.3
%
 
840.9

 
11.6
%
 
738.0

 
11.3
%
Candy
 
459.8

 
5.7
%
 
426.0

 
5.8
%
 
405.0

 
6.2
%
Other tobacco products
 
607.9

 
7.5
%
 
503.6

 
6.9
%
 
434.0

 
6.6
%
Health, beauty & general
 
237.5

 
2.9
%
 
220.6

 
3.0
%
 
209.5

 
3.2
%
Beverages
 
100.9

 
1.2
%
 
152.0

 
2.1
%
 
151.7

 
2.3
%
Equipment/other
 
2.5

 
%
 
4.0

 
0.1
%
 
4.3

 
0.1
%
Total food/non-food products
 
2,404.3

 
29.6
%
 
2,147.1

 
29.5
%
 
1,942.5

 
29.7
%
Total net sales
 
$
8,114.9

 
100.0
%
 
$
7,266.8

 
100.0
%
 
$
6,531.6

 
100.0
%
______________________________________________
Cigarette Products. We purchase cigarette products from major U.S. and Canadian manufacturers. With cigarettes accounting for approximately $5,710.6 million or 70.4% of our total net sales and 31.7% of our total gross profit in 2011, we control major purchases of cigarettes centrally in order to optimize inventory levels and purchasing opportunities. The daily replenishment of inventory and brand selection is controlled by our distribution centers.
U.S. cigarette consumption has generally declined over the last ten years. Based on 2011 statistics provided by the Tobacco Merchants Association (“TMA”) published in early 2012 and compiled from the U.S. Department of Agriculture - Economic Research Service, total cigarette consumption in the U.S. declined from 444 billion cigarettes in 2001 to 300 billion cigarettes in 2011, or 32%. Total cigarette consumption also declined in Canada from 41 billion cigarettes in 2001 to 25 billion cigarettes in 2011, or a 39% reduction in consumption, based on the 2011 statistics provided by TMA. In 2011 our carton sales increased 9.2% due to the incremental sales attributable to the FCGC and FDI acquisitions, the new distribution agreement with Couche-Tard and one additional selling day this year compared to 2010. Excluding these items, carton sales decreased 1.9% in the U.S. Our carton sales in Canada increased 0.9% in 2011 on a comparative basis to last year. Although we anticipate overall cigarette consumption will continue to decline, we expect to offset the majority of the impact from these declines through market share expansion, growth in our non-cigarette categories and incremental gross profit that results from cigarette manufacturer price increases. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability.
We have no long-term cigarette purchase agreements and buy substantially all of our products on an as needed basis. Cigarette manufacturers historically have offered structured incentive programs to wholesalers based on maintaining market share and

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executing promotional programs. These programs are subject to change by the manufacturers without notice.
Excise taxes are levied on cigarettes and other tobacco products by the U.S. and Canadian federal governments and are also imposed by the various states, localities and provinces. We collect state, local and provincial excise taxes from our customers and remit these amounts to the appropriate authorities. Excise taxes are a significant component of our net sales and cost of sales. During 2011, we included in net sales approximately $1,951.5 million of state, local and provincial excise taxes. As of December 31, 2011, state cigarette excise taxes in the U.S. jurisdictions we serve ranged from $0.17 per pack of 20 cigarettes in the state of Missouri to $4.35 per pack of 20 cigarettes in the state of New York. In the Canadian jurisdictions we serve, provincial excise taxes ranged from C$2.47 per pack of 20 cigarettes in Ontario to C$5.72 per pack of 20 cigarettes in the Northwest Territories. Federal excise taxes are levied on the manufacturers who pass the tax on to us as part of the product cost and thus are not a component of our excise taxes.
Food/Non-food Products. Our food products include fast food, candy, snacks, groceries, beverages, fresh products such as sandwiches, juices, salads, produce, dairy and bread. Our non-food products include cigars, tobacco, health and beauty care products, general merchandise and equipment. Net sales of the combined food/non-food product categories grew 12.0% in 2011 to $2,404.3 million, which was 29.6% of our total net sales. Excluding a reduction in our beverage product category resulting from the movement of Gatorade to a direct-store-delivery format during the first quarter of 2011, net sales of our food/non-food category increased 15.6% in 2011 compared to 2010. Gross profits for food/non-food categories grew $30.8 million, or 11.6%, to $296.7 million, which was 68.3% of our total gross profit. Food/non-food products generated gross margins of 13.40% excluding excise taxes in 2011, while the cigarette category generated gross margins of 3.48% excluding excise taxes.
In order to take advantage of the significantly higher margins earned by food/non-food products, two of our key business strategies, VCI and our fresh initiative, focus primarily on the higher margin categories in the food group. These categories include milk, fresh bread, fresh sandwiches, fresh fruit, fresh produce, fresh baked goods, home replacement meals and other fresh and natural products. We believe this drive toward more healthy and fresh foods being sold in the convenience markets is a recognized major trend in the industry. We have invested a significant amount of capital to position our Company to have the proper infrastructure to successfully deliver these highly perishable items. Our objective is to consolidate the current fragmented nature of convenience store vendor distribution by consolidating such items as dairy and bread and to grow “fresh food” market share for the customers we service as they fight for consumer “share of stomach” for fresh foods with other retailers. Ultimately we believe the defragmentation of vendor deliveries coupled with market share gains in fresh foods for the stores we service will increase our customers' sales and profits and in turn improve our sales and profits.
In addition to fresh foods, we have recognized a VCI opportunity with regard to wine distribution in the state of California. To act upon this opportunity in 2011, we successfully obtained licenses for all five of our California distribution centers to distribute wine and beer. In July 2011 we began wine distribution to many of our California retail customers. In 2012, we expect to increase the number of California customers that purchase wine and beer from us as well as expand distribution outside of California.

Our Suppliers. We purchase products for resale from approximately 4,300 trade suppliers and manufacturers located across the U.S. and Canada. In 2011, we purchased approximately 63% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris and R.J. Reynolds, representing approximately 27% and 14% of our purchases, respectively. We coordinate our purchasing from suppliers by negotiating, on a corporate-wide basis, special arrangements to obtain volume discounts and additional incentives, while also taking advantage of promotional and marketing incentives offered to us as a wholesale distributor. In addition, buyers in each of our distribution facilities purchase products, particularly food, directly from the manufacturers, improving product mix and availability for individual markets.


Seasonality
We typically generate slightly higher net sales and higher gross profits during the warm weather months (May through September) than in other times throughout the year. We believe this occurs because the convenience store industry which we serve tends to be busier during this period due to vacations and travel by consumers. During the second and third quarters of 2011, 2010 and 2009, we generated approximately 53% of our net sales for each fiscal year.





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Operations
We operate a network of 26 distribution centers (excluding two distribution facilities we operate as a third party logistics provider). In 2011, we acquired FCGC in Arkansas and we added a distribution center in Tampa, Florida initially to support a new distribution agreement with Couche-Tard by servicing their Southeast, Gulf Coast and Florida regions. Twenty-two of our distribution centers are located in the U.S. and four are located in Canada. The map below depicts the scope of our operations and distribution centers.

Map of Operations

______________________________________________
Two of the facilities we operate in the U.S., Artic Cascade and Allied Merchandising Industry, are consolidating warehouses which buy products from our suppliers in bulk quantities and then distribute the products to many of our other distribution centers. By using Artic Cascade, located in Sacramento, California, to obtain products at lower cost from frozen product vendors, we are able to offer a broader selection of quality products to retailers at more competitive prices. Allied Merchandising Industry, located in Corona, California, purchases a portion of our non-cigarette products, primarily health and beauty care and general merchandise items, for our distribution centers enabling us to optimize our inventory to meet the needs of our customers. We operate two additional facilities as a third party logistics provider. One distribution facility located in Phoenix, Arizona, referred to as the Arizona Distribution Center (“ADC”), is dedicated solely to supporting the logistics and management requirements of one of our major customers, Alimentation Couche-Tard, Inc. The second distribution facility located in San Antonio, Texas, referred to as the Retail Distribution Center (“RDC”), is dedicated solely to supporting another major customer, Valero Energy Corporation.
We purchase a variety of brand name and private label products, in excess of 45,000 SKUs, including over 2,000 cigarette products, from our suppliers and manufacturers. We offer customers a variety of food/non-food products, including fast food, candy, snacks, groceries, fresh products, dairy, bread, beverages, other tobacco products, general merchandise and health and beauty care products.
A typical convenience store order consists of a mix of dry, frozen and chilled products. Our receivers, stockers, order selectors, stampers, forklift drivers and loaders received, stored and picked approximately 476 million, 454 million and 426 million items (a carton of 10 packs of cigarettes is one item) or 71 million, 71 million and 65 million cubic feet of product, during the years ended December 31, 2011, 2010 and 2009, respectively, while limiting the service error rate to approximately two errors per thousand items shipped in 2011.
 
Our proprietary Distribution Center Management System ("DCMS") platform provides our distribution centers with the flexibility to adapt to our customers' information technology requirements in an industry that does not have a standard information technology platform. Actively integrating our customers onto our platform is a priority which enables fast, efficient and reliable service.


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Distribution
At December 31, 2011, we had 1,128 transportation department personnel, including delivery drivers, shuttle drivers, routers, training supervisors and managers who focus on achieving safe, on-time deliveries. Our daily orders are picked and loaded nightly in reverse order of scheduled delivery. At December 31, 2011, our trucking fleet consisted of approximately 700 tractors, trucks and vans, of which nearly all were leased. We have made a significant investment over the past few years in upgrading our trailer fleet to tri-temperature (“tri-temp”) which gives us the capability to deliver frozen, chilled and non-refrigerated goods in one delivery. As of December 31, 2011, approximately 70% of our trailers were tri-temp, with the remainder capable of delivering refrigerated and non-refrigerated foods. This provides us the multiple temperature zone capability needed to support our focus on delivering fresh products to our customers. Our fuel consumption costs for 2011 totaled approximately $13.0 million, net of fuel surcharges passed on to customers, which represented an increase of approximately $3.5 million, from $9.5 million in 2010, due to higher fuel prices, a 5.9% increase in miles driven, the acquisition of FCGC and the addition of the Tampa, Florida division.

Competition
We estimate that, as of December 31, 2011, there were approximately 300 wholesale distributors serving traditional convenience retailers in the U.S. We believe McLane Company, Inc., a subsidiary of Berkshire Hathaway, Inc., and Core-Mark are the two largest convenience wholesale distributors (measured by annual sales) in North America. There are two other large regional companies that provide products to specific areas of the country, H.T. Hackney Company in the Southeast and Eby-Brown Company in the Midwest and Mid-Atlantic regions. In addition there are several hundred local distributors serving small regional chains and independent convenience retailers. In Canada, there are two large regional players, aside from Core-Mark, that make up the competitive landscape, Karrys Wholesale Distributors and Wallace and Carey, Inc.

Beyond the traditional wholesale supply channels, we face potential competition from at least three other supply avenues.  First, certain manufacturers such as Budweiser, Miller-Coors, Coca-Cola, Frito-Lay and PepsiCo deliver their products directly to convenience retailers. Secondly, club wholesalers such as Costco and Sam's Club provide a limited selection of products at generally competitive prices, however, they often have limited delivery options and often no services. Finally, some large convenience retail chains have chosen self-distribution due to the geographic density of their stores and their belief that they can economically service such locations.  
Competition within the industry is based primarily on the range and quality of the services provided, price, variety of products offered and the reliability of deliveries. We operate from a perspective that focuses heavily on flexibility and providing outstanding customer service through our distribution centers, order fulfillment rates, on-time delivery performance using delivery equipment sized for the small format store, innovative marketing solutions and merchandising support, as well as competitive pricing. We believe this represents a contrast to some large competitors who offer a standardized logistics approach, with emphasis on uniformity of product lines, and company determined delivery schedules using large delivery equipment designed for large format stores. We believe this emphasis on a standardized logistics approach, while it allows for competitive pricing, is not best suited for retailers looking for more customized solutions and support from their supply partners in addition to competitive pricing. Alternatively, some small competitors focus on customer service and long-standing customer relationships but often lack the range of offerings of the larger distributor. We believe that our unique combination of service, marketing solutions and price is a compelling combination that is highly attractive to retailers and helps to enhance their growth and profitability.
We purchase cigarettes primarily from manufacturers covered by the tobacco industry's Master Settlement Agreement (“MSA”), which was signed in November 1998. Competition amongst cigarette wholesalers is based primarily on service, price and variety, whereas competition amongst manufacturers for cigarette sales is based primarily on brand positioning, price, product attributes, consumer loyalty, promotions, marketing and retail presence. Cigarette brands produced by the major tobacco product manufacturers generally require competitive pricing, substantial marketing support, retail programs and other financial incentives to maintain or improve a brand's market position. Historically, major tobacco product manufacturers have had a competitive advantage in the U.S. because significant cigarette marketing restrictions and the scale of investment required to compete made gaining consumer awareness and trial of new brands difficult.
We face competition from the diversion into the U.S. and Canadian markets of cigarettes intended for sale outside of such markets, the sale of cigarettes in non-taxable jurisdictions, inter-state/provincial and international smuggling of cigarettes, the sale of counterfeit cigarettes by third parties, increased imports of foreign low priced brands, the sale of cigarettes by third parties over the internet and by other means designed to avoid collection of applicable taxes. The competitive environment has been characterized by a continued influx of cheap products that challenge sales of higher priced and fully taxed cigarettes.
We also believe the competitive environment has been impacted by alternative smoking products, such as snus and snuff. In addition, cigarette prices continue to rise due to continuing pressure on taxing jurisdictions to raise revenues through excise taxes. Further, cigarette list prices have historically increased for those manufacturers who are parties to the MSA. As a result, the

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lower priced products of numerous small share brands manufactured by non-MSA participants have held their market share, putting profitability pressure on MSA products.


