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ACCO > SEC Filings for ACCO > Form 10-Q on 31-Oct-2013All Recent SEC Filings

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Form 10-Q for ACCO BRANDS CORP


31-Oct-2013

Quarterly Report


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

Overview of Company and Performance

ACCO Brands is a leading global manufacturer and marketer of office and school products and select computer and electronic accessories. We sell our products to consumers and commercial end-users primarily through resellers, including traditional office resellers, wholesalers, mass retailers and e-tailers. Through a focus on research, marketing and innovation, we seek to develop new products that meet the needs of our consumers and commercial end-users and drive growth for our business. We compete through a balance of product innovation, category management, a low-cost operating model and an efficient supply chain. We sell our products primarily to markets located in the Unites States, Northern Europe, Canada, Australia, Brazil and Mexico. Today, the majority of our revenue is concentrated in geographies where demand for our product categories is in mature stages, but we see opportunities to grow sales through share gains, channel penetration and new products. Going forward we aim to derive growth in faster growing geographies where demand in the product categories in which we compete is strong, such as in Latin America and parts of Asia and Eastern Europe. Key drivers of demand for office and school products have included trends in white collar employment levels, education enrollment levels, gross domestic product (GDP), growth in the number of small businesses and home offices, as well as consumer usage trends for our product categories. Key factors that affect our profitability are volume, sales prices compared to commodity costs and foreign exchange rates (see the Company's Annual Report on Form 10-K for the year ended December 31, 2012 for additional information regarding these factors).

During the third quarter the Company's reported sales declined in all three segments and most of our geographic markets. The sales decline was principally in the North America segment primarily due to soft demand. Foreign exchange rates also adversely effected reported results. Significant cost reductions resulting from synergies and productivity savings mitigated some of the impact of lower sales volume on operating income for both the North America and International segments. Overall our International segment continued to recover in the third quarter. In our Computer Products Group segment sales continued to decline due to increased competition and weak demand.

Management's Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2013 and 2012, should be read in conjunction with the unaudited condensed consolidated financial statements of ACCO Brands Corporation and the accompanying notes contained herein. Unless otherwise noted, the following discussion pertains only to our continuing operations.

Three months ended September 30, 2013 versus three months ended September 30, 2012
The following table presents the Company's results for the three months ended September 30, 2013 and 2012, respectively.

                                               Three Months Ended September 30,           Amount of Change
(in millions of dollars)                          2013                   2012              $            %
Net sales                                  $         469.2         $         501.2     $  (32.0 )       (6 )%
Cost of products sold                                328.1                   350.0        (21.9 )       (6 )%
Gross profit                                         141.1                   151.2        (10.1 )       (7 )%
Gross profit margin                                   30.1 %                  30.2 %                 (0.1)    pts
Advertising, selling, general and
administrative expenses                               82.6                    87.1         (4.5 )       (5 )%
Amortization of intangibles                            5.9                     6.9         (1.0 )      (14 )%
Restructuring charges                                  2.3                     0.8          1.5        188  %
Operating income                                      50.3                    56.4         (6.1 )      (11 )%
Operating income margin                               10.7 %                  11.3 %                 (0.6)    pts
Interest expense, net                                 12.5                    18.1         (5.6 )      (31 )%
Equity in earnings of joint ventures                  (3.3 )                  (3.6 )        0.3         (8 )%
Other expense, net                                     0.1                     0.3         (0.2 )       67  %
Income tax expense (benefit)                          14.6                   (13.6 )       28.2         NM
Effective tax rate                                    35.6 %                    NM                      NM
Net income                                            26.4                    55.2        (28.8 )      (52 )%


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Net Sales

Net sales decreased by $32.0 million, or 6%, to $469.2 million compared to $501.2 million in the prior-year period, including unfavorable currency translation of $11.2 million, or 2%. The sales decline was principally in the North America segment primarily due to soft demand, unfavorable product mix during the back-to-school season as consumers purchased more lower-priced products, lost placements with some customers and the exit from unprofitable business. The Computer Products Group segment decline was driven by lost market share due to increased competition in the tablet and smart phone accessory space and the timing of new mobile device launches from manufacturers, as well as continued declines in laptop shipments, which impacted demand for security products and PC accessories.

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, and purchasing costs associated with materials and packaging used in the production processes. Cost of products sold decreased $21.9 million, or 6%, to $328.1 million compared to $350.0 million in the prior-year period. The decrease primarily was the result of lower sales and a $7.4 million benefit from currency translation.

Gross Profit

Management believes that gross profit and gross profit margin provide enhanced shareholder understanding of underlying operating profit drivers. Gross profit decreased $10.1 million, or 7%, to $141.1 million compared to $151.2 million in the prior-year period, including unfavorable currency translation of $3.8 million, or 3%. The comparable change (exclusive of currency translation) was primarily due to the lower sales volume and higher sales of low-margin products and was partially offset by synergies and productivity savings primarily in the North America segment.

