Essendant Reports Full-Year And Fourth Quarter 2015 Results

Feb 16, 2016, 16:15 ET from Essendant Inc.

DEERFIELD, Ill., Feb. 16, 2016 /PRNewswire/ -- Essendant Inc. (NASDAQ: ESND), a leading supplier of workplace essentials, today announced financial results for the fourth quarter and year ended December 31, 2015.  Key results were as follows:

  • FY 2015 adjusted earnings per share of $3.08 (1)
  • Q4 2015 adjusted earnings per share increased three cents to $0.81(1) year-over-year
  • FY 2015 sales increased 0.7% year-over-year
  • Q4 2015 sales declined 2.7% year-over-year
  • FY 2015 GAAP net income (loss) declined to $(1.18) per share from $2.87 per share in 2014 due principally to goodwill impairments and restructuring actions
  • Restructuring charges and industrial asset impairment drove Q4 2015 GAAP net loss of $95.8 million
  • FY 2015 free cash flow increased by $79.7 million to $134.6 million
  • Reached agreement with Staples to acquire more than $550 million in wholesale corporate contract business contingent on the Office Depot merger

"In 2015 we took a series of actions to position the company for success, including renewing the focus on our core Office Product and JanSan businesses, lowering our cost structure and rebranding to Essendant," said Robert B. Aiken, Jr., president and chief executive officer of Essendant. "The impact of our actions was reflected in our fourth quarter as the team executed well – delivering strong earnings per share in the face of macroeconomic headwinds.  As we look ahead, we are well-positioned to continue implementing our strategic initiatives and deliver revenue and earnings growth in 2016 consistent with our previous guidance."

Management Perspective

  • Management has placed significant focus on the transition to a common operating and IT platform to drive operating and cost efficiencies, and expects the Office Product and JanSan categories to be on the common platform at the beginning of Q2 2016
  • Essendant continued its efforts to exit non-strategic businesses (MBS Dev technology subsidiary in 2014, Mexico business in 2015) as part of its efforts to deliver long-term profitability and shareholder value
  • Management remains upbeat about the company's opportunity set regardless of outcome in the Staples-Office Depot merger, and expects increased business in the core Office Product and JanSan categories to be a significant contributor to growth in 2016

Fourth Quarter Results

  • Net sales declined 2.7% versus the prior year quarter. Organic sales declined across the portfolio and partly offset by growth from acquisitions in the Automotive category, which contributed $46.4 million in sales year-over-year. Excluding the impact of acquisitions and the sale of the Mexico business, sales were down 4.2%.
  • Adjusted operating income rose by $1.8 million to $54.1 million despite lower sales and gross margin, due to acquisitions and a decrease in adjusted operating expense resulting from cost actions and lower variable compensation expense. GAAP operating income (loss) fell by $123.3 million to $(79.2) million due to charges.
  • Adjusted EBITDA rose by $1.5 million to $66.1 million, due to higher adjusted operating income.
  • Adjusted net income fell by $0.3 million to $30.0 million due to higher adjusted operating income, offset by higher interest. GAAP net income (loss) fell by $117.9 million to $(95.8) million due to goodwill impairment and restructuring actions.
  • Adjusted earnings per share were $0.81(1), compared to $0.78 last year due to acquisitions and cost containment. GAAP net income (loss) amounted to $(2.61) per share due to industrial asset impairment and restructuring.

Impairment of ORS Industrial Business

One-time charges totaling $120.7 million related to the ORS Industrial business unit were incurred in the fourth quarter of 2015. These charges are comprised of an impairment of goodwill and intangibles totaling $115.8 million and a reserve increase for obsolete inventory of $4.9 million, and are a result of declines in the oilfield and energy sectors.

Under new leadership, the ORS Industrial business has revised its merchandising and sales strategy to diversify its offerings and lessen dependencies on the oilfield and energy sectors as the environment in those sectors is expected to remain challenging.

