Third quarter adjusted operating margins improve over the prior-year
period; synergy savings begin positively impacting bottom line
Announces realignment of commercial businesses and completion of
synergy review
Raises estimate of merger integration annual cost synergy target to
$60 million, a $20 million increase
Pays down additional $20 million in debt, achieving more than $100
million repayment year-to-date
ACCO Brands Corporation (NYSE:ABD), a world leader in select categories
of branded office products, reported its third quarter 2006 results
today. The company also announced an increase to $60 million of its
targeted annual synergy savings from its merger with General Binding
Corporation (“GBC”),
resulting from a realignment of its commercial businesses and completion
of its integration planning. The new estimate results in an increase of
$20 million of annual cost synergies, which it expects to achieve by the
end of 2009.
“We knew last year that the merger with GBC
created substantial opportunity for us,” said
David D. Campbell, chairman and chief executive officer. “As
the integration has evolved, it is clear that the opportunities are even
greater than we initially projected. Today we are announcing a strategic
realignment of our businesses that will allow us to better focus our new
product development activities and drive revenue growth in the Document
Finishing and Commercial Laminating Solutions categories, while
realizing significantly larger net cost synergies.”
In a separate announcement the Company detailed specific plans for its
business and reporting segment realignment, which it intends to
implement in time for 2007 reporting.
“The third quarter marked a significant
inflection point for our business,” Campbell
said. “We started to see our integration
efforts positively impact the bottom line. From this point forward, we
expect to see positive year-over-year improvement in operating income as
synergies build and we recover margins through price increases.”
During the quarter, the company announced the consolidation or closure
of an additional four facilities within its Office Products Group,
which, when implemented, will complete the merger integration within
this group. Since the beginning of 2006, the company has disclosed plans
to close or downsize 28 facilities, as well as significantly expand
strategically located manufacturing and distribution centers in Europe
and the United States. These actions will ultimately account for 100% of
the initially targeted cost synergies of $40 million.
The company continued to pay down its debt by a further $20 million in
the third quarter, bringing to more than $100 million its debt reduction
for the full year, far exceeding its mandatory debt repayment schedule. “Building
a strong balance sheet is a high priority to allow for future financial
flexibility and growth,” Campbell said.
Third Quarter Results
Reported results include the operations of the former General Binding
Corporation (“GBC”)
for the entire third quarter of 2006, but only the last six weeks of the
comparable quarter of 2005.
Third quarter net sales increased 18%, to $499.2 million, due to the
August 2005 acquisition of GBC. Current year net sales were 2% lower
than the prior-year pro forma quarter. An early exit of certain
low-margin business within U.S. Office Products offset growth in all
other segments. (Refer to p. 5 for the definition of pro forma results
and non-GAAP financial measures.)
The company reported third quarter net income of $18.1 million, or $0.33
per diluted share, compared to net income of $4.5 million, or $0.10 per
diluted share in the prior-year quarter. Net income in the current
quarter includes restructuring and non-recurring after-tax costs
totaling $9.6 million ($13.6 million pre-tax), or $0.18 per diluted
share, and incremental after-tax expense of $2.3 million, or $0.04 per
diluted share, related to the new company’s
long-term compensation plan and required expensing of equity
compensation under SFAS 123R. Also included in net income, but
eliminated from adjusted net income, was a tax credit of $9.5 million
resulting from the recognition of additional tax benefits from the
filing of tax returns associated with the spin-off from Fortune Brands
and merger with GBC in 2005. In the comparable quarter in 2005, the
company incurred $11.4 million in income tax charges related to a
corporate reorganization to facilitate the merger of its international
operations.
Adjusted net income increased to $18.2 million, or $0.34 per diluted
share, compared to adjusted pro forma net income of $15.8 million, or
$0.30 per diluted share, in the prior-year quarter.Excluding
incremental after-tax long-term compensation expense of $2.3 million, or
$0.04 per diluted share, current-year adjusted net income was $0.38 per
diluted share. The increase was due to operating profit improvements in
the Office Products and Computer Products groups, as savings from
synergies offset investments in SG&A and higher raw material and freight
costs. (Refer to p. 12 for a reconciliation of “adjusted”
results to GAAP.)
Results of Business Segments
Items Affecting Segment-level
Adjusted Operating Income Comparability:
Office Products net sales increased 11% to $327.9 million, compared to
$296.0 million in the prior-year quarter. Compared to prior-year pro
forma results, net sales declined 3% after adjusting for currency and
calendar days. The decline was due to the early exit of certain
low-margin products and strong June demand ahead of the July price
increase within U.S. Office Products, which offset growth in Australia
and Latin America.
Office Products reported operating income was $10.9 million, compared to
$25.0 million in the prior year. Adjusted operating income (refer to the
table on p. 14) decreased 2% to $24.0 million, compared to adjusted pro
forma operating income of $24.6 million in the prior-year quarter,
principally due to equity compensation expense as noted in the table
above. Adjusted operating income margins increased to 7.3% from 7.2%.
Office Products operating income improved in all regions of the world
except Europe. Excluding items affecting year-over-year comparability,
operating income improved as a result of a number of factors in the U.S.
business, principally net synergy savings and modest benefits from some
July price increases. These factors were partially offset by European
operations, which incurred unfavorable pricing coupled with higher raw
material costs as well as increased investments in SG&A infrastructure
to transition the European business model.
Computer Products Group
Computer Products sales increased 5% to $62.2 million, compared to $59.3
million in the prior-year quarter. The growth was driven primarily by
increased sales of security products, iPod®
accessories and notebook docking stations. This growth was lower than
historical rates because of the company’s
planned exit from the low-margin cleaning category and early shipment of
new products in the prior year.
Computer Products operating income increased to $14.6 million, from
$11.6 million. On an adjusted basis (refer to the table on p. 14),
operating income was $14.9 million and operating margins increased to
24.0% from 19.6%, driven by favorable sales mix from new products across
all regions.
Commercial-Industrial and Print Finishing Group
Commercial-Industrial and Print Finishing (“IPFG”)
net sales increased to $45.9 million, compared to $24.8 million in the
prior-year quarter. Compared to prior-year pro forma results, IPFG net
sales increased 1%. On a constant currency basis, sales were down 1%.
Sales were impacted by competitive pricing for laminating film, offset
in part by strong machine sales, which should drive future film sales.
IPFG reported operating income increased to $2.2 million, compared to
$2.0 million in the prior-year quarter. Adjusted operating income (refer
to the table on p. 14) decreased 35%, to $2.2 million, compared to
adjusted pro forma operating income of $3.4 million in the prior-year
quarter. Operating margins decreased 270 basis points. The decrease was
due to adverse sales mix from lower-margin machine sales, lower pricing
and higher raw material costs, as resin costs continue to be volatile.
Other Commercial
Other Commercial net sales increased to $63.2 million, compared to $43.9
million in the prior-year quarter. Compared to prior-year quarter pro
forma results, net sales increased 3%, adjusting for currency and
calendar days. The increase was driven by price increases in the
document finishing business.
Other Commercial reported operating income decreased to $5.8 million,
compared to $6.1 million in the prior-year quarter. Adjusted operating
income (refer to the table on p. 14) increased to $6.0 million, from
adjusted pro forma operating income of $5.9 million in the prior-year
quarter, and adjusted margins stayed flat at 9.5%.
Business Outlook
ACCO Brands believes that given the current economic environment,
business integration and de-leveraging should enable the company to
exhibit longer-term growth rates comprising revenue growth in the low-
to mid-single-digits, operating income growth in the mid- to
high-single-digits and diluted earnings-per-share growth in the
low-double-digits. Sales growth for the remainder of 2006 and through
2007 will be impacted by the $75 million exit of low-margin business, of
which only $10 million has been shed to date, and a further $20 million
should be shed by the end of 2006.
The company continues to believe that full-year 2006 adjusted EBITDA
(refer to p. 12 for the calculation of adjusted EBITDA) will be
comparable to 2005 pro forma levels, with the positive effects of both
increased synergies and the effect of the July price increase benefiting
the second half of 2006. In addition, the fourth quarter should compare
favorably to the prior-year period as the company anticipates stronger
volumes versus a weak December prior period and a comparable impact from
the stepped-up investments in corporate costs associated with the company’s
new status as an independent public company, in Computer Products’
go-to-market efforts, and in the company’s
European office products infrastructure. The fourth quarter of 2005 was
also a period in which the company began to incur significant increases
in certain raw material costs.
Full-year operating income and EPS will be impacted by equity and
incentive compensation charges relative to 2005 pro forma results in
connection with the new company’s inaugural
long-term incentive compensation plan and required stock option
expensing under SFAS 123R. The company anticipates the incremental net
of tax cost to be approximately $10 million, or $0.18 per share, for
2006. The company still anticipates achieving a run-rate adjusted
operating income margin, before restructuring, amortization of
intangible assets and stock-based compensation expense, of 12% exiting
2008, or approximately 11% including these factors.
