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 distributor of workplace essentials.
The accompanying Condensed Consolidated Financial Statements are unaudited. The Condensed Consolidated Balance Sheet as of December 31, 2015, was derived from the December 31, 2015 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, 2015 (the “2015 Form 10-K”) for further information.
In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Essendant at September 30, 2016 and the results of operations and cash flows for the nine months ended September 30, 2016 and 2015. The results of operations for the three and nine months ended September 30, 2016 should not necessarily be taken as indicative of the results of operations that may be expected for the entire year.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers,
that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers,
which deferred the effective date of ASU No. 2014-09. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
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.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
. Under the new guidance, when awards vest or are settled, companies are required to record excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement instead of in additional paid-in capital (APIC). This guidance will be applied prospectively. Furthermore, companies will present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, which companies can elect to apply retrospectively or prospectively. Under the new guidance, companies will elect whether to account for forfeitures of share-based payments by recognizing forfeitures of awards as they occur or estimate the number of awards expected to be forfeited, as is currently required. This guidance will be applied using a modified retrospective transition method, with a cumulative adjustment to retained earnings. The standard will be effective for annual periods beginning after December 15, 2016, 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.
7
Inventory
Approximately 98.4% of total inventory as of September 30, 2016 and December 31, 2015, respectively, has been valued under the 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 FIFO cost or market, inventory values would have been $147.2 million and $147.8 million higher than reported as of September 30, 2016 and December 31, 2015, respectively.
The change in the LIFO reserve in the third quarter of 2016 included a LIFO liquidation relating to decrements in five of the Company’s thirteen LIFO pools. These decrements resulted in liquidation of LIFO inventory quantities carried at lower costs in prior years as compared with the cost of current year purchases. This liquidation resulted in LIFO income of $2.3 million which was partially offset by LIFO expense of $2.1 million related to current inflation for an overall net decrease in cost of sales of $0.2 million for the three months ended September 30, 2016. For the three months ended September 30, 2015, the change in the method of inventory costing resulted in LIFO income of $3.5 million which was partially offset by LIFO expense of $0.8 million related to inflation for an overall net decrease in cost of sales of $2.7 million. For the nine months ended September 30, 2016, the LIFO income of $2.3 million related to the liquidation was more than offset by LIFO expense of $3.2 million related to current inflation for an overall net increase in cost of sales of $0.9 million.
2. Acquisitions
Nestor Sales LLC
On July 31, 2015, Essendant Co. completed the acquisition of 100% of the capital stock of Nestor Sales LLC (“Nestor”), a leading wholesaler and distributor of tools, equipment and supplies to the transportation industry. This acquisition accelerates the Company’s growth in the automotive aftermarket, complements the Company’s existing industrial offerings while providing access to new customer segments.
The purchase price was $41.8 million. This acquisition was funded through a combination of cash on hand and cash available under the Company’s revolving credit facility. Purchase accounting for this transaction was completed as of June 30, 2016.
At September 30, 2016, the allocation of the purchase price was as follows (amounts in thousands):
Purchase price, net of cash acquired
|
$
|
39,983
|
|
|
|
|
|
Accounts receivable
|
|
9,230
|
|
Inventories
|
|
12,067
|
|
Other current assets
|
|
339
|
|
Property, plant and equipment, net
|
|
1,251
|
|
Other assets
|
|
752
|
|
Intangible assets
|
|
16,930
|
|
Total assets acquired
|
|
40,569
|
|
|
|
|
|
Accounts payable
|
|
4,992
|
|
Accrued liabilities
|
|
1,943
|
|
Deferred income taxes
|
|
3,287
|
|
Other long-term liabilities
|
|
76
|
|
Total liabilities assumed
|
|
10,298
|
|
Goodwill
|
$
|
9,712
|
|
|
|
|
|
The purchased identifiable intangible assets were as follows (amounts in thousands):
|
Total
|
|
|
Estimated Life
|
Customer relationships
|
$
|
15,570
|
|
|
13 years
|
Trademark
|
|
1,360
|
|
|
2-15 years
|
Total
|
$
|
16,930
|
|
|
|
8
3. Sale-Leaseback
On September 23, 2016, the Company entered into an agreement for the sale and leaseback of its facility in City of Industry, CA. The agreement provided for the sale of the facility for a purchase price of $31.7 million and the subsequent leaseback for a two year period. The lease is classified as an operating lease. As a result, the Company recorded a gain of $20.5 million in “warehousing, marketing and administrative expenses.” A deferred gain of approximately $2.8 million that will be amortized into income over the term of the lease was also recorded. As of September 30, 2016, $1.4 million of the deferred gain is reflected in the accompanying Consolidated Balance Sheet under “other long-term liabilities”, with the remainder included as a component of “other current liabilities”. The cash proceeds from the sale were used primarily to pay down long-term debt.
