Essendant 10Q 2013 Q2 Quarterly report

Essendant (ESND) Inactive 10-Q2013 Q2 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-10653

UNITED STATIONERS INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

36-3141189

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

One Parkway North Boulevard

Suite 100

Deerfield, Illinois 60015-2559

(847) 627-7000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

On July 25, 2013, the registrant had outstanding 39,881,144 shares of common stock, par value $0.10 per share.

UNITED STATIONERS INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2013

TABLE OF CONTENTS


	Page No.
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012		3

Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2013 and 2012		4

Condensed Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2013 and 2012		5

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012		6

Notes to Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		22

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		23

Item 1A. Risk Factors		23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23

Item 6. Exhibits		24

SIGNATURES		25

UNITED STATIONERS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	(Unaudited)			(Audited)
	As of June 30, 2013			As of December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	21,117		$	30,919
Accounts receivable, less allowance for doubtful accounts of $22,671 in 2013 and $22,716 in 2012		662,195			658,760
Inventories		732,202			767,206
Other current assets		26,014			30,118

Total current assets		1,441,528			1,487,003
Property, plant and equipment, net		139,098			143,523
Goodwill		358,427			357,226
Intangible assets, net		64,713			67,192
Other long-term assets		26,598			20,260

Total assets	$	2,030,364		$	2,075,204

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	475,207		$	495,278
Accrued liabilities		176,394			205,228
Short-term debt		1,200			—

Total current liabilities		652,801			700,506
Deferred income taxes		16,693			18,054
Long-term debt		517,285			524,376
Other long-term liabilities		83,059			94,176

Total liabilities		1,269,838			1,337,112
Stockholders’ equity:
Common stock, $0.10 par value; authorized—100,000,000 shares, issued—74,435,628 shares in 2013 and 2012		7,444			7,444
Additional paid-in capital		408,419			404,196
Treasury stock, at cost – 34,605,362 shares in 2013 and 34,116,220 shares in 2012		(986,949	)		(963,220	)
Retained earnings		1,380,727			1,343,437
Accumulated other comprehensive loss		(49,115	)		(53,765	)

Total stockholders’ equity		760,526			738,092

Total liabilities and stockholders’ equity	$	2,030,364		$	2,075,204

See notes to condensed consolidated financial statements.

UNITED STATIONERS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(Unaudited)


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Net sales	$	1,274,494	$	1,275,710	$	2,524,979	$	2,547,357
Cost of goods sold		1,072,558		1,087,451		2,134,518		2,178,169

Gross profit		201,936		188,259		390,461		369,188
Operating expenses:
Warehousing, marketing and administrative expenses		143,009		137,935		306,293		287,272

Operating income		58,927		50,324		84,168		81,916
Interest expense, net		2,856		7,070		5,969		14,236

Income before income taxes		56,071		43,254		78,199		67,680
Income tax expense		21,401		16,225		29,655		25,539

Net income	$	34,670	$	27,029	$	48,544	$	42,141

Net income per share—basic:
Net income per share—basic	$	0.87	$	0.67	$	1.22	$	1.03

Average number of common shares outstanding—basic		39,762		40,223		39,867		40,899
Net income per share—diluted:
Net income per share—diluted	$	0.86	$	0.66	$	1.20	$	1.01

Average number of common shares outstanding—diluted		40,328		40,887		40,475		41,626
Dividends declared per share	$	0.14	$	0.13	$	0.28	$	0.26

See notes to condensed consolidated financial statements.

UNITED STATIONERS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Net income	$	34,670		$	27,029		$	48,544		$	42,141
Other comprehensive income, net of tax
Unrealized translation adjustment		(1,384	)		(852	)		(639	)		766
Amortization of prior service costs and unrecognized loss included in net periodic benefit cost		967			—			1,987			—
Unrealized interest rate swap adjustments		3,158			2,293			3,302			4,437

Total other comprehensive income, net of tax		2,741			1,441			4,650			5,203

Comprehensive income	$	37,411		$	28,470		$	53,194		$	47,344

See notes to condensed consolidated financial statements.

UNITED STATIONERS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)


	For the Six Months Ended
	June 30,
	2013			2012
Cash Flows From Operating Activities:
Net income	$	48,544		$	42,141
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,381			17,338
Share-based compensation		5,538			3,165
(Gain) loss on the disposition of property, plant and equipment		(219	)		49
Amortization of capitalized financing costs		446			498
Excess tax benefits related to share-based compensation		(1,545	)		(159	)
Deferred income taxes		(7,195	)		(3,474	)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net		(4,036	)		4,425
Decrease in inventory		31,604			48,924
Decrease in other assets		997			15,455
Decrease in accounts payable		(36,236	)		(32,178	)
Increase (decrease) in checks in-transit		16,094			(20,324	)
Decrease in accrued liabilities		(20,757	)		(14,283	)
Decrease in other liabilities		(7,366	)		(13,244	)

Net cash provided by operating activities		45,250			48,333
Cash Flows From Investing Activities:
Capital expenditures		(17,044	)		(10,342	)
Proceeds from the disposition of property, plant and equipment		3,522			103

Net cash used in investing activities		(13,522	)		(10,239	)
Cash Flows From Financing Activities:
Net (repayments) borrowings under debt arrangements		(5,891	)		30,384
Net proceeds (disbursements) from share-based compensation arrangements		14,366			(583	)
Acquisition of treasury stock, at cost		(39,810	)		(54,311	)
Payment of cash dividends		(11,220	)		(10,848	)
Excess tax benefits related to share-based compensation		1,545			159
Payment of debt issuance costs		(410	)		(121	)

Net cash used in financing activities		(41,420	)		(35,320	)
Effect of exchange rate changes on cash and cash equivalents		(110	)		2

Net change in cash and cash equivalents		(9,802	)		2,776
Cash and cash equivalents, beginning of period		30,919			11,783

Cash and cash equivalents, end of period	$	21,117		$	14,559

Other Cash Flow Information:
Income tax payments, net	$	36,882		$	13,606
Interest paid		7,115			14,144

See notes to condensed consolidated financial statements.

UNITED STATIONERS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying Condensed Consolidated Financial Statements represent United Stationers Inc. (“USI”) with its wholly owned subsidiary United Stationers Supply Co. (“USSC”), and USSC’s subsidiaries (collectively, “United” 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 USI and its subsidiaries. All intercompany transactions and balances have been eliminated. The Company operates in a single reportable segment as a leading distributor of business products.

The accompanying Condensed Consolidated Financial Statements are unaudited, except for the Condensed Consolidated Balance Sheet as of December 31, 2012, which was derived from the December 31, 2012 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, 2012 for further information.

