ACCO Brands Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. ACCO designs, markets and manufactures branded consumer and office products. Results include Esselte for January 2018, whereas the comparable 2017 quarter included Esselte beginning February 1, 2017. The first quarter is seasonal and results may not indicate full-year performance.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $405.8 million | $359.8 million | +13% |
| Gross profit / margin | $127.5 million / 31.4% | $110.9 million / 30.8% | Margin +0.6 pts |
| Operating income / margin | $11.7 million / 2.9% | $7.2 million / 2.0% | +63%; margin +0.9 pts |
| Income before tax | $6.1 million | $0.1 million | +$6.0 million |
| Income tax benefit | $4.3 million | $3.5 million | Benefit in both periods |
| Net income / diluted EPS | $10.4 million / $0.09 | $3.6 million / $0.03 | Net income +189%; EPS +$0.06 |
| Operating cash flow | $60.4 million | $65.4 million | Down $5.0 million |
| Capital expenditures | $8.0 million | $5.2 million | Up $2.8 million |
Reported sales growth reflected $44.2 million from Esselte's additional January results and $17.0 million of favorable currency translation. Comparable sales at constant currency declined 4%. Gross margin improvement was attributed primarily to higher EMEA pricing. Operating margin and net income also benefited from Esselte's additional month and lower integration and transaction costs; the tax benefit included a Brazil reserve release and stock-compensation tax benefits.
Segment results
| Segment | Sales | Sales change | Operating income | Operating margin |
|---|---|---|---|---|
| North America | $165.6 million | -5% | $2.9 million (prior: $5.8 million) | 1.8% (prior: 3.3%) |
| EMEA | $154.5 million | +60% | $14.1 million (prior: $3.6 million) | 9.1% (prior: 3.7%) |
| International | $85.7 million | -3% | $5.8 million (prior: $10.1 million) | 6.8% (prior: 11.4%) |
EMEA growth included Esselte and currency; comparable constant-currency sales increased 2%. North America comparable sales fell 6%, principally from customer inventory reductions and lost product placement. International comparable sales fell 7%, reflecting declines in Australia/New Zealand, Mexico and Asia-Pacific, partly offset by Brazil.
Balance sheet, debt and liquidity
- At March 31, 2018, cash was $122.7 million, total assets $2,754.7 million, and total liabilities $1,989.7 million.
- Total debt was $958.0 million, versus $939.5 million at December 31, 2017; current debt was $42.8 million. Approximate debt less cash was $835.3 million.
- Revolving-facility borrowings were $147.9 million, with $239.5 million available after letters of credit. The company reported compliance with applicable debt covenants.
- Operating cash flow was $60.4 million; investing activities used $8.0 million, and financing activities used $7.0 million. Cash increased $45.8 million during the quarter. Operating cash flow included a $162.0 million source from receivables and a $43.5 million use for inventory.
- Management said cash, operating cash flow and available borrowing capacity should meet foreseeable working-capital, capital, restructuring and debt-service needs. Approximately $84 million of cash was held in Brazil, where seasonal cash is costly to transfer.
Outlook, commentary and risks
- Management expected approximately $4 million of additional Esselte integration costs and $2.5 million of additional restructuring expenses over the balance of 2018; timing and associated cash outflows were not estimable.
- Management anticipated 2018 income tax payments of approximately $52 million, compared with $35 million paid in 2017, largely because U.S. net-operating-loss tax benefits had been exhausted.
- Rising paper, wire, steel and aluminum costs, U.S. tariffs, fuel and carrier rates had not affected reported results at the time of filing. The company planned price increases to help offset potential effects.
- The Brazilian tax assessment remained a significant contingency. After releasing $5.6 million when the 2011 statute of limitations expired, the accrued amount, including tax, penalties and interest, was $33.4 million. The company intended to challenge the assessments; an adverse outcome could materially affect cash flow. A further assessment concerning 2012 remained possible.
- Other pending litigation and environmental matters were not expected by management to have a material adverse effect, though outcomes are uncertain. The filing reported no material change in previously disclosed risk factors.
- On January 1, 2018, the company adopted revenue-recognition guidance, recording a $1.6 million increase to opening retained earnings; the reported Q1 impact was immaterial. The company expected adoption of the new lease standard in 2019 to significantly affect its balance sheet, but not materially affect its income statement.
Investor facts to verify
- Whether comparable-sales trends improve, particularly in North America and International, and whether lost placements or customer inventory reductions persist.
- Whether planned pricing offsets input-cost, tariff, fuel and freight inflation without weakening demand or margins.
- Progress on Esselte integration, expected savings, and the timing and cash cost of remaining integration and restructuring actions.
- The resolution and possible cash exposure of the Brazilian tax assessments, including the potential 2012 assessment.
- Debt, seasonal liquidity and cash availability, including the substantial Brazil cash balance, alongside planned dividends and share repurchases.
- Whether the provisional accounting for U.S. tax reform changes before completion of the measurement period in 2018, and the balance-sheet effect of lease-standard adoption in 2019.