news release

Executive Offices

One Parkway North Blvd.

Suite 100

Deerfield, IL 60015-2559

For Further Information Contact:

For Inquiries:

investorrelations@essendant.com

(847) 627-7000

·

Net income per share was $0.74 in the current quarter, including $0.26 per share of expense related to the impairment of seller notes receivable relating to the company’s prior year sale of its software service subsidiary and the previously-announced repositioning actions (together the “third quarter charges”). Adjusted earnings per share were $1.00⁽¹⁾ compared to earnings per share of $1.03⁽²⁾ in the prior year quarter.

·

Cash flow provided by operating activities was $183.7 million in the first nine months of 2015, up from $93.7 million in the prior year.

·

Sales decreased 2.0% to $1.39 billion when compared to the third quarter of last year.  

·

Gross margin was $225.1 million, or 16.2% of sales, up from $216.7 million⁽²⁾ or 15.3%⁽²⁾ of sales, in the prior year quarter.

·

Operating expenses were $172.2 million, including $13.5 million related to the third quarter charges. Adjusted operating expenses⁽¹⁾ were $158.6 million, or 11.4% of sales, up from $148.8 million⁽²⁾ or 10.5%⁽²⁾ of sales in the prior year quarter.

(1)

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

(2)

Value includes the restated impacts of the change in accounting principle related to inventory accounting. See the Reconciliation of Restated Financial Statements on page 11 of this release for further details.  

·

Sales of industrial supplies increased 37.3% to $223.5 million, including $81.2 million of incremental sales from the MEDCO and Nestor acquisitions made in October of 2014 and August of 2015, respectively. Weakness in the energy and industrial sectors drove a $20.5 million sales decline in the organic industrial business. Janitorial and breakroom supplies sales decreased 1.8% to $375.5 million from $382.3 million. Total office products sales were down 9.5% to $752.0 million from $830.5 million on lower cut-sheet paper sales and exiting non-strategic business in Mexico.

·

The gross margin rate of 16.2% benefitted 17 basis points from acquisitions. Excluding acquisitions, gross margin rate improved 75 basis points, driven by higher product margin, lower freight expenses, and favorable inflation related inventory adjustments. Gross margin was $225.1 million, an increase of $8.4 million from the prior year quarter, with an incremental $15.4 million from acquisitions.

·

Operating expenses were $172.2 million, including $13.5 million related to the third quarter charges. Adjusted operating expenses⁽¹⁾ were $158.6 million or 11.4% of sales, compared to $148.8 million⁽²⁾, or 10.5%⁽²⁾ of sales, in the prior year quarter. The $9.8 million increase included $11.5 million of incremental expenses from acquisitions, partially offset by restructuring benefits and expense control.

·

Operating income was $53.0 million, including $13.5 million of expense related to the third quarter charges. Adjusted operating income⁽¹⁾ was $66.5 million, or 4.8% of sales, compared to $67.9 million⁽²⁾, or 4.8%⁽²⁾ of sales, in the prior year quarter.

·

Net income was $27.7 million, including $10.0 million of after-tax costs related to the third quarter charges. Earnings per share were $0.74, including $0.26 of expense related to the third quarter charges.  Adjusted net income⁽¹⁾ was $37.7 million, compared to $40.2 million⁽²⁾ in the prior year quarter. Adjusted earnings per share were $1.00⁽¹⁾, compared to $1.03⁽²⁾ in the third quarter of 2014.

·

Sales of industrial supplies increased 47.0% to $647.7 million, including $258.1 million of incremental sales from the CPO and MEDCO acquisitions made in 2014 and the Nestor acquisition made in August 2015. Weakness in the energy and industrial sectors drove a $51.1 million sales decline in the organic industrial business. Janitorial and breakroom supplies sales increased 3.0% to $1.10 billion from $1.07 billion. Total office products sales were down 6.8% to $2.20 billion from $2.36 billion driven by lower cut-sheet paper sales and exiting non-strategic business in Mexico.

·

The gross margin rate of 15.6% benefitted 30 basis points from acquisitions. Excluding acquisitions, gross margin rate improved due to a favorable product margin, driven by favorable product mix and purchase driven inventory allowances. Gross margin was $635.7 million, an increase of $42.5 million from the first nine months of last year, with an incremental $52.1 million from acquisitions.

