(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 ☒ 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 ☒ 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):

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 ☒

On ~~October 24, 2016,~~April 21, 2017, the registrant had outstanding ~~36,968,408~~37,499,549 shares of common stock, par value $0.10 per share.

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, ~~2015~~2016 audited financial statements. The Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations. Accordingly, the reader of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 (the ~~“2015~~“2016 Form 10-K”) for further information.

In the opinion of management, the accompanying unaudited ~~consolidated financial statements~~Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Essendant at ~~September 30, 2016~~March 31, 2017 and the results of operations and cash flows for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 and ~~2015.~~2016. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year.

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.

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 ~~evaluating~~anticipates 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 ~~guidance~~standard will most likely result in recognition of financing components for certain rebate arrangements that have significant, implied terms and are expected to ~~determine~~result in a reduction of net revenues related to implicit interest associated with the ~~impact~~significant 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 ~~March~~August 2016, the FASB issued ASU No. ~~2016-09,~~2016-15, ~~Compensation – Stock Compensation~~Statement of Cash Flows (Topic ~~718)~~230), ~~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~~Classification of Certain Cash Receipts and ~~tax deficiencies as income tax expense or benefit in the income statement instead of in additional paid-in capital (APIC)~~Cash Payments. This ~~guidance will be applied prospectively. Furthermore, companies will present excess tax benefits as an operating activity on~~standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows ~~rather than as~~and is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and will require adoption on a ~~financing activity, which companies can elect~~retrospective basis unless impracticable. If impracticable the Company would be required to apply ~~retrospectively or prospectively. Under~~the amendments prospectively as of the earliest date possible. The Company is currently evaluating the impact the new guidance ~~companies~~ will ~~elect whether~~have on its statement of cash flows or financial statement disclosures.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): 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 ~~account~~include the service cost component in the same financial statement line item as other compensation costs and to report other pension-related costs, including amortization of prior 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 ~~forfeitures~~capitalization. Application of ~~share-based payments by recognizing forfeitures of awards as they occur or estimate~~ the ~~number of awards expected~~standard is required to be ~~forfeited, as~~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 ~~currently required. This guidance will~~to be applied ~~using a modified retrospective transition method, with a cumulative adjustment to retained earnings. The~~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.~~statements, but does not expect any impact on the Company’s net income.

Approximately 98.4% of total inventory as of ~~September 30, 2016~~March 31, 2017 and 98.3% as of December 31, ~~2015,~~2016, respectively, has been valued under the ~~LIFO~~Last-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 ~~FIFO~~First-In-First-Out (“FIFO”) cost or market, inventory values would have been ~~$147.2~~$157.0 million and ~~$147.8~~$147.9 million higher than reported as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, respectively.

The change in the LIFO reserve in the ~~third~~first quarter of ~~2016~~2017 included a LIFO liquidation relating to decrements in ~~five~~three of the Company’s ~~thirteen~~eight LIFO pools. These decrements resulted in liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of current year purchases. This liquidation resulted in LIFO income of ~~$2.3~~$1.6 million which was partially offset by LIFO expense of $2.1 million related to current inflation for an overall net decrease in cost of sales of $0.2 million for the three months ended September 30, 2016. For the three months ended September 30, 2015, the change in the method of inventory costing resulted in LIFO income of $3.5 million which was partially offset by LIFO expense of $0.8 million related to inflation for an overall net decrease in cost of sales of $2.7 million. For the nine months ended September 30, 2016, the LIFO income of $2.3 million related to the liquidation was more than offset by LIFO expense of ~~$3.2~~$10.7 million related to current inflation for an overall net increase in cost of sales of ~~$0.9 million.~~

On July 31, 2015, Essendant Co. completed the acquisition of 100% of the capital stock of Nestor Sales LLC (“Nestor”), a leading wholesaler and distributor of tools, equipment and supplies to the transportation industry. This acquisition accelerates the Company’s growth in the automotive aftermarket, complements the Company’s existing industrial offerings while providing access to new customer segments.

The purchase price was $41.8 million. This acquisition was funded through a combination of cash on hand and cash available under the Company’s revolving credit facility. Purchase accounting for this transaction was completed as of June 30, 2016.

~~At September 30, 2016, the allocation of the purchase price was as follows (amounts in thousands):~~

~~The purchased identifiable intangible assets were as follows (amounts in thousands):~~

~~3. Sale-Leaseback~~ ~~On September 23, 2016, the Company entered into an agreement~~$9.1 million for the sale and leaseback of its facility in City of Industry, CA. The agreement provided for the sale of the facility for a purchase price of $31.7 million and the subsequent leaseback for a two year period. The lease is classified as an operating lease. As a result, the Company recorded a gain of $20.5 million in “warehousing, marketing and administrative expenses.” A deferred gain of approximately $2.8 million that will be amortized into income over the term of the lease was also recorded. As of September 30, 2016, $1.4 million of the deferred gain is reflected in the accompanying Consolidated Balance Sheet under “other long-term liabilities”, with the remainder included as a component of “other current liabilities”. The cash proceeds from the sale were used primarily to pay down long-term debt.three months ended March 31, 2017.

As of ~~September 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 ~~526,697~~43,385 shares of restricted stock and ~~290,725~~221,297 RSUs during the first ~~nine~~three months of ~~2016,~~2017, compared to ~~440,948~~120,376 shares of restricted stock and ~~162,092~~247,510 RSUs during the first ~~nine~~three months of ~~2015.~~2016.

Commencing in ~~the first quarter of~~ 2015, the Company began certain restructuring actions which included workforce reductions, ~~and~~ facility ~~closures. Commencing in the fourth quarter of 2015, the Company executed~~closures, and actions to reduce costs through management delayering in order to achieve broader functional alignment of the organization. The charges associated with these actions were included in “warehousing, marketing and administrative expenses.” These actions were substantially completed in 2016.

The expenses, cash flows, and accrued liabilities associated with the restructuring actions described above are noted in the following table (in thousands):

The ~~changes~~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 ~~are~~by reporting unit and impairment recognized is noted in the ~~following~~ table below (in thousands):

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):

The following table summarizes the amortization expense to be incurred in ~~2016~~2017 through ~~2020~~2021 on intangible assets (in thousands):

The change in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the period ended ~~September 30, 2016~~March 31, 2017 was as follows (amounts in thousands):

The following table details the amounts reclassified out of AOCI into the income statement during the three ~~and nine~~ months ended ~~September 30, 2016(in~~March 31, 2017 (in thousands):

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if dilutive securities were exercised into common stock. Stock options, restricted stock, restricted stock units and deferred stock units are considered dilutive securities. For the three-month ~~period~~periods ending ~~September 30,~~March 31, 2017 and 2016, 0.2 and ~~2015,~~ 0.3 ~~and 0.4~~ million shares of such securities, respectively, were outstanding but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. ~~For the nine-month period ending September 30, 2016, 0.3~~An additional 0.2 million shares of ~~securities~~common stock outstanding at March 31, 2017 were excluded from the ~~computation. For~~computation of diluted earnings per share due to the ~~nine-month period September 30, 2015, no shares of securities were excluded from the computation.~~net loss. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

As of ~~September 30, 2016~~March 31, 2017 , the Company had Board authorization to repurchase $68.2 million of common stock. During the three months ended ~~September 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 ~~744,081~~241,270 shares at an aggregate cost of ~~$25.9~~$6.8 million. During the nine months ended September 30, 2016 and 2015, the Company repurchased 241,270 and 1,525,222 shares of the Company’s common stock at an aggregate cost of $6.8 million and $57.4 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 ~~nine~~three months ofended March 31, 2017 and 2016, ~~and 2015,~~ the Company reissued ~~452,286~~15,945 and ~~369,591~~106,800 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.

ESND is a holding company and, as a result, its primary sources of funds are cash generated from operating activities of its direct operating subsidiary, ECO, and from borrowings by ECO. The ~~2013~~2017 Credit Agreement and the 2013 Note Purchase Agreement ~~and the Receivables Securitization Program~~ (each as defined in Note 11 – “Debt” of the ~~2015~~2016 Form ~~10-K) (each~~10-K and each a “Lending Agreement”) contain restrictions on the use of cash transferred from ECO to ESND. ~~Each~~

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 ~~Lending Agreements also prohibits~~“2013 Credit Agreement”). Also on February 22, 2017, ESND, ECO and the ~~Company from exceeding a Leverage Ratio~~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 ~~defined~~amended prior to February 22, 2017, the “2013 Note Purchase Agreement”).

