UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20152016
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-10653
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 |
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| Accelerated filer |
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Non-accelerated filer |
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| Smaller reporting company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
On October 19, 2015,24, 2016, the registrant had outstanding 37,391,27336,968,408 shares of common stock, par value $0.10 per share.
FORM 10-Q
For the Quarterly Period Ended September 30, 20152016
TABLE OF CONTENTS
2
PART I – FINANCIAL INFORMATION
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| (Unaudited) |
|
| (Unaudited) |
| (Unaudited) |
|
| (Audited) |
| ||||
| As of September 30, |
|
| As of December 31, |
| As of September 30, |
|
| As of December 31, |
| ||||
| 2015 |
|
| 2014 (Revised) |
| 2016 |
|
| 2015 |
| ||||
ASSETS |
|
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Current assets: |
|
|
|
|
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|
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|
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|
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Cash and cash equivalents | $ | 28,047 |
|
| $ | 20,812 |
| $ | 22,647 |
|
| $ | 29,983 |
|
Accounts receivable, less allowance for doubtful accounts of $18,079 in 2015 and $19,725 in 2014 |
| 737,979 |
|
|
| 702,527 |
| |||||||
Accounts receivable, less allowance for doubtful accounts of $16,696 in 2016 and $17,810 in 2015 |
| 752,260 |
|
|
| 716,537 |
| |||||||
Inventories |
| 860,355 |
|
|
| 906,430 |
|
| 850,463 |
|
|
| 922,162 |
|
Other current assets |
| 31,946 |
|
|
| 30,713 |
|
| 44,771 |
|
|
| 27,310 |
|
Total current assets |
| 1,658,327 |
|
|
| 1,660,482 |
|
| 1,670,141 |
|
|
| 1,695,992 |
|
Property, plant and equipment, net |
| 129,744 |
|
|
| 138,217 |
|
| 126,334 |
|
|
| 133,751 |
|
Goodwill |
| 413,178 |
|
|
| 398,042 |
|
| 298,242 |
|
|
| 299,355 |
|
Intangible assets, net |
| 102,760 |
|
|
| 111,958 |
|
| 86,886 |
|
|
| 96,413 |
|
Other long-term assets |
| 36,282 |
|
|
| 38,669 |
|
| 55,059 |
|
|
| 37,348 |
|
Total assets | $ | 2,340,291 |
|
| $ | 2,347,368 |
| $ | 2,236,662 |
|
| $ | 2,262,859 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
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Current liabilities: |
|
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Accounts payable | $ | 540,949 |
|
| $ | 485,241 |
| $ | 540,743 |
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| $ | 531,949 |
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Accrued liabilities |
| 186,826 |
|
|
| 185,535 |
|
| 192,189 |
|
|
| 177,472 |
|
Current maturities of long-term debt |
| 43 |
|
|
| 851 |
|
| 35 |
|
|
| 51 |
|
Total current liabilities |
| 727,818 |
|
|
| 671,627 |
|
| 732,967 |
|
|
| 709,472 |
|
Deferred income taxes |
| 15,119 |
|
|
| 17,763 |
|
| 8,372 |
|
|
| 11,901 |
|
Long-term debt |
| 666,142 |
|
|
| 709,917 |
|
| 620,155 |
|
|
| 716,264 |
|
Other long-term liabilities |
| 98,621 |
|
|
| 104,394 |
|
| 92,535 |
|
|
| 101,488 |
|
Total liabilities |
| 1,507,700 |
|
| �� | 1,503,701 |
|
| 1,454,029 |
|
|
| 1,539,125 |
|
Stockholders’ equity: |
|
|
|
|
|
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|
|
|
|
|
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Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2015 and 2014 |
| 7,444 |
|
|
| 7,444 |
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Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2016 and 2015 |
| 7,444 |
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| 7,444 |
| |||||||
Additional paid-in capital |
| 408,475 |
|
|
| 412,291 |
|
| 406,964 |
|
|
| 410,927 |
|
Treasury stock, at cost – 36,874,672 shares in 2015 and 35,719,041 shares in 2014 |
| (1,090,624 | ) |
|
| (1,042,501 | ) | |||||||
Treasury stock, at cost – 36,967,378 shares in 2016 and 37,178,394 shares in 2015 |
| (1,097,094 | ) |
|
| (1,100,867 | ) | |||||||
Retained earnings |
| 1,564,816 |
|
|
| 1,529,224 |
|
| 1,514,573 |
|
|
| 1,463,821 |
|
Accumulated other comprehensive loss |
| (57,520 | ) |
|
| (62,791 | ) |
| (49,254 | ) |
|
| (57,591 | ) |
Total stockholders’ equity |
| 832,591 |
|
|
| 843,667 |
|
| 782,633 |
|
|
| 723,734 |
|
Total liabilities and stockholders’ equity | $ | 2,340,291 |
|
| $ | 2,347,368 |
| $ | 2,236,662 |
|
| $ | 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 Nine Months Ended |
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
| September 30, |
|
| September 30, |
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
| 2015 |
|
| 2014 (Revised) |
|
| 2015 |
|
| 2014 (Revised) |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||||||
Net sales | $ | 1,391,545 |
|
| $ | 1,419,947 |
|
| $ | 4,065,719 |
|
| $ | 3,994,123 |
| $ | 1,407,504 |
|
| $ | 1,391,545 |
|
| $ | 4,114,323 |
|
| $ | 4,065,719 |
|
Cost of goods sold |
| 1,166,402 |
|
|
| 1,203,246 |
|
|
| 3,430,062 |
|
|
| 3,400,992 |
|
| 1,208,650 |
|
|
| 1,166,402 |
|
|
| 3,519,564 |
|
|
| 3,430,062 |
|
Gross profit |
| 225,143 |
|
|
| 216,701 |
|
|
| 635,657 |
|
|
| 593,131 |
|
| 198,854 |
|
|
| 225,143 |
|
|
| 594,759 |
|
|
| 635,657 |
|
Operating expenses: |
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Warehousing, marketing and administrative expenses |
| 172,159 |
|
|
| 148,831 |
|
|
| 526,653 |
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|
| 438,538 |
|
| 138,107 |
|
|
| 172,159 |
|
|
| 463,410 |
|
|
| 526,653 |
|
Defined benefit plan settlement loss (Note 10) |
| 419 |
|
|
| - |
|
|
| 12,163 |
|
|
| - |
| |||||||||||||||
Operating income |
| 52,984 |
|
|
| 67,870 |
|
|
| 109,004 |
|
|
| 154,593 |
|
| 60,328 |
|
|
| 52,984 |
|
|
| 119,186 |
|
|
| 109,004 |
|
Interest expense, net |
| 5,300 |
|
|
| 3,992 |
|
|
| 14,918 |
|
|
| 11,199 |
|
| 6,484 |
|
|
| 5,300 |
|
|
| 18,058 |
|
|
| 14,918 |
|
Income before income taxes |
| 47,684 |
|
|
| 63,878 |
|
|
| 94,086 |
|
|
| 143,394 |
|
| 53,844 |
|
|
| 47,684 |
|
|
| 101,128 |
|
|
| 94,086 |
|
Income tax expense |
| 20,017 |
|
|
| 23,647 |
|
|
| 42,594 |
|
|
| 53,349 |
|
| 17,102 |
|
|
| 20,017 |
|
|
| 34,923 |
|
|
| 42,594 |
|
Net income | $ | 27,667 |
|
| $ | 40,231 |
|
| $ | 51,492 |
|
| $ | 90,045 |
| $ | 36,742 |
|
| $ | 27,667 |
|
| $ | 66,205 |
|
| $ | 51,492 |
|
Net income per share - basic: | $ | 0.74 |
|
| $ | 1.05 |
|
| $ | 1.36 |
|
| $ | 2.32 |
| $ | 1.00 |
|
| $ | 0.74 |
|
| $ | 1.81 |
|
| $ | 1.36 |
|
Average number of common shares outstanding - basic |
| 37,300 |
|
|
| 38,450 |
|
|
| 37,724 |
|
|
| 38,817 |
|
| 36,578 |
|
|
| 37,300 |
|
|
| 36,560 |
|
|
| 37,724 |
|
Net income per share - diluted: | $ | 0.74 |
|
| $ | 1.03 |
|
| $ | 1.35 |
|
| $ | 2.29 |
| $ | 0.99 |
|
| $ | 0.74 |
|
| $ | 1.79 |
|
| $ | 1.35 |
|
Average number of common shares outstanding - diluted |
| 37,608 |
|
|
| 38,884 |
|
|
| 38,109 |
|
|
| 39,244 |
|
| 36,938 |
|
|
| 37,608 |
|
|
| 36,896 |
|
|
| 38,109 |
|
Dividends declared per share | $ | 0.14 |
|
| $ | 0.14 |
|
| $ | 0.42 |
|
| $ | 0.42 |
| $ | 0.14 |
|
| $ | 0.14 |
|
| $ | 0.42 |
|
| $ | 0.42 |
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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 Nine Months Ended |
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
| September 30, |
|
| September 30, |
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
| 2015 |
|
| 2014 (Revised) |
|
| 2015 |
|
| 2014 (Revised) |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||||||
Net income | $ | 27,667 |
|
| $ | 40,231 |
|
| $ | 51,492 |
|
| $ | 90,045 |
| $ | 36,742 |
|
| $ | 27,667 |
|
| $ | 66,205 |
|
| $ | 51,492 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
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| |||||||||||||||
Translation adjustments |
| 7,497 |
|
|
| (1,395 | ) |
|
| 3,076 |
|
|
| (1,378 | ) |
| (692 | ) |
|
| 7,497 |
|
|
| 2,441 |
|
|
| 3,076 |
|
Minimum pension liability adjustments |
| 967 |
|
|
| 606 |
|
|
| 2,831 |
|
|
| 1,767 |
|
| (2,298 | ) |
|
| 967 |
|
|
| 6,035 |
|
|
| 2,831 |
|
Cash flow hedge adjustments |
| (208 | ) |
|
| 446 |
|
|
| (636 | ) |
|
| (339 | ) |
| 288 |
|
|
| (208 | ) |
|
| (139 | ) |
|
| (636 | ) |
Total other comprehensive gain (loss), net of tax |
| 8,256 |
|
|
| (343 | ) |
|
| 5,271 |
|
|
| 50 |
| |||||||||||||||
Total other comprehensive income (loss), net of tax |
| (2,702 | ) |
|
| 8,256 |
|
|
| 8,337 |
|
|
| 5,271 |
| |||||||||||||||
Comprehensive income | $ | 35,923 |
|
| $ | 39,888 |
|
| $ | 56,763 |
|
| $ | 90,095 |
| $ | 34,040 |
|
| $ | 35,923 |
|
| $ | 74,542 |
|
| $ | 56,763 |
|
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See notes to condensed consolidated financial statements.
5
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
| For the Nine Months Ended |
| For the Nine Months Ended |
| ||||||||||
| September 30, |
| September 30, |
| ||||||||||
| 2015 |
|
| 2014 (Revised) |
| 2016 |
|
| 2015 |
| ||||
Cash Flows From Operating Activities: |
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Net income | $ | 51,492 |
|
| $ | 90,045 |
| $ | 66,205 |
|
| $ | 51,492 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
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|
|
|
|
|
|
|
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Depreciation and amortization |
| 36,344 |
|
|
| 29,699 |
|
| 34,199 |
|
|
| 36,344 |
|
Share-based compensation |
| 6,447 |
|
|
| 5,935 |
|
| 6,903 |
|
|
| 6,447 |
|
Loss on the disposition of property, plant and equipment |
| 1,562 |
|
|
| 97 |
| |||||||
(Gain) loss on the disposition of property, plant and equipment |
| (21,027 | ) |
|
| 1,562 |
| |||||||
Amortization of capitalized financing costs |
| 659 |
|
|
| 657 |
|
| 502 |
|
|
| 659 |
|
Excess tax benefits related to share-based compensation |
| (402 | ) |
|
| (1,166 | ) | |||||||
Excess tax cost (benefit) related to share-based compensation |
| 960 |
|
|
| (402 | ) | |||||||
Asset impairment charges |
| 34,893 |
|
|
| - |
|
| - |
|
|
| 34,893 |
|
Loss on sale of equity investment |
| 33 |
|
|
| - |
|
| - |
|
|
| 33 |
|
Deferred income taxes |
| (15,285 | ) |
|
| (9,134 | ) |
| (6,970 | ) |
|
| (15,285 | ) |
Changes in operating assets and liabilities (net of acquisitions): |
|
|
|
|
|
|
| |||||||
Pension settlement charge |
| 12,163 |
|
|
| - |
| |||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||||||
Increase in accounts receivable, net |
| (31,288 | ) |
|
| (104,540 | ) |
| (35,457 | ) |
|
| (31,288 | ) |
Decrease in inventory |
| 54,354 |
|
|
| 51,974 |
|
| 73,735 |
|
|
| 54,354 |
|
(Increase) decrease in other assets |
| (8,720 | ) |
|
| 10,000 |
| |||||||
Increase in other assets |
| (35,221 | ) |
|
| (8,720 | ) | |||||||
Increase in accounts payable |
| 8,972 |
|
|
| 24,663 |
|
| 8,902 |
|
|
| 50,412 |
|
Increase (decrease) in checks in-transit |
| 41,440 |
|
|
| (2,679 | ) | |||||||
Increase in accrued liabilities |
| 6,500 |
|
|
| 2,883 |
|
| 13,659 |
|
|
| 6,500 |
|
Decrease in other liabilities |
| (3,342 | ) |
|
| (4,768 | ) |
| (12,585 | ) |
|
| (3,342 | ) |
Net cash provided by operating activities |
| 183,659 |
|
|
| 93,666 |
|
| 105,968 |
|
|
| 183,659 |
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| (18,133 | ) |
|
| (15,431 | ) |
| (28,167 | ) |
|
| (18,133 | ) |
Proceeds from the disposition of property, plant and equipment |
| 184 |
|
|
| 872 |
|
| 33,890 |
|
|
| 184 |
|
Acquisitions, net of cash acquired |
| (40,471 | ) |
|
| (26,725 | ) | |||||||
Acquisition, net of cash acquired |
| - |
|
|
| (40,471 | ) | |||||||
Proceeds from sale of equity investment |
| 612 |
|
|
| - |
|
| - |
|
|
| 612 |
|
Net cash used in investing activities |
| (57,808 | ) |
|
| (41,284 | ) | |||||||
|
|
|
|
|
|
|
| |||||||
Net cash provided by (used in) investing activities |
| 5,723 |
|
|
| (57,808 | ) | |||||||
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments under revolving credit facility |
| (45,309 | ) |
|
| (12,094 | ) |
| (96,640 | ) |
|
| (45,309 | ) |
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 |
| (1,507 | ) |
|
| (3,142 | ) | |||||||
Net proceeds (disbursements) from share-based compensation arrangements |
| 621 |
|
|
| (1,507 | ) | |||||||
Acquisition of treasury stock, at cost |
| (55,677 | ) |
|
| (43,037 | ) |
| (6,839 | ) |
|
| (55,677 | ) |
Payment of cash dividends |
| (15,976 | ) |
|
| (16,407 | ) |
| (15,355 | ) |
|
| (15,976 | ) |
Excess tax benefits related to share-based compensation |
| 402 |
|
|
| 1,166 |
| |||||||
Excess tax (cost) benefit related to share-based compensation |
| (960 | ) |
|
| 402 |
| |||||||
Payment of debt issuance costs |
| (36 | ) |
|
| (623 | ) |
| (86 | ) |
|
| (36 | ) |
Net cash used in financing activities |
| (118,103 | ) |
|
| (49,837 | ) |
| (119,259 | ) |
|
| (118,103 | ) |
Effect of exchange rate changes on cash and cash equivalents |
| (513 | ) |
|
| (33 | ) |
| 232 |
|
|
| (513 | ) |
Net change in cash and cash equivalents |
| 7,235 |
|
|
| 2,512 |
|
| (7,336 | ) |
|
| 7,235 |
|
Cash and cash equivalents, beginning of period |
| 20,812 |
|
|
| 22,326 |
|
| 29,983 |
|
|
| 20,812 |
|
Cash and cash equivalents, end of period | $ | 28,047 |
|
| $ | 24,838 |
| $ | 22,647 |
|
| $ | 28,047 |
|
Other Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments, net | $ | 53,704 |
|
| $ | 55,867 |
| $ | 27,821 |
|
| $ | 53,704 |
|
Interest paid |
| 16,032 |
|
|
| 9,838 |
|
| 19,607 |
|
|
| 16,032 |
|
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. The Condensed Consolidated Balance Sheet as of December 31, 2014,2015, was derived from the December 31, 20142015 audited financial statements with certain line items being restated for changes in accounting principles. See Note 2, “Change in Accounting Principles,” for additional details.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 (the “2015 Form 10-K”) 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 September 30, 20152016 and the results of operations and cash flows for the nine months ended September 30, 20152016 and 2014.2015. The results of operations for the three and nine months ended September 30, 20152016 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year.
