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Section 1: 8-K (8-K)

esnd-8k_20161026.htm

 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 8-K

 

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of Earliest Event Reported):  October 26, 2016

 

ESSENDANT INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

0-10653

 

36-3141189

(State or other jurisdiction
of incorporation)

 

(Commission File Number)

 

(IRS Employer
Identification No.)

 

 

 

 

 

One Parkway North Blvd.

Suite 100

Deerfield, Illinois

 

60015-2559

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (847) 627-7000

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

[  ]   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

[  ]   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

[  ]   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

[  ]   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

 

 


 

Item 2.02

 

Results of Operations and Financial Condition.

 

The following information, including Exhibit 99.1 and Exhibit 99.2, shall not be deemed “filed” hereunder for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

On October 26, 2016, Essendant Inc. (the “Registrant”) issued a press release announcing its financial results for the three- and nine-month periods ended September 30, 2016. A copy of the Registrant’s press release is attached as Exhibit 99.1 hereto and is incorporated herein by reference. In addition, a slide presentation summarizing earnings and financial results is attached as Exhibit 99.2 hereto and is incorporated herein by reference.

 

 

Item 9.01

 

Financial Statements and Exhibits.

The following exhibits are filed herewith:

 

 

 

 

Exhibit No.

  

Description

 

 

99.1

 

Press Release, dated October 26, 2016, announcing financial results for the three- and nine-month periods ended September 30, 2016.

99.2

 

Earnings Presentation, a slide presentation summarizing earnings and financial results.

 

 

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  

 

 

ESSENDANT INC.

Date:  October 26, 2016

 

/s/Earl C. Shanks

 

Earl C. Shanks

Senior Vice President and Chief Financial Officer

 

 

 


 

 

ESSENDANT INC.

EXHIBIT INDEX TO CURRENT REPORT ON FORM 8-K

DATED SEPTEMBER 30, 2016

 

 

 

 

 

Exhibit No.

  

Description

Method of Filing

 

 

 

99.1

 

Press Release, dated October 26, 2016, announcing financial results for the three- and nine-month periods ended September 30, 2016.

Filed Herewith

99.2

 

Earnings Presentation, a slide presentation summarizing earnings and financial results.

Filed Herewith

 

 

 

 

 

(Back To Top)

Section 2: EX-99.1 (EX-99.1)

esnd-ex991_7.htm

Exhibit 99.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Executive Offices

One Parkway North Blvd.

Suite 100

Deerfield, IL 60015-2559

  

For Further Information Contact:

investorrelations@essendant.com

(847) 627-2900

 

 

ESSENDANT REPORTS THIRD QUARTER 2016 RESULTS

DEERFIELD, Ill., October 26, 2016 – Essendant Inc. (NASDAQ: ESND), a leading supplier of workplace essentials, today announced financial results for the third quarter ended September 30, 2016.  Key results for third quarter 2016 were as follows:

 

 

Continued revenue growth with net sales increase of 1.1% year-over-year, to $1.4 billion

 

GAAP net income of $36.7 million compared to $27.7 million last year

 

GAAP operating income of $60.3 million compared to $53.0 million last year

 

GAAP diluted earnings per share of $0.99 compared to $0.74 per share last year

 

Free cash flow totaled $144.2(1) million compared to $56.8 million last year

 

Adjusted EBITDA of $51.6(1) million compared to $80.1 million last year

 

Adjusted diluted earnings per share of $0.57(1) compared to $1.00 last year

 

Full year adjusted diluted EPS guidance is reduced to $1.75 to $1.90(1) per share

“Our actions in the third quarter to advance our strategy, increase market share, reduce inventory and improve our leverage position showed positive impact, but we continued to face challenging industry dynamics which negatively impacted our margin and earnings performance,” said Robert B. Aiken, Jr., president and chief executive officer of Essendant. “Our recent results are below our expectations for the business.  However, we are moving forward aggressively to implement the first phase of a comprehensive multi-year transformation program. This action builds on the organizational changes we made earlier in the year to improve our focus on key customer channels and is designed to deliver improved profitability by winning back lost revenue in our JanSan distributor channel, aligning pricing with cost to serve, enhancing our merchandising efforts through better sourcing and assortment, driving productivity and reducing costs, and diversifying our industrial channel.”  

 

Mr. Aiken continued, “In light of the continued headwinds facing our business and recognizing the fact that our transformation efforts will take time to impact our results, we are reducing our guidance for the balance of the year.  We do not take this decision lightly and remain committed to moving forward with focus and urgency to implement changes to drive improved results and value.”

 

 

(1)

This is non-GAAP information. See the Reconciliation of Non-GAAP Financial Measures section of this document for more information.

 

Note: All EPS numbers in this document are diluted unless stated otherwise.

