Essendant Reports Third Quarter 2017 Results

DEERFIELD, Ill., Oct. 25, 2017 /PRNewswire/ -- Essendant Inc. (NASDAQ: ESND), a leading national wholesale distributor of workplace items, today announced financial results for the third quarter ended September 30, 2017.  Key results for third quarter 2017 were as follows:

Third Quarter 2017 Summary

• Revenue declined 5.5% to $1.3 billion, compared to $1.4 billion in the prior year quarter.
• GAAP loss per share in the quarter was $(2.23) compared to diluted earnings per share of $0.99 in the prior year quarter. GAAP net loss was $(81.9) million in the quarter, including a goodwill impairment of $(79.5) million, after-tax, and $(265.4) million in the first nine months of 2017.
• Adjusted diluted earnings per share⁽¹⁾ of $0.03 in the quarter decreased compared to $0.57 in the prior year quarter. Adjusted net income⁽¹⁾ was $1.2 million in the quarter and $20.7 million in the first nine months of 2017.
• Free cash flow⁽¹⁾ was $68.4 million in the quarter and $180.5 million in the first nine months of 2017.

"Challenging industry dynamics and sales declines persisted, particularly in our national accounts channel," said Ric Phillips, President and Chief Executive Officer of Essendant.  "This year's sales declines were largely unanticipated and outpaced our ability to reduce costs.  Accordingly, I have worked with our leadership team and our Board to identify and launch the key strategic drivers that will improve our performance: improving efficiency across our distribution network and aligning our cost base, driving sales performance in key growth channels, and developing supplier partnerships that leverage our network and capabilities.  We will act with urgency to execute against these priorities and reset our cost structure.  We are targeting annualized cost savings in excess of $50 million by 2020.  We have launched efforts to achieve these savings and will continue to refine this savings target and provide updates as we develop our detailed plans."

Third Quarter Performance

• Net sales decreased 5.5% compared to the prior year quarter, driven by reduced sales in JanSan, traditional office products and technology categories, partly offset by growth in industrial products and cut-sheet paper products categories. Net sales by product category were:
• JanSan Products: revenues of $342.9 million, a decrease of $(35.5) million or 8.0%, primarily driven by declines in the national retail channel.
• Technology Products: revenues of $320.7 million, a decrease of $(26.4) million or 6.1%, as a result of declines in the national retail channel.
• Traditional Office Products: revenues of $202.7 million, a decrease of $(26.7) million or 10.2%, due to sales declines in the national retail channel and the independent dealer channel.
• Industrial Products: revenues of $143.4 million, an increase of $3.1 million or 3.8%, due to growth initiatives and energy market recovery.
• Cut-sheet Paper Products: revenues of $110.3 million, an increase of $0.6 million or 2.2%, primarily driven by growth in sales to internet retailers.
• Automotive Products: revenues of $75.7 million, a decrease of $(2.9) million or 2.2%, driven by timing of promotional activities.
• Office Furniture: revenues of $72.1 million, a decrease of $(10.1) million or 10.9%, primarily driven by declines in the independent dealer and national retailer channel.
• Gross profit was $172.0 million, a decline of $(26.9) million versus the prior year quarter. The decline was primarily the result of lower sales volume and lower supplier allowances driven by inventory purchase mix.
• Operating expenses were $254.9 million, an increase from $138.5 million in the prior year quarter as a result of goodwill impairment of $86.3 million and transformational expenses of $6.1 million and prior year gains on the sale of a facility of $20.5 million creating an unfavorable comparison. Adjusted operating expenses were $162.6 million, an increase of $4.0 million from the prior year quarter. The increase includes higher variable incentive compensation expense in the third quarter of 2017, versus a reduction in the variable incentive compensation expense in the third quarter of 2016.
• Income tax benefit was $7.1 million in the third quarter of 2017, compared to income tax expense of $17.1 million in the prior year quarter due to pretax loss in the current quarter primarily driven by the goodwill impairment. Income tax expense on adjusted net income was $2.1 million, compared to $12.8 million in the prior year quarter.
• GAAP loss per share was $(2.23) compared to diluted earnings per share of $0.99 in the prior year quarter. Adjusted diluted earnings per share⁽¹⁾ were $0.03 compared to $0.57 in the quarter last year.
• Free cash flow totaled $68.4 million in the quarter, primarily reflecting lower inventory balances. Free cash flow drove a reduction in long-term debt of $51.8 million during the quarter to $453.2 million as of September 30, 2017.

