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ACCO > SEC Filings for ACCO > Form 10-K on 25-Feb-2014All Recent SEC Filings

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Form 10-K for ACCO BRANDS CORP


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 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.

ACCO Brands is a leading global manufacturer and marketer of office, school and calendar 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, retailers and e-tailers. We design, develop, manufacture and market a wide variety of traditional and computer-related office products, school supplies and paper-based calendar products. 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. 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 United States, Northern Europe, Canada, Brazil, Australia and Mexico. We currently manufacture approximately half of our products locally where we operate, and source approximately the other half of our products, primarily from Asia.

We believe our leading product positions provide the scale to enable us to invest in product innovation and drive growth across our product categories. In addition, the expertise we use to satisfy the exacting technical specifications of our more demanding commercial customers is in many instances the basis for expanding our products and innovations to consumer products. We plan to grow via a strategy of organic growth supplemented by acquisitions.

ACCO Brands North America and ACCO Brands International manufacture, source and sell traditional office, school and calendar product lines under name brands such as AT-A-GLANCE®, Day-Timer®, Five Star®, GBC®, Hilroy, Marbig, Mead®, NOBO, Quartet®, Rexel, Swingline®, Tilibra, Wilson Jones® and many others. Products and brands are not necessarily confined to one channel or product category and are sold based on end-user preference in each geographic location.

The majority of our office products, such as stapling, binding and laminating equipment and related consumable supplies, shredders and whiteboards, are used by businesses. Most of these end-users purchase their products from our customers, which include commercial contract stationers, mass merchandisers, retail superstores, wholesalers, resellers, e-tailers, club stores and dealers. We also supply some of our products directly to large commercial and industrial end-users and provide business machine maintenance and certain repair services.

Our school products include notebooks, folders, decorative calendars, and stationery products. We distribute our school products primarily through traditional and online retail, mass merchandisers, grocery, drug and office superstore channels. We also supply private label products within the school products sector.

Our calendar products are sold throughout all channels where we sell office or school products, as well as direct to consumers.

Our Computer Products Group designs, sources, distributes, markets and sells accessories for laptop and desktop computers, and tablets and smartphones. These accessories primarily include security products, tablet covers and keypads, smartphone accessories, power adapters, input devices such as mice, laptop computer carrying cases, hubs, docking stations and ergonomic devices. We sell these products mostly under the Kensington®, Microsaver® and ClickSafe® brand names, with the majority of our revenue coming from the U.S. and Western Europe. Our computer products are manufactured by third-party suppliers, principally in Asia, and are distributed from our regional facilities. Our computer products are sold primarily to consumer electronics retailers, information technology value-added resellers, original equipment manufacturers and office products retailers.

Our results are dependent upon a number of factors, including pricing and competition. Historically, key drivers of demand in the office and school products industries have included trends in white collar employment levels, enrollment levels in education, gross domestic product (GDP) and growth in the number of small businesses and home offices together with usage of personal computers. Current pricing and demand levels for office products reflect the 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. Two of our large customers, Office Depot and OfficeMax, have merged in the fourth quarter of 2013. Management currently expects the combined companies will take actions to harmonize pricing from their suppliers, close retail outlets and rationalize their supply chain which will negatively impact our sales and margins. These adverse affects are expected to take several years to be fully realized. See "Part I, Item1A. Risk Factors - Our customers may further consolidate, which could adversely impact our margins and sales."


Overall commodity pricing has been fairly flat in 2013; however paper pricing has recently increased together with Chinese wage rates and these could impact the future business performance if we are not able to recover our additional costs with increases in our product pricing. 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. See "Part I, Item1A. Risk Factors - The raw materials and labor costs we incur are subject to price increases that could adversely affect our profitability."

