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 June 30, 2015March 31, 2016
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
ESSENDANT 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 July 20, 2015,April 18, 2016, the registrant had outstanding 38,007,08137,153,988 shares of common stock, par value $0.10 per share.
FORM 10-Q
For the Quarterly Period Ended June 30, 2015March 31, 2016
TABLE OF CONTENTS
2
PART I – FINANCIAL INFORMATION
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| (Unaudited) |
|
| (Audited) |
| (Unaudited) |
|
|
|
|
| |||
| As of June 30, |
|
| As of December 31, |
| As of March 31, |
|
| As of December 31, |
| ||||
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 29,935 |
|
| $ | 20,812 |
| $ | 35,430 |
|
| $ | 29,983 |
|
Accounts receivable, less allowance for doubtful accounts of $18,157 in 2015 and $19,725 in 2014 |
| 667,062 |
|
|
| 702,527 |
| |||||||
Accounts receivable, less allowance for doubtful accounts of $17,686 in 2016 and $17,810 in 2015 |
| 741,625 |
|
|
| 716,537 |
| |||||||
Inventories |
| 875,465 |
|
|
| 926,809 |
|
| 894,350 |
|
|
| 922,162 |
|
Assets related to held for sale disposal group |
| 7,880 |
|
|
| - |
| |||||||
Other current assets |
| 29,595 |
|
|
| 30,042 |
|
| 35,153 |
|
|
| 27,310 |
|
Total current assets |
| 1,609,937 |
|
|
| 1,680,190 |
|
| 1,706,558 |
|
|
| 1,695,992 |
|
Property, plant and equipment, net |
| 130,216 |
|
|
| 138,217 |
|
| 132,452 |
|
|
| 133,751 |
|
Goodwill |
| 402,545 |
|
|
| 398,042 |
|
| 299,147 |
|
|
| 299,355 |
|
Intangible assets, net |
| 88,622 |
|
|
| 111,958 |
|
| 93,657 |
|
|
| 96,413 |
|
Other long-term assets |
| 48,439 |
|
|
| 41,810 |
|
| 54,004 |
|
|
| 37,348 |
|
Total assets | $ | 2,279,759 |
|
| $ | 2,370,217 |
| $ | 2,285,818 |
|
| $ | 2,262,859 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
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|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 465,953 |
|
| $ | 485,241 |
| $ | 521,132 |
|
| $ | 531,949 |
|
Accrued liabilities |
| 190,257 |
|
|
| 192,792 |
|
| 178,858 |
|
|
| 177,472 |
|
Liabilities related to held for sale disposal group |
| 7,169 |
|
|
| - |
| |||||||
Current maturities of long-term debt |
| 28 |
|
|
| 851 |
|
| 48 |
|
|
| 51 |
|
Total current liabilities |
| 663,407 |
|
|
| 678,884 |
|
| 700,038 |
|
|
| 709,472 |
|
Deferred income taxes |
| 12,362 |
|
|
| 17,763 |
|
| 7,508 |
|
|
| 11,901 |
|
Long-term debt |
| 661,143 |
|
|
| 713,058 |
|
| 753,854 |
|
|
| 716,264 |
|
Other long-term liabilities |
| 102,577 |
|
|
| 104,394 |
|
| 89,904 |
|
|
| 101,488 |
|
Total liabilities |
| 1,439,489 |
|
|
| 1,514,099 |
|
| 1,551,304 |
|
|
| 1,539,125 |
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
| 411,504 |
|
|
| 412,291 |
|
| 411,485 |
|
|
| 410,927 |
|
Treasury stock, at cost – 36,349,375 shares in 2015 and 35,719,041 shares in 2014 |
| (1,070,183 | ) |
|
| (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 |
| 1,557,281 |
|
|
| 1,541,675 |
|
| 1,475,216 |
|
|
| 1,463,821 |
|
Accumulated other comprehensive loss |
| (65,776 | ) |
|
| (62,791 | ) |
| (54,512 | ) |
|
| (57,591 | ) |
Total stockholders’ equity |
| 840,270 |
|
|
| 856,118 |
|
| 734,514 |
|
|
| 723,734 |
|
Total liabilities and stockholders’ equity | $ | 2,279,759 |
|
| $ | 2,370,217 |
| $ | 2,285,818 |
|
| $ | 2,262,859 |
|
See notes to condensed consolidated financial statements.
3
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
| For the Three Months Ended |
|
| For the Six Months Ended |
| For the Three Months Ended |
| |||||||||||||||
| June 30, |
|
| June 30, |
| March 31, |
| |||||||||||||||
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 (Revised)* |
| ||||||
Net sales | $ | 1,341,799 |
|
| $ | 1,320,037 |
|
| $ | 2,674,174 |
|
| $ | 2,574,176 |
| $ | 1,352,296 |
|
| $ | 1,332,375 |
|
Cost of goods sold |
| 1,129,737 |
|
|
| 1,120,577 |
|
|
| 2,257,662 |
|
|
| 2,187,633 |
|
| 1,152,214 |
|
|
| 1,131,980 |
|
Gross profit |
| 212,062 |
|
|
| 199,460 |
|
|
| 416,512 |
|
|
| 386,543 |
|
| 200,082 |
|
|
| 200,395 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehousing, marketing and administrative expenses |
| 158,159 |
|
|
| 142,186 |
|
|
| 356,531 |
|
|
| 291,035 |
|
| 167,678 |
|
|
| 197,581 |
|
Operating income |
| 53,903 |
|
|
| 57,274 |
|
|
| 59,981 |
|
|
| 95,508 |
|
| 32,404 |
|
|
| 2,814 |
|
Interest expense, net |
| 4,778 |
|
|
| 3,833 |
|
|
| 9,617 |
|
|
| 7,207 |
|
| 5,897 |
|
|
| 4,839 |
|
Income before income taxes |
| 49,125 |
|
|
| 53,441 |
|
|
| 50,364 |
|
|
| 88,301 |
| |||||||
Income (loss) before income taxes |
| 26,507 |
|
|
| (2,025 | ) | |||||||||||||||
Income tax expense |
| 18,864 |
|
|
| 20,110 |
|
|
| 24,095 |
|
|
| 33,113 |
|
| 9,977 |
|
|
| 3,982 |
|
Net income | $ | 30,261 |
|
| $ | 33,331 |
|
| $ | 26,269 |
|
| $ | 55,188 |
| |||||||
Net income per share - basic: | $ | 0.80 |
|
| $ | 0.86 |
|
| $ | 0.69 |
|
| $ | 1.41 |
| |||||||
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) | |||||||||||||||
Net income (loss) per share - basic: | $ | 0.45 |
|
| $ | (0.16 | ) | |||||||||||||||
Average number of common shares outstanding - basic |
| 37,765 |
|
|
| 38,816 |
|
|
| 37,939 |
|
|
| 39,004 |
|
| 36,593 |
|
|
| 38,115 |
|
Net income per share - diluted: | $ | 0.79 |
|
| $ | 0.85 |
|
| $ | 0.69 |
|
| $ | 1.40 |
| |||||||
Net income (loss) per share - diluted: | $ | 0.45 |
|
| $ | (0.16 | ) | |||||||||||||||
Average number of common shares outstanding - diluted |
| 38,106 |
|
|
| 39,226 |
|
|
| 38,317 |
|
|
| 39,435 |
|
| 36,875 |
|
|
| 38,115 |
|
Dividends declared per share | $ | 0.14 |
|
| $ | 0.14 |
|
| $ | 0.28 |
|
| $ | 0.28 |
| $ | 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
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
| For the Three Months Ended |
|
| For the Six Months Ended |
| ||||||||||
| June 30, |
|
| June 30, |
| ||||||||||
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||
Net income | $ | 30,261 |
|
| $ | 33,331 |
|
| $ | 26,269 |
|
| $ | 55,188 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized translation adjustment |
| 209 |
|
|
| 562 |
|
|
| (4,421 | ) |
|
| 17 |
|
Minimum pension liability adjustments |
| 932 |
|
|
| 580 |
|
|
| 1,864 |
|
|
| 1,161 |
|
Unrealized interest rate swap adjustments |
| 48 |
|
|
| (626 | ) |
|
| (428 | ) |
|
| (785 | ) |
Total other comprehensive gain (loss), net of tax |
| 1,189 |
|
|
| 516 |
|
|
| (2,985 | ) |
|
| 393 |
|
Comprehensive income | $ | 31,450 |
|
| $ | 33,847 |
|
| $ | 23,284 |
|
| $ | 55,581 |
|
| For the Three Months Ended |
| |||||
| March 31, |
| |||||
| 2016 |
|
| 2015 (Revised)* |
| ||
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) |
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
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 | ) |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
| For the Six Months Ended |
| For the Three Months Ended |
| ||||||||||
| June 30, |
| March 31, |
| ||||||||||
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 (Revised)* |
| ||||
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 26,269 |
|
| $ | 55,188 |
| |||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
| |||||||
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
| |||||||
Depreciation and amortization |
| 24,198 |
|
|
| 19,430 |
|
| 11,731 |
|
|
| 12,223 |
|
Share-based compensation |
| 3,268 |
|
|
| 4,294 |
|
| 2,911 |
|
|
| 2,640 |
|
Loss on the disposition of property, plant and equipment |
| 57 |
|
|
| 96 |
| |||||||
Gain on the disposition of property, plant and equipment |
| (167 | ) |
|
| (15 | ) | |||||||
Amortization of capitalized financing costs |
| 451 |
|
|
| 460 |
|
| 166 |
|
|