·

Operating expenses were $526.7 million, including $45.7 million related to the impairment of seller notes and the previously-announced repositioning actions (together the “2015 charges”). Adjusted operating expenses⁽¹⁾ were $480.9 million or 11.8% of sales, compared to $438.5 million⁽²⁾, or 11.0%⁽²⁾ of sales, in the prior year period. The $42.4 million increase included $40.9 million of incremental expenses from acquisitions.

·

Operating income was $109.0 million, including $45.7 million of expense related to the 2015 charges.

Adjusted operating income⁽¹⁾ was $154.7 million, or 3.8% of sales, compared to $154.6 million⁽²⁾, or 3.9%⁽²⁾ of sales, in the prior year period. 

·

Net income was $51.5 million, including $34.9 million of after-tax costs related to the 2015 charges. Earnings per share for the first nine months of 2015 were $1.35, including $0.91 of expense related to the 2015 charges. Adjusted net income⁽¹⁾ was $86.3 million, compared to $90.0 million⁽²⁾ in the prior year period. Adjusted earnings per share were $2.26⁽¹⁾, compared to $2.29⁽²⁾ earnings per share in the first nine months of 2014.

·

Incremental $13.0 million cost in 2015 to move to a common operating and information technology platform for the office products, janitorial and breakroom categories that will simplify customer experience and deliver operating cost savings. In the first nine months of 2015 the cost impact was $8.2 million related to this project and includes a $4.0 million restatement of inventory values. Additionally, during the first nine-months of 2015 the company recorded pre-tax charges relating to the following:

o

Workforce reductions and facility consolidations of $7.5 million. Additional facility actions will occur later in 2015 for a full year pre-tax charge of approximately $9.0 million;

o

Loss and related expenses, totaling $17.0 million, attributed to the sale of the Mexico business, which closed in September 2015;

o

Non-cash impairment of intangibles and accelerated amortization related to rebranding totaling $11.5 million. The company expects a total charge of $12.0 million for the full year.

·

Total benefits from the above actions are expected to be:

o

Savings of $6.0 million in 2015 and $10.0 million annually beginning in 2016 from the workforce reductions and facility consolidations;

o

$5.0 million to $10.0 million beginning in the second half of 2016, and $15.0 million to $20.0 million on an annual basis thereafter from the transition to a common operating and IT platform.

·

Implement new workforce reductions as it transitions to a channel-based organization more closely aligned with its customers. As the company finalizes its plan, additional information will be provided in the fourth quarter regarding the cost and expected benefit of this action;

·

Re-invest a portion of the expected savings to fund bringing additional businesses onto the common operating and IT platform.

For the Three Months Ended

For the Nine Months Ended

September 30,

September 30,

2015

2014 (Revised)

2015

2014 (Revised)

Net sales

$

1,391,545

$

1,419,947

$

4,065,719

$

3,994,123

Cost of goods sold

1,166,402

1,203,246

3,430,062

3,400,992

Gross profit

225,143

216,701

635,657

593,131

Operating expenses:

     Warehousing, marketing and administrative expenses

172,159

148,831

526,653

438,538

Operating income

52,984

67,870

109,004

154,593

Interest expense, net

5,300

3,992

14,918

11,199

Income before income taxes

47,684

63,878

94,086

143,394

Income tax expense

20,017

23,647

42,594

53,349

Net income

$

27,667

$

40,231

$

51,492

$

90,045

Net income per share - basic:

$

0.74

$

1.05

$

1.36

$

2.32

     Average number of common shares outstanding - basic

37,300

38,450

37,724

38,817

Net income per share - diluted:

$

0.74

$

1.03

$

1.35

$

2.29

     Average number of common shares outstanding - diluted

37,608

38,884

38,109

39,244

Dividends declared per share

$

0.14

$

0.14

$

0.42

$

0.42

(Unaudited)

(Unaudited)

As of  September 30,

As of December 31,

2015

2014 (Revised)

2014 (Revised)

ASSETS

Current assets:

