ACCO Brands Corporation — Q3 2014 Form 10-Q
Business context and period: ACCO Brands manufactures and markets office and school products and computer accessories. This unaudited quarterly report covers the three and nine months ended September 30, 2014; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $472.2 | $469.2 | $1,229.3 | $1,261.4 |
| Gross profit / margin | $151.9 / 32.2% | $141.1 / 30.1% | $370.8 / 30.2% | $374.9 / 29.7% |
| Operating income / margin | $61.8 / 13.1% | $50.3 / 10.7% | $105.1 / 8.5% | $79.0 / 6.3% |
| Net income | $34.2 | $26.4 | $47.7 | $26.9 |
| Diluted earnings per share | $0.29 | $0.23 | $0.41 | $0.23 |
| Cash from operating activities | Not separately reported | Not separately reported | $67.5 | $125.2 |
For the nine-month period, capital expenditures were $21.1 and net cash used in investing and financing activities was $17.3 and $29.4, respectively. Cash increased $19.0 to $72.5. At September 30, total debt was $896.6, including $895.6 of long-term debt; the $250.0 revolving facility had no borrowings and $239.1 available. Current assets were $824.4 and current liabilities $373.1. The company reported compliance with debt covenants.
Material changes and management commentary
- Q3 sales: Up 1% year over year; foreign exchange reduced reported sales by $1.0. North America’s strong back-to-school performance and International pricing and volume gains were partly offset by declining computer-accessory sales.
- Q3 profitability: Operating income rose 23%, mainly on North America cost savings, productivity, favorable pricing and lower restructuring expense. Gross margin improved 2.1 percentage points. Higher management incentives partly offset SG&A savings.
- Nine-month results: Sales declined 2.5%, including a $15.9 foreign-exchange impact. Operating income rose 33%, reflecting lower restructuring and SG&A costs, partly offset by lower gross profit. Interest expense fell $8.3; the prior-year period included a $9.4 debt-origination-cost write-off.
- Segments: Q3 North America sales increased 1% and operating income rose 40%; International sales rose 3% and operating income 7%. Computer Products Group sales fell 9% and operating income 21%, reflecting the deliberate de-emphasis of commoditized tablet accessories. Year-to-date Computer Products Group sales and operating income fell 10% and 45%, respectively.
- Cash flow: Nine-month operating cash flow fell to $67.5 from $125.2. Working-capital cash generation was $11.6 versus $75.3, with cash used for inventory and accounts payable partly offsetting receivables collections.
Outlook, risks and unusual items
- The filing provides no specific earnings or sales guidance. Management believes operating cash flow, cash on hand and available revolving credit should fund working capital, capital expenditures and debt service for the foreseeable future. The company expects much of its cash generation to be seasonal.
- Restructuring actions begun in 2014 were expected to be substantially completed by year-end. Remaining employee-termination and lease liabilities were $6.5 in total and expected to be paid substantially within 12 months.
- A Brazilian tax authority challenges goodwill deductions for 2007–2010, assessing approximately R$100.7 million (about $41.0 at the filing’s exchange rates). The company recorded a $44.5 reserve and continues to accrue interest; the appeal may take years, and the outcome is uncertain.
- Disclosure controls remained ineffective at September 30 because of a material weakness in IT general controls at the acquired Mead business in the U.S. and Canada. Management said remediation actions were implemented but required repeatable testing before concluding the weakness was remediated. Management stated the financial statements fairly present the company’s results after additional testing procedures.
- Foreign-currency translation contributed to a $19.2 Q3 comprehensive loss despite net income of $34.2; the principal reported impact was a $60.0 pre-tax translation loss. The company also authorized up to $100 million of share repurchases and bought 810,972 shares in September for an average $7.14 per share.
- Other risks include foreign-exchange and interest-rate exposure, competitive and demand conditions, and the possibility of additional Brazilian tax assessments. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether Q3 sales momentum continues after the back-to-school season, particularly in North America and the office-superstore channel.
- Whether cost savings sustain improved margins as restructuring benefits diminish, and whether Computer Products Group stabilizes.
- Working-capital trends and operating cash conversion, given the year-to-date decline in operating cash flow.
- Debt reduction, liquidity availability, and the pace and funding of share repurchases.
- Developments in the Brazilian tax appeals, continuing interest accruals, and any further assessments.
- Evidence that the Mead IT-control material weakness has been remediated and disclosure controls are effective.