| 272 |
|
Excess tax benefits related to share-based compensation |
| (433 | ) |
|
| (638 | ) | |||||||
Excess tax cost (benefit) related to share-based compensation |
| 133 |
|
|
| (262 | ) | |||||||
Asset impairment charges |
| 24,034 |
|
|
| - |
|
| - |
|
|
| 23,610 |
|
Deferred income taxes |
| (8,365 | ) |
|
| (5,317 | ) |
| (1,881 | ) |
|
| (1,469 | ) |
Changes in operating assets and liabilities (net of acquisitions): |
|
|
|
|
|
|
| |||||||
Decrease (increase) in accounts receivable, net |
| 28,330 |
|
|
| (17,650 | ) | |||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||||||
(Increase) decrease in accounts receivable, net |
| (24,819 | ) |
|
| 26,217 |
| |||||||
Decrease in inventory |
| 44,984 |
|
|
| 39,290 |
|
| 28,018 |
|
|
| 46,023 |
|
Increase in other assets |
| (10,173 | ) |
|
| (2,765 | ) |
| (24,774 | ) |
|
| (10,751 | ) |
Increase in accounts payable |
| 3,152 |
|
|
| 21,961 |
|
| 9,571 |
|
|
| 645 |
|
Decrease in checks in-transit |
| (19,240 | ) |
|
| (28,545 | ) |
| (20,294 | ) |
|
| (13,613 | ) |
Decrease (increase) in accrued liabilities |
| 4,794 |
|
|
| (1,106 | ) | |||||||
Decrease in other liabilities |
| (478 | ) |
|
| (5,809 | ) | |||||||
Net cash provided by operating activities |
| 120,848 |
|
|
| 78,889 |
| |||||||
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| (11,931 | ) |
|
| (10,335 | ) |
| (9,877 | ) |
|
| (5,490 | ) |
Proceeds from the disposition of property, plant and equipment |
| 18 |
|
|
| 869 |
|
| 281 |
|
|
| 18 |
|
Acquisition, net of cash acquired |
| (532 | ) |
|
| (26,161 | ) | |||||||
Net cash used in investing activities |
| (12,445 | ) |
|
| (35,627 | ) |
| (9,596 | ) |
|
| (5,472 | ) |
|
|
|
|
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|
|
| |||||||
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under revolving credit facility |
| (52,738 | ) |
|
| (14,489 | ) | |||||||
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 |
| (759 | ) |
|
| (1,788 | ) | |||||||
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 |
| (31,227 | ) |
|
| (31,152 | ) |
| (6,839 | ) |
|
| (16,028 | ) |
Payment of cash dividends |
| (10,699 | ) |
|
| (10,991 | ) |
| (5,160 | ) |
|
| (5,396 | ) |
Excess tax benefits related to share-based compensation |
| 433 |
|
|
| 638 |
| |||||||
Excess tax (cost) benefit related to share-based compensation |
| (133 | ) |
|
| 262 |
| |||||||
Payment of debt issuance costs |
| (36 | ) |
|
| (615 | ) |
| - |
|
|
| (36 | ) |
Net cash used in financing activities |
| (95,026 | ) |
|
| (34,097 | ) | |||||||
Net cash provided by (used in) financing activities |
| 25,595 |
|
|
| (51,703 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
| (135 | ) |
|
| 4 |
|
| 269 |
|
|
| (1,758 | ) |
Transfer of cash to held for sale |
| (4,119 | ) |
|
| - |
|
| - |
|
|
| (970 | ) |
Net change in cash and cash equivalents |
| 9,123 |
|
|
| 9,169 |
|
| 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 | $ | 29,935 |
|
| $ | 31,495 |
| $ | 35,430 |
|
| $ | 23,631 |
|
Other Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments, net | $ | 31,618 |
|
| $ | 25,236 |
| $ | 1,027 |
|
| $ | 3,183 |
|
Interest paid |
| 9,451 |
|
|
| 4,621 |
|
| 7,292 |
|
|
| 6,213 |
|
See notes to condensed consolidated financial statements.
6
ESSENDANT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying Condensed Consolidated Financial Statements represent Essendant Inc. (“ESND”) (formerly known as United Stationers Inc.) with its wholly owned subsidiary Essendant Co. (formerly known as United Stationers Supply Co.(“ECO”), and Essendant Co’sECO’s subsidiaries (collectively, “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 ESND and its subsidiaries. All intercompany transactions and balances have been eliminated. The Company operates in a single reportable segment as a leading distributor of workplace essentials.
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 Essendant at June 30, 2015March 31, 2016 and the results of operations and cash flows for the six monthsthree-month periods ended June 30, 2015March 31, 2016 and 2014.2015. The results of operations for the three and six months ended June 30, 2015March 31, 2016 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year.
Inventory
The Company used the last-in, first-out (“LIFO”) method for valuing approximately 77% and 74% of its total inventory as of June 30, 2015 and December 31, 2014, respectively. The remaining inventory was 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 was 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 $124.2 million and $118.6 million higher than reported as of June 30, 2015 and December 31, 2014, respectively.
The six-month change in the LIFO reserve as of June 30, 2015 resulted in a $5.6 million increase in cost of goods sold related to 2015 inflation. The six-month change in the LIFO reserves as of June 30, 2014 resulted in a $1.6 million increase 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 $3.4 million liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of purchases in 2014. This liquidation was more than offset by LIFO expense of $5.0 million related to 2014 inflation.
New Accounting Pronouncements
In April 2015,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, that simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance costs. The ASU will be effective for Essendant financial statements issued for fiscal years beginning after December 15, 2015, and early application is permitted. The Company is currently evaluating the timing of implementation of the new guidance but expect it will have an immaterial impact on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, that provides guidance to customers about whether a cloud computing arrangement includes a software license. If such an arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for it as a service contract. This ASU will be effective for Essendant for annual periods beginning after December 15, 2015, and early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
7
In May 2014, the FASB issued ASU No. 2014-09, Revenue Fromfrom Contracts Withwith Customers,, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU No. 2014-09. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. 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,July 31, 2015, Essendant Co. completed the acquisition of CPO, a leading online retailer of brand name power tools and equipment. The acquisition of CPO significantly expanded the Company’s digital resources and capabilities to support resellers as they transition to an increasingly online environment. CPO’s expertise will strengthen Essendant’s ability to offer features like improved product content, real-time access to inventory and pricing, digital marketing and merchandising, and an enhanced digital platform to our resellers and manufacturing partners.
The purchase price was $37.8 million, including $5.5 million related to the estimated fair value of contingent consideration. The contingent consideration ultimately paid will be determined based on CPO’s sales 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 million. Any changes to the estimated fair value after the original purchase accounting was completed were recorded in “warehousing, marketing and administrative expenses” in the period in which the change occurred. The Company financed the 100% stock acquisition with borrowings under the Company’s available committed bank facilities.
The fair value of the assets and liabilities acquired were determined using various valuation methods including selling price, a market approach, and discounted cash flows using both an income and cost approach.
