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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, 2007
Commission File Number 001-08454
ACCO Brands Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) | 36-2704017 (I.R.S. Employer 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)
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, 2007, the registrant had outstanding 54,085,711 shares of Common Stock.
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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, contained in the Company’s annual report onForm 10-K for the year ended December 31, 2006, and discussions set forth in PART I, ITEM 2. Management’s Discussion and Analysis of Financial Condition 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.
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 for the year ended December 31, 2006.
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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, | |||||||
2007 | 2006 | |||||||
(in millions of dollars) | (Unaudited) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 44.1 | $ | 50.0 | ||||
Accounts receivable, net | 394.3 | 427.4 | ||||||
Inventories, net | 307.4 | 277.6 | ||||||
Deferred income taxes | 38.7 | 37.2 | ||||||
Other current assets | 37.5 | 30.0 | ||||||
Total current assets | 822.0 | 822.2 | ||||||
Property, plant and equipment, net | 225.0 | 217.2 | ||||||
Deferred income taxes | 76.3 | 79.2 | ||||||
Goodwill | 451.9 | 438.3 | ||||||
Identifiable intangibles, net | 230.9 | 233.6 | ||||||
Other assets | 83.6 | 59.1 | ||||||
Total assets | $ | 1,889.7 | $ | 1,849.6 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Notes payable to banks | $ | 15.6 | $ | 4.7 | ||||
Current portion of long-term debt | 14.7 | 0.1 | ||||||
Accounts payable | 176.3 | 189.2 | ||||||
Accrued compensation | 35.3 | 36.5 | ||||||
Accrued customer program liabilities | 112.7 | 121.9 | ||||||
Other current liabilities | 128.1 | 143.7 | ||||||
Total current liabilities | 482.7 | 496.1 | ||||||
Long-term debt | 793.0 | 800.3 | ||||||
Deferred income taxes | 93.4 | 99.7 | ||||||
Postretirement and other liabilities | 84.4 | 69.5 | ||||||
Total liabilities | 1,453.5 | 1,465.6 | ||||||
Commitments and Contingencies —Note 12 | ||||||||
Common stock | 0.6 | 0.6 | ||||||
Treasury stock | (1.1 | ) | (1.1 | ) | ||||
Paid-in capital | 1,388.7 | 1,374.6 | ||||||
Accumulated other comprehensive loss | (25.4 | ) | (50.1 | ) | ||||
Accumulated deficit | (926.6 | ) | (940.0 | ) | ||||
Total stockholders’ equity | 436.2 | 384.0 | ||||||
Total liabilities and stockholders’ equity | $ | 1,889.7 | $ | 1,849.6 | ||||
See notes to condensed consolidated financial statements.
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ACCO Brands Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions of dollars, except per share data) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Net sales | $ | 494.7 | $ | 499.2 | $ | 1,405.5 | $ | 1,430.4 | ||||||||
Cost of products sold | 346.5 | 352.8 | 989.4 | 1,027.5 | ||||||||||||
Advertising, selling, general and administrative expenses | 107.2 | 112.6 | 333.3 | 329.7 | ||||||||||||
Amortization of intangibles | 2.6 | 2.5 | 7.9 | 8.5 | ||||||||||||
Restructuring and asset impairment charges | 11.4 | 5.8 | 14.5 | 25.6 | ||||||||||||
Operating income | 27.0 | 25.5 | 60.4 | 39.1 | ||||||||||||
Interest expense, net | 16.5 | 16.5 | 47.4 | 47.2 | ||||||||||||
Other income, net | (3.0 | ) | (2.4 | ) | (5.5 | ) | (4.1 | ) | ||||||||
Income (loss) before income taxes and minority interest | 13.5 | 11.4 | 18.5 | (4.0 | ) | |||||||||||
Income taxes | 4.6 | (6.9 | ) | 4.6 | (12.5 | ) | ||||||||||
Minority interest | 0.2 | 0.2 | 0.5 | 0.3 | ||||||||||||
Net income | $ | 8.7 | $ | 18.1 | $ | 13.4 | $ | 8.2 | ||||||||
Basic earnings per common share | $ | 0.16 | $ | 0.34 | $ | 0.25 | $ | 0.15 | ||||||||
Diluted earnings per common share | $ | 0.16 | $ | 0.33 | $ | 0.24 | $ | 0.15 | ||||||||
Weighted average number of shares outstanding: | ||||||||||||||||
Basic | 54.0 | 53.5 | 54.0 | 53.3 | ||||||||||||
Diluted | 55.0 | 54.3 | 55.0 | 54.1 |
See notes to condensed consolidated financial statements.
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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) | 2007 | 2006 | ||||||
Operating activities | ||||||||
Net income | $ | 13.4 | $ | 8.2 | ||||
Restructuring, impairment and other non-cash charges | 1.2 | 5.2 | ||||||
Loss on sale of assets | 0.2 | 0.9 | ||||||
Depreciation | 25.2 | 29.5 | ||||||
Amortization of debt issuance costs | 3.2 | 3.7 | ||||||
Amortization of intangibles | 7.9 | 8.5 | ||||||
Stock-based compensation | 10.3 | 14.3 | ||||||
Changes in balance sheet items: | ||||||||
Accounts receivable | 43.7 | 38.7 | ||||||
Inventories | (23.1 | ) | (16.8 | ) | ||||
Other assets | (7.3 | ) | (7.4 | ) | ||||
Accounts payable | (18.9 | ) | 19.9 | |||||
Accrued expenses and other liabilities | (32.1 | ) | (17.2 | ) | ||||
Income taxes | (4.6 | ) | (24.2 | ) | ||||
Other operating activities, net | (3.5 | ) | (1.2 | ) | ||||
Net cash provided by operating activities | 15.6 | 62.1 | ||||||
Investing activities | ||||||||
Additions to property, plant and equipment | (38.1 | ) | (22.1 | ) | ||||
Proceeds from the disposition of assets | 0.8 | 5.5 | ||||||
Other investing activities | — | 2.1 | ||||||
Net cash used by investing activities | (37.3 | ) | (14.5 | ) | ||||
Financing activities | ||||||||
Repayments of long-term debt | — | (100.8 | ) | |||||
Borrowings (repayments) of short-term debt, net | 10.3 | (0.8 | ) | |||||
Proceeds from the exercise of stock options | 3.7 | 9.8 | ||||||
Other financing activities | — | (0.2 | ) | |||||
Net cash provided (used) by financing activities | 14.0 | (92.0 | ) | |||||
Effect of foreign exchange rate changes on cash | 1.8 | 2.6 | ||||||
Net decrease in cash and cash equivalents | (5.9 | ) | (41.8 | ) | ||||
Cash and cash equivalents | ||||||||
Beginning of period | 50.0 | 91.1 | ||||||
End of period | $ | 44.1 | $ | 49.3 | ||||
See notes to condensed consolidated financial statements.
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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.
Certain reclassifications have been made in the prior period’s financial statements to conform to the current year presentation.
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Company believes the disclosures are adequate to make the information presented not misleading, certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006.
The condensed consolidated balance sheet as of September 30, 2007, the related condensed consolidated statements of income for the three and nine months ended September 30, 2007 and 2006, and the related condensed consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006 are unaudited. The year-end condensed consolidated 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 preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (FASB) 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. As a result of the implementation of FIN 48, the Company did not recognize an increase or decrease in the liability for unrecognized tax benefits.
Effective January 1, 2007, the Company realigned and reclassified certain businesses, resulting in a change in the Company’s reportable segments. Prior year amounts included herein have been restated to conform to the current year presentation.
2.Significant Accounting Policies
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes, deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce deferred tax assets to an amount that is more likely than not to be realized.
The amount of income taxes that we pay is subject to ongoing audits by federal, state and foreign tax authorities. The Company’s estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at each reporting date. Tax positions are recognized as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority, when it is more likely than not, based on technical merits, that the position will be sustained upon examination. 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.
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The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income taxes in its results of operations.
3.Information on Business Segments
As of January 1, 2007, the Company realigned and reclassified certain businesses, resulting in the following changes:
• | The Company created a new business segment, the Document Finishing Group, which consists of the following businesses: |
o | the businesses comprising its former Other Commercial segment (consisting of the Document Finishing and Day-Timers businesses); | ||
o | the Company’s document communication business, which was transferred from the Office Products Group; and | ||
o | the Company’s high-speed and other binding business, which was transferred from the former Industrial Print Finishing Group (“IPFG”) business segment. |
• | In addition, the remaining components of the former IPFG business segment began reporting as the Commercial Laminating Solutions Group business segment to more appropriately reflect the remaining operations. |
The Company’s realigned business segments are further described below.
Office Products Group
The Office Products Group includes three 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) and Storage and Organization (storage bindery, filing systems, 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.
Document Finishing Group
The Document Finishing Group provides document solutions throughout a document’s lifecycle. Primary solutions include Finishing (binding, lamination and punching equipment, binding and lamination supplies, report covers, and custom and stock binders and folders), Archival (report covers), Destruction (shredders) and Services (machine maintenance and repair services). Also included in this business is our Personal Planning Solutions business (personal organization tools, including time management products), primarily under the Day-Timer® brand name.
Document Finishing products are manufactured both internally and by third-party manufacturing partners. Products are sold directly to high volume end-users, commercial reprographic centers and indirectly to lower volume consumers worldwide.
Our Day-Timers business includes U.S., New Zealand and U.K. operating companies, which sell products regionally to consumers, 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 customers. The remainder of the business sells to large resellers and commercial dealers.
