Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2006
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 | (I.R.S. Employer | |
Incorporation or Organization) | Identification Number) |
300 Tower Parkway
Lincolnshire, Illinois 60069
(Address of Registrant’s Principal Executive Office, Including Zip Code)
Lincolnshire, Illinois 60069
(Address of Registrant’s Principal Executive Office, Including Zip Code)
(847) 541-9500
(Registrant’s Telephone Number, Including Area Code)
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large accelerated filerþ Accelerated filero Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ
As of November 1, 2006, the registrant had outstanding 53,623,543 shares of Common Stock.
Table of Contents
This Quarterly Report onForm 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results of operations of the registrant could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of important factors that could affect our results, please refer to Part I Item 1A. Risk Factors discussed in the Company’s annual report onForm 10-K and discussions set forth in Part I Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations below.
Unless the context otherwise requires, the terms “ACCO Brands,” “we,” “us,” “our,” “the Company” and other similar terms refer to ACCO Brands Corporation and its consolidated subsidiaries, including GBC. The term “GBC” refers to General Binding Corporation, a Delaware corporation acquired by ACCO Brands in the merger described in Note 1, Basis of Presentation. The term “Fortune Brands” refers to Fortune Brands, Inc., a Delaware corporation, and the former parent company of ACCO Brands prior to the spin-off.
Website Access To Securities and Exchange Commission Reports
The Company’s Internet website can be found atwww.accobrands.com. The Company makes available free of charge on or through its website its annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, and amendments to those reports filed or furnished pursuant toSection 13(a) or15(d) of the Securities Exchange Act of 1934 as soon as practicable after the Company files them with, or furnishes them to, the Securities and Exchange Commission.
It is suggested that the condensed consolidated financial statements included herein in PART I – ITEM 1. Financial Information, be read in conjunction with the financial statements and notes thereto included in the Company’s annual report onForm 10-K.
2
TABLE OF CONTENTS
Table of Contents
PART I — FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
ACCO Brands Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
Condensed Consolidated Balance Sheets
September 30, | December 31, | |||||||
2006 | 2005 | |||||||
(in millions of dollars) | (Unaudited) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 49.3 | $ | 91.1 | ||||
Accounts receivable, net | 405.8 | 438.9 | ||||||
Inventories, net | 282.4 | 268.2 | ||||||
Deferred income taxes | 36.2 | 37.5 | ||||||
Other current assets | 44.7 | 25.3 | ||||||
Total current assets | 818.4 | 861.0 | ||||||
Property, plant and equipment, net | 227.4 | 239.8 | ||||||
Deferred income taxes | 10.4 | 17.4 | ||||||
Goodwill | 440.7 | 433.8 | ||||||
Identifiable intangibles, net | 234.5 | 240.6 | ||||||
Prepaid pension | 83.8 | 81.9 | ||||||
Other assets | 51.9 | 55.0 | ||||||
Total assets | $ | 1,867.1 | $ | 1,929.5 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Notes payable to banks | $ | 6.4 | $ | 7.0 | ||||
Current portion of long-term debt | 14.1 | 23.1 | ||||||
Accounts payable | 176.7 | 150.1 | ||||||
Accrued compensation | 31.6 | 27.7 | ||||||
Accrued customer program liabilities | 120.1 | 122.9 | ||||||
Other current liabilities | 131.1 | 122.2 | ||||||
Total current liabilities | 480.0 | 453.0 | ||||||
Long-term debt | 833.9 | 911.8 | ||||||
Deferred income taxes | 59.8 | 94.1 | ||||||
Postretirement and other liabilities | 62.9 | 62.3 | ||||||
Total liabilities | 1,436.6 | 1,521.2 | ||||||
Commitments and Contingencies —Note 12 | ||||||||
Common stock | 0.6 | 0.5 | ||||||
Treasury stock | (1.1 | ) | (1.1 | ) | ||||
Paid-in capital | 1,367.3 | 1,350.3 | ||||||
Unearned compensation | — | (5.2 | ) | |||||
Accumulated other comprehensive income | 2.7 | 11.0 | ||||||
Accumulated deficit | (939.0 | ) | (947.2 | ) | ||||
Total stockholders’ equity | 430.5 | 408.3 | ||||||
Total liabilities and stockholders’ equity | $ | 1,867.1 | $ | 1,929.5 | ||||
See notes to condensed consolidated financial statements.
3
Table of Contents
ACCO Brands Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended | ||||||||||||||||
September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions of dollars, except per share data) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Net sales | $ | 499.2 | $ | 424.0 | $ | 1,430.4 | $ | 974.5 | ||||||||
Cost of products sold | 352.8 | 301.1 | 1,027.5 | 688.9 | ||||||||||||
Advertising, selling, general and administrative expenses | 112.6 | 88.9 | 329.7 | 201.8 | ||||||||||||
Amortization of intangibles | 2.5 | 1.4 | 8.5 | 2.4 | ||||||||||||
Restructuring charges | 5.8 | 0.4 | 25.6 | 0.4 | ||||||||||||
Operating income | 25.5 | 32.2 | 39.1 | 81.0 | ||||||||||||
Interest expense | 16.5 | 9.1 | 47.2 | 13.0 | ||||||||||||
Other (income) expense, net | (2.4 | ) | (1.3 | ) | (4.1 | ) | 0.7 | |||||||||
Income (loss) before income taxes, minority interest, and cumulative effect of change in accounting principle | 11.4 | 24.4 | (4.0 | ) | 67.3 | |||||||||||
Income taxes | (6.9 | ) | 19.9 | (12.5 | ) | 37.3 | ||||||||||
Minority interest, net of tax | 0.2 | — | 0.3 | — | ||||||||||||
Income before cumulative effect of change in accounting principle | 18.1 | 4.5 | 8.2 | 30.0 | ||||||||||||
Cumulative effect of change in accounting principle, net of tax | — | — | — | 3.3 | ||||||||||||
Net income | $ | 18.1 | $ | 4.5 | $ | 8.2 | $ | 33.3 | ||||||||
Basic earnings per common share: | ||||||||||||||||
Income before change in accounting principle | $ | 0.34 | $ | 0.10 | $ | 0.15 | $ | 0.79 | ||||||||
Change in accounting principle | — | — | — | 0.09 | ||||||||||||
Net income | $ | 0.34 | $ | 0.10 | $ | 0.15 | $ | 0.88 | ||||||||
Diluted earnings per common share: | ||||||||||||||||
Income before change in accounting principle | $ | 0.33 | $ | 0.10 | $ | 0.15 | $ | 0.78 | ||||||||
Change in accounting principle | — | — | — | 0.08 | ||||||||||||
Net income | $ | 0.33 | $ | 0.10 | $ | 0.15 | $ | 0.86 | ||||||||
Weighted average number of shares outstanding: | ||||||||||||||||
Basic | 53.5 | 43.4 | 53.3 | 37.8 | ||||||||||||
Diluted | 54.3 | 44.4 | 54.1 | 38.5 |
See notes to condensed consolidated financial statements.
4
Table of Contents
ACCO Brands Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | ||||||||
(in millions of dollars) | 2006 | 2005 | ||||||
Operating activities | ||||||||
Net income | $ | 8.2 | $ | 33.3 | ||||
Restructuring, impairment and other non-cash charges | 5.2 | — | ||||||
Loss (gain) on sale of assets | 0.9 | (1.7 | ) | |||||
Depreciation | 29.5 | 21.2 | ||||||
Amortization of debt issuance costs | 3.7 | 0.5 | ||||||
Amortization of intangibles | 8.5 | 2.5 | ||||||
Stock based compensation | 14.3 | 0.2 | ||||||
Changes in balance sheet items: | ||||||||
Accounts receivable | 38.7 | 22.4 | ||||||
Inventories | (16.8 | ) | (1.1 | ) | ||||
Other assets | (7.4 | ) | (3.7 | ) | ||||
Accounts payable | 19.9 | (9.4 | ) | |||||
Accrued expenses and other liabilities | (17.2 | ) | (39.8 | ) | ||||
Income taxes | (24.2 | ) | 0.6 | |||||
Other operating activities, net | (2.6 | ) | (1.2 | ) | ||||
Net cash provided by operating activities | 60.7 | 23.8 | ||||||
Investing activities | ||||||||
Additions to property, plant and equipment | (22.1 | ) | (20.4 | ) | ||||
Proceeds from the disposition of assets | 5.5 | 2.2 | ||||||
Other investing activities | 3.5 | 0.1 | ||||||
Net cash used by investing activities | (13.1 | ) | (18.1 | ) | ||||
Financing activities | ||||||||
Decrease in parent company investment | — | (24.5 | ) | |||||
Net dividends paid | — | (625.0 | ) | |||||
Proceeds from long-term borrowings | — | 950.0 | ||||||
Repayments of long-term debt | (100.8 | ) | (293.6 | ) | ||||
(Repayments) borrowings of short-term debt, net | (0.8 | ) | 3.1 | |||||
Cost of debt issuance | (0.2 | ) | (26.1 | ) | ||||
Proceeds from the exercise of stock options | 9.8 | 2.9 | ||||||
Net cash used by financing activities | (92.0 | ) | (13.2 | ) | ||||
Effect of foreign exchange rate changes on cash | 2.6 | (3.4 | ) | |||||
Net decrease in cash and cash equivalents | (41.8 | ) | (10.9 | ) | ||||
Cash and cash equivalents | ||||||||
Beginning of year | 91.1 | 79.8 | ||||||
End of period | $ | 49.3 | $ | 68.9 | ||||
Significant non-cash transaction: | ||||||||
Common stock issued in connection with the acquisition of GBC | $ | — | $ | 392.4 |
See notes to condensed consolidated financial statements.
5
Table of Contents
ACCO Brands Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
1.Basis of Presentation
The management of ACCO Brands Corporation is responsible for the accuracy and internal consistency of the preparation of the consolidated financial statements and footnotes contained in this quarterly report on Form 10-Q.
ACCO Brands Corporation (“ACCO Brands” or the “Company”), formerly doing business under the name ACCO World Corporation (“ACCO World”), supplies branded office products to the office products resale industry. On August 16, 2005, Fortune Brands, Inc. (“Fortune Brands” or the “Parent”), then the majority stockholder of ACCO World, completed its spin-off of the Company by means of the pro rata distribution (the “Distribution”) of all outstanding shares of ACCO Brands held by Fortune Brands to its stockholders. In the Distribution, each Fortune Brands stockholder received one share of ACCO Brands common stock for every 4.255 shares of Fortune Brands common stock held of record as of the close of business on August 9, 2005. Following the Distribution, ACCO Brands became an independent, separately traded, publicly held company. On August 17, 2005, pursuant to an Agreement and Plan of Merger dated as of March 15, 2005, as amended as of August 4, 2005 (the “Merger Agreement”), by and among Fortune Brands, ACCO Brands, Gemini Acquisition Sub, Inc., a wholly-owned subsidiary of the Company (“Acquisition Sub”) and General Binding Corporation (“GBC”), Acquisition Sub merged with and into GBC (the “Merger”). Each outstanding share of GBC common stock and GBC Class B common stock was converted into the right to receive one share of ACCO Brands common stock and each outstanding share of Acquisition Sub common stock was converted into one share of GBC common stock. As a result of the Merger, the separate corporate existence of Acquisition Sub ceased and GBC continues as the surviving corporation and a wholly-owned subsidiary of ACCO Brands.
The condensed consolidated balance sheet as of September 30, 2006, the related condensed consolidated statements of income for the three and nine months ended September 30, 2006 and 2005, and the related condensed consolidated statements of cash flows for the nine months ended September 30, 2006 and 2005 are unaudited. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required annually by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments consisting of only normal recurring adjustments necessary for a fair presentation of the financial statements have been included. Interim results may not be indicative of results for a full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2005 annual report on Form 10-K.
As more fully described in the Company’s 2005 annual report on Form 10-K, the financial statements for the nine months ended September 30, 2005 include a restatement of results affecting the previously filed three-month and nine-month periods ended September 30, 2005 for the cumulative effect of a change in accounting principle related to the removal of a one-month lag in reporting by several of the Company’s foreign subsidiaries. The change was made to better align their reporting periods with the Company’s fiscal calendar. This increased net income $3.3 million.
During the third quarter of 2005, the Company’s financial reporting calendar for its ACCO North American businesses was changed to a calendar month end from the previous 25th day of the last month of each quarterly reporting period. The Company’s fiscal year end calendar, previously ended December 27th, was also changed to a calendar month end. The change was made to better align the reporting calendars of the Company and the acquired GBC businesses.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
In December 2004, the Financial Accounting Standards Board (FASB) revised and reissued Statement of Financial Accounting Standards (SFAS) No. 123, “Share-Based Payment” (SFAS No. 123(R)), which requires companies to expense the fair value of employee stock options and similar awards. The Company adopted SFAS No. 123(R) effective January 1, 2006, using the modified prospective method. Refer to Note 2,Stock-Based Compensation, for further information about the Company’s share-based compensation plans and related accounting treatment in the current and prior periods.
6
Table of Contents
2.Stock —Based Compensation
As more fully described in the Company’s 2005 annual report on Form 10-K, in connection with becoming a separate public company after the spin-off, the Company established two stock-based compensation plans (the “ACCO Plans”) which included the Company’s 2005 Long-Term Incentive Plan (the “LTIP”). At the Company’s May 25, 2006 Annual Meeting of Stockholders, a shareholder vote approved an Amended and Restated ACCO Brands Corporation 2005 Incentive Plan (“Restated LTIP”). The terms of the Restated LTIP increased the number of shares of the Company’s common stock reserved for issuance in respect of stock based awards to its key employees and non-employee directors from 4,200,000 to 4,578,000. Stock options from the GBC plans that were assumed in connection with the merger, and from the Fortune Brands plans that were not vested as of the spin-off date, were converted to options to acquire ACCO Brands stock under the Company’s 2005 Assumed Option and Restricted Stock Unit Plan.
As part of the acquisition and merger with GBC, options and restricted stock units held by former GBC employees were converted to similar awards of ACCO Brands stock on a one-for-one basis at the time of the merger. The fair value of these instruments was included as part of the purchase price of GBC, and a portion of the intrinsic value of the unvested options (and restricted stock units) was recorded as unearned compensation.
On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standard No. 123(R), “Share-Based Payment” (SFAS 123(R)) using the modified prospective method. SFAS 123(R) requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant-date fair value of those awards. Under the modified prospective method of adopting SFAS 123(R), the Company will recognize compensation cost for all stock-based awards granted after January 1, 2006, plus any awards granted to employees prior to January 1, 2006 that remain unvested at that time. Under this method of adoption, no restatement of prior periods is made. As a result of adopting this standard the remaining amount of unearned compensation was reclassified to paid-in-capital.
The following table summarizes the impact of all stock-based compensation on the Company’s consolidated financial statements for three and nine months ended September 30, 2006 (under SFAS No. 123(R)).
Three Months Ended | Nine Months Ended | |||||||
(in millions of dollars, except earnings per share) | September 30, 2006 | September 30, 2006 | ||||||
Advertising, selling, general and administrative expense | $ | 4.7 | $ | 14.3 | ||||
Income from continuing operations before income taxes | $ | 4.7 | $ | 14.3 | ||||
Income tax expense | $ | 1.7 | $ | 5.3 | ||||
Net income | $ | 3.0 | $ | 9.0 | ||||
Diluted earnings per share | $ | 0.06 | $ | 0.17 |
There was no capitalization of stock based compensation expense. The incremental effect of adopting SFAS 123(R) for the three months ended September 30, 2006 was an additional pre-tax expense of $2.8 million, lower net income of $1.8 million and an incremental reduction in earnings per share of $0.03. For the nine months ended September 30, 2006 the incremental effect was an additional pre-tax expense of $8.4 million, lower net income of $5.3 and an incremental reduction in earnings per share of $0.10.
