ACCO Brands Corporation — Q1 2016 Form 10-Q
Business context and reporting period: ACCO Brands designs, markets and manufactures branded business, academic and consumer products. This unaudited report covers the three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. The company reports North America, International and Computer Products Group segments.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net sales | $278.1 million | $290.0 million |
| Gross profit / margin | $82.4 million / 29.6% | $80.2 million / 27.7% |
| Operating income / margin | $6.5 million / 2.3% | $2.6 million / 0.9% |
| Net income (loss) | $4.8 million | $(5.8) million |
| Diluted EPS | $0.04 | $(0.05) |
| Operating cash flow | $51.6 million | $49.9 million |
| Capital expenditures | $3.9 million | $8.7 million |
| Cash and cash equivalents | $102.4 million | $55.4 million at Dec. 31, 2015 |
| Total debt | $729.0 million | $729.0 million at Dec. 31, 2015 |
| Revolving credit availability | $291.8 million; no borrowings | — |
Interest expense was $10.7 million, down from $11.2 million. The company reported a $7.4 million income tax benefit on a $2.6 million pretax loss, producing a 284.6% effective tax rate. Management attributes the unusually high rate to a tax loss on foreign exchange from repayment of an intercompany loan; its pretax effect was recorded in equity. The filing reports basic EPS of $0.05 and diluted EPS of $0.04.
Q1 operating cash flow was supported by a $102.5 million net working-capital cash inflow, including $153.0 million from accounts receivable, partly offset by $53.0 million used for inventory. Cash increased by $47.0 million during the quarter. The company held approximately $46.9 million of cash in Brazil.
Changes versus Q1 2015
- Sales declined 4% reported. Foreign currency translation reduced sales by $13.6 million, or 5%; higher pricing was largely offset by lower volume across segments.
- Gross profit rose $2.2 million as pricing, cost savings and productivity improvements outweighed currency pressure. Gross margin improved 1.9 percentage points.
- Operating income increased $3.9 million, chiefly from stronger gross margins. North America operating income improved to $10.3 million from $5.6 million; International rose to $3.8 million from $3.3 million; Computer Products Group fell to $1.7 million from $2.0 million.
- Net income improved by $10.6 million, reflecting the tax benefit and higher gross margins. The result should be considered alongside the unusual tax item.
- Foreign exchange remained a headwind: Q1 average rates versus the U.S. dollar were lower by 27% for the Brazilian real, 17% for the Mexican peso, 10% for the Canadian dollar, 8% for the Australian dollar, 6% for the British pound and 2% for the euro.
Outlook, risks and notable matters
- Pelikan acquisition: ACCO agreed to acquire the remaining 50% of Pelikan Artline Pty Limited for approximately $103 million, subject to post-closing net-asset adjustments and customary conditions. Closing was expected in Q2 2016. Approximately 18% of the price was designated to fund redemption of a minority interest, expected within 180 days after closing. The company expected to finance the deal with Australian-dollar borrowings under its credit facility. Completion, consents, integration, synergies and redemption timing remain risks.
- Guidance: The filing provides no clear quantified earnings or sales guidance. Management says liquidity should be adequate for working capital, capital expenditures and debt service for the foreseeable future.
- Brazil tax assessment: Tilibra is contesting Brazilian assessments concerning goodwill deductions for 2007–2010. The recorded accrual, including tax, penalties and interest, was $31.5 million at current exchange rates as of March 31, 2016. The administrative process may take years; an unfavorable outcome could materially affect cash flow, and additional assessments may be possible.
- Other risks: Currency movements, pricing and volume, mature-market demand, office-products industry consolidation and customer inventory timing affect results. Certain indefinite-lived trade names have limited fair-value headroom; their aggregate carrying value was $182.3 million. The company also disclosed seasonal working-capital needs and ongoing foreign tax examinations.
- The company was in compliance with applicable debt covenants. It had $729.0 million of debt, including $500.0 million of 6.75% notes due 2020 and a $229.0 million floating-rate term loan due 2020. The European ERP system was implemented in February 2016; related internal controls were updated, and management concluded disclosure controls were effective.
Key facts for investors to verify
- Whether the Pelikan acquisition closed on the expected terms, how it was financed, and the resulting leverage and integration costs.
- How much of the Q1 earnings improvement is recurring, given the substantial tax benefit and ongoing foreign-exchange effects.
- Whether pricing can offset currency-related cost inflation without further volume declines, particularly in International markets.
- Developments in the Brazilian tax appeals, potential additional assessments and any changes to the recorded accrual.
- Cash conversion and seasonal working-capital requirements, including cash held in Brazil and availability under the revolving facility.
- Any impairment indicators affecting trade names with limited fair-value headroom.