Working Capital Practices
We sell products on credit terms to our customers that averaged, as measured by days sales outstanding, about nine days for 2011, 2010 and 2009. Credit terms may impact pricing and are competitive within our industry. An increasing number of our customers remit payment electronically, which facilitates efficient and timely monitoring of payment risk. Canadian days sales outstanding in receivables tend to be lower as Canadian industry practice is for shorter credit terms than in the U.S.
We maintain our inventory of products based on the level of sales of the particular product and manufacturer replenishment cycles. The number of days a particular item of inventory remains in our distribution centers varies by product and is principally driven by the turnover of that product and economic order quantities. We typically order and carry in inventory additional amounts of certain critical products to assure high order fulfillment levels for these items and periodically we may carry higher levels of inventory to take advantage of manufacturer price increases. The number of days of cost of sales in inventory averaged about 16 days during 2011 and about 15 days during 2010 and 2009. The increase of one day cost of sales in 2011 compared to 2010 was driven primarily by speculative purchases to take advantage of expected price increases by manufacturers.
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. Terms for our accounts payable and cigarette and tobacco taxes payable range anywhere from three days prepaid to 60 days credit. Days payable outstanding for both categories, excluding the impact of prepayments, during 2011, 2010 and 2009 averaged about 11 days.

Employees
The following chart provides a breakdown of our employees by function and geographic region (including employees at our third party logistic facilities) as of December 31, 2011:
TOTAL EMPLOYEES BY BUSINESS FUNCTIONS
 
 
 
U.S.
 
Canada
 
Total
Sales and Marketing
 
1,095

 
47

 
1,142

Warehousing and Distribution
 
2,792

 
248

 
3,040

Management, Administration, Finance and Purchasing
 
569

 
101

 
670

Total Categories
 
4,456

 
396

 
4,852

 
Three of our distribution centers, Hayward, Las Vegas and Calgary, have employees who are covered by collective bargaining agreements with local affiliates of The International Brotherhood of Teamsters (Hayward and Las Vegas) and United Food and Commercial Workers (Calgary). Approximately 188 employees, or 3.9% of our workforce, are unionized. There have been no disruptions in customer service, strikes, work stoppages or slowdowns as a result of union activities, and we believe we have satisfactory relations with our employees.

Regulation
As a distributor of food products in the U.S., we are subject to the Federal Food, Drug and Cosmetic Act and regulations promulgated by the U.S. Food and Drug Administration ("FDA"). The FDA regulates the holding requirements for foods through its current good manufacturing practice regulations, specifies the standards of identity for certain foods and prescribes the format and content of certain information required to appear on food product labels. A limited number of the over-the-counter medications that we distribute are subject to the regulations of the U.S. Drug Enforcement Administration. In Canada, similar standards related to food and over-the-counter medications are governed by Health Canada. The products we distribute are also subject to federal, state, provincial and local regulation through such measures as the licensing of our facilities, enforcement by state, provincial and local health agencies of relevant standards for the products we distribute and regulation of our trade practices in connection with the sale of our products. Our facilities are inspected periodically by federal, state, provincial and local authorities, including the Occupational Safety and Health Administration under the U.S. Department of Labor, which require us to comply with certain health and safety standards to protect our employees.
We are also subject to regulation by numerous other federal, state, provincial and local regulatory agencies including, but not limited to, the U.S. Department of Labor, which sets employment practice standards for workers, the U.S. and Canadian Departments of Transportation, which regulate transportation of perishable goods, and similar state, provincial and local agencies. Non-compliance with, or significant changes to, these laws or the implementation of new laws, could have a material effect on our results of operations.

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In September 2011, the Tobacco Products Labeling Regulations (Cigarettes and Little Cigars) came into force in Canada with strengthened labeling requirements for cigarettes and little cigar packages. The requirements include graphic health warnings and health information messages which are prominently displayed on the front and back of most tobacco packages and primarily focus on the health hazards posed by tobacco use.
We voluntarily participate in random quality inspections of all of our distribution centers, conducted by the American Institute of Baking (“AIB”). The AIB publishes standards as a tool to permit operators of distribution centers to evaluate the food safety risks within their operations and determine the levels of compliance with the standards. AIB conducts an inspection which is composed of food safety and quality criteria. AIB conducts its inspections based on five categories: adequacy of the company's food safety program, pest control, operational methods and personnel practices, maintenance of food safety and cleaning practices. Within these five categories, the AIB evaluates over 100 criteria items. In 2011, 95% of the audits of our distribution centers received a score of 900 or greater (on a possible 1,000 point scale).

Registered Trademarks
We have registered trademarks including the following: Arcadia Bay®, Arcadia Bay Coffee Company®, Cable Car®, Core-Mark®, Core-Mark International®, EMERALD®, Fresh and Local™, Java Street®, QUICKEATS®, Richland Valley™, SmartStock® and Tastefully Yours®.

Segment and Geographic Information
We operate in two geographic areas -- the U.S. and Canada. See Note 14 -- Segment Information to our consolidated financial statements.

Corporate and Available Information
The office of our corporate headquarters is located at 395 Oyster Point Boulevard, Suite 415, South San Francisco, California, 94080 and the telephone number is (650) 589-9445.
Our internet website address is www.core-mark.com. We provide free access to various reports that we file with or furnish to the U.S. Securities and Exchange Commission (“SEC”) through our website, as soon as reasonably practicable after they have been filed or furnished. These reports include, but are not limited to, our annual reports on Form 10-K, quarterly reports on Form 10-Q and any amendments to those reports. Our SEC reports can be accessed through the “Investor Relations” section of our website, or through www.sec.gov. Also available on our website are printable versions of Core-Mark's Audit Committee Charter, Compensation Committee Charter, Nominating and Corporate Governance Committee Charter, Code of Business Conduct and Ethics, and Corporate Governance Guidelines and Principles. Copies of these documents may also be requested from:
Core-Mark International
395 Oyster Point Blvd, Suite 415
South San Francisco, CA 94080
Attention: Investor Relations
Corporate Governance--Code of Business Conduct and Ethics and Whistle Blower Policy:
Our Code of Business Conduct and Ethics is designed to promote honest, ethical and lawful conduct by all employees, officers and directors and is available on the “Investor Relations” section of our website at www.core-mark.com under “Corporate Governance.”
Additionally, the Audit Committee (“Audit Committee”) of the Board of Directors of Core-Mark has established procedures to receive, retain, investigate and act on complaints and concerns of employees, shareholders and others regarding accounting, internal accounting controls and auditing matters, including complaints regarding attempted or actual circumvention of internal accounting controls or complaints regarding violations of the Company's accounting policies. The procedures are also described on our website at www.core-mark.com under Corporate Governance in the “Investor Relations” section.



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ITEM 1. A.     RISK FACTORS
You should carefully consider the following risks together with all of the other information contained in this Annual Report on Form 10-K. Additional risks and uncertainties not currently known to us may also materially adversely affect our business, financial condition or results of operations.
 
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, the risk factors set forth below (see Special Note Regarding Forward-Looking Statements prior to Item 1. Business).

Risks Related to Our Business and Industry
Protracted challenging economic conditions may reduce demand for our products and increase credit risks.
Protracted challenging economic conditions, including high unemployment and underemployment rates, depressed real estate values, losses to consumer retirement and investment accounts and increases in food and other commodity prices, have resulted in weakened consumer confidence and curtailed consumer spending in certain sectors. If these economic conditions persist or deteriorate further, we expect that many convenience retail operators will experience continued instability and reductions in same store sales, which would adversely affect demand for our products and could lead to reduced sales and increased pressures on margins. In addition, ongoing uncertainty in the financial markets and the resulting pressures on liquidity may place a number of our convenience retail customers under financial stress, which could increase our credit risk and potential bad debt exposure. These economic and market conditions may have a material adverse effect on our business and operating results.
We are dependent on the convenience retail industry for our revenues, and our results of operations could suffer if there is an overall decline or consolidation in the convenience retail industry.
The majority of our sales are made under purchase orders and short-term contracts with convenience retail stores which inherently involve significant risks. These risks include declining sales in the convenience retail industry due to general economic conditions, credit exposure from our customers, termination of customer relationships without notice and consolidation of our customer base. Any of these factors could negatively affect our results of operations.
We face competition in our distribution markets and, if we are unable to compete effectively in any distribution market, we may lose market share and suffer a decline in sales and profitability.
Our distribution centers operate in highly competitive markets. We face competition from local, regional and national tobacco and consumable products distributors on the basis of service, price and variety of products offered, and schedules and reliability of deliveries. We also face competition from club stores and alternate sources of consumable products that sell to convenience retailers. Some of our competitors, including McLane Company, Inc. (a subsidiary of Berkshire Hathaway Inc.), have substantial financial resources and long-standing customer relationships. In addition, heightened competition among our existing competitors, or by new entrants into the distribution market, could create additional competitive pressures that may reduce our margins and adversely affect our business. If we fail to successfully respond to these competitive pressures or to implement our strategies effectively, we may lose market share and our results of operations could suffer.
Increasing the growth and profitability of our distribution business is particularly dependent upon our ability to retain existing customers and attract additional customers. The ability to attract additional customers through our existing network of distribution centers is especially important because it enables us to leverage our distribution centers and other fixed assets. Our ability to retain existing customers and attract new customers is dependent upon our ability to provide industry-leading customer service, offer competitive products at low prices, maintain high levels of productivity and efficiency in distributing products to our customers while integrating new customers into our distribution system, and offer marketing, merchandising and ancillary services that provide value to our customers. If we are unable to execute these tasks effectively, we may not be able to attract a significant number of new customers and our existing customer base could decrease, either of which could have an adverse impact on our results of operations.
We may lose business if manufacturers decide to engage in direct distribution of their products.
In the past, certain large manufacturers have elected to engage in direct distribution of their products and eliminate distributors such as Core-Mark. If other manufacturers make similar decisions in the future, our revenues and profits would be adversely affected and there can be no assurance that we will be able to take action to compensate for such losses.


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Some of our distribution centers are dependent on a few relatively large customers, and our failure to maintain our relationships with these customers could substantially harm our business and prospects.
Some of our distribution centers are dependent on relationships with a single customer or a few customers, and we expect our reliance on these relationships to continue for the foreseeable future. Any termination, non-renewal or reduction in services that we provide to such customers could cause revenues generated by certain of our distribution centers to decline and our operating results to suffer.
Our business is sensitive to gasoline prices and related transportation costs, which could adversely affect business.
Our operating results are sensitive to, and may be adversely affected by, unexpected increases in fuel or other transportation-related costs, including costs from the use of third party carriers, temporary staff and overtime. Historically, we have been able to pass on a substantial portion of increases in our own fuel or other transportation costs to our customers in the form of fuel surcharges, but our ability to continue to pass through price increases, either from manufacturers or costs incurred in the business, including fuel costs, is not assured. If we are unable to continue to pass on fuel and transportation-related cost increases to our customers, our operating results could be materially and adversely affected.
Our retailers have reported to us that when gasoline prices increased they have experienced a decrease in the proportion of their customers' expenditures on food/non-food products compared to customers' expenditures on cigarettes. The shift in expenditures may place pressure on our sales and gross margins since sales of food/non-food products carry higher margins than sales of cigarettes.
Cigarette and consumable goods distribution is a low-margin business sensitive to economic conditions.
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 relatively low profit margins. Our food/non-food sales are generally priced based on the cost of the product plus a percentage markup. As a result, our profit levels may be negatively impacted during periods of cost deflation for these products, even though our gross profit as a percentage of the price of goods sold may remain relatively constant. Alternatively, periods of product cost inflation may also have a negative impact on our profit margins and earnings with respect to sales of cigarettes. Gross profit on cigarette sales are generally fixed on a cents per carton basis. Therefore, as cigarette prices increase, gross profit generally decreases as a percent 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 costs and accounts receivable could rise. To the extent that we are unable to pass on product cost increases to our customers, our profit margins and earnings could be negatively impacted.
We rely on manufacturer discount and incentive programs and cigarette excise stamping allowances, and any material changes in these programs could adversely affect our results of operations.
We receive payments from the manufacturers on the products we distribute for allowances, discounts, volume rebates and other merchandising and incentive programs. These payments are a substantial benefit to us. The amount and timing of these payments are affected by changes in the programs by the manufacturers, our ability to sell specified volumes of a particular product, attaining specified levels of purchases by our customers and the duration of carrying a specified product. In addition, we receive discounts from certain taxing jurisdictions in connection with the collection of excise taxes. If the manufacturers or taxing jurisdictions change or discontinue these programs or change the timing of payments, or if we are unable to maintain the volume of our sales required by such programs, our results of operations could be negatively affected.
We depend on relatively few suppliers for a large portion of our products, and any interruptions in the supply of the products that we distribute could adversely affect our results of operations.
We obtain the products we distribute from third party suppliers. At December 31, 2011, we had approximately 4,300 vendors, and during 2011 we purchased approximately 63% of our products from our top 20 suppliers, with our top two suppliers, Philip Morris and R. J. Reynolds, representing approximately 27% and 14% of our purchases, respectively. We do not have any long-term contracts with our suppliers committing them to provide products to us. Our suppliers may not provide the products we distribute in the quantities we request on favorable terms, or at all. We are also subject to delays caused by interruption in production due to conditions outside our control, such as job actions or strikes by employees of suppliers, inclement weather, transportation interruptions, regulatory requirements and natural disasters or other catastrophic events. Our inability to obtain adequate supplies of the products we distribute could cause us to fail to meet our obligations to our customers and reduce the volume of our sales and profitability.