Cost Reduction Plan

As previously disclosed, during the fourth quarter Essendant executed a plan to reduce operating costs by approximately $20 million on an annualized basis by the first quarter of 2016. This plan included steps to de-layer the management structure and simplify the organization as it transitions to a common operating and IT platform through a combination of voluntary retirement and involuntary workforce reductions. The company incurred on-time severance costs of $11.9 million in the fourth quarter of 2015 related to this plan.

Agreement with Staples, Inc.

The company reached an agreement to purchase more than $550 million worth of annual contracts with minority and woman-owned office supply resellers and their large corporate and other enterprise customers from Staples, Inc. The transaction is subject to the successful completion of the proposed merger of Staples and Office Depot, as well as other regulatory and customary closing conditions.  Under the terms of the agreement, Essendant will pay Staples approximately $22.5 million

In the first year following closing, Essendant anticipates minimal impact to earnings per share and expects to make further investments in working capital of approximately $100 million to support the business.

Guidance

The company reaffirms its previously announced 2016 outlook, and currently expects the following:

  • Low to mid-single digit revenue growth compared to 2015, or total company revenue in the range of $5.4 billion to $5.6 billion;
  • High single digit adjusted earnings per share growth compared to prior year, or EPS in the range of $3.20 to $3.40;
  • Annual free cash flow equal to or greater than net income.

The guidance above excludes the impact of the enterprise account business that would be acquired in the Staples transaction, any new acquisitions or unusual charges.

Conference Call

Essendant will hold a conference call followed by a question and answer session on Wednesday, February 17, 2016, at 7:30 a.m. CDT, to discuss fourth quarter 2015 results. To participate, callers within the U.S. and Canada should dial (877) 358-2531 and international callers should dial (412) 902-6623 approximately 10 minutes before the presentation.  The conference ID is "10078476."  To listen to the webcast, participants should visit the Investors section of the company's website (investors.essendant.com), and click on the "Q4-15 Earnings Release" button on the right side of the page, several minutes before the event is broadcast.   Interested parties can access an archived version of the call, this news release, a financial slide presentation and other information related to the call, also located on the quarterly results section of Essendant's investor website, about two hours after the call ends.

Forward-Looking Statements

This news release contains forward-looking statements, including references to goals, plans, strategies, objectives, projected costs or savings, anticipated future performance, results or events and other statements that are not strictly historical in nature.  These statements are based on management's current expectations, forecasts and assumptions.  This means they involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied here.  These risks and uncertainties include, but are not limited to the following: Essendant's reliance on key customers, and the risks inherent in continuing or increased customer concentration and consolidations; end-user demand for products in the office, technology, and furniture product categories may continue to decline; the impact of Essendant's repositioning activities on Essendant's customers, suppliers, and operations; Essendant's reliance on independent resellers for a significant percentage of its net sales and, therefore, the importance of the continued independence, viability and success of these resellers; prevailing economic conditions and changes affecting the business products industry and the general economy; Essendant's ability to maintain its existing information technology systems and to successfully procure, develop and implement new systems and services without business disruption or other unanticipated difficulties or costs; the impact of price transparency, customer consolidation, and changes in product sales mix on Essendant's margins; the impact on the company's reputation and relationships of a breach of the company's information technology systems; the risks and expense associated with Essendant's obligations to maintain the security of private information provided by Essendant's customers; Essendant's reliance on supplier allowances and promotional incentives; the creditworthiness of Essendant's customers; continuing or increasing competitive activity and pricing pressures within existing or expanded product categories, including competition from product manufacturers who sell directly to Essendant's customers; the impact of supply chain disruptions or changes in key suppliers' distribution strategies; Essendant's ability to manage inventory in order to maximize sales and supplier allowances while minimizing excess and obsolete inventory; Essendant's success in effectively identifying, consummating and integrating acquisitions; the costs and risks related to compliance with laws, regulations and industry standards affecting Essendant's business; the availability of financing sources to meet Essendant's business needs; Essendant's reliance on key management personnel, both in day-to-day operations and in execution of new business initiatives; and the effects of hurricanes, acts of terrorism and other natural or man-made disruptions. 

