ACCO BRANDS CORPORATION Introduction
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and nine months ended
Overview of the Company
ACCO Brands designs, markets, and manufactures well-recognized consumer, school, technology and office products. Our widely known brands include AT-A-GLANCE®, Barrilito®, Derwent®, Esselte®, Five Star®, Foroni®, GBC®, Hilroy®, Kensington®, Leitz®, Marbig®, Mead®, NOBO®, PowerA®, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra®, TruSens® and Wilson Jones®. Approximately 75 percent of our sales come from brands that occupy the No. 1 or No. 2 position in the product categories in which we compete. Our top 12 brands represented$1.3 billion of our 2020 net sales. We distribute our products through a wide variety of retail and commercial channels to ensure that our products are readily and conveniently available for purchase by consumers and other end-users, wherever they prefer to shop. These channels include mass retailers, e-tailers, discount, drug/grocery and variety chains; warehouse clubs; hardware and specialty stores; independent office product dealers; office superstores; wholesalers; contract stationers, technology specialty businesses, and our direct-to-consumer channel. Our products are sold primarily in theU.S. ,Europe ,Brazil ,Australia ,Canada , andMexico . For the year endedDecember 31, 2020 , approximately 44 percent of our net sales were in theU.S. ACCO Brands is in the midst of a substantial transformation of its business. Today we are a global enterprise focused on developing innovative branded consumer and technology products for use in businesses, schools, and homes. We have refocused our business to sell more in the mass merchant, e-commerce and technology channels to increase growth and profitability and to reduce reliance on declining customers and commoditized product categories. In particular, sales in the commercial channels have been declining for several years, and customers within the channel have been consolidating. The commercial channel and school customers also were impacted significantly by COVID-19. We have been strategically transforming our business to be more consumer- and brand-centric, product differentiated, and geographically diverse. We are successfully achieving this transformation through both organic initiatives and acquisitions. Organically, we have grown our Kensington® computer accessories offerings and entered the wellness category with TruSens® branded air purifiers, which we plan to expand over the next few years. ACCO remains a leading supplier of school products, including our top-selling Five Star® line of school notebooks, laminating machines, and stapling and punching products, among others. We have refreshed most of our line of shredders in EMEA over the past three years, improving consumer designs. This refresh includes a new line of personal shredders to capitalize on the work-from-home environment. Shredder sales have remained strong, and we plan to leverage our platforms more globally. During 2020, our EMEA business also launched organization and storage products for home offices under the Leitz® WOW and Leitz® Cosy brands. Our approach to acquisitions has been focused on consolidation, geographic expansion, and adjacency opportunities that meet our strategic and financial criteria. Strategically, we are focusing on categories or geographies that provide opportunities for growth, leading brands, and channel diversity. We have made five acquisitions over the past five years. These acquisitions have meaningfully expanded our portfolio of well-known brands, enhanced our competitive position from both a product and channel perspective, and added scale to our operations. As a result, our foreign businesses contributed over half of our sales in 2020, up from 43 percent in 2016. Our acquisition of PowerA (the "PowerA Acquisition") in late 2020 was about accelerating growth and entering into an attractive consumer product adjacency of third-party video game controllers, power charging stations, and headsets. The addition of PowerA has already meaningfully improved our organic sales growth and profitability and increased our presence in faster growing mass and e-commerce channels. PowerA has and is expected to continue to experience strong double-digit sales growth in theU.S. , as well as opportunities for expansion internationally, particularly inEurope . It greatly advances our strategic shift toward consumer, school and technology products as more than half of our sales will now come from these faster growing product categories. On a pro forma basis for 2020, including full year PowerA sales of$210 million , gaming and computer products would represent approximately 22 percent of our sales. 33 -------------------------------------------------------------------------------- Our leading product category positions provide the scale to invest in marketing and product innovation to drive profitable growth. We now expect to grow in mature markets in consumer, technology, and adjacent categories driven by new product development. We will also continue to grow in emerging markets once the impact of COVID-19 subsides inLatin America and parts ofAsia , theMiddle East , andEastern Europe . In all of our markets, we see opportunities for sales growth through share gains, channel and geographic expansion, and product enhancements.
We generate strong operating cash flow, and will continue to leverage our cost structure through acquisitions, synergies and productivity savings to drive long-term profit and operating cash flow improvement.
