ACCO Brands Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing; fourth-quarter figures are noted separately. ACCO Brands makes and markets office, school, calendar and computer-accessory products. The 2013 results include a full year of Mead Consumer and Office Products (Mead C&OP), compared with eight months in 2012.
Key financial results
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $1,765.1 million | $1,758.5 million |
| Gross profit / margin | $544.8 million / 30.9% | $533.4 million / 30.3% |
| Operating income / margin | $145.8 million / 8.3% | $139.3 million / 7.9% |
| Income from continuing operations | $77.3 million | $117.0 million |
| Net income | $77.1 million | $115.4 million |
| Diluted EPS from continuing operations | $0.67 | $1.22 |
| Cash from operating activities | $194.5 million | $(7.5) million |
| Capital expenditures | $36.6 million | $30.3 million |
- Sales increased just 0.4%. The full-year Mead contribution added about $125 million, while underlying sales declined about $118 million, including $27.5 million of unfavorable currency translation.
- Operating income rose 5%, supported by integration synergies and productivity savings. Gross margin improved 0.6 percentage points. Restructuring charges increased to $30.1 million from $24.3 million.
- Continuing-operations income fell 34%, primarily reflecting the prior year’s substantial tax benefit from releasing valuation allowances. The 2013 effective tax rate was 15.7%; 2012’s tax benefit included a $126.1 million U.S. valuation-allowance release and $19.0 million of foreign releases.
- Interest expense declined to $54.7 million from $89.3 million, following the 2013 refinancing, lower effective rates and reduced debt. Other expense was $7.6 million versus $61.3 million, largely because 2012 included refinancing charges.
- Cash and cash equivalents were $53.5 million at year-end. Total debt was $920.9 million, down $151.2 million from year-end 2012. The $250 million revolving facility had no borrowings and $235.9 million available; the company reported a 3.3x leverage ratio and compliance with loan covenants.
- Current assets were $841.7 million and current liabilities $445.1 million. Stockholders’ equity was $702.3 million.
Fourth-quarter performance
2013 fourth-quarter net sales were $503.7 million, gross profit $169.9 million, operating income $66.8 million, and income from continuing operations $50.3 million. In the prior-year fourth quarter, these were $529.7 million, $178.1 million, $67.3 million, and a loss of $15.1 million, respectively. Quarterly results reflect the company’s seasonality, with higher sales typically in the second half.
Material changes and segment trends
- ACCO Brands North America sales rose 1% to $1,041.4 million, including Mead’s additional months; segment operating income increased 14% to $98.2 million. Underlying sales were pressured by soft demand, lower-priced purchases, lost placements and exits from unprofitable business.
- ACCO Brands International sales rose 3% to $566.6 million, including the Mead contribution; segment operating income increased 7% to $66.5 million. Brazil grew, while currency translation and weakness in other markets weighed on sales.
- Computer Products Group sales fell 12% to $157.1 million and segment operating income fell 62% to $13.7 million. Management cited competition and share loss in tablet and smartphone accessories, continued PC accessory declines, lower pricing, lost royalty income and inventory obsolescence.
- The 2013 refinancing replaced prior credit facilities with a $780 million, five-year senior secured facility, including a $530 million term loan and a $250 million revolving facility. Year-end debt also included $500 million of 6.75% senior unsecured notes due 2020.
Outlook, risks and unusual items
- Management expected approximately $24 million of annual savings from restructuring actions, including a planned reduction of about 12% of the North American salaried workforce; implementation was to begin in early 2014 and finish by year-end. The filing does not provide clear quantified revenue or earnings guidance.
- Management said operating cash flow, cash balances and revolving-facility availability were expected to meet working-capital, capital-expenditure and debt-service needs for the foreseeable future, subject to business and economic conditions. Debt reduction remained a priority; dividends were restricted while leverage remained above the stated threshold.
- Office Depot and OfficeMax completed their merger in late 2013. Management expected supplier-price harmonization, store closures and supply-chain rationalization to pressure ACCO’s sales and margins over several years. The combined customer group would have represented about 13% of 2013 sales on a pro forma basis. The top ten customers accounted for 51% of sales; Staples alone accounted for 13%.
- A material weakness in IT general controls over the acquired U.S. and Canadian Mead business led management to conclude that internal control over financial reporting and disclosure controls were ineffective as of December 31, 2013. KPMG likewise reported that ICFR was not effective. The weakness involved system configuration, user access and change-management controls. Additional procedures supported the auditors’ unqualified opinion on the financial statements; remediation and subsequent testing were planned.
- Brazilian tax authorities assessed Tilibra approximately R$95.2 million, or $40.4 million at the stated exchange rate, including tax, penalties and interest, disputing goodwill deductions for 2007–2010. ACCO is contesting the assessments; the process may take years. A $44.5 million reserve had been recorded in 2012, and further interest expense was accrued in 2013.
- Foreign exchange, raw-material and labor costs, customer consolidation, private-label competition, digital substitution for paper-based products, supplier disruptions, seasonality, pension funding and potential impairment of goodwill or trade names are material risks. Certain acquired indefinite-lived trade names had fair values not substantially above carrying values, although no impairment was recorded in 2013.
Investor verification priorities
- Track remediation and independent testing of Mead IT controls, including whether management later concludes controls are effective.
- Assess whether the planned restructuring delivers the expected $24 million annual savings and whether associated charges or execution costs differ from plan.
- Monitor Computer Products Group sales, margins, inventory obsolescence and competitive performance in mobile-device accessories.
- Review customer concentration and the realized sales and margin effects of the Office Depot–OfficeMax combination.
- Follow the Brazilian tax appeals, related reserve and interest accruals, and potential exposure from open tax years.
- Evaluate debt paydown, covenant headroom, floating-rate exposure and the sustainability of operating cash flow, noting that 2013 cash generation benefited from seasonality and working-capital movements.