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Section 1: 10-Q (FORM 10-Q)

esnd-10q_20160630.htm

 

 

 

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, 2016

or

¨

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

For the transition period from                      to                    

Commission File Number: 0-10653

 

ESSENDANT INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

36-3141189

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

One Parkway North Boulevard

Suite 100

Deerfield, Illinois 60015-2559

(847) 627-7000

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

 

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

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

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

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

On July 18, 2016, the registrant had outstanding 37,297,438 shares of common stock, par value $0.10 per share.

 

 

 

 

 

 


 

ESSENDANT INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2016

TABLE OF CONTENTS

 

 

  

Page No.

PART I — FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

  

3

 

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015

  

4

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015

  

5

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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

  

17

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

27

 

Item 4. Controls and Procedures

  

27

 

PART II — OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

28

 

Item 1A. Risk Factors

  

28

 

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

  

29

 

Item 6. Exhibits

  

30

 

SIGNATURES

  

31

 

 

 

 

2


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

(Unaudited)

 

 

(Audited)

 

 

As of  June 30,

 

 

As of  December 31,

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

25,700

 

 

$

29,983

 

Accounts receivable, less allowance for doubtful accounts of $16,671 in 2016 and $17,810 in 2015

 

745,285

 

 

 

716,537

 

Inventories

 

968,263

 

 

 

922,162

 

Other current assets

 

48,535

 

 

 

27,310

 

Total current assets

 

1,787,783

 

 

 

1,695,992

 

Property, plant and equipment, net

 

133,437

 

 

 

133,751

 

Goodwill

 

298,474

 

 

 

299,355

 

Intangible assets, net

 

90,027

 

 

 

96,413

 

Other long-term assets

 

52,429

 

 

 

37,348

 

Total assets

$

2,362,150

 

 

$

2,262,859

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

575,225

 

 

$

531,949

 

Accrued liabilities

 

167,219

 

 

 

177,472

 

Current maturities of long-term debt

 

43

 

 

 

51

 

Total current liabilities

 

742,487

 

 

 

709,472

 

Deferred income taxes

 

10,783

 

 

 

11,901

 

Long-term debt

 

760,546

 

 

 

716,264

 

Other long-term liabilities

 

94,381

 

 

 

101,488

 

Total liabilities

 

1,608,197

 

 

 

1,539,125

 

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

 

Additional paid-in capital

 

414,865

 

 

 

410,927

 

Treasury stock, at cost – 37,298,175 shares in 2016 and 37,178,394 shares in 2015

 

(1,104,806

)

 

 

(1,100,867

)

Retained earnings

 

1,483,002

 

 

 

1,463,821

 

Accumulated other comprehensive loss

 

(46,552

)

 

 

(57,591

)

Total stockholders’ equity

 

753,953

 

 

 

723,734

 

Total liabilities and stockholders’ equity

$

2,362,150

 

 

$

2,262,859

 

 

See notes to condensed consolidated financial statements.

3


 

ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(Unaudited)

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015 (Revised)*

 

 

2016

 

 

2015 (Revised)*

 

Net sales

$

1,354,523

 

 

$

1,341,799

 

 

$

2,706,819

 

 

$

2,674,174

 

Cost of goods sold

 

1,158,700

 

 

 

1,131,680

 

 

 

2,310,914

 

 

 

2,263,660

 

Gross profit

 

195,823

 

 

 

210,119

 

 

 

395,905

 

 

 

410,514

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Warehousing, marketing and administrative expenses

 

157,625

 

 

 

156,912

 

 

 

325,303

 

 

 

354,493

 

     Defined benefit plan settlement loss (Note 9)

 

11,744

 

 

 

-

 

 

 

11,744

 

 

 

-

 

Operating income

 

26,454

 

 

 

53,207

 

 

 

58,858

 

 

 

56,021

 

Interest expense, net

 

5,677

 

 

 

4,778

 

 

 

11,574

 

 

 

9,617

 

Income before income taxes

 

20,777

 

 

 

48,429

 

 

 

47,284

 

 

 

46,404

 

