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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, 2011

 

¨ 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)

300 Tower Parkway

Lincolnshire, Illinois 60069

(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 ¨    No þ

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 ¨    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 ¨

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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer ¨    Accelerated filer þ    Non-accelerated filer ¨    Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ¨    No þ

As of June 30, 2011, the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was approximately $282 million.

As of February 1, 2012, the registrant had outstanding 55,480,751 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 15, 2012 are incorporated by reference into Part III of this report.

 

 

 


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TABLE OF CONTENTS

 

PART I       

ITEM 1.

   Business      1   

ITEM 1A.

   Risk Factors      7   

ITEM 1B.

   Unresolved Staff Comments      13   

ITEM 2.

   Properties      14   

ITEM 3.

   Legal Proceedings      14   

ITEM 4.

   (Removed and Reserved)      14   
PART II   

ITEM 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      15   

ITEM 6.

   Selected Financial Data      17   

ITEM 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      19   

ITEM 7A.

   Quantitative and Qualitative Disclosures About Market Risk      39   

ITEM 8.

   Financial Statements and Supplementary Data      41   

ITEM 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      93   

ITEM 9A.

   Controls and Procedures      93   

ITEM 9B.

   Other Information      93   
PART III   

ITEM 10.

   Directors, Executive Officers and Corporate Governance      93   

ITEM 11.

   Executive Compensation      93   

ITEM 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      94   

ITEM 13.

   Certain Relationships and Related Transactions, and Director Independence      94   

ITEM 14.

   Principal Accountant Fees and Services      94   

PART IV

  

ITEM 15.

   Exhibits and Financial Statement Schedules      95   
   Signatures      102   


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PART I

Cautionary Statement Regarding Forward-Looking Statements. Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “will,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “forecast,” “project,” “plan,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Because actual results may differ from those predicted by such forward-looking statements, you should not place undue reliance on such forward-looking statements when deciding whether to buy, sell or hold the Company’s securities. We undertake no obligation to update these forward-looking statements in the future. The factors that could affect our results or cause plans, actions and results to differ materially from current expectations are detailed in this report, including under “Item 1. Business,” “Item 1A. Risk Factors” and the financial statement line item discussions set forth in “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and from time to time in our other 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 Securities and Exchange Commission. 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; our Corporate Governance Principles; and our Code of Business Conduct and Ethics. The Company’s Code of Business Conduct and Ethics applies to all of our directors, officers (including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer) and employees. You may obtain a copy of any of the foregoing documents, free of charge, if you submit a written request to ACCO Brands Corporation, 300 Tower Parkway, Lincolnshire, IL. 60069, Attn: Investor Relations.

ITEM 1. BUSINESS

Overview

ACCO Brands is one of the world’s largest suppliers of branded office products (excluding furniture, computers, printers and bulk paper) to the office products resale industry. We design, develop, manufacture and market a wide variety of traditional and computer-related office products, supplies, binding and laminating equipment and related consumable supplies, personal computer accessory products, paper-based time management products and presentation aids and products. Through a focus on research, marketing and innovation, we seek to develop new products that meet the needs of our consumers and commercial end-users, which we believe will increase the product positioning of our brands. We compete through a balance of innovation, a low-cost operating model and an efficient supply chain. We sell our products primarily to markets located in North America, Europe and Australia. Our brands include GBC®, Kensington®, Quartet®, Rexel, Swingline®, Wilson Jones®, Marbig, NOBO and Day-Timer ®, among others.

The majority of our office products are used by businesses. Most of these end-users purchase our products from our reseller customers, which include commercial contract stationers, retail superstores, wholesalers, mail order and internet catalogs, mass merchandisers, club stores and dealers. We also supply our products directly to

 

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commercial and industrial end-users and to the educational market. Historically we have targeted the premium-end of the product categories in which we compete. However, we also supply private label products for our customers where we believe we have an economic advantage or where it is necessary to merchandise a complete category.

Our leading brand positions provide the scale to enable us to invest in product innovation and drive market growth across our product categories. In addition, the expertise we use to satisfy the exacting technical specifications of our more demanding commercial customers is in many instances the basis for expanding our products and innovations to consumer products.

Our strategy centers on a combination of growing sales and market share and generating acceptable profitability and returns. Specifically, we have substantially reduced our operating expenses and seek to leverage our platform for organic growth through greater consumer understanding, product innovation, marketing and merchandising, disciplined category expansion including broader product penetration and possible strategic transactions, and continued cost realignment. To achieve these goals, we plan to continue to execute the following strategies: (1) invest in research, marketing and innovation, (2) penetrate the full product spectrum of our categories and (3) opportunistically pursue strategic transactions.

We utilize a combination of manufacturing and third-party sourcing to procure our products, depending on transportation costs, service needs and direct labor costs associated with each product.

Our priority for cash flow use over the near term, after internal growth, is to fund the reduction of debt and invest in new products through both organic development and acquisitions. 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”.

Reportable Segments

Our Company is organized into three business segments: ACCO Brands Americas, ACCO Brands International and Computer Products Group.

The following table shows the percentages of consolidated revenue from continuing operations derived from each of our reportable segments in the years indicated:

 

Segment

   2011    2010    2009
ACCO Brands Americas    52%    53%    55%
ACCO Brands International    34%    33%    32%
Computer Products Group    14%    14%    13%

ACCO Brands Americas and ACCO Brands International

These two segments manufacture, source and sell traditional office products and supplies and document finishing solutions. ACCO Brands Americas comprises the North, Central and South American markets, and ACCO Brands International comprises the rest of the world, principally Europe, Australia and Asia-Pacific.

Examples of our traditional office products and supplies are staplers, staples, punches, ring binders, trimmers, sheet protectors, hanging file folders, clips and fasteners, dry-erase boards, dry-erase markers, easels, bulletin boards, overhead projectors, transparencies, laser pointers and screens. These products are sold under leading brands including Quartet®, Rexel, Swingline®, Wilson Jones®, Marbig, NOBO, ACCO®, Derwent and Eastlight. Examples of our document finishing solutions are binding, lamination and punching equipment, binding and lamination supplies, report covers, archival report covers and shredders. These products are sold primarily under the GBC® brand. We also provide machine maintenance and repair services sold under the GBC brand. Included in the ACCO Brands Americas segment are our personal organization tools, including time management products, primarily under the Day-Timer® brand name.

 

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The customer base to which our products are sold is made up of large global and regional resellers of our products. It is through these large resellers that the Company’s products reach the end consumer. Our customer base includes commercial contract stationers, office products superstores, wholesalers, distributors, mail order and internet catalogs, mass merchandisers, club stores and independent dealers. The majority of sales by our customers are to business end-users, which generally seek office products that have added value or ease of use features and a reputation for reliability, performance and professional appearance. Some of our document finishing products are sold directly to high volume end-users and commercial reprographic centers and indirectly to lower-volume consumers worldwide. Approximately two-thirds of the Day-Timer® business is sold through the direct channel, which markets product through the internet and periodic sales catalogs and ships product directly to our end-user customers. The remainder of the business sells to large resellers and commercial dealers.

Computer Products Group

The Computer Products Group designs, distributes, markets and sells accessories for laptop and desktop computers, smart phones and tablets. These accessories primarily include security locks, power adapters, input devices such as mice and keyboards, laptop computer carrying cases, hubs and docking stations, ergonomic devices and technology accessories for smart phones and tablets. The Computer Products Group sells mostly under the Kensington®, Microsaver® and ClickSafe® brand names, with the majority of its revenue coming from the U.S. and Western Europe.

All of our computer products are manufactured by third-party suppliers, principally in Asia, and are stored in and distributed from our regional facilities. Our computer products are sold primarily to consumer electronics retailers, information technology value-added resellers, original equipment manufacturers and office products retailers.

For further information on the Company’s business segments see Note 15, Information on Business Segments, to our consolidated financial statements contained in Item 8 of this report.

Discontinued Operations

On June 14, 2011, the Company announced the disposition of GBC-Fordigraph Pty Ltd (“GBC-Fordigraph Business”). The Australia-based business was formerly part of the ACCO Brands International segment and the results of operations are included in the financial statements as a discontinued operation for all periods presented. The GBC-Fordigraph Business represented $45.9 million in annual net sales for the year ended December 31, 2010. The Company has received final proceeds of $52.9 million inclusive of working capital adjustments and selling costs. In connection with this transaction, in 2011, the Company recorded a gain on sale of $41.9 million ($36.8 million after- tax).

In June 2009, the Company completed the sale of its commercial print finishing business for final gross proceeds of $16.2 million. The results of operations and loss on sale of this business are reported in discontinued operations for all periods presented.

For further information on the Company’s discontinued operations see Note 18, Discontinued Operations, to our consolidated financial statements contained in Item 8 of this report.

Acquisition

On November 17, 2011, the Company announced the signing of a definitive agreement to merge MeadWestvaco Corporation’s Consumer and Office Products business (“Mead C&OP Business”) into the Company in a transaction that was valued at approximately $860 million as of the date the transaction was announced. The Mead C&OP Business is a leading manufacturer and marketer of school supplies, office products, and planning and organizing tools including the Mead®, Five Star®, Trapper Keeper®, AT-A-GLANCE®, Cambridge®, Day Runner®, Hilroy, Tilibra and Grafons brands in the U.S., Canada and

 

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Brazil. Upon completion of the transaction, MeadWestvaco shareholders will own 50.5% of the combined company. The transaction is subject to approval by the Company’s shareholders and the satisfaction of customary closing conditions and regulatory approvals, including a ruling from the U.S. Internal Revenue Service on the tax-free nature of the transaction for MeadWestvaco. The transaction is expected to be completed in the first half of 2012. The Company will be the accounting acquirer in the merger and will apply purchase accounting to the assets and liabilities acquired upon consummation of the merger.

Customers/Competition

Our sales are generated principally in North America, Europe and Australia. For the fiscal year ended December 31, 2011, these markets represented 59%, 25% and 11% of our net sales, respectively. Our top ten customers are Staples, Office Depot, OfficeMax, BPGI, United Stationers, S.P. Richards, Wal-Mart/Sam’s Club, Coles Group, Lyreco and Spicers, together accounting for 51% of our net sales for the fiscal year ended December 31, 2011. Sales to Staples, Inc. and subsidiaries amounted to approximately 13% of consolidated net sales for each of the three years ended 2011, 2010 and 2009. Sales to Office Depot, Inc. and subsidiaries amounted to approximately 11% of consolidated net sales for each of the three years ended 2011, 2010 and 2009. Sales to no other customer exceeded 10% of consolidated sales for any of these periods.

Current trends among our customers include fostering high levels of competition among suppliers, demanding innovative new products and requiring suppliers to maintain or reduce product prices and deliver products with shorter lead times and in smaller quantities. Other trends are for retailers to import generic products directly from foreign sources and sell those products, which compete with our products, under the customers’ own private-label brands. The combination of these market influences, along with a recent and continuing trend of consolidation among resellers, has created an intensely competitive environment in which our principal customers continuously evaluate which products they will offer to their customers. This results in pricing pressures, the need for stronger end-user brands, broader product penetration within categories, the ongoing introduction of innovative new products and continuing improvements in customer service.

Competitors of the ACCO Brands Americas and ACCO Brands International segments include Avery Dennison, Esselte, 3M, Newell Rubbermaid, Hamelin, Smead, Fellowes, MeadWestvaco, Tops Products, Franklin Covey, House of Doolittle, Dominion BlueLine, Carolina Pad, Ampad, Blue Sky, Spiral Binding and numerous private label suppliers and importers. Competitors of the Computer Products Group include Belkin, Logitech, Targus and Fellowes.

Certain financial information for each of our business segments and geographic regions is incorporated by reference to Note 15, Information on Business Segments, to our consolidated financial statements contained in Item 8 of this report.

