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 March 31, 20152016
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 April 20, 2015,18, 2016, the registrant had outstanding 38,317,62137,153,988 shares of common stock, par value $0.10 per share.
UNITED STATIONERSESSENDANT INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 20152016
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) |
|
|
|
|
| |||
| As of March 31, |
|
| As of December 31, |
| As of March 31, |
|
| As of December 31, |
| ||||
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 |
| ||||
ASSETS |
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Current assets: |
|
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|
Cash and cash equivalents | $ | 23,631 |
|
| $ | 20,812 |
| $ | 35,430 |
|
| $ | 29,983 |
|
Accounts receivable, less allowance for doubtful accounts of $18,043 in 2015 and $19,725 in 2014 |
| 665,426 |
|
|
| 702,527 |
| |||||||
Accounts receivable, less allowance for doubtful accounts of $17,686 in 2016 and $17,810 in 2015 |
| 741,625 |
|
|
| 716,537 |
| |||||||
Inventories |
| 871,310 |
|
|
| 926,809 |
|
| 894,350 |
|
|
| 922,162 |
|
Assets held for sale |
| 15,799 |
|
|
| - |
| |||||||
Other current assets |
| 31,226 |
|
|
| 30,042 |
|
| 35,153 |
|
|
| 27,310 |
|
Total current assets |
| 1,607,392 |
|
|
| 1,680,190 |
|
| 1,706,558 |
|
|
| 1,695,992 |
|
Property, plant and equipment, net |
| 133,640 |
|
|
| 138,217 |
|
| 132,452 |
|
|
| 133,751 |
|
Goodwill |
| 394,186 |
|
|
| 398,042 |
|
| 299,147 |
|
|
| 299,355 |
|
Intangible assets, net |
| 96,797 |
|
|
| 111,958 |
|
| 93,657 |
|
|
| 96,413 |
|
Other long-term assets |
| 49,440 |
|
|
| 41,810 |
|
| 54,004 |
|
|
| 37,348 |
|
Total assets | $ | 2,281,455 |
|
| $ | 2,370,217 |
| $ | 2,285,818 |
|
| $ | 2,262,859 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
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Current liabilities: |
|
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Accounts payable | $ | 467,657 |
|
| $ | 485,241 |
| $ | 521,132 |
|
| $ | 531,949 |
|
Accrued liabilities |
| 175,770 |
|
|
| 192,792 |
|
| 178,858 |
|
|
| 177,472 |
|
Liabilities held for sale |
| 6,956 |
|
|
| - |
| |||||||
Current maturities of long-term debt |
| 41 |
|
|
| 851 |
|
| 48 |
|
|
| 51 |
|
Total current liabilities |
| 650,424 |
|
|
| 678,884 |
|
| 700,038 |
|
|
| 709,472 |
|
Deferred income taxes |
| 13,985 |
|
|
| 17,763 |
|
| 7,508 |
|
|
| 11,901 |
|
Long-term debt |
| 684,238 |
|
|
| 713,058 |
|
| 753,854 |
|
|
| 716,264 |
|
Other long-term liabilities |
| 104,413 |
|
|
| 104,394 |
|
| 89,904 |
|
|
| 101,488 |
|
Total liabilities |
| 1,453,060 |
|
|
| 1,514,099 |
|
| 1,551,304 |
|
|
| 1,539,125 |
|
Stockholders’ equity: |
|
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Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2015 and 2014 |
| 7,444 |
|
|
| 7,444 |
| |||||||
Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2016 and 2015 |
| 7,444 |
|
|
| 7,444 |
| |||||||
Additional paid-in capital |
| 413,546 |
|
|
| 412,291 |
|
| 411,485 |
|
|
| 410,927 |
|
Treasury stock, at cost – 36,089,975 shares in 2015 and 35,719,041 shares in 2014 |
| (1,057,955 | ) |
|
| (1,042,501 | ) | |||||||
Treasury stock, at cost – 37,312,864 shares in 2016 and 37,178,394 shares in 2015 |
| (1,105,119 | ) |
|
| (1,100,867 | ) | |||||||
Retained earnings |
| 1,532,325 |
|
|
| 1,541,675 |
|
| 1,475,216 |
|
|
| 1,463,821 |
|
Accumulated other comprehensive loss |
| (66,965 | ) |
|
| (62,791 | ) |
| (54,512 | ) |
|
| (57,591 | ) |
Total stockholders’ equity |
| 828,395 |
|
|
| 856,118 |
|
| 734,514 |
|
|
| 723,734 |
|
Total liabilities and stockholders’ equity | $ | 2,281,455 |
|
| $ | 2,370,217 |
| $ | 2,285,818 |
|
| $ | 2,262,859 |
|
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 Three Months Ended |
| ||||||||||
| March 31, |
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| March 31, |
| ||||||||||
| 2015 |
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| 2014 |
|
| 2016 |
|
| 2015 (Revised)* |
| ||||
Net sales | $ | 1,332,375 |
|
| $ | 1,254,139 |
|
| $ | 1,352,296 |
|
| $ | 1,332,375 |
|
Cost of goods sold |
| 1,127,925 |
|
|
| 1,067,056 |
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|
| 1,152,214 |
|
|
| 1,131,980 |
|
Gross profit |
| 204,450 |
|
|
| 187,083 |
|
|
| 200,082 |
|
|
| 200,395 |
|
Operating expenses: |
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Warehousing, marketing and administrative expenses |
| 198,372 |
|
|
| 148,849 |
|
|
| 167,678 |
|
|
| 197,581 |
|
Operating income |
| 6,078 |
|
|
| 38,234 |
|
|
| 32,404 |
|
|
| 2,814 |
|
Interest expense, net |
| 4,839 |
|
|
| 3,374 |
|
|
| 5,897 |
|
|
| 4,839 |
|
Income before income taxes |
| 1,239 |
|
|
| 34,860 |
|
| |||||||
Income (loss) before income taxes |
| 26,507 |
|
|
| (2,025 | ) | ||||||||
Income tax expense |
| 5,231 |
|
|
| 13,003 |
|
|
| 9,977 |
|
|
| 3,982 |
|
Net (loss) income | $ | (3,992 | ) |
| $ | 21,857 |
|
| |||||||
Net (loss) income per share - basic: | $ | (0.10 | ) |
| $ | 0.56 |
|
| |||||||
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) | ||||||||
Net income (loss) per share - basic: | $ | 0.45 |
|
| $ | (0.16 | ) | ||||||||
Average number of common shares outstanding - basic |
| 38,115 |
|
|
| 39,194 |
|
|
| 36,593 |
|
|
| 38,115 |
|
Net (loss) income per share - diluted: | $ | (0.10 | ) |
| $ | 0.55 |
|
| |||||||
Net income (loss) per share - diluted: | $ | 0.45 |
|
| $ | (0.16 | ) | ||||||||
Average number of common shares outstanding - diluted |
| 38,534 |
|
|
| 39,655 |
|
|
| 36,875 |
|
|
| 38,115 |
|
Dividends declared per share | $ | 0.14 |
|
| $ | 0.14 |
|
| $ | 0.14 |
|
| $ | 0.14 |
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* During the third quarter of 2015, the Company elected a change in accounting principle for the valuation method of certain inventories to the last-in, first-out (“LIFO”) method from the first-in, first out method (“FIFO”). This change required retrospective application. As such, the financial statements presented for prior periods are titled “Revised”.
