ACCO Brands Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; filed October 31, 2013. Unaudited interim results. ACCO sells office, school and calendar products, plus computer accessories. Comparisons are affected by the May 2012 Mead C&OP acquisition: 2013 includes nine months of Mead results versus five months in the 2012 nine-month comparison.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $469.2m | $501.2m | $1,261.4m | $1,228.8m |
| Gross profit / margin | $141.1m / 30.1% | $151.2m / 30.2% | $374.9m / 29.7% | $355.3m / 28.9% |
| Operating income / margin | $50.3m / 10.7% | $56.4m / 11.3% | $79.0m / 6.3% | $72.0m / 5.9% |
| Net income | $26.4m | $55.2m | $26.9m | $132.0m |
| Diluted earnings per share | $0.23 | $0.48 | $0.23 | $1.47 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $125.2m | $(80.3)m |
Q3 sales fell 6%, chiefly from soft North American demand, lower-priced product mix, customer placement losses and foreign-exchange translation. Operating income declined 11%; gross margin was nearly flat, while lower volume weighed on profit. Nine-month sales rose 3%, but the increase included Mead; management cited an underlying decline excluding acquisition effects. Nine-month operating income increased 10%.
Segment trends in Q3: North America sales fell 8% and segment operating income fell 10%; International sales declined 2% as reported, but increased 5% excluding currency effects, with operating income up 21%; Computer Products Group sales fell 8% and operating income fell 56%, amid competition, weak demand and lower pricing. For the nine months, Computer Products Group sales fell 12% and operating income fell 64%.
Cash, debt and liquidity
- Cash was $70.8m at September 30, 2013, versus $50.0m at year-end 2012. Nine-month operating cash flow of $125.2m included a $75.3m cash source from working capital, primarily receivables collections, partly offset by seasonal inventory investment.
- Total debt was $1,000.7m, down from $1,072.1m at December 31, 2012. The company reported $991.1m long-term debt and $7.8m current portion; the debt table also includes $1.8m in bank notes payable.
- May refinancing established a $780m secured facility, including a $250m revolving facility and $530m term loan. At quarter-end, $1.7m was drawn on the revolver and $237.8m was available after letters of credit. Senior unsecured notes of $500m bear a 6.75% fixed rate; the secured facilities’ weighted-average rate was 2.52%.
- Management said operating cash flow, cash on hand and available revolving credit should cover working capital, capital expenditures and debt service for the foreseeable future. The company was in compliance with loan covenants.
Outlook, commentary and significant items
- Management cited soft demand, consumer trade-down and foreign-exchange pressure; cost synergies and productivity savings partly mitigated lower volume. International performance continued to recover in Q3. No specific earnings or revenue guidance was provided.
- The company expected approximately $7m of additional restructuring charges in 2013. Initiatives included North American post-merger integration and closure of the Brampton, Canada facility; $17.9m of restructuring charges had been recorded in the first nine months.
- Q3 net income comparison was affected by taxes: 2013 included $14.6m tax expense, while Q3 2012 included a $13.6m tax benefit. Nine-month 2012 results also benefited from $130.9m of non-cash tax valuation-allowance releases. 2012 other expense included $61.4m of merger-related refinancing costs; 2013 included a $9.4m debt-cost write-off related to refinancing.
- The Brazil tax authority assessed Tilibra for 2008–2010 in October 2013, following a 2007 assessment challenging goodwill deductions. ACCO said the later assessment was expected and covered by its $44.5m reserve recorded in 2012; it intends to contest the assessments and continued accruing interest.
- ACCO reported no goodwill or indefinite-lived intangible impairment in its 2013 annual assessment, but noted certain acquired trade names’ fair values were not substantially above carrying values. Foreign-currency and interest-rate movements, customer concentration and competitive/technology shifts remain risks.
Key facts for investors to verify
- Underlying sales and margin trends by segment, separating acquisition effects, currency translation and seasonal demand.
- Whether Computer Products Group can stabilize sales, pricing and margins amid competition and product obsolescence risk.
- Progress and cash costs of restructuring, integration savings and the Brampton facility transition.
- Debt repayment, refinancing benefits and continued covenant compliance; liquidity is seasonal, including Brazilian working-capital needs.
- Outcome and potential interest growth of the Brazilian tax dispute, and whether the existing reserve remains adequate.
- Recoverability of acquired goodwill and trade names whose fair values have limited headroom over carrying values.