Product Development and Product Line Rationalization

Our strong commitment to understanding our consumers and defining 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 in the office products industry. Our new products are developed from our own consumer understanding, our own research and development or through partnership initiatives with inventors and vendors. Costs related to consumer research and product research when paid directly by ACCO Brands are included in marketing costs and research and development expenses, respectively. Research and development expenses amounted to $20.5 million, $24.0 million and $18.6 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Significant product developments include the Computer Products Group development of smart phone and tablet accessory products that now represent 22% of 2011 segment revenue. With respect to office products, the “Stack and Shred” range of shredders was an innovative product line launched at a time when there was disruption in the product market resulting from supply chain limitations suffered by a major competitor. Total shredder sales increased by approximately 74% in 2011. Market acceptance of “Stack and Shred” shredders continues to be favorable.

 

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In 2011 the Computer Products Group also launched a new proprietary computer security lock product under the brand name “ClickSafe® to supplement its well recognized MicroSaver® product line for which most patent protection expired in January 2012. By the end of 2011, ClickSafe® product sales accounted for approximately 12% of our computer security product sales. The ClickSafe® solution has patent protection through 2029.

Our product line strategy emphasizes the divestiture of businesses and rationalization of product offerings that do not meet our long-term strategic goals and objectives. We consistently review our businesses and product offerings, assess their strategic fit and seek opportunities to divest non-strategic businesses. The criteria we use in assessing the strategic fit include: the ability to increase sales for the business; the ability to create strong, differentiated brands; the importance of the business to key customers; the business relationship with existing product lines; the impact of the business to the market; and the business’s actual and potential impact on our operating performance.

As a result of this review process, during 2011 we completed the sale of the GBC-Fordigraph Business, the Company’s former Australian direct sales business that sold mailroom and binding and laminating equipment and supplies. This business represented approximately $46 million in annual net sales for the year ended December 31, 2010. In addition, during 2009 we completed the sale of our former commercial print finishing business. This business represented approximately $100 million in annual net sales for the year ended December 31, 2008.

Raw Materials

The primary materials used in the manufacturing of many of our products are plastics, resin, polyester and polypropylene substrates, paper, 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. In general, our gross profit may be affected from time to time by fluctuations in the prices of these materials because our customers require advance notice and negotiation to pass through raw material price increases, giving rise to a delay before cost increases can be passed on to our customers. See Item 1A, “Risk Factors.” The raw materials and labor costs we incur are subject to price increases that could adversely affect our profitability. Based on experience, we believe that adequate quantities of these materials will be available in the foreseeable future. In addition, a significant portion of the products we sell in our international markets are sourced from China and other Asia-Pacific countries and are paid for in U.S. dollars. Thus, movements of their local currency to the U.S. dollar have the same impacts as raw material price changes and we adjust our pricing in these markets to reflect these currency changes.

Supply

Our products are either manufactured or sourced to ensure that we supply our customers with appropriate customer service, quality products, innovative solutions and attractive pricing. 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 our capital investment and working capital requirements. Our strategy is to manufacture those products that would incur a relatively high freight expense or have high service needs and source those products that have a high proportion of direct labor cost. Low-cost sourcing mainly comes from China, but we also source from other Asian countries and Eastern Europe. Where freight costs or service issues are significant, we source from factories located in or near to our domestic markets.

Seasonality

Our business, as it concerns both historical sales and profit, has experienced increased sales volume in the third and fourth quarters of the calendar year. Two principal factors have contributed to this seasonality: the

 

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office products industry, its customers and ACCO Brands specifically are major suppliers of products related to the “back-to-school” season, which occurs principally during June, July, August and September for our North American business and during November, December and January for our Australian business; and our offering includes several products which lend themselves to calendar year-end purchase timing, including Day-Timer planners, paper organization and storage products (including bindery) and Kensington computer accessories, which increase with traditionally strong fourth-quarter sales of personal computers.

Intellectual Property

We have many patents, trademarks, brand names and trade names that are, in the aggregate, important to our business. The loss of any individual patent or license, however, would not be material to us taken as a whole, even though there can be no assurance that the royalty income we have received pursuant to license agreements covering patents that have expired can be replaced, or that we will not experience a decline in gross profit margin on related products that no longer have patent protection. Many of our trademarks are only important in particular geographic markets or regions. Our principal registered trademarks are: GBC®, Kensington®, Quartet®, Rexel, Swingline®, Wilson Jones®, Marbig, NOBO, Day-Timer®, Microsaver®, ClickSafe® and ACCO®.

Certain of our patents covering MicroSaver branded products in the computer security category expired in January 2012. We recognized approximately $5.4 million, $7.5 million and $4.6 million in royalty revenue related to these patents in the years ended December 31, 2011, 2010 and 2009, respectively. As these patents have expired, competitors may be able to legally utilize the technology that was protected by those patents and competition could increase, resulting in the Company realizing lower gross margin from the loss of royalty receipts and possibly lower gross margin for MicroSaver branded products. The development of the ClickSafe® product will enable the Company to continue to offer a proprietary computer security product although no license agreements have yet been entered into for the patents related to ClickSafe®. See “Product Development and Product Line Rationalization.”

Environmental Matters

We are subject to federal, state and local 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. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. In the opinion of our management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon our capital expenditures, financial condition, results of operations or competitive position. See Item 1A, “Risk Factors.”

Employees

As of December 31, 2011, the Company had approximately 3,800 full-time and part-time employees. There have been no strikes or material labor disputes at any of our facilities during the past five years. We consider our employee relations to be good.

 

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ITEM 1A. RISK FACTORS

The factors that are discussed below, as well as the matters that are generally set forth in this 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.

Risks Related to Our Business

Sales of our products may be adversely affected by issues that affect business, commercial and consumer spending decisions during periods of economic uncertainty or weakness.

Sales of our products can be very sensitive to uncertain U.S. and global economic conditions, particularly in categories where we compete against private label, other branded and/or generic products that are competitive on price, quality, service or other grounds. In periods of economic uncertainty or weakness, the demand for our products may be adversely affected, as businesses and consumers may seek or be forced to purchase more lower cost, private label or other economy brands, may more readily switch to electronic, digital or web-based products serving similar functions, or may forego certain purchases altogether. As a result, adverse changes in the U.S. or global economy or sustained periods of economic uncertainty or weakness could negatively affect our earnings and could have a material adverse effect on our business, results of operations, cash flows and financial position.

Challenges related to the highly competitive business segments in which we operate could have a negative effect on our ongoing operations, revenues, results, cash flows or financial position.

We operate in highly competitive business segments that face a number of challenges, including competitors with strong brands or brand recognition, significant private label producers, imports from a range of countries, low entry barriers, sophisticated and large buyers of office products, and potential substitution from a range of products and services including electronic, digital or web-based products that can replicate or render obsolete or less desirable some of the products we sell. In particular, our business is likely to be affected by: (1) the decisions and actions of our major customers, including their decisions on whether to increase their purchases of private label products; (2) decisions of current and potential suppliers of competing products on whether to take advantage of low entry barriers to expand their production; and (3) the decisions of end-users of our products to expand their use of substitute products and, in particular, to shift their use of time management and planning products toward electronic and other substitutes. In addition, our competitive position depends on continued investment in innovation and product development, manufacturing and sourcing, quality standards, marketing and customer service and support. Our success will depend in part on our ability to anticipate and offer products that appeal to the changing needs and preferences of our customers in a market where many of our product categories are affected by continuing improvements in technology and shortened product lifecycles. We may not have sufficient resources to make the investments that may be necessary to anticipate those changing needs and may not anticipate, identify, develop and market products successfully or otherwise be successful in maintaining their competitive position.

Our business depends on a limited number of large and sophisticated customers, and a substantial reduction in sales to these customers could significantly impact our operating results.

The office products industry is characterized by a small number of major customers, principally office products superstores (which combine contract stationers, retail and mail order), office products resellers and mass merchandisers. A relatively limited number of customers account for a large percentage of our total net sales. Our top ten customers accounted for 51% of our net sales for the fiscal year ended December 31, 2011. Sales to Staples, Inc. and Office Depot, Inc. and subsidiaries during the same period amounted to approximately 13% and 11%, respectively, of our 2011 net sales. Our large customers have the ability to obtain favorable terms, to directly source their own private label products and to create and support new and competing suppliers. The loss of, or a significant reduction in, business from one or more of our major customers could have a material adverse effect on our business, financial condition and results of operations.

 

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Our substantial indebtedness may adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt, prevent us from meeting our obligations under our indebtedness and otherwise adversely affect our results of operations and financial condition.

As of December 31, 2011, we had $669.0 million of outstanding debt. This indebtedness could have negative consequences to us, such as:

 

   

requiring us to dedicate a substantial portion of our cash flow from operating activities to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, potential strategic acquisitions and other general corporate purposes;

 

   

limiting our ability to obtain additional financing to fund growth, working capital or capital expenditures, or to fulfill debt service requirements or other cash requirements;

 

   

increasing our vulnerability to economic downturns and changing market conditions;

 

   

limiting our operational flexibility due to the covenants contained in our debt agreements;

 

   

placing us at a competitive disadvantage relative to competitors that have less debt;

 

   

to the extent that our debt is subject to floating interest rates, increasing our vulnerability to fluctuations in market interest rates; and

 

   

limiting our ability to buy back our stock or pay cash dividends

The agreements governing our indebtedness contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our ability to meet our expense and debt service obligations will depend on our future performance, which will be affected by financial, business, economic and other factors, including potential changes in customer preferences, the success of product and marketing innovation and pressure from competitors. Should our sales decline, we may not be able to generate sufficient cash flow to pay our debt service obligations when due. If we are unable to meet our debt service obligations or should we fail to comply with our financial and other restrictive covenants, we may be required to refinance all or part of our existing debt (in all likelihood on terms less favorable than our current terms), sell important strategic assets at unfavorable prices or borrow more money. We may not be able to, at any given time, refinance our debt, sell assets or borrow more money on terms acceptable to us or at all. The inability to refinance our debt could have a material adverse effect on our financial condition and results from operations.

Our failure to comply with certain restrictive debt covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts.

Certain covenants we have made in connection with our existing borrowings restrict our ability to, among other things, incur additional indebtedness, incur certain liens on our assets, issue preferred stock or certain disqualified stock, pay dividends on capital stock, make other restricted payments, including investments, sell our assets, and enter into consolidations or mergers or other transactions with affiliates. Our asset-based revolving credit facility also requires us to maintain specified financial ratios under certain conditions and satisfy financial condition tests. Our ability to meet those financial ratios and tests and otherwise comply with our financial covenants may be affected by events beyond our control, and we may not be able to continue to meet those ratios, tests and covenants. Our ability to generate sufficient cash from operations to meet our debt obligations will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. A breach of any of these covenants, ratios, tests or restrictions, as applicable, or any inability to pay interest on, or principal of, our outstanding debt as it becomes due could result in an event of default under any of the agreements governing any

 

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of our debt obligations, in which case our lenders could elect to declare all amounts outstanding to be immediately due and payable. If the lenders accelerate the payment of any of our indebtedness, 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 and, if we were unable to obtain replacement financing or any such replacement financing was on terms that were less favorable than the indebtedness being replaced, our liquidity and results of operations would be materially and adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

We require a significant amount of cash to service our debt. Our ability to meet our cash requirements and service our debt could be impacted by many factors that are outside our control, including global economic conditions and access to credit markets.

Our future operating performance is dependent on many factors, some of which are beyond our control, including prevailing economic, financial and industry conditions. Worsening global economic conditions would adversely impact commercial spending and our sales would likely decline or become increasingly concentrated in lower margin products, and our business, financial condition, results of operations and/or cash flows could be materially adversely affected.