Gross profit margin decreased slightly to 30.1% from 30.2% due to reduced gross margins in our North America and Computer Products Group segments resulting from higher sales of low-margin products. This was partially offset by synergies and productivity savings primarily in the North America segment.

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 decreased $4.5 million, or 5%, to $82.6 million, compared to $87.1 million in the prior-year period. The decrease was driven by synergies and productivity savings, and favorable currency translation of $2.0 million. Also contributing to the decrease was a reduction in transaction and integration charges associated with the acquisition of Mead C&OP, which were $1.5 million higher in the prior-year period. These improvements were partially offset by higher management incentive expenses.

As a percentage of sales, SG&A increased to 17.6% compared to 17.4% in the prior-year period, primarily due to the lower sales volume.

Restructuring Charges

Restructuring charges increased to $2.3 million in the current-year period, from $0.8 million in the prior-year period. Employee termination and severance charges included in restructuring charges in the current year primarily relate to the Company's North American operations and are primarily associated with post-merger integration activities of the North American segment following the acquisition of Mead C&OP.

Operating Income

Operating income decreased by $6.1 million, or 11%, to $50.3 million compared to $56.4 million in the prior-year period, including unfavorable currency translation of $1.8 million, or 3%. The decrease was primarily due to lower sales volume.


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Interest Expense, Net

Interest expense, net of interest income, decreased to $12.5 million compared to $18.1 million in the prior-year period. The decrease was primarily due to the Company's refinancing completed in the second quarter of 2013, which substantially lowered its effective interest rate and debt origination amortization cost. Reductions of debt outstanding and higher interest income at our Brazilian subsidiary also contributed to the decline.

Income Taxes

For the three months ended September 30, 2013, the Company recorded an income tax expense from continuing operations of $14.6 million on income of $41.0 million. For the prior-year period, the Company reported an income tax benefit from continuing operations of $13.6 million on income before taxes of $41.6 million. The low tax rate for 2012 was primarily due to a change in the effective tax rate for foreign earnings resulting in a cumulative period adjustment during the third quarter of 2012.

Net Income

Net income was $26.4 million, or $0.23 per diluted share, compared to net income of $55.2 million, or $0.48 per diluted share, in the prior-year quarter.

Segment Discussion
                       Three Months Ended September 30, 2013                                   Amount of Change

                                                                                                                     Segment
                                                                                                    Segment         Operating
                                                                      Net Sales     Net Sales   Operating Income     Income
(in millions of                 Segment Operating     Operating                                                                   Margin
dollars)           Net Sales       Income (A)       Income Margin         $             %              $                %         Points
ACCO Brands North
America           $   295.9     $          36.1         12.2 %       $    (25.5 )     (8)%      $      (3.9 )         (10 )%        (20 )
ACCO Brands
International         136.0                17.8         13.1 %             (3.4 )     (2)%              3.1            21  %        260
Computer Products
Group                  37.3                 3.4          9.1 %             (3.1 )     (8)%             (4.3 )         (56 )%     (1,000 )
Total segment     $   469.2     $          57.3                      $    (32.0 )               $      (5.1 )

                        Three Months Ended September 30, 2012


(in millions of                 Segment Operating     Operating
dollars)           Net Sales       Income (A)       Income Margin
ACCO Brands North
America           $   321.4     $          40.0         12.4 %
ACCO Brands
International         139.4                14.7         10.5 %
Computer Products
Group                  40.4                 7.7         19.1 %
Total segment     $   501.2     $          62.4

(A) Segment operating income excludes corporate costs; Interest expense, net; Equity in earnings of joint ventures and Other expense, 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 to Income (loss) from continuing operations before income tax.

ACCO Brands North America

ACCO Brands North America net sales decreased $25.5 million, or 8%, to $295.9 million compared to $321.4 million in the prior-year period and includes unfavorable currency translation of $1.7 million, or 1%. The driver of the decline was soft demand, unfavorable product mix during the back-to-school season as consumers purchased more lower-priced products and lost placements with some customers. The exit from unprofitable business contributed $6.5 million of the decline.

ACCO Brands North America operating income decreased $3.9 million, or 10%, to $36.1 million compared to $40.0 million in the prior-year period, and operating income margin decreased to 12.2% from 12.4% in the prior-year period. The decrease was driven by lower sales volume, an unfavorable product mix due to consumers trading down to lower-priced products, as well as higher pension expense. This was partially offset by synergies and productivity savings in the current year, the absence of $1.8 million of amortization of the step-up in inventory value related to the Merger and higher management incentive expenses.


