Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 Q3 2016 - ACCO BRANDS Corp | acco-20160930xex322.htm |
| EX-32.1 - EXHIBIT 32.1 Q3 2016 - ACCO BRANDS Corp | acco-20160930xex321.htm |
| EX-31.2 - EXHIBIT 31.2 Q3 2016 - ACCO BRANDS Corp | acco-20160930xex312.htm |
| EX-31.1 - EXHIBIT 31.1 Q3 2016 - ACCO BRANDS Corp | acco-20160930xex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2016
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 001-08454
ACCO Brands Corporation (Exact Name of Registrant as Specified in Its Charter) |
Delaware | 36-2704017 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
Four Corporate Drive Lake Zurich, Illinois 60047 (Address of Registrant’s Principal Executive Office, Including Zip Code) |
(847) 541-9500 (Registrant’s Telephone Number, Including Area Code) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | o |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 20, 2016, the registrant had outstanding 107,238,305 shares of Common Stock.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the ACCO Brands Corporation (the "Company"), are generally identifiable by use of the words "will," "believe," "expect," "intend," "anticipate," "estimate," "forecast," "project," "plan," or similar expressions. In particular, our business outlook is based on certain assumptions, which we believe to be reasonable under the circumstances. These include, without limitation, assumptions regarding changes in the macro environment, fluctuations in foreign currency rates, changes in the competitive landscape and consumer behavior and the effect of consolidation in the office products industry, as well as other factors described below.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Because actual results may differ from those predicted by such forward-looking statements, you should not place undue reliance on them when deciding whether to buy, sell or hold the Company’s securities. Our forward-looking statements are made as of the date hereof and we undertake no obligation to update these forward-looking statements in the future, except as may be required by law.
Some of the factors that could affect our results or cause plans, actions and results to differ materially from current expectations are detailed in "Part I, Item 1. Business" and "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015, as updated under "Part II, Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, the discussions set forth in "Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q and from time to time in our other Securities and Exchange Commission (the "SEC") filings. Other factors include the risk that material conditions to closing the acquisition of Esselte Group Holding AB ("Esselte"), including regulatory approvals, the risk that the acquisition of Esselte may not close; the length of time necessary to consummate the acquisition; the risk that material conditions to the entry into the Third Amended and Restated Credit Agreement may not be satisfied; and our ability to realize the synergies, growth opportunities and other potential benefits of acquiring Esselte and successfully combine it with our existing business and other potential benefits of the Pelikan Artline acquisition and successfully combine it with our existing Australian business.
Website Access to Securities and Exchange Commission Reports
The Company’s Internet website can be found at www.accobrands.com. The Company makes available free of charge on or through its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as practicable after the Company files them with, or furnishes them to, the SEC.
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TABLE OF CONTENTS
Consolidated Statement of Operations | |
3
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCO Brands Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2016 | December 31, 2015 | ||||||
(in millions of dollars) | (unaudited) | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 101.0 | $ | 55.4 | |||
Accounts receivable, net | 344.7 | 369.3 | |||||
Inventories | 263.5 | 203.6 | |||||
Other current assets | 30.6 | 25.3 | |||||
Total current assets | 739.8 | 653.6 | |||||
Total property, plant and equipment | 541.5 | 526.1 | |||||
Less: accumulated depreciation | (339.4 | ) | (317.0 | ) | |||
Property, plant and equipment, net | 202.1 | 209.1 | |||||
Deferred income taxes | 27.3 | 25.1 | |||||
Goodwill | 595.6 | 496.9 | |||||
Identifiable intangibles, net | 575.2 | 520.9 | |||||
Other non-current assets | 16.6 | 47.8 | |||||
Total assets | $ | 2,156.6 | $ | 1,953.4 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities: | |||||||
Notes payable | $ | 20.0 | $ | — | |||
Current portion of long-term debt | 4.4 | — | |||||
Accounts payable | 150.5 | 147.6 | |||||
Accrued compensation | 38.2 | 34.0 | |||||
Accrued customer program liabilities | 82.5 | 108.7 | |||||
Accrued interest | 14.6 | 6.3 | |||||
Other current liabilities | 63.4 | 58.7 | |||||
Total current liabilities | 373.6 | 355.3 | |||||
Long-term debt, net | 759.8 | 720.5 | |||||
Deferred income taxes | 147.8 | 142.3 | |||||
Pension and post-retirement benefit obligations | 75.2 | 89.1 | |||||
Other non-current liabilities | 76.1 | 65.0 | |||||
Total liabilities | 1,432.5 | 1,372.2 | |||||
Stockholders' equity: | |||||||
Common stock | 1.1 | 1.1 | |||||
Treasury stock | (16.9 | ) | (11.8 | ) | |||
Paid-in capital | 2,003.1 | 1,988.3 | |||||
Accumulated other comprehensive loss | (385.4 | ) | (429.2 | ) | |||
Accumulated deficit | (877.8 | ) | (967.2 | ) | |||
Total stockholders' equity | 724.1 | 581.2 | |||||
Total liabilities and stockholders' equity | $ | 2,156.6 | $ | 1,953.4 | |||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
4
ACCO Brands Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions of dollars, except per share data) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Net sales | $ | 431.3 | $ | 413.6 | $ | 1,119.5 | $ | 1,098.3 | |||||||
Cost of products sold | 287.1 | 279.9 | 758.1 | 757.7 | |||||||||||
Gross profit | 144.2 | 133.7 | 361.4 | 340.6 | |||||||||||
Operating costs and expenses: | |||||||||||||||
Advertising, selling, general and administrative expenses | 82.3 | 74.1 | 233.1 | 219.4 | |||||||||||
Amortization of intangibles | 5.8 | 4.8 | 15.9 | 14.9 | |||||||||||
Restructuring charges (credits) | 0.4 | — | 4.8 | (0.3 | ) | ||||||||||
Total operating costs and expenses | 88.5 | 78.9 | 253.8 | 234.0 | |||||||||||
Operating income | 55.7 | 54.8 | 107.6 | 106.6 | |||||||||||
Non-operating expense (income): | |||||||||||||||
Interest expense | 13.0 | 11.0 | 36.5 | 33.5 | |||||||||||
Interest income | (1.8 | ) | (1.9 | ) | (5.1 | ) | (5.3 | ) | |||||||
Equity in earnings of joint venture | — | (2.5 | ) | (2.1 | ) | (5.1 | ) | ||||||||
Other expense (income), net | 6.8 | 0.3 | (28.7 | ) | 2.2 | ||||||||||
Income before income tax | 37.7 | 47.9 | 107.0 | 81.3 | |||||||||||
Income tax expense | 15.0 | 15.3 | 17.6 | 26.8 | |||||||||||
Net income | $ | 22.7 | $ | 32.6 | $ | 89.4 | $ | 54.5 | |||||||
Per share: | |||||||||||||||
Basic income per share | $ | 0.21 | $ | 0.30 | $ | 0.84 | $ | 0.50 | |||||||
Diluted income per share | $ | 0.21 | $ | 0.30 | $ | 0.82 | $ | 0.49 | |||||||
Weighted average number of shares outstanding: | |||||||||||||||
Basic | 107.2 | 108.0 | 106.8 | 109.7 | |||||||||||
Diluted | 109.4 | 109.5 | 108.9 | 111.5 | |||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
5
ACCO Brands Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Net income | $ | 22.7 | $ | 32.6 | $ | 89.4 | $ | 54.5 | |||||||
Other comprehensive income (loss), before tax: | |||||||||||||||
Unrealized (loss) gain on derivative financial instruments: | |||||||||||||||
(Loss) gain arising during the period | (0.6 | ) | 3.1 | (4.4 | ) | 7.3 | |||||||||
Reclassification of loss (gain) included in net income | 1.3 | (1.8 | ) | 2.1 | (9.1 | ) | |||||||||
Foreign currency translation: | |||||||||||||||
Foreign currency translation adjustments | (4.9 | ) | (74.4 | ) | 35.4 | (135.0 | ) | ||||||||
Pension and other post-retirement plans: | |||||||||||||||
Amortization of actuarial loss included in net income | 0.8 | 1.0 | 2.8 | 3.2 | |||||||||||
Amortization of prior service cost included in net income | 0.1 | — | 0.3 | 0.2 | |||||||||||
Other | 2.7 | 3.4 | 10.5 | 2.6 | |||||||||||
Other comprehensive (loss) income, before tax | (0.6 | ) | (68.7 | ) | 46.7 | (130.8 | ) | ||||||||
Income tax expense related to items of other comprehensive income (loss) | (1.1 | ) | (1.7 | ) | (2.9 | ) | (1.2 | ) | |||||||
Comprehensive income (loss) | $ | 21.0 | $ | (37.8 | ) | $ | 133.2 | $ | (77.5 | ) | |||||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
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ACCO Brands Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | |||||||
(in millions of dollars) | 2016 | 2015 | |||||
Operating activities | |||||||
Net income | $ | 89.4 | $ | 54.5 | |||
Revaluation gain on previously held joint-venture equity interest | (28.9 | ) | — | ||||
Amortization of inventory step-up | 0.4 | — | |||||
Gain on disposal of assets | (0.5 | ) | (0.1 | ) | |||
Depreciation | 23.0 | 24.7 | |||||
Other non-cash charges | — | 0.1 | |||||
Amortization of debt issuance costs | 3.2 | 2.5 | |||||
Amortization of intangibles | 15.9 | 14.9 | |||||
Stock-based compensation | 12.1 | 10.5 | |||||
Loss on debt extinguishment | — | 1.9 | |||||
Equity in earnings of joint ventures, net of dividends received | (1.6 | ) | (1.3 | ) | |||
Changes in balance sheet items: | |||||||
Accounts receivable | 67.7 | 40.7 | |||||
Inventories | (31.3 | ) | (37.3 | ) | |||
Other assets | — | (4.7 | ) | ||||
Accounts payable | (7.3 | ) | (18.3 | ) | |||
Accrued expenses and other liabilities | (37.7 | ) | (36.1 | ) | |||
Accrued income taxes | 5.6 | 17.7 | |||||
Net cash provided by operating activities | 110.0 | 69.7 | |||||
Investing activities | |||||||
Additions to property, plant and equipment | (11.1 | ) | (21.4 | ) | |||
Proceeds from the disposition of assets | 0.8 | 2.7 | |||||
Cost of acquisitions, net of cash acquired | (88.8 | ) | — | ||||
Net cash used by investing activities | (99.1 | ) | (18.7 | ) | |||
Financing activities | |||||||
Proceeds from long-term borrowings | 187.4 | 300.0 | |||||
Repayments of long-term debt | (163.5 | ) | (320.1 | ) | |||
Borrowings of notes payable, net | 7.8 | 46.2 | |||||
Payments for debt issuance costs | (0.8 | ) | (1.7 | ) | |||
Repurchases of common stock | — | (46.0 | ) | ||||
Payments related to tax withholding for share-based compensation | (5.0 | ) | (5.9 | ) | |||
Excess tax benefit from share-based compensation | 0.9 | — | |||||
Proceeds from the exercise of stock options | 1.9 | 0.5 | |||||
Net cash provided (used) by financing activities | 28.7 | (27.0 | ) | ||||
Effect of foreign exchange rate changes on cash and cash equivalents | 6.0 | (6.3 | ) | ||||
Net increase in cash and cash equivalents | 45.6 | 17.7 | |||||
Cash and cash equivalents | |||||||
Beginning of the period | 55.4 | 53.2 | |||||
End of the period | $ | 101.0 | $ | 70.9 | |||
See Notes to Condensed Consolidated Financial Statements (Unaudited).
7
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
As used in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, the terms "ACCO Brands," "ACCO," the "Company," "we," "us," and "our" refer to ACCO Brands Corporation and its consolidated subsidiaries.
The management of ACCO Brands Corporation is responsible for the accuracy and internal consistency of the preparation of the condensed consolidated financial statements and notes contained in this Quarterly Report on Form 10-Q.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Although the Company believes the disclosures are adequate to make the information presented not misleading, certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") have been condensed or omitted pursuant to those rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The Condensed Consolidated Balance Sheet as of September 30, 2016, the related Consolidated Statements of Income and the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015 and Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 are unaudited. The December 31, 2015 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all annual disclosures required by U.S. GAAP. The above referenced financial statements included herein were prepared by management on the same basis as the Company's audited consolidated financial statements for the year ended December 31, 2015 and reflect all adjustments (consisting solely of normal recurring items unless otherwise noted) which are, in the opinion of management, necessary for the fair presentation of results of operations and cash flows for the interim periods ended September 30, 2016 and 2015, and the financial position of the Company as of September 30, 2016. Interim results may not be indicative of results for a full year.
On May 2, 2016, the Company completed the acquisition of Australia Stationery Industries, Inc. (the "PA Acquisition"), which indirectly owned the 50% of the Pelikan Artline Joint Venture and the issued capital stock of Pelikan Artline Pty Limited (collectively, the “Pelikan Artline JV”) that was not already owned by the Company. Prior to the PA Acquisition, the Pelikan Artline JV was accounted for under the equity method. Accordingly, the results of the Pelikan Artline JV are included in the Company's condensed consolidated financial statements and will be reported in the ACCO Brands International segment from the date of the PA Acquisition, May 2, 2016. See "Note 3. Acquisition" for details on the PA Acquisition and see "Note 16. Joint-Venture Investment" for details on the joint-venture.
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. Actual results could differ from those estimates.
2. Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). The standard update simplifies the accounting for employee share-based payments and involves several aspects of the accounting for share-based transactions, including the potential timing of expenses, the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has determined that ASU 2016-09 will have an immaterial effect on the Company's consolidated financial statements and the Company will adopt ASU 2016-09 effective with its 2017 fiscal year.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). The standard will require the recognition, on the balance sheet, of most leases as lease assets (right-of-use assets) and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. The standard also includes increased disclosures to meet the objective of enabling users of financial statements to understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted and adoption of ASU 2016-02 is to be done on a modified retrospective basis. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on the Company’s consolidated financial statements.
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ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"). The standard applies to inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in ASU 2015-11 more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). ASU 2015-11 is effective for fiscal years beginning after December 15, 2016. The Company has determined that ASU 2015-11 will have an immaterial effect on the Company's consolidated financial statements and the Company will adopt ASU 2015-11 effective with its 2017 fiscal year.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers ("ASU 2015-14") deferring by one year the effective date of ASU 2014-09 until reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods.
In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08"). The amendments in ASU 2016-08 affect ASU 2014-09 and are related to the principal versus agent considerations implementation guidance in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing ("ASU 2016-10"). The amendments in ASU 2016-10 clarify the following two aspects: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. In May 2016, the FASB issued ASU No. 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting ("ASU 2016-11"). The amendments in ASU 2016-11 rescinded certain SEC Staff Observer comments that are codified, effective upon the adoption of ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12"). The amendments in ASU 2016-12 address certain issues identified in the guidance on assessing collectability, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications at transition. The Company is currently in the process of evaluating the impact of adoption of ASU 2014-09 and the related amendments on the Company’s consolidated financial statements.
3. Acquisition
On May 2, 2016, the Company completed the PA Acquisition, which included the remaining 50% interest in its former joint-venture, Pelikan Artline, which it did not already own. Prior to the PA Acquisition, Pelikan Artline was accounted for under the equity method. Pelikan Artline is a premier distributor of academic, consumer and business products in Australia and New Zealand. Pelikan Artline's product categories include writing instruments, notebooks, binding and lamination, visual communication, cleaning and janitorial supplies, as well as general stationery. Its industry-leading brands include Artline, Quartet and GBC (Pelikan Artline was ACCO Brands' distributor), Spirax, and Texta, among others.