Income tax expense

 

7,844

 

 

 

18,595

 

 

 

17,821

 

 

 

22,577

 

Net income

$

12,933

 

 

$

29,834

 

 

$

29,463

 

 

$

23,827

 

Net income per share - basic:

$

0.35

 

 

$

0.79

 

 

$

0.81

 

 

$

0.63

 

     Average number of common shares outstanding - basic

 

36,512

 

 

 

37,765

 

 

 

36,552

 

 

 

37,939

 

Net income per share - diluted:

$

0.35

 

 

$

0.78

 

 

$

0.80

 

 

$

0.62

 

     Average number of common shares outstanding - diluted

 

36,910

 

 

 

38,106

 

 

 

36,897

 

 

 

38,317

 

Dividends declared per share

$

0.14

 

 

$

0.14

 

 

$

0.28

 

 

$

0.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* During the third quarter of 2015, the Company elected a change in accounting principle for the valuation method of certain inventories to the last-in, first-out (“LIFO”) method from the first-in, first out method (“FIFO”). This change required retrospective application. As such, the financial statements presented for prior periods are titled “Revised”.

See notes to condensed consolidated financial statements.

4


 

ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2016

 

 

2015 (Revised)*

 

 

2016

 

 

2015 (Revised)*

 

Net income

$

12,933

 

 

$

29,834

 

 

$

29,463

 

 

$

23,827

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Translation adjustments

 

442

 

 

 

209

 

 

 

3,133

 

 

 

(4,421

)

       Minimum pension liability adjustments

 

7,418

 

 

 

932

 

 

 

8,333

 

 

 

1,864

 

       Cash flow hedge adjustments

 

100

 

 

 

48

 

 

 

(427

)

 

 

(428

)

Total other comprehensive income (loss), net of tax

 

7,960

 

 

 

1,189

 

 

 

11,039

 

 

 

(2,985

)

Comprehensive income

$

20,893

 

 

$

31,023

 

 

$

40,502

 

 

$

20,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

5


 

ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

 

 

For the Six Months Ended

 

 

June 30,

 

 

2016

 

 

2015 (Revised)*

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income

$

29,463

 

 

$

23,827

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

22,936

 

 

 

24,198

 

Share-based compensation

 

5,689

 

 

 

3,268

 

(Gain) loss on the disposition of property, plant and equipment

 

(739

)

 

 

57

 

Amortization of capitalized financing costs

 

332

 

 

 

451

 

Excess tax cost (benefit) related to share-based compensation

 

193

 

 

 

(433

)

Asset impairment charges

 

-

 

 

 

24,034

 

Deferred income taxes

 

(2,765

)

 

 

(8,294

)

Pension settlement charge

 

11,744

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable, net

 

(28,439

)

 

 

28,330

 

(Increase) decrease in inventory

 

(44,017

)

 

 

48,944

 

Increase in other assets

 

(36,529

)

 

 

(10,250

)

Increase in accounts payable

 

62,162

 

 

 

3,152

 

Decrease in checks in-transit

 

(18,733

)

 

 

(19,240

)

(Decrease) increase in accrued liabilities

 

(12,219

)

 

 

3,282

 

Decrease in other liabilities

 

(5,062

)

 

 

(478

)

Net cash (used in) provided by operating activities

 

(15,984

)

 

 

120,848

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Capital expenditures

 

(19,327

)

 

 

(11,931

)

Proceeds from the disposition of property, plant and equipment

 

2,770

 

 

 

18

 

Acquisition, net of cash acquired

 

-

 

 

 

(532

)

Net cash used in investing activities

 

(16,557

)

 

 

(12,445

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Net borrowings (repayments) under revolving credit facility

 

43,876

 

 

 

(52,738

)

Net proceeds (disbursements) from share-based compensation arrangements

 

1,285

 

 

 

(759

)

Acquisition of treasury stock, at cost

 

(6,839

)

 

 

(31,227

)

Payment of cash dividends

 

(10,237

)

 

 

(10,699

)

Excess tax (cost) benefit related to share-based compensation

 

(193

)

