ACCO BRANDS Corp: Form 10-Q for the period ended Mar 31, 2025

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2025 and 2024 should be read in conjunction with the unaudited condensed consolidated financial statements of ACCO Brands Corporation and the accompanying notes contained therein.

Overview of the Company

ACCO Brands is a leading global consumer, technology and business branded products company, providing well-known brands and innovative product solutions used in schools, homes and at work. These brands include At-A-Glance®, Barrilito®, Esselte®, Five Star®, Foroni®, GBC®, Hilroy®, Kensington®, Leitz®, Mead®, PowerA®, Quartet®, Rapid®, Swingline®, Tilibra® and others. Our products are sold primarily in the U.S., Europe, Australia, Canada, Brazil and Mexico.

The Company has two operating segments Americas and International. Each operating segment designs, markets, sources, manufactures, and sells recognized consumer, technology and business branded products used in schools, homes and at work. Product designs are tailored to end-user preferences in each geographic region, and where possible, leverage common engineering, design, and sourcing.

Our product categories include gaming and computer accessories; storage and organization; notebooks; shredding; laminating and binding machines; stapling; punching; planners; dry erase boards; and do-it-yourself tools, among others. We distribute our products through a wide variety of channels to ensure that our products are readily and conveniently available for purchase by consumers and other end-users, wherever they prefer to shop. These channels include mass retailers, e-tailers, technology distributors, discount, drug/grocery and variety chains, warehouse clubs, hardware and specialty stores, independent office product dealers, office superstores, wholesalers, and contract stationers. We also sell directly through e-commerce sites and our direct sales organization.

Overview of Performance

The Company continues to be impacted by softer global demand, reflecting lower consumer and office spending due to the weak macroeconomic conditions and geopolitical instability. We expect these collective global trends to continue to impact our financial results.

During the first quarter, our net sales decreased $41.5 million, or 11.6 percent, compared to the prior year's first quarter. The decrease is due to lower global demand for certain office related products and gaming accessories. These declines were partially offset by growth in computer accessories. Gross margin increased 60 basis points reflecting a favorable sales mix and cost savings from our global footprint rationalization program.

We reported an operating loss of $6.7 million in the first quarter, compared to operating income of $5.9 million in the prior year's first quarter. The decline in operating results was primarily due to lower sales volume and higher restructuring expense.

Our operating cash flow for the first three months was cash provided of $5.5 million compared to cash provided of $28.2 million in the prior year primarily reflecting reductions in working capital. Our operating cash flow continues to be seasonal with a historic pattern of strong inflows during the second half of the year.

Consolidated Results of Operations for the Three Months Ended March 31, 2025 and 2024

(in millions, except per share data)

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

Net Sales

For the three months ended March 31, 2025, net sales decreased $41.5 million, or 11.6 percent, including $11.7 million, or 3.3 percent from adverse foreign exchange. Comparable net sales decreased 8.3 percent. The reported sales decline was driven by lower volume, which was down $30.1 million, or 8.4 percent, primarily due to lower global demand for certain office related products and gaming accessories, partly offset by growth in computer accessories.

Gross Profit

For the three months ended March 31, 2025, gross profit decreased $10.8 million, or 9.8 percent, primarily due to volume declines partly offset by improved product mix and savings from the impact of our global cost reduction actions. Adverse foreign exchange reduced gross profit by $3.6 million, or 3.3 percent.

Selling, General and Administrative Expenses ("SG&A")

For the three months ended March 31, 2025, SG&A decreased $1.5 million, or 1.6 percent. The decrease was due to favorable foreign exchange which reduced SG&A by $2.3 million, or 2.4 percent, as well as the positive impact of global cost reductions, offset by people costs.

Operating (Loss) Income

For the three months ended March 31, 2025, we reported an operating loss of $6.7 million, compared to operating income of $5.9 million in the prior year, primarily due to the impact of lower sales volume and higher restructuring costs partly offset by lower SG&A expense and positive sales mix. Adverse foreign exchange increased operating loss by $1.0 million, or 16.9 percent.

Interest Expense, Net

For the three months ended March 31, 2025, interest expense, net decreased $2.5 million, or 21.9 percent, primarily due to lower variable interest rates on lower variable debt balances versus the prior year. The weighted average interest rate on $361.5 million of outstanding variable rate debt as of March 31, 2025 decreased to 4.73 percent from 6.26 percent in the prior year.

Income Tax (Benefit) Expense

For the three months ended March 31, 2025, we recorded an income tax benefit of $3.3 million on a loss before taxes of $16.5 million. For the three months ended March 31, 2024, we recorded income tax expense of $1.0 million on a loss before taxes of $5.3 million.

See "Note 11. Income Taxes" for more information.

Segment Net Sales and Operating Income for the Three Months Ended March 31, 2025 and 2024

ACCO Brands Americas

(in millions)

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

(2) Segment operating income excludes corporate costs. See "Part I, Item 1. Note 17. Information on Operating Segments" for a reconciliation of total "Segment operating income" to "Loss before income tax."