The final allocation of the purchase price was as follows (amounts in thousands):
Purchase price, net of cash acquired |
|
|
|
| $ | 32,225 |
|
Accounts receivable | $ | (2,956 | ) |
|
|
|
|
Inventories |
| (13,051 | ) |
|
|
|
|
Other current assets |
| (269 | ) |
|
|
|
|
Property, plant and equipment, net |
| (488 | ) |
|
|
|
|
Intangible assets |
| (12,800 | ) |
|
|
|
|
Total assets acquired |
|
|
|
|
| (29,564 | ) |
Accounts payable |
| 16,911 |
|
|
|
|
|
Accrued liabilities |
| 2,580 |
|
|
|
|
|
Deferred income taxes |
| 3,453 |
|
|
|
|
|
Other long-term liabilities |
| 90 |
|
|
|
|
|
Total liabilities assumed |
|
|
|
|
| 23,034 |
|
Goodwill |
|
|
|
| $ | 25,695 |
|
The purchased identifiable intangible assets were as follows (amounts in thousands):
| Total |
|
| Estimated Life | |
Customer relationships | $ | 5,200 |
|
| 3 years |
Trademark |
| 7,600 |
|
| 15 years |
Total | $ | 12,800 |
|
|
|
8
On October 31, 2014, Essendant Co. 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 Equipement 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.
The purchase price was $150.4 million, including $4.7 million related to the estimated fair value of contingent consideration. The contingent consideration ultimately paid will be determined based on MEDCO’s sales and EBITDA during a three-year period immediately following the acquisition date. Additionally, $6.0 million was reserved as a payable upon completion of an eighteen month indemnification period. The final payments related to the contingent consideration 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.
The Company has developed a preliminary estimate of the fair value of assets acquired and liabilities assumed for purposes of allocating the purchase price. The 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 June 30, 2015, the preliminary allocation of the purchase price was as follows (amounts in thousands):
Purchase price, net of cash acquired |
|
|
|
| $ | 145,873 |
|
Accounts receivable | $ | (44,815 | ) |
|
|
|
|
Inventories |
| (55,491 | ) |
|
|
|
|
Other current assets |
| (1,299 | ) |
|
|
|
|
Property, plant and equipment, net |
| (4,408 | ) |
|
|
|
|
Other assets |
| (442 | ) |
|
|
|
|
Intangible assets |
| (39,330 | ) |
|
|
|
|
Total assets acquired |
|
|
|
|
| (145,785 | ) |
Accounts payable |
| 32,383 |
|
|
|
|
|
Accrued liabilities |
| 5,254 |
|
|
|
|
|
Deferred income taxes |
| 1,333 |
|
|
|
|
|
Other long-term liabilities |
| 52 |
|
|
|
|
|
Total liabilities assumed |
|
|
|
|
| 39,022 |
|
Goodwill |
|
|
|
| $ | 39,110 |
|
The purchased identifiable intangible assets were as follows (amounts in thousands):
| Total |
|
| Estimated Life | |
Customer relationships | $ | 36,920 |
|
| 4-15 years |
Trademarks |
| 2,410 |
|
| 1.5-15 years |
Total | $ | 39,330 |
|
|
|
Any changes to the preliminary allocation of the purchase price, some of which may be material, will be allocated to residual goodwill.
9
On February 10, 2015, the Company approved a plan to sell its subsidiary in Mexico, which is not strategic to the Company. The Company plans to dispose of the entity in 2015. As of the approval date, in accordance with Accounting Standards Codification (ASC) 360-10-45-9 Property, Plant, and Equipment, the Mexican subsidiary met all of the criteria to be classified as a held-for-sale asset disposal group. In accordance with ASC 350-20-40, Intangibles – Goodwill and Other, the Company allocated a proportionate share of the goodwill balance from the office product and janitorial and breakroom supply reporting unit based on 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 allocated to the subsidiary was determined to be fully impaired. Additionally, in conjunction with classifying the subsidiary as a held-for-sale asset disposal group, the Company revalued the subsidiary to fair value using the cost-approach method less the estimated cost to sell. The carrying value, including a $10.1 million cumulative foreign currency translation adjustment, of the disposal group was then compared to the fair value less the estimated cost to sell, resulting in a pre-tax impairment loss of $10.1 million. The goodwill impairment of $3.3 million, the held-for-sale impairment of $10.1 million and the $0.1 million estimated cost to sell were recorded in the first quarter of 2015 within “warehousing, marketing and administrative expenses.” During the second quarter, the Company recorded an additional $1.4 million within “warehousing, marketing and administrative expenses.” Additional financial statement impacts may occur during the remainder of 2015 as this transaction is completed.
As of June 30, 2015, the carrying amounts, excluding intercompany accounts, of the Mexican subsidiary by major classes of assets and liabilities included in the Consolidated Balance Sheet were as follows (in thousands):
| Amount |
| |
Assets held for sale: |
|
|
|
Cash and cash equivalents | $ | 4,119 |
|
Accounts receivable, less allowance for doubtful accounts |
| 6,720 |
|
Inventories |
| 6,527 |
|
Other current assets |
| 418 |
|
Net property, plant equipment |
| 110 |
|
Other assets |
| 657 |
|
Held-for-sale valuation allowance |
| (10,671 | ) |
Total assets held for sale | $ | 7,880 |
|
|
|
|
|
Liabilities held for sale: |
|
|
|
Accounts payable |
| 3,447 |
|
Accrued liabilities |
| 3,184 |
|
Other long-term liabilities |
| 538 |
|
Total liabilities held for sale | $ | 7,169 |
|
Agreement to Purchase Nestor Sales LLC
On July 14, 2015, Essendant Co signed an agreement to acquire Nestor Sales LLC, (“Nestor”), a leading wholesaler and distributor of tools, equipment and supplies to the transportation industry. The all cash purchase price is $38.5 million, subject to closing adjustments. This acquisition accelerates the Company’s growth in the automotive aftermarket, complements the Company’s existing industrial offerings while providing access to new customer segments, and advances a key strategic pillar to diversify into higher growth and margin channels and categories. categories that leverage our common platform.
The acquisition is expected to be completed in the third quarter of 2015, subject to customary closing conditions.purchase price was $41.8 million. This acquisition will bewas funded through a combination of cash on hand and cash available under ourthe Company’s revolving credit facility.
The Company has developed preliminary estimates of the fair values of assets acquired and liabilities assumed for purposes of allocating the purchase price. The estimates are subject to change as the valuation activities are completed. The fair values of the assets and liabilities were estimated using various valuation methods including estimated selling prices, market approach, and discounted cash flows using both an income and cost approach.
Any changes to the preliminary allocations of the purchase price, some of which may be material, will be allocated to residual goodwill.
At 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 16, 2016, the Company 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.
3. Share-Based Compensation
As of June 30, 2015,March 31, 2016, the Company has two active equity compensation plans. On May 20,Under the 2015 the Company’s stockholders approved certain amendments to the Amended and Restated 2004 Long-Term Incentive Plan (“LTIP) which included the renaming of the LTIP to the “2015 Long-Term Incentive Plan” (as amended and restated, the “2015 Plan”). Under the 2015 Plan,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.
10
The Company granted 206,479120,376 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 sixthree months of 2015. No stock options were granted during the first six months of 2015. During the first six months of 2014, the Company granted 62,594 shares of restricted stock, 147,725 RSUs, and 5,538 stock options.