Overview of Performance
Our third quarter net sales increased 18.6 percent to$526.7 million , primarily from the acquisition of PowerA, which added$56.8 million . Excluding PowerA, sales increased 5.8 percent as a result of higher demand as offices and schools continued to reopen, and we had some benefit from price increases. EMEA continues to exhibit growth above pre-pandemic sales levels. BothNorth America and International were above 2020 levels due to higher demand related to increased in-person education and use of offices, despite some of our customers having excess inventory on hand. The prior-year period forNorth America included a large computer accessory sale that did not repeat in the current year. Favorable foreign exchange was$6.6 million , or 1.5 percent. Demand growth varied by channel as depicted in the table below, which includes the benefit of PowerA (mainly in the Mass/Retail and Etail channels): Channel Change vs. Q3 2020 Commercial/B2B 20 % Mass/Retail 34 % E-tail/D2C 28 % Tech specialist (32) % Total sales (including PowerA)* 19 % *Numbers may not add due to rounding The Company recorded operating income of$38.6 million . PowerA's underlying performance was impacted by a charge of$4.9 million related to the change in fair value of the contingent consideration that was part of the purchase price ("PowerA Earnout"), and$4.1 million of additional amortization resulting from the acquisition. Gross margin rose 120 basis points as improvements inNorth America and International offset a decline in EMEA. SG&A expenditures increased due to the PowerA acquisition and because the prior-year quarter contained many short-term cost reductions related to COVID-19 impacts, including lower management incentive expenses and$3.1 million in higher government assistance. Foreign exchange benefited operating income$0.8 million , or 2.3 percent, and added$0.7 million to net income. Operating cash flow for the nine months endedSeptember 30, 2021 , was$44.0 million , compared with operating cash flow of$21.8 million for the nine months endedSeptember 30, 2020 . The$22.2 million year-over-year improvement was after$4.5 million for funding PowerA's adverse operating cash flow. Higher logistics expense, commodity cost increases, international shipping delays and overall supply chain disruptions continue to adversely affect 2021 results. Our logistics and commodity costs and those used by our suppliers remain high. In the third quarter, we raised prices to partly offset these higher costs and also benefited from smaller price increases we had taken earlier in 2021. Throughout 2022, we anticipate that we will experience continuing higher logistics and commodity costs, as well as additional cost increases from our suppliers, necessitating additional increases in our selling prices. Overall, pricing still lags the cost increases we are experiencing, particularly in EMEA where price increases were not effective untilOctober 1 . In 2020, to address the financial impact of the pandemic on our results of operations, we took a series of cost reductions, both temporary and then more long term, that will continue to impact our results and prior-period comparisons throughout 2021. In addition, during the first quarter of 2021, we recorded$3.9 million in restructuring charges to further reduce long-term expenses. The temporary cost reductions were gradually rescinded in late 2020 and early 2021, so the current period reflected, and the fourth quarter will continue to reflect, these operating expenses at more normalized levels. While our business is benefiting from the gradual reopening of offices and the return of mostly in-person education in many of our regions this fall, the impact of the COVID-19 pandemic is not yet fully behind us. We expect the impact of the 34 -------------------------------------------------------------------------------- pandemic will continue to vary by geographic region and country depending upon a range of factors, including how seriously COVID-19 is affecting public health in the country, the progress of mass vaccinations, whether and to what degree businesses and schools are open, and the general seasonality and channel structure of our business in that country. Levels of vaccination improved in all markets during the third quarter, most notably inCanada , EMEA and most of our International markets. Compared with the third quarter 2021, we expect improving operating margin in the fourth quarter, mainly due to the seasonal product mix and more benefit of price increases as we catch up further with cost inflation. We expect a stronger overall 2021-2022 back-to-school season for the International segment, but we expect some demand may be pushed into the first quarter of 2022 due to inventory, supply chain and customer credit constraints. We also anticipate additional benefit from higher levels of offices reopening in most markets, includingNorth America , as the delays related to the Delta variant wane. In bothNorth America and International, we continue to be impacted by lower demand than the respective pre-pandemic periods for some of our office and school products. Overall, we are expecting continuing economic improvement in all regions in the fourth quarter and into 2022. We believe that environment will lead to continued organic sales growth, with inflation muting some of the gross profit gain from the volume growth.