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 |
|
| |||||
| March 31, |
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| |||||
| 2015 |
|
| 2014 |
|
| ||
Net (loss) income | $ | (3,992 | ) |
| $ | 21,857 |
|
|
Other comprehensive (loss) income, net of tax |
|
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|
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|
|
|
|
Unrealized translation adjustment |
| (4,630 | ) |
|
| (545 | ) |
|
Minimum pension liability adjustments |
| 932 |
|
|
| 581 |
|
|
Unrealized interest rate swap adjustments |
| (476 | ) |
|
| (159 | ) |
|
Total other comprehensive loss, net of tax |
| (4,174 | ) |
|
| (123 | ) |
|
Comprehensive (loss) income | $ | (8,166 | ) |
| $ | 21,734 |
|
|
| For the Three Months Ended |
| |||||
| March 31, |
| |||||
| 2016 |
|
| 2015 (Revised)* |
| ||
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) |
Other comprehensive income (loss), net of tax |
|
|
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Translation adjustments |
| 2,691 |
|
|
| (4,630 | ) |
Minimum pension liability adjustments |
| 915 |
|
|
| 932 |
|
Cash flow hedge adjustments |
| (527 | ) |
|
| (476 | ) |
Total other comprehensive income (loss), net of tax |
| 3,079 |
|
|
| (4,174 | ) |
Comprehensive income (loss) | $ | 19,609 |
|
| $ | (10,181 | ) |
|
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|
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 Three Months Ended |
| For the Three Months Ended |
| ||||||||||
| March 31, |
| March 31, |
| ||||||||||
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 (Revised)* |
| ||||
Cash Flows From Operating Activities: |
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Net (loss) income | $ | (3,992 | ) |
| $ | 21,857 |
| |||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
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|
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| |||||||
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
|
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| |||||||
Depreciation and amortization |
| 12,223 |
|
|
| 9,523 |
|
| 11,731 |
|
|
| 12,223 |
|
Share-based compensation |
| 2,640 |
|
|
| 3,225 |
|
| 2,911 |
|
|
| 2,640 |
|
Gain on the disposition of property, plant and equipment |
| (15 | ) |
|
| (4 | ) |
| (167 | ) |
|
| (15 | ) |
Amortization of capitalized financing costs |
| 272 |
|
|
| 287 |
|
| 166 |
|
|
| 272 |
|
Excess tax benefits related to share-based compensation |
| (262 | ) |
|
| (494 | ) | |||||||
Excess tax cost (benefit) related to share-based compensation |
| 133 |
|
|
| (262 | ) | |||||||
Asset impairment charges |
| 23,610 |
|
|
| - |
|
| - |
|
|
| 23,610 |
|
Deferred income taxes |
| (1,858 | ) |
|
| (2,450 | ) |
| (1,881 | ) |
|
| (1,469 | ) |
Changes in operating assets and liabilities (net of acquisitions): |
|
|
|
|
|
|
| |||||||
Decrease (increase) in accounts receivable, net |
| 26,217 |
|
|
| (15,583 | ) | |||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||||||
(Increase) decrease in accounts receivable, net |
| (24,819 | ) |
|
| 26,217 |
| |||||||
Decrease in inventory |
| 42,759 |
|
|
| 81,714 |
|
| 28,018 |
|
|
| 46,023 |
|
Increase in other assets |
| (10,126 | ) |
|
| (1,041 | ) |
| (24,774 | ) |
|
| (10,751 | ) |
Increase (decrease) in accounts payable |
| 645 |
|
|
| (47,191 | ) | |||||||
Increase in accounts payable |
| 9,571 |
|
|
| 645 |
| |||||||
Decrease in checks in-transit |
| (13,613 | ) |
|
| (31,751 | ) |
| (20,294 | ) |
|
| (13,613 | ) |
Decrease in accrued liabilities |
| (16,521 | ) |
|
| (13,654 | ) | |||||||
Increase (decrease) in other liabilities |
| 743 |
|
|
| (2,948 | ) | |||||||
Net cash provided by operating activities |
| 62,722 |
|
|
| 1,490 |
| |||||||
Increase (decrease) in accrued liabilities |
| 1,997 |
|
|
| (17,534 | ) | |||||||
(Decrease) increase in other liabilities |
| (9,943 | ) |
|
| 743 |
| |||||||
Net cash (used in) provided by operating activities |
| (10,821 | ) |
|
| 62,722 |
| |||||||
Cash Flows From Investing Activities: |
|
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|
|
|
|
|
|
Capital expenditures |
| (5,490 | ) |
|
| (6,390 | ) |
| (9,877 | ) |
|
| (5,490 | ) |
Proceeds from the disposition of property, plant and equipment |
| 18 |
|
|
| 458 |
|
| 281 |
|
|
| 18 |
|
Net cash used in investing activities |
| (5,472 | ) |
|
| (5,932 | ) |
| (9,596 | ) |
|
| (5,472 | ) |
|
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| |||||||
Cash Flows From Financing Activities: |
|
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|
Net (repayments) borrowings under revolving credit facility |
| (29,630 | ) |
|
| 4,562 |
| |||||||
Borrowings under Receivables Securitization Program |
| - |
|
|
| 9,300 |
| |||||||
Repayment of debt |
| - |
|
|
| (135,000 | ) | |||||||
Proceeds from the issuance of debt |
| - |
|
|
| 150,000 |
| |||||||
Net disbursements from share-based compensation arrangements |
| (875 | ) |
|
| (1,704 | ) | |||||||
Net borrowing (repayments) under revolving credit facility |
| 37,388 |
|
|
| (29,630 | ) | |||||||
Net proceeds (disbursements) from share-based compensation arrangements |
| 339 |
|
|
| (875 | ) | |||||||
Acquisition of treasury stock, at cost |
| (16,028 | ) |
|
| (12,491 | ) |
| (6,839 | ) |
|
| (16,028 | ) |
Payment of cash dividends |
| (5,396 | ) |
|
| (5,509 | ) |
| (5,160 | ) |
|
| (5,396 | ) |
Excess tax benefits related to share-based compensation |
| 262 |
|
|
| 494 |
| |||||||
Excess tax (cost) benefit related to share-based compensation |
| (133 | ) |
|
| 262 |
| |||||||
Payment of debt issuance costs |
| (36 | ) |
|
| (605 | ) |
| - |
|
|
| (36 | ) |
Net cash (used in) provided by financing activities |
| (51,703 | ) |
|
| 9,047 |
| |||||||
Net cash provided by (used in) financing activities |
| 25,595 |
|
|
| (51,703 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
| (1,758 | ) |
|
| 33 |
|
| 269 |
|
|
| (1,758 | ) |
Transfer of cash to held for sale |
| (970 | ) |
|
| - |
|
| - |
|
|
| (970 | ) |
Net change in cash and cash equivalents |
| 2,819 |
|
|
| 4,638 |
|
| 5,447 |
|
|
| 2,819 |
|
Cash and cash equivalents, beginning of period |
| 20,812 |
|
|
| 22,326 |
|
| 29,983 |
|
|
| 20,812 |
|
Cash and cash equivalents, end of period | $ | 23,631 |
|
| $ | 26,964 |
| $ | 35,430 |
|
| $ | 23,631 |
|
Other Cash Flow Information: |
|
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|
|
|
|
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|
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|
Income tax payments, net | $ | 3,183 |
|
| $ | 2,236 |
| $ | 1,027 |
|
| $ | 3,183 |
|
Interest paid |
| 6,213 |
|
|
| 2,424 |
|
| 7,292 |
|
|
| 6,213 |
|
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 United StationersEssendant Inc. (“USI”ESND”) with its wholly owned subsidiary United Stationers SupplyEssendant Co. (“USSC”ECO”), and USSC’sECO’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.
During the first quarter of 2015, the Company approved a plan to change its corporate name to Essendant Inc., effective in June of 2015. See footnote 5, “Goodwill and Intangible Assets” for further disclosure.
The accompanying Condensed Consolidated Financial Statements are unaudited, except for theunaudited. The Condensed Consolidated Balance Sheet as of December 31, 2014, which2015, was derived from the December 31, 20142015 audited financial statements. 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, 20142015 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 March 31, 20152016 and the results of operations and cash flows for the three monthsthree-month periods ended March 31, 20152016 and 2014.2015. The results of operations for the three months ended March 31, 20152016 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year.
Inventory
The Company uses the last-in, first-out (“LIFO”) method for valuing approximately 75% and 74% of its total inventory as of March 31, 2015 and December 31, 2014, respectively. The remaining inventory is valued under the first-in, first-out (“FIFO”) accounting 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 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 $120.9 million and $118.6 million higher than reported as of March 31, 2015 and December 31, 2014, respectively.
The quarterly change in the LIFO reserve as of March 31, 2015 resulted in a $2.3 million increase in cost of goods sold related to 2015 inflation. The change in the LIFO reserves as of March 31, 2014 resulted in a $0.5 million decrease in costs of goods sold which included LIFO liquidations relating to decrements in the Company’s office products and furniture pools which resulted in a $4.0 million liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of purchases in the year. This liquidation was partially offset by LIFO expense of $3.5 million related to 2014 inflation.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, 2016,2017, 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.
In May 2015, he FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). Under the standard, investments for which fair value is measured at net asset value ("NAV") per share (or its equivalent) using the practical expedient will no longer be categorized in the fair value hierarchy. The Company adopted this standard on January 1, 2016, which had no impact on the quarterly financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), that requires lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. This standard will be effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period, 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 March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, the objective of which is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. This standard will be effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
7
Change in Accounting Principle
During the third quarter of 2015, the Company elected a change in accounting principle for the valuation method of certain inventories to the last-in, first-out (“LIFO”) method from the first-in, first out method (“FIFO”). This change required retrospective application. As such, the financial statements presented for prior periods are titled “Revised”. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further information.
Inventory
Approximately 98.5% and 98.4% of total inventory as of March 31, 2016 and December 31, 2015, respectively, has been valued under the 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 FIFO cost or market, inventory would have been $148.6 million and $147.8 million higher than reported as of March 31, 2016 and December 31, 2015, respectively.
2. Acquisitions and Dispositions
Acquisition of CPO Commerce, Inc.Nestor Sales LLC
On May 30, 2014, USSCJuly 31, 2015, Essendant Co. completed the acquisition of CPO,100% of the capital stock of Nestor Sales LLC (“Nestor”), a leading online retailerwholesaler and distributor of brand name power tools, equipment and equipment. Thesupplies to the transportation industry. This acquisition of CPO significantly expandedaccelerates the Company’s digital resources and capabilities to support resellers as they transition to an increasingly online environment. CPO’s expertise will strengthen United’s ability to offer features like improved product content, real-timegrowth in the automotive aftermarket, complements the Company’s existing industrial offerings while providing access to inventorynew customer segments, and pricing, digital marketingadvances a key strategic pillar to diversify into channels and merchandising, and an enhanced digital platform tocategories that leverage our resellers and manufacturing partners.common platform.
The purchase price was $37.8 million, including $5.5 million related to the estimated fair value of contingent consideration which is based upon the achievement of certain sales targets during a three-year period immediately following the acquisition date. The final payments related to the contingent consideration will be determined by actual achievement in the earn-out periods and will be between zero and $10$41.8 million. Any changes to the estimated fair value after the original purchase accounting is completed will be recorded in “warehousing, marketing and administrative expenses” in the period in which a change occurs. The Company financed the 100% stock acquisition with borrowings under the Company’s available committed bank facilities.
The Company has developed a preliminary estimate of the fair value of assets acquired and liabilities assumed for purposes of allocating the purchase price. This estimate is subject to change as the valuation activities are completed. The fair value of the assets and liabilities acquired were estimated using various valuation methods including estimated selling price, a market approach, and discounted cash flows using both an income and cost approach.
