ACCO Brands Corporation — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Unless otherwise stated, amounts are U.S. dollars.
Business context
ACCO Brands designs, markets and manufactures branded consumer and business products for schools, homes and workplaces. Its products include school and office supplies, storage and organization products, computer accessories and do-it-yourself tools. The company reports North America, EMEA and International segments and sells through retail, e-commerce and commercial channels.
The January 2017 acquisition of Esselte expanded the company’s European presence. Together with the 2016 Pelikan Artline acquisition, it contributed to a shift in geographic mix: approximately 55% of 2017 sales were outside the U.S., versus 43% in 2016.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $1,948.8 million | $1,557.1 million |
| Gross profit / margin | $656.4 million / 33.7% | $515.1 million / 33.1% |
| Operating income / margin | $193.0 million / 9.9% | $167.3 million / 10.7% |
| Net income | $131.7 million | $95.5 million |
| Diluted earnings per share | $1.19 | $0.87 |
| Cash from operating activities | $204.9 million | $167.1 million |
| Free cash flow (non-GAAP) | $178.1 million | Not stated here |
| Cash and cash equivalents at year-end | $76.9 million | $42.9 million |
2017 fourth-quarter net sales were $566.8 million, operating income was $79.6 million and net income was $74.0 million. Fourth-quarter 2016 figures were $437.6 million, $59.7 million and $6.1 million, respectively.
Year-end total debt was $939.5 million gross ($932.4 million net in selected financial data); debt was $703.5 million gross at year-end 2016. The company had $133.9 million outstanding under its revolving facility and $255.0 million available, after letters of credit. Its reported leverage ratio was approximately 2.6:1 and fixed-charge coverage ratio approximately 5.3:1; it was in compliance with loan covenants. The filing reports $538.9 million of debt subject to floating rates.
Changes versus the prior comparable period
- Sales rose 25%, but included $438.8 million attributed to the Esselte and Pelikan Artline acquisitions and a $12.4 million favorable currency-translation effect. Comparable sales, excluding acquisitions and currency, declined, mainly due to lost product placements, customer inventory reductions and weakness among office superstore customers.
- Gross margin improved 0.6 percentage point, primarily from productivity improvements and higher pricing. Operating margin fell 0.8 percentage point, reflecting higher restructuring and acquisition integration costs, amortization and other expenses.
- Net income increased 38%; the increase reflected acquisitions, lower interest expense and a lower effective tax rate. The 2017 rate was 16.7%, including a $25.7 million net tax benefit related to the U.S. Tax Act and $5.6 million of excess stock-compensation tax benefits.
- Operating cash flow increased $37.8 million. Investing cash outflow rose to $319.1 million, largely reflecting the $292.3 million net cash purchase price for Esselte. Financing provided $142.2 million, including acquisition-related borrowing.
- Segment trends diverged: North America sales declined 2% and operating income rose 2%; EMEA sales rose sharply with Esselte, while comparable sales declined and reported operating margin fell to 6.8%; International sales rose 10%, but reported operating margin declined to 12.5%.
Outlook, management commentary and key risks
- Management said current forecasts and available liquidity were expected to support working capital, capital expenditures, dividends and debt service for the foreseeable future. The filing does not provide specific 2018 revenue or earnings guidance.
- Management’s longer-term strategy emphasizes product innovation, market-share gains, channel expansion and acquisitions, including growth in emerging markets. The company expects its usual seasonality to continue, with higher sales and earnings generally in the second half of the year.
- Management expected approximately $4 million of further Esselte integration costs and $4 million of incremental restructuring charges during the remainder of 2018, in addition to $3.5 million of restructuring projects approved in first-quarter 2018. Timing and cash outflows were not yet reasonably estimable.
- The U.S. Tax Act’s effects were provisional and still under analysis, including the treatment of GILTI and possible future repatriation. The company recorded a $38.0 million Transition Toll Tax liability, payable over eight years, and reported approximately $500 million of undistributed non-U.S. subsidiary earnings.
- A Brazilian tax dispute remains a material contingency. The reserve, including tax, penalties and interest, was $38.7 million at year-end; $24.6 million related to an assessment whose final administrative appeal was decided against the company. Management planned a court challenge and said an adverse outcome could materially affect cash flow in the settlement year.
- Other notable risks include customer concentration (top ten customers represented 44% of sales), competitive and private-label pricing pressure, declining demand for some paper-based products, foreign-exchange and raw-material exposure, acquisition integration, pension funding and leverage. Pension and post-retirement obligations were $275.5 million, largely increased by the Esselte acquisition; a multi-employer plan was described as critically underfunded.
- The company initiated a quarterly dividend of $0.06 per share in 2018 and authorized an additional $100 million share-repurchase program. These are subsequent events, not 2017 operating results.
Most important facts for investors to verify
- How much of reported sales and earnings growth is sustainable on an organic, constant-currency basis, and whether comparable-sales declines continue.
- Esselte and Pelikan Artline integration progress, realization of expected synergies, and the remaining restructuring and integration cash costs.
- Debt paydown, interest-rate exposure, covenant headroom and liquidity needs through seasonal working-capital peaks.
- Final tax effects of the U.S. Tax Act and the timing and outcome of the Brazilian tax assessments.
- Customer retention and pricing, pension funding requirements, and potential impairment exposure for goodwill and intangible assets.
KPMG issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2017.