 

-1-


Essendant Reports Third Quarter 2016 Results

Page 2 of 11

 

 

Third Quarter Sales

 

 

Net sales increased 1.1%, driven principally by sales in our office products category, partly offset by continued declines in our Industrial category

 

o

Janitorial/Sanitation:  decreased $4.9 million, or 1.3%, to $372.9 million

 

o

Technology Products:  increased $2.3 million, or 0.7%, to $345.6 million

 

o

Traditional Office Products:  increased $3.7 million, or 1.6% to $240.0 million

 

o

Industrial:  decreased $6.9 million, or 4.7%, to $139.8 million

 

o

Cut-sheet Paper:  increased $23.0 million, or 27.6% to $106.6 million

 

o

Automotive:  increased $3.0 million, or 3.9%, to $78.6 million

 

o

Office Furniture:  decreased $5.5 million, or 6.3%, to $82.2 million

 

Third Quarter Performance

 

 

Gross profit was $198.9 million, a decline from $225.1 million in the prior year resulting from:

 

o

Shifts in customer channel and product category mix

 

o

Lower supplier allowances related to reductions of inventory during the quarter

 

o

Higher freight cost due to new customers, growth by large customers and inflation

 

o

Inventory expense favorability in 2015 following a last-in first-out method (LIFO) conversion that did not recur

 

Operating expenses were $138.5 million, a decline from $172.2 million in the prior year resulting from:

 

o

Gains on the sale of the City of Industry, CA facility in the third quarter of 2016 totaling $20.5 million, pre-tax

 

o

Third quarter 2015 impact of the impairment of seller notes totaling $10.7 million, pre-tax

 

Income tax expense was $17.1 million compared to $20.0 million in the prior year resulting from:

 

o

Utilization of a capital loss carry forward totaling $5.0 million

 

o

Additional tax expense of $1.7 million related to dividends from a foreign subsidiary

 

Diluted earnings per share increased to $0.99 per share compared to $0.74 per share last year. Adjusted earnings per share were $0.57(1) compared to $1.00 last year

 

Free cash flow increased to $144.2(1) million from $56.8 million in the prior year resulting from:

 

o

Reduction in inventory of $117.8 million

 

o

Proceeds of $31.0 million from a sale of the City of Industry facility

 

o

Cash outflows of $39.9 million for a 2015 acquisition

 

Reduced debt leverage from 3.5x at June 30, 2016 to 2.8x at September 30, 2016

 

Guidance

The company provided updated guidance and currently expects the following in 2016, excluding any acquisitions or unusual charges:

 

Full-Year 2016

 

 

 

Net sales

$5.325 billion to $5.375 billion

 

Adjusted diluted earnings per share(1)

$1.75 to $1.90 per share

 

Free cash flow(1)

Greater than $150 million in the second half of 2016

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Essendant Reports Third Quarter 2016 Results

Page 3 of 11

 

Conference Call

Essendant will hold a conference call followed by a question and answer session on Thursday, October 27, 2016, at 7:30 a.m. CDT, to discuss third quarter 2016 results. To participate, callers within the U.S. and Canada should dial (877) 358-2531 and international callers should dial (412) 902-6623 approximately 10 minutes before the presentation.  The conference ID is “10091551.”  To listen to the webcast, participants should visit the Investors section of the company’s website (investors.essendant.com), and click on the “Q3-16 Earnings Release” button on the right side of the page, several minutes before the event is broadcast.   Interested parties can access an archived version of the call, this news release, a financial slide presentation and other information related to the call, also located on the quarterly results section of Essendant’s investor website, about two hours after the call ends.

Forward-Looking Statements

This news release contains forward-looking statements, including 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 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, but are not limited to the following: Essendant's reliance on key customers, and the risks inherent in continuing or increased customer concentration and consolidations; end-user demand for products in the office, technology, and furniture product categories may continue to decline; the impact of Essendant's repositioning activities on Essendant's customers, suppliers, and operations; Essendant's reliance on independent resellers for a significant percentage of its net sales and, therefore, the importance of the continued independence, viability and success of these resellers; prevailing economic conditions and changes affecting the business products industry and the general economy; Essendant's ability to maintain its existing information technology systems and to successfully procure, develop and implement new systems and services without business disruption or other unanticipated difficulties or costs; the impact of price transparency, customer consolidation, and changes in product sales mix on Essendant's margins; the impact on the company’s reputation and relationships of a breach of the company’s information technology systems; the risks and expense associated with Essendant's obligations to maintain the security of private information provided by Essendant's customers; Essendant's reliance on supplier allowances and promotional incentives; the creditworthiness of Essendant's customers; continuing or increasing competitive activity and pricing pressures within existing or expanded product manufacturers who sell directly to Essendant's customers; the impact of supply chain disruptions or changes in key suppliers’ distribution strategies; Essendant's ability to manage inventory in order to maximize sales and supplier allowances while minimizing excess and obsolete inventory; Essendant's success in effectively identifying, consummating and integrating acquisitions; the costs and risks related to compliance with laws, regulations and industry standards affecting Essendant's business; the availability of financing sources to meet Essendant's business needs; Essendant's reliance on key management personnel, both in day-to-day operations and in execution of new business initiatives; and the effects of hurricanes, acts of terrorism and other natural or man-made disruptions.  