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Our ability to operate effectively could be impaired by the risks and costs associated with the efforts to grow our business through acquisitions.
Efforts to grow our distribution business may include acquisitions. Acquisitions entail various risks such as identifying suitable candidates, effecting acquisitions at acceptable rates of return, obtaining adequate financing and negotiating acceptable terms and conditions. Successful integration of new operations will depend on our ability to manage those operations, fully assimilate the operations into our distribution network, realize opportunities for revenue growth presented by strengthened product offerings and expanded geographic market coverage, maintain the customer base, and eliminate redundant and excess costs. We may not realize the anticipated benefits or savings from an acquisition to the extent or in the time frame anticipated, if at all, or such benefits and savings may include higher costs than anticipated. In addition, we may assume both known and unknown liabilities as part of an acquisition which may increase the costs and risks associated with assimilating such operations.
We may be subject to product liability claims which could materially adversely affect our business, and our operations could be subject to disruptions as a result of manufacturer recalls of products.
Core-Mark, as a distributor of food and consumer products, faces the risk of exposure to product liability claims in the event that the use of products sold by us causes injury or illness. In addition, our business could be adversely affected if consumers lose confidence in the safety and quality of the food and other products we distribute. This risk may increase as we continue to expand our distribution of fresh products. If we do not have adequate insurance, if contractual indemnification from the supplier of the defective or contaminated product is not available or if a party cannot fulfill its indemnification obligations, product liability relating to defective or contaminated products could materially adversely impact our results of operations.
In addition, we may be required to manage a recall of products on behalf of a manufacturer. Managing a recall could disrupt our operations as we might be required to devote substantial resources toward implementing the recall. Costs associated with a potential product recall could adversely affect our operating results.
Unexpected outcomes in legal proceedings may result in adverse effect on results of operations.
On occasion, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims and other proceedings arising in the ordinary course of business. We estimate our exposure to these legal proceedings and establish reserves for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings, or changes in our evaluation of the proceedings, could have a material adverse impact on our finances and results of operations.
We may not be able to achieve the expected benefits from the implementation of marketing initiatives.
We are taking action to improve our competitive performance through a series of strategic marketing initiatives. The goal of this effort is to develop and implement a comprehensive and competitive business strategy, addressing the special needs of the convenience industry environment, increase our market position within the industry and ultimately create increased shareholder value.
We may not be able to successfully execute our marketing initiatives to realize the intended synergies, business opportunities and growth prospects. Many of the risk factors previously mentioned, such as increased competition, may limit our ability to capitalize on business opportunities and expand our business. Our efforts to capitalize on business opportunities may not bring the intended result. Assumptions underlying estimates of expected revenue growth or overall cost savings may not be met or economic conditions may deteriorate. Customer acceptance of new distribution formats developed may not be as anticipated, hampering our ability to attract new customers or maintain our existing customer base. Additionally, our management may have its attention diverted from other important activities while trying to execute new marketing initiatives. If these or other factors limit our ability to execute our strategic initiatives, our expectations of future results of operations, including expected revenue growth and cost savings, may not be met.
Our information technology systems may be subject to failure or disruptions, which could seriously harm our business.
Our business is highly dependent on our customized enterprise IT Distribution Center Management System ("DCMS"). We rely on DCMS and our internal information technology staff to maintain the information required to operate our distribution centers and to provide our customers with fast, efficient and reliable deliveries. We have taken steps to increase redundancy in our IT systems and have disaster recovery plans in place to mitigate unforeseen events that could disrupt our systems' service. However, if DCMS fails or is not reliable, we may suffer disruptions in service to our customers and our results of operations could suffer.
We depend on our senior management.
We substantially depend on the continued services and performance of our senior executive officers as named in our Proxy Statement. We do not maintain key person life insurance policies on these individuals, and we do not have employment agreements

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with any of them. The loss of the services of any of our senior executive officers could harm our business.
Shortages of qualified labor could negatively impact our business and profitability.
Our continued success will depend partly on our ability to attract and retain qualified personnel. We compete with other businesses in each of our markets with respect to attracting and retaining qualified employees. A shortage of qualified employees, especially drivers, in a market could require us to enhance our wage and benefit packages in order to compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees. Any such shortage of qualified employees could decrease our ability to effectively serve our customers and might lead to lower earnings because of higher labor costs.
Unions may attempt to organize our employees.
As of December 31, 2011, 188, or 3.9%, of our employees were covered by collective bargaining agreements with labor organizations, which expire at various times. We cannot assure you that we will be able to renew our respective collective bargaining agreements on favorable terms, that employees at other facilities will not unionize and that our labor costs will not increase. In addition, the National Labor Relations Board is becoming more active with the passage of administrative rules that could impact our ability to manage our labor force. To the extent we suffer business interruptions as a result of strikes or other work stoppages, 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.


Risks Related to the Distribution of Cigarettes and Other Tobacco Products
Our sales volume is largely dependent upon the distribution of cigarettes, sales of which are declining generally.
The distribution of cigarettes is currently a significant portion of our business. In 2011, approximately 70.4% of our net sales (which includes excise taxes) and 31.7% of our gross profit were generated from the distribution of cigarettes. Due to increases in the prices of cigarettes, restrictions on marketing and promotions by cigarette manufacturers, increases in cigarette regulation and excise taxes, health concerns, increased pressure from anti-tobacco groups and other factors, cigarette consumption in the U.S. and Canada has been declining gradually over the past few decades. We expect consumption trends of legal cigarette products will continue to be negatively impacted by the factors described above. In addition, we expect rising prices may lead to a higher percentage of consumers purchasing cigarettes from illicit markets. If we are unable to sell other products to make up for these declines in cigarette unit sales, our operating results may suffer.
Legislation and other matters are negatively affecting the cigarette and tobacco industry.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, distribution, sale, taxation and use of tobacco products imposed by local, state, federal and foreign governments. Various jurisdictions have adopted or are considering legislation and regulations restricting displays and marketing of tobacco products, establishing fire safety standards for cigarettes, raising the minimum age to possess or purchase tobacco products, requiring the disclosure of ingredients used in the manufacture of tobacco products, imposing restrictions on public smoking, restricting the sale of tobacco products directly to consumers or other recipients over the internet and other tobacco product regulation. In addition, the FDA has been empowered to regulate changes to nicotine yields and the chemicals and flavors used in tobacco products (including cigars and pipe products), require ingredient listings be displayed on tobacco products, prohibit the use of certain terms which may attract youth or mislead users as to the risks involved with using tobacco products, as well as limit or otherwise impact the marketing of tobacco products by requiring additional labels or warnings as well as pre-approval of the FDA. Such legislation and related regulation could adversely impact the market for tobacco products and, accordingly, our sales of such products.
In Canada, many provinces have enacted legislation authorizing and facilitating the recovery by provincial governments of tobacco-related health care costs from the tobacco industry by way of lawsuit. Some Canadian provincial governments have either already initiated lawsuits or indicated an intention that such lawsuits will be filed. It is unclear at this time how such restrictions and lawsuits may affect Core-Mark and its Canadian operations.
If excise taxes are increased or credit terms are reduced, our sales of cigarettes and other tobacco products could decline and our liquidity could be negatively impacted.
Cigarettes and tobacco products are subject to substantial excise taxes in the U.S. and Canada. Significant increases in cigarette-related taxes and/or fees have been proposed or enacted and are likely to continue to be proposed or enacted by various taxing jurisdictions within the U.S. and Canada as a means of increasing government revenues. These tax increases are expected to continue and may negatively impact consumption and may cause a shift in sales from premium brands to discount brands or illicit channels as smokers seek lower priced options.
In addition, taxing jurisdictions have the ability to change or rescind credit terms currently extended for the remittance of

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tax that we collect on their behalf. If these excise taxes are substantially increased or credit terms are substantially reduced, it could have a negative impact on our liquidity. Accordingly, we may be required to obtain additional debt financing, which we may not be able to obtain on satisfactory terms or at all.
Our distribution of cigarettes and other tobacco products exposes us to potential liabilities.
In June 1994, the Mississippi attorney general brought an action against various tobacco industry members on behalf of the state to recover state funds paid for health care costs related to tobacco use. Most other states sued the major U.S. cigarette manufacturers based on similar theories. In November 1998, the major U.S. tobacco product manufacturers entered into a Master Settlement Agreement (“MSA”) with 46 states, the District of Columbia and certain U.S. territories. The other four states -- Mississippi, Florida, Texas and Minnesota (the “non-MSA states”) -- settled their litigations with the major cigarette manufacturers by separate agreements. The MSA and the other state settlement agreements settled health care cost recovery actions and monetary claims relating to future conduct arising out of the use of, or exposure to, tobacco products, imposed a stream of future payment obligations on major U.S. cigarette manufacturers and placed significant restrictions on the ability to market and sell cigarettes. The payments required under the MSA result in the products sold by the participating manufacturers to be priced at higher levels than non-MSA manufacturers.
In connection with the MSA, we are indemnified by most of the tobacco product manufacturers from which we purchase cigarettes and other tobacco products for liabilities arising from our sale of the tobacco products that they supply to us. Should the MSA ever be invalidated, we could be subject to substantial litigation due to our distribution of cigarettes and other tobacco products, and we may not be indemnified for such costs by the tobacco product manufacturers in the future. In addition, even if we are indemnified by cigarette manufacturers that are parties to the MSA, future litigation awards against such cigarette manufacturers and our Company could be so large as to eliminate the ability of the manufacturers to satisfy their indemnification obligations.
The benefits of liability limitations and indemnities we have pursuant to the MSA do not apply to sales of cigarettes manufactured by non-MSA manufacturers. Consequently, we try to limit our purchases of cigarettes from non-MSA manufacturers for sale in MSA states. From time to time, however, we find it necessary to purchase a limited amount of cigarettes from non-MSA manufacturers. For example, during a transition period while integrating distribution operations from an acquisition we may need to purchase and distribute cigarettes manufactured by non-MSA manufacturers to satisfy the demands of customers of the acquired business. With respect to sales of such non-MSA cigarettes, we could be subject to litigation that could expose us to liabilities for which we would not be indemnified.
Our purchase of cigarettes primarily from MSA manufacturers for sale in MSA states are adversely impacted by sales of brands from non-MSA manufacturers and discount brands manufactured by small manufacturers that are not parties to the MSA. The cigarettes subject to the MSA that we sell have been burdened by MSA related payments and are thus negatively impacted by widening price gaps between those brands and discount brands for the past several years. Growth in market share of discount brands since the MSA was signed has had an adverse impact on the volume of the cigarettes that we sell.
We face competition from sales of illicit and other low priced sales of cigarettes.
We also face competition from the diversion into the U.S. and Canadian markets of cigarettes intended for sale outside of such markets, the sale of cigarettes in non-taxable jurisdictions, inter-state/provincial and international smuggling of cigarettes, the sale of counterfeit cigarettes by third parties, increased imports of foreign low priced brands, the sale of cigarettes by third parties over the internet and by other means designed to avoid collection of applicable taxes. The competitive environment has been characterized by a continued influx of cheap products that challenge sales of higher priced and fully taxed cigarettes. Increased sales of illicit or other low priced alternatives by third parties, or sales by means to avoid the collection of applicable taxes, could have an adverse effect on our results of operations.


Risks Related to Financial Matters, Financing and Foreign Exchange

Changes to federal, state or provincial income tax legislation could have a material adverse affect on our business and results of operations.
From time to time, new tax legislation is adopted by the federal government and various states or other regulatory bodies. Significant changes in tax legislation could adversely affect our business or results of operations in a material way. For example, in the U.S. certain pending legislative and regulatory proposals effectively could limit, or even eliminate, use of the LIFO inventory method for financial and income tax purposes. Although the final outcome of these proposals cannot be ascertained at this time, the ultimate impact to us of the transition from LIFO to another inventory method could be material.

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As a result of recent recessionary economic conditions, our pension plan is currently underfunded and we will be required to make cash payments to the plan, reducing the cash available for our business.
We record a liability associated with the underfunded status of our pension plans when the benefit obligation exceeds the fair value of the plan assets. Included in pension liabilities on our balance sheet as of December 31, 2011 is $9.3 million related to the underfunded pension obligation compared with $8.5 million as of December 31, 2010. The increase in the underfunded status of our pension plans from 2010 to 2011 is due primarily to an actuarial loss of $2.9 million, driven by a reduction in bond yields, and lower than expected returns on our pension plan assets of $1.2 million, partially offset by $3.2 million of contributions made by the Company in 2011. If the performance of the assets in the plan does not meet our expectations, or if other actuarial assumptions are modified, our future cash payments to the plan could be substantially higher than we expect. The pension plan is subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). Under ERISA, the Pension Benefit Guaranty Corporation ("PBGC") has the authority to terminate an underfunded pension plan under limited circumstances. In the event our pension plan is terminated for any reason while it is underfunded, we will incur a liability to the PBGC that may be equal to the entire amount of the underfunding in the pension plan. If this were to occur, our working capital and results of operations could be adversely impacted.
There can be no assurance that we will continue to declare cash dividends in the future or in any particular amounts and if there is a reduction in dividend payments, our stock price may be harmed.
In October 2011, our Board of Directors approved the commencement of a quarterly cash dividend. We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all applicable laws and agreements to which we are a party. Future dividends may be affected by: then available cash, anticipated working capital requirements, overall financial condition, credit agreement restrictions, future prospects for earnings and cash flows, capital requirements for acquisitions, reserves for legal risks, stock repurchase programs, and changes in federal and state income tax laws or corporate laws, as well as other factors considered relevant by our Board of Directors. Furthermore, the payment of dividends affects our cash flow and may act to limit certain strategic activities, such as acquisitions and capital expenditures. Our Board of Directors may, at its discretion, decrease or entirely discontinue the payment of dividends at any time. A reduction in our dividend payments could have a negative effect on our stock price.
Currency exchange rate fluctuations could have an adverse effect on our revenues and financial results.
We generate a significant portion of our revenues in Canadian dollars, approximately 15% in 2011 and 16% in 2010. We also incur a significant portion of our expenses in Canadian dollars. To the extent that we are unable to match revenues received in Canadian dollars with costs paid in the same currency, exchange rate fluctuations in Canadian dollars could have an adverse effect on our revenues and financial results. During times of a strengthening U.S. dollar, our reported sales and earnings from our Canadian operations will be reduced because the Canadian currency will be translated into fewer U.S. dollars. Conversely, during times of a weakening U.S. dollar, our reported sales and earnings from our Canadian operations will be increased because the Canadian currency will be translated into more U.S. dollars. Accounting principles generally accepted in the United States of America (“GAAP”) require that foreign currency transaction gains or losses on short-term intercompany transactions be recorded currently as gains or losses within the income statement. To the extent we incur losses on such transactions, our net income and earnings per share will be reduced.
We may not be able to borrow additional capital to provide us with sufficient liquidity and capital resources necessary to meet our future financial obligations.
We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $200 million Credit Facility. While we believe our sources of liquidity are adequate, we cannot assure you that these sources will be available or continue to provide us with sufficient liquidity and capital resources required to meet our future financial obligations, or to provide funds for our working capital, capital expenditures and other needs. As such, additional equity or debt financing may be necessary, but we may not be able to expand our existing Credit Facility or obtain new financing on terms satisfactory to us, or at all.
Our operating flexibility is limited in significant respects by the restrictive covenants in our Credit Facility.
Our Credit Facility imposes restrictions on us that could increase our vulnerability to general adverse economic and industry conditions by limiting our flexibility in planning for and reacting to changes in our business and industry. Specifically, these restrictions place limits on our ability, among other things, to: incur additional indebtedness, pay dividends and make distributions, issue stock of subsidiaries, make investments, repurchase stock, create liens, enter into transactions with affiliates, merge or consolidate, or transfer and sell our assets. In addition, under our Credit Facility, under certain circumstances we are required to meet a fixed charge coverage ratio. Our ability to comply with this covenant may be affected by factors beyond our control and a breach of the covenant could result in an event of default under our Credit Facility, which would permit the lenders to declare

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all amounts incurred thereunder to be immediately due and payable and terminate their commitments to make further extensions of credit.
Changes to accounting rules or regulations may adversely affect our operating results and financial position
Changes to GAAP arise from new and revised standards, interpretations and other guidance issued by the Financial Accounting Standards Board ("FASB"), the SEC and others. For example, the U.S.-based FASB is currently working together with the International Accounting Standards Board (“IASB”) on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow GAAP under SEC regulations and those who are required to follow International Financial Reporting Standards (“IFRS”) outside of the U.S. The effects of such changes may include prescribing an accounting method where none had been previously specified, prescribing a single acceptable method of accounting from among several acceptable methods that currently exist or revoking the acceptability of a current method and replacing it with an entirely different method, among others. Such changes could result in unanticipated effects on our results of operations, financial position and other financial measures, including significant additional costs to implement and maintain the new accounting standards.