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Computer Products Group
The Computer Products Group 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®. The Computer Products Group 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 suppliers, principally in Asia, and are stored and distributed from our regional facilities. Our computer products are sold primarily to consumer electronic retailers, information technology value-added resellers, original equipment manufacturers and office products retailers.
Commercial Laminating Solutions Group
The Commercial Laminating Solutions Group (“CLSG”) targets book publishers, “print-for-pay” and other finishing customers who use our professional grade finishing equipment and supplies. CLSG’s primary products include thermal and pressure-sensitive laminating films, mid-range and commercial high-speed laminators and large-format digital print laminators. CLSG’s products and services are sold worldwide through direct, dealer and other channels.
Financial information by reportable segment is set forth below. All prior year information has been restated to reflect the January 1, 2007 changes in business segments.
Net sales by business segment are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Office Products Group | $ | 244.8 | $ | 252.3 | $ | 690.4 | $ | 714.7 | ||||||||
Document Finishing Group | 145.9 | 142.8 | 422.6 | 420.0 | ||||||||||||
Computer Products Group | 60.3 | 62.2 | 163.0 | 165.3 | ||||||||||||
Commercial Laminating Solutions Group | 43.7 | 41.9 | 129.5 | 130.4 | ||||||||||||
Net sales | $ | 494.7 | $ | 499.2 | $ | 1,405.5 | $ | 1,430.4 | ||||||||
Operating income by business segment is as follows (a):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Office Products Group | $ | 14.4 | $ | 11.9 | $ | 38.4 | $ | 11.3 | ||||||||
Document Finishing Group | 4.9 | 5.6 | 14.1 | 15.9 | ||||||||||||
Computer Products Group | 14.0 | 14.6 | 29.5 | 29.4 | ||||||||||||
Commercial Laminating Solutions Group | 0.3 | 1.4 | 0.9 | 8.6 | ||||||||||||
Subtotal | 33.6 | 33.5 | 82.9 | 65.2 | ||||||||||||
Corporate | (6.6 | ) | (8.0 | ) | (22.5 | ) | (26.1 | ) | ||||||||
Operating income | 27.0 | 25.5 | 60.4 | 39.1 | ||||||||||||
Interest expense | 16.5 | 16.5 | 47.4 | 47.2 | ||||||||||||
Other income | (3.0 | ) | (2.4 | ) | (5.5 | ) | (4.1 | ) | ||||||||
Income (loss) before income taxes and minority interest | $ | 13.5 | $ | 11.4 | $ | 18.5 | $ | (4.0 | ) | |||||||
(a) | Operating income as presented in the segment table above is defined as i) net sales; ii) less cost of products sold; iii) less advertising, selling, general and administrative expenses; iv) less amortization of intangibles; and v) less restructuring charges. |
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Segment assets:
The following table presents the measure of segment assets used by the Company’s chief operating decision maker (b), as required by Statement of Financial Accounting Standards No. 131,Disclosures about Segments of an Enterprise and Related Information.
September 30, | December 31, | |||||||
(in millions of dollars) | 2007 | 2006 | ||||||
Office Products Group | $ | 509.7 | $ | 492.4 | ||||
Document Finishing Group | 275.2 | 280.3 | ||||||
Computer Products Group | 105.9 | 100.4 | ||||||
Commercial Laminating Solutions Group | 90.7 | 84.5 | ||||||
Total segment assets (b) | 981.5 | 957.6 | ||||||
Unallocated assets | 904.9 | 889.0 | ||||||
Corporate | 3.3 | 3.0 | ||||||
Total assets | $ | 1,889.7 | $ | 1,849.6 | ||||
(b) | Represents total assets, excluding: goodwill and identifiable intangibles resulting from business acquisitions, intercompany balances, cash, deferred taxes, prepaid pension assets, prepaid debt issuance costs and joint ventures accounted for on the equity basis. |
As a supplement to the presentation of segment assets presented above, the table below presents segment assets, including the allocation of identifiable intangible assets and goodwill resulting from business combinations (c).
September 30, | December 31, | |||||||
(in millions of dollars) | 2007 | 2006 | ||||||
Office Products Group | $ | 852.4 | $ | 828.4 | ||||
Document Finishing Group | 462.2 | 464.5 | ||||||
Computer Products Group | 123.8 | 118.2 | ||||||
Commercial Laminating Solutions Group | 225.9 | 218.4 | ||||||
Total segment assets (c) | 1,664.3 | 1,629.5 | ||||||
Unallocated assets | 222.1 | 217.1 | ||||||
Corporate | 3.3 | 3.0 | ||||||
Total assets | $ | 1,889.7 | $ | 1,849.6 | ||||
(c) | Represents total assets, excluding: intercompany balances, cash, deferred taxes, prepaid pension assets, prepaid debt issuance costs and joint ventures accounted for on the equity basis. |
4.Restructuring and Restructuring-Related Charges
In March, 2005, the Company announced its plan to merge with General Binding Corporation (“GBC”) and took certain restructuring actions in preparation for the merger. Subsequent to the merger, significant restructuring actions have been initiated, which have resulted in the closure or consolidation of facilities that are engaged in manufacturing and distributing the Company’s products, primarily in North America and Europe. The Company recorded pre-tax restructuring and asset impairment charges of $11.4 million and $5.8 million during the three months ended September 30, 2007 and 2006, respectively, and $14.5 million and $25.6 million during the nine months ended September 30, 2007 and 2006, respectively, related to these actions. Additional charges are expected to be incurred throughout 2007 and 2008 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, 2007 are as follows:
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Balance at | Non-cash | Balance at | ||||||||||||||||||
December 31, | Cash | Write-offs/ | September 30, | |||||||||||||||||
(in millions of dollars) | 2006 | Total Provision | Expenditures | Currency Change | 2007 | |||||||||||||||
Employee termination costs | $ | 18.0 | $ | 13.9 | $ | (10.0 | ) | $ | 0.8 | $ | 22.7 | |||||||||
Termination of lease agreements | 4.5 | 0.3 | (2.8 | ) | — | 2.0 | ||||||||||||||
Subtotal | 22.5 | 14.2 | (12.8 | ) | 0.8 | 24.7 | ||||||||||||||
Asset impairments(1) | — | 0.3 | — | (0.3 | ) | — | ||||||||||||||
Net loss on disposal of assets resulting from restructuring activities | 0.1 | — | — | (0.1 | ) | — | ||||||||||||||
Total rationalization of operations | $ | 22.6 | $ | 14.5 | $ | (12.8 | ) | $ | 0.4 | $ | 24.7 | |||||||||
(1) | Included in the total restructuring provision recognized during the nine months ended September 30, 2007 is a pre-tax charge of $0.3 million related to the exit of a facility meeting the criteria for recognition as an impaired disposal 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. |
Of the 1,309 positions planned for elimination under restructuring initiatives provided for through September 30, 2007, 823 had been eliminated as of the balance sheet date.
Management expects the $22.7 million employee termination costs balance to be substantially paid within the next twelve months. Lease costs included in the $2.0 million balance are expected to continue until the last lease terminates in 2013.
In association with the Company’s restructuring activities, 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, outside consulting and strategic product category exits. For the nine months ended September 30, 2007 and 2006 these charges totaled $23.1 million and $14.6 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 nine months ended September 30, 2006 and were classified in advertising, selling, general and administrative expense in the income statement.
5.Acquisition and Merger
On August 17, 2005, 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 determination of goodwill required in the purchase price allocation related to the acquisition included 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 was $33.4 million.
The following table provides a reconciliation of the activity by cost category from December 31, 2006 through September 30, 2007.
Balance at | Non-cash | Balance at | ||||||||||||||||||
December 31, | Adjustments to | Cash | Write-offs/ | September 30, | ||||||||||||||||
(in millions of dollars) | 2006 | Reserve | Expenditures | Currency Change | 2007 | |||||||||||||||
Employee termination costs | $ | 7.7 | $ | (0.5 | ) | $ | (4.0 | ) | $ | — | $ | 3.2 | ||||||||
Termination of lease agreements | 8.2 | (0.1 | ) | (1.6 | ) | 0.3 | 6.8 | |||||||||||||
Other | 1.7 | (0.2 | ) | (0.3 | ) | 0.1 | 1.3 | |||||||||||||
Total | $ | 17.6 | $ | (0.8 | ) | $ | (5.9 | ) | $ | 0.4 | $ | 11.3 | ||||||||
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6.Stock -Based Compensation
The following table summarizes the Company’s stock-based compensation (including stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”)) for the three and nine months ended September 30, 2007 and 2006.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Stock option compensation expense | $ | 1.5 | $ | 3.2 | $ | 5.1 | $ | 9.5 | ||||||||
RSU compensation expense | 1.0 | 0.8 | 3.3 | 2.7 | ||||||||||||
PSU compensation expense | — | 0.7 | 1.9 | 2.1 | ||||||||||||
Total | $ | 2.5 | $ | 4.7 | $ | 10.3 | $ | 14.3 | ||||||||
Unrecognized compensation cost related to unvested stock options, RSUs and PSUs was approximately $4.9 million, $7.7 million and $6.8 million, respectively, as of September 30, 2007.
On March 16, 2007, the Company’s Board of Directors approved a stock compensation grant, which consisted of 301,250 stock options, 145,700 RSUs and 287,750 PSUs. The Company’s Board of Directors approved additional grants of 143,975 RSUs on May 16, 2007 and 3,500 stock options, 3,500 RSUs and 3,500 PSUs on August 7, 2007.