Consolidated Results of Operations for the Three and Nine Months Ended
Three Months Ended September
30, Amount of Change Nine Months Ended September 30, Amount of Change
(in millions, except per share
data) 2021 2020(1) $ %/pts 2021 2020(1) $ %/pts
Net sales $ 526.7 $ 444.1 $ 82.6 18.6 % $ 1,455.0 $ 1,195.1 $ 259.9 21.7 %
Cost of products sold 369.5 317.0 52.5 16.6 % 1,018.2 845.8 172.4 20.4 %
Gross profit 157.2 127.1 30.1 23.7 % 436.8 349.3 87.5 25.1 %
Gross profit margin 29.8 % 28.6 % 1.2 pts 30.0 % 29.2 % 0.8 pts
Selling, general and administrative
expenses 101.8 84.4 17.4 20.6 % 293.5 247.7 45.8 18.5 %
SG&A % to net sales 19.3 % 19.0 % 0.3 pts 20.2 % 20.7 % (0.5) pts
Amortization of intangibles 11.6 7.9 3.7 46.8 % 35.2 24.1 11.1 46.1 %
Restructuring charges 0.3 0.5 (0.2) (40.0) % 4.2 7.3 (3.1) (42.5) %
Change in fair value of contingent
consideration 4.9 - 4.9 NM 16.5 - 16.5 NM
Operating income 38.6 34.3 4.3 12.5 % 87.4 70.2 17.2 24.5 %
Operating income margin 7.3 % 7.7 % (0.4) pts 6.0 % 5.9 % 0.1 pts
Interest expense 11.2 10.2 1.0 9.8 % 36.0 28.7 7.3 25.4 %
Interest income (0.6) (0.2) 0.4 200.0 % (1.2) (0.8) 0.4 50.0 %
Non-operating pension income (2.3) (1.4) 0.9 64.3 % (5.6) (4.4) 1.2 27.3 %
Other expense, net 0.1 0.1 - - 4.0 0.8 3.2 400.0 %
Income before income tax 30.2 25.6
4.6 18.0 % 54.2 45.9 8.3 18.1 %
Income tax expense 10.0 6.8 3.2 47.1 % 5.8 13.7 (7.9) (57.7) %
Effective tax rate 33.1 % 26.6 % 6.5 pts 10.7 % 29.8 % (19.1) pts
Net income 20.2 18.8 1.4 7.4 % 48.4 32.2 16.2 50.3 %
Weighted average number of diluted
shares outstanding: 97.3 95.6 1.7 1.8 % 97.0 96.2 0.8 0.8 %
Diluted income per share $ 0.21 $ 0.20 $ 0.01 5.0 % $ 0.50 $ 0.34 $ 0.16 47.1 %
Comparable net sales $ 463.3 $ 444.1 $ 19.2 4.3 % $ 1,238.8 $ 1,195.1 $ 43.7 3.7 %
(1) The Company acquired PowerA effective
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--------------------------------------------------------------------------------Foreign Exchange Rates
Approximately 52.9 percent of our net sales for the nine months endedSeptember 30, 2021 , were transacted in a currency other than theU.S. dollar. Additionally, we source approximately 60 percent of our products mainly fromChina ,Vietnam and other Far Eastern countries usingU.S. dollars. As a result, the sales, profitability and cash flow of our foreign operations which transact business in their local currency are affected by the fluctuation in foreign currency rates relative to theU.S. dollar.
For the three months endedSeptember 30, 2021 , net sales increased due to the PowerA Acquisition, which added$56.8 million , as well as greater demand related to office and school reopenings, and the benefit of sales price increases, partially offset by the absence of a large computer accessories sale inNorth America . Favorable foreign exchange was$6.6 million , or 1.5 percent. For the nine months endedSeptember 30, 2021 , net sales increased due to the PowerA Acquisition, which added$170.2 million , and higher demand related to office and school reopenings. Favorable foreign exchange was$46.0 million , or 3.8 percent. Cost of Products Sold Cost of products sold includes all manufacturing, product sourcing and distribution costs, including depreciation related to assets used in manufacturing; procurement and distribution processes; 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; and inventory valuation adjustments. For the three months endedSeptember 30, 2021 , PowerA added$41.6 million , or 13.1 percent. Foreign exchange reduced cost of products sold$4.4 million , or 1.4 percent. Excluding PowerA and foreign exchange, cost of products sold increased, primarily due to higher comparable sales and inflationary cost increases related to logistics, commodities, and wages. For the nine months endedSeptember 30, 2021 , PowerA added$124.2 million , or 14.7 percent. Foreign exchange reduced cost of products sold$31.0 million , or 3.7 percent. Excluding PowerA and foreign exchange, cost of products sold increased, primarily for the same reasons noted above for three months.
