ACCO Brands Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results. The company designs, markets and manufactures branded consumer, school and office products. Management identified COVID-19 as the primary driver of the period’s declines.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $366.9 million | $518.7 million | $751.0 million | $912.6 million |
| Gross profit / margin | $110.0 million / 30.0% | $165.8 million / 32.0% | $222.2 million / 29.6% | $291.6 million / 32.0% |
| Operating income / margin | $18.5 million / 5.0% | $61.4 million / 11.8% | $35.9 million / 4.8% | $79.3 million / 8.7% |
| Net income | $5.4 million | $35.9 million | $13.4 million | $35.3 million |
| Diluted EPS | $0.06 | $0.35 | $0.14 | $0.34 |
- Q2 sales declined 29.3%; comparable sales, excluding currency and acquisition effects, fell 28.3%. Six-month sales declined 17.7% (17.5% comparable).
- Q2 operating income fell 69.9% and net income fell 85.0%. Lower demand drove the declines; cost reductions partially offset the impact. Margin pressure also reflected unfavorable mix, weaker fixed-cost absorption, bad-debt expense and inventory provisions.
- Six-month cash used in operations was $67.5 million versus $115.7 million in 2019. Investing cash outflow was $8.3 million; financing provided $178.5 million. Cash increased by $101.0 million to $128.8 million, with financing including substantial incremental borrowing.
- At June 30, total debt was $1,026.8 million, versus $816.0 million at December 31, 2019. Cash was $128.8 million. The company reported $342.8 million available on its $600 million revolving facility, after letters of credit.
- Current assets were $867.4 million and current liabilities $484.1 million. The company reported a 3.48x consolidated leverage ratio and compliance with applicable loan covenants.
Material changes and segment results
- COVID-19 reduced demand across all three segments, particularly commercial office products. Q2 sales fell in North America 24.7%, EMEA 31.2% and International 43.2%.
- Q2 segment operating income was $37.4 million in North America, a loss of $1.8 million in EMEA and a loss of $4.4 million in International. The International result included a $2.2 million Foroni acquisition-related loss.
- Q2 gross margin declined 2.0 percentage points to 30.0%; operating margin declined 6.8 points to 5.0%. Six-month operating margin fell 3.9 points to 4.8%.
- The company recorded $6.5 million of Q2 restructuring charges, primarily severance in North America; six-month charges were $6.8 million. It also cited $3.9 million of additional Q2 bad-debt expense and $2.4 million of increased slow-moving inventory provisions versus Q2 2019.
- The May 2020 credit agreement amendment raised the maximum leverage covenant from 3.75x to 4.75x, reverting to 3.75x for the first fiscal quarter ending after June 30, 2021. It also added restrictions and required revolver paydown if loan-party cash exceeds $100 million.
Outlook, risks and contingencies
- Management withdrew full-year 2020 guidance and said visibility was limited for Q3 and weaker beyond it. It expected demand to remain below 2019, especially for commercial office products, and warned that school-opening timing could affect back-to-school sales. The company said it could not reasonably estimate the pandemic’s financial impact beyond Q3.
- Management reported approximately $33 million of Q2 cost savings from actions and normal productivity initiatives, plus $4.0 million of Q2 government assistance. It expected approximately $15 million of additional Q3 expense savings versus the prior year. Planned North America and Mexico restructuring was expected to generate $11 million of annualized savings, some to be reinvested. Temporary salary reductions were reinstated effective July 1; other cost actions continued.
- Management expected adequate liquidity, with remaining-2020 cash after operating needs directed to dividends and debt reduction; it said it did not intend to repurchase shares during 2020. The company expected no debt maturities before May 2024.
- Key risks include renewed COVID-related closures or supply-chain disruption, weak demand and delayed school openings, customer payment delays and defaults, inventory obsolescence, and foreign-exchange movements. Management said impairment testing found no goodwill or indefinite-lived intangible impairment as of June 30.
- The Brazil tax assessments remain contested. The company reported a $26.1 million accrued liability, including tax, penalties and interest; an adverse outcome could materially affect cash flow when settled. The dispute may take years to resolve. Other litigation was not expected by management to have a material adverse effect, though outcomes are uncertain.
Most important facts for investors to verify
- Whether demand, school reopening patterns and office-product sales recover as assumed, and whether Q3 performance matches management’s limited outlook.
- Whether cost savings and restructuring deliver the expected benefits, and how much temporary government assistance or restructuring spending affects results.
- Whether cash generation, receivables and inventory stabilize while debt and leverage remain manageable under the amended credit terms.
- Whether bad debts, inventory provisions, currency movements or further pandemic disruption create additional earnings or liquidity pressure.
- Developments in the Brazil tax assessments, including any change to the $26.1 million accrual or the potential cash exposure.