7.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) | 2007 | 2006 | ||||||
Raw materials | $ | 33.8 | $ | 37.0 | ||||
Work in process | 10.5 | 10.8 | ||||||
Finished goods | 263.1 | 229.8 | ||||||
Total inventories | $ | 307.4 | $ | 277.6 | ||||
8.Goodwill and Intangibles
Goodwill
As discussed in Note 3, as of January 1, 2007, the Company realigned and reclassified certain businesses and began reporting under this new structure in the first quarter of 2007. The December 31, 2006 goodwill balances presented below have been reallocated to the new reportable business segments to reflect this new structure. The goodwill balances by business segment as of December 31, 2006 and September 30, 2007 are as follows:
(in millions of dollars) | Balance at | Translation | Balance at | |||||||||
Reportable Segment | December 31, 2006 | and Other | September 30, 2007 | |||||||||
Office Products Group | $ | 204.4 | $ | 7.2 | $ | 211.6 | ||||||
Document Finishing Group | 133.7 | 4.1 | 137.8 | |||||||||
Computer Products Group | 6.9 | — | 6.9 | |||||||||
Commercial Laminating Solutions Group | 93.3 | 2.3 | 95.6 | |||||||||
Total | $ | 438.3 | $ | 13.6 | $ | 451.9 | ||||||
Identifiable Intangible Assets
The gross carrying value and accumulated amortization by class of identifiable intangible assets as of September 30, 2007 and December 31, 2006 are as follows:
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September 30, 2007 | December 31, 2006 | |||||||||||||||||||||||
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 | $ | 195.7 | $ | (44.5 | ) | $ | 151.2 | $ | 192.3 | $ | (44.5 | )(1) | $ | 147.8 | ||||||||||
Amortizable intangible assets: | ||||||||||||||||||||||||
Trade names | 71.2 | (26.6 | ) | 44.6 | 69.8 | (23.9 | ) | 45.9 | ||||||||||||||||
Customer and contractual relationships | 41.0 | (14.9 | ) | 26.1 | 39.4 | (9.7 | ) | 29.7 | ||||||||||||||||
Patents/proprietary technology | 12.1 | (3.1 | ) | 9.0 | 12.1 | (1.9 | ) | 10.2 | ||||||||||||||||
Subtotal | 124.3 | (44.6 | ) | 79.7 | 121.3 | (35.5 | ) | 85.8 | ||||||||||||||||
Total identifiable intangibles | $ | 320.0 | $ | (89.1 | ) | $ | 230.9 | $ | 313.6 | $ | (80.0 | ) | $ | 233.6 | ||||||||||
(1) | Accumulated amortization prior to the adoption of SFAS No. 142,Goodwill and Other Intangible Assets. |
The Company’s intangible amortization expense was $2.6 million and $2.5 million for the three months ended September 30, 2007 and 2006, respectively, and $7.9 million and $8.5 million for the nine months ended September 30, 2007 and 2006, respectively. Estimated 2007 amortization expense is $10.4 million, and is expected to decline by approximately $1.0 million for each of the five years following.
As more fully described in the Company’s 2006 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 and concluded that no impairment existed.
As a part of the annual impairment review, the Company concluded that the fair value of the reporting units in the CLSG operating segment marginally exceeded book value. Management does not believe that an impairment is probable at this time. However, the near term CLSG profitability forecast is expected to be less than that experienced in the prior year, and will require improvement in future periods to sustain its carrying value. If the performance of the segment does not meet or exceed those expectations, a future impairment could result for a portion or all of the goodwill valued at $95.6 million as of September 30, 2007. The quantification of any impairment would be dependent on the performance of the segment, which is dependent upon a number of variables that cannot be predicted with certainty.
9.Pension and Other Retiree Benefits
The components of net periodic benefit cost for pension and postretirement plans for the three and nine months ended September 30, 2007 and 2006 are as follows:
Three Months Ended September 30, | ||||||||||||||||||||||||
Pension Benefits | ||||||||||||||||||||||||
U.S. | International | Postretirement | ||||||||||||||||||||||
(in millions of dollars) | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
Service cost | $ | 1.6 | $ | 1.6 | $ | 1.5 | $ | 1.2 | $ | — | $ | 0.1 | ||||||||||||
Interest cost | 2.2 | 2.5 | 3.8 | 3.2 | 0.2 | 0.2 | ||||||||||||||||||
Expected return on plan assets | (2.9 | ) | (3.5 | ) | (5.0 | ) | (4.2 | ) | — | — | ||||||||||||||
Amortization of prior service cost | — | — | 0.1 | 0.3 | — | — | ||||||||||||||||||
Amortization of net loss (gain) | 0.1 | 0.4 | 0.8 | 0.7 | (0.1 | ) | (0.2 | ) | ||||||||||||||||
Total net periodic benefit cost | $ | 1.0 | $ | 1.0 | $ | 1.2 | $ | 1.2 | $ | 0.1 | $ | 0.1 | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
Pension Benefits | ||||||||||||||||||||||||
U.S. | International | Postretirement | ||||||||||||||||||||||
(in millions of dollars) | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | ||||||||||||||||||
Service cost | $ | 6.0 | $ | 4.9 | $ | 4.3 | $ | 3.6 | $ | 0.2 | $ | 0.2 | ||||||||||||
Interest cost | 6.4 | 7.5 | 11.4 | 9.2 | 0.7 | 0.7 | ||||||||||||||||||
Expected return on plan assets | (8.5 | ) | (10.5 | ) | (14.8 | ) | (12.2 | ) | — | — | ||||||||||||||
Amortization of prior service cost | (0.1 | ) | (0.1 | ) | 0.4 | 0.9 | — | — | ||||||||||||||||
Amortization of net loss (gain) | 0.8 | 1.3 | 2.3 | 2.0 | (0.5 | ) | (0.5 | ) | ||||||||||||||||
Total net periodic benefit cost | $ | 4.6 | $ | 3.1 | $ | 3.6 | $ | 3.5 | $ | 0.4 | $ | 0.4 | ||||||||||||
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The Company expects to contribute approximately $6.5 million to its pension plans in 2007. For the nine months ended September 30, 2007, the Company has contributed approximately $5.1 million to those plans.
During the third quarter the Company experienced a pension curtailment as a significant number of U.S. employees were involuntarily terminated in connection with the Company’s restructuring initiatives. As of the date of curtailment, the Company remeasured its pension plan expense and pension plan obligation. The impact of the curtailment was insignificant. The remeasurement resulted in a significant reduction of full year pension expense, $1.9 million, of which $0.8 million was recognized in the third quarter. This significant decrease was due to a number of factors:
• | An increase in the discount rate for the U.S. plan from 5.94% to 6.47%. | ||
• | Updated demographic assumptions, particularly updated withdrawal experience. | ||
• | Actual asset gains realized in the first part of the year. |
Total U.S. pension cost for 2007 is now expected to be $5.4 million, compared to $4.4 million in 2006.
10.Long-term Debt and Short-term Borrowings
Notes payable and long-term debt consisted of the following at September 30, 2007 and December 31, 2006:
September 30, | December 31, | |||||||
(in millions of dollars) | 2007 | 2006 | ||||||
U.S. Dollar Senior Secured Term Loan Credit Facility (weighted-average floating interest rate of 7.23% at September 30, 2007 and 7.12% at December 31, 2006) | $ | 316.0 | $ | 316.0 | ||||
British Pound Senior Secured Term Loan Credit Facility (weighted-average floating interest rate of 8.16% at September 30, 2007 and 7.20% at December 31, 2006) | 68.5 | 66.3 | ||||||
Euro Senior Secured Term Loan Credit Facility (weighted-average floating interest rate of 6.30% at September 30, 2007 and 5.61% at December 31, 2006) | 72.4 | 67.5 | ||||||
Euro Senior Secured Revolving Credit Facility (floating interest rate of 6.21% at September 30, 2007) | 11.3 | — | ||||||
U.S. Dollar Senior Subordinated Notes, due 2015 (fixed interest rate of 7.625%) | 350.0 | 350.0 | ||||||
Other borrowings | 5.1 | 5.3 | ||||||
Total debt | 823.3 | 805.1 | ||||||
Less: current portion | (30.3 | ) | (4.8 | ) | ||||
Total long-term debt | $ | 793.0 | $ | 800.3 | ||||
As more fully described in the Company’s 2006 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, 2007 and December 31, 2006, the Company was in compliance with all applicable covenants.
11.Earnings per Share
Total outstanding shares as of September 30, 2007 and 2006 were 54.1 million and 53.6 million, respectively. 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 assumes that any common shares outstanding were increased by shares that would be issued upon exercise of those stock units for which the average market price for the period exceeds the exercise price; less, the shares that could have been purchased by the Company with the related proceeds, including compensation expense measured but not yet recognized, net of tax.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Weighted average number of common shares outstanding — basic | 54.0 | 53.5 | 54.0 | 53.3 | ||||||||||||
Employee stock options | 0.8 | 0.8 | 0.8 | 0.8 | ||||||||||||
Restricted stock units | 0.2 | — | 0.2 | — | ||||||||||||
Adjusted weighted-average shares and assumed conversions (1) — diluted | 55.0 | 54.3 | 55.0 | 54.1 | ||||||||||||
(1) | The Company has dilutive shares related to stock options and restricted stock units that were granted under the Company’s stock compensation plans. As of September 30, 2007 and 2006, the Company had anti-dilutive shares of 2.0 million and 1.8 million, respectively. |
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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 operations, 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, 2007 and 2006 was $24.9 million and $19.8 million, respectively, and during the nine months ended September 30, 2007 and 2006, was $38.1 million and $0.0 million, respectively. The total comprehensive income recognized in the current year was principally due to foreign currency translation adjustments and net income realized.
