ACCO BRANDS CORPORATION Introduction
Management's Discussion and Analysis of Financial Condition and Results of Operations for the three months endedMarch 31, 2021 and 2020 should be read in conjunction with the unaudited condensed consolidated financial statements ofACCO Brands Corporation and the accompanying notes contained therein.
Overview of the Company
ACCO Brands designs, markets, and manufactures well-recognized consumer, school, technology and office products. Our widely known brands include AT-A-GLANCE®, Barrilito®, Derwent®, Esselte®, Five Star®, Foroni®, GBC®, Hilroy®, Kensington®, Leitz®, Marbig®, Mead®, NOBO®, PowerA®, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra®, TruSens® and Wilson Jones®. Approximately 75 percent of our sales come from brands that occupy the No. 1 or No. 2 position in the product categories in which we compete. Our top 12 brands represented$1.3 billion of our 2020 net sales. We distribute our products through a wide variety of retail and commercial channels to ensure that our products are readily and conveniently available for purchase by consumers and other end-users, wherever they prefer to shop. These channels include mass retailers, e-tailers, discount, drug/grocery and variety chains; warehouse clubs; hardware and specialty stores; independent office product dealers; office superstores; wholesalers; contract stationers, technology specialty businesses, and our direct-to-consumer channel. Our products are sold primarily in theU.S. ,Europe ,Brazil ,Australia ,Canada , andMexico . For the year endedDecember 31, 2020 , approximately 44 percent of our net sales were in theU.S. ACCO Brands is in the midst of a substantial transformation of its business. Today we are a global enterprise focused on developing innovative branded consumer and technology products for use in businesses, schools, and homes. Sales in the commercial channels have been declining for several years, and customers within the channel have been consolidating. Therefore, we have refocused our business to sell more in the mass merchant, e-commerce and technology channels to increase growth and profitability and to reduce reliance on declining customers and commoditized product categories. The commercial channel was also significantly impacted by COVID-19 in 2020. As a result of both of these factors, our top five customers represented 34 percent of our sales in 2020, compared with 43 percent in 2016. We have been strategically transforming our business to be more consumer- and brand-centric, product differentiated, and geographically diverse. We are successfully achieving this transformation through both organic initiatives and acquisitions. Organically, we have grown our Kensington® computer accessories offerings and entered the wellness category with TruSens® branded air purifiers, which we plan to expand over the next few years. ACCO remains a leading supplier of school products, including our top-selling Five Star® line of school notebooks, laminating machines, and stapling and punching products, among others. We have refreshed most of our line of shredders in EMEA over the past three years, improving consumer designs. This refresh includes a new line of personal shredders to capitalize on the work-from-home environment. Shredder sales have remained strong, and we plan to leverage our platforms globally. During 2020, EMEA also launched organization and storage products for home offices under the Leitz® WOW and Leitz® Cosy brands. Our approach to acquisitions has been focused on consolidation, geographic expansion, and adjacency opportunities that meet our strategic and financial criteria. Strategically, we are focusing on categories or geographies that provide opportunities for growth, leading brands, and channel diversity. We have made five acquisitions over the past five years. These acquisitions have meaningfully expanded our portfolio of well-known brands, enhanced our competitive position from both a product and channel perspective, and added scale to our operations. As a result, our foreign businesses contributed over half of our sales in 2020, up from 43 percent in 2016. Our most recent acquisition of PowerA (the "PowerA Acquisition") in late 2020 is about accelerating growth and entering into an attractive consumer product adjacency of third-party video game controllers, power charging stations, and headsets. The addition of PowerA will meaningfully improve our organic sales growth and profitability and increase our presence in faster growing mass and e-commerce channels. PowerA is expected to provide strong double-digit sales growth in theU.S. , as well as opportunities for expansion internationally, particularly inEurope . It greatly advances our strategic shift toward consumer, school and technology products as more than half of our sales will now come from these product categories, which offer faster growing demand. On a pro forma basis, including full year PowerA sales of$210 million for 2020, gaming and computer products would represent approximately 22 percent of our sales. 31 -------------------------------------------------------------------------------- Our leading product category positions provide the scale to invest in marketing and product innovation to drive profitable growth. We now expect to grow in mature markets in consumer, technology, and adjacent categories driven by new product development. We will also continue to grow in emerging markets once the impact of COVID-19 subsides inLatin America and parts ofAsia , theMiddle East , andEastern Europe . In all of our markets, we see opportunities for sales growth through share gains, channel and geographic expansion, and product enhancements.
