UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
Form 10-K
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 20142017
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¨o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-08454
ACCO Brands Corporation
(Exact Name of Registrant as Specified in Its Charter)
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| Delaware | | 36-2704017 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
Four Corporate Drive
Lake Zurich, Illinois 60047
(Address of Registrant’s Principal Executive Office, Including Zip Code)
(847) 541-9500
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | | Name of Each Exchange on Which Registered |
| Common Stock, par value $.01 per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨þ No þo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, (as definedor an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act).Act.
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Large accelerated filer | x | Accelerated filer | o |
| Non-accelerated filer | o þ(Do not check if a smaller reporting company) | Smaller reporting company | o |
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Emerging growth company | | Non-accelerated filer ¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨o No þ
As of June 30, 2014,06/30/17, the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was approximately $557.7 million.$1,226.0 million. As of February 9, 2015,7, 2018, the registrant had outstanding 112,168,657106,406,478 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be issued in connection with registrant’s annual stockholder’s meeting expected to be held on May 12, 201515, 2018 are incorporated by reference into Part III of this report.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements madecontained in this Annual Report on Form 10-K other than statements of historical fact, particularly those anticipating future financial performance, business prospects, growth, operating strategies and similar matters are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of invoking these safe harbor provisions.1995. These forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of ACCO Brands Corporation (the "Company"), are generally identifiable by the use of the words "will," "believe," "expect," "intend," "anticipate," "estimate," "forecast," "project," "plan," and similar expressions, are subject to certain risks and uncertainties, are made as of the date hereof, and we undertake no duty or similar expressions. In particular, our business outlook is basedobligation to update them. Because actual results may differ materially from those suggested or implied by such forward-looking statements, you should not place undue reliance on certain assumptions which we believethem when deciding whether to be reasonable underbuy, sell or hold the circumstances. These include, without limitation, assumptions regarding changes in the macro environment, fluctuations in foreign currency rates, changes in the competitive landscape and consumer behavior and the effect of consolidation in the office products industry, as well as other factors. Company's securities.
Some of the factors that could affect our results or cause plans, actions and results to differ materially from current expectations are detailed in "Part I, Item 1. Business,"Business" and "Part I, Item 1A. Risk Factors" and the financial statement line item discussions set forth in "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this report and from time to time in our other SECSecurities and Exchange Commission (the "SEC") filings.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Because actual results may differ from those predicted by such forward-looking statements, you should not place undue reliance on them when deciding whether to buy, sell or hold the Company’s securities. Our forward-looking statements are made as of the date hereof and we undertake no obligation to update these forward-looking statements in the future.
Website Access to Securities and Exchange Commission Reports
The Company’s Internet website can be found at www.accobrands.com. The Company makes available free of charge on or through its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as practicable after the Company files them with, or furnishes them to, the Securities and Exchange Commission.SEC. We also make available the following documents on our Internet website: the Audit Committee Charter; the Compensation Committee Charter; the Corporate Governance and Nominating Committee Charter; the Finance and Planning Committee Charter; the Executive Committee Charter; our Corporate Governance Principles; and our Code of Business Conduct and Ethics. The Company’s Code of Business Conduct and Ethics applies to all of our directors, officers (including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer) and employees. You may obtain a copy of any of the foregoing documents, free of charge, if you submit a written request to ACCO Brands Corporation, Four Corporate Drive, Lake Zurich, IL. 60047, Attn: Investor Relations.
TABLE OF CONTENTS
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| PART I | |
| ITEM 1. | | |
| ITEM 1A. | | |
| ITEM 1B. | | |
| ITEM 2. | | |
| ITEM 3. | | |
| ITEM 4. | | |
| PART II | |
| ITEM 5. | | |
| ITEM 6. | | |
| ITEM 7. | | |
| ITEM 7A. | | |
| ITEM 8. | | |
| ITEM 9. | | |
| ITEM 9A. | | |
| ITEM 9B. | | |
| PART III | |
| ITEM 10. | | |
| ITEM 11. | | |
| ITEM 12. | | |
| ITEM 13. | | |
| ITEM 14. | | |
| PART IV | |
| ITEM 15. | | |
| ITEM 16. | | |
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PART I
ITEM 1. BUSINESS
As used in this Annual Report on Form 10-K for the fiscal year ended December 31, 20142017, the terms "ACCO Brands," "ACCO," the "Company," "we," "us," and "our" refer to ACCO Brands Corporation, a Delaware corporation incorporated in 2005, and its consolidated domestic and international subsidiaries.
OverviewFor a description of certain factors that may have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see "Item 1A. Risk Factors."
Overview of the Company
ACCO Brands is a leading globaldesigner, marketer and manufacturer of recognized consumer and marketer of office, schoolend-user demanded brands used in businesses, schools, and calendar productshomes. Our widely known brands include AT-A-GLANCE®, Derwent®, Esselte®, Five Star®, GBC®, Hilroy®, Kensington®,Leitz®, Marbig®, Mead®, NOBO®, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra® and select computer and electronic accessories. ApproximatelyWilson Jones®. More than 80% of our net sales come from brands that occupy the number one or number two positions in the select marketsproduct categories in which we compete. We seekdistribute our products through a wide variety of retail and commercial channels to develop newensure that our products that meet the needs of ourare readily and conveniently available for purchase by consumers and commercial end-users. We compete through a balance ofother end-users, wherever they prefer to shop. These channels include mass retailers, e-tailers, discount, drug/grocery and variety chains; warehouse clubs; hardware and specialty stores; independent office product innovation, category management, a low-cost operating modeldealers; office superstores; and an efficient supply chain. We sell our products to consumers and commercial end-users primarily through resellers, including traditional office supply resellers, wholesalers, and retailers, including on-line retailers.contract stationers. Our products are sold primarily to markets located in the U.S., Northern Europe, Brazil,Australia, Canada, Australia,Brazil and Mexico. For the year ended December 31, 2014,2017, approximately 45%55% of our sales were outside the U.S.; up from 43% in 2016. This increase was the result of the Esselte and Pelikan Artline acquisitions, which further extended our geographic reach. For further information on the acquisitions see "Note 3. Acquisitions" to the consolidated financial statements contained in Part II, Item 8. of this report and"Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
The majorityOver the past several years we have transformed our business by: divesting certain non-core commercially-oriented product lines; acquiring companies with consumer and end-user demanded brands, and continuing to diversify our distribution channels. In 2012, we acquired the Mead Consumer and Office Products business ("Mead C&OP"), which substantially increased our presence in North America and Brazil in school and calendar products with well-known consumer brands. In 2016, we purchased the remaining equity interest in Pelikan Artline from our joint venture partner, which enhanced our competitive position in school and business products in Australia and New Zealand and added new consumer categories, including writing instruments and janitorial supplies. In early 2017, we acquired Esselte Group Holdings AB ("Esselte"), which more than doubled our presence in Europe and added several iconic business brands, a significant base of independent dealer customers, and a new product category of do-it-yourself hardware tools. Together these three acquisitions have meaningfully expanded our portfolio of well-known end-user demanded brands, enhanced our competitive position from both a product and channel perspective, and added scale to our business operations.
Today our Company is a global enterprise focused on developing innovative branded consumer products for use in businesses, schools and homes. We believe our leading product category positions provide the scale to enable us to invest in marketing and product innovation to drive profitable growth. We expect to derive much of our revenue is concentratedgrowth, over the long term, in faster-growing emerging geographies wheresuch as Latin America and parts of Asia, the Middle East and Eastern Europe, which exhibit stronger demand for our product categories isthan in mature stages, butdeveloped markets. In all of our markets we see opportunities to grow sales through share gains, channel expansion and newinnovative products. We expect to derive growth in faster growing emerging geographies where demand in the product categories in which we compete is strong, such as in Latin America and parts of Asia, the Middle East and Eastern Europe. We plan to grow throughsupplement organic growth supplemented byglobally with strategic acquisitions in both coreexisting and adjacent categories. Historically, key drivers of demand for office and school products have included trends in white collar employment levels, education enrollment levels, gross domestic product (GDP), growth in the number of small businesses and home offices, as well as consumer usage trends for our product categories.
We believe our leading product positions provide the scale to enable us to invest in product innovation and drive growth across our product categories. We currently manufacture approximately half of our products locally where we operate, and source the remaining half primarily from China.
On May 1, 2012, we completed the merger ("Merger") of the Mead Consumer and Office Products Business ("Mead C&OP") with a wholly owned subsidiary of the Company. Accordingly, the results of Mead C&OP are included in our consolidated financial statements from the date of the Merger.
Reportable Segments
ACCO Brands is organized intohas three business segments: ACCO Brands North America, ACCO Brands International and Computer Products Group. Our threeoperating business segments each of which is comprised of different geographic regions. Each of the Company's three operating segments designs, markets, sources, manufactures and sells recognized consumer and end-user demanded brands used in businesses, schools and homes. Product designs are described below.tailored based on end-user preferences in each geographic region.
Our product categories include storage and organization; stapling; punching; laminating, binding and shredding machines and related consumable supplies; whiteboards; notebooks; calendars; computer accessories; and do-it-yourself tools, among others. Our portfolio of consumer and end-user demanded brands includes both globally and regionally recognized brands.
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| Operating Segment | | Geographic Regions | | Primary Brands |
| ACCO Brands North America | | United States and Canada | | AT-A-GLANCE®, Five Star®, GBC®, Hilroy®, Kensington®, Mead®, Quartet®, and Swingline® |
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| ACCO Brands EMEA | | Europe, Middle East and Africa | | Derwent®, Esselte®, GBC®, Kensington®, Leitz®, NOBO®, Rapid®, and Rexel® |
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| ACCO Brands International | | Australia, Latin America and Asia-Pacific | | Artline®, GBC®, Kensington®, Marbig®, Quartet®, Rexel®, Tilibra®, and Wilson Jones® |
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| Sales Percentage by Operating Segment | | 2017 | | 2016 | | 2015 |
| ACCO Brands North America | | 51 | % | | 65 | % | | 68 | % |
| ACCO Brands EMEA | | 28 | % | | 11 | % | | 13 | % |
| ACCO Brands International | | 21 | % | | 24 | % | | 19 | % |
| | | 100 | % | | 100 | % | | 100 | % |
ACCO Brands North America and ACCO Brands International
The ACCO Brands North America and ACCO Brands International manufacture, source and sell traditional office products, school supplies and calendar products. ACCO Brands North America comprisessegment is comprised of the U.S.United States and Canada where the Company is a leading branded supplier of consumer and ACCO Brands International comprises the rest of the world, primarily Northern Europe, Brazil, Australia and Mexico.
Our office, school and calendar product lines use namebusiness products under brands such as AT-A-GLANCE®, Day-Timer®, Five Star®, GBC®, Hilroy Marbig,®, Kensington®, Mead®, Quartet®, and Swingline®.The ACCO Brands North America segment designs, sources or manufactures and distributes school notebooks, calendars, whiteboards, storage and organization products (such as three-ring binders, sheet protectors and indexes), stapling, punching, laminating, binding and shredding products, and computer accessories, among others, which are primarily used in schools, homes and businesses. The majority of revenue in this segment is related to consumer and home products and is associated with the "back-to-school" season and calendar year-end purchases; we expect sales of consumer products to become an increasingly greater percentage of our revenue as they are faster growing than most business-related products.
ACCO Brands EMEA
The ACCO Brands EMEA segment is comprised of Europe, the Middle East and Africa, where the Company is a leading branded supplier of consumer and business products under brands such as Derwent®, Esselte®, GBC®, Kensington®, Leitz®, NOBO®, Rapid®, and Rexel®.The ACCO Brands EMEA segment designs, manufactures or sources and distributes storage and organization products (such as lever-arch binders, sheet protectors and indexes), stapling, punching, laminating, binding and shredding products, do-it-yourself tools, and computer accessories, among others, which are primarily used in businesses, homes and schools.
ACCO Brands International
The ACCO Brands International segment is comprised of Australia, Latin America and Asia-Pacific where the Company is a leading branded supplier of consumer and business products under brands such as Artline®, GBC®, Kensington®, Marbig®, Quartet®, Rexel Swingline®, Tilibra®, and Wilson Jones®, among others. The ACCO Brands International segment designs, sources or manufactures and many others. Productsdistributes school notebooks, calendars, whiteboards, storage and brandsorganization products (such as three-ring binders, sheet protectors and indexes), stapling, punching, laminating, binding and shredding products, writing instruments, and janitorial supplies, among others, which are not confined to one channel or product categoryprimarily used in businesses, schools and are sold based on end-user preference in each geographic location.
homes. The majority of our officerevenue in this segment is related to consumer products such as stapling, binding and laminating equipmentis associated with the “back-to-school” season and related consumable supplies, shredders and whiteboards, are used by businesses. Mostcalendar year-end purchases; we expect sales of these end-users purchase theirconsumer products from our customers, which include traditional office supply resellers, wholesalers and other retailers, including on-line retailers. We also supply someto become an increasingly greater percentage of our products directly to large commercial and industrial end-users, and provide business machine maintenance and certain repair services. We also supply private label products within the office products sector.
Our school products include notebooks, folders, decorative calendars, and stationeryrevenue as they are faster growing than most business-related products. We distribute our school products primarily through mass merchandisers, and other retailers, such as grocery, drug and office superstores as well as on-line retailers. We also supply private label products within the school products sector.
Our calendar products are sold throughout all channels where we sell office or school products, as well as directly to consumers both on-line and through direct mail.
Computer Products Group
Our Computer Products Group designs, sources, distributes, markets and sells accessories for laptop and desktop computers and tablets. These accessories primarily include security products, input devices such as mice, laptop computer carrying cases, hubs, docking stations, power adapters, tablet accessories and charging racks and ergonomic devices. We sell these products mostly under the Kensington®, Microsaver® and ClickSafe® brand names, with the majority of revenue coming from the U.S. and Northern Europe. Our computer products are manufactured by third-party suppliers, principally in Asia, and are distributed from our regional facilities. Our computer products are sold primarily to consumer electronics retailers, information technology value-added resellers, original equipment manufacturers, office products retailers, as well as directly to consumers on-line.
For furtherCertain financial information onfor each of our business segments see "Noteand geographic regions is incorporated by reference to "Note 16. Information on Business Segments" to the consolidated financial statements contained in Part II, Item 8. of this report.
Customers/Competition
Customers
ACCO Brands markets and sells its strong multi-product offering broadly and is not dependent on any one channel. Our products are sold through all relevant channels, namely retailers, including: mass retailers; e-tailers; discount, drug/grocery and variety chains; warehouse clubs; hardware and specialty stores; independent office product dealers; office superstores; and contract stationers. We also sell directly to commercial and consumer end-users through our e-commerce platform and our direct sales are generated principallyorganization. Changes in consumer buying patterns over the U.S., Northern Europe, Brazil, Canada, Australia and Mexico. For the year ended December 31, 2014, approximately 45%past several years have resulted in increased consumer purchases of our netproducts through mass retailers and e-tailers. Increased sales were outsidethrough retail and e-tail channels have partially mitigated the U.S. impact of lower traffic and sales experienced by the traditional office products suppliers and wholesaler channels.
Our top ten customers accounted for 53%44% of net sales for the year ended December 31, 2014.2017. During 2017, no customer exceeded 10% of our net sales. Sales to Staples our largest customer, amounted to approximately 13%14% of net sales for each of the years ended 2014, 2013December 31, 2016 and 2012.2015. Sales for Office Depot, our second largest customer,to Walmart amounted to approximately 11%10% of our 2014 net sales. See "Item 1A. Risk Factors - Our business servessales for the year ended December 31, 2016. Sales to Office Depot amounted to approximately 10% of net sales for the year ended December 31, 2015.
Competition
We operate in a limited number ofhighly competitive environment characterized by low-cost competitors, large, and sophisticated customers, low barriers to entry, and competition from a substantial reduction in sales to one or morewide range of these customers could significantly impact our operating results," and"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
The customer base to which we sell our products is primarily made up of large global and regional resellers of our products including traditional office supply resellers, wholesalers and other retailers, including on-line retailers. Mass merchandisers and retail channels primarily sell to individual consumers but also to small businesses. We also sell to commercial contract dealers, wholesalers, distributors and independent dealers who primarily serve business end-users. Over half of our product sales by our customers are to business end-users, who generally seek premium products that have added value or ease-of-use features and a reputation for reliability, performance and professional appearance. Some of our binding and laminating equipment products are sold directly to high-volume end-users and commercial reprographic centers. We also sell calendar and computer products directly to consumers.
Our customers have steadily consolidated over the last two decades. In the fourth quarter of 2013, two of our large customers, Office Depot and OfficeMax, completed their merger. Since the merger, the combined company has taken actions to harmonize pricing from its suppliers, close retail outlets and rationalize their supply chain, which have negatively impacted, and will continue to negatively impact, our sales and margins. Additionally, our largest customer, Staples, recently announced an agreement to acquire Office Depot. Together these customers accounted for 25% of our 2014 net sales.
Historically, office product superstores have maintained a significant market share in office, school and dated goods. More recently, new outlets, including mass merchandisers, drug store chains and on-line retailers, have surfaced as meaningful competitors to the office products superstores and are successfully taking market share from office product superstores in many of our product categories.
Other current trends among our customers include fostering high levels of competition among suppliers, demanding innovative new products and requiring suppliers to maintain or reduce product prices and deliver products with shorter lead times and in smaller quantities. Other trends are for retailers to import products directly from foreign sources and sell those products, which compete with our products, under the retailer's own private-label brands. Our increased focus on the mass channel and sales growth with on-line retailers has helped to partially offset declines in the office superstore channel due to consolidation and channel shifts. The combination of these market influences, along with a continuing trend of consolidation among resellers, has created an intensely competitive environment in which our principal customers continuously evaluate which product suppliers they use. This results in pricing pressures, the need for stronger end-user brands, broader product penetration within categories, the ongoing introduction of innovative new products and continuing improvements in customer service. See also "Item 1A. Risk Factors - Our
customers may further consolidate, which could adversely impact our sales and margins," "- Shifts in the channels of distribution for our products could adversely impact our business," "- Challenges related to the highly competitive business segments in which we operate could have an adverse effect on our ongoing business, results of operation and financial position," "- Our success depends on our ability to continue to develop innovative products that meet end-user demandsservices (including price expectations) and expand our business into adjacent categories which are experiencing higher growth rates," and "- The market for products sold by our Computer Products Group is rapidly changing and highly competitive."
Competitors of ourprivate label). ACCO Brands North America and ACCO Brands International segments include 3M, Blue Sky, Carolina Pad, CCL Industries, Dominion Blueline, Esselte, Fellowes, Franklin Covey, Hamelin, House of Doolittle, Newell Rubbermaid, RR Donnelley, Smead, Spiral Binding andcompetes with numerous branded consumer products manufacturers as well as numerous private label suppliers and importers. Competitorsimporters, including many of the Computer Products Groupour customers who import their own private label products directly from foreign sources. Examples of branded competitors to ACCO Brands include Belkin,Bi-Silque, Blue Sky, CCL Industries, Dominion Blueline, Fellowes, Logitech, TargusHamelin, Herlitz, LSC Communications, Newell Rubbermaid, Novus, Smead, Spiral Binding and Zagg.Stanley Black and Decker, among others.
Certain financial information for each of ourThe Company meets its competitive challenges by creating and maintaining leading brands and differentiated and innovative products that deliver superior value, performance and benefits to consumers. Our products are sold to consumers and end-users through diverse distribution channels delivering superior customer services. We further meet consumer needs by developing, producing and procuring products at a competitive cost, which are priced attractively. The Company’s management also believes that its experience at successfully managing a complex, highly seasonal business segments and geographic regions is incorporated by reference to "Note 16. Information on Business Segments" to the consolidated financial statements contained in Part II, Item 8. of this report.a competitive advantage.
Product Development and Product Line Rationalization
Our strong commitment to understanding our consumers and definingdesigning products that fulfill their needs drives our product development strategy, which we believe is and will continue to be a key contributor to our success. Our new products are developed from our owna strong understanding of consumer understanding,needs by our own research and development team or through partnership initiatives with inventors and vendors. Costs related to consumer research and product research when paid directly by ACCO Brands are included in marketing costs and research and development expenses, respectively. Research and development expenses amounted to $20.2$23.5 million, $22.5$21.0 million and $20.8$20.0 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. As a percentage of sales, research and development expenses were 1.2%, 1.3% and 1.2%1.3% for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. See also "Item 1A. Risk Factors - Our success depends on our ability to continue to invest in and develop innovative products that meet end-user demands (including price expectations) and expand our business into adjacent categories which are experiencing higher growth rates."
We consistently review our businessesbusiness units and product offerings, assess their strategic fit, and seek opportunities to divest nonstrategic businessesinvest in new products and adjacencies as well as to rationalize our product offerings. The criteria we use in assessing the strategic fit or investment opportunities include: the ability to increase sales for the business;Company; the ability to create strong, differentiated products and brands; the importance of the businessproduct category to key customers; the business's relationship with existing product lines; the impact of the businessimportance to the market; and the business's actual and potential impact on our operating performance. Asperformance; and the value to ACCO Brands versus an alternative owner.
Marketing and Demand Generation
We support our brands with a resultsignificant investment in targeted marketing, advertising and consumer promotions, which increase brand awareness and highlight the innovation and differentiation of this review process, during 2014, we made a business decision that resulted in the loss of low-margin retail bindery business relatedour products. We work with third party vendors, such as Nielsen, NPD Group, GfK SE and Kantar Group, to a large customer in the North America segmentcapture and repositioned the Computer Products Group by shiftinganalyze consumer buying habits and product trends. We also use our focus away from commoditized tablet accessories. These decisions will continuedeep consumer knowledge to impact us in 2015.develop effective marketing programs, strategies and merchandising activities.
Raw Materials
The primary materials used in the manufacturing of many of our products are paper, plastics, resin, polyester and polypropylene substrates, steel, wood, aluminum, melamine, zinc and cork. These materials are available from a number of suppliers, and we are not dependent upon any single supplier for any of these materials. Based on our experience, we believe that adequate quantities of these materials will be available in the foreseeable future. See also "Item 1A. Risk Factors - Risks associated with currency volatility could adversely affect our sales, profitability, cash flow and results of operations," and "- Raw materials, labor and transportation costs are subject to price increases and decreases that could adversely affect our sales and profitability."
Supply
Our products are either manufactured or sourced to ensure that we supply our customers with appropriate customer service, quality products, innovative solutions and attractive pricing.pricing as well as convenient customer service. We have built a customer-focused business model with a flexible supply chain to ensure that these factors are appropriately balanced. Using a combination of manufacturing and third-party sourcing also enables us to reduce our costs and effectively manage our production assets by lowering capital investment and working capital requirements. Our overall strategy is to manufacture locally those products that would incur a relatively high freight and/or duty expense or that have high customer service needs and source through third-parties those products, that have a high proportion ofwhich require higher direct labor cost.to produce. We also look for opportunities to leverage our manufacturing facilities to improve operating efficiencies as well as customer service. We currently manufacture approximately half of our products locally where we operate, and source the remaining half. Low-cost sourcinghalf in lower cost countries, primarily comes from China, but we also source from other Far Eastern countries and Eastern Europe.
Seasonality
Historically, our business has experienced higher sales and earnings in the third and fourth quarters of the calendar year.year and we expect these trends to continue. Two principal factors contribute to this seasonality: (1) the office products industry, its customers and ACCO Brands specificallywe are a major supplierssupplier of products related to the "back-to-school"back-to-school season, which occurs principally from June through September for our North American business and from November through February for our Australian and Brazilian businesses; and (2) several productsproduct categories we sell lend themselves to calendar year-end purchase timing, including AT-A-GLANCE® and Day-Timer®planners, paper organization and storage products (including bindery) and Kensington® computer accessories, which have higher sales in the fourth quarter driven by traditionally strong fourth-quarter sales of personal computers and tablets. As a result, we have generated, and expect to continue to generate, most of our earnings in the second half of the year and much of our cash flow in the first, third and fourth quarters as the associated receivables are collected.
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| Sales Percentages by Fiscal Quarter | | 2014 | | 2013 |
| 1st Quarter | | 20 | % | | 20 | % |
| 2nd Quarter | | 25 | % | | 25 | % |
| 3rd Quarter | | 28 | % | | 27 | % |
| 4th Quarter | | 27 | % | | 28 | % |
| | | 100 | % | | 100 | % |
See also "Item 1A. Risk Factors - Our business is subjectFor further information on the seasonality of net sales and earnings, see "Note 19. Quarterly Financial Information (Unaudited)" to risks associated with seasonality, which could adversely affect our cash flow, resultsthe consolidated financial statements contained in Part II, Item 8. of operations and financial condition."this report.
Intellectual Property
We have many patents,Our products are marketed under a variety of trademarks. Some of our more significant trademarks brand names and trade names that are, in the aggregate, important to our business. The loss of any individual patent or license, however, would not be material to us taken as a whole. Many of ACCO Brands' trademarks are only important in particular geographic markets or regions. Our principal registered trademarks are:include ACCO®, AT-A-GLANCE®, ClickSafeDerwent®, Day-TimerEsselte®, Five Star®, GBC®, Hilroy®, Kensington®, Leitz®, Marbig®, Mead®, MicroSaverNOBO® NOBO,, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra®, and Wilson Jones®. See also "Item 1A. Risk Factors - Our inability to secure, protect and maintainWe own rights to these trademarks in various countries throughout the world. We protect these marks as appropriate through registrations in the U.S. and other jurisdictions. Depending on the jurisdiction, trademarks are generally valid as long as they are in use or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use. We also own numerous patents worldwide. While we consider our portfolio of trademarks, patents, proprietary trade secrets, technology, know-how processes, and related intellectual property couldrights to be material to our operations in the aggregate, the loss of any one trademark, patent or a group of related patents would not have ana material adverse impacteffect on our business."business as a whole.
Environmental Matters
We are subject to federal,national, state, andprovincial and/or local environmental laws and regulations concerning the discharge of materials into the environment and the handling, disposal and clean-up of waste materials and otherwise relating to the protection of the environment. This includes environmental laws and regulations that affect the design and composition of certain of our products. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. In the opinion of our management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon our capital expenditures, financial condition and results of operations or competitive position. See also "Item 1A. Risk Factors - We are subject to global environmental regulation and environmental risks, product content and product safety laws and regulations as well as laws, regulations and self-regulatory requirements relating to privacy and data security."
Employees
As of December 31, 20142017, we had approximately 5,2406,620 full-time and part-time employees. There have been no strikes or material labor disputes at any of our facilities during the past five years. We consider our employee relations to be good.
For a description of certain factors that may have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see "Item 1A. Risk Factors."
Executive Officers of the Company
The following sets forth certain information with regard to our executive officers as of February 23, 201528, 2018 (ages are as of December 31, 2014)2017).
Mark C. Anderson, age 5255
2007 - present, Senior Vice President, Corporate Development
Joined the Company in 2007
Boris ElismanPatrick H. Buchenroth, , age 5251
2017 - present, Executive Vice President and President, ACCO Brands International
2013 - 2017, Senior Vice President and President, Emerging Markets
2013 - Controller and Chief Accounting Officer, NewPage Corporation
2012 - 2013, Senior Vice President, Finance, ACCO Brands USA LLC
2005 - 2012, Chief Financial Officer, Consumer and Office Products Division, MeadWestvaco Corporation
Joined the Company in 2002
Boris Elisman, age 55
2016 - present, Chairman, President and Chief Executive Officer
2013 - 2016, President and Chief Executive Officer
2010 - 2013, President and Chief Operating Officer
2008 - 2010, President, ACCO Brands Americas
2008, President, Global Office Products Group
2004 - 2008, President, Computer Products Group
Joined the Company in 2004
Neal V. Fenwick, age 5356
2005 - present, Executive Vice President and Chief Financial Officer
1999 - 2005, Vice President Finance and Administration, ACCO World
1994 - 1999 Vice President Finance, ACCO Europe
Joined the Company in 1984
Christopher M. Franey, age 58
2010 - present, Executive Vice President; President, Computer Products Group
2010 - 2013, Executive Vice President; President, ACCO Brands International and President, Computer Products Group
2008 - 2010, President, Computer Products Group
Joined the Company in 2008
Ralph P. Hargrow, age 6265
2013 - present, Senior Vice President, andGlobal Chief People Officer
2005 - 2013, Global Chief People Officer, Molson Coors Brewing Company
Joined the Company in August 2013
Robert J. Keller, age 61
2013 - present, Executive Chairman
2008 - 2013, Chairman and Chief Executive Officer
2004 - 2008, President and Chief Executive Officer, APAC Customer Services, Inc.
Joined the Company in 2008
Gregory J. McCormack, age 5154
October 2018 - present, Senior Vice President, Global Products and Operations
2013 - present,2018, Senior Vice President, Global Products
2012 - 2013, Senior Vice President, Operations, ACCO Brands Emerging Markets
2010 - 2012, Senior Vice President, Operations - ACCO Brands International
2008 - 2010, Senior Vice President, Operations, Americas
Joined the Company in 1996
Neil A. McLachlanCezary L. Monko, age 5856
20122017 - present, Executive Vice President; President Internationaland President, ACCO Brands EMEA
19992014 - 2012,2017, President Consumer and Office Products Group, MeadWestvaco CorporationChief Executive Officer, Esselte
2004 - 2014, President, Esselte Europe
2002-2004, President Sales Esselte Europe
Joined the Company in 20121992
Thomas P. O'Neill, Jr, age 61
2008 - March 2015, Senior Vice President, Finance and Accounting and Principal Accounting Officer
2005 - 2008, Vice President, Finance and Accounting
Joined the Company in 2005
Kathleen D. Schnaedter, age 4548
Effective April 2017 - present, Senior Vice President and Chief Accounting Officer
2015 - 2017, Senior Vice President, Corporate Controller and Chief Accounting Officer
2008 - 2015, Vice President and Corporate Controller
Joined the Company in 1994
Pamela R. Schneider, age 5558
2012 - present, Senior Vice President, General Counsel and Secretary
2010 - 2012, General Counsel, Accertify, Inc.
2008 - 2010, Executive Vice President, General Counsel and Secretary, Movie Gallery, Inc. (filed for Chapter 11 in February 2010)
2005 - 2008, Senior Vice President, General Counsel and Secretary, APAC Customer Services, Inc.
Joined the Company in 2012
Thomas W. Tedford, age 4447
2015 - present, Executive Vice President and President, ACCO Brands North America
2010 - present,2015, Executive Vice President; President, ACCO Brands U.S. Office and Consumer Products
2010, - 2010, Chief Marketing and Product Development Officer
2007 - 2010, Group Vice President, APAC Customer Services, Inc.
Joined the Company in 2010
ITEM 1A. RISK FACTORS
The factors that are discussed below, as well as the matters that are generally set forth in this Annual Report on Form 10-K and the documents incorporated by reference herein, could materially and adversely affect the Company’s business, results of operations and financial condition.
Our business serves aA limited number of large and sophisticated customers account for a significant percentage of our net sales, and a substantial reduction in sales to or the consolidation of one or more of these customers could significantlyadversely impact our operating results.results of operations.
A relatively limited number of customers account for a large percentage of our total net sales. Our top ten customers accounted for 53%44% of our net sales for the fiscal year ended December 31, 2014. Sales to Staples, our largest customer, amounted to approximately 13% of our 2014 net sales and sales to Office Depot, our second largest customer, amounted to approximately 11% of our 2014 net sales.
Our large customers may seek to leverage their size to obtain favorable pricing and other terms. In addition, they have the ability to directly source their own private label products and to create and support new and competing suppliers.2017. The loss of, or a significant reduction in sales to, one or more of our top customers, or significant changes to the terms on which we sell our products to our top customers, could have a material adverse effect on our business, results of operations and financial condition.
OurWhen our larger customers resist our efforts to increase prices, delist our products or reduce the shelf space allotted to our products, or demand lower pricing, increased promotional programs, longer payment terms or specifically tailored products, our sales and margins may further consolidate,be adversely effected. Other significant retail customers might also adopt these tactics in their dealings with us in response to the significant growth in online retailing for consumer products, which could adversely impactis outpacing the growth of traditional retail channels. Larger customers also generally have the scale to develop supply chains that permit them to change their buying patterns, operate with reduced inventories or develop and market their own private label and other economy brands that compete with some of our products, all of which negatively impacts our sales and margins.
OurOffice superstores, wholesale and retail customers have steadily consolidated overin Europe, the last two decades.U.S. and our other major markets face increasing competition. In response they continue to consolidate or form buying alliances, resulting in fewer, larger customers with whom we can conduct business. Additionally, certain of them face, or in the fourth quarterfuture may face, financial difficulties. Continued consolidation among one or a few large retailers in a particular country or region increases the risk that if any one of them substantially reduces its purchases of our products, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales and margins. In 2013, two of our large U.S. customers, Office Depot and OfficeMax, completedmerged. Another large customer, Staples, along with Office Depot also continue to sell off parts of their merger. Sincenon-U.S. business to private equity firms. Historically, consolidation of our customers or their sale to private equity firms have had a material impact on our sales and margins. Further, the merger,declining financial health of one or more of our large customers may result in a significant loss or reduction in sales to that customer.
The economic climate in some of the combined companycountries in which we operate is volatile. A slowing economy in our key markets or changes in consumer buying habits could adversely affect the financial health of one or more of our large customers, which in turn could have an adverse effect on our results of operations and financial condition. The sell-through of our products by our customers is dependent in part on high quality merchandising and an appealing store environment to attract consumers, which requires continuing investments by our customers. Large customers that experience financial difficulties may fail to make such investments or delay them, resulting in lower sales and orders for our products.
Sales of our products may be adversely affected by issues that affect consumer discretionary spending and/or consumer spending decisions during periods of economic uncertainty or weakness.
Our business depends on consumer discretionary spending, and as a result, our results are highly dependent on consumer and business confidence and the health of the economies in the countries in which we operate. Consumer spending is affected by many factors outside of the Company’s control, including general economic conditions, consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt, the costs of basic necessities and other goods and the effects of the weather or natural disasters. Additionally, during periods of economic uncertainty or weakness, we tend to see our reseller customers reduce inventories as the demand for our products decrease as consumers forgo certain purchases altogether or switch to private label and other branded and/or generic products that compete on price and quality. Decreases in consumer demand for our products can result in the need to spend more on promotional activities. Overall, adverse changes in economic conditions or sustained periods of economic uncertainty or weakness could negatively affect our earnings and have an adverse effect on our business, results of operations, cash flow and financial condition.
The Company has taken actionsforeign currency translation and transaction risks that may materially adversely affect the Company’s results of operations, financial condition and liquidity.
Approximately 55% of our net sales for the fiscal year ended December 31, 2017 were transacted in a currency other than the U.S. dollar. The fluctuations in the foreign currency rates relative to harmonize pricing from its suppliers, close retail outletsthe U.S. dollar can cause transaction, translation, and rationalize their supply chain,other losses, which have negatively impacted, and will continue tocould negatively impact our sales and margins.profitability. We believe these activities will continue for some time and that the adverse effects and future actions will take several years to be fully realized. Additionally, our largest customer, Staples, announced in early 2015 an agreement to acquire Office Depot, our second largest customer. Together these customers accounted for 25%also source approximately half of our 2014 net sales. Ifproducts from China and other Far Eastern countries using U.S. dollars. The strengthening of the acquisitionU.S. dollar against foreign currencies ordinarily has a negative impact on the Company’s reported sales and operating margins, and conversely, the weakening of the U.S. dollar against foreign currencies ordinarily has a positive impact.
When our cost of goods increases due to a strengthening in the U.S. dollar against the local foreign currency, we will seek to raise prices in our foreign markets in an effort to recover the lost margin. Due to competitive pressures and the timing of these price increases relative to the changes in the foreign currency exchange rates, it is completedoften difficult to increase prices fast enough to fully offset the cumulative impact of the foreign-exchange-related inflation of our cost of goods sold in these markets. From time to time, we expect Staplesmay also use hedging instruments to take similarmitigate transactional exposure to changes in foreign currencies. The effectiveness of our hedges in part depends on our ability to accurately forecast future cash flows, which is particularly difficult during periods of uncertain demand for our products and services and highly volatile exchange rates. Further, hedging activities may only offset a portion, or none at all, of the material adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place and we may incur significant losses from hedging activities due to factors such as demand volatility and currency fluctuations.
Our primary exposure to local currency movements is in Europe (the Euro, the Swedish krona and the British pound), Australia, Canada, Brazil, and Mexico. Government actions such as currency devaluations, foreign exchange controls, price or profit controls, and a government take-over, could further adversely impact foreign currency exchange rates and the Company’s business, results of operations, cash flows, and financial condition.
Challenges related to the highly competitive business environments in which we expect to adversely impact our sales and margins. The impact of this further industry consolidation will takeoperate could have a number of years to be fully realized.
There can be no assurance that following consolidation these and other large customers will continue to buy from us across our different product segments or geographic regions or at the same levels as prior to consolidation, which could adversely impact our financial results. Further, continued industry consolidation appears likely, which may result in further reductions in our sales and margins and have anmaterial adverse effect on our business, results of operations and financial condition.
See also "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Shifts in the channels of distribution for our products could adversely impact our business.
Our customersWe operate in a very competitive environment. Historically, office product superstores have maintained a significant market share in office, school and dated goods. More recently, new outlets, including mass merchandisers, drug store chains and on-line retailers, have surfaced as meaningful competitors to the office products superstores and are successfully taking market share from office product superstores in many of our product categories. The loss of market share by one or more of our top customers or the continued shift of market share away from the traditional office product superstores towards mass merchandisers, online merchants and other competitors (with whom we currently do a smaller volume of business) could reduce our sales and adversely affect our margins. Additionally, if we are unable to grow sales and gain market share with customers operating in these newer channels of distribution or if the margins we realize in these channels are lower, our business, results of operations and financial condition could be adversely affected.
Challenges related to the highly competitive business segments in which we operate could have an adverse effect on our ongoing business, results of operations and financial condition.
We operate in highly competitive business environment which presents a number of challenges, including:
characterized by low-cost competitors; large, sophisticated customers; low barriers to entry;
sophisticated and large customers who have the ability to source their own private label products;
limited retail space which constrains our ability to offer certain products;
competitors with strong brands;
importscompetition from a range of countries, including countries with lower production costs; and
competition from awide range of products and services including(including private label products and electronic and digital or web-based products and services that can replace or render obsoletecertain of our products obsolete). ACCO Brands competes with numerous branded consumer products manufacturers as well as numerous private label suppliers and importers, including many of our customers who import their own private label products directly from foreign sources. Many of our competitors have strong, sought-after brands. They also have the ability to manufacture products locally at a lower cost or less desirable somesource them from other countries with lower production costs both of which can give them a competitive advantage in terms of price under certain circumstances. In addition, retail space devoted to our product categories is limited and, as a result of competitive pressures, many of our customers are closing retail locations, reducing the products we sell.size of their retail stores and diversifying their product offerings further reducing the available retail space devoted to our products.
As a result, our business is likely to be affected by:by actions: (1) decisions and actions ofby our top customers to increase their purchases of private label products or otherwise change product assortments; (2) decisions ofby current and potential suppliers of competing productscompetitors to increase investment in product and brand development, lower prices, take advantage of low entry barriers to expand their production, or move production to countries with lower prices;production costs; and (3) decisions ofby consumers and other end-users of our products to expand their use of lower priced, substitutelower-priced or alternative products. Any such decisionsactions could result in lower sales and margins and adversely affect our business, results of operations and financial condition.
Our success depends partially on our ability to continue to develop and market innovative products that meet end-userour consumer demands, (includingincluding price expectations) and expand our business into adjacent categories which are experiencing higher growth rates.expectations.
Our competitive position depends on continued investmentour ability to successfully invest in innovation and product development, manufacturing and sourcing, quality standards, marketing and customer service and support. Ourdevelopment. That success will depend, in part, on our ability to anticipate and offerdevelop and market products that appeal to the changing needs and preferences of our customersconsumers. We could focus our efforts and end-users in a market where manyinvestment on new products that ultimately are not accepted by consumers. Likewise, our failure to offer innovative products that meet consumer and end-user demand could compromise our competitive position and adversely affect our sales, profitability and results of operation.
Our strategy is partially based on growth through acquisitions and the expansion of our product assortment into new and adjacent product categories are affected by continuing improvements in technology and shortened product lifecycles and othersthat are experiencing secular declines. higher growth rates. Failure to properly identify, value, manage and integrate acquisitions or to expand into adjacent categories may materially impact our business, results of operations and financial condition.
Our growth strategy includes continued focus on mergers and acquisitions. We are focused on acquiring companies that are either in our existing product categories or geographic markets, which enhance our ability to compete effectively or that have the potential to accelerate our growth or our entry into adjacent product categories.
We may not have sufficient resourcesbe successful in identifying suitable acquisition opportunities, prevailing against competing potential acquirers, negotiating appropriate acquisition terms, obtaining financing, completing proposed acquisitions, integrating acquired businesses or expanding in new markets or product categories. In addition, an acquisition may not perform as anticipated, be accretive to make the investments that mayearnings or prove to be necessarybeneficial to anticipate or reactour operations and cash flow. If we fail to the changing needs,effectively identify, value, consummate, manage and integrate any acquired company, we may not identify, developrealize the potential growth opportunities or achieve the financial results anticipated at the time of its acquisition.
An acquisition could also adversely impact our operating performance as a result of the issuance of acquisition-related debt, pre-acquisition assumed liabilities, undisclosed facts about the business, acquisition expense and market products successfullythe amortization of acquired assets or otherwise be able to maintain our competitive position.possible future impairments of goodwill or intangible assets associated with the acquisition.
In addition,To the market for certain ofextent acquisitions increase our exposure to emerging markets, the products we sell is declining.risks associated with doing business in these markets will increase. See also "- Continued declinesGrowth in the use of certainemerging geographies may be difficult to achieve and exposes us to financial, operational, regulatory and compliance and other risks not present or not as prevalent as in more established markets."
Additionally, part of our products, especially paper-based dated and time management and productivity tools, could adversely affect our business." Part of our strategy to deal with this decline is to expand our product assortment into new and adjacent product categories with a higher growth profile. There can be no assurance that we will successfully execute these strategies. If we are unable to take market share or to successfully expandincrease sales by expanding our product assortment, our business, results of operations and financial condition could be adversely affected.
We may face challenges with integrating acquisitions and achieving the financial and other results anticipated at the time of acquisition, including the planned synergies.
We may face challenges in integrating our acquisitions, including the Pelikan Artline and Esselte acquisitions, with our existing operations. These challenges may include, among other things: integrating the business cultures; possible difficulties in retaining key employees and key customers; and the difficulty of integrating the acquired business's finance, accounting and other business systems without negatively impacting our internal control over financial reporting and our disclosure controls and procedures.
The market for products sold byprocess of integrating operations also could cause an interruption of, or loss of momentum in, the activities of one or more of our Computer Products Groupbusinesses. Members of our senior management may need to devote considerable amounts of time to the integration process. If our senior management is rapidly changingnot able to effectively manage the integration processes, or if any significant business activities are interrupted as a result of the integration process, our business and highly competitive.financial results could suffer.
Additionally, we generally expect that we will realize synergy cost savings and other financial and operating benefits from our acquisitions. Our Computer Products Group operatessuccess in a market that is characterized by rapid technological changes, short product life cyclesrealizing these synergy savings and a dependencyother financial and operating benefits, and the timing of this realization depends on the introduction by third party manufacturerssuccessful integration of new productsthe business operations of the acquired company. We cannot predict with certainty if or when these synergy savings and devices,other benefits will occur, or the extent to which drives demand for accessories sold bywe will be successful.
Finally, the Company. To compete successfully, we needintegration of any acquisition will involve changes to, anticipateor implementation of critical information technology systems, modifications to our internal control systems, processes and bringaccounting and financial systems, and the establishment of disclosure controls and procedures and internal control over financial reporting necessary to market innovative new accessories inmeet our obligations as a timely and effective way, which requires significant skills and investment. We may not have sufficient market intelligence, talent or resourcespublic company. Failure to successfully meetcomplete any of these challenges. Additionally, the short product life cycles increase the risk thattasks could adversely affect our products will become commoditized or obsoleteinternal control over financial reporting, our disclosure controls and that we could be left with an excess of old and slow-moving inventory. Rapid changes in technology, shifting demand for personal computers, laptops, tablets and mobile devices, as well as delays in the introduction of new technologyprocedures and our ability to anticipateeffectively and respondtimely report our financial results. If we are unable to these changes and delays, could adversely affect the demand foraccurately report our products and have an adverse effect on the business,financial results of operations and financial condition of our Computer Products Group. Recently, rapid changes in technology lead to the commoditization of many of our tablet accessories resulting in increased competition and a degradation in sales and margins. In 2014, we decided to shift our focus away from these commoditized products resulting in a reduction in salestimely manner and profitability. See "Part II, Item 7. Management's Discussionestablish internal control over financial reporting and Analysis of Financial Conditiondisclosure controls and Results of Operations."
Sales of our products may be adversely affected by issuesprocedures that affect business, commercial and consumer spending decisions during periods of economic uncertainty or weakness.
Demand for our products, especially business machines and other durable goods, can be very sensitive to uncertain or weak economic conditions. In addition, during periods of economic uncertainty or weakness, we tend to see the demand for our products decrease, increased competition from private label and other branded and/or generic products that compete on price and quality and our reseller customers reduce inventories. In addition end-users tend to purchase more lower-cost, private label or other economy brands, more readily switch to electronic, digital or web-based products serving similar functions, or forgo certain purchases altogether. As a result, adverse changes in economic conditions or sustained periods of economic uncertainty or weakness could negatively affect our earnings and have an adverse effect onare effective; our business, results of operations, cash flowoperation and financial position.condition; investor, supplier and customer confidence in our reported financial information; the market perception of our Company and/or the trading price of our common stock could be materially and adversely affected.
We rely extensively on information technology systems to operate, transact and otherwise manage our business. Any material failure, inadequacy, interruption or security breachinterruption of that technology or its supporting infrastructure could materially adversely affect our business, results of operations orand financial condition.
We rely extensively on our information technology systems, mostmany of which are outsourced to third-party service providers. We depend on these systems and our third-party service providers to effectively manage our business and execute the production, distribution and sale of our products as well as to manage and report our financial results and run other support functions. Although we have implemented service level agreements and have established monitoring controls, if our outsourcing vendorsthird-party service providers fail to perform their obligations in a timely manner or at satisfactory levels, our business could suffer. TheAdditionally, our failure to properly maintain and successfully upgrade or replace any of these systems, toespecially our enterprise resource planning systems (including our financial systems), so that they operate effectively problems with transitioning to upgraded or replacement systems, or a breach in the security of these systems could disrupt service to our customers or negatively impact our ability to report our financial results in a timely and accurate manner, damage our reputation, and adversely affect our business, results of operations and financial condition.manner.
Our information technology general controls are an important aspectelement of our internal control over financial reporting and our disclosure controls and procedures. In 2014, we had a material weakness in our information technology general controls which has been remediated. Failure to successfully execute our information technology general controls could adversely impact the effectiveness of our internal control over financial reporting and our disclosure controls and procedures and impair our ability to accurately and timely report our financial results in a timely manner.results.
If services to our customers are negatively impacted by the failure or breach of our information systems, or if we are unable to accurately and timely report our financial results, in a timely manner or to conclude that ourwe do not have effective internal control over financial reporting and effective disclosure controls and procedures, are effective, investor, supplierit could damage our reputation and customer confidence in our reported financial information as well as market perception of our Company and/or the trading price of our common stock could be adversely affected. The occurrence of any of these events could have an adverse impact onaffect our business, results of operations and financial condition.
Security breaches could compromise our confidential and proprietary information as well as personally identifiable information we hold and expose us to operational and legal risks which could cause our business and reputation to suffer and materially adversely affect our results of operations.
We maintain information necessary to conduct our business in digital form, which is stored in data centers and on our networks and third-party cloud services, including confidential and proprietary information as well as personally identifiable information regarding our customers and employees. Data maintained in digital form is subject to the risk of intrusion, tampering and theft. Our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions.
We maintain systems designed to prevent such intrusion, tampering and theft. The development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts by hackers to overcome security measures become more sophisticated. Further, we obtain assurances from third parties to whom we provide confidential, proprietary and personally identifiable information regarding the sufficiency of their security procedures and, where appropriate, assess the protections employed by these third parties.
Despite these efforts, the possibility of intrusion, tampering and theft cannot be eliminated entirely. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target. Additionally, there can be no assurance that the actions we and our third party providers are taking and will continue to take will prevent a breach of, or attack on the information systems which house our confidential, proprietary and personally identifiable information. Any such breach or attack could compromise our network, the network of a third party to whom we have disclosed confidential, proprietary or personally identifiable information, a data center where we have stored such information or a third-party cloud service provider, and the information stored there could be accessed, publicly disclosed, lost or stolen.
Any such intrusion, tampering or theft and any resulting disclosure or other loss of such information could result in a disruption to our information technology infrastructure, interruption of our business operations, violation of applicable privacy and other laws or standards, significant legal and financial exposure beyond the scope or limits of any insurance coverage, increased operating costs associated with remediation activities, and a loss of confidence in our security measures, all of which could harm our reputation with our customers, end-users, employees and other stakeholders and adversely affect our results of operation. Contractual provisions with third parties, including cloud service providers, may limit our ability to recover these losses.
Growth in emerging market geographies may be difficult to achieve and exposes us to certainfinancial, operational, regulatory and compliance and other risks including economic volatility, unstable political conditions and civil unrest.not present or not as prevalent as in more established markets.
An increasing percentageA portion of our sales are derived from emerging markets such as Latin America and parts of Asia, the Middle East, Africa and Eastern Europe. Moreover, the profitable growth of our business in emerging markets, through both organic investments and through acquisitions, is a key element to our long-term growth strategy.
Emerging markets generally involve more financial, operational and operationalregulatory and compliance risks than more mature markets. In some cases, emerging markets have greater political and economic volatility, greater vulnerability to infrastructure and labor disruptions, are more susceptible to corruption and have different laws and regulations. Further, these emerging markets are in locations wheregenerally more remote from our headquarter's location and have different cultures which may make it may be more difficult to impose corporate standards and procedures and the extraterritorial laws of the United States.U.S. and other jurisdictions, including the U.S. Foreign Corrupt Practices Act , the U.K. Bribery Act and other similar laws. Negative or uncertain political climates and military disruptions in developing and emerging markets could also adversely affect us. Further, weak or corrupt legal systems may affect our ability to protect and enforce our intellectual property, contractual and other rights.
As we seek to expand and grow our business in these emerging markets, we increase our exposure to these financial, operational and regulatory and compliance risks as well as legal and other risks, including currency transfer restrictions, the impact of currency fluctuations, hyperinflation or devaluation, changes in international trade and tax policies and regulations (including import and export restrictions), the lack of well-established or reliable legal systems, corruption, adverse economic conditions, political actions or instability, import and export restrictions, terrorism and civil unrest. Likewise, our overall cost of doing business increases due to the costs of compliance with complex and numerous foreign and U.S. laws and regulations, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, and regulations on the transfer of funds to and from foreign countries, which, from time to time, result in significant cash balances in foreign countries due to limitations on the repatriation of funds. See also "- Material disruptions resulting from telecommunication failures, power and/or water shortages, acts of God, war, terrorism and other geopolitical incidents and other circumstances outside our control could adversely impact our business, results of operations and financial condition."regulations.
If we are unable to successfully expand our businesses ininto emerging markets, profitably grow our existing emerging market businesses, achieve the return on capital we expect as a result of our investments, or effectively manage the risks inherent in our growth strategy in these markets, our business, results of operations and financial condition could be adversely affected.
Our strategy is partially based on growth through acquisitions. Failure to properly identify, value, manage and integrate anyThe effects of the acquisitionsU.S. Tax Cuts and Jobs Act on our business have not yet been fully analyzed and could have an adverse effect on our net income and cash flows.
On December 22, 2017, the Tax Cuts and Jobs Act (the "U.S. Tax Act") was signed into law in the U.S. The U.S. Tax Act includes, among other things, changes to U.S. federal tax rates, imposing significant additional limitations on the deductibility of interest, allowing for the expensing of capital expenditures, the migration from a "worldwide" system of taxation to a modified territorial system, and the use of certain border adjustments. Any benefits associated with lower U.S. corporate tax rates could be reduced or outweighed by other tax changes adverse to our business or operations, such as new or additional taxes imposed on earnings and/or reinvested earnings of our foreign subsidiaries. Additionally, the manner in which the U.S. Tax Act will be interpreted and enforced is still evolving so it is not possible to fully analyze its ultimate impact on the Company. The aggregate impact of such legislation when fully implemented could have a material adverse impact on our cash flows and results of operations.
Changes to current policies by the U.S. government could materially adversely affect our business.
We anticipate possible changes to current policies by the U.S. government that could affect our business, including increased import tariffs or quotas and other changes in U.S. trade relations with other countries (e.g., Mexico and China). These changes could increase our costs in certain markets requiring us to find alternative suppliers or to increase prices. This may cause our customers to find alternative sourcing. There can be no assurance that the Company will be able to locate alternative suppliers for its products at acceptable costs in a timely manner. In response to these changes, other countries may change their own policies on business and foreign investment in companies. Additionally, it is possible that U.S. policy changes and uncertainty about policy could increase the volatility of currency exchange rates, which could adversely impact our business, results of operations and financial condition.
A key element of our long-term growth strategy involves acquisitions. We are particularly focused on acquiring companies that have the potential to accelerate our growth in emerging markets or our entry into adjacent product categories.
We may not be successful in identifying suitable acquisition opportunities, prevailing against competing potential acquirers, negotiating appropriate acquisition terms, obtaining financing, completing proposed acquisitions, integrating acquired businesses or expanding in new markets or product categories. In addition, an acquisition may not perform as planned, be accretive to earnings, or prove to be beneficial to our operations and cash flow. If we fail to effectively identify, value, consummate, manage and integrate any acquired company we may not realize the potential growth opportunities or achieve the synergies or financial results anticipated at the time of its acquisition, which could adversely affect our growth prospects, business and results of operations. An acquisition could also adversely impact our operating performance as a result of the issuance of acquisition-related debt, pre-acquisition potential liabilities, acquisition expense and the amortization of acquisition assets or possible future impairments of goodwill or intangible assets associated with the acquisition.
In addition, to the extent these acquisitions increase our exposure to emerging markets, the risks associated with doing business in these markets will increase. See also "- Growth in emerging market geographies may be difficult to achieve and exposes us to certain risks, including economic volatility, unstable political conditions and civil unrest."
Our failure to comply with customer contracts may lead to fines or loss of business which could adversely impact our revenue and results of operations.
Our contracts with our customers include specific performance requirements. In addition, some of our contracts with governmental customers are subject to various procurement regulations, contract provisions and other requirements. If we fail to comply with the specific provisions of our customer contracts or violate government contracting regulations, we could become subject to fines, suffer a loss of business or incur other penalties which, in the case of government contracts, could include suspension from further government contract opportunities. If our customer contracts are terminated, if we fail to meet our contractual obligations, are suspended or disbarred from government work, or if our ability to compete for new contracts is adversely affected, we could suffer a reduction in expected revenue and margins.
Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.
We are party to various lawsuits and regulatory proceedings, primarily related to alleged patent infringement and employee terminations as well as other claims incidental to our business. In addition, we may be unaware of third party claims of intellectual property infringement relating to our technology, brands or products and we may face other claims related to business operations. Any litigation regarding patents or other intellectual property could be costly and time-consuming and might require us to pay monetary damages or enter into costly license agreements. We also may be subject to injunctions against development and sale of certain of our products.
It is the opinion of management that (other than the Brazilian Tax Assessment described below) the ultimate resolution of currently outstanding matters will not have a material adverse effect on our financial condition, results of operations or cash flow. However, there is no assurance that we will ultimately be successful in our defense of any of these matters or that an adverse outcome in any matter will not negatively affect our results of operations, financial condition or cash flow. Further, future claims, lawsuits and legal proceedings could materially and adversely affect our business, reputation, results of operations and financial condition.
In connection with our May 1, 2012 acquisition of the Mead Consumer and Office Products business ("Mead C&OP,&OP"), we assumed all of the tax liabilities for the acquired foreign operations including Tilibra Produtos de Papelaria Ltda. ("Tilibra"). In December of 2012, the Federal Revenue Department of the Ministry of Finance of Brazil ("FRD") issued a tax assessment (the "Brazilian Tax Assessment") against Tilibra, which challenged the tax deduction of goodwill from Tilibra's taxable income for the year 2007.2007 (the "First Assessment"). A second assessment challenging the deduction of goodwill from Tilibra's taxable income for the years 2008, 2009 and 2010 was issued by FRD in October 2013.
2013 (the "Second Assessment"). Tilibra is disputing both of the tax assessmentsassessments.
Recently, the final administrative appeal of the Second Assessment was decided against the Company. We intend to challenge this decision in court in early 2018. In connection with the judicial challenge, we may be required to post security to guarantee payment of the Second Assessment, which represents $24.6 million of the current reserve, should we not prevail. The First Assessment is still being challenged through established administrative procedures.
We believe we have meritorious defenses and intend to vigorously contest these matters; however, there can be no assurances that we will ultimately prevail. We are in the early stages of the process to challenge the FRD's tax assessments, and theThe ultimate outcome will not be determined until the Brazilian tax appeal process is complete, which is expected to take a number of years. In addition, Tilibra's 2011-20122012 tax years remainyear remains open and subject to audit, and there can be no assurances that we will not receive an additional tax assessmentsassessment regarding the goodwill for one or both of those years. With respect to the years 2008 to2012. The time limit for issuing an assessment for 2011 expired in January 2018 and we did not receive an assessment. The time limit for issuing an assessment for 2012 we have accrued R102.7 million ($38.7 million based on December 31, 2014 exchange rates) of tax, penalties and interest.will expire in January 2019. If the FRD's initial position is ultimately sustained, the amount assessed would materially and adversely affect our cash flow in the year of settlement.
Because there is no settled legal precedent on which to base a definitive opinion as to whether we will ultimately prevail, we consider the outcome of this dispute to be uncertain. Since it is not more likely than not that we will prevail, in the fourth quarter of 2012, we recorded a reserve in the amount of $44.5 million (at December 31, 2012 exchange rates) in consideration of this contingency, of which $43.3 million was recorded as an adjustment to the purchase price and which included the 2008-20122007-2012 tax years plus interestpenalties and penaltiesinterest through December 2012. Included in this reserve is an assumption of penalties at 75%, which is the standard penalty. While there is a possibility that a penalty of 150% could be imposed in connection with the First Assessment, based on the facts in our case and existing precedent, we believe the likelihood of a 150% penalty is not more likely than not as of December 31, 2017. We will continue to actively monitor administrative and judicial court decisions and evaluate their impact, if any, on our legal assessment of the ultimate outcome of our case. In addition, we will continue to accrue interest related to this contingency until such time as the outcome is known or until evidence is presented that we are more likely than not to prevail. During 2014, 2013the years ended December 31, 2017, 2016 and 2012,2015, we accrued additional interest as a charge to current tax expense of $3.2$2.2 million, $1.8$2.8 million and $1.2$2.7 million, respectively. At current exchange rates, our accrual through December 31, 2017, including tax, penalties and interest is $38.7 million.
There are various other claims, lawsuits and pending actions against us incidental to our operations. It is the opinion of management that (other than the Brazilian Tax Assessment) the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or cash flow. However, there is no assurance that we will ultimately be successful in our defense of any of these matters or that an adverse outcome in any matter will not affect our results of operations, financial condition or cash flow.
Risks associated with outsourcingOutsourcing the production of certain of our products, and our information technology systems and other administrative functions could materially adversely affect our business, results of operations and financial condition.
We outsource certain manufacturing functions to suppliers in China, and other Far EasternAsia-Pacific countries and Eastern Europe. Outsourcing of product design and production creates a number of risks, including decreased control over the engineering and manufacturing processes resulting in unforeseen production delays or interruptions, inferior product quality, loss or misappropriation of trade secrets and other performance issues, which could result in cost overruns, delayed deliveries or shortages. Additionally, we rely on our suppliers must comply withto ensure that our products meet our design and product content specifications, and all applicable laws, including product safety, security, labor and environmental laws. In addition, weWe also expect our suppliers to conform to our and our customers'customers’ expectations with respect to product safety, product quality and social responsibility, be responsive to our audits and otherwise be certified as meeting our and our customers'customers’ supplier codes of conduct. Failure to meet any of these requirements may result in our having to cease doing business with a supplier or cease production at a particular facility. Substitute suppliers might not be available or, if available, might be unwilling or unable to offer products on acceptable terms or in a timely manner. Any of these circumstances could result in unforeseen production delays and increased costs and negatively affect our ability to deliver products and services to our customers, all of which could adversely affect our business, results of operations and financial condition.
Moreover, if one or more of our suppliers is unable or unwilling to continue to provide products of acceptable quality, at acceptable cost or in a timely manner due to financial difficulties, insolvency or otherwise, or if customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current suppliers, or others, in a timely manner or on acceptable terms. Increases in import duties and tariffs could also negatively affect our cost of finished goods manufactured by our suppliers in China and other Asia-Pacific countries. Any of these events could result in unforeseen production delays and increased costs and negatively affect our ability to deliver our products and services to our customers, all of which could adversely affect our business, results of operations and financial condition.
We also outsource important portions of our information technology infrastructure and systems support to third party service providers. Outsourcing of information technology services creates risks to our business, which are similar to those created by our product production outsourcing. If one or more of our information technology suppliers is unable or unwilling to continue to provide services at acceptable cost due to financial difficulties, insolvency or otherwise, or if our third party service providers experience a security breach or disruptions in service, our business could be adversely affected. See also "- We rely extensively on information technology systems to operate, transact and otherwise manage our business. Any material failure, inadequacy, interruption or security breach of that technology or its supporting infrastructure could adversely affect our business, results of operation or financial condition."
In addition, we outsource certain administrative functions, such as payroll processing and benefit plan administration and accounts payable to third party service providers and may outsource other functions in the future to achieve cost savings and efficiencies. If the service providers to which we outsource these functions do not perform effectively, we may not be able to achieve the expected cost savings and may have to incur additional costs to correct errors made by such service providers.they make. Depending on the function involved, such errors may lead to business disruption, processing inefficiencies or loss of, or damage to intellectual property, or harm to employee morale.
Continued declines in the use of certain of our products especially paper-based dated and time management and productivity tools, could adversely affect our business.
A number of our products and brands consist of paper-based dated and time management and productivityrelated products. As use of technology-based tools that historically have tended to be higher-margin products. However,rises worldwide, consumer preference for technology-based solutions for time management and planning continues to grow worldwide. Many consumers use or have access to electronic tools that may serve as substitutesdemand for traditional paper-based time management and productivity tools. Accordingly, the continued introduction of new digital software applications and web-based services by companies offering time management and productivity solutions could adversely impact the revenue and profitability of our largely paper-based portfolio of dated and time management products.
Additionally, the markets for other product categories,related products, such as decorative calendars, planners, envelopes, ring binders and mechanical binding equipment, are also declining. Ahas declined. The continued decline or an acceleration of the decline in the overall sizedemand for any of the market for the products we sell could adversely impact our business, results of operations and financial condition.
Our business is subject to risks associated with seasonality, which could materially adversely affect our cash flow, results of operations and financial condition.
Historically, our business has experienced higher sales and earnings in the third and fourth quarters of the calendar year and we expect these trends to continue. Two principal factors contribute to this seasonality: (1) we are a major supplier of products related to the back-to-school season, which occurs principally from June through September for our North American business and from November through February for our Australian and Brazilian businesses; and (2) several product categories we sell lend themselves to calendar year-end purchase timing, including planners, paper organization and storage products (including bindery) and Kensington® computer accessories, which have higher sales in the fourth quarter driven by traditionally strong fourth-quarter sales of personal computers and tablets. As a result, we have generated, and expect to continue to generate, most of our earnings in the second half of the year and much of our cash flow in the first, third and fourth quarters as receivables are collected. If these typical seasonal increases in sales of certain products do not materialize or if sales of these product lines were to represent a larger overall percentage of our sales or profitability, it may have an outsized impact on our business that could adversely affect our cash flow, results of operations and financial condition.
Our operating results can be adversely affected by changes in the cost or availability of raw materials, transportation, and other necessary supplies and services.
Pricing and availability of raw materials, transportation, and other necessary supplies and services used in our business can be volatile due to numerous factors beyond our control, including general, domestic and international economic conditions, labor costs, production levels, competition, consumer demand, and import duties and tariffs. This volatility can significantly affect our business, results of operations, and financial condition.
Our success is dependent, in part, on our continued ability to reduce our exposure to increases in those costs through a variety of programs, including periodic purchases, future delivery purchases, long-term contracts, sales price adjustments and certain derivative instruments, while maintaining and improving margins and category share. Also, we rely on third-party manufacturers as a source for many of our products. These manufacturers are also subject to price volatility and labor cost and other inflationary pressures, which may, in turn, result in an increase in the amount the Company pays for sourced products. During periods of rising raw material prices, there can be no assurance that the Company will be able to pass any portion of such increases on to customers. Conversely, when raw material prices decline, customer demands for lower prices could result in lower sale prices and, to the extent the Company has existing inventory, lower margins. As a result, fluctuations in raw material prices could have a material adverse effect on the Company’s business, results of operations and financial condition.
The primary materials used in the manufacturing of many of our products are paper, plastics, resin, polyester and polypropylene substrates, steel, wood, aluminum, melamine, zinc and cork. Supply shortages for a particular type of material can delay production or cause increases in the cost of manufacturing the Company’s products. This could have a material adverse effect on the Company’s business, results of operations and financial condition.
The risks associated with our failure to comply with laws, rules and regulations and self-regulatory requirements that affect our business, and the costs of compliance, as well as the impact of changes in such laws could materially adversely affect our business, reputation and results of operations.
