10-K 1 acco-2018xq410k.htm 10-K 2018 Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
Form 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
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)
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:
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 o
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, a smaller reporting company, or 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.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o
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, 2018, the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was approximately $1,415 million. As of February 19, 2019, the registrant had outstanding 102,206,938 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 21, 2019 are incorporated by reference into Part III of this report.
 



Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained 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 the Private Securities Litigation Reform Act of 1995. These statements, which 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 obligation 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 them when deciding whether to buy, sell or hold the 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" 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 Securities and Exchange Commission (the "SEC") filings.

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 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 Conduct. The Company’s Code of Conduct 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

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.
 



PART I

ITEM 1. BUSINESS

As used in this Annual Report on Form 10-K for the fiscal year ended December 31, 2018, 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.

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."

Overview of the Company

ACCO Brands is a designer, marketer and manufacturer of recognized consumer and end-user demanded brands used in businesses, schools, and homes. Our widely known brands include AT-A-GLANCE®, Barrilito®, Derwent®, Esselte®, Five Star®, GBC®, Hilroy®, Kensington®, Leitz®, Marbig®, Mead®, NOBO®, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra® and Wilson Jones®. More than 75% of our net sales come from brands that occupy the number-one or number-two positions in the select product categories in which we compete. We distribute our products through a wide variety of retail and commercial channels to ensure that our products are readily and conveniently available for purchase by consumers and other 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 dealers; office superstores; wholesalers; and contract stationers. Our products are sold primarily in the U.S., Europe, Australia, Canada, Brazil and Mexico. For the year ended December 31, 2018, approximately 42% of our sales were in the U.S.; down from 45% in 2017. This decrease was primarily the result of the Esselte Acquisition and GOBA Acquisition, as defined below, 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 Company's strategy is to grow its global portfolio of consumer brands, increase its presence in faster growing geographies and channels and diversify its customer base. The Company continues to focus on leveraging its cost structure through synergies and productivity savings to drive long-term profit improvement and on strong free cash flow generation. We plan to supplement organic growth globally with strategic acquisitions in both existing and adjacent product categories.

In furtherance of our strategy, we have transformed our business by acquiring companies with consumer and other 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 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. On July 2, 2018, we completed the acquisition (the "GOBA Acquisition") of GOBA Internacional, S.A. de C.V. ("GOBA") in Mexico. Together these 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 growth, over the long term, in faster-growing emerging geographies such as Latin America and parts of Asia, the Middle East and Eastern Europe, which exhibit growing demand for our product categories. In all of our markets, we see opportunities to grow sales through share gains, channel expansion and innovative products.

Reportable Business Segments

ACCO Brands has three reportable business segments each of which is comprised of different geographic regions. Each of the Company's three reportable business segments designs, markets, sources, manufactures and sells recognized consumer and other end-user demanded brands used in businesses, schools and homes. Product designs are tailored based on end-user preferences in each geographic region.


1


Our product categories include school products; storage and organization; laminating, binding and shredding machines and related consumable supplies; calendars; stapling and punching; whiteboards; computer accessories; and do-it-yourself tools, among others. Our portfolio of consumer and other end-user demanded brands includes both globally and regionally recognized brands.

Reportable Business 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/N.Z., Latin America and Asia-Pacific
 
Artline®, Barrilito®, GBC®, Kensington®, Marbig®, Quartet®, Rexel®, Tilibra®, and Wilson Jones®

Sales Percentage by Reportable Business Segment
 
2018
 
2017
 
2016
ACCO Brands North America
 
49
%
 
51
%
 
65
%
ACCO Brands EMEA
 
31

 
28

 
11

ACCO Brands International
 
20

 
21

 
24

 
 
100
%
 
100
%
 
100
%

ACCO Brands North America

The ACCO Brands North America segment is comprised of the United States and Canada where the Company is a leading branded supplier of consumer and business products under brands such as AT-A-GLANCE®, Five Star®, GBC®, Hilroy®, Kensington®, Mead®, Quartet®, and Swingline®. The ACCO Brands North America segment designs, sources or manufactures and distributes school products (such as notebooks); calendars; laminating, binding and shredding machines and related consumable supplies; whiteboards; storage and organization products (such as three-ring binders, sheet protectors and indexes), stapling and punching products; 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 demand for consumer products is growing faster than most business-related products.

ACCO Brands EMEA

The ACCO Brands EMEA segment is comprised largely of Europe, but also includes export sales to the Middle East and Africa. 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 and punching products; laminating, binding and shredding products and related consumable supplies; do-it-yourself tools; 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/New Zealand (N.Z.), Latin America and Asia-Pacific where the Company is a leading branded supplier of consumer and business products. These brands include Artline®, Barrilito®, GBC®, Kensington®, Marbig®, Quartet®, Rexel®, Tilibra®, and Wilson Jones®, among others. The ACCO Brands International segment designs, sources or manufactures and distributes school products (such as notebooks); storage and organization products (such as three-ring binders, sheet protectors and indexes); laminating, binding and shredding products and related consumable supplies; writing instruments; computer accessories; whiteboards; stapling and punching products; calendars and janitorial supplies, among others, which are primarily used in schools, businesses and homes. The majority of revenue in this segment is related to consumer 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 demand for consumer products is growing faster than most business-related products.


2


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; wholesalers; and contract stationers. We also sell directly to commercial and consumer end-users through our e-commerce platform and our direct sales organization. Changes in consumer buying patterns over the past several years have resulted in increased consumer purchases of our products through mass retailers and e-tailers. Increased sales through retail and e-tail channels have partially mitigated the impact of lower traffic and sales experienced by the traditional office products suppliers and wholesaler channels.

Our top ten customers accounted for 40% of net sales for the year ended December 31, 2018. Net sales to no customer exceeded 10% of net sales for the years ended December 31, 2018 and 2017. For the year ended December 31, 2016, net sales to Staples, our largest customer, and Walmart amounted to approximately 14% and 10%, respectively, of our net sales.

Competition

We operate in a highly competitive environment characterized by low-cost competitors, large, sophisticated customers, low barriers to entry, and competition from a wide range of products and services (including private label). 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. Examples of branded competitors to ACCO Brands include Bi-Silque, Blue Sky, CCL Industries, Dominion Blueline, Fellowes, Hamelin, Herlitz, LSC Communications, Newell Brands, Novus, Smead, Spiral Binding and Stanley Black and Decker, among others.

The 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 is a competitive advantage.

Product Development

Our strong commitment to understanding our consumers and designing 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 products are developed from a strong understanding of consumer needs and by our own research and development team or through partnership initiatives with inventors and vendors. Costs related to consumer and product research when paid directly by ACCO Brands are included in selling, general and administrative expenses.

We consistently review our business units and product offerings, assess their strategic fit, and seek opportunities to invest in new products and adjacencies as well as to rationalize our product offerings. The criteria we use in assessing strategic fit or investment opportunities include: the ability to increase sales for the Company; the ability to create strong, differentiated products and brands; the importance of the product category to key customers; the relationship with existing product lines; the importance to the market; the actual and potential impact on our operating performance; and the value to ACCO Brands versus an alternative owner.

Marketing and Demand Generation

We support our brands with a significant investment in targeted marketing, advertising and consumer promotions, which increase brand awareness and highlight the innovation and differentiation of our products. We work with third party vendors, such as Nielsen, NPD Group, GfK SE and Kantar Group, to capture and analyze consumer buying habits and product trends. We also use our deep consumer knowledge to 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; however, we are currently experiencing instability of supply of various grades of paper necessitating forward buys to ensure supply at reasonable prices.


3


Supply

Our products are either manufactured or sourced to ensure that we supply our customers with quality products, innovative solutions and attractive 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 require higher direct labor 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 in lower cost countries, primarily China, but also 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 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 businesses in North America 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 storage and organization 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 and much of our cash flow in the second half of the year as receivables are collected.

For further information on the seasonality of net sales and earnings, see "Note 20. Quarterly Financial Information (Unaudited)" to the consolidated financial statements contained in Part II, Item 8. of this report.

Intellectual Property

Our products are marketed under a variety of trademarks. Some of our more significant trademarks include ACCO®, AT-A-GLANCE®, Barrilito®, Derwent®, Esselte®, Five Star®, GBC®, Hilroy®, Kensington®, Leitz®, Marbig®, Mead®, NOBO®, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra®, and Wilson Jones®. We 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 rights 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 a material adverse effect on our business as a whole.

Environmental Matters

We are subject to national, state, provincial 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 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. We strive to optimize resource utilization and reduce our environmental impact.

Employees

As of December 31, 2018, we had approximately 6,700 full-time and part-time employees. Of the North American employees, approximately 850 were covered by collective bargaining agreements in certain of our manufacturing and distribution facilities. One of these agreements expired on December 31, 2018 and was under negotiation and covers approximately 50 employees. A second agreement covering approximately 450 employees, expires in 2019. Outside the United States, the Company has government-mandated collective bargaining arrangements in certain countries, particularly in Europe. 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.


4



Executive Leadership of the Company

As of February 27, 2019, the executive leadership team of the Company consists of the following executive officers and key senior officers. Ages are as of December 31, 2018.

Mark C. Anderson, age 56
2007 - present, Senior Vice President, Corporate Development
Joined the Company in 2007

Patrick H. Buchenroth, age 52
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

Stephen J. Byers, age 53
2019 - present, Senior Vice President and Chief Information Officer
2008 - 2018, Group Vice President and Chief Information Officer, Tate & Lyle PLC
2007 - 2008, Vice President, Enterprise Applications, United Stationers Inc.
2006 - 2007, Vice President, Infrastructure Operations, United Stationers Inc.
Joined the Company in 2019

Boris Elisman, age 56
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 57
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

Ralph P. Hargrow, age 66
2013 - present, Senior Vice President, Global Chief People Officer
2005 - 2013, Global Chief People Officer, Molson Coors Brewing Company
Joined the Company in 2013
 
Gregory J. McCormack, age 55
2018 - present, Senior Vice President, Global Products and Operations
2013 - 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

Cezary L. Monko, age 57
2017 - present, Executive Vice President and President, ACCO Brands EMEA
2014 - 2017, President and Chief Executive Officer, Esselte
2004 - 2014, President, Esselte Europe
2002 - 2004, President Sales Esselte Europe
Joined the Company in 1992

Kathleen D. Hood, age 49
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 59
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 48
2015 - present, Executive Vice President and President, ACCO Brands North America
2010 - 2015, Executive Vice President; President, ACCO Brands U.S. Office and Consumer Products
2010, Chief Marketing and Product Development Officer
Joined the Company in 2010

5


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.

