ACCO Brands Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; this filing reports full-year results, not standalone Q4 results. Amounts are in U.S. dollars unless noted.
Business context
ACCO Brands designs, sources, manufactures and sells branded consumer, technology and business products for schools, homes and workplaces. It reports three geographic segments: North America, EMEA, and International. Management’s strategy emphasizes organic growth through innovation and faster-growing categories and channels, margin improvement, and management of declining product categories. About 73% of net sales came from brands ranked No. 1 or No. 2 in their categories.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $1,947.6 million | $2,025.3 million |
| Gross profit / margin | $552.3 million / 28.4% | $614.9 million / 30.4% |
| Operating income | $34.8 million | $151.0 million |
| Net income (loss) | $(13.2) million | $101.9 million |
| Diluted EPS | $(0.14) | $1.05 |
| Operating cash flow | $77.6 million | $159.6 million |
- Reported sales fell 3.8%, including a $93.9 million adverse foreign-exchange impact. Comparable sales, a non-GAAP measure, rose 0.8%: pricing contributed 8.0%, offset by a 7.2% volume decline.
- Gross margin declined 2.0 percentage points as inflationary costs exceeded price increases and lower volumes weighed on results. SG&A declined 4.0% to $376.7 million, mainly from lower incentive compensation and currency effects.
- Operating income included a $98.7 million non-cash North America goodwill impairment charge and a favorable $28.0 million change in PowerA contingent consideration fair value. The effective tax rate was 188.6%, largely because the goodwill impairment was not tax-deductible.
- Cash and cash equivalents were $62.2 million at year-end. Total debt was $1,004.9 million; the company reported $72.8 million drawn on its revolving facility and $517.8 million available, net of letters of credit. Senior unsecured notes of $575.0 million mature in March 2029; the credit agreement matures in March 2026.
- Year-end consolidated leverage was approximately 4.16x against a 4.50x covenant maximum; interest coverage was 6.56x against a 3.00x minimum. The company reported compliance with applicable debt covenants.
- Operating cash flow was seasonally concentrated in the second half. Capital expenditures were $16.5 million; dividends paid were $28.6 million and share repurchases were $19.4 million.
Material changes versus FY2021
- North America sales decreased 4.3% and the segment reported a $4.9 million operating loss, primarily reflecting the impairment charge, weaker gaming-accessory demand and higher costs.
- EMEA sales decreased 12.5% as adverse currency translation reduced reported sales; comparable sales decreased 0.7%. Segment operating income fell 64.8% to $21.7 million.
- International sales increased 15.4% reported and 19.0% on a comparable basis, supported by Latin American demand associated with a return to in-person education and work. Segment operating income rose 59.8% to $50.5 million.
- Operating cash flow decreased $82.0 million, mainly due to lower net income, incentive payments and other liability and tax payments, partly offset by lower trade-working-capital investment.
- Pension and post-retirement obligations declined to $155.5 million from $222.3 million, primarily due to higher discount rates, partly offset by investment losses.
Outlook, risks and unusual items
- Management stated that, based on its 2023 business plan and forecasts, cash, operating cash flow and available revolver capacity should be adequate for working capital, capital expenditures, dividends, repurchases and debt service. The filing provides no specific revenue or earnings guidance.
- Management said inflation and the timing of pricing actions continued to pressure margins and could remain influential. Supply-chain disruptions and freight costs had moderated, but the company cautioned that improvement may not continue. Chip shortages and limited gaming-console availability affected technology-accessory sales.
- Key exposures include macroeconomic weakness and discretionary demand, foreign exchange (about 54% of FY2022 sales were transacted in non-U.S. currencies), customer concentration (top ten customers were 42.9% of sales), competition and private label, seasonality, and declining demand for certain paper-based products.
- Goodwill and other identifiable intangible assets totaled approximately $1.5 billion at year-end. Management warned that weaker-than-expected performance could lead to further impairment. The Leitz indefinite-lived trade name was reclassified as amortizable and will be amortized over 30 years beginning in 2023.
- Brazil tax assessments remain contested. A court ruled against the company at the first judicial level on the Second Assessment, and the company appealed; the First Assessment is also being challenged. The recorded accrual, including tax, penalties and interest, was $30.4 million. An adverse final outcome could materially affect cash flow in the settlement year.
- Restructuring charges were $9.6 million in 2022; management expects approximately $13.0 million in savings from North America and EMEA initiatives, mostly within the next 12 months.
Important facts for investors to verify
- Whether North America demand, gaming-accessory volumes and segment profitability recover, and whether further goodwill impairment is required.
- Progress in passing through inflation-driven cost increases and sustaining the International segment’s growth and margins.
- Foreign-exchange effects, customer inventory replenishment, and working-capital needs as seasonal cash generation changes through the year.
- Debt covenant headroom, floating-rate borrowing costs, refinancing needs and the capacity to maintain dividends or repurchases.
- Status and potential cash consequences of the Brazil tax assessments, as well as realization of restructuring savings.
- The filing reports unmodified audit opinions on the financial statements and internal control over financial reporting. KPMG identified inventory obsolescence estimates and goodwill impairment assumptions as critical audit matters.