Outlook for 2017

• Full year 2017 net sales are expected to be down 6.0% to 7.5% from the prior year.
• The range of 2017 sales decline is expected to continue to affect fourth quarter adjusted diluted earnings per share⁽¹⁾.
• Free cash flow⁽¹⁾ for 2017 is expected to be in excess of $100 million for the full year 2017.

In a separate release today, the Company announced that the Board of Directors elected Mr. Phillips President and Chief Executive Officer of Essendant.  Mr. Phillips had served as Interim President and Chief Executive Officer since June 2017.

Conference Call
Essendant will hold a conference call followed by a question and answer session on Thursday, October 26, 2017, at 7:30 a.m. CDT, to discuss third quarter 2017 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 "10108864."  To listen to the webcast, participants should visit the Investors section of the company's website (investors.essendant.com), and click on the "Essendant Q3 2017 Earnings Call" 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, within 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; the impact of price transparency, customer consolidation and product sales mix changes on the Company's sales and margins; 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; Essendant's reliance on supplier allowances and promotional incentives; Essendant's exposure to the credit risk of its customers; continuing or increasing competitive activity and pricing pressures within existing or expanded product categories, including competition from e-tailers and product manufacturers who sell directly to Essendant's customers; the impact of supply chain disruptions or changes in key suppliers' distribution strategies; continued declines in end-user demand for products in the office, technology and furniture product categories; Essendant may experience financial cycles due to secular consumer demand, recession or other events, most notably in the Company's Industrial and Automotive businesses; the impact of the Company's transformation program and possible disruption of business operations and relationships with customers and suppliers; Essendant's ability to manage inventory in order to maximize sales and supplier allowances while minimizing excess and obsolete inventory; Essendant's ability to attract and retain key management personnel; the costs and risks related to compliance with laws, regulations and industry standards affecting Essendant's business; 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 on the Company's reputation and relationships of a breach of the Company's information technology systems or a failure to maintain the security of private information; the availability of financing sources to meet Essendant's business needs; Essendant's success in effectively identifying, consummating and integrating acquisitions; and unexpected events that could disrupt business operations, increasing costs and decreasing revenues.

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 any obligation 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 national wholesale distributor of workplace items, with 2016 net sales of $5.4 billion. The company sells a broad assortment of over 190,000 items, including janitorial and breakroom supplies, technology products, traditional office products, industrial supplies, cut sheet paper products, automotive products and office furniture. The Company's network of 70 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.

Essendant Inc. and Subsidiaries
Reconciliation of Non-GAAP Financial Measures
Adjusted Operating Expenses, Adjusted Operating Income,
Adjusted Net Income, Adjusted Diluted Earnings Per Share, Adjusted EBITDA, and Free Cash Flow

The Non-GAAP table below presents Adjusted Operating Expenses, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings per Share, Adjusted EBITDA and Free Cash Flow for the three and nine months ended September 30, 2017 and 2016 (in thousands, except per share data). These non-GAAP measures exclude certain non-recurring items and exclude other items that do not reflect the Company's ongoing operations and are included to provide investors with useful information about the financial performance of our business. The presented non-GAAP financial measures should not be considered in isolation or as substitutes for the comparable GAAP financial measures. The non-GAAP financial measures do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP, and these non-GAAP financial measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP financial measures.

In order to calculate the non-GAAP measures, management excludes the following items to the extent they occur in the reporting period, to facilitate the comparison of current and prior year results and ongoing operations, as management believes these items do not reflect the underlying cost structure of our business. These items can vary significantly in amount and frequency.

• Restructuring charges. Workforce reduction and facility closure charges such as employee termination costs, facility closure and consolidation costs, and other costs directly associated with shifting business strategies or business conditions that are part of a restructuring program.
  
  Restructuring actions were taken in 2015 to improve our operational utilization, labor spend, inventory performance and functional alignment of the organization. This included workforce reductions and facility consolidations with a beneficial impact of $1.2 million and $1.0 million in the three and nine months ended September 30, 2016, respectively.
  