At March 31, 2015, the preliminary allocation of the purchase price is as follows (amounts in thousands):
Purchase price, net of cash acquired |
|
|
|
| $ | 32,225 |
|
Accounts receivable | $ | (2,658 | ) |
|
|
|
|
Inventories |
| (13,051 | ) |
|
|
|
|
Other current assets |
| (307 | ) |
|
|
|
|
Property, plant and equipment, net |
| (488 | ) |
|
|
|
|
Intangible assets |
| (12,800 | ) |
|
|
|
|
Total assets acquired |
|
|
|
|
| (29,304 | ) |
Accounts payable |
| 17,131 |
|
|
|
|
|
Accrued liabilities |
| 2,139 |
|
|
|
|
|
Deferred income taxes |
| 3,453 |
|
|
|
|
|
Other long-term liabilities |
| 51 |
|
|
|
|
|
Total liabilities assumed |
|
|
|
|
| 22,774 |
|
Goodwill |
|
|
|
| $ | 25,695 |
|
The purchased identifiable intangible assets are as follows (amounts in thousands):
| Total |
|
| Estimated Life | |
Customer relationships | $ | 5,200 |
|
| 3 years |
Trademark |
| 7,600 |
|
| 15 years |
Total | $ | 12,800 |
|
|
|
Any changes to the preliminary estimates of the fair value of assets acquired and liabilities assumed, some of which may be material, will be allocated to residual goodwill.
Acquisition of MEDCO
On October 31, 2014, USSC completed the acquisition of all 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 Equipment de Fabrication et d’Entretien ULC, a Canadian wholesaler. MEDCO advances a key pillar of the Company’s strategy, which is to diversify into higher growth and margin channels and categories. It also brings expanded categories and services to customers.
8
The purchase price was $149.9 million, including $4.7 million related to the estimated fair value of contingent consideration which is based upon the achievements of certain sales and EBITDA targets over the next three years as well as $6.0 million reserved as a payable upon completion of an eighteen month indemnification period. The final payments related to the contingent consideration will 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 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.revolving credit facility.
The Company has developed a preliminary estimateestimates of the fair valuevalues of assets acquired and liabilities assumed for purposes of allocating the purchase price. The estimate isestimates are subject to change as the valuation activities are completed. The fair valuevalues of the assets and liabilities acquired 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 March 31, 2015, the preliminary allocation of the purchase price is as follows (amounts in thousands):
Purchase price, net of cash acquired |
|
|
|
| $ | 145,340 |
|
Accounts receivable | $ | (44,815 | ) |
|
|
|
|
Inventories |
| (54,656 | ) |
|
|
|
|
Other current assets |
| (1,299 | ) |
|
|
|
|
Property, plant and equipment, net |
| (4,408 | ) |
|
|
|
|
Deferred income tax assets |
| (1,101 | ) |
|
|
|
|
Other assets |
| (442 | ) |
|
|
|
|
Intangible assets |
| (44,070 | ) |
|
|
|
|
Total assets acquired |
|
|
|
|
| (150,791 | ) |
Accounts payable |
| 32,383 |
|
|
|
|
|
Accrued liabilities |
| 3,976 |
|
|
|
|
|
Other long-term liabilities |
| 52 |
|
|
|
|
|
Total liabilities assumed |
|
|
|
|
| 36,411 |
|
Goodwill |
|
|
|
| $ | 30,960 |
|
The purchased identifiable intangible assets are as follows (amounts in thousands):
| Total |
|
| Estimated Life | |
Customer relationships | $ | 40,030 |
|
| 4-15 years |
Trademarks |
| 4,040 |
|
| 3-15 years |
Total | $ | 44,070 |
|
|
|
Any changes to the preliminary allocationallocations of the purchase price, some of which may be material, will be allocated to residual goodwill.
Assets Held for SaleAt March 31, 2016, the preliminary allocation of the purchase price was as follows (amounts in thousands):
Purchase price, net of cash acquired | $ | 39,983 |
|
|
|
|
|
Accounts receivable |
| 9,230 |
|
Inventories |
| 10,542 |
|
Other current assets |
| 338 |
|
Property, plant and equipment, net |
| 1,251 |
|
Other assets |
| 752 |
|
Intangible assets |
| 17,580 |
|
Total assets acquired |
| 39,693 |
|
|
|
|
|
Accounts payable |
| 4,992 |
|
Accrued liabilities |
| 1,943 |
|
Deferred income taxes |
| 3,175 |
|
Other long-term liabilities |
| 76 |
|
Total liabilities assumed |
| 10,186 |
|
Goodwill | $ | 10,476 |
|
|
|
|
|
8
The purchased identifiable intangible assets were as follows (amounts in thousands):
| Total |
|
| Estimated Life | |
Customer relationships | $ | 16,220 |
|
| 13 years |
Trademark |
| 1,360 |
|
| 2.5-15 years |
Total | $ | 17,580 |
|
|
|
Agreement with Staples, Inc.
On February 10, 2015,16, 2016, the Company approved a planannounced an agreement to sell its operationspurchase from Staples, Inc. contracts and related assets representing more than $550 million in Mexico as the subsidiaryannual sales to minority and woman-owned office supply resellers and their large corporate and other enterprise customers. The transaction is not strategicsubject to the Company’s long-term business plan. The Company plans to disposesuccessful completion of the entity in 2015. Asproposed merger of Staples and Office Depot, as well as other regulatory and customary closing conditions. A court ruling on the preliminary injunction action brought by the Federal Trade Commission to block the proposed merger is expected during the second quarter of 2016. Under the terms of the approval date, in accordance with Accounting Standards Codification (ASC) 360-10-45-9, the Mexican subsidiary met all of the criteria to be classified as a held-for-sale asset. In accordance with ASC 350-20-40, the Company allocated a proportionate share of the goodwill balance from the office product and janitorial and breakroom supply reporting unit based on the subsidiary’s relative fair value to the reporting unit and performed an impairment test for the allocated goodwill utilizing the cost approach to value the entity. Based upon the impairment test, the $3.3 million of goodwill 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 disposal group to fair value using the cost-approach method less the estimated cost to sell. The carrying value, including a $10.1 million cumulative foreign currency translation adjustment, of the disposal was then compared to the fair value less the estimated cost to sell resulting in a pre-tax impairment loss of $10.1agreement, Essendant will pay Staples approximately $22.5 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 are recorded in the first quarter of 2015 within “warehousing, marketing and administrative expenses.” The Company anticipates additional financial statement impacts during the remainder of 2015 related to transaction costs, foreign exchange volatility, and operating results.
9
As of March 31, 2015, the carrying amounts, excluding intercompany accounts, of the Mexican subsidiary by major classes of assets and liabilities included in the Consolidated Balance Sheet are as follows (in thousands):
| Amount |
| |
Assets held for sale: |
|
|
|
Cash and cash equivalents | $ | 970 |
|
Accounts receivable, less allowance for doubtful accounts |
| 10,980 |
|
Inventories |
| 12,753 |
|
Other current assets |
| 573 |
|
Net property, plant equipment |
| 112 |
|
Other assets |
| 658 |
|
Held-for-sale valuation allowance |
| (10,247 | ) |
Total assets held for sale | $ | 15,799 |
|
|
|
|
|
Liabilities held for sale: |
|
|
|
Accounts payable |
| 4,618 |
|
Accrued liabilities |
| 1,782 |
|
Other long-term liabilities |
| 556 |
|
Total liabilities held for sale | $ | 6,956 |
|
3. Share-Based Compensation
As of March 31, 2015,2016, the Company has two active equity compensation plans. Under the Amended and Restated 20042015 Long-Term Incentive Plan (as amended and restated), award vehiclesinstruments 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 annual retainer and meeting fees.in deferred stock units.
The Company granted 120,376 shares of restricted stock and 247,510 RSUs during the first three months of 2016, compared to 46,229 shares of restricted stock and 145,552 RSUs during the first three months of 2015. No stock options were granted during the first quarter of 2015. During the first three months of 2014, the Company granted 56,451 shares of restricted stock, 145,355 RSUs, and 5,538 stock options.
4. Severance and Restructuring Charges
During
Commencing in the first quarter of 2015, the Company began certain restructuring actions which included workforce reductions and facility closures. In the first quarter of 2015, the Company recorded a $6.0 million of pre-tax chargeexpense relating to a workforce reductionreductions. During the first quarter of 2016 and a2015, the Company recorded $0.3 million and $0.4 million, respectively, of pre-tax chargeexpense relating to facility consolidations that wasconsolidations. These charges were included in “warehousing, marketing and administrative expenses.” Cash outflowsoutlays for these actions will occuroccurred primarily in 2015 and were approximately $0.7 million and $0.5 million, inrespectively, for the three months ended March 31, 2016 and 2015. As of March 31, 2015,2016, the Company has accrued liabilities for these actions of $5.9 million. The Company is estimating an additional $2.6 million to be incurred in the remainder of 2015 due to facility closures related to this action for a total 2015 expense of approximately $9.0$1.8 million.
Commencing in the fourth quarter of 2015, the Company executed actions to reduce costs through management delayering in order to achieve broader functional alignment of the organization. In the fourth quarter of 2015, the Company recorded an $11.9 million pre-tax charge relating to this workforce reduction included in “warehousing, marketing and administrative expenses.” Cash outlays associated with these charges were approximately $3.1 million in the three months ended March 31, 2016. As of March 31, 2016, the Company has accrued liabilities for these actions of $7.9 million.