With approximately 46% of our net sales for the fiscal year ended December 31, 2013 arising from foreign sales, fluctuations in currency exchange rates can have a material impact on our results of operations. Currency fluctuations impact the results of our non-U.S. operations that are reported in U.S. dollars. As a result, a weak U.S. dollar benefits, and a strong U.S. dollar reduces, the dollar-denominated contributions from foreign operations. Additionally, approximately half of the products we sell are sourced from China and other Asia-Pacific countries and are paid for in U.S. dollars. Thus, movements in the value of local currency relative to the U.S. dollar in countries where we source our products affect our cost of goods sold. Further, our international operations sell in their local currencies and are exposed to their domestic currency movements against the U.S. dollar. See "Part I, Item1A. Risk Factors - Risks associated with currency volatility could harm our sales, profitability, cash flows and results of operations" and "Note 13. Derivative Financial Instruments" to the consolidated financial statements contained in Item 8 of this report.

Mead Consumer and Office Products Business Merger

On May 1, 2012, we completed the Merger of Mead C&OP with a wholly-owned subsidiary of the Company. Mead C&OP is a leading manufacturer and marketer of school supplies, office products, and planning and organizing tools - including the Mead®, Five Star®, Trapper Keeper®, AT-A-GLANCE®, Cambridge®, Day Runner®, Hilroy, Tilibra and Grafons brands in the U.S., Canada and Brazil.

The results of Mead C&OP are included in the Company's consolidated financial statements from the date of the Merger.

Debt Refinancing

Effective May 13, 2013 (the "Effective Date"), the Company entered into an Amended and Restated Credit Agreement (the "Restated Credit Agreement") among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other agents and lenders party thereto. The Restated Credit Agreement amended and restated the Company's prior credit agreement, dated as of March 26, 2012, as amended (the "2012 Credit Agreement"), that had been entered into in connection with the Merger.

The Restated Credit Agreement provides for a $780 million, five-year senior secured credit facility, which consists of a $250.0 million multi-currency revolving credit facility, due May 2018 (the "Revolving Facility"), and a $530.0 million U.S. dollar denominated Senior Secured Term Loan A, due May 2018 (the "Restated Term Loan A"). Specifically, in connection with the Restated Credit Agreement, the Company:

• replaced its then-existing U.S.-dollar denominated Senior Secured Term Loan A, due May 2017, under the 2012 Credit Agreement, which had an aggregate principal amount of $220.8 million outstanding immediately prior to the Effective Date, with the Restated Term Loan A, due May 2018, in an aggregate original principal amount of $530.0 million;

• prepaid in full its then-existing U.S.-dollar denominated Senior Secured Term Loan B, due May 2019, under the 2012 Credit Agreement, which had an aggregate principal amount of $310.2 million outstanding immediately prior to the Effective Date, using a portion of the proceeds from the Restated Term A Loan; and

• replaced the $250.0 million revolving credit facility under the 2012 Credit Agreement with the Revolving Facility, under which $47.3 million was outstanding immediately following the Effective Date.

Prior to the Effective Date, the Company's repaid in full the $21.4 million Canadian-dollar denominated Senior Secured Term Loan A, due May 2017 that had been drawn under the 2012 Credit Agreement.

Restructuring

During the fourth quarter of 2013, in light of current economic and industry conditions and in anticipation of an uncertain demand environment as well as the impact of industry consolidation in 2014, we committed to restructuring actions that were primarily focused on streamlining our North American school, office and computer products operations. These actions will reduce


approximately 12% of our North American salaried workforce, impacting all operational, supply chain and administrative functions, with efforts beginning in early 2014. Such efforts are expected to be complete by the end of 2014. We expect to realize approximately $24 million in annual savings from these restructuring actions.

Also during the year 2013, we committed to incremental cost savings plans intended to improve the efficiency and effectiveness of our businesses. These plans relate to cost-reduction initiatives within our North American and International segments, and are primarily associated with post-merger integration activities of the North American operations following the Merger and changes in the European business model and manufacturing footprint. The most significant of these plans was finalized during the second quarter of 2013, and relates to the closure of our Brampton, Canada distribution and manufacturing facility and relocation of its activities to other facilities within the Company.