Risks Related to Government Regulation and Environment
 
If we are unable to comply with governmental regulations that affect our business or if there are substantial changes in these regulations, our business could be adversely affected.
As a distributor of food and other consumable products, we are subject to regulation by the FDA, Health Canada and similar regulatory authorities at the state, provincial and local levels. In addition, our employees operate tractor trailers, trucks, forklifts and various other powered material handling equipment and we are therefore subject to regulation by the U.S. and Canadian Departments of Transportation. Our operations are also subject to regulation by the Occupational Safety and Health Administration, the Drug Enforcement Agency and other federal, state, provincial and local agencies. Each of these regulatory authorities has broad administrative powers with respect to our operations. Regulations, and the costs of complying with those regulations, have been increasing in recent years. If we fail to adequately comply with government regulations, we could experience increased inspections, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased compliance costs. If any of these events were to occur, our results of operations would be adversely affected.
Earthquake and natural disaster damage could have a material adverse effect on our business.
Our headquarters and operations in California, as well as one of our data centers located in Richmond, British Columbia, Canada, are located in or near high hazard earthquake zones. In addition, one of our data centers is located in Plano, Texas, which is susceptible to wind storms. We also have operations in areas that have been affected by natural disasters such as hurricanes, tornados, flooding, ice and snow storms. While we maintain insurance to cover us for such potential losses, our insurance may not be sufficient in the event of a significant natural disaster or payments under our policies may not be received timely enough to prevent adverse impacts on our business. Our customers could also be affected by like events, which could adversely impact our sales.



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ITEM 1. B.    UNRESOLVED STAFF COMMENTS
None.

ITEM 2.    PROPERTIES
Our headquarters are located in South San Francisco, California, and consist of approximately 27,000 square feet of leased office space. We also lease approximately 13,000 square feet for use by our information technology and tax personnel in Richmond, British Columbia, approximately 6,000 square feet for use by our information technology personnel in Plano, Texas, and approximately 3,000 square feet of additional office space in Fort Worth, Texas. We lease approximately 3.2 million square feet and own approximately 0.7 million square feet of distribution space.
 
Distribution Center Facilities by City and State of Location(1) 
Albuquerque, New Mexico
Hayward, California
Spokane, Washington
Atlanta, Georgia
Las Vegas, Nevada
Tampa, Florida
Bakersfield, California
Leitchfield, Kentucky
Whitinsville, Massachusetts
Corona, California(2)
Los Angeles, California
Wilkes-Barre, Pennsylvania
Denver, Colorado
Minneapolis, Minnesota
Calgary, Alberta
Forrest City, Arkansas
Portland, Oregon
Toronto, Ontario
Fort Worth, Texas
Sacramento, California(3)
Vancouver, British Columbia
Grants Pass, Oregon
Salt Lake City, Utah
Winnipeg, Manitoba
 
(1)
Excluding outside storage facilities or depots and two 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 Leitchfield, Kentucky; Wilkes-Barre, Pennsylvania; and Forrest City, Arkansas. All other facilities listed are leased. The facilities we own are subject to encumbrances under our principal credit facility.
(2)
This facility includes a distribution center and our Allied Merchandising Industry consolidating warehouse.
(3)
This facility includes a distribution center and our Artic Cascade consolidating warehouse.
We also operate distribution centers on behalf of two of our major customers, one in Phoenix, Arizona for Couche-Tard, and one in San Antonio, Texas for Valero Energy Corporation. Each facility is leased by the specific customer solely for their use and operated by Core-Mark.

ITEM 3.    LEGAL PROCEEDINGS
The Company is a plaintiff in a successful lawsuit, currently on appeal, against Sonitrol Corporation. The case arose from the December 21, 2002 arson fire at the Denver warehouse in which Sonitrol failed to detect and respond to a four-hour burglary and subsequent arson. In 2010, a jury found in favor of the Company and our insurers. The Company's current share of the judgment, with daily accruing pre-judgment interest, is approximately $15.5 million, less outstanding attorneys' fees and costs. Sonitrol is appealing the decision through the Colorado appellate court. While we are expecting oral arguments on the appeal to be heard in late 2012, no date has been set by the court. We are unable to predict when this litigation will be finally resolved and the ultimate outcome. Any monetary recovery from the lawsuit would be recognized in income only when and if it is finally paid to the Company.
As of December 31, 2011, we were not involved in any other material legal proceedings.

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 2,781 stockholders of record as of February 29, 2012.
The following table provides the range of high and low sales prices of our common stock as reported by NASDAQ for the periods indicated:
 
 
 
Low
Price
 
High
Price
Fiscal 2011
 
 
 
 
4th Quarter
 
$
29.57

 
$
40.52

3rd Quarter
 
30.33

 
38.69

2nd Quarter
 
32.41

 
35.84

1st Quarter
 
31.61

 
36.10

 
 
 
 
 
 
 
Low
Price
 
High
Price
Fiscal 2010
 
 
 
 
4th Quarter
 
$
30.14

 
$
37.19

3rd Quarter
 
25.61

 
31.85

2nd Quarter
 
26.25

 
31.88

1st Quarter
 
29.21

 
34.51



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PERFORMANCE COMPARISON
The graph below presents a comparison of cumulative total return to stockholders on the NASDAQ Global Market at the end of each year from 2006 through 2011, as well as the cumulative total returns of the NASDAQ Non-Financial Stock Index, the Russell 2000 Index and a peer group of companies (“the Performance Peer Group”).
Cumulative total return to stockholders is measured by the change in the share price for the period, plus any dividends, divided by the share price at the beginning of the measurement period. Core-Mark's cumulative stockholder return is based on an investment of $100 on December 29, 2006, and is compared to the total return of the NASDAQ Non-Financial Stock Index, the Russell 2000 Index, and the weighted-average performance of the Performance Peer Group over the same period with a like amount invested, including the assumption that any dividends have been reinvested. We regularly compare our performance to the Russell 2000 Index since it includes primarily companies with relatively small market capitalization similar to us.
The companies composing the Performance Peer Group are Sysco Corp. (SYY), Nash Finch Company (NAFC), United Natural Foods, Inc. (UNFI) and AMCON Distributing Co. (DIT).
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG CORE-MARK, NASDAQ NON-FINANCIAL STOCK AND RUSSELL 2000 INDEXES,
AND THE PERFORMANCE PEER GROUP

 
 
Investment Value at
 
 
12/29/06
 
12/31/07
 
12/31/08
 
12/31/09
 
12/31/10
 
12/30/11
CORE
 
$
100.00

 
$
85.86

 
$
64.33

 
$
98.54

 
$
106.40

 
$
118.90

NASDAQ Index
 
$
100.00

 
$
113.43

 
$
66.67

 
$
100.55

 
$
119.34

 
$
119.20

Russell 2000
 
$
100.00

 
$
98.43

 
$
65.18

 
$
82.89

 
$
105.14

 
$
100.75

Performance Peer Group
 
$
100.00

 
$
87.65

 
$
66.52

 
$
84.06

 
$
92.97

 
$
95.58

 
 
 
 
 
 
 
 
 
 
 
 
 



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Sales of Unregistered Securities
Common Stock and Warrants Issued Pursuant to the Plan of Reorganization in 2004
Pursuant to the plan of reorganization (May 2004) described in Exhibit 2.1 and incorporated by reference (see Part IV, Item 15, Exhibit Index of this Form 10-K), herein referred to as “Fleming's bankruptcy” or “plan of reorganization,” on August 23, 2004 we issued an aggregate of 9,800,000 shares of our common stock and warrants to purchase an aggregate of 990,616 shares of our common stock to the Class 6(B) creditors of Fleming (our former parent company). We refer to the warrants we issued to the Class 6(B) creditors as the Class 6(B) warrants. We received no cash consideration at the time we issued the Class 6(B) warrants. The Class 6(B) warrants had an exercise price of $20.93 per share. The shares of common stock and the Class 6(B) warrants were issued pursuant to an exemption from registration under Section 1145(a) of the Bankruptcy Code. We also issued warrants to purchase an aggregate of 247,654 shares of our common stock to the holders of our Tranche B Notes, which we refer to as the Tranche B warrants. The Tranche B warrants had an exercise price of $15.50 per share. Shares of our common stock issued upon exercise of the Tranche B warrants are issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933.
Both the Class 6(B) and Tranche B warrants expired August 23, 2011, at which time any outstanding warrants were net issued in an automatic cashless exercise in accordance with their terms. As of December 31, 2011, (a) all 990,616 Class 6(B) warrants originally issued have been exercised resulting in a cumulative net issuance of 550,873 shares of common stock, and (b)
all 247,654 Tranche B warrants originally issued have been exercised resulting in a cumulative net issuance of 145,512 shares of common stock. No Class 6(B) warrants or Tranche B warrants remain outstanding.
Dividends
On October 19, 2011, we announced the commencement of a quarterly dividend program. The Board declared a quarterly cash dividend of $0.17 per common share, which resulted in a total amount of approximately $1.9 million paid on December 15, 2011 to shareholders of record as of the close of business on November 15, 2011. On February 3, 2012, the Board declared the second quarterly cash dividend of $0.17 per common share, which is payable on March 15, 2012 to shareholders of record as of the close of business on February 24, 2012. The agreement for our Credit Facility places certain limits on our ability to pay cash dividends on our common stock. The payment of any future dividends will be determined by our board of directors in light of then existing conditions, including our earnings, financial condition and capital requirements, strategic alternatives, restrictions in financing agreements, business conditions and other factors.
Issuer Purchases of Equity Securities
The following table provides the repurchases of common stock shares during the three months ended December 31, 2011:

Issuer Purchases of Equity Securities
 
 
 
 
 
 
 
 
Maximum
 
 
 
 
 
 
 
 
Dollar Value
 
 
 
 
 
 
 
 
of Shares that
 
 
Total Number of
 
 
 
Total Cost of
 
May Yet be
Calendar month
 
Shares
 
Average Cost
 
Purchased Shares
 
Purchased
in which purchases were made:
 
Repurchased (1)
 
per Share (2)
 
(in millions)(1)
 
(in millions) (3)
 
 
 
 
 
 
 
 
 
October 1, 2011 to October 31, 2011
 

 
$

 
$

 
$
12.0

November 1, 2011 to November 30, 2011
 
1,700

 
37.02

 
0.1

 
11.9

December 1, 2011 to December 31, 2011
 
23,648

 
39.60

 
0.9

 
11.0

Total repurchases for the three months ended December 31, 2011
 
25,348

 
$
39.43

 
$
1.0

 
$
11.0

 
 
 
 
 
 
 
 
 
_____________________________________________
(1)
All purchases were made as part of the share repurchase program announced on May 25, 2011.
(2)
Includes related transaction fees.
(3)
On May 24, 2011, our Board of Directors authorized the repurchase of up to $30 million of our common stock. The timing and amount of the purchases are based on market conditions, our cash and liquidity requirements, relevant securities laws and other factors. The share repurchase program may be discontinued or amended at any time. The program has no expiration date and expires when the amount authorized has been expended or the Board withdraws its authorization.

