ACCO Brands Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
ACCO Brands designs, manufactures and markets consumer, school, technology and office products through North America, EMEA, and International segments. Its strategy is shifting toward branded consumer and technology products, mass retail and e-commerce, while traditional commercial office-products channels decline. COVID-19 disrupted demand, especially for office and school products; PowerA, acquired December 17, 2020, expanded the company into gaming accessories.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,655.2 million | $1,955.7 million |
| Gross profit / margin | $492.4 million / 29.7% | $633.5 million / 32.4% |
| Operating income / margin | $112.4 million / 6.8% | $196.2 million / 10.0% |
| Net income | $62.0 million | $106.8 million |
| Diluted EPS | $0.65 | $1.06 |
| Operating cash flow | $119.2 million | $203.9 million |
Net sales fell 15.4% (comparable sales down 15.9%); operating income declined 42.7%. Lower volume, unfavorable customer and product mix, and reduced fixed-cost absorption pressured margins. Cost reductions and government assistance partially offset the decline. Reported 2020 results include only 15 days of PowerA operations.
Fourth quarter: Net sales were $460.1 million versus $537.4 million in Q4 2019; operating income was $42.2 million versus $68.1 million; net income was $29.8 million versus $43.5 million.
Segments: North America sales were $822.1 million (-15.0%) and operating income $83.0 million (-36.6%); EMEA sales were $523.9 million (-8.0%) and operating income $51.6 million (-11.9%); International sales were $309.2 million (-26.3%) and operating income $15.6 million (-67.8%). International was most affected, notably by school closures in Latin America and unfavorable currency movements.
Cash, debt and liquidity: Cash was $36.6 million at year-end, with $256.8 million available under the $600 million revolving facility. Total debt was $1,136.6 million, versus $816.0 million a year earlier; $755.9 million was floating-rate debt. The company reported leverage of approximately 4.30x against a 4.75x covenant limit and interest coverage of 5.44x against a 3.00x minimum. No debt maturities were due before May 2024. Capital expenditures were $15.3 million; acquisition spending was $339.4 million, primarily for PowerA.
PowerA’s preliminary purchase price was $340.0 million plus contingent consideration of up to $55.0 million. The 2020 dividend was $0.26 per share. Management said it did not anticipate share repurchases in 2021, prioritizing dividends and debt reduction.
Material changes and unusual items
- COVID-19 drove widespread sales declines and disrupted back-to-school, office and commercial demand. E-tail/direct-to-consumer sales rose 17% and technology-specialist sales rose 31%, while commercial/B2B sales fell 25% and retail/mass sales fell 15%, excluding PowerA.
- Cost-reduction actions lowered costs by approximately $83 million; worldwide headcount fell about 900, or 13%, year over year. The company received $8.6 million of government assistance.
- Bad-debt expense was $8.4 million, $7.1 million above 2019. Inventory provisions totaled $16.9 million.
- Restructuring charges were $10.9 million and acquisition integration and transaction expenses were $4.4 million. PowerA added $0.4 million of operating income for its brief period in 2020; Foroni contributed a $2.7 million operating loss.
- Pension and post-retirement liabilities rose to $317.1 million from $283.2 million, largely due to lower discount rates. Goodwill and identifiable intangible assets totaled approximately $1.8 billion; management identified International-segment goodwill as potentially at risk if recovery underperforms.
Outlook, risks and contingencies
Management said visibility for 2021 was limited and expected COVID-19 to continue materially affecting results. Excluding PowerA, first-quarter demand was expected to decline year over year, particularly commercial products and Latin American back-to-school products. Management anticipated gradual improvement from the second quarter into 2022, with a possible stronger second-half 2021 North American back-to-school sell-out if in-person schooling resumed. No quantified full-year 2021 sales or earnings guidance is provided in the filing.
Key risks include the pandemic and its effects on schools, offices, customers and supply chains; delayed ocean freight and higher inbound costs; customer concentration and channel shifts; foreign exchange, tariffs and input-cost inflation; debt and covenant constraints; acquisition integration; pension funding; and competition from private-label and digital substitutes.
The Brazil tax assessments remain contested in judicial proceedings expected to take years. The recorded accrual was $28.4 million at year-end; an adverse final outcome could materially affect cash flow in the settlement year. Management considered other pending litigation not likely to have a material adverse effect. The auditor gave unqualified opinions on the financial statements and internal control; PowerA was excluded from the 2020 internal-control assessment as a recently acquired business.
Important facts for investors to verify
- Whether demand, margins and working capital recover as schools and offices reopen, and whether freight disruption and cost inflation ease.
- PowerA’s post-acquisition growth, profitability, integration progress, final purchase accounting and achievement of earnout targets.
- Debt reduction, covenant headroom and refinancing or interest-rate exposure, given elevated leverage and floating-rate borrowings.
- Developments in the Brazil tax appeals and the potential cash impact beyond the recorded $28.4 million accrual.
- International segment recovery, pension funding requirements and any goodwill or intangible-asset impairment indicators.