ACCO Brands Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited. ACCO Brands designs, markets and manufactures consumer, school, technology and office products, sold through retail, e-commerce and other channels.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $441.6 million | $410.5 million |
| Gross profit / margin | $119.6 million / 27.1% | $115.5 million / 28.1% |
| Operating income (loss) / margin | $6.8 million / 1.5% | $(1.1) million / (0.3)% |
| Net loss | $(2.7) million | $(20.4) million |
| Diluted loss per share | $(0.03) | $(0.21) |
| Cash used by operating activities | $(104.2) million | $(42.4) million |
- Sales rose 7.6% as reported; comparable sales, excluding foreign-exchange effects, increased 11.2%. Management attributed growth mainly to price increases of 6.4% and volume growth of 4.7%. Foreign exchange reduced reported sales by $14.9 million.
- Cost of products sold increased 9.2%, faster than sales, reflecting higher sales and inflation in commodities, logistics and labor. Gross margin fell 1.0 percentage point; management said pricing had not fully caught up with cumulative inflation.
- Operating income improved by $7.9 million. Lower PowerA-related charges and restructuring costs, as well as higher sales, contributed. Q1 2022 included $2.6 million of contingent-consideration expense and $1.8 million of operating expenses related to the Russian business.
- Interest expense decreased to $9.7 million from $13.2 million, primarily due to lower debt and interest rates. Other expense, net was $0.9 million versus $12.9 million, mainly because prior-year debt-refinancing charges did not recur. The company recorded $1.7 million of income-tax expense despite a $1.0 million pretax loss.
Segments and period-over-period changes
| Segment | Sales, Q1 2022 | Change in reported sales | Operating income |
|---|---|---|---|
| North America | $208.5 million | +10.4% | $13.9 million, versus a $0.7 million loss |
| EMEA | $156.1 million | (0.5)%; comparable sales +7.4% | $5.6 million, versus $16.8 million |
| International | $77.0 million | +18.8%; comparable sales +22.7% | $4.2 million, versus $0.6 million |
North America growth reflected pricing and stronger school, business and computer-accessory demand, partly offset by lower gaming-product sales. International growth was led by school-product demand in Brazil and Mexico as in-person education resumed. EMEA comparable growth was offset in reported results by currency; segment operating income declined as inflation outpaced pricing.
Cash, debt and liquidity
- Cash and equivalents were $91.3 million at March 31, 2022, compared with $41.2 million at year-end 2021. Current assets were $955.0 million and current liabilities were $568.9 million.
- Gross debt was $1,163.2 million, up from $1,006.7 million at December 31, 2021; long-term debt, net of issuance costs, was $1,109.2 million. Debt included $575.0 million of 4.25% senior unsecured notes due 2029. Senior secured facilities had a weighted-average rate of 2.05%.
- Revolver borrowings were $208.3 million; $379.8 million remained available after letters of credit. The company reported a consolidated leverage ratio of approximately 3.70:1.00 against a 4.25:1.00 maximum covenant for the quarter. No debt maturities were reported before March 2026.
- Operating cash outflow increased by $61.8 million year over year, driven by working-capital investment, vendor-payment timing and higher incentive-compensation payments. Investing activities used $3.4 million; financing activities provided $153.5 million, including increased net borrowings. Capital expenditures were $3.4 million and dividends paid were $7.3 million.
Outlook, risks and unusual items
- The filing provides no specific quantified full-year financial guidance. Management expects inflation and supply-chain disruption to continue for some time, and said price increases were lagging cumulative cost increases, particularly in EMEA. Additional EMEA price increases were expected to take effect in Q2.
- Management said near-term cash priorities include dividends and debt reduction; longer-term capital uses may include dividends, debt reduction, acquisitions and share repurchases. It believes cash, operating cash flow and revolver availability will fund foreseeable requirements.
- In April 2022, the company paid $27.0 million of contingent purchase price related to the PowerA acquisition, after quarter-end.
- Brazil tax assessments remain contested in court. The recorded accrual was $32.1 million at March 31, 2022; management believes it has defenses but says the outcome is uncertain and an adverse resolution could materially harm cash flow in the settlement year. The company also disclosed that additional Brazilian tax credits may be material, but amounts and timing are unresolved; a substantial majority of certain Foroni credits would be remitted to former owners.
- Management identified ACCO Brands International goodwill as potentially at risk if recovery weakens or assumptions such as revenue growth, margins or discount rates deteriorate. The filing reported no impairment at the prior annual assessment.
- Other risks include currency and interest-rate exposure, litigation (including intellectual-property claims), and general business risks. Management reported no material change in the risk factors from its 2021 Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- Whether pricing can catch up with cost inflation without further pressuring gross margin, especially in EMEA.
- How supply-chain conditions, inventory levels and seasonal working-capital outflows affect cash generation in subsequent quarters.
- Debt, revolver usage and covenant headroom, including the applicable leverage limit as covenant terms change over time.
- Developments in the Brazil tax-assessment litigation and the potential cash impact; separately, the timing and net benefit of Brazilian tax credits.
- PowerA performance, contingent consideration payments, and the significance of the reported Russian-business expenses.
- Whether the International reporting unit’s performance supports the goodwill assumptions disclosed by management.