-3-


Essendant Reports Third Quarter 2016 Results

Page 4 of 11

 

Shareholders, potential investors and other readers are urged to consider these risks and uncertainties in evaluating forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. For additional information about risks and uncertainties that could materially affect Essendant's results, please see the company’s Securities and Exchange Commission filings.  The forward-looking information in this news release is made as of this date only, and the company does not undertake to update any forward-looking statement.  Investors are advised to consult any further disclosure by Essendant regarding the matters discussed in this news release in its filings with the Securities and Exchange Commission and in other written statements it makes from time to time.  It is not possible to anticipate or foresee all risks and uncertainties, and investors should not consider any list of risks and uncertainties to be exhaustive or complete.

Company Overview

Essendant Inc. is a leading supplier of workplace essentials, with 2015 net sales of $5.4 billion. The company stocks a broad assortment of over 180,000 items, including technology products, traditional office products, janitorial and breakroom supplies, office furniture, industrial supplies, and automotive aftermarket tools. The Company’s network of 71 distribution centers enables the Company to ship most products overnight to more than ninety percent of the U.S. For more information, visit www.essendant.com.    

 

 

Essendant common stock trades on the NASDAQ Global Select Market under the symbol ESND.

-4-


Essendant Reports Third Quarter 2016 Results

Page 5 of 11

 

Essendant Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

 

  

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net sales

$

1,407,504

 

 

$

1,391,545

 

 

$

4,114,323

 

 

$

4,065,719

 

Cost of goods sold

 

1,208,650

 

 

 

1,166,402

 

 

 

3,519,564

 

 

 

3,430,062

 

Gross profit

 

198,854

 

 

 

225,143

 

 

 

594,759

 

 

 

635,657

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Warehousing, marketing and administrative expenses

 

138,107

 

 

 

172,159

 

 

 

463,410

 

 

 

526,653

 

     Defined benefit plan settlement loss (Note 10)

 

419

 

 

 

-

 

 

 

12,163

 

 

 

-

 

Operating income

 

60,328

 

 

 

52,984

 

 

 

119,186

 

 

 

109,004

 

Interest expense, net

 

6,484

 

 

 

5,300

 

 

 

18,058

 

 

 

14,918

 

Income before income taxes

 

53,844

 

 

 

47,684

 

 

 

101,128

 

 

 

94,086

 

Income tax expense

 

17,102

 

 

 

20,017

 

 

 

34,923

 

 

 

42,594

 

Net income

$

36,742

 

 

$

27,667

 

 

$

66,205

 

 

$

51,492

 

Net income per share - basic:

$

1.00

 

 

$

0.74

 

 

$

1.81

 

 

$

1.36

 

     Average number of common shares outstanding - basic

 

36,578

 

 

 

37,300

 

 

 

36,560

 

 

 

37,724

 

Net income per share - diluted:

$

0.99

 

 

$

0.74

 

 

$

1.79

 

 

$

1.35

 

     Average number of common shares outstanding - diluted

 

36,938

 

 

 

37,608

 

 

 

36,896

 

 

 

38,109

 

Dividends declared per share

$

0.14

 

 

$

0.14

 

 

$

0.42

 

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-5-


Essendant Reports Third Quarter 2016 Results

Page 6 of 11

 

Essendant Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(dollars in thousands, except share data)

 

  

(Unaudited)

 

 

(Audited)

 

 

As of  September 30,

 

 

As of  December 31,

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

22,647

 

 

$

29,983

 

Accounts receivable, less allowance for doubtful accounts of $16,696 in 2016 and $17,810 in 2015

 

752,260

 

 

 

716,537

 

Inventories

 

850,463

 

 

 

922,162

 

Other current assets

 

44,771

 

 

 

27,310

 

Total current assets

 

1,670,141

 

 

 

1,695,992

 

Property, plant and equipment, net

 

126,334

 

 

 

133,751

 

Goodwill

 

298,242

 

 

 

299,355

 

Intangible assets, net

 

86,886

 

 

 

96,413

 

Other long-term assets

 

55,059

 

 

 

37,348

 

Total assets

$

2,236,662

 

 

$

2,262,859

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

540,743

 

 

$

531,949

 

Accrued liabilities

 

192,189

 

 

 

177,472

 

Current maturities of long-term debt

 

35

 

 

 

51

 

Total current liabilities

 

732,967

 

 

 

709,472

 

Deferred income taxes

 

8,372

 

 

 

11,901

 

Long-term debt

 

620,155

 

 

 

716,264

 

Other long-term liabilities

 

92,535

 

 

 

101,488

 

Total liabilities

 

1,454,029

 

 

 

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

 

406,964

 

 

 

410,927

 

Treasury stock, at cost – 36,967,378 shares in 2016 and 37,178,394 shares in 2015

 

(1,097,094

)

 

 

(1,100,867

)

Retained earnings

 

1,514,573

 

 

 

1,463,821

 

Accumulated other comprehensive loss

 

(49,254

)

