ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended June 30, 2022 and 2021 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 designs, manufactures, and markets well-recognized consumer, school, technology and office products. Our widely known brands include AT-A-GLANCE®, Barrilito®, Derwent®, Esselte®, Five Star®, Foroni®, GBC®, Hilroy®, Kensington®, Leitz®, Marbig®, Mead®, NOBO®, PowerA®, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra®, and TruSens®. Approximately 70 percent of our sales come from brands that occupy the No. 1 or No. 2 position in the product categories in which we compete. Our top 12 brands represented $1.5 billion of our 2021 net sales. We distribute our products through a wide variety of channels to ensure that our products are readily and conveniently available for purchase by consumers and other end-users, wherever they prefer to shop. These channels include mass retailers; e-tailers; discount, drug/grocery and variety chains; warehouse clubs; hardware and specialty stores; independent office product dealers; office superstores; wholesalers; contract stationers; technology specialty businesses; and our direct-to-consumer channel. Our products are sold primarily in the U.S., Europe, Australia, Canada, Brazil and Mexico.
We have transformed our business by investing in innovative branded consumer and technology products for use in businesses, schools, and homes, both organically and through acquisitions. This change should enable us to continue to organically grow sales and increase profitability by focusing our selling efforts on growing channels, as well as strategically managing declining customers and commoditized product categories, which remain important profit and cash generators. Our top five customers represented 36 percent of our sales in 2021.
Our business is consumer- and brand-centric, product differentiated, and geographically diverse. We have organically grown our PowerA® video gaming accessories, Kensington® computer accessories and Leitz® and Rexel® European range of shredders and organization product offerings. ACCO Brands remains a leading supplier of school products, including our top-selling Five Star® line of school notebooks in North America, laminating machines, and stapling and punching products, among others.
We have made five major acquisitions over the past six years. These acquisitions have meaningfully expanded our portfolio of well-known brands, enhanced our competitive position from both a product and channel perspective, and added scale to our operations. We believe that these acquisitions have cumulatively set us up to achieve organic growth in the long-term. Historically, our approach to acquisitions has focused on consolidation and geographic expansion opportunities that met our strategic and financial criteria. Strategically, we have targeted categories or geographies that provided opportunities for growth, leading brands, and channel diversity. More recently we have prioritized debt reduction, but will still consider opportunistic acquisitions that focus on growing product categories, including adjacencies.
Our most recent acquisition of PowerA in late 2020 allowed us to enter the attractive product category of third-party video gaming accessories, including controllers, power charging stations, and headsets. The addition of PowerA has meaningfully improved ACCO Brands' potential for organic sales growth and profitability and reinforced our presence in the faster growing mass and e-commerce channels. The Company plans to expand this business internationally, particularly in Europe and Asia, adding to organic growth over the longer term. PowerA® and Kensington® are our largest and fastest growing brands but they continue to be constrained by the lack of worldwide semiconductor chip availability, which we expect to gradually improve throughout the remainder of 2022.
28
Our leading product category positions provide the scale to invest in marketing and product innovation to drive profitable growth. We expect to grow in mature markets in the gaming, technology, and branded school and office categories. We also anticipate continuing recovery in areas depressed from COVID-19 as the level of office use and in person education increases globally, particularly in Latin America.
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
During the second quarter our net sales increased $3.2 million, or 0.6 percent, including 4.6 percent from adverse foreign exchange. Comparable net sales increased 5.2 percent. Price increases added 8.1 percent while volume declined 2.9 percent. Our International segment reported 16.4 percent sales growth as demand for school products continued to increase in Brazil and Mexico following a return to in-person education. Our North America segment’s sales increased 3.9 percent due to higher prices and volume increases in school products, computer accessories, and business products.
In the second quarter, the Company reported operating income of $55.4 million, a $5.5 million increase, compared with operating income of $49.9 million for the prior year's second quarter. Operating income increased due to a favorable change to the contingent earnout, partially offset by higher restructuring expense of $1.9 million. Operating income included contingent earnout income of $9.4 million compared with earnout expense of $4.9 million in the prior year. Operating income was negatively affected by higher inflation that was not fully mitigated with price increases, lower volume, and adverse foreign exchange of $1.0 million. Gross margin declined 290 basis points reflecting the margin erosion from higher costs despite multiple price increases. This is particularly acute in EMEA.
We have been experiencing substantial levels of inflation in the cost of our products, including freight. We have responded, and will continue to respond, by increasing selling prices more frequently than we have historically, but these increases continue to lag the cumulative impact of inflation. We expect moderating inflationary pressures and supply chain disruptions to continue for the remainder of the year. We have seen most foreign currencies weaken against the U.S. dollar which has also adversely affected our financial results and we also expect that to continue.