Our business is subject to national, state, provincial and/or local laws, rules and regulations as well as self-regulatory requirements in numerous countries due to the nature of our operations and the products we sell. This, in turn, affects the way we conduct our business as well as our customers’ expectations and requirements. Among others, laws and self-regulatory requirements in the following significant indebtedness requiresareas (and the rules and regulations promulgated thereunder) affect our business and our current and prospective customers’ expectations:
Laws relating to the discharge and emission of certain materials and waste, and establishing standards for their use, disposal and management;
Laws governing content of toxic chemicals and materials in the products we sell;
Product safety laws;
International trade laws;
Privacy and data security laws;
Self-regulatory requirements regarding the acceptance, processing, storage and transmission of credit card data;
Laws governing the use of the internet, social media, advertising, endorsements and testimonials;
Anti-bribery and corruption laws;
Anti-money laundering laws; and
Competition laws.
All of these legal frameworks are complex and may change frequently. For example, the European Union adopted the General Data Protection Regulation ("GDPR"), which will take effect in May 2018. The GDPR supersedes, and is more stringent than, the existing EU data protection directive. Capital and operating expenses required to establish and maintain compliance with all of these laws, rules and regulations and self-regulatory requirements can be significant, and violations may result in substantial fines, penalties and civil damages as well as damage to our reputation. Any significant increase in our costs to comply with applicable legal and self-regulatory requirements, or liability arising from noncompliance, as well as changes in tariffs or duties associated with the international transfer of goods could have an adverse effect on our business, results of operations and financial condition as well as damage to our reputation.
In addition, as we expand our business into emerging and new markets, we increase the number of legal and self-regulatory requirements with which we are required to comply, which increases the complexity and costs of compliance as well as the risks of noncompliance.
The level of investment returns on pension and post-retirement plan assets and the actuarial assumptions used for valuation purposes could affect the Company’s earnings and cash flows in future periods. Changes in government regulations could also affect the Company’s pension and post-retirement plan expenses and funding requirements.
As of December 31, 2017, the Company had $276.2 million recorded as pension liabilities in its Consolidated Balance Sheet. The funding obligations for the Company’s pension plans are impacted by the performance of the financial markets, particularly the equity markets, and interest rates. Funding obligations are determined by government regulations and are measured each year based on the value of assets and liabilities on a specific date. If the financial markets do not provide the long-term returns that are expected, the Company could be required to make larger contributions. The equity markets can be, and recently have been, very volatile, and therefore the Company’s estimate of future contribution requirements can change dramatically in relatively short periods of time. Similarly, changes in interest rates and legislation enacted by governmental authorities can impact the timing and amounts of contribution requirements. An adverse change in the funded status of the plans could significantly increase the Company’s required contributions in the future and adversely impact its liquidity.
Assumptions used in determining projected benefit obligations and the fair value of plan assets for the Company’s pension and post-retirement benefit plans are determined by the Company in consultation with outside actuaries. In the event that the Company determines that changes are warranted in the assumptions used, such as the discount rate, expected long-term rate of return on assets, expected health care costs, or mortality rates, the Company’s future pension and post-retirement benefit expenses
could increase or decrease. Due to changing market conditions or changes in the participant population, the assumptions that the Company uses may differ from actual results, which could have a significant impact on the Company’s pension and post-retirement liabilities and related costs and funding requirements.
We also participate in a multi-employer pension plan for our union employees at our Ogdensburg, New York facility. The plan has reported significant underfunded liabilities and declared itself in critical and declining status. As a result, the trustees of the plan adopted a rehabilitation plan in an effort to forestall insolvency. Our required contributions to this plan could increase due to the shrinking contribution base resulting from the insolvency, or withdrawal of other participating employers, the inability or the failure of withdrawing participating employers to pay their withdrawal liability, lower than expected returns on pension fund assets, and other funding deficiencies. In the event that we withdraw from participation in the plan, we will be required to make withdrawal liability payments for a period of 20 years or longer in certain circumstances. The present value of our withdrawal liability payments could be significant and would be recorded as an expense in our Consolidated Statements of Income and as a liability on our Consolidated Balance Sheets in the first year of our withdrawal.
See also "Part II, Item 7. Critical Accounting Policies - Employee Benefit Plans" and "Note 5. Pension and Other Retiree Benefits" to the consolidated financial statements contained in Part II, Item 8. of this report.
Impairment of intangible assets could have a material adverse effect on our financial results.
We have approximately $1.5 billion of goodwill and other specifically identifiable intangible assets as of December 31, 2017. Future events may occur that could adversely affect the reported value, or fair value, of our intangible assets that would require impairment charges to our financial results. Such events may include, but are not limited to, strategic decisions made in response to changes in economic and competitive conditions, the impact of the economic environment on the Company’s sales and customer base, the unfavorable resolution of litigation, a material adverse change in the Company’s relationship with significant customers, or a sustained decline in the Company’s stock price. The Company continues to evaluate the impact of developments from its reporting units to assess whether impairment indicators are present. Accordingly, the Company may be required to perform impairment tests based on whether or not indicators are present. In addition, the Company performs an impairment test on an annual basis in the second quarter, as required by GAAP whether or not impairment indicators are present. See also "Part II, Item 7. Critical Accounting Policies - Intangible Assets," " - Goodwill" and "Note 9. Goodwill and Identifiable Intangible Assets" to the consolidated financial statements contained in Part II, Item 8. of this report.
Our existing borrowing arrangements require us to dedicate a substantial portion of our cash flow to debt payments and limitslimit our ability to engage in certain activities. If we are unable to meet our obligations under our debtthese agreements or are contractually restricted from pursuing activities or transactions that we believe are in our long-term best interests, our business, results of operations and financial condition could be materially adversely affected.
As of December 31, 2014,2017, we had $800.7$939.5 million of outstanding debt. debt, which increased by approximately $326 million in early 2017 due to the borrowings to fund the acquisition of Esselte and related transaction expenses.
Our debt service obligations require us to dedicate a
substantial portion of our cash flow from operating activities to payments on our indebtedness, which reduces the availability of our cash flow to fund working capital, capital expenditures, research and product development efforts, potential acquisitions and for other general corporate purposes. Our significant indebtedness also may increase our vulnerability to economic downturns and changing market conditions and place us at a competitive disadvantage relative to competitors that have less debt. In addition, approximately $299as of December 31, 2017, $538.9 million of our outstanding debt is subject to floating interest rates, which increases our exposure to fluctuations in interest rates.
The terms of our debt agreements also limit our ability to engage in certain activities and transactions that may be in our and our stockholders' long-term interest. Among other things, the covenants and financial ratios and tests contained in our debt agreements restrict or limit our ability to incur additional indebtedness, incur certain liens on our assets, issue preferred stock or certain disqualified stock, make restricted payments including(including dividends and share repurchases), make investments, sell our assets or merge with other companies, and enter into certain transactions with affiliates. We are also required to maintain specified financial ratios under certain circumstances and satisfy financial condition tests. Our ability to comply with these covenants and financial ratios and tests may be affected by events beyond our control, and we may not be able to continue to meet those covenants, ratios and tests.
Our ability to meet our debt obligations, including our financial covenants, and to refinance our existing indebtedness upon maturity, will depend upon our future operating performance, which will be affected by general economic, financial, competitive, regulatory, business and other factors. Breach of any of the covenants, ratios and tests contained in the agreements governing our
indebtedness, or our inability to pay interest on, or principal of, our outstanding debt as it becomes due, could result in an event of default, in which case our lenders could declare all amounts outstanding to be immediately due and payable. If our lenders accelerate our indebtedness, or we are not able to refinance our debts at maturity, our assets may not be sufficient to repay in full such indebtedness and any other indebtedness that would become due as a result of such acceleration. If we then are unable to obtain replacement financing or any such replacement financing is on terms that are less favorable than the indebtedness being replaced, our liquidity, results of operations and financial condition would be adversely affected.
Should any of the risks associated with our substantial indebtedness be realized, our business, results of operations and financial condition could be adversely affected. See also "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
Our business is subject to risks associated with seasonality, which could adversely affect our cash flow, results of operations and financial condition.
Historically, our business has experienced higher sales in the third and fourth quarters of the calendar year. Two principal factors contribute to this seasonality: (1) the office products industry, its customers and ACCO Brands specifically are major suppliers of products related to the "back-to-school" season, which occurs principally from June through September for our North American business and from November through February for our Australian and Brazilian businesses; and (2) several products we sell lend themselves to calendar year-end purchase timing, including AT-A-GLANCE® and Day-Timer® planners, paper organization and storage products (including bindery) and Kensington computer accessories, which have higher sales in the fourth quarter driven by traditionally strong fourth-quarter sales of personal computers and tablets. As a result, we have generated, and expect to continue to generate, most of our earnings in the second half of the year and much of our cash flow in the first, third and fourth quarters as receivables are collected. If these typical seasonal increases in sales of certain portions of our product line do not materialize, it may have an outsized impact on our business, which could adversely affect our cash flow, results of operations and financial condition.
Risks associated with currency volatility could adversely affect our sales, profitability, cash flow and results of operations.
With approximately 45% of our sales for the fiscal year ended December 31, 2014 arising from foreign sales, fluctuations in currency exchange rates can have a material impact on our results of operations. Our risk exposure is primarily related to the Brazilian real, the Canadian dollar, the Euro, the Australian dollar, the British pound, the Mexican peso and the Japanese yen. Currency fluctuations impact the results of our non-U.S. operations that are reported in U.S. dollars. As a result, a strong U.S. dollar reduces the dollar-denominated sales contributions from foreign operations and a weak U.S. dollar benefits us in the form of higher reported sales.
Additionally approximately half of the products we sell are sourced from China and other Far Eastern countries and Eastern Europe and are paid for in U.S. dollars based on prevailing currency exchange rates. Thus, for our non-U.S. businesses, movements in the value of local currencies relative to the U.S. dollar affect our cost of goods sold where we source products from Asia, with a weaker dollar decreasing costs of goods sold and a stronger dollar increasing costs of goods sold relative to the local selling price.
We cannot predict the rate at which the U.S. dollar will trade against other currencies in the future. As the reporting currency of the Company is the U.S. dollar, if the U.S. dollar were to strengthen, making the dollar more valuable relative to other currencies in the global market, it would negatively impact the U.S dollar value of our international sales, profits and cash flow and it could adversely impact our ability to compete or competitively price our products in those markets, and therefore, adversely affect our sales, profitability, cash flow and results of operations. Additionally, as we increase the size of our business in emerging markets, our exposure to the risks associated with currency volatility increases. See also "- Growth in emerging market geographies may be difficult to achieve and exposes us to certain risks, including economic volatility, unstable political conditions and civil unrest."
During the fourth quarter of 2014, the U.S. dollar strengthened significantly relative to other currencies which reduced our sales and adversely impacted our financial results. We expect this trend to continue into 2015. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Raw materials, labor and transportation costs are subject to price increases and decreases that could adversely affect our sales and profitability.
The primary materials used in the manufacturing of many of our products are paper, plastics, resin, polyester and polypropylene substrates, steel, wood, aluminum, melamine, zinc and cork. In general, our gross profit may be affected from time to time by fluctuations in the prices of these materials. We attempt to reduce our exposure to increases in these costs through a variety of measures, including obtaining price increases from our customers when appropriate as well as executing periodic purchases, future delivery contracts, longer-term price contracts and holding our own inventory. Likewise, we attempt to take advantage of price decreases by negotiating cost reductions with our suppliers to ensure that our customer pricing remains competitive. There can be no assurances that we will successfully negotiate price increases or decreases or that the other measures we take to manage the risk of fluctuation in raw material costs will be effective in avoiding a negative impact in our sales and profitability. See also "Note 13. Derivative Financial Instruments" to the consolidated financial statements contained in Part II, Item 8. of this report.
Inflationary and other substantial increases and decreases in costs of materials, labor and transportation have occurred in the past and may recur, and raw materials may not continue to be available in adequate supply in the future. Shortages in the supply of any of the raw materials we use in our products and services, or the availability of international shipping capacity could result in price increases or decreases that could have an adverse effect on our business, results of operations and financial condition.
Some of our suppliers are dependent upon other industries for raw materials as well as the other products and services necessary to produce the products they supply to us. Any adverse impacts to those industries could have a ripple effect on our suppliers, which could adversely impact their ability to supply us at levels or costs we consider necessary or appropriate for our business, or at all. Any such disruptions could negatively impact our ability to deliver products and services to our customers, which in turn could have an adverse impact on our business, results of operations and financial condition.
Our pension costs and cash contributions could substantially increase as a result of volatility in the equity markets, changes in interest rates or other factors.
Our defined benefit pension plans are not fully funded and the funding status of our plans is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Changes in interest rates and the market value of plan assets impact the funded status of these plans and cause volatility in the net periodic benefit cost and future plan funding requirements. Our cash contributions to pension and defined benefit plans totaled $12.4 million in 2014; however the exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors, including the investment returns on pension plan assets and laws relating to pension funding requirements. A significant increase in our pension funding requirements could have an adverse impact on our cash flow, results from operations and financial condition. See also "Part II, Item 7. Critical Accounting Policies - Employee Benefit Plans" and "Note 5. Pension and Other Retiree Benefits" to the consolidated financial statements contained in Part II, Item 8. of this report for more information about these plans.
Impairment charges could have a material adverse effect on our financial results.
We have recorded significant amounts of goodwill and other intangible assets, which increased substantially due to our acquisition of Mead C&OP. As a result, the fair values of certain indefinite-lived trade names are not significantly above their carrying values. Future events may occur that could adversely affect the reported value of our assets and require impairment charges, which could negatively affect our financial results. Such events may include, but are not limited to, a sustained decline in our stock price or our sales of one or more of our branded product lines, or strategic decisions we may choose to make regarding how we use our brands in various global markets.
Should one of our large customers or suppliers experience financial difficulties or file for bankruptcy, our cash flow,flows, results of operations and financial condition could be materially adversely affected.
Our concentrated customer baseconcentration increases our customer credit risk. WereIf any of our larger customers were to face liquidity issues, become insolvent or file for bankruptcy, we could be adversely impacted due to not only a reduction in future sales but also delays in the payment and/or losses associated with the inability to collect any outstandingof existing accounts receivable from that customer.balances. Such a result could adversely impact our cash flow,flows, results of operations and financial condition.
In addition, should one of our suppliers or third party service providers experience financial difficulties, our business, results of operations and financial condition could be adversely affected. Seealso "- Risks associated with outsourcing the production of certain of our products and our information technology systems and other administrative functions could adversely affect our business, results of operations and financial condition."
We are subject to global environmental regulation and environmental risks, product content and product safety laws and regulations as well as laws, regulations and self-regulatory requirements relating to privacy and data security.
Our business is subject to national, state, provincial and/or local environmental laws and regulations in both the U.S. and abroad which govern the discharge and emission of certain materials and waste, and establish standards for their use, disposal and management. We are also subject to laws regulating the content of toxic chemicals and materials in the products we sell as well as laws and directives related to the safety of our products, and self-regulatory requirements regarding privacy and data security. There has also been a sharp increase in laws and regulations in Europe, the U.S. and elsewhere, imposing requirements on our handling of personal data, including data of employees, consumers and business contacts.
All of these laws, regulations and self-regulatory frameworks are complex and may change frequently. Capital and operating expenses requiredfailure to comply with environmental, product contentcustomer contracts may lead to fines or loss of business, which could adversely impact our revenue and product safety laws and regulations and information security and privacy obligations can be significant, and violations may result in substantial fines, penalties and civil damages as well as reputational damage. Any significant increase in our costs of complying with applicable environmental and product content and safety laws and obligations relating to privacy and data security as well as claims or liability arising from noncompliance with such laws, regulations and self-regulatory frameworks, could have an adverse effect on our results of operations and financial condition.
In addition, asOur contracts with our customers include specific performance requirements. If we expand our business into emerging and new markets, we increase the number of laws and regulations we are requiredfail to comply with which increases the complexityspecific provisions of our customer contracts, we could be subject to fines, suffer a loss of business or incur other penalties. If our customer contracts are terminated, if we fail to meet our contractual obligations, or if our ability to compete for new contracts is adversely affected, we could suffer a reduction in expected revenue and costs of compliance as well as the risks of noncompliance. See also "- Growth in emerging market geographies may be difficult to achieve and exposes us to certain risks, including economic volatility, unstable political conditions and civil unrest."margins.
Our inability to secure, protect and maintain rights to intellectual property could have an adverse impact on our business.
We ownconsider our intellectual property rights, particularly and license many patents,most notably our trademarks brand names,and trade names, but also our patents, trade secrets, trade dress, copyrights and proprietary content that are, in the aggregate,licensing agreements, to be an important toand valuable part of our business. In particular, key products such asOur failure to obtain or adequately protect our computer security products and our office machines contain patented technology, our school and dated goods business operates under strong consumer brands and our school and calendar businesses license content from third parties. If third parties challengeintellectual property rights, or any change in law or other changes that serve to lessen or remove the validity or enforceabilitycurrent legal protections of our intellectual property, rights and we cannot successfully defend these challenges, ormay diminish our intellectual property is invalidated or our patents expire, or if our licenses are terminated due to breach by us, or if licenses expire or are not renewed, our business, results of operations and financial condition could be adversely impacted. The loss, expiration or non-renewal of any individual trademark, patent or license may not be material to us, but the loss of a number of patents or trademarks, or the expiration or non-renewal of a significant number of licenses that relate to principal portions of our business could negatively impact our competitive position in the market and have an adverse effect on our business.
We could also incur substantial costs to pursue legal actions relating to the unauthorized use by third parties of our intellectual property. If our brands become diluted, if our patents are infringed, or if our competitors introduce brands and products that cause confusion with our brands in the marketplace,competitiveness, dilute the value of our brands, may become diminished, which could adverselycause confusion in the marketplace and materially impact our sales and profitability.
We may also become involved in defending intellectual property infringement claims being asserted against us that could cause us to incur substantial costs, divert the efforts of our management, and require us to pay substantial damages or require us to obtain a license, which might not be available on reasonable terms, if at all.
Product liability claims, recalls or regulatory actions could materially adversely affect our financial results or harm our reputation or the value of our end-user brands.
Claims for losses or injuries purportedly caused by some of our products arise in the ordinary course of our business. In addition to the risk of substantiallitigation or regulatory enforcement actions and the associated costs and potential for monetary judgments and penalties, which could have an adverse affecteffect on our results of operations and financial condition, product liability claims or regulatory actions, regardless of merit, could result in negative publicity that could harm our reputation in the marketplace or the value of our end-userconsumer brands. We also could be required to recall and possibly discontinue the sale of possible defective or unsafe products, which could result in adverse publicity, significant expenses and significant expenses.adverse impacts to our financial position.
Our success depends on our ability to attract and retain qualified personnel.
Our success will dependdepends on our ability to attract and retain qualified personnel, including executive officers and other key personnel.personnel for a diverse, global workforce. We rely to a significant degree on compensating our executive officers and key employees with performance-based incentive awards that pay out only if specified performance goals have been met. To the extent these performance goals are not met and theour incentive awards do not pay out, or pay out less than the targeted amount, as has occurred in prior years, it may motivate certain executive officers and key employees to seek other opportunities.opportunities and affect our ability to attract and retain qualified personnel. The loss of key management personnel or other key employees or our potential inability to attract such personnel may adversely affect our ability to manage our overall operations and successfully implement our business strategy.
Our stock price has been volatile historically and may continue to be volatile in the future.is volatile.
The market price for our common stock has been volatile historically. Our results arestock price may be significantly affected by factors including those described elsewhere in this "Part I, Item 1A. Risk Factors" as well as the following:
•quarterly fluctuations in our operating results compared to market expectations;
•fluctuations ininvestors' perceptions of the stockoffice products industry;
•amounts we repurchase on the open market prices and volumes;under our share repurchase program;
•changes in financial estimates by us or securities analysts and recommendations by securities analysts;
•actual or anticipated negative earnings or other announcements by us or our top customers; and
•the composition of our shareholders,stockholders, particularly the presence of "short sellers" trading in our stockstock.
Volatility in our stock price could adversely affect our business and financing opportunities and force us to increase our cash compensation to our employees or grant larger stock awards, which could hurt our operating results and reduce the percentage ownership of our existing stockholders.
Material disruptions resulting from telecommunication failures, labor strikes, power and/or water shortages, acts of God, war, terrorism, other geopolitical incidents or other circumstances outside our control could adversely impact our business, results of operations and financial condition.
A disruption at one of our facilities or at one of our supplier's ora third-party service providers’provider’s facilities (especially facilities in China, and other Asia-Pacific countries as well asand Latin America) could adversely impact production, and our customer deliveries or otherwisewhich can negatively impact the operation of our businessoperations and result in increased costs. Such a disruption could occur as a result of any number of events, including but not limited to, a major equipment failure, labor stoppages, transportation failures affecting the supply and shipment of materials and finished goods, the unavailability of raw materials, severe weather conditions, natural disasters, civil unrest, fire, explosions, health pandemics, war or terrorism and disruptions in utility and other services. Any such disruptions could adversely impact our business, results of operations orand financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We have manufacturing facilities in North America, Europe, Brazil, Mexico and Australia, and maintain distribution centers in the regional markets we service. We lease our corporate and U.S. headquarters in Lake Zurich, Illinois. The following table lists our principal facilities by segment as of December 31, 20142017:
|
| | | |
| Location | Functional Use | | Owned/Leased (number of properties) |
| ACCO Brands North America: | | | |
| Ontario, California | Distribution/Manufacturing | | Leased |
| Booneville, Mississippi | Distribution/Manufacturing | | Owned |
| Ogdensburg, New York | Distribution/Manufacturing | | Owned/LeasedOwned |
| Sidney, New York | Distribution/Manufacturing | | Owned |
| Alexandria, Pennsylvania | Distribution/Manufacturing | | Owned |
Pleasant Prairie, Wisconsin(a) | Distribution/Manufacturing | | Leased (2) |
| Mississauga, Canada | Distribution/Manufacturing/Office | | Leased |
International:San Mateo, California | Office | | Leased |
| | | |
Sydney, AustraliaACCO Brands EMEA: | | | |
| Sint-Niklass, Belgium | Distribution/Manufacturing | | OwnedLeased |
Bauru, BrazilShanghai, China | Distribution/Manufacturing/OfficeManufacturing | | OwnedLeased |
| Lanov, Czech Republic | Distribution/Manufacturing | | Leased |
| Aylesbury, England | Office | | Leased |
| Halesowen, England | Distribution | | Owned |
| Lillyhall, England | Manufacturing | | Leased |
| Uxbridge, England | Office | | Leased |
| Vagney, France | Distribution | | Owned |
| Heilbronn, Germany | Distribution | | Owned |
| Stuttgart, Germany | Office | | Leased |
| Uelzen, Germany | Manufacturing | | Owned |
| Gorgonzola, Italy | Distribution/Manufacturing | | Leased |
| Tornaco, Italy | Distribution | | Owned |
Lerma, Mexico | Manufacturing/Office | | Owned |
Born, Netherlands(b) | Distribution | | Leased |
Wellington, New ZealandKozienice, Poland | Distribution/Manufacturing | | Owned |
| Warsaw, Poland | Office | | OwnedLeased |
| Arcos de Valdevez, Portugal | Manufacturing | | Owned |
Computer Products Group:Hestra, Sweden | Distribution/Manufacturing/Office | | Owned |
| | | |
Redwood Shores, CaliforniaACCO Brands International: | | | |
| Sydney, Australia | Distribution/Manufacturing/Office | | Owned/Leased (2) |
| Bauru, Brazil | Distribution/Manufacturing/Office | | Owned (2) |
| Hong Kong | Office | | Leased |
| Tokyo, Japan | Office | | Leased |
| Lerma, Mexico | Manufacturing/Office | | Owned |
| Auckland, New Zealand | Distribution/Office | | Leased |
| Taipei, Taiwan City | Office | | Leased |
| |
| (a) | Distribution center scheduled to be closed during the second quarter of 2018. Activities will be substantially relocated to Booneville, Mississippi. |
| |
| (b) | Scheduled to be closed during the second quarter of 2018. Activities will be relocated to various locations throughout Europe. |
The Computer Products Group also utilizes many of the distributions centers listed above.
We believe that the properties are suitable to the respective businesses and have production capacities adequate to meet the needs of our businesses.
ITEM 3. LEGAL PROCEEDINGS
We are party to various lawsuits and regulatory proceedings, primarily related to alleged patent infringement and employee terminations as well as other claims incidental to our business. In addition, we may be unaware of third party claims of intellectual property infringement relating to our technology, brands or products and we may face other claims related to business operations. Any litigation regarding patents or other intellectual property could be costly and time-consuming and might require us to pay monetary damages or enter into costly license agreements. We also may be subject to injunctions against development and sale of certain of our products.
It is the opinion of management that (other than the Brazilian Tax Assessment described below) the ultimate resolution of currently outstanding matters will not have a material adverse effect on our financial condition, results of operations or cash flow. However, there is no assurance that we will ultimately be successful in our defense of any of these matters or that an adverse outcome in any matter will not negatively affect our results of operations, financial condition or cash flow. Further, future claims, lawsuits and legal proceedings could materially and adversely affect our business, reputation, results of operations and financial condition.
In connection with our May 1, 2012 acquisition of the Mead Consumer and Office Products business ("Mead C&OP&OP"), we assumed all of the tax liabilities for the acquired foreign operations including Tilibra.Tilibra Produtos de Papelaria Ltda. ("Tilibra"). In December of 2012, the FRDFederal Revenue Department of the Ministry of Finance of Brazil ("FRD") issued a tax assessment (the "Brazilian Tax Assessment") against Tilibra, which challenged the tax deduction of goodwill from Tilibra's taxable income for the year 2007.2007 (the "First Assessment"). A second assessment challenging the deduction of goodwill from Tilibra's taxable income for the years 2008, 2009 and 2010 was issued by FRD in October 2013.
2013 (the "Second Assessment"). Tilibra is disputing both of the tax assessmentsassessments.
Recently, the final administrative appeal of the Second Assessment was decided against the Company. We intend to challenge this decision in court in early 2018. In connection with the judicial challenge, we may be required to post security to guarantee payment of the Second Assessment, which represents $24.6 million of the current reserve, should we not prevail. The First Assessment is still being challenged through established administrative procedures.
We believe we have meritorious defenses and intend to vigorously contest these matters; however, there can be no assurances that we will ultimately prevail. We are in the early stages of the process to challenge the FRD's tax assessments, and theThe ultimate outcome will not be determined until the Brazilian tax appeal process is complete, which is expected to take a number of years. In addition, Tilibra's 2011-20122012 tax years remainyear remains open and subject to audit, and there can be no assurances that we will not receive an additional tax assessmentsassessment regarding the goodwill for one or both of those years. With respect to the years 2008 to2012. The time limit for issuing an assessment for 2011 expired in January 2018 and we did not receive an assessment. The time limit for issuing an assessment for 2012 we have accrued R102.7 million ($38.7 million based on December 31, 2014 exchange rates) of tax, penalties and interest.will expire in January 2019. If the FRD's initial position is ultimately sustained, the amount assessed would materially and adversely affect our cash flow in the year of settlement.
Because there is no settled legal precedent on which to base a definitive opinion as to whether we will ultimately prevail, we consider the outcome of this dispute to be uncertain. Since it is not more likely than not that we will prevail, in the fourth quarter of 2012, we recorded a reserve in the amount of $44.5$44.5 million (at December 31, 2012 exchange rates) in consideration of this contingency, of which $43.3 million was recorded as an adjustment to the purchase price and which included the 2008-20122007-2012 tax years plus interestpenalties and penaltiesinterest through December 2012. Included in this reserve is an assumption of penalties at 75%, which is the standard penalty. While there is a possibility that a penalty of 150% could be imposed in connection with the First Assessment, based on the facts in our case and existing precedent, we believe the likelihood of a 150% penalty is not more likely than not as of December 31, 2017. We will continue to actively monitor administrative and judicial court decisions and evaluate their impact, if any, on our legal assessment of the ultimate outcome of our case. In addition, we will continue to accrue interest related to this
contingency until such time as the outcome is known or until evidence is presented that we are more likely than not to prevail. During 2014, 2013the years ended December 31, 2017, 2016 and 2012,2015, we accrued additional interest as a charge to current tax expense of $3.2$2.2 million, $1.8$2.8 million and $1.2$2.7 million, respectively. At current exchange rates, our accrual through December 31, 2017, including tax, penalties and interest is $38.7 million.
There are various other claims, lawsuits and pending actions against us incidental to our operations. It is the opinion of management that (other than the Brazilian Tax Assessment) the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flow. However, we can make no assurances that we will ultimately be successful in our defense of any of these matters.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Common Stock Information
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "ACCO." The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on the NYSE for 20132016 and 20142017:
| | | | High | | Low | High | | Low |
| 2013 | | | | |
| 2016 | | | | |
| First Quarter | $ | 9.16 |
| | $ | 6.55 |
| $ | 9.05 |
| | $ | 5.47 |
|
| Second Quarter | $ | 7.63 |
| | $ | 5.97 |
| 10.75 |
| | 8.58 |
|
| Third Quarter | $ | 7.44 |
| | $ | 6.08 |
| 11.75 |
| | 9.35 |
|
| Fourth Quarter | $ | 7.26 |
| | $ | 5.56 |
| 14.00 |
| | 9.06 |
|
| 2014 | | | | |
| 2017 | | | | |
| First Quarter | $ | 7.25 |
| | $ | 5.47 |
| $ | 14.45 |
| | $ | 12.00 |
|
| Second Quarter | $ | 6.56 |
| | $ | 5.77 |
| 14.75 |
| | 11.06 |
|
| Third Quarter | $ | 7.97 |
| | $ | 5.99 |
| 12.35 |
| | 10.35 |
|
| Fourth Quarter | $ | 9.45 |
| | $ | 6.48 |
| 13.75 |
| | 11.90 |
|
As of February 9, 2015,7, 2018, we had approximately 16,900 registered12,103 record holders of our common stock.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on our common stock to that of the S&P Office Services and Supplies (SuperCap1500) Index and the Russell 2000 Index assuming an investment of $100 in each from December 31, 20092012 through December 31, 2014.2017.
| | | | Cumulative Total Return | Cumulative Total Return |
| | 12/31/09 | | 12/31/10 | | 12/31/11 | | 12/31/12 | | 12/31/13 | | 12/31/14 | 12/31/12 | | 12/31/13 | | 12/31/14 | | 12/31/15 | | 12/31/16 | | 12/31/17 |
| ACCO Brands Corporation. | $ | 100.00 |
| | $ | 117.03 |
| | $ | 132.55 |
| | $ | 100.82 |
| | $ | 92.31 |
| | $ | 123.76 |
| |
| ACCO Brands Corporation | | $ | 100.00 |
| | $ | 91.55 |
| | $ | 122.75 |
| | $ | 97.14 |
| | $ | 177.79 |
| | $ | 166.21 |
|
| Russell 2000 | 100.00 |
| | 126.86 |
| | 121.56 |
| | 141.43 |
| | 196.34 |
| | 205.95 |
| 100.00 |
| | 138.82 |
| | 145.62 |
| | 139.19 |
| | 168.85 |
| | 193.58 |
|
S&P Office Services and Supplies (SuperCap1500) | 100.00 |
| | 122.41 |
| | 105.80 |
| | 102.55 |
| | 163.73 |
| | 171.51 |
| 100.00 |
| | 159.65 |
| | 167.23 |
| | 146.06 |
| | 158.35 |
| | 151.22 |
|
Common Stock Purchases
The following table provides information about our purchases of equity securities during the yearquarter ended December 31, 2014:2017:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program(1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) |
| August 1, 2014 to August 31, 2014 | | — |
| | $ | — |
| | — |
| | $ | 100,000,000 |
|
| September 1, 2014 to September 30, 2014 | | 810,972 |
| | 7.14 |
| | 810,972 |
| | 94,207,668 |
|
| October 1, 2014 to October 31, 2014 | | 1,839,051 |
| | 6.93 |
| | 1,839,051 |
| | 81,459,732 |
|
| November 1, 2014 to November 30, 2014 | | 105,619 |
| | 8.41 |
| | 105,619 |
| | 80,571,795 |
|
| December 1, 2014 to December 31, 2014 | | — |
| | — |
| | — |
| | 80,571,795 |
|
| Total | | 2,755,642 |
| | $ | 7.05 |
| | 2,755,642 |
| | $ | 80,571,795 |
|
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program(1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) |
| October 1, 2017 to October 31, 2017 | | 839 |
| | $ | 11.98 |
| | 839 |
| | $ | 83,964,217 |
|
| November 1, 2017 to November 30, 2017 | | — |
| | — |
| | — |
| | 83,964,217 |
|
| December 1, 2017 to December 31, 2017 | | — |
| | — |
| | — |
| | 83,964,217 |
|
| Total | | 839 |
| | $ | — |
| | 839 |
| | $ | 83,964,217 |
|
(1) On August 21, 2014,October 28, 2015, the Company announced that its Board of Directors had approved the repurchase of up to $100 million in shares of its common stock. On February 14, 2018, the Company announced that its Board of Directors had approved an authorization to repurchase up to an additional $100 million in shares of its common stock.
For the year ended December 31, 2017, we repurchased $36.6 million of our common stock in the open market.
The number of shares to be purchased, if any, and the timing of purchases will dependbe based on the Company's stock price, leverage ratios, cash balances, general business and market conditions, and other factors, including alternative investment opportunities and working capital needs. The Company may repurchase its shares, from time to time, through a variety of methods, including open-market purchases, privately negotiated transactions and block trades or pursuant to repurchase plans designed to comply with the Rule 10b5-1 of the Securities Exchange Act of 1934. In connection with the share repurchase authorization, the Company has entered into a written trading plan under Rule 10b5-1 for the purchase of a portion of the common1934, as amended. Any stock authorized for repurchase, and may enter into additional Rule 10b5-1 plans in the future. Stock repurchases will be subject to market conditions, SEC regulations and other considerations and may be commenced or suspended at any time or from time to time, without prior notice. Accordingly, there is no guarantee as to the number of shares that will be repurchased or the timing of such repurchases.
Dividend Policy
We have not paid any dividendsOn February 12, 2018, the Company's Board of Directors approved the initiation of a dividend program under which the Company will pay a regular quarterly cash dividend of $0.06 per share on ourits common stock since becoming a public company. We intend($0.24 per share on an annualized basis). The first dividend is payable on March 21, 2018 to retain any 2015 earnings to reduce our indebtednessstockholders of record as of the close of business on March 1, 2018.
The declaration and repurchase our shares, absent a value-creating acquisition. Any determination as topayment of future dividends will be at the declarationdiscretion of dividends is at ourthe Board of Directors’ sole discretion based on factors it deems relevant at that time.Directors and will be dependent upon, among other things, the Company's financial position, results of operations, cash flows and other factors.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth our selected consolidated financial data. The selected consolidated financial data as of and for the five fiscal years ended December 31 2014 are derived from our consolidated financial statements. The data should be read in conjunction with the consolidated financial statements and related notes contained in Part II, Item 8. inof this report.
| | | | Year Ended December 31, | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012(1) | | 2011 | | 2010 | Year Ended December 31, |
| (in millions of dollars, except per share data) | | | | | | | | | | 2017(1) | | 2016(1) | | 2015 | | 2014 | | 2013 |
| Income Statement Data: | | | | | | | | | | | | | | | | | | |
| Net sales | $ | 1,689.2 |
| | $ | 1,765.1 |
| | $ | 1,758.5 |
| | $ | 1,318.4 |
| | $ | 1,284.6 |
| $ | 1,948.8 |
| | $ | 1,557.1 |
| | $ | 1,510.4 |
| | $ | 1,689.2 |
| | $ | 1,765.1 |
|
Operating income(2) | 173.6 |
| | 145.8 |
| | 139.3 |
| | 115.2 |
| | 109.7 |
| 193.0 |
| | 167.3 |
| | 163.5 |
| | 173.6 |
| | 145.8 |
|
| Interest expense | 49.5 |
| | 59.0 |
| | 91.3 |
| | 78.1 |
| | 79.0 |
| 41.1 |
| | 49.3 |
| | 44.5 |
| | 49.5 |
| | 59.0 |
|
| Interest income | (5.6 | ) | | (4.3 | ) | | (2.0 | ) | | (0.9 | ) | | (0.7 | ) | (5.8 | ) | | (6.4 | ) | | (6.6 | ) | | (5.6 | ) | | (4.3 | ) |
Other expense, net(3) | 0.8 |
| | 7.6 |
| | 61.3 |
| | 3.6 |
| | 1.2 |
| |
Income from continuing operations(4) | 91.6 |
| | 77.3 |
| | 117.0 |
| | 18.6 |
| | 7.8 |
| |
Other (income) expense, net(3) | | (0.4 | ) | | 1.4 |
| | 2.1 |
| | 0.8 |
| | 7.6 |
|
Net income(4) | | 131.7 |
| | 95.5 |
| | 85.9 |
| | 91.6 |
| | 77.1 |
|
| Per common share: | | | | | | | | | | | | | | | | | | |
Income from continuing operations(4) | | | | | | | | | | |
Net income(4) | | | | | | | | | | |
| Basic | $ | 0.81 |
| | $ | 0.68 |
| | $ | 1.24 |
| | $ | 0.34 |
| | $ | 0.14 |
| $ | 1.22 |
| | $ | 0.89 |
| | $ | 0.79 |
| | $ | 0.81 |
| | $ | 0.68 |
|
| Diluted | $ | 0.79 |
| | $ | 0.67 |
| | $ | 1.22 |
| | $ | 0.32 |
| | $ | 0.14 |
| $ | 1.19 |
| | $ | 0.87 |
| | $ | 0.78 |
| | $ | 0.79 |
| | $ | 0.67 |
|
| Balance Sheet Data (at year end): | | | | | | | | | | | | | | | | | | |
| Total assets | $ | 2,226.4 |
| | $ | 2,382.9 |
| | $ | 2,507.7 |
| | $ | 1,116.7 |
| | $ | 1,149.6 |
| $ | 2,799.1 |
| | $ | 2,064.5 |
| | $ | 1,953.4 |
| | $ | 2,215.1 |
| | $ | 2,368.3 |
|
| External debt | 800.6 |
| | 920.9 |
| | 1,072.1 |
| | 669.0 |
| | 727.6 |
| |
| Total stockholders’ equity (deficit) | 681.0 |
| | 702.3 |
| | 639.2 |
| | (61.9 | ) | | (79.8 | ) | |
| Total debt, net | | 932.4 |
| | 696.2 |
| | 720.5 |
| | 789.3 |
| | 906.3 |
|
| Total stockholders’ equity | | 774.1 |
| | 708.7 |
| | 581.2 |
| | 681.0 |
| | 702.3 |
|
| Other Data: | | | | | | | | | | | | | | | | | | |
| Cash provided (used) by operating activities | $ | 171.7 |
| | $ | 194.5 |
| | $ | (7.5 | ) | | $ | 61.8 |
| | $ | 54.9 |
| |
| Cash (used) provided by investing activities | (25.8 | ) | | (33.3 | ) | | (423.2 | ) | | 40.0 |
| | (14.9 | ) | |
| Cash (used) provided by financing activities | (142.0 | ) | | (155.5 | ) | | 360.1 |
| | (63.1 | ) | | (0.1 | ) | |
| Cash provided by operating activities | | $ | 204.9 |
| | $ | 167.1 |
| | $ | 171.2 |
| | $ | 171.7 |
| | $ | 194.5 |
|
| Cash (used) by investing activities | | (319.1 | ) | | (106.4 | ) | | (24.6 | ) | | (25.8 | ) | | (33.3 | ) |
| Cash provided (used) by financing activities | | 142.2 |
| | (76.4 | ) | | (137.8 | ) | | (142.0 | ) | | (155.5 | ) |
| |
| (1) | On May 1, 2012, we completed the Merger. Accordingly,The Company acquired Esselte on January 31, 2017; the results of Mead C&OPEsselte are included in 2017 results from February 1, 2017. The Company acquired Pelikan Artline on May 2, 2016; the Company's consolidated financial statementsresults of Pelikan Artline are included in 2016 results from thethat date of the Merger. For further information on the Merger, see "Note 3. Acquisitions" to the consolidated financial statements contained in Item 8. of this report.
forward. |
| |
| (2) | Operating income for the years 2017, 2016, 2015, 2014 2013, 2012, 2011 and 20102013 was impacted by restructuring charges (income)(credits) of $5.521.7 million, $30.15.4 million, $24.3(0.4) million, $(0.7)$5.5 million and $(0.5)$30.1 million, respectively. Such charges were largely severance related, and were principally associated with post-merger integration activities following the acquisition of Esselte in 2017, Pelikan Artline in 2016 and Mead C&OP in 2012. |
| |
| (3) | Other (income) expense, net for the years 2013 and 2012year 2016 was impacted by $9.4a $28.9 million and $61.4 million in charges, respectively, relatednon-cash gain arising from the PA Acquisition due to the refinancings completed in 2013 and 2012.revaluation of the previously held equity interest to fair value. For further information on our refinancing, see "Note 4. Long-term Debt and Short-term Borrowings"3. Acquisitions" to the consolidated financial statements contained in Part II, Item 8. of this report. Other (income) expense, net for the years 2017, 2016, 2015 and 2013 was also impacted by incremental charges related to various refinancings of $0.3 million, $29.9 million, $1.9 million and $9.4 million, respectively. For further information on the refinancings completed in 2017 and 2016 see "Note 4. Long-term Debt and Short-term Borrowings" to the consolidated financial statements contained in Part II, Item 8. of this report. |
| |
| (4) | DueIn 2017, we recorded a net tax benefit of $25.7 million related to the Merger, we analyzed our need to maintain valuation allowances against ourrecently passed U.S. deferred taxes, which were established in 2009. Based on our analysis we determined in 2012 that there existed sufficient evidence in the form of future taxable income from the combined operations to release $126.1 million of the valuation allowance that had been previously recorded against the U.S. deferred income tax assets.Tax Act. In 2013, and 2012, we also released $11.6 million and $19.0 million, respectively, of tax valuation allowances in certain foreign jurisdictions. For a further discussion, see "Note 11. Income Taxes" to the consolidated financial statements contained in Item 8. of this report.
|
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES
To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles in the United StatesU.S. ("GAAP"), we provide investors with certain non-GAAP financial measures. See below for an explanation of how we calculate and use these non-GAAP financial measures and for a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures.
We believe theseuse the non-GAAP financial measures are appropriateboth in the internal evaluation and management of our business and to explain our results to shareholders and the investment community. Senior management’s incentive compensation is derived, in part, using certain of these measures. We believe these measures provide management and investors with a more complete understanding of our underlying operational results and trends, facilitate meaningful comparisons and enhance an overall understanding of our past financial performance and also our prospects for the future as well as to facilitate comparisons with our historical operating results. Adjustments to our GAAPprospects. The non-GAAP results are made with the intent of providing both management and investors a more complete understanding of our underlying operational results and trends. For example, the non-GAAP measures are an indication of our baseline performance before gains, losses or other charges that arewe considered by management to be outside our core operating results. In addition, these non-GAAP financial measures are among the primary indicators management uses as a basis for our planning and forecasting of future periods . Additionally, senior management’s incentive compensation is derived, in part, using certain of these non-GAAP financial measures.
There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. The non-GAAP financial measures are limited in value because they exclude certain items that may have a material impact upon our reported financial results;results such as unusual income tax items, restructuring and integration charges, goodwill or other intangible asset impairment charges,acquisition-related expenses, foreign currency fluctuation, and other one-time or non-recurring items. The presentation of this additional information isThese measures should not meant to be considered in isolation or as a substitute for, the directly comparable financial measures prepared in accordance with GAAP. Investors should review the reconciliations of the non-GAAP financial measuresor superior to, their mostthe directly comparable GAAP financial measures as providedand should be read in connection with the tables below as well as our consolidatedcompany’s financial statements and related notes included elsewherepresented in this report.accordance with GAAP.
Net Sales at Constant Currency
We provide net sales at constant currency in order to facilitate comparisons of our historical sales results as well as highlight the underlying sales trends in our business. We calculate net sales at constant currency by translating the current period foreign operation net sales at prior year periodic currency rates.
The following table provides a reconciliation of GAAP net sales as reported to Non-GAAPnon-GAAP net sales at constant currency:
| | | | Year Ended December 31, 2014 | | Year Ended December 31, 2013 | | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | |
| (in millions of dollars) | GAAP Reported Net Sales | | Currency Translation | | Non-GAAP Net Sales at Constant Currency | | GAAP Reported Net Sales | | % Change at Constant Currency | GAAP Reported Net Sales | | Currency Translation | | Non-GAAP Net Sales at Constant Currency | | GAAP Reported Net Sales | | % Change at Constant Currency |
| ACCO Brands North America | $ | 1,006.0 |
| | $ | 9.8 |
| | $ | 1,015.8 |
| | $ | 1,041.4 |
| | (2 | )% | $ | 999.0 |
| | $ | (2.0 | ) | | $ | 997.0 |
| | $ | 1,016.1 |
| | (1.9 | )% |
| ACCO Brands EMEA | | 542.8 |
| | (0.8 | ) | | 542.0 |
| | 171.8 |
| | 215.5 | % |
| ACCO Brands International | 546.9 |
| | 24.1 |
| | 571.0 |
| | 566.6 |
| | 1 | % | 407.0 |
| | (9.6 | ) | | 397.4 |
| | 369.2 |
| | 7.6 | % |
| Computer Products Group | 136.3 |
| | 1.3 |
| | 137.6 |
| | 157.1 |
| | (12 | )% | |
| Total | $ | 1,689.2 |
| | $ | 35.2 |
| | $ | 1,724.4 |
| | $ | 1,765.1 |
| | (2 | )% | $ | 1,948.8 |
| | $ | (12.4 | ) | | $ | 1,936.4 |
| | $ | 1,557.1 |
| | 24.4 | % |
Adjusted Operating Income
We provide adjusted operating income in order to facilitate comparisons of our historical operating results by excluding one-time gains, losses and other charges, such as restructuring charges.(credits) charges, integration charges and acquisition-related expenses.
The following table provides a reconciliation of GAAP operating income as reported to Non-GAAPnon-GAAP adjusted operating income:
| | | | Year Ended December 31, 2014 | Year Ended December 31, 2017 |
| (in millions of dollars) | GAAP Reported Operating Income | | Adjustments(1) | | Non-GAAP Adjusted Operating Income | GAAP Reported Operating Income | | Adjustments(1) | | Non-GAAP Adjusted Operating Income |
| ACCO Brands North America | $ | 140.7 |
| | $ | 3.3 |
| | $ | 144.0 |
| $ | 155.6 |
| | $ | 5.8 |
| | $ | 161.4 |
|
| ACCO Brands EMEA | | 37.1 |
| | 17.5 |
| | 54.6 |
|
| ACCO Brands International | 62.9 |
| | 1.1 |
| | 64.0 |
| 50.9 |
| | 6.2 |
| | 57.1 |
|
| Computer Products Group | 8.2 |
| | 1.1 |
| | 9.3 |
| |
| Corporate | (38.2 | ) | | — |
| | (38.2 | ) | (50.6 | ) | | 8.0 |
| | (42.6 | ) |
| Total | $ | 173.6 |
| | $ | 5.5 |
| | $ | 179.1 |
| $ | 193.0 |
| | $ | 37.5 |
| | $ | 230.5 |
|
(1) Represents the adjustment of restructuring charges.charges, transaction and integration expenses associated with the Esselte and PA Acquisitions, the gain on the sale of a distribution center related to the Pelikan Artline integration and the amortization of step-up in the value of finished goods inventory associated with the acquisition of Esselte.
Free Cash Flow
We provide free cash flow in order to show the cash available to pay down debt, buy back shares of common sharesstock, pay dividends and fund strategic acquisitions. Free cash flow represents cash flow from operating activities less cash used for additions to property, plant and equipment, net ofplus cash proceeds from the disposition of assets.
The following table sets forth a reconciliation of GAAP net cash provided by operating activities as reported to Non-GAAPnon-GAAP free cash flow:
| | | (in millions of dollars) | Year Ended December 31, 2014 | Year Ended December 31, 2017 |
| Net cash provided by operating activities | $ | 171.7 |
| $ | 204.9 |
|
| Net cash provided (used) by: | | |
| Net cash (used) provided by: | | |
| Additions to property, plant and equipment | (29.6 | ) | (31.0 | ) |
| Proceeds from the disposition of assets | 3.8 |
| 4.2 |
|
| Free cash flow | $ | 145.9 |
| |
| Free cash flow (non-GAAP) | | $ | 178.1 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements of ACCO Brands Corporation and the accompanying notes contained in Item 8. of this report. Unless otherwise noted, the following discussion pertains only to our continuing operations.
Overview of the Company
ACCO Brands is a leading globaldesigner, marketer and manufacturer of recognized consumer and marketer of office, schoolend-user demanded brands used in businesses, schools, and calendar productshomes. Our widely known brands include AT-A-GLANCE®, Derwent®, Esselte®, Five Star®, GBC®, Hilroy®, Kensington®,Leitz®, Marbig®, Mead®, NOBO®, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra® and select computer and electronic accessories. ApproximatelyWilson Jones®. More than 80% of our net sales come from brands that occupy the number one or number two positions in the select marketsproduct categories in which we compete. We seekdistribute our products through a wide variety of retail and commercial channels to develop newensure that our products that meet the needs of ourare readily and conveniently available for purchase by consumers and commercial end-users. We compete through a balance ofother end-users, wherever they prefer to shop. These channels include mass retailers, e-tailers, discount, drug/grocery and variety chains; warehouse clubs; hardware and specialty stores; independent office product innovation, category management, a low-cost operating modeldealers; office superstores; and an efficient supply chain. We sell our products to consumers and commercial end-users primarily through resellers, including traditional office supply resellers, wholesalers, and retailers, including on-line retailers.contract stationers. Our products are sold primarily to markets located in the U.S., Northern Europe, Brazil,Australia, Canada, Australia,Brazil and Mexico. For the year ended December 31, 2014,2017, approximately 45%55% of our sales were outside the U.S., up from 43% in 2016. This increase was the result of the Esselte and Pelikan Artline acquisitions, which further extended our geographic reach.
The majorityOver the past several years we have transformed our business by: divesting certain non-core commercially-oriented product lines; acquiring companies with consumer and end-user demanded brands, and continuing to diversify our distribution channels. In 2012, we acquired the Mead Consumer and Office Products business ("Mead C&OP"), which substantially increased our presence in North America and Brazil in school and calendar products with well-known consumer brands. In 2016, we purchased the remaining equity interest in Pelikan Artline from our joint venture partner, which enhanced our competitive position in school and business products in Australia and New Zealand and added new consumer categories, including writing instruments and janitorial supplies. In early 2017, we acquired Esselte Group Holdings AB ("Esselte"), which more than doubled our presence in Europe and added several iconic business brands, a significant base of independent dealer customers, and a new product category of do-it-yourself hardware tools. Together these three acquisitions have meaningfully expanded our portfolio of well-known end-user demanded brands, enhanced our competitive position from both a product and channel perspective, and added scale to our business operations.
Today our Company is a global enterprise focused on developing innovative branded consumer products for use in businesses, schools and homes. We believe our leading product category positions provide the scale to enable us to invest in marketing and product innovation to drive profitable growth. We expect to derive much of our revenue is concentratedgrowth, over the long term, in faster-growing emerging geographies wheresuch as Latin America and parts of Asia, the Middle East and Eastern Europe, which exhibit stronger demand for our product categories isthan in mature stages, butdeveloped markets. In all of our markets we see opportunities to grow sales through share gains, channel expansion and newinnovative products. We expect to derive growth in faster growing emerging geographies where demand in the product categories in which we compete is strong, such as in Latin America and parts of Asia, the Middle East and Eastern Europe. We plan to grow throughsupplement organic growth supplemented byglobally with strategic acquisitions in both coreexisting and adjacent categories. Historically, key drivers of demand for office and school products have included trends in white collar employment levels, education enrollment levels, gross domestic product (GDP), growth in the number of small businesses and home offices, as well as consumer usage trends for our product categories.
We believe our leading product positions provide the scale to enable us to invest in product innovation and drive growth across our product categories. We currently manufacture approximately half of our products locally where we operate, and source approximately the other half of our products, primarily from China.
ACCO Brands North America and ACCO Brands International
ACCO Brands North America and ACCO Brands International manufacture, source and sell traditional office products, school supplies and calendar products. ACCO Brands North America comprises the U.S. and Canada, and ACCO Brands International comprises the rest of the world, primarily Northern Europe, Brazil, Australia and Mexico.Acquisitions
OurEsselte Group Holdings AB Acquisition and Refinancing
On January 31, 2017, the Company completed the acquisition (the "Esselte Acquisition") of Esselte. Accordingly, the results of Esselte are included in the Company's consolidated financial statements from February 1, 2017 forward and are reported in all three of the Company's segments, but primarily in the ACCO Brands EMEA segment. The acquisition of Esselte made ACCO Brands a leading European manufacturer and marketer of branded consumer and office schoolproducts, and calendar product lines use name brands such as AT-A-GLANCEimproved ACCO Brands' scale. Esselte products are primarily marketed under the Leitz®, Day-Timer®, Five Star®, GBC®, Hilroy, Marbig, Mead®, NOBO, Quartet®, Rexel, Swingline®, Tilibra, Wilson JonesRapid® and many others. ProductsEsselte® brands in the storage and brands are not confined to one channel or product category and are sold based on end-user preference in each geographic location.
The majority of our office products, such asorganization, stapling, punching, binding and laminating equipment and related consumable supplies, shredders and whiteboards, are used by businesses. Most of these end-users purchase their products from our customers, which include traditional office supply resellers, wholesalers and other retailers, including on-line retailers. We also supply some of our products directly to large commercial and industrial end-users, and provide business machine maintenance and certain repair services. We also supply private label products within the office products sector.
Our school products include notebooks, folders, decorative calendars, and stationery products. We distribute our school products primarily through mass merchandisers, and other retailers, such as grocery, drug and office superstores as well as on-line retailers. We also supply private label products within the school products sector.
Our calendar products are sold throughout all channels where we sell office or school products, as well as directly to consumers both on-line and through direct mail.
Computer Products Group
Our Computer Products Group designs, sources, distributes, markets and sells accessories for laptop and desktop computers, and tablets. These accessories primarily include security products, input devices such as mice, laptop computer carrying cases,
hubs, docking stations, power adapters, tablet accessories and charging racks and ergonomic devices. We sell these products mostly under the Kensington®, Microsaver® and ClickSafe® brand names, with the majority of revenue coming from the U.S. and Northern Europe. Our computer products are manufactured by third-party suppliers, principally in Asia, and are distributed from our regional facilities. Our computer products are sold primarily to consumer electronics retailers, information technology value-added resellers, original equipment manufacturers and office products retailers, as well as directly to consumers on-line.do-it-yourself tools product categories.
The cash purchase price paid was $292.3 million, net of cash acquired of $34.2 million. In 2014 we repositionedconnection with the Computer Products Group by shifting our focus away from commoditized tablet accessories. We expectEsselte Acquisition, the repositioningCompany entered into a Third Amended and Restated Credit Agreement (the "2017 Credit Agreement"), dated as of this business to be complete by the second halfJanuary 27, 2017. The 2017 Credit Agreement provides for a five-year senior secured credit facility, which consists of 2015. The sales of laptopa €300.0 million (US$320.8 million based on January 27, 2017 exchange rates) term loan facility (the "Euro Term Loan A"), a A$80.0 million (US$60.4 million based on January 27, 2017 exchange rates) term loan facility (the "AUD Term Loan A"), and desktop computers, which help drive the sales our accessories, had a change in trend in 2014, with sales increasing slightly after two years of declining sales.
Overview of 2014 Company Performance
In 2014, net sales decreased 4% to $1,689.2US$400.0 million from $1,765.1 million in the prior year. Foreign currency adversely impacted sales by $35.2 million, or 2%multi-currency revolving credit facility (the "2017 Revolving Facility"). The remaining decline was primarily in the North America segment, where sales fell largely as the result of the merger of Office Depot and OfficeMax, and in the Computer Products Group segment, primarily due to lower sales of tablet accessories. Despite the sales declines we were able to improve our gross margin to 31.4% from 31.0%, and reduce our SG&A expenses by 5%. These improvements were largely the result of cost savings and productivity initiatives. Operating income increased by $28 million, primarily due to lower restructuring charges in the current year. Underlying operating income declined primarily due to the decline in sales. However, operating income as a percent of sales increased as the lower sales, adverse foreign exchange and a $10 million increase in management incentive compensation were all offset by cost savings and productivity improvements.
Net income was $91.6 million, or $0.79 per diluted share, compared to net income of $77.1 million, or $0.67 per diluted share in the prior year. The company generated significant free cash flow in 2014, $146 million (net cash provided by operating activities of $172 million less net cash used in investing activities of $26 million) and as a result we reduced our debt by $120 million and repurchased $22 million of our Company's common stock.
See also "Item 6. Selected Financial Data - Supplemental Non-GAAP Financial Measures."Pelikan Artline Joint-Venture Acquisition
Consolidation in Our Industry
Our results are dependent upon a numberOn May 2, 2016, we completed the acquisition of factors, including pricingAustralia Stationery Industries, Inc. (the "PA Acquisition"), which indirectly owned the 50% of the Pelikan Artline joint-venture and competition. Current pricing and demand levelsthe issued capital stock of Pelikan Artline Pty Limited (collectively, "Pelikan Artline") that was not already owned by the Company. Prior to the PA Acquisition, the Pelikan Artline joint-venture was accounted for office products reflectusing the substantial consolidation among the global resellers of office products. This consolidation has led to multiple years of industry pricing pressure and more efficient asset utilization by customers, resulting in lower sales and volume for suppliers of office products. In the fourth quarter of 2013, two of our large customers, Office Depot and OfficeMax, completed their merger. Since the merger the combined company has taken actions to harmonize pricing from their suppliers, close retail outlets and rationalize their supply chain which have negatively impacted and will continue to negatively impact, our sales and margins. In 2014, sales to Office Depot globally declined by $40 million.
We believe these activities will continue for some time and that these adverse effects and future effects will take several years to be fully realized. Additionally, Staples recently announced an agreement to acquire Office Depot. See "Part I, Item1A. Risk Factors - Our customers may further consolidate, which could adversely impact our salea and margins."
Foreign Currency
With approximately 45% of our net sales for the fiscal year ended December 31, 2014 arising from foreign sales, fluctuations in currency exchange rates can have a material impact on ourequity method. The results of operations. Currency fluctuations impactPelikan Artline are included in the results of our non-U.S. operations thatCompany's consolidated financial statements from May 2, 2016 forward, and are reported in U.S. dollars. Asthe ACCO Brands International segment. Accordingly, we no longer separately report equity in earnings from this joint-venture. Pelikan Artline is a result, a strong U.S. dollar reduces the dollar-denominated sales contributions from foreign operationspremier distributor of recognized consumer brands used in businesses, schools, and a weak U.S. dollar benefits ushomes in the form of higher reported sales. Additionally, approximately half of the products we sell are sourced from ChinaAustralia and other Asia-Pacific countries and are paid for in U.S. dollars. Thus, movements in the value of local currency relative to the U.S. dollar in countries where we source our products affect our cost of goods sold. Further, our international operations sell in their local currencies and are exposed to their domestic currency movements against the U.S. dollar. The strong U.S. dollar decreased our 2014 reported sales by $35.2 million, or 2.0%, and adversely impacted our profitability.New Zealand.
Fluctuations inFor further information on the currency exchange rates can also have a material impact on our Consolidated Balance Sheets. For the year ended December 31, 2014 the strengthening of the U.S. dollar has reduced the value our reported assets and liabilities by $76.4 million versus December 31, 2013. Therefore, our reported shareholders' equity has decreased by this amount.
We expect additional adverse effects from the strong U.S. dollar to continue to impact us in 2015. See "Part I, Item1A. Risk Factors - Risks associated with currency volatility could adversely affect our sales, profitability, cash flow and results of operations" andacquisitions, see "Note 13. Derivative Financial Instruments"3. Acquisitions" to the consolidated financial statements contained in Item 8. of this report.
Restructuring
Following our merger withreport. For information on the Mead C&OP business in 2012, we have undertaken a series of restructuring actions to reduce our operating costs. These actions were recorded as restructuring charges in the amount of $5.5 million, $30.1 million and $24.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. The cost savings associated with these actions were realized in the form of lower operating costs reported in cost of products sold and advertising, selling, general and administrative expenses. In 2014, cost savings were substantially related to charges taken in 2013. In 2015, we expect to realize additional cost savings related to the charges taken in 2014. Also in 2015, we expect to pay substantially allfinancings of the $8.4 million accrued restructuring liability that remains as of December 31, 2014. For additional details concerning these charges and associated actions taken in each year,acquisitions, see "Note 10. Restructuring"4. Long-term Debt and Short-term Borrowings" to the consolidated financial statements contained in Item 8. of this report.
Reportable Segments
Effective in the first quarter of 2017, as a result of the Esselte Acquisition, the Company realigned its operating structure, which affected the makeup of its business segments for financial reporting purposes. The Company has three operating business segments each of which is comprised of different geographic regions. The Company no longer reports the results of its Computer Products Group as a separate segment. Results of the former Computer Products Group are reflected in the appropriate geographic segment based on the region from which sales are made. The Company's three realigned business segments are as follows:
|
| | | | |
| Operating Segment | | Geographic Regions | | Primary Brands |
| ACCO Brands North America | | United States and Canada | | AT-A-GLANCE®, Five Star®, GBC®, Hilroy®, Kensington®, Mead®, Quartet®, and Swingline® |
| | | | |
| ACCO Brands EMEA | | Europe, Middle East and Africa | | Derwent®, Esselte®, GBC®, Kensington®, Leitz®, NOBO®, Rapid®, and Rexel® |
| | | | |
| ACCO Brands International | | Australia, Latin America and Asia-Pacific | | Artline®, GBC®, Kensington®, Marbig®, Quartet®, Rexel®, Tilibra®, and Wilson Jones® |
We have restated our financial statements for each of the periods presented to reflect this change in reportable business segments.
Each of the Company's three operating segments designs, markets, sources, manufactures and Office Products Business Mergersells recognized consumer and end-user demanded brands used in businesses, schools and homes. Product designs are tailored based on end-user preferences in each geographic region.
Our product categories include storage and organization; stapling; punching; laminating, binding and shredding machines and related consumable supplies; whiteboards; notebooks; calendars; computer accessories; and do-it-yourself tools, among others. Our portfolio of consumer and end-user demanded brands includes both globally and regionally recognized brands.
ACCO Brands markets and sells its strong multi-product offering broadly and is not dependent on any one channel. Our products are sold through all relevant channels, namely retailers, including: mass retailers; e-tailers; discount, drug/grocery and variety chains; warehouse clubs; hardware and specialty stores; independent office product dealers; office superstores; and contract stationers. We also sell directly to commercial and consumer end-users through our e-commerce platform and our direct sales organization.
On May 1, 2012, we completedFor further information on our business segments see "Note 16. Information on Business Segments" to the Merger of Mead C&OP with a wholly-owned subsidiary of the Company. The results of Mead C&OP are included in the Company's consolidated financial statements fromcontained in Part II, Item 8. of this report.
Overview of 2017 Performance
Our financial results for the dateyear ended December 31, 2017 reflect the significant benefit of our acquisitions. The Esselte Acquisition and the Merger.PA Acquisition primarily impact the financial results of our EMEA and International segments, respectively. For furthermore information, see "Note 3. Acquisitions"Acquisitions" to the consolidated financial statements contained in Item 8. of this report.
Debt AmendmentThe Company's cash flow from operations, effective tax rate and Refinancing
On June 26, 2014,interest payments were impacted by the Company entered intorefinancing of our senior unsecured notes in December 2016 to obtain a Second Amendmentlower interest rate, and the increase in our bank debt in January 2017 to finance the Amended and Restated Credit Agreement (the "2014 Amendment"). The 2014 Amendment relates to and amends the Company’s Amended and Restated Credit Agreement, dated as of May 13, 2013 (the "2013 Restated Credit Agreement") among the Company, certain of its subsidiaries, the lenders party thereto, the administrative agent and other parties named therein.
On May 13, 2013, the Company entered into the 2013 Restated Credit Agreement that amended and restated the Company's prior credit agreement, dated as of March 26, 2012, as amended (the "2012 Credit Agreement"), that had been entered into in connection with the Merger.
Esselte Acquisition. For further information, on our refinancing and amendment see "Note 4. Long-term Debt and Short-term Borrowings"Borrowings" to the consolidated financial statements contained in Item 8. of this report.
Fiscal 2014 versus Fiscal 2013
The following table presentsIn addition, we recorded a tax benefit of $25.7 million related to the Company’s resultsnewly passed U.S Tax Act in December of 2017. For further information, see "Note 11. Income Taxes" to the consolidated financial statements contained in Item 8. of this report.
Foreign currency translation also impacted our consolidated financial statements favorably for the yearsyear ended December 31, 2014,2017. Where necessary, we adjust sales prices to cover the impacts of currency fluctuation on our cost of goods sold and 2013.take currency positions to allow for the time needed to generally achieve the sales price adjustments.
