ACCO Brands Corporation — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2013, compared with the three months ended March 31, 2012. ACCO sells office, school, calendar and computer-accessory products. The comparison is affected by the May 2012 acquisition of Mead’s Consumer and Office Products business (Mead C&OP), whose results were not included in Q1 2012.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $352.0 million | $288.9 million |
| Gross profit / margin | $96.7 million / 27.5% | $79.8 million / 27.6% |
| Operating income (loss) / margin | $(9.2) million / (2.6)% | $4.0 million / 1.4% |
| Net loss | $(9.0) million | $(17.4) million |
| Diluted loss per share | $(0.08) | $(0.31) |
| Operating cash flow | $85.7 million | $(45.0) million |
- Sales increased 22%, but Mead C&OP contributed $100.1 million; excluding that contribution, sales declined $37.0 million, including $1.7 million of unfavorable currency translation.
- Gross margin was nearly flat. Higher SG&A, amortization and restructuring contributed to the operating loss. SG&A was $89.6 million, or 25.5% of sales, versus $68.2 million, or 23.6%.
- The income tax benefit was $14.6 million, including a $7.0 million benefit from releasing a valuation allowance on Netherlands deferred tax assets. The effective tax rate was 62.1%.
- Q1 operating cash flow benefited substantially from seasonal working-capital inflows, including $188.8 million from receivables collections; inventory used $24.6 million of cash. Cash ended at $102.1 million, up from $50.0 million at year-end 2012.
- Capital expenditures were $7.3 million; investing cash outflow was $8.6 million. Financing cash outflow was $21.6 million, including $20.0 million of long-term debt repayments.
- At March 31, total debt was $1,051.0 million, including $500 million of 6.75% senior unsecured notes. Cash was $102.1 million. No revolving-credit borrowings were outstanding; $238.4 million was available under the $250 million facility, after letters of credit. The company reported compliance with debt covenants.
Material changes and segment performance
- ACCO Brands North America sales rose to $189.0 million from $136.7 million, including $67.9 million from Mead; segment operating loss widened to $8.2 million from $3.5 million. Management cited weak U.S. demand, lower customer inventories, exited business and integration costs.
- ACCO Brands International sales rose to $126.2 million from $110.6 million, including $32.2 million from Mead’s Brazilian business; operating income fell to $4.0 million from $8.2 million. European market weakness, exited business and restructuring weighed on results.
- Computer Products Group sales declined 12% to $36.8 million and operating income fell to $2.8 million from $7.5 million, reflecting soft PC-accessory demand, lower pricing, lost royalty income and weaker product mix.
- Interest expense declined to $15.7 million from $19.1 million, primarily following the 2012 refinancing. Mead-related acquisition increased the share count: weighted-average basic shares were 113.3 million versus 55.5 million.
Outlook, risks and unusual items
- Management cited weak demand, industry pricing pressure, declining usage in some product categories, foreign-exchange exposure and commodity-cost volatility. The proposed Office Depot–OfficeMax merger could affect the retail channel; management said that channel represented about one-third of ACCO’s business with those customers.
- Management described Mead C&OP as seasonal, with historical first-quarter operating losses; Brazilian school-product sales are concentrated around the back-to-school season.
- The company committed to restructuring and integration initiatives. The filing’s MD&A forecasts approximately $25 million of additional restructuring charges and $4 million of additional IT integration charges in 2013, with related cash outflows of about $19 million in 2013 and $6 million in 2014. Note 9 separately estimates approximately $15 million of additional restructuring charges in 2013; investors should reconcile these disclosures.
- A Brazilian tax assessment challenges the deductibility of goodwill at acquired subsidiary Tilibra. ACCO recorded a $44.5 million reserve in Q4 2012, accrued another $0.3 million of interest in Q1 2013, and is contesting the assessment. The appeal may take years; additional assessments relating to 2008–2012 tax years are possible.
- Management stated that cash, operating cash flow and available revolving credit should cover foreseeable working-capital, capital-expenditure and debt-service needs. Interim results may not indicate full-year performance. No specific revenue or earnings forecast was provided.
- Other notable items included $1.6 million of integration inefficiencies, $1.2 million of headquarters-relocation costs and $1.2 million of IT integration costs. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported sales and earnings improvement reflects Mead C&OP versus underlying demand, pricing, mix and cost savings.
- The expected amount, timing and cash cost of restructuring and integration, including the different 2013 restructuring estimates in the filing.
- Progress and potential exposure from the Brazilian tax dispute, including interest accruals and possible assessments for additional years.
- Seasonal working-capital effects on cash flow and liquidity, alongside debt levels, covenant headroom and the availability of the revolver.
- Whether weak demand, customer consolidation, currency movements and lower high-margin computer-product sales persist.