Gross Profit
For the three months endedSeptember 30, 2021 , PowerA contributed$15.2 million , or 12.0 percent, to gross profit and foreign exchange increased gross profit$2.2 million , or 1.7 percent. Excluding PowerA and foreign exchange, gross profit increased primarily due to higher comparable sales. For the three months endedSeptember 30, 2021 , gross profit as a percent of net sales increased 120 basis points. Gross profit margin improved, primarily from a better sales mix and cost savings, partially offset by higher logistics and commodity costs, which were not fully offset by price increases. For the nine months endedSeptember 30, 2021 , PowerA contributed$46.0 million , or 13.2 percent and foreign exchange increased gross profit$15.0 million , or 4.3 percent. Excluding PowerA and foreign exchange, gross profit rose primarily due to higher comparable sales. For the nine months endedSeptember 30, 2021 , gross profit as a percent of net sales increased 80 basis points. Gross profit margin rose primarily from cost savings, lower inventory reserves, and an improved product mix, partly offset by higher logistics and commodity costs.
Selling, General and Administrative Expenses
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).
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For the three months ended September 30, 2021 , PowerA increased SG&A $5.8
million , or 6.9 percent, foreign exchange added $1.2 million , or 1.4 percent,
and integration and transaction costs were $1.0 million . Excluding PowerA,
integration and transaction costs, and foreign exchange, SG&A increased $9.4
million as the prior period benefited from many pandemic-related, short-term
cost reductions, including low management incentives and an additional $1.6
million of higher government
For the three months ended
For the nine months endedSeptember 30, 2021 , PowerA increased SG&A$16.1 million , or 6.5 percent, foreign exchange added$8.0 million , or 3.2 percent, and integration and transaction costs were$2.5 million . The prior-year period included$3.3 million in higher government assistance and$0.8 million in integration costs related to prior acquisitions. Excluding PowerA, integration and transaction costs, and foreign exchange, SG&A increased$20.0 million as the prior period benefited from many pandemic-related, short-term cost reductions, including the government assistance noted above.
For the nine months ended
Restructuring Charges
For the three months ended
For the nine months endedSeptember 30, 2021 , restructuring charges were$4.2 million . Costs associated with severance were$3.8 million , primarily inNorth America , but also inBrazil and the U.K. Lease abandonment charges were$0.3 million related to facilities inNorth America andMexico .
Operating Income
For the three months endedSeptember 30, 2021 , operating income increased to$38.6 million , primarily due to higher sales and improved gross margin. PowerA did not contribute to operating income as its underlying performance was impacted by a charge of$4.9 million related to the change in fair value of the contingent consideration that was part of the purchase price, as well as$3.7 million of higher amortization primarily from PowerA. Restructuring costs were$0.2 million lower than prior year. Foreign exchange benefited operating income$0.8 million , or 2.3 percent. For the nine months endedSeptember 30, 2021 , operating income rose to$87.4 million , primarily due to higher sales and improved gross margin. PowerA contributed operating income of$0.5 million , which includes$16.5 million related to the contingent consideration expense and$11.1 million of higher amortization primarily related to the PowerA acquisition. Restructuring costs were$3.1 million lower than prior year. Foreign exchange benefited operating income$5.9 million , or 8.4 percent.
Interest Expense
For the three and nine months endedSeptember 30, 2021 , the increase in interest expense was primarily due to higher average debt outstanding due to the PowerA Acquisition. Other Expense, Net The nine months endedSeptember 30, 2021 , included$9.1 million of Brazilian operating tax credits as a result of favorable judicial court rulings as well as charges associated with the first quarter refinancing of the senior unsecured notes due 2024 and our bank debt. These charges consisted of a call premium of$9.8 million and a$3.7 million charge for the write-off of debt issuance costs.
Income Tax Expense
The increase in the effective tax rate versus the three months ended
37
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The decrease in the effective rate versus the nine months ended September 30,
2020 , was primarily driven by the revaluation of the deferred tax assets due to
enacted statutory tax rate changes and the release of non-U.S. reserves for
unrecognized tax benefits for which the time to assess has lapsed.
See "Note 11. Income Taxes" for more information.
