UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20142015
or
¨ | 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: 0-10653
UNITED STATIONERSESSENDANT INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
| 36-3141189 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
One Parkway North Boulevard
Suite 100
Deerfield, Illinois 60015-2559
(847) 627-7000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Indicate by check mark whether 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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 and 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 ¨
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
| x |
| Accelerated filer |
| ¨ |
|
|
|
| |||
Non-accelerated filer |
| ¨ (Do not check if a smaller reporting company) |
| Smaller reporting company |
| ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
On October 17, 2014,19, 2015, the registrant had outstanding 38,899,71037,391,273 shares of common stock, par value $0.10 per share.
UNITED STATIONERSESSENDANT INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 20142015
TABLE OF CONTENTS
2
PARTPART I – FINANCIAL INFORMATION
UNITED STATIONERSESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| (Unaudited) |
|
| (Audited) |
| (Unaudited) |
|
| (Unaudited) |
| ||||
| As of September 30, |
|
| As of December 31, |
| As of September 30, |
|
| As of December 31, |
| ||||
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 (Revised) |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 24,838 |
|
| $ | 22,326 |
| $ | 28,047 |
|
| $ | 20,812 |
|
Accounts receivable, less allowance for doubtful accounts of $20,168 in 2014 and $20,608 in 2013 |
| 749,415 |
|
|
| 643,379 |
| |||||||
Accounts receivable, less allowance for doubtful accounts of $18,079 in 2015 and $19,725 in 2014 |
| 737,979 |
|
|
| 702,527 |
| |||||||
Inventories |
| 796,325 |
|
|
| 830,295 |
|
| 860,355 |
|
|
| 906,430 |
|
Other current assets |
| 20,599 |
|
|
| 29,255 |
|
| 31,946 |
|
|
| 30,713 |
|
Total current assets |
| 1,591,177 |
|
|
| 1,525,255 |
|
| 1,658,327 |
|
|
| 1,660,482 |
|
Property, plant and equipment, net |
| 133,076 |
|
|
| 143,050 |
|
| 129,744 |
|
|
| 138,217 |
|
Goodwill |
| 381,687 |
|
|
| 356,811 |
|
| 413,178 |
|
|
| 398,042 |
|
Intangible assets, net |
| 72,499 |
|
|
| 65,502 |
|
| 102,760 |
|
|
| 111,958 |
|
Other long-term assets |
| 24,372 |
|
|
| 25,576 |
|
| 36,282 |
|
|
| 38,669 |
|
Total assets | $ | 2,202,811 |
|
| $ | 2,116,194 |
| $ | 2,340,291 |
|
| $ | 2,347,368 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 515,350 |
|
| $ | 476,113 |
| $ | 540,949 |
|
| $ | 485,241 |
|
Accrued liabilities |
| 189,224 |
|
|
| 191,531 |
|
| 186,826 |
|
|
| 185,535 |
|
Current maturities of long-term debt |
| 894 |
|
|
| 373 |
|
| 43 |
|
|
| 851 |
|
Total current liabilities |
| 705,468 |
|
|
| 668,017 |
|
| 727,818 |
|
|
| 671,627 |
|
Deferred income taxes |
| 28,265 |
|
|
| 29,552 |
|
| 15,119 |
|
|
| 17,763 |
|
Long-term debt |
| 545,009 |
|
|
| 533,324 |
|
| 666,142 |
|
|
| 709,917 |
|
Other long-term liabilities |
| 60,500 |
|
|
| 59,787 |
|
| 98,621 |
|
|
| 104,394 |
|
Total liabilities |
| 1,339,242 |
|
|
| 1,290,680 |
|
| 1,507,700 |
|
| �� | 1,503,701 |
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2014 and 2013 |
| 7,444 |
|
|
| 7,444 |
| |||||||
Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2015 and 2014 |
| 7,444 |
|
|
| 7,444 |
| |||||||
Additional paid-in capital |
| 410,303 |
|
|
| 411,954 |
|
| 408,475 |
|
|
| 412,291 |
|
Treasury stock, at cost – 35,562,874 shares in 2014 and 34,714,083 shares in 2013 |
| (1,035,570 | ) |
|
| (998,234 | ) | |||||||
Treasury stock, at cost – 36,874,672 shares in 2015 and 35,719,041 shares in 2014 |
| (1,090,624 | ) |
|
| (1,042,501 | ) | |||||||
Retained earnings |
| 1,521,230 |
|
|
| 1,444,238 |
|
| 1,564,816 |
|
|
| 1,529,224 |
|
Accumulated other comprehensive loss |
| (39,838 | ) |
|
| (39,888 | ) |
| (57,520 | ) |
|
| (62,791 | ) |
Total stockholders’ equity |
| 863,569 |
|
|
| 825,514 |
|
| 832,591 |
|
|
| 843,667 |
|
Total liabilities and stockholders’ equity | $ | 2,202,811 |
|
| $ | 2,116,194 |
| $ | 2,340,291 |
|
| $ | 2,347,368 |
|
See notes to condensed consolidated financial statements.
3
UNITED STATIONERSESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
| For the Three Months Ended |
|
| For the Nine Months Ended |
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
| September 30, |
|
| September 30, |
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 (Revised) |
|
| 2015 |
|
| 2014 (Revised) |
| ||||||||
Net sales | $ | 1,419,947 |
|
| $ | 1,336,676 |
|
| $ | 3,994,123 |
|
| $ | 3,861,655 |
| $ | 1,391,545 |
|
| $ | 1,419,947 |
|
| $ | 4,065,719 |
|
| $ | 3,994,123 |
|
Cost of goods sold |
| 1,208,919 |
|
|
| 1,133,015 |
|
|
| 3,396,552 |
|
|
| 3,267,533 |
|
| 1,166,402 |
|
|
| 1,203,246 |
|
|
| 3,430,062 |
|
|
| 3,400,992 |
|
Gross profit |
| 211,028 |
|
|
| 203,661 |
|
|
| 597,571 |
|
|
| 594,122 |
|
| 225,143 |
|
|
| 216,701 |
|
|
| 635,657 |
|
|
| 593,131 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehousing, marketing and administrative expenses |
| 146,560 |
|
|
| 136,265 |
|
|
| 437,595 |
|
|
| 442,558 |
|
| 172,159 |
|
|
| 148,831 |
|
|
| 526,653 |
|
|
| 438,538 |
|
Operating income |
| 64,468 |
|
|
| 67,396 |
|
|
| 159,976 |
|
|
| 151,564 |
|
| 52,984 |
|
|
| 67,870 |
|
|
| 109,004 |
|
|
| 154,593 |
|
Interest expense, net |
| 3,992 |
|
|
| 2,734 |
|
|
| 11,199 |
|
|
| 8,703 |
|
| 5,300 |
|
|
| 3,992 |
|
|
| 14,918 |
|
|
| 11,199 |
|
Income before income taxes |
| 60,476 |
|
|
| 64,662 |
|
|
| 148,777 |
|
|
| 142,861 |
|
| 47,684 |
|
|
| 63,878 |
|
|
| 94,086 |
|
|
| 143,394 |
|
Income tax expense |
| 22,307 |
|
|
| 24,161 |
|
|
| 55,420 |
|
|
| 53,816 |
|
| 20,017 |
|
|
| 23,647 |
|
|
| 42,594 |
|
|
| 53,349 |
|
Net income | $ | 38,169 |
|
| $ | 40,501 |
|
| $ | 93,357 |
|
| $ | 89,045 |
| $ | 27,667 |
|
| $ | 40,231 |
|
| $ | 51,492 |
|
| $ | 90,045 |
|
Net income per share - basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 0.74 |
|
| $ | 1.05 |
|
| $ | 1.36 |
|
| $ | 2.32 |
|
Net income per share - basic | $ | 0.99 |
|
| $ | 1.03 |
|
| $ | 2.41 |
|
| $ | 2.24 |
| |||||||||||||||
Average number of common shares outstanding - basic |
| 38,450 |
|
|
| 39,468 |
|
|
| 38,817 |
|
|
| 39,732 |
|
| 37,300 |
|
|
| 38,450 |
|
|
| 37,724 |
|
|
| 38,817 |
|
Net income per share - diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 0.74 |
|
| $ | 1.03 |
|
| $ | 1.35 |
|
| $ | 2.29 |
|
Net income per share - diluted | $ | 0.98 |
|
| $ | 1.01 |
|
| $ | 2.38 |
|
| $ | 2.21 |
| |||||||||||||||
Average number of common shares outstanding - diluted |
| 38,884 |
|
|
| 40,031 |
|
|
| 39,244 |
|
|
| 40,331 |
|
| 37,608 |
|
|
| 38,884 |
|
|
| 38,109 |
|
|
| 39,244 |
|
Dividends declared per share | $ | 0.14 |
|
| $ | 0.14 |
|
| $ | 0.42 |
|
| $ | 0.42 |
| $ | 0.14 |
|
| $ | 0.14 |
|
| $ | 0.42 |
|
| $ | 0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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| |||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
UNITED STATIONERSESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
| For the Three Months Ended |
|
| For the Nine Months Ended |
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
| September 30, |
|
| September 30, |
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 (Revised) |
|
| 2015 |
|
| 2014 (Revised) |
| ||||||||
Net income | $ | 38,169 |
|
| $ | 40,501 |
|
| $ | 93,357 |
|
| $ | 89,045 |
| $ | 27,667 |
|
| $ | 40,231 |
|
| $ | 51,492 |
|
| $ | 90,045 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized translation adjustment |
| (1,395 | ) |
|
| (111 | ) |
|
| (1,378 | ) |
|
| (751 | ) | |||||||||||||||
Translation adjustments |
| 7,497 |
|
|
| (1,395 | ) |
|
| 3,076 |
|
|
| (1,378 | ) | |||||||||||||||
Minimum pension liability adjustments |
| 606 |
|
|
| 994 |
|
|
| 1,767 |
|
|
| 2,982 |
|
| 967 |
|
|
| 606 |
|
|
| 2,831 |
|
|
| 1,767 |
|
Unrealized interest rate swap adjustments |
| 446 |
|
|
| (1,152 | ) |
|
| (339 | ) |
|
| 2,150 |
| |||||||||||||||
Total other comprehensive income, net of tax |
| (343 | ) |
|
| (269 | ) |
|
| 50 |
|
|
| 4,381 |
| |||||||||||||||
Cash flow hedge adjustments |
| (208 | ) |
|
| 446 |
|
|
| (636 | ) |
|
| (339 | ) | |||||||||||||||
Total other comprehensive gain (loss), net of tax |
| 8,256 |
|
|
| (343 | ) |
|
| 5,271 |
|
|
| 50 |
| |||||||||||||||
Comprehensive income | $ | 37,826 |
|
| $ | 40,232 |
|
| $ | 93,407 |
|
| $ | 93,426 |
| $ | 35,923 |
|
| $ | 39,888 |
|
| $ | 56,763 |
|
| $ | 90,095 |
|
See notes to condensed consolidated financial statements.
5
UNITED STATIONERSESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
| For the Nine Months Ended |
| For the Nine Months Ended |
| ||||||||||
| September 30, |
| September 30, |
| ||||||||||
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 (Revised) |
| ||||
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 93,357 |
|
| $ | 89,045 |
| $ | 51,492 |
|
| $ | 90,045 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| 29,699 |
|
|
| 29,236 |
|
| 36,344 |
|
|
| 29,699 |
|
Share-based compensation |
| 5,935 |
|
|
| 7,526 |
|
| 6,447 |
|
|
| 5,935 |
|
Loss (gain) on the disposition of property, plant and equipment |
| 97 |
|
|
| (108 | ) | |||||||
Loss on the disposition of property, plant and equipment |
| 1,562 |
|
|
| 97 |
| |||||||
Amortization of capitalized financing costs |
| 657 |
|
|
| 687 |
|
| 659 |
|
|
| 657 |
|
Excess tax benefits related to share-based compensation |
| (1,166 | ) |
|
| (3,223 | ) |
| (402 | ) |
|
| (1,166 | ) |
Asset impairment charges |
| 34,893 |
|
|
| - |
| |||||||
Loss on sale of equity investment |
| 33 |
|
|
| - |
| |||||||
Deferred income taxes |
| (7,618 | ) |
|
| (8,214 | ) |
| (15,285 | ) |
|
| (9,134 | ) |
Changes in operating assets and liabilities (net of acquisitions): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable, net |
| (104,540 | ) |
|
| (36,855 | ) |
| (31,288 | ) |
|
| (104,540 | ) |
Decrease in inventory |
| 46,591 |
|
|
| 40,936 |
|
| 54,354 |
|
|
| 51,974 |
|
Decrease in other assets |
| 10,000 |
|
|
| 1,612 |
| |||||||
Increase (decrease) in accounts payable |
| 24,663 |
|
|
| (24,677 | ) | |||||||
Decrease in checks in-transit |
| (2,679 | ) |
|
| (835 | ) | |||||||
Increase (decrease) in accrued liabilities |
| 3,438 |
|
|
| (7,569 | ) | |||||||
(Increase) decrease in other assets |
| (8,720 | ) |
|
| 10,000 |
| |||||||
Increase in accounts payable |
| 8,972 |
|
|
| 24,663 |
| |||||||
Increase (decrease) in checks in-transit |
| 41,440 |
|
|
| (2,679 | ) | |||||||
Increase in accrued liabilities |
| 6,500 |
|
|
| 2,883 |
| |||||||
Decrease in other liabilities |
| (4,768 | ) |
|
| (8,120 | ) |
| (3,342 | ) |
|
| (4,768 | ) |
Net cash provided by operating activities |
| 93,666 |
|
|
| 79,441 |
|
| 183,659 |
|
|
| 93,666 |
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| (15,431 | ) |
|
| (22,822 | ) |
| (18,133 | ) |
|
| (15,431 | ) |
Proceeds from the disposition of property, plant and equipment |
| 872 |
|
|
| 3,522 |
|
| 184 |
|
|
| 872 |
|
Acquisition, net of cash acquired |
| (26,725 | ) |
|
| - |
| |||||||
Acquisitions, net of cash acquired |
| (40,471 | ) |
|
| (26,725 | ) | |||||||
Proceeds from sale of equity investment |
| 612 |
|
|
| - |
| |||||||
Net cash used in investing activities |
| (41,284 | ) |
|
| (19,300 | ) |
| (57,808 | ) |
|
| (41,284 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under revolving credit facility |
| (12,094 | ) |
|
| (66,891 | ) |
| (45,309 | ) |
|
| (12,094 | ) |
Borrowings under Receivables Securitization Program |
| 9,300 |
|
|
| 50,000 |
|
| - |
|
|
| 9,300 |
|
Repayment of debt |
| (135,000 | ) |
|
| - |
|
| - |
|
|
| (135,000 | ) |
Proceeds from the issuance of debt |
| 150,000 |
|
|
| - |
|
| - |
|
|
| 150,000 |
|
Net (disbursements) proceeds from share-based compensation arrangements |
| (3,142 | ) |
|
| 18,143 |
| |||||||
Net disbursements from share-based compensation arrangements |
| (1,507 | ) |
|
| (3,142 | ) | |||||||
Acquisition of treasury stock, at cost |
| (43,037 | ) |
|
| (46,984 | ) |
| (55,677 | ) |
|
| (43,037 | ) |
Payment of cash dividends |
| (16,407 | ) |
|
| (16,764 | ) |
| (15,976 | ) |
|
| (16,407 | ) |
Excess tax benefits related to share-based compensation |
| 1,166 |
|
|
| 3,223 |
|
| 402 |
|
|
| 1,166 |
|
Payment of debt issuance costs |
| (623 | ) |
|
| (1,680 | ) |
| (36 | ) |
|
| (623 | ) |
Net cash used in financing activities |
| (49,837 | ) |
|
| (60,953 | ) |
| (118,103 | ) |
|
| (49,837 | ) |
Effect of exchange rate changes on cash and cash equivalents |
| (33 | ) |
|
| 36 |
|
| (513 | ) |
|
| (33 | ) |
Net change in cash and cash equivalents |
| 2,512 |
|
|
| (776 | ) |
| 7,235 |
|
|
| 2,512 |
|
Cash and cash equivalents, beginning of period |
| 22,326 |
|
|
| 30,919 |
|
| 20,812 |
|
|
| 22,326 |
|
Cash and cash equivalents, end of period | $ | 24,838 |
|
| $ | 30,143 |
| $ | 28,047 |
|
| $ | 24,838 |
|
Other Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments, net | $ | 55,867 |
|
| $ | 60,342 |
| $ | 53,704 |
|
| $ | 55,867 |
|
Interest paid |
| 9,838 |
|
|
| 9,806 |
|
| 16,032 |
|
|
| 9,838 |
|
See notes to condensed consolidated financial statements.
