Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2023 and 2022 should be read in conjunction with the unaudited condensed consolidated financial statements of ACCO Brands Corporation and the accompanying notes contained therein.

Overview of the Company

ACCO 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 the U.S., Europe, Australia, Canada, Brazil and Mexico.

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, technology distributors, discount, drug/grocery and variety chains, warehouse clubs, hardware and specialty stores, independent office product dealers, office superstores, wholesalers, and contract stationers.

Overview of Performance

During the first quarter, our net sales decreased $39.0 million, or 8.8 percent, including 2.4 percent from adverse foreign exchange, compared with the prior year's first quarter. Comparable net sales decreased 6.4 percent. Price increases added 9.1 percent while volume declined 15.5 percent. Our EMEA and North America segments reported sales declines of 13.0 percent and 15.3 percent, respectively. This decline was partially offset by 17.0 percent sales growth in our International segment.

In the first quarter, we reported operating income of $10.1 million, a $3.3 million increase, compared with operating income of $6.8 million in the prior year's first quarter. The increase in operating income reflects the impact of our cumulative global price increases and lower SG&A expense, which more than offset lower sales volume and adverse foreign exchange. Gross margin increased 250 basis points primarily due to cumulative global price increases, cost reduction actions within our North America and EMEA segments and improved cost leverage from volume growth within our International segment.

Our operating cash flow for the first three months was a use of cash of $23.2 million, compared to cash used of $104.2 million in the prior year due to improved working capital, primarily related to less cash used for payables, lower inventory purchases, and lower payments for incentive compensation. Our operating cash flow is seasonal with a historic pattern of outflow in the first half followed by strong inflows in both quarters of the second half. We anticipate the same seasonal cash flow pattern to repeat again this year.

We continue to see volatility in most foreign currencies against the U.S. dollar, which affected the sales, profitability and cash flow of our foreign operations which transact business in their local currency. During the first quarter, our EMEA segment was most negatively impacted. We expect foreign currency fluctuations to continue to impact our results.



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Consolidated Results of Operations for the Three Months Ended March 31, 2023 and 2022



                                         Three Months Ended
                                             March 31,            Amount of Change
(in millions, except per share
data)                                    2023          2022         $        %/pts
Net sales                           $      402.6  $      441.6 $  (39.0)     (8.8)%
Cost of products sold                      283.3         322.0    (38.7)    (12.0)%
Gross profit                               119.3         119.6     (0.3)     (0.3)%
Gross profit margin                       29.6 %        27.1 %                  2.5 pts
Selling, general and administrative
expenses                                    95.0          98.8     (3.8)     (3.8)%
SG&A% to net sales                        23.6 %        22.4 %                  1.2 pts
Amortization of intangibles                 10.9          11.1     (0.2)     (1.8)%
Restructuring charges                        3.3           0.3       3.0         NM
Change in fair value of contingent
consideration                                  -           2.6     (2.6)         NM
Operating income                            10.1           6.8       3.3     48.5 %
Operating (loss) income margin             2.5 %         1.5 %                  1.0 pts
Interest expense                            13.9           9.7       4.2     43.3 %
Interest income                            (2.4)         (1.4)     (1.0)     71.4 %
Non-operating pension expense
(income)                                     0.1         (1.4)       1.5         NM
Other expense, net                           1.8           0.9       0.9    100.0 %
Loss before income tax                     (3.3)         (1.0)     (2.3)         NM
Income tax expense                           0.4           1.7     (1.3)    (76.5)%
Effective tax rate                       (12.1)%      (170.0)%                157.9 pts
Net loss                                   (3.7)         (2.7)     (1.0)    (37.0)%
Weighted average number of diluted
shares outstanding:                         94.9          96.2     (1.3)     (1.3)%
Diluted loss per share              $     (0.04)  $     (0.03) $  (0.01)    (33.3)%

Comparable net sales (Non-GAAP)(1) $ 413.2 $ 441.6 $ (28.4) (6.4)%

(1)

See reconciliation to GAAP, contained in Part I, Item 2. "Supplemental Non-GAAP Financial Measure."

