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Section 1: 8-K (8-K)

esnd-8k_20170227.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):  February 27, 2017

 

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 February 27, 2017, Essendant Inc. (the “Registrant”) issued a press release announcing its financial results for the three- and twelve-month periods ended December 31, 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 February 27, 2016, announcing financial results for the three- and twelve-month periods ended December 31, 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:  February 27, 2017

 

/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 DECEMBER 31, 2016

 

 

 

 

 

Exhibit No.

  

Description

Method of Filing

 

 

 

99.1

 

Press Release, dated February 27, 2017, announcing financial results for the three- and twelve-month periods ended December 31, 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_8.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 FOURTH QUARTER AND FULL YEAR 2016 RESULTS

DEERFIELD, Ill., February 27, 2017 – Essendant Inc. (NASDAQ: ESND), a leading national wholesale distributor of workplace items, today announced financial results for the fourth quarter and year ended December 31, 2016.  Key results for fourth quarter and full year 2016 were as follows:

 

Full Year 2016 Summary

 

Revenue, workday adjusted, declined 0.3% year-over-year, to $5.4 billion

 

GAAP diluted earnings per share of $1.73 compared to loss per share of $1.18 in 2015, including a $115.8 million, or $3.04 per share, impairment in the fourth quarter of 2015

 

Adjusted diluted earnings per share(1) of $1.54 compared to $3.08 in 2015, including the recognition of a $13.3 million allowance on receivables from one customer in 2016 which impacted adjusted earnings per share by $0.22 in 2016

 

Free cash flow(1) totaled $127.2 million compared to $134.7 million in 2015

 

In February 2017, the Company replaced two of its financing agreements with a new credit agreement to provide greater liquidity and capital availability

Fourth Quarter 2016 Summary

 

Revenue, workday adjusted, decreased 3.3% compared to fourth quarter last year, to $1.3 billion

 

GAAP net loss of ($2.4) million compared to a net loss of ($95.8) million in the prior year quarter

 

GAAP diluted loss per share of ($0.06) compared to loss of ($2.61) per share in the prior year quarter, including a $3.04 per share impairment in 2015

 

Adjusted operating income(1) of $3.3 million compared to $54.1 million fourth quarter last year including the recognition of a $13.3 million allowance on receivables from one customer in 2016

 

Adjusted diluted loss per share(1) of ($0.02) compared to earnings per share of $0.81 fourth quarter last year, including earnings per share impact in 2016 of the allowance on receivable for one customer of $0.22  

 

“We continued to move aggressively in the fourth quarter to advance our transformation program and strengthen our balance sheet as we reposition Essendant to drive earnings growth,” said Robert B. Aiken, Jr., president and chief executive officer of Essendant.

 

 

 

(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, except losses or unless stated otherwise.

 

-1-


Essendant Reports Fourth Quarter and Full Year 2016 Results

Page 2 of 10

“While recognizing persistent industry headwinds, we are confident that our actions will position Essendant to deliver greater value to our shareholders, customers, suppliers and associates in the years ahead. Our actions are centered upon driving merchandising excellence through better sourcing and assortment and stronger alignment of our pricing with cost to serve. We are also intensely focused on winning back lost revenue in the JanSan distributor channel, diversifying and growing our industrial channel, driving productivity and cost reductions and further reducing our working capital.  We expect these actions will enable us to deliver sequential improvement in our results throughout 2017.

 

Fourth Quarter Performance

 

Net sales, workday adjusted, decreased 3.3% year-over-year, driven principally by reduced sales in our JanSan, traditional office products, and technology products categories, partly offset by growth in our cut-sheet paper product category

 

JanSan:  decreased $17.9 million, or 5.1%, to $332.7 million

 

Technology Products:  decreased $8.1 million, or 2.5%, to $309.7 million

 

Traditional Office Products:  decreased $14.3 million, or 7.0% to $190.8 million

 

Industrial Supplies:  decreased $3.6 million, or 2.6%, to $138.4 million

 

Cut-sheet Paper Products:  increased $10.6 million, or 11.9% to $99.8 million

 

Automotive:  decreased $2.1 million, or 2.7%, to $78.0 million

 

Office Furniture:  decreased $6.5 million, or 8.8%, to $67.3 million

 

Gross profit was $165.1 million, a decline of $35.7 million from $200.8 million in the prior year quarter resulting from:

 

Shifts in customer channel and product category mix, down $18.9 million

 