During the year 2012, we initiated cost savings plans related to the consolidation and integration of our then recently acquired Mead C&OP business. The most significant of these plans related to our dated goods business and included closure of a manufacturing and distribution facility in East Texas, Pennsylvania and relocation of its activities to other facilities within the Company, which was completed during the second quarter of 2013. We also committed to certain cost savings plans that are expected to improve the efficiency and effectiveness of our U.S. and European businesses, which were independent of any plans related to our acquisition of Mead C&OP.

Income Taxes

In 2012, due to the Merger, we analyzed our need for maintaining a valuation allowance against the expected U.S. future tax benefits. Based on our analysis we determined that there existed sufficient evidence in the form of future taxable income from the combined operations to release $126.1 million of the valuation allowance that had been previously recorded against the U.S. deferred income tax assets. The resulting deferred tax assets are comprised principally of net operating loss carryforwards that are expected to be fully realized within the expiration period and other temporary differences. Also in 2012, valuation allowances in the amount of $19.0 million were released in certain foreign jurisdictions. In 2013, the company had a net tax benefit from the release of certain foreign jurisdictions in the amount of $11.6 million.

Discontinued Operations

As of May 31, 2011, we disposed of the GBC Fordigraph Pty Ltd ("GBC Fordigraph") business. The Australia-based business was formerly part of the ACCO Brands International segment and the results of operations are included in the financial statements as a discontinued operation for all periods presented. In 2011, we received net proceeds of $52.9 million and recorded a gain on the sale of $41.9 million ($36.8 million after-tax).

For further information on discontinued operations see "Note 19. Discontinued Operations" to the consolidated financial statements contained in Item 8 of this report.

Overview of 2013 Company Performance

The financial results for the 2013 year include the full year results for Mead C&OP while 2012 included only eight months of Mead C&OP results. Operating income increased by $6 million, primarily due to synergies and productivity improvements, but was adversely impacted primarily by the performance of the Computer Products Group segment and by adverse foreign exchange. The additional four months of January through April of Mead C&OP contributed additional sales and gross profit, but it was not a profit contributor to the Company as a whole as these months were not historically profitable due to the seasonality of sales of the the acquired business (absent synergies and productivity savings). Sales for the year were impacted by challenging markets in the North America and Computer Products Group segments and the adverse impact of foreign exchange, partially offset by strength in the International segment. The Company generated significant cash flow and used this to reduce its debt by $151 million.


Fiscal 2013 versus Fiscal 2012

The following table presents the Company's results for the years ended December 31, 2013, and 2012.

                                              Year Ended December 31,          Amount of Change
(in millions of dollars)                        2013            2012            $             %
Net sales                                  $    1,765.1      $ 1,758.5     $    6.6          0.4  %
Cost of products sold                           1,220.3        1,225.1         (4.8 )       (0.4 )%
Gross profit                                      544.8          533.4         11.4            2  %
Gross profit margin                                30.9 %         30.3 %                     0.6    pts
Advertising, selling, general and
administrative expenses                           344.2          349.9         (5.7 )         (2 )%
Amortization of intangibles                        24.7           19.9          4.8           24  %
Restructuring charges                              30.1           24.3          5.8           24  %
Operating income                                  145.8          139.3          6.5            5  %
Operating income margin                             8.3 %          7.9 %                     0.4    pts
Interest expense, net                              54.7           89.3        (34.6 )        (39 )%
Equity in earnings of joint ventures               (8.2 )         (6.9 )       (1.3 )         19  %
Other expense, net                                  7.6           61.3        (53.7 )        (88 )%
Income tax expense (benefit)                       14.4         (121.4 )      135.8          112  %
Effective tax rate                                 15.7 %           NM                        NM
Income from continuing operations                  77.3          117.0        (39.7 )        (34 )%
Loss from discontinued operations, net of
income taxes                                       (0.2 )         (1.6 )        1.4           88  %
Net income                                         77.1          115.4        (38.3 )        (33 )%