 

 

433

 

Payment of debt issuance costs

 

-

 

 

 

(36

)

Net cash provided by (used in) financing activities

 

27,892

 

 

 

(95,026

)

Effect of exchange rate changes on cash and cash equivalents

 

366

 

 

 

(135

)

Transfer of cash to held for sale

 

-

 

 

 

(4,119

)

Net change in cash and cash equivalents

 

(4,283

)

 

 

9,123

 

Cash and cash equivalents, beginning of period

 

29,983

 

 

 

20,812

 

Cash and cash equivalents, end of period

$

25,700

 

 

$

29,935

 

Other Cash Flow Information:

 

 

 

 

 

 

 

Income tax payments, net

$

27,358

 

 

$

31,618

 

Interest paid

 

11,750

 

 

 

9,451

 

 

 

See notes to condensed consolidated financial statements.

6


 

ESSENDANT INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The accompanying Condensed Consolidated Financial Statements represent Essendant Inc. (“ESND”) with its wholly owned subsidiary Essendant Co. (“ECO”), and ECO’s subsidiaries (collectively, “Essendant” or the “Company”). The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of ESND and its subsidiaries. All intercompany transactions and balances have been eliminated. The Company operates in a single reportable segment as a leading distributor of workplace essentials.

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

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

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU No. 2014-09. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), that requires lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. This standard will be effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period, and early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, the objective of which is to identify, evaluate, and improve areas of generally accepted accounting principles (“GAAP”) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. This standard will be effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

 


 

7


 

Change in Accounting Principle

 

During the third quarter of 2015, the Company elected a change in accounting principle for the valuation method of certain inventories to the last-in, first-out (“LIFO”) method from the first-in, first out method (“FIFO”). This change required retrospective application. As such, the financial statements presented for periods prior to September 30, 2015 are titled “Revised”. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for further information.

Inventory

Approximately 98.6% and 98.4% of total inventory as of June 30, 2016 and December 31, 2015, respectively, has been valued under the LIFO method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation.  Inventory valued under the LIFO accounting method is recorded at the lower of cost or market. If the Company had valued its entire inventory under the lower of FIFO cost or market, inventory would have been $147.3 million and $147.8 million higher than reported as of June 30, 2016 and December 31, 2015, respectively.

 

2. Acquisitions

Nestor Sales LLC

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

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

 

Purchase price, net of cash acquired

$

39,983

 

 

 

 

 

Accounts receivable

 

9,230

 

Inventories

 

12,067

 

Other current assets

 

339

 

Property, plant and equipment, net

 

1,251

 

Other assets

 

752

 

Intangible assets

 

16,930

 

Total assets acquired

 

40,569

 

 

 

 

 

Accounts payable

 

4,992

 

Accrued liabilities

 

1,943

 

Deferred income taxes

 

3,287

 

Other long-term liabilities

 

76

 

Total liabilities assumed

 

10,298

 

     Goodwill

$

9,712

 

 

 

 

 

 

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

 

Total

 

 

Estimated Life

Customer relationships

$

15,570

 

 

13 years

Trademark

 

1,360

 

 

2-15 years

     Total

$

16,930

 

 

 

 

8


 

Agreement with Staples, Inc.

On February 16, 2016, the Company announced an agreement to purchase from Staples, Inc. contracts and related assets representing more than $550 million in annual sales to minority and woman-owned office supply resellers and their large corporate and other enterprise customers.  The transaction was subject to the successful completion of the proposed merger of Staples and Office Depot, which was abandoned in May 2016. As a result, the Company cancelled its agreement to complete this purchase.     

 

3. Share-Based Compensation

As of June 30, 2016, the Company has two active equity compensation plans. Under the 2015 Long-Term Incentive Plan (as amended and restated), award instruments include, but are not limited to, stock options, restricted stock awards, restricted stock units (“RSUs”), and performance-based awards. Associates and non-employee directors of the Company are eligible to become participants in the plan. The Nonemployee Directors’ Deferred Stock Compensation Plan allows non-employee directors to elect to defer receipt of all or a portion of their annual retainer in deferred stock units.