Our operating cash flow for the first six months was a use of cash of $97.9 million, compared to a use of cash of $55.1 million in the prior year. 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 that seasonal flow pattern to be repeated again this year.
In management’s opinion, the goodwill balance for our ACCO Brands North America and ACCO Brands International reporting units could be at risk for impairment if operating performance does not improve as expected. This includes negative changes to our long-term outlook for our business and other assumptions which impact fair value including low or declining revenue growth rates, depressed operating margins, or adverse changes to discount rates.
29
Consolidated Results of Operations for the Three and Six Months Ended June 30, 2022 and 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Amount of Change |
|
|
|
Six Months Ended June 30, |
|
|
Amount of Change |
|
|
(in millions, except per share data) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
%/pts |
|
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
%/pts |
|
|
Net sales |
$ |
|
521.0 |
|
$ |
|
517.8 |
|
$ |
|
3.2 |
|
|
|
0.6 |
% |
|
$ |
|
962.6 |
|
$ |
|
928.3 |
|
$ |
|
34.3 |
|
|
|
3.7 |
% |
|
Cost of products sold |
|
|
371.0 |
|
|
|
353.7 |
|
|
|
17.3 |
|
|
|
4.9 |
% |
|
|
|
693.0 |
|
|
|
648.7 |
|
|
|
44.3 |
|
|
|
6.8 |
% |
|
Gross profit |
|
|
150.0 |
|
|
|
164.1 |
|
|
|
(14.1 |
) |
|
|
(8.6 |
)% |
|
|
|
269.6 |
|
|
|
279.6 |
|
|
|
(10.0 |
) |
|
|
(3.6 |
)% |
|
Gross profit margin |
|
|
28.8 |
% |
|
|
31.7 |
% |
|
|
|
|
|
(2.9 |
) |
pts |
|
|
28.0 |
% |
|
|
30.1 |
% |
|
|
|
|
|
(2.1 |
) |
pts |
Selling, general and administrative expenses |
|
|
91.6 |
|
|
|
97.7 |
|
|
|
(6.1 |
) |
|
|
(6.2 |
)% |
|
|
|
190.4 |
|
|
|
191.7 |
|
|
|
(1.3 |
) |
|
|
(0.7 |
)% |
|
SG&A% to net sales |
|
|
17.6 |
% |
|
|
18.9 |
% |
|
|
|
|
|
(1.3 |
) |
pts |
|
|
19.8 |
% |
|
|
20.7 |
% |
|
|
|
|
|
(0.9 |
) |
pts |
Amortization of intangibles |
|
|
10.5 |
|
|
|
11.6 |
|
|
|
(1.1 |
) |
|
|
(9.5 |
)% |
|
|
|
21.6 |
|
|
|
23.6 |
|
|
|
(2.0 |
) |
|
|
(8.5 |
)% |
|
Restructuring charges |
|
|
1.9 |
|
|
|
— |
|
|
|
1.9 |
|
|
NM |
|
|
|
|
2.2 |
|
|
|
3.9 |
|
|
|
(1.7 |
) |
|
|
(43.6 |
)% |
|
Change in fair value of contingent consideration |
|
|
(9.4 |
) |
|
|
4.9 |
|
|
|
(14.3 |
) |
|
NM |
|
|
|
|
(6.8 |
) |
|
|
11.6 |
|
|
|
(18.4 |
) |
|
NM |
|
|
Operating income |
|
|
55.4 |
|
|
|
49.9 |
|
|
|
5.5 |
|
|
|
11.0 |
% |
|
|
|
62.2 |
|
|
|
48.8 |
|
|
|
13.4 |
|
|
|
27.5 |
% |
|
Operating income margin |
|
|
10.6 |
% |
|
|
9.6 |
% |
|
|
|
|
|
1.0 |
|
pts |
|
|
6.5 |
% |
|
|
5.3 |
% |
|
|
|
|
|
1.2 |
|
pts |
Interest expense |
|
|
10.8 |
|
|
|
11.6 |
|
|
|
(0.8 |
) |
|
|
(6.9 |
)% |
|
|
|
20.5 |
|
|
|
24.8 |
|
|
|
(4.3 |
) |
|
|
(17.3 |
)% |
|
Interest income |
|
|
(2.2 |
) |
|
|
(0.5 |
) |
|
|
(1.7 |
) |
|
NM |
|
|
|
|
(3.6 |
) |
|
|
(0.6 |
) |
|
|
(3.0 |
) |
|
NM |
|
|
Non-operating pension income |
|
|
(1.3 |
) |
|
|
(2.5 |
) |
|
|
1.2 |
|
|
|
(48.0 |
)% |
|
|
|
(2.7 |
) |
|
|
(3.3 |
) |
|
|
0.6 |
|
|
|
(18.2 |
)% |
|
Other (income) expense, net |
|
|
(3.7 |
) |
|
|
(9.0 |
) |
|
|
5.3 |
|
|
|
(58.9 |
)% |
|
|
|
(2.8 |
) |
|
|
3.9 |
|
|
|
(6.7 |
) |
|
NM |
|
|
Income before income tax |
|
|
51.8 |
|
|
|
50.3 |
|
|
|
1.5 |
|
|
|
3.0 |
% |
|
|
|
50.8 |
|
|
|
24.0 |
|
|
|
26.8 |
|
|
|
111.7 |
% |
|
Income tax expense (benefit) |
|
|
12.4 |
|
|
|
1.7 |
|
|
|
10.7 |
|
|
NM |
|
|
|
|
14.1 |
|
|
|
(4.2 |
) |
|
|
18.3 |
|
|
NM |
|
|
Effective tax rate |
|
|
23.9 |
% |
|
|
3.4 |
% |
|
|
|
|
|
20.5 |
|
pts |
|
|
27.8 |
% |
|
|
(17.5 |
)% |
|
|
|
|
|
45.3 |
|