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ITEM 6.    SELECTED FINANCIAL DATA
Core-Mark Holding Company, Inc., or Core-Mark, is the ultimate parent holding company for Core-Mark International, Inc. and our wholly-owned subsidiaries.
Basis of Presentation
The selected consolidated financial data for the five years from 2007 to 2011 are derived from Core-Mark's audited consolidated financial statements included in our Annual Reports on Form 10-K. The following financial data should be read in conjunction with the consolidated financial statements and notes thereto and with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
SELECTED CONSOLIDATED FINANCIAL DATA
 
 
Core-Mark Holding Company, Inc. and Subsidiaries
 
 
Year Ended December 31,
(dollars in millions except per share amounts)
 
2011(a)
 
2010(b)
 
2009(c)
 
2008(d)
 
2007
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
8,114.9

 
$
7,266.8

 
$
6,531.6

 
$
6,044.9

 
$
5,560.9

Gross profit (e)
 
434.1

 
385.3

 
401.6

 
359.1

 
332.6

Warehousing and distribution expenses (e)
 
234.6

 
211.8

 
197.3

 
197.6

 
174.1

Selling, general and administrative expenses
 
150.8

 
142.5

 
137.3

 
129.4

 
119.0

Amortization of intangible assets
 
3.0

 
2.1

 
2.0

 
2.0

 
1.8

Income from operations
 
45.7

 
28.9

 
65.0

 
30.1

 
37.7

Interest expense, net (f)
 
2.0

 
2.2

 
1.4

 
1.2

 
1.0

Net income
 
26.2

 
17.7

 
47.3

 
17.9

 
24.1

Per share data:
 
 
 
 
 
 
 
 
 
 
Basic net income per common share
 
$
2.30

 
$
1.64

 
$
4.53

 
$
1.71

 
$
2.30

Diluted net income per common share
 
$
2.23

 
$
1.55

 
$
4.35

 
$
1.64

 
$
2.15

Shares used to compute net income per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
11.4

 
10.8

 
10.5

 
10.5

 
10.5

Diluted
 
11.7

 
11.4

 
10.9

 
10.9

 
11.2

Other Financial Data:
 
 
 
 
 
 
 
 
 
 
Excise taxes (g)
 
$
1,951.5

 
$
1,756.5

 
$
1,516.0

 
$
1,474.4

 
$
1,349.4

Cigarette inventory holding gains/FET (h)
 
8.2

 
6.1

 
25.2

 
3.1

 
7.3

OTP tax items (i)
 
0.8

 
0.6

 
0.6

 
1.4

 
13.3

LIFO expense
 
18.3

 
16.6

 
6.7

 
11.0

 
13.1

Depreciation and amortization (j)
 
22.4

 
19.7

 
18.7

 
17.4

 
14.9

Stock-based compensation
 
5.5

 
4.8

 
5.1

 
3.9

 
5.3

Capital expenditures
 
24.1

 
13.9

 
21.1

 
19.9

 
20.8

Adjusted EBITDA (k)
 
91.9

 
70.0

 
95.5

 
62.4

 
71.0

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
2011
 
2010
 
2009
 
2008
 
2007
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
870.2

 
$
708.8

 
$
677.9

 
$
612.6

 
$
577.1

Total debt, including current maturities
 
63.3

 
1.0

 
20.0

 
30.8

 
29.7

______________________________________________
(a)
The selected consolidated financial data for 2011 includes the results of operations of FCGC, which was acquired in May 2011, and the Tampa, Florida division, which commenced operations in September 2011.
(b)
The selected consolidated financial data for 2010 includes approximately $105.9 million of incremental sales related to

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increased cigarette prices by manufacturers in response to the increase in federal excise taxes mandated by the SCHIP legislation. The 2010 data also includes the results of operations of Finkle Distributors, Inc., which was acquired in August 2010.
(c)
The selected consolidated financial data for 2009 includes approximately $534.0 million of incremental sales related to increased cigarette prices by manufacturers in response to the increase in federal excise taxes mandated by the SCHIP legislation and $36.7 million of related cigarette inventory holding gains, offset by $11.5 million of net floor stock tax.
(d)
The selected consolidated financial data for 2008 includes the results of operations of the Toronto division, which commenced operations in late January 2008, and also the New England division following its acquisition in June 2008.
(e)
Gross margins may not be comparable to those of other entities because warehousing and distribution expenses are not included as a component of our cost of goods sold.
(f)
Interest expense, net, is reported net of interest income.  
(g)
State, local and provincial excise taxes (predominantly cigarettes and tobacco) paid by the Company are included in net sales and cost of goods sold.
(h)
Cigarette inventory holding gains represent income related to cigarette and excise tax stamp inventories on hand at the time either cigarette manufacturers increase their prices or states increase their excise taxes, for which the Company is able to pass such increases on to its customers. This income is recorded as an offset to cost of goods sold and recognized as the inventory is sold. Although we have realized cigarette inventory holding gains in each of the last five years, this income is not predictable and is dependent on inventory levels and the timing of manufacturer price increases or state excise tax increases. In 2009, we realized significant cigarette inventory holding gains due to the price increases in response to the federal excise taxes ("FET") levied on manufacturers by the SCHIP legislation.
(i)
We received an Other Tobacco Products ("OTP") tax settlement of $0.8 million in 2011. We recognized a $0.6 million OTP tax gain resulting from a state tax method change in 2010 and received OTP tax refunds of $0.6 million in 2009, $1.4 million in 2008 and $13.3 million in 2007.
(j)
Depreciation and amortization includes depreciation on property and equipment and amortization of purchased intangibles.
(k)
Adjusted EBITDA is not defined by GAAP and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Adjusted EBITDA is equal to net income adding back interest expense, net, provision for income taxes, depreciation and amortization, LIFO expense, stock-based compensation expense and foreign currency transaction losses (gains), net.





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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the accompanying audited consolidated financial statements and notes thereto that are included under Part II, Item 8, of this Form 10-K. Also refer to “Special Note Regarding Forward-Looking Statements,” which is included after Table of Contents in this Form 10-K.
Our Business
Core-Mark is one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America. We offer a full range of products, marketing programs and technology solutions to over 28,000 customer locations in the U.S. and Canada. Our customers include traditional convenience stores, grocery stores, drug stores, liquor stores and other specialty and small format stores that carry convenience products. Our product offering includes cigarettes, other tobacco products, candy, snacks, fast food, groceries, fresh products, dairy, bread, beverages, general merchandise and health and beauty care products. We operate a network of 26 distribution centers (excluding two distribution facilities we operate as a third party logistics provider) in the U.S. and Canada.
We derive our net sales primarily from sales to convenience store customers. Our gross profit is derived primarily by applying a markup to the cost of the product at the time of the sale and from cost reductions derived from vendor credit term discounts received and other vendor incentive programs. Our operating expenses are comprised primarily of sales personnel costs; warehouse personnel costs related to receiving, stocking and selecting product for delivery; delivery costs such as delivery personnel, truck leases and fuel; costs relating to the rental and maintenance of our facilities; and other general and administrative costs.

Overview of 2011 Results
In 2011 we expanded our geographic presence into two new markets through the acquisition of Forrest City Grocery Company (“FCGC”) and the establishment of a new operating division in Tampa, Florida. In addition, we signed a new agreement with Alimentation Couche-Tard, Inc. (“Couche-Tard”) to service their corporate stores in the Southeast, Gulf Coast and Florida markets and started servicing these stores during September 2011. Net sales to Couche-Tard were approximately 13% of our total net sales for the fourth quarter of 2011.
These market expansions, coupled with net sales increases in our food/non-food category, were the primary drivers of an increase in our net sales of $848.1 million, or 11.7%, to $8,114.9 million for 2011 compared to $7,266.8 million for 2010. In addition, inflation in cigarette prices from manufacturers and excise taxes contributed approximately 1.8% to the increase in total net sales for 2011 compared to 2010. Sales of our food/non-food category increased 12.0%, or 15.6%, excluding a reduction in our beverage product category resulting from the movement of Gatorade to a direct-store-delivery ("DSD") format during the first quarter of 2011. In addition, we have seen an increase in price inflation in certain of our food/non-food commodities which not only improved our sales in 2011, but will continue to benefit us in future quarters for products that use a cost-plus-markup approach to pricing.  We continue to monitor the current macroeconomic conditions, including consumer confidence, spending, cigarette consumption, employment, inflation/deflation levels and fuel prices, where a significant change in macroeconomic conditions could materially impact our operating results.
Gross profit for 2011 increased $48.8 million, or 12.7%, to $434.1 million and benefited from incremental cigarette inventory holding gains of $2.1 million and candy inventory holding gains of approximately $5.9 million, both resulting from manufacturer price increases, which also contributed to a $1.7 million increase in LIFO expense. Inventory holding gains are an integral part of the wholesale business model, however, timing and magnitude is controlled by the manufacturer. Remaining gross profit1 which excludes the aforementioned inventory holding gains and LIFO expense, increased 10.7% or $42.3 million, from $395.2 million last year to $437.5 million in 2011. Remaining gross profit margin1 declined 5 basis points to 5.39% from 5.44% for 2010. The decline in remaining gross profit margin was due primarily to the addition of FCGC and the new business with Couche-Tard, as well as margin compression resulting from price increases by cigarette manufacturers in 2011. As we expand into more fair trade states where cigarette pricing is regulated, such as the case with FCGC, we will likely see higher cigarette gross profits, in terms of cents per carton, and lower food/non-food gross profit margins. To the extent that we capture large chain business like Couche-Tard, we will likely realize lower across the board gross profit margins since our invested assets for these customers are lower, allowing us in most cases to offer lower prices to achieve our desired return on investment.
______________________________________________
(1)
Remaining gross profit and remaining gross profit margin are non-GAAP financial measures which we provide to segregate the effects of cigarette inventory holding gains, LIFO expense and other items that significantly affect the comparability of gross profit and related margins (see table reconciling gross profit and remaining gross profit in "Results from Operations" below).

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Net income increased $8.5 million, or 48%, to $26.2 million for 2011, compared to $17.7 million for 2010, despite higher income tax rates.  The increase in net income resulted from a 12.7% increase in gross profit driven by higher sales and increases in inventory holding gains offset partially by an increase in operating expenses of 9%. Operating expenses as a percentage of net sales improved 11 basis points in 2011 compared to 2010 despite additional infrastructure costs to support the new distribution agreement with Couch-Tard, including our new Florida division and a $3.5 million increase in net fuel costs. While the impact of fuel costs lessened in the second half of 2011 as prices stabilized, future increases or decreases in fuel costs or the fuel surcharges we pass on to our customers may materially impact our financial results depending on the extent and timing of these changes.
 
Adjusted EBITDA2 increased $21.9 million, or 31%, to $91.9 million in 2011 from $70.0 million in 2010. The increase in adjusted EBITDA for 2011 was driven primarily by the addition of FCGC and the new Couche-Tard business, gross profit expansion in our food/non-food commodities, incremental inventory holding gains and operating expense leverage.


Business and Supply Expansion
We continue to expand our presence eastward, expand our fresh product offering and drive our vendor consolidation initiative.  Some of our expansion activities include:
In 2011, as part of our selling strategy of providing “fresh” product to our retailers to meet consumer demand, we increased sales for this small, but growing food category by approximately 28%. In part, we accomplished this by increasing the number of stores participating in our proprietary “Fresh and Local™” program by over 2,100 locations. Total store participation has grown to over 8,700 stores with approximately 4,600 of those stores purchasing three of the four qualifying fresh categories. We have continued to partner with our vendors and certain equipment manufacturers to assist the retailer in obtaining the proper refrigerated equipment to showcase their fresh product offering. In 2011 we expanded our line of equipment offerings to include open-air, walk-around and end-cap units and continued to provide our free-standing wall units. We have partnered with local dairies, bakeries and commissaries to further enable our divisions to deliver the freshest product possible aligned with geographical preferences. This program was in addition to our other sales and marketing initiatives focused on increasing sales for fresh products. We continue to add breadth to the program by offering new fresh item solutions and we realized positive margin growth in 2011 for “Fresh” by improving product assortment, in-store marketing efforts and spoil management.

On September 7, 2011, we signed a distribution agreement with Couche-Tard to service approximately 970 additional Couche-Tard corporate stores, under the Circle K brand, within Couche-Tard's Southeast, Gulf Coast and Florida markets. We began supplying the additional Circle K stores in September 2011 through a new distribution center in Tampa, Florida and certain of our existing facilities. Effective October 31, 2011, Core-Mark became the authorized wholesaler for the Couche-Tard chain of approximately 300 Circle K franchised stores located throughout the eastern United States which allows us the opportunity to carry all Circle K franchise proprietary products. On December 15, 2011, we finalized the renewal of our existing distribution agreements with Couche-Tard for stores located in western Canada and the western U.S. We expect annual net sales to Couche-Tard to grow to approximately 13% of our total net sales in 2012.

On May 2, 2011, we acquired Forrest City Grocery Company ("FCGC"), located in Forrest City, Arkansas, and FCGC thereafter became a subsidiary of Core-Mark. FCGC was a regional wholesale distributor servicing customers in Arkansas, Mississippi, Tennessee and the surrounding states with annualized sales of approximately $540 million. Total consideration to acquire FCGC was approximately $53 million. The acquisition resulted in approximately $12 million of goodwill and $18 million of intangible assets based on the purchase price allocation from the valuation of the assets and liabilities. The acquisition was funded with a combination of cash on hand and borrowings under our $200 million revolving credit facility. This acquisition has allowed us to increase our infrastructure and market share in the southeastern U.S. The financial results of FCGC's operations have been included in our consolidated financial statements since the date of acquisition, along with the costs associated with completing the acquisition and integrating them onto DCMS. FCGC's customers are located primarily in states where cigarette pricing is regulated. Sales in these states, known as "fair trade" states, will likely result in higher cigarette gross profits, in terms of cents per carton, and lower food/non-food gross profit margins. We integrated FCGC onto DCMS in October 2011 and expect to increase its operational leverage as a result of that conversion (see Note 3 -- Acquisitions to our consolidated financial statements).

____________________________________________
(2)
Adjusted EBITDA is not defined by GAAP and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP (see calculation of adjusted EBITDA in "Liquidity and Capital Resources" below).


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On August 2, 2010, we acquired substantially all of the assets of Finkle Distributors, Inc. ("FDI"), located in Johnstown, New York, for approximately $36.0 million. FDI was a regional, convenience wholesaler servicing customers in New York, Pennsylvania and the surrounding states. The acquired assets consisted primarily of accounts receivable, inventory and fixed assets. Results of operations have been included in our consolidated financial statements since the date of acquisition. Upon completion of the acquisition, we transitioned warehouse operations to our New England and Pennsylvania divisions (see Note 3 -- Acquisitions to our consolidated financial statements).

We entered into a five-year contract with BP Products North America in February 2010 to provide all of the ampm® proprietary products to its 1,200 stores nationwide. This agreement expanded our existing relationship with BP Products North America from a focus in western states to a national basis. In addition, Core-Mark became designated as the approved supplier for traditional nonproprietary products, in a move designed to further advance ampm®'s ongoing progress in supply chain efficiencies, marketing program effectiveness and consistency of offerings.
 