Prior to January 1, 2006, the Company recognized the cost of employee services received in exchange for equity awards in accordance with Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees,”and related interpretations in accounting for its stock options. APB 25 required the use of the intrinsic value method, which measures compensation expense as the excess, if any, of the quoted market price of the stock at date of grant over the amount an employee must pay to acquire the stock.Accordingly, no compensation expense was recognized for stock option awards at the date of grant, but compensation expense was recognized for restricted stock unit (“RSU”) awards.
During the three and nine months ended September 30, 2005, if compensation cost of employee services received in exchange for equity awards had been recognized based on the grant-date fair value of those awards in accordance with the provisions of SFAS 123(R), the Company’s net income and earnings per share would have been impacted as shown in the following table:
7
Table of Contents
Three Months Ended | Nine Months Ended | |||||||
(in millions of dollars, except share data) | September 30, 2005 | September 30, 2005 | ||||||
Net income — as reported | $ | 4.5 | $ | 33.3 | ||||
Add: Stock-based employee compensation included in reported net income, net of tax | 0.1 | 0.3 | ||||||
Deduct: Total stock-based employee compensation determined under the fair value-based method for all awards, net of tax | (0.2 | ) | (2.3 | ) | ||||
Pro forma net income | $ | 4.4 | $ | 31.3 | ||||
Basic earnings per common share, as reported | $ | 0.10 | $ | 0.88 | ||||
Diluted earnings per common share, as reported | $ | 0.10 | $ | 0.87 | ||||
Pro forma earnings per common share — basic | $ | 0.10 | $ | 0.83 | ||||
Pro forma earnings per common share — diluted | $ | 0.10 | $ | 0.81 |
Information regarding 2005 compensation expense related to stock options of Fortune Brands held by ACCO Brands employees is discussed in the Company’s annual report on Form 10-K.
Stock Options
The exercise price of each stock option equals or exceeds the market price of the Company’s stock on the date of grant. Options can generally be exercised over a maximum term of up to 10 years. Options generally vest ratably over the shorter of three years or one year after the date of grant upon the retirement of an employee (age 55, with at least 5 years of service). The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the weighted average assumptions as outlined in the following table:
Nine Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
Weighted average expected lives | 4.5 years | 4.5 years | ||||||
Weighted average risk-free interest rate | 3.4 | % | 3.8 | % | ||||
Weighted average expected volatility | 35.0 | % | 24.0 | % | ||||
Expected dividend yield | 0.0 | % | 1.6 | % | ||||
Weighted average grant date fair value | $ | 8.01 | $ | 4.59 |
The Company has utilized historical volatility for a pool of peer companies for a period of time that is comparable to the expected life of the option to determine volatility assumptions. The risk-free interest rate assumption is based upon the average daily closing rates during the quarter for U.S. treasury notes that have a life which approximates the expected life of the option. The dividend yield assumption is based on the Company’s expectation of dividend payouts. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. These expected life assumptions are established annually through the review of historical employee exercise behavior of option grants with similar vesting periods.
A summary of the changes in stock options outstanding under the Company’s option plans during the nine months ended September 30, 2006 is presented below:
Weighted | ||||||||||||||||
Average | Weighted Average | Aggregate | ||||||||||||||
Number | Exercise | Remaining | Intrinsic | |||||||||||||
Outstanding | Price | Contractual Term | Value | |||||||||||||
Outstanding at December 31, 2005 | 5,790,394 | $ | 17.55 | |||||||||||||
Granted | 42,000 | $ | 23.18 | |||||||||||||
Exercised | (742,168 | ) | $ | 13.34 | ||||||||||||
Lapsed | (235,863 | ) | $ | 19.27 | ||||||||||||
Outstanding at September 30, 2006 | 4,854,363 | $ | 18.16 | 6.9 years | $20.7 million | |||||||||||
Exercisable shares at September 30, 2006 | 2,003,468 | $ | 14.61 | 7.4 years | $15.3 million | |||||||||||
Options vested or expected to vest | 4,687,219 | $ | 18.09 | 6.9 years | $20.3 million |
8
Table of Contents
During the three and nine months ended September 30, 2006, the total intrinsic value of options exercised was $0.3 million and $5.6 million, and the Company received cash of $0.7 million and $9.8 million, respectively, from the exercise of stock options. The fair value of options vested during the three and nine months ended September 30, 2006 was $4.4 million and $5.9 million, respectively. As of September 30, 2006, the Company had $14.4 million of total unrecognized compensation expense related to stock option plans that will be recognized over a weighted average period of 1.4 years.
Stock Unit Awards
There were 28,906 and 25,600 GBC restricted stock units outstanding as of September 30, 2006, which had previously been granted in 2004 and 2005, respectively, which were converted to ACCO Brands restricted stock units (“RSUs”) in connection with the merger. These awards will vest in 2007 and 2008, respectively. The Restated LTIP provides for stock based awards in the form of RSUs, performance stock units (“PSUs”), incentive and non-qualified stock options, and stock appreciation rights, any of which may be granted alone or with other types of awards and dividend equivalents. RSUs vest over a pre-determined period of time, typically three years from grant. PSUs also vest over a pre-determined period of time, presently 3 years, but are further subject to the achievement of certain business performance criteria in 2008. Based upon the level of achieved performance, the number of shares actually awarded can vary from 0% to 150% of the original grant.
There were an additional 321,776 RSUs outstanding at September 30, 2006 that were granted in 2005 and 33,658 that were granted during the nine months ended September 30, 2006. Substantially all outstanding RSUs as of September 30, 2006 vest within three years of the date of grant. Also outstanding at September 30, 2006 were 353,000 and 11,500 PSUs granted in 2005 and 2006 respectively, all of which will vest in 2008. Upon vesting, all of these awards will be converted into the right to receive one share of common stock of the Company for each unit that vests. The cost of these awards is determined using the fair value of the shares on the date of grant, and compensation expense is recognized over the period during which the employees provide the requisite service to the Company. A summary of the changes in the stock unit awards outstanding under the Company’s equity compensation plans during the first nine months of fiscal 2006 is presented below:
Weighted | ||||||||||||
Average | Weighted Average | |||||||||||
Grant | Remaining | |||||||||||
Stock | Date Fair | Contractual Term | ||||||||||
Units | Value | (years) | ||||||||||
Unvested at December 31, 2005 | 768,062 | $ | 22.11 | 2.9 | ||||||||
Granted | 45,158 | $ | 23.28 | 1.5 | ||||||||
Vested | — | $ | — | — | ||||||||
Forfeited | (38,780 | ) | $ | 22.48 | 2.5 | |||||||
Unvested at September 30, 2006 | 774,440 | $ | 22.14 | 2.0 | ||||||||
Exercisable at September 30, 2006 | — | $ | — | — |
There were no stock unit awards that vested during the quarter ended September 30, 2006. As of September 30, 2006, the Company had $12.2 million of total unrecognized compensation expense related to stock unit awards which will be recognized over the weighted average period of 1.5 years. The Company will satisfy the requirement for delivering the common shares for stock-based plans by issuing new shares.
SFAS No. 123(R) changes the presentation of realized excess tax benefits associated with exercised stock options in the statement of cash flows. Prior to the adoption of SFAS No. 123(R), such realized tax benefits were required to be presented as an inflow within the operating section of the cash flow statement. Under SFAS No. 123(R), such realized tax benefits are presented as an inflow within the financing section of the statement. The Company had no realized excess tax benefits associated with the exercise of options during the first nine months of 2006.
9
Table of Contents
3.Inventories
Inventories are stated at the lower of cost or market value. The components of inventories were as follows:
September 30, | December 31, | |||||||
(in millions of dollars) | 2006 | 2005 | ||||||
Raw materials | $ | 38.5 | $ | 39.7 | ||||
Work in process | 12.9 | 10.3 | ||||||
Finished goods | 231.0 | 218.2 | ||||||
Total inventories | $ | 282.4 | $ | 268.2 | ||||
4.Acquisition and Merger
On August 17, 2005, as described in Note 1,Basis of Presentation,above, ACCO Brands acquired 100% of the outstanding common stock of GBC. The results of GBC’s operations have been included in ACCO Brands’ consolidated financial statements since the merger date. The GBC companies are engaged in the design, manufacture and distribution of office equipment, related supplies and laminating equipment and films. The combination of ACCO Brands and GBC created a world leader in the supply of branded office products (excluding furniture, computers, printers and bulk paper) to the office products resale industry. The Company expects its larger scale and combined operations to result in the realization of operating synergies. The consolidated statements of income reflect the results of operations of GBC since the effective date of the purchase.
The aggregate purchase price of $422.2 million was comprised primarily of 17.1 million shares of ACCO Brands common stock which was issued to GBC shareholders with a fair value of $392.4 million. ACCO Brands has completed its integration planning process. Goodwill arising from the integration plan liabilities, including costs related to the closure of GBC facilities and other actions, is final. The Company expects to recognize adjustments to goodwill in future periods, which relate to changes in tax positions and to tax benefits on the exercise of stock options issued to GBC employees prior to the acquisition date.
Of the $129.0 million of purchase price assigned to intangible assets, $38.2 million was assigned to customer relationships with remaining amortizable lives of approximately 13.5 years, amortizing on an accelerated basis, and $10.5 million was assigned to developed technology with a life of approximately 8.5 years. The remaining $80.3 million was assigned to intangible trade names, of which $62.8 million was assigned an indefinite life and the remaining $17.5 million was assigned to trade names with a life of 23 years. The finite life assigned to a portion of the acquired trade names was determined based on consideration of the product categories, competitive position, and other factors associated with the Company’s expected use of the trade names. The excess of purchase price over the fair value of net assets of $439.6 million as of the acquisition date has been allocated to goodwill and reflects the benefit the Company expects to realize from expanding its scale in the office products market, and from expected operating cost synergies. The Company has completed the allocation of goodwill to its operating segments. The results of that allocation are included in Note 5,Goodwill and Intangibles.
The following table provides unaudited pro forma results of operations for the period noted below, as if the acquisition had occurred on the first day of the Company’s fiscal year of 2005. The pro forma amounts are not necessarily indicative of the results that would have occurred if the acquisition had been completed at that time.
10
Table of Contents
Three Months Ended | Nine Months Ended | |||||||
September 30, | September 30, | |||||||
(in millions of dollars, except per share data) | 2005 | 2005 | ||||||
Revenues | $ | 507.0 | $ | 1,424.0 | ||||
Net income before change in accounting principle | 1.9 | 7.3 | ||||||
Change in accounting principle, net of tax | — | 3.3 | ||||||
Net income | $ | 1.9 | $ | 10.6 | ||||
Basic earnings per share, before change in accounting principle | $ | 0.04 | $ | 0.19 | ||||
Diluted earnings per share, before change in accounting principle | $ | 0.04 | $ | 0.19 | ||||
Basic earnings per share, net income | $ | 0.04 | $ | 0.28 | ||||
Diluted earnings per share, net income | $ | 0.04 | $ | 0.28 | ||||
Basic weighted average shares | 43.4 | 37.8 | ||||||
Diluted weighted average shares | 44.4 | 38.5 |
The pro forma amounts are based on the historical results of operations, and are adjusted for depreciation and amortization of finite-lived intangibles and property, plant and equipment, and other charges related to acquisition accounting which will continue beyond the first full year of acquisition. These pro forma results of operations for the three and nine months ended September 30, 2005 reflect the actual purchase accounting step-up in inventory cost of $3.6 million that was recognized during the third quarter of 2005. As presented in the Company’s Form 8-K as furnished in February, 2006, the aggregate step-up value of $5.4 million was reflected as an adjustment to the opening balance sheet of GBC with a corresponding income statement charge during the three months ended March 2005.
Included in the determination of goodwill are accruals for certain estimated costs, including those related to the closure of GBC facilities, the termination of GBC lease agreements and to GBC employee-related severance arrangements. The amount provided for these costs as of the date of acquisition is $35.7 million. The following tables provide a reconciliation of the activity by cost category since the acquisition date.
Reconciliation of the Company’s integration reserve activity as of September 30, 2006:
Non-cash | ||||||||||||||||||||
Balance at | Additions and | Write-offs/ | Balance at | |||||||||||||||||
December 31, | Adjustments to | Cash | Currency | September 30, | ||||||||||||||||
(in millions of dollars) | 2005 | Reserve | Expenditures | Change | 2006 | |||||||||||||||
Employee termination costs | $ | 9.4 | $ | 6.4 | $ | (5.7 | ) | $ | 0.1 | $ | 10.2 | |||||||||
Termination of lease agreements | 6.5 | 2.3 | (0.3 | ) | 0.1 | 8.6 | ||||||||||||||
Other | 3.1 | 0.4 | (0.3 | ) | (0.7 | ) | 2.5 | |||||||||||||
$ | 19.0 | $ | 9.1 | $ | (6.3 | ) | $ | (0.5 | ) | $ | 21.3 | |||||||||
Reconciliation of the Company’s integration reserve activity as of December 31, 2005:
Balance at | Balance at | |||||||||||
Acquisition, | Cash | December 31, | ||||||||||
(in millions of dollars) | August 17, 2005 | Expenditures | 2005 | |||||||||
Employee termination costs | $ | 15.8 | $ | (6.4 | ) | $ | 9.4 | |||||
Termination of lease agreements | 6.5 | — | 6.5 | |||||||||
Other | 4.3 | (1.2 | ) | 3.1 | ||||||||
$ | 26.6 | $ | (7.6 | ) | $ | 19.0 | ||||||
11
Table of Contents
5.Goodwill and Intangibles
The Company had goodwill of $440.7 million as September 30, 2006. The increase in goodwill during the nine months ended September 30, 2006 was $6.9 million. The increase was related to the addition of business integration liabilities, as described in Note 4,Acquisition and Merger,as well as currency translation.
The gross carrying value and accumulated amortization by class of identifiable intangible assets as of September 30, 2006 and December 31, 2005 are as follows:
As of September 30, 2006 | As of December 31, 2005 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Book | Carrying | Accumulated | Book | |||||||||||||||||||
(in millions of dollars) | Amounts | Amortization | Value | Amounts | Amortization | Value | ||||||||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||||||||||
Trade names | $ | 192.3 | $ | (44.5 | )(1) | $ | 147.8 | $ | 221.6 | $ | (44.5 | )(1) | $ | 177.1 | ||||||||||
Amortizable intangible assets: | ||||||||||||||||||||||||
Trade names | 68.3 | (22.6 | ) | 45.7 | 36.1 | (19.4 | ) | 16.7 | ||||||||||||||||
Customer and contractual relationships | 39.2 | (8.0 | ) | 31.2 | 38.8 | (2.7 | ) | 36.1 | ||||||||||||||||
Patents/proprietary technology | 11.4 | (1.6 | ) | 9.8 | 11.2 | (0.5 | ) | 10.7 | ||||||||||||||||
Subtotal | 118.9 | (32.2 | ) | 86.7 | 86.1 | (22.6 | ) | 63.5 | ||||||||||||||||
Total identifiable intangibles | $ | 311.2 | $ | (76.7 | ) | $ | 234.5 | $ | 307.7 | $ | (67.1 | ) | $ | 240.6 | ||||||||||
(1) | Accumulated amortization prior to the adoption of SFAS No. 142“Goodwill and Other Intangible Assets”. |
The Company’s intangible amortization was $2.5 million and $1.4 million for the three months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006 and 2005 intangible amortization was $8.5 million and $2.5 million, respectively. Estimated 2006 amortization is $11.0 million, and is expected to decline by approximately $1.0 million for each of the 5 years following. As of June 30, 2006, $12.6 million of the value previously assigned to indefinite-lived trade names was changed to an amortizable intangible asset. The change was made in respect of decisions regarding the Company’s future use of the trade name. The Company commenced amortizing the trade name in the third quarter of 2006 on a prospective basis over a life of 23 years. Additionally, $17.5 million of intangible trade names was reclassified from indefinite-lived intangible assets to amortizable intangible assets upon completion of the purchase price allocation as discussed in Note 4.
