ACCO Brands Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. ACCO designs, markets and manufactures branded business, academic and consumer products. Results include Pelikan Artline from its May 2, 2016 acquisition date.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $431.3 million | $413.6 million | $1,119.5 million | $1,098.3 million |
| Gross profit / margin | $144.2 million / 33.4% | $133.7 million / 32.3% | $361.4 million / 32.3% | $340.6 million / 31.0% |
| Operating income / margin | $55.7 million / 12.9% | $54.8 million / 13.2% | $107.6 million / 9.6% | $106.6 million / 9.7% |
| Net income | $22.7 million | $32.6 million | $89.4 million | $54.5 million |
| Diluted earnings per share | $0.21 | $0.30 | $0.82 | $0.49 |
- Cash flow: Nine-month operating cash flow was $110.0 million, versus $69.7 million a year earlier. Investing used $99.1 million, including $88.8 million net cash paid for Pelikan Artline; financing provided $28.7 million. Cash increased $45.6 million to $101.0 million.
- Liquidity and debt: At September 30, cash was $101.0 million, total debt was $790.4 million and current debt was $24.4 million. Revolver borrowings were $133.8 million, with $157.4 million available after letters of credit. The company reported compliance with debt covenants and said liquidity was adequate for foreseeable needs.
- Other balance-sheet items: Total assets were $2,156.6 million and stockholders’ equity was $724.1 million. Goodwill was $595.6 million and identifiable intangibles were $575.2 million.
Changes versus comparable periods
- Q3 sales rose 4%; Pelikan Artline contributed $27.6 million, while underlying sales declined amid wholesaler destocking and office-superstore declines. Gross margin improved 1.1 percentage points, but operating margin decreased 0.3 points. Higher SG&A, including $4.3 million of Esselte-related costs, offset much of the gross-profit improvement.
- Q3 net income fell 30%. The quarter included a $6.3 million reduction to the previously reported Pelikan Artline remeasurement gain, higher interest expense and a higher effective tax rate. Interest expense increased 18% to $13.0 million.
- Nine-month sales increased 2%, including $44.4 million from Pelikan Artline, partly offset by $19.6 million of adverse foreign-currency translation and lower underlying International sales. Gross margin improved 1.3 points; operating income rose 1%.
- Nine-month net income increased 64%, primarily reflecting the $28.9 million Pelikan Artline remeasurement gain and a 16.4% effective tax rate, compared with 33.0% in 2015. The gain was non-recurring; tax benefits also reflected foreign-exchange losses on intercompany loans whose pre-tax effect was recorded in equity.
- By segment, Q3 North America sales decreased 2%; International sales rose 23% with the acquisition contribution, despite underlying volume weakness; Computer Products Group sales were flat. Nine-month segment operating income improved in all three segments.
Outlook, commentary and risks
- No numerical full-year guidance is provided in the filing. Management cited opportunities from market-share gains, channel expansion and new products, with organic growth supplemented by strategic acquisitions; it also emphasized seasonality and the effects of foreign exchange, pricing and cost inflation.
- Management expected to repay U.S. dollar revolving-credit borrowings by year-end 2016. It expected approximately $6.6 million of 2016 defined-benefit plan contributions; $5.0 million had been contributed through September.
- On October 21, 2016, after quarter-end, ACCO agreed to acquire Esselte for approximately €296.9 million (about $333.1 million at September 30 exchange rates), subject to customary conditions including antitrust approval; closing was expected in early 2017. The proposed financing includes €300 million of term loans and a $400 million revolver, conditional on closing and other requirements. The filing identifies execution, financing, regulatory and synergy-realization risks.
- Brazilian tax assessments challenge goodwill deductions for 2007–2010. ACCO disputes the assessments; the process may take years. The recorded accrual, including tax, penalties and interest, was $36.5 million at September 30, 2016. If the tax authority prevails, settlement could materially affect cash flow; additional assessments were also possible.
- Other risks discussed include foreign-exchange and interest-rate exposure, Brazil’s recession, channel destocking, lost customer share, and potential impairment sensitivity for certain trade names. Management reported no material change in other disclosed risk factors.
Key facts for investors to verify
- Whether Esselte closes on the expected terms and schedule, and the resulting debt, liquidity, covenant and integration effects.
- How much future earnings growth comes from underlying sales, pricing and productivity versus acquisitions and non-recurring gains; monitor International volumes and North American channel trends.
- Final purchase accounting for Pelikan Artline: asset and liability valuations remained preliminary and could change, including future amortization.
- Developments in the Brazilian tax dispute, potential further assessments and the adequacy of the $36.5 million accrual.
- Debt reduction, revolver availability and seasonal working-capital cash flows, including the concentration of $44.7 million of cash in Brazil.