Other Business Developments
Dividends
On October 19, 2011 we announced the commencement of a quarterly dividend program. The Board declared a quarterly cash dividend of $0.17 per common share, which resulted in a total amount of approximately $1.9 million paid on December 15, 2011 to shareholders of record as of the close of business on November 15, 2011. On February 3, 2012, the Board declared the second quarterly cash dividend of $0.17 per common share, which is payable on March 15, 2012 to shareholders of record as of the close of business on February 24, 2012.
Share Repurchase Program
Our available funds for future share repurchases under our Credit Facility were re-established at $30 million under the February 2010 amendment to our Credit Facility (see Note 7 -- Long-Term Debt to our consolidated financial statements).
The share repurchase program was approved by our Board to enable the company to buy shares when we believe our stock price is undervalued.  Repurchases under the program also have the positive effect of offsetting the dilution associated with new share issuances due to vesting of restricted stock and the exercise of stock options and warrants. During the year ended December 31, 2011, we repurchased 542,415 shares of common stock at an average price of $35.03 per share for a total cost of $19.0 million. No shares of common stock were repurchased under our share repurchase program for the year ended December 31, 2010. During the year ended December 31, 2009, we repurchased 98,646 shares of common stock at an average price of $22.77 per share for a total cost of $2.2 million. As of December 31, 2011 there was $11.0 million available for future share repurchases under our share repurchase program.
Federal Excise Tax Liability Impact for the State Children's Health Insurance Program
In February 2009, the State Children's Health Insurance Program (“SCHIP”) was signed into law, which increased federal cigarette excise taxes levied on manufacturers of cigarettes from 39¢ to $1.01 per pack effective April 1, 2009. In March 2009, most U.S. manufacturers increased their list prices which resulted in an increase of approximately 28% on Core-Mark's product purchases in response to the passage of the SCHIP legislation. Cigarette inventory holding gains were $8.2 million for 2011 and $6.1 million for 2010, compared to cigarette inventory holding gains of $36.7 million, partially offset by a net federal floor stock tax of $11.5 million, for 2009. The significant cigarette inventory holding gains in 2009 were due primarily to increases in cigarette prices by manufacturers in response to the anticipated increase in federal excise taxes mandated by the SCHIP legislation.

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Results of Operations
Comparison of 2011 and 2010 (1)

 
 
 
 
2011
 
2010
 
 
2011
 
Amounts (in millions)
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts (in millions)
 
% of Net sales
 
% of Net sales, less excise taxes
 
 
Increase (Decrease) (in millions)
 
 
 
 
 
 
Net sales
 
$
848.1

 
$
8,114.9

 
100.0
%
 
%
 
$
7,266.8

 
100.0
%
 
%
Net sales — Cigarettes
 
590.9

 
5,710.6

 
70.4

 
64.1

 
5,119.7

 
70.5

 
64.0

Net sales — Food/non-food
 
257.2

 
2,404.3

 
29.6

 
35.9

 
2,147.1

 
29.5

 
36.0

Net sales, less excise taxes (2)
 
653.1

 
6,163.4

 
76.0

 
100.0

 
5,510.3

 
75.8

 
100.0

Gross profit (3)
 
48.8

 
434.1

 
5.3

 
7.0

 
385.3

 
5.3

 
7.0

Warehousing and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    distribution expenses
 
22.8

 
234.6

 
2.9

 
3.8

 
211.8

 
2.9

 
3.8

Selling, general and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    administrative expenses
 
8.3

 
150.8

 
1.9

 
2.4

 
142.5

 
2.0

 
2.6

Amortization of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   intangible assets
 
0.9

 
3.0

 

 

 
2.1

 

 

Income from operations
 
16.8

 
45.7

 
0.6

 
0.7

 
28.9

 
0.4

 
0.5

Interest expense
 
(0.2
)
 
(2.4
)
 

 

 
(2.6
)
 

 

Interest income
 

 
0.4

 

 

 
0.4

 

 

Foreign currency transaction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    (losses) gains, net
 
(1.0
)
 
(0.5
)
 

 

 
0.5

 

 

Income before taxes
 
16.0

 
43.2

 
0.5

 
0.7

 
27.2

 
0.4

 
0.5

Net income
 
8.5

 
26.2

 
0.3

 
0.4

 
17.7

 
0.2

 
0.3

Adjusted EBITDA (4)
 
21.9

 
91.9

 
1.1

 
1.5

 
70.0

 
1.0

 
1.3

______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2)
Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to product sales growth and increases in state, local and provincial excise taxes which we are responsible for collecting and remitting. Federal excise taxes are levied on the manufacturers who pass the taxes on to us as part of the product cost and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage may be reduced, however we do not expect increases in excise taxes to negatively impact gross profit per carton (see Comparison of Sales and Gross Profit by Product Category, page 33).
(3)
Gross margins may not be comparable to those of other entities because warehousing and distribution expenses are not included as a component of our cost of goods sold.
(4)
Adjusted EBITDA is not defined by GAAP and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP (see calculation of adjusted EBITDA in "Liquidity and Capital Resources" below).
Consolidated Net Sales. Net sales for 2011 increased by $848.1 million, or 11.7%, to $8,114.9 million from $7,266.8 million in 2010. Excluding the effects of foreign currency fluctuations, net sales increased 11.0% in 2011 compared to 2010, driven primarily by sales attributable to the FCGC and FDI acquisitions, sales associated with the new distribution agreement with Couche-Tard and increases in food/non-food sales to existing customers.
Net Sales of Cigarettes. Net sales of cigarettes for 2011 increased by $590.9 million, or 11.5%, to $5,710.6 million from $5,119.7 million in 2010. Net cigarette sales for 2011 increased 10.9%, excluding the effects of foreign currency fluctuations. This increase in net cigarette sales was driven by sales attributable to the FCGC and FDI acquisitions and sales associated with the new distribution agreement with Couche-Tard. In addition, there was a 3.3% increase in the average sales price per carton due primarily to cigarette price inflation and increases in excise taxes. Total carton sales in 2011 increased 9.2% in the U.S. and increased 1.3% in Canada. Excluding incremental carton sales attributable to the FCGC and FDI acquisitions, carton sales associated with the new distribution agreement with Couche-Tard and one additional selling day this year, carton sales declined by 1.9% in the U.S. While we have experienced only slight declines in carton sales on a comparative basis, consistent with industry trends over the

25

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last several years, we believe long-term cigarette consumption will be negatively impacted by rising prices, legislative actions, diminishing social acceptance and sales through illicit markets. We expect cigarette manufacturers will raise prices as carton sales decline in order to maintain or enhance their overall profitability, thus mitigating the effects of the decline to the distributor. Total net cigarette sales as a percentage of total net sales were 70.4% in 2011 compared to 70.5% in 2010.
Net Sales of Food/Non-food Products. Net sales of food/non-food products for 2011 increased $257.2 million, or 12.0%, to $2,404.3 million from $2,147.1 million in 2010. Excluding the effects of foreign currency fluctuations, net sales of our food/non-food products increased 11.3% in 2011. The following table provides net sales by product category for our food/non-food products (dollars in millions)(1):
 
2011
 
2010
 
Increase / (Decrease)
Product Category
Net Sales
 
Net Sales
 
Dollars
 
Percentage
Food
$
995.7

 
$
840.9

 
$
154.8

 
18.4
 %
Candy
459.8

 
426.0

 
33.8

 
7.9
 %
Other tobacco products
607.9

 
503.6

 
104.3

 
20.7
 %
Health, beauty & general
237.5

 
220.6

 
16.9

 
7.7
 %
Beverages
100.9

 
152.0

 
(51.1
)
 
(33.6
)%
Equipment/other
2.5

 
4.0

 
(1.5
)
 
(37.5
)%
 
 
 
 
 
 
 
 
Total Food/Non-food Products
$
2,404.3

 
$
2,147.1

 
$
257.2

 
12.0
 %
______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
Net sales of food/non-food products increased 15.6% excluding sales of Gatorade, which was moved to a DSD format during the first quarter of this year. The increase in food/non-food sales was driven primarily by sales attributable to the FCGC and FDI acquisitions, the new distribution agreement with Couche-Tard and incremental sales driven by our sales and marketing initiatives primarily impacting our food category. In addition, sales in our Other Tobacco Products ("OTP") category were positively impacted by an increase in sales of smokeless tobacco products, which we believe is driven by increased regulation of where people can smoke and an increase in excise taxes. Total net sales of food/non-food products as a percentage of total net sales increased slightly to 29.6% for 2011 compared to 29.5% for 2010, despite the addition of FCGC which has a lower percentage of food/non-food net sales.
Gross Profit. Gross profit represents the amount of profit after deducting cost of goods sold from net sales during the period. Vendor incentives, inventory holding gains and changes in LIFO reserves are components of cost of goods sold and therefore part of our gross profit. Gross profit for 2011 increased by $48.8 million, or 12.7%, to $434.1 million from $385.3 million in 2010. The increase in gross profit for 2011 was driven primarily by a $42.3 million increase in remaining gross profit, incremental cigarette inventory holding gains of $2.1 million and candy inventory holding gains of $5.9 million, both resulting from manufacturer price increases, which also contributed to a $1.7 million increase in LIFO expense. The increase in remaining gross profit was due primarily to the addition of FCGC, the new Couche-Tard business and sales increases in our food/non-food category.











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The following table provides the components comprising the change in gross profit as a percentage of net sales for 2011 and 2010(1):
 
2011
 
2010
 
Amounts
(in millions)
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
(in millions)
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
8,114.9

 
100.0
 %
 

 
$
7,266.8

 
100.0
 %
 

Net sales, less excise taxes (2)
6,163.4

 
76.0

 
100.0
 %
 
5,510.3

 
75.8

 
100.0
 %
Components of gross profit:
 
 
 
 
 
 
 
 
 
 
 
Cigarette inventory holding gains
$
8.2

 
0.10
 %
 
0.13
 %
 
$
6.1

 
0.08
 %
 
0.11
 %
Candy inventory holding gains (3)
5.9

 
0.07

 
0.10

 

 

 

OTP tax items (4)
0.8

 
0.01

 
0.01

 
0.6

 
0.01

 
0.01

LIFO expense
(18.3
)
 
(0.22
)
 
(0.30
)
 
(16.6
)
 
(0.23
)
 
(0.30
)
Remaining gross profit (5)
437.5

 
5.39

 
7.10

 
395.2

 
5.44

 
7.17

Gross profit
$
434.1

 
5.35
 %
 
7.04
 %
 
$
385.3

 
5.30
 %
 
6.99
 %
______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2)
Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to product sales growth and increases in state, local and provincial excise taxes which we are responsible for collecting and remitting. Federal excise taxes are levied on the manufacturers who pass the tax on to us as part of the product cost and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage may be reduced, however we do not expect increases in excise taxes to negatively impact gross profit per carton (see Comparison of Sales and Gross Profit by Product Category, page 33).
(3)
We recognized approximately $5.9 million of candy inventory holding gains resulting from manufacturer price increases during 2011. The candy inventory holding gains were estimated as the amount in excess of our normal manufacturer incentives for those products sold during 2011.
(4)
We received an OTP tax settlement of $0.8 million in 2011 and recognized a $0.6 million OTP tax gain resulting from a state tax method change in 2010.
(5)
Remaining gross profit is a non-GAAP financial measure which we provide to segregate the effects of LIFO expense, cigarette inventory holding gains and other items that significantly affect the comparability of gross profit.
Our remaining gross profit margin was 5.39% of total net sales for 2011 compared with 5.44% in 2010. The addition of FCGC and the new Couche-Tard business reduced remaining gross profit margin by five basis points in 2011. Inflation in cigarette prices reduced our remaining gross profit margin by approximately eight basis points in 2011.
Cigarette remaining gross profit increased approximately 12.0%, or 3.4% on a cents per carton basis, in 2011 compared to 2010 due primarily to higher remaining gross profit per carton from FCGC, which operates primarily in fair trade states. As we expand our presence into fair trade states cigarette margins will be positively impacted and food/non-food margins will generally be negatively impacted.
Food/non-food remaining gross profit increased $27.3 million, or 10.1%, for 2011 compared to 2010. The increase was driven by the addition of FCGC, the new Couche-Tard business and by our sales and marketing initiatives. Remaining gross profit margin for our food/non-food category decreased approximately 21 basis points in 2011 to 12.39% compared to 12.60% in 2010. Excluding FCGC and the new Couche-Tard business, which have lower food/non-food margins than the rest of our business, food/non-food remaining gross profit margins increased approximately 22 basis points.
In 2011, our remaining gross profit for food/non-food products was approximately 68.1% of our total remaining gross profit compared to 68.5% in 2010. The decrease in 2011 was due primarily to the addition of FCGC, which derives a higher percentage of its remaining gross profit from cigarettes. We expect FCGC's food/non-food remaining gross profit margin to increase over time as we introduce and implement our marketing programs, including VCI and Fresh, to its customers.
Operating Expenses. Our operating expenses include costs related to Warehousing and Distribution, and Selling, General and Administrative activities. In 2011, operating expenses increased $32.0 million, or 9.0%, to $388.4 million from $356.4 million in 2010. The majority of the increase in operating expenses was attributable to the addition of FCGC, FDI, the new Florida distribution center and other infrastructure costs to support the new distribution agreement with Couche-Tard. Additional items impacting operating expenses for the year ended December 31, 2011 are discussed below. As a percentage of net sales, total

