Essendant Reports Third Quarter 2015 Financial Results

DEERFIELD, Ill., Oct. 20, 2015 /PRNewswire/ -- Essendant Inc. (NASDAQ: ESND), a leading supplier of workplace essentials, today announced financial results for the third quarter ended September 30, 2015.

Third Quarter Overview

• 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.

"In the third quarter we achieved solid financial performance, generating strong operating cash flows in the face of challenging market conditions," said Robert B. Aiken, Jr., president and chief executive officer of Essendant.  "Our team successfully executed actions we set out to achieve at the beginning of the year, including selling the Mexico business, transitioning the first two of our facilities to a common operating and IT platform, and making solid progress on our restructuring," continued Aiken.  "Going forward we will take more aggressive actions to expand earnings by driving profitable sales growth and reducing costs.  Among these efforts, we expect to implement additional cost reductions in the fourth quarter. Taken together, these actions will support our goal of achieving high single-digit EPS growth, beginning in 2016." 

Third Quarter Performance

Third quarter 2015 sales decreased 2.0%. Excluding the impact of our acquisitions, sales were down 7.7%. The current quarter gross margin was $225.1 million, up from $216.7 million(2) in the third quarter of 2014.

• 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.

Nine-Month Performance

Sales in the first nine months of 2015 increased 1.8%, driven by acquisitions. The current period gross margin was $635.7 million, up from $593.1 million(2) in the first nine months 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.

Cash Flow, Debt Trends and Share Repurchases

Net cash provided by operating activities for the nine-month period ended September 30, 2015 was $183.7 million, compared with $93.7 million for the same period last year. The 96% improvement over the prior year was driven by market factors and the company's commitment to effectively manage its working capital. Cash flow used in investing activities totaled $57.8 million in 2015, compared with $41.3 million in the same period last year. 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 September 30, 2015, the company had total debt outstanding of $666.2, million compared with $542.7 million as of September 30, 2014.  Debt-to-total capitalization increased to 44.5% at September 30, 2015 from 39.0% at September 30, 2014 due to acquisitions.  In the first nine months of 2015, the company paid $55.7 million to repurchase approximately 1.5 million shares and paid cash dividends of $16.0 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. The costs and benefits of these actions are expected to be as follows:

• 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:
  • 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;
  • Loss and related expenses, totaling $17.0 million, attributed to the sale of the Mexico business, which closed in September 2015;
  • 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:
  • Savings of $6.0 million in 2015 and $10.0 million annually beginning in 2016 from the workforce reductions and facility consolidations;
  • $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.

Fourth Quarter Cost Initiative

The company remains committed to its strategy and has executed well on its priorities. However, additional steps must be taken to reduce cost through management de-layering in order to achieve broader functional alignment of the organization, and to counteract headwinds in the industrial and energy markets. In the fourth quarter the company plans to:

• 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.

The company views these actions to be critical to driving its goal of achieving high-single digit EPS growth beginning in 2016.

Conference Call

Essendant will hold a conference call followed by a question and answer session on Wednesday, October 21, 2015, at 7:30 a.m. CDT, to discuss third 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 "10071386."  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 "Q3-15 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 79 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:[email protected] (847) 627-7000

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Note: Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income and Adjusted Earnings Per Share in the third quarter of 2015 exclude the effects of a $0.2 million facility consolidation charge, $0.5 million accelerated amortization related to rebranding, $10.7 million impairment of certain notes receivable relating to the company's prior year sale of its software service subsidiary, and $2.1 million attributable to a sale of a business and the related costs to sell. 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.

 

Note: Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income and Adjusted Earnings Per Share in the first nine months of 2015 exclude the effects of a $6.5 million workforce reduction and facility consolidation, $11.5 million intangible asset charge and accelerated amortization related to rebranding, $10.7 million impairment of certain notes receivable relating to the company's prior year sale of its software service subsidiary, and $17.0 million attributable to a sale of a business and the related costs to sell. 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.