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of United at June 30, 2013 and the results of operations and cash flows for the three and six months ended June 30, 2013 and 2012. The results of operations for the three months and six months ended June 30, 2013 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year.

Acquisition of O.K.I. Supply Co.

During the fourth quarter of 2012, USSC completed the acquisition of all of the capital stock of O.K.I. Supply Co. (OKI), a welding, safety and industrial products wholesaler. This acquisition was completed with a purchase price of $90 million. The purchase price includes approximately $4.5 million payable upon completion of a two year indemnification period. In total the purchase price, net of cash acquired, was $79.8 million. The acquisition extends the Company’s position as the leading pure-wholesale industrial distributor in the United States and brings expanded categories and services to customers. The purchase was financed through the Company’s existing debt agreements.

The acquisition was accounted for under the purchase method of accounting in accordance with ASC 805, Business Combinations, with the excess purchase price over the fair market value of the assets acquired and liabilities assumed allocated to goodwill. Based on the preliminary purchase price allocation, the Company has recorded goodwill of $30.4 million and intangible assets of $18.0 million with definite lives related to trademarks and trade names, content, customer lists, and certain non-compete agreements as of June 30, 2013. Additionally, included within the purchase price allocation was $3.3 million of facilities and related equipment which the Company has sold in 2013. These assets were valued at their fair-value at the date of acquisition less the estimated cost to sell these assets.

The purchase price for OKI has been allocated to the assets acquired and liabilities assumed based on estimated fair values at the date of the acquisition. The Company is in the process of finalizing appraisals of tangible and intangible assets and continues to evaluate the initial purchase price allocations and adjust, as of the acquisition date, as additional information relative to the fair values of the assets and liabilities of the businesses become known. Accordingly, management has used its best estimate in the initial purchase price allocation as of the date of these financial statements.

New Accounting Pronouncements

On January 1, 2013 the Company adopted ASU No. 2012-02,Intangibles—Goodwill and Other (Topic 350)—Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), which was issued by the FASB in July 2012. Under the guidance, testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill has been simplified. The guidance allows an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. Upon adoption of this guidance on January 1, 2013, there was no impact on the Company’s financial condition or results of operations.

In February 2013, the FASB issued Accounting Standards Update No. 2013-02,Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income(ASU 2013-02), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires an entity to report the effect of significant reclassifications

out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The Company has adopted the guidance for the reporting period ending June 30, 2013. There was no impact on the Company’s financial condition or results of operations due to the adoption.

2. Share-Based Compensation

As of June 30, 2013, the Company has two active equity compensation plans. Under the Amended and Restated 2004 Long-Term Incentive Plan, award vehicles include, but are not limited to, stock options, restricted stock awards, restricted stock units, 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 retainer and meeting fees.

The Company granted 41,379 shares of restricted stock, 152,513 restricted stock units (“RSUs”), and 575,426 stock options during the first six months of 2013. During the first six months of 2012, the Company granted 216,311 shares of restricted stock and 204,686 RSUs. There were no stock options granted during the first six months of 2012.

3. Severance and Restructuring Charges

During the first quarter of 2013, the Company recorded a $14.4 million pre-tax charge related to a workforce reduction and facility closures. These actions were substantially completed in the first quarter of 2013. The pre-tax charge is comprised of certain OKI facility closure expenses of $1.2 million and severance and workforce reduction related expense of $13.2 million which were included in operating expenses. Cash outflows for this action will occur primarily during 2013 and 2014. Cash outlays associated with this charge in the six months ended June 30, 2013 were $3.0 million. In the second quarter of 2013, the Company reversed approximately $0.3 million of this charge. As of June 30, 2013, the Company had accrued liabilities for these actions of $11.1 million.

During the first quarter 2012, the Company approved a distribution network optimization and cost reduction program. This program was substantially completed in the first quarter of 2012 and the Company recorded a $6.2 million pre-tax charge in that period in connection with these actions. The pre-tax charge is comprised of facility closure expenses of $2.6 million and severance and workforce reduction related expense of $3.6 million which were included in operating expenses. Cash outflows for this action occurred during 2012 and will continue in 2013. Cash outlays associated with this charge in the six months ended June 30, 2013 were $1.5 million. As of June 30, 2013 and December 31, 2012, the Company had accrued liabilities for these actions of $0.4 million and $1.9 million, respectively.

4. Accumulated Other Comprehensive Income (Loss)

The change in Accumulated Other Comprehensive Income (Loss) (AOCI) by component, net of tax, for the period ended June 30, 2013 is as follows:


(amounts in thousands)	Foreign Currency Translation			Cash Flow Hedges			Defined Benefit Pension Plans			Total
AOCI, balance as of December 31, 2012	$	(5,760	)	$	(713	)	$	(47,292	)	$	(53,765	)
Other comprehensive income before reclassifications		(639	)		3,161			—			2,522
Amounts reclassified from AOCI		—			141			1,987			2,128

Net other comprehensive income		(639	)		3,302			1,987			4,650

AOCI, balance as of June 30, 2013	$	(6,399	)	$	2,589		$	(45,305	)	$	(49,115	)

The following table details the amounts reclassified out of AOCI into the income statement during the three-month and six-month periods ending June 30, 2013 respectively:


Details About AOCI Components	Amount Reclassified From AOCI						Affected Line Item In The Statement Where Net Income Is Presented
Details About AOCI Components	For the Three Months Ended June 30, 2013			For the Six Months Ended June 30, 2013
Losses on interest rate swap cash flow hedges, before tax	$	—		$	228		Interest expense, net
		—			(87	)	Tax provision

	$	—		$	141		Net of tax

Amortization of defined benefit pension plan items:⁽¹⁾
Prior service cost and unrecognized loss	$	1,624		$	3,249		Warehousing, marketing and administrative expenses
		(657	)		(1,262	)	Tax provision

		967			1,987		Net of tax

Total reclassifications for the period	$	967		$	2,128		Net of tax

(1)

In the first quarter of 2013, the Company began to record the amortization of actuarial gains and losses and prior service costs recognized as a component of net periodic pension costs to AOCI. Prior to the first quarter of 2013, on a quarterly basis the Company recorded the amortization of actuarial gains and losses and prior service costs recognized as a component of net periodic pension cost to long term liabilities, with the amount being recorded to AOCI on an annual basis.

5. Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if dilutive securities were exercised into common stock. Stock options, restricted stock and deferred stock units are considered dilutive securities. For the three-month and six-month periods ending June 30, 2013 and 2012, 0.6 million and 0.5 million shares of such securities, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
Numerator:
Net income	$	34,670	$	27,029	$	48,544	$	42,141
Denominator:
Denominator for basic earnings per share -
weighted average shares		39,762		40,223		39,867		40,899
Effect of dilutive securities:
Employee stock options and restricted units		566		664		608		727

Denominator for diluted earnings per share -
Adjusted weighted average shares and the effect of dilutive securities		40,328		40,887		40,475		41,626

Net income per share:
Net income per share—basic	$	0.87	$	0.67	$	1.22	$	1.03
Net income per share—diluted	$	0.86	$	0.66	$	1.20	$	1.01

Common Stock Repurchases

On May 15, 2013 the Company’s Board of Directors approved an expanded stock repurchase program authorizing the purchase of an additional $100 million of the Company’s Common Stock. During the three-month periods ended June 30, 2013 and 2012, the Company repurchased 978,194 and 715,561 shares of USI’s common stock at an aggregate cost of $33.2 million and $20.7 million, respectively. During the six-month periods ended June 30, 2013 and 2012, the Company repurchased 1,186,468 and 1,843,716 shares of USI’s common stock at an aggregate cost of $41.0 million and $54.3 million, respectively. Depending on market and business conditions and other factors, the Company may continue or suspend purchasing its common stock at any time without notice. Acquired shares are included in the issued shares of the Company and treasury stock, but are not included in average shares outstanding when calculating earnings per share data. During the first six months of 2013 and 2012, the Company reissued 697,326 and 257,585 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.

6. Debt

USI is a holding company and, as a result, its primary sources of funds are cash generated from operating activities of its direct operating subsidiary, USSC, and from borrowings by USSC. The 2011 Credit Agreement (as defined in Note 9 of the Company’s Form 10-K for the year ended December 31, 2012), the 2007 Note Purchase Agreement (as defined in Note 9 of the Company’s Form 10-K for the year ended December 31, 2012), and the current Receivables Securitization Program (as defined below) contain restrictions on the use of cash transferred from USSC to USI.

On January 18, 2013, the Company’s accounts receivable securitization program (“Receivables Securitization Program” or “Program”) was amended and restated to increase the maximum amount of financing from $150 million to $200 million and to extend the term of the Program through January 18, 2016. The parties to the Program are USI, USSC, United Stationers Financial Services LLC (“USFS”), United Stationers Receivables, LLC (“USR”), and PNC Bank, National Association and the Bank of Tokyo – Mitsubishi UFJ, Ltd New York Branch (the “Investors”). The Receivables Securitization Program is governed by the following agreements:

•

The Transfer and Administration Agreement among USSC, USFS, USR, and the Investors;

•

The Receivables Sale Agreement between USSC and USFS;

•

The Receivables Purchase Agreement between USFS and USR; and

•

The Performance Guaranty executed by USI in favor of USR.

The receivables sold to the Investor remain on USI’s Condensed Consolidated Balance Sheets, and amounts advanced to USR by the Investors or any successor Investors are recorded as debt on USI’s Condensed Consolidated Balance Sheets. The cost of such debt is recorded as interest expense on USI’s Condensed Consolidated Statements of Income. As of June 30, 2013 and December 31, 2012, $377.5 million and $400.2 million, respectively, of receivables had been sold to the Investors. USR had $200.0 million and $150.0 million outstanding as of June 30, 2013 and December 31, 2012, respectively, under the Program.

On July 8, 2013, the Company and USSC entered into a Fourth Amended and Restated Five-Year Revolving Credit Agreement (the “2013 Credit Agreement”) with JPMorgan Chase Bank, National Association, as Agent, and the lenders identified therein. The 2013 Credit Agreement amended and restated the 2011 Credit Agreement and extends the maturity date of the loan agreement to July 6, 2018.

The 2013 Credit Agreement provides for a revolving credit facility with an aggregate committed principal amount of $700 million. The 2013 Credit Agreement also provides for the issuance of letters of credit. Subject to the terms and conditions of the 2013 Credit Agreement, USSC may seek additional commitments to increase the aggregate committed principal amount to a total amount of $1.05 billion, a $50 million increase over the maximum under the 2011 Credit Agreement.

Amounts borrowed under the 2013 Credit Agreement are secured by substantially all of the Company’s assets, other than real property and certain accounts receivable. Borrowings under the 2013 Credit Agreement will bear interest at LIBOR for specified interest periods or at the Alternate Base Rate (as defined in the 2013 Credit Agreement), plus, in each case, a margin determined based on the Company’s permitted debt to EBITDA ratio calculated as provided in Section 6.20 of the 2013 Credit Agreement (the “Leverage Ratio”). Depending on the Company’s Leverage Ratio, the margin on LIBOR-based loans ranges from 1.00% to 2.00% and on Alternate Base Rate loans ranges from 0.00% to 1.00%. Based on the Company’s current Leverage Ratio, the applicable margin for LIBOR-based loans would be 1.375% and for Alternate Base Rate loans would be 0.375%. In addition, USSC is required to pay the lenders a fee on the unutilized portion of the commitments under the 2013 Credit Agreement at a rate per annum between 0.15% and 0.35%, depending on the Company’s Leverage Ratio. The 2013 Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type.

Debt consisted of the following amounts (in millions):


	As of June 30, 2013		As of December 31, 2012
2011 Credit Agreement	$	182.1	$	238.1
2007 Master Note Purchase Agreement (Private Placement)		135.0		135.0
2009 Receivables Securitization Program		200.0		150.0
Mortgage & Capital Lease		1.4		1.3

Total	$	518.5	$	524.4

As of June 30, 2013, 100% of the Company’s outstanding debt is priced at variable interest rates based primarily on the applicable bank prime rate or London InterBank Offered Rate (“LIBOR”).

7. Pension and Post-Retirement Benefit Plans

The Company maintains pension plans covering union and certain non-union employees. For more information on the Company’s retirement plans, see Notes 11 and 12 to the Company’s Consolidated Financial Statements in the Form 10-K for the year ended December 31, 2012. A summary of net periodic pension cost related to the Company’s pension plans for the three and six months ended June 30, 2013 and 2012 is as follows (dollars in thousands):


	Pension Benefits
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Service cost—benefit earned during the period	$	303		$	240		$	607		$	481
Interest cost on projected benefit obligation		2,098			2,104			4,195			4,208
Expected return on plan assets		(2,841	)		(2,501	)		(5,683	)		(5,002	)
Amortization of prior service cost		47			44			95			88
Amortization of actuarial loss		1,577			1,549			3,154			3,097

Net periodic pension cost	$	1,184		$	1,436		$	2,368		$	2,872

The Company made cash contributions of $13.0 million to its pension plans during each of the first six months ended June 30, 2013 and 2012. Additional fundings, if any, for 2013 have not yet been determined. As of June 30, 2013 and December 31, 2012, respectively, the Company had accrued $37.1 million and $51.0 million of pension liability within “Other Long-Term Liabilities” on the Condensed Consolidated Balance Sheets.

