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ACCO > SEC Filings for ACCO > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for ACCO BRANDS CORP


8-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview of Company Performance

ACCO Brands' operating results are dependent upon a number of factors affecting sales, including pricing and competition. Key drivers of demand in the office and school products industries include trends in white collar employment levels, education enrollment levels, gross domestic product (GDP) and growth in the number of small businesses and home offices, as well as declining consumer usage trends for certain of our product categories. Pricing and demand levels for office products have also resulted in substantial consolidation within the global resellers of office products. This consolidation has led to multiple years of industry pricing pressure and a more efficient level of asset utilization by customers, resulting in lower sales pricing and volume for suppliers of office products. As an example, in February 2013, two of our largest customers, Office Depot and OfficeMax, announced that they have entered into a merger agreement. Management currently expects that the effects on our business of the proposed merger, if consummated, would be realized primarily in our retail channel, which only represents approximately one-third of our business with these customers. In the short term, customer buying patterns are influenced by a number of factors, including: customer sales to end users, volume discounts, anticipation of price increases and by changes in our customers' holding levels of our inventory.

With 45% of revenues for the year ended December 31, 2012 arising from foreign operations, exchange rate fluctuations can play a major role in our reported results. Foreign currency fluctuations impact our business in two ways: 1) the translation of our foreign operations results into U.S. dollars: a weak U.S. dollar benefits us and a strong U.S. dollar reduces the dollar-denominated contribution from foreign operations; and 2) the impact of foreign currency fluctuations on the purchase price of goods we sell. Approximately half of the products we sell worldwide are sourced from Asia, and are paid for in U.S. dollars. However, our international operations sell in their local currency and are therefore exposed to their domestic currency movements against the U.S. dollar. A strong U.S. dollar, therefore, increases our cost of goods sold and a weak U.S. dollar decreases our cost of goods sold for our international operations.

The cost of certain commodities used to make products on occasion may increase significantly, negatively impacting cost of goods. As commodity costs rise, we implement price increases in an effort to offset increases in commodity costs. We continue to monitor commodity costs and work with suppliers and customers to negotiate balanced and fair pricing that best reflects the current economic environment. Results for our first quarter include a small favorable price benefit that recovers previously experienced adverse commodity cost changes.

During the first quarter of 2013, we committed to new cost savings plans intended to improve the efficiency and effectiveness of our businesses. The Company expects approximately $25 million of additional restructuring charges and $4 million of additional IT-related integration charges in 2013. These charges relate to cost-reduction initiatives in the Company's International and North American segments. The International segment initiatives are primarily associated with changes in the European business model and manufacturing footprint. The North American initiatives are associated with the completion of the Mead C&OP integration and productivity initiatives. The cash outflow from these charges are expected to be approximately $19 million in 2013 and $6 million in 2014.

We fund our liquidity needs for capital investment, working capital and other financial commitments through cash flow from continuing operations and our $250.0 million senior secured revolving credit facility. Based on our borrowing base, as of March 31, 2013, $238.4 million remained available for borrowing under this facility.

On May 1, 2012, we completed the Merger of Mead C&OP with a wholly-owned subsidiary of the Company. Accordingly, the results of Mead C&OP are included in our condensed consolidated financial statements and in this Management's Discussion and Analysis of Financial Condition and Results of Operations from the date of the Merger. For further information on the Merger with Mead C&OP see Note 3, Acquisitions to the condensed consolidated financial statements contained in Item 1 of this report.

Management's Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2013 and 2012, should be read in conjunction with the unaudited condensed consolidated financial statements of ACCO Brands Corporation and the accompanying notes contained therein. Unless otherwise noted, the following discussion pertains only to our continuing operations.


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Three months ended March 31, 2013 versus three months ended March 31, 2012

The following table presents the Company's results for the three months ended March 31, 2013 and 2012, respectively.