New Accounting Pronouncements
In September 2015,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (Topic 805): Business Combinations,” which replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. For public business entities, ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance, and earlier application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, that provides guidance to customers about whether a cloud computing arrangement includes a software license. If such an arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for it as a service contract. This standard will be effective for annual periods beginning after December 15, 2015, and early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, that simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance costs. This standard is effective for fiscal years beginning after December 15, 2015. Early application is permitted. The Company elected to early adopt this new guidance as of September 30, 2015. See Note 2 for the impact on the Company’s consolidated financial statements.
7
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with 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,period. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated 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 early application is permittedlease liabilities for fiscal yearsall 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, 2016,2018, including interim periods within that reporting period.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. Under the new guidance, when awards vest or are settled, companies are required to record excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement instead of in additional paid-in capital (APIC). This guidance will be applied prospectively. Furthermore, companies will present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, which companies can elect to apply retrospectively or prospectively. Under the new guidance, companies will elect whether to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimate the number of awards expected to be forfeited, as is currently required. This guidance will be applied using a modified retrospective transition method, with a cumulative adjustment to retained earnings. The standard will be effective for annual periods beginning after December 15, 2016, 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.
7
Approximately 99% and 98%98.4% of total inventory as of September 30, 20152016 and December 31, 2014,2015, respectively, has been valued under the last-in, first-out (“LIFO”)LIFO method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation. Inventory valued under the LIFO accounting method is recorded at the lower of cost or market. If the Company had valued its entire inventory under the lower of first-in, first-out (“FIFO”)FIFO cost or market, inventory values would have been $147.5$147.2 million and $139.6$147.8 million higher than reported as of September 30, 20152016 and December 31, 2014,2015, respectively. During
The change in the LIFO reserve in the third quarter of 2015,2016 included a LIFO liquidation relating to decrements in five of the Company elected a changeCompany’s thirteen LIFO pools. These decrements resulted in accounting principle to changeliquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the valuation method for certain inventories. See Note 2, “Changecost of current year purchases. This liquidation resulted in Accounting Principles,” for further details.
2. Change in Accounting Principles
Change in MethodLIFO income of Accounting for Inventory Valuation
In the third quarter$2.3 million which was partially offset by LIFO expense of 2015, the Company changed its method of inventory costing for certain inventory in its Business and Facility Essentials (formerly separately known as Supply and Lagasse) operating segment to the LIFO method from the FIFO accounting method. Prior to the change, the Business and Facility Essentials operating segment was comprised of two separate legal entities which each utilized different methods of inventory costing: LIFO for inventories$2.1 million related to Business Essentials which is comprised mainly of office product and breakroom categories and FIFOcurrent inflation for inventories related to Facility Essentials which consists of the janitorial product category. The Company believes that the LIFO method is preferable because i) the Company is executing an initiative to combine the office products and janitorial categories onto a single information technology and operating platform, ii) it allows for consistencyoverall net decrease in financial reporting (all domestic inventories will now be on LIFO), and iii) it allows for better matching of costs and revenues as historical inflationary inventory acquisition prices are expected to continue in the future and the LIFO method uses the current acquisition cost to value cost of goods sold as inventory is sold. The change has been reported through retrospective applicationsales of $0.2 million for the new accounting policy to all periods presented. The impact ofthree months ended September 30, 2016. For the three months ended September 30, 2015, the change in the method of inventory costing resulted in LIFO income of $3.5 million which was partially offset by LIFO expense of $0.8 million related to inflation for certain inventory to the third quarter 2015 was a $4.2 millionan overall net decrease toin cost of goods sold, $2.3 million increase to net income, and $0.06 increase in basic and diluted EPS.
Change in Methodsales of Accounting for Debt Issuance Costs
In April 2015,$2.7 million. For the FASB issued ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs which amends the FASB Accounting Standards Codification (ASC) subtopic 835-30 Interest-Imputation of Interest. This guidance requires 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 the related debt liability, consistent with debt discounts. The Company has elected to early adopt the guidance as ofnine months ended September 30, 2015 and has retrospectively applied2016, the changes to all periods presented for the third quarter 2015.
8
The impactLIFO income of all adjustments made to the consolidated financial statements presented is summarized in the following tables (in thousands, except per share data):
|
| Years Ended December 31, |
| |||||||||||||||||||||||||||
|
| 2014 |
|
| 2013 |
|
| 2012 |
| |||||||||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
| |||||||||
Consolidated Statement of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold(A) |
| $ | 4,516,704 |
| $ | 4,524,676 |
| $ | 7,972 |
|
| $ | 4,295,715 |
| $ | 4,297,952 |
| $ | 2,237 |
|
| $ | 4,305,502 |
| $ | 4,303,778 |
| $ | (1,724 | ) |
Gross profit(A) |
|
| 810,501 |
|
| 802,529 |
|
| (7,972 | ) |
|
| 789,578 |
|
| 787,341 |
|
| (2,237 | ) |
|
| 774,604 |
|
| 776,328 |
|
| 1,724 |
|
Warehousing, marketing, and administrative expenses(A) |
|
| 592,050 |
|
| 595,673 |
|
| 3,623 |
|
|
| 580,428 |
|
| 580,141 |
|
| (287 | ) |
|
| 573,693 |
|
| 573,645 |
|
| (48 | ) |
Income before income taxes(A) |
|
| 194,483 |
|
| 182,888 |
|
| (11,595 | ) |
|
| 197,510 |
|
| 195,560 |
|
| (1,950 | ) |
|
| 177,635 |
|
| 179,407 |
|
| 1,772 |
|
Income tax expense(A) |
|
| 75,285 |
|
| 70,773 |
|
| (4,512 | ) |
|
| 74,340 |
|
| 73,507 |
|
| (833 | ) |
|
| 65,805 |
|
| 66,526 |
|
| 721 |
|
Net income(A) |
|
| 119,198 |
|
| 112,115 |
|
| (7,083 | ) |
|
| 123,170 |
|
| 122,053 |
|
| (1,117 | ) |
|
| 111,830 |
|
| 112,881 |
|
| 1,051 |
|
Net income per share(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(A) |
| $ | 3.08 |
| $ | 2.90 |
| $ | (0.18 | ) |
| $ | 3.11 |
| $ | 3.08 |
| $ | (0.03 | ) |
| $ | 2.77 |
| $ | 2.80 |
| $ | 0.03 |
|
Diluted(A) |
| $ | 3.05 |
| $ | 2.87 |
| $ | (0.18 | ) |
| $ | 3.06 |
| $ | 3.03 |
| $ | (0.03 | ) |
| $ | 2.73 |
| $ | 2.75 |
| $ | 0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(A) |
| $ | 119,198 |
| $ | 112,115 |
| $ | (7,083 | ) |
| $ | 123,170 |
| $ | 122,053 |
| $ | (1,117 | ) |
| $ | 111,830 |
| $ | 112,881 |
| $ | 1,051 |
|
Comprehensive income(A) |
|
| 96,295 |
|
| 89,212 |
|
| (7,083 | ) |
|
| 137,047 |
|
| 135,930 |
|
| (1,117 | ) |
|
| 114,471 |
|
| 115,522 |
|
| 1,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories(A) |
| $ | 926,809 |
| $ | 906,430 |
| $ | (20,379 | ) |
| $ | 830,295 |
| $ | 821,511 |
| $ | (8,784 | ) |
| $ | 767,206 |
| $ | 760,372 |
| $ | (6,834 | ) |
Other current assets(A) |
|
| 30,042 |
|
| 30,713 |
|
| 671 |
|
|
| 29,255 |
|
| 29,255 |
|
| - |
|
|
| 30,118 |
|
| 30,118 |
|
| - |
|
Other long-term assets(B) |
|
| 41,810 |
|
| 38,669 |
|
| (3,141 | ) |
|
| 25,576 |
|
| 22,185 |
|
| (3,391 | ) |
|
| 20,260 |
|
| 17,737 |
|
| (2,523 | ) |
Accrued liabilities(A) |
|
| 192,792 |
|
| 185,535 |
|
| (7,257 | ) |
|
| 191,531 |
|
| 188,115 |
|
| (3,416 | ) |
|
| 205,228 |
|
| 202,645 |
|
| (2,583 | ) |
Long-term debt(B) |
|
| 713,058 |
|
| 709,917 |
|
| (3,141 | ) |
|
| 533,324 |
|
| 529,933 |
|
| (3,391 | ) |
|
| 524,376 |
|
| 521,853 |
|
| (2,523 | ) |
Retained earnings(A) |
|
| 1,541,675 |
|
| 1,529,224 |
|
| (12,451 | ) |
|
| 1,444,238 |
|
| 1,438,870 |
|
| (5,368 | ) |
|
| 1,343,437 |
|
| 1,339,186 |
|
| (4,251 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(A) |
| $ | 119,198 |
| $ | 112,115 |
| $ | (7,083 | ) |
| $ | 123,170 |
| $ | 122,053 |
| $ | (1,117 | ) |
| $ | 111,830 |
| $ | 112,881 |
| $ | 1,051 |
|
Deferred income taxes(A) |
|
| (6,367 | ) |
| (10,879 | ) |
| (4,512 | ) |
|
| (3,921 | ) |
| (4,754 | ) |
| (833 | ) |
|
| (6,713 | ) |
| (5,992 | ) |
| 721 |
|
Inventories(A) |
|
| (30,319 | ) |
| (18,724 | ) |
| 11,595 |
|
|
| (66,627 | ) |
| (64,677 | ) |
| 1,950 |
|
|
| 10,374 |
|
| 8,602 |
|
| (1,772 | ) |
Cash provided by operating activities(A) |
|
| 77,133 |
|
| 77,133 |
|
| - |
|
|
| 74,737 |
|
| 74,737 |
|
| - |
|
|
| 189,814 |
|
| 189,814 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings at beginning of year(A) |
| $ | 1,444,238 |
| $ | 1,438,870 |
| $ | (5,368 | ) |
| $ | 1,343,437 |
| $ | 1,339,186 |
| $ | (4,251 | ) |
| $ | 1,253,118 |
| $ | 1,247,816 |
| $ | (5,302 | ) |
Retained earnings at end of year(A) |
|
| 1,541,675 |
|
| 1,529,224 |
|
| (12,451 | ) |
|
| 1,444,238 |
|
| 1,438,870 |
|
| (5,368 | ) |
|
| 1,343,437 |
|
| 1,339,186 |
|
| (4,251 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Change related to Inventory Valuation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B) Change related to Debt Issuance Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
| As of and for the Three Months Ended June 30, 2015 |
|
| As of and for the Three Months Ended March 31, 2015 |
|
| ||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| ||||||
Consolidated Statement of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold(A) |
| $ | 1,129,737 |
| $ | 1,131,680 |
| $ | 1,943 |
|
| $ | 1,127,925 |
| $ | 1,131,980 |
| $ | 4,055 |
|
|
Gross profit(A) |
|
| 212,062 |
|
| 210,119 |
|
| (1,943 | ) |
|
| 204,450 |
|
| 200,395 |
|
| (4,055 | ) |
|
Warehousing, marketing, and administrative expenses(A) |
|
| 158,159 |
|
| 156,912 |
|
| (1,247 | ) |
|
| 198,372 |
|
| 197,581 |
|
| (791 | ) |
|
Income before income taxes(A) |
|
| 49,125 |
|
| 48,429 |
|
| (696 | ) |
|
| 1,239 |
|
| (2,025 | ) |
| (3,264 | ) |
|
Income tax expense(A) |
|
| 18,864 |
|
| 18,595 |
|
| (269 | ) |
|
| 5,231 |
|
| 3,982 |
|
| (1,249 | ) |
|
Net income (loss)(A) |
|
| 30,261 |
|
| 29,834 |
|
| (427 | ) |
|
| (3,992 | ) |
| (6,007 | ) |
| (2,015 | ) |
|
Net income (loss) per share(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(A) |
| $ | 0.80 |
| $ | 0.79 |
| $ | (0.01 | ) |
| $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.06 | ) |
|
Diluted(A) |
| $ | 0.79 |
| $ | 0.78 |
| $ | (0.01 | ) |
| $ | (0.10 | ) | $ | (0.16 | ) | $ | (0.06 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(A) |
| $ | 30,261 |
| $ | 29,834 |
| $ | (427 | ) |
| $ | (3,992 | ) | $ | (6,007 | ) | $ | (2,015 | ) |
|
Comprehensive income (loss) (A) |
|
| 31,450 |
|
| 31,023 |
|
| (427 | ) |
|
| (8,166 | ) |
| (10,181 | ) |
| (2,015 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories(A) |
| $ | 875,465 |
| $ | 851,126 |
| $ | (24,339 | ) |
| $ | 871,310 |
| $ | 847,667 |
| $ | (23,643 | ) |
|
Other current assets(A) |
|
| 29,595 |
|
| 30,344 |
|
| 749 |
|
|
| 31,226 |
|
| 31,977 |
|
| 751 |
|
|
Other long-term assets(B) |
|
| 48,439 |
|
| 45,779 |
|
| (2,660 | ) |
|
| 49,440 |
|
| 46,535 |
|
| (2,905 | ) |
|
Accrued liabilities(A) |
|
| 190,257 |
|
| 181,560 |
|
| (8,697 | ) |
|
| 175,770 |
|
| 167,344 |
|
| (8,426 | ) |
|
Long-term debt(B) |
|
| 661,143 |
|
| 658,483 |
|
| (2,660 | ) |
|
| 684,238 |
|
| 681,333 |
|
| (2,905 | ) |
|
Retained earnings(A) |
|
| 1,557,281 |
|
| 1,542,388 |
|
| (14,893 | ) |
|
| 1,532,325 |
|
| 1,517,859 |
|
| (14,466 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Six Months Ended June 30, 2015 |
|
| For the Three Months Ended March 31, 2015 |
|
| ||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| ||||||
Consolidated Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(A) |
| $ | 26,269 |
| $ | 23,827 |
| $ | (2,442 | ) |
| $ | (3,992 | ) | $ | (6,007 | ) | $ | (2,015 | ) |
|
Deferred income taxes(A) |
|
| (8,365 | ) |
| (8,294 | ) |
| 71 |
|
|
| (1,858 | ) |
| (1,469 | ) |
| 389 |
|
|
Inventories(A) |
|
| 44,984 |
|
| 48,944 |
|
| 3,960 |
|
|
| 42,759 |
|
| 46,023 |
|
| 3,264 |
|
|
Other assets(A) |
|
| (10,173 | ) |
| (10,250 | ) |