The 2017 Credit Agreement and Amendment No. 4 eliminated certain covenants in the 2013 Credit Agreement and the 2013 Note Purchase ~~Agreement). The maximum Leverage Ratio is 3.50~~Agreement that prohibited the Company from exceeding a debt-to-EBITDA ratio of 3.5 to ~~1.00 but increases~~1.0 (or 4.0 to ~~up to 4.00 to 1.00 for the first four fiscal quarters (the “Adjusted Leverage Period”)~~1.0 following certain ~~acquisitions. Following~~permitted acquisitions) and restricted the ~~2015 acquisition of Nestor Sales, an Adjusted Leverage period~~Company’s ability to pay dividends and repurchase stock when the ratio was ~~applicable through the quarter ended June 30, 2016. On August 30, 2016, the Lending Agreements were amended~~3.0 to ~~extend the Adjusted Leverage Period for two additional quarters.~~1.0 or more. As a result, the ~~maximum permitted Leverage Ratio remains at 4.00~~Company is no longer subject to ~~1.00 but will revert~~a debt-to-EBITDA ratio covenant.

Proceeds from the 2017 Credit Facility were used to ~~3.50~~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 ~~1.00~~the Company first through the FILO facility. The 2017 Credit Agreement also provides for the ~~quarter ending March 31, 2017.~~issuance of up to $25.0 million of letters of credit, plus an additional $165.0 million letter of credit as collateral for the Company’s obligations under the 2013 Note Purchase Agreement.

Borrowings under the 2017 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 2017 Credit Agreement), plus, in each case, a margin determined based on the Company’s average quarterly revolving availability. Depending on the Company’s average quarterly revolving availability, the margin on LIBOR-based loans and REVLIBOR30 Rate-based loans ranges from 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 0.25% to 0.75% for revolving and term loans and 1.00% to 1.50% for FILO loans. From February 22, 2017 (the date of the 2017 Credit Agreement) to June 30, 2017, the applicable margin for LIBOR-based loans 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 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 2017 Credit Agreement at a rate per annum equal 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 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.

Obligations of ECO under the 2017 Credit Agreement are guaranteed by ESND and ECO’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 certain equipment. Beginning in April 2017, the Company will repay nominal principal amounts pursuant to the terms 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 the 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 obligations 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 provided maximum financing of up to $200 million secured by all the customer accounts receivable and related rights originated by ECO.

As of September 30, 2016, 75.9% of the Company’s outstanding debt, excluding capital leases and transaction costs, was priced at variable interest rates based primarily on the applicable bank prime rate or London InterBank Offered Rate (“LIBOR”).

~~The Company had outstanding letters of credit of $11.2 million and $11.6 million under the 2013 Credit Agreement as of September 30, 2016 and December 31, 2015, respectively.~~

~~As of September 30, 2016, the applicable margin under the 2013 Credit Agreement was 2.00% for LIBOR-based loans and was 1.00% for Alternate Base Rate loans.~~ 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), except the annual rate increases by 0.625% if the Company’s Leverage Ratio is between 3.50 to 1.00 and 3.75 to 1.00, and increases by 0.75% if the Leverage Ratio is between 3.75 to 1.00 and 4.00 to 1.00. The Company’s Leverage Ratio was 3.51 to 1.00 as of June 30, 2016 and was 2.77 to 1.00 as of September 30, 2016..

~~As of September 30, 2016~~For additional information about the 2017 Credit Agreement and ~~December 31, 2015, $552.9 million and $448.6 million, respectively, of receivables had been sold to~~ the ~~Investors (as defined in~~2013 Note Purchase Agreement, see Note 11 – “Debt” to the Company’s Consolidated Financial Statements in the ~~2015 Form 10-K). Essendant Receivables LLC had $200.0 million outstanding under the Receivables Securitization Program as of September 30,~~ 2016 ~~and December 31, 2015.~~

~~For additional information about the 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program, see Note 11 of the 2015~~ Form 10-K.

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 ~~Statement~~Statements in the ~~2015~~2016 Form 10-K. A summary of net periodic pension cost related to the Company’s pension plans for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ was as follows (dollars in thousands):

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 nine months ended September 30, 2016 and 2015, respectively.~~plans. Additional contributions, if any, for ~~2016~~2017 have not yet been determined. As of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, respectively, the Company had accrued ~~$44.7~~$40.1 million and ~~$48.4~~$40.2 million of pension liability within “Other long-term liabilities” on the Condensed Consolidated Balance Sheets.

~~During 2016, the Company has taken several actions to mitigate the interest rate, mortality and investment risks of the Essendant Pension Plan. These actions include~~ ~~a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants~~ ~~that was completed during the second quarter.~~

As a result of the lump sum offer, a settlement and remeasurement of the Essendant Pension Plan was performed. The remeasurement and activity in the first nine months of 2016 had no cash impact to the Company since the payments were made by the Essendant Pension Trust, and resulted in a $1.5 million improvement to the net funded status of the plan, therefore reducing other long-term liabilities. However, the settlement caused a loss of $12.2 million, which was partially offset by the $8.4 million reduction in Accumulated Other Comprehensive Income related to the unrecognized actuarial loss, for a net impact on shareholders’ equity of $3.8 million as of September 30, 2016 when compared to December 31, 2015. This offer also reduces future pension expense recognized by the Company and volatility related to future obligations of the plan.

The Company has defined contribution plans covering certain salaried associates and non-union hourly paid associates (the “Plan”). The Plan permits associates to defer a portion of their pre-tax and after-tax salary as contributions to the Plan. The Plan also provides for Company-funded discretionary contributions as well as matching associates’ salary deferral contributions, at the discretion of the Board of Directors. The Company recorded expense of ~~$1.8~~$1.9 million and ~~$5.5~~$1.8 million, respectively, for the Company match of employee contributions to the Plan for the three ~~and nine~~ months ended ~~September 30, 2016. During the same periods last year, the Company recorded expense of $1.5 million~~March 31, 2017 and ~~$4.4 million to match employee contributions.~~2016, respectively.

The Company measures certain financial assets and liabilities, including an 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. The fair value of the interest rate swaps is determined by using quoted market forward rates (level 2 inputs) and reflects the present value of the amount the Company would pay for contracts involving the same notional amount and maturity date. ~~The fair value of the foreign currency cash flow hedge is determined by using quoted market spot rates (level 2 inputs).~~

Accounting guidance on fair value establishes a hierarchy for those instruments measured at fair value which distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

Determining which level to apply to an asset or liability requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value in the accompanying Condensed Consolidated Balance Sheets as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016 (in thousands):

The carrying amount of accounts receivable at ~~September 30, 2016, including $552.9 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.

Receivables related to supplier allowances totaling ~~$93.4~~$82.1 million and ~~$111.0~~$86.9 million were included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of ~~September 30, 2016~~March 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 ~~$64.3~~$46.1 million and ~~$63.6~~$65.3 million as of ~~September 30, 2016~~March 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 nine~~ months ended ~~September 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 ~~$17.1 million and $34.9~~$10.0 million on pre-tax income of ~~$53.8 million and $101.1~~$26.5 million, for an effective tax rate of ~~31.8% and 34.5%, respectively. For~~37.6%. In the ~~three and nine months~~quarter ended ~~September 30, 2015,~~March 31, 2017, the Company ~~recorded income~~adopted ASU 2016-09 which resulted in $0.3 million of incremental tax expense recognized due to excess tax deficiencies of ~~$20.0 million and $42.6 million on pre-tax income~~vested or settled awards in the period. The adoption of ~~$47.7 million and $94.1 million, for an effective tax rate of 42.0% and 45.3%, respectively.~~the standard was applied prospectively in accordance with guidance.

The Company’s U.S. statutory rate is 35.0%. The most significant factor impacting the effective tax rate for the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 was the discrete ~~tax~~ impact of the ~~payment of a dividend from a foreign subsidiary. The most~~goodwill impairment charges. There were no significant ~~factors~~discrete items impacting the effective tax rate for the three ~~and nine~~ months ended September 30, 2015 were the discrete tax impacts of the impairment charges and the establishment of a valuation allowance on a capital loss asset for financial reporting purposes related to selling a non-strategic business in the third quarter.March 31, 2016.

The Company has been named as a defendant in two lawsuits alleging that the Company sent unsolicited fax advertisements to the named plaintiffs, as well as other persons and entities, in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 ("TCPA"). One lawsuit was initially filed in the United States District Court for the Central District of California on May 1, 2015, and ~~has been dismissed without prejudice and~~subsequently 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 certify~~seek 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 because~~year ended December 31, 2016, the Company ~~is continuing~~recorded 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.

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~~2016 (the ~~“2015~~“2016 Form 10-K”) ~~and in Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q.~~.

Readers should not place undue reliance on forward-looking statements contained in this Quarterly Report on Form 10-Q. The forward-looking information herein is given as of this date only, and the Company undertakes no obligation to revise or update it.

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-branded~~brand-name and ~~private branded~~Essendant brand products. Essendant sells through a network of 7170 distribution centers to approximately ~~30,000~~29,000 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 ~~power~~ tools, do-it-yourself equipment and ~~outdoor equipment~~other items online to the consumer ~~market and construction professionals.~~market.