Net Sales

Net sales increased $6.6 million, or 0.4%, to $1.765 billion compared to $1.759 billion in the prior-year period. The acquisition of Mead C&OP contributed incremental sales of approximately $125 million with twelve months of results included in the current year and only eight months of results in the prior year. The underlying decline of approximately $118 million includes an unfavorable currency translation of $27.5 million, or 2%. The remaining sales decline was primarily in the North America segment and resulted from soft demand, consumers purchasing more lower-priced products, lost placements and the exit from unprofitable business. Additionally, the Computer Products Group segment declined primarily due to increased competition in the tablet and smartphone categories.

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, inbound and outbound freight, shipping and handling costs, purchasing costs associated with materials and packaging used in the production processes, including an allocation of information technology costs. Cost of products sold decreased $4.8 million, or 0.4% to $1.220 billion compared to $1.225 billion in the prior-year period and includes $18.7 million of favorable currency translation. The underlying decrease was due to lower sales demand, together with synergies and productivity savings and the absence of $13.3 million of amortization of step-up in inventory value due to the Merger, which was partially offset by the full year impact from the acquisition of Mead C&OP.

Gross Profit

Management believes that gross profit and gross profit margin provide enhanced shareholder appreciation of underlying profit drivers. Gross profit increased $11.4 million, or 2%, to $544.8 million, compared to $533.4 million in the prior-year period, and includes $8.8 million of unfavorable currency translation. The underlying increase was due to the full year results from the acquisition of Mead C&OP, together with synergies and productivity savings, which partly offset by the absence of $13.3 million of amortization of step-up in inventory value due to the Merger and by lower sales volume.


Gross profit margin increased to 30.9% from 30.3%. The increase was driven by synergies and productivity savings, as well as the full year impact of Mead C&OP, which has historically higher relative margins, but was partially offset by adverse sales mix, particularly in the Computer Products Group.

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, corporate expenses, etc.). SG&A decreased $5.7 million, or 2%, to $344.2 million, compared to $349.9 million in the prior-year period, and includes $4.7 million of favorable currency translation. The underlying decrease was primarily due to a reduction in transaction and integration charges associated with the Merger, which were $18.6 million higher in the prior-year period, synergies and productivity savings, and a $2.5 million gain on the sale of a facility in 2013. The decrease was partially offset by the inclusion of the full year expense for Mead C&OP, higher stock compensation, and $1.8 million in expenses related to the relocation of our corporate and U.S. headquarters.

As a percentage of sales, SG&A decreased to 19.5% compared to 19.9% in the prior-year period primarily due to a reduction in transaction and integration charges.

Amortization of Intangibles

Amortization of intangibles increased to $24.7 million compared to $19.9 million in the prior-year period. The increase was driven by incremental amortization as a result of the Merger.

Restructuring Charges

Restructuring charges were $30.1 million compared to $24.3 million in the prior-year period. Employee termination and severance charges included in restructuring charges in the current and prior year relate our North American and International operations and are primarily associated with post-merger integration activities following the Merger and changes in the European business model and manufacturing footprint. In addition, during the fourth quarter of 2013 we committed to restructuring actions that were primarily focused on streamlining our North American school, office and computer products operations.

Operating Income

Operating income increased $6.5 million, or 5%, to $145.8 million, compared to $139.3 million in the prior-year period, including unfavorable currency translation of $3.5 million. The increase was primarily due to synergies and productivity savings and a reduction in transaction and integration charges, which were partially offset by a less profitable sales mix.