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ACCO Brands International

ACCO Brands International net sales decreased $3.4 million, or 2%, to $136.0 million compared to $139.4 million in the prior-year period. The decline was due to unfavorable currency translation of $9.6 million, or 7%. The comparable change (exclusive of currency translation) was an improvement of $6.2 million, or 5%, primarily driven by higher pricing and some volume gains, including market share gains, in Latin America. Our European region sales improved modestly compared to last year, due to higher pricing, as a result of lower customer rebates.

ACCO Brands International operating income increased $3.1 million, or 21%, to $17.8 million compared to $14.7 million in the prior-year period, and operating income margin increased to 13.1% from 10.5% in the prior-year period. Foreign exchange negatively impacted operating income by $1.7 million, or 12%. The underlying improvement reflects higher pricing, the absence of $0.7 million in amortization of the step-up in inventory value related to the Merger included in the prior year, lower pension expenses and productivity savings, partially offset by higher management incentive expenses and restructuring charges.

Computer Products Group

Computer Products Group net sales decreased $3.1 million, or 8%, to $37.3 million compared to $40.4 million in the prior-year period. The decline was driven by lost market share due to increased competition in the tablet and smart phone accessory space and the timing of new mobile device launches from manufacturers, as well as continued declines in laptop shipments, which impacted demand for security and PC accessories.

Computer Products Group operating income decreased $4.3 million, or 56%, to $3.4 million compared to $7.7 million in the prior-year period, and operating income margin decreased to 9.1% from 19.1% in the prior-year period. The decline in operating income and margin was primarily due to lower sales and lower gross margins due to reduced prices on older model products.

Nine months ended September 30, 2013 versus nine months ended September 30, 2012

The following table presents the Company's results for the nine months ended September 30, 2013 and 2012, respectively.

                                                Nine Months Ended September 30,           Amount of Change
(in millions of dollars)                           2013                 2012               $             %
Net sales                                   $       1,261.4       $       1,228.8     $    32.6           3  %
Cost of products sold                                 886.5                 873.5          13.0           1  %
Gross profit                                          374.9                 355.3          19.6           6  %
Gross profit margin                                    29.7 %                28.9 %                     0.8    pts
Advertising, selling, general and
administrative expenses                               259.3                 248.2          11.1           4  %
Amortization of intangibles                            18.7                  13.5           5.2          39  %
Restructuring charges                                  17.9                  21.6          (3.7 )       (17 )%
Operating income                                       79.0                  72.0           7.0          10  %
Operating income margin                                 6.3 %                 5.9 %                     0.4    pts
Interest expense, net                                  41.7                  70.0         (28.3 )       (40 )%
Equity in earnings of joint ventures                   (5.9 )                (6.3 )         0.4          (6 )%
Other expense, net                                      9.6                  61.4         (51.8 )       (84 )%
Income tax expense (benefit)                            6.6                (185.2 )       191.8          NM
Effective tax rate                                     19.6 %                  NM                        NM
Income from continuing operations                      27.0                 132.1        (105.1 )       (80 )%
Loss from discontinued operations, net of
income taxes                                           (0.1 )                (0.1 )           -           -
Net income                                             26.9                 132.0        (105.1 )       (80 )%


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Net Sales

Net sales increased by $32.6 million, or 3%, to $1,261.4 million compared to $1,228.8 million in the prior-year period. The acquisition of Mead C&OP contributed sales of $126.2 million with nine months of results included in the current year and only five months of results in the prior year. The underlying decline of $93.6 million, includes an unfavorable currency translation of $14.4 million, or 1%. The sales decline in the North America and International segments resulted from soft demand, consumers purchasing more lower-priced products, lost placement with some customers and the exit from unprofitable business. The Computer Products Group segment decline was due to lower sales and pricing. Increased competition in the tablet and smart phone accessory space and the unfavorable timing of new mobile device launches from manufacturers also reduced demand during the current-year period.

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 $13.0 million, or 1%, to $886.5 million compared to $873.5 million in the prior-year period. The increase was primarily due to the acquisition of Mead C&OP and was partially offset by lower sales volume, the absence of $13.3 million in amortization of the step-up in inventory value related to the Merger, a $9.5 million favorable currency translation impact and synergies and productivity savings.

Gross Profit

Management believes that gross profit and gross profit margin provide enhanced shareholder understanding of underlying profit drivers. Gross profit increased $19.6 million, or 6%, to $374.9 million compared to $355.3 million in the prior-year period. The increase was due to the acquisition of Mead C&OP and the absence of $13.3 million in amortization of the step-up in inventory value related to the Merger and synergies and productivity savings. These factors were partially offset by lower sales volume, $2.5 million of integration related inefficiencies from the closure of manufacturing and distribution facilities and a $4.9 million impact from unfavorable currency translation.

