ACCO Brands Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. ACCO supplies branded office products and computer accessories through its Americas, International, and Computer Products segments. Unless noted, operating results below reflect continuing operations; prior periods were reclassified for the GBC Fordigraph sale.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $330.2 million | $305.2 million | $628.6 million | $605.7 million |
| Gross profit / margin | $105.5 million / 32.0% | $94.5 million / 31.0% | $194.7 million / 31.0% | $185.5 million / 30.6% |
| Operating income / margin | $30.6 million / 9.3% | $25.0 million / 8.2% | $43.9 million / 7.0% | $45.5 million / 7.5% |
| Continuing operations income (loss) | $6.3 million | $4.3 million | $(2.7) million | $(0.9) million |
| Net income | $43.7 million | $4.9 million | $35.6 million | $0.2 million |
| Diluted EPS | $0.75 | $0.09 | $0.65 | $0.00 |
- Q2 sales rose 8%; management attributed $18.7 million of the increase to favorable foreign-exchange translation. Higher pricing and Computer Products volume also contributed. For the first half, sales increased 4%, including $26.3 million from currency translation; reported volumes declined in the Americas and International segments.
- Q2 operating income increased 22%, supported by pricing, currency and freight/distribution efficiencies. First-half operating income declined 4%, reflecting European rationalization costs, lower volume and higher commodity costs.
- Q2 sales by segment: Americas $175.7 million (+3%), International $105.8 million (+14%), and Computer Products $48.7 million (+16%). First-half segment operating income was flat overall at $55.5 million: Computer Products improved, while Americas and International declined.
- Q2 continuing-operations tax expense was $6.0 million on $12.3 million pretax income (48.8% effective rate). The six-month rate was 134.6% on $7.8 million pretax income. ACCO cited valuation allowances that prevented tax benefits on certain U.S. and foreign losses; the 2010 comparison also included a $2.8 million deferred-tax correction benefit.
Cash flow, debt and liquidity
- For the six months, operating cash flow was a use of $28.9 million, versus $3.7 million provided in 2010. The filing cites incentive-plan payments, taxes, interest, pension contributions and rationalization spending, along with working-capital timing.
- Investing activities provided $46.9 million, principally from $54.6 million of proceeds from discontinued operations; financing activities used $10.9 million, including repayment of debt. Cash increased $9.5 million to $92.7 million.
- June 30 total debt was $717.3 million, including $454.9 million of 10.625% Senior Secured Notes due 2015 and $260.3 million of 7.625% Senior Subordinated Notes due 2015. Long-term debt was $716.8 million. ACCO redeemed $11.0 million of subordinated notes during Q2.
- Available borrowing capacity under the ABL Facility was $167.2 million, after letters of credit and borrowing-base limits; the facility expires September 2013. ACCO reported compliance with applicable loan covenants. Cash and ABL availability were cited as adequate for foreseeable needs.
- Stockholders’ deficit was $28.3 million. Current assets were $624.1 million and current liabilities $284.8 million at June 30.
Material changes, outlook and risks
- ACCO sold its GBC Fordigraph business, effective May 31, 2011, for net proceeds received of $54.8 million; anticipated pretax net proceeds were $53.0 million after working-capital adjustments and estimated selling costs. The business had approximately $46 million in 2010 annual sales. The Q2 sale generated a $41.8 million pretax gain and $37.4 million of total discontinued-operations income; the filing separately describes the sale gain as $36.9 million net of tax. Thus, reported net income materially benefited from the divestiture.
- European operations rationalization costs were $4.3 million in the first half, including $2.6 million of cash payments; management expected savings in the rest of 2011 to largely offset these costs. Separate legacy restructuring actions were complete, though related cash payments continued.
- Management communicated further price increases effective in Q3 2011 to help offset higher commodity costs. No specific full-year sales, earnings or cash-flow guidance is provided. Management’s stated strategy includes product innovation, category expansion, cost efficiency and opportunistic strategic transactions.
- Key stated risks include raw-material and freight cost increases, ability to pass costs through without losing volume, foreign-exchange movements, weak demand and customer inventory reductions, competition and customer consolidation, supplier dependence, customer financial health, and pension and employee-benefit costs. Litigation and environmental matters were not expected by management to have a material adverse effect, but outcomes remain uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing cautions that interim results may not indicate full-year results.
Important facts for investors to verify
- Underlying continuing-operations performance excluding the GBC Fordigraph gain, especially the first-half continuing loss and weaker operating margin.
- Whether pricing and productivity improvements can offset commodity inflation and the reported volume softness.
- Cash conversion and working-capital trends after the first-half operating cash outflow, and the planned uses of divestiture proceeds.
- Debt repayment progress, interest burden, ABL availability and ongoing covenant compliance.
- Tax-rate effects from valuation allowances, and the costs, timing and savings attributable to European rationalization.