pts |
Net income |
|
|
39.4 |
|
|
|
48.6 |
|
|
|
(9.2 |
) |
|
|
(18.9 |
)% |
|
|
|
36.7 |
|
|
|
28.2 |
|
|
|
8.5 |
|
|
|
30.1 |
% |
|
Weighted average number of diluted shares outstanding: |
|
|
97.4 |
|
|
|
97.2 |
|
|
|
0.2 |
|
|
|
0.2 |
% |
|
|
|
98.0 |
|
|
|
96.9 |
|
|
|
1.1 |
|
|
|
1.1 |
% |
|
Diluted income per share |
$ |
|
0.40 |
|
$ |
|
0.50 |
|
$ |
|
(0.10 |
) |
|
|
(20.0 |
)% |
|
$ |
|
0.37 |
|
$ |
|
0.29 |
|
$ |
|
0.08 |
|
|
|
27.6 |
% |
|
Comparable net sales (Non-GAAP)⁽¹⁾ |
$ |
|
544.6 |
|
$ |
|
517.8 |
|
$ |
|
26.8 |
|
|
|
5.2 |
% |
|
$ |
|
1,001.1 |
|
$ |
|
928.3 |
|
$ |
|
72.8 |
|
|
|
7.8 |
% |
|
(1)See reconciliation to GAAP, contained in Part I, Item 2. "Supplemental Non-GAAP Financial Measure."
Foreign Exchange Rates
Approximately 52 percent of our net sales for the six months ended June 30, 2022, were transacted in a currency other than the U.S. dollar. Additionally, we source approximately 60 percent of our products mainly from China, Vietnam and other Far Eastern countries using U.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 fluctuations in foreign currency rates relative to the U.S. dollar.
Net Sales
For the three months ended June 30, 2022, our net sales increased $3.2 million, or 0.6 percent, including 4.6 percent from adverse foreign exchange. Comparable net sales increased 5.2 percent. Price increases added 8.1 percent and volume decreased 2.9 percent. The lower volume was primarily due to reduced sales of gaming accessories. The lack of semiconductor chips limits the production of gaming consoles affecting demand for gaming accessories. We are also seeing decreased demand this year compared to 2021 where we had significant increased demand due to COVID-19. We expect sales of gaming accessories for 2022 to be less than the prior year.
For the six months ended June 30, 2022, net sales increased $34.3 million. Higher prices added 7.4 percent and volume increased 0.5 percent mainly for back-to-school and business products, partially offset by lower sales of gaming accessories and unfavorable foreign exchange of 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.
30
For the three months ended June 30, 2022, cost of products sold increased $17.3 million, or 4.9 percent, primarily due to inflation related to commodities, logistics and labor partially offset by lower volume. Foreign exchange reduced cost of products sold $17.7 million, or 5.0 percent.
For the six months ended June 30, 2022, cost of products sold increased $44.3 million, or 6.8 percent, primarily due to inflation related to commodities, logistics and labor. Foreign exchange reduced cost of products sold $28.7 million, or 4.4 percent.
Gross Profit
For the three months ended June 30, 2022, gross profit decreased $14.1 million, or 8.6 percent, primarily due to cost inflation and to a lesser extent lower sales volume. Foreign exchange reduced gross profit $5.9 million, or 3.6 percent. Gross profit margin decreased 290 basis points, primarily because the benefit of our sales price increases only partly offset our cumulative incremental inflation.
For the six months ended June 30, 2022, gross profit decreased $10.0 million, or 3.6 percent, primarily due to cost inflation exceeding the benefit of higher prices, which was partially offset by a $2.4 million step-up charge related to the acquisition of PowerA which did not repeat. Foreign exchange reduced gross profit $9.8 million, or 3.5 percent. Gross profit margin decreased 210 basis points primarily because the benefit of our sales price increases did not offset our cumulative incremental inflation.