In the PA Acquisition, ACCO Brands Australia Pty Limited and Bigadale Pty Limited (collectively, ''ACCO Australia"), two wholly-owned indirect subsidiaries of the Company, entered into a Share Sale Agreement (the "Agreement") with Andrew Kaldor, Cherington Investments Pty Ltd, Freiburg Nominees Proprietary Limited, Enora Pty Ltd and Bruce Haynes and certain Guarantors named therein (collectively, the "Seller Parties") to purchase directly or indirectly 100% of the capital stock of Australia Stationery Industries, Inc. which indirectly owned the 50% of the Pelikan Artline JV and the issued capital stock of Pelikan Artline Pty Limited (collectively the "Pelikan Artline JV") that was not already owned by ACCO Brands Australia Pty Limited.
The purchase price was $103.7 million, net of working capital adjustments and was $88.8 million, net of cash acquired.
Following completion of the PA Acquisition, ACCO Australia owns, directly and indirectly, 100% of the Pelikan Artline JV and Pelikan Artline Pty Limited. In addition to representations, warranties and covenants, the Agreement contains indemnification obligations and certain non-competition and non-solicitation covenants made by the Seller Parties in favor of ACCO Australia. A
9
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
portion of the purchase price was allocated to fund the redemption of a 19.83% minority interest from a shareholder of a subsidiary of Pelikan Artline (the "Minority Interest Redemption"), which occurred shortly following the closing of the PA Acquisition. Additionally, approximately 10% of the purchase price after deducting the Minority Interest Redemption is held in escrow as security with respect to post-closing warranty, tax claims and indemnification obligations.
The Company financed the PA Acquisition through increased borrowings under its existing credit facility. See "Note 4. Long-term Debt and Short-term Borrowings" for details on these additional borrowings.
For accounting purposes, the Company is the acquiring enterprise. The PA Acquisition is being accounted for as a purchase business combination and its results are included in the Company’s consolidated financial statements from the date of the PA Acquisition, May 2, 2016.
Additionally, we recognized a $28.9 million gain in association with the PA Acquisition due to the revaluation of the Company's previously held equity interest in the Pelikan Artline JV. This gain was reported in "Other expense (income), net."
The calculation of consideration given in the PA Acquisition is described in the following table.
(in millions of dollars) | At May 2, 2016 | ||
Purchase price, net of working capital adjustments | $ | 103.7 | |
Fair value of previously held equity interest | 69.3 | ||
Consideration for Pelikan Artline | $ | 173.0 | |
The following table presents the preliminary allocation of the consideration given to the fair values of the assets acquired and liabilities assumed at the date of acquisition.
(in millions of dollars) | At May 2, 2016 | ||
Calculation of Goodwill: | |||
Purchase price, net of working capital adjustments | $ | 103.7 | |
Fair value of previously held equity interest | 69.3 | ||
Plus fair value of liabilities assumed: | |||
Accounts payable and accrued liabilities | 21.7 | ||
Deferred tax liabilities | 0.2 | ||
Debt | 24.7 | ||
Other non-current liabilities | 1.4 | ||
Fair value of liabilities assumed | $ | 48.0 | |
Less fair value of assets acquired: | |||
Cash acquired | 14.9 | ||
Accounts receivable | 27.0 | ||
Inventory | 24.1 | ||
Property and equipment | 2.2 | ||
Identifiable intangibles | 58.0 | ||
Deferred tax assets | 5.7 | ||
Other assets | 8.6 | ||
Fair value of assets acquired | $ | 140.5 | |
Goodwill | $ | 80.5 | |
10
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
We are continuing our review of our fair value estimate of assets acquired and liabilities assumed during the measurement period, which will conclude as soon as we receive the information we are seeking about facts and circumstances that existed as of the acquisition date, or learn that more information is not available. This measurement period will not exceed one year from the acquisition date. The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill.
Our fair value estimate of assets acquired and liabilities assumed is pending the completion of an independent appraisal and valuations of the fair value of the assets acquired and liabilities assumed and final review by our management. Accordingly, there could be material adjustments to our consolidated financial statements, including changes in our amortization related to the valuation of intangible assets and their respective useful lives, among other adjustments.
Within our second quarter of 2016, we reported our initial view of the allocated fair value of the assets for the PA Acquisition, which included the effect of the gain on the Company’s previously held equity interest in the Pelikan Artline JV. During the third quarter of 2016, the Company further refined its allocation of the purchase price to the acquired assets, which resulted in a $6.3 million reduction in the previously reported gain on the Company's previously held equity interest in the Pelikan Artline JV. This reduction was reported in the income statement, the offset to which was a reduction in the reported amount for goodwill, on the balance sheet, resulting in a net gain of $28.9 million.
In addition, the previously estimated values for trade name and customer relationship intangible values, have also been refined, which resulted in reductions in value of $2.8 million, the updated values for which are included in "Note 8. Goodwill and Identifiable Intangible Assets". The impact to net income from this refinement in the second quarter of 2016 would have been immaterial.
Transaction costs related to the PA Acquisition of $1.4 million were incurred during the nine months ended September 30, 2016 and $0.6 million were incurred during the fourth quarter of 2015 and were reported as advertising, selling, general and administrative expenses.
The accounting literature establishes guidelines regarding, and requires the presentation of, the following unaudited pro forma information. Therefore, the unaudited pro forma information presented below is not intended to represent, nor do we believe it is indicative of, the consolidated results of operations of the Company that would have been reported had the PA Acquisition been completed on January 1, 2015. Furthermore, the unaudited pro forma information does not give effect to the anticipated synergies or other anticipated benefits of the PA Acquisition.
Had the PA Acquisition occurred on January 1, 2015, unaudited pro forma consolidated results for the three and nine month periods ending September 30, 2016 and 2015 would have been as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions of dollar, except per share data) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Net sales | $ | 431.3 | $ | 440.9 | $ | 1,155.5 | $ | 1,176.9 | |||||||
Net income | 29.2 | 33.7 | 59.2 | 86.4 | |||||||||||
Net income per common share (diluted) | $ | 0.27 | $ | 0.31 | $ | 0.54 | $ | 0.77 | |||||||
The pro forma amounts are based on the Company's historical results of operations and the historical results of operations for the acquired Pelikan Artline business, which have been translated at the average foreign exchange rates for the presented periods. The pro forma results of operations have been adjusted for amortization of finite-lived intangibles, and other charges related to acquisition accounting. The pro forma results of operations for the nine months ended September 30, 2015 have also been adjusted to include transaction costs related to the PA Acquisition of $2.0 million, amortization of the purchase accounting step-up in inventory cost of $0.3 million and financing related costs. These 2015 adjustments include the $28.9 million gain ($32.2 million based on 2015 exchange rates) associated with the PA Acquisition due to the revaluation of the Company's previously held equity interest in the Pelikan Artline JV. All adjustments were made on a net of income tax basis, where applicable. In addition, the equity in earnings of the Pelikan Artline JV that were previously included in the Company's results has been excluded.
11
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
4. Long-term Debt and Short-term Borrowings
Notes payable and long-term debt, listed in order of their security interests, consisted of the following as of September 30, 2016 and December 31, 2015:
(in millions of dollars) | September 30, 2016 | December 31, 2015 | |||||
U.S. Dollar Senior Secured Term Loan A, due April 2020 (floating interest rate of 2.03% at September 30, 2016 and 1.88% at December 31, 2015) | $ | 81.0 | $ | 229.0 | |||
Australian Dollar Senior Secured Term Loan A, due April 2020 (floating interest rate of 3.28% at September 30, 2016) | 75.4 | — | |||||
U.S. Dollar Senior Secured Revolving Credit Facility, due April 2020 (floating interest rate of 2.01% at September 30, 2016) | 20.0 | — | |||||
Australian Dollar Senior Secured Revolving Credit Facility, due April 2020 (floating interest rate of 3.34% at September 30, 2016) | 113.8 | — | |||||
Senior Unsecured Notes, due April 2020 (fixed interest rate of 6.75%) | 500.0 | 500.0 | |||||
Other borrowings | 0.2 | — | |||||
Total debt | 790.4 | 729.0 | |||||
Less: | |||||||
Current portion | 24.4 | — | |||||
Debt issuance costs, unamortized | 6.2 | 8.5 | |||||
Long-term debt, net | $ | 759.8 | $ | 720.5 | |||
In connection with the PA Acquisition, effective May 1, 2016, the Company entered into a Second Amendment and Additional Borrower Consent (the "Second Amendment"), among the Company, certain guarantor subsidiaries of the Company, Bank of America, N.A., as administrative agent (the "Agent"), and the other lenders party thereto, which amends the Company’s existing Second Amended and Restated Credit Agreement, dated as of April 28, 2015, as amended. Among other things, the Second Amendment amends the Second Amended and Restated Credit Agreement (as amended by the Second Amendment, the "Credit Agreement") to include ACCO Brands Australia Holding Pty. Ltd. ("ACCO Australia") as a foreign borrower and, together with a related incremental joinder agreement, facilitates borrowings under the Credit Agreement by ACCO Australia.
The PA Acquisition was financed through a borrowing of A$100.0 million (US$74.4 million based on June 30, 2016 exchange rates) by ACCO Australia in the form of an incremental Term A loan under the Credit Agreement along with additional borrowings of A$152.0 million (US$113.1 million based on June 30, 2016 exchange rates) under the Company’s existing revolving facility. The Company used some of the proceeds from the borrowings to reduce the U.S. Dollar Senior Secured Term Loan A by $78.0 million and to pay off the debt assumed in the PA Acquisition of A$32.1 million (US$24.5 million based on May 2, 2016 exchange rates).
During the third quarter of 2016 the Company paid down an additional $70.0 million on the U.S. Dollar Senior Secured Term Loan A.
As of September 30, 2016, there were $133.8 million in borrowings under the revolving credit facilities. The amount available for borrowings was $157.4 million (allowing for $8.8 million of letters of credit outstanding on that date). We expect to repay the borrowings under the U.S. Dollar Senior Secured Revolving Credit Facility by the end of 2016.
As more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, we must meet certain restrictive debt covenants under the senior secured credit facilities. The indenture governing the senior unsecured notes also contains certain covenants. As of and for the periods ended September 30, 2016 and December 31, 2015, the Company was in compliance with all applicable loan covenants.
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ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
5. Pension and Other Retiree Benefits
The components of net periodic benefit (income) cost for pension and post-retirement plans for the three and nine months ended September 30, 2016 and 2015 were as follows:
Three Months Ended September 30, | |||||||||||||||||||||||
Pension | Post-retirement | ||||||||||||||||||||||
U.S. | International | ||||||||||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||
Service cost | $ | 0.4 | $ | 0.4 | $ | 0.2 | $ | 0.3 | $ | — | $ | 0.1 | |||||||||||
Interest cost | 1.8 | 2.1 | 2.5 | 3.3 | — | 0.2 | |||||||||||||||||
Expected return on plan assets | (2.9 | ) | (3.0 | ) | (4.2 | ) | (5.6 | ) | — | — | |||||||||||||
Amortization of net loss (gain) | 0.4 | 0.6 | 0.5 | 0.6 | (0.1 | ) | (0.2 | ) | |||||||||||||||
Amortization of prior service cost (credit) | 0.1 | 0.1 | — | — | — | (0.1 | ) | ||||||||||||||||
Curtailment gain | — | — | — | — | (0.6 | ) | — | ||||||||||||||||
Net periodic benefit (income) cost | $ | (0.2 | ) | $ | 0.2 | $ | (1.0 | ) | $ | (1.4 | ) | $ | (0.7 | ) | $ | — | |||||||
Nine Months Ended September 30, | |||||||||||||||||||||||
Pension Benefits | Post-retirement | ||||||||||||||||||||||
U.S. | International | ||||||||||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||||||
Service cost | $ | 1.0 | $ | 1.2 | $ | 0.6 | $ | 0.7 | $ | — | $ | 0.1 | |||||||||||
Interest cost | 5.4 | 6.5 | 7.9 | 9.7 | 0.2 | 0.3 | |||||||||||||||||
Expected return on plan assets | (8.9 | ) | (9.2 | ) | (13.4 | ) | (16.5 | ) | — | — | |||||||||||||
Amortization of net loss (gain) | 1.4 | 1.6 | 1.7 | 1.8 | (0.3 | ) | (0.2 | ) | |||||||||||||||
Amortization of prior service cost (credit) | 0.3 | 0.3 | — | — | — | (0.1 | ) | ||||||||||||||||
Curtailment gain | — | — | — | — | (0.6 | ) | (0.2 | ) | |||||||||||||||
Settlement gain | — | — | — | — | — | (0.3 | ) | ||||||||||||||||
Net periodic benefit (income) cost | $ | (0.8 | ) | $ | 0.4 | $ | (3.2 | ) | $ | (4.3 | ) | $ | (0.7 | ) | $ | (0.4 | ) | ||||||
We expect to contribute approximately $6.6 million to our defined benefit plans in 2016. For the nine months ended September 30, 2016, we have contributed $5.0 million to these plans.
6. Stock-Based Compensation
The following table summarizes our stock-based compensation expense (including stock options, restricted stock units ("RSUs") and performance stock units ("PSUs")) for the three and nine months ended September 30, 2016 and 2015:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Stock option compensation expense | $ | 0.6 | $ | 1.0 | $ | 2.2 | $ | 2.9 | |||||||
RSU compensation expense | 1.0 | 1.0 | 3.6 | 3.8 | |||||||||||
PSU compensation expense | 2.6 | 0.9 | 6.3 | 3.8 | |||||||||||
Total stock-based compensation expense | $ | 4.2 | $ | 2.9 | $ | 12.1 | $ | 10.5 | |||||||
We generally recognize compensation expense for stock-based awards ratably over the vesting period. Stock-based compensation expense for the nine months ended September 30, 2016 and 2015 includes $0.9 million and $0.8 million, respectively, of expense related to stock awards granted to eligible non-employee directors, which were fully vested on the grant date.
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ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table summarizes our unrecognized compensation expense and the weighted-average period over which the expense will be recognized as of September 30, 2016:
September 30, 2016 | |||
Unrecognized | Weighted Average | ||
Compensation | Years Expense To Be | ||
(in millions of dollars, except weighted average years) | Expense | Recognized Over | |
Stock options | $2.3 | 1.1 | |
RSUs | $4.4 | 1.8 | |
PSUs | $9.9 | 1.8 | |
7. Inventories
Inventories are stated at the lower of cost or market value. The components of inventories were as follows:
(in millions of dollars) | September 30, 2016 | December 31, 2015 | |||||
Raw materials | $ | 33.2 | $ | 33.3 | |||
Work in process | 3.4 | 2.6 | |||||
Finished goods | 226.9 | 167.7 | |||||
Total inventories | $ | 263.5 | $ | 203.6 | |||
8. Goodwill and Identifiable Intangible Assets
Goodwill
As more fully described in the Company’s 2015 Annual Report on Form 10-K, we test goodwill for impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The Company performed this annual assessment, on a qualitative basis, as allowed by U.S. GAAP, in the second quarter of 2016 and concluded that no impairment existed.
