ACCO BRANDS CORPORATION INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements ofACCO Brands Corporation and the accompanying notes contained in Item 8. of this report. The following discussion and analysis are for the year endedDecember 31, 2022 , compared with the same period in 2021 unless otherwise stated. For a discussion and analysis of the year endedDecember 31, 2021 compared with the same period in 2020, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Item 7. of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission (the "SEC") onFebruary 23, 2022 . Overview of the CompanyACCO Brands is a leading global consumer, technology and business branded products company, providing well-known brands and innovative product solutions used in schools, homes and at work. Recently we have successfully increased the mix of our sales to higher growth product categories and sales channels, including retail and mass merchants, e-tailers, and technology specialists. We have an experienced management team with a proven ability to grow brands, integrate acquisitions, manage seasonal businesses, run lean organizations and navigate challenging environments. Our products are sold primarily in theU.S. ,Europe ,Australia ,Canada ,Brazil andMexico .ACCO Brands has three operating business segments based in different geographic regions:North America , EMEA, and International. Each business segment designs, markets, sources, manufactures, and sells recognized consumer, technology and business branded products used in schools, homes and at work. Product designs are tailored to end-user preferences in each geographic region, and where possible, leverage common engineering, design, and sourcing. Our product categories include gaming and computer accessories; storage and organization; notebooks; shredding; laminating and binding machines; stapling; punching; planners; dry erase boards; and do-it-yourself tools, among others. 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, and specialist technology businesses.
Overview of 2022 Financial Performance
Our net sales decreased$77.7 million , or 3.8 percent in 2022, including 4.6 percent from adverse foreign exchange. Comparable net sales increased 0.8 percent. Price increases added 8.0 percent while volume declined 7.2 percent. Our EMEA andNorth America segments reported sales declines of 12.5 percent and 4.3 percent, respectively, which was partially offset by 15.4 percent sales growth in our International segment. Volume declines reflect weaker sales of gaming accessories inNorth America , and lower demand in bothNorth America and EMEA due to the challenging macroeconomic environment in the second half. Operating income was$34.8 million compared to$151.0 million in 2021, with the decline primarily due to the non-cash goodwill impairment charge of$98.7 million related to theNorth America segment, partially offset by the favorable change in fair value of$28.0 million related to the PowerA contingent earnout. The decline in operating income also reflects the impact of inflation that exceeded the benefit of price increases and reduced volumes, partially offset by reduced SG&A expense, which includes lower incentive compensation expense. 23 -------------------------------------------------------------------------------- We reported a net loss of$13.2 million , or ($0.14 ) per share compared to net income of$101.9 million , or$1.05 per share in the prior year. The current year net loss reflects the decline in operating income which includes a non-cash goodwill impairment charge. Our operating cash flow for the year was cash provided of$77.6 million , compared to$159.6 million of cash provided in the prior year with the shortfall due to lower net income. Although down, our seasonal operating cash flow followed our historic pattern of outflow in the first half followed by strong inflows in both quarters of the second half. 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 impact our results. We experienced high levels of inflation in our cost of products that continued to escalate throughout the year. We responded by increasing our selling prices but typically the impact of price increases lag the inflationary increase. We expect the timing of inflation and pricing actions to continue to impact our results. Consolidated Results of Operations for the Years EndedDecember 31, 2022 and 2021 Year Ended December 31, Amount of Change (in millions, except per share data) 2022 2021 $ %/pts Net sales$ 1,947.6 $ 2,025.3 $ (77.7) (3.8)% Cost of products sold 1,395.3 1,410.4 (15.1) (1.1)% Gross profit 552.3 614.9 (62.6) (10.2)% Gross profit margin 28.4 % 30.4 % (2.0) pts Selling, general and administrative expenses 376.7 392.6 (15.9) (4.0)% SG&A% to net sales 19.3 % 19.4 % (0.1) pts Amortization of intangibles 41.5 46.3 (4.8) (10.4)% Restructuring charges 9.6 6.0 3.6 60.0 % Goodwill impairment 98.7 - 98.7 NM Change in fair value of contingent consideration (9.0) 19.0 (28.0)
NM
Operating income 34.8 151.0 (116.2)
(77.0)%
Operating (loss) income margin 1.8 % 7.5 % (5.7) pts Interest expense 45.6 46.3 (0.7) (1.5)% Interest income (8.3) (1.9) (6.4) NM Non-operating pension income (4.5) (7.9) 3.4 (43.0)% Other (income) expense, net (12.9) 3.1 (16.0) NM Income before income tax 14.9 111.4 (96.5) (86.6)% Income tax expense 28.1 9.5 18.6 NM Effective tax rate 188.6 % 8.5 % 180.1 pts Net (loss) income (13.2) 101.9 (115.1) NM Weighted average number of diluted shares outstanding: 95.3 97.1 (1.8)
(1.9)%
Diluted income per share$ (0.14) $ 1.05 $ (1.19)
NM
Comparable net sales (Non-GAAP)
0.8 %Net Sales For the year endedDecember 31, 2022 , net sales decreased$77.7 million , or 3.8 percent. Adverse foreign exchange reduced sales$93.9 million , or 4.6 percent. Comparable net sales increased 0.8 percent. Higher prices across all segments, which added 8.0 percent, were partly offset by lower sales volume of 7.2 percent. The lower volume was driven byNorth America and EMEA due to challenging macroeconomic conditions in the second half, and lower demand for gaming accessories inNorth America , partly offset by higher sales volume in International. 24 --------------------------------------------------------------------------------
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 year endedDecember 31, 2022 , cost of products sold decreased$15.1 million , or 1.1 percent, due to foreign exchange and reduced sales, partially offset by increased inflation specifically related to inbound and outbound freight, purchased finished goods and raw materials. Foreign exchange reduced cost of products sold$69.6 million , or 4.9 percent.