6
UNITED STATIONERSESSENDANT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying Condensed Consolidated Financial Statements represent Essendant Inc. (“ESND”) (formerly known as United Stationers Inc. (“USI”) with its wholly owned subsidiary Essendant Co. (formerly known as United Stationers Supply Co. (“USSC”), and USSC’sEssendant Co.’s subsidiaries (collectively, “United”“Essendant” or the “Company”). The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of USIESND and its subsidiaries. All intercompany transactions and balances have been eliminated. The Company operates in a single reportable segment as a leading distributor of businessworkplace essentials.
The accompanying Condensed Consolidated Financial Statements are unaudited, except for theunaudited. The Condensed Consolidated Balance Sheet as of December 31, 2013, which2014, was derived from the December 31, 20132014 audited financial statements.statements with certain line items being restated for changes in accounting principles. See Note 2, “Change in Accounting Principles,” for additional details. The Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations. Accordingly, the reader of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 20132014 for further information.
In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of UnitedEssendant at September 30, 20142015 and the results of operations and cash flows for the nine months ended September 30, 20142015 and 2013.2014. The results of operations for the three months and nine months ended September 30, 20142015 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year.
Inventory
Approximately 74% and 76% of total inventory as of September 30, 2014 and December 31, 2013, respectively has been valued under the last-in, first-out (“LIFO”) accounting method. The remaining inventory is valued under the first-in, first-out (“FIFO”) accounting method. Inventory valued under the FIFO and LIFO accounting methods is recorded at the lower of cost or market. If the Company had valued its entire inventory under the lower of FIFO cost or market, inventory would have been $117.3 million and $112.4 million higher than reported as of September 30, 2014 and December 31, 2013, respectively.
The nine-month change in the LIFO reserve as of September 30, 2014 resulted in a $4.9 million increase in cost of goods sold which included a LIFO liquidation relating to decrements in the Company’s office products and furniture pools. These decrements resulted in liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of current year purchases. This liquidation resulted in LIFO income of $3.4 million, which was more than offset by LIFO expense of $8.3 million related to current inflation.
New Accounting Pronouncements
In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The standard requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition, and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. This ASU is effective for fiscal years beginning after December 15,September 2015, and for interim periods within those fiscal years. This new standard will not have an effect on the Company’s consolidated financial statements as it is in alignment with the Company’s current accounting policies for equity based compensation.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805): Business Combinations,” which replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. For public business entities, ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance, and earlier application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, that provides guidance to customers about whether a cloud computing arrangement includes a software license. If such an arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for it as a service contract. This standard will be effective for annual periods beginning after December 15, 2015, and early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, that simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance costs. This standard is effective for fiscal years beginning after December 15, 2015. Early application is permitted. The Company elected to early adopt this new guidance as of September 30, 2015. See Note 2 for the impact on the Company’s consolidated financial statements.
7
In May 2014, the FASB issued ASU No. 2014-09, Revenue Fromfrom Contracts Withwith Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU No. 2014-09. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, and early application is permitted for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
7Inventory
Approximately 99% and 98% of total inventory as of September 30, 2015 and December 31, 2014, respectively, has been valued under the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation. Inventory valued under the LIFO accounting method is recorded at the lower of cost or market. If the Company had valued its entire inventory under the lower of first-in, first-out (“FIFO”) cost or market, inventory would have been $147.5 million and $139.6 million higher than reported as of September 30, 2015 and December 31, 2014, respectively. During the third quarter of 2015, the Company elected a change in accounting principle to change the valuation method for certain inventories. See Note 2, “Change in Accounting Principles,” for further details.
2. Change in Accounting Principles
Change in Method of Accounting for Inventory Valuation
In July 2013,the third quarter of 2015, the Company changed its method of inventory costing for certain inventory in its Business and Facility Essentials (formerly separately known as Supply and Lagasse) operating segment to the LIFO method from the FIFO accounting method. Prior to the change, the Business and Facility Essentials operating segment was comprised of two separate legal entities which each utilized different methods of inventory costing: LIFO for inventories related to Business Essentials which is comprised mainly of office product and breakroom categories and FIFO for inventories related to Facility Essentials which consists of the janitorial product category. The Company believes that the LIFO method is preferable because i) the Company is executing an initiative to combine the office products and janitorial categories onto a single information technology and operating platform, ii) it allows for consistency in financial reporting (all domestic inventories will now be on LIFO), and iii) it allows for better matching of costs and revenues as historical inflationary inventory acquisition prices are expected to continue in the future and the LIFO method uses the current acquisition cost to value cost of goods sold as inventory is sold. The change has been reported through retrospective application of the new accounting policy to all periods presented. The impact of the change in the method of inventory costing for certain inventory to the third quarter 2015 was a $4.2 million decrease to cost of goods sold, $2.3 million increase to net income, and $0.06 increase in basic and diluted EPS.
Change in Method of Accounting for Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs which amends the FASB Accounting Standards Update No. 2013-11,Codification (ASC) subtopic 835-30 Income Taxes (Topic 740) - PresentationInterest-Imputation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists Interest(ASU 2013-11). This ASUguidance requires that an unrecognized tax benefit, ordebt issuance costs related to a portion of an unrecognized tax benefit,recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The Company has elected to early adopt the guidance as of September 30, 2015 and has retrospectively applied the changes to all periods presented for the third quarter 2015.
8
The impact of all adjustments made to the consolidated financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carry forward, a similar tax loss, or a tax credit carry forward. This ASU was effective for the Company beginningpresented is summarized in the first quarter of 2014. There was no impact on the Company’s financial condition or results of operations due to the adoption of this standard.following tables (in thousands, except per share data):
Acquisition of
|
| Years Ended December 31, |
| |||||||||||||||||||||||||||
|
| 2014 |
|
| 2013 |
|
| 2012 |
| |||||||||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
| |||||||||
Consolidated Statement of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold(A) |
| $ | 4,516,704 |
| $ | 4,524,676 |
| $ | 7,972 |
|
| $ | 4,295,715 |
| $ | 4,297,952 |
| $ | 2,237 |
|
| $ | 4,305,502 |
| $ | 4,303,778 |
| $ | (1,724 | ) |
Gross profit(A) |
|
| 810,501 |
|
| 802,529 |
|
| (7,972 | ) |
|
| 789,578 |
|
| 787,341 |
|
| (2,237 | ) |
|
| 774,604 |
|
| 776,328 |
|
| 1,724 |
|
Warehousing, marketing, and administrative expenses(A) |
|
| 592,050 |
|
| 595,673 |
|
| 3,623 |
|
|
| 580,428 |
|
| 580,141 |
|
| (287 | ) |
|
| 573,693 |
|
| 573,645 |
|
| (48 | ) |
Income before income taxes(A) |
|
| 194,483 |
|
| 182,888 |
|
| (11,595 | ) |
|
| 197,510 |
|
| 195,560 |
|
| (1,950 | ) |
|
| 177,635 |
|
| 179,407 |
|
| 1,772 |
|
Income tax expense(A) |
|
| 75,285 |
|
| 70,773 |
|
| (4,512 | ) |
|
| 74,340 |
|
| 73,507 |
|
| (833 | ) |
|
| 65,805 |
|
| 66,526 |
|
| 721 |
|
Net income(A) |
|
| 119,198 |
|
| 112,115 |
|
| (7,083 | ) |
|
| 123,170 |
|
| 122,053 |
|
| (1,117 | ) |
|
| 111,830 |
|
| 112,881 |
|
| 1,051 |
|
Net income per share(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(A) |
| $ | 3.08 |
| $ | 2.90 |
| $ | (0.18 | ) |
| $ | 3.11 |
| $ | 3.08 |
| $ | (0.03 | ) |
| $ | 2.77 |
| $ | 2.80 |
| $ | 0.03 |
|
Diluted(A) |
| $ | 3.05 |
| $ | 2.87 |
| $ | (0.18 | ) |
| $ | 3.06 |
| $ | 3.03 |
| $ | (0.03 | ) |
| $ | 2.73 |
| $ | 2.75 |
| $ | 0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(A) |
| $ | 119,198 |
| $ | 112,115 |
| $ | (7,083 | ) |
| $ | 123,170 |
| $ | 122,053 |
| $ | (1,117 | ) |
| $ | 111,830 |
| $ | 112,881 |
| $ | 1,051 |
|
Comprehensive income(A) |
|
| 96,295 |
|
| 89,212 |
|
| (7,083 | ) |
|
| 137,047 |
|
| 135,930 |
|
| (1,117 | ) |
|
| 114,471 |
|
| 115,522 |
|
| 1,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories(A) |
| $ | 926,809 |
| $ | 906,430 |
| $ | (20,379 | ) |
| $ | 830,295 |
| $ | 821,511 |
| $ | (8,784 | ) |
| $ | 767,206 |
| $ | 760,372 |
| $ | (6,834 | ) |
Other current assets(A) |
|
| 30,042 |
|
| 30,713 |
|
| 671 |
|
|
| 29,255 |
|
| 29,255 |
|
| - |
|
|
| 30,118 |
|
| 30,118 |
|
| - |
|
Other long-term assets(B) |
|
| 41,810 |
|
| 38,669 |
|
| (3,141 | ) |
|
| 25,576 |
|
| 22,185 |
|
| (3,391 | ) |
|
| 20,260 |
|
| 17,737 |
|
| (2,523 | ) |
Accrued liabilities(A) |
|
| 192,792 |
|
| 185,535 |
|
| (7,257 | ) |
|
| 191,531 |
|
| 188,115 |
|
| (3,416 | ) |
|
| 205,228 |
|
| 202,645 |
|
| (2,583 | ) |
Long-term debt(B) |
|
| 713,058 |
|
| 709,917 |
|
| (3,141 | ) |
|
| 533,324 |
|
| 529,933 |
|
| (3,391 | ) |
|
| 524,376 |
|
| 521,853 |
|
| (2,523 | ) |
Retained earnings(A) |
|
| 1,541,675 |
|
| 1,529,224 |
|
| (12,451 | ) |
|
| 1,444,238 |
|
| 1,438,870 |
|
| (5,368 | ) |
|
| 1,343,437 |
|
| 1,339,186 |
|
| (4,251 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(A) |
| $ | 119,198 |
| $ | 112,115 |
| $ | (7,083 | ) |
| $ | 123,170 |
| $ | 122,053 |
| $ | (1,117 | ) |
| $ | 111,830 |
| $ | 112,881 |
| $ | 1,051 |
|
Deferred income taxes(A) |
|
| (6,367 | ) |
| (10,879 | ) |
| (4,512 | ) |
|
| (3,921 | ) |
| (4,754 | ) |
| (833 | ) |
|
| (6,713 | ) |
| (5,992 | ) |
| 721 |
|
Inventories(A) |
|
| (30,319 | ) |
| (18,724 | ) |
| 11,595 |
|
|
| (66,627 | ) |
| (64,677 | ) |
| 1,950 |
|
|
| 10,374 |
|
| 8,602 |
|
| (1,772 | ) |
Cash provided by operating activities(A) |
|
| 77,133 |
|
| 77,133 |
|
| - |
|
|
| 74,737 |
|
| 74,737 |
|
| - |
|
|
| 189,814 |
|
| 189,814 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings at beginning of year(A) |
| $ | 1,444,238 |
| $ | 1,438,870 |
| $ | (5,368 | ) |
| $ | 1,343,437 |
| $ | 1,339,186 |
| $ | (4,251 | ) |
| $ | 1,253,118 |
| $ | 1,247,816 |
| $ | (5,302 | ) |
Retained earnings at end of year(A) |
|
| 1,541,675 |
|
| 1,529,224 |
|
| (12,451 | ) |
|
| 1,444,238 |
|
| 1,438,870 |
|
| (5,368 | ) |
|
| 1,343,437 |
|
| 1,339,186 |
|
| (4,251 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Change related to Inventory Valuation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B) Change related to Debt Issuance Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
| As of and for the Three Months Ended June 30, 2015 |
|
| As of and for the Three Months Ended March 31, 2015 |
|
| ||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| ||||||
Consolidated Statement of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold(A) |
| $ | 1,129,737 |
| $ | 1,131,680 |
| $ | 1,943 |
|
| $ | 1,127,925 |
| $ | 1,131,980 |
| $ | 4,055 |
|
|
Gross profit(A) |
|
| 212,062 |
|
| 210,119 |
|
| (1,943 | ) |
|
| 204,450 |
|
| 200,395 |
|
| (4,055 | ) |
|
Warehousing, marketing, and administrative expenses(A) |
|
| 158,159 |
|
| 156,912 |
|
| (1,247 | ) |
|
| 198,372 |
|
| 197,581 |
|
| (791 | ) |
|
Income before income taxes(A) |
|
| 49,125 |
|
| 48,429 |
|
| (696 | ) |
|
| 1,239 |
|
| (2,025 | ) |
| (3,264 | ) |
|
Income tax expense(A) |
|
| 18,864 |
|
| 18,595 |
|
| (269 | ) |
|
| 5,231 |
|
| 3,982 |
|
| (1,249 | ) |
|
Net income (loss)(A) |
|
| 30,261 |
|
| 29,834 |
|
| (427 | ) |
|
| (3,992 | ) |
| (6,007 | ) |
| (2,015 | ) |
|
Net income (loss) per share(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(A) |
| $ | 0.80 |
| $ | 0.79 |
| $ | (0.01 | ) |
| $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.06 | ) |
|
Diluted(A) |
| $ | 0.79 |
| $ | 0.78 |
| $ | (0.01 | ) |
| $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.06 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(A) |
| $ | 30,261 |
| $ | 29,834 |
| $ | (427 | ) |
| $ | (3,992 | ) | $ | (6,007 | ) | $ | (2,015 | ) |
|
Comprehensive income (loss) (A) |
|
| 31,450 |
|
| 31,023 |
|
| (427 | ) |
|
| (8,166 | ) |
| (10,181 | ) |
| (2,015 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories(A) |
| $ | 875,465 |
| $ | 851,126 |
| $ | (24,339 | ) |
| $ | 871,310 |
| $ | 847,667 |
| $ | (23,643 | ) |
|
Other current assets(A) |
|
| 29,595 |
|
| 30,344 |
|
| 749 |
|
|
| 31,226 |
|
| 31,977 |
|
| 751 |
|
|
Other long-term assets(B) |
|
| 48,439 |
|
| 45,779 |
|
| (2,660 | ) |
|
| 49,440 |
|
| 46,535 |
|
| (2,905 | ) |
|
Accrued liabilities(A) |
|
| 190,257 |
|
| 181,560 |
|
| (8,697 | ) |
|
| 175,770 |
|
| 167,344 |
|
| (8,426 | ) |
|
Long-term debt(B) |
|
| 661,143 |
|
| 658,483 |
|
| (2,660 | ) |
|
| 684,238 |
|
| 681,333 |
|
| (2,905 | ) |
|
Retained earnings(A) |
|
| 1,557,281 |
|
| 1,542,388 |
|
| (14,893 | ) |
|
| 1,532,325 |
|
| 1,517,859 |
|
| (14,466 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Six Months Ended June 30, 2015 |
|
| For the Three Months Ended March 31, 2015 |
|
| ||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| ||||||
Consolidated Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(A) |
| $ | 26,269 |
| $ | 23,827 |
| $ | (2,442 | ) |
| $ | (3,992 | ) | $ | (6,007 | ) | $ | (2,015 | ) |
|
Deferred income taxes(A) |
|
| (8,365 | ) |
| (8,294 | ) |
| 71 |
|
|
| (1,858 | ) |
| (1,469 | ) |
| 389 |
|
|
Inventories(A) |
|
| 44,984 |
|
| 48,944 |
|
| 3,960 |
|
|
| 42,759 |
|
| 46,023 |
|
| 3,264 |
|
|
Other assets(A) |
|