Defined Contribution Plan

The Company has defined contribution plans covering certain salaried associates and non-union hourly paid associates (the “Plan”). The Plan permits associates to defer a portion of their pre-tax and after-tax salary as contributions to the Plan. The Plan also provides for company-funded discretionary contributions as well as matching associates’ salary deferral contributions, at the discretion of the Board of Directors. The Company recorded expense of $1.5 million and $2.9 for the Company match of employee contributions to the Plan for the three and six months ended June 30, 2013. During the same periods last year, the Company recorded $1.3 million and $2.7 million to match employee contributions.

8. Derivative Financial Instruments

Interest rate movements create a degree of risk to the Company’s operations by affecting the amount of interest payments. Interest rate swap agreements are used to manage the Company’s exposure to interest rate changes. The Company designates its floating-to-fixed interest rate swaps as cash flow hedges of the variability of future cash flows at the inception of the swap contract to support hedge accounting.

USSC entered into five separate swap transactions to mitigate USSC’s floating rate risk on the noted aggregate notional amount of LIBOR-based interest rate risk noted in the table below. These swap transactions occurred as follows:

•

On November 6, 2007, USSC entered into an interest rate swap transaction (the “November 2007 Swap Transaction”) with U.S. Bank National Association as the counterparty. This swap matured on January 15, 2013.

•

On December 20, 2007, USSC entered into another interest rate swap transaction (the “December 2007 Swap Transaction”) with Key Bank National Association as the counterparty. This swap transaction matured on June 21, 2012.

•

On March 13, 2008, USSC entered into an interest rate swap transaction (the “March 2008 Swap Transaction”) with U.S. Bank National Association as the counterparty. This swap transaction matured on June 29, 2012.

•

On July 18, 2012, USSC entered into a two-year forward, three-year interest rate swap transaction (the “July 2012 Swap Transaction”) with U.S. Bank National Association as the counterparty. The swap transaction has an effective date of July 18, 2014 and a maturity date of July 18, 2017.

•

On June 11, 2013, USSC entered into a seven-month forward, seven-year interest rate swap transaction (the “June 2013 Swap Transaction”) with J.P. Morgan Chase Bank as the counterparty. The swap transaction has an effective date of January 15, 2014 and a maturity date of January 15, 2021.

As of June 30, 2013, none of the Company’s current outstanding debt interest payments were designated as hedged forecasted transactions.

The Company’s outstanding swap transactions were accounted for as cash flow hedges and were recorded at fair value on the statement of financial position as of June 30, 2013, at the following amounts (in thousands):


As of June 30, 2013	Notional Amount		Receive	Pay			Maturity Date		Fair Value Net Asset ⁽¹⁾
July 2012 Swap Transaction	$	150,000	Floating 1-month LIBOR		1.054	%		July 18, 2017	$	1,539
June 2013 Swap Transaction	$	150,000	Floating 3-month LIBOR		2.125	%		January 15, 2021	$	2,785

(1)

These interest rate derivatives qualify for hedge accounting, and are in a net asset position. Therefore, the fair value of the interest rate derivatives are included in the Company’s Condensed Consolidated Balance Sheets as a component of “Other Assets”, with an offsetting component in “Stockholders’ Equity” as part of “Accumulated Other Comprehensive Loss”.

Under the terms of the July 2012 Swap Transaction, USSC will be required to make monthly fixed rate payments to the counterparty calculated based on the notional amounts noted in the table above at a fixed rate also noted in the table above, while the counterparty is obligated to make monthly floating rate payments to USSC based on the one-month LIBOR on the same referenced notional amount. Under the terms of the June 2013 Swap Transaction, USSC will be required to make semi-annual fixed rate payments to the counterparty calculated based on the notional amounts noted in the table above at a fixed rate also noted in the table above, while the counterparty is obligated to make quarterly floating rate payments to USSC based on the three-month LIBOR on the same referenced notional amount.

The hedged transactions described above qualify as cash flow hedges in accordance with accounting guidance on derivative instruments. This guidance requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The Company does not offset fair value amounts recognized for interest rate swaps executed with the same counterparty.

For derivative instruments that are designated and qualify as a cash flow hedge (for example, hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (for example, in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt).

The July 2012 Swap Transaction effectively converts a portion of the Company’s future floating-rate debt to a fixed-rate basis. The June 2013 Swap Transaction reduces the exposure to variability in interest rates between the date the Company entered into the hedge and the future date of a debt issuance by the Company. Both swap transactions, reduce the impact of interest rate changes on future interest expense. By using such derivative financial instruments, the Company exposes itself to credit risk and market risk. Credit risk is the risk that the counterparty to the interest rate swap (as noted above) will fail to perform under the terms of the agreement. The Company attempts to minimize the credit risk in these agreements by only entering into transactions with counterparties the Company determines are creditworthy. The market risk is the adverse effect on the value of a derivative financial instrument that results from a change in interest rates.

The Company’s agreements with its derivative counterparties provides that if an event of default occurs on any Company debt of $25 million or more, the counterparties can terminate the swap agreement. If an event of default had occurred and the counterparties had exercised its early termination rights under the outstanding swap transactions as of June 30, 2013, the Company would have been entitled to receive the aggregate fair value net asset of $4.3 million plus accrued interest from the counterparties.

The swap transactions that were in effect as of June 30, 2013 and the swap transaction that was in effect as of June 30, 2012 contained no ineffectiveness; therefore, all gains or losses on those derivative instruments were reported as a component of other comprehensive income (“OCI”) and reclassified into earnings as “interest expense” in the same period or periods during which they affected earnings. The following table depicts the effect of these derivative instruments on the statements of income and comprehensive income for the three and six month periods ended June 30, 2013 and June 30, 2012.