We generate strong operating cash flow, and will continue to leverage our cost structure through acquisitions, synergies and productivity savings to drive long-term profit and operating cash flow improvement.
Overview of Performance
Our first quarter results were significantly impacted by our acquisition of PowerA that occurred inDecember 2020 . PowerA added$62.7 million to sales and contributed an operating loss of$0.1 million , primarily due to a charge of$6.7 million related to the change in fair value of the contingent consideration that was part of the purchase price for PowerA ("PowerA Earnout"),$4.1 million of additional amortization, and$2.4 million of inventory step-up charges also resulting from the acquisition. In addition, the purchase of PowerA significantly increased our interest expense as we borrowed the majority of the purchase price. During the quarter we also refinanced both our bonds and our bank debt. The benefits achieved by the refinancing are to substantially extend the term of our debt, reduced interest rates, and improved liquidity by structuring our purchase of PowerA with appropriate levels of short- and long-term debt. "Other expense (income), net" in the "Consolidated Statements of Operations" includes charges associated with both the call premium for refinancing our bonds and to write off debt issuance costs associated with amending our bank debt. Higher logistics expenses increasingly impacted 2020 results and are continuing to affect 2021 performance. Costs of our raw materials and those used by our suppliers are also rising. We have already received and anticipate that we will experience additional cost increases from our suppliers of raw materials and finished goods, necessitating an increase in our selling prices as the year progresses. The business continues to be impacted by lower demand for our products primarily due to lower occupancy of offices and schools worldwide. The first quarter of 2021 is also the last quarter in which COVID-19-impacted results were compared against a prior period that was not as significantly impacted by COVID-19. The COVID-19 impacts on our business have varied and continue to vary significantly by geographic region and country depending upon a range of factors, including how seriously the pandemic is affecting public health in the country, the progress of mass vaccinations, whether and to what degree businesses and schools are open, the general seasonality and channel structure of our business in that country, and the nature and level of government support. While all segments have been impacted by COVID-19, EMEA, which experienced the earliest significant adverse impacts at the end ofMarch 2020 , is now seeing lower impacts. Our International segment experienced and continues to experience the highest impacts, largely inLatin America due to the seriousness of the pandemic and the dependence of our Brazilian and Mexican businesses on the sale of school products. Many schools and offices inLatin America have been closed since the onset of the pandemic and access to online learning is limited. InNorth America , as the quarter progressed, we saw demand for back-to-school items increase at retail as many more schools are now fully open for in-person education. That demand increase bodes well for reducing the inventory overhang that retailers hold because of school closures in 2020. As used in this Quarterly Report on Form 10-Q, "COVID-19 impacts" include the operational, financial, and other effects onACCO Brands , its customers and end users of its products, of school and business closures, work from home, remote and hybrid learning, government orders and manufacturing, distribution and supply chain and other disruptions resulting from COVID-19 and the actionsACCO Brands , its customers and end users have taken in response to the pandemic, including actions we have taken to manage our inventory and credit risk under the circumstances. 32 -------------------------------------------------------------------------------- Our first quarter net sales increased by 6.9 percent to$410.5 million , primarily from the acquisition of PowerA. Excluding PowerA, sales decreased 9.5 percent as a result of reduced demand related to COVID-19 impacts, which varied by channel as depicted in the table below. Channel Change vs. Q1 2020 Commercial/B2B (18) % Retail/Mass (7) % E-tail/D2C 28 % Tech specialist 6 % Total sales (excluding PowerA)* (10) % *Numbers may not add due to rounding The Company recorded an operating loss of$1.1 million , which includes the impact of a$6.7 million charge related to the PowerA Earnout and amortization and restructuring charges, which rose$7.2 million ($3.6 million each). Foreign exchange had a favorable impact on sales and operating profit. From a net income perspective, foreign exchange was favorable by$1.3 million . Operating cash outflow for the three months endedMarch 31, 2021 , was$42.4 million , compared with operating cash outflow of$25.2 million for the three months endedMarch 31, 2020 . The$17.2 million year-over-year increase was to rebuild PowerA's working capital since we did not purchase accounts receivable and accounts payable in the transaction at closing. During the quarter, we received$18.2 million from the seller due to having delivered less working capital than required in the acquisition agreement, which was accounted for as a reduction in purchase price. InMarch 2021 , we issued$575.0 million in 4.25% Senior Notes dueMarch 2029 (the "New Notes") and redeemed$375.0 million in 5.25% Senior Notes dueMay 2024 (the "Prior Notes"). The proceeds from the New Notes were applied towards the redemption of the Prior Notes and to reduce the level of our revolver borrowing by approximately$178.0 million . We had temporarily increased our revolver as part of the financing for the PowerA Acquisition. We also paid a$9.8 million call premium for early redemption of the Prior Notes and took a total$3.7 million charge to write off debt issuance costs for the bank debt and bond refinancing. As a result of refinancing our bank debt, we extended the maturities from 2024 to 2026. In addition, these refinancing actions reduced the interest rate on our bonds and our bank borrowings. For the remainder of 2021, we estimate the interest savings will be$5.2 million (assuming the current rates for LIBOR continue), compared with the expected interest expense for 2021 prior to refinancing the bond and bank debt.