Net Income/Diluted Income per Share
For the three months endedSeptember 30, 2021 , net income increased primarily due to higher operating income, partly offset by higher taxes. Foreign exchange increased net income$0.7 million , or 3.7 percent. For the nine months endedSeptember 30, 2021 , net income increased primarily due to higher operating income, partly offset by the increase in interest expense of$7.3 million . Foreign exchange increased net income$4.4 million , or 13.7 percent. SegmentNet Sales and Operating Income for the Three and Nine Months EndedSeptember 30, 2021 and 2020ACCO Brands North America Three Months Ended September Nine Months Ended September 30, Amount of Change 30, Amount of Change (in millions) 2021 2020 $ %/pts 2021 2020 $ %/pts Net sales$ 287.5 $ 238.5 $ 49.0 20.5 %$ 771.4 $ 638.0 $ 133.4 20.9 % Segment operating income(1) 34.6 22.9 11.7 51.1 % 87.7 67.9 19.8 29.2 % Segment operating income margin 12.0 % 9.6 % 2.4 pts 11.4 % 10.6 % 0.8 pts Comparable net sales (Non-GAAP)(2)$ 240.4 $ 238.5 $ 1.9 0.8 %$ 627.4 $ 638.0 $ (10.6) (1.7) % (1) Segment operating income excludes corporate costs. See "Part I, Item 1. Note 17. Information on Business Segments," for a reconciliation of total "Segment operating income" to "Income before income tax." (2) See reconciliation to GAAP, contained in Part I, Item 2. "Supplemental Non-GAAP Financial Measure." FX Impact vs US$ 2021 3rd QTR Avg vs. 2020 3rd QTR Avg 2021 YTD Avg vs. 2020 YTD Avg Currency Increase/(Decline) Increase/(Decline) Canadian dollar 6% 8% For the three months endedSeptember 30, 2021 , net sales increased primarily due to the PowerA acquisition, which added$45.1 million . Favorable foreign exchange increased net sales$2.0 million , or 0.8 percent. The comparable sales increase was driven by higher back-to-school sales, which as expected, were partially reduced by our customers selling inventory remaining from last year and therefore ordering less product this year in order to conclude the back-to-school season without excess inventory, and by a pull forward of sales into the second quarter inCanada . Commercial sales improved but were affected by delayed returns to offices due to the Delta variant. Last year we benefited from a very large order of Kensington computer accessories that did not repeat this year. The absence of this order impacted sales more than$22 million . Excluding this large order, computer accessory sales continued to show double-digit growth, and Kensington overall had an improved gross margin.
We raised sales prices, which were effective towards the middle of the quarter, and therefore should provide more margin recovery in the fourth quarter.
For the nine months endedSeptember 30, 2021 , net sales increased due to PowerA, which added$137.1 million , mainly in the mass and e-tail channels. Favorable foreign exchange increased net sales$6.9 million , or 1.1 percent. Comparable sales decreased due to a decline in the first quarter from COVID-19 impacts, although we have experienced improving demand since. For the three months endedSeptember 30, 2021 , operating income and operating margin increased, primarily due to higher sales and a favorable product mix,$0.5 million of lower restructuring costs, and a$2.5 million contribution from PowerA, which included$3.3 million of increased amortization related to the acquisition. Favorable foreign exchange contributed$0.4 million . The benefit from the higher comparable sales increase (which included increased sales prices) and 38 -------------------------------------------------------------------------------- long-term cost reduction efforts was partly offset by higher logistics and commodity inflation and increased SG&A expenses. The increased SG&A expenses result from the current period including PowerA and the 2020 period benefiting from many pandemic-related, short-term cost reduction measures. The change in the fair value of the contingent consideration is not allocated against the segment results.
For the nine months ended
ACCO Brands EMEA
Three Months Ended September Nine Months Ended September
30, Amount of Change 30, Amount of Change
(in millions) 2021 2020 $ %/pts 2021 2020 $ %/pts
Net sales $ 161.1 $ 136.4 $ 24.7 18.1 % $ 475.0 $ 352.2 $ 122.8 34.9 %
Segment operating income(1) 13.4 16.7 (3.3) (19.8) % 40.1 26.9 13.2 49.1 %
Segment operating income margin 8.3 % 12.2 % (3.9) pts 8.4 % 7.6 % 0.8 pts
Comparable net sales
(Non-GAAP)(2) $ 150.5 136.4 $ 14.1 10.3 % $ 422.8 $ 352.2 $ 70.6 20.1 %
(1) Segment operating income excludes corporate costs. See "Part I, Item 1. Note
17. Information on Business Segments," for a reconciliation of total "Segment
operating income" to "Income before income tax."
(2) See reconciliation to GAAP, contained in Part I, Item 2. "Supplemental
Non-GAAP Financial Measure."
FX Impact vs US$ 2021 3rd QTR Avg vs. 2020 3rd QTR Avg 2021 YTD Avg vs. 2020 YTD Avg
Currency Increase/(Decline) Increase/(Decline)
Euro 1% 6%
Swedish krona 3% 11%
British pound 7% 9%
For the three months ended September 30, 2021 , net sales increased primarily
because of improved demand due to economic recovery and market share gains that
included higher sales of new products, including those from the acquisition of
the Franken product range. Favorable foreign exchange contributed $2.3 million ,
and PowerA added $8.3 million . Comparable sales exceeded third quarter 2019
levels. Even though the pandemic continues to adversely impact demand, EMEA is
benefiting from higher vaccination rates and less adverse impacts from the Delta
variant.