Changes in the net carrying amount of goodwill by segment were as follows:
(in millions of dollars) | ACCO Brands North America | ACCO Brands International | Computer Products Group | Total | |||||||||||
Balance at December 31, 2015 | $ | 377.5 | $ | 112.6 | $ | 6.8 | $ | 496.9 | |||||||
PA Acquisition (preliminary) | — | 80.5 | — | 80.5 | |||||||||||
Translation | 2.9 | 15.3 | — | 18.2 | |||||||||||
Balance at September 30, 2016 | $ | 380.4 | $ | 208.4 | $ | 6.8 | $ | 595.6 | |||||||
Goodwill | $ | 511.3 | $ | 292.6 | $ | 6.8 | $ | 810.7 | |||||||
Accumulated impairment losses | (130.9 | ) | (84.2 | ) | — | (215.1 | ) | ||||||||
Balance at September 30, 2016 | $ | 380.4 | $ | 208.4 | $ | 6.8 | $ | 595.6 | |||||||
Goodwill has been recorded on our balance sheet related to the PA Acquisition and represents the excess of the cost of the PA Acquisition when compared to the fair value estimate of the net assets acquired on May 2, 2016 (the date of the PA Acquisition). See Note 3. Acquisition, for details on the preliminary calculation of the goodwill acquired in the PA Acquisition.
Identifiable Intangible Assets
The identifiable intangible assets of $58.0 million acquired in the PA Acquisition include amortizable customer relationships and trade names and were recorded at their preliminary estimated fair values. We are continuing our review of our fair value
14
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
estimate of assets acquired and liabilities assumed during the measurement period, which will conclude as soon as we receive the information we are seeking about facts and circumstances that existed as of the acquisition date, or learn that more information is not available. Our fair value estimate of assets acquired and liabilities assumed is pending the completion of an independent appraisal and valuations of the fair value of the assets acquired and liabilities assumed and final review by our management. The values assigned were based on the estimated future discounted cash flows attributable to the assets. These future cash flows were estimated based on the historical cash flows and then adjusted for anticipated future changes, primarily expected changes in sales volume or price.
Amortizable customer relationships and trade names are expected to be amortized over lives ranging from 12 to 30 years from the PA Acquisition date of May 2, 2016. The customer relationships will be amortized on an accelerated basis. The preliminary allocations of the acquired identifiable intangibles acquired in the PA Acquisition are as follows:
(in millions of dollars) | Estimated Fair Value | Estimated Average Remaining Useful Life | |||
Customer relationships | $ | 36.0 | 12 Years | ||
Trade names - amortizable | 22.0 | 12-30 Years | |||
Total identifiable intangibles acquired | $ | 58.0 | |||
The gross carrying value and accumulated amortization by class of identifiable intangible assets as of September 30, 2016 and December 31, 2015 were as follows:
September 30, 2016 | December 31, 2015 | ||||||||||||||||||||||
(in millions of dollars) | Gross Carrying Amounts | Accumulated Amortization | Net Book Value | Gross Carrying Amounts | Accumulated Amortization | Net Book Value | |||||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||
Trade names | $ | 483.6 | $ | (44.5 | ) | (1) | $ | 439.1 | $ | 471.8 | $ | (44.5 | ) | (1) | $ | 427.3 | |||||||
Amortizable intangible assets: | |||||||||||||||||||||||
Trade names | 143.1 | (66.7 | ) | 76.4 | 122.6 | (61.7 | ) | 60.9 | |||||||||||||||
Customer and contractual relationships | 132.6 | (72.9 | ) | 59.7 | 95.8 | (63.1 | ) | 32.7 | |||||||||||||||
Subtotal | 275.7 | (139.6 | ) | 136.1 | 218.4 | (124.8 | ) | 93.6 | |||||||||||||||
Total identifiable intangibles | $ | 759.3 | $ | (184.1 | ) | $ | 575.2 | $ | 690.2 | $ | (169.3 | ) | $ | 520.9 | |||||||||
(1) | Accumulated amortization prior to the adoption of authoritative guidance on goodwill and indefinite-lived intangible assets, at which time further amortization ceased. |
The Company’s intangible amortization expense was $5.8 million and $4.8 million for the three months ended September 30, 2016 and 2015, respectively and $15.9 million and $14.9 million for the nine months ended September 30, 2016 and 2015, respectively.
Estimated amortization expense for amortizable intangible assets as of September 30, 2016 for the current year and the next five years are as follows:
(in millions of dollars) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||
Estimated amortization expense(1) | $ | 21.5 | $ | 20.3 | $ | 17.6 | $ | 15.1 | $ | 12.5 | $ | 10.0 | |||||||||||
(1) | Actual amounts of amortization expense may differ from estimated amounts due to changes in foreign currency exchange rates, additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets and other events. |
We test indefinite-lived intangibles for impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. We performed this annual assessment, on a
15
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
qualitative basis, as allowed by U.S. GAAP, for the majority of indefinite-lived trade names in the second quarter of 2016 and concluded that no impairment existed. For two of our indefinite-lived trade names that are not substantially above their carrying values, Mead® and Hilroy®, we performed quantitative tests (Step 1) in the second quarter of 2016. The following long-term growth rates and discount rates were used, 1.5% and 10.0% for Mead® and 1.5% and 10.5% for Hilroy®, respectively. We concluded that neither Mead® nor Hilroy® were impaired.
In the fourth quarter of 2015 we performed a quantitative test, as we identified the recession in Brazil as a triggering event related to our trade name, Tilibra®, primarily used in Brazil. While we concluded that no impairment existed, the trade name's fair value has been significantly reduced. Key financial assumptions utilized to determine the fair value of Tilibra® included a long-term growth rate of 6.5% and a 14.5% discount rate. In 2016, the Tilibra® trade name is performing in line with the forecast used in the fourth quarter of 2015 quantitative test; however, the economic conditions in Brazil could deteriorate further triggering additional future reviews.
The fair values of Mead®, Tilibra® and Hilroy® trade names are less than 30% above their carrying values. As of September 30, 2016 the carrying values of those trade names were as follows: Mead® ($113.3 million), Tilibra® ($63.0 million) and Hilroy® ($12.2 million).
9. Restructuring
During 2016, the Company initiated cost savings plans related to the consolidation and integration of the recently acquired Pelikan Artline into the Company's already existing Australian and New Zealand business. In addition the Company initiated additional cost savings plans to further enhance its North American operations.
During 2014, we initiated restructuring actions that further enhanced our ongoing efforts to centralize, control and streamline our global and regional operational, supply chain and administrative functions, primarily associated with our North American school, office and Computer Products Group workforce. The remaining balance reported at December 31, 2015 has been substantially paid in 2016.
We recorded $0.4 million and $0.0 million of expense for the three months ended September 30, 2016 and 2015, respectively and $4.8 million of expense and $0.3 million of income for the nine months ended September 30, 2016 and 2015, respectively. Employee termination income in 2015 relates to the release of reserves no longer required.
A summary of the activity in the restructuring accounts for the nine months ended September 30, 2016 and 2015 was as follows:
(in millions of dollars) | Balance at December 31, 2015 | Provision | Cash Expenditures | Non-cash Items/ Currency Change | Balance at September 30, 2016 | ||||||||||||||
Employee termination costs | $ | 0.9 | $ | 4.6 | $ | (4.4 | ) | $ | 0.1 | $ | 1.2 | ||||||||
Termination of lease agreements | 0.1 | 0.2 | (0.2 | ) | — | 0.1 | |||||||||||||
Total restructuring liability | $ | 1.0 | $ | 4.8 | $ | (4.6 | ) | $ | 0.1 | $ | 1.3 | ||||||||
(in millions of dollars) | Balance at December 31, 2014 | (Income)/ Provision | Cash Expenditures | Non-cash Items/ Currency Change | Balance at September 30, 2015 | ||||||||||||||
Employee termination costs | $ | 7.8 | $ | (0.5 | ) | $ | (5.2 | ) | $ | (0.3 | ) | $ | 1.8 | ||||||
Termination of lease agreements | 0.6 | 0.2 | (0.5 | ) | — | 0.3 | |||||||||||||
Total restructuring liability | $ | 8.4 | $ | (0.3 | ) | $ | (5.7 | ) | $ | (0.3 | ) | $ | 2.1 | ||||||
We expect the remaining $1.2 million of employee termination costs to be substantially paid in the next eighteen months.
16
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
10. Income Taxes
The reconciliation of income taxes for the three and nine month periods ended September 30, 2016 and 2015, computed at the U.S. federal statutory income tax rate, compared to our effective income tax rate, was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
Income tax expense computed at U.S. statutory income tax rate (35%) | $ | 13.2 | $ | 16.7 | $ | 37.5 | $ | 28.4 | |||||||
Interest on Brazilian Tax Assessment | 0.8 | 0.7 | 2.1 | 2.1 | |||||||||||
Realized foreign exchange net loss on intercompany loans | — | — | (10.7 | ) | — | ||||||||||
Revaluation of previously held equity interest | 2.2 | — | (12.0 | ) | — | ||||||||||
Correction of deferred tax | — | — | — | (1.6 | ) | ||||||||||
Miscellaneous | (1.2 | ) | (2.1 | ) | 0.7 | (2.1 | ) | ||||||||
Income tax expense as reported | $ | 15.0 | $ | 15.3 | $ | 17.6 | $ | 26.8 | |||||||
Effective tax rate | 39.8 | % | 31.9 | % | 16.4 | % | 33.0 | % | |||||||
For the nine months ended September 30, 2016, we recorded an income tax expense of $17.6 million on income before taxes of $107.0 million. For the nine months ended September 30, 2015, we reported an income tax expense of $26.8 million on income before taxes of $81.3 million. The low effective tax rate for the nine months ended September 30, 2016 is primarily due to the following: 1) under Australian tax laws, there is no tax expense on the $28.9 million gain arising from the PA Acquisition due to the revaluation of the Company's ownership interest to fair value and 2) tax benefits of $10.7 million on foreign exchange losses on the repayment of intercompany loans, for which the pre-tax effect is recorded in equity. The third quarter 2016 results include a downward refinement of $6.3 million on the gain recorded in the second quarter on the PA acquisition. As a result of this refinement to the pre-tax gain previously reported, the corresponding tax impact reported in the second quarter has been adjusted downward by $2.2 million in the quarter ended September 30, 2016.
The U.S. federal statute of limitations remains open for the year 2013 and forward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 2 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include Australia (2012 forward), Brazil (2011 forward), Canada (2008 forward) and the U.K. (2014 forward). We are currently under examination in certain foreign jurisdictions.
Income Tax Assessment
In connection with our May 1, 2012 acquisition of Mead Consumer and Office Products Business ("Mead C&OP") we assumed all of the tax liabilities for the acquired foreign operations including Tilibra Produtos de Papelaria Ltda. ("Tilibra"). In December of 2012, the Federal Revenue Department of the Ministry of Finance of Brazil ("FRD") issued a tax assessment (the "Brazilian Tax Assessment") against Tilibra, which challenged the tax deduction of goodwill from Tilibra's taxable income for the year 2007. A second assessment challenging the deduction of goodwill from Tilibra's taxable income for the years 2008, 2009 and 2010 was issued by FRD in October 2013.
Tilibra is disputing both of the tax assessments through established administrative procedures. We believe we have meritorious defenses and intend to vigorously contest these matters; however, there can be no assurances that we will ultimately prevail. We are still in the administrative stages of the process to challenge the FRD's tax assessments, and the ultimate outcome will not be determined until the Brazilian tax appeal process is complete, which is expected to take a number of years. In addition, Tilibra's 2011-2012 tax years remain open and subject to audit, and there can be no assurances that we will not receive additional tax assessments regarding the goodwill for one or both of those years. The time limit for issuing an assessment for 2011 expires in December 2016. If the FRD's initial position is ultimately sustained, the amount assessed would materially and adversely affect our cash flow in the year of settlement.
Because there is no settled legal precedent on which to base a definitive opinion as to whether we will ultimately prevail, we consider the outcome of this dispute to be uncertain. Since it is not more likely than not that we will prevail, in 2012, we recorded a reserve in the amount of $44.5 million (at December 31, 2012 exchange rates) in consideration of this contingency, of which $43.3 million was recorded as an adjustment to the purchase price and which included the 2007-2012 tax years plus penalties
17
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
and interest through December 2012. Included in this reserve is an assumption of penalties at 75%, which is the standard penalty. While there is a possibility that a penalty of 150% could be imposed, based on the facts in our case and existing precedent, we believe the likelihood of a 150% penalty being imposed is not more likely than not. In the meantime, we will continue to actively monitor administrative and judicial court decisions and evaluate their impact, if any, on our legal assessment of the ultimate outcome of our case. In addition, we will continue to accrue interest related to this contingency until such time as the outcome is known or until evidence is presented that we are more likely than not to prevail. During the three months ended September 30, 2016 and 2015 we accrued additional interest as a charge to current income tax expense of $0.8 million and $0.7 million, respectively and for the nine months ended September 30, 2016 and 2015, we accrued additional interest of $2.1 million and $2.1 million, respectively. At current exchange rates, our accrual through September 30, 2016, including tax, penalties and interest is $36.5 million.
11. Earnings per Share
Total outstanding shares as of September 30, 2016 and 2015 were 107.2 million and 107.4 million, respectively. Under our stock repurchase program, for the three and nine months ended September 30, 2015 we repurchased and retired 1.0 million and 6.1 million shares, respectively, of common stock. No shares were repurchased during the three or nine months ended September 30, 2016. In addition, for the nine months ended September 30, 2016 and 2015 we acquired 0.7 million and 0.7 million shares, respectively, of treasury shares related to tax withholding for share-based compensation. The calculation of basic earnings per common share is based on the weighted average number of common shares outstanding in the year, or period, over which they were outstanding. Our calculation of diluted earnings per common share assumes that any common shares outstanding were increased by shares that would be issued upon exercise of those stock units for which the average market price for the period exceeds the exercise price less the shares that could have been purchased by the Company with the related proceeds, including compensation expense measured but not yet recognized, net of tax.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
(in millions) | 2016 | 2015 | 2016 | 2015 | |||||||
Weighted-average number of common shares outstanding — basic | 107.2 | 108.0 | 106.8 | 109.7 | |||||||
Stock options | 1.0 | 0.1 | 0.7 | 0.2 | |||||||
Stock-settled stock appreciation rights | — | 0.3 | — | 0.4 | |||||||
Restricted stock units | 1.2 | 1.1 | 1.4 | 1.2 | |||||||
Adjusted weighted-average shares and assumed conversions — diluted | 109.4 | 109.5 | 108.9 | 111.5 | |||||||
Awards of potentially dilutive shares of common stock, which have exercise prices that were higher than the average market price during the period, are not included in the computation of dilutive earnings per share as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2016 these shares were approximately 3.7 million and 3.7 million, respectively. For the three and nine months ended September 30, 2015 these shares were approximately 7.0 million and 5.4 million, respectively.
12. Derivative Financial Instruments
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rate changes. We enter into financial instruments to manage and reduce the impact of these risks, not for trading or speculative purposes. The counterparties to these financial instruments are major financial institutions. We continually monitor our foreign currency exposures in order to maximize the overall effectiveness of our foreign currency hedge positions. Principal currencies hedged include the U.S. dollar, Euro, Australian dollar, Canadian dollar, British pound and Japanese Yen. We are subject to credit risk, which relates to the ability of counterparties to meet their contractual payment obligations or the potential non-performance by counterparties to financial instrument contracts. Management continues to monitor the status of our counterparties and will take action, as appropriate, to further manage our counterparty credit risk. There are no credit contingency features in our derivative financial instruments.
When hedge accounting is applicable, on the date we enter into a derivative, the derivative is designated as a hedge of the identified exposure. We measure the effectiveness of our hedging relationships both at hedge inception and on an ongoing basis.
18
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Forward Currency Contracts
We enter into forward foreign currency contracts to reduce the effect of fluctuating foreign currencies, primarily on foreign denominated inventory purchases and intercompany loans. The majority of the Company’s exposure to local currency movements is in Europe, Australia, Canada, Brazil, Mexico and Japan.