COVID-19 Impact
Health and Safety of Our People
Our top priority is the health and safety of our employees and we continue to follow the modified operating procedures we implemented in 2020 to address their safety. We will continue to modify our operations based on local conditions and consistent with government mandates regarding employee health and safety. Since the onset of the pandemic, most of our office and administrative employees continued to work from home, but many employees outsideNorth America , particularly in EMEA andAustralia , began returning to work in our offices. We have implemented modifications to our normal office procedures similar to those used at our plants and distribution facilities to protect the health and safety of our employees returning to our office locations.
Cost Reductions
To begin to address the financial impact of the pandemic on our results of operations, we effected a series of cost reductions, both temporary and then more long term, that will continue to impact our results and prior-period comparisons through 2021. Full salaries were restored in late 2020. In the first quarter of 2021, we restored management incentive programs and the matching contribution for theU.S. 401 (k) plan. In addition, during the first quarter of 2021, we took$3.9 million in restructuring charges to further reduce long-term expenses. AtMarch 31, 2021 , our worldwide headcount decreased by approximately 840 people, or 12 percent, compared withMarch 31, 2020 . We continue to evaluate the impact of COVID-19 on our business and expect to make additional structural changes and take associated restructuring charges. 33 -------------------------------------------------------------------------------- Where we qualify, we have taken full advantage of government assistance available to employers in the countries outside theU.S. Most of this assistance is designed to encourage and enable companies to sustain employment, including pay and working conditions of employees, by providing cash benefits to employers. During the quarter, we received$0.9 million in government assistance to offset the payroll and other costs of retaining our employees. This assistance was recorded on a cash-received basis. As the pandemic appears to be abating in some regions, these government assistance programs are being reduced or eliminated and there can be no assurance that government assistance programs will continue or that we will continue to meet the performance criteria to obtain benefits.
Working Capital
We are monitoring our working capital, including accounts receivable and inventory. We have and are continuing to experience an increased level of late payments and potential bad debts in various geographies, but particularlyLatin America , as our customers deal with the COVID-19 impacts on their businesses. In the first quarter, inventory reserve charges were lower than the prior year and bad debt reserves were only slightly higher than those recorded atDecember 31, 2020 . We are actively managing our receivables and have restricted and will continue to restrict our own sales if necessary to mitigate our risk.
Outlook
There is great uncertainty as to how COVID-19 will impact our results for the second half of 2021. We are hopeful that as mass vaccinations continue to roll out, we will continue to see reduced impacts from COVID-19. Excluding PowerA, which will benefit each future quarter, we expect overall demand to improve relative to 2020 in all markets except forLatin America . ForNorth America , we expect a softer sell-in of back-to-school products in the second quarter as the channel inventory at the end of last year was higher than normal. However, we anticipate that the sell-out of back-to-school products by our customers will increase as the year progresses and more children continue to return to in-person education. The pace and number of students returning to in-person education will determine how much of a stronger sell-out will occur in the second half. We also anticipate additional increases in our sales of commercial products as more employees return to some level of in-person office use, which we anticipate will steadily increase over time. ForLatin America , while we anticipate some additional return to schools and offices in 2021, we believe that this will happen more gradually. We anticipate a continued improvement in comparable year-over-year seasonal demand that will vary by channel and geography, from the second quarter of 2021 into 2022. Overall, we expect the Company to be in a stronger competitive position after the pandemic because of the return to in-person use of offices and schools, our strong brands, more diversified and healthier channels, investments in innovative products, solid financial position, and disciplined execution. We