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, manufactures, and markets 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®, and TruSens®. Approximately 70 percent of our 2021 net 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$1.5 billion of our 2021 net sales. We distribute our products through a wide variety of 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 ,Australia ,Canada ,Brazil andMexico . We have transformed our business by investing in innovative branded consumer and technology products for use in businesses, schools, and homes, both organically and through acquisitions. This change should enable us to continue to organically grow sales and increase profitability by focusing our selling efforts on growing channels, as well as strategically managing declining customers and commoditized product categories, which remain important profit and cash generators. Our top five customers represented 36 percent of our sales in 2021.
Our business is consumer- and brand-centric, product differentiated, and
geographically diverse.
We have made five major acquisitions over the past six 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. We believe that these acquisitions have cumulatively set us up to achieve organic growth in the long-term. Historically, our approach to acquisitions has focused on consolidation and geographic expansion opportunities that met our strategic and financial criteria. Strategically, we have targeted categories or geographies that provided opportunities for growth, leading brands, and channel diversity. More recently we have prioritized debt reduction, but will still consider opportunistic acquisitions that focus on growing product categories, including adjacencies. Our most recent acquisition of PowerA in late 2020 allowed us to enter the attractive product category of third-party video gaming accessories, including controllers, power charging stations, and headsets. The addition of PowerA has meaningfully improvedACCO Brands' potential for sustained organic sales growth and profitability and reinforced our presence in the faster growing mass and e-commerce channels. The Company plans to expand this business internationally, particularly inEurope andAsia , adding to organic growth over the longer term. PowerA® and Kensington® are our largest and fastest growing brands. Our leading product category positions provide the scale to invest in marketing and product innovation to drive sustainable profitable growth. We expect to grow in mature markets in the gaming, technology, and branded school and office categories. We also anticipate ongoing sales recovery as the level of office use and in person education continues to increase globally.
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.
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--------------------------------------------------------------------------------Overview of Performance
During the third quarter our net sales decreased$41.1 million , or 7.8 percent, including 5.7 percent from adverse foreign exchange. Comparable net sales decreased 2.1 percent. Price increases added 8.7 percent while volume declined 10.8 percent. Our EMEA andNorth America segments reported sales declines of 19.1 percent and 10.5 percent, respectively, which was partially offset by 25.6 percent sales growth in our International segment. Sales declines were due to lower demand from retailers being more cautious about replenishing their inventory and the challenging macroeconomic conditions in many countries, especially within EMEA. In the third quarter, we reported an operating loss of$63.0 million , a$101.6 million decrease, compared with operating income of$38.6 million for the prior year's third quarter. The decline in operating results was primarily due to a non-cash goodwill impairment charge of$98.7 million for ourNorth America reporting unit. Our operating results were also negatively affected by higher inflation that was not fully mitigated with price increases, lower volume, and adverse foreign exchange of$1.9 million , partially offset by lower incentive compensation expense. Gross margin declined 150 basis points reflecting the margin erosion from higher costs despite multiple price increases, which was particularly acute in EMEA. We have been experiencing substantial levels of inflation in our cost of products. We have responded, and will continue to respond, by increasing selling prices more frequently than we have historically, but these increases continue to lag the cumulative impact of inflation. We expect inflationary pressures and supply chain disruptions to continue to impact our results for the remainder of the year.