                                               Three Months Ended March 31,          Amount of Change
(in millions of dollars)                         2013                2012             $            %
Net sales                                  $      352.0         $      288.9      $   63.1         22  %
Cost of products sold                             255.3                209.1          46.2         22  %
Gross profit                                       96.7                 79.8          16.9         21  %
Gross profit margin                                27.5  %              27.6  %                 (0.1)    pts
Advertising, selling, general and
administrative expenses                            89.6                 68.2          21.4         31  %
Amortization of intangibles                         6.6                  1.5           5.1         NM
Restructuring charges                               9.7                  6.1           3.6         59  %
Operating income (loss)                            (9.2 )                4.0         (13.2 )       NM
Operating income (loss) margin                     (2.6 )%               1.4  %                 (4.0)    pts
Interest expense, net                              15.7                 19.1          (3.4 )      (18 )%
Equity in earnings of joint ventures               (1.3 )               (1.5 )        (0.2 )      (13 )%
Other income, net                                  (0.1 )               (0.2 )        (0.1 )      (50 )%
Income tax expense (benefit)                      (14.6 )                3.9         (18.5 )       NM
Effective tax rate                                 62.1  %             (29.1 )%                    NM
Loss from continuing operations                    (8.9 )              (17.3 )         8.4         NM
Loss from discontinued operations, net of
income taxes                                       (0.1 )               (0.1 )           -          -
Net loss                                           (9.0 )              (17.4 )         8.4         NM

Net Sales

Net sales increased by $63.1 million, or 22%, to $352.0 million compared to $288.9 million in the prior-year period. The acquisition of Mead C&OP contributed sales of $100.1 million. The underlying decline of $37.0 million includes unfavorable currency translation of $1.7 million, or 1%. The sales decline in the North America and International segments resulted from the exit of unprofitable business and weak overall demand, most notably in our U.S. business. The Computer Products segment experienced soft demand for PC accessories globally.

Cost of Products Sold

Cost of products sold includes all manufacturing, product sourcing and distribution costs, including depreciation related to assets used in the manufacturing, procurement and distribution process; allocation of certain information technology costs supporting those processes; inbound and outbound freight, shipping and handling costs; purchasing costs associated with materials and packaging used in the production processes. Cost of products sold increased $46.2 million, or 22%, to $255.3 million compared to $209.1 million in the prior-year period. The increase was due to the acquisition of Mead C&OP and was partially offset by lower sales volume and a $1.0 million impact of favorable currency translation.

Gross Profit

Management believes that gross profit and gross profit margin provide enhanced shareholder understanding of underlying profit drivers. Gross profit increased $16.9 million, or 21%, to $96.7 million compared to $79.8 million in the prior-year period. The increase was due to the acquisition of Mead C&OP and was partially offset by lower sales volume, adverse product mix, $1.6 million of integration related inefficiencies from the closure of our Day-Timers manufacturing and distribution facility and $0.7 million of unfavorable currency translation.

Gross profit margin decreased slightly to 27.5% from 27.6%. The inclusion of Mead C&OP, which has historically higher relative margins, was offset by adverse sales mix in Computer Products (lower high-margin security product sales and reduced royalty income) and integration-related inefficiencies.


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Advertising, Selling, General and Administrative Expenses

Advertising, selling, general and administrative expenses (SG&A) include advertising, marketing, selling (including commissions), research and development, customer service, depreciation related to assets outside the manufacturing and distribution processes and all other general and administrative expenses outside the manufacturing and distribution functions (e.g., finance, human resources, information technology, etc.). SG&A increased $21.4 million, or 31%, to $89.6 million, compared to $68.2 million in the prior-year period. The increase was due to the acquisition of Mead C&OP, $1.2 million of costs related to the relocation of our corporate headquarters and $1.2 million of IT integration costs. The increase was partially offset by synergies and productivity savings, as well as favorable currency translation of $0.4 million. The prior-year quarter included $1.8 million of transaction costs associated with the acquisition of Mead C&OP.

As a percentage of sales, SG&A increased compared to the prior-year period, 25.5% versus 23.6%, primarily due to lower sales volume.

Restructuring Charges

Restructuring charges amounted to $9.7 million, compared to $6.1 million in the prior-year quarter. Employee termination and severance charges included in restructuring charges in the current year primarily relate to the Company's International and North American operations and are primarily associated with changes in the European business model and manufacturing footprint and with post-merger integration activities of the North American operations following the acquisition of Mead C&OP.