 

 

(57,591

)

Total stockholders’ equity

 

782,633

 

 

 

723,734

 

Total liabilities and stockholders’ equity

$

2,236,662

 

 

$

2,262,859

 

 

 

 

 

 

 

 

 

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Essendant Reports Third Quarter 2016 Results

Page 7 of 11

 

Essendant Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

For the Nine Months Ended

 

 

September 30,

 

 

2016

 

 

2015

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income

$

66,205

 

 

$

51,492

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

34,199

 

 

 

36,344

 

Share-based compensation

 

6,903

 

 

 

6,447

 

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

 

(21,027

)

 

 

1,562

 

Amortization of capitalized financing costs

 

502

 

 

 

659

 

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

 

960

 

 

 

(402

)

Asset impairment charges

 

-

 

 

 

34,893

 

Loss on sale of equity investment

 

-

 

 

 

33

 

Deferred income taxes

 

(6,970

)

 

 

(15,285

)

Pension settlement charge

 

12,163

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Increase in accounts receivable, net

 

(35,457

)

 

 

(31,288

)

Decrease in inventory

 

73,735

 

 

 

54,354

 

Increase in other assets

 

(35,221

)

 

 

(8,720

)

Increase in accounts payable

 

8,902

 

 

 

50,412

 

Increase in accrued liabilities

 

13,659

 

 

 

6,500

 

Decrease in other liabilities

 

(12,585

)

 

 

(3,342

)

Net cash provided by operating activities

 

105,968

 

 

 

183,659

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Capital expenditures

 

(28,167

)

 

 

(18,133

)

Proceeds from the disposition of property, plant and equipment

 

33,890

 

 

 

184

 

Acquisition, net of cash acquired

 

-

 

 

 

(40,471

)

Proceeds from sale of equity investment

 

-

 

 

 

612

 

Net cash provided by (used in) investing activities

 

5,723

 

 

 

(57,808

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Net repayments under revolving credit facility

 

(96,640

)

 

 

(45,309

)

Net proceeds (disbursements) from share-based compensation arrangements

 

621

 

 

 

(1,507

)

Acquisition of treasury stock, at cost

 

(6,839

)

 

 

(55,677

)

Payment of cash dividends

 

(15,355

)

 

 

(15,976

)

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

 

(960

)

 

 

402

 

Payment of debt issuance costs

 

(86

)

 

 

(36

)

Net cash used in financing activities

 

(119,259

)

 

 

(118,103

)

Effect of exchange rate changes on cash and cash equivalents

 

232

 

 

 

(513

)

Net change in cash and cash equivalents

 

(7,336

)

 

 

7,235

 

Cash and cash equivalents, beginning of period

 

29,983

 

 

 

20,812

 

Cash and cash equivalents, end of period

$

22,647

 

 

$

28,047

 

Other Cash Flow Information:

 

 

 

 

 

 

 

Income tax payments, net

$

27,821

 

 

$

53,704

 

Interest paid

 

19,607

 

 

 

16,032

 

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Essendant Reports Third Quarter 2016 Results

Page 8 of 11

 

Essendant Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income,

Adjusted Diluted Earnings Per Share, Adjusted EBITDA, and Free Cash Flow

 

The Non-GAAP table below presents Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings per Share, Adjusted EBITDA and Free Cash Flow for the three and nine months ended September 30, 2016 and 2015 (in thousands, except per share data). These non-GAAP measures exclude certain non-recurring items and exclude other items that do not reflect the Company’s ongoing operations and are included to provide investors with useful information about the financial performance of our business. The presented non-GAAP financial measures should not be considered in isolation or as substitutes for the comparable GAAP financial measures. The non-GAAP financial measures do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP, and these non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP financial measures.

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

 

 

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

 

The Company commenced two such restructuring programs during 2015.

 

Gain or loss on sale of assets or businesses. Sales of assets, such as buildings or equipment, and businesses can cause gains or losses. These transactions occur as the Company is repositioning its business and reviewing its cost structure. 

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

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

 

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

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

 

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

The Company recorded impairment and accelerated amortization of its trademarks upon the announcement of its rebranding effort in 2015.

 

Other actions.  Actions, which may be non-recurring events, that result from the changing strategies and needs of the Company and do not reflect the underlying expense of the on-going business. These charges include items such as settlement charges related to the defined benefit plan settlement in 2016 and the tax impact of the dividend from a foreign subsidiary.

Adjusted operating expenses and adjusted operating income. Adjusted operating expenses and adjusted operating income provide management and our investors with an understanding of the results from the primary operations of our business by excluding the effects of items described above that do not reflect the ordinary expenses and earnings of our operations. Adjusted operating expenses and adjusted operating income are used to evaluate our period-over-period operating performance as they are more comparable measures of our continuing business. These measures may be useful to an investor in evaluating the underlying operating performance of our business.