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 June 30, 2022, SG&A decreased $6.1 million, or 6.2 percent, primarily due to the favorable impact of foreign exchange which reduced SG&A by $4.4 million, or 4.5 percent. Excluding foreign exchange, expenses were slightly down with increased sales and marketing expense more than offset by lower administrative expense, including lower incentive compensation costs. SG&A as a percentage of net sales decreased primarily from higher sales.
For the six months ended June 30, 2022, SG&A decreased $1.3 million, or 0.7 percent, primarily due to the favorable impact of foreign exchange which reduced SG&A by $6.8 million, or 3.5 percent. Excluding foreign exchange, expenses were slightly up due to increased sales and marketing expense and $1.5 million of additional operating expenses related to our Russian business. SG&A as a percentage of net sales decreased primarily from higher sales.
Restructuring Charges
For the three months ended June 30, 2022, restructuring expense was $1.9 million, primarily related to our cost reduction programs, compared with net restructuring expense of zero in the prior year.
For the six months ended June 30, 2022, restructuring expense was $2.2 million, a decrease of $1.7 million from the prior year.
Change in Fair Value of Contingent Consideration
For the three months ended June 30, 2022, the change in fair value of contingent consideration related to the earnout for the PowerA acquisition was income of $9.4 million, a favorable change of $14.3 million, due to the reversal of prior period
31
accruals. The PowerA operations has been adversely impacted by a combination of factors that have reduced the expected financial results for the current year such that the anticipated earnout is now lower than previously expected.
For the six months ended June 30, 2022, the change in fair value of contingent consideration related to the earnout for the PowerA acquisition was income of $6.8 million, a favorable change of $18.4 million for the reasons noted above.
Operating Income
For the three months ended June 30, 2022, operating income increased to $55.4 million, compared to $49.9 million in the prior year. The increase of $5.5 million included a favorable change in our contingent earnout of $14.3 million, a decrease of SG&A expense of $6.1 million primarily due to the favorable impact of foreign exchange and lower incentive compensation, and lower amortization of $1.1 million. Gross profit decreased by $14.1 million due to higher inflation that was not fully mitigated with price increases and restructuring expense increased by $1.9 million. Adverse foreign exchange reduced operating income by $1.0 million.
For the six months ended June 30, 2022, operating income increased to $62.2 million, compared to $48.8 million in the prior year. The increase of $13.4 million included a favorable change in our contingent earnout of $18.4 million, a decrease in amortization of $2.0 million, a decrease in restructuring expense of $1.7 million, and a decrease of SG&A expense of $1.3 million primarily due to the favorable impact of foreign exchange and lower incentive compensation. Gross profit decreased by $10.0 million due to higher inflation that was not fully mitigated with price increases. Adverse foreign exchange reduced operating income by $2.2 million.
Interest Expense
For the three and six months ended June 30, 2022, the decrease in interest expense was primarily due to lower outstanding debt and lower interest rates versus the first half of 2021.
Other (Income) Expense, Net
For the three months ended June 30, 2022, other (income) expense, net was income of $3.7 million, compared to income of $9.0 million in the second quarter of the prior year. The change was due to a decrease in the Brazilian tax credits of $5.3 million in the current year compared to the prior year.
For the six months ended June 30, 2022, other (income) expense, net was income of $2.8 million, compared to expense of $3.9 million in the prior year. The change was primarily due to charges of $13.5 million related to the refinancing of our debt in the prior year's first six months that did not recur. This was partially offset by a decrease in the Brazilian tax credits of $5.3 million in the current year compared to the prior year.
Income Tax Expense (Benefit)
For the three months ended June 30, 2022, we recorded income tax expense of $12.4 million on income before taxes of $51.8 million. This compared with an income tax expense of $1.7 million on income before taxes of $50.3 million for the three months ended June 30, 2021.
For the six months ended June 30, 2022, we recorded income tax expense of $14.1 million on income before taxes of $50.8 million. This compared with an income tax benefit of $4.2 million on income before taxes of $24.0 million for the six months ended June 30, 2021.
See "Note 11. Income Taxes" for more information.
32
Net Loss/Diluted Loss per Share
For the three months ended June 30, 2022, net income decreased $9.2 million, compared to the prior year, primarily due to lower discrete tax benefits as well as reduced operating tax credits related to Brazil, partially offset by higher operating income.
For the six months ended June 30, 2022, net income increased $8.5 million, compared to the prior year, primarily due to higher operating income, the non-repeat of prior year debt refinancing expenses of $13.5 million, lower discrete tax benefits, and reduced operating tax credits related to Brazil.