The impact of any negative global economic conditions and the ability of our suppliers and customers to access credit markets is also unpredictable, and may create additional risks for us, both directly and indirectly. The inability of suppliers to access financing or the insolvency of one or more of our suppliers could lead to disruptions in our supply chain, which could adversely impact our sales and/or increase our costs. Our suppliers may require us to pay cash in advance or obtain letters of credit for their benefit as a condition to selling us their products and services. If one or more of our principal customers were to file for bankruptcy, our sales could be adversely impacted and our ability to collect outstanding accounts receivable from any such customer could be limited. Any of these risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations and/or cash flows.

Our operating performance and ability to comply with covenants under our borrowing arrangements are dependent on our continued ability to access funds under our credit and loan agreements, including under our asset-based revolving credit facility, and from cash on hand, maintain sales volumes, drive profitable growth, realize cost savings and generate cash from operations. The financial institutions that fund our asset-based revolving credit facility are also impacted by any volatility in the credit markets, and if one or more of them cannot fulfill our revolving credit requests, our operations may be adversely impacted.

During the third quarter of 2009, the Company completed a series of transactions to refinance its indebtedness. These transactions resulted in both an increased amount of indebtedness as well as an increase to the weighted average interest rate on our indebtedness. As such, these transactions have increased the cost of servicing our debt, which has negatively impacted our results of operations and cash flows.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future because the terms of our existing indebtedness do not prohibit us or our subsidiaries from doing so, within certain limits. Based on our borrowing base, as of December 31, 2011 our revolving credit facility permitted borrowing of up to an additional $165.5 million. If new indebtedness is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.

Failure to maintain our credit ratings could limit our access to the capital markets, adversely affect the cost and terms upon which we are able to obtain additional financing and negatively impact our business.

Although we believe existing cash, funds generated by operations and amounts available under our asset-based revolving credit facility will collectively provide adequate resources to fund our ongoing operating

 

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requirements, we may be required to seek additional financing to compete effectively in our market. In light of the current difficulties in the financial markets, there can be no assurance that we will be able to maintain our credit ratings. We have experienced downgrades in the past and may experience further downgrades. Failure to maintain these credit ratings could, among other things, limit our access to the capital markets and adversely affect the cost and terms upon which we are able to obtain additional financing, including any financing from our suppliers, which could negatively impact our business.

A bankruptcy of one or more of our major customers could have a material adverse effect on our financial condition and results of operations.

Our concentrated customer base increases our customer credit risk. Were any of our major customers to make a bankruptcy filing, we could be adversely impacted due to not only a reduction in future sales but also losses associated with the potential inability to collect any outstanding accounts receivable from such customer. Such a result could negatively impact our financial results and cash flows.

Our pension costs could substantially increase as a result of volatility in the equity markets or interest rates.

The difference between plan obligations and assets, or the funded status of our defined benefit pension plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Changes in interest rates and the market value of plan assets impact the funded status of these plans and cause volatility in the net periodic benefit cost and future funding requirements of these plans. The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors, including the investment returns on pension plan assets, and a significant increase in our pension funding requirements could have a negative impact on our cash flow and financial condition.

Impairment charges could have a material adverse effect on our financial results.

In prior years we have recorded significant amounts of goodwill and other asset impairment charges adversely affecting financial results. Future events may occur that may also adversely affect the reported value of our assets and require impairment charges, which could further adversely affect our financial results. Such events may include, but are not limited to, a sustained decline in our stock price, strategic decisions made in response to changes in economic and competitive conditions, the impact of the economic environment on our customer base or a material adverse change in our relationship with significant customers.

Our customers may further consolidate, which could adversely impact our margins and sales.

Customers within our customer base have steadily consolidated over the last two decades. If that trend continues, it is likely to result in further pricing pressures on us that could result in reduced margin and sales. Further, there can be no assurance that following consolidation large customers will continue to buy from us across different product segments or geographic regions, which could negatively impact our financial results.

Our business is subject to risks associated with seasonality, which could adversely affect our cash flow, financial condition or results of operations.

Our business, as it concerns both historical sales and profit, has experienced higher sales volume in the third and fourth quarters of the calendar year. Two principal factors have contributed to this seasonality: the office products industry’s customers and our product line. We are major suppliers of products related to the “back-to-school” season, which occurs principally during June, July, August and September for our North American business and November, December and January for our Australian business; and our product line includes several products that lend themselves to calendar year-end purchase timing. If either of these typical seasonal increases in sales of certain portions of our product line does not materialize, we could experience a material adverse effect on our business, financial condition and results of operations.

 

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The raw materials and labor costs we incur are subject to price increases that could adversely affect our profitability.

The primary materials used in the manufacturing of many of our products are resin, plastics, polyester and polypropylene substrates, paper, steel, wood, aluminum, melamine, zinc and cork. In general, our gross profit may be affected from time to time by fluctuations in the prices of these materials because our customers require advance notice and negotiation to pass through raw material price increases, giving rise to a delay before cost increases can be passed to our customers. We attempt to reduce our exposure to increases in these costs through a variety of measures, including periodic purchases, future delivery contracts and longer-term price contracts together with holding our own inventory; however, these measures may not always be effective. Inflationary and other increases in costs of materials and labor have occurred in the past and may recur, and raw materials may not continue to be available in adequate supply in the future. Shortages in the supply of any of the raw materials we use in our products and other factors, such as inflation, could result in price increases that could have a material adverse effect on our financial condition or results of operations.

We are subject to supplier credit and order fulfillment risk.

We purchase products for resale under credit arrangements with our vendors. In weak global markets, vendors may seek credit insurance to protect against non-payment of amounts due to them. During any period of declining operating performance, or should we experience severe liquidity challenges, vendors may demand that we accelerate our payment for their products. Also, credit insurers may curtail or eliminate coverage to the vendors. If vendors begin to demand accelerated payment of amounts due to them or if they begin to require advance payments or letters of credit before goods are shipped to us, these demands could have a significant adverse impact on our operating cash flow and result in a severe drain on our liquidity. In addition, if our vendors are unable to access liquidity or become insolvent, they could be unable to supply us with product. Also, some of our vendors are dependent upon other industries for raw materials and other products and services necessary to produce and provide the products they supply to us. Any adverse impacts to those industries could have a ripple effect on these vendors, which could adversely impact their ability to supply us at levels we consider necessary or appropriate for our business, or at all. Any such disruptions could negatively impact our ability to deliver products and services to our customers, which in turn could have an adverse impact on our business, operating results, financial condition or cash flow.

Risks associated with currency volatility could harm our sales, profitability and cash flows.

Approximately 53% of our net sales for the fiscal year ended December 31, 2011 were from foreign sales. While the recent relative volatility of the U.S. dollar to other currencies has impacted our businesses’ sales, profitability and cash flows as the results of non-U.S. operations have increased when reported in U.S. dollars, we cannot predict the rate at which the U.S. dollar will trade against other currencies in the future. If the U.S. dollar were to substantially strengthen, making the dollar significantly more valuable relative to other currencies in the global market, such an increase could harm our ability to compete, and therefore, materially and adversely affect our financial condition and our results of operations. More specifically, a significant portion of the products we sell are sourced from China and other Asia-Pacific countries and are paid for in U.S. dollars. Thus, movements of their local currency to the U.S. dollar have the same impacts as raw material price changes in addition to the currency translation impact noted above.

Risks associated with outsourcing the production of certain of our products could materially and adversely affect our business, financial condition and results of operations.

Historically, we have outsourced certain manufacturing functions to third-party service providers in China and other Asia-Pacific countries. Outsourcing generates a number of risks, including decreased control over the manufacturing process potentially leading to production delays or interruptions, inferior product quality control and misappropriation of trade secrets. In addition, performance problems by these third-party service providers

 

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could result in cost overruns, delayed deliveries, shortages, quality issues or other problems, which could result in significant customer dissatisfaction and could materially and adversely affect our business, financial condition and results of operations.

If one or more of these third-party service providers becomes insolvent or unable or unwilling to continue to provide services of acceptable quality, at acceptable costs, in a timely manner or any combination thereof, our ability to deliver our products to our customers could be severely impaired. Furthermore, the need to identify and qualify substitute service providers or increase our internal capacity could result in unforeseen operational problems and additional costs. Substitute service providers might not be available or, if available, might be unwilling or unable to offer services on acceptable terms. Moreover, if customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current service providers, or others, on commercially reasonable terms, if at all.

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

We own and license many patents, trademarks, brand names and trade names that are, in the aggregate, important to our business. The loss of any individual patent or license may not be material to us taken as a whole, but the loss of a number of patents or licenses that represent principal portions of our business, or expenses related to defending or maintaining the patents or licenses, could have a material adverse effect on our business.

We may become involved in intellectual property claims being asserted against us that could cause us to incur substantial costs, divert the efforts of our management, and require us to pay substantial damages or require us to obtain a license, which might not be available on reasonable terms, if at all. We could also incur substantial costs to pursue legal actions relating to the unauthorized use by third parties of our intellectual property, which could have a material adverse effect on our business, results of operation or financial condition. If our brands become diluted, if our patents are infringed or if our competitors introduce brands and products that cause confusion with our brands in the marketplace, the value that our consumers associate with our brands may become diminished, which could negatively impact our sales. If third parties assert claims against our intellectual property rights and we are not able to successfully resolve those claims, or our intellectual property becomes invalidated, we could lose our ability to use the technology, brand names or other intellectual property that were the subject of those claims, which, if such intellectual property is material to the operation of our business or our financial results, could have a material adverse effect on our business, financial condition and results from operations.

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

Our success will depend on our ability to attract and retain qualified personnel, including executive officers and other key management personnel. We may not be able to attract and retain qualified management and other personnel necessary for the development, manufacture and sale of our products, and key employees may not remain with us in the future. If we fail to retain our key employees, we may experience substantial disruption in our businesses. 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.

We are subject to global environmental regulation and environmental risks.

We and our operations, both in the U.S. and abroad, are subject to national, state, provincial and/or local environmental laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal and management of, certain materials and waste. We are also subject to laws regulating the content of toxic chemicals and materials in the products we sell. Environmental and product content laws and regulations can be complex and may change often. Capital and operating expenses required to comply with environmental and product content laws and regulations can be significant, and violations may result in substantial fines, penalties and civil damages. The costs of complying with

 

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environmental and product content laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future could have a material adverse effect on our financial condition or results of operations.

Product liability claims or regulatory actions could adversely affect our financial results or harm our reputation or the value of our end-user brands.

Claims for losses or injuries purportedly caused by some of our products arise in the ordinary course of our business. In addition to the risk of substantial monetary judgments, product liability claims or regulatory actions could result in negative publicity that could harm our reputation in the marketplace or the value of our end-user brands. We also could be required to recall and possibly discontinue the sale of possible defective or unsafe products, which could result in adverse publicity and significant expenses. Although we maintain product liability insurance coverage, potential product liability claims are subject to a self-insured deductible or could be excluded under the terms of the policy.

We may not consummate our acquisition of the Mead C&OP Business or realize the anticipated benefits if we do complete the acquisition.

Our proposed acquisition of the Mead C&OP Business may not be consummated in a timely manner or at all. If we are unable to complete the proposed acquisition, we will have incurred substantial expenses and diverted significant management time and resources from our ongoing business. Even if we consummate the proposed acquisition, we will still have incurred substantial expenses but may not realize the anticipated cost synergies and other benefits of the acquisition. Given the size and significance of the acquisition, we may encounter difficulties in the integration of the operations of the Mead C&OP Business, which could adversely affect our combined business and financial performance.