Net Sales

For the three months ended March 31, 2023, net sales decreased $39.0 million, or 8.8 percent, including $10.6 million, or 2.4 percent, from adverse foreign exchange. Comparable net sales decreased 6.4 percent. The sales decline was driven by lower volume, which was down 15.5 percent, reflecting lower demand due to the challenging macroeconomic conditions, the return of typical seasonality in back-to-school purchasing by retailers in North America and weaker sales of technology accessories, partially offset by higher prices which added 9.1 percent. These sales declines more than offset cumulative global price increases and volume growth within our International segment.

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 ended March 31, 2023, cost of products sold decreased $38.7 million, or 12.0 percent, primarily due to lower net sales, global cost reduction actions and favorable foreign exchange, partially offset by lagging inflation. Foreign exchange reduced cost of products sold by $7.6 million, or 2.4 percent.

Gross Profit

For the three months ended March 31, 2023, gross profit decreased $0.3 million, or 0.3 percent. The reduction in gross profit includes adverse foreign exchange of $3.0 million, or 2.5 percent. Gross profit margin increased 250 basis points primarily due to the cumulative effect of global price increases and global cost reduction actions, as well as improved cost leverage from volume growth within our International segment.



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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 ended March 31, 2023, SG&A decreased $3.8 million, or 3.8 percent, primarily due to the favorable impact of foreign exchange which reduced SG&A by $2.4 million, or 2.4 percent. Excluding foreign exchange, expenses were down due to strong cost controls. SG&A as a percentage of net sales increased due to lower sales.

Restructuring Charges

For the three months ended March 31, 2023, restructuring expense increased $3.0 million compared to prior year. Cost reduction programs primarily related to severance costs in EMEA and International.

Change in Fair Value of Contingent Consideration

The prior period benefited from a $2.6 million reversal of accruals related to the change in fair value of the contingent consideration related to the PowerA earnout.

Operating Income

For the three months ended March 31, 2023, operating income was $10.1 million compared to $6.8 million in the prior year. The increase of $3.3 million reflects the impact of cumulative global price increases, and lower SG&A expense, partly offset by higher restructuring charges. Adverse foreign exchange reduced operating income by $0.2 million.

Interest Expense

For the three months ended March 31, 2023, the increase in interest expense of $4.2 million was primarily due to higher interest rates versus the prior year. Our variable debt weighted average interest rate increased to 6.19 percent from 2.05 percent in the prior year.

Income Tax Expense

For the three months ended March 31, 2023, we recorded income tax expense of $0.4 million on a loss before taxes of $3.3 million. This compared with an income tax expense of $1.7 million on a loss before taxes of $1.0 million for the three months ended March 31, 2022.

See "Note 10. Income Taxes" for more information.

Net Loss/Diluted Loss per Share

For the three months ended March 31, 2023, net loss was $3.7 million compared to $2.7 million in the prior year, due primarily to higher interest and non-operating pension costs.




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Segment Net Sales and Operating Income for the Three Months Ended March 31, 2023
and 2022

ACCO Brands North America

                                       Three Months Ended
                                           March 31,           Amount of Change
(in millions)                          2023         2022         $        %/pts
Net sales                          $     176.7  $     208.5 $  (31.8)    (15.3)%
Segment operating income?¹?                5.2         13.9     (8.7)    (62.6)%
Segment operating income margin          2.9 %        6.7 %                (3.8) pts

Comparable net sales (Non-GAAP)?²? $ 178.2 $ 208.5 $ (30.3) (14.6)%

(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 income" to "Loss before income tax."
(2)
See reconciliation to GAAP contained in Part I, Item 2. "Supplemental Non-GAAP
Financial Measure."

For the three months ended March 31, 2023, net sales decreased $31.8 million, or 15.3 percent. Sales price increases added $8.8 million, or 4.2 percent, and were more than offset by decreased volume of $39.2 million, or 18.8 percent. The volume decline is due to a weaker macroeconomic environment, lower early back-to-school purchases by retailers and lower demand for technology accessories. In 2022, due to supply chain concerns retailers purchased back-to-school product earlier in the year than is typical to ensure product availability for the selling season, which did not occur at the same level in 2023.

For the three months ended March 31, 2023, operating income was $5.2 million compared to $13.9 million in the prior year. The decreases in operating income and operating margin primarily reflect the impact of lower sales volume, the lagging effect of inflation, and negative fixed cost leverage.