Cash and cash equivalents

$

28,047

$

24,838

$

20,812

Accounts receivable, net

737,979

749,415

702,527

Inventories

860,355

782,158

906,430

Other current assets

31,946

20,599

30,713

Total current assets

1,658,327

1,577,010

1,660,482

Property, plant and equipment, net

129,744

133,076

138,217

Goodwill

413,178

381,687

398,042

Intangible assets, net

102,760

72,499

111,958

Other long-term assets

36,282

21,197

38,669

Total assets

$

2,340,291

$

2,185,469

$

2,347,368

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

540,949

$

515,350

$

485,241

Accrued liabilities

186,826

183,737

185,535

Current maturities of long-term debt

43

894

851

Total current liabilities

727,818

699,981

671,627

Deferred income taxes

15,119

28,265

17,763

Long-term debt

666,142

541,834

709,917

Other long-term liabilities

98,621

60,501

104,394

Total liabilities

1,507,700

1,330,581

1,503,701

Stockholders’ equity:

Common stock, $0.10 par value; authorized - 100,000,000 shares, issued - 74,435,628 shares in 2015 and 2014

7,444

7,444

7,444

Additional paid-in capital

408,475

410,302

412,291

Treasury stock, at cost – 36,874,672 shares in 2015 and 35,719,041 shares in 2014

(1,090,624

)

(1,035,570

)

(1,042,501

)

Retained earnings

1,564,816

1,512,550

1,529,224

Accumulated other comprehensive loss

(57,520

)

(39,838

)

(62,791

)

Total stockholders’ equity

832,591

854,888

843,667

Total liabilities and stockholders’ equity

$

2,340,291

$

2,185,469

$

2,347,368

For the Nine Months Ended

September 30,

2015

2014 (Revised)

Cash Flows From Operating Activities:

Net income

$

51,492

$

90,045

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

Depreciation and amortization

36,344

29,699

Share-based compensation

6,447

5,935

Loss on the disposition of property, plant and equipment

1,562

97

Amortization of capitalized financing costs

659

657

Excess tax benefits related to share-based compensation

(402

)

(1,166

)

Asset impairment charges

34,893

-

Loss on sale of equity investment

33

-

Deferred income taxes

(15,285

)

(9,134

)

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

Increase in accounts receivable, net

(31,288

)

(104,540

)

Decrease in inventory

54,354

51,974

(Increase) decrease in other assets

(8,720

)

10,000

Increase in accounts payable

8,972

24,663

Increase (decrease) in checks in-transit

41,440

(2,679

)

Increase in accrued liabilities

6,500

2,883

Decrease in other liabilities

(3,342

)

(4,768

)

Net cash provided by operating activities

183,659

93,666

Cash Flows From Investing Activities:

Capital expenditures

(18,133

)

(15,431

)

Proceeds from the disposition of property, plant and equipment

184

872

Acquisitions, net of cash acquired

(40,471

)

(26,725

)

Proceeds from sale of equity investment

612

-

Net cash used in investing activities

(57,808

)

(41,284

)

Cash Flows From Financing Activities:

Net repayments under revolving credit facility

(45,309

)

(12,094

)

Borrowings under Receivables Securitization Program

-

9,300

Repayment of debt

-

(135,000

)

Proceeds from the issuance of debt

-

150,000

Net disbursements from share-based compensation arrangements

(1,507

)

(3,142

)

Acquisition of treasury stock, at cost

(55,677

)

(43,037

)

Payment of cash dividends

(15,976

)

(16,407

)

Excess tax benefits related to share-based compensation

402

1,166

Payment of debt issuance costs

(36

)

(623

)

Net cash used in financing activities

(118,103

)

(49,837

)

Effect of exchange rate changes on cash and cash equivalents

(513

)

(33

)

Net change in cash and cash equivalents

7,235

2,512

Cash and cash equivalents, beginning of period

20,812

22,326

Cash and cash equivalents, end of period

$

28,047

$

24,838

For the Three Months Ended September 30,

2015

2014 (Revised)

% to

% to

Amount

Net Sales

Amount

Net Sales

Net Sales

$

1,391,545

100.0

%

$

1,419,947

100.0

%

Gross profit

$

225,143

16.2

%

$

216,701

15.3

%

Operating expenses

$

172,159

12.4

%

$

148,831

10.5

%

Workforce reduction and facility consolidation charge

(200

)

-

-

-

Rebranding - intangible asset amortization

(511

)