| (10,173 | ) |
| (10,250 | ) |
| (77 | ) |
|
| (10,126 | ) |
| (10,751 | ) |
| (625 | ) |
|
Accrued liabilities(A) |
|
| 4,794 |
|
| 3,282 |
|
| (1,512 | ) |
|
| (16,521 | ) |
| (17,534 | ) |
| (1,013 | ) |
|
Cash provided by operating activities(A) |
|
| 120,848 |
|
| 120,848 |
|
| - |
|
|
| 62,722 |
|
| 62,722 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Change related to Inventory Valuation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B) Change related to Debt Issuance Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
| As of and for the Three Months Ended September 30, 2014 |
|
| As of and for the Three Months Ended June 30, 2014 |
|
| As of and for the Three Months Ended March 31, 2014 |
| ||||||||||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
| |||||||||
Consolidated Statement of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold(A) |
| $ | 1,208,919 |
| $ | 1,203,246 |
| $ | (5,673 | ) |
| $ | 1,120,577 |
| $ | 1,124,485 |
| $ | 3,908 |
|
| $ | 1,067,056 |
| $ | 1,073,261 |
| $ | 6,205 |
|
Gross profit(A) |
|
| 211,028 |
|
| 216,701 |
|
| 5,673 |
|
|
| 199,460 |
|
| 195,552 |
|
| (3,908 | ) |
|
| 187,083 |
|
| 180,878 |
|
| (6,205 | ) |
Warehousing, marketing, and administrative expenses(A) |
|
| 146,560 |
|
| 148,831 |
|
| 2,271 |
|
|
| 142,186 |
|
| 142,870 |
|
| 684 |
|
|
| 148,849 |
|
| 146,837 |
|
| (2,012 | ) |
Income before income taxes(A) |
|
| 60,476 |
|
| 63,878 |
|
| 3,402 |
|
|
| 53,441 |
|
| 48,849 |
|
| (4,592 | ) |
|
| 34,860 |
|
| 30,667 |
|
| (4,193 | ) |
Income tax expense(A) |
|
| 22,307 |
|
| 23,647 |
|
| 1,340 |
|
|
| 20,110 |
|
| 18,327 |
|
| (1,783 | ) |
|
| 13,003 |
|
| 11,375 |
|
| (1,628 | ) |
Net income(A) |
|
| 38,169 |
|
| 40,231 |
|
| 2,062 |
|
|
| 33,331 |
|
| 30,522 |
|
| (2,809 | ) |
|
| 21,857 |
|
| 19,292 |
|
| (2,565 | ) |
Net income per share(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(A) |
| $ | 0.99 |
| $ | 1.05 |
| $ | 0.06 |
|
| $ | 0.86 |
| $ | 0.79 |
| $ | (0.07 | ) |
| $ | 0.56 |
| $ | 0.49 |
| $ | (0.07 | ) |
Diluted(A) |
| $ | 0.98 |
| $ | 1.03 |
| $ | 0.05 |
|
| $ | 0.85 |
| $ | 0.78 |
| $ | (0.07 | ) |
| $ | 0.55 |
| $ | 0.49 |
| $ | (0.06 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(A) |
| $ | 38,169 |
| $ | 40,231 |
| $ | 2,062 |
|
| $ | 33,331 |
| $ | 30,522 |
| $ | (2,809 | ) |
| $ | 21,857 |
| $ | 19,292 |
| $ | (2,565 | ) |
Comprehensive income(A) |
|
| 37,826 |
|
| 39,888 |
|
| 2,062 |
|
|
| 33,847 |
|
| 31,038 |
|
| (2,809 | ) |
|
| 21,734 |
|
| 19,169 |
|
| (2,565 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories(A) |
| $ | 796,325 |
| $ | 782,158 |
| $ | (14,167 | ) |
| $ | 804,395 |
| $ | 786,826 |
| $ | (17,569 | ) |
| $ | 748,499 |
| $ | 735,522 |
| $ | (12,977 | ) |
Other long-term assets(B) |
|
| 24,372 |
|
| 21,197 |
|
| (3,175 | ) |
|
| 26,059 |
|
| 22,662 |
|
| (3,397 | ) |
|
| 27,170 |
|
| 23,459 |
|
| (3,711 | ) |
Accrued liabilities(A) |
|
| 189,224 |
|
| 183,737 |
|
| (5,487 | ) |
|
| 187,414 |
|
| 180,587 |
|
| (6,827 | ) |
|
| 177,251 |
|
| 172,207 |
|
| (5,044 | ) |
Long-term debt(B) |
|
| 545,009 |
|
| 541,834 |
|
| (3,175 | ) |
|
| 542,410 |
|
| 539,013 |
|
| (3,397 | ) |
|
| 561,511 |
|
| 557,800 |
|
| (3,711 | ) |
Retained earnings(A) |
|
| 1,521,230 |
|
| 1,512,550 |
|
| (8,680 | ) |
|
| 1,488,469 |
|
| 1,477,727 |
|
| (10,742 | ) |
|
| 1,460,582 |
|
| 1,452,649 |
|
| (7,933 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended September 30, 2014 |
|
| For the Six Months Ended June 30, 2014 |
|
| For the Three Months Ended March 31, 2014 |
| |||||||||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
| |||||||||
Consolidated Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(A) |
| $ | 93,357 |
| $ | 90,045 |
| $ | (3,312 | ) |
| $ | 55,188 |
| $ | 49,814 |
| $ | (5,374 | ) |
| $ | 21,857 |
| $ | 19,292 |
| $ | (2,565 | ) |
Deferred income taxes(A) |
|
| (7,618 | ) |
| (9,134 | ) |
| (1,516 | ) |
|
| (5,317 | ) |
| (6,381 | ) |
| (1,064 | ) |
|
| (2,450 | ) |
| (2,437 | ) |
| 13 |
|
Inventories(A) |
|
| 46,591 |
|
| 51,974 |
|
| 5,383 |
|
|
| 39,290 |
|
| 48,075 |
|
| 8,785 |
|
|
| 81,714 |
|
| 85,907 |
|
| 4,193 |
|
Accrued liabilities(A) |
|
| 3,438 |
|
| 2,883 |
|
| (555 | ) |
|
| (1,106 | ) |
| (3,453 | ) |
| (2,347 | ) |
|
| (13,654 | ) |
| (15,295 | ) |
| (1,641 | ) |
Cash provided by operating activities(A) |
|
| 93,666 |
|
| 93,666 |
|
| - |
|
|
| 78,889 |
|
| 78,889 |
|
| - |
|
|
| 1,490 |
|
| 1,490 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Change related to Inventory Valuation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B) Change related to Debt Issuance Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
3. Acquisitions and Dispositions
Acquisitions
CPO Commerce, Inc.
On May 30, 2014, USSCEssendant Co. completed the acquisition of CPO Commerce, Inc. (“CPO”), a leading online retailer of brand name power tools and equipment. The acquisition of CPO will significantly expandexpanded the Company’s digital resources and capabilities to support customersresellers as they transition to an increasingly online environment. CPO’s expertise will strengthen Essendant’s ability to offer features like improved product content, real-time access to inventory and supplierpricing, digital marketing and merchandising, and an enhanced digital platform to our resellers and manufacturing partners. The Company financed the 100% stock acquisition with borrowings under the Company’s available committed bank facilities.
The purchase price was $37.4$37.8 million, including $5.1$5.5 million related to the estimated fair value of contingent consideration. The contingent consideration which isultimately paid will be determined based upon the achievement of certainon CPO’s sales targets during a three-year period immediately following the acquisition date. The final payments related to the contingent consideration arewill be determined by actual achievement in the earn-out periods and range fromwill be between zero and $10 million. The Company financed the 100% stock acquisition with borrowings under the Company’s available committed bank facilities. Purchase accounting for this transaction was completed as of May 30, 2015.
MEDCO
On October 31, 2014, Essendant Co. completed the acquisition of 100% of the capital stock of Liberty Bell Equipment Corp., a United States wholesaler of automotive aftermarket tools and equipment, and its affiliates (collectively, MEDCO) including G2S Equipement de Fabrication et d’Entretien, a Canadian wholesaler. MEDCO advances a key pillar of the Company’s strategy, which is to $10.0 million. Afterdiversify into channels and categories that leverage our common platform. It also brings expanded categories and services to customers.
The purchase price was $150.4 million, including $4.7 million related to the finalizationestimated fair value of contingent consideration. The contingent consideration ultimately paid will be determined based on MEDCO’s sales and EBITDA during a three-year period immediately following the acquisition date. Additionally, $6.0 million was reserved as a payable upon completion of an eighteen month indemnification period. The final payments related to the contingent consideration anywill be determined by actual achievement in the earn-out periods and will be between zero and $10 million. Any changes to the estimated fair value of contingent consideration after the original purchase accounting is completed will be recorded in “warehousing, marketing and administrative expenses” in the period in which a change occurs. This acquisition was funded through a combination of cash on hand and cash available under the Company’s committed bank facilities.
Nestor Sales LLC
On July 31, 2015, Essendant Co. completed the acquisition of 100% of the capital stock of Nestor Sales LLC (“Nestor”), a leading wholesaler and distributor of tools, equipment and supplies to the transportation industry. This acquisition accelerates the Company’s growth in the automotive aftermarket, complements the Company’s existing industrial offerings while providing access to new customer segments, and advances a key strategic pillar to diversify into channels and categories that leverage our common platform.
The purchase price was $41.8 million. This acquisition was funded through a combination of cash on hand and cash available under the Company’s revolving credit facility.
The Company has developed a preliminary estimateestimates of the fair valuevalues of assets acquired and liabilities assumed from the MEDCO and Nestor acquisitions for purposes of allocating the purchase price. This estimate isprices. The estimates are subject to change as the valuation activities are completed. The fair valuevalues of the assets and liabilities acquired in the MEDCO and Nestor acquisitions were estimated using various valuation methods including estimated selling price, aprices, market approach, and discounted cash flows using both an income and cost approach.
At September 30, 2014, The same methods were used for determining the preliminary allocationfair values of the purchase price is as follows (amounts in thousands):
Purchase price, net of cash acquired |
|
|
|
| $ | 31,825 |
|
Inventories | $ | (13,051 | ) |
|
|
|
|
Accounts receivable |
| (2,658 | ) |
|
|
|
|
Other current assets |
| (307 | ) |
|
|
|
|
Property, plant and equipment, net |
| (488 | ) |
|
|
|
|
Intangible assets |
| (12,800 | ) |
|
|
|
|
Total assets acquired |
|
|
|
|
| (29,304 | ) |
Accounts payable |
| 17,124 |
|
|
|
|
|
Accrued liabilities |
| 2,130 |
|
|
|
|
|
Other long-term liabilities |
| 51 |
|
|
|
|
|
Deferred income taxes |
| 3,233 |
|
|
|
|
|
Total liabilities assumed |
|
|
|
|
| 22,538 |
|
Goodwill |
|
|
|
| $ | 25,059 |
|
The purchased identifiable intangible assets are as follows (amounts in thousands):and liabilities acquired for the CPO acquisition.
| Total |
|
| Estimated Life | |
Customer relationships | $ | 5,200 |
|
| 3 years |
Trademark |
| 7,600 |
|
| 15 years |
Total | $ | 12,800 |
|
|
|
Any changes to the preliminary estimatesallocations of the fair value of assets acquired and liabilities assumed,purchase prices, some of which may be material, will be allocated to residual goodwill.
The impact of CPO on12
At September 30, 2015, the Company’s third-quarter 2014 net financial sales was immaterial. Had the CPO acquisition been completed asallocations of the beginningpurchase prices were as follows (amounts in thousands):
| CPO |
|
| MEDCO |
|
| Nestor |
| |||
| (Final) |
|
| (Preliminary) |
|
| (Preliminary) |
| |||
Purchase price, net of cash acquired | $ | 32,225 |
|
| $ | 145,873 |
|
| $ | 39,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
| (2,956 | ) |
|
| (44,815 | ) |
|
| (9,230 | ) |
Inventories |
| (13,051 | ) |
|
| (55,491 | ) |
|
| (10,442 | ) |
Other current assets |
| (269 | ) |
|
| (1,299 | ) |
|
| (339 | ) |
Property, plant and equipment, net |
| (488 | ) |
|
| (4,408 | ) |
|
| (1,251 | ) |
Other assets |
| - |
|
|
| (650 | ) |
|
| (752 | ) |
Intangible assets |
| (12,800 | ) |
|
| (40,000 | ) |
|
| (17,670 | ) |
Total assets acquired |
| (29,564 | ) |
|
| (146,663 | ) |
|
| (39,684 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| 16,911 |
|
|
| 32,383 |
|
|
| 4,992 |
|
Accrued liabilities |
| 2,580 |
|
|
| 5,542 |
|
|
| 1,912 |
|
Deferred income taxes |
| 3,453 |
|
|
| 2,716 |
|
|
| 3,875 |
|
Other long-term liabilities |
| 90 |
|
|
| 52 |
|
|
| 76 |
|
Total liabilities assumed |
| 23,034 |
|
|
| 40,693 |
|
|
| 10,855 |
|
Goodwill | $ | 25,695 |
|
| $ | 39,903 |
|
| $ | 11,110 |
|
The purchased identifiable intangible assets were as follows (amounts in thousands):
| CPO (Final) |
| MEDCO (Preliminary) |
| Nestor (Preliminary) | ||||||||||||
| Total |
|
| Estimated Life |
| Total |
|
| Estimated Life |
| Total |
|
| Estimated Life | |||
Customer relationships | $ | 5,200 |
|
| 3 years |
| $ | 37,590 |
|
| 3-15 years |
| $ | 16,890 |
|
| 13 years |
Trademark |
| 7,600 |
|
| 15 years |
|
| 2,410 |
|
| 1.5-15 years |
|
| 780 |
|
| 2.5-15 years |
Total | $ | 12,800 |
|
|
|
| $ | 40,000 |
|
|
|
| $ | 17,670 |
|
|
|
Disposition of 2013, the Company’s unaudited pro forma net sales and net income for the three-month and nine-month periods ending September 30, 2014 and 2013 would not have been materially impacted.
8
Agreement to Purchase MEDCOAzerty de Mexico
On September 11, 2014, USSC signed an agreement18, 2015, the Company completed the 100% stock-sale of its subsidiary, Azerty de Mexico, to acquire Liberty Bell Equipment Corp., a United States wholesaler of automotive aftermarket tools and supplies, and its affiliates (collectively, “MEDCO”) including G2S Equipment de Fabrication et d'Entretien ULC, a Canadian wholesaler.the local general manager. The all cash purchasesale price is $130.0 million, subject to closing adjustments, with up to an additional $10 million to be paid over three years based on performance. The acquisition is expected to be completed in the fourth quarter of 2014 and is subject to customary closing conditions. This acquisition will be funded throughwas a combination of cash and a seller’s note, totaling $8.7 million. The seller’s note matures in 180 days and requires periodic repayments. When the decision to sell the subsidiary was approved, in accordance with Accounting Standards Codification (ASC) 360-10-45-9 Property, Plant, and Equipment, Azerty de Mexico met all of the criteria to be classified as a held-for-sale asset disposal group. In accordance with ASC 350-20-40, Intangibles – Goodwill and Other, the Company allocated a proportionate share of the goodwill balance from the office product and janitorial and breakroom supply reporting unit based on handthe subsidiary’s relative fair value to the reporting unit and cash available under our revolving credit facility. performed an impairment test for the allocated goodwill utilizing the cost approach to value the subsidiary. Based upon the impairment test, the $3.3 million of goodwill allocated to the subsidiary was determined to be fully impaired. Additionally, in conjunction with classifying the subsidiary as a held-for-sale asset disposal group, the Company revalued the subsidiary to fair value using the cost-approach method less the estimated cost to sell. The carrying value of the disposal group, including a $10.1 million cumulative foreign currency translation adjustment, was then compared to the fair value less the estimated cost to sell, resulting in a pre-tax impairment loss of $10.1 million. The goodwill impairment of $3.3 million, the held-for-sale impairment of $10.1 million and the $0.1 million estimated cost to sell were recorded in the first quarter of 2015 within “warehousing, marketing and administrative expenses.” During the second and third quarters, the Company recorded an additional $1.4 million and $2.1 million, respectively, within “warehousing, marketing and administrative expenses.” This includes a $1.5 million loss on sale. The pre-tax loss, excluding the foreign currency translation adjustment noted above, attributable to Azerty de Mexico for the three months ended September 30, 2015 and 2014 was $0.9 million and $0.2 million, respectively. The pre-tax loss attributable to this subsidiary for the nine months ended September 30, 2015 was $5.2 million and none for the nine months ended September 30, 2014.
