ACCO Brands Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. ACCO Brands manufactures and markets office, school, calendar and computer-accessory products. Interim results are unaudited and may not indicate full-year performance.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $290.0 million | $329.4 million |
| Gross profit / margin | $80.2 million / 27.7% | $88.5 million / 26.9% |
| Operating income (loss) / margin | $2.6 million / 0.9% | $(0.6) million / (0.2)% |
| Net loss / diluted loss per share | $(5.8) million / $(0.05) | $(7.8) million / $(0.07) |
| Cash from operating activities | $49.9 million | $48.0 million |
| Capital expenditures | $8.7 million | $6.8 million |
- Sales declined 12%; foreign-exchange translation reduced sales by $20.0 million, or 6%. Management attributed the underlying decline mainly to International, particularly Brazil.
- Gross margin improved 0.8 percentage points, supported by North American cost savings and productivity gains. SG&A fell 11% to $72.9 million, although SG&A as a share of sales rose to 25.1% from 24.9%.
- Operating income improved by $3.2 million, reflecting lower SG&A and restructuring costs, partly offset by lower gross profit. Interest expense decreased $1.2 million to $11.2 million. The company recorded $0.1 million of income tax expense despite a pretax loss, versus a $2.9 million tax benefit a year earlier.
- Q1 comprehensive loss was $79.8 million, chiefly reflecting $77.8 million of foreign-currency translation losses before tax.
Balance sheet, debt and liquidity
- At March 31, cash was $90.8 million, total debt was $819.7 million, and stockholders’ equity was $583.1 million. Cash increased from $53.2 million at year-end 2014; total debt increased from $800.7 million.
- Cash from operations was supported by a seasonal $101.8 million inflow from accounts receivable, inventory and accounts payable. Inventory used $52.8 million of cash; operating cash flow also reflected seasonal collections and payments of accrued liabilities.
- The company had $20.0 million drawn on its $250.0 million revolving facility and $217.3 million available, net of letters of credit. Management expected to repay the revolver by year-end and said available liquidity was adequate for foreseeable needs. Approximately $59 million of cash was held in Brazil, where transferring working capital is costly.
- Debt included $299.0 million under a floating-rate term loan, $20.0 million drawn on the revolving facility and $500.0 million of 6.75% senior unsecured notes due April 2020. The company reported compliance with applicable debt covenants.
- On April 28, 2015, after quarter-end, ACCO entered a new five-year, $600 million secured facility: a $300 million revolving facility and a $300 million term loan. The new facilities replaced the prior secured facilities; the filing says the revolving facility had approximately $42 million outstanding immediately after the transaction.
Segments and material changes
- North America: Sales fell 3% to $166.7 million; segment operating income improved to $5.6 million from a $1.5 million loss, primarily from savings, productivity and lower pension costs.
- International: Sales fell 24% to $94.6 million and segment operating income fell 57% to $3.3 million. Brazil weakness, lower volume, channel inventory de-stocking and consumer trade-down weighed on results; pricing partly offset the decline.
- Computer Products Group: Sales fell 15% to $28.7 million, partly due to a strategic reduction in low-margin tablet accessories. Segment operating income rose to $2.0 million from $1.9 million as product mix and lower SG&A improved margins.
- Currency weakness against the U.S. dollar affected reported results and raised product costs for foreign operations sourcing in dollars. Management cited cost savings and productivity improvements, particularly in North America, as offsets.
Outlook, risks and unusual items
- The filing provides no quantified full-year earnings or sales guidance. Management expected continued soft economic trends in Brazil and said the adverse comparison from reducing tablet-accessory sales was expected to run through the first half of 2015.
- Brazilian tax authorities are challenging goodwill deductions at subsidiary Tilibra for 2007–2010. ACCO reported accrued tax, penalties and interest totaling R$104.7 million, or $32.5 million at current exchange rates, for 2007–2012. The company is contesting the assessments; the outcome is uncertain, and an adverse result could materially affect cash flow when settled. Further assessments for open years are possible.
- ACCO repurchased 2.13 million shares in Q1 for approximately $19.4 million, funded substantially by short-term borrowing. It also reported $14.6 million of common-stock repurchases in financing cash flows; the filing’s cash-flow amount and management’s stated repurchase amount differ.
- Restructuring generated a $0.5 million credit in Q1. The remaining $5.5 million restructuring liability was expected to be substantially paid within nine months.
- Management identified currency movements, consumer behavior, macroeconomic conditions and office-products industry consolidation among factors that could cause actual results to differ from expectations. It reported no material change in risk factors from the 2014 Form 10-K.
Important facts for investors to verify
- Whether Brazil’s economic weakness, currency depreciation and channel de-stocking persist, and how much sales and profit are affected.
- The status, accounting reserve and potential cash exposure of the Brazilian tax assessments, including any new assessments or appeal developments.
- Execution and terms of the April 28 credit agreement, subsequent revolver borrowing and repayment, covenant headroom, and debt maturities relative to the 2020 notes.
- Whether working-capital seasonality, inventory levels and collections support operating cash flow through the back-to-school period.
- The pace and funding of share repurchases, and the reconciliation of the reported $19.4 million repurchase amount with the $14.6 million cash-flow line.