Forward currency contracts are used to hedge foreign denominated inventory purchases for Europe, Australia, Canada and Japan and are designated as cash flow hedges. Unrealized gains and losses on these contracts for inventory purchases are deferred in other comprehensive income (loss) until the contracts are settled and the underlying hedged transactions are recognized, at which time the deferred gains or losses will be reported in the "Cost of products sold" line in the "Consolidated Statements of Income." As of September 30, 2016 and December 31, 2015, we had cash-flow-designated foreign exchange contracts outstanding with a U.S. dollar equivalent notional value of $101.7 million and $68.2 million, respectively.
Forward currency contracts used to hedge foreign denominated intercompany loans are not designated as hedging instruments. Gains and losses on these derivative instruments are recognized within "Other expense (income), net" in the "Consolidated Statements of Income" and are largely offset by the change in the current translated value of the hedged item. In the first of quarter of 2016, we also took out a forward currency contract to hedge an expected intercompany dividend, which also was not designated as a hedging instrument. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions, and do not extend beyond September 2017. As of September 30, 2016 and December 31, 2015, we had undesignated foreign exchange contracts outstanding with a U.S. dollar equivalent notional value of $79.0 million and $33.3 million, respectively.
The following table summarizes the fair value of our derivative financial instruments as of September 30, 2016 and December 31, 2015:
Fair Value of Derivative Instruments | |||||||||||||||||||
Derivative Assets | Derivative Liabilities | ||||||||||||||||||
(in millions of dollars) | Balance Sheet Location | September 30, 2016 | December 31, 2015 | Balance Sheet Location | September 30, 2016 | December 31, 2015 | |||||||||||||
Derivatives designated as hedging instruments: | |||||||||||||||||||
Foreign exchange contracts | Other current assets | $ | 0.3 | $ | 1.9 | Other current liabilities | $ | 1.6 | $ | 0.3 | |||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||||
Foreign exchange contracts | Other current assets | 0.6 | 0.7 | Other current liabilities | — | 0.1 | |||||||||||||
Total derivatives | $ | 0.9 | $ | 2.6 | $ | 1.6 | $ | 0.4 | |||||||||||
19
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following tables summarize the pre-tax effect of our derivative financial instruments on the condensed consolidated financial statements for the three and nine months ended September 30, 2016 and 2015:
The Effect of Derivative Instruments in Cash Flow Hedging Relationships on the Consolidated Financial Statements | ||||||||||||||||||
Amount of Gain (Loss) Recognized in OCI (Effective Portion) | Location of (Gain) Loss Reclassified from OCI to Income | Amount of (Gain) Loss Reclassified from AOCI to Income (Effective Portion) | ||||||||||||||||
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | ||||||||||||||
Cash flow hedges: | ||||||||||||||||||
Foreign exchange contracts | $ | (0.6 | ) | $ | 3.1 | Cost of products sold | $ | 1.3 | $ | (1.8 | ) | |||||||
The Effect of Derivative Instruments in Cash Flow Hedging Relationships on the Consolidated Financial Statements | ||||||||||||||||||
Amount of Gain (Loss) Recognized in OCI (Effective Portion) | Location of (Gain) Loss Reclassified from OCI to Income | Amount of (Gain) Loss Reclassified from AOCI to Income (Effective Portion) | ||||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | ||||||||||||||
Cash flow hedges: | ||||||||||||||||||
Foreign exchange contracts | $ | (4.4 | ) | $ | 7.3 | Cost of products sold | $ | 2.1 | $ | (9.1 | ) | |||||||
The Effect of Derivatives Not Designated as Hedging Instruments on the Condensed Consolidated Statements of Operations | |||||||||||||||||
Location of (Gain) Loss Recognized in Income on Derivatives | Amount of (Gain) Loss Recognized in Income | Amount of (Gain) Loss Recognized in Income | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||||
Foreign exchange contracts | Other expense (income), net | $ | (1.1 | ) | $ | (1.9 | ) | $ | (2.7 | ) | $ | (0.9 | ) | ||||
13. Fair Value of Financial Instruments
In establishing a fair value, there is a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The basis of the fair value measurement is categorized in three levels, in order of priority, as described below:
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or |
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or | |
Inputs other than quoted prices that are observable for the asset or liability | |
Level 3 | Unobservable inputs for the asset or liability |
We utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
20
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
We have determined that our financial assets and liabilities are Level 2 in the fair value hierarchy. The following table sets forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2016 and December 31, 2015:
(in millions of dollars) | September 30, 2016 | December 31, 2015 | |||||
Assets: | |||||||
Forward currency contracts | $ | 0.9 | $ | 2.6 | |||
Liabilities: | |||||||
Forward currency contracts | $ | 1.6 | $ | 0.4 | |||
Our forward currency contracts are included in "Other current assets" or "Other current liabilities" and mature within 12 months. The forward foreign currency exchange contracts are primarily valued based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. As such, these derivative instruments are classified within Level 2.
The fair values of cash and cash equivalents, notes payable to banks, accounts receivable and accounts payable approximate carrying amounts due principally to their short maturities. The carrying amount of total debt was $790.4 million and $729.0 million and the estimated fair value of total debt was $820.4 million and $740.3 million at September 30, 2016 and December 31, 2015, respectively. The fair values are determined from quoted market prices, where available, and from investment bankers using current interest rates considering credit ratings and the remaining time to maturity.
14. Accumulated Other Comprehensive Income (Loss)
Comprehensive income is defined as net income (loss) and other changes in stockholders’ equity from transactions and other events from sources other than stockholders. The components of, and changes in, accumulated other comprehensive income (loss), net of tax were as follows:
(in millions of dollars) | Derivative Financial Instruments | Foreign Currency Adjustments | Unrecognized Pension and Other Post-retirement Benefit Costs | Accumulated Other Comprehensive Income (Loss) | |||||||||||
Balance at December 31, 2015 | $ | 0.8 | $ | (302.7 | ) | $ | (127.3 | ) | $ | (429.2 | ) | ||||
Other comprehensive income (loss) before reclassifications, net of tax | (3.0 | ) | 35.4 | 7.8 | 40.2 | ||||||||||
Amounts reclassified from accumulated other comprehensive income, net of tax | 1.4 | — | 2.2 | 3.6 | |||||||||||
Balance at September 30, 2016 | $ | (0.8 | ) | $ | (267.3 | ) | $ | (117.3 | ) | $ | (385.4 | ) | |||
21
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||||
(in millions of dollars) | Amount Reclassified from Accumulated Other Comprehensive Income | Amount Reclassified from Accumulated Other Comprehensive Income | Location on Income Statement | ||||||||||||||
Details about Accumulated Other Comprehensive Income Components | |||||||||||||||||
(Loss) gain on cash flow hedges: | |||||||||||||||||
Foreign exchange contracts | $ | (1.3 | ) | $ | 1.8 | $ | (2.1 | ) | $ | 9.1 | Cost of products sold | ||||||
Tax benefit (expense) | 0.5 | (0.6 | ) | 0.7 | (2.7 | ) | Income tax expense | ||||||||||
Net of tax | $ | (0.8 | ) | $ | 1.2 | $ | (1.4 | ) | $ | 6.4 | |||||||
Defined benefit plan items: | |||||||||||||||||
Amortization of actuarial loss | $ | (0.8 | ) | $ | (1.0 | ) | $ | (2.8 | ) | $ | (3.2 | ) | (1) | ||||
Amortization of prior service cost | (0.1 | ) | — | (0.3 | ) | (0.2 | ) | (1) | |||||||||
Total before tax | (0.9 | ) | (1.0 | ) | (3.1 | ) | (3.4 | ) | |||||||||
Tax benefit | 0.1 | 0.2 | 0.9 | 1.4 | Income tax expense | ||||||||||||
Net of tax | $ | (0.8 | ) | $ | (0.8 | ) | $ | (2.2 | ) | $ | (2.0 | ) | |||||
Total reclassifications for the period, net of tax | $ | (1.6 | ) | $ | 0.4 | $ | (3.6 | ) | $ | 4.4 | |||||||
(1) | These accumulated other comprehensive income components are included in the computation of net periodic benefit cost for pension and post-retirement plans (See "Note 5. Pension and Other Retiree Benefits" for additional details). |
15. Information on Business Segments
ACCO Brands is one of the world's largest designers, marketers and manufacturers of branded business, academic and consumer products.
The Company’s three business segments are described below.
ACCO Brands North America and ACCO Brands International
ACCO Brands North America and ACCO Brands International design, market, source, manufacture and sell traditional office products, academic supplies and calendar products. ACCO Brands North America comprises the U.S. and Canada, and ACCO Brands International comprises the rest of the world, primarily Northern Europe, Australia, Brazil and Mexico.
On May 2, 2016, the Company completed the acquisition of the remaining 50% interest in its former joint-venture, Pelikan Artline, which it did not already own. Prior to the PA Acquisition, the Pelikan Artline joint venture was accounted for under the equity method. Accordingly, the results of Pelikan Artline are included in the Company's condensed consolidated financial statements from the date of the PA Acquisition, May 2, 2016. Pelikan Artline is a premier distributor of academic, consumer and business products in Australia and New Zealand. Pelikan Artline's product categories include writing instruments, notebooks, binding and lamination, visual communication, cleaning and janitorial supplies, as well as general stationery. Its industry-leading brands include Artline, Quartet and GBC (Pelikan Artline was ACCO Brands' distributor), Spirax, and Texta, among others. Pelikan Artline has been included in the ACCO Brands International segment.
Our business, academic and calendar product lines use name brands such as Artline®, AT-A-GLANCE®, Derwent®, Five Star®, GBC®, Hilroy®, Marbig®, Mead®, NOBO®, Quartet®, Rexel, Swingline®, Tilibra®, Wilson Jones® and many others. Products and brands are not confined to one channel or product category and are sold based on end-user preference in each geographic location.
22
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The majority of our office products, such as stapling, binding and laminating equipment and related consumable supplies, shredders and whiteboards, are used by businesses. Most of these end-users purchase their products from our customers, which include traditional office supply resellers, wholesalers and other retailers, including on-line retailers. We also supply some of our products directly to large commercial and industrial end-users, and provide business machine maintenance and certain repair services. Additionally, we also supply private label products within the office products sector.
Our academic products include notebooks, folders, decorative calendars and stationery products. We distribute our academic products primarily through mass merchandisers, and other retailers, such as grocery, drug and office superstores as well as on-line retailers. We also supply private label products within the academic products sector.
Our calendar products are sold through all the same channels where we sell office or school products, as well as directly to consumers both on-line and through direct mail.
Our customers are primarily large global and regional resellers of our products including traditional office supply resellers, wholesalers and other retailers, including on-line retailers. Mass merchandisers and retail channels primarily sell to individual consumers but also to small businesses. We also sell to commercial contract dealers, wholesalers, distributors and independent dealers who primarily serve business end-users. Over half of our product sales by our customers are to business end-users, who generally seek premium products that have added value or ease-of-use features and a reputation for reliability, performance and professional appearance. Some of our binding and laminating equipment products are sold directly to high-volume end-users and commercial reprographic centers. We also sell our directly to consumers.
Computer Products Group
Our Computer Products Group designs, sources, distributes, markets and sells accessories for laptop and desktop computers and tablets. These accessories primarily include security products, input devices such as presenters, mice and trackballs, ergonomic aids such as foot and wrist rests, docking stations, and other PC and tablet accessories. We sell these products mostly under the Kensington®, Microsaver® and ClickSafe® brand names, with the majority of revenue coming from the U.S. and Northern Europe. Our computer products are manufactured by third-party suppliers, principally in Asia, and are distributed from our regional facilities. Our computer products are sold primarily to consumer electronics retailers, information technology value-added resellers, original equipment manufacturers, and office products retailers, as well as directly to consumers on-line.
Net sales by business segment for the three and nine months ended September 30, 2016 and 2015 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
ACCO Brands North America | $ | 273.3 | $ | 279.8 | $ | 718.1 | $ | 715.1 | |||||||
ACCO Brands International | 128.5 | 104.3 | 315.1 | 295.6 | |||||||||||
Computer Products Group | 29.5 | 29.5 | 86.3 | 87.6 | |||||||||||
Net sales | $ | 431.3 | $ | 413.6 | $ | 1,119.5 | $ | 1,098.3 | |||||||
23
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Operating income by business segment for the three and nine months ended September 30, 2016 and 2015 was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions of dollars) | 2016 | 2015 | 2016 | 2015 | |||||||||||
ACCO Brands North America | $ | 48.6 | $ | 48.4 | $ | 110.5 | $ | 104.1 | |||||||
ACCO Brands International | 16.7 | 11.3 | 23.4 | 20.8 | |||||||||||
Computer Products Group | 3.1 | 2.7 | 8.0 | 6.9 | |||||||||||
Segment operating income | 68.4 | 62.4 | 141.9 | 131.8 | |||||||||||
Corporate | (12.7 | ) | (7.6 | ) | (34.3 | ) | (25.2 | ) | |||||||
Operating income(a) | 55.7 | 54.8 | 107.6 | 106.6 | |||||||||||
Interest expense | 13.0 | 11.0 | 36.5 | 33.5 | |||||||||||
Interest income | (1.8 | ) | (1.9 | ) | (5.1 | ) | (5.3 | ) | |||||||
Equity in earnings of joint venture | — | (2.5 | ) | (2.1 | ) | (5.1 | ) | ||||||||
Other expense (income), net | 6.8 | 0.3 | (28.7 | ) | 2.2 | ||||||||||
Income before income tax | $ | 37.7 | $ | 47.9 | $ | 107.0 | $ | 81.3 | |||||||
(a) | Operating income as presented in the segment table above is defined as i) net sales; ii) less cost of products sold; iii) less advertising, selling, general and administrative expenses; iv) less amortization of intangibles; and v) less restructuring charges. |
16. Joint-Venture Investment
Summarized below is the financial information for the Pelikan Artline JV, in which we owned a 50% non-controlling interest, which was accounted for under the equity method. Accordingly, we recorded our proportionate share of earnings or losses on the line entitled "Equity in earnings of joint venture" in the "Consolidated Statements of Income."
On May 2, 2016, the Company completed the PA Acquisition and accordingly, the results of the Pelikan Artline JV are included in the Company's condensed consolidated financial statements from the date of the PA Acquisition, May 2, 2016. See "Note 3. Acquisition" for details on the PA Acquisition.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
(in millions of dollars) | 2015 | 2016 | 2015 | ||||||||
Net sales | $ | 26.2 | $ | 34.9 | $ | 74.6 | |||||
Gross profit | 12.7 | 14.1 | 31.8 | ||||||||
Net income | 5.1 | 4.1 | 10.3 | ||||||||
(in millions of dollars) | December 31, 2015 | ||
Current assets | $ | 76.6 | |
Non-current assets | 43.6 | ||
Current liabilities | 37.5 | ||
Non-current liabilities | 13.1 | ||
17. Commitments and Contingencies
Pending Litigation - Brazil Tax Assessment
In connection with our May 1, 2012 acquisition of Mead C&OP we assumed all of the tax liabilities for the acquired foreign operations. See "Note 10. Income Taxes - Income Tax Assessment" for details on tax assessments issued by the FRD against our acquired indirect subsidiary, Tilibra, which challenged the tax deduction of goodwill from Tilibra's taxable income for the years 2007 through 2010.
24
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Other Pending Litigation
There are various other claims, lawsuits and pending actions against us incidental to our operations. It is the opinion of management that (other than the Brazilian Tax Assessment) the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial condition, results of operations or cash flow. However, there is no assurance that we will ultimately be successful in our defense of any of these matters or that an adverse outcome in any matter will not affect our results of operations, financial condition or cash flow.
