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Section 1: 10-Q (10-Q)

esnd-10q_20180630.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 June 30, 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: 001-38499

 

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 August 3, 2018, the registrant had outstanding 37,709,883 shares of common stock, par value $0.10 per share.

 

 

 

 

 


ESSENDANT INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2018

TABLE OF CONTENTS

 

 

  

Page No.

PART I — FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

  

3

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017

  

4

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017

  

5

 

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

  

33

 

Item 4. Controls and Procedures

  

33

 

PART II — OTHER INFORMATION

  

 

 

Item 1. Legal Proceedings

  

34

 

Item 1A. Risk Factors

  

34

 

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

  

38

 

Item 6. Exhibits

  

39

 

SIGNATURES

  

40

 

 

 

 

2


PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS.

ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

(Unaudited)

 

 

(Audited)

 

 

As of  June 30,

 

 

As of  December 31,

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

31,751

 

 

$

28,802

 

Accounts receivable, less allowance for doubtful accounts of $16,677 in 2018 and $17,102 in 2017

 

640,134

 

 

 

619,200

 

Inventories

 

742,886

 

 

 

821,683

 

Other current assets

 

63,903

 

 

 

43,044

 

Total current assets

 

1,478,674

 

 

 

1,512,729

 

Property, plant and equipment, net

 

129,927

 

 

 

132,793

 

Intangible assets, net

 

68,547

 

 

 

73,441

 

Goodwill

 

13,065

 

 

 

13,153

 

Other long-term assets

 

73,061

 

 

 

42,134

 

Total assets

$

1,763,274

 

 

$

1,774,250

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

526,263

 

 

$

500,883

 

Accrued liabilities

 

195,342

 

 

 

189,916

 

Current maturities of long-term debt

 

6,072

 

 

 

6,079

 

Total current liabilities

 

727,677

 

 

 

696,878

 

Deferred income taxes

 

1,175

 

 

 

1,192

 

Long-term debt

 

518,660

 

 

 

492,044

 

Other long-term liabilities

 

76,525

 

 

 

89,222

 

Total liabilities

 

1,324,037

 

 

 

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

 

415,449

 

 

 

412,987

 

Treasury stock, at cost – 36,725,594 shares in 2018 and 36,811,366 shares in 2017

 

(1,091,993

)

 

 

(1,093,813

)

Retained earnings

 

1,156,910

 

 

 

1,219,309

 

Accumulated other comprehensive loss

 

(48,573

)

 

 

(51,013

)

Total stockholders’ equity

 

439,237

 

 

 

494,914

 

Total liabilities and stockholders’ equity

$

1,763,274

 

 

$

1,774,250

 

 

See notes to condensed consolidated financial statements.

3


ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017*

Revised

 

 

2018

 

 

2017*

Revised

 

Net sales

$

1,254,222

 

 

$

1,260,656

 

 

$

2,494,378

 

 

$

2,530,038

 

Cost of goods sold

 

1,081,016

 

 

 

1,083,092

 

 

 

2,199,996

 

 

 

2,166,807

 

Gross profit

 

173,206

 

 

 

177,564

 

 

 

294,382

 

 

 

363,231

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warehousing, marketing and administrative expenses

 

156,574

 

 

 

160,972

 

 

 

322,119

 

 

 

333,270

 

Restructuring charges

 

8,019

 

 

 

-

 

 

 

22,080

 

 

 

-

 

Impairment of goodwill

 

-

 

 

 

-

 

 

 

-

 

 

 

198,828

 

Operating (loss) income

 

8,613

 

 

 

16,592

 

 

 

(49,817

)

 

 

(168,867

)

Interest and other expense, net

 

8,850

 

 

 

7,022

 

 

 

17,072

 

 

 

14,485

 

(Loss) income before income taxes

 

(237

)

 

 

9,570

 

 

 

(66,889

)

 

 

(183,352

)

Income tax (benefit) expense

 

(140

)

 

 

4,474

 

 

 

(15,352

)

 

 

146

 

Net (loss) income

$

(97

)