Consolidated Results of Operations for the Years Ended December 31, 2017 and 2016
| | | | Year Ended December 31, | | Amount of Change | | Year Ended December 31, | | Amount of Change | |
| (in millions of dollars) | 2014 | | 2013 | | $ | | % | | |
| (in millions of dollars, except per share data) | | 2017(1) | | 2016(2) | | $ | | %/pts | |
| Net sales | $ | 1,689.2 |
| | $ | 1,765.1 |
| | $ | (75.9 | ) | | (4 | )% | | $ | 1,948.8 |
| | $ | 1,557.1 |
| | $ | 391.7 |
| | 25 | % | |
| Cost of products sold | 1,159.3 |
| | 1,217.2 |
| | (57.9 | ) | | (5 | )% | | 1,292.4 |
| | 1,042.0 |
| | 250.4 |
| | 24 | % | |
| Gross profit | 529.9 |
| | 547.9 |
| | (18.0 | ) | | (3 | )% | | 656.4 |
| | 515.1 |
| | 141.3 |
| | 27 | % | |
| Gross profit margin | 31.4 | % | | 31.0 | % | | | | 0.4 |
| pts | 33.7 | % | | 33.1 | % | | | | 0.6 |
| pts |
| Advertising, selling, general and administrative expenses | 328.6 |
| | 347.3 |
| | (18.7 | ) | | (5 | )% | | |
| Selling, general and administrative expenses | | 406.1 |
| | 320.8 |
| | 85.3 |
| | 27 | % | |
| Amortization of intangibles | 22.2 |
| | 24.7 |
| | (2.5 | ) | | (10 | )% | | 35.6 |
| | 21.6 |
| | 14.0 |
| | 65 | % | |
| Restructuring charges | 5.5 |
| | 30.1 |
| | (24.6 | ) | | (82 | )% | | 21.7 |
| | 5.4 |
| | 16.3 |
| | NM |
| |
| Operating income | 173.6 |
| | 145.8 |
| | 27.8 |
| | 19 | % | | 193.0 |
| | 167.3 |
| | 25.7 |
| | 15 | % | |
| Operating income margin | 10.3 | % | | 8.3 | % | | | | 2.0 |
| pts | 9.9 | % | | 10.7 | % | | | | (0.8) |
| pts |
| Interest expense | 49.5 |
| | 59.0 |
| | (9.5 | ) | | (16 | )% | | 41.1 |
| | 49.3 |
| | (8.2 | ) | | (17 | )% | |
| Interest income | (5.6 | ) | | (4.3 | ) | | (1.3 | ) | | 30 | % | | (5.8 | ) | | (6.4 | ) | | (0.6 | ) | | (9 | )% | |
| Equity in earnings of joint ventures | (8.1 | ) | | (8.2 | ) | | 0.1 |
| | (1 | )% | | |
| Other expense, net | 0.8 |
| | 7.6 |
| | (6.8 | ) | | (89 | )% | | |
| Equity in earnings of joint venture | | — |
| | (2.1 | ) | | 2.1 |
| | (100 | )% | |
| Other (income) expense, net | | (0.4 | ) | | 1.4 |
| | 1.8 |
| | NM |
| |
| Income tax expense | 45.4 |
| | 14.4 |
| | 31.0 |
| | 215 | % | | 26.4 |
| | 29.6 |
| | (3.2 | ) | | (11 | )% | |
| Effective tax rate | 33.1 | % | | 15.7 | % | |
| | 17.4 |
| pts | 16.7 | % | | 23.7 | % | |
| | (7.0) |
| pts |
| Income from continuing operations | 91.6 |
| | 77.3 |
| | 14.3 |
| | 18 | % | | |
| Loss from discontinued operations, net of income taxes | — |
| | (0.2 | ) | | 0.2 |
| | 100 | % | | |
| Net income | 91.6 |
| | 77.1 |
| | 14.5 |
| | 19 | % | | 131.7 |
| | 95.5 |
| | 36.2 |
| | 38 | % | |
| Weighted average number of diluted shares outstanding: | | 110.9 |
| | 109.2 |
| | 1.7 |
| | 2 | % | |
| Diluted income per share | | 1.19 |
| | 0.87 |
| | 0.32 |
| | 37 | % | |
| |
| (1) | The Company acquired Esselte on January 31, 2017; Esselte's results are included in 2017 results from February 1, 2017 forward. |
| |
| (2) | The Company acquired Pelikan Artline on May 2, 2016; Pelikan Artline's results are included in 2016 results from that date forward. |
Net Sales
Net sales decreased $75.9of $1,948.8 million, including $438.8 million attributable to the Esselte and PA Acquisitions, were up $391.7 million, or 4%25%, to $1,689.2 million from $1,765.1$1,557.1 million in the prior-year period. Foreign currency translation reducedincreased sales by $35.2$12.4 million, or 2%. The underlying sales decline was principally1% in the North America segment which experienced a significant reduction incurrent-year period. Comparable net sales, excluding the acquisitions and foreign currency translation, were down primarily due to Office Depot following the merger with OfficeMax,declines at certain office superstore customers and in the Computer Products Group segment as result of our strategic decision to shift focus away from commoditized tablet accessories.lost product placements.
Cost of Products Sold
Cost of products sold includes all manufacturing, product sourcing and distribution costs, including depreciation related to assets used in the manufacturing, procurement and distribution process,processes, allocation of certain information technology costs supporting those processes, inbound and outbound freight, shipping and handling costs, purchasing costs associated with materials and packaging used in the production processes and inventory valuation adjustments. Cost of products sold decreased $57.9of $1,292.4 million, was up $250.4 million, or 24%, or 5%, to $1,159.3from $1,042.0 million from $1,217.2 million in the prior-year period. Foreign currency translation reduced cost of
products sold by $25.6 million. Costs$8.4 million, or 1% in the current-year period. Underlying cost of products sold, also decreasedexcluding foreign currency translation, increased due to the inclusion of the acquisitions, partially offset by lower comparable sales and cost savings and productivity improvements, mostly in the North America segment, and lower sales volume.improvements.
Gross Profit
Management believesWe believe that gross profit and gross profit margin provide enhanced shareholder appreciation of underlying profit drivers. Gross profit decreased $18.0of $656.4 million,, was up $141.3 million, or 3%, to $529.9 million27%, from $547.9$515.1 million in the prior-year period. Foreign currency translation reducedincreased gross profit by $9.6 million. The underlying decrease was$4.0 million, or 1% in the current-year period. Underlying gross profit, excluding foreign currency translation, increased due to lower salesthe inclusion of the acquisitions, together with productivity initiatives and higher costs,pricing, which was partially offset by cost savings,lower comparable sales and inflation.
Gross profit as a percent of net sales increased to 33.7% from 33.1%. The increase was primarily due to productivity improvements and higher pricing.
Gross profit margin increased to 31.4% from 31.0%. The improvement was primarily due to cost savingsSelling, General and productivity improvements, which more than offset the adverse impact of sales deleveraging, adverse sales mix, increased management incentives and increased inventory write-offs.
Advertising, selling, general and administrativeAdministrative expenses
Advertising, selling,Selling, general and administrative expenses ("SG&A") include advertising, marketing, selling (including commissions), research and development, customer service, depreciation related to assets outside the manufacturing and distribution processes, and all other general and administrative expenses outside the manufacturing and distribution functions (e.g., finance, human resources, information technology and corporate expenses, etc.)expenses). SG&A decreased $18.7of $406.1 million, was up $85.3 million, or 27%, from $320.8 million in the prior-year period. The current-year period includes $16.4 million of integration and transaction costs related to the acquisitions. The prior-year period included $12.8 million in transaction and integration costs related to the acquisitions. Foreign currency translation increased SG&A by $0.6 million, or 5%0.2%, in the current-year period. Underlying SG&A, excluding integration and transaction costs and foreign currency translation, increased primarily due to $328.6the inclusion of the acquisitions.
As a percentage of net sales, SG&A increased to 20.8% from 20.6% in the prior-year period, primarily due to higher integration and transaction costs incurred in the current-year period, partially offset by productivity initiatives.
Amortization of Intangibles
Amortization of intangibles of $35.6 million, was up $14.0 million, or 65%, from $347.3$21.6 million in the prior-year period. The increase was due to the inclusion of the Esselte and PA Acquisitions.
Restructuring Charges
Restructuring charges in the current-year period of $21.7 million related primarily to the integrations of Esselte and Pelikan Artline. Restructuring charges in the prior-year period of $5.4 million related primarily to the integration of Pelikan Artline and consolidation of certain functions in the North America segment.
Operating Income
Operating income of $193.0 million, was up $25.7 million, or 15%, from $167.3 million in the prior-year period. Foreign currency translation reduced SG&Aincreased operating income by $4.5 million. The underlying decrease was driven primarily by savings related to cost reduction activities in addition to $7$3.2 million, in lower pension expense. Also contributing to the improvement were the absence of $4.4 million of Mead C&OP information technology integration charges, which were includedor 2%, in the prior year. Partially offsetting the reduction in SG&A were higher management incentivescurrent-year period. Underlying operating income, excluding restructuring, transaction and various strategic initiatives expenses. The prior year also included a $2.5 million gain on the sale of a facility.
As a percentage of sales, SG&A decreased to 19.5% from 19.7% in the prior-year periodintegration costs, and foreign currency translation, increased primarily due to the cost reductions mentioned above. Lower sales volume somewhat offsetinclusion of the favorable impact.
Restructuring Charges
Restructuring charges were $5.5 million compared to $30.1 million in the prior-year period, as there were fewer restructuring initiatives in 2014.
Operating Income
Operating income increased $27.8 million, or 19%, to $173.6 million, from $145.8 million in the prior-year period including a $4.9 million reduction due to foreign currency translation. The underlying improvement was primarily due to lower restructuring charges and SG&A expenses offset by lower gross profit.acquisitions.
Interest Expense, Equity in Earnings of Joint Venture and Other (Income) Expense, Net
Interest expense decreased by $9.5 of $41.1 million, was down $8.2 million, or 16%17%, to $49.5 million from $59.0$49.3 million in the prior-year period. The decrease was primarily due to the lower interest ratesrate paid on our senior unsecured notes, which were refinanced in the fourth quarter of 2016, partially offset by interest resulting from increased debt incurred in connection with the Esselte Acquisition. The prior-year period included $2.5 million of incremental interest expense related to the above-referenced refinancing of our senior unsecured notes and the accelerated amortization of debt issuance cost related to the prepayment of $70 million on our U.S. Dollar Senior Secured Term Loan A.
As a result of the PA Acquisition, which was completed on May 2, 2016, equity in earnings of joint venture decreased $2.1 million as the second quarterCompany ceased accounting for the Pelikan Artline joint-venture using the equity method of 2013 and lower debt outstandingaccounting.
Other (income) expense, net was income of $0.4 million compared to the prior year.
Other expense netof other income decreased by $6.8 million to $0.8 million from $7.6$1.4 million in the prior-year period. The reduction wascurrent-year period included a $2.3 million foreign currency gain related to the settlement of certain intercompany loan transactions. The prior-year period included charges associated with the refinancing of our senior unsecured notes. These charges consisted of $25.0 million in a "make-whole" call premium and a $4.9 million charge for the write-off of debt issuance costs, which were offset by a $28.9 million non-cash gain arising from the PA Acquisition due to the absencerevaluation of the Company's previously held equity interest to fair value and a $9.4gain on the settlement of an intercompany loan of $1.0 million, write-offpreviously deemed permanently invested.
Income Taxes
For the current-year period, income tax expense was $26.4 million on income before taxes of debt origination costs$158.1 million, or an effective tax rate of 16.7%. The low effective tax rate for the current-year period is primarily due to a net tax benefit of $25.7 million related to the second quarternewly passed U.S. Tax Act in December of 2013 debt refinancing and2017. This benefit was driven by the reduction of net deferred tax liabilities, partially offset by a $2.0 million gain related to a bargain purchaseone-time mandatory deemed repatriation tax on an acquisition completed inaccumulated foreign subsidiaries' previously untaxed foreign earnings (the "Transition Toll Tax"). For further information on the fourth quarterimpact of 2013. For a further discussion of our debt refinancing completed in the second quarter of 2013U.S. Tax Act, see "Note 4. Long-term Debt and Short-term Borrowings"11. Income Taxes" to ourthe consolidated financial statements contained in Item 8. of this report.
Income Taxes
Income tax expense from continuing operations was $45.4 million on income from continuing operations before taxes of $137.0 million, with an effective tax rate of 33.1%. For Also contributing to the prior-year period, we reported income tax expense from continuing operations of $14.4 million on income from continuing operations before taxes of $91.7 million, with an effective tax rate of 15.7%. The low effective rate was $5.6 million of excess tax rate in the prior year was primarily duebenefits from stock-based compensation related to the releaseadoption of valuation allowances for certain foreign jurisdictions in the amount of $11.6 million.
Segment Discussion
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 | | Amount of Change |
| | Net Sales | | Segment Operating Income (A) | | Operating Income Margin | | Net Sales | | Net Sales | | Segment Operating Income | | Segment Operating Income | | Margin Points |
| | | | | | | | |
| (in millions of dollars) | | | | $ | | % | | $ | | % | |
| ACCO Brands North America | $ | 1,006.0 |
| | $ | 140.7 |
| | 14.0 | % | | $ | (35.4 | ) | | (3)% | | $ | 42.5 |
| | 43 | % | | 460 |
|
| ACCO Brands International | 546.9 |
| | 62.9 |
| | 11.5 | % | | (19.7 | ) | | (3)% | | (3.6 | ) | | (5 | )% | | (20 | ) |
| Computer Products Group | 136.3 |
| | 8.2 |
| | 6.0 | % | | (20.8 | ) | | (13)% | | (5.5 | ) | | (40 | )% | | (270 | ) |
| Total | $ | 1,689.2 |
| | $ | 211.8 |
| | | | $ | (75.9 | ) | | | | $ | 33.4 |
| | | | |
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2013 | | | | | | | | | | |
| | Net Sales | | Segment Operating Income (A) | | Operating Income Margin | | | | | | | | | | |
| | | | | | | | | | | | | |
| (in millions of dollars) | | | | | | | | | | | | |
| ACCO Brands North America | $ | 1,041.4 |
| | $ | 98.2 |
| | 9.4 | % | | | | | | | | | | |
| ACCO Brands International | 566.6 |
| | 66.5 |
| | 11.7 | % | | | | | | | | | | |
| Computer Products Group | 157.1 |
| | 13.7 |
| | 8.7 | % | | | | | | | | | | |
| Total | $ | 1,765.1 |
| | $ | 178.4 |
| | | | | | | | | | | | |
(A) Segment operating income excludes corporate costs; Interest expense; Interest income; Equity in earnings of joint ventures and Other expense, net.ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. See "Note 16. Information on Business Segments"2. Significant Accounting Policies" to the consolidated financial statements contained in Item 8. of this report for details on the adoption of this new standard.
For the prior-year period, income tax expense was $29.6 million on income before taxes of $125.1 million, or an effective tax rate of 23.7%. The low effective tax rate in the prior-year period was primarily due to the following: 1) the $28.9 million gain arising from the PA Acquisition due to the revaluation of the previously held equity interest to fair value, which was not subject to tax, and 2) tax losses on foreign exchange on the repayment of intercompany loans, for which the pre-tax effect was recorded in equity.
Net Income
Net income of $131.7 million, was up $36.2 million, or 38%, from $95.5 million in the prior-year period. Diluted income per share was $1.19, up $0.32, or 37% from $0.87 per diluted share in the prior-year period. Foreign currency translation increased net income by $5.9 million, or 6% in the current-year period. The increase in net income was primarily due to inclusion of the acquisitions, lower interest expense and a reconciliation of total lower effective tax rate.
Segment operating income toNet Sales and Operating Income (loss) from continuing operationsfor the Years Ended December 31, 2017 and 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Amount of Change |
| | Net Sales | | Segment Operating Income(1) | | Operating Income Margin | | Net Sales | | Net Sales | | Segment Operating Income | | Segment Operating Income | | Margin Points |
| | | | | | | | |
| (in millions of dollars) | | | | $ | | % | | $ | | % | |
| ACCO Brands North America | $ | 999.0 |
| | $ | 155.6 |
| | 15.6 | % | | $ | (17.1 | ) | | (2)% | | $ | 2.3 |
| | 2 | % | | 50 |
|
| ACCO Brands EMEA | 542.8 |
| | 37.1 |
| | 6.8 | % | | 371.0 |
| | 216% | | 24.5 |
| | 194 | % | | (50 | ) |
| ACCO Brands International | 407.0 |
| | 50.9 |
| | 12.5 | % | | 37.8 |
| | 10% | | 1.5 |
| | 3 | % | | (90 | ) |
| Total | $ | 1,948.8 |
| | $ | 243.6 |
| | | | $ | 391.7 |
| | | | $ | 28.3 |
| | | | |
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 | | | | | | | | | | |
| | Net Sales | | Segment Operating Income(1) | | Operating Income Margin | | | | | | | | | | |
| | | | | | | | | | | | | |
| (in millions of dollars) | | | | | | | | | | | | |
| ACCO Brands North America | $ | 1,016.1 |
| | $ | 153.3 |
| | 15.1 | % | | | | | | | | | | |
| ACCO Brands EMEA | 171.8 |
| | 12.6 |
| | 7.3 | % | | | | | | | | | | |
| ACCO Brands International | 369.2 |
| | 49.4 |
| | 13.4 | % | | | | | | | | | | |
| Total | $ | 1,557.1 |
| | $ | 215.3 |
| | | | | | | | | | | | |
| |
| (1) | Segment operating income excludes corporate costs: "Interest expense;" "Interest income;" "Equity in earnings of joint-venture" and "Other (income) expense, net." See "Note 16. Information on Business Segments" to the consolidated financial statements contained in Item 8. of this report for a reconciliation of total "Segment operating income" to "Income before income tax." |
ACCO Brands North America
ACCO Brands North America net sales of $999.0 million, including $13.4 million attributable to the Esselte Acquisition, were down $17.1 million, or 2%, from $1,016.1 million in the prior-year period. Foreign currency translation increased sales by $2.0 million, or 0.2%, in the current-year period. Comparable net sales, excluding Esselte and foreign currency translation, decreased $35.4primarily due to continued declines with office superstore customers and lost product placements with certain customers. Sales during the back-to-school season were down slightly compared to the prior year, which had strong growth.
ACCO Brands North America operating income of $155.6 million, was up $2.3 million, or 2%, from $153.3 million in the prior-year period, and operating income as a percent of net sales increased to 15.6% from 15.1%. The increase was due to higher gross margins from cost savings and productivity initiatives, and reduced customer sales rebates, which were partially offset by lower comparable sales, higher go-to-market spending and $5.5 million in restructuring charges (versus $1.1 million in the prior-year period). The restructuring charges related to the realignment of the operating structure of our former Computer Products Group, the Esselte integration and other projects to enhance the future long-term performance of the business.
ACCO Brands EMEA
ACCO Brands EMEA net sales of $542.8 million, including approximately $388 million attributable to the Esselte Acquisition, were up $371.0 million, or 216%, from $171.8 million in the prior-year period. Foreign currency translation increased sales by $0.8 million, or 0.5%, in the current-year period. Comparable net sales, excluding Esselte and foreign currency translation, decreased due to lost product placements and inventory reductions by certain customers.
ACCO Brands EMEA operating income of $37.1 million, including approximately $24.9 million attributable to the Esselte Acquisition, was up $24.5 million, or 194%, from $12.6 million in the prior-year period, but operating income as a percent of net sales decreased to 6.8% from 7.3%. The increase in operating income was driven by the Esselte Acquisition and includes restructuring costs of $11.2 million, integration costs of $5.5 million, and the amortization of step-up in the value of finished goods inventory of $0.8 million. Foreign currency translation increased operating income by $2.4 million in the current-year period. Underlying operating income, excluding Esselte, restructuring and integration costs, foreign currency translation and the amortization of step-up in the value of finished goods inventory, decreased due to lower comparable sales, partially offset by reduced SG&A expenses.
Operating income as a percent of sales decreased due to restructuring and integration costs, higher intangible amortization resulting from the Esselte Acquisition and lower gross margins (primarily due to Esselte having lower margins than the legacy ACCO business), partially offset by the lower SG&A margins in the legacy Esselte business.
ACCO Brands International
ACCO Brands International net sales of $407.0 million, including $37.9 million attributable to the PA and Esselte Acquisitions, were up $37.8 million, or 10%, from $369.2 million in the prior-year period. Foreign currency translation increased sales by $9.6 million, or 3% in the current-year period. Comparable net sales, excluding acquisitions and foreign currency translation, decreased primarily due to lost product placements and inventory reductions in Australia, partially offset by higher sales in Brazil and Mexico.
ACCO Brands International operating income of $50.9 million, was up $1.5 million, or 3%, from $49.4 million in the prior-year period, but operating income as a percent of net sales decreased to $1,006.012.5% from 13.4%. Restructuring and integration costs in the current-year period were $5.0 million and $2.6 million, respectively. In addition, the current-year period includes a $1.5 million gain on the sale of a distribution center in New Zealand related to the integration of Pelikan Artline. The prior-year period includes restructuring costs of $4.3 million, integration costs of $2.3 million and the amortization of the step-up in value of the finished goods inventory of $0.4 million. Foreign currency translation increased operating income by $0.7 million in the current-year period. Underlying operating income, excluding restructuring and integration costs, the amortization of step-up in the value of finished goods inventory, the gain on sale of the distribution center and foreign currency translation, was flat due to the inclusion of the results of Pelikan Artline in the current-year period and improved profitability in Brazil and Mexico, which was offset by lower comparable net sales and higher distribution costs associated with the warehouse and IT system consolidation in Australia.
Consolidated Results of Operations for the Years Ended December 31, 2016 and 2015
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Amount of Change | |
| (in millions of dollars, except per share data) | 2016(1) | | 2015 | | $ | | %/pts | |
| Net sales | $ | 1,557.1 |
| | $ | 1,510.4 |
| | $ | 46.7 |
| | 3 | % | |
| Cost of products sold | 1,042.0 |
| | 1,032.0 |
| | 10.0 |
| | 1 | % | |
| Gross profit | 515.1 |
| | 478.4 |
| | 36.7 |
| | 8 | % | |
| Gross profit margin | 33.1 | % | | 31.7 | % | | | | 1.4 |
| pts |
| Advertising, selling, general and administrative expenses | 320.8 |
| | 295.7 |
| | 25.1 |
| | 8 | % | |
| Amortization of intangibles | 21.6 |
| | 19.6 |
| | 2.0 |
| | 10 | % | |
| Restructuring charges (credits) | 5.4 |
| | (0.4 | ) | | 5.8 |
| | NM |
| |
| Operating income | 167.3 |
| | 163.5 |
| | 3.8 |
| | 2 | % | |
| Operating income margin | 10.7 | % | | 10.8 | % | | | | (0.1) |
| pts |
| Interest expense | 49.3 |
| | 44.5 |
| | 4.8 |
| | 11 | % | |
| Interest income | (6.4 | ) | | (6.6 | ) | | (0.2 | ) | | (3 | )% | |
| Equity in earnings of joint venture | (2.1 | ) | | (7.9 | ) | | 5.8 |
| | (73 | )% | |
| Other expense, net | 1.4 |
| | 2.1 |
| | (0.7 | ) | | (33 | )% | |
| Income tax expense | 29.6 |
| | 45.5 |
| | (15.9 | ) | | (35 | )% | |
| Effective tax rate | 23.7 | % | | 34.6 | % | | | | (10.9) |
| pts |
| Net income | 95.5 |
| | 85.9 |
| | 9.6 |
| | 11 | % | |
| Weighted average number of diluted shares outstanding: | 109.2 |
| | 110.6 |
| | (1.4 | ) | | (1 | )% | |
| Diluted income per share | $ | 0.87 |
| | $ | 0.78 |
| | $ | 0.09 |
| | 12 | % | |
| |
| (1) | The Company acquired Pelikan Artline on May 2, 2016; the results of which are included in 2016 results from that date forward. |
Net Sales
Net sales of $1,557.1 million, including $78.5 million attributable to the PA Acquisition, were up $46.7 million, or 3%, from $1,041.4$1,510.4 million in the prior-year period. Foreign currency translation reduced net sales by $9.8$16.9 million, or 1%. The underlyingComparable net sales, decline was primarily with Office Depot, where 2014 sales declined $40 million globally, the vast majority of which impacted North America. The decline with Office Depot was largely related to their merger with OfficeMax which has adversely impacted our sales through inventory reductions (including, the effects of supply chain rationalizationexcluding Pelikan Artline and store closures), losses of product placement and a change to a consignment sales model for certain calendar products. We expect inventory reductions and lost product placementforeign currency translation, were down due to the merger to continue to adversely impact our sales in 2015. North America sales also declined with wholesalerdeclines at certain wholesalers and office superstores customers, who reduced inventory, partially offset by a strong back-to-school season in thegrowth at mass merchandiser channel.and e-tail customers.
ACCO Brands North America operating income increased $42.5 million, or 43%, to $140.7 million from $98.2 million in the prior-year period, and operating income margin increased to 14.0% from 9.4%. The improvement was primarily due to a reduction in restructuring charges of $17.6 million as well as cost savings from restructuring initiatives, other productivity improvements and lower pension expenses. Also contributing to the improvement were the absence of $4.2 million of Mead C&OP information technology integration charges and $1.8 million of costs associated with our U.S and corporate headquarters relocation, which were included in the prior year. The improvements were partially offset by lower sales volume and higher management incentives expenses.
ACCO Brands International
ACCO Brands International net sales decreased $19.7 million, or 3%, to $546.9 million from $566.6 million in the prior-year period. Foreign currency translation reduced sales by $24.1 million, or 4%. The underlying sales improvement was primarily driven by price increases taken to offset the negative effect of inflation and the adverse impact of foreign exchange on our cost of goods. Sales gains in Latin America and Asia-Pacific were offset by lower sales primarily in Europe and Australia. Brazil started the year strongly, with underlying sales 13% higher in the first six months; however sales growth moderated significantly in the second half as the Brazilian economy weakened. Brazilian sales for the year increased 7%, principally due to price increases on flat volume. We expect the soft macroeconomic trends in Brazil will continue into 2015.
ACCO Brands International operating income decreased $3.6 million, or 5%, to $62.9 million from $66.5 million in the prior-year period, and operating income margin decreased to 11.5% from 11.7%. Foreign currency translation reduced operating
income by $3.8 million, or 6%. The benefit of $5.4 million in lower restructuring charges and lower pension expenses was offset by investment in sales and marketing and the absence of a $2.5 million gain on the sale of a building in 2013.
Computer Products Group
Computer Products Group net sales decreased $20.8 million, or 13%, to $136.3 million from $157.1 million in the prior-year period. The decline was due to reduced volume and pricing of tablet accessories resulting from our strategic decision to shift focus away from commoditized tablet accessories. We expect the adverse impact from this decision to be completed in the first half of 2015. Sales of our security and laptop accessory products (over 80% of sales) were up slightly from the prior year as a result of stabilization in demand for personal computers and laptops.
Computer Products Group operating income decreased $5.5 million, or 40%, to $8.2 million from $13.7 million in the prior-year period, and operating margin decreased to 6.0% from 8.7%. The declines in operating income and margin were primarily due to substantially lower sales and margins in the tablet accessory business, including price discounting to sell remaining inventory, partially offset by lower SG&A expenses.
Fiscal 2013 versus Fiscal 2012
The following table presents the Company’s results for the years ended December 31, 2013 and 2012.
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Amount of Change | |
| (in millions of dollars) | 2013 | | 2012 | | $ | | % | |
| Net sales | $ | 1,765.1 |
| | $ | 1,758.5 |
| | $ | 6.6 |
| | 0.4 | % | |
| Cost of products sold | 1,217.2 |
| | 1,221.4 |
| | (4.2 | ) | | (0.3 | )% | |
| Gross profit | 547.9 |
| | 537.1 |
| | 10.8 |
| | 2 | % | |
| Gross profit margin | 31.0 | % | | 30.5 | % | | | | 0.5 |
| pts |
| Advertising, selling, general and administrative expenses | 347.3 |
| | 353.6 |
| | (6.3 | ) | | (2 | )% | |
| Amortization of intangibles | 24.7 |
| | 19.9 |
| | 4.8 |
| | 24 | % | |
| Restructuring charges | 30.1 |
| | 24.3 |
| | 5.8 |
| | 24 | % | |
| Operating income | 145.8 |
| | 139.3 |
| | 6.5 |
| | 5 | % | |
| Operating income margin | 8.3 | % | | 7.9 | % | | | | 0.4 |
| pts |
| Interest expense | 59.0 |
| | 91.3 |
| | (32.3 | ) | | (35 | )% | |
| Interest income | (4.3 | ) | | (2.0 | ) | | (2.3 | ) | | 115 | % | |
| Equity in earnings of joint ventures | (8.2 | ) | | (6.9 | ) | | (1.3 | ) | | 19 | % | |
| Other expense, net | 7.6 |
| | 61.3 |
| | (53.7 | ) | | (88 | )% | |
| Income tax expense (benefit) | 14.4 |
| | (121.4 | ) | | 135.8 |
| | 112 | % | |
| Effective tax rate | 15.7 | % | | NM |
| | | | NM |
| |
| Income from continuing operations | 77.3 |
| | 117.0 |
| | (39.7 | ) | | (34 | )% | |
| Loss discontinued operations, net of income taxes | (0.2 | ) | | (1.6 | ) | | 1.4 |
| | 88 | % | |
| Net income | 77.1 |
| | 115.4 |
| | (38.3 | ) | | (33 | )% | |
Net Sales
Net sales increased $6.6 million, or 0.4%, to $1,765.1 million from $1,758.5 million in the prior-year period. The acquisition of Mead C&OP contributed incremental sales of approximately $125 million with twelve months of results included in the current year and only eight months of results in the prior year. The underlying decline of approximately $118 million includes an unfavorable currency translation of $27.5 million, or 2%. The remaining sales decline was primarily in the North America segment and resulted from soft demand, consumers purchasing more lower-priced products, lost placements and the exit from unprofitable business. Additionally, the Computer Products Group segment declined primarily due to increased competition in the tablet and smartphone categories.
Cost of Products Sold
Cost of products sold decreased $4.2of $1,042.0 million, including $47.7 million attributable to the PA Acquisition, was up $10.0 million, or 0.3%1%, to $1,217.2 million from $1,221.4$1,032.0 million in the prior-year period. Foreign currency translation reduceddecreased cost of products sold by $18.7 million. The underlying decrease was$13.3 million, or 1%. Underlying cost of products sold, excluding Pelikan Artline and foreign currency translation, decreased due to lower sales demand, together with synergiesvolume and productivity savings and the absence of $13.3 million of amortization of step-up in inventory value due to the Merger, which wasimprovements, partially offset by the full year impact from the acquisitionforeign-exchange-related inflationary increases in certain foreign markets' cost of Mead C&OP.products sold.
Gross Profit
Gross profit increased $10.8of $515.1 million, including $30.8 million attributable to the PA Acquisition, was up $36.7 million, or 2%8%, to $547.9 million from $537.1$478.4 million in the prior-year period. Foreign currency translation reduceddecreased gross profit by $8.8 million. The underlying increase was$3.6 million, or 1%. Underlying gross profit, excluding Pelikan Artline and foreign currency translation, increased due to the full year results from the acquisition of Mead C&OP, together with synergieshigher pricing and productivity savings,improvements, which was partlywere partially offset by the absenceforeign-exchange-related inflationary increases in certain foreign markets' costs of $13.3 million of amortization of step-up in inventory value due to the Merger, and by lower sales volume.products sold.
Gross profit marginas a percent of net sales increased to 31.0%33.1% from 30.5%.31.7% in the prior-year period. The increase was driven by synergiesprimarily due to cost savings and productivity savings, as well asimprovements, higher pricing and the full yearpositive impact of Mead C&OP, which has historically higher relative margins, but was partially offset by adverse sales mix, particularly in the Computer Products Group.PA Acquisition.
Advertising, selling, general
Selling, General and administrative expensesAdministrative Expenses
SG&A decreased $6.3of $320.8 million, including $16.6 million attributable to the PA Acquisition, was up $25.1 million, or 2%8%, to $347.3 million from $353.6$295.7 million in the prior-year period. Foreign currency translation reduced SG&A by $4.7 million.$4.8 million, or 2%. The underlying decrease was primarily dueprior-year period included $3.6 million of integration and transaction costs related to a reduction inthe PA Acquisition. Underlying SG&A, excluding Pelikan Artline and foreign currency translation, increased, driven by higher professional fees, including $9.2 million of transaction and integration charges associated withcosts related to the Merger, which were $18.6 million higher inEsselte Acquisition. Additionally, the prior-year period synergies and productivity savings, andbenefited from a $2.5one-time $2.3 million gain on the salerecovery of a facilityan indirect tax in 2013. The decrease was partially offset by the inclusion of the full year expense for Mead C&OP, higher stock compensation, and $1.8 million in expenses related to the relocation of our corporate and U.S. headquarters.Brazil.
As a percentage of net sales, SG&A decreasedincreased to 19.7%20.6% from 20.1%19.6% in the prior-year period primarily duefor the reasons mentioned above.
Restructuring Charges (Credits)
We initiated cost reduction plans related to a reduction in transactionthe consolidation and integration charges.of Pelikan Artline with our already existing Australian and New Zealand businesses and, as a result, incurred $4.2 million of charges in 2016, primarily related to severance. In addition, in 2016 we initiated additional cost reduction plans and incurred $1.2 million of severance charges related to the consolidation of certain functions in the North America segment.
Amortization of Intangibles
Amortization of intangibles increased to $24.7was $21.6 million, up $2.0 million, or 10%, from $19.9$19.6 million in the prior-year period. The increase was driven by incremental amortization as a result ofdue to the Merger.
Restructuring Charges
Restructuring charges were $30.1 million comparedinclusion due to $24.3 million in the prior-year period. Employee termination and severance charges included in restructuring charges in the current and prior year relate to our North American and International operations and are primarily associated with post-merger integration activities following the Merger and changes in the European business model and manufacturing footprint. In addition, during the fourth quarter of 2013 we committed to restructuring actions that were primarily focused on streamlining our North American school, office and computer products operations.PA Acquisition.
Operating Income
Operating income increased $6.5of $167.3 million, including $5.6 million attributable to the PA Acquisition, was up $3.8 million, or 5%2%, to $145.8 million from $139.3$163.5 million in the prior-year period, including a $3.5period. Foreign currency translation increased operating income by $1.6 million, reduction due toor 1%. Underlying operating income, excluding the PA Acquisition and foreign currency translation. The increase wastranslation, decreased primarily due to synergies and productivity savings and a reduction in transaction and integration charges, which were partially offset by a less profitable sales mix.increased SG&A.
Interest Expense Equity in Earnings of Joint Ventures and Other Expense, Net
Interest expense decreased to $59.0of $49.3 million, was up $4.8 million, or 11%, from $91.3 million in the prior-year period, due to the absence of $16.4 million of costs, primarily Merger-related, for the committed financing in the prior-year period and substantially lower effective interest rates as a result of the May 2013 refinancing. Reduced debt outstanding and higher interest income also contributed to the decline.
Equity in earnings of joint ventures increased to $8.2 million from $6.9 million in the prior-year period. During 2012 we took an impairment charge of $1.9 million related our Neschen GBC Graphics Films, LLC joint venture.
Other expense, net was $7.6 million compared to $61.3$44.5 million in the prior-year period. The improvementincrease was primarily due to additional debt incurred to finance the absencePA Acquisition and the refinancing of one-time Merger-related refinancing costsour senior unsecured notes which resulted in the payment of $61.4$2.5 million forof incremental interest expense. Also contributing to the repurchase or dischargeincrease was the accelerated amortization of alldebt issuance cost related to the prepayment of the Company's outstanding$70 million on our U.S. Dollar Senior Secured NotesTerm Loan A.
Other expense, net of $1.4 million was down $0.7 million from $2.1 million in the prior year.prior-year period. The current2016 year includes $9.4included charges associated with the above referenced refinancing of our senior unsecured notes. These charges consisted of $25.0 million in a "make-whole" call premium and a $4.9 million charge for the write-off of debt originationissuance costs, which were offset by a $28.9 million non-cash gain arising from the PA Acquisition due to the revaluation of the Company's previously held equity interest to fair value and a gain on the settlement of an intercompany loan of $1.0 million, previously deemed permanently invested. In the prior-year period we wrote-off $1.9 million of debt issuance costs related to the May 2013 refinancing and $2.0 million for a gain related to a bargain purchase on an acquisition completed in the fourth quarter of 2013. For a further discussion of our debt refinancing completed in the second quarter of 2013 see "Note 4. Long-term Debt and Short-term Borrowings" to our consolidated financial statements contained in Item 8. of this report.2015.
Income Taxes
Income tax expense from continuing operations was $14.4$29.6 million on income from continuing operations before taxes of $91.7 million. The low$125.1 million, or an effective tax rate of 15.7% is23.7%. For the prior-year period, income tax expense was $45.5 million on income before taxes of $131.4 million, or an effective tax rate of 34.6%. The low effective tax rate in 2016 was primarily due to the reversalfollowing: 1) the $28.9 million non-cash gain arising from the PA Acquisition due to the revaluation of valuation allowancesthe previously held equity interest to fair value, which was not subject to tax, and 2) tax losses on foreign exchange on the repayment of intercompany loans, for certain foreign jurisdictionswhich the pre-tax effect was recorded in equity.
Net Income
Net income was $95.5 million, up $9.6 million, or 11%, from $85.9 million in the amount of $11.6 million. Forprior-year period. Diluted income per share was $0.87, up $0.09, or 12% from $0.78 per diluted share in the prior-year period, we reported an income tax benefit from continuing operations of $121.4 million on a loss from continuing operations before taxes of $4.4 million,period. The increase was primarily due to the release of certain valuation allowanceslower effective tax rate in 2016.
Segment Net Sales and Operating Income for the U.S.Years Ended December 31, 2016 and certain foreign jurisdictions in the amount of $126.1 million and $19.0 million, respectively.
Segment Discussion2015
| | | | Year Ended December 31, 2013 | | Amount of Change | Year Ended December 31, 2016 | | Amount of Change |
| | Net Sales | | Segment Operating Income (A) | | Operating Income Margin | | Net Sales | | Net Sales | | Segment Operating Income | | Segment Operating Income | | Margin Points | Net Sales | | Segment Operating Income(1) | | Operating Income Margin | | Net Sales | | Net Sales | | Segment Operating Income | | Segment Operating Income | | Margin Points |
| | | |
| (in millions of dollars) | | $ | | % | | $ | | % | | | $ | | % | | $ | | % | |
| ACCO Brands North America | $ | 1,041.4 |
| | $ | 98.2 |
| | 9.4 | % | | $ | 13.2 |
| | 1% | | $ | 12.0 |
| | 14 | % | | 100 |
| $ | 1,016.1 |
| | $ | 153.3 |
| | 15.1 | % | | $ | (9.6 | ) | | (1)% | | $ | 1.7 |
| | 1 | % | | 30 |
|
| ACCO Brands EMEA | | 171.8 |
| | 12.6 |
| | 7.3 | % | | (27.9 | ) | | (14)% | | (5.4 | ) | | (30 | )% | | (170 | ) |
| ACCO Brands International | 566.6 |
| | 66.5 |
| | 11.7 | % | | 15.4 |
| | 3% | | 4.5 |
| | 7 | % | | 50 |
| 369.2 |
| | 49.4 |
| | 13.4 | % | | 84.2 |
| | 30% | | 20.3 |
| | 70 | % | | 320 |
|
| Computer Products Group | 157.1 |
| | 13.7 |
| | 8.7 | % | | (22.0 | ) | | (12)% | | (22.2 | ) | | (62 | )% | | (1,130 | ) | |
| Total | $ | 1,765.1 |
| | $ | 178.4 |
| | | | $ | 6.6 |
| | $ | (5.7 | ) | | | | | $ | 1,557.1 |
| | $ | 215.3 |
| | | | $ | 46.7 |
| | $ | 16.6 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2012 | | | | | | | | | Year Ended December 31, 2015 | | | | | | | | |
| | Net Sales | | Segment Operating Income (A) | | Operating Income Margin | | | | | | | | | Net Sales | | Segment Operating Income(1) | | Operating Income Margin | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| (in millions of dollars) | | | | | | | | | | | | | | | | |
| ACCO Brands North America | 1,028.2 |
| | 86.2 |
| | 8.4 | % | | | | | | | | | $ | 1,025.7 |
| | $ | 151.6 |
| | 14.8 | % | | | | | | | | |
| ACCO Brands EMEA | | 199.7 |
| | 18.0 |
| | 9.0 | % | | | | | | | | |
| ACCO Brands International | 551.2 |
| | 62.0 |
| | 11.2 | % | | | | | | | | | 285.0 |
| | 29.1 |
| | 10.2 | % | | | | | | | | |
| Computer Products Group | 179.1 |
| | 35.9 |
| | 20.0 | % | | | | | | | | | |
| Total | $ | 1,758.5 |
| | $ | 184.1 |
| | | | | | | | | | | $ | 1,510.4 |
| | $ | 198.7 |
| | | | | | | | | | |
(A) Segment operating income excludes corporate costs; Interest expense; Interest income; Equity in earnings of joint ventures and Other expense, net. See "Note 16. Information on Business Segments" to the consolidated financial statements contained in Item 8. of this report for a reconciliation of total Segment operating income to Income (loss) from continuing operations | |
| (1) | Segment operating income excludes corporate costs: "Interest expense;" "Interest income;" "Equity in earnings of joint-venture" and "Other (income) expense, net." See "Note 16. Information on Business Segments" to the consolidated financial statements contained in Item 8. of this report for a reconciliation of total "Segment operating income" to "Income before income tax." |
ACCO Brands North America
ACCO Brands North America net sales increased $13.2of $1,016.1 million, were down $9.6 million, or 1%, to $1,041.4 million from $1,028.2$1,025.7 million in the prior-year period. The Merger contributed incremental sales of approximately $88 million, with twelve months of results included in the current year and only eight months of results in the prior year. The underlying decline of approximately $75 million included unfavorableForeign currency translation of $4.2 million.reduced sales by $4.1 million, or 0.4%. Comparable net sales, excluding foreign currency translation, decreased due to declines at certain wholesalers and an office products superstore due to inventory reductions and consumers purchasing in different channels. The net sales decline was drivenpartially offset by soft consumer demand, consumers purchasing more lower-priced products,strong back-to-school sales, notably with mass-market customers and loste-tailers, due to increased product placements with some customers. These factors impacted both the acquired Mead and legacy ACCO Brands businesses. The planned exit from unprofitable business accounted for $26.0 million of the decline.broadened product offerings.
ACCO Brands North AmericasAmerica operating income of $153.3 million, was up $1.7 million, or 1%, from $151.6 million in the prior-year period. Operating income as a percent of net sales increased $12.0to 15.1% from 14.8% in the prior-year period. Foreign currency translation decreased operating income by $0.4 million, or 0.2%. Underlying operating income, excluding foreign currency translation, increased due to productivity improvements.
ACCO Brands EMEA
ACCO Brands EMEA net sales of $171.8 million, were down $27.9 million, or 14%, to $98.2 million from $86.2$199.7 million in the prior-year period,period. Foreign currency translation reduced sales by $8.6 million, or 4%. Comparable net sales, excluding foreign currency translation, decreased due to lower volume as a result of the ongoing inventory reductions, as well as lost share with some customers and lower consumer demand, partially offset by price increases that were implemented to recover gross margins following foreign-exchange-related cost of products sold increases.
ACCO Brands EMEA operating income margin increased to 9.4%of $12.6 million, was down $5.4 million, or 30% from 8.4%$18.0 million in the prior-year period. The improvement wasOperating income as a percent of net sales decreased to 7.3% from 9.0% in the prior-year period. Foreign currency translation increased operating income by $0.3 million. Underlying operating income, excluding foreign currency translation, decreased primarily due to synergies and productivity savings and the absence of $11.5 million of amortization of step-up in inventory value due to the Merger. Partially offsetting the improvement were lower comparable net sales, volume, unfavorable customer/product mix,partially offset by higher amortization of intangibles of $5.1 million and $1.8 million of costs related to the relocation of our corporate and U.S. headquarters.gross margins.
ACCO Brands International
ACCO Brands International net sales increased $15.4of $369.2 million, including $78.5 million attributable to the PA Acquisition, were up $84.2 million, or 3%30%, to $566.6 million from $551.2$285.0 million in the prior-year period. The Merger contributed incremental sales of $37.3 million, with twelve months of results included in the current year and only eight months of results in the prior year. The underlying decline of $21.9 million included unfavorableForeign currency translation of $23.5reduced sales by $4.2 million,
or 4%1%. Excluding the effect of the MergerComparable net sales, excluding Pelikan Artline and foreign currency translation, sales increased $1.7 million with growth in Brazil due to higher pricing, which benefited sales by 9%. Price increases were implemented to recover gross margins following foreign-exchange-related cost of products sold increases, in Australia and volume.Mexico, as well as to offset paper related inflation in Brazil. Partially offsetting the increaseprice increases were lower sales in other regions,volume declines, primarily in Europe during the first quarter, which included $3.6 million of unprofitable business that was exited.legacy ACCO Brands Australian business.
ACCO Brands International operating income of $49.4 million, including $6.9 million attributable to the PA Acquisition, increased $4.5$20.3 million, or 7%70%, to $66.5 million from $62.0$29.1 million in the prior-year period, and operating income marginas a percent of net sales increased to 11.7%13.4% from 11.2%10.2% in the prior-year period. Pelikan Artline operating income of $6.9 million includes restructuring costs of $4.2 million and integration costs of $2.3 million. Foreign currency translation negatively impacted resultsincreased operating income by $3.7$1.7 million, or 6%. The underlying improvement (exclusive of currency translation) reflected productivity savings, lower pension expenses, a $2.5 million gain on the sale of a facility and the absence of $1.8 million of amortization of step-up in inventory value, due to the Merger. This wasrecovery of the Brazilian real, which occurred in the seasonally stronger fourth quarter. Underlying operating income, excluding Pelikan Artline and foreign currency translation, increased due to higher pricing and productivity improvements, partially offset by higher restructuring charges of $3.1 million.
Computer Products Group
Computer Products Group net sales decreased $22.0 million, or 12%, to $157.1 million from $179.1 million in the prior-year period. Volume decreased 9% primarily due to increased competition in the tablet and smartphone categories resulting in market share loss and lower sales and pricing.volumes. In addition, we experienced a continuation of the decline in sales of PC accessory and security products due to the ongoing contraction of worldwide PC unit sales volumes. Lower net pricing due to promotions and the loss of $2.3 million in royalty income from security products unfavorably impacted sales by 3%.
Computer Products Group operating income decreased $22.2 million, or 62%, to $13.7 million from $35.9 million in the prior-year period included a one-time $2.3 million recovery of an indirect tax and operating margin decreased to 8.7% from 20.0%$1.3 million of severance charges, both in the prior-year period. The decline in operating income and margin was primarily due to lower sales, lower pricing (including royalties), higher inventory obsolescence expenses and increased restructuring charges.Brazil.
Liquidity and Capital Resources
Our primary liquidity needs are to service indebtedness, reduce our borrowings, fund capital expenditures and support working capital requirements. Our principal sources of liquidity are cash flowflows from operating activities, cash and cash equivalents held and seasonal borrowings under our $250.0 million2017 Revolving Facility. As of December 31, 2014,2017, there were nowas $133.9 million in borrowings outstanding under our $400.0 million 2017 Revolving Facility and the amount available for borrowings was $238.3$255.0 million (allowing for $11.7$11.1 million of letters of credit outstanding on that date).
We maintain adequate financing arrangements at market rates. Because of the seasonality of our business, we typically generate much of our cash flow in the first, third and fourth quarters, as accounts receivables are collected.collected, and we use cash in the second quarter to fund working capital in order to support the North America back-to-school season. Our Brazilian business is highly seasonal due to the combined impacttiming of the back-to-school season, coincidingwhich coincides with the calendar year-end in the fourth quarter. Due to various tax laws, it is costly to transfer short-term working capital in and out of Brazil. Therefore,Brazil; therefore, our normal practice is to hold seasonal cash requirements withinin Brazil, investedand invest in short-term Brazilian government securities. Consolidated cash and cash equivalents was $53.2$76.9 million as of December 31, 2014,2017, approximately $31 million of which approximately $10 million was held in Brazil.
On February 12, 2018, the Company's Board of Directors approved the initiation of a cash dividend program under which the Company will pay a regular quarterly cash dividend of $0.06 per share on its common stock ($0.24 per share on an annualized basis). In addition, on February 14, 2018, the Company announced that its Board of Directors had approved an authorization to repurchase up to an additional $100 million in shares of its common stock. As of December 31, 2017, the Company had $84.0 million remaining of its prior authorizations.
Our priorities for all other cash flow use over the near term, after funding internal growth,business operations, including restructuring expenditures, are debt reduction, dividends, stock repurchases and acquisition funding.to fund strategic acquisitions.
Any available overseas cash, other than that held for working capital requirements in Brazil, is repatriated onThe current senior secured credit facilities had a continuous basis. Undistributed earningsweighted average interest rate of foreign subsidiaries that are expected to be permanently reinvested and thus not available for repatriation aggregate to approximately $565 million and $549 million3.48% as of December 31, 20142017 and 2013, respectively,our senior unsecured notes have a fixed interest rate of which approximately $43 million and $46 million was cash held at foreign subsidiaries as of December 31, 2014 and 2013, respectively. If these amounts were distributed to the U.S., in the form of a dividend or otherwise, we would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable.5.25%.
Debt AmendmentAmendments and Refinancing
On June 26, 2014,Third Amended and Restated Credit Agreement
In connection with the Esselte Acquisition, the Company entered into the Second Amendment to thea Third Amended and Restated Credit Agreement (the "2014 Amendment""2017 Credit Agreement")., dated as of January 27, 2017, among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other agents and various lenders party thereto. The 2014 Amendment relates to2017 Credit Agreement amended and amendsrestated the 2013Company’s Second Amended and Restated Credit Agreement dated April 28, 2015 (the "2015 Credit Agreement").
The 2017 Credit Agreement provides a five-year senior secured credit facility, which consists of a €300 million (US$320.8 million based on January 27, 2017 exchange rates) term loan facility (the "Euro Term Loan A"), a A$80 million (US$60.4 million based on January 27, 2017 exchange rates) term loan facility (the "AUD Term Loan A" and, increasestogether with the Company’s flexibilityEuro Term Loan A, the "2017 Term A Loan Facility"), and a US$400 million multi-currency revolving credit facility (the "2017 Revolving Facility").
Maturity and Amortization
Borrowings under the 2017 Revolving Facility and the 2017 Term A Loan Facility mature on January 27, 2022. Amounts under the 2017 Revolving Facility are non-amortizing. Beginning June 30, 2017, the outstanding principal amounts under the 2017 Term A Loan Facility are payable in quarterly installments in an amount representing, on an annual basis, 5.0% of the initial aggregate principal amount of such loan facility and increasing to pay dividends12.5% on an annual basis by June 30, 2020.
Interest rates
Amounts outstanding under the 2017 Credit Agreement bear interest at a rate per annum equal to the Euro Rate with a 0% floor, the Australian BBSR Rate, the Canadian BA Rate or the Base Rate, as applicable and repurchase its sharesas each such rate is defined in the 2017 Credit Agreement, plus an "applicable rate." The applicable rate applied to outstanding Euro, Australian and Canadian dollar denominated loans and Base Rate loans is based uponon the Company’s Consolidated Leverage Ratio (as defined in the 2013 Restated2017 Credit Agreement) as follows:
|
| | | | |
Consolidated Leverage Ratio | | Applicable Rate on Euro/AUD/CDN Dollar Loans | | Applicable Rate on Base Rate Loans |
| > 4.00 to 1.00 | | 2.50% | | 1.50% |
| ≤ 4.00 to 1.00 and > 3.50 to 1.00 | | 2.25% | | 1.25% |
| ≤ 3.50 to 1.00 and > 3.00 to 1.00 | | 2.00% | | 1.00% |
| ≤ 3.00 to 1.00 and > 2.00 to 1.00 | | 1.50% | | 0.50% |
| ≤ 2.00 to 1.00 | | 1.25% | | 0.25% |
As of December 31, 2017, the applicable rate on Euro, Australian and Canadian dollar loans was 1.50% and the applicable rate on Base Rate loans was 0.50%. Undrawn amounts under the 2017 Revolving Facility are subject to a commitment fee of 0.25% to 0.40% per annum, depending on the Company’s Consolidated Leverage Ratio. As of December 31, 2017, the commitment fee rate was 0.30%.
Prepayments
Subject to certain conditions and specific exceptions, the 2017 Credit Agreement requires the Company to prepay outstanding amounts under the 2017 Credit Agreement under various circumstances, including (a) if sales or dispositions of certain property or assets in any fiscal year results in the receipt of net cash proceeds of $12.0 million, then an amount equal to 100% of the net cash proceeds received in excess of such $12.0 million, and (b) with respect to the AUD Term Loan A, in an amount equal to 100% of the net cash proceeds received from the disposition of any real property located in Australia. The Company also would be required to make prepayments in the event it receives proceeds related to certain property insurance or condemnation awards, from additional debt other than debt permitted under the 2017 Credit Agreement and from excess cash flow as determined under the 2017 Credit Agreement. The 2017 Credit Agreement also contains other customary prepayment obligations and provides for voluntary commitment reductions and prepayment of loans, subject to certain other conditions specifiedand exceptions.
Dividends and Share Repurchases
Under the 2017 Credit Agreement, the Company may pay dividends and/or repurchase shares in an aggregate amount not to exceed the sum of: (i) the greater of $30 million and 1.00% of the Company’s Consolidated Total Assets (as defined in the Amendment.
On May 13, 2013,2017 Credit Agreement); plus (ii) an additional amount not to exceed $75.0 million in any fiscal year (provided the Company entered intoCompany’s Consolidated Leverage Ratio after giving pro forma effect to the 2013 Restatedrestricted payment would be greater than 2.50:1.00 and less than or equal to 3.75:1.00); plus (iii) an additional amount so long as the Consolidated Leverage Ratio after giving pro forma effect to the restricted payment would be less than or equal to 2.50:1.00; plus (iv) any Net Equity Proceeds (as defined in the 2017 Credit Agreement and on May 1, 2012 we entered into the 2012 Credit Agreement in conjunction with the Merger.Agreement).
For further information on our refinancing and amendment see "Note 4. Long-term Debt and Short-term Borrowings" to the consolidated financial statements contained in Item 8. of this report.
LoanFinancial Covenants
The 2013 RestatedCompany’s Consolidated Leverage Ratio as of the end of any fiscal quarter may not exceed 3.75:1.00; provided that following the consummation of a Material Acquisition (as defined in the 2017 Credit Agreement), and as of the end of the fiscal quarter in which such Material Acquisition occurred and as of the end of the three fiscal quarters thereafter, the maximum
Consolidated Leverage Ratio level above will increase by 0.50:1.00, provided that no more than one such increase can be in effect at any time. The Esselte Acquisition qualified as a Material Acquisition under the 2017 Credit Agreement.
The 2017 Credit Agreement requires the Company to maintain a Consolidated Fixed Charge Coverage Ratio (as defined in the 2017 Credit Agreement) as of the end of any fiscal quarter at or above 1.25 to 1.00.
As of December 31, 2017, our Consolidated Leverage Ratio was approximately 2.6 to 1 and our Fixed Charge Coverage Ratio was approximately 5.3 to 1.
Other Covenants and Restrictions
The 2017 Credit Agreement contains customary affirmative and negative covenants as well as events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults, certain bankruptcy or insolvency events, certain ERISA-related events, changes in control or ownership and invalidity of any loan document.
Under the 2013 Restated Credit Agreement, we are required to meet certain financial tests, including a maximum Consolidated Leverage Ratio as determined by reference to the following ratios:
|
| | |
Period | | Maximum Consolidated Leverage Ratio(1)
|
July 1, 2014 through June 30, 2015 | | 4.00:1.00 |
July 1, 2015 through June 30, The 2017 | | 3.75:1.00 |
July 1, 2017 and thereafter | | 3.50:1.00 |
| |
(1) | The Consolidated Leverage Ratio is computed by dividing the Company's net funded indebtedness by the cumulative four-quarter-trailing EBITDA, which excludes transaction costs, restructuring and other charges up to certain limits as well as other adjustments defined in the 2013 Restated Credit Agreement. |
The 2013 Restated Credit Agreement also requiresestablishes limitations on the Company to maintain a consolidated fixed charge coverage ratio (asaggregate amount of Permitted Acquisitions and Investments (each as defined in the 2013 Restated2017 Credit Agreement) that the Company and its subsidiaries may make during the term of the 2017 Credit Agreement.
As of and for the periods ended December 31, 2017 and December 31, 2016, the Company was in compliance with all applicable loan covenants.
Guarantees and Security
Generally, obligations under the 2017 Credit Agreement the "Fixed Charge Coverage Ratio") asare guaranteed by certain of the endCompany’s existing and future subsidiaries, and are secured by substantially all of any fiscal quarter at or above 1.25the Company’s and certain guarantor subsidiaries’ assets, subject to 1.00.certain exclusions and limitations.
Incremental Facilities
The indenture governing2017 Credit Agreement permits the 6.75% Company to seek increases in the size of the 2017 Revolving Facility and the 2017 Term A Loan Facility prior to maturity by up to $500.0 million in the aggregate, subject to lender commitment and the conditions set forth in the 2017 Credit Agreement.
Senior Unsecured Notes due April 2020December 2024
On December 22, 2016, the Company completed a private offering of $400.0 million in senior unsecured notes, due December 2024 (the "Senior"New Notes"), does not contain financial performance covenants. However, that indenture does contain covenants that limit, amongwhich bear interest at 5.25%. Net proceeds from the sale of the New Notes, together with borrowings of $73.9 million under the Company's revolving credit facility and cash on hand, were used to redeem the then existing senior unsecured notes (the "Old Notes"). The aggregate redemption price of $531.5 million consisted of principal due and payable on the Old Notes, a "make-whole" call premium of $25.0 million (included in "Other (income) expense, net"), and accrued and unpaid interest of $6.5 million (included in "Interest expense") which the Company irrevocably deposited with the trustee of the Old Notes thereby satisfying all its obligations related to the Old Notes.
Also included in "Other expense, net" is a $4.9 million charge for the write-off of debt issuance costs associated with the Old Notes. Additionally, we incurred and capitalized approximately $6.1 million in bank, legal and other things, our abilityfees associated with the issuance of the New Notes.
Restructuring and Integration Activities
From time to time the Company may implement restructuring, realignment or cost-reduction plans and activities, including those related to integrating acquired businesses.
During the year ended December 31, 2017, the Company recorded an aggregate $21.7 million in restructuring expenses primarily related to the integration of the ACCO Brands and Esselte operations worldwide. The remaining charges relate to the integration of ACCO Brands and Pelikan Artline operations in Australia and New Zealand, and the abilitychange in the operating structure in North America, including integration of our restricted subsidiaries to:
incur additional indebtedness;
pay dividendsformer Computer Products Group into our remaining business segments. As of December 31, 2017, there was $13.3 million remaining of restructuring liability on our capital stock or repurchase our capital stock;
enter into or permit to exist contractual limits on the ability of our subsidiaries to pay dividends to the Company;
enter into certain transactions with affiliates;
make investments;
create liens; and
sell certain assets or merge with or into other companies.
Certain of these covenants will be subject to suspension when and if the notes are rated at least "BBB–" by Standard & Poor’s or at least "Baa3" by Moody’s. Each of the covenants is subject to a number of important exceptions and qualifications.
See alsoConsolidated Balance Sheet. For further information, see "Note 4. Long-term Debt and Short-term Borrowings"10. Restructuring" to the consolidated financial statements contained in Item 8. of this report.
Compliance with Loan Covenants
In addition, during the year ended December 31, 2017, the Company recorded an aggregate $11.4 million in non-restructuring integration expenses related to the integration of the ACCO Brands and Esselte and Pelikan Artline operations.
AsDuring the first quarter of December 31, 2014, our Consolidated Leverage Ratio was approximately 2.92018, the Company approved additional restructuring projects aggregating to 1$3.5 million, primarily related to changes to the structure in the ACCO Brands North America segment and our Fixed Charge Coverage Ratio was approximately 4.5 to 1.the continued integration of Esselte in the ACCO Brands EMEA segment. In accordance with GAAP, none of the aforementioned liabilities were recorded in the fourth quarter of 2017.
Consistent with our previous communications about the Esselte Acquisition, the Company currently expects it will record approximately $4 million for integration activities and $4 million of incremental restructuring expenses during the remainder of 2018, which is in addition to the $3.5 million of restructuring projects approved during the first quarter of 2018. As integration plans are still being finalized, it is not possible to reasonably estimate the nature or timing of these restructuring and integration charges or the timing of their associated cash outflows.
Cash Flow for the period ended Years Ended December 31, 2014, we were in compliance with all applicable loan covenants.
Guarantees2017 and Security
Generally, obligations under the 2013 Restated Credit Agreement are irrevocably and unconditionally guaranteed, jointly and severally, by certain of the Company's existing and future domestic subsidiaries, and are secured by substantially all of the Company's and certain guarantor subsidiaries' assets, subject to certain exclusions and limitations.
The Senior Notes are irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our existing and future domestic subsidiaries other than certain excluded subsidiaries. The Senior Notes and the related guarantees will rank equally in right of payment with all of the existing and future senior debt of the Company and the guarantors, senior in right of payment to all of the existing and future subordinated debt of the Company and the guarantors, and are effectively subordinated to all of the existing and future secured indebtedness of the Company and the guarantors to the extent of the value of the assets securing such indebtedness. The Senior Notes and the guarantees are and will be structurally subordinated to all existing and future liabilities, including trade payables, of each of the Company's subsidiaries that do not guarantee the notes.
Cash Flow
Fiscal 2014 versus Fiscal 20132016
Cash Flow from Operating Activities
ForCash provided by operating activities during the year ended December 31, 20142017 of $204.9 million was generated principally from increased operating profits, primarily due to the Esselte and PA Acquisitions. Cash generated by incremental operating profits was partially offset by lower contribution from working capital (accounts receivable, inventories, accounts payable), payments of professional fees associated with acquisition and integration activities for the Esselte and PA Acquisitions, increased cash taxes and higher pension contributions. For the 2016 year, cash provided by operating activities was $171.7 million, compared to the cash provided by the prior-year period of $194.5 million.$167.1 million. Net income for 20142017 was $91.6 million, compared to $77.1 million in 2013.
During 2014, the net cash inflow of $171.7 million was generated from operating profit and by net working capital (accounts receivable, inventories and accounts payable) which was $21.9 million. Of this, $20.4 million was related to collections of customer accounts receivable, as lower fourth quarter sales and improved year-end collections activity contributed additional cash. Cash generated by inventory of $11.6 million was due to continuous inventory supply chain improvements and the timing of inventory purchases. Cash used by accounts payable of $10.1 million reflects the timing of raw materials purchased and settled earlier than in the prior year, partially offset by the benefit of extended settlement terms. Partially offsetting the cash flow generated by net working capital during 2014 were significant cash outflows related to the settlement of customer rebate program liabilities. Other significant cash payments in 2014 included cash interest payments of $45.1$131.7 million compared to $52.0$95.5 million in the prior-year period (which were reduced following our mid-year 2013 refinancing). In addition, 2014 income tax payments of $28.9 million were lower than the $31.1 million paid in 2013, and cash contributions to the Company's pension plans, which were $12.4 million in 2014, compared to the $14.7 million in 2013. Restructuring payments in 2014 of $16.9 million, principally associated with employee termination benefits, were lower than the $23.3 million paid during the 2013 year.2016.
The table below shows our cash flow from accounts receivable, inventories and accounts payable for the years ended December 31, 20142017 and 20132016, respectively:
| | | (in millions of dollars) | | 2014 | | 2013 | | 2017 | | 2016 |
| Accounts receivable | | $ | 20.4 |
| | $ | 0.5 |
| | $ | 10.2 |
| | $ | 13.4 |
|
| Inventories | | 11.6 |
| | 6.5 |
| | 2.5 |
| | 16.7 |
|
| Accounts payable | | (10.1 | ) | | 26.8 |
| | (18.7 | ) | | (19.3 | ) |
| Cash flow provided by net working capital | | $ | 21.9 |
| | $ | 33.8 |
| |
| Cash flow (used) provided by net working capital | | | $ | (6.0 | ) | | $ | 10.8 |
|
Accounts receivable contributed $10.2 million, which was lower than the prior year of $13.4 million due to the timing of the Esselte Acquisition and higher sales in certain foreign markets. Inventory contributed $2.5 million, which was lower than the prior year of $16.7 million due to the Esselte and PA Acquisitions, inventory reductions at certain customers and inventory builds in support of warehouse integration activities. Partially offsetting the cash generated from net working capital were employee annual incentive payments made in the first quarter (including payroll taxes) related to transaction bonuses paid by the seller in connection with the Esselte Acquisition. The settlement of customer program liabilities was lower, primarily driven by lower sales in comparable businesses, partially offset by increased settlements from the Esselte Acquisition. Other significant cash fluctuations included income tax payments of $34.8 million in 2017, which were higher than the $16.9 million paid in 2016 due to higher international taxes, largely related to the Esselte Acquisition, and pension contributions of $21.7 million in 2017, which increased from $6.2 million in 2016 due to higher U.S. contribution requirements and the Esselte Acquisition. Restructuring payments of $13.4 million (primarily associated with headcount reductions and footprint rationalization activities in connection with the integration of Esselte and Pelikan Artline) were higher than the prior-year spend of $4.9 million. Interest payments were $38.0 million, lower than the prior-year payments of $50.1 million due to refinancing activities in late 2016 and lower debt.
Cash Flow from Investing Activities
Cash used by investing activities was $25.8$319.1 million and $33.3$106.4 million for the years ended December 31, 2014 and 2013, respectively. Gross capital expenditures were $29.6 million and $36.6 million for the years ended December 31, 20142017 and 2013,2016, respectively. The decrease2017 cash outflow reflects the $292.3 million purchase price, net of cash acquired, paid for Esselte. The 2016 cash outflow reflects the $88.8 million purchase price, net of cash acquired, paid for Pelikan Artline. For further information, see "Note 3. Acquisitions" to the consolidated financial statements contained in capitalItem 8. of this report. Capital expenditures was due to significant investments associated with the Company's headquarters relocation in 2013. Proceeds from the sale of properties and other assets were $3.8$31.0 million and $6.1$18.5 million for the years ended December 31, 20142017 and 2013, respectively.2016, respectively, with the increase driven by information technology systems-related investments.
