ACCO Brands Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statements are unaudited. ACCO sells office, school, calendar and computer accessories through North America, International and Computer Products segments. Results include Mead Consumer & Office Products (Mead C&OP), acquired May 1, 2012, so comparable periods do not include the same number of months of Mead results.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $440.2m | $438.7m | $792.2m | $727.6m |
| Gross profit / margin | $137.1m / 31.1% | $124.3m / 28.3% | $233.8m / 29.5% | $204.1m / 28.1% |
| Operating income / margin | $37.9m / 8.6% | $11.6m / 2.6% | $28.7m / 3.6% | $15.6m / 2.1% |
| Net income | $9.5m | $94.2m | $0.5m | $76.8m |
| Diluted EPS | $0.08 | $0.98 | $0.01 | $1.00 |
| Operating cash flow | Not separately stated for Q2 | $57.2m | $(166.3)m |
- Q2 sales were nearly flat year over year. Mead C&OP contributed $26.1m from an additional month in the comparison; excluding that contribution, management reported an underlying decline of $24.6m, including $1.5m of unfavorable currency translation.
- For the first half, sales rose 9%, but Mead C&OP contributed $126.2m because six months were included in 2013 versus two in 2012. Management reported an underlying sales decline of $61.6m, including $3.2m of unfavorable currency translation.
- Gross margin improvement reflected Mead C&OP mix, synergies and productivity, and the absence of prior-year merger inventory step-up amortization. Q2 operating income also benefited from lower transaction/integration and restructuring costs. Q2 SG&A was $87.1m, down 6%; first-half SG&A was $176.7m, up 10%, largely reflecting the acquisition and higher stock compensation.
- Q2 interest expense fell to $13.5m from $32.8m; first-half expense fell to $29.2m from $51.9m, reflecting lower rates after refinancing and the absence of prior-year acquisition financing costs. Other expense was $9.6m in Q2, including a $9.4m write-off of debt issuance costs from the 2013 refinancing; Q2 2012 included $61.4m of merger-related refinancing costs.
- The prior-year tax benefit included a $130.4m release of valuation allowances. This substantially distorts year-over-year net income and EPS comparisons: first-half 2013 had a $7.4m pretax loss and an $8.0m tax benefit, versus a $94.7m pretax loss and $171.6m tax benefit in first-half 2012.
Balance sheet, debt and liquidity
- At June 30, cash was $95.3m, total debt was $1,089.9m and net debt was approximately $994.6m. Total debt at December 31, 2012 was $1,072.1m. Current assets were $875.8m and current liabilities were $499.9m.
- In May 2013, ACCO refinanced its secured credit facilities with a $780m, five-year facility: a $530m Term Loan A and a $250m revolving facility, both due May 2018. The Term Loan A had a 2.54% floating rate; the company reported a 2.59% weighted-average rate on current senior secured facilities. Senior unsecured notes totalled $500m at a fixed 6.75%, due 2020.
- Revolver borrowings were $57.3m; $181.8m remained available, after letters of credit. The company was in compliance with its covenants at June 30, including a minimum fixed-charge coverage ratio of 1.25:1.00. Management said cash, operating cash flow and available borrowing capacity should cover foreseeable working capital, capital expenditure and debt-service needs.
- First-half cash provided by operations was $57.2m, versus cash use of $166.3m in 2012. The 2013 result included a $77.3m working-capital cash inflow, with $94.4m from receivable collections partly offset by a $64.8m seasonal inventory build. Capital expenditures were $26.6m, versus $10.3m. Cash increased $45.3m to $95.3m.
- Comprehensive loss was $34.7m for the first half, including $44.6m of foreign currency translation losses.
Outlook, commentary and risks
- Management expected approximately $25m of restructuring charges and $4m of IT-related integration charges for full-year 2013, with approximately $30m of restructuring cash outflow. It also expected about $9m of additional restructuring charges in 2013; these estimates are management expectations, not guarantees.
- Restructuring plans include integration-related cost reductions and changes to the European business and manufacturing footprint. The Brampton, Canada distribution and manufacturing facility was to close, with activities relocated. The company recorded $15.6m of restructuring charges in the first half and had a $21.0m employee termination-cost liability at June 30.
- Computer Products faced weaker demand from fewer new mobile-device launches, declining PC shipments, competition, lower royalty income and inventory obsolescence. Its Q2 sales fell 17% and segment operating income fell 71%. Management also cited soft consumer demand, industry pricing pressure, customer consolidation and foreign-exchange exposure.
- ACCO highlighted the proposed Office Depot–OfficeMax merger, approved by shareholders in July 2013, and expected any effects on its business, if completed, primarily in the U.S. retail channel.
- A Brazilian tax assessment challenges the deductibility of goodwill at acquired subsidiary Tilibra. ACCO had reserved $44.5m, including potential exposure for additional open tax years, and accrued $0.7m of additional interest in the first half. The appeal is at an early stage and could take years; the company says the outcome is uncertain. Other litigation and environmental matters were not expected by management to have a material adverse effect.
- Annual impairment testing in Q2 found no impairment of goodwill or indefinite-lived intangibles. The filing notes that fair values of certain recently acquired trade names were not substantially above carrying values.
Most important facts for investors to verify
- Underlying sales trends excluding Mead C&OP acquisition-period differences, especially in North America and Computer Products.
- Whether margin and operating-income improvements persist after excluding prior-year inventory step-up, integration costs, restructuring and the Ireland facility sale gain.
- Progress on restructuring savings, the expected charges and cash outflows, and execution of the Brampton closure and other integration plans.
- Debt reduction, seasonal working-capital requirements, borrowing availability and continued compliance with credit covenants.
- Developments in the Tilibra Brazilian tax dispute, including potential assessments for open years and further interest accruals.
- Demand, product launches, competitive conditions and customer-channel effects, including any consequences of the Office Depot–OfficeMax merger.