ACCO Brands Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; the company designs, markets and manufactures branded school, office and consumer products. COVID-19 materially affected demand and operations.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $444.1m | $505.7m | $1,195.1m | $1,418.3m |
| Gross profit / margin | $127.1m / 28.6% | $155.9m / 30.8% | $349.3m / 29.2% | $447.5m / 31.6% |
| Operating income / margin | $34.3m / 7.7% | $48.8m / 9.6% | $70.2m / 5.9% | $128.1m / 9.0% |
| Net income | $18.8m | $28.0m | $32.2m | $63.3m |
| Diluted EPS | $0.20 | $0.28 | $0.34 | $0.62 |
| Operating cash flow | Not separately provided | Not separately provided | $21.8m | $75.1m |
Q3 sales fell 12.2% year over year and operating income fell 29.7%; nine-month sales declined 15.7% and operating income declined 45.2%. Lower demand drove the declines, with margin pressure from unfavorable product/customer mix, lower fixed-cost absorption and inventory provisions. Cost reductions partly offset these effects. Nine-month comparable sales, excluding acquisition and currency effects, decreased 15.6%.
Segments and material developments
- North America: Q3 sales fell 12.4%; operating income fell 32.0%. Weak back-to-school sell-through and commercial product demand were partly offset by strong Kensington computer accessories and growth in selected products.
- EMEA: Q3 reported sales rose 2.5%, helped by favorable currency; comparable sales fell 2.1%. Operating income increased 21.0%, supported by improved gross margin, lower SG&A and government assistance. Nine-month sales and operating income declined.
- International: Q3 sales fell 30.9% and operating income fell 65.7%, with the greatest pandemic impact in Latin America, particularly Brazil and Mexico. Foroni contributed a $1.5m Q3 loss and $3.9m loss for the nine-month period.
- Q3 cost reductions and normal productivity savings reduced costs by approximately $20m. Headcount was down about 700 employees, or 10%, from year-end 2019. The company expects further structural changes and restructuring charges.
- Q3 government assistance totaled $3.5m. Assistance programs may be reduced or discontinued; management does not assure continued eligibility.
Cash, debt and liquidity
- Cash was $85.8m at September 30, 2020, versus $27.8m at December 31, 2019. Nine-month operating cash flow was $21.8m; investing cash use was $11.2m and financing cash provided was $48.6m.
- Total debt was $917.3m, compared with $816.0m at year-end 2019. The company had $123.7m drawn on its revolving facility and $465.5m available, net of letters of credit. No debt maturities are due before May 2024.
- Consolidated leverage ratio was 3.45x. A May 2020 amendment raised the maximum leverage covenant to 4.75x, reverting to 3.75x for the first fiscal quarter ending after June 30, 2021. The company reported covenant compliance.
- Management said available cash, operating cash flow and committed borrowing capacity should support foreseeable liquidity needs. Share repurchases were paused for 2020; dividends continued.
Outlook, risks and unusual items
- No numerical full-year or fourth-quarter earnings guidance was provided. Management expected demand to remain below 2019 levels, especially commercial products and Brazilian back-to-school products, and reported limited visibility for Q4 and less for 2021. COVID-19 impacts were expected to continue materially affecting results.
- Management cited regional variation in the pandemic, school and business openings, a resurgence of infections, changing channels and consumer behavior, foreign exchange, and potential supply-chain or customer disruptions as uncertainties. It expects medium- to long-term macroeconomic recovery but cannot estimate the pandemic’s longer-term financial impact.
- Late customer payments and potential bad debts increased: bad debt expense was $2.6m higher in Q3 and $6.3m higher year to date than the prior-year periods. Q3 inventory provisions were $5.7m; the nine-month increase over prior year was $4.8m. Management anticipated these pressures would continue.
- Brazil tax assessments remain contested in court. The company recorded a $1.2m Q3 expense for potential attorneys’ costs and fees; the related accrued liability, including tax, penalties and interest, was $26.1m. An adverse final outcome could materially harm cash flow, and resolution may take years.
- No goodwill or indefinite-lived intangible impairment trigger was identified as of the assessment described in the filing. Management noted ACCO Brands International goodwill could be at risk if performance fails to recover or long-term assumptions worsen.
- Q3 restructuring expense was $0.5m; nine-month expense was $7.3m. The filing also reports a $1.6m Brazilian tax charge in 2019 on a contingent gain, affecting period-to-period tax comparisons.
Investor verification priorities
- Track demand, school reopening and sell-through trends, particularly in North America and Latin America, and the pace of recovery in commercial products.
- Monitor bad debts, customer collections, inventory levels and provisions, and the sustainability of cost savings and government assistance.
- Verify leverage, covenant headroom, revolving-credit availability and cash generation against debt and seasonal working-capital needs.
- Follow the Brazilian tax-assessment appeals, related reserves and potential cash exposure.
- Assess whether International segment performance and goodwill assumptions recover sufficiently to avoid impairment risk.