The Company granted 129,059 shares of restricted stock and 247,656 RSUs during the first six months of 2016, compared to 206,479 shares of restricted stock and 145,552 RSUs during the first six months of 2015.

 

4. Severance and Restructuring Charges

 

Commencing in the first quarter of 2015, the Company began certain restructuring actions which included workforce reductions and facility closures. During the three-month periods ended June 30, 2016, and 2015, the Company did not record any expenses for those actions. During the six-month period ended June 30, 2016, the Company recorded $0.3 million of pre-tax expense related to facility consolidations. For the six-month period ended June 30, 2015, the Company recorded $6.0 million of pre-tax expense relating to workforce reductions and $0.3 million of pre-tax expense relating to facility consolidations. These charges were included in “warehousing, marketing and administrative expenses.” Cash outlays for these actions occurred primarily in 2015 and were approximately $0.5 million and $2.4 million for the six months ended June 30, 2016 and 2015. As of June 30, 2016, the Company has accrued liabilities for these actions of $1.4  million.

 

Commencing in the fourth quarter of 2015, the Company executed actions to reduce costs through management delayering in order to achieve broader functional alignment of the organization. Cash outlays associated with these charges were approximately $6.5 million in the six months ended June 30, 2016. As of June 30, 2016, the Company has accrued liabilities for these actions of $3.8 million.        

 


 

9


 

5. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill are noted in the following table (in thousands):

Goodwill, balance as of December 31, 2015

$

299,355

 

Purchase accounting adjustments

 

(1,858

)

Currency translation adjustments

 

977

 

Goodwill, balance as of June 30, 2016

$

298,474

 

The following table summarizes the intangible assets of the Company by major class of intangible assets and the cost, accumulated amortization, net carrying amount, and weighted average life, if applicable (in thousands):

 

 

June 30, 2016

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

Gross

 

 

 

 

 

 

Net

 

 

Useful

 

Gross

 

 

 

 

 

 

Net

 

 

Useful

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Life

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Life

 

Amount

 

 

Amortization

 

 

Amount

 

 

(years)

 

Amount

 

 

Amortization

 

 

Amount

 

 

(years)

Intangible assets subject to amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships and other intangibles

$

137,832

 

 

$

(56,839

)

 

$

80,993

 

 

16

 

$

137,938

 

 

$

(51,357

)

 

$

86,581

 

 

16

Non-compete agreements

 

4,655

 

 

 

(4,260

)

 

 

395

 

 

4

 

 

4,644

 

 

 

(4,260

)

 

 

384

 

 

4

Trademarks

 

13,740

 

 

 

(5,101

)

 

 

8,639

 

 

14

 

 

13,688

 

 

 

(4,240

)

 

 

9,448

 

 

14

Total

$

156,227

 

 

$

(66,200

)

 

$

90,027

 

 

 

 

$

156,270

 

 

$

(59,857

)

 

$

96,413

 

 

 

 

 

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

Year

 

Amount

 

2016

 

$

12,247

 

2017

 

 

10,810

 

2018

 

 

8,065

 

2019

 

 

6,947

 

2020

 

 

6,944

 

 

6. 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, 2016 was as follows (amounts in thousands):

 

 

 

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

)

Other comprehensive (loss) income before reclassifications

 

 

3,133

 

 

 

(719

)

 

 

(633

)

 

 

1,781

 

Settlement loss reclassified from AOCI

 

 

-

 

 

 

-

 

 

 

7,196

 

 

 

7,196

 

Amounts reclassified from AOCI

 

 

-

 

 

 

292

 

 

 

1,770

 

 

 

2,062

 

Net other comprehensive (loss) income

 

 

3,133

 

 

 

(427

)

 

 

8,333

 

 

 

11,039

 

AOCI, balance as of June 30, 2016

 

$

(6,733

)

 

$

(281

)

 

$

(39,538

)

 

$

(46,552

)

 

 

 

10


 

The following table details the amounts reclassified out of AOCI into the income statement during the three and six months ended June 30, 2016  (in thousands):

