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 June 30, 2016March 31, 2017
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, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company”, and “emerging growth 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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Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
On July 18, 2016,April 21, 2017, the registrant had outstanding 37,297,43837,499,549 shares of common stock, par value $0.10 per share.
FORM 10-Q
For the Quarterly Period Ended June 30, 2016March 31, 2017
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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| (Audited) |
| (Unaudited) |
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| (Audited) |
| ||||
| As of June 30, |
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| As of December 31, |
| As of March 31, |
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| As of December 31, |
| ||||
| 2016 |
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| 2015 |
| 2017 |
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| 2016 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 25,700 |
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| $ | 29,983 |
| $ | 22,635 |
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| $ | 21,329 |
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Accounts receivable, less allowance for doubtful accounts of $16,671 in 2016 and $17,810 in 2015 |
| 745,285 |
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| 716,537 |
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Accounts receivable, less allowance for doubtful accounts of $17,639 in 2017 and $18,196 in 2016 |
| 679,770 |
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| 678,184 |
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Inventories |
| 968,263 |
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| 922,162 |
|
| 826,369 |
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| 876,837 |
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Other current assets |
| 48,535 |
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|
| 27,310 |
|
| 41,287 |
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|
| 32,100 |
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Total current assets |
| 1,787,783 |
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|
| 1,695,992 |
|
| 1,570,061 |
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| 1,608,450 |
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Property, plant and equipment, net |
| 133,437 |
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| 133,751 |
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| 124,735 |
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| 128,251 |
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Intangible assets, net |
| 80,775 |
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| 83,690 |
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Goodwill |
| 298,474 |
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| 299,355 |
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| 99,211 |
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| 297,906 |
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Intangible assets, net |
| 90,027 |
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| 96,413 |
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Other long-term assets |
| 52,429 |
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| 37,348 |
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| 45,435 |
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| 45,209 |
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Total assets | $ | 2,362,150 |
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| $ | 2,262,859 |
| $ | 1,920,217 |
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| $ | 2,163,506 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | 575,225 |
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| $ | 531,949 |
| $ | 487,820 |
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| $ | 484,602 |
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Accrued liabilities |
| 167,219 |
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| 177,472 |
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| 187,125 |
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| 197,804 |
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Current maturities of long-term debt |
| 43 |
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| 51 |
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| 6,094 |
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| 28 |
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Total current liabilities |
| 742,487 |
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| 709,472 |
| �� | 681,039 |
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| 682,434 |
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Deferred income taxes |
| 10,783 |
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| 11,901 |
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| 1,486 |
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| 6,378 |
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Long-term debt |
| 760,546 |
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| 716,264 |
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| 565,380 |
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| 608,941 |
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Other long-term liabilities |
| 94,381 |
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| 101,488 |
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| 81,701 |
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| 84,647 |
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Total liabilities |
| 1,608,197 |
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| 1,539,125 |
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| 1,329,606 |
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| 1,382,400 |
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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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Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2017 and 2016 |
| 7,444 |
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| 7,444 |
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Additional paid-in capital |
| 414,865 |
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| 410,927 |
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| 411,586 |
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| 409,805 |
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Treasury stock, at cost – 37,298,175 shares in 2016 and 37,178,394 shares in 2015 |
| (1,104,806 | ) |
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| (1,100,867 | ) | |||||||
Treasury stock, at cost – 36,935,577 shares in 2017 and 36,951,522 shares in 2016 |
| (1,096,412 | ) |
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| (1,096,744 | ) | |||||||
Retained earnings |
| 1,483,002 |
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| 1,463,821 |
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| 1,313,292 |
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| 1,507,057 |
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Accumulated other comprehensive loss |
| (46,552 | ) |
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| (57,591 | ) |
| (45,299 | ) |
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| (46,456 | ) |
Total stockholders’ equity |
| 753,953 |
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| 723,734 |
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| 590,611 |
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| 781,106 |
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Total liabilities and stockholders’ equity | $ | 2,362,150 |
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| $ | 2,262,859 |
| $ | 1,920,217 |
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| $ | 2,163,506 |
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See notes to condensed consolidated financial statements.
3
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands, except per share data)
(Unaudited)
| For the Three Months Ended |
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| For the Six Months Ended |
| For the Three Months Ended |
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| June 30, |
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| June 30, |
| March 31, |
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| 2016 |
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| 2015 (Revised)* |
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| 2016 |
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| 2015 (Revised)* |
| 2017 |
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| 2016 |
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Net sales | $ | 1,354,523 |
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| $ | 1,341,799 |
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| $ | 2,706,819 |
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| $ | 2,674,174 |
| $ | 1,269,383 |
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| $ | 1,352,296 |
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Cost of goods sold |
| 1,158,700 |
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| 1,131,680 |
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| 2,310,914 |
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| 2,263,660 |
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| 1,083,715 |
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| 1,152,214 |
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Gross profit |
| 195,823 |
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| 210,119 |
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| 395,905 |
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| 410,514 |
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| 185,668 |
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| 200,082 |
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Operating expenses: |
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Warehousing, marketing and administrative expenses |
| 157,625 |
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| 156,912 |
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| 325,303 |
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| 354,493 |
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| 173,022 |
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| 167,678 |
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Defined benefit plan settlement loss (Note 9) |
| 11,744 |
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| - |
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| 11,744 |
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| - |
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Operating income |
| 26,454 |
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| 53,207 |
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| 58,858 |
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| 56,021 |
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Impairment of goodwill |
| 198,828 |
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| - |
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Operating (loss) income |
| (186,182 | ) |
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| 32,404 |
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Interest expense, net |
| 5,677 |
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| 4,778 |
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| 11,574 |
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| 9,617 |
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| 6,739 |
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| 5,897 |
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Income before income taxes |
| 20,777 |
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| 48,429 |
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| 47,284 |
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| 46,404 |
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Income tax expense |
| 7,844 |
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| 18,595 |
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| 17,821 |
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| 22,577 |
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Net income | $ | 12,933 |
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| $ | 29,834 |
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| $ | 29,463 |
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| $ | 23,827 |
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Net income per share - basic: | $ | 0.35 |
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| $ | 0.79 |
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| $ | 0.81 |
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| $ | 0.63 |
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(Loss) income before income taxes |
| (192,921 | ) |
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| 26,507 |
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Income tax (benefit) expense |
| (4,328 | ) |
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| 9,977 |
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Net (loss) income | $ | (188,593 | ) |
| $ | 16,530 |
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Net (loss) income per share - basic: | $ | (5.15 | ) |
| $ | 0.45 |
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Average number of common shares outstanding - basic |
| 36,512 |
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| 37,765 |
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| 36,552 |
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| 37,939 |
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| 36,644 |
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| 36,593 |
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Net income per share - diluted: | $ | 0.35 |
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| $ | 0.78 |
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| $ | 0.80 |
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| $ | 0.62 |
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Net (loss) income per share - diluted: | $ | (5.15 | ) |
| $ | 0.45 |
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Average number of common shares outstanding - diluted |
| 36,910 |
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| 38,106 |
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| 36,897 |
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| 38,317 |
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| 36,644 |
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| 36,875 |
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Dividends declared per share | $ | 0.14 |
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| $ | 0.14 |
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| $ | 0.28 |
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| $ | 0.28 |
| $ | 0.14 |
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| $ | 0.14 |
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* During the third quarter of 2015, the Company elected a change in accounting principle for the valuation method of certain inventories to the last-in, first-out (“LIFO”) method from the first-in, first out method (“FIFO”). This change required retrospective application. As such, the financial statements presented for prior periods are titled “Revised”.
See notes to condensed consolidated financial statements.
4
ESSENDANT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(Unaudited)
| For the Three Months Ended |
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| For the Six Months Ended |
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| June 30, |
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| June 30, |
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| 2016 |
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| 2015 (Revised)* |
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| 2016 |
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| 2015 (Revised)* |
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Net income | $ | 12,933 |
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| $ | 29,834 |
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| $ | 29,463 |
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| $ | 23,827 |
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Other comprehensive income (loss), net of tax |
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Translation adjustments |
| 442 |
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| 209 |
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| 3,133 |
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| (4,421 | ) |
Minimum pension liability adjustments |
| 7,418 |
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|
| 932 |
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| 8,333 |
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| 1,864 |
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Cash flow hedge adjustments |
| 100 |
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|
| 48 |
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|
| (427 | ) |
|
| (428 | ) |
Total other comprehensive income (loss), net of tax |
| 7,960 |
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| 1,189 |
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| 11,039 |
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| (2,985 | ) |
Comprehensive income | $ | 20,893 |
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| $ | 31,023 |
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| $ | 40,502 |
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| $ | 20,842 |
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| For the Three Months Ended |
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| March 31, |
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| 2017 |
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| 2016 |
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Net (loss) income | $ | (188,593 | ) |
| $ | 16,530 |
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Other comprehensive (loss) income, net of tax |
|
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Translation adjustments |
| 385 |
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|
| 2,691 |
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Minimum pension liability adjustments |
| 704 |
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|
| 915 |
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Cash flow hedge adjustments |
| 68 |
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|
| (527 | ) |
Total other comprehensive (loss) income, net of tax |
| 1,157 |
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| 3,079 |
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Comprehensive (loss) income | $ | (187,436 | ) |
| $ | 19,609 |
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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 Six Months Ended |
| For the Three Months Ended |
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| June 30, |
| March 31, |
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| 2016 |
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| 2015 (Revised)* |
| 2017 |
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| 2016 |
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Cash Flows From Operating Activities: |
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Net income | $ | 29,463 |
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| $ | 23,827 |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Net (loss) income | $ | (188,593 | ) |
| $ | 16,530 |
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Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
| 22,936 |
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| 24,198 |
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| 10,965 |
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| 11,731 |
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Share-based compensation |
| 5,689 |
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| 3,268 |
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| 2,468 |
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| 2,911 |
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(Gain) loss on the disposition of property, plant and equipment |
| (739 | ) |
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| 57 |
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Gain on the disposition of property, plant and equipment |
| (319 | ) |
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| (167 | ) | |||||||
Amortization of capitalized financing costs |
| 332 |
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| 451 |
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| 437 |
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| 166 |
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Excess tax cost (benefit) related to share-based compensation |
| 193 |
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| (433 | ) | |||||||
Asset impairment charges |
| - |
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| 24,034 |
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Excess tax cost related to share-based compensation |
| - |
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| 133 |
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Deferred income taxes |
| (2,765 | ) |
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| (8,294 | ) |
| 4,280 |
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| (1,881 | ) |
Pension settlement charge |
| 11,744 |
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| - |
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Impairment of goodwill |
| 198,828 |
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| - |
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Changes in operating assets and liabilities: |
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(Increase) decrease in accounts receivable, net |
| (28,439 | ) |
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| 28,330 |
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(Increase) decrease in inventory |
| (44,017 | ) |
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| 48,944 |
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Increase in accounts receivable, net |
| (1,544 | ) |
|
| (24,819 | ) | |||||||
Decrease in inventory |
| 50,531 |
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| 28,018 |
| |||||||
Increase in other assets |
| (36,529 | ) |
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| (10,250 | ) |
| (9,915 | ) |
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| (24,774 | ) |
Increase in accounts payable |
| 62,162 |
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| 3,152 |
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Decrease in checks in-transit |
| (18,733 | ) |
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| (19,240 | ) | |||||||
Increase (decrease) in accounts payable |
| 3,238 |
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| (10,723 | ) | |||||||
(Decrease) increase in accrued liabilities |
| (12,219 | ) |
|
| 3,282 |
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| (15,828 | ) |
|
| 1,997 |
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Decrease in other liabilities |
| (5,062 | ) |
|
| (478 | ) |
| (1,523 | ) |
|
| (9,943 | ) |
Net cash (used in) provided by operating activities |
| (15,984 | ) |
|
| 120,848 |
| |||||||
Net cash provided by (used in) operating activities |
| 53,025 |
|
|
| (10,821 | ) | |||||||
Cash Flows From Investing Activities: |
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Capital expenditures |
| (19,327 | ) |
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| (11,931 | ) |
| (8,312 | ) |
|
| (9,877 | ) |
Proceeds from the disposition of property, plant and equipment |
| 2,770 |
|
|
| 18 |
|
| - |
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|
| 281 |
|
Acquisition, net of cash acquired |
| - |
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|
| (532 | ) | |||||||
Net cash used in investing activities |
| (16,557 | ) |
|
| (12,445 | ) |
| (8,312 | ) |
|
| (9,596 | ) |
Cash Flows From Financing Activities: |
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Net borrowings (repayments) under revolving credit facility |
| 43,876 |
|
|
| (52,738 | ) | |||||||
Net proceeds (disbursements) from share-based compensation arrangements |
| 1,285 |
|
|
| (759 | ) | |||||||
Net borrowings under revolving credit facility |
| 90,112 |
|
|
| 37,388 |
| |||||||
Borrowings under Term Loan |
| 77,600 |
|
|
| - |
| |||||||
Net repayments under Securitization Program |
| (200,000 | ) |
|
| - |
| |||||||
Net (disbursements) proceeds from share-based compensation arrangements |
| (310 | ) |
|
| 339 |
| |||||||
Acquisition of treasury stock, at cost |
| (6,839 | ) |
|
| (31,227 | ) |
| - |
|
|
| (6,839 | ) |
Payment of cash dividends |
| (10,237 | ) |
|
| (10,699 | ) |
| (5,167 | ) |
|
| (5,160 | ) |
Excess tax (cost) benefit related to share-based compensation |
| (193 | ) |
|
| 433 |
| |||||||
Excess tax cost related to share-based compensation |
| - |
|
|
| (133 | ) | |||||||
Payment of debt issuance costs |
| - |
|
|
| (36 | ) |
| (5,678 | ) |
|
| - |
|
Net cash provided by (used in) financing activities |
| 27,892 |
|
|
| (95,026 | ) | |||||||
Net cash (used in) provided by financing activities |
| (43,443 | ) |
|
| 25,595 |
| |||||||
Effect of exchange rate changes on cash and cash equivalents |
| 366 |
|
|
| (135 | ) |
| 36 |
|
|
| 269 |
|
Transfer of cash to held for sale |
| - |
|
|
| (4,119 | ) | |||||||
Net change in cash and cash equivalents |
| (4,283 | ) |
|
| 9,123 |
|
| 1,306 |
|
|
| 5,447 |
|
Cash and cash equivalents, beginning of period |
| 29,983 |
|
|
| 20,812 |
|
| 21,329 |
|
|
| 29,983 |
|
Cash and cash equivalents, end of period | $ | 25,700 |
|
| $ | 29,935 |
| $ | 22,635 |
|
| $ | 35,430 |
|
Other Cash Flow Information: |
|
|
|
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|
|
|
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|
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Income tax payments, net | $ | 27,358 |
|
| $ | 31,618 |
| $ | 11,555 |
|
| $ | 1,027 |
|
Interest paid |
| 11,750 |
|
|
| 9,451 |
|
| 7,658 |
|
|
| 7,292 |
|
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 national wholesale distributor of workplace essentials.items.