For the nine months ended September 30, 2021 , net sales increased primarily
because of the same drivers cited above, with strong comparable sales growth
coming from computer accessories, do-it-yourself tools, home-use filing items,
shredders, air purifiers, and art supplies, along with an increase for many
commercial product categories. Favorable foreign exchange added $28.1 million ,
and PowerA added $24.1 million .
For the three months ended September 30, 2021 , operating income and operating
margin decreased primarily due to a lower gross margin from higher logistics and
commodity costs, as well as increased SG&A expenses as the prior period
benefited from many pandemic-related, short-term cost reduction measures,
including $1.1 million of higher government assistance. These factors were
partially offset by higher sales. Foreign exchange benefited operating income
$0.2 million , and PowerA contributed $1.8 million .
For the nine months ended September 30, 2021 , operating income and operating
margin increased primarily due to increases in the first half, which were
partially offset by declines in the third quarter from the reasons cited above
for the three-month period, including $2.0 million of higher government
assistance in 2020. Foreign exchange benefited operating income $3.0 million ,
and PowerA contributed $4.8 million .
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--------------------------------------------------------------------------------ACCO Brands International Three Months Ended September Nine Months Ended September 30, Amount of Change 30, Amount of Change (in millions) 2021 2020 $ %/pts 2021 2020 $ %/pts Net sales$ 78.1 $ 69.2 $ 8.9 12.9 %$ 208.6 $ 204.9 $ 3.7 1.8 % Segment operating income(1) 7.3 3.7 3.6 97.3 % 10.7 5.2 5.5 105.8 % Segment operating income margin 9.3 % 5.3 % 4.0 pts 5.1 % 2.5 % 2.6 pts Comparable net sales (Non-GAAP)(2)$ 72.4 69.2$ 3.2 4.7 %$ 188.6 204.9$ (16.3) (8.0) % (1) Segment operating income excludes corporate costs. See "Part I, Item 1. Note 17. Information on Business Segments," for a reconciliation of total "Segment operating income" to "Income before income tax." (2) See reconciliation to GAAP, contained in Part I, Item 2. "Supplemental Non-GAAP Financial Measure." FX Impact vs US$ 2021 3rd QTR Avg vs. 2020 3rd QTR Avg 2021 YTD Avg vs. 2020 YTD Avg Currency Increase/(Decline) Increase/(Decline) Brazilian real 3% (6)% Australian dollar 3% 12% Mexican peso 10% 8% Japanese yen (3)% (1)% For the three months endedSeptember 30, 2021 , net sales rose due to price increases, the acquisition of Power A, which added$3.4 million , and favorable foreign exchange of$2.3 million . Comparable sales rose mainly due to price increases and some recovering demand. Our International markets have the lowest vaccination rates of our segments, and the consequence of these low rates was reflected in very poor back-to-school sales inMexico and lockdowns inAustralia throughout the entire third quarter due to outbreaks of the Delta variant. There was a substantial pick up in vaccination rates towards the end of the quarter that bodes well for the seasonally important Southern Hemisphere back-to-school season inAustralia andBrazil , which spans the fourth and first quarters. Children inBrazil , particularly in the highly populatedstate of Sao Paulo , started to return to in-person education in the third quarter. We expect the back-to-school season inBrazil to be larger than prior year; however, we anticipate that some sales are likely to move into the first quarter of 2022. For the nine months endedSeptember 30, 2021 , net sales increased, as a result of favorable foreign exchange, which added$11.0 million , PowerA, which contributed$9.0 million , and higher pricing. Comparable sales declined due to lower demand related to the continuing impact of COVID-19, particularly in the first quarter. For the three months endedSeptember 30, 2021 , operating income and operating margin improved primarily as a result of long-term cost reductions, some benefit from higher pricing, and PowerA, which added$0.9 million . These factors were partially offset by higher SG&A expenses as the prior year benefited from many pandemic-related, short-term cost reduction measures, including$1.7 million of higher government assistance. Foreign exchange increased operating income$0.2 million . For the nine months endedSeptember 30, 2021 , operating income and operating margin improved due to long-term cost reductions, lower reserves for bad debts and inventory, and PowerA, which contributed$2.1 million . These factors were partially offset by higher SG&A expense as the prior year benefited from many pandemic-related, short-term cost reduction measures, including$3.1 million of higher government assistance. Restructuring costs were$0.3 million lower and foreign exchange increased operating income$1.7 million . Excluding PowerA and foreign exchange, operating income increased slightly. 40 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our primary liquidity needs are to support our working capital requirements, service indebtedness and fund capital expenditures, dividends and acquisitions. Our principal sources of liquidity are cash flows from operating activities, cash and cash equivalents held and seasonal borrowings under our$600 million multi-currency revolving credit facility (the "Revolving Facility"). As ofSeptember 30, 2021 , there was$153.0 million in borrowings outstanding under the Revolving Facility ($7.9 million reported in "Current portion of long-term debt" and$145.1 million reported in "Long-term debt, net"), we had$58.1 million in cash on hand, and the amount available for borrowings was$434.5 million (allowing for$12.5 million of letters of credit outstanding on that date). We maintain adequate financing arrangements at market rates. As ofSeptember 30, 2021 , our Consolidated Leverage Ratio was approximately 3.8 to 1.00 versus our maximum covenant of 5.25 to 1.00. We have no debt maturities beforeMarch 2026 .
