ACCO Brands Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited results; amounts are in U.S. dollars and millions except per-share data.
Business context and performance
ACCO Brands sells consumer, technology and business products through three segments: North America, EMEA, and International. Management cited soft global demand amid inflation, higher interest rates, lower business IT spending, stabilized return-to-office trends and North American retailers maintaining lower inventories. Technology accessories were particularly affected.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $448.0 | $485.6 | $1,344.2 | $1,448.2 |
| Gross profit / margin | $144.8 / 32.3% | $137.4 / 28.3% | $428.3 / 31.9% | $407.0 / 28.1% |
| Operating income (loss) / margin | $32.2 / 7.2% | $(63.0) / (13.0)% | $97.5 / 7.3% | $(0.8) / (0.1)% |
| Net income (loss) | $14.9 | $(68.7) | $37.6 | $(32.0) |
| Diluted EPS | $0.15 | $(0.73) | $0.39 | $(0.33) |
| Operating cash flow | Not presented separately for quarter | $70.7 | $(9.6) |
Q3 sales fell 7.7%; comparable sales, a company-defined non-GAAP measure, fell 9.9%. For the nine months, sales declined 7.2% and comparable sales declined 7.1%. Q3 volume fell 14.9%, partly offset by price increases of 5.0% and favorable foreign exchange of 2.2%. Year-to-date volume fell 14.5%, while price increases contributed 7.3%.
Gross margin improved 400 basis points in Q3 and 380 basis points year to date, principally from cumulative pricing and cost reductions. The prior-year comparison includes a non-cash goodwill impairment charge of $98.7 million, which did not recur; therefore, the sharp operating-income improvement is not solely a measure of underlying growth. Interest expense increased $3.5 million in Q3 and $12.4 million year to date, mainly due to higher variable rates.
Segments and balance sheet
- North America: Q3 sales declined 14.9% to $218.9 million; segment operating income was $19.9 million versus a loss of $78.4 million, principally reflecting the prior-year impairment. Nine-month sales declined 10.9%.
- EMEA: Q3 sales declined 2.8% to $126.6 million; segment operating income increased to $6.9 million from $4.9 million. Nine-month sales declined 8.5%.
- International: Q3 sales increased 4.5% to $102.5 million, but segment operating income declined to $16.4 million from $17.3 million. Nine-month sales increased 6.5%.
- At September 30, cash was $73.7 million; total debt was $969.4 million, versus $1,004.9 million at year-end 2022. Long-term debt, net, was $892.2 million, and current debt including notes payable was $70.1 million.
- Revolving-facility borrowings were $67.6 million, with $522.8 million available after letters of credit. Leverage was approximately 3.78x against a 4.75x maximum covenant. No debt maturities were reported before March 2026.
Cash flow, outlook, risks and unusual items
Nine-month operating cash flow was $70.7 million, compared with $9.6 million used in the prior year, reflecting lower working-capital investment and lower incentive-compensation payments. Investing cash outflow was $7.5 million, including $9.7 million of capital expenditures and $2.2 million of proceeds from a Japan facility sale. Financing cash outflow was $53.9 million, including $30.8 million of net debt repayments and $21.4 million of dividends. Cash increased $11.5 million over the period.
Management expects macroeconomic and demand trends to continue affecting results through the remainder of 2023 and anticipates the company’s customary seasonal pattern of stronger cash inflows in the second half. It believes cash, operating cash flow and revolving-credit availability will be adequate for foreseeable working-capital, investment and debt-service needs. Near-term cash priorities include dividends and debt reduction. The filing provides no quantified earnings or sales guidance.
- Debt and rates: $394.4 million of senior secured variable-rate debt carried a weighted average rate of 6.72%, up from 4.02% a year earlier. The $575.0 million senior notes due 2029 carry a fixed 4.25% rate. Management expects higher interest expense in the current rate environment.
- Brazil tax assessments: The company is contesting assessments concerning goodwill deductions. The recorded accrual, including tax, penalties and interest, was $33.4 million. An adverse outcome could materially affect cash flow in the settlement year. A 2023 change in Brazilian law may allow the company to seek cancellation of the 75% penalty; it intends to apply, but the outcome is uncertain.
- Brazil tax credits: The company recorded $1.3 million of tax credits in both the third quarter and nine-month period. It also expects to pursue additional credits of approximately $1.7 million after administrative steps are completed; those additional credits had not yet been recorded as a gain.
- Other items: Restructuring charges were $3.0 million in Q3 and $6.3 million year to date, primarily EMEA severance and footprint rationalization. The company reported no goodwill impairment in 2023 and no impairment trigger in its 2023 qualitative assessment. Management said there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether demand and sales volumes stabilize, particularly in North America and technology accessories, and whether pricing and cost actions can sustain margin improvement.
- How the Brazil tax-assessment litigation and penalty-cancellation request progress, including potential cash exposure beyond the $33.4 million accrual.
- Whether operating cash flow remains sufficient to fund dividends and debt reduction as seasonal working-capital patterns change.
- Exposure to higher floating interest rates, covenant headroom and leverage relative to the 4.75x limit.
- The effect of restructuring, segment-level trends and the prior-year $98.7 million impairment on comparisons of reported earnings.