A limited number of large customers account for a significant percentage of our net sales, and a substantial reduction in sales to, or gross profit from, or a significant decline in the financial condition of, one or more of these customers can materially adversely impact our business and results of operations.

Our top ten customers accounted for 40% and 44%, respectively, of our net sales for the year ended December 31, 2018 and December 31, 2017. The loss of, or a significant reduction in sales to, or gross profit from, one or more of our top customers, or significant adverse changes to the terms on which we sell our products to one or more of our top customers, can have a material adverse effect on our business, results of operations and financial condition.

The competitive environment in which our large customers operate is rapidly changing. Office superstores, wholesalers and other traditional office products resellers (especially in our more developed geographies such as the U.S., Europe and Australia) face increasing competition, especially from mass merchants and e-tailers, which is driving changes in the relative market shares of our large customers. In response, our commercial customers, including the office superstores and wholesalers, continue to evolve their businesses by shifting their channel or geographic focus, making changes to their operating models and merchandising strategies and, in many cases, consolidating or divesting unprofitable or unattractive segments of their businesses. In particular, the acquisition of Essendant by Staples, which was under negotiation through much of 2018 and is now complete, brings together two of our large U.S. customers. Additionally, Staples and Office Depot have acquired a number of U.S. independent dealers. We have seen similar consolidating activity and business model changes with large customers in Europe and Australia, where several of our office superstore and wholesaler customers have merged or are under new private equity ownership. We expect these trends to continue.

Our larger customers generally have the scale to develop supply chains that permit them to change their buying patterns, or develop and market their own private label brands that compete with some of our products. In addition, the increasing competition, shifting market share and business model changes have made, and will continue to make, our business relationships with our large customers more challenging and unpredictable. Their size and scale and relative competitive market position make it easier for them to: (i) resist our efforts to increase prices; (ii) demand better pricing, more promotional programs and longer payment terms; (iii) reduce the shelf space allotted to, and carry a narrower assortment of, branded office and school products; (iv) increase the amount of private label products that compete with our branded offerings; and (v) reduce the amount of inventory they hold. Given the significance of these customers to our business, lower sales to our large customers (many of which historically purchased products with relatively higher margins) have, and will continue to have, an adverse impact on our sales, margins and results of operations.

Additionally, increased competition, 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 sales, 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.

Shifts in the channels of distribution for our products have, and could continue to, adversely impact our sales, margins and results of operations.

Due to the competitive pressures and resulting decline in market share of our traditional commercial customers, including office superstores and wholesalers, as well as the ongoing disruption and uncertainties in these channels (especially in the U.S., Europe and Australia), the key channels of distribution for our products is changing. Our ongoing strategy is to grow sales and market share in the faster growing mass merchant and e-tailer channels, increase our direct sales to independent dealers, and expand distribution into new and growing channels and geographies while maintaining strong margins. We may not be successful in executing against this strategy fast enough to offset the declines we are experiencing in the traditional commercial channels, if at all. Additionally, the changes in our customer and product mix which have resulted, and may continue to result, from the shift in sales and market share away from our traditional commercial customers (which have historically purchased products with higher margins) into these faster growing channels have, and are likely to continue to negatively impact our margins. Our inability to successfully manage the shift away from distribution channels which are declining, and grow sales and market share with customers

6


in faster growing channels, could have a material adverse impact on our sales, margins, results of operations, cash flow and financial condition.

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 both to reduce their own working capital investment and because consumer demand for our products decreases as consumers switch to private label and other branded and/or generic products that compete on price and quality or forgo purchases altogether. 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 foreign currency translation and transaction risks that can materially adversely affect the Company’s sales, results of operations, financial condition and liquidity.

Approximately 58% of our net sales for the fiscal year ended December 31, 2018 were transacted in a currency other than the U.S. dollar. Our primary exposure to local currency movements is in Europe (the Euro, the Swedish krona and the British pound), Australia, Canada, Brazil and Mexico. Currency exchange rates can be volatile especially in times of global, political and economic tension or uncertainty. Additionally, government actions such as currency devaluations, foreign exchange controls, and price or profit controls can further negatively impact foreign currency exchange rates.

The fluctuations in the foreign currency rates relative to the U.S. dollar can cause translation, transaction, and other losses, which negatively impact our sales, profitability and cash flow. We source approximately half of our products from China and other Far Eastern countries using U.S. dollars. The strengthening of the U.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 often difficult to increase prices fast enough to fully offset the cumulative impact of the foreign-exchange-related inflation on our cost of goods sold in these markets. From time to time, we may also use hedging instruments to mitigate 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.

Challenges related to the highly competitive business environments in which we operate could have a material adverse effect on our business, results of operations and financial condition.

We operate in a highly competitive environment characterized by low-cost competitors; large, sophisticated customers; low barriers to entry; and competition from a wide range of products and services (including private label products and electronic and digital products and services that can replace or render certain 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 source 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 or reducing the size of their retail locations, and diversifying their product offerings further reducing the available retail space devoted to our products.


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As a result, our business has been, and is likely to continue to be, affected by actions: (1) by our customers to increase their purchases of private label products or otherwise change product assortments; (2) by current and potential competitors to increase their investment in product and brand development, lower their prices, take advantage of low entry barriers to expand their production, or move production to countries with lower production costs; and (3) by consumers and other end-users to use lower-priced or alternative products. Any such actions 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 our consumer demands, including price expectations.

Our competitive position depends on our ability to successfully invest in innovation and product development. That success will depend, in part, on our ability to anticipate, develop and market products that appeal to the changing needs and preferences of our consumers. We could focus our efforts and investment on new products that ultimately are not accepted by consumers. Likewise, our failure to offer innovative products that meet consumer and other 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 that are experiencing 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 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 anticipated, be accretive to earnings or prove to be beneficial to our operations and cash flow. If we fail to effectively identify, value, consummate, manage or integrate any acquired company, we may not realize 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 the amortization of acquired assets or possible future impairments of goodwill or intangible assets associated with the acquisition.

To the extent acquisitions increase our exposure to emerging markets, the risks associated with doing business in these markets will increase. See also "- Growth in emerging 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 strategy 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 successfully increase 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 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 process of integrating operations also could cause an interruption of, or loss of momentum in, the activities of one or more of our businesses. Members of our senior management may need to devote considerable amounts of time to the integration process. If our senior management is not 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 financial results could suffer.


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Additionally, we generally expect that we will realize synergy cost savings and other financial and operating benefits from our acquisitions. Our success in realizing these synergy savings and other financial and operating benefits, and the timing of this realization, depends on the successful integration of the business operations of the acquired company. We cannot predict with certainty if or when these synergy savings and other benefits will occur, or the extent to which we will be successful.

Finally, the integration of any acquisition will involve changes to, or implementation of critical information technology systems, modifications to our internal control systems, processes and accounting and financial systems, and the establishment of disclosure controls and procedures and internal control over financial reporting necessary to meet our obligations as a public company. Failure to successfully complete any of these tasks could adversely affect our internal control over financial reporting, our disclosure controls and procedures and our ability to effectively and timely report our financial results. If we are unable to accurately report our financial results in a timely manner and establish internal control over financial reporting and disclosure controls and procedures that are effective, our business, results of operation and financial 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.

Changes in U.S. trade policies and regulations, as well as the overall uncertainty surrounding international trade relations, could have a material adverse effect on our business, results of operations and financial condition.

Changes in U.S. trade policies, including tariffs on imports from China and on steel and aluminum that we use in our U.S. manufacturing operations, have had, and we expect that they will continue to have, an adverse effect on our cost of products sold and margins in our North America segment. Additionally, further changes in U.S. trade policies appear likely, including additional import tariffs, and could adversely impact our business. In response to these changes, other countries have and may continue to change their own trade policies, including the imposition of tariffs and quotas, which could also adversely affect our business outside the U.S. The uncertainty surrounding U.S. trade policy makes it difficult to make long-term strategic decisions regarding the best way to respond to these pressures and could also increase the volatility of currency exchange rates. Further, the knock-on effect of the tariffs has resulted in an increase in the cost of U.S.-sourced products commensurate with the tariffs.

In order to mitigate the impact of these trade-related increases on our cost of products sold, we have increased, and intend to continue to increase prices in the U.S., if necessary, to recover any increased costs. Over the longer term, we may make changes in our supply chain and, potentially, our U.S. manufacturing strategy. There can be no assurance that we will be able to successfully pass on these costs through price increases or adjust our supply chain by locating alternative suppliers for raw materials or finished goods at acceptable costs or in a timely manner. Additionally, implementing price increases may cause our customers to find alternative sources for their products or decrease their purchases from us. Conversely, when tariffs decline, customer demands for lower prices could result in lower sale prices and, to the extent we have existing inventory, lower margins. As a result, fluctuations in tariffs have had, and will continue to have, a material adverse effect on the Company’s business, results of operations and financial condition.

Our inability to effectively manage the negative impacts of changing U.S. and foreign trade policies, including tariffs, could materially adversely impact our sales, margins, results of operations and financial condition.

We rely extensively on information technology systems to operate, transact and otherwise manage our business. Any material failure, inadequacy, or interruption of that technology or its supporting infrastructure could materially adversely affect our business, results of operations and financial condition.

We rely extensively on our information technology systems, many 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 third-party service providers fail to perform their obligations in a timely manner or at satisfactory levels, our business could suffer. Additionally, our failure to properly maintain and successfully upgrade or replace any of these systems, especially our enterprise resource planning systems (including our financial systems) so that they operate effectively, could disrupt service to our customers or negatively impact our ability to report our financial results in a timely and accurate manner.

Our information technology general controls are an important element of our internal control over financial reporting and our disclosure controls and procedures. 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.


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If services to our customers are negatively impacted by the failure of our information technology systems, if we are unable to accurately and timely report our financial results, or conclude that we do not have effective internal control over financial reporting and effective disclosure controls and procedures, it could damage our reputation and adversely affect our business, results of operations and financial condition.

Security breaches could compromise our confidential and proprietary information, as well as any 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. The cost and operational consequences of implementing, maintaining and further enhancing cybersecurity protection measures could increase significantly as cybersecurity threats increase.

Despite these efforts, the possibility of intrusion, tampering and theft cannot be eliminated entirely. We have from time to time experienced cybersecurity breaches, such as "phishing" attacks, employee or insider error, brute force attacks, unauthorized parties gaining access to our information technology systems and similar incidents. To date these incidents have not had a material impact on our business, but there can be no assurance that future incidents will not have a material impact. 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 another breach of, or attack on the information technology 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 (including legal claims and proceedings and regulatory enforcement actions and penalties), 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.