9
5. 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, 2014 | $ | 398,042 |
|
Impairment |
| (3,319 | ) |
Purchase accounting adjustments |
| 1,034 |
|
Currency translation adjustment |
| (1,571 | ) |
Goodwill, balance as of March 31, 2015 | $ | 394,186 |
|
Goodwill, balance as of December 31, 2015 | $ | 299,355 |
|
Purchase accounting adjustments |
| (1,095 | ) |
Currency translation adjustments |
| 887 |
|
Goodwill, balance as of March 31, 2016 | $ | 299,147 |
|
10
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):
| March 31, 2015 |
| December 31, 2014 | March 31, 2016 |
| December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
| Gross |
|
|
|
|
|
| Net |
|
| Useful |
| Gross |
|
|
|
|
|
| Net |
|
| Useful | Gross |
|
|
|
|
|
| Net |
|
| Useful |
| Gross |
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and other intangibles | $ | 124,697 |
|
| $ | (43,813 | ) |
| $ | 80,884 |
|
| 16 |
| $ | 125,761 |
|
| $ | (41,123 | ) |
| $ | 84,638 |
|
| 16 | $ | 138,422 |
|
| $ | (54,140 | ) |
| $ | 84,282 |
|
| 16 |
| $ | 137,938 |
|
| $ | (51,357 | ) |
| $ | 86,581 |
|
| 16 |
Non-compete agreements |
| 4,658 |
|
|
| (2,675 | ) |
|
| 1,983 |
|
| 4 |
|
| 4,672 |
|
|
| (2,364 | ) |
|
| 2,308 |
|
| 4 |
| 4,654 |
|
|
| (4,260 | ) |
|
| 394 |
|
| 4 |
|
| 4,644 |
|
|
| (4,260 | ) |
|
| 384 |
|
| 4 |
Trademarks |
| 13,728 |
|
|
| (1,398 | ) |
|
| 12,330 |
|
| 14 |
|
| 14,428 |
|
|
| (1,716 | ) |
|
| 12,712 |
|
| 13 |
| 13,734 |
|
|
| (4,753 | ) |
|
| 8,981 |
|
| 14 |
|
| 13,688 |
|
|
| (4,240 | ) |
|
| 9,448 |
|
| 14 |
Total | $ | 143,083 |
|
| $ | (47,886 | ) |
| $ | 95,197 |
|
|
|
| $ | 144,861 |
|
| $ | (45,203 | ) |
| $ | 99,658 |
|
|
| $ | 156,810 |
|
| $ | (63,153 | ) |
| $ | 93,657 |
|
|
|
| $ | 156,270 |
|
| $ | (59,857 | ) |
| $ | 96,413 |
|
|
|
Intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Trademarks |
| 1,600 |
|
|
| - |
|
|
| 1,600 |
|
| n/a |
|
| 12,300 |
|
|
| - |
|
|
| 12,300 |
|
| n/a | |||||||||||||||||||||||||||
Total | $ | 144,683 |
|
| $ | (47,886 | ) |
| $ | 96,797 |
|
|
|
| $ | 157,161 |
|
| $ | (45,203 | ) |
| $ | 111,958 |
|
|
|
During the first quarter of 2015, the Company approved a plan to change its corporate name in order to more accurately reflect its purpose and vision. The corporate names of the Company and several of its operating subsidiaries, including USSC and ORS Nasco, LLC, will change in the second quarter of the year. Accordingly, inIn the first quarter of 2015, the Company recorded a pre-tax non-cash impairment charge of $10.2 million to write-down the trademarks of ORS Nasco and certain OKI brands to their fair value. Itvalue related to the corporate name change that was also determined that the useful lives did not extend pastapproved in February 2015 and 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 the intangiblesthese trademarks based upon management’s current forecasted future revenues from the trademarks. The Company determined the useful lives of these intangibles based upon management’s timeline for rebranding. The trademarks had a total value of $1.5 million at March 31, 2015 and will bewere fully amortized byas of December 31, 2015. The Company is evaluating how it will utilize these assets in the future.
The following table summarizes the amortization expense to be incurred in 2015 and over the next four years2016 through 2020 on intangible assets (in thousands):
Year |
| Amount |
|
| Amount |
| ||
2015 |
| $ | 11,355 |
| ||||
2016 |
|
| 12,785 |
|
| $ | 12,314 |
|
2017 |
|
| 10,805 |
|
|
| 10,855 |
|
2018 |
|
| 7,452 |
|
|
| 8,111 |
|
2019 |
|
| 5,679 |
|
|
| 6,993 |
|
2020 |
|
| 6,990 |
|
6. Accumulated Other Comprehensive Income (Loss)
The change in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the period ended March 31, 2015 is2016 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, 2014 |
| $ | (11,923 | ) |
| $ | 274 |
|
| $ | (51,142 | ) |
| $ | (62,791 | ) | ||||||||||||||||
AOCI, balance as of December 31, 2015 |
| $ | (9,866 | ) |
| $ | 146 |
|
| $ | (47,871 | ) |
| $ | (57,591 | ) | ||||||||||||||||
Other comprehensive (loss) income before reclassifications |
|
| (4,630 | ) |
|
| (702 | ) |
|
| - |
|
|
| (5,332 | ) |
|
| 2,691 |
|
|
| (753 | ) |
|
| - |
|
|
| 1,938 |
|
Amounts reclassified from AOCI |
|
| - |
|
|
| 226 |
|
|
| 932 |
|
|
| 1,158 |
|
|
| - |
|
|
| 226 |
|
|
| 915 |
|
|
| 1,141 |
|
Net other comprehensive (loss) income |
|
| (4,630 | ) |
|
| (476 | ) |
|
| 932 |
|
|
| (4,174 | ) |
|
| 2,691 |
|
|
| (527 | ) |
|
| 915 |
|
|
| 3,079 |
|
AOCI, balance as of March 31, 2015 |
| $ | (16,553 | ) |
| $ | (202 | ) |
| $ | (50,210 | ) |
| $ | (66,965 | ) | ||||||||||||||||
AOCI, balance as of March 31, 2016 |
| $ | (7,175 | ) |
| $ | (381 | ) |
| $ | (46,956 | ) |
| $ | (54,512 | ) |
The following table details the amounts reclassified out of AOCI into the income statement during the three-month period ending March 31, 2015 respectively2016 (in thousands):
|
| Amount Reclassified From AOCI |
|
|
| |
|
| For the Three |
|
|
| |
|
| Months Ended |
|
|
| |
|
| March 31, |
|
| Affected Line Item In The Statement | |
Details About AOCI Components |
| 2015 |
|
| Where Net Income is Presented | |
Gain on interest rate swap cash flow hedges, before tax |
| $ | 364 |
|
| Interest expense, net |
|
|
| (138 | ) |
| Tax provision |
|
| $ | 226 |
|
| Net of tax |
Amortization of defined benefit pension plan items: |
|
|
|
|
|
|
Prior service cost and unrecognized loss |
| $ | 1,525 |
|
| Warehousing, marketing and administrative expenses |
|
|
| (593 | ) |
| Tax provision |
|
|
| 932 |
|
| Net of tax |
Total reclassifications for the period |
| $ | 1,158 |
|
| Net of tax |
1210
| Amount |
|
|
| ||
|
| Reclassified |
|
|
| |
|
| From AOCI |
|
|
| |
|
| For the Three |
|
|
| |
|
| Months Ended |
|
|
| |
|
| March 31, |
|
| Affected Line Item In The Statement | |
Details About AOCI Components |
| 2016 |
|
| Where Net Income is Presented | |
Realized and unrealized gains (losses) on cash flow hedges |
|
|
|
|
|
|
Gain on interest rate swap, before tax |
| $ | 275 |
|
| Interest expense, net |
Gain on foreign exchange hedges, before tax |
|
| 89 |
|
| Cost of goods sold |
|
|
| (138 | ) |
| Tax provision |
|
| $ | 226 |
|
| Net of tax |
|
|
|
|
|
|
|
Defined benefit pension plan items |
|
|
|
|
|
|
Amortization of prior service cost and unrecognized loss |
| $ | 1,493 |
|
| Warehousing, marketing and administrative expenses |
|
|
| (578 | ) |
| Tax provision |
|
|
| 915 |
|
| Net of tax |
Total reclassifications for the period, net of tax |
| $ | 1,141 |
|
|
|
7. Earnings Per Share
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 periods endingended March 31, 2016 and 2015, and 2014, 0.40.3 million and 0.50.4 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. An additional 0.4 million shares of common stock outstanding at March 31, 2015 were excluded from the computation of diluted earnings per share due to the net loss. 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 |
|
| |||||
| March 31, |
|
| |||||
| 2015 |
|
| 2014 |
|
| ||
Numerator: |
|
|
|
|
|
|
|
|
Net (loss) income | $ | (3,992 | ) |
| $ | 21,857 |
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
|
weighted average shares |
| 38,115 |
|
|
| 39,194 |
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock options and restricted units |
| 419 |
|
|
| 461 |
|
|
Denominator for diluted earnings per share - |
|
|
|
|
|
|
|
|
Adjusted weighted average shares and the effect of dilutive |
|
|
|
|
|
|
|
|
securities |
| 38,534 |
|
|
| 39,655 |
|
|
Net income per share: |
|
|
|
|
|
|
|
|
Net (loss) income per share - basic | $ | (0.10 | ) |
| $ | 0.56 |
|
|
Net (loss) income per share - diluted | $ | (0.10 | ) |
| $ | 0.55 |
|
|
| For the Three Months Ended |
| |||||
| March 31, |
| |||||
| 2016 |
|
| 2015 |
| ||
Numerator: |
|
|
|
|
|
|
|
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) |
Denominator: |
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
weighted average shares |
| 36,593 |
|
|
| 38,115 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
Employee stock options and restricted stock |
| 282 |
|
|
| - |
|
Denominator for diluted earnings per share - |
|
|
|
|
|
|
|
Adjusted weighted average shares and the effect of dilutive securities |
| 36,875 |
|
|
| 38,115 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
Net income (loss) per share - basic | $ | 0.45 |
|
| $ | (0.16 | ) |
Net income (loss) per share - diluted(1) | $ | 0.45 |
|
| $ | (0.16 | ) |
(1) | Diluted earnings per share for the first quarter of 2015 under GAAP equals basic earnings per share due to net loss. |
Common Stock Repurchases
As of DecemberMarch 31, 2014,2016 , the Company had Board authorization to repurchase $42.4 million of USI common stock. In February 2015, the Board of Directors authorized the Company to purchase an additional $100.0$68.2 million of common stock. During the three-month periods ended March 31, 20152016 and 2014,2015, the Company repurchased 402,679241,270 and 331,369402,679 shares of USI’sthe Company’s common stock at an aggregate cost of $16.3$6.8 million and $13.7$16.3 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 three months of 20152016 and 2014,2015, the Company reissued 31,745106,800 and 73,75031,745 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.