The Company has begun implementing ~~the first phase of a comprehensive multi-year transformation program~~six actions to improve the value of our business, which ~~includes:~~include:

~~The following is a summary~~Diluted loss per share for the first quarter of ~~selected trends, events or uncertainties that the Company believes may have a significant impact on its future performance.~~

~~Third Quarter Results~~

~~Third quarter net sales increased 1.1%,~~2017 of $(5.15) decreased from ~~the prior-year quarter to $1.4 billion.~~

~~Gross profit as a percent~~diluted earnings per share of ~~net sales~~$0.45 in the ~~third~~prior year quarter, ~~of 2016 was 14.1% versus 16.2% in~~including the ~~prior-year quarter. Gross profit for the third quarter of 2016 was $198.9 million, compared to $225.1 million in the third quarter of 2015.~~

~~Operating expenses in the third quarter of 2016 were $138.5 million or 9.8% of net sales, compared with $172.2 million or 12.4% of net sales in the prior-year quarter, including~~ impacts of the Company’s Actions impacting comparability of results (collectively, the “Actions”) discussed ~~below.~~above. Adjusted ~~operating expenses in the third quarter of 2016~~diluted earnings per share were ~~$158.6 million or 11.3% of net sales~~$0.25 compared ~~to $158.6 million or 11.4% of net sales~~with $0.45 in the prior-year quarter and a 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.

First quarter net sales decreased 6.1% or $82.9 million, from the prior-year quarter to $1.3 billion.

Gross margin as a percentage of net sales in the first quarter of 2017 was 14.6% versus 14.8% in the prior-year quarter. Gross margin for the first quarter of 2017 was $185.7 million, compared to $200.1 million in the first quarter of 2016.

Operating ~~income for~~expenses in the first quarter ~~ended September 30, 2016 was $60.3~~of 2017 were $371.9 million or ~~4.3%~~29.3% of net sales, compared with ~~$53.0~~$167.7 million or ~~3.8%~~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 ~~below.~~above. Excluding the Actions, adjusted operating income in the ~~third~~first quarter of ~~2016~~2017 was ~~$40.2~~$21.6 million or ~~2.9%~~1.7% of net sales, ~~versus $66.5~~as compared to $32.7 million or ~~4.8%~~2.4% of net sales in the ~~third~~first quarter of ~~2015.~~2016.

~~Diluted earnings per share for~~In the ~~third quarter~~three months ended March 2017, the Company replaced two of ~~2016 increased~~its existing financing agreements with a new credit agreement and term loan arrangement to ~~$0.99 from $0.74 in the prior year quarter, including the impacts of the Actions discussed below. Adjusted diluted earnings per share were $0.57 compared with $1.00 in the prior-year period.~~provide enhanced liquidity and increase debt availability.

Cash flows provided by operating activities for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 were ~~$106.0~~$53.0 million versus ~~$183.7~~cash flows used in operating activities of $10.8 million in the prior year ~~quarter.~~

~~Inventory decreased $73.7 million compared to a decrease of $54.4 million in the prior year.~~

~~Accounts payable increased $8.9 million compared to an increase of $50.4 million in the prior year.~~

~~Dealer rebate prepayments increased $34.5 million compared to an increase of $10.8 million in the prior year.~~

quarter, due primarily to decreased accounts receivable and inventories. Cash ~~flow~~used in financing activities for the three months ended March 31, 2017 increased to $43.4 million versus cash flows provided by ~~investing~~financing activities ~~improved $63.5 million compared to the prior year due to proceeds~~ of ~~$31.0 million from the 2016 sale of our City of Industry facility. In addition, there were no acquisitions in 2016 compared to acquisitions totaling $40.5~~$25.6 million in the prior ~~year.~~

~~Actions impacting comparability of results (the “Actions”)~~

~~In the third~~year quarter ~~of 2016, the Company entered into a two-year operating lease agreement in connection with the disposition of its City of Industry facility. The sale~~due primarily to impacts of the ~~facility resulted in a $20.5 million gain. Refer to~~financing agreements entered during the first quarter (see Note ~~3 for further details of this transaction.~~

~~In the third quarter of 2016, the Company incurred charges of $1.2 million related to severance costs for two members of the Company’s operating leadership team.~~

A voluntary lump-sum pension offering was completed in the second quarter of 2016 and resulted in a significant reduction of interest rate, mortality and investment risk of the Essendant Pension Plan. Due to this offer, a settlement and remeasurement of the Essendant Pension Plan was required as of August 31, 2016 and May 31, 2016, resulting in a defined benefit plan settlement loss of $0.4 million and $12.2 million, respectively, for the three and nine months ended September 30, 2016. Refer to Note 10 “Pension and Post-Retirement Benefit Plans”7 – “Debt”), ~~for further information on the remeasurement and voluntary lump sum program.~~

Restructuring actions were taken in 2015 to improve our operational utilization, labor spend, inventory performance and functional alignment of the organization. This included workforce reductions and facility consolidations with an unfavorable impact of $0.2 millionrespectively. Free cash flow generated in the three months ended ~~September 30, 2015 and an unfavorable $6.5~~March 31, 2017 was $44.7 million as compared to free cash flow usage of $(20.4) million in the ~~first nine months of 2015. In the three months and nine months ended September 30, 2016, the impact of these actions totaled a favorable $1.2 million and $1.0 million, respectively,~~prior year due primarily to ~~the release of severance accruals.~~

On June 1, 2015, we officially rebranded the Company to Essendant Inc. to communicate the Company’s strategy in a consistent manner. When we announced in the first quarter of 2015 our decision to rebrand the company, the ORS Nasco trademark and certain OKI brands were determinedreduced inventory balances. Free cash flow is expected to be ~~impaired. Pre-tax, non-cash, impairment charges and accelerated amortization totaling $11.5 million were recorded in the first nine months of 2015.~~

~~In the third quarter of 2015, seller notes receivable of $10.7 million related to the 2014 sale of the Company’s software service provider were impaired.~~

In 2015 we exited non-strategic channels to further align our product categories and channels with our strategies, including the sale of Azerty de Mexico, our operations in Mexico. The total charges in the first nine months of 2015 related to the disposition of this subsidiary were $17.0 million. In the first nine months of 2015, this subsidiary had net sales of $50.1 million and operating loss of $0.8 million, excluding the charges previously mentioned.

~~Guidance~~

~~The Company revised its guidance regarding 2016, and currently expects the following:~~

~~Total company net sales~~ in the range of ~~$5.325 billion~~$50 million to ~~$5.375 billion~~

~~Adjusted diluted earnings per share in the range of $1.75 to $1.90~~

~~Free cash flow greater than $150~~$70 million in ~~the second half of 2016~~2017.

Adjusted diluted earnings per share and free cash flow are non-GAAP measures. A quantitative reconciliation of our non-GAAP guidance to the corresponding GAAP information is not available because the non-GAAP guidance excludes certain GAAP information that is uncertain and difficult to predict.

The adjusted diluted earnings per share guidance excludes income in the first nine months of 2016 of $0.22 per share related to a settlement charge for the defined benefit plan, gain on sale of City of Industry facility, severance costs for operating leadership, restructuring charges, and non-GAAP tax provision. Actual amounts for these measures for the three and nine months ended September 30, 2016 appear in the Non-GAAP table included later in this section. For the remainder of the year, the factors that will be excluded are currently unknown due to the level of unpredictability and uncertainty associated with these items, but may include actions such as gain or loss on future sales of assets or businesses, future restructuring charges, non-GAAP tax adjustments, cash flow impacts of acquisitions, and other actions.

For a further discussion of selected trends, events or uncertainties the Company believes may have a significant impact on its future performance, readers should refer to “Key Trends and Recent Results” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the ~~2015~~2016 Form 10-K.

Critical Accounting Policies, Judgments and Estimates

In the ~~third~~first quarter of ~~2016,~~2017, there were no significant changes to the Company’s critical accounting policies, judgments or estimates from those disclosed in the ~~2015~~2016 Form 10-K.

Results of Operations—Three Months Ended March 31, 2017 Compared with the Three Months Ended March 31, 2016

The following table presents the Condensed Consolidated Statements of Income results (in thousands):

	For the Three Months Ended March 31,
	2017						2016⁽¹⁾
	Amount			% of Revenue			Amount		% of Revenue
Net sales:⁽¹⁾
Janitorial, foodservice and breakroom supplies (JanSan)	$	334,375			26.3	%	$	365,523		27.0	%
Technology products		306,356			24.1	%		351,999		26.0	%
Traditional office products		193,988			15.3	%		212,331		15.7	%
Industrial supplies		146,741			11.6	%		139,486		10.3	%
Cut sheet paper		102,018			8.0	%		91,436		6.8	%
Automotive		78,806			6.2	%		79,408		5.9	%
Office furniture		70,128			5.5	%		74,702		5.5	%
Freight and other		36,971			3.0	%		37,411		2.8	%
Total net sales		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	%

(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.