Webcast
At 8:30 a.m. Eastern Time today, ACCO Brands Corporation will host a
conference call to discuss the company’s
third quarter results. The call will be broadcast live via webcast. The
webcast can be accessed through the Investor Relations section of www.accobrands.com.
The webcast will be in listen-only mode and will be available for replay
for one month following the event.
Pro Forma and Non-GAAP Financial Measures
In order to provide a more meaningful comparison to prior-year numbers,
the company has presented pro forma results for prior-year periods
assuming that the merger with GBC had occurred on January 1, 2005,
instead of August 17, 2005, the actual date of the merger. Pro forma
results are based on SEC regulations and are on a non-GAAP basis.
“Adjusted” results
exclude all restructuring and restructuring-related items, as well as
unusual tax items, for the combined company, and are non-GAAP measures.
Adjusted pro forma information is provided to assist in the
comparability with current-period results. There could be limitations
associated with the use of non-GAAP financial measures as compared to
the use of the most directly comparable GAAP financial measure.
Management uses the adjusted measures to determine the returns generated
by its operating segments and to evaluate and identify cost-reduction
initiatives. Management believes these measures provide investors with
helpful supplemental information regarding the underlying performance of
the company from year to year. These measures may be inconsistent with
measures presented by other companies. (Refer to the attached pro forma
and adjusted results schedules provided herein, as well as the company’s
reports on Form 8-K furnished to the Securities and Exchange Commission
on February 14, 2006.)
About ACCO Brands Corporation
ACCO Brands Corporation is a world leader in select categories of
branded office products, with annual revenues of nearly $2 billion. Its
industry-leading brands include Day-Timer®,
Swingline®, Kensington®,
Quartet®, GBC®,
Rexel®, and Wilson Jones®,
among others. Under the GBC brand, the company is also a leader in the
professional print finishing market.
Forward-Looking Statements
This press release contains statements which may constitute
"forward-looking" statements as that term is defined in the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to certain risks and
uncertainties, are made as of the date hereof and the company assumes no
obligation to update them. ACCO Brands' ability to predict results or
the actual effect of future plans or strategies is inherently uncertain
and actual results may differ from those predicted depending on a
variety of factors, including but not limited to fluctuations in cost
and availability of raw materials; competition within the markets in
which the company operates; the effects of both general and
extraordinary economic, political and social conditions; the dependence
of the company on certain suppliers of manufactured products; the effect
of consolidation in the office products industry; the risk that
businesses that have been combined into the company as a result of the
merger with General Binding Corporation will not be integrated
successfully; the risk that targeted cost savings and synergies from the
aforesaid merger and other previous business combinations may not be
fully realized or take longer to realize than expected; disruption from
business combinations making it more difficult to maintain relationships
with the company's customers, employees or suppliers; foreign exchange
rate fluctuations; the development, introduction and acceptance of new
products; the degree to which higher raw material costs, and freight and
distribution costs, can be passed on to customers through selling price
increases and the effect on sales volumes as a result thereof; increases
in health care, pension and other employee welfare costs; as well as
other risks and uncertainties detailed from time to time in the
company's SEC filings.
ACCO Brands Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions of dollars, except per share data)
Three Months Ended September 30,
% Change
Nine Months Ended September 30,
% Change
2006 (A)
2005 (A)
2006 (A)
2005 (A)
Net sales
$ 499.2
$ 424.0
18%
$ 1,430.4
$ 974.5
47%
Cost of products sold (B)
352.8
301.1
17%
1,027.5
688.9
49%
Advertising, selling, general and administrative (C), (D)
112.6
88.9
27%
329.7
201.8
63%
Amortization of intangibles
2.5
1.4
79%
8.5
2.4
254%
Restructuring charges
5.8
0.4
NM
25.6
0.4
NM
Operating Income
25.5
32.2
(21)%
39.1
81.0
(52)%
Interest expense
16.5
9.1
81%
47.2
13.0
263%
Other expense/(income), net
(2.4)
(1.3)
85%
(4.1)
0.7
NM
Income (loss) before income taxes, minority interest and cumulative
effect of change in accounting principle
11.4
24.4
(53)%
(4.0)
67.3
(106)%
Income taxes
(6.9)
19.9
(135)%
(12.5)
37.3
(134)%
Minority Interest
0.2
0.3
Net income before change in accounting principle
18.1
4.5
302%
8.2
30.0
(73)%
Cumulative effect of change in accounting principle, net of tax