-8-


Essendant Reports Third Quarter 2016 Results

Page 9 of 11

 

Adjusted net income and adjusted diluted earnings per share. Adjusted net income and adjusted diluted earnings per share provide a more comparable view of our Company’s underlying performance and trends than the comparable GAAP measures. Net income and diluted earnings per share are adjusted for the effect of items described above that do not reflect the ordinary earnings of our operations.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Adjusted EBITDA is helpful in evaluating our operating performance and is used by management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting. Net income is adjusted for the effect of interest, taxes, depreciation and amortization and stock-based compensation expense. Management believes that adjusted EBITDA is also commonly used by investors to evaluate operating performance between competitors because it helps reduce variability caused by differences in capital structures, income taxes, stock-based compensation accounting policies, and depreciation and amortization policies.

Free cash flow. Free cash flow is useful to management and our investors as it is a measure of the Company’s liquidity. It provides a more complete understanding of factors and trends affecting our cash flows than the comparable GAAP measure. Net cash provided by (used in) operating activities and net cash provided by (used in) investing activities are aggregated and adjusted to exclude the non-cash impact of acquisitions and divestitures.

Guidance. Adjusted diluted earnings per share and free cash flow are non-GAAP measures. A quantitative reconciliation of our non-GAAP guidance to the corresponding GAAP information is not available because the non-GAAP guidance excludes certain GAAP information that is uncertain and difficult to predict. The adjusted diluted earnings per share guidance excludes income in the first nine months of 2016 of $0.22 per share related to a settlement charge for the defined benefit plan, gain on sale of City of Industry facility, severance costs for operating leadership, restructuring charges, and non-GAAP tax provision. Actual amounts for these measures for the three and nine months ended September 30, 2016 appear in the Non-GAAP table included later in this section. For the remainder of the year, the factors that will be excluded are currently unknown due to the level of unpredictability and uncertainty associated with these items, but may include actions such as gain or loss on future sales of assets or businesses, future restructuring charges, non-GAAP tax adjustments, cash flow impacts of acquisitions, and other actions.

 

-9-


Essendant Reports Third Quarter 2016 Results

Page 10 of 11

 

Essendant Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income,

Adjusted Diluted Earnings Per Share, Adjusted EBITDA, and Free Cash Flow

(unaudited)

(in thousands, except per share data)

 

For the Three Months Ended September 30,

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

Operating expenses

$

138,526

 

 

$

172,159

 

Settlement charge related to the defined benefit plan

 

(419

)

 

 

-

 

Gain on sale of City of Industry facility

 

20,541

 

 

 

-

 

Severance costs for operating leadership

 

(1,245

)

 

 

-

 

Restructuring charges

 

1,210

 

 

 

(200

)

Impairment of assets and accelerated amortization related to rebranding

 

-

 

 

 

(511

)

Impairment of seller notes

 

-

 

 

 

(10,738

)

Loss on sale of Mexico business and related costs

 

-

 

 

 

(2,072

)

Adjusted operating expenses

$

158,613

 

 

$

158,638

 

 

 

 

 

 

 

 

 

Operating income

$

60,328

 

 

$

52,984

 

Operating expense adjustments noted above

 

(20,087

)

 

 

13,521

 

Adjusted operating income

$

40,241

 

 

$

66,505

 

 

 

 

 

 

 

 

 

Net income

$

36,742

 

 

$

27,667

 

        Operating expense adjustments noted above

 

(20,087

)

 

 

13,521

 

Non-GAAP tax provision on adjustments

 

 

 

 

 

 

 

Settlement charge related to the defined benefit plan

 

(158

)

 

 

-

 

Gain on sale of City of Industry facility

 

2,789

 

 

 

-

 

Severance costs for operating leadership

 

(469

)

 

 

-

 

Restructuring charges

 

456

 

 

 

(76

)

Dividend from a foreign subsidiary

 

1,666

 

 

 

-

 

Impairment of assets and accelerated amortization related to rebranding

 

-

 

 

 

(194

)

Impairment of seller notes

 

-

 

 

 

(4,080

)

Loss on sale of Mexico business and related costs

 

-

 

 

 

846

 

Adjusted net income

$

20,939

 

 

$

37,684

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.99

 

 

$

0.74

 

Operating expense adjustments noted above

 

(0.54

)

 

 

0.36

 

Non-GAAP tax provision on adjustments

 

0.12

 

 

 

(0.10

)

Adjusted diluted earnings per share

$

0.57

 

 

$

1.00

 

 

 

 

 

 

 

 

 

Net income

$

36,742

 

 

$

27,667

 

Provision for income taxes

 

17,102

 

 

 

20,017

 

Interest expense, net

 

6,484

 

 

 

5,300

 

Depreciation and amortization

 

10,046

 

 

 

10,424

 

Equity compensation expense

 

1,355

 

 

 

3,179

 

Operating expense adjustments noted above

 

(20,087

)

 

 

13,521

 

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

$

51,642

 

 

$

80,108

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

$

121,952

 

 

$

62,811

 

Net cash provided by (used in) investing activities

 

22,280

 

 

 

(45,363

)

Less: Acquisition, net of cash acquired

 

-

 