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 quarter 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 quarter of 2017 compared to the first quarter of 2016. Sales decreased due to declines in national big-box retailers of $20.3 million, independent distributor channel of $10.2 million and internet retailers sales of $1.5 million. As a percentage of total sales, JanSan represented 26.3% in the first quarter of 2017, a decrease from the prior year quarter percentage of total sales of 27.0%.

Technology products (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 quarter of 2017, a decrease from the prior year quarter percentage 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%.

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, industrial supplies represented 11.6% in the first quarter of 2017, 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 quarter of 2017 compared to the first quarter of 2016. The increase in this category was primarily driven by increased 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 represented 8.0% in the first quarter of 2017, 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 $0.6 million or 0.8% in the first quarter of 2017 compared to the first quarter of 2016. As a percentage of total sales, automotive products represented 6.2% in the first quarter of 2017, which increased from the prior year quarter percentage of total sales of 5.9%.

Office furniture sales decreased $4.6 million or 6.1% in the first quarter of 2017 compared to the first quarter of 2016. This decrease was primarily the 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, office furniture represented 5.5% in the first quarter of 2017 and 2016, respectively.

The remainder of the Company’s first quarter 2017 net sales were composed of freight and other revenues.

Gross Profit and Gross Margin Rate. Gross profit for the first quarter of 2017 was $185.7 million, compared to $200.1 million in the first quarter of 2016. 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 14.8%. The gross margin decline of $14.4 million was principally 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 lower 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 technology products, while JanSan, traditional office products, furniture and industrial supplies are higher margin categories.

Operating Expenses. Operating expenses for the first quarter of 2017 were $371.9 million or 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 $167.4 million or 12.4% of net sales in the same period last year, primarily as a result of net sales reductions.

Interest Expense, net. Interest expense, net for the first quarter of 2017 was $6.7 million compared to $5.9 million in the first quarter of 2016. This increase was primarily driven by higher interest rates on outstanding debt.

Income Taxes. Income tax benefit was $4.3 million for the first quarter of 2017, compared to income tax expense of $10.0 million for the same period in 2016. The Company’s effective tax rate was 2.2% for the current-year quarter compared to 37.6% for the same period in 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 loss for the first quarter of 2017 decreased to $(188.6) million or $(5.15) per diluted share, compared to net income of $16.5 million or $0.45 per diluted share in the prior year quarter. Adjusted net income was $9.2 million, or $0.25 per diluted share, compared with adjusted net income of $16.7 million or $0.45 per diluted share for the prior year quarter.

Cash Flows

Cash flows for the Company for the quarters ended March 31, 2017 and 2016 are summarized below (in thousands):

	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

Operating Activities

The quarter ended March 31, 2017 increase in net cash provided by operating activities was principally the result of decreased accounts receivable, inventories, other assets and increased accounts payable, partially offset by diminished operating results and decreased accrued liabilities.

Investing Activities

Gross capital spending for the quarter ended March 31, 2017 and 2016 was $8.3 million and $9.9 million, respectively, which was used for various investments in fleet equipment, information technology systems, technology hardware, and distribution center equipment including facility projects.

Financing Activities

The Company’s cash flow from financing activities is largely dependent on levels of borrowing under the Company’s credit agreements, the acquisition or issuance of treasury stock, and quarterly dividend payments.

Cash outflows from financing activities in the quarter 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 incremental borrowings under the 2017 Credit Agreement and term loan as compared to net borrowings and repurchases of shares in the quarter ended March 31, 2016.

In February 2017, the Board of Directors approved a dividend of $0.14 that was paid on April 14, 2017 to shareholders of record as of March 15, 2017.

Liquidity and Capital Resources

Essendant’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. The Company believes that its cash from operations and collections of receivables, coupled with its 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, the funding of pension plans, and funding for additional share repurchases and acquisitions, if any. The Company believes that its sources of borrowings are sound and that the strength of its balance sheet affords the financial flexibility to respond to both internal growth opportunities and those available through acquisitions.

Availability of financing as of March 31, 2017, is summarized below (in millions):

	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

The term loan was funded in a single funding on March 24, 2017. The proceeds from the funding were used to pay down borrowings and increase availability under the revolving credit facility.

The 2017 Credit Agreement provides for the issuance of letters of credit up to $25.0 million, plus up to $165.0 million to be used as collateral for obligations under the 2013 Note Purchase Agreement. Letters of credit totaling approximately $177.5 million were outstanding as of March 31, 2017.

The Company’s total debt and debt-to-total capitalization ratio consisted of the following amounts (in millions):

	As of			As of
	March 31,			December 31,
	2017			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
Debt		577.8			610.4
Stockholders’ equity		590.6			781.1
Total capitalization	$	1,168.4		$	1,391.5

Debt-to-total capitalization ratio		49.5	%		43.9	%

Refer to Note 8 - “Debt”, for further descriptions of the provisions of our financing facilities as well as Note 11 - “Debt”, in our 2016 Form 10-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 three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ (in thousands, except per share data). These non-GAAP measures exclude certain non-recurring items and exclude other items that do not reflect the Company’s ongoing operations and are included to provide investors with useful information about the financial performance of our business. The presented non-GAAP financial measures should not be considered in isolation or as substitutes for the comparable GAAP financial measures. The non-GAAP financial measures do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP, and these non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP financial measures.

In order to calculate the non-GAAP measures, management excludes the following items to the extent they occur in the reporting period, to facilitate the comparison of current and prior year results and ongoing operations, as management believes these items do not reflect the underlying cost structure of our business. These items can vary significantly in amount and frequency.

•

Restructuring charges.Workforce reduction and facility closure charges such as employee termination costs, facility closure and consolidation costs, and other costs directly associated with shifting business strategies or business conditions that are part of a restructuring program.

Restructuring actions were taken in 2015 to improve our operational utilization, labor spend, inventory performance and functional alignment of the organization. This included workforce reductions and facility ~~closure charges such as employee termination costs, facility closure and consolidation costs, and other costs directly associated~~consolidations with ~~shifting business strategies or business conditions that are part~~an expense impact of ~~a restructuring program.~~

~~The Company commenced two such restructuring programs during 2015~~$0.3 million in the first quarter of 2016 (refer to Note 5)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.

The Company recognized a gain on the sale of its City of Industry facility in the third quarter of 2016 (refer to Note 3), a loss on the sale and related impairment of intangible assets of the operations in Mexico in 2015, and a loss on the sale and related impairment of intangible assets of its software subsidiary in 2014, recording an impairment of the seller notes in the third quarter of 2015.

Due to the sale of the City of Industry facility, the Company was able to utilize its capital loss carryforwards. This utilization resulted in the release of the valuation allowance previously established against the deferred tax asset. The $5.0 million tax benefit from the release of the valuation allowance reduced the effective tax rate for the three and nine months ended September 30, 2016, by 9.2% and 4.9%, respectively.

Severance costs for operating leadership.Employee termination costs related to members of the Company’s operating leadership team are excluded as they are based upon individual agreements.

~~Two operating leaders were severed from the Company in the third quarter of 2016, which were not part of a restructuring program.~~

Asset impairments. Changes in strategy or macroeconomic events may cause asset impairments.

~~The~~

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 ~~accelerated amortization of its trademarks upon the announcement of its rebranding effort in 2015.~~Intangible Assets”).

Other ~~actions~~actions.. Actions, which may be non-recurring events, that result from the changing strategies and needs of the Company and do not reflect the underlying expense of the on-going business. These ~~charges~~ include ~~items such as settlement~~ charges related to ~~the defined benefit plan settlement in 2016~~litigation totaling $6.0 million (refer to Note ~~10)~~12 – “Legal Matters”) and ~~the tax impact of the dividend from a foreign subsidiary (refer to Note 13).~~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 ~~the non-cash impact~~acquisitions, net of ~~acquisitions~~cash acquired and divestitures.