If the proposed transaction is not completed the price of the our common stock may decline to the extent that the market price of the Company’s common stock reflects positive market assumptions that the proposed acquisition will be completed and the related anticipated benefits will be realized. We also may be subject to additional risks if the proposed transaction is not completed, including, depending on the reasons for termination of the merger agreement, the requirement that we pay MeadWestvaco Corporation a termination fee of $15.0 million or reimburse MeadWestvaco Corporation for their expenses in connection with the transactions in an amount up to $5.0 million.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

We have manufacturing facilities in North America, Europe and Australia, and maintain distribution centers in relation to the regional markets we service. We lease our principal U.S. headquarters in Lincolnshire, Illinois. The following table indicates the principal manufacturing and distribution facilities of our subsidiaries as of December 31, 2011:

 

Location

  

Functional Use

   Owned/Leased

U.S. Properties:

     
Ontario, California    Distribution/Manufacturing    Leased
Booneville, Mississippi    Distribution/Manufacturing    Owned/Leased
Ogdensburg, New York    Distribution/Manufacturing    Owned/Leased
East Texas, Pennsylvania    Distribution/Manufacturing/Office    Owned
Pleasant Prairie, Wisconsin    Distribution/Manufacturing    Leased

Non-U.S. Properties:

     
Sydney, Australia    Distribution/Manufacturing    Owned
Brampton, Canada    Distribution/Manufacturing/Office    Leased
Tabor, Czech Republic    Manufacturing    Owned
Denton, England    Manufacturing    Owned
Halesowen, England    Distribution    Owned
Lillyhall, England    Manufacturing    Leased
Tornaco, Italy    Distribution    Leased
Lerma, Mexico    Manufacturing/Office    Owned
Born, Netherlands    Distribution    Leased
Wellington, New Zealand    Distribution/Office    Owned
Arcos de Valdevez, Portugal    Manufacturing    Owned

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

ITEM 3. LEGAL PROCEEDINGS

We are, from time to time, involved in routine litigation incidental to our operations. None of the legal proceedings in which we are currently involved, individually or in the aggregate, is material to our consolidated financial condition or results of operations nor are we aware of any material pending or contemplated proceedings. We intend to vigorously defend, or resolve by settlement, any such matters as appropriate.

ITEM 4. (REMOVED AND RESERVED)

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “ABD.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on the NYSE for 2010 and 2011:

 

     High      Low  

2010

     

First Quarter

   $ 8.62       $ 5.92   

Second Quarter

   $ 9.47       $ 4.93   

Third Quarter

   $ 6.81       $ 4.63   

Fourth Quarter

   $ 8.89       $ 5.52   

2011

     

First Quarter

   $ 9.66       $ 7.77   

Second Quarter

   $ 10.39       $ 6.91   

Third Quarter

   $ 8.89       $ 4.62   

Fourth Quarter

   $ 10.20       $ 4.33   

As of February 1, 2012, the Company had approximately 11,459 registered holders of its common stock.

Dividend Policy

We have not paid any dividends on our common stock since becoming a public company. We intend to retain any future earnings to fund the development and growth of our business and reduce our indebtedness. Currently our debt agreements restrict our ability to make dividend payments and we do not anticipate paying any cash dividends in the foreseeable future. Any determination as to the declaration of dividends is at our board of directors’ sole discretion based on factors it deems relevant.

 

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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, 2006 through December 31, 2011.

 

LOGO

 

     Cumulative Total Return
     12/31/06    12/31/07    12/31/08    12/31/09    12/31/10    12/31/11
ACCO Brands Corporation.    $100.00    $60.60    $13.03    $27.50    $32.19    $36.46
Russell 2000    100.00    98.43    65.18    82.89    105.14    100.75
S & P Office Services & Supplies
(SuperCap1500)...
   100.00    88.69    54.96    64.56    76.41    62.19

 

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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 included elsewhere in this annual report.

 

     Year Ended December 31,  
      2011     2010     2009     2008     2007  
(in millions of dollars, except per share data)                               

Income Statement Data:

          

Net sales

   $ 1,318.4      $ 1,284.6      $ 1,233.3      $ 1,539.2      $ 1,798.5   

Cost of products sold (1)

     903.7        887.5        868.7        1,071.4        1,241.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     414.7        397.1        364.6        467.8        557.3   

Operating costs and expenses:

          

Advertising, selling, general and administrative expenses (1)

     293.9        281.2        263.0        367.6        422.5   

Amortization of intangibles

     6.3        6.7        7.1        7.5        7.8   

Restructuring (income) charges

     (0.7     (0.5     17.4        28.8        21.0   

Goodwill and asset impairment charges (2)

                   1.7        263.8        2.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     299.5        287.4        289.2        667.7        453.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     115.2        109.7        75.4        (199.9     103.7   

Interest expense, net

     77.2        78.3        67.0        63.7        64.1   

Income (loss) from continuing operations (3)

     18.6        7.8        (118.6     (255.1     31.3   

Per common share:

          

Income (loss) from continuing operations (3)

          

Basic

   $ 0.34      $ 0.14      $ (2.18   $ (4.71   $ 0.58   

Diluted

   $ 0.32      $ 0.14      $ (2.18   $ (4.71   $ 0.57   

Balance Sheet Data (at year end):

          

Total assets

   $ 1,116.7      $ 1,149.6      $ 1,106.8      $ 1,282.2      $ 1,898.5   

External debt

     669.0        727.6        725.8        708.7        775.3   

Total stockholders’ equity (deficit)

     (61.9     (79.8     (117.2     (3.4     438.3   

Other Data:

          

Cash provided by operating activities

   $ 61.8      $ 54.9      $ 71.5      $ 37.2      $ 81.2   

Cash provided (used) by investing activities

     40.0        (14.9     (3.9     (18.7     (55.2

Cash used by financing activities

     (63.1     (0.1     (44.5     (37.7     (35.4

 

(1)

Income (loss) from continuing operations for the years 2009, 2008 and 2007 was impacted by certain other charges that have been recorded within cost of products sold, and advertising, selling, general and administrative expenses. These charges are incremental to the cost of the Company’s underlying restructuring actions and do not qualify as restructuring. These charges include redundant warehousing or storage costs during the transition to new distribution centers, equipment and other asset move costs, ongoing facility overhead and maintenance costs after exit, gains on the sale of exited facilities, certain costs associated with the Company’s debt refinancing and employee retention incentives. Within cost of products sold on the Consolidated Statements of Operations for the years ended December 31, 2009, 2008, and 2007, these charges totaled $3.4 million, $7.5 million, and $17.2 million, respectively. Within advertising, selling, general and administrative expenses on the Consolidated Statements of Operations for the years ended December 31, 2009, 2008, and 2007, these charges totaled $1.2 million, $3.1 million, and $16.3 million, respectively. Included within the 2008 result, is a charge for $4.2 million related to the exit of the

 

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  Company’s former CEO, a $3.5 million gain on the sale of a manufacturing facility and net gains of $2.4 million on the sale of three additional properties. The Company did not incur these other charges in 2011 and 2010.
(2) The following table sets forth the Company’s pre-tax impacts of the non-cash goodwill and asset impairment charges recorded during 2009, 2008 and 2007, respectively.

 

(in millions of dollars)    2009      2008      2007  

Continuing Operations

        

Segment:

        

ACCO Brands Americas

   $ 0.9       $ 160.6       $ 1.6   

ACCO Brands International

     0.8         100.4         0.7   

Computer Products Group

     —           2.8         —     
  

 

 

    

 

 

    

 

 

 

Total Continuing Operations

   $ 1.7       $ 263.8       $ 2.3   

 

(3) During 2009, the Company recorded a non-cash charge of $108.1 million to establish a valuation allowance against its U.S. deferred taxes. For a further discussion of the valuation allowance, see Note 10, Income Taxes, to our consolidated financial statements, contained in Item 8 of this report.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

ACCO Brands is one of the world’s largest suppliers of branded office products (excluding furniture, computers, printers and bulk paper) to the office products resale industry. We design, develop, manufacture and market a wide variety of traditional and computer-related office products, supplies, binding and laminating equipment and related consumable supplies, personal computer accessory products, paper-based time management products and presentation aids and products. Through a focus on research, marketing and innovation, we seek to develop new products that meet the needs of our consumers and commercial end-users, which we believe will increase the product positioning of our brands. We compete through a balance of innovation, a low-cost operating model and an efficient supply chain. We sell products in highly competitive markets, and compete against large international and national companies, regional competitors and against our own customers’ direct sourcing of private-label products. We sell our products primarily to markets located in North America, Europe and Australia. Our brands include GBC®, Kensington®, Quartet®, Rexel, Swingline®, Wilson Jones®, Marbig, NOBO and Day-Timer®, among others.

The majority of our office products are used by businesses. Most of these end-users purchase our products from our reseller customers, which include commercial contract stationers, retail superstores, wholesalers, mail order and internet catalogs, mass merchandisers, club stores and dealers. We also supply our products directly to commercial and industrial end-users and to the educational market. Historically we have targeted the premium-end of the product categories in which we compete. However, we also supply private label products for our customers where we believe we have an economic advantage or where it is necessary to merchandise a complete category.

Our leading brand positions provide the scale to enable us to invest in product innovation and drive market growth across our product categories. In addition, the expertise we use to satisfy the exacting technical specifications of our more demanding commercial customers is in many instances the basis for expanding our product range to include consumer products.

Our strategy centers on a combination of growing sales and market share and generating acceptable profitability and returns. Specifically, we have substantially reduced our operating expenses and seek to leverage our platform for organic growth through greater consumer understanding, product innovation, marketing and merchandising, disciplined category expansion including broader product penetration and possible strategic transactions, and continued cost realignment. To achieve these goals, we plan to continue to execute the following strategies: (1) invest in research, marketing and innovation, (2) penetrate the full product spectrum of our categories and (3) opportunistically pursue strategic transactions.

On November 17, 2011, the Company announced the signing of a definitive agreement to merge the Mead C&OP Business into the Company in a transaction valued at approximately $860 million as of the date the transaction was announced. The Mead C&OP Business is a leading manufacturer and marketer of school supplies, office products, and planning and organizing tools including the Mead®, Five Star®, Trapper Keeper®, AT-A-GLANCE®, Cambridge®, Day Runner®, Hilroy, Tilibra and Grafons brands in the U.S., Canada and Brazil. Upon completion of the transaction, MeadWestvaco shareholders will own 50.5% of the combined company. The transaction is subject to approval by the Company’s shareholders and the satisfaction of customary closing conditions and regulatory approvals, including a ruling from the U.S. Internal Revenue Service on the tax-free nature of the transaction for MeadWestvaco. The transaction is expected to be completed in the first half of 2012. The Company will be the accounting acquirer in the merger and will apply purchase accounting to the assets and liabilities acquired upon consummation of the merger. In connection with this transaction, in the year ended December 31, 2011, the Company has incurred expenses of $5.6 million.

On June 14, 2011, the Company announced the disposition of GBC-Fordigraph Business. The Australia-based business was formerly part of the ACCO Brands International segment and the results of operations are

 

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included in the financial statements as a discontinued operation for all periods presented. The GBC-Fordigraph Business represented $45.9 million in annual net sales for the year ended December 31, 2010. The Company has received final proceeds of $52.9 million inclusive of working capital adjustments and selling costs. In connection with this transaction, in 2011, the Company recorded a gain on sale of $41.9 million ($36.8 million after-tax).

In June 2009, the Company completed the sale of its commercial print finishing business for final gross proceeds of $16.2 million, after final working capital adjustments. As a result of the adjustments, the Company received net cash proceeds before expenses of $12.5 million and a $3.65 million note due from the buyer payable in installments, $1.325 million of which was paid in June, 2011 and $2.325 million that is due June, 2012. Interest on the unpaid balance is payable at the rate of 4.9 percent per annum. The gross proceeds received are before fees and expenses related to the transactions and provisions arising from continuing litigation related to the transaction. The commercial print finishing business has been classified as a discontinued operation in our consolidated financial statements for all periods presented.

For further information on the Company’s discontinued operations see Note 18, Discontinued Operations, to our consolidated financial statements contained in Item 8 of this report.

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 therein. Unless otherwise noted, the following discussion pertains only to our continuing operations.