Additionally, we are an acquisitive organization and the process of integrating the information technology systems of the businesses we acquire is complex and exposes us to additional risk as we might not adequately identify weaknesses in the targets' information technology systems. This could expose us to unexpected liabilities or make our own systems more vulnerable to attack.

Growth in emerging 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.

A 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, regulatory 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 generally more remote from our headquarters location and have different cultures which may make it be more difficult to impose corporate standards and procedures and the extraterritorial laws of the 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

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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 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, 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.

If we are unable to successfully expand into 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.

The anticipated positive effects of the U.S. Tax Cuts and Jobs Act (the "U.S. Tax Act") on our financial results may not be fully realized and could adversely impact our net income and cash flow.

On December 22, 2017, the U.S. Tax Act was signed into law. The U.S. Tax Act made 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 (the "Transition Toll Tax"); (iii) bonus depreciation that will allow for full expensing of qualified property; (iv) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (v) a new provision designed to tax global intangible low-taxed income ("GILTI"); (vi) the repeal of domestic production activity deductions; (vii) limitations on the deductibility of certain executive compensation expenses; (viii) limitations on the use of foreign tax credits to reduce U.S. income tax liability; and (ix) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income ("FDII").

The initially anticipated positive effects of the U.S. Tax Act on our financial results have been mitigated by a reduction in the overall percentage mix of our earnings from the U.S. and other unfavorable provisions of the new law. In 2018, the benefits associated with the lower U.S. federal corporate tax rate were offset by the impact of the GILTI tax and the limitations on deductibility of executive compensation expenses as well as a reduction in the overall percentage of our earnings from the U.S. The evolving regulations and interpretations still being issued by the IRS could change our understanding of, and assumptions pertaining to, the application of the U.S. Tax Act. Likewise, the manner in which the U.S. Tax Act will be enforced is still uncertain. In addition, a further reduction in the overall percentage mix of our earnings from the U.S. could further reduce the anticipated benefits of the lower corporate tax rate. As a result of these factors, the aggregate impact of the U.S. Tax Act on our tax rate, cash taxes and net income could change and any such change could adversely impact our net income and cash flow.

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 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 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 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"), 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 (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 (the "Second Assessment"). Tilibra is disputing both of the tax assessments.


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The final administrative appeal of the Second Assessment was decided against the Company in 2017. We are challenging this decision in court. In connection with the judicial challenge, we are required to provide security to guarantee payment of the Second Assessment, which represents $21.0 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. The ultimate outcome will not be determined until the Brazilian tax appeal process is complete, which is expected to take a number of years. 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 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 2007-2012 tax years plus penalties and interest 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, 2018. 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. The time limit for issuing an assessment for 2011 expired in January 2018 and we did not receive an assessment; we therefore reversed $5.6 million of reserves related to 2011 in the first quarter of 2018. During the years ended December 31, 2018, 2017 and 2016, we accrued additional interest as a charge to current tax expense of $1.1 million, $2.2 million and $2.8 million, respectively. At current exchange rates, our accrual through December 31, 2018, including tax, penalties and interest is $29.4 million. The time limit for issuing an assessment for 2012 expired in January 2019 and we did not receive an assessment.

Outsourcing the production of certain of our products, 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, other Asia-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 to ensure that our products meet our design and product content specifications, and all applicable laws, including product safety, security, labor and environmental laws. We also expect our suppliers to conform to our and our 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’ 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. Additionally, failure to meet legal and regulatory requirements or customer expectations may result in our having to stop selling non-conforming products until the issues are remediated. Any of these circumstances could result in unforeseen 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, sales, 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. Any of these events could result in unforeseen production delays and increased costs and negatively affect our ability to deliver our products to our customers, all of which could adversely affect our business, sales, 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.

In addition, we outsource certain administrative functions, such as payroll processing and benefit plan administration to third party service providers and may outsource other functions in the future to achieve cost savings and efficiencies. If the service

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providers to whom 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 they make. Depending on the function involved, such errors may lead to business disruption, processing inefficiencies or loss of, or damage to intellectual property, legal and regulatory exposure, or harm to employee morale.

Continued declines in the use of certain of our products have and could continue to adversely affect our business.

A number of our products and brands consist of paper-based and related products. As use of technology-based tools continues to rise worldwide, consumer demand for traditional paper-based and related products, such as decorative calendars, planners, envelopes, ring binders, lever arch files and other storage and organization products, and mechanical binding equipment, has declined. The impact of tariff and commodity price driven inflation in the U.S. also has the potential to result in higher pricing (especially for paper-based products) which may, in turn, accelerate the pace of change in consumer preferences for product substitutes. Continuation or acceleration of the decline in the overall demand for any of the products we sell has, and could continue to, 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 businesses in North America 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 storage and organization 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 and much of our cash flow in the second half of the year as receivables are collected. If these typical seasonal increases in sales of certain products do not materialize or when sales of these product lines represent a larger overall percentage of our sales or profitability, it could have an outsized impact on our business that would adversely affect our cash flow, results of operations and financial condition.

Our operating results have, and may continue to be, adversely affected by changes in cost of products sold, including the cost or availability of raw materials, transportation, labor, and other necessary supplies and services and the cost of finished goods.

Pricing and availability of raw materials, transportation, labor, and other necessary supplies and services used in our business can be volatile due to numerous factors beyond our control, including general economic conditions, labor costs, production levels, and import tariffs as well as overall competitive conditions, including demand and supply. This volatility has, and may continue to, significantly affect our business, results of operations, and financial condition.

We also rely on third-party manufacturers, principally in China, as a source for many of our finished products. These manufacturers are also subject to changes in the cost or availability of raw materials, transportation, labor, and other necessary supplies and services, which may, in turn, result in an increase in the amount we pay for finished goods.

During periods of rising costs, we manage this volatility through a variety of actions, including periodic purchases, future delivery purchases, long-term contracts, sales price increases and the use of certain derivative instruments. Over the longer term, we may also make adjustments in our supply chain in an effort to mitigate the adverse impact of increasing costs. There can be no assurance that we will be able to effectively mitigate the impact on our cost of products sold fast enough to preserve our margins, if at all. Additionally, we may lose sales as we seek to offset these cost increases by raising prices to our customers. Conversely, when input costs decline, customer demands for lower prices could result in lower sale prices and, to the extent we have existing inventory, lower margins. As a result, fluctuations in costs of raw materials, transportation, labor, and finished goods has had, and may continue to 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. During 2018, we experienced significant increases in the cost of paper, steel and aluminum as well as increases in transportation costs. While we believe the situation has stabilized somewhat, we may see further increases in the cost of raw materials, finished goods and transportation.


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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 areas (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. 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 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, 2018, the Company had $258.3 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

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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 6. 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, 2018. 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 10. 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 limit our ability to engage in certain activities. If we are unable to meet our obligations under these 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, 2018, we had $888.0 million of outstanding debt.

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 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, as of December 31, 2018, $512.7 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 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 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."

15



Should one of our large customers or suppliers experience financial difficulties or file for bankruptcy, our cash flows, results of operations and financial condition could be materially adversely affected.

Our customer concentration increases our customer credit risk. If 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 of existing accounts receivable balances. Such a result could adversely impact our cash 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.

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. If we fail to comply with the specific 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 margins.

Our inability to secure, protect and maintain rights to intellectual property could have an adverse impact on our business.

We consider our intellectual property rights, particularly and most notably our trademarks and trade names, but also our patents, trade secrets, trade dress, copyrights and licensing agreements, to be an important and valuable part of our business. Our failure to obtain or adequately protect our intellectual property rights, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness, dilute the value of our brands, cause confusion in the marketplace and materially impact our sales and profitability.

Product liability claims, recalls or regulatory actions could materially adversely affect our financial results or harm our reputation or brands.

Claims for losses or injuries purportedly caused by one of our products arise in the ordinary course of our business. In addition to the risk of litigation or regulatory enforcement actions and the associated costs and potential for monetary judgments and penalties, which could have an adverse effect 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 consumer brands. We also could be required to recall and possibly discontinue the sale of defective or unsafe products, which could result in adverse publicity, significant expenses and adverse impacts to our financial position.

Our success depends on our ability to attract and retain qualified personnel.

Our success depends on our ability to attract and retain qualified personnel, including executive officers and other key 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 our incentive awards do not pay out, or pay out less than the targeted amount, it may motivate certain executive officers and key employees to seek other 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 is volatile.

The market price for our common stock has been volatile historically. Our stock 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;
investors' perceptions of the office products industry;
amounts we repurchase on the open market under our share repurchase program;
changes in financial estimates by us or securities analysts and recommendations by securities analysts; and
the composition of our stockholders, particularly the presence of "short sellers" trading in our stock.


16


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 a third-party service provider’s facilities (especially facilities in China, other Asia-Pacific countries and Latin America) could adversely impact production, and our customer deliveries which can negatively impact our operations 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 and financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

17


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, 2018:
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
Sidney, New York
Distribution/Manufacturing
 
Owned
Alexandria, Pennsylvania
Distribution/Manufacturing
 
Owned
Pleasant Prairie, Wisconsin(a)
Manufacturing
 
Leased
Mississauga, Canada
Distribution/Manufacturing/Office
 
Leased
San Mateo, California
Office
 
Leased
 
 
 
 
ACCO Brands EMEA:
 
 
 
Sint-Niklass, Belgium
Distribution/Manufacturing
 
Leased
Shanghai, China
Manufacturing
 
Leased
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
Kozienice, Poland
Distribution/Manufacturing
 
Owned
Warsaw, Poland
Office
 
Leased
Arcos de Valdevez, Portugal
Manufacturing
 
Owned
Hestra, Sweden
Distribution/Manufacturing/Office
 
Owned
 
 
 
 
ACCO 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
Queretaro, Mexico
Distribution/Office
 
Leased
Auckland, New Zealand
Distribution/Office
 
Leased
Taipei, Taiwan City
Office
 
Leased

(a)
Scheduled to be closed during 2019.

We believe that the properties are suitable to the respective businesses and have production capacities adequate to meet the needs of our businesses.


18


ITEM 3. LEGAL PROCEEDINGS

We are party to various lawsuits and regulatory proceedings, primarily related to alleged patent infringement 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 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 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"), 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 (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 (the "Second Assessment"). Tilibra is disputing both of the tax assessments.

The final administrative appeal of the Second Assessment was decided against the Company in 2017. We are challenging this decision in court. In connection with the judicial challenge, we are required to provide security to guarantee payment of the Second Assessment, which represents $21.0 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. The ultimate outcome will not be determined until the Brazilian tax appeal process is complete, which is expected to take a number of years. 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 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 2007-2012 tax years plus penalties and interest 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, 2018. 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. The time limit for issuing an assessment for 2011 expired in January 2018 and we did not receive an assessment; we therefore reversed $5.6 million of reserves related to 2011 in the first quarter of 2018. During the years ended December 31, 2018, 2017 and 2016, we accrued additional interest as a charge to current tax expense of $1.1 million, $2.2 million and $2.8 million, respectively. At current exchange rates, our accrual through December 31, 2018, including tax, penalties and interest is $29.4 million. The time limit for issuing an assessment for 2012 expired in January 2019 and we did not receive an assessment.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


19


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." As of February 19, 2019, we had approximately 11,291 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, 2013 through December 31, 2018.
acco-2017xq3_chartx58416a05.jpg
 
Cumulative Total Return
 
12/31/13
 
12/31/14
 
12/31/15
 
12/31/16
 
12/31/17
 
12/31/18
ACCO Brands Corporation
$
100.00

 
$
134.08

 
$
106.10

 
$
194.20

 
$
181.55

 
$
103.10

Russell 2000
100.00

 
104.89

 
100.26

 
121.63

 
139.44

 
124.09

S&P Office Services and Supplies
(SuperCap1500)
100.00

 
104.75

 
91.49

 
99.18

 
94.72

 
83.26



20


Common Stock Purchases

The following table provides information about our purchases of equity securities during the quarter ended December 31, 2018:
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, 2018 to October 31, 2018
 

 
$

 

 
$
108,964,228

November 1, 2018 to November 30, 2018
 

 

 

 
108,964,228

December 1, 2018 to December 31, 2018
 

 

 

 
108,964,228

Total
 

 
$

 

 
$
108,964,228


(1) On 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.

During the year ended December 31, 2018, we repurchased $75.0 million of our common stock in the open market.

The number of shares to be purchased, if any, and the timing of purchases will be 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, as amended. Any 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

In February 2018, the Company's Board of Directors approved the initiation of a dividend program under which the Company intends to pay a regular quarterly cash dividend of $0.06 per share on its common stock ($0.24 per share on an annualized basis). The continued declaration and payment of dividends is at the discretion of the Board of Directors and will be dependent upon, among other things, the Company's financial position, results of operations, cash flows and other factors.


21


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 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. of this report.
 
Year Ended December 31,
(in millions, except per share data)
2018(1)
 
2017(1)
 
2016(1)
 
2015
 
2014
Income Statement Data:
 
 
 
 
 
 
 
 
 
Net sales
$
1,941.2

 
$
1,948.8

 
$
1,557.1

 
$
1,510.4

 
$
1,689.2

Operating income(2) (3)
187.0

 
184.5

 
159.1

 
155.1

 
169.8

Interest expense
41.2

 
41.1

 
49.3

 
44.5

 
49.5

Interest income
(4.4
)
 
(5.8
)
 
(6.4
)
 
(6.6
)
 
(5.6
)
Non-operating pension income(3)
(9.3
)
 
(8.5
)
 
(8.2
)
 
(8.4
)
 
(3.8
)
Other expense (income), net(4)
1.6

 
(0.4
)
 
1.4

 
2.1

 
0.8

Net income(5)
106.7

 
131.7

 
95.5

 
85.9

 
91.6

Per common share:
 
 
 
 
 
 
 
 
 
Net income(5)
 
 
 
 
 
 
 
 
 
Basic
$
1.02

 
$
1.22

 
$
0.89

 
$
0.79

 
$
0.81

Diluted
$
1.00

 
$
1.19

 
$
0.87

 
$
0.78

 
$
0.79

Balance Sheet Data (as of December 31):
 
 
 
 
 
 
 
 
 
Total assets
$
2,786.4

 
$
2,799.1

 
$
2,064.5

 
$
1,953.4

 
$
2,215.1

Total debt, net
882.5

 
932.4

 
696.2

 
720.5

 
789.3

Total stockholders’ equity
789.7

 
774.1

 
708.7

 
581.2

 
681.0

Other Data:
 
 
 
 
 
 
 
 
 
Cash provided by operating activities
$
194.8

 
$
204.9

 
$
167.1

 
$
171.2

 
$
171.7

Cash used by investing activities
(71.9
)
 
(319.1
)
 
(106.4
)
 
(24.6
)
 
(25.8
)
Cash (used) provided by financing activities
(125.6
)
 
142.2

 
(76.4
)
 
(137.8
)
 
(142.0
)

(1)
The Company acquired GOBA on July 2, 2018; the results of GOBA are included in 2018 results from July 2, 2018. The Company acquired Esselte on January 31, 2017; the results of Esselte are included in 2017 results from February 1, 2017. The Company acquired Pelikan Artline on May 2, 2016; the results of Pelikan Artline are included in 2016 results from that date forward.

(2)
Operating income for the years 2018, 2017, 2016, 2015 and 2014 was impacted by restructuring charges (credits) of $11.7 million, $21.7 million, $5.4 million, $(0.4) million and $5.5 million, respectively. Such charges were largely severance related, and were principally associated with post-merger integration activities following various acquisitions.

(3)
On January 1, 2018, we adopted the accounting standard 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 (income)/costs, other than service costs, in an income statement line item included in "Non-operating (income)/expense." On this basis, the Company restated its operating income for the years 2017, 2016, 2015 and 2014, which were reduced by $8.5 million, $8.2 million, $8.4 million and $3.8 million, respectively. For further information see "Note 2. Significant Accounting Policies, Recent Accounting Pronouncements and Adopted Accounting Standards" to the consolidated financial statements contained in Part II, Item 8. of this report.

(4)
Other expense (income), net for the year 2016 was impacted by a $28.9 million non-cash gain arising from the Pelikan Artline acquisition due to the revaluation of the previously held equity interest to fair value. For further information see "Note 3. Acquisitions" to the consolidated financial statements contained in Part II, Item 8. of this report. Other expense (income), net for the years 2017, 2016, and 2015 was also impacted by incremental charges related to various refinancings of $0.3 million, $29.9 million, and $1.9 million, respectively. For further information on the refinancings completed in 2017 and

22


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.

(5)
In 2017, we recorded a net tax benefit of $25.7 million related to the U.S. Tax Act.

SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES - COMPARABLE NET SALES

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles in the U.S. ("GAAP"), we provide investors with certain non-GAAP financial measures, including comparable net sales, adjusted operating income, adjusted net income, adjusted net income per share, free cash flow, and normalized tax rate. 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 sometimes refer to comparable net sales as comparable sales and adjusted net income per share as adjusted earnings per share.

We use the non-GAAP financial measures both in the internal evaluation and management of our business and to explain our results to stockholders 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 our future prospects. The non-GAAP results are an indication of our baseline performance before gains, losses or other charges that we consider to be outside our core operating results.

The non-GAAP financial measures exclude certain items that may have a material impact upon our reported financial results such as unusual income tax items, restructuring and integration charges, acquisition-related expenses, the impact of foreign currency fluctuation and acquisitions, and other one-time or non-recurring items. These measures should not be considered in isolation or as a substitute for, or superior to, the directly comparable GAAP financial measures and should be read in connection with the Company’s financial statements presented in accordance with GAAP.

Comparable Net Sales

We calculate comparable net sales by excluding the effect of acquisitions and by translating the current-period foreign operation net sales at prior-year currency rates.

The following tables provides a reconciliation of GAAP net sales change as reported to non-GAAP comparable net sales change:
 
Amount of Change - Year Ended December 31, 2018 compared to the Year Ended December 31, 2017
 
$ Change - Net Sales
 
 
Non-GAAP
 
GAAP
 
 
 
 
 
Comparable
 
Net Sales
 
Currency
 
 
 
Net Sales
(in millions)
Change
 
Translation
 
Acquisition
 
Change
ACCO Brands North America
$(58.3)
 
$(0.3)
 
$0.9
 
$(58.9)
ACCO Brands EMEA
62.4
 
10.8
 
42.7
 
8.9
ACCO Brands International
(11.7)
 
(22.0)
 
20.3
 
(10.0)
    Total
$(7.6)
 
$(11.5)
 
$63.9
 
$(60.0)
 
 
 
 
 
 
 
 
 
% Change - Net Sales
 
 
Non-GAAP
 
GAAP
 
 
 
 
 
Comparable
 
Net Sales
 
Currency
 
 
 
Net Sales
 
Change
 
Translation
 
Acquisition
 
Change
ACCO Brands North America
(5.8)%
 
—%
 
0.1%
 
(5.9)%
ACCO Brands EMEA
11.5%
 
2.0%
 
7.9%
 
1.6%
ACCO Brands International
(2.9)%
 
(5.4)%
 
5.0%
 
(2.5)%
    Total
(0.4)%
 
(0.6)%
 
3.3%
 
(3.1)%


23


 
Amount of Change - Year Ended December 31, 2017 compared to the Year Ended December 31, 2016
 
$ Change - Net Sales
 
 
Non-GAAP
 
GAAP
 
 
 
 
 
Comparable
 
Net Sales
 
Currency
 
 
 
Net Sales
(in millions)
Change
 
Translation
 
Acquisition
 
Change
ACCO Brands North America
$(17.1)
 
$2.0
 
$13.4
 
$(32.5)
ACCO Brands EMEA
371.0
 
0.8
 
387.5
 
(17.3)
ACCO Brands International
37.8
 
9.6
 
37.9
 
(9.7)
    Total
$391.7
 
$12.4
 
$438.8
 
$(59.5)
 
 
 
 
 
 
 
 
 
% Change - Net Sales
 
 
Non-GAAP
 
GAAP
 
 
 
 
 
Comparable
 
Net Sales
 
Currency
 
 
 
Net Sales
 
Change
 
Translation
 
Acquisition
 
Change
ACCO Brands North America
(1.7)%
 
0.2%
 
1.3%
 
(3.2)%
ACCO Brands EMEA
215.9%
 
0.5%
 
225.6%
 
(10.2)%
ACCO Brands International
10.2%
 
2.6%
 
10.3%
 
(2.7)%
    Total
25.2%
 
0.8%
 
28.2%
 
(3.8)%

Adjusted Operating Income and Adjusted Earnings per Share

The following table sets forth a reconciliation of certain Income Statement information reported in accordance with GAAP to adjusted non-GAAP information:

 
Year Ended December 31, 2018
 
Reported
 
% of
 
Adjusted
 
Adjusted
 
% of
 
GAAP
 
Sales
 
Items
 
Non-GAAP
 
Sales
Gross profit
$
627.8

 
32.3
%
 
$
0.1

 (A.1)
$
627.9

 
32.3
%
Selling, general and administrative expenses
392.4

 
20.2
%
 
(4.6
)
 (A.2)
387.8

 
20.0
%
Restructuring charges
11.7

 
 
 
(11.7
)
 (A.3)

 
 
Operating income
187.0

 
9.6
%
 
16.4

 
203.4

 
10.5
%
Interest expense
41.2

 
 
 
(0.6
)
 (A.4)
40.6

 
 
Non-operating pension income
(9.3
)
 
 
 
0.6

 (A.5)
(8.7
)
 
 
Income before income tax
157.9

 
8.1
%
 
16.4

 
174.3

 
9.0
%
Income tax expense
51.2

 
 
 
1.1

 (A.6)
52.3

 
 
Income tax rate
32.4
%
 
 
 
 
 
30.0
%
 
 
Net income
$
106.7

 
5.5
%
 
$
15.3

 
$
122.0

 
6.3
%
Diluted income per share
$
1.00

 
 
 
$
0.14

 
$
1.14

 
 
Weighted average number of shares outstanding:
107.0

 
 
 
 
 
107.0

 
 

Notes for Reconciliation of GAAP to Adjusted Non-GAAP Information (Unaudited)

A.
"Adjusted" results exclude restructuring charges, amortization of the step-up in value of finished goods, transaction and integration expenses associated with the acquisitions of Esselte Group Holdings AB ("Esselte") and GOBA Internacional, S.A. de C.V ("GOBA"). In addition, "Adjusted" results exclude other one-time or non-recurring items and all unusual income tax items, including income taxes related to the aforementioned items; in addition, income taxes have been recalculated at a normalized tax rate of 30% for 2018.
1.
Represents the adjustment related to the amortization of step-up in the value of finished goods inventory associated with the acquisition of GOBA.
2.
Represents the elimination of integration and transaction expenses associated with the acquisitions of Esselte and GOBA.
3.
Represents the elimination of restructuring charges.
4.
Represents the elimination of forward points on a hedged intercompany loan for the GOBA acquisition.
5.
Represents the elimination of a pension curtailment gain related to a restructuring project for the integration of Esselte.

24


6.
Primarily reflects the tax effect of the adjustments outlined in items A.1-5 above and adjusts the company's effective tax rate to a normalized rate of 30% for 2018. The Company's estimated long-term rate remains subject to variations from the mix of earnings across the Company's operating jurisdictions and changes in tax laws.

Free Cash Flow

Free cash flow represents cash flow from operating activities less cash used for additions to property, plant and equipment, plus 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-GAAP free cash flow:
(in millions)
Year Ended December 31, 2018
Net cash provided by operating activities
$
194.8

Net cash (used) provided by:
 
Additions to property, plant and equipment
(34.1
)
Proceeds from the disposition of assets
0.2

Free cash flow (non-GAAP)
$
160.9



25


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.

Overview of the Company

ACCO Brands is a designer, marketer and manufacturer of recognized consumer and end-user demanded brands used in businesses, schools, and homes. Our widely known brands include AT-A-GLANCE®, Barrilito®, Derwent®, Esselte®, Five Star®, GBC®, Hilroy®, Kensington®, Leitz®, Marbig®, Mead®, NOBO®, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra® and Wilson Jones®. More than 75% of our net sales come from brands that occupy the number-one or number-two positions in the select product categories in which we compete. We distribute our products through a wide variety of retail and commercial channels to ensure that our products are readily and conveniently available for purchase by consumers and other 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 dealers; office superstores; wholesalers; and contract stationers. Our products are sold primarily in the U.S., Europe, Australia, Canada, Brazil and Mexico. For the year ended December 31, 2018, approximately 42% of our sales were in the U.S., down from 45% in 2017. This decrease was primarily the result of the Esselte and GOBA acquisitions, which further extended our geographic reach.

The Company's strategy is to grow its global portfolio of consumer brands, increase its presence in faster growing geographies and channels and diversify its customer base. The Company continues to focus on leveraging its cost structure through synergies and productivity savings to drive long-term profit improvement and on strong free cash flow generation. We plan to supplement organic growth globally with strategic acquisitions in both existing and adjacent product categories.

In furtherance of our strategy, we have transformed our business by acquiring companies with consumer and other 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 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. On July 2, 2018, we completed the acquisition (the "GOBA Acquisition") of GOBA Internacional, S.A. de C.V. ("GOBA") in Mexico. Together these 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 growth, over the long term, in faster-growing emerging geographies such as Latin America and parts of Asia, the Middle East and Eastern Europe, which exhibit growing demand for our product categories. In all of our markets, we see opportunities to grow sales through share gains, channel expansion and innovative products.

Acquisitions

GOBA Internacional, S.A. de C.V. Acquisition

On July 2, 2018, we completed the GOBA Acquisition. GOBA is a leading provider of school and craft products in Mexico under the Barrilito® brand, for a preliminary purchase price of approximately $38.0 million, net of cash acquired, and subject to working capital and other adjustments. The GOBA Acquisition is expected to increase the breadth and depth of our distribution, especially with wholesalers and retailers throughout Mexico and complement our existing office products portfolio with a strong offering of school and craft products. The results of GOBA are included in the ACCO Brands International segment from July 2, 2018.


26


Esselte Group Holdings AB Acquisition

On January 31, 2017, we 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 products, and improved ACCO Brands' scale. Esselte products are primarily marketed under the Leitz®, Rapid® and Esselte® brands in the storage and organization, stapling, punching, binding and laminating equipment and do-it-yourself tools product categories.

Pelikan Artline Joint Venture Acquisition

On May 2, 2016, we 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 using the equity method. The results of Pelikan Artline are included in the Company's consolidated financial statements from May 2, 2016 forward, and are reported in the ACCO Brands International segment. Pelikan Artline is a premier distributor of recognized consumer brands used in businesses, schools, and homes in Australia and New Zealand.

For further information on the acquisitions, see "Note 3. Acquisitions" to the consolidated financial statements contained in Item 8. of this report. For information on the financings of the acquisitions, see "Note 4. Long-term Debt and Short-term Borrowings" to the consolidated financial statements contained in Item 8. of this report.

Reportable Business Segments

The Company has three reportable business segments each of which is comprised of different geographic regions. The Company's three reportable business segments are as follows:

Reportable Business 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/N.Z., Latin America and Asia-Pacific
 
Artline®, Barrilito®, GBC®, Kensington®, Marbig®, Quartet®, Rexel®, Tilibra®, and Wilson Jones®

Each of the Company's three reportable business segments designs, markets, sources, manufactures and sells recognized consumer and other 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 school products; storage and organization; laminating, binding and shredding machines and related consumable supplies; calendars; stapling and punching; whiteboards; computer accessories; and do-it-yourself tools, among others. Our portfolio of consumer and other 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; wholesalers; and contract stationers. We also sell directly to commercial and consumer end-users through our e-commerce platform and our direct sales organization.

Overview of 2018 Performance

Net sales for the year ended December 31, 2018 decreased slightly, primarily due to lower sales to wholesalers and reduced sales of calendar products, both in the U.S., which offset the benefits of the acquisitions and growth in EMEA. Operating income increased 1% due to lower restructuring and integration charges in the current year as well as lower management incentive compensation expenses, which offset the negative margin impact of the sales reduction, adverse mix, inflation and foreign exchange. The lower management incentive compensation expenses resulted from failure to meet sales and operating income targets and lower than expected cash flow performance for 2018.

27



Our financial results for the year ended December 31, 2018 were impacted by the following key factors:

Sales and gross profit declined in our North America segment primarily due to declines with a large wholesaler customer and lost placement of calendar products. Our gross profit margin was also reduced by the customer and product mix impact from these lost sales. The lower sales to the wholesaler were largely driven by consolidation, in particular, the acquisition of Essendant by Staples, which was under negotiation through much of 2018 and is now completed, and the acquisition of various U.S. independent dealers by both Staples and Office Depot. The ongoing consolidation in the U.S. commercial office products channel is creating substantial uncertainty and disruption. This uncertainty has and will likely continue to adversely impact our customers' buying patterns. We expect this trend to continue and this could result in a further reduction of sales to and profit from these channels.

The profitability of our North America segment was also negatively impacted by inflationary increases in input costs, including the cost of paper, steel, aluminum, and transportation, as well as increased tariffs. These cost increases adversely impacted our cost of products sold and gross profit margin during the second half of 2018. We implemented price increases in the U.S. in October 2018 and January 2019 which, together with cost reduction initiatives, are expected to fully offset current inflation in 2019. It is currently anticipated that tariffs on purchased finished goods we source from China will increase again as early as March 1, 2019. We may need to increase prices again to offset the cost of any further inflationary increases, including increased tariffs, in the coming quarters, which may result in a decrease in sales volume. Further increases in input costs, including tariffs, could adversely impact our sales, cost of products sold and gross margin.

Acquisitions benefited our 2018 net sales by $63.9 million, including the additional month of Esselte and six months of contribution from GOBA.

Foreign currency translation negatively impacted our net sales and operating income. The negative foreign currency translation in the International segment was partially offset by favorable foreign currency translation in the EMEA segment.

The year-to-date average foreign exchange rates have moved as follows for our major currencies relative to the U.S. dollar:
 
2018 YTD Average Versus 2017 YTD Average
 
2017 YTD Average Versus 2016 YTD Average
Currency
Increase/(Decline)
 
Increase/(Decline)
Euro
5%
 
2%
Australian dollar
(3)%
 
3%
Canadian dollar
—%
 
2%
Brazilian real
(12)%
 
9%
Swedish krona
(2)%
 
—%
British pound
4%
 
(5)%
Mexican peso
(2)%
 
(1)%
Japanese yen
2%
 
(3)%


28


Consolidated Results of Operations for the Years Ended December 31, 2018 and 2017
 
Year Ended December 31,
 
Amount of Change
 
(in millions, except per share data)
2018(1)
 
2017(2)
 
$
 
%/pts
 
Net sales
$
1,941.2

 
$
1,948.8

 
$
(7.6
)
 
(0.4
)%
 
Cost of products sold
1,313.4

 
1,291.5

 
21.9

 
1.7
 %
 
Gross profit
627.8

 
657.3

 
(29.5
)
 
(4.5
)%
 
Gross profit margin
32.3
%
 
33.7
%
 
 
 
(1.4)

pts 
Selling, general and administrative expenses
392.4

 
415.5

 
(23.1
)
 
(5.6
)%
 
Amortization of intangibles
36.7

 
35.6

 
1.1

 
3.1
 %
 
Restructuring charges
11.7

 
21.7

 
(10.0
)
 
(46.1
)%
 
Operating income
187.0

 
184.5

 
2.5

 
1.4
 %
 
Operating income margin
9.6
%
 
9.5
%
 
 
 
0.1

pts 
Interest expense
41.2

 
41.1

 
0.1

 
0.2
 %
 
Interest income
(4.4
)
 
(5.8
)
 
(1.4
)
 
(24.1
)%
 
Non-operating pension income
(9.3
)
 
(8.5
)
 
0.8

 
9.4
 %
 
Other expense (income), net
1.6

 
(0.4
)
 
2.0

 
NM

 
Income tax expense
51.2

 
26.4

 
24.8

 
93.9
 %
 
Effective tax rate
32.4
%
 
16.7
%
 

 
15.7

pts 
Net income
106.7

 
131.7

 
(25.0
)
 
(19.0
)%
 
Weighted average number of diluted shares outstanding:
107.0

 
110.9

 
(3.9
)
 
(3.5
)%
 
Diluted income per share
$
1.00

 
$
1.19

 
$
(0.19
)
 
(16.0
)%
 
(1)
The Company acquired GOBA on July 2, 2018; GOBA's results are included in 2018 results from July 2, 2018 forward.
(2)
The Company acquired Esselte on January 31, 2017; Esselte's results are included in 2017 results from February 1, 2017 forward.

Net Sales

Net sales of $1,941.2 million decreased $7.6 million, or 0.4%, from $1,948.8 million in the prior-year period, as growth from acquisitions ($44.2 million from the addition of Esselte for the month of January and $19.7 million from GOBA) was offset by lower net sales, and adverse foreign currency translation, which reduced net sales by $11.5 million, or 0.6%. Comparable net sales, excluding acquisitions and foreign currency translation, decreased 3.1% driven by declines in the North America segment, partially offset by higher net sales in the EMEA segment.

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 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 of $1,313.4 million, including $29.7 million from the addition of Esselte for the month of January and $14.2 million attributable to GOBA, increased $21.9 million, or 1.7%, from $1,291.5 million in the prior-year period. Foreign currency translation reduced cost of products sold by $8.3 million, or 0.6% in the current-year period. Underlying cost of products sold, excluding acquisitions and foreign currency translation, decreased due to lower comparable net sales, partially offset by inflationary increases in input costs, some of which were driven by new tariffs in the U.S.


29


Gross Profit

We believe that gross profit and gross profit margin provide enhanced shareholder understanding of underlying profit drivers. Gross profit of $627.8 million, including $14.5 million from the addition of Esselte for the month of January and $5.5 million attributable to GOBA, decreased $29.5 million, or 4.5%, from $657.3 million in the prior-year period. Foreign currency translation reduced gross profit by $3.2 million, or 0.5% in the current-year period. Underlying gross profit, excluding acquisitions and foreign currency translation, decreased primarily due to lower comparable net sales and unfavorable customer and product mix in the North America and International segments and rising input costs primarily in North America, partially offset by cost savings.

For similar reasons, gross profit margin as a percent of net sales decreased to 32.3% from 33.7%.

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). SG&A of $392.4 million, including $7.9 million from the addition of Esselte for the month of January and $2.3 million attributable to GOBA, decreased $23.1 million, or 5.6%, from $415.5 million in the prior-year period. The current-year period includes $4.6 million of integration costs (primarily related to the Esselte Acquisition) and transaction costs (related to the GOBA Acquisition). The prior-year period included $16.4 million in integration and transaction costs primarily related to the Esselte and Pelikan Artline acquisitions. Underlying SG&A, excluding acquisitions, transaction and integration costs, and foreign currency translation, decreased due to a $19.8 million reduction in management incentive compensation expenses resulting from our below target performance for 2018 and cost and synergy savings.

For similar reasons, SG&A as a percentage of net sales decreased to 20.2% from 21.3%.

Restructuring Charges

Restructuring charges of $11.7 million decreased $10.0 million, or 46.1%, from $21.7 million in the prior-year period. The current-year period charges primarily related to changes in the operating structure of the North America segment and the continued integration of Esselte within the EMEA segment. The prior-year period charges of $21.7 million primarily related to Esselte and Pelikan Artline integration activities.

Operating Income

Operating income of $187.0 million, including $5.2 million from the addition of Esselte for the month of January and $2.3 million attributable to GOBA, increased $2.5 million, or 1.4%, from $184.5 million in the prior-year period. Foreign currency translation reduced operating income by $4.1 million, or 2.2%, in the current-year period. Underlying operating income, excluding acquisitions, restructuring, transaction and integration costs, and foreign currency translation, decreased primarily due to lower gross profit, primarily in the North America segment, substantially offset by a $20.8 million reduction in management incentive compensation expenses and cost and synergy savings.

Other Expense (Income), Net

Other expense (income), net was an expense of $1.6 million compared to income of $0.4 million in the prior-year period. The increase in expense was due to foreign exchange losses in the current-year period.

Income Taxes

For the current-year period, income tax expense was $51.2 million on income before taxes of $157.9 million, an effective tax rate of 32.4%. For the prior-year period, income tax expense was $26.4 million on income before taxes of $158.1 million, an effective tax rate of 16.7%. The low effective tax rate in the prior-year period was primarily due to a one-time net tax benefit of $25.7 million related to the U.S. Tax Act. This benefit was driven by the reduction of net deferred tax liabilities, partially offset by the Transition Toll Tax. Also contributing to the low effective rate in 2017 was $5.6 million of tax benefit from the settlement of stock-based compensation.


30


Net Income/Diluted Income per Share

Net income of $106.7 million decreased $25.0 million, or 19%, from $131.7 million in the prior-year period. Foreign currency translation reduced net income by $5.9 million, or 4.5%, in the current-year period. Diluted income per share was $1.00, down $0.19, or 16% from $1.19 per diluted share in the prior-year period. The decrease in net income was primarily driven by the higher effective tax rate.

Segment Net Sales and Operating Income for the Years Ended December 31, 2018 and 2017
 
Year Ended December 31, 2018
 
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)
 
 
 
$
 
%
 
$
 
%
 
ACCO Brands North America
$
940.7

 
$
116.6

 
12.4
%
 
$
(58.3
)
 
(5.8)%
 
$
(35.8
)
 
(23.5
)%
 
(290
)
ACCO Brands EMEA
605.2

 
59.4

 
9.8
%
 
62.4

 
11.5%
 
27.4

 
85.6
 %
 
390

ACCO Brands International
395.3

 
49.2

 
12.4
%
 
(11.7
)
 
(2.9)%
 
(1.7
)
 
(3.3
)%
 
(10
)
Total
$
1,941.2

 
$
225.2

 
 
 
$
(7.6
)
 
 
 
$
(10.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Net Sales
 
Segment Operating Income(1)
 
Operating Income Margin
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
ACCO Brands North America
$
999.0

 
$
152.4

 
15.3
%
 
 
 
 
 
 
 
 
 
 
ACCO Brands EMEA
542.8

 
32.0

 
5.9
%
 
 
 
 
 
 
 
 
 
 
ACCO Brands International
407.0

 
50.9

 
12.5
%
 
 
 
 
 
 
 
 
 
 
Total
$
1,948.8

 
$
235.3

 
 
 
 
 
 
 
 
 
 
 
 

(1)
Segment operating income excludes corporate costs. See "Item 8. Note 17. Information on Business Segments" for a reconciliation of total "Segment operating income" to "Income before income tax."

ACCO Brands North America

ACCO Brands North America net sales of $940.7 million decreased $58.3 million, or 5.8%, from $999.0 million in the prior-year period, including $0.9 million from the addition of Esselte for the month of January. Comparable net sales, excluding Esselte and foreign currency translation, decreased 5.9%. Both declines were primarily due to lower net sales to U.S. wholesalers, which accounted for approximately 4.0% of the sales reduction, with the remaining decline primarily driven by lower net sales due to lost share of calendar products. We anticipate there could be further net sales declines in our U.S. business in 2019 due to ongoing disruption in the traditional commercial reseller channel (including office superstores and wholesalers).

ACCO Brands North America operating income of $116.6 million decreased $35.8 million, or 23.5%, from $152.4 million in the prior-year period, and operating income margin decreased to 12.4% from 15.3%. Operating income decreased primarily as a result of lower net sales, which contributed lower gross profit. Operating income margin declined due to unfavorable customer and product mix and rising input costs, including tariffs. This was partially offset by cost savings, lower management incentive compensation expenses of $11.1 million, and an October sales price increase.

ACCO Brands EMEA

ACCO Brands EMEA net sales of $605.2 million increased $62.4 million, or 11.5%, from $542.8 million in the prior-year period, due to the contribution of $42.7 million from the addition of Esselte for the month of January and favorable foreign currency translation of $10.8 million, or 2.0%. Comparable net sales, excluding Esselte and foreign currency translation, increased 1.6% due to increased volume resulting from expanding distribution of legacy ACCO Brands' products to the acquired Esselte customer base, as well as double-digit growth in shredders and computer products, which were partially offset by lower sales of commodity products.

ACCO Brands EMEA operating income of $59.4 million, including $5.4 million from the addition of Esselte for the month of January, increased $27.4 million, or 85.6%, from $32.0 million in the prior-year period, and operating margin increased to 9.8% from 5.9%. Foreign currency translation increased operating income by $0.3 million, or 0.9%, in the current-year period. Underlying

31


operating income, excluding Esselte and foreign currency translation, increased due to $9.5 million in lower restructuring charges and integration costs, and higher gross profit and gross profit margin from both favorable mix and synergy savings.

ACCO Brands International

ACCO Brands International net sales of $395.3 million decreased $11.7 million, or 2.9%, from $407.0 million in the prior-year period as growth from acquisitions ($19.7 million attributable to GOBA and $0.6 million from the addition of Esselte for the month of January) was offset by foreign currency translation, which reduced net sales by $22.0 million, or 5.4%. Comparable net sales, excluding acquisitions and foreign currency translation, decreased 2.5% primarily driven by reduced customer purchases as certain customers lowered their inventory levels in Australia and Mexico, as well as lower net sales from lost share of commodity products in Australia. These declines were only partially offset by net sales growth in Brazil.

ACCO Brands International operating income of $49.2 million, including $2.3 million attributable to GOBA, decreased $1.7 million, or 3.3%, from $50.9 million in the prior-year period. Operating income margin was flat at 12.4%. Foreign currency translation reduced operating income by $4.3 million, or 8.4%, in the current-year period. Underlying operating income, excluding acquisitions and foreign currency translation, decreased due to lower net sales resulting in lower gross profit, partially offset by $4.7 million in lower restructuring charges and integration costs as well as cost savings.
Consolidated Results of Operations for the Years Ended December 31, 2017 and 2016
 
Year Ended December 31,
 
Amount of Change
 
(in millions, except per share data)
2017(1)
 
2016(2)
 
$
 
%/pts
 
Net sales
$
1,948.8

 
$
1,557.1

 
$
391.7

 
25.2
 %
 
Cost of products sold
1,291.5

 
1,042.2

 
249.3

 
23.9
 %
 
Gross profit
657.3

 
514.9

 
142.4

 
27.7
 %
 
Gross profit margin
33.7
%
 
33.1
%
 
 
 
0.6

pts
Selling, general and administrative expenses
415.5

 
328.8

 
86.7

 
26.4
 %
 
Amortization of intangibles
35.6

 
21.6

 
14.0

 
64.8
 %
 
Restructuring charges
21.7

 
5.4

 
16.3

 
NM

 
Operating income
184.5

 
159.1

 
25.4

 
16.0
 %
 
Operating income margin
9.5
%
 
10.2
%
 
 
 
(0.7)

pts
Interest expense
41.1

 
49.3

 
(8.2
)
 
(16.6
)%
 
Interest income
(5.8
)
 
(6.4
)
 
(0.6
)
 
(9.4
)%
 
Non-operating pension income
(8.5
)
 
(8.2
)
 
0.3

 
3.7
 %
 
Equity in earnings of joint venture

 
(2.1
)
 
(2.1
)
 
(100.0
)%
 
Other (income) expense, net
(0.4
)
 
1.4

 
1.8

 
NM

 
Income tax expense
26.4

 
29.6

 
(3.2
)
 
(10.8
)%
 
Effective tax rate
16.7
%
 
23.7
%
 
 
 
(7.0)

pts
Net income
131.7

 
95.5

 
36.2

 
37.9
 %
 
Weighted average number of diluted shares outstanding:
110.9

 
109.2

 
1.7

 
1.6
 %
 
Diluted income per share
$
1.19

 
$
0.87

 
$
0.32

 
36.8
 %
 
(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 of $1,948.8 million, including $438.8 million attributable to the Esselte and PA Acquisitions, increased $391.7 million, or 25.2%, from $1,557.1 million in the prior-year period. Foreign currency translation increased sales by $12.4 million, or 0.8%. Comparable net sales, excluding the acquisitions and foreign currency translation, decreased primarily due to declines at certain office superstore customers and lost product placements.


32


Cost of Products Sold

Cost of products sold of $1,291.5 million increased $249.3 million, or 23.9%, from $1,042.2 million in the prior-year period. Foreign currency translation reduced cost of products sold by $8.4 million, or 0.8%. Underlying cost of products sold, excluding foreign currency translation, increased due to the inclusion of the acquisitions, partially offset by lower comparable sales and cost savings and productivity improvements.

Gross Profit

Gross profit of $657.3 million increased $142.4 million, or 27.7%, from $514.9 million in the prior-year period. Foreign currency translation increased gross profit by $4.0 million, or 0.8%. Underlying gross profit, excluding foreign currency translation, increased due to the inclusion of the acquisitions, together with productivity initiatives and higher pricing, which was partially offset by 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.

Selling, General and Administrative expenses

SG&A of $415.5 million increased $86.7 million, or 26.4%, from $328.8 million in the prior-year period. The 2017 year included $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 0.2%. Underlying SG&A, excluding integration and transaction costs and foreign currency translation, increased primarily due to the inclusion of the acquisitions.

As a percentage of net sales, SG&A increased to 21.3% from 21.1% in the prior-year period, primarily due to higher integration and transaction costs incurred in 2017, partially offset by productivity initiatives.

Amortization of Intangibles

Amortization of intangibles of $35.6 million increased $14.0 million, or 64.8%, from $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 2017 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 $184.5 million increased $25.4 million, or 16.0%, from $159.1 million in the prior-year period. Foreign currency translation increased operating income by $3.2 million, or 2.0%. Underlying operating income, excluding restructuring, transaction and integration costs, and foreign currency translation, increased primarily due to the inclusion of the acquisitions.

Interest Expense, Equity in Earnings of Joint Venture and Other (Income) Expense, Net

Interest expense of $41.1 million decreased $8.2 million, or 16.6%, from $49.3 million in the prior-year period. The decrease was primarily due to the lower interest rate 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. 2016 also 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 our then outstanding U.S. Dollar Senior Secured Term Loan A due April 2020.

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 Company ceased accounting for the Pelikan Artline joint venture using the equity method of accounting.

Other (income) expense, net was income of $0.4 million compared to expense of $1.4 million in the prior-year period. The 2017 year included a $2.3 million foreign currency gain related to the settlement of certain intercompany loan transactions. The

33


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 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.

Income Taxes

Income tax expense was $26.4 million on income before taxes of $158.1 million, or an effective tax rate of 16.7%. The low effective tax rate in 2017 is primarily due to a net tax benefit of $25.7 million related to the U.S. Tax Act. This benefit was driven by the reduction of net deferred tax liabilities, partially offset by the Transition Toll Tax. For further information on the impact of the U.S. Tax Act, see "Note 12. Income Taxes" to the consolidated financial statements contained in Item 8. of this report. Also contributing to the low effective rate in 2017 was 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.

For 2016, 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 for 2016 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/Diluted Income per Share

Net income of $131.7 million increased $36.2 million, or 37.9%, from $95.5 million in the prior-year period. Diluted income per share was $1.19, up $0.32, or 36.8% from $0.87 per diluted share in the prior-year period. Foreign currency translation increased net income by $5.9 million, or 6.2%. The increase in net income was primarily due to inclusion of the acquisitions, lower interest expense and a lower effective tax rate.

Segment Net Sales and Operating Income for 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)
 
 
 
$
 
%
 
$
 
%
 
ACCO Brands North America
$
999.0

 
$
152.4

 
15.3
%
 
$
(17.1
)
 
(1.7)%
 
$
2.6

 
1.7
%
 
60

ACCO Brands EMEA
542.8

 
32.0

 
5.9
%
 
371.0

 
215.9%
 
24.0

 
300.0
%
 
120

ACCO Brands International
407.0

 
50.9

 
12.5
%
 
37.8

 
10.2%
 
1.5

 
3.0
%
 
(90
)
Total
$
1,948.8

 
$
235.3

 
 
 
$
391.7

 
 
 
$
28.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Net Sales
 
Segment Operating Income(1)
 
Operating Income Margin
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
ACCO Brands North America
$
1,016.1

 
$
149.8

 
14.7
%
 
 
 
 
 
 
 
 
 
 
ACCO Brands EMEA
171.8

 
8.0

 
4.7
%
 
 
 
 
 
 
 
 
 
 
ACCO Brands International
369.2

 
49.4

 
13.4
%
 
 
 
 
 
 
 
 
 
 
Total
$
1,557.1

 
$
207.2

 
 
 
 
 
 
 
 
 
 
 
 

(1)
Segment operating income excludes corporate costs. See "Item 8. Note 17. Information on Business Segments" 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, decreased $17.1 million, or 1.7%, from $1,016.1 million in the prior-year period. Foreign currency translation increased sales by $2.0 million, or 0.2%. Comparable net sales, excluding Esselte and foreign currency translation, decreased primarily due to continued declines with office superstore customers and lost product placements with certain customers. Sales during the back-to-school season decreased slightly compared to the prior year, which had strong growth.

34



ACCO Brands North America operating income of $152.4 million increased $2.6 million, or 1.7%, from $149.8 million in the prior-year period, and operating income as a percent of net sales increased to 15.3% from 14.7%. 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, increased $371.0 million, or 215.9%, from $171.8 million in the prior-year period. Foreign currency translation increased sales by $0.8 million, or 0.5%. 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 $32.0 million, including approximately $24.9 million attributable to the Esselte Acquisition, increased $24.0 million, or 300%, from $8.0 million in the prior-year period, and operating income as a percent of net sales increased to 5.9% from 4.7%. 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. 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 increased due to lower SG&A margins in the legacy Esselte business, partially offset by 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).

ACCO Brands International

ACCO Brands International net sales of $407.0 million, including $37.9 million attributable to the PA and Esselte Acquisitions, increased $37.8 million, or 10.2%, from $369.2 million in the prior-year period. Foreign currency translation increased sales by $9.6 million, or 2.6%. 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 increased $1.5 million, or 3.0%, from $49.4 million in the prior-year period, but operating income as a percent of net sales decreased to 12.5% from 13.4%. Restructuring and integration costs in 2017 were $5.0 million and $2.6 million, respectively. In addition, 2017 included 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. 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 2017 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.

Liquidity and Capital Resources

Our primary liquidity needs are to service indebtedness, fund capital expenditures and support working capital requirements. Our principal sources of liquidity are cash flow from operating activities, cash and cash equivalents held and seasonal borrowings under our $500 million multi-currency Revolving Facility (as defined in "Debt Amendments and Refinancing" below). As of December 31, 2018, there was $180.7 million in borrowings outstanding under the Revolving Facility and the amount available for borrowings was $309.0 million (allowing for $10.3 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 third and fourth quarters, as accounts receivables are collected, and use cash in the second quarter to fund working capital in order to support the North America back-to-school season. We anticipate a different cash flow pattern in 2019, with a cash outflow in the first quarter and a much lower outflow in the second quarter when compared to 2018. Our Brazilian business is also highly seasonal due to the timing of the back-to-school season, which 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;

35


therefore, our normal practice is to hold seasonal cash requirements in Brazil, and invest in short-term Brazilian government securities. Consolidated cash and cash equivalents was $67.0 million as of December 31, 2018, approximately $35 million of which was held in Brazil.

In February 2018, the Company's Board of Directors approved the initiation of a dividend program under which the Company intends to pay a regular quarterly cash dividend of $0.06 per share on its common stock ($0.24 per share on an annualized basis). The continued declaration and payment of dividends is at the discretion of the Board of Directors and will be dependent upon, among other things, the Company's financial position, results of operations, cash flows and other factors.

Our priorities for cash flow use over the near term, after funding business operations, including restructuring expenditures, are debt reduction, share repurchases, dividends and funding strategic acquisitions.

The current senior secured credit facilities have a weighted average interest rate of 2.45% as of December 31, 2018 and our senior unsecured notes have a fixed interest rate of 5.25%.

Debt Amendments and Refinancing

Third Amended and Restated Credit Agreement

The Company is party to a Third 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 thereto, which was subsequently amended effective July 26, 2018 (the "Credit Agreement"). The 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, together with the Euro Term Loan A, the "Term A Loan Facility"), and a US$500 million multi-currency revolving credit facility (the "Revolving Facility").

Financial Covenants

The Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement), and 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 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 Credit Agreement.

The Credit Agreement requires the Company to maintain a Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) as of the end of any fiscal quarter at or above 1.25 to 1.00.

As of December 31, 2018, our Consolidated Leverage Ratio was approximately 2.8 to 1 and our Fixed Charge Coverage Ratio was approximately 2.0 to 1.

Other Covenants and Restrictions

The 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 Credit Agreement also establishes limitations on the aggregate amount of Permitted Acquisitions and Investments (each as defined in the Credit Agreement) that the Company and its subsidiaries may make during the term of the Credit Agreement.

As of and for the periods ended December 31, 2018 and December 31, 2017, the Company was in compliance with all applicable loan covenants.

Guarantees and Security

Generally, obligations under the Credit Agreement are guaranteed by certain of the Company's existing and future subsidiaries, and are secured by substantially all of the Company's and certain guarantor subsidiaries' assets, subject to certain exclusions and limitations.


36


Senior Unsecured Notes due December 2024

On December 22, 2016, the Company completed a private offering of $400.0 million in senior unsecured notes, due December 2024 (the "New Notes"), which 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"). During 2018, the Company repurchased and retired $25.0 million of its New Notes.

For further information, see "Note 4. Long-term Debt and Short-term Borrowings" to the consolidated financial statements contained in Item 8. of this report.

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, 2018, the Company recorded an aggregate $11.7 million in restructuring expenses, primarily severance, related to additional changes in the operating structure of the North America segment and the continued integration of Esselte within the EMEA segment. For further information, see "Note 11. Restructuring" to the consolidated financial statements contained in Item 8. of this report.

In addition, during the year ended December 31, 2018, the Company recorded an aggregate $4.2 million in integration expenses related to the integration of the Esselte operations.

The Company currently expects to recognize approximately $3 million of additional restructuring expenses, primarily severance, during the first quarter of 2019, associated with our ACCO Brands North America and International segments, which has not yet been recorded in our 2018 financial statements, pursuant to GAAP rules.

Cash Flow for the Years Ended December 31, 2018 and 2017

Cash Flow from Operating Activities

Cash provided by operating activities during the year ended December 31, 2018 of $194.8 million decreased from $204.9 million provided in the 2017 period due to lower sales and profit, partially offset by cash provided by net working capital (accounts receivable, inventories, accounts payable).

The table below shows our cash flow from accounts receivable, inventories and accounts payable for the years ended December 31, 2018 and 2017:
(in millions)
 
2018
 
2017
Accounts receivable
 
$
46.0

 
$
10.2

Inventories
 
(92.9
)
 
2.5

Accounts payable
 
101.0

 
(18.7
)
Cash flow provided (used) by net working capital
 
$
54.1

 
$
(6.0
)

Accounts receivable contributed $46.0 million in 2018, driven by lower accounts receivable as a result of lower sales and improved collections when compared to the $10.2 million generated in the prior year. Earlier than usual purchases of finished goods ahead of proposed tariffs, and raw materials, notably paper, in order to secure supply and lock-in pricing, increased both inventory, $92.9 million, and accounts payable, $101.0 million, to levels significantly higher than the prior year. Other significant cash outflows during the year ended December 31, 2018 included pension contributions of $20.9 million, interest payments of $37.9 million, tax payments of $33.7 million and restructuring payments of $14.7 million, all of which were broadly in line with similar payments made in the prior year. Cash payments associated with transaction and integration activities were $8 million lower than the prior year.


37


Cash Flow from Investing Activities

Cash used by investing activities was $71.9 million and $319.1 million for the years ended December 31, 2018 and 2017, respectively. The 2018 cash outflow includes $38.0 million of preliminary purchase price, net of cash acquired, paid for GOBA, while the 2017 outflow reflects $292.3 million of purchase price, net of cash acquired, paid for Esselte. For further details, see "Note 3. Acquisitions" to the consolidated financial statements contained in Item 8. of this report. Capital expenditures were $34.1 million and $31.0 million for the years ended December 31, 2018 and 2017, respectively, with the increase compared to the prior-year period driven by information technology systems-related investments.

Cash Flow from Financing Activities

Cash used by financing activities was $125.6 million for the year ended December 31, 2018 compared to $142.2 million provided for the same period of 2017. Cash used in 2018 includes net repayments of long-term debt of $24.2 million, $75.7 million of 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 $25.1 million for the payment of dividends.

Cash provided in 2017 reflects long-term borrowings of $187.6 million, largely in connection with the Esselte Acquisition. This was partially offset by $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 for debt issuance costs associated with the 2017 debt refinancing in connection with the Esselte Acquisition.

Cash Flow for the Years Ended December 31, 2017 and 2016

Cash Flow from Operating Activities

Cash provided by operating activities during the year ended December 31, 2017 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 $167.1 million. Net income for 2017 was $131.7 million compared to $95.5 million in 2016.

The table below shows our cash flow from accounts receivable, inventories and accounts payable for the years ended December 31, 2017 and 2016, respectively:
(in millions)
 
2017
 
2016
Accounts receivable
 
$
10.2

 
$
13.4

Inventories
 
2.5

 
16.7

Accounts payable
 
(18.7
)
 
(19.3
)
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) as well as 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.


38


Cash Flow from Investing Activities

Cash used by investing activities was $319.1 million and $106.4 million for the years ended December 31, 2017 and 2016, respectively. The 2017 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 Item 8. of this report. Capital expenditures were $31.0 million and $18.5 million for the years ended December 31, 2017 and 2016, respectively, with the increase driven by information technology systems-related investments.

Cash Flow from Financing Activities

Cash provided by financing activities was $142.2 million for the year ended December 31, 2017, 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 2016 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 $148.0 million on the then existing U.S. Dollar Senior Secured Term Loan A and payment of $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 the early satisfaction and discharge of our $500.0 million principal amount of senior unsecured notes, and paid $6.9 million in debt issuance fees in connection with the New Notes.

Capitalization

The Company had 102.7 million and 106.7 million shares of common stock outstanding as of December 31, 2018 and 2017, respectively.

Adequacy of Liquidity Sources

Based on our 2019 business plan and current forecasts, we believe that cash flow from operations, our current cash balance and borrowings available under our 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 further information on these risks, see "Part I, Item1A. Risk Factors - Our existing borrowing arrangements require us to dedicate a substantial portion of our cash flow to debt payments and limit our ability to engage in certain activities. If we are unable to meet our obligations under these 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."

Off-Balance-Sheet Arrangements and Contractual Financial Obligations

The 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, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


39


Our contractual obligations and related payments by period as of December 31, 2018 were as follows:
(in millions)
2019
 
2020 - 2021
 
2022 - 2023
 
Thereafter
 
Total
Debt
$
39.4

 
$
95.3

 
$
378.0

 
$
375.0

 
$
887.7

Interest on debt(1)
32.9

 
63.7

 
45.8

 
18.9

 
161.3

Operating lease obligations
29.7

 
45.2

 
27.4

 
19.6

 
121.9

Purchase obligations(2)
89.1

 
1.9

 
0.2

 

 
91.2

Transition Toll Tax(3)
3.1

 
6.1

 
8.8

 
17.3

 
35.3

Other long-term liabilities(4)
21.0

 
15.2

 
15.6

 
39.0

 
90.8

Total
$
215.2

 
$
227.4

 
$
475.8

 
$
469.8

 
$
1,388.2


(1)
Interest calculated at December 31, 2018 rates for variable rate debt.
(2)
Purchase obligations primarily consist of contracts and non-cancelable purchase orders for raw materials and finished goods.
(3)
The U.S. Tax Act requires companies to pay a one-time Transition Toll Tax. The Transition Toll Tax is payable over eight years.
(4)
Other long-term liabilities consist of estimated expected employer contributions for 2019, along with estimated future payments, for pension 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, 2018, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $43.7 million of unrecognized tax benefits have been excluded from the contractual obligations table above. For further information, see "Note 12. Income Taxes" to the consolidated financial statements contained in Item 8. of this report.

Critical Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the U.S. ("GAAP"). Preparation of our financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses presented for each reporting period in the financial statements and the related accompanying notes. 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 significant, subjective and complex judgments to be made by our management.

Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount reflective of the consideration we expect to receive in exchange for those goods or services. Taxes we collect concurrent with revenue producing activities are excluded from revenue. Incidental items incurred that are immaterial in the context of the contract are expensed.

At the inception of each contract, the Company assesses the products and services promised and identifies each distinct performance obligation. To identify the performance obligations, the Company considers all products and services promised regardless of whether they are explicitly stated or implied within the contract or by standard business practices.

Products: For our products, we transfer control and recognize a sale primarily when we either ship the product from our manufacturing facility or distribution center, or upon delivery to a customer specified location depending upon the terms in the customer agreement. In addition, we recognize revenue for private label products as the product is manufactured (or over-time) when a contract has an enforceable right to payment. For consignment arrangements, revenue is not recognized until the products are sold to the end customer.


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Customer Program Costs: Customer programs and incentives ("Customer Program Costs") 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. The amount of consideration we receive and revenue we recognize is impacted by Customer Program Costs, including sales rebates (which are generally tied to achievement of certain sales volume levels); in-store promotional allowances; shared media and customer catalog allowances; other cooperative advertising arrangements; freight allowance programs offered to our customers; allowances for discounts and reserves for returns. We recognize Customer Program Costs, primarily as a deduction to gross sales, at the time that the associated revenue is recognized. Customer Program Costs are based on management's best estimates using the most likely amount method and is an amount that is unlikely to be reversed. In the absence of a signed contract, estimates are based on historical or projected experience for each program type or customer.