ACCO Brands Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; it also provides unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context and reporting period
ACCO Brands designs, manufactures, sources and markets office, academic, calendar and computer accessory products. Its brands include Mead, Kensington, Swingline, Five Star, Leitz and Artline. More than 80% of sales came from brands holding a leading position in their product categories. The company reports North America, International and Computer Products Group segments; about 43% of 2016 sales were outside the U.S.
On May 2, 2016, ACCO acquired the remaining interest in Pelikan Artline and consolidated its results from that date. The Esselte acquisition closed January 31, 2017, after year-end, and is not included in 2016 results.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $1,557.1 million | $1,510.4 million | +3%; +4.2% at constant currency |
| Gross profit / margin | $515.1 million / 33.1% | $478.4 million / 31.7% | Margin +1.4 points |
| Operating income / margin | $167.3 million / 10.7% | $163.5 million / 10.8% | Income +2%; margin -0.1 points |
| Net income | $95.5 million | $85.9 million | +11% |
| Diluted EPS | $0.87 | $0.78 | +12% |
| Cash from operations | $165.9 million | $171.2 million | Down $5.3 million |
| Free cash flow (non-GAAP) | $148.3 million | Not provided in the excerpt | Defined as operating cash flow less capital expenditures, adjusted for specified investing items |
| Cash and cash equivalents | $42.9 million | $55.4 million | Down $12.5 million |
| Total debt, gross | $703.5 million | $729.0 million | Down $25.5 million |
Current assets were $670.7 million and current liabilities $406.4 million at year-end. Reported total debt, net of issuance costs, was $696.2 million. The company had $151.6 million drawn on its $300 million revolving facility and $140.6 million available, after letters of credit.
Fourth-quarter 2016 sales were $437.6 million versus $412.1 million in Q4 2015; operating income was $59.7 million versus $56.9 million. Net income was $6.1 million versus $31.4 million. The filing’s quarterly table does not clearly explain this year-over-year quarterly net-income decline.
Material changes versus the prior comparable period
- Pelikan Artline contributed $78.5 million of 2016 sales. Reported sales growth also reflected a $16.9 million adverse currency translation effect. Excluding the acquisition, underlying sales declined, principally because of lower sales at certain wholesalers and office superstores; mass-market and online channels grew.
- Gross margin improved through pricing, cost savings, productivity and the Pelikan Artline contribution. SG&A rose 8% to $320.8 million, including acquisition-related costs, professional fees and higher expenses associated with Esselte.
- Net income growth was primarily attributable to a lower effective tax rate: 23.7% versus 34.6%. The 2016 rate benefited from non-taxable acquisition remeasurement gain and foreign-exchange tax effects; therefore, EPS growth outpaced operating-income growth.
- Operating cash flow decreased modestly, while investing cash outflow increased to $106.4 million, mainly from the $88.8 million Pelikan Artline purchase price, net of cash acquired. Capital expenditure was $18.5 million.
- North America sales declined 1%; International sales increased 14% as reported, including acquisition contribution; Computer Products Group sales declined 3%. Segment operating income increased in all three segments.
Outlook, management commentary, risks and unusual items
- Management said it expected adverse effects from a strong U.S. dollar to continue into 2017. It cited difficulty raising international prices quickly enough to fully offset foreign-exchange-related cost inflation.
- Management stated that operating cash flow, cash balances and borrowing availability under the new revolving facility should be adequate for working capital, capital expenditures and debt service for the foreseeable future. Debt reduction is a near-term cash-use priority. The filing does not provide quantified 2017 revenue or earnings guidance.
- In December 2016, ACCO issued $400 million of 5.25% senior unsecured notes due 2024 and retired its 6.75% notes due 2020. Refinancing included a $25 million make-whole premium and a $4.9 million write-off of debt issuance costs. The company reported compliance with its year-end loan covenants.
- Following the Esselte acquisition, completed in January 2017 for €296.9 million (about $317.7 million), ACCO entered a new credit agreement with a $400 million multi-currency revolver and term loans. About $156.7 million was available under that revolver immediately after closing. The company also assumed an estimated $160 million of unfunded pension liabilities, net of related deferred tax.
- The Brazilian tax assessments challenging goodwill deductions remain under administrative appeal. ACCO recorded an accrual of $37.3 million, including tax, penalties and interest, at year-end; the company says an adverse outcome could materially affect cash flow in the settlement year. Additional assessments for open tax years were possible.
- Other risks include customer concentration (top ten customers were 56% of sales; Staples 14% and Walmart 10%), customer consolidation and channel shifts, private-label competition, secular substitution of paper-based products, foreign-currency exposure, acquisition integration and potential impairment of goodwill or trade names. Mead, Tilibra and Hilroy trade names had carrying values totaling $188.1 million and fair values less than 30% above carrying value.
- Defined benefit pension plans were underfunded; 2016 contributions were $6.2 million and expected 2017 contributions were $10.7 million. A multi-employer plan covering union employees was in critical and declining status. The 2016 audited financial statements received an unqualified opinion, and the auditor reported effective internal control over financial reporting, excluding Pelikan Artline from the year-end assessment.
Most important facts for investors to verify
- How much of future sales and profit growth is organic after separating acquisition effects, currency translation and pricing.
- Whether Pelikan Artline and Esselte integration delivers expected cost savings, and how Esselte’s pension liabilities and financing affect leverage and cash flow.
- The drivers of the sharp Q4 net-income decline despite higher sales and operating income, including quarterly tax and unusual items.
- Progress and potential cash exposure from the Brazilian tax dispute, including any assessments for additional years.
- Debt levels, covenant headroom, floating-rate exposure and liquidity after the Esselte financing; reconcile the year-end debt figures with subsequent borrowing and refinancing disclosures.
- Changes in customer concentration, office-products channel demand, and impairment headroom for the Mead, Tilibra and Hilroy trade names.