Operating Income (Loss)

Operating income was a loss of $9.2 million, compared to income of $4.0 million in the prior year quarter. The acquisition of Mead C&OP added to the operating loss in the current year period. The acquired businesses are very seasonal and historically operate at a loss in the first quarter of the year. Also contributing to the decline were lower sales volume, increased restructuring charges and other one-time items, including $1.6 million of integration-related inefficiencies, $1.2 million of incremental costs related to the relocation of our corporate headquarters and $1.2 million of IT integration costs, partially offset by synergies and productivity savings.

Interest Expense and Other Income, Net

Interest expense was $15.7 million compared to $19.1 million in the prior-year quarter. The decrease was due to the refinancing, completed in the second quarter of 2012, which substantially lowered our effective interest rate. Also, in the prior-year quarter, we incurred $1.2 million of Mead C&OP acquisition related expenses for the committed financing required for the Merger.

Other income, net, was $0.1 million compared to $0.2 million other income in the prior-year quarter.

Income Taxes

For the three months ended March 31, 2013, we recorded an income tax benefit from continuing operations of $14.6 million on a loss before taxes of $23.5 million. The current year benefit includes $7.0 million related to the release of a valuation allowance on the deferred tax assets of our Netherlands operations. For the prior-year period, we reported an income tax expense from continuing operations of $3.9 million on a loss before taxes of $13.4 million. The tax expense for 2012 was due to no tax benefits being provided on losses incurred in the U.S. and in certain foreign jurisdictions where valuation reserves had been recorded against future tax benefits.

Loss from Continuing Operations

Loss from continuing operations was $8.9 million, or $0.08 per diluted share, compared to a loss of $17.3 million, or $0.31 per diluted share in the prior-year.

Net Loss

Net loss was $9.0 million, or $0.08 per diluted share, compared to a loss of $17.4 million, or $0.31 per diluted share, in the prior-year quarter.


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Segment Discussion

                             Three Months Ended March 31, 2013                                         Amount of Change

                                                                                                                             Segment
                                                                                                     Segment Operating      Operating
                                                                            Net Sales    Net Sales        Income             Income
(in millions of                    Segment Operating        Operating                                                                       Margin
dollars)            Net Sales      Income (Loss) (A)      Income Margin         $            %               $                  %           Points
ACCO Brands North
America           $     189.0     $        (8.2 )          (4.3 )%         $    52.3        38%      $       (4.7 )        (134 )%           (170 )
ACCO Brands
International           126.2               4.0             3.2  %              15.6        14%              (4.2 )         (51 )%           (420 )
Computer Products
Group                    36.8               2.8             7.6  %              (4.8 )     (12)%             (4.7 )         (63 )%         (1,040 )
Total             $     352.0     $        (1.4 )                          $    63.1                 $      (13.6 )

                             Three Months Ended March 31, 2012


(in millions of                    Segment Operating        Operating
dollars)            Net Sales      Income (Loss) (A)      Income Margin
ACCO Brands North
America           $     136.7     $        (3.5 )          (2.6 )%
ACCO Brands
International           110.6               8.2             7.4  %
Computer Products
Group                    41.6               7.5            18.0  %
Total             $     288.9     $        12.2

(A) Segment operating income (loss) excludes corporate costs; Interest expense, net; Equity in earnings of joint ventures and Other income, net. See Note 15, Information on Business Segments, to our condensed consolidated financial statements contained in Item 1 of this report for a reconciliation of total Segment operating income (loss) to Loss from continuing operations before income tax.

ACCO Brands North America

ACCO Brands North America net sales increased $52.3 million, or 38%, to $189.0 million compared to $136.7 million in the prior-year period. The acquisition of Mead C&OP contributed sales of $67.9 million. The underlying decline of $15.6 million was due to our exit from $5.8 million of unprofitable business, reduced customer inventory levels, a business model change within our Print Finishing Business and general softness in demand in the U.S.

ACCO Brands North America operating income decreased $4.7 million, to a loss of $8.2 million compared to a loss of $3.5 million in the prior-year period. The acquisition of Mead C&OP added to the operating loss in the current year. In the current year there were $4.5 million of restructuring and $1.2 million of IT integration charges, compared to $3.6 million of restructuring in the prior-year period. Also contributing to the decrease in operating income was $1.6 million in integration related inefficiencies from the closure of our Day-Timer manufacturing and distribution facility, together with $1.2 million of incremental costs associated with our corporate headquarters relocation. Partially offsetting the decline were synergies and productivity savings that were realized in both cost of products sold and SG&A.

