ACCO Brands Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. ACCO Brands manufactures and markets office and school products and computer accessories. Financial amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $329.4 million | $352.0 million |
| Gross profit / margin | $88.3 million / 26.8% | $96.7 million / 27.5% |
| Operating loss | $0.6 million | $9.2 million |
| Net loss | $7.8 million | $9.0 million |
| Basic and diluted loss per share | $0.07 | $0.08 |
| Cash provided by operating activities | $48.0 million | $85.7 million |
- Sales fell 6%, including $11.5 million of unfavorable currency translation; underlying sales declined 3%. Gross margin decreased 0.7 percentage points, principally due to North American freight and distribution inefficiencies.
- Operating loss improved by $8.6 million, mainly because restructuring charges declined to $1.1 million from $9.7 million. SG&A also fell 9% to $81.9 million. Interest expense declined to $11.3 million from $15.7 million following the 2013 refinancing and lower debt.
- The tax benefit was $2.9 million, versus $14.6 million a year earlier; the prior-year benefit included a $7.0 million valuation-allowance release.
- Cash from operations decreased by $37.7 million. First-quarter operating cash flow is seasonal and benefited from receivables collections; inventory purchases and payments of accrued expenses and customer-program liabilities used cash.
Segments and material changes
- North America: Sales declined 9% to $171.4 million, reflecting soft demand and customer inventory reductions. Segment operating loss improved to $1.5 million from $8.2 million, with cost savings and lower restructuring charges partly offset by lower volume and distribution inefficiencies.
- International: Reported sales declined 2% to $124.3 million, including unfavorable currency effects; sales increased 6% at constant currency, driven principally by Latin America. Segment operating income rose to $7.6 million from $4.0 million.
- Computer Products Group: Sales fell 8% to $33.7 million and operating income fell to $1.9 million from $2.8 million, amid pricing pressure and competition in tablet accessories.
Balance sheet, liquidity, and outlook
- At March 31, 2014, cash was $95.3 million, total debt was $921.5 million, and total current liabilities were $373.0 million. Approximately $70 million of cash was held in Brazil.
- No borrowings were outstanding under the $250 million revolving facility; $236.6 million was available, after letters of credit. The company reported compliance with debt covenants and said cash, operating cash flow, and available borrowing capacity should support foreseeable liquidity needs.
- Management provided no quantified earnings or sales guidance in the filing. It cited soft demand, industry consolidation, foreign-exchange movements, competition, and seasonality as factors affecting results. The company’s stated cash priorities include internal growth, debt reduction, and acquisitions.
Risks, contingencies, and unusual items
- A Brazilian tax authority is challenging goodwill deductions for 2007–2010, seeking approximately R$95.2 million, or $42.1 million at the cited exchange rate, including tax, penalties, and interest. ACCO disputes the assessments and had recorded a $44.5 million reserve; it continues to accrue interest. The appeal process may take years, and the outcome is uncertain.
- Restructuring actions begun in 2013 include reducing approximately 12% of the North American salaried workforce, with completion expected by year-end 2014. The quarter’s $1.1 million charge related to previously announced actions; $14.8 million of restructuring liabilities remained at quarter-end.
- Management reported that disclosure controls were not effective at March 31, 2014, due to a material weakness in IT general controls relating to the acquired Mead business in the U.S. and Canada. Remediation was underway, but effectiveness had not yet been demonstrated through repeatable execution.
- Management reported no material changes to the risk factors disclosed in the 2013 Form 10-K. It also said other pending litigation and environmental matters were not expected to have a material adverse effect, while noting outcomes cannot be assured.
Important facts for investors to verify
- Whether North American demand and warehouse-related freight and distribution inefficiencies improve, and whether International constant-currency growth continues.
- Whether the tablet-accessory business stabilizes amid pricing pressure and competition.
- Progress on restructuring, expected cash costs, and delivery of related savings.
- Developments in the Brazilian tax appeal, reserve adequacy, and further interest accruals.
- Remediation and independent testing of the material weakness in IT controls.
- Cash generation through seasonal working-capital swings, debt reduction, and compliance with debt covenants.