14.Income Taxes
For the nine months ended September 30, 2007, the Company recorded income tax expense of $4.6 million versus an income tax benefit of $12.5 million in the prior year. The lower than statutory tax rate of 24.9% in the current year was principally due to the tax benefit of the restructuring and restructuring related charges and an excess foreign tax credit associated with dividends received during the first nine months. The tax benefits for the prior year include a reduction in taxes due on certain unrepatriated foreign earnings, a settlement of the prior year’s tax return, a settlement with the Company’s former parent 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 Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. All tax returns filed by ACCO Brands legacy entities for tax years ended on or before August 15, 2005 are subject to a tax indemnification agreement between the Company and Fortune Brands, Inc. (“Fortune Brands”). Pursuant to that agreement, Fortune Brands will reimburse ACCO Brands for cumulative taxes, interest, penalties, and out of pocket expenses incurred in excess of $1 million related to the examination of such tax returns.
The U.S. federal statute of limitations remains open for the year 2005 and onward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include Canada (2000 onward) and the United Kingdom (2005 onward). The Company is currently under examination in various foreign jurisdictions.
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (FASB) 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. As a result of the implementation of FIN 48, the Company recognized no increase or decrease in the liability for unrecognized tax benefits. The amount of unrecognized tax benefits as of January 1, 2007 is $6.5 million, of which $4.5 million would affect the Company’s effective tax rate, if recognized. As of September 30, 2007 the amount of unrecognized tax benefits decreased to $4.9 million, of which $3.5 million would affect the Company’s effective tax rate, if recognized. The Company expects the amount of unrecognized tax benefits to change within the next twelve months but these changes are not expected to have a significant impact on the Company’s results of operations or financial position.
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The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income taxes in its results of operations. As of January 1, 2007, the Company had no net amount accrued for interest and penalties.
15.Joint Venture Investments (Unaudited)
Summarized below is financial information for the Company’s joint ventures, which are accounted for under the equity method. Accordingly, the Company has recorded its proportionate share of earnings or losses on the line entitled “Other income, net” in the condensed consolidated statements of income.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Net sales | $ | 31.3 | $ | 17.5 | $ | 87.7 | $ | 50.6 | ||||||||
Gross profit | 16.8 | 7.5 | 45.5 | 19.4 | ||||||||||||
Operating income | 5.5 | 3.4 | 12.4 | 7.2 | ||||||||||||
Net income | 4.3 | 3.0 | 9.4 | 5.9 |
September 30, | December 31, | |||||||
(in millions of dollars) | 2007 | 2006 | ||||||
Current assets | $ | 60.9 | $ | 52.5 | ||||
Non-current assets | 23.0 | 21.0 | ||||||
Current liabilities | 23.3 | 26.2 | ||||||
Non-current liabilities | 17.7 | 16.8 |
16.Condensed Consolidated Financial Information
The Company’s 100% owned domestic subsidiaries have jointly and severally, fully and unconditionally, guaranteed certain outstanding notes issued by the Company. 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, 2007 and 2006, cash flows for the nine months ended September 30, 2007 and 2006 and financial position as of September 30, 2007 and December 31, 2006 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.
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Condensed Consolidating Balance Sheets (Unaudited)
September 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 3.7 | $ | 0.3 | $ | 40.1 | $ | — | $ | 44.1 | ||||||||||
Accounts receivable, net | — | 178.2 | 216.1 | — | 394.3 | |||||||||||||||
Inventory, net | — | 148.1 | 159.3 | — | 307.4 | |||||||||||||||
Receivables from affiliates | 330.9 | 2.8 | 9.5 | (343.2 | ) | — | ||||||||||||||
Deferred income taxes | 19.0 | 9.2 | 10.5 | — | 38.7 | |||||||||||||||
Other current assets | 0.8 | 16.9 | 19.8 | — | 37.5 | |||||||||||||||
Total current assets | 354.4 | 355.5 | 455.3 | (343.2 | ) | 822.0 | ||||||||||||||
Property, plant and equipment, net | 0.3 | 107.7 | 117.0 | — | 225.0 | |||||||||||||||
Deferred income taxes | 18.4 | 9.9 | 48.0 | — | 76.3 | |||||||||||||||
Goodwill | — | 266.0 | 185.9 | — | 451.9 | |||||||||||||||
Identifiable intangibles, net | 70.1 | 95.1 | 65.7 | — | 230.9 | |||||||||||||||
Other assets | 16.6 | 28.8 | 38.2 | — | 83.6 | |||||||||||||||
Investment in, long-term receivable from, affiliates | 877.3 | 811.3 | 198.0 | (1,886.6 | ) | — | ||||||||||||||
Total assets | $ | 1,337.1 | $ | 1,674.3 | $ | 1,108.1 | $ | (2,229.8 | ) | $ | 1,889.7 | |||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Notes payable to banks | $ | — | $ | — | $ | 15.6 | $ | — | $ | 15.6 | ||||||||||
Current portion of long-term debt | — | — | 14.7 | — | 14.7 | |||||||||||||||
Accounts payable | — | 106.1 | 70.2 | — | 176.3 | |||||||||||||||
Accrued customer program liabilities | — | 51.1 | 61.6 | — | 112.7 | |||||||||||||||
Other current liabilities | 0.7 | 68.1 | 94.6 | — | 163.4 | |||||||||||||||
Payables to affiliates | 6.2 | 556.7 | 256.2 | (819.1 | ) | — | ||||||||||||||
Total current liabilities | 6.9 | 782.0 | 512.9 | (819.1 | ) | 482.7 | ||||||||||||||
Long-term debt | 666.0 | — | 127.0 | — | 793.0 | |||||||||||||||
Long-term notes payable to affiliates | 178.2 | 99.5 | 23.8 | (301.5 | ) | — | ||||||||||||||
Deferred income taxes | 8.8 | 11.3 | 73.3 | — | 93.4 | |||||||||||||||
Postretirement and other liabilities | 41.0 | 13.4 | 30.0 | — | 84.4 | |||||||||||||||
Total liabilities | 900.9 | 906.2 | 767.0 | (1,120.6 | ) | 1,453.5 | ||||||||||||||
Stockholders’ equity | ||||||||||||||||||||
Common stock | 0.6 | 600.9 | 36.5 | (637.4 | ) | 0.6 | ||||||||||||||
Treasury stock | (1.1 | ) | — | — | — | (1.1 | ) | |||||||||||||
Paid-in capital | 1,388.7 | 623.8 | 241.8 | (865.6 | ) | 1,388.7 | ||||||||||||||
Accumulated other comprehensive (loss) income | (25.4 | ) | (16.6 | ) | 11.1 | 5.5 | (25.4 | ) | ||||||||||||
Accumulated (deficit) retained earnings | (926.6 | ) | (440.0 | ) | 51.7 | 388.3 | (926.6 | ) | ||||||||||||
Total stockholders’ equity | 436.2 | 768.1 | 341.1 | (1,109.2 | ) | 436.2 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,337.1 | $ | 1,674.3 | $ | 1,108.1 | $ | (2,229.8 | ) | $ | 1,889.7 | |||||||||
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Condensed Consolidating Balance Sheets
December 31, 2006 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 2.6 | $ | 6.5 | $ | 40.9 | $ | — | $ | 50.0 | ||||||||||
Accounts receivable, net | — | 204.9 | 222.5 | — | 427.4 | |||||||||||||||
Inventory, net | — | 139.2 | 138.4 | — | 277.6 | |||||||||||||||
Receivables from affiliates | 339.4 | 48.9 | 28.8 | (417.1 | ) | — | ||||||||||||||
Deferred income taxes | 9.6 | 24.2 | 3.4 | — | 37.2 | |||||||||||||||
Other current assets | 0.9 | 14.9 | 14.2 | — | 30.0 | |||||||||||||||
Total current assets | 352.5 | 438.6 | 448.2 | (417.1 | ) | 822.2 | ||||||||||||||
Property, plant and equipment, net | 0.2 | 95.0 | 122.0 | — | 217.2 | |||||||||||||||
Deferred income taxes | 37.5 | 26.7 | 15.0 | — | 79.2 | |||||||||||||||
Goodwill | — | 265.1 | 173.2 | — | 438.3 | |||||||||||||||
Identifiable intangibles, net | 70.2 | 103.9 | 59.5 | — | 233.6 | |||||||||||||||
Other assets | 19.1 | 9.1 | 30.9 | — | 59.1 | |||||||||||||||
Investment in, long-term receivable from, affiliates | 820.6 | 838.7 | 247.0 | (1,906.3 | ) | — | ||||||||||||||
Total assets | $ | 1,300.1 | $ | 1,777.1 | $ | 1,095.8 | $ | (2,323.4 | ) | $ | 1,849.6 | |||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||
Notes payable to banks | $ | — | $ | — | $ | 4.7 | $ | — | $ | 4.7 | ||||||||||
Current portion of long-term debt | — | — | 0.1 | — | 0.1 | |||||||||||||||
Accounts payable | — | 99.7 | 89.5 | — | 189.2 | |||||||||||||||
Accrued customer program liabilities | — | 66.1 | 55.8 | — | 121.9 | |||||||||||||||
Other current liabilities | 11.3 | 81.1 | 87.8 | — | 180.2 | |||||||||||||||
Payables to affiliates | 8.6 | 628.2 | 310.4 | (947.2 | ) | — | ||||||||||||||
Total current liabilities | 19.9 | 875.1 | 548.3 | (947.2 | ) | 496.1 | ||||||||||||||
Long-term debt | 666.0 | — | 134.3 | — | 800.3 | |||||||||||||||
Long-term notes payable to affiliates | 178.2 | 102.0 | 13.7 | (293.9 | ) | — | ||||||||||||||
Deferred income taxes | 25.6 | 45.7 | 28.4 | — | 99.7 | |||||||||||||||
Postretirement and other liabilities | 26.4 | 16.4 | 26.7 | — | 69.5 | |||||||||||||||