ACCO Brands International

ACCO Brands International net sales increased $15.6 million, or 14%, to $126.2 million compared to $110.6 million in the prior-year period. The acquisition of Mead C&OP contributed sales of $32.2 million in Brazil which reflected a strong back-to-school season. The underlying decline of $16.6 million includes unfavorable currency translation of $1.5 million, or 1%. Of this decline, Europe accounted for $10.5 million. The decline was principally due to continued adverse market conditions for all of Europe driving weak consumer demand and $3.6 million of residual unprofitable business that was exited in 2012. Additionally, lower demand in Australia and Mexico contributed to the decrease.

ACCO Brands International operating income decreased $4.2 million, or 51%, to $4.0 million compared to $8.2 million, and operating income margin decreased to 3.2% from 7.4% in the prior-year period. The acquisition of Mead C&OP contributed $0.8 million in operating income. The $5.0 million underlying decrease in operating income was the result of lower sales and higher restructuring charges of $4.6 million in the current-year period versus $2.5 million in the prior-year period, partially offset by costs savings, including reduced pension expenses.


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Computer Products Group

Computer Products net sales decreased $4.8 million, or 12%, to $36.8 million compared to $41.6 million in the prior-year period. The decrease primarily reflects soft demand for PC accessories, lower net pricing due to promotions and the loss of $0.9 million in royalty income.

Operating income decreased $4.7 million, or 63%, to $2.8 million and operating income margin decreased to 7.6% from 18.0%. The decrease was primarily due to lower pricing, loss of royalty income and unfavorable product mix, principally associated with lower sales of high-margin security products.

Liquidity and Capital Resources

As of March 31, 2013, our primary liquidity needs are to service indebtedness, reduce our borrowing, fund capital expenditures and support working capital requirements. Our principal sources of liquidity are cash flows from operating activities, cash and cash equivalents held and seasonal borrowings under our senior secured revolving credit facility. We maintain adequate financing arrangements at market rates. Because of the seasonality of our business we typically carry greater cash balances in the first, second and third quarters of our fiscal year. Lower cash balances are typically carried during the fourth quarter due to the absorption of our Brazilian cash into working capital. Our Brazilian business is highly seasonal due to the combined impact of the back-to-school season coinciding with the calendar year-end in the fourth quarter. Due to various tax laws, it is costly to transfer short-term working capital in and out of Brazil. Our normal practice is therefore to hold seasonal cash requirements within Brazil, invested in Brazilian government securities. Our priority for all other cash flow use over the near term, after funding internal growth, is debt reduction, and investment in new products through both organic development and acquisitions.

As of March 31, 2013, approximately $238 million remained available for borrowing under the Company's $250.0 million revolving credit facilities.

Interest rates under our current senior secured term loans are based on the London Interbank Offered Rate (LIBOR). The range of borrowing costs under the pricing grid is LIBOR plus 3.00% for Term A loans of the debt and LIBOR plus 3.25% with a LIBOR rate floor of 1.00% for Term B loans of the debt as of March 31, 2013. The current senior secured credit facilities have a weighted average interest rate of 3.9% as of March 31, 2013 and our senior unsecured notes have an interest rate of 6.75%.

Cash Flow for the Three months ended March 31, 2013 versus three months ended March 31, 2012

Cash Flow from Operating Activities

For the three months ended March 31, 2013 cash provided by operating activities was $85.7 million compared to a use of $45.0 million in the prior-year period. The net loss in 2013 was $9.0 million, compared to $17.4 million in 2012. Non-cash adjustments to net loss on a pre-tax basis in 2013 were a net expense of $20.8 million, compared to a net expense of $10.9 million in 2012.