Our operating cash flow for the first nine months was a use of cash of
We have seen most foreign currencies significantly weaken against theU.S. dollar which has also adversely affected the sales, profitability and cash flow of our foreign operations which transact business in their local currency. We expect foreign currency fluctuations to continue to adversely impact our results. Approximately 53 percent of our net sales for the nine months endedSeptember 30, 2022 , 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. 30 -------------------------------------------------------------------------------- Consolidated Results of Operations for the Three and Nine Months EndedSeptember 30, 2022 and 2021 Three Months Ended Nine Months Ended September 30, Amount of Change September 30, Amount of Change (in millions, except per share data) 2022 2021 $ %/pts 2022 2021 $ %/pts Net sales$ 485.6 $ 526.7 $ (41.1) (7.8)%$ 1,448.2 $ 1,455.0 $ (6.8) (0.5)% Cost of products sold 348.2 369.5 (21.3) (5.8)% 1,041.2 1,018.2 23.0 2.3 % Gross profit 137.4 157.2 (19.8) (12.6)% 407.0 436.8 (29.8) (6.8)% Gross profit margin 28.3 % 29.8 % (1.5) pts 28.1 % 30.0 % (1.9) pts Selling, general and administrative expenses 93.9 101.8 (7.9) (7.8)% 284.3 293.5 (9.2) (3.1)% SG&A% to net sales 19.3 % 19.3 % - pts 19.6 % 20.2 % (0.6) pts Amortization of intangibles 9.9 11.6 (1.7) (14.7)% 31.5 35.2 (3.7) (10.5)% Restructuring charges 0.1 0.3 (0.2) (66.7)% 2.3 4.2 (1.9) (45.2)% Goodwill impairment 98.7 - 98.7 NM 98.7 - 98.7 NM Change in fair value of contingent consideration (2.2) 4.9 (7.1) NM (9.0) 16.5 (25.5) NM Operating (loss) income (63.0) 38.6 (101.6) NM (0.8) 87.4 (88.2) NM Operating (loss) income margin (13.0)% 7.3 % (20.3) pts (0.1)% 6.0 % (6.1) pts Interest expense 12.1 11.2 0.9 8.0 % 32.6 36.0 (3.4) (9.4)% Interest income (2.6) (0.6) (2.0) NM (6.2) (1.2) (5.0) NM Non-operating pension income (0.5) (2.3) 1.8 (78.3)% (3.2) (5.6) 2.4 (42.9)% Other (income) expense, net (7.4) 0.1 (7.5) NM (10.2) 4.0 (14.2) NM (Loss) income before income tax (64.6) 30.2 (94.8) NM (13.8) 54.2 (68.0) NM Income tax expense 4.1 10.0 (5.9) (59.0)% 18.2 5.8 12.4 213.8 % Effective tax rate (6.3)% 33.1 % (39.4) pts (131.9)% 10.7 % (142.6) pts Net (loss) income (68.7) 20.2 (88.9) NM (32.0) 48.4 (80.4) NM Weighted average number of diluted shares outstanding: 94.5 97.3 (2.8) (2.9)% 95.6 97.0 (1.4) (1.4)% Diluted (loss) income per share$ (0.73) $ 0.21 $ (0.94) NM$ (0.33) $ 0.50 $ (0.83) NM Comparable net sales (Non-GAAP)?¹?$ 515.5 $ 526.7 $ (11.2) (2.1)%$ 1,516.6 $ 1,455.0 $ 61.6 4.2 % (1)
See reconciliation to GAAP, contained in Part I, Item 2. "Supplemental Non-GAAP Financial Measure."
Net Sales For the three months endedSeptember 30, 2022 , our net sales decreased$41.1 million , or 7.8 percent, including$29.9 million , or 5.7 percent, from adverse foreign exchange. Comparable net sales decreased 2.1 percent. The sales decline was driven by lower volume, which was down 10.8 percent, due to lower demand from retailers being more cautious about replenishing their inventory as well as challenging macroeconomic conditions in many countries, especially within EMEA. The volume decline was partially offset by price increases which added 8.7 percent and volume growth in our International segment. For the nine months endedSeptember 30, 2022 , net sales decreased$6.8 million , or 0.5 percent, including$68.4 million , or 4.7 percent, from adverse foreign exchange. Comparable net sales increased 4.2 percent. The sales decline was driven by lower volume which was down 3.6 percent, partially offset by higher prices which added 7.8 percent. The decline in volume was driven by lower demand, the challenging macroeconomic conditions within our EMEA segment, and lower sales of gaming accessories in ourNorth America segment. This was partially offset by increased volume in our International segment, primarily inLatin America from a return to in-person education.
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, 2022 , cost of products sold decreased$21.3 million , or 5.8 percent, as inflationary cost increases related to logistics, purchased finished goods and raw materials were more than offset by lower volume. Foreign exchange reduced cost of products sold$22.1 million , or 6.0 percent. 31 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2022 , cost of products sold increased$23.0 million , or 2.3 percent, primarily due to inflation related to logistics, purchased finished goods and raw materials. Foreign exchange reduced cost of products sold$50.8 million , or 5.0 percent.