| (77 | ) |
|
| (10,126 | ) |
| (10,751 | ) |
| (625 | ) |
|
Accrued liabilities(A) |
|
| 4,794 |
|
| 3,282 |
|
| (1,512 | ) |
|
| (16,521 | ) |
| (17,534 | ) |
| (1,013 | ) |
|
Cash provided by operating activities(A) |
|
| 120,848 |
|
| 120,848 |
|
| - |
|
|
| 62,722 |
|
| 62,722 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Change related to Inventory Valuation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B) Change related to Debt Issuance Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
| As of and for the Three Months Ended September 30, 2014 |
|
| As of and for the Three Months Ended June 30, 2014 |
|
| As of and for the Three Months Ended March 31, 2014 |
| ||||||||||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
| |||||||||
Consolidated Statement of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold(A) |
| $ | 1,208,919 |
| $ | 1,203,246 |
| $ | (5,673 | ) |
| $ | 1,120,577 |
| $ | 1,124,485 |
| $ | 3,908 |
|
| $ | 1,067,056 |
| $ | 1,073,261 |
| $ | 6,205 |
|
Gross profit(A) |
|
| 211,028 |
|
| 216,701 |
|
| 5,673 |
|
|
| 199,460 |
|
| 195,552 |
|
| (3,908 | ) |
|
| 187,083 |
|
| 180,878 |
|
| (6,205 | ) |
Warehousing, marketing, and administrative expenses(A) |
|
| 146,560 |
|
| 148,831 |
|
| 2,271 |
|
|
| 142,186 |
|
| 142,870 |
|
| 684 |
|
|
| 148,849 |
|
| 146,837 |
|
| (2,012 | ) |
Income before income taxes(A) |
|
| 60,476 |
|
| 63,878 |
|
| 3,402 |
|
|
| 53,441 |
|
| 48,849 |
|
| (4,592 | ) |
|
| 34,860 |
|
| 30,667 |
|
| (4,193 | ) |
Income tax expense(A) |
|
| 22,307 |
|
| 23,647 |
|
| 1,340 |
|
|
| 20,110 |
|
| 18,327 |
|
| (1,783 | ) |
|
| 13,003 |
|
| 11,375 |
|
| (1,628 | ) |
Net income(A) |
|
| 38,169 |
|
| 40,231 |
|
| 2,062 |
|
|
| 33,331 |
|
| 30,522 |
|
| (2,809 | ) |
|
| 21,857 |
|
| 19,292 |
|
| (2,565 | ) |
Net income per share(A) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(A) |
| $ | 0.99 |
| $ | 1.05 |
| $ | 0.06 |
|
| $ | 0.86 |
| $ | 0.79 |
| $ | (0.07 | ) |
| $ | 0.56 |
| $ | 0.49 |
| $ | (0.07 | ) |
Diluted(A) |
| $ | 0.98 |
| $ | 1.03 |
| $ | 0.05 |
|
| $ | 0.85 |
| $ | 0.78 |
| $ | (0.07 | ) |
| $ | 0.55 |
| $ | 0.49 |
| $ | (0.06 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(A) |
| $ | 38,169 |
| $ | 40,231 |
| $ | 2,062 |
|
| $ | 33,331 |
| $ | 30,522 |
| $ | (2,809 | ) |
| $ | 21,857 |
| $ | 19,292 |
| $ | (2,565 | ) |
Comprehensive income(A) |
|
| 37,826 |
|
| 39,888 |
|
| 2,062 |
|
|
| 33,847 |
|
| 31,038 |
|
| (2,809 | ) |
|
| 21,734 |
|
| 19,169 |
|
| (2,565 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories(A) |
| $ | 796,325 |
| $ | 782,158 |
| $ | (14,167 | ) |
| $ | 804,395 |
| $ | 786,826 |
| $ | (17,569 | ) |
| $ | 748,499 |
| $ | 735,522 |
| $ | (12,977 | ) |
Other long-term assets(B) |
|
| 24,372 |
|
| 21,197 |
|
| (3,175 | ) |
|
| 26,059 |
|
| 22,662 |
|
| (3,397 | ) |
|
| 27,170 |
|
| 23,459 |
|
| (3,711 | ) |
Accrued liabilities(A) |
|
| 189,224 |
|
| 183,737 |
|
| (5,487 | ) |
|
| 187,414 |
|
| 180,587 |
|
| (6,827 | ) |
|
| 177,251 |
|
| 172,207 |
|
| (5,044 | ) |
Long-term debt(B) |
|
| 545,009 |
|
| 541,834 |
|
| (3,175 | ) |
|
| 542,410 |
|
| 539,013 |
|
| (3,397 | ) |
|
| 561,511 |
|
| 557,800 |
|
| (3,711 | ) |
Retained earnings(A) |
|
| 1,521,230 |
|
| 1,512,550 |
|
| (8,680 | ) |
|
| 1,488,469 |
|
| 1,477,727 |
|
| (10,742 | ) |
|
| 1,460,582 |
|
| 1,452,649 |
|
| (7,933 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended September 30, 2014 |
|
| For the Six Months Ended June 30, 2014 |
|
| For the Three Months Ended March 31, 2014 |
| |||||||||||||||||||||
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
|
| Previous Method |
| As Reported |
| Effect of Change |
| |||||||||
Consolidated Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(A) |
| $ | 93,357 |
| $ | 90,045 |
| $ | (3,312 | ) |
| $ | 55,188 |
| $ | 49,814 |
| $ | (5,374 | ) |
| $ | 21,857 |
| $ | 19,292 |
| $ | (2,565 | ) |
Deferred income taxes(A) |
|
| (7,618 | ) |
| (9,134 | ) |
| (1,516 | ) |
|
| (5,317 | ) |
| (6,381 | ) |
| (1,064 | ) |
|
| (2,450 | ) |
| (2,437 | ) |
| 13 |
|
Inventories(A) |
|
| 46,591 |
|
| 51,974 |
|
| 5,383 |
|
|
| 39,290 |
|
| 48,075 |
|
| 8,785 |
|
|
| 81,714 |
|
| 85,907 |
|
| 4,193 |
|
Accrued liabilities(A) |
|
| 3,438 |
|
| 2,883 |
|
| (555 | ) |
|
| (1,106 | ) |
| (3,453 | ) |
| (2,347 | ) |
|
| (13,654 | ) |
| (15,295 | ) |
| (1,641 | ) |
Cash provided by operating activities(A) |
|
| 93,666 |
|
| 93,666 |
|
| - |
|
|
| 78,889 |
|
| 78,889 |
|
| - |
|
|
| 1,490 |
|
| 1,490 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) Change related to Inventory Valuation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B) Change related to Debt Issuance Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
3. Acquisitions and Dispositions
Acquisitions
CPO Commerce, Inc.
On May 30, 2014, Essendant Co. completed the acquisition of CPO Commerce, Inc. (“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$2.3 million related to the estimated fair valueliquidation was more than offset by LIFO expense 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. The Company financed the 100% stock acquisition with borrowings under the Company’s available committed bank facilities. Purchase accounting for this transaction was completed as of May 30, 2015.
MEDCO
On October 31, 2014, Essendant Co. completed the acquisition of 100% of the capital stock of Liberty Bell Equipment Corp., a United States wholesaler of automotive aftermarket tools and equipment, and its affiliates (collectively, MEDCO) including G2S Equipement de Fabrication et d’Entretien, a Canadian wholesaler. MEDCO advances a key pillar of the Company’s strategy, which is to diversify into channels and categories that leverage our common platform. It also brings expanded categories and services to customers.
The purchase price was $150.4 million, including $4.7$3.2 million related to the estimated fair valuecurrent inflation for an overall net increase in cost 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$0.9 million. Any changes to the estimated fair value of contingent consideration after the original purchase accounting is completed will be recorded in “warehousing, marketing and administrative expenses” in the period in which a change occurs. This acquisition was funded through a combination of cash on hand and cash available under the Company’s committed bank facilities.
2. Acquisitions
Nestor Sales LLC
On July 31, 2015, Essendant Co. completed the acquisition of 100% of the capital stock of Nestor Sales LLC (“Nestor”), a leading wholesaler and distributor of tools, equipment and supplies to the transportation industry. This acquisition accelerates the Company’s growth in the automotive aftermarket, complements the Company’s existing industrial offerings while providing access to new customer segments, and advances a key strategic pillar to diversify into channels and categories that leverage our common platform.segments.
The purchase price was $41.8 million. This acquisition was funded through a combination of cash on hand and cash available under the Company’s revolving credit facility. Purchase accounting for this transaction was completed as of June 30, 2016.
The Company has developed preliminary estimates ofAt September 30, 2016, the fair values of assets acquired and liabilities assumed from the MEDCO and Nestor acquisitions for purposes of allocating the purchase prices. The estimates are subject to change as the valuation activities are completed. The fair values of the assets and liabilities acquired in the MEDCO and Nestor acquisitions were estimated using various valuation methods including estimated selling prices, market approach, and discounted cash flows using both an income and cost approach. The same methods were used for determining the fair values of the assets and liabilities acquired for the CPO acquisition.
Any changes to the preliminary allocationsallocation of the purchase prices, some of which may be material, will be allocated to residual goodwill.
12
At September 30, 2015, the allocations of the purchase prices wereprice was as follows (amounts in thousands):
| CPO |
|
| MEDCO |
|
| Nestor |
| ||||||
| (Final) |
|
| (Preliminary) |
|
| (Preliminary) |
| ||||||
Purchase price, net of cash acquired | $ | 32,225 |
|
| $ | 145,873 |
|
| $ | 39,939 |
| $ | 39,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
| (2,956 | ) |
|
| (44,815 | ) |
|
| (9,230 | ) |
| 9,230 |
|
Inventories |
| (13,051 | ) |
|
| (55,491 | ) |
|
| (10,442 | ) |
| 12,067 |
|
Other current assets |
| (269 | ) |
|
| (1,299 | ) |
|
| (339 | ) |
| 339 |
|
Property, plant and equipment, net |
| (488 | ) |
|
| (4,408 | ) |
|
| (1,251 | ) |
| 1,251 |
|
Other assets |
| - |
|
|
| (650 | ) |
|
| (752 | ) |
| 752 |
|
Intangible assets |
| (12,800 | ) |
|
| (40,000 | ) |
|
| (17,670 | ) |
| 16,930 |
|
Total assets acquired |
| (29,564 | ) |
|
| (146,663 | ) |
|
| (39,684 | ) |
| 40,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| 16,911 |
|
|
| 32,383 |
|
|
| 4,992 |
|
| 4,992 |
|
Accrued liabilities |
| 2,580 |
|
|
| 5,542 |
|
|
| 1,912 |
|
| 1,943 |
|
Deferred income taxes |
| 3,453 |
|
|
| 2,716 |
|
|
| 3,875 |
|
| 3,287 |
|
Other long-term liabilities |
| 90 |
|
|
| 52 |
|
|
| 76 |
|
| 76 |
|
Total liabilities assumed |
| 23,034 |
|
|
| 40,693 |
|
|
| 10,855 |
|
| 10,298 |
|
Goodwill | $ | 25,695 |
|
| $ | 39,903 |
|
| $ | 11,110 |
| $ | 9,712 |
|
|
|
|
|
The purchased identifiable intangible assets were as follows (amounts in thousands):
| Total |
|
| Estimated Life | |
Customer relationships | $ | 15,570 |
|
| 13 years |
Trademark |
| 1,360 |
|
| 2-15 years |
Total | $ | 16,930 |
|
|
|
| CPO (Final) |
| MEDCO (Preliminary) |
| Nestor (Preliminary) | ||||||||||||
| Total |
|
| Estimated Life |
| Total |
|
| Estimated Life |
| Total |
|
| Estimated Life | |||
Customer relationships | $ | 5,200 |
|
| 3 years |
| $ | 37,590 |
|
| 3-15 years |
| $ | 16,890 |
|
| 13 years |
Trademark |
| 7,600 |
|
| 15 years |
|
| 2,410 |
|
| 1.5-15 years |
|
| 780 |
|
| 2.5-15 years |
Total | $ | 12,800 |
|
|
|
| $ | 40,000 |
|
|
|
| $ | 17,670 |
|
|
|
Disposition of Azerty de Mexico8
3. Sale-Leaseback On September 18, 2015,23, 2016, the Company completedentered into an agreement for the 100% stock-salesale and leaseback of its subsidiary, Azerty de Mexico, tofacility in City of Industry, CA. The agreement provided for the local general manager. The sale price was a combination of cash and a seller’s note, totaling $8.7 million. The seller’s note matures in 180 days and requires periodic repayments. When the decision to sell the subsidiary was approved, in accordance with Accounting Standards Codification (ASC) 360-10-45-9 Property, Plant, and Equipment, Azerty de Mexico met all of the criteria to be classified asfacility for a held-for-sale asset disposal group. In accordance with ASC 350-20-40, Intangibles – Goodwill and Other, the Company allocated a proportionate sharepurchase price 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 subsidiary. Based upon the impairment test, the $3.3 million of goodwill allocated to the subsidiary was determined to be fully impaired. Additionally, in conjunction with classifying the subsidiary as a held-for-sale asset disposal group, the Company revalued the subsidiary to fair value using the cost-approach method less the estimated cost to sell. The carrying value of the disposal group, including a $10.1 million cumulative foreign currency translation adjustment, was then compared to the fair value less the estimated cost to sell, resulting in a pre-tax impairment loss of $10.1 million. The goodwill impairment of $3.3 million, the held-for-sale impairment of $10.1$31.7 million and the $0.1subsequent leaseback for a two year period. The lease is classified as an operating lease. As a result, the Company recorded a gain of $20.5 million estimated cost to sell were recorded in the first quarter of 2015 within “warehousing, marketing and administrative expenses.” DuringA deferred gain of approximately $2.8 million that will be amortized into income over the second and third quarters,term of the Company recorded an additionallease was also recorded. As of September 30, 2016, $1.4 million and $2.1 million, respectively, within “warehousing, marketing and administrative expenses.” This includesof the deferred gain is reflected in the accompanying Consolidated Balance Sheet under “other long-term liabilities”, with the remainder included as a $1.5 million loss on sale.component of “other current liabilities”. The pre-tax loss, excludingcash proceeds from the foreign currency translation adjustment noted above, attributablesale were used primarily to Azerty de Mexico for the three months ended September 30, 2015 and 2014 was $0.9 million and $0.2 million, respectively. The pre-tax loss attributable to this subsidiary for the nine months ended September 30, 2015 was $5.2 million and none for the nine months ended September 30, 2014.pay down long-term debt.
13
As of September 30, 2015,2016, 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.
The Company granted 526,697 shares of restricted stock and 290,725 RSUs during the first nine months of 2016, compared to 440,948 shares of restricted stock and 162,092 RSUs during the first nine months of 2015. No stock options were granted during the first nine months of 2015. During the first nine months of 2014, the Company granted 229,477 shares of restricted stock, 176,717 RSUs, and 5,538 stock options.