are assessing likely changes to consumer behavior post pandemic and will continue to adjust our business and product strategy to align with evolving consumer preferences. These consumer changes will likely include: more purchases through online and convenience channels and less through specialty channels; more working, education, and playing at home; more awareness of physical and mental health issues and searching for ways to improve both; and more emphasis on local products and services. These consumer behavior modifications are likely to lead us to: continue to develop and improve our direct to consumer capabilities; make additional investments in such product categories as video gaming, computer accessories, wellness, school, arts and crafts, and other products for working, education and playing from home; change colorways from office to home colors; and implement smaller pack sizes to facilitate efficient shipments of consumer-sized product quantities. We expect that the pandemic will continue to materially and adversely affect our business, sales, and results of operations for some time and there is still great uncertainty regarding when the risks of the pandemic will subside and how geographies, distribution channels, and consumer behavior will evolve over time. We also expect COVID-19 impacts will continue to vary significantly by geographic region and country depending upon a range of factors, including how seriously the pandemic is affecting public health in the country, the progress of mass vaccinations, whether and to what degree businesses and schools are open, the general seasonality and channel structure of our business in that country, and the nature and level of government support. 34 --------------------------------------------------------------------------------
Acquisitions
PowerA Acquisition
EffectiveDecember 17, 2020 , we completed the acquisition of PowerA, a leading provider of third-party video gaming console accessories primarily inNorth America . The results of PowerA are included in all three of the Company's business segments effectiveDecember 17, 2020 . The preliminary purchase price was$321.8 million , plus an additional earnout of up to$55.0 million in cash, contingent upon PowerA achieving one- and two- year sales and profit growth objectives, which has a fair value of$24.9 million as ofMarch 31, 2021 . The PowerA Acquisition and related expenses were funded by cash on hand, as well as borrowings from our revolving credit facility. For further information on the PowerA Acquisition, see "Note 3. Acquisition" to the condensed consolidated financial statements contained in Item 1. of this Quarterly Report on Form 10-Q.
Operating Segments
The Company has three operating business segments, each of which is comprised of
different geographic regions. The Company's three operating segments are as
follows:
Operating Segment Geography Primary Brands Primary Products
ACCO Brands North America United States and Canada PowerA®, Five Star®, Gaming and computer accessories,
Kensington®, AT-A-GLANCE®, school products, planners,
Quartet®, Swingline®, GBC®, storage and organization (3-ring
Mead®, Hilroy® binders), dry erase boards,
laminating, binding, stapling
and punching products
ACCO Brands EMEA Europe, Middle East and Leitz®, Rapid®, Esselte®, Storage and organization
Africa Kensington®, Rexel® GBC®, products (lever-arch binders,
PowerA®, NOBO®, Derwent® sheet protectors, indexes),
computer and gaming accessories,
laminating, shredding, stapling,
punching, do-it-yourself tools,
dry erase boards and writing
instruments
ACCO Brands International Australia/N.Z., Latin Tilibra®, Foroni®, GBC®, School notebooks, laminating,
America and Asia-Pacific Barrilito®, Marbig®, shredding, storage and
Kensington®, Artline®*, organization products (binders,
PowerA®, Spirax®, Quartet®, sheet protectors and indexes),
Wilson Jones®, Rexel® writing and arts products,
*Australia /N.Z. only janitorial supplies, dry erase
boards, and stapling and
punching products
Each business segment designs, markets, sources, manufactures, and sells
recognized consumer, technology and other end-user products used in businesses,
schools, and homes. 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; laminating, shredding, and binding machines; calendars;
stapling; punching; dry erase boards; and do-it-yourself tools, among others.
Our portfolio includes both globally and regionally recognized brands.
We distribute our products through a wide variety of retail and commercial
channels to ensure that our products are readily and conveniently available for
purchase by consumers and other customers, 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. We also sell directly to commercial and
consumer end-users through e-commerce sites and our direct sales organization.
