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Section 1: 10-Q (10-Q)

esnd-10q_20180331.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 March 31, 2018

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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth 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

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

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

On April 20, 2018, the registrant had outstanding 37,656,113 shares of common stock, par value $0.10 per share.

 

 

 

 

 


ESSENDANT INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2018

TABLE OF CONTENTS

 

 

  

Page No.

PART I — FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

  

3

 

Condensed Consolidated Statements of Loss for the Three Months Ended March 31, 2018 and 2017

  

4

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017

  

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

  

6

 

Notes to Condensed Consolidated Financial Statements

  

7

 

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

  

21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

30

 

Item 4. Controls and Procedures

  

30

 

PART II — OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

31

 

Item 1A. Risk Factors

  

31

 

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

  

34

 

Item 6. Exhibits

  

35

 

SIGNATURES

  

36

 

 

 

 

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  March 31,

 

 

As of  December 31,

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

30,967

 

 

$

28,802

 

Accounts receivable, less allowance for doubtful accounts of $17,120 in 2018 and $17,102 in 2017

 

641,637

 

 

 

619,200

 

Inventories

 

704,313

 

 

 

821,683

 

Other current assets

 

69,523

 

 

 

43,044

 

Total current assets

 

1,446,440

 

 

 

1,512,729

 

Property, plant and equipment, net

 

129,291

 

 

 

132,793

 

Intangible assets, net

 

70,866

 

 

 

73,441

 

Goodwill

 

13,128

 

 

 

13,153

 

Other long-term assets

 

52,334

 

 

 

42,134

 

Total assets

$

1,712,059

 

 

$

1,774,250

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

469,981

 

 

$

500,883

 

Accrued liabilities

 

185,577

 

 

 

189,916

 

Current maturities of long-term debt

 

6,077

 

 

 

6,079

 

Total current liabilities

 

661,635

 

 

 

696,878

 

Deferred income taxes

 

1,172

 

 

 

1,192

 

Long-term debt

 

530,350

 

 

 

492,044

 

Other long-term liabilities

 

77,551

 

 

 

89,222

 

Total liabilities

 

1,270,708

 

 

 

1,279,336

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2018 and 2017

 

7,444

 

 

 

7,444

 

Additional paid-in capital

 

414,055

 

 

 

412,987

 

Treasury stock, at cost – 36,775,019 shares in 2018 and 36,811,366 shares in 2017

 

(1,092,979

)

 

 

(1,093,813

)

Retained earnings

 

1,162,237

 

 

 

1,219,309

 

Accumulated other comprehensive loss

 

(49,406

)

 

 

(51,013

)

Total stockholders’ equity

 

441,351

 

 

 

494,914

 

Total liabilities and stockholders’ equity

$

1,712,059

 

 

$

1,774,250

 

 

See notes to condensed consolidated financial statements.

3


ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(in thousands, except per share data)

(Unaudited)

 

 

For the Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017*

Revised

 

Net sales

$

1,240,155

 

 

$

1,269,383

 

Cost of goods sold

 

1,118,979

 

 

 

1,083,715

 

Gross profit

 

121,176

 

 

 

185,668

 

Operating expenses:

 

 

 

 

 

 

 

Warehousing, marketing and administrative expenses

 

165,544

 

 

 

172,298

 

Restructuring charges

 

14,061

 

 

 

-

 

Impairment of goodwill

 

-

 

 

 

198,828

 

Operating loss

 

(58,429

)

 

 

(185,458

)

Interest and other expense, net

 

8,222

 

 

 

7,463

 

Loss before income taxes

 

(66,651

)

 

 

(192,921

)

Income tax benefit

 

(15,211

)

 

 

(4,328

)

Net loss

$

(51,440

)

 

$

(188,593

)

Net loss per share - basic:

$

(1.40

)

 

$

(5.15

)

     Average number of common shares outstanding - basic

 

36,865

 

 

 

36,644

 

Net loss per share - diluted:

$

(1.40

)

 

$

(5.15

)

     Average number of common shares outstanding - diluted

 

36,865

 

 

 

36,644

 

Dividends declared per share

$

0.14

 

 

$

0.14

 

 

* Revised in the first quarter of 2018 for the impact of the adoption of a new pension accounting pronouncement (see Note 9 – “Pension and Post-Retirement Benefit Plans”) for further detail.

See notes to condensed consolidated financial statements.

4


ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

 

 

For the Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Net loss

$

(51,440

)

 

$

(188,593

)

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

       Translation adjustments

 

(928

)

 

 

385

 

       Minimum pension liability adjustments

 

1,044

 

 

 

704

 

       Cash flow hedge adjustments

 

1,491

 

 

 

68

 

Total other comprehensive income, net of tax

 

1,607

 

 

 

1,157

 

Comprehensive loss

$

(49,833

)

 

$

(187,436

)

 

See notes to condensed consolidated financial statements.