Segment Net Sales and Operating Income (Loss) for the Three and Six Months Ended June 30, 2022 and 2021
ACCO Brands North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Amount of Change |
|
|
Six Months Ended June 30, |
|
Amount of Change |
|
(in millions) |
|
2022 |
|
2021 |
|
$ |
|
%/pts |
|
|
2022 |
|
2021 |
|
$ |
|
%/pts |
|
Net sales |
$ |
306.6 |
$ |
295.1 |
$ |
11.5 |
|
3.9 % |
|
$ |
515.1 |
$ |
483.9 |
$ |
31.2 |
|
6.4 % |
|
Segment Operating income⁽¹⁾ |
|
50.7 |
|
53.8 |
|
(3.1) |
|
(5.8)% |
|
|
64.6 |
|
53.1 |
|
11.5 |
|
21.7 % |
|
Segment operating income margin |
|
16.5% |
|
18.2 % |
|
|
|
-1.7 |
pts |
|
12.5% |
|
11.0 % |
|
|
|
1.5 |
pts |
Comparable net sales (Non-GAAP)⁽²⁾ |
$ |
308.0 |
$ |
295.1 |
$ |
12.9 |
|
4.4 % |
|
$ |
516.5 |
$ |
483.9 |
$ |
32.6 |
|
6.7 % |
|
(1)Segment operating income excludes corporate costs. See "Part I, Item 1. Note 17. Information on Business Segments," for a reconciliation of total "Segment operating income" to "Income before income tax."
(2)See reconciliation to GAAP, contained in Part I, Item 2. "Supplemental Non-GAAP Financial Measure."
|
|
|
|
|
FX Impact vs US$ |
|
2022 2nd QTR Avg vs. 2021 2nd QTR Avg |
|
2022 YTD Avg vs. 2021 YTD Avg |
Currency |
|
Increase/(Decline) |
|
Increase/(Decline) |
Canadian dollar |
|
(4)% |
|
(2)% |
For the three months ended June 30, 2022, sales and comparable net sales increased, primarily due to sales price increases which added $19.5 million, or 6.6 percent. Overall volume decreased by $6.6 million, or 2.3 percent, primarily due to lower sales of video gaming products, reflecting the semiconductor chip shortage and lower industry-wide demand, which more than offset the volume increases in business and school products and computer accessories. The increase in volume of school products was primarily due to a higher back-to-school sell-in versus the prior year.
For the six months ended June 30, 2022, sales and comparable net sales increased, primarily due to sales price increases which added $33.4 million, or 6.9 percent. Overall volume decreased $0.8 million, or 0.2 percent, primarily due to lower sales of video gaming products, reflecting the semiconductor chip shortage and lower industry-wide demand, partially offset by increases in business and school products and computer accessories. The increase in volume of school products was primarily due to a higher back-to-school sell-in versus the prior year.
For the three months ended June 30, 2022, operating income and operating margin decreased, primarily due to higher prices of commodity materials, including paper, increased freight costs and lower sales volume from gaming accessories. In addition, our back-to-school sell-in did not reflect the full impact of our increased pricing given the early placement of orders for the season. These factors were only partly offset by the benefit of price increases and lower SG&A. The current period also included $0.8 million of higher restructuring charges.
For the six months ended June 30, 2022, operating income and operating margin increased, primarily due to higher sales. Restructuring charges were $1.9 million lower and the prior period included $2.4 million of inventory step-up related to PowerA.
33
ACCO Brands EMEA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Amount of Change |
|
|
Six Months Ended June 30, |
|
Amount of Change |
|
(in millions) |
|
2022 |
|
2021 |
|
$ |
|
%/pts |
|
|
2022 |
|
2021 |
|
$ |
|
%/pts |
|
Net sales |
$ |
137.9 |
$ |
157.0 |
$ |
(19.1) |
|
(12.2)% |
|
$ |
294.0 |
$ |
313.9 |
$ |
(19.9) |
|
(6.3)% |
|
Segment Operating (loss) income⁽¹⁾ |
|
(1.5) |
|
9.9 |
|
(11.4) |
|
NM |
|
|
4.1 |
|
26.7 |
|
(22.6) |
|
(84.6)% |
|
Segment operating (loss) income margin |
|
(1.1)% |
|
6.3% |
|
|
|
-7.4 |
pts |
|
1.4% |
|
8.5% |
|
|
|
-7.1 |
pts |
Comparable net sales (Non-GAAP)⁽²⁾ |
$ |
157.7 |
$ |
157.0 |
$ |
0.7 |
|
0.4 % |
|
$ |
326.2 |
$ |
313.9 |
$ |
12.3 |
|
4.0 % |
|
(1)Segment operating income excludes corporate costs. See "Part I, Item 1. Note 17. Information on Business Segments," for a reconciliation of total "Segment operating income" to "Income before income tax."