ACCO Brands EMEA

                                       Three Months Ended
                                           March 31,           Amount of Change
(in millions)                          2023         2022         $        %/pts
Net sales                          $     135.8  $     156.1 $  (20.3)    (13.0)%
Segment operating income?¹?                7.8          5.6       2.2     39.3 %
Segment operating income margin           5.7%         3.6%                  2.1 pts

Comparable net sales (Non-GAAP)?²? $ 144.8 $ 156.1 $ (11.3) (7.3)%

(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 income" to "Loss before income tax."
(2)
See reconciliation to GAAP contained in Part I, Item 2. "Supplemental Non-GAAP
Financial Measure."

For the three months ended March 31, 2023, net sales decreased $20.3 million, or 13.0 percent, including $9.0 million, or 5.7 percent of adverse foreign exchange. Comparable net sales decreased mainly due to lower volume of $33.0 million, or 21.1 percent, partly offset by price increases which added $21.7 million, or 13.9 percent. The lower volume was primarily driven by reduced demand due to a weaker macroeconomic environment and lower demand for technology accessories.

For the three months ended March 31, 2023, operating income increased $2.2 million, or 39.3 percent, which includes $0.3 million, or 6.1 percent, of adverse foreign exchange. Operating income and operating margin increased primarily due to the cumulative effect of price increases and cost saving actions, more than offsetting negative fixed cost leverage and higher costs of certain goods.




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ACCO Brands International

                                      Three Months Ended
                                           March 31,          Amount of Change
(in millions)                          2023         2022       $         %/pts
Net sales                          $      90.1  $     77.0 $   13.1       17.0 %
Segment operating income?¹?                9.0         4.2      4.8           NM
Segment operating income margin          10.0%        5.5%                   4.5 pts

Comparable net sales (Non-GAAP)?²? $ 90.3 $ 77.0 $ 13.3 17.2 %

(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 income" to "Loss before income tax."
(2)
See reconciliation to GAAP contained in Part I, Item 2. "Supplemental Non-GAAP
Financial Measure."

For the three months ended March 31, 2023, net sales increased $13.1 million, or 17.0 percent, including adverse foreign exchange of $0.2 million, or 0.2 percent. Comparable net sales increased primarily due to price increases which added $9.7 million, or 12.6 percent, and volume growth of $3.6 million, or 4.7 percent. Volume growth was primarily driven by Mexico and Brazil which benefited from the improvement of both in-person education and return-to-work trends.

For the three months ended March 31, 2023, operating income increased $4.8 million, primarily due to higher sales and improved cost leverage. Foreign exchange increased operating income $0.3 million, or 6.4 percent.

Liquidity and Capital Resources

Our primary liquidity needs are to support our working capital requirements, service indebtedness and fund capital expenditures and dividends. 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 of March 31, 2023, there was $168.5 million in borrowings outstanding under the Revolving Facility ($18.4 million reported in "Current portion of long-term debt" and $150.1 million reported in "Long-term debt, net"), and the amount available for borrowings was $419.6 million (allowing for $11.9 million of letters of credit outstanding on that date). We had $127.1 million in cash on hand. We maintain adequate financing arrangements at market rates.

As of March 31, 2023, our Consolidated Leverage Ratio was approximately 4.30 to 1.00 versus our maximum covenant of 5.00 to 1.00. We have no debt maturities before March 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.

The $524.4 million of debt outstanding as of March 31, 2023 under our senior secured credit facilities has a weighted average interest rate of 6.19 percent, and the $575.0 million outstanding principal amount of our senior unsecured notes due 2029 has a fixed interest rate of 4.25 percent.

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 $3.3 million for the three months ended March 31, 2023, primarily related to the Company's cost reduction programs representing expected severance costs mainly in EMEA, related to our footprint rationalization, and



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International. 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 Three Months Ended March 31, 2023 and 2022

During the three months ended March 31, 2023, our cash and cash equivalents increased $64.9 million, as compared to an increase of $50.1 million in the first three months of the prior year. The increase in cash generated of $14.8 million was primarily due to timing of payments for inventory which reduced the use of cash for accounts payable by $49.5 million, decreased inventory purchases of $12.3 million, reduced incentive payments of $16.7 million, and more cash provided by accounts receivable of $4.5 million, which were partially offset by lower net borrowings of $67.8 million.

