ACCO Brands Corporation — Q1 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2012, compared with Q1 2011. ACCO sells branded office products, document-finishing equipment and supplies, and computer accessories through three segments: Americas, International, and Computer Products Group. Results exclude Mead Consumer and Office Products (Mead C&OP), acquired on May 1, 2012; its results are expected to be included from that date.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $288.9 million | $298.4 million | Down 3% |
| Gross profit / margin | $83.8 million / 29.0% | $89.2 million / 29.9% | Down $5.4 million / 0.9 percentage points |
| Operating income / margin | $4.0 million / 1.4% | $13.3 million / 4.5% | Down $9.3 million |
| Loss from continuing operations | $17.3 million | $9.0 million | Loss increased $8.3 million |
| Net loss / diluted loss per share | $17.4 million / $0.31 | $8.1 million / $0.15 | Loss increased $9.3 million |
| Net cash used by operations | $45.0 million | $60.0 million | Use decreased $15.0 million |
- Interest expense was $19.1 million, essentially unchanged from $19.2 million. Income tax expense was $3.9 million despite a pretax loss of $13.4 million; the company cited valuation allowances that prevented tax benefits on losses in the U.S. and certain foreign jurisdictions.
- At March 31, cash was $74.2 million, down from $121.2 million at year-end 2011. Current assets were $554.9 million and current liabilities $243.1 million. Long-term debt was $669.0 million; total debt was $669.2 million. Stockholders’ deficit was $68.3 million.
- Q1 investing cash use was $2.1 million, including $2.0 million of capital expenditures; financing cash use was $1.4 million. The company described first-quarter operating cash use as seasonal, including semiannual interest, annual incentive, and pension payments.
Material changes versus Q1 2011
- Sales declined $9.5 million. Management attributed the decrease mainly to lower volume in Europe and Canada; volume fell 4.0%, and unfavorable currency translation reduced sales by a further $1.9 million. Higher net pricing partly offset the decline.
- Gross margin contracted due primarily to higher commodity costs and unfavorable mix, partly offset by pricing. Operating income fell substantially, reflecting $6.1 million of restructuring charges and lower sales, partly offset by reduced SG&A.
- Segment sales and operating income: Americas sales were $152.8 million versus $152.2 million, with an operating loss of $0.8 million versus income of $5.5 million; International sales were $94.5 million versus $104.9 million, with operating income of $5.5 million versus $4.1 million; Computer Products sales were $41.6 million versus $41.3 million, with operating income of $7.5 million versus $9.3 million.
- Operating cash use improved year over year, including a $5.0 million source from net working capital versus a $5.8 million use in Q1 2011. Cash remained subject to seasonal working-capital and payment patterns.
Outlook, management commentary, risks and unusual items
- Cost actions: Plans announced in February target approximately 230 positions, principally in the U.S. and U.K. Management expects about $8 million of annualized savings when fully realized, including approximately $5 million in 2012. Expected 2012 pretax charges are approximately $7 million; $6.1 million was recorded in Q1. Net cash costs are expected to be about $5 million. These actions are separate from Mead integration.
- Mead merger and refinancing: The May 1 merger issued approximately 57.1 million ACCO shares to MeadWestvaco shareholders, giving them 50.5% of the combined company; approximately 113 million shares were outstanding afterward. The May refinancing was intended to lower effective interest rates, increase borrowing capacity, and extend maturities. Following the merger and refinancing, the filing reports approximately $1.27 billion of debt outstanding. New facilities include secured revolving and term loans and $500 million of unsecured notes due 2020; stated rates were 3.9% weighted average for secured facilities and 6.75% on the notes. The former $175 million ABL facility was terminated. Refinancing-related fees were approximately $54 million, of which about $32 million were to be capitalized and amortized.
- Debt and liquidity: At March 31, $165.5 million was available under the former ABL facility, net of letters of credit. The company reported compliance with loan covenants and believed existing liquidity sources would meet foreseeable needs. New secured facilities have leverage and interest-coverage covenants that become more restrictive over time.
- Business risks: The filing highlights competition and customer concentration, commodity and freight costs, foreign-exchange movements, seasonal demand, and the ability to pass costs through pricing. Mead-related risks include integration execution, expected synergies, customer and license consents, replacing services previously supplied by MeadWestvaco, and retention of key personnel. Mead also adds exposure to paper-based planning products that may face substitution by digital tools.
- Tax and legal contingencies: The company may have substantial indemnification exposure if the Mead transaction’s tax-free treatment is jeopardized by specified actions or ownership changes. Pending litigation outcomes are uncertain; management believes adequate provisions have been made and does not expect an adverse outcome to materially affect results, cash flows, or financial condition. The company is also subject to environmental requirements and ongoing tax examinations.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management describes pricing actions, cost savings, product innovation, and potential strategic transactions as elements of its strategy; results may differ from forward-looking statements.
Important facts for investors to verify
- Mead acquisition accounting, purchase-price allocation, integration costs, and realized savings; the filing says the allocation was not complete.
- Post-merger debt balances, refinancing costs, interest burden, borrowing availability, and compliance with increasingly restrictive financial covenants.
- Whether planned restructuring savings are achieved and whether the associated charges and cash costs remain within estimates.
- Sales and margin trends by segment, especially International volume and Americas and Computer Products profitability, along with commodity, pricing, and currency effects.
- Working-capital conversion and seasonal cash needs, plus any developments in Mead-related tax indemnities, contract consents, litigation, or other contingencies.