	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)					Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	For the Three Months Ended June 30, 2013		For the Six Months Ended June 30, 2013				For the Three Months Ended June 30, 2013		For the Six Months Ended June 30, 2013
November 2007 Swap Transaction	$	—	$	(77	)	Interest expense, net	$	—	$	(228	)
December 2007 Swap Transaction		—		—		Interest expense, net		—		—
March 2008 Swap Transaction		—		—		Interest expense, net		—		—
July 2012 Swap Transaction		1,459		1,452		Interest expense, net		—		—
June 2013 Swap Transaction		1,699		1,699		Interest expense, net		—		—


	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	For the Three Months Ended June 30, 2012			For the Six Months Ended June 30, 2012				For the Three Months Ended June 30, 2012			For the Six Months Ended June 30, 2012
November 2007 Swap Transaction	$	(578	)	$	(1,276	)	Interest expense, net	$	(1,430	)	$	(2,839	)
December 2007 Swap Transaction		(605	)		(1,335	)	Interest expense, net		(1,621	)		(3,400	)
March 2008 Swap Transaction		(253	)		(535	)	Interest expense, net		(678	)		(1,344	)
July 2012 Swap Transaction		—			—		Interest expense, net		—			—
June 2013 Swap Transaction		—			—		Interest expense, net		—			—

9. Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including interest rate swap derivatives, based on the mark-to-market position of the Company’s positions and other observable interest rates (see Note 8 “Derivative Financial Instruments”, for more information on these interest rate swaps).

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

•

Level 1—Quoted market prices in active markets for identical assets or liabilities;

•

Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable; and

•

Level 3—Unobservable inputs developed using estimates and assumptions developed by the Company which reflect those that a market participant would use.

Determining which level to apply to an asset or liability requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2013 (in thousands):


	Fair Value Measurements as of June 30, 2013
			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
Interest rate swap asset	$	4,324	$	—	$	4,324	$	—

The carrying amount of accounts receivable at June 30, 2013, including $377.5 million of receivables sold under the Current Receivables Securitization Program, approximates fair value because of the short-term nature of this item.

Accounting guidance on fair value measurements requires separate disclosure of assets and liabilities measured at fair value on a recurring basis, as noted above, from those measured at fair value on a nonrecurring basis. As of June 30, 2013, no assets or liabilities are measured at fair value on a nonrecurring basis.

10. Other Assets and Liabilities

The Company had receivables related to supplier allowances totaling $85.3 million and $96.9 million included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, respectively.

Accrued customer rebates of $43.7 million and $56.3 million as of June 30, 2013 and December 31, 2012, respectively, were included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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, 2012.

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

Company Background

United is a leading distributor of business products with 2012 net sales of approximately $5.1 billion. United stocks over 130,000 items from over 1,400 manufacturers. These items include a broad spectrum of manufacturer-branded and private brand technology products, traditional office products, office furniture, janitorial and breakroom supplies, and industrial supplies. United sells its products through a network of 64 distribution centers to its approximately 25,000 reseller customers, who in turn sell directly to end-consumers. The Company’s customers include independent office products dealers; contract stationers; office products superstores; computer products resellers; office furniture dealers; mass merchandisers; mail order companies; sanitary supply, paper and foodservice distributors; drug and grocery store chains; healthcare distributors; e-commerce merchants; oil field, welding supply and industrial/MRO distributors; and other independent distributors.

Overview of Strategy, Key Trends and Recent Results

•

Our strategy has two main components: 1) to strengthen our core business and 2) to diversify our offering of business essentials to drive profitable growth. We are in position to capture the growth created by the changing marketplace. Specifically, we continue to invest in digital and online capabilities and are working with leading online resellers to help accelerate their growth in the categories we offer. Strengthening the core business also means driving efficiency and cost improvements. In addition, many distributors are broadening their categories and diversifying their businesses. Our business model allows these resellers to quickly enter new categories and scale their offerings. United’s product offering continues to expand into a broader product assortment of janitorial/breakroom and industrial products.

•

During the second quarter of 2013, GAAP diluted earnings per share for the latest quarter was $0.86, compared with $0.66 in the prior-year period. Increased operating income and lower interest expense benefited earnings per share in the second quarter of 2013.

•

Second quarter sales were relatively flat at $1.3 billion with strong industrial sales growth of 31.5%. The acquisition of OKI in the fourth quarter of last year was the primary driver of this growth. Industrial sales now comprise over 10% of our consolidated sales. Janitorial and breakroom products also grew by 2.6% with solid growth in sales of breakroom products and in sales to e-tailers and our independent office products resellers. Sales from our three office products categories declined approximately 5% as the demand environment remained challenged by low jobs growth, muted small business confidence levels and reduced government spending. United is well positioned to help our supply chain partners win in the migration to an online marketplace.

•

The gross margin rate of 15.8% was up 110 basis points (bps) from the prior-year quarter gross margin rate of 14.8%. Higher gross margin reflects the continued growth of our industrial category, as well as the decline in lower margin technology sales.

•

Operating income for the quarter ended June 30, 2013 was up 17% to $58.9 million or 4.6% of sales, versus $50.3 million or 3.9% of sales in the second quarter of 2012. This improvement was driven primarily by a 110 basis point improvement in gross margin, somewhat offset by a 40 basis point increase in operating expenses.

For a further discussion of selected trends, events or uncertainties the Company believes may have a significant impact on its future performance, readers should refer to “Key Trends and Recent Results” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2012.

Critical Accounting Policies, Judgments and Estimates

During the first six months of 2013, there were no significant changes to the Company’s critical accounting policies, judgments or estimates from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Adjusted Operating Income, Net Income and Earnings Per Share

The following table presents Adjusted Operating Expenses, Operating Income, Net Income, and Earnings Per Share for the six-month period ended June 30, 2013 and 2012 (in thousands, except per share data) excluding the effects of pre-tax charges related to workforce reductions and facility closures in the first quarters of 2013 and 2012, respectively. Generally Accepted Accounting Principles require that the effects of these items be included in the Condensed Consolidated Statements of Income. Management believes that excluding these items is an appropriate comparison of its ongoing operating results to last year. It is helpful to provide readers of its financial statements with a reconciliation of these items to its Condensed Consolidated Statements of Income reported in accordance with Generally Accepted Accounting Principles.