4. Share-Based Compensation
As of September 30, 2016, the Company has two active equity compensation plans. Under the 2015 Long-Term Incentive Plan (as amended and restated), award instruments include, but are not limited to, stock options, restricted stock awards, restricted stock units (“RSUs”), and performance-based awards. Associates and non-employee directors of the Company are eligible to become participants in the plan. The Nonemployee Directors’ Deferred Stock Compensation Plan allows non-employee directors to elect to defer receipt of all or a portion of their annual retainer in deferred stock units.
The Company granted 526,697
shares of restricted stock and 290,725 RSUs during the first nine months of 2016, compared to 440,948 shares of restricted stock and 162,092 RSUs during the first nine months of 2015.
5. Severance and Restructuring Charges
Commencing in the first quarter of 2015, the Company began certain restructuring actions which included workforce reductions and facility closures. Commencing in the fourth quarter of 2015, the Company executed actions to reduce costs through management delayering in order to achieve broader functional alignment of the organization. The charges associated with these actions were included in “warehousing, marketing and administrative expenses.”
The expenses, cash flows, and accrued liabilities associated with the restructuring actions described above are noted in the following table (in thousands):
|
Expenses
|
|
|
Cash flow
|
|
|
Accrued Liabilities
|
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
As of September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
First quarter 2015 Actions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction
|
$
|
(0.5
|
)
|
|
$
|
-
|
|
|
$
|
(0.5
|
)
|
|
$
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility closure
|
$
|
-
|
|
|
|
0.2
|
|
|
$
|
0.3
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
(0.5
|
)
|
|
|
0.2
|
|
|
$
|
(0.2
|
)
|
|
$
|
6.5
|
|
|
$
|
1.2
|
|
|
$
|
3.0
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter 2015 Action
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction
|
$
|
(0.7
|
)
|
|
N/A
|
|
|
$
|
(0.7
|
)
|
|
N/A
|
|
|
$
|
8.0
|
|
|
N/A
|
|
|
$
|
2.1
|
|
9
6. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are noted in the following table (in thousands):
Goodwill, balance as of December 31, 2015
|
$
|
299,355
|
|
Purchase accounting adjustments
|
|
(1,858
|
)
|
Currency translation adjustments
|
|
745
|
|
Goodwill, balance as of September 30, 2016
|
$
|
298,242
|
|
The following table summarizes the intangible assets of the Company by major class of intangible assets and the cost, accumulated amortization, net carrying amount, and weighted average life, if applicable (in thousands):
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
137,678
|
|
|
$
|
(59,545
|
)
|
|
$
|
78,133
|
|
|
16
|
|
$
|
137,938
|
|
|
$
|
(51,357
|
)
|
|
$
|
86,581
|
|
|
16
|
Non-compete agreements
|
|
4,651
|
|
|
|
(4,260
|
)
|
|
|
391
|
|
|
4
|
|
|
4,644
|
|
|
|
(4,260
|
)
|
|
|
384
|
|
|
4
|
Trademarks
|
|
13,725
|
|
|
|
(5,363
|
)
|
|
|
8,362
|
|
|
14
|
|
|
13,688
|
|
|
|
(4,240
|
)
|
|
|
9,448
|
|
|
14
|
Total
|
$
|
156,054
|
|
|
$
|
(69,168
|
)
|
|
$
|
86,886
|
|
|
|
|
$
|
156,270
|
|
|
$
|
(59,857
|
)
|
|
$
|
96,413
|
|
|
|
The following table summarizes the amortization expense to be incurred in 2016 through 2020 on intangible assets (in thousands):
Year
|
|
Amount
|
|
2016
|
|
$
|
12,242
|
|
2017
|
|
|
10,797
|
|
2018
|
|
|
8,054
|
|
2019
|
|
|
6,937
|
|
2020
|
|
|
6,934
|
|
7. Accumulated Other Comprehensive Income (Loss)
The change in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the period ended September 30, 2016 was as follows (amounts in thousands):
|
|
Foreign Currency Translation
|
|
|
Cash Flow Hedges
|
|
|
Defined Benefit Pension Plans
|
|
|
Total
|
|
AOCI, balance as of December 31, 2015
|
|
$
|
(9,866
|
)
|
|
$
|
146
|
|
|
$
|
(47,871
|
)
|
|
$
|
(57,591
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
2,441
|
|
|
|
(579
|
)
|
