ACCO Brands Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. Amounts are in U.S. dollars unless noted.
Business context and performance
ACCO Brands designs, markets and manufactures business, academic and consumer products. On May 2, 2016, the company acquired the remaining 50% of Pelikan Artline, its former Australian and New Zealand joint venture, and began consolidating its results in the International segment from that date.
- Q2 sales: $410.1 million, up 4% from $394.7 million. Pelikan Artline added $16.8 million; foreign-currency translation reduced sales by $6.8 million.
- Six-month sales: $688.2 million, up 1% from $684.7 million. Pelikan Artline added $16.8 million; currency translation reduced sales by $20.4 million.
- Q2 segment sales: North America $279.1 million, up 4%; International $101.3 million, up 5% including the acquisition; Computer Products Group $29.7 million, up 1%.
- Management attributed North America’s growth mainly to back-to-school sell-in, product placements and broader offerings. International sales faced softness in Europe and Brazil and lower pre-acquisition Australian sales; Computer Products Group growth was modest.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Gross profit | $134.8 million | $126.7 million | $217.2 million | $206.9 million |
| Gross margin | 32.9% | 32.1% | 31.6% | 30.2% |
| Operating income | $45.4 million | $49.2 million | $51.9 million | $51.8 million |
| Operating margin | 11.1% | 12.5% | 7.5% | 7.6% |
| Net income | $61.9 million | $27.7 million | $66.7 million | $21.9 million |
| Diluted EPS | $0.57 | $0.25 | $0.61 | $0.19 |
- Q2 operating income declined despite higher gross profit, reflecting increased SG&A, acquisition-related expenses and $4.4 million of restructuring charges. Q2 International segment operating income fell to $2.9 million from $6.2 million; North America rose to $51.6 million from $50.1 million.
- Net income included a non-cash $35.2 million gain from remeasuring ACCO’s previously held Pelikan Artline interest at fair value. The gain and related tax effects materially boosted reported earnings; the Q2 effective tax rate was 13.9% and the six-month rate was 3.8%.
- Cash flow: Six-month operating cash flow was $0.8 million, versus $8.9 million in 2015. Investing used $92.2 million, including $85.4 million net cash paid for the acquisition. Financing provided $126.6 million. Cash ended at $96.2 million, versus $55.4 million at year-end 2015.
- Debt and liquidity: Total debt was $883.6 million, versus $729.0 million at December 31, 2015. Cash plus current assets were $792.3 million; current liabilities were $401.7 million. The company had $158.1 million drawn on revolving facilities and $132.9 million available, net of letters of credit. Senior unsecured notes carry a fixed 6.75% rate; the secured facilities had a reported weighted-average rate of 2.85%. ACCO reported compliance with debt covenants.
Material changes, outlook and risks
- Acquisition accounting remains preliminary. The company recorded $84.3 million of preliminary goodwill and $60.8 million of identifiable intangibles for Pelikan Artline; final valuations and purchase-price adjustments could change reported amounts and future depreciation or amortization.
- Management said it expects to repay the U.S.-dollar revolving-credit borrowings by year-end 2016 and believes cash, operating cash flow and available credit will meet foreseeable working-capital, capital-expenditure and debt-service needs. No specific earnings or sales guidance is provided in the filing text.
- The business is seasonal: cash is typically used in Q2 to support back-to-school working capital. At June 30, approximately $56.5 million of cash was held in Brazil, where moving funds can be costly.
- Foreign exchange remains a material risk: about 40% of sales were outside the U.S. before the acquisition; management estimated a pro forma foreign-currency revenue share of approximately 44%. Currency movements affected reported sales and costs, and additional Australian exposure followed the acquisition.
- The Brazilian subsidiary Tilibra is contesting tax assessments concerning goodwill deductions. The recorded accrual, including tax, penalties and interest, was $36.0 million at current exchange rates. The dispute may take years to resolve; an adverse outcome could materially affect cash flow, and additional assessments remain possible.
- Customer consolidation and retail restructuring may pressure sales and margins. Staples and Office Depot terminated their proposed merger after a court injunction; both announced plans to explore European operations sales and lower costs. ACCO also cited the ongoing Brazilian recession and competitive pressures.
- New cost-saving plans address Pelikan Artline integration and North American operations. Remaining restructuring liabilities were $2.1 million, expected to be substantially paid within 18 months. Management reported no impairment in its second-quarter goodwill and tested trade-name assessments, while noting Brazilian economic deterioration could trigger further review of Tilibra’s trade name.
Most important facts for investors to verify
- How much of earnings growth persists after excluding the $35.2 million acquisition remeasurement gain and unusually low effective tax rate.
- Whether Pelikan Artline integration delivers expected benefits and whether final purchase accounting materially changes goodwill, intangibles or future expenses.
- Progress on debt reduction, repayment of U.S.-dollar revolver borrowings by year-end, and seasonal working-capital requirements.
- Sales, margins and pricing trends in International markets, particularly Brazil and Europe, and the effects of customer consolidation.
- Developments in the Brazilian tax dispute, including any additional assessments and changes to the $36.0 million accrual.