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

esnd-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 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      No  

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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

 

  

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  

On October 24, 2016, the registrant had outstanding 36,968,408 shares of common stock, par value $0.10 per share.

 

 

 

 

 


ESSENDANT INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2016

TABLE OF CONTENTS

 

 

  

Page No.

PART I — FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

 

 

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

  

3

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015

  

4

 

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

  

5

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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

  

16

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

28

 

Item 4. Controls and Procedures

  

28

 

PART II — OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

29

 

Item 1A. Risk Factors

  

29

 

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

  

30

 

Item 6. Exhibits

  

31

 

SIGNATURES

  

32

 

 

 

 

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  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

 

 

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 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

$

36,742

 

 

$

27,667

 

 

$

66,205

 

 

$

51,492

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Translation adjustments

 

(692

)

 

 

7,497

 

 

 

2,441

 

 

 

3,076

 

       Minimum pension liability adjustments

 

(2,298

)

 

 

967

 

 

 

6,035

 

 

 

2,831

 

       Cash flow hedge adjustments

 

288

 

 

 

(208

)

 

 

(139

)

 

 

(636

)

Total other comprehensive income (loss), net of tax

 

(2,702

)

 

 

8,256

 

 

 

8,337

 

 

 

5,271

 

Comprehensive income

$

34,040

 

 

$

35,923

 

 

$

74,542

 

 

$

56,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

5


ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars 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

 

 

 

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 (the “2015 Form 10-K”)  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 September 30, 2016 and the results of operations and cash flows for the nine months ended September 30, 2016 and 2015. The results of operations for the three and nine months ended September 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. Under the new guidance, when awards vest or are settled, companies are required to record excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement instead of in additional paid-in capital (APIC). This guidance will be applied prospectively. Furthermore, companies will present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, which companies can elect to apply retrospectively or prospectively. Under the new guidance, companies will elect whether to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimate the number of awards expected to be forfeited, as is currently required. This guidance will be applied using a modified retrospective transition method, with a cumulative adjustment to retained earnings. The 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


Inventory

Approximately 98.4% of total inventory as of September 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 values would have been $147.2 million and $147.8 million higher than reported as of September 30, 2016 and December 31, 2015, respectively.

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

 

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.

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

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

 

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


 

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

 

4. Share-Based Compensation

As of September 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 526,697 shares of restricted stock and 290,725 RSUs during the first nine months of 2016, compared to 440,948 shares of restricted stock and 162,092 RSUs during the first nine months of 2015.

 

5. Severance and Restructuring Charges

 

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

 

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

 

 

Expenses

 

 

Cash flow

 

 

Accrued Liabilities

 

 

For the three months ended September 30,

 

 

For the nine months ended September 30,

 

 

For the nine months ended September 30,

 

 

As of September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

2016

 

First quarter 2015 Actions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Workforce reduction

$

(0.5

)

 

$

-

 

 

$

(0.5

)

 

$

6.0

 

 

 

 

 

 

 

 

 

 

 

 

 

   Facility closure

$

-

 

 

 

0.2

 

 

$

0.3

 

 

 

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

(0.5

)

 

 

0.2

 

 

$

(0.2

)

 

$

6.5

 

 

$

1.2

 

 

$

3.0

 

 

$

0.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter 2015 Action

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Workforce reduction

$

(0.7

)

 

N/A

 

 

$

(0.7

)

 

N/A

 

 

$

8.0

 

 

N/A

 

 

$

2.1

 

    

 


 

9


6. 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

 

745

 

Goodwill, balance as of September 30, 2016

$

298,242

 

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):

 

 

September 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

$

137,678

 

 

$

(59,545

)

 

$

78,133

 

 

16

 

$

137,938

 

 

$

(51,357

)

 

$

86,581

 

 

16

Non-compete agreements

 

4,651

 

 

 

(4,260

)

 

 

391

 

 

4

 

 

4,644

 

 

 

(4,260

)

 

 

384

 

 

4

Trademarks

 

13,725

 

 

 

(5,363

)

 

 

8,362

 

 

14

 

 

13,688

 

 

 

(4,240

)

 

 

9,448

 

 

14

Total

$

156,054

 

 

$

(69,168

)

 

$

86,886

 

 

 

 

$

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

 

$

12,242

 

2017

 

 

10,797

 

2018

 

 

8,054

 

2019

 

 

6,937

 

2020

 

 

6,934

 

 

7. Accumulated Other Comprehensive Income (Loss)

The change in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the period ended September 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

 

 

2,441

 

 

 

(579

)

 

 

(3,946

)

 

 

(2,084

)

Settlement loss reclassified from AOCI

 

 

-

 

 

 

-

 

 

 

7,453

 

 

 

7,453

 

Amounts reclassified from AOCI

 

 

-

 

 

 

440

 

 

 

2,528

 

 

 

2,968

 

Net other comprehensive (loss) income

 

 

2,441

 

 

 

(139

)

 

 

6,035

 

 

 

8,337

 

AOCI, balance as of September 30, 2016

 

$

(7,425

)

 

$

7

 

 

$

(41,836

)

 

$

(49,254

)

 

 

 

10


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

 

 

Amount Reclassified From AOCI

 

 

 

 

 

For the Three

 

 

For the Nine

 

 

 

 

 

Months Ended

 

 

Months Ended

 

 

 

 

 

September 30,

 

 

September 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

 

$

249

 

 

$

789

 

 

Interest expense, net

Loss on foreign exchange hedges, before tax

 

 