The Company completed the allocation of goodwill to its reportable segments as of June 30, 2006. The following table summarizes the allocated balances as of the initial allocation:
(in millions of dollars) | ||||
Reportable Segment | June 30, 2006 | |||
Office Products | $ | 269.4 | ||
Computer Products | 7.0 | |||
Commercial-IPFG | 94.5 | |||
Other Commercial | 72.3 | |||
$ | 443.2 | |||
As more fully described in the Company’s 2005 annual report on Form 10-K, the Company must complete an annual assessment of the carrying value of its goodwill. The Company performed this assessment during the second quarter of 2006 and concluded that no impairment exists.
6.Transactions with Fortune Brands
Certain services were provided to ACCO Brands by Fortune Brands, ACCO Brands’ parent company prior to the spin-off and merger described in Note 1,Basis of Presentation.Executive compensation and consulting expenses paid by Fortune Brands on behalf of ACCO Brands were allocated based on actual direct costs incurred. Where specific identification of expenses was not
12
Table of Contents
practicable, the cost of such services was allocated based on the most relevant allocation method to the service provided. Costs for the most significant of these services, legal and internal audit, were allocated to ACCO Brands based on the relative percentage of net sales and total assets, respectively, of ACCO Brands to Fortune Brands. The cost of all other services have been allocated to ACCO Brands based on the most relevant allocation method to the service provided, either net sales of ACCO Brands as a percentage of net sales of Fortune Brands, total assets of ACCO Brands as a percentage of total assets of Fortune Brands, or headcount of ACCO Brands as a percentage of headcount of Fortune Brands. Total expenses (income), other than interest allocated to ACCO Brands, were $(0.1) million and $1.3 million for the three and nine month periods ended September 30, 2005.
In addition, interest expense associated with Fortune Brands’ outstanding debt was allocated to ACCO Brands based upon the average net assets of ACCO Brands as a percentage of the parent’s average net assets, plus average consolidated debt not attributable to other operations of Fortune Brands, ACCO Brands believes this method of allocating interest expense produced reasonable results because average net assets is a significant factor in determining the amount of the former parent company’s borrowings. Total interest expense allocated to ACCO Brands was $0.2 million and $5.4 million for the three and nine month periods ended September 30, 2005.
7.Pension and Other Retiree Benefits
The components of net periodic benefit cost for pension and postretirement benefits for the three and nine months ended September 30, 2006 and 2005 are as follows:
Three Months Ended September 30, | ||||||||||||||||||||||||
Pension Benefits | Postretirement | |||||||||||||||||||||||
U.S. | International | |||||||||||||||||||||||
(in millions of dollars) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Service cost | $ | 1.6 | $ | 1.2 | $ | 1.2 | $ | 0.9 | $ | 0.1 | $ | 0.1 | ||||||||||||
Interest cost | 2.5 | 1.9 | 3.2 | 2.9 | 0.2 | 0.3 | ||||||||||||||||||
Expected return on plan assets | (3.5 | ) | (3.1 | ) | (4.2 | ) | (3.6 | ) | — | — | ||||||||||||||
Amortization of prior service cost | — | — | 0.3 | 0.4 | — | — | ||||||||||||||||||
Amortization of net loss (gain) | 0.4 | 0.1 | 0.7 | 1.2 | (0.2 | ) | (0.6 | ) | ||||||||||||||||
Net periodic benefit cost | $ | 1.0 | $ | 0.1 | $ | 1.2 | $ | 1.8 | $ | 0.1 | $ | (0.2 | ) | |||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
Pension Benefits | Postretirement | |||||||||||||||||||||||
U.S. | International | |||||||||||||||||||||||
(in millions of dollars) | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
Service cost | $ | 4.9 | $ | 3.6 | $ | 3.6 | $ | 2.5 | $ | 0.2 | $ | 0.1 | ||||||||||||
Interest cost | 7.5 | 5.8 | 9.2 | 8.3 | 0.7 | 0.5 | ||||||||||||||||||
Expected return on plan assets | (10.5 | ) | (8.8 | ) | (12.2 | ) | (10.0 | ) | — | — | ||||||||||||||
Amortization of prior service cost | (0.1 | ) | (0.1 | ) | 0.9 | 1.0 | — | — | ||||||||||||||||
Amortization of net loss (gain) | 1.3 | 0.4 | 2.0 | 3.2 | (0.5 | ) | (0.8 | ) | ||||||||||||||||
Net periodic benefit cost | $ | 3.1 | $ | 0.9 | $ | 3.5 | $ | 5.0 | $ | 0.4 | $ | (0.2 | ) | |||||||||||
The company expects to contribute approximately $11.0 million to its pension plans in 2006. For the nine months ended September 30, 2006, the Company has contributed approximately $9.7 million to these plans.
13
Table of Contents
8.Long-term Debt and Short-term Borrowings
Notes payable and long-term debt consisted of the following at September 30, 2006 and December 31, 2005:
September 30, | December 31, | |||||||
(in millions of dollars) | 2006 | 2005 | ||||||
Credit Facilities | ||||||||
U.S. Dollar Senior Secured Term Loan Credit Facility (weighted-average floating interest rate of 7.18% at September 30, 2006 and 5.97% at December 31, 2005) | $ | 319.0 | $ | 399.0 | ||||
British Pound Senior Secured Term Loan Credit Facility (weighted-average floating interest rate of 6.85% at September 30, 2006 and 6.61% at December 31, 2005) | 102.9 | 106.5 | ||||||
Euro Senior Secured Term Loan Credit Facility (weighted-average floating interest rate of 5.15% at September 30, 2006 and 4.27% at December 31, 2005) | 75.5 | 78.7 | ||||||
Notes Payable | ||||||||
U.S. Dollar Senior Subordinated Notes, due 2015 (fixed interest rate of 7.625%) | 350.0 | 350.0 | ||||||
Other borrowings | 7.0 | 7.7 | ||||||
Total debt | 854.4 | 941.9 | ||||||
Less: current portion of long-term debt | (20.5 | ) | (30.1 | ) | ||||
Total long-term debt | $ | 833.9 | $ | 911.8 | ||||
As more fully described in the Company’s 2005 annual report on Form 10-K, the Company must meet certain restrictive debt covenants under the senior secured credit facilities. The indenture governing the senior subordinated notes also contains certain covenants. As of and for the periods ended September 30, 2006 and December 31, 2005, the Company was in compliance with all applicable covenants. On February 13, 2006 the Company entered into an amendment of its senior secured credit facilities waiving any default that may have arisen as a result of the restatement of the Company’s financial statements related to income taxes as discussed in our 2005 annual report on Form 10-K in February, 2006.
9.Restructuring and Restructuring-Related Charges
In March of 2005, the Company announced its plan to merge with GBC and took certain restructuring actions in preparation for the merger. Subsequent to the merger, additional restructuring actions have been initiated, which resulted in the closure or consolidation of facilities that are engaged in manufacturing and distributing the Company’s products, primarily in the United States and Europe. The Company has accrued employee termination benefits and lease cancellation costs related to these actions. Additional charges are expected to be incurred throughout the 2006 to 2008 periods as the Company continues to identify and implement the specific phases of its strategic and business integration plans.
A summary of the activity in the restructuring accounts and a reconciliation of the liability for, and as of, the nine months ended September 30, 2006 is as follows:
Balance at | Non-cash | Balance at | ||||||||||||||||||
December 31, | Cash | Write-offs/ | September 30, | |||||||||||||||||
(in millions of dollars) | 2005 | Total Provision | Expenditures | Currency Change | 2006 | |||||||||||||||
Rationalization of operations | ||||||||||||||||||||
Employee termination costs | $ | 0.8 | $ | 21.8 | $ | (5.5 | ) | $ | 0.2 | $ | 17.3 | |||||||||
Termination of lease agreements | 5.2 | 0.7 | (1.6 | ) | 0.3 | 4.6 | ||||||||||||||
Other | — | 0.8 | (0.7 | ) | — | 0.1 | ||||||||||||||
Subtotal | $ | 6.0 | $ | 23.3 | $ | (7.8 | ) | $ | 0.5 | $ | 22.0 | |||||||||
Asset impairments(1) | — | 1.5 | — | (1.5 | ) | — | ||||||||||||||
Net loss on disposal of assets resulting from restructuring activities | 0.4 | 0.8 | 0.3 | (1.3 | ) | 0.2 | ||||||||||||||
Total rationalization of operations | $ | 6.4 | $ | 25.6 | $ | (7.5 | ) | $ | (2.3 | ) | $ | 22.2 | ||||||||
(1) | Included in the total restructuring provision recognized during the nine months ended September 30, 2006 is a pre-tax charge of $1.5 million related to the exit of a facility meeting the criteria for recognition as an impaired asset group as defined by SFAS 144 “Impairment or Disposal of Long-Lived Assets”. The decision to exit the facility was a part of the restructuring actions undertaken subsequent to the Company’s merger with GBC. |
14
Table of Contents
Of the 805 positions planned for elimination under restructuring initiatives provided for through September 30, 2006, 329 had been eliminated as of the balance sheet date.
Management expects the $17.3 million employee termination costs balance to be substantially paid within the next twelve months. Lease costs included in the $4.6 million balance are expected to continue until the last lease terminates in 2013.
In association with the Company’s restructuring, certain restructuring-related costs were expensed to cost of products sold and advertising, selling, general and administrative expense in the income statement. These charges were principally related to the implementation of the new company footprint, including internal and external project management costs, and to strategic product category exits. For the nine months ended September 30, 2006 and 2005 these charges totaled $14.6 million and $0.5 million, respectively. The Company expects to record additional amounts as it continues its restructuring initiatives. In addition, the final charges related to planning for the integration of ACCO Brands and GBC businesses of $0.8 million were recorded during the six months ended June 30, 2006 and were classified in advertising, selling, general and administrative expense in the income statement. The three and nine months ended September 30, 2005 included $7.9 million and $8.7 million, respectively, of non-capitalizable merger and spin-off related expenses which were classified in advertising, selling, general and administrative expense in the income statement.
10.Information on Business Segments
The Company’s four business segments are described below:
Office Products Group
Office Products includes four broad consumer-focused product groupings throughout our global operations. These product groupings are: Workspace Tools (stapling and punch products and supplies), Visual Communication (dry erase boards, easels, laser pointers, overhead projectors and supplies), Document Communication (office and personal use binding, laminating machines and supplies) and Storage and Organization (storage bindery, filing systems, storage boxes, and business essentials). Our businesses, principally in North America, Europe and Asia-Pacific, distribute and sell such products on a regional basis.
Our office products are manufactured internally or sourced from outside suppliers. The customer base to which our office products are sold is made up of large global and regional resellers of our product. It is through these large resellers that the Company’s office products reach the end consumer.
Computer Products Group
Computer Products designs, distributes, markets and sells accessories for laptop and desktop computers and Apple® iPod® products. These accessories primarily include security locks, power adapters, input devices such as mice and keyboards, computer carrying cases, hubs and docking stations and technology accessories for iPods®. Computer Products sells mostly under the Kensington brand name, with the majority of its revenue coming from the U.S. and Western Europe.
All of our computer products are manufactured to our specifications by third party companies, principally in Asia, and are stored, shipped and distributed from facilities which are shared with our regional Office Products groups. Our Computer Products are sold primarily to consumer electronic retailers, information technology value added resellers, original equipment manufacturers and office products retailers.
Commercial — Industrial and Print Finishing Group
The Industrial and Print Finishing Group (“IPFG”) targets book publishers, “print-for-pay” and other finishing customers who use our professional grade finishing equipment and supplies. IPFG’s primary products include thermal and pressure-sensitive laminating films, mid-range and commercial high-speed laminators, large-format digital print laminators and other automated finishing products. IPFG’s products and services are sold worldwide through direct and dealer channels.
15
Table of Contents
Other Commercial
Other Commercial consists of a grouping of our various Document Finishing businesses located in dispersed geographic markets and our Day-Timers business. The results of these companies are not individually significant to the consolidated results of ACCO Brands.
Our Document Finishing businesses sell binding and punching equipment, binding supplies, custom and stock binders and folders, and also provide maintenance and repair services. The Document Finishing products and services are primarily sold direct to high volume commercial end users, commercial reprographic centers and education markets in North America, Australia and Europe.
Our Day-Timers business includes U.S., Australia, New Zealand and U.K. operating companies which sell personal organization tools and products regionally, primarily utilizing their own manufacturing, customer service and distribution structures. Approximately two-thirds of the Day-Timers business is through the direct channel, which markets product through periodic sales catalogs and ships product directly to our end user customer. The remainder of the business sells to large resellers and commercial dealers.
Financial information by reportable segment is set forth below:
Net sales by business segment are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Office Products Group | $ | 327.9 | $ | 296.0 | $ | 947.2 | $ | 727.3 | ||||||||
Computer Products Group | 62.2 | 59.3 | 165.3 | 152.7 | ||||||||||||
Commercial-IPFG | 45.9 | 24.8 | 143.4 | 24.8 | ||||||||||||
Other Commercial | 63.2 | 43.9 | 174.5 | 69.7 | ||||||||||||
Net sales | $ | 499.2 | $ | 424.0 | $ | 1,430.4 | $ | 974.5 | ||||||||
Operating income (loss) by business segment is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Office Products Group | $ | 10.9 | $ | 25.0 | $ | 12.2 | $ | 58.1 | ||||||||
Computer Products Group | 14.6 | 11.6 | 29.4 | 32.6 | ||||||||||||
Commercial-IPFG | 2.2 | 2.0 | 11.9 | 2.0 | ||||||||||||
Other Commercial | 5.8 | 6.1 | 11.7 | 6.0 | ||||||||||||
Subtotal | 33.5 | 44.7 | 65.2 | 98.7 | ||||||||||||
Corporate | (8.0 | ) | (12.5 | ) | (26.1 | ) | (17.7 | ) | ||||||||
Operating income | 25.5 | 32.2 | 39.1 | 81.0 | ||||||||||||
Interest expense | 16.5 | 9.1 | 47.2 | 13.0 | ||||||||||||
Other expense (income) | (2.4 | ) | (1.3 | ) | (4.1 | ) | 0.7 | |||||||||
Income (loss) before taxes, minority interest and change in accounting principle | $ | 11.4 | $ | 24.4 | $ | (4.0 | ) | $ | 67.3 | |||||||
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.
11.Earnings per Share
The distribution and merger discussed in Note 1,Basis of Presentation,significantly impacted the capital structure of the Company. ACCO Brands’ Certificate of Incorporation provides for 200 million authorized shares of Common Stock with a par value of $0.01 per share. Approximately 35.0 million shares of the Company’s common stock were issued to shareholders of
16
Table of Contents
Fortune and a minority shareholder of the Company in connection with the spin-off. In connection with the Merger, approximately 17.1 million additional shares were issued to GBC’s shareholders and employees in exchange for their GBC common and Class B common shares and restricted stock units that converted into the right to receive the Company’s common stock upon consummation of the Merger. These amounts, as well as the dilutive impact of ACCO Brands stock options on the date of the spin-off have been used in the basic and dilutive earnings per common share calculation below for all periods prior to the spin-off. Total outstanding shares as of September 30, 2006 were 53.6 million.