Lower supplier allowances due primarily to lower purchases, down $13.9 million

 

Higher freight cost, up $3.5 million

 

Operating expenses were $166.8 million, a decline from $280.1 million in the prior year quarter resulting from:

 

Fourth quarter 2015 impairment of certain Industrial (formerly ORS Industrial) assets of $115.8 million and work force reduction and facility closures charges of $12.1 million

 

Increased litigation accruals in the fourth quarter 2016 of $4.0 million

 

Recognition of an allowance on receivables from one customer totaling $13.3 million in the fourth quarter 2016

 

Income tax benefit was $4.1 million in the fourth quarter 2016 as compared to expense of $11.9 million in the prior year due to diminished operating results in 2016, exclusive of 2015 impairment, other non-deductible charges, and the utilization of a capital loss carryforward.

 

Loss per share was ($0.06) per share compared to a loss per share of ($2.61) per share fourth quarter last year. Adjusted loss per share(1) was ($0.02) compared to earnings per share of $0.81 fourth quarter last year

 

Outlook for 2017

The following outlooks exclude the impacts of any new acquisitions or unusual charges.

 

Net sales expected to be flat to down 4%

 

First quarter adjusted diluted earnings per share(1) are expected to be similar to Q4 2016, and we expect to generate sequential improvement in adjusted diluted earnings per share throughout 2017 apart from any impact of the allowances on receivables from the customer referred to above

 

Free cash flow(1) generation expected to be in the range of $50 million to $70 million

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Essendant Reports Fourth Quarter and Full Year 2016 Results

Page 3 of 10

Conference Call

Essendant will hold a conference call followed by a question and answer session on Tuesday, February 28, 2017, at 7:30 a.m. CST, to discuss fourth quarter and full year 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 “10098658.”  To listen to the webcast, participants should visit the Investors section of the company’s website (investors.essendant.com), and click on the “Q4-2016 Earnings Call” 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, within 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; the impact of price transparency, customer consolidation and product sales mix changes on the Company’s sales and margins; 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; Essendant's reliance on supplier allowances and promotional incentives; Essendant’s exposure to the credit risk of its customers; continuing or increasing competitive activity and pricing pressures within existing or expanded product categories, including competition from e-tailers and product manufacturers who sell directly to Essendant's customers; the impact of supply chain disruptions or changes in key suppliers’ distribution strategies; continued declines in end-user demand for products in the office, technology and furniture product categories; Essendant’s exposure to cyclical economic and market fluctuations that impact consumer demand, most notably in Industrial and Automotive; the impact of the Company’s transformation program and possible disruption of business operations and relationships with customers and suppliers; Essendant's ability to manage inventory in order to maximize sales and supplier allowances while minimizing excess and obsolete inventory; Essendant's ability to attract and retain key management personnel; the costs and risks related to compliance with laws, regulations and industry standards affecting Essendant's business; 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 on the Company’s reputation and relationships of a breach of the Company’s information technology systems or a failure to maintain the security of private information; the availability of financing sources to meet Essendant's business needs; Essendant's success in effectively identifying, consummating and integrating acquisitions; and unexpected events that could disrupt business operations, increasing costs and decreasing revenues.

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.

-3-


Essendant Reports Fourth Quarter and Full Year 2016 Results

Page 4 of 10

Company Overview

Essendant Inc. is a leading national wholesale distributor of workplace items, with 2016 net sales of $5.4 billion. The company stocks a broad assortment of over 190,000 items, including janitorial and breakroom supplies, technology products, traditional office products, industrial supplies, cut sheet paper products, automotive products and office furniture. The Company’s network of 70 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 Fourth Quarter and Full Year 2016 Results

Page 5 of 10

Essendant Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

For the Years Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

Net sales

$

1,254,699

 

 

$

1,297,327

 

 

$

5,369,022

 

 

$

5,363,046

 

 

Cost of goods sold

 

1,089,597

 

 

 

1,096,489

 

 

 

4,609,161

 

 

 

4,526,551

 

 

Gross profit

 

165,102

 

 

 

200,838

 

 

 

759,861

 

 

 

836,495

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehousing, marketing and administrative expenses

 

166,415

 

 

 

162,773

 

 

 

629,825

 

 

 

675,913

 

 

Defined benefit plan settlement loss

 

347

 

 

 

-

 

 

 

12,510

 

 

 

-

 

 