The following table summarizes our cash flows for the periods presented:



                                                    Three Months Ended March 31,
(in millions)                                          2023              2022
Net cash flow (used in) provided by:
Operating activities                            $         (23.2)  $        (104.2)
Investing activities                                       (2.0)             (3.4)

Net borrowings                                              89.9             157.7
Dividends paid                                                 -             (7.3)
All other financing                                        (1.7)               3.1
Financing activities                                        88.2             153.5
Effect of foreign exchange rate changes on
cash and cash equivalents                                    1.9               4.2
Net increase in cash and cash equivalents       $           64.9  $           50.1


Cash Flow from Operating Activities

Operating activities used $23.2 million of cash during the first three months ended March 31, 2023 resulting from a net loss of $3.7 million, net cash outflows from changes in our operating assets and liabilities of $46.9 million, partly offset by non-cash add backs of $27.4 million consisting primarily of the amortization of intangibles, depreciation, and stock-based compensation expense. The net cash outflows from changes in our operating assets and liabilities were primarily due to $43.8 million of payments for interest, employee incentives, and taxes, as well as payments related to other current and non-current liabilities. These were partly offset by cash provided by trade working capital of $25.6 million consisting of changes in accounts payable, inventory, and accounts receivable.

Operating activities used $104.2 million of cash during the first three months ended March 31, 2022 resulting from a net loss of $2.7 million, net cash outflows from changes in our operating assets and liabilities of $130.7 million, partially offset by non-cash add backs of $29.2 million consisting primarily of the amortization of intangibles, depreciation, and stock-based compensation expense. The net cash outflows from changes in our operating assets and liabilities were primarily due to $52.5 million of payments for interest, employee incentives, and taxes, as well as payments related to other current and non-current liabilities. We also used cash to fund investments in trade working capital of $40.7 million consisting of changes in accounts payable, inventory, and accounts receivable.

Cash Flow from Investing Activities

Cash used by investing activities of $2.0 million during the first three months ended March 31, 2023, were due to capital expenditures.

Cash used by investing activities of $3.4 million during the first three months ended March 31, 2022, were due to capital expenditures.



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Cash Flow from Financing Activities

Cash provided by financing activities during the first three months ended March 31, 2023, were primarily due to net borrowings of $89.9 million. Dividends for the first three months of the year were declared during the first quarter and were paid in the second quarter of 2023.

Cash provided by financing activities during the first three months ended March 31, 2022, were primarily due to net borrowings of $157.7 million, partly offset by dividends paid of $7.3 million.

Supplemental Non-GAAP Financial Measure

To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles in the U.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 - Three Months Ended March 31, 2023
                                                                      Non-GAAP
                                         GAAP               Currency            Comparable
(in millions)                          Net Sales          Translation           Net Sales
ACCO Brands North America         $      176.7       $       (1.5)         $      178.2
ACCO Brands EMEA                         135.8               (9.0)                144.8
ACCO Brands International                90.1                (0.2)                 90.3
Total                             $      402.6       $       (10.6)        $      413.2



                                    Amount of Change - Three Months Ended March 31, 2023
                                      compared to the Three Months Ended March 31, 2022
                                                    $ Change - Net Sales
                                                                       Non-GAAP
                                           GAAP                                 Comparable
                                        Net Sales            Currency           Net Sales
(in millions)                             Change           Translation            Change
ACCO Brands North America           $     (31.8)        $     (1.5)         $     (30.3)
ACCO Brands EMEA                          (20.3)              (9.0)               (11.3)
ACCO Brands International                  13.1               (0.2)                13.3
Total                               $     (39.0)        $     (10.6)        $     (28.4)



                                   % Change - Net Sales
                                                Non-GAAP
                              GAAP                    Comparable
                            Net Sales    Currency     Net Sales
                             Change     Translation     Change
ACCO Brands North America    (15.3)%      (0.7)%       (14.6)%
ACCO Brands EMEA             (13.0)%      (5.7)%        (7.3)%
ACCO Brands International     17.0%       (0.2)%        17.2%
Total                        (8.8)%       (2.4)%        (6.4)%




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