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operating expenses declined to 4.8% in 2011 compared to 4.9% in 2010.
Warehousing and Distribution Expenses.  Warehousing and distribution expenses increased $22.8 million, or 10.8%, to $234.6 million in 2011 from $211.8 million in 2010. The increase in warehousing and distribution expenses compared with 2010 was due primarily to the addition of FCGC, FDI, the new Florida distribution center and a $2.7 million increase in net fuel costs excluding FCGC and Florida. As a percentage of net sales, warehousing and distribution expenses were 2.9% for both years, including the impact of higher fuel costs. While the impact of fuel costs lessened in the second half of 2011 as prices stabilized, future increases or decreases in fuel costs or in the fuel surcharges we pass on to our customers may materially impact our financial results depending on the extent and timing of these changes.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $8.3 million, or 5.8%, in 2011 to $150.8 million from $142.5 million in 2010. The increase in SG&A expenses in 2011 was due primarily to the addition of FCGC including $2.7 million of transition costs, the addition of the Florida distribution center including $1.8 million of start-up costs, other infrastructure costs to support the new distribution agreement with Couche-Tard, and an increase of $2.7 million for employee bonus and stock-based compensation expense, partially offset by a $1.2 million decrease in health and welfare costs. SG&A expenses for 2010 included $2.8 million of FDI integration costs, $1.6 million of costs related to the settlement of insurance claims we inherited from Fleming, our former parent company, and $1.1 million of expenses for advisory and due diligence activities necessary to analyze multiple offers from potential acquirers. As a percentage of net sales, SG&A expenses were 1.9% for 2011 compared with 2.0%, for 2010.
Interest Expense. Interest expense includes both interest and loan amortization fees related to borrowings. Interest expense was $2.4 million for 2011 compared to $2.6 million for the same period in 2010. Lower fees for unused facility and letter of credit participation were offset in part by higher interest expense due to higher borrowings during 2011. Average borrowings for 2011 were $21.1 million with an average interest rate of 2.2%, compared to average borrowings of $3.1 million and an average interest rate of 2.9% for the same period in 2010.
Interest Income. Interest income was $0.4 million for both 2011 and 2010. Our interest income was derived primarily from earnings on cash balances kept in trust, checking accounts and overnight deposits.
Foreign Currency Transaction (Losses) Gains, Net. We realized foreign currency transaction losses of $0.5 million for 2011 compared to gains of $0.5 million in 2010. The fluctuation was due primarily to the level of investment in our Canadian operations and to changes in the Canadian/U.S. exchange rate.
Income Taxes. Our effective tax rate was 39.4% for 2011 compared to 34.9% for 2010 (see Note 9 -- Income Taxes to our consolidated financial statements for a reconciliation of the differences between the federal statutory tax rate and the effective tax rate). The increase in our effective tax rate for 2011 was due primarily to a higher proportion of earnings from our Canadian operations in 2011, the impact of uncertain tax positions recognized in each period and non-deductible transaction costs related to our recent acquisition of FCGC.

In 2011, the provision for income taxes included a $0.3 million net benefit, including $0.1 million of interest recovery, compared to a net benefit of $0.5 million, including $0.1 million of interest recovery, for 2010 related to the expiration of the statute of limitations for uncertain tax positions.



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Table of Contents

Results of Operations
Comparison of 2010 and 2009 (1) 

 
 
 
 
2010
 
2009
 
 
2010
 
Amounts (in millions)
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts (in millions)
 
% of Net sales
 
% of Net sales, less excise taxes
 
 
Increase (Decrease) (in millions)
 
 
 
 
 
 
Net sales
 
$
735.2

 
$
7,266.8

 
100.0
%
 
%
 
$
6,531.6

 
100.0
%
 
%
Net sales — Cigarettes
 
530.6

 
5,119.7

 
70.5

 
64.0

 
4,589.1

 
70.3

 
64.0

Net sales — Food/non-food
 
204.6

 
2,147.1

 
29.5

 
36.0

 
1,942.5

 
29.7

 
36.0

Net sales, less excise taxes (2)
 
494.7

 
5,510.3

 
75.8

 
100.0

 
5,015.6

 
76.8

 
100.0

Gross profit (3)
 
(16.3
)
 
385.3

 
5.3

 
7.0

 
401.6

 
6.1

 
8.0

Warehousing and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    distribution expenses
 
14.5

 
211.8

 
2.9

 
3.8

 
197.3

 
3.0

 
3.9

Selling, general and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    administrative expenses
 
5.2

 
142.5

 
2.0

 
2.6

 
137.3

 
2.1

 
2.7

Amortization of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   intangible assets
 
0.1

 
2.1

 

 

 
2.0

 

 

Income from operations
 
(36.1
)
 
28.9

 
0.4

 
0.5

 
65.0

 
1.0

 
1.3

Interest expense
 
0.9

 
(2.6
)
 

 

 
(1.7
)
 

 

Interest income
 
0.1

 
0.4

 

 

 
0.3

 

 

Foreign currency transaction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    gains (losses), net
 
(1.7
)
 
0.5

 

 

 
2.2

 

 

Income before taxes
 
(38.6
)
 
27.2

 
0.4

 
0.5

 
65.8

 
1.0

 
1.3

Net income (4)
 
(29.6
)
 
17.7

 
0.2

 
0.3

 
47.3

 
0.7

 
0.9

Adjusted EBITDA (5)
 
(25.5
)
 
70.0

 
1.0

 
1.3

 
95.5

 
1.5

 
1.9

______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2)
Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to product sales growth and increases in state, local and provincial excise taxes which we are responsible for collecting and remitting. Federal excise taxes are levied on the manufacturers who pass the taxes on to us as part of the product cost and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage may be reduced, however we do not expect increases in excise taxes to negatively impact gross profit per carton (see Comparison of Sales and Gross Profit by Product Category, page 33).
(3)
Gross margins may not be comparable to those of other entities because warehousing and distribution expenses are not included as a component of our cost of goods sold.
(4)
The decrease in net income compared to 2009 was due primarily to a $19.1 million reduction in cigarette inventory holding gains, a $5.3 million reduction in income earned primarily from manufacturer price increases, an increase in LIFO expense of $9.9 million and $5.5 million of additional expenses in 2010.
(5)
Adjusted EBITDA is not defined by GAAP and should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP (see calculation of adjusted EBITDA in "Liquidity and Capital Resources" below).
Consolidated Net Sales. Net sales for 2010 increased by $735.2 million, or 11.3%, to $7,266.8 million from $6,531.6 million in 2009. Excluding the effects of foreign currency fluctuations, sales from the FDI acquisition and approximately $105.9 million of incremental sales resulting from manufacturers' cigarette price increases in response to the SCHIP legislation, net sales increased by 6.1% in 2010 compared to 2009. This increase was the result of sales gains from new and existing customers and inflation of cigarette prices and excise taxes.
Net Sales of Cigarettes. Net sales of cigarettes for 2010 increased by $530.6 million, or 11.6%, to $5,119.7 million from $4,589.1 million in 2009. Net cigarette sales for 2010 increased 10.0%, excluding the effects of foreign currency fluctuations. The increase in net cigarette sales in 2010 was driven by an 8.3% increase in the average sales price per carton, due primarily to manufacturer price and excise tax increases, and an overall increase in carton sales of 3.0%, or 1.8% excluding sales from the FDI

29

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acquisition. Our carton sales in 2010 increased 1.1% in the U.S., excluding FDI, and increased 7.5% in Canada, attributable primarily to market share gains in our Toronto division. Total net cigarette sales as a percentage of total net sales were 70.5% in 2010 compared to 70.3% in 2009.
Net Sales of Food/Non-food Products. Net sales of food/non-food products for 2010 increased $204.6 million, or 10.5%, to $2,147.1 million from $1,942.5 million in 2009. The following table provides net sales by product category for our food/non-food products (dollars in millions)(1):
 
2010
 
2009
 
Increase / (Decrease)
Product Category
Net Sales
 
Net Sales
 
Dollars
 
Percentage
Food
$
840.9

 
$
738.0

 
$
102.9

 
13.9
 %
Candy
426.0

 
405.0

 
21.0

 
5.2
 %
Other tobacco products
503.6

 
434.0

 
69.6

 
16.0
 %
Health, beauty & general
220.6

 
209.5

 
11.1

 
5.3
 %
Beverages
152.0

 
151.7

 
0.3

 
0.1
 %
Equipment/other
4.0

 
4.3

 
(0.3
)
 
(5.5
)%
 
 
 
 
 
 
 
 
Total Food/Non-food Products
$
2,147.1

 
$
1,942.5

 
$
204.6

 
10.5
 %
______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
Excluding the effects of foreign currency fluctuations, net sales of food/non-food products increased 9.0% in 2010 compared to 2009. The increase, primarily in our food and other tobacco products categories, was driven by our sales and marketing initiatives, sales gains from new customers and sales from the FDI acquisition. Total net sales of food/non-food products as a percentage of total net sales was 29.5% for 2010 compared to 29.7% for 2009.
Gross Profit. Gross profit represents the amount of profit after deducting cost of goods sold from net sales during the period. Vendor incentives, inventory holding gains and changes in LIFO reserves are components of cost of goods sold and therefore part of our gross profit. Gross profit for 2010 decreased by $16.3 million, or 4.1%, to $385.3 million from $401.6 million in 2009. This decrease in gross profit was due primarily to realizing $19.1 million more of cigarette inventory holding gains, net of floor stock tax, during 2009 largely related to the increase in federal excise tax mandated by the SCHIP legislation. In addition, LIFO expense increased by $9.9 million compared to the prior year, due primarily to the cigarette category, which reflected multiple price increases during the year.
The following table provides the components comprising the change in gross profit as a percentage of net sales for 2010 and 2009(1):
 
2010
 
2009
 
Amounts
(in millions)
 
% of Net sales
 
% of Net sales, less excise taxes
 
Amounts
(in millions)
 
% of Net sales
 
% of Net sales, less excise taxes
Net sales
$
7,266.8

 
100.0
 %
 

 
$
6,531.6

 
100.0
 %
 

Net sales, less excise taxes (2)
5,510.3

 
75.8

 
100.0
 %
 
5,015.6

 
76.8

 
100.0
 %
Components of gross profit:
 
 
 
 
 
 
 
 
 
 
 
Cigarette inventory holding gains
$
6.1

 
0.08
 %
 
0.11
 %
 
$
36.7

 
0.56
 %
 
0.73
 %
Net federal floor stock tax (3)

 

 

 
(11.5
)
 
(0.18
)
 
(0.23
)
OTP tax items (4)
0.6

 
0.01

 
0.01

 
0.6

 
0.01

 
0.01

LIFO expense
(16.6
)
 
(0.23
)
 
(0.30
)
 
(6.7
)
 
(0.10
)
 
(0.13
)
Remaining gross profit (5)
395.2

 
5.44

 
7.17

 
382.5

 
5.86

 
7.63

Gross profit
$
385.3

 
5.30
 %
 
6.99
 %
 
$
401.6

 
6.15
 %
 
8.01
 %
______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2)
Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to 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

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are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage may be reduced, however we do not expect increases in excise taxes to negatively impact gross profit per carton (see Comparison of Sales and Gross Profit by Product Category, page 33).
(3)
In February 2009, SCHIP was signed into law and imposed a floor stock tax on tobacco products held for sale on April 1, 2009. The net floor stock tax was recorded as an increase to our cost of goods sold in the second quarter of 2009.
(4)
We recognized a $0.6 million OTP tax gain resulting from a state tax method change in 2010. We recognized an OTP tax refund of $0.6 million in 2009.
(5)
Remaining gross profit is a non-GAAP financial measure which we provide to segregate the effects of LIFO expense, cigarette inventory holding gains, FET associated with the SCHIP legislation and other items that significantly affect the comparability of gross profit.

Our remaining gross profit was 5.44% of total net sales for 2010 compared with 5.86% in 2009. The incremental sales related to the cigarette price increases associated with SCHIP reduced our remaining gross profit margins by approximately eight basis points in 2010.
Cigarette remaining gross profit decreased approximately 1.6% on a cents per carton basis in 2010 compared with 2009 due primarily to the effect of competitive pricing pressures. Remaining gross profit for our food/non-food category decreased approximately 76 basis points in 2010 to 12.60% compared to 13.36% in 2009. The decrease in total remaining gross profit was attributable primarily to contract renewals, competitive pricing pressures and a net reduction of $5.3 million related to income earned primarily from manufacturer price increases. In 2010, our remaining gross profit for food/non-food products increased to approximately 68.5% of our total remaining gross profit compared to 67.9% in 2009.
Operating Expenses. Our operating expenses include costs related to Warehousing and Distribution, and Selling, General and Administrative activities. In 2010, operating expenses increased $19.8 million, or 5.9%, to $356.4 million from $336.6 million in 2009. As a percentage of net sales, total operating expenses declined to 4.9% in 2010 compared to 5.2% in 2009. Our operating expenses in 2010 included $5.5 million of additional expenses consisting of $2.8 million of integration expenses associated with the FDI acquisition, $1.6 million of costs related to the settlement of insurance claims we inherited from Fleming, our former parent, and $1.1 million of expenses for advisory and due diligence activities necessary to analyze multiple offers from potential acquirers. Operating expenses also included $7.1 million of expenses related to the operations of FDI. Our operating expenses in 2009 included $0.9 million of costs to convert our New England division onto our information systems platform. Excluding the items above, operating expenses in 2010 increased $8.1 million, or 2.4%, to $343.8 million.
Warehousing and Distribution Expenses.  Warehousing and distribution expenses increased $14.5 million, or 7.3%, to $211.8 million in 2010 from $197.3 million in 2009. Included in warehousing and distribution expenses for 2010 were $4.3 million of incremental net fuel costs, excluding FDI, and $4.0 million of expenses related to the operations of FDI which we acquired this year. The increase in net fuel costs was due primarily to higher fuel prices and an increase in mileage due primarily to market share expansion. As a percentage of net sales, warehousing and distribution expenses were 2.9% for 2010 compared with 3.0% for 2009.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $5.2 million, or 3.8%, in 2010 to $142.5 million from $137.3 million in 2009. SG&A expenses in 2010 included $3.1 million related to the operations of FDI, $2.8 million of integration expenses associated with the FDI acquisition, $1.6 million of costs related to the settlement of insurance claims we inherited from Fleming, our former parent, and $1.1 million of expenses for advisory and due diligence activities necessary to analyze multiple offers from potential acquirers. SG&A expenses for 2009 included $0.9 million of costs related to the integration of our New England division onto our information systems platform. Excluding the items above, SG&A expenses decreased $2.5 million, or 1.8%, to $133.9 million. The decrease is due primarily to reductions in health care and workers' compensation costs and cost savings initiatives. As a percentage of net sales, SG&A expenses declined to 2.0% for 2010 compared with 2.1% for the same period in 2009.
Interest Expense. Interest expense includes both debt interest and fees related to borrowings. Interest expense was $2.6 million for 2010 compared to $1.7 million for the same period in 2009. The increase was due primarily to higher unused facility and letter of credit participation fees that resulted from increased rates with the extension of our revolving Credit Facility in February 2010, partially offset by a reduction in average borrowings in the current period versus the prior year period. Average borrowings for 2010 were $3.1 million with an average interest rate of 2.9%, compared to average borrowings of $8.2 million and an average interest rate of 2.0% for the same period in 2009.
Interest Income. In 2010, interest income was $0.4 million compared to $0.3 million for 2009. Our interest income was derived primarily from earnings on cash balances kept in trust, checking accounts and overnight deposits.