The accompanying Condensed Consolidated Financial Statements are unaudited. The Condensed Consolidated Balance Sheet as of December 31, 2015,2016, was derived from the December 31, 20152016 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, 20152016 (the “2016 Form 10-K”) for further information.
In the opinion of management, the accompanying unaudited consolidated financial statementsCondensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Essendant at June 30, 2016March 31, 2017 and the results of operations and cash flows for the sixthree months ended June 30, 2016March 31, 2017 and 2015.2016. The results of operations for the three and six months ended June 30, 2016March 31, 2017 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,March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. Furthermore, excess tax benefits are presented as an operating activity on the statement of cash flows rather than as a financing activity. In the quarter ended March 31, 2017, the Company adopted the standard which resulted in $0.3 million of incremental tax expense that was recognized due to excess tax deficiencies of vested or settled awards in the period. Furthermore, the Company notes certain other changes resulting from adoption including changes in the calculation of the effect of dilutive securities for purposes of calculating diluted net income per share which was immaterial in the period and Condensed Consolidated Statement of Cash Flows presentation changes. The Company has elected to apply guidance concerning cash flow presentation on a prospective basis and to continue to estimate the number of awards expected to be forfeited.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the second step of the two-step goodwill impairment test. Specifically, the standard requires an entity to perform its interim or annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized could not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. The Company early adopted the standard in the quarter ended March 31, 2017 when an interim impairment test was conducted as further discussed in Note 4 – “Goodwill and Intangible Assets”.
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.
7
Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The Company is currently evaluatinganticipates adopting the standard using the modified retrospective approach, which will require the Company to recognize the cumulative effect of initial adoption of the standard for all contracts as of, and new contracts after, the date of initial application.
Based on the Company’s initial assessment and detailed review of the revenue transactions of the organization with its customers, the impact of the application of the new guidancestandard will most likely result in recognition of financing components for certain rebate arrangements that have significant, implied terms and are expected to determineresult in a reduction of net revenues related to implicit interest associated with the impactsignificant financing components of those rebate arrangements. The Company also expects other disclosure changes resulting from certain policy elections and practical expedient uses, or allowable divergences from authoritative guidance. The Company expects that revenue recognition related to the processing, fulfillment and shipment of various warehoused goods to remain substantially unchanged. While the Company has not completed the full assessment it will have on its consolidated financial statements.continue to monitor for modifications required by the standards throughout the year ended December 31, 2017.
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 MarchAugust 2016, the FASB issued ASU No. 2016-09, 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows and is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a retrospective basis unless impracticable. If impracticable the Company would be required to apply the amendments prospectively as of the earliest date possible. The Company is currently evaluating the impact the new guidance will have on its statement of cash flows or financial statement disclosures.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Stock CompensationRetirement Benefits (Topic 718), Improvements715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The standard requires registrants that include a measure of operating income to Employee Share-Based Payment Accounting,include the objectiveservice cost component in the same financial statement line item as other compensation costs and to report other pension-related costs, including amortization of whichprior service cost/credit, and settlement and curtailment effects, etc. separately, excluding them from operating expenses and income. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. Application of the standard is required to be made on a retrospective basis for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement while the change in capitalized benefit cost is to identify, evaluate, and improve areas of generally accepted accounting principles (“GAAP”) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements.applied prospectively. This standard will be effective for annual periods beginning after December 15, 2016,2017, including interim periods within that reporting period, and early application is permitted.permitted as of the beginning of an annual period. The Company is currently evaluating the new guidance to determine the impact it will have on the presentation of its consolidated financial statements.
Change in Accounting Principle
During the third quarter of 2015, the Company elected a change in accounting principle for the valuation method of certain inventories to the last-in, first-out (“LIFO”) method from the first-in, first out method (“FIFO”). This change required retrospective application. As such, the financial statements, presented for periods prior to September 30, 2015 are titled “Revised”. Refer tobut does not expect any impact on the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further information.net income.
Inventory
Approximately 98.6% and 98.4% of total inventory as of June 30, 2016March 31, 2017 and 98.3% as of December 31, 2015,2016, respectively, has been valued under the LIFOLast-In-First-Out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation. Inventory valued under the LIFO accounting method is recorded at the lower of cost or market. If the Company had valued its entire inventory under the lower of FIFOFirst-In-First-Out (“FIFO”) cost or market, inventory values would have been $147.3$157.0 million and $147.8$147.9 million higher than reported as of June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively.
2. Acquisitions
Nestor Sales LLC
On July 31, 2015, Essendant Co. completedThe change in the acquisitionLIFO reserve in the first quarter of 100%2017 included a LIFO liquidation relating to decrements in three of the capital stockCompany’s eight LIFO pools. These decrements resulted in liquidation of Nestor Sales LLC (“Nestor”), a leading wholesaler and distributorLIFO inventory quantities carried at lower costs in prior years as compared with the cost of tools, equipment and supplies to the transportation industry.current year purchases. This acquisition accelerates the Company’s growthliquidation resulted in the automotive aftermarket, complements the Company’s existing industrial offerings while providing access to new customer segments, and advances a key strategic pillar to diversify into channels and categories that leverage our common platform.
The purchase priceLIFO income of $1.6 million which 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.
At June 30, 2016, the allocation of the purchase price was as follows (amounts in thousands):
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 |
|
|
|
|
|
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 |
|
|
|
On February 16, 2016, the Company announced an agreement to purchase from Staples, Inc. contracts and related assets representing more than $550offset by LIFO expense of $10.7 million related to current inflation for an overall net increase in annualcost of sales to minority and woman-owned office supply resellers and their large corporate and other enterprise customers. The transaction was subject toof $9.1 million for the successful completion of the proposed merger of Staples and Office Depot, which was abandoned in May 2016. As a result, the Company cancelled its agreement to complete this purchase. three months ended March 31, 2017.
8
3.
2. Share-Based Compensation
As of June 30, 2016,March 31, 2017, 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 129,05943,385 shares of restricted stock and 247,656221,297 RSUs during the first sixthree months of 2016,2017, compared to 206,479120,376 shares of restricted stock and 145,552247,510 RSUs during the first sixthree months of 2015.2016.
4.3. Severance and Restructuring Charges
Commencing in the first quarter of 2015, the Company began certain restructuring actions which included workforce reductions, and facility closures. During the three-month periods ended June 30, 2016,closures, and 2015, the Company did not record any expenses for those actions. During the six-month period ended June 30, 2016, the Company recorded $0.3 million of pre-tax expense related to facility consolidations. For the six-month period ended June 30, 2015, the Company recorded $6.0 million of pre-tax expense relating to workforce reductions and $0.3 million 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 $0.5 million and $2.4 million for the six months ended June 30, 2016 and 2015. As of June 30, 2016, the Company has accrued liabilities for these actions of $1.4 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. Cash outlaysThe charges associated with these chargesactions were approximately $6.5 millionincluded in the six months ended June 30,“warehousing, marketing and administrative expenses.” These actions were substantially completed in 2016. As of June 30, 2016, the Company has
The expenses, cash flows, and accrued liabilities for theseassociated with the restructuring actions of $3.8 million.
5. Goodwill and Intangible Assets
The changes in the carrying amount of goodwilldescribed above are noted in the following table (in thousands):
Goodwill, balance as of December 31, 2015 | $ | 299,355 |
|
Purchase accounting adjustments |
| (1,858 | ) |
Currency translation adjustments |
| 977 |
|
Goodwill, balance as of June 30, 2016 | $ | 298,474 |
|
| Expenses |
|
| Cash flow |
|
| Accrued Liabilities |
| |||||||||||||||
| For the three months ended March 31, |
|
| For the three months ended March 31, |
|
| As of March 31, |
|
| As of December 31, |
| ||||||||||||
| 2017 |
|
| 2016 |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
| ||||||
Fourth quarter 2015 Action |
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Workforce reduction | $ | - |
|
| $ | - |
|
| $ | 316 |
|
| $ | 3,179 |
|
| $ | 1,108 |
|
| $ | 1,424 |
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First quarter 2015 Actions |
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Workforce reduction | $ | - |
|
| $ | - |
|
| $ | 94 |
|
| $ | 250 |
|
| $ | 664 |
|
| $ | 758 |
|
Facility closure |
| - |
|
|
| 254 |
|
|
| - |
|
|
| 385 |
|
|
| - |
|
|
| - |
|
Total | $ | - |
|
|
| 254 |
|
| $ | 94 |
|
| $ | 635 |
|
| $ | 664 |
|
| $ | 758 |
|
9
4. Goodwill and Intangible Assets
The Company tests goodwill for impairment annually as of October 1 and whenever triggering events or circumstances indicate that an impairment may have occurred, such as a significant adverse change in the business climate, loss of key personnel or a decision to sell or dispose of a reporting unit, among others. Determining whether an impairment has occurred requires a comparison of the carrying value of the net assets of the reporting unit to the fair value of the respective reporting unit.
During the quarter ended March 31, 2017, given a sustained decrease in the Company’s share price and related market capitalization, the Company determined that a triggering event had occurred for all of its reporting units, requiring an interim impairment test of goodwill. During this assessment, the Company determined that the carrying value of net assets for three of the four reporting units of the Company exceeded fair value. In consideration of the Company’s adoption of ASU 2017-04 (refer to Note 1 – “Basis of Presentation”) the Company recognized goodwill impairment of $198.8 million in aggregate based on the difference between the carrying value of net assets and fair value as determined based on the combination of prices and merger and acquisitions (“M&A”) transactions of comparable businesses and forecasted future discounted cash flows.
The carrying amount of goodwill by reporting unit and impairment recognized is noted in the table below (in thousands):
| Goodwill balance |
|
| For the three months ended March 31, 2017 |
|
| Goodwill balance |
| |||||||
| as of December 31, 2016 |
|
| Impairment |
|
| Currency translation adjustments |
|
| as of March 31, 2017 |
| ||||
Office & Facilities | $ | 224,683 |
|
| $ | (185,704 | ) |
| $ | - |
|
| $ | 38,979 |
|
Industrial |
| 13,067 |
|
|
| - |
|
| 11 |
|
|
| 13,078 |
| |
Automotive |
| 45,234 |
|
|
| (12,220 | ) |
| 122 |
|
|
| 33,136 |
| |
CPO |
| 14,922 |
|
|
| (904 | ) |
|
| - |
|
|
| 14,018 |
|
| $ | 297,906 |
|
| $ | (198,828 | ) |
| $ | 133 |
|
| $ | 99,211 |
|
Acquired intangible assets are initially recorded at their fair market values determined based on quoted market prices in active markets, if available, or recognized valuation models. The Company’s intangible assets have finite useful lives and are amortized on a straight-line basis over their useful lives.
The following table summarizes the intangible assets of the Company by major class of intangible assets and the cost, accumulated amortization, net carrying amount, and weighted average life, if applicable (in thousands):
| June 30, 2016 |
| December 31, 2015 | March 31, 2017 |
| December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
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| Weighted |
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| Weighted |
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| Weighted |
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| Weighted |
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| Average |
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| Average |
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| Average |
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| Average |
| Gross |
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| Net |
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| Useful |
| Gross |
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| Net |
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| Useful | Gross |
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| Net |
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| Useful |
| Gross |
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| Net |
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| Useful | ||||||||
| Carrying |
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| Accumulated |
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| Carrying |
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| Life |
| Carrying |
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| Accumulated |
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| Carrying |
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| Life | Carrying |
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| Accumulated |
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| Carrying |
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| Life |
| Carrying |
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| Accumulated |
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| Carrying |
|
| Life | ||||||||||||
| Amount |
|
| Amortization |
|
| Amount |
|
| (years) |
| Amount |
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| Amortization |
|
| Amount |
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| (years) | Amount |
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| Amortization |
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| Amount |
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| (years) |
| Amount |
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| Amortization |
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| Amount |
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| (years) | ||||||||||||
Intangible assets subject to amortization |
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Customer relationships and other intangibles | $ | 137,832 |
|
| $ | (56,839 | ) |
| $ | 80,993 |
|
| 16 |
| $ | 137,938 |
|
| $ | (51,357 | ) |
| $ | 86,581 |
|
| 16 | $ | 137,539 |
|
| $ | (64,970 | ) |
| $ | 72,569 |
|
| 16 |
| $ | 137,452 |
|
| $ | (62,235 | ) |
| $ | 75,217 |
|
| 16 |
Non-compete agreements |
| 4,655 |
|
|
| (4,260 | ) |
|
| 395 |
|
| 4 |
|
| 4,644 |
|
|
| (4,260 | ) |
|
| 384 |
|
| 4 |
| 4,651 |
|
|
| (4,260 | ) |
|
| 391 |
|
| 4 |
|
| 4,649 |
|
|
| (4,260 | ) |
|
| 389 |
|
| 4 |
Trademarks |
| 13,740 |
|
|
| (5,101 | ) |
|
| 8,639 |
|
| 14 |
|
| 13,688 |
|
|
| (4,240 | ) |
|
| 9,448 |
|
| 14 |
| 13,712 |
|
|
| (5,897 | ) |
|
| 7,815 |
|
| 14 |
|
| 13,704 |
|
|
| (5,620 | ) |
|
| 8,084 |
|
| 14 |
Total | $ | 156,227 |
|
| $ | (66,200 | ) |
| $ | 90,027 |
|
|
|
| $ | 156,270 |
|
| $ | (59,857 | ) |
| $ | 96,413 |
|
|
| $ | 155,902 |
|
| $ | (75,127 | ) |
| $ | 80,775 |
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|
| $ | 155,805 |
|
| $ | (72,115 | ) |
| $ | 83,690 |
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The following table summarizes the amortization expense to be incurred in 20162017 through 20202021 on intangible assets (in thousands):
Year |
| Amount |
|
| Amount |
| ||
2016 |
| $ | 12,247 |
| ||||
2017 |
|
| 10,810 |
|
| $ | 10,786 |
|
2018 |
|
| 8,065 |
|
|
| 8,045 |
|
2019 |
|
| 6,947 |
|
|
| 6,928 |
|
2020 |
|
| 6,944 |
|
|
| 6,925 |
|
2021 |
|
| 6,925 |
|
10
6.
5. Accumulated Other Comprehensive Income (Loss)
The change in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the period ended June 30, 2016March 31, 2017 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 | ) | ||||||||||||||||
AOCI, balance as of December 31, 2016 |
| $ | (8,439 | ) |
| $ | 172 |
|
| $ | (38,189 | ) |
| $ | (46,456 | ) | ||||||||||||||||
Other comprehensive (loss) income before reclassifications |
|
| 3,133 |
|
|
| (719 | ) |
|
| (633 | ) |
|
| 1,781 |
|
|
| 385 |
|
|
| (126 | ) |
|
| - |
|
|
| 259 |
|
Settlement loss reclassified from AOCI |
|
| - |
|
|
| - |
|
|
| 7,196 |
|
|
| 7,196 |
| ||||||||||||||||
Amounts reclassified from AOCI |
|
| - |
|
|
| 292 |
|
|
| 1,770 |
|
|
| 2,062 |
|
|
| - |
|
|
| 194 |
|
|
| 704 |
|
|
| 898 |
|
Net other comprehensive (loss) income |
|
| 3,133 |
|
|
| (427 | ) |
|
| 8,333 |
|
|
| 11,039 |
|
|
| 385 |
|
|
| 68 |
|
|
| 704 |
|
|
| 1,157 |
|
AOCI, balance as of June 30, 2016 |
| $ | (6,733 | ) |
| $ | (281 | ) |
| $ | (39,538 | ) |
| $ | (46,552 | ) | ||||||||||||||||
AOCI, balance as of March 31, 2017 |
| $ | (8,054 | ) |
| $ | 240 |
|
| $ | (37,485 | ) |
| $ | (45,299 | ) |
The following table details the amounts reclassified out of AOCI into the income statement during the three and six months ended June 30, 2016(inMarch 31, 2017 (in thousands):
|
| Amount Reclassified From AOCI |
|
|
|
| Amount Reclassified From AOCI |
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| ||||||
|
| For the Three |
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| For the Six |
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| For the Three |
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| ||||
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| Months Ended |
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| Months Ended |
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| Months Ended |
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| ||||
|
| June 30, |
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| June 30, |
|
| Affected Line Item In The Statement |
| March 31, |
|
| Affected Line Item In The Statement | ||||
Details About AOCI Components |
| 2016 |
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| 2016 |
|
| Where Net Income is Presented |
| 2017 |
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| Where Net Income is Presented | |||
Realized and unrealized gains (losses) on cash flow hedges |
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|
Gain on interest rate swap, before tax |
| $ | 266 |
|
| $ | 541 |
|
| Interest expense, net |
| $ | 317 |
|
| Interest expense, net | |
Gain on foreign exchange hedges, before tax |
|
| (159 | ) |
|
| (70 | ) |
| Cost of goods sold | |||||||
|
|
| (41 | ) |
|
| (179 | ) |
| Tax provision |
|
| (123 | ) |
| Tax provision | |
|
| $ | 66 |
|
| $ | 292 |
|
| Net of tax |
| $ | 194 |
|
| Net of tax | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Defined benefit pension plan items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Amortization of prior service cost and unrecognized loss |
| $ | 1,395 |
|
| $ | 2,888 |
|
| Warehousing, marketing and administrative expenses |
| $ | 1,134 |
|
| Warehousing, marketing and administrative expenses | |
Settlement loss |
|
| 11,744 |
|
|
| 11,744 |
|
| Defined benefit plan settlement loss | |||||||
|
|
| (5,093 | ) |
|
| (5,666 | ) |
| Tax provision |
|
| (430 | ) |
| Tax provision | |
|
|
| 8,046 |
|
|
| 8,966 |
|
| Net of tax |
|
| 704 |
|
| Net of tax | |
Total reclassifications for the period, net of tax |
| $ | 8,112 |
|
| $ | 9,258 |
|
|
|
| $ | 898 |
|
|
|
7.11
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 threethree-month periods ending March 31, 2017 and six months ended June 30, 2016, 0.2 and 0.3 million shares of such securities, respectively, were outstanding but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. An additional 0.2 million shares of common stock outstanding at March 31, 2017 were excluded from the computation of diluted earnings per share due to the net loss. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
| For the Three Months Ended |
|
| For the Six Months Ended |
| For the Three Months Ended |
| |||||||||||||||
| June 30, |
|
| June 30, |
| March 31, |
| |||||||||||||||
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| 2017 |
|
| 2016 |
| ||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 12,933 |
|
| $ | 29,834 |
|
| $ | 29,463 |
|
| $ | 23,827 |
| |||||||
Net (loss) income | $ | (188,593 | ) |
| $ | 16,530 |
| |||||||||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted average shares |
| 36,512 |
|
|
| 37,765 |
|
|
| 36,552 |
|
|
| 37,939 |
|
| 36,644 |
|
|
| 36,593 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and restricted stock |
| 398 |
|
|
| 341 |
|
|
| 345 |
|
|
| 378 |
|
| - |
|
|
| 282 |
|
Denominator for diluted earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares and the effect of dilutive securities |
| 36,910 |
|
|
| 38,106 |
|
|
| 36,897 |
|
|
| 38,317 |
|
| 36,644 |
|
|
| 36,875 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income per share - basic | $ | 0.35 |
|
| $ | 0.79 |
|
| $ | 0.81 |
|
| $ | 0.63 |
| |||||||
Net income per share - diluted | $ | 0.35 |
|
| $ | 0.78 |
|
| $ | 0.80 |
|
| $ | 0.62 |
| |||||||
Net (loss) income per share: |
|
|
|
|
|
|
| |||||||||||||||
Net (loss) income per share - basic | $ | (5.15 | ) |
| $ | 0.45 |
| |||||||||||||||
Net (loss) income per share - diluted (2) | $ | (5.15 | ) |
| $ | 0.45 |
|
(1) | The effect of dilutive securities for employee stock options and restricted stock in the quarter ended March 31, 2017 was affected by the adoption of ASU 2016-09 in the period. In accordance with the standard, the effect of dilutive securities in the calculation of diluted net income per share was applied prospectively and results for the quarter ended March 31, 2016 have not been revised. |
(2) | As a result of the net loss in the three months ended March 31, 2017, the effect of potentially dilutive securities would have been anti-dilutive and has been omitted from the calculation of diluted earnings per share. |
As of June 30, 2016March 31, 2017 , the Company had Board authorization to repurchase $68.2 million of common stock. During the three months ended June 30, 2016,March 31, 2017, the Company did not repurchase any shares of its common stock. For the same period in the prior year, the Company repurchased 378,462241,270 shares at an aggregate cost of $15.2$6.8 million. During the six months ended June 30, 2016 and 2015, the Company repurchased 241,270 and 781,141 shares of the Company’s common stock at an aggregate cost of $6.8 million and $31.5 million, respectively. Depending on the market and business conditions and other factors, the Company may continue or suspend purchasing its common stock at any time without notice. Acquired shares are included in the issued shares of the Company and treasury stock, but are not included in average shares outstanding when calculating earnings per share data. During the first sixthree months ofended March 31, 2017 and 2016, and 2015, the Company reissued 121,48915,945 and 150,807106,800 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.
8.7. 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, ECO, and from borrowings by ECO. The 20132017 Credit Agreement and the 2013 Note Purchase Agreement and the Receivables Securitization Program (each as defined in Note 11 – “Debt” of the Company’s2016 Form 10-K for the year ended December 31, 2015)and each a “Lending Agreement”) contain restrictions on the use of cash transferred from ECO to ESND.
Debt consisted
On February 22, 2017, ESND, ECO, ECO’s United States subsidiaries (ESND, ECO and the subsidiaries collectively referred to as the “Loan Parties”), JPMorgan Chase Bank, National Association, as Administrative Agent, and certain lenders entered into a Fifth Amended and Restated Revolving Credit Agreement (“2017 Credit Agreement”). The 2017 Credit Agreement amended and restated the Fourth Amended and Restated Five-Year Revolving Credit Agreement dated as of July 9, 2013 (as amended prior to February 22, 2017, the following amounts (in millions):“2013 Credit Agreement”). Also on February 22, 2017, ESND, ECO and the holders of ECO’s 3.75% senior secured notes due January 15, 2021, (the “Notes”) entered into Amendment No. 4 (“Amendment No. 4”) to the Note Purchase Agreement dated as of November 25, 2013, (as amended prior to February 22, 2017, the “2013 Note Purchase Agreement”).
| As of |
| As of |
| ||
| June 30, 2016 |
| December 31, 2015 |
| ||
|
|
|
|
|
|
|
2013 Credit Agreement | $ | 412.3 |
| $ | 368.4 |
|
2013 Note Purchase Agreement |
| 150.0 |
|
| 150.0 |
|
Receivables Securitization Program |
| 200.0 |
|
| 200.0 |
|
Mortgage & Capital Lease |
| 0.1 |
|
| 0.1 |
|
Transaction Costs |
| (1.8 | ) |
| (2.2 | ) |
Total | $ | 760.6 |
| $ | 716.3 |
|
As of June 30, 2016, 80.3% of the Company’s outstanding debt, excluding capital leases12
The 2017 Credit Agreement 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 $11.4 million and $11.6 million underAmendment No. 4 eliminated certain covenants in the 2013 Credit Agreement and the 2013 Note Purchase Agreement that prohibited the Company from exceeding a debt-to-EBITDA ratio of 3.5 to 1.0 (or 4.0 to 1.0 following certain permitted acquisitions) and restricted the Company’s ability to pay dividends and repurchase stock when the ratio was 3.0 to 1.0 or more. As a result, the Company is no longer subject to a debt-to-EBITDA ratio covenant.
Proceeds from the 2017 Credit Facility were used to repay the balances of the 2013 Credit Agreement and the Receivables Securitization Program (as defined below).
The 2017 Credit Agreement provides for a revolving credit facility (with an aggregated committed principal amount of $1.0 billion), a first-in-last-out (“FILO”) revolving credit facility (with an aggregated committed principal amount of $100 million) and a term loan (with an aggregated committed principal amount of $77.6 million). The term loan was funded in a single funding on March 24, 2017. Loans under the 2017 Credit Agreement must be extended to the Company first through the FILO facility. The 2017 Credit Agreement also provides for the issuance of up to $25.0 million of letters of credit, plus an additional $165.0 million letter of credit as of June 30, 2016 and December 31, 2015, respectively.collateral for the Company’s obligations under the 2013 Note Purchase Agreement.
Borrowings under the 20132017 Credit Agreement bear interest at LIBOR for specified interest periods, at the REVLIBOR30 Rate (as defined in the 2017 Credit Agreement) or at the Alternate Base Rate (as defined in the 20132017 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”).average quarterly revolving availability. Depending on the Company’s Leverage Ratio,average quarterly revolving availability, the margin on LIBOR-based loans and REVLIBOR30 Rate-based loans ranges from 1.00%1.25% to 1.75% for revolving and term loans and 2.00% to 2.50% for FILO loans, and on Alternate Base Rate loans ranges from 0.00%0.25% to 0.75% for revolving and term loans and 1.00%. As to 1.50% for FILO loans. From February 22, 2017 (the date of the 2017 Credit Agreement) to June 30, 2016,2017, the applicable margin for LIBOR-based loans was 2.00%and REVLIBOR30 Rate-based loans is 1.50% for revolving and term loans and 2.25% for FILO loans, and for Alternate Base Rate loans was 1.00%.is 0.50% for revolving and term loans and 1.25% for FILO loans. In addition, ECO is required to pay the lenders a commitment fee on the unutilized portion of the revolving and FILO commitments under the 20132017 Credit Agreement at a rate per annum between 0.15% and 0.35%, dependingequal to 0.25%. The Company can borrow up to $100.0 million of swingline revolving loans on a revolving basis; swingline loans are considered to be unutilized for purposes of the commitment fee. Letters of credit issued pursuant to the 2017 Credit Agreement incur interest based on the Company’s Leverage Ratio.applicable margin rate for LIBOR-based Loans, plus 0.125%. Unamortized deferred financing fees of $6.4 million are included within “Current maturities of long-term debt” and “Long-term debt” on the Condensed Consolidated Balance Sheets and will be amortized over the life of the agreements.
AsObligations of June 30, 2016ECO under the 2017 Credit Agreement are guaranteed by ESND and December 31, 2015, $532.5ECO’s domestic subsidiaries. ECO’s obligations under these agreements and the guarantors’ obligations under the guaranty are secured by liens on substantially all Company assets. Availability of credit under the revolving facility will be subject to a revolving borrowing base calculation comprised of a certain percentage of the eligible accounts receivable, plus a certain percentage of the inventory, less reserves. Similarly, availability under the FILO revolving credit facility is subject to a FILO borrowing base comprised primarily of 10% of the eligible accounts receivable, plus 10% multiplied by the net orderly liquidation value percentages of the eligible inventory, less reserves. The amount of the term loan of $77.6 million, was based on the value of the Company’s owned real estate and $448.6 million, respectively, of receivables had been soldcertain equipment. Beginning in April 2017, the Company will repay nominal principal amounts pursuant to the Investorsterms and conditions of the term loan, subject to acceleration under certain dispositions of the underlying collateral.
The 2017 Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, including covenants to deliver periodic certifications setting forth the revolving borrowing base and FILO borrowing base. As long as the Payment Conditions (as defined in Note 11the 2017 Credit Agreement) are satisfied, the Loan Parties may pay dividends, repurchase stock and engage in certain permitted acquisitions, investments and dispositions, in each case subject to the other terms and conditions of the Credit Agreement and the other loan documents.
If ECO elects to prepay some or all of the Notes prior to January 15, 2021, and in some circumstances if ECO is required to prepay the Notes, ECO will be obligated to pay a make-whole amount as set forth in the Agreement and Amendment No. 4. The Company’s Form 10-K for the year ended December 31, 2015). Essendant Receivables LLC had $200.0 million outstandingobligations under the 2013 Note Purchase Agreement and Amendment No. 4 are secured by a $165.0 million letter of credit issued under the 2017 Credit Agreement.
The Company’s accounts receivable securitization program (“Receivables Securitization Program” or the “Program”) was terminated when the Company entered into the 2017 Credit Agreement. The Program asprovided maximum financing of June 30, 2016up to $200 million secured by all the customer accounts receivable and December 31, 2015.related rights originated by ECO.
13
Debt consisted of the following amounts (in millions):
| As of |
| As of |
| ||
| March 31, 2017 |
| December 31, 2016 |
| ||
|
|
|
|
|
|
|
2017 Credit Agreement |
|
|
|
|
|
|
Term Loan | $ | 77.6 |
| $ | - |
|
Revolving Credit Facility |
| 250.2 |
|
| - |
|
FILO Facility |
| 100.0 |
|
| - |
|
2013 Credit Agreement |
| - |
|
| 260.4 |
|
2013 Note Purchase Agreement |
| 150.0 |
|
| 150.0 |
|
Receivables Securitization Program |
| - |
|
| 200.0 |
|
Mortgage & Capital Lease |
| 0.1 |
|
| 0.1 |
|
Transaction Costs |
| (6.4 | ) |
| (1.5 | ) |
Total | $ | 571.5 |
| $ | 609.0 |
|
Interest under the 2013 Note Purchase Agreement is payable semi-annually at a rate per annum equal to 3.75% (3.66% after the effect of terminating an interest rate swap).
For additional information about the 20132017 Credit Agreement and the 2013 Note Purchase Agreement, and the Receivables Securitization Program, see Note 11 of– “Debt” to the Company’s Consolidated Financial Statements in the 2016 Form 10-K for the year ended December 31, 2015.10-K.
9.8. 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 – “Pension Plans and Defined Contribution Plan” to the Company’s Consolidated Financial Statements in the 2016 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 and six months ended June 30,March 31, 2017 and 2016 and 2015 was as follows (dollars in thousands):
| For the Three Months Ended June 30, |
|
| For the Six Months Ended June 30, |
| For the Three Months Ended March 31, |
| |||||||||||||||
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| 2017 |
|
| 2016 |
| ||||||
Service cost - benefit earned during the period | $ | 317 |
|
| $ | 400 |
|
| $ | 634 |
|
| $ | 800 |
| $ | 321 |
|
| $ | 317 |
|
Interest cost on projected benefit obligation |
| 2,173 |
|
|
| 2,270 |
|
| $ | 4,516 |
|
|
| 4,540 |
|
| 1,862 |
|
|
| 2,343 |
|
Expected return on plan assets |
| (2,547 | ) |
|
| (2,805 | ) |
| $ | (5,265 | ) |
|
| (5,610 | ) |
| (2,272 | ) |
|
| (2,718 | ) |
Amortization of prior service cost |
| 74 |
|
|
| 75 |
|
| $ | 148 |
|
|
| 150 |
|
| 72 |
|
|
| 74 |
|
Amortization of actuarial loss |
| 1,321 |
|
|
| 1,450 |
|
| $ | 2,740 |
|
|
| 2,900 |
|
| 1,062 |
|
|
| 1,419 |
|
Settlement loss |
| 11,744 |
|
|
| - |
|
|
| 11,744 |
|
|
| - |
| |||||||
Net periodic pension cost | $ | 13,082 |
|
| $ | 1,390 |
|
| $ | 14,517 |
|
| $ | 2,780 |
| $ | 1,045 |
|
| $ | 1,435 |
|
The Company made cash contributions of $10.0 million in April 2017 and $2.0$10.0 million during the three months ended March 31, 2016 to its pension plans during the six months ended June 30, 2016 and 2015, respectively.plans. Additional contributions, if any, for 20162017 have not yet been determined. As of June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively, the Company had accrued $39.4$40.1 million and $48.4$40.2 million of pension liability within “Other long-term liabilities” on the Condensed Consolidated Balance Sheets.
In order to reduce interest rate, mortality and investment risks, the Company commenced a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants. Due to this offering, a settlement and remeasurement of the Essendant Pension Plan was required as of May 31, 2016. The impact of the remeasurement and activity in the first five months of 2016 resulted in a $6.5 million improvement to the net funded status of the plan, therefore reducing other long-term liabilities. As of June 30, 2016, shareholders’ equity improved $0.9 million related to the unrecognized actuarial loss, included as a component of Accumulated Other Comprehensive Income, being reduced by $12.6 million as compared to December 31, 2015, partly offset by the settlement causing a loss of $11.7 million. As a result, the pension plan trust paid $37.6 million in lump sum payments during the first five months of 2016 and as part of this offer. 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 $1.9 million and $3.7$1.8 million, respectively, for the Company match of employee contributions to the Plan for the three and six months ended June 30, 2016. During the same periods last year, the Company recorded expense of $1.5 millionMarch 31, 2017 and $2.9 million to match employee contributions.2016, respectively.
10. Derivative Financial Instruments
14
The Company selectively uses derivativemeasures certain financial instruments to reduce its exposure to changes in interest ratesassets 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 intoliabilities, including an interest rate swap, to convertat fair value on a portionrecurring basis, based on market rates of the Company’s floating-rate debt to a fixed-rate basis.positions and other observable interest rates. 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 that the Company would pay for contracts involving the same notional amount and maturity date. The changes in fair value of this instrument are reported in AOCI and reclassified into earnings in interest expense in the same periods during which the related interest payments on the hedged debt affect earnings. This swap matures in July 2017.As of June 30, 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 million and $0.5 million respectively.
The Company maintains a foreign currency cash flow hedge program in order to manage the volatility in exchange rates and the related impacts on the operations of its Canadian functional currency subsidiaries. The Company uses foreign currency exchange contracts to hedge certain of its foreign exchange rate exposures related to inventory purchases. The Company has currently hedged approximately 25%, or $2.4 million, of its Canadian subsidiaries’ US dollar denominated inventory purchases for the next quarter. 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 June 30, 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” and “Other Current Assets” totaling $0.01 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 and six months ended June 30, 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 June 30, 2016 |
|
| For the Six Months Ended June 30, 2016 |
|
| Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| For the Three Months Ended June 30, 2016 |
|
| For the Six Months Ended June 30, 2016 |
| ||||
Interest Rate Swap | $ | 161 |
|
| $ | 40 |
|
| Interest expense, net |
| $ | 233 |
|
| $ | 475 |
|
Foreign Exchange Hedges |
| (154 | ) |
|
| (184 | ) |
| Cost of goods sold |
|
| (159 | ) |
|
| (70 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 Cash Flow Hedging Relationships | For the Three Months Ended June 30, 2015 |
|
| For the Six Months Ended June 30, 2015 |
|
| Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| For the Three Months Ended June 30, 2015 |
|
| For the Six Months Ended June 30, 2015 |
| ||||
Interest Rate Swap | $ | 441 |
|
| $ | 43 |
|
| Interest expense, net |
| $ | 331 |
|
| $ | 662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. 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 10 “Derivative Financial Instruments”, for more information on these interest rate swaps and foreign currency derivatives).
Accounting guidance on fair value establishes a hierarchy for those instruments measured at fair value which distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
|
|
Level 1—Quoted market prices in active markets for identical assets or liabilities;
|
|
Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable; and
|
|
Level 3—Unobservable inputs developed using estimates and assumptions developed by the Company which reflect those that a market participant would use.
