ACCO Brands Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; filed November 1, 2017. Financial statements are unaudited. Results include Esselte from February 1, 2017. Segment reporting was realigned in 2017, with prior periods recast.
Financial performance
- Q3 revenue: $532.2 million, up 23% from $431.3 million. Esselte contributed $107.7 million and foreign exchange added $5.3 million. Excluding Esselte and currency, comparable sales decreased slightly.
- Q3 profit and margins: Gross profit was $177.9 million; gross margin was 33.4%, unchanged. Operating income was $58.7 million, up 5%, while operating margin declined to 11.0% from 12.9%. Net income was $30.6 million, up 35%; diluted EPS was $0.28 versus $0.21.
- Nine-month revenue: $1.382 billion, up 23%. Gross profit was $457.2 million, with gross margin improving to 33.1% from 32.3%. Operating income was $113.4 million, up 5%, but operating margin declined to 8.2% from 9.6%.
- Nine-month earnings: Net income was $57.7 million, down 35%; diluted EPS was $0.52 versus $0.82. The 2016 comparison included a $28.9 million non-cash gain from revaluing ACCO’s previously held Pelikan Artline interest. The 2017 effective tax rate was 34.4%, versus 16.4% in 2016; 2017 included a $5.5 million stock-compensation tax benefit.
- Cash flow: Nine-month operating cash flow was $115.7 million, compared with $110.9 million. Investing used $311.0 million, including $292.3 million for Esselte; capital expenditures were $18.8 million. Financing provided $247.7 million. Cash ended the period at $101.3 million.
- Debt and liquidity: Total debt was $1.042 billion, versus $703.5 million at year-end 2016. Cash was $101.3 million, approximately $60 million held in Brazil. Revolver borrowings were $237.0 million, with $151.1 million available after letters of credit. The company reported covenant compliance and stated that liquidity sources should be adequate for foreseeable needs.
Comparative trends and business drivers
- Reported growth reflects acquisitions: Esselte contributed $274.5 million of nine-month sales; Esselte and PA acquisitions together contributed $306.4 million. Excluding acquisitions and currency, nine-month comparable sales declined, primarily due to office-superstore declines and lost product listings.
- Q3 North America sales were nearly flat; comparable sales were pressured by commodity items, order timing, and expected office-superstore declines. EMEA sales rose sharply with Esselte, but legacy comparable sales declined amid customer transitions and share loss. International sales were flat; operating income declined 30%, reflecting lower sales and higher Australian distribution costs.
- Management attributed improved nine-month gross margin chiefly to pricing, cost savings, and productivity. Operating income growth was limited by lower comparable sales, higher integration costs, restructuring, and SG&A.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expects approximately $10 million of additional integration costs and $20 million of additional restructuring expenses over the balance of 2017 and 2018; timing and cash outflows were not reasonably estimable.
- In Q4 2017, the company began consultation regarding a potential European distribution-facility closure in 2018. Potential employee termination and lease-exit costs of $4.2 million and $2.8 million, respectively, were not accrued in Q3.
- The Brazilian tax dispute remains a material contingency. Tilibra’s administrative appeal of the Second Assessment was decided against the company; it planned to challenge the decision in court in early 2018 and may need to post security for $25.3 million. The recorded tax, penalty, and interest accrual was $39.9 million. Management said an adverse outcome could materially affect cash flow in the settlement year.
- Esselte purchase accounting remained preliminary, particularly for taxes and contingent liabilities, and could be materially adjusted. The acquisition added $171.5 million of pension obligations, including an unfunded German pension plan. ACCO expected 2017 defined-benefit contributions of approximately $20.9 million.
- Exposure to foreign currencies increased following acquisitions; about 55% of pro forma 2016 revenue would have been in foreign currencies, versus 43% before the acquisitions. The company also cited seasonality, customer and channel declines, integration execution, and restructuring as relevant considerations.
- The company expects to adopt lease accounting changes in 2019 and anticipates that recognition of operating lease assets and liabilities will be material to its financial statements. Revenue-standard adoption was expected in 2018, with an immaterial financial-statement impact anticipated.
Important facts for investors to verify
- Organic sales, pricing, and customer-retention trends by segment, separated from Esselte and currency effects.
- Whether integration and restructuring deliver planned savings, and the timing and cash cost of the additional expected charges.
- Debt reduction, revolver availability, covenant headroom, and the impact of floating rates and foreign exchange.
- Developments in the Brazilian tax litigation, including any required security posting or additional assessments.
- Final Esselte purchase-price allocation and pension obligations, plus the company’s ability to fund seasonal working capital and pension contributions.