 

 

Amount Reclassified From AOCI

 

 

 

 

 

For the Three

 

 

For the Six

 

 

 

 

 

Months Ended

 

 

Months Ended

 

 

 

 

 

June 30,

 

 

June 30,

 

 

Affected Line Item In The Statement

Details About AOCI Components

 

2016

 

 

2016

 

 

Where Net Income is Presented

Realized and unrealized gains (losses) on cash flow hedges

 

 

 

 

 

 

 

 

 

 

Gain on interest rate swap, before tax

 

$

266

 

 

$

541

 

 

Interest expense, net

Gain on foreign exchange hedges, before tax

 

 

(159

)

 

 

(70

)

 

Cost of goods sold

 

 

 

(41

)

 

 

(179

)

 

Tax provision

 

 

$

66

 

 

$

292

 

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan items

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and unrecognized loss

 

$

1,395

 

 

$

2,888

 

 

Warehousing, marketing and administrative expenses

Settlement loss

 

 

11,744

 

 

 

11,744

 

 

Defined benefit plan settlement loss

 

 

 

(5,093

)

 

 

(5,666

)

 

Tax provision

 

 

 

8,046

 

 

 

8,966

 

 

Net of tax

Total reclassifications for the period, net of tax

 

$

8,112

 

 

$

9,258

 

 

 

 

7. Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if dilutive securities were exercised into common stock. Stock options, restricted stock, restricted stock units and deferred stock units are considered dilutive securities. For the three and six months ended June 30, 2016, 0.2 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,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

12,933

 

 

$

29,834

 

 

$

29,463

 

 

$

23,827

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

weighted average shares

 

36,512

 

 

 

37,765

 

 

 

36,552

 

 

 

37,939

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options and restricted stock

 

398

 

 

 

341

 

 

 

345

 

 

 

378

 

Denominator for diluted earnings per share -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted average shares and the effect of dilutive securities

 

36,910

 

 

 

38,106

 

 

 

36,897

 

 

 

38,317

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - basic

$

0.35

 

 

$

0.79

 

 

$

0.81

 

 

$

0.63

 

Net income per share - diluted

$

0.35

 

 

$

0.78

 

 

$

0.80

 

 

$

0.62

 

 

 

 

 

 

 

 

 

 

 

11


 

Common Stock Repurchases

As of June 30, 2016 , the Company had Board authorization to repurchase $68.2 million of common stock. During the three months ended June 30, 2016, the Company did not repurchase any shares of its common stock. For the same period in the prior year, the Company repurchased 378,462 shares at an aggregate cost of $15.2 million. During the six months ended June 30, 2016 and 2015, the Company repurchased 241,270 and 781,141 shares of the Company’s common stock at an aggregate cost of $6.8 million and $31.5 million, respectively. Depending on 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 2016 and 2015, the Company reissued 121,489 and 150,807 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.

 

8. Debt

ESND is a holding company and, as a result, its primary sources of funds are cash generated from operating activities of its direct operating subsidiary, ECO, and from borrowings by ECO. The 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program (each as defined in Note 11 of the Company’s Form 10-K for the year ended December 31, 2015) contain restrictions on the use of cash transferred from ECO to ESND.

Debt consisted of the following amounts (in millions):

 

As of

 

As of

 

 

June 30, 2016

 

December 31, 2015

 

 

 

 

 

 

 

 

2013 Credit Agreement

$

412.3

 

$

368.4

 

2013 Note Purchase Agreement

 

150.0

 

 

150.0

 

Receivables Securitization Program

 

200.0

 

 

200.0

 

Mortgage & Capital Lease

 

0.1

 

 

0.1

 

Transaction Costs

 

(1.8

)

 

(2.2

)

Total

$

760.6

 

$

716.3

 

 

As of June 30, 2016, 80.3% of the Company’s outstanding debt, excluding capital 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 $11.4 million and $11.6 million under the 2013 Credit Agreement as of June 30, 2016 and December 31, 2015, respectively.