4. Severance and Restructuring Charges
During
Commencing in the secondfirst quarter of 2015, the Company recorded a $0.1 million pre-tax reversal of expense relating tobegan certain restructuring actions which included workforce reductions and facility consolidations. Duringclosures. 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. These charges were included in “warehousing, marketing and administrative expenses.” Cash outflowsoutlays for these actions will occuroccurred primarily in 2015 and were approximately $2.4$0.7 million inand $0.5 million, respectively, for the sixthree months ended June 30,March 31, 2016 and 2015. As of June 30, 2015,March 31, 2016, the Company has accrued liabilities for these actions of $3.9 million. The Company estimated an additional $2.7 million will be incurred in the remainder of 2015 due to facility closures related to this action, for a total 2015 expense of approximately $9.0$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 |
| 9,184 |
|
Currency translation adjustment |
| (1,362 | ) |
Goodwill, balance as of June 30, 2015 | $ | 402,545 |
|
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 |
|
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):
| June 30, 2015 |
| December 31, 2014 | March 31, 2016 |
| December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
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| Weighted |
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|
|
|
|
|
|
|
|
| Weighted |
|
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|
|
|
|
|
|
|
|
| Weighted |
|
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|
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|
|
| Weighted |
|
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|
|
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|
| Average |
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| Average |
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| Average |
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| Average |
| Gross |
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|
| Net |
|
| Useful |
| Gross |
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|
|
| Net |
|
| Useful | Gross |
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|
|
|
| Net |
|
| Useful |
| Gross |
|
|
|
|
|
| Net |
|
| Useful | ||||||||
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life |
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life | Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life |
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life | ||||||||||||
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) |
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) | Amount |
|
| Amortization |
|
| Amount |
|
| (years) |
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) | ||||||||||||
Intangible assets subject to amortization |
|
|
|
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|
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|
|
|
|
|
|
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|
|
|
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|
Customer relationships and other intangibles | $ | 121,766 |
|
| $ | (46,228 | ) |
| $ | 75,538 |
|
| 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 |
| 4,660 |
|
|
| (2,981 | ) |
|
| 1,679 |
|
| 4 |
|
| 4,672 |
|
|
| (2,364 | ) |
|
| 2,308 |
|
| 4 |
| 4,654 |
|
|
| (4,260 | ) |
|
| 394 |
|
| 4 |
|
| 4,644 |
|
|
| (4,260 | ) |
|
| 384 |
|
| 4 |
Trademarks |
| 12,112 |
|
|
| (2,307 | ) |
|
| 9,805 |
|
| 14 |
|
| 14,428 |
|
|
| (1,716 | ) |
|
| 12,712 |
|
| 13 |
| 13,734 |
|
|
| (4,753 | ) |
|
| 8,981 |
|
| 14 |
|
| 13,688 |
|
|
| (4,240 | ) |
|
| 9,448 |
|
| 14 |
Total | $ | 138,538 |
|
| $ | (51,516 | ) |
| $ | 87,022 |
|
|
|
| $ | 144,861 |
|
| $ | (45,203 | ) |
| $ | 99,658 |
|
|
| $ | 156,810 |
|
| $ | (63,153 | ) |
| $ | 93,657 |
|
|
|
| $ | 156,270 |
|
| $ | (59,857 | ) |
| $ | 96,413 |
|
|
|
Intangible assets not subject to amortization |
|
|
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|
|
|
|
|
|
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|
|
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|
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|
|
|
| |||||||||||||||||||||||||||
Trademarks |
| 1,600 |
|
|
| - |
|
|
| 1,600 |
|
| n/a |
|
| 12,300 |
|
|
| - |
|
|
| 12,300 |
|
| n/a | |||||||||||||||||||||||||||
Total | $ | 140,138 |
|
| $ | (51,516 | ) |
| $ | 88,622 |
|
|
|
| $ | 157,161 |
|
| $ | (45,203 | ) |
| $ | 111,958 |
|
|
|
In 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 related to the corporate name change that was approved 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 these trademarks based upon management’s current forecasted future revenues from the trademarks. The trademarks had a total valuewere fully amortized as of $1.0 million at June 30,December 31, 2015.
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 |
| $ | 14,863 |
| ||||
2016 |
|
| 11,910 |
|
| $ | 12,314 |
|
2017 |
|
| 9,801 |
|
|
| 10,855 |
|
2018 |
|
| 7,248 |
|
|
| 8,111 |
|
2019 |
|
| 5,477 |
|
|
| 6,993 |
|
2020 |
|
| 6,990 |
|
11
6. Accumulated Other Comprehensive Income (Loss)
The change in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the period ended June 30, 2015March 31, 2016 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 |
|
| (4,421 | ) |
|
| (864 | ) |
|
| - |
|
|
| (5,285 | ) |
|
| 2,691 |
|
|
| (753 | ) |
|
| - |
|
|
| 1,938 |
|
Amounts reclassified from AOCI |
|
| - |
|
|
| 436 |
|
|
| 1,864 |
|
|
| 2,300 |
|
|
| - |
|
|
| 226 |
|
|
| 915 |
|
|
| 1,141 |
|
Net other comprehensive (loss) income |
|
| (4,421 | ) |
|
| (428 | ) |
|
| 1,864 |
|
|
| (2,985 | ) |
|
| 2,691 |
|
|
| (527 | ) |
|
| 915 |
|
|
| 3,079 |
|
AOCI, balance as of June 30, 2015 |
| $ | (16,344 | ) |
| $ | (154 | ) |
| $ | (49,278 | ) |
| $ | (65,776 | ) | ||||||||||||||||
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 and six-month period ending June 30, 2015 respectivelyMarch 31, 2016 (in thousands):
|
| Amount Reclassified From AOCI |
|
|
| |||||
|
| For the Three |
|
| For the Six |
|
|
| ||
|
| Months Ended |
|
| Months Ended |
|
|
| ||
|
| June 30, |
|
| June 30, |
|
| Affected Line Item In The Statement | ||
Details About AOCI Components |
| 2015 |
|
| 2015 |
|
| Where Net Income is Presented | ||
Gain on interest rate swap cash flow hedges, before tax |
| $ | 339 |
|
| $ | 703 |
|
| Interest expense, net |
|
|
| (129 | ) |
|
| (267 | ) |
| Tax provision |
|
| $ | 210 |
|
| $ | 436 |
|
| Net of tax |
Amortization of defined benefit pension plan items: |
|
|
|
|
|
|
|
|
|
|
Prior service cost and unrecognized loss |
| $ | 1,525 |
|
| $ | 3,050 |
|
| Warehousing, marketing and administrative expenses |
|
|
| (593 | ) |
|
| (1,186 | ) |
| Tax provision |
|
|
| 932 |
|
|
| 1,864 |
|
| Net of tax |
Total reclassifications for the period |
| $ | 1,142 |
|
| $ | 2,300 |
|
| 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 ended March 31, 2016 and six-month periods ending June 30, 2015, and 2014, 0.3 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 |
|
| For the Six Months Ended |
| For the Three Months Ended |
| |||||||||||||||
| June 30, |
|
| June 30, |
| March 31, |
| |||||||||||||||
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 |
| ||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 30,261 |
|
| $ | 33,331 |
|
| $ | 26,269 |
|
| $ | 55,188 |
| |||||||
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) | |||||||||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted average shares |
| 37,765 |
|
|
| 38,816 |
|
|
| 37,939 |
|
|
| 39,004 |
|
| 36,593 |
|
|
| 38,115 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and restricted units |
| 341 |
|
|
| 410 |
|
|
| 378 |
|
|
| 431 |
| |||||||
Employee stock options and restricted stock |
| 282 |
|
|
| - |
| |||||||||||||||
Denominator for diluted earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares and the effect of dilutive securities |
| 38,106 |
|
|
| 39,226 |
|
|
| 38,317 |
|
|
| 39,435 |
|
| 36,875 |
|
|
| 38,115 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income per share - basic | $ | 0.80 |
|
| $ | 0.86 |
|
| $ | 0.69 |
|
| $ | 1.41 |
| |||||||
Net income per share - diluted | $ | 0.79 |
|
| $ | 0.85 |
|
| $ | 0.69 |
|
| $ | 1.40 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
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 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 June 30,March 31, 2016 and 2015, and 2014, the Company repurchased 378,462241,270 and 459,922402,679 shares of the Company’s common stock at an aggregate cost of $15.2$6.8 million and $17.9 million, respectively. During the six-month periods ended June 30, 2015 and 2014, the Company repurchased 781,141 and 791,291 shares of the Company’s common stock at an aggregate cost of $31.5 million and $31.7$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 sixthree months of 20152016 and 2014,2015, the Company reissued 150,807106,800 and 91,90431,745 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.
11
ESND is a holding company and, as a result, its primary sources of funds are cash generated from operating activities of its direct operating subsidiary, Essendant Co.,ECO, and from borrowings by Essendant Co.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) restrict Essendant Co.’s ability to transfer2015) contain restrictions on the use of cash transferred from ECO to ESND.
Debt consisted of the following amounts (in millions):
| As of |
|
| As of |
| As of |
| As of |
| ||||
| June 30, 2015 |
|
| December 31, 2014 |
| March 31, 2016 |
| December 31, 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Credit Agreement | $ | 311.1 |
|
| $ | 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 | $ | 661.2 |
|
| $ | 713.9 |
| $ | 753.9 |
| $ | 716.3 |
|
As of June 30, 2015, 77.3%March 31, 2016, 80.2% of the Company’s outstanding debt, excluding capital leases and transaction costs, was priced at variable interest rates based primarily on the applicable bank prime rate or London InterBank Offered Rate (“LIBOR”).
