ACCO Brands Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. ACCO Brands sells consumer, school, technology and office products through three segments: North America, EMEA and International. The December 2020 PowerA acquisition expanded its gaming-accessories business; PowerA contributed $62.7 million of Q1 sales.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $410.5 million | $384.1 million |
| Gross profit / margin | $115.5 million / 28.1% | $112.2 million / 29.2% |
| Operating income (loss) / margin | ($1.1) million / (0.3)% | $17.4 million / 4.5% |
| Net income (loss) | ($20.4) million | $8.0 million |
| Diluted EPS | ($0.21) | $0.08 |
| Cash from operating activities | ($42.4) million | ($25.2) million |
Reported sales rose 6.9%, reflecting PowerA and a $15.7 million favorable currency impact. Comparable sales, excluding acquisitions and translating foreign sales at prior-year rates, fell 13.5%. Gross margin contracted 1.1 percentage points. The company attributed the operating loss chiefly to acquisition-related earnout remeasurement, increased amortization and restructuring costs, along with inflation and freight expense.
- Segments: North America sales rose 12.5% to $188.8 million, but comparable sales fell 18.8%; segment operating loss was $0.7 million. EMEA sales rose 23.1% to $156.9 million, with comparable sales up 6.8%; operating income was $16.8 million. International sales fell 27.0% to $64.8 million, with comparable sales down 32.7%; operating income was $0.6 million.
- Balance sheet at March 31: Cash was $75.1 million; inventory $351.2 million; total assets $3,001.7 million; and total stockholders’ equity $708.8 million.
- Debt and liquidity: Total debt was $1,214.5 million. The company had $218.9 million drawn on its revolving facility and $367.1 million available, including the effect of outstanding letters of credit. Consolidated leverage was approximately 4.50:1 versus a 5.25:1 covenant ceiling.
- Cash flow: Investing activities provided $14.4 million, including an $18.2 million PowerA working-capital adjustment. Financing activities provided $68.3 million. Cash increased from $36.6 million at year-end 2020 to $75.1 million.
Material changes and unusual items
- In March, ACCO issued $575 million of 4.25% notes due 2029 and redeemed $375 million of 5.25% notes due 2024. It also amended its bank facility, extending maturity to March 2026. Refinancing generated a $9.8 million call premium and a $3.7 million debt-cost write-off, included in other expense. Management estimated $5.2 million of interest savings for the remainder of 2021, assuming LIBOR rates remained at then-current levels.
- The $6.7 million increase in fair value of PowerA contingent consideration was recorded as an operating expense. The earnout may reach $55 million; its reported fair value at quarter-end was $24.9 million.
- Restructuring charges were $3.9 million, primarily severance and lease termination costs. A $1.4 million pension curtailment loss was also recorded.
- Foreign exchange translation reduced comprehensive income: other comprehensive loss was $13.0 million, and comprehensive loss totaled $33.4 million.
Outlook, commentary and risks
Management gave no specific full-year revenue or earnings guidance in the provided filing text. It expected demand to improve compared with 2020 in most markets, but anticipated continued weakness in Latin America and uneven recovery based on school and office reopening, vaccinations, channel conditions and consumer behavior. North America back-to-school sell-in could be soft in Q2 because channel inventory was elevated; management expected customer sell-through to strengthen as in-person schooling returned. It also anticipated gradual improvement in commercial-product demand as employees returned to offices.
Management warned that COVID-19 could continue to materially and adversely affect sales and results, with ongoing uncertainty around regional reopening, customer payment capacity, demand, manufacturing and supply chains. Higher freight, raw-material and supplier costs were pressuring performance; the company expected further cost increases and planned selling-price increases. Late customer payments and potential bad debts were concerns, particularly in Latin America. Management said cash, operating cash flow and revolver availability should support foreseeable liquidity needs and did not anticipate share repurchases in 2021.
- Contingencies: Brazilian tax assessments remain under judicial challenge. The recorded accrual was $25.7 million; an adverse outcome could materially affect cash flow when settled. The company also disclosed other routine litigation, including potential intellectual-property claims.
- Impairment and acquisition estimates: Management identified ACCO Brands International goodwill as potentially at risk if performance does not recover as expected. PowerA purchase accounting remained preliminary, including valuations of intangibles and contingent consideration.
- Other: The company expected to contribute approximately $24.5 million to defined benefit plans in 2021, of which $6.6 million had been contributed by March 31. Franken was acquired on April 1, 2021, for approximately $4.0 million.
Important facts for investors to verify
- Whether underlying comparable sales and margins recover, especially in North America and Latin America, as schools and offices reopen.
- Progress on inflation and freight-cost pass-through, and whether planned price increases protect gross margin.
- Debt reduction, leverage covenant headroom and the realized interest savings following refinancing.
- PowerA’s growth and profitability, and any changes to its preliminary purchase accounting or earnout valuation.
- Developments in the Brazilian tax disputes, customer credit risk and potential goodwill impairment triggers.