ACCO Brands Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. Mead Consumer and Office Products (Mead C&OP) was acquired on May 1, 2012; its results are included from that date, limiting direct comparability with 2011.
Business context and performance
ACCO Brands supplies branded office, school, calendar and computer-accessory products through North America and international markets. It reported three segments: North America, International and Computer Products Group. The Mead acquisition materially increased the company’s scale, expanded its brands and markets, and was accompanied by a debt refinancing and integration program.
Financial highlights
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $1,758.5 million | $1,318.4 million |
| Gross profit / margin | $533.4 million / 30.3% | $399.2 million / 30.3% |
| Operating income / margin | $139.3 million / 7.9% | $115.2 million / 8.7% |
| Net income | $115.4 million | $56.7 million |
| Diluted earnings per share | $1.20 | $0.98 |
| Cash from operating activities | $(7.5) million | $61.8 million |
| Cash and cash equivalents at year-end | $50.0 million | $121.2 million |
| Total debt at year-end | $1,072.1 million | $669.0 million |
Revenue rose 33%, including $551.5 million of acquired Mead sales; excluding Mead and currency translation, sales declined $94.3 million, or 7%. Gross margin was flat, while operating margin contracted 0.8 percentage points. Net income included a $121.4 million income-tax benefit, primarily from releasing U.S. and foreign deferred-tax valuation allowances; pretax continuing operations recorded a $4.4 million loss. Other expense was $61.3 million, mainly related to refinancing and debt extinguishment.
Operating cash flow fell to negative $7.5 million, including a $117.0 million use of cash for working capital, $16.1 million of transaction payments and $61.6 million of debt-extinguishment/refinancing payments. Investing cash outflow was $423.2 million, including $397.5 million net cash paid for Mead; capital expenditures were $30.3 million. Financing cash inflow was $360.1 million. As a simple operating-cash-flow less capital-expenditures measure, free cash flow was approximately negative $37.8 million.
At year-end, the company had $238.5 million available under its $250 million revolving facility and reported compliance with debt covenants. Its leverage ratio was approximately 3.7x and interest coverage approximately 4.5x. The current-year refinancing established secured term loans due 2017 and 2019 and $500 million of 6.75% unsecured notes due 2020; secured term loans carried floating rates.
Fourth-quarter results and changes
Fourth-quarter 2012 net sales were $529.7 million, operating income $67.3 million, and net loss $16.6 million, or $0.15 per diluted share. The quarter included a $15.1 million loss from continuing operations and a $1.5 million discontinued-operations loss. The annual filing reflects subsequent audit adjustments that reduced previously announced FY net income by $4.1 million and increased the reported fourth-quarter net loss by $4.1 million.
Segment comparisons were also affected by the acquisition. North America sales were $1,028.2 million and segment operating income $86.2 million; International sales were $551.2 million and segment operating income $62.0 million; Computer Products sales were $179.1 million and segment operating income $35.9 million. Computer Products revenue and operating income declined 6% and 24%, respectively, amid lower pricing, lost royalty income and weaker high-margin security-product sales.
Outlook, commentary, risks and unusual items
- Management expected the 2013 business plan, operating cash flow, cash on hand and available revolver capacity to cover working capital, capital expenditures and debt service for the foreseeable future. The filing gives no specific revenue or earnings-per-share guidance.
- Management expected approximately $8 million in annualized savings from cost actions initiated in early 2012. Mead integration and productivity actions were expected to bring approximately $25 million of additional restructuring charges through the fourth quarter of 2013, with cash costs mainly in 2013 and 2014. A Pennsylvania facility closure and relocation were planned for 2013.
- A Brazilian tax authority assessment challenged goodwill deductions at acquired subsidiary Tilibra. The company recorded a $44.5 million reserve; further assessments could bring stated total exposure to approximately $44.5 million. The appeal was expected to take years, and interest would continue to accrue.
- Key risks include customer concentration (top ten customers represented 53% of sales; Staples 13%), continued reseller consolidation and pricing pressure, integration execution, paper-product substitution by digital tools, raw-material and currency movements, supplier and seasonal working-capital risks, and substantial indebtedness with floating-rate exposure and restrictive covenants.
- The company had no material off-balance-sheet arrangements and paid no common dividends; debt agreements restricted dividends. Goodwill and identifiable intangibles increased substantially with the acquisition. Management’s 2012 qualitative goodwill impairment review identified no need for a quantitative test, but future impairments remain possible.
- Auditors and management reported effective internal control over financial reporting, but the acquired Mead business—representing $551.5 million of 2012 revenue and $514.4 million of year-end assets—was excluded from the year-of-acquisition control assessment.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying sales trends and assess whether integration savings offset legacy-business declines and margin pressure.
- Track operating cash generation, seasonal working-capital recovery, debt reduction, floating-rate exposure and covenant headroom.
- Follow the Tilibra tax appeal, possible additional assessments and interest accruals against the $44.5 million reserve.
- Review the timing, cash cost and realized benefits of restructuring, facility consolidation and Mead integration.
- Assess customer concentration and the potential effect of reseller consolidation, including the announced Office Depot–OfficeMax merger.
- Monitor goodwill and intangible valuations, pension funding needs and the integration of Mead’s financial-reporting controls.