 

 

39,939

 

Add: Sale of equity investment

 

-

 

 

 

(612

)

Free cash flow

$

144,232

 

 

$

56,775

 

 

 

-10-


Essendant Reports Third Quarter 2016 Results

Page 11 of 11

 

Essendant Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income,

Adjusted Diluted Earnings Per Share, Adjusted EBITDA, and Free Cash Flow

(unaudited)

(in thousands, except per share data)

 

For the Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

Operating expenses

$

475,573

 

 

$

526,653

 

Settlement charge related to the defined benefit plan

 

(12,163

)

 

 

-

 

Gain on sale of City of Industry facility

 

20,541

 

 

 

-

 

Severance costs for operating leadership

 

(1,245

)

 

 

-

 

Restructuring charges

 

956

 

 

 

(6,495

)

Impairment of assets and accelerated amortization related to rebranding

 

-

 

 

 

(11,485

)

Impairment of seller notes

 

-

 

 

 

(10,738

)

Loss on sale of Mexico business and related costs

 

-

 

 

 

(16,999

)

Adjusted operating expenses

$

483,662

 

 

$

480,936

 

 

 

 

 

 

 

 

 

Operating income

$

119,186

 

 

$

109,004

 

Operating expense adjustments noted above

 

(8,089

)

 

 

45,717

 

Adjusted operating income

$

111,097

 

 

$

154,721

 

 

 

 

 

 

 

 

 

Net income

$

66,205

 

 

$

51,492

 

Operating expense adjustments noted above

 

(8,089

)

 

 

45,717

 

Non-GAAP tax provision on adjustments

 

 

 

 

 

 

 

Settlement charge related to the defined benefit plan

 

(4,574

)

 

 

-

 

Gain on sale of City of Industry facility

 

2,789

 

 

 

-

 

Severance costs for operating leadership

 

(469

)

 

 

-

 

Restructuring charges

 

357

 

 

 

(2,468

)

Dividend from a foreign subsidiary

 

1,666

 

 

 

-

 

Impairment of assets and accelerated amortization related to rebranding

 

-

 

 

 

(4,364

)

Impairment of seller notes

 

-

 

 

 

(4,080

)

Loss on sale of Mexico business and related costs

 

-

 

 

 

49

 

Adjusted net income

$

57,885

 

 

$

86,346

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

1.79

 

 

$

1.35

 

Operating expense adjustments noted above

 

(0.22

)

 

 

1.20

 

Non-GAAP tax provision on adjustments

 

-

 

 

 

(0.29

)

Adjusted diluted net income per share

$

1.57

 

 

$

2.26

 

 

 

 

 

 

 

 

 

Net income

$

66,205

 

 

$

51,492

 

Provision for income taxes

 

34,923

 

 

 

42,594

 

Interest expense, net

 

18,058

 

 

 

14,918

 

Depreciation and amortization

 

30,500

 

 

 

31,356

 

Equity compensation expense

 

7,044

 

 

 

6,447

 

Operating expense adjustments noted above

 

(8,089

)

 

 

45,717

 

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

$

148,641

 

 

$

192,524

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

$

105,968

 

 

$

183,659

 

Net cash provided by (used in) investing activities

 

5,723

 

 

 

(57,808

)

Less: Acquisitions, net of cash acquired

 

-

 

 

 

(40,471

)

Add: Sale of equity investment

 

-

 

 

 

612

 

Free cash flow

$

111,691

 

 

$

85,992

 

 

 

 

 

 

 

 

 

 

-11-

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Section 3: EX-99.2 (EX-99.2)

esnd-ex992_8.pptx.htm

Slide 1

Earnings Presentation Third Quarter 2016 October 27, 2016 Exhibit 99.2

Slide 2

Forward-Looking Statements This presentation contains forward-looking statements, including 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 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, but are not limited to the following: Essendant's reliance on key customers, and the risks inherent in continuing or increased customer concentration and consolidations; end-user demand for products in the office, technology, and furniture product categories may continue to decline; the impact of Essendant's repositioning activities on Essendant's customers, suppliers, and operations; Essendant's reliance on independent resellers for a significant percentage of its net sales and, therefore, the importance of the continued independence, viability and success of these resellers; prevailing economic conditions and changes affecting the business products industry and the general economy; Essendant's ability to maintain its existing information technology systems and to successfully procure, develop and implement new systems and services without business disruption or other unanticipated difficulties or costs; the impact of price transparency, customer consolidation, and changes in product sales mix on Essendant's margins; the impact on the company’s reputation and relationships of a breach of the company’s information technology systems; the risks and expense associated with Essendant's obligations to maintain the security of private information provided by Essendant's customers; Essendant's reliance on supplier allowances and promotional incentives; the creditworthiness of Essendant's customers; continuing or increasing competitive activity and pricing pressures within existing or expanded product categories, including competition from product manufacturers who sell directly to Essendant's customers; the impact of supply chain disruptions or changes in key suppliers’ distribution strategies; Essendant's ability to manage inventory in order to maximize sales and supplier allowances while minimizing excess and obsolete inventory; Essendant's success in effectively identifying, consummating and integrating acquisitions; the costs and risks related to compliance with laws, regulations and industry standards affecting Essendant's business; the availability of financing sources to meet Essendant's business needs; Essendant's reliance on key management personnel, both in day-to-day operations and in execution of new business initiatives; and the effects of hurricanes, acts of terrorism and other natural or man-made disruptions. Shareholders, potential investors and other readers are urged to consider these risks and uncertainties in evaluating forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. For additional information about risks and uncertainties that could materially affect Essendant's results, please see the company’s Securities and Exchange Commission filings. The forward-looking information in this presentation is made as of this date only, and the company does not undertake to update any forward-looking statement. Investors are advised to consult any further disclosure by Essendant regarding the matters discussed in this presentation in its filings with the Securities and Exchange Commission and in other written statements it makes from time to time. It is not possible to anticipate or foresee all risks and uncertainties, and investors should not consider any list of risks and uncertainties to be exhaustive or complete. 2