11
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,ECO, and from borrowings by USSC.ECO. The 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program (each as defined in Note 911 of the Company’s Form 10-K for the year ended December 31, 2014)2015) contain restrictions on the use of cash transferred from USSCECO to USI.ESND.
Debt consisted of the following amounts (in millions):
| As of |
|
| As of |
| As of |
| As of |
| ||||
| March 31, 2015 |
|
| December 31, 2014 |
| March 31, 2016 |
| December 31, 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Credit Agreement | $ | 334.2 |
|
| $ | 363.0 |
| $ | 405.8 |
| $ | 368.4 |
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
| 150.0 |
|
| 150.0 |
| 150.0 |
| |
Receivables Securitization Program |
| 200.0 |
|
|
| 200.0 |
|
| 200.0 |
| 200.0 |
| |
Mortgage & Capital Lease |
| 0.1 |
|
|
| 0.9 |
|
| 0.1 |
| 0.1 |
| |
Transaction Costs |
| (2.0 | ) |
| (2.2 | ) | |||||||
Total | $ | 684.3 |
|
| $ | 713.9 |
| $ | 753.9 |
| $ | 716.3 |
|
As of March 31, 2015, 78.1%2016, 80.2% 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”).
The Company had outstanding letters of credit of $11.1$11.6 million under the 2013 Credit Agreement as of March 31, 20152016 and December 31, 2014.2015.
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%0.00% to 1.00%. As of March 31, 2015,2016, the applicable margin for LIBOR-based loans was 1.375%1.50% and for Alternate Base Rate loans was 0.375%0.50%. USSCEffective in April 2016, the applicable margin for LIBOR-based loans was 1.75% and for Alternate Base Rate loans was 0.75%. ECO 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.
As of March 31, 20152016 and December 31, 2014, $380.72015, $524.1 million and $360.3$448.6 million, respectively, of receivables had been sold to the Investors (as defined in Note 911 of the Company’s Form 10-K for the year ended December 31, 2014)2015). United Stationers Receivables, LLC (“USR”)ESR had $200.0 million outstanding under the Receivables Securitization Program as of March 31, 20152016 and December 31, 2014.2015.
For additional information about the 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program, see Note 911 of the Company’s Form 10-K for the year ended December 31, 2014.2015.
9. 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 1113 to the Company’s Consolidated Financial Statements in the Form 10-K for the year ended December 31, 2014.2015. A summary of net periodic pension cost related to the Company’s pension plans for the three monthsthree-month periods ended March 31, 2016 and 2015 and 2014 iswas as follows (dollars in thousands):
| For the Three Months Ended March 31, |
|
| For the Three Months Ended March 31, |
| ||||||||||
| 2015 |
|
| 2014 |
|
| 2016 |
|
| 2015 |
| ||||
Service cost - benefit earned during the period | $ | 400 |
|
| $ | 328 |
|
| $ | 317 |
|
| $ | 400 |
|
Interest cost on projected benefit obligation |
| 2,270 |
|
|
| 2,243 |
|
|
| 2,343 |
|
|
| 2,270 |
|
Expected return on plan assets |
| (2,805 | ) |
|
| (2,558 | ) |
|
| (2,718 | ) |
|
| (2,805 | ) |
Amortization of prior service cost |
| 75 |
|
|
| 45 |
|
|
| 74 |
|
|
| 75 |
|
Amortization of actuarial loss |
| 1,450 |
|
|
| 905 |
|
|
| 1,419 |
|
|
| 1,450 |
|
Net periodic pension cost | $ | 1,390 |
|
| $ | 963 |
|
| $ | 1,435 |
|
| $ | 1,390 |
|
12
The Company made cash contributions of $10.0 million and $2.0 million to its pension plans during each of the quartersthree-month periods ended March 31, 2016 and 2015, and 2014.respectively. Additional contributions, if any, for 20152016 have not yet been determined. As of March 31, 20152016 and December 31, 2014,2015, respectively, the Company had accrued $48.2$38.4 million and $50.3$48.4 million of pension liability within “Other Long-Term Liabilities”long-term liabilities” on the Condensed Consolidated Balance Sheets.
In February 2016, as a result of an amendment to the Essendant Pension Plan, the Company announced a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants. The lump-sum settlement payments will be made on May 16, 2016, using assets from the Essendant Pension Plan.
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 $1.8 million and $1.4 million, respectively, for the Company match of employee contributions to the Plan for the three monthsthree-month periods ended March 31, 20152016 and 2014.2015.
15
10. 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 March 31, 2015, approximately 21.9% ($150.0 million) of the Company’s current outstanding debt had its interest payments designated as hedged forecasted transactions.
The Company’s outstanding swap transaction is accounted for as a cash flow hedge and is recorded at fair value on the Condensed Consolidated Balance Sheet as of March 31, 2015 and December 31, 2014, at the following amounts (in thousands):
| Notional |
|
|
|
|
|
|
|
|
|
| Fair Value Net |
| ||
As of March 31, 2015 | Amount |
|
| Receive |
| Pay |
|
| Maturity Date |
| Liability (1) |
| |||
July 2012 Swap Transaction | $ | 150,000 |
|
| Floating 1-month LIBOR |
|
| 1.05% |
|
| July 18, 2017 |
| $ | 982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notional |
|
|
|
|
|
|
|
|
|
| Fair Value Net |
| ||
As of December 31, 2014 | Amount |
|
| Receive |
| Pay |
|
| Maturity Date |
| Liability (1) |
| |||
July 2012 Swap Transaction | $ | 150,000 |
|
| Floating 1-month LIBOR |
|
| 1.05% |
|
| July 18, 2017 |
| $ | 253 |
|
|
|
Under the terms of the July 2012 Swap Transaction, USSC will be required to make monthly fixed rate payments to the counterparty calculated based on the notional amounts noted 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 derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings.
The July 2012 Swap Transaction effectively convertsconvert a portion of the Company’s future floating-rate debt to a fixed-rate basis. The fair value is determined by using quoted market forward rates (level 2 inputs) and reflects the present value of the amount that the Company would pay for contracts involving the same notional amount and maturity date. The changes in fair value of this instrument is reported in AOCI and reclassified into earnings in interest expense in the same periods during which the related interest payments on the hedged debt affect earnings. This swap transaction reducesmatures in July 2017.As of March 31, 2016 and December 31, 2015, the impactfair value 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 theCompany's interest rate swap (as noted above) will fail to perform underincluded in 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
16
exercised early termination right under the outstanding swap transaction as of March 31, 2015, the Company would have been required to pay the aggregate fair value net liability of $1.0 million plus accrued interest to the counterparty.
The swap transaction that was in effect as of March 31, 2015 and the swap transaction that was in effect as of March 31, 2014 contained no ineffectiveness; therefore, all gains or losses on those derivative instruments were reportedCondensed Consolidated Balance Sheet as a component of other comprehensive income (“OCI”)“Other long-term liabilities” was $0.9 million and $0.5 million respectively.
The Company maintains a foreign currency cash flow hedge program in order to manage the volatility in exchange rates and the related impacts on the operations of its 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 $8.1 million, of its Canadian subsidiaries’ US dollar denominated inventory purchases for the next two quarters. The fair value of the foreign currency cash flow hedge 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 reclassified into earnings as “interest expense”in cost of goods sold in the same period or periods during which they affectedthe related inventory is sold and affects earnings.As of March 31, 2016, the fair value of these cash flow hedges were included in the Company’s Condensed Consolidated Balance Sheet as a component of “Accrued liabilities” totaling $0.3 million. As of December 31, 2015, the fair value of these cash flow hedges were included in the Company’s Condensed Consolidated Balance Sheet as a component of “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 threethree-month periods ended March 31, 20152016 and March 31, 20142015 (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 March 31, 2015 |
|
| For the Three Months Ended March 31, 2014 |
|
| Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| For the Three Months Ended March 31, 2015 |
|
| For the Three Months Ended March 31, 2014 |
| ||||
July 2012 Swap Transaction | $ | (124 | ) |
| $ | (159 | ) |
| Interest expense, net |
| $ | 331 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 March 31, 2016 |
|
| For the Three Months Ended March 31, 2015 |
|
| Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| For the Three Months Ended March 31, 2016 |
|
| For the Three Months Ended March 31, 2015 |
| ||||
Interest Rate Swap | $ | (121 | ) |
| $ | (124 | ) |
| Interest expense, net |
| $ | 242 |
|
| $ | 331 |
|
Foreign Exchange Hedges |
| (195 | ) |
|
| - |
|
| Cost of goods sold |
|
| 89 |
|
|
| - |
|
13
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 10 “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. |
17
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 March 31, 20152016 and December 31, 20142015 (in thousands):
| Fair Value Measurements as of March 31, 2015 |
| |||||||||||||
|
|
|
|
| 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 |
| ||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability |
| 982 |
|
|
| - |
|
|
| 982 |
|
|
| - |
|
Total | $ | 982 |
|
| $ | - |
|
| $ | 982 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| |||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability |
| 253 |
|
|
| - |
|
|
| 253 |
|
|
| - |
|
Total | $ | 253 |
|
| $ | - |
|
| $ | 253 |
|
| $ | - |
|
| Fair Value Measurements as of March 31, 2016 |
| |||||||||||||
|
|
|
|
| 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 |
| ||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap | $ | 832 |
|
| $ | - |
|
| $ | 832 |
|
| $ | - |
|
Foreign exchange hedges | $ | 288 |
|
| $ | - |
|
| $ | 288 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements as of December 31, 2015 |
| |||||||||||||
|
|
|
|
| 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 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange hedges | $ | 91 |
|
| $ | - |
|
| $ | 91 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap | $ | 469 |
|
| $ | - |
|
| $ | 469 |
|
| $ | - |
|
The carrying amount of accounts receivable at March 31, 2015,2016, including $380.7$524.1 million of receivables sold under the Receivables Securitization Program, approximates fair value because of the short-term nature of this item.