2.
13
As of September 30, 2014,2015, the Company has two active equity compensation plans. UnderOn May 20, 2015 the Company’s stockholders approved certain amendments to the Amended and Restated 2004 Long-Term Incentive Plan (“LTIP) which included the renaming of the LTIP to the “2015 Long-Term Incentive Plan” (as amended and restated, the “2015 Plan”). Under the 2015 Plan, award vehicles include, but are not limited to, stock options, restricted stock awards, restricted stock units (“RSUs”), and performance-based awards. Associates and non-employee directors of the Company are eligible to become participants in the plan. The Nonemployee Directors’ Deferred Stock Compensation Plan allows non-employee directors to elect to defer receipt of all or a portion of their retainer and meeting fees.
The Company granted 440,948 shares of restricted stock and 162,092 RSUs during the first nine months of 2015. No stock options were granted during the first nine months of 2015. During the first nine months of 2014, the Company granted 229,477 shares of restricted stock, 176,717 RSUs, and 5,538 stock options during the first nine months of 2014. During the first nine months of 2013, the Company granted 181,916 shares of restricted stock, 166,348 RSUs, and 585,189 stock options.
3.5. Severance and Restructuring Charges
The Company began certain restructuring actions in 2015 which included workforce reductions and facility consolidations. For the three months and nine months ended September 30, 2015, the Company recorded $0.2 million and $1.5 million pre-tax expense relating to facility consolidations, respectively. During the first quarter of 2013,2015, the Company recorded a $14.4$6.0 million pre-tax charge relatedrelating to a workforce reduction and facility closures. The pre-tax charge is comprised of certain OKI facility closure expenses of $1.2 million and severance and workforce reduction-related expenses of $13.2 million whichreduction. These charges were included in operating“warehousing, marketing and administrative expenses.” Cash outflows for these actions occurredwill occur primarily during 2013in 2015 and have continued into 2014. Cash outlays associated with these chargeswere approximately $3.0 million in the nine months ended September 30, 2014 were $3.6 million. During 2013, the Company reversed a portion of these charges totaling $1.4 million. Additionally, the Company reversed a portion of these charges totaling $0.3 million in the first quarter of 2014.2015. As of September 30, 2014 and December 31, 2013,2015, the Company hadhas accrued liabilities for these actions of $0.5$3.1 million. The Company estimated an additional $1.5 million and $4.4 million, respectively.will be incurred in the remainder of 2015 due to facility closures related to this action, for a total 2015 expense of approximately $9.0 million.
9
4.6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are noted in the following table (in thousands):
Goodwill, balance as of December 31, 2013 | $ | 356,811 |
|
Acquisition of CPO |
| 25,059 |
|
Currency translation adjustment |
| (183 | ) |
Goodwill, balance as of September 30, 2014 | $ | 381,687 |
|
Goodwill, balance as of December 31, 2014 | $ | 398,042 |
|
Impairment |
| (3,319 | ) |
Purchase accounting adjustments |
| 9,977 |
|
Acquisition |
| 11,110 |
|
Currency translation adjustments |
| (2,632 | ) |
Goodwill, balance as of September 30, 2015 | $ | 413,178 |
|
The following table summarizes the intangible assets of the Company by major class of intangible assets and the cost, accumulated amortization, net carrying amount, and weighted average life, if applicable (in thousands):
| September 30, 2014 |
| December 31, 2013 | September 30, 2015 |
| December 31, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
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| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
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|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
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|
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|
|
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|
|
|
| Average |
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| Average |
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| Average |
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| Average |
| Gross |
|
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|
| Net |
|
| Useful |
| Gross |
|
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|
|
| Net |
|
| Useful | Gross |
|
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|
| Net |
|
| Useful |
| Gross |
|
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|
|
|
| Net |
|
| Useful | ||||||||
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life |
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life | Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life |
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life | ||||||||||||
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) |
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) | Amount |
|
| Amortization |
|
| Amount |
|
| (years) |
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) | ||||||||||||
Intangible assets subject to amortization |
|
|
|
|
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|
|
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|
|
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|
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|
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|
|
|
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|
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|
|
|
|
|
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|
|
|
|
Customer relationships and other intangibles | $ | 89,632 |
|
| $ | (41,145 | ) |
| $ | 48,487 |
|
| 17 |
| $ | 84,470 |
|
| $ | (36,232 | ) |
| $ | 48,238 |
|
| 17 | $ | 138,864 |
|
| $ | (48,659 | ) |
| $ | 90,205 |
|
| 16 |
| $ | 125,761 |
|
| $ | (41,123 | ) |
| $ | 84,638 |
|
| 16 |
Non-compete agreements |
| 4,679 |
|
|
| (2,108 | ) |
|
| 2,571 |
|
| 4 |
|
| 4,700 |
|
|
| (1,952 | ) |
|
| 2,748 |
|
| 4 |
| 4,650 |
|
|
| (3,260 | ) |
|
| 1,390 |
|
| 4 |
|
| 4,672 |
|
|
| (2,364 | ) |
|
| 2,308 |
|
| 4 |
Trademarks |
| 10,433 |
|
|
| (1,292 | ) |
|
| 9,141 |
|
| 14 |
|
| 2,890 |
|
|
| (674 | ) |
|
| 2,216 |
|
| 5 |
| 12,833 |
|
|
| (3,268 | ) |
|
| 9,565 |
|
| 14 |
|
| 14,428 |
|
|
| (1,716 | ) |
|
| 12,712 |
|
| 13 |
Total | $ | 104,744 |
|
| $ | (44,545 | ) |
| $ | 60,199 |
|
|
|
| $ | 92,060 |
|
| $ | (38,858 | ) |
| $ | 53,202 |
|
|
| $ | 156,347 |
|
| $ | (55,187 | ) |
| $ | 101,160 |
|
|
|
| $ | 144,861 |
|
| $ | (45,203 | ) |
| $ | 99,658 |
|
|
|
Intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
| 12,300 |
|
|
| - |
|
|
| 12,300 |
|
| n/a |
|
| 12,300 |
|
| - |
|
|
| 12,300 |
|
| n/a |
| 1,600 |
|
|
| - |
|
|
| 1,600 |
|
| n/a |
|
| 12,300 |
|
|
| - |
|
|
| 12,300 |
|
| n/a | |
Total | $ | 117,044 |
|
| $ | (44,545 | ) |
| $ | 72,499 |
|
|
|
| $ | 104,360 |
|
| $ | (38,858 | ) |
| $ | 65,502 |
|
|
| $ | 157,947 |
|
| $ | (55,187 | ) |
| $ | 102,760 |
|
|
|
| $ | 157,161 |
|
| $ | (45,203 | ) |
| $ | 111,958 |
|
|
|
Based upon14
In the preliminary purchase price allocation for the acquisitionfirst quarter of CPO,2015, the Company has recorded $5.2a pre-tax non-cash impairment charge of $10.2 million to write-down the trademarks of customer relationshipsORS Nasco and certain OKI brands to their fair value related to the corporate name change that was effective June 1, 2015. This impairment charge was recorded in “warehousing, marketing and administrative expenses.” The Company utilized the discounted cash flow method to determine the fair value of these trademarks based upon management’s current forecasted future revenues from the trademarks. The trademarks had a total value of $0.5 million at September 30, 2015.
The following table summarizes the amortization expense to be amortizedincurred in 2015 and over a period of 3the next four years and a $7.6 million trademark to be amortized over a period of 15 years. See Note 1 “Basis of Presentation” for further discussion of the acquisition.on intangible assets (in thousands):
10
Year |
| Amount |
| |
2015 |
| $ | 15,156 |
|
2016 |
|
| 13,113 |
|
2017 |
|
| 10,956 |
|
2018 |
|
| 8,088 |
|
2019 |
|
| 6,953 |
|
5.7. Accumulated Other Comprehensive Income (Loss)
The change in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the period ended September 30, 2014 is2015 was as follows (amounts in thousands):
|
| Foreign Currency Translation |
|
| Cash Flow Hedges |
|
| Defined Benefit Pension Plans |
|
| Total |
|
| Foreign Currency Translation |
|
| Cash Flow Hedges |
|
| Defined Benefit Pension Plans |
|
| Total |
| ||||||||
AOCI, balance as of December 31, 2013 |
| $ | (6,661 | ) |
| $ | 871 |
|
| $ | (34,098 | ) |
| $ | (39,888 | ) | ||||||||||||||||
AOCI, balance as of December 31, 2014 |
| $ | (11,923 | ) |
| $ | 274 |
|
| $ | (51,142 | ) |
| $ | (62,791 | ) | ||||||||||||||||
Other comprehensive (loss) income before reclassifications |
|
| (1,378 | ) |
|
| (573 | ) |
| — |
|
|
| (1,951 | ) |
|
| (8,056 | ) |
|
| (1,291 | ) |
|
| - |
|
|
| (9,347 | ) | |
Amounts reclassified from AOCI |
| — |
|
|
| 234 |
|
|
| 1,767 |
|
|
| 2,001 |
|
|
| 11,132 |
|
|
| 655 |
|
|
| 2,831 |
|
|
| 14,618 |
| |
Net other comprehensive (loss) income |
|
| (1,378 | ) |
|
| (339 | ) |
|
| 1,767 |
|
|
| 50 |
|
|
| 3,076 |
|
|
| (636 | ) |
|
| 2,831 |
|
|
| 5,271 |
|
AOCI, balance as of September 30, 2014 |
| $ | (8,039 | ) |
| $ | 532 |
|
| $ | (32,331 | ) |
| $ | (39,838 | ) | ||||||||||||||||
AOCI, balance as of September 30, 2015 |
| $ | (8,847 | ) |
| $ | (362 | ) |
| $ | (48,311 | ) |
| $ | (57,520 | ) |
The following table details the amounts reclassified out of AOCI into the income statement during the three-month and nine-month periods ending September 30, 20142015, respectively (in thousands):
|
| Amount Reclassified From AOCI |
|
|
| |||||
|
| For the Three |
|
| For the Nine |
|
|
| ||
|
| Months Ended |
|
| Months Ended |
|
|
| ||
|
| September 30, |
|
| September 30, |
|
| Affected Line Item In The Statement | ||
Details About AOCI Components |
| 2014 |
|
| 2014 |
|
| Where Net Income is Presented | ||
Gain on interest rate swap cash flow hedges, before tax |
| $ | 339 |
|
| $ | 376 |
|
| Interest expense, net |
|
|
| (128 | ) |
|
| (142 | ) |
| Tax provision |
|
| $ | 211 |
|
| $ | 234 |
|
| Net of tax |
Amortization of defined benefit pension plan items: |
|
|
|
|
|
|
|
|
|
|
Prior service cost and unrecognized loss |
| $ | 992 |
|
| $ | 2,892 |
|
| Warehousing, marketing and administrative expenses |
|
|
| (386 | ) |
|
| (1,125 | ) |
| Tax provision |
|
|
| 606 |
|
|
| 1,767 |
|
| Net of tax |
Total reclassifications for the period |
| $ | 817 |
|
| $ | 2,001 |
|
| Net of tax |
|
| Amount Reclassified From AOCI |
|
|
| |||||
|
| For the Three |
|
| For the Nine |
|
|
| ||
|
| Months Ended |
|
| Months Ended |
|
|
| ||
|
| September 30, |
|
| September 30, |
|
| Affected Line Item In The Statement | ||
Details About AOCI Components |
| 2015 |
|
| 2015 |
|
| Where Net Income is Presented | ||
Realized and unrealized gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
|
|
|
Gain (loss) on interest rate swap, before tax |
| $ | 349 |
|
| $ | 1,052 |
|
| Interest expense, net |
Gain on foreign exchange hedge, before tax |
|
| 4 |
|
|
| 4 |
|
| Cost of goods sold |
|
|
| (134 | ) |
|
| (401 | ) |
| Tax provision |
|
| $ | 219 |
|
| $ | 655 |
|
| Net of tax |
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
Disposition of Azerty de Mexico |
| $ | 11,132 |
|
| $ | 11,132 |
|
| Warehousing, marketing and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan items |
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost and unrecognized loss |
| $ | 1,573 |
|
| $ | 4,623 |
|
| Warehousing, marketing and administrative expenses |
|
|
| (610 | ) |
|
| (1,792 | ) |
| Tax provision |
|
|
| 963 |
|
|
| 2,831 |
|
| Net of tax |
Total reclassifications for the period, net of tax |
| $ | 12,314 |
|
| $ | 14,618 |
|
|
|
1115
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if dilutive securities were exercised into common stock. Stock options, restricted stock, restricted stock units and deferred stock units are considered dilutive securities. For the three-month periodsperiod ending September 30, 2014 and 2013, 0.5 million and 0.62015, 0.4 million shares of such securities respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. For the nine-month period ending September 30, 2015, no shares of securities were excluded from the computation. For the three-month and nine-month periods ending September 30, 2014, and 2013, 0.5 million and 0.7 million shares of such securities, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
| For the Three Months Ended |
|
| For the Nine Months Ended |
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
| September 30, |
|
| September 30, |
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 38,169 |
|
| $ | 40,501 |
|
| $ | 93,357 |
|
| $ | 89,045 |
| $ | 27,667 |
|
| $ | 40,231 |
|
| $ | 51,492 |
|
| $ | 90,045 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted average shares |
| 38,450 |
|
|
| 39,468 |
|
|
| 38,817 |
|
|
| 39,732 |
|
| 37,300 |
|
|
| 38,450 |
|
|
| 37,724 |
|
|
| 38,817 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and restricted units |
| 434 |
|
|
| 563 |
|
|
| 427 |
|
|
| 599 |
| |||||||||||||||
Employee stock options and restricted stock |
| 308 |
|
|
| 434 |
|
|
| 385 |
|
|
| 427 |
| |||||||||||||||
Denominator for diluted earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares and the effect of dilutive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
securities |
| 38,884 |
|
|
| 40,031 |
|
|
| 39,244 |
|
|
| 40,331 |
| |||||||||||||||
Adjusted weighted average shares and the effect of dilutive securities |
| 37,608 |
|
|
| 38,884 |
|
|
| 38,109 |
|
|
| 39,244 |
| |||||||||||||||
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic | $ | 0.99 |
|
| $ | 1.03 |
|
| $ | 2.41 |
|
| $ | 2.24 |
| $ | 0.74 |
|
| $ | 1.05 |
|
| $ | 1.36 |
|
| $ | 2.32 |
|
Net income per share - diluted | $ | 0.98 |
|
| $ | 1.01 |
|
| $ | 2.38 |
|
| $ | 2.21 |
| $ | 0.74 |
|
| $ | 1.03 |
|
| $ | 1.35 |
|
| $ | 2.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Repurchases
As of December 31, 2013,2014, the Company had Board authorization to repurchase $93.0$42.4 million of USIcommon stock. In February 2015, the Board of Directors authorized the Company to purchase an additional $100.0 million of common stock. During the three-month periods ended September 30, 20142015 and 2013,2014, the Company repurchased 283,283744,081 and 166,570283,283 shares of USI’sthe Company’s common stock at an aggregate cost of $11.4$25.9 million and $6.5$11.4 million, respectively. During the nine-month periods ended September 30, 20142015 and 2013,2014, the Company repurchased 1,074,5741,525,222 and 1,353,0201,074,574 shares of USI’sthe Company’s common stock at an aggregate cost of $43.0$57.4 million and $47.5$43.0 million, respectively. Depending on market and business conditions and other factors, the Company may continue or suspend purchasing its common stock at any time without notice. Acquired shares are included in the issued shares of the Company and treasury stock, but are not included in average shares outstanding when calculating earnings per share data. During the first nine months of 20142015 and 2013,2014, the Company reissued 225,783369,591 and 1,014,554225,783 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.