13
The Company had outstanding letters of credit of $11.1$11.6 million under the 2013 Credit Agreement as of June 30, 2015March 31, 2016 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 June 30, 2015,March 31, 2016, the applicable margin for LIBOR-based loans was 1.375%1.50% and for Alternate Base Rate loans was 0.375%0.50%. Essendant Co.Effective 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.
On June 26, 2015, the Company and its subsidiaries Essendant Co., Essendant Financial Services LLC (“EFS") and Essendant Receivables LLC ("ESR") entered into a Third Omnibus Amendment to Transaction Documents (the “Omnibus Amendment”) with The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch ("BTMU") and PNC Bank, National Association (“PNC Bank”). The Omnibus Agreement amended the transaction documents of the Receivable Securitization Program to reflect rebranded legal entity names. On June 29, 2015, Lagasse, LLC, a subsidiary of Essendant Co. merged into Essendant Co. All accounts receivable originated by Lagasse prior to the merger are excluded from the Program. The Omnibus Agreement amended the Transaction Documents to also exclude “Excluded Receivables” from the Receivables Securitization Program, which are defined as “any receivable which, at the time of such Receivable’s origination, was processed on the [enterprise resource planning system previously used by Lagasse, LLC].”
As of June 30, 2015March 31, 2016 and December 31, 2014, $380.32015, $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). ESR had $200.0 million outstanding under the Receivables Securitization Program as of June 30, 2015March 31, 2016 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 threethree-month periods ended March 31, 2016 and six months ended June 30, 2015 and 2014 was as follows (dollars in thousands):
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| For the Three Months Ended March 31, |
| |||||||||||||||
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 |
| ||||||
Service cost - benefit earned during the period | $ | 400 |
|
| $ | 327 |
|
| $ | 800 |
|
| $ | 655 |
| $ | 317 |
|
| $ | 400 |
|
Interest cost on projected benefit obligation |
| 2,270 |
|
|
| 2,242 |
|
|
| 4,540 |
|
|
| 4,485 |
|
| 2,343 |
|
|
| 2,270 |
|
Expected return on plan assets |
| (2,805 | ) |
|
| (2,557 | ) |
|
| (5,610 | ) |
|
| (5,115 | ) |
| (2,718 | ) |
|
| (2,805 | ) |
Amortization of prior service cost |
| 75 |
|
|
| 45 |
|
|
| 150 |
|
|
| 90 |
|
| 74 |
|
|
| 75 |
|
Amortization of actuarial loss |
| 1,450 |
|
|
| 905 |
|
|
| 2,900 |
|
|
| 1,810 |
|
| 1,419 |
|
|
| 1,450 |
|
Net periodic pension cost | $ | 1,390 |
|
| $ | 962 |
|
| $ | 2,780 |
|
| $ | 1,925 |
| $ | 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 six monththree-month periods ended June 30,March 31, 2016 and 2015, and 2014.respectively. Additional contributions, if any, for 20152016 have not yet been determined. As of June 30, 2015March 31, 2016 and December 31, 2014,2015, respectively, the Company had accrued $48.0$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 $1.5$1.8 million and $2.9$1.4 million, respectively, for the Company match of employee contributions to the Plan for the threethree-month periods ended March 31, 2016 and six months ended June 30, 2015. During the same periods last year, the Company recorded expense of $1.3 million and $2.7 million to match employee contributions.
14
10. Derivative Financial Instruments
The Company selectively uses derivative financial instruments to manage a portion of exposuresreduce its exposure to fluctuationschanges in interest rates and foreign currency exchange rates. TheUnder Company policy, the Company does not enter into derivative financial instruments for trading or speculative purposes. A description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs.
The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its debt arrangements. In July 2012, the Company entered into an interest rate swap to convert a portion of the Company’s floating-rate debt to a fixed-rate basis. The fair values of these instruments arevalue is determined by using quoted market forward rates (level 2 inputs) and reflectreflects the present value of the amount that the Company would pay for contracts involving the same notional amountsamount and maturity dates. These instruments qualify for hedge accounting and thedate. The changes in fair value areof this instrument is reported as a component of other comprehensivein AOCI and reclassified into earnings (losses) net of tax effects.
in interest expense in the same periods during which the related interest payments on the hedged debt affect earnings. This swap matures in July 2017.As of June 30, 2015March 31, 2016 and December 31, 2014,2015, the fair value of the Company's interest rate swap included in the Company’s Condensed Consolidated Balance Sheet as a component of “Other long-term liabilities” was $0.9 million and $0.3$0.5 million respectively. The purpose of the interest rate swap is to convert a portion of the Company’s floating-rate debt to a fixed-rate basis. The swap matures in July 2017. The Company had no other derivative instruments as of June 30, 2015 or December 31, 2014.
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 in cost of goods sold in the same periods during which the 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 three-month periods ended March 31, 2016 and 2015 (in thousands).
| 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, based on market 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. |
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 June 30, 2015March 31, 2016 and December 31, 20142015 (in thousands):
| Fair Value Measurements as of June 30, 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 |
| 872 |
|
|
| - |
|
|
| 872 |
|
|
| - |
|
Total | $ | 872 |
|
| $ | - |
|
| $ | 872 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
| $ | - |
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| Fair Value Measurements as of December 31, 2015 |
| |||||||||||||
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|
| 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 |
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|
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|
|
|
|
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|
Foreign exchange hedges | $ | 91 |
|
| $ | - |
|
| $ | 91 |
|
| $ | - |
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|
Liabilities |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap | $ | 469 |
|
| $ | - |
|
| $ | 469 |
|
| $ | - |
|
The carrying amount of accounts receivable at June 30, 2015,March 31, 2016, including $380.3$524.1 million of receivables sold under the Receivables Securitization Program, approximates fair value because of the short-term nature of this item.
15
As of June 30, 2015, the held for sale assets and liabilities detailed in Note 2 “Acquisitions and Dispositions” were measured at fair value on a nonrecurring basis. No other assets or liabilities were measured at fair value on a nonrecurring basis.
12. Other Assets and Liabilities
Receivables related to supplier allowances totaling $86.4$92.1 million and $124.4$111.0 million were included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of June 30, 2015March 31, 2016 and December 31, 2014,2015, respectively.
Accrued customer rebates of $51.7$47.2 million and $63.2$63.6 million as of June 30, 2015March 31, 2016 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 and six months ended June 30,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 $18.9 million and $24.1$4.0 million on pre-tax incomeloss of $49.1 million and $50.4$2.0 million, for an effective tax rate of 38.4% and 47.8%, respectively. For the three months and six months ended June 30, 2014, the Company recorded income tax expense of $20.1 million and $33.1 million on pre-tax income of $53.4 million and $88.3 million, respectively, for an effective tax rate of 37.6% and 37.5%, respectively.(196.6)%.
The Company'sCompany’s U.S. statutory rate is 35.0%. There were no significant discrete items impacting the effective tax rate for the three months ended March 31, 2016. The most significant factor impacting the effective tax rate for the three and six months ended June 30,March 31, 2015 was the discrete tax impactsimpact of the impairment charges for financial reporting purposes related to placing a non-strategic business for sale in the first quarter. There were no significant discrete items for the three and six months ended June 30, 2014.
14. Legal Matters
The Company has been named as a defendant in an action filed before the United States District Court for the Central District of California on May 1, 2015. The complaint allegestwo lawsuits alleging that the Company sent unsolicited fax advertisements to twothe named plaintiffs, as well as thousands of other persons and entities, in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 ("TCPA"). After filingOne lawsuit was initially filed in the complaint,United States District Court for the plaintiffCentral 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. TheIn each lawsuit, the Company is vigorously contesting class certification and liability.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 litigation islawsuits 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.