 

$

5,096

 

 

$

(51,537

)

 

$

(183,498

)

Net (loss) income per share - basic:

$

(0.00

)

 

$

0.14

 

 

$

(1.40

)

 

$

(5.01

)

     Average number of common shares outstanding - basic

 

36,925

 

 

 

36,673

 

 

 

36,895

 

 

 

36,659

 

Net (loss) income per share - diluted:

$

(0.00

)

 

$

0.14

 

 

$

(1.40

)

 

$

(5.01

)

     Average number of common shares outstanding - diluted

 

36,925

 

 

 

36,873

 

 

 

36,895

 

 

 

36,659

 

Dividends declared per share

$

0.14

 

 

$

0.14

 

 

$

0.28

 

 

$

0.28

 

 

* Revised 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 INCOME (LOSS)

(in thousands)

(Unaudited)

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net (loss) income

$

(97

)

 

$

5,096

 

 

$

(51,537

)

 

$

(183,498

)

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Translation adjustments

 

(697

)

 

 

1,092

 

 

 

(1,625

)

 

 

1,477

 

       Minimum pension liability adjustments

 

1,045

 

 

 

704

 

 

 

2,089

 

 

 

1,408

 

       Cash flow hedge adjustments

 

485

 

 

 

(36

)

 

 

1,976

 

 

 

32

 

Total other comprehensive income, net of tax

 

833

 

 

 

1,760

 

 

 

2,440

 

 

 

2,917

 

Comprehensive income (loss)

$

736

 

 

$

6,856

 

 

$

(49,097

)

 

$

(180,581

)

 

See notes to condensed consolidated financial statements.

5


ESSENDANT INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

For the Six Months Ended

 

 

June 30,

 

 

2018

 

 

2017

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net loss

$

(51,537

)

 

$

(183,498

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

21,389

 

 

 

21,534

 

Share-based compensation

 

4,441

 

 

 

4,038

 

Gain on the disposition of property, plant and equipment

 

(771

)

 

 

(656

)

Amortization of capitalized financing costs

 

713

 

 

 

804

 

Deferred income taxes

 

(9,352

)

 

 

(270

)

Change in contingent consideration

 

(700

)

 

 

-

 

Impairment of goodwill

 

-

 

 

 

198,828

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable, net

 

(21,385

)

 

 

14,434

 

Decrease in inventory

 

78,385

 

 

 

76,757

 

Increase in other assets

 

(22,108

)

 

 

(1,178

)

Increase in accounts payable

 

25,189

 

 

 

24,133

 

Increase (decrease) in accrued liabilities

 

9,368

 

 

 

(19,603

)

Decrease in other liabilities

 

(9,955

)

 

 

(9,512

)

Net cash provided by operating activities

 

23,678

 

 

 

125,811

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Capital expenditures

 

(16,026

)

 

 

(13,677

)

Proceeds from the disposition of property, plant and equipment

 

296

 

 

 

-

 

Investment in independent reseller channel

 

(19,000

)

 

 

-

 

Net cash used in investing activities

 

(34,730

)

 

 

(13,677

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Net borrowing under revolving credit facility

 

28,867

 

 

 

31,375

 

Borrowings under Term Loan

 

-

 

 

 

77,600

 

Repayments under Term Loan

 

(3,036

)

 

 

(1,518

)

Contingent consideration

 

(967

)

 

 

-

 

Net repayments under Securitization Program

 

-

 

 

 

(200,000

)

Net disbursements from share-based compensation arrangements

 

(238

)

 

 

(600

)

Payment of cash dividends

 

(10,425

)

 

 

(10,339

)

Payment of debt issuance costs

 

-

 

 

 

(6,277

)

Net cash provided by (used in) financing activities

 

14,201

 

 

 

(109,759

)

Effect of exchange rate changes on cash and cash equivalents

 

(200

)

 

 

185

 

Net change in cash and cash equivalents

 

2,949

 

 

 

2,560

 

Cash and cash equivalents, beginning of period

 

28,802

 

