ACCO Brands Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in millions of dollars except per-share data. ACCO Brands sells consumer, technology and business-branded products across North America, EMEA and International markets. Interim results are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $493.6 | $521.0 | $896.2 | $962.6 |
| Gross profit | $164.2 | $150.0 | $283.5 | $269.6 |
| Gross margin | 33.3% | 28.8% | 31.6% | 28.0% |
| Operating income | $55.2 | $55.4 | $65.3 | $62.2 |
| Operating margin | 11.2% | 10.6% | 7.3% | 6.5% |
| Net income | $26.4 | $39.4 | $22.7 | $36.7 |
| Diluted EPS | $0.27 | $0.40 | $0.23 | $0.37 |
| Interest expense | $15.5 | $10.8 | $29.4 | $20.5 |
Sales fell 5.3% in Q2 and 6.9% in the first half; comparable sales, excluding foreign exchange effects, declined 5.1% and 5.7%, respectively. Management attributed the declines primarily to weaker volumes amid soft global demand, retailer inventory rebalancing, and lower computer-accessory demand. Price increases partly offset lower volumes. Gross-margin expansion reflected cumulative pricing and cost reductions; higher interest costs and tax expense contributed to lower net income.
Segments and material changes
- North America: Q2 sales declined 4.6% to $292.6; operating income rose 8.7% to $55.1. First-half sales declined 8.9% to $469.3 and operating income fell 6.7% to $60.3.
- EMEA: Q2 sales declined 8.8% to $125.7; operating income improved to $5.7 from a $1.5 loss. First-half sales declined 11.1% to $261.5, while operating income rose to $13.5 from $4.1.
- International: Q2 sales declined 1.6% to $75.3 and operating income rose to $6.7 from $6.3. First-half sales increased 7.8% to $165.4 and operating income increased 49.5% to $15.7, with growth supported by Latin America.
Q2 operating income was nearly flat year over year: better gross margin and lower restructuring charges largely offset lower sales, higher SG&A and the absence of a $9.4 benefit from the prior-year PowerA contingent-consideration fair-value change. For the first half, operating income improved despite lower sales, but net income declined as interest, pension and tax costs increased. The effective tax rate rose to 37.1% in Q2 from 23.9%, and to 41.3% for the first half from 27.8%, in part due to discrete tax items.
Cash flow, debt and liquidity
- First-half operating cash outflow was $39.3, compared with $97.9 in 2022. Management cited reduced working-capital investment and lower incentive-compensation payments. Cash use in the first half is described as seasonal, with historically stronger inflows in the second half.
- First-half capital expenditures were $6.1. Financing provided $61.4, including $77.3 of net borrowings; dividends paid were $14.2. Cash increased $20.2 to $82.4.
- Total debt was $1,085.2 at June 30, versus $1,004.9 at year-end 2022. The balance included $575.0 of 4.25% notes due 2029; secured credit-facility borrowings carry variable rates. The weighted-average rate on $510.2 of secured-credit-facility debt was 6.63%, compared with 3.02% a year earlier.
- Revolver borrowings were $164.0, with $423.5 available after letters of credit. The consolidated leverage ratio was approximately 4.28:1 against a 5.00:1 maximum covenant. The filing states there are no debt maturities before March 2026.
- Current assets were $954.1 and current liabilities $534.0. Management believes cash, operating cash flow and available revolver capacity will be adequate for foreseeable requirements.
Outlook, risks and unusual items
No quantified earnings or sales guidance is provided in the supplied filing text. Management expects macroeconomic pressures, weak technology-accessory demand, retailer inventory rebalancing and foreign-exchange volatility to continue affecting results. It also expects higher interest expense under prevailing rates and anticipates the seasonal pattern of first-half cash outflows and second-half inflows to continue during 2023. The stated near-term cash priorities are dividends and debt reduction.
- Brazil tax assessments: ACCO is contesting assessments related to goodwill deductions for 2007–2010. The recorded accrual, including tax, penalties and interest, was $34.1 at June 30, 2023. An adverse outcome could materially affect cash flow in the settlement year; a decision on the Second Assessment could occur in the next six months to three years.
- Other legal matters: The company faces ordinary-course claims, including intellectual-property matters. Management does not expect currently outstanding matters other than the Brazil assessments to materially adversely affect the company, while noting outcomes are uncertain.
- Restructuring: First-half charges were $3.3, with $6.7 of restructuring liabilities remaining at June 30; most employee-termination costs were expected to be paid within nine months.
- Impairment and controls: The second-quarter qualitative assessments identified no goodwill or indefinite-lived intangible impairment. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales volumes and technology-accessory demand stabilize, and whether price increases and cost actions can sustain margins.
- How higher floating rates affect interest expense, leverage and covenant headroom; confirm borrowing availability and the reported 4.28:1 leverage ratio.
- Second-half operating cash generation and working-capital trends, given first-half cash outflows and the seasonal cash-flow pattern.
- Developments in the Brazil tax-assessment litigation, including potential cash exposure beyond the $34.1 recorded accrual.
- Progress in EMEA and North America, and whether International’s first-half growth—particularly in Latin America—continues.