Environmental
We are subject to national, state, provincial and/or local environmental laws and regulations concerning the discharge of materials into the environment and the handling, disposal and clean-up of waste materials and otherwise relating to the protection of the environment. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. In the opinion of our management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon our capital expenditures, financial condition and results of operations or competitive position.
25
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
18. Condensed Consolidating Financial Information
Certain of the Company’s 100% owned domestic subsidiaries are required to jointly and severally, fully and unconditionally guarantee the 6.75% Senior Unsecured Notes that are due in the year 2020. Rather than filing separate financial statements for each guarantor subsidiary with the SEC, the Company has elected to present the following condensed consolidating financial statements, which includes the condensed consolidating statements of comprehensive income and results of operations for the three and nine months ended September 30, 2016 and 2015, cash flows for the nine months ended September 30, 2016, and 2015, and financial position as of September 30, 2016 and December 31, 2015 of the Company and its guarantor and non-guarantor subsidiaries (in each case carrying investments under the equity method), and the eliminations necessary to arrive at the reported amounts included in the condensed consolidated financial statements of the Company.
26
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Condensed Consolidating Balance Sheets (Unaudited)
September 30, 2016 | |||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Assets | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 11.5 | $ | 11.0 | $ | 78.5 | $ | — | $ | 101.0 | |||||||||
Accounts receivable, net | — | 162.7 | 182.0 | — | 344.7 | ||||||||||||||
Inventories | — | 138.9 | 124.6 | — | 263.5 | ||||||||||||||
Receivables from affiliates | 4.2 | 550.4 | 68.8 | (623.4 | ) | — | |||||||||||||
Other current assets | 2.2 | 11.8 | 16.6 | — | 30.6 | ||||||||||||||
Total current assets | 17.9 | 874.8 | 470.5 | (623.4 | ) | 739.8 | |||||||||||||
Property, plant and equipment, net | 3.9 | 98.0 | 100.2 | — | 202.1 | ||||||||||||||
Deferred income taxes | — | — | 27.3 | — | 27.3 | ||||||||||||||
Goodwill | — | 330.7 | 264.9 | — | 595.6 | ||||||||||||||
Identifiable intangibles, net | 57.4 | 370.9 | 146.9 | — | 575.2 | ||||||||||||||
Other non-current assets | 2.5 | 1.1 | 13.0 | — | 16.6 | ||||||||||||||
Investment in, long-term receivable from affiliates | 1,566.9 | 863.2 | 441.0 | (2,871.1 | ) | — | |||||||||||||
Total assets | $ | 1,648.6 | $ | 2,538.7 | $ | 1,463.8 | $ | (3,494.5 | ) | $ | 2,156.6 | ||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Notes payable | $ | 20.0 | $ | — | $ | — | $ | — | $ | 20.0 | |||||||||
Current portion of long-term debt | — | — | 4.4 | — | 4.4 | ||||||||||||||
Accounts payable | — | 82.1 | 68.4 | — | 150.5 | ||||||||||||||
Accrued compensation | 3.2 | 16.3 | 18.7 | — | 38.2 | ||||||||||||||
Accrued customer programs liabilities | — | 43.6 | 38.9 | — | 82.5 | ||||||||||||||
Accrued interest | 14.2 | — | 0.4 | — | 14.6 | ||||||||||||||
Other current liabilities | 3.2 | 20.8 | 39.4 | — | 63.4 | ||||||||||||||
Payables to affiliates | 10.0 | 209.7 | 238.0 | (457.7 | ) | — | |||||||||||||
Total current liabilities | 50.6 | 372.5 | 408.2 | (457.7 | ) | 373.6 | |||||||||||||
Long-term debt, net | 575.1 | — | 184.7 | — | 759.8 | ||||||||||||||
Long-term notes payable to affiliates | 178.2 | 26.7 | — | (204.9 | ) | — | |||||||||||||
Deferred income taxes | 114.9 | — | 32.9 | — | 147.8 | ||||||||||||||
Pension and post-retirement benefit obligations | 1.4 | 52.1 | 21.7 | — | 75.2 | ||||||||||||||
Other non-current liabilities | 4.3 | 19.7 | 52.1 | — | 76.1 | ||||||||||||||
Total liabilities | 924.5 | 471.0 | 699.6 | (662.6 | ) | 1,432.5 | |||||||||||||
Stockholders’ equity: | |||||||||||||||||||
Common stock | 1.1 | 448.1 | 154.7 | (602.8 | ) | 1.1 | |||||||||||||
Treasury stock | (16.9 | ) | — | — | — | (16.9 | ) | ||||||||||||
Paid-in capital | 2,003.1 | 1,551.1 | 743.0 | (2,294.1 | ) | 2,003.1 | |||||||||||||
Accumulated other comprehensive loss | (385.4 | ) | (67.7 | ) | (262.8 | ) | 330.5 | (385.4 | ) | ||||||||||
(Accumulated deficit) retained earnings | (877.8 | ) | 136.2 | 129.3 | (265.5 | ) | (877.8 | ) | |||||||||||
Total stockholders’ equity | 724.1 | 2,067.7 | 764.2 | (2,831.9 | ) | 724.1 | |||||||||||||
Total liabilities and stockholders’ equity | $ | 1,648.6 | $ | 2,538.7 | $ | 1,463.8 | $ | (3,494.5 | ) | $ | 2,156.6 | ||||||||
27
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Condensed Consolidating Balance Sheets
December 31, 2015 | |||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Assets | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 0.8 | $ | 0.3 | $ | 54.3 | $ | — | $ | 55.4 | |||||||||
Accounts receivable, net | — | 163.8 | 205.5 | — | 369.3 | ||||||||||||||
Inventories | — | 125.8 | 77.8 | — | 203.6 | ||||||||||||||
Receivables from affiliates | 4.4 | 474.6 | 64.5 | (543.5 | ) | — | |||||||||||||
Other current assets | 1.1 | 10.8 | 13.4 | — | 25.3 | ||||||||||||||
Total current assets | 6.3 | 775.3 | 415.5 | (543.5 | ) | 653.6 | |||||||||||||
Property, plant and equipment, net | 3.7 | 107.8 | 97.6 | — | 209.1 | ||||||||||||||
Deferred income taxes | — | — | 25.1 | — | 25.1 | ||||||||||||||
Goodwill | — | 330.8 | 166.1 | — | 496.9 | ||||||||||||||
Identifiable intangibles, net | 57.4 | 382.0 | 81.5 | — | 520.9 | ||||||||||||||
Other non-current assets | 3.1 | 0.8 | 43.9 | — | 47.8 | ||||||||||||||
Investment in, long-term receivable from affiliates | 1,545.7 | 903.8 | 441.0 | (2,890.5 | ) | — | |||||||||||||
Total assets | $ | 1,616.2 | $ | 2,500.5 | $ | 1,270.7 | $ | (3,434.0 | ) | $ | 1,953.4 | ||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | — | $ | 86.6 | $ | 61.0 | $ | — | $ | 147.6 | |||||||||
Accrued compensation | 3.8 | 17.9 | 12.3 | — | 34.0 | ||||||||||||||
Accrued customer programs liabilities | — | 63.9 | 44.8 | — | 108.7 | ||||||||||||||
Accrued interest | 6.3 | — | — | — | 6.3 | ||||||||||||||
Other current liabilities | 2.3 | 22.9 | 33.5 | — | 58.7 | ||||||||||||||
Payables to affiliates | 5.6 | 210.0 | 239.5 | (455.1 | ) | — | |||||||||||||
Total current liabilities | 18.0 | 401.3 | 391.1 | (455.1 | ) | 355.3 | |||||||||||||
Long-term debt, net | 720.5 | — | — | — | 720.5 | ||||||||||||||
Long-term notes payable to affiliates | 178.2 | 26.7 | 21.0 | (225.9 | ) | — | |||||||||||||
Deferred income taxes | 113.5 | — | 28.8 | — | 142.3 | ||||||||||||||
Pension and post-retirement benefit obligations | 1.5 | 55.2 | 32.4 | — | 89.1 | ||||||||||||||
Other non-current liabilities | 3.3 | 20.8 | 40.9 | — | 65.0 | ||||||||||||||
Total liabilities | 1,035.0 | 504.0 | 514.2 | (681.0 | ) | 1,372.2 | |||||||||||||
Stockholders’ equity: | |||||||||||||||||||
Common stock | 1.1 | 448.0 | 227.5 | (675.5 | ) | 1.1 | |||||||||||||
Treasury stock | (11.8 | ) | — | — | — | (11.8 | ) | ||||||||||||
Paid-in capital | 1,988.3 | 1,551.1 | 743.2 | (2,294.3 | ) | 1,988.3 | |||||||||||||
Accumulated other comprehensive loss | (429.2 | ) | (68.8 | ) | (305.8 | ) | 374.6 | (429.2 | ) | ||||||||||
(Accumulated deficit) retained earnings | (967.2 | ) | 66.2 | 91.6 | (157.8 | ) | (967.2 | ) | |||||||||||
Total stockholders’ equity | 581.2 | 1,996.5 | 756.5 | (2,753.0 | ) | 581.2 | |||||||||||||
Total liabilities and stockholders’ equity | $ | 1,616.2 | $ | 2,500.5 | $ | 1,270.7 | $ | (3,434.0 | ) | $ | 1,953.4 | ||||||||
28
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Condensed Consolidating Statement of Comprehensive Income (Loss) (Unaudited)
Three Months Ended September 30, 2016 | |||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | — | $ | 261.8 | $ | 180.1 | $ | (10.6 | ) | $ | 431.3 | ||||||||
Cost of products sold | — | 176.3 | 121.4 | (10.6 | ) | 287.1 | |||||||||||||
Gross profit | — | 85.5 | 58.7 | — | 144.2 | ||||||||||||||
Advertising, selling, general and administrative expenses | 11.3 | 38.2 | 32.8 | — | 82.3 | ||||||||||||||
Amortization of intangibles | 0.1 | 3.3 | 2.4 | — | 5.8 | ||||||||||||||
Restructuring charges (credits) | — | (0.1 | ) | 0.5 | — | 0.4 | |||||||||||||
Operating income (loss) | (11.4 | ) | 44.1 | 23.0 | — | 55.7 | |||||||||||||
(Income) expense from affiliates | (0.6 | ) | (3.6 | ) | 4.2 | — | — | ||||||||||||
Interest expense | 11.1 | — | 1.9 | — | 13.0 | ||||||||||||||
Interest income | — | — | (1.8 | ) | — | (1.8 | ) | ||||||||||||
Other expense (income), net | 0.1 | (0.1 | ) | 6.8 | — | 6.8 | |||||||||||||
Income (loss) from continuing operations before income taxes and earnings of wholly owned subsidiaries | (22.0 | ) | 47.8 | 11.9 | — | 37.7 | |||||||||||||
Income tax expense | 8.2 | — | 6.8 | — | 15.0 | ||||||||||||||
Income (loss) before earnings of wholly owned subsidiaries | (30.2 | ) | 47.8 | 5.1 | — | 22.7 | |||||||||||||
Earnings of wholly owned subsidiaries | 52.9 | 3.3 | — | (56.2 | ) | — | |||||||||||||
Net income | $ | 22.7 | $ | 51.1 | $ | 5.1 | $ | (56.2 | ) | $ | 22.7 | ||||||||
Comprehensive income | $ | 21.0 | $ | 51.6 | $ | 2.9 | $ | (54.5 | ) | $ | 21.0 | ||||||||
29
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Condensed Consolidating Statement of Comprehensive Income (Loss) (Unaudited)
Three Months Ended September 30, 2015 | |||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | — | $ | 271.6 | $ | 152.6 | $ | (10.6 | ) | $ | 413.6 | ||||||||
Cost of products sold | — | 182.6 | 107.9 | (10.6 | ) | 279.9 | |||||||||||||
Gross profit | — | 89.0 | 44.7 | — | 133.7 | ||||||||||||||
Advertising, selling, general and administrative expenses | 9.3 | 40.6 | 24.2 | — | 74.1 | ||||||||||||||
Amortization of intangibles | 0.1 | 3.9 | 0.8 | — | 4.8 | ||||||||||||||
Operating income (loss) | (9.4 | ) | 44.5 | 19.7 | — | 54.8 | |||||||||||||
(Income) expense from affiliates | (0.4 | ) | (5.1 | ) | 5.5 | — | — | ||||||||||||
Interest expense | 11.2 | — | (0.2 | ) | — | 11.0 | |||||||||||||
Interest income | — | — | (1.9 | ) | — | (1.9 | ) | ||||||||||||
Equity in earnings of joint ventures | — | — | (2.5 | ) | — | (2.5 | ) | ||||||||||||
Other expense (income), net | (0.6 | ) | 2.5 | (1.6 | ) | — | 0.3 | ||||||||||||
Income (loss) from continuing operations before income taxes and earnings of wholly owned subsidiaries | (19.6 | ) | 47.1 | 20.4 | — | 47.9 | |||||||||||||
Income tax expense | 8.4 | — | 6.9 | — | 15.3 | ||||||||||||||
Income (loss) before earnings of wholly owned subsidiaries | (28.0 | ) | 47.1 | 13.5 | — | 32.6 | |||||||||||||
Earnings of wholly owned subsidiaries | 60.6 | 11.1 | — | (71.7 | ) | — | |||||||||||||
Net income | $ | 32.6 | $ | 58.2 | $ | 13.5 | $ | (71.7 | ) | $ | 32.6 | ||||||||
Comprehensive (loss) income | $ | (37.8 | ) | $ | 58.2 | $ | (51.0 | ) | $ | (7.2 | ) | $ | (37.8 | ) | |||||
30
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Condensed Consolidating Statement of Comprehensive Income (Loss) (Unaudited)
Nine Months Ended September 30, 2016 | |||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | — | $ | 697.2 | $ | 454.8 | $ | (32.5 | ) | $ | 1,119.5 | ||||||||
Cost of products sold | — | 477.5 | 313.1 | (32.5 | ) | 758.1 | |||||||||||||
Gross profit | — | 219.7 | 141.7 | — | 361.4 | ||||||||||||||
Advertising, selling, general and administrative expenses | 34.8 | 111.1 | 87.2 | — | 233.1 | ||||||||||||||
Amortization of intangibles | 0.1 | 10.8 | 5.0 | — | 15.9 | ||||||||||||||
Restructuring charges | — | — | 4.8 | — | 4.8 | ||||||||||||||
Operating income (loss) | (34.9 | ) | 97.8 | 44.7 | — | 107.6 | |||||||||||||
(Income) expense from affiliates | (1.1 | ) | (11.9 | ) | 13.0 | — | — | ||||||||||||
Interest expense | 32.7 | — | 3.8 | — | 36.5 | ||||||||||||||
Interest income | — | — | (5.1 | ) | — | (5.1 | ) | ||||||||||||
Equity in earnings of joint ventures | — | — | (2.1 | ) | — | (2.1 | ) | ||||||||||||
Other (income) expense, net | (1.7 | ) | 0.7 | (27.7 | ) | — | (28.7 | ) | |||||||||||
Income (loss) from continuing operations before income taxes and earnings of wholly owned subsidiaries | (64.8 | ) | 109.0 | 62.8 | — | 107.0 | |||||||||||||
Income tax expense | 1.9 | — | 15.7 | — | 17.6 | ||||||||||||||
Income (loss) before earnings of wholly owned subsidiaries | (66.7 | ) | 109.0 | 47.1 | — | 89.4 | |||||||||||||
Earnings of wholly owned subsidiaries | 156.1 | 43.1 | — | (199.2 | ) | — | |||||||||||||
Net income | $ | 89.4 | $ | 152.1 | $ | 47.1 | $ | (199.2 | ) | $ | 89.4 | ||||||||
Comprehensive income | $ | 133.2 | $ | 153.2 | $ | 90.1 | $ | (243.3 | ) | $ | 133.2 | ||||||||
31
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Condensed Consolidating Statement of Comprehensive Income (Loss) (Unaudited)
Nine Months Ended September 30, 2015 | |||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | — | $ | 699.4 | $ | 435.3 | $ | (36.4 | ) | $ | 1,098.3 | ||||||||
Cost of products sold | — | 481.5 | 312.6 | (36.4 | ) | 757.7 | |||||||||||||
Gross profit | — | 217.9 | 122.7 | — | 340.6 | ||||||||||||||
Advertising, selling, general and administrative expenses | 30.2 | 113.7 | 75.5 | — | 219.4 | ||||||||||||||
Amortization of intangibles | 0.1 | 12.1 | 2.7 | — | 14.9 | ||||||||||||||
Restructuring credits | — | (0.3 | ) | — | — | (0.3 | ) | ||||||||||||
Operating income (loss) | (30.3 | ) | 92.4 | 44.5 | — | 106.6 | |||||||||||||
(Income) expense from affiliates | (1.0 | ) | (16.2 | ) | 17.2 | — | — | ||||||||||||
Interest expense | 34.1 | — | (0.6 | ) | — | 33.5 | |||||||||||||
Interest income | — | — | (5.3 | ) | — | (5.3 | ) | ||||||||||||
Equity in earnings of joint ventures | — | — | (5.1 | ) | — | (5.1 | ) | ||||||||||||
Other expense (income), net | 1.4 | 2.0 | (1.2 | ) | — | 2.2 | |||||||||||||
Income (loss) from continuing operations before income taxes and earnings of wholly owned subsidiaries | (64.8 | ) | 106.6 | 39.5 | — | 81.3 | |||||||||||||
Income tax expense | 14.0 | — | 12.8 | — | 26.8 | ||||||||||||||