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. The Company’s diluted earnings per common share assume that any common shares outstanding were increased by shares that would be issued upon exercise of those stock options 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) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Weighted average number of common shares outstanding — basic | 53.5 | 43.4 | 53.3 | 37.8 | ||||||||||||
Employee stock options (1) | 0.8 | 1.0 | 0.8 | 0.7 | ||||||||||||
Adjusted weighted-average shares and assumed conversions — diluted | 54.3 | 44.4 | 54.1 | 38.5 | ||||||||||||
(1) | The Company has dilutive shares related to stock options and restricted stock units that were granted under the Company’s stock compensation plans. |
12.Commitments and Contingencies
Pending Litigation
The Company and its subsidiaries are defendants in various claims and legal proceedings associated with their business and operations. It is not possible to predict the outcome of the pending actions, but management believes that there are meritorious defenses to these actions and that these actions if adjudicated or settled in a manner adverse to the Company, would not have a material adverse effect upon the results of operations, cash flows or financial condition of the Company.
Environmental
The Company is subject to laws and regulations relating to the protection of the environment. While it is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company’s subsidiaries may undertake in the future, in the opinion of management, compliance with the present environmental protection laws, before taking into account any estimated recoveries from third parties, will not have a material adverse effect upon the results of operation, cash flows or financial condition of the Company.
13.Comprehensive Income
Comprehensive income is defined as net income and other changes in stockholders’ equity from transactions and other events from sources other than stockholders, including currency translation gains and losses. Total comprehensive income recognized during the three months ended September 30, 2006 and 2005 was $19.8 million and $10.5 million, respectively, and during the nine months ended September 30, 2006 and 2005 was $0.0 million and $27.3 million, respectively.
17
Table of Contents
14.Income Taxes
For the three months ended September 30, 2006, the Company recorded an income tax benefit of $6.9 million versus tax expense of $19.9 million recorded in the prior year quarter. Both the current period and prior period quarters contain significant non-recurring tax items. The total benefit for the current year includes tax benefits for a reduction in taxes due on certain unrepatriated foreign earnings, a payment from Fortune Brands under a tax allocation agreement entered into in connection with the spin-off, and benefits from the Domestic Production Activities and Extraterritorial Income Exclusion.
In the prior year period, the Company recorded a charge of $1.7 million related to foreign earnings no longer considered permanently reinvested and $11.4 million of taxes on a reorganization of various non-U.S. operations, which amount was subsequently refined and reversed due to favorable changes made to U.S. income tax regulations.
The tax benefit recorded during the nine months ended September 30, 2006 was $12.5 million. The Company reported a year to date effective tax benefit rate of 312.5% which differs from the statutory tax rate primarily as result of the third quarter items discussed above. For the nine months ended September 30, 2005, the Company recorded income tax expense of $37.3 million for an effective rate of 55.4% which differs from the statutory rate due to extraordinary charges resulting from the reorganization of various non-US operations and foreign earnings no longer considered permanently reinvested.
15.Condensed Consolidated Financial Information
Following the Distribution and Merger the Company’s 100% owned domestic subsidiaries were required to jointly and severally, fully and unconditionally guarantee the notes issued in connection with the merger with GBC. Rather than filing separate financial statements for each guarantor subsidiary with the Securities and Exchange Commission, the Company has elected to present the following consolidating financial statements, which detail the results of operations for the three and nine months ended September 30, 2006 and 2005, cash flows for the nine months ended September 30, 2006 and 2005 and financial position as of September 30, 2006 and December 31, 2005 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 consolidated financial statements of the Company.
18
Table of Contents
Condensed Consolidating Balance Sheets (Unaudited)
September 30, 2006 | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 6.0 | $ | 11.2 | $ | 32.1 | $ | — | $ | 49.3 | ||||||||||
Accounts receivable, net | — | 202.3 | 203.5 | — | 405.8 | |||||||||||||||
Inventory, net | — | 144.8 | 137.6 | — | 282.4 | |||||||||||||||
Receivables from affiliates | 413.7 | 32.2 | 3.0 | (448.9 | ) | — | ||||||||||||||
Deferred income taxes | 11.2 | 18.2 | 6.8 | — | 36.2 | |||||||||||||||
Other current assets | 7.1 | 15.6 | 22.0 | — | 44.7 | |||||||||||||||
Total current assets | 438.0 | 424.3 | 405.0 | (448.9 | ) | 818.4 | ||||||||||||||
Property, plant and equipment, net | 0.1 | 96.5 | 130.8 | — | 227.4 | |||||||||||||||
Deferred income taxes | 0.2 | (0.2 | ) | 10.4 | — | 10.4 | ||||||||||||||
Goodwill | — | 268.4 | 172.3 | — | 440.7 | |||||||||||||||
Identifiable intangibles, net | 70.2 | 105.1 | 59.2 | — | 234.5 | |||||||||||||||
Prepaid pension | — | 26.5 | 57.3 | — | 83.8 | |||||||||||||||
Other assets | 19.8 | 9.5 | 22.6 | — | 51.9 | |||||||||||||||
Investment in, long-term receivable from, affiliates | 814.9 | 853.6 | 236.3 | (1,904.8 | ) | — | ||||||||||||||
Total assets | $ | 1,343.2 | $ | 1,783.7 | $ | 1,093.9 | $ | (2,353.7 | ) | $ | 1,867.1 | |||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Notes payable to banks | $ | — | $ | — | $ | 6.4 | $ | — | $ | 6.4 | ||||||||||
Current portion of long-term debt | — | — | 14.1 | — | 14.1 | |||||||||||||||
Accounts payable | — | 98.1 | 78.6 | — | 176.7 | |||||||||||||||
Accrued customer program liabilities | — | 70.3 | 49.8 | — | 120.1 | |||||||||||||||
Other current liabilities | 12.8 | 71.0 | 78.9 | — | 162.7 | |||||||||||||||
Payables to affiliates | 10.1 | 640.6 | 239.9 | (890.6 | ) | — | ||||||||||||||
Total current liabilities | 22.9 | 880.0 | 467.7 | (890.6 | ) | 480.0 | ||||||||||||||
Long-term debt | 669.0 | — | 164.9 | — | 833.9 | |||||||||||||||
Long-term notes payable to affiliates | 188.4 | 124.0 | 13.5 | (325.9 | ) | — | ||||||||||||||
Deferred income taxes | 17.6 | (3.5 | ) | 45.7 | — | 59.8 | ||||||||||||||
Postretirement and other liabilities | 14.8 | 19.8 | 28.3 | — | 62.9 | |||||||||||||||
Total liabilities | 912.7 | 1,020.3 | 720.1 | (1,216.5 | ) | 1,436.6 | ||||||||||||||
Stockholders’ equity | ||||||||||||||||||||
Common stock | 0.6 | 600.9 | 23.4 | (624.3 | ) | 0.6 | ||||||||||||||
Treasury stock, at cost | (1.1 | ) | — | — | — | (1.1 | ) | |||||||||||||
Paid-in capital | 1,367.3 | 612.9 | 269.5 | (882.4 | ) | 1,367.3 | ||||||||||||||
Accumulated other comprehensive income (loss) | 2.7 | (0.8 | ) | 11.0 | (10.2 | ) | 2.7 | |||||||||||||
Accumulated (deficit) retained earnings | (939.0 | ) | (449.6 | ) | 69.9 | 379.7 | (939.0 | ) | ||||||||||||
Total stockholders’ equity | 430.5 | 763.4 | 373.8 | (1,137.2 | ) | 430.5 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,343.2 | $ | 1,783.7 | $ | 1,093.9 | $ | (2,353.7 | ) | $ | 1,867.1 | |||||||||
19
Table of Contents
Condensed Consolidating Balance Sheets
December 31, 2005 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 17.9 | $ | 24.2 | $ | 49.0 | $ | — | $ | 91.1 | ||||||||||
Accounts receivable, net | — | 235.6 | 203.3 | — | 438.9 | |||||||||||||||
Inventory, net | — | 150.1 | 118.1 | — | 268.2 | |||||||||||||||
Receivables from affiliates | 321.5 | 28.8 | 45.6 | (395.9 | ) | — | ||||||||||||||
Deferred income taxes | 5.1 | 25.7 | 6.7 | — | 37.5 | |||||||||||||||
Other current assets | 1.3 | 9.8 | 14.2 | — | 25.3 | |||||||||||||||
Total current assets | 345.8 | 474.2 | 436.9 | (395.9 | ) | 861.0 | ||||||||||||||
Property, plant and equipment, net | 0.2 | 110.0 | 129.6 | — | 239.8 | |||||||||||||||
Deferred income taxes | (2.9 | ) | 13.5 | 6.8 | — | 17.4 | ||||||||||||||
Goodwill | 433.8 | — | — | — | 433.8 | |||||||||||||||
Identifiable intangibles, net | 70.3 | 104.3 | 66.0 | — | 240.6 | |||||||||||||||
Prepaid pension | — | 29.3 | 52.6 | — | 81.9 | |||||||||||||||
Other assets | 21.9 | 10.5 | 22.6 | — | 55.0 | |||||||||||||||
Investment in, long-term receivable from, affiliates | 522.3 | 982.4 | 190.3 | (1,695.0 | ) | — | ||||||||||||||
Total assets | $ | 1,391.4 | $ | 1,724.2 | $ | 904.8 | $ | (2,090.9 | ) | $ | 1,929.5 | |||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Notes payable to banks | $ | — | $ | — | $ | 7.0 | $ | — | $ | 7.0 | ||||||||||
Current portion of long-term debt | 4.0 | — | 19.1 | — | 23.1 | |||||||||||||||
Accounts payable | — | 80.6 | 69.5 | — | 150.1 | |||||||||||||||
Accrued customer program liabilities | — | 77.5 | 45.4 | — | 122.9 | |||||||||||||||
Other current liabilities | 10.1 | 77.6 | 62.2 | — | 149.9 | |||||||||||||||
Payables to affiliates | 8.4 | 716.0 | 66.8 | (791.2 | ) | — | ||||||||||||||
Total current liabilities | 22.5 | 951.7 | 270.0 | (791.2 | ) | 453.0 | ||||||||||||||
Long-term debt | 745.0 | — | 166.8 | — | 911.8 | |||||||||||||||
Long-term notes payable to affiliates | 188.5 | — | 30.7 | (219.2 | ) | — | ||||||||||||||
Deferred income taxes | 24.5 | 25.8 | 43.8 | — | 94.1 | |||||||||||||||
Postretirement and other liabilities | 2.6 | 24.3 | 35.4 | — | 62.3 | |||||||||||||||
Total liabilities | 983.1 | 1,001.8 | 546.7 | (1,010.4 | ) | 1,521.2 | ||||||||||||||
Stockholders’ equity | ||||||||||||||||||||
Common stock | 0.5 | 600.9 | 23.4 | (624.3 | ) | 0.5 | ||||||||||||||
Treasury stock, at cost | (1.1 | ) | — | — | — | (1.1 | ) | |||||||||||||
Paid-in capital | 1,350.3 | 640.1 | 277.1 | (917.2 | ) | 1,350.3 | ||||||||||||||
Unearned compensation | (5.2 | ) | — | — | — | (5.2 | ) | |||||||||||||
Accumulated other comprehensive income (loss) | 11.0 | (11.2 | ) | 9.2 | 2.0 | 11.0 | ||||||||||||||
Accumulated (deficit) retained earnings | (947.2 | ) | (507.4 | ) | 48.4 | 459.0 | (947.2 | ) | ||||||||||||
Total stockholders’ equity | 408.3 | 722.4 | 358.1 | (1,080.5 | ) | 408.3 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,391.4 | $ | 1,724.2 | $ | 904.8 | $ | (2,090.9 | ) | $ | 1,929.5 | |||||||||
20
Table of Contents
Condensed Consolidating Income Statements (Unaudited)
Three months ended September 30, 2006 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||
Unaffiliated sales | $ | — | $ | 280.1 | $ | 219.1 | $ | — | $ | 499.2 | ||||||||||
Affiliated sales | — | 15.0 | 11.2 | (26.2 | ) | — | ||||||||||||||
Net sales | — | 295.1 | 230.3 | (26.2 | ) | 499.2 | ||||||||||||||
Cost of products sold | — | 216.2 | 162.8 | (26.2 | ) | 352.8 | ||||||||||||||
Advertising, selling, general and administrative expenses | 10.4 | 53.3 | 48.9 | — | 112.6 | |||||||||||||||
Amortization of intangibles | 0.1 | 1.2 | 1.2 | — | 2.5 | |||||||||||||||
Restructuring charges | — | 1.2 | 4.6 | — | 5.8 | |||||||||||||||
Operating income (loss) | (10.5 | ) | 23.2 | 12.8 | — | 25.5 | ||||||||||||||
Interest (income) expense from affiliates | (0.3 | ) | (0.2 | ) | 0.5 | — | — | |||||||||||||
Interest (income) expense | 10.9 | 1.9 | 3.7 | — | 16.5 | |||||||||||||||
Other (income) expense, net | (1.3 | ) | (0.5 | ) | (0.6 | ) | — | (2.4 | ) | |||||||||||
Income (loss) before taxes, minority interest and earnings (losses) of wholly owned subsidiaries | (19.8 | ) | 22.0 | 9.2 | — | 11.4 | ||||||||||||||
Income taxes | (0.8 | ) | (8.5 | ) | 2.4 | — | (6.9 | ) | ||||||||||||
Minority interest, net of tax | — | — | 0.2 | — | 0.2 | |||||||||||||||
Income (loss) before earnings (losses) of wholly owned subsidiaries | (19.0 | ) | 30.5 | 6.6 | — | 18.1 | ||||||||||||||
Earnings (losses) of wholly owned subsidiaries | 37.1 | (4.0 | ) | — | (33.1 | ) | — | |||||||||||||
Net income (loss) | $ | 18.1 | $ | 26.5 | $ | 6.6 | $ | (33.1 | ) | $ | 18.1 | |||||||||
Three months ended September 30, 2005 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||
Unaffiliated sales | $ | — | $ | 246.3 | $ | 177.7 | $ | — | $ | 424.0 | ||||||||||
Affiliated sales | — | 10.3 | 9.7 | (20.0 | ) | — | ||||||||||||||
Net sales | — | 256.6 | 187.4 | (20.0 | ) | 424.0 | ||||||||||||||
Cost of products sold | — | 189.7 | 131.4 | (20.0 | ) | 301.1 | ||||||||||||||
Advertising, selling, general and administrative expenses | 10.1 | 44.5 | 34.3 | — | 88.9 | |||||||||||||||
Amortization of intangibles | — | 0.8 | 0.6 | — | 1.4 | |||||||||||||||
Restructuring charges | — | — | 0.4 | — | 0.4 | |||||||||||||||
Operating income (loss) | (10.1 | ) | 21.6 | 20.7 | — | 32.2 | ||||||||||||||
Interest (income) expense from affiliates | (6.0 | ) | 5.7 | 0.3 | — | — | ||||||||||||||
Interest (income) expense | 7.4 | — | 1.8 | (0.1 | ) | 9.1 | ||||||||||||||
Other (income) expense, net | (0.1 | ) | (0.6 | ) | (0.7 | ) | 0.1 | (1.3 | ) | |||||||||||
Income (loss) before taxes and earnings (losses) of wholly owned subsidiaries | (11.4 | ) | 16.5 | 19.3 | — | 24.4 | ||||||||||||||
Income taxes | 9.4 | 3.6 | 6.9 | — | 19.9 | |||||||||||||||
Income (loss) before earnings (losses) of wholly owned subsidiaries | (20.8 | ) | 12.9 | 12.4 | — | 4.5 | ||||||||||||||
Earnings (losses) of wholly owned subsidiaries | 25.3 | 3.2 | — | (28.5 | ) | — | ||||||||||||||
Net income (loss) | $ | 4.5 | $ | 16.1 | $ | 12.4 | $ | (28.5 | ) | $ | 4.5 | |||||||||
21
Table of Contents
Condensed Consolidating Income Statements (Unaudited)
Nine months ended September 30, 2006 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||
Unaffiliated sales | $ | — | $ | 781.2 | $ | 649.2 | $ | — | $ | 1,430.4 | ||||||||||
Affiliated sales | — | 49.9 | 42.9 | (92.8 | ) | — | ||||||||||||||
Net sales | — | 831.1 | 692.1 | (92.8 | ) | 1,430.4 | ||||||||||||||
Cost of products sold | — | 630.9 | 489.4 | (92.8 | ) | 1,027.5 | ||||||||||||||
Advertising, selling, general and administrative expenses | 33.3 | 158.1 | 138.3 | — | 329.7 | |||||||||||||||
Amortization of intangibles | 0.1 | 4.7 | 3.7 | — | 8.5 | |||||||||||||||
Restructuring charges | 0.1 | 6.7 | 18.8 | — | 25.6 | |||||||||||||||
Operating income (loss) | (33.5 | ) | 30.7 | 41.9 | — | 39.1 | ||||||||||||||
Interest (income) expense from affiliates | (1.0 | ) | (0.8 | ) | 1.8 | — | — | |||||||||||||
Interest (income) expense | 36.2 | 1.6 | 9.4 | — | 47.2 | |||||||||||||||
Other (income) expense, net | (1.9 | ) | (6.5 | ) | 4.3 | — | (4.1 | ) | ||||||||||||
Income (loss) before taxes, minority interest and earnings (losses) of wholly owned subsidiaries | (66.8 | ) | 36.4 | 26.4 | — | (4.0 | ) | |||||||||||||
Income taxes | (10.4 | ) | (8.8 | ) | 6.7 | — | (12.5 | ) | ||||||||||||
Minority interest, net of tax | — | — | 0.3 | — | 0.3 | |||||||||||||||
Income (loss) before earnings (losses) of wholly owned subsidiaries | (56.4 | ) | 45.2 | 19.4 | — | 8.2 | ||||||||||||||
Earnings (losses) of wholly owned subsidiaries | 64.6 | 5.8 | — | (70.4 | ) | — | ||||||||||||||
Net income (loss) | $ | 8.2 | $ | 51.0 | $ | 19.4 | $ | (70.4 | ) | $ | 8.2 | |||||||||