5. Severance and Restructuring Charges
The Company began certain restructuring actions
Commencing in 2015 which included workforce reductions and facility consolidations. For the three months and nine months ended September 30, 2015, the Company recorded $0.2 million and $1.5 million pre-tax expense relating to facility consolidations, respectively. During the first quarter of 2015, the Company recorded a $6.0 million pre-tax charge relatingbegan certain restructuring actions which included workforce reductions and facility closures. Commencing in the fourth quarter of 2015, the Company executed actions to a workforce reduction. Thesereduce costs through management delayering in order to achieve broader functional alignment of the organization. The charges associated with these actions were included in “warehousing, marketing and administrative expenses.” Cash outflows for these
The expenses, cash flows, and accrued liabilities associated with the restructuring actions will occur primarily in 2015 and were approximately $3.0 milliondescribed above are noted in the nine months ended September 30, 2015. As of September 30, 2015, the Company has accrued liabilities for these actions of $3.1 million. The Company estimated an additional $1.5 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 million.following table (in thousands):
| Expenses |
|
| Cash flow |
|
| Accrued Liabilities |
| |||||||||||||||||||
| For the three months ended September 30, |
|
| For the nine months ended September 30, |
|
| For the nine months ended September 30, |
|
| As of September 30, |
| ||||||||||||||||
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
| 2016 |
| |||||||
First quarter 2015 Actions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction | $ | (0.5 | ) |
| $ | - |
|
| $ | (0.5 | ) |
| $ | 6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility closure | $ | - |
|
|
| 0.2 |
|
| $ | 0.3 |
|
|
| 0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | $ | (0.5 | ) |
|
| 0.2 |
|
| $ | (0.2 | ) |
| $ | 6.5 |
|
| $ | 1.2 |
|
| $ | 3.0 |
|
| $ | 0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter 2015 Action |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction | $ | (0.7 | ) |
| N/A |
|
| $ | (0.7 | ) |
| N/A |
|
| $ | 8.0 |
|
| N/A |
|
| $ | 2.1 |
|
9
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are noted in the following table (in thousands):
Goodwill, balance as of December 31, 2014 | $ | 398,042 |
|
Impairment |
| (3,319 | ) |
Purchase accounting adjustments |
| 9,977 |
|
Acquisition |
| 11,110 |
|
Currency translation adjustments |
| (2,632 | ) |
Goodwill, balance as of September 30, 2015 | $ | 413,178 |
|
Goodwill, balance as of December 31, 2015 | $ | 299,355 |
|
Purchase accounting adjustments |
| (1,858 | ) |
Currency translation adjustments |
| 745 |
|
Goodwill, balance as of September 30, 2016 | $ | 298,242 |
|
The following table summarizes the intangible assets of the Company by major class of intangible assets and the cost, accumulated amortization, net carrying amount, and weighted average life, if applicable (in thousands):
| September 30, 2015 |
| December 31, 2014 | September 30, 2016 |
| December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
| Gross |
|
|
|
|
|
| Net |
|
| Useful |
| Gross |
|
|
|
|
|
| Net |
|
| Useful | Gross |
|
|
|
|
|
| Net |
|
| Useful |
| Gross |
|
|
|
|
|
| Net |
|
| Useful | ||||||||
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life |
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life | Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life |
| Carrying |
|
| Accumulated |
|
| Carrying |
|
| Life | ||||||||||||
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) |
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) | Amount |
|
| Amortization |
|
| Amount |
|
| (years) |
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) | ||||||||||||
Intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and other intangibles | $ | 138,864 |
|
| $ | (48,659 | ) |
| $ | 90,205 |
|
| 16 |
| $ | 125,761 |
|
| $ | (41,123 | ) |
| $ | 84,638 |
|
| 16 | $ | 137,678 |
|
| $ | (59,545 | ) |
| $ | 78,133 |
|
| 16 |
| $ | 137,938 |
|
| $ | (51,357 | ) |
| $ | 86,581 |
|
| 16 |
Non-compete agreements |
| 4,650 |
|
|
| (3,260 | ) |
|
| 1,390 |
|
| 4 |
|
| 4,672 |
|
|
| (2,364 | ) |
|
| 2,308 |
|
| 4 |
| 4,651 |
|
|
| (4,260 | ) |
|
| 391 |
|
| 4 |
|
| 4,644 |
|
|
| (4,260 | ) |
|
| 384 |
|
| 4 |
Trademarks |
| 12,833 |
|
|
| (3,268 | ) |
|
| 9,565 |
|
| 14 |
|
| 14,428 |
|
|
| (1,716 | ) |
|
| 12,712 |
|
| 13 |
| 13,725 |
|
|
| (5,363 | ) |
|
| 8,362 |
|
| 14 |
|
| 13,688 |
|
|
| (4,240 | ) |
|
| 9,448 |
|
| 14 |
Total | $ | 156,347 |
|
| $ | (55,187 | ) |
| $ | 101,160 |
|
|
|
| $ | 144,861 |
|
| $ | (45,203 | ) |
| $ | 99,658 |
|
|
| $ | 156,054 |
|
| $ | (69,168 | ) |
| $ | 86,886 |
|
|
|
| $ | 156,270 |
|
| $ | (59,857 | ) |
| $ | 96,413 |
|
|
|
Intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Trademarks |
| 1,600 |
|
|
| - |
|
|
| 1,600 |
|
| n/a |
|
| 12,300 |
|
|
| - |
|
|
| 12,300 |
|
| n/a | |||||||||||||||||||||||||||
Total | $ | 157,947 |
|
| $ | (55,187 | ) |
| $ | 102,760 |
|
|
|
| $ | 157,161 |
|
| $ | (45,203 | ) |
| $ | 111,958 |
|
|
|
14
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 effective June 1, 2015. This impairment charge was recorded in “warehousing, marketing and administrative expenses.” The Company utilized the discounted cash flow method to determine the fair value of these trademarks based upon management’s current forecasted future revenues from the trademarks. The trademarks had a total value of $0.5 million at September 30, 2015.
The following table summarizes the amortization expense to be incurred in 2015 and over the next four years2016 through 2020 on intangible assets (in thousands):
Year |
| Amount |
|
| Amount |
| ||
2015 |
| $ | 15,156 |
| ||||
2016 |
|
| 13,113 |
|
| $ | 12,242 |
|
2017 |
|
| 10,956 |
|
|
| 10,797 |
|
2018 |
|
| 8,088 |
|
|
| 8,054 |
|
2019 |
|
| 6,953 |
|
|
| 6,937 |
|
2020 |
|
| 6,934 |
|
7. Accumulated Other Comprehensive Income (Loss)
The change in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the period ended September 30, 20152016 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 |
|
| (8,056 | ) |
|
| (1,291 | ) |
|
| - |
|
|
| (9,347 | ) |
|
| 2,441 |
|
|
| (579 | ) |
|
| (3,946 | ) |
|
| (2,084 | ) |
Settlement loss reclassified from AOCI |
|
| - |
|
|
| - |
|
|
| 7,453 |
|
|
| 7,453 |
| ||||||||||||||||
Amounts reclassified from AOCI |
|
| 11,132 |
|
|
| 655 |
|
|
| 2,831 |
|
|
| 14,618 |
|
|
| - |
|
|
| 440 |
|
|
| 2,528 |
|
|
| 2,968 |
|
Net other comprehensive (loss) income |
|
| 3,076 |
|
|
| (636 | ) |
|
| 2,831 |
|
|
| 5,271 |
|
|
| 2,441 |
|
|
| (139 | ) |
|
| 6,035 |
|
|
| 8,337 |
|
AOCI, balance as of September 30, 2015 |
| $ | (8,847 | ) |
| $ | (362 | ) |
| $ | (48,311 | ) |
| $ | (57,520 | ) | ||||||||||||||||
AOCI, balance as of September 30, 2016 |
| $ | (7,425 | ) |
| $ | 7 |
|
| $ | (41,836 | ) |
| $ | (49,254 | ) |
10
The following table details the amounts reclassified out of AOCI into the income statement during the three-monththree and nine-month periods endingnine months ended September 30, 2015, respectively (in2016(in thousands):
|
| Amount Reclassified From AOCI |
|
|
|
| Amount Reclassified From AOCI |
|
|
| ||||||||||
|
| For the Three |
|
| For the Nine |
|
|
|
| For the Three |
|
| For the Nine |
|
|
| ||||
|
| Months Ended |
|
| Months Ended |
|
|
|
| Months Ended |
|
| Months Ended |
|
|
| ||||
|
| September 30, |
|
| September 30, |
|
| Affected Line Item In The Statement |
| September 30, |
|
| September 30, |
|
| Affected Line Item In The Statement | ||||
Details About AOCI Components |
| 2015 |
|
| 2015 |
|
| Where Net Income is Presented |
| 2016 |
|
| 2016 |
|
| Where Net Income is Presented | ||||
Realized and unrealized gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on interest rate swap, before tax |
| $ | 349 |
|
| $ | 1,052 |
|
| Interest expense, net | ||||||||||
Gain on foreign exchange hedge, before tax |
|
| 4 |
|
|
| 4 |
|
| Cost of goods sold | ||||||||||
Gain on interest rate swap, before tax |
| $ | 249 |
|
| $ | 789 |
|
| Interest expense, net | ||||||||||
Loss on foreign exchange hedges, before tax |
|
| - |
|
|
| (70 | ) |
| Cost of goods sold | ||||||||||
|
|
| (134 | ) |
|
| (401 | ) |
| Tax provision |
|
| (96 | ) |
|
| (279 | ) |
| Tax provision |
|
| $ | 219 |
|
| $ | 655 |
|
| Net of tax |
| $ | 153 |
|
| $ | 440 |
|
| Net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
| ||||||||||
Disposition of Azerty de Mexico |
| $ | 11,132 |
|
| $ | 11,132 |
|
| Warehousing, marketing and administrative expenses | ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Defined benefit pension plan items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost and unrecognized loss |
| $ | 1,573 |
|
| $ | 4,623 |
|
| Warehousing, marketing and administrative expenses |
| $ | 1,237 |
|
| $ | 4,125 |
|
| Warehousing, marketing and administrative expenses |
Settlement loss |
|
| 419 |
|
|
| 12,163 |
|
| Defined benefit plan settlement loss | ||||||||||
|
|
| (610 | ) |
|
| (1,792 | ) |
| Tax provision |
|
| (641 | ) |
|
| (6,307 | ) |
| Tax provision |
|
|
| 963 |
|
|
| 2,831 |
|
| Net of tax |
|
| 1,015 |
|
|
| 9,981 |
|
| Net of tax |
Total reclassifications for the period, net of tax |
| $ | 12,314 |
|
| $ | 14,618 |
|
|
|
| $ | 1,168 |
|
| $ | 10,421 |
|
|
|
15
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 period ending September 30, 2016 and 2015, 0.3 and 0.4 million shares of such securities, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. For the nine-month period ending September 30, 2015, no2016, 0.3 million shares of securities were excluded from the computation. For the three-month and nine-month periods endingperiod September 30, 2014, 0.5 million2015, no shares of such securities were not included becauseexcluded from the effect would be antidilutive.computation. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
| For the Three Months Ended |
|
| For the Nine Months Ended |
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
| September 30, |
|
| September 30, |
| September 30, |
|
| September 30, |
| ||||||||||||||||||||
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 27,667 |
|
| $ | 40,231 |
|
| $ | 51,492 |
|
| $ | 90,045 |
| $ | 36,742 |
|
| $ | 27,667 |
|
| $ | 66,205 |
|
| $ | 51,492 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted average shares |
| 37,300 |
|
|
| 38,450 |
|
|
| 37,724 |
|
|
| 38,817 |
|
| 36,578 |
|
|
| 37,300 |
|
|
| 36,560 |
|
|
| 37,724 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and restricted stock |
| 308 |
|
|
| 434 |
|
|
| 385 |
|
|
| 427 |
|
| 360 |
|
|
| 308 |
|
|
| 336 |
|
|
| 385 |
|
Denominator for diluted earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares and the effect of dilutive securities |
| 37,608 |
|
|
| 38,884 |
|
|
| 38,109 |
|
|
| 39,244 |
|
| 36,938 |
|
|
| 37,608 |
|
|
| 36,896 |
|
|
| 38,109 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic | $ | 0.74 |
|
| $ | 1.05 |
|
| $ | 1.36 |
|
| $ | 2.32 |
| $ | 1.00 |
|
| $ | 0.74 |
|
| $ | 1.81 |
|
| $ | 1.36 |
|
Net income per share - diluted | $ | 0.74 |
|
| $ | 1.03 |
|
| $ | 1.35 |
|
| $ | 2.29 |
| $ | 0.99 |
|
| $ | 0.74 |
|
| $ | 1.79 |
|
| $ | 1.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
As of December 31, 2014,September 30, 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 periodsthree months ended September 30, 2015 and 2014,2016, the Company did not repurchase any shares of its common stock. For the same period in the prior year, the Company repurchased 744,081 shares at an aggregate cost of $25.9 million. During the nine months ended September 30, 2016 and 283,2832015, the Company repurchased 241,270 and 1,525,222 shares of the Company’s common stock at an aggregate cost of $25.9$6.8 million and $11.4 million, respectively. During the nine-month periods ended September 30, 2015 and 2014, the Company repurchased 1,525,222 and 1,074,574 shares of the Company’s common stock at an aggregate cost of $57.4 million and $43.0 million, respectively. Depending on market and business conditions and other factors, the Company may continue or suspend purchasing its common stock at any time without notice. Acquired shares are included in the issued shares of the Company and treasury stock, but are not included in average shares outstanding when calculating earnings per share data. During the first nine months of 20152016 and 2014,2015, the Company reissued 369,591452,286 and 225,783369,591 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.
9. Debt
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’s2015 Form 10-K10-K) (each a “Lending Agreement”) contain restrictions on the use of cash transferred from ECO to ESND. Each of the Lending Agreements also prohibits the Company from exceeding a Leverage Ratio (as defined in the 2013 Credit Agreement and the 2013 Note Purchase Agreement). The maximum Leverage Ratio is 3.50 to 1.00 but increases to up to 4.00 to 1.00 for the yearfirst four fiscal quarters (the “Adjusted Leverage Period”) following certain acquisitions. Following the 2015 acquisition of Nestor Sales, an Adjusted Leverage period was applicable through the quarter ended DecemberJune 30, 2016. On August 30, 2016, the Lending Agreements were amended to extend the Adjusted Leverage Period for two additional quarters. As a result, the maximum permitted Leverage Ratio remains at 4.00 to 1.00 but will revert to 3.50 to 1.00 for the quarter ending March 31, 2014) restrict Essendant Co.’s ability to transfer cash to ESND.2017.
Debt consisted of the following amounts (in millions):
| As of |
|
| As of |
| As of |
| As of |
| ||||
| September 30, 2015 |
|
| December 31, 2014 |
| September 30, 2016 |
| December 31, 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Credit Agreement | $ | 318.5 |
|
| $ | 363.0 |
| $ | 271.8 |
| $ | 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 |
| (2.4 | ) |
|
| (3.1 | ) |
| (1.7 | ) |
| (2.2 | ) |
Total | $ | 666.2 |
|
| $ | 710.8 |
| $ | 620.2 |
| $ | 716.3 |
|
16
As of September 30, 2015, 77.6%2016, 75.9% 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”).
The Company had outstanding letters of credit of $11.1$11.2 million and $11.6 million under the 2013 Credit Agreement as of September 30, 20152016 and December 31, 2014.2015, respectively.
BorrowingsAs of September 30, 2016, the applicable margin 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% towas 2.00% and on Alternate Base Rate loans ranges from 0% to 1.00%. As of September 30, 2015, the applicable margin for LIBOR-based loans and was 1.375% and1.00% for Alternate Base Rate loans was 0.375%. Essendant Co. is required to pay the lenders a fee on the unutilized portion of the commitmentsloans. Interest under the 2013 CreditNote Purchase Agreement is payable semi-annually at a rate per annum between 0.15% and 0.35%equal to 3.75% (3.66% after the effect of terminating an interest rate swap), depending onexcept the annual rate increases by 0.625% if the Company’s Leverage Ratio.Ratio is between 3.50 to 1.00 and 3.75 to 1.00, and increases by 0.75% if the Leverage Ratio is between 3.75 to 1.00 and 4.00 to 1.00. The Company’s Leverage Ratio was 3.51 to 1.00 as of June 30, 2016 and was 2.77 to 1.00 as of September 30, 2016.
On June 26, 2015, the Company and its subsidiaries Essendant Co., Essendant Financial Services LLC (“EFS") and Essendant Receivables LLC ("ESR") entered into a Third Omnibus Amendment to Transaction Documents (the “Omnibus Amendment”) with The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch ("BTMU") and PNC Bank, National Association (“PNC Bank”). The Omnibus Agreement amended the transaction documents of the Receivable Securitization Program to reflect rebranded legal entity names. On June 29, 2015, Lagasse, LLC, a subsidiary of Essendant Co. merged into Essendant Co. All accounts receivable originated by Lagasse prior to the merger are excluded from the Program. The Omnibus Agreement amended the Transaction Documents to also exclude “Excluded Receivables” from the Receivables Securitization Program, which are defined as “any receivable which, at the time of such Receivable’s origination, was processed on the [enterprise resource planning system previously used by Lagasse, LLC].”
As of September 30, 20152016 and December 31, 2014, $414.22015, $552.9 million and $360.3$448.6 million, respectively, of receivables had been sold to the Investors (as defined in Note 9 of11 to the Company’s Consolidated Financial Statements in the 2015 Form 10-K for the year ended December 31, 2014)10-K). ESREssendant Receivables LLC had $200.0 million outstanding under the Receivables Securitization Program as of September 30, 20152016 and December 31, 2014.2015.