Overview of Company Performance

ACCO Brands’ results are dependent upon a number of factors affecting sales, including pricing and competition. Historically, key drivers of demand in the office products industry have included trends in white collar employment levels, gross domestic product (GDP) and growth in the number of small businesses and home offices together with usage of personal computers. Pricing and demand levels for office products have also reflected a substantial consolidation within the global resellers of office products. This consolidation has led to multiple years of industry pricing pressure and a more efficient level of asset utilization by customers, resulting in lower sales volumes for suppliers of office products.

With 53% of revenues for the fiscal year ended December 31, 2011 arising from foreign operations, exchange rate fluctuations can play a major role in our reported results. Foreign currency fluctuations impact our business in two important ways. The first and more obvious foreign exchange impact comes from the translation of our foreign operations results into U.S. dollars: a weak U.S. dollar therefore benefits ACCO Brands and a strong U.S. dollar will diminish the contribution from our foreign operations. The second, but potentially larger and less obvious impact is from foreign currency fluctuations on our cost of goods sold. A significant portion of the products we sell worldwide are sourced from Asia (approximately 70%) and paid for in U.S. dollars. However, our international operations sell in their local currency, and are exposed to their domestic currency movements against the U.S. dollar. A strong U.S. dollar, therefore, increases our cost of goods sold and a weak U.S. dollar decreases our cost of goods sold for our international operations.

We respond to these market changes by adjusting our sales prices, but this response can be difficult during periods of rapid fluctuation. A significant portion of our foreign-currency cost of goods purchases is hedged with forward foreign currency contracts, which delays the economic effect of a fluctuating U.S. dollar helping us align market pricing changes. The financial impact on our business from foreign exchange movements for cost of goods is also further delayed until we sell the inventory. The two foreign exchange exposures impact the business at different times: the translation of results is impacted immediately when the exchange rates move, whereas the impact on our cost of goods is typically delayed due to a combination of currency hedging and the inventory cycle.

 

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During the second half of 2010 and into 2011, the cost of certain commodities used to make our products increased significantly, negatively impacting our cost of goods. We continue to monitor commodity costs and work with our suppliers and customers to negotiate balanced and fair pricing that best reflect the current economic environment. Select price increases took effect during the third quarter of 2010 and the Company implemented additional price increases in the first and third quarters of 2011. These increases are intended to further help offset our additional cost increases.

The Company did not incur restructuring charges in 2011 and 2010, but adjusted outstanding reserve estimates as necessary. Cash payments related to prior years’ restructuring and integration activities amounted to $3.4 million during 2011. It is expected that additional disbursements of $1.0 million will be completed by the end of 2013 as the Company spends amounts accrued on its balance sheet. Any residual cash payments beyond 2011 are anticipated to be offset by expected proceeds from real estate held for sale. Additionally, in the first quarter of 2011, the Company initiated plans to rationalize its European operations. The associated costs primarily related to employee terminations, which were accounted for as regular business expenses and were primarily incurred in the first half of 2011; these were largely offset by associated savings realized in the second half of 2011. These costs totaled $4.5 million during the year December 31, 2011.

The Company funds liquidity needs for capital investment, working capital and other financial commitments through cash flow from continuing operations and its $175.0 million revolving credit facility. Based on our borrowing base, as of December 31, 2011, approximately $165.5 million remained available for borrowing under our revolving credit facility.

During 2009, the Company determined that it was no longer more likely than not that its U.S. deferred tax assets would be realized, and as a result, the Company recorded a non-cash charge of $108.1 million to establish a valuation allowance against its U.S. deferred tax assets. In addition, during 2009, the Company recorded a non-cash impairment charge of $1.7 million on certain of its trade names.

Refinancing Transactions

On September 30, 2009, the Company issued $460.0 million aggregate principal amount of its 10.625% Senior Secured Notes due March 15, 2015 (the “Senior Secured Notes”), and entered into a four-year senior secured asset-based revolving credit facility (“ABL Facility”) providing for borrowings of up to $175.0 million subject to borrowing base limitations including a $40 million sub-limit for letters of credit and an optional $50 million accordion feature (available to fund working capital growth if needed). Initial borrowings under the ABL Facility were $16.1 million. These funds, together with the $453.1 million in proceeds from the issuance of the Senior Secured Notes, were used to (i) repay all outstanding borrowings under and terminate the Company’s prior senior secured credit agreements, (ii) repay all outstanding borrowings under and terminate the Company’s accounts receivable securitization program, (iii) terminate the Company’s cross-currency swap agreement, (iv) repurchase approximately $29.1 million aggregate principal amount of its 7 5/8% senior subordinated notes due August 15, 2015 (“Senior Subordinated Notes”) and (v) pay the fees, expenses and other costs relating to such transactions.

On November 17, 2011, the Company announced the signing of a definitive agreement to merge the Mead C&OP Business into the Company. Subject to this transaction closing, the Company has underwritten financing that will fund a $460 million dividend to MeadWestvaco and refinance the Company’s Senior Secured Notes, which had a principal amount outstanding of $425.1 million as of December 31, 2011, and its $175.0 million revolving credit facility, together with transaction and refinancing expenses.

 

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Fiscal 2011 versus Fiscal 2010

The following table presents the Company’s results for the years ended December 31, 2011 and 2010.

 

     Twelve Months Ended
December 31,
    Amount of Change  
(in millions of dollars)    2011     2010           $                 %        

Net sales

   $ 1,318.4      $ 1,284.6      $ 33.8        3

Cost of products sold

     903.7        887.5        16.2        2

Gross profit

     414.7        397.1        17.6        4

Gross profit margin

     31.5     30.9       0.6 pts   

Advertising, selling, general and administrative expenses

     293.9        281.2        12.7        5

Amortization of intangibles

     6.3        6.7        (0.4     (6 )% 

Restructuring income

     (0.7     (0.5     (0.2     40

Operating income

     115.2        109.7        5.5        5

Operating income margin

     8.7     8.5       0.2 pts   

Interest expense, net

     77.2        78.3        (1.1     (1 )% 

Equity in earnings of joint ventures

     (8.5     (8.3     (0.2     2

Other expense, net

     3.6        1.2        2.4        200

Income tax expense

     24.3        30.7        (6.4     (21 )% 

Effective tax rate

     56.6     79.7       (23.1)pts   

Income from continuing operations

     18.6        7.8        10.8        138

Income from discontinued operations, net of income taxes

     38.1        4.6        33.5        728

Net income

     56.7        12.4        44.3        357

Net Sales

Net sales increased $33.8 million, or 3%, to $1.32 billion, primarily due to translation gains from the U.S. dollar weakening relative to the prior year, which favorably impacted sales by $39.8 million, or 3%. Underlying sales declined modestly as lower volume in the International and Americas segments were partially offset by higher pricing and volumes gains in the Computer Products segment.

Cost of Products Sold

Cost of products sold includes all product sourcing, manufacturing and distribution costs, including depreciation related to assets used in the manufacturing and distribution process, inbound and outbound freight, shipping and handling costs, purchasing costs associated with materials and packaging used in the production processes. Cost of products sold increased $16.2 million to $903.7 million. The increase reflects the impact of unfavorable currency translation of $25.6 million as well as higher commodity and fuel costs, which were partially offset by lower sales volume and improved manufacturing, freight and distribution efficiencies.

Gross Profit

Management believes that gross profit and gross profit margin provide enhanced shareholder appreciation of underlying profit drivers. Gross profit increased $17.6 million, or 4%, to $414.7 million. The increase in gross profit was primarily due to the benefit from favorable currency translation of $14.2 million. Gross profit margin increased to 31.5% from 30.9%, primarily due to improved freight and distribution efficiencies, particularly in Europe.

 

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SG&A (Advertising, selling, general and administrative expenses)

SG&A expenses 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, etc.). SG&A increased $12.7 million, or 5%, to $293.9 million, of which currency translation contributed $7.0 million of the increase. SG&A as a percentage of sales increased to 22.3% from 21.9%. This increase was due to $5.6 million in costs associated with the pending acquisition of the Mead C&OP Business. Business rationalization charges of $4.5 million, primarily incurred in the first quarter of 2011, were offset by savings during the rest of the 2011.

Operating Income

Operating income increased $5.5 million, or 5%, to $115.2 million, and as a percentage of sales, operating income increased modestly to 8.7% from 8.5%. The increase in operating income was driven by $7.0 million of favorable currency translation and improved gross margins, partly offset by the SG&A cost increases described above.

Interest Expense, Net, Equity in Earnings of Joint Ventures and Other Expense, Net

Interest expense was $77.2 million compared to $78.3 million in the prior-year. The decrease in interest was due to repurchases of the Company’s Senior Secured Notes and Senior Subordinated Notes totaling $34.9 million and $25.0 million, respectively, as well as lower borrowings under its revolving credit facility during the year. This reduction was partly offset by the acceleration of debt origination amortization costs resulting from bond repurchases of $1.2 million.

Other expense was $3.6 million compared to $1.2 million in the prior-year period. The increase was due to $3.0 million of premium paid on the repurchase of $34.9 million of the Senior Secured Notes, partly offset by lower foreign exchange losses in the current year.

Income Taxes

For the year ended December 31, 2011, the Company recorded income tax expense from continuing operations of $24.3 million on income before taxes of $42.9 million, which compares to an income tax expense from continuing operations of $30.7 million on income before taxes of $38.5 million in the prior year. The high effective tax rates for 2011 and 2010 are due to no tax benefit being provided on losses incurred in the U.S. and certain foreign jurisdictions where valuation reserves are recorded against future tax benefits. Included in the 2011 amount is a $2.8 million benefit from the reversal of a valuation reserve in the U.K. Included in the 2010 amount is an $8.6 million expense recorded to reflect the tax impact of foreign currency fluctuations on an intercompany debt obligation, partially offset by the benefit of a $2.8 million out-of-period adjustment to increase deferred tax assets of a non-U.S. subsidiary.

Income from Continuing Operations

Income from continuing operations was $18.6 million, or $0.32 per diluted share, compared to income of $7.8 million, or $0.14 per diluted share in the prior-year.

Income from Discontinued Operations

Income from discontinued operations was $38.1 million, or $0.66 per diluted share, compared to income of $4.6 million, or $0.08 per diluted share in the prior-year.

Discontinued operations include the results of the Company’s GBC-Fordigraph Business, which was sold during the second quarter of 2011, and the commercial print finishing business, which was sold during 2009. For a further discussion of the Company’s discontinued operations see Note 18, Discontinued Operations, to our consolidated financial statements contained in Item 8 of this report.

 

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The components of discontinued operations for the years ended December 31, 2011 and 2010 are as follows:

 

(in millions of dollars)    2011      2010  

Income from operations before income tax

   $ 2.5       $ 6.6   

Gain (loss) on sale before income tax

     41.5         (0.1

Income tax expense

     5.9         1.9   
  

 

 

    

 

 

 

Income from discontinued operations

   $ 38.1       $ 4.6   
  

 

 

    

 

 

 

Net Income

Net income was $56.7 million, or $0.98 per diluted share, compared to net income of $12.4 million, or $0.22 per diluted share, in the prior year.

Segment Discussion

 

     Year Ended
December 31,
        
     2011      2010      Amount of change  
(in millions of dollars)    Net Sales      $     %  

ACCO Brands Americas

   $ 684.9       $ 688.3       $ (3.4     —     

ACCO Brands International

     443.2         419.3         23.9        6

Computer Products

     190.3         177.0         13.3        8
  

 

 

    

 

 

    

 

 

   

Total segment sales

   $ 1,318.4       $ 1,284.6       $ 33.8     
  

 

 

    

 

 

    

 

 

   

 

     Year Ended December 31,        
     2011     2010     Amount of change  
(in millions of dollars)    Operating
Income
     Operating
Income
Margin
    Operating
Income
     Operating
Income
Margin
    $     %     Margin
Points
 

ACCO Brands Americas

   $ 50.7         7.4   $ 56.3         8.2   $ (5.6     (10 )%      (80

ACCO Brands International

     45.6         10.3     31.5         7.5     14.1        45     280   

Computer Products

     47.1         24.8     43.0         24.3     4.1        10     50   
  

 

 

      

 

 

      

 

 

     

Total segment operating income

   $ 143.4         $ 130.8         $ 12.6       
  

 

 

      

 

 

      

 

 

     

Segment operating income excludes corporate costs; interest expense, net; equity in earnings of joint ventures and other expense, net. See Note 15, Information on Business Segments, to our consolidated financial statements contained in Item 8 of this report for a reconciliation of total segment operating income to income from continuing operations before income taxes.