|
|
(3,946
|
)
|
|
|
(2,084
|
)
|
Settlement loss reclassified from AOCI
|
|
|
-
|
|
|
|
-
|
|
|
|
7,453
|
|
|
|
7,453
|
|
Amounts reclassified from AOCI
|
|
|
-
|
|
|
|
440
|
|
|
|
2,528
|
|
|
|
2,968
|
|
Net other comprehensive (loss) income
|
|
|
2,441
|
|
|
|
(139
|
)
|
|
|
6,035
|
|
|
|
8,337
|
|
AOCI, balance as of September 30, 2016
|
|
$
|
(7,425
|
)
|
|
$
|
7
|
|
|
$
|
(41,836
|
)
|
|
$
|
(49,254
|
)
|
10
The following table details the amounts reclassified out of AOCI into the income statement during the three and nine months ended September 30, 2016
(in thousan
ds):
|
|
Amount Reclassified From AOCI
|
|
|
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Affected Line Item In The Statement
|
Details About AOCI Components
|
|
2016
|
|
|
2016
|
|
|
Where Net Income is Presented
|
Realized and unrealized gains (losses) on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Gain on interest rate swap, before tax
|
|
$
|
249
|
|
|
$
|
789
|
|
|
Interest expense, net
|
Loss on foreign exchange hedges, before tax
|
|
|
-
|
|
|
|
(70
|
)
|
|
Cost of goods sold
|
|
|
|
(96
|
)
|
|
|
(279
|
)
|
|
Tax provision
|
|
|
$
|
153
|
|
|
$
|
440
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan items
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost and unrecognized loss
|
|
$
|
1,237
|
|
|
$
|
4,125
|
|
|
Warehousing, marketing and administrative expenses
|
Settlement loss
|
|
|
419
|
|
|
|
12,163
|
|
|
Defined benefit plan settlement loss
|
|
|
|
(641
|
)
|
|
|
(6,307
|
)
|
|
Tax provision
|
|
|
|
1,015
|
|
|
|
9,981
|
|
|
Net of tax
|
Total reclassifications for the period, net of tax
|
|
$
|
1,168
|
|
|
$
|
10,421
|
|
|
|
8. 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, restricted stock units and deferred stock units are considered dilutive securities. For the three-month period ending September 30, 2016 and 2015, 0.3 and 0.4 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. For the nine-month period ending September 30, 2016, 0.3 million shares of securities were excluded from the computation. For the nine-month period September 30, 2015, no shares of securities were excluded from the computation. 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 Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
36,742
|
|
|
$
|
27,667
|
|
|
$
|
66,205
|
|
|
$
|
51,492
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted average shares
|
|
36,578
|
|
|
|
37,300
|
|
|
|
36,560
|
|
|
|
37,724
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and restricted stock
|
|
360
|
|
|
|
308
|
|
|
|
336
|
|
|
|
385
|
|
Denominator for diluted earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares and the effect of dilutive securities
|
|
36,938
|
|
|
|
37,608
|
|
|
|
36,896
|
|
|
|
38,109
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
$
|
1.00
|
|
|
$
|
0.74
|
|
|
$
|
1.81
|
|
|
$
|
1.36
|
|
Net income per share - diluted
|
$
|
0.99
|
|
|
$
|
0.74
|
|
|
$
|
1.79
|
|
|
$
|
1.35
|
|
11
Common Stock Repurchases
As of September 30, 2016 , the Company had Board authorization to repurchase $68.2 million of common stock. During the three months ended September 30, 2016, the Company did not repurchase any shares of its common stock. For the same period in the prior year, the Company repurchased 744,081 shares at an aggregate cost of $25.9 million. During the nine months ended September 30, 2016 and 2015, the Company repurchased 241,270 and 1,525,222 shares of the Company’s common stock at an aggregate cost of $6.8 million and $57.4 million, respectively. Depending on market and business conditions and other factors, the Company may continue or suspend purchasing its common stock at any time without notice. Acquired shares are included in the issued shares of the Company and treasury stock, but are not included in average shares outstanding when calculating earnings per share data. During the first nine months of 2016 and 2015, the Company reissued 452,286 and 369,591 shares, respectively, of treasury stock to fulfill its obligations under its equity incentive plans.