For the Three Months Ended September 30,

2016

2015

Operating expenses
$
138,526

$
172,159

Settlement charge related to the defined benefit plan (Note 10)

(419
)

-

Gain on sale of City of Industry facility (Note 3)

20,541

-

Severance costs for operating leadership

(1,245
)

-

Restructuring charges (Note 5)

1,210

(200
)
Impairment of assets and accelerated amortization related to rebranding

-

(511
)
Impairment of seller notes

-

(10,738
)
Loss on sale of Mexico business and related costs

-

(2,072
)
Adjusted operating expenses
$
158,613

$
158,638

Operating income
$
60,328

$
52,984

Operating expense adjustments noted above

(20,087
)

13,521

Adjusted operating income
$
40,241

$
66,505

Net income
$
36,742

$
27,667

Operating expense adjustments noted above

(20,087
)

13,521

Non-GAAP tax provision on adjustments

Settlement charge related to the defined benefit plan (Note 10)

(158
)

-

Gain on sale of City of Industry facility (Note 3)

2,789

-

Severance costs for operating leadership

(469
)

-

Restructuring charges (Note 5)

456

(76
)
Dividend from a foreign subsidiary (Note 13)

1,666

-

Impairment of assets and accelerated amortization related to rebranding

-

(194
)
Impairment of seller notes

-

(4,080
)
Loss on sale of Mexico business and related costs

-

846

Adjusted net income
$
20,939

$
37,684

Diluted earnings per share
$
0.99

$
0.74

Operating expense adjustments noted above

(0.54
)

0.36

Non-GAAP tax provision on adjustments

0.12

(0.10
)
Adjusted diluted earnings per share
$
0.57

$
1.00

Net income
$
36,742

$
27,667

Provision for income taxes

17,102

20,017

Interest expense, net

6,484

5,300

Depreciation and amortization

10,046

10,424

Equity compensation expense

1,355

3,179

Operating expense adjustments noted above

(20,087
)

13,521

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA)
$
51,642

$
80,108

Net cash provided by operating activities
$
121,952

$
62,811

Net cash provided by (used in) investing activities

22,280

(45,363
)
Less: Acquisition, net of cash acquired

-

39,939

Add: Sale of equity investment

-

(612
)
Free cash flow
$
144,232

$
56,775

For the Nine Months Ended September 30,

2016

2015

Operating expenses
$
475,573

$
526,653

Settlement charge related to the defined benefit plan (Note 10)

(12,163
)

-

Gain on sale of City of Industry facility (Note 3)

20,541

-

Severance costs for operating leadership

(1,245
)

-

Restructuring charges (Note 5)

956

(6,495
)
Impairment of assets and accelerated amortization related to rebranding

-

(11,485
)
Impairment of seller notes

-

(10,738
)
Loss on sale of Mexico business and related costs

-

(16,999
)
Adjusted operating expenses
$
483,662

$
480,936

Operating income
$
119,186

$
109,004

Operating expense adjustments noted above

(8,089
)

45,717

Adjusted operating income
$
111,097

$
154,721

Net income
$
66,205

$
51,492

Operating expense adjustments noted above

(8,089
)

45,717

Non-GAAP tax provision on adjustments

Settlement charge related to the defined benefit plan (Note 10)

(4,574
)

-

Gain on sale of City of Industry facility (Note 3)

2,789

-

Severance costs for operating leadership

(469
)

-

Restructuring charges (Note 5)

357

(2,468
)
Dividend from a foreign subsidiary (Note 13)

1,666

-

Impairment of assets and accelerated amortization related to rebranding

-

(4,364
)
Impairment of seller notes

-

(4,080
)
Loss on sale of Mexico business and related costs

-

49

Adjusted net income
$
57,885

$
86,346

Diluted earnings per share
$
1.79

$
1.35

Operating expense adjustments noted above

(0.22
)

1.20

Non-GAAP tax provision on adjustments

-

(0.29
)
Adjusted diluted net income per share
$
1.57

$
2.26

Net income
$
66,205

$
51,492

Provision for income taxes

34,923

42,594

Interest expense, net

18,058

14,918

Depreciation and amortization

30,500

31,356

Equity compensation expense

7,044

6,447

Operating expense adjustments noted above

(8,089
)

45,717

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA)
$
148,641

$
192,524

Net cash provided by operating activities
$
105,968

$
183,659

Net cash provided by (used in) investing activities

5,723

(57,808
)
Less: Acquisitions, net of cash acquired

-

(40,471
)
Add: Sale of equity investment

-

612

Free cash flow
$
111,691

$
85,992

	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	)

~~Results of Operations—Three Months Ended September 30, 2016 Compared with the Three Months Ended September 30, 2015~~

~~Net Sales.~~ ~~Net sales for the third quarter of 2016 were $1.4 billion. The following table summarizes net sales by product category for the three-month periods ended September 30, 2016 and 2015 (in thousands):~~

For the Three Months Ended September 30,

2016

2015⁽¹⁾

Janitorial and breakroom supplies (JanSan)
$
372,880

$
377,763

Technology products

345,649

343,303

Traditional office products

239,964

236,258

Industrial supplies

139,822

146,769

Cut sheet paper

106,589

83,543

Automotive

78,618

75,633

Office furniture

82,216

87,731

Freight revenue

34,731

33,264

Services, Advertising and Other

7,035

7,281

Total net sales
$
1,407,504

$
1,391,545

~~(1)~~

Net sales in the janitorial and breakroom supplies (JanSan) product category decreased 1.3% in the third quarter of 2016 compared to the third quarter of 2015. This category accounted for 26.5% of the Company’s second quarter 2016 consolidated net sales. Sales in this category declined due to lower volumes in independent distributor channels.

Net sales in the technology products category (primarily ink and toner) increased 0.7% from the third quarter of 2015. This category accounted for 24.6% of net sales for the third quarter of 2016. Excluding our Mexican subsidiary, which was sold in the third quarter of 2015, net sales in this category increased 3.2% compared to the prior year quarter, which was driven by sales to new customers.

Net sales of traditional office products increased in the third quarter of 2016 by 1.6% versus the third quarter of 2015. Traditional office supplies represented 17.0% of the Company’s consolidated net sales for the third quarter of 2016. The sales increase was driven by an increase in sales in independent dealer channels as we have increased our share in this channel with new key customer acquisitions.

Industrial supplies net sales in the third quarter of 2016 decreased by 4.7% compared to the same prior-year period. Net sales of industrial supplies accounted for 9.9% of the Company’s net sales for the third quarter of 2016. Growth in retail channel sales partially offset the decline in industrial supplies net sales driven by challenges in the oilfield and welding sector and macro-economic environment.

Net sales in the cut sheet paper category increased in the third quarter of 2016 by 27.6% compared to the third quarter of 2015. Cut sheet paper net sales accounted for 7.6% of the Company’s net sales for the third quarter of 2016. The increase in this category was driven by increased sales in the independent dealer channels.

Automotive net sales in the third quarter of 2016 increased 3.9% compared to the third quarter of 2015. Automotive net sales represented 5.6% of the Company’s third quarter of 2016 net sales. This increase was due to the acquisition of Nestor which contributed an additional $3.8 million in net sales in the third quarter of 2016.

Office furniture net sales in the third quarter of 2016 decreased 6.3% compared to the third quarter of 2015. Office furniture accounted for 5.8% of the Company’s third quarter of 2016 consolidated net sales. This decline was due to declines in sales in national accounts and independent dealer channels.

~~The remainder of the Company’s third quarter 2016 net sales were composed of freight and other revenues.~~

~~Gross Profit and Gross Margin Rate.~~ Gross profit for the third quarter of 2016 was $198.9 million, compared to $225.1 million in the third quarter of 2015. The gross margin rate of 14.1% was down 210 basis points (bps) from the prior-year quarter gross margin rate of 16.2%. Our gross margin declined primarily due to reduced supplier allowances related to inventory reductions and customer and product mix. We also experienced higher freight cost due to new sales and growth of larger customers, and inventory expense increase due to the 2015 favorability related to a LIFO conversion. 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 mature over time. Lower margin categories of sales include cut-sheet paper and technology, while JanSan office products, furniture and industrial are higher margin categories.

~~Operating Expenses.~~ Operating expenses for the third quarter of 2016 were $138.5 million or 9.8% of net sales, compared to $172.2 million or 12.4% of net sales in the prior year. The $33.7 million decline was driven by the gain on sale of the City of Industry facility (refer to Note 3) as well as the impairment of seller notes in 2015. Adjusted operating expenses were $158.6 million or 11.3% of net sales compared with $158.6 million or 11.4% of net sales in the same period last year, reflecting the recognition of previously capitalized costs related to inventory reduction and incremental variable labor costs, offset by actions to reduce salary expense, discretionary spend and lower incentive compensation. We expect to realize future savings through continued rationalization of our distribution center network, realization of process improvements in our distribution centers and our infrastructure, and optimization of our fleet and delivery structure to match the changing business that we are supporting.

~~Interest Expense, net.~~ Interest expense, net for the third quarter of 2016 was $6.5 million compared to $5.3 million in the third 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 $17.1 million for the third quarter of 2016, compared with $20.0 million for the same period in 2015. The Company’s effective tax rate was 31.8% for the current-year quarter and 42.0% for the same period in 2015.

~~Net Income.~~ Net income for the third quarter of 2016 increased to $36.7 million or $0.99 per diluted share, compared to $27.7 million or $0.74 per diluted share in the prior year. Adjusted net income was $20.9 million, or $0.57 per diluted share, compared with adjusted net income of $37.7 million or $1.00 per diluted share for the same three-month period in 2015.