-

-

-

Notes receivable impairment

(10,738

)

(0.8

%)

Loss on sale of business and related costs

(2,072

)

(0.1

%)

-

-

Adjusted operating expenses

$

158,638

11.4

%

$

148,831

10.5

%

Operating income

$

52,984

3.8

%

$

67,870

4.8

%

Operating expense items noted above

13,521

1.0

%

-

-

Adjusted operating income

$

66,505

4.8

%

$

67,870

4.8

%

Net income

$

27,667

$

40,231

Operating expense items noted above, net of tax

10,017

-

Adjusted net income

$

37,684

$

40,231

Diluted earnings per share

$

0.74

$

1.03

Per share operating expense items noted above

0.26

-

Adjusted diluted earnings per share

$

1.00

$

1.03

Adjusted diluted earnings per share - change over the prior year period

(2.9

%)

Weighted average number of common shares - diluted

37,608

38,884

For the Nine Months Ended September 30,

2015

2014 (Revised)

% to

% to

Amount

Net Sales

Amount

Net Sales

Net Sales

$

4,065,719

100.0

%

$

3,994,123

100.0

%

Gross profit

$

635,657

15.6

%

$

593,131

14.9

%

Operating expenses

$

526,653

13.0

%

$

438,538

11.0

%

Workforce reduction and facility consolidation charge

(6,495

)

(0.2

%)

-

-

Rebranding - intangible asset impairment and amortization

(11,485

)

(0.3

%)

-

-

Notes receivable impairment

(10,738

)

(0.3

%)

Loss on sale of business and related costs

(16,999

)

(0.4

%)

-

-

Adjusted operating expenses

$

480,936

11.8

%

$

438,538

11.0

%

Operating income

$

109,004

2.7

%

$

154,593

3.9

%

Operating expense items noted above

45,717

1.1

%

-

-

Adjusted operating income

$

154,721

3.8

%

$

154,593

3.9

%

Net income

$

51,492

$

90,045

Operating expense items noted above, net of tax

34,854

-

Adjusted net income

$

86,346

$

90,045

Diluted earnings per share

$

1.35

$

2.29

Per share operating expense items noted above

0.91

-

Adjusted diluted earnings per share

$

2.26

$

2.29

Adjusted diluted earnings per share - change over the prior year period

(1.3

%)

Weighted average number of common shares - diluted

38,109

39,244

As of and for the Three Months Ended

September 30, 2014

As of and for the Nine Months Ended

September 30, 2014

Previous Method

As Reported

Effect of Change

Previous Method

As Reported

Effect of Change

Consolidated Statement of Income

Cost of goods sold

$

1,208,919

$

1,203,246

$

(5,673

)

$

3,396,552

$

3,400,992

$

4,440

Gross profit

211,028

216,701

5,673

597,571

593,131

(4,440

)

Warehousing, marketing, and administrative expenses

146,560

148,831

2,271

437,595

438,538

943

Income before income taxes

60,476

63,878

3,402

148,777

143,394

(5,383

)

Income tax expense

22,307

23,647

1,340

55,420

53,349

(2,071

)

Net income

38,169

40,231

2,062

93,357

90,045

(3,312

)

Net income per share

Basic

$

0.99

$

1.05

$

0.06

$

2.41

$

2.32

$

(0.09

)

Diluted

$

0.98

$

1.03

$

0.05

$

2.38

$

2.29

$

(0.09

)

Consolidated Statement of Comprehensive Income

Net income

$

38,169

$

40,231

$

2,062

$

93,357

$

90,045

$

(3,312

)

Comprehensive income

37,826

39,888

2,062

93,407

90,095

(3,312

)

As of and for the Period Ended

September 30, 2014

Previous Method

As Reported

Effect of Change

Consolidated Statement of Financial Position

Inventories (A)

$

796,325

$

782,158

$

(14,167

)

Other long-term assets (B)

24,372

21,197

(3,175

)

Accrued liabilities (A)

189,224

183,737

(5,487

)

Long-term debt (B)

545,009

541,834

(3,175

)

Retained earnings (A)

1,521,230

1,512,550

(8,680

)

(A)

Relates to the change in inventory valuation methodology detailed above

(B)

Relates to the change in debt issuance costs detailed above