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--------------------------------------------------------------------------------Foreign Exchange Rates
Approximately 58.5 percent of our net sales for the three months endedMarch 31, 2021 were transacted in a currency other than theU.S. dollar. Additionally, we source approximately 60 percent of our products mainly fromChina ,Vietnam and other Far Eastern countries usingU.S. dollars. As a result, the sales, profitability and cash flow of our foreign operations which transact business in their local currency are affected by the fluctuation in foreign currency rates relative to theU.S. dollar. The quarterly average foreign exchange rates for the currencies in most of our mature markets have increased relative to theU.S. dollar from the prior period. InLatin America they are still significantly reduced versus the prior period. On balance, with many currencies strengthening versus theU.S. dollar during the first quarter, as detailed below, we experienced a benefit to the translation of both our foreign sales and profits. 2021 1st QTR Average Versus 2020 1st QTR Average Currency Increase/(Decline) Euro 9% Brazilian real (19)% Australian dollar 17% Canadian dollar 6% Mexican peso (2)% Swedish krona 15% British pound 8% Japanese yen 2%
Consolidated Results of Operations for the Three Months Ended
Three Months Ended March 31, Amount of Change
(in millions, except per share data) 2021 2020(1) $ %/pts
Net sales $ 410.5 $ 384.1 $ 26.4 6.9 %
Cost of products sold 295.0 271.9 23.1 8.5 %
Gross profit 115.5 112.2 3.3 2.9 %
Gross profit margin 28.1 % 29.2 % (1.1) pts
Selling, general and administrative expenses 94.0 86.1 7.9 9.2 %
SG&A % to net sales 22.9 % 22.4 % 0.5 pts
Amortization of intangibles 12.0 8.4 3.6 42.9 %
Restructuring charges 3.9 0.3 3.6 NM
Change in fair value of contingent
consideration 6.7 - 6.7 NM
Operating (loss) income (1.1) 17.4 (18.5)
NM
Operating income (loss) margin (0.3) % 4.5 % (4.8) pts Interest expense 13.2 8.6 4.6 53.5 % Interest income (0.1) (0.3) (0.2) (66.7) % Non-operating pension income (0.8) (1.5) (0.7) (46.7) % Other expense (income), net 12.9 (0.5) 13.4
NM
(Loss) income before income tax (26.3) 11.1 (37.4)
NM
Income tax (benefit) expense (5.9) 3.1 (9.0) NM Effective tax rate 22.4 % 27.9 % (5.5) pts Net (loss) income (20.4) 8.0 (28.4) NM Weighted average number of diluted shares outstanding: 95.1 97.5 (2.4) (2.5) % Diluted (loss) income per share$ (0.21) $ 0.08 $ (0.29) NM Comparable net sales$ 332.1 $ 384.1 $ (52.0) (13.5) %
(1) The Company acquired PowerA effective
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--------------------------------------------------------------------------------For the three months endedMarch 31, 2021 , net sales increased due to the PowerA Acquisition, which added$62.7 million . Excluding PowerA, sales declined 9.5 percent due to lower demand from COVID-19 impacts in theNorth America and International segments, primarily from office and school closures. Favorable foreign exchange was$15.7 million , or 4.1 percent.
Cost of Products Sold
Cost of products sold includes all manufacturing, product sourcing and distribution costs, including depreciation related to assets used in manufacturing; procurement and distribution processes; allocation of certain information technology costs supporting those processes; inbound and outbound freight; shipping and handling costs; purchasing costs associated with materials and packaging used in the production processes; and inventory valuation adjustments. For the three months endedMarch 31, 2021 , the PowerA Acquisition added$46.5 million , or 17.1 percent. Foreign exchange reduced cost of products sold$10.2 million , or 3.8 percent. Excluding PowerA and foreign exchange, cost of products sold decreased, primarily due to lower comparable sales, which were partly offset by higher costs. The higher costs resulted from inflation, particularly related to inbound freight, which was partially offset by cost reductions and$0.5 million in government assistance, primarily provided in return for maintaining employment and wages.
Gross Profit
For the three months endedMarch 31, 2021 , foreign exchange reduced gross profit$5.5 million , or 4.9 percent, and PowerA contributed$16.2 million , or 14.4 percent. Excluding PowerA and foreign exchange, gross profit decreased primarily due to lower comparable sales. Gross profit as a percent of net sales decreased 110 basis points. Gross profit margin declined, primarily in theNorth America segment, due to PowerA inventory step up charges and higher inflation as noted above.
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).
In the first quarter, foreign exchange increased SG&A$2.5 million , or 2.9 percent, and PowerA added$5.5 million , or 6.4 percent, including$0.7 million of integration and transaction costs. The prior-year period included$0.3 million in integration costs related to prior acquisitions. Excluding PowerA, integration and transaction costs, and foreign exchange, SG&A was flat, with$8.0 million higher incentive accruals largely offset by cost reductions. We received$0.4 million in government assistance, primarily provided in return for maintaining employment and wages.
Excluding PowerA and foreign exchange, SG&A as a percentage of net sales increased, primarily due to flat SG&A expense and lower sales.