~~Results of Operations— Nine Months Ended September 30, 2016 Compared with the Nine Months Ended September 30, 2015~~

~~Net Sales.~~ Net sales for the nine-month period ended September 30, 2016 were $4.1 billion. The following table summarizes net sales by product category for the nine months ended September 30, 2016 and 2015 (in thousands):

For the Nine Months Ended September 30,

2016

2015⁽¹⁾

Janitorial and breakroom supplies
$
1,102,909

$
1,107,574

Technology products

1,038,194

1,045,577

Traditional office products

669,290

654,669

Industrial supplies

422,142

444,413

Cut sheet paper

294,804

254,395

Automotive

238,576

199,870

Office furniture

231,370

245,104

Freight revenue

100,293

95,522

Services, Advertising and Other

16,745

18,595

Total net sales
$
4,114,323

$
4,065,719

~~(1)~~

Sales in the janitorial and breakroom supplies product category in the first nine months of 2016 were comparable to the first nine months of 2015. This category accounted for 26.8% of the Company’s first nine months of 2016 consolidated net sales. Sales in this category declined due to lower volumes in independent distributor channels.

Sales in the technology products category (primarily ink and toner) decreased in the first nine months of 2016 by 0.7% versus the first nine months of 2015. This category accounted for 25.2% of net sales for the first nine months of 2016. Excluding our Mexican subsidiary, which was sold in the third quarter of 2015, net sales in this category increased 4.3% compared to the prior year quarter, driven by sales to new e-tailers and technology customers.

Sales of traditional office products increased in the first nine months of 2016 by 2.2% versus the first nine months of 2015. Traditional office supplies represented 16.3% of the Company’s consolidated net sales for the first nine months of 2016. The improvement in this category was primarily driven by increased sales in independent dealer channels as we have increased our share in this channel with new key customer acquisitions.

Industrial supplies sales in the first nine months of 2016 decreased by 5.0% compared to the same prior-year period and accounted for 10.3% of the Company’s net sales for the first nine months of 2016. Industrial supplies sales declined due to impacts of our general industrial and energy channels. We expect this impact to continue throughout the year.

Net sales in the cut sheet paper category increased in the first nine months of 2016 by 15.9% compared to the first nine months of 2015. Cut sheet paper net sales accounted for 7.2% of the Company’s net sales for the first nine months of 2016. The increase in this category was driven by increased sales in the independent dealer channels.

Automotive net sales in the first nine months of 2016 increased 19.4% compared to the same prior-year period. Automotive net sales represented 5.8% of the Company’s net sales for the first nine months of 2016. This increase was primarily due to the acquisition of Nestor which contributed an additional $38.9 million in net sales.

Office furniture sales in the first nine months of 2016 decreased 5.6% compared to the first nine months of 2015. Office furniture accounted for 5.6% of the Company’s first nine months of 2016 consolidated net sales. The decline in this category was primarily driven by national account and independent dealer channels sales decreases.

~~The remainder of the Company’s first nine months of 2016 net sales was composed of freight and other revenues.~~

~~Gross Profit and Gross Margin Rate.~~ Gross profit for the first nine months of 2016 was $594.8 million, compared to $635.7 million in the first nine months of 2015. The gross margin rate of 14.5% was down 110 bps from the prior-year period gross margin rate of 15.6%. This decrease was primarily due to product margin, driven by customer and product mix, and higher freight expenses.

~~Operating Expenses.~~ Operating expenses for the first nine months of 2016 were $475.6 million or 11.6% of sales, compared with $526.7 million or 13.0% of sales in the same period last year. The improvement was due to the gain on sale of City of Industry facility (see Note 3) as well as the impairment of seller notes in 2015. Adjusted operating expenses were $483.7 million or 11.8% of net sales and $480.9 million or 11.8% of net sales in the first nine months of 2016 and 2015, respectively.

~~Interest Expense, net.~~ Interest expense, net for the first nine months of 2016 was $18.1 million compared to $14.9 million in the first nine months 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 $34.9 million for the first nine months of 2016, compared with $42.6 million for the same period in 2015. The Company’s effective tax rate was 34.5% for the current-year period and 45.3% for the same period in 2015.

~~Net Income.~~ Net income for the first nine months of 2016 totaled $66.2 million or $1.79 per diluted share, including $8.3 million after-tax, or $0.22 per diluted share, of income related to the Actions. For the same period in the prior year, net income was $51.5 million or $1.35 per diluted share. Adjusted net income for the first nine months of 2016 was $57.9 million, or $1.57 per diluted share, compared with adjusted net income of $86.3 million or $2.26 per diluted share for the same nine-month period in 2015.

~~Pension Settlement~~

Defined benefit plan settlement loss of $0.4 million and $12.2 million for the three and nine months ended September 30, 2016, respectively, resulted from the voluntary lump sum program announced in February 2016. Refer to Note 10 “Pension and Post-Retirement Benefit Plans”, for further information on the remeasurement and voluntary lump sum program.

~~Cash Flows~~

~~The following discussion focuses on information included in the accompanying Condensed Consolidated Statements of Cash Flows.~~

~~Operating Activities~~

Net cash provided by operating activities for the nine-month period ended September 30, 2016 totaled $106.0 million, compared with $183.7 million in the nine-month period ended September 30, 2015. A decrease in inventory of $73.7 million compared to a decrease of $54.4 million in the prior year, an increase in accounts payable of $8.9 million compared to an increase of $50.4 million in the prior year, and an increase in dealer prepayments of $34.5 million compared to an increase of $10.8 million in the prior year were the primary drivers of the $77.7 million decrease.

~~Investing Activities~~

Net cash provided by investing activities for the first nine months of 2016 was $5.7 million, compared with $57.8 million used in investing activities for the nine-month period ended September 30, 2015. The $63.5 million change was primarily driven by $31.0 million proceeds from the sale of our City of Industry facility in 2016 compared with $40.5 million cash used in our acquisition activity in 2015.

~~Financing Activities~~

Net cash used in financing activities for the nine-month period ended September 30, 2016 totaled $119.3 million, compared with $118.1 million in the same prior-year period. Net cash used in financing activities during the first nine months of 2016 was impacted by $96.6 million in net repayments under our revolving credit facility compared to $45.3 million in the prior year, and $6.8 million in share repurchases, compared to $55.7 million in the prior year.

On July 14, 2016, the Board of Directors approved a dividend of $0.14 which was paid on October 14, 2016 to shareholders of record as of September 15, 2016. On September 28, 2016, the Company’s Board of Directors approved payment of a $0.14 per share dividend to shareholders of record as of December 15, 2016 to be paid on January 13, 2017.

The 2013 Credit Agreement and the 2013 Note Purchase Agreement (each as defined in Note 11 “Debt” in the Notes to the Consolidated Financial Statements in the 2015 Form 10-K) limit the Company’s ability to repurchase its stock when the Company’s Leverage Ratio, as defined in the 2013 Credit Agreement and the 2013 Note Purchase Agreement and as reported to its lenders, exceeds 3.00 to 1.00. As of September 30, 2016, the Company’s Leverage Ratio was 2.77 to 1.00.

~~Liquidity and Capital Resources~~

Essendant’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. We believe that our cash from operations and collections of receivables, coupled with our sources of borrowings and available cash on hand, are sufficient to fund currently anticipated requirements. These requirements include payments of interest and dividends, scheduled debt repayments, capital expenditures, working capital needs, restructuring activities, the funding of pension plans, and funding for additional share repurchases and acquisitions, if any. Due to our credit profile over the years, external funds have been available at an acceptable cost. We believe that current credit arrangements are sound and that the strength of our balance sheet affords us the financial flexibility to respond to both internal growth opportunities and those available through acquisitions.

~~Financing available from debt and the sale of accounts receivable as of September 30, 2016, 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

271.8

2013 Note Purchase Agreement

150.0

Receivables Securitization Program ⁽¹⁾

200.0

Outstanding letters of credit

11.2

Total financing utilized

633.0

Available financing, before restrictions

417.0

Restrictive covenant limitation ⁽²⁾

140.4

Available financing as of September 30, 2016

$
276.6

~~(1)~~

The Receivables Securitization Program provides for maximum funding available of the lesser of $200.0 million or the total amount of eligible receivables less excess concentrations and applicable reserves.

~~(2)~~

~~For a description of the restrictive covenants limiting the indebtedness the Company can incur, refer to Note 9 to the Condensed Consolidated Financial Statements included herein.~~

~~The Company’s total capitalization consisted of the following amounts (in millions):~~

As of

As of

September 30,

December 31,

2016

2015

2013 Credit Agreement
$
271.8

$
368.4

2013 Note Purchase Agreement

150.0

150.0

Receivables Securitization Program

200.0

200.0

Debt

621.8

718.4

Stockholders’ equity

782.6

723.7

Total capitalization
$
1,404.4

$
1,442.1

Debt-to-total capitalization ratio

44.3
%

49.8
%

~~Refer to Note 9, “Debt”, for further descriptions of the provisions of our financing facilities as well as Note 11 “Debt” in our 2015 Form 10-K.~~

~~Contractual Obligations~~

During the nine-month period ended September 30, 2016, contractual obligations increased by $73.8 million from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, driven by new facility leases, facility lease renewals and new multi-year technology contracts.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is subject to market risk associated principally with changes in interest rates and foreign currency exchange rates. There were no material changes to the Company’s exposures to market risk during the ~~first nine months of 2016~~quarter 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.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the ~~fiscal~~ quarter ended ~~September 30, 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.