12
7.9. Debt
USIESND is a holding company and, as a result, its primary sources of funds are cash generated from operating activities of its direct operating subsidiary, USSC,Essendant Co., and from borrowings by USSC.Essendant Co. The 2013 Credit Agreement, the 2013 Note Purchase Agreement, the 2007 Note Purchase Agreement, and the Receivables Securitization Program (each as defined in Note 9 of the Company’s Form 10-K for the year ended December 31, 2013) contain restrictions on the use of2014) restrict Essendant Co.’s ability to transfer cash transferred from USSC to USI.ESND.
Debt consisted of the following amounts (in millions):
| As of |
|
| As of |
| As of |
|
| As of |
| ||||
| September 30, 2014 |
|
| December 31, 2013 |
| September 30, 2015 |
|
| December 31, 2014 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Credit Agreement | $ | 195.0 |
|
| $ | 206.8 |
| $ | 318.5 |
|
| $ | 363.0 |
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
| - |
|
| 150.0 |
|
|
| 150.0 |
|
2007 Note Purchase Agreement |
| - |
|
|
| 135.0 |
| |||||||
Receivables Securitization Program |
| 200.0 |
|
|
| 190.7 |
|
| 200.0 |
|
|
| 200.0 |
|
Mortgage & Capital Lease |
| 0.9 |
|
|
| 1.2 |
|
| 0.1 |
|
|
| 0.9 |
|
Transaction Costs |
| (2.4 | ) |
|
| (3.1 | ) | |||||||
Total | $ | 545.9 |
|
| $ | 533.7 |
| $ | 666.2 |
|
| $ | 710.8 |
|
16
As of September 30, 2014, 72.4%2015, 77.6% of the Company’s outstanding debt, excluding capital leases isand transaction costs, was priced at variable interest rates based primarily on the applicable bank prime rate or London InterBank Offered Rate (“LIBOR”).
Pursuant to the 2013 Note Purchase Agreement, on January 15, 2014 USSC issued an aggregate of $150 million of senior secured notes due January 15, 2021 (the “2014 Notes”). USSC used the proceeds from the sale of the 2014 Notes to repay the Series 2007-A Notes issued under the 2007 Note Purchase Agreement and to reduce the borrowings under the 2013 Credit Agreement. The parties to the 2007 Note Purchase Agreement have satisfied their obligations under that agreement. The Company will not issue any new debt under the 2007 Note Purchase Agreement.
The Company had outstanding letters of credit of $11.1 million under the 2013 Credit Agreement as of September 30, 20142015 and December 31, 2013.2014.
Borrowings under the 2013 Credit Agreement bear interest at LIBOR for specified interest periods or at the Alternate Base Rate (as defined in the 2013 Credit Agreement), plus, in each case, a margin determined based on the Company’s permitted debt to EBITDA ratio calculated as provided in Section 6.20 of the 2013 Credit Agreement (the “Leverage Ratio”). Depending on the Company’s Leverage Ratio, the margin on LIBOR-based loans ranges from 1.00% to 2.00% and on Alternate Base Rate loans ranges from 0% to 1.00%. As of September 30, 2014,2015, the applicable margin for LIBOR-based loans was 1.25%1.375% and for Alternate Base Rate loans was 0.25%0.375%. USSCEssendant Co. is required to pay the lenders a fee on the unutilized portion of the commitments under the 2013 Credit Agreement at a rate per annum between 0.15% and 0.35%, depending on the Company’s Leverage Ratio.
On June 26, 2015, the Company and its subsidiaries Essendant Co., Essendant Financial Services LLC (“EFS") and Essendant Receivables LLC ("ESR") entered into a Third Omnibus Amendment to Transaction Documents (the “Omnibus Amendment”) with The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch ("BTMU") and PNC Bank, National Association (“PNC Bank”). The Omnibus Agreement amended the transaction documents of the Receivable Securitization Program to reflect rebranded legal entity names. On June 29, 2015, Lagasse, LLC, a subsidiary of Essendant Co. merged into Essendant Co. All accounts receivable originated by Lagasse prior to the merger are excluded from the Program. The Omnibus Agreement amended the Transaction Documents to also exclude “Excluded Receivables” from the Receivables Securitization Program, which are defined as “any receivable which, at the time of such Receivable’s origination, was processed on the [enterprise resource planning system previously used by Lagasse, LLC].”
As of September 30, 20142015 and December 31, 2013, $427.62014, $414.2 million and $355.4$360.3 million, respectively, of receivables had been sold to the Investors (as defined in Note 9 of the Company’s Form 10-K for the year ended December 31, 2013)2014). As of September 30, 2014, United Stationers Receivables, LLC (“USR”)ESR had $200.0 million outstanding under the Receivables Securitization Program. AsProgram as of September 30, 2015 and December 31, 2013, USR had $190.7 million outstanding under the Receivables Securitization Program.2014.
For additional information about the 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program, see Note 9 of the Company’s Form 10-K for the year ended December 31, 2013.2014.
13
8.10. Pension and Post-Retirement Benefit Plans
The Company maintains pension plans covering union and certain non-union employees. For more information on the Company’s retirement plans, see Note 11 to the Company’s Consolidated Financial Statements in the Form 10-K for the year ended December 31, 2013.2014. A summary of net periodic pension cost related to the Company’s pension plans for the three and nine months ended September 30, 2015 and 2014 and 2013 iswas as follows (dollars in thousands):
| Pension Benefits |
| ||||||||||||||||||||||||||||
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||||||||||||
| 2014 |
|
| 2013 |
|
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||||||
Service cost - benefit earned during the period | $ | 147 |
|
| $ | 304 |
|
| $ | 802 |
|
| $ | 911 |
| $ | 321 |
|
| $ | 147 |
|
| $ | 1,121 |
|
| $ | 802 |
|
Interest cost on projected benefit obligation |
| 2,235 |
|
|
| 2,097 |
|
|
| 6,720 |
|
|
| 6,292 |
|
| 2,208 |
|
|
| 2,235 |
|
|
| 6,748 |
|
|
| 6,720 |
|
Expected return on plan assets |
| (2,599 | ) |
|
| (2,842 | ) |
|
| (7,714 | ) |
|
| (8,525 | ) |
| (2,803 | ) |
|
| (2,599 | ) |
|
| (8,413 | ) |
|
| (7,714 | ) |
Amortization of prior service cost |
| 47 |
|
|
| 48 |
|
|
| 137 |
|
|
| 143 |
|
| 72 |
|
|
| 47 |
|
|
| 222 |
|
|
| 137 |
|
Amortization of actuarial loss |
| 945 |
|
|
| 1,577 |
|
|
| 2,755 |
|
|
| 4,731 |
|
| 1,501 |
|
|
| 945 |
|
|
| 4,401 |
|
|
| 2,755 |
|
Net periodic pension cost | $ | 775 |
|
| $ | 1,184 |
|
| $ | 2,700 |
|
| $ | 3,552 |
| $ | 1,299 |
|
| $ | 775 |
|
| $ | 4,079 |
|
| $ | 2,700 |
|
The Company made cash contributions of $2.0 million and $13.0 million to its pension plans during each of the first nine monthsmonth periods ended September 30, 20142015 and 2013, respectively.2014. Additional contributions, if any, for 20142015 have not yet been determined. As of September 30, 20142015 and December 31, 2013,2014, respectively, the Company had accrued $18.6$47.8 million and $20.8$50.3 million of pension liability within “Other Long-Term Liabilities”long-term liabilities” on the Condensed Consolidated Balance Sheets.
Defined Contribution Plan
The Company has defined contribution plans covering certain salaried associates and non-union hourly paid associates (the “Plan”). The Plan permits associates to defer a portion of their pre-tax and after-tax salary as contributions to the Plan. The Plan also provides for Company-funded discretionary contributions as well as matching associates’ salary deferral contributions, at the discretion of the Board of Directors. The Company recorded expense of $1.4$1.5 million and $4.2$4.4 million for the Company match of employee contributions to the Plan for the three and nine months ended September 30, 2014.2015. During the same periods last year, the Company recorded expense of $1.3$1.4 million and $4.2 million to match employee contributions.
1417
9.11. Derivative Financial Instruments
Interest rate movements create a degreeThe Company selectively uses derivative financial instruments to reduce its exposure to changes in interest rates and foreign currency exchange rates. Under Company policy, the Company does not enter into derivative financial instruments for trading or speculative purposes. A description of risk toeach type of derivative utilized by the Company’s operations by affecting the amount of interest payments. Interest rate swap agreements are usedCompany to manage risk is included in the Company’s exposure to interest rate changes. following paragraphs.
The Company designates its floating-to-fixedselectively uses interest rate swaps as cash flow hedges ofto reduce market risk associated with changes in interest rates for its debt arrangements. In July 2012, the variability of future cash flows at the inception of the swap contract to support hedge accounting.
USSC hasCompany entered into various separate swap transactions to mitigate USSC’s floating rate risk on the noted aggregate notional amount of LIBOR-based an interest rate risk noted in the table below. These swap transactions occurred as follows:
|
|
|
|
|
|
As of September 30, 2014, approximately 27.5% ($150.0 million)to convert a portion of the Company’s current outstandingfloating-rate debt had its interest payments designated as hedged forecasted transactions.
The Company’s outstanding swap transaction is accounted for asto a cash flow hedge and is recorded atfixed-rate basis. The fair value onis determined by using quoted market forward rates (level 2 inputs) and reflect the Condensed Consolidated Balance Sheet as of September 30, 2014 and December 31, 2013, at the following amounts (in thousands):
| Notional |
|
|
|
|
|
|
|
|
|
| Fair Value Net |
| ||
As of September 30, 2014 | Amount |
|
| Receive |
| Pay |
|
| Maturity Date |
| Asset (1) |
| |||
July 2012 Swap Transaction | $ | 150,000 |
|
| Floating 1-month LIBOR |
|
| 1.05% |
|
| July 18, 2017 |
| $ | 138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notional |
|
|
|
|
|
|
|
|
|
| Fair Value Net |
| ||
As of December 31, 2013 | Amount |
|
| Receive |
| Pay |
|
| Maturity Date |
| Asset (1) |
| |||
July 2012 Swap Transaction | $ | 150,000 |
|
| Floating 1-month LIBOR |
|
| 1.05% |
|
| July 18, 2017 |
| $ | 599 |
|
|
|
Under the terms of the July 2012 Swap Transaction, USSC will be required to make monthly fixed rate payments toamount that the counterparty calculated based onCompany would pay for contracts involving the same notional amounts notedand maturity dates. The changes in the table above at a fixed rate also noted in the table above, while the counterparty will be obligated to make monthly floating rate payments to USSC based on the one-month LIBOR on the same referenced notional amount.
The hedged transactions described above qualify as cash flow hedges in accordance with accounting guidance on derivative instruments. This guidance requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The Company does not offset fair value amounts recognized for interest rate swaps executed with the same counterparty.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivativethis instrument is reported as a component of other comprehensive incomein AOCI and reclassified into earnings in the same financial statement line item associated with the forecasted transactionand in the same period or periods during which the related interest payments on the hedged transaction affectsdebt affect earnings.
In connection with This swap matures in July 2017.As of September 30, 2015 and December 31, 2014, the pricingfair value of the 2013 Note Purchase AgreementCompany's interest rate swap included in the Company terminated the June 2013 Swap Transaction. The gain of $0.9 million realized by the Company on the termination has been recordedCompany’s Condensed Consolidated Balance Sheet as a component of Other Comprehensive Income“Other long-term liabilities” was $1.3 million and $0.3 million respectively.
During the third quarter of 2015, the Company implemented a foreign currency cash flow hedge program in order to manage the volatility in exchange rates and the related impacts on the Company’s consolidated balance sheet asoperations of December 31, 2013its Canadian functional currency subsidiaries. The Company uses foreign currency exchange contracts to hedge certain of its foreign exchange rate exposures related to inventory purchases. The Company has currently hedged approximately 50%, or $5.6 million, of its Canadian subsidiaries’ US dollar denominated inventory purchases for the next two quarters. The fair value is determined by using quoted market spot rates (level 2 inputs). The changes in fair value of ASC 815 designated hedges are reported in AOCI and will be reclassified into earnings overin the term ofsame financial statement line item and in the 2014 Notes. Duringsame periods during which the nine-month period ending September 30, 2014, the Company recognized $0.1 million into earnings from AOCI.
15
This swap reduces the exposure to variability in interest rates between the date the Company entered into the hedgerelated inventory is sold and the date the Company priced the 2014 Notes.
The July 2012 Swap Transaction effectively converts a portion of the Company’s future floating-rate debt to a fixed-rate basis. This swap transaction reduces the impact of interest rate changes on future interest expense. By using such derivative financial instruments, the Company exposes itself to credit risk and market risk. Credit risk is the risk that the counterparty to the interest rate swap (as noted above) will fail to perform under the terms of the agreement. The Company attempts to minimize the credit risk in these agreements by only entering into transactions with counterparties the Company determines are creditworthy. The market risk is the adverse effect on the value of a derivative financial instrument that results from a change in interest rates.
The Company’s agreement with its derivative counterparty provides that if an event of default occurs on any Company debt of $25 million or more, the counterparty can terminate the swap agreement. If an event of default had occurred and the counterparty had exercised early termination right under the outstanding swap transaction asaffects earnings. As of September 30, 2014,2015, the Company would have been required to pay the aggregate fair value net asset of $0.1 million plus accrued interest tothese cash flow hedges were included in the counterparty.
The swap transaction that was in effect as of September 30, 2014 and the swap transaction that was in effect as of September 30, 2013 contained no ineffectiveness; therefore, all gains or losses on those derivative instruments were reportedCompany’s Condensed Consolidated Balance Sheet as a component of other comprehensive income (“OCI”) and reclassified into earnings as “interest expense” in the same period or periods during which they affected earnings.“Other current assets” totaling $0.1 million.
The following table depicts the effect of these derivative instruments on the statements of income and comprehensive income for the three and nine month periodsmonths ended September 30, 20142015 and September 30, 20132014 (in thousands).
| Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |
|
|
|
| Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| ||||||||||
| For the Three Months Ended September 30, 2014 |
|
| For the Nine Months Ended September 30, 2014 |
|
| Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| For the Three Months Ended September 30, 2014 |
|
| For the Nine Months Ended September 30, 2014 |
| ||||
July 2012 Swap Transaction | $ | 748 |
|
| $ | (1 | ) |
| Interest expense, net |
| $ | 281 |
|
| $ | 281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |
|
|
|
| Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| ||||||||||
| For the Three Months Ended September 30, 2013 |
|
| For the Nine Months Ended September 30, 2013 |
|
| Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| For the Three Months Ended September 30, 2013 |
|
| For the Nine Months Ended September 30, 2013 |
| ||||
November 2007 Swap Transaction | $ | - |
|
| $ | (77 | ) |
| Interest expense, net |
| $ | - |
|
| $ | (228 | ) |
July 2012 Swap Transaction |
| (574 | ) |
|
| 878 |
|
| Interest expense, net |
|
| - |
|
|
| - |
|
June 2013 Swap Transaction |
| (578 | ) |
|
| 1,121 |
|
| Interest expense, net |
|
| - |
|
|
| - |
|
| Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |
|
|
|
| Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| ||||||||||
Derivatives in ASC 815 Cash Flow Hedging Relationships | For the Three Months Ended September 30, 2015 |
|
| For the Nine Months Ended September 30, 2015 |
|
| Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| For the Three Months Ended September 30, 2015 |
|
| For the Nine Months Ended September 30, 2015 |
| ||||
Interest Rate Swap | $ | 86 |
|
| $ | 361 |
|
| Interest expense, net |
| $ | 329 |
|
| $ | 991 |
|
Foreign Exchange Hedges |
| 55 |
|
|
| 55 |
|
| Cost of goods sold |
|
| 4 |
|
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 Cash Flow Hedging Relationships | For the Three Months Ended September 30, 2014 |
|
| For the Nine Months Ended September 30, 2014 |
|
| Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| For the Three Months Ended September 30, 2014 |
|
| For the Nine Months Ended September 30, 2014 |
| ||||
Interest Rate Swap | $ | 748 |
|
| $ | (1 | ) |
| Interest expense, net |
| $ | 281 |
|
| $ | 281 |
|
16
10.12. Fair Value Measurements
The Company measures certain financial assets and liabilities, including interest rate swap and foreign currency derivatives, at fair value on a recurring basis, including interest rate swap derivatives, based on the mark-to-market positionmarket rates of the Company’s positions and other observable interest rates (see Note 911 “Derivative Financial Instruments”, for more information on these interest rate swaps)swaps and foreign currency derivatives).