Gross Profit
For the three months endedSeptember 30, 2022 , gross profit decreased$19.8 million , or 12.6 percent. Gross profit margin declined 150 basis points. The reduction in gross profit and gross profit margin is primarily due to the cumulative incremental inflationary costs exceeding our sales price increases, and lower volume. Foreign exchange reduced gross profit$7.8 million , or 5.0 percent. For the nine months endedSeptember 30, 2022 , gross profit decreased$29.8 million , or 6.8 percent. Gross profit margin decreased 190 basis points. The reduction in gross profit and gross profit margin is primarily due to the cumulative incremental inflationary costs exceeding our sales price increases, which was partially offset by a$3.0 million step-up charge related to the acquisition of PowerA which did not repeat. Foreign exchange reduced gross profit$17.6 million , or 4.0 percent.
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).
For the three months endedSeptember 30, 2022 , SG&A decreased$7.9 million , or 7.8 percent, primarily due to the favorable impact of foreign exchange which reduced SG&A by$5.4 million , or 5.3 percent. Excluding foreign exchange, expenses were slightly down with lower administrative expense, including lower incentive compensation costs, partially offset by increased sales and marketing expense. SG&A as a percentage of net sales was flat. For the nine months endedSeptember 30, 2022 , SG&A decreased$9.2 million , or 3.1 percent, primarily due to the favorable impact of foreign exchange which reduced SG&A by$12.2 million , or 4.2 percent. Excluding foreign exchange, expenses were slightly up due to increased sales and marketing expense and$0.8 million of additional operating expenses related to our Russian business. SG&A as a percentage of net sales decreased due to a higher rate of cost reduction on lower sales. Restructuring Charges For the three and nine months endedSeptember 30, 2022 , restructuring expense decreased$0.2 million and$1.9 million , respectively compared to prior year. Cost reduction programs in the prior year were primarily related to severance costs inNorth America .
Change in Fair Value of Contingent Consideration
For the three and nine months endedSeptember 30, 2022 , the change in fair value of contingent consideration related to the earnout for the PowerA acquisition was a favorable change of$7.1 million and$25.5 million , respectively, due to the reversal of prior period accruals. The PowerA operations have been adversely impacted by a combination of factors that have reduced the expected financial results for the current year. We expect no additional earnout payments will be made. Goodwill Impairment For the three and nine months endedSeptember 30, 2022 , we recorded a non-cash goodwill impairment charge of$98.7 million for ourNorth America reporting unit. Our goodwill balance could be at risk of further impairment if operating performance does not improve as expected.
See "Note 8.
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--------------------------------------------------------------------------------Operating (Loss) Income
For the three months endedSeptember 30, 2022 , operating loss was$63.0 million compared to operating income of$38.6 million in the prior year, primarily due to the non-cash goodwill impairment charge of$98.7 million for ourNorth America reporting unit. The decrease of$101.6 million also reflects lower gross profit, partially offset by a favorable change in our contingent earnout expense, lower SG&A expense, and a decrease in amortization of$1.7 million . Adverse foreign exchange reduced operating income by$1.9 million . For the nine months endedSeptember 30, 2022 , operating loss was$0.8 million compared to operating income of$87.4 million in the prior year, primarily due to the non-cash goodwill impairment charge of$98.7 million for ourNorth America reporting unit. The decrease of$88.2 million also included the favorable change in our contingent earnout expense, a decrease in amortization of$3.7 million , a decrease in restructuring expense of$1.9 million , and the decrease of SG&A expense. Adverse foreign exchange reduced operating income by$4.1 million . Interest Expense
For the nine months ended
Other (Income) Expense, Net
For the three months ended
For the nine months endedSeptember 30, 2022 , other (income) expense, net increased$14.2 million primarily due to charges of$13.5 million related to the refinancing of our debt in the prior year's first half that did not recur, and an increase in Brazilian operating tax credits of$2.0 million in the current year compared to the prior year.