Cash Flow from Financing Activities
Cash usedprovided by financing activities was $142.2 million for the year ended December 31, 2014 was $142.02017, compared to $76.4 million. used for the same period of 2016. Cash provided in 2017 reflects long-term borrowings of $484.1 million, consisting of €300.0 million (US$320.8 million based on January 27, 2017 exchange rates) in the form of the Euro Term Loan A incurred to fund the Esselte Acquisition, along with additional borrowings of US$91.4 million under the Company's 2017 Revolving Facility, primarily to repay the then existing U.S. Dollar Senior Secured Term Loan A in the amount of $81.0 million and to reduce the outstanding balance on the Australian Dollar Senior Secured Term Loan A. Additionally, we used $41.8 million for repurchases of our common stock and payments related to tax withholding for stock-based compensation, net of proceeds received from the exercise of stock options, and $3.6 million of debt issuance costs associated with the financing of the Esselte Acquisition.
Cash used in 2014 includes repayments2016 of $76.4 million reflected long-term borrowings of $587.4 million, consisting primarily of a private issuance of New Notes of $400.0 million and an incremental loan in the amount of A$100.0 million (US$76.6 million based on May 2, 2016 exchange rates), along with additional borrowings under the Company’s then existing revolving facility, to fund the PA Acquisition. Repayments of long-term debt of $685.1 million primarily reflects the early satisfaction and discharge of our $500 million principal amount of senior unsecured notes, repayments totaling $121.1$148.0 million on the then existing U.S. Dollar Senior Secured Term Loan A and paymentspayment of $21.9$24.5 million of debt assumed with the PA Acquisition. In 2016, we also made a "make-whole" call premium payment of $25.0 million related to repurchase the Company's common stock. Cash used by financing activitiesearly satisfaction and discharge of our $500.0 million principal amount of senior unsecured notes, and paid $6.9 million in2013 was $155.5 million, and reflects repayments of the Company's debt facilities of $679.5 million and debt issuance payments of $4.3 million, which were partly offset by proceeds fromfees in connection with the refinancing of long-term debt facilities of $530.0 million.New Notes.
Fiscal 2013 versus Fiscal 2012Cash Flow for the Years Ended December 31, 2016 and 2015
Cash Flow from Operating Activities
For the year ended December 31, 2013,2016, cash provided by operating activities was $194.5$167.1 million compared to the cash used inprovided by the prior-year periodoperating activities of $7.5$171.2 million. Net income for 20132016 was $77.1$95.5 million compared to $115.4$85.9 million in 2012.2015. The 2012 net income includes non-cash incomeoperating cash inflow for the 2016 year of $167.1 million was generated by enhanced profitability, improved net working capital management (accounts receivable, inventories, accounts payable) and incremental cash flow from the releasePA Acquisition. Cash outflows in 2016 included an accelerated interest payment of income tax valuation allowances$6.5 million, in association with the early satisfaction and discharge of $145.1 million.
The operating cash generated in 2013 is much higher than prior year period because it includes a full 12 monthsour senior unsecured notes. Additionally, $11.6 million of cash flowpayments were for transaction and integration costs associated with the Mead C&OP business that was acquired on May 1, 2012;Esselte and due to the seasonality of the acquired business, nearly all of its net cash generation occurs during the first quarter (prior to our acquisition date). In addition, the absence of debt extinguishment and transaction costs included in the 2012 year, and increased operating profits and lower cash interest payments resulting from our debt refinancing activities in 2013 also contributed to the improvement. Cash sourced from net working capital was $33.8 million in 2013, and was driven by cash from accounts payable of $26.8 million that was attributed to our continued focus on extending supplier payment terms and to timing of our inventory purchases. In addition, improved supply chain management resulted in lower year-end inventory levels and a cash inflow of $6.5 million. Other significant cash payments in 2013 included interest payments of $52.0 million, income tax payments of $31.1 million and contributions to the Company's pension and defined benefit plans of $14.7 million.PA Acquisitions.
The table below shows our cash flow from accounts receivable, inventories and accounts payable for the years ended December 31, 20132016 and 2012,2015, respectively:
| | | (in millions of dollars) | | 2013 | | 2012 | | 2016 | | 2015 |
| Accounts receivable | | $ | 0.5 |
| | $ | (153.8 | ) | | $ | 13.4 |
| | $ | (3.9 | ) |
| Inventories | | 6.5 |
| | 61.8 |
| | 16.7 |
| | 9.8 |
|
| Accounts payable | | 26.8 |
| | (25.0 | ) | | (19.3 | ) | | (2.6 | ) |
| Cash flow provided (used) by net working capital | | $ | 33.8 |
| | $ | (117.0 | ) | |
| Cash flow provided by net working capital | | | $ | 10.8 |
| | $ | 3.3 |
|
Accounts receivable contributed $13.4 million in 2016 due to improved management of year-end collections. Inventory provided cash of $16.7 million as a result of increased real-time inventory purchases earlier in the fourth quarter and improved forecasting, which also contributed to an increased use of cash for accounts payable, which was $19.3 million in 2016, compared to $2.6 million in the prior year. Partially offsetting the cash generated from operating profit and net working capital were significant cash payments related to the settlement of customer program liabilities, which were higher than the prior year due to changes in 2016 customer mix and increased settlements in early 2016 (related to higher year-end 2015 purchases by certain customers to achieve rebate levels). Outflows related to employee annual incentive payments made in the first quarter, underlying interest payments, income tax payments and restructuring cash payments were similar to those made during the prior year.
Cash Flow from Investing Activities
Cash used by investing activities was $33.3$106.4 million and $423.2$24.6 million for the year ended December 31, 2016 and 2015, respectively. The 2016 cash outflow reflects the $88.8 million purchase price, net of cash acquired, paid for Pelikan Artline. For further information on the PA Acquisition, see "Note 3. Acquisition" to the consolidated financial statements contained in Item 8. of this report. Capital expenditures were $18.5 million and $27.6 million for the years ended December 31, 20132016 and 2012,2015, respectively. The 2012 cash outflow reflects $397.5 million of net cash paid for the Mead C&OP business. Capital expenditures were $36.6 million and $30.3 million for the years ended December 31, 2013 and 2012, respectively. The increase inlower capital expenditures in 2016 reflects investments associated withlower spending on information technology due to the acquisitionimplementation of Mead C&OP, including integration-related spendinga new enterprise resource planning system in association with the relocation of our Day-TimerEuropean operations to other Company locations, investments in the Company's new corporate and U.S. headquarters, and continuing information technology investments.first quarter of 2016.
Cash Flow from Financing Activities
Cash used by financing activities was $76.4 million for the year ended December 31, 2013 was $155.52016, compared to a use of $137.8 million for the same period of 2015. Cash used in 2016 reflected long-term borrowings of $587.4 million, consisting primarily of a private issuance of the New Notes of $400.0 million and incremental Term A loan in the amount of A$100.0 million (US$76.6 million based on May 2, 2016 exchange rates), along with additional borrowings under the Company’s existing revolving facility to fund the PA Acquisition. Repayments of long-term debt of $685.1 million primarily reflects a net repaymentthe early satisfaction and discharge of outstandingour $500 million principal amount of senior unsecured notes, repayments totaling $148.0 million on the then existing U.S. Dollar Senior Secured Term Loan A and payment of $24.5 million of debt associatedassumed with the Company's newPA Acquisition. In 2016, we also made a "make-whole" call premium payment of $25.0 million related to the early satisfaction and previously existingdischarge of our $500.0 million principal amount of senior unsecured notes, and paid $6.9 million in debt facilities of $150.2 million. Includedissuance fees in this amount were proceeds from new debt facilities of $530.0 million, offset byconnection with the New Notes. Cash used in 2015 reflected net repayments of long-term debt of $70.1 million and $65.9 million to repurchase the Company's extinguishedcommon stock and new debt facilities of $679.5 million. In addition, debt issuancefor payments in 2013 were $4.3 million. Cash provided by financing activities in 2012 was $360.1 million, representing proceeds from new debt facilities of $1.27 billion, offset by repayments of the Company's extinguished and new debt facilities of $872.0 million and debt issuance payments of $38.5 million.related to tax withholding for share-based compensation.
Capitalization
WeThe Company had approximately 111.9106.7 million shares of common sharesstock outstanding as of December 31, 20142017.
Adequacy of Liquidity Sources
Based on our 20152018 business plan and latestcurrent forecasts, we believe that cash flow from operations, our current cash balance and other sources of liquidity, including borrowings available under our 2017 Revolving Facility, will be adequate to support our requirements for working capital, capital expenditures, to pay dividends and to service indebtedness for the foreseeable future. Our future operating performance is dependent on many factors, some of which are beyond our control, including prevailing economic, financial and industry conditions. For morefurther information on these risks, see "Part I, Item1A. Risk Factors - Our significant indebtedness requires us to dedicate a substantial portion of our cash flow to debt payments and limits our ability to engage in certain activities.activities."
Off-Balance-Sheet Arrangements and Contractual Financial Obligations
We doThe Company does not have any material off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Our contractual obligations and related payments by period at December 31, 20142017 were as follows:
| | | (in millions of dollars) | 2015 | | 2016 - 2017 | | 2018 -2019 | | Thereafter | | Total | 2018 | | 2019 - 2020 | | 2021 - 2022 | | Thereafter | | Total |
Debt(1) | $ | 1.7 |
| | 12.5 |
| | 286.5 |
| | $ | 500.0 |
| | $ | 800.7 |
| $ | 42.8 |
| | $ | 89.4 |
| | $ | 406.7 |
| | $ | 400.0 |
| | $ | 938.9 |
|
Interest on debt(2)(1) | 41.1 |
| | 80.7 |
| | 69.9 |
| | 16.9 |
| | 208.6 |
| 34.7 |
| | 67.2 |
| | 59.4 |
| | 41.0 |
| | 202.3 |
|
| Operating lease obligations | 23.0 |
| | 36.3 |
| | 26.9 |
| | 35.0 |
| | 121.2 |
| 28.1 |
| | 46.6 |
| | 28.4 |
| | 17.6 |
| | 120.7 |
|
Purchase obligations(3)(2) | 74.0 |
| | 21.2 |
| | 2.4 |
| | — |
| | 97.6 |
| 96.8 |
| | 0.3 |
| | — |
| | — |
| | 97.1 |
|
Other long-term liabilities(4)(3) | 8.1 |
| | — |
| | — |
| | — |
| | 8.1 |
| 20.0 |
| | 15.1 |
| | 15.2 |
| | 45.2 |
| | 95.5 |
|
| Total | $ | 147.9 |
| | $ | 150.7 |
| | $ | 385.7 |
| | $ | 551.9 |
| | $ | 1,236.2 |
| $ | 222.4 |
| | $ | 218.6 |
| | $ | 509.7 |
| | $ | 503.8 |
| | $ | 1,454.5 |
|
| |
| (1) | The required 2015 principal cash payments on the Restated Term Loan A were made in 2014. |
| |
(2) | Interest calculated at December 31, 20142017 rates for variable rate debt. |
| |
(3)(2) | Purchase obligations primarily consist of contracts and non-cancelable purchase orders for raw materials and finished goods. |
| |
(4)(3) | Obligations related to the Company’sOther long-term liabilities consist of estimated expected employer contributions for 2018, along with estimated future payments, for pension plans.and post-retirement plans that are not paid from assets held in a plan trust. |
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 20142017, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $45.9$47.2 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See "NoteFor further information, see "Note 11. Income Taxes" to the consolidated financial statements contained in Item 8. of this report for a discussion on income taxes.report.
Critical Accounting Policies
Our financial statements are prepared in conformity with accounting principles generally accepted in the U.SU.S. ("GAAP"). Preparation of our financial statements requires us to make judgments, estimates and assumptions that affect the amounts of actual assets, liabilities, revenues and expenses presented for each reporting period. Actual results could differ significantly from those estimates. We regularly review our assumptions and estimates, which are based on historical experience and, where appropriate, current business trends. We believe that the following discussion addresses our critical accounting policies, which require more significant, subjective and complex judgments to be made by our management.
Revenue Recognition
We recognize revenue from product sales when earned, net of applicable provisions for discounts, returns and allowances. We consider revenue to be realized or realizable and earned when all of the following criteria are met: title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. We also provide for our estimate of potential bad debt concurrent with recognizing revenue.
Customer Program Costs
Customer programs and incentives are a common practice in our industry. We incur customer program costs to obtain favorable product placement, to promote sell-through of products and to maintain competitive pricing. Customer program costs and incentives, including rebates, promotional funds and volume allowances, are accounted for as a reduction to gross sales. These costs are recorded at the time of revenue recognition.sale based on management’s best estimates. Estimates are based on individual customer contracts and projected sales to the customer in comparison to any thresholds indicated by contract. In the absence of a signed contract, estimates are based on historical or projected experience for each program type or customer. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in sales volume expectations or contractual obligations).
Allowances for Doubtful Accounts and Sales Returns
Trade receivables are recorded at the stated amount, less allowances for discounts, doubtful accounts and returns. The allowance for doubtful accounts represents estimated uncollectible receivables associated with potential customer defaults on contractual obligations, usually due to customers'a customer's potential insolvency. The allowance includes amounts for certain customers where a risk of default has been specifically identified. In addition, the allowance includes a provision for customer defaults on a general formulaformulaic basis when it is determined the risk of some default is probable and estimable, but cannot yet be associated with a specific customers.customer. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience and existing economic conditions.
The allowance for sales returns represents estimated uncollectible receivables associated with the potential return of products previously sold to customers, and is recorded at the same time that the sales are recognized. The allowance includes a general provision for product returns based on historical trends. In addition, the allowance includes a reserve for currently authorized customer returns that are considered to be abnormal in comparison to the historical basis.
Inventories
Inventories are priced at the lower of cost (principally first-in, first-out with minor amounts at average) or market. A reserve is established to adjust the cost of inventory to its net realizable value. Inventory reserves are recorded for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions and specific identification of items, such as product discontinuance or engineering/material changes. These estimates could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations.
Long-Lived Assets
We test long-lived assets for impairment whenever events or changes in circumstances indicate that the assets’ carrying amount ismay not be recoverable from its undiscounted cash flow. When such events occur, we compare the sum of the undiscounted cash flow expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate at the time of future cash flow, derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flow. The discount rate applied to these cash flows is based on our weighted average cost of capital, computed by selecting market rates at the valuation dates for debt and equity that are reflective of the risks associated with an investment in the our industry as estimated by using comparable publicly traded companies.
Intangible Assets
Intangible assets are comprised primarily of indefinite-lived and amortizable intangible assets acquired and arising from the application of purchase accounting. Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine whether the indefinite useful life is appropriate. In addition, amortizable intangible assets other than goodwill are amortized over their useful lives. Certain of our trade names have been assigned an indefinite life as we currently anticipate that these trade names will contribute cash flows to ACCO Brands indefinitely.
We reviewtest indefinite-lived intangibles for impairment at least annually, normally in the second quarter, and whenever market or business events indicate there may be a potential adverse impact on a particular intangible. The review may be on a qualitative ("Step-Zero") or quantitative ("Step-1") basis as allowed by GAAP. We consider the implications of both external factors (e.g., market growth, pricing, competition, and technology) and internal factors (e.g., product costs, margins, support expenses, and capital investment) and their potential impact on cash flows for each business in both the near and long term, as well as their impact on any identifiable intangible asset associated with the business. Based on recent business results, consideration of significant external and internal factors, and the resulting business projections, indefinite-lived intangible assets are reviewed to determine whether they are likely to remain indefinite-lived, or whether a finite life is more appropriate. In addition, based on events in the period and future expectations, management considers whether the potential for impairment exists. Finite lived intangibles are amortized over 10, 15, 23 or 30 years.
During 2013, we adopted ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU No. 2012-02 permits entities to first assess qualitative factors to determine if it is more likely than not that the fair value of a indefinite-lived intangible unit is less than its carrying amount as a basis for determining whether further impairment testing of indefinite-lived intangible assets is necessary.
We performed our annual assessment, on a qualitative basis, as allowed by GAAP, for the majority of our indefinite-lived trade names in the second quarter of 20142017 and concluded that no impairment exists. However, due to the recent acquisitionexisted. For two of Mead C&OP, the fair values of certainour indefinite-lived trade names that are not substantially above their carrying values.values, Mead® and Hilroy®, we performed Step-1 tests in the second quarter of 2017. The following long-term growth rates and discount rates were used, 1.5% and 10.5% for Mead®, and 1.5% and 11.0% for Hilroy®, respectively. We concluded that neither the Mead® nor Hilroy® trade names were impaired. The fair value of the Mead® trade name was less than 30% above its carrying value as of the second quarter of 2017 Step-1 test. As of December 31, 2017, the carrying value of the Mead® trade name was $113.3 million.
As of June 1, 2017, we changed the indefinite-lived Hilroy® trade name to an amortizable intangible asset. The change was made as a result of decisions regarding the Company's future use of the trade name. The Company commenced amortizing the Hilroy trade name June 1, 2017 on a straight-line basis over a life of 30 years.
Goodwill
Goodwill has been recorded on our balance sheet and represents the excess of the cost of an acquisition when compared to the fair value of the net assets acquired. The authoritative guidance on goodwill and other intangible assets requires that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are ACCO Brands North America, ACCO Brands InternationalEMEA and Computer Products Group segments. ACCO Brands International.
We test goodwill for impairment at least annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. During 2012,As permitted by GAAP, we adopted ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU No. 2011-08 permits entities to first assessmay perform a qualitative factorsassessment ("Step-Zero") to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-stepa quantitative goodwill impairment test included("Step-1") as required by GAAP. We performed our annual assessment in GAAP. Entities arethe second quarter of 2017, on a qualitative basis, and concluded that it was not required to calculatemore likely than not that the fair value of aany reporting unit unless they determineis less than its carrying amount.
If the qualitative assessment determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if it is determined that a qualitative assessment is not appropriate, we move onto the carrying amount.
We performed our annual assessment inquantitative goodwill ("Step-1") impairment test where we calculate the second quarter of 2014 and concluded that no impairment exists; however we did conclude it was necessary to apply the traditional two-step fair value quantitative impairment test in ASC 350 to ourof the reporting units in 2014 due to the Merger and the decline in sales.units. When applying a fair-value-based test, if it is determined to be required, the fair
value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, an impairment charge is recognized, however, the second step ofloss recognized is not to exceed the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill. Determining the implied fair valuetotal amount of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similarallocated to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. For the North America reporting unit, we determined that its fair value exceeded its carrying amount by 13%. Key financial assumptions utilized to determine the fair value of the North America reporting unit included annual sales growth rates in the range of (1.4)% to 0.2% and a 9.0% discount rate. For the International reporting unit, we determined that its fair value exceeded its carrying amount by 52%. Key financial assumptions utilized to determine the fair value of the International reporting unit included annual sales growth rates in the range of 3.2% to 4.4% and a 10.5% discount rate. For the Computer Products Group reporting unit we determined that its fair value exceeded its carrying amount by 33%. Key financial assumptions utilized to determine the fair value of the Computer Products Group reporting unit included annual sales growth rates in the range of (3.5)% to 2.5% and a 10.0% discount rate.unit.
Given the current economic environment and the uncertainties regarding their impact on our business, there can be no assurance that our estimates and assumptions made for purposes of our qualitative impairment testing during 20142017 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not achieved, we may be required to record impairment charges in future periods, whether in connection with our next annual impairment testing in the second quarter of fiscal year 20152018 or prior to that, if a triggering event is identified outside of the quarter from when the annual impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.
Employee Benefit Plans
We provide a range of benefits to our employees and retired employees, including pensions,pension, post-retirement, post-employment and health care benefits. We record annual amounts relating to these plans based on calculations specified by GAAP, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. Actuarial assumptions are reviewed on an annual basis and modifications to these assumptions are made based on current rates and trends when it is deemed appropriate. As required by GAAP, the effect of our modifications are generally recorded and amortized over future periods. We believe that the assumptions utilized in recording our obligations under the plans are reasonable based on our experience. The actuarial assumptions used to record our plan obligations could differ materially from actual results due to changing economic and market conditions, higher or lower withdrawal rates or other factors which may impact the amount of retirement-related benefit expense recorded by us in future periods.
The discount rate assumptions used to determine the pension and post-retirement obligations of the benefit plans isare based on a spot-rate yield curve that matches projected future benefit payments with the appropriate interest rate applicable to the timing of the projected future benefit payments. The assumed discount rates reflect market rates for high-quality corporate bonds currently available. Our discount rates were determined by considering the average of pension yield curves constructed of a large population of high quality corporate bonds. The resulting discount rates reflect the matching of plan liability cash flows to the yield curves.
The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested based on our investment profile to provide for benefits included in the projected benefit obligations. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns over the last 10 years, and asset allocation and investment strategy.
We estimate the service and interest components of net periodic benefit cost (income) for pension and post-retirement benefits utilizing a full yield curve approach by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
At the end of each calendar year an actuarial evaluation is performed to determine the funded status of our pension and post-retirement obligations and any actuarial gain or loss is recognized in accumulated other comprehensive income (loss) and then amortized into the income statement in future periods.
Pension expense (income)income was $(0.2)$4.9 million,, $6.3 $5.3 million and $8.9$5.1 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. The $6.5Post-retirement income was $0.2 million, decrease in pension expense in 2014 compared to 2013 was due to lower amortization of actuarial losses due to lower discount rates at the end of 2013$0.7 million and higher expected returns on the plans' assets because of a higher level of assets due to market performance. The $2.6$0.7 million decrease in pension expense in 2013 compared to 2012 was due to higher expected returns on the plans' assets because of higher level of assets, primarily due to actual market returns and a
$1.0 million curtailment gain, which were partially offset by higher amortization of actuarial losses in the U.S. plans. Post-retirement expense (income) was $(0.5) million, $0.2 million and $(0.8) million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. The $1.0 million increase in post-retirement expense in 2013 compared to 2012 was due to reduced amortization of actuarial gains.
The weighted average assumptions used to determine benefit obligations for the years ended December 31, 2014, 2013,2017, 2016, and 20122015 were as follows:
| | | | Pension Benefits | | Post-retirement | Pension | | Post-retirement |
| | U.S. | | International | | | U.S. | | International | | |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | 4.2 | % | | 5.0 | % | | 4.2 | % | | 3.4 | % | | 4.3 | % | | 4.3 | % | | 3.7 | % | | 4.4 | % | | 4.0 | % | 3.7 | % | | 4.3 | % | | 4.6 | % | | 2.3 | % | | 2.7 | % | | 3.7 | % | | 3.2 | % | | 3.4 | % | | 3.9 | % |
| Rate of compensation increase | N/A |
| | N/A |
| | N/A |
| | 3.0 | % | | 3.3 | % | | 4.0 | % | | — |
| | — |
| | — |
| N/A |
| | N/A |
| | N/A |
| | 2.8 | % | | 3.1 | % | | 3.0 | % | | N/A |
| | N/A |
| | N/A |
|
The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 20142017, 20132016 and 20122015 were as follows:
| | | | Pension Benefits | | Post-retirement | Pension | | Post-retirement |
| | U.S. | | International | | | U.S. | | International | | |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | 5.0 | % | | 4.2 | % | | 5.0 | % | | 4.3 | % | | 4.3 | % | | 4.7 | % | | 4.4 | % | | 4.0 | % | | 4.5 | % | 3.8 | % | | 4.6 | % | | 4.2 | % | | 2.3 | % | | 3.7 | % | | 3.4 | % | | 3.4 | % | | 3.9 | % | | 3.7 | % |
| Expected long-term rate of return | 8.2 | % | | 8.2 | % | | 8.2 | % | | 6.8 | % | | 6.8 | % | | 6.2 | % | | — |
| | — |
| | — |
| 7.8 | % | | 7.8 | % | | 8.0 | % | | 5.5 | % | | 6.0 | % | | 6.5 | % | | N/A |
| | N/A |
| | N/A |
|
| Rate of compensation increase | N/A |
| | N/A |
| | N/A |
| | 3.3 | % | | 4.0 | % | | 3.6 | % | | — |
| | — |
| | — |
| N/A |
| | N/A |
| | N/A |
| | 3.1 | % | | 3.0 | % | | 3.0 | % | | N/A |
| | N/A |
| | N/A |
|
In 2015,2018, we expect pension income of approximately $5.2$4.9 million and post-retirement expenseincome of approximately $0.2 million. The estimated $5.0 million increase in pension income for 2015 compared to 2014 is due to reduced amortization of actuarial losses in the U.S. Effective in 2015 we will change the amortization of our net actuarial loss included in accumulated other comprehensive income (loss) for the U.S. Salaried Plan from the average remaining service period of active employees expected to receive benefits under the plan to the average remaining life expectancy of all participants. This change was the result of the Company's decision to permanently freeze the benefits under the plan. This change will reduce the net periodic benefit cost in the U.S. by approximately $6.0 million for the year ended December 31, 2015 and will be partially offset by higher amortization of actuarial losses in our international plans.$0.2 million.
A 25-basis point change (0.25%) in our discount rate assumption would lead to an increase or decrease in our pension and post-retirement expense of approximately $0.1$0.002 million for 2015.2018. A 25-basis point change (0.25%) in our long-term rate of return assumption would lead to an increase or decrease in pension and post-retirement expense of approximately $1.2$1.6 million for 2015.2018.
Pension and post-retirement liabilities of $100.5$275.5 million as of December 31, 2014,2017 increased from $61.7$98.0 million at December 31, 2013,2016, primarily due to lower discount rates compared to prior year assumptions and the adoption of new mortality tables for the U.S. and Canadian plans.Esselte Acquisition.
Customer Program Costs
Customer programs and incentives are a common practice in our industry. We incur customer program costs to obtain favorable product placement, to promote sell-through of products and to maintain competitive pricing. Customer program costs and incentives, including rebates, promotional funds and volume allowances, are accounted for as a reduction to gross sales. These costs are recorded at the time of sale based on management’s best estimates. Estimates are based on individual customer contracts and projected sales to the customer in comparison to any thresholds indicated by contract. In the absence of a signed contract, estimates are based on historical or projected experience for each program type or customer. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in sales volume expectations or customer contracts).
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. Facts and circumstances may change thatand cause us to revise the conclusions on our ability to realize certain net operating losses and other deferred tax attributes.
The amount of income taxes that we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period theany assessments are received, revised or resolved.
Deferred income taxes areOn December 22, 2017, the U.S. Tax Act was signed into law. The U.S. Tax Act makes broad and complex changes to the U.S. tax code, including, but not providedlimited to: (i) reducing the future U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) requiring companies to pay a one-time transition tax on certain undistributed earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.
The undistributed earnings of all non-U.S. subsidiaries thatwere approximately $500 million as of December 31, 2017. All of the undistributed earnings have become subject to U.S. income taxes due to the enactment of the U.S. Tax Act in 2017. As a result of the U.S. Tax Act, we are expectedanalyzing the global working capital and cash requirements, and potential tax liabilities attributable to future repatriation of cash, but we have yet to determine whether we plan to change our prior indefinite investment assertion under ASC 740. We will record the effects of any change in prior assertions in the period in which the change occurs.
Due to the complexity of the global intangible low-taxed income ("GILTI") tax rules recently enacted by the U.S. Tax Act, the Company continues to analyze this provision and its impact and the proper application of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice to either treat the taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the "period cost method") or factor in such amounts in to the Company’s measurement of deferred taxes (the "deferred method"). The Company’s selection of an accounting policy in connection with GILTI depends upon additional analysis and potential future modifications to the existing structure, which are yet to be permanently reinvestedknown. Accordingly, the Company has not recorded any adjustments related to GILTI in those companies, aggregating approximately $565 millionour financial statements and has not made a policy choice regarding whether to record deferred taxes on GILTI.$549 million as of December 31, 2014 and 2013, respectively. If these amounts were distributed
For further information on the U.S. Tax Act, see "Note 11. Income Taxes" to the U.S.,consolidated financial statements contained in the formItem 8. of a dividend or otherwise, we would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable.this report.
Recent Accounting PronouncementsStandards Updates and Recently Adopted Accounting Standards
For information on recent accounting pronouncements, see "Note"Note 2. Significant Accounting Policies" to the consolidated financial statements contained in Item 8. of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our industry ishas historically been concentrated in a small number of major customers, principallyprimarily large regional resellers of our products including traditional office products superstores, largesuppliers, retailers, wholesalerse-tailers and contract stationers.wholesalers. Customer consolidation, shifts in the channels of distribution for our products and share growth of private-label products continue to increase pricing pressures, which may adversely affect margins for usour competitors and our competitors.for us. We are addressing these challenges through design innovations, value-added featuresstrong end-user brands, broader product penetration within categories, ongoing introduction of innovative new products, continuing improvements in customer service and services,diversification of our customer base, as well as continued cost and asset reductions.
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rate changes. We enter into financial instruments to manage and reduce the impact of these risks, not for trading or speculative purposes. The counterparties to these financial instruments are major financial institutions.
See also "Item 1A. Risk Factors."
Foreign Exchange Risk Management
We enter into forward foreign currency contracts to reduce the effect of fluctuating foreign currencies, primarily on foreign denominated inventory purchases and intercompany loans. The majority of ourthe Company’s exposure to local currency movements is in Europe (both(the Euro, the EuroSwedish krona and the British pound), Australia, Canada, Brazil, Canada, Australia, Mexico and Japan. All ofMexico. Principal currencies hedged include the existing foreign exchange contracts as of December 31, 2014 have maturity dates in 2015.U.S. dollar, Euro, Australian dollar, Canadian dollar, Swedish krona, British pound and Japanese yen. Increases and decreases in the fair market values of theour forward agreements are expected to be offset by gains/losses in recognized net underlying foreign currency transactions or loans. Notional amounts of outstanding foreign currency forward exchange contracts were $124.2188.5 million and $144.2128.6 million at December 31, 20142017 and 20132016, respectively. The net fair value of these foreign currency contracts was $4.2(0.3) million and $0.9$4.1 million at December 31, 20142017 and 20132016, respectively. At December 31, 20142017, a 10% unfavorable exchange rate movement in our portfolio of foreign currency forward contracts would have reduced our unrealized gains by $8.3 million.$20.1 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, we believe these forward contracts and the offsetting underlying commitments do not create material market risk.
For morefurther information related to outstanding foreign currency forward exchange contracts, see "Note"Note 13. Derivative Financial Instruments" and "Note"Note 14. Fair Value of Financial Instruments" to the consolidated financial statements contained in Item 8. of this report.
For our most recent acquisitions (the PA and Esselte Acquisitions), we have taken on additional debt in the local currency of the targets to reduce our foreign exchange leverage risk. In the case of the PA Acquisition, which primarily conducts its business in the Australian dollar, we borrowed A$100.0 million. For the Esselte Acquisition, completed on January 31, 2017, which primarily conducts its business in the Euro, we borrowed €300.0 million. For further information see, "Note 3. Acquisitions" and "Note 4. Long-term Debt and Short-term Borrowings" to the consolidated financial statements contained in Item 8. of this report.
Interest Rate Risk Management
Amounts outstanding under the 2013 Restated2017 Credit Agreement bear interest (i) in the case of Eurodollar loans, at a rate
per annum equal to the Eurodollar rate (which is based on an average British Bankers Association Interest Settlement Rate) plus the applicable rate; (ii) in the case of loans made at the Base Rate (which means the highest of (a) the Bank of America, N.A. prime rate then in effect, (b) the Federal Funds Effective Rate (as defined in the 2013 Restated Credit Agreement) then in effect plus ½ of 1.00% and (c) the Eurodollar rate that would be payable on such day for a Eurodollar loan with a one-month interest period plus 1.00%), at a rate per annum equal to the BaseEuro Rate, pluswith a 0% floor, the applicable rate; and (iii) inAustralian BBSR Rate, the case of swing line loans, at a rate per annum equal toCanadian BA Rate or the Base Rate, as applicable and as each such rate is defined in the 2017 Credit Agreement, plus the applicable rate for the Revolving Facility. Separate base interest rate and applicable rate provisions will apply for any Canadian or Australian currency denominated loans outstanding under the Revolving Facility.
an "applicable rate." The applicable rate applied to outstanding EurodollarEuro, Australian and Canadian dollar denominated loans and Base Rate loans is based on our consolidatedthe Company’s Consolidated Leverage Ratio (as defined in the 2017 Credit Agreement) as follows:
| | Consolidated Leverage Ratio | | Eurodollar Credit Spread | | Base Rate Credit Spread | | Applicable Rate on Euro/AUD/CDN Dollar Loans | | Applicable Rate on Base Rate Loans |
| > 4.00 to 1.00 | | 2.50% | | 1.50% | | 2.50% | | 1.50% |
| ≤ 4.00 to 1.00 and > 3.50 to 1.00 | | 2.25% | | 1.25% | | 2.25% | | 1.25% |
| ≤ 3.50 to 1.00 and > 2.50 to 1.00 | | 2.00% | | 1.00% | |
| ≤ 2.50 to 1.00 | | 1.75% | | 0.75% | |
| ≤ 3.50 to 1.00 and > 3.00 to 1.00 | | | 2.00% | | 1.00% |
| ≤ 3.00 to 1.00 and > 2.00 to 1.00 | | | 1.50% | | 0.50% |
| ≤ 2.00 to 1.00 | | | 1.25% | | 0.25% |
As of December 31, 2017, the applicable rate on Euro, Australian and Canadian dollar loans was 1.50% and the applicable rate on Base Rate loans was 0.50%. Undrawn amounts under the 2017 Revolving Facility are subject to a commitment fee rate of 0.25% to 0.40% per annum, depending on the Company’s Consolidated Leverage Ratio. As of December 31, 2017, the commitment fee rate was 0.30%.
The SeniorNew Notes have a fixed interest ratesrate and, accordingly, are not exposed to market risk resulting from changes in interest rates. However, the fair market value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. In addition, fair market values will also reflect the credit markets' view of credit risk spreads and our risk profile. These interest rate changes may affect the fair market value of theour fixed interest rate debt and any repurchases of these notes,New Notes, but do not impact our earnings or cash flows.
The following table summarizes information about our major debt components as of December 31, 2014,2017, including the principal cash payments and interest rates.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stated Maturity Date | | | | |
| (in millions of dollars) | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total | | Fair Value |
| Long term debt: | | | | | | | | | | | | | | | |
| Fixed rate Senior Unsecured Notes, due April 2020 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 500.0 |
| | $ | 500.0 |
| | $ | 531.2 |
|
| Average fixed interest rate | 6.75 | % | | 6.75 | % | | 6.75 | % | | 6.75 | % | | 6.75 | % | | 6.75 | % | | | | |
Variable rate U.S. Dollar Senior Secured Term Loan A, due May 2018(1) | $ | — |
| | $ | 6.1 |
| | $ | 6.4 |
| | $ | 286.5 |
| | $ | — |
| | $ | — |
| | $ | 299.0 |
| | $ | 299.0 |
|
Average variable interest rate(2) | 2.24 | % | | 2.24 | % | | 2.24 | % | | 2.24 | % | |
|
| |
|
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stated Maturity Date | | | | |
| (in millions of dollars) | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total | | Fair Value |
| Long term debt: | | | | | | | | | | | | | | | |
| Fixed rate Senior Unsecured Notes, due December 2024 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 400.0 |
| | $ | 400.0 |
| | $ | 412.0 |
|
| Fixed interest rate |
|
| |
|
| |
|
| |
|
| |
|
| | 5.25 | % | | | | |
| Variable rate Euro Senior Secured Term Loan A, due January 2022 | $ | 24.6 |
| | $ | 33.6 |
| | $ | 42.6 |
| | $ | 44.8 |
| | $ | 199.4 |
| | $ | — |
| | $ | 345.0 |
| | $ | 345.0 |
|
| Variable rate Australian Dollar Senior Secured Term Loan A, due January 2022 | $ | 4.3 |
| | $ | 5.8 |
| | $ | 7.4 |
| | $ | 7.8 |
| | $ | 34.7 |
| | $ | — |
| | $ | 60.0 |
| | $ | 60.0 |
|
| Variable rate U.S. Dollar Senior Secured Revolving Credit Facility, due January 2022 | $ | 13.9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 35.0 |
| | $ | — |
| | $ | 48.9 |
| | $ | 48.9 |
|
| Variable rate Australian Dollar Senior Secured Revolving Credit Facility, due January 2022 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 85.0 |
| | $ | — |
| | $ | 85.0 |
| | $ | 85.0 |
|
Average variable interest rate(1) | 2.16 | % | | 2.16 | % | | 2.16 | % | | 2.16 | % | | 2.16 | % | |
|
| | | | |
| |
| (1) | The required 2015 principal cash payments were made in 2014. |
| |
(2) | Rates presented are as of December 31, 2014. 2017. |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders of
ACCO Brands Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of ACCO Brands Corporation and subsidiaries (the Company) as of December 31, 20142017 and 2013, and2016, the related consolidated statements of income, comprehensive income (loss), cash flows, and stockholders’ equity, (deficit)and cash flows for each of the years in the three-year period ended December 31, 2014. In connection with our audits of the consolidated financial statements, we also audited2017, and the related consolidatednotes and financial statement schedule Schedule II - Valuation and Qualifying Accounts and Reserves.Reserves (collectively, the consolidated financial statements). We also have audited ACCO Brands Corporation’sthe Company’s internal control over financial reporting as of December 31, 2014,2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ACCO Brands Corporation’sCommission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ACCO Brands Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, ACCO Brands Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
[/s/ KPMG LLP]
/s/ KPMG LLPWe have served as the Company’s auditor since 2009.
Chicago, Illinois
February 25, 201528, 2018
ACCO Brands Corporation and Subsidiaries
Consolidated Balance Sheets
| | | | December 31, 2014 | | December 31, 2013 | | | | | |
| (in millions of dollars, except share data) | | | | December 31, 2017 | | December 31, 2016 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 53.2 |
| | $ | 53.5 |
| $ | 76.9 |
| | $ | 42.9 |
|
| Accounts receivable less allowances for discounts, doubtful accounts and returns of $19.5 and $21.2, respectively | 420.5 |
| | 471.9 |
| |
| Accounts receivable less allowances for discounts, doubtful accounts and sales returns of $18.1 and $15.7, respectively | | 469.3 |
| | 391.0 |
|
| Inventories | 229.9 |
| | 254.7 |
| 254.2 |
| | 210.0 |
|
| Deferred income taxes | 39.4 |
| | 33.5 |
| |
| Other current assets | 35.8 |
| | 28.1 |
| 29.2 |
| | 26.8 |
|
| Total current assets | 778.8 |
| | 841.7 |
| 829.6 |
| | 670.7 |
|
| Total property, plant and equipment | 547.7 |
| | 548.5 |
| 645.2 |
| | 528.0 |
|
| Less accumulated depreciation | (312.2 | ) | | (295.2 | ) | |
| Less: accumulated depreciation | | (366.7 | ) | | (329.6 | ) |
| Property, plant and equipment, net | 235.5 |
| | 253.3 |
| 278.5 |
| | 198.4 |
|
| Deferred income taxes | 31.7 |
| | 37.3 |
| 137.9 |
| | 27.3 |
|
| Goodwill | 544.9 |
| | 568.3 |
| 670.3 |
| | 587.1 |
|
| Identifiable intangibles, net of accumulated amortization of $166.3 and $147.8, respectively | 571.4 |
| | 607.0 |
| |
| Identifiable intangibles, net of accumulated amortization of $203.7 and $167.1, respectively | | 839.9 |
| | 565.7 |
|
| Other non-current assets | 64.1 |
| | 75.3 |
| 42.9 |
| | 15.3 |
|
| Total assets | $ | 2,226.4 |
| | $ | 2,382.9 |
| $ | 2,799.1 |
| | $ | 2,064.5 |
|
| Liabilities and Stockholders' Equity | | | | | | |
| Current liabilities: | | | | | | |
| Notes payable | $ | 0.8 |
| | $ | — |
| $ | — |
| | $ | 63.7 |
|
| Current portion of long-term debt | 0.8 |
| | 0.1 |
| 43.2 |
| | 4.8 |
|
| Accounts payable | 159.1 |
| | 177.9 |
| 178.2 |
| | 135.1 |
|
| Accrued compensation | 36.6 |
| | 32.0 |
| 60.9 |
| | 42.8 |
|
| Accrued customer program liabilities | 111.8 |
| | 123.6 |
| 141.1 |
| | 94.0 |
|
| Accrued interest | 6.5 |
| | 7.0 |
| 1.2 |
| | 1.3 |
|
| Other current liabilities | 79.8 |
| | 104.5 |
| 113.8 |
| | 64.7 |
|
| Total current liabilities | 395.4 |
| | 445.1 |
| 538.4 |
| | 406.4 |
|
| Long-term debt | 799.0 |
| | 920.8 |
| |
| Long-term debt, net of debt issuance costs of $7.1 and $7.3, respectively | | 889.2 |
| | 627.7 |
|
| Deferred income taxes | 172.2 |
| | 169.1 |
| 177.1 |
| | 146.7 |
|
| Pension and post-retirement benefit obligations | 100.5 |
| | 61.7 |
| 275.5 |
| | 98.0 |
|
| Other non-current liabilities | 78.3 |
| | 83.9 |
| 144.8 |
| | 77.0 |
|
| Total liabilities | 1,545.4 |
| | 1,680.6 |
| 2,025.0 |
| | 1,355.8 |
|
| Stockholders' equity: | | | | | | |
| Preferred stock, $0.01 par value, 25,000,000 shares authorized; none issued and outstanding | — |
| | — |
| — |
| | — |
|
| Common stock, $0.01 par value, 200,000,000 shares authorized; 112,670,514 and 114,056,416 shares issued and 111,911,290 and 113,663,856 outstanding, respectively | 1.1 |
| | 1.1 |
| |
| Treasury stock, 759,224 and 392,560 shares, respectively | (5.9 | ) | | (3.5 | ) | |
| Common stock, $0.01 par value, 200,000,000 shares authorized; 109,597,197 and 110,086,283 shares issued and 106,684,084 and 107,906,644 outstanding, respectively | | 1.1 |
| | 1.1 |
|
| Treasury stock, 2,913,113 and 2,179,639 shares, respectively | | (26.4 | ) | | (17.0 | ) |
| Paid-in capital | 2,031.5 |
| | 2,035.0 |
| 1,999.7 |
| | 2,015.7 |
|
| Accumulated other comprehensive loss | (292.6 | ) | | (185.6 | ) | (461.1 | ) | | (419.4 | ) |
| Accumulated deficit | (1,053.1 | ) | | (1,144.7 | ) | (739.2 | ) | | (871.7 | ) |
| Total stockholders' equity | 681.0 |
| | 702.3 |
| 774.1 |
| | 708.7 |
|
| Total liabilities and stockholders' equity | $ | 2,226.4 |
| | $ | 2,382.9 |
| $ | 2,799.1 |
| | $ | 2,064.5 |
|
See notes to consolidated financial statements.
43
ACCO Brands Corporation and Subsidiaries
Consolidated Statements of Income
| | | | Year Ended December 31, | Year Ended December 31, |
| (in millions of dollars, except per share data) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Net sales | $ | 1,689.2 |
| | $ | 1,765.1 |
| | $ | 1,758.5 |
| $ | 1,948.8 |
| | $ | 1,557.1 |
| | $ | 1,510.4 |
|
| Cost of products sold | 1,159.3 |
| | 1,217.2 |
| | 1,221.4 |
| 1,292.4 |
| | 1,042.0 |
| | 1,032.0 |
|
| Gross profit | 529.9 |
| | 547.9 |
| | 537.1 |
| 656.4 |
| | 515.1 |
| | 478.4 |
|
| Operating costs and expenses: | | | | | | | | | | |
| Advertising, selling, general and administrative expenses | 328.6 |
| | 347.3 |
| | 353.6 |
| |
| Selling, general and administrative expenses | | 406.1 |
| | 320.8 |
| | 295.7 |
|
| Amortization of intangibles | 22.2 |
| | 24.7 |
| | 19.9 |
| 35.6 |
| | 21.6 |
| | 19.6 |
|
| Restructuring charges | 5.5 |
| | 30.1 |
| | 24.3 |
| |
| Restructuring charges (credits) | | 21.7 |
| | 5.4 |
| | (0.4 | ) |
| Total operating costs and expenses | 356.3 |
| | 402.1 |
| | 397.8 |
| 463.4 |
| | 347.8 |
| | 314.9 |
|
| Operating income | 173.6 |
| | 145.8 |
| | 139.3 |
| 193.0 |
| | 167.3 |
| | 163.5 |
|
| Non-operating expense (income): | | | | | | | | | | |
| Interest expense | 49.5 |
| | 59.0 |
| | 91.3 |
| 41.1 |
| | 49.3 |
| | 44.5 |
|
| Interest income | (5.6 | ) | | (4.3 | ) | | (2.0 | ) | (5.8 | ) | | (6.4 | ) | | (6.6 | ) |
| Equity in earnings of joint ventures | (8.1 | ) | | (8.2 | ) | | (6.9 | ) | |
| Other expense, net | 0.8 |
| | 7.6 |
| | 61.3 |
| |
| Income (loss) from continuing operations before income tax | 137.0 |
| | 91.7 |
| | (4.4 | ) | |
| Income tax expense (benefit) | 45.4 |
| | 14.4 |
| | (121.4 | ) | |
| Income from continuing operations | 91.6 |
| | 77.3 |
| | 117.0 |
| |
| Loss from discontinued operations, net of income taxes | — |
| | (0.2 | ) | | (1.6 | ) | |
| Equity in earnings of joint-venture | | — |
| | (2.1 | ) | | (7.9 | ) |
| Other (income) expense, net | | (0.4 | ) | | 1.4 |
| | 2.1 |
|
| Income before income tax | | 158.1 |
| | 125.1 |
| | 131.4 |
|
| Income tax expense | | 26.4 |
| | 29.6 |
| | 45.5 |
|
| Net income | $ | 91.6 |
| | $ | 77.1 |
| | $ | 115.4 |
| $ | 131.7 |
| | $ | 95.5 |
| | $ | 85.9 |
|
| | | | | | | |
| Per share: | | | | | | | | | | |
| Basic income per share: | | | | | | |
| Income from continuing operations | $ | 0.81 |
| | $ | 0.68 |
| | $ | 1.24 |
| |
| Loss from discontinued operations | $ | — |
| | $ | — |
| | $ | (0.02 | ) | |
| Basic income per share | $ | 0.81 |
| | $ | 0.68 |
| | $ | 1.23 |
| $ | 1.22 |
| | $ | 0.89 |
| | $ | 0.79 |
|
| Diluted income per share: | | | | | | |
| Income from continuing operations | $ | 0.79 |
| | $ | 0.67 |
| | $ | 1.22 |
| |
| Loss from discontinued operations | $ | — |
| | $ | — |
| | $ | (0.02 | ) | |
| Diluted income per share | $ | 0.79 |
| | $ | 0.67 |
| | $ | 1.20 |
| $ | 1.19 |
| | $ | 0.87 |
| | $ | 0.78 |
|
| | | | | | | |
| Weighted average number of shares outstanding: | | | | | | | | | | |
| Basic | 113.7 |
| | 113.5 |
| | 94.1 |
| 108.1 |
| | 107.0 |
| | 108.8 |
|
| Diluted | 116.3 |
| | 115.7 |
| | 96.1 |
| 110.9 |
| | 109.2 |
| | 110.6 |
|
See notes to consolidated financial statements.
44
ACCO Brands Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 |
| Net income | $ | 91.6 |
| | $ | 77.1 |
| | $ | 115.4 |
|
| Other comprehensive income (loss), before tax: | | | | | |
| Unrealized gain (loss) on derivative financial instruments: | | | | | |
| Gain (loss) arising during the period | 6.9 |
| | 3.7 |
| | (0.2 | ) |
| Reclassification of gain included in net income | (3.5 | ) | | (3.4 | ) | | (1.9 | ) |
| Foreign currency translation: | | | | | |
| Foreign currency translation adjustments | (76.4 | ) | | (61.6 | ) | | (10.9 | ) |
| Pension and other post-retirement plans: | | | | | |
| Actuarial (loss) gain arising during the period | (60.2 | ) | | 39.3 |
| | (21.1 | ) |
| Amortization of actuarial loss included in net income | 6.0 |
| | 11.4 |
| | 7.2 |
|
| Amortization of prior service cost included in net income | 0.3 |
| | 0.1 |
| | — |
|
| Other | 5.1 |
| | (2.1 | ) | | (4.5 | ) |
| Other comprehensive loss, before tax | (121.8 | ) | | (12.6 | ) | | (31.4 | ) |
| Income tax benefit (expense) related to items of other comprehensive loss | 14.8 |
| | (16.9 | ) | | 6.3 |
|
| Comprehensive (loss) income | $ | (15.4 | ) | | $ | 47.6 |
| | $ | 90.3 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions of dollars) | 2017 | | 2016 | | 2015 |
| Net income | $ | 131.7 |
| | $ | 95.5 |
| | $ | 85.9 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Unrealized (loss) income on derivative instruments, net of tax benefit (expense) of $1.0, $(0.7) and $0.8, respectively | (2.3 | ) | | 1.7 |
| | (1.9 | ) |
| | | | | | |
| Foreign currency translation adjustments, net of tax benefit of $5.0, $0.0 and $0.0, respectively | (19.5 | ) | | 16.8 |
| | (136.7 | ) |
| | | | | | |
| Recognition of deferred pension and other post-retirement items, net of tax benefit of $5.8, $0.6 and $0.1, respectively | (19.9 | ) | | (8.7 | ) | | 2.0 |
|
| Other comprehensive (loss) income, net of tax | (41.7 | ) | | 9.8 |
| | (136.6 | ) |
| | | | | | |
| Comprehensive income (loss) | $ | 90.0 |
| | $ | 105.3 |
| | $ | (50.7 | ) |
See notes to consolidated financial statements.
45
ACCO Brands Corporation and Subsidiaries
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 |
| Operating activities | | | | | |
| Net income | $ | 91.6 |
| | $ | 77.1 |
| | $ | 115.4 |
|
| Amortization of inventory step-up | — |
| | — |
| | 13.3 |
|
| Loss (gain) on disposal of assets | 0.8 |
| | (4.1 | ) | | 2.0 |
|
| Deferred income tax provision | 20.6 |
| | (0.7 | ) | | (9.9 | ) |
| Release of tax valuation allowance | — |
| | (11.6 | ) | | (145.1 | ) |
| Depreciation | 35.3 |
| | 39.9 |
| | 34.5 |
|
| Amortization of debt issuance costs | 4.6 |
| | 6.2 |
| | 9.9 |
|
| Amortization of intangibles | 22.2 |
| | 24.7 |
| | 19.9 |
|
| Stock-based compensation | 15.7 |
| | 16.4 |
| | 9.2 |
|
| Loss on debt extinguishment | — |
| | 9.4 |
| | 15.5 |
|
| Other non-cash charges | 0.7 |
| | 1.2 |
| | 2.3 |
|
| Equity in earnings of joint ventures, net of dividends received | (2.4 | ) | | (2.7 | ) | | 3.0 |
|
| Changes in balance sheet items: | | | | | |
| Accounts receivable | 20.4 |
| | 0.5 |
| | (153.8 | ) |
| Inventories | 11.6 |
| | 6.5 |
| | 61.8 |
|
| Other assets | (6.1 | ) | | 0.1 |
| | 7.4 |
|
| Accounts payable | (10.1 | ) | | 26.8 |
| | (25.0 | ) |
| Accrued expenses and other liabilities | (28.9 | ) | | 9.0 |
| | 30.1 |
|
| Accrued income taxes | (4.3 | ) | | (4.2 | ) | | 2.0 |
|
| Net cash provided (used) by operating activities | 171.7 |
| | 194.5 |
| | (7.5 | ) |
| Investing activities | | | | | |
| Additions to property, plant and equipment | (29.6 | ) | | (36.6 | ) | | (30.3 | ) |
| (Payments) proceeds related to the sale of discontinued operations | — |
| | (1.5 | ) | | 1.5 |
|
| Proceeds from the disposition of assets | 3.8 |
| | 6.1 |
| | 3.1 |
|
| Cost of acquisitions, net of cash acquired | — |
| | (1.3 | ) | | (397.5 | ) |
| Net cash used by investing activities | (25.8 | ) | | (33.3 | ) | | (423.2 | ) |
| Financing activities | | | | | |
| Proceeds from long-term borrowings | — |
| | 530.0 |
| | 1,270.0 |
|
| Repayments of long-term debt | (121.1 | ) | | (679.5 | ) | | (872.0 | ) |
| Borrowings (repayments) of notes payable, net | 1.0 |
| | (0.7 | ) | | 1.2 |
|
| Payments for debt issuance costs | (0.3 | ) | | (4.3 | ) | | (38.5 | ) |
| Repurchases of common stock | (19.4 | ) | | — |
| | — |
|
| Payments related to tax withholding for share-based compensation | (2.5 | ) | | (1.0 | ) | | (0.8 | ) |
| Proceeds from the exercise of stock options | 0.3 |
| | — |
| | 0.2 |
|
| Net cash (used) provided by financing activities | (142.0 | ) | | (155.5 | ) | | 360.1 |
|
| Effect of foreign exchange rate changes on cash and cash equivalents | (4.2 | ) | | (2.2 | ) | | (0.6 | ) |
| Net (decrease) increase in cash and cash equivalents | (0.3 | ) | | 3.5 |
| | (71.2 | ) |
| Cash and cash equivalents | | | | | |
| Beginning of the period | 53.5 |
| | 50.0 |
| | 121.2 |
|
| End of the period | $ | 53.2 |
| | $ | 53.5 |
| | $ | 50.0 |
|
| Cash paid during the year for: | | | | | |
| Interest | $ | 45.1 |
| | $ | 52.0 |
| | $ | 94.9 |
|
| Income taxes | $ | 28.9 |
| | $ | 31.1 |
| | $ | 28.8 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 |
| Significant non-cash transactions: | | | | | |
| Common stock issued in conjunction with the acquisition of Mead C&OP | $ | — |
| | $ | — |
| | $ | 602.3 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions of dollars) | 2017 | | 2016 | | 2015 |
| Operating activities | | | | | |
| Net income | $ | 131.7 |
| | $ | 95.5 |
| | $ | 85.9 |
|
| Gain on revaluation of previously held joint-venture equity interest | — |
| | (28.9 | ) | | — |
|
| Amortization of inventory step-up | 0.9 |
| | 0.4 |
| | — |
|
| (Gain) loss on disposal of assets | (1.3 | ) | | (0.3 | ) | | 0.1 |
|
| Deferred income tax (benefit) expense | (45.2 | ) | | 6.0 |
| | 27.4 |
|
| Insurance claims, net of proceeds | (0.4 | ) | | — |
| | — |
|
| Depreciation | 35.6 |
| | 30.4 |
| | 32.4 |
|
| Amortization of debt issuance costs | 2.9 |
| | 3.8 |
| | 3.5 |
|
| Amortization of intangibles | 35.6 |
| | 21.6 |
| | 19.6 |
|
| Stock-based compensation | 17.0 |
| | 19.4 |
| | 16.0 |
|
| Loss on debt extinguishment | — |
| | 29.9 |
| | 1.9 |
|
| Other non-cash items | — |
| | 0.1 |
| | — |
|
| Equity in earnings of joint-venture, net of dividends received | — |
| | (1.6 | ) | | (3.8 | ) |
| Changes in balance sheet items: | | | | | |
| Accounts receivable | 10.2 |
| | 13.4 |
| | (3.9 | ) |
| Inventories | 2.5 |
| | 16.7 |
| | 9.8 |
|
| Other assets | 4.6 |
| | 5.5 |
| | 1.2 |
|
| Accounts payable | (18.7 | ) | | (19.3 | ) | | (2.6 | ) |
| Accrued expenses and other liabilities | (8.3 | ) | | (31.2 | ) | | (19.2 | ) |
| Accrued income taxes | 37.8 |
| | 5.7 |
| | 2.9 |
|
| Net cash provided by operating activities | 204.9 |
| | 167.1 |
| | 171.2 |
|
| Investing activities | | | | | |
| Additions to property, plant and equipment | (31.0 | ) | | (18.5 | ) | | (27.6 | ) |
| Proceeds from the disposition of assets | 4.2 |
| | 0.7 |
| | 2.8 |
|
| Cost of acquisitions, net of cash acquired | (292.3 | ) | | (88.8 | ) | | — |
|
| Other | — |
| | 0.2 |
| | 0.2 |
|
| Net cash used by investing activities | (319.1 | ) | | (106.4 | ) | | (24.6 | ) |
| Financing activities | | | | | |
| Proceeds from long-term borrowings | 484.1 |
| | 587.4 |
| | 300.0 |
|
| Repayments of long-term debt | (296.5 | ) | | (685.1 | ) | | (370.1 | ) |
| Borrowings (repayments) of notes payable, net | — |
| | 51.5 |
| | (0.8 | ) |
| Payment for debt premium | — |
| | (25.0 | ) | | — |
|
| Payments for debt issuance costs | (3.6 | ) | | (6.9 | ) | | (1.7 | ) |
| Repurchases of common stock | (36.6 | ) | | — |
| | (60.0 | ) |
| Payments related to tax withholding for stock-based compensation | (9.4 | ) | | (5.1 | ) | | (5.9 | ) |
| Proceeds from the exercise of stock options | 4.2 |
| | 6.8 |
| | 0.7 |
|
| Net cash provided (used) by financing activities | 142.2 |
| | (76.4 | ) | | (137.8 | ) |
| Effect of foreign exchange rate changes on cash and cash equivalents | 6.0 |
| | 3.2 |
| | (6.6 | ) |
| Net increase (decrease) in cash and cash equivalents | 34.0 |
| | (12.5 | ) | | 2.2 |
|
| Cash and cash equivalents | | | | | |
| Beginning of the period | 42.9 |
| | 55.4 |
| | 53.2 |
|
| End of the period | $ | 76.9 |
| | $ | 42.9 |
| | $ | 55.4 |
|
| Cash paid during the year for: | | | | | |
| Interest | $ | 38.0 |
| | $ | 50.1 |
| | $ | 41.0 |
|
| Income taxes | $ | 34.8 |
| | $ | 16.9 |
| | $ | 16.9 |
|
See notes to consolidated financial statements.
46
ACCO Brands Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity (Deficit)
| | | (in millions of dollars) | Common
Stock | | Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury
Stock | | Accumulated
Deficit | | Total | Common
Stock | | Paid-in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury
Stock | | Accumulated
Deficit | | Total |
| Balance at December 31, 2011 | $ | 0.6 |
| | $ | 1,407.4 |
| | $ | (131.0 | ) | | $ | (1.7 | ) | | $ | (1,337.2 | ) | | $ | (61.9 | ) | |
| Balance at December 31, 2014 | | $ | 1.1 |
| | $ | 2,031.5 |
| | $ | (292.6 | ) | | $ | (5.9 | ) | | $ | (1,053.1 | ) | | $ | 681.0 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | $ | 115.4 |
| | 115.4 |
| — |
| | — |
| | — |
| | — |
| | 85.9 |
| | 85.9 |
|
| Stock issuance - Mead C&OP acquisition | 0.5 |
| | 601.8 |
| | — |
| | — |
| | — |
| | 602.3 |
| |
| Loss on derivative financial instruments, net of tax | — |
| | — |
| | (2.1 | ) | | — |
| | — |
| | (2.1 | ) | — |
| | — |
| | (1.9 | ) | | — |
| | — |
| | (1.9 | ) |
| Translation impact | — |
| | — |
| | (10.9 | ) | | — |
| | — |
| | (10.9 | ) | — |
| | — |
| | (136.7 | ) | | — |
| | — |
| | (136.7 | ) |
| Pension and post-retirement adjustment, net of tax | — |
| | — |
| | (12.1 | ) | | — |
| | — |
| | (12.1 | ) | — |
| | — |
| | 2.0 |
| | — |
| | — |
| | 2.0 |
|
| Common stock repurchases | | (0.1 | ) | | (59.9 | ) | | — |
| | — |
| | — |
| | (60.0 | ) |
| Stock-based compensation | — |
| | 9.2 |
| | — |
| | — |
| | — |
| | 9.2 |
| — |
| | 16.0 |
| | — |
| | — |
| | — |
| | 16.0 |
|
| Common stock issued, net of shares withheld for employee taxes | — |
| | 0.2 |
| | — |
| | (0.8 | ) | | — |
| | (0.6 | ) | — |
| | 0.7 |
| | — |
| | (5.9 | ) | | — |
| | (5.2 | ) |
| Other | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| | (0.1 | ) | 0.1 |
| | — |
| | — |
| | — |
| | — |
| | 0.1 |
|
| Balance at December 31, 2012 | 1.1 |
| | 2,018.5 |
| | (156.1 | ) | | (2.5 | ) | | (1,221.8 | ) | | 639.2 |
| |
| Balance at December 31, 2015 | | 1.1 |
| | 1,988.3 |
| | (429.2 | ) | | (11.8 | ) | | (967.2 | ) | | 581.2 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | $ | 77.1 |
| | 77.1 |
| — |
| | — |
| | — |
| | — |
| | 95.5 |
| | 95.5 |
|
| Income on derivative financial instruments, net of tax | — |
| | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
| — |
| | — |
| | 1.7 |
| | — |
| | — |
| | 1.7 |
|
| Translation impact | — |
| | — |
| | (61.6 | ) | | — |
| | — |
| | (61.6 | ) | — |
| | — |
| | 16.8 |
| | — |
| | — |
| | 16.8 |
|
| Pension and post-retirement adjustment, net of tax | — |
| | — |
| | 31.9 |
| | — |
| | — |
| | 31.9 |
| — |
| | — |
| | (8.7 | ) | | — |
| | — |
| | (8.7 | ) |
| Stock-based compensation | — |
| | 16.4 |
| | — |
| | — |
| | — |
| | 16.4 |
| — |
| | 19.4 |
| | — |
| | — |
| | — |
| | 19.4 |
|
| Common stock issued, net of shares withheld for employee taxes | — |
| | — |
| | — |
| | (1.0 | ) | | — |
| | (1.0 | ) | — |
| | 6.8 |
| | — |
| | (5.2 | ) | | — |
| | 1.6 |
|
| Other | — |
| | 0.1 |
| | — |
| | — |
| | — |
| | 0.1 |
| |
| Balance at December 31, 2013 | 1.1 |
| | 2,035.0 |
| | (185.6 | ) | | (3.5 | ) | | (1,144.7 | ) | | 702.3 |
| |
| Excess tax benefit on stock-based compensation | | — |
| | 1.2 |
| | — |
| | — |
| | — |
| | 1.2 |
|
| Balance at December 31, 2016 | | 1.1 |
| | 2,015.7 |
| | (419.4 | ) | | (17.0 | ) | | (871.7 | ) | | 708.7 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 91.6 |
| | 91.6 |
| — |
| | — |
| | — |
| | — |
| | 131.7 |
| | 131.7 |
|
| Income on derivative financial instruments, net of tax | — |
| | — |
| | 2.4 |
| | — |
| | — |
| | 2.4 |
| |
| Loss on derivative financial instruments, net of tax | | — |
| | — |
| | (2.3 | ) | | — |
| | — |
| | (2.3 | ) |
| Translation impact | — |
| | — |
| | (76.4 | ) | | — |
| | — |
| | (76.4 | ) | — |
| | — |
| | (19.5 | ) | | — |
| | — |
| | (19.5 | ) |
| Pension and post-retirement adjustment, net of tax | — |
| | — |
| | (33.0 | ) | | — |
| | — |
| | (33.0 | ) | — |
| | — |
| | (19.9 | ) | | — |
| | — |
| | (19.9 | ) |
| Common stock repurchases | — |
| | (19.4 | ) | | — |
| | — |
| | — |
| | (19.4 | ) | — |
| | (36.6 | ) | | — |
| | — |
| | — |
| | (36.6 | ) |
| Stock-based compensation | — |
| | 15.7 |
| | — |
| | — |
| | — |
| | 15.7 |
| — |
| | 17.0 |
| | — |
| | — |
| | — |
| | 17.0 |
|
| Common stock issued, net of shares withheld for employee taxes | — |
| | 0.3 |
| | — |
| | (2.5 | ) | | — |
| | (2.2 | ) | — |
| | 4.2 |
| | — |
| | (9.4 | ) | | — |
| | (5.2 | ) |
| Other | — |
| | (0.1 | ) | | — |
| | 0.1 |
| | — |
| | — |
| |
| Balance at December 31, 2014 | $ | 1.1 |
| | $ | 2,031.5 |
| | $ | (292.6 | ) | | $ | (5.9 | ) | | $ | (1,053.1 | ) | | $ | 681.0 |
| |
| Adjustment due to the adoption of ASU 2016-09 | | — |
| | (0.6 | ) | | — |
| | — |
| | 0.8 |
| | 0.2 |
|
| Balance at December 31, 2017 | | $ | 1.1 |
| | $ | 1,999.7 |
| | $ | (461.1 | ) | | $ | (26.4 | ) | | $ | (739.2 | ) | | $ | 774.1 |
|
Shares of Capital Stock
| | | | Common
Stock | | Treasury
Stock | | Net
Shares | Common
Stock | | Treasury
Stock | | Net
Shares |
| Shares at December 31, 2011 | 55,659,753 |
| | 184,018 |
| | 55,475,735 |
| |
Common stock issued, net of shares withheld for employee taxes
| 654,263 |
| | 76,462 |
| | 577,801 |
| |
| Stock issuance - Mead C&OP acquisition | 57,089,808 |
| | — |
| | 57,089,808 |
| |
| Shares at December 31, 2012 | 113,403,824 |
| | 260,480 |
| | 113,143,344 |
| |
Common stock issued, net of shares withheld for employee taxes
| 652,592 |
| | 132,080 |
| | 520,512 |
| |
| Shares at December 31, 2013 | 114,056,416 |
| | 392,560 |
| | 113,663,856 |
| |
| Shares at December 31, 2014 | | 112,670,514 |
| | 759,224 |
| | 111,911,290 |
|
Common stock issued, net of shares withheld for employee taxes
| 1,369,740 |
| | 366,664 |
| | 1,003,076 |
| 2,149,165 |
| | 729,824 |
| | 1,419,341 |
|
| Common stock repurchases | (2,755,642 | ) | | — |
| | (2,755,642 | ) | (7,690,628 | ) | | — |
| | (7,690,628 | ) |
| Shares at December 31, 2014 | 112,670,514 |
| | 759,224 |
| | 111,911,290 |
| |
| Shares at December 31, 2015 | | 107,129,051 |
| | 1,489,048 |
| | 105,640,003 |
|
| Common stock issued, net of shares withheld for employee taxes | | 2,957,232 |
| | 690,591 |
| | 2,266,641 |
|
| Shares at December 31, 2016 | | 110,086,283 |
| | 2,179,639 |
| | 107,906,644 |
|
| Common stock issued, net of shares withheld for employee taxes | | 2,778,795 |
| | 733,474 |
| | 2,045,321 |
|
| Common stock repurchases | | (3,267,881 | ) | | — |
| | (3,267,881 | ) |
| Shares at December 31, 2017 | | 109,597,197 |
| | 2,913,113 |
| | 106,684,084 |
|
See notes to consolidated financial statements.