Gross Profit
For the year endedDecember 31, 2022 , gross profit decreased$62.6 million , or 10.2 percent. Gross profit margin decreased 200 basis points. The reduction in gross profit reflects the decline in sales volume. The decrease in the gross profit margin is primarily due to the cumulative impact of inflationary costs which exceeded our sales price increases. Foreign exchange reduced gross profit$24.3 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 year ended
Restructuring Charges
For the year endedDecember 31, 2022 , restructuring charges were$9.6 million compared with$6.0 million in 2021. The current year restructuring expense was primarily for severance costs inNorth America and EMEA related to cost reduction initiatives. Prior year restructuring expense was primarily related to severance costs inNorth America and International.
Change in Fair Value of Contingent Consideration
For the year endedDecember 31, 2022 , the change in fair value of contingent consideration related to the earnout for the PowerA acquisition was a favorable change of$28.0 million , due to the reversal of prior period accruals. The PowerA financial results did not warrant any additional earnout payments.
Goodwill Impairment
For the twelve months endedDecember 31, 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 is not as expected.
See "Note 10.
25
--------------------------------------------------------------------------------Operating Income
For the year endedDecember 31, 2022 , operating income decreased$116.2 million to$34.8 million compared to$151.0 million in the prior year, primarily due to the non-cash goodwill impairment charge of$98.7 million for ourNorth America reporting unit, partly offset by the favorable change in our contingent earnout expense of$28.0 million . The decrease reflects the lower gross profit, higher restructuring expense and adverse foreign exchange of$6.3 million . This was partially offset by lower SG&A expenses.
Interest (Income) Expense
For the year endedDecember 31, 2022 , interest income increased$6.4 million due to higher cash balances and increased interest rates inBrazil . Interest expense was similar to prior year with significantly higher rates on our variable debt mitigated by the impact of lower rates due to the bond refinancing.
Other (Income) Expense, Net
For the year ended
Income Tax Expense
For the year endedDecember 31, 2022 , we recorded income tax expense of$28.1 million on income before taxes of$14.9 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$9.5 million on income before taxes of$111.4 million for the twelve months endedDecember 31, 2021 which included a$15.5 million benefit from the reversal of a valuation allowance.
See "Note 12. Income Taxes" to the Consolidated Financial Statements contained in Part II, Item 8. of this report for more information.
Net (Loss) Income/Diluted (Loss) Income per Share
For the year endedDecember 31, 2022 , net loss was$13.2 million , or ($0.14 ) per share, compared to net income of$101.9 million , or$1.05 per share, in the prior year. The current year net loss reflects the decline in operating income which includes a non-cash goodwill impairment charge. SegmentNet Sales and Operating Income for the Years EndedDecember 31, 2022 and 2021ACCO Brands North America Year Ended December 31, Amount of Change (in millions) 2022 2021 $ %/pts Net sales$ 998.0 $ 1,042.4 $ (44.4) (4.3)% Segment operating income?¹? (4.9) 121.9 (126.8) NM Segment operating (loss) income margin (0.5)% 11.7 %
NM
Comparable net sales (Non-GAAP)?²?