Restructuring Charges
Restructuring charges in the quarter were$3.9 million . Costs associated with severance expense were$3.1 million , primarily inNorth America , but also inBrazil and the U.K. Lease abandonment charges were$0.8 million related to facilities inNorth America andMexico . 37 --------------------------------------------------------------------------------
Operating (Loss) Income
The quarter had a slight operating loss, primarily due to the$6.7 million expense related to the change in fair value of the PowerA Earnout recognized during the quarter,$3.6 million of higher amortization,$3.6 million of higher restructuring costs, and increased SG&A expense, which were partially offset by cost reductions. Foreign exchange benefited operating income$2.6 million , or 14.9 percent. PowerA contributed a loss of$0.1 million .
Interest Expense and Income
The increase in interest expense was primarily due to higher average debt
outstanding due to the PowerA Acquisition. The decrease in interest income was
primarily due to lower cash balances being held in
Other Expense (Income), Net
The quarter included charges associated with the refinancing of the Prior Notes and the amendment of our bank debt. These charges consisted of a call premium of$9.8 million and a$3.7 million charge for the write-off of debt issuance costs.
Income Tax (Benefit) Expense
For the three months endedMarch 31, 2021 , we recorded an income tax benefit of$5.9 million on a loss before taxes of$26.3 million , for an effective rate of 22.4 percent. The decrease in the effective rate versus the three months endedMarch 31, 2020 , was primarily driven by the loss before taxes of$26.3 million in the current quarter versus income of$11.1 million in the prior year. For the three months endedMarch 31, 2020 , we recorded an income tax expense of$3.1 million on income before taxes of$11.1 million , for an effective rate of 27.9 percent.
Net (Loss) Income/Diluted Income per Share
For the three months endedMarch 31, 2021 , net income decreased primarily due to lower operating income and the increase in other expense due to the bond and bank debt refinancing. Foreign exchange increased net income$1.3 million , or 16.3 percent. Diluted income per share benefited from fewer outstanding shares. SegmentNet Sales and Operating (Loss) Income for the Three Months EndedMarch 31, 2021 and 2020ACCO Brands North America Three Months Ended March 31, Amount of Change (in millions) 2021 2020 $ %/pts Net sales$ 188.8 $ 167.8 $ 21.0 12.5 % Segment operating (loss) income(1) (0.7) 7.6 (8.3)
NM
Segment operating (loss) income margin (0.4) % 4.5 % (4.9) pts Comparable net sales (Non-GAAP)(2)$ 136.3 $ 167.8 $ (31.5) (18.8) % (1) Segment operating (loss) income excludes corporate costs. See "Part I, Item 1. Note 17. Information on Business Segments," for a reconciliation of total "Segment operating (loss) income" to "(Loss) income before income tax." (2) See reconciliation to GAAP, contained in Part II, Item 6. "Supplemental Non-GAAP Financial Measures." 38 -------------------------------------------------------------------------------- Net sales increased due to the PowerA Acquisition, which added$51.5 million . Excluding PowerA, we continued to experience lower demand due to COVID-19 impacts, particularly in our commercial product lines as many people continued to work from home. Favorable foreign exchange increased net sales$1.0 million , or 0.6 percent. Operating income and operating margin decreased, primarily due to$3.4 million of increased amortization,$2.4 million of inventory step-up charges related to the PowerA Acquisition and$3.0 million of restructuring charges. Also contributing to the decline were cost increases, particularly in freight costs, and higher incentive accruals, which were partially offset by cost reductions and lower charges for obsolete inventory. We received$0.4 million in Canadian government assistance, primarily provided in return for maintaining employment and wages. PowerA contributed$2.8 million , including the amortization charge noted above. ACCO Brands EMEA Three Months Ended March 31, Amount of Change (in millions) 2021 2020 $ %/pts Net sales$ 156.9 $ 127.5 $ 29.4 23.1 % Segment operating income(1) 16.8 12.0 4.8 40.0 % Segment operating income margin 10.7 % 9.4 % 1.3 pts Comparable net sales (Non-GAAP)(2) 136.1 127.5 $ 8.6 6.8 % Net sales increased primarily because of favorable foreign exchange of$12.2 million , or 9.6 percent, and the PowerA Acquisition which added$8.6 million . Comparable sales increased primarily from higher demand for air purifiers, do-it-yourself tools, computer accessories, home-use filing items, shredders, and art products. These increases more than offset lower demand for traditional office products due to COVID-19 impacts. We took share in many office product categories. Operating income and operating margin increased primarily due to higher sales, which offset higher incentive costs and inflation, particularly related to inbound freight. Foreign exchange benefited operating income$1.6 million , or 13.3 percent and PowerA contributed$2.6 million .