47
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
As used in this Annual Report on Form 10-K for the fiscal year ended December 31, 2017, the terms "ACCO Brands," "ACCO," the "Company," "we," "us," and "our" refer to ACCO Brands Corporation, a Delaware corporation incorporated in 2005, and its consolidated domestic and international subsidiaries.
The management of ACCO Brands Corporation is responsible for the accuracy and internal consistency of the preparation of the consolidated financial statements and notes contained in this annual report.Annual Report on Form 10-K.
The consolidated financial statements include the accounts of ACCO Brands Corporation and its domestic and international subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Our investments in companies that are between 20% and 50% owned are accounted for using the equity method of accounting. ACCO Brands has an equity investment in the following joint venture: Pelikan-Artline Pty Ltd ("Pelikan-Artline") - 50% ownership. Our share of earnings from equity investments is included on the line entitled "Equity in earnings of joint ventures" in the Consolidated Statements of Income.
On May 1, 2012, weJanuary 31, 2017, the Company completed the merger ("Merger"acquisition (the "Esselte Acquisition") of the Mead Consumer and Office Products BusinessEsselte Group Holdings AB ("Mead C&OP"Esselte") with a wholly-owned subsidiary of the Company.. Accordingly, the financial results of Mead C&OPEsselte are included in ourthe Company's condensed consolidated financial statements fromas of February 1, 2017, and are reflected in all three of the Company's reportable segments. See "Note 3. Acquisitions" for details on the Esselte Acquisition.
Effective with the first quarter of 2017, as a result of the Esselte Acquisition, the Company realigned its operating structure, which impacted its determination of its business segments for financial reporting purposes. As a result, the Company no longer reports the financial results of its Computer Products Group as a separate segment. Prior year amounts included herein have been restated to conform to the current year presentation. See "Note 16. Information on Business Segments" for details on the realigned segments.
On May 2, 2016, the Company completed the acquisition of Australia Stationery Industries, Inc. (the "PA Acquisition"), which indirectly owned the 50% of the Pelikan Artline joint-venture and the issued capital stock of Pelikan Artline Pty Limited (collectively, "Pelikan Artline") that was not already owned by the Company. Prior to the PA Acquisition, the Pelikan Artline joint-venture was accounted for under the equity method. From the date of the Merger. For further informationPA Acquisition, the results of Pelikan Artline are included in the Company's consolidated financial statements and are reported in the ACCO Brands International segment. Accordingly, we no longer separately report equity in earnings from this joint venture. See "Note 3. Acquisitions" for details on the Merger see "Note 3. Acquisitions."PA Acquisition.
We reclassified certain costs from costThe preparation of products sold to SG&A to align classifications of certain expenses across our businesses. All prior periods have been adjustedfinancial statements in conformity with generally accepted accounting principles in the U.S. ("GAAP") requires management to make certain estimates and assumptions that affect the reported assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. Actual results comparable. For the years ended December 31, 2013, and 2012 reclassified costs totaled $3.1 million, and $3.7 million, respectively. These historical reclassifications were not material and have had no effect on net income.could differ from those estimates.
2. Significant Accounting Policies
Nature of Business
ACCO Brands is primarily involveda designer, marketer and manufacturer of recognized consumer and end-user demanded brands used in businesses, schools, and homes.
ACCO Brands has three operating business segments each of which is comprised of different geographic regions. Each of the manufacturing, marketingCompany's three operating segments designs, markets, sources, manufactures and distribution of office products such as stapling,sells recognized consumer and end-user demanded brands used in businesses, schools and homes. Product designs are tailored based on end-user preferences in each geographic region.
Our product categories include storage and organization; stapling; punching; laminating, binding and laminating equipmentshredding machines and related consumable supplies, shredderssupplies; whiteboards; notebooks; calendars; computer accessories; and whiteboards; schooldo-it-yourself tools, among others. Our portfolio of consumer and end-user demanded brands includes both globally and regionally recognized brands.
ACCO Brands markets and sells its strong multi-product offering broadly and is not dependent on any one channel. Our products such as notebooks, folders, decorative calendars,are sold through all relevant channels, namely retailers, including: mass retailers; e-tailers; discount, drug/grocery and stationery products; calendar products;variety chains; warehouse clubs; hardware and accessories for laptopspecialty stores; independent office product dealers; office superstores; and desktop computerscontract
ACCO Brands Corporation and tablets.Subsidiaries
Notes to Consolidated Financial Statements (Continued)
stationers. We also sell primarilydirectly to large resellers,commercial and consumer end-users through our e-commerce platform and our subsidiaries operate principally in the United States, Northern Europe, Brazil, Canada, Australia and Mexico.direct sales organization.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S ("GAAP")GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less are included in cash and cash equivalents.
Allowances for Doubtful Accounts, Discounts and Returns
Trade receivables are recorded at the stated amount, less allowances for discounts, doubtful accounts and returns. The allowance for doubtful accounts represents estimated uncollectible receivables associated with potential customer defaults on contractual obligations, usually due to customers’a customer's potential insolvency. The allowance includes amounts for certain customers where a risk of default has been specifically identified. In addition, the allowance includes a provision for customer defaults on a general formulaformulaic basis when it is determined the risk of some default is probable and estimable, but cannot yet be associated with a specific customers.customer. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience and existing economic conditions.
The allowance for sales returns represents estimated uncollectible receivables associated with the potential return of products previously sold to customers, and is recorded at the same time that the sales are recognized. The allowance includes a general provision for product returns based on historical trends. In addition, the allowance includes a reserve for currently authorized customer returns that are considered to be abnormal in comparison to the historical basis.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Inventories
Inventories are priced at the lower of cost (principally first-in, first-out with minor amounts at average) or market. A reserve is established to adjust the cost of inventory to its net realizable value. Inventory reserves are recorded for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions and specific identification of items, such as product discontinuance or engineering/material changes. These estimates could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is provided, principally on a straight-line basis, over the estimated useful lives of the assets. Gains or losses resulting from dispositions are included in operating income. Betterments and renewals, which improve and extend the life of an asset are capitalized; maintenance and repair costs are expensed. Purchased computer software is capitalized and amortized over the software’s useful life. The following table shows estimated useful lives of property, plant and equipment:
|
| | |
| Property, plant and equipment | | Useful Life |
| Buildings | | 40 to 50 years |
| Leasehold improvements | | Lesser of lease term or the life of the asset |
| Machinery, equipment and furniture | | 3 to 10 years |
| Computer software | | 5 to 710 years |
We capitalize interest for major capital projects. Capitalized interest is added to the cost of the underlying assets and is depreciated over the useful lives of those assets. We capitalized interest of $0.1 million, $0.1 million and $1.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Long-Lived Assets
We test long-lived assets for impairment whenever events or changes in circumstances indicate that the assets’ carrying amount may not be recoverable from its undiscounted cash flow. When such events occur, we compare the sum of the undiscounted cash flow expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate at the time of future cash flow, derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flow. The discount rate applied to these cash flows is based on our weighted average cost of capital, computed by selecting market rates at the valuation dates for debt and equity that are reflective of the risks associated with an investment in our industry as estimated by using comparable publicly traded companies.
Intangible Assets
Intangible assets are comprised primarily of indefinite-lived and amortizable intangible assets acquired and arising from the application of purchase accounting. Indefinite-lived intangible assets are not amortized, but are evaluated at least annually to determine whether the indefinite useful life is appropriate. In addition, amortizable intangible assets other than goodwill are amortized over their useful lives. Certain of our trade names have been assigned an indefinite life as we currently anticipate that these trade names will contribute cash flows to ACCO Brands indefinitely.
We reviewtest indefinite-lived intangibles for impairment at least annually, normally in the second quarter, and whenever market or business events indicate there may be a potential adverse impact on a particular intangible. The review may be on a qualitative ("Step-Zero") or quantitative ("Step-1") basis as allowed by GAAP. We consider the implications of both external factors (e.g., market growth, pricing, competition, and technology) and internal factors (e.g., product costs, margins, support expenses, and capital investment) and their potential impact on cash flows for each business in both the near and long term, as well as their impact on any identifiable intangible asset associated with the business. Based on recent business results, consideration of significant external and internal factors, and the resulting business projections, indefinite-lived intangible assets are reviewed to determine whether they are likely to remain indefinite-lived, or whether a finite life is more appropriate. In addition, based on events in the period and future expectations, management considers whether the potential for impairment exists. Finite lived intangibles are amortized over 10, 15, 23 or 30 years.
During 2013, we adopted ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU No. 2012-02 permits entities to first assess qualitative factors to determine if it is more likely than
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
not that the fair value of a indefinite-lived intangible unit is less than its carrying amount as a basis for determining whether further impairment testing of indefinite-lived intangible assets is necessary.
We performed our annual assessment, on a qualitative basis, as allowed by GAAP, for the majority of our indefinite-lived trade names in the second quarter of 20142017 and concluded that no impairment exists. However, due to the recent acquisitionexisted. For two of Mead C&OP, the fair values of certainour indefinite-lived trade names that are not substantially above their carrying values.values, Mead® and Hilroy®, we performed Step-1 tests in the second quarter of 2017. The following long-term growth rates and discount rates were used, 1.5% and 10.5% for Mead®, and 1.5% and 11.0% for Hilroy®, respectively. We concluded that neither the Mead® nor Hilroy® trade names were impaired. The fair value of the Mead® trade name was less than 30% above its carrying value as of the second quarter of 2017 Step-1 test. As of December 31, 2017, the carrying value of the Mead® trade name was $113.3 million.
As of June 1, 2017, we changed the indefinite-lived Hilroy® trade name to an amortizable intangible asset. The change was made as a result of decisions regarding the Company's future use of the trade name. The Company commenced amortizing the Hilroy trade name June 1, 2017 on a straight-line basis over a life of 30 years.
Goodwill
Goodwill has been recorded on our balance sheet and represents the excess of the cost of the acquisitionsan acquisition when compared to the fair value of the net assets acquired. The authoritative guidance on goodwill and other intangible assets requires that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are ACCO Brands North America, ACCO Brands InternationalEMEA and Computer Products Group segments. ACCO Brands International.
We test goodwill for impairment at least annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. During 2012,As permitted by GAAP, we adopted ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU No. 2011-08 permits entities to first assessmay perform a qualitative factorsassessment ("Step-Zero") to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-stepa quantitative goodwill impairment test included("Step-1") as required by GAAP. We performed our annual assessment in GAAP. Entities arethe second quarter of 2017, on a qualitative basis, and concluded that it was not required to calculatemore likely than not that the fair value of aany reporting unit unless they determineis less than its carrying amount.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
If the qualitative assessment determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if it is determined that a qualitative assessment is not appropriate, we move onto the carrying amount. We performed our annual assessment inquantitative goodwill ("Step-1") impairment test where we calculate the second quarter of 2014 and concluded that no impairment exists. We performed our assessment using the two-step fair value quantitative impairment test in ASC 350 to ourof the reporting units in 2014 due to the Merger and the decline in sales.units. When applying a fair-value-based test, if it is determined to be required, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, an impairment charge is recognized, however, the second step ofloss recognized is not to exceed the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill. Determining the implied fair valuetotal amount of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similarallocated to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference.unit.
Employee Benefit Plans
We provide a range of benefits to our employees and retired employees, including pension, post-retirement, post-employment and health care benefits. We record annual amounts relating to these plans based on calculations specified by GAAP, which include various actuarial assumptions, including discount rates, assumed rates of return, on plan assets, compensation increases, turnover rates and health care cost trend rates. We review our actuarialActuarial assumptions are reviewed on an annual basis and make modifications to thethese assumptions are made based on current rates and trends when it is deemed appropriate to do so. Theappropriate. As required by GAAP, the effect of theour modifications are generally recorded and amortized over future periods.
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. Facts and circumstances may change and cause us to revise the conclusions on our ability to realize certain net operating losses and other deferred tax attributes.
The amount of income taxes that we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period theany assessments are received, revised or resolved.
On December 22, 2017, the U.S. Tax Act was signed into law. The U.S. Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the future U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) requiring companies to pay a one-time transition tax on certain undistributed earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.
The undistributed earnings of all non-U.S. subsidiaries were approximately $500 million as of December 31, 2017. All of the undistributed earnings have become subject to U.S. income taxes due to the enactment of the U.S. Tax Act in 2017. As a result of the U.S. Tax Act, we are analyzing the global working capital and cash requirements, and potential tax liabilities attributable to future repatriation of cash, but we have yet to determine whether we plan to change our prior indefinite investment assertion under ASC 740. We will record the effects of any change in prior assertions in the period in which the change occurs.
Due to the complexity of the global intangible low-taxed income ("GILTI") tax rules recently enacted by the U.S. Tax Act, the Company continues to analyze this provision and its impact and the proper application of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice to either treat the taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the "period cost method") or factor in such amounts in to the Company’s measurement of deferred taxes (the "deferred method"). The Company’s selection of an accounting policy in connection with GILTI depends upon additional analysis and potential future modifications to the existing structure, which are yet to be known. Accordingly, the Company has not recorded any adjustments related to GILTI in our financial statements and has not made a policy choice regarding whether to record deferred taxes on GILTI.
For further information on the U.S. Tax Act, see "Note 11. Income Taxes" to the consolidated financial statements contained in Item 8. of this report.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Revenue Recognition
We recognize revenue from product sales when earned, net of applicable provisions for discounts, returns and allowances. We consider revenue to be realized or realizable and earned when all of the following criteria are met: title and risk of loss have
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
passed to the customer, persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. We also provide for our estimate of potential uncollectible receivables at the time of revenue recognition.
Cost of Products Sold
Cost of products sold includes all manufacturing, product sourcing and distribution costs, including depreciation related to assets used in the manufacturing, procurement and distribution process, allocation of certain information technology costs supporting those processes, inbound and outbound freight, shipping and handling costs, purchasing costs associatedbad debt concurrent with materials and packaging used in the production processes.
Advertising, Selling, General and Administrative Expenses
Advertising, selling, general and administrative expenses ("SG&A") include advertising, marketing, selling (including commissions), research and development, customer service, depreciation related to assets outside the manufacturing and distribution processes and all other general and administrative expenses outside the manufacturing and distribution functions (e.g., finance, human resources, information technology, corporate expenses, etc.).
Advertising Costs
Advertising costs amounted to $130.8 million, $131.0 million and $125.7 million for the years ended December 31, 2014, 2013 and 2012, respectively and are principally expensed as incurred.recognizing revenue.
Customer Program Costs
Customer program costs include, but are not limited to, sales rebates, which are generally tied to achievement of certain sales volume levels, in-store promotional allowances, shared media and customer catalog allowances and other cooperative advertising arrangements, and freight allowance programs. We generally recognize customer program costs as a deduction to gross sales at the time that the associated revenue is recognized. Certain customer incentives that do not directly relate to future revenues are expensed when initiated.
In addition, accrued customer program liabilities principally include, but are not limited to, sales volume rebates, promotional allowances, shared media and customer catalog allowances and other cooperative advertising arrangements and freight allowances.
Cost of Products Sold
Cost of products sold includes all manufacturing, product sourcing and distribution costs, including depreciation related to assets used in the manufacturing, procurement and distribution process, allocation of certain information technology costs supporting those processes, inbound and outbound freight, shipping and handling costs, purchasing costs associated with materials and packaging used in the production processes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") include advertising, marketing, selling (including commissions), research and development, customer service, depreciation related to assets outside the manufacturing and distribution processes and all other general and administrative expenses outside the manufacturing and distribution functions (e.g., finance, human resources, information technology, and corporate expenses).
Advertising Costs
Advertising costs amounted to $114.8 million, $110.1 million and $120.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. These costs primarily include, but are not limited to, cooperative advertising and promotional allowances as discussed above.described in "Customer Program Costs" above, and are principally expensed as incurred.
Shipping and Handling
We reflect all amounts billed to customers for shipping and handling in net sales and the costs incurred from shipping and handling product (including costs to ship and move product from the seller’s place of business to the buyer’s place of business, as well as costs to store, move and prepare products for shipment) in cost of products sold.
Warranty Reserves
We offer our customers various warranty terms based on the type of product that is sold. Estimated future obligations related to products sold under these warranty terms are provided by charges to cost of products sold in the same period in which the related revenue is recognized.
Research and Development
Research and development expenses, which amounted to $23.5 million, $20.2 million, $22.521.0 million and $20.820.0 million for the years ended December 31, 20142017, 20132016 and 20122015, respectively, are classified as general and administrativeSG&A expenses and are charged to expense as incurred.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Stock-Based Compensation
Our primary types of share-based compensation consist of stock options, restricted stock unit awards and performance stock unit awards. Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Where awards are made with non-substantive vesting periods (for example, where a portion of the award vests upondue to retirement eligibility), we estimate and recognize expense based on the period from the grant date to the date on which the employee is retirement eligible. Effective in 2017, the Company made the accounting policy election to account for forfeitures as they occur, which affects the timing of stock compensation expense. See "Recently Adopted Accounting Standards" below for details.
Foreign Currency Translation
Foreign currency balance sheet accounts are translated into U.S. dollars at the rates of exchange at the balance sheet date. Income and expenses are translated at the average rates of exchange in effect during the period. The related translation adjustments are made directly to a separate component of accumulated other comprehensive income (loss) ("AOCI") in stockholders’ equity. Some transactions are made in currencies different from an entity’s functional currency. Gains and losses on these foreign currency transactions are included in income as they occur.
Derivative Financial Instruments
We recognize all derivatives as either assets or liabilities on the balance sheet and measuresrecord those instruments at fair value. If the derivative is designated as a fair value hedge and is effective, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss)AOCI and are recognized in the income statementConsolidated Statements of Income when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
Certain forecasted transactions, assets and liabilities are exposed to foreign currency risk. We continually monitor our foreign currency exposures in order to maximize the overall effectiveness of our foreign currency hedge positions. Principal currencies hedged include the U.S. dollar, Euro, Australian dollar, Canadian dollar, Swedish krona, British pound and British pound.Japanese yen.
Recent Accounting PronouncementsStandards Updates
There were noIn May 2014 the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes substantially all existing revenue recognition requirements, including most industry-specific guidance. The new accounting pronouncementsstandard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the Company adopted in 2014 that had a material impact oncompany expects to receive for those goods or services. The FASB has subsequently issued the Company’s consolidated financial statements.following amendments to ASU 2014-09, which have the same effective date and transition date of January 1, 2018:
In May 2014,August 2015, the FASB issued ASU No. 2014-09, 2015-14, Revenue from Contracts with Customers ("ASU 2014-09"). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle (Topic 606): Deferral of the model is to recognize revenue when controlEffective Date, which delayed the effective date of the goods or services transfersnew standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the customer,standard as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is in the process of evaluating the impact of adoption of ASU 2014-09 on its consolidated financial statements.
3.Acquisitions
On May 1, 2012, the Company completed the Merger of Mead C&OP with a wholly-owned subsidiary of the Company. Mead C&OP is a leading manufacturer and marketer of school supplies, office products, and planning and organizing tools including the Mead®, Five Star®, Trapper Keeper®, AT-A-GLANCE®, Cambridge®, Day Runner®, Hilroy, Tilibra and Grafons brands in the U.S., Canada and Brazil.original effective date.
In March 2016, the Merger, MeadWestvaco Corporation ("MWV") shareholders received 57.1 million shares ofFASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the Company's common stock, or 50.5% of the combined company, valued at $602.3 millionimplementation guidance on the date of the Merger. After the transaction was completed the Company had 113.1 million common shares outstanding.principal versus agent considerations.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies certain aspects of identifying performance obligations and licensing implementation guidance.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers.
52
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
ACCO’s management determinedIn December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends certain narrow aspects of the guidance issued in ASU 2014-09, including guidance related to the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.
The Company analyzed the impact of ASU 2014-09 across all of its revenue streams. This included reviewing current accounting policies and practices to identify potential differences that ACCO iswould result from applying the accounting acquiror in this combination. Accordingly,requirements under the new standard. The Company also completed contract reviews and validated the results of Mead C&OPapplying the new revenue guidance. Upon the implementation of ASU 2014-09, the Company expects to accelerate the timing of some of its revenue recognition with respect to its customer contracts for private label and customized products. This acceleration of revenue would only be for contracts where a right to payment exists and there is no alternative use for the product, as prescribed by ASU 2014-09.
The Company will adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance will be recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018. The Company expects to record an increase to its opening balance of retained earnings of approximately $1.6 million, net of tax effect, in the first quarter ending March 31, 2018.
The Company is also in the process of updating its controls and systems, and is still finalizing its new disclosures required in 2018.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). In December 2017, the U.S. Tax Act was signed into law. Prior to ASU 2018-02, GAAP required deferred tax assets and deferred tax liabilities to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period including the enactment date. The U.S. Tax Act reduces the historical U.S corporate tax rate and the effect of that change is required to be included in income from continuing operations, even if the original tax effects were recorded in Accumulated Other Comprehensive Income ("AOCI"). This could cause some tax effects to become stranded in AOCI as they are includednot updated to reflect the new tax rate. This new standard allows a company to elect to reclass the stranded tax effects resulting from the U.S. Tax Act from AOCI to retained earnings. The adoption of the new standard may be applied in the period of adoption or retrospectively to each period(s) effected by the change in the corporate tax rate. The Company is currently in the process of evaluating the impact of adoption of ASU 2018-02 on the Company’s consolidated financial statements. ASU 2018-02 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Early adoption of the standard is permitted including adoption in any interim period for which financial statements have not been issued.
In August 2017, the FASB issued ASU No. 2017-12, Derivative and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. The new standard improves certain aspects of the hedge accounting model, including making more risk management strategies eligible for hedge accounting and simplifying the assessment of hedge effectiveness. The Company is currently in the process of assessing the impact of adoption of ASU 2017-12 on the Company's consolidated financial statements. The Company will adopt ASU 2017-12 effective with its 2019 fiscal year.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new standard requires presentation of all components of net periodic pension and postretirement benefit costs, other than service costs, in an income statement line item outside of a subtotal of income from operations. The service cost component will continue to be presented in the same line item as other employee compensation costs. In addition, the guidance allows only service costs to be eligible for capitalization. The guidance is required to be adopted retrospectively with respect to the income statement requirement and prospectively for the capitalization requirement. We do not expect the change in the capitalization requirement to have a material effect on our financial statements, frombut it is expected to have a material effect on our operating income. The Company will use the datepractical expedient that permits an employer to use the amounts disclosed in "Note 5. Pension and Other Retiree Benefits" as the basis for applying the retrospective presentation requirements. On this basis, the Company's operating income for the years ended December 31, 2017 and 2016 would be reduced by approximately $8.4 million and $8.2 million, respectively. The new guidance is effective with the first quarter of the Merger.Company's 2018 fiscal year.
The purchase price, netIn February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new standard will require the recognition, on the balance sheet, of working capital adjustmentsmost leases as lease assets (right-of-use assets) and cash acquired, was $999.8 million. The consideration given included 57.1 million shares of ACCO Brands common stock, which were issuedlease liabilities by lessees for those leases classified as operating leases under current GAAP. Lease expense is recorded on the income statement in a manner similar to MWV shareholders with a fair value of $602.3 million and a $460.0 million dividend paid to MWV. The calculation of consideration given for Mead C&OP was finalized during the fourth quarter of 2012 and is described in the following table:current
|
| | | |
| (in millions, except per share price) | At May 1, 2012 |
| Calculated consideration for Mead C&OP: | |
Outstanding shares of ACCO Brands common stock(1) | 56.0 |
|
Multiplier needed to calculate shares to be issued(2) | 1.0202020202 |
|
| Number of shares issued to MWV shareholders | 57.1 |
|
Closing price per share of ACCO Brands common stock(3) | $ | 10.55 |
|
| Value of common shares issued | $ | 602.3 |
|
| Plus: | |
| Dividend paid to MWV | 460.0 |
|
| Less: | |
Working capital adjustment(4) | (30.5 | ) |
| Consideration given for Mead C&OP | $ | 1,031.8 |
|
| |
(1) | Represents the number of shares of the Company's common stock as of May 1, 2012. |
| |
(2) | Represents MWV shareholders' negotiated ownership percentage in ACCO Brands of 50.5% divided by the 49.5% that was owned by ACCO Brands shareholders upon completion of the Merger. |
| |
(3) | Represents the closing price per share of the Company's stock as of April 30, 2012. |
| |
(4) | Represents the difference between the target net working capital and the closing net working capital as of April 30, 2012. |
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
accounting. This new standard also includes increased disclosures to meet the objective of enabling users of financial statements to understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted and adoption of ASU 2016-02 is to be done on a modified retrospective basis. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on the Company’s consolidated financial statements and it currently expects that most of its operating lease commitments will be subject to the new standard and will be recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02. It is expected that these changes will be material to the Company's consolidated financial statements. The Company will adopt ASU 2016-02 effective with its 2019 fiscal year.
Other than the items mentioned above, there are no other recently issued accounting standards that are expected to have a material effect on the Company’s financial condition, results of operations or cash flow.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This new standard simplifies the accounting for employee share-based payments and involves several aspects of the accounting for share-based transactions, including the potential timing of expenses, the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 effective with the first quarter of 2017. The Company made the allowed accounting policy election to account for forfeitures as they occur, which affects the timing of stock compensation expense. The change in accounting of forfeitures, along with the changes related to how excess tax benefits are recognized, has been done using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the first quarter of 2017, which was not material. An effect of the change was to require recognition of excess tax benefits in our Consolidated Statements of Income rather than as a component of equity under the previous standard; therefore, for the year ended December 31, 2017, a tax benefit of $5.6 million was recorded in the Company's Consolidated Statements of Income.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This new standard applies to inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016. The Company adopted ASU 2015-11 effective with the first quarter of 2017 and it had an immaterial effect on the Company's consolidated financial statements.
3. Acquisitions
Acquisition of Esselte Group Holdings AB (the "Esselte Acquisition")
On January 31, 2017, ACCO Europe Limited ("ACCO Europe"), an indirect wholly-owned subsidiary of the Company, completed the Esselte Acquisition. The Esselte Acquisition was made pursuant to the share purchase agreement, dated October 21, 2016, as amended (the "Purchase Agreement"), among ACCO Europe, the Company and an entity controlled by J. W. Childs ("Seller").
With the acquisition of Esselte, ACCO Brands is a leading European manufacturer and marketer of branded business products. Esselte takes products to market under the Leitz®, Rapid® and Esselte® brands in the storage and organization, stapling, punching, business machines and do-it-yourself tools product categories. The combination improved ACCO Brands’ scale and enhanced its position as an industry leader in Europe.
The purchase price paid at closing was €302.9 million (US$326.8 million based on January 31, 2017 exchange rates) and was subject to a working capital adjustment that reduced it by $0.3 million. The purchase price, net of cash acquired of $34.2 million, was $292.3 million. A portion of the purchase price (€8.1 million (US$8.7 million based on January 31, 2017 exchange rates)) is being held in an escrow account for a period of up to two years after closing as ACCO Europe’s sole recourse against Seller in the event of any claims against Seller under the Purchase Agreement. A warranty and indemnity insurance policy held by the Company and ACCO Europe insures certain of Seller’s contractual obligations to ACCO Europe under the Purchase Agreement for up to €40.0 million (US$43.2 million based on January 31, 2017 exchange rates) for a period of up to seven years, subject to certain deductibles and limitations set forth in the policy.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Esselte Acquisition and related expenses were funded through a term loan of €300.0 million (US$320.8 million based on January 27, 2017 exchange rates) and cash on hand. See "Note 4. Long-term Debt and Short-term Borrowings" for details.
For accounting purposes, the Company is the acquiring enterprise. The Esselte Acquisition is being accounted for as a purchase combination and Esselte's results are included in the Company’s condensed consolidated financial statements as of February 1, 2017. Esselte contributed $406.9 million of net sales for the year ended December 31, 2017.
The following table presents the allocation of the purchase priceconsideration given to the fair values of the assets acquired and liabilities assumed at the date of acquisition:acquisition.
| | | (in millions of dollars) | At May 1, 2012 | At January 31, 2017 |
| Calculation of Goodwill: | | |
| Consideration given for Mead C&OP | $ | 1,031.8 |
| |
| Cash acquired | (32.0 | ) | |
| Net purchase price | $ | 999.8 |
| |
| Purchase price, net of working capital adjustment | | $ | 326.5 |
|
| | | |
| Plus fair value of liabilities assumed: | | |
| Accounts payable and accrued liabilities | 103.9 |
| 121.9 |
|
| Current and non-current deferred tax liabilities | 209.6 |
| |
| Deferred tax liabilities | | 83.6 |
|
| Pension obligations | | 174.1 |
|
| Other non-current liabilities | 72.9 |
| 5.8 |
|
| Fair value of liabilities assumed | $ | 386.4 |
| $ | 385.4 |
|
| | | |
| Less fair value of assets acquired: | | |
| Cash acquired | | 34.2 |
|
| Accounts receivable | 73.3 |
| 60.0 |
|
| Inventory | 143.5 |
| 41.9 |
|
| Property, plant and equipment | 136.6 |
| 75.6 |
|
| Identifiable intangibles | 543.2 |
| 277.0 |
|
| Deferred tax assets | | 106.3 |
|
| Other assets | 24.3 |
| 10.4 |
|
| Fair value of assets acquired | $ | 920.9 |
| $ | 605.4 |
|
| | | |
| Goodwill | $ | 465.3 |
| $ | 106.5 |
|
In connection withWe have finalized our acquisitionfair value estimate of Mead C&OP weassets acquired and liabilities assumed allas of the tax liabilitiesacquisition date. No additional adjustments to the goodwill related to the Esselte Acquisition will be recognized.
The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill. The goodwill of $106.5 million is primarily attributable to synergies expected to be realized from facility integration, headcount reduction and other operational streamlining activities, and from the existence of an assembled workforce.
During the fourth quarter of 2017, the previously estimated values for property, plant and equipment continued to be refined, which resulted in reductions in value of $2.4 million and we revised the depreciable life of certain assets. The impact to net income from this refinement in the first three quarters of 2017 would have been immaterial.
For the years ended December 31, 2017 and 2016, transaction costs were $5.0 million and $9.2 million, respectively. These costs were reported as SG&A expenses.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Unaudited Pro Forma Consolidated Results
The accounting literature establishes guidelines regarding, and requires the presentation of, the following unaudited pro forma information. Therefore, the unaudited pro forma information presented below is not intended to represent, nor do we believe it is indicative of, the consolidated results of operations of the Company that would have been reported had the Esselte Acquisition been completed on January 1, 2016. Furthermore, the unaudited pro forma information does not give effect to the anticipated synergies or other anticipated benefits of the Esselte Acquisition.
Had the Esselte Acquisition occurred on January 1, 2016, unaudited pro forma consolidated results for the years ended December 31, 2017 and 2016 would have been as follows:
|
| | | | | | | | |
| | | Year Ended December 31, |
| (in millions of dollars, except per share data) | | 2017 | | 2016 |
| Net sales | | $ | 1,992.3 |
| | $ | 2,006.3 |
|
| Net income | | 149.2 |
| | 55.6 |
|
| Net income per common share (diluted) | | $ | 1.35 |
| | $ | 0.51 |
|
The pro forma amounts are based on the Company's historical results and the historical results for the acquired Esselte business, which have been translated at the average foreign operations including Tilibra Produtos de Papelaria Ltda. ("Tilibra"). See "Note 11. Income Taxes - Income Tax Assessment" for details on tax assessments issued by the Federal Revenue Department of the Ministry of Finance of Brazil ("FRD") against Tilibra, which challenged the tax deduction of goodwill from Tilibra's taxable incomeexchange rates for the years 2007 through 2010.
Acquisition-related costsperiods presented. The pro forma results of $14.5 million that were incurred duringoperations have been adjusted for amortization of finite-lived intangibles, and other charges related to the Esselte Acquisition accounting. The pro forma results for the year ended December 30, 201231, 2016 have also been adjusted to include transaction costs related to the Esselte Acquisition of $14.2 million and amortization of the purchase accounting step-up in inventory cost of $0.9 million.
Acquisition of Australia Stationery Industries, Inc. (the "PA Acquisition")
On May 2, 2016, the Company completed the PA Acquisition, purchasing the remaining 50% interest in the former Pelikan Artline joint-venture, which it did not already own. Prior to the PA Acquisition, the Company's investment in the Pelikan Artline joint-venture was accounted for under the equity method. Pelikan Artline's product categories include writing instruments, notebooks, binding and lamination, visual communication, cleaning and janitorial supplies, as well as general stationery. Its industry-leading brands include Artline®, Quartet®, GBC®, Spirax® and Texta®, among others.
In the PA Acquisition, ACCO Brands Australia Pty Limited and Bigadale Pty Limited (collectively, ''ACCO Australia"), two wholly-owned indirect subsidiaries of the Company, entered into a Share Sale Agreement (the "Agreement") with Andrew Kaldor, Cherington Investments Pty Ltd, Freiburg Nominees Proprietary Limited, Enora Pty Ltd and Bruce Haynes and certain Guarantors named therein (collectively, the "Seller Parties") to purchase directly or indirectly 100% of the capital stock of Australia Stationery Industries, Inc., which indirectly owned the 50% of the Pelikan Artline joint-venture and the issued capital stock of Pelikan Artline Pty Limited (collectively "Pelikan Artline") that was not already owned by ACCO Brands Australia Pty Limited.
The purchase price was $103.7 million, net of working capital adjustments, and was $88.8 million, net of cash acquired.
Following completion of the PA Acquisition, ACCO Australia owns, directly and indirectly, 100% of Pelikan Artline. In addition to representations, warranties and covenants, the Agreement contains indemnification obligations and certain non-competition and non-solicitation covenants made by the Seller Parties in favor of ACCO Australia. A portion of the purchase price was allocated to fund the redemption of a 19.83% minority interest from a shareholder of a subsidiary of Pelikan Artline (the "Minority Interest Redemption"), which occurred shortly following the closing of the PA Acquisition. Additionally, approximately 10% of the purchase price after deducting the Minority Interest Redemption is held in escrow as security with respect to post-closing warranty, tax claims and indemnification obligations.
The Company financed the PA Acquisition through increased borrowings under its existing credit facility. See "Note 4. Long-term Debt and Short-term Borrowings" for details on these additional borrowings.
For accounting purposes, the Company is the acquiring enterprise. The PA Acquisition was accounted for as a purchased business combination and Pelikan Artline's results are included in the Company’s consolidated financial statements from the date of the PA Acquisition, May 2, 2016.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The Company’s previously held equity interest in the Pelikan Artline joint-venture was remeasured to fair value at the date the controlling interest was acquired. The fair value of the previously held equity interest in the Pelikan Artline joint-venture was determined by applying the income approach and using significant inputs that market participants would consider, including: revenue growth rates, operating margins, a discount rate and an adjustment for lack of control. The $28.9 million excess of the fair value of the previously held equity interest when compared to the carrying value was recognized as a gain in "Other (income) expense, net” in the Consolidated Statements of Income.
The calculation of consideration given in the PA Acquisition is described in the following table.
|
| | | |
| (in millions of dollars) | At May 2, 2016 |
| Purchase price, net of working capital adjustment | $ | 103.7 |
|
| Fair value of previously held equity interest | 69.3 |
|
| Consideration for Pelikan Artline | $ | 173.0 |
|
The following table presents the allocation of the consideration given to the fair values of the assets acquired and liabilities assumed at the date of the PA Acquisition.
|
| | | |
| (in millions of dollars) | At May 2, 2016 |
| Calculation of Goodwill: | |
| Purchase price, net of working capital adjustment | $ | 103.7 |
|
| | |
| Fair value of previously held equity interest | 69.3 |
|
| | |
| Plus fair value of liabilities assumed: | |
| Accounts payable and accrued liabilities | 21.7 |
|
| Deferred tax liabilities | 0.2 |
|
| Debt | 24.7 |
|
| Other non-current liabilities | 1.4 |
|
| Fair value of liabilities assumed | $ | 48.0 |
|
| | |
| Less fair value of assets acquired: | |
| Cash acquired | 14.9 |
|
| Accounts receivable | 27.0 |
|
| Inventory | 24.1 |
|
| Property and equipment | 2.2 |
|
| Identifiable intangibles | 58.0 |
|
| Deferred tax assets | 5.7 |
|
| Other assets | 8.6 |
|
| Fair value of assets acquired | $ | 140.5 |
|
| | |
| Goodwill | $ | 80.5 |
|
In the fourth quarter of 2016 we finalized our fair value estimate of assets acquired and liabilities assumed as of the acquisition date. No additional adjustments to the goodwill related to the PA Acquisition will be recognized.
The excess of the purchase price over the fair value of net assets acquired has been allocated to goodwill. The goodwill of $80.5 million is primarily attributable to synergies expected to be realized from facility integration, headcount reduction and other operational streamlining activities, and from the existence of an assembled workforce.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
For the years ended December 31, 2016 and 2015, transaction costs related to the PA Acquisition were classified$1.3 million and $0.6 million, respectively. These costs were reported as SG&A expenses.
4. Long-term Debt and Short-term Borrowings
Notes payable and long-term debt, listed in order of their security interests, consisted of the following as of December 31, 20142017 and 2013:2016:
|
| | | | | | | |
| (in millions of dollars) | 2014 | | 2013 |
| U.S. Dollar Senior Secured Term Loan A, due May 2018 (floating interest rate of 2.24% at December 31, 2014 and 2.49% at December 31, 2013) | $ | 299.0 |
| | $ | 420.0 |
|
| Senior Unsecured Notes, due April 2020 (fixed interest rate of 6.75%) | 500.0 |
| | 500.0 |
|
| Other borrowings | 1.7 |
| | 0.9 |
|
| Total debt | 800.7 |
| | 920.9 |
|
| Less: current portion | (1.7 | ) | | (0.1 | ) |
| Total long-term debt | $ | 799.0 |
| | $ | 920.8 |
|
|
| | | | | | | |
| (in millions of dollars) | 2017 | | 2016 |
| Euro Senior Secured Term Loan A, due January 2022 (floating interest rate of 1.50% at December 31, 2017) | $ | 345.0 |
| | $ | — |
|
| U.S. Dollar Senior Secured Term Loan A, due April 2020 (floating interest rate of 2.27% at December 31, 2016) | — |
| | 81.0 |
|
| Australian Dollar Senior Secured Term Loan A, due January 2022 (floating interest rate of 3.29% at December 31, 2017) | 60.0 |
| | — |
|
| Australian Dollar Senior Secured Term Loan A, due April 2020 (floating interest rate of 3.25% at December 31, 2016) | — |
| | 70.3 |
|
| U.S. Dollar Senior Secured Revolving Credit Facility, due January 2022 (floating interest rate of 3.53% at December 31, 2017) | 48.9 |
| | — |
|
| U.S. Dollar Senior Secured Revolving Credit Facility, due April 2020 (floating interest rate of 2.59% at December 31, 2016) | — |
| | 63.7 |
|
| Australian Dollar Senior Secured Revolving Credit Facility, due January 2022 (floating interest rate of 3.28% at December 31, 2017) | 85.0 |
| | — |
|
| Australian Dollar Senior Secured Revolving Credit Facility, due April 2020 (floating interest rate of 3.27% at December 31, 2016) | — |
| | 87.9 |
|
| Senior Unsecured Notes, due December 2024 (fixed interest rate of 5.25%) | 400.0 |
| | 400.0 |
|
| Other borrowings | 0.6 |
| | 0.6 |
|
| Total debt | 939.5 |
| | 703.5 |
|
| Less: | | | |
| Current portion | 43.2 |
| | 68.5 |
|
| Debt issuance costs, unamortized | 7.1 |
| | 7.3 |
|
| Long-term debt, net | $ | 889.2 |
| | $ | 627.7 |
|
On June 26, 2014,Third Amended and Restated Credit Agreement
In connection with the Esselte Acquisition, the Company entered into a Second Amendment to theThird Amended and Restated Credit Agreement (the "2014 Amendment""2017 Credit Agreement")., dated as of January 27, 2017, among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other agents and various lenders party thereto. The 2014 Amendment relates to2017 Credit Agreement amended and amendsrestated the Company’s Second Amended and Restated Credit Agreement, dated April 28, 2015, as amended, among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other lenders party thereto (the "2015 Credit Agreement").
The 2017 Credit Agreement provides for a five-year senior secured credit facility, which consists of a €300.0 million (US$320.8 million based on January 27, 2017 exchange rates) term loan facility (the "Euro Term Loan A"), a A$80.0 million (US$60.4 million based on January 27, 2017 exchange rates) term loan facility (the "AUD Term Loan A" and, together with the Euro Term Loan A, the "2017 Term A Loan Facility"), and a US$400.0 million multi-currency revolving credit facility (the "2017 Revolving Facility").
54
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
as of May 13, 2013 (the "2013 Restated Credit Agreement") among the Company, certain of its subsidiaries, the lenders party thereto, the administrative agent and other parties named therein.
The 2014 Amendment increases the Company’s flexibility to pay dividends and repurchase its shares based upon the Company’s Consolidated Leverage Ratio (the "Leverage Ratio," as defined in the 2013 Restated Credit Agreement) and subject to certain other conditions specified in the 2014 Amendment.
Effective May 13, 2013 (the "Effective Date"), the Company entered into the 2013 Restated Credit Agreement that amended and restated the Company's prior credit agreement, dated as of March 26, 2012, as amended (the “2012 Credit Agreement”), that had been entered into in connection with the Merger.
The 2013 Restated Credit Agreement provides for a $780 million, five-year senior secured credit facility, which consists of a $250.0 million multi-currency revolving credit facility, due May 2018 (the "Revolving Facility") and a $530.0 million U.S. dollar denominated Senior Secured Term Loan A, due May 2018 (the "Restated Term Loan A"). Specifically, in connection with the 2013 Restated Credit Agreement, the Company:
replaced its then-existing U.S.-dollar denominated Senior Secured Term Loan A, due May 2017 ("the Term Loan A"), under the 2012 Credit Agreement, which had an aggregate principal amount of $220.8 million outstanding immediately prior to the Effective Date, with the Restated Term Loan A, due May 2018, in an aggregate original principal amount of $530.0 million;
prepaid in full its then-existing U.S.-dollar denominated Senior Secured Term Loan B (the "Term Loan B"), due May 2019, under the 2012 Credit Agreement, which had an aggregate principal amount of $310.2 million outstanding immediately prior to the Effective Date, using a portion of the proceeds from the Restated Term A Loan; and
replaced the $250.0 million revolving credit facility under the 2012 Credit Agreement with the Revolving Facility.
Prior to the Effective Date, the Company repaid in full the $21.4 million Canadian-dollar denominated Senior Secured Term Loan A, due May 2017, that had been drawn under the 2012 Credit Agreement.
During the year ended December 31, 2013, we included in "Other expense, net" a $9.4 million charge for the write-off of debt origination costs associated with the refinancing. Additionally, we incurred approximately $4.5 million in bank, legal and other fees associated with the 2013 Restated Credit Agreement. Of these fees, $4.2 million were capitalized and are being amortized over the life of the Restated Term Loan A and the Revolving Facility.
As of December 31, 2014, there were no borrowingsunder the Revolving Facility. The amount available for borrowings was $238.3 million (allowing for $11.7 million of letters of credit outstanding on that date).
The Revolving Facility is expected to be available for working capital and general corporate purposes. Undrawn amounts under the Revolving Facility are subject to a commitment fee rate of 0.25% to 0.50% per annum, depending on the Company's Leverage Ratio. As of December 31, 2014, the commitment fee rate was 0.375%.
Maturity and amortizationAmortization
Borrowings under the 2017 Revolving Facility and the Restated2017 Term A Loan A willFacility mature on May 13, 2018.January 27, 2022. Amounts under the 2017 Revolving Facility are non-amortizing. Beginning SeptemberJune 30, 2013,2017, the outstanding principal amountamounts under the Restated2017 Term A Loan A wasFacility are payable in quarterly installments in an amount representing, on an annual basis, 5.0% of the initial aggregate principal amount of such loan facility and increasing to 12.5% of the initial aggregate principal amount of such loanon an annual basis by June 30, 2016. Due to prepayments made during 2014, the next scheduled installment is due March 31, 2016.2020.
Interest ratesRates
Amounts outstanding under the 2013 Restated2017 Credit Agreement will bear interest (i) in the case of Eurodollar loans, at a rate per annum equal to the Eurodollar rate (which is based on an average British Bankers Association Interest Settlement Rate) plusEuro Rate with a 0% floor, the applicable rate; (ii) inAustralian BBSR Rate, the case of loans made atCanadian BA Rate or the Base Rate, (which means the highest of (a) the Bank of America, N.A. primeas applicable and as each such rate then in effect, (b) the Federal Funds Effective Rate (asis defined in the 2013 Restated2017 Credit Agreement) then in effect
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Agreement, plus ½ of 1.00% and (c) the Eurodollar rate that would be payable on such day for a Eurodollar loan with a one-month interest period plus 1.00%), at a rate per annum equal to the Base Rate plus the applicable rate; and (iii) in the case of swing line loans, at a rate per annum equal to the Base Rate plus thean "applicable rate." The applicable rate for the Revolving Facility. Separate base interest rate and applicable rate provisions will apply for any Canadian or Australian currency denominated loans outstanding under the Revolving Facility.
The credit spread applied to outstanding EurodollarEuro, Australian and Canadian dollar denominated loans and Base Rate loans is based on ourthe Company’s Consolidated Leverage Ratio as calculated(as defined in the most recently submitted compliance certificate. The credit spreads are2017 Credit Agreement) as follows:
|
| | | | |
Consolidated Leverage Ratio | | Eurodollar Credit Spread | | Base Rate Credit Spread |
| > 4.00 to 1.00 | | 2.50% | | 1.50% |
| ≤ 4.00 to 1.00 and > 3.50 to 1.00 | | 2.25% | | 1.25% |
| ≤ 3.50 to 1.00 and > 2.50 to 1.00 | | 2.00% | | 1.00% |
| ≤ 2.50 to 1.00 | | 1.75% | | 0.75% |
|
| | | | |
| Consolidated Leverage Ratio | | Applicable Rate on Euro/AUD/CDN Dollar Loans | | Applicable Rate on Base Rate Loans |
| > 4.00 to 1.00 | | 2.50% | | 1.50% |
| ≤ 4.00 to 1.00 and > 3.50 to 1.00 | | 2.25% | | 1.25% |
| ≤ 3.50 to 1.00 and > 3.00 to 1.00 | | 2.00% | | 1.00% |
| ≤ 3.00 to 1.00 and > 2.00 to 1.00 | | 1.50% | | 0.50% |
| ≤ 2.00 to 1.00 | | 1.25% | | 0.25% |
As of December 31, 2014,2017, the Eurodollar credit spread forapplicable rate on Euro, Australian and Canadian dollar loans was 1.50% and the Restated Term Loan A andapplicable rate on Base Rate loans was 0.50%. Undrawn amounts drawn under the 2017 Revolving Credit Facility are subject to a commitment fee rate of 0.25% to 0.40% per annum, depending on the Company’s Consolidated Leverage Ratio. As of December 31, 2017, the commitment fee rate was 2.00% and the Base Rate credit spread was 1.00%0.30%.
Prepayments
Subject to certain conditions and specific exceptions, the 2013 Restated2017 Credit Agreement requires the Company to prepay outstanding loans in certainamounts under the 2017 Credit Agreement under various circumstances, including (a) if sales or dispositions of certain property or assets in any fiscal year result in the receipt of net cash proceeds of $12.0 million, then an amount equal to 100% of the net cash proceeds received in excess of such $12.0 million, and (b) with respect to the AUD Term Loan A, in an amount equal to 100% of the net cash proceeds received from sales or dispositionsthe disposition of any real property or assetslocated in excess of $10.0 million per fiscal year, (b)Australia. The Company also would be required to make prepayments in an amount equalthe event it receives proceeds related to 100% of the net cash proceeds fromcertain property insurance or condemnation awards, in excess of $10.0 million per fiscal year and (c) in an amount equal to 100% of the net cash proceeds from additional debt other than debt permitted under the 2013 Restated2017 Credit Agreement and from excess cash flow as determined under the 2017 Credit Agreement. The Company also is required to prepay outstanding loans with specified percentages of excess cash flow based on its leverage. The 2013 Restated2017 Credit Agreement also contains other customary prepayment obligations and provides for voluntary commitment reductions and prepayment of loans, subject to certain conditions and exceptions.
LoanDividends and Share Repurchases
Under the 2017 Credit Agreement, the Company may pay dividends and/or repurchase shares in an aggregate amount not to exceed the sum of: (i) the greater of $30.0 million and 1% of the Company’s Consolidated Total Assets (as defined in the 2017 Credit Agreement); plus (ii) an additional amount not to exceed $75.0 million in any fiscal year (provided the Company’s Consolidated Leverage Ratio after giving pro forma effect to the restricted payment would be greater than 2.50:1.00 and less than or equal to 3.75:1.00); plus (iii) an additional amount so long as the Consolidated Leverage Ratio after giving pro forma effect to the restricted payment would be less than or equal to 2.50:1.00; plus (iv) any Net Equity Proceeds (as defined in the 2017 Credit Agreement).
Financial Covenants
We must meet certain restrictive financial covenantsThe Company’s Consolidated Leverage Ratio as of the end of any fiscal quarter may not exceed 3.75:1.00; provided that following the consummation of a Material Acquisition (as defined in the 2017 Credit Agreement), and as of the end of the fiscal
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
quarter in which such Material Acquisition occurred and as of the end of the three fiscal quarters thereafter, the maximum Consolidated Leverage Ratio level above will increase by 0.50 :1.00, provided that no more than one such increase can be in effect at any time. The Esselte Acquisition qualified as a Material Acquisition under the 2013 Restated2017 Credit Agreement. The covenants become more restrictive over time and require us to maintain certain ratios related to the Leverage Ratio. We are also subject to certain customary restrictive covenants under the Senior Unsecured Notes, due April 2020 (the "Senior Notes").
The 2013 Restated2017 Credit Agreement requires the Company to maintain a Consolidated Fixed Charge Coverage Ratio (as defined in the 2017 Credit Agreement) as of the end of any fiscal quarter at or above 1.25 to 1.00.
As of December 31, 2017, our Consolidated Leverage Ratio was approximately 2.6 to 1 and our Fixed Charge Coverage Ratio was approximately 5.3 to 1.
Other Covenants and Restrictions
The 2017 Credit Agreement contains customary affirmative and negative covenants as well as events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults, certain bankruptcy or insolvency events, certain ERISA-related events, changes in control or ownership and invalidity of any loan document. The 2017 Credit Agreement also establishes limitations on the aggregate amount of Permitted Acquisitions and Investments (each as defined in the 2017 Credit Agreement) that the Company and its subsidiaries may make during the term of the 2017 Credit Agreement.
UnderGuarantees and Security
Generally, obligations under the 2013 Restated2017 Credit Agreement are guaranteed by certain of the Company is requiredCompany’s existing and future subsidiaries, and are secured by substantially all of the Company’s and certain guarantor subsidiaries’ assets, subject to meet certain financial tests, including a maximum Leverage Ratio as determined by reference to the following ratios:
|
| | |
Period | | Maximum Consolidated Leverage Ratio(1)
|
July 1, 2014 through June 30, 2015 | | 4.00:1.00 |
July 1, 2015 through June 30, 2017 | | 3.75:1.00 |
July 1, 2017 and thereafter | | 3.50:1.00 |
exclusions and limitations.
| |
(1) | The Leverage Ratio is computed by dividing the Company's net funded indebtedness by the cumulative four-quarter-trailing EBITDA, which excludes transaction costs, restructuring and other charges up to certain limits as well as other adjustments defined in the 2013 Restated Credit Agreement. |
Incremental Facilities
The 2013 Restated2017 Credit Agreement also requirespermits the Company to maintain a consolidated fixed charge coverage ratio (as definedseek increases in the 2013 Restated Credit Agreement) assize of the end of any fiscal quarter at or above 1.252017 Revolving Facility and the 2017 Term A Facility prior to 1.00.maturity by up to $500.0 million in the aggregate, subject to lender commitment and the conditions set forth in the 2017 Credit Agreement.
As of December 31, 2017, there were $133.9 million in borrowings outstanding under the 2017 Revolving Facility. The remaining amount available for borrowings was $255.0 million (allowing for $11.1 million of letters of credit outstanding on that date).
Senior Unsecured Notes due December 2024
56
On December 22, 2016, the Company completed a private offering of $400.0 million in aggregate principal amount of 5.25% senior notes due December 2024 (the "New Notes"), which we issued under an indenture, dated December 22, 2016 (the "New Indenture"), among the Company, as issuer, the guarantors named therein (the "Guarantors") and Wells Fargo Bank, National Association, as trustee. Pursuant to the New Indenture, the Company pays interest on the New Notes semiannually on June 15 and December 15 of each year, beginning on June 15, 2017.
The New Indenture contains covenants that could limit the ability of the Company and its restricted subsidiaries to, among other things: (i) incur additional indebtedness or issue disqualified stock or, in the case of the Company’s restricted subsidiaries, preferred stock; (ii) create liens; (iii) pay dividends, make certain investments or make other restricted payments; (iv) sell certain assets or merge with or into other companies; (v) enter into transactions with affiliates; and (vi) allow limitations on any restricted subsidiary’s ability to pay dividends, loans, or assets to the Company or other restricted subsidiaries. These covenants are subject to a number of important limitations and exceptions. The New Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and accrued but unpaid interest on all the then outstanding New Notes to be immediately due and payable.
The Company borrowed $73.9 million under its revolving credit facility and applied the funds, together with the net proceeds from the issuance of the New Notes and cash on hand, toward the payment of the redemption price for all of the 6.75% Senior Notes due 2020 (the "Old Notes"). The aggregate redemption price of $531.5 million consisted of principal due and payable on the Old Notes, a "make-whole" call premium of $25.0 million (included in "Other (income) expense, net"), and accrued and unpaid interest of $6.5 million (included in "Interest expense").
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Also included in "Other (income) expense, net" in 2016 was a $4.9 million charge for the write-off of debt issuance costs associated with the Old Notes. Additionally, we incurred and capitalized approximately $6.1 million in bank, legal and other fees associated with the issuance of the New Notes in 2016.
Second Amended and Restated Credit Agreement
During 2016, the Company’s credit facilities were governed by a Second Amended and Restated Credit Agreement, dated April 28, 2015 (as subsequently amended, the "2015 Credit Agreement"), among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other agents and lenders party thereto.
The indenture governing2015 Credit Agreement provided for a $600.0 million five-year senior secured credit facility, which consisted of a $300.0 million revolving credit facility (the "2015 Revolving Facility") and a $300.0 million term loan (the "2015 Term Loan A"). Borrowings under the Senior Notes does not contain financial performance covenants. However, that indenture does contain covenants that limit,2015 Credit Agreement were due April 2020.
In connection with the PA Acquisition, effective May 1, 2016, the Company entered into a Second Amendment and Additional Borrower Consent, among the Company, certain guarantor subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other lenders party thereto, which amended the 2015 Credit Agreement. Among other things, our abilitythe Second Amendment amended the 2015 Credit Agreement to include ACCO Brands Australia Holding Pty. Ltd. ("ACCO Australia Holdings") as a foreign borrower and, together with a related incremental joinder agreement, facilitated borrowings under the ability of our restricted subsidiaries to:2015 Credit Agreement by ACCO Australia Holdings.
incurFinancing of PA Acquisition
The PA Acquisition, which closed in the second quarter of 2016, was financed through a borrowing under the 2015 Credit Agreement of A$100.0 million (US$76.6 million based on May 2, 2016 exchange rates) by ACCO Australia Holdings in the form of an incremental Australian Dollar Senior Secured Term A loan, along with additional indebtedness;
pay dividendsborrowings of A$152.0 million (US$116.4 million based on our capital stock or repurchase our capital stock;
enter into or permitMay 2, 2016 exchange rates) under the 2015 Revolving Facility. The Company used some of the proceeds from the borrowings to exist contractual limits onreduce the ability of our subsidiariesU.S. Dollar Senior Secured Term Loan A due April 2020 by $78.0 million and to pay dividends tooff the Company;
enter into certain transactions with affiliates;
make investments;
create liens; and
sell certain assets or merge with or into other companies.debt assumed in the PA Acquisition of A$32.1 million (US$24.5 million based on May 2, 2016 exchange rates).
CertainCompliance with Loan Covenants
As of these covenants will be subject to suspension when and iffor the notes are rated at least "BBB–" by Standard & Poor’s or at least "Baa3' by Moody’s. Each ofperiods ended December 31, 2017 and December 31, 2016, the covenants is subject to a number of important exceptions and qualifications.Company was in compliance with all applicable loan covenants.
Guarantees and Security
Generally, obligations under the 2013 Restated2017 Credit Agreement and the 2015 Credit Agreement are irrevocablyand unconditionallywere guaranteed jointly and severally, by certain of the Company's existing and future domestic subsidiaries, and are and were secured by substantially all of the Company's and certain guarantor subsidiaries' assets, subject to certain exclusions and limitations.
The SeniorNew Notes are irrevocably and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our existing and future domestic subsidiaries other than certain excluded subsidiaries. The SeniorNew Notes and the related guarantees will rank equally in right of payment with all of the existing and future senior debt of the Company and the guarantors, senior in right of payment to all of the existing and future subordinated debt of the Company and the guarantors, and effectively subordinated to all of the existing and future secured indebtedness of the Company and the guarantors to the extent of the value of the assets securing such indebtedness. The SeniorNew Notes and the guarantees are and will be structurally subordinated to all existing and future liabilities, including trade payables, of each of the Company's subsidiaries that do not guarantee the notes.
Compliance with Loan Covenants
As of and for the year ended December 31, 2014, we were in compliance with all applicable loan covenants.
5. Pension and Other Retiree Benefits
We have a number of pension plans, principally in Germany, the U.K. and the U.S. The plans provide for payment of retirement benefits, primarily commencing between the ages of 60 and 65, and also for payment of certain disability and severance benefits. After meeting certain qualifications, an employee acquires a vested right to future benefits. The benefits payable under the plans are generally determined based on the basis of an employee’s length of service and earnings. SeveralThe majority of these plans have been frozen and
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
are no longer accruing additional service benefits. Cash contributions to the plans are made as necessary to ensure legal funding requirements are satisfied.
In the Esselte Acquisition, we acquired numerous pension plans, primarily in Germany and the U.K. The German plan, which is unfunded, is the primarily driver of our increased pension liabilities compared to the prior-year period. The Esselte U.K. plan is frozen.
On January 20, 2009, the Company’s Board of Directors approved plan amendments to temporarily freeze our ACCO Brands Corporation Pension Plan for Salaried and Certain Hourly Paid Employees in the U.S.(the (the "U.S. Salaried Plan") effective March 7, 2009. During the fourth quarter of 2014, the U.S. Salaried Plan became permanently frozen. On September 30, 2012, our U.K. pension plan was frozen.
The Merger added six additional pensionfrozen and, post-retirement plans in the U.S. and Canada. In the U.S. we added a pension plan for certain bargained hourly employees of Mead C&OP. Asas of December 31, 2014, we have permanently frozen a portion of this plan. In Canada we added fiveour U.S. pension and post-retirement plans, asplan for certain bargained hourly employees.
On September 30, 2012, our legacy U.K. pension plan was frozen. As of December 31, 2013. We permanently froze the Salaried and Supplemental Executive Retirement Plans in Canada.2016, all of our Canadian pension plans were frozen.
We also provide post-retirement health care and life insurance benefits to certain employee groups outside of the U.S and certain employees and retirees in the U.S., U.K. and Canada. All but one of these benefit plans have been frozen to new participants. Many employees and retirees outside of the U.S. are covered by government health care programs.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table sets forth our defined benefit pension and post-retirement plans funded status and the amounts recognized in our Consolidated Balance Sheets:
| | | | Pension Benefits | | Post-retirement | Pension | | Post-retirement |
| | U.S. | | International | | | U.S. | | International | | |
| (in millions of dollars) | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in projected benefit obligation (PBO) | | | | | | | | | | | | | | | | | | | | | | |
| Projected benefit obligation at beginning of year | $ | 177.4 |
| | $ | 191.7 |
| | $ | 371.4 |
| | $ | 361.0 |
| | $ | 13.3 |
| | $ | 16.0 |
| $ | 200.1 |
| | $ | 198.7 |
| | $ | 345.1 |
| | $ | 347.1 |
| | $ | 6.7 |
| | $ | 8.1 |
|
| Service cost | 2.1 |
| | 2.0 |
| | 0.8 |
| | 1.6 |
| | 0.2 |
| | 0.2 |
| 1.4 |
| | 1.3 |
| | 1.9 |
| | 0.8 |
| | — |
| | 0.1 |
|
| Interest cost | 8.6 |
| | 7.9 |
| | 15.7 |
| | 14.7 |
| | 0.5 |
| | 0.6 |
| 7.1 |
| | 7.3 |
| | 13.4 |
| | 10.3 |
| | 0.2 |
| | 0.2 |
|
| Actuarial loss (gain) | 34.2 |
| | (19.0 | ) | | 48.3 |
| | 1.9 |
| | (0.3 | ) | | (2.8 | ) | 14.7 |
| | 3.1 |
| | 13.2 |
| | 55.6 |
| | — |
| | (0.2 | ) |
| Participants’ contributions | — |
| | — |
| | 0.2 |
| | 0.3 |
| | 0.1 |
| | 0.1 |
| — |
| | — |
| | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Benefits paid | (9.4 | ) | | (8.9 | ) | | (16.6 | ) | | (13.9 | ) | | (0.8 | ) | | (0.7 | ) | (16.8 | ) | | (10.3 | ) | | (26.5 | ) | | (13.0 | ) | | (0.5 | ) | | (0.5 | ) |
| Curtailment gain | — |
| | — |
| | — |
| | (1.0 | ) | | — |
| | — |
| — |
| | — |
| | — |
| | (0.6 | ) | | — |
| | (0.8 | ) |
| Plan amendments | — |
| | 3.7 |
| | (0.2 | ) | | — |
| | (0.4 | ) | | — |
| |
| Foreign exchange rate changes | — |
| | — |
| | (27.8 | ) | | 6.8 |
| | (0.4 | ) | | (0.1 | ) | — |
| | — |
| | 59.8 |
| | (55.2 | ) | | 0.3 |
| | (0.3 | ) |
| Esselte Acquisition | | — |
| | — |
| | 288.0 |
| | — |
| | — |
| | — |
|
| Projected benefit obligation at end of year | 212.9 |
| | 177.4 |
| | 391.8 |
| | 371.4 |
| | 12.2 |
| | 13.3 |
| 206.5 |
| | 200.1 |
| | 695.0 |
| | 345.1 |
| | 6.8 |
| | 6.7 |
|
| Change in plan assets | | | | | | | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | 156.3 |
| | 135.4 |
| | 342.8 |
| | 311.9 |
| | — |
| | — |
| 150.5 |
| | 145.8 |
| | 302.7 |
| | 318.9 |
| | — |
| | — |
|
| Actual return on plan assets | 10.8 |
| | 21.7 |
| | 43.8 |
| | 32.2 |
| | — |
| | — |
| 21.1 |
| | 14.1 |
| | 21.3 |
| | 41.8 |
| | — |
| | — |
|
| Employer contributions | 6.2 |
| | 8.1 |
| | 5.5 |
| | 6.0 |
| | 0.7 |
| | 0.6 |
| 7.3 |
| | 0.9 |
| | 14.0 |
| | 4.9 |
| | 0.4 |
| | 0.4 |
|
| Participants’ contributions | — |
| | — |
| | 0.2 |
| | 0.3 |
| | 0.1 |
| | 0.1 |
| — |
| | — |
| | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Benefits paid | (9.4 | ) | | (8.9 | ) | | (16.6 | ) | | (13.9 | ) | | (0.8 | ) | | (0.7 | ) | (16.8 | ) | | (10.3 | ) | | (26.5 | ) | | (13.0 | ) | | (0.5 | ) | | (0.5 | ) |
| Foreign exchange rate changes | — |
| | — |
| | (24.5 | ) | | 6.3 |
| | — |
| | — |
| — |
| | — |
| | 38.2 |
| | (50.0 | ) | | — |
| | — |
|
| Esselte Acquisition | | — |
| | — |
| | 114.0 |
| | — |
| | — |
| | — |
|
| Fair value of plan assets at end of year | 163.9 |
| | 156.3 |
| | 351.2 |
| | 342.8 |
| | — |
| | — |
| 162.1 |
| | 150.5 |
| | 463.8 |
| | 302.7 |
| | — |
| | — |
|
| Funded status (Fair value of plan assets less PBO) | $ | (49.0 | ) | | $ | (21.1 | ) | | $ | (40.6 | ) | | $ | (28.6 | ) | | $ | (12.2 | ) | | $ | (13.3 | ) | $ | (44.4 | ) | | $ | (49.6 | ) | | $ | (231.2 | ) | | $ | (42.4 | ) | | $ | (6.8 | ) | | $ | (6.7 | ) |
| Amounts recognized in the Consolidated Balance Sheets consist of: | | | | | | | | | | | | | | | | | | | | | | |
| Other non-current assets | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.3 |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | 0.6 |
| | $ | 0.3 |
| | $ | — |
| | $ | — |
|
| Other current liabilities | — |
| | — |
| | 0.5 |
| | 0.6 |
| | 0.8 |
| | 1.0 |
| — |
| | — |
| | 6.9 |
| | 0.4 |
| | 0.6 |
| | 0.6 |
|
Pension and post-retirement benefit obligations(1) | 49.0 |
| | 21.1 |
| | 40.1 |
| | 28.3 |
| | 11.4 |
| | 12.3 |
| 44.4 |
| | 49.6 |
| | 224.9 |
| | 42.3 |
| | 6.2 |
| | 6.1 |
|
| Components of accumulated other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | | | | | | |
| Unrecognized actuarial loss (gain) | 51.9 |
| | 33.3 |
| | 78.1 |
| | 63.6 |
| | (1.1 | ) | | (2.9 | ) | 56.9 |
| | 54.2 |
| | 100.5 |
| | 83.7 |
| | (3.6 | ) | | (3.5 | ) |
| Unrecognized prior service cost (credit) | 2.4 |
| | 2.7 |
| | (0.4 | ) | | (0.3 | ) | | (1.5 | ) | | (0.1 | ) | 1.7 |
| | 2.0 |
| | (0.2 | ) | | (0.2 | ) | | (0.2 | ) | | (0.2 | ) |
| |
| (1) | Pension and post-retirement obligations of $100.5275.5 million as of December 31, 20142017, increased from $61.798.0 million as of December 31, 20132016, primarily due to lower discount rates compared to prior year assumptions and the adoption of new mortality tables for the U.S. and Canadian plans.Esselte Acquisition. |
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Of the amounts included within accumulated other comprehensive income (loss), we expect to recognize the following pre-tax amounts as components of net periodic benefit cost (income) for the year endedending December 31, 20152018:
|
| | | | | | | | | | | |
| | Pension Benefits | | Post-retirement |
| (in millions of dollars) | U.S. | | International | |
| Actuarial loss (gain) | $ | 2.1 |
| | $ | 2.5 |
| | $ | (0.2 | ) |
| Prior service cost (credit) | 0.4 |
| | — |
| | (0.2 | ) |
| | $ | 2.5 |
| | $ | 2.5 |
| | $ | (0.4 | ) |
Effective in 2015 we will change the amortization of our net actuarial loss included in accumulated other comprehensive income (loss) for the U.S. Salaried Plan from the average remaining service period of active employees expected to receive benefits under the plan to the average remaining life expectancy of all participants. This change was the result of the Company's decision to permanently freeze the benefits under the plan. |
| | | | | | | | | | | |
| | Pension | | Post-retirement |
| (in millions of dollars) | U.S. | | International | |
| Actuarial loss (gain) | $ | 2.7 |
| | $ | 3.4 |
| | $ | (0.4 | ) |
| Prior service cost | 0.4 |
| | — |
| | — |
|
| | $ | 3.1 |
| | $ | 3.4 |
| | $ | (0.4 | ) |
All of our plans have projected benefit obligations in excess of plan assets, except for one of our Canadian pension plan.plans.
