ACCO Brands Corporation — Q3 2011 Form 10-Q
Business context and period: Quarterly report for the three and nine months ended September 30, 2011; filed October 26, 2011. ACCO sells branded office products, document-finishing solutions and computer accessories through three segments: ACCO Brands Americas, ACCO Brands International and Computer Products Group. Unless noted, amounts are in millions of dollars. Prior-period comparisons reflect reclassification of the GBC Fordigraph business as discontinued operations.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $339.1 | $319.4 | $967.7 | $925.1 |
| Gross profit / margin | $107.1 / 31.6% | $97.8 / 30.6% | $301.8 / 31.2% | $283.3 / 30.6% |
| Operating income / margin | $35.4 / 10.4% | $30.0 / 9.4% | $79.3 / 8.2% | $75.5 / 8.2% |
| Continuing-operations income | $11.9 | $4.4 | $9.2 | $3.5 |
| Net income | $11.7 | $5.4 | $47.3 | $5.6 |
| Diluted EPS | $0.20 | $0.09 | $0.82 | $0.10 |
- Cash flow: Operating activities used $21.9 for the first nine months, versus $14.9 used in 2010. Investing activities provided $43.5, including $54.6 of proceeds from discontinued-operation sales; financing activities used $63.0, principally for debt repayment. Cash declined $41.9 to $41.3.
- Debt and liquidity: Total debt was $668.8 at September 30, down from $727.6 at December 31, 2010; cash was $41.3. The company reported $168.5 available under its $175.0 asset-based revolving credit facility, after letters of credit. It was in compliance with applicable covenants. Senior Secured Notes carry a 10.625% fixed rate and mature March 2015; Senior Subordinated Notes carry a 7.625% fixed rate and mature August 2015.
- Balance sheet: Total assets were $1,050.3 versus $1,149.6 at year-end 2010; stockholders’ deficit was $32.6 versus $79.8. Current assets were $553.8 and current liabilities $255.1.
Changes and drivers versus prior period
- Q3 sales rose 6%; nine-month sales rose 5%. Management attributed much of the increase to favorable foreign-currency translation ($14.5 in Q3 and $40.8 for nine months); higher pricing also helped, while volumes declined modestly in several markets.
- Gross margin improved 1.0 percentage point in Q3 and 0.6 point year to date, with higher pricing and efficiencies partly offsetting commodity and fuel costs. Q3 operating income increased 18%; year-to-date operating margin was unchanged at 8.2% as higher SG&A and lower volume offset gross-margin improvement.
- International segment Q3 operating income rose to $14.6 from $5.3, with European operations returning to profitability. Americas Q3 operating income was flat at $16.5; Computer Products operating income declined to $11.1 from $12.6, primarily on lower royalties and unfavorable product mix.
- For the first nine months, Americas operating income fell to $36.5 from $39.2; International increased to $27.7 from $19.3; Computer Products increased to $33.5 from $31.4.
- Nine-month net income includes $38.1 from discontinued operations, including a $36.9 after-tax gain on the GBC Fordigraph sale. Continuing-operations income was $9.2. Thus reported net-income growth substantially reflects a nonrecurring disposal gain.
Outlook, commentary and risks
- Management said cash, operating cash flow and available ABL borrowings should fund working capital, capital expenditures and debt service for the foreseeable future. It gave no specific earnings or revenue guidance in the provided filing text.
- The GBC Fordigraph business was sold effective May 31, 2011; it had approximately $46 of annual sales. The company reported $53.6 net proceeds and anticipated $52.9 of pretax net proceeds after working-capital adjustments and estimated selling costs. Additional sale costs and tax payments were expected later.
- European rationalization costs were $4.5 for the first nine months, primarily employee termination costs; management expected 2011 savings to largely offset them. The restructuring program was described as complete, though remaining liabilities are payable into 2013.
- Key risks cited include raw-material and freight-cost increases, ability to pass costs through without losing volume, foreign-exchange movements, competitive and private-label pressure, office-products industry consolidation, customer and supplier health, access to credit, new-product acceptance, and pension and employee-benefit costs. Pending litigation and environmental matters were not expected by management to have a material adverse effect, but outcomes remain uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material change in foreign-exchange or interest-rate risk management.
Important facts for investors to verify
- Underlying sales and volume trends apart from currency translation and pricing, particularly in Europe and the Americas.
- Whether improved margins and European profitability persist as commodity, fuel and freight costs evolve.
- Cash conversion: operating cash outflow continued despite positive earnings; assess the role of pension, interest, tax and incentive payments and seasonal inventory.
- How much of reported nine-month earnings is attributable to the GBC Fordigraph disposal gain, and the final proceeds, costs and taxes.
- Debt-repurchase details: the filing reports $59.9 of year-to-date repurchases and separately describes Q3 repurchases; reconcile timing and amounts, and monitor debt-service capacity and the September 2013 ABL expiration.
- Tax-rate sustainability: nine-month effective tax rate was 60.3%, affected by valuation allowances and jurisdictional income; Q3 benefited from U.K. valuation-reserve releases and lower-tax jurisdictions.