Total liabilities | 916.1 | 1,039.2 | 751.4 | (1,241.1 | ) | 1,465.6 | ||||||||||||||
Stockholders’ equity | ||||||||||||||||||||
Common stock | 0.6 | 600.9 | 33.4 | (634.3 | ) | 0.6 | ||||||||||||||
Treasury stock | (1.1 | ) | — | — | — | (1.1 | ) | |||||||||||||
Paid-in capital | 1,374.6 | 611.2 | 262.1 | (873.3 | ) | 1,374.6 | ||||||||||||||
Accumulated other comprehensive (loss) income | (50.1 | ) | (23.8 | ) | (7.7 | ) | 31.5 | (50.1 | ) | |||||||||||
Accumulated (deficit) retained earnings | (940.0 | ) | (450.4 | ) | 56.6 | 393.8 | (940.0 | ) | ||||||||||||
Total stockholders’ equity | 384.0 | 737.9 | 344.4 | (1,082.3 | ) | 384.0 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,300.1 | $ | 1,777.1 | $ | 1,095.8 | $ | (2,323.4 | ) | $ | 1,849.6 | |||||||||
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Condensed Consolidating Income Statements (Unaudited)
Three months ended September 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||
Unaffiliated sales | $ | — | $ | 265.5 | $ | 229.2 | $ | — | $ | 494.7 | ||||||||||
Affiliated sales | — | 13.5 | 11.6 | (25.1 | ) | — | ||||||||||||||
Net sales | — | 279.0 | 240.8 | (25.1 | ) | 494.7 | ||||||||||||||
Cost of products sold | — | 203.3 | 168.3 | (25.1 | ) | 346.5 | ||||||||||||||
Advertising, selling, general and administrative expenses | 8.2 | 54.8 | 44.2 | — | 107.2 | |||||||||||||||
Amortization of intangibles | 0.1 | 1.4 | 1.1 | — | 2.6 | |||||||||||||||
Restructuring and asset impairment charges | — | 1.9 | 9.5 | — | 11.4 | |||||||||||||||
Operating (loss) income | (8.3 | ) | 17.6 | 17.7 | — | 27.0 | ||||||||||||||
Interest (income) expense from affiliates | (0.7 | ) | (0.5 | ) | 1.2 | — | — | |||||||||||||
Interest expense | 11.2 | 2.8 | 2.5 | — | 16.5 | |||||||||||||||
Other (income) expense, net | 0.2 | (2.9 | ) | (0.3 | ) | — | (3.0 | ) | ||||||||||||
(Loss) income before taxes, minority interest and earnings (losses) of wholly owned subsidiaries | (19.0 | ) | 18.2 | 14.3 | — | 13.5 | ||||||||||||||
Income taxes | (1.6 | ) | (0.4 | ) | 6.6 | — | 4.6 | |||||||||||||
Minority interest | — | — | 0.2 | — | 0.2 | |||||||||||||||
(Loss) income before earnings (losses) of wholly owned subsidiaries | (17.4 | ) | 18.6 | 7.5 | — | 8.7 | ||||||||||||||
Earnings (losses) of wholly owned subsidiaries | 26.1 | (3.1 | ) | — | (23.0 | ) | — | |||||||||||||
Net income (loss) | $ | 8.7 | $ | 15.5 | $ | 7.5 | $ | (23.0 | ) | $ | 8.7 | |||||||||
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 and asset impairment charges | — | 1.2 | 4.6 | — | 5.8 | |||||||||||||||
Operating (loss) income | (10.5 | ) | 23.2 | 12.8 | — | 25.5 | ||||||||||||||
Interest (income) expense from affiliates | (0.3 | ) | (0.2 | ) | 0.5 | — | — | |||||||||||||
Interest expense (income) | 10.9 | 1.9 | 3.7 | — | 16.5 | |||||||||||||||
Other (income) expense, net | (1.3 | ) | (0.5 | ) | (0.6 | ) | — | (2.4 | ) | |||||||||||
(Loss) income before taxes 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 | — | — | 0.2 | — | 0.2 | |||||||||||||||
(Loss) income 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 | |||||||||
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Condensed Consolidating Income Statements (Unaudited)
Nine months ended September 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||||
Unaffiliated sales | $ | — | $ | 734.6 | $ | 670.9 | $ | — | $ | 1,405.5 | ||||||||||
Affiliated sales | — | 45.2 | 33.0 | (78.2 | ) | — | ||||||||||||||
Net sales | — | 779.8 | 703.9 | (78.2 | ) | 1,405.5 | ||||||||||||||
Cost of products sold | — | 573.0 | 494.6 | (78.2 | ) | 989.4 | ||||||||||||||
Advertising, selling, general and administrative expenses | 28.2 | 164.4 | 140.7 | — | 333.3 | |||||||||||||||
Amortization of intangibles | 0.1 | 4.3 | 3.5 | — | 7.9 | |||||||||||||||
Restructuring and asset impairment charges | — | 2.5 | 12.0 | — | 14.5 | |||||||||||||||
Operating (loss) income | (28.3 | ) | 35.6 | 53.1 | — | 60.4 | ||||||||||||||
Interest (income) expense from affiliates | (2.1 | ) | (1.3 | ) | 3.4 | — | — | |||||||||||||
Interest expense | 31.7 | 8.2 | 7.5 | — | 47.4 | |||||||||||||||
Other (income) expense, net | (0.8 | ) | (7.5 | ) | 2.8 | — | (5.5 | ) | ||||||||||||
(Loss) income before taxes, minority interest and earnings (losses) of wholly owned subsidiaries | (57.1 | ) | 36.2 | 39.4 | — | 18.5 | ||||||||||||||
Income taxes | (8.0 | ) | (3.2 | ) | 15.8 | — | 4.6 | |||||||||||||
Minority interest | — | — | 0.5 | — | 0.5 | |||||||||||||||
(Loss) income before earnings (losses) of wholly owned subsidiaries | (49.1 | ) | 39.4 | 23.1 | — | 13.4 | ||||||||||||||
Earnings (losses) of wholly owned subsidiaries | 62.5 | 0.3 | — | (62.8 | ) | — | ||||||||||||||
Net income (loss) | $ | 13.4 | $ | 39.7 | $ | 23.1 | $ | (62.8 | ) | $ | 13.4 | |||||||||
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 and asset impairment charges | 0.1 | 6.7 | 18.8 | — | 25.6 | |||||||||||||||
Operating (loss) income | (33.5 | ) | 30.7 | 41.9 | — | 39.1 | ||||||||||||||
Interest (income) expense from affiliates | (1.0 | ) | (0.8 | ) | 1.8 | — | — | |||||||||||||
Interest expense (income) | 36.2 | 1.6 | 9.4 | — | 47.2 | |||||||||||||||
Other (income) expense, net | (1.9 | ) | (6.5 | ) | 4.3 | — | (4.1 | ) | ||||||||||||
(Loss) income before taxes 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 | — | — | 0.3 | — | 0.3 | |||||||||||||||
(Loss) income 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 | |||||||||
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Condensed Consolidating Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 2007 | ||||||||||||||||
Non- | ||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Consolidated | ||||||||||||
Net cash (used) provided by operating activities | $ | (48.9 | ) | $ | 48.9 | $ | 15.6 | $ | 15.6 | |||||||
Investing activities: | ||||||||||||||||
Additions to property, plant and equipment | (0.1 | ) | (27.5 | ) | (10.5 | ) | (38.1 | ) | ||||||||
Proceeds from the disposition of assets | — | 0.3 | 0.5 | 0.8 | ||||||||||||
Net cash used by investing activities | (0.1 | ) | (27.2 | ) | (10.0 | ) | (37.3 | ) | ||||||||
Financing activities: | ||||||||||||||||
Intercompany financing | 42.3 | (37.0 | ) | (5.3 | ) | — | ||||||||||
Intercompany dividends received (paid) | 4.1 | 9.1 | (13.2 | ) | — | |||||||||||
Borrowings of short-term debt | — | — | 10.3 | 10.3 | ||||||||||||
Proceeds from the exercise of stock options | 3.7 | — | — | 3.7 | ||||||||||||
Net cash provided (used) by financing activities | 50.1 | (27.9 | ) | (8.2 | ) | 14.0 | ||||||||||
Effect of foreign exchange rate changes on cash | — | — | 1.8 | 1.8 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 1.1 | (6.2 | ) | (0.8 | ) | (5.9 | ) | |||||||||
Cash and cash equivalents at the beginning of the period | 2.6 | 6.5 | 40.9 | 50.0 | ||||||||||||
Cash and cash equivalents at the end of the period | $ | 3.7 | $ | 0.3 | $ | 40.1 | $ | 44.1 | ||||||||
Nine Months Ended September 30, 2006 | ||||||||||||||||
Non- | ||||||||||||||||
(in millions of dollars) | Parent | Guarantors | Guarantors | Consolidated | ||||||||||||
Net cash (used) provided by operating activities | $ | (52.0 | ) | $ | 79.3 | $ | 34.8 | $ | 62.1 | |||||||
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 | — | 2.1 | ||||||||||||
Net cash used by investing activities | 1.3 | (7.3 | ) | (8.5 | ) | (14.5 | ) | |||||||||
Financing activities: | ||||||||||||||||
Intercompany financing | 109.2 | (86.0 | ) | (23.2 | ) | — | ||||||||||
Intercompany dividends received (paid) | — | 1.0 | (1.0 | ) | — | |||||||||||
Repayments on long-term debt | (80.0 | ) | — | (20.8 | ) | (100.8 | ) | |||||||||
Repayments on short-term debt | — | — | (0.8 | ) | (0.8 | ) | ||||||||||
Proceeds from the exercise of stock options | 9.8 | — | — | 9.8 | ||||||||||||
Other financing activities | (0.2 | ) | — | — | (0.2 | ) | ||||||||||
Net cash provided (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 | ||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
ACCO Brands Corporation is a leading supplier of 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 and presentation aids. We have leading market positions and brand names, including Swingline®, GBC®, Kensington®, Quartet®, Rexel®, Nobo®, 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 OfficeMax), 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 seek to 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 our storage box business during the third quarter of 2006, announced the discontinuance of the Computer Products’ cleaning product category as of the end of the first quarter of 2006, and discontinued certain other low-margin products in the Office Products and Document Finishing Groups in 2006 and 2007. In aggregate, these businesses and products represented approximately $90 million of annual net sales. The impact of the divestiture and exits on these segments is expected to continue into 2008, with a negative impact on net sales, but a positive impact on margins.