ACCO Brands Americas

Results

ACCO Brands Americas net sales decreased $3.4 million to $684.9 million. Foreign currency translation favorably impacted sales by $5.3 million. Sales volume declined 3%, primarily in the U.S. due to inventory management initiatives by certain customers. The decline was partially offset by higher pricing and increased volumes in Latin America and Canada.

Operating income decreased $5.6 million, or 10%, to $50.7 million and included favorable foreign currency translation of $0.9 million. Operating income margin decreased to 7.4% from 8.2% in the prior-year period primarily due to the deleveraging of fixed costs due to lower sales volume.

 

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ACCO Brands International

Results

ACCO Brands International net sales increased $23.9 million, or 6%, to $443.2 million. The increase was driven by foreign currency translation, which increased sales by $30.0 million, or 7%. Sales volume declined 4% due to weak European market demand, partially offset by European price increases and small volume gains in the Asia-Pacific region.

Operating income increased $14.1 million, or 45%, to $45.6 million, including a $4.6 million benefit from foreign currency translation. Operating income margin increased to 10.3% from 7.5%, mainly due to the substantial improvements in European operations, resulting from higher pricing, improved freight and distribution efficiencies, as well as SG&A savings. Included in the net SG&A savings were $4.5 million of business rationalization charges within Europe.

Computer Products Group

Results

Computer Products net sales increased $13.3 million, or 8%, to $190.3 million. The favorable impact from foreign currency translation increased sales by $4.5 million, or 3%. The remainder of the increase primarily reflects volume gains from sales of new accessory products for smart phones and tablets.

Operating income increased $4.1 million, or 10%, to $47.1 million, resulting from a $1.5 million benefit from foreign currency translation, higher volume and lower SG&A expenses, partially offset by lower security product sales, which adversely impacted both margin and royalty income. Operating income margins increased to 24.8% from 24.3% primarily due to the favorable benefit from increased sales, partially offset by the adverse sales mix.

Fiscal 2010 versus Fiscal 2009

The following table presents the Company’s results for the years ended December 31, 2010 and 2009.

 

     Year Ended
December 31,
    Amount of Change  
(in millions of dollars)    2010     2009           $                 %        

Net sales

   $ 1,284.6      $ 1,233.3      $ 51.3        4

Cost of products sold

     887.5        868.7        18.8        2

Gross profit

     397.1        364.6        32.5        9

Gross profit margin

     30.9     29.6       1.3pts   

Advertising, selling, general and administrative expenses

     281.2        263.0        18.2        7

Amortization of intangibles

     6.7        7.1        (0.4     (6 )% 

Restructuring (income) charges

     (0.5     17.4        (17.9     (103 )% 

Intangible asset impairment charges

            1.7        (1.7     (100 )% 

Operating income

     109.7        75.4        34.3        45

Operating income margin

     8.5     6.1       2.4pts   

Interest expense, net

     78.3        67.0        11.3        17

Equity in earnings of joint ventures

     (8.3     (4.4     (3.9     89

Other expense, net

     1.2        5.4        (4.2     (78 )% 

Income taxes

     30.7        126.0        (95.3     (76 )% 

Effective tax rate

     79.7     NM          NM   

Income (loss) from continuing operations

     7.8        (118.6     126.4        107

Income (loss) from discontinued operations, net of income taxes

     4.6        (7.5     12.1        161

Net income (loss)

     12.4        (126.1     138.5        110

 

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Net Sales

Net sales increased $51.3 million, or 4%, to $1.3 billion led by solid performance in the Computer Products Group and translation gains from the weaker U.S. dollar relative to the prior year, which favorably impacted sales by 2%, or $24.5 million. All segments reported volume increases. Sales growth was partially offset by reduced pricing in the International and Americas segments.

Cost of Products Sold

Cost of products sold includes all manufacturing, product sourcing and freight and distribution costs, including depreciation related to assets used in the manufacturing and distribution process, inbound and outbound freight, shipping and handling costs, purchasing costs associated with materials and packaging used in the production processes. Cost of products sold increased $18.8 million, or 2%, to $887.5 million. The increase principally reflects the impact of currency translation of $14.4 million, increased sales volume, and commodity and compensation cost increases, partially offset by improved sourcing and production efficiencies.

In addition, the prior-year period includes certain other charges that have been recorded within cost of products sold that did not qualify as restructuring. Those charges include redundant warehousing or storage costs during the transition to a new distribution center, equipment and other asset move costs, ongoing facility overhead and maintenance costs after exit and employee retention incentives. For the year ended December 31, 2009, those charges totaled $3.4 million.

Gross Profit

Gross profit increased $32.5 million, or 9%, to $397.1 million and gross profit margin increased to 30.9% from 29.6%. The increases in gross profit and margin were primarily due to increased sales volume, favorable product mix, sourcing, production, freight and distribution efficiencies compared to the period last year, partially offset by increased commodity costs and compensation costs. Product mix was favorable due to higher royalty income from security products and from both higher margin security products and new products. Gross profit also increased from favorable currency translation of $10.1 million.

SG&A (Advertising, selling, general and administrative expenses)

Advertising, selling, general and administrative expenses (“SG&A”) include advertising, marketing, selling, 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, etc.). SG&A increased $18.2 million, or 7%, to $281.2 million, with currency translation contributing $3.2 million of the increase and, as a percentage of sales, SG&A increased to 21.9% from 21.3%. The 2010 year results include $24.2 million of additional salary, management incentive and employee benefits expense. The lower expense in 2009 was largely due to temporary reductions in salary and benefits.

In addition, certain other charges have been recorded within SG&A. These charges are incremental to the cost of the Company’s underlying restructuring actions and do not qualify as restructuring. These charges include redundant costs during the transition to a new location, asset move costs, facility overhead and maintenance costs after exit, gains on the sale of exited facilities, certain costs associated with the Company’s debt refinancing and employee retention incentives. For the year ended December 31, 2009, those charges totaled $1.2 million.

Operating Income

Operating income increased 45%, or $34.3 million, to $109.7 million principally as a result of favorable currency translation contributing $6.9 million, and the absence of $23.7 million in impairment, restructuring and other charges incurred in the prior year. As a percentage of sales, operating income improved to 8.5% from 6.1%.

 

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The improvement in operating income margin was driven by improved gross margin, as discussed above, and the decrease in impairment, restructuring and other charges, which was partially offset by the SG&A increase as discussed above.

Interest Expense, Net, Equity in Earnings of Joint Ventures and Other Expense, Net

Interest expense was $78.3 million compared to $67.0 million in the prior-year period. The increase principally reflects higher average interest rates associated with the Company’s refinancing, which was completed at the end of September 2009.

Equity in earnings of joint ventures increased $3.9 million to $8.3 million reflecting higher revenue and reduced expenses related to an acquisition made by one of our unconsolidated joint ventures in the prior year.

Other expense was $1.2 million, compared to $5.4 million in the prior-year period. In the prior year, in connection with the refinancing transactions, the Company recorded a $9.1 million loss on the early extinguishment of debt associated with the repayment of $403.0 million of borrowings outstanding under its senior secured credit agreements and accounts receivable securitization facility, partially offset by a $4.9 million gain on the early extinguishment of debt in connection with the repurchase of $29.1 million of Senior Subordinated Notes.

Income Taxes

For the year ended December 31, 2010, the Company recorded income tax expense from continuing operations of $30.7 million on income before taxes of $38.5 million. This compares to prior year income tax expense from continuing operations of $126.0 million on income before taxes of $7.4 million. During the second quarter of 2009, the Company recorded a non-cash charge of $108.1 million to establish a valuation allowance on its U.S. deferred tax assets. The high effective tax rate for 2010 is due to an increase in the valuation allowance of $15.7 million because no tax benefit is being provided on losses incurred in the U.S. and certain foreign jurisdictions where valuation allowances are recorded against future tax benefits, and because of an $8.6 million expense recorded to reflect the tax impact of foreign currency fluctuations on an intercompany debt obligation, partially offset by the benefit of a $2.8 million out-of-period adjustment recorded in the second quarter to increase deferred tax assets of a non-U.S. subsidiary.

Income (Loss) from Continuing Operations

Income from continuing operations was $7.8 million, or $0.14 per diluted share, compared to a loss of $118.6 million, or $2.18 per diluted share, in the prior year.

Income (Loss) from Discontinued Operations

Income from discontinued operations was $4.6 million, or $0.08 per diluted share, compared to a $7.5 million loss, or $0.14 per diluted share, in the prior-year period.

The financial statement caption “discontinued operations” includes the results of the Company’s former commercial print finishing business, which supplied commercial laminating film and equipment to printers and packaging suppliers and represented approximately $100 million in annual net sales. During the fourth quarter of 2008, the Company’s Board of Directors authorized management to sell its commercial print finishing business and in the first quarter of 2009, the Company announced it had reached a definitive agreement to sell this business and to exit from selling high volume laminating film and equipment.

In June 2009, the Company completed the sale of its commercial print finishing business for final proceeds of $16.2 million, after final working capital adjustments made during the third quarter. As a result of the adjustments, the Company received net cash proceeds before expenses of $12.5 million and a $3.65 million note

 

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due from the buyer payable in installments of $1.325 million in June 2011 and $2.325 million in June 2012. Interest on the unpaid balance is payable at the rate of 4.9 percent per annum. The sale resulted in a pre-tax loss for the year 2009 of $0.8 million ($1.1 million after-tax), which included a pre-tax pension curtailment gain of $0.5 million. During the fourth quarter of 2010, the Company completed the sale of a property formerly occupied by its commercial print finishing business, resulting in a gain on sale of $1.7 million. Also in 2010, the Company recorded a loss on sale of $0.1 million ($0.2 million after-tax) related to the settlement of litigation attributable to the wind-down of the disposed operations.

During the year ended December 31, 2010 discontinued operations included $5.2 million in income from operations ($3.7 million after-tax) from the GBC-Fordigraph Business. During the year ended December 31, 2009 discontinued operations included $4.7 million of income from operations ($2.8 million after-tax) from the GBC-Fordigraph Business.

For a further discussion of the Company’s discontinued operations see Note 18, Discontinued Operations, to our consolidated financial statements contained in Item 8 of this report.

The components of discontinued operations for the years ended December 31, 2010 and 2009 are as follows:

 

(in millions of dollars)    2010     2009  

Income (loss) from operations before income taxes

   $ 6.6      $ (4.3

Loss on sale before income tax

     (0.1     (0.8

Provision for income taxes

     1.9        2.4   
  

 

 

   

 

 

 

Income (loss) from discontinued operations

   $ 4.6      $ (7.5
  

 

 

   

 

 

 

Net Income (Loss)

Net income was $12.4 million, or $0.22 per diluted share, compared to a net loss of $126.1 million, or $2.32 per diluted share in the prior year.

Segment Discussion

 

     Year Ended
December 31,
    

 

 
     2010      2009      Amount of change  
(in millions of dollars)    Net Sales            $                  %        

ACCO Brands Americas

   $ 688.3       $ 671.5       $ 16.8         3

ACCO Brands International

     419.3         398.8         20.5         5

Computer Products

     177.0         163.0         14.0         9
  

 

 

    

 

 

    

 

 

    

Total segment sales

   $ 1,284.6       $ 1,233.3       $ 51.3      
  

 

 

    

 

 

    

 

 

    

 

     Year Ended
December 31,
       
    

 

 

 
     2010     2009     Amount of change  
(in millions of dollars)    Operating
Income
     Operating
Income
Margin
    Operating
Income
     Operating
Income
Margin
    $      %     Margin
Points
 

ACCO Brands Americas

   $ 56.3         8.2   $ 38.6         5.7   $ 17.7         46     250   

ACCO Brands International

     31.5         7.5     23.0         5.8     8.5         37     170   

Computer Products

     43.0         24.3     31.7         19.4     11.3         36     490   
  

 

 

      

 

 

      

 

 

      

Total segment operating income

   $ 130.8         $ 93.3         $ 37.5        
  

 

 

      

 

 

      

 

 

      

 

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Segment operating income excludes corporate costs; interest expense net; equity in earnings of joint ventures and other expense, net. See Note 15, Information on Business Segments, to our consolidated financial statements contained in Item 8 of this report for a reconciliation of total segment operating income to income from continuing operations before income taxes.

ACCO Brands Americas

Results

ACCO Brands Americas net sales increased $16.8 million, or 3%, to $688.3 million. The favorable impact from foreign currency translation increased sales by $12.1 million, or 2%. Sales volume increased 2% driven by growth in all markets, partially offset by reduced pricing.

ACCO Brands Americas operating income increased $17.7 million, to $56.3 million, and operating income margin increased to 8.2% from 5.7% in the prior year period. The increase in operating income primarily reflects the impact of an improved gross margin resulting from improved customer channel mix and a favorable product mix due to increased sales in the higher margin stapling category and decreased sales in the lower margin bindery and accessories category. Also contributing were sourcing, production, freight and distribution efficiencies; the absence of $6.9 million in impairment, restructuring and other charges incurred in the 2009 period; and $2.0 million of foreign exchange benefit. This increase was partially offset by $17.3 million of higher compensation expense resulting primarily from temporary salary reductions and suspension of management incentive programs and retirement plan contributions in 2009 together with increased commodity costs in 2010.

ACCO Brands International

Results

ACCO Brands International net sales increased $20.5 million, or 5%, to $419.3 million. The favorable impact from foreign currency translation increased sales by $12.5 million, or 3%. All regions experienced volume growth, offset by lower pricing, principally in Australia where foreign exchange volatility required significant price increases in 2009, which were reversed in 2010.

ACCO Brands International operating income increased $8.5 million, to $31.5 million, and operating income margin increased to 7.5% from 5.8% in the prior-year period. The increase in operating income was primarily the result of the absence of $13.4 million in impairment, restructuring and other charges incurred in the 2009 period. Reduced operating performance came from our European operations, which suffered increases in its cost of goods sold due to higher commodity costs and weak local currencies versus the U.S. dollar together with increased customer program costs. This decrease in operating income was partially offset by improved operating performance from our other international regions.

Computer Products Group

Results

Computer Products net sales increased $14.0 million, or 9%, to $177.0 million. The increase reflects strong growth in sales mainly from security products in most regions. There was no net impact due to currency translation on the full year results.

Operating income increased 36%, or $11.3 million, to $43.0 million due to higher royalty income from security products, favorable product mix, higher sales volumes and the absence of $2.6 million in restructuring and other charges incurred in the 2009 period, partially offset by $4.0 million of higher compensation expense resulting primarily from temporary salary reductions, and the suspension of management incentive programs and retirement plan contributions in 2009. Operating income margins increased to 24.3% from 19.4% primarily due to higher royalty income from security products and favorable product mix from both higher margin security products and new products.

 

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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 flows from operating activities, cash and cash equivalents held and borrowings under our ABL Facility (defined below). Because of the seasonality of our business we typically carry greater cash balances in the third and fourth quarters of our fiscal year. Lower cash balances are typically carried during the first and second quarters due to the timing of payments made by the Company pursuant to customer rebate and management incentive programs. We maintain adequate financing arrangements at market rates. Our priority for cash flow use over the near term, after internal growth, is to invest in new products through both organic development and acquisitions and to fund the reduction of debt.

Any available overseas cash is repatriated on a continuous basis. Undistributed earnings of foreign subsidiaries that are expected to be permanently reinvested, aggregated to approximately $517 million at December 31, 2011 and $495 million at December 31, 2010. If these amounts were distributed to the U.S., in the form of a dividend or otherwise, the Company would be subject to additional U.S. income taxes.

On November 17, 2011, the Company announced the signing of a definitive agreement to merge the Mead C&OP Business into the Company. Subject to this transaction closing, the Company has underwritten financing that will fund a $460 million dividend to MeadWestvaco and refinance the Company’s Senior Secured Notes, which had a principal amount outstanding of $425.1 million as of December 31, 2011, and its $175.0 million revolving credit facility, together with transaction and refinancing expenses.

Loan Covenants

The indentures governing our Senior Secured Notes and Senior Subordinated Notes do not contain quarterly or annual financial performance covenants. However, these indentures restrict, among other things, ACCO Brands’ ability and the ability of ACCO Brands’ restricted subsidiaries to, subject to certain exceptions, incur additional indebtedness, create liens, pay dividends, make certain investments, enter into certain types of transactions with affiliates and provide for limitations on any restricted subsidiary’s ability to pay dividends, make loans, or transfer assets to ACCO Brands or other restricted subsidiaries.

The ABL Facility contains customary terms and conditions, including limitations on liens and indebtedness, asset sales, and intercompany transactions. A springing fixed charge financial covenant would be triggered if the excess availability under the ABL Facility falls below $20.0 million or 15% of total commitments. The ABL Facility also contains cash dominion provisions that apply in the event that the Company’s excess availability fails to meet certain thresholds. Further, it limits the ability of the Company to repurchase Senior Subordinated Notes while the facility is utilized.

The Senior Secured Notes, Senior Subordinated Notes and the ABL Facility contain customary events of default, including payment default, breach of representation and warranties, covenant defaults, cross-defaults and cross-accelerations, certain bankruptcy or insolvency events, judgment defaults, certain ERISA-related events, changes in control or ownership and invalidity of any collateral or guarantee or other document. Any inability to pay interest on, or principal of, our outstanding debt as it becomes due could result in an event of default under any of the agreements governing any of our debt obligations, in which case our lenders could elect to declare all amounts outstanding to be immediately due and payable. If the lenders accelerate the payment of any of our indebtedness, 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 and, if we were unable to obtain replacement financing or any such replacement financing was on terms that were less favorable than the indebtedness being replaced, our liquidity and results of operations would be materially and adversely affected.

Compliance with Loan Covenants

Based on our borrowing base, as of December 31, 2011, the amount available for borrowings under the Company’s ABL Facility was $165.5 million (allowing for $9.5 million of letters of credit outstanding on that date). The Company’s ABL Facility would not be affected by a change in its credit rating.

As of and for the period ended December 31, 2011, the Company was in compliance with all applicable loan covenants.

 

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Guarantees and Security

The Senior Secured Notes are guaranteed on a senior secured basis by the Company’s existing and future domestic subsidiaries, with certain exceptions, and are secured on a first-priority basis by a lien on substantially all of the Company’s and guarantors’ present and future assets (other than receivables and inventory and their related general intangibles and certain other assets), including equipment, certain owned and leased real property interests, trade names and certain other intellectual property, certain intercompany receivables and all present and future equity interests of each of the Company’s and guarantors’ directly owned domestic subsidiaries and up to 65% of the present and future equity interests of certain of the Company’s and the guarantors’ directly owned foreign subsidiaries, in each case subject to certain exceptions and customary permitted liens. The Senior Secured Notes and the related guarantees also are secured on a second-priority basis by a lien on the assets that secure the Company’s and the guarantors’ obligations under the ABL Facility, including accounts receivable, inventory and the other assets identified as excluded first-lien assets above.

The Company’s obligations under the ABL Facility are guaranteed by the same subsidiaries that guarantee the Senior Secured Notes together with certain of the Company’s foreign subsidiaries and are secured on a first-priority basis by a lien on substantially all of the Company’s and such guarantors’ accounts receivable, inventory and the other assets identified as excluded first-lien assets above with respect to the Notes.

Cash Flow

Fiscal 2011 versus Fiscal 2010

Cash Flow from Operating Activities

For the year ended December 31, 2011, cash provided by operating activities was $61.8 million, compared to $54.9 million in the prior year. Net income for 2011 was $56.7 million, compared to $12.4 million in 2010. Non-cash and non-operating adjustments to net income on a pre-tax basis in 2011 totaled $10.0 million, compared to $46.2 million in 2010. The 2011 net adjustments were substantially lower than 2010, largely due to the sale of the GBC-Fordigraph Business which resulted in a pre-tax net gain of $41.9 million.

The table below shows our cash flow from accounts receivable, inventories and accounts payable for the years ended December 31, 2011 and 2010, respectively:

 

     2011      2010  

Accounts receivable

   $ 0.6       $ (18.5

Inventories

     5.4         (9.8

Accounts payable

     16.8         14.8   
  

 

 

    

 

 

 

Cash flow from net working capital

   $ 22.8       $ (13.5
  

 

 

    

 

 

 

Operating cash flow in 2011 of $61.8 million was the result of the realization of income from operations and net working capital, partly offset by the use of cash to fund income tax and interest payments and contributions to our pension plans. Compared to the prior year, accounts receivable levels reflect improved customer collections and increased sales in the early part of the fourth quarter, which allowed us to collect more of our receivables before the end of the quarter. Inventory levels demonstrate improved supply chain management. Payments associated with the 2010 annual incentive plan of approximately $9 million were made during the first quarter of 2011, compared to approximately $1 million in the prior year. Income tax payments were $27.7 million in 2011, compared to only $13.9 million in the 2010 period when the Company benefited from substantial refunds related to prior years and had lower operating profit. Interest payments of $71.9 million were slightly higher than the prior year, while contributions to the Company’s pension plans of $13.5 million were slightly less than payments made during the prior year. Payments associated with the Company’s wind-down of restructuring activities were $3.4 million, while European business rationalization activity resulted in payments of $4.2 million during 2011. In addition, the second half of 2011 included payments in pursuit of the Mead C&OP Business acquisition of $4.8 million.

 

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During the 2010 year, a recurring pattern of strong sales during the final month of each quarter lead to high quarter-end accounts receivable balances. In addition, inventory levels increased due to higher commodity costs and in support of the sales growth anticipated during the first quarter of 2011.

Cash Flow from Investing Activities

Cash provided by investing activities was $40.0 million for the year ended December 31, 2011 and cash used was $14.9 million for the year ended December 31, 2010. The sale of the Company’s GBC-Fordigraph Business during the second quarter of 2011 generated net proceeds of $52.9 million, and approximately $5.4 million of taxes associated with the sale are expected to be paid in 2012. The Company also received $0.6 million of net proceeds associated with the 2009 sale of the Company’s former commercial print finishing business, and anticipates additional cash proceeds of $2.6 million and additional payments associated with the sale of approximately $1.1 million in the years 2012 and 2013. Gross capital expenditures were $13.5 million and $12.6 million for the periods ended December 31, 2011 and 2010, respectively. Additional cash payments of $1.4 million associated with the purchase of two minor product line acquisitions were also recognized during the first half of 2011.

Cash Flow from Financing Activities

Cash used by financing activities was $63.1 million and $0.1 million for the years ended December 31, 2011 and 2010, respectively. During 2011, principally during the third quarter, the Company repurchased $59.9 million of its Senior Subordinated Notes and Senior Secured Notes debt.

Fiscal 2010 versus Fiscal 2009

Cash Flow from Operating Activities

For the year ended December 31, 2010, cash provided from operating activities was $54.9 million, compared to $71.5 million in the prior year. Net income for 2010 was $12.4 million. The net loss for 2009 was $126.1 million, and was principally the result of a $108.1 million non-cash charge related to the impairment of U.S. deferred tax assets. Non-cash and non-operating adjustments to pre-tax net income in 2010 totaled $46.2 million, compared to $59.9 million in 2009.

The table below shows our cash flow from accounts receivable, inventories and accounts payable for the years ended December 31, 2010 and 2009, respectively:

 

     2010     2009  

Accounts receivable

   $ (18.5   $ 41.5   

Inventories

     (9.8     78.7   

Accounts payable

     14.8        (54.9
  

 

 

   

 

 

 

Cash flow from net working capital

   $ (13.5   $ 65.3   
  

 

 

   

 

 

 

Operating cash flow in 2010 of $54.9 million was the result of the realization of income from operations, partly offset by the use of cash to fund net working capital and contributions to our pension plans. During the 2010 year, a recurring pattern of strong sales during the final month of each quarter lead to higher quarter end accounts receivable balances. In addition, inventory levels increased in comparison to the prior year due to higher commodity costs and in support of the sales growth anticipated during the first quarter of 2011. Reduced cash payments associated with restructuring and integration activities of $30.8 million were partially offset by interest payments that were $16.2 million and cash contributions to our pension plans that were $7.7 million higher than the prior year, respectively. The operating cash flow of $71.5 million in 2009 was generated as we focused on right-sizing our net working capital. Significant inventory reductions were achieved across our global businesses and our accounts receivable remained well-controlled as we responded to sales volume declines due to the economic downturn. Because of the inability of some of our suppliers to obtain credit insurance, we were required to pay certain suppliers more promptly, offsetting some of our gains from working capital management.

 

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Cash Flow from Investing Activities

Cash used by investing activities was $14.9 million and $3.9 million for the years ended December 31, 2010 and 2009, respectively. Gross capital expenditures were $12.6 million and $10.3 million for the years ended December 31, 2010 and 2009, respectively, with the increase related to investments in information technology projects, primarily in our foreign operations. Litigation settlements associated with discontinued operations resulted in payments of $3.7 million in 2010, in comparison to $9.2 million of net cash proceeds that were received in the prior year when the discontinued operations were sold. Proceeds from the disposition of assets were $2.5 million for the year ended 2010, an increase of $1.9 million from the prior year, principally due to the sale of a former property of our discontinued operations during the fourth quarter of 2010.

Cash Flow from Financing Activities

Cash used by financing activities was $0.1 million and $44.5 million for the years ended December 31, 2010 and 2009, respectively. The decrease in cash used by financing activities primarily reflects the impact of the Company’s refinancing transactions, which were completed at the end of the third quarter of 2009 and included the settlement of a Euro debt cross-currency swap at a cost of $40.8 million and $20.6 million of debt issuance payments.

Capitalization

We had approximately 55.5 million common shares outstanding as of December 31, 2011.

Adequacy of Liquidity Sources

The Company is subject to credit risk relative to the ability of counterparties to meet their contractual payment obligations or the potential non-performance of counterparties to deliver contracted commodities or services at the contracted price. The impact of any global economic downturn and the ability of our suppliers and customers to access credit markets is also unpredictable, outside of our control and may create additional risks for us, both directly and indirectly. The inability of suppliers to access financing or the insolvency of one or more of our suppliers could lead to disruptions in our supply chain, which could adversely impact our sales and/or increase our costs. Our suppliers may require us to pay cash in advance or obtain letters of credit for their benefit as a condition to selling us their products and services. If one or more of our principal customers were to file for bankruptcy, our sales could be adversely impacted and our ability to collect outstanding accounts receivable from any such customer could be limited. Any of these risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Based on its 2012 business plan and latest forecasts, the Company believes that cash flow from operations, its current cash balance and other sources of liquidity, including borrowings available under our ABL Facility will be adequate to support requirements for working capital and capital expenditures 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 (see Item 1A, “Risk Factors”).

Our operating performance and ability to comply with restrictions under our borrowing arrangements are dependent on our continued ability to access funds under our credit and loan agreements, including under our ABL Facility and from cash on hand, maintain sales volumes, drive profitable growth, realize cost savings and generate cash from operations. The financial institutions that fund our ABL Facility could also be impacted by any volatility in the credit markets, and if one or more of them could not fulfill our revolving credit requests, our operations may be adversely impacted. If our revolving credit is unavailable due to a lender not being able to fund requested amounts, or because we have not maintained compliance with our covenants, or we do not meet our sales or growth initiatives within the time frame we expect, our cash flow could be materially adversely impacted. A material decrease in our cash flow could cause us to fail to meet our obligations under our borrowing arrangements. A default under our credit or loan agreements could restrict or terminate our access to borrowings and materially impair our ability to meet our obligations as they come due. If we do not comply with

 

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any of our covenants and thereafter we do not obtain a waiver or amendment that otherwise addresses that non-compliance, our lenders may accelerate payment of all amounts outstanding under the affected borrowing arrangements, which amounts would immediately become due and payable, together with accrued interest. Such acceleration would cause a default under the indentures governing the Senior Secured Notes and the Senior Subordinated Notes and other agreements that provide us with access to funding. Any one or more defaults, or our inability to generate sufficient cash flow from our operations in the future to service our indebtedness and meet our other needs, may require us to refinance all or a portion of our existing indebtedness or obtain additional financing or reduce expenditures that we deem necessary to our business. There can be no assurance that any refinancing of this kind would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on our financial condition and on our ability to meet our obligations to noteholders.

Our cash flows from operating activities are dependent upon a number of factors that affect our sales, including demand, pricing and competition. Historically, key drivers of demand in the office products industry have included economic conditions generally, and specifically trends in gross domestic product (GDP), which affects business confidence and the propensity to purchase consumer durables, white collar employment levels, and growth in the number of small businesses and home offices together with increasing usage of personal computers. Pricing and demand levels for office products have also reflected a substantial consolidation within the global resellers of office products. Those resellers are our principal customers. This consolidation has led to increased pricing pressure on suppliers and a more efficient level of asset utilization by customers, resulting in lower sales volumes and higher costs from more frequent small orders for suppliers of office products. We sell products in highly competitive markets, and compete against large international and national companies, regional competitors and against our own customers’ direct and private-label sourcing initiatives.

Off-Balance-Sheet Arrangements and Contractual Financial Obligations

We do not have any material off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Our contractual obligations and related payments by period at December 31, 2011 were as follows:

 

     Total      2012      2013 - 2014      2015 - 2016      Thereafter  
(in millions of dollars)       

Contractual obligations

              

Long-term debt(1)

   $ 673.2       $ 0.2       $ 0.5       $ 672.5       $   

Interest on long-term debt

     231.5         64.0         127.9         39.6           

Operating lease obligations

     63.6         19.7         22.9         14.2         6.8   

Purchase obligations(2)

     26.9         26.0         0.5         0.4           

Other long-term liabilities(3)

     16.3         16.3                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,011.5       $ 126.2       $ 151.8       $ 726.7       $ 6.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Debt obligations include an amount in excess of the carrying value of debt which reflects the original issue discount on the Senior Secured Notes ($4.2 million as of December 31, 2011).

 

(2) Purchase obligations primarily consist of contracts and non-cancelable purchase orders for raw materials and finished goods.

 

(3) Obligations related to the other long-term liabilities consist of payments for the Company’s pension plans.

Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2011, we are unable to make reasonably reliable estimates of the period of cash

 

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settlement with the respective taxing authorities. Therefore, $5.5 million of unrecognized tax benefits have been excluded from the contractual obligations table above. See Note 10, Income Taxes, to our consolidated financial statements contained in Item 8 of this report for a discussion on income taxes.

Critical Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the U.S. Preparation of our financial statements require us to make judgments, estimates and assumptions that affect the amounts of actual assets, liabilities, revenues and expenses presented for each reporting period. Actual results could differ significantly from those estimates. We regularly review our assumptions and estimates, which are based on historical experience and, where appropriate, current business trends. We believe that the following discussion addresses our critical accounting policies, which require more significant, subjective and complex judgments to be made by our management.

Revenue Recognition

We recognize revenue from product sales when earned, net of applicable provisions for discounts, returns and allowances. We consider revenue to be realized or realizable and earned when all of the following criteria are met: title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. We also provide for our estimate of potential bad debt at the time of revenue recognition.

Allowances for Doubtful Accounts and Sales Returns

Trade receivables are recorded at the stated amount, less allowances for discounts, doubtful accounts and returns. The allowance for doubtful accounts represents estimated uncollectible receivables associated with potential customer defaults on contractual obligations, usually due to customers’ potential insolvency. The allowance includes amounts for certain customers where a risk of default has been specifically identified. In addition, the allowance includes a provision for customer defaults on a general formula basis when it is determined the risk of some default is probable and estimable, but cannot yet be associated with specific customers. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience and existing economic conditions.

The allowance for sales returns represents estimated uncollectible receivables associated with the potential return of products previously sold to customers, and is recorded at the time that the sales are recognized. The allowance includes a general provision for product returns based on historical trends. In addition, the allowance includes a reserve for currently authorized customer returns that are considered to be abnormal in comparison to the historical basis.

Inventories

Inventories are priced at the lower of cost (principally first-in, first-out with minor amounts at average) or market. A reserve is established to adjust the cost of inventory to its net realizable value. Inventory reserves are recorded for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions and specific identification of items, such as product discontinuance or engineering/material changes. These estimates could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from expectations.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation is provided, principally on a straight-line basis, over the estimated useful lives of the assets. Gains or losses resulting from dispositions are included in

 

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operating income. Betterments and renewals, that improve and extend the life of an asset, are capitalized; maintenance and repair costs are expensed. Purchased computer software is capitalized and amortized over the software’s useful life. The following table shows estimated useful lives of property, plant and equipment:

 

Buildings

   40 to 50 years

Leasehold improvements

   Lesser of lease term or the life of the asset

Machinery, equipment and furniture

   3 to 10 years

Long-Lived Assets

We test long-lived assets for impairment whenever events or changes in circumstances indicate that the assets’ carrying amount is not recoverable from its undiscounted cash flows. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate at the time of future cash flow, derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is typically calculated using discounted expected future cash flows. The discount rate applied to these cash flows is based on our weighted average cost of capital, computed by selecting market rates at the valuation dates for debt and equity that are reflective of the risks associated with an investment in the Company’s industry as estimated by using comparable publicly traded companies.

Indefinite-Lived Intangibles

Indefinite-lived intangibles are tested for impairment on an annual basis and written down when impaired. An interim impairment test is performed if an event occurs or conditions change that would more likely than not reduce the fair value below the carrying value.

In addition, purchased intangible assets other than goodwill are amortized over their useful lives unless their lives are determined to be indefinite. Certain of our trade names have been assigned an indefinite life as we currently anticipate that these trade names will contribute cash flows to ACCO Brands indefinitely.

We review indefinite-lived intangibles for impairment annually, and whenever market or business events indicate there may be a potential adverse impact on a particular intangible. We consider the implications of both external factors (e.g., market growth, pricing, competition, and technology) and internal factors (e.g., product costs, margins, support expenses, and capital investment) and their potential impact on cash flows for each business in both the near and long term, as well as their impact on any identifiable intangible asset associated with the business. Based on recent business results, consideration of significant external and internal factors, and the resulting business projections, indefinite-lived intangible assets are reviewed to determine whether they are likely to remain indefinite-lived, or whether a finite life is more appropriate. In addition, based on events in the period and future expectations, management considers whether the potential for impairment exists.

Goodwill and Intangible Assets

We test goodwill for impairment at least annually, normally in the second quarter, and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment has been incurred. If the carrying amount of the goodwill exceeds its fair value, an impairment loss is recognized. In applying a fair-value-based test, estimates are made of the expected future cash flows to be derived from each reporting unit. The resulting fair value determination is significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors.

Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions made for purposes of our impairment testing during 2011 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin

 

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growth rates of certain reporting units are not achieved, we may be required to record additional impairment charges in future periods, whether