Essendant Reports Second Quarter 2015 Financial Results

Jul 22, 2015, 16:30 ET from Essendant Inc.

DEERFIELD, Ill., July 22, 2015 /PRNewswire/ -- Essendant Inc. (NASDAQ: ESND), a leading supplier of workplace essentials, today announced financial results for the second quarter ended June 30, 2015.

Second Quarter Overview

  • Sales increased 1.6% to $1.34 billion when compared to the second quarter of last year.  
  • Gross margin was $212.1 million, or 15.8 percent of sales, up from 15.1 percent of sales in the prior year quarter.
  • Operating expenses were $158.2 million, including $1.7 million related to the previously announced repositioning actions. Adjusted operating expenses(1) were $156.4 million, or 11.7 percent of sales, up from $142.2 million or 10.8 percent of sales in the prior year quarter.
  • Net income per share was $0.79 in the current quarter, including $0.03 per share of expense related to repositioning actions. Adjusted earnings per share were $0.82(1) compared to earnings per share of $0.85 in the prior year quarter.
  • Cash flow provided by operating activities was $120.8 million in the first six months of 2015, up from $78.9 million in the prior year.

"In the second quarter we officially became Essendant, marking another major milestone in our journey to become the fastest and most convenient solution for workplace essentials," said Robert B. Aiken, Jr., president and chief executive officer.  "We continue to make solid progress executing our strategy as we strengthen the core business with a common operating platform, grow our e-commerce relationships and offerings, and expand our automotive aftermarket business with the recently announced Nestor Sales LLC acquisition. Our results reflect solid execution, particularly in light of increasing headwinds in the industrial and energy sectors." 

(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

Second Quarter Performance

Second quarter 2015 sales increased 1.6%, driven by prior year acquisitions. The current quarter gross margin was $212.1 million, up from $199.5 million in the second quarter of 2014.

  • Sales of industrial supplies increased 48.1 percent to $215.0 million, including $86.7 million of incremental sales from the CPO and MEDCO acquisitions made in 2014. Weakness in the energy and industrial sectors drove a $16.9 million sales decline in the core industrial business. Janitorial and breakroom supplies sales increased 3.1 percent to $368.3 million from $357.2 million. Total office products sales were down 7.3 percent to $722.0 million from $778.5 million as the company exited certain low margin business.
  • The gross margin rate of 15.8 percent included a favorable 29 basis points from acquisitions. Excluding acquisitions, gross margin rate improved driven by a favorable product mix. Gross margin was $212.1 million, an increase of $12.6 million from the prior year quarter, with an incremental $17.4 million from acquisitions.
  • Operating expenses were $158.2 million, including $1.7 million related to the previously announced repositioning actions. Adjusted operating expenses(1) were $156.4 million or 11.7 percent of sales, compared to $142.2 million, or 10.8 percent of sales, in the prior year quarter. The $14.2 million increase included $12.8 million of incremental expenses from acquisitions.
  • Operating income was $53.9 million, including $1.7 million of expense related to the previously announced repositioning activities. Adjusted operating income(1) was $55.6 million, or 4.1 percent of sales, compared to $57.3 million, or 4.3 percent of sales, in the prior year quarter.
  • Net income was $30.3 million, including $0.9 million of after-tax costs related to repositioning actions. Earnings per share were $0.79, including $0.03 of expense related to repositioning actions.  Adjusted net income(1) was $31.2 million compared to $33.3 million in the prior year quarter. Adjusted earnings per share were $0.82(1), compared to $0.85 in the second quarter of 2014.

Six-Month Performance

First half 2015 sales increased 3.9%, driven by prior year acquisitions. The current period gross margin was $416.5 million, up from $386.5 million in the first half of 2014.