9. Debt
ESND is a holding company and, as a result, its primary sources of funds are cash generated from operating activities of its direct operating subsidiary, ECO, and from borrowings by ECO. The 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program (each as defined in Note 11 of the 2015 Form 10-K) (each a “Lending Agreement”) contain restrictions on the use of cash transferred from ECO to ESND. Each of the Lending Agreements also prohibits the Company from exceeding a Leverage Ratio (as defined in the 2013 Credit Agreement and the 2013 Note Purchase Agreement). The maximum Leverage Ratio is 3.50 to 1.00 but increases to up to 4.00 to 1.00 for the first four fiscal quarters (the “Adjusted Leverage Period”) following certain acquisitions. Following the 2015 acquisition of Nestor Sales, an Adjusted Leverage period was applicable through the quarter ended June 30, 2016. On August 30, 2016, the Lending Agreements were amended to extend the Adjusted Leverage Period for two additional quarters. As a result, the maximum permitted Leverage Ratio remains at 4.00 to 1.00 but will revert to 3.50 to 1.00 for the quarter ending March 31, 2017.
Debt consisted of the following amounts (in millions):
|
As of
|
|
As of
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
2013 Credit Agreement
|
$
|
271.8
|
|
$
|
368.4
|
|
2013 Note Purchase Agreement
|
|
150.0
|
|
|
150.0
|
|
Receivables Securitization Program
|
|
200.0
|
|
|
200.0
|
|
Mortgage & Capital Lease
|
|
0.1
|
|
|
0.1
|
|
Transaction Costs
|
|
(1.7
|
)
|
|
(2.2
|
)
|
Total
|
$
|
620.2
|
|
$
|
716.3
|
|
As of September 30, 2016, 75.9% of the Company’s outstanding debt, excluding capital leases and transaction costs, was priced at variable interest rates based primarily on the applicable bank prime rate or London InterBank Offered Rate (“LIBOR”).
The Company had outstanding letters of credit of $11.2 million and $11.6 million under the 2013 Credit Agreement as of September 30, 2016 and December 31, 2015, respectively.
As of September 30, 2016, the applicable margin under the 2013 Credit Agreement was
2.00% for LIBOR-based loans and was 1.00% for Alternate Base Rate loans. Interest under the 2013 Note Purchase Agreement is payable semi-annually at a rate per annum equal to 3.75% (3.66% after the effect of terminating an interest rate swap), except the annual rate increases by 0.625% if the Company’s Leverage Ratio is between 3.50 to 1.00 and 3.75 to 1.00, and increases by 0.75% if the Leverage Ratio is between 3.75 to 1.00 and 4.00 to 1.00. The Company’s Leverage Ratio was 3.51 to 1.00 as of June 30, 2016 and was 2.77 to 1.00 as of September 30, 2016.
As of September 30, 2016 and December 31, 2015, $552.9 million and $448.6 million, respectively, of receivables had been sold to the Investors (as defined in Note 11 to the Company’s Consolidated Financial Statements in the 2015 Form 10-K). Essendant Receivables LLC had $200.0 million outstanding under the Receivables Securitization Program as of September 30, 2016 and December 31, 2015.
For additional information about the 2013 Credit Agreement, the 2013 Note Purchase Agreement, and the Receivables Securitization Program, see Note 11 of the 2015 Form 10-K.