Income (loss) before earnings of wholly owned subsidiaries | (78.8 | ) | 106.6 | 26.7 | — | 54.5 | |||||||||||||
Earnings of wholly owned subsidiaries | 133.3 | 26.2 | — | (159.5 | ) | — | |||||||||||||
Net income | $ | 54.5 | $ | 132.8 | $ | 26.7 | $ | (159.5 | ) | $ | 54.5 | ||||||||
Comprehensive (loss) income | $ | (77.5 | ) | $ | 132.7 | $ | (94.6 | ) | $ | (38.1 | ) | $ | (77.5 | ) | |||||
32
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Condensed Consolidating Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 2016 | |||||||||||||||
(in millions of dollars) | Parent | Guarantors | Non-Guarantors | Consolidated | |||||||||||
Net cash provided (used) by operating activities | $ | (42.1 | ) | $ | 89.8 | $ | 62.3 | $ | 110.0 | ||||||
Investing activities: | |||||||||||||||
Additions to property, plant and equipment | — | (4.8 | ) | (6.3 | ) | (11.1 | ) | ||||||||
Payments for (proceeds from) interest in affiliates | — | 74.4 | (74.4 | ) | — | ||||||||||
Proceeds from the disposition of assets | — | — | 0.8 | 0.8 | |||||||||||
Cost of acquisition, net of cash acquired | — | — | (88.8 | ) | (88.8 | ) | |||||||||
Net cash (used) provided by investing activities | — | 69.6 | (168.7 | ) | (99.1 | ) | |||||||||
Financing activities: | |||||||||||||||
Intercompany financing | 100.9 | (76.2 | ) | (24.7 | ) | — | |||||||||
Net dividends | 82.1 | (72.5 | ) | (9.6 | ) | — | |||||||||
Proceeds from long-term borrowings | — | — | 187.4 | 187.4 | |||||||||||
Repayments of long-term debt | (148.0 | ) | — | (15.5 | ) | (163.5 | ) | ||||||||
Borrowings of notes payable, net | 20.0 | — | (12.2 | ) | 7.8 | ||||||||||
Payments for debt issuance costs | — | — | (0.8 | ) | (0.8 | ) | |||||||||
Payments related to tax withholding for share-based compensation | (5.0 | ) | — | — | (5.0 | ) | |||||||||
Excess tax benefit from share-based compensation | 0.9 | — | — | 0.9 | |||||||||||
Proceeds from the exercise of stock options | 1.9 | — | — | 1.9 | |||||||||||
Net cash provided (used) by financing activities | 52.8 | (148.7 | ) | 124.6 | 28.7 | ||||||||||
Effect of foreign exchange rate changes on cash and cash equivalents | — | — | 6.0 | 6.0 | |||||||||||
Net increase in cash and cash equivalents | 10.7 | 10.7 | 24.2 | 45.6 | |||||||||||
Cash and cash equivalents: | |||||||||||||||
Beginning of the period | 0.8 | 0.3 | 54.3 | 55.4 | |||||||||||
End of the period | $ | 11.5 | $ | 11.0 | $ | 78.5 | $ | 101.0 | |||||||
33
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Condensed Consolidating Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 2015 | |||||||||||||||
(in millions of dollars) | Parent | Guarantors | Non-Guarantors | Consolidated | |||||||||||
Net cash provided (used) by operating activities | $ | (43.7 | ) | $ | 69.2 | $ | 44.2 | $ | 69.7 | ||||||
Investing activities: | |||||||||||||||
Additions to property, plant and equipment | — | (9.7 | ) | (11.7 | ) | (21.4 | ) | ||||||||
Payments for (proceeds from) interest in affiliates | — | 14.9 | (14.9 | ) | — | ||||||||||
Proceeds from the disposition of assets | — | — | 2.7 | 2.7 | |||||||||||
Net cash (used) provided by investing activities | — | 5.2 | (23.9 | ) | (18.7 | ) | |||||||||
Financing activities: | |||||||||||||||
Intercompany financing | 48.0 | (59.6 | ) | 11.6 | — | ||||||||||
Net dividends | 18.0 | (14.9 | ) | (3.1 | ) | — | |||||||||
Proceeds from long-term borrowings | 300.0 | — | — | 300.0 | |||||||||||
Repayments of long-term debt | (320.1 | ) | — | — | (320.1 | ) | |||||||||
Borrowings (repayments) of notes payable, net | 47.0 | — | (0.8 | ) | 46.2 | ||||||||||
Payments for debt issuance costs | (1.7 | ) | — | — | (1.7 | ) | |||||||||
Repurchases of common stock | (46.0 | ) | — | — | (46.0 | ) | |||||||||
Payments related to tax withholding for share-based compensation | (5.9 | ) | — | — | (5.9 | ) | |||||||||
Proceeds from the exercise of stock options | 0.5 | — | — | 0.5 | |||||||||||
Net cash provided (used) by financing activities | 39.8 | (74.5 | ) | 7.7 | (27.0 | ) | |||||||||
Effect of foreign exchange rate changes on cash and cash equivalents | — | — | (6.3 | ) | (6.3 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents | (3.9 | ) | (0.1 | ) | 21.7 | 17.7 | |||||||||
Cash and cash equivalents: | |||||||||||||||
Beginning of the period | 9.7 | 0.1 | 43.4 | 53.2 | |||||||||||
End of the period | $ | 5.8 | $ | — | $ | 65.1 | $ | 70.9 | |||||||
34
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
19. Subsequent Event
On October 21, 2016, the Company and the Company’s indirect wholly-owned subsidiary, ACCO Europe Limited (the "Purchaser") entered into a share purchase agreement (the "Purchase Agreement") with an entity controlled by J. W. Childs, pursuant to which the Purchaser will acquire the entire issued share capital of Esselte Group Holdings AB ("Esselte") for approximately €296.9 million (US$333.1 million based on September 30, 2016 exchange rates) in cash (the Esselte Acquisition"). The purchase price is subject to certain adjustments based on net debt and working capital as detailed in the Purchase Agreement. The Company is a party to the Purchase Agreement solely for the purposes of guaranteeing the obligations of the Purchaser.
The completion of the Esselte Acquisition is subject to customary closing conditions, including conditions relating to required antitrust approvals. The Esselte Acquisition is expected to close in early 2017.
Esselte is a leading European manufacturer and marketer of branded business products. It takes products to market under the Leitz, Rapid and Esselte brands in the storage and organization, stapling and punch, business machines and do-it-yourself tools product categories.
The Esselte Acquisition will be funded with cash and Euro-denominated bank debt.
In anticipation of the Esselte Acquisition, the Company entered into a Third Amendment to Second Amended and Restated Credit Agreement, dated October 21, 2016 (the "Third Amendment"), which amends, in certain respects, the Second Amended and Restated Credit Agreement, dated as of April 28, 2015, as amended, among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other lenders party thereto (as further amended by the Third Amendment, the "Existing Credit Agreement"). Pursuant to the Third Amendment, the Company and certain lenders party thereto have agreed to restate the Existing Credit Agreement in order to, among other things, provide financing for the Esselte Acquisition. The agreement to restate the Existing Credit Agreement is subject to the satisfaction of the conditions set forth in the Third Amendment, including, without limitation, consummation of the Esselte Acquisition and related transactions.
The restated Existing Credit Agreement ("Third Amended and Restated Credit Agreement") will provide for a five-year senior secured credit facility that will, among other things (i) provide funds to repay, in full, all outstanding US Dollar denominated term loans under the Existing Credit Agreement; (ii) provide funds to repay, in part, Australian Dollar denominated term loans under the Existing Credit Agreement and continue such loans in an aggregate principal amount of A$80 million; (iii) make available new Euro denominated term loans in the aggregate principal amount of €300 million; and (iv) establish a revolving credit facility of US$400 million, thereby increasing the Existing Credit Agreement revolving credit facility by US$100 million. Substantially all of the proceeds from the Euro denominated term loans will be applied toward financing the Esselte Acquisition and related costs. The applicable interest rates applied to Eurodollar loans and loans made at the Base Rate (as defined in the Third Amended and Restated Credit Agreement) will be substantially the same as under the Existing Credit Agreement. The Company will be required to meet the same financial covenants as in effect under the Existing Credit Agreement.
Transaction costs related to the Esselte Acquisition of $2.0 million and $4.3 million were incurred during the second and third quarters of 2016, respectively, and were reported as advertising, selling, general and administrative expenses.
35
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 nine months ended September 30, 2016 and 2015, should be read in conjunction with the unaudited condensed consolidated financial statements of ACCO Brands Corporation and the accompanying notes contained herein.
Overview of the Company
ACCO Brands is one of the world's largest designers, marketers and manufacturers of branded business, academic and consumer products. Our widely recognized brands include Artline, AT-A-GLANCE®, Day-Timer®, Five Star®, GBC®, Hilroy®, Kensington®, Marbig, Mead®, NOBO, Quartet®, Rexel, Swingline®, Tilibra®, Wilson Jones® and many others. More than 80% of our net sales come from brands that occupy the number one or number two positions in the select markets in which we compete. We seek to develop new products that meet the needs of our consumers and commercial end-users. We compete through a balance of product innovation, category management, a low-cost operating model and an efficient supply chain. We sell our products to consumers and commercial end-users primarily through resellers, including traditional office supply resellers, wholesalers and retailers, including on-line retailers. Our products are sold primarily to markets located in the U.S., Northern Europe, Australia Canada, Brazil and Mexico. For the year ended December 31, 2015, approximately 40% of our sales were outside the U.S.
The majority of our revenue is concentrated in geographies where demand for our product categories is in mature stages, but we see opportunities to grow sales through market share gains, channel expansion and new products. Over the long-term we expect to derive growth in faster growing emerging geographies where demand in the product categories in which we compete is strong, such as in Latin America and parts of Asia, the Middle East and Eastern Europe. We plan to grow organically supplemented by strategic acquisitions in both existing and adjacent categories. Historically, key drivers of demand for office and school products have included trends in white-collar employment levels, education enrollment levels, gross domestic product (GDP), growth in the number of small businesses and home offices, as well as consumer usage trends for our product categories.
We believe our leading product positions provide the scale to enable us to invest in product innovation and drive growth across our product categories. We manufacture approximately half of our products locally where we operate, and source approximately half of our products, primarily from China.
Key factors that affect our profitability are volume, sales prices compared to product cost and foreign exchange rates (see "Part I, Item 1A. Risk Factors" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and as updated in "Part II, Item 1A. Risk Factors" in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 for further information regarding these and other risk factors).
Pelikan Artline Joint-Venture Acquisition
On May 2, 2016, the Company completed the acquisition of Australia Stationery Industries, Inc. (the "PA Acquisition"), which indirectly owned the 50% of the Pelikan Artline Joint Venture and the issued capital stock of Pelikan Artline Pty Limited (collectively, the “Pelikan Artline JV”) that was not already owned by the Company. Prior to the PA Acquisition, the Pelikan Artline JV was accounted for under the equity method. Accordingly, the results of Pelikan Artline JV are included in the Company's condensed consolidated financial statements from the date of the PA Acquisition, May 2, 2016. Pelikan Artline is a premier distributor of academic, consumer and business products in Australia and New Zealand. Pelikan Artline's product categories include writing instruments, notebooks, binding and lamination, visual communication, cleaning and janitorial supplies, as well as general stationery. Its industry-leading brands include Artline, Quartet and GBC (Pelikan Artline was ACCO Brands' distributor), Spirax, and Texta, among others. The PA Acquisition was financed through a borrowing of A$100.0 million (US$74.4 million based on June 30, 2016 exchange rates) under our existing credit facilities.
During the second quarter of 2016, we recognized a $35.2 million gain in connection with the PA Acquisition due to the revaluation of the Company's previously held equity interest in the Pelikan Artline JV. During the third quarter of 2016, the Company further refined its allocation of the purchase price to the acquired assets, which resulted in a $6.3 million, reduction in the previously reported gain on the Company's previously held equity interest in the Pelikan Artline JV. This reduction was reported in the income statement, the offset to which was a reduction in the reported amount for goodwill, on the balance sheet, resulting in a net gain of $28.9 million for the nine months ended September 30, 2016. This amount was reported in "Other expense (income), net."
36
Overview of Performance
In the third quarter of 2016, net sales increased 4%. The PA Acquisition contributed 7%, but this was partially offset by lower sales elsewhere, particularly in our other markets in International. North America where sales decreased 2% as strong back-to-school sales in North America were more than offset by declines in wholesalers and at office superstores.
While foreign exchange had only a small impact during the third quarter of 2016 on translation of our international results, foreign exchange has historically materially impacted our reported sales, earnings, cash flow and comparative balance sheet because approximately 40% of our consolidated results are denominated in currencies other than the USD. Additionally our international business units have had to adjust their local currency sales prices to reflect the inflation impacts on their costs of goods sold, raising prices in 2015 and again in 2016.