For additional information about the 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program, see Note 911 of the Company’s2015 Form 10-K for the year ended December 31, 2014.10-K.
12
10. Pension and Post-Retirement Benefit Plans
The Company maintains pension plans covering union and certain non-union employees. For more information on the Company’s retirement plans, see Note 1113 to the Company’s Consolidated Financial StatementsStatement in the 2015 Form 10-K for the year ended December 31, 2014.10-K. A summary of net periodic pension cost related to the Company’s pension plans for the three and nine months ended September 30, 20152016 and 20142015 was as follows (dollars in thousands):
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||||||||||||
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||||||
Service cost - benefit earned during the period | $ | 321 |
|
| $ | 147 |
|
| $ | 1,121 |
|
| $ | 802 |
| $ | 318 |
|
| $ | 321 |
|
| $ | 952 |
|
| $ | 1,121 |
|
Interest cost on projected benefit obligation |
| 2,208 |
|
|
| 2,235 |
|
|
| 6,748 |
|
|
| 6,720 |
|
| 1,806 |
|
|
| 2,208 |
|
|
| 6,322 |
|
|
| 6,748 |
|
Expected return on plan assets |
| (2,803 | ) |
|
| (2,599 | ) |
|
| (8,413 | ) |
|
| (7,714 | ) |
| (2,219 | ) |
|
| (2,803 | ) |
|
| (7,484 | ) |
|
| (8,413 | ) |
Amortization of prior service cost |
| 72 |
|
|
| 47 |
|
|
| 222 |
|
|
| 137 |
|
| 74 |
|
|
| 72 |
|
|
| 222 |
|
|
| 222 |
|
Amortization of actuarial loss |
| 1,501 |
|
|
| 945 |
|
|
| 4,401 |
|
|
| 2,755 |
|
| 1,163 |
|
|
| 1,501 |
|
|
| 3,903 |
|
|
| 4,401 |
|
Settlement loss |
| 419 |
|
|
| - |
|
|
| 12,163 |
|
|
| - |
| |||||||||||||||
Net periodic pension cost | $ | 1,299 |
|
| $ | 775 |
|
| $ | 4,079 |
|
| $ | 2,700 |
| $ | 1,561 |
|
| $ | 1,299 |
|
| $ | 16,078 |
|
| $ | 4,079 |
|
The Company made cash contributions of $10.0 million and $2.0 million to its pension plans during each of the nine month periodsmonths ended September 30, 2016 and 2015, and 2014.respectively. Additional contributions, if any, for 20152016 have not yet been determined. As of September 30, 20152016 and December 31, 2014,2015, respectively, the Company had accrued $47.8$44.7 million and $50.3$48.4 million of pension liability within “Other long-term liabilities” on the Condensed Consolidated Balance Sheets.
During 2016, the Company has taken several actions to mitigate the interest rate, mortality and investment risks of the Essendant Pension Plan. These actions include a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants that was completed during the second quarter.
As a result of the lump sum offer, a settlement and remeasurement of the Essendant Pension Plan was performed. The remeasurement and activity in the first nine months of 2016 had no cash impact to the Company since the payments were made by the Essendant Pension Trust, and resulted in a $1.5 million improvement to the net funded status of the plan, therefore reducing other long-term liabilities. However, the settlement caused a loss of $12.2 million, which was partially offset by the $8.4 million reduction in Accumulated Other Comprehensive Income related to the unrecognized actuarial loss, for a net impact on shareholders’ equity of $3.8 million as of September 30, 2016 when compared to December 31, 2015. This offer also reduces future pension expense recognized by the Company and volatility related to future obligations of the 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 $4.4$5.5 million, respectively, for the Company match of employee contributions to the Plan for the three and nine months ended September 30, 2015.2016. During the same periods last year, the Company recorded expense of $1.4$1.5 million and $4.2$4.4 million to match employee contributions.
17
13
11. Derivative Financial Instruments
The Company selectively uses derivative financial instruments to reduce its exposure to changes in interest rates and foreign currency exchange rates. Under Company policy, the Company does not enter into derivative financial instruments for trading or speculative purposes. A description of 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 value is determined by using quoted market forward rates (level 2 inputs) and reflect the present value of the amount that the Company would pay for contracts involving the same notional amounts and maturity dates. The changes in fair value of this instrument is reported in AOCI and reclassified into earnings in the same financial statement line item and in the same periods during which the related interest payments on the hedged debt affect earnings. This swap matures in July 2017.As of September 30, 2015 and December 31, 2014, 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 $1.3 million and $0.3 million respectively.
During the third quarter of 2015, the Company implemented a foreign currency cash flow hedge program in order to manage the volatility in exchange rates and the related impacts on the 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 $5.6 million, of its Canadian subsidiaries’ US dollar denominated inventory purchases for the next two quarters. The fair value is determined by using quoted market spot rates (level 2 inputs). The changes in fair value of ASC 815 designated hedges are reported in AOCI and reclassified into earnings in the same financial statement line item and in the same periods during which the related inventory is sold and affects earnings. As of September 30, 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 and nine months ended September 30, 2015 and September 30, 2014 (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 September 30, 2015 |
|
| For the Nine Months Ended September 30, 2015 |
|
| Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| For the Three Months Ended September 30, 2015 |
|
| For the Nine Months Ended September 30, 2015 |
| ||||
Interest Rate Swap | $ | 86 |
|
| $ | 361 |
|
| Interest expense, net |
| $ | 329 |
|
| $ | 991 |
|
Foreign Exchange Hedges |
| 55 |
|
|
| 55 |
|
| Cost of goods sold |
|
| 4 |
|
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 Cash Flow Hedging Relationships | For the Three Months Ended September 30, 2014 |
|
| For the Nine Months Ended September 30, 2014 |
|
| Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| For the Three Months Ended September 30, 2014 |
|
| For the Nine Months Ended September 30, 2014 |
| ||||
Interest Rate Swap | $ | 748 |
|
| $ | (1 | ) |
| Interest expense, net |
| $ | 281 |
|
| $ | 281 |
|
12. Fair Value Measurements
The Company measures certain financial assets and liabilities, including interest rate swap and foreign currency derivatives, at fair value on a recurring basis, based on market rates of the Company’s positions and other observable interest rates (see Note 11 “Derivative Financial Instruments”, for more information on theserates. The fair value of the interest rate swaps is determined by using quoted market forward rates (level 2 inputs) and reflects the present value of the amount the Company would pay for contracts involving the same notional amount and maturity date. The fair value of the foreign currency derivatives)cash flow hedge is determined by using quoted market spot rates (level 2 inputs).
Accounting guidance on fair value establishes a hierarchy for those instruments measured at fair value which distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
|
|
Level 1—Quoted market prices in active markets for identical assets or liabilities;
|
|
Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable; and
|
|
Level 3—Unobservable inputs developed using estimates and assumptions developed by the Company which reflect those that a market participant would use.
18
Determining which level to apply to an asset or liability requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value in the accompanying Condensed Consolidated Balance Sheets as of September 30, 20152016 and December 31, 20142015 (in thousands):
| Fair Value Measurements as of September 30, 2015 |
| Fair Value Measurements as of September 30, 2016 |
| ||||||||||||||||||||||||||
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| ||||||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange hedge | $ | 50 |
|
| $ | - |
|
| $ | 50 |
|
| $ | - |
| |||||||||||||||
Foreign exchange hedges | $ | 95 |
|
| $ | - |
|
| $ | 95 |
|
| $ | - |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability | $ | 1,260 |
|
| $ | - |
|
| $ | 1,260 |
|
| $ | - |
| |||||||||||||||
Interest rate swap | $ | 501 |
|
| $ | - |
|
| $ | 501 |
|
| $ | - |
| |||||||||||||||
Foreign exchange hedges |
| 30 |
|
|
| - |
|
|
| 30 |
|
|
| - |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 531 |
|
| $ | - |
|
| $ | 531 |
|
| $ | - |
|
| 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 |
| Fair Value Measurements as of December 31, 2015 |
| ||||||||||||||||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| |||||||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Foreign exchange hedges | $ | 91 |
|
| $ | - |
|
| $ | 91 |
|
| $ | - |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability | $ | 253 |
|
| $ | - |
|
| $ | 253 |
|
| $ | - |
| |||||||||||||||
Interest rate swap | $ | 469 |
|
| $ | - |
|
| $ | 469 |
|
| $ | - |
|
The carrying amount of accounts receivable at September 30, 2015,2016, including $414.2$552.9 million of receivables sold under the Receivables Securitization Program, approximates fair value because of the short-term nature of this item.
No assets or liabilities were measured at fair value on a nonrecurring basis.
13.12. Other Assets and Liabilities
Receivables related to supplier allowances totaling $102.4$93.4 million and $124.4$111.0 million were included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of September 30, 20152016 and December 31, 2014,2015, respectively.
Accrued customer rebates of $60.9$64.3 million and $63.2$63.6 million as of September 30, 20152016 and December 31, 2014,2015, respectively, were included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.
In December 2014, the Company sold its software solutions subsidiary in exchange for a combination of cash and convertible and non-convertible notes (the “Notes”). Based upon a financial analysis that included information available through the end of the third quarter, the Company determined it was probable, within the scope of ASC 450-20-25-2(a) Contingencies, that the Company will not be able to collect any of the amounts due according to the contractual terms of the Notes or the other receivables from the acquirer. The loss was estimable at the book value of the Notes and other receivables as of September 30, 2015. As such, the Company fully impaired the assets and recorded a loss of $10.7 million in the third quarter of 2015 within “Warehousing, marketing and administrative expenses” in the Condensed Consolidated Statements of Income. As of December 31, 2014, the value of the Notes and other receivables totaled $10.6 million.
14
19
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 nine months ended September 30, 2016, the Company recorded income tax expense of $17.1 million and $34.9 million on pre-tax income of $53.8 million and $101.1 million, for an effective tax rate of 31.8% and 34.5%, respectively. For the three and nine months ended September 30, 2015, the Company recorded income tax expense of $20.0 million and $42.6 million on pre-tax income of $47.7 million and $94.1 million, for an effective tax rate of 42.0% and 45.3%, respectively. For
The Company’s U.S. statutory rate is 35.0%. The most significant factor impacting the effective tax rate for the three months and nine months ended September 30, 2014,2016 was the Company recorded incomediscrete tax expenseimpact of $23.6 million and $53.3 million on pre-tax incomethe payment of $63.9 million and $143.4 million, respectively, for an effective tax rate of 37.0% and 37.2%, respectively.
The Company's U.S. statutory rate is 35.0%.a dividend from a foreign subsidiary. The most significant factors impacting the effective tax rate for the three and nine months ended September 30, 2015 were the discrete tax impacts of the impairment charges and the establishment of a valuation allowance on a capital loss asset for financial reporting purposes related to selling a non-strategic business in the third quarter. There were no significant discrete items for the three and nine months ended September 30, 2014.
15.14. 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 dismissed without prejudice and refiled in the United States District Court for the Northern District of Illinois. 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.
20
15
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 “ItemItem 1A. Risk“Risk Factors” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2014.2015 (the “2015 Form 10-K”) and in Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q.
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 7971 distribution centers to approximately 30,000 reseller customers, who in turn sell directly to end consumers. The Company also operates CPO Commerce which sells power tools and outdoor equipment online to the consumer market and construction professionals.
Our strategy is comprisedWe have begun implementing the first phase of three key elements:
1) Strengthen our core office, janitorial, and breakroom business;
2) Win online by growing our business-to-business (B2B) sales with major e-commerce players and by enablinga comprehensive multi-year transformation program to improve the online successvalue of our resellers by providing digital capabilitiesbusiness, which includes:
Winning back lost revenue in the JanSan distributor channel
Aligning pricing with the cost to serve
Enhancing our merchandising efforts through better sourcing and tools to support them;assortment
Driving productivity and reducing costs
Diversifying the industrial channel
3) Expand and diversify our business into channels and categories that leverage our common platform which includes the IT systems, distribution network, data infrastructure, digital expertise and functional capabilities in merchandising, sales and operations.16
Execution on these priorities will help us achieve our goal of becoming the fastest and most convenient solution for workplace essentials.
The following is a summary of selected trends, events or uncertainties that the Company believes may have a significant impact on its future performance.
Third Quarter Results
Third quarter net sales increased 1.1%, from the prior-year quarter to $1.4 billion.
Gross profit as a percent of net sales in the third quarter of 2016 was 14.1% versus 16.2% in the prior-year quarter. Gross profit for the third quarter of 2016 was $198.9 million, compared to $225.1 million in the third quarter of 2015.
Operating expenses in the third quarter of 2016 were $138.5 million or 9.8% of net sales, compared with $172.2 million or 12.4% of net sales in the prior-year quarter, including impacts of the Company’s Actions impacting comparability of results (collectively, the “Actions”) discussed below. Adjusted operating expenses in the third quarter of 2016 were $158.6 million or 11.3% of net sales compared to $158.6 million or 11.4% of net sales in the prior-year quarter. Refer to the Adjusted Operating Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income, Adjusted Earnings Per Share and Free Cash Flow table (the “Non-GAAP table”) included later in this section for more detail.
Operating income for the quarter ended September 30, 2016 was $60.3 million or 4.3% of net sales, compared with $53.0 million or 3.8% of net sales in the prior year quarter, including impacts of the Actions discussed below. Excluding the Actions, adjusted operating income in the third quarter of 2016 was $40.2 million or 2.9% of net sales, versus $66.5 million or 4.8% of net sales in the third quarter of 2015.
Diluted earnings per share for the third quarter of 2016 increased to $0.99 from $0.74 in the prior year quarter, including the impacts of the Actions discussed below. Adjusted diluted earnings per share were $0.57 compared with $1.00 in the prior-year period.
Cash flows provided by operating activities for the nine months ended September 30, 2016 were $106.0 million versus $183.7 million in the prior year quarter.
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| Inventory decreased $73.7 million compared to a decrease of $54.4 million in the |
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| Accounts payable increased $8.9 million compared to |
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21
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Repositioning for Sustained Success
As previously announced, we are taking decisive actions to reposition our business, provide enhanced customer service, and generate sustained long-term success. These actions are as follows:
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| Dealer rebate prepayments increased $34.5 million compared to |
Cash flow provided by investing activities improved $63.5 million compared to the prior year due to proceeds of $31.0 million from the 2016 sale of our City of Industry facility. In addition, there were no acquisitions in 2016 compared to acquisitions totaling $40.5 million in the prior year.
Fourth Quarter Cost InitiativeActions impacting comparability of results (the “Actions”)
We remain committedIn the third quarter of 2016, the Company entered into a two-year operating lease agreement in connection with the disposition of its City of Industry facility. The sale of the facility resulted in a $20.5 million gain. Refer to Note 3 for further details of this transaction.
In the third quarter of 2016, the Company incurred charges of $1.2 million related to severance costs for two members of the Company’s operating leadership team.
A voluntary lump-sum pension offering was completed in the second quarter of 2016 and resulted in a significant reduction of interest rate, mortality and investment risk of the Essendant Pension Plan. Due to this offer, a settlement and remeasurement of the Essendant Pension Plan was required as of August 31, 2016 and May 31, 2016, resulting in a defined benefit plan settlement loss of $0.4 million and $12.2 million, respectively, for the three and nine months ended September 30, 2016. Refer to Note 10 “Pension and Post-Retirement Benefit Plans”, for further information on the remeasurement and voluntary lump sum program.
Restructuring actions were taken in 2015 to improve our strategyoperational utilization, labor spend, inventory performance and have executed well on our priorities. However, additional steps must be taken to reduce cost through management de-layering in order to achieve broader functional alignment of the organizationorganization. This included workforce reductions and to counteract headwindsfacility consolidations with an unfavorable impact of $0.2 million in the industrialthree months ended September 30, 2015 and energy markets.an unfavorable $6.5 million in the first nine months of 2015. In the fourththree months and nine months ended September 30, 2016, the impact of these actions totaled a favorable $1.2 million and $1.0 million, respectively, due to the release of severance accruals.
On June 1, 2015, we officially rebranded the Company to Essendant Inc. to communicate the Company’s strategy in a consistent manner. When we announced in the first quarter of 2015 our decision to rebrand the company, the ORS Nasco trademark and certain OKI brands were determined to be impaired. Pre-tax, non-cash, impairment charges and accelerated amortization totaling $11.5 million were recorded in the first nine months of 2015.
In the third quarter of 2015, seller notes receivable of $10.7 million related to the 2014 sale of the Company’s software service provider were impaired.
In 2015 we planexited non-strategic channels to implement new workforce reductions as we transitionfurther align our product categories and channels with our strategies, including the sale of Azerty de Mexico, our operations in Mexico. The total charges in the first nine months of 2015 related to the disposition of this subsidiary were $17.0 million. In the first nine months of 2015, this subsidiary had net sales of $50.1 million and operating loss of $0.8 million, excluding the charges previously mentioned.
17
The Company revised its guidance regarding 2016, and currently expects the following:
Total company net sales in the range of $5.325 billion to $5.375 billion
Adjusted diluted earnings per share in the range of $1.75 to $1.90
Free cash flow greater than $150 million in the second half of 2016
Adjusted diluted earnings per share and free cash flow are non-GAAP measures. A quantitative reconciliation of our non-GAAP guidance to the corresponding GAAP information is not available because the non-GAAP guidance excludes certain GAAP information that is uncertain and difficult to predict.
The adjusted diluted earnings per share guidance excludes income in the first nine months of 2016 of $0.22 per share related to a channel-based organization more closely aligned with our customers,settlement charge for the defined benefit plan, gain on sale of City of Industry facility, severance costs for operating leadership, restructuring charges, and re-invest a portionnon-GAAP tax provision. Actual amounts for these measures for the three and nine months ended September 30, 2016 appear in the Non-GAAP table included later in this section. For the remainder of the expected savingsyear, the factors that will be excluded are currently unknown due to fund bringing additionalthe level of unpredictability and uncertainty associated with these items, but may include actions such as gain or loss on future sales of assets or businesses, onto the common platform. These actions are critical to driving our goalfuture restructuring charges, non-GAAP tax adjustments, cash flow impacts of achieving high-single digit EPS growth beginning in 2016.acquisitions, and other actions.
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 on2015 Form 10-K for the year-ended December 31, 2014.10-K.
22
Critical Accounting Policies, Judgments and Estimates
Change in Method of Accounting for Inventory Valuation
In the third quarter of 2015, the Company changed its method of inventory costing for certain inventory in its Business and Facility Essentials (formerly separately known as Supply and Lagasse) operating segment2016, there were no significant changes to the last-in-first-out (“LIFO”) methodCompany’s critical accounting policies, judgments or estimates from the first-in-first-out (“FIFO”) accounting method. For further discussion of the Company’s changethose disclosed in the method of inventory costing, refer to Note 2, “Change in Accounting Principles.”2015 Form 10-K.
18
Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, andAdjusted Diluted Earnings Per Share, Adjusted EBITDA and Free Cash Flow (the “Non-GAAP table”)
The following tablesNon-GAAP table below presents Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, and Adjusted Diluted Earnings Perper Share, Adjusted EBITDA and Free Cash Flow for the three and nine-month periodsnine months ended September 30, 20152016 and 20142015 (in thousands, except per share data). These non-GAAP measures exclude certain non-recurring items and exclude other items that do not reflect the Company’s ongoing operations and are included to provide investors with useful information about the financial performance of our business. The presented non-GAAP financial measures should not be considered in isolation or as substitutes for the comparable GAAP financial measures. The non-GAAP financial measures do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP, and these non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP financial measures.
In order to calculate the non-GAAP measures, management excludes the following items to facilitate the comparison of current and prior year results and ongoing operations, as management believes these items do not reflect the underlying cost structure of our business. These items can vary significantly in amount and frequency.
Restructuring charges. Workforce reduction and facility closure charges such as employee termination costs, facility closure and consolidation costs, and other costs directly associated with shifting business strategies or business conditions that are part of a restructuring program.
The Company commenced two such restructuring programs during 2015 (refer to Note 5).
Gain or loss on sale of assets or businesses. Sales of assets, such as buildings or equipment, and businesses can cause gains or losses. These transactions occur as the Company is repositioning its business and reviewing its cost structure.
The Company recognized a gain on the sale of its City of Industry facility in the third quarter of 2016 (refer to Note 3), a loss on the sale and related impairment of intangible assets of the operations in Mexico in 2015, and a loss on the sale and related impairment of intangible assets of its software subsidiary in 2014, recording an impairment of the seller notes in the third quarter of 2015.
Due to the sale of the City of Industry facility, the Company was able to utilize its capital loss carryforwards. This utilization resulted in the release of the valuation allowance previously established against the deferred tax asset. The $5.0 million tax benefit from the release of the valuation allowance reduced the effective tax rate for the three and nine months ended September 30, 2016, by 9.2% and 4.9%, respectively.
Severance costs for operating leadership. Employee termination costs related to members of the Company’s operating leadership team are excluded as they are based upon individual agreements.
Two operating leaders were severed from the Company in the third quarter of 2016, which were not part of a restructuring program.
Asset impairments. Changes in strategy or macroeconomic events may cause asset impairments.
The Company recorded impairment and accelerated amortization of its trademarks upon the announcement of its rebranding effort in 2015.
Other actions. Actions, which may be non-recurring events, that result from the changing strategies and needs of the Company and do not reflect the underlying expense of the on-going business. These charges include items such as settlement charges related to the defined benefit plan settlement in 2016 (refer to Note 10) and the tax impact of the dividend from a foreign subsidiary (refer to Note 13).
Adjusted operating expenses and adjusted operating income. Adjusted operating expenses and adjusted operating income provide management and our investors with an understanding of the results from the primary operations of our business by excluding the effects of items described above that do not reflect the pre-tax charges related to workforce reductionsordinary expenses and facility consolidations, intangible asset impairment charge and accelerated amortization related to rebranding efforts, an impairment of seller notes receivable related to the company’s prior year sale of its software service provider, and a loss on sale and related costsearnings of our Mexican subsidiary. Generally Accepted Accounting Principles requireoperations. Adjusted operating expenses and adjusted operating income are used to evaluate our period-over-period operating performance as they are more comparable measures of our continuing business. These measures may be useful to an investor in evaluating the underlying operating performance of our business.
Adjusted net income and adjusted diluted earnings per share. Adjusted net income and adjusted diluted earnings per share provide a more comparable view of our Company’s underlying performance and trends than the comparable GAAP measures. Net income and diluted earnings per share are adjusted for the effect of items described above that do not reflect the effectsordinary earnings of these items be includedour operations.
19
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Adjusted EBITDA is helpful in evaluating our operating performance and is used by management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting. Net income is adjusted for the Condensed Consolidated Statementseffect of Income.interest, taxes, depreciation and amortization and stock-based compensation expense. Management believes that excluding these itemsadjusted EBITDA is an appropriate comparisonalso commonly used by investors to evaluate operating performance between competitors because it helps reduce variability caused by differences in capital structures, income taxes, stock-based compensation accounting policies, and depreciation and amortization policies.
Free cash flow. Free cash flow is useful to management and our investors as it is a measure of its ongoingthe Company’s liquidity. It provides a more complete understanding of factors and trends affecting our cash flows than the comparable GAAP measure. Net cash provided by (used in) operating activities and net cash provided by (used in) investing activities are aggregated and adjusted to exclude the resultsnon-cash impact 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.acquisitions and divestitures.
| For the Three Months Ended September 30, |
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| 2015 |
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| 2014 (Revised) |
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| % to |
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| % to |
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| Amount |
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| Net Sales |
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| Amount |
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| Net Sales |
| ||||
Net Sales | $ | 1,391,545 |
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| 100.0 | % |
| $ | 1,419,947 |
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| 100.0 | % |
Gross profit | $ | 225,143 |
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| 16.2 | % |
| $ | 216,701 |
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| 15.3 | % |
Operating expenses | $ | 172,159 |
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| 12.4 | % |
| $ | 148,831 |
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| 10.5 | % |
Workforce reduction and facility consolidation charge |
| (200 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Rebranding - intangible asset amortization |
| (511 | ) |
|
| - |
|
|
| - |
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|
| - |
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Notes receivable impairment |
| (10,738 | ) |
|
| (0.8 | %) |
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|
Loss on sale of business and related costs |
| (2,072 | ) |
|
| (0.1 | %) |
|
| - |
|
|
| - |
|
Adjusted operating expenses | $ | 158,638 |
|
|
| 11.4 | % |
| $ | 148,831 |
|
|
| 10.5 | % |
Operating income | $ | 52,984 |
|
|
| 3.8 | % |
| $ | 67,870 |
|
|
| 4.8 | % |
Operating expense items noted above |
| 13,521 |
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|
| 1.0 | % |
|
| - |
|
|
| - |
|
Adjusted operating income | $ | 66,505 |
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|
| 4.8 | % |
| $ | 67,870 |
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| 4.8 | % |
Net income | $ | 27,667 |
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|
|
|
| $ | 40,231 |
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Operating expense items noted above, net of tax |
| 10,017 |
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|
|
| - |
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Adjusted net income | $ | 37,684 |
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| $ | 40,231 |
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Diluted earnings per share | $ | 0.74 |
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| $ | 1.03 |
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Per share operating expense items noted above |
| 0.26 |
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| - |
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Adjusted diluted earnings per share | $ | 1.00 |
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| $ | 1.03 |
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Adjusted diluted earnings per share - change over the prior year period |
| (2.9 | %) |
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Weighted average number of common shares - diluted |
| 37,608 |
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| 38,884 |
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2320
| For the Nine Months Ended September 30, |
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| 2015 |
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| 2014 (Revised) |
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| % to |
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| % to |
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| Amount |
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| Net Sales |
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| Amount |
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| Net Sales |
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Net Sales | $ | 4,065,719 |
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| 100.0 | % |
| $ | 3,994,123 |
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| 100.0 | % |
Gross profit | $ | 635,657 |
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| 15.6 | % |
| $ | 593,131 |
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| 14.9 | % |
Operating expenses | $ | 526,653 |
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| 13.0 | % |
| $ | 438,538 |
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| 11.0 | % |
Workforce reduction and facility consolidation charge |
| (6,495 | ) |
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| (0.2 | %) |
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| - |
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| - |
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Rebranding - intangible asset impairment and amortization |
| (11,485 | ) |
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| (0.3 | %) |
|
| - |
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| - |
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Notes receivable impairment |
| (10,738 | ) |
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| (0.3 | %) |
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|
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Loss on sale of business and related costs |
| (16,999 | ) |
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| (0.4 | %) |
|
| - |
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| - |
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Adjusted operating expenses | $ | 480,936 |
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| 11.8 | % |
| $ | 438,538 |
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| 11.0 | % |
Operating income | $ | 109,004 |
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| 2.7 | % |
| $ | 154,593 |
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| 3.9 | % |
Operating expense items noted above |
| 45,717 |
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| 1.1 | % |
|
| - |
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|
| - |
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Adjusted operating income | $ | 154,721 |
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| 3.8 | % |
| $ | 154,593 |
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| 3.9 | % |
Net income | $ | 51,492 |
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| $ | 90,045 |
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Operating expense items noted above, net of tax |
| 34,854 |
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|
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| - |
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Adjusted net income | $ | 86,346 |
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| $ | 90,045 |
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Diluted earnings per share | $ | 1.35 |
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| $ | 2.29 |
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Per share operating expense items noted above |
| 0.91 |
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|
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|
|
|
| - |
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|
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Adjusted diluted earnings per share | $ | 2.26 |
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| $ | 2.29 |
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Adjusted diluted earnings per share - change over the prior year period |
| (1.3 | %) |
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Weighted average number of common shares - diluted |
| 38,109 |
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| 39,244 |
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| For the Three Months Ended September 30, |
| |||||
| 2016 |
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| 2015 |
| ||
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|
|
|
Operating expenses | $ | 138,526 |
|
| $ | 172,159 |
|
Settlement charge related to the defined benefit plan (Note 10) |
| (419 | ) |
|
| - |
|
Gain on sale of City of Industry facility (Note 3) |
| 20,541 |
|
|
| - |
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Severance costs for operating leadership |
| (1,245 | ) |
|
| - |
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Restructuring charges (Note 5) |
| 1,210 |
|
|
| (200 | ) |
Impairment of assets and accelerated amortization related to rebranding |
| - |
|
|
| (511 | ) |
Impairment of seller notes |
| - |
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|
| (10,738 | ) |
Loss on sale of Mexico business and related costs |
| - |
|
|
| (2,072 | ) |
Adjusted operating expenses | $ | 158,613 |
|
| $ | 158,638 |
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|
|
|
|
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|
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Operating income | $ | 60,328 |
|
| $ | 52,984 |
|
Operating expense adjustments noted above |
| (20,087 | ) |
|
| 13,521 |
|
Adjusted operating income | $ | 40,241 |
|
| $ | 66,505 |
|
|
|
|
|
|
|
|
