ACCO Brands Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited; amounts are in U.S. dollars unless noted.
Business context
ACCO Brands manufactures and markets office and school products and computer accessories through three segments: North America, International, and Computer Products Group (CPG). Demand is seasonal, with school-related sales and receivable collections affecting working capital and cash flow.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $427.7M | $440.2M | $757.1M | $792.2M |
| Gross profit / margin | $130.6M / 30.5% | $137.1M / 31.1% | $218.9M / 28.9% | $233.8M / 29.5% |
| Operating income / margin | $43.9M / 10.3% | $37.9M / 8.6% | $43.3M / 5.7% | $28.7M / 3.6% |
| Continuing-operations income | $21.3M | $9.5M | $13.5M | $0.6M |
| Net income | $21.3M | $9.5M | $13.5M | $0.5M |
| Diluted EPS | $0.18 | $0.08 | $0.12 | $0.01 |
| Operating cash flow | Not provided for quarter alone | $5.6M | $57.2M |
- Q2 sales fell 3%, including a 1% negative currency impact. First-half sales declined 4%, including $14.9M of unfavorable currency translation.
- Q2 SG&A fell 7% to $81.1M; first-half SG&A fell 8% to $163.0M. Lower restructuring costs and operating expenses supported higher operating income despite lower gross profit.
- First-half operating cash flow decreased to $5.6M from $57.2M. Working-capital cash generation was $48.9M, including strong receivable collections, partly offset by seasonal inventory purchases and payments of accrued liabilities.
- Capital expenditures were $13.1M for the first half, versus $26.6M a year earlier. Financing provided $41.2M, principally from net revolving-credit borrowings of $43.3M.
Balance sheet, debt and liquidity
- At June 30, 2014, cash was $92.3M, total debt $964.2M, and total liabilities $1,665.7M. Cash included approximately $75M held in Brazil.
- Debt comprised a $420.0M term loan, $42.5M drawn on the revolving facility, $500.0M of 6.75% senior notes due 2020, and other borrowings. The term loan and revolver mature in May 2018; the facility’s stated floating rate was 2.23% for the term loan and 2.27% for revolver borrowings.
- The $250M revolving facility had $195.4M available after $12.1M of letters of credit. The company reported compliance with applicable debt covenants.
- Management said available cash, operating cash flow and revolving-credit availability should cover working capital, capital spending and debt service for the foreseeable future. The company noted seasonal cash needs and that moving Brazilian working capital is costly.
Material changes and management commentary
- North America Q2 sales declined 1%; segment operating income rose to $49.0M from $33.7M, helped by restructuring savings, productivity, lower pension costs and absence of prior-year IT integration costs. A customer merger and a shift to consignment delayed some calendar-product sales.
- International Q2 sales fell 4% and segment operating income fell to $5.2M from $10.5M. Lower volumes, higher go-to-market and bad-debt costs, and the absence of a prior-year building-sale gain contributed to the decline.
- CPG Q2 sales fell 12% and segment operating income fell to $0.4M from $2.9M. Tablet-accessory competition, weaker demand, pricing pressure and inventory write-offs were key factors; security and laptop accessory sales were flat.
- Management said the Q2 sales decline moderated from recent quarters, supported by improved North American trends and expanded back-to-school placements. No specific financial guidance or quantified full-year outlook is provided in the filing.
Risks, contingencies and unusual items
- The company is contesting Brazilian tax assessments against subsidiary Tilibra concerning goodwill deductions for 2007–2010. The assessments seek approximately R$98.7M, or $44.9M at the stated exchange rate. ACCO had reserved $44.5M and continued accruing interest; the appeal process may take years, and an adverse outcome could affect cash flow.
- ACCO disclosed distributor litigation in Puerto Rico and the Dominican Republic involving alleged unlawful termination and claims for statutory damages. Management intends to defend the cases; outcomes are uncertain.
- Disclosure controls and procedures remained ineffective at June 30, 2014 because of a previously identified material weakness in IT general controls for the acquired Mead business in the U.S. and Canada. Management reported remediation work substantially completed but said further testing and evidence were needed before concluding controls were effective. Additional procedures supported management’s conclusion that the filed statements fairly present the results.
- Goodwill and indefinite-lived intangible impairment testing in Q2 found no impairment. The Mead indefinite-lived trade name’s estimated fair value exceeded carrying value by 17%, leaving sensitivity to changed assumptions.
- Prior-year comparisons benefited from the absence of a $9.4M debt-origination-cost write-off and lower prior-year restructuring and integration costs. The Q2 2014 restructuring charge was zero; first-half charges were $1.1M versus $15.6M.
Important facts for investors to verify
- Whether North American back-to-school placements and delayed consignment sales convert to revenue in subsequent quarters.
- Whether CPG tablet-accessory pricing, volume and inventory write-offs stabilize, and whether international volume and credit costs improve.
- Seasonal working-capital requirements, cash generation, and the amount and location of cash available for debt service.
- Progress in remediating the Mead IT-control weakness and any later conclusion on control effectiveness.
- Developments in the Brazilian tax appeals and distributor litigation, including any change in reserves or potential exposure.
- Assumptions underlying impairment valuations, particularly the limited 17% headroom for the Mead trade name.