Income Tax Expense
For the three months endedSeptember 30, 2022 , we recorded income tax expense of$4.1 million on a loss before taxes of$64.6 million . This reflects no income tax benefit on the non-deductible goodwill impairment charge of$98.7 million . This compared with an income tax expense of$10.0 million on income before taxes of$30.2 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , we recorded income tax expense of$18.2 million on a loss before taxes of$13.8 million . This reflects no income tax benefit on the non-deductible goodwill impairment charge of$98.7 million . This compared with an income tax expense of$5.8 million on income before taxes of$54.2 million for the nine months endedSeptember 30, 2021 .
See "Note 10. Income Taxes" for more information.
Net (Loss) Income/Diluted (Loss) Income per Share
For the three months endedSeptember 30, 2022 , net loss was$68.7 million compared to net income of$20.2 million in the prior year, primarily due to the non-cash goodwill impairment charge of$98.7 million , partly offset by higher operating tax credits inBrazil and a lower tax rate.
For the nine months ended
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Segment
ACCO Brands North America Three Months Ended Nine Months EndedSeptember 30 , Amount of Change
(in millions) 2022 2021 $ %/pts 2022 2021 $ %/pts
Net sales $ 257.2 $ 287.5 $ (30.3) (10.5)% $ 772.3 $ 771.4 $ 0.9 0.1 %
Segment operating
(loss) income?¹? (78.4) 34.6 (113.0) NM (13.8) 87.7 (101.5) NM
Segment operating
(loss) income margin -30.5% 12.0 % NM -1.8% 11.4 % NM
Comparable net sales
(Non-GAAP)?²? $ 258.5 $ 287.5 $ (29.0) (10.0)% $ 775.0 $ 771.4 $ 3.6 0.5 %
(1)
Segment operating income excludes corporate costs. See "Part I, Item 1. Note 16.
Information on Business Segments," for a reconciliation of total "Segment
operating (loss) income" to "(Loss) income before income tax."
(2)
See reconciliation to GAAP contained in Part I, Item 2. "Supplemental Non-GAAP
Financial Measure."
2022 3rd QTR Avg vs. 2021
FX Impact vs US$ 3rd QTR Avg 2022 YTD Avg vs. 2021 YTD Avg
Currency Increase/(Decline) Increase/(Decline)
Canadian dollar (3)% (2)%
For the three months ended September 30, 2022 , net sales decreased $30.3
million , or 10.5 percent. Lower volume of $45.2 million , or 15.7 percent, was
primarily due to lower demand from retailers being more cautious about
replenishing their inventory, and lower sales of gaming accessories which
continue to be impacted by semiconductor chip shortages and lower industry-wide
demand. The lower volume was partially offset by price increases which added
$16.1 million , or 5.6 percent, and higher sales of computer accessories.
For the nine months ended September 30, 2022 , net sales increased $0.9 million ,
or 0.1 percent. Sales price increases added $49.5 million , or 6.4 percent, and
were partly offset by decreased volume of $46.0 million , or 6.0 percent. The
volume decline is primarily due to lower sales of gaming accessories reflecting
the continued impact of semiconductor chip shortages and lower industry-wide
demand. The lower sales of gaming accessories were partly offset by increases in
sales of business and school products and computer accessories.
For the three months ended September 30, 2022 , operating loss was $78.4 million
compared to operating income of $34.6 million , primarily due to the non-cash
goodwill impairment charge of $98.7 million . The decrease in operating results
and operating margin was also impacted by lower sales volume, and higher
inflation on purchased finished goods and transportation, and increased sales
and marketing expense.
For the nine months ended September 30, 2022 , operating loss was $13.8 million
compared to operating income of $87.7 million , primarily due to the non-cash
goodwill impairment charge of $98.7 million . The decrease in operating results
and operating margin was also impacted by lower sales volume, which was partly
offset by lower restructuring charges of $1.6 million . The prior period also
included $3.0 million of inventory step-up related to PowerA which did not
repeat.