  • Sales of industrial supplies increased 52.4 percent to $425.3 million, including $176.8 million of incremental sales from the CPO and MEDCO acquisitions made in 2014. Weakness in the energy and industrial sectors drove a $30.5 million sales decline in the core industrial business. Janitorial and breakroom supplies sales increased 5.6 percent to $725.3 million from $686.7 million. Total office products sales were down 5.4 percent to $1,450.0 million from $1,532.9 million as the company exited certain low margin business.
  • The gross margin rate of 15.6 percent included a favorable 37 basis points from acquisitions. Excluding acquisitions, gross margin rate improved due to a favorable product mix. Gross margin was $416.5 million, an increase of $30.0 million from the first half of last year, with an incremental $36.7 million from acquisitions.
  • Operating expenses were $356.5 million, including $32.2 million related to the previously announced repositioning actions. Adjusted operating expenses(1) were $324.3 million or 12.1 percent of sales, compared to $291.0 million, or 11.3 percent of sales, in the prior year period. The $33.3 million increase included $30.3 million of incremental expenses from acquisitions.
  • Operating income was $60.0 million, including $32.2 million of expense related to the previously announced repositioning activities. Adjusted operating income(1) was $92.2 million, or 3.4 percent of sales, compared to $95.5 million, or 3.7 percent of sales, in the prior year period.
  • Net income was $26.3 million, including $24.8 million of after-tax costs related to repositioning actions. Earnings per share for the first half of 2015 were $0.69, including $0.64 of expense related to repositioning actions. Adjusted net income(1) was $51.1 million compared to $55.2 million in the prior year period. Adjusted earnings per share were $1.33(1) , compared to $1.40 earnings per share in the first half of 2014.

Cash Flow, Debt Trends and Share Repurchases

Net cash provided by operating activities for the six-month period ended June 30, 2015 was $120.8 million, compared with $78.9 million for the same period last year. The 53 percent improvement over the prior year demonstrates the company's commitment to effectively manage its working capital. Cash flow used in investing activities totaled $12.4 million in 2015, compared with $35.6 million in the same period last year which included $26.2 million for acquisitions. The company estimates the 2015 full-year total capital expenditures to be $30 million to $35 million, excluding acquisitions.

The company has approximately $1.0 billion of total committed debt capacity.  As of June 30, 2015, the company had total debt outstanding of $661.2 million compared with $543.5 million as of June 30, 2014.  Debt-to-total capitalization increased to 44.0 percent at June 30, 2015 from 39.2 percent at June 30, 2014 due to the acquisition of MEDCO in the fourth quarter of 2014.  In the first half of 2015, the company paid $31.2 million to acquire approximately 0.8 million shares and paid cash dividends of $10.7 million to common shareholders. 

Update on Previously Announced Repositioning Actions

As previously announced in February, the company is taking decisive actions to reposition the business, provide enhanced customer service, and create sustained long-term success. These actions are as follows:

  • During 2015 the company expects to invest an incremental $13.0 million to move to a common operating and information technology platform for the office products and janitorial and breakroom products that will simplify the customer experience and deliver operating cost savings. In the first half of 2015 the company invested $2.4 million.  Total cost savings from this initiative are expected to be $5.0 to $10.0 million beginning in the second half of 2016, and $15.0 to $20.0 million on an annual basis thereafter.
  • In the first half of 2015 the company recorded the following pre-tax charges:
    • Workforce reductions and facility consolidations of $6.3 million. Additional facility actions will occur later in 2015 for a full year pre-tax charge of approximately $9.0 million. The company expects these actions to drive savings of $6.0 million in 2015 and $10.0 million annually, beginning in 2016;
    • Non-cash charges of $14.0 million and a $0.9 million charge related to listing a non-strategic business for sale. Additional cash and non-cash charges related to this sale may occur during 2015 as this transaction is completed;
    • Non-cash impairment of intangibles and accelerated amortization related to rebranding efforts totaling $11.0 million.  The company expects a total charge of $12.0 million for the full year.

Conference Call

Essendant will hold a conference call followed by a question and answer session on Thursday, July 23, 2015, at 7:30 a.m. CDT, to discuss second 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 "10067778."  To listen to the webcast, participants should visit the Investors section of the company's website (link: http://investors.essendant.com), and click on the "Q2-15 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 Investors section of Essendant's 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: end-user demand for products in the office, technology, and furniture product categories may continue to decline; Essendant's reliance on key customers, and the risks inherent in continuing or increased customer concentration and consolidations; prevailing economic conditions and changes affecting the business products industry and the general economy; Essendant's ability to effectively manage its operations and to implement growth, cost-reduction and margin-enhancement initiatives; the impact of Essendant's repositioning, restructuring and rebranding activities on Essendant's customers, suppliers, and operations; Essendant's reliance on supplier allowances and promotional incentives; 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; 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 maintain its existing information technology systems and the systems and e-commerce services that it provides to customers, and to successfully procure, develop and implement new systems and services without business disruption or other unanticipated difficulties or costs; the creditworthiness of Essendant's customers; 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 risks and expense associated with Essendant's obligations to maintain the security of private information provided by Essendant's customers; 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 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 2014 net sales of $5.3 billion. The company stocks a broad assortment of over 160,000 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. and major cities in Mexico and Canada. 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:

For Investor Inquiries: investorrelations@essendant.com (847) 627-7000

For Media Inquiries: Diane Hund (dhund@essendant.com) (847) 627-2046

-tables follow-

 

Essendant Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

For the Three Months Ended

For the Six Months Ended

June 30,

June 30,

2015

2014

2015

2014

Net sales

$

1,341,799

$

1,320,037

$

2,674,174

$

2,574,176

Cost of goods sold

1,129,737

1,120,577

2,257,662

2,187,633

Gross profit

212,062

199,460

416,512

386,543

Operating expenses:

    Warehousing, marketing and administrative expenses

158,159

142,186

356,531

291,035

Operating income

53,903

57,274

59,981

95,508

Interest expense, net

4,778

3,833

9,617

7,207

Income before income taxes

49,125

53,441

50,364

88,301

Income tax expense

18,864

20,110

24,095

33,113

Net income

$

30,261

$

33,331

$

26,269

$

55,188

Net income per share - basic:

$

0.80

$

0.86

$

0.69

$

1.41

    Average number of common shares outstanding - basic

37,765

38,816

37,939

39,004

Net income per share - diluted:

$

0.79

$

0.85

$

0.69

$

1.40

    Average number of common shares outstanding - diluted

38,106

39,226

38,317

39,435

Dividends declared per share

$

0.14

$

0.14

$

0.28

$

0.28

 

Essendant Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(dollars in thousands, except share data)

(Unaudited)

(Audited)

As of  June 30,

As of

2015

2014

December 31, 2014

ASSETS

Current assets:

Cash and cash equivalents

$

29,935

$

31,495

$

20,812

Accounts receivable, less allowance for doubtful accounts of $18,157 in 2015 and $19,725 in 2014

667,062

662,772

702,527

Inventories

875,465

804,395

926,809

Assets related to held for sale disposal group

7,880

-

-

Other current assets

29,595

31,436

30,042

Total current assets

1,609,937

1,530,098

1,680,190

Property, plant and equipment, net

130,216

135,529

138,217

Goodwill

402,545

382,950

398,042

Intangible assets, net

88,622

75,210

111,958

Other long-term assets

48,439

26,059

41,810

Total assets

$

2,279,759

$

2,149,846

$

2,370,217

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

465,953

$

486,621

$

485,241

Accrued liabilities

190,257

187,414

192,792

Liabilities related to held for sale disposal group

7,169

-

-

Current maturities of long-term debt

28

1,098

851

Total current liabilities

663,407

675,133

678,884

Deferred income taxes

12,362

27,539

17,763

Long-term debt

661,143

542,410

713,058

Other long-term liabilities

102,577

63,082

104,394

Total liabilities

1,439,489

1,308,164

1,514,099

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

411,504

412,839

412,291

Treasury stock, at cost – 36,349,375 shares in 2015 and 35,719,041 shares in 2014

(1,070,183)

(1,027,575)

(1,042,501)

Retained earnings

1,557,281

1,488,469

1,541,675

Accumulated other comprehensive loss

(65,776)

(39,495)

(62,791)

Total stockholders' equity

840,270

841,682

856,118

Total liabilities and stockholders' equity

$

2,279,759

$

2,149,846

$

2,370,217

 

Essendant Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

For the Six Months Ended

June 30,

2015

2014

Cash Flows From Operating Activities:

Net income

$

26,269

$

55,188

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

Depreciation and amortization

24,198

19,430

Share-based compensation

3,268

4,294

Loss on the disposition of property, plant and equipment

57

96

Amortization of capitalized financing costs

451

460

Excess tax benefits related to share-based compensation

(433)

(638)

Asset impairment charges

24,034

-

Deferred income taxes

(8,365)

(5,317)

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

Decrease (increase) in accounts receivable, net

28,330

(17,650)

Decrease in inventory

44,984

39,290

Increase in other assets

(10,173)

(2,765)

Increase in accounts payable

3,152

21,961

Decrease in checks in-transit

(19,240)

(28,545)

Decrease (increase) in accrued liabilities

4,794

(1,106)

Decrease in other liabilities

(478)

(5,809)

Net cash provided by operating activities

120,848

78,889

Cash Flows From Investing Activities:

Capital expenditures

(11,931)

(10,335)

Proceeds from the disposition of property, plant and equipment

18

869

Acquisition, net of cash acquired

(532)

(26,161)

Net cash used in investing activities

(12,445)

(35,627)

Cash Flows From Financing Activities:

Net repayments under revolving credit facility

(52,738)

(14,489)

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

(759)

(1,788)

Acquisition of treasury stock, at cost

(31,227)

(31,152)

Payment of cash dividends

(10,699)

(10,991)

Excess tax benefits related to share-based compensation

433

638

Payment of debt issuance costs

(36)

(615)

Net cash used in financing activities

(95,026)

(34,097)

Effect of exchange rate changes on cash and cash equivalents

(135)

4

Transfer of cash to held for sale

(4,119)

-

Net change in cash and cash equivalents

9,123

9,169

Cash and cash equivalents, beginning of period

20,812

22,326

Cash and cash equivalents, end of period

$

29,935

$

31,495

 

Essendant Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Income, Net Income, and Diluted Earnings Per Share

(unaudited)

(in thousands, except per share data)

For the Three Months Ended June 30,

2015

2014

% to

% to

Amount

Net Sales

Amount

Net Sales

Net Sales

$

1,341,799

100.0

%

$

1,320,037

100.0

%

Gross profit

$

212,062

15.8

%

$

199,460

15.1

%

Operating expenses

$

158,159

11.8

%

$

142,186

10.8

%

Workforce reduction and facility consolidation charge

138

0.0

%

-

-

Rebranding - intangible asset amortization

(512)

0.0

%

-

-

Asset held for sale related costs

(1,361)

(0.1)

%

-

-

Adjusted operating expenses

$

156,424

11.7

%

$

142,186

10.8

%

Operating income

$

53,903

4.0

%

$

57,274

4.3

%

Operating expense items noted above

1,735

0.1

%

-

-

Adjusted operating income

$

55,638

4.1

%

$

57,274

4.3

%

Net income

$

30,261

$

33,331

Operating expense items noted above, net of tax

942

-

Adjusted net income

$

31,203

$

33,331

Diluted earnings per share

$

0.79

$

0.85

Per share operating expense items noted above

0.03

-

Adjusted diluted earnings per share

$

0.82

$

0.85

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

(3.5%)

Weighted average number of common shares - diluted

38,106

39,226

 

Note: Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income and Adjusted Earnings Per Share in the second quarter of 2015 exclude the effects of a $0.1 million partial reversal of the first quarter facility consolidation charge, $0.5 million accelerated amortization related to rebranding, and $1.4 million related to listing a non-strategic business for sale. 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.

Essendant Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Measures

Adjusted Operating Income, Net Income, and Diluted Earnings Per Share

(unaudited)

(in thousands, except per share data)

For the Six Months Ended June 30,

2015

2014

% to

% to

Amount

Net Sales

Amount

Net Sales

Net Sales

$

2,674,174

100.0

%

$

2,574,176

100.0

%

Gross profit

$

416,512

15.6

%

$

386,543

15.0

%

Operating expenses

$

356,531

13.3

%

$

291,035

11.3

%

Workforce reduction and facility consolidation charge

(6,295)

(0.2)

%

-

-

Rebranding - intangible asset impairment and amortization

(10,975)

(0.4)

%

-

-

Asset held for sale impairment and related costs

(14,927)

(0.6)

%

-

-

Adjusted operating expenses

$

324,334

12.1

%

$

291,035

11.3

%

Operating income

$

59,981

2.2

%

$

95,508

3.7

%

Operating expense items noted above

32,197

1.2

%

-

-

Adjusted operating income

$

92,178

3.4

%

$

95,508

3.7

%

Net income

$

26,269

$

55,188

Operating expense items noted above, net of tax

24,837

-

Adjusted net income

$

51,106

$

55,188

Diluted earnings per share

$

0.69

$

1.40

Per share operating expense items noted above

0.64

-

Adjusted diluted earnings per share

$

1.33

$

1.40

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

(5.0%)

Weighted average number of common shares - diluted

38,317

39,435

 

Note: Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income and Adjusted Earnings Per Share in the first half of 2015 exclude the effects of a $6.3 million workforce reduction and facility consolidation, $11.0 million intangible asset charge and accelerated amortization related to rebranding, and $14.9 million related to listing a non-strategic business for sale. 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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