Interest Expense, Net, Equity in Earnings of Joint Ventures and Other Expense, Net

Interest expense, net of interest income, decreased to $54.7 million, compared to $89.3 million in the prior-year period, due to the absence of $16.4 million of costs, primarily Merger-related, for the committed financing in the prior-year period and substantially lower effective interest rates as a result of the May 2013 refinancing. Reduced debt outstanding and higher interest income also contributed to the decline.

Equity in earnings of joint ventures increased to $8.2 million, compared to $6.9 million in the prior-year period. During 2012 we took an impairment charge of $1.9 million related our Neschen GBC Graphics Films, LLC joint venture.

Other expense, net was $7.6 million compared to $61.3 million in the prior-year period. The improvement was due to the absence of one-time Merger-related refinancing costs of $61.4 million for the repurchase or discharge of 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 May 2013 refinancing and $2.0 million for a gain related to a bargain purchase on an acquisition completed in the fourth quarter of 2013. 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 8 of this report.

Income Taxes

Income tax expense from continuing operations was $14.4 million on income from continuing operations before taxes of $91.7 million. The low tax rate of 15.7% is primarily due to the reversal of valuation allowances for certain foreign jurisdictions


in the amount of $11.6 million. For the prior-year period, the Company reported an income tax benefit from continuing operations of $121.4 million on a loss from continuing operations before taxes of $4.4 million, primarily due to the release of certain valuation allowances for the U.S. and certain foreign jurisdictions in the amount of $126.1 million and $19.0 million, respectively.

Segment Discussion
                             Year Ended December 31, 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           $     1,041.4     $         98.2          9.4 %       $    13.2        1%       $      12.0            14  %        100
ACCO Brands
International             566.6               66.5         11.7 %            15.4        3%               4.5             7  %         50
Computer Products
Group                     157.1               13.7          8.7 %           (22.0 )     (12)%           (22.2 )         (62 )%     (1,130 )
Total segment
sales             $     1,765.1     $        178.4                      $     6.6                 $      (5.7 )

                             Year Ended December 31, 2012

                                        Segment
(in millions of                     Operating Income     Operating
dollars)             Net Sales            (A)          Income Margin
ACCO Brands North
America           $     1,028.2     $         86.2          8.4 %
ACCO Brands
International             551.2               62.0         11.2 %
Computer Products
Group                     179.1               35.9         20.0 %
Total segment
operating income  $     1,758.5     $        184.1

(A) Segment operating income excludes corporate costs; Interest expense, net; Equity in earnings of joint ventures and Other expense, net. See Note 16. Information on Business Segments to the consolidated financial statements contained in Item 8 of this report for a reconciliation of total segment operating income to income from continuing operations before income taxes.

ACCO Brands North America

ACCO Brands North America net sales increased $13.2 million, or 1%, to $1,041.4 million, compared to $1,028.2 million in the prior-year period. The Merger contributed incremental sales of approximately $88 million, with twelve months of results included in the current year and only eight months of results in the prior year. The underlying decline of approximately $75 million includes unfavorable currency translation of $4.2 million. The decline was driven by soft consumer demand, consumers purchasing more lower-priced products, and lost placements with some customers. These factors impacted both the acquired Mead and legacy ACCO Brands businesses. The planned exit from unprofitable business accounted for $26.0 million of the decline.

ACCO Brands North Americas operating income increased $12.0 million, or 14%, to $98.2 million compared to $86.2 million in the prior-year period, and operating income margin increased to 9.4% from 8.4% in the prior-year period. The improvement was due to synergies and productivity savings and the absence of $11.5 million of amortization of step-up in inventory value due to the Merger. Partially offsetting the improvement were lower sales volume, unfavorable customer/product mix, higher amortization of intangibles of $5.1 million and $1.8 million of costs related to the relocation of our corporate and U.S. headquarters.

ACCO Brands International

ACCO Brands International net sales increased $15.4 million, or 3%, to $566.6 million compared to $551.2 million in the prior-year period. The Merger . . .

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