ACCO Brands Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. ACCO Brands designs, markets and manufactures branded consumer and business products for schools, homes and workplaces. Results are seasonal, with North American back-to-school sales and year-end calendar purchases contributing to demand.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $518.7m | $498.8m | $912.6m | $904.6m |
| Gross profit / margin | $165.8m / 32.0% | $162.4m / 32.6% | $291.6m / 32.0% | $289.9m / 32.0% |
| Operating income / margin | $61.4m / 11.8% | $51.8m / 10.4% | $79.3m / 8.7% | $63.5m / 7.0% |
| Net income | $35.9m | $25.7m | $35.3m | $36.1m |
| Diluted EPS | $0.35 | $0.24 | $0.34 | $0.33 |
| Operating cash flow | Not separately stated | Not separately stated | $(115.7)m | $(6.5)m |
Q2 sales increased 4.0%; comparable sales, excluding acquisitions and currency translation, rose 4.4%. Operating income rose 18.5%, reflecting pricing, cost savings, lower prior-year restructuring and integration costs, and GOBA’s contribution. Gross margin fell 0.6 percentage points, principally on unfavorable product mix in EMEA and International. Q2 net income also benefited from a lower effective tax rate than in the prior-year quarter and fewer diluted shares.
For the first half, sales increased 0.9% as growth and GOBA were largely offset by currency translation; comparable sales grew 2.2%. Operating income increased 24.9%, but net income declined 2.2%, mainly reflecting a higher effective tax rate. First-half EPS edged higher as share repurchases reduced weighted-average diluted shares.
Liquidity, debt and capital allocation
- Cash was $94.1m at June 30, 2019, versus $67.0m at December 31, 2018; approximately $76m was held in Brazil. Current assets were $973.2m and current liabilities $500.6m.
- Total debt was $1,104.8m, up from $888.0m at year-end; long-term debt, net of issuance costs, was $1,049.7m. Q2 interest expense was $11.7m, up from $9.9m.
- The amended credit facility extended maturities to May 2024 and increased revolving commitments to $600m. At quarter-end, revolver borrowings were $296.5m and available borrowing capacity was $286.0m, after letters of credit. The company reported compliance with loan covenants.
- First-half operating cash use was $115.7m, driven largely by working-capital outflows of $130.7m, including earlier inventory purchases and related payment timing. Investing cash use was $19.6m; financing provided $161.9m, including incremental net borrowings. Capital expenditures were $14.7m.
- The company paid $12.2m in dividends and spent $37.9m repurchasing shares in the first half. It had $69.6m remaining under its $100m repurchase authorization at June 30. A $0.06-per-share dividend was declared July 31, payable September 18, 2019.
Changes, outlook and risks
- Regional trends: Q2 North America sales rose 8.9% and segment operating income rose 17.7%, led by pricing and higher back-to-school shipments. EMEA sales fell 8.7%, including a 6.3% currency impact; comparable sales declined 2.4%. International sales rose 9.3% including GOBA, but comparable sales fell 1.3%, with lost placements in Australia.
- Costs and tariffs: Management cited input-cost inflation and tariffs on finished goods sourced from China. Tariff increases implemented in May were expected to affect cost of goods sold beginning in Q3. The company announced an August 2019 price increase and expected it to fully offset the higher tariffs; further tariff or input-cost increases, or pricing-related sales losses, could pressure margins and cash flow.
- Cash flow and seasonality: Management expected substantially higher operating cash flow in Q3 and Q4 than in 2018, partly because inventory was purchased earlier in 2019. The company said cash, operating cash flow and available borrowing capacity should support foreseeable liquidity needs. This outlook depends on seasonal collections and working-capital execution.
- Tax contingency and unusual item: The company recorded a $5.6m increase in its Brazil tax reserve in Q1 2019, although management said it should have been recorded in 2018; it concluded the out-of-period adjustment was not material to either year. The Brazil assessment accrual, including tax, penalties and interest, was $36.1m at June 30. The dispute remains unresolved; an adverse outcome could materially harm cash flow in the settlement year.
- Other items: First-half restructuring charges were $2.7m, primarily severance. The company adopted lease accounting in 2019, recognizing $98.3m of right-of-use assets and $106.9m of lease liabilities at June 30; management said the adoption’s income-statement and cash-flow effects were immaterial. No goodwill or indefinite-lived intangible impairment was identified in the second-quarter assessment.
Key facts for investors to verify
- Whether Q3/Q4 collections and operating cash generation recover after the first-half working-capital outflow.
- Whether the August price increase offsets higher China-related tariffs without materially weakening demand or sales.
- Progress in resolving the Brazil tax assessments and the potential timing and cash impact of an adverse result.
- Debt and interest-cost trends following the credit amendment, and continued compliance with covenants.
- Underlying regional sales and margins, particularly EMEA performance and International results excluding GOBA and currency effects.