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 provide value-added features or benefits that enhance product appeal to our customers. This focus, we believe, increases 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 continue to focus on realizing synergies from our merger with GBC. Opportunities for significant potential savings 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 ACCO Brands Corporation for the three months and nine months ended September 30, 2007 and 2006. The discussion of operating results at the consolidated level is followed by a more detailed discussion of operating results by segment. As more fully described in the Segment Discussion section, as of January 1, 2007, the Company realigned and reclassified certain business segments. Segment information for the 2006 period has been restated based on the segment structure effective January 1, 2007.
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.
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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.
As much of our business is conducted in foreign markets (approximately 47% of revenues for the fiscal year ended December 31, 2006), foreign currency plays a major role in our reported results. During the first nine months of 2007, the U.S. dollar weakened relative to certain currencies. This benefited ACCO Brands as the same amount of foreign (e.g. local) currency units were translated into more U.S. dollars. The impact of the weakened U.S. dollar benefited ACCO Brands in inventory purchase transactions made by its foreign operations. Our foreign operations’ purchases of outsourced products are primarily denominated in U.S. dollars, and as a result their costs of goods sold decreased as the value of the U.S. dollar has weakened. A significant portion of the purchases are hedged with forward currency contracts which delays much of the effect of the weakening U.S. dollar in the short term.
We have completed our integration planning for the Office Products Group and the indirect component of the Document Finishing Group. In addition, during the first quarter of 2007 we initiated the realignment of the former GBC commercial businesses (now reported within the Commercial Laminating Solutions Group and the Document Finishing Group). During the second quarter the Company began the integration of the European distribution locations and the consolidations of certain operations into the shared services facility in the Netherlands. The Company has made significant progress toward relocating our employees, aligning our customer relationships and upgrading information technology systems. Since the acquisition of GBC we have announced and moved ahead with plans to close, consolidate, downsize, or relocate more than 39 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 $40 million of targeted annual cost synergies by the end of 2008 and an additional $20 million by the end of 2009 from the consolidation of the former GBC commercial businesses and additional outsourcing of production. This results in a total of $60 million in targeted annualized synergies expected to be realized by the end of 2009.
Cash payments related to the Company’s restructuring and integration activities amounted to $15.1 million (excluding capital expenditures) during the third quarter of 2007, and $40.8 million during the first nine months of 2007. It is expected that additional payments of approximately $60 million, offset by expected proceeds of approximately $30 million from facility sales, 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.
Three Months Ended September 2007 versus 2006
Results
The following table presents the Company’s results for the three months ended September 30, 2007 and 2006. Restructuring and restructuring-related expenses have been noted where appropriate, as management believes that a comparative review of these costs and their relative impact on operating income allows for a better understanding of the underlying business performance from period to period. Restructuring-related expenses represent costs related to restructuring projects which cannot be reported as restructuring under U.S. GAAP (e.g., losses on inventory disposal related to product category exits, manufacturing inefficiencies following the start of manufacturing operations at a new facility following closure of the old facility, SG&A reorganization and implementation costs, dedicated consulting, stay bonuses, etc.).
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Three Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 494.7 | $ | 499.2 | $ | (4.5 | ) | (1 | )% | |||||||
Gross profit | 148.2 | 146.4 | 1.8 | 1 | % | |||||||||||
Gross profit margin | 30.0 | % | 29.3 | % | 0.7 | pts | ||||||||||
Advertising, selling, general and administrative expenses | 107.2 | 112.6 | (5.4 | ) | (5 | )% | ||||||||||
Restructuring and asset impairment charges | 11.4 | 5.8 | 5.6 | 97 | % | |||||||||||
Operating income | 27.0 | 25.5 | 1.5 | 6 | % | |||||||||||
Operating income margin | 5.5 | % | 5.1 | % | 0.4 pts | |||||||||||
Interest expense, net | 16.5 | 16.5 | — | — | % | |||||||||||
Other income, net | 3.0 | 2.4 | 0.6 | 25 | % | |||||||||||
Income tax expense (benefit) | 4.6 | (6.9 | ) | 11.5 | NM | |||||||||||
Effective tax rate | 34.1 | % | (60.5 | )% | NM | |||||||||||
Net income | 8.7 | 18.1 | (9.4 | ) | (52 | )% | ||||||||||
Restructuring-related expense included in cost of products sold | 3.1 | 5.3 | (2.2 | ) | (42 | )% | ||||||||||
Restructuring-related expense included in SG&A | 4.5 | 2.5 | 2.0 | 80 | % |
Net Sales
Net sales decreased $4.5 million to $494.7 million. The decrease was driven by the previously-planned divestiture of non-strategic business in the Office Products segment, planned product decreases associated with the Company’s strategic intent to focus on the premium end of its product categories and volume decreases in all but the Commercial Laminating Solutions segment. Volume decreases accelerated toward the end of the quarter as underlying markets in both North America and Europe began to soften. These decreases were partially offset by the positive impact of $16.3 million in currency translation as well as price increases implemented in North America and Europe in early 2007.
Gross Profit
Gross profit increased $1.8 million, or 1%, to $148.2 million, while gross profit margin increased to 30.0% from 29.3%. Currency translation resulted in a $5.2 million increase in gross profit. Excluding the impact of currency, the decrease in gross profit was primarily the result of lower sales, excess distribution costs and supply chain inefficiencies, the adverse impact of a $4.4 million reclassification to reflect cumulative after-sales service expenses previously reported as a component of SG&A and a $1.6 million decrease in gross profit for the laminating solutions business, partly offset by price increases in the Office Products and Document Finishing Groups, savings from product outsourcing and a $2.2 million reduction of restructuring-related charges.
SG&A (Advertising, selling, general and administrative expenses)
SG&A decreased $5.4 million, or 5%, to $107.2 million, and as a percentage of sales to 21.7% from 22.6%. Currency translation resulted in a $3.1 million increase in SG&A expenses. The improvement was related to merger integration synergies, lower management incentive costs and the favorable impact of the $4.4 million reclassification to reflect cumulative after-sales service expenses as a component of gross profit. This was partially offset by continued investment in marketing and product development initiatives and higher restructuring-related expense of $2.0 million, principally consisting of outside consulting fees related to SG&A reduction initiatives.
Operating Income
Operating income increased $1.5 million, or 6%, to $27.0 million, and as a percentage of sales to 5.5% from 5.1%. The increase in operating income was driven by favorable currency rates, price increases and the realization of merger integration synergies. These positive impacts were partially offset by continued investment in marketing and product development initiatives, lower sales and $5.4 million in higher restructuring, asset impairment and restructuring-related charges during 2007.
Interest Expense and Other Income
Interest expense was unchanged from the prior year. Higher interest rates were offset by lower debt levels.
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Other income increased $0.6 million to $3.0 million principally due to higher income from our unconsolidated Australian joint-venture.
Income Taxes
For the quarter ended September 30, 2007, the Company recorded income tax expense of $4.6 million versus a tax benefit of $6.9 million recorded in the prior-year quarter. The effective tax rate for the quarter ended September 30, 2007 was 34.1% compared to (60.5)% for the quarter ended September 30, 2006. The tax benefits in the prior year include a reduction in taxes due on certain unrepatriated foreign earnings, a settlement of the prior year’s tax return, a settlement with the Company’s former parent under a tax allocation agreement entered into in connection with the spin-off, and benefits from the Domestic Production Activities and Extraterritorial Income Exclusion.
Net Income
Net income decreased to $8.7 million, or $0.16 per diluted share, from $18.1 million, or $0.33 per diluted share, in the prior year. Absent the significant increase in tax expense, favorable operating income would have resulted in net income growth.
Segment Discussion
As of January 1, 2007, the Company realigned and reclassified certain businesses, resulting in the following changes:
• | The Company created a new business segment, the Document Finishing Group, which consists of the following businesses: |
o | the businesses comprising its former Other Commercial segment (consisting of the Document Finishing and Day-Timers businesses); | ||
o | the Company’s document communication business, which was transferred from the Office Products Group; and | ||
o | the Company’s high speed and other binding business, which was transferred from the former Industrial Print Finishing Group (“IPFG”) business segment. |
• | In addition, the remaining components of the former IPFG business segment began reporting as the Commercial Laminating Solutions Group business segment to more appropriately reflect the remaining operations. |
All segment information for the three months ended September 30, 2006 has been restated to reflect the realigned segment structure.
