ACCO Brands Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Interim financial statements are unaudited. ACCO Brands sells consumer, school, technology and office products across North America, EMEA and International markets. Results include PowerA, acquired in December 2020, and Franken, acquired in April 2021.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $517.8 million | $366.9 million | $928.3 million | $751.0 million |
| Comparable sales growth | 20.8% | — | 3.3% | — |
| Gross margin | 31.7% | 30.0% | 30.1% | 29.6% |
| Operating income / margin | $49.9 million / 9.6% | $18.5 million / 5.0% | $48.8 million / 5.3% | $35.9 million / 4.8% |
| Net income | $48.6 million | $5.4 million | $28.2 million | $13.4 million |
| Diluted EPS | $0.50 | $0.06 | $0.29 | $0.14 |
Q2 sales rose 41.1%; PowerA contributed $50.7 million and favorable currency translation contributed $23.7 million. Excluding acquisitions and currency, comparable sales grew 20.8%, with stronger demand as offices and schools reopened. For the first half, comparable sales increased 3.3%; PowerA added $113.4 million and favorable currency added $39.4 million to reported sales.
Q2 margin and income improved with higher sales, cost savings and improved fixed-cost leverage. However, Q2 net income also benefited from $9.1 million of Brazilian tax-credit income and a 3.4% effective tax rate. First-half results included $11.6 million of expense from remeasurement of the PowerA earnout, $3.9 million of restructuring charges, and refinancing costs; the effective tax rate was negative 17.5%, principally reflecting deferred-tax remeasurement and release of certain tax reserves.
Six-month operating cash flow was negative $55.1 million, compared with negative $67.5 million a year earlier. Working capital used $90.1 million of cash, including $54.5 million for receivables and $77.9 million for inventory, partly offset by $42.3 million from accounts payable. Investing activities provided $6.1 million and financing activities provided $90.2 million. Cash at June 30 was $77.9 million, versus $36.6 million at year-end 2020.
At June 30, total debt was $1,247.3 million, compared with $1,136.6 million at December 31, 2020. The company reported $256.3 million drawn on its revolving facility, $330.9 million of remaining availability and a consolidated leverage ratio of approximately 4.20:1, below the 5.25:1 covenant maximum. Current assets were $938.5 million and current liabilities were $561.8 million. Management said available cash, operating cash flow and borrowing capacity should support foreseeable needs.
Material changes and notable items
- All three segments reported higher Q2 comparable sales: North America +8.2%, EMEA +54.2% and International +20.5%. For the first half, EMEA comparable sales rose 26.2%, while North America fell 3.1% and International fell 14.3%, reflecting first-quarter pandemic effects, particularly in Brazil and Mexico.
- ACCO issued $575 million of 4.25% senior notes due 2029 and redeemed its $375 million 5.25% notes due 2024. It also amended its credit facility, extending maturity to March 2026. No debt maturities are due before March 2026.
- The PowerA contingent earnout liability increased from $18.2 million to $29.8 million, generating $11.6 million of first-half operating expense. The potential earnout is up to $55 million.
- Brazilian tax-credit rulings produced $9.1 million of other income in Q2 and $3.1 million of related income-tax expense. Further credits could arise as remaining cases are decided.
- The company recorded $3.9 million of first-half restructuring expense, mainly severance and lease-related costs. Its annual goodwill impairment test found no impairment, but management said the International reporting unit could be at risk if recovery or other valuation assumptions weaken.
Outlook, commentary and risks
The filing provides no specific full-year numerical guidance. Management expected a sustained second-half economic recovery and continued organic sales growth, while noting that some office and school product demand remained below pre-pandemic levels. It expected greater operating-margin pressure in Q3 as inflationary costs flowed through inventory before the benefit of recent price increases.
Key risks include higher logistics, commodity, supplier and labor costs; shipping delays, product shortages, customer fines and lost sales; and global chip shortages affecting computer accessories and gaming products. Management said price increases may not offset cost inflation quickly enough and could reduce demand. COVID-19 effects remain uneven by region. The $30.0 million reserve for disputed Brazilian tax assessments remains subject to judicial proceedings; if the tax authority prevails, payment could materially affect cash flow in the settlement year. Other litigation includes intellectual-property claims, though management did not expect currently outstanding matters other than the Brazil assessments to materially affect results.
Important facts for investors to verify
- Whether price increases and easing supply constraints offset inflation and support margins after Q2, particularly in Q3.
- Whether working-capital investment converts to cash as sales and inventory levels evolve, and whether debt and leverage decline.
- PowerA’s contribution to sales and profitability after earnout remeasurement and acquisition-related amortization.
- Progress and potential cash exposure in the Brazilian tax-assessment cases, and the timing and amount of any further Brazilian tax credits.
- Recovery in International markets and the assumptions supporting the International goodwill valuation.