16
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
Essendant Inc. (formerly known as United Stationers Inc.) is a leading supplier of workplace essentials, with 20142015 net sales of approximately $5.3$5.4 billion. Essendant 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.products. Essendant sells through a network of 74 distribution centers to approximately 30,000 reseller customers, who in turn sell directly to end consumers. The Company also operates CPO Commerce which sells tools and do-it-yourself equipment online to 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
· |
|
· |
|
· | Gross margin |
· | Operating expenses in the |
· | Operating income for the quarter ended |
· | Implementation of our initiative to combine the office products and janitorial businesses on a common operating platform began in the third quarter of 2015 |
17
|
· | On July |
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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· |
|
17
· | On June 1, 2015 we officially rebranded the Company to Essendant Inc. |
· | 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, this subsidiary had net sales of $23.2 million and a $0.4 million operating income, excluding the charges previously mentioned. |
· | Restructuring actions were taken in 2015 to improve our operational utilization, labor spend, inventory performance and functional alignment of the organization. This included workforce reductions and facility consolidations with an expense impact of $0.3 million in the first |
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 $5.4 billion to $5.6 billion; |
· | +4% to +10% adjusted earnings per share growth compared to prior year, or adjusted EPS in the range of $3.20 to $3.40; |
· | Annual free cash flow equal to or better than net income. |
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 six 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
18
Adjusted Operating Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share
The following tablestable presents Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, and Adjusted Diluted Earnings Per Share for the three and six-monththree-month periods ended June 30,March 31, 2016 and 2015 and 2014 (in thousands, except per share data), excluding the effects of the pre-tax charges related to workforce reduction and facility consolidations in the first three months of 2016, and workforce reductions and facility consolidations, intangible asset impairment charge and accelerated amortization related to rebranding efforts, and anasset held for sale impairment charge, certain transaction costs, and foreign currency volatility related toin the held-for-sale classificationfirst three months of our Mexican subsidiary.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 June 30, |
| |||||||||||||
| 2015 |
|
| 2014 |
| ||||||||||
|
|
|
|
| % to |
|
|
|
|
|
| % to |
| ||
| Amount |
|
| Net Sales |
|
| Amount |
|
| Net Sales |
| ||||
Net Sales | $ | 1,341,799 |
|
|
| 100.0 | % |
| $ | 1,320,037 |
|
|
| 100.0 | % |
Gross profit | $ | 212,062 |
|
|
| 15.8 | % |
| $ | 199,460 |
|
|
| 15.1 | % |
Operating expenses | $ | 158,159 |
|
|
| 11.8 | % |
| $ | 142,186 |
|
|
| 10.8 | % |
Workforce reduction and facility consolidation charge |
| 138 |
|
|
| 0.0 | % |
|
| - |
|
|
| - |
|
Rebranding - intangible asset amortization |
| (512 | ) |
|
| 0.0 | % |
|
| - |
|
|
| - |
|
Asset held for sale related costs |
| (1,361 | ) |
|
| (0.1 | %) |
|
| - |
|
|
| - |
|
Adjusted operating expenses | $ | 156,424 |
|
|
| 11.7 | % |
| $ | 142,186 |
|
|
| 10.8 | % |
Operating income | $ | 53,903 |
|
|
| 4.0 | % |
| $ | 57,274 |
|
|
| 4.3 | % |
Operating expense items noted above |
| 1,735 |
|
|
| 0.1 | % |
|
| - |
|
|
| - |
|
Adjusted operating income | $ | 55,638 |
|
|
| 4.1 | % |
| $ | 57,274 |
|
|
| 4.3 | % |
Net income | $ | 30,261 |
|
|
|
|
|
| $ | 33,331 |
|
|
|
|
|
Operating expense items noted above, net of tax |
| 942 |
|
|
|
|
|
|
| - |
|
|
|
|
|
Adjusted net income | $ | 31,203 |
|
|
|
|
|
| $ | 33,331 |
|
|
|
|
|
Diluted earnings per share | $ | 0.79 |
|
|
|
|
|
| $ | 0.85 |
|
|
|
|
|
Per share operating expense items noted above |
| 0.03 |
|
|
|
|
|
|
| - |
|
|
|
|
|
Adjusted diluted earnings per share | $ | 0.82 |
|
|
|
|
|
| $ | 0.85 |
|
|
|
|
|
Adjusted diluted earnings per share - change over the prior year period |
| (3.5 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - diluted |
| 38,106 |
|
|
|
|
|
|
| 39,226 |
|
|
|
|
|
| For the Three Months Ended March 31, |
| |||||
| 2016 |
|
| 2015 (Revised) |
| ||
|
|
|
|
|
|
|
|
Operating expenses | $ | 167,678 |
|
| $ | 197,581 |
|
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 | ) |
Adjusted operating expenses | $ | 167,424 |
|
| $ | 167,120 |
|
|
|
|
|
|
|
|
|
Operating income | $ | 32,404 |
|
| $ | 2,814 |
|
Operating expense items noted above |
| 254 |
|
|
| 30,461 |
|
Adjusted operating income | $ | 32,658 |
|
| $ | 33,275 |
|
Depreciation and amortization | $ | 10,489 |
|
| $ | 10,711 |
|
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 |
| 155 |
|
|
| 23,896 |
|
Adjusted net income | $ | 16,685 |
|
| $ | 17,889 |
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share(1) | $ | 0.45 |
|
| $ | (0.16 | ) |
Per share operating expense items noted above |
| 0.00 |
|
|
| 0.62 |
|
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. |
19
| For the Six Months Ended June 30, |
| |||||||||||||
| 2015 |
|
| 2014 |
| ||||||||||
|
|
|
|
| % to |
|
|
|
|
|
| % to |
| ||
| Amount |
|
| Net Sales |
|
| Amount |
|
| Net Sales |
| ||||
Net Sales | $ | 2,674,174 |
|
|
| 100.0 | % |
| $ | 2,574,176 |
|
|
| 100.0 | % |
Gross profit | $ | 416,512 |
|
|
| 15.6 | % |
| $ | 386,543 |
|
|
| 15.0 | % |
Operating expenses | $ | 356,531 |
|
|
| 13.3 | % |
| $ | 291,035 |
|
|
| 11.3 | % |
Workforce reduction and facility consolidation charge |
| (6,295 | ) |
|
| (0.2 | %) |
|
| - |
|
|
| - |
|
Rebranding - intangible asset impairment and amortization |
| (10,975 | ) |
|
| (0.4 | %) |
|
| - |
|
|
| - |
|
Asset held for sale impairment and related costs |
| (14,927 | ) |
|
| (0.6 | %) |
|
| - |
|
|
| - |
|
Adjusted operating expenses | $ | 324,334 |
|
|
| 12.1 | % |
| $ | 291,035 |
|
|
| 11.3 | % |
Operating income | $ | 59,981 |
|
|
| 2.2 | % |
| $ | 95,508 |
|
|
| 3.7 | % |
Operating expense items noted above |
| 32,197 |
|
|
| 1.2 | % |
|
| - |
|
|
| - |
|
Adjusted operating income | $ | 92,178 |
|
|
| 3.4 | % |
| $ | 95,508 |
|
|
| 3.7 | % |
Net income | $ | 26,269 |
|
|
|
|
|
| $ | 55,188 |
|
|
|
|
|
Operating expense items noted above, net of tax |
| 24,837 |
|
|
|
|
|
|
| - |
|
|
|
|
|
Adjusted net income | $ | 51,106 |
|
|
|
|
|
| $ | 55,188 |
|
|
|
|
|
Diluted earnings per share | $ | 0.69 |
|
|
|
|
|
| $ | 1.40 |
|
|
|
|
|
Per share operating expense items noted above |
| 0.64 |
|
|
|
|
|
|
| - |
|
|
|
|
|
Adjusted diluted earnings per share | $ | 1.33 |
|
|
|
|
|
| $ | 1.40 |
|
|
|
|
|
Adjusted diluted earnings per share - change over the prior year period |
| (5.0 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - diluted |
| 38,317 |
|
|
|
|
|
|
| 39,435 |
|
|
|
|
|
Results of Operations—Three Months Ended June 30, 2015March 31, 2016 Compared with the Three Months Ended June 30, 2014March 31, 2015
Net Sales. Net sales for the secondfirst quarter of 20152016 were $1.34$1.35 billion. The following table summarizes net sales by product category for the three-month periods ended June 30,March 31, 2016 and 2015 and 2014 (in thousands):
| Three Months Ended June 30, |
| Three Months Ended March 31, |
| ||||||||||
| 2015 |
|
| 2014 (1) |
| 2016 |
|
| 2015 (1) |
| ||||
Janitorial and breakroom supplies | $ | 368,343 |
|
| $ | 357,242 |
| |||||||
Janitorial and breakroom supplies (JanSan) | $ | 362,387 |
|
| $ | 358,677 |
| |||||||
Technology products |
| 349,702 |
|
|
| 369,700 |
|
| 351,113 |
|
|
| 353,047 |
|
Traditional office products (including cut-sheet paper) |
| 293,800 |
|
|
| 330,175 |
|
| 308,055 |
|
|
| 296,177 |
|
Industrial supplies |
| 214,990 |
|
|
| 145,151 |
|
| 139,764 |
|
|
| 149,074 |
|
Automotive |
| 79,408 |
|
|
| 60,240 |
| |||||||
Office furniture |
| 78,499 |
|
|
| 78,631 |
|
| 74,158 |
|
|
| 78,053 |
|
Freight revenue |
| 30,299 |
|
|
| 29,638 |
|
| 33,201 |
|
|
| 31,959 |
|
Services, Advertising and Other |
| 6,166 |
|
|
| 9,500 |
|
| 4,210 |
|
|
| 5,148 |
|
Total net sales | $ | 1,341,799 |
|
| $ | 1,320,037 |
| $ | 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 3.1%1.0% in the secondfirst quarter of 20152016 compared to the secondfirst quarter of 2014.2015. This category accounted for 27.5%26.8% of the Company’s secondfirst quarter 20152016 consolidated net sales. SalesNet sales increased from being nameddue to new e-tail growth, partially offset by a decline in sales to the primary supplier for Office Depot’s janitorial business and e-tail growth.independent dealer channel.
