ACCO Brands Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The unaudited results compare with Q1 2019; balance-sheet figures compare with December 31, 2019. ACCO designs, markets and sells branded school, office and consumer products across North America, EMEA and International markets. COVID-19 began affecting demand and operations during the quarter, particularly in March.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 or prior balance date |
|---|---|---|
| Net sales | $384.1 million | $393.9 million; down 2.5% reported and 3.5% on a comparable basis |
| Gross profit and margin | $112.2 million; 29.2% | $125.8 million; 31.9% |
| Operating income and margin | $17.4 million; 4.5% | $17.9 million; 4.5% |
| Net income (loss) | $8.0 million; diluted EPS $0.08 | $(0.6) million; diluted EPS $(0.01) |
| Operating cash flow | $(25.2) million | $(61.3) million |
| Cash and cash equivalents | $93.4 million | $27.8 million at December 31, 2019 |
| Total debt | $929.2 million | $816.0 million at December 31, 2019 |
Gross margin fell 2.7 percentage points, reflecting lower comparable sales, weaker fixed-cost absorption and unfavorable product mix; Foroni accounted for 50 basis points of the decline. SG&A decreased to $86.1 million from $95.9 million, including lower incentive accruals and cost savings. Interest expense declined to $8.6 million from $10.4 million. The effective tax rate was 27.9%, versus 106.0% in Q1 2019, when tax reserves and other items included a $5.6 million Brazil assessment-related charge.
Cash used in operations improved by $36.1 million year over year. Management attributed the comparison in part to the prior-year payment for inventory built in late 2018; Q1 2020 working-capital movements also differed. Investing cash use was $6.3 million, including $6.9 million of capital expenditures. Financing provided $99.2 million, including net borrowings; the company repurchased $18.9 million of stock and paid $6.2 million in dividends.
At March 31, debt included $538.5 million outstanding under senior secured credit facilities and $375.0 million of 5.25% senior unsecured notes. ACCO reported $450.1 million of revolver availability, a 2.8x net leverage ratio and compliance with applicable covenants. Approximately $53 million of cash was held in Brazil, where management says transfers of short-term working capital are costly. No debt maturities were due before May 2024.
Material changes and segment results
- Reported sales declined $9.8 million. Foreign exchange reduced sales by $10.6 million; the Foroni acquisition added $14.4 million. Excluding both, comparable sales fell $13.6 million, or 3.5%.
- North America sales rose to $167.8 million from $160.4 million and segment operating income increased to $7.6 million from $6.8 million.
- EMEA sales declined to $127.5 million from $146.5 million; segment operating income fell to $12.0 million from $15.9 million, primarily due to March closures and lower sales.
- International sales increased to $88.8 million from $87.0 million, including Foroni; excluding acquisition and currency effects, comparable sales declined 7.5%. Segment operating income was $5.9 million versus $5.6 million.
- Foroni, acquired in August 2019, contributed $14.4 million in Q1 sales. Its purchase-price allocation remained preliminary.
- Q1 share repurchases totaled 2.7 million shares. Management said it did not intend to repurchase additional shares during 2020.
Outlook, risks and notable items
- Management withdrew full-year guidance because visibility was limited. It expected the pandemic to materially and adversely affect sales and results through at least year-end.
- Q2 sales were forecast to decline 25%–40%, including an estimated 3% adverse foreign-exchange impact; April was expected to be the weakest month. Management described full-year demand as lower than 2019, with a wide range of possible outcomes.
- Cost actions, combined with normal productivity savings, were expected to reduce Q2 costs by approximately $20 million, but not fully offset the expected sales impact. Actions included reduced discretionary spending, salary reductions, furloughs and layoffs, and suspension of the U.S. 401(k) match.
- Management anticipated potentially higher seasonal borrowing, late customer payments and bad debts, and elevated inventory at the end of Q2. Back-to-school demand and school-opening timing were important uncertainties. The company reported that most facilities remained open and that it did not then anticipate significant supply constraints for North American back-to-school orders.
- On May 1, 2020, after quarter-end, the company amended its credit agreement. The maximum consolidated leverage ratio rose from 3.75x to 4.75x, stepping back down to 3.75x for the first fiscal quarter ending after June 30, 2021. The amendment also increased pricing under specified terms, restricted certain debt, payments and acquisitions, and required revolver paydowns when loan-party cash exceeded $100 million.
- The Brazil tax-assessment reserve was $27.0 million, including tax, penalties and interest. ACCO disputes the assessments; an adverse outcome could materially affect cash flow in the settlement year. The company also disclosed uncertainty over potential Brazilian tax credits.
- Management concluded there was no goodwill or indefinite-lived intangible impairment trigger as of March 31, 2020. It expected approximately $19.5 million of defined-benefit plan contributions in 2020; $5.7 million had been contributed through Q1.
- On May 1, the board declared a $0.065-per-share dividend, payable June 19, 2020. Future dividends remain subject to board discretion and financial, liquidity and covenant considerations.
Most important facts for investors to verify
- Whether COVID-19 demand, customer closures and back-to-school timing ultimately matched management’s Q2 range and full-year assumptions.
- Cash conversion, receivable collections, customer credit losses, inventory levels and seasonal revolver usage as the pandemic affected working capital.
- Debt, net leverage, available revolver capacity and compliance with the amended credit agreement’s leverage, pricing and cash-sweep provisions.
- Segment-level sales and margins, especially EMEA performance and the contribution and final purchase accounting for Foroni.
- Progress and sufficiency of announced cost reductions, and the outcome of the Brazil tax assessments and tax-credit proceedings.