Gross profit margin increased to 29.7% from 28.9%. The inclusion of Mead C&OP, which has historically higher relative margins, was partially offset by adverse sales mix in the Computer Products Group segment due to lower sales of high-margin security products and lower royalty income.

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 $11.1 million, or 4%, to $259.3 million compared to $248.2 million in the prior-year period. The increase was primarily due to the acquisition of Mead C&OP, higher management incentive expenses, primarily stock compensation, and $1.8 million related to the relocation of our corporate headquarters. The increase was partially offset by a reduction in transaction and integration charges associated with the acquisition of Mead C&OP, which were $14.0 million higher in the prior-year period, synergies and productivity savings, favorable currency translation of $3.1 million and a $2.5 million gain on the sale of a facility.

As a percentage of sales, SG&A increased to 20.6% compared to 20.2% in the prior-year period primarily due to lower sales volume.

Amortization of Intangibles

Amortization of intangibles amounted to $18.7 million, compared to $13.5 million in the prior-year period. The increase was driven by incremental amortization as a result of the Merger.

Restructuring Charges

Restructuring charges were $17.9 million, compared to $21.6 million in the prior-year period. Employee termination and severance charges included in restructuring charges in the current and prior year relate to the Company's North American and


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International operations and are primarily associated with post-merger integration activities following the acquisition of Mead C&OP and changes in the European business model and manufacturing footprint.

Operating Income

Operating income increased $7.0 million, or 10%, to $79.0 million compared to $72.0 million in the prior-year period. The increase was primarily due to the acquisition of Mead C&OP.

Interest Expense, Net and Other Expense, Net

Interest expense, net of interest income, decreased to $41.7 million compared to $70.0 million in the prior-year period primarily due the absence of $17.4 million of costs, primarily merger-related, for the committed financing in the prior-year period and substantially lower effective interest rates due to the debt refinancing in the second quarter of 2013. Reductions of debt outstanding and higher interest income also contributed to the decline.

Other expense, net was $9.6 million compared to $61.4 million in the prior-year period. The improvement was due to the absence of one-time merger-related refinancing costs of $61.4 million related to the repurchase or discharge all of the Company's outstanding Senior Secured Notes in the prior year. The current year includes $9.4 million for the write-off of debt origination costs related to the second quarter 2013 refinancing. For a further discussion of the Company's refinancing completed in the second quarter of 2013 see Note 4, Long-term Debt and Short-term Borrowings, to our consolidated financial statements contained in Item 1 of this report.

Income Taxes

For the nine months ended September 30, 2013, the Company recorded income tax expense from continuing operations of $6.6 million on income before taxes of $33.6 million. For the prior year period, the Company reported an income tax benefit from continuing operations of $185.2 million on a loss before taxes of $53.1 million, primarily due to the release of certain valuation allowances for the U.S. and certain foreign jurisdictions in the amount of $112.7 million and $18.2 million, respectively.

Income from Continuing Operations

Income from continuing operations was $27.0 million, or $0.23 per diluted share, compared to income of $132.1 million, or $1.47 per diluted share in the prior-year period.

Net Income

Net income was $26.9 million, or $0.23 per diluted share, compared to net income of $132.0 million, or $1.47 per diluted share, in the prior-year period.


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Segment Discussion

                          Nine Months Ended September 30, 2013                                     Amount of Change

                                                                                                                         Segment
                                                                                                        Segment         Operating
                                          Segment                          Net Sales    Net Sales   Operating Income     Income
(in millions of                       Operating Income     Operating                                                                  Margin
dollars)              Net Sales             (A)          Income Margin         $            %              $                %         Points
ACCO Brands North
America           $         771.8     $         61.6          8.0 %       $    33.9        5%       $      11.5            23  %        120
ACCO Brands
International               378.3               32.3          8.5 %            14.4        4%               0.4             1  %        (30 )
Computer Products           111.3                9.1          8.2 %           (15.7 )     (12)%           (16.1 )         (64 )%     (1,160 )
Total segment     $       1,261.4     $        103.0                      $    32.6                 $      (4.2 )

                           Nine Months Ended September 30, 2012

                                          Segment
(in millions of                       Operating Income     Operating
dollars)              Net Sales             (A)          Income Margin
ACCO Brands North
America           $         737.9     $         50.1          6.8 %
ACCO Brands
International               363.9               31.9          8.8 %
Computer Products           127.0               25.2         19.8 %
Total segment     $       1,228.8     $        107.2

(A) Segment operating income excludes corporate costs; Interest expense, net; Equity in earnings of joint ventures and Other expense, net. See Note 15, . . .

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