Cash provided by operating activities during the three months ended March 31, 2013 was $85.7 million. The net cash inflow is primarily from cash generated by net working capital (accounts receivable, inventories and accounts payable) of $163.0 million, of which $188.8 million is related to collections of customer accounts receivable. The significant cash collected is driven by the seasonality of our acquired Mead C&OP business which includes significant sales of school products during the third and fourth quarters. The use of cash for inventory of $24.6 million is the result of inventory purchases in preparation for the back-to-school manufacturing and selling season, primarily in our Mead C&OP business. In addition, cash interest payments in 2013 were $5.3 million, compared to $33.1 million in the first three months of 2012 (prior to our refinancing and change in payment schedule). Other significant cash payments in 2013 include income tax payments of $16.1 million, which was higher than the $6.5 million paid in 2012 due to the 2012 U.S. taxable income.

During the three months ended March 31, 2012 the use of cash by operating activities of $45.0 million was primarily due to scheduled outflows related to interest payments, annual incentive payments and pension plan contributions. These payments were partially offset by cash flow provided by net working capital (accounts receivable, inventories and accounts payable) of $5.0 million, primarily from collections of customer accounts receivable, which were partially offset by increased payments to suppliers.

The table below shows our cash flow from accounts receivable, inventories and accounts payable for the three months ended March 31, 2013 and 2012, respectively.


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                                              Three Months Ended
                                            March 31,      March 31,
(in millions of dollars)                      2013           2012
Accounts receivable                       $    188.8      $    39.6
Inventories                                    (24.6 )         (3.8 )
Accounts payable                                (1.2 )        (30.8 )
Cash flow provided by net working capital $    163.0      $     5.0

Cash Flow from Investing Activities

Cash used by investing activities was $8.6 million and $2.1 million for the three months ended March 31, 2013 and 2012, respectively. Gross capital expenditures were $7.3 million and $2.0 million for the three months ended March 31, 2013 and 2012, respectively. The increase in expenditures in 2013 reflects the acquisition of Mead C&OP, including integration-related spending in association with the relocation of our Day-Timer's operations to Sidney, NY, and increased information technology related investments.

Cash Flow from Financing Activities

Cash used by financing activities for the three months ended March 31, 2013 was $21.6 million, and includes repayments of the Company's existing debt facilities of $20.7 million. Cash used by financing activities in 2012 was $1.4 million, and included $0.9 million of pre-paid debt issuance costs associated with the Company's refinancing that occurred during the second quarter of 2012.

Capitalization

We had approximately 113.5 million common shares outstanding as of March 31, 2013.
Loan Covenants
We must meet certain restrictive financial covenants as defined under the senior secured credit facilities. The covenants become more restrictive over time and require us to maintain certain ratios related to consolidated leverage and consolidated interest coverage. We are also subject to certain customary restrictive covenants under the senior unsecured notes.
The table below sets forth the financial covenant ratio levels under the senior secured credit facilities:

                                       Maximum Consolidated Leverage     Minimum - Interest
                                                 Ratio(1)                 Coverage Ratio(2)
January 1, 2013 to December 31, 2013             4.25:1.00                    3.00:1.00
January 1, 2014 to December 31, 2014             4.00:1.00                    3.25:1.00
January 1, 2015 to December 31, 2015             3.75:1.00                    3.25:1.00
January 1, 2016 and thereafter                   3.50:1.00                    3.50:1.00

(1) The leverage ratio is computed by dividing our net indebtedness by the cumulative four-quarter-trailing EBITDA, which excludes transaction, restructuring, integration and other charges up to certain limits as well as other adjustments as defined under the senior secured credit facilities.

(2) The interest coverage ratio for any period is the cumulative four-quarter-trailing EBITDA, for the Company, for such period, adjusted as provided in (1), divided by cash interest expense for the Company for such period and other adjustments, all as defined under the senior secured credit facilities.

The senior secured credit facilities contain customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults and cross-accelerations, certain bankruptcy or insolvency events, certain ERISA-related events, changes in control or ownership, and invalidity of any loan document.

The indenture governing the senior unsecured notes does not contain financial performance covenants. However, that indenture does contain covenants that limit, among other things, our ability and the ability of our restricted subsidiaries to:

incur additional indebtedness;

pay dividends on our capital stock or repurchase our capital stock;


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enter into or permit to exist contractual limits on the ability of our subsidiaries to pay dividends to the Company;

enter into certain transactions with affiliates;

make investments; . . .

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