Compared to quarter (QTD) and year-to-date periods (YTD) in 2015, the 2016 average foreign exchange rates have moved as follows for our major currencies relative to the USD:
Currency | QTD Increase (Decrease) versus Q3 2015 | YTD Increase (Decrease) versus Q3 2015 | |
Brazilian real | 8% | (12)% | |
Mexican peso | (13)% | (15)% | |
Canadian dollar | —% | (5)% | |
Australian dollar | 4% | (3)% | |
British pound | (15)% | (9)% | |
Euro | —% | —% | |
Japanese yen | 20% | 11% | |
Three months ended September 30, 2016 versus three months ended September 30, 2015
The following table presents the Company’s results for the three months ended September 30, 2016 and 2015:
Three Months Ended September 30, | Amount of Change | ||||||||||||||
(in millions of dollars) | 2016 | 2015 | $ | % | |||||||||||
Net sales | $ | 431.3 | $ | 413.6 | $ | 17.7 | 4 | % | |||||||
Cost of products sold | 287.1 | 279.9 | 7.2 | 3 | % | ||||||||||
Gross profit | 144.2 | 133.7 | 10.5 | 8 | % | ||||||||||
Gross profit margin | 33.4 | % | 32.3 | % | 1.1 | pts | |||||||||
Advertising, selling, general and administrative expenses | 82.3 | 74.1 | 8.2 | 11 | % | ||||||||||
Amortization of intangibles | 5.8 | 4.8 | 1.0 | 21 | % | ||||||||||
Restructuring charges | 0.4 | — | 0.4 | NM | |||||||||||
Operating income | 55.7 | 54.8 | 0.9 | 2 | % | ||||||||||
Operating income margin | 12.9 | % | 13.2 | % | (0.3) | pts | |||||||||
Interest expense | 13.0 | 11.0 | 2.0 | 18 | % | ||||||||||
Interest income | (1.8 | ) | (1.9 | ) | (0.1 | ) | (5 | )% | |||||||
Equity in earnings of joint venture | — | (2.5 | ) | (2.5 | ) | (100 | )% | ||||||||
Other expense, net | 6.8 | 0.3 | 6.5 | NM | |||||||||||
Income tax expense | 15.0 | 15.3 | (0.3 | ) | (2 | )% | |||||||||
Effective tax rate | 39.8 | % | 31.9 | % | 7.9 | pts | |||||||||
Net income | 22.7 | 32.6 | (9.9 | ) | (30 | )% | |||||||||
Weighted average number of diluted shares outstanding: | 109.4 | 109.5 | (0.1 | ) | — | % | |||||||||
37
Net Sales
Net sales increased $17.7 million, or 4%, to $431.3 million from $413.6 million in the prior-year period. The PA Acquisition contributed sales of $27.6 million, or 7%. Foreign currency translation increased sales by $0.8 million, or 0.2%. Underlying sales decreased as robust growth in North America for the back-to-school season was more than offset by inventory reductions at certain wholesalers, declines at office superstores in both North America and International.
Cost of Products Sold
Cost of products sold includes all manufacturing, product sourcing and distribution costs, including depreciation related to assets used in the manufacturing, procurement and distribution process, 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. Cost of products sold increased $7.2 million, or 3%, to $287.1 million from $279.9 million in the prior-year period. The PA Acquisition contributed $17.0 million to the increased in cost of products sold. Foreign currency translation increased cost of products sold by $0.5 million, or 0.2%. The underlying decrease was driven by lower underlying sales, cost savings and productivity improvements.
Gross Profit
Management believes that gross profit and gross profit margin provide enhanced shareholder understanding of underlying operating profit drivers. Gross profit increased $10.5 million, or 8%, to $144.2 million from $133.7 million in the prior-year period. The PA Acquisition contributed gross profit of $10.6 million. Foreign currency translation increased gross profit by $0.3 million, or 0.2%. The underlying increase was driven by cost savings and productivity improvements and higher pricing in our international markets.
Gross profit margin increased to 33.4% from 32.3% in the prior-year period driven by cost savings and productivity improvements, the PA acquisition and higher pricing.
Advertising, Selling, General and Administrative Expenses
Advertising, 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, etc.). SG&A increased $8.2 million, or 11%, to $82.3 million from $74.1 million in the prior-year period. The PA Acquisition increased SG&A by $4.8 million, including $0.3 million of integration costs related to the PA Acquisition. Foreign currency translation reduced SG&A by $0.4 million, or 1%. The underlying increase was driven by $4.3 million in costs associated with the recently announced Esselte Acquisition.
As a percentage of sales, SG&A increased to 19.1% from 17.9% in the prior-year period for the reasons mentioned above.
Operating Income
Operating income increased $0.9 million, or 2%, to $55.7 million from $54.8 million in the prior-year period. Foreign currency translation increased operating income by $0.8 million, or 1%. The $4.2 million added by the PA Acquisition was offset by $4.3 million in costs associated with the recently announced Esselte Acquisition.
Interest Expense, Equity in Earnings of Joint Venture and Other Expense, Net
Interest expense increased $2.0 million, or 18%, to $13.0 million from $11.0 million in the prior-year period. The increase was due to the additional debt incurred for the PA Acquisition and the accelerated amortization of debt issuance cost related to the prepayment of $70 million on our U.S. Dollar Senior Secured Term Loan A.
Equity in earnings of joint venture declined from $2.5 million in the prior-year period to zero because the Company completed the PA Acquisition on May 2, 2016 and, accordingly, the results of the Pelikan Artline JV have been included in the Company's consolidated results from that date forward. Historically they were accounted for under the equity method.
Other expense, net increased $6.5 million, to $6.8 million from $0.3 million in the prior-year period. The increase was driven by a refinement in the allocation of the purchase price to the acquired assets for the PA Acquisition, which resulted in a $6.3 million reduction to the previously reported gain on previously held equity interest.
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Income Taxes
Income tax expense was $15.0 million on income before taxes of $37.7 million, with an effective tax rate of 39.8%. For the prior-year period, income tax expense was $15.3 million on income before taxes of $47.9 million, with an effective tax rate of 31.9%. The higher effective tax rate in the current year period was primarily due to the $6.3 million reduction to the previously reported gain on the previously held equity interest arising from the PA Acquisition, which was not subject to tax.
Net Income
Net income decreased $9.9 million, to $22.7 million, or $0.21 per diluted share, from income of $32.6 million, or $0.30 per diluted share, in the prior-year period. Foreign currency translation increased net income by $0.2 million, or 1%. The underlying decrease was primarily due the $6.3 million reduction to the previously reported gain on previously held equity interest arising from the PA Acquisition and higher interest expense.
Segment Discussion
Three Months Ended September 30, 2016 | Amount of Change | |||||||||||||||||||||||||
Net Sales | Segment Operating Income (A) | Operating Income Margin | Net Sales | Net Sales | Segment Operating Income | Segment Operating Income | Margin Points | |||||||||||||||||||
(in millions of dollars) | $ | % | $ | % | ||||||||||||||||||||||
ACCO Brands North America | $ | 273.3 | $ | 48.6 | 17.8 | % | $ | (6.5 | ) | (2)% | $ | 0.2 | 0.4 | % | 50 | |||||||||||
ACCO Brands International | 128.5 | 16.7 | 13.0 | % | 24.2 | 23% | 5.4 | 48 | % | 220 | ||||||||||||||||
Computer Products Group | 29.5 | 3.1 | 10.5 | % | — | —% | 0.4 | 15 | % | 130 | ||||||||||||||||
Total | $ | 431.3 | $ | 68.4 | $ | 17.7 | $ | 6.0 | ||||||||||||||||||
Three Months Ended September 30, 2015 | ||||||||||||||||||||||||||
Net Sales | Segment Operating Income (A) | Operating Income Margin | ||||||||||||||||||||||||
(in millions of dollars) | ||||||||||||||||||||||||||
ACCO Brands North America | $ | 279.8 | $ | 48.4 | 17.3 | % | ||||||||||||||||||||
ACCO Brands International | 104.3 | 11.3 | 10.8 | % | ||||||||||||||||||||||
Computer Products Group | 29.5 | 2.7 | 9.2 | % | ||||||||||||||||||||||
Total | $ | 413.6 | $ | 62.4 | ||||||||||||||||||||||
(A) Segment operating income excludes corporate costs; "Interest expense," "Interest income," "Equity in earnings of joint venture," and "Other expense (income), net." See "Part I, Item 1. Note 15. Information on Business Segments," for a reconciliation of total Segment operating income to "Income before income tax."
ACCO Brands North America
ACCO Brands North America net sales decreased $6.5 million, or 2%, to $273.3 million from $279.8 million in the prior-year period. Underlying sales decreased as strong back-to-school sales with mass-market customers and online retailers was more than offset by a combination of lower sales at wholesalers, who reduced their inventory levels, and declines at office superstores, reflecting the effects of ongoing distribution center and store closures.
ACCO Brands North America operating income increased $0.2 million, or 0.4%, to $48.6 million from $48.4 million in the prior-year period. The improvement was primarily due to lower SG&A expenses partially offset by the lower gross profit due to reduced sales. Operating income margin increased to 17.8% from 17.3%.
ACCO Brands International
ACCO Brands International net sales increased $24.2 million, or 23%, to $128.5 million from $104.3 million in the prior-year period. The PA Acquisition contributed sales of $27.6 million, or 26%. Foreign currency translation increased sales by $0.8 million, or 1%. The underlying sales decrease was due to lower volume as a result of the ongoing recession in Brazil, channel destocking, most notably in Europe and lost share with some customers. Partially offsetting the decline was pricing, which benefited
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sales by 7% as we raised prices to recover our gross margin following foreign-exchange-related increases to our cost of products sold.
ACCO Brands International operating income increased $5.4 million, or 48%, to $16.7 million from $11.3 million in the prior-year period, and operating income margin increased to 13.0% from 10.8%. Foreign currency translation increased operating income by $0.7 million, or 6%. The underlying increase was driven by higher pricing and the PA Acquisition, which contributed $4.2 million, net of $0.3 million of integration expenses. The increase was partially offset by lower sales volume.
Computer Products Group
Computer Products Group net sales of $29.5 million were flat versus the prior-year period. Higher sales in desktop accessories were offset by lower sales of security and tablet accessories.
Computer Products Group operating income increased $0.4 million, or 15%, to $3.1 million from $2.7 million in the prior-year period, and operating income margin increased to 10.5% from 9.2%. Foreign currency translation increased operating income by $0.2 million, or 7%. The underlying increase was primarily due to a more favorable product mix, with less of an impact from low margin commoditized tablet accessories. The operating margin increased primarily due to the improved gross margin from the favorable product mix noted above.
Nine months ended September 30, 2016 versus nine months ended September 30, 2015
The following table presents the Company’s results for the nine months ended September 30, 2016 and 2015:
Nine Months Ended September 30, | Amount of Change | ||||||||||||||
(in millions of dollars) | 2016 | 2015 | $ | % | |||||||||||
Net sales | $ | 1,119.5 | $ | 1,098.3 | $ | 21.2 | 2 | % | |||||||
Cost of products sold | 758.1 | 757.7 | 0.4 | 0.1 | % | ||||||||||
Gross profit | 361.4 | 340.6 | 20.8 | 6 | % | ||||||||||
Gross profit margin | 32.3 | % | 31.0 | % | 1.3 | pts | |||||||||
Advertising, selling, general and administrative expenses | 233.1 | 219.4 | 13.7 | 6 | % | ||||||||||
Amortization of intangibles | 15.9 | 14.9 | 1.0 | 7 | % | ||||||||||
Restructuring charges (credits) | 4.8 | (0.3 | ) | 5.1 | NM | ||||||||||
Operating income | 107.6 | 106.6 | 1.0 | 1 | % | ||||||||||
Operating income margin | 9.6 | % | 9.7 | % | (0.1) | pts | |||||||||
Interest expense | 36.5 | 33.5 | 3.0 | 9 | % | ||||||||||
Interest income | (5.1 | ) | (5.3 | ) | (0.2 | ) | (4 | )% | |||||||
Equity in earnings of joint venture | (2.1 | ) | (5.1 | ) | (3.0 | ) | (59 | )% | |||||||
Other (income) expense, net | (28.7 | ) | 2.2 | 30.9 | NM | ||||||||||
Income tax expense | 17.6 | 26.8 | (9.2 | ) | (34 | )% | |||||||||
Effective tax rate | 16.4 | % | 33.0 | % | (16.6) | pts | |||||||||
Net income | 89.4 | 54.5 | 34.9 | 64 | % | ||||||||||
Weighted average number of diluted shares outstanding: | 108.9 | 111.5 | (2.6 | ) | (2 | )% | |||||||||
Net Sales
Net sales increased $21.2 million, or 2%, to $1,119.5 million from $1,098.3 million in the prior-year period. The PA Acquisition contributed sales of $44.4 million, or 4%. Foreign currency translation reduced sales by $19.6 million, or 2%. The underlying sales decrease was due to lower volume in International and was partially offset by growth in North America from strong back-to-school sales.
Cost of Products Sold
Cost of products sold increased $0.4 million, or 0.1%, to $758.1 million from $757.7 million in the prior-year period. The PA Acquisition contributed $27.6 million to increased cost of products sold. Foreign currency translation reduced cost of products sold by $15.0 million, or 2%. The underlying decline was due to lower sales volume (primarily in International), cost savings and
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productivity improvements (primarily in North America), partially offset by foreign-exchange-related inflationary increases in certain cost of products.
Gross Profit
Gross profit increased $20.8 million, or 6%, to $361.4 million from $340.6 million in the prior-year period. The PA Acquisition increased gross profit by $16.8 million. Foreign currency translation reduced gross profit by $4.6 million, or 1%. The underlying increase was due to higher pricing, cost savings and productivity improvements, which were partially offset by foreign-exchange-related inflationary increases in certain costs of products.
Gross profit margin increased to 32.3% from 31.0%. The increase was primarily due to cost savings and productivity improvements, higher pricing and from the inclusion of the PA acquisition.
Advertising, Selling, General and Administrative Expenses
SG&A increased $13.7 million, or 6%, to $233.1 million from $219.4 million in the prior-year period. The PA Acquisition increased SG&A by $9.8 million, including $2.0 million of costs related to the PA Acquisition. Foreign currency translation reduced SG&A by $4.3 million, or 2%. The underlying increase was driven by higher professional fees, including $6.3 million related to the recently announced Esselte Acquisition. Additionally, the prior year included a one-time $2.3 million benefit from the recovery of an indirect tax in Brazil.
As a percentage of sales, SG&A increased to 20.8% from 20.0% in the prior-year period, for the reasons mentioned above.
Restructuring Charges (Credits)
The Company initiated cost reduction plans related to the consolidation and integration of Pelikan Artline with our already existing Australian and New Zealand businesses, and as a result incurred $3.6 million in charges, primarily related to severance. In addition, the Company initiated cost reduction plans and incurred $1.2 million in severance charges related to the consolidation of certain functions in the North America segment.
Operating Income
Operating income increased $1.0 million, to $107.6 million from $106.6 million in the prior-year period. Foreign currency translation increased operating income by $0.2 million, or 0.2%. The underlying increase was due to the PA Acquisition, partially offset by increased SG&A and restructuring charges.
Interest Expense, Equity in Earnings of Joint Venture and Other (Income) Expense, Net
Interest expense increased $3.0 million, or 9%, to $36.5 million from $33.5 million in the prior-year period. The increase was primarily related to the additional debt incurred for the PA Acquisition and the accelerated amortization of debt issuance cost related to the prepayment of $70 million on our U.S. Dollar Senior Secured Term Loan A. We also incurred a $0.5 million loan breakage fee for pre-existing Pelikan Artline JV debt and $0.4 million of expense for the accelerated amortization of debt issuance costs due to a debt swap of part of our USD term loan for the new Australian dollar revolving loan.
Equity in earnings of joint venture was $2.1 million compared to $5.1 million in the prior-year period. The Company completed the PA Acquisition on May 2, 2016 and accordingly, the results of Pelikan Artline JV have been included in the Company's consolidated results from that date. Historically they were accounted for under the equity method.
Other expense (income), net was income of $28.7 million compared to expense of $2.2 million in the prior-year period. The increase in income was driven by a $28.9 million gain arising from the PA Acquisition due to the revaluation of the Company's previously held equity interest to fair value and a $1.0 million gain on the settlement of an intercompany loan, previously deemed permanently invested. In the prior year we wrote-off $1.9 million of debt issuance costs related to the refinancing completed in the second quarter of 2015.
Income Taxes
Income tax expense was $17.6 million on income before taxes of $107.0 million, with an effective tax rate of 16.4%. For the prior-year period, income tax expense was $26.8 million on income before taxes of $81.3 million, with an effective tax rate of 33.0%. The lower effective tax rate in the current year period was primarily due to the following: 1) the $28.9 million gain
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arising from the PA Acquisition due to the revaluation of the previously held equity interest to fair value, which was not subject to tax, and 2) tax losses on foreign exchange on the repayment of intercompany loans, for which the pre-tax effect was recorded in equity.
Net Income
Net income increased $34.9 million, or 64%, to $89.4 million or $0.82 per diluted share, from $54.5 million, or $0.49 per diluted share in the prior-year period. Foreign currency translation reduced net income by $2.4 million, or 4%. The underlying increase was primarily due to the $28.9 million gain arising as a result of the PA Acquisition from the revaluation of the previously held equity interest to fair value and the low effective tax rate in the current year.
Segment Discussion
Nine Months Ended September 30, 2016 | Amount of Change | |||||||||||||||||||||||||
Net Sales | Segment Operating Income (A) | Operating Income Margin | Net Sales | Net Sales | Segment Operating Income | Segment Operating Income | Margin Points | |||||||||||||||||||
(in millions of dollars) | $ | % | $ | % | ||||||||||||||||||||||
ACCO Brands North America | $ | 718.1 | $ | 110.5 | 15.4 | % | $ | 3.0 | 0.4% | $ | 6.4 | 6 | % | 80 | ||||||||||||
ACCO Brands International | 315.1 | 23.4 | 7.4 | % | 19.5 | 7% | 2.6 | 13 | % | 40 | ||||||||||||||||
Computer Products Group | 86.3 | 8.0 | 9.3 | % | (1.3 | ) | (1)% | 1.1 | 16 | % | 140 | |||||||||||||||
Total | $ | 1,119.5 | $ | 141.9 | $ | 21.2 | $ | 10.1 | ||||||||||||||||||
Nine Months Ended September 30, 2015 | ||||||||||||||||||||||||||
Net Sales | Segment Operating Income (A) | Operating Income Margin | ||||||||||||||||||||||||
(in millions of dollars) | ||||||||||||||||||||||||||
ACCO Brands North America | $ | 715.1 | $ | 104.1 | 14.6 | % | ||||||||||||||||||||
ACCO Brands International | 295.6 | 20.8 | 7.0 | % | ||||||||||||||||||||||
Computer Products Group | 87.6 | 6.9 | 7.9 | % | ||||||||||||||||||||||
Total | $ | 1,098.3 | $ | 131.8 | ||||||||||||||||||||||
(A) Segment operating income excludes corporate costs; "Interest expense," "Interest income," "Equity in earnings of joint venture" and "Other expense (income), net." See "Part I, Item 1. Note 15. Information on Business Segments," for a reconciliation of total Segment operating income to "Income before income tax."
ACCO Brands North America
ACCO Brands North America net sales increased $3.0 million, or 0.4%, to $718.1 million from $715.1 million in the prior-year period. Foreign currency translation reduced sales by $4.0 million, or 1%. The underlying sales increase was primarily due to strong back-to-school sales, notably with mass-market customers and on-line retailers and higher pricing. The strong back-to-school sales were due to increased product placements and broadened product offerings. The increase was partially offset by lower sales due to inventory reduction at wholesalers and office superstores, reflecting the ongoing effects of distribution center and store closures.
ACCO Brands North America operating income increased $6.4 million, or 6%, to $110.5 million from $104.1 million in the prior-year period, and operating income margin increased to 15.4% from 14.6%. Foreign currency translation reduced operating income by $0.4 million, or 0.4%. The improvement was driven by higher sales and cost savings and productivity improvements.
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ACCO Brands International
ACCO Brands International net sales increased $19.5 million, or 7%, to $315.1 million from $295.6 million in the prior-year period. The PA Acquisition contributed sales of $44.4 million, or 15%. Foreign currency translation reduced sales by $14.8 million, or 5%. The underlying sales decrease was due to lower volume as a result of the ongoing recession in Brazil, channel destocking, most notably in Europe and lost share with some customers. Partially offsetting the decline was pricing, which benefited sales by 9%, as we raised prices to recover our gross margins following foreign-exchange-related cost of products sold increases.
ACCO Brands International operating income increased $2.6 million, or 13%, to $23.4 million from $20.8 million in the prior-year period, and operating income margin increased to 7.4% from 7.0%. The PA Acquisition contributed operating income before restructuring charges of $5.7 million, net of $0.6 million of integration expenses. Foreign currency translation increased operating income by $0.4 million, or 2%. The underlying decrease was due to $3.6 million of restructuring charges related to the integration of the PA Acquisition, the absence of a one-time $2.3 million benefit from the recovery of an indirect tax in Brazil, which benefited the prior-year period, and lower sales volume. The decrease was partially offset by higher pricing and productivity improvements.
Computer Products Group
Computer Products Group net sales decreased $1.3 million, or 1%, to $86.3 million from $87.6 million in the prior-year period. Foreign currency translation reduced sales by $0.8 million, or 1%. Increased sales of laptop accessory products were offset by lower sales of tablet accessories as we largely completed our exit of low margin commoditized tablet accessories.
Computer Products Group operating income increased $1.1 million, or 16%, to $8.0 million from $6.9 million in the prior-year period, and operating margin increased to 9.3% from 7.9%. Foreign currency translation increased operating income by $0.2 million, or 3%. Operating income and margin increased due to higher pricing in international markets and favorable product mix with lower sales of tablet accessories, as well as an improved product mix. The prior-year period also included $0.3 million in restructuring charges.
Liquidity and Capital Resources
Our primary liquidity needs are to service indebtedness, fund capital expenditures and support working capital requirements. Our principal sources of liquidity are cash flows from operating activities, cash and cash equivalents held and seasonal borrowings under our revolving credit facility. As of September 30, 2016, there were $133.8 million in borrowings under our $300.0 million revolving credit facility and the amount available for borrowings was $157.4 million (allowing for $8.8 million of letters of credit outstanding on that date).
We maintain adequate financing arrangements at market rates. Because of the seasonality of our business, we typically generate much of our cash flow in the first, third and fourth quarters, as accounts receivables are collected, and use cash in the second quarter, to fund working capital in order to support the North America back-to-school season. Our Brazilian business is highly seasonal due to the timing of the back-to-school season, which coincides with the calendar year-end in the fourth quarter. Due to various tax laws, it is costly to transfer short-term working capital in and out of Brazil; therefore, our normal practice is to hold seasonal cash requirements in Brazil, and invest them in short-term Brazilian government securities. During the first quarter of 2016 we repatriated $21.8 million (R$83.0 million) to the U.S. from Brazil as the cash was not needed in the foreseeable future due to lower sales volume caused by the adverse economic conditions in Brazil. Consolidated cash and cash equivalents was $101.0 million as of September 30, 2016, of which approximately $44.7 million was held in Brazil. Our priorities for cash flow use over the near term, after funding internal growth, are debt reduction, funding acquisitions and stock repurchases.
On May 2, 2016, the Company completed the PA Acquisition. The purchase price, net of cash acquired was $88.8 million. The PA Acquisition was financed through a borrowing of A$100.0 million (US$74.4 million based on June 30, 2016 exchange rates) in the form of an incremental Term A loan under the Credit Agreement along with additional borrowings of A$152.0 million (US$113.1 million based on June 30, 2016 exchange rates) under the Company’s existing revolving facility under the Credit Agreement.
The Company used some of the proceeds from borrowings under the existing revolving facility to reduce the U.S. Dollar Senior Secured Term Loan A by $78.0 million and to pay off the debt assumed in the PA Acquisition of A$32.1 million (US$24.5 million).
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The current senior secured credit facilities have a weighted average interest rate of 2.87% as of September 30, 2016 and our senior unsecured notes have a fixed interest rate of 6.75%.
Cash Flow for the nine months ended September 30, 2016 versus nine months ended September 30, 2015
Cash Flow from Operating Activities
Cash provided by operating activities during the nine months ended September 30, 2016 of $110.0 million was generated by a combination of operating profit and net working capital (Accounts Receivable, Inventories, Accounts Payable) and reflects the seasonally high cash inflow that is typical of our business, as well as incremental cash flow from the PA Acquisition. Cash provided by operating activities in the comparable 2015 period was $69.7 million. Accounts receivable contributed $67.7 million due to customer settlements following a strong "back-to-school" sales season in North America, which was higher than the prior year of $40.7 million due to earlier sales timing and improved management of collections. Increased real-time inventory purchases contributed to a reduced use of cash for accounts payable, which was $7.3 million in 2016, compared to $18.3 million in the prior year. The use of cash for inventory of $31.3 million was marginally lower that the prior year due to reduced demand in certain markets. Partially offsetting the cash generated from operating profit and net working capital were significant cash payments related to the settlement of customer program liabilities, which were higher than the prior year due to higher earned rebates on strong fourth quarter 2015 sales and increased settlements alongside the improved accounts receivable collections. In addition, employee annual incentive payments made in the first quarter, interest payments and income tax payments were broadly in line with those made during the first nine months of the prior year.
The table below shows our cash flow from accounts receivable, inventories and accounts payable for the nine months ended September 30, 2016 and 2015:
Nine Months Ended | |||||||
(in millions of dollars) | September 30, 2016 | September 30, 2015 | |||||
Accounts receivable | $ | 67.7 | $ | 40.7 | |||
Inventories | (31.3 | ) | (37.3 | ) | |||
Accounts payable | (7.3 | ) | (18.3 | ) | |||
Cash flow provided by net working capital | $ | 29.1 | $ | (14.9 | ) | ||
Cash Flow from Investing Activities
Cash used by investing activities was $99.1 million and $18.7 million for the nine months ended September 30, 2016 and 2015, respectively. The 2016 cash outflow reflects $88.8 million of purchase price net of cash acquired in connection with the PA Acquisition. See "Note 3. Acquisition" to the condensed consolidated financial statements contained in Item 1 of this report for details on the PA Acquisition. Capital expenditures were $11.1 million and $21.4 million for the nine months ended September 30, 2016 and 2015, respectively, due to reduced information technology investment following the implementation of a new enterprise resource planning ("ERP") system in our European operations in early 2016.
Cash Flow from Financing Activities
Cash provided by financing activities was $28.7 million for the nine months ended September 30, 2016, compared to a use of $27.0 million for the same period of 2015. Cash provided in 2016 reflects long-term borrowings of $187.4 million, consisting of A$100.0 million (US$74.4 million based on June 30, 2016 exchange rates) in the form of an incremental Term A loan, along with additional borrowings of A$152.0 million (US$113.1 million based on June 30, 2016 exchange rates) under the Company’s existing revolving facility, primarily for the PA Acquisition. Repayments of long-term debt of $163.5 million include the repayment of the U.S. Dollar Senior Secured Term Loan A and repayment of the debt assumed in the PA Acquisition. In 2016, we also used $5.0 million for payments related to tax withholding for share-based compensation and paid $0.8 million of debt issuance fees in association with PA Acquisition financing described above. Cash used in 2015 reflects borrowing on our short-term credit facility of $46.2 million, largely to repurchase $51.9 million of our Company's common stock and for payments related to tax withholding for share-based compensation. Also included in 2015 were net repayments of long-term borrowings of $20.1 million and payments of $1.7 million for debt issuance costs associated with debt refinancing.
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Credit Facilities and Notes Covenants
As of and for the period ended September 30, 2016, the Company was in compliance with all applicable covenants under the senior secured credit facilities and indenture governing the senior unsecured notes.
Guarantees and Security
Generally, obligations under our credit agreement and debt instruments are guaranteed by certain of the Company's existing and future domestic subsidiaries, and are secured by substantially all of the Company's and certain guarantor subsidiaries' assets, subject to certain exclusions and limitations.
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 credit facility, will be adequate to support our requirements for working capital, capital expenditures and to service indebtedness for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Foreign Exchange Risk Management
As discussed in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2015 the Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rate changes. With the PA Acquisition the Company will have a substantial increase in the portion of its business in Australia. For 2015, on a pro forma basis (as if we had acquired the Pelikan Artline on January 1, 2015), approximately 44% of the Company's revenues would be in foreign currencies as compared to 40% before the PA Acquisition. Overall there has been no material change to our Foreign Exchange Risk Management.
Interest Rate Risk Management
There have been no material changes to Interest Rate Risk Management in the quarter ended September 30, 2016 or through the date of this report.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of, our Disclosure Committee, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting.
In May 2016, we completed the PA Acquisition, which represented $27.6 million of our consolidated net sales for the quarter ended September 30, 2016. Consolidated assets as of September 30, 2016 were $95.4 million. As the PA Acquisition occurred in the second quarter of 2016, the scope of our evaluation of the effectiveness of internal control over financial reporting does not include Pelikan Artline. This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition.
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, except as mentioned above.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims, lawsuits and pending actions against us incidental to our operations, including the income tax assessment against our Brazilian subsidiary, Tilibra Produtos de Papelaria Ltda (the "Brazilian Tax Assessment"), which is more fully described in our Annual Report on Form 10-K for the year ended December 31, 2015 and in "Part I, Item 1. Note 10. Income Taxes - Income Tax Assessment" to the Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q. It is the opinion of management that (other than the Brazilian Tax Assessment) the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial condition, results of operations or cash flow. However, there is no assurance that we will ultimately be successful in our defense of any of these matters or that an adverse outcome in any matter will not affect our results of operations, financial condition or cash flow.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015, except as updated under "Part II, Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Common Stock Purchases
The following table provides information about the Company’s purchases of equity securities during the quarter ended September 30, 2016:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program(1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) | ||||||||||
July 1, 2016 to July 31, 2016 | — | $ | — | — | $ | 120,571,849 | ||||||||
August 1, 2016 to August 31, 2016 | — | — | — | 120,571,849 | ||||||||||
September 1, 2016 to September 30, 2016 | — | — | — | 120,571,849 | ||||||||||
Total | — | $ | — | — | ||||||||||
(1) On August 21, 2014, the Company announced that its Board of Directors had approved the repurchase of up to $100 million in shares of its common stock. On October 28, 2015, the Company announced that its Board of Directors had approved an authorization to repurchase up to an additional $100 million in shares of its common stock.
The number of shares to be purchased and the timing of purchases will be based on the Company's stock price, leverage ratios, cash balances, general business and market conditions, and other factors, including alternative investment opportunities and working capital needs. The Company may repurchase its shares, from time to time, through a variety of methods, including open-market purchases, privately negotiated transactions and block trades or pursuant to repurchase plans designed to comply with the Rule 10b5-1 of the Securities Exchange Act of 1934. Stock repurchases will be subject to market conditions, SEC regulations and other considerations and may be commenced or suspended at any time or from time to time, without prior notice. Accordingly, there is no guarantee as to the number of shares that will be repurchased or the timing of such repurchases.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibit
Number Description of Exhibit
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** |
32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** |
101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows and (v) related notes to those financial statements* |
* | Filed herewith. |
** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REGISTRANT: | |
ACCO BRANDS CORPORATION | |
By: | /s/ Boris Elisman |
Boris Elisman | |
Chairman, President and Chief Executive Officer (principal executive officer) | |
By: | /s/ Neal V. Fenwick |
Neal V. Fenwick | |
Executive Vice President and Chief Financial Officer (principal financial officer) | |
By: | /s/ Kathleen D. Schnaedter |
Kathleen D. Schnaedter | |
Senior Vice President, Corporate Controller and Chief Accounting Officer (principal accounting officer) | |
Date: October 26, 2016
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** |
32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** |
101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows and (v) related notes to those financial statements* |
* | Filed herewith. |
** | Furnished herewith. |
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