Three Months Ended March 31, Amount of Change
(in millions) 2021 2020 $ %/pts
Net sales $ 64.8 $ 88.8 $ (24.0) (27.0) %
Segment operating income(1) 0.6 5.9 (5.3) (89.8) %
Segment operating income margin 0.9 % 6.6 % (5.7) pts
Comparable net sales (Non-GAAP)(2) $ 59.7 88.8 $ (29.1) (32.7) %
Net sales and comparable sales decreased primarily as a result of lower demand
related to COVID-19 impacts that most significantly occurred in Brazil and
Mexico where schools and many offices remain closed. The PowerA Acquisition
contributed $2.6 million and favorable foreign exchange added $2.5 million , or
2.8 percent.
Operating income was down significantly, primarily from lower sales, fixed
expenses, higher bad debt reserves, and restructuring charges. These factors
were partially offset by cost reductions. Foreign exchange increased operating
income $0.8 million or 13.6 percent, and PowerA contributed $1.2 million .
39
--------------------------------------------------------------------------------Liquidity and Capital Resources
Our primary liquidity needs are to support our working capital requirements, service indebtedness and fund capital expenditures, dividends and acquisitions. Our principal sources of liquidity are cash flows from operating activities, cash and cash equivalents held and seasonal borrowings under our$600 million multi-currency revolving credit facility (the "Revolving Facility"). As ofMarch 31, 2021 , there was$218.9 million in borrowings outstanding under the Revolving Facility ($16.3 million reported in "Current portion of long-term debt" and$202.6 million reported in "Long-term debt, net"), we had$75.1 million in cash on hand, and the amount available for borrowings was$367.1 million (allowing for$14.0 million of letters of credit outstanding on that date). We maintain adequate financing arrangements at market rates. EffectiveMarch 31, 2021 , we amended our bank debt maintenance covenant increasing the maximum Consolidated Leverage Ratio for the fiscal quarter endingSeptember 30, 2022 and thereafter to 4.00:1.00 from 3.75:1.00. As ofMarch 31, 2021 , our Consolidated Leverage Ratio was approximately 4.50 to 1.00 versus our maximum covenant of 5.25 to 1.00. We have no debt maturities beforeMarch 2026 . Given the debt incurred in connection with our acquisition of PowerA, our near-term use of cash will be to fund our dividend and reduce debt. As a result, we currently do not anticipate repurchasing shares of our common stock in 2021. Our long-term strategy remains to deploy cash to fund dividends, reduce debt, make acquisitions and repurchase stock. The$628.1 million of debt currently outstanding under our senior secured credit facilities has a weighted average interest rate of 2.34 percent as ofMarch 31, 2021 , and$575.0 million outstanding principal amount of our New Notes have 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 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 three months endedMarch 31, 2021 , the Company recorded$3.9 million in restructuring expenses primarily related to its cost reduction programs representing expected severance costs mainly inNorth America . Additional charges were also taken inBrazil , EMEA andMexico . For additional details, see "Note 10. Restructuring" to the condensed consolidated financial statements contained in "Part I, Item 1. Financial Information" of this Quarterly Report on Form 10-Q.
In addition, the Company recorded a
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Cash Flow for the Three Months Ended
Cash Flow from Operating Activities
Cash used by operating activities during the three months endedMarch 31, 2021 was$42.4 million , an increase in cash outflow of$17.2 million compared to cash used by operating activities of$25.2 million during the three months endedMarch 31, 2020 . The$17.2 million increase in cash used from operating activities was primarily due to the increase in cash used to rebuild PowerA's working capital because we purchased PowerA without its outstanding accounts receivable or payable. The significant change was the result of a decrease in cash provided by net working capital of$49.3 million , which was partially offset by decreases in payments of customer incentives of$13.3 million driven by lower sales, lower annual employee incentive payments of approximately$7.6 million and less net cash used for paying accrued expenses, including income taxes. The table below shows our cash flow used or provided by accounts receivable, inventories and accounts payable for the three months endedMarch 31, 2021 and 2020: Three Months Ended March 31, March 31, Amount of (in millions) 2021 2020 Change Accounts receivable$ 34.4 $ 112.0 $ (77.6) Inventories (54.4) (26.2) (28.2) Accounts payable 11.3 (45.2) 56.5 Cash flow (used) provided by net working capital$ (8.7)
•Accounts receivable was a source of cash of$34.4 million during the three months endedMarch 31, 2021 , an unfavorable change of$77.6 million compared to a source of cash of$112.0 million during the first three months endedMarch 31, 2020 . The$77.6 million unfavorable change was due to lower sales available for collection and minimal collections related to Power A as we did not purchase the outstanding accounts receivable at closing. •Inventories was a use of cash of$54.4 million during the three months endedMarch 31, 2021 , an unfavorable change of$28.2 million when compared with the$26.2 million cash used during the three months endedMarch 31, 2020 . The use of cash for inventory was higher during the three months endedMarch 31, 2021 , compared to the three months endedMarch 31, 2020 , as a result of the Company increasing inventory during the quarter both to support the growth in PowerA and also due to supply chain disruptions related to international shipping and an extendedChinese New Year . •Accounts payable was a source of cash of$11.3 million during the three months endedMarch 31, 2021 , a favorable change of$56.5 million when compared to a use of cash of$45.2 million during the three months endedMarch 31, 2020 . The source of cash for accounts payable was a result of the Company purchasing more inventory and also not acquiring the outstanding accounts payable associated with PowerA at closing.