Borrowings under the 2013 Credit Agreement bear interest at LIBOR for specified interest periods or at the Alternate Base Rate (as defined in the 2013 Credit Agreement), plus, in each case, a margin determined based on the Company’s permitted debt to EBITDA ratio calculated as provided in Section 6.20 of the 2013 Credit Agreement (the “Leverage Ratio”). Depending on the Company’s Leverage Ratio, the margin on LIBOR-based loans ranges from 1.00% to 2.00% and on Alternate Base Rate loans ranges from 0.00% to 1.00%. As of June 30, 2016, the applicable margin for LIBOR-based loans was 2.00% and for Alternate Base Rate loans was 1.00%. ECO 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.

 

As of June 30, 2016 and December 31, 2015, $532.5 million and $448.6 million, respectively, of receivables had been sold to the Investors (as defined in Note 11 of the Company’s Form 10-K for the year ended December 31, 2015). Essendant Receivables LLC had $200.0 million outstanding under the Receivables Securitization Program as of June 30, 2016 and December 31, 2015.

 

For additional information about the 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program, see Note 11 of the Company’s Form 10-K for the year ended December 31, 2015.

 

 

 

12


 

9. Pension and Post-Retirement Benefit Plans

The Company maintains pension plans covering union and certain non-union employees. For more information on the Company’s retirement plans, see Note 13 to the Company’s Consolidated Financial Statements in the Form 10-K for the year ended December 31, 2015. A summary of net periodic pension cost related to the Company’s pension plans for the three and six months ended June 30, 2016 and 2015 was as follows (dollars in thousands):

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Service cost - benefit earned during the period

$

317

 

 

$

400

 

 

$

634

 

 

$

800

 

Interest cost on projected benefit obligation

 

2,173

 

 

 

2,270

 

 

$

4,516

 

 

 

4,540

 

Expected return on plan assets

 

(2,547

)

 

 

(2,805

)

 

$

(5,265

)

 

 

(5,610

)

Amortization of prior service cost

 

74

 

 

 

75

 

 

$

148

 

 

 

150

 

Amortization of actuarial loss

 

1,321

 

 

 

1,450

 

 

$

2,740

 

 

 

2,900

 

Settlement loss

 

11,744

 

 

 

-

 

 

 

11,744

 

 

 

-

 

Net periodic pension cost

$

13,082

 

 

$

1,390

 

 

$

14,517

 

 

$

2,780

 

 

The Company made cash contributions of $10.0 million and $2.0 million to its pension plans during the six months ended June 30, 2016 and 2015, respectively. Additional contributions, if any, for 2016 have not yet been determined. As of June 30, 2016 and December 31, 2015, respectively, the Company had accrued $39.4 million and $48.4 million of pension liability within “Other long-term liabilities” on the Condensed Consolidated Balance Sheets.

 

In order to reduce interest rate, mortality and investment risks, the Company commenced a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants. Due to this offering, a settlement and remeasurement of the Essendant Pension Plan was required as of May 31, 2016.  The impact of the remeasurement and activity in the first five months of 2016 resulted in a $6.5 million improvement to the net funded status of the plan, therefore reducing other long-term liabilities. As of June 30, 2016, shareholders’ equity improved $0.9 million related to the unrecognized actuarial loss, included as a component of Accumulated Other Comprehensive Income, being reduced by $12.6 million as compared to December 31, 2015, partly offset by the settlement causing a loss of $11.7 million. As a result, the pension plan trust paid $37.6 million in lump sum payments during the first five months of 2016 and as part of this offer. This offer also reduces future pension expense recognized by the Company and volatility related to future obligations of the plan.

 

Defined Contribution Plan

The Company has defined contribution plans covering certain salaried associates and non-union hourly paid associates (the “Plan”). The Plan permits associates to defer a portion of their pre-tax and after-tax salary as contributions to the Plan. The Plan also provides for Company-funded discretionary contributions as well as matching associates’ salary deferral contributions, at the discretion of the Board of Directors. The Company recorded expense of $1.9 million and $3.7 million, respectively, for the Company match of employee contributions to the Plan for the three and six months ended June 30, 2016. During the same periods last year, the Company recorded expense of $1.5 million and $2.9 million to match employee contributions.