Office Products Group
Results
Three Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 244.8 | $ | 252.3 | $ | (7.5 | ) | (3 | )% | |||||||
Operating income | 14.4 | 11.9 | 2.5 | 21 | % | |||||||||||
Operating income margin | 5.9 | % | 4.7 | % | 1.2 | pts | ||||||||||
Restructuring and related charges | 11.1 | 11.0 | 0.1 | 1 | % |
Office Products net sales decreased $7.5 million, or 3%, to $244.8 million. The decrease is primarily the result of the exit and divestiture of certain non-strategic business or low margin product lines (including the box business sale and other non-strategic product exits in North America and Europe) amounting to approximately $14.7 million. Favorable foreign currency translation of $8.3 million and price increases were partially offset by volume declines in both North America and Europe from a combination of lost product placements and weaker demand.
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Office Products operating income increased $2.5 million to $14.4 million and operating income margin increased to 5.9% from 4.7%. The increases in operating income and margin primarily resulted from price increases, an increase in the level of product outsourcing, and savings from integration initiatives. These positive factors were partially offset by sales volume declines and increased investment in marketing and product development.
Document Finishing Group
Results
Three Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 145.9 | $ | 142.8 | $ | 3.1 | 2 | % | ||||||||
Operating income | 4.9 | 5.6 | (0.7 | ) | (13 | )% | ||||||||||
Operating income margin | 3.4 | % | 3.9 | % | (0.5 | ) pts | ||||||||||
Restructuring and related charges | 6.2 | 2.3 | 3.9 | 170 | % |
Document Finishing net sales increased $3.1 million, or 2%, to $145.9 million. Currency translation positively impacted net sales by $4.7 million. Excluding the impact of currency translation, Document Finishing sales decreased 1%, primarily due to lower volumes in the indirect sales channel, principally caused by weaker demand and lost product placements to both competitors and our customers’ direct-sourcing private-label initiatives. Sales declines were partially offset by the implementation of price increases in 2007.
Document Finishing operating income decreased $0.7 million, or 13%, to $4.9 million, and operating income margin decreased to 3.4% from 3.9%. Operating income and margin decreases resulted from increased restructuring-related charges, lower sales volumes and increased investment in marketing and product development initiatives. These factors were partially offset by price increases and the realization of synergy savings.
Computer Products Group
Results
Three Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 60.3 | $ | 62.2 | $ | (1.9 | ) | (3 | )% | |||||||
Operating income | 14.0 | 14.6 | (0.6 | ) | (4 | )% | ||||||||||
Operating income margin | 23.2 | % | 23.5 | % | (0.3 | ) pts | ||||||||||
Restructuring and related charges | 1.4 | 0.3 | 1.1 | NM |
Computer Products sales decreased $1.9 million, or 3%, to $60.3 million. The decrease was primarily due to lower U.S. sales volumes resulting from a continuation of the distribution channel shift and store closures by a large customer, which began in the fourth quarter of 2006. The U.S. sales decline was partially offset by $1.9 million of favorable currency translation and increased sales volumes in Europe and Asia.
Operating income decreased $0.6 million, or 4%, to $14.0 million, and operating income margin decreased to 23.2% from 23.5%. Operating income and margin decreases were due to higher restructuring costs, partially mitigated by favorable product mix, reduced SG&A and favorable foreign exchange.
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Commercial Laminating Solutions Group
Results
Three Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 43.7 | $ | 41.9 | $ | 1.8 | 4 | % | ||||||||
Operating income | 0.3 | 1.4 | (1.1 | ) | (79 | )% | ||||||||||
Operating income margin | 0.7 | % | 3.3 | % | (2.6 | ) pts | ||||||||||
Restructuring and related charges | 0.4 | — | 0.4 | NM |
Commercial Laminating net sales increased $1.8 million, or 4%, to $43.7 million. Currency translation favorably impacted sales by $1.4 million. Sales volumes increased $1.0 million, but were partially offset by reduced pricing.
Operating income was $0.3 million, compared to operating income of $1.4 million in the prior-year quarter. The decrease was driven by the combination of reduced prices, adverse product mix, higher raw material costs and $0.4 million of restructuring-related charges.
Nine Months Ended September 2007 versus 2006
Results
The following table presents the Company’s results for the nine months ended September 30, 2007 and 2006. Restructuring and restructuring-related expenses have been noted where appropriate, as management believes that a comparative review of these costs and their relative impact on operating income allows for a better understanding of the underlying business performance from period to period. Restructuring-related expenses represent costs related to restructuring projects which cannot be reported as restructuring under U.S. GAAP (e.g., losses on inventory disposal related to product category exits, manufacturing inefficiencies following the start of manufacturing operations at a new facility following closure of the old facility, SG&A reorganization and implementation costs, dedicated consulting, stay bonuses, etc.).
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Nine Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 1,405.5 | $ | 1,430.4 | $ | (24.9 | ) | (2 | )% | |||||||
Gross profit | 416.1 | 402.9 | 13.2 | 3 | % | |||||||||||
Gross profit margin | 29.6 | % | 28.2 | % | 1.4 | pts | ||||||||||
Advertising, selling, general and administrative expenses | 333.3 | 329.7 | 3.6 | 1 | % | |||||||||||
Restructuring and asset impairment charges | 14.5 | 25.6 | (11.1 | ) | (43 | )% | ||||||||||
Operating income | 60.4 | 39.1 | 21.3 | 54 | % | |||||||||||
Operating income margin | 4.3 | % | 2.7 | % | 1.6 | pts | ||||||||||
Interest expense, net | 47.4 | 47.2 | 0.2 | 0 | % | |||||||||||
Other income, net | 5.5 | 4.1 | 1.4 | 34 | % | |||||||||||
Income taxes | 4.6 | (12.5 | ) | 17.1 | NM | |||||||||||
Effective tax rate | 24.9 | % | NM | NM | ||||||||||||
Net income | 13.4 | 8.2 | 5.2 | 63 | % | |||||||||||
Restructuring-related expense included in cost of products sold | 10.2 | 7.7 | 2.5 | 32 | % | |||||||||||
Restructuring-related expense included in SG&A | 12.9 | 7.7 | 5.2 | 68 | % |
Net Sales
Net sales decreased $24.9 million, or 2%, to $1,405.5 million. The Company’s intent to focus on the premium end of its product categories, planned exits and a divestiture from non-strategic business in the Office Products segment accounted for $51.9 million of the decline. Favorable currency translation of $43.2 million as well as price increases were offset by reductions in volume for all business segments caused by a combination of weakening consumer demand and lost product placements to both competitors and our customers’ private-label direct-sourcing initiatives.
Gross Profit
Gross profit increased $13.2 million, or 3%, to $416.1 million, and gross profit margin increased to 29.6% from 28.2%. Currency translation resulted in a $13.6 million increase in gross profit. Excluding the impact of currency, gross profit decreased primarily as a result of lower sales, excess distribution costs and supply chain inefficiencies, the adverse impact of a $5.0 million reclassification to reflect cumulative after-sales service expenses previously reported as a component of SG&A and an increase of $2.5 million in restructuring-related charges, partially offset by flow-through from price increases net of raw material costs and product outsourcing savings.
SG&A (Advertising, selling, general and administrative expenses)
SG&A increased $3.6 million, or 1%, to $333.3 million, and as a percentage of sales to 23.7% from 23.0%. Currency translation accounted for $9.3 million of the increase. Excluding the impact of currency, SG&A expense improved as a result of the flow-through of integration synergies and reduced management incentives costs, and the favorable impact of the $5.0 million reclassification of after-sales service expenses as a component of gross profit. The decrease was partly offset by continued investment in marketing and product development initiatives, primarily within the Office Products and Document Finishing Groups, and a $5.2 million increase in restructuring-related costs, which principally consisted of outside consulting fees related to SG&A reduction initiatives.
Operating Income
Operating income increased $21.3 million, or 54%, to $60.4 million, and as a percent to sales to 4.3% from 2.7%. The increase in operating income was the result of price increases, the realization of integration synergies and a decrease of $3.4 million in restructuring, asset impairment and restructuring-related charges. These positive factors were partly offset by lower sales volumes and continued investment in marketing and product development initiatives.
Interest Expense and Other Income
Interest expense increased $0.2 million to $47.4 million. The increase was a result of higher interest rates partially offset by the Company’s reduced 2007 debt levels.
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Other income increased $1.4 million to $5.5 million principally resulting from higher income from our unconsolidated Australian joint-venture.
Income Taxes
For the nine months ended September 30, 2007, the Company had income tax expense of $4.6 million, compared with an income tax benefit of $12.5 million recorded in the prior year period. The lower-than-expected tax rate for 2007 was due to the tax benefit of the restructuring and restructuring-related charges and an excess foreign tax credit associated with dividends received during the first nine months. The tax benefits in the prior year include a reduction in taxes due on certain unrepatriated foreign earnings, a settlement of the prior year’s tax return, a settlement with the Company’s former parent under a tax allocation agreement entered into in connection with the spin-off, and benefits from the Domestic Production Activities and Extraterritorial Income Exclusion.
Net Income
Net income increased to $13.4 million, or $0.24 per diluted share, from $8.2 million, or $0.15 per diluted share, in the prior year. The increase was due to the higher operating income partially offset by a less favorable tax expense as discussed above.