For the three months ended March 31, 2025, net sales decreased $23.3 million, or 11.8 percent, including $7.0 million, or 3.5 percent, from adverse foreign exchange. Comparable net sales decreased 8.3 percent. The reported sales decline was driven by lower volume, which was down $13.5 million, or 6.8 percent, primarily due to lower demand for technology accessories and certain consumer and business products. Price decreases of $2.7 million, or 1.4 percent also contributed to the decline.

For the three months ended March 31, 2025, we reported operating income of $0.9 million, a decrease of $5.2 million, primarily due to the impact of lower sales volume and $1.8 million of restructuring expense in the current year period. Adverse foreign exchange reduced operating income $0.6 million, or 9.8 percent.

ACCO Brands International

(in millions)

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

(2) Segment operating income excludes corporate costs. See "Part I, Item 1. Note 17. Information on Operating Segments" for a reconciliation of total "Segment operating income" to "Loss before income tax."

For the three months ended March 31, 2025, net sales decreased 11.3 percent, including $4.7 million, or 2.9 percent, from adverse foreign exchange. Comparable net sales decreased 8.4 percent. The reported sales decline was driven by lower volume, which was down $16.6 million, or 10.3 percent, primarily due to reduced business and consumer demand for office products, partly offset by growth in technology accessories and the benefit of price increases of $3.0 million, or 1.9 percent.

For the three months ended March 31, 2025, operating income decreased $7.7 million primarily due to lower sales volume, partly offset by cost savings and pricing actions. Adverse foreign exchange reduced operating income $0.4 million, or 3.1 percent.

Impact and Potential Impact of Tariffs

During the first quarter of 2025, the impact of the new U.S. and reciprocal tariffs on our business was not material to our condensed consolidated financial statements. We expect the environment to remain uncertain throughout 2025 until there is greater clarity on the tariffs and business and consumer demand. In reaction to the evolving tariff landscape, we have initiated a number of actions:

• Implementing price increases,
• In the near term, investing in inventory arriving from countries with lower tariffs,
• Moving sourcing of our U.S. products to countries where we believe tariffs will be lower over the long term,
• Evaluating our own manufacturing facilities to utilize existing capacity where it makes economic sense, and
• Expanding our SKU rationalization in the U.S. and offering our customers item substitutions for high-cost products.

For further information on our risks related to the impact of tariffs, see "Part II, Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q.

Liquidity and Capital Resources

Our primary liquidity needs are to support our working capital requirements, service indebtedness and fund capital expenditures, dividends, stock repurchases and acquisitions. Our principal sources of liquidity are cash flows from operating activities, cash and cash equivalents held, and seasonal borrowings under our $467.5 million multi-currency revolving credit facility (the "Revolving Facility"). As of March 31, 2025, there was $221.4 million in borrowings outstanding under the Revolving Facility ($18.5 million reported in "Current portion of long-term debt" and $202.9 million reported in "Long-term debt, net"), and the amount available for borrowings was $235.9 million (allowing for $10.2 million of letters of credit outstanding on that date). We had $134.6 million in cash on hand as of March 31, 2025.

As of March 31, 2025, our Consolidated Leverage Ratio was approximately 3.65 to 1.00 versus our maximum covenant of 4.50 to 1.00. We had no debt maturities before March 2029.

Our priorities for cash flow use, after funding business operations, include debt reduction, dividends, share repurchases and funding strategic acquisitions.

The $361.5 million of debt currently outstanding under our senior secured credit facilities had a weighted average interest rate of 4.73 percent as of March 31, 2025, and the $575.0 million outstanding principal amount of our senior unsecured notes due March 2029 had a fixed interest rate of 4.25 percent.

Because of the seasonality of our business, generally our operating cash flow is generated in the second half of the year, as the cash inflows in the first and second quarters are consumed building working capital and making our annual performance-based compensation payments when earned. Our third and fourth quarter cash flows come from completing the working capital cycle.

Adequacy of Liquidity Sources

We believe that cash flow from operations, our current cash balance and other sources of liquidity, including borrowings available under our Revolving Facility, will be adequate to support our requirements for working capital and restructuring expenditures, and to service indebtedness for the foreseeable future.

Restructuring Activities

The Company may implement restructuring, realignment or cost-reduction plans and activities, including those related to integrating acquired businesses.

In January 2024, the Company announced a multi-year restructuring and cost savings program, with currently anticipated annualized pre-tax cost savings of approximately $100.0 million by the end of 2026. The program incorporates initiatives to simplify and delayer the Company's operating structure and reduce costs through headcount reductions, supply chain optimization, global footprint rationalization, and better leveraging the Company's sourcing capabilities.

For additional details, see "Note 10. Restructuring" to the condensed consolidated financial statements contained in "Part I, Item 1. Financial Information" of this Quarterly Report on Form 10-Q.