Nine months ended September 30, 2005 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||
Unaffiliated sales | $ | — | $ | 523.8 | $ | 450.7 | $ | — | $ | 974.5 | ||||||||||
Affiliated sales | — | 18.1 | 20.8 | (38.9 | ) | — | ||||||||||||||
Net sales | — | 541.9 | 471.5 | (38.9 | ) | 974.5 | ||||||||||||||
Cost of products sold | — | 404.1 | 323.7 | (38.9 | ) | 688.9 | ||||||||||||||
Advertising, selling, general and administrative expenses | 15.2 | 101.5 | 85.1 | — | 201.8 | |||||||||||||||
Amortization of intangibles | 0.1 | 0.8 | 1.5 | — | 2.4 | |||||||||||||||
Restructuring charges | — | — | 0.4 | — | 0.4 | |||||||||||||||
Operating income (loss) | (15.3 | ) | 35.5 | 60.8 | — | 81.0 | ||||||||||||||
Interest (income) expense from affiliates | (16.4 | ) | 16.1 | 0.3 | — | — | ||||||||||||||
Interest (income) expense | 13.0 | (0.4 | ) | 0.5 | (0.1 | ) | 13.0 | |||||||||||||
Other (income) expense, net | (6.0 | ) | 0.1 | 6.5 | 0.1 | 0.7 | ||||||||||||||
Income (loss) before taxes, change in accounting principle and earnings (losses) of wholly owned subsidiaries | (5.9 | ) | 19.7 | 53.5 | — | 67.3 | ||||||||||||||
Income taxes | 11.7 | 5.7 | 19.9 | — | 37.3 | |||||||||||||||
Income (loss) before change in accounting principle and earnings (losses) of wholly owned subsidiaries | (17.6 | ) | 14.0 | 33.6 | — | 30.0 | ||||||||||||||
Change in accounting principle | — | — | 3.3 | — | 3.3 | |||||||||||||||
Income (loss) before earnings (losses) of wholly owned subsidiaries | (17.6 | ) | 14.0 | 36.9 | — | 33.3 | ||||||||||||||
Earnings (losses) of wholly owned subsidiaries | 50.9 | 4.9 | — | (55.8 | ) | — | ||||||||||||||
Net income (loss) | $ | 33.3 | $ | 18.9 | $ | 36.9 | $ | (55.8 | ) | $ | 33.3 | |||||||||
22
Table of Contents
Condensed Consolidating Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 2006 | ||||||||||||||||
Non- | ||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Consolidated | ||||||||||||
Net cash provided by (used by) operating activities: | $ | (52.0 | ) | $ | 79.3 | $ | 33.4 | $ | 60.7 | |||||||
Investing activities: | ||||||||||||||||
Additions to property, plant and equipment | — | (12.7 | ) | (9.4 | ) | (22.1 | ) | |||||||||
Proceeds from the disposition of assets | — | 4.6 | 0.9 | 5.5 | ||||||||||||
Other investing activities | 1.3 | 0.8 | 1.4 | 3.5 | ||||||||||||
Net cash provided by (used by) investing activities | 1.3 | (7.3 | ) | (7.1 | ) | (13.1 | ) | |||||||||
Financing activities: | ||||||||||||||||
Intercompany financing | 109.2 | (86.0 | ) | (23.2 | ) | — | ||||||||||
Net dividends | — | 1.0 | (1.0 | ) | — | |||||||||||
Repayments of long-term debt | (80.0 | ) | — | (20.8 | ) | (100.8 | ) | |||||||||
Repayments of short-term debt | — | — | (0.8 | ) | (0.8 | ) | ||||||||||
Cost of debt issuance | (0.2 | ) | — | — | (0.2 | ) | ||||||||||
Proceeds from the exercise of stock options | 9.8 | — | — | 9.8 | ||||||||||||
Net cash provided by (used by) financing activities | 38.8 | (85.0 | ) | (45.8 | ) | (92.0 | ) | |||||||||
Effect of foreign exchange rate changes on cash | — | — | 2.6 | 2.6 | ||||||||||||
Net decrease in cash and cash equivalents | (11.9 | ) | (13.0 | ) | (16.9 | ) | (41.8 | ) | ||||||||
Cash and cash equivalents at the beginning of the period | 17.9 | 24.2 | 49.0 | 91.1 | ||||||||||||
Cash and cash equivalents at the end of the period | $ | 6.0 | $ | 11.2 | $ | 32.1 | $ | 49.3 | ||||||||
Condensed Consolidating Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 2005 | ||||||||||||||||
Non- | ||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Consolidated | ||||||||||||
Net cash provided by (used by) operating activities: | $ | (1.8 | ) | $ | (20.9 | ) | $ | 46.5 | $ | 23.8 | ||||||
Investing activities: | ||||||||||||||||
Additions to property, plant and equipment | — | (7.7 | ) | (12.7 | ) | (20.4 | ) | |||||||||
Proceeds from the disposition of assets | — | — | 2.2 | 2.2 | ||||||||||||
Other investing activities | (11.5 | ) | 11.6 | — | 0.1 | |||||||||||
Net cash provided by (used by) investing activities | (11.5 | ) | 3.9 | (10.5 | ) | (18.1 | ) | |||||||||
Financing activities: | �� | |||||||||||||||
Decrease in parent company investment | (24.5 | ) | — | — | (24.5 | ) | ||||||||||
Intercompany financing | (166.8 | ) | 326.1 | (159.3 | ) | — | ||||||||||
Net dividends | (507.2 | ) | 0.5 | (118.3 | ) | (625.0 | ) | |||||||||
Proceeds from borrowings of short-term debt | 750.0 | — | 200.0 | 950.0 | ||||||||||||
Repayments of long-term debt | — | (293.6 | ) | — | (293.6 | ) | ||||||||||
(Repayments) borrowings of short-term debt | — | 3.2 | (0.1 | ) | (3.1 | ) | ||||||||||
Cost of debt issuance | (26.1 | ) | — | — | (26.1 | ) | ||||||||||
Proceeds from the exercise of stock options | 2.9 | — | — | 2.9 | ||||||||||||
Net cash provided by (used by) financing activities | 28.3 | 36.2 | (77.7 | ) | (13.2 | ) | ||||||||||
Effect of foreign exchange rate changes on cash | — | — | (3.4 | ) | (3.4 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | 15.0 | 19.2 | (45.1 | ) | (10.9 | ) | ||||||||||
Cash and cash equivalents at the beginning of the period | — | (13.4 | ) | 93.2 | 79.8 | |||||||||||
Cash and cash equivalents at the end of the period | $ | 15.0 | $ | 5.8 | $ | 48.1 | $ | 68.9 | ||||||||
23
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On August 17, 2005, ACCO Brands Corporation, following its spin-off from Fortune Brands Inc. (“Fortune Brands” or the “Parent”), became the parent company of General Binding Corporation (“GBC”) when GBC merged with a wholly owned subsidiary of ACCO Brands. As a result of the merger, GBC is now a wholly owned subsidiary of ACCO Brands Corporation.
ACCO Brands Corporation is a world leader in select categories of branded office products (excluding furniture, computers, printers and bulk paper) to the office products resale industry. We design, develop, manufacture and market a wide variety of traditional and computer-related office products, supplies, binding and laminating equipment and consumable supplies, personal computer accessory products, paper-based time management products, presentation aids and label products. We have leading market positions and brand names, including Swingline®, GBC®, Kensington®, Quartet®, Rexel®, Day-Timer® and Wilson Jones®, among others.
We also manufacture and market specialized laminating films for book printers, packaging and digital print lamination, as well as high-speed laminating and binding equipment targeted at commercial consumers.
Our customers include commercial contract stationers (such as Office Depot, Staples, Corporate Express and Office Max), retail superstores, wholesalers, distributors, mail order catalogs, mass merchandisers, club stores and dealers. We also supply our products to commercial and industrial end-users and to the educational market.
We enhance shareholder value by building our leading brands to generate sales, earn profits and create cash flow. We do this by targeting the premium end of select categories, which are characterized by high brand equity, high customer loyalty and a reasonably high price gap between branded and private label products. Our participation in private label or value categories is limited to areas where we believe we have an economic advantage or where it is necessary to merchandise a complete category. We completed the sale of the Perma® storage business during the third quarter of 2006, and announced the discontinuance of the Kensington cleaning product category as of the end of the first quarter of 2006. These actions represent approximately $40 million of annual net sales. In addition, we have identified $35 million of annual net sales in low-margin products in the Office Products Group that will be discontinued by the end of 2006. Through a focus on research, marketing and innovation, we seek to develop new products that meet the needs of our consumers and commercial end-users. In addition, we will provide value-added features or benefits that will enhance product appeal to our customers. This focus, we believe, will increase the premium product positioning of our brands.
Our strategy centers on maximizing profitability and high-return growth. Specifically, we seek to leverage our platform for organic growth through greater consumer understanding, product innovation, marketing and merchandising, disciplined category expansion, including possible strategic transactions, and continued cost realignment.
In the near term, we are focused on realizing synergies from our merger with GBC. We have identified significant potential savings opportunities resulting from the merger. These opportunities include cost reductions attributable to efficiencies and synergies expected to be derived from facility integration, headcount reduction, supply chain optimization and revenue enhancement. Our near-term priorities for the use of cash flow are to fund integration and restructuring-related activities and to pay down acquisition-related debt.
The following discussion of historical results includes the consolidated financial results of operations for the former ACCO World Corporation businesses through August 17, 2005, and the consolidated financial results of operations of ACCO Brands Corporation (including the consolidation of GBC) subsequent to August 17, 2005 for the three and nine months ended September 30, 2005. In order to provide additional information relating to our operating results, we also present a discussion of our consolidated operating results as if ACCO Brands and GBC had been a combined company (pro forma) for the entire three and nine months ended September 30, 2005. We have included this additional information in order to provide further insight into our operating results, prior period trends and current financial position. This supplemental information is presented in a manner consistent with the disclosure requirements of Statement of Financial Accounting Standards (FAS No. 141), “Business Combinations,” which are described in more detail in Note 4,Acquisition and Merger,in the Notes to Condensed Consolidated Financial Statements. The discussion of operating results at the consolidated level is followed by a more detailed discussion of operating results by segment on both a historically reported and a pro forma basis.
24
Table of Contents
As more fully described in the Company’s 2005 annual report on Form 10-K, the financial statements for the nine months ended September 30, 2005 include a restatement of results affecting the previously filed three-month and nine-month periods ended September 30, 2005 for the cumulative effect of a change in accounting principle related to the removal of a one-month lag in reporting by several of the Company’s foreign subsidiaries. The change was made to better align their reporting periods with the Company’s fiscal calendar.
Our comparative discussion below includes references to the impact of a change in calendar days in comparison to the prior year. During the third quarter of 2005, the Company’s financial reporting calendar for its ACCO North American businesses was changed to a calendar month end from the previous 25th day of the last month of each quarterly reporting period. The Company’s fiscal year end calendar, previously ended December 27th, was also changed to a calendar month end. The change was made to better align the reporting calendars of the Company and the acquired GBC businesses. As a result, the three and nine months ended September 30, 2005 include the results of 5 and 4 additional calendar days, respectively in comparison to the 2006 periods. It should be understood, however, that the impact of this change is influenced by a number of factors, including seasonality of the business. In addition, the Company’s business segments have both gained and lost sales revenues on a comparative basis, depending on the impact of seasonality on each business segment. While the impact of this change was not material to the overall business, the impact of the change in calendar is included in the segment discussions below where the impact is believed to be of use in understanding the change in results.
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements of ACCO Brands Corporation and the accompanying notes contained therein.
Overview
ACCO Brands’ results are dependent upon a number of factors affecting sales, pricing and competition. Historically, key drivers of demand in the office products industry have included trends in white collar employment levels, gross domestic product (GDP) and growth in the number of small businesses and home offices together with increasing usage of personal computers. Pricing and demand levels for office products have also reflected a substantial consolidation within the global resellers of office products. This has led to multiple years of industry pricing pressure and a more efficient level of asset utilization by customers, resulting in lower sales volumes for suppliers. We sell products in highly competitive markets, and compete against large international and national companies, regional competitors and against our own customers’ direct and private-label sourcing initiatives. We have substantially completed our integration planning for the Office Products Group, and have made significant progress toward relocating our people, aligning our customer relationships and toward upgrading information technology systems. Since the beginning of 2006 we have announced and moved ahead with plans to close, consolidate, downsize, or relocate 28 manufacturing, distribution and administrative operations. In addition, the Company has successfully integrated key information technology systems in the U.S., Canada and Mexico, creating a common technology platform for its office products businesses, and consolidated its European office products sales force. Collectively, these actions are expected to ultimately account for all of the previously announced $40 million of targeted annual cost synergies by the end of 2008, as planned. During the third quarter of 2006 the Company completed its review of GBC’s commercial businesses (Industrial and Print Finishing Group and the Document Finishing businesses) resulting in a planned realignment of those businesses. As a result of that review the Company now expects an additional $20 million in annualized synergies to be realized by the end of 2009, resulting in a total of $60 million in targeted annualized synergies that will be realized by the end of 2009.
Cash payments related to the Company’s restructuring and integration activities have amounted to $19.6 million (excluding capital expenditures) since January 1, 2006. It is expected that additional disbursements of approximately of $80 million will be substantially completed by the end of 2008 as the Company continues to implement phases of its strategic and business integration plans. The Company has adequate resources to finance the anticipated requirements.
25
Table of Contents
Three Months Ended September 2006 versus 2005
Historical Results
Three Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 499.2 | $ | 424.0 | $ | 75.2 | 18 | % | ||||||||
Operating income | 25.5 | 32.2 | (6.7 | ) | (21 | )% | ||||||||||
Net income | 18.1 | 4.5 | 13.6 | 302 | % |
Net Sales
Sales increased $75.2 million, or 18% to $499.2 million. The increase was principally related to the acquisition of GBC.