The accumulated benefit obligation for all pension plans was $590.0887.9 million and $533.5536.8 million at December 31, 20142017 and 20132016, respectively.
The following table sets out information for pension plans with an accumulated benefit obligation in excess of plan assets:
| | | | U.S. | | International | U.S. | | International |
| (in millions of dollars) | 2014 | | 2013 | | 2014 | | 2013 | 2017 | | 2016 | | 2017 | | 2016 |
| Projected benefit obligation | $ | 212.9 |
| | $ | 177.4 |
| | $ | 371.0 |
| | $ | 331.2 |
| $ | 206.5 |
| | $ | 200.1 |
| | $ | 675.3 |
| | $ | 326.9 |
|
| Accumulated benefit obligation | 209.1 |
| | 173.0 |
| | 360.9 |
| | 321.7 |
| 205.4 |
| | 198.3 |
| | 662.8 |
| | 320.4 |
|
| Fair value of plan assets | 163.9 |
| | 156.3 |
| | 331.1 |
| | 302.8 |
| 162.1 |
| | 150.5 |
| | 443.5 |
| | 284.2 |
|
The components of net periodic benefit cost (income) expense for pension and post-retirement plans for the years ended December 31, 20142017, 20132016, and 20122015, respectively, were as follows:
| | | | Pension Benefits | | Post-retirement | Pension | | Post-retirement |
| | U.S. | | International | | | | | | | U.S. | | International | | | | | | |
| (in millions of dollars) | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Service cost | $ | 2.1 |
| | $ | 2.0 |
| | $ | 1.2 |
| | $ | 0.8 |
| | $ | 1.6 |
| | $ | 2.1 |
| | $ | 0.2 |
| | $ | 0.2 |
| | $ | 0.2 |
| $ | 1.4 |
| | $ | 1.3 |
| | $ | 1.6 |
| | $ | 1.9 |
| | $ | 0.8 |
| | $ | 0.9 |
| | $ | — |
| | $ | 0.1 |
| | $ | 0.1 |
|
| Interest cost | 8.6 |
| | 7.9 |
| | 8.4 |
| | 15.7 |
| | 14.7 |
| | 14.3 |
| | 0.5 |
| | 0.6 |
| | 0.6 |
| 7.1 |
| | 7.3 |
| | 8.7 |
| | 13.4 |
| | 10.3 |
| | 12.9 |
| | 0.2 |
| | 0.2 |
| | 0.4 |
|
| Expected return on plan assets | (12.0 | ) | | (10.4 | ) | | (10.4 | ) | | (22.8 | ) | | (20.6 | ) | | (16.2 | ) | | — |
| | — |
| | — |
| (12.3 | ) | | (11.9 | ) | | (12.2 | ) | | (21.8 | ) | | (17.6 | ) | | (21.9 | ) | | — |
| | — |
| | — |
|
| Amortization of net loss (gain) | 5.1 |
| | 9.6 |
| | 6.2 |
| | 1.9 |
| | 2.4 |
| | 2.2 |
| | (1.1 | ) | | (0.6 | ) | | (1.6 | ) | 2.0 |
| | 1.8 |
| | 2.1 |
| | 3.0 |
| | 2.3 |
| | 2.4 |
| | (0.4 | ) | | (0.4 | ) | | (0.4 | ) |
| Amortization of prior service cost (credit) | 0.4 |
| | 0.1 |
| | — |
| | — |
| | — |
| | 0.4 |
| | — |
| | — |
| | — |
| 0.4 |
| | 0.4 |
| | 0.4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.3 | ) |
| Curtailment gain | — |
| | — |
| | — |
| | — |
| | (1.0 | ) | | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.6 | ) | | — |
|
| Settlement loss (gain) | — |
| | — |
| | 0.7 |
| | — |
| | — |
| | — |
| | (0.1 | ) | | — |
| | — |
| |
| Net periodic benefit cost (income) | $ | 4.2 |
| | $ | 9.2 |
| | $ | 6.1 |
| | $ | (4.4 | ) | | $ | (2.9 | ) | | $ | 2.8 |
| | $ | (0.5 | ) | | $ | 0.2 |
| | $ | (0.8 | ) | |
| Settlement gain | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.5 | ) |
| Net periodic benefit (income) expense | | $ | (1.4 | ) | | $ | (1.1 | ) | | $ | 0.6 |
| | $ | (3.5 | ) | | $ | (4.2 | ) | | $ | (5.7 | ) | | $ | (0.2 | ) | | $ | (0.7 | ) | | $ | (0.7 | ) |
In 2013, we recognized a curtailment gain of $1.0 million related to freezing two of our Canadian pension plans.
During 2012, due to the Merger, we settled the Amended and Restated ACCO Brands Corporation Supplemental Retirement Plan (the "SRP"). The SRP provided that the accrued vested benefit of each participant be paid in an actuarial equivalent lump sum upon the occurrence of a change of control (as defined in the SRP), which resulted in a settlement charge of $0.7 million.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Other changes in plan assets and benefit obligations that were recognized in accumulated other comprehensive income (loss) during the years ended December 31, 2014, 2013,2017, 2016, and 20122015 were as follows:
| | | | Pension Benefits | | Post-retirement | Pension | | Post-retirement |
| | U.S. | | International | | | | | | | U.S. | | International | | | | | | |
| (in millions of dollars) | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Current year actuarial loss (gain) | $ | 35.4 |
| | $ | (30.2 | ) | | $ | 9.6 |
| | $ | 27.3 |
| | $ | (10.0 | ) | | $ | 11.4 |
| | $ | (0.3 | ) | | $ | (2.8 | ) | | $ | 0.1 |
| $ | 5.9 |
| | $ | 0.9 |
| | $ | 7.1 |
| | $ | 14.3 |
| | $ | 27.9 |
| | $ | 3.8 |
| | $ | — |
| | $ | (1.0 | ) | | $ | (3.4 | ) |
| Amortization of actuarial (loss) gain | (5.1 | ) | | (9.6 | ) | | (6.2 | ) | | (1.9 | ) | | (2.4 | ) | | (2.2 | ) | | 1.1 |
| | 0.6 |
| | 1.6 |
| (2.0 | ) | | (1.8 | ) | | (2.1 | ) | | (3.0 | ) | | (2.3 | ) | | (2.4 | ) | | 0.4 |
| | 1.0 |
| | 0.9 |
|
| Current year prior service cost (credit) | — |
| | 3.7 |
| | 0.8 |
| | (0.2 | ) | | — |
| | (0.3 | ) | | (0.3 | ) | | — |
| | — |
| |
| Amortization of prior service cost | (0.4 | ) | | (0.1 | ) | | — |
| | — |
| | — |
| | (0.4 | ) | | — |
| | — |
| | — |
| |
| Current year prior service credit | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.2 | ) |
| Amortization of prior service (cost) credit | | (0.4 | ) | | (0.4 | ) | | (0.4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | 0.3 |
|
| Foreign exchange rate changes | — |
| | — |
| | — |
| | (6.8 | ) | | 2.1 |
| | 4.1 |
| | 0.1 |
| | — |
| | (0.1 | ) | — |
| | — |
| | — |
| | 10.7 |
| | (15.5 | ) | | (5.6 | ) | | (0.2 | ) | | 0.5 |
| | 0.1 |
|
| Total recognized in other comprehensive income (loss) | $ | 29.9 |
| | $ | (36.2 | ) | | $ | 4.2 |
| | $ | 18.4 |
| | $ | (10.3 | ) | | $ | 12.6 |
| | $ | 0.6 |
| | $ | (2.2 | ) | | $ | 1.6 |
| $ | 3.5 |
| | $ | (1.3 | ) | | $ | 4.6 |
| | $ | 22.0 |
| | $ | 10.1 |
| | $ | (4.2 | ) | | $ | 0.2 |
| | $ | 0.5 |
| | $ | (2.3 | ) |
| Total recognized in net periodic benefit cost (credit) and other comprehensive income (loss) | $ | 34.1 |
| | $ | (27.0 | ) | | $ | 10.3 |
| | $ | 14.0 |
| | $ | (13.2 | ) | | $ | 15.4 |
| | $ | 0.1 |
| | $ | (2.0 | ) | | $ | 0.8 |
| |
| Total recognized in net periodic benefit cost (income) and other comprehensive income (loss) | | $ | 2.1 |
| | $ | (2.4 | ) | | $ | 5.2 |
| | $ | 18.5 |
| | $ | 5.9 |
| | $ | (9.9 | ) | | $ | — |
| | $ | (0.2 | ) | | $ | (3.0 | ) |
Assumptions
The weighted average assumptions used to determine benefit obligations for the years ended December 31, 2014, 2013,2017, 2016, and 20122015 were as follows:
| | | | Pension Benefits | | Post-retirement | Pension | | Post-retirement |
| | U.S. | | International | | | U.S. | | International | | |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | 4.2 | % | | 5.0 | % | | 4.2 | % | | 3.4 | % | | 4.3 | % | | 4.3 | % | | 3.7 | % | | 4.4 | % | | 4.0 | % | 3.7 | % | | 4.3 | % | | 4.6 | % | | 2.3 | % | | 2.7 | % | | 3.7 | % | | 3.2 | % | | 3.4 | % | | 3.9 | % |
| Rate of compensation increase | N/A |
| | N/A |
| | N/A |
| | 3.0 | % | | 3.3 | % | | 4.0 | % | | — |
| | — |
| | — |
| N/A |
| | N/A |
| | N/A |
| | 2.8 | % | | 3.1 | % | | 3.0 | % | | N/A |
| | N/A |
| | N/A |
|
The weighted average assumptions used to determine net periodic benefit cost (income) expense for the years ended December 31, 2014, 2013,2017, 2016, and 20122015 were as follows:
| | | | Pension Benefits | | Post-retirement | Pension | | Post-retirement |
| | U.S. | | International | | | U.S. | | International | | |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | 5.0 | % | | 4.2 | % | | 5.0 | % | | 4.3 | % | | 4.3 | % | | 4.7 | % | | 4.4 | % | | 4.0 | % | | 4.5 | % | 3.8 | % | | 4.6 | % | | 4.2 | % | | 2.3 | % | | 3.7 | % | | 3.4 | % | | 3.4 | % | | 3.9 | % | | 3.7 | % |
| Expected long-term rate of return | 8.2 | % | | 8.2 | % | | 8.2 | % | | 6.8 | % | | 6.8 | % | | 6.2 | % | | — |
| | — |
| | — |
| 7.8 | % | | 7.8 | % | | 8.0 | % | | 5.5 | % | | 6.0 | % | | 6.5 | % | | N/A |
| | N/A |
| | N/A |
|
| Rate of compensation increase | N/A |
| | N/A |
| | N/A |
| | 3.3 | % | | 4.0 | % | | 3.6 | % | | — |
| | — |
| | — |
| N/A |
| | N/A |
| | N/A |
| | 3.1 | % | | 3.0 | % | | 3.0 | % | | N/A |
| | N/A |
| | N/A |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The weighted average health care cost trend rates used to determine post-retirement benefit obligations and net periodic benefit cost(income) expense as of December 31, 20142017, 20132016, and 20122015 were as follows:
| | | | Post-retirement Benefits | Post-retirement |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Health care cost trend rate assumed for next year | 8 | % | | 8 | % | | 7 | % | 7 | % | | 8 | % | | 7 | % |
| Rate that the cost trend rate is assumed to decline (the ultimate trend rate) | 5 | % | | 5 | % | | 5 | % | 5 | % | | 5 | % | | 5 | % |
| Year that the rate reaches the ultimate trend rate | 2023 |
| | 2020 |
| | 2020 |
| 2025 |
| | 2025 |
| | 2024 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| | | | 1-Percentage- | | 1-Percentage- | 1-Percentage- | | 1-Percentage- |
| (in millions of dollars) | Point Increase | | Point Decrease | Point Increase | | Point Decrease |
| Increase (decrease) on total of service and interest cost | $ | 0.2 |
| | $ | (0.1 | ) | $ | — |
| | $ | — |
|
| Increase (decrease) on post-retirement benefit obligation | 1.3 |
| | (1.1 | ) | 0.5 |
| | (0.4 | ) |
Plan Assets
The investment strategy for the Company is to optimize investment returns through a diversified portfolio of investments, taking into consideration underlying plan liabilities and asset volatility. Each plan has a different target asset allocation, which is reviewed periodically and is based on the underlying liability structure. The target asset allocation for our U.S. plan is 65%60% in equity securities, 20%28% in fixed income securities and 15%12% in alternative assets. The target asset allocation for non-U.S. plans is set by the local plan trustees.
Our pension plan weighted average asset allocations as of December 31, 20142017 and 20132016 were as follows:
| | | | | 2014 | | 2013 | | 2017 | | 2016 |
| | | U.S. | | International | | U.S. | | International | | U.S. | | International | | U.S. | | International |
| Asset category | Asset category | | | | | | | | Asset category | | | | | | | |
| Equity securities | Equity securities | 62 | % | | 45 | % | | 62 | % | | 48 | % | Equity securities | 57 | % | | 26 | % | | 68 | % | | 33 | % |
| Fixed income | Fixed income | 31 |
| | 38 |
| | 31 |
| | 36 |
| Fixed income | 30 |
| | 29 |
| | 25 |
| | 51 |
|
| Real estate | Real estate | — |
| | 3 |
| | — |
| | 3 |
| Real estate | 6 |
| | 5 |
| | — |
| | 3 |
|
Other(1)(2) | | 7 |
| | 14 |
| | 7 |
| | 13 |
| | 7 |
| | 40 |
| | 7 |
| | 13 |
|
| Total | Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | Total | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| |
(1)(2) | Insurance contracts, multi-strategyMulti-strategy hedge funds, insurance contracts and cash and cash equivalents for certain of our plans. |
U.S. Pension Plan Assets
The fair value measurements of our U.S. pension plan assets by asset category as of December 31, 20142017 were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions of dollars) | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value
as of
December 31,
2014 |
| Common stocks | $ | 8.3 |
| | $ | — |
| | $ | — |
| | $ | 8.3 |
|
| Mutual funds | 93.2 |
| | — |
| | — |
| | 93.2 |
|
| Common collective trust funds | — |
| | 8.9 |
| | — |
| | 8.9 |
|
| Government debt securities | — |
| | 2.2 |
| | — |
| | 2.2 |
|
| Corporate debt securities | — |
| | 16.7 |
| | — |
| | 16.7 |
|
| Asset-backed securities | — |
| | 9.8 |
| | — |
| | 9.8 |
|
| Multi-strategy hedge funds | — |
| | 9.5 |
| | — |
| | 9.5 |
|
| Government mortgage-backed securities | — |
| | 8.0 |
| | — |
| | 8.0 |
|
| Collateralized mortgage obligations, mortgage backed securities, and other | — |
| | 7.3 |
| | — |
| | 7.3 |
|
| Total | $ | 101.5 |
| | $ | 62.4 |
| | $ | — |
| | $ | 163.9 |
|
|
| | | | | | | | | | | | | | | |
| (in millions of dollars) | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value
as of
December 31,
2017 |
| Mutual funds | $ | 94.8 |
| | $ | — |
| | $ | — |
| | $ | 94.8 |
|
| Exchange traded funds | 56.6 |
| | — |
| | — |
| | 56.6 |
|
| Common collective trust funds | — |
| | 1.7 |
| | — |
| | 1.7 |
|
Investments measured at net asset value(3) | | | | | | | |
| Multi-strategy hedge funds | | | | | | | 9.0 |
|
| Total | $ | 151.4 |
| | $ | 1.7 |
| | $ | — |
| | $ | 162.1 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The fair value measurements of our U.S. pension plan assets by asset category as of December 31, 20132016 were as follows:
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
| | | (in millions of dollars) | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value
as of
December 31,
2013 | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value
as of
December 31,
2016 |
| Common stocks | $ | 9.4 |
| | $ | — |
| | $ | — |
| | $ | 9.4 |
| |
| Mutual funds | 87.8 |
| | — |
| | — |
| | 87.8 |
| 89.3 |
| | — |
| | — |
| | 89.3 |
|
| Exchange traded funds | | 13.5 |
| | — |
| | — |
| | 13.5 |
|
| Common collective trust funds | — |
| | 7.5 |
| | — |
| | 7.5 |
| — |
| | 7.9 |
| | — |
| | 7.9 |
|
| Government debt securities | — |
| | 6.2 |
| | — |
| | 6.2 |
| |
| Corporate debt securities | — |
| | 14.9 |
| | — |
| | 14.9 |
| — |
| | 16.3 |
| | — |
| | 16.3 |
|
| Asset-backed securities | — |
| | 9.7 |
| | — |
| | 9.7 |
| — |
| | 3.4 |
| | — |
| | 3.4 |
|
| Multi-strategy hedge funds | — |
| | 7.8 |
| | — |
| | 7.8 |
| |
| Government mortgage-backed securities | — |
| | 7.5 |
| | — |
| | 7.5 |
| — |
| | 5.4 |
| | — |
| | 5.4 |
|
| Collateralized mortgage obligations, mortgage backed securities, and other | — |
| | 5.5 |
| | — |
| | 5.5 |
| — |
| | 5.2 |
| | — |
| | 5.2 |
|
Investments measured at net asset value(3) | | | | | | | | |
| Multi-strategy hedge funds | | | | | | | | 9.5 |
|
| Total | $ | 97.2 |
| | $ | 59.1 |
| | $ | — |
| | $ | 156.3 |
| $ | 102.8 |
| | $ | 38.2 |
| | $ | — |
| | $ | 150.5 |
|
Mutual funds and common stocks:exchange traded funds: The fair values of mutual fund and common stock fund investments are determined by obtaining quoted prices on nationally recognized securities exchanges (level 1 inputs).
Common collective trusts: The fair values of participation units held in common collective trusts are based on their net asset values, as reported by the managers of the common collective trusts and as supported by the unit prices of actual purchase and sale transactions occurring as of or close to the financial statement date (level 2 inputs).
Debt securities: Fixed income securities, such as corporate and government bonds, collateralized mortgage obligations, asset-backed securities, government mortgage-backed securities and other debt securities are valued using quotes from independent pricing vendors based on recent trading activity and other relevant information, including market interest rate curves, referenced credit spreads, and estimated prepayment rates, where applicable (level 2 inputs).
Multi-strategy hedge funds: The fair values of participation units held in multi-strategy hedge funds are based on their net asset values, as reported by the managers of the funds and are based on the daily closing prices of the underlying investments (level 2 inputs).
International Pension Plans Assets
The fair value measurements of our international pension plans assets by asset category as of December 31, 2017 were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions of dollars) | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value
as of
December 31,
2017 |
| Cash and cash equivalents | $ | 2.2 |
| | $ | — |
| | $ | — |
| | $ | 2.2 |
|
| Equity securities | 102.0 |
| | — |
| | — |
| | 102.0 |
|
| Exchange traded funds | 16.9 |
| | — |
| | — |
| | 16.9 |
|
| Corporate debt securities | — |
| | 72.2 |
| | — |
| | 72.2 |
|
| Multi-strategy hedge funds | — |
| | 133.4 |
| | — |
| | 133.4 |
|
| Insurance contracts | — |
| | 24.4 |
| | — |
| | 24.4 |
|
| Government debt securities | — |
| | 61.0 |
| | — |
| | 61.0 |
|
Investments measured at net asset value(3) | | | | | | | |
| Multi-strategy hedge funds | | | | | | | 30.5 |
|
| Real estate | | | | | | | 21.2 |
|
| Total | $ | 121.1 |
| | $ | 291.0 |
| | $ | — |
| | $ | 463.8 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The fair value measurements of our international pension plans assets by asset category as of December 31, 20142016 were as follows:
| | | (in millions of dollars) | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value
as of
December 31,
2014 | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value
as of
December 31,
2016 |
| Cash and cash equivalents | $ | 6.1 |
| | $ | — |
| | $ | — |
| | $ | 6.1 |
| $ | 0.5 |
| | $ | — |
| | $ | — |
| | $ | 0.5 |
|
| Equity securities | 156.7 |
| | — |
| | — |
| | 156.7 |
| 99.2 |
| | — |
| | — |
| | 99.2 |
|
| Corporate debt securities | — |
| | 118.6 |
| | — |
| | 118.6 |
| — |
| | 145.3 |
| | — |
| | 145.3 |
|
| Multi-strategy hedge funds | — |
| | 25.1 |
| | — |
| | 25.1 |
| — |
| | 20.2 |
| | — |
| | 20.2 |
|
| Insurance contracts | — |
| | 18.4 |
| | — |
| | 18.4 |
| — |
| | 17.8 |
| | — |
| | 17.8 |
|
| Other debt securities | — |
| | 12.1 |
| | — |
| | 12.1 |
| |
| Government debt securities | | — |
| | 10.1 |
| | — |
| | 10.1 |
|
Investments measured at net asset value(3) | | | | | | | | |
| Real estate | — |
| | 9.7 |
| | 0.9 |
| | 10.6 |
| | | | | | | 9.6 |
|
| Government debt securities | — |
| | 3.6 |
| | — |
| | 3.6 |
| |
| Total | $ | 162.8 |
| | $ | 187.5 |
| | $ | 0.9 |
| | $ | 351.2 |
| $ | 99.7 |
| | $ | 193.4 |
| | $ | — |
| | $ | 302.7 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The fair value measurements of our international pension plans assets by asset category as of December 31, 2013 were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions of dollars) | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value
as of
December 31,
2013 |
| Cash and cash equivalents | $ | 2.2 |
| | $ | — |
| | $ | — |
| | $ | 2.2 |
|
| Equity securities | 167.7 |
| | — |
| | — |
| | 167.7 |
|
| Corporate debt securities | — |
| | 110.0 |
| | — |
| | 110.0 |
|
| Multi-strategy hedge funds | — |
| | 25.9 |
| | — |
| | 25.9 |
|
| Insurance contracts | — |
| | 13.6 |
| | — |
| | 13.6 |
|
| Other debt securities | — |
| | 10.6 |
| | — |
| | 10.6 |
|
| Real estate | — |
| | 9.0 |
| | 1.0 |
| | 10.0 |
|
| Government debt securities | — |
| | 2.8 |
| | — |
| | 2.8 |
|
| Total | $ | 169.9 |
| | $ | 171.9 |
| | $ | 1.0 |
| | $ | 342.8 |
|
| |
| (3) | Certain investments that are measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the table that presents our defined benefit pension and post-retirement plans funded status. |
Equity securities:securities and exchange traded funds: The fair values of equity securities are determined by obtaining quoted prices on nationally recognized securities exchanges (level 1 inputs).
Debt securities: Fixed income securities, such as corporate and government bonds and other debt securities, consist of index linkedindex-linked securities. These debt securities are valued using quotes from independent pricing vendors based on recent trading activity and other relevant information, including market interest rate curves, referenced credit spreads, and estimated prepayment rates, where applicable (level 2 inputs).
Real estate: Real estate, exclusive of the Canadian plan, consists of managed real estate investment trust securities (level 2 inputs). Real estate in the Canadian plans is appraised by a third party on an annual basis (level 3 inputs). There have been no substantial purchases or gains/losses in 2014 or 2013.
Insurance contracts: Valued at contributions made, plus earnings, less participant withdrawals and administrative expenses, which approximate fair value (level 2 inputs).
Multi-strategy hedge funds: The fair values of participation units held in multi-strategy hedge funds are based on their net asset values, as reported by the managers of the funds and are based on the daily closing prices of the underlying investments (level 2 inputs).
Cash Contributions
We contributed $12.4$21.7 million to our pension and post-retirement plans in 20142017 and expect to contribute $8.1$20.0 million in 2015.2018.
The following table presents estimated future benefit payments to participants for the next ten fiscal years:
|
| | | | | | | |
| | Pension | | Post-retirement |
| (in millions of dollars) | Benefits | | Benefits |
| 2015 | $ | 23.7 |
| | $ | 0.8 |
|
| 2016 | $ | 24.3 |
| | $ | 0.8 |
|
| 2017 | $ | 25.0 |
| | $ | 0.8 |
|
| 2018 | $ | 25.9 |
| | $ | 0.8 |
|
| 2019 | $ | 26.4 |
| | $ | 0.8 |
|
| Years 2020 — 2024 | $ | 137.5 |
| | $ | 3.6 |
|
|
| | | | | | | |
| | Pension | | Post-retirement |
| (in millions of dollars) | Benefits | | Benefits |
| 2018 | $ | 40.1 |
| | $ | 0.6 |
|
| 2019 | 39.2 |
| | 0.6 |
|
| 2020 | 39.8 |
| | 0.6 |
|
| 2021 | 40.7 |
| | 0.5 |
|
| 2022 | 40.9 |
| | 0.5 |
|
| Years 2023 - 2027 | 212.4 |
| | 2.4 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We also sponsor a number of defined contribution plans. Contributions are determined under various formulas. Costs related to such plans amounted to $8.613.4 million, $8.411.3 million and $8.09.8 million for the years ended December 31, 20142017, 20132016, and 20122015, respectively. The increase of $2.1 million in defined contribution plan costs in 2017 compared to 2016 is due to the Esselte Acquisition and additional matching contributions in the U.S. The $1.5 million increase in defined contribution plan costs in 2016 compared to 2015 was due to the PA Acquisition and additional matching contributions in the U.S.
Multi-Employer Pension Plan
We are a participant in a multi-employer pension plan. The plan has reported significant underfunded liabilities and declared itself in critical and declining status (red). As a result, the trustees of the plan adopted a rehabilitation plan (RP) in an effort to forestall insolvency. Our required contributions to this plan could increase due to the shrinking contribution base resulting from the insolvency of or withdrawal of other participating employers, from the inability or the failure of withdrawing participating employers to pay their withdrawal liability, from lower than expected returns on pension fund assets, and from other funding deficiencies. In the event that we withdraw from participation in the plan, we will be required to make withdrawal liability payments for a period of 20 years or longer in certain circumstances. The present value of our withdrawal liability payments would be recorded as an expense in our Consolidated Statements of Income and as a liability on our Consolidated Balance Sheets in the first year of our withdrawal. The most recent Pension Protection Act (PPA) zone status available in 2017 and 2016 is for the plan’s years ended December 31, 2016 and 2015, respectively. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. Plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded. Details regarding the plan are outlined in the table below.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Pension Protection Act Zone Status | | FIP/RP Status Pending/Implemented | | Contributions | | | | Expiration Date of Collective-Bargaining Agreement |
| | | | | | | Year Ended December 31, | | | |
| Pension Fund | | EIN/Pension Plan Number | | 2017 | | 2016 | | | 2017 | | 2016 | | 2015 | | Surcharge Imposed | |
| PACE Industry Union-Management Pension Fund | | 11-6166763 / 001 | | Red | | Red | | Implemented | | $ | 0.2 |
| | $ | 0.3 |
| | $ | 0.3 |
| | Yes | | 6/30/2018 |
6. Stock-Based Compensation
The 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (the "Plan") provides for stock based awards generally in the form of stock options, stock-settled appreciation rights ("SSARs"), restricted stock units ("RSUs") and performance stock units ("PSUs"), any of which may be granted alone or with other types of awards and dividend equivalents. We have one share-based compensation plan under which a total of up to 15,665,00013,118,430 shares may be issued under awards to key employees and non-employee directors.
Beginning in 2017, per ASU No. 2016-09 Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, the Company made the allowed accounting policy election to account for forfeitures as they occur, which affects the timing of stock compensation expense. Prior to 2017, forfeitures were estimated at the time of grant in order to calculate the amount of share-based payment awards ultimately expected to vest and the forfeiture rate was based on historical experience.
We will satisfy the requirement for delivering shares of our common stock for our Plan by issuing new shares.
The following table summarizes the impact of all stock-based compensation expense on our Consolidated Statements of Income for the years ended December 31, 20142017, 20132016 and 20122015.
|
| | | | | | | | | | | |
| (in millions of dollars) | 2014 | | 2013 | | 2012 |
| Advertising, selling, general and administrative expense | $ | 15.7 |
| | $ | 16.4 |
| | $ | 9.2 |
|
| Income (loss) from continuing operations before income tax | (15.7 | ) | | (16.4 | ) | | (9.2 | ) |
| Income tax expense (benefit) | (5.7 | ) | | (5.9 | ) | | (3.3 | ) |
| Net income (loss) | $ | (10.0 | ) | | $ | (10.5 | ) | | $ | (5.9 | ) |
|
| | | | | | | | | | | |
| (in millions of dollars) | 2017 | | 2016 | | 2015 |
| Selling, general and administrative expense | $ | 17.0 |
| | $ | 19.4 |
| | $ | 16.0 |
|
| Loss before income tax | (17.0 | ) | | (19.4 | ) | | (16.0 | ) |
| Income tax benefit | (6.1 | ) | | (7.0 | ) | | (5.7 | ) |
| Net loss | $ | (10.9 | ) | | $ | (12.4 | ) | | $ | (10.3 | ) |
There was no capitalization of stock basedstock-based compensation expense.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Stock-based compensation expense by award type for the years ended December 31, 20142017, 20132016 and 20122015 was as follows:
| | | (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Stock option compensation expense | $ | 3.7 |
| | $ | 3.0 |
| | $ | 1.8 |
| $ | 2.4 |
| | $ | 2.9 |
| | $ | 3.9 |
|
| SSAR compensation expense | — |
| | — |
| | 0.1 |
| |
| RSU compensation expense | 6.6 |
| | 5.5 |
| | 3.9 |
| 4.3 |
| | 4.5 |
| | 4.7 |
|
| PSU compensation expense | 5.4 |
| | 7.9 |
| | 3.4 |
| 10.3 |
| | 12.0 |
| | 7.4 |
|
| Total stock-based compensation expense | $ | 15.7 |
| | $ | 16.4 |
| | $ | 9.2 |
| $ | 17.0 |
| | $ | 19.4 |
| | $ | 16.0 |
|
Stock Option and SSAR Awards
The exercise price of each stock option and SSAR equals or exceeds the fair market price of our stock on the date of grant. Options/SSARsOptions can generally be exercised over a maximum term of up to seven years. Stock options/SSARsoptions outstanding as of December 31, 20142017 generally vest ratably over three years. During 2014, 2013In 2016, we did not grant any option awards. SSARs were last issued in 2009 and 2012, we granted only option awards.expired in 2016. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model usingand the weighted average assumptions as outlined in the following table:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2015 |
| Weighted average expected lives | 4.5 |
| years | | 4.5 |
| years | | 4.5 |
| years | 4.8 |
| years | | 4.5 |
| years |
| Weighted average risk-free interest rate | 1.33 |
| % | | 0.75 |
| % | | 0.75 |
| % | 2.04 |
| % | | 1.47 |
| % |
| Weighted average expected volatility | 52.2 |
| % | | 55.3 |
| % | | 55.7 |
| % | 39.7 |
| % | | 46.5 |
| % |
| Expected dividend yield | 0.0 |
| % | | 0.0 |
| % | | 0.0 |
| % | 0.0 |
| % | | 0.0 |
| % |
| Weighted average grant date fair value | $ | 2.69 |
| | $ | 3.43 |
| | $ | 5.41 |
| | $ | 4.70 |
| | $ | 3.00 |
| |
Prior to 2012 we utilized historical volatility for a pool of peer companies for a period of time that is comparable to the expected life of the option/SSAR to determine volatility assumptions for stock-based compensation. Beginning in 2012 volatility was calculated using a combination of peer companies (50%) and ACCO Brands' historic volatility (50%). In 2013, volatility was calculated using a combination of peer companies (25%) and ACCO Brands' historic volatility (75%). In 2014, volatilityVolatility was calculated using ACCO Brands' historic volatility (100%).volatility. The weighted average expected option/SSARoption term reflects the
ACCO Brands Corporation and Subsidiaries
NotesBrands' historic life for all option tranches beginning in 2017. Prior to Consolidated Financial Statements (Continued)
2017, the weighted average expected option term reflects the application of the simplified method, which defines the life as the average of the contractual term of the option/SSARoption and the weighted average vesting period for all option tranches. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Forfeitures are estimated at the time of grant in order to calculate the amount of share-based payment awards ultimately expected to vest. The forfeiture rate is based on historical experience.
A summary of the changes in stock options/SSARsoptions outstanding under our stock compensation plansthe Plan during the year ended December 31, 20142017 areis presented below:
|
| | | | | | | | | | | | |
| | Number
Outstanding | | Weighted
Average
Exercise
Price | | Weighted Average
Remaining
Contractual Term | | Aggregate
Intrinsic
Value |
| Outstanding at December 31, 2013 | 4,806,475 |
| | $ | 8.30 |
| | | | |
| Granted | 1,630,631 |
| | $ | 6.14 |
| | | | |
| Exercised | (593,731 | ) | | $ | 1.35 |
| | | | |
| Lapsed | (869,989 | ) | | $ | 19.18 |
| | | | |
| Outstanding at December 31, 2014 | 4,973,386 |
| | $ | 7.02 |
| | 4.2 years | | $ | 13.0 | million |
| Options/SSARs vested or expected to vest | 4,852,670 |
| | $ | 7.03 |
| | 4.2 years | | $ | 12.7 | million |
| Exercisable shares at December 31, 2014 | 2,427,221 |
| | $ | 7.03 |
| | 2.6 years | | $ | 7.3 | million |
|
| | | | | | | | | | | | |
| | Number
Outstanding | | Weighted
Average
Exercise
Price | | Weighted Average
Remaining
Contractual Term | | Aggregate
Intrinsic
Value |
| Outstanding at December 31, 2016 | 4,133,874 |
| | $ | 7.82 |
| | | | |
| Granted | 745,772 |
| | $ | 12.75 |
| | | | |
| Exercised | (547,107 | ) | | $ | 7.72 |
| | | | |
| Forfeited | (59,888 | ) | | $ | 9.57 |
| | | | |
| Outstanding at December 31, 2017 | 4,272,651 |
| | $ | 8.68 |
| | 3.3 years | | $ | 15.5 | million |
| Exercisable shares at December 31, 2017 | 3,157,606 |
| | $ | 7.88 |
| | 2.6 years | | $ | 13.6 | million |
We received cash of $0.3$4.2 million, $6.8 million and $0.2$0.7 million from the exercise of stock options forduring the years ended December 31, 20142017, 2016 and 2012,2015, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 20142017, 2016 and 2012, was not significant. No options were exercised in the year ended December 31, 2013.2015 totaled $2.8 million, $3.5 million and $0.7 million, respectively.
The aggregate intrinsic value of SSARs exercised during the years ended December 31, 2014, 20132016 and 20122015 totaled $3.6$2.9 million, $0.7 million and $2.52.0 million, respectively. As of December 31, 2016, there were no SSARs outstanding.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The fair value of options and SSARs vested during the years ended December 31, 20142017, 20132016 and 20122015 was $3.22.6 million, $1.94.1 million and $1.03.8 million, respectively. As of December 31, 20142017, we had unrecognized compensation expense related to stock options of $4.52.7 million, which will be recognized over a weighted-average period of 1.71.5 years.
Stock Unit Awards
RSUs vest over a pre-determined period of time, generally three to four years from the date of grant. Stock-based compensation expense for the years ended December 31, 20142017, 20132016 and 20122015 includes $0.8 million, $0.9 million and $0.90.8 million, respectively, of expense related tothat consisted of shares of stock (included in RSU compensation expense) and RSUs granted to non-employee directors, which became fully vested on the grant date. PSUs also vest over a pre-determined period of time, minimally three years, but are further subject to the achievement of certain business performance criteria in future periods.being met during the vesting period. Based upon the level of achieved performance, the number of shares actually awarded can vary from 0% to 150% of the original grant.
There were 2,430,6831,534,058 RSUs outstanding atas of December 31, 20142017. All outstanding RSUs as of December 31, 20142017 vest within fourthree years of their date of grant. We generally recognize compensation expense for our RSU awards ratably over the service period. Also outstanding at as of December 31, 20142017 were 2,837,1623,531,312 PSUs. All outstanding PSUs as of December 31, 20142017 vest at the end of their respective performance periods subject to percentage achievedthe level of achievement of the performance targets associated with such awards. Upon vesting, all of the remaining RSU and PSU awards will be converted into the right to receive one share of common stock of the Company for each unit that vests. The cost of these awards is determined using the fair value of the shares on the date of grant, and compensation expense is generally recognized over the period during which the employees provideemployee provides the requisite service to the Company. We generally recognize compensation expense for our PSU awards ratably over the performance period based on management’s judgment of the likelihood that performance measures will be attained. We generally recognize compensation expense for our RSU awards ratably over the service period.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
A summary of the changes in the RSUs outstanding under our equity compensation plansthe Plan during 20142017 areis presented below:
|
| | | | | | |
| | Stock
Units | | Weighted
Average
Grant
Date Fair
Value |
| Outstanding at December 31, 2013 | 2,021,123 |
| | $ | 8.95 |
|
| Granted | 881,554 |
| | $ | 6.12 |
|
| Vested and distributed | (321,697 | ) | | $ | 8.45 |
|
| Vested and deferred distributed | (43,428 | ) | | $ | 8.29 |
|
| Forfeited | (106,869 | ) | | $ | 8.61 |
|
| Outstanding at December 31, 2014 | 2,430,683 |
| | $ | 8.02 |
|
Vested and deferred at December 31, 2014(1) | 175,504 |
| | $ | 7.98 |
|
|
| | | | | | |
| | Stock
Units | | Weighted
Average
Grant
Date Fair
Value |
| Outstanding at December 31, 2016 | 1,910,669 |
| | $ | 7.23 |
|
| Granted | 438,521 |
| | $ | 12.65 |
|
| Vested and distributed | (691,319 | ) | | $ | 6.21 |
|
| Vested and deferred distributed | (38,042 | ) | | $ | 9.46 |
|
| Forfeited and cancelled | (85,771 | ) | | $ | 8.66 |
|
| Outstanding at December 31, 2017 | 1,534,058 |
| | $ | 9.10 |
|
Vested and deferred at December 31, 2017(1) | 326,835 |
| | $ | 9.16 |
|
| |
| (1) | Included in outstanding at December 31, 2014.2017. Vested and deferred RSUs are primarily related to deferred compensation for non-employee directors. |
For the years ended December 31, 20132016 and 20122015, we granted 791,349516,739 and 671,941668,619 shares of RSUs, respectively. The weighted-average grant date fair value of our RSUs was $6.1212.65, $7.148.05, and $10.987.58 for the years ended December 31, 20142017, 20132016 and 20122015, respectively. The fair value of stock unit awardsRSUs that vested during the years ended December 31, 20142017, 20132016 and 20122015 was $3.25.5 million, $1.05.2 million and $5.910.3 million, respectively. As of December 31, 20142017, we have unrecognized compensation expense related to RSUs of $4.84.6 million. The unrecognized compensation expense related to RSUs will be recognized over a weighted-average period of 1.71.8 years.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
A summary of the changes in the PSUs outstanding under our equity compensation plansthe Plan during 20142017 areis presented below:
| | | | Stock
Units | | Weighted
Average
Grant
Date Fair
Value | Stock
Units | | Weighted
Average
Grant
Date Fair
Value |
| Outstanding at December 31, 2013 | 2,294,792 |
| | $ | 7.94 |
| |
| Outstanding at December 31, 2016 | | 4,281,792 |
| | $ | 7.09 |
|
| Granted | 1,316,867 |
| | $ | 6.14 |
| 706,732 |
| | $ | 12.75 |
|
| Vested | (496,926 | ) | | $ | 8.91 |
| (1,502,327 | ) | | $ | 6.16 |
|
| Forfeited and cancelled | (136,411 | ) | | $ | 7.04 |
| (131,465 | ) | | $ | 8.24 |
|
| Other - decrease due to performance of PSU's | (141,160 | ) | | $ | 6.39 |
| |
| Outstanding at December 31, 2014 | 2,837,162 |
| | $ | 7.37 |
| |
| Other - increase due to performance of PSU's | | 176,580 |
| | $ | 11.72 |
|
| Outstanding at December 31, 2017 | | 3,531,312 |
| | $ | 8.82 |
|
For the years ended December 31, 20132016 and 20122015 we granted 1,174,4651,013,242 and 864,8381,017,702 shares of PSUs, respectively. For the years ended December 31, 2014, 20132017, 2016 and 2012 we paid out 496,926, 419,2052015, 1,502,327, 1,072,692 and 3,119697,172 shares of PSUs vested, respectively. The weighted-average grant date fair value of our PSUs was $6.14, $7.59,$12.75, $7.65, and $8.53$7.52 for the years ended December 31, 20142017, 20132016 and 20122015, respectively. The fair value of PSUs that vested during the years ended December 31, 20142017, and 20132016 and 2015 was $4.4$9.3 million, $8.1 million and $3.0$5.4 million respectively. The fair value of PSUs that vested during the year ended December 31, 2012 were immaterial. As of December 31, 20142017, we have unrecognized compensation expense related to PSUs of $7.011.2 million. The unrecognized compensation expense related to PSUs will be recognized over a weighted-average period of 1.61.7 years.
We will satisfy7. Inventories
Inventories are stated at the requirement for delivering the common shares for stock-based plans by issuing new shares.lower of cost or net realizable value. The components of inventories were as follows: |
| | | | | | | |
| | December 31, |
| (in millions of dollars) | 2017 | | 2016 |
| Raw materials | $ | 38.2 |
| | $ | 30.3 |
|
| Work in process | 4.1 |
| | 3.0 |
|
| Finished goods | 211.9 |
| | 176.7 |
|
| Total inventories | $ | 254.2 |
| | $ | 210.0 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Inventories
Inventories are stated at the lower of cost or market value. The components of inventories were as follows: |
| | | | | | | |
| | December 31, |
| (in millions of dollars) | 2014 | | 2013 |
| Raw materials | $ | 36.7 |
| | $ | 36.1 |
|
| Work in process | 2.0 |
| | 2.4 |
|
| Finished goods | 191.2 |
| | 216.2 |
|
| Total inventories | $ | 229.9 |
| | $ | 254.7 |
|
8. Property, Plant and Equipment, Net
The components of net property, plant and equipment were as follows: | | | | December 31, | December 31, |
| (in millions of dollars) | 2014 | | 2013 | 2017 | | 2016 |
| Land and improvements | $ | 21.5 |
| | $ | 23.3 |
| $ | 28.0 |
| | $ | 18.9 |
|
| Buildings and improvements to leaseholds | 129.0 |
| | 133.3 |
| 152.6 |
| | 119.1 |
|
| Machinery and equipment | 374.2 |
| | 352.4 |
| 453.5 |
| | 382.0 |
|
| Construction in progress | 23.0 |
| | 39.5 |
| 11.1 |
| | 8.0 |
|
| | 547.7 |
| | 548.5 |
| 645.2 |
| | 528.0 |
|
| Less: accumulated depreciation | (312.2 | ) | | (295.2 | ) | (366.7 | ) | | (329.6 | ) |
Property, plant and equipment, net(1) | $ | 235.5 |
| | $ | 253.3 |
| $ | 278.5 |
| | $ | 198.4 |
|
| |
| (1) | Net property, plant and equipment as of December 31, 20142017 and 20132016 contained $37.042.1 million and $32.634.7 million of computer software assets, respectively, which are classified within machinery and equipment and construction in progress. Amortization ofexpense for software costs was $7.47.1 million, $6.77.0 million and $8.46.1 million for the years ended December 31, 20142017, 20132016 and 20122015, respectively. |
The increase in net property, plant and equipment is primarily due to the Esselte Acquisition.
9. Goodwill and Identifiable Intangible Assets
Goodwill
Effective in the first quarter of 2017, as a result of the Esselte Acquisition, the Company realigned its operating structure, which impacted its determination of its business segments for financial reporting purposes. As a result, the Company no longer reports the results of its Computer Products Group as a separate segment. See "Note 16. Information on Business Segments" for further details on the realigned segments. The Company's three realigned segments are as follows:
|
| | |
| Operating Segment | | Geography |
| ACCO Brands North America | | United States and Canada |
| ACCO Brands EMEA | | Europe, Middle East and Africa |
| ACCO Brands International | | Australia, Latin America and Asia-Pacific |
As part of the realignment, the Company performed a quantitative goodwill impairment test ("Step-1") to reallocate the goodwill among the realigned segments based on their relative fair values. There were no impairment charges recognized as a result of this change.
We have restated our reportable segments for the period presented below to reflect this change.
Changes in the net carrying amount of goodwill by segment were as follows:
|
| | | | | | | | | | | | | | | | |
| | (in millions of dollars) | ACCO Brands North America | | ACCO Brands International | | Computer Products Group | | Total |
| |
| | Balance at December 31, 2012 | $ | 396.3 |
| | $ | 186.3 |
| | $ | 6.8 |
| | $ | 589.4 |
|
| | Mead C&OP acquisition | 1.4 |
| | 0.5 |
| | — |
| | 1.9 |
|
| | Translation | (4.6 | ) | | (18.4 | ) | | — |
| | (23.0 | ) |
| | Balance at December 31, 2013 | 393.1 |
| | 168.4 |
| | 6.8 |
| | 568.3 |
|
| | Translation | (5.5 | ) | | (17.9 | ) | | — |
| | (23.4 | ) |
| | Balance at December 31, 2014 | $ | 387.6 |
| | $ | 150.5 |
| | $ | 6.8 |
| | $ | 544.9 |
|
| | Goodwill | $ | 518.5 |
| | $ | 234.7 |
| | $ | 6.8 |
| | $ | 760.0 |
|
| | Accumulated impairment losses | (130.9 | ) | | (84.2 | ) | | — |
| | (215.1 | ) |
| | Balance at December 31, 2014 | $ | 387.6 |
| | $ | 150.5 |
| | $ | 6.8 |
| | $ | 544.9 |
|
|
| | | | | | | | | | | | | | | | |
| | (in millions of dollars) | ACCO
Brands
North America | | ACCO
Brands
EMEA | | ACCO
Brands
International | | Total |
| |
| | Balance at December 31, 2016 | 380.7 |
| | 39.5 |
| | 166.9 |
| | 587.1 |
|
| | Esselte Acquisition | (5.1 | ) | | 113.2 |
| | (1.6 | ) | | 106.5 |
|
| | Translation | — |
| | (23.3 | ) | | — |
| | (23.3 | ) |
| | Balance at December 31, 2017 | $ | 375.6 |
| | $ | 129.4 |
| | $ | 165.3 |
| | $ | 670.3 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The goodwill balance includes $215.1 million of accumulated impairment losses, which occurred prior to December 31, 2016.
Goodwill has been recorded on our Consolidated Balance Sheet related to the Esselte Acquisition and represents the excess of the cost of the Esselte Acquisition when compared to the fair value estimate of the net assets acquired on January 31, 2017 (the date of the Esselte Acquisition). See "Note 3. Acquisitions", for details on the calculation of the goodwill acquired in the Esselte Acquisition.
The authoritative guidance on goodwill and other intangible assets requires that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are ACCO Brands North America, ACCO Brands InternationalEMEA and Computer Products Group segments.ACCO Brands International. We test goodwill for impairment at least annually and whenever eventson an interim basis if an event or circumstances
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
makecircumstance indicates that it is more likely than not that an impairment may have occurred. Weloss has been incurred. The Company performed this annual assessment, on a qualitative basis, as allowed by GAAP, in the second quarter of 20142017 and concluded that no impairment existed. For the North America reporting unit, we determined that its fair value exceeded its carrying amount by 13%. Key financial assumptions utilized to determine the fair value of the North America reporting unit included annual sales growth rates in the range of (1.4)% to 0.2% and a 9.0% discount rate. For the International reporting unit, we determined that its fair value exceeded its carrying amount by 52%. Key financial assumptions utilized to determine the fair value of the International reporting unit included annual sales growth rates in the range of 3.2% to 4.4% and a 10.5% discount rate. For the Computer Products Group reporting unit we determined that its fair value exceeded its carrying amount by 33%. Key financial assumptions utilized to determine the fair value of the Computer Products Group reporting unit included annual sales growth rates in the range of (3.5)% to 2.5% and a 10.0% discount rate.
A considerable amount of management judgment and assumptions are required in performing the impairment tests, principally in determining the fair value of each reporting unit and the indefinite lived intangible assets. While we believe our judgments and assumptions are reasonable, different assumptions could change the estimated fair values and, therefore, impairment charges could be required. Significant negative industry or economic trends, disruptions to our business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in the use of the assets or in entity structure and divestitures may adversely impact the assumptions used in the valuations and ultimately result in future impairment charges.
Identifiable Intangibles
We test indefinite-lived intangibles for impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. We performed this annual assessment, on a qualitative (Step-Zero) basis, as allowed by GAAP, for the majority of indefinite-lived trade names in the second quarter of 20142017 and concluded that no impairment exists. However, due to the recent acquisitionexisted. For two of Mead C&OP, the fair values of certainour indefinite-lived trade names that are not substantially above their carrying values, Mead® and Hilroy®, we performed quantitative tests (Step 1) in the second quarter of 2017. The following long-term growth rates and discount rates were used, 1.5% and 10.5% for Mead®, and 1.5% and 11.0% for Hilroy®, respectively. We concluded that neither the Mead® nor Hilroy® trade names were impaired. The fair value of the Mead® trade name was less than 30% above its carrying value as of the second quarter of 2017 Step-1 test. As of December 31, 2017, the carrying value of the Mead® trade name was $113.3 million.
As of June 1, 2017, we changed the indefinite-lived Hilroy trade name to an amortizable intangible asset. The change was made as a result of decisions regarding the Company's future use of the trade name. The Company commenced amortizing the Hilroy trade name June 1, 2017 on a straight-line basis over a life of 30 years.
The identifiable intangible assets of $277.0 million acquired in the Esselte Acquisition include amortizable customer relationships, indefinite lived and amortizable trade names and patents, which have been recorded at their estimated fair values. The fair value of the trade names and patents was determined using the relief from royalty method, which is based on the present value of royalty fees derived from projected revenues. The fair value of the customer relationships was determined using the multi-period excess earnings method, which is based on the present value of the projected after-tax cash flows.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Amortizable customer relationships, trade names and patents are expected to be amortized over lives ranging from 10 to 30 years from the Esselte Acquisition date of January 31, 2017. The customer relationships will be amortized on an accelerated basis. The allocations of the acquired identifiable intangibles acquired in the Esselte Acquisition are as follows:
|
| | | | | |
| (in millions of dollars) | Fair Value | | Remaining Useful Life Ranges |
| Trade name - indefinite lived | $ | 116.8 |
| | Indefinite |
| Trade names - amortizable | 53.2 |
| | 15-30 Years |
| Customer relationships | 102.4 |
| | 15 Years |
| Patents | 4.6 |
| | 10 Years |
| Total identifiable intangibles acquired | $ | 277.0 |
| | |
The identifiable intangible assets of $58.0 million acquired in the PA Acquisition include amortizable customer relationships and trade names and were recorded at their estimated fair values. The values assigned were based on the estimated future discounted cash flows attributable to the assets. These future cash flows were estimated based on the historical cash flows and then adjusted for anticipated future changes, primarily expected changes in sales volume or price.
Amortizable customer relationships and trade names are being amortized over lives ranging from 12 to 30 years from the PA Acquisition date of May 2, 2016. The customer relationships are being amortized on an accelerated basis. The allocations of the identifiable intangibles acquired in the PA Acquisition are as follows:
|
| | | | | |
| (in millions of dollars) | Fair Value | | Remaining Useful Life Ranges |
| Trade names - amortizable | $ | 22.0 |
| | 12-30 Years |
| Customer relationships | 36.0 |
| | 12 Years |
| Total identifiable intangibles acquired | $ | 58.0 |
| | |
The gross carrying value and accumulated amortization by class of identifiable intangible assets as of December 31, 20142017 and 20132016 were as follows:
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| (in millions of dollars) | Gross
Carrying
Amounts | | Accumulated
Amortization | | Net
Book
Value | | Gross
Carrying
Amounts | | Accumulated
Amortization | | Net
Book
Value | Gross
Carrying
Amounts | | Accumulated
Amortization | | Net
Book
Value | | Gross
Carrying
Amounts | | Accumulated
Amortization | | Net
Book
Value |
| Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | |
| Trade names | $ | 499.4 |
| | $ | (44.5 | ) | (1) | $ | 454.9 |
| | $ | 510.5 |
| | $ | (44.5 | ) | (1) | $ | 466.0 |
| $ | 599.5 |
| | $ | (44.5 | ) | (1) | $ | 555.0 |
| | $ | 483.3 |
| | $ | (44.5 | ) | (1) | $ | 438.8 |
|
| Amortizable intangible assets: | | | | | | | | | | | | | | | | | | | | | | |
| Trade names | 127.7 |
| | (55.5 | ) | | 72.2 |
| | 131.3 |
| | (47.5 | ) | | 83.8 |
| 195.3 |
| | (59.4 | ) | | 135.9 |
| | 121.2 |
| | (48.8 | ) | | 72.4 |
|
| Customer and contractual relationships | 100.4 |
| | (57.2 | ) | | 43.2 |
| | 102.7 |
| | (46.4 | ) | | 56.3 |
| 243.0 |
| | (99.3 | ) | | 143.7 |
| | 127.5 |
| | (73.8 | ) | | 53.7 |
|
| Patents/proprietary technology | 10.2 |
| | (9.1 | ) | | 1.1 |
| | 10.3 |
| | (9.4 | ) | | 0.9 |
| |
| Patents | | 5.8 |
| | (0.5 | ) | | 5.3 |
| | 0.8 |
| | — |
| | 0.8 |
|
| Subtotal | 238.3 |
| | (121.8 | ) | | 116.5 |
| | 244.3 |
| | (103.3 | ) | | 141.0 |
| 444.1 |
| | (159.2 | ) | | 284.9 |
| | 249.5 |
| | (122.6 | ) | | 126.9 |
|
| Total identifiable intangibles | $ | 737.7 |
| | $ | (166.3 | ) | | $ | 571.4 |
| | $ | 754.8 |
| | $ | (147.8 | ) | | $ | 607.0 |
| $ | 1,043.6 |
| | $ | (203.7 | ) | | $ | 839.9 |
| | $ | 732.8 |
| | $ | (167.1 | ) | | $ | 565.7 |
|
| |
| (1) | Accumulated amortization prior to the adoption of authoritative guidance on goodwill and other intangible assets, at which time further amortization ceased. |
The Company’s intangible amortization was $22.2$35.6 million, $24.7$21.6 million and $19.9$19.6 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Estimated amortization expense for amortizable intangible assets for the next five years is as follows:
| | | (in millions of dollars) | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
Estimated amortization expense | $ | 19.8 |
| | $ | 17.4 |
| | $ | 14.2 |
| | $ | 12.0 |
| | $ | 9.9 |
| $ | 34.3 |
| | $ | 30.8 |
| | $ | 27.3 |
| | $ | 23.8 |
| | $ | 20.3 |
|
| |
| (2) | Actual amounts of amortization expense may differ from estimated amounts due to changes in foreign currency exchange rates, additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets and other events. |
10. Restructuring
During 2017, the Company initiated cost savings plans related to the consolidation and integration of Esselte affecting all three of the Company's segments, but primarily the ACCO Brands EMEA segment. The cost savings initiatives undertaken by the Company in 2016 to further enhance its operations in the ACCO Brands North America segment were expanded during 2017 to include the change in the operating structure in North America, including integration of our former Computer Products Group.
During 2016, the Company initiated cost savings plans related to the consolidation and integration of the acquired Pelikan Artline business into the Company's already existing Australia and New Zealand businesses within the ACCO Brands International segment.
During the first quarter of 2018, the Company approved additional restructuring projects aggregating to $3.5 million, primarily related to changes to the structure in the ACCO Brands North America segment and the continued integration of Esselte in the ACCO Brands EMEA segment. In accordance with GAAP, none of the aforementioned liabilities were recorded in the fourth quarter of 2017.
Consistent with our previous communications about the Esselte Acquisition, the Company currently expects it will record approximately $4 million of incremental restructuring expenses during the remainder of 2018, which is in addition to the $3.5 million of restructuring projects approved during the first quarter of 2018. As integration plans are still being finalized, it is not possible to reasonably estimate the nature or timing of these restructuring and integration charges or the timing of their associated cash outflows.
For the years ended December 31, 2017, 2016 and 2015, we recorded restructuring charges (credits) of $21.7 million, $5.4 million and $(0.4) million, respectively.
The summary of the activity in the restructuring liability (which is included in "Other current liabilities") for the year ended December 31, 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions of dollars) | Balance at December 31, 2016 | | Esselte Acquisition (4) | | Provision | | Cash
Expenditures | | Non-cash
Items/
Currency Change | | Balance at December 31, 2017 |
Employee termination costs(1) | $ | 1.4 |
| | $ | 1.5 |
| | $ | 18.2 |
| | $ | (9.6 | ) | | $ | 0.5 |
| | $ | 12.0 |
|
Termination of lease agreements(2) | 0.1 |
| | 1.2 |
| | 2.4 |
| | (3.1 | ) | | 0.2 |
| | 0.8 |
|
Other(3) | — |
| | 0.1 |
| | 1.1 |
| | (0.7 | ) | | — |
| | 0.5 |
|
| Total restructuring liability | $ | 1.5 |
| | $ | 2.8 |
| | $ | 21.7 |
| | $ | (13.4 | ) | | $ | 0.7 |
| | $ | 13.3 |
|
(1) We expect the remaining $12.0 million employee termination costs to be substantially paid within the next eighteen months.
(2) We expect the remaining $0.8 million termination of lease costs to be substantially paid within the next fifteen months.
(3) We expect the remaining $0.5 million of other costs to be substantially paid with the next twelve months.
(4) Restructuring liabilities assumed in the Esselte Acquisition.
During the fourth quarter of 2017, in connection with the Pelikan Artline integration, the Company sold its building and related assets in New Zealand for net proceeds of $3.9 million and recorded a gain on sale of $1.5 million as a reduction of SG&A expense in its Consolidated Statements of Income within the ACCO Brands International segment. The sale was not included in the Company’s restructuring liability activity presented above.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Actual amounts of amortization expense may differ from estimated amounts due to changes in foreign currency exchange rates, additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets and other events.
10. Restructuring
During the fourth quarter of 2014, we committed to certain restructuring actions which further enhance our ongoing efforts to centralize, control and streamline our global and regional operational, supply chain and administrative functions. These plans were primarily associated with our North American school, office and computer products workforce. The associated actions will be substantially completed during the first half of 2015.
During the fourth quarter of 2013, in light of current economic and industry conditions and in anticipation of an uncertain demand environment as well as the expected impact of industry consolidation in 2014, we committed to restructuring actions that were primarily focused on streamlining our North American school, office and computer products workforce, impacting all operational, supply chain and administrative functions. These efforts were substantially completed in 2014.
Also in 2013, we committed to incremental cost savings plans intended to improve the efficiency and effectiveness of our businesses. These plans relate to cost-reduction initiatives within our North America and International segments, and were primarily associated with post-merger integration activities of the North American operations following the Merger and changes in the European business model and manufacturing footprint. The most significant of these plans was finalized during the second quarter of 2013, and related to the closure of our Brampton, Canada distribution and manufacturing facility and relocation of its activities to other facilities within the Company.
In 2012, we initiated cost savings plans related to the consolidation and integration of our then recently acquired Mead C&OP business. The most significant of these plans related to our dated goods business and included closure of a manufacturing and distribution facility in East Texas, Pennsylvania and relocation of its activities to other facilities within the Company, which was completed during the second quarter of 2013. We also committed to certain cost savings plans that were expected to improve the efficiency and effectiveness of our U.S. and European businesses, which were independent of any plans related to our acquisition of Mead C&OP.
For the years ended December 31, 2014, 2013 and 2012, we recorded restructuring charges of $5.5 million, $30.1 million and $24.3 million, respectively.
A summary of the activity in the restructuring accounts and a reconciliation of the liability for the year ended December 31, 20142016 was as follows:
| | | (in millions of dollars) | Balance at December 31, 2013 | | Provision | | Cash
Expenditures | | Non-cash
Items/
Currency Change | | Balance at December 31, 2014 | Balance at December 31, 2015 | | PA Acquisition (5) | | Provision | | Cash
Expenditures | | Non-cash
Items/
Currency Change | | Balance at December 31, 2016 |
| Employee termination costs | $ | 19.1 |
| | $ | 4.3 |
| | $ | (15.3 | ) | | $ | (0.3 | ) | | $ | 7.8 |
| $ | 0.9 |
| | $ | — |
| | $ | 5.2 |
| | $ | (4.7 | ) | | $ | — |
| | $ | 1.4 |
|
| Termination of lease agreements | 1.4 |
| | 0.5 |
| | (1.5 | ) | | 0.2 |
| | 0.6 |
| 0.1 |
| | — |
| | 0.2 |
| | (0.2 | ) | | — |
| | 0.1 |
|
| Asset impairments/net loss on disposal of assets resulting from restructuring activities | — |
| | 0.6 |
| | — |
| | (0.6 | ) | | — |
| |
| Other | — |
| | 0.1 |
| | (0.1 | ) | | — |
| | — |
| |
| Total restructuring liability | $ | 20.5 |
| | $ | 5.5 |
| | $ | (16.9 | ) | | $ | (0.7 | ) | | $ | 8.4 |
| $ | 1.0 |
| | $ | — |
| | $ | 5.4 |
| | $ | (4.9 | ) | | $ | — |
| | $ | 1.5 |
|
Management expects(5) Restructuring liabilities assumed in the $7.8 million employee termination costs balance to be substantially paid within the next 12 months. Cash payments associated with lease termination costs of $0.6 million are also expected to be paid within the next 12 months.PA Acquisition.