26
--------------------------------------------------------------------------------(1)
Segment operating income forNorth America includes goodwill impairment charges but excludes corporate costs. See "Note 18. Information on Business Segments" to the consolidated financial statements contained in Part II, Item 8. of this report for a reconciliation of total "Segment operating income" to "Income before income tax." (2) See reconciliation to GAAP, contained in Part II, Item 7. "Supplemental Non-GAAP Financial Measures" of this report. For the year endedDecember 31, 2022 , net sales decreased$44.4 million , or 4.3 percent. Decreased volume of$100.5 million , or 9.6 percent, was partly offset by sales price increases which added$60.3 million , or 5.8 percent. The volume decline is primarily due to lower sales of gaming accessories from lower industry-wide demand and the continued impact of semiconductor chip shortages. The lower sales of gaming accessories were partly offset by increases in sales of business and school products and computer accessories. Sales were also negatively impacted by lower inventory replenishment by our retailer customers during the second half of the year due to the challenging macroeconomic environment. For the year endedDecember 31, 2022 , operating loss was$4.9 million compared to operating income of$121.9 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 raw materials, finished goods and inbound and outbound freight costs. ACCO Brands EMEA Year Ended December 31, Amount of Change (in millions) 2022 2021 $ %/pts Net sales$ 580.3 $ 662.9 $ (82.6) (12.5)% Segment operating income?¹? 21.7 61.7 (40.0) (64.8)% Segment operating income margin 3.7% 9.3% -5.6
pts
Comparable net sales (Non-GAAP)?²?
(1)
Segment operating income excludes corporate costs. See "Note 18. Information on Business Segments" to the consolidated financial statements contained in Part II, Item 8. of this report for a reconciliation of total "Segment operating income" to "Income before income tax." (2) See reconciliation to GAAP, contained in Part II, Item 7. "Supplemental Non-GAAP Financial Measures" of this report. For the year endedDecember 31, 2022 , net sales decreased$82.6 million , or 12.5 percent. Adverse foreign exchange reduced sales by$78.2 million , or 11.8 percent. Comparable net sales decreased 0.7 percent, reflecting lower volume of$67.0 million , or 10.1 percent, primarily from reduced demand for business products due to a challenging macroeconomic environment. Price increases partly offset the lower volume, adding$62.7 million , or 9.5 percent. For the year endedDecember 31, 2022 , operating income decreased$40.0 million , or 64.8 percent. Adverse foreign exchange reduced operating income by$4.8 million , or 7.8 percent. Operating income and operating margin decreased due to lower sales volume, higher costs for raw materials and freight due to inflation that exceeded the impact of price increases and negative fixed cost leverage.ACCO Brands International Year Ended December 31, Amount of Change (in millions) 2022 2021 $ %/pts Net sales$ 369.3 $ 320.0 $ 49.3 15.4 % Segment operating income?¹? 50.5 31.6 18.9 59.8 % Segment operating income margin 13.7% 9.9% 3.8
pts
Comparable net sales (Non-GAAP)?²?
27
--------------------------------------------------------------------------------(1)
Segment operating income excludes corporate costs. See "Note 18. Information on Business Segments" to the consolidated financial statements contained in Part II, Item 8. of this report for a reconciliation of total "Segment operating income" to "Income before income tax." (2) See reconciliation to GAAP, contained in Part II, Item 7. "Supplemental Non-GAAP Financial Measures" of this report. For the year endedDecember 31, 2022 , net sales increased$49.3 million , or 15.4 percent. Adverse foreign exchange reduced sales$11.4 million , or 3.6 percent. Comparable net sales increased 19.0 percent, due to price increases, which added$38.9 million or 12.2 percent, and increased volume of$21.7 million , or 6.8 percent, primarily inLatin America due to a return to in-person education and work.
For the year ended
Liquidity and Capital Resources
Our primary liquidity needs are to support our working capital requirements, service indebtedness and fund capital expenditures, dividends, repurchase stock, 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 ofDecember 31, 2022 , there was$72.8 million in borrowings outstanding under the Revolving Facility ($23.6 million reported in "Current portion of long-term debt" and$49.2 million reported in "Long-term debt, net"), and the amount available for borrowings was$517.8 million (allowing for$9.4 million of letters of credit outstanding on that date). We had$62.2 million cash on hand as ofDecember 31, 2022 . EffectiveNovember 7, 2022 , we entered into an amendment to our bank credit agreement, which increases our maximum consolidated leverage ratio financial covenant ("Consolidated Leverage Ratio"), beginning with the fourth quarter of 2022 throughDecember 2023 and for the first and second quarters of each year thereafter, and favorably amends several other items. As ofDecember 31, 2022 , our Consolidated Leverage Ratio was approximately 4.16 to 1.00 versus our maximum covenant of 4.50 to 1.00. We have no debt maturities beforeMarch 2026 . The$429.9 million of debt currently outstanding under our senior secured credit facilities has a weighted average interest rate of 4.90 percent as ofDecember 31, 2022 , and the$575.0 million outstanding principal amount of our senior unsecured notes dueMarch 2029 ("Senior Unsecured Notes") has a fixed interest rate of 4.25 percent. 28 --------------------------------------------------------------------------------