-

 

 

 

(70

)

 

Cost of goods sold

 

 

 

(96

)

 

 

(279

)

 

Tax provision

 

 

$

153

 

 

$

440

 

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan items

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and unrecognized loss

 

$

1,237

 

 

$

4,125

 

 

Warehousing, marketing and administrative expenses

Settlement loss

 

 

419

 

 

 

12,163

 

 

Defined benefit plan settlement loss

 

 

 

(641

)

 

 

(6,307

)

 

Tax provision

 

 

 

1,015

 

 

 

9,981

 

 

Net of tax

Total reclassifications for the period, net of tax

 

$

1,168

 

 

$

10,421

 

 

 

 

8. 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-month period ending September 30, 2016 and 2015, 0.3 and 0.4 million shares of such securities, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. For the nine-month period ending September 30, 2016, 0.3 million shares of securities were excluded from the computation. For the nine-month period September 30, 2015, no shares of securities were excluded from the computation. 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 Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

36,742

 

 

$

27,667

 

 

$

66,205

 

 

$

51,492

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

weighted average shares

 

36,578

 

 

 

37,300

 

 

 

36,560

 

 

 

37,724

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options and restricted stock

 

360

 

 

 

308

 

 

 

336

 

 

 

385

 

Denominator for diluted earnings per share -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted average shares and the effect of dilutive securities

 

36,938

 

 

 

37,608

 

 

 

36,896

 

 

 

38,109

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - basic

$

1.00

 

 

$

0.74

 

 

$

1.81

 

 

$

1.36

 

Net income per share - diluted

$

0.99

 

 

$

0.74

 

 

$

1.79

 

 

$

1.35

 

 

 

 

11


Common Stock Repurchases

As of September 30, 2016 , the Company had Board authorization to repurchase $68.2 million of common stock. During the three months ended September 30, 2016, the Company did not repurchase any shares of its common stock. For the same period in the prior year, the Company repurchased 744,081 shares at an aggregate cost of $25.9 million. During the nine months ended September 30, 2016 and 2015, the Company repurchased 241,270 and 1,525,222 shares of the Company’s common stock at an aggregate cost of $6.8 million and $57.4 million, respectively. Depending on market and business conditions and other factors, the Company may continue or suspend purchasing its common stock at any time without notice. Acquired shares are included in the issued shares of the Company and treasury stock, but are not included in average shares outstanding when calculating earnings per share data. During the first nine months of 2016 and 2015, the Company reissued 452,286 and 369,591 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.

 

9. 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 2015 Form 10-K) (each a “Lending Agreement”) contain restrictions on the use of cash transferred from ECO to ESND. Each of the Lending Agreements also prohibits the Company from exceeding a Leverage Ratio (as defined in the 2013 Credit Agreement and the 2013 Note Purchase Agreement). The maximum Leverage Ratio is 3.50 to 1.00 but increases to up to 4.00 to 1.00 for the first four fiscal quarters (the “Adjusted Leverage Period”) following certain acquisitions. Following the 2015 acquisition of Nestor Sales, an Adjusted Leverage period was applicable through the quarter ended June 30, 2016. On August 30, 2016, the Lending Agreements were amended to extend the Adjusted Leverage Period for two additional quarters. As a result, the maximum permitted Leverage Ratio remains at 4.00 to 1.00 but will revert to 3.50 to 1.00 for the quarter ending March 31, 2017.

Debt consisted of the following amounts (in millions):

 

As of

 

As of

 

 

September 30, 2016

 

December 31, 2015

 

 

 

 

 

 

 

 

2013 Credit Agreement

$

271.8

 

$

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

 

(1.7

)

 

(2.2

)

Total

$

620.2

 

$

716.3

 

 

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

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

As of September 30, 2016, the applicable margin under the 2013 Credit Agreement was 2.00% for LIBOR-based loans and was 1.00% for Alternate Base Rate loans. Interest under the 2013 Note Purchase Agreement is payable semi-annually at a rate per annum equal to 3.75% (3.66% after the effect of terminating an interest rate swap),  except the annual rate increases by 0.625% if the Company’s Leverage Ratio is between 3.50 to 1.00 and 3.75 to 1.00, and increases by 0.75% if the Leverage Ratio is between 3.75 to 1.00 and 4.00 to 1.00. The Company’s Leverage Ratio was 3.51 to 1.00 as of June 30, 2016 and was 2.77 to 1.00 as of September 30, 2016.

 

As of September 30, 2016 and December 31, 2015, $552.9 million and $448.6 million, respectively, of receivables had been sold to the Investors (as defined in Note 11 to the Company’s Consolidated Financial Statements in the 2015 Form 10-K). Essendant Receivables LLC had $200.0 million outstanding under the Receivables Securitization Program as of September 30, 2016 and December 31, 2015.

 

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

 

 

 

12


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

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Service cost - benefit earned during the period

$

318

 

 

$

321

 

 

$

952

 

 

$

1,121

 

Interest cost on projected benefit obligation

 

1,806

 

 

 

2,208

 

 

 

6,322

 

 

 

6,748

 

Expected return on plan assets

 

(2,219

)

 

 

(2,803

)

 

 

(7,484

)

 

 

(8,413

)

Amortization of prior service cost

 

74

 

 

 

72

 

 

 

222

 

 

 

222

 

Amortization of actuarial loss

 

1,163

 

 

 

1,501

 

 

 

3,903

 

 

 

4,401

 

Settlement loss

 

419

 

 

 

-

 

 

 

12,163