  
• Gain or loss on sale of assets or businesses. Sales of assets, such as buildings or equipment, and businesses can cause gains or losses. These transactions occur as the Company is repositioning its business and reviewing its cost structure.
  
  The Company recognized a $20.5 million gain on the sale of its City of Industry facility in the third quarter of 2016.
  
  
• Severance costs for operating leadership. Employee termination costs related to members of the Company's operating leadership team are excluded as they are based upon individual agreements.
  
  In the third quarter of 2016, the Company recorded a $1.2 million charge related to the severance of two operating leaders which were not part of a restructuring program.
  
  
• Asset impairments. Changes in strategy or macroeconomic events may cause asset impairments.
  
  In the nine months ended September 30, 2017, the Company recorded two charges related to the impairment of goodwill.  In the third quarter, a $86.3 million impairment charge was the result of sales and earnings declines, and sustained market capitalization declines. In the nine months ended September 30, 2017, the Company recognized charges of $285.2 million, which include charges from the first and third quarters.
  
  
• Other actions. Actions, which may be non-recurring events, that result from the changing strategies and needs of the Company and do not reflect the underlying expense of the on-going business. These include charges related to litigation matters totaling $9.0 million for the nine months ended September 30, 2017, transformational expenses totaling $6.1 million and $14.5 million, respectively, for the three and nine months ended September 30, 2017 and a gain of $0.2 million reflecting receipt of payment on notes receivable reserved in 2015 in the three months ended September 30, 2017. In the three and nine months ended September 30, 2016, other actions included settlement charges of $0.4 million and $12.2 million, respectively, related to a defined benefit plan settlement, as well as the tax impact of dividends from a foreign subsidiary of $1.7 million.

Adjusted operating expenses and adjusted operating income. Adjusted operating expenses and adjusted operating income provide management and our investors with an understanding of the results from the primary operations of our business by excluding the effects of items described above that do not reflect the ordinary expenses and earnings of our operations. Adjusted operating expenses and adjusted operating income are used to evaluate our period-over-period operating performance as they are more comparable measures of our continuing business. These measures may be useful to an investor in evaluating the underlying operating performance of our business.

Adjusted net income and adjusted diluted earnings per share. Adjusted net income and adjusted diluted earnings per share provide a more comparable view of our Company's underlying performance and trends than the comparable GAAP measures. Net income and diluted earnings per share are adjusted for the effect of items described above that do not reflect the ordinary earnings of our operations.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Adjusted EBITDA is helpful in evaluating our operating performance and is used by management for various purposes, including as a measure of performance and as a basis for strategic planning and forecasting. Net income is adjusted for the effect of interest, taxes, depreciation and amortization and stock-based compensation expense. Management believes that adjusted EBITDA is also commonly used by investors to evaluate operating performance between competitors because it helps reduce variability caused by differences in capital structures, income taxes, stock-based compensation accounting policies, and depreciation and amortization policies.

Free cash flow. Free cash flow is useful to management and our investors as it is a measure of the Company's liquidity. It provides a more complete understanding of factors and trends affecting our cash flows than the comparable GAAP measure. Net cash provided by (used in) operating activities and net cash provided by (used in) investing activities are aggregated and adjusted to exclude the impact of acquisitions, net of cash acquired and divestitures. 

Outlook. Adjusted diluted earnings per share and free cash flow are non-GAAP measures. A quantitative reconciliation of our non-GAAP guidance to the corresponding GAAP information is not available because the non-GAAP guidance excludes certain GAAP information that is uncertain and difficult to predict. The adjusted diluted EPS guidance excludes expenses of $(2.25) and $(7.76) per share in the three and nine months ended September 30, 2017, respectively, related to goodwill impairment, litigation charges, transformational expenses and the receipt of payment on notes receivable reserved in 2015. Actual amounts for these expenses appear in the non-GAAP table included later in this section. For the remainder of the year, the factors that will be excluded are currently unknown due to the level of unpredictability and uncertainty associated with these items, but may include actions such as future restructuring charges, gain or loss on future sales of assets or businesses, cash flow impacts of acquisitions, and other actions.

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

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SOURCE Essendant Inc.