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ACCO Brands EMEA
Three Months Ended Nine Months Ended
September 30, Amount of Change September 30, Amount of Change
(in millions) 2022 2021 $ %/pts 2022 2021 $ %/pts
Net sales $ 130.3 $ 161.1 $ (30.8) (19.1)% $ 424.3 $ 475.0 $ (50.7) (10.7)%
Segment operating
income?¹? 4.9 13.4 (8.5) (63.4)% 9.0 40.1 (31.1) (77.6)%
Segment operating
income margin 3.8 % 8.3% -4.6 pts 2.1% 8.4% -6.3 pts
Comparable net sales
(Non-GAAP)?²? $ 154.4 $ 161.1 $ (6.7) (4.1)% $ 480.6 $ 475.0 $ 5.6 1.2 %
(1)
Segment operating income excludes corporate costs. See "Part I, Item 1. Note 16.
Information on Business Segments," for a reconciliation of total "Segment
operating (loss) income" to "(Loss) income before income tax."
(2)
See reconciliation to GAAP contained in Part I, Item 2. "Supplemental Non-GAAP
Financial Measure."
2022 3rd QTR Avg vs. 2021
FX Impact vs US$ 3rd QTR Avg 2022 YTD Avg vs. 2021 YTD Avg
Currency Increase/(Decline) Increase/(Decline)
Euro (15)% (11)%
Swedish krona (18)% (14)%
British pound (15)% (9)%
For the three months ended September 30, 2022 , net sales decreased $30.8
million , or 19.1 percent, including $24.1 million , or 15.0 percent, from adverse
foreign exchange. Comparable net sales decreased due to lower volume of $25.7
million , or 16.0 percent, partially offset by price increases which added $19.1
million , or 11.9 percent. In Europe , the current energy crisis and higher
inflation have created a challenging macroeconomic environment that has
negatively impacted the segment's sales.
For the nine months ended September 30, 2022 , net sales decreased $50.7 million ,
or 10.7 percent, including $56.3 million , or 11.9 percent of adverse foreign
exchange. Comparable net sales increased mainly due to price increases which
added $42.6 million , or 9.0 percent, but were partly offset by lower volume of
$36.9 million , or 7.8 percent, primarily from decreased sales of business
products driven by a challenging macroeconomic environment.
For the three months ended September 30, 2022 , the operating income decrease of
$8.5 million , or 63.4 percent, includes adverse foreign exchange of $1.2
million , or 9.0 percent. Operating income and operating margin were negatively
impacted by lower sales volume, negative fixed cost leverage, and cost inflation
that exceeded the benefit of price increases. Cost increases in EMEA have been
higher than in our other segments primarily due to significant inflation in
locally sourced raw materials and transportation costs. We expect inflationary
pressures and unfavorable foreign currency impacts to continue for the remainder
of the year. Consequently, additional price increases have been and will
continue to be taken as necessary.
For the nine months ended
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Three Months Ended Nine Months Ended
September 30, Amount of Change September 30, Amount of Change
(in millions) 2022 2021 $ %/pts 2022 2021 $ %/pts
Net sales $ 98.1 $ 78.1 $ 20.0 25.6 % $ 251.6 $ 208.6 $ 43.0 20.6 %
Segment operating
income?¹? 17.3 7.3 10.0 137.0 % 27.8 10.7 17.1 159.8 %
Segment operating
income margin 17.6% 9.3% 8.3 pts 11.0% 5.1% 5.9 pts
Comparable net sales
(Non-GAAP)?²?
(1)
Segment operating income excludes corporate costs. See "Part I, Item 1. Note 16.
Information on Business Segments," for a reconciliation of total "Segment
operating (loss) income" to "(Loss) income before income tax."
(2)
See reconciliation to GAAP contained in Part I, Item 2. "Supplemental Non-GAAP
Financial Measure."
2022 3rd QTR Avg vs. 2021
FX Impact vs US$ 3rd QTR Avg 2022 YTD Avg vs. 2021 YTD Avg
Currency Increase/(Decline) Increase/(Decline)
Brazilian real (0)% 4 %
Australian dollar (7)% (7)%
Mexican peso (1)% (1)%
Japanese yen (21)% (14)%
For the three months ended September 30, 2022 , net sales increased $20.0
million , or 25.6 percent, including adverse foreign exchange of $4.5 million , or
5.8 percent. Comparable net sales increased due to increased volume of $13.9
million , or 17.8 percent, due to a return to in-person education, particularly
in Latin America , and higher prices which added $10.6 million or 13.6 percent.