Cash Flow for the Three Months Ended March 31, 2025 and 2024

During the three months ended March 31, 2025, our cash and cash equivalents increased $60.5 million, as compared to an increase of $58.2 million in the first three months of the prior year. The following table summarizes our cash flows for the periods presented:

(in millions)

Cash Flow from Operating Activities

Cash provided by operating activities during the three months ended March 31, 2025, was driven by cash inflows of $13.1 million (excluding the non-cash impacts primarily of amortization of intangibles, depreciation, and stock-based compensation expense that are included in our net loss). Cash provided by trade working capital was $72.9 million, which includes accounts receivable, inventory, and accounts payable. This was more than offset by a net cash outflow of $80.5 million for all other assets and liabilities.

Cash provided by operating activities during the three months ended March 31, 2024, was driven by cash inflows of $17.5 million (excluding the non-cash impacts primarily of amortization of intangibles, depreciation, and stock-based compensation expense that are included in our net loss). Cash provided by trade working capital was $114.6 million, which includes accounts receivable, inventory, and accounts payable. This was partially offset by a net cash outflow of $103.9 million for all other assets and liabilities.

Cash Flow from Investing Activities

Cash used by investing activities during the three months ended March 31, 2025, was due to $10.1 million of cash used for the acquisition of Buro Seating as well as capital expenditures.

Cash used by investing activities during the three months ended March 31, 2024, was due to capital expenditures.

Cash Flow from Financing Activities

Cash provided by financing activities during the three months ended March 31, 2025, was primarily due to borrowings exceeding debt repayments, partially offset by dividend payments and $15.0 million in repurchases of common stock.

Cash provided by financing activities during the three months ended March 31, 2024, was primarily due to borrowings exceeding debt repayments, partially offset by dividend payments.

Supplemental Non-GAAP Financial Measure

To supplement our condensed consolidated financial statements presented in accordance with generally accepted accounting principles in the U.S. ("GAAP"), we provide investors with certain non-GAAP financial measures, including comparable sales. Comparable sales represent net sales excluding the impact of material acquisitions, if any, and with current-period foreign operation sales translated at prior-year currency rates. We sometimes refer to comparable sales as comparable net sales.

We use comparable sales both to explain our results to stockholders and the investment community and in the internal evaluation and management of our business. We believe comparable sales provide management and investors with a more complete understanding of our underlying operational results and trends, facilitate meaningful period-to-period comparisons and enhance an overall understanding of our past and future financial performance. Comparable sales should not be considered in isolation or as a substitute for, or superior to, GAAP net sales and should be read in connection with the Company's financial statements presented in accordance with GAAP.

The following tables provide a reconciliation of GAAP net sales as reported to non-GAAP comparable sales:

(in millions)

33

(in millions)

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, 2024. There have been no material changes to Foreign Exchange Risk Management or Interest Rate Risk Management in the quarter ended March 31, 2025 or through the date of this report.

(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 of the Chief Executive Officer and the Chief Financial Officer, and with the participation of our Disclosure Committee, 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 as of March 31, 2025.

(b) Changes in Internal Control over Financial Reporting.

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Except as set forth below, there have been no material changes in our risk factors from those disclosed in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2024.

Changes in trade policy and regulations in the United States and other countries, including the imposition of tariffs and changes in trade agreements, and the resulting consequences, as well as the ongoing uncertainties related to future tariffs and trade policy, have, and are likely to continue to, adversely impact our business, results of operations and financial condition.

The U.S. government has implemented tariffs (including reciprocal tariffs) on a wide range of products and other goods from many countries, including China, and is considering additional tariffs and further changes to international trade policy. Other countries, including Canada, have implemented retaliatory tariffs in response to the new U.S. tariffs. A significant number of the products we sell and certain raw materials we use in our U.S. production facilities are sourced from China, Vietnam and other impacted countries, and we optimize our North American supply chain by, in some cases, consolidating inventories in the U.S. The existing tariffs have had, and are likely to continue to have an adverse impact on our business and operating results which may be material. In addition, the current uncertainty surrounding international trade policy and regulations as well as trade disputes and tensions between the U.S. and its trading partners has had, and is likely to have, an adverse effect on business and consumer confidence and spending which is affecting, and we expect will continue to affect, the demand for our products. We are constantly monitoring the tariffs and other changes and adjusting our manufacturing and distribution footprint globally to manage and mitigate these risks. In addition, we are implementing price increases as appropriate.

We cannot predict future trade policy and regulations in the U.S. and other countries or their impact on our business. There remains significant uncertainty regarding these policies and regulations, including whether and when further tariffs will be implemented or the tensions between the U.S. and its trading partners will worsen. Our ongoing efforts to address these risks may not be sufficient or effective, may take time to implement, and may have long-term adverse effects on our business and operating results. As a result, new or increased U.S. tariffs and other changes in global trade policies and regulations, and the continued uncertainty, are likely to have an adverse impact on our business, results of operations and financial condition which may be material.