Business context and reporting period
ACCO Brands Corporation designs, markets and manufactures consumer and office products. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; year-over-year comparisons are to the corresponding 2017 periods. Results are seasonal, with second-quarter cash use supporting working capital for the North American back-to-school season.
Key financial results
Amounts are in U.S. dollars; figures in millions except per-share data.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $498.8 | $490.0 | $904.6 | $849.8 |
| Gross profit | $162.4 | $168.8 | $289.9 | $279.7 |
| Gross margin | 32.6% | 34.4% | 32.0% | 32.9% |
| Operating income | $51.8 | $43.3 | $63.5 | $50.5 |
| Operating margin | 10.4% | 8.8% | 7.0% | 5.9% |
| Net income | $25.7 | $23.5 | $36.1 | $27.1 |
| Diluted EPS | $0.24 | $0.21 | $0.33 | $0.24 |
- Sales: Q2 reported sales increased 1.8%; foreign currency added $8.1 million, while comparable sales at constant currency increased 0.1%. For the first half, reported sales rose 6.4%, including $25.1 million of favorable currency translation and $44.2 million from Esselte’s additional January results; comparable sales at constant currency declined 1.8%.
- Profitability: Q2 gross profit fell 3.8% and gross margin declined 1.8 percentage points, reflecting adverse customer/product mix and North American input-cost increases. Operating income rose 19.6%, principally as restructuring charges fell from $12.3 million to $2.1 million; management said underlying operating income, excluding restructuring, integration/transaction costs and currency, declined, mainly due to lower gross profit. First-half operating income rose 25.7%, while gross margin fell 0.9 percentage point.
- Segments: Q2 EMEA sales rose 9.3% and operating income was $8.4 million versus a $0.6 million loss, helped by sales growth and lower restructuring and integration costs. North America sales rose 0.8%, but operating income edged down to $51.5 million. International sales fell 6.7% and operating income fell 17.5% to $3.3 million, reflecting inventory reductions and weaker sales, particularly in Australia and Mexico.
- Cash flow and liquidity: First-half operating cash flow was negative $6.5 million versus positive $7.9 million a year earlier. Capital expenditures were $17.0 million. Cash and equivalents were $139.2 million at June 30, including approximately $70 million in Brazil. The company reported $1,077.0 million of total debt; calculated net debt was approximately $937.8 million. The revolving facility had $64.6 million available, after letters of credit.
- Capital allocation: First-half financing provided $92.1 million, including $155.9 million of incremental net borrowings; the company paid $12.7 million in dividends and repurchased $50.2 million of shares. It remained compliant with applicable debt covenants.
Material changes, outlook, risks and unusual items
- Management expects tariffs and higher raw-material and transportation costs to increasingly pressure costs and margins, especially in North America. It plans price increases and longer-term supply-chain changes, but cautions these may not fully offset costs and could reduce sales.
- Management expected stronger U.S. dollar translation to adversely affect results for the remainder of 2018. It also anticipated 2018 income-tax payments of approximately $47 million, versus $35 million paid in 2017. The filing provides no numeric full-year earnings or sales guidance.
- The top ten customers represented 42% of first-half net sales. Customer inventory reductions affected sales in North America, Australia and Mexico; customer concentration, competition, product delistings, and pricing pressure are notable risks.
- The Brazilian tax assessment remains a material contingency. The recorded accrual was $29.2 million at June 30; the company disputes the assessments and expects the process to take years. It reversed $5.6 million of reserves after the 2011 statute of limitations expired, benefiting first-half taxes. An adverse final outcome could materially affect cash flow.
- On July 2, 2018, after quarter-end, ACCO acquired Mexican school and craft-products company GOBA for approximately $38 million, net of cash acquired, subject to adjustments. On July 26, it increased its revolver commitment from $400 million to $500 million; available borrowing capacity was approximately $137.7 million after letters of credit. A $0.06-per-share dividend was declared July 31.
- Other notable items: the company adopted the new revenue standard, recording a $1.6 million increase to opening retained earnings; its effect on first-half results was described as immaterial. The Mead trade name was reclassified as amortizable and will be amortized over 30 years starting July 1, 2018. The filing identified $3.0 million of future facility-exit restructuring costs not yet recorded.
Important facts for investors to verify
- Whether planned price increases and sourcing changes offset tariffs, materials and transportation costs without materially weakening demand or margins.
- Whether customer inventory reductions abate, and how sales and profitability develop in North America and International, where first-half comparable sales declined.
- Cash conversion and seasonal borrowing needs, given negative first-half operating cash flow, elevated inventory and limited revolving-facility availability at June 30.
- Progress and final exposure in the Brazilian tax dispute, including the status of the $29.2 million accrual and any further assessments.
- GOBA’s post-acquisition contribution, integration requirements and final purchase accounting, which were incomplete when the filing was issued.