Slide 3

Q3 2016 Overview 3 Net sales growth of 1.1% year-over year, to $1.4 billion Continued market share gains Significant cash flow improvement during Q3 Inventory reductions totaled $117.8 million Long-term debt reduced $140.4 million Gross margin pressure experienced in first half of 2016 continued Earnings per share increased to $0.99 from $0.74 per share last year Increase driven by gain on sale of facility totaling $20.5 million Adjusted earnings per share of $0.57(1) compared to $1.00 last year For a definition and reconciliation of Adjusted EPS, please see appendix.

Slide 4

Comprehensive Transformation 4 We have begun implementing the first phase of a comprehensive, multi-year transformation program to fundamentally improve our value proposition Winning back lost revenue in JanSan distributor channel Aligning pricing with the cost to serve Enhancing our merchandising efforts through better sourcing and assortment Driving productivity and reducing costs Diversifying the industrial channel

Slide 5

Key Value Drivers Next day fulfillment Broad assortment Advanced digital capabilities Content and category expertise 5

Slide 6

Q3 2016 Financial Results 6 Net sales increased 1.1% Earnings per share increased $0.25 to $0.99 Adjusted EPS(1) of $0.57 down $0.43 cents YOY Earnings Per Share ($/share) Adjusted EPS(1) ($/share) For a definition and reconciliation of Adjusted EPS, please see appendix. $1.00 Q3 2015 $0.57 Q3 2016 +1.1% Q3 2015 Q3 2016 $1,408 $1,392 Net Sales ($M) Q3 2016 Q3 2015 $0.99 $0.74

Slide 7

7 Q3 Category Sales Trends YOY % Δ 27.6% 1.6% 0.7% (6.3%) (1.3%) (4.7%) 3.9% Sales by category Cut-sheet Paper Office Products Tech Furniture Jan San Industrial Automotive Q3 2015 $1,392 $2.3 ($5.5) ($4.9) $23.0 ($6.9) $3.7 $3.0 Other*: $1.3 Q3 2016 $1,408 * Other includes Freight and Other Revenue ($M) Q3 2016 Total Sales $106.6 $240.0 $345.6 $82.2 $372.9 $139.8 $78.6

Slide 8

Q3 Gross Margin Drivers 8 ($13.5) Adj. $158.6 ($21.3) $138.5 Gross profit was $198.9 million, a decrease of $26.2 million from last year Approximately half related to mix changes, including impacts of both customer channel and product category shifts Approximately a third related to lower supplier allowances resulting from the third quarter inventory reduction Remaining decrease related to: Higher freight costs due to new customers, growth by large customers and inflation Favorable impact of an inventory valuation conversion in 2015 that did not recur

Slide 9

Q3 Balance Sheet 9 Inventory levels significantly decreased during the third quarter, improving free cash flow and operational efficiencies Free cash flow resulted in a reduction of long-term debt Debt leverage improvement reduces interest expense Inventory Long-term Debt Debt Leverage $117.8 $140.4 0.7x $968.3 $850.5 $760.6 $620.2 3.5x 2.8x ($M)

Slide 10

Full-Year 2016 Guidance Guidance excludes impacts of any new acquisitions or unusual charges 2016E Guidance Range Net Sales $5.325B - $5.375B Adjusted EPS(1) $1.75 - $1.90 Free Cash Flow(1) >$150M in the second half of 2016 10 For a definition of Adjusted EPS and Free Cash Flow, please see appendix.

Slide 11

Appendix

Slide 12

2 The following Non-GAAP Table presents Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings per Share, Adjusted EBITDA and Free Cash Flow for the three and nine months ended September 30, 2016 and 2015 (in thousands, except per share data). These non-GAAP measures exclude certain non-recurring items and exclude other items that do not reflect the Company’s ongoing operations and are included to provide investors with useful information about the financial performance of our business. The presented non-GAAP financial measures should not be considered in isolation or as substitutes for the comparable GAAP financial measures. The non-GAAP financial measures do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP, and these non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP financial measures. In order to calculate the non-GAAP measures, management excludes the following items to facilitate the comparison of current and prior year results and ongoing operations, as management believes these items do not reflect the underlying cost structure of our business. These items can vary significantly in amount and frequency. Restructuring charges. Workforce reduction and facility closure charges such as employee termination costs, facility closure and consolidation costs, and other costs directly associated with shifting business strategies or business conditions that are part of a restructuring program. The Company commenced two such restructuring programs during 2015. Gain or loss on sale of assets or businesses. Sales of assets, such as buildings or equipment, and businesses can cause gains or losses. These transactions occur as the Company is repositioning its business and reviewing its cost structure. The Company recognized a gain on the sale of its City of Industry, CA facility in the third quarter of 2016, a loss on the sale and related impairment of intangible assets of the operations in Mexico in 2015, and a loss on the sale and related impairment of intangible assets of its software subsidiary in 2014, recording an impairment of the seller notes in the third quarter of 2015. Due to the sale of the City of Industry facility, the Company was able to utilize its capital loss carryforwards. This utilization resulted in the release of the valuation allowance previously established against the deferred tax asset. The $5.0 million tax benefit from the release of the valuation allowance reduced the effective tax rate for the three and nine months ended September 30, 2016, by 9.2% and 4.9 %, respectively. Severance costs for operating leadership. Employee termination costs related to members of the Company’s operating leadership team are excluded as they are based upon individual agreements. Two operating leaders were severed from the Company in the third quarter of 2016, which were not part of a restructuring program. Asset impairments. Changes in strategy or macroeconomic events may cause asset impairments. The Company recorded impairment and accelerated amortization of its trademarks upon the announcement of its rebranding effort in 2015. Other actions. Actions, which may be non-recurring events, that result from the changing strategies and needs of the Company and do not reflect the underlying expense of the on-going business. These charges include items such as settlement charges related to the defined benefit plan settlement in 2016 and the tax impact of the dividend from a foreign subsidiary. Essendant Inc. and Subsidiaries Reconciliation of Non-GAAP Financial Measures Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share, Adjusted EBITDA, and Free Cash Flow

Slide 13

2 Adjusted operating expenses and adjusted operating income. Adjusted operating expenses and adjusted operating income provide management and our investors with an understanding of the results from the primary operations of our business by excluding the effects of items described above that do not reflect the ordinary expenses and earnings of our operations. Adjusted operating expenses and adjusted operating income are used to evaluate our period-over-period operating performance as they are more comparable measures of our continuing business. These measures may be useful to an investor in evaluating the underlying operating performance of our business. Adjusted net income and adjusted diluted earnings per share. Adjusted net income and adjusted diluted earnings per share provide a more comparable view of our Company’s underlying performance and trends than the comparable GAAP measures. Net income and diluted earnings per share are adjusted for the effect of certain items described above that do not reflect the ordinary earnings of our operations. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Adjusted EBITDA is helpful in evaluating our operating performance and is used by management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting. Net income is adjusted for the effect of interest, taxes, depreciation and amortization and stock based-compensation expense. Management believes that adjusted EBITDA is also commonly used by investors to evaluate operating performance between competitors because it helps reduce variability caused by differences in capital structures, income taxes, stock-based compensation accounting policies, and depreciation and amortization policies. Furthermore, adjusted EBITDA is used by lenders and other parties to evaluate our creditworthiness. Free cash flow. Free cash flow is useful to management and our investors as it is a measure of the Company’s liquidity. It provides a more complete understanding of factors and trends affecting our cash flows than the comparable GAAP measure. Net cash provided by (used in) operating activities and net cash provided by (used in) investing activities are aggregated and adjusted to exclude the non-cash impact of acquisitions and divestitures. Guidance. Adjusted diluted earnings per share and free cash flow, which are included in our 2016 guidance, are non-GAAP measures. A quantitative reconciliation of our non-GAAP guidance to the corresponding GAAP information is not available because the non-GAAP guidance excludes certain GAAP information that is uncertain and difficult to predict. The adjusted diluted earnings per share guidance excludes income in the first nine months of 2016 of $0.22 per share related to a settlement charge related to the defined benefit plan, gain on sale of City of Industry facility, severance costs for operating leadership, restructuring charges, and non-GAAP tax provision. Actual amounts for these measures for the three and nine months ended September 30, 2016 appear in the following non-GAAP table. For the remainder of the year, the factors that will be excluded are currently unknown due to the level of unpredictability and uncertainty associated with these items, but may be actions such as gain or loss on future sales of assets or businesses, future restructuring charges, non-GAAP tax adjustments, cash flow impacts of acquisitions, and other actions. Essendant Inc. and Subsidiaries Reconciliation of Non-GAAP Financial Measures Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share, Adjusted EBITDA, and Free Cash Flow

Slide 14

2 Essendant Inc. and Subsidiaries Reconciliation of Non-GAAP Financial Measures Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share, Adjusted EBITDA, and Free Cash Flow

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