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 March 31,September 30, 2016
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-10653
ESSENDANT INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
| 36-3141189 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
One Parkway North Boulevard
Suite 100
Deerfield, Illinois 60015-2559
(847) 627-7000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
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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 April 18,October 24, 2016, the registrant had outstanding 37,153,98836,968,408 shares of common stock, par value $0.10 per share.
FORM 10-Q
For the Quarterly Period Ended March 31,September 30, 2016
TABLE OF CONTENTS
2
PART I – FINANCIAL INFORMATION
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| (Unaudited) |
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| (Unaudited) |
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| (Audited) |
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| As of March 31, |
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| As of December 31, |
| As of September 30, |
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| As of December 31, |
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| 2016 |
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| 2015 |
| 2016 |
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| 2015 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 35,430 |
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| $ | 29,983 |
| $ | 22,647 |
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| $ | 29,983 |
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Accounts receivable, less allowance for doubtful accounts of $17,686 in 2016 and $17,810 in 2015 |
| 741,625 |
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| 716,537 |
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Accounts receivable, less allowance for doubtful accounts of $16,696 in 2016 and $17,810 in 2015 |
| 752,260 |
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| 716,537 |
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Inventories |
| 894,350 |
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| 922,162 |
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| 850,463 |
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| 922,162 |
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Other current assets |
| 35,153 |
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| 27,310 |
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| 44,771 |
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| 27,310 |
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Total current assets |
| 1,706,558 |
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| 1,695,992 |
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| 1,670,141 |
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| 1,695,992 |
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Property, plant and equipment, net |
| 132,452 |
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| 133,751 |
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| 126,334 |
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| 133,751 |
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Goodwill |
| 299,147 |
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| 299,355 |
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| 298,242 |
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| 299,355 |
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Intangible assets, net |
| 93,657 |
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| 96,413 |
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| 86,886 |
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| 96,413 |
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Other long-term assets |
| 54,004 |
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| 37,348 |
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| 55,059 |
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| 37,348 |
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Total assets | $ | 2,285,818 |
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| $ | 2,262,859 |
| $ | 2,236,662 |
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| $ | 2,262,859 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | 521,132 |
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| $ | 531,949 |
| $ | 540,743 |
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| $ | 531,949 |
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Accrued liabilities |
| 178,858 |
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| 177,472 |
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| 192,189 |
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| 177,472 |
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Current maturities of long-term debt |
| 48 |
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| 51 |
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| 35 |
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| 51 |
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Total current liabilities |
| 700,038 |
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| 709,472 |
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| 732,967 |
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| 709,472 |
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Deferred income taxes |
| 7,508 |
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| 11,901 |
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| 8,372 |
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| 11,901 |
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Long-term debt |
| 753,854 |
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| 716,264 |
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| 620,155 |
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| 716,264 |
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Other long-term liabilities |
| 89,904 |
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| 101,488 |
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| 92,535 |
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| 101,488 |
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Total liabilities |
| 1,551,304 |
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| 1,539,125 |
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| 1,454,029 |
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| 1,539,125 |
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Stockholders’ equity: |
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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 |
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| 7,444 |
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| 7,444 |
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Additional paid-in capital |
| 411,485 |
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| 410,927 |
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| 406,964 |
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| 410,927 |
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Treasury stock, at cost – 37,312,864 shares in 2016 and 37,178,394 shares in 2015 |
| (1,105,119 | ) |
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| (1,100,867 | ) | |||||||
Treasury stock, at cost – 36,967,378 shares in 2016 and 37,178,394 shares in 2015 |
| (1,097,094 | ) |
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| (1,100,867 | ) | |||||||
Retained earnings |
| 1,475,216 |
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| 1,463,821 |
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| 1,514,573 |
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| 1,463,821 |
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Accumulated other comprehensive loss |
| (54,512 | ) |
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| (57,591 | ) |
| (49,254 | ) |
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| (57,591 | ) |
Total stockholders’ equity |
| 734,514 |
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| 723,734 |
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| 782,633 |
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| 723,734 |
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Total liabilities and stockholders’ equity | $ | 2,285,818 |
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| $ | 2,262,859 |
| $ | 2,236,662 |
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| $ | 2,262,859 |
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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 Three Months Ended |
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| For the Nine Months Ended |
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| March 31, |
| September 30, |
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| September 30, |
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| 2016 |
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| 2015 (Revised)* |
| 2016 |
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| 2015 |
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| 2016 |
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| 2015 |
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Net sales | $ | 1,352,296 |
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| $ | 1,332,375 |
| $ | 1,407,504 |
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| $ | 1,391,545 |
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| $ | 4,114,323 |
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| $ | 4,065,719 |
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Cost of goods sold |
| 1,152,214 |
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| 1,131,980 |
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| 1,208,650 |
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| 1,166,402 |
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| 3,519,564 |
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| 3,430,062 |
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Gross profit |
| 200,082 |
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| 200,395 |
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| 198,854 |
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| 225,143 |
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| 594,759 |
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| 635,657 |
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Operating expenses: |
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Warehousing, marketing and administrative expenses |
| 167,678 |
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| 197,581 |
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| 138,107 |
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| 172,159 |
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| 463,410 |
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| 526,653 |
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Defined benefit plan settlement loss (Note 10) |
| 419 |
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| - |
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| 12,163 |
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| - |
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Operating income |
| 32,404 |
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| 2,814 |
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| 60,328 |
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| 52,984 |
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| 119,186 |
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| 109,004 |
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Interest expense, net |
| 5,897 |
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| 4,839 |
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| 6,484 |
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| 5,300 |
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| 18,058 |
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| 14,918 |
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Income (loss) before income taxes |
| 26,507 |
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| (2,025 | ) | |||||||||||||||
Income before income taxes |
| 53,844 |
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| 47,684 |
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| 101,128 |
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| 94,086 |
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Income tax expense |
| 9,977 |
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| 3,982 |
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| 17,102 |
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| 20,017 |
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| 34,923 |
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| 42,594 |
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Net income (loss) | $ | 16,530 |
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| $ | (6,007 | ) | |||||||||||||||
Net income (loss) per share - basic: | $ | 0.45 |
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| $ | (0.16 | ) | |||||||||||||||
Net income | $ | 36,742 |
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| $ | 27,667 |
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| $ | 66,205 |
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| $ | 51,492 |
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Net income per share - basic: | $ | 1.00 |
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| $ | 0.74 |
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| $ | 1.81 |
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| $ | 1.36 |
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Average number of common shares outstanding - basic |
| 36,593 |
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| 38,115 |
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| 36,578 |
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| 37,300 |
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| 36,560 |
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| 37,724 |
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Net income (loss) per share - diluted: | $ | 0.45 |
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| $ | (0.16 | ) | |||||||||||||||
Net income per share - diluted: | $ | 0.99 |
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| $ | 0.74 |
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| $ | 1.79 |
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| $ | 1.35 |
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Average number of common shares outstanding - diluted |
| 36,875 |
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| 38,115 |
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| 36,938 |
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| 37,608 |
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| 36,896 |
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| 38,109 |
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Dividends declared per share | $ | 0.14 |
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| $ | 0.14 |
| $ | 0.14 |
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| $ | 0.14 |
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| $ | 0.42 |
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| $ | 0.42 |
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* During the third quarter of 2015, the Company elected a change in accounting principle for the valuation method of certain inventories to the last-in, first-out (“LIFO”) method from the first-in, first out method (“FIFO”). This change required retrospective application. As such, the financial statements presented for prior periods are titled “Revised”.
See notes to condensed consolidated financial statements.
4
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
| For the Three Months Ended |
| For the Three Months Ended |
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| For the Nine Months Ended |
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| March 31, |
| September 30, |
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| September 30, |
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| 2016 |
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| 2015 (Revised)* |
| 2016 |
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| 2015 |
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| 2016 |
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| 2015 |
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Net income (loss) | $ | 16,530 |
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| $ | (6,007 | ) | |||||||||||||||
Net income | $ | 36,742 |
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| $ | 27,667 |
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| $ | 66,205 |
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| $ | 51,492 |
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Other comprehensive income (loss), net of tax |
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Translation adjustments |
| 2,691 |
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| (4,630 | ) |
| (692 | ) |
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| 7,497 |
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| 2,441 |
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| 3,076 |
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Minimum pension liability adjustments |
| 915 |
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| 932 |
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| (2,298 | ) |
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| 967 |
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| 6,035 |
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| 2,831 |
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Cash flow hedge adjustments |
| (527 | ) |
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| (476 | ) |
| 288 |
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| (208 | ) |
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| (139 | ) |
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| (636 | ) |
Total other comprehensive income (loss), net of tax |
| 3,079 |
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| (4,174 | ) |
| (2,702 | ) |
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| 8,256 |
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| 8,337 |
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| 5,271 |
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Comprehensive income (loss) | $ | 19,609 |
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| $ | (10,181 | ) | |||||||||||||||
Comprehensive income | $ | 34,040 |
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| $ | 35,923 |
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| $ | 74,542 |
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| $ | 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 Three Months Ended |
| For the Nine Months Ended |
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| March 31, |
| September 30, |
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| 2016 |
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| 2015 (Revised)* |
| 2016 |
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| 2015 |
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Cash Flows From Operating Activities: |
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Net income (loss) | $ | 16,530 |
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| $ | (6,007 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
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Net income | $ | 66,205 |
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| $ | 51,492 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 11,731 |
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| 12,223 |
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| 34,199 |
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| 36,344 |
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Share-based compensation |
| 2,911 |
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| 2,640 |
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| 6,903 |
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| 6,447 |
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Gain on the disposition of property, plant and equipment |
| (167 | ) |
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| (15 | ) | |||||||
(Gain) loss on the disposition of property, plant and equipment |
| (21,027 | ) |
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| 1,562 |
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Amortization of capitalized financing costs |
| 166 |
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| 272 |
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| 502 |
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| 659 |
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Excess tax cost (benefit) related to share-based compensation |
| 133 |
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| (262 | ) |
| 960 |
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| (402 | ) |
Asset impairment charges |
| - |
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| 23,610 |
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| - |
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| 34,893 |
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Loss on sale of equity investment |
| - |
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| 33 |
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Deferred income taxes |
| (1,881 | ) |
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| (1,469 | ) |
| (6,970 | ) |
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| (15,285 | ) |
Pension settlement charge |
| 12,163 |
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| - |
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Changes in operating assets and liabilities: |
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(Increase) decrease in accounts receivable, net |
| (24,819 | ) |
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| 26,217 |
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Increase in accounts receivable, net |
| (35,457 | ) |
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| (31,288 | ) | |||||||
Decrease in inventory |
| 28,018 |
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| 46,023 |
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| 73,735 |
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| 54,354 |
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Increase in other assets |
| (24,774 | ) |
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| (10,751 | ) |
| (35,221 | ) |
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| (8,720 | ) |
Increase in accounts payable |
| 9,571 |
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| 645 |
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| 8,902 |
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| 50,412 |
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Decrease in checks in-transit |
| (20,294 | ) |
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| (13,613 | ) | |||||||
Increase (decrease) in accrued liabilities |
| 1,997 |
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| (17,534 | ) | |||||||
(Decrease) increase in other liabilities |
| (9,943 | ) |
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| 743 |
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Net cash (used in) provided by operating activities |
| (10,821 | ) |
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| 62,722 |
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Increase in accrued liabilities |
| 13,659 |
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| 6,500 |
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Decrease in other liabilities |
| (12,585 | ) |
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| (3,342 | ) | |||||||
Net cash provided by operating activities |
| 105,968 |
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| 183,659 |
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Cash Flows From Investing Activities: |
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Capital expenditures |
| (9,877 | ) |
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| (5,490 | ) |
| (28,167 | ) |
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| (18,133 | ) |
Proceeds from the disposition of property, plant and equipment |
| 281 |
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| 18 |
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| 33,890 |
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| 184 |
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Net cash used in investing activities |
| (9,596 | ) |
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| (5,472 | ) | |||||||
Acquisition, net of cash acquired |
| - |
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| (40,471 | ) | |||||||
Proceeds from sale of equity investment |
| - |
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| 612 |
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Net cash provided by (used in) investing activities |
| 5,723 |
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| (57,808 | ) | |||||||
Cash Flows From Financing Activities: |
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Net borrowing (repayments) under revolving credit facility |
| 37,388 |
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| (29,630 | ) | |||||||
Net repayments under revolving credit facility |
| (96,640 | ) |
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| (45,309 | ) | |||||||
Net proceeds (disbursements) from share-based compensation arrangements |
| 339 |
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|
| (875 | ) |
| 621 |
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|
| (1,507 | ) |
Acquisition of treasury stock, at cost |
| (6,839 | ) |
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| (16,028 | ) |
| (6,839 | ) |
|
| (55,677 | ) |
Payment of cash dividends |
| (5,160 | ) |
|
| (5,396 | ) |
| (15,355 | ) |
|
| (15,976 | ) |
Excess tax (cost) benefit related to share-based compensation |
| (133 | ) |
|
| 262 |
|
| (960 | ) |
|
| 402 |
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Payment of debt issuance costs |
| - |
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|
| (36 | ) |
| (86 | ) |
|
| (36 | ) |
Net cash provided by (used in) financing activities |
| 25,595 |
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|
| (51,703 | ) | |||||||
Net cash used in financing activities |
| (119,259 | ) |
|
| (118,103 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
| 269 |
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|
| (1,758 | ) |
| 232 |
|
|
| (513 | ) |
Transfer of cash to held for sale |
| - |
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|
| (970 | ) | |||||||
Net change in cash and cash equivalents |
| 5,447 |
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|
| 2,819 |
|
| (7,336 | ) |
|
| 7,235 |
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Cash and cash equivalents, beginning of period |
| 29,983 |
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|
| 20,812 |
|
| 29,983 |
|
|
| 20,812 |
|
Cash and cash equivalents, end of period | $ | 35,430 |
|
| $ | 23,631 |
| $ | 22,647 |
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| $ | 28,047 |
|
Other Cash Flow Information: |
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Income tax payments, net | $ | 1,027 |
|
| $ | 3,183 |
| $ | 27,821 |
|
| $ | 53,704 |
|
Interest paid |
| 7,292 |
|
|
| 6,213 |
|
| 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”) with its wholly owned subsidiary Essendant Co. (“ECO”), and ECO’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, 2015, was derived from the December 31, 2015 audited financial statements. The Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations. Accordingly, the reader of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (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 March 31,September 30, 2016 and the results of operations and cash flows for the three-month periodsnine months ended March 31,September 30, 2016 and 2015. The results of operations for the three and nine months ended March 31,September 30, 2016 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
In May 2015, he FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). Under the standard, investments for which fair value is measured at net asset value ("NAV") per share (or its equivalent) using the practical expedient will no longer be categorized in the fair value hierarchy. The Company adopted this standard on January 1, 2016, which had no impact on the quarterly financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), that requires lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. This standard will be effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period, and early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,. Under the objectivenew 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 identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. Thisretained earnings. The standard will be effective for annual periods beginning after December 15, 2016, andincluding interim periods within those annual periods,that reporting period, and early adoptionapplication is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
7
Change in Accounting PrincipleInventory
During the third quarter of 2015, the Company elected a change in accounting principle for the valuation method of certain inventories to the last-in, first-out (“LIFO”) method from the first-in, first out method (“FIFO”). This change required retrospective application. As such, the financial statements presented for prior periods are titled “Revised”. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further information.
Inventory
Approximately 98.5% and 98.4% of total inventory as of March 31,September 30, 2016 and December 31, 2015, respectively, has been valued under the LIFO method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation. Inventory valued under the LIFO accounting method is recorded at the lower of cost or market. If the Company had valued its entire inventory under the lower of FIFO cost or market, inventory values would have been $148.6$147.2 million and $147.8 million higher than reported as of March 31,September 30, 2016 and December 31, 2015, respectively.
The change in the LIFO reserve in the third quarter of 2016 included a LIFO liquidation relating to decrements in five of the Company’s thirteen LIFO pools. These decrements resulted in liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of current year purchases. This liquidation resulted in LIFO income of $2.3 million which was partially offset by LIFO expense of $2.1 million related to current inflation for an overall net decrease in cost of sales of $0.2 million for the three 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 an overall net decrease in cost of sales of $2.7 million. For the nine months ended September 30, 2016, the LIFO income of $2.3 million related to the liquidation was more than offset by LIFO expense of $3.2 million related to current inflation for an overall net increase in cost of sales of $0.9 million.
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.
The Company has developed preliminary estimatesPurchase accounting for this transaction was completed as of the fair values of assets acquired and liabilities assumed for purposes of allocating the purchase price. The estimates are subject to change as the valuation activities are completed. The fair values of the assets and liabilities were estimated using various valuation methods including estimated selling prices, market approach, and discounted cash flows using both an income and cost approach.
Any changes to the preliminary allocations of the purchase price, some of which may be material, will be allocated to residual goodwill.June 30, 2016.
At March 31,September 30, 2016, the preliminary allocation of the purchase price was as follows (amounts in thousands):
Purchase price, net of cash acquired | $ | 39,983 |
|
|
|
|
|
Accounts receivable |
| 9,230 |
|
Inventories |
| 10,542 |
|
Other current assets |
| 338 |
|
Property, plant and equipment, net |
| 1,251 |
|
Other assets |
| 752 |
|
Intangible assets |
| 17,580 |
|
Total assets acquired |
| 39,693 |
|
|
|
|
|
Accounts payable |
| 4,992 |
|
Accrued liabilities |
| 1,943 |
|
Deferred income taxes |
| 3,175 |
|
Other long-term liabilities |
| 76 |
|
Total liabilities assumed |
| 10,186 |
|
Goodwill | $ | 10,476 |
|
|
|
|
|
Purchase price, net of cash acquired | $ | 39,983 |
|
|
|
|
|
Accounts receivable |
| 9,230 |
|
Inventories |
| 12,067 |
|
Other current assets |
| 339 |
|
Property, plant and equipment, net |
| 1,251 |
|
Other assets |
| 752 |
|
Intangible assets |
| 16,930 |
|
Total assets acquired |
| 40,569 |
|
|
|
|
|
Accounts payable |
| 4,992 |
|
Accrued liabilities |
| 1,943 |
|
Deferred income taxes |
| 3,287 |
|
Other long-term liabilities |
| 76 |
|
Total liabilities assumed |
| 10,298 |
|
Goodwill | $ | 9,712 |
|
|
|
|
|
8
The purchased identifiable intangible assets were as follows (amounts in thousands):
| Total |
|
| Estimated Life | Total |
|
| Estimated Life | ||
Customer relationships | $ | 16,220 |
|
| 13 years | $ | 15,570 |
|
| 13 years |
Trademark |
| 1,360 |
|
| 2.5-15 years |
| 1,360 |
|
| 2-15 years |
Total | $ | 17,580 |
|
|
| $ | 16,930 |
|
|
|
Agreement with Staples, Inc.
8
3. Sale-Leaseback On February 16,September 23, 2016, the Company announcedentered into an agreement tofor the sale and leaseback of its facility in City of Industry, CA. The agreement provided for the sale of the facility for a purchase from Staples, Inc. contractsprice of $31.7 million and related assets representing more than $550the subsequent 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 in annual sales to minority“warehousing, marketing and woman-owned office supply resellers and their large corporate and other enterprise customers. The transaction is subject toadministrative expenses.” A deferred gain of approximately $2.8 million that will be amortized into income over the successful completionterm of the proposed mergerlease was also recorded. As of Staples and Office Depot, as well as other regulatory and customary closing conditions. A court ruling on the preliminary injunction action brought by the Federal Trade Commission to block the proposed merger is expected during the second quarter of 2016. Under the termsSeptember 30, 2016, $1.4 million of the agreement, Essendant willdeferred gain is reflected in the accompanying Consolidated Balance Sheet under “other long-term liabilities”, with the remainder included as a component of “other current liabilities”. The cash proceeds from the sale were used primarily to pay Staples approximately $22.5 million.down long-term debt.
3.4. Share-Based Compensation
As of March 31,September 30, 2016, the Company has two active equity compensation plans. Under the 2015 Long-Term Incentive Plan (as amended and restated), award instruments 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 in deferred stock units.
The Company granted 120,376526,697 shares of restricted stock and 247,510290,725 RSUs during the first threenine months of 2016, compared to 46,229440,948 shares of restricted stock and 145,552162,092 RSUs during the first threenine months of 2015.
4.5. Severance and Restructuring Charges
Commencing in the first quarter of 2015, the Company began certain restructuring actions which included workforce reductions and facility closures. In the first quarter of 2015, the Company recorded $6.0 million of pre-tax expense relating to workforce reductions. During the first quarter of 2016 and 2015, the Company recorded $0.3 million and $0.4 million, respectively, of pre-tax expense relating to facility consolidations. These charges were included in “warehousing, marketing and administrative expenses.” Cash outlays for these actions occurred primarily in 2015 and were approximately $0.7 million and $0.5 million, respectively, for the three months ended March 31, 2016 and 2015. As of March 31, 2016, the Company has accrued liabilities for these actions of $1.8 million.
Commencing in the fourth quarter of 2015, the Company executed actions to reduce costs through management delayering in order to achieve broader functional alignment of the organization. In the fourth quarter of 2015, the Company recorded an $11.9 million pre-tax charge relating to this workforce reductionThe charges associated with these actions were included in “warehousing, marketing and administrative expenses.” Cash outlays
The expenses, cash flows, and accrued liabilities associated with these charges were approximately $3.1 millionthe restructuring actions described above are noted in the three months ended March 31, 2016. As of March 31, 2016, the Company has accrued liabilities for these actions of $7.9 million.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
5.6. 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, 2015 | $ | 299,355 |
| $ | 299,355 |
|
Purchase accounting adjustments |
| (1,095 | ) |
| (1,858 | ) |
Currency translation adjustments |
| 887 |
|
| 745 |
|
Goodwill, balance as of March 31, 2016 | $ | 299,147 |
| |||
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):
| March 31, 2016 |
| December 31, 2015 | 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 | $ | 138,422 |
|
| $ | (54,140 | ) |
| $ | 84,282 |
|
| 16 |
| $ | 137,938 |
|
| $ | (51,357 | ) |
| $ | 86,581 |
|
| 16 | $ | 137,678 |
|
| $ | (59,545 | ) |
| $ | 78,133 |
|
| 16 |
| $ | 137,938 |
|
| $ | (51,357 | ) |
| $ | 86,581 |
|
| 16 |
Non-compete agreements |
| 4,654 |
|
|
| (4,260 | ) |
|
| 394 |
|
| 4 |
|
| 4,644 |
|
|
| (4,260 | ) |
|
| 384 |
|
| 4 |
| 4,651 |
|
|
| (4,260 | ) |
|
| 391 |
|
| 4 |
|
| 4,644 |
|
|
| (4,260 | ) |
|
| 384 |
|
| 4 |
Trademarks |
| 13,734 |
|
|
| (4,753 | ) |
|
| 8,981 |
|
| 14 |
|
| 13,688 |
|
|
| (4,240 | ) |
|
| 9,448 |
|
| 14 |
| 13,725 |
|
|
| (5,363 | ) |
|
| 8,362 |
|
| 14 |
|
| 13,688 |
|
|
| (4,240 | ) |
|
| 9,448 |
|
| 14 |
Total | $ | 156,810 |
|
| $ | (63,153 | ) |
| $ | 93,657 |
|
|
|
| $ | 156,270 |
|
| $ | (59,857 | ) |
| $ | 96,413 |
|
|
| $ | 156,054 |
|
| $ | (69,168 | ) |
| $ | 86,886 |
|
|
|
| $ | 156,270 |
|
| $ | (59,857 | ) |
| $ | 96,413 |
|
|
|
In the first quarter of 2015, the Company recorded a pre-tax non-cash impairment charge of $10.2 million to write-down the trademarks of ORS Nasco and certain OKI brands to their fair value related to the corporate name change that was approved in February 2015 and effective June 1, 2015. This impairment charge was recorded in “warehousing, marketing and administrative expenses.” The Company utilized the discounted cash flow method to determine the fair value of these trademarks based upon management’s current forecasted future revenues from the trademarks. The trademarks were fully amortized as of December 31, 2015.
The following table summarizes the amortization expense to be incurred in 2016 through 2020 on intangible assets (in thousands):
Year |
| Amount |
|
| Amount |
| ||
2016 |
| $ | 12,314 |
|
| $ | 12,242 |
|
2017 |
|
| 10,855 |
|
|
| 10,797 |
|
2018 |
|
| 8,111 |
|
|
| 8,054 |
|
2019 |
|
| 6,993 |
|
|
| 6,937 |
|
2020 |
|
| 6,990 |
|
|
| 6,934 |
|
6.7. Accumulated Other Comprehensive Income (Loss)
The change in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the period ended March 31,September 30, 2016 was as follows (amounts in thousands):
|
| Foreign Currency Translation |
|
| Cash Flow Hedges |
|
| Defined Benefit Pension Plans |
|
| Total |
|
| Foreign Currency Translation |
|
| Cash Flow Hedges |
|
| Defined Benefit Pension Plans |
|
| Total |
| ||||||||
AOCI, balance as of December 31, 2015 |
| $ | (9,866 | ) |
| $ | 146 |
|
| $ | (47,871 | ) |
| $ | (57,591 | ) |
| $ | (9,866 | ) |
| $ | 146 |
|
| $ | (47,871 | ) |
| $ | (57,591 | ) |
Other comprehensive (loss) income before reclassifications |
|
| 2,691 |
|
|
| (753 | ) |
|
| - |
|
|
| 1,938 |
|
|
| 2,441 |
|
|
| (579 | ) |
|
| (3,946 | ) |
|
| (2,084 | ) |
Settlement loss reclassified from AOCI |
|
| - |
|
|
| - |
|
|
| 7,453 |
|
|
| 7,453 |
| ||||||||||||||||
Amounts reclassified from AOCI |
|
| - |
|
|
| 226 |
|
|
| 915 |
|
|
| 1,141 |
|
|
| - |
|
|
| 440 |
|
|
| 2,528 |
|
|
| 2,968 |
|
Net other comprehensive (loss) income |
|
| 2,691 |
|
|
| (527 | ) |
|
| 915 |
|
|
| 3,079 |
|
|
| 2,441 |
|
|
| (139 | ) |
|
| 6,035 |
|
|
| 8,337 |
|
AOCI, balance as of March 31, 2016 |
| $ | (7,175 | ) |
| $ | (381 | ) |
| $ | (46,956 | ) |
| $ | (54,512 | ) | ||||||||||||||||
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-month period ending March 31,three and nine months ended September 30, 2016 (in(in thousands):
|
| Amount Reclassified From AOCI |
|
|
| |||||
|
| For the Three |
|
| For the Nine |
|
|
| ||
|
| Months Ended |
|
| Months Ended |
|
|
| ||
|
| September 30, |
|
| September 30, |
|
| Affected Line Item In The Statement | ||
Details About AOCI Components |
| 2016 |
|
| 2016 |
|
| Where Net Income is Presented | ||
Realized and unrealized gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
|
|
|
Gain on interest rate swap, before tax |
| $ | 249 |
|
| $ | 789 |
|
| Interest expense, net |
Loss on foreign exchange hedges, before tax |
|
| - |
|
|
| (70 | ) |
| Cost of goods sold |
|
|
| (96 | ) |
|
| (279 | ) |
| Tax provision |
|
| $ | 153 |
|
| $ | 440 |
|
| Net of tax |
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan items |
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost and unrecognized loss |
| $ | 1,237 |
|
| $ | 4,125 |
|
| Warehousing, marketing and administrative expenses |
Settlement loss |
|
| 419 |
|
|
| 12,163 |
|
| Defined benefit plan settlement loss |
|
|
| (641 | ) |
|
| (6,307 | ) |
| Tax provision |
|
|
| 1,015 |
|
|
| 9,981 |
|
| Net of tax |
Total reclassifications for the period, net of tax |
| $ | 1,168 |
|
| $ | 10,421 |
|
|
|
10
| Amount |
|
|
| ||
|
| Reclassified |
|
|
| |
|
| From AOCI |
|
|
| |
|
| For the Three |
|
|
| |
|
| Months Ended |
|
|
| |
|
| March 31, |
|
| Affected Line Item In The Statement | |
Details About AOCI Components |
| 2016 |
|
| Where Net Income is Presented | |
Realized and unrealized gains (losses) on cash flow hedges |
|
|
|
|
|
|
Gain on interest rate swap, before tax |
| $ | 275 |
|
| Interest expense, net |
Gain on foreign exchange hedges, before tax |
|
| 89 |
|
| Cost of goods sold |
|
|
| (138 | ) |
| Tax provision |
|
| $ | 226 |
|
| Net of tax |
|
|
|
|
|
|
|
Defined benefit pension plan items |
|
|
|
|
|
|
Amortization of prior service cost and unrecognized loss |
| $ | 1,493 |
|
| Warehousing, marketing and administrative expenses |
|
|
| (578 | ) |
| Tax provision |
|
|
| 915 |
|
| Net of tax |
Total reclassifications for the period, net of tax |
| $ | 1,141 |
|
|
|
7.8. Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if dilutive securities were exercised into common stock. Stock options, restricted stock, restricted stock units and deferred stock units are considered dilutive securities. For the three-month periods ended March 31,period ending September 30, 2016 and 2015, 0.3 million 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. An additional 0.4For the nine-month period ending September 30, 2016, 0.3 million shares of common stock outstanding at March 31, 2015securities were excluded from the computationcomputation. For the nine-month period September 30, 2015, no shares of diluted earnings per share due tosecurities were excluded from the net loss.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 |
| |||||
| March 31, |
| |||||
| 2016 |
|
| 2015 |
| ||
Numerator: |
|
|
|
|
|
|
|
Net income (loss) | $ | 16,530 |
|
| $ | (6,007 | ) |
Denominator: |
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
weighted average shares |
| 36,593 |
|
|
| 38,115 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
Employee stock options and restricted stock |
| 282 |
|
|
| - |
|
Denominator for diluted earnings per share - |
|
|
|
|
|
|
|
Adjusted weighted average shares and the effect of dilutive securities |
| 36,875 |
|
|
| 38,115 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
Net income (loss) per share - basic | $ | 0.45 |
|
| $ | (0.16 | ) |
Net income (loss) per share - diluted(1) | $ | 0.45 |
|
| $ | (0.16 | ) |
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
| September 30, |
|
| September 30, |
| ||||||||||
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 36,742 |
|
| $ | 27,667 |
|
| $ | 66,205 |
|
| $ | 51,492 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted average shares |
| 36,578 |
|
|
| 37,300 |
|
|
| 36,560 |
|
|
| 37,724 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and restricted stock |
| 360 |
|
|
| 308 |
|
|
| 336 |
|
|
| 385 |
|
Denominator for diluted earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares and the effect of dilutive securities |
| 36,938 |
|
|
| 37,608 |
|
|
| 36,896 |
|
|
| 38,109 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic | $ | 1.00 |
|
| $ | 0.74 |
|
| $ | 1.81 |
|
| $ | 1.36 |
|
Net income per share - diluted | $ | 0.99 |
|
| $ | 0.74 |
|
| $ | 1.79 |
|
| $ | 1.35 |
|
11
As of March 31,September 30, 2016 , the Company had Board authorization to repurchase $68.2 million of common stock. During the three-month periodsthree months ended March 31,September 30, 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 2015, the Company repurchased 241,270 and 402,6791,525,222 shares of the Company’s common stock at an aggregate cost of $6.8 million and $16.3$57.4 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 threenine months of 2016 and 2015, the Company reissued 106,800452,286 and 31,745369,591 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.
11
ESND is a holding company and, as a result, its primary sources of funds are cash generated from operating activities of its direct operating subsidiary, ECO, and from borrowings by ECO. The 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program (each as defined in Note 11 of the Company’s2015 Form 10-K for the year ended December 31, 2015)10-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 first 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 June 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, 2017.
Debt consisted of the following amounts (in millions):
| As of |
| As of |
| As of |
| As of |
| ||||
| March 31, 2016 |
| December 31, 2015 |
| September 30, 2016 |
| December 31, 2015 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Credit Agreement | $ | 405.8 |
| $ | 368.4 |
| $ | 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 |
| 0.1 |
|
| 0.1 |
| 0.1 |
| ||
Transaction Costs |
| (2.0 | ) |
| (2.2 | ) |
| (1.7 | ) |
| (2.2 | ) |
Total | $ | 753.9 |
| $ | 716.3 |
| $ | 620.2 |
| $ | 716.3 |
|
As of March 31,September 30, 2016, 80.2%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 $11.2 million and $11.6 million under the 2013 Credit Agreement as of March 31,September 30, 2016 and December 31, 2015.2015, 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 0.00% to 1.00%. As of March 31, 2016, the applicable margin for LIBOR-based loans and was 1.50% and1.00% for Alternate Base Rate loans was 0.50%. Effective in April 2016, the applicable margin for LIBOR-based loans was 1.75% and for Alternate Base Rate loans was 0.75%. ECO is required to pay the lenders a fee on the unutilized portion of the 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.
