ACCO Brands Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. ACCO Brands designs, manufactures, and markets consumer, school, technology, and office products through three segments: North America, EMEA, and International. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $485.6 | $526.7 | $1,448.2 | $1,455.0 |
| Gross profit / margin | $137.4 / 28.3% | $157.2 / 29.8% | $407.0 / 28.1% | $436.8 / 30.0% |
| Operating income (loss) | $(63.0) | $38.6 | $(0.8) | $87.4 |
| Net income (loss) | $(68.7) | $20.2 | $(32.0) | $48.4 |
| Diluted EPS | $(0.73) | $0.21 | $(0.33) | $0.50 |
| Cash from operating activities | Not separately stated | Not separately stated | $(9.6) | $44.0 |
- Q3 sales fell 7.8%; adverse foreign exchange accounted for 5.7 percentage points. Comparable sales, a non-GAAP measure excluding material acquisitions and currency translation effects, declined 2.1%. Price increases contributed 8.7%, while volume declined 10.8%.
- For the first nine months, reported sales declined 0.5%, including a 4.7% adverse foreign-exchange impact; comparable sales increased 4.2%. Price increases contributed 7.8%, partly offset by a 3.6% volume decline.
- Q3 gross margin fell 150 basis points; the nine-month margin fell 190 basis points. Management attributed pressure to inflation outpacing price increases and, in Q3, lower volume.
- Q3 results included a $98.7 non-cash goodwill impairment charge for North America. Without treating it as an adjusted result, this charge was the principal stated reason for the operating and net loss.
- At September 30, cash was $78.0, total current assets $914.2, and current liabilities $503.6. Total debt was $1,082.0, compared with $1,006.7 at December 31, 2021; long-term debt, net, was $1,045.0. Cash and debt imply net debt of approximately $1,004.0.
- There were $173.9 of revolving-facility borrowings and $417.1 available, after letters of credit. The reported consolidated leverage ratio was approximately 3.91:1, against a 4.00:1 maximum covenant. No debt maturities were due before March 2026.
- Capital expenditures were $11.8 for the first nine months. Financing cash flow was $58.3, including $218.0 of long-term borrowings and $95.2 of repayments; dividends paid were $21.5 and share repurchases were $19.4.
Material changes and segment trends
- North America: Q3 sales declined 10.5%; nine-month sales were essentially flat, up 0.1%. Q3 segment operating loss was $78.4, including the $98.7 goodwill impairment. Gaming accessory demand and semiconductor shortages weighed on volume.
- EMEA: Q3 sales declined 19.1% and nine-month sales declined 10.7% as reported, with currency a major factor. Comparable sales fell 4.1% in Q3 but rose 1.2% year to date. Inflation and lower volume reduced segment operating income.
- International: Q3 sales rose 25.6% and nine-month sales rose 20.6% as reported; comparable sales grew 31.4% and 25.1%, respectively. Management cited the return to in-person education, particularly in Latin America, pricing, and improved expense leverage.
- The Q3 $68.7 net loss compares with $20.2 net income in the prior-year quarter; nine-month results shifted from $48.4 net income to a $32.0 loss. Higher Brazilian operating tax credits and favorable changes in PowerA contingent consideration partly offset other pressures.
Outlook, commentary, and risks
- Management said inflation and supply-chain disruptions were expected to continue affecting results through the remainder of 2022, and that price increases had lagged cumulative cost inflation. The filing also says additional price increases were planned for 2023.
- Management expected foreign-currency movements to continue adversely affecting results. About 53% of nine-month sales were transacted in currencies other than the U.S. dollar; approximately 60% of products were sourced mainly from China, Vietnam, and other Far Eastern countries using U.S. dollars.
- Operating cash flow is seasonal, historically with first-half outflows followed by stronger second-half inflows. Management expected this pattern to repeat and said available cash, operating cash flow, and revolving-facility capacity should support foreseeable liquidity needs. No specific full-year financial guidance is provided in the supplied filing text.
- Goodwill impairment risk remains: management warned that further impairment could arise if performance does not improve as expected. The Leitz indefinite-lived trade name passed its impairment test, but its estimated fair value exceeded carrying value by less than 10%.
- The company reported a 3.91:1 leverage ratio against a 4.00:1 covenant at quarter-end. A November 7, 2022 credit-agreement amendment increased the maximum leverage covenant for specified future periods and amended other terms; the revised covenant levels are not clearly provided in the supplied filing text.
- Brazil tax assessments challenge goodwill deductions for 2007–2010. The company is contesting them and had accrued $29.3, including tax, penalties, and interest, at September 30, 2022. An adverse outcome could materially affect cash flow in the settlement year; resolution is expected to take years.
- Other notable items: $11.1 of Brazilian operating tax credits was recorded in the first nine months; the PowerA contingent consideration liability was reduced to zero after payments and fair-value changes. The filing also cites discretionary-spending weakness, retailer inventory caution, energy and commodity costs, and potential product availability or pricing-related sales losses.
- Disclosure controls were reported effective as of September 30, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales volumes and margins stabilize as retailer inventory replenishment, gaming accessory demand, and macroeconomic conditions evolve.
- Whether price increases recover inflationary costs without further reducing demand or product availability.
- Progress against the leverage covenant, the terms of the November 2022 amendment, and the effect of rising rates on floating-rate borrowings.
- Potential further North America goodwill impairment and the assumptions underlying reporting-unit valuations.
- Developments and potential cash exposure from the Brazil tax assessments, separately from the recorded reserve.
- Whether expected seasonal second-half cash generation materializes after nine-month operating cash use of $9.6.