ACCO Brands Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited. ACCO Brands designs, manufactures and markets consumer, school, technology and office products through three segments: North America, EMEA and International.
Financial performance
- Q2 revenue: Net sales were $521.0 million, up 0.6% year over year. Comparable sales, a non-GAAP measure excluding currency and acquisition effects, rose 5.2%; pricing contributed 8.1%, while volume declined 2.9%. Foreign exchange reduced reported sales by 4.6%.
- First-half revenue: Net sales were $962.6 million, up 3.7%; comparable sales increased 7.8%. Pricing contributed 7.4%, volume 0.5%, and foreign exchange reduced reported sales by 4.1%.
- Profit and margins: Q2 gross profit was $150.0 million, down 8.6%, and gross margin fell 2.9 percentage points to 28.8%. Operating income was $55.4 million, up 11.0%, with a 10.6% margin. Net income was $39.4 million, down 18.9%; diluted EPS was $0.40 versus $0.50. For the first half, operating income increased 27.5% to $62.2 million and net income rose 30.1% to $36.7 million; diluted EPS was $0.37 versus $0.29. First-half gross margin declined 2.1 points to 28.0%.
- Cash flow: Operating cash use in the first half was $97.9 million, versus $55.1 million used a year earlier. Cash and equivalents were $91.7 million at June 30, up from $41.2 million at year-end. Management describes first-half cash outflow as seasonal, typically followed by inflows in both second-half quarters.
- Debt and liquidity: Total debt was $1,187.4 million, compared with $1,006.7 million at December 31, 2021. The company had $240.3 million drawn under its revolving facility, $348.7 million available (net of letters of credit), and no debt maturities before March 2026. The consolidated leverage ratio was approximately 3.97x against a 4.25x maximum covenant; the maximum tightens to 4.00x from September 2022. Senior notes of $575 million carry a fixed 4.25% rate.
Material changes and segment performance
- North America Q2 sales increased 3.9% to $306.6 million; segment operating income declined 5.8% to $50.7 million as inflation and lower gaming-accessory volume pressured margins.
- EMEA Q2 sales fell 12.2% to $137.9 million as currency translation reduced reported sales; comparable sales edged up 0.4%. The segment recorded a $1.5 million operating loss versus $9.9 million income a year earlier, reflecting inflation, weaker volume and adverse currency effects.
- International Q2 sales rose 16.4% to $76.5 million and operating income increased to $6.3 million from $2.8 million, supported by school-product demand in Brazil and Mexico as in-person education resumed.
- Q2 operating income benefited from a $9.4 million gain from reducing the estimated PowerA contingent earnout, compared with a $4.9 million expense in Q2 2021. The company attributed the lower expected earnout to weaker anticipated PowerA results.
- Q2 net income declined despite higher operating income, primarily because the prior-year period included larger tax benefits and Brazilian operating tax credits. First-half comparisons also benefited from the non-recurrence of $13.5 million in prior-year debt-refinancing charges.
Outlook, risks and unusual items
- No numerical full-year guidance is stated in the filing. Management expects inflationary pressures and supply-chain disruptions to moderate but persist through the rest of 2022, and expects unfavorable foreign-exchange effects to continue. The company plans further price increases as needed; pricing has lagged cumulative cost inflation.
- PowerA and Kensington growth is constrained by semiconductor shortages. Management expects chip availability to improve gradually in the second half, but expects 2022 gaming-accessory sales to be below 2021.
- Management says goodwill for North America and International could be at risk if operating performance fails to improve or assumptions such as revenue growth, margins or discount rates worsen. Their fair-value headroom was less than 10%; the annual impairment test found no impairment as of May 31, 2022.
- Brazil tax assessments remain contested. The recorded accrual, including tax, penalties and interest, was $30.0 million at June 30. If the tax authority’s position is ultimately upheld, payment could materially affect cash flow in the settlement year. The legal process is expected to take years.
- The company recorded $3.8 million of Brazilian tax credits in the first half and said unresolved legal actions could yield approximately $10.2 million of additional credits in the future.
- Other notable items include $2.2 million of first-half restructuring charges, $19.4 million of share repurchases and $27.0 million of PowerA contingent-consideration payments during the first half. Management believes available cash, operating cash flow and revolver capacity will meet foreseeable liquidity needs.
Important facts for investors to verify
- Whether price increases can catch up with inflation and restore gross margins, particularly in EMEA.
- How the 3.97x leverage ratio compares with the tighter 4.00x covenant effective September 2022, and the company’s plan to reduce debt.
- Whether gaming-product supply constraints and weaker expected PowerA results persist, including their effect on the contingent earnout estimate.
- Developments in the Brazil tax assessments and the timing and collectability of the potential tax credits.
- Performance against the assumptions supporting North America and International goodwill valuations, given the limited impairment headroom.