For the nine months ended September 30, 2022 , net sales increased $43.0 million ,
or 20.6 percent, including adverse foreign exchange of $9.4 million , or 4.5
percent. Comparable net sales increased primarily due to increased volume of
$30.4 million , or 14.6 percent, due to a return to in-person education,
particularly in Latin America , and price increases which added $22.0 million , or
10.6 percent.
For the three months ended September 30, 2022 , operating income increased $10.0
million , or 137.0 percent. The $10.0 million increase in operating income and
improved operating margin were due to higher sales, improved expense leverage, a
reduction of bad debt expense, and a reduction in operating tax reserves.
Foreign exchange decreased operating income $0.6 million .
For the nine months ended September 30, 2022 , operating income increased $17.1
million , or 159.8 percent. The $17.1 million increase in operating income and
improved operating margin were due to higher sales, the benefit of long-term
cost reductions, and reductions in the reserves for operating taxes, bad debts,
and obsolete inventory. Foreign exchange reduced operating income $1.4 million .
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, 2022 , there was$173.9 million in borrowings outstanding under the Revolving Facility ($4.9 million reported in "Current portion of long-term debt" and$169.0 million reported in "Long-term debt, net"), and the amount available for borrowings was$417.1 million (allowing for$9.0 million of letters of credit outstanding on that date). We had$78.0 million in cash on hand. We maintain adequate financing arrangements at market rates. As ofSeptember 30, 2022 , our Consolidated Leverage Ratio was approximately 3.91 to 1.00 versus our maximum covenant of 4.00 to 1.00. We have no debt maturities beforeMarch 2026 .
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.
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During the second quarter of 2022, we made a contingent payment of
The$507.0 million of debt currently outstanding under our senior secured credit facilities has a weighted average interest rate of 4.02 percent as ofSeptember 30, 2022 , and the$575.0 million outstanding principal amount of our senior unsecured notes due 2029 has a fixed interest rate of 4.25 percent. EffectiveNovember 7, 2022 , we entered into an amendment to our bank credit agreement, which increases our maximum Consolidated Leverage Ratio financial covenant, beginning with the fourth quarter of 2022 throughDecember 2023 and the first and second quarters of each year thereafter, and favorably amends several other items.
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 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$0.1 million and$2.3 million for the three and nine months endedSeptember 30, 2022 , respectively, primarily related to the Company's cost reduction programs representing expected severance costs mainly inNorth America . Additional charges were also taken in EMEA. For additional details, see "Note 9. Restructuring" to the condensed consolidated financial statements contained in "Part I, Item 1. Financial Information" of this Quarterly Report on Form 10-Q.
Cash Flow for the Nine Months Ended
Cash Flow from Operating Activities
Cash used by operating activities during the nine months endedSeptember 30, 2022 was$9.6 million , an increase in cash used of$53.6 million compared to cash provided by operating activities of$44.0 million during the prior year's first nine months. The increase in cash used by operating activities was primarily driven by lower net income of$80.4 million , partially offset by non-cash add backs of$57.4 million , primarily driven by a goodwill impairment charge and a decrease in the PowerA contingent earnout. Cash used was also up due to higher annual incentive payments of$28.4 million , a contingent earnout payment of$9.2 million , and an increase in cash used for customer programs and income taxes, partially offset by lower investments in net working capital of$26.5 million .
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) 2022 2021 Change
Accounts receivable $ 48.8 $ (18.3 ) $ 67.1
Inventories (20.9 ) (116.2 ) 95.3
Accounts payable (80.8 ) 55.1 (135.9 )
Cash flow used by net working capital $ (52.9 ) $ (79.4 ) $ 26.5
•
Accounts receivable was a source of cash of $48.8 million during the nine months
ended September 30, 2022 , a favorable change of $67.1 million compared to a use
of cash of $18.3 million during the nine months ended September 30, 2021 . The
$67.1 million favorable change was due to increased recovery of past due
accounts and increased collections on a higher level of accounts receivable,
primarily because the prior year included minimal collections related to gaming
accessories as we did not purchase the outstanding accounts receivable at the
closing of the acquisition of PowerA.