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Net income | $ | 36,742 |
|
| $ | 27,667 |
|
Operating expense adjustments noted above |
| (20,087 | ) |
|
| 13,521 |
|
Non-GAAP tax provision on adjustments |
|
|
|
|
|
|
|
Settlement charge related to the defined benefit plan (Note 10) |
| (158 | ) |
|
| - |
|
Gain on sale of City of Industry facility (Note 3) |
| 2,789 |
|
|
| - |
|
Severance costs for operating leadership |
| (469 | ) |
|
| - |
|
Restructuring charges (Note 5) |
| 456 |
|
|
| (76 | ) |
Dividend from a foreign subsidiary (Note 13) |
| 1,666 |
|
|
| - |
|
Impairment of assets and accelerated amortization related to rebranding |
| - |
|
|
| (194 | ) |
Impairment of seller notes |
| - |
|
|
| (4,080 | ) |
Loss on sale of Mexico business and related costs |
| - |
|
|
| 846 |
|
Adjusted net income | $ | 20,939 |
|
| $ | 37,684 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share | $ | 0.99 |
|
| $ | 0.74 |
|
Operating expense adjustments noted above |
| (0.54 | ) |
|
| 0.36 |
|
Non-GAAP tax provision on adjustments |
| 0.12 |
|
|
| (0.10 | ) |
Adjusted diluted earnings per share | $ | 0.57 |
|
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
Net income | $ | 36,742 |
|
| $ | 27,667 |
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Provision for income taxes |
| 17,102 |
|
|
| 20,017 |
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Interest expense, net |
| 6,484 |
|
|
| 5,300 |
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Depreciation and amortization |
| 10,046 |
|
|
| 10,424 |
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Equity compensation expense |
| 1,355 |
|
|
| 3,179 |
|
Operating expense adjustments noted above |
| (20,087 | ) |
|
| 13,521 |
|
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) | $ | 51,642 |
|
| $ | 80,108 |
|
|
|
|
|
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|
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Net cash provided by operating activities | $ | 121,952 |
|
| $ | 62,811 |
|
Net cash provided by (used in) investing activities |
| 22,280 |
|
|
| (45,363 | ) |
Less: Acquisition, net of cash acquired |
| - |
|
|
| 39,939 |
|
Add: Sale of equity investment |
| - |
|
|
| (612 | ) |
Free cash flow | $ | 144,232 |
|
| $ | 56,775 |
|
21
| For the Nine Months Ended September 30, |
| |||||
| 2016 |
|
| 2015 |
| ||
|
|
|
|
|
|
|
|
Operating expenses | $ | 475,573 |
|
| $ | 526,653 |
|
Settlement charge related to the defined benefit plan (Note 10) |
| (12,163 | ) |
|
| - |
|
Gain on sale of City of Industry facility (Note 3) |
| 20,541 |
|
|
| - |
|
Severance costs for operating leadership |
| (1,245 | ) |
|
| - |
|
Restructuring charges (Note 5) |
| 956 |
|
|
| (6,495 | ) |
Impairment of assets and accelerated amortization related to rebranding |
| - |
|
|
| (11,485 | ) |
Impairment of seller notes |
| - |
|
|
| (10,738 | ) |
Loss on sale of Mexico business and related costs |
| - |
|
|
| (16,999 | ) |
Adjusted operating expenses | $ | 483,662 |
|
| $ | 480,936 |
|
|
|
|
|
|
|
|
|
Operating income | $ | 119,186 |
|
| $ | 109,004 |
|
Operating expense adjustments noted above |
| (8,089 | ) |
|
| 45,717 |
|
Adjusted operating income | $ | 111,097 |
|
| $ | 154,721 |
|
|
|
|
|
|
|
|
|
Net income | $ | 66,205 |
|
| $ | 51,492 |
|
Operating expense adjustments noted above |
| (8,089 | ) |
|
| 45,717 |
|
Non-GAAP tax provision on adjustments |
|
|
|
|
|
|
|
Settlement charge related to the defined benefit plan (Note 10) |
| (4,574 | ) |
|
| - |
|
Gain on sale of City of Industry facility (Note 3) |
| 2,789 |
|
|
| - |
|
Severance costs for operating leadership |
| (469 | ) |
|
| - |
|
Restructuring charges (Note 5) |
| 357 |
|
|
| (2,468 | ) |
Dividend from a foreign subsidiary (Note 13) |
| 1,666 |
|
|
| - |
|
Impairment of assets and accelerated amortization related to rebranding |
| - |
|
|
| (4,364 | ) |
Impairment of seller notes |
| - |
|
|
| (4,080 | ) |
Loss on sale of Mexico business and related costs |
| - |
|
|
| 49 |
|
Adjusted net income | $ | 57,885 |
|
| $ | 86,346 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share | $ | 1.79 |
|
| $ | 1.35 |
|
Operating expense adjustments noted above |
| (0.22 | ) |
|
| 1.20 |
|
Non-GAAP tax provision on adjustments |
| - |
|
|
| (0.29 | ) |
Adjusted diluted net income per share | $ | 1.57 |
|
| $ | 2.26 |
|
|
|
|
|
|
|
|
|
Net income | $ | 66,205 |
|
| $ | 51,492 |
|
Provision for income taxes |
| 34,923 |
|
|
| 42,594 |
|
Interest expense, net |
| 18,058 |
|
|
| 14,918 |
|
Depreciation and amortization |
| 30,500 |
|
|
| 31,356 |
|
Equity compensation expense |
| 7,044 |
|
|
| 6,447 |
|
Operating expense adjustments noted above |
| (8,089 | ) |
|
| 45,717 |
|
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) | $ | 148,641 |
|
| $ | 192,524 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities | $ | 105,968 |
|
| $ | 183,659 |
|
Net cash provided by (used in) investing activities |
| 5,723 |
|
|
| (57,808 | ) |
Less: Acquisitions, net of cash acquired |
| - |
|
|
| (40,471 | ) |
Add: Sale of equity investment |
| - |
|
|
| 612 |
|
Free cash flow | $ | 111,691 |
|
| $ | 85,992 |
|
22
Results of Operations—Three Months Ended September 30, 20152016 Compared with the Three Months Ended September 30, 20142015
Net Sales. Net sales for the third quarter of 20152016 were $1.39$1.4 billion. The following table summarizes net sales by product category for the three-month periods ended September 30, 20152016 and 20142015 (in thousands):
| Three Months Ended September 30, |
| For the Three Months Ended September 30, |
| ||||||||||
| 2015 |
|
| 2014 (1) |
| 2016 |
|
| 2015 (1) |
| ||||
Janitorial and breakroom supplies | $ | 375,454 |
|
| $ | 382,308 |
| |||||||
Janitorial and breakroom supplies (JanSan) | $ | 372,880 |
|
| $ | 377,763 |
| |||||||
Technology products |
| 343,891 |
|
|
| 384,591 |
|
| 345,649 |
|
|
| 343,303 |
|
Traditional office products (including cut-sheet paper) |
| 320,736 |
|
|
| 360,848 |
| |||||||
Traditional office products |
| 239,964 |
|
|
| 236,258 |
| |||||||
Industrial supplies |
| 223,510 |
|
|
| 162,813 |
|
| 139,822 |
|
|
| 146,769 |
|
Cut sheet paper |
| 106,589 |
|
|
| 83,543 |
| |||||||
Automotive |
| 78,618 |
|
|
| 75,633 |
| |||||||
Office furniture |
| 87,409 |
|
|
| 85,090 |
|
| 82,216 |
|
|
| 87,731 |
|
Freight revenue |
| 33,264 |
|
|
| 33,302 |
|
| 34,731 |
|
|
| 33,264 |
|
Services, Advertising and Other |
| 7,281 |
|
|
| 10,995 |
|
| 7,035 |
|
|
| 7,281 |
|
Total net sales | $ | 1,391,545 |
|
| $ | 1,419,947 |
| $ | 1,407,504 |
|
| $ | 1,391,545 |
|
(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 decreased 1.8%1.3% in the third quarter of 20152016 compared to the third quarter of 2014.2015. This category accounted for 27.0%26.5% of the Company’s thirdsecond quarter 20152016 consolidated net sales. Sales increased from being named the primary supplier for Office Depot’s janitorial business and e-tail growth but was more than offset by a decline in salesthis category declined due to thelower volumes in independent dealer channel.distributor channels.
24
SalesNet sales in the technology products category (primarily ink and toner) decreased 10.6%increased 0.7% from the third quarter of 2014.2015. This category accounted for 24.7%24.6% of net sales for the third quarter of 2015. This decline is primarily attributable to the loss of business with large national customers, lower sales to the independent dealer channel, and lower sales at2016. Excluding our Mexican subsidiary, which was sold in the third quarter. These were partially offsetquarter of 2015, net sales in this category increased 3.2% compared to the prior year quarter, which was driven by growth in e-tailsales to new customers.
SalesNet sales of traditional office products decreasedincreased in the third quarter of 20152016 by 11.1%1.6% versus the third quarter of 2014.2015. Traditional office supplies represented 23.0%17.0% of the Company’s consolidated net sales for the third quarter of 2015. This2016. The sales increase was driven by a declinean increase in cut-sheet paper sales loss of businessin independent dealer channels as we have increased our share in this channel with Office Depot and reduced demand in our independent channel. These declines were partially offset by continued growth in e-tailers and a higher government spending.new key customer acquisitions.
Industrial supplies net sales in the third quarter of 2015 increased2016 decreased by 37.3%4.7% compared to the same prior-year period. SalesNet sales of industrial supplies accounted for 16.1%9.9% of the Company’s net sales for the third quarter of 2015 and reflected solid2016. Growth in retail channel sales momentum from our acquisitions in the last 12 months, which contributed $81.2 million in incremental sales. Without the acquisitions, industrial sales declined 12.6% over the prior-year quarter. Approximately 25% of our organic industrial business is exposed to energy sector resellers which have been impacted bypartially offset the decline in oil prices resultingindustrial supplies net sales driven by challenges in the oilfield and welding sector and macro-economic environment.
Net sales declines in our general industrial and energythe cut sheet paper category increased in the third quarter of 2016 by 27.6% compared to the third quarter of 2015. Cut sheet paper net sales accounted for 7.6% of the Company’s net sales for the third quarter of 2016. The increase in this category was driven by increased sales in the independent dealer channels. We expect this impact to continue throughout the year.
Office furnitureAutomotive net sales in the third quarter of 20152016 increased 2.7%3.9% compared to the third quarter of 2014. Office furniture accounted for 6.3%2015. Automotive net sales represented 5.6% of the Company’s third quarter of 20152016 net sales. This increase was due to the acquisition of Nestor which contributed an additional $3.8 million in net sales in the third quarter of 2016.
Office furniture net sales in the third quarter of 2016 decreased 6.3% compared to the third quarter of 2015. Office furniture accounted for 5.8% of the Company’s third quarter of 2016 consolidated net sales. Within this category, the loss ofThis decline was due to declines in sales at Office Depot was mostly offset by growth in other large customersnational accounts and e-tailers.independent dealer channels.
The remainder of the Company’s third quarter 20152016 net sales waswere composed of freight and other revenues.
23
Gross Profit and Gross Margin Rate. Gross profit for the third quarter of 20152016 was $225.1$198.9 million, compared to $216.7$225.1 million in the third quarter of 2014.2015. The gross margin rate of 16.2%14.1% was up 92down 210 basis points (bps) from the prior-year quarter gross margin rate of 15.3%16.2%. Our acquisitions ingross margin declined primarily due to reduced supplier allowances related to inventory reductions and customer and product mix. We also experienced higher freight cost due to new sales and growth of larger customers, and inventory expense increase due to the last 12 months added an incremental 17 basis points2015 favorability related to a LIFO conversion. Our sales to larger resellers are generally at lower margins than sales to our grosssmaller resellers. Sales to new customers tend to be lower margin rate in the quarter. Excluding the impactbut mature over time. Lower margin categories of our acquisitions, our grosssales include cut-sheet paper and technology, while JanSan office products, furniture and industrial are higher margin rate benefited from a favorable product margin driven by a favorable product mix (20 bps), a decline in freight expenses (31 bps) and favorable inflation related inventory adjustments (48 bps).categories.
Operating Expenses. Operating expenses for the third quarter of 2016 were $138.5 million or 9.8% of net sales, compared to $172.2 million or 12.4% of net sales including $13.5in the prior year. The $33.7 million relateddecline was driven by the gain on sale of the City of Industry facility (refer to Note 3) as well as the third quarter charges.impairment of seller notes in 2015. Adjusted operating expenses were $158.6 million or 11.4%11.3% of net sales compared with $148.8$158.6 million or 10.5%11.4% of net sales in the same period last year. The $9.8 million increase was driven by $11.5 millionyear, reflecting the recognition of previously capitalized costs related to inventory reduction and incremental expenses from acquisitions, partiallyvariable labor costs, offset by benefits fromactions to reduce salary expense, discretionary spend and lower incentive compensation. We expect to realize future savings through continued rationalization of our first quarter restructuring actionsdistribution center network, realization of process improvements in our distribution centers and expense control.our infrastructure, and optimization of our fleet and delivery structure to match the changing business that we are supporting.
Interest Expense, net. Interest expense, net for the third quarter of 20152016 was $5.3$6.5 million compared to $4.0$5.3 million in the third quarter 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 20152016 than in the prior year.
Income Taxes. Income tax expense was $20.0$17.1 million for the third quarter of 2015,2016, compared with $23.6$20.0 million for the same period in 2014.2015. The Company’s effective tax rate was 42.0%31.8% for the current-year quarter and 37.0%42.0% for the same period in 2014 driven by the capital loss on the sale of Azerty de Mexico which cannot be recognized at this time and carries a full valuation allowance.2015.
Net Income. Net income for the third quarter of 2015 totaled2016 increased to $36.7 million or $0.99 per diluted share, compared to $27.7 million or $0.74 per diluted share including $10.0 million after-tax, or $0.26 per diluted share, of costs related toin the third quarter charges.prior year. Adjusted net income was $37.7$20.9 million, or $1.00$0.57 per diluted share, compared with adjusted net income of $40.2$37.7 million or $1.03$1.00 per diluted share for the same three-month period in 2014.2015.
25
Results of Operations—Nine Months Ended September 30, 20152016 Compared with the Nine Months Ended September 30, 20142015
Net Sales. Net sales for the first nine months of 2015nine-month period ended September 30, 2016 were $4.07$4.1 billion. The following table summarizes net sales by product category for the nine-month periodsnine months ended September 30, 20152016 and 20142015 (in thousands):
| Nine Months Ended September 30, |
| For the Nine Months Ended September 30, |
| ||||||||||
| 2015 (1) |
|
| 2014 (1) |
| 2016 |
|
| 2015 (1) |
| ||||
Janitorial and breakroom supplies | $ | 1,100,646 |
|
| $ | 1,068,766 |
| $ | 1,102,909 |
|
| $ | 1,107,574 |
|
Technology products |
| 1,047,558 |
|
|
| 1,109,974 |
|
| 1,038,194 |
|
|
| 1,045,577 |
|
Traditional office products (including cut-sheet paper) |
| 911,532 |
|
|
| 1,015,838 |
| |||||||
Traditional office products |
| 669,290 |
|
|
| 654,669 |
| |||||||
Industrial supplies |
| 647,689 |
|
|
| 440,751 |
|
| 422,142 |
|
|
| 444,413 |
|
Cut sheet paper |
| 294,804 |
|
|
| 254,395 |
| |||||||
Automotive |
| 238,576 |
|
|
| 199,870 |
| |||||||
Office furniture |
| 244,177 |
|
|
| 238,867 |
|
| 231,370 |
|
|
| 245,104 |
|
Freight revenue |
| 95,522 |
|
|
| 92,120 |
|
| 100,293 |
|
|
| 95,522 |
|
Services, Advertising and Other |
| 18,595 |
|
|
| 27,807 |
|
| 16,745 |
|
|
| 18,595 |
|
Total net sales | $ | 4,065,719 |
|
| $ | 3,994,123 |
| $ | 4,114,323 |
|
| $ | 4,065,719 |
|
(1) | Certain prior period amounts have been reclassified to conform to the current presentation. Such |
Sales in the janitorial and breakroom supplies product category increased 3.0% in the first nine months of 2015 compared2016 were comparable to the first nine months of 2014.2015. This category accounted for 27.1%26.8% of the Company’s first nine months of 20152016 consolidated net sales. Sales growth in this category was driven by being named the primary supplier for Office Depot’s janitorial business and growthdeclined due to lower volumes in e-tail, partially offset by reduced demand in our independent dealer customers.distributor channels.
Sales in the technology products category (primarily ink and toner) decreased in the first nine months of 20152016 by 5.6%0.7% versus the first nine months of 2014.2015. This category accounted for 25.8%25.2% of net sales for the first nine months of 2015. Sales declined due to the loss of business with Office Depot, lower sales at2016. Excluding our Mexican subsidiary, which was sold in the third quarter of 2015, net sales in this category increased 4.3% compared to the prior year quarter, driven by sales to new e-tailers and reduced demand in our independent dealer channel. The sales decline was partially offset by growth in e-tailers.technology customers.
24
Sales of traditional office products decreasedincreased in the first nine months of 20152016 by 10.3%2.2% versus the first nine months of 2014.2015. Traditional office supplies represented 22.4%16.3% of the Company’s consolidated net sales for the first nine months of 2015.2016. The declineimprovement in this category was primarily driven by the decline of cut-sheet paper and the loss of first call supplier statusincreased sales in independent dealer channels as we have increased our share in this channel with Office Depot.new key customer acquisitions.
Industrial supplies sales in the first nine months of 2015 increased2016 decreased by 47.0%5.0% compared to the same prior-year period and accounted for 15.9%10.3% of the Company’s net sales for the first nine months of 2015. Our acquisitions contributed $258.1 million in incremental sales. Excluding sales from acquisitions, industrial2016. Industrial supplies sales declined 11.6% over the same period last year, due to declines inimpacts of our general industrial and energy channels. We expect this impact to continue throughout the year.
Net sales in the cut sheet paper category increased in the first nine months of 2016 by 15.9% compared to the first nine months of 2015. Cut sheet paper net sales accounted for 7.2% of the Company’s net sales for the first nine months of 2016. The increase in this category was driven by increased sales in the independent dealer channels.
Automotive net sales in the first nine months of 2016 increased 19.4% compared to the same prior-year period. Automotive net sales represented 5.8% of the Company’s net sales for the first nine months of 2016. This increase was primarily due to the acquisition of Nestor which contributed an additional $38.9 million in net sales.
Office furniture sales in the first nine months of 2015 increased 2.2%2016 decreased 5.6% compared to the first nine months of 2014.2015. Office furniture accounted for 6.0%5.6% of the Company’s first nine months of 20152016 consolidated net sales. Improved sales with a largeThe decline in this category was primarily driven by national customer and growth in e-tailaccount and independent resellers more than offset lostdealer channels sales to Office Depot.decreases.
The remainder of the Company’s first nine months of 20152016 net sales was composed of freight and other revenues.