Summary of Cash Flow by Quarter and Full-Year for 2022 and 2021
2022
(in millions) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
Net cash (used) provided by
operating activities: $ (104.2) $ 6.3 $
88.3
Net cash (used) provided by investing activities: (3.4) (3.4) (4.8) 2.3 (9.3) Net cash provided (used) by financing activities: 153.5 0.4 (95.6) (106.6) (48.3) Effect of foreign exchange rate changes on cash and cash equivalents 4.2 (2.9) (1.6) 1.3 1.0 Net increase (decrease) in cash and cash equivalents$ 50.1 $ 0.4$ (13.7) $ (15.8) $ 21.0 2021 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year Net cash (used) provided by operating activities:$ (42.4) $ (12.7) $
99.1
Net cash provided (used) by investing activities: 14.4 (8.3)
(4.6) (7.3) (5.8)
Net cash provided (used) by financing activities: 68.3 21.9 (112.7) (124.7) (147.2) Effect of foreign exchange rate changes on cash and cash equivalents (1.8) 1.9 (1.6) (0.5) (2.0) Net increase (decrease) in cash and cash equivalents$ 38.5 $ 2.8$ (19.8) $ (16.9) $ 4.6 Because of the seasonality of our business, all our operating cash flow is generated in the second half of the year, as the cash inflows in the first and second quarters are consumed building working capital and for making our annual performance-based compensation payments, when earned. Our third and fourth quarter cash flow comes from completing the working capital cycle. Although down, our 2022 operating cash flow followed our historical seasonal pattern. Consolidated cash and cash equivalents were$62.2 million as ofDecember 31, 2022 , approximately$43.3 million of which was held inBrazil . Our Brazilian business is highly seasonal due to the timing of the back-to-school season, which coincides with the calendar year-end in the fourth quarter. Due to various tax laws, it is costly to transfer short-term working capital in and out ofBrazil ; therefore, our normal practice is to hold seasonal cash requirements inBrazil and invest them in short-term Brazilian government securities.
Debt
EffectiveNovember 7, 2022 , the Company entered into a Sixth Amendment (the "Sixth Amendment") to its Third Amended and Restated Credit Agreement, as amended, among the Company, certain subsidiaries of the Company,Bank of America, N.A ., as administrative agent, and the other lenders party thereto (the "Credit Agreement"). Pursuant to the Sixth Amendment, the Credit Agreement was amended to, among other things:
•
increase the maximum Consolidated Leverage Ratio financial covenant from then current levels for each of the five fiscal quarters beginningDecember 31, 2022 , and endingDecember 31, 2023 , as follows: Quarter Ended Maximum Consolidated Leverage RatioDecember 2022 4.50:1.00March 2023 5.00:1.00June 2023 5.00:1.00September 2023 4.75:1.00December 2023 4.25:1.00 29
--------------------------------------------------------------------------------
•
modify the maximum Consolidated Leverage Ratio financial covenant for all first and second fiscal quarters afterDecember 31, 2023 , from the current level of 4.00x to 4.50x, while maintaining the current level of 4.00x for all third and fourth fiscal quarters;
•
limit the maximum Consolidated Leverage Ratio to 5.00:1.00 at any time, thereby capping any material acquisition step ups for the fiscal quarters endingMarch 31, 2023 ,June 30, 2023 andSeptember 30, 2023 ;
•
increase the Company's flexibility under the restricted payments baskets;
•
remove the anti-cash hoarding provision; and
•
change the
The current maturity of the Credit Agreement, as amended, is
Financial Covenants
As ofDecember 31, 2022 , our Consolidated Leverage Ratio was approximately 4.16 to 1.00 versus our maximum covenant of 4.50 to 1.00. Our Interest Coverage Ratio was approximately 6.56 to 1.00 versus the minimum covenant of 3.00 to 1.00.
Other Covenants and Restrictions
The Credit Agreement, as amended, contains customary affirmative and negative covenants as well as events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults, certain bankruptcy or insolvency events, certain ERISA-related events, changes in control or ownership and invalidity of any loan document. The Credit Agreement, as amended, also establishes limitations on the aggregate amount of Permitted Acquisitions and Investments (each as defined in the Credit Agreement, as amended) that the Company and its subsidiaries may make during the term of the Credit Agreement, as amended. As of and for the periods endedDecember 31, 2022 andDecember 31, 2021 , the Company was in compliance with all applicable loan covenants under its senior secured credit facilities and the Senior Unsecured Notes.
Guarantees and Security
Generally, obligations under the Credit Agreement, as amended, 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. For further information, see "Note 4. Long-term Debt and Short-term Borrowings" to the consolidated financial statements contained in Part II. Item 8. of this report.
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.