	For the Six Months Ended June 30,
	2013						2012
				% to						% to
	Amount			Net Sales			Amount			Net Sales
Net Sales	$	2,524,979			100.00	%	$	2,547,357			100.00	%

Gross profit	$	390,461			15.46	%	$	369,188			14.49	%
Operating expenses	$	306,293			12.13	%	$	287,272			11.28	%
Workforce reduction and facility closure charge		(14,432	)		(0.57	)%		(6,247	)		(0.25	)%

Adjusted operating expenses	$	291,861			11.56	%	$	281,025			11.03	%

Operating income	$	84,168			3.33	%	$	81,916			3.21	%
Operating expense item noted above		14,432			0.57	%		6,247			0.25	%

Adjusted operating income	$	98,600			3.90	%	$	88,163			3.46	%

Net income	$	48,544					$	42,141
Operating expense item noted above, net of tax		8,948						3,873

Adjusted net income	$	57,492					$	46,014

Diluted earnings per share	$	1.20					$	1.01
Per share operating expense item noted above		0.22						0.10

Adjusted diluted earnings per share	$	1.42					$	1.11

Adjusted diluted earnings per share—growth rate over the prior year period		28	%
Weighted average number of common shares—diluted		40,475						41,626

Results of Operations—Three Months Ended June 30, 2013 Compared with the Three Months Ended June 30, 2012

Net Sales.Net sales for the second quarter of 2013 were $1.3 billion. The following table summarizes net sales by product category for the three-month periods ended June 30, 2013 and 2012 (in thousands):


	Three Months Ended June 30,
	2013		2012⁽¹⁾
Technology products	$	374,160	$	399,359
Janitorial and breakroom supplies		332,870		324,407
Traditional office products (including cut-sheet paper)		324,041		337,457
Industrial supplies		132,280		100,595
Office furniture		76,706		80,774
Freight revenue		25,365		24,635
Services, Advertising and Other		9,072		8,483

Total net sales	$	1,274,494	$	1,275,710

(1)

Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications include changes between several product categories due to several specific products being reclassified to different categories. These changes did not impact the Condensed Consolidated Statements of Income.

Sales in the technology products category decreased in the second quarter of 2013 by 6.3% versus the second quarter of 2012. This category, which continues to represent the largest percentage of the Company’s consolidated net sales, accounted for 29.4% of net sales for the second quarter of 2013. Sales declines in this category reflect reduced corporate and government spending, reduced sales of printer imaging supplies, and the de-emphasis in sales of certain low profit portions of our business as we execute our margin improvement initiatives.

Sales in the janitorial and breakroom supplies product category increased 2.6% in the second quarter of 2013 compared to the second quarter of 2012. This category accounted for 26.1% of the Company’s second quarter of 2013 consolidated net sales. This growth was driven by increased breakroom sales, and in sales to e-tailers and our independent office products resellers. Sales to national accounts customers were in the low single digits.

Sales of traditional office products declined in the second quarter of 2013 by 4.0% versus the second quarter of 2012. Traditional office supplies represented 25.4% of the Company’s consolidated net sales for the second quarter of 2013. Within this category, the decline was driven by reduced cut-sheet paper and lower sales to the independent dealer channel.

Industrial supplies sales in the second quarter of 2013 increased 31.5% compared to the same prior-year period. Sales of industrial supplies accounted for 10.4% of the Company’s net sales for the second quarter of 2013. Sales growth in industrial supplies was largely driven by the acquisition of OKI in November of 2012. Safety and general industrial sub-categories showed the strongest growth. Year-over-year sales decline in oilfield and welding experienced in the first quarter of 2013 continued into the second quarter of 2013.

Office furniture sales in the second quarter of 2013 declined 5.0% compared to the second quarter of 2012. Office furniture accounted for 6.0% of the Company’s second quarter of 2013 consolidated net sales. Second quarter sales declines in this category were driven by reduced sales to independent channel dealers and some national accounts.

The remainder of the Company’s second quarter 2013 net sales was composed of freight and other revenues.

Gross Profit and Gross Margin Rate.Gross profit (gross margin dollars) for the second quarter of 2013 was $201.9 million, compared to $188.3 million in the second quarter of 2012. The gross margin rate of 15.8% was up 110 basis points (bps) from the prior-year quarter gross margin rate of 14.8%. This improvement is due primarily to a portfolio shift to higher margin product categories (40 bps), including the growth of our industrial business as well as a decline in lower margin technology sales. Additional margin improvement initiatives drove another 40 bps of the rate increase. Higher purchase related supplier allowances also contributed 50 bps in the quarter versus the prior-year quarter. These favorable items were partially offset by increased freight costs, net of WOW savings, of 20 bps and by lower inflation trends net of LIFO of 20 bps.

Operating Expenses. Operating expenses for the latest quarter were $143.0 million or 11.2% of sales, compared with $137.9 million or 10.8% of sales in the same period last year. The rise in operating expenses is mainly due to investments in our growth businesses, the OKI acquisition, and variable management compensation (45 bps). These increases were partially offset by savings from our restructuring programs and ongoing cost savings initiatives (15 bps).

Interest Expense, net.Interest expense, net for the second quarter of 2013 was $2.9 million, down by $4.2 million from the same period in 2012, mainly due to the maturity of three interest rate swaps since the prior-year quarter and utilization of borrowings with a lower interest rate.

Income Taxes.Income tax expense was $21.4 million for the second quarter of 2013, compared with $16.2 million for the same period in 2012. The Company’s effective tax rate was 38.2% for the current-year quarter and 37.5% for the same period in 2012.

Net Income.Net income for the second quarter of 2013 totaled $34.7 million, or $0.86 per diluted share, compared with net income of $27.0 million, or $0.66 per diluted share for the same three-month period in 2012.

Results of Operations—Six Months Ended June 30, 2013 Compared with the Six Months Ended June 30, 2012

Net Sales.Net sales for the first six months of 2013 were $2.5 billion, flat to the same six-month period of 2012. The following table summarizes net sales by product category for the six-month periods ended June 30, 2013 and 2012 (in millions):


	Six Months Ended June 30,
	2013		2012 (1)
Technology products	$	738,603	$	792,764
Janitorial and breakroom supplies		658,205		645,184
Traditional office products (including cut-sheet paper)		644,265		685,206
Industrial supplies		262,013		197,749
Office furniture		154,359		162,159
Freight revenue		50,674		48,276
Services, Advertising and Other		16,860		16,019

Total net sales	$	2,524,979	$	2,547,357

(1)

Sales in the technology products category decreased in the first half of 2013 by 6.1% versus the first half of 2012, after adjusting for one less workday in the current year period. This category accounted for 29.3% of net sales for the first half of 2013. Sales declines in this category reflect the digitization of the workplace with reduced sales of printer imaging supplies as well as decreased sales in certain low profit portions of our business as we execute our margin improvement initiatives.

Sales in the janitorial and breakroom supplies product category increased 2.8% in the first half of 2013 compared to the first half of 2012, after adjusting for one less workday in the current year period. This category accounted for 26.1% of the Company’s first six months of 2013 consolidated net sales. The sales increase reflected execution of cross selling initiatives and increased sales to other new channels that helped more than offset the shift of other national account business to direct purchases from manufacturers.

