ACCO Brands Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. ACCO Brands makes and sells office, school, calendar and computer-accessory products. Figures are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $413.6 million | $472.2 million | $1,098.3 million | $1,229.3 million |
| Gross profit / margin | $133.7 million / 32.3% | $153.3 million / 32.5% | $340.6 million / 31.0% | $373.0 million / 30.3% |
| Operating income / margin | $54.8 million / 13.2% | $61.8 million / 13.1% | $106.6 million / 9.7% | $105.1 million / 8.5% |
| Net income | $32.6 million | $34.2 million | $54.5 million | $47.7 million |
| Diluted EPS | $0.30 | $0.29 | $0.49 | $0.41 |
- Q3 sales fell 12%; management attributed $38.9 million, or 8%, of the decline to foreign-currency translation. Higher pricing partly offset lower volume.
- For the nine months, sales fell 11%, including an $86.6 million adverse translation impact. Operating income rose $1.5 million despite an $11.1 million adverse translation impact; lower SG&A was the main underlying support.
- Q3 gross margin eased 0.2 percentage points, while nine-month gross margin improved 0.7 points. Pricing, savings and productivity supported year-to-date margin; currency-related input-cost inflation and lower volume remained pressures.
- Operating cash flow was $69.7 million for nine months, versus $67.5 million. Capital expenditures were $21.4 million. Cash and equivalents were $70.9 million at September 30, 2015, versus $53.2 million at year-end 2014.
- Total debt was $826.0 million, including $47.0 million drawn on the revolving facility; long-term debt was $779.0 million. The company had $243.9 million available under its $300 million revolver, net of letters of credit, and expected to repay the revolver by year-end. It reported compliance with debt covenants.
- Current assets were $710.1 million and current liabilities $368.8 million. Approximately $40 million of cash was held in Brazil, where tax rules make transfers of working capital costly.
Changes, segments and notable items
- Q3 sales declined across all segments. International sales fell 26%, substantially affected by currency translation and weaker Brazilian demand; North America sales fell 6%, reflecting shipment timing, lost placement, store closures and lower customer inventories. Computer Products Group sales fell 13%, partly as ACCO reduced exposure to lower-margin tablet accessories.
- For the first nine months, North America operating income increased to $104.1 million from $98.0 million. International operating income fell to $20.8 million from $31.9 million, while Computer Products Group operating income rose to $6.9 million from $5.0 million.
- The company refinanced its secured credit facilities in April 2015 with a five-year $600 million facility, consisting of a $300 million term loan and $300 million revolver. It also has $500 million of 6.75% senior unsecured notes due 2020. A $1.9 million debt-origination-cost write-off affected nine-month other expense.
- ACCO repurchased 6.1 million shares during the first nine months. Financing cash use included $46.0 million of repurchases and $5.9 million of share-based compensation tax withholding.
- Foreign-currency translation adjustments were a $135.0 million loss before tax for the first nine months, contributing to a $77.5 million comprehensive loss despite net income of $54.5 million.
Outlook, risks and contingencies
- No specific earnings or sales guidance is provided in the filing. Management said it expected the strong U.S. dollar trend to continue and noted that pricing actions had not fully offset foreign-exchange-related cost inflation. It considered cash flow, cash balances and available borrowing capacity adequate for foreseeable working-capital, capital-expenditure and debt-service needs.
- Management cited deteriorating economic conditions in Brazil and Mexico, currency volatility, weak demand, reseller inventory reductions, competition, and substitution toward digital or lower-cost products as significant risks.
- The Brazilian tax authority disputes goodwill deductions at Tilibra for 2007–2010. ACCO reported accrued tax, penalties and interest of R$109.3 million, or approximately $27.1 million at current exchange rates, for 2007–2012. The matter remains contested and could take years; if the tax authority’s position is sustained, settlement could materially adversely affect cash flow. Additional assessments for later years are possible.
- Other litigation and environmental matters were not expected by management to have a material adverse effect. The filing also notes that interim results may not indicate full-year performance.
Investor facts to verify
- How much of future sales and earnings changes reflect currency translation versus underlying volume, pricing and mix, particularly in Brazil and Europe.
- Whether pricing and productivity gains can offset foreign-currency-driven sourcing costs without further weakening demand or margins.
- Progress toward repaying the revolver by year-end and the company’s debt, liquidity and covenant position.
- Developments in the Brazilian tax appeals, the adequacy of the recorded accrual and potential cash exposure.
- Whether working-capital needs, seasonal cash generation and the substantial cash held in Brazil affect access to liquidity.