2825

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

For information regarding legal proceedings, see Note 1412 - “Legal Matters.”

ITEM 1A.

RISK FACTORS.

For information regarding risk factors, see “Risk Factors” in Item 1A of Part I of the ~~2015~~2016 Form 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:~~

~~Increased price transparency, driven by online resellers~~

~~Customer consolidation resulting in some customers increasing their buying power and seeking economic~~

~~concessions from the Company~~

~~Shift in customer mix from higher to lower margin channels and vertical markets~~

~~Secular decline in office products categories leading to unfavorable product mix~~

~~Vendor consolidation.~~

If Essendant is unable to reduce expenses, grow sales to existing and new customers, and increase sales of higher margin products as a percentage of total sales, the Company’s results of operations and financial condition may be adversely affected.

For example, during the second and third quarters of 2016, despite the Company’s success at converting customers, profitability was adversely affected by margin pressure resulting from a shift in customer mix to lower margin customers and in product category mix to lower margin products. The transparency of pricing online also caused margin pressure.

~~Essendant’s reliance on supplier allowances and promotional incentives could impact profitability.~~

Supplier allowances and promotional incentives that are often based on the volume of Company product purchases contribute significantly to Essendant’s profitability. If Essendant does not comply with suppliers’ terms and conditions, or does not make requisite purchases to achieve certain volume hurdles, Essendant may not earn certain allowances and promotional incentives. Additionally, suppliers may reduce the allowances they pay Essendant if they conclude the value Essendant creates does not justify the allowances. If Essendant’s suppliers reduce or otherwise alter their allowances or promotional incentives, Essendant’s profit margin for the sale of the products it purchases from those suppliers may decline. The loss or diminution of supplier allowances and promotional support could have an adverse effect on the Company’s results of operations.

For example, in the second quarter of 2016, lower supplier allowances and promotional incentives contributed to the unfavorable margin impact of the product category mix shift, and as the Company executed its strategy to improve cash flow in part through lower inventory balances in the third quarter of 2016, a reduction in purchases from suppliers resulted in lower supplier allowances, which ~~contributed to~~ ~~the unfavorable gross margin changes.~~10-K.

2926

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

(a)

Not applicable.

(b)

Not applicable.

(c)

Common Stock Purchases.

~~During~~The Company did not repurchase any shares of common stock in the ~~nine~~three months ended ~~September 30,~~March 31, 2017 while during the three months ended March 31, 2016, ~~and 2015,~~ the Company repurchased 241,270 ~~and 1,525,222 shares~~ of common stock at an aggregate cost of $6.8 ~~million and $57.4 million, respectively.~~million. The Company did not repurchase any additional shares through ~~October 24, 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

July 1, 2016 to July 31, 2016

-

-

-

68,160,702

August 1, 2016 to August 31, 2016

-

-

-

68,160,702

September 1, 2016 to September 30, 2016

-

-

-

68,160,702

Total Third Quarter

-

$
-

-

$
68,160,702

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

3027

ITEM 6.

EXHIBITS

(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 ~~June 1, 2015~~December 13, 2016 (Exhibit ~~3.2~~3.1 to the Company’s Current Report on Form ~~10-Q,~~8-K, filed on ~~July 23, 2015)~~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)
4.4		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)
~~4.4~~4.5		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~~10.1*		~~Essendant, Inc.~~Fifth Amended and Restated ~~Executive Severance Plan (Exhibit 10.1 to~~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 ~~Company’s Current Report~~financial institutions listed on Form 8-K, filed on July 18, 2016)**the signature pages thereto (the “Credit Agreement”)
10.2*†		~~2016 Cash Incentive Award~~Amendment No 3 to Note Purchase Agreement, ~~with EPS Minimum~~ dated as of ~~July 18, 2016, by~~February 9, 2017, among ESND, ECO and between ESND and Richard D. Phillips**the note purchasers identified therein
10.3*		~~Amended and Restated Executive Employment~~Amendment No 4 to Note Purchase Agreement, dated as of ~~July~~February 22, ~~2016, by and~~2017, among ESND, ECO ~~Essendant Management Services (“EMS”)~~ and Robert B. Aiken, Jr.**the note purchasers identified therein
10.4*		~~Form of~~Second Amended and Restated ~~Executive Employment~~Pledge and Security Agreement, ~~effective~~dated as of January 1, 2017**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*		~~Form of 2016 Restricted Stock Award Agreement with EPS Minimum under the 2015 Long-Term~~Management Incentive PlanPlan for Employees Other Than Section 16 Officers, effective January 1, 2017*
10.6*		Form of ~~Performance Based Restricted Stock Unit~~Performance-Based Cash Award Agreement under the 2015 Long-Term Incentive Plan**
10.7*		~~Amendment No. 2 to Note Purchase Agreement, dated as of August 30, 2016, between ESND, ECO, and~~Essendant Inc. Annual Cash Incentive Award Plan for Section 16 Officers under the ~~noteholders identified therein~~2015 Long-Term Incentive Plan**
10.8*		~~Amendment No. 2 to the Fourth Amended and Restated Five Year Revolving Credit~~Form of Performance-Based Restricted Stock Unit Award Agreement ~~dated as of August 29, 2016, between ESND, ECO, JPMorgan Chase Bank, N.A., as agent, and the other financial institutions identified therein~~for Section 16 Officers**
10.9*		~~August 30, 2016 Consent~~Form of ~~Class Agents under the Amended and Restated Transfer and Administration~~2017 Restricted Stock Award Agreement ~~dated as of January 18, 2013 to amendment to the amendment of the Fourth Amended and Restated Five Year Revolving Credit Agreement, dated as of July 8, 2013~~with EPS Minimum**
10.10*		Essendant Inc. Executive Severance Plan**
31.1*		Certification of Chief Executive Officer, dated as of ~~October~~April 26, ~~2016,~~2017, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer, dated as of ~~October~~April 26, ~~2016,~~2017, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer, dated as of ~~October~~April 26, ~~2016,~~2017, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*		The following financial information from Essendant Inc.’s Quarterly Report on Form 10-Q for the period ended ~~September 30, 2016,~~March 31, 2017, filed with the SEC on ~~October~~April 26, ~~2016,~~2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheet at March 31, 2017 and December 31, 2016; (ii) the Condensed Consolidated Statement of (Loss) Income for the three-month ~~and nine-month~~ periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015 , (ii)~~2016; (iii) the Condensed Consolidated ~~Balance Sheet at September 30, 2016~~Statements of Comprehensive (Loss) Income for the three-month periods ended March 31, 2017 and ~~December 31, 2015, (iii)~~2016; (iv) the Condensed Consolidated Statement of Cash Flows for the ~~nine-month~~three-month periods ended ~~September 30, 2016~~March 31, 2017 and ~~2015,~~2016; and ~~(iv)~~(v) Notes to Condensed Consolidated Financial Statements.
*		- Filed herewith
**		- Represents a management contract or compensatory plan or arrangement
†		~~- Confidential treatment has been requested for a portion of this document. Confidential portions have been omitted and filed separately with the Securities and Exchange Commission.~~

SIGNATURES

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: ~~October~~April 26, ~~2016~~2017			/s/ Earl C. Shanks
			Earl C. Shanks
			Senior Vice President and Chief Financial Officer

3229

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☐

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016		3
Condensed Consolidated Statements of (Loss) Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~		4
Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~		5
Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2825
Item 4. Controls and Procedures		2825
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		2926
Item 1A. Risk Factors		2926
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		3027
Item 6. Exhibits		3128
SIGNATURES		3229