Segment Discussion
As of January 1, 2007, the Company realigned and reclassified certain businesses as discussed earlier under Segment Discussion.
All segment information for the nine months ended September 30, 2006 has been restated to reflect the realigned segment structure.
Office Products Group
Results
Nine Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 690.4 | $ | 714.7 | $ | (24.3 | ) | (3 | )% | |||||||
Operating income | 38.4 | 11.3 | 27.1 | 240 | % | |||||||||||
Operating income margin | 5.6 | % | 1.6 | % | 4.0 | pts | ||||||||||
Restructuring and related charges | 21.8 | 30.9 | (9.1 | ) | (29 | )% |
Office Products net sales decreased $24.3 million, or 3%, to $690.4 million. The decrease is primarily the result of the exit from and divestiture of certain non-strategic business (including the storage box business sale and other non-strategic product exits in North America and Europe) amounting to approximately $45.2 million and volume declines principally caused by reduced end-user demand, lost product placements to both competitors and our customers’ private-label direct-sourcing initiatives and demand volatility associated with channel inventory adjustments. These factors were partially offset by the favorable impact of foreign currency translation of $21.5 million and price increases.
Office Products operating income increased $27.1 million to $38.4 million and operating income margin increased to 5.6% from 1.6%. The increases in operating income and margin were primarily related to price increases, savings from merger integration activities, and a $9.1 million reduction in restructuring and related costs. These factors were partially offset by increased investment in marketing and product development and continued investment in the Company’s transition to a pan-European business model.
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Document Finishing Group
Results
Nine Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 422.6 | $ | 420.0 | $ | 2.6 | 1 | % | ||||||||
Operating income | 14.1 | 15.9 | (1.8 | ) | (11 | )% | ||||||||||
Operating income margin | 3.3 | % | 3.8 | % | (0.5 | ) pts | ||||||||||
Restructuring and related charges | 11.3 | 5.9 | 5.4 | 92 | % |
Document Finishing net sales increased $2.6 million, or 1%, to $422.6 million. The increase was primarily the result of a $13.0 million favorable impact of currency translation and price increases. Sales volumes declined due to lower sales to the indirect sales channel, the result of a combination of slower demand and lost product placements to both competitors and our customers’ private-label products. In addition, sales were negatively impacted by $3.3 million from the exit of certain non-strategic low priced product categories.
Document Finishing operating income decreased $1.8 million, or 11%, to $14.1 million, and operating income margin declined to 3.3% from 3.8%. Increased restructuring and related costs of $5.4 million and increased investment in marketing and product development initiatives, together with lower volume, outweighed the impact of favorable price increases and the realization of synergy savings.
Computer Products Group
Results
Nine Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 163.2 | $ | 165.3 | $ | (2.1 | ) | (1 | )% | |||||||
Operating income | 29.5 | 29.4 | 0.1 | 0 | % | |||||||||||
Operating income margin | 18.1 | % | 17.8 | % | 0.3 | pts | ||||||||||
Restructuring and related charges | 3.4 | 1.6 | 1.8 | 113 | % |
Computer Products sales decreased $2.1 million, or 1%, to $163.2 million. The decline was primarily due to the $3.4 million exit of the non-strategic cleaning business, as well as volume declines in the U.S. which were the result of the continued shift in U.S. distribution channels. U.S. declines were partially offset by increased sales volumes in Europe and Asia, as well as a favorable currency impact of $5.1 million. The combination of decreased U.S. sales and increased European sales, has resulted in non-U.S. sales now accounting for more than 50% of this segment.
Operating income increased $0.1 million to $29.5 million, and operating income margin increased to 18.1% from 17.8%. Operating income was impacted by $1.8 million of higher restructuring and related activity and lower sales, offset by favorable sales mix, reduced marketing spending and $1.7 million of favorable foreign exchange.
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Commercial Laminating Solutions Group
Results
Nine Months Ended | ||||||||||||||||
September 30, | Amount of Change | |||||||||||||||
(in millions of dollars) | 2007 | 2006 | $ | % | ||||||||||||
Net sales | $ | 129.5 | $ | 130.4 | $ | (0.9 | ) | (1 | )% | |||||||
Operating income | 0.9 | 8.6 | (7.7 | ) | (90 | )% | ||||||||||
Operating income margin | 0.7 | % | 6.6 | % | (5.9 | ) pts | ||||||||||
Restructuring and related charges | 0.9 | — | 0.9 | NM |
Commercial Laminating net sales decreased $0.9 million, or 1%, to $129.5 million. The decline was due to loss of market share and reduced pricing, both the result of increased competition from lower-cost importers of high-speed laminating films. Pricing and volume reductions were partially offset by a favorable impact from currency translation of $3.6 million.
Operating income decreased 90% to $0.9 million. The decrease was driven by reduced pricing, increased raw material costs, lower volume and adverse mix.
In the near term it is expected that the overall profitability of this segment will be lower than prior years. The Company is addressing longer-term solutions to reduce the cost of films currently manufactured in the U.S., the Netherlands and Korea.
As a part of the annual impairment review in June, the company concluded that the fair value of the units in the CLSG operating segment marginally exceeded book value. Management does not believe that an impairment is probable at this time. However, the near term CLSG profitability forecast is expected to be less than that experienced in the prior year, and will require improvement in future periods to sustain its carrying value. If the performance of the segment does not meet or exceed those expectations, a future impairment could result for a portion or all of the goodwill valued at $95.6 million as of September 30, 2007. The quantification of any impairment would be dependent on the performance of the segment, which is dependent upon a number of variables that cannot be predicted with certainty.
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.
Cash Flow from Operating Activities
In the nine months ended September 30, 2007, cash provided by operating activities was $15.6 million, compared to $62.1 million of cash provided by operating activities in the prior year. Net income in the current nine months was $13.4 million, compared to $8.2 million in the 2006 period. Non-cash adjustments to net income were $48.0 million in 2007, compared to $62.1 million in 2006, on a pre-tax basis. The improvement in net income was offset by the following cash operating activities:
• | Increased payments to vendors and suppliers, which was primarily attributable to lower payments in the first quarter of 2006, resulting from a one-time benefit from extended payment terms, as well as other cash management initiatives in the prior year period. | ||
• | Higher payments for restructuring and restructuring-related activities, incentive compensation and customer rebate programs. | ||
• | Higher levels of inventory resulting from the build-up of safety stock to support business integration and outsourcing activities. |
Cash Flow from Investing Activities
Cash used by investing activities was $37.3 million and $14.5 million for the nine months ended September 30, 2007 and 2006, respectively. Gross capital expenditure was $38.1 million and $22.1 million in for the nine months ended September 30, 2007 and 2006, respectively. The increase was driven by the cost of new distribution facilities and continued information technology investments.
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Cash Flow from Financing Activities
Cash provided by financing activities was $14.0 million in the first nine months of 2007, whereas cash used by financing activities was $92.0 million for the same period in 2006. During the first nine months of 2006, the Company paid all required 2006 debt service totaling $24.7 million, and further reduced its Senior Secured Term Loan Facilities by $76.1 million.
Capitalization
Total debt at September 30, 2007 was $823.3 million. The ratio of debt to stockholders’ equity at September 30, 2007 was 1.9 to 1.
As of September 30, 2007 the amount available for borrowings under our revolving credit facilities was $126.3 million (allowing for $11.3 million drawn and $12.4 million of letters of credit outstanding on that date).
As of and for the period ended September 30, 2007, 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
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes, deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce deferred tax assets to an amount that is more likely than not to be realized.
The amount of income taxes that we pay is subject to ongoing audits by federal, state and foreign tax authorities. The Company’s estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at each reporting date. Tax positions are recognized as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority, when it is more likely than not, based on technical merits, that the position will be sustained upon examination. Any differences between tax positions taken in a tax return and amounts recognized in our financial statements results 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.
Interest and penalties recognized in the Company’s results of operations are classified as income tax expense.
Recent Accounting Pronouncements
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 Company applied the provisions of the Interpretation to all tax positions upon initial adoption on January 1, 2007. The implementation of this interpretation did not result in an increase or decrease in the Company’s liability for unrecognized tax benefits.
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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, 2006. 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, 2007 or through the date of this report.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision of, and with the participation of the Company’s Disclosure Committee, the Company’s management, and including the Chief Executive Officer and the Chief Financial Officer, of 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). 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.
(b) Changes in Internal Control Over Financial Reporting.
There has been no change in the Company’s internal control over financial reporting that occurred during the three month period ending September 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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, 2006. 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.
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ITEM 6. EXHIBITS
Number | Description | |
10.1 | Amended and Restated ACCO Brands Corporation Deferred Compensation Plan for Non-Employee Directors (Effective January 1, 2008) * | |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | |
32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
99.1 | Form of Directors Restricted Stock Unit Award Agreement under the Amended and Restated ACCO Brands Corporation 2005 Incentive Plan * |
* | Filed herewith. | |
** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REGISTRANT: | ||||||
ACCO BRANDS CORPORATION | ||||||
By: | /s/ 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 8, 2007
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EXHIBIT INDEX
Number | Description | |
10.1 | Amended and Restated ACCO Brands Corporation Deferred Compensation Plan for Non-Employee Directors (Effective January 1, 2008) * | |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | |
32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
99.1 | Form of Directors Restricted Stock Unit Award Agreement under the Amended and Restated ACCO Brands Corporation 2005 Incentive Plan * |
* | Filed herewith. | |
** | Furnished herewith |
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