Given the debt incurred in connection with our acquisition of PowerA, our near-term use of cash will be to fund our dividend and reduce debt. Our long-term strategy remains to deploy cash to fund dividends, reduce debt, make acquisitions and repurchase stock.
The
Adequacy of Liquidity Sources
We believe that cash flow from operations, our current cash balance and other sources of liquidity, including borrowings available under our Revolving Facility, will be adequate to support our requirements for working capital, capital and restructuring expenditures and to service indebtedness for the foreseeable future.
Restructuring and Integration Activities
From time to time the Company may implement restructuring, realignment or cost-reduction plans and activities, including those related to integrating acquired businesses.
The restructuring provision was$0.3 million and$4.2 million for the three and nine months endedSeptember 30, 2021 , respectively, primarily related to the Company's cost reduction programs representing expected severance costs mainly inNorth America . Additional charges were also taken inBrazil , EMEA andMexico . For additional details, see "Note 10. Restructuring" to the condensed consolidated financial statements contained in "Part I, Item 1. Financial Information" of this Quarterly Report on Form 10-Q.
In addition, for the three and nine months ended
Cash Flow for the Nine Months Ended
Cash Flow from Operating Activities
Cash provided by operating activities during the nine months endedSeptember 30, 2021 was$44.0 million , an increase of$22.2 million compared to cash provided by operating activities of$21.8 million during the prior year's first nine months. The improvement in cash provided by operating activities was primarily due to a decrease in cash used for accrued expenses and other liabilities of$50.5 million , an increase in the fair value of the contingent earnout of$16.5 million , higher depreciation and amortization costs of$12.3 million , and higher stock-based compensation of$7.0 million , partially offset by more cash used for investments in our working capital of$62.6 million , which is primarily due to the PowerA Acquisition. 41 --------------------------------------------------------------------------------
The table below shows our cash flow used or provided by the components of net
working capital for the nine months ended
Nine Months Ended
September 30, September 30, Amount of
(in millions) 2021 2020 Change
Accounts receivable $ (18.3) $ 78.7 $ (97.0)
Inventories (116.2) (28.4) (87.8)
Accounts payable 55.1 (67.1) 122.2
Cash flow (used) provided by net working capital
•Accounts receivable was a use of cash of$18.3 million during the nine months endedSeptember 30, 2021 , an unfavorable change of$97.0 million compared to a source of cash of$78.7 million during the first nine months endedSeptember 30, 2020 . The$97.0 million unfavorable change was due to strong sales (including$25.7 million in receivables from PowerA) during the nine months endedSeptember 30, 2021 , as compared to lower sales during the nine months endedSeptember 30, 2020 , driven by COVID-19 impacts. •Inventories was a use of cash of$116.2 million during the nine months endedSeptember 30, 2021 , an unfavorable change of$87.8 million when compared with the$28.4 million cash used during the nine months endedSeptember 30, 2020 . The use of cash for inventory was higher during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , as a result of the Company increasing inventory to secure supply for the back-to-school season, and to support the growth in PowerA ($47.8 million ) as well as increased purchases due to supply chain disruptions related to international shipping. •Accounts payable was a source of cash of$55.1 million during the nine months endedSeptember 30, 2021 , a favorable change of$122.2 million when compared to a use of cash of$67.1 million during the nine months endedSeptember 30, 2020 . The source of cash for accounts payable was a result of the Company purchasing more inventory due to higher sales, including for back-to-school, and PowerA ($26.9 million ).
