ACCO Brands Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; results are unaudited and compared with Q1 2018. ACCO designs, markets and manufactures branded products for businesses, schools and homes. Results are seasonal, with significant sales tied to back-to-school and year-end calendar purchases.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $393.9 million | $405.8 million | Down 2.9% |
| Gross profit / margin | $125.8 million / 31.9% | $127.5 million / 31.4% | Margin up 0.5 percentage points |
| Operating income / margin | $17.9 million / 4.5% | $11.7 million / 2.9% | Income up 53.0% |
| Income before tax | $10.0 million | $6.1 million | Up $3.9 million |
| Income tax expense (benefit) | $10.6 million | ($4.3 million) | Effective tax rate 106.0% vs. (70.5%) |
| Net income (loss) | ($0.6 million) | $10.4 million | Down $11.0 million |
| Diluted EPS | ($0.01) | $0.09 | Down $0.10 |
| Operating cash flow | ($61.3 million) | $60.4 million | Down $121.7 million |
Foreign currency translation reduced sales by $21.6 million and operating income by $2.2 million. Excluding currency translation and GOBA, comparable sales declined 0.5%; higher pricing partly offset lower volume. Gross margin improved mainly from pricing and cost savings. Operating income growth reflected cost savings, higher pricing and lower restructuring and integration costs; the reported figure included $2.5 million of GOBA operating income.
Segments
- North America: Sales of $160.4 million, down 3.1%; operating income rose to $6.8 million from $2.9 million, with margin increasing to 4.2% from 1.8%. Lower sales reflected order timing and lost placements; pricing and savings supported profit.
- EMEA: Sales of $146.5 million, down 5.2% as reported, but comparable sales rose 3.5%. Operating income increased to $15.9 million from $14.1 million.
- International: Sales of $87.0 million, up 1.5% as reported, including $11.8 million from GOBA; comparable sales declined 4.0%. Operating income was $5.6 million versus $5.8 million.
Cash, debt and liquidity
- Cash and cash equivalents were $100.5 million at March 31, 2019, versus $67.0 million at year-end; approximately $76 million was held in Brazil.
- Total debt was $1,011.3 million, versus $888.0 million at December 31, 2018. Long-term debt, net of issuance costs, was $949.4 million. Interest expense rose 10.6% to $10.4 million, mainly due to higher average borrowings and variable rates.
- Cash used in investing was $12.5 million, including $5.4 million paid toward the Cumberland asset acquisition; capital expenditures were $7.2 million. Financing provided $107.6 million, including $123.7 million of long-term borrowings, alongside dividends and share repurchases.
- There was $300.0 million drawn under the $500 million revolving facility and $183.6 million available after letters of credit. The company reported compliance with applicable debt covenants and said available liquidity should meet foreseeable needs.
- Management attributed the operating cash outflow primarily to working-capital timing: earlier inventory purchases and related payments, partly offset by receivable collections. It anticipated a much lower cash outflow in Q2 2019 than Q2 2018.
Material developments, outlook and risks
- Brazil tax matter: The quarter included a $5.6 million increase in reserves for uncertain tax positions, producing a 106.0% effective tax rate and a net loss. The company said this out-of-period adjustment should have been recorded in 2018 but was not material to 2018 or expected 2019 net income. It was not expected to require near-term cash payment. The company is contesting the assessments; the recorded accrual, including tax, penalties and interest, was $35.1 million at quarter-end. An adverse outcome could materially affect cash flow when settled.
- Pricing, costs and tariffs: Management said existing price increases and cost-reduction actions were expected to offset currently known inflation in 2019. Higher input costs and tariffs remained a headwind; further China tariff increases or inflation could require additional price increases and potentially reduce sales volume.
- Acquisitions: ACCO acquired Cumberland brand assets in Australia for A$8.2 million (about $6.0 million). GOBA, acquired in 2018, contributed $11.8 million of Q1 sales. GOBA purchase accounting remained preliminary, with potential material adjustments as valuation and tax matters were finalized.
- Other items: Adoption of lease accounting in January added right-of-use assets and lease liabilities to the balance sheet; the company said its effect on earnings and cash flow was immaterial. Q1 restructuring charges were $2.7 million. The board declared a $0.06-per-share dividend payable in June 2019.
- The filing provides no specific full-year financial guidance. Management cautioned that interim results may not indicate full-year performance and that forward-looking statements are subject to risks and uncertainties.
Important facts for investors to verify
- Whether pricing and cost savings continue to offset inflation and tariffs without materially weakening sales volumes.
- Whether working-capital movements and seasonal cash generation follow management’s expectations, including the anticipated lower Q2 cash outflow.
- Progress and potential cash exposure from the Brazil tax assessments, including the outcome of judicial proceedings.
- Debt levels, borrowing costs, revolver availability and continued covenant compliance.
- Final purchase accounting for GOBA and the financial contribution and integration of recent acquisitions.