Sales of traditional office supplies were down 5.2% in the first six months of 2013 compared to the first six months of 2012, after adjusting for one less workday in the current year period. Traditional office supplies represented 25.5% of the Company’s consolidated net sales for the first half of 2013. Within this category, the decline was driven by reduced cut-sheet paper as well as traditional office products. New channel account sales increased from the prior-year, but this growth was more than offset by the sales decline in the independent dealer and national account channels.

Industrial sales in the first half of 2013 increased 33.5% compared to the same prior-year period, after adjusting for one less workday in the current year period. Sales of industrial supplies accounted for 10.4% of the Company’s net sales for the first half of 2013. Sales growth in industrial supplies was largely driven by the acquisition of OKI in November of 2012.

Office furniture sales in the first six months of 2013 were down 4.1% compared to the first half of 2012, after adjusting for one less workday in the current year period. Office furniture accounted for 6.1% of the Company’s first six months of 2013 consolidated net sales. Sales declines in this category were driven by continued weakness in demand for office furniture and reduced corporate and government spending.

The remainder of the Company’s first six months of 2013 net sales was composed of freight and other revenues.

Gross Profit and Gross Margin Rate.Gross profit (gross margin dollars) for the first six months of 2013 was $390.5 million, compared to $369.2 million in the second quarter of 2012. The gross margin rate of 15.5% was 100 basis points higher than the rate for the first six months of the prior year. The gross margin rate increased due to a favorable product category mix and margin improvement initiatives (90 bps), increased purchase-related supplier allowances (55 bps), and WOW cost savings. These improvements were partially offset by lower inflation trends net of LIFO inventory impacts (45 bps) and increased freight costs (20 bps).

Operating Expenses. Operating expenses for the first half of 2013 totaled $306.3 million or 12.1% of net sales, compared with $287.3 million or 11.3% of net sales in the first half of 2012. Excluding the $14.4 million network optimization and cost reduction charge in the first half of 2013 and the $6.2 million network optimization and cost reduction charge in the first half of 2012, adjusted operating expenses were $291.9 million or 11.6% of sales in 2013, compared with $281.0 million or 11.0% of sales in 2012. Operating expenses reflected increased employee-related costs mainly driven by the incremental costs from the acquisition of OKI. The Company continues to make investments in building capabilities and to drive growth.

Interest Expense, net.Interest expense for the first six months of 2013 was $6.0 million, down by $8.3 million for the same period in 2012, mainly due to the maturity of three interest rate swaps since the prior-year and utilization of borrowings with a lower interest rate.

Income Taxes.Income tax expense was $29.7 million for the first half of 2013, compared with $25.5 million for the same period in 2012. The Company’s effective tax rate was 37.9% for the first six months of 2013 and 37.7% for the same period in 2012.

Net Income.Net income for the first six months of 2013 totaled $48.5 million, or $1.20 per diluted share, compared with net income of $42.1 million, or $1.01 per diluted share for the same six-month period in 2012. Adjusted for the impact of the network optimization and cost reduction charge in the first half of 2013 and 2012, net income was $57.5 million or $1.42 per diluted share, compared with net income of $46.0 million or $1.11 per diluted share in the prior year period.

Liquidity and Capital Resources

United’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, restructuring activities, the funding of pension plans, and funding for additional share repurchases and acquisitions, if any. Due to our credit profile over the years, external funds have been available at an acceptable cost. We believe that current credit arrangements are sound and that the strength of our balance sheet affords us the financial flexibility to respond to both internal growth opportunities and those available through acquisitions.

Financing available from debt and the sale of accounts receivable as of June 30, 2013, is summarized below (in millions):

Availability


Maximum financing available under:
2011 Credit Agreement	$	700.0
2007 Master Note Purchase Agreement		135.0
Receivables Securitization Program⁽¹⁾		200.0

Maximum financing available			$	1,035.0
Amounts utilized:
2011 Credit Agreement		182.1
2007 Master Note Purchase Agreement		135.0
Receivables Securitization Program⁽¹⁾		200.0
Outstanding letters of credit		9.4
Mortgage & Other		1.4

Total financing utilized				527.9

Available financing, before restrictions				507.1
Restrictive covenant limitation				119.1

Available financing as of June 30, 2013			$	388.0

(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.

Cash Flows

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

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2013 totaled $45.3 million, compared with cash provided by operating activities of $48.3 million in the same six-month period of 2012. Operating cash flows during the first six months of 2012 were also positively impacted by approximately $10 million inflow related to an income tax refund during the quarter offset by pension plan costs of $13 million. In the current quarter, tax payments were approximately $27.0 million.

Investing Activities

Net cash used in investing activities for the first six months of 2013 was $13.5 million, compared to net cash used in investing activities of $10.2 million for the six months ended June 30, 2013. For the full year 2013, the Company expects capital spending to be approximately $35 million.

Financing Activities

Net cash used in financing activities for the six months ended June 30, 2013 totaled $41.4 million, compared with $35.3 million in the prior-year period. Net cash used in financing activities during the first six months of 2013 was impacted by $5.9 million in net repayments of borrowings under debt arrangements, $39.8 million in share repurchases, and $11.2 million in payment of cash dividends. These outflows were partially offset by cash inflows of $14.4 million in net proceeds from share-based compensation arrangements. In 2012, borrowings of $30.4 million were more than offset by stock repurchases of $54 million and cash dividends of $11 million.

Debt

The Company’s outstanding debt consisted of the following amounts (in millions):


	As of			As of
	June 30, 2013			December 31, 2012
2011 Credit Agreement	$	182.1		$	238.1
2007 Master Note Purchase Agreement (Private Placement)		135.0			135.0
Receivables Securitization Program		200.0			150.0
Mortgage & Capital Lease		1.4			1.3

Debt		518.5			524.4
Stockholders’ equity		760.5			738.1

Total capitalization	$	1,279.0		$	1,262.5

Debt-to-total capitalization ratio		40.5	%		41.5	%

The 2007 Note Purchase Agreement allows USSC to issue up to $1 billion of senior secured notes, subject to the debt restrictions contained in the 2011 Credit Agreement. Pursuant to the 2007 Note Purchase Agreement, USSC sold $135 million of floating rate senior secured notes due October 15, 2014 at par in a private placement. Interest on the notes is payable quarterly in arrears at a rate per annum equal to three-month LIBOR plus 1.30%.

The 2011 Credit Agreement is a revolving credit facility with an aggregate committed principal amount of $700 million. Borrowings under the 2011 Credit Agreement bear interest at LIBOR for specified interest periods or at the Alternate Base Rate (as defined in the 2011 Credit Agreement), plus, in each case, a margin determined based on the Company’s permitted debt to EBITDA ratio (calculated as provided in Section 6.20 of the 2011 Credit Agreement) (the “Leverage Ratio”). In addition, the Company is required to pay the lenders a fee on the unutilized portion of the commitments under the 2011 Credit Agreement at a rate per annum determined based on the Company’s Leverage Ratio.