Shareholders, potential investors and other readers are urged to consider these risks and uncertainties in evaluating forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. For additional information about risks and uncertainties that could materially affect Essendant's results, please see the company's Securities and Exchange Commission filings.  The forward-looking information in this news release is made as of this date only, and the company does not undertake to update any forward-looking statement.  Investors are advised to consult any further disclosure by Essendant regarding the matters discussed in this news release in its filings with the Securities and Exchange Commission and in other written statements it makes from time to time.  It is not possible to anticipate or foresee all risks and uncertainties, and investors should not consider any list of risks and uncertainties to be exhaustive or complete.

Company Overview

Essendant Inc. is a leading supplier of workplace essentials, with 2015 net sales of $5.4 billion. The company stocks a broad assortment of over 180,000 items, including technology products, traditional office products, janitorial and breakroom supplies, office furniture, industrial supplies, and automotive aftermarket tools. The Company's network of 74 distribution centers enables the Company to ship most products overnight to more than ninety percent of the U.S. For more information, visit www.essendant.com.   

Essendant common stock trades on the NASDAQ Global Select Market under the symbol ESND.

For Further Information Contact:
Kaveh Bakhtiari
investorrelations@essendant.com
(847) 627-2900

(1)

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




Note: All EPS numbers in this document are diluted unless stated otherwise.




-tables follow-

 

Essendant Inc. and Subsidiaries

Condensed Consolidated Statements of Income

 (in thousands, except per share data)



For the Three Months Ended


For the Years Ended


December 31,


December 31,


2015



2014 (Revised)*


2015



2014 (Revised)*

Net sales

$

1,297,327



$

1,333,082


$

5,363,046



$

5,327,205

Cost of goods sold


1,096,489




1,123,684



4,526,551




4,524,676

Gross profit


200,838




209,398



836,495




802,529

Operating expenses:














Warehousing, marketing and administrative expenses


162,773




157,135



675,913




595,673

Impairments of goodwill and intangible assets


115,825




9,034



129,338




9,034

Loss (gain) on disposition of business


1,461




(800)



1,461




(800)

Operating income (loss)


(79,221)




44,029



29,783




198,622

Interest expense, net


4,668




4,534



19,584




15,734

Income (loss) before income taxes


(83,889)




39,495



10,199




182,888

Income tax expense


11,947




17,425



54,541




70,773

Net income (loss)

$

(95,836)



$

22,070


$

(44,342)



$

112,115

     Net income (loss) per share - diluted

$

(2.61)



$

0.57


$

(1.18)



$

2.87

     Average number of common shares outstanding - diluted


36,665




38,806



37,457




39,130


* Revised in the third quarter of 2015 for the impact of the changes in accounting principle related to inventory accounting and debt transaction costs.

 

Essendant Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(dollars in thousands, except share data)




As of  December 31,


2015



2014 (Revised)*

ASSETS







Current assets:







Cash and cash equivalents

$

29,983



$

20,812

Accounts receivable, less allowance for doubtful accounts of $17,810 in 2015 and $19,725 in 2014


716,537




702,527

Inventories


922,162




906,430

Other current assets


27,310




30,713

Total current assets


1,695,992




1,660,482

Property, plant and equipment, at cost


133,751




138,217

Intangible assets, net


96,413




111,958

Goodwill


299,355




398,042

Other long-term assets


37,348




38,669

Total assets

$

2,262,859



$

2,347,368

LIABILITIES AND STOCKHOLDERS' EQUITY







Current liabilities:







Accounts payable

$

531,949



$

485,241

Accrued liabilities


177,472




185,535

Current maturities of long-term debt


51




851

Total current liabilities


709,472




671,627

Deferred income taxes


11,901




17,763

Long-term debt


716,264




709,917

Other long-term liabilities


101,488




104,394

Total liabilities


1,539,125




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

Additional paid-in capital


410,927




412,291

Treasury stock, at cost – 37,178,394 shares in 2015 and 35,719,041 shares in 2014


(1,100,867)




(1,042,501)

Retained earnings


1,463,821




1,529,224

Accumulated other comprehensive loss


(57,591)




(62,791)

Total stockholders' equity


723,734




843,667








 

Essendant Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)



Years Ended December 31,


2015


2014 (Revised)*

Cash Flows From Operating Activities:






Net income (loss)

$

(44,342)


$

112,115

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






Depreciation


33,532



32,381

Amortization of intangible assets


15,143



8,623

Share-based compensation


7,895



8,195

Loss (gain) on the disposition of property, plant and equipment


1,959



1,155

Amortization of capitalized financing costs


875



859

Excess tax benefits related to share-based compensation


(479)



(1,214)

Loss on disposition of business


-



8,234

Loss on sale of equity investment


33



-

Asset impairment charge


155,603



-

Deferred income taxes


(23,162)



(10,879)

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






(Increase) decrease in accounts receivable, net


(9,986)



(16,529)

(Increase) decrease  in inventory


(12,467)



(18,724)

(Increase) decrease in other assets


(5,313)



(2,898)

(Decrease) increase in accounts payable


57,416



(42,093)

Increase (decrease) in checks in-transit


(16,087)



1,368

Increase (decrease) in accrued liabilities


1,077



1,276

(Decrease) increase in other liabilities


1,037



(4,736)

Net cash provided by operating activities


162,734



77,133

Cash Flows From Investing Activities:






Capital expenditures


(28,325)



(24,994)

Proceeds from the disposition of property, plant and equipment


153



2,767

Proceeds from the disposition of a subsidiary


146



-

Acquisitions, net of cash acquired


(40,515)



(161,406)

Sale of Equity Investment


612



-

Net cash used in investing activities


(67,929)



(183,633)







Cash Flows From Financing Activities:






Net borrowings (repayments) under revolving credit facility


4,577



155,911

Borrowings under Receivables Securitization Program


-



9,300

Repayment of debt


-



(135,000)

Proceeds from the issuance of debt


-



150,000

Net (disbursements) proceeds from share-based compensation arrangements


(770)



(2,863)

Acquisition of treasury stock, at cost


(68,055)



(49,982)

Payment of cash dividends


(21,185)



(21,789)

Excess tax benefits related to share-based compensation


479



1,214

Payment of debt issuance costs


(36)



(823)

Net cash provided by (used in) financing activities


(84,990)



105,968

Effect of exchange rate changes on cash and cash equivalents


(644)



(982)

Net change in cash and cash equivalents


9,171



(1,514)

Cash and cash equivalents, beginning of period


20,812



22,326

Cash and cash equivalents, end of period

$

29,983


$

20,812







 

Essendant Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Measures

Adjusted Gross Profit, Operating Income, EBITDA, Net Income, and Diluted Earnings Per Share

(unaudited)

(in thousands, except per share data)



For the Three Months Ended December 31,


2015



2014

Gross profit

$

200,838



$

209,398

ORS Industrial inventory obsolescence reserve


4,887




-

Adjusted gross profit

$

205,725



$

209,398








Operating expenses

$

280,059



$

165,369

Impairment of ORS Industrial goodwill and intangible assets


(115,825)




-

Workforce reduction and facility closure charge


(12,080)




-

Intangible asset impairment charge and accelerated amortization related to rebranding


(495)




-

Loss on disposition of business and related impairment charges


-




(8,234)

Adjusted operating expenses

$

151,659



$

157,135








Operating income (loss)