Gross Profit
Gross profit increased $23.5 million to $146.4 million. This increase was primarily related to the acquisition of GBC. Gross profit margin increased to 29.3% from 29.0%. The increase in gross profit margin was primarily due to operating profit improvements in the Office Products and Computer Products groups as synergies and higher prices offset higher raw material costs. In addition, the current year includes a release of workers’ compensation accruals resulting from a change in estimate.
SG&A (Advertising, selling, general and administrative expenses)
SG&A increased $23.7 million to $112.6 million. The increase was primarily attributable to the acquisition of GBC. SG&A increased as a percentage of sales to 22.6% from 21.0%. The increase in SG&A as a percentage of sales was primarily driven by a $7.0 million increase in management incentives, which includes $4.7 million of equity incentive charges in the current period. The prior period benefited from the release of accruals for management incentives resulting from a change in estimate.
The Company’s results of operations in 2006 were impacted by the adoption of SFAS No. 123(R), which requires companies to expense the fair value of employee stock options and similar awards. The Company adopted SFAS No. 123(R) effective January 1, 2006, using the modified prospective method. Therefore, stock-based compensation expense was recorded during 2006, but the prior year consolidated statement of income was not restated.
In December 2005, the Company issued an inaugural grant of stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) following the spin-off and merger. The inaugural grant followed market practice for Initial Public Offerings/spin transactions and was larger than would be expected in a normal year. The Company will therefore have a larger charge related to the expensing of equity awards for the years 2006 through 2008.
The following is a summary of the incremental impact of all stock compensation expense and other long-term compensation recorded in the third quarter of 2006 and 2005, which includes expenses related to grants of stock options, RSUs, and PSUs, along with the impact of the pre-tax expense amounts as a percentage of sales.
26
Table of Contents
Stock-Based and Other Long Term Compensation
Historical Results
Historical Results
Three Months Ended September 30, | Incremental | |||||||||||
(in millions of dollars) | 2006 | 2005 | Expense | |||||||||
Expensing required under SFAS No. 123(R)(a) | $ | 2.8 | $ | — | $ | 2.8 | ||||||
Previously required expensing(b) | 1.9 | 0.2 | 1.7 | |||||||||
Other non-equity based long term compensation | — | 0.2 | (0.2 | ) | ||||||||
Total long term executive compensation | $ | 4.7 | $ | 0.4 | $ | 4.3 | ||||||
% of Sales | 1.0 | % | 0.1 | % | 0.9 | % | ||||||
(a) | The Company has adopted SFAS 123(R) using the modified prospective method. Therefore, restatement of prior periods is not required. | |
(b) | Includes expensing of RSUs and PSUs under SFAS 123, and unvested stock options/unearned compensation related to GBC. |
Refer to Note 2 for information specific to the adoption of SFAS No. 123(R) in the condensed consolidated financial statements.
Operating Income
Operating income decreased $6.7 million, or 21%, to $25.5 million and decreased as a percentage of sales to 5.1% from 7.6%. The decrease in income and margin was driven by $6.9 million of incremental restructuring and restructuring-related costs, as well as higher SG&A expense as discussed above.
Interest, Other Expense (Income) and Income Taxes
Interest expense increased $7.4 million to $16.5 million, as debt was outstanding for the full quarter in 2006 compared to the prior year when debt was outstanding beginning with the date of the merger. Other income increased $1.1 million to $2.4 million, primarily due to incremental foreign exchange gains in 2006 of $0.9 million and incremental earnings from the Company’s share of a GBC joint venture investment.
Income tax for the third quarter of 2006 was a benefit of $6.9 million, compared to an expense of $19.9 million in the same quarter of 2005. The effective tax rate for the quarter ended September 30, 2006 was 60.5% compared to 81.6% for the quarter ended September 30, 2005. The total benefit for the current year includes tax benefits for a reduction in taxes due on certain unrepatriated foreign earnings, a payment from Fortune Brands under a tax allocation agreement entered into in connection with the spin-off, and benefits from the Domestic Production Activities and Extraterritorial Income Exclusion. In the comparable quarter in 2005, the Company incurred $11.4 million in charges related to a reorganization to facilitate the merger of its international operations.
Net Income
Net income was $18.1 million compared to $4.5 million in the prior year, and was significantly impacted by the higher tax benefits offset partially by lower operating income and increased interest expense. Included in net income for 2006 were restructuring and restructuring-related after-tax costs of $9.6 million, or $0.18 per diluted share. In the same quarter in 2005 the after-tax cost of restructuring and restructuring-related charges was $5.1 million or $0.12 per diluted share.
27
Table of Contents
Three Months Ended September 2006 versus 2005
Combined Companies — Pro Forma Discussion
The Company has included a “combined companies” discussion below as if GBC had been included in results since the beginning of the 2005 year. Restructuring and restructuring-related costs have been noted where appropriate, as management believes that a comparative review of operating income before restructuring and restructuring-related charges allows for a better understanding of the underlying business performance from year to year.
The presentation of, and supporting calculations related to, the 2005 pro forma information contained in this Management’s Discussion and Analysis is derived from the Company’s Report on Form 8-K furnished on February 14, 2006, except for our presentation of the one-time expense related to the step-up in inventory value that was recorded as an adjustment to the opening balance sheet of GBC. The pro forma results for the three months presented in this discussion reflect the actual inventory costs resulting from the step-up of $3.6 million recognized in our reported results during the third quarter of 2005.
The following table presents ACCO Brands’ reported combined results and pro forma combined results for the quarters ended September 30, 2006 and 2005, respectively. Amounts of restructuring and restructuring-related charges are also presented for each period.
Combined Companies (Reported)
Three Months Ended September 30, 2006 | ||||||||||||||||
Gross | Operating | |||||||||||||||
(in millions of dollars) | Net Sales | Profit | SG&A | Income | ||||||||||||
Reported results | $ | 499.2 | $ | 146.4 | $ | 112.6 | $ | 25.5 | ||||||||
Restructuring and restructuring-related charges included in the results: | ||||||||||||||||
Restructuring charges | — | — | — | 5.8 | ||||||||||||
Restructuring-related expense | — | 5.3 | 2.5 | 7.8 |
The Company has incurred a net total of $13.6 million in restructuring and restructuring-related expenses in the 2006 quarter. The charges were principally related to the closure or consolidation of facilities, primarily in the United States and Europe, as well as associated employee termination benefits.
Combined Companies (Pro Forma)
Three Months Ended September 30, 2005 | ||||||||||||||||
Gross | Operating | |||||||||||||||
(in millions of dollars) | Net Sales | Profit | SG&A | Income | ||||||||||||
Pro forma results | $ | 507.0 | $ | 142.7 | $ | 111.7 | $ | 28.2 | ||||||||
Restructuring and restructuring-related charges included in the results: | ||||||||||||||||
Restructuring charges | — | — | — | 0.1 | ||||||||||||
Restructuring-related expense (income) | — | (1.9 | ) | 8.3 | 6.4 |
Net Sales
Net sales decreased $7.8 million, or 2%, to $499.2 million. The alignment of North American reporting calendars during the third quarter of 2005 resulted in an estimated $10.6 million of additional revenue in the prior year period. An exit of certain low-margin business within Office Products also contributed to the decline, but was offset by key category growth in Computer Products.
Gross Profit
Gross profit increased $3.7 million to $146.4 million. Gross profit margin increased to 29.3% from 28.1%. The increase in gross profit margin is primarily due to the expensing of the inventory acquisition step-up in 2005 of $3.6 million, or 0.7 margin points, and gross profit improvements in the Office Products and Computer Products groups driven by favorable sales mix and integration synergies.
28
Table of Contents
SG&A (Advertising, selling, general and administrative expenses)
SG&A increased $0.9 million, to $112.6 million and as a percentage of sales to 22.6% from 22.0%. The increase in SG&A as a percentage of sales was attributable to lower restructuring-related charges of $5.8 million (including integration costs), incremental long-term compensation expense of $3.6 million and investment in the business offset by savings from synergies.
The following is a summary of the incremental impact of all stock compensation expense and other long-term compensation expense recorded in the third quarter of 2006 and 2005, which includes expenses related to grants of both stock options and restricted stock units, along with the impact of the pre-tax expense amounts as a percentage of sales.
Stock-Based and Other Long Term Compensation
Combined Companies (Pro Forma)
Combined Companies (Pro Forma)
Three Months Ended September 30, | Incremental | |||||||||||
(in millions of dollars) | 2006 | 2005 | Expense | |||||||||
Expensing required under SFAS No. 123(R)(a) | $ | 2.8 | $ | — | $ | 2.8 | ||||||
Previously required expensing(b) | 1.9 | 0.9 | 1.0 | |||||||||
Other non-equity based long term compensation | — | 0.2 | (0.2 | ) | ||||||||
Total long term executive compensation | $ | 4.7 | $ | 1.1 | $ | 3.6 | ||||||
% of Sales | 1.0 | % | 0.2 | % | 0.8 | % | ||||||
(a) | The Company has adopted SFAS 123(R) using the modified prospective method. Therefore, restatement of prior periods is not required. | |
(b) | Includes expensing of RSUs and PSUs under SFAS 123, and unvested stock options/unearned compensation related to GBC pre-merger grants under SFAS 141, “Business Combinations.” |
Operating Income
Operating income decreased $2.7 million, or 10%, to $25.5 million, and operating income margin decreased from 5.6% to 5.1%. The decrease was attributable to the change in restructuring and restructuring-related charges, which were $13.6 million and $6.5 million in the quarters ended September 30, 2006 and 2005, respectively, partially offset by improved gross margin.
Net Income
Net income (loss) for the quarter was $18.1 million, or $0.33 per diluted share, compared to $(1.9) million, or $(0.04) per diluted share in the prior year. The increase was attributable to the significant tax benefits discussed above offset by lower operating income and increased interest expense.
Segment Discussion
Office Products Group
Historical Results
Three Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 327.9 | $ | 296.0 | $ | 31.9 | 11 | % | ||||||||
Operating income | 10.9 | 25.0 | (14.1 | ) | (56 | )% | ||||||||||
Operating income margin | 3.3 | % | 8.4 | % | (5.1 | )% |
Office Products net sales increased $31.9 million, or 11%. The increase was principally due to the acquisition of GBC.
29
Table of Contents
Office Products operating income decreased $14.1 million, to $10.9 million. The decrease resulted from higher restructuring and restructuring-related costs, as well as the negative impact of pan-European pricing, investment in changing our European business model, increased equity incentive expenses and the prior year reversal of management incentive accruals. The decrease was partially offset by a release of workers’ compensation reserves.
The following table presents Office Products’ reported combined results and pro forma combined results for the quarters ended September 30, 2006 and 2005, respectively. Amounts of restructuring and restructuring-related charges are also presented for each period.
Combined Companies (Pro Forma)
Three Months Ended September 30, | Amount of Change | |||||||||||||||
2006 | 2005 | $ | % | |||||||||||||
(in millions of dollars) | (Reported) | (Pro forma) | ||||||||||||||
Net sales | $ | 327.9 | $ | 340.3 | $ | (12.4 | ) | (4 | )% | |||||||
Operating income | 10.9 | 23.7 | (12.8 | ) | (54 | )% | ||||||||||
Restructuring and related charges | 13.1 | (1.0 | ) | 14.1 | NM |
Net sales decreased 4% from $340.3 million to $327.9 million. The decline was principally due to the exit of certain low-margin products within U.S. Office Products and a shift in sales in anticipation of July price increases which offset growth in Australia and Latin America. Additionally, the change in calendar and the effects of a stronger U.S. Dollar, decreased sales by a net $2.7 million.
Office Products operating income declined $12.8 million to $10.9 million, including restructuring and restructuring-related charges. Excluding the impact of restructuring and restructuring-related charges from both periods, operating income would have decreased. The prior year included the expense related to the inventory acquisition step-up of $1.9 million in 2005. The negative impact of pan-European pricing, investment in changing our European business model, increased equity incentive expenses and the prior year reversal of management incentive accruals due to a change in estimate were partially offset by the positive effects of global synergy savings and release of workers’ compensation reserves.
Computer Products Group
Historical Results
Three Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 62.2 | $ | 59.3 | $ | 2.9 | 5 | % | ||||||||
Operating income | 14.6 | 11.6 | 3.0 | 26 | % | |||||||||||
Operating income margin | 23.5 | % | 19.6 | % | 3.9 | % | ||||||||||
Restructuring and related charges | 0.3 | — | 0.3 | NM |
Computer Products sales increased $2.9 million, or 5%, to $62.2 million. The sales growth was driven by increased sales of security products, iPod® accessories, and notebook docking stations. This growth was lower than historical rates because of the company’s planned exit from the low-margin cleaning category, an earlier shipment of products in the prior year in anticipation of the seasonally strong holiday period, and a change in calendar days in the current year.
Operating income increased to $14.6 million from $11.6 million, while operating income margins increased to 23.5% from 19.6%. The increase was principally driven by broad strength in higher margin new products across all regions.
No pro forma information is provided for the Computer Products segment as it was not impacted by the GBC acquisition.
30
Table of Contents
Commercial — Industrial and Print Finishing Group
Historical Results
Three Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 45.9 | $ | 24.8 | $ | 21.1 | 85 | % | ||||||||
Operating income | 2.2 | 2.0 | 0.2 | 10 | % | |||||||||||
Operating income margin | 4.8 | % | 8.1 | % | (3.3 | )% |
Commercial — Industrial and Print Finishing (“IPFG”) net sales were $45.9 million compared to $24.8 million in the prior year quarter, an increase of 85%. The sales growth is attributable to 2005 results only representing activity subsequent to the GBC acquisition on August 17, 2005.
Operating income increased $0.2 million to $2.2 million. The increase is attributable to the higher sales volume offset by a lower operating income margin attributable to adverse sales mix, lower pricing and higher raw material costs.
The following table presents IPFG’s reported combined results and pro forma combined results for the quarters ended September 30, 2006 and 2005, respectively.
Combined Companies (Pro Forma)
Three Months Ended September 30, | Amount of Change | |||||||||||||||
2006 | 2005 | $ | % | |||||||||||||
(in millions of dollars) | (Reported) | (Pro forma) | ||||||||||||||
Net sales | $ | 45.9 | $ | 45.3 | $ | 0.6 | 1 | % | ||||||||
Operating income | 2.2 | 2.5 | (0.3 | ) | (12 | )% |
IPFG net sales increased 1%, to $45.9 million. Favorable currency translation increased sales by 2%. In addition, sales were negatively impacted by competitive pricing for laminating film, offset in part by strong machine sales, which should drive future higher margin film sales.
Operating income decreased 12%, to $2.2 million, and operating margins decreased to 4.8% from 5.5%. The decrease in profit and margin was due to lower pricing and higher raw material costs offset by the inclusion of the expense related to the inventory acquisition step-up of $0.9 million in 2005.
Other Commercial
Historical Results
Three Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 63.2 | $ | 43.9 | $ | 19.3 | 44 | % | ||||||||
Operating income | 5.8 | 6.1 | (0.3 | ) | (5 | )% | ||||||||||
Operating income margin | 9.2 | % | 13.9 | % | (4.7 | )% |
Other Commercial net sales increased to $63.2 million from $43.9 million. The acquisition of GBC’s Document Finishing businesses accounted for $20.9 million of the increase. Sales volumes at Day-Timers declined by $1.6 million, principally due to lost business with certain reseller customers.
Other Commercial operating income decreased $0.3 million to $5.8 million due to unfavorable manufacturing and other variances at Day-Timers and selling expense investments for the entire segment, partly offset by higher sales. The margin decrease is attributable to the lower operating margin of the two businesses as compared to the Day-Timers business on a stand-alone basis.