The 2011 Credit Agreement prohibits the Company from exceeding a Leverage Ratio of 3.50 to 1.00 and imposes limits on the Company’s ability to repurchase stock and issue dividends when the Leverage Ratio is greater than 3.00 to 1.00.

•

The Transfer and Administration Agreement among USSC, USFS, USR, and the Investors;

•

The Receivables Sale Agreement between USSC and USFS;

•

The Receivables Purchase Agreement between USFS and USR; and

•

The Performance Guaranty executed by USI in favor of USR.

Pursuant to the Receivables Sale Agreement, USSC sells to USFS, on an on-going basis, all the customer accounts receivable and related rights originated by USSC. Pursuant to the Receivables Purchase Agreement, USFS sells to USR, on an on-going basis, all the accounts receivable and related rights purchased from USSC. Pursuant to the Transfer and Administration Agreement, USR then sells the receivables and related rights to the Investor. The Program now provides for maximum funding available of the lesser of $200 million or the total amount of eligible receivables less excess concentrations and applicable reserves.

Each of the 2007 Note Purchase Agreement, the 2011 Credit Agreement and the Receivable Securitization Program contains representations and warranties, covenants and events of default that are customary for such facilities. The agreements also contain cross-default provisions under which, if a termination event occurs under any of the agreements, the lenders under all of the agreements may cease to make additional loans, accelerate any loans then outstanding and/or terminate the agreements to which they are party.

On June 11, 2013, USSC entered into a seven-month forward, seven year interest rate swap transaction (the “June 2013 Swap Transaction”) with J.P. Morgan Chase Bank, N.A. as the counterparty in connection with indebtedness the Company expects to incur in the future. The June 2013 Swap Transaction has an effective date of January 15, 2014 and a termination date of January 15, 2021.

Under the terms of the June 2013 Swap Transaction, USSC will make semi-annual fixed rate payments to the counterparty calculated based on a notional amount of $150.0 million at a fixed rate of 2.125%, and the counterparty will make quarterly floating rate payments to USSC based on the three-month London Interbank Offered Rate on the same referenced notional amount. USSC is required to make the fixed rate payments even if a future financing is not completed.

Contractual Obligations

During the six-month period ended June 30, 2013, the Company entered into several operating lease extensions committing the Company to an additional $39.9 million in contractual obligations from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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 six months of 2013 from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

ITEM 4.

CONTROLS AND PROCEDURES.

Attached as exhibits to this Quarterly Report are certifications of the Company’s President and Chief Executive Officer (“CEO”) and Senior Vice President and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 under the Exchange Act. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in such certifications.

Inherent Limitations on Effectiveness of Controls

The Company’s management, including the CEO and CFO, does not expect that the Company’s Disclosure Controls or its internal control over financial reporting will prevent or detect all error or all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the existence of resource constraints. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the fact that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by managerial override. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and no design is likely to succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks, including that controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Disclosure Controls and Procedures

At the end of the period covered by this Quarterly Report the Company’s management performed an evaluation, under the supervision and with the participation of the Company’s CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Such disclosure controls and procedures (“Disclosure Controls”) are controls and other procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management’s quarterly evaluation of Disclosure Controls includes an evaluation of some components of the Company’s internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis.

Based on this evaluation, the Company’s management (including its CEO and CFO) concluded that as of June 30, 2013, the Company’s Disclosure Controls were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes to the Company’s internal control over financial reporting during the quarter ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

The Company is involved in 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 pending legal proceedings will be resolved with no material adverse effect upon its financial condition or results of operations.

ITEM 1A.

RISK FACTORS.

For information regarding risk factors, see “Risk Factors” in Item 1A of Part I of the Company’s Form 10-K for the year ended December 31, 2012. There have been no material changes to the risk factors described in such Form 10-K.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

(a)

Not applicable.

(b)

Not applicable.

(c)

Common Stock Purchases.


2013 Fiscal Month	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
April 1, 2013 to April 30, 2013		225,670	$	35.02		225,670	$	39,360,503
May 1, 2013 to May 31, 2013		486,044		33.51		486,044		123,071,372
June 1, 2013 to June 30, 2013		266,480		33.75		266,480		114,076,434

Total Second Quarter		978,194	$	33.93		978,194	$	114,076,434

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.


Exhibit No.		Description

3.1		Second Restated Certificate of Incorporation of the Company, dated as of March 19, 2002 (Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, filed on April 1, 2002)

3.2		Amended and Restated Bylaws of the Company, dated as of July 16, 2009 (Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended September 30, 2009, filed on November 5, 2009)

4.1		Master Note Purchase Agreement, dated as of October 15, 2007, among United Stationers Inc. (“USI”), United Stationers Supply Co. (“USSC”), and the note Purchasers identified therein (Exhibit 4.1 to the Company’s Form 10-Q for the quarter ended June 30, 2010, filed on August 6, 2010)

4.2		Parent Guaranty, dated as of October 15, 2007, by USI in favor of holders of the promissory notes identified therein (Exhibit 4.4 to the Company’s Form 10-Q for the quarter ended September 30, 2007, filed on November 7, 2007)

4.3		Subsidiary Guaranty, dated as of October 15, 2007, by Lagasse, Inc., United Stationers Technology Services LLC (“USTS”) and United Stationers Financial Services LLC (“USFS”) in favor of the holders of the promissory notes identified therein (Exhibit 4.5 to the Company’s Form 10-Q for the quarter ended September 30, 2007, filed on November 7, 2007)

22		Published Report regarding matters submitted to vote of security holders (Company‘s current report on Form 8-K, filed on May 20, 2013)

31.1*		Certification of Chief Executive Officer, dated as of July 30, 2013, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer, dated as of July 30, 2013, 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 July 30, 2013, 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 United Stationers Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, filed with the SEC on July 30, 2013, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statement of Income for the three- and six-month periods ended June 30, 2013 and 2012, (ii) the Condensed Consolidated Balance Sheet at June 30, 2013 and December 31, 2012, (iii) the Condensed Consolidated Statement of Cash Flows for the six-month period ended June 30, 2013 and 2012, and (iv) Notes to Condensed Consolidated Financial Statements.

*	- Filed herewith

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.


		UNITED STATIONERS INC.
		(Registrant)

Date: July 30, 2013		/s/ Fareed A. Khan
		Fareed A. Khan
		Senior Vice President and Chief Financial Officer (Duly authorized signatory and principal financial officer)

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