$

(79,221)



$

44,029

Gross profit and operating expense items noted above


133,287




8,234

Adjusted operating income

$

54,066



$

52,263

Depreciation and amortization

$

10,561



$

10,087

Equity compensation


1,448




2,264

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

$

66,075



$

64,614








Net income (loss)

$

(95,836)



$

22,070

Gross profit and operating expense items noted above, net of tax


125,872




8,234

Adjusted net income

$

30,036



$

30,304








Diluted earnings per share(2)

$

(2.59)



$

0.57

Per share gross profit and operating expense items noted above


3.40




0.21

Adjusted diluted earnings per share

$

0.81



$

0.78


Note: Adjusted Gross Profit, Adjusted Operating Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share in the fourth quarter of 2015 exclude the effects of a $120.7 million write-down of industrial business, $0.5 million non-cash impairment of intangibles and accelerated amortization related to rebranding, and $12.1 million of workforce reduction and facility consolidation charges. The fourth quarter of 2014 excludes the effects of an $8.2 million loss on disposition of business and related impairment charges. Generally Accepted Accounting Principles require that the effects of these items be included in the Condensed Consolidated Statements of Income.  Management believes that excluding these items is an appropriate comparison of its ongoing operating results and to the results of the prior year. It is helpful to provide readers of its financial statements with a reconciliation of these items to its Condensed Consolidated Statements of Income reported in accordance with Generally Accepted Accounting Principles.  


(2)

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

 

Essendant Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Measures

Adjusted Gross Profit, Operating Income, EBITDA, Net Income, and Diluted Earnings Per Share

(unaudited)

(in thousands, except per share data)



For the Years Ended December 31,


2015



2014 (Revised)

Gross profit

$

836,495



$

802,529

ORS Industrial inventory obsolescence reserve


4,887




-

Adjusted gross profit


841,382




802,529








Operating expenses

$

806,712



$

603,907

Impairment of ORS Industrial goodwill and intangible assets


(115,825)




-

Workforce reduction and facility closure charge


(18,575)




-

Intangible asset impairment charge and accelerated amortization related to rebranding


(11,981)




-

Notes receivable impairment


(10,738)




-

Loss on disposition of business and related impairment charges


(16,999)




(8,234)

Adjusted operating expenses

$

632,594



$

595,673








Operating income

$

29,783



$

198,622

Gross profit and operating expense items noted above


179,005




8,234

Adjusted operating income

$

208,788



$

206,856

Depreciation and amortization

$

41,917



$

36,227

Equity compensation


7,895




8,195

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

$

258,600



$

251,278








Net income

$

(44,342)



$

112,115

Gross profit and operating expense items noted above, net of tax


160,727




8,234

Adjusted net income

$

116,385



$

120,349








Diluted earnings per share(2)

$

(1.17)



$

2.87

Per share gross profit and operating expense items noted above


4.25




0.21

Adjusted diluted earnings per share

$

3.08



$

3.08


Note: Adjusted Gross Profit, Adjusted Operating Expenses, Adjusted Operating Income, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share for the year ended December 31, 2015 exclude the effects of $120.7 million write-down of industrial business; a $18.6 million workforce reduction and facility consolidation charges; $12.0 million non-cash impairment of intangibles and accelerated amortization related to rebranding; $10.7 million notes receivable impairment charges; and $17.0 million loss and related expenses attributable to the sale of the Mexico business. The 2014 year excludes the effects of an $8.2 million loss on disposition of business and related impairment charges. Generally Accepted Accounting Principles require that the effects of these items be included in the Condensed Consolidated Statements of Income.  Management believes that excluding these items is an appropriate comparison of its ongoing operating results and to the results of the prior year. It is helpful to provide readers of its financial statements with a reconciliation of these items to its Condensed Consolidated Statements of Income reported in accordance with Generally Accepted Accounting Principles.

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SOURCE Essendant Inc.



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