Cash Flow from Investing Activities
Cash provided by investing activities was$1.5 million and cash used by investing activities was$11.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Cash used for capital expenditures was up$2.1 million primarily for the integration of PowerA into SAP. Cash provided by acquisitions increased by$14.8 million , primarily from a working capital adjustment received from the seller of PowerA due to having delivered less working capital than required in the acquisition agreement, partly offset by cash paid for the Franken acquisition.
Cash Flow from Financing Activities
Cash used by financing activities was$22.5 million for the nine months endedSeptember 30, 2021 , a decrease of$71.1 million , compared with cash provided of$48.6 million by financing activities during the first nine months of the prior year. The decrease of$71.1 million primarily relates to a reduction of cash used for share repurchases of$18.9 million in 2020 and a decrease in cash provided by our incremental net borrowings of$72.7 million during the first nine months of 2021, compared to the prior year's first nine months. In addition, there were cash outflows of$9.8 million related to the call premium on early redemption of our Prior Notes and$8.9 million increase in cash outflows for payments of debt issuance costs associated with our bond and bank debt refinancing in the 2021 first quarter.
Credit Facilities and Notes Covenants
As of
Guarantees and Security
Generally, obligations under the Credit Agreement are guaranteed by certain of
the Company's existing and future subsidiaries, and are secured by substantially
all of the Company's and certain guarantor subsidiaries' assets, subject to
certain exclusions and limitations.
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--------------------------------------------------------------------------------Supplemental Non-GAAP Financial Measure
To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles in theU.S. ("GAAP"), we provide investors with certain non-GAAP financial measures, including comparable net sales. Comparable net sales represent net sales excluding the impact of material acquisitions and with current-period foreign operation sales translated at prior-year currency rates. We sometimes refer to comparable net sales as comparable sales. We use comparable net sales both to explain our results to stockholders and the investment community and in the internal evaluation and management of our business. We believe comparable net sales provide management and investors with a more complete understanding of our underlying operational results and trends, facilitate meaningful period-to-period comparisons and enhance an overall understanding of our past and future financial performance. Comparable net sales should not be considered in isolation or as a substitute for, or superior to, the directly comparable GAAP financial measure and should be read in connection with the Company's financial statements presented in accordance with GAAP.
The following tables provide a reconciliation of GAAP net sales change as reported to non-GAAP comparable net sales change:
Comparable Net Sales - Three Months Ended September 30, 2021
Non-GAAP
GAAP Currency Comparable
(in millions) Net Sales Translation Acquisition Net Sales
ACCO Brands North America $287.5 $2.0 $45.1 $240.4
ACCO Brands EMEA 161.1 2.3 8.3 150.5
ACCO Brands International 78.1 2.3 3.4 72.4
Total $526.7 $6.6 $56.8 $463.3
Amount of Change - Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020
$ Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
(in millions) Change Translation Acquisition Change
ACCO Brands North America $49.0 $2.0 $45.1 $1.9
ACCO Brands EMEA 24.7 2.3 8.3 14.1
ACCO Brands International 8.9 2.3 3.4 3.2
Total $82.6 $6.6 $56.8 $19.2
% Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
Change Translation Acquisition Change
ACCO Brands North America 20.5% 0.8% 18.9% 0.8%
ACCO Brands EMEA 18.1% 1.7% 6.1% 10.3%
ACCO Brands International 12.9% 3.3% 4.9% 4.7%
Total 18.6% 1.5% 12.8% 4.3%
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Comparable Net Sales - Nine Months Ended September 30, 2021
Non-GAAP
GAAP Currency Comparable
(in millions) Net Sales Translation Acquisition Net Sales
ACCO Brands North America $771.4 $6.9 $137.1 $627.4
ACCO Brands EMEA 475.0 28.1 24.1 422.8
ACCO Brands International 208.6 11.0 9.0 188.6
Total $1,455.0 $46.0 $170.2 $1,238.8
Amount of Change - Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020
$ Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
(in millions) Change Translation Acquisition Change
ACCO Brands North America $133.4 $6.9 $137.1 $(10.6)
ACCO Brands EMEA 122.8 28.1 24.1 70.6
ACCO Brands International 3.7 11.0 9.0 (16.3)
Total $259.9 $46.0 $170.2 $43.7
% Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
Change Translation Acquisition Change
ACCO Brands North America 20.9% 1.1% 21.5% (1.7)%
ACCO Brands EMEA 34.9% 8.0% 6.8% 20.1%
ACCO Brands International 1.8% 5.4% 4.4% (8.0)%
Total 21.7% 3.8% 14.2% 3.7%© Edgar Online, source
