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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