 

 

21,329

 

Cash and cash equivalents, end of period

$

31,751

 

 

$

23,889

 

Other Cash Flow Information:

 

 

 

 

 

 

 

Income tax payments, net

$

843

 

 

$

19,058

 

Interest paid

 

14,537

 

 

 

11,809

 

 

 

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 June 30, 2018 and the results of operations for the three and six months ended June 30, 2018 and 2017, and cash flows for the six months ended June 30, 2018 and 2017. The results of operations for the three and six months ended June 30, 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 June 30, 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 $168.7 million and $159.3 million higher than reported as of June 30, 2018, and December 31, 2017, respectively.

For the six months ended June 30, 2018, LIFO liquidations resulted in LIFO income of $2.5 million, which was more than offset by LIFO expenses in the three and six months ended June 30, 2018 of $1.4 million and $11.9 million related to current inflation, for an overall net increase in cost of sales of $1.4 million and $9.4 million, respectively. 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 and six-month periods ended June 30, 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 and six months ended June 30, 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 and six months ended June 30, 2018, and 2017 are as follows (in thousands):

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product categories:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Janitorial, foodservice and breakroom supplies (JanSan products)

$

346,305

 

 

$

349,700

 

 

$

674,809

 

 

$

695,127

 

Technology products

 

298,801

 

 

 

309,689

 

 

 

613,621

 

 

 

626,900

 

Traditional office products

 

176,617

 

 

 

186,708

 

 

 

355,568

 

 

 

384,740

 

Industrial supplies

 

163,031

 

 

 

146,104

 

 

 

318,241

 

 

 

293,303

 

Cut sheet paper products

 

116,020

 

 

 

109,631

 

 

 

235,587

 

 

 

215,795

 

Automotive products

 

85,389

 

 

 

82,143

 

 

 

166,381

 

 

 

160,949

 

Office furniture

 

62,997

 

 

 

69,939

 

 

 

121,798

 

 

 

142,027

 

Other revenues

 

5,062

 

 

 

6,742

 

 

 

8,373

 

 

 

11,198

 

Total revenue

$

1,254,222

 

 

$

1,260,656

 

 

$

2,494,378

 

 

$

2,530,038

 

 

Cost of sales for the three months ended June 30, 2018 and 2017 totaled $1.1 billion and $1.1 billion, while cost of sales for the six months ended June 30, 2018 and 2017, totaled $2.2 billion and $2.2 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 June 30, 2018 consisted of amounts to be amortized as a reduction of revenues in the future as follows:

 

Year

 

 

 

 

2018

 

$

20,756

 

2019

 

 

11,628

 

2020

 

 

7,638

 

2021

 

 

5,286

 

2022

 

 

3,344

 

Thereafter

 

 

5,143

 

Total prepaid customer rebates

 

$

53,795

 

 

Transaction Price Allocated to Remaining Performance Obligations

 

As of June 30, 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 June 30, 2018, the Company granted 45,280 RSUs and no shares of restricted stock or performance-based units, compared to 68 RSUs and 15,577 shares of restricted stock in the same period of 2017. No performance-based units were granted in the three months ended June 30, 2018 or 2017.

 

During the six months ended June 30, 2018, the Company granted 107,296 shares of restricted stock, 45,280 RSUs and 634,778 performance-based units, compared to 58,962 shares of restricted stock and 221,365 RSUs in the same period of 2017. No performance units were granted in the six months ended June 30, 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 are included in restructuring charges in the Condensed Consolidated Statement of Operations in the three and six months ended June 30, 2018.

 

Product assortment refinement charges have also been incurred and are reflected as additional cost of goods sold in the three and six months ended June 30, 2018. The reduction in product assortment charges in the three months ended June 30, 2018 was due to better recovery rates than previously estimated.

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

June 30,

 

 

For the six months ended

June 30,

 

 

For the six months ended

June 30,

 

 

For the six months ended

June 30,

 

 

As of

June 30,

 

 

As of

December 31,

 

 

 

2018

 

 

2018

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

2018 Actions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product assortment refinement

 

$

(8,554

)

 

$

34,269

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workforce reduction

 

 

(152

)

 

 

11,436

 

 

 

2,592

 

 

 

-

 

 

 

8,844

 

 

 

-

 

Facility closure

 

 

8,171

 

 

 

11,183

 

 

 

7,235

 

 

 

-

 

 

 

3,770

 

 

$

-

 

Total

 

$

8,019

 

 

$

22,619

 

 

$

9,827

 

 

$

-

 

 

$

12,614

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter 2015 Actions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workforce reduction

 

$

(13

)

 

$

(553

)

 

$

103

 

 

$

316

 

 

$

261

 

 

$

917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter 2015 Actions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Workforce reduction

 

$

-

 

 

$

-

 

 

$

-

 

 

$

94

 

 

$

664

 

 

$

664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(548

)

 

$

56,335

 

 

$

9,930

 

 

$

410

 

 

$

13,539

 

 

$

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 June 30, 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):

 

 

June 30, 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

$

137,672

 

 

$

(76,333

)

 

$

61,339

 

 

16

 

$

138,110

 

 

$

(72,192

)

 

$

65,918

 

 

16

Non-compete agreements

 

4,652

 

 

 

(4,260

)

 

 

392

 

 

4

 

 

4,659

 

 

 

(4,260

)

 

 

399

 

 

4

Trademarks

 

13,725

 

 

 

(6,909

)

 

 

6,816

 

 

14

 

 

13,766

 

 

 

(6,642

)

 

 

7,124

 

 

14

Total

$

156,049

 

 

$

(87,502

)

 

$

68,547

 

 

 

 

$

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

 

$

8,063

 

2019

 

 

6,937

 

2020

 

 

6,934

 

2021

 

 

6,934

 

2022

 

 

6,880

 

 

6. Accumulated Other Comprehensive Loss

 

The change in Accumulated Other Comprehensive Loss (“AOCI”) by component, net of tax, for the six-month period ended June 30, 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

 

 

(1,625

)

 

 

1,746

 

 

 

-

 

 

 

121

 

Amounts reclassified from AOCI

 

 

-

 

 

 

230

 

 

 

2,089

 

 

 

2,319

 

Net other comprehensive income

 

 

(1,625

)

 

 

1,976

 

 

 

2,089

 

 

 

2,440

 

AOCI, balance as of June 30, 2018

 

$

(7,558

)

 

$

1,770

 

 

$

(42,785

)

 

$

(48,573

)

 

The following table details the amounts reclassified out of AOCI into the income statement during the three and six months ended June 30, 2018 (in thousands):

 

 

Amount Reclassified From AOCI

 

 

 

 

 

For the Three

 

 

For the Six

 

 

 

 

 

Months Ended

 

 

Months Ended

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

Details About AOCI Components

 

2018

 

 

2018

 

 

 

Realized and unrealized gains (losses) on cash flow hedges

 

 

 

 

 

 

 

 

 

 

Gain on interest rate swap, before tax

 

$

115

 

 

$

309

 

 

Interest and other expense, net

 

 

 

(30

)

 

 

(79

)

 

Tax provision

 

 

$

85

 

 

$

230

 

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan items

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost and unrecognized loss

 

$

1,405

 

 

$

2,810

 

 

Interest and other expense, net

 

 

 

(361

)

 

 

(721

)

 

Tax provision

 

 

 

1,044

 

 

 

2,089

 

 

Net of tax

Total reclassifications for the period, net of tax

 

$

1,129

 

 

$

2,319

 

 

 

 

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 and six months ended June 30, 2018, 0.1 million shares and in the three and six months ended June 30, 2017, 0.2 million shares of such securities, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would be antidilutive. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):  

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) Income

$

(97

)

 

$

5,096

 

 

$

(51,537

)

 

$

(183,498

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

weighted average shares

 

36,925

 

 

 

36,673

 

 

 

36,895

 

 

 

36,659

 

Effect of dilutive securities: