NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for ACCO Brands Corporation's (ACCO) Issuer Default Rating (IDR) at 'BB' and assigned Recovery Ratings (RR) to the individual facilities. The assignment of the RRs reflects 'Recovery Ratings and Notching Criteria for Non-Financial Corporates Issuers' criteria dated Nov. 18, 2014, which allows for the assignment of RRs for issuers with IDRs in the 'BB' category. A full list of ACCO's ratings follows at the end of this release.
Revenue declines in the 10% range this year were driven by negative organic growth in the 4%-7% range and negative foreign exchange translation. In 2016, with easier comps, and translation expected to be less of an issue, pressure from the potential Staples Inc./Office Depot, Inc. merger slated for late 2015 moves to the forefront with ACCO's sales expected to decline in the 2% range.
EBITDA is roughly flat at $225 million in the next two years from $252 million in 2014 despite a meaningful amount of sales deleverage in 2015. The company has a very solid track record in cutting costs and should deliver the $30 million it guided toward this year, providing some offset to top-line declines.
Free cash flow (FCF) is expected to be in the $140 million range. While the company indicated that it would use more of its FCF for share repurchases this year, Fitch expects that a meaningful portion will also be used to reduce debt. The company is mindful of the potential pressure to revenues and is expected to proactively manage its debt balances to maintain its current 3x leverage profile.
KEY RATING DRIVERS
Negative Organic Growth Likely
ACCO has had negative organic growth in 23 of 32 quarters. Organic growth has been variable between positive 4% to negative 21%. The negative trend results from being a large participant in a cyclical sector that is also experiencing slow secular declines due to a shift towards digital technologies from both a product and channel perspective. Fitch estimates that at least 15% of ACCO's product lines are undergoing slow secular decline. The bulk of this is in the paper-based time-management products such as DayTimer/DayRunner and a portion of computer accessories related to the PC.
The cyclical aspect of the industry will move up front this year. ACCO's international markets represent more than 30% of revenues. These markets had provided 1% to 2% or organic growth over the past two years. However, fast-growing emerging countries such as Brazil (9% of 2014's revenues), have weakened and their currencies have meaningfully depreciated against the U.S. dollar. ACCO and other U.S. multinationals have responded with pricing initiatives and have seen volumes decline as a result. In ACCO's case an overall 4% price increase in the first quarter of 2015 was met with a 17% volume/mix decline and a negative 12% organic growth. Fitch expects the pressure on organic growth to continue as the current factors are not likely to ease this year. Fitch anticipates that ACCO will have negative organic growth of 4%-7% in 2015, driven mainly by international markets and mirroring the first quarter .
Meaningful Exposure to Struggling Channel
ACCO has a material exposure to the office supply store (OSS) channel, which accounted for approximately 24% of 2014's $1.7 billion in revenues. The organic growth discussion above, excluded the impact of the OfficeMax, Inc./Office Depot, Inc. merger last year. Store closure and inventory adjustments by the merged entity reduced ACCO's sales by $40 million or more than 2% and which should continue into 2015.
Last year, Fitch had projected that the OSS channel would reduce its overall square footage from 2012 to 2015 by 20% and that by the end of 2015, much of the store-base right-sizing should be accomplished, likely leaving the slow secular declines as the remaining issue after 2015. The store base could potentially decline further in 2016. In February 2014, Staples announced that it would merge with Office Depot, Inc. at the end of 2015 pending regulatory and other approvals. If the merger is approved, pressure on ACCO's revenues will continue into 2016 as this $43 billion company is likely to pull back on orders and/or close some of its combined 4,400 stores and distribution centers to right-size its organization.
Strong FCF Despite Headwinds
The company has generated positive FCF every year since 2007, except for 2012, when the company had approximately $78 million in transaction and refinancing fees related to the Mead acquisition. Excluding the fees, 2012's reported -$8 million in FCF would have continued to demonstrate the company's strong FCF generation despite secular headwinds. Importantly, company has an excellent track record in meeting its public FCF goals. Fitch expects annual FCF of approximately $140 million over the next two years.
Cost Structure Flexibility
ACCO has maintained a solid grip on its cost structure and improved profitability despite negative or limited organic growth. Further, the company has and is likely to continue exiting unprofitable business lines and relationships. As a result, EBITDA margins steadily increased from 9% in 2008 to almost 12% by 2011. Then, through the highly accretive acquisition of MeadWestvaco Corporation's Consumer & Office Products division (Mead) in May 2012, margin growth accelerated even further to more than 15% in 2014. Fitch expects EBITDA margins to improve modestly in 2015 with $30 million in cost savings this year.
ACCO intends to be a leader in this consolidating industry. Fitch expects the company will focus on accretive acquisitions to reduce costs with a positive benefit to profitability and FCF. However, this will result in periodic increases in leverage. Fitch does not expect a negative rating impact as long as management focuses on reducing debt to return leverage to below 4x in 12 - 18 months post acquisition. This was observed in the transformative Mead acquisition where leverage increased to 4.7x in 2012 but was 3.6x by the end of 2013.
Improving Credit Protection Measures
Leverage, FCF, and margins have improved, supporting good liquidity and access to the capital markets despite near-term increases in business model risk. Fitch views the company's focus on maintaining strong metrics and directing a meaningful portion of its FCF to debt reduction as supportive of the rating in the near term. ACCO's leverage was 3.2x at the end of 2014, and the company plans to further reduce debt ahead of potential top-line pressure if or when Staples, Inc. and Office Depot, Inc. merge late this year. The company's covenant cushion is ample and financial flexibility high.
Ample Liquidity, Modest Maturities
ACCO had good liquidity of approximately $360 million at March 31, 2015 on a pro forma basis to include its recently upsized revolving credit agreement which went to $250 million from $300 million on April 28, 2015. The maturity date on both the revolver and its restated $300 million Term A loans were extended out by two years to 2020. Liquidity should be buttressed by about $140 million in annual FCF in 2015 and 2016. Fitch expects a meaningful portion will be directed toward debt reduction. Required debt amortization is modest through 2018 at less than $60 million annually.
Future developments that may, individually or collectively, lead to a positive rating action include:
--An upgrade beyond the 'BB' range is possible if the company makes favorable acquisitions that change its business mix or model to one with less cyclical or higher growth prospects while maintaining current credit metrics and FCF characteristics. However, an upgrade is not anticipated in the near term given existing business model issues.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Inability of the company to cut costs to offset the impact of declining sales and maintain current credit protection measures and cash flows.
--Additionally sustaining gross leverage at or above 4x at year end - roughly the company's bank covenant level - and FCF of less than $100 million. The company has maintained FCF in the $140 million range since markedly increasing its scale with the MeadWestvaco acquisition. FCF below $100 million would be a significant enough decline to prompt concern.
--A large debt-financed acquisition without a concrete plan to reduce debt meaningfully in the 4x range in the 12-18 month time frame could lead to a negative rating action.
Fitch affirms and assigns the following Recovery Ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'BB';
--$300 million senior secured revolving credit facility due April 2020 at 'BB+/RR1';
--$300 million senior secured Term Loan A due April 2020 at 'BB+/RR1';
--$500 million senior unsecured 6.75% notes due April 2020 at 'BB/RR4'.
The bank revolving credit facility, Term Loan A, and the senior unsecured notes are guaranteed by domestic (mostly Delaware and Nevada) subsidiaries.
The Rating Outlook is Stable
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and Subsidiary Linkage' (May 2014);
--'Recovery Ratings and Notching Criteria for Non-Financial Issuers' (November 2014).