The following table presents Other Commercial’s reported combined results and pro forma combined results for the quarters ended September 30, 2006 and 2005, respectively. Amounts of restructuring and restructuring-related charges are also presented for each period.
31
Table of Contents
Combined Companies (Pro Forma)
Three Months Ended September 30, | Amount of Change | |||||||||||||||
2006 | 2005 | $ | % | |||||||||||||
(in millions of dollars) | (Reported) | (Pro forma) | ||||||||||||||
Net sales | $ | 63.2 | $ | 62.1 | $ | 1.1 | 2 | % | ||||||||
Operating income | 5.8 | 5.1 | 0.7 | 14 | % | |||||||||||
Restructuring and related charges | 0.2 | — | 0.2 | NM |
Net sales increased $1.1 million, or 2%. The increase was driven by price increases and volume growth, primarily in sales of document finishing products. This increase was partially offset by a $1.6 million reduction in sales in the Day-Timers business resulting from lower sales in its reseller channels.
Operating income increased $0.7 million, or 14%. The increase in profit and margins was principally driven by inclusion of the $0.8 million of expense related to the inventory acquisition step-up in the prior year.
Nine Months Ended September 2006 versus 2005
Historical Results
Nine Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 1,430.4 | $ | 974.5 | $ | 455.9 | 47 | % | ||||||||
Operating income | 39.1 | 81.0 | (41.9 | ) | (52 | )% | ||||||||||
Net income | 8.2 | 33.3 | (25.1 | ) | (75 | )% |
Net Sales
Net sales increased $455.9 million, or 47%, to $1,430.4 million. The increase was principally related to the acquisition of GBC.
Gross Profit
Gross profit increased $117.3 million to $402.9 million, primarily as a result of the acquisition of GBC. Gross profit margin decreased to 28.2% from 29.3%. The decrease in gross profit margin was primarily due to increased raw material and freight costs, partially offset by sales price increases. In addition, unfavorable sales mix, including volume growth in lower relative margin products, has also depressed margins.
SG&A (Advertising, selling, general and administrative expenses)
SG&A increased $127.9 million to $329.7 million. The increase was primarily attributable to the acquisition of GBC. SG&A as a percentage of sales increased to 23.0% from 20.7%. The increase in SG&A margin is attributable to higher marketing and selling investments to drive growth, significantly higher cost related to expensing of equity based management incentive programs, as well as infrastructure costs to support our public company status, align our business model globally and develop our European business model.
The Company’s results of operations for the nine months ended September 30, 2006 were impacted by the adoption of SFAS No. 123(R), which requires companies to expense the fair value of employee stock options and similar awards. The Company adopted SFAS No. 123(R) effective January 1, 2006, using the modified prospective method. Therefore, stock-based compensation expense was recorded during the first nine months of 2006, but the prior year consolidated statement of income was not restated.
In December 2005, the Company issued an inaugural grant of stock options, restricted stock units and performance stock units following the spin-off and merger. The inaugural grant followed market practice for Initial Public Offerings/spin transactions and was larger than would be expected in a normal year. The Company will therefore have a larger charge related to the expensing of equity awards for the years 2006 through 2008.
32
Table of Contents
The following is a summary of the incremental impact of all stock compensation expense and other long-term compensation recorded during the first nine months of 2006 and 2005, which includes expenses related to grants of both stock options and restricted stock units, along with the impact of the pre-tax expense amounts as a percentage of sales.
Stock-Based and Other Long Term Compensation
Historical Results
Historical Results
Nine Months Ended September 30, | Incremental | |||||||||||
2006 | 2005 | Expense | ||||||||||
(in millions of dollars) | ||||||||||||
Expensing required under SFAS No. 123(R)(a) | $ | 8.4 | $ | — | $ | 8.4 | ||||||
Previously required expensing(b) | 5.9 | 0.2 | 5.7 | |||||||||
Other non-equity based long term compensation | (0.2 | ) | 1.0 | (1.2 | ) | |||||||
Total long term executive compensation | $ | 14.1 | $ | 1.2 | $ | 12.9 | ||||||
% of Sales | 1.0 | % | 0.1 | % | 0.9 | % | ||||||
(a) | The Company has adopted SFAS 123(R) using the modified prospective method. Therefore, restatement of prior periods is not required. | |
(b) | Includes expensing of RSUs and PSUs under SFAS 123, and unvested stock options/unearned compensation related to GBC. |
Refer to Note 2 for information specific to the adoption of SFAS No. 123(R) in the condensed consolidated financial statements.
Operating Income
Operating income decreased $41.9 million, or 52%, to $39.1 million, and decreased as a percentage of sales to 2.7% from 8.3%. The decrease was driven by $31.4 million of higher restructuring and restructuring-related costs, and lower gross margin and higher SG&A expense as discussed above.
Interest, Other Expense (Income) and Income Taxes
Interest expense increased $34.2 million, to $47.2 million, as debt levels increased significantly in order to finance the transactions related to the spin-off from Fortune Brands and the merger with GBC. Other income increased $4.8 million to $4.1 million, primarily due to incremental foreign exchange gains in 2006 of $3.8 million and incremental earnings from the Company’s share of a GBC joint venture investment of $1.4 million.
Income tax for the first nine months of 2006 was a benefit of $12.5 million, compared to an expense of $37.3 million in the same period of 2005. Included in the first nine months of 2006 were tax benefits which reflect a reduction in taxes due on certain unrepatriated foreign earnings, a payment from Fortune Brands under a tax allocation agreement entered into in connection with the spin-off, and benefits from the Domestic Production Activities and Extraterritorial Income Exclusion. The effective tax rate for the nine months ended September 30, 2005 was unfavorably impacted by the repatriation expenses of foreign earnings, resulting from a reorganization to facilitate the merger of various foreign operations.
Net Income
Net income was $8.2 million compared to $33.3 million in the prior year period, and was significantly impacted by lower operating income and increased interest expense partially offset by the tax benefits described above. Included in net income for the nine months ended September 30, 2006 were restructuring and restructuring-related after-tax costs of $29.1 million, or $0.54 per diluted share. Similar after-tax costs in the 2005 period were $7.2 million or $0.19 per diluted share. Additionally, the change in accounting principle related to removal of the one-month lag in reporting by various of the Company’s foreign operations contributed $3.3 million of net income to the prior year.
33
Table of Contents
Nine Months Ended September 2006 versus 2005
Combined Companies — Pro Forma Discussion
The Company has included a “combined companies” discussion below as if GBC had been included in results since the beginning of the 2005 year. Restructuring and restructuring-related costs have been noted where appropriate, as management believes that a comparative review of operating income before restructuring and restructuring-related charges allows for a better understanding of the underlying business performance from year to year.
The presentation of, and supporting calculations related to, the 2005 pro forma information contained in this Management’s Discussion and Analysis is derived from the Company’s Report on Form 8-K furnished on February 14, 2006, except for our presentation of the one-time expense related to the step-up in inventory value that was recorded as an adjustment to the opening balance sheet of GBC. The pro forma results for the nine months presented in this discussion reflect the actual inventory cost resulting from the step-up of $3.6 million recognized in our reported results during the third quarter of 2005.
The following table presents ACCO Brands’ reported combined results and pro forma combined results for the nine months ended September 30, 2006 and 2005, respectively. Amounts of restructuring and restructuring-related charges are also presented for each period.
Combined Companies (Reported)
Nine Months Ended September 30, 2006 | ||||||||||||||||
Gross | Operating | |||||||||||||||
(in millions of dollars) | Net Sales | Profit | SG&A | Income | ||||||||||||
Reported results | $ | 1,430.4 | $ | 402.9 | $ | 329.7 | $ | 39.1 | ||||||||
Restructuring and restructuring-related charges included in the results: | ||||||||||||||||
Restructuring charges | — | — | — | 25.6 | ||||||||||||
Restructuring-related expense | — | 7.7 | 7.7 | 15.4 |
The Company has incurred a net total of $41.0 million in pre-tax restructuring, restructuring-related and merger and integration related expenses in the 2006 period. The charges were primarily related to the closure or consolidation of facilities, primarily in the United States and Europe, and associated employee termination benefits.
Combined Companies (Pro Forma)
Nine Months Ended September 30, 2005 | ||||||||||||||||
Gross | Operating | |||||||||||||||
(in millions of dollars) | Net Sales | Profit | SG&A | Income | ||||||||||||
Pro forma results | $ | 1,424.0 | $ | 412.4 | $ | 316.9 | $ | 85.9 | ||||||||
Restructuring and restructuring-related charges included in the results: | ||||||||||||||||
Restructuring charges | — | — | — | 1.4 | ||||||||||||
Restructuring-related expense (income) | — | (1.9 | ) | 15.4 | 13.5 |
Net Sales
Net sales increased $6.4 million, or 0.4%, to $1,430.4 million, primarily driven by volume growth related to new products across all business segments other than Office Products. Segmental sales growth was 8% for Computer Products, 4% for Commercial-IPFG, and 3% for Other Commercial. These increases were partially offset by a decrease in the Office Products Group of 2%, which resulted from both the exit of certain low margin business and the change in calendar days.
Gross Profit
Gross profit decreased $9.5 million, or 2%, to $402.9 million. Gross profit margin decreased to 28.2% from 29.0% and was adversely impacted by the increase in restructuring-related expenses of $9.6 million, or 0.7 margin points. The slight decline in underlying gross profit margin was due to increased raw material and freight costs, partially offset by sales price increases.
34
Table of Contents
SG&A (Advertising, selling, general and administrative expenses)
SG&A increased $12.8 million, or 4%, to $329.7 million and increased as a percentage of sales to 23.0% from 22.3%. The increase in SG&A was attributable to higher marketing and selling investments to drive growth, significantly higher cost related to expensing of equity based management incentive programs, and infrastructure costs to support our status as an independent public company, align our business model globally and develop our pan-European business model. These costs were partially offset by lower restructuring-related SG&A charges in the current year.
The following is a summary of the incremental impact of all stock compensation expense and other long-term compensation expense recorded during the first nine months of 2006 and 2005, which includes expenses related to grants of stock options, RSUs and PSUs, along with the impact of pre-tax expense amounts as a percentage of sales.
Stock-Based and Other Long Term Compensation
Combined Companies (Pro Forma)
Combined Companies (Pro Forma)
Nine Months Ended September 30, | Incremental | |||||||||||
(in millions of dollars) | 2006 | 2005 | Expense | |||||||||
Expensing required under SFAS No. 123(R)(a) | $ | 8.4 | $ | — | $ | 8.4 | ||||||
Previously required expensing(b) | 5.9 | 3.4 | 2.5 | |||||||||
Other non-equity based long term compensation | (0.2 | ) | 1.0 | (1.2 | ) | |||||||
Total long term executive compensation | $ | 14.1 | $ | 4.4 | $ | 9.7 | ||||||
% of Sales | 1.0 | % | 0.3 | % | 0.7 | % | ||||||
(a) | The Company has adopted SFAS 123(R) using the modified prospective method. Therefore, restatement of prior periods is not required. | |
(b) | Includes expensing of RSUs and PSUs under SFAS 123, and unvested stock options/unearned compensation related to GBC pre-merger grants under SFAS 141, “Business Combinations.” |
Operating Income
Operating income decreased $46.8 million, or 55%, to $39.1 million, and decreased as a percentage of sales to 2.7% from 6.0%. The decrease is attributable to the $26.1 million increase in restructuring and restructuring-related charges, and the lower gross margin and higher SG&A expenses as discussed above.
Net Income Before Change In Accounting Principle
Net income for the nine months ended September 30, 2006 was $8.2 million, or $0.15 per share, compared to $7.3 million, or $0.19 per share, before the change in accounting principle in the nine months ended September 30, 2005. The increase was due to the income tax benefits as discussed above partially offset by the lower operating income in the current year.
Segment Discussion
Office Products Group
Historical Results
Nine Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 947.2 | $ | 727.3 | $ | 219.9 | 30 | % | ||||||||
Operating income | 12.2 | 58.1 | (45.9 | ) | (79 | )% | ||||||||||
Operating income margin | 1.3 | % | 8.0 | % | (6.7 | )% |
Office Products net sales increased $219.9 million, or 30%, to $947.2 million. The increase was principally related to the acquisition of GBC.
35
Table of Contents
Office Products operating income declined $45.9 million to $12.2 million. The decrease resulted from higher restructuring and restructuring related costs, as well as an overall decline in operating margin due to higher cost related to expensing of equity-based management incentive programs, investments to change our European business model and higher raw material cost.
The table below provides Office Products’ reported combined results and pro forma combined results for the nine months ended September 30, 2006 and 2005, respectively. Amounts of restructuring and restructuring-related charges are also presented for each period.
Combined Companies (Pro Forma)
Nine Months Ended September 30, | Amount of Change | |||||||||||||||
2006 | 2005 | $ | % | |||||||||||||
(in millions of dollars) | (Reported) | (Pro forma) | ||||||||||||||
Net sales | $ | 947.2 | $ | 963.8 | $ | (16.6 | ) | (2 | )% | |||||||
Operating income | 12.2 | 64.4 | (52.2 | ) | (81 | )% | ||||||||||
Restructuring and related charges | 36.5 | 2.3 | 34.2 | NM |
Net sales decreased $16.6 million, or 2%, to $947.2 million. The impacts of the change in calendar and foreign currency translation negatively impacted sales by 1.0%. The remaining decline was due to the exit of certain low-margin products within the U.S. as well as loss of market share and unfavorable pricing in Europe, which offset growth in Australia and Latin America.
Office Products operating income declined $52.2 million to $12.2 million including restructuring and restructuring-related charges. Excluding the adverse impact of restructuring and restructuring-related charges of $34.2 million, the decline in operating profit and margin was mainly attributable to European operations, specifically unfavorable pricing coupled with higher raw material costs. The segment in total also saw increased charges related to equity-based incentives and increased investments in SG&A to transition to a pan-European business model.
Computer Products Group
Historical Results
Nine Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 165.3 | $ | 152.7 | $ | 12.6 | 8 | % | ||||||||
Operating income | 29.4 | 32.6 | (3.2 | ) | (10 | )% | ||||||||||
Operating income margin | 17.8 | % | 21.3 | % | (3.5 | )% | ||||||||||
Restructuring and related charges | 1.6 | — | 1.6 | NM |
Computer Products delivered strong sales growth for 2006, increasing $12.6 million, or 8%, to $165.3 million. The strong sales growth was driven by sales of iPod® accessories, mobile power adapters, notebook docking stations and security products, and was primarily the result of new product introductions.
Computer Products operating income decreased $3.2 million, or 10%, to $29.4 million. Operating margins decreased to 17.8% from 21.3%, principally due to planned increased investments in selling, marketing and product development activities and restructuring and restructuring-related charges of $1.6 million (representing an allocation of shared services charges). Operating margins are anticipated to decrease year over year by approximately 0.8% due to anticipated product mix change resulting from expected sales growth.
No pro forma information is provided for the Computer Products segment as it was not impacted by the GBC acquisition.
36
Table of Contents
Commercial — Industrial and Print Finishing Group
Historical Results
Nine Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 143.4 | $ | 24.8 | $ | 118.6 | NM | |||||||||
Operating income | 11.9 | 2.0 | 9.9 | NM | ||||||||||||
Operating income margin | 8.3 | % | 8.1 | % | 0.2 | % |
Commercial — Industrial and Print Finishing (“IPFG”) net sales were $143.4 million compared to $24.8 million in the prior year period, and operating income was $11.9 million compared to $2.0 million in the prior year period. The growth is attributable to 2005 results only representing activity subsequent to the GBC acquisition on August 17, 2005.