During the year endedDecember 31, 2022 , the Company recorded$9.6 million in restructuring expenses:$5.3 million of restructuring expense for ourNorth America segment;$3.4 million for our EMEA segment;$0.7 million for our International segment; and$0.2 million for Corporate. Restructuring charges in 2022 were primarily for severance costs related to cost reduction initiatives which are expected to generate approximately$13.0 million of savings in ourNorth America and EMEA 30 -------------------------------------------------------------------------------- segments, the majority of which will be realized in the next twelve months. For further information, see "Note 11. Restructuring" to the consolidated financial statements contained in Part II. Item 8. of this report. In addition, during the year endedDecember 31, 2021 , the Company recorded an aggregate$2.6 million in integration and transaction expenses related to the acquisitions of PowerA andForoni .
Cash Flow for the Years Ended
Cash Flow from Operating Activities
Cash provided by operating activities during the year endedDecember 31, 2022 was$77.6 million , a decrease of$82.0 million compared to cash provided by operating activities of$159.6 million during the prior year. The decrease in cash provided by operating activities was primarily driven by lower net income of$115.1 million , partially offset by non-cash add backs of$70.5 million , which includes a goodwill impairment charge. Cash provided by operating activities was also down due to higher annual incentive payments of$15.3 million , a contingent earnout payment of$9.2 million , an increase in cash used for customer programs, income taxes, and higher payments related to all other current and non-current liabilities, partially offset by lower investments in trade working capital of$67.0 million . The table below shows our cash flow provided (used) by accounts receivable, inventories and accounts payable for the years endedDecember 31, 2022 and 2021: Year Ended December 31, (in millions) 2022 2021 Amount of Change Accounts receivable$ 31.6 $ (77.6) $ 109.2 Inventories 23.2 (131.8) 155.0 Accounts payable (66.0) 131.2 (197.2)
Cash flow used by trade working capital
67.0
•
Accounts receivable was a source of cash of $31.6 million during the twelve
months ended December 31, 2022 , a favorable change of $109.2 million compared to
a use of cash of $77.6 million during the twelve months ended December 31, 2021 .
The $109.2 million favorable change was due to increased recovery of past due
accounts and a reduction of accounts receivable due to lower sales in the
current year. The prior year included an increase in accounts receivable due to
the acquisition of PowerA.
•
Inventories was a source of cash of $23.2 million during the twelve months ended
December 31, 2022 , a favorable change of $155.0 million when compared with the
$131.8 million cash used during the twelve months ended December 31, 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. These reductions are partly offset by higher
costs driven by inflation on raw materials and finished goods.
•
Accounts payable was a use of cash of $66.0 million during the twelve months
ended December 31, 2022 , an unfavorable change of $197.2 million when compared
to a source of cash of $131.2 million during the twelve months ended December
31, 2021 . The $197.2 million unfavorable change was due to lower inventory
purchases in 2022 and a higher level of accounts payable at the end of the prior
year.
31
--------------------------------------------------------------------------------Cash Flow from Investing Activities
Cash used by investing activities was$9.3 million and$5.8 million for the twelve months endedDecember 31, 2022 and 2021, respectively. 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. Partially offsetting this were proceeds from the sale of ourOgdensburg, New York facility of$6.6 million and lower cash used for capital expenditures of$4.7 million .
Cash Flow from Financing Activities
Cash used by financing activities was$48.3 million for the twelve months endedDecember 31, 2022 , a decrease of cash used of$98.9 million , compared with cash used of$147.2 million by financing activities during the prior year. The decrease of$98.9 million primarily relates to an increase in cash provided by our incremental net borrowings of$119.8 million , compared to the prior year. In addition, cash outflows related to our debt refinancing decreased$19.1 million compared to the prior year. Partly offsetting the cash provided by financing activities were uses of cash for share repurchases of$19.4 million and increases in the contingent earnout payment of$17.4 million and dividends paid of$2.8 million , compared to the prior year.
Capitalization
The Company had 94.3 million and 95.8 million shares of common stock outstanding
as of
Adequacy of Liquidity Sources
Based on our 2023 business plan and current forecasts, we believe that cash flow from operations, our current cash balance and borrowings available under our Revolving Facility will be adequate to support our requirements for working capital, capital expenditures, dividend payments, share repurchases and debt service in both the short and long-term. Our future operating performance is dependent on many factors, some of which are beyond our control, including prevailing economic, financial and industry conditions. For further information on these risks, see "Part I, Item1A. Risk Factors" of this report.