	(Unaudited)			(Audited)			(Unaudited)			(Audited)
	As of September 30,			As of December 31,			As of March 31,			As of December 31,
	2016			2015			2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	22,647		$	29,983		$	22,635		$	21,329
Accounts receivable, less allowance for doubtful accounts of $16,696 in 2016 and $17,810 in 2015		752,260			716,537
Accounts receivable, less allowance for doubtful accounts of $17,639 in 2017 and $18,196 in 2016								679,770			678,184
Inventories		850,463			922,162			826,369			876,837
Other current assets		44,771			27,310			41,287			32,100
Total current assets		1,670,141			1,695,992			1,570,061			1,608,450
Property, plant and equipment, net		126,334			133,751			124,735			128,251
Intangible assets, net								80,775			83,690
Goodwill		298,242			299,355			99,211			297,906
Intangible assets, net		86,886			96,413
Other long-term assets		55,059			37,348			45,435			45,209
Total assets	$	2,236,662		$	2,262,859		$	1,920,217		$	2,163,506
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	540,743		$	531,949		$	487,820		$	484,602
Accrued liabilities		192,189			177,472			187,125			197,804
Current maturities of long-term debt		35			51			6,094			28
Total current liabilities		732,967			709,472		��	681,039			682,434
Deferred income taxes		8,372			11,901			1,486			6,378
Long-term debt		620,155			716,264			565,380			608,941
Other long-term liabilities		92,535			101,488			81,701			84,647
Total liabilities		1,454,029			1,539,125			1,329,606			1,382,400
Stockholders’ equity:
Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2016 and 2015		7,444			7,444
Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2017 and 2016								7,444			7,444
Additional paid-in capital		406,964			410,927			411,586			409,805
Treasury stock, at cost – 36,967,378 shares in 2016 and 37,178,394 shares in 2015		(1,097,094	)		(1,100,867	)
Treasury stock, at cost – 36,935,577 shares in 2017 and 36,951,522 shares in 2016								(1,096,412	)		(1,096,744	)
Retained earnings		1,514,573			1,463,821			1,313,292			1,507,057
Accumulated other comprehensive loss		(49,254	)		(57,591	)		(45,299	)		(46,456	)
Total stockholders’ equity		782,633			723,734			590,611			781,106
Total liabilities and stockholders’ equity	$	2,236,662		$	2,262,859		$	1,920,217		$	2,163,506

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Net income	$	36,742		$	27,667		$	66,205		$	51,492
Other comprehensive income (loss), net of tax
Translation adjustments		(692	)		7,497			2,441			3,076
Minimum pension liability adjustments		(2,298	)		967			6,035			2,831
Cash flow hedge adjustments		288			(208	)		(139	)		(636	)
Total other comprehensive income (loss), net of tax		(2,702	)		8,256			8,337			5,271
Comprehensive income	$	34,040		$	35,923		$	74,542		$	56,763

	For the Three Months Ended
	March 31,
	2017			2016
Net (loss) income	$	(188,593	)	$	16,530
Other comprehensive (loss) income, net of tax
Translation adjustments		385			2,691
Minimum pension liability adjustments		704			915
Cash flow hedge adjustments		68			(527	)
Total other comprehensive (loss) income, net of tax		1,157			3,079
Comprehensive (loss) income	$	(187,436	)	$	19,609

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

	Total		Estimated Life
Customer relationships	$	15,570	13 years
Trademark		1,360	2-15 years
Total	$	16,930

	Expenses										Cash flow				Accrued Liabilities		Expenses				Cash flow				Accrued Liabilities
	For the three months ended September 30,					For the nine months ended September 30,					For the nine months ended September 30,				As of September 30,		For the three months ended March 31,				For the three months ended March 31,				As of March 31,		As of December 31,
																	2017		2016		2017		2016		2017		2016
Fourth quarter 2015 Action
Workforce reduction																	$	-	$	-	$	316	$	3,179	$	1,108	$	1,424
	2016			2015		2016			2015		2016		2015		2016
First quarter 2015 Actions
Workforce reduction	$	(0.5	)	$	-	$	(0.5	)	$	6.0							$	-	$	-	$	94	$	250	$	664	$	758
Facility closure	$	-			0.2	$	0.3			0.5								-		254		-		385		-		-
Total	$	(0.5	)		0.2	$	(0.2	)	$	6.5	$	1.2	$	3.0	$	0.8	$	-		254	$	94	$	635	$	664	$	758

Fourth Quarter 2015 Action
Workforce reduction	$	(0.7	)	N/A		$	(0.7	)	N/A		$	8.0	N/A		$	2.1

Goodwill, balance as of December 31, 2015	$	299,355
Purchase accounting adjustments		(1,858	)
Currency translation adjustments		745
Goodwill, balance as of September 30, 2016	$	298,242

	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

	September 30, 2016								December 31, 2015								March 31, 2017								December 31, 2016
								Weighted								Weighted								Weighted								Weighted
								Average								Average								Average								Average
	Gross					Net		Useful	Gross					Net		Useful	Gross					Net		Useful	Gross					Net		Useful
	Carrying		Accumulated			Carrying		Life	Carrying		Accumulated			Carrying		Life	Carrying		Accumulated			Carrying		Life	Carrying		Accumulated			Carrying		Life
	Amount		Amortization			Amount		(years)	Amount		Amortization			Amount		(years)	Amount		Amortization			Amount		(years)	Amount		Amortization			Amount		(years)
Intangible assets subject to amortization
Customer relationships and other intangibles	$	137,678	$	(59,545	)	$	78,133	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		4,651		(4,260	)		391	4		4,644		(4,260	)		384	4		4,651		(4,260	)		391	4		4,649		(4,260	)		389	4
Trademarks		13,725		(5,363	)		8,362	14		13,688		(4,240	)		9,448	14		13,712		(5,897	)		7,815	14		13,704		(5,620	)		8,084	14
Total	$	156,054	$	(69,168	)	$	86,886		$	156,270	$	(59,857	)	$	96,413		$	155,902	$	(75,127	)	$	80,775		$	155,805	$	(72,115	)	$	83,690

Year	Amount		Amount
2016	$	12,242
2017		10,797	$	10,786
2018		8,054		8,045
2019		6,937		6,928
2020		6,934		6,925
2021				6,925

	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		2,441			(579	)		(3,946	)		(2,084	)		385			(126	)		-			259
Settlement loss reclassified from AOCI		-			-			7,453			7,453
Amounts reclassified from AOCI		-			440			2,528			2,968			-			194			704			898
Net other comprehensive (loss) income		2,441			(139	)		6,035			8,337			385			68			704			1,157
AOCI, balance as of September 30, 2016	$	(7,425	)	$	7		$	(41,836	)	$	(49,254	)
AOCI, balance as of March 31, 2017													$	(8,054	)	$	240		$	(37,485	)	$	(45,299	)

	Amount Reclassified From AOCI							Amount Reclassified From AOCI
	For the Three			For the Nine				For the Three
	Months Ended			Months Ended				Months Ended
	September 30,			September 30,			Affected Line Item In The Statement	March 31,			Affected Line Item In The Statement
Details About AOCI Components	2016			2016			Where Net Income is Presented	2017			Where Net Income is Presented
Realized and unrealized gains (losses) on cash flow hedges
Gain on interest rate swap, before tax	$	249		$	789		Interest expense, net	$	317		Interest expense, net
Loss on foreign exchange hedges, before tax		-			(70	)	Cost of goods sold
		(96	)		(279	)	Tax provision		(123	)	Tax provision
	$	153		$	440		Net of tax	$	194		Net of tax

Defined benefit pension plan items
Amortization of prior service cost and unrecognized loss	$	1,237		$	4,125		Warehousing, marketing and administrative expenses	$	1,134		Warehousing, marketing and administrative expenses
Settlement loss		419			12,163		Defined benefit plan settlement loss
		(641	)		(6,307	)	Tax provision		(430	)	Tax provision
		1,015			9,981		Net of tax		704		Net of tax
Total reclassifications for the period, net of tax	$	1,168		$	10,421			$	898

	Fair Value Measurements as of September 30, 2016
			Quoted Market Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		Level 1		Level 2		Level 3
Assets
Foreign exchange hedges	$	95	$	-	$	95	$	-

Liabilities
Interest rate swap	$	501	$	-	$	501	$	-
Foreign exchange hedges		30		-		30		-
	$	531	$	-	$	531	$	-

	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	$	-

	For the Three Months Ended September 30,
	2016		2015⁽¹⁾
Janitorial and breakroom supplies (JanSan)	$	372,880	$	377,763
Technology products		345,649		343,303
Traditional office products		239,964		236,258
Industrial supplies		139,822		146,769
Cut sheet paper		106,589		83,543
Automotive		78,618		75,633
Office furniture		82,216		87,731
Freight revenue		34,731		33,264
Services, Advertising and Other		7,035		7,281
Total net sales	$	1,407,504	$	1,391,545

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		271.8
2013 Note Purchase Agreement		150.0
Receivables Securitization Program ⁽¹⁾		200.0
Outstanding letters of credit		11.2
Total financing utilized				633.0
Available financing, before restrictions				417.0
Restrictive covenant limitation ⁽²⁾				140.4
Available financing as of September 30, 2016			$	276.6

2016 Fiscal Month	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
July 1, 2016 to July 31, 2016		-		-		-		68,160,702
August 1, 2016 to August 31, 2016		-		-		-		68,160,702
September 1, 2016 to September 30, 2016		-		-		-		68,160,702
Total Third Quarter		-	$	-		-	$	68,160,702