As of March 31, 2015, the held for sale assets and liabilities detailed in Note 2 “Acquisitions and Dispositions” and the values of the impaired trademark assets detailed in Note 5 “Goodwill and Intangible Assets” were measured at fair value on a nonrecurring basis. No other assets or liabilities arewere measured at fair value on a nonrecurring basis.
12. Other Assets and Liabilities
The Company had receivablesReceivables related to supplier allowances totaling $76.9$92.1 million and $124.4$111.0 million were included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of March 31, 20152016 and December 31, 2014,2015, respectively.
Accrued customer rebates of $45.7$47.2 million and $63.2$63.6 million as of March 31, 20152016 and December 31, 2014,2015, respectively, were included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.
14
The 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 months ended March 31, 2016, the Company recorded income tax expense of $10.0 million on pre-tax income of $26.5 million, for an effective tax rate of 37.6%. For the three months ended March 31, 2015, the Company recorded income tax expense of $5.2$4.0 million on pre-tax incomeloss of $1.2$2.0 million, for an effective tax rate of 422.2%(196.6)%.
The Company’s U.S. statutory rate is 35.0%. ForThere were no significant discrete items impacting the effective tax rate for the three months ended March 31, 2014, the Company recorded income tax expense of $13.0 million on pre-tax income of $34.9 million, for an effective tax rate of 37.3%.
The Company's U.S. statutory rate is 35.0%.2016. The most significant factor impacting the effective tax rate for the three months ended March 31, 2015 werewas the discrete tax impactsimpact of the impairment charges for financial reporting purposes related to placing a non-strategic business for sale in the quarter. There were no significant discrete items
14. Legal Matters
The Company has been named as a defendant in two lawsuits alleging that the Company sent unsolicited fax advertisements to the named plaintiffs, as well as 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"). One lawsuit was initially filed in the United States District Court for the three months ended March 31, 2014.Central District of California on May 1, 2015 and has been refiled in an Illinois state court, subject to a motion to dismiss the California case without prejudice. The other lawsuit was filed in the United States District Court for the Northern District of Illinois on January 14, 2016. In both lawsuits the plaintiffs 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. In each lawsuit, the Company is vigorously contesting class certification and denies that any violations occurred. 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 lawsuits are 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.
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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, 2014.2015.
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 Overview
UnitedEssendant Inc. is a leading supplier of workplace essentials, with 20142015 net sales of approximately $5.3$5.4 billion. UnitedEssendant Inc. stocks over 160,000180,000 items from over 1,600 manufacturers.and is a leading national wholesale distributor of workplace items including traditional office products and office furniture, janitorial, sanitation and breakroom supplies, technology products, industrial supplies, and automotive aftermarket tools and equipment. These items include a broad spectrum of manufacturer-branded and private branded technology products, traditional office products, office furniture, janitorial and breakroom supplies, and industrial supplies. Unitedproducts. Essendant sells its products through a network of 7774 distribution centers to its approximately 30,000 reseller customers, who in turn sell directly to end-consumers.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; automotive aftermarket dealers and wholesalers; and other independent distributors. Additionally, United’s subsidiary,Company also operates CPO Commerce LLC (“CPO”), is an e-retailer of brand name powerwhich sells tools and do-it-yourself equipment that sells directlyonline to end consumers.the consumer market.
Our strategy is comprised of three key elements:strategic pillars:
· | Grow share in core office products and janitorial and breakroom businesses; |
· | Win the shift to online; and |
· | Transition the business to the Company’s common operating platform. |
1) Strengthen our core office, janitorial, and breakroom business with a common operating and IT platform, an aligned customer care and sales team, and advanced digital services;
2) Win online by growing our business-to-business (B2B) sales with major e-commerce players, and by enablingEssendant will focus on the online success of our resellers by providing digital capabilities and tools to support them; andfollowing five key objectives over the next two years:
3) Expand and diversify our business into higher growth and higher margin channels and categories.
1) | Generate profitable sales growth through alignment with customers who are taking share in each channel they serve. |
2) | Move businesses onto a common operating, technology and digital platform, which began with the office products and janitorial and breakroom product categories in 2015 and will continue with the direct online and automotive businesses. |
3) | Simplify the business and continue to control costs, which will gain operating leverage and reduce overhead, by fully integrating recently acquired businesses. |
4) | Pursue merchandising excellence to optimize assortment and create additional value for customers. |
5) | Refine the industrial channel value proposition to diversify and lessen its dependence on the oilfield and energy sectors. |
Execution on these priorities will help us achieve our goal of becoming the fastest and most convenient solution for workplace essentials.
16
The following is a summary of selected trends, events or uncertainties that the Company believes may have a significant impact on its future performance.
RecentFirst Quarter Results
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· |
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· | Gross margin |
· | Operating expenses in the first quarter of |
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· | Operating income for the quarter ended March 31, |
· |
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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:
· |
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· | On July 31, 2015, we acquired 100% of the capital stock of Nestor Sales LLC (“Nestor”), a leading wholesaler and distributor of tools, equipment and supplies to |
· | On February 16, 2016, we announced an agreement to purchase from Staples, Inc. contracts and related assets representing more than $550 million in annual sales to minority and woman-owned office supply resellers and their large corporate and other enterprise customers. The transaction is subject to the successful completion of the proposed merger of Staples and Office Depot, as well as other regulatory and customary closing conditions. A court ruling on the preliminary injunction action brought by the Federal Trade Commission to block the proposed merger is expected during the second quarter of 2016. Under the terms of the agreement, Essendant will pay Staples approximately $22.5 million. |
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· | On June 1, 2015 we officially rebranded the Company to Essendant Inc. When we announced in the first quarter of 2015 our decision to rebrand the company, the ORS Nasco trademark and certain OKI brands were determined to be impaired. Pre-tax, non-cash, impairment charges and accelerated amortization totaling $10.5 million were recorded in the first quarter of 2015. |
· | In 2015 we exited non-strategic channels, including the sale of Azerty de Mexico, our operations in Mexico. The total charges in the first quarter of 2015 related to the disposition of this subsidiary were $13.6 million. In the first quarter of 2015, |
· | Restructuring actions |
Guidance
The Company reaffirms its previously announced outlook regarding 2016, and currently expects the following:
· | +1% to +5% revenue growth compared to prior year, or total company revenue in the range of |
· |
|
· |
|
The guidance above excludes the impact of assets acquired in the proposed Staples transaction, any new acquisitions and any unusual charges, such as impacts from our pension lump-sum offer described in Note 9.
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, 2014.2015.
Critical Accounting Policies, Judgments and Estimates
DuringIn the first three monthsquarter of 2015,2016, there were no significant changes to the Company’s critical accounting policies, judgments or estimates from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.2015
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18
Adjusted Operating Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share
The following table presents Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, and Adjusted Diluted Earnings Per Share for the three-month periods ended March 31, 20152016 and 20142015 (in thousands, except per share data), excluding the effects of the $6.4 million pre-tax chargecharges related to workforce reduction and facility consolidations in the first three months of 2016, and workforce reductions and facility consolidations, $10.5 million pre-tax intangible asset impairment charge and accelerated amortization related to rebranding efforts, and $13.6 million pre-taxasset held for sale impairment charge related to the held-for-sale classification of our Mexican subsidiary in the first quarterthree months of 2015. 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 results and to the results of 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 Three Months Ended March 31, |
| For the Three Months Ended March 31, |
| ||||||||||||||||||
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 (Revised) |
| ||||||||||||
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|
|
|
| % to |
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|
|
|
|
| % to |
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|
|
|
|
|
|
| ||
| Amount |
|
| Net Sales |
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| Amount |
|
| Net Sales |
| |||||||||||
Net Sales | $ | 1,332,375 |
|
|
| 100.0 | % |
| $ | 1,254,139 |
|
|
| 100.0 | % | |||||||
Gross profit | $ | 204,450 |
|
|
| 15.3 | % |
| $ | 187,083 |
|
|
| 14.9 | % | |||||||
Operating expenses | $ | 198,372 |
|
|
| 14.9 | % |
| $ | 148,849 |
|
|
| 11.9 | % | $ | 167,678 |
|
| $ | 197,581 |
|
Workforce reduction and facility consolidation charge |
| (6,433 | ) |
|
| (0.5 | %) |
|
| - |
|
|
| - |
| |||||||
Rebranding - intangible asset impairment and amortization |
| (10,462 | ) |
|
| (0.8 | %) |
|
| - |
|
|
| - |
| |||||||
Workforce reduction and facility closure charge |
| (254 | ) |
|
| (6,433 | ) | |||||||||||||||
Intangible asset impairment charge and accelerated amortization related to rebranding |