5


ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

For the Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net loss

$

(51,440

)

 

$

(188,593

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

10,798

 

 

 

10,965

 

Share-based compensation

 

2,030

 

 

 

2,468

 

Gain on the disposition of property, plant and equipment

 

(234

)

 

 

(319

)

Amortization of capitalized financing costs

 

366

 

 

 

437

 

Deferred income taxes

 

(5,093

)

 

 

4,280

 

Change in contingent consideration

 

(700

)

 

 

-

 

Impairment of goodwill

 

-

 

 

 

198,828

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Increase in accounts receivable, net

 

(22,766

)

 

 

(1,544

)

Decrease in inventory

 

117,257

 

 

 

50,531

 

Increase in other assets

 

(30,472

)

 

 

(9,915

)

(Decrease) increase in accounts payable

 

(30,979

)

 

 

3,238

 

Decrease in accrued liabilities

 

(45

)

 

 

(15,828

)

Decrease in other liabilities

 

(10,147

)

 

 

(1,523

)

Net cash (used in) provided by operating activities

 

(21,425

)

 

 

53,025

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Capital expenditures

 

(7,838

)

 

 

(8,312

)

Proceeds from the disposition of property, plant and equipment

 

46

 

 

 

-

 

Net cash used in investing activities

 

(7,792

)

 

 

(8,312

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Net borrowing under revolving credit facility

 

39,422

 

 

 

90,112

 

Borrowings under Term Loan

 

-

 

 

 

77,600

 

Repayments under Term Loan

 

(1,518

)

 

 

-

 

Contingent consideration

 

(967

)

 

 

-

 

Net repayments under Securitization Program

 

-

 

 

 

(200,000

)

Net disbursements from share-based compensation arrangements

 

(168

)

 

 

(310

)

Payment of cash dividends

 

(5,209

)

 

 

(5,167

)

Payment of debt issuance costs

 

-

 

 

 

(5,678

)

Net cash provided by (used in) financing activities

 

31,560

 

 

 

(43,443

)

Effect of exchange rate changes on cash and cash equivalents

 

(178

)

 

 

36

 

Net change in cash and cash equivalents

 

2,165

 

 

 

1,306

 

Cash and cash equivalents, beginning of period

 

28,802

 

 

 

21,329

 

Cash and cash equivalents, end of period

$

30,967

 

 

$

22,635

 

Other Cash Flow Information:

 

 

 

 

 

 

 

Income tax payments, net

$

192

 

 

$

11,555

 

Interest paid

 

8,470

 

 

 

7,658

 

 

 

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 national distributor of workplace items.

The accompanying Condensed Consolidated Financial Statements are unaudited. The Condensed Consolidated Balance Sheet as of December 31, 2017, was derived from the December 31, 2017 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, 2017 (the “2017 Form 10-K”) for further information.

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Essendant at March 31, 2018 and the results of operations for the three months ended March 31, 2018 and 2017, and cash flows for the three months ended March 31, 2018 and 2017. The results of operations for the three months ended March 31, 2018 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year.

 

Pending Accounting Pronouncements

 

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 and disclosures, but expects the impact to the Company’s consolidated balance sheet to be significant. The Company is in the process of analyzing existing leases and processes to support additional disclosures under the standard.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update provides guidance concerning the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and expands the ability to apply hedge accounting to financial and nonfinancial risk components. Additionally, the standard eliminates the need to separately measure and report hedge ineffectiveness and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The amendments in the standard are effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard addresses the “stranded” tax effects resulting from the 2017 Tax Act in accumulated other comprehensive income.  The effect of changes in tax laws or rates included in income from continuing operations are unaffected. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted.  Disclosures are required in the period of adoption. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

7

 

 


In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. This standard replaces the incurred loss methodology previously employed to measure credit losses for most financial assets and requires the use of a forward-looking expected loss model. Current accounting delays the recognition of credit losses until it is probable a loss has been incurred, while the update will require financial assets to be measured at amortized costs less a reserve and equal to the net amount expected to be collected. This standard will be effective for annual periods beginning after December 15, 2019, 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

 

Inventory

Approximately 98.2% and 98.0% of total inventory as of March 31, 2018 and December 31, 2017, respectively, has been valued under the Last-In-First-Out (“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 First-In-First-Out (“FIFO”) cost or market, inventory values would have been $167.3 million and $159.3 million higher than reported as of March 31, 2018, and December 31, 2017, respectively.

For the three months ended March 31, 2018, LIFO liquidations resulted in LIFO income of $2.5 million, which was more than offset by LIFO expense of $10.5 million related to current inflation, for an overall net increase in cost of sales of $8.0 million. LIFO liquidations occur when there are decrements of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of current year purchases.

 

2. Revenue Recognition

On January 1, 2018, the Company adopted Topic 606 applying the modified retrospective transition method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net reduction to beginning retained earnings of $0.4 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The impact to revenues for the three months ended March 31, 2018 was immaterial as a result of adopting Topic 606.

 

Nature of Goods and Services

 

The following is a description of principal activities from which the Company generates its revenue. Revenues are recognized when control of the promised goods are transferred to or services are performed for customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services.

 

Merchandise Sales

The Company principally generates revenue from selling workplace products to reseller customers under a contract or by purchase order.  The Company’s product offerings may be divided into the following primary categories: (1) janitorial, foodservice and breakroom supplies, including janitorial and sanitation supplies, breakroom items, foodservice consumables, safety and security items and paper and packaging supplies; (2) technology products, including computer accessories and computer hardware items such as printers and other peripherals, imaging supplies and data storage; (3) traditional office products, including writing instruments, business machines, filing and record storage products, presentation products, shipping and mailing supplies, calendars and general office accessories; (4) industrial supplies, including various industrial MRO (maintenance, repair and operations) items, hand and power tools, safety and security supplies, janitorial equipment, oilfield and welding supplies; (5) cut sheet paper products, including copy paper with a wide assortment of styles and types; (6) automotive products, including a broad portfolio of automotive aftermarket tools and equipment; and (7) office furniture, including desks, filing and storage solutions, seating and systems furniture, along with a variety of specialized products for niche markets such as education, government, healthcare and professional services.  

  

Control of goods usually transfers to the customer when those goods are shipped. For certain customers, control of goods transfers when those goods are delivered. Merchandise sales are billed daily or monthly. The amount of revenue recognized for merchandise sales is adjusted for expected returns, which are estimated based on historical product return trends and the gross margin associated with those returns; cash discounts, which are estimated based on customer purchases and discount terms and historical payments; and rebates, which are estimated based on sales volume to customers and customer rebate terms. The Company presents this revenue in net sales.

 

8

 

 


Other Revenues

The remainder of the Company’s consolidated net sales were generated by advertising, fulfillment and other services. Advertising revenue is generated from the sale of catalogs and other advertising materials to customers over time. The Company also offers fulfillment services including fulfillment of product orders on behalf of the customer and call center support. The Company acts as an agent of the customer and therefore recognizes revenue on a net basis. The Company presents other revenues in net sales.

 

Contracts with Customers

 

Disaggregation of Revenues

 

In accordance with authoritative Generally Accepted Accounting Principles (“GAAP”), the following table disaggregates revenue from contracts with customers into product categories. The Company has determined that disaggregating revenue into these categories provides appropriate disclosure and achieves associated objectives to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Company generated 98% of net sales from its operations in the United States in the three months ended March 31, 2018 and 2017. As noted in the Company’s 2017 Form 10-K the Company has one reportable segment.

 

The disaggregated revenue for the three months ended March 31, 2018, and 2017 are as follows (in thousands):

 

 

Three months ended March 31,

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

Product categories:

 

 

 

 

 

 

 

Janitorial, foodservice and breakroom supplies (JanSan products)

$

328,226

 

 

$

345,408

 

Technology products

 

314,704

 

 

 

317,198

 

Traditional office products

 

178,976

 

 

 

198,078

 

Industrial supplies

 

155,575

 

 

 

147,197

 

Cut sheet paper products

 

119,547

 

 

 

106,148

 

Automotive products

 

80,992

 

 

 

78,806

 

Office furniture

 

58,826

 

 

 

72,091

 

Other revenues

 

3,309

 

 

 

4,457

 

Total revenue

$

1,240,155

 

 

$

1,269,383

 

 

Cost of sales for the three months ended March 31, 2018 and 2017 totaled $1.1 billion, respectively.

 

9

 

 


Accounts Receivable and Customer Rebates

 

The Company enters into contracts to sell goods to resellers with credit terms that vary based on the risk of the customer, the volume of transactions and the nature of contractual terms. These credit terms may allow the customer to make payment in arrears, which are adjusted for significant financing components when recorded as an account receivable. The Company also provides certain contract rebates, upfront marketing arrangements, acquisition assistance and other rebates which are intended to incentivize customers to engage in long-term purchase arrangements with the Company. These are either prepaid at contract inception and amortized over the term of the contract or accrued over the contract term. Prepaid customer rebates are included as a component of either “Other current assets” or “Other assets” in the Condensed Consolidated Balance Sheets, while accrued customer rebates are included as a component of “Accrued liabilities” in the Condensed Consolidated Balance Sheets, refer to Note 11 – “Other Assets and Liabilities.”

 

Prepaid customer rebates at March 31, 2018 consisted of amounts to be amortized as a reduction of revenues in the future as follows:

 

Year

 

 

 

 

2018

 

$

22,522

 

2019

 

 

12,537

 

2020

 

 

8,964

 

2021

 

 

6,562

 

2022

 

 

4,597

 

Thereafter

 

 

6,529

 

Total prepaid customer rebates

 

$

61,711

 

 

Transaction Price Allocated to Remaining Performance Obligations

 

As of March 31, 2018, no revenue is expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. This disclosure does not include revenue related to performance obligations that are part of a contract whose original expected duration is one year or less.

 

Performance Obligations

 

At the inception of each contract, the Company assesses the goods and services promised in its contracts and identifies each distinct performance obligations. To identify the performance obligations, the Company considers all goods or services promised regardless of whether they are explicitly stated or implied within the contract or by standard business practices. The Company determined that net merchandise sales to resellers and end-consumers represent performance obligations. This includes the packing and shipping of product through either delivery to the reseller or direct delivery to the end-consumer.

 

Shipping and handling activities performed before the customer obtains control of the goods are not considered promised services under customer contracts and therefore are not distinct performance obligations. The Company has chosen to make an accounting policy election to account for shipping and handling activities that occur after the customer obtains control of the goods as a fulfillment activity, and therefore accrues the expense of shipping and handling in cost of goods sold when merchandise is shipped.  Shipping and handling costs billed to customers are part of the contract consideration and recognized at the time control of the promised goods has transferred to the customer.  Control of goods generally transfers to the customer when those goods are shipped (FOB-shipping point).  

 

When Performance Obligations Are Satisfied

 

For performance obligations related to sales, revenue is recognized when control is transferred. Determining when control transfers requires judgments that affect the timing of revenue recognized. Generally, revenue is recognized at a point in time when shipment occurs from the Company’s warehousing facilities. At this time, the customer is able to direct the use of the product and obtains substantially all of the benefits and risks from the product or service. The Company has a present right to payment at that time, the customer has legal title to the product, and the Company has transferred physical possession.

10

 

 


 

Significant Payment Terms

 

Payment terms for net merchandise sales, fulfillment and other services are dependent on the agreed upon contractual repayment terms of the customer. Typically, these vary dependent on the size of the customer and its risk profile to the Company. Some customers receive discounts based on the contractual terms wherein early payment reduces the net payment amount. Conversely, for some customers the Company provides enhanced payment terms which can extend up to and in excess of one year from invoicing. In some instances, these enhanced terms represent a significant financing component with an assumption of implicit interest. These amounts were immaterial in the period of adoption.

 

Given the Company’s reliance on customer rebates and discounts of the selling price of net sales, the Company notes that many of the contracts contain variable consideration payable to the customer that is recognized when the underlying revenue associated with the rebate and discount is recognized. Customer rebates and discounts include volume components, growth components, conversions, promotions, discount programs, and other programs. Estimates for customer rebates and discounts are based on both historical and estimated sales volume and other drivers as dictated by the contract. Changes in estimates of sales volume, product mix, customer mix or sales patterns, or actual results that vary from such estimates may impact future results.

 

Returns and Refunds

 

In the normal course of business, the Company accepts product returns based on certain contractual terms, typically for product expiration dating or damage. The Company estimates reserves for returns and the related refunds to customers based on historical experience of similar products and customers, as applicable. Reserves for returned merchandise are included as a component of “Other current assets” in the Condensed Consolidated Balance Sheets, while refund liabilities are included as a component of “Accrued liabilities.”

 

11

 

 


Practical Expedient Usage and Accounting Policy Elections

 

The Company has determined to utilize the modified retrospective approach which requires cumulative effect adjustment to the opening balance of retained earnings in the current year. This opening adjustment is determined based on the impact of the new revenue standard’s application on contracts that were not completed as of January 1, 2018, the date of initial application of the standard. This election had an immaterial impact on the Company’s financial statements.  

 

The Company applies the practical expedient in Accounting Standard Codification (“ASC”) 606-10-65-1(f)(4) and does not retrospectively restate contracts for contract modifications that occurred before the beginning of the earliest reporting period presented. Instead, the Company has aggregated the effect of all modifications that occurred before the earliest reporting period presented. The effect of applying this practical expedient was immaterial.

 

For the Company’s contracts that have an original duration of one year or less, the Company uses the practical expedient in ASC 606-10-32-18 applicable to such contracts and does not consider the time value of money in relation to significant financing components.  The effect of applying this practical expedient was immaterial.  

 

Per ASC 606-10-25-18B, the Company has elected to account for shipping and handling activities that occur after the customer has obtained control as a fulfillment activity instead of a performance obligation. Furthermore, shipping and handling activities performed before transfer of control of the product also do not constitute a separate and distinct performance obligation.

 

The Company has elected to exclude from the transaction price those amounts which relate to sales and other taxes that are assessed by governmental authorities and that are imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer.

 

The Company applies the practical expedient in ASC 606-10-50-14 and is not required to determine the amount of the transaction price allocated to the remaining performance obligations that have original expected durations of one year or less. The effect of applying this practical expedient was immaterial as the Company has no remaining performance obligations associated with merchandise sales as of December 31, 2017.

 

Applying the practical expedient in ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. These costs are included in “Warehouse, marketing and administrative expenses.” The effect of applying this practical expedient was immaterial.

 

3. Share-Based Compensation

 

During the three months ended March 31, 2018, the Company granted 107,296 shares of restricted stock, no RSUs and 634,778 performance-based units, compared to 43,385 shares of restricted stock and 221,297 RSUs in the same period of 2017. No performance-based units were granted in the three months ended March 31, 2017.

 

4. Severance and Restructuring Charges

 

In 2015, the Company commenced two restructuring actions that included workforce reductions, facility closures and actions to reduce costs through management delayering in order to achieve broader functional alignment of the organization (“2015 restructuring action”). The charges associated with this action were included in “Warehousing, marketing and administrative expenses.” This action was substantially completed in 2016.

 

In the first quarter of 2018, the Company launched a restructuring program (“2018 restructuring action”) that will span to mid-2020. It includes facility consolidations totaling an anticipated $23 million to $28 million and workforce reductions totaling an anticipated $7 million to $12 million, or in aggregate an estimated cash cost of $30 million to $40 million over the restructuring period. These amounts will be included in restructuring charges in the Condensed Consolidated Statement of Operations.

 

Product assortment refinement charges have also been incurred and are reflected as additional cost of goods sold in the quarter ended March 31, 2018.

 

12

 

 


The expenses, cash flows, and liabilities associated with the 2015 and 2018 restructuring actions described above are noted in the following table (in thousands):

 

 

 

Expense

 

 

Cash flow

 

 

Liabilities

 

 

 

For the three months ended

March 31,

 

 

For the three months ended

March 31,

 

For the three months ended

March 31,

 

 

As of

March 31,

 

As of

December 31,

 

 

 

2018

 

 

2018

 

2017

 

 

2018

 

2017

 

2018 Actions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product assortment refinement

 

$

42,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workforce reduction

 

 

11,588

 

 

 

673

 

 

-

 

 

 

10,915

 

 

-

 

Facility closure

 

 

3,012

 

 

 

1,517

 

 

 

 

 

 

1,403

 

 

 

 

Total

 

$

57,423

 

 

$

2,190

 

$

-

 

 

$

12,318

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter 2015 Actions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workforce reduction

 

$

(539

)

 

$

-

 

$

316

 

 

$

378

 

$

917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter 2015 Actions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workforce reduction

 

$

-

 

 

$

-

 

$

94

 

 

$

664

 

$

664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

56,884

 

 

$

2,190

 

$

410

 

 

$

13,360

 

$

1,581

 

 

  

5. Goodwill and Intangible Assets

Due to changes in management structure to allow for sales and operational efficiency, a new Canadian operating segment was created in the first quarter of 2018. This segment includes operations previously included in the Industrial and Automotive segments. The Canadian operating segment does not meet the materiality thresholds for reporting of individual segments and is combined with the other operating segments into one reportable segment. The Company has determined that each of the Company’s goodwill reporting units comprise an operating segment. At March 31, 2018, goodwill balances of the reporting units were $11.1 million at Industrial and $2.0 million at Canada.

 

Acquired intangible assets are initially recorded at their fair market values determined based on quoted market prices in active markets, if available, or recognized valuation models. The Company’s intangible assets have finite useful lives and are amortized on a straight-line basis over their useful lives.

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

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

137,853

 

 

$

(74,351

)

 

$

63,502

 

 

16

 

$

138,110

 

 

$

(72,192

)

 

$

65,918

 

 

16

Non-compete agreements

 

4,655

 

 

 

(4,260

)

 

 

395

 

 

4

 

 

4,659

 

 

 

(4,260

)

 

 

399

 

 

4

Trademarks

 

13,741

 

 

 

(6,772

)

 

 

6,969

 

 

14

 

 

13,766

 

 

 

(6,642

)

 

 

7,124

 

 

14

Total

$

156,249

 

 

$

(85,383

)

 

$

70,866

 

 

 

 

$

156,535

 

 

$

(83,094

)

 

$

73,441

 

 

 

13

 

 


 

The following table summarizes the amortization expense to be incurred in 2018 through 2022 on intangible assets (in thousands):

 

Year

 

Amount

 

2018

 

$

8,066

 

2019

 

 

6,944

 

2020

 

 

6,941

 

2021

 

 

6,941

 

2022

 

 

6,887

 

 

6. Accumulated Other Comprehensive Loss

 

The change in Accumulated Other Comprehensive Loss (“AOCI”) by component, net of tax, for the period ended March 31, 2018 was as follows (in thousands):

 

 

 

Foreign Currency Translation

 

 

Cash Flow Hedges

 

 

Defined Benefit Pension Plans

 

 

Total

 

AOCI, balance as of December 31, 2017

 

$

(5,933

)

 

$

(206

)

 

$

(44,874

)

 

$

(51,013

)

Other comprehensive income (loss) before reclassifications

 

 

(928

)

 

 

1,347

 

 

 

-

 

 

 

419

 

Amounts reclassified from AOCI

 

 

-

 

 

 

144

 

 

 

1,044

 

 

 

1,188

 

Net other comprehensive income

 

 

(928

)

 

 

1,491

 

 

 

1,044

 

 

 

1,607

 

AOCI, balance as of March 31, 2018

 

$

(6,861

)

 

$

1,285

 

 

$

(43,830

)

 

$

(49,406

)

 

The following table details the amounts reclassified out of AOCI into the income statement during the three months ended March 31, 2018 (in thousands):

 

 

Amount Reclassified From AOCI

 

 

 

 

 

For the Three

 

 

 

 

 

Months Ended

 

 

 

 

 

March 31,

 

 

 

Details About AOCI Components

 

2018

 

 

 

Realized and unrealized gains (losses) on cash flow hedges

 

 

 

 

 

 

Gain on interest rate swap, before tax

 

$

194

 

 

Interest and other expense, net

 

 

 

(50

)

 

Tax provision

 

 

$

144

 

 

Net of tax

 

 

 

 

 

 

 

Defined benefit pension plan items

 

 

 

 

 

 

Amortization of prior service cost and unrecognized loss

 

$

1,405

 

 

Interest and other expense, net

 

 

 

(361

)

 

Tax provision

 

 

 

1,044

 

 

Net of tax

Total reclassifications for the period, net of tax

 

$

1,188

 

 

 

 

14

 

 


7. Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if dilutive securities were exercised into common stock. Stock options, restricted stock, performance unit awards, restricted stock units and deferred stock units are considered dilutive securities. For the three-month periods ended March 31, 2018 and 2017, 0.1 million and 0.2 million shares of such securities, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. An additional 0.3 million and 0.2 million shares of common stock outstanding for the three months ended March 31, 2018 and 2017, respectively, were excluded from the computation because the respective net loss would have caused the calculation to be anti-dilutive. 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

 

 

March 31,

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

Net loss

$

(51,440

)

 

$

(188,593

)

Denominator:

 

 

 

 

 

 

 

Denominator for basic earnings per share -

 

 

 

 

 

 

 

weighted average shares

 

36,865

 

 

 

36,644

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Employee stock options and restricted stock

 

-

 

 

 

-

 

Denominator for diluted earnings per share -

 

 

 

 

 

 

 

Adjusted weighted average shares and the effect of dilutive securities

 

36,865

 

 

 

36,644

 

Net loss per share:

 

 

 

 

 

 

 

Net loss per share - basic

$

(1.40

)

 

$

(5.15

)

Net loss per share - diluted (1)

$

(1.40

)

 

$

(5.15

)

 

 

(1)

As a result of the net loss in the three months ended March 31, 2018 and 2017, the effect of potentially dilutive securities would have been anti-dilutive and have been omitted from the calculation of diluted earnings per share.

 

8. Debt

Debt consisted of the following amounts (in millions):

 

 

As of

 

As of

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

2017 Credit Agreement

$

6.1

 

$

6.1

 

Current maturities of long term debt

$

6.1

 

$

6.1

 

 

 

 

 

 

 

 

Term Loan

$

65.4

 

$

67.0

 

Revolving Credit Facility

 

220.8

 

 

181.3

 

FILO Facility

 

100.0

 

 

100.0

 

2013 Note Purchase Agreement

 

150.0

 

 

150.0

 

Total long-term debt

$

536.2

 

$

498.3

 

Transaction Costs

$

(5.9

)

$

(6.3

)

 

 

 

 

 

 

 

Total Debt

$

536.4

 

$

498.1

 

 

15

 

 


9. Pension and Post-Retirement Benefit Plans

 

The Company maintains pension plans covering union and certain non-union employees. For more information on the Company’s retirement plans, see Note 13 – “Pension Plans and Defined Contribution Plan” to the Company’s Consolidated Financial Statements in the 2017 Form 10-K.

 

In accordance with the adoption of ASU 2017-07 the Company has retrospectively revised the presentation of the non-service components of periodic pension cost to “Interest and other expense, net” in the condensed consolidated statement of operations, while service cost remains in “Warehouse, marketing and administrative expense.” A summary of the effect for periods presented was as follows (in thousands):

 

 

 

Three months ended March 31, 2017

 

Condensed consolidated statement of loss

 

As reported

 

 

As revised

 

 

Effect of change

 

Warehousing, marketing and administrative expenses

 

$

173,022

 

 

$

172,298

 

 

$

(724

)

Operating loss

 

 

(186,182

)

 

 

(185,458

)

 

 

724

 

Interest and other expense, net

 

 

6,739

 

 

 

7,463

 

 

 

724

 

Loss before income taxes

 

 

(192,921

)

 

 

(192,921

)

 

 

-

 

 

A summary of net periodic pension cost related to the Company’s pension plans for the three months ended March 31, 2018 and 2017 was as follows (in thousands):

 

 

For the Three Months Ended March 31,

 

 

2018

 

 

2017

 

Service cost - benefit earned during the period

$

444

 

 

$

321

 

 

 

 

 

 

 

 

 

Interest cost on projected benefit obligation

 

1,769

 

 

 

1,862

 

Expected return on plan assets

 

(2,266

)

 

 

(2,272

)

Amortization of prior service cost

 

101

 

 

 

72

 

Amortization of actuarial loss

 

1,304

 

 

 

1,062

 

Total non-service cost

$

908

 

 

$

724

 

 

 

 

 

 

 

 

 

Net periodic pension cost

$

1,352

 

 

$

1,045

 

 

The Company made cash contributions of $10.0 million in January 2018 and April 2017, respectively, to its pension plans. Additional contributions, if any, for the remainder of 2018 have not yet been determined. As of March 31, 2018 and December 31, 2017, respectively, the Company had accrued $33.3 million and $43.3 million of pension liability within “Other long-term liabilities” on the Condensed Consolidated Balance Sheets.

 

Defined Contribution Plans

 

The Company has defined contribution plans covering certain salaried associates, non-union hourly paid associates and certain union associates (the “Plans”). The Plans permit associates to defer a portion of their pre-tax and after-tax salary as contributions to the Plans. The Plans also provide for Company-funded discretionary contributions as well as matching associates’ salary deferral contributions, at the discretion of the Board of Directors. The Company recorded expense of $1.9 million, respectively, for the Company match of employee contributions to the Plans for the three months ended March 31, 2018 and 2017.

 

16

 

 


10. Fair Value Measurements

 

The Company measures certain financial assets and liabilities, including foreign exchange hedges and interest rate swaps, at fair value on a recurring basis, based on significant other observable inputs. The fair value of the foreign exchange hedges and the interest rate swaps is determined by using quoted market forward rates (level 2 inputs) and reflects the present value of the amount the Company would pay for contracts involving the same notional amount and maturity date.

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

 

 

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

 

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

 

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

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period.

The following table summarizes the financial instruments measured at fair value in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (in thousands):

 

 

Fair Value Measurements

 

 

 

 

 

 

Quoted Market

Prices in Active

Markets for

Identical Assets or

Liabilities

 

 

Significant Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate swap & foreign exchange hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- as of March 31, 2018

$

1,357

 

 

$

-

 

 

$

1,357

 

 

$

-

 

- as of December 31, 2017

$

29

 

 

$

-

 

 

$

29

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- as of December 31, 2017

$

638

 

 

$

-

 

 

$

638

 

 

$

-

 

The carrying amount of accounts receivable at March 31, 2018, approximates fair value because of the short-term nature of this item. As of March 31, 2018, no assets or liabilities are measured at fair value on a nonrecurring basis.

 

17

 

 


 

11. Other Assets and Liabilities

 

Receivables related to supplier allowances totaling $74.0 million and $90.8 million were included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, respectively.

 

Current and non-current prepaid customer rebates, net of allowances, were $53.9 million and $40.7 million as of March 31, 2018, and December 31, 2017, respectively, and are included as a component of “Other current assets” and “Other long-term assets”. Accrued customer rebates of $36.8 million and $49.2 million as of March 31, 2018 and December 31, 2017, respectively, were included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.

 

12. Income Taxes

 

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items.

 

For the three months ended March 31, 2018, the Company recorded an income tax benefit of $15.2 million on pre-tax loss of $66.7 million for an effective tax rate of 22.8%. For the three months ended March 31, 2017, the Company recorded income tax benefit of $4.3 million on a pre-tax loss of $192.9 million, for an effective tax rate of 2.2%.

 

The Company’s U.S. federal statutory rate is 21.0%. The most significant factor impacting the effective tax rate for the three months ended March 31, 2018 was the discrete impact of the equity compensation adjustment related to ASU No. 2016-09. The most significant factor impacting the effective tax rate for the three months ended March 31, 2017 was the discrete impact of the goodwill impairment charges.

 

The effective tax rate for the three months ended March 31, 2018, also reflects the reduced federal corporate income tax rate as a result of the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017. The Company continues to analyze the aspects of the Tax Act which could potentially affect the provisional estimates that were recorded in the year ended December 31, 2017.

 


18

 

 


13. Legal Matters

 

The Company has been named as a defendant in two lawsuits alleging that the Company sent unsolicited fax advertisements to the named plaintiffs, as well as other persons and entities, in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 ("TCPA"). One lawsuit was initially filed in the United States District Court for the Central District of California on May 1, 2015, and subsequently refiled in the United States District Court for the Northern District of Illinois (the “ND IL”). The other lawsuit was filed in the ND IL on January 14, 2016. The two lawsuits were consolidated for discovery and pre-trial proceedings, and assigned to the same judge. Plaintiffs in both lawsuits seek certification of a class of plaintiffs comprised of persons and entities who allegedly received fax advertisements from the Company. Under the TCPA, recipients of unsolicited fax advertisements can seek damages of $500 per fax for inadvertent violations and up to $1,500 per fax for knowing and willful violations. Other reported TCPA lawsuits have resulted in a broad range of outcomes, with each case being dependent on its own unique set of facts and circumstances. In each lawsuit, the Company has vigorously contested class certification and denied that any violations occurred. On November 3, 2017, the ND IL granted a motion by the Company to deny class certification.  The effect of the ruling prevents the formation of a class and limits the two plaintiffs to their individual claims. On November 17, 2017, plaintiffs filed a Petition for Permission to Appeal under Rule 23(f) of the Federal Rules of Civil Procedure (the “Petition”) with the United States Court of Appeals for the 7th Circuit (the “7th Circuit”). The 7th Circuit granted the Petition, and following briefing, the 7th Circuit heard oral argument on the appeal on April 10, 2018.  The lawsuits are stayed until the 7th Circuit rules on the appeal. 

 

Litigation of this kind is likely to lead to settlement negotiations, including negotiations prompted by pre-trial civil court procedures. Regardless of whether the lawsuits are resolved at trial or through settlement, the Company believes that a loss associated with resolution of the pending claims is probable. In 2016, the Company recorded a $4.0 million, pre-tax reserve within “Warehousing, marketing and administrative expenses” in the Condensed Consolidated Statement of Operations and during the three months ended March 31, 2017, the Company recorded an additional $6.0 million, pre-tax reserve to reflect events concerning mediation activities and settlement negotiations between the Company and the plaintiffs, for a total reserve of $10.0 million at March 31, 2017. The Company continues to evaluate its defenses based on its internal review and investigation of prior events, new information and future circumstances. Final disposition of the lawsuits, whether through settlement or through trial, may result in a loss materially in excess of the aggregate recorded amount. However, a range of reasonably possible excess losses is not estimable at this time.

 

In 2017, the Company was named in a class action lawsuit filed by a former employee in the Los Angeles Superior Court. During the second quarter of 2017, the Company reached an agreement on the general terms of a settlement to resolve this litigation. The parties have finalized a settlement agreement, which is now subject to court approval. A hearing on the parties’ Motion for Preliminary Approval is set for May 10, 2018. In consideration of the settlement, in the second quarter of 2017, the Company recorded a $3.0 million pre-tax reserve within “Warehousing, marketing and administrative expenses” in the Condensed Consolidated Statement of Operations. 

 

The Company is also involved in other legal proceedings arising in the ordinary course of, or incidental to its business. The Company has established reserves, which are not material, for potential losses that are probable and reasonably estimable that may result from those proceedings. In many cases, however, it is difficult to determine whether a loss is probable or even possible or to estimate the amount or range of potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated. The Company believes that such ordinary course legal proceedings will be resolved with no material adverse effect upon its financial condition, results of operations or cash flows.

 

 

19

 

 


14. Pending Transaction Activity

On April 12, 2018, the Company announced it entered into a definitive agreement with Genuine Parts Company (“GPC”) pursuant to which the Company will combine with GPC’s Business Products Group (collectively, the “Business”) in a business combination transaction, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) dated as of April 12, 2018, by and among GPC, Rhino SpinCo, Inc., a Delaware corporation and wholly owned subsidiary of GPC (“SpinCo”), ESND and Elephant Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of ESND (“Merger Sub”). In connection with the Merger Agreement, GPC and SpinCo entered into a Separation Agreement dated as of April 12, 2018 (the “Separation Agreement”), pursuant to which the Business will be separated from GPC.

 

In the transactions contemplated by the Merger Agreement and the Separation Agreement, (i) GPC will transfer certain of its wholly owned subsidiaries that are engaged in the Business to SpinCo, (ii) GPC will distribute SpinCo’s stock to GPC’s stockholders by way of a pro rata dividend (the “Distribution”), and (iii) Merger Sub will merge with and into SpinCo, with SpinCo as the surviving corporation (the “Merger”) and a wholly owned subsidiary of ESND. Upon consummation of the transactions contemplated by the Merger Agreement and the Separation Agreement, GPC shareholders will receive approximately 40.2 million shares of ESND common stock, which will represent approximately 51% of the outstanding shares of ESND common stock. ESND’s existing stockholders will continue to hold the remaining approximately 49% of the outstanding shares of ESND common stock.

 

Prior to the Distribution, SpinCo will enter into a credit facility for up to $400 million (the “SpinCo Debt”) and immediately thereafter, GPC will transfer certain wholly owned subsidiaries to SpinCo and SpinCo will draw the SpinCo Debt in an amount sufficient to make special cash payments to GPC of approximately $347 million, subject to adjustment based on SpinCo’s and ESND’s net debt and SpinCo’s net working capital at the time of the Distribution and certain other adjustments. SpinCo has entered into commitment letters with certain financial institutions to provide for the SpinCo Debt.

 

The transaction, which has been unanimously approved by the Boards of ESND and GPC, is expected to be tax free to the companies’ respective shareholders.

 

The issuance of shares by ESND in connection with the transaction requires approval by ESND’s stockholders and is subject to c