Essendant Reports Third Quarter 2017 Results

DEERFIELD, Ill., Oct. 25, 2017

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.