As of March 31,September 30, 2016 and December 31, 2015, $524.1$552.9 million and $448.6 million, respectively, of receivables had been sold to the Investors (as defined in Note 11 ofto the Company’s Consolidated Financial Statements in the 2015 Form 10-K for the year ended December 31, 2015)10-K). ESREssendant Receivables LLC had $200.0 million outstanding under the Receivables Securitization Program as of March 31,September 30, 2016 and December 31, 2015.
For additional information about the 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program, see Note 11 of the Company’s2015 Form 10-K for the year ended December 31, 2015.10-K.
9.
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 13 to the Company’s Consolidated Financial StatementsStatement in the 2015 Form 10-K for the year ended December 31, 2015.10-K. A summary of net periodic pension cost related to the Company’s pension plans for the three-month periodsthree and nine months ended March 31,September 30, 2016 and 2015 was as follows (dollars in thousands):
| For the Three Months Ended March 31, |
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| |||||||||||||||
| 2016 |
|
| 2015 |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||||
Service cost - benefit earned during the period | $ | 317 |
|
| $ | 400 |
| $ | 318 |
|
| $ | 321 |
|
| $ | 952 |
|
| $ | 1,121 |
|
Interest cost on projected benefit obligation |
| 2,343 |
|
|
| 2,270 |
|
| 1,806 |
|
|
| 2,208 |
|
|
| 6,322 |
|
|
| 6,748 |
|
Expected return on plan assets |
| (2,718 | ) |
|
| (2,805 | ) |
| (2,219 | ) |
|
| (2,803 | ) |
|
| (7,484 | ) |
|
| (8,413 | ) |
Amortization of prior service cost |
| 74 |
|
|
| 75 |
|
| 74 |
|
|
| 72 |
|
|
| 222 |
|
|
| 222 |
|
Amortization of actuarial loss |
| 1,419 |
|
|
| 1,450 |
|
| 1,163 |
|
|
| 1,501 |
|
|
| 3,903 |
|
|
| 4,401 |
|
Settlement loss |
| 419 |
|
|
| - |
|
|
| 12,163 |
|
|
| - |
| |||||||
Net periodic pension cost | $ | 1,435 |
|
| $ | 1,390 |
| $ | 1,561 |
|
| $ | 1,299 |
|
| $ | 16,078 |
|
| $ | 4,079 |
|
12
The Company made cash contributions of $10.0 million and $2.0 million to its pension plans during the three-month periodsnine months ended March 31,September 30, 2016 and 2015, respectively. Additional contributions, if any, for 2016 have not yet been determined. As of March 31,September 30, 2016 and December 31, 2015, respectively, the Company had accrued $38.4$44.7 million and $48.4 million of pension liability within “Other long-term liabilities” on the Condensed Consolidated Balance Sheets.
In February
During 2016, as a resultthe Company has taken several actions to mitigate the interest rate, mortality and investment risks of an amendment to the Essendant Pension Plan, the Company announced Plan. These actions include a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants. The lump-sumparticipants that was completed during the second quarter.
As a result of the lump sum offer, a settlement payments will be made on May 16, 2016, using assets fromand remeasurement of the Essendant Pension Plan.
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 $1.8 million and $1.4$5.5 million, respectively, for the Company match of employee contributions to the Plan for the three-month periodsthree and nine months ended March 31, 2016 and 2015.
10. 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 reflects the present value of the amount that the Company would pay for contracts involving the same notional amount and maturity date. The changes in fair value of this instrument is reported in AOCI and reclassified into earnings in interest expense inSeptember 30, 2016. During the same periods during whichlast year, the related interest payments on the hedged debt affect earnings. This swap matures in July 2017.AsCompany recorded expense of March 31, 2016 and December 31, 2015, the fair value of the Company's interest rate swap included in the Company’s Condensed Consolidated Balance Sheet as a component of “Other long-term liabilities” was $0.9$1.5 million and $0.5$4.4 million respectively.to match employee contributions.
The Company maintains a foreign currency cash flow hedge program in order to manage the volatility in exchange rates and the related impacts on the operations of its Canadian functional currency subsidiaries. The Company uses foreign currency exchange contracts to hedge certain of its foreign exchange rate exposures related to inventory purchases. The Company has currently hedged approximately 50%, or $8.1 million, of its Canadian subsidiaries’ US dollar denominated inventory purchases for the next two quarters. The fair value of the foreign currency cash flow hedge is determined by using quoted market spot rates (level 2 inputs). The changes in fair value of ASC 815 designated hedges are reported in AOCI and reclassified into earnings in cost of goods sold in the same periods during which the related inventory is sold and affects earnings. As of March 31, 2016, the fair value of these cash flow hedges were included in the Company’s Condensed Consolidated Balance Sheet as a component of “Accrued liabilities” totaling $0.3 million. As of December 31, 2015, the fair value of these cash flow hedges were included in the Company’s Condensed Consolidated Balance Sheet as a component of “Other current assets” totaling $0.1 million.
The following table depicts the effect of these derivative instruments on the statements of income and comprehensive income for the three-month periods ended March 31, 2016 and 2015 (in thousands).
| Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |
|
|
|
| Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| ||||||||||
Derivatives in ASC 815 Cash Flow Hedging Relationships | For the Three Months Ended March 31, 2016 |
|
| For the Three Months Ended March 31, 2015 |
|
| Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| For the Three Months Ended March 31, 2016 |
|
| For the Three Months Ended March 31, 2015 |
| ||||
Interest Rate Swap | $ | (121 | ) |
| $ | (124 | ) |
| Interest expense, net |
| $ | 242 |
|
| $ | 331 |
|
Foreign Exchange Hedges |
| (195 | ) |
|
| - |
|
| Cost of goods sold |
|
| 89 |
|
|
| - |
|
13
The Company measures certain financial assets and liabilities, including interest rate swap and foreign currency derivatives, at fair value on a recurring basis, based on market rates of the Company’s positions and other observable interest rates (see Note 10 “Derivative Financial Instruments”, for more information on 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.
Determining which level to apply to an asset or liability requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value in the accompanying Condensed Consolidated Balance Sheets as of March 31,September 30, 2016 and December 31, 2015 (in thousands):
| Fair Value Measurements as of March 31, 2016 |
| 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 |
| |||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Foreign exchange hedges | $ | 95 |
|
| $ | - |
|
| $ | 95 |
|
| $ | - |
| |||||||||||||||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap | $ | 832 |
|
| $ | - |
|
| $ | 832 |
|
| $ | - |
| $ | 501 |
|
| $ | - |
|
| $ | 501 |
|
| $ | - |
|
Foreign exchange hedges | $ | 288 |
|
| $ | - |
|
| $ | 288 |
|
| $ | - |
|
| 30 |
|
|
| - |
|
|
| 30 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 531 |
|
| $ | - |
|
| $ | 531 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements as of December 31, 2015 |
| Fair Value Measurements as of December 31, 2015 |
| ||||||||||||||||||||||||||
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
|
|
|
|
| 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 hedges | $ | 91 |
|
| $ | - |
|
| $ | 91 |
|
| $ | - |
| $ | 91 |
|
| $ | - |
|
| $ | 91 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap | $ | 469 |
|
| $ | - |
|
| $ | 469 |
|
| $ | - |
| $ | 469 |
|
| $ | - |
|
| $ | 469 |
|
| $ | - |
|
The carrying amount of accounts receivable at March 31,September 30, 2016, including $524.1$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.
12. Other Assets and Liabilities
Receivables related to supplier allowances totaling $92.1$93.4 million and $111.0 million were included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of March 31,September 30, 2016 and December 31, 2015, respectively.
Accrued customer rebates of $47.2$64.3 million and $63.6 million as of March 31,September 30, 2016 and December 31, 2015, respectively, were included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.
14
13. Income Taxes
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 March 31,September 30, 2016, the Company recorded income tax expense of $10.0$17.1 million and $34.9 million on pre-tax income of $26.5$53.8 million and $101.1 million, for an effective tax rate of 37.6%.31.8% and 34.5%, respectively. For the three and nine months ended March 31,September 30, 2015, the Company recorded income tax expense of $4.0$20.0 million and $42.6 million on pre-tax lossincome of $2.0$47.7 million and $94.1 million, for an effective tax rate of (196.6)%.42.0% and 45.3%, respectively.
The Company’s U.S. statutory rate is 35.0%. There were no significant discrete items impacting the effective tax rate for the three months ended March 31, 2016. The most significant factor impacting the effective tax rate for the three and nine months ended March 31, 2015September 30, 2016 was the discrete tax impact of the payment of 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 placingselling a non-strategic business for sale in the third quarter.
14. Legal Matters
The Company has been named as a defendant in two lawsuits alleging that the Company sent unsolicited fax advertisements to the named plaintiffs, as well as other persons and entities, in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 ("TCPA"). One lawsuit was initially filed in the United States District Court for the Central District of California on May 1, 2015 and has been dismissed without prejudice and refiled in an Illinois state court, subject to a motion to dismiss the California case without prejudice.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. In each lawsuit, the Company is vigorously contesting class certification and denies that any violations occurred. Litigation of this kind, however, is likely to lead to settlement negotiations, including negotiations prompted by pre-trial civil court procedures. Regardless of whether the lawsuits are resolved at trial or through settlement, the Company believes that a loss associated with resolution of pending claims is probable. However, the amount of any such loss, which could be material, cannot be reasonably estimated because the Company is continuing to evaluate its defenses based on its internal review and investigation of prior events, new information and future circumstances.
The Company is also involved in other legal proceedings arising in the ordinary course of or incidental to its business. The Company has established reserves, which are not material, for potential losses that are probable and reasonably estimable that may result from those proceedings. In many cases, however, it is difficult to determine whether a loss is probable or even possible or to estimate the amount or range of potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated. The Company believes that such ordinary course legal proceedings will be resolved with no material adverse effect upon its financial condition or results of operations.
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This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements often contain words such as “expects,” “anticipates,” “estimates,” “intends,” “plans,” “believes,” “seeks,” “will,” “is likely,” “scheduled,” “positioned to,” “continue,” “forecast,” “predicting,” “projection,” “potential” or similar expressions. Forward-looking statements include references to goals, plans, strategies, objectives, projected costs or savings, anticipated future performance, results or events and other statements that are not strictly historical in nature. These forward-looking statements are based on management’s current expectations, forecasts and assumptions. This means they involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied here. These risks and uncertainties include, without limitation, those set forth in “ItemItem 1A. Risk“Risk Factors” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2015.2015 (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. is a leading supplier of workplace essentials, with 2015 net sales of approximately $5.4 billion. Essendant Inc. stocks over 180,000 items 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 products. Essendant sells through a network of 7471 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 do-it-yourselfoutdoor equipment online to the consumer market.market and construction professionals.
Our strategy is comprisedWe have begun implementing the first phase of three key strategic pillars:a comprehensive multi-year transformation program to improve the value of our business, which includes:
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Winning back lost revenue in the JanSan distributor channel
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Aligning pricing with the cost to serve
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Enhancing our merchandising efforts through better sourcing and assortment
Driving productivity and reducing costs
Diversifying the industrial channel
Essendant will focus on the following five key objectives over the next two years:
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Execution on these priorities will help us achieve our goal of becoming the fastest and most convenient solution for workplace essentials.
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The following is a summary of selected trends, events or uncertainties that the Company believes may have a significant impact on its future performance.
FirstThird Quarter Results