SalesNet sales in the technology products category (primarily ink and toner) decreased 5.4%0.5% from the secondfirst quarter of 2014.2015. This category accounted for 26.1% of net sales for the second quarter of 2015. This decline is primarily attributable to the loss of business with large
20
national customers and lower sales at our Mexican subsidiary. These were partially offset by growth in e-tail customers and technology resellers.
Sales of traditional office products decreased in the second quarter of 2015 by 11.0% versus the second quarter of 2014. Traditional office supplies represented 21.9% of the Company’s consolidated net sales for the second quarter of 2015. This decline was driven by a decline in cut-sheet paper sales as we exit low margin business and losing the first-call supplier status with Office Depot. The traditional office products decline was partially offset by continued growth in e-tailers and a rebound in government spending. Net of incremental sales in janitorial products to Office Depot, we estimate the impact of the 2014 changes to our relationship to be a $0.14 to $0.22 reduction in earnings per share in 2015.
Industrial supplies sales in the second quarter of 2015 increased by 48.1% compared to the same prior-year period. Sales of industrial supplies accounted for 16.0% of the Company’s net sales for the second quarter of 2015 and reflected solid sales momentum from our acquisitions, which contributed $86.7 million in incremental sales and positively impacted earnings per share. Without the acquisitions, industrial sales declined 11.6% over the prior-year quarter. Approximately 25% of our core industrial business is exposed to energy sector resellers which have been impacted by the decline in oil prices resulting in sales declines in our general industrial and energy channels. We expect this impact to continue throughout the year.
Office furniture sales in the second quarter of 2015 decreased 0.2% compared to the second quarter of 2014. Office furniture accounted for 5.9% of the Company’s second quarter of 2015 consolidated net sales. Within this category, the loss of sales at Office Depot was mostly offset by growth in other large customers and e-tailers.
The remainder of the Company’s second quarter 2015 net sales was composed of freight and other revenues.
Gross Profit and Gross Margin Rate. Gross profit for the second quarter of 2015 was $212.1 million, compared to $199.5 million in the second quarter of 2014. The gross margin rate of 15.8% was up 69 basis points (bps) from the prior-year quarter gross margin rate of 15.1%. Our acquisitions added an incremental 29 basis points to our gross margin rate in the quarter. Excluding the impact of our acquisitions, our gross margin rate benefited from a favorable product mix.
Operating Expenses. Operating expenses for the second quarter were $158.2 million or 11.8% of sales, including $1.7 million related to repositioning actions. Adjusted operating expenses were $156.4 million or 11.7% of sales compared with $142.2 million or 10.8% of sales in the same period last year. The $14.2 million increase was driven by $12.8 million of incremental expenses from acquisitions.
Interest Expense, net. Interest expense, net for the second quarter of 2015 was $4.8 million compared to $3.8 million in the second quarter of 2014. This was driven by higher debt outstanding related to our acquisition in the fourth quarter of 2014. Interest expense is expected to be higher in 2015 than in the prior year.
Income Taxes. Income tax expense was $18.9 million for the second quarter of 2015, compared with $20.1 million for the same period in 2014. The Company’s effective tax rate was 38.4% for the current-year quarter and 37.6% for the same period in 2014.
Net Income. Net income for the second quarter of 2015 totaled $30.3 million or $0.79 per diluted share, including $0.9 million after-tax, or $0.03 per diluted share, of costs related to repositioning actions. Adjusted net income was $31.2 million, or $0.82 per diluted share, compared with net income of $33.3 million or $0.85 per diluted share for the same three-month period in 2014.
Results of Operations—Six Months Ended June 30, 2015 Compared with the Six Months Ended June 30, 2014
Net Sales. Net sales for the first six months of 2015 were $2.67 billion. The following table summarizes net sales by product category for the six-month periods ended June 30, 2015 and 2014 (in thousands):
| Six Months Ended June 30, |
| |||||
| 2015 (1) |
|
| 2014 (1) |
| ||
Janitorial and breakroom supplies | $ | 725,318 |
|
| $ | 686,668 |
|
Technology products |
| 703,083 |
|
|
| 724,780 |
|
Traditional office products (including cut-sheet paper) |
| 590,305 |
|
|
| 654,434 |
|
Industrial supplies |
| 425,262 |
|
|
| 279,009 |
|
Office furniture |
| 156,635 |
|
|
| 153,656 |
|
Freight revenue |
| 62,258 |
|
|
| 58,818 |
|
Services, Advertising and Other |
| 11,313 |
|
|
| 16,811 |
|
Total net sales | $ | 2,674,174 |
|
| $ | 2,574,176 |
|
21
Sales in the janitorial and breakroom supplies product category increased 5.6% in the first six months of 2015 compared to the first six months of 2014. This category accounted for 27.1% of the Company’s first six months of 2015 consolidated net sales. Sales growth in this category was driven by being named the primary supplier for Office Depot’s janitorial business, growth in e-tail and increased sales to independent dealer customers.
Sales in the technology products category (primarily ink and toner) decreased in the first six months of 2015 by 3.0% versus the first six months of 2014. This category accounted for 26.3%26.0% of net sales for the first six monthsquarter of 2015. Sales declined due to the loss of business with Office Depot, lower sales at2016. Excluding our Mexican subsidiary, and reduced demandwhich was sold in our independent channel. Thethe third quarter of 2015, net sales declinein this category increased 4.8% compared to the prior year quarter, which was partially offsetdriven by growth in e-tailers and technology resellers.sales to new customers.
SalesNet sales of traditional office products decreasedincreased in the first six monthsquarter of 20152016 by 9.8%4.0% versus the first six monthsquarter of 2014.2015. Traditional office supplies represented 22.1%22.8% of the Company’s consolidated net sales for the first six monthsquarter of 2015.2016. The decline in this categorysales increase was primarily driven by the decline ofincreases in cut-sheet paper as we exited low margin businesssales and the loss of first call supplier status with Office Depot.higher government spending.
Industrial supplies net sales in the first six monthsquarter of 2015 increased2016 decreased by 52.4%6.2% compared to the same prior-year period andperiod. Net sales of industrial supplies accounted for 15.9%10.3% of the Company’s net sales for the first six monthsquarter of 2015. Our acquisitions contributed $176.8 million2016. The decline in incremental sales. Excluding sales from acquisitions, industrial supplies net sales declined 11.0% over the same period last year,was primarily due to declineschallenges in our general industrialthe oilfield sector and energy channels. We expect this impact to continue throughout the year.macro-economic environment. This decline was partially offset by growth in retail channel sales.
Office furnitureAutomotive net sales in the first six monthsquarter of 20152016 increased 1.9%31.8% compared to the first six monthsquarter of 2014. Office furniture accounted for2015. Automotive net sales represented 5.9% of the Company’s first six monthsquarter 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. ImprovedThis decline was due to declines in sales with a largein national customer and growth in e-tailaccounts and independent resellers more than offset lost sales to Office Depot.dealer channels.
The remainder of the Company’s first six months of 2015quarter 2016 net sales was composed of freight and other revenues.