(2)See reconciliation to GAAP, contained in Part I, Item 2. "Supplemental Non-GAAP Financial Measure."
|
|
|
|
|
FX Impact vs US$ |
|
2022 2nd QTR Avg vs. 2021 2nd QTR Avg |
|
2022 YTD Avg vs. 2021 YTD Avg |
Currency |
|
Increase/(Decline) |
|
Increase/(Decline) |
Euro |
|
(12)% |
|
(9)% |
Swedish krona |
|
(14)% |
|
(12)% |
British pound |
|
(10)% |
|
(6)% |
For the three months ended June 30, 2022, net sales decreased due to adverse foreign exchange of $19.8 million, or 12.6 percent. Comparable net sales increased slightly due to price increases which added $15.5 million, or 9.9 percent, but were largely offset by lower volume of $14.9 million, or 9.5 percent, primarily from business products in a difficult economic environment which included accelerated inflation.
For the six months ended June 30, 2022, net sales decreased due to adverse foreign exchange of $32.2 million, or 10.3 percent. Comparable net sales increased mainly due to price increases which added $23.5 million, or 7.5 percent, but were partly offset by lower volume of $11.2 million, or 3.6 percent, primarily from business products in a difficult economic environment which included accelerated inflation.
For the three months ended June 30, 2022, the segment had a small operating loss due to lower sales volume and cost inflation that exceeded the benefit of price increases. Cost increases in EMEA have been higher than in our other segments primarily due to significant inflation in locally sourced raw materials related to the war in Ukraine, and high energy costs. The segment continues to experience both higher inflation and a weakening of local currencies versus the U.S. dollar which further magnifies the inflation impact of Asian-sourced products. We expect moderating inflationary pressures and unfavorable foreign currency impacts to continue for the remainder of the year. Consequently additional price increases have been and will continue to be taken as necessary.
For the six months ended June 30, 2022, operating income and operating margin decreased substantially due to cost inflation that exceeded the benefit of price increases, and lower volume as well as $1.2 million from unfavorable foreign exchange.
34
ACCO Brands International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Amount of Change |
|
|
Six Months Ended June 30, |
|
Amount of Change |
|
(in millions) |
|
2022 |
|
2021 |
|
$ |
|
%/pts |
|
|
2022 |
|
2021 |
|
$ |
|
%/pts |
|
Net sales |
$ |
76.5 |
$ |
65.7 |
$ |
10.8 |
|
16.4 % |
|
$ |
153.5 |
$ |
130.5 |
$ |
23.0 |
|
17.6 % |
|
Segment Operating income⁽¹⁾ |
|
6.3 |
|
2.8 |
|
3.5 |
|
125.0 % |
|
|
10.5 |
|
3.4 |
|
7.1 |
|
208.8 % |
|
Segment operating income margin |
|
8.2% |
|
4.3% |
|
|
|
3.9 |
pts |
|
6.8% |
|
2.6% |
|
|
|
4.2 |
pts |
Comparable net sales (Non-GAAP)⁽²⁾ |
$ |
78.9 |
$ |
65.7 |
$ |
13.2 |
|
20.1 % |
|
$ |
158.4 |
$ |
130.5 |
$ |
27.9 |
|
21.4 % |
|
(1) Segment operating income excludes corporate costs. See "Part I, Item 1. Note 17. Information on Business Segments," for a reconciliation of total "Segment operating income" to "Income before income tax."
(2) See reconciliation to GAAP, contained in Part I, Item 2. "Supplemental Non-GAAP Financial Measure."
|
|
|
|
|
FX Impact vs US$ |
|
2022 2nd QTR Avg vs. 2021 2nd QTR Avg |
|
2022 YTD Avg vs. 2021 YTD Avg |
Currency |
|
Increase/(Decline) |
|
Increase/(Decline) |
Brazilian real |
|
8 % |
|
6 % |
Australian dollar |
|
(7)% |
|
(7)% |
Mexican peso |
|
- % |
|
(1)% |
Japanese yen |
|
(15)% |
|
(12)% |
For the three months ended June 30, 2022, net sales and comparable net sales rose as a result of increased volume of $6.2 million, or 9.4 percent, particularly in Brazil and Mexico primarily due to a return to in-person education. Price increases added $7.0 million or 10.7 percent, but were partly offset by adverse foreign exchange of $2.4 million or 3.7 percent.
For the six months ended June 30, 2022, net sales and comparable net sales rose as a result of increased volume of $16.5 million, or 12.6 percent, particularly in Brazil and Mexico due to a return to in-person education. Price increases added $11.4 million, or 8.8 percent, but were partly offset by adverse foreign exchange of $4.9 million or 3.8 percent.
For the three months ended June 30, 2022, operating income and operating margin improved primarily as a result of higher sales, strong cost controls, and a reduction in operating tax reserves. Foreign exchange decreased operating income $0.4 million.
