ACCO Brands Corporation — Q1 2017 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2017. ACCO designs, markets and manufactures branded business, academic and selected consumer products. Esselte was acquired on January 31, 2017, with results included from February 1; the operating segments were realigned into North America, EMEA and International, and prior-period segment figures were recast.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Net sales | $359.8 million | $278.1 million; up 29% |
| Gross profit / margin | $110.8 million / 30.8% | $82.4 million / 29.6% |
| Operating income / margin | $9.3 million / 2.6% | $6.5 million / 2.3% |
| Income before tax | $0.1 million | Loss of $2.6 million |
| Income tax benefit | $3.5 million | $7.4 million |
| Net income / diluted EPS | $3.6 million / $0.03 | $4.8 million / $0.04 |
| Cash from operations | $65.4 million | $52.5 million |
| Cash / total debt | $118.3 million / $1,030.0 million | At Dec. 31, 2016: $42.9 million / $703.5 million |
- Acquisitions contributed $93.1 million of sales; foreign-currency translation added $2.1 million. Comparable sales declined, reflecting office-superstore declines, customer inventory reductions, lower volume and some EMEA share loss.
- Gross margin improved mainly from acquisition mix; management also cited pricing, cost savings and productivity improvements, partly offset by unfavorable mix and lower underlying volume.
- Cash used in investing was $297.7 million, including $292.6 million for Esselte net of acquired cash. Financing provided $306.4 million, including $412.0 million of long-term borrowings and $94.4 million of repayments.
- At quarter-end, $247.7 million was drawn on the $400 million revolving facility; $141.0 million remained available after letters of credit. The company reported covenant compliance. The secured facilities’ weighted-average interest rate was 3.70%; unsecured notes carry a 5.25% fixed rate.
Changes, outlook and risks
- Sales and operating income rose substantially, but the reported sales increase was acquisition-driven; net income and diluted EPS declined year over year. North America sales fell 2% and operating income fell to $6.6 million from $10.0 million. EMEA and International operating results included acquisition contributions.
- Interest expense declined to $9.8 million from $10.7 million following a prior refinancing, partly offset by acquisition-related debt. A $5.3 million excess stock-compensation tax benefit contributed to the current-quarter tax benefit.
- No numerical earnings or revenue guidance is provided in the filing. Management said cash flow from operations, cash on hand and available revolver capacity should meet working-capital, capital-expenditure and debt-service needs for the foreseeable future. Near-term cash priorities, after operations, include debt reduction and share repurchases.
- Seasonality affects cash and working capital: the company typically uses cash in Q2 to support North American back-to-school inventory. Approximately $71 million of quarter-end cash was held in Brazil.
- The Brazilian tax assessments concerning goodwill deductions remain contested. The recorded accrual, including tax, penalties and interest, was $39.3 million at March 31; an adverse outcome could materially affect cash flow, and additional assessments are possible.
- Esselte’s purchase-price allocation remains preliminary and may change, including for working capital, intangible assets, property and equipment, contingent liabilities and taxes. The acquisition added $171.4 million of pension obligations, including an unfunded German plan.
- Other risks include floating-rate debt, increased foreign-currency exposure (about 55% of pro forma 2016 revenue in foreign currencies after acquisitions), and potential impairment sensitivity for certain trade names. The filing reports no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of subsequent sales, margin and cash-flow performance reflects organic trends versus Esselte and Pelikan Artline acquisitions.
- Final Esselte purchase accounting, integration and restructuring costs, expected synergies, and the acquired pension obligations.
- Debt reduction, revolver availability, interest-rate exposure and continued compliance with credit-facility covenants.
- Developments in the Brazilian tax dispute and any changes to the $39.3 million accrual or potential cash exposure.
- Whether North American and EMEA volume, customer inventory reductions and share-loss trends improve; the filing provides no numerical forward guidance.