Off-Balance-Sheet Arrangements and Contractual Financial Obligations
The Company does not have any material off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Our contractual obligations and related payments by period as ofDecember 31, 2022 were as follows: (in millions) 2023 2024 - 2025 2026 - 2027 Thereafter Total Debt$ 60.1 $ 64.2 $ 305.6$ 575.0 $ 1,004.9 Interest on debt(1) 43.9 81.8 56.3 29.5 211.5 Operating lease obligations(2) 25.4 35.9 21.8 29.1 112.2 Purchase obligations(3) 132.3 10.6 1.0 0.1 144.0 Transition Toll Tax(4) 5.8 17.3 - - 23.1 Other long-term liabilities(5) 16.6 14.9 15.2 37.5 84.2 Total$ 284.1 $ 224.7 $ 399.9$ 671.2 $ 1,579.9 (1) Interest calculated atDecember 31, 2022 , rates for variable rate debt. (2) For further information on leases, see "Note 5. Leases" to the consolidated financial statements contained in Item 8. of this report. (3) Purchase obligations primarily consist of contracts and non-cancelable purchase orders for raw materials and finished goods. (4) TheU.S. Tax Cuts and Jobs Act requires companies to pay a one-time Transition Toll Tax, which is payable over eight years. 32 --------------------------------------------------------------------------------
(5)
Other long-term liabilities consist of estimated expected employer contributions for 2023, along with estimated future payments, for pension and post-retirement plans that are not paid from assets held in a plan trust. Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits atDecember 31, 2022 , we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore,$39.1 million of unrecognized tax benefits have been excluded from the contractual obligations table above. For further information, see "Note 12. Income Taxes" to the consolidated financial statements contained in Part II. Item 8. of this report.
Critical Accounting Policies
Our financial statements are prepared in conformity with generally accepted accounting principles in theU.S. ("GAAP"). Preparation of our financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses presented for each reporting period in the financial statements and the related accompanying notes. Actual results could differ significantly from those estimates. We regularly review our assumptions and estimates, which are based on historical experience and, where appropriate, current business trends. We believe that the following discussion addresses our critical accounting policies, which require significant, subjective and complex judgments to be made by our management.
Revenue Recognition
Revenue is recognized when control of the promised goods or services is
transferred to our customers in an amount reflective of the consideration we
expect to receive in exchange for those goods or services. Taxes we collect
concurrent with revenue producing activities are excluded from revenue.
Incidental items incurred that are immaterial in the context of the contract are
expensed.
At the inception of each contract, the Company assesses the products and
services promised and identifies each distinct performance obligation. To
identify the performance obligations, the Company considers all products and
services promised regardless of whether they are explicitly stated or implied
within the contract or by standard business practices.
For our products, we transfer control and recognize a sale primarily when we
either ship the product from our manufacturing facility or distribution center,
or upon delivery to a customer-specified location depending upon the terms in
the customer agreement. In addition, we recognize revenue for private label
products as the product is manufactured (or over time) when a contract has an
enforceable right to payment. For consignment arrangements, revenue is not
recognized until the products are sold to the end customer.
33
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Customer programs and incentives ("Customer Program Costs") are a common
practice in our industry. We incur Customer Program Costs to obtain favorable
product placement, to promote sell-through of products and to maintain
competitive pricing. The amount of consideration we receive and revenue we
recognize is impacted by Customer Program Costs, including sales rebates;
in-store promotional allowances; shared media and customer catalog allowances;
other cooperative advertising arrangements; freight allowance programs offered
to our customers; allowances for discounts and reserves for returns. We
recognize Customer Program Costs, primarily as a deduction to gross sales, at
the time that the associated revenue is recognized. Customer Program Costs are
based on management's best estimates using the most likely amount method and is
an amount that is probable of not being reversed. In the absence of a signed
contract, estimates are based on historical or projected experience for each
program type or customer. We adjust our estimate of revenue when the most likely
amount of consideration we expect to receive changes.
Inventories
Inventories are priced at the lower of cost (principally first-in, first-out) or net realizable value. When necessary, the write-down of inventory to its net realizable value is recorded for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions and specific identification of items, such as product discontinuance or engineering/material changes. These estimates could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations. Intangible Assets Intangible assets are comprised primarily of indefinite-lived and amortizable intangible assets acquired and arising from the application of purchase accounting. Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine whether the indefinite useful life is appropriate. Certain of our trade names have been assigned an indefinite life as we currently anticipate that these trade names will contribute cash flows toACCO Brands indefinitely. Amortizable intangible assets are amortized over their useful lives. We test indefinite-lived intangibles for impairment annually, during the second quarter, and during any interim period when market or business events indicate there may be a potential adverse impact on a particular intangible. The test may be on a qualitative or quantitative basis as allowed by GAAP. We consider the implications of both external factors (e.g., market growth, pricing, competition, and technology) and internal factors (e.g., product costs, margins, support expenses, and capital investment) and their potential impact on cash flows in both the near and long term, as well as their impact on any identifiable intangible asset associated with the business. Based on recent business results, consideration of significant external and internal factors, and the resulting business projections, indefinite-lived intangible assets are reviewed to determine whether they are likely to remain indefinite-lived, or whether a finite life is more appropriate. In addition, based on events in the period and future expectations, management considers whether the potential for impairment exists. Finite lived intangibles are amortized over 5, 7, 10, 15, 23 or 30 years. We performed our annual assessment, in the second quarter of 2022, on a qualitative basis, and concluded that it was not more likely than not that the fair value of any indefinite-lived intangible was less than its carrying amount. During 2022, our revenue generated from ourLeitz indefinite-lived trade name declined. Accordingly, as ofAugust 31, 2022 , we completed an impairment assessment, on a quantitative basis, for ourLeitz indefinite-lived trade name. The result of our assessment was that the fair value of theLeitz indefinite-lived trade name exceeded its carrying value by less than five percent and we concluded that no impairment existed. In addition, we have not identified a triggering event throughDecember 31, 2022 that more likely than not would result in impairment. 34 --------------------------------------------------------------------------------
Goodwill has been recorded on our balance sheet and represents the excess of the cost of an acquisition when compared with the fair value of the net assets acquired. The authoritative guidance on goodwill and other intangible assets requires that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units areNorth America , EMEA and International. We test goodwill for impairment annually, during the second quarter, or any interim period when market or business events indicate there may be a potential adverse impact on goodwill. As permitted by GAAP, we may perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test as required by GAAP. We performed our annual assessment in the second quarter of 2022, on a quantitative basis, and concluded that it was not more likely than not that the fair value of any reporting unit was less than its carrying amount. During the third quarter of 2022, our market capitalization declined further compared to the second quarter of 2022. In addition, our forecasted cash flows for ourNorth America and EMEA reporting units decreased due to lower inventory replenishment by major retailers, lower sales of gaming accessories, and a challenging demand environment in several countries within EMEA. As a result, we identified a triggering event indicating it was more likely than not that an impairment loss had been incurred. Accordingly, as ofAugust 31, 2022 , we completed a goodwill impairment assessment, on a quantitative basis, for goodwill for each of our three reporting units. The result of our assessment was that the fair value of theNorth America reporting unit did not exceed its carrying value resulting in an impairment charge of$98.7 million . The result of our assessment for the International and EMEA reporting units was that the fair value of each exceeded its carrying values by greater than ten percent and fifty percent, respectively, and we concluded that no impairment existed. Estimating the fair value of each reporting unit requires us to make assumptions and estimates regarding our future. We utilized a combination of both discounted cash flows and a market approach. The financial projections used in the valuation models reflected management's assumptions regarding revenue growth rates, economic and market trends, cost structure, discount rate, and other expectations about the anticipated short-term and long-term operating results for each of our three reporting units. The implied fair values of all three of our reporting units, more likely than not, exceed their carrying values atDecember 31, 2022 . In addition, we have not identified a triggering event that would cause us to perform another quantitative goodwill impairment analysis. We believe the assumptions used in our goodwill impairment analysis are appropriate and result in reasonable estimates of the implied fair value of each reporting unit. However, given the economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions, made for purposes of our goodwill impairment testing, will prove to be an accurate prediction of the future. If our assumptions regarding future performance are not achieved, we may be required to record additional goodwill impairment charges in future periods.
Employee Benefit Plans
We provide a range of benefits to our employees and retired employees, including
pension, post-retirement, post-employment and health care benefits. We record
annual amounts relating to these plans based on calculations specified by GAAP,
which include various actuarial assumptions, including discount rates, assumed
rates of return, mortality rate tables, compensation increases, turnover rates
and health care cost trends. Actuarial assumptions are reviewed on an annual
basis and modifications to these assumptions are made based on current rates and
trends when it is deemed appropriate. As required by GAAP, the effect of our
modifications and unrecognized actuarial gains and losses are generally recorded
to a separate component of accumulated other comprehensive income (loss)
("AOCI") in stockholders' equity and amortized over future periods. We believe
that the assumptions utilized in recording our obligations under the plans are
reasonable based on our experience. The actuarial assumptions used to record our
plan obligations could differ materially from actual results due to changing
economic and market conditions, higher or lower withdrawal rates or other
factors which may impact the amount of retirement-related benefit expense
recorded by us in future periods.
35
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The discount rate assumptions used to determine the pension and post-retirement
obligations of the benefit plans are based on a spot-rate yield curve that
matches projected future benefit payments with the appropriate interest rate
applicable to the timing of the projected future benefit payments. For the
majority of the obligations, the assumed discount rates reflect market rates for
high-quality corporate bonds currently available and were determined by
constructing a yield curve based on a large population of high quality corporate
bonds. Where the corporate bond market is not sufficiently deep, government bond
yields are used instead. The resulting discount rates reflect the matching of
plan liability cash flows to the yield curves.