12
10
. Pension and Post-Retirement Benefit Plans
The Company maintains pension plans covering union and certain non-union employees. For more information on the Company’s retirement plans, see Note 13 to the Company’s Consolidated Financial Statement in the 2015 Form 10-K. A summary of net periodic pension cost related to the Company’s pension plans for the three and nine months ended September 30, 2016 and 2015 was as follows (dollars in thousands):
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost - benefit earned during the period
|
$
|
318
|
|
|
$
|
321
|
|
|
$
|
952
|
|
|
$
|
1,121
|
|
Interest cost on projected benefit obligation
|
|
1,806
|
|
|
|
2,208
|
|
|
|
6,322
|
|
|
|
6,748
|
|
Expected return on plan assets
|
|
(2,219
|
)
|
|
|
(2,803
|
)
|
|
|
(7,484
|
)
|
|
|
(8,413
|
)
|
Amortization of prior service cost
|
|
74
|
|
|
|
72
|
|
|
|
222
|
|
|
|
222
|
|
Amortization of actuarial loss
|
|
1,163
|
|
|
|
1,501
|
|
|
|
3,903
|
|
|
|
4,401
|
|
Settlement loss
|
|
419
|
|
|
|
-
|
|
|
|
12,163
|
|
|
|
-
|
|
Net periodic pension cost
|
$
|
1,561
|
|
|
$
|
1,299
|
|
|
$
|
16,078
|
|
|
$
|
4,079
|
|
The Company made cash contributions of $10.0 million and $2.0 million to its pension plans during the nine months ended September 30, 2016 and 2015, respectively. Additional contributions, if any, for 2016 have not yet been determined. As of September 30, 2016 and December 31, 2015, respectively, the Company had accrued $44.7 million and $48.4 million of pension liability within “Other long-term liabilities” on the Condensed Consolidated Balance Sheets.
During 2016, the Company has taken several actions to mitigate the interest rate, mortality and investment risks of the Essendant Pension Plan. These actions include
a limited-time voluntary lump-sum pension offering to eligible, terminated, vested plan participants
that was completed during the second quarter.
As a result of the lump sum offer, a settlement and remeasurement of the Essendant Pension Plan was performed. The remeasurement and activity in the first nine months of 2016 had no cash impact to the Company since the payments were made by the Essendant Pension Trust, and resulted in a $1.5 million improvement to the net funded status of the plan, therefore reducing other long-term liabilities. However, the settlement caused a loss of $12.2 million, which was partially offset by the $8.4 million reduction in Accumulated Other Comprehensive Income related to the unrecognized actuarial loss, for a net impact on shareholders’ equity of $3.8 million as of September 30, 2016 when compared to December 31, 2015. This offer also reduces future pension expense recognized by the Company and volatility related to future obligations of the plan.
Defined Contribution Plan
The Company has defined contribution plans covering certain salaried associates and non-union hourly paid associates (the “Plan”). The Plan permits associates to defer a portion of their pre-tax and after-tax salary as contributions to the Plan. The Plan also provides for Company-funded discretionary contributions as well as matching associates’ salary deferral contributions, at the discretion of the Board of Directors. The Company recorded expense of $1.8 million and $5.5 million, respectively, for the Company match of employee contributions to the Plan for the three and nine months ended September 30, 2016. During the same periods last year, the Company recorded expense of $1.5 million and $4.4 million to match employee contributions.
13
11. Fair Value Measurements
The Company measures certain financial assets and liabilities, including interest rate swap and foreign currency derivatives, at fair value on a recurring basis, based on market rates of the Company’s positions and other observable interest rates. The fair value of the interest rate swaps is determined by using quoted market forward rates (level 2 inputs) and reflects the present value of the amount the Company would pay for contracts involving the same notional amount and maturity date. The fair value of the foreign currency cash flow hedge is determined by using quoted market spot rates (level 2 inputs).