| - |
|
|
| (10,462 | ) | |||||||||||||||
Asset held for sale impairment |
| (13,566 | ) |
|
| (1.0 | %) |
|
| - |
|
|
| - |
|
| - |
|
|
| (13,566 | ) |
Adjusted operating expenses | $ | 167,911 |
|
|
| 12.6 | % |
| $ | 148,849 |
|
|
| 11.9 | % | $ | 167,424 |
|
| $ | 167,120 |
|
|
|
|
|
|
|
|
| |||||||||||||||
Operating income | $ | 6,078 |
|
|
| 0.5 | % |
| $ | 38,234 |
|
|
| 3.0 | % | $ | 32,404 |
|
| $ | 2,814 |
|
Operating expense items noted above |
| 30,461 |
|
|
| 2.3 | % |
|
| - |
|
|
| - |
|
| 254 |
|
|
| 30,461 |
|
Adjusted operating income | $ | 36,539 |
|
|
| 2.7 | % |
| $ | 38,234 |
|
|
| 3.0 | % | $ | 32,658 |
|
| $ | 33,275 |
|
Net (loss) income | $ | (3,992 | ) |
|
|
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|
| $ | 21,857 |
|
|
|
|
| |||||||
Depreciation and amortization | $ | 10,489 |
|
| $ | 10,711 |
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Equity compensation |
| 2,911 |
|
|
| 2,640 |
| |||||||||||||||
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) | $ | 46,058 |
|
| $ | 46,626 |
| |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) | |||||||||||||||
Operating expense items noted above, net of tax |
| 23,896 |
|
|
|
|
|
|
| - |
|
|
|
|
|
| 155 |
|
|
| 23,896 |
|
Adjusted net income | $ | 19,904 |
|
|
|
|
|
| $ | 21,857 |
|
|
|
|
| $ | 16,685 |
|
| $ | 17,889 |
|
Diluted (loss) earnings per share | $ | (0.10 | ) |
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| $ | 0.55 |
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Diluted net income (loss) per share(1) | $ | 0.45 |
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| $ | (0.16 | ) | |||||||||||||||
Per share operating expense items noted above |
| 0.62 |
|
|
|
|
|
|
| - |
|
|
|
|
|
| 0.00 |
|
|
| 0.62 |
|
Adjusted diluted earnings per share | $ | 0.52 |
|
|
|
|
|
| $ | 0.55 |
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| |||||||
Adjusted diluted earnings per share - change over the prior year period |
| (5.5 | %) |
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| |||||||
Weighted average number of common shares - diluted |
| 38,534 |
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|
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|
|
|
| 39,655 |
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|
|
|
| |||||||
Adjusted diluted net income per share | $ | 0.45 |
|
| $ | 0.46 |
|
(1) | Diluted net income (loss) per share for the first quarter of 2015 under GAAP equals basic earnings per share due to the net loss. The diluted earnings per share shown here does not reflect this adjustment. |
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19
Results of Operations—Three Months Ended March 31, 20152016 Compared with the Three Months Ended March 31, 20142015
Net Sales. Net sales for the first quarter of 20152016 were $1.33$1.35 billion. The following table summarizes net sales by product category for the three-month periods ended March 31, 20152016 and 20142015 (in thousands):
| Three Months Ended March 31, |
| Three Months Ended March 31, |
| ||||||||||
| 2015 |
|
| 2014 (1) |
| 2016 |
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| 2015 (1) |
| ||||
Janitorial and breakroom supplies | $ | 357,721 |
|
| $ | 330,261 |
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Janitorial and breakroom supplies (JanSan) | $ | 362,387 |
|
| $ | 358,677 |
| |||||||
Technology products |
| 353,016 |
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|
| 354,716 |
|
| 351,113 |
|
|
| 353,047 |
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Traditional office products (including cut-sheet paper) |
| 296,221 |
|
|
| 323,943 |
|
| 308,055 |
|
|
| 296,177 |
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Industrial supplies |
| 210,258 |
|
|
| 133,779 |
|
| 139,764 |
|
|
| 149,074 |
|
Automotive |
| 79,408 |
|
|
| 60,240 |
| |||||||
Office furniture |
| 78,053 |
|
|
| 74,948 |
|
| 74,158 |
|
|
| 78,053 |
|
Freight revenue |
| 31,959 |
|
|
| 29,180 |
|
| 33,201 |
|
|
| 31,959 |
|
Services, Advertising and Other |
| 5,147 |
|
|
| 7,312 |
|
| 4,210 |
|
|
| 5,148 |
|
Total net sales | $ | 1,332,375 |
|
| $ | 1,254,139 |
| $ | 1,352,296 |
|
| $ | 1,332,375 |
|
(1) | Certain prior period amounts have been reclassified to conform to the current presentation. Such |
SalesNet sales in the janitorial and breakroom supplies (JanSan) product category increased 8.3%1.0% in the first quarter of 20152016 compared to the first quarter of 2014.2015. This category accounted for 26.8% of the Company’s first quarter 20152016 consolidated net sales. SalesNet sales increased due to new e-tail growth, partially offset by a decline in this category was driven by sales growth across all channels. Sales also increased approximately 3.0% from being namedto the primary supplier for Office Depot’s janitorial business.independent dealer channel.
SalesNet sales in the technology products category (primarily ink and toner) decreased 0.5% from the first quarter of 2014.2015. This category accounted for 26.5%26.0% of net sales for the first quarter of 2015. This decline is attributable to reduced demand in our independent channel, the loss of business with a large national customer, and lower sales at2016. Excluding our Mexican subsidiary. These were partially offsetsubsidiary, which was sold in the third quarter of 2015, net sales in this category increased 4.8% compared to the prior year quarter, which was driven by growth in our e-tail dealers, purchases by certain large customers during the quarter, and the addition ofsales to new business.customers.
SalesNet sales of traditional office products decreasedincreased in the first quarter of 20152016 by 8.6%4.0% versus the first quarter of 2014.2015. Traditional office supplies represented 22.2%22.8% of the Company’s consolidated net sales for the first quarter of 2015. This decline2016. The sales increase was driven by a $26.6 million declineincreases in cut-sheet paper sales as we exit low margin business and losing the first-call supplier status with Office Depot. We continue to estimate this impact, net of incremental sales in janitorial products, to be a $0.14 to $0.22 reduction in earnings per share in 2015. This was partially offset by continued double-digit growth in e-tailers, a rebound inhigher government spending, and growth with certain larger customers.spending.
Industrial supplies net sales in the first quarter of 2015 increased2016 decreased by 57.2%6.2% compared to the same prior-year period. SalesNet sales of industrial supplies accounted for 15.8%10.3% of the Company’s net sales for the first quarter of 2015 and reflected solid sales momentum from our acquisitions, which contributed $90.2 million in incremental sales and positively impacted earnings per share. Without the acquisitions, industrial sales declined 10.2% over the prior-year quarter. Approximately 25% of our core industrial business is exposed to oilfield and other energy sector resellers which have been impacted by the2016. The decline in oil prices resultingindustrial supplies net sales was primarily due to challenges in sales declinesthe oilfield sector and macro-economic environment. This decline was partially offset by growth in our general industrial and oilfield channels. We expect this impact to continue throughout the year.retail channel sales.
Office furnitureAutomotive net sales in the first quarter of 20152016 increased 4.1%31.8% compared to the first quarter of 2014. Office furniture accounted for2015. Automotive net sales represented 5.9% of the Company’s first quarter of 20152016 net sales. This increase was primarily due to the acquisition of Nestor which contributed $16.9 million in net sales.
Office furniture net sales in the first quarter of 2016 decreased 5.0% compared to the first quarter of 2015. Office furniture accounted for 5.5% of the Company’s first quarter of 2016 consolidated net sales. Within this category we saw continued increasedThis decline was due to declines in sales toin national accounts and independent resellers, e-commerce customers, and certain larger customers which more than offset lost sales to a large national customer.dealer channels.
The remainder of the Company’s first quarter 20152016 net sales was composed of freight and other revenues.
Gross Profit and Gross Margin Rate. Gross profit for the first quarter of 20152016 was $204.4$200.1 million, compared to $187.1$200.4 million in the first quarter of 2014.2015. The gross margin rate of 15.3%14.8% was up 40down 20 basis points (bps) from the prior-year quarter gross margin rate of 14.9%15.0%. Our acquisitions added 40 basis points to our gross margin rate in the quarter. Excluding the impact of our acquisitions, our gross margin rate was flat to the prior year as product margins improved (31 bps) from higher purchase-related allowances offset partiallyimpacted by a shift in the customer and product mix. Higher LIFO expense (20lower inflation (22 bps) and higher inventory related reserves (11freight (22 bps) in the quarter, partially offset the product margin increase.by increased sales.
22
Operating Expenses. Operating expenses for the first quarter of 2016 were $198.4$167.7 million or 14.9%12.4% of net sales, compared to $197.6 million in the prior year, including $30.5 million related to repositioning actions.the first quarter of 2015 Repositioning Actions. Adjusted operating expenses were $167.9$167.4 million or 12.6%12.4% of net sales compared with $148.8$167.1 million or 11.9%12.5% of net sales in the same period last year. The $19.1$0.3 million increase was driven by $17.5 million from acquisitions and $1.6 million from operating investments.incremental costs related to the common platform project (22 bps).
Interest Expense, net. Interest expense, net for the first quarter of 20152016 was $4.8$5.9 million compared to $3.4$4.8 million in the first quarter of 2014.2015. This was driven by higher debt outstanding related to the acquisition of MEDCOour acquisitions in the fourth quarter of 2014.past year. Interest expense is expected to be higher in 20152016 than in the prior year.
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Income Taxes. Income tax expense was $5.2$10.0 million for the first quarter of 2015,2016, compared with $13.0$4.0 million for the same period in 2014.2015. The Company’s effective tax rate was 422.2%37.6% for the current-year quarter and 37.3%(196.6)% for the same period in 2014. The current quarter tax rate was impacted2015, driven by unfavorable discrete tax impacts of placing a non-strategic business for sale in the quarter.first quarter of 2015.
Net Income.Income (Loss). The net lossNet income for the first quarter of 20152016 totaled $4.0$16.5 million or $0.10$0.45 per diluted share, includingcompared to $(6.0) million in the prior year, which included $23.9 million after-tax, or $0.62 per diluted share, of costs related to repositioning actions.the first quarter charges. Adjusted net income was $19.9$16.7 million, or $0.52$0.45 per diluted share, compared with adjusted net income of $21.9$17.9 million or $0.55$0.46 per diluted share for the same three-month period in 2014.2015.
