ACCO BRANDS Corp annual report, FY2014

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ACCO Brands Corporation — FY2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. ACCO Brands manufactures and markets office, school, calendar and computer-accessory products through three segments: North America, International and Computer Products Group. Approximately 45% of annual sales were outside the U.S.

Financial performance

  • Revenue: FY2014 net sales were $1.689 billion, down 4% from $1.765 billion in 2013. Foreign exchange reduced reported sales by $35.2 million; constant-currency sales declined 2%.
  • Profit and margins: Gross profit was $529.9 million, down 3%, while gross margin improved to 31.4% from 31.0%. Operating income rose to $173.6 million from $145.8 million, and operating margin increased to 10.3% from 8.3%. The increase primarily reflected lower restructuring charges and SG&A; adjusted operating income was $179.1 million after $5.5 million of restructuring charges.
  • Net income and EPS: Net income was $91.6 million versus $77.1 million; diluted EPS was $0.79 versus $0.67. The effective tax rate rose to 33.1% from 15.7%, partly because 2013 benefited from foreign tax valuation-allowance releases.
  • Fourth quarter: Sales were $459.9 million versus $503.7 million in Q4 2013. Operating income was $68.5 million versus $66.8 million; net income was $43.9 million versus $50.2 million; diluted EPS was $0.38 versus $0.43.
  • Cash flow: Operating cash flow was $171.7 million, down from $194.5 million. Free cash flow, a company-defined non-GAAP measure, was $145.9 million. Capital expenditures were $29.6 million.
  • Debt and liquidity: Debt was approximately $800.7 million at year-end, down from $920.9 million. Cash was $53.2 million. No revolving-facility borrowings were outstanding; $238.3 million was available. The company reported a 2.9x consolidated leverage ratio and 4.5x fixed-charge coverage ratio and compliance with applicable covenants.
  • Balance sheet: Total assets were $2.226 billion, stockholders’ equity was $681.0 million, and pension and post-retirement obligations were $100.5 million, up from $61.7 million.

Changes and segment results

  • North America: Sales fell 3% to $1.006 billion, principally from Office Depot-related reductions. Segment operating income increased to $140.7 million from $98.2 million, significantly reflecting lower restructuring charges and cost savings.
  • International: Sales declined 3% to $546.9 million; currency translation reduced sales by $24.1 million. Segment operating income decreased 5% to $62.9 million. Latin American and Asia-Pacific gains were offset by weakness in Europe and Australia.
  • Computer Products Group: Sales fell 13% to $136.3 million and segment operating income fell 40% to $8.2 million, as ACCO exited commoditized tablet accessories and discounted remaining inventory.
  • Company-wide sales were pressured by Office Depot/OfficeMax integration actions and channel shifts. In 2014, sales to Office Depot declined $40 million. Staples and Office Depot together represented 24% of sales (reported by the company as approximately 25%); the top ten customers accounted for 53%.

Outlook, risks and unusual items

  • Management expected the strong U.S. dollar to continue adversely affecting results in 2015. It also expected Office Depot-related inventory reductions and lost product placements to continue and Brazilian macroeconomic softness to persist.
  • The Computer Products Group repositioning was expected to be completed in the second half of 2015; management expected the adverse sales impact from exiting commoditized tablet accessories to be completed in the first half.
  • Management expected additional savings from restructuring actions and planned to pay substantially all of the $8.4 million year-end restructuring liability in 2015. It believed operating cash flow, cash and available credit would meet foreseeable liquidity needs.
  • Customer concentration and consolidation: Staples had agreed to acquire Office Depot. ACCO warned that further consolidation could reduce sales, pricing and margins; the deal’s eventual impact was uncertain.
  • Brazilian tax dispute: Tilibra is contesting Brazilian assessments challenging goodwill tax deductions. ACCO had accrued R$102.7 million, or $38.7 million at year-end exchange rates, for tax, penalties and interest for 2008–2012; additional assessments for 2011–2012 were possible. An adverse outcome could materially affect cash flow at settlement.
  • Other exposures: Risks include foreign exchange, floating-rate debt, seasonality, declining paper-based product categories, sourcing and supply disruption, pension funding, and potential goodwill or intangible-asset impairment. No impairment was recorded in 2014, though certain trade-name fair values were not substantially above carrying value. Goodwill fair value exceeded carrying value by 13% for North America, 52% for International and 33% for Computer Products Group.
  • A material weakness in information-technology general controls identified for 2013 was reported as remediated by December 31, 2014. Management and the auditor concluded internal control over financial reporting was effective at year-end.

Key facts for investors to verify

  • Whether Office Depot/OfficeMax integration and any Staples–Office Depot transaction further affect ACCO’s sales, customer terms and margins.
  • Progress and potential cash exposure from the Brazilian tax appeal, including any assessments for open tax years.
  • Debt reduction, covenant headroom, interest-rate exposure and use of available revolver capacity.
  • Whether 2015 currency, Brazil, restructuring and product-repositioning expectations are borne out by reported results.
  • Goodwill and trade-name valuation assumptions, pension funding exposure, and continued effectiveness of remediated IT controls.