Gross Profit and Gross Margin Rate. Gross profit for the first nine months of 20152016 was $635.7$594.8 million, compared to $593.1$635.7 million in the first nine months of 2014.2015. The gross margin rate of 15.6%14.5% was up 78 basis points (bps)down 110 bps from the prior-year period gross margin rate of 14.9%15.6%. This increasedecrease was primarily due to acquisitions (30 bps) and a favorable product margin, driven by favorablecustomer and product mix, and purchase driven inventory allowances.higher freight expenses.
Operating Expenses. Operating expenses for the first nine months of 20152016 were $475.6 million or 11.6% of sales, compared with $526.7 million or 13.0% of sales, compared with $438.5 million or 11.0% of sales in the same period last year. This includedThe improvement was due to the impactsgain on sale of a $10.7 millionCity of Industry facility (see Note 3) as well as the impairment of seller notes $6.5 million related to workforce reduction and facility consolidations, $11.5 million charge for accelerated amortization related to intangible assets impaired in the first quarter of 2015, and $17.0 million charge related to exiting our non-strategic business in Mexico (together the “2015 charges”).2015. Adjusted operating expenses were $483.7 million or 11.8% of net sales and $480.9 million or 11.8% of sales. Current period operating expenses were affected by acquisitions which added an incremental $40.9 million in operating expenses. The Company incurred approximately $4.2 millionnet sales in the first nine months of 2016 and 2015, of operating expense related to the initiative to combine the Company’s office product and janitorial platforms. respectively.
26
Interest Expense, net. Interest expense, net for the first nine months of 20152016 was $14.9$18.1 million compared to $11.2$14.9 million in the first nine months 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.
Income Taxes. Income tax expense was $42.6$34.9 million for the first nine months of 2015,2016, compared with $53.3$42.6 million for the same period in 2014.2015. The Company’s effective tax rate was 45.3%34.5% for the current-year period and 37.2%45.3% for the same period in 2014 driven by discrete tax impacts of the impairment charges and a capital loss on the sale of Azerty de Mexico which cannot be recognized at this time and carries a full valuation allowance.2015.
Net Income. Net income for the first nine months of 20152016 totaled $66.2 million or $1.79 per diluted share, including $8.3 million after-tax, or $0.22 per diluted share, of income related to the Actions. For the same period in the prior year, net income was $51.5 million or $1.35 per diluted share, including $34.9 million after-tax, or $0.91 per diluted share, of costs related to 2015 charges.share. Adjusted net income for the first nine months of 2016 was $86.3$57.9 million, or $2.26$1.57 per diluted share, compared with adjusted net income of $90.0$86.3 million or $2.29$2.26 per diluted share for the same nine-month period in 2014.2015.
Pension Settlement
Defined benefit plan settlement loss of $0.4 million and $12.2 million for the three and nine months ended September 30, 2016, respectively, resulted from the voluntary lump sum program announced in February 2016. Refer to Note 10 “Pension and Post-Retirement Benefit Plans”, for further information on the remeasurement and voluntary lump sum program.
25
The following discussion focuses on information included in the accompanying Condensed Consolidated Statements of Cash Flows.
Operating Activities
Net cash provided by operating activities for the nine monthsnine-month period ended September 30, 20152016 totaled $183.7$106.0 million, compared with $93.7$183.7 million in the same nine-month period ended September 30, 2015. A decrease in inventory of 2014. The 96.1% improvement over$73.7 million compared to a decrease of $54.4 million in the prior year, demonstrates market factorsan increase in accounts payable of $8.9 million compared to an increase of $50.4 million in the prior year, and our commitmentan increase in dealer prepayments of $34.5 million compared to effectively manage working capital. an increase of $10.8 million in the prior year were the primary drivers of the $77.7 million decrease.
Investing Activities
Net cash used inprovided by investing activities for the first nine months of 20152016 was $57.8$5.7 million, compared with $41.3$57.8 million used in investing activities for the nine monthsnine-month period ended September 30, 2014. For2015. The $63.5 million change was primarily driven by $31.0 million proceeds from the full year 2015, the Company expects capital spending, excluding acquisitions, to be approximately $30.0sale of our City of Industry facility in 2016 compared with $40.5 million to $35.0 million.cash used in our acquisition activity in 2015.
Financing Activities
Net cash used in financing activities for the nine monthsnine-month period ended September 30, 20152016 totaled $118.1$119.3 million, compared with $49.8$118.1 million in the same prior-year period. Net cash used in financing activities during the first nine months of 20152016 was impacted by $45.3$96.6 million in net repayments under debt arrangements, $55.7our revolving credit facility compared to $45.3 million in the prior year, and $6.8 million in share repurchases, and $16.0compared to $55.7 million in payments of cash dividends.the prior year.
On July 14, 2016, the Board of Directors approved a dividend of $0.14 which was paid on October 6, 2015,14, 2016 to shareholders of record as of September 15, 2016. On September 28, 2016, the Company’s Board of Directors approved the payment of a $0.14 per share dividend payable to stockholdersshareholders of record as of December 15, 20152016 to be paid on January 15, 2016.13, 2017.
The 2013 Credit Agreement and the 2013 Note Purchase Agreement (each as defined in Note 11 “Debt” in the Notes to the Consolidated Financial Statements in the 2015 Form 10-K) limit the Company’s ability to repurchase its stock when the Company’s Leverage Ratio, as defined in the 2013 Credit Agreement and the 2013 Note Purchase Agreement and as reported to its lenders, exceeds 3.00 to 1.00. As of September 30, 2016, the Company’s Leverage Ratio was 2.77 to 1.00.
26
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.
27
Financing available from debt and the sale of accounts receivable as of September 30, 2015,2016, 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 |
| 318.5 |
|
|
|
|
|
| 271.8 |
|
|
|
|
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
|
|
|
| 150.0 |
|
|
|
|
|
Receivables Securitization Program (1) |
| 200.0 |
|
|
|
|
|
| 200.0 |
|
|
|
|
|
Outstanding letters of credit |
| 11.1 |
|
|
|
|
|
| 11.2 |
|
|
|
|
|
Total financing utilized |
|
|
|
|
| 679.6 |
|
|
|
|
|
| 633.0 |
|
Available financing, before restrictions |
|
|
|
|
| 370.4 |
|
|
|
|
|
| 417.0 |
|
Restrictive covenant limitation |
|
|
|
|
| - |
|
|
|
|
|
| 140.4 |
|
Available financing as of September 30, 2015 |
|
|
|
| $ | 370.4 |
| |||||||
Available financing as of September 30, 2016 |
|
|
|
| $ | 276.6 |
|
(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. |
(2) | For a description of the restrictive covenants limiting the indebtedness the Company can incur, refer to Note 9 to the Condensed Consolidated Financial Statements included herein. |
The Company’s outstanding debttotal capitalization consisted of the following amounts (in millions):
| As of |
|
| As of |
| As of |
|
| As of |
| ||||
| September 30, |
|
| December 31, |
| September 30, |
|
| December 31, |
| ||||
| 2015 |
|
| 2014 |
| 2016 |
|
| 2015 |
| ||||
2013 Credit Agreement | $ | 318.5 |
|
| $ | 363.0 |
| $ | 271.8 |
|
| $ | 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 |
| |||||||
Debt |
| 668.6 |
|
|
| 713.9 |
|
| 621.8 |
|
|
| 718.4 |
|
Stockholders’ equity |
| 832.6 |
|
|
| 843.7 |
|
| 782.6 |
|
|
| 723.7 |
|
Total capitalization | $ | 1,501.2 |
|
| $ | 1,557.6 |
| $ | 1,404.4 |
|
| $ | 1,442.1 |
|
|
|
|
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Debt-to-total capitalization ratio |
| 44.5 | % |
|
| 45.8 | % |
| 44.3 | % |
|
| 49.8 | % |
We believe that our operating cash flow and financing capacity, as described, provide adequate liquidity for operating the business for the foreseeable future. Refer to Note 9, “Debt”, for further descriptions of the provisions of our financing facilities as well as Note 911 “Debt” in our Annual Report on2015 Form 10-K for the year-ended December 31, 2014.10-K.
Contractual Obligations
During the nine-month period ended September 30, 2015,2016, contractual obligations have increased $90.0by $73.8 million from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014,2015, driven by the renewed corporate office building lease and othernew facility leases, facility lease renewals.renewals and new multi-year technology contracts.
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The Company is subject to market risk associated principally with changes in interest rates and foreign currency exchange rates. There were no material changes to the Company’s exposures to market risk during the first nine months of 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 September 30, 2015,2016, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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The Company has been named as a defendant in an action filed before the United States District Court for the Central District of California on May 1, 2015. The complaint alleges that the Company sent unsolicited fax advertisements to two named plaintiffs, as well as thousands of other persons and entities, in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 ("TCPA"). After filing the complaint, the plaintiff filed a motion asking the Court to certify a class of plaintiffs comprised of persons and entities who allegedly received fax advertisements from the Company. Under the TCPA, recipients of unsolicited fax advertisements can seek damages of $500 per fax for inadvertent violations and up to $1,500 per fax for knowing and willful violations. Other reported TCPA lawsuits have resulted in a broad range of outcomes, with each case being dependent on its own unique set of facts and circumstances. The Company is vigorously contesting class certification and liability. Litigation of this kind, however, is likely to lead to settlement negotiations, including negotiations prompted by pre-trial civil court procedures. Regardless of whether the litigation is resolved at trial or through settlement, the Company believes that a loss associated with resolution of pending claims is probable. However, the amount of any such loss, which could be material, cannot be reasonably estimated because the Company is continuing to evaluate its defenses based on its internal review and investigation of prior events, newFor information and future circumstances.
The Company is also involved in otherregarding 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.see Note 14 “Legal Matters.”
For information regarding risk factors, see “Risk Factors” in Item 1A of Part I of the Company’s2015 Form 10-K for the year ended December 31, 2014.10-K. There have been no material changes to the risk factors described in such Form 10-K.10-K, except for the following two revised risk factors.
Price transparency, customer consolidation, and changes in product sales mix may result in lower margins.
The Company faces price and margin pressure due to a number of factors, including:
Increased price transparency, driven by online resellers
Customer consolidation resulting in some customers increasing their buying power and seeking economic
concessions from the Company
Shift in customer mix from higher to lower margin channels and vertical markets
Secular decline in office products categories leading to unfavorable product mix
Vendor consolidation.
If Essendant is unable to reduce expenses, grow sales to existing and new customers, and increase sales of higher margin products as a percentage of total sales, the Company’s results of operations and financial condition may be adversely affected.
For example, during the second and third quarters of 2016, despite the Company’s success at converting customers, profitability was adversely affected by margin pressure resulting from a shift in customer mix to lower margin customers and in product category mix to lower margin products. The transparency of pricing online also caused margin pressure.
Essendant’s reliance on supplier allowances and promotional incentives could impact profitability.
Supplier allowances and promotional incentives that are often based on the volume of Company product purchases contribute significantly to Essendant’s profitability. If Essendant does not comply with suppliers’ terms and conditions, or does not make requisite purchases to achieve certain volume hurdles, Essendant may not earn certain allowances and promotional incentives. Additionally, suppliers may reduce the allowances they pay Essendant if they conclude the value Essendant creates does not justify the allowances. If Essendant’s suppliers reduce or otherwise alter their allowances or promotional incentives, Essendant’s profit margin for the sale of the products it purchases from those suppliers may decline. The loss or diminution of supplier allowances and promotional support could have an adverse effect on the Company’s results of operations.
For example, in the second quarter of 2016, lower supplier allowances and promotional incentives contributed to the unfavorable margin impact of the product category mix shift, and as the Company executed its strategy to improve cash flow in part through lower inventory balances in the third quarter of 2016, a reduction in purchases from suppliers resulted in lower supplier allowances, which contributed to the unfavorable gross margin changes.
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| (a) | Not applicable. |
| (b) | Not applicable. |
| (c) | Common Stock Purchases. |
During the nine-month periodsnine months ended September 30, 20152016 and 2014,2015, the Company repurchased 1,525,222241,270 and 1,074,5741,525,222 shares of common stock at an aggregate cost of $6.8 million and $57.4 million, and $43.0 million, respectively. On February 11, 2015, the Board of Directors authorized the Company to purchase an additional $100.0 million of common stock. The Company repurchased 1,737,850did not repurchase any additional shares for $64.5 million year-to-date through October 19, 2015.24, 2016. As of that date, the Company had approximately $77.9$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 |
| ||||
July 1, 2015 to July 31, 2015 |
|
| 179,757 |
|
| $ | 37.88 |
|
|
| 179,757 |
|
| $ | 104,169,515 |
|
August 1, 2015 to August 31, 2015 |
|
| 215,011 |
|
|
| 35.35 |
|
|
| 215,011 |
|
|
| 96,569,656 |
|
September 1, 2015 to September 30, 2015 |
|
| 349,313 |
|
|
| 32.89 |
|
|
| 349,313 |
|
|
| 85,082,091 |
|
Total Third Quarter |
|
| 744,081 |
|
| $ | 35.37 |
|
|
| 744,081 |
|
| $ | 85,082,091 |
|
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 |
| ||||
July 1, 2016 to July 31, 2016 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68,160,702 |
|
August 1, 2016 to August 31, 2016 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68,160,702 |
|
September 1, 2016 to September 30, 2016 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68,160,702 |
|
Total Third Quarter |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | 68,160,702 |
|
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(a) | Exhibits |
This Quarterly Report on Form 10-Q includes as exhibits certain documents that the Company has previously filed with the SEC. Such previously filed documents are incorporated herein by reference from the respective filings indicated in parentheses at the end of the exhibit descriptions (all made under the Company’s file number of 0-10653). Each of the management contracts and compensatory plans or arrangements included below as an exhibit is identified as such by a double asterisk at the end of the related exhibit description.
Exhibit No. |
| Description |
3.1 |
| Third Restated Certificate of Incorporation of Essendant Inc. (“ESND” or the |
23,2015) | ||
3.2 |
| Amended and Restated Bylaws of |
4.1 |
| Note Purchase Agreement, dated as of November 25, 2013, among |
4.2 |
| 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 (Exhibit 4.2 to the Form 10-Q, filed on April 20, 2016) |
|
| Parent Guaranty, dated as of November 25, 2013, by |
|
| Subsidiary Guaranty, dated as of November 25, 2013, by all of the domestic subsidiaries of |
|
|
|
|
| |
|
|
|
10.3* |
| Amended and Restated Executive Employment Agreement, dated as of July 22, 2016, by and among ESND, ECO, Essendant Management Services (“EMS”) and Robert B. Aiken, Jr.** |
10.4* | Form of Amended and Restated Executive Employment Agreement, effective as of January 1, 2017** | |
10.5* | Form of 2016 Restricted Stock Award Agreement with EPS Minimum under the 2015 Long-Term Incentive Plan** | |
10.6* | Form of Performance Based Restricted Stock Unit Award Agreement under the 2015 Long-Term Incentive Plan** | |
10.7* | Amendment No. 2 to Note Purchase Agreement, dated as of August 30, 2016, between ESND, ECO, and the noteholders identified therein | |
10.8* | Amendment No. 2 to the Fourth Amended and Restated Five Year Revolving Credit Agreement, dated as of August 29, 2016, between ESND, ECO, JPMorgan Chase Bank, N.A., as agent, and the other financial institutions identified therein | |
10.9* | August 30, 2016 Consent of Class Agents under the Amended and Restated Transfer and Administration Agreement dated as of January 18, 2013 to amendment to the amendment of the Fourth Amended and Restated Five Year Revolving Credit Agreement, dated as of July 8, 2013 | |
31.1* |
| Certification of Chief Executive Officer, dated as of October |
31.2* |
| Certification of Chief Financial Officer, dated as of October |
32.1* |
| Certification of Chief Executive Officer and Chief Financial Officer, dated as of October |
101* |
| The following financial information from Essendant Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, |
* | - Filed herewith |
** | - Represents a management contract or compensatory plan or arrangement | |
† | - Confidential treatment has been requested for a portion of this document. Confidential portions have been omitted and filed separately with the Securities and Exchange Commission. |
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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) |
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| ||
Date: October |
|
| /s/ |
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|
|
|
|
| Senior Vice President and Chief Financial Officer |
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