ACCO Brands Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. ACCO Brands designs, markets and manufactures branded consumer and business products for schools, homes and workplaces. Results include GOBA, acquired July 2, 2018, from that date. Financial statements are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $507.3 million | $532.2 million | $1,411.9 million | $1,382.0 million |
| Gross profit / margin | $160.8 million / 31.7% | $178.2 million / 33.5% | $450.7 million / 31.9% | $457.9 million / 33.1% |
| Operating income / margin | $57.5 million / 11.3% | $56.7 million / 10.7% | $121.0 million / 8.6% | $107.2 million / 7.8% |
| Net income | $35.6 million | $30.6 million | $71.7 million | $57.7 million |
| Diluted EPS | $0.34 | $0.28 | $0.66 | $0.52 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $84.7 million | $115.7 million |
- Q3 reported sales fell 4.7%; comparable sales, excluding acquisitions and currency translation, declined 3.7%. YTD reported sales rose 2.2%, while comparable sales declined 2.4%.
- Q3 net income increased 16.3% and diluted EPS rose 21.4%. YTD net income increased 24.3% and diluted EPS rose 26.9%. Lower tax expense and fewer diluted shares contributed to EPS growth.
- Gross margin contracted in both periods, reflecting unfavorable mix and higher input costs, particularly in North America. Lower SG&A and restructuring charges supported reported operating income growth.
Segments and principal drivers
- North America: Q3 sales declined 9.3% to $263.4 million and segment operating income fell 32.1% to $33.7 million. YTD sales declined 4.6% to $711.8 million and segment operating income fell 17.7% to $88.1 million. Wholesaler weakness, earlier back-to-school shipments, fewer calendar placements, adverse mix and inflation weighed on results.
- EMEA: Q3 sales increased 2.0% to $143.1 million and segment operating income increased to $14.6 million from $7.8 million. YTD sales increased 19.9% to $438.1 million, including Esselte and currency effects; operating income rose to $37.1 million from $10.8 million. Distribution gains, synergies and improved mix aided performance.
- International: Q3 sales declined 0.8% to $100.8 million, including $10.0 million from GOBA; operating income rose to $16.1 million from $11.2 million. YTD sales declined 3.3% to $262.0 million and operating income was broadly flat at $25.2 million.
Liquidity, debt and capital allocation
- At September 30, 2018, cash was $95.0 million, total debt was $1,019.4 million and long-term debt, net, was $958.6 million. Total debt was $939.5 million at December 31, 2017.
- The revolving facility was expanded to $500 million. At quarter-end, borrowings were $272.8 million, with $216.7 million available after letters of credit. The company reported compliance with applicable debt covenants.
- Nine-month operating cash flow was $84.7 million, down $31.0 million year over year. Working capital provided $4.1 million, versus $12.7 million a year earlier; inventory absorbed $81.2 million of cash. Capital expenditures were $26.3 million.
- Nine-month investing cash use was $63.4 million, including $37.3 million for GOBA. Financing provided $3.9 million; the company paid $18.9 million in dividends and spent $75.0 million repurchasing shares.
- Approximately $55 million of cash was held in Brazil, where management says transferring working capital is costly. Management expects current cash, operating cash flow and available borrowing capacity to cover foreseeable needs.
Outlook, risks and unusual items
- Management expects disruption in U.S. wholesalers and independent dealers to persist until channel uncertainty stabilizes. The proposed Staples-Essendant combination and dealer acquisitions by Staples and Office Depot affected customer buying patterns.
- Paper, metals, transportation and tariffs raised North American costs. The company implemented a Q4 2018 price increase, planned another in early 2019 and said further increases might be needed. It expects tariff effects to worsen in Q4 2018 and the first half of 2019; successful price pass-through is not assured.
- Based on then-current exchange rates, management expected currency translation to reduce Q4 and full-year 2018 results by $0.02–$0.03 per share. The filing does not provide a complete full-year earnings forecast.
- Management expected $3.1 million of additional North America restructuring charges in Q4 2018. Pension contributions expected for 2018 were approximately $21.3 million; $18.4 million had been contributed through September.
- The Brazilian tax assessment reserve was $28.4 million at September 30. A $5.6 million reserve release related to the expired 2011 assessment limitation period reduced nine-month tax expense. The company intends to contest the remaining assessments; an adverse outcome could materially affect cash flow, and the 2012 year remained subject to possible assessment.
- GOBA purchase accounting remained preliminary; final valuations could change acquired asset values, goodwill and future depreciation or amortization. GOBA’s preliminary net purchase price was $37.3 million.
- The top ten customers represented 42% of nine-month sales. The company also cited channel shifts, customer consolidation, tariffs, foreign exchange and litigation as risks. It expected adoption of the new lease standard in 2019 to materially affect the balance sheet, but not materially affect the income statement.
Important facts for investors to verify
- Whether U.S. wholesaler and independent-dealer channel disruption persists, and its effects on sales, mix and margins.
- Whether planned price increases offset tariffs and other inflation without reducing customer volumes or market share.
- Debt, revolver availability, seasonal working-capital needs and cash accessibility, particularly cash held in Brazil.
- The resolution and potential cash exposure from the Brazilian tax assessments, including any assessment for 2012.
- Final GOBA acquisition accounting and whether EMEA and International growth and synergies continue.
- Whether the stated currency headwind and expected restructuring charges materialize; the filing provides no complete full-year earnings guidance.