Determining which level to apply to an asset or liability requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2016March 31, 2017 and December 31, 20152016 (in thousands):
| Fair Value Measurements as of June 30, 2016 |
| |||||||||||||
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| |||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange hedges | $ | 73 |
|
| $ | - |
|
| $ | 73 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap | $ | 904 |
|
| $ | - |
|
| $ | 904 |
|
| $ | - |
|
Foreign exchange hedges |
| 40 |
|
|
| - |
|
|
| 40 |
|
|
| - |
|
| $ | 944 |
|
| $ | - |
|
| $ | 944 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements as of December 31, 2015 |
| |||||||||||||
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| |||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange hedges | $ | 91 |
|
| $ | - |
|
| $ | 91 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap | $ | 469 |
|
| $ | - |
|
| $ | 469 |
|
| $ | - |
|
| Fair Value Measurements |
| |||||||||||||
|
|
|
|
| Quoted Market Prices in Active Markets for Identical Assets or Liabilities |
|
| Significant Other Observable Inputs |
|
| Significant Unobservable Inputs |
| |||
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- as of March 31, 2017 | $ | 28 |
|
| $ | - |
|
| $ | 28 |
|
| $ | - |
|
- as of December 31, 2016 | $ | 205 |
|
| $ | - |
|
| $ | 205 |
|
| $ | - |
|
The carrying amount of accounts receivable at June 30, 2016, including $532.5 million of receivables sold under the Receivables Securitization Program,March 31, 2017, approximates fair value because of the short-term nature of this item.
NoOther than the measurement of goodwill at fair value as a result of the impairment as discussed in Note 4 – “Goodwill and Intangible Assets”, as of March 31, 2017, no assets or liabilities were measured at fair value on a nonrecurring basis.
12.10. Other Assets and Liabilities
Receivables related to supplier allowances totaling $106.6$82.1 million and $111.0$86.9 million were included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively.
Current and non-current prepaid customer rebates, net of allowances, were $55.6 million and $47.9 million as of March 31, 2017 and December 31, 2016, respectively, and are included as a component of “Other current assets” and “Other assets”. Accrued customer rebates of $59.2$46.1 million and $63.6$65.3 million as of June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively, were included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items.
For the three and six months ended June 30,March 31, 2017, the Company recorded income tax benefit of $4.3 million on pre-tax loss of $192.9 million, for an effective tax rate of 2.2%. For the three months ended March 31, 2016, the Company recorded income tax expense of $7.8 million and $17.8$10.0 million on pre-tax income of $20.8 million and $47.3$26.5 million, for an effective tax rate of 37.8% and 37.7%, respectively. For37.6%. In the three and six monthsquarter ended June 30, 2015,March 31, 2017, the Company recorded incomeadopted ASU 2016-09 which resulted in $0.3 million of incremental tax expense recognized due to excess tax deficiencies of $18.6 million and $22.6 million on pre-tax incomevested or settled awards in the period. The adoption of $48.4 million and $46.4 million, for an effective tax rate of 38.4% and 48.7%, respectively.the standard was applied prospectively in accordance with guidance.
The Company’s U.S. statutory rate is 35.0%.There. The most significant factor impacting the effective tax rate for the three months ended March 31, 2017 was the discrete impact of the goodwill impairment charges. There were no significant discrete items impacting the effective tax rate for the sixthree months ended June 30,March 31, 2016. The most significant factor impacting the effective tax rate for the six months ended June 30, 2015 was the discrete impact of the impairment charges for financial reporting purposes related to placing a non-strategic business for sale in the first quarter of 2015.
15
14.
12. 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 andsubsequently 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. InThe two lawsuits have since been consolidated for discovery, and assigned to the same judge. Plaintiffs in both lawsuits the plaintiffs filed a motion asking the Court to certifyseek certification of 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 the pending claims is probable. However,As of the amount of any such loss, which could be material, cannot be reasonably estimated becauseyear ended December 31, 2016, the Company is continuingrecorded a $4.0 million, pre-tax reserve within “warehousing, marketing and administrative expenses” in the consolidated statement of operations. During the quarter ended March 31, 2017, the Company recorded an additional $6.0 million, pre-tax reserve to reflect recent events concerning mediation activities and settlement negotiations between the Company and the plaintiffs for a total reserve at March 31, 2017 of $10.0 million. The Company continues to evaluate its defenses based on its internal review and investigation of prior events, new information and future circumstances. Final disposition of the lawsuits, whether through settlement or through trial, may result in a loss materially in excess of the aggregate recorded amount. However, a range of reasonably possible excess losses is not estimable at this time.
The Company has been named in a lawsuit filed by a former employee in the Los Angeles Superior Court on February 17, 2017. The complaint alleges violations by the Company of California’s wage and hour, overtime, meal break and rest break rules and regulations, among other things. The complaint seeks class certification, the appointment of the plaintiff as class representative, and an unspecified amount of damages and penalties. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. The parties have issued discovery requests but have not yet produced discovery, no amounts have been accrued by the Company as of the date of this report. Depending on the actual outcome of this case, provisions could be recorded in the future which could have a material, adverse effect on the Company’s operating results.
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.operations or cash flows.
16
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements often contain words such as “expects,” “anticipates,” “estimates,” “intends,” “plans,” “believes,” “seeks,” “will,” “is likely,” “scheduled,” “positioned to,” “continue,” “forecast,” “predicting,” “projection,” “potential” or similar expressions. Forward-looking statements include references to goals, plans, strategies, objectives, projected costs or savings, anticipated future performance, results or events and other statements that are not strictly historical in nature. These forward-looking statements are based on management’s current expectations, forecasts and assumptions. This means they involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied here. These risks and uncertainties include, without limitation, those set forth in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2015 and in Item 1A. “Risk Factors” in this Quarterly Report on2016 (the “2016 Form 10-Q.10-K”).
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, with 2016 net sales of approximately $5.4 billion. Essendant Inc. sells over 190,000 items including janitorial, foodservice and breakroom supplies (“JanSan”), technology products, traditional office products, industrial supplies, cut sheet paper products, automotive products and office furniture, janitorial, sanitation and breakroom supplies, technology products, industrial supplies, and automotive aftermarket tools and equipment.furniture. These items include a broad spectrum of manufacturer-brandedbrand-name and private brandedEssendant brand products. Essendant sells through a network of 7170 distribution centers to approximately 30,00029,000 reseller customers, who in turn sell directly to end consumers.customers. They include office and workplace dealers; facilities and maintenance distributors, technology, military, automotive aftermarket, national big-box retailers and healthcare and vertical suppliers; industrial distributors and internet retailers. The Company also operates CPO Commerce which sells tools, and do-it-yourself equipment and other items online to the consumer market.
Our strategy is comprised
The Company has begun implementing six actions to improve the value of three key strategic pillars:our business, which include:
|
Merchandising excellence through supplier negotiation to reduce cost of goods sold, driving Essendant brand strategies and assortment optimization to increase profitability. Alignment of pricing with cost to serve through the standardization of contracts and reevaluation of pricing. Stabilization of the JanSan sales channel by improving the customer experience and comprehensive sales, marketing and care programs to regain lost sales. Industrial growth through continued diversification and leveraging of the product set to a broader customer base and |
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Essendant will focus on the following five key objectives over the next two years:online and governmental growth initiatives.
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Additional cost reductions through network optimization, productivity improvements and in-bound freight management activities.
Reduce working capital through reductions in inventory and continued debt reductions through free cash flow generation. |
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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.
The following is a summary
Actions impacting comparability of selected trends, events or uncertainties thatresults (the “Actions”)
In the first quarter of 2017, the Company believes may haverecognized a charge of $198.8 million related to the impairment of the Company’s goodwill as a result of sustained share price declines. Refer to Note 4 – “Goodwill and Intangible Assets” for further details.
In the first quarter of 2017, the Company recognized an additional accrual of $6.0 million related to ongoing Telephone Consumer Protection Act of 1991 (“TCPA”) litigation. Refer to Note 12 – “Legal Matters” for further details.
In the first quarter of 2017, the Company incurred $3.0 million related to transformational consultancy expenses associated with the implementation of strategic objectives to improve the value of the business. These expenses, which result from the changing strategies of the Company, included consulting fees and other activities for which the Company has had significant impact on its future performance.investment.
Second Quarter Results
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|
In the first quarter of 2016, the Company incurred restructuring charges of $0.3 million related to the 2015 actions to improve operational utilization, labor spend, inventory performance and functional alignment of the organization. Refer to Note 3 – “Severance and Restructuring Charges.” |
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Repositioning Actions17
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Margin Enhancement, Cost ReductionFirst Quarter Results
Diluted loss per share for the first quarter of 2017 of $(5.15) decreased from diluted earnings per share of $0.45 in the prior year quarter, including the impacts of the Company’s Actions impacting comparability of results (collectively, the “Actions”) discussed above. Adjusted diluted earnings per share were $0.25 compared with $0.45 in the prior-year quarter and Improveda loss of $(0.02) per share in the prior quarter. As expected throughout 2017, adjusted diluted earnings per share improved sequentially from the fourth quarter 2016. 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.
The company continuesFirst quarter net sales decreased 6.1% or $82.9 million, from the prior-year quarter to reposition$1.3 billion.
Gross margin as a percentage of net sales in the businessfirst quarter of 2017 was 14.6% versus 14.8% in the prior-year quarter. Gross margin for continued success despite marketplace headwinds, which includesthe first quarter of 2017 was $185.7 million, compared to $200.1 million in the first quarter of 2016.
Operating expenses in the first quarter of 2017 were $371.9 million or 29.3% of net sales, compared with $167.7 million or 12.4% of net sales in the prior-year quarter, including impacts of the Actions. Adjusted operating expenses in the first quarter of 2017 were $164.1 million or 12.9% of net sales compared to $167.4 million or 12.4% of net sales in the prior-year quarter.
Operating loss for the quarter ended March 31, 2017 was $(186.2) million or (14.7%) of net sales, compared with operating income of $32.4 million or 2.4% of net sales in the prior year quarter, including impacts of the Actions discussed above. Excluding the Actions, adjusted operating income in the first quarter of 2017 was $21.6 million or 1.7% of net sales, as compared to $32.7 million or 2.4% of net sales in the first quarter of 2016.
In the three months ended March 2017, the Company replaced two of its existing financing agreements with a plannew credit agreement and term loan arrangement to accelerate efforts to advance our strategy, improve margins and reduce costs,provide enhanced liquidity and increase debt availability.
Cash flows provided by operating activities for the three months ended March 31, 2017 were $53.0 million versus cash flows used in operating activities of $10.8 million in the prior year quarter, due primarily to decreased accounts receivable and inventories. Cash used in financing activities for the three months ended March 31, 2017 increased to $43.4 million versus cash flows provided by financing activities of $25.6 million in the prior year quarter due primarily to impacts of the financing agreements entered during the first quarter (see Note 7 – “Debt”), respectively. Free cash flow generated in the second halfthree months ended March 31, 2017 was $44.7 million as compared to free cash flow usage of 2016. The plan involves a number of actions including pricing that better aligns to our cost to serve, merchandising excellence, continued reduction in discretionary expenses, a plan to reduce distribution center footprint, further simplification of the organization and lower fixed cost structure, as well as significant inventory reduction driven by lower purchasing levels.
The actions are designed to improve the run-rate financial performance of the company and are reflected$(20.4) million in the updated guidance.
The Company updated its outlook regarding 2016, and currently expects the following:
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The guidance above excludes a $0.20 per share charge relatedprior year due primarily to a defined benefit pension plan settlement (Note 9) and workforce reduction and facility consolidation, and excludes any acquisitions or unusual charges that may occurreduced inventory balances. Free cash flow is expected to be in the remainderrange of fiscal year 2016.$50 million to $70 million in 2017.
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 on2016 Form 10-K for the year-ended December 31, 2015.10-K.
Critical Accounting Policies, Judgments and Estimates
In the secondfirst quarter of 2016,2017, there were no significant changes to the Company’s critical accounting policies, judgments or estimates from those disclosed in the Company’s Annual Report on2016 Form 10-K for the year ended December 31, 2015.10-K.