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Inventories was a use of cash of$20.9 million during the nine months endedSeptember 30, 2022 , a favorable change of$95.3 million when compared with the$116.2 million cash used during the nine months endedSeptember 30, 2021 . The favorable change was primarily driven by a reduction in inventory levels when compared to the prior year during which significant safety stock was purchased to mitigate supply chain issues.
•
Accounts payable was a use of cash of$80.8 million during the nine months endedSeptember 30, 2022 , an unfavorable change of$135.9 million when compared to a source of cash of$55.1 million during the nine months endedSeptember 30, 2021 . The$135.9 million unfavorable change was due to increased payments on a higher level of accounts payable, driven by higher accounts payable at the end of the prior year primarily associated with the timing of inventory purchases noted above, and increased accounts payable related to gaming accessories.
Cash Flow from Investing Activities
Cash used by investing activities was$11.6 million and cash provided by investing activities was$1.5 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Cash used for capital expenditures was down by$2.1 million . Cash provided by acquisitions decreased by$15.4 million primarily because the prior year period included a working capital adjustment received from the seller of PowerA that did not recur.
Cash Flow from Financing Activities
Cash provided by financing activities was$58.3 million for the nine months endedSeptember 30, 2022 , an increase of$80.8 million , compared with cash used of$22.5 million by financing activities during the first nine months of the prior year. The increase of$80.8 million primarily relates to an increase in cash provided by our incremental net borrowings of$100.3 million during the first nine months of 2022, compared to the prior year's first nine months. In addition, there were cash outflows of$20.3 million related to our debt refinancing during the first nine months of 2021. Partly offsetting the cash provided by financing activities was uses of cash for share repurchases of$19.4 million , and a contingent earnout payment of$17.8 million .
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.
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 sales. Comparable 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 sales as comparable net sales. We use comparable 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 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 sales should not be considered in isolation or as a substitute for, or superior to, GAAP net sales and should be read in connection with the Company's financial statements presented in accordance with GAAP. 38 --------------------------------------------------------------------------------
The following tables provide a reconciliation of GAAP net sales change as reported to non-GAAP comparable sales change:
Comparable Net Sales - Three Months Ended September 30, 2022
Non-GAAP
GAAP Currency Comparable
(in millions) Net Sales Translation Net Sales
ACCO Brands North America $ 257.2 $ (1.3) $ 258.5
ACCO Brands EMEA 130.3 (24.1) 154.4
ACCO Brands International 98.1 (4.5) 102.6
Total $ 485.6 $ (29.9) $ 515.5
Amount of Change - Three Months Ended September 30, 2022
compared to the Three Months Ended September 30, 2021
$ Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
(in millions) Change Translation Change
ACCO Brands North America $ (30.3) $ (1.3) $ (29.0)
ACCO Brands EMEA (30.8) (24.1) (6.7)
ACCO Brands International 20.0 (4.5) 24.5
Total $ (41.1) $ (29.9) $ (11.2)
% Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
Change Translation Change
ACCO Brands North America (10.5)% (0.5)% (10.0)%
ACCO Brands EMEA (19.1)% (15.0)% (4.1)%
ACCO Brands International 25.6% (5.8)% 31.4%
Total (7.8)% (5.7)% (2.1)%
Comparable Net Sales - Nine Months Ended September 30, 2022
Non-GAAP
GAAP Currency Comparable
(in millions) Net Sales Translation Net Sales
ACCO Brands North America $ 772.3 $ (2.7) $ 775.0
ACCO Brands EMEA 424.3 (56.3) 480.6
ACCO Brands International 251.6 (9.4) 261.0
Total $ 1,448.2 $ (68.4) $ 1,516.6
Amount of Change - Nine Months Ended September 30, 2022
compared to the Nine Months Ended September 30, 2021
$ Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
(in millions) Change Translation Change
ACCO Brands North America $ 0.9 $ (2.7) $ 3.6
ACCO Brands EMEA (50.7) (56.3) 5.6
ACCO Brands International 43.0 (9.4) 52.4
Total $ (6.8) $ (68.4) $ 61.6
% Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
Change Translation Change
ACCO Brands North America 0.1% (0.4)% 0.5%
ACCO Brands EMEA (10.7)% (11.9)% 1.2%
ACCO Brands International 20.6% (4.5)% 25.1%
Total (0.5)% (4.7)% 4.2%
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