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Foreign Currency Transaction Gains (Losses), Net. We realized foreign currency transaction gains of $0.5 million for 2010 compared to gains of $2.2 million in 2009. The fluctuation was due primarily to the level of investment in our Canadian operations and to changes in the Canadian/U.S. exchange rate.
Income Taxes. Our effective tax rate was 34.9% for 2010 compared to 28.1% for 2009 (see Note 9 -- Income Taxes to our consolidated financial statements for a reconciliation of the differences between the federal statutory tax rate and the effective tax rate). Included in the provision for income taxes for 2010 was a $0.7 million net benefit, including $0.1 million of interest recovery, compared to a net benefit of $6.7 million, including $2.1 million of interest recovery, for the same period in 2009. The net benefits related primarily to the expiration of the statute of limitations for uncertain tax positions and revisions to prior year estimates based upon the finalization of our tax returns.

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Comparison of Sales and Gross Profit by Product Category
The following table summarizes our cigarette and food/non-food product sales, LIFO expense, gross profit and other relevant financial data for 2011, 2010 and 2009 (dollars in millions)(1):
 
2011
 
2010
 
2009
Cigarettes
 
 
 
 
 
Net sales
$
5,710.6

 
$
5,119.7

 
$
4,589.1

Excise taxes in sales (2)
1,762.1

 
1,594.2

 
1,381.0

Net sales, less excise taxes (3)
3,948.5

 
3,525.5

 
3,208.1

LIFO expense
10.4

 
11.3

 
6.6

Gross profit (4)
137.4

 
119.4

 
142.4

Gross profit %
2.41
%
 
2.33
%
 
3.10
%
Gross profit % less excise taxes
3.48
%
 
3.39
%
 
4.44
%
Remaining gross profit (5)
$
139.6

 
$
124.6

 
$
122.9

Remaining gross profit %
2.44
%
 
2.43
%
 
2.68
%
Remaining gross profit % less excise taxes
3.54
%
 
3.53
%
 
3.83
%
 
 
 
 
 
 
Food/Non-food Products
 
 
 
 
 
Net sales
$
2,404.3

 
$
2,147.1

 
$
1,942.5

Excise taxes in sales (2)
189.4

 
162.3

 
135.0

Net sales, less excise taxes (3)
2,214.9

 
1,984.8

 
1,807.5

LIFO expense
7.9

 
5.3

 
0.1

Gross profit (6)
296.7

 
265.9

 
259.2

Gross profit %
12.34
%
 
12.38
%
 
13.34
%
Gross profit % less excise taxes
13.40
%
 
13.40
%
 
14.34
%
Remaining gross profit (5)
$
297.9

 
$
270.6

 
$
259.6

Remaining gross profit % (7)
12.39
%
 
12.60
%
 
13.36
%
Remaining gross profit % less excise taxes
13.45
%
 
13.63
%
 
14.36
%
 
 
 
 
 
 
Totals
 
 
 
 
 
Net sales
$
8,114.9

 
$
7,266.8

 
$
6,531.6

Excise taxes in sales (2)
1,951.5

 
1,756.5

 
1,516.0

Net sales, less excise taxes (3)
6,163.4

 
5,510.3

 
5,015.6

LIFO expense
18.3

 
16.6

 
6.7

Gross profit (4),(6)
434.1

 
385.3

 
401.6

Gross profit %
5.35
%
 
5.30
%
 
6.15
%
Gross profit % less excise taxes
7.04
%
 
6.99
%
 
8.01
%
Remaining gross profit (5)
$
437.5

 
$
395.2

 
$
382.5

Remaining gross profit %
5.39
%
 
5.44
%
 
5.86
%
Remaining gross profit % less excise taxes
7.10
%
 
7.17
%
 
7.63
%
______________________________________________
(1)
Amounts and percentages have been rounded for presentation purposes and might differ from unrounded results.
(2)
Excise taxes included in our net sales consist of state, local and provincial excise taxes which we are responsible for collecting and remitting. Federal excise taxes are levied on the manufacturers who pass the tax on to us as part of the product cost and thus are not a component of our excise taxes. Although increases in cigarette excise taxes result in higher net sales, our overall gross profit percentage may be reduced since gross profit dollars generally remain the same.
(3)
Net sales, less excise taxes is a non-GAAP financial measure which we provide to separate the increase in sales due to product sales growth and increases in excise taxes.
(4)
Cigarette gross profit includes (i) cigarette inventory holding gains related to manufacturer price increases, (ii) increases in

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state, local and provincial excise taxes, (iii) federal excise floor taxes and (iv) LIFO effects. Cigarette inventory holding gains for the years 2011, 2010 and 2009 were $8.2 million, $6.1 million and $36.7 million, respectively. The significant amount of cigarette inventory holding gains in 2009 was due primarily to increases in cigarette prices by manufacturers in response to the increases in federal excise taxes mandated by the SCHIP legislation. Cigarette gross profit for the year ended December 31, 2009 was negatively impacted by $10.6 million of federal excise floor tax net of manufacturer reimbursements related to SCHIP.
(5)
Remaining gross profit is a non-GAAP financial measure which we provide to segregate the effects of LIFO expense, cigarette inventory holding gains and other items, such as FET associated with the SCHIP legislation and OTP tax items, that significantly affect the comparability of gross profit.
(6)
Food/non-food gross profit includes (i) inventory holding gains related to manufacturer price increases, (ii) increases in state, local and provincial excise taxes, (iii) federal excise floor taxes, (iv) LIFO effects and (v) OTP tax items. Included in food/non-food gross profit for 2011 is approximately $5.9 million of candy inventory holding gains and an OTP tax settlement of $0.8 million. Included in food/non-food gross profit for 2010 and 2009 is an OTP tax gain of $0.6 million resulting from a state tax method change and OTP tax refunds of $0.6 million, respectively, all of which were recorded as a reduction to our costs of goods sold in the applicable year. Also included in food/non-food gross profit for the year ended December 31, 2009 is $0.9 million of federal excise floor taxes related to SCHIP.
(7)
Excluding FCGC and the new Couche-Tard business, food/non-food remaining gross profit margins increased 22 basis points in 2011 compared to 2010. We expect that FCGC margins will improve over time as we introduce more of our marketing programs to the FCGC customer base. The decrease in remaining gross profit margin in 2010 compared to 2009 was attributable primarily to contract renewals, competitive pricing pressures and a net reduction of $5.3 million related to income earned primarily from manufacturers' price increases.


Liquidity and Capital Resources
Our cash and cash equivalents as of December 31, 2011 were $15.2 million compared to $16.1 million as of December 31, 2010. Our restricted cash as of December 31, 2011 was $12.6 million compared to $12.8 million as of December 31, 2010. Restricted cash primarily represents funds that have been set aside in trust as required by one of the Canadian provincial taxing authorities to secure amounts payable for cigarette and tobacco excise taxes.
Our liquidity requirements arise primarily from the funding of our working capital, capital expenditures, debt service requirements of our Credit Facility, income taxes and dividend payments. We have historically funded our liquidity requirements through our cash flows from operations and external borrowings. For the year ended December 31, 2011, our cash flows from operating activities provided $11.3 million and we had $106.2 million of borrowing capacity available in our revolving credit facility as of December 31, 2011.
On October 19, 2011 we announced the commencement of a quarterly dividend program. The Board declared a quarterly cash dividend of $0.17 per common share, which resulted in a total amount of approximately $1.9 million paid on December 15, 2011 to shareholders of record as of the close of business on November 15, 2011. On February 3, 2012, the Board declared the second quarterly cash dividend of $0.17 per common share, which is payable on March 15, 2012 to shareholders of record as of the close of business on February 24, 2012.
Based on our anticipated cash needs, availability under our Credit Facility and the scheduled maturity of our debt, we expect that our current liquidity will be sufficient to meet all of our anticipated operating needs during the next twelve months.

 Cash flows from operating activities
Year ended December 31, 2011
Net cash provided by operating activities decreased by $63.6 million to $11.3 million for the year ended December 31, 2011 compared to net cash provided of $74.9 million for the same period in 2010. This decrease was due primarily to an increase of $71.1 million in net cash used to fund working capital. Inventory levels and prepaid inventory at December 31, 2011, net of related accounts payable, used $37.5 million more in cash in 2011 compared to 2010 due primarily to investments at year-end to capitalize on promotional opportunities, support new business, maximize LIFO tax strategy, and fund increases in inventory to support holiday timing. In addition, tobacco taxes payable used $24.6 million more cash in 2011 compared to 2010, as 2010 benefited from the establishment of credit terms related to both the FDI acquisition, and one additional taxing jurisdiction, and tax increases in several states. A $7.5 million increase in net income adjusted for non-cash items offset partially the increase in net cash used to fund working capital.

 

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Year ended December 31, 2010
Net cash provided by operating activities increased by $41.8 million to $74.9 million for the year ended December 31, 2010 compared to $33.1 million for the same period in 2009. The increase in cash provided by operating activities was due primarily to a $68.6 million increase in cash provided by working capital.
A significant use of cash occurred in 2009 as a result of the SCHIP legislation which increased accounts receivable, prepayments and inventory by approximately $35 million, and did not recur in 2010. This was partially offset by an increase in cash used to buy inventory at the end of 2010 in order to maintain appropriate LIFO levels. In addition, prepayments decreased due to the timing of purchases and cigarette and tobacco taxes payable increased due primarily to the FDI acquisition and the establishment of credit terms in one additional state earlier this year.
The increase in cash provided by working capital was offset by a $26.8 million decrease in net income adjusted for non-cash items due primarily to a $19.1 million reduction in cigarette inventory holding gains included in prior year net income related to the SCHIP legislation and a $5.3 million reduction in income earned primarily from manufacturer price increases.
Cash flows from investing activities
Year ended December 31, 2011
Net cash used in investing activities increased by $24.6 million to $75.1 million for the year ended December 31, 2011 compared to $50.5 million for the same period in 2010. This increase was due primarily to the acquisition of FCGC in 2011 for which we paid $50.8 million net of acquired cash, compared with the acquisition of FDI in the same period in 2010 for which we paid $35.9 million net of acquired cash. Capital expenditures increased by $10.2 million to $24.1 million in 2011 compared with $13.9 million for 2010. The increase in capital expenditures is due primarily to the opening of our Florida distribution center and IT and other equipment for FCGC. The remainder of our capital expenditures during 2011 consisted of additions to our trucking fleet, freezer and cooler expansion and other warehouse equipment.
Year ended December 31, 2010
Net cash used in investing activities increased by $29.9 million to $50.5 million for the year ended December 31, 2010 compared with $20.6 million for the same period in 2009. This increase was due primarily to the acquisition of FDI. We paid approximately $35.9 million, net of cash received, for the acquired assets, which consisted primarily of purchased accounts receivable, inventory and fixed assets. Capital expenditures decreased by $7.2 million to $13.9 million in 2010 compared with $21.1 million for 2009. Capital expenditures during 2010 consisted primarily of additions to our trucking fleet and warehouse equipment.
Cash flows from financing activities
Year ended December 31, 2011
Net cash provided from financing activities increased by $88.2 million to $62.9 million for 2011 compared to a net cash use of $25.3 million for the same period in 2010. This increase was due primarily to an increase in net borrowings under our Credit Facility of $81.2 million to fund the acquisition of FCGC and our working capital requirements primarily resulting from the timing of year-end inventory purchases. An increase in book overdrafts of $30.0 million which was caused by the level of cash on hand in relation to the timing of vendor payments also contributed to the increase in net cash provided, partially offset by $19.0 million used to repurchase common stock in 2011.
Year ended December 31, 2010
Net cash used in financing activities increased by $16.1 million to $25.3 million for 2010 compared with $9.2 million for 2009. The increase in net cash used in financing activities was due primarily to a $14.5 million decrease in book overdrafts and an increase of $8.5 million in net repayments under our revolving credit facility, partially offset by a $6.1 million increase in proceeds received from the exercise of stock options and warrants. The decrease in book overdrafts was due primarily to the level of cash on hand and timing of vendor payments compared to the same period in 2009.
Adjusted EBITDA
Adjusted EBITDA is a measure used by management to measure operating performance. We believe adjusted EBITDA provides meaningful supplemental information for investors regarding the performance of our business and allows investors to view results in a manner similar to the method used by our management. Adjusted EBITDA is also among the primary measures used externally by our investors, analysts and peers in our industry for purposes of valuation and comparing our results to other

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companies in our industry. Adjusted EBITDA is not defined by GAAP and the discussion of adjusted EBITDA should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. We may define adjusted EBITDA differently than other companies and therefore such measures may not be comparable to ours.

The following table provides the components of adjusted EBITDA for the year ended December 31, 2011, 2010 and 2009 (dollars in millions):
 
Year Ended December 31,
 
2011
 
2010
 
2009
Net income
$
26.2

 
$
17.7

 
$
47.3

Interest expense, net (1)
2.0

 
2.2

 
1.4

Provision for income taxes
17.0

 
9.5

 
18.5

Depreciation and amortization
22.4

 
19.7

 
18.7

LIFO expense
18.3

 
16.6

 
6.7

Stock-based compensation expense
5.5

 
4.8

 
5.1