18
Adjusted Operating Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share
The following table presents Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, and Adjusted Diluted Earnings Per Share for the three and six months ended June 30, 2016 and 2015 (in thousands, except per share data), excluding the effects of the pre-tax charges related to the defined benefit plan settlement charge, workforce reduction and facility consolidations, intangible asset impairment charge and accelerated amortization related to rebranding and asset held for sale impairment. Generally Accepted Accounting Principles require that the effects of these items be included in the Condensed Consolidated Statements of Income. Management believes that excluding these items is an appropriate comparison of its ongoing operating results and to the results of last year. It is helpful to provide readers of its financial statements with a reconciliation of these items to its Condensed Consolidated Statements of Income reported in accordance with Generally Accepted Accounting Principles.
| For the Three Months Ended June 30, |
| |||||
| 2016 |
|
| 2015 (Revised)* |
| ||
|
|
|
|
|
|
|
|
Operating expenses | $ | 169,369 |
|
| $ | 156,912 |
|
Defined benefit plan settlement charge |
| (11,744 | ) |
|
| - |
|
Workforce reduction and facility consolidations |
| - |
|
|
| 138 |
|
Intangible asset impairment charge and accelerated amortization related to rebranding |
| - |
|
|
| (512 | ) |
Asset held for sale impairment |
| - |
|
|
| (1,361 | ) |
Adjusted operating expenses | $ | 157,625 |
|
| $ | 155,177 |
|
|
|
|
|
|
|
|
|
Operating income | $ | 26,454 |
|
| $ | 53,207 |
|
Operating expense items noted above |
| 11,744 |
|
|
| 1,735 |
|
Adjusted operating income | $ | 38,198 |
|
| $ | 54,942 |
|
Depreciation and amortization | $ | 9,966 |
|
| $ | 10,221 |
|
Equity compensation |
| 2,778 |
|
|
| 628 |
|
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) | $ | 50,942 |
|
| $ | 65,791 |
|
|
|
|
|
|
|
|
|
Net income | $ | 12,933 |
|
| $ | 29,834 |
|
Operating expense items noted above, net of tax |
| 7,328 |
|
|
| 942 |
|
Adjusted net income | $ | 20,261 |
|
| $ | 30,776 |
|
|
|
|
|
|
|
|
|
Diluted net income per share | $ | 0.35 |
|
| $ | 0.78 |
|
Per share operating expense items noted above |
| 0.20 |
|
|
| 0.03 |
|
Adjusted diluted net income per share | $ | 0.55 |
|
| $ | 0.81 |
|
| For the Six Months Ended June 30, |
| |||||
| 2016 |
|
| 2015 (Revised)* |
| ||
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|
|
|
|
|
|
|
Operating expenses | $ | 337,047 |
|
| $ | 354,493 |
|
Defined benefit plan settlement charge |
| (11,744 | ) |
|
| - |
|
Workforce reduction and facility consolidations |
| (254 | ) |
|
| (6,295 | ) |
Intangible asset impairment charge and accelerated amortization related to rebranding |
| - |
|
|
| (10,975 | ) |
Asset held for sale impairment |
| - |
|
|
| (14,927 | ) |
Adjusted operating expenses | $ | 325,049 |
|
| $ | 322,296 |
|
|
|
|
|
|
|
|
|
Operating income | $ | 58,858 |
|
| $ | 56,021 |
|
Operating expense items noted above |
| 11,998 |
|
|
| 32,197 |
|
Adjusted operating income | $ | 70,856 |
|
| $ | 88,218 |
|
Depreciation and amortization | $ | 20,454 |
|
| $ | 20,932 |
|
Equity compensation |
| 5,689 |
|
|
| 3,268 |
|
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) | $ | 96,999 |
|
| $ | 112,418 |
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|
|
|
|
|
|
|
|
Net income | $ | 29,463 |
|
| $ | 23,827 |
|
Operating expense items noted above, net of tax |
| 7,480 |
|
|
| 24,837 |
|
Adjusted net income | $ | 36,943 |
|
| $ | 48,664 |
|
|
|
|
|
|
|
|
|
Diluted net income per share | $ | 0.80 |
|
| $ | 0.62 |
|
Per share operating expense items noted above |
| 0.20 |
|
|
| 0.65 |
|
Adjusted diluted net income per share | $ | 1.00 |
|
| $ | 1.27 |
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities | $ | (15,984 | ) |
| $ | 120,848 |
|
Net cash used in investing activities |
| (16,557 | ) |
|
| (12,445 | ) |
Less: Acquisition, net of cash acquired |
| - |
|
|
| 532 |
|
Free cash flow | $ | (32,541 | ) |
| $ | 108,935 |
|
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|
|
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|
|
Results of Operations—Three Months Ended June 30, 2016March 31, 2017 Compared with the Three Months Ended June 30, 2015March 31, 2016
Net Sales. Net sales for the second quarter of 2016 were $1.35 billion. The following table summarizes net sales by product category forpresents the three-month periods ended June 30, 2016 and 2015Condensed Consolidated Statements of Income results (in thousands):
| For the Three Months Ended June 30, |
| For the Three Months Ended March 31, |
| ||||||||||||||||||
| 2016 |
|
| 2015 (1) |
| 2017 |
|
| 2016 (1) |
| ||||||||||||
Janitorial and breakroom supplies (JanSan) | $ | 366,671 |
|
| $ | 370,032 |
| |||||||||||||||
| Amount |
|
| % of Revenue |
|
| Amount |
|
| % of Revenue |
| |||||||||||
Net sales: (1) |
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|
|
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|
|
|
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|
|
|
|
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| |||||||
Janitorial, foodservice and breakroom supplies (JanSan) | $ | 334,375 |
|
|
| 26.3 | % |
| $ | 365,523 |
|
|
| 27.0 | % | |||||||
Technology products |
| 341,408 |
|
|
| 349,184 |
|
| 306,356 |
|
|
| 24.1 | % |
|
| 351,999 |
|
|
| 26.0 | % |
Traditional office products (including cut-sheet paper) |
| 309,496 |
|
|
| 293,160 |
| |||||||||||||||
Traditional office products |
| 193,988 |
|
|
| 15.3 | % |
|
| 212,331 |
|
|
| 15.7 | % | |||||||
Industrial supplies |
| 144,458 |
|
|
| 150,663 |
|
| 146,741 |
|
|
| 11.6 | % |
|
| 139,486 |
|
|
| 10.3 | % |
Cut sheet paper |
| 102,018 |
|
|
| 8.0 | % |
|
| 91,436 |
|
|
| 6.8 | % | |||||||
Automotive |
| 80,550 |
|
|
| 63,997 |
|
| 78,806 |
|
|
| 6.2 | % |
|
| 79,408 |
|
|
| 5.9 | % |
Office furniture |
| 74,078 |
|
|
| 78,298 |
|
| 70,128 |
|
|
| 5.5 | % |
|
| 74,702 |
|
|
| 5.5 | % |
Freight revenue |
| 32,361 |
|
|
| 30,299 |
| |||||||||||||||
Services, Advertising and Other |
| 5,501 |
|
|
| 6,166 |
| |||||||||||||||
Freight and other |
| 36,971 |
|
|
| 3.0 | % |
|
| 37,411 |
|
|
| 2.8 | % | |||||||
Total net sales | $ | 1,354,523 |
|
| $ | 1,341,799 |
|
| 1,269,383 |
|
|
| 100.0 | % |
|
| 1,352,296 |
|
|
| 100.0 | % |
Cost of goods sold |
| 1,083,715 |
|
|
| 85.4 | % |
|
| 1,152,214 |
|
|
| 85.2 | % | |||||||
Total gross profit | $ | 185,668 |
|
|
| 14.6 | % |
| $ | 200,082 |
|
|
| 14.8 | % | |||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Warehousing, marketing and administrative expenses |
| 173,022 |
|
|
| 13.6 | % |
|
| 167,678 |
|
|
| 12.4 | % | |||||||
Impairment of goodwill |
| 198,828 |
|
|
| 15.7 | % |
|
| - |
|
|
| 0.0 | % | |||||||
Total operating expenses | $ | 371,850 |
|
|
| 29.3 | % |
| $ | 167,678 |
|
|
| 12.4 | % | |||||||
Total operating income |
| (186,182 | ) |
|
| (14.7 | %) |
|
| 32,404 |
|
|
| 2.4 | % | |||||||
Interest expense, net |
| 6,739 |
|
|
| 0.5 | % |
|
| 5,897 |
|
|
| 0.4 | % | |||||||
Income before income taxes |
| (192,921 | ) |
|
| (15.2 | %) |
|
| 26,507 |
|
|
| 2.0 | % | |||||||
Income tax (benefit) expense |
| (4,328 | ) |
|
| (0.3 | %) |
|
| 9,977 |
|
|
| 0.7 | % | |||||||
Net income (loss) | $ | (188,593 | ) |
|
| (14.9 | %) |
| $ | 16,530 |
|
|
| 1.2 | % |
|
|
Net sales in the janitorial and breakroom supplies (JanSan) product category decreased 0.9% in the second quarter of 2016 compared to the second quarter of 2015. This category accounted for 27.1% of the Company’s second quarter 2016 consolidated net sales. Sales in this category declined due to lower volumes in independent dealer channels.
Net sales in the technology products category (primarily ink and toner) decreased 2.2% from the second quarter of 2015. This category accounted for 25.2% of net sales for the second quarter of 2016. Excluding our Mexican subsidiary, which was sold in the third quarter of 2015, net sales in this category increased 3.3% compared to the prior year quarter, which was driven by sales to new customers.
Net sales of traditional office products increased in the second quarter of 2016 by 5.6% versus the second quarter of 2015. Traditional office supplies represented 22.8% of the Company’s consolidated net sales for the second quarter of 2016. The sales increase was driven by increases in cut-sheet paper sales and higher government spending.
Industrial supplies net sales in the second quarter of 2016 decreased by 4.1% compared to the same prior-year period. Net sales of industrial supplies accounted for 10.7% of the Company’s net sales for the second quarter of 2016. The decline in industrial supplies net sales was primarily due to challenges in the oilfield sector and macro-economic environment. This decline was partially offset by growth in retail channel sales.
Automotive net sales in the second quarter of 2016 increased 25.9% compared to the second quarter of 2015. Automotive net sales represented 5.9% of the Company’s second quarter of 2016 net sales. This increase was due to the acquisition of Nestor which contributed $18.2 million in net sales.
Office furniture net sales in the second quarter of 2016 decreased 5.4% compared to the second quarter of 2015. Office furniture accounted for 5.5% of the Company’s second quarter of 2016 consolidated net sales. This decline was due to declines in sales in national accounts.
The remainder of the Company’s second quarter 2016 net sales was composed of freight and other revenues.
Gross Profit and Gross Margin Rate. Gross profit for the second quarter of 2016 was $195.8 million, compared to $210.1 million in the second quarter of 2015. The gross margin rate of 14.5% was down 120 basis points (bps) from the prior-year quarter gross margin rate of 15.7%. Our gross margin declined primarily due to customer and product mix, as we experienced margin pressure resulting from a shift in customer mix to lower margin customers and product mix to lower margin products, and higher freight (14 bps).
Operating Expenses. Operating expenses for the second quarter of 2016 were $169.4 million or 12.5% of net sales, compared to $156.9 million or 11.7% of net sales in the prior year. The $12.5 million increase was driven by the pension settlement charge of $11.7 million discussed in Note 9. Adjusted operating expenses were $157.6 million or 11.6% of net sales compared with $155.2 million or 11.6% of net sales in the same period last year. The Company expects to spend between $10 million and $15 million on the common platform project in 2016.
Interest Expense, net. Interest expense, net for the second quarter of 2016 was $5.7 million compared to $4.8 million in the second quarter of 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 $7.8 million for the second quarter of 2016, compared with $18.6 million for the same period in 2015. The Company’s effective tax rate was 37.8% for the current-year quarter and 38.4% for the same period in 2015.
Net Income. Net income for the second quarter of 2016 totaled $12.9 million or $0.35 per diluted share, compared to $29.8 million or $0.78 per diluted share in the prior year. Adjusted net income was $20.3 million, or $0.55 per diluted share, compared with adjusted net income of $30.8 million or $0.81 per diluted share for the same three-month period in 2015.
Results of Operations—Six Months Ended June 30, 2016 Compared with the Six Months Ended June 30, 2015
Net Sales. Net sales for the six-month period ended June 30, 2016 were $2.71 billion. The following table summarizes net sales by product category for the six months ended June 30, 2016 and 2015 (in thousands):
| For the Six Months Ended June 30, |
| |||||
| 2016 |
|
| 2015 (1) |
| ||
Janitorial and breakroom supplies | $ | 728,674 |
|
| $ | 728,454 |
|
Technology products |
| 692,469 |
|
|
| 702,223 |
|
Traditional office products (including cut-sheet paper) |
| 617,558 |
|
|
| 589,327 |
|
Industrial supplies |
| 284,761 |
|
|
| 300,105 |
|
Automotive |
| 159,958 |
|
|
| 124,238 |
|
Office furniture |
| 148,128 |
|
|
| 156,257 |
|
Freight revenue |
| 65,562 |
|
|
| 62,258 |
|
Services, Advertising and Other |
| 9,709 |
|
|
| 11,312 |
|
Total net sales | $ | 2,706,819 |
|
| $ | 2,674,174 |
|
(1) | Certain prior period amounts have been reclassified to conform to the current presentation. Such changes include reclassification of specific products to different product categories and did not impact the Condensed Consolidated Statements of Income. All percentage presentations described below are based on the reclassified amounts. |
Sales
Net Sales. Net sales for the quarter ended March 31, 2017 were $1.3 billion, a 6.1% decrease from $1.4 billion in sales during the janitorial and breakroom suppliesquarter ended March 31, 2016. Full year 2017 net sales are expected to be flat to down 4% compared to 2016. Net sales by key product category for the quarters included the following:
JanSan sales decreased $31.1 million or 8.5% in the first six monthsquarter of 2016 were comparable2017 compared to the first six monthsquarter of 2015. This category accounted for 26.9%2016. Sales decreased due to declines in national big-box retailers of the Company’s first six months$20.3 million, independent distributor channel of 2016 consolidated net sales.
