ACCO Brands Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. ACCO designs, markets and manufactures consumer, school and office products, with North America, EMEA and International segments. Approximately 43% of FY2019 sales were in the U.S.; about 75% came from brands holding a No. 1 or No. 2 position in their categories.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $1,955.7 million | $1,941.2 million | +0.7% |
| Gross profit / margin | $633.5 million / 32.4% | $627.8 million / 32.3% | Margin +0.1 pts |
| Operating income / margin | $196.2 million / 10.0% | $187.0 million / 9.6% | +4.9%; margin +0.4 pts |
| Net income | $106.8 million | $106.7 million | +0.1% |
| Diluted EPS | $1.06 | $1.00 | +6.0% |
| Operating cash flow | $203.9 million | $194.8 million | +$9.1 million |
| Capital expenditures | $32.8 million | $34.1 million | -$1.3 million |
FY2019 sales growth reflected $54.2 million from the Foroni and GOBA acquisitions, offset by $55.5 million of unfavorable currency translation. Comparable sales increased 0.8%. Operating income benefited from higher sales and cost savings, partly offset by foreign exchange, inflation and tariffs. Diluted EPS growth also benefited from lower weighted-average diluted shares, down 5.6%.
Fourth quarter: Net sales were $537.4 million versus $529.3 million in Q4 2018; operating income was $68.1 million versus $66.0 million; net income was $43.5 million versus $35.0 million; and diluted EPS was $0.44 versus $0.34. Results are seasonal, with back-to-school and year-end demand supporting sales and earnings in the second half.
Segments and material changes
- North America: Sales of $966.8 million, up 2.8%; segment operating income of $131.0 million, up 12.3%. Pricing, strong back-to-school sales and cost savings helped; volume declines included lost office and calendar placements.
- EMEA: Sales of $569.3 million, down 5.9%, largely due to $34.1 million of adverse currency translation; comparable sales declined 0.3%. Segment operating income was $58.6 million, down 1.3%, while margin improved to 10.3% from 9.8%.
- International: Sales of $419.6 million, up 6.1% as acquisitions offset currency headwinds; comparable sales declined 2.8%. Segment operating income was $48.5 million, down 1.4%, and margin fell to 11.6% from 12.4%, reflecting lower comparable sales, restructuring and exit costs for low-margin Asian products.
Foroni, a Brazilian school and office products business, was acquired effective August 1, 2019 for a preliminary $42.1 million purchase price, with $7.6 million of debt assumed. Its preliminary purchase accounting remained subject to adjustment. ACCO also acquired certain Cumberland brand assets in Australia for $6.0 million.
Cash, debt and liquidity
- Cash at year-end was $27.8 million, down from $67.0 million. Operating cash flow was $203.9 million; investing activities used $79.6 million and financing activities used $163.4 million.
- Gross debt was $816.0 million at December 31, 2019; total debt, net, was reported as $810.4 million. Debt included $375.0 million of 5.25% fixed-rate notes and $437.2 million outstanding under secured credit facilities, which carried a weighted-average rate of 2.09%.
- The $600 million revolving facility had $22.2 million drawn and $566.6 million available after letters of credit. The credit agreement was amended in May 2019, extending maturity to May 2024 and increasing revolving commitments. ACCO reported leverage of approximately 2.6x and interest coverage of 7.5x, and compliance with applicable covenants.
- FY2019 cash uses included $70.6 million of net debt repayments, $65.0 million of share repurchases, $41.3 million for acquisitions, $24.4 million of dividends and $32.8 million of capital expenditures. The board declared a $0.065-per-share dividend in February 2020.
Outlook, risks and unusual items
No specific FY2020 revenue or earnings guidance is provided in the filing. Management said current forecasts indicated cash flow from operations, cash on hand and revolver availability should support working capital, capital expenditures, dividends and debt service for the foreseeable future. Management expected cash-flow timing to return largely to historical patterns in 2020.
- Management cited customer and channel consolidation, private-label competition, declining traditional office-product channels and reduced demand for some paper-based products as continuing business pressures. The top ten customers represented 41% of sales; Staples/Essendant accounted for about 10%.
- Approximately 57% of sales were denominated in currencies other than the U.S. dollar. A stronger dollar reduced reported sales and operating income; tariffs, input-cost inflation and supply-chain changes also pressured margins.
- The filing identified the then-current COVID-19 outbreak as a potential demand and supply-chain risk, but said its effects on shipments and production were not yet clear.
- Brazil tax assessments remain contested and could materially affect cash flow if the tax authority prevails. The year-end accrual, including tax, penalties and interest, was $34.8 million; an additional $5.6 million reserve was recorded in Q1 2019.
- Pension and post-retirement obligations were $283.2 million, up from $257.2 million, primarily due to lower discount rates. The company also participates in a multi-employer pension plan reported in critical and declining status.
- Restructuring charges were $12.0 million in 2019. A $3.3 million Brazilian tax-credit benefit was recognized in other income. The effective tax rate was 34.7%, including the additional Brazil tax-assessment reserve.
- Goodwill and identifiable intangible assets totaled approximately $1.48 billion. Annual qualitative impairment reviews found no impairment in 2019, but future impairment remains a risk if business assumptions weaken.
Investor verification priorities
- Track comparable sales, segment margins and whether North American pricing and productivity continue to offset volume, tariff and inflation pressures.
- Review the status, potential cash exposure and accounting for the Brazil tax assessments, and confirm the timing and realization of Brazilian tax credits.
- Assess debt reduction, interest-rate exposure, covenant headroom and the sustainability of dividends and buybacks relative to operating cash flow.
- Verify Foroni’s final purchase accounting, integration progress and contribution to International segment performance.
- Monitor pension funding requirements, customer concentration, foreign-exchange impacts, and any COVID-related supply or demand effects.
KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Foroni was excluded from the 2019 internal-control assessment as a recently acquired business.