Impairments of goodwill and intangible assets

 

-

 

 

 

115,825

 

 

 

-

 

 

 

129,338

 

 

Loss (gain) on disposition of business

 

-

 

 

 

1,461

 

 

 

-

 

 

 

1,461

 

 

Operating income (loss)

 

(1,660

)

 

 

(79,221

)

 

 

117,526

 

 

 

29,783

 

 

Interest expense, net

 

4,813

 

 

 

4,668

 

 

 

22,871

 

 

 

19,584

 

 

Income (loss) before income taxes

 

(6,473

)

 

 

(83,889

)

 

 

94,655

 

 

 

10,199

 

 

Income tax (benefit) expense

 

(4,120

)

 

 

11,947

 

 

 

30,803

 

 

 

54,541

 

 

Net income (loss)

$

(2,353

)

 

$

(95,836

)

 

$

63,852

 

 

$

(44,342

)

 

     Net income (loss) per share - diluted

$

(0.06

)

 

$

(2.61

)

 

$

1.73

 

 

$

(1.18

)

 

     Average number of common shares outstanding - diluted

 

37,021

 

 

 

36,665

 

 

 

36,918

 

 

 

37,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-5-


Essendant Reports Fourth Quarter and Full Year 2016 Results

Page 6 of 10

Essendant Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(dollars in thousands, except share data)

 

 

 

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

21,329

 

 

$

29,983

 

 

Accounts receivable, less allowance for doubtful accounts of $18,196 in 2016 and $17,810 in 2015

 

678,184

 

 

 

716,537

 

 

Inventories

 

876,837

 

 

 

922,162

 

 

Other current assets

 

32,100

 

 

 

27,310

 

 

Total current assets

 

1,608,450

 

 

 

1,695,992

 

 

Property, plant and equipment, at cost

 

128,251

 

 

 

133,751

 

 

Intangible assets, net

 

83,690

 

 

 

96,413

 

 

Goodwill

 

297,906

 

 

 

299,355

 

 

Other long-term assets

 

45,209

 

 

 

37,348

 

 

Total assets

$

2,163,506

 

 

$

2,262,859

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

$

484,602

 

 

$

531,949

 

 

Accrued liabilities

 

197,804

 

 

 

177,472

 

 

Current maturities of long-term debt

 

28

 

 

 

51

 

 

Total current liabilities

 

682,434

 

 

 

709,472

 

 

Deferred income taxes

 

6,378

 

 

 

11,901

 

 

Long-term debt

 

608,941

 

 

 

716,264

 

 

Other long-term liabilities

 

84,647

 

 

 

101,488

 

 

Total liabilities

 

1,382,400

 

 

 

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

 

409,805

 

 

 

410,927

 

 

Treasury stock, at cost – 36,951,522 shares in 2016 and 37,178,394 shares in 2015

 

(1,096,744

)

 

 

(1,100,867

)

 

Retained earnings

 

1,507,057

 

 

 

1,463,821

 

 

Accumulated other comprehensive loss

 

(46,456

)

 

 

(57,591

)

 

Total stockholders’ equity

 

781,106

 

 

 

723,734

 

 

Total liabilities and stockholders’ equity

$

2,163,506

 

 

$

2,262,859

 

 

 

 

 

 

 

 

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Essendant Reports Fourth Quarter and Full Year 2016 Results

Page 7 of 10

Essendant Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income (loss)

$

63,852

 

 

$

(44,342

)

 

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

 

 

 

 

 

 

 

 

Depreciation

 

33,289

 

 

 

33,532

 

 

Amortization of intangible assets

 

12,238

 

 

 

15,143

 

 

Share-based compensation

 

10,202

 

 

 

7,895

 

 

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

 

(20,965

)

 

 

1,959

 

 

Amortization of capitalized financing costs

 

681

 

 

 

875

 

 

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

 

1,034

 

 

 

(479

)

 

Loss on sale of equity investment

 

-

 

 

 

33

 

 

Asset impairment charge

 

-

 

 

 

155,603

 

 

Deferred income taxes

 

(10,624

)

 

 

(23,162

)

 

Pension settlement charge

 

12,510

 

 

 

-

 

 

Changes in operating assets and liabilities (net of acquisitions):

 

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable, net

 

38,499

 

 

 

(9,986

)

 

Decrease (increase) in inventory

 

47,148

 

 

 

(12,467

)

 

Increase in other assets

 

(12,631

)

 

 

(5,313

)

 

(Decrease) increase in accounts payable

 

(47,262

)

 

 

41,329

 

 

Increase in accrued liabilities

 

17,534

 

 

 

1,077

 

 

(Decrease) increase in other liabilities

 

(14,563

)

 

 

1,037

 

 

Net cash provided by operating activities

 

130,942

 

 

 

162,734

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

(37,709

)

 

 

(28,325

)

 

Proceeds from the disposition of property, plant and equipment

 

33,940

 

 

 

153

 

 

Proceeds from the disposition of a subsidiary

 

-

 

 

 

146

 

 

Acquisitions, net of cash acquired

 

-

 

 

 

(40,515

)

 

Sale of equity investment

 

-

 

 

 

612

 

 

Net cash used in investing activities

 

(3,769

)

 

 

(67,929

)

 

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Net (repayment) borrowings under revolving credit facility

 

(108,052

)

 

 

4,577

 

 

Net proceeds (disbursements) from share-based compensation arrangements

 

554

 

 

 

(770

)

 

Acquisition of treasury stock, at cost

 

(6,839

)

 

 

(68,055

)

 

Payment of cash dividends

 

(20,487

)

 

 

(21,185

)

 

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

 

(1,034

)

 

 

479

 

 

Payment of debt issuance costs

 

(106

)

 

 

(36

)

 

Net cash (used in) provided by financing activities

 

(135,964

)

 

 

(84,990

)

 

Effect of exchange rate changes on cash and cash equivalents

 

137

 

 

 

(644

)

 

Net change in cash and cash equivalents

 

(8,654

)

 

 

9,171

 

 

Cash and cash equivalents, beginning of period

 

29,983

 

 

 

20,812

 

 

Cash and cash equivalents, end of period

$

21,329

 

 

$

29,983

 

 

 

 

-7-


Essendant Reports Fourth Quarter and Full Year 2016 Results

Page 8 of 10

Essendant Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Measures

Adjusted Gross Profit, 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 Gross Profit, Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings per Share, Adjusted EBITDA and Free Cash Flow for the three months and years ended December 31, 2016 and 2015. 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 and incurred adjustments of the related accruals in 2016.

 

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 year ended December 31, 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 year ended December 31, 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.

 

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 during 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. The Company recorded impairment of goodwill and intangible assets, as well as an increase in reserves for obsolete inventory, based on a strategic review of the Industrial business unit 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 charges related to the defined benefit plan settlement, charges related to litigation, the tax impact of the dividend from a foreign subsidiary and reserves related to discrete prior year uncertain tax provisions in 2016.

Adjusted gross profit, adjusted operating expenses and adjusted operating income. Adjusted gross profit, 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 gross profit, 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.

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Essendant Reports Fourth Quarter and Full Year 2016 Results

Page 9 of 10

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 impact of acquisitions, net of cash acquired and divestitures.

Outlook. 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 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 Fourth Quarter and Full Year 2016 Results

Page 10 of 10

Essendant Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Measures

Adjusted Gross Profit, 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

 

 

For the Years Ended

 

 

December 31,

 

 

December 31,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Gross Profit

$

165,102

 

 

$

200,838

 

 

$

759,861

 

 

$

836,495

 

Industrial inventory obsolescence reserve

 

-

 

 

 

4,887

 

 

 

-

 

 

 

4,887

 

Adjusted Gross Profit

$

165,102

 

 

$

205,725

 

 

$

759,861

 

 

$

841,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

$

166,762

 

 

$

280,059

 

 

$

642,335

 

 

$

806,712

 

Gain on sale of City of Industry facility

 

-

 

 

 

-

 

 

 

20,541

 

 

 

-

 

Settlement charge related to the defined benefit plan

 

(347

)

 

 

-

 

 

 

(12,510

)

 

 

-

 

Litigation reserve

 

(4,000

)

 

 

-

 

 

 

(4,000

)

 

 

-

 

Severance costs for operating leadership

 

-

 

 

 

-

 

 

 

(1,245

)

 

 

-

 

State income tax reserve adjustment

 

(642

)

 

 

-

 

 

 

(642

)

 

 

-

 

Impairment of Industrial goodwill and intangible assets

 

-

 

 

 

(115,825

)

 

 

-

 

 

 

(115,825

)

Restructuring charges

 

-

 

 

 

(12,080

)

 

 

956

 

 

 

(18,575

)

Loss on disposition of business and related costs

 

-

 

 

 

-

 

 

 

-

 

 

 

(16,999

)

Impairment of assets and accelerated amortization related to rebranding

 

-

 

 

 

(495

)

 

 

-

 

 

 

(11,981

)

Impairment of seller notes

 

-

 

 

 

-

 

 

 

-

 

 

 

(10,738

)

Adjusted operating expenses

$

161,773

 

 

$

151,659

 

 

$

645,435

 

 

$

632,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

$

(1,660

)

 

$

(79,221

)

 

$

117,526

 

 

$

29,783

 

Gross profit and operating expense adjustments noted above

 

4,989

 

 

 

133,287

 

 

 

(3,100

)

 

 

179,005

 

Adjusted operating income

$

3,329

 

 

$

54,066

 

 

$

114,426

 

 

$

208,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(2,353

)

 

$

(95,836

)

 

$

63,852

 

 

$

(44,342

)

Gross profit and operating expense adjustments noted above

 

4,989

 

 

 

133,287

 

 

 

(3,100

)

 

 

179,005

 

Non-GAAP tax provision on adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of City of Industry facility

 

(1,651

)

 

 

-

 

 

 

1,138

 

 

 

-

 

Settlement charge related to the defined benefit plan

 

(131

)

 

 

-

 

 

 

(4,705

)

 

 

-

 

Litigation reserve

 

(1,508

)

 

 

-

 

 

 

(1,508

)

 

 

-

 

Dividend from a foreign subsidiary

 

-

 

 

 

-

 

 

 

1,666

 

 

 

-

 

Severance costs for operating leadership

 

-

 

 

 

-

 

 

 

(469

)

 

 

-

 

State income tax reserve adjustment

 

(225

)

 

 

-

 

 

 

(225

)

 

 

-

 

Impairment of Industrial goodwill and intangible assets

 

-

 

 

 

(2,636

)

 

 

-

 

 

 

(2,636

)

Restructuring charges

 

-

 

 

 

(4,591

)

 

 

357

 

 

 

(7,059

)

Loss on sale of business and related costs

 

-

 

 

 

-

 

 

 

-

 

 

 

49

 

Impairment of assets and accelerated amortization related to rebranding

 

-

 

 

 

(188

)

 

 

-

 

 

 

(4,552

)

Impairment of seller notes

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,080

)

Adjusted net (loss) income

$

(879

)

 

$

30,036

 

 

$

57,006

 

 

$

116,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share (1)

$

(0.06

)

 

$

(2.59

)

 

$

1.73

 

 

$

(1.17

)

Per share gross profit and operating expense adjustments noted above

 

0.13

 

 

 

3.60

 

 

 

(0.08

)

 

 

4.78

 

Non-GAAP tax provision on adjustments

 

(0.09

)

 

 

(0.20

)

 

 

(0.11

)

 

 

(0.53

)

Adjusted diluted net (loss) income per share

$

(0.02

)

 

$

0.81

 

 

$

1.54

 

 

$

3.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(2,353

)

 

$

(95,836

)

 

$

63,852

 

 

$

(44,342

)

Provision for income taxes

 

(4,120

)

 

 

11,947

 

 

 

30,803

 

 

 

54,541

 

Interest expense, net

 

4,813

 

 

 

4,668

 

 

 

22,871

 

 

 

19,584

 

Depreciation and amortization

 

10,171

 

 

 

10,561

 

 

 

40,671

 

 

 

41,917

 

Equity compensation expense

 

3,158

 

 

 

1,448

 

 

 

10,202

 

 

 

7,895

 

Gross profit and operating expense adjustments noted above

 

4,989

 

 

 

133,287

 

 

 

(3,100

)

 

 

179,005

 

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

$

16,658

 

 

$

66,075

 

 

$

165,299

 

 

$

258,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

$

24,974

 

 

$

(20,925

)

 

$

130,942

 

 

$

162,734

 

Less: Net cash used in investing activities

 

(9,492

)

 

 

(10,121

)

 

 

(3,769

)

 

 

(67,929

)

Add: Acquisitions, net of cash acquired

 

-

 

 

 

44

 

 

 

-

 

 

 

40,515

 

Less: Sale of equity investment

 

-

 

 

 

-

 

 

 

-

 

 

 

(612

)

Free cash flow

$

15,482

 

 

$

(31,002

)

 

$

127,173

 

 

$

134,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Diluted earnings per share for 2015 under GAAP reflect an adjustment to the basic earnings per share due to the net loss. The diluted earnings per share shown here do not reflect this adjustment.

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Section 3: EX-99.2 (EX-99.2)

esnd-ex992_9.pptx.htm

Slide 1

Earnings Presentation Fourth Quarter 2016 February 27, 2017 Exhibit 99.2

Slide 2

Forward-Looking Statements 2 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; the impact of price transparency, customer consolidation and product sales mix changes on the Company’s sales and margins; 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; Essendant's reliance on supplier allowances and promotional incentives; Essendant’s exposure to the credit risk of its customers; continuing or increasing competitive activity and pricing pressures within existing or expanded product categories, including competition from e-tailers and product manufacturers who sell directly to Essendant's customers; the impact of supply chain disruptions or changes in key suppliers’ distribution strategies; continued declines in end-user demand for products in the office, technology and furniture product categories; Essendant’s exposure to cyclical economic and market fluctuations that impact consumer demand, most notably in Industrial and Automotive; the impact of the Company’s transformation program and possible disruption of business operations and relationships with customers and suppliers; Essendant's ability to manage inventory in order to maximize sales and supplier allowances while minimizing excess and obsolete inventory; Essendant's ability to attract and retain key management personnel; the costs and risks related to compliance with laws, regulations and industry standards affecting Essendant's business; 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 on the Company’s reputation and relationships of a breach of the Company’s information technology systems or a failure to maintain the security of private information; the availability of financing sources to meet Essendant's business needs; Essendant's success in effectively identifying, consummating and integrating acquisitions; and unexpected events that could disrupt business operations, increasing costs and decreasing revenues. 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 any obligation to update any forward-looking statement. Investors are advised to consult any further disclosure made 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.

Slide 3

Q4 2016 Overview 3 Net sales declined 3.3%, to $1.25 billion Driven by declines in national big-box retailers and JanSan distributors; also, certain technology sales in 2015 did not recur in 2016 Gross margin pressure continued throughout Q4 Adjusted Earnings per share decreased to ($0.02) from $0.81 per share last year $13 million reserve recorded in Q4 2016 – EPS impact of this reserve was approximately 22 cents Remainder of decline driven by gross margin pressure Disciplined inventory management Reduced $45.3 million vs. prior year Reduced $91.4 million since Q2 (1) For a definition and reconciliation of non-GAAP adjustments, please see appendix. (1)

Slide 4

FY 2016 Overview 4 Net Sales of $5.37 billion ~flat on a workday adjusted basis Adjusted Earnings per share decreased to $1.54 from $3.08 per share last year Decline primarily driven by gross margin pressure Strong free cash flow generation FY 2016 free cash flow of $127.2 million Generated $159.7 million of free cash flow in 2H 2016 (1) (1) For a definition and reconciliation of non-GAAP adjustments, please see appendix. (1)

Slide 5

Comprehensive Transformation Program Stabilize our JanSan distributor channel Merchandising Excellence through better sourcing and assortment Drive productivity and reduce costs Align pricing with cost-to-serve Diversify and grow our Industrial business Already seeing positive impacts from the initiatives above; benefit ramp across 2017 with full benefit in 2018 and beyond 1 2 3 4 5 Reduce working capital 6

Slide 6

6 Key Value Drivers | Next Day Fulfillment | Channel Category Expertise | | Broad Assortment | Advanced Digital Capabilities |

Slide 7

Q4 2016 Financial Results 7 Net sales decreased 3.3% GAAP EPS of ($0.06) Adjusted EPS(1) of ($0.02) Impact of $13 million reserve in 2016 was 22 cents GAAP EPS ($/share) Adjusted EPS(1) ($/share) $0.81 Q4 2015 ($0.02) Q4 2016 -3.3% Q4 2015 Q4 2016 $1,255 $1,297 Net Sales ($M) Q4 2016 Q4 2015 ($0.06) ($2.61) (1) For a definition and reconciliation of non-GAAP adjustments, please see appendix. X-$13M receivables allowances $0.20

Slide 8

8 Q4 2016 Category Sales ($M)       YoY ∆   Q4 2016 Q4 2015 $ % Jan San $332.7 $350.5 ($17.9) -5.1% Technology 309.7 317.8 (8.1) -2.5% Office Products 190.8 205.1 (14.3) -7.0% Industrial Supplies 138.4 142.0 (3.6) -2.6% Cut Sheet Paper 99.8 89.2 10.6 11.9% Automotive 78.0 80.1 (2.1) -2.7% Furniture 67.3 73.8 (6.5) -8.8% Freight and Other 38.0 38.7 (0.7) -1.9% Net Sales 1,254.7 1,297.3 (42.6) -3.3%

Slide 9

9 Q4 2016 Gross Margin Drivers ($13.5) Adj. $158.6 ($21.3) $138.5 Gross profit was $165.1 million, a decrease of $40.6 million from last year Approximately 35% related to sales mix changes, including impacts of both customer channel and product category shifts, as well as some rate impacts Approximately 35% related to lower supplier allowances resulting from purchase discipline and mix Approximately 15% driven by sales volume decrease Remaining 15% driven by freight and other items, such as inflationary impacts (1) For a definition and reconciliation of non-GAAP adjustments, please see appendix. (1)

Slide 10

10 Balance Sheet and Free Cash Flow Inventory levels decreased YOY Free cash flow resulted in a reduction of long-term debt Inventory Long-term Debt Free Cash Flow $922.2 $876.8 $716.3 $608.9 $134.7 $127.2 ($M) YE 2015 YE 2015 FY 2015 YE 2016 YE 2016 FY 2016 (1) (1) (1) (1) For a definition and reconciliation of non-GAAP adjustments, please see appendix.

Slide 11

11 Full Year 2017 Outlook Net Sales: flat to down 4% Adjusted EPS(1) : first quarter adjusted diluted earnings per share(1) are expected to be similar to Q4 2016, and we expect to generate sequential improvement in adjusted diluted earnings per share throughout 2017 apart from any impact of the allowances on receivables from one customer Interest expense: ~$3M higher than 2016 Effective tax rate: ~40% Capex: similar to 2016 Workdays: 253 in 2017 (64 in Q1 and Q2, 63 in Q3, and 62 in Q4) vs. 254 in 2016 (1) For a definition and reconciliation of non-GAAP adjustments, please see appendix.

Slide 12

Appendix

Slide 13

14 The following Non-GAAP Table presents Adjusted Gross Profit, Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings per Share, Adjusted EBITDA and Free Cash Flow for the three months and years ended December 31, 2016 and 2015. 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 and incurred adjustments of the related accruals in 2016. 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 year ended December 31, 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 year ended December 31, 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. 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 during 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. The Company recorded impairment of goodwill and intangible assets, as well as an increase in reserves for obsolete inventory, based on a strategic review of the Industrial business unit 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 charges related to the defined benefit plan settlement, charges related to litigation, the tax impact of the dividend from a foreign subsidiary and reserves related to discrete prior year uncertain tax provisions in 2016. Essendant Inc. and Subsidiaries Reconciliation of Non-GAAP Financial Measures Adjusted Gross Profit, Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share, Adjusted EBITDA, and Free Cash Flow

Slide 14

15 Adjusted gross profit, adjusted operating expenses and adjusted operating income. Adjusted gross profit, 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 gross profit, adjusted operating expenses and adjusted operating income are used to evaluate our period-over-period operating performance as they are more comparable measures of our continuing business. These measures may be useful to an investor in evaluating the underlying operating performance of our business. Adjusted net income and adjusted diluted earnings per share. Adjusted net income and adjusted diluted earnings per share provide a more comparable view of our Company’s underlying performance and trends than the comparable GAAP measures. Net income and diluted earnings per share are adjusted for the effect of items described above that do not reflect the ordinary earnings of our operations. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Adjusted EBITDA is helpful in evaluating our operating performance and is used by management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting. Net income is adjusted for the effect of interest, taxes, depreciation and amortization and stock-based compensation expense. Management believes that adjusted EBITDA is also commonly used by investors to evaluate operating performance between competitors because it helps reduce variability caused by differences in capital structures, income taxes, stock-based compensation accounting policies, and depreciation and amortization policies. Free cash flow. Free cash flow is useful to management and our investors as it is a measure of the Company’s liquidity. It provides a more complete understanding of factors and trends affecting our cash flows than the comparable GAAP measure. Net cash provided by (used in) operating activities and net cash provided by (used in) investing activities are aggregated and adjusted to exclude the impact of acquisitions, net of cash acquired and divestitures. Outlook. Adjusted diluted earnings per share and free cash flow are a 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 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. 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 15

16 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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