Gross Profit and Gross Margin Rate. Gross profit for the first six monthsquarter of 20152016 was $416.5$200.1 million, compared to $386.5$200.4 million in the first six monthsquarter of 2014.2015. The gross margin rate of 15.6%14.8% was up 56down 20 basis points (bps) from the prior-year periodquarter gross margin rate of 15.0%. This increaseOur gross margin was due to acquisitions (37impacted by lower inflation (22 bps) and a favorable product mix.higher freight (22 bps), partially offset by increased sales.
Operating Expenses. Operating expenses for the first six monthsquarter of 2016 were $167.7 million or 12.4% of net sales, compared to $197.6 million in the prior year, including $30.5 million related to the first quarter of 2015 Repositioning Actions. Adjusted operating expenses were $356.5$167.4 million or 13.3%12.4% of net sales compared with $291.0$167.1 million or 11.3%12.5% of net sales in the same period last year. Current period operating expenses were affectedThe $0.3 million increase was driven by acquisitions which added an incremental $30.3 million in operating expenses. The Company incurred approximately $2.4 million in the first six months of 2015costs related to the initiative to combine the Company’s office product and janitorial platforms. common platform project (22 bps).
Interest Expense, net. Interest expense, net for the first six monthsquarter of 20152016 was $9.6$5.9 million compared to $7.2$4.8 million in the first six monthsquarter of 2014.2015. This was driven by higher debt outstanding related to our acquisitions in the past year. Interest expense is expected to be higher in 2016 than in the prior year.
20
Income Taxes. Income tax expense was $24.1$10.0 million for the first six monthsquarter of 2015,2016, compared with $33.1$4.0 million for the same period in 2014.2015. The Company’s effective tax rate was 47.8%37.6% for the current-year periodquarter and 37.5%(196.6)% for the same period in 2014.2015, driven by unfavorable discrete tax impacts of placing a non-strategic business for sale in the first quarter of 2015.
Net Income.Income (Loss). Net income for the first six monthsquarter of 20152016 totaled $26.3$16.5 million or $0.69$0.45 per diluted share, including $24.8compared to $(6.0) million in the prior year, which included $23.9 million after-tax, or $0.64$0.62 per diluted share, of costs related to repositioning actions.the first quarter charges. Adjusted net income was $51.1$16.7 million, or $1.33$0.45 per diluted share, compared with adjusted net income of $55.2$17.9 million or $1.40$0.46 per diluted share for the same six-monththree-month period in 2014.2015.
21
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 used in operating activities for the three months ended March 31, 2016 totaled $10.8 million, compared with $62.7 million cash provided by operating activities forin the sixthree months ended June 30, 2015 totaled $120.8March 31, 2015. The $73.5 million compared with $78.9 million in the same six-month period of 2014. The 53% improvementdecrease over the prior year demonstrates our commitment to effectively manage working capital.was primarily driven by a $24.8 million increase in accounts receivable in the current year versus a $26.2 million decrease in accounts 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.
22
Net cash used in investing activities for the first sixthree months of 20152016 was $12.4$9.6 million, compared with $35.6$5.5 million for the sixthree months ended June 30, 2014. For the full year 2015, the Company expects capital spending, excluding acquisitions, to be approximately $30.0 million to $35.0 million. On July 14, 2015, the Company’s Board of Directors approved the payment of a $0.14 per share dividend payable to stockholders of record as of September 15, 2015 to be paid on October 15,March 31, 2015.
Financing Activities
Net cash used inprovided by financing activities for the sixthree months ended June 30, 2015March 31, 2016 totaled $95.0$25.6 million, compared with $34.1$51.7 million cash used in financing activities in the prior-year period. Net cash used inprovided by financing activities during the first sixthree months of 20152016 was impacted by $52.7$37.0 million in net repaymentsborrowing under debt arrangements, $31.2our revolving credit facility, $6.8 million in share repurchases and $10.7$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
Essendant’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.
Financing available from debt and the sale of accounts receivable as of June 30, 2015,March 31, 2016, is summarized below (in millions):
Availability
Maximum financing available under: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Credit Agreement | $ | 700.0 |
|
|
|
|
| $ | 700.0 |
|
|
|
|
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
|
|
|
| 150.0 |
|
|
|
|
|
Receivables Securitization Program (1) |
| 200.0 |
|
|
|
|
|
| 200.0 |
|
|
|
|
|
Maximum financing available |
|
|
|
| $ | 1,050.0 |
|
|
|
|
| $ | 1,050.0 |
|
Amounts utilized: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Credit Agreement |
| 311.1 |
|
|
|
|
|
| 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 |
|
|
|
|
| 672.2 |
|
|
|
|
|
| 767.4 |
|
Available financing, before restrictions |
|
|
|
|
| 377.8 |
|
|
|
|
|
| 282.6 |
|
Restrictive covenant limitation |
|
|
|
|
| - |
|
|
|
|
|
| 94.3 |
|
Available financing as of June 30, 2015 |
|
|
|
| $ | 377.8 |
| |||||||
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 |
| ||||
| June 30, |
|
| December 31, |
| March 31, |
|
| December 31, |
| ||||
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 |
| ||||
2013 Credit Agreement | $ | 311.1 |
|
| $ | 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 |
| 661.2 |
|
|
| 713.9 |
|
| 755.9 |
|
|
| 718.4 |
|
Stockholders’ equity |
| 840.3 |
|
|
| 856.1 |
|
| 734.5 |
|
|
| 723.7 |
|
Total capitalization | $ | 1,501.5 |
|
| $ | 1,570.0 |
| $ | 1,490.4 |
|
| $ | 1,442.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt-to-total capitalization ratio |
| 44.0 | % |
|
| 45.5 | % |
| 50.7 | % |
|
| 49.8 | % |
23
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 six-month period ended June 30, 2015, contractual obligations have increased $78.2 million from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, driven by the renewed corporate office building lease and other facility lease renewals.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 sixthree 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 June 30, 2015,March 31, 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.
The Company has been named as a defendant in an action filed before the United States District Court for the Central District of California on May 1, 2015. The complaint allegestwo lawsuits alleging that the Company sent unsolicited fax advertisements to twothe named plaintiffs, as well as thousands of other persons and entities, in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 ("TCPA"). After filingOne lawsuit was initially filed in the complaint,United States District Court for the plaintiffCentral 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. TheIn each lawsuit, the Company is vigorously contesting class certification and liability.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 litigation islawsuits 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.
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.
2524
(a) | Not applicable. |
(b) | Not applicable. |
(c) | Common Stock Purchases. |
During the six-monththree-month periods ended June 30,March 31, 2016 and 2015, and 2014, the Company repurchased 781,141241,270 and 791,291402,679 shares of common stock at an aggregate cost of $31.5$6.8 million and $31.7$16.3 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 885,181 milliondid not repurchase any additional shares for $35.5 million year-to-date through July 20, 2015.April 18, 2016. As of that date, the Company had approximately $106.9$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 |
| ||||
April 1, 2015 to April 30, 2015 |
|
| 86,793 |
|
| $ | 41.98 |
|
|
| 86,793 |
|
| $ | 122,548,958 |
|
May 1, 2015 to May 31, 2015 |
|
| 115,048 |
|
|
| 39.81 |
|
|
| 115,048 |
|
|
| 117,968,784 |
|
June 1, 2015 to June 30, 2015 |
|
| 176,621 |
|
|
| 39.57 |
|
|
| 176,621 |
|
|
| 110,979,546 |
|
Total Second Quarter |
|
| 378,462 |
|
| $ | 40.45 |
|
|
| 378,462 |
|
| $ | 110,979,546 |
|
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 |
|
| Third Restated Certificate of Incorporation of Essendant Inc. (“ESND” or the |
|
| |
|
| 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 |
|
| |
|
| Essendant Inc. |
|
| |
|
|
|
|
|
|
|
|
|
10.4* | Amendment No. 1 to | |
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 | |
18.1 | Preferability Letter on | |
|
|
|
31.1* |
| Certification of Chief Executive Officer, dated as of |
|
| |
31.2* |
| Certification of Chief Financial Officer, dated as of |
|
| |
32.1* |
| Certification of Chief Executive Officer and Chief Financial Officer, dated as of |
|
| |
101* |
| The following financial information from Essendant Inc.’s Quarterly Report on Form 10-Q for the period ended |
* | - 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.
|
|
| ESSENDANT INC. |
|
|
| (Registrant) |
|
| ||
Date: |
|
| /s/ |
|
|
|
|
|
|
| Senior Vice President and Chief Financial Officer |
2827