Sales$10.2 million and internet retailers sales of $1.5 million. As a percentage of total sales, JanSan represented 26.3% in the technologyfirst quarter of 2017, a decrease from the prior year quarter percentage of total sales of 27.0%.
Technology products category (primarily ink and toner) sales decreased $45.6 million or 13.0% from the first quarter of 2016. Sales in this category decreased primarily as a result of reduced supplier promotions in low-margin ink and toner sales in the independent dealer channel of $44.7 million as well as declines in national big-box retailers of $4.1 million, partially offset by internet retailers sales growth of $2.6 million. As a percentage of total sales, technology products represented 24.1% in the first six months of 2016 by 1.4% versus the first six months of 2015. This category accounted for 25.6% of net sales for the first six months of 2016. Excluding our Mexican subsidiary, which was sold in the third quarter of 2015, net sales in this category increased 4.9% compared to2017, a decrease from the prior year quarter whichpercentage of total sales of 26.0%.
Traditional office product sales decreased $18.3 million or 8.6% in the first quarter of 2017 compared to the first quarter of 2016. Sales in this category decreased due to reductions in the independent dealers channel of $13.7 million and declines in sales to national big-box retailers of $7.5 million, partially offset by internet retailers sales growth of $2.6 million. As a percentage of total sales, traditional office products represented 15.3% in the first quarter of 2017, a decrease from the prior year quarter percentage of total sales of 15.7%.
19
Industrial supplies sales increased $7.3 million or 5.2% in the first quarter of 2017 compared to the first quarter of 2016. This increase was driven by growth in the general industrial channel of $2.8 million, the energy channel of $2.1 million and the retail channel of $1.1 million, partially offset by continued declines in the welding channel of $1.2 million. As a percentage of total sales, to new e-tailers and technology customers.
Sales of traditional office products increasedindustrial supplies represented 11.6% in the first six monthsquarter of 2016 by 4.8% versus2017, an increase from the prior year quarter percentage of total sales of 10.3%.
Cut sheet paper product sales increased $10.6 million or 11.6% in the first six monthsquarter of 2015. Traditional office supplies represented 22.8% of the Company’s consolidated net sales for2017 compared to the first six monthsquarter of 2016. The improvementincrease in this category was primarily driven by increases in cut-sheetincreased sales to independent dealers of $8.8 million and internet sales growth of $1.7 million. As a percentage of total sales, cut sheet paper sales.
Industrial supplies salesrepresented 8.0% in the first six monthsquarter of 20162017, which increased from the prior year quarter percentage of total sales of 6.8% due to continued product category market-share growth.
Automotive product sales decreased by 5.1%$0.6 million or 0.8% in the first quarter of 2017 compared to the same prior-year period and accounted for 10.5% of the Company’s net sales for the first six monthsquarter of 2016. Industrial suppliesAs a percentage of total sales, declined due to impacts of our general industrial and energy channels. We expect this impact to continue throughout the year.
Automotive net salesautomotive products represented 6.2% in the first six monthsquarter of 20162017, which increased 28.8% compared tofrom the same prior-year period. Automotive netprior year quarter percentage of total sales representedof 5.9% of the Company’s net sales for the first six months of 2016. This increase was primarily due to the acquisition of Nestor which contributed $34.8 million in net sales..
Office furniture sales decreased $4.6 million or 6.1% in the first six monthsquarter of 2016 decreased 5.2%2017 compared to the first six monthsquarter of 2015. Office furniture accounted for 5.5% of the Company’s first six months of 2016 consolidated net sales. The decline in this category2016. This decrease was primarily driven by national account andthe result of declines in sales to independent dealer channels of $3.1 million and national big-box retailers of $1.7 million. As a percentage of total sales, decreases.office furniture represented 5.5% in the first quarter of 2017 and 2016, respectively.
The remainder of the Company’s first six months of 2016quarter 2017 net sales waswere composed of freight and other revenues.
Gross Profit and Gross Margin Rate. Gross profit for the first six monthsquarter of 20162017 was $395.9$185.7 million, compared to $410.5$200.1 million in the first six monthsquarter of 2015. The2016. Gross profit as a percentage of net sales (the gross margin rate) of 14.6% decreased from the prior-year quarter gross margin rate of 14.6% was down 72 basis points (bps) from the prior-year period14.8%. The gross margin ratedecline of 15.4%. This decrease$14.4 million was primarilyprincipally the result of lower sales volume, impacting margin by $10.5 million, higher freight costs of $3.1 million and reduced supplier allowances of $2.6 million due to customerlower purchase volumes, partially offset by favorable inflation benefits of $0.9 million. Our sales to larger resellers are generally at lower margins than sales to our smaller resellers. Sales to new customers tend to be lower margin but improve over time. Lower margin category sales include cut-sheet paper products and product mixtechnology products, while JanSan, traditional office products, furniture and industrial supplies are higher freight expenses (18 bps).margin categories.
Operating Expenses. Operating expenses for the first six monthsquarter of 20162017 were $337.0$371.9 million or 12.5%29.3% of net sales, compared to $167.7 million or 12.4% of net sales in the prior year. The $204.2 million increase was primarily driven by goodwill impairment of $198.8 million, increased litigation expenses of $6.0 million and transformational consultancy expenses of $3.0 million, partially offset by reductions in occupancy expenses of $1.7 million and employee related costs of $1.4 million. Adjusted operating expenses were $164.1 million or 12.9% of net sales compared with $354.5$167.4 million or 13.3%12.4% of net sales in the same period last year. The $17.5 million decrease was due to higher expenses from Repositioning Actions in 2015. In 2016, Repositioning Actions consisted ofyear, primarily as a pension settlement charge of $11.7 million as discussed in Note 9 and $0.3 million in workforce reductions and facility closure charges. The 2015 Repositioning Actions consisted of $6.3 million in workforce reductions and facility closure charges, $11.0 million in intangible asset impairment charges and accelerated amortization related to rebranding, and $15.0 million of impairment related to a non-strategic business being held for sale. Adjusted operating expenses were $325.0 million or 12.0%result of net sales and $322.3 million or 12.1% of net sales in the first six months of 2016 and 2015, respectively.reductions.
Interest Expense, net. Interest expense, net for the first six monthsquarter of 20162017 was $11.6$6.7 million compared to $9.6$5.9 million in the first six monthsquarter of 2015.2016. This increase was primarily driven by higher interest rates on outstanding debt.
Income Taxes. Income tax expensebenefit was $17.8$4.3 million for the first six monthsquarter of 2016,2017, compared with $22.6to income tax expense of $10.0 million for the same period in 2015.2016. The Company’s effective tax rate was 37.7%2.2% for the current-year period and 48.7%quarter compared to 37.6% for the same period in 2015.2016. The most significant factor impacting the effective tax rate for the three months ended March 31, 2017 was the discrete impact of the goodwill impairment charges.
Net (Loss) Income. Net incomeloss for the first six monthsquarter of 2016 totaled $29.52017 decreased to $(188.6) million or $0.80$(5.15) per diluted share, including $7.5compared to net income of $16.5 million after-tax, or $0.20$0.45 per diluted share of costs related to repositioning actions.in the prior year quarter. Adjusted net income was $36.9$9.2 million, or $1.00$0.25 per diluted share, compared with adjusted net income of $48.7$16.7 million or $1.27$0.45 per diluted share for the same six-month period in 2015.prior year quarter.
Pension Settlement
20
Defined benefit plan settlement loss of $11.7 millionCash Flows
Cash flows for the threeCompany for the quarters ended March 31, 2017 and six months ended June 30, 2016 resulted from the voluntary lump sum program announced in February 2016. Refer to Note 9 “Pension and Post-Retirement Benefit Plans”, for further information on the remeasurement and voluntary lump sum program.are summarized below (in thousands):
Cash Flows
|
| Quarter Ended March 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Net cash provided by (used in) operating activities |
| $ | 53,025 |
|
| $ | (10,821 | ) |
Net cash used in investing activities |
|
| (8,312 | ) |
|
| (9,596 | ) |
Net cash (used in) provided by financing activities |
|
| (43,443 | ) |
|
| 25,595 |
|
The following discussion focuses on information included in the accompanying Condensed Consolidated Statements of Cash Flows.
Operating Activities
Net cash usedThe quarter ended March 31, 2017 increase in operating activities for the six-month period ended June 30, 2016 totaled $16.0 million, compared with $120.8 millionnet cash provided by operating activities inwas principally the six-month period ended June 30, 2015. The $136.8 million decrease over the prior year was primarily driven by a $44.0 million increase in inventory in the first six monthsresult of 2016, compared with a decrease of $48.9 million in the same prior year period, and a $28.4 million increase indecreased accounts receivable, in the current year versus a $28.3 million decrease ininventories, other assets and increased accounts receivable in the prior year.payable, partially offset by diminished operating results and decreased accrued liabilities.
Investing Activities
Net cash used in investing activities
Gross capital spending for the first six months ofquarter ended March 31, 2017 and 2016 was $16.6$8.3 million compared with $12.4and $9.9 million, respectively, which was used for the six-month period ended June 30, 2015.various investments in fleet equipment, information technology systems, technology hardware, and distribution center equipment including facility projects.
Financing Activities
Net
The Company’s cash provided byflow from financing activities foris largely dependent on levels of borrowing under the six-month period ended June 30, 2016 totaled $27.9 million, compared with $95.0 million cash used inCompany’s credit agreements, the acquisition or issuance of treasury stock, and quarterly dividend payments.
Cash outflows from financing activities in the prior-year period. Net cash providedquarter ended March 31, 2017 included the repayment of the asset securitization program and payment of debt issuance costs incurred in the credit amendments, partially offset by financing activities duringincremental borrowings under the first six months of 2016 was impacted by $43.9 million in2017 Credit Agreement and term loan as compared to net borrowings under our revolving credit facility, $6.8 millionand repurchases of shares in share repurchases and $10.2 million in payments of cash dividends.the quarter ended March 31, 2016.
On May 25, 2016,
In February 2017, the Board of Directors approved a dividend of $0.14 whichthat was paid on July 15, 2016April 14, 2017 to shareholders of record as of JuneMarch 15, 2016. On July 14, 2016, the Board of Directors approved a dividend of $0.14 which will be paid on October 14, 2016 to shareholders of record as of September 15, 2016.
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 Company’s Form 10-K for the year ended December 31, 2015) 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 June 30, 2016, the Company’s Leverage Ratio exceeded 3.00 to 1.00.2017.
Liquidity and Capital Resources
Essendant’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. We believeThe Company believes that ourits cash from operations and collections of receivables, coupled with ourits sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements. These requirements include payments of interest and dividends, scheduled debt repayments, capital expenditures, working capital needs, restructuring activities, the funding of pension plans, and funding for additional share repurchases and acquisitions, if any. Due to our credit profile over the years, external funds have been available at an acceptable cost. We believeThe Company believes that current credit arrangementsits sources of borrowings are sound and that the strength of ourits balance sheet affords us the financial flexibility to respond to both internal growth opportunities and those available through acquisitions.