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In February 2016, as a result of plan amendment, the Company announced a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants of the Essendant Pension Plan. The Company estimates approximately 1,400 plan participants took this offering during the election period which terminated on April 12, 2016. The lump-sum settlement payments will be made on May 16, 2016, using assets from the Essendant Pension Plan. The settlement payments will result in a remeasurement of the Essendant Pension Plan’s assets and obligations in the second quarter of 2016. The remeasurement will result in a non-cash settlement charge in the second quarter of 2016 and will reduce net income and retained earnings, with a partial offset to accumulated other comprehensive income in shareholders’ equity. The amount of the remeasurement will depend on a variety of factors, including plan assets values and discount rates at the date of valuation.
Cash Flows
The following discussion focuses on information included in the accompanying Condensed Consolidated Statements of Cash Flows.
Operating Activities
Net cash provided byused in operating activities for the three months ended March 31, 20152016 totaled $62.7$10.8 million, compared with $1.5$62.7 million cash provided by operating activities in the same three-month period of 2014.three months ended March 31, 2015. The increase$73.5 million decrease over the prior year was primarily driven by declinesa $24.8 million increase in accounts receivable andin the current year versus a lower decline$26.2 million decrease in accounts payable and accrued liabilities, as we proactively manage cash flow.receivable in the prior year. Also, inventory decreased $28.0 million in the first quarter of 2016, compared with a decrease of $46.0 million in the prior year quarter.
Investing Activities
Net cash used in investing activities for the first three months of 20152016 was $5.5$9.6 million, compared with $5.9$5.5 million for the three months ended March 31, 2014. For the full year 2015, the Company expects capital spending to be approximately $30.0 million to $35.0 million.2015.
Financing Activities
Net cash used inprovided by financing activities for the three months ended March 31, 20152016 totaled $51.7$25.6 million, compared with $9.0$51.7 million provided bycash used in financing activities in the prior-year period. Net cash used inprovided by financing activities during the first three months of 20152016 was impacted by $29.6$37.0 million in net repaymentsborrowing under debt arrangements, $16.0our revolving credit facility, $6.8 million in share repurchases and $5.4$5.2 million in payments of cash dividends.
On February 10, 2016, the Board of Directors approved a dividend of $0.14 which was paid on April 15, 2016 to shareholders of record as of March 15, 2016.
In the first quarter of 2016, the Company had a Leverage Ratio, as defined in its 2013 Credit Agreement, 2013 Note Purchase Agreement and the Amended and Restated Transfer and Administration Agreement, that exceeds the 3.00 to 1.00 maximum per the agreements and, therefore, is currently limited in its ability to repurchase its stock.
22
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 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.
23
Financing available from debt and the sale of accounts receivable as of March 31, 2015,2016, is summarized below (in millions):
Availability
Maximum financing available under: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
| 334.2 |
|
|
|
|
|
| 405.8 |
|
|
|
|
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
|
|
|
| 150.0 |
|
|
|
|
|
Receivables Securitization Program (1) |
| 200.0 |
|
|
|
|
|
| 200.0 |
|
|
|
|
|
Outstanding letters of credit |
| 11.1 |
|
|
|
|
|
| 11.6 |
|
|
|
|
|
Total financing utilized |
|
|
|
|
| 695.3 |
|
|
|
|
|
| 767.4 |
|
Available financing, before restrictions |
|
|
|
|
| 354.7 |
|
|
|
|
|
| 282.6 |
|
Restrictive covenant limitation |
|
|
|
|
| - |
|
|
|
|
|
| 94.3 |
|
Available financing as of March 31, 2015 |
|
|
|
| $ | 354.7 |
| |||||||
Available financing as of March 31, 2016 |
|
|
|
| $ | 188.3 |
|
(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 debttotal capitalization consisted of the following amounts (in millions):
| As of |
|
| As of |
| As of |
|
| As of |
| ||||
| March 31, |
|
| December 31, |
| March 31, |
|
| December 31, |
| ||||
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 |
| ||||
2013 Credit Agreement | $ | 334.2 |
|
| $ | 363.0 |
| $ | 405.8 |
|
| $ | 368.4 |
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
| 150.0 |
|
| 150.0 |
|
|
| 150.0 |
|
Receivables Securitization Program |
| 200.0 |
|
|
| 200.0 |
|
| 200.0 |
|
|
| 200.0 |
|
Mortgage & Capital Lease |
| 0.1 |
|
|
| 0.9 |
|
| 0.1 |
|
|
| - |
|
Debt |
| 684.3 |
|
|
| 713.9 |
|
| 755.9 |
|
|
| 718.4 |
|
Stockholders’ equity |
| 828.4 |
|
|
| 856.1 |
|
| 734.5 |
|
|
| 723.7 |
|
Total capitalization | $ | 1,512.7 |
|
| $ | 1,570.0 |
| $ | 1,490.4 |
|
| $ | 1,442.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt-to-total capitalization ratio |
| 45.2 | % |
|
| 45.5 | % |
| 50.7 | % |
|
| 49.8 | % |
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 8, “Debt”, for further descriptions of the provisions of our financing facilities as well as Note 911 “Debt” in our Annual Report on Form 10-K for the year-ended December 31, 2014.
Contractual Obligations
During the three-month period ended March 31, 2015, contractual obligations have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.2015.
2423
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 three months of 20152016 from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.2015.
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 March 31, 2015,2016, 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 two lawsuits alleging that the Company sent unsolicited fax advertisements to the named plaintiffs, as well as 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"). One lawsuit was initially filed in the United States District Court for the Central District of California on May 1, 2015 and has been refiled in an Illinois state court, subject to a motion to dismiss the California case without prejudice. The other lawsuit was filed in the United States District Court for the Northern District of Illinois on January 14, 2016. In both lawsuits the plaintiffs 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. In each lawsuit, the Company is vigorously contesting class certification and denies that any violations occurred. 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 lawsuits are 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, 2014.2015. There have been no material changes to the risk factors described in such Form 10-K.
24
(a) | Not applicable. |
(b) | Not applicable. |
(c) | Common Stock Purchases. |
During the three-month periods ended March 31, 20152016 and 2014,2015, the Company repurchased 402,679241,270 and 331,369402,679 shares of USI’s common stock at an aggregate cost of $6.8 million and $16.3 million, and $13.7 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 0.5 milliondid not repurchase any additional shares for $18.7 million year-to-date through April 20, 2015.18, 2016. As of that date, the Company had approximately $123.7$68.2 million remaining of existing share repurchase authorization from the Board of Directors.
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 |
| ||||
January 1, 2015 to January 31, 2015 |
|
| 104,115 |
|
| $ | 40.44 |
|
|
| 104,115 |
|
| $ | 38,235,430 |
|
February 1, 2015 to February 28, 2015 |
|
| 88,454 |
|
|
| 41.63 |
|
|
| 88,454 |
|
|
| 134,552,953 |
|
March 1, 2015 to March 31, 2015 |
|
| 210,110 |
|
|
| 39.79 |
|
|
| 210,110 |
|
|
| 126,192,695 |
|
Total First Quarter |
|
| 402,679 |
|
| $ | 40.62 |
|
|
| 402,679 |
|
| $ | 126,192,695 |
|
2016 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 |
| ||||
January 1, 2016 to January 31, 2016 |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | 75,000,020 |
|
February 1, 2016 to February 29, 2016 |
|
| 178,278 |
|
|
| 27.80 |
|
|
| 178,278 |
|
|
| 70,044,065 |
|
March 1, 2016 to March 31, 2016 |
|
| 62,992 |
|
|
| 29.90 |
|
|
| 62,992 |
|
|
| 68,160,702 |
|
Total Third Quarter |
|
| 241,270 |
|
| $ | 28.85 |
|
|
| 241,270 |
|
| $ | 68,160,702 |
|
2625
(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 |
|
|
|
| |
3.2 |
| Amended and Restated Bylaws of |
|
| |
4.1 |
| Note Purchase Agreement, dated as of November 25, 2013, among |
|
| |
| Amendment No. 1 to Note Purchase Agreement, dated as of January 27, 2016, among ECO, ESND and the holders of Notes issued by the Company that are parties thereto. | |
4.3 |
| Parent Guaranty, dated as of November 25, 2013, by |
|
| |
|
| Subsidiary Guaranty, dated as of November 25, 2013, by all of the domestic subsidiaries of |
|
| |
10.1* | Essendant Inc. 2016 Annual Cash Incentive Award Plan For Section 16 Officers** | |
10.2* |
| Form of Performance Based Restricted Stock Unit Award Agreement |
10.3* | Form of 2016 Restricted Stock Award Agreement with EPS Minimum Under the 2015 Long-Term Incentive Plan** | |
10.4* | Amendment No. 1 to Fourth Amended and Restated Five-Year Revolving Credit Agreement, dated as of January 27, 2016, among ECO, ESND, the financial institutions that are parties theret,o and JPMorgan Chase Bank, National Association, as agent | |
10.5* | Fifth Amendment to Amended and Restated Transfer and Administration Agreement, dated as of March 30, 2016 among Essendant Receivables LLC, ECO, Essendant Financial Services LLC, PNC Bank, National Association and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch | |
10.6* | Amendment to the Amended and Restated Transfer and Administration Agreement, dated as of January 22, 2016 | |
18.1 | Preferability Letter on Change in Accounting Principle | |
|
| |
31.1* |
| Certification of Chief Executive Officer, dated as of April |
|
| |
31.2* |
| Certification of Chief Financial Officer, dated as of April |
|
| |
32.1* |
| Certification of Chief Executive Officer and Chief Financial Officer, dated as of April |
|
| |
101* |
| The following financial information from |
* | - Filed herewith |
** | - Represents a management contract or compensatory plan or arrangement |
2726
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: April |
|
| /s/ |
|
|
|
|
|
|
| Senior Vice President and Chief Financial Officer |
2827