The Company's East Texas, Pennsylvania manufacturing and distribution facilitysummary of the activity in the restructuring accounts for the year ended December 31, 2015 was sold during the second quarter of 2014 and generated net cash proceeds of $3.2 million. An immaterial loss was recognized on the sale.as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions of dollars) | Balance at December 31, 2014 | | Acquisitions | | Provision/(Credits) | | Cash
Expenditures | | Non-cash
Items/
Currency Change | | Balance at December 31, 2015 |
| Employee termination costs | $ | 7.8 |
| | $ | — |
| | $ | (0.6 | ) | | $ | (6.0 | ) | | $ | (0.3 | ) | | $ | 0.9 |
|
| Termination of lease agreements | 0.6 |
| | — |
| | 0.2 |
| | (0.7 | ) | | — |
| | 0.1 |
|
| Total restructuring liability | $ | 8.4 |
| | $ | — |
| | $ | (0.4 | ) | | $ | (6.7 | ) | | $ | (0.3 | ) | | $ | 1.0 |
|
Restructuring charges (credits) for the years ended December 31, 2017, 2016 and 2015 by reporting segment were as follows:
|
| | | | | | | | | | | |
| | December 31, |
| (in millions of dollars) | 2017 | | 2016 | | 2015 |
| ACCO Brands North America | $ | 5.5 |
| | $ | 1.1 |
| | $ | (0.4 | ) |
| ACCO Brands EMEA | 11.2 |
| | — |
| | — |
|
| ACCO Brands International | 5.0 |
| | 4.3 |
| | — |
|
| Total restructuring charges (credits) | $ | 21.7 |
| | $ | 5.4 |
| | $ | (0.4 | ) |
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
A summary of the activity in the restructuring accounts and a reconciliation of the liability for the year ended December 31, 2013 was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions of dollars) | Balance at December 31, 2012 | | Provision | | Cash
Expenditures | | Non-cash
Items/
Currency Change | | Balance at December 31, 2013 |
| Employee termination costs | $ | 15.2 |
| | 26.4 |
| | (22.5 | ) | | — |
| | $ | 19.1 |
|
| Termination of lease agreements | 0.2 |
| | 1.9 |
| | (0.7 | ) | | — |
| | 1.4 |
|
| Asset impairments/net loss on disposal of assets resulting from restructuring activities | — |
| | 1.2 |
| | 0.5 |
| | (1.7 | ) | | — |
|
| Other | — |
| | 0.6 |
| | (0.6 | ) | | — |
| | — |
|
| Total restructuring liability | $ | 15.4 |
| | $ | 30.1 |
| | $ | (23.3 | ) | | $ | (1.7 | ) | | $ | 20.5 |
|
Not included in the restructuring table above is a $2.5 million net gain on the sale of the Company's Ireland distribution facility. The sale, which occurred during the second quarter of 2013, generated net cash proceeds of $3.8 million. The gain on sale was recognized in the Consolidated Statements of Income in SG&A.
A summary of the activity in the restructuring accounts and a reconciliation of the liability for the year ended December 31, 2012 was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| (in millions of dollars) | Balance at December 31, 2011 | | Provision/Income | | Cash
Expenditures | | Non-cash
Items/
Currency Change | | Balance at December 31, 2012 |
| Employee termination costs | 0.3 |
| | 24.0 |
| | (9.2 | ) | | 0.1 |
| | $ | 15.2 |
|
| Termination of lease agreements | 0.7 |
| | (0.1 | ) | | (0.4 | ) | | — |
| | 0.2 |
|
| Asset impairments/net loss on disposal of assets resulting from restructuring activities | 0.2 |
| | 0.3 |
| | (0.3 | ) | | (0.2 | ) | | — |
|
| Other | — |
| | 0.1 |
| | (0.1 | ) | | — |
| | — |
|
| Total restructuring liability | $ | 1.2 |
| | $ | 24.3 |
| | $ | (10.0 | ) | | $ | (0.1 | ) | | $ | 15.4 |
|
Not included in the restructuring table above is a $0.1 million net gain on the sale of a manufacturing facility and certain assets in the U.K. The sale, which occurred during the second quarter of 2012, generated net cash proceeds of $2.7 million. The gain on sale was recognized in the Consolidated Statements of Income in SG&A.
11. Income Taxes
The components of income (loss)from continuing operations before income taxes from continuing operationstax were as follows:
| | | (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Domestic operations | $ | 43.5 |
| | $ | 1.8 |
| | $ | (94.9 | ) | $ | 68.7 |
| | $ | 33.9 |
| | $ | 60.9 |
|
| Foreign operations | 93.5 |
| | 89.9 |
| | 90.5 |
| 89.4 |
| | 91.2 |
| | 70.5 |
|
| Total | $ | 137.0 |
| | $ | 91.7 |
| | $ | (4.4 | ) | $ | 158.1 |
| | $ | 125.1 |
| | $ | 131.4 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The reconciliation of income taxes computed at the U.S. federal statutory income tax rate of 35% to our effective income tax rate for continuing operations was as follows:
| | | (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Income tax at U.S. statutory rate of 35% | $ | 47.9 |
| | $ | 32.1 |
| | $ | (1.5 | ) | $ | 55.3 |
| | $ | 43.8 |
| | $ | 46.0 |
|
| Effect of the U.S. Tax Act | | (25.7 | ) | | — |
| | — |
|
| State, local and other tax, net of federal benefit | 2.1 |
| | (1.4 | ) | | (0.6 | ) | 3.6 |
| | 2.4 |
| | 2.1 |
|
| U.S. effect of foreign dividends and earnings | 7.4 |
| | 7.5 |
| | 23.7 |
| |
| Unrealized foreign currency loss on intercompany debt | (3.0 | ) | | (3.5 | ) | | (7.7 | ) | |
| U.S. effect of foreign dividends and withholding taxes | | 4.9 |
| | 4.6 |
| | 3.9 |
|
| Unrealized foreign currency expense (benefit) on intercompany debt | | — |
| | 0.7 |
| | (0.7 | ) |
| Realized foreign exchange net loss on intercompany loans | | — |
| | (9.6 | ) | | — |
|
| Revaluation of previously held equity interest | | — |
| | (12.0 | ) | | — |
|
| Foreign income taxed at a lower effective rate | (8.6 | ) | | (6.4 | ) | | (7.2 | ) | (6.9 | ) | | (4.6 | ) | | (5.6 | ) |
| Interest on Brazilian Tax Assessment | | 2.2 |
| | 2.8 |
| | 2.7 |
|
| Expiration of tax credits | 11.7 |
| | — |
| | — |
| — |
| | 10.9 |
| | 1.0 |
|
| Decrease in valuation allowance | (11.5 | ) | | (11.6 | ) | | (145.1 | ) | (0.6 | ) | | (9.9 | ) | | (1.3 | ) |
| U.S. effect of capital gain | — |
| | — |
| | 11.0 |
| |
| Correction of deferred tax error | — |
| | (3.1 | ) | | 0.8 |
| |
| Change in prior year tax estimates and other | (0.6 | ) | | 0.8 |
| | 5.2 |
| |
| Excess benefit from stock-based compensation | | (5.6 | ) | | — |
| | — |
|
| Other | | (0.8 | ) | | 0.5 |
| | (2.6 | ) |
| Income taxes as reported | $ | 45.4 |
| | $ | 14.4 |
| | $ | (121.4 | ) | $ | 26.4 |
| | $ | 29.6 |
| | $ | 45.5 |
|
| Effective tax rate | 33.1 | % | | 15.7 | % | | NM |
| 16.7 | % | | 23.7 | % | | 34.6 | % |
2017
For 2014,2017, we recorded an income tax expense from continuing operations of $45.4$26.4 million on income before taxes of $137.0$158.1 million. The lower effective rate for 20142017 of 33.1% is less than16.7% was primarily driven by a $25.7 million benefit resulting from the U.S. statutoryTax Act, and a $5.6 million benefit due to the impact of the Company's adoption of ASU No. 2016-9, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-9 in 2017.
Tax Reform
On December 22, 2017, the U.S. Tax Act was signed into law. The U.S. Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the future U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) requiring companies to pay a one-time transition tax on certain undistributed earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.
The U.S. Tax Act also established new tax laws that will affect 2018, including, but not limited to: (i) the reduction of the U.S. federal corporate tax rate discussed above; (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income ("GILTI"); (iv) the repeal of the domestic production activity deductions; (v) limitations on the deductibility of certain executive compensation; (vi) limitations on the use of foreign tax credits to reduce the U.S. income tax liability; and (vii) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income ("FDII").
The SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the U.S. Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
for companies to complete the related accounting under ASC 740, Accounting for Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the U.S. Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for a certain income tax effect of the U.S. Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the U.S. Tax Act.
Changes in tax rates and tax laws are accounted for in the period of enactment. Therefore, during the year ended December 31, 2017, we recorded a net tax benefit totaling $25.7 million related to our current provisional estimate of the provisions of the U.S. Tax Act.
Transition Toll Tax
The U.S. Tax Act eliminates the deferral of U.S. income tax on the historical undistributed earnings by imposing the Transition Toll Tax, which is a one-time mandatory deemed repatriation tax on undistributed foreign earnings. The Transition Toll Tax is assessed on the U.S. shareholder's share of the foreign corporation's accumulated foreign earnings that have not previously been taxed. Earnings in the form of cash and cash equivalents will be taxed at a rate primarilyof 15.5% and all other earnings will be taxed at a rate of 8.0%.
As of December 31, 2017, we have accrued income tax liabilities of $38.0 million under the Transition Toll Tax, of which $3.0 million is expected to be paid within one year. The Transition Toll Tax will be paid over an eight-year period, starting in 2018, and will not accrue interest. The Transition Toll Tax expense, net of foreign tax credit carryforwards of $14.0 million, is $24.0 million.
Effect on Deferred Tax Assets and Liabilities
Our deferred tax assets and liabilities are measured at the enacted tax rate expected to apply when these temporary differences are expected to be realized or settled.
As our deferred tax liabilities exceed the balance of our deferred tax assets as of the date of enactment, we have recorded a tax benefit of $49.7 million, reflecting the decrease in the U.S. corporate income tax rate.
Status of our Assessment
The Company’s accounting for certain components of the U.S. Tax Act is not complete. However, the Company was able to make reasonable estimates of the effects and recorded provisional estimates for these items. In connection with our initial analysis of the impact of the U.S. Tax Act, the Company recorded a provisional benefit of $25.7 million. The benefit consists of an expense of $24.0 million, net of foreign tax credit carryforwards of $14.0 million, for the one-time Transition Toll Tax and a net benefit of $49.7 million in connection with the revaluation of the deferred tax assets and liabilities resulting from the decrease in the U.S. corporate tax rate. To compute the Transition Toll Tax, the Company must determine the amount of post-1986 accumulated earnings and profits of the relevant subsidiaries as well as the total non-U.S. income taxes on the earnings and profits. While the Company made a reasonable estimate of the Transition Toll Tax, further information will be gathered and analyzed in order to compute a more precise final amount. Additionally, the Company was able to make a reasonable estimate of the impact of the reduction of the U.S. corporate tax rate, but it may be impacted by other components of the U.S. Tax Act, including, but not limited to, the state tax effects of adjustments to federal temporary differences, and the impact of changes to limits in connection with the deductibility of executive compensation. Due to the complexity of the GILTI tax rules, the Company continues to analyze this provision and its impact and the proper application of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice to either treat the taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the "period cost method") or factor in such amounts in to the Company’s measurement of deferred taxes (the "deferred method"). The Company’s selection of an accounting policy in connection with GILTI is dependent upon additional analysis and potential future modifications to the existing structure, which are yet to be known. Accordingly, the Company has not recorded any adjustments related to GILTI in our financial statements and has not made a policy choice regarding whether to record deferred taxes on GILTI. The Company will continue its analysis of the impact of the U.S. Tax Act on the financial statements. The actual impact of the U.S. Tax Act may differ from the current estimate, possibly materially, due to changes to interpretations and assumptions the Company has made, future guidance that may be issued and actions taken by the Company as a result of the law.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2016 and 2015
For 2016, we recorded income tax expense of $29.6 million on income before taxes of $125.1 million. The lower effective rate for 2016 of 23.7% was due to the following: 1) a tax benefit of $12.0 million on the previously held equity interest; due to no tax expense, under Australian tax law, on the $28.9 million non-cash gain arising from the PA Acquisition due to the revaluation of the Company's ownership interest to fair value and due to the release of a deferred tax liability related to a tax basis difference in the Pelikan Artline joint-venture assets, 2) a tax benefit of $9.6 million on a net foreign exchange loss on the repayment of intercompany loans, for which the pre-tax effect was recorded in equity and 3) earnings from foreign jurisdictions which are taxed at a lower rate. In 2014,addition, in 2016, the Foreign Tax Credit Carryover from 2005 in2007 of $10.9 million expired, and the amount of $11.7 million expired; theassociated valuation allowance on the carryover was also removed. Theseremoved; the combination of these two items netted together diddoes not affect income tax expense.
For 2013,2015, we recorded an income tax expense from continuing operations of $14.4$45.5 million on income before taxes of $91.7$131.4 million. Included in the results for 2013 is an out-of-period adjustment of $3.1 million made to correct an error related to the estimate of the tax benefit for certain equity compensation grants exercised during 2012. The Company determined that the impact of the error was not significant to the current or prior period, and accordingly, a restatement of the prior period tax expense was not deemed to be necessary. The low effective rate for 20132015 of 15.7% is primarily due to34.6% approximated the netU.S. statutory tax benefit from the releaserate of foreign valuation allowances of $11.6 million and earnings from foreign jurisdictions which are taxed at a lower rate.35%.
We continually review the need for establishing or releasing valuation allowances on our deferred tax attributes.assets. In 2014,2017, the companyCompany had a net tax benefit from the release and generation of valuation allowances in U.S. state and certain foreign jurisdictions of $0.7 million. In 2016, the Company had a net tax benefit from the release and generation of valuation allowances in U.S. state and certain foreign jurisdictions of $0.7 million. In 2015, the Company had a net tax expense from the release and generation of valuation allowances in U.S. state jurisdictions and certain foreign jurisdictions in the amount of $0.2$0.3 million. In 2013, the company had a net tax benefit from the release and generation of valuation allowances in certain foreign jurisdictions in the amount of $11.6 million due to there being sufficient evidence in the form of future taxable income in those jurisdictions. Following the Merger in the second quarter of 2012, the Company analyzed its need for maintaining valuation reserves against the expected U.S. future tax benefits. Based on that analysis the Company determined that as of June 30, 2012 there existed sufficient evidence in the form of future taxable income from the combined operations to release $126.1 million of the valuation allowance that had been previously recorded against the U.S. deferred income tax assets. Also in 2012, valuation allowances in the amount of $19.0 million were released in certain foreign jurisdictions. The resulting U.S. deferred tax assets are comprised principally of net operating loss carryforwards that are expected to be fully realized within the expiration period and other temporary differences.
For 2012, we recorded an income tax benefit from continuing operationsAs of $121.4 million on a loss before taxes of $4.4 million. The tax benefit for 2012 was primarily due toDecember 31, 2017, the $145.1 million release of valuation allowances.
The effective tax rates for discontinued operations were 35.0% and 25.6% in 2013 and 2012, respectively.
The U.S. federal statute of limitations remains open for the year 20112014 and forward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 2 to 5 years. YearsAs of December 31, 2017, years still open to examination by foreign tax authorities in major jurisdictions include Australia (2010(2013 forward), Brazil (2011 forward), Canada (2009 forward), Canada (2007Germany (2011 forward), Sweden (2011 forward) and the U.K. (2011(2016 forward). We are currently under examination in various foreign jurisdictions.
Deferred tax liabilities of $83.6 million and deferred tax assets of $106.3 million acquired in the Esselte Acquisition, as of January 31, 2017, have been recorded at their estimated fair values. See "Note 3. Acquisitions" for additional details.
The components of the income tax expense were as follows:
|
| | | | | | | | | | | |
| (in millions of dollars) | 2017 | | 2016 | | 2015 |
| Current expense | | | | | |
| Federal and other | $ | 41.1 |
| | $ | 0.7 |
| | $ | 2.1 |
|
| Foreign | 30.5 |
| | 22.9 |
| | 16.0 |
|
| Total current income tax expense | 71.6 |
| | 23.6 |
| | 18.1 |
|
| Deferred expense | | | | | |
| Federal and other | (47.4 | ) | | 3.5 |
| | 22.8 |
|
| Foreign | 2.2 |
| | 2.5 |
| | 4.6 |
|
| Total deferred income tax (benefit) expense | (45.2 | ) | | 6.0 |
| | 27.4 |
|
| Total income tax expense | $ | 26.4 |
| | $ | 29.6 |
| | $ | 45.5 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The components of the income tax expense (benefit) from continuing operations were as follows:
|
| | | | | | | | | | | |
| (in millions of dollars) | 2014 | | 2013 | | 2012 |
| Current expense | | | | | |
| Federal and other | $ | 1.6 |
| | $ | 0.8 |
| | $ | 6.0 |
|
| Foreign | 23.2 |
| | 25.3 |
| | 27.1 |
|
| Total current income tax expense | 24.8 |
| | 26.1 |
| | 33.1 |
|
| Deferred expense (benefit) | | | | | |
| Federal and other | 15.4 |
| | (2.8 | ) | | (129.5 | ) |
| Foreign | 5.2 |
| | (8.9 | ) | | (25.0 | ) |
| Total deferred income tax expense (benefit) | 20.6 |
| | (11.7 | ) | | (154.5 | ) |
| Total income tax expense (benefit) | $ | 45.4 |
| | $ | 14.4 |
| | $ | (121.4 | ) |
The components of deferred tax assets (liabilities) were as follows:
| | | (in millions of dollars) | 2014 | | 2013(1) | 2017 | | 2016 |
| Deferred tax assets | | | | | | |
| Compensation and benefits | $ | 20.4 |
| | $ | 23.8 |
| $ | 18.5 |
| | $ | 20.7 |
|
| Pension | 32.0 |
| | 19.1 |
| 49.6 |
| | 28.6 |
|
| Inventory | 7.1 |
| | 2.6 |
| 10.6 |
| | 12.4 |
|
| Other reserves | 19.8 |
| | 20.3 |
| 15.2 |
| | 19.1 |
|
| Accounts receivable | 7.6 |
| | 7.4 |
| 5.7 |
| | 7.0 |
|
| Foreign tax credit carryforwards | 11.9 |
| | 20.5 |
| 29.1 |
| | — |
|
| Net operating loss carryforwards | 87.5 |
| | 114.6 |
| 126.6 |
| | 47.2 |
|
| Unrealized foreign currency loss on intercompany debt | 3.2 |
| | 0.1 |
| |
| Other | 8.8 |
| | 6.9 |
| 5.6 |
| | 10.3 |
|
| Gross deferred income tax assets | 198.3 |
| | 215.3 |
| 260.9 |
| | 145.3 |
|
| Valuation allowance | (23.9 | ) | | (33.0 | ) | (45.0 | ) | | (11.7 | ) |
| Net deferred tax assets | 174.4 |
| | 182.3 |
| 215.9 |
| | 133.6 |
|
| Deferred tax liabilities | | | | | | |
| Depreciation | (19.1 | ) | | (21.1 | ) | (17.2 | ) | | (12.6 | ) |
| Identifiable intangibles | (256.6 | ) | | (259.5 | ) | (237.9 | ) | | (240.4 | ) |
| Gross deferred tax liabilities | (275.7 | ) | | (280.6 | ) | (255.1 | ) | | (253.0 | ) |
| Net deferred tax liabilities | $ | (101.3 | ) | | $ | (98.3 | ) | $ | (39.2 | ) | | $ | (119.4 | ) |
(1) Certain adjustments to the classifications of deferred tax balances at December 31, 2013 were made to conform to current year classifications. The adjustments do not impact the total net deferred tax liability.
Deferred income taxes are not provided on certain undistributed earnings of foreignall non-U.S. subsidiaries that are expected to be permanently reinvested in those companies, which aggregate towere approximately $565 million and $549$500 million as of December 31, 2014 and at 2013, respectively. If these amounts were distributed2017. All of the undistributed earnings have become subject to U.S. income taxes due to the enactment of the U.S., Tax Act in 2017. As a result of the U.S. Tax Act, we are analyzing the global working capital and cash requirements, and potential tax liabilities attributable to future repatriation of cash, but we have yet to determine whether we plan to change our prior indefinite investment assertion under ASC 740. We will record the effects of any change in prior assertions in the form of a dividend or otherwise, we would be subject to additional U.S. income taxes. Determination ofperiod in which the amount of unrecognized deferred income tax liabilities on these earnings is not practicable.change occurs.
As of December 31, 2014, $257.52017, $529.6 million of net operating loss carryforwards are available to reduce future taxable income of domestic and international companies. These loss carryforwards expire in the years 20152018 through 2031 or have an unlimited carryover period.
Interest and penalties related to unrecognized tax benefits are recognized within "Income tax expense (benefit)" expense" in the Consolidated Statements of Income. As of December 31, 2014,2017, we have accrued a cumulative amount of $7.0$14.7 million for interest and penalties on the unrecognized tax benefits.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits werewas as follows:
| | | (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 52.1 |
| | $ | 56.3 |
| | $ | 5.5 |
| $ | 43.7 |
| | $ | 34.8 |
| | $ | 45.9 |
|
| Additions for tax positions of prior years | 3.5 |
| | 2.4 |
| | 2.0 |
| 2.9 |
| | 3.0 |
| | 3.0 |
|
| Reductions for tax positions of prior years | (4.2 | ) | | — |
| | (1.5 | ) | (0.7 | ) | | (0.5 | ) | | — |
|
| Settlements | — |
| | (0.1 | ) | | — |
| |
| Mead C&OP acquisition | — |
| | — |
| | 50.3 |
| |
| Foreign exchange changes | (5.5 | ) | | (6.5 | ) | | — |
| |
| Esselte Acquisition | | 1.6 |
| | — |
| | — |
|
| Increase resulting from foreign currency translation | | — |
| | 6.4 |
| | — |
|
| Decrease resulting from foreign currency translation | | (0.3 | ) | | — |
| | (14.1 | ) |
| Balance at end of year | $ | 45.9 |
| | $ | 52.1 |
| | $ | 56.3 |
| $ | 47.2 |
| | $ | 43.7 |
| | $ | 34.8 |
|
As of December 31, 20142017, the amount of unrecognized tax benefits decreasedincreased to $45.9$47.2 million, of which $44.2$45.5 million would affectimpact our effective tax rate, if recognized. We expect the amount of unrecognized tax benefits to change within the next twelve months, but these changes are not expectedmost notably for the Brazilian Tax Assessment (see below) for the 2011 year, which lapsed without being assessed effective January 1, 2018; and for which the Company expects to have a significant impact on our resultsrelease $5.5 million of operations or financial position.the reserve in the first quarter of 2018. None of the positions included in the unrecognized tax benefit relate to tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about such deductibility.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Income Tax Assessment
In connection with our May 1, 2012 acquisition of the Mead Consumer and Office Products business ("Mead C&OP&OP"), we assumed all of the tax liabilities for the acquired foreign operations including Tilibra Produtos de Papelaria Ltda. ("Tilibra"). In December of 2012, the Federal Revenue Department of the Ministry of Finance of Brazil ("FRD") issued a tax assessment (the "Brazilian Tax Assessment") against Tilibra, which challenged the tax deduction of goodwill from Tilibra's taxable income for the year 2007.2007 (the "First Assessment"). A second assessment challenging the deduction of goodwill from Tilibra's taxable income for the years 2008, 2009 and 2010 was issued by FRD in October 2013.
2013 (the "Second Assessment"). Tilibra is disputing both of the tax assessmentsassessments.
Recently, the final administrative appeal of the Second Assessment was decided against the Company. We intend to challenge this decision in court in early 2018. In connection with the judicial challenge, we may be required to post security to guarantee payment of the Second Assessment, which represents $24.6 million of the current reserve, should we not prevail. The First Assessment is still being challenged through established administrative procedures.
We believe we have meritorious defenses and intend to vigorously contest these matters; however, there can be no assurances that we will ultimately prevail. We are in the early stages of the process to challenge the FRD's tax assessments, and theThe ultimate outcome will not be determined until the Brazilian tax appeal process is complete, which is expected to take a number of years. In addition, Tilibra's 2011-20122012 tax years remainyear remains open and subject to audit, and there can be no assurances that we will not receive an additional tax assessmentsassessment regarding the goodwill for one or both of those years. With respect to the years 2008 to2012. The time limit for issuing an assessment for 2011 expired in January 2018 and we did not receive an assessment. The time limit for issuing an assessment for 2012 we have accrued R102.7 million ($38.7 million based on December 31, 2014 exchange rates) of tax, penalties and interest.will expire in January 2019. If the FRD's initial position is ultimately sustained, the amount assessed would materially and adversely affect our cash flow in the year of settlement.
Because there is no settled legal precedent on which to base a definitive opinion as to whether we will ultimately prevail, we consider the outcome of this dispute to be uncertain. Since it is not more likely than not that we will prevail, in the fourth quarter of 2012, we recorded a reserve in the amount of $44.5$44.5 million(at (at December 31, 2012 exchange rates) in considerationconsideration of this contingency, of which $43.3 million was recorded as an adjustment to the purchase price and which included the 2008-20122007-2012 tax years plus interestpenalties and penaltiesinterest through December 2012. Included in this reserve is an assumption of penalties at 75%, which is the standard penalty. While there is a possibility that a penalty of 150% could be imposed in connection with the First Assessment, based on the facts in our case and existing precedent, we believe the likelihood of a 150% penalty is not more likely than not as of December 31, 2017. We will continue to actively monitor administrative and judicial court decisions and evaluate their impact, if any, on our legal assessment of the ultimate outcome of our case. In addition, we will continue to accrue interest related to this contingency until such time as the outcome is known or until evidence is presented that we are more likely than not to prevail. During 2014, 2013the years ended December 31, 2017, 2016 and 2012,2015, we accrued additional interest as a charge to current tax expense of $3.2$2.2 million, $1.8$2.8 million and $1.2$2.7 million, respectively. At current exchange rates, our accrual through December 31, 2017, including tax, penalties and interest is $38.7 million.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Earnings per Share
Total outstanding shares as of December 31, 20142017, 2016 and 20132015 were 111.9106.7 million, 107.9 million and 105.6 million respectively. Under our stock repurchase program, for the years ended December 31, 113.72017 and 2015, we repurchased and retired 3.3 million, respectively. On May 1, 2012 we issued 57.1 and 7.7 million shares of common stock, respectively. No shares were repurchased during the year ended December 31, 2016. For each of the years ended December 31, 2017, 2016 and 2015, we acquired 0.7 million shares, related to the Merger. In 2014, we repurchased and retired 2.8 million shares of common stock, in the third and fourth quarters.tax withholding for share-based compensation. The calculation of basic earnings per common share is based on the weighted average number of common shares outstanding in the year, or period, over which they were outstanding. Our calculation of diluted earnings per common share assumes that any common shares outstanding were increased by shares that would be issued upon exercise of those stock units for which the average market price for the period exceeds the exercise price;price less the shares that could have been purchased by usthe Company with the related proceeds, including compensation expense measured but not yet recognized, net of tax.recognized.
| | | (in millions) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Weighted-average number of common shares outstanding — basic | 113.7 |
| | 113.5 |
| | 94.1 |
| |
| Weighted-average number of common shares outstanding - basic | | 108.1 |
| | 107.0 |
| | 108.8 |
|
| Stock options | 0.1 |
| | — |
| | 0.1 |
| 1.3 |
| | 0.8 |
| | 0.2 |
|
| Stock-settled stock appreciation rights | 0.6 |
| | 0.9 |
| | 0.9 |
| — |
| | — |
| | 0.3 |
|
| Restricted stock units | 1.9 |
| | 1.3 |
| | 1.0 |
| 1.5 |
| | 1.4 |
| | 1.3 |
|
| Adjusted weighted-average shares and assumed conversions — diluted | 116.3 |
| | 115.7 |
| | 96.1 |
| |
| Adjusted weighted-average shares and assumed conversions - diluted | | 110.9 |
| | 109.2 |
| | 110.6 |
|
Awards of shares representing approximately 4.3 million, 4.9 million and 5.4 million as of December 31, 2014, 2013 and 2012, respectively, of potentially dilutive shares of common stock, which have exercise prices that were outstanding andhigher than the average market price during the period, are not included in the computation of dilutive earnings per share as their effect would have been anti-dilutive because their exercise pricesanti-dilutive. For the years ended December 31, 2017, 2016 and 2015, these shares were higher than the average market price during the period.approximately 3.1 million, 3.6 million and 5.5 million, respectively.
13. Derivative Financial Instruments
We are exposed to various market risks, including changes in foreign currency exchange rates and interest rate changes. We enter into financial instruments to manage and reduce the impact of these risks, not for trading or speculative purposes. The counterparties to these financial instruments are major financial institutions. We continually monitor our foreign currency exposures in order to maximize the overall effectiveness of our foreign currency hedge positions. Principal currencies hedged include the U.S. dollar, Euro, Australian dollar, Canadian dollar, Swedish krona, British pound and Japanese yen. We are subject to credit risk, which relates to the ability of counterparties to meet their contractual payment obligations or the potential non-performance by counterparties to financial instrument contracts. Management continues to monitor the status of our counterparties and will take action, as appropriate, to further manage our counterparty credit risk. There are no credit contingency features in our derivative financial instruments.
When hedge accounting is applicable, on the date in which we enter into a derivative, the derivative is designated as a hedge of the identified exposure. We measure the effectiveness of our hedging relationships both at hedge inception and on an ongoing basis.
Forward Currency Contracts
We enter into forward foreign currency contracts with third parties to reduce the effect of fluctuating foreign currencies, primarily on foreign denominated inventory purchases and intercompany loans. The majority of the Company’s exposure to local currency movements is in Europe (the Euro, the Swedish krona and the British pound), Australia, Canada, Brazil, Canada, Australia, Mexico and Japan.Mexico.
Forward currency contracts are used to hedge foreign denominated inventory purchases for Europe, Australia, Canada Australia, and Japan and are designated as cash flow hedges. Unrealized gains and losses on these contracts for inventory purchases are deferred in accumulated other comprehensive income (loss) ("AOCI") until the contracts are settled and the underlying hedged transactions are recognized, at which time the deferred gains or losses will be reported in the "Cost of products sold" line in the Consolidated Statements of Income. As of December 31, 20142017 and 2013,2016, the Company had cash flow designated foreign exchange contracts outstanding with a U.S. dollar equivalent notional value of $68.4$93.5 million and $88.7$76.5 million, respectively.
Forward currency contracts used to hedge foreign denominated intercompany loans are not designated as hedging instruments. Gains and losses on these derivative instruments are recognized within "Other (income) expense, net" in the Consolidated Statements of Income and are largely offset by the changeschange in the faircurrent translated value of the hedged item. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions, and do not extend beyond 2015. As of December 31, 2014 and
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2013,exchange contracts correspond to the periods of the hedged transactions, and do not extend beyond December 2018, except for one which extends to December 2020. As of December 31, 2017 and 2016, we have undesignated foreign exchange contracts outstanding with a U.S. dollar equivalent notional value of $55.8$95.0 million and $55.5$52.1 million, respectively.
The following table summarizes the fair value of our derivative financial instruments as of December 31, 20142017 and 2013:2016:
| | | | Fair Value of Derivative Instruments | Fair Value of Derivative Instruments |
| | Derivative Assets | | Derivative Liabilities | Derivative Assets | | Derivative Liabilities |
| (in millions of dollars) | Balance Sheet
Location | | December 31, 2014 | | December 31, 2013 | | Balance Sheet
Location | | December 31, 2014 | | December 31, 2013 | Balance Sheet
Location | | December 31, 2017 | | December 31, 2016 | | Balance Sheet
Location | | December 31, 2017 | | December 31, 2016 |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | $ | 4.6 |
| | $ | 1.4 |
| | Other current liabilities | | $ | 0.1 |
| | $ | 0.8 |
| Other current assets | | $ | 0.5 |
| | $ | 4.0 |
| | Other current liabilities | | $ | 0.5 |
| | $ | — |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | Other current assets | | 0.1 |
| | 0.4 |
| | Other current liabilities | | 0.4 |
| | 0.1 |
| Other current assets | | 0.4 |
| | 0.4 |
| | Other current liabilities | | 0.7 |
| | 0.3 |
|
| Foreign exchange contracts | | Other non-current assets | | 24.2 |
| | — |
| | Other non-current liabilities | | 24.2 |
| | — |
|
| Total derivatives | | $ | 4.7 |
| | $ | 1.8 |
| | $ | 0.5 |
| | $ | 0.9 |
| | $ | 25.1 |
| | $ | 4.4 |
| | $ | 25.4 |
| | $ | 0.3 |
|
The following tables summarizessummarize the pre-tax effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the years ended December 31, 2014, 20132017, 2016 and 2012:2015:
| | | | The Effect of Derivative Instruments in Cash Flow Hedging Relationships on the Consolidated Statements of Income for the Years Ended December 31, | The Effect of Derivative Instruments in Cash Flow Hedging Relationships on the Consolidated Financial Statements |
| | Amount of Gain (Loss) Recognized in OCI (Effective Portion) | | Location of (Gain) Loss Reclassified from OCI to Income | | Amount of (Gain) Loss
Reclassified from AOCI to Income (Effective Portion) | Amount of Gain (Loss) Recognized in AOCI (Effective Portion) | | Location of (Gain) Loss Reclassified from AOCI to Income | | Amount of (Gain) Loss
Reclassified from AOCI to Income (Effective Portion) |
| (in millions of dollars) | 2014 | | 2013 | | 2012 | | | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | | | 2017 | | 2016 | | 2015 |
| Cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | $ | 6.9 |
| | $ | 3.7 |
| | $ | (0.2 | ) | | Cost of products sold | | $ | (3.5 | ) | | $ | (3.4 | ) | | $ | (1.9 | ) | $ | (4.9 | ) | | $ | (0.1 | ) | | $ | 8.2 |
| | Cost of products sold | | $ | 1.6 |
| | $ | 2.5 |
| | $ | (10.9 | ) |
| | | | The Effect of Derivatives Not Designated as Hedging Instruments on the Consolidated��Statements of Income | The Effect of Derivatives Not Designated as Hedging Instruments on the Consolidated Statements of Operations |
| | Location of (Gain) Loss Recognized in
Income on Derivatives | | Amount of (Gain) Loss
Recognized in Income year ended December 31, | Location of (Gain) Loss Recognized in
Income on Derivatives | | Amount of (Gain) Loss
Recognized in Income year ended December 31, |
| (in millions of dollars) | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Foreign exchange contracts | Other expense, net | | $ | 1.3 |
| | $ | (0.6 | ) | | $ | 2.3 |
| Other (income) expense, net | | $ | (1.5 | ) | | $ | (2.0 | ) | | $ | (0.5 | ) |
14. Fair Value of Financial Instruments
In establishing a fair value, there is a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The basis of the fair value measurement is categorized in three levels, in order of priority, as described below:
|
| |
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or |
| | Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or |
| | Inputs other than quoted prices that are observable for the asset or liability |
| Level 3 | Unobservable inputs for the asset or liability |
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We have determined that our financial assets and liabilities described in "Note"Note 13. Derivative Financial Instruments" are Level 2 in the fair value hierarchy. The following table sets forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 20142017 and 20132016:
| | | (in millions of dollars) | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Assets: | | | | | | |
| Forward currency contracts | $ | 4.7 |
| | $ | 1.8 |
| $ | 25.1 |
| | $ | 4.4 |
|
| Liabilities: | | | | | | |
| Forward currency contracts | $ | 0.5 |
| | $ | 0.9 |
| 25.4 |
| | 0.3 |
|
Our forward currency contracts are included in "Other current assets," or"Other non-current assets," "Other current liabilities," or "Other non-current liabilities" and mature within 12 months.do not extend beyond December 2018, except for one which extends to December 2020. The forward foreign currency exchange contracts are primarily valued based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. As such, these derivative instruments are classified within Level 2.
The fair values of cash and cash equivalents, notes payable to banks, accounts receivable and accounts payable approximate carrying amounts due principally to their short maturities. The carrying amount of total debt was $800.7939.5 million and $920.9703.5 million and the estimated fair value of total debt was $831.9951.5 million and $912.2708.4 million as of December 31, 20142017 and 20132016, respectively. The fair values are determined from quoted market prices, where available, and from investment bankers using current interest rates considering credit ratings and the remaining terms of maturity.
15. Accumulated Other Comprehensive Income (Loss)
Comprehensive income is defined as net income (loss) and other changes in stockholders’ equity from transactions and other events from sources other than stockholders. The components of, and changes in, accumulated other comprehensive income (loss) were as follows:
| | | (in millions of dollars) | Derivative
Financial
Instruments | |
Foreign
Currency
Adjustments | | Unrecognized
Pension and Other
Post-retirement
Benefit Costs | | Accumulated
Other
Comprehensive
Income (Loss) | Derivative
Financial
Instruments | |
Foreign
Currency
Adjustments | | Unrecognized
Pension and Other
Post-retirement
Benefit Costs | | Accumulated
Other
Comprehensive
Income (Loss) |
| Balance at December 31, 2012 | $ | 0.1 |
| | $ | (28.0 | ) | | $ | (128.2 | ) | | $ | (156.1 | ) | |
| Balance at December 31, 2015 | | $ | 0.8 |
| | $ | (302.7 | ) | | $ | (127.3 | ) | | $ | (429.2 | ) |
| Other comprehensive income (loss) before reclassifications, net of tax | 2.6 |
| | (61.6 | ) | | 24.4 |
| | (34.6 | ) | — |
| | 16.8 |
| | (11.5 | ) | | 5.3 |
|
| Amounts reclassified from accumulated other comprehensive income (loss), net of tax | (2.4 | ) | | — |
| | 7.5 |
| | 5.1 |
| 1.7 |
| | — |
| | 2.8 |
| | 4.5 |
|
| Balance at December 31, 2013 | 0.3 |
| | (89.6 | ) | | (96.3 | ) | | (185.6 | ) | |
| Other comprehensive income (loss) before reclassifications, net of tax | 4.9 |
| | (76.4 | ) | | (37.1 | ) | | (108.6 | ) | |
| Balance at December 31, 2016 | | 2.5 |
| | (285.9 | ) | | (136.0 | ) | | (419.4 | ) |
| Other comprehensive loss before reclassifications, net of tax | | (3.6 | ) | | (19.5 | ) | | (23.4 | ) | | (46.5 | ) |
| Amounts reclassified from accumulated other comprehensive income (loss), net of tax | (2.5 | ) | | — |
| | 4.1 |
| | 1.6 |
| 1.3 |
| | — |
| | 3.5 |
| | 4.8 |
|
| Balance at December 31, 2014 | $ | 2.7 |
| | $ | (166.0 | ) | | $ | (129.3 | ) | | $ | (292.6 | ) | |
| Balance at December 31, 2017 | | $ | 0.2 |
| | $ | (305.4 | ) | | $ | (155.9 | ) | | $ | (461.1 | ) |
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The reclassifications out of accumulated other comprehensive income (loss) for the yearyears ended December 31, 20142017, 2016 and 2015 were as follows:
| | | | | Year Ended December 31, | | | Year Ended December 31, | |
| (in millions of dollars) | | 2014 | | 2013 | | | | 2017 | | 2016 | | 2015 | | |
| Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Location on Income Statement | Amount Reclassified from Accumulated Other Comprehensive Income | Location on Income Statement |
| Gain on cash flow hedges: | | | | | | |
| (Loss) gain on cash flow hedges: | | | | | | | | |
| Foreign exchange contracts | | $ | (3.5 | ) | | $ | (3.4 | ) | | Cost of products sold | | $ | (1.6 | ) | | $ | (2.4 | ) | | $ | 10.9 |
| | Cost of products sold |
| Total before tax | | (3.5 | ) | | (3.4 | ) | | |
| Tax benefit | | 1.0 |
| | 1.0 |
| | Income tax expense (benefit) | |
| Tax benefit (expense) | | | 0.3 |
| | 0.7 |
| | (3.2 | ) | | Income tax (benefit) expense |
| Net of tax | | $ | (2.5 | ) | | $ | (2.4 | ) | | | $ | (1.3 | ) | | $ | (1.7 | ) | | $ | 7.7 |
| |
| Defined benefit plan items: | | | | | | | | | | | | |
| Amortization of actuarial loss | | $ | 6.0 |
| | $ | 11.4 |
| | (1) | | $ | (4.6 | ) | | $ | (3.1 | ) | | $ | (3.6 | ) | | (1) |
| Amortization of prior service cost | | 0.3 |
| | 0.1 |
| | (1) | | (0.4 | ) | | (0.4 | ) | | (0.1 | ) | | (1) |
| Total before tax | | 6.3 |
| | 11.5 |
| | | (5.0 | ) | | (3.5 | ) | | (3.7 | ) | |
| Tax expense | | (2.2 | ) | | $ | (4.0 | ) | | Income tax expense (benefit) | |
| Tax benefit | | | 1.5 |
| | $ | 0.7 |
| | $ | 1.2 |
| | Income tax (benefit) expense |
| Net of tax | | $ | 4.1 |
| | $ | 7.5 |
| | | $ | (3.5 | ) | | $ | (2.8 | ) | | $ | (2.5 | ) | |
| | | | | | | | | | | | | |
| Total reclassifications for the period, net of tax | | $ | 1.6 |
| | $ | 5.1 |
| | | $ | (4.8 | ) | | $ | (4.5 | ) | | $ | 5.2 |
| |
| |
| (1) | This accumulated other comprehensive income component is included in the computation of net periodic benefit cost (income)for pension and post-retirement plans (See "Note"Note 5. Pension and Other Retiree Benefits" for additional details). |
16. Information on Business Segments
Effective in the first quarter of 2017, as a result of the Esselte Acquisition, the Company realigned its operating structure, which affected the makeup of its business segments for financial reporting purposes. The Company has three operating business segments each of which is comprised of different geographic regions. The Company no longer reports the results of its Computer Products Group as a separate segment. Results of the former Computer Products Group are reflected in the appropriate geographic segment based on the region from which sales are made. The Company's three realigned business segments are as follows:
|
| | | | |
| Operating Segment | | Geographic Regions | | Primary Brands |
| ACCO Brands North America | | United States and Canada | | AT-A-GLANCE®, Five Star®, GBC®, Hilroy®, Kensington®, Mead®, Quartet®, and Swingline® |
| | | | |
| ACCO Brands EMEA | | Europe, Middle East and Africa | | Derwent®, Esselte®, GBC®, Kensington®, Leitz®, NOBO®, Rapid®, and Rexel® |
| | | | |
| ACCO Brands International | | Australia, Latin America and Asia-Pacific | | Artline®, GBC®, Kensington®, Marbig®, Quartet®, Rexel®, Tilibra®, and Wilson Jones® |
We have restated our financial statements for each of the periods presented to reflect this change in reportable business segments.
Each of the Company's three operating segments designs, markets, sources, manufactures and sells recognized consumer and end-user demanded brands used in businesses, schools and homes. Product designs are tailored based on end-user preferences in each geographic region.
Our product categories include storage and organization; stapling; punching; laminating, binding and shredding machines and related consumable supplies; whiteboards; notebooks; calendars; computer accessories; and do-it-yourself tools, among others. Our portfolio of consumer and end-user demanded brands includes both globally and regionally recognized brands.
ACCO Brands is organized into three business segments: ACCO Brands North America, ACCO Brands InternationalCorporation and Computer Products Group. Our three business segments are described below.Subsidiaries
Notes to Consolidated Financial Statements (Continued)
ACCO Brands North America and ACCO Brands International
The ACCO Brands North America and ACCO Brands International manufacture, source and sell traditional office products, school supplies and calendar products. ACCO Brands North America comprisessegment is comprised of the U.S.United States and Canada where the Company is a leading branded supplier of consumer and ACCO Brands International comprises the rest of the world, primarily Northern Europe, Australia, Brazil and Mexico.
Our office, school and calendar product lines use namebusiness products under brands such as:as AT-A-GLANCE®, Day-Timer®, Five Star®, GBC®, Hilroy®, Marbig,Kensington®, Mead®, Quartet®, and Swingline®.The ACCO Brands North America segment designs, sources or manufactures and distributes school notebooks, calendars, whiteboards, storage and organization products (such as three-ring binders, sheet protectors and indexes), stapling, punching, laminating, binding and shredding products, and computer accessories, among others, which are primarily used in schools, homes and businesses. The majority of revenue in this segment is related to consumer and home products and is associated with the "back-to-school" season and calendar year-end purchases; we expect sales of consumer products to become an increasingly greater percentage of our revenue as they are faster growing than most business-related products.
ACCO Brands EMEA
The ACCO Brands EMEA segment is comprised of Europe, the Middle East and Africa, where the Company is a leading branded supplier of consumer and business products under brands such as Derwent®, Esselte®, GBC®, Kensington®, Leitz®, NOBO®, Rapid®, and Rexel®.The ACCO Brands EMEA segment designs, manufactures or sources and distributes storage and organization products (such as lever-arch binders, sheet protectors and indexes), stapling, punching, laminating, binding and shredding products, do-it-yourself tools, and computer accessories, among others, which are primarily used in businesses, homes and schools.
ACCO Brands International
The ACCO Brands International segment is comprised of Australia, Latin America and Asia-Pacific where the Company is a leading branded supplier of consumer and business products under brands such as Artline®, GBC®, Kensington®, Marbig®, Quartet®, Rexel Swingline®, Tilibra®, and Wilson Jones®, among others. The ACCO Brands International segment designs, sources or manufactures and many others. Productsdistributes school notebooks, calendars, whiteboards, storage and brandsorganization products (such as three-ring binders, sheet protectors and indexes), stapling, punching, laminating, binding and shredding products, writing instruments, and janitorial supplies, among others, which are not confinedprimarily used in businesses, schools and homes. The majority of revenue in this segment is related to one channel or product categoryconsumer products and is associated with the “back-to-school” season and calendar year-end purchases; we expect sales of consumer products to become an increasingly greater percentage of our revenue as they are sold based on end-user preference in each geographic location.faster growing than most business-related products.
The majority of our office products, such as stapling, binding and laminating equipment and related consumable supplies, shredders and whiteboards, are used by businesses. Most of these end-users purchase their products from our customers, which include traditional office resellers, wholesalers and other retailers, including on-line retailers. We also supply some of our products directly to large commercial and industrial end-users, and provide business machine maintenance and certain repair services. We also supply private label products within the office products sector.Customers
Our school products include notebooks, folders, decorative calendars,ACCO Brands markets and stationery products. We distribute our school products primarily through mass merchandisers,sells its strong multi-product offering broadly and other retailers, such as grocery, drug and office superstores as well as on-line retailers. We also supply private label products within the school products sector.
is not dependent on any one channel. Our calendar products are sold throughoutthrough all relevant channels, where wenamely retailers, including: mass retailers; e-tailers; discount, drug/grocery and variety chains; warehouse clubs; hardware and specialty stores; independent office product dealers; office superstores; and contract stationers. We also sell office or school products, as well as directly to consumers both on-linecommercial and consumer end-users through our e-commerce platform and our direct mail.sales organization.
Net sales by business segment for the years ended December 31, 2017, 2016 and 2015 were as follows:
|
| | | | | | | | | | | |
| (in millions of dollars) | 2017 | | 2016 | | 2015 |
| ACCO Brands North America | $ | 999.0 |
| | $ | 1,016.1 |
| | $ | 1,025.7 |
|
| ACCO Brands EMEA | 542.8 |
| | 171.8 |
| | 199.7 |
|
| ACCO Brands International | 407.0 |
| | 369.2 |
| | 285.0 |
|
| Net sales | $ | 1,948.8 |
| | $ | 1,557.1 |
| | $ | 1,510.4 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The customer base to which we sell our products is primarily made up of large global and regional resellers of our products including traditional office supply resellers, wholesalers and other retailers, including on-line retailers. Mass merchandisers and retail channels primarily sell to individual consumers but also to small businesses. We also sell to commercial contract dealers, wholesalers, distributors and independent dealers who primarily serve business end-users. Over half of our product sales by our customers are to business end-users, who generally seek premium products that have added value or ease-of-use features and a reputation for reliability, performance and professional appearance. Some of our binding and laminating equipment products are sold directly to high-volume end-users and commercial reprographic centers. We also sell calendar and computer products directly to consumers.
Computer Products Group
Our Computer Products Group designs, sources, distributes, markets and sells accessories for laptop and desktop computers and tablets. These accessories primarily include security products, input devices such as mice, laptop computer carrying cases, hubs, docking stations, power adapters, tablet accessories and charging racks and ergonomic devices. We sell these products mostly under the Kensington®, Microsaver® and ClickSafe® brand names, with the majority of revenue coming from the U.S. and Northern Europe. Our computer products are manufactured by third-party suppliers, principally in Asia, and distributed from our regional facilities. Our computer products are sold primarily to consumer electronics retailers, information technology value-added resellers, original equipment manufacturers, office products retailers, as well as directly to consumers on-line.
Net sales by business segment for the years ended December 31, 2014, 2013 and 2012 were as follows:
|
| | | | | | | | | | | |
| (in millions of dollars) | 2014 | | 2013 | | 2012 |
| ACCO Brands North America | $ | 1,006.0 |
| | $ | 1,041.4 |
| | $ | 1,028.2 |
|
| ACCO Brands International | 546.9 |
| | 566.6 |
| | 551.2 |
|
| Computer Products Group | 136.3 |
| | 157.1 |
| | 179.1 |
|
| Net sales | $ | 1,689.2 |
| | $ | 1,765.1 |
| | $ | 1,758.5 |
|
Operating income by business segment for the years ended December 31, 20142017, 20132016 and 20122015 werewas as follows(a):follows:
| | | (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| ACCO Brands North America | $ | 140.7 |
| | $ | 98.2 |
| | $ | 86.2 |
| $ | 155.6 |
| | $ | 153.3 |
| | $ | 151.6 |
|
| ACCO Brands EMEA | | 37.1 |
| | 12.6 |
| | 18.0 |
|
| ACCO Brands International | 62.9 |
| | 66.5 |
| | 62.0 |
| 50.9 |
| | 49.4 |
| | 29.1 |
|
| Computer Products Group | 8.2 |
| | 13.7 |
| | 35.9 |
| |
| Segment operating income | 211.8 |
| | 178.4 |
| | 184.1 |
| 243.6 |
| | 215.3 |
| | 198.7 |
|
Corporate | (38.2 | ) | | (32.6 | ) | | (44.8 | ) | (50.6 | ) | | (48.0 | ) | | (35.2 | ) |
Operating income | 173.6 |
| | 145.8 |
| | 139.3 |
| 193.0 |
| | 167.3 |
| | 163.5 |
|
| Interest expense | 49.5 |
| | 59.0 |
| | 91.3 |
| 41.1 |
| | 49.3 |
| | 44.5 |
|
| Interest income | (5.6 | ) | | (4.3 | ) | | (2.0 | ) | (5.8 | ) | | (6.4 | ) | | (6.6 | ) |
| Equity in earnings of joint ventures | (8.1 | ) | | (8.2 | ) | | (6.9 | ) | |
| Other expense, net | 0.8 |
| | 7.6 |
| | 61.3 |
| |
| Income (loss) from continuing operations before income tax | $ | 137.0 |
| | $ | 91.7 |
| | $ | (4.4 | ) | |
| Equity in earnings of joint-venture | | — |
| | (2.1 | ) | | (7.9 | ) |
| Other (income) expense, net | | (0.4 | ) | | 1.4 |
| | 2.1 |
|
| Income before income tax | | $ | 158.1 |
| | $ | 125.1 |
| | $ | 131.4 |
|
| |
(a)(1) | Corporate operating loss in 2017, 2016 and 2015 includes transaction costs of $5.0 million, $10.5 million and $0.6 million respectively, primarily for legal and due diligence expenditures associated with the Esselte and PA acquisitions. |
| |
| (2) | 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. |
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table presents the measure of segment assets used by the Company’s chief operating decision maker.
| | | | December 31, | December 31, |
| (in millions of dollars) | 2014 | | 2013 | 2017 | | 2016 |
ACCO Brands North America(b)(3) | $ | 433.7 |
| | $ | 465.4 |
| $ | 413.9 |
| | $ | 404.3 |
|
ACCO Brands International(b) | 429.7 |
| | 464.1 |
| |
Computer Products Group(b) | 62.4 |
| | 88.1 |
| |
ACCO Brands EMEA(3) | | 287.6 |
| | 104.0 |
|
ACCO Brands International(3) | | 338.2 |
| | 323.4 |
|
| Total segment assets | 925.8 |
| | 1,017.6 |
| 1,039.7 |
| | 831.7 |
|
| Unallocated assets | 1,299.2 |
| | 1,364.3 |
| 1,758.6 |
| | 1,232.0 |
|
Corporate(b)(3) | 1.4 |
| | 1.0 |
| 0.8 |
| | 0.8 |
|
| Total assets | $ | 2,226.4 |
| | $ | 2,382.9 |
| $ | 2,799.1 |
| | $ | 2,064.5 |
|
| |
(b)(3) | Represents total assets, excluding: goodwill and identifiable intangibles resulting from business acquisitions, intercompany balances, cash, deferred taxes, derivatives, prepaid pension assets and prepaid debt issuance costs and joint ventures accounted for on an equity basis.costs. |
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
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.
| | | | December 31, | December 31, |
| (in millions of dollars) | 2014 | | 2013 | 2017 | | 2016 |
ACCO Brands North America(c)(4) | $ | 1,272.4 |
| | $ | 1,332.0 |
| $ | 1,204.3 |
| | $ | 1,206.8 |
|
ACCO Brands International(c) | 692.7 |
| | 758.4 |
| |
Computer Products Group(c) | 77.0 |
| | 102.4 |
| |
ACCO Brands EMEA(4) | | 711.7 |
| | 155.2 |
|
ACCO Brands International(4) | | 634.0 |
| | 622.5 |
|
| Total segment assets | 2,042.1 |
| | 2,192.8 |
| 2,550.0 |
| | 1,984.5 |
|
| Unallocated assets | 182.9 |
| | 189.1 |
| 248.3 |
| | 79.2 |
|
Corporate(c)(4) | 1.4 |
| | 1.0 |
| 0.8 |
| | 0.8 |
|
| Total assets | $ | 2,226.4 |
| | $ | 2,382.9 |
| $ | 2,799.1 |
| | $ | 2,064.5 |
|
| |
(c)(4) | Represents total assets, excluding: intercompany balances, cash, deferred taxes, derivatives, prepaid pension assets and prepaid debt issuance costs and joint ventures accounted for on an equity basis.costs. |
Capital spend by segment was as follows:
|
| | | | | | | | | | | |
| | December 31, |
| (in millions of dollars) | 2017 | | 2016 | | 2015 |
| ACCO Brands North America | $ | 16.3 |
| | $ | 10.3 |
| | $ | 12.5 |
|
| ACCO Brands EMEA | 5.1 |
| | 2.9 |
| | 10.3 |
|
| ACCO Brands International | 9.6 |
| | 5.3 |
| | 4.8 |
|
| Total capital spend | $ | 31.0 |
| | $ | 18.5 |
| | $ | 27.6 |
|
Depreciation expense by segment was as follows:
|
| | | | | | | | | | | |
| | December 31, |
| (in millions of dollars) | 2017 | | 2016 | | 2015 |
| ACCO Brands North America | $ | 17.7 |
| | $ | 19.7 |
| | $ | 23.3 |
|
| ACCO Brands EMEA | 11.9 |
| | 5.0 |
| | 3.4 |
|
| ACCO Brands International | 6.0 |
| | 5.7 |
| | 5.7 |
|
| Total depreciation | $ | 35.6 |
| | $ | 30.4 |
| | $ | 32.4 |
|
Property, plant and equipment, net by geographic region werewas as follows:
| | | | December 31, | December 31, |
| (in millions of dollars) | 2014 | | 2013 | 2017 | | 2016 |
| U.S. | $ | 122.0 |
| | $ | 134.4 |
| $ | 102.3 |
| | $ | 103.0 |
|
| Brazil | 49.3 |
| | 54.7 |
| 35.6 |
| | 36.8 |
|
| U.K. | 34.1 |
| | 30.5 |
| 30.5 |
| | 30.3 |
|
| Poland | | 26.8 |
| | — |
|
| Germany | | 21.2 |
| | — |
|
| Australia | 12.0 |
| | 13.7 |
| 14.7 |
| | 12.5 |
|
| Other countries | 18.1 |
| | 20.0 |
| 47.4 |
| | 15.8 |
|
| Property, plant and equipment, net | $ | 235.5 |
| | $ | 253.3 |
| $ | 278.5 |
| | $ | 198.4 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Net sales by geographic region for the years ended December 31, 2014, 2013 and 2012(5) were as follows(d):follows:
| | | | | | | | | December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| U.S. | $ | 921.0 |
| | $ | 955.5 |
| | $ | 959.2 |
| $ | 880.4 |
| | $ | 894.4 |
| | $ | 904.3 |
|
| Australia | | 173.5 |
| | 156.5 |
| | 91.8 |
|
| Germany | | 141.4 |
| | — |
| | — |
|
| Canada | | 118.6 |
| | 121.7 |
| | 121.4 |
|
| Brazil | 154.0 |
| | 157.2 |
| | 118.9 |
| 114.6 |
| | 102.6 |
| | 92.0 |
|
| Canada | 150.6 |
| | 159.7 |
| | 160.8 |
| |
| Netherlands | 130.2 |
| | 130.2 |
| | 45.9 |
| 111.3 |
| | 101.4 |
| | 108.7 |
|
| Australia | 108.5 |
| | 119.8 |
| | 133.4 |
| |
| Sweden | | 61.3 |
| | — |
| | — |
|
| U.K. | 89.1 |
| | 101.3 |
| | 98.0 |
| 59.2 |
| | 59.1 |
| | 76.4 |
|
| Mexico | 58.8 |
| | 58.9 |
| | 59.2 |
| 50.6 |
| | 47.3 |
| | 49.6 |
|
| Other countries | 77.0 |
| | 82.5 |
| | 183.1 |
| 237.9 |
| | 74.1 |
| | 66.2 |
|
| Net sales | $ | 1,689.2 |
| | $ | 1,765.1 |
| | $ | 1,758.5 |
| $ | 1,948.8 |
| | $ | 1,557.1 |
| | $ | 1,510.4 |
|
| |
(d)(5) | Net sales are attributed to geographic areas based on the location of the selling company.subsidiaries. |
Top Customers
Net sales to our five largest customers totaled $706.0$615.1 million,, $680.5 $663.5 million and $716.2$637.7 million in for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively. Net sales to no customer exceeded 10% of net sales for the year ended December 31, 2017. Net sales to Staples, our largest customer, were $224.1$210.5 million (13%), $229.5 million (13% (14%) and $236.3$204.1 million (13% (14%) infor the years ended December 31, 2014, 20132016 and 2012,2015, respectively. Net sales to Office Depot, our second largest customer,Walmart were $190.9$161.7 million (11%(10%) for the year ended December 31, 2014. Sales2016. Net sales to Office Depot were $152.5 million (10%) for the year ended December 31, 2015. Net sales to no other customercustomers exceeded 10% of net sales for any of the last three years.
A significant percentage of our sales are to customers engaged in the office products resale industry. Concentration of credit risk with respect to trade accounts receivable is partially mitigated because a large number of geographically diverse customers make up each operating company's domestic and international customer base, thus spreading the credit risk. As of December 31, 20142017 and 20132016, our top five trade account receivables totaled $144.2$148.4 million and $194.0162.2 million, respectively.
17. Joint Venture Investment
17. Joint-Venture Investment
Summarized below is aggregatedthe financial information for the Company’s joint venture,Pelikan Artline joint-venture, in which iswe owned a 50% non-controlling interest, through May 1, 2016, which was accounted for underusing the equity method. Accordingly, we recordrecorded our proportionate share of earnings or losses on the line entitled "Equity"Equity in earnings of joint ventures"joint-venture" in the Consolidated Statements of Income. Our share of the net assets of the joint venture is included within "Other non-current assets" in the Consolidated Balance Sheets.
| | | | Year Ended December 31, | Year Ended December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 | 2016 | | 2015 |
| Net sales | $ | 121.4 |
| | $ | 105.4 |
| | $ | 116.6 |
| $ | 34.9 |
| | $ | 111.2 |
|
| Gross profit | 48.2 |
| | 44.8 |
| | 47.9 |
| 14.1 |
| | 45.5 |
|
| Operating income | 23.6 |
| | 23.0 |
| | 24.7 |
| |
| Net income | 16.4 |
| | 16.4 |
| | 17.3 |
| 4.1 |
| | 15.8 |
|
|
| | | | | | | |
| | December 31, |
| (in millions of dollars) | 2014 | | 2013 |
| Current assets | $ | 83.4 |
| | $ | 71.8 |
|
| Non-current assets | 47.3 |
| | 32.5 |
|
| Current liabilities | 40.7 |
| | 32.1 |
|
| Non-current liabilities | 22.0 |
| | 4.9 |
|
On May 2, 2016, the Company completed the PA Acquisition and accordingly, the results of Pelikan Artline are included in the Company's consolidated financial statements from the date of the PA Acquisition, May 2, 2016. For further information, see "Note 3. Acquisitions" for details on the PA Acquisition.
80
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
18. Commitments and Contingencies
Pending Litigation
In connection with our May 1, 2012 acquisition of the Mead C&OP business, we assumed all of the tax liabilities for the acquired foreign operations including Tilibra Produtos de Papelaria Ltda. ("Tilibra"). SeeFor further information see "Note 11. Income Taxes - Income Tax Assessment" for details on tax assessments issued by the FRD against Tilibra, which challenged the tax deduction of goodwill from Tilibra's taxable income for the years 2007 through 2010.
ThereWe are party to various other claims, lawsuits and pending actions against usregulatory proceedings, primarily related to alleged patent infringement and employee terminations as well as other claims incidental to our business. In addition, we may be unaware of third party claims of intellectual property infringement relating to our technology, brands or products and we may face other claims related to business operations. Any litigation regarding patents or other intellectual property could be costly and time-consuming and might require us to pay monetary damages or enter into costly license agreements. We also may be subject to injunctions against development and sale of certain of our products.
It is the opinion of management that (other than the Brazilian Tax Assessment) the ultimate resolution of thesecurrently outstanding matters will not have a material adverse effect on our consolidated financial position,condition, results of operations or cash flows.flow. However, we can makethere is no assurancesassurance that we will ultimately be successful in our defense of any of these matters.matters or that an adverse outcome in any matter will not affect our results of operations, financial condition or cash flow. Further, future claims, lawsuits and legal proceedings could materially and adversely affect our business, reputation, results of operations and financial condition.
Lease Commitments
Future minimum rental payments for all non-cancelable operating leases (reduced by minor amounts from subleases) as of December 31, 20142017 were as follows:
| | | (in millions of dollars) | | |
| 2015 | $ | 23.0 |
| |
| 2016 | 20.0 |
| |
| 2017 | 16.3 |
| |
| 2018 | 14.0 |
| $ | 28.1 |
|
| 2019 | 12.9 |
| 25.0 |
|
| 2020 | | 21.6 |
|
| 2021 | | 16.2 |
|
| 2022 | | 12.2 |
|
| Thereafter | 35.0 |
| 17.6 |
|
| Total minimum rental payments | $ | 121.2 |
| 120.7 |
|
| Less minimum rentals to be received under non-cancelable subleases | 5.3 |
| 2.0 |
|
| | $ | 115.9 |
| |
| Future minimum payments for operating leases, net of sublease rental income | | $ | 118.7 |
|
Total rental expense reported in our Consolidated Statements of Income for all non-cancelable operating leases (reduced by minor amounts for subleases) amounted to $23.1$30.9 million, $25.3$24.2 million and $22.3$21.2 million for the years ended December 31, 2014, 20132017, 2016 and 2012,2015, respectively.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Unconditional Purchase Commitments
Future minimum payments under unconditional purchase commitments, primarily for inventory purchase commitments as of December 31, 20142017 were as follows:
| | | (in millions of dollars) | | |
| 2015 | $ | 74.0 |
| |
| 2016 | 10.7 |
| |
| 2017 | 10.5 |
| |
| 2018 | 2.4 |
| $ | 96.8 |
|
| 2019 | — |
| 0.2 |
|
| 2020 | | 0.1 |
|
| 2021 | | — |
|
| 2022 | | — |
|
| Thereafter | — |
| — |
|
| Total unconditional purchase commitments | $ | 97.6 |
| $ | 97.1 |
|
Environmental
We are subject to federal,national, state, andprovincial and/or local environmental laws and regulations concerning the discharge of materials into the environment and the handling, disposal and clean-up of waste materials and otherwise relating to the protection of the environment. This includes environmental laws and regulations that affect the design and composition of certain of our products. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
other compliance efforts that we may undertake in the future. In the opinion of our management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon our capital expenditures, financial condition orand results of operations.
19. Discontinued Operations
Included in discontinued operations are residual costs of our commercial print finishing business, which was sold in 2009. In association with ongoing legal disputes related to this business, we recorded expenses of $0.2 million and $2.0 million, during 2013 and 2012, respectively.or competitive position.
The operating results and financial position of discontinued operations were as follows:
|
| | | | | | | | | | | |
| (in millions, except per share data) | 2014 | | 2013 | | 2012 |
| Operating Results: | | | | | |
| Loss on sale before income taxes | — |
| | (0.3 | ) | | (2.1 | ) |
| Income tax benefit | — |
| | (0.1 | ) | | (0.5 | ) |
| Loss from discontinued operations | $ | — |
| | $ | (0.2 | ) | | $ | (1.6 | ) |
| Per share: | | | | | |
| Basic loss from discontinued operations | $ | — |
| | $ | — |
| | $ | (0.02 | ) |
| Diluted loss from discontinued operations | $ | — |
| | $ | — |
| | $ | (0.02 | ) |
Litigation-related accruals of $1.2 million for discontinued operations, which were included in the line "Other current liabilities" as of December 31, 2013 have been settled in 2014.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
20.
19. Quarterly Financial Information (Unaudited)
The following is an analysis of certain line items in the Consolidated Statements of Income by quarter for 20142017 and 2013:2016:
|
| | | | | | | | | | | | | | | |
| (in millions of dollars, except per share data) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| 2014 | | | | | | | |
Net sales(1) | $ | 329.4 |
| | $ | 427.7 |
| | $ | 472.2 |
| | $ | 459.9 |
|
| Gross profit | 88.5 |
| | 131.2 |
| | 153.3 |
| | 156.9 |
|
| Operating income (loss) | (0.6 | ) | | 43.9 |
| | 61.8 |
| | 68.5 |
|
| Income (loss) from continuing operations | (7.8 | ) | | 21.3 |
| | 34.2 |
| | 43.9 |
|
| Loss from discontinued operations, net of income taxes | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | $ | (7.8 | ) | | $ | 21.3 |
| | $ | 34.2 |
| | $ | 43.9 |
|
| Basic income (loss) per share: | | | | | | | |
Income (loss) from continuing operations(2) | $ | (0.07 | ) | | $ | 0.19 |
| | $ | 0.30 |
| | $ | 0.39 |
|
Loss from discontinued operations(2) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net income (loss)(2) | $ | (0.07 | ) | | $ | 0.19 |
| | $ | 0.30 |
| | $ | 0.39 |
|
| Diluted income (loss) per share: | | | | | | | |
Income (loss) from continuing operations(2) | $ | (0.07 | ) | | $ | 0.18 |
| | $ | 0.29 |
| | $ | 0.38 |
|
Loss from discontinued operations(2) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net income (loss)(2) | $ | (0.07 | ) | | $ | 0.18 |
| | $ | 0.29 |
| | $ | 0.38 |
|
| 2013 | | | | | | | |
Net sales(1) | $ | 352.0 |
| | $ | 440.2 |
| | $ | 469.2 |
| | $ | 503.7 |
|
| Gross profit | 97.2 |
| | 138.3 |
| | 142.3 |
| | 170.1 |
|
| Operating income (loss) | (9.2 | ) | | 37.9 |
| | 50.3 |
| | 66.8 |
|
| Income (loss) from continuing operations | (8.9 | ) | | 9.5 |
| | 26.4 |
| | 50.3 |
|
| Loss from discontinued operations, net of income taxes | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
| Net income (loss) | $ | (9.0 | ) | | $ | 9.5 |
| | $ | 26.4 |
| | $ | 50.2 |
|
| Basic income (loss) per share: | | | | | | | |
Income (loss) from continuing operations(2) | $ | (0.08 | ) | | $ | 0.08 |
| | $ | 0.23 |
| | $ | 0.44 |
|
Loss from discontinued operations(2) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net income (loss)(2) | $ | (0.08 | ) | | $ | 0.08 |
| | $ | 0.23 |
| | $ | 0.44 |
|
| Diluted income (loss) per share: | | | | | | | |
Income (loss) from continuing operations(2) | $ | (0.08 | ) | | $ | 0.08 |
| | $ | 0.23 |
| | $ | 0.43 |
|
Loss from discontinued operations(2) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net income (loss)(2) | $ | (0.08 | ) | | $ | 0.08 |
| | $ | 0.23 |
| | $ | 0.43 |
|
|
| | | | | | | | | | | | | | | |
| (in millions of dollars, except per share data) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
| 2017 | | | | | | | |
Net sales(1) | $ | 359.8 |
| | $ | 490.0 |
| | $ | 532.2 |
| | $ | 566.8 |
|
| Gross profit | 110.8 |
| | 168.5 |
| | 177.9 |
| | 199.2 |
|
| Operating income | 9.3 |
| | 45.4 |
| | 58.7 |
| | 79.6 |
|
| Net income | $ | 3.6 |
| | $ | 23.5 |
| | $ | 30.6 |
| | $ | 74.0 |
|
| Per share: | | | | | | | |
Basic income per share (2) | $ | 0.03 |
| | $ | 0.21 |
| | $ | 0.28 |
| | $ | 0.69 |
|
Diluted income per share (2) | $ | 0.03 |
| | $ | 0.21 |
| | $ | 0.28 |
| | $ | 0.68 |
|
| 2016 | | | | | | | |
Net sales(1) | $ | 278.1 |
| | $ | 410.1 |
| | $ | 431.3 |
| | $ | 437.6 |
|
| Gross profit | 82.4 |
| | 134.8 |
| | 144.2 |
| | 153.7 |
|
| Operating income | 6.5 |
| | 45.4 |
| | 55.7 |
| | 59.7 |
|
| Net income | $ | 4.8 |
| | $ | 61.9 |
| | $ | 22.7 |
| | $ | 6.1 |
|
| Per share: | | | | | | | |
Basic income per share (2) | $ | 0.05 |
| | $ | 0.58 |
| | $ | 0.21 |
| | $ | 0.06 |
|
Diluted income per share (2) | $ | 0.04 |
| | $ | 0.57 |
| | $ | 0.21 |
| | $ | 0.06 |
|
| |
| (1) | Historically, our business has experienced higher sales and earnings in the third and fourth quarters of the calendar year.year and we expect these trends to continue. Two principal factors contribute to this seasonality: (1) the office products industry, its customers and ACCO Brands specificallywe are a major supplierssupplier of products related to the "back-to-school"back-to-school season, which occurs principally from June through September for our North American business and from November through February for our Australian and Brazilian businesses; and (2) several productsproduct categories we sell lend themselves to calendar year-end purchase timing, including AT-A-GLANCE® and Day-Timer®planners, paper organization and storage products (including bindery) and Kensington® computer accessories, which have higher sales in the fourth quarter driven by traditionally strong fourth-quarter sales of personal computers and tablets. |
| |
| (2) | The sum of the quarterly earnings per share amounts may not equal the total for the year due to the effects of rounding, and dilution as a result of issuing shares of common sharesstock and repurchasing of shares of common sharesstock during the year. |
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
21. Condensed Consolidated Financial Information20. Subsequent Events
CertainOn February 12, 2018, the Company's Board of Directors approved the initiation of a dividend program under which the Company will pay a regular quarterly cash dividend of $0.06 per share on its common stock. The first dividend is payable on March 21, 2018 to stockholders of record as of the Company’s 100% owned domestic subsidiaries are required to jointly and severally, fully and unconditionally guarantee the 6.75% Senior Unsecured Notes that are due in the year 2020. Rather than filing separate financial statements for each guarantor subsidiary with the Securities and Exchange Commission,close of business on March 1, 2018.
Also on February 14, 2018, the Company has electedannounced that its Board of Directors had approved an authorization to present the following condensed consolidating financial statements, which detail the resultsrepurchase up to an additional $100 million in shares of operations for the years ended December 31, 2014, 2013 and 2012, cash flows for the years ended December 31, 2014, 2013 and 2012 and financial position asits common stock. As of December 31, 2014 and 2013 of2017, the Company andhad $84.0 million remaining of its guarantor and non-guarantor subsidiaries (in each case carrying investments under the equity method), and the eliminations necessary to arrive at the reported amounts included in the condensed consolidated financial statements of the Company.prior authorizations.
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Balance Sheets |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 |
| (in millions of dollars) | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Assets | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 9.7 |
| | $ | 0.1 |
| | $ | 43.4 |
| | $ | — |
| | $ | 53.2 |
|
| Accounts receivable, net | — |
| | 156.1 |
| | 264.4 |
| | — |
| | 420.5 |
|
| Inventories | — |
| | 129.9 |
| | 100.0 |
| | — |
| | 229.9 |
|
| Receivables from affiliates | 4.8 |
| | 302.7 |
| | 68.0 |
| | (375.5 | ) | | — |
|
| Deferred income taxes | 27.2 |
| | — |
| | 12.2 |
| | — |
| | 39.4 |
|
| Other current assets | 1.4 |
| | 15.1 |
| | 19.3 |
| | — |
| | 35.8 |
|
| Total current assets | 43.1 |
| | 603.9 |
| | 507.3 |
| | (375.5 | ) | | 778.8 |
|
| Property, plant and equipment, net | 4.2 |
| | 117.8 |
| | 113.5 |
| | — |
| | 235.5 |
|
| Deferred income taxes | 0.9 |
| | — |
| | 30.8 |
| | — |
| | 31.7 |
|
| Goodwill | — |
| | 330.9 |
| | 214.0 |
| | — |
| | 544.9 |
|
| Identifiable intangibles, net | 57.5 |
| | 397.9 |
| | 116.0 |
| | — |
| | 571.4 |
|
| Other non-current assets | 15.2 |
| | 1.0 |
| | 47.9 |
| | — |
| | 64.1 |
|
| Investment in, long term receivable from affiliates | 1,680.0 |
| | 890.8 |
| | 441.0 |
| | (3,011.8 | ) | | — |
|
| Total assets | $ | 1,800.9 |
| | $ | 2,342.3 |
| | $ | 1,470.5 |
| | $ | (3,387.3 | ) | | $ | 2,226.4 |
|
| Liabilities and Stockholders’ Equity | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Notes payable | $ | — |
| | $ | — |
| | $ | 0.8 |
| | — |
| | $ | 0.8 |
|
| Current portion of long-term debt | 0.7 |
| | 0.1 |
| | — |
| | — |
| | 0.8 |
|
| Accounts payable | — |
| | 84.8 |
| | 74.3 |
| | — |
| | 159.1 |
|
| Accrued compensation | 3.3 |
| | 20.1 |
| | 13.2 |
| | — |
| | 36.6 |
|
| Accrued customer programs liabilities | — |
| | 60.1 |
| | 51.7 |
| | — |
| | 111.8 |
|
| Accrued interest | 6.5 |
| | — |
| | — |
| | — |
| | 6.5 |
|
| Other current liabilities | 1.9 |
| | 31.0 |
| | 46.9 |
| | — |
| | 79.8 |
|
| Payables to affiliates | 5.6 |
| | 214.1 |
| | 240.5 |
| | (460.2 | ) | | — |
|
| Total current liabilities | 18.0 |
| | 410.2 |
| | 427.4 |
| | (460.2 | ) | | 395.4 |
|
| Long-term debt | 799.0 |
| | — |
| | — |
| | — |
| | 799.0 |
|
| Long-term notes payable to affiliates | 178.2 |
| | 26.7 |
| | 31.2 |
| | (236.1 | ) | | — |
|
| Deferred income taxes | 120.0 |
| | — |
| | 52.2 |
| | — |
| | 172.2 |
|
| Pension and post-retirement benefit obligations | 1.5 |
| | 52.3 |
| | 46.7 |
| | — |
| | 100.5 |
|
| Other non-current liabilities | 3.2 |
| | 19.9 |
| | 55.2 |
| | — |
| | 78.3 |
|
| Total liabilities | 1,119.9 |
| | 509.1 |
| | 612.7 |
| | (696.3 | ) | | 1,545.4 |
|
| Stockholders’ equity: | | | | | | | | | |
| Common stock | 1.1 |
| | 448.0 |
| | 247.0 |
| | (695.0 | ) | | 1.1 |
|
| Treasury stock | (5.9 | ) | | — |
| | — |
| | — |
| | (5.9 | ) |
| Paid-in capital | 2,031.5 |
| | 1,551.1 |
| | 743.0 |
| | (2,294.1 | ) | | 2,031.5 |
|
| Accumulated other comprehensive loss | (292.6 | ) | | (65.2 | ) | | (183.0 | ) | | 248.2 |
| | (292.6 | ) |
| (Accumulated deficit) retained earnings | (1,053.1 | ) | | (100.7 | ) | | 50.8 |
| | 49.9 |
| | (1,053.1 | ) |
| Total stockholders’ equity | 681.0 |
| | 1,833.2 |
| | 857.8 |
| | (2,691.0 | ) | | 681.0 |
|
| Total liabilities and stockholders’ equity | $ | 1,800.9 |
| | $ | 2,342.3 |
| | $ | 1,470.5 |
| | $ | (3,387.3 | ) | | $ | 2,226.4 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Balance Sheets
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 |
| (in millions of dollars) | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Assets | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 7.0 |
| | $ | 1.0 |
| | $ | 45.5 |
| | $ | — |
| | $ | 53.5 |
|
| Accounts receivable, net | — |
| | 177.3 |
| | 294.6 |
| | — |
| | 471.9 |
|
| Inventories | — |
| | 124.8 |
| | 129.9 |
| | — |
| | 254.7 |
|
| Receivables from affiliates | 8.2 |
| | 101.5 |
| | 65.0 |
| | (174.7 | ) | | — |
|
| Deferred income taxes | 20.9 |
| | — |
| | 12.6 |
| | — |
| | 33.5 |
|
| Other current assets | 0.6 |
| | 8.8 |
| | 18.7 |
| | — |
| | 28.1 |
|
| Total current assets | 36.7 |
| | 413.4 |
| | 566.3 |
| | (174.7 | ) | | 841.7 |
|
| Property, plant and equipment, net | 4.1 |
| | 130.3 |
| | 118.9 |
| | — |
| | 253.3 |
|
| Deferred income taxes | — |
| | — |
| | 37.3 |
| | — |
| | 37.3 |
|
| Goodwill | — |
| | 330.9 |
| | 237.4 |
| | — |
| | 568.3 |
|
| Identifiable intangibles, net | 57.6 |
| | 415.4 |
| | 134.0 |
| | — |
| | 607.0 |
|
| Other non-current assets | 20.0 |
| | 6.2 |
| | 49.1 |
| | — |
| | 75.3 |
|
| Investment in, long term receivable from affiliates | 1,818.2 |
| | 868.4 |
| | 441.0 |
| | (3,127.6 | ) | | — |
|
| Total assets | $ | 1,936.6 |
| | $ | 2,164.6 |
| | $ | 1,584.0 |
| | $ | (3,302.3 | ) | | $ | 2,382.9 |
|
| Liabilities and Stockholders’ Equity | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Current portion of long-term debt | $ | — |
| | $ | 0.1 |
| | $ | — |
| | $ | — |
| | $ | 0.1 |
|
| Accounts payable | — |
| | 81.4 |
| | 96.5 |
| | — |
| | 177.9 |
|
| Accrued compensation | 4.6 |
| | 12.3 |
| | 15.1 |
| | — |
| | 32.0 |
|
| Accrued customer programs liabilities | — |
| | 65.5 |
| | 58.1 |
| | — |
| | 123.6 |
|
| Accrued interest | 7.0 |
| | — |
| | — |
| | — |
| | 7.0 |
|
| Other current liabilities | 3.0 |
| | 39.1 |
| | 62.4 |
| | — |
| | 104.5 |
|
| Payables to affiliates | 9.5 |
| | 206.4 |
| | 244.0 |
| | (459.9 | ) | | — |
|
| Total current liabilities | 24.1 |
| | 404.8 |
| | 476.1 |
| | (459.9 | ) | | 445.1 |
|
| Long-term debt | 920.7 |
| | 0.1 |
| | — |
| | — |
| | 920.8 |
|
| Long-term notes payable to affiliates | 178.3 |
| | 26.7 |
| | 35.2 |
| | (240.2 | ) | | — |
|
| Deferred income taxes | 109.2 |
| | — |
| | 59.9 |
| | — |
| | 169.1 |
|
| Pension and post-retirement benefit obligations | 1.5 |
| | 24.2 |
| | 36.0 |
| | — |
| | 61.7 |
|
| Other non-current liabilities | 0.5 |
| | 22.0 |
| | 61.4 |
| | — |
| | 83.9 |
|
| Total liabilities | 1,234.3 |
| | 477.8 |
| | 668.6 |
| | (700.1 | ) | | 1,680.6 |
|
| Stockholders’ equity: | | | | | | | | | |
| Common stock | 1.1 |
| | 448.1 |
| | 267.4 |
| | (715.5 | ) | | 1.1 |
|
| Treasury stock | (3.5 | ) | | — |
| | — |
| | — |
| | (3.5 | ) |
| Paid-in capital | 2,035.0 |
| | 1,551.2 |
| | 743.0 |
| | (2,294.2 | ) | | 2,035.0 |
|
| Accumulated other comprehensive loss | (185.6 | ) | | (45.6 | ) | | (99.7 | ) | | 145.3 |
| | (185.6 | ) |
| (Accumulated deficit) retained earnings | (1,144.7 | ) | | (266.9 | ) | | 4.7 |
| | 262.2 |
| | (1,144.7 | ) |
| Total stockholders’ equity | 702.3 |
| | 1,686.8 |
| | 915.4 |
| | (2,602.2 | ) | | 702.3 |
|
| Total liabilities and stockholders’ equity | $ | 1,936.6 |
| | $ | 2,164.6 |
| | $ | 1,584.0 |
| | $ | (3,302.3 | ) | | $ | 2,382.9 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Comprehensive Income
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 |
| (in millions of dollars) | Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 969.2 |
| | $ | 772.0 |
| | $ | (52.0 | ) | | $ | 1,689.2 |
|
| Cost of products sold | — |
| | 673.4 |
| | 537.9 |
| | (52.0 | ) | | 1,159.3 |
|
| Gross profit | — |
| | 295.8 |
| | 234.1 |
| | — |
| | 529.9 |
|
| Advertising, selling, general and administrative expenses | 45.4 |
| | 157.1 |
| | 126.1 |
| | — |
| | 328.6 |
|
| Amortization of intangibles | 0.1 |
| | 17.7 |
| | 4.4 |
| | — |
| | 22.2 |
|
| Restructuring charges | — |
| | 4.6 |
| | 0.9 |
| | — |
| | 5.5 |
|
| Operating (loss) income | (45.5 | ) | | 116.4 |
| | 102.7 |
| | — |
| | 173.6 |
|
| (Income) expense from affiliates | (1.5 | ) | | (20.7 | ) | | 22.2 |
| | — |
| | — |
|
| Interest expense | 49.9 |
| | — |
| | (0.4 | ) | | — |
| | 49.5 |
|
| Interest income | — |
| | (0.1 | ) | | (5.5 | ) | | — |
| | (5.6 | ) |
| Equity in earnings of joint ventures | — |
| | — |
| | (8.1 | ) | | — |
| | (8.1 | ) |
| Other expense (income), net | 0.4 |
| | (0.7 | ) | | 1.1 |
| | — |
| | 0.8 |
|
| Income (loss) from continuing operations before income taxes and earnings of wholly owned subsidiaries | (94.3 | ) | | 137.9 |
| | 93.4 |
| | — |
| | 137.0 |
|
| Income tax expense | 18.2 |
| | — |
| | 27.2 |
| | — |
| | 45.4 |
|
| (Loss) income from continuing operations | (112.5 | ) | | 137.9 |
| | 66.2 |
| | — |
| | 91.6 |
|
| Loss from discontinued operations, net of income taxes | — |
| | — |
| | — |
| | — |
| | — |
|
| Income (loss) before earnings of wholly owned subsidiaries | (112.5 | ) | | 137.9 |
| | 66.2 |
| | — |
| | 91.6 |
|
| Earnings of wholly owned subsidiaries | 204.1 |
| | 62.7 |
| | — |
| | (266.8 | ) | | — |
|
| Net income | $ | 91.6 |
| | $ | 200.6 |
| | $ | 66.2 |
| | $ | (266.8 | ) | | $ | 91.6 |
|
| Comprehensive (loss) income | $ | (15.4 | ) | | $ | 181.0 |
| | $ | (17.1 | ) | | $ | (163.9 | ) | | $ | (15.4 | ) |
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Comprehensive Income
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2013 |
| (in millions of dollars) | Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 971.2 |
| | $ | 814.0 |
| | $ | (20.1 | ) | | $ | 1,765.1 |
|
| Cost of products sold | — |
| | 669.8 |
| | 567.5 |
| | (20.1 | ) | | 1,217.2 |
|
| Gross profit | — |
| | 301.4 |
| | 246.5 |
| | — |
| | 547.9 |
|
| Advertising, selling, general and administrative expenses | 40.6 |
| | 183.5 |
| | 123.2 |
| | — |
| | 347.3 |
|
| Amortization of intangibles | 0.1 |
| | 19.7 |
| | 4.9 |
| | — |
| | 24.7 |
|
| Restructuring charges | 0.5 |
| | 14.3 |
| | 15.3 |
| | — |
| | 30.1 |
|
| Operating income (loss) | (41.2 | ) | | 83.9 |
| | 103.1 |
| | — |
| | 145.8 |
|
| Expense (income) from affiliates | (1.5 | ) | | (21.7 | ) | | 23.2 |
| | — |
| | — |
|
| Interest expense | 58.6 |
| | — |
| | 0.4 |
| | — |
| | 59.0 |
|
| Interest income | — |
| | (0.1 | ) | | (4.2 | ) | | — |
| | (4.3 | ) |
| Equity in earnings of joint ventures | — |
| | — |
| | (8.2 | ) | | — |
| | (8.2 | ) |
| Other expense, net | 4.8 |
| | 0.8 |
| | 2.0 |
| | — |
| | 7.6 |
|
| Income (loss) from continuing operations before income taxes and earnings of wholly owned subsidiaries | (103.1 | ) | | 104.9 |
| | 89.9 |
| | — |
| | 91.7 |
|
| Income tax expense (benefit) | (1.5 | ) | | — |
| | 15.9 |
| | — |
| | 14.4 |
|
| Income (loss) from continuing operations | (101.6 | ) | | 104.9 |
| | 74.0 |
| | — |
| | 77.3 |
|
| Loss from discontinued operations, net of income taxes | — |
| | (0.2 | ) | | — |
| | — |
| | (0.2 | ) |
| Income (loss) before earnings of wholly owned subsidiaries | (101.6 | ) | | 104.7 |
| | 74.0 |
| | — |
| | 77.1 |
|
| Earnings of wholly owned subsidiaries | 178.7 |
| | 72.6 |
| | — |
| | (251.3 | ) | | — |
|
| Net income | $ | 77.1 |
| | $ | 177.3 |
| | $ | 74.0 |
| | $ | (251.3 | ) | | $ | 77.1 |
|
| Comprehensive income | $ | 47.6 |
| | $ | 200.6 |
| | $ | 26.5 |
| | $ | (227.1 | ) | | $ | 47.6 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Comprehensive Income
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2012 |
| (in millions of dollars) | Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 976.5 |
| | $ | 803.4 |
| | $ | (21.4 | ) | | $ | 1,758.5 |
|
| Cost of products sold | — |
| | 684.2 |
| | 558.6 |
| | (21.4 | ) | | 1,221.4 |
|
| Gross profit | — |
| | 292.3 |
| | 244.8 |
| | — |
| | 537.1 |
|
| Advertising, selling, general and administrative expenses | 46.6 |
| | 176.4 |
| | 130.6 |
| | — |
| | 353.6 |
|
| Amortization of intangibles | 0.1 |
| | 15.3 |
| | 4.5 |
| | — |
| | 19.9 |
|
| Restructuring charges | — |
| | 20.2 |
| | 4.1 |
| | — |
| | 24.3 |
|
| Operating income (loss) | (46.7 | ) | | 80.4 |
| | 105.6 |
| | — |
| | 139.3 |
|
| Expense (income) from affiliates | (1.3 | ) | | (24.6 | ) | | 25.9 |
| | — |
| | — |
|
| Interest expense | 61.5 |
| | 28.3 |
| | 1.5 |
| | — |
| | 91.3 |
|
| Interest income | (0.1 | ) | | (0.1 | ) | | (1.8 | ) | | — |
| | (2.0 | ) |
| Equity in (earnings) losses of joint ventures | — |
| | 1.9 |
| | (8.8 | ) | | — |
| | (6.9 | ) |
| Other expense (income), net | 59.7 |
| | 3.3 |
| | (1.7 | ) | | — |
| | 61.3 |
|
| (Loss) income from continuing operations before income taxes and earnings of wholly owned subsidiaries | (166.5 | ) | | 71.6 |
| | 90.5 |
| | — |
| | (4.4 | ) |
| Income tax benefit | (121.1 | ) | | (0.2 | ) | | (0.1 | ) | | — |
| | (121.4 | ) |
| Income (loss) from continuing operations | (45.4 | ) | | 71.8 |
| | 90.6 |
| | — |
| | 117.0 |
|
| (Loss) income from discontinued operations, net of income taxes | 0.5 |
| | (1.4 | ) | | (0.7 | ) | | — |
| | (1.6 | ) |
| Income (loss) before earnings of wholly owned subsidiaries | (44.9 | ) | | 70.4 |
| | 89.9 |
| | — |
| | 115.4 |
|
| Earnings of wholly owned subsidiaries | 160.3 |
| | 79.0 |
| | — |
| | (239.3 | ) | | — |
|
| Net income | $ | 115.4 |
| | $ | 149.4 |
| | $ | 89.9 |
| | $ | (239.3 | ) | | $ | 115.4 |
|
| Comprehensive income | $ | 90.3 |
| | $ | 146.3 |
| | $ | 67.5 |
| | $ | (213.8 | ) | | $ | 90.3 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Cash Flows
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 |
| (in millions of dollars) | Parent | | Guarantors | | Non-Guarantors | | Consolidated |
| Net cash provided (used) by operating activities | $ | (77.9 | ) | | $ | 182.3 |
| | $ | 67.3 |
| | $ | 171.7 |
|
| Investing activities: | | | | | | | |
| Additions to property, plant and equipment | (0.2 | ) | | (10.6 | ) | | (18.8 | ) | | (29.6 | ) |
| Payments for (proceeds from) interest in affiliates | — |
| | 20.5 |
| | (20.5 | ) | | — |
|
| Proceeds from the disposition of assets | — |
| | 3.6 |
| | 0.2 |
| | 3.8 |
|
| Net cash (used) provided by investing activities | (0.2 | ) | | 13.5 |
| | (39.1 | ) | | (25.8 | ) |
| Financing activities: | | | | | | | |
| Intercompany financing | 188.3 |
| | (181.3 | ) | | (7.0 | ) | | — |
|
| Net dividends | 35.4 |
| | (15.3 | ) | | (20.1 | ) | | — |
|
| Repayments of long-term debt | (121.0 | ) | | (0.1 | ) | | — |
| | (121.1 | ) |
| Borrowings of notes payable, net | — |
| | — |
| | 1.0 |
| | 1.0 |
|
| Payments for debt issuance costs | (0.3 | ) | | — |
| | — |
| | (0.3 | ) |
| Repurchases of common stock | (19.4 | ) | | — |
| | — |
| | (19.4 | ) |
| Payments related to tax withholding for share-based compensation | (2.5 | ) | | — |
| | — |
| | (2.5 | ) |
| Proceeds from the exercise of stock options | 0.3 |
| | — |
| | — |
| | 0.3 |
|
| Net cash (used) provided by financing activities | 80.8 |
| | (196.7 | ) | | (26.1 | ) | | (142.0 | ) |
| Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | — |
| | (4.2 | ) | | (4.2 | ) |
| Net (decrease) increase in cash and cash equivalents | 2.7 |
| | (0.9 | ) | | (2.1 | ) | | (0.3 | ) |
| Cash and cash equivalents: | | | | | | | |
| Beginning of the period | 7.0 |
| | 1.0 |
| | 45.5 |
| | 53.5 |
|
| End of the period | $ | 9.7 |
| | $ | 0.1 |
| | $ | 43.4 |
| | $ | 53.2 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Cash Flows
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2013 |
| (in millions of dollars) | Parent | | Guarantors | | Non-Guarantors | | Consolidated |
| Net cash provided (used) by operating activities | $ | (81.7 | ) | | $ | 186.5 |
| | $ | 89.7 |
| | $ | 194.5 |
|
| Investing activities: | | | | | | | |
| Additions to property, plant and equipment | — |
| | (21.2 | ) | | (15.4 | ) | | (36.6 | ) |
| Payments for (proceeds from) interest in affiliates | — |
| | 55.6 |
| | (55.6 | ) | | — |
|
| Payments related to the sale of discontinued operations | — |
| | (1.5 | ) | | — |
| | (1.5 | ) |
| Proceeds from the disposition of assets | — |
| | — |
| | 6.1 |
| | 6.1 |
|
| Cost of acquisition, net of cash acquired | — |
| | (1.3 | ) | | — |
| | (1.3 | ) |
| Net cash (used) provided by investing activities | — |
| | 31.6 |
| | (64.9 | ) | | (33.3 | ) |
| Financing activities: | | | | | | | |
| Intercompany financing | 143.8 |
| | (168.2 | ) | | 24.4 |
| | — |
|
| Net dividends | 65.7 |
| | (45.9 | ) | | (19.8 | ) | | — |
|
| Proceeds from long-term borrowings | 530.0 |
| | — |
| | — |
| | 530.0 |
|
| Repayments of long-term debt | (658.1 | ) | | — |
| | (21.4 | ) | | (679.5 | ) |
| (Repayments) borrowings of notes payable, net | 0.5 |
| | — |
| | (1.2 | ) | | (0.7 | ) |
| Payments for debt issuance costs | (4.3 | ) | | — |
| | — |
| | (4.3 | ) |
| Payments related to tax withholding for share-based compensation | (1.0 | ) | | — |
| | — |
| | (1.0 | ) |
| Net cash (used) provided by financing activities | 76.6 |
| | (214.1 | ) | | (18.0 | ) | | (155.5 | ) |
| Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | — |
| | (2.2 | ) | | (2.2 | ) |
| Net increase (decrease) in cash and cash equivalents | (5.1 | ) | | 4.0 |
| | 4.6 |
| | 3.5 |
|
| Cash and cash equivalents: | | | | | | | |
| Beginning of the period | 12.1 |
| | (3.0 | ) | | 40.9 |
| | 50.0 |
|
| End of the period | $ | 7.0 |
| | $ | 1.0 |
| | $ | 45.5 |
| | $ | 53.5 |
|
ACCO Brands Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Condensed Consolidating Statement of Cash Flows
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31,2012 |
| (in millions of dollars) | Parent | | Guarantors | | Non-Guarantors | | Consolidated |
| Net cash (used) provided by operating activities: | $ | (156.0 | ) | | $ | 137.5 |
| | $ | 11.0 |
| | $ | (7.5 | ) |
| Investing activities: | | | | | | | |
| Additions to property, plant and equipment | — |
| | (22.4 | ) | | (7.9 | ) | | (30.3 | ) |
| Proceeds (payments) related to the sale of discontinued operations | — |
| | 2.1 |
| | (0.6 | ) | | 1.5 |
|
| Proceeds from the disposition of assets | — |
| | — |
| | 3.1 |
| | 3.1 |
|
| Cost of acquisitions, net of cash acquired | (429.5 | ) | | — |
| | 32.0 |
| | (397.5 | ) |
| Net cash (used) provided by investing activities | (429.5 | ) | | (20.3 | ) | | 26.6 |
| | (423.2 | ) |
| Financing activities: | | | | | | | |
| Intercompany financing | 775.6 |
| | (777.4 | ) | | 1.8 |
| | — |
|
| Net dividends | 53.3 |
| | 27.3 |
| | (80.6 | ) | | — |
|
| Proceeds from long-term borrowings | 545.0 |
| | 690.0 |
| | 35.0 |
| | 1,270.0 |
|
| Repayments of long-term debt | (816.2 | ) | | (42.8 | ) | | (13.0 | ) | | (872.0 | ) |
| Borrowings of short-term debt, net | — |
| | — |
| | 1.2 |
| | 1.2 |
|
| Payments for debt issuance costs | (21.5 | ) | | (16.1 | ) | | (0.9 | ) | | (38.5 | ) |
| Payments related to tax withholding for share-based compensation | (0.8 | ) | | — |
| | — |
| | (0.8 | ) |
| Proceeds from the exercise of stock options | 0.2 |
| | — |
| | — |
| | 0.2 |
|
| Net cash provided (used) by financing activities | 535.6 |
| | (119.0 | ) | | (56.5 | ) | | 360.1 |
|
| Effect of foreign exchange rate changes on cash | — |
| | — |
| | (0.6 | ) | | (0.6 | ) |
| Net decrease in cash and cash equivalents | (49.9 | ) | | (1.8 | ) | | (19.5 | ) | | (71.2 | ) |
| Cash and cash equivalents: | | | | | | | |
| Beginning of the period | 62.0 |
| | (1.2 | ) | | 60.4 |
| | 121.2 |
|
| End of the period | $ | 12.1 |
| | $ | (3.0 | ) | | $ | 40.9 |
| | $ | 50.0 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Management's Evaluation of Disclosure Controls and Procedures
We seek to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, our management, under the supervision and with the participation of our Disclosure Committee and our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effectiveeffective.
(b) Changes in Internal Control over Financial Reporting
Except as described below, thereThere were no changes in our internal control over financial reporting during the quarter ended December 31, 20142017 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
(c) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.Act. Our internal control over financial reporting is designed by and under the supervision of our Chief Executive Officer and Chief Financial Officer and effected by management and our board of directors to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S.
In designing and evaluating our internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objective. Also, projections of any evaluation of the effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013) in Internal Control-Integrated Framework.Framework (2013). Our management concluded that our internal control over financial reporting was effective as of December 31, 2014.2017.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 20142017 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included in Item 8. of this report.
(d) Remediation of Previously Reported Material Weakness for Period Ended December 31, 2013
A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
In the course of completing our assessment of internal control over financial reporting as of December 31, 2013, management identified a number of deficiencies related to the design, implementation and effectiveness of certain U.S. and Canadian information technology general controls for the Mead C&OP business that have a direct impact on our financial reporting. Based on the nature and interrelationship of the noted deficiencies, management concluded that these deficiencies, in the aggregate, resulted in a reasonable possibility that a material misstatement in our interim or annual financial statements would not be prevented or detected
on a timely basis, and as such, constituted a material weakness. In particular, these deficiencies related to the configuration set-up of the system, user access and change management controls that are intended to ensure that access to financial applications and data is adequately restricted to appropriate personnel and that all changes affecting the financial applications and underlying account records are identified, tested and implemented appropriately. Based on our assessment, management concluded that the Company did not maintain effective disclosures controls and procedures or internal control over financial reporting as of December 31, 2013.
In response to the material weakness described above, management developed and implemented a remediation plan to address the material weakness.
Management's plan to remediate the material weakness included the following actions:
The appropriate change management control settings, including tracking of access and history of changes, were properly configured and the log files are being reviewed.
Internal IT resources were reassigned to remediate the deficiencies identified and to improve control within the IT environment.
An additional dedicated resource, reporting to our Chief Financial Officer, was appointed to monitor and verify the IT control environment on an ongoing basis.
Appropriate change management processes including appropriate reviews and approvals were implemented.
A robust training program was designed and implemented. All personnel with responsibility for IT general controls completed appropriate retraining regarding IT general control objectives and their roles and responsibilities for them. Additional specialized training for those who are responsible for and oversee the key IT general controls was conducted.
Controls associated with IT system access were reviewed and, where necessary, revised.
Access rules for our outsourced service providers were codified and implemented to remediate the deficiencies identified.
Robust monitoring processes were implemented within the IT function to ensure effective operation of our key IT controls. These processes include retention of proper evidence to demonstrate the complete and timely execution of each key control. Ongoing monitoring also provides a control feedback loop that provides for the control design to be revised as needed to suit changing circumstances and ensures that we amend the associated control documentation.
Because the reliability of the internal control processes requires repeatable execution, management tested and re-tested the internal controls over several periods. Based on the actions taken, and the testing results, management has concluded that the material weakness described above was remediated as of December 31, 2014.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required under this Item is contained in the Company’s 20152018 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 30, 20152018, and is incorporated herein by reference.
Code of Business Conduct
The Company has adopted a code of business conduct as required by the listing standards of the New York Stock Exchange and rules of the Securities and Exchange Commission. This code applies to all of the Company’s directors, officers and employees. The code of business conduct is published and available at the Investor Relations Section of the Company’s internet website at www.accobrands.com. The Company will post on its website any amendments to, or waivers from, our code of business conduct applicable to any of its directors or executive officers. The foregoing information will be available in print to any shareholderstockholder who requests such information from ACCO Brands Corporation, Four Corporate Drive, Lake Zurich, IL 60047-2997, Attn: Office of the General Counsel.
As required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, the Company’s Chief Executive Officer certified to the NYSE within 30 days after the Company’s 2014 Annual Meeting of Stockholders that he was not aware of any violation by the Company of the NYSE Corporate Governance Listing Standards.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item is contained in the Company’s 20152018 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 30, 20152018, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table gives information, as of December 31, 20142017, about our common stock that may be issued upon the exercise of options stock-settled appreciation rights ("SSARs") and other equity awards under all compensation plans under which equity securities are reserved for issuance.
| | | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c) | |
Equity compensation plans approved by security holders(1) | 4,973,386 |
| | $ | 7.02 |
| | 4,987,128 |
| (2) | 4,272,651 |
| | $ | 8.68 |
| | 6,158,389 |
| (1) |
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Total | 4,973,386 |
| | $ | 7.02 |
| | 4,987,128 |
| (2) | 4,272,651 |
| | $ | 8.68 |
| | 6,158,389 |
| (1) |
| |
| (1) | This number includes 4,944,796 common shares that were subject to issuance upon the exercise of stock options/SSARs granted under the 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (the "Restated Plan”), and 28,590 common shares that were subject to issuance upon the exercise of stock options pursuant to the Company’s 2005 Assumed Option and Restricted Stock Unit Plan. The weighted-average exercise price in column (b) of the table reflects all such options/SSARs. |
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(2) | These are shares available for grant as of December 31, 20142017 under the RestatedACCO Brands Corporation Incentive Plan (the "Plan") pursuant to which the Compensation Committee of the Board of Directors or the Board of Directors may make various stock-based awards, including grants of stock options, stock-settled appreciation rights, restricted stock, restricted stock units and performance sharestock units. In addition to these shares, shares covered by outstanding awards under the following sharesPlan that were forfeited or otherwise terminated may become available for grant under the Restated Plan and, to the extent such shares have become available as of December 31, 2017, they are included in the table as available for grant. |
available as of December 31, 2014, they are included in the table as available for grant: shares covered by outstanding awards under the Plan that were forfeited or otherwise terminated.
Other information required under this Item is contained in the Company’s 20152018 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 30, 20152018, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required under this Item is contained in the Company’s 20152018 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 30, 20152018, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required under this Item is contained in the Company’s 20152018 Definitive Proxy Statement, which is to be filed with the Securities and Exchange Commission prior to April 30, 20152018, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission, as indicated in the description of each. We agree to furnish to the Commission upon request a copy of any instrument with respect to long-term debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed 10 percent of our total assets on a consolidated basis.
| |
| (a) | Financial Statements, Financial Statement Schedules and Exhibits |
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| 1. | All Financial Statements |
The following consolidated financial statements of the Company and its subsidiaries are filed as part of this report under Part II, Item 8. - Financial Statements and Supplementary Data:
|
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| | Page |
| Reports of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of December 31, 20142017 and 20132016 | |
Consolidated Statements of Income for the years ended December 31, 2014, 20132017, 2016 and 20122015 | |
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 20132017, 2016 and 20122015 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 20132017, 2016 and 20122015 | |
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2014, 20132017, 2016 and 20122015 | |
| Notes to Consolidated Financial Statements | |
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| 2. | Financial Statement Schedule: |
Schedule II - Valuation and Qualifying Accounts and Reserves for each of the years ended December 31, 2014, 20132017, 2016 and 2012.
The separate consolidated financial statements of Pelikan-Artline Pty Ltd, the Company’s 50 percent owned joint venture as of September 30, 2014 and 2013 and for each of the years in the three-year period ended September 30, 2014 required to be included in this report pursuant to Rule 3-09 of Regulation S-X, are filed as Exhibit 99.1.2015.
A list of exhibits filed or furnished with this Report on Form 10-K (or incorporated by reference to exhibits previously filed or furnished by the Company) is provided in the accompanying Exhibit Index.
ITEM 16. FORM 10-K SUMMARY
EXHIBIT INDEX
Number Description of Exhibit
Plans of acquisition, reorganization, arrangement, liquidation or succession
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2.1 | Agreement and Plan of Merger, dated November 17, 2011, by and among MeadWestvaco Corporation, Monaco SpinCo Inc., ACCO Brands Corporation and Augusta Sub, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K filed by the Registrant on November 22, 2011 (File No. 001-08454)) |
2.1Share Sale Agreement, dated as of March 22, 2016, among ACCO Brands Australia Pty Limited, Bigadale Pty Limited, Andrew Kaldor, Cherington Investments Pty Ltd, Freiburg Nominees Proprietary Limited and Enora Pty Ltd and certain Guarantors named therein (incorporated by reference to Exhibit 2.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on March 21, 2016 (File No. 001-08454))
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2.2 | Amendment No. 1, dated as of March 19, 2012, to the Agreement and Plan of Merger, dated as of November 17, 2011, by and among MeadWestvaco Corporation, Monaco SpinCo Inc., ACCO Brands Corporation and Augusta Acquisition Sub, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K filed by the Registrant on March 22, 2012 (File No. 001-08454)) |
2.2Share Purchase Agreement, dated as of October 21, 2016, among ACCO Brands Corporation, ACCO Europe Limited and Esselte Group Holdings (Luxembourg) S.A. (incorporated by reference to Exhibit 2.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on October 24, 2016 (File No. 001-08454))
2.3Amendment Deed, dated as of January 31, 2017, to Share Purchase Agreement among ACCO Brands Corporation, ACCO Europe Limited and Esselte Group Holdings (Luxembourg) S.A. (incorporated by reference to Exhibit 2.3 to ACCO Brands Corporation's Annual Report on Form 10-K filed with the SEC on February 27, 2017 (File No. 001-08454))
Certificate of Incorporation and Bylaws
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3.1 | Restated Certificate of Incorporation of ACCO Brands Corporation, as amended (incorporated by reference to Exhibit 3.1 to Form 8-K filed by the Registrant on May 19, 2008 (File No. 001-08454)) |
3.1Restated Certificate of Incorporation of ACCO Brands Corporation, as amended (incorporated by reference to Exhibit 3.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 19, 2008 (File No. 001-08454))
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3.2 | Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed August 17, 2005 (File No. 001-08454)) |
3.2Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.2 to ACCO Brands Corporation's Current Report on Form 8-K filed the SEC on August 17, 2005 (File No. 001-08454))
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3.3 | By-laws of ACCO Brands Corporation, as amended through February 20, 2013 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed February 26, 2013 (File No. 001-08454)) |
3.3Certificate of Elimination of the Series A Junior Participating Preferred Stock of the Company, as filed with the Secretary of State of the State of Delaware on September 11, 2015 (incorporated by reference to Exhibit 3.2 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on September 11, 2015 (File No. 001-08454))
3.4By-laws of ACCO Brands Corporation, as amended through December 9, 2015 (incorporated by reference to Exhibit 3.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on December 14, 2015 (File No. 001-08454))
Instruments defining the rights of security holders, including indentures
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4.1 | Rights Agreement, dated as of August 16, 2005, between ACCO Brands Corporation and Wells Fargo Bank, National Association, as rights agent (incorporated by reference to Exhibit 4.1 to Form 8-K filed by the Registrant on August 17, 2005 (File No. 001-08454)) |
4.1Indenture, dated as of December 22, 2016, among ACCO Brands Corporation, as issuer, the guarantors named therein, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to ACCO Brands Corporation's Annual Report on Form 10-K filed with the SEC on February 27, 2017 (File No. 001-08454))
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4.2 | Indenture, dated as of April 30, 2012, among Monaco SpinCo Inc., as issuer, the guarantors named therein, and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 10.3 of the Registrant's Form 8-K filed on May 7, 2012 (File No. 001-08454)) |
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4.3 | First Supplemental Indenture, dated as of May 1, 2012, among the Company, Monaco SpinCo Inc., the guarantors named therein and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 10.4 of the Registrant's Form 8-K filed on May 7, 2012 (File No. 001-08454)) |
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4.4 | Second Supplemental Indenture, dated as of May 1, 2012, among the Company, Mead Products LLC, the guarantors named therein and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 10.5 of the Registrant's Form 8-K filed on May 7, 2012 (File No. 001-08454)) |
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4.5 | Registration Rights Agreement, dated as of May 1, 2012, among Monaco SpinCo Inc., the Company, the guarantors named therein, and representatives of the initial purchasers named therein (incorporated by reference to Exhibit 10.6 of the Registrant's Form 8-K filed on May 7, 2012 (File No. 001-08454)) |
Material Contracts
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10.1 | Tax Allocation Agreement, dated as of August 16, 2005, between ACCO World Corporation and Fortune Brands, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated August 12, 2005 and filed August 17, 2005 (File No. 001-08454)) |
10.1Tax Allocation Agreement, dated as of August 16, 2005, between ACCO World Corporation and Fortune Brands, Inc. (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Current Report on Form 8-K dated August 12, 2005 and filed with the SEC on August 17, 2005 (File No. 001-08454))
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10.2 | Tax Allocation Agreement, dated as of August 16, 2005, between General Binding Corporation and Lane Industries, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated August 12, 2005 and filed August 17, 2005 filed May 13, 2005 (File No. 001-08454)) |
10.2Separation Agreement, dated November 17, 2011, by and between MeadWestvaco and Monaco SpinCo Inc. (incorporated by reference to Exhibit 10.1 of ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on November 22, 2011 (File No. 001-08454))
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10.3 | Employee Matters Agreement, dated as of March 15, 2005, by and among Fortune Brands, Inc., ACCO World Corporation and General Binding Corporation (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-4 (File No. 333-124946)) |
10.3Employee Benefits Agreement, dated as of November 17, 2011, by and among MeadWestvaco Corporation, Monaco Spinco Inc. and ACCO Brands Corporation (incorporated by reference to Exhibit 10.3 of ACCO Brands Corporation's Registration Statement on Form S-4/A filed with the SEC on February 13, 2012 (File No. 333-178869))
EXHIBIT INDEX
Number Description of Exhibit
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10.4 | Separation Agreement, dated November 17, 2011, by and between MeadWestvaco and Monaco SpinCo Inc. (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed on November 22, 2011 (File No. 001-08454)) |
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10.5 | Employee Benefits Agreement, dated as of November 17, 2011, by and among MeadWestvaco Corporation, Monaco Spinco Inc. and ACCO Brands Corporation. (incorporated by reference to Exhibit 10.3 of Registrant's Form S-4/A filed on February 13, 2012 (File No. 333-178869)) |
10.4Amendment No. 1, dated as of March 19, 2012, to the Separation Agreement, dated as of November 17, 2011, by and among MeadWestvaco Corporation and Monaco SpinCo Inc. (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on March 22, 2012 (File No. 001-08454))
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10.6 | Amendment No. 1, dated as of March 19, 2012, to the Separation Agreement, dated as of November 17, 2011, by and among MeadWestvaco Corporation and Monaco SpinCo Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant on March 22, 2012 (File No. 001-08454)) |
10.5Tax Matters Agreement, effective as of May 1, 2012, among the Company, MeadWestvaco Corporation and Monaco SpinCo Inc. (incorporated by reference to Exhibit 10.2 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 7, 2012 (File No. 001-08454))
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10.7 | Transition Services Agreement, effective as of May 1, 2012, between Monaco SpinCo Inc. and MeadWestvaco Corporation (incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on May 7, 2012 (File No. 001-08454)) |
10.6Third Amended and Restated Credit Agreement, dated as of January 27, 2017, among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other agents and various lenders party hereto (incorporated by reference to Exhibit 10.11 to ACCO Brands Corporation's Annual Report on Form 10-K filed with the SEC on February 27, 2017 (File No. 001-08454))
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10.8 | Tax Matters Agreement, effective as of May 1, 2012, among the Company, MeadWestvaco Corporation and Monaco SpinCo Inc. (incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K filed on May 7, 2012 (File No. 001-08454)) |
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10.9 | Amended and Restated Credit Agreement, dated as of May 13, 2013, among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other agents and lenders party thereto. (incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K filed on May 13, 2013 (File No. 001-08454)) |
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10.10 | First Amendment to the Amended and Restated Credit Agreement dated as of July 19, 2013, among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other agents and lenders party thereto* |
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10.11 | Second Amendment to the Amended and Restated Credit Agreement dated as of June 26, 2014, among the Company, certain subsidiaries of the Company, Bank of America, N.A., as administrative agent, and the other agents and lenders party thereto (incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on June 27, 2014 (File No. 001-08454)) |
Executive Compensation Plans and Management Contracts
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10.12 | ACCO Brands Corporation 2005 Assumed Option and Restricted Stock Unit Plan, together with Sub-Plan A thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated August 3,2005 and filed August 8, 2005 (File No. 001-08454)) |
10.7ACCO Brands Corporation Executive Severance Plan (effective December 1, 2007) (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on November 29, 2007 (File No. 001-08454))
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10.13 | Amended and Restated ACCO Brands Corporation 2005 Incentive Plan (incorporated by reference to Annex A of the Registrant’s definitive proxy statement filed April 4, 2006 (File No. 001-08454)) |
10.8Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on December 24, 2008 (File No. 001-08454))
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10.14 | Amendment to the Amended and Restated ACCO Brands Corporation 2005 Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant on May 19, 2008 (File No. 001-08454)) |
10.9Amended and Restated ACCO Brands Deferred Compensation Plan for Non-Employee Directors, effective December 14, 2009 (incorporated by reference to Exhibit 10.41 to ACCO Brands Corporation's Annual Report on Form 10-K filed with the SEC on February 26, 2010 (File No. 001-089454))
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10.15 | ACCO Brands Corporation Executive Severance Plan (effective December 1, 2007) (incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant on November 29, 2007 (File No. 001-08454)) |
10.10Letter agreement, dated November 4, 2008, from ACCO Brands Corporation to Christopher M. Franey (incorporated by reference to Exhibit 10.42 to ACCO Brands Corporation's Annual Report on Form 10-K filed with the SEC on February 26, 2010 (File No. 001-08454))
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10.16 | 2008 Amended and Restated ACCO Brands Corporation Supplemental Retirement Plan (incorporated by reference to Exhibit 10.31 to Form 10-K filed by the Registrant on February 29, 2008 (File No. 001-08454)) |
10.112011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 20, 2011 (File No. 001-08454))
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10.17 | Amendment to the 2008 Amended and Restated ACCO Brands Corporation Supplemental Retirement Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant on January 22, 2009 (File No. 001-08454)) |
10.12Form of Nonqualified Stock Option Agreement under the 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.3 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 20, 2011 (File No. 001-08454))
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10.18 | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Registrant on December 24, 2008 (File No. 001-08454)) |
10.13Amendment of 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on April 24, 2012 (File No. 001-08454))
10.14Amendment of the ACCO Brands Corporation Executive Severance Plan, adopted as of October 23, 2012 (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Quarterly Report on Form 10-Q filed with the SEC on October 31, 2012 (File No. 001-08454))
10.15Form of Non-qualified Stock Option Agreement (Robert J. Keller) under the 2011 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.2 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on February 26, 2013 (File No. 001-08454)) 99
10.16Amendment to Deferred Compensation Plan for Non-Employee Directors, effective January 1, 2014 (incorporated by reference to Exhibit 10.15 to ACCO Brands Corporation's Annual Report on Form 10-K filed with the SEC on February 25, 2014 (File No. 001-089454))
EXHIBIT INDEX
Number Description of Exhibit
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10.19 | Form of Stock-settled Stock Appreciation Rights Agreement under the ACCO Brands Corporation Amended and Restated 2005 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10.46 to Form 10-K filed by the Registrant on March 2, 2009 (File No. 001-08454)) |
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10.20 | Amended and Restated ACCO Brands Deferred Compensation Plan for Non-Employee Directors, effective December 14, 2009 (incorporated by reference to Exhibit 10.41 to Form 10-K filed by the Registrant on February 26, 2010 (File No. 001-089454)) |
10.17Form of 2011 Amended and Restated Incentive Plan Directors Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.16 to ACCO Brands Corporation's Annual Report on Form 10-K filed with the SEC on February 25, 2014 (File No. 001-089454))
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10.21 | Amendment to Deferred Compensation Plan for Non-Employee Directors, effective January 1, 2014 (incorporated by reference to Exhibit 10.15 to Form 10-K filed by the Registrant on February 25, 2014 (File No. 001-089454)) |
10.18Form of Non-qualified Stock Option Agreement under the 2011 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.2 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on March 10, 2014 (File No. 001-08454))
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10.22 | Form of 2011 Amended and Restated Incentive Plan Directors Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.16 to Form 10-K filed by the Registrant on February 25, 2014 (File No. 001-089454)) |
10.19Second Amendment of 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.4 to ACCO Brands Corporation's Quarterly Report on Form 10-Q filed with the SEC on April 30, 2014 (File No. 001-08454))
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10.23 | Letter agreement, dated November 4, 2008, from ACCO Brands Corporation to Christopher M. Franey (incorporated by reference to Exhibit 10.42 to Form 10-K filed by the Registrant on February 26, 2010 (File No. 001-08454)) |
10.20ACCO Brands Corporation Annual Incentive Plan (incorporated by reference to Exhibit 4.4 to ACCO Brands Corporation's Registration Statement on Form S-8 filed with the SEC on May 12, 2015 (File No. 001-08454))
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10.24 | 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 20, 2011 (File No. 001-08454)) |
10.21Form of Directors Restricted Stock Unit Award Agreement under the ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 18, 2015 (File No. 001-08454))
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10.25 | Form of Directors Restricted Stock Unit Award Agreement under the 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.2 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 20, 2011 (File No. 001-08454)) |
10.22Form of Restricted Stock Unit Award Agreement under the ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.2 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 18, 2015 (File No. 001-08454))
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10.26 | Form of Nonqualified Stock Option Agreement under the 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.3 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 20, 2011 (File No. 001-08454)) |
10.23Form of Performance Stock Unit Award Agreement under the ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.3 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 18, 2015 (File No. 001-08454))
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10.27 | Form of Restricted Stock Unit Award Agreement under the 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.4 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 20, 2011 (File No. 001-08454)) |
10.24Form of Nonqualified Stock Option Award Agreement under the ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.4 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 18, 2015 (File No. 001-08454))
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10.26 | Form of Performance Stock Unit Award Agreement under the 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.5 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 20, 2011 (File No. 001-08454)) |
10.25Form of 2016-2018 Performance-Based Cash Award Agreement under the ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.35 to ACCO Brands Corporation's Annual Report on Form 10-K filed with the SEC on February 27, 2017 (File No. 001-08454))
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10.27 | Form of Stock-Settled Stock Appreciation Rights Award Agreement under the 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.6 to ACCO Brands Corporation's Current Report on Form 8-K filed with the SEC on May 20, 2011 (File No. 001-08454)) |
10.26Form of Executive Officer Restricted Stock Unit Award Agreement under the ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.1 to ACCO Brands Corporation's Quarterly Report on Form 10-Q filed with the SEC on May 9, 2017 (File No. 001-08454))
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10.28 | Amendment of 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on April 24, 2012 (File No. 001-08454)) |
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10.29 | Amendment to the 2008 Amended and Restated ACCO Brands Corporation Supplemental Retirement Plan (incorporated by reference to Exhibit 10.8 of the Registrant's Form 8-K filed on May 7, 2012 (File No. 001-08454)) |
Other Exhibits
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10.30 | Amendment of the ACCO Brands Corporation Executive Severance Plan, adopted as of October 23, 2012 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed by the Registrant on October 31, 2012 (File No. 001-08454)) |
21.1Subsidiaries of the Registrant*
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10.31 | Form of Restricted Stock Unit Award Agreement (Robert J. Keller) under the 2011 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on February 26, 2013 (File No. 001-08454)) |
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10.32 | Form of Non-qualified Stock Option Agreement (Robert J. Keller) under the 2011 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K filed on February 26, 2013 (File No. 001-08454)) |
31.1Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 100
32.1Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
EXHIBIT INDEX
Number Description of Exhibit
| |
10.33 | Form of Performance Stock Unit Award Agreement under the 2011 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.3 of the Registrant's Form 8-K filed on February 26, 2013 (File No. 001-08454)) |
| |
10.34 | Form of Performance Stock Unit Award Agreement (Robert J. Keller) under the 2011 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.4 of the Registrant's Form 8-K filed on February 26, 2013 (File No. 001-08454)) |
| |
10.35 | ACCO Brands 2013 Annual Incentive Plan (incorporated by reference to 10.5 of the Registrant’s Form 10-Q filed May 8, 2013 (File No. 001-08454)) |
| |
10.36 | Form of Performance Stock Unit Award Agreement under the 2011 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on March 10, 2014 (File No. 001-08454)) |
| |
10.37 | Form of Non-qualified Stock Option Agreement under the 2011 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K filed on March 10, 2014 (File No. 001-08454)) |
| |
10.38 | Form of Restricted Stock Unit Award Agreement under the 2011 Amended and Restated Incentive Plan (incorporated by reference to Exhibit 10.3 of the Registrant's Form 8-K filed on March 10, 2014 (File No. 001-08454)) |
| |
10.39 | Second Amendment of 2011 Amended and Restated ACCO Brands Corporation Incentive Plan (incorporated by reference to Exhibit 10.4 to Form 10-Q filed by the Registrant on April 30, 2014 (File No. 001-08454)) |
Other Exhibits
| |
21.1 | Subsidiaries of the Registrant* |
| |
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 | Pelikan-Artline Pty Ltd Financial Statements as of September 30, 2014*
|
| |
101 | The following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2014 and 2013, (ii) the Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012, (iii) the Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012, (v) Consolidated Statements of Stockholders Equity (Deficit) for the years ended December 31, 2014, 2013 and 2012, and (vi) related notes to those financial statements*
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | | REGISTRANT: |
| | | |
| | | ACCO BRANDS CORPORATION |
| | |
| | By: | /s/ Boris Elisman |
| | | Boris Elisman |
| | | Chairman, President and Chief Executive Officer (principal executive officer) |
|
| | |
| | By: | /s/ Neal V. Fenwick |
| | | Neal V. Fenwick |
| | | Executive Vice President and Chief Financial Officer (principal financial officer) |
|
| | |
| | By: | /s/ Thomas P. O’Neill, Jr.Kathleen D. Schnaedter |
| | | Thomas P. O’Neill, Jr.Kathleen D. Schnaedter |
| | | Senior Vice President Finance and Chief Accounting Officer (principalaccounting officer) |
February 25, 201528, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on its behalf by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
| /s/ Boris Elisman | | Chairman, President and
Chief Executive Officer
(principal executive officer) | February 25, 201528, 2018 |
| Boris Elisman | |
| | | | | |
| /s/ Neal V. Fenwick | | Executive Vice President and Chief Financial Officer (principal financial officer) | | February 25, 201528, 2018 |
| Neal V. Fenwick | | | |
| | | | | |
/s/ Thomas P. O’Neill, Jr.Kathleen D. Schnaedter | | Senior Vice President Finance and Chief Accounting (principalOfficer (principal accounting officer) | | February 25, 201528, 2018 |
Thomas P. O’Neill, Jr. | | | |
| | | | |
/s/ Robert J. Keller* | | Executive Chairman of the Board of Directors | | February 25, 2015 |
Robert J. Keller | | | |
| | | | |
/s/ George V. Bayly* | | Director | | February 25, 2015 |
George V. Bayly | Kathleen D. Schnaedter | | | |
| | | | | |
| /s/ James A. Buzzard* | | Director | | February 25, 201528, 2018 |
| James A. Buzzard | | | | |
| | | | |
| /s/ Kathleen S. Dvorak* | | Director | | February 28, 2018 |
| Kathleen S. Dvorak | | | | |
| | | | |
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ Kathleen S. Dvorak*Pradeep Jotwani* | | Director | | February 25, 201528, 2018 |
Kathleen S. DvorakPradeep Jotwani | | | | |
| | | | | |
/s/ Robert H. Jenkins*J. Keller* | | Director | | February 25, 201528, 2018 |
Robert H. Jenkins | | | | |
| | | | |
/s/ Pradeep Jotwani* | | Director | | February 25, 2015 |
Pradeep JotwaniJ. Keller | | | | |
| | | | | |
| /s/ Thomas Kroeger* | | Director | | February 25, 201528, 2018 |
| Thomas Kroeger | | | | |
| | | | | |
| /s/ Graciela Monteagudo* | | Director | | February 28, 2018 |
| Graciela Monteagudo | | | | |
| | | | |
| /s/ Hans Michael Norkus* | | Director | | February 25, 201528, 2018 |
| Hans Michael Norkus | | | | |
| | | | | |
| /s/ E. Mark Rajkowski* | | Director | | February 25, 201528, 2018 |
| E. Mark Rajkowski | | | | |
| | | | |
/s/ Sheila G. Talton* | | Director | | February 25, 2015 |
Sheila G. Talton | | | | |
| | | | | |
| /s/ Neal V. Fenwick | | | | |
* Neal V. Fenwick as
Attorney-in-Fact | | | | |
ACCO Brands Corporation
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
Allowances for Doubtful Accounts
Changes in the allowances for doubtful accounts were as follows:
| | | | Year Ended December 31, | Year Ended December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 6.1 |
| | $ | 6.5 |
| | $ | 5.1 |
| $ | 4.5 |
| | $ | 4.8 |
| | $ | 5.5 |
|
| Additions charged to expense | 1.0 |
| | 1.5 |
| | 2.2 |
| — |
| | 0.2 |
| | 3.2 |
|
| Deductions - write offs | (1.3 | ) | | (1.6 | ) | | (3.0 | ) | (1.1 | ) | | (0.8 | ) | | (3.5 | ) |
| Mead C&OP acquisition | — |
| | — |
| | 2.1 |
| |
| Acquisitions | | 1.7 |
| | 0.1 |
| | — |
|
| Foreign exchange changes | (0.3 | ) | | (0.3 | ) | | 0.1 |
| 0.3 |
| | 0.2 |
| | (0.4 | ) |
| Balance at end of year | $ | 5.5 |
| | $ | 6.1 |
| | $ | 6.5 |
| $ | 5.4 |
| | $ | 4.5 |
| | $ | 4.8 |
|
Allowances for Sales Returns and Discounts
Changes in the allowances for sales returns and discounts were as follows:
| | | | Year Ended December 31, | Year Ended December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 12.9 |
| | $ | 10.6 |
| | $ | 7.7 |
| $ | 9.4 |
| | $ | 11.7 |
| | $ | 12.0 |
|
| Additions charged to expense | 37.4 |
| | 41.3 |
| | 41.0 |
| 23.7 |
| | 22.5 |
| | 30.3 |
|
| Deductions - returns | (38.4 | ) | | (39.1 | ) | | (41.6 | ) | (24.5 | ) | | (24.9 | ) | | (30.4 | ) |
| Mead C&OP acquisition | — |
| | — |
| | 2.8 |
| |
| Acquisitions | | 0.8 |
| | — |
| | — |
|
| Foreign exchange changes | 0.1 |
| | 0.1 |
| | 0.7 |
| 0.3 |
| | 0.1 |
| | (0.2 | ) |
| Balance at end of year | $ | 12.0 |
| | $ | 12.9 |
| | $ | 10.6 |
| $ | 9.7 |
| | $ | 9.4 |
| | $ | 11.7 |
|
Allowances for Cash Discounts
Changes in the allowances for cash discounts were as follows:
| | | | Year Ended December 31, | Year Ended December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 2.2 |
| | $ | 2.2 |
| | $ | 1.1 |
| $ | 1.8 |
| | $ | 2.2 |
| | $ | 2.0 |
|
| Additions charged to expense | 15.5 |
| | 16.0 |
| | 16.4 |
| 22.9 |
| | 13.6 |
| | 14.2 |
|
| Deductions - discounts taken | (15.6 | ) | | (16.2 | ) | | (16.0 | ) | (22.6 | ) | | (14.1 | ) | | (13.9 | ) |
| Mead C&OP acquisition | — |
| | — |
| | 0.6 |
| |
| Acquisitions | | 0.8 |
| | 0.2 |
| | — |
|
| Foreign exchange changes | (0.1 | ) | | 0.2 |
| | 0.1 |
| 0.1 |
| | (0.1 | ) | | (0.1 | ) |
| Balance at end of year | $ | 2.0 |
| | $ | 2.2 |
| | $ | 2.2 |
| $ | 3.0 |
| | $ | 1.8 |
| | $ | 2.2 |
|
ACCO Brands Corporation
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II (Continued)
Warranty Reserves
Changes in the reserve for warranty claims were as follows:
| | | | Year Ended December 31, | Year Ended December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 2.2 |
| | $ | 2.8 |
| | $ | 2.7 |
| $ | 1.9 |
| | $ | 1.7 |
| | $ | 1.8 |
|
| Provision for warranties issued | 2.0 |
| | 2.0 |
| | 3.3 |
| 2.8 |
| | 2.2 |
| | 1.8 |
|
| Deductions - settlements made (in cash or in kind) | (2.4 | ) | | (2.6 | ) | | (3.2 | ) | (2.7 | ) | | (2.2 | ) | | (1.8 | ) |
| Acquisitions | | 1.8 |
| | 0.3 |
| | — |
|
| Foreign exchange changes | | 0.3 |
| | (0.1 | ) | | (0.1 | ) |
| Balance at end of year | $ | 1.8 |
| | $ | 2.2 |
| | $ | 2.8 |
| $ | 4.1 |
| | $ | 1.9 |
| | $ | 1.7 |
|
Income Tax Valuation Allowance
Changes in the deferred tax valuation allowances were as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions of dollars) | 2014 | | 2013 | | 2012 |
| Balance at beginning of year | $ | 33.0 |
| | $ | 55.4 |
| | $ | 204.3 |
|
| Charges (credits) to expense | 0.2 |
| | (11.6 | ) | | (145.1 | ) |
| Credited to other accounts | (8.7 | ) | | (10.5 | ) | | (4.3 | ) |
| Foreign exchange changes | (0.6 | ) | | (0.3 | ) | | 0.5 |
|
| Balance at end of year | $ | 23.9 |
| | $ | 33.0 |
| | $ | 55.4 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (in millions of dollars) | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 11.7 |
| | $ | 22.1 |
| | $ | 23.9 |
|
| Charge for effect of U.S. Tax Act | 15.1 |
| | — |
| | — |
|
| Credits to expense | (0.7 | ) | | (0.7 | ) | | (0.3 | ) |
| Charged (credited) to other accounts | 1.2 |
| | (9.3 | ) | | (1.1 | ) |
| Acquisitions | 16.1 |
| | — |
| | — |
|
| Foreign exchange changes | 1.6 |
| | (0.4 | ) | | (0.4 | ) |
| Balance at end of year | $ | 45.0 |
| | $ | 11.7 |
| | $ | 22.1 |
|
See accompanying report of independent registered public accounting firm.