Accounting guidance on fair value establishes a hierarchy for those instruments measured at fair value which distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
· | Level 1—Quoted market prices in active markets for identical assets or liabilities; |
· | Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable; and |
· | Level 3—Unobservable inputs developed using estimates and assumptions developed by the Company which reflect those that a market participant would use. |
18
Determining which level to apply to an asset or liability requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value in the accompanying Condensed Consolidated Balance Sheets as of September 30, 20142015 and December 31, 20132014 (in thousands):
| Fair Value Measurements as of September 30, 2014 |
| Fair Value Measurements as of September 30, 2015 |
| ||||||||||||||||||||||||||
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| ||||||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap asset | $ | 138 |
|
| $ | - |
|
| $ | 138 |
|
| $ | - |
| |||||||||||||||
Foreign exchange hedge | $ | 50 |
|
| $ | - |
|
| $ | 50 |
|
| $ | - |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Interest rate swap liability | $ | 1,260 |
|
| $ | - |
|
| $ | 1,260 |
|
| $ | - |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements as of December 31, 2013 |
| Fair Value Measurements as of December 31, 2014 |
| ||||||||||||||||||||||||||
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| ||||||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Interest rate swap asset | $ | 599 |
|
| $ | - |
|
| $ | 599 |
|
| $ | - |
| |||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Interest rate swap liability | $ | 253 |
|
| $ | - |
|
| $ | 253 |
|
| $ | - |
|
The carrying amount of accounts receivable at September 30, 2014,2015, including $427.6$414.2 million of receivables sold under the Receivables Securitization Program, approximates fair value because of the short-term nature of this item.
Accounting guidance on fair value measurements requires separate disclosure of assets and liabilities measured at fair value on a recurring basis, as noted above, from those measured at fair value on a nonrecurring basis. As of September 30, 2014, noNo assets or liabilities arewere measured at fair value on a nonrecurring basis.
11.13. Other Assets and Liabilities
The Company had receivablesReceivables related to supplier allowances totaling $95.4$102.4 million and $103.2$124.4 million were included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of September 30, 20142015 and December 31, 2013,2014, respectively.
Accrued customer rebates of $57.4$60.9 million and $52.6$63.2 million as of September 30, 20142015 and December 31, 2013,2014, respectively, were included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.
In December 2014, the Company sold its software solutions subsidiary in exchange for a combination of cash and convertible and non-convertible notes (the “Notes”). Based upon a financial analysis that included information available through the end of the third quarter, the Company determined it was probable, within the scope of ASC 450-20-25-2(a) Contingencies, that the Company will not be able to collect any of the amounts due according to the contractual terms of the Notes or the other receivables from the acquirer. The loss was estimable at the book value of the Notes and other receivables as of September 30, 2015. As such, the Company fully impaired the assets and recorded a loss of $10.7 million in the third quarter of 2015 within “Warehousing, marketing and administrative expenses” in the Condensed Consolidated Statements of Income. As of December 31, 2014, the value of the Notes and other receivables totaled $10.6 million.
19
17The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items.
For the three and nine months ended September 30, 2015, the Company recorded income tax expense of $20.0 million and $42.6 million on pre-tax income of $47.7 million and $94.1 million, for an effective tax rate of 42.0% and 45.3%, respectively. For the three months and nine months ended September 30, 2014, the Company recorded income tax expense of $23.6 million and $53.3 million on pre-tax income of $63.9 million and $143.4 million, respectively, for an effective tax rate of 37.0% and 37.2%, respectively.
The Company's U.S. statutory rate is 35.0%. The most significant factors impacting the effective tax rate for the three and nine months ended September 30, 2015 were the discrete tax impacts of the impairment charges and the establishment of a valuation allowance on a capital loss asset for financial reporting purposes related to selling a non-strategic business in the third quarter. There were no significant discrete items for the three and nine months ended September 30, 2014.
15. Legal Matters
The Company has been named as a defendant in an action filed before the United States District Court for the Central District of California on May 1, 2015. The complaint alleges that the Company sent unsolicited fax advertisements to two named plaintiffs, as well as thousands of other persons and entities, in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 ("TCPA"). After filing the complaint, the plaintiff filed a motion asking the Court to certify a class of plaintiffs comprised of persons and entities who allegedly received fax advertisements from the Company. Under the TCPA, recipients of unsolicited fax advertisements can seek damages of $500 per fax for inadvertent violations and up to $1,500 per fax for knowing and willful violations. Other reported TCPA lawsuits have resulted in a broad range of outcomes, with each case being dependent on its own unique set of facts and circumstances. The Company is vigorously contesting class certification and liability. Litigation of this kind, however, is likely to lead to settlement negotiations, including negotiations prompted by pre-trial civil court procedures. Regardless of whether the litigation is resolved at trial or through settlement, the Company believes that a loss associated with resolution of pending claims is probable. However, the amount of any such loss, which could be material, cannot be reasonably estimated because the Company is continuing to evaluate its defenses based on its internal review and investigation of prior events, new information and future circumstances.
The Company is also involved in other legal proceedings arising in the ordinary course of or incidental to its business. The Company has established reserves, which are not material, for potential losses that are probable and reasonably estimable that may result from those proceedings. In many cases, however, it is difficult to determine whether a loss is probable or even possible or to estimate the amount or range of potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated. The Company believes that such ordinary course legal proceedings will be resolved with no material adverse effect upon its financial condition or results of operations.
20
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements often contain words such as “expects,” “anticipates,” “estimates,” “intends,” “plans,” “believes,” “seeks,” “will,” “is likely,” “scheduled,” “positioned to,” “continue,” “forecast,” “predicting,” “projection,” “potential” or similar expressions. Forward-looking statements include references to goals, plans, strategies, objectives, projected costs or savings, anticipated future performance, results or events and other statements that are not strictly historical in nature. These forward-looking statements are based on management’s current expectations, forecasts and assumptions. This means they involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied here. These risks and uncertainties include, without limitation, those set forth in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2013.2014.
Readers should not place undue reliance on forward-looking statements contained in this Quarterly Report on Form 10-Q. The forward-looking information herein is given as of this date only, and the Company undertakes no obligation to revise or update it.
Company BackgroundOverview
Essendant Inc. (formerly known as United Stationers Inc.) is a leading supplier of businessworkplace essentials, with 20132014 net sales of approximately $5.1$5.3 billion. UnitedEssendant Inc. stocks over 140,000160,000 items from over 1,600 manufacturers. These items include a broad spectrum of manufacturer-branded and private brandbranded technology products, traditional office products, office furniture, janitorial and breakroom supplies, and industrial supplies. UnitedEssendant sells its products through a network of 6579 distribution centers to its approximately 25,00030,000 reseller customers, who in turn sell directly to end-consumers. The Company’s customers include independent office products dealers; contract stationers; office products superstores; computer products resellers; office furniture dealers; mass merchandisers; mail order companies; sanitary supply, paper and foodservice distributors; drug and grocery store chains; healthcare distributors; e-commerce merchants; oil field, welding supply and industrial/MRO distributors; and other independent distributors. Additionally, newly acquired CPO Commerce, LLC (“CPO”) is an e-retailer of brand name power tools and equipment who sells directly to end consumers.
OverviewOur strategy is comprised of Strategy, three key elements:
1) Strengthen our core office, janitorial, and breakroom business;
2) Win online by growing our business-to-business (B2B) sales with major e-commerce players and by enabling the online success of our resellers by providing digital capabilities and tools to support them; and
3) Expand and diversify our business into channels and categories that leverage our common platform which includes the IT systems, distribution network, data infrastructure, digital expertise and functional capabilities in merchandising, sales and operations.
Execution on these priorities will help us achieve our goal of becoming the fastest and most convenient solution for workplace essentials.
Key Trends and Recent Results
The following is a summary of selected trends, events or uncertainties that the Company believes may have a significant impact on its future performance.
Third Quarter Results
· |
|
· | The gross margin rate in the third quarter of 2015 was 16.2%, compared to the prior-year quarter gross margin rate of 15.3%. Gross profit for the third quarter of 2015 was $225.1 million, compared to $216.7 million in the third quarter of 2014. |
· | Operating expenses in the third quarter of 2015 were $172.2 million or 12.4% of sales, compared with $148.8 million or 10.5% of sales in the prior-year quarter. Excluding the impacts of the $0.5 million pre-tax charge for accelerated amortization related to intangible assets impaired in the first quarter of 2015, $0.2 million pretax charge related to facility consolidations, $2.1 million pre-tax charge related to exiting our non-strategic business in Mexico, and $10.7 million impairment of seller notes receivable relating to the company’s prior year sale of its software service subsidiary (“third quarter charges”), adjusted operating expenses were $158.6 million or 11.4% of sales. |
· | Operating income for the quarter ended September 30, 2015 was $53.0 million or 3.8% of sales, including $13.5 million of expense related to the third quarter charges. Adjusted operating income in the third quarter of 2015 was $66.5 million or 4.8% of sales, versus $67.9 million or 4.8% of sales in the third quarter of 2014. |
21
· | On July 31, 2015, we acquired 100% if the capital stock of Nestor Sales LLC (“Nestor”), a leading wholesaler and distributor of tools, equipment and supplies to the transportation industry. The purchase price was $41.8 million. Nestor’s annual sales are |
Repositioning for Sustained Success
As previously announced, we are taking decisive actions to reposition our business, provide enhanced customer service, and generate sustained long-term success. These actions are as follows:
· | Our initiative to combine the |
· |
|
· | We will exit certain non-strategic channels and categories during 2015 to further align our portfolio of product categories and channels with our strategies. During the third quarter of 2015, we |
· |
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18
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|
Fourth Quarter Cost Initiative We remain committed to our strategy and have executed well on our priorities. However, additional steps must be taken to reduce cost through management de-layering in order to achieve broader functional alignment of the organization and to counteract headwinds in the industrial and energy markets. In the fourth quarter we plan to implement new workforce reductions as we transition to a channel-based organization more closely aligned with our customers, and re-invest a portion of the expected savings to fund bringing additional businesses onto the common platform. These actions are critical to driving our goal of achieving high-single digit EPS growth beginning in 2016. |
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For a further discussion of selected trends, events or uncertainties the Company believes may have a significant impact on its future performance, readers should refer to “Key Trends and Recent Results” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2013.2014.
22
Critical Accounting Policies, Judgments and Estimates
During
Change in Method of Accounting for Inventory Valuation
In the first nine monthsthird quarter of 2014, there were no significant changes2015, the Company changed its method of inventory costing for certain inventory in its Business and Facility Essentials (formerly separately known as Supply and Lagasse) operating segment to the last-in-first-out (“LIFO”) method from the first-in-first-out (“FIFO”) accounting method. For further discussion of the Company’s critical accounting policies, judgments or estimates from those disclosedchange in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.method of inventory costing, refer to Note 2, “Change in Accounting Principles.”
19
Adjusted Operating Income, Net Income and Earnings Per Share
The following tabletables presents Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, and Adjusted Diluted Earnings Per Share for the three and nine-month periods ended September 30, 20142015 and 20132014 (in thousands, except per share data) excluding the effects of $14.4 millionthe pre-tax chargecharges related to workforce reductions and facility closures inconsolidations, intangible asset impairment charge and accelerated amortization related to rebranding efforts, an impairment of seller notes receivable related to the first quartercompany’s prior year sale of 2013.its software service provider, and a loss on sale and related costs of our Mexican subsidiary. Generally Accepted Accounting Principles require that the effects of these items be included in the Condensed Consolidated Statements of Income. Management believes that excluding these items is an appropriate comparison of its ongoing operating and to the results toof last year. It is helpful to provide readers of its financial statements with a reconciliation of these items to its Condensed Consolidated Statements of Income reported in accordance with Generally Accepted Accounting Principles.
| For the Nine Months Ended September 30, |
| For the Three Months Ended September 30, |
| ||||||||||||||||||||||||||
| 2014 |
|
| 2013 |
| 2015 |
|
| 2014 (Revised) |
| ||||||||||||||||||||
|
|
|
|
| % to |
|
|
|
|
|
| % to |
|
|
|
|
| % to |
|
|
|
|
|
| % to |
| ||||
| Amount |
|
| Net Sales |
|
| Amount |
|
| Net Sales |
| Amount |
|
| Net Sales |
|
| Amount |
|
| Net Sales |
| ||||||||
Net Sales | $ | 3,994,123 |
|
|
| 100.0 | % |
| $ | 3,861,655 |
|
|
| 100.0 | % | $ | 1,391,545 |
|
|
| 100.0 | % |
| $ | 1,419,947 |
|
|
| 100.0 | % |
Gross profit | $ | 597,571 |
|
|
| 15.0 | % |
| $ | 594,122 |
|
|
| 15.4 | % | $ | 225,143 |
|
|
| 16.2 | % |
| $ | 216,701 |
|
|
| 15.3 | % |
Operating expenses | $ | 437,595 |
|
|
| 11.0 | % |
| $ | 442,558 |
|
|
| 11.5 | % | $ | 172,159 |
|
|
| 12.4 | % |
| $ | 148,831 |
|
|
| 10.5 | % |
Workforce reduction and facility closure charge |
| - |
|
|
| 0.0 | % |
|
| (14,432 | ) |
|
| (0.4 | %) | |||||||||||||||
Workforce reduction and facility consolidation charge |
| (200 | ) |
|
| - |
|
|
| - |
|
|
| - |
| |||||||||||||||
Rebranding - intangible asset amortization |
| (511 | ) |
|
| - |
|
|
| - |
|
|
| - |
| |||||||||||||||
Notes receivable impairment |
| (10,738 | ) |
|
| (0.8 | %) |
|
|
|
|
|
|
|
| |||||||||||||||
Loss on sale of business and related costs |
| (2,072 | ) |
|
| (0.1 | %) |
|
| - |
|
|
| - |
| |||||||||||||||
Adjusted operating expenses | $ | 437,595 |
|
|
| 11.0 | % |
| $ | 428,126 |
|
|
| 11.1 | % | $ | 158,638 |
|
|
| 11.4 | % |
| $ | 148,831 |
|
|
| 10.5 | % |
Operating income | $ | 159,976 |
|
|
| 4.0 | % |
| $ | 151,564 |
|
|
| 3.9 | % | $ | 52,984 |
|
|
| 3.8 | % |
| $ | 67,870 |
|
|
| 4.8 | % |
Operating expense item noted above |
| - |
|
|
| 0.0 | % |
|
| 14,432 |
|
|
| 0.4 | % | |||||||||||||||
Operating expense items noted above |
| 13,521 |
|
|
| 1.0 | % |
|
| - |
|
|
| - |
| |||||||||||||||
Adjusted operating income | $ | 159,976 |
|
|
| 4.0 | % |
| $ | 165,996 |
|
|
| 4.3 | % | $ | 66,505 |
|
|
| 4.8 | % |
| $ | 67,870 |
|
|
| 4.8 | % |
Net income | $ | 93,357 |
|
|
|
|
|
| $ | 89,045 |
|
|
|
|
| $ | 27,667 |
|
|
|
|
|
| $ | 40,231 |
|
|
|
|
|
Operating expense item noted above, net of tax |
| - |
|
|
|
|
|
|
| 8,948 |
|
|
|
|
| |||||||||||||||
Operating expense items noted above, net of tax |
| 10,017 |
|
|
|
|
|
|
| - |
|
|
|
|
| |||||||||||||||
Adjusted net income | $ | 93,357 |
|
|
|
|
|
| $ | 97,993 |
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|
|
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| $ | 37,684 |
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|
|
|
|
| $ | 40,231 |
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|
|
|
|
Diluted earnings per share | $ | 2.38 |
|
|
|
|
|
| $ | 2.21 |
|
|
|
|
| $ | 0.74 |
|
|
|
|
|
| $ | 1.03 |
|
|
|
|
|
Per share operating expense item noted above |
| - |
|
|
|
|
|
|
| 0.22 |
|
|
|
|
| |||||||||||||||
Per share operating expense items noted above |
| 0.26 |
|
|
|
|
|
|
| - |
|
|
|
|
| |||||||||||||||
Adjusted diluted earnings per share | $ | 2.38 |
|
|
|
|
|
| $ | 2.43 |
|
|
|
|
| $ | 1.00 |
|
|
|
|
|
| $ | 1.03 |
|
|
|
|
|
Adjusted diluted earnings per share - change over the prior year period |
| (2.1 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
| (2.9 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - diluted |
| 39,244 |
|
|
|
|
|
|
| 40,331 |
|
|
|
|
|
| 37,608 |
|
|
|
|
|
|
| 38,884 |
|
|
|
|
|
23
20
| For the Nine Months Ended September 30, |
| |||||||||||||
| 2015 |
|
| 2014 (Revised) |
| ||||||||||
|
|
|
|
| % to |
|
|
|
|
|
| % to |
| ||
| Amount |
|
| Net Sales |
|
| Amount |
|
| Net Sales |
| ||||
Net Sales | $ | 4,065,719 |
|
|
| 100.0 | % |
| $ | 3,994,123 |
|
|
| 100.0 | % |
Gross profit | $ | 635,657 |
|
|
| 15.6 | % |
| $ | 593,131 |
|
|
| 14.9 | % |
Operating expenses | $ | 526,653 |
|
|
| 13.0 | % |
| $ | 438,538 |
|
|
| 11.0 | % |
Workforce reduction and facility consolidation charge |
| (6,495 | ) |
|
| (0.2 | %) |
|
| - |
|
|
| - |
|
Rebranding - intangible asset impairment and amortization |
| (11,485 | ) |
|
| (0.3 | %) |
|
| - |
|
|
| - |
|
Notes receivable impairment |
| (10,738 | ) |
|
| (0.3 | %) |
|
|
|
|
|
|
|
|
Loss on sale of business and related costs |
| (16,999 | ) |
|
| (0.4 | %) |
|
| - |
|
|
| - |
|
Adjusted operating expenses | $ | 480,936 |
|
|
| 11.8 | % |
| $ | 438,538 |
|
|
| 11.0 | % |
Operating income | $ | 109,004 |
|
|
| 2.7 | % |
| $ | 154,593 |
|
|
| 3.9 | % |
Operating expense items noted above |
| 45,717 |
|
|
| 1.1 | % |
|
| - |
|
|
| - |
|
Adjusted operating income | $ | 154,721 |
|
|
| 3.8 | % |
| $ | 154,593 |
|
|
| 3.9 | % |
Net income | $ | 51,492 |
|
|
|
|
|
| $ | 90,045 |
|
|
|
|
|
Operating expense items noted above, net of tax |
| 34,854 |
|
|
|
|
|
|
| - |
|
|
|
|
|
Adjusted net income | $ | 86,346 |
|
|
|
|
|
| $ | 90,045 |
|
|
|
|
|
Diluted earnings per share | $ | 1.35 |
|
|
|
|
|
| $ | 2.29 |
|
|
|
|
|
Per share operating expense items noted above |
| 0.91 |
|
|
|
|
|
|
| - |
|
|
|
|
|
Adjusted diluted earnings per share | $ | 2.26 |
|
|
|
|
|
| $ | 2.29 |
|
|
|
|
|
Adjusted diluted earnings per share - change over the prior year period |
| (1.3 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - diluted |
| 38,109 |
|
|
|
|
|
|
| 39,244 |
|
|
|
|
|
Results of Operations—Three Months Ended September 30, 20142015 Compared with the Three Months Ended September 30, 20132014
Net Sales. Net sales for the third quarter of 20142015 were $1.42$1.39 billion. The following table summarizes net sales by product category for the three-month periods ended September 30, 20142015 and 20132014 (in thousands):
| Three Months Ended September 30, |
| Three Months Ended September 30, |
| ||||||||||
| 2014 |
|
| 2013 (1) |
| 2015 |
|
| 2014 (1) |
| ||||
Janitorial and breakroom supplies | $ | 375,454 |
|
| $ | 382,308 |
| |||||||
Technology products | $ | 381,210 |
|
| $ | 381,580 |
|
| 343,891 |
|
|
| 384,591 |
|
Janitorial and breakroom supplies |
| 386,060 |
|
|
| 344,459 |
| |||||||
Traditional office products (including cut-sheet paper) |
| 360,353 |
|
|
| 355,222 |
|
| 320,736 |
|
|
| 360,848 |
|
Industrial supplies |
| 163,514 |
|
|
| 131,462 |
|
| 223,510 |
|
|
| 162,813 |
|
Office furniture |
| 84,512 |
|
|
| 85,098 |
|
| 87,409 |
|
|
| 85,090 |
|
Freight revenue |
| 33,302 |
|
|
| 29,222 |
|
| 33,264 |
|
|
| 33,302 |
|
Services, Advertising and Other |
| 10,996 |
|
|
| 9,633 |
|
| 7,281 |
|
|
| 10,995 |
|
Total net sales | $ | 1,419,947 |
|
| $ | 1,336,676 |
| $ | 1,391,545 |
|
| $ | 1,419,947 |
|
(1) | Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications include changes to shift to a single operational item hierarchy. These changes did not impact the Condensed Consolidated Statements of Income. |
Sales in the janitorial and breakroom supplies product category decreased 1.8% in the third quarter of 2015 compared to the third quarter of 2014. This category accounted for 27.0% of the Company’s third quarter 2015 consolidated net sales. Sales increased from being named the primary supplier for Office Depot’s janitorial business and e-tail growth but was more than offset by a decline in sales to the independent dealer channel.
24
Sales in the technology products category (primarily ink and toner) decreased 10.6% from the third quarter of 2014. This category accounted for 24.7% of net sales for the third quarter of 2015. This decline is primarily attributable to the loss of business with large national customers, lower sales to the independent dealer channel, and lower sales at our Mexican subsidiary which was sold in the third quarter. These were partially offset by growth in e-tail customers.
Sales of traditional office products decreased in the third quarter of 2015 by 11.1% versus the third quarter of 2014. Traditional office supplies represented 23.0% of the Company’s consolidated net sales for the third quarter of 2015. This was driven by a decline in cut-sheet paper sales, loss of business with Office Depot and reduced demand in our independent channel. These declines were partially offset by continued growth in e-tailers and a higher government spending.
Industrial supplies sales in the third quarter of 2015 increased by 37.3% compared to the same prior-year period. Sales of industrial supplies accounted for 16.1% of the Company’s net sales for the third quarter of 2015 and reflected solid sales momentum from our acquisitions in the last 12 months, which contributed $81.2 million in incremental sales. Without the acquisitions, industrial sales declined 12.6% over the prior-year quarter. Approximately 25% of our organic industrial business is exposed to energy sector resellers which have been impacted by the decline in oil prices resulting in sales declines in our general industrial and energy channels. We expect this impact to continue throughout the year.
Office furniture sales in the third quarter of 2015 increased 2.7% compared to the third quarter of 2014. Office furniture accounted for 6.3% of the Company’s third quarter of 2015 consolidated net sales. Within this category, the loss of sales at Office Depot was mostly offset by growth in other large customers and e-tailers.
The remainder of the Company’s third quarter 2015 net sales was composed of freight and other revenues.
Gross Profit and Gross Margin Rate. Gross profit for the third quarter of 2015 was $225.1 million, compared to $216.7 million in the third quarter of 2014. The gross margin rate of 16.2% was up 92 basis points (bps) from the prior-year quarter gross margin rate of 15.3%. Our acquisitions in the last 12 months added an incremental 17 basis points to our gross margin rate in the quarter. Excluding the impact of our acquisitions, our gross margin rate benefited from a favorable product margin driven by a favorable product mix (20 bps), a decline in freight expenses (31 bps) and favorable inflation related inventory adjustments (48 bps).
Operating Expenses. Operating expenses for the third quarter were $172.2 million or 12.4% of sales, including $13.5 million related to the third quarter charges. Adjusted operating expenses were $158.6 million or 11.4% of sales compared with $148.8 million or 10.5% of sales in the same period last year. The $9.8 million increase was driven by $11.5 million of incremental expenses from acquisitions, partially offset by benefits from our first quarter restructuring actions and expense control.
Interest Expense, net. Interest expense, net for the third quarter of 2015 was $5.3 million compared to $4.0 million in the third quarter of 2014. This was driven by higher debt outstanding related to our acquisitions in the past year. Interest expense is expected to be higher in 2015 than in the prior year.
Income Taxes. Income tax expense was $20.0 million for the third quarter of 2015, compared with $23.6 million for the same period in 2014. The Company’s effective tax rate was 42.0% for the current-year quarter and 37.0% for the same period in 2014 driven by the capital loss on the sale of Azerty de Mexico which cannot be recognized at this time and carries a full valuation allowance.
Net Income. Net income for the third quarter of 2015 totaled $27.7 million or $0.74 per diluted share, including $10.0 million after-tax, or $0.26 per diluted share, of costs related to the third quarter charges. Adjusted net income was $37.7 million, or $1.00 per diluted share, compared with net income of $40.2 million or $1.03 per diluted share for the same three-month period in 2014.
25
Results of Operations—Nine Months Ended September 30, 2015 Compared with the Nine Months Ended September 30, 2014
Net Sales. Net sales for the first nine months of 2015 were $4.07 billion. The following table summarizes net sales by product category for the nine-month periods ended September 30, 2015 and 2014 (in thousands):
| Nine Months Ended September 30, |
| |||||
| 2015 (1) |
|
| 2014 (1) |
| ||
Janitorial and breakroom supplies | $ | 1,100,646 |
|
| $ | 1,068,766 |
|
Technology products |
| 1,047,558 |
|
|
| 1,109,974 |
|
Traditional office products (including cut-sheet paper) |
| 911,532 |
|
|
| 1,015,838 |
|
Industrial supplies |
| 647,689 |
|
|
| 440,751 |
|
Office furniture |
| 244,177 |
|
|
| 238,867 |
|
Freight revenue |
| 95,522 |
|
|
| 92,120 |
|
Services, Advertising and Other |
| 18,595 |
|
|
| 27,807 |
|
Total net sales | $ | 4,065,719 |
|
| $ | 3,994,123 |
|
(1) | Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications include changes between several product categories due to several specific products being reclassified to different categories. These changes did not impact the Condensed Consolidated Statements of Income. |
Sales in the technology products category (primarily ink and toner) were flat to the third quarter of 2013. This category accounted for 26.8% of net sales for the third quarter of 2014. Sales declines in this category mainly resulted from a new distribution policy by our largest product line manufacturer that limits our sales to certain authorized resellers. This negative impact was offset by sales to certain large customers during the quarter and the addition of new business.
Sales in the janitorial and breakroom supplies product category increased 12.1%3.0% in the third quarterfirst nine months of 20142015 compared to the third quarterfirst nine months of 2013.2014. This category accounted for 27.2%27.1% of the Company’s third quarter 2014first nine months of 2015 consolidated net sales. Sales growth in this category was driven by enhanced product line launches which increased breakroom sales through our traditional channels as well as 2.4% of incremental sales from being named the primary supplier for Office Depot’s janitorial business and breakroom business.
Sales of traditional office products increased in the third quarter of 2014 by 1.4% versus the third quarter of 2013. Traditional office supplies represented 25.4% of the Company’s consolidated net sales for the third quarter of 2014. Within this category, we saw continued double-digit growth in e-tailers, a rebound in government spending, and growth with certain larger customers. These weree-tail, partially offset by lower sales of cut-sheet paper and the continued effects of workplace digitization which is lowering overall consumption.
Industrial supplies salesreduced demand in the third quarter of 2014 increased by 24.4% compared to the same prior-year period. Sales of industrial supplies accounted for 11.5% of the Company’s net sales for the third quarter of 2014 and reflected solid sales momentum in the general industrial channel and double-digit growth in the safety and e-commerce channels. We also saw moderate growth in the oilfield-pipeline and welding channels. The acquisition of CPO contributed $21.9 million in incremental sales which benefited the quarterly growth rate. Without CPO, industrial sales increased 7.7% over the prior-year quarter.
Office furniture sales in the third quarter of 2014 decreased 0.7% compared to the third quarter of 2013. Office furniture accounted for 6.0% of the Company’s third quarter of 2014 consolidated net sales. Declines in this category are due to lower sales in national accounts offset by increased sales to e-commerceour independent dealer customers.
The remainder of the Company’s third quarter 2014 net sales was composed of freight and other revenues.
Gross Profit and Gross Margin Rate. Gross profit for the third quarter of 2014 was $211.0 million, compared to $203.7 million in the third quarter of 2013. The gross margin rate of 14.9% was down 37 basis points (bps) from the prior-year quarter gross margin rate of 15.2%. This decline was due primarily from higher freight costs (55 bps) and higher inventory related costs (15 bps). This decline was partially offset by favorable product margins (30 bps), which was driven by increased supplier allowances, and lower advertising expenses. CPO had a favorable impact (15 bps) on the gross margin rate in the quarter. Gross margin is expected to be volatile as we diversify and invest in the business.
Operating Expenses. Operating expenses for the third quarter were $146.6 million or 10.3% of sales, compared with $136.3 million or 10.2% of sales in the same period last year. Operating expenses were unfavorably impacted by the addition of CPO (25 bps) and increased bad debt expense (10 bps). Current quarter operating expenses were also impacted by savings from favorable capitalization
21
of purchase, storage, and handling costs (20 bps). The Company incurred approximately $0.5 million in incremental expenses in the quarter in addition to the internal resources deployed to the initiative to combine the Company’s office product and janitorial platforms.
Interest Expense, net. Interest expense, net for the third quarter of 2014 was $4.0 million compared to $2.7 million in the third quarter of 2013. This was driven by higher debt outstanding as well as the issuance of seven-year notes in January 2014, which replaced floating rate debt with long term, fixed rate debt. Interest expense is expected to be higher in 2014 than in the prior year.
Income Taxes. Income tax expense was $22.3 million for the third quarter of 2014, compared with $24.2 million for the same period in 2013. The Company’s effective tax rate was 36.9% for the current-year quarter and 37.4% for the same period in 2013. The current quarter tax rate was favorably impacted by net favorable permanent differences, a favorable federal return to provision adjustment, and a decrease in state reserves.
Net Income. Net income for the third quarter of 2014 totaled $38.2 million or $0.98 per diluted share, compared with net income of $40.5 million or $1.01 per diluted share for the same three-month period in 2013.
Results of Operations—Nine Months Ended September 30, 2014 Compared with the Nine Months Ended September 30, 2013
Net Sales. Net sales for the first nine months of 2014 were $3.99 billion. The following table summarizes net sales by product category for the nine-month periods ended September 30, 2014 and 2013 (in thousands):
| Nine Months Ended September 30, |
| |||||
| 2014 (1) |
|
| 2013 (1) |
| ||
Technology products | $ | 1,102,085 |
|
| $ | 1,120,372 |
|
Janitorial and breakroom supplies |
| 1,076,679 |
|
|
| 1,002,715 |
|
Traditional office products (including cut-sheet paper) |
| 1,016,260 |
|
|
| 999,356 |
|
Industrial supplies |
| 441,580 |
|
|
| 393,463 |
|
Office furniture |
| 237,591 |
|
|
| 239,359 |
|
Freight revenue |
| 92,120 |
|
|
| 79,896 |
|
Services, Advertising and Other |
| 27,808 |
|
|
| 26,494 |
|
Total net sales | $ | 3,994,123 |
|
| $ | 3,861,655 |
|
|
|
Sales in the technology products category (primarily ink and toner) decreased in the first nine months of 20142015 by 1.6%5.6% versus the first nine months of 2013.2014. This category which continues to represent the largest percentage of the Company’s consolidated net sales on a year to date basis, accounted for 27.6%25.8% of net sales for the first nine months of 2014.2015. Sales declines in this category were partiallydeclined due to a new distribution policy bythe loss of business with Office Depot, lower sales at our largest product line manufacturer that limitsMexican subsidiary and reduced demand in our independent dealer channel. The sales to certain authorized resellers. This negative impactdecline was partially offset by new business with certain large customers.growth in e-tailers.
Sales in the janitorial and breakroom supplies product category increased 7.4%of traditional office products decreased in the first nine months of 2014 compared to the first nine months of 2013. This category accounted for 27.0% of the Company’s first nine months of 2014 consolidated net sales. Sales growth in this category was driven2015 by gains in breakroom as we launched an enhanced product line as well as incremental sales from now being the primary supplier for Office Depot’s janitorial and breakroom business.
Sales of traditional office products increased in the first nine months of 2014 by 1.7%10.3% versus the first nine months of 2013.2014. Traditional office supplies represented 25.4%22.4% of the Company’s consolidated net sales for the first nine months of 2014. Within2015. The decline in this category higher saleswas primarily driven by the decline of cut-sheet paper continued double-digit growth in sales to e-tailers, and a rebound in government spending were partially offset by the continued effectsloss of workplace digitization which is lowering overall consumption.first call supplier status with Office Depot.
Industrial supplies sales in the first nine months of 20142015 increased by 12.2%47.0% compared to the same prior-year period. Sales of industrial suppliesperiod and accounted for 11.1%15.9% of the Company’s net sales for the first nine months of 2014. Increases in the general industrial, oilfield-pipeline and safety channels were partially offset by the continued decline in welding. CPO2015. Our acquisitions contributed $30.1$258.1 million in incremental sales which benefited the growth rate.sales. Excluding sales from CPO,acquisitions, industrial supplies sales increased 4.6%declined 11.6% over the same period last year, due to declines in our general industrial and energy channels. We expect this impact to continue throughout the year.
22
Office furniture sales in the first nine months of 2014 decreased 0.7%2015 increased 2.2% compared to the first nine months of 2013.2014. Office furniture accounted for 5.9%6.0% of the Company’s first nine months of 20142015 consolidated net sales. SalesImproved sales with a large national customer and growth in this category were down slightly duee-tail and independent resellers more than offset lost sales to lower sales in independent channel dealers and national accounts offset by growth with e-tailer customers.Office Depot.
The remainder of the Company’s first nine months of 20142015 net sales was composed of freight and other revenues.
Gross Profit and Gross Margin Rate. Gross profit for the first nine months of 20142015 was $597.6$635.7 million, compared to $594.1$593.1 million in the first nine months of 2013.2014. The gross margin rate of 15.0%15.6% was down 40up 78 basis points (bps) from the prior-year period gross margin rate of 15.4%14.9%. This declineincrease was due primarily to loweracquisitions (30 bps) and a favorable product margin (15 bps) which included a shifting product and customer mix compared to the prior-year period, offsetdriven by favorable supplierproduct mix and purchase driven inventory allowances. Gross margin was also unfavorably affected by higher freight costs (20 bps) and higher inventory-related adjustments driven by inflation (5 bps).
Operating Expenses. Operating expenses for the first nine months of 20142015 were $437.6$526.7 million or 11.0%13.0% of sales, compared with $442.6$438.5 million or 11.5%11.0% of sales in the same period last year. ExcludingThis included the $14.4impacts of a $10.7 million network optimizationimpairment of seller notes, $6.5 million related to workforce reduction and cost reductionfacility consolidations, $11.5 million charge for accelerated amortization related to intangible assets impaired in the first nine monthsquarter of 2013, adjusted2015, and $17.0 million charge related to exiting our non-strategic business in Mexico (together the “2015 charges”). Adjusted operating expenses were $428.1$480.9 million or 11.1%11.8% of sales in 2013.sales. Current period operating expenses were affected by lower employee-related expenses (15 bps) offset by investmentsacquisitions which added an incremental $40.9 million in the business.operating expenses. The Company incurred approximately $2.5$4.2 million in the first nine months of 20142015 of operating expense related to the initiative to combine the Company’s office product and janitorial platforms.
26
Interest Expense, net. Interest expense, net for the first nine months of 20142015 was $11.2$14.9 million compared to $8.7$11.2 million in the first nine months of 2013. This was driven primarily by higher borrowings in the period as well as the issuance of seven-year notes in January 2014 which replaced floating rate debt with long-term, fixed rate debt.2014.
Income Taxes. Income tax expense was $55.4$42.6 million for the first nine months of 2014,2015, compared with $53.8$53.3 million for the same period in 2013.2014. The Company’s effective tax rate was 37.3%45.3% for the current-year period and 37.7%37.2% for the same period in 2013.2014 driven by discrete tax impacts of the impairment charges and a capital loss on the sale of Azerty de Mexico which cannot be recognized at this time and carries a full valuation allowance.
Net Income. Net income for the first nine months of 20142015 totaled $93.4$51.5 million or $2.38$1.35 per diluted share, including $34.9 million after-tax, or $0.91 per diluted share, of costs related to 2015 charges. Adjusted net income was $86.3 million, or $2.26 per diluted share, compared with net income of $89.0$90.0 million or $2.21$2.29 per diluted share for the same nine-month period in 2013. Adjusted for the impact of the network optimization and cost reduction charge in the first nine months of 2013, net income was $98.0 million or $2.43 per diluted share in the prior-year period.2014.
Cash Flows
The following discussion focuses on information included in the accompanying Condensed Consolidated Statements of Cash Flows.
Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 20142015 totaled $93.7$183.7 million, compared with $79.4$93.7 million in the same nine-month period of 2013.2014. The current nine-month period cash flow was positively affected by a reduction in inventory levels from December 31, 201396.1% improvement over the prior year demonstrates market factors and a favorable change in accounts payable, partially offset by higher accounts receivables. Additionally in the first quarter of 2013, the Company paid a cash contributionour commitment to its pension plans totaling $13.0 million. The cash contribution to the pension plan in the first quarter of 2014 was $2.0 million.effectively manage working capital.
Investing Activities
Net cash used in investing activities for the first nine months of 20142015 was $41.3$57.8 million, compared with $19.3$41.3 million for the nine months ended September 30, 2013. This included the $26.7 million acquisition, net of cash acquired, of CPO in May 2014. For the full year 2014,2015, the Company expects capital spending, excluding acquisitions, to be approximately $20.0$30.0 million to $25.0$35.0 million.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 20142015 totaled $49.8$118.1 million, compared with $61.0$49.8 million in the prior-year period. Net cash used in financing activities during the first nine months of 20142015 was impacted by $12.2$45.3 million in net borrowingsrepayments under debt arrangements, offset by $43.0$55.7 million in share repurchases and $16.4$16.0 million in payments of cash dividends.
23On October 6, 2015, the Company’s Board of Directors approved the payment of a $0.14 per share dividend payable to stockholders of record as of December 15, 2015 to be paid on January 15, 2016.
Liquidity and Capital Resources
United’sEssendant’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. We believe that our cash from operations and collections of receivables, coupled with our sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements. These requirements include payments of interest and dividends, scheduled debt repayments, capital expenditures, working capital needs, restructuring activities, the funding of pension plans, and funding for additional share repurchases and acquisitions, if any. Due to our credit profile over the years, external funds have been available at an acceptable cost. We believe that current credit arrangements are sound and that the strength of our balance sheet affords us the financial flexibility to respond to both internal growth opportunities and those available through acquisitions.
27
Financing available from debt and the sale of accounts receivable as of September 30, 2014,2015, is summarized below (in millions):
Availability
Maximum financing available under: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Credit Agreement | $ | 700.0 |
|
|
|
|
| $ | 700.0 |
|
|
|
|
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
|
|
|
| 150.0 |
|
|
|
|
|
Receivables Securitization Program (1) |
| 200.0 |
|
|
|
|
|
| 200.0 |
|
|
|
|
|
Maximum financing available |
|
|
|
| $ | 1,050.0 |
|
|
|
|
| $ | 1,050.0 |
|
Amounts utilized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Credit Agreement |
| 195.0 |
|
|
|
|
|
| 318.5 |
|
|
|
|
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
|
|
|
| 150.0 |
|
|
|
|
|
Receivables Securitization Program (1) |
| 200.0 |
|
|
|
|
|
| 200.0 |
|
|
|
|
|
Outstanding letters of credit |
| 11.1 |
|
|
|
|
|
| 11.1 |
|
|
|
|
|
Total financing utilized |
|
|
|
|
| 556.1 |
|
|
|
|
|
| 679.6 |
|
Available financing, before restrictions |
|
|
|
|
| 493.9 |
|
|
|
|
|
| 370.4 |
|
Restrictive covenant limitation |
|
|
|
|
| 78.0 |
|
|
|
|
|
| - |
|
Available financing as of September 30, 2014 |
|
|
|
| $ | 415.9 |
| |||||||
Available financing as of September 30, 2015 |
|
|
|
| $ | 370.4 |
|
(1) | The Receivables Securitization Program provides for maximum funding available of the lesser of $200.0 million or the total amount of eligible receivables less excess concentrations and applicable reserves. |
The Company’s outstanding debt consisted of the following amounts (in millions):
| As of |
|
| As of |
| ||
| September 30, |
|
| December 31, |
| ||
| 2014 |
|
| 2013 |
| ||
2013 Credit Agreement | $ | 195.0 |
|
| $ | 206.8 |
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
| - |
|
2007 Note Purchase Agreement (2) |
| - |
|
|
| 135.0 |
|
Receivables Securitization Program |
| 200.0 |
|
|
| 190.7 |
|
Mortgage & Capital Lease |
| 0.9 |
|
|
| 1.2 |
|
Debt |
| 545.9 |
|
|
| 533.7 |
|
Stockholders’ equity |
| 863.6 |
|
|
| 825.5 |
|
Total capitalization | $ | 1,409.5 |
|
| $ | 1,359.2 |
|
|
|
|
|
|
|
|
|
Debt-to-total capitalization ratio |
| 38.7 | % |
|
| 39.3 | % |
|
|
| As of |
|
| As of |
| ||
| September 30, |
|
| December 31, |
| ||
| 2015 |
|
| 2014 |
| ||
2013 Credit Agreement | $ | 318.5 |
|
| $ | 363.0 |
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
| 150.0 |
|
Receivables Securitization Program |
| 200.0 |
|
|
| 200.0 |
|
Mortgage & Capital Lease |
| 0.1 |
|
|
| 0.9 |
|
Debt |
| 668.6 |
|
|
| 713.9 |
|
Stockholders’ equity |
| 832.6 |
|
|
| 843.7 |
|
Total capitalization | $ | 1,501.2 |
|
| $ | 1,557.6 |
|
|
|
|
|
|
|
|
|
Debt-to-total capitalization ratio |
| 44.5 | % |
|
| 45.8 | % |
We believe that our operating cash flow and financing capacity, as described, provide adequate liquidity for operating the business for the foreseeable future. Refer to Note 7,9, “Debt”, for further descriptions of the provisions of our financing facilities as well as Note 9 “Debt” in our Annual Report on Form 10-K for the year-ended December 31, 2013.2014.
24
Contractual Obligations
During the nine-month period ended September 30, 2014,2015, contractual obligations have increased $18.0$90.0 million from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, primarily2014, driven by a new software licensethe renewed corporate office building lease and maintenance agreement and renewed building leases.other facility lease renewals.
28
The Company is subject to market risk associated principally with changes in interest rates and foreign currency exchange rates. There were no material changes to the Company’s exposures to market risk during the first nine months of 20142015 from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.2014.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended September 30, 2014,2015, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
25
The Company has been named as a defendant in an action filed before the United States District Court for the Central District of California on May 1, 2015. The complaint alleges that the Company sent unsolicited fax advertisements to two named plaintiffs, as well as thousands of other persons and entities, in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 ("TCPA"). After filing the complaint, the plaintiff filed a motion asking the Court to certify a class of plaintiffs comprised of persons and entities who allegedly received fax advertisements from the Company. Under the TCPA, recipients of unsolicited fax advertisements can seek damages of $500 per fax for inadvertent violations and up to $1,500 per fax for knowing and willful violations. Other reported TCPA lawsuits have resulted in a broad range of outcomes, with each case being dependent on its own unique set of facts and circumstances. The Company is vigorously contesting class certification and liability. Litigation of this kind, however, is likely to lead to settlement negotiations, including negotiations prompted by pre-trial civil court procedures. Regardless of whether the litigation is resolved at trial or through settlement, the Company believes that a loss associated with resolution of pending claims is probable. However, the amount of any such loss, which could be material, cannot be reasonably estimated because the Company is continuing to evaluate its defenses based on its internal review and investigation of prior events, new information and future circumstances.
The Company is also involved in other legal proceedings arising in the ordinary course of or incidental to its business. The Company has established reserves, which are not material, for potential losses that are probable and reasonably estimable that may result from those proceedings. In many cases, however, it is difficult to determine whether a loss is probable or even possible or to estimate the amount or range of potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated. The Company believes that pendingsuch ordinary course legal proceedings will be resolved with no material adverse effect upon its financial condition or results of operations.
For information regarding risk factors, see “Risk Factors” in Item 1A of Part I of the Company’s Form 10-K for the year ended December 31, 2013.2014. There have been no material changes to the risk factors described in such Form 10-K.
29
(a) | Not applicable. |
(b) | Not applicable. |
(c) | Common Stock Purchases. |
During the nine-month periods ended September 30, 2015 and 2014, the Company repurchased 1,525,222 and 1,074,574 shares of common stock at an aggregate cost of $57.4 million and $43.0 million, respectively. On February 11, 2015, the Board of Directors authorized the Company to purchase an additional $100.0 million of common stock. The Company repurchased 1,737,850 shares for $64.5 million year-to-date through October 19, 2015. As of that date, the Company had approximately $77.9 million remaining of existing share repurchase authorization from the Board of Directors. |
2014 Fiscal Month |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of a Publicly Announced Program |
|
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
| ||||
July 1, 2014 to July 31, 2014 |
|
| 176,499 |
|
| $ | 40.08 |
|
|
| 176,499 |
|
| $ | 54,301,155 |
|
August 1, 2014 to August 31, 2014 |
|
| 106,784 |
|
|
| 40.28 |
|
|
| 106,784 |
|
|
| 50,000,029 |
|
September 1, 2014 to September 30, 2014 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 50,000,029 |
|
Total Third Quarter |
|
| 283,283 |
|
| $ | - |
|
|
| 283,283 |
|
| $ | 50,000,029 |
|
2015 Fiscal Month |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of a Publicly Announced Program |
|
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
| ||||
July 1, 2015 to July 31, 2015 |
|
| 179,757 |
|
| $ | 37.88 |
|
|
| 179,757 |
|
| $ | 104,169,515 |
|
August 1, 2015 to August 31, 2015 |
|
| 215,011 |
|
|
| 35.35 |
|
|
| 215,011 |
|
|
| 96,569,656 |
|
September 1, 2015 to September 30, 2015 |
|
| 349,313 |
|
|
| 32.89 |
|
|
| 349,313 |
|
|
| 85,082,091 |
|
Total Third Quarter |
|
| 744,081 |
|
| $ | 35.37 |
|
|
| 744,081 |
|
| $ | 85,082,091 |
|
2630
(a) | Exhibits |
This Quarterly Report on Form 10-Q includes as exhibits certain documents that the Company has previously filed with the SEC. Such previously filed documents are incorporated herein by reference from the respective filings indicated in parentheses at the end of the exhibit descriptions (all made under the Company’s file number of 0-10653). Each of the management contracts and compensatory plans or arrangements included below as an exhibit is identified as such by a double asterisk at the end of the related exhibit description.
Exhibit No. |
| Description |
3.1 |
| Third Restated Certificate of Incorporation of the Company, dated as of |
|
| |
3.2 |
| Amended and Restated Bylaws of the Company, dated as of |
|
| |
4.1 |
|
|
|
| |
4.2 |
| Parent Guaranty, dated as of |
|
| |
4.3 |
| Subsidiary Guaranty, dated as of |
|
| |
10.1* |
|
|
|
| |
|
|
|
18.1* | Preferability Letter on Change in Accounting Principle | |
|
| |
31.1* |
| Certification of Chief Executive Officer, dated as of October |
|
| |
31.2* |
| Certification of Chief Financial Officer, dated as of October |
|
| |
32.1* |
| Certification of Chief Executive Officer and Chief Financial Officer, dated as of October |
|
| |
101* |
| The following financial information from |
* | - Filed herewith |
** | - Represents a management contract or compensatory plan or arrangement |
31
27
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
| (Registrant) |
|
| ||
Date: October |
|
| /s/ Todd A. Shelton |
|
|
| Todd A. Shelton |
|
|
| Senior Vice President and Chief Financial Officer |
2832