Accounting guidance on fair value establishes a hierarchy for those instruments measured at fair value which distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
|
•
|
Level 1—Quoted market prices in active markets for identical assets or liabilities;
|
|
•
|
Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable; and
|
|
•
|
Level 3—Unobservable inputs developed using estimates and assumptions developed by the Company which reflect those that a market participant would use.
|
Determining which level to apply to an asset or liability requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 (in thousands):
|
Fair Value Measurements as of September 30, 2016
|
|
|
|
|
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets or
Liabilities
|
|
|
Significant Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange hedges
|
$
|
95
|
|
|
$
|
-
|
|
|
$
|
95
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
501
|
|
|
$
|
-
|
|
|
$
|
501
|
|
|
$
|
-
|
|
Foreign exchange hedges
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
$
|
531
|
|
|
$
|
-
|
|
|
$
|
531
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2015
|
|
|
|
|
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets or
Liabilities
|
|
|
Significant Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange hedges
|
$
|
91
|
|
|
$
|
-
|
|
|
$
|
91
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
469
|
|
|
$
|
-
|
|
|
$
|
469
|
|
|
$
|
-
|
|
The carrying amount of accounts receivable at September 30, 2016, including $552.9 million of receivables sold under the Receivables Securitization Program, approximates fair value because of the short-term nature of this item.
No assets or liabilities were measured at fair value on a nonrecurring basis.
12. Other Assets and Liabilities
Receivables related to supplier allowances totaling $93.4 million and $111.0 million were included in “Accounts receivable” in the Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015, respectively.
Accrued customer rebates of $64.3 million and $63.6 million as of September 30, 2016 and December 31, 2015, respectively, were included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.
14
13. Income Taxes
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items.
For the three and nine months ended September 30, 2016, the Company recorded income tax expense of $17.1 million and $34.9 million on pre-tax income of $53.8 million and $101.1 million, for an effective tax rate of 31.8% and 34.5%, respectively. For the three and nine months ended September 30, 2015, the Company recorded income tax expense of $20.0 million and $42.6 million on pre-tax income of $47.7 million and $94.1 million, for an effective tax rate of 42.0% and 45.3%, respectively.
The Company’s U.S. statutory rate is 35.0%. The most significant factor impacting the effective tax rate for the three and nine months ended September 30, 2016 was the discrete tax impact of the payment of a dividend from a foreign subsidiary. The most significant factors impacting the effective tax rate for the three and nine months ended September 30, 2015 were the discrete tax impacts of the impairment charges and the establishment of a valuation allowance on a capital loss asset for financial reporting purposes related to selling a non-strategic business in the third quarter.
14. Legal Matters
The Company has been named as a defendant in two lawsuits alleging that the Company sent unsolicited fax advertisements to the named plaintiffs, as well as other persons and entities, in violation of the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 ("TCPA"). One lawsuit was initially filed in the United States District Court for the Central District of California on May 1, 2015 and has been dismissed without prejudice and refiled in the United States District Court for the Northern District of Illinois. The other lawsuit was filed in the United States District Court for the Northern District of Illinois on January 14, 2016. In both lawsuits the plaintiffs filed a motion asking the Court to certify a class of plaintiffs comprised of persons and entities who allegedly received fax advertisements from the Company. Under the TCPA, recipients of unsolicited fax advertisements can seek damages of $500 per fax for inadvertent violations and up to $1,500 per fax for knowing and willful violations. Other reported TCPA lawsuits have resulted in a broad range of outcomes, with each case being dependent on its own unique set of facts and circumstances. In each lawsuit, the Company is vigorously contesting class certification and denies that any violations occurred. Litigation of this kind, however, is likely to lead to settlement negotiations, including negotiations prompted by pre-trial civil court procedures. Regardless of whether the lawsuits are resolved at trial or through settlement, the Company believes that a loss associated with resolution of pending claims is probable. However, the amount of any such loss, which could be material, cannot be reasonably estimated because the Company is continuing to evaluate its defenses based on its internal review and investigation of prior events, new information and future circumstances.
The Company is also involved in other legal proceedings arising in the ordinary course of or incidental to its business. The Company has established reserves, which are not material, for potential losses that are probable and reasonably estimable that may result from those proceedings. In many cases, however, it is difficult to determine whether a loss is probable or even possible or to estimate the amount or range of potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated. The Company believes that such ordinary course legal proceedings will be resolved with no material adverse effect upon its financial condition or results of operations.
15