10. Derivative Financial Instruments

The Company selectively uses derivative financial instruments to reduce its exposure to changes in interest rates and foreign currency exchange rates. Under Company policy, the Company does not enter into derivative financial instruments for trading or speculative purposes. A description of each type of derivative utilized by the Company to manage risk is included in the following paragraphs.  

The Company selectively uses interest rate swaps to reduce market risk associated with changes in interest rates for its debt arrangements. In July 2012, the Company entered into an interest rate swap to convert a portion of the Company’s floating-rate debt to a fixed-rate basis. The fair value is determined by using quoted market forward rates (level 2 inputs) and reflects the present value of the amount that the Company would pay for contracts involving the same notional amount and maturity date. The changes in fair value of this instrument are reported in AOCI and reclassified into earnings in interest expense in the same periods during which the related interest payments on the hedged debt affect earnings. This swap matures in July 2017. As of June 30, 2016 and December 31, 2015, the fair value of the Company's interest rate swap included in the Company’s Condensed Consolidated Balance Sheet as a component of “Other long-term liabilities” was $0.9 million and $0.5 million respectively.

 

 

13


 

The Company maintains a foreign currency cash flow hedge program in order to manage the volatility in exchange rates and the related impacts on the operations of its Canadian functional currency subsidiaries. The Company uses foreign currency exchange contracts to hedge certain of its foreign exchange rate exposures related to inventory purchases. The Company has currently hedged approximately 25%, or $2.4 million, of its Canadian subsidiaries’ US dollar denominated inventory purchases for the next quarter. The fair value of the foreign currency cash flow hedge is determined by using quoted market spot rates (level 2 inputs). The changes in fair value of ASC 815 designated hedges are reported in AOCI and reclassified into earnings in cost of goods sold in the same periods during which the related inventory is sold and affects earnings. As of June 30, 2016, the fair value of these cash flow hedges were included in the Company’s Condensed Consolidated Balance Sheet as a component of “Accrued liabilities” and “Other Current Assets” totaling $0.01 million. As of December 31, 2015, the fair value of these cash flow hedges were included in the Company’s Condensed Consolidated Balance Sheet as a component of “Other current assets” totaling $0.1 million.

 

The following table depicts the effect of these derivative instruments on the statements of income and comprehensive income for the three and six months ended June 30, 2016 and 2015 (in thousands).

 

 

Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)

 

 

 

 

Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)

 

Derivatives in ASC 815 Cash Flow Hedging Relationships

For the Three Months Ended June 30, 2016

 

 

For the Six Months Ended June 30, 2016

 

 

Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)

 

For the Three Months Ended June 30, 2016

 

 

For the Six Months Ended June 30, 2016

 

Interest Rate Swap

$

161

 

 

$

40

 

 

   Interest expense, net

 

$

233

 

 

$

475

 

Foreign Exchange Hedges

 

(154

)

 

 

(184

)

 

   Cost of goods sold

 

 

(159

)

 

 

(70

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives in ASC 815 Cash Flow Hedging Relationships

For the Three Months Ended June 30, 2015

 

 

For the Six Months Ended June 30, 2015

 

 

Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)

 

For the Three Months Ended June 30, 2015

 

 

For the Six Months Ended June 30, 2015

 

Interest Rate Swap

$

441

 

 

$

43

 

 

   Interest expense, net

 

$

331

 

 

$

662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11. Fair Value Measurements

The Company measures certain financial assets and liabilities, including interest rate swap and foreign currency derivatives, at fair value on a recurring basis, based on market rates of the Company’s positions and other observable interest rates (see Note 10 “Derivative Financial Instruments”, for more information on these interest rate swaps and foreign currency derivatives).

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

 

·

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

 

·

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

 

·

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

 

14


 

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

 

 

Fair Value Measurements as of June 30, 2016

 

 

 

 

 

 

Quoted Market

Prices in Active

Markets for

Identical Assets or

Liabilities

 

 

Significant Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets