ACCO Brands Corporation — Q3 2012 Form 10-Q
Business context and period. Reports the three and nine months ended September 30, 2012. ACCO supplies branded school, office, calendaring and computer-accessory products. Results include the Mead Consumer and Office Products (C&OP) Business from its May 1, 2012 acquisition; therefore, reported year-over-year growth is not directly comparable with the legacy business.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $501.2 million | $339.1 million | $1,228.8 million | $967.7 million |
| Gross profit / margin | $151.2 million / 30.2% | $103.2 million / 30.4% | $355.3 million / 28.9% | $289.8 million / 29.9% |
| Operating income / margin | $56.4 million / 11.3% | $35.4 million / 10.4% | $72.0 million / 5.9% | $79.3 million / 8.2% |
| Net income | $55.2 million | $11.7 million | $132.0 million | $47.3 million |
| Diluted EPS | $0.48 | $0.20 | $1.47 | $0.82 |
- Q3 sales rose 48%, with $204.4 million of the increase attributable to Mead. Excluding the acquisition, sales declined 12%, reflecting weaker volume across all segments. Nine-month sales rose 27%, while underlying sales declined 9%.
- Nine-month operating income fell 9%. The period included $21.6 million of restructuring charges, $18.4 million of Mead transaction and integration costs, and $13.3 million of acquisition inventory step-up amortization.
- Nine-month net income included a $185.2 million income-tax benefit, primarily from releasing U.S. and foreign deferred-tax valuation allowances totaling $130.9 million. The 2011 comparison included $38.1 million of discontinued-operations income, principally a sale gain. Earnings growth therefore does not solely reflect operating improvement.
- Operating cash flow was negative $80.3 million for the first nine months, versus negative $21.9 million in 2011. Investing cash flow was negative $414.3 million, including $401.4 million net cash paid for Mead; financing cash flow was positive $498.7 million. Cash at September 30 was $125.0 million.
- Total debt was $1,210.3 million, compared with $669.0 million at year-end 2011. The May refinancing established term loans and $500 million of senior unsecured notes; senior secured debt rates averaged 4.0% and the notes bear 6.75%. About $238.3 million was available under the $250 million revolver. The company reported compliance with loan covenants.
- Total assets were $2,552.7 million and stockholders’ equity was $679.8 million at September 30, versus a $61.9 million deficit at December 31, 2011, substantially reflecting the acquisition and share issuance.
Material changes, outlook and risks
- Mead consideration was preliminarily estimated at $1,031.6 million, with net purchase price of $999.6 million and $437.9 million of goodwill. The purchase-price allocation remained preliminary; final valuations could materially change recorded assets, liabilities, depreciation and goodwill.
- Management cited soft U.S. and Canadian back-to-school demand, customer inventory reductions, weak European and Australian markets, pricing pressure, and weaker demand for computer security products. Q3 legacy-business weakness was partly offset by lower expenses.
- The company expects approximately $8 million in annualized savings from separate U.S. and U.K. efficiency plans, with about $5 million expected in 2012. Mead integration restructuring is ongoing; the East Texas facility closure is planned for 2013, with cumulative cash-flow break-even expected by the end of 2014. Further restructuring charges were anticipated through Q4 2013. No specific consolidated revenue or earnings guidance is provided in the filing.
- Management said cash, operating cash flows and available revolver capacity should support foreseeable liquidity needs. Key risks include further sales weakness, commodity and freight costs, foreign exchange, customer and supplier concentration, integration execution, debt burden, and possible impairment. Management noted the stock-price decline could require impairment testing if sustained and if reporting-unit fair values fall below carrying values.
- Management considered pending litigation and environmental matters not expected to have a material adverse effect, while acknowledging outcomes remain uncertain. Disclosure controls were reported effective, with no material change in internal control during the quarter.
Investor verification points
- Assess the recurring earnings picture apart from the large tax-valuation-allowance release, acquisition charges and 2011 discontinued-operation gain.
- Track operating cash conversion, seasonal receivables and working capital, and progress in reducing debt after the acquisition and refinancing.
- Verify final Mead purchase accounting, integration costs, restructuring cash requirements and realization of projected savings.
- Monitor legacy-business sales, segment margins, foreign exchange and demand trends, and any goodwill or long-lived-asset impairment indicators.
- Review covenant headroom and the company’s ability to maintain liquidity while meeting debt service and pension funding obligations.