For the ACCO Europe Pension Plan, the Company's discount rate assumption methodology was based on the yield curve that uses a dataset of bonds rated AA by at least one of the main rating agencies.
The expected long-term rate of return on plan assets reflects management's expectations of long-term average rates of return on funds invested based on our investment profile to provide for benefits included in the projected benefit obligations. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns over the last 10 years, asset allocation and investment strategy. We estimate the service and interest components of net periodic benefit cost (income) for pension and post-retirement benefits utilizing a full yield curve approach by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. At the end of each calendar year an actuarial evaluation is performed to determine the funded status of our pension and post-retirement obligations and any actuarial gain or loss is recognized in AOCI and then amortized into the income statement in future periods, based on the average remaining lifetime or average remaining service expected. Pension income was$3.1 million ,$5.4 million and$2.1 million for the years endedDecember 31, 2022 , 2021, and 2020, respectively. Post-retirement income was$0.4 million for each of the years endedDecember 31, 2022 , 2021, and 2020. The decrease in pension income was due to higher discount rates in our foreign pension plans.
The weighted average assumptions used to determine benefit obligations for the
years ended
Pension Post-retirement
U.S. International
2022 2021 2020 2022 2021 2020 2022 2021 2020
Discount rate 5.1 % 2.9 % 2.6 % 4.5 % 1.8 % 1.2 % 3.8 % 2.4 % 1.9 % Rate of compensation increase N/A N/A N/A 3.0 % 3.0 % 2.9 % N/A N/A N/A
The weighted average assumptions used to determine net periodic benefit cost for
the years ended
Pension Post-retirement
U.S. International
2022 2021 2020 2022 2021 2020 2022 2021 2020
Discount rate 2.9 % 3.1 % 3.2 % 1.8 % 1.0 % 1.6 % 2.4 % 2.2 % 2.7 %
Expected long-term rate of return 6.5 % 6.8 % 7.0 % 4.0 % 4.0 % 4.2 % N/A N/A N/A
Rate of compensation increase N/A N/A N/A 3.0 % 2.7 % 2.9 % N/A N/A N/A
In 2023, we expect pension income of approximately
A 25-basis point decrease (0.25 percent) in our discount rate assumption would lead to an increase in our pension and post-retirement expense of approximately$0.7 million for 2023. A 25-basis point change in our long-term rate of return assumption would lead to an increase or decrease in pension and post-retirement expense of approximately$1.1 million for 2023. 36 -------------------------------------------------------------------------------- Pension and post-retirement liabilities of$155.5 million as ofDecember 31, 2022 , decreased from$222.3 million atDecember 31, 2021 , primarily due to the higher discount rate assumptions compared to the prior year, partly offset by investment losses in 2022. These factors were the primary reasons for the actuarial gains of$204.5 million that were recognized in 2022.
Income Taxes
Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce deferred tax assets to an amount that is more likely than not to be realized. Facts and circumstances may change and cause us to revise our conclusions regarding our ability to realize certain net operating losses and other deferred tax attributes. The amount of income taxes that we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax position is subject to management's assessment of relevant risks, facts and circumstances existing at that time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period any assessments are received, revised or resolved.
Recently Adopted Accounting Standards
For information on recently adopted accounting pronouncements, see "Note 2. Significant Accounting Policies, Recent Accounting Pronouncements and Adopted Accounting Standards" to the consolidated financial statements contained in Part II. Item 8. of this report.
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES
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.
The following tables provide a reconciliation of GAAP net sales change as reported to non-GAAP comparable sales change:
Comparable Sales - Year Ended December 31, 2022
Non-GAAP
GAAP Currency Comparable
(in millions) Net Sales Translation Net Sales
ACCO Brands North America $ 998.0 $ (4.3) $ 1,002.3
ACCO Brands EMEA 580.3 (78.2) 658.5
ACCO Brands International 369.3 (11.4) 380.7
Total $ 1,947.6 $ (93.9) $ 2,041.5
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Amount of Change - Year Ended December 31, 2022 compared
to the Year Ended December 31, 2021
$ Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
(in millions) Change Translation Change
ACCO Brands North America $ (44.4) $ (4.3) $ (40.1)
ACCO Brands EMEA (82.6) (78.2) (4.4)
ACCO Brands International 49.3 (11.4) 60.7
Total $ (77.7) $ (93.9) $ 16.2
% Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
Change Translation Change
ACCO Brands North America (4.3)% (0.4)% (3.9)%
ACCO Brands EMEA (12.5)% (11.8)% (0.7)%
ACCO Brands International 15.4% (3.6)% 19.0%
Total (3.8)% (4.6)% 0.8%
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