ACCO Brands Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statements are unaudited. ACCO Brands sells consumer, school, technology and office products through three segments: North America, EMEA and International. Results include PowerA, acquired in December 2020, and Franken, acquired in April 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $526.7 million | $444.1 million | $1,455.0 million | $1,195.1 million |
| Gross profit / margin | $157.2 million / 29.8% | $127.1 million / 28.6% | $436.8 million / 30.0% | $349.3 million / 29.2% |
| Operating income / margin | $38.6 million / 7.3% | $34.3 million / 7.7% | $87.4 million / 6.0% | $70.2 million / 5.9% |
| Net income | $20.2 million | $18.8 million | $48.4 million | $32.2 million |
| Diluted EPS | $0.21 | $0.20 | $0.50 | $0.34 |
| Operating cash flow | Not separately provided | Not separately provided | $44.0 million | $21.8 million |
Q3 reported sales rose 18.6%; comparable sales, excluding acquisition and currency effects, rose 4.3%. PowerA added $56.8 million to Q3 sales. For the nine months, reported sales increased 21.7%, while comparable sales rose 3.7%; PowerA contributed $170.2 million and favorable currency translation $46.0 million. Q3 gross margin expanded 1.2 percentage points, but operating margin fell 0.4 points, reflecting acquisition-related contingent consideration expense, higher amortization and costs that had been unusually low in the pandemic-affected prior-year quarter.
Nine-month operating cash flow improved $22.2 million year over year, but working capital used $79.4 million of cash, including $116.2 million for inventory. Inventory stood at $413.9 million at quarter-end, compared with $305.1 million at December 31, 2020. Cash and cash equivalents were $58.1 million, versus $36.6 million at year-end.
Debt and liquidity
Total debt was $1,130.1 million at September 30, 2021, compared with $1,136.6 million at December 31, 2020. The company reported $153.0 million drawn on its revolving facility, $434.5 million available for borrowing after letters of credit, and no debt maturities before March 2026. Its reported consolidated leverage ratio was approximately 3.8:1, against a 4.75:1 maximum covenant for the quarter. Management said available cash, operating cash flow and borrowing capacity should cover foreseeable working capital, capital spending and debt-service needs.
In March, ACCO issued $575 million of 4.25% senior notes due 2029 and redeemed its 5.25% notes due 2024. The refinancing included a $9.8 million call premium and a $3.7 million write-off of debt issuance costs. The filing’s liquidity discussion also describes the new notes as due 2026, while the debt table and note terms specify 2029; investors should verify the maturity disclosure.
Segments and material changes
- North America: Q3 sales increased 20.5% as reported, but comparable sales rose only 0.8%. PowerA added $45.1 million. Segment operating income increased to $34.6 million from $22.9 million. The prior-year period included a large computer-accessories sale that did not recur.
- EMEA: Q3 sales rose 18.1% as reported and 10.3% on a comparable basis. Segment operating income declined to $13.4 million from $16.7 million, and margin fell to 8.3% from 12.2%, mainly due to logistics and commodity inflation and higher SG&A.
- International: Q3 sales increased 12.9% as reported and 4.7% comparably. Segment operating income rose to $7.3 million from $3.7 million. For the nine months, comparable sales declined 8.0%, reflecting pandemic-related demand weakness, particularly early in the year.
For the nine months, net income benefited from higher operating income and a lower effective tax rate, partly offset by $7.3 million of additional interest expense. The nine-month effective tax rate was 10.7%, compared with 29.8% in 2020; the filing attributes the reduction mainly to deferred-tax-asset revaluation and release of certain non-U.S. tax reserves. Q3’s rate increased to 33.1% from 26.6%, primarily due to higher global intangible low-taxed income tax.
Outlook, risks and unusual items
- Management expected Q4 operating margin to improve from Q3, citing seasonal mix and further recovery from price increases. It anticipated continued organic sales growth into 2022, while inflation would mute gross-profit gains. Management also expected higher logistics, commodity and supplier costs through 2022, requiring further selling-price increases; pricing was still lagging cost inflation, particularly in EMEA.
- COVID-19 effects, office and school reopening patterns, Delta-variant impacts, customer inventory and credit constraints, and supply-chain disruption remained uncertain. Management expected some International back-to-school sales to shift into Q1 2022.
- PowerA’s contingent consideration was remeasured, generating $16.5 million of expense for the nine months, including $4.9 million in Q3. The liability was $34.7 million at quarter-end, against an earnout of up to $55 million.
- ACCO recorded $9.1 million of Brazilian indirect-tax credits in Q2 and $3.1 million of related tax expense. Further credits could be material, subject to final decisions in remaining cases.
- Brazil tax assessments remain contested. The recorded accrual was $27.3 million at September 30, 2021; management said an adverse final outcome could materially affect cash flow in the settlement year. The judicial process is expected to take years.
- Management reported that International goodwill could be at risk if performance fails to recover as expected or assumptions such as revenue growth, margins or discount rates deteriorate. The annual 2021 impairment review found no impairment.
- Management considered other outstanding litigation unlikely to materially harm results, while noting that adverse outcomes and future claims cannot be ruled out. Disclosure controls were reported effective; no material change to internal control over financial reporting was reported.
Investor verification priorities
- Reconcile reported growth with acquisition- and currency-adjusted comparable sales, especially North America and International.
- Track inventory, receivables, operating cash conversion and the ability to pass through continuing cost inflation.
- Verify debt maturity disclosures, covenant headroom and leverage as the company reduces acquisition-related debt.
- Assess the PowerA earnout remeasurement and the assumptions behind its $34.7 million fair value.
- Monitor outcomes and cash exposure from the Brazilian tax assessments and potential additional tax credits.
- Evaluate whether International performance recovers sufficiently to support goodwill carrying values and the stated outlook.