ACCO Brands Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless noted. ACCO Brands sells consumer, technology and business products through three segments: North America, EMEA and International.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $402.6 million | $441.6 million |
| Gross profit / margin | $119.3 million / 29.6% | $119.6 million / 27.1% |
| Operating income / margin | $10.1 million / 2.5% | $6.8 million / 1.5% |
| Net loss | $3.7 million | $2.7 million |
| Diluted loss per share | $0.04 | $0.03 |
| Cash used by operating activities | $23.2 million | $104.2 million |
| Capital expenditures | $2.0 million | $3.4 million |
- Reported sales fell 8.8%; comparable sales, excluding foreign-exchange effects, declined 6.4%. Price increases contributed 9.1%, while volume fell 15.5%.
- Gross margin expanded 2.5 percentage points, principally from pricing and cost reductions. Operating income improved despite lower sales, while net loss widened primarily because of higher interest and non-operating pension costs.
- Interest expense rose to $13.9 million from $9.7 million. The weighted-average rate on variable debt increased to 6.19% from 2.05%.
- At March 31, cash was $127.1 million, versus $62.2 million at year-end 2022. Total debt was $1,099.4 million, versus $1,004.9 million; long-term debt, net, was $1,035.0 million. Cash increased during the quarter principally because of $88.2 million in financing cash flow, including $89.9 million of net borrowings.
- Inventory was $422.5 million, up from $395.2 million at December 31, 2022. Stockholders’ equity was $809.8 million.
Segment results
- North America: Sales declined 15.3% to $176.7 million; operating income fell to $5.2 million from $13.9 million. Lower volume reflected softer demand, reduced early back-to-school retailer purchases and weaker technology-accessory sales.
- EMEA: Sales declined 13.0% to $135.8 million, including a 5.7% adverse foreign-exchange impact; operating income rose to $7.8 million from $5.6 million, reflecting pricing and cost savings.
- International: Sales increased 17.0% to $90.1 million and operating income rose to $9.0 million from $4.2 million, supported by pricing, volume growth and improved cost leverage.
Liquidity, debt and outlook
- The $600 million revolving facility had $168.5 million outstanding and $419.6 million available, after letters of credit. The company reported a consolidated leverage ratio of approximately 4.30:1 against a 5.00:1 maximum covenant. No debt maturities are due before March 2026.
- Senior secured credit-facility debt had a 6.19% weighted-average interest rate; $575.0 million of senior unsecured notes carry a fixed 4.25% rate and mature in 2029.
- Management said cash, operating cash flow and available borrowing capacity should be adequate for foreseeable working-capital, capital, restructuring and debt-service needs. It expects the usual seasonal pattern of operating cash outflow in the first half and stronger inflows in the second half. Near-term cash priorities include dividends and debt reduction; the filing provides no specific earnings or sales guidance.
- A $0.075-per-share dividend was declared in Q1 and paid in Q2. No shares were repurchased during the quarter.
Risks, contingencies and unusual items
- Brazilian tax assessments relating to goodwill deductions remain under judicial challenge. The company had accrued $32.0 million for tax, penalties and interest at March 31, 2023. Management says an adverse final outcome could materially affect cash flow in the settlement year; the timing and outcome remain uncertain.
- Q1 restructuring charges were $3.3 million, primarily severance associated with cost-reduction initiatives in EMEA and International. The remaining restructuring liability was $9.5 million, which the company expected to substantially pay within 12 months.
- Management cited macroeconomic weakness, lower demand, foreign-exchange volatility and lagging inflation among factors affecting results. It expects currency fluctuations to continue affecting performance. The filing reported no material change in risk factors from the 2022 Form 10-K.
- Goodwill and indefinite-lived intangible impairment reviews identified no triggering event in Q1; future impairment remains possible if performance assumptions are not achieved.
Important facts for investors to verify
- Whether sales volume and demand stabilize, particularly in North America and EMEA, and whether International growth continues.
- Whether pricing and cost actions can sustain gross-margin improvement despite inflation, foreign exchange and weaker volumes.
- Debt, interest costs and covenant headroom, especially the 4.30:1 leverage ratio relative to the 5.00:1 limit.
- Progress and potential cash exposure in the Brazil tax disputes, including the adequacy of the recorded $32.0 million reserve.
- Second-half cash generation, working-capital trends and the company’s ability to fund dividends while reducing debt.