For the six months ended June 30, 2022, operating income and operating margin improved primarily as a result of higher sales, the benefit of long-term cost reductions and a $2.6 million benefit from lower reserves for operating taxes, bad debts, and obsolete inventory. Foreign exchange reduced operating income $0.8 million.
Liquidity and Capital Resources
Our primary liquidity needs are to support our working capital requirements, service indebtedness and fund capital expenditures, dividends and acquisitions. Our principal sources of liquidity are cash flows from operating activities, cash and cash equivalents held and seasonal borrowings under our $600 million multi-currency revolving credit facility (the "Revolving Facility"). As of June 30, 2022, there was $240.3 million in borrowings outstanding under the Revolving Facility ($12.8 million reported in "Current portion of long-term debt" and $227.5 million reported in "Long-term debt, net"), we had $91.7 million in cash on hand, and the amount available for borrowings was $348.7 million (allowing for $11.0 million of letters of credit outstanding on that date). We maintain adequate financing arrangements at market rates.
As of June 30, 2022, our Consolidated Leverage Ratio was approximately 3.97 to 1.00 versus our maximum covenant of 4.25 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.
35
During the second quarter of 2022, we made a contingent purchase price payment of $27.0 million related to the acquisition of PowerA.
The $612.4 million of debt currently outstanding under our senior secured credit facilities has a weighted average interest rate of 3.02 percent as of June 30, 2022, and the $575.0 million outstanding principal amount of our senior unsecured notes due 2029 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 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 $1.9 million and $2.2 million for the three and six months ended June 30, 2022, respectively, primarily related to the Company's cost reduction programs representing expected severance costs mainly in North America. Additional charges were also taken in EMEA. 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.
Cash Flow for the Six Months Ended June 30, 2022 and 2021
Cash Flow from Operating Activities
Cash used by operating activities during the six months ended June 30, 2022 was $97.9 million, an increase in cash used of $42.8 million compared to cash used by operating activities of $55.1 million during the prior year's first six months. The increase in cash used by operating activities was primarily due to higher investments in net working capital of $20.9 million, an increase in cash used for customer programs of approximately $15.4 million, and $9.2 million of cash used for contingent earnout during the second quarter, partially offset by increased net income of $8.5 million. The $9.2 million represents the portion of the contingent liability that was not included in our purchase accounting at the time of the acquisition of PowerA.
The table below shows our cash flow used or provided by the components of net working capital for the six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
(in millions) |
|
June 30, 2022 |
|
|
June 30, 2021 |
|
|
Amount of Change |
|
Accounts receivable |
$ |
|
(12.4 |
) |
$ |
|
(54.5 |
) |
$ |
|
42.1 |
|
Inventories |
|
|
(51.4 |
) |
|
|
(77.9 |
) |
|
|
26.5 |
|
Accounts payable |
|
|
(47.2 |
) |
|
|
42.3 |
|
|
|
(89.5 |
) |
Cash flow used by net working capital |
$ |
|
(111.0 |
) |
$ |
|
(90.1 |
) |
$ |
|
(20.9 |
) |
36
•Accounts receivable was a use of cash of $12.4 million during the six months ended June 30, 2022, a favorable change of $42.1 million compared to a use of cash of $54.5 million during the six months ended June 30, 2021. The $42.1 million favorable change was due to increased recovery of past due accounts and increased collections on a higher level of accounts receivable, primarily because the prior year included minimal collections related to gaming accessories as we did not purchase the outstanding accounts receivable at the closing of the acquisition of PowerA.
•Inventories was a use of cash of $51.4 million during the six months ended June 30, 2022, a favorable change of $26.5 million when compared with the $77.9 million cash used during the six months ended June 30, 2021. The favorable change was primarily driven by the Company having increased inventory exiting the prior year to mitigate supply chain issues.
•Accounts payable was a use of cash of $47.2 million during the six months ended June 30, 2022, an unfavorable change of $89.5 million when compared to a source of cash of $42.3 million during the six months ended June 30, 2021. The $89.5 million unfavorable change was due to increased payments on a higher level of accounts payable, partly because the prior year included minimal payments related to gaming accessories as we did not acquire the outstanding accounts payable at the closing of the acquisition of PowerA. In addition, high levels of accounts payable at the end of the prior year associated with the timing of inventory purchases noted above also drove higher vendor payments in the first half of the current year.
Cash Flow from Investing Activities
Cash used by investing activities was $6.8 million and cash provided by investing activities was $6.1 million for the six months ended June 30, 2022 and 2021, respectively. Cash used for capital expenditures was down by $2.3 million. Cash provided by acquisitions decreased by $15.4 million primarily because the prior year period included a working capital adjustment received from the seller of PowerA that did not recur.