Cash Flow from Investing Activities
Cash provided by investing activities was$14.4 million and cash used by investing activities was$6.3 million for the three months endedMarch 31, 2021 and 2020, respectively. Cash used for capital expenditures was down$3.1 million primarily due to the completion of certain IT projects during 2020. Cash provided by acquisitions was an$18.2 million inflow in the first quarter of 2021 for the working capital adjustment received from the seller of PowerA due to having delivered less working capital than required in the acquisition agreement.
Cash Flow from Financing Activities
Cash provided by financing activities was$68.3 million for the three months endedMarch 31, 2021 , a decrease of$30.9 million , compared with cash provided of$99.2 million by financing activities during the first three months of the prior year. The decrease of$30.9 million primarily relates to a reduction of cash used for share repurchases of$18.9 million in 2020 and a decrease in cash provided by our incremental net borrowings of$31.5 million during the first three months of 2021, compared to the prior year's first three months. In addition, there were cash outflows of$9.8 million related to the call premium on early redemption of our Prior Notes and$9.7 million for payments of debt issuance costs associated with our bond and bank debt refinancing in the quarter. 41 --------------------------------------------------------------------------------
Credit Facilities and Notes Covenants
As of
Guarantees and Security
Generally, obligations under the Credit Agreement are guaranteed by certain of the Company's existing and future subsidiaries, and are secured by substantially all of the Company's and certain guarantor subsidiaries' assets, subject to certain exclusions and limitations.
Supplemental Non-GAAP Financial Measure
To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles in theU.S. ("GAAP"), we provide investors with certain non-GAAP financial measures, including comparable net sales. Comparable net sales represent net sales excluding the impact of acquisitions and with current-period foreign operation sales translated at prior-year currency rates. We sometimes refer to comparable net sales as comparable sales. We use comparable net sales both to explain our results to stockholders and the investment community and in the internal evaluation and management of our business. We believe comparable net sales provide management and investors with a more complete understanding of our underlying operational results and trends, facilitate meaningful period-to-period comparisons and enhance an overall understanding of our past and future financial performance. Comparable net sales should not be considered in isolation or as a substitute for, or superior to, the directly comparable GAAP financial measure and should be read in connection with the Company's financial statements presented in accordance with GAAP.
The following tables provide a reconciliation of GAAP net sales change as reported to non-GAAP comparable net sales change:
Comparable Net Sales - Three Months Ended March 31, 2021
Non-GAAP
GAAP Currency Comparable
(in millions) Net Sales Translation Acquisition Net Sales
ACCO Brands North America $188.8 $1.0 $51.5 $136.3
ACCO Brands EMEA 156.9 12.2 8.6 136.1
ACCO Brands International 64.8 2.5 2.6 59.7
Total $410.5 $15.7 $62.7 $332.1
Amount of Change - Three Months Ended March 31, 2021 compared to the Three Months Ended March 31, 2020
$ Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
(in millions) Change Translation Acquisition Change
ACCO Brands North America $21.0 $1.0 $51.5 $(31.5)
ACCO Brands EMEA 29.4 12.2 8.6 8.6
ACCO Brands International (24.0) 2.5 2.6 (29.1)
Total $26.4 $15.7 $62.7 $(52.0)
% Change - Net Sales
Non-GAAP
GAAP Comparable
Net Sales Currency Net Sales
Change Translation Acquisition Change
ACCO Brands North America 12.5% 0.6% 30.7% (18.8)%
ACCO Brands EMEA 23.1% 9.6% 6.7% 6.8%
ACCO Brands International (27.0)% 2.8% 2.9% (32.7)%
Total 6.9% 4.1% 16.3% (13.5)%
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