Financing available from debt and the sale21
Availability of accounts receivablefinancing as of June 30, 2016,March 31, 2017, is summarized below (in millions):
Availability
Maximum financing available under: |
|
|
|
|
|
|
|
2013 Credit Agreement | $ | 700.0 |
|
|
|
|
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
|
|
|
Receivables Securitization Program (1) |
| 200.0 |
|
|
|
|
|
Maximum financing available |
|
|
|
| $ | 1,050.0 |
|
Amounts utilized: |
|
|
|
|
|
|
|
2013 Credit Agreement |
| 412.3 |
|
|
|
|
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
|
|
|
Receivables Securitization Program (1) |
| 200.0 |
|
|
|
|
|
Outstanding letters of credit |
| 11.4 |
|
|
|
|
|
Total financing utilized |
|
|
|
|
| 773.7 |
|
Available financing, before restrictions |
|
|
|
|
| 276.3 |
|
Restrictive covenant limitation (2) |
|
|
|
|
| 169.2 |
|
Available financing as of June 30, 2016 |
|
|
|
| $ | 107.1 |
|
| Aggregated Committed Principal |
|
| Borrowing Base Limitation |
|
| Total Utilization |
|
| Net Availability |
| ||||
2017 Credit Agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan (1) | $ | 77.6 |
|
| $ | 77.6 |
|
| $ | 77.6 |
|
| $ | - |
|
Revolving Credit Facility (2) |
| 1,000.0 |
|
|
| 904.0 |
|
| 427.7 |
|
| 476.3 |
| ||
First-in-Last-Out ("FILO") |
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| - |
|
Total all Funding Sources | $ | 1,177.6 |
|
| $ | 1,081.6 |
|
| $ | 605.3 |
|
| $ | 476.3 |
|
(1) The Receivables Securitization Program provides for maximum funding available of the lesser of $200.0 million or the total amount of eligible receivables less excess concentrations and applicable reserves.
|
| The term loan was funded in a single funding on March 24, 2017. The proceeds from the |
2) | The 2017 Credit Agreement |
The Company’s total debt and debt-to-total capitalization ratio consisted of the following amounts (in millions):
| As of |
|
| As of |
| As of |
|
| As of |
| ||||
| June 30, |
|
| December 31, |
| March 31, |
|
| December 31, |
| ||||
| 2016 |
|
| 2015 |
| 2017 |
|
| 2016 |
| ||||
2017 Credit Agreement |
|
|
|
|
|
|
| |||||||
Term Loan | $ | 77.6 |
|
| $ | - |
| |||||||
Revolving Credit Facility |
| 250.2 |
|
|
| - |
| |||||||
FILO Facility |
| 100.0 |
|
|
| - |
| |||||||
2013 Credit Agreement | $ | 412.3 |
|
| $ | 368.4 |
|
| - |
|
|
| 260.4 |
|
2013 Note Purchase Agreement |
| 150.0 |
|
|
| 150.0 |
|
| 150.0 |
|
|
| 150.0 |
|
Receivables Securitization Program |
| 200.0 |
|
|
| 200.0 |
|
| - |
|
|
| 200.0 |
|
Mortgage & Capital Lease |
| 0.1 |
|
|
| - |
| |||||||
Debt |
| 762.4 |
|
|
| 718.4 |
|
| 577.8 |
|
|
| 610.4 |
|
Stockholders’ equity |
| 754.0 |
|
|
| 723.7 |
|
| 590.6 |
|
|
| 781.1 |
|
Total capitalization | $ | 1,516.4 |
|
| $ | 1,442.1 |
| $ | 1,168.4 |
|
| $ | 1,391.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt-to-total capitalization ratio |
| 50.3 | % |
|
| 49.8 | % |
| 49.5 | % |
|
| 43.9 | % |
We believe that our operating cash flow and financing capacity, as described, provide adequate liquidity for operating the business for the foreseeable future.
Refer to Note 8 - “Debt”, for further descriptions of the provisions of our financing facilities as well as Note 11 - “Debt”, in our Annual Report on2016 Form 10-K10-K.
Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share, Adjusted EBITDA and Free Cash Flow (the “Non-GAAP table”)
The Non-GAAP table below presents Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings per Share, Adjusted EBITDA and Free Cash Flow for the year-ended Decemberthree months ended March 31, 2015.
Contractual Obligations
During2017 and 2016 (in thousands, except per share data). These non-GAAP measures exclude certain non-recurring items and exclude other items that do not reflect the six-month period ended June 30, 2016, contractual obligations increased by $35 million from those disclosedCompany’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 our Annual Report on Form 10-Kisolation 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 the extent they occur in the reporting period, to facilitate the comparison of current and prior year ended December 31,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.
22
Restructuring actions were taken in 2015 driven by newto improve our operational utilization, labor spend, inventory performance and functional alignment of the organization. This included workforce reductions and facility leases, facility lease renewals and new multi-year technology contracts.consolidations with an expense impact of $0.3 million in the first quarter of 2016 (refer to Note 3 – “Severance & Restructuring Charges”).
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.
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.
Asset impairments. Changes in strategy or macroeconomic events may cause asset impairments.
In the quarter ended March 31, 2017, the Company recorded impairment of goodwill of $198.8 million, based on a decline in market capitalization (refer to Note 4 – “Goodwill and Intangible Assets”).
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 include charges related to litigation totaling $6.0 million (refer to Note 12 – “Legal Matters”) and transformational consultancy expenses totaling $3.0 million.
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 ordinary expenses and earnings of our operations. 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 ordinary earnings of our operations.
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 effect of interest, taxes, depreciation and amortization and stock-based compensation expense. Management believes that adjusted EBITDA is also 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 the 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 acquisitions, net of cash acquired and divestitures.
23
| For the Three Months Ended March 31, |
| |||||
| 2017 |
|
| 2016 |
| ||
|
|
|
|
|
|
|
|
Operating expenses | $ | 371,850 |
|
| $ | 167,678 |
|
Impairment of goodwill (Note 4) |
| (198,828 | ) |
|
| - |
|
Litigation reserve (Note 12) |
| (6,000 | ) |
|
| - |
|
Transformational consultancy expenses |
| (2,951 | ) |
|
| - |
|
Restructuring charges (Note 3) |
| - |
|
|
| (254 | ) |
Adjusted operating expenses | $ | 164,071 |
|
| $ | 167,424 |
|
|
|
|
|
|
|
|
|
Operating (loss) income | $ | (186,182 | ) |
| $ | 32,404 |
|
Operating expense adjustments noted above |
| 207,779 |
|
|
| 254 |
|
Adjusted operating income | $ | 21,597 |
|
| $ | 32,658 |
|
|
|
|
|
|
|
|
|
Net (loss) income | $ | (188,593 | ) |
| $ | 16,530 |
|
Operating expense adjustments noted above |
| 207,779 |
|
|
| 254 |
|
Non-GAAP tax provision on adjustments |
|
|
|
|
|
|
|
Impairment of goodwill |
| (6,559 | ) |
|
| - |
|
Litigation reserve |
| (2,324 | ) |
|
| - |
|
Transformational consultancy expenses |
| (1,118 | ) |
|
| - |
|
Restructuring charges |
| - |
|
|
| (99 | ) |
Adjusted net income | $ | 9,185 |
|
| $ | 16,685 |
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share | $ | (5.15 | ) |
| $ | 0.45 |
|
Operating expense adjustments noted above |
| 5.67 |
|
|
| 0.01 |
|
Non-GAAP tax provision on adjustments |
| (0.27 | ) |
|
| (0.01 | ) |
Adjusted diluted earnings per share | $ | 0.25 |
|
| $ | 0.45 |
|
|
|
|
|
|
|
|
|
Net (loss) income | $ | (188,593 | ) |
| $ | 16,530 |
|
Provision for income taxes |
| (4,328 | ) |
|
| 9,977 |
|
Interest expense, net |
| 6,739 |
|
|
| 5,897 |
|
Depreciation and amortization |
| 10,965 |
|
|
| 11,731 |
|
Equity compensation expense |
| 2,468 |
|
|
| 2,911 |
|
Operating expense adjustments noted above |
| 207,779 |
|
|
| 254 |
|
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) | $ | 35,030 |
|
| $ | 47,300 |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities | $ | 53,025 |
|
| $ | (10,821 | ) |
Net cash used in investing activities |
| (8,312 | ) |
|
| (9,596 | ) |
Free cash flow | $ | 44,713 |
|
| $ | (20,417 | ) |
24
The Company is subject to market risk associated principally with changes in interest rates and foreign currency exchange rates. There were no material changes to the Company’s exposures to market risk during the first three months of 2016quarter ended March 31, 2017, from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended June 30, 2016,March 31, 2017, 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.
For information regarding legal proceedings, see Note 1412 - “Legal Matters.”
For information regarding risk factors, see “Risk Factors” in Item 1A of Part I of the Company’s2016 Form 10-K for the year ended December 31, 2015.10-K. There have been no material changes to the risk factors described in such Form 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:
|
|
|
|
concessions from the Company;
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|
|
|
|
10-K.
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 quarter of 2016, the Company’s profitability was adversely affected by margin pressure resulting primarily 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 volume 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, lower supplier allowances and promotional incentives contributed to the unfavorable margin impact of the product category mix shift in the second quarter of 2016.26
| (a) | Not applicable. |
| (b) | Not applicable. |
| (c) | Common Stock Purchases. |
DuringThe Company did not repurchase any shares of common stock in the sixthree months ended June 30,March 31, 2017 while during the three months ended March 31, 2016, and 2015, the Company repurchased 241,270 and 781,141 shares of common stock at an aggregate cost of $6.8 million and $31.5 million, respectively.million. The Company did not repurchase any additional shares through July 18, 2016.April 21, 2017. As of that date, the Company had approximately $68.2 million remaining of existing share repurchase authorization from the Board of Directors.
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 |
| ||||
April 1, 2016 to April 30, 2016 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68,160,702 |
|
May 1, 2016 to May 31, 2016 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68,160,702 |
|
June 1, 2016 to June 30, 2016 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68,160,702 |
|
Total Second Quarter |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | 68,160,702 |
|
2017 Fiscal Month |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of a Publicly Announced Program |
|
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
| ||||
January 1, 2017 to January 31, 2017 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68,160,702 |
|
February 1, 2017 to February 28, 2017 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68,160,702 |
|
March 1, 2017 to March 31, 2017 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 68,160,702 |
|
Total First Quarter |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | 68,160,702 |
|
27
(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.
description.
Exhibit No. |
| Description |
3.1 |
| Third Restated Certificate of Incorporation of Essendant Inc. (“ESND” or the “Company”), dated as of June 1, 2015 (Exhibit 3.1 to the Form 10-Q, filed on July 23,2015) |
3.2 |
| Amended and Restated Bylaws of Essendant Inc., dated as of |
December 16, 2016) | ||
4.1 |
| Note Purchase Agreement, dated as of November 25, 2013, among ESND, Essendant Co. (“ECO”), and the note purchasers identified therein (the “2013 Note Purchase Agreement”) (Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on February 19, 2014 (the “2013 Form 10-K”)) |
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) |
4.3 |
| Amendment No. 2 to Note Purchase Agreement, dated as of August 30, 2016, among ESND, ECO, and the note purchasers identified therein (Exhibit 10.7 to the Company’s Form 10-Q filed on October 26, 2016) |
|
| Parent Guaranty, dated as of November 25, 2013, by ESND in favor of the holders of the promissory notes identified therein (Exhibit 4.5 to the 2013 Form 10-K) |
|
| Subsidiary Guaranty, dated as of November 25, 2013, by all of the domestic subsidiaries of ECO (Exhibit 4.6 to the 2013 Form 10-K) |
10.1* |
| Fifth Amended and Restated Credit Agreement, dated as of February 22, 2017, among ECO, as borrower, ESND, as a loan party, JPMorgan Chase Bank, National Association, as Agent, and the financial institutions listed on the signature pages thereto (the “Credit Agreement”) |
10.2* | Amendment No 3 to Note Purchase Agreement, dated as of February 9, 2017, among ESND, ECO and the note purchasers identified therein | |
10.3* | Amendment No 4 to Note Purchase Agreement, dated as of February 22, 2017, among ESND, ECO and the note purchasers identified therein | |
10.4* | Second Amended and Restated Pledge and Security Agreement, dated as of February 22, 2017, among ECO, ESND, Essendant Financial Services LLC, Essendant Management Services LLC, Essendant Industrial LLC, Essendant Receivables, LLC, O.K.I. Supply, LLC, Nestor Sales LLC, Nestor Sales Holdco LLC, Nestor Holding Company, Liberty Bell Equipment Company, Label Industries, Inc., TransSupply Group, LLC, CPO Commerce Acquisition, LLC, CPO Commerce, LLC and JPMorgan Chase Bank, N.A. as administrative agent | |
10.5* | Management Incentive Plan for Employees Other Than Section 16 Officers, effective January 1, 2017** | |
10.6* | Form of Performance-Based Cash Award Agreement under the 2015 Long-Term Incentive Plan** | |
10.7* | Essendant Inc. Annual Cash Incentive Award Plan for Section 16 Officers under the 2015 Long-Term Incentive Plan** | |
10.8* | Form of Performance-Based Restricted Stock Unit Award Agreement for Section 16 Officers** | |
10.9* | Form of 2017 Restricted Stock Award Agreement with EPS Minimum** | |
10.10* | Essendant Inc. Executive Severance Plan** | |
31.1* |
| Certification of Chief Executive Officer, dated as of |
31.2* |
| Certification of Chief Financial Officer, dated as of |
32.1* |
| Certification of Chief Executive Officer and Chief Financial Officer, dated as of |
101* |
| The following financial information from Essendant Inc.’s Quarterly Report on Form 10-Q for the period ended |
* | - Filed herewith |
** | - Represents a management contract or compensatory plan or arrangement |
28
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
| ESSENDANT INC. |
|
|
| (Registrant) |
|
| ||
Date: |
|
| /s/ Earl C. Shanks |
|
|
| Earl C. Shanks |
|
|
| Senior Vice President and Chief Financial Officer |
3129