Combined Companies (Pro Forma)
Nine Months Ended September 30, | Amount of Change | |||||||||||||||
2006 | 2005 | $ | % | |||||||||||||
(in millions of dollars) | (Reported) | (Pro forma) | ||||||||||||||
Net sales | $ | 143.4 | $ | 138.3 | $ | 5.1 | 4 | % | ||||||||
Operating income | 11.9 | 10.6 | 1.3 | 12 | % |
IPFG net sales increased $5.1 million, or 4%, to $143.4 million. Growth was driven by improved sales from new product introductions, higher volume and increased selling prices to recover raw material cost increases.
IPFG operating income increased $1.3 million, or 12%, to $11.9 million. Operating income margins also improved to 8.3% from 7.7% in the prior year. The increase was due to inclusion of the expense related to the inventory acquisition step-up in 2005 of $0.9 million and higher sales volumes in the current year.
Other Commercial
Historical Results
Nine Months Ended September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2006 | 2005 | $ | % | ||||||||||||
Net sales | $ | 174.5 | $ | 69.7 | $ | 104.8 | 150 | % | ||||||||
Operating income | 11.7 | 6.0 | 5.7 | 95 | % | |||||||||||
Operating income margin | 6.7 | % | 8.6 | % | (1.9 | )% |
Other Commercial net sales increased by $104.8 million to $174.5 million. The acquisition of GBC’s Document Finishing businesses accounted for $107.7 million of the increase. Sales volumes at Day-Timers declined by $2.9 million with lower sales in its reseller channels and the change in calendar, offset in part by higher direct-to–end-user catalog sales.
Other Commercial operating income increased $5.7 million to $11.7 million. The acquisition of GBC accounted for substantially all of the increase. Operating income within our Day-Timers business was unfavorably impacted by the change in the calendar and by increased investment in customer acquisition programs.
Combined Companies (Pro Forma)
Nine Months Ended September 30, | Amount of Change | |||||||||||||||
2006 | 2005 | $ | % | |||||||||||||
(in millions of dollars) | (Reported) | (Pro forma) | ||||||||||||||
Net sales | $ | 174.5 | $ | 169.2 | $ | 5.3 | 3 | % | ||||||||
Operating income | 11.7 | 11.3 | 0.4 | 4 | % | |||||||||||
Restructuring and related charges | 0.3 | — | 0.3 | NM |
Net sales increased $5.3 million, or 3%. The increase was driven by higher pricing and volume in the Document Finishing businesses. This growth was partially offset by a 1.0% reduction in sales, primarily related to the Day-Timers business, which was a result of volume loss in the reseller channel and the change in calendar days for the comparative periods.
37
Table of Contents
Pro forma operating income increased $0.4 million, to $11.7 million. The improvement in operating income was due to the inclusion of expense related to the inventory acquisition step-up of $0.8 million in the prior year partially offset by higher sales volume and increased pricing in the current year.
Liquidity and Capital Resources
Our primary liquidity needs are to fund capital expenditures, service indebtedness and support working capital requirements. Our principal sources of liquidity are cash flows from operating activities and borrowings under our credit agreements and long-term notes. We maintain adequate financing arrangements at competitive rates. Our priority for cash flow over the near term, after internal growth, is to fund integration and restructuring-related activities and the reduction of debt that was incurred in connection with the merger with GBC and the spin-off from Fortune Brands.
Cash Flow from Operating Activities
Cash provided by operating activities was $60.7 million and $23.8 million for the nine months ended September 30, 2006 and 2005, respectively. Net income in 2006 was $8.2 million or $25.1 million less than 2005. Non-cash adjustments to net income were $62.1 million in 2006, compared to $22.7 million in 2005, on a pre-tax basis. The increase in non-cash items is principally attributable to the change in accounting for stock-based compensation as well as recognizing depreciation and amortization on the GBC businesses for the full nine months in 2006.
Principal cash items favorably affecting operating activities included:
• | Higher accounts payable as the Company benefited from extended payment terms, later timing of inventory purchases compared to the prior year and other cash management initiatives. | ||
• | Lower accounts receivable due to improved collection activities, including efficient resolution of disputed items, and modestly lower sales in the quarter. | ||
• | Substantially lower payments in 2006 of long term incentives and annual bonuses (accrued in 2005 and prior years) as a result of underachieved targets in 2005 compared to significant overachievement in the 2004 year. In addition, the first quarter of 2005 included payments amounting to $22.0 million related to long term incentives tied to the successful repositioning of the former ACCO World businesses. |
Principal cash items unfavorably affecting operating activities included:
• | Higher inventory levels resulting principally from lower than expected third quarter 2006 sales in Europe, and sourced inventory timing at Kensington, coupled with increased raw material and other product input costs. | ||
• | Higher payments for customer programs resulting from enhanced programs (customer consolidation & competitive pricing), including such programs associated with GBC. | ||
• | Increased payments of acquisition related interest expense, as the acquisition and spin-off related debt was not in place until the third quarter of 2005. | ||
• | Supplemental cash contributions to the GBC UK pension plan totaling $6.3 million in 2006. |
Cash Flow from Investing Activities
Cash used by investing activities was $13.1 million and $18.1 million for the nine months ended September 30, 2006 and 2005, respectively. Gross capital expenditure was $22.1 million in 2006 and $20.4 million in 2005; both years include substantial investment in enhanced information technology systems. In 2006, capital spending was partly offset by proceeds from the sale of assets of $5.5 million, of which $4.2 million related to the sale of our Perma business assets during the third quarter. In 2005, proceeds were $2.2 million, of which $1.8 million related to the sale of our Turin, Italy facility. The 2006 period also includes cash distributions received from the Company’s investments in unconsolidated subsidiaries of $1.4 million.
38
Table of Contents
Cash Flow from Financing Activities
Cash used by financing activities was $92.0 million in 2006. During the 2006 nine month period, the Company paid all of the required fiscal 2006 debt service of $24.7 million and paid down an additional $76 million of the Senior Secured Term Loan Credit Facilities. Cash used by financing activities in 2005 of $13.2 million included a number of substantial exchanges, including proceeds of $950.0 million from long-term credit facilities and notes, $625.0 million of dividends paid to shareholders of the former ACCO World Corporation, and the repayment of $293.6 million of debt assumed in the acquisition of GBC.
Capitalization
The Company’s total debt at September 30, 2006 was $854.4 million. The ratio of debt to stockholders’ equity at September 30, 2006 was 2.0 to 1.
As of September 30, 2006 the amount available for borrowings under the revolving credit facilities was $138.1 million (allowing for $11.9 million of letters of credit outstanding on that date).
On February 13, 2006 the Company entered into an amendment to its senior secured credit facilities waiving any default that may have arisen under those facilities as a result of the restatement of the Company’s financial statements.
As of and for the period ended September 30, 2006, the Company was in compliance with all applicable loan covenants.
Adequacy of Liquidity Sources
The Company believes that its internally generated funds, together with revolver availability under its senior secured credit facilities and its access to global credit markets, provide adequate liquidity to meet both its long-term and short-term capital needs with respect to operating activities, capital expenditures and debt service requirements. The Company’s existing credit facilities would not be affected by a change in its credit rating.
Critical Accounting Policies
Stock Based Compensation
The Company adopted SFAS No. 123(R) effective January 1, 2006, using the modified prospective method. Refer to Note 2 for further information.
Under SFAS No. 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. Determining the appropriate fair value model to use requires judgment. Determining the assumptions that enter into the model is highly subjective and also requires judgment, including long-term projections regarding stock price volatility, employee exercise, post-vesting termination, and pre-vesting forfeiture behaviors, interest rates and dividend yields. Management used the guidance outlined in Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB No. 107) relating to SFAS No. 123(R) in selecting a model and developing assumptions.
The Company has historically used the Black-Scholes model for estimating the fair value of stock options in providing the pro forma fair value method disclosures pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). After a review of alternatives, the Company decided to continue to use this model for estimating the fair value of stock options as it meets the fair value measurement objective of SFAS No. 123(R).
The Company has utilized historical volatility for a pool of peer companies for a period of time that is comparable to the expected life of the option to determine volatility assumptions. The weighted average expected option term reflects the application of the simplified method set out in SAB No. 107. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The forfeiture rate used to calculate compensation expense is primarily based on the Company’s estimate of employee forfeiture patterns based on the experience of Fortune Brands, Inc.
39
Table of Contents
The use of different assumptions would result in different amounts of stock compensation expense. Holding all other variables constant, the indicated change in each of the assumptions below increases or decreases the fair value of an option (and hence, expense), as follows:
Assumption | Change to Assumption | Impact on Fair Value of Option | ||
Expected volatility | Higher | Higher | ||
Expected life | Higher | Higher | ||
Risk-free interest rate | Higher | Higher | ||
Dividend yield | Higher | Lower |
The pre-vesting forfeitures assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeitures assumption would not impact the total amount of expense ultimately recognized over the vesting period. Different forfeitures assumptions would only impact the timing of expense recognition over the vesting period. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.
The fair value of an option is particularly impacted by the expected volatility and expected life assumptions. In order to understand the impact of changes in these assumptions on the fair value of an option, management performed sensitivity analyses. Holding all other variables constant, if the expected volatility assumption for the fourth quarter 2005 stock option grant were to increase by 5 percentage points, the fair value of a stock option would increase by approximately 10.2%, from $7.84 to $8.64. Alternately, if the expected volatility assumption for the fourth quarter 2005 stock option grant were to decrease by 5 percentage points, the fair value of a stock option would decrease by approximately 10.5%, from $7.84 to $7.02. Holding all other variables constant (including the expected volatility assumption), if the expected term assumption for the fourth quarter 2005 stock option grant were to increase by one year, the fair value of a stock option would increase by approximately 11.1% from $7.84 to $8.71.
Management is not able to estimate the probability of actual results differing from expected results, but believes the Company’s assumptions are appropriate, based upon the requirements of SFAS No. 123(R), the guidance included in SAB No. 107, and the Company’s historical and expected future experience.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(SFAS 157). The statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with limited exception. Any required transition adjustments (the difference between the carrying amounts and the fair value of those financial instruments at the date SFAS 157 is initially applied) should be recognized as a cumulative-effect adjustment to the opening balance of retained earnings for the fiscal year in which the statement is initially applied. When adopted in 2008, the implementation of this statement is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R)). This statement requires companies to (a) recognize the funded status of a benefit plan – measured as the difference between plan assets at fair value and the benefit obligation – in its statement of financial position; (b) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS 87Employers’ Accounting for Pensions, or SFAS 106,Employers’ Accounting for Postretirement Benefits Other Than Pensions; (c) measure defined benefit plan assets and obligations as of the date of the entity’s fiscal year-end statement of financial position; and (d) disclose in the notes to the financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation remaining from the initial
40
Table of Contents
application of Statements 87 and 106. Companies with publicly traded equity securities are required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company has performed an initial assessment of the impact of implementing SFAS 158. If the Company would have applied the reporting requirements using the fair value of plan assets, projected benefit obligation, and unrealized items as of December 31, 2005, shareholders’ equity would decrease by approximately $50 million, net of tax. Additionally, the Company will be required to change the measurement date of its United Kingdom pension plan in 2007.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. FIN 48 establishes a two-step process consisting of (a) recognition and (b) measurement for evaluating a tax position. The interpretation provides that a position should be recognized if it is more likely than not that a tax position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Any differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in an increase in a liability for income taxes payable or a reduction of an income tax refund receivable; a reduction in a deferred tax asset or an increase in a deferred tax liability; or both. This interpretation is effective for fiscal years beginning after December 15, 2006. The provisions of the Interpretation should be applied to all tax positions upon initial adoption. The cumulative effect of applying the provisions of this Interpretation should be reported as an adjustment to the opening balance of retained earnings as of the date of adoption. The implementation of this interpretation is not expected to have a material effect on the Company’s annual Consolidated Financial Statements.
In June 2006 the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-3How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)(EITF 06-3). The consensuses reached in EITF 06-3 provide that presentation of any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer, which could include sales, use, value added and other excise taxes on either a gross or a net basis is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22,Disclosure of Accounting Policies. In addition, the Task Force noted that for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The consensuses in EITF 06-3 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006, with earlier application permitted. The application of the consensuses in this Issue is not expected to have a material effect on the Company’s Consolidated Financial Statements, as the Company currently records the taxes discussed in EITF 06-3 on a net basis.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements.
Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “roll-over” method and the “iron curtain” method. The roll-over method focuses primarily on the impact of a misstatement on the income statement—including the reversing effect of prior year misstatements—but its use can lead to the accumulation of misstatements in the balance sheet. The iron-curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. Prior to our application of the guidance in SAB 108, we used the iron curtain method for quantifying financial statement misstatements.
In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the iron curtain and the roll-over methods.
SAB 108 permits existing public companies to initially apply its provisions either by (i) restating prior financial statements as if the “dual approach” had always been applied or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the
41
Table of Contents
opening balance of retained earnings. The Company will adopt SAB 108 on December 31, 2006 and does not expect its implementation to have any effect on the Company’s Consolidated Financial Statements.
Forward-Looking Statements
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report contain, and other periodic reports and press releases of the Company may contain, certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends 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 is 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 Company, are generally identifiable by use of the words “will”, “believe,” “expect,” “intend,” “anticipate,” “estimate,” “forecast,” “project,” “plan,” or similar expressions. The Company’s 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 rely on such forward-looking statements when deciding whether to buy, sell or hold the Company’s securities. The Company undertakes no obligation to update these forward-looking statements in the future. Among the factors that could cause plans, actions and results to differ materially from current expectations are: fluctuations in cost and availability of raw materials; competition within the markets in which the Company operates; the effects of both general and extraordinary economic, political and social conditions; the dependence of the Company on certain suppliers of manufactured products; the effect of consolidation in the office products industry; the risk that businesses that have been combined into the Company as a result of the merger with General Binding Corporation will not be integrated successfully; the risk that targeted cost savings and synergies from the aforesaid merger and other previous business combinations may not be fully realized or take longer to realize than expected; disruption from business combinations making it more difficult to maintain relationships with the Company’s customers, employees or suppliers; foreign exchange rate fluctuations; the development, introduction and acceptance of new products; the degree to which higher raw material costs, and freight and distribution costs, can be passed on to customers through selling price increases and the effect on sales volumes as a result thereof; increases in health care, pension and other employee welfare costs; as well as other risks and uncertainties detailed from time to time in the Company’s SEC filings.
ITEM 3. QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. There has been no material change to disclosures made therein on Foreign Exchange Risk Management or Interest Rate Risk Management through the period ended September 30, 2006 or through the date of this report.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company’s management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2006.
(b) Changes in Internal Control Over Financial Reporting.
There have not been any changes in the Company’s internal control over financial reporting that occurred during the three month period ending September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
42
Table of Contents
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in various claims and legal proceedings associated with their business and operations. It is not possible to predict the outcome of the pending actions, but management believes that there are meritorious defenses to these actions and that these actions if adjudicated or settled in a manner adverse to the Company, would not have a material adverse effect upon the results of operations, cash flows or financial condition of the Company.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A.Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2005. Those risk factors described in that annual report could materially adversely affect our business, financial condition or future results. The risks described in that annual report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently consider immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Number | Description | |||
10.1 | Amendment No. 3 dated as of August 11, 2006 to the Credit Agreement dated as of August 17, 2005 among the Company, certain of its subsidiaries, the Lenders party thereto and Citicorp North America, Inc., as administrative agent. * | |||
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. * | |||
31.3 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |||
31.4 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** |
* | Filed herewith. | |
** | Furnished herewith |
43
Table of Contents
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/ David D. Campbell | |||||
David D. Campbell | ||||||
Chairman of the Board 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/ Thomas P. O’Neill, Jr. | |||||
Thomas P. O’Neill, Jr. | ||||||
Vice President, Finance and Accounting | ||||||
(principal accounting officer) |
November 9, 2006
44