ACCO Brands Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Amounts are in U.S. dollars. The Mead Consumer and Office Products (C&OP) Business merger closed May 1, 2012; its results are included only from that date, limiting direct period-to-period comparability.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $438.7 million | $330.2 million | $727.6 million | $628.6 million |
| Gross profit / margin | $124.3 million / 28.3% | $101.4 million / 30.7% | $204.1 million / 28.1% | $186.6 million / 29.7% |
| Operating income / margin | $11.6 million / 2.6% | $30.6 million / 9.3% | $15.6 million / 2.1% | $43.9 million / 7.0% |
| Net income | $94.2 million | $43.7 million | $76.8 million | $35.6 million |
| Diluted EPS | $0.98 | $0.75 | $1.00 | $0.65 |
- Revenue rose 33% in Q2 and 16% year to date, mainly due to the acquired business, which contributed $147.7 million in the six-month period. Excluding the acquisition, management reported an underlying sales decline of 12% in Q2 and 8% for the six months, including unfavorable currency effects.
- Lower operating income reflected restructuring and merger integration costs, weaker legacy-business sales, and Q2 inventory fair-value step-up expense of $10.8 million. Gross margin also declined due to that step-up and unfavorable product mix.
- Reported earnings were substantially affected by a $175.5 million Q2 income tax benefit, including release of $130.4 million in valuation allowances ($112.7 million U.S.; $17.7 million foreign). Pretax results were a loss of $81.3 million in Q2 and $94.7 million for the six months. The tax benefit is not a measure of recurring operating performance.
- Other expense was $61.3 million in Q2, principally associated with refinancing, including debt-extinguishment costs and write-offs. Net interest expense was $32.8 million for Q2 and $51.9 million for the six months.
Cash flow, debt and liquidity
- Six-month operating cash flow was negative $166.3 million, versus negative $28.9 million in 2011. The reported net income included $130.4 million of non-cash tax benefit. Cash use also reflected $102.8 million of working-capital outflow, transaction and refinancing payments, interest, pension contributions, and seasonal inventory build.
- Investing cash flow was negative $407.3 million, including $401.4 million net cash paid for the acquisition; capital expenditures were $10.3 million. Financing cash flow was positive $550.8 million, including $1.27 billion of new borrowings and $681.8 million of debt repayments.
- Cash was $94.5 million at June 30, compared with $121.2 million at year-end 2011. Total debt was $1.260 billion, versus $669.0 million at year-end. The company reported $234.1 million available on its $250 million revolving facility, after letters of credit.
- The May refinancing extended maturities and reduced stated borrowing costs: secured term loans mature in 2017 and 2019, and $500 million of 6.75% senior unsecured notes mature in 2020. The company reported compliance with applicable loan covenants and said liquidity sources should be adequate for foreseeable needs.
Material developments, outlook and risks
- The Mead C&OP merger was accounted for as an acquisition. Preliminary net purchase price was $998.1 million, including $602.3 million in stock issued and a $460.0 million payment to MeadWestvaco, net of preliminary working-capital adjustment and cash acquired. Purchase-price allocations, including $416.5 million goodwill and $545.8 million acquired intangibles, remained preliminary and subject to measurement-period changes.
- Management expected legacy cost-saving plans to yield about $8 million annualized when fully realized, with about $5 million expected in 2012. Separate acquisition-integration restructuring included closure of the East Texas, Pennsylvania facility during 2013; management expected that plan to reach cumulative cash-flow break-even by the end of 2014. The filing provides no formal earnings guidance.
- Key risks include realizing acquisition synergies and integrating operations and systems, high debt and tightening financial covenants, weak demand and pricing pressure, foreign-exchange and commodity-cost movements, and dependence on suppliers and major customers. Management said pending litigation was not expected to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- How much of reported earnings reflects the one-time tax valuation-allowance release, and what earnings level is supported by ongoing operations?
- Whether acquired purchase-price allocations and working-capital adjustments changed materially after the preliminary estimates.
- Whether acquisition integration and cost-saving targets are achieved, and whether restructuring charges and cash outflows stay within expectations.
- Whether operating cash flow and working capital improve as seasonal receivables are collected, while the company services its higher debt load and remains within covenants.
- Whether legacy sales, margins, and segment trends recover, particularly in International and Computer Products, amid currency, demand, and pricing pressures.