Cash Flow from Financing Activities
Cash provided by financing activities was $153.9 million for the six months ended June 30, 2022, an increase of $63.7 million, compared with cash provided of $90.2 million by financing activities during the first six months of the prior year. The increase of $63.7 million primarily relates to an increase in cash provided by our incremental net borrowings of $81.9 million during the first six months of 2022, compared to the prior year's first six months. In addition, there were cash outflows of $20.3 million related to our debt refinancing during the first six months of 2021. Partly offsetting the cash provided by financing activities was uses of cash for share repurchases of $19.4 million and a $17.8 million payment representing the amount of contingent earnout which was recorded in our purchase accounting at the time of the acquisition of PowerA.
Credit Facilities and Notes Covenants
As of June 30, 2022, our Consolidated Leverage Ratio was approximately 3.97 to 1.00 versus our maximum covenant of 4.25 to 1.00.
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 the U.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 material acquisitions and with
37
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, 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 net sales change:
|
|
|
|
|
|
|
|
Comparable Net Sales - Three Months Ended June 30, 2022 |
|
|
|
|
Non-GAAP |
|
|
GAAP |
|
Currency |
|
Comparable |
(in millions) |
|
Net Sales |
|
Translation |
|
Net Sales |
ACCO Brands North America |
$ |
306.6 |
$ |
(1.4) |
$ |
308.0 |
ACCO Brands EMEA |
|
137.9 |
|
(19.8) |
|
157.7 |
ACCO Brands International |
|
76.5 |
|
(2.4) |
|
78.9 |
Total |
$ |
521.0 |
$ |
(23.6) |
$ |
544.6 |
|
|
|
|
|
|
|
|
Amount of Change - Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021 |
|
$ Change - Net Sales |
|
|
|
|
Non-GAAP |
|
|
GAAP |
|
|
|
Comparable |
|
|
Net Sales |
|
Currency |
|
Net Sales |
(in millions) |
|
Change |
|
Translation |
|
Change |
ACCO Brands North America |
$ |
11.5 |
$ |
(1.4) |
$ |
12.9 |
ACCO Brands EMEA |
|
(19.1) |
|
(19.8) |
|
0.7 |
ACCO Brands International |
|
10.8 |
|
(2.4) |
|
13.2 |
Total |
$ |
3.2 |
$ |
(23.6) |
$ |
26.8 |
|
|
|
|
|
|
|
|
% Change - Net Sales |
|
|
|
|
Non-GAAP |
|
|
GAAP |
|
|
|
Comparable |
|
|
Net Sales |
|
Currency |
|
Net Sales |
|
|
Change |
|
Translation |
|
Change |
ACCO Brands North America |
|
3.9% |
|
(0.5)% |
|
4.4% |
ACCO Brands EMEA |
|
(12.2)% |
|
(12.6)% |
|
0.4% |
ACCO Brands International |
|
16.4% |
|
(3.7)% |
|
20.1% |
Total |
|
0.6% |
|
(4.6)% |
|
5.2% |
|
|
|
|
|
|
|
|
Comparable Net Sales - Six Months Ended June 30, 2022 |
|
|
|
|
Non-GAAP |
|
|
GAAP |
|
Currency |
|
Comparable |
(in millions) |
|
Net Sales |
|
Translation |
|
Net Sales |
ACCO Brands North America |
$ |
515.1 |
$ |
(1.4) |
$ |
516.5 |
ACCO Brands EMEA |
|
294.0 |
|
(32.2) |
|
326.2 |
ACCO Brands International |
|
153.5 |
|
(4.9) |
|
158.4 |
Total |
$ |
962.6 |
$ |
(38.5) |
$ |
1,001.1 |
38
|
|
|
|
|
|
|
|
Amount of Change - Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021 |
|
$ Change - Net Sales |
|
|
|
|
Non-GAAP |
|
|
GAAP |
|
|
|
Comparable |
|
|
Net Sales |
|
Currency |
|
Net Sales |
(in millions) |
|
Change |
|
Translation |
|
Change |
ACCO Brands North America |
$ |
31.2 |
$ |
(1.4) |
$ |
32.6 |
ACCO Brands EMEA |
|
(19.9) |
|
(32.2) |
|
12.3 |
ACCO Brands International |
|
23.0 |
|
(4.9) |
|
27.9 |
Total |
$ |
34.3 |
$ |
(38.5) |
$ |
72.8 |
|
|
|
|
|
|
|
|
% Change - Net Sales |
|
|
|
|
Non-GAAP |
|
|
GAAP |
|
|
|
Comparable |
|
|
Net Sales |
|
Currency |
|
Net Sales |
|
|
Change |
|
Translation |
|
Change |
ACCO Brands North America |
|
6.4% |
|
(0.3)% |
|
6.7% |
ACCO Brands EMEA |
|
(6.3)% |
|
(10.3)% |
|
4.0% |
ACCO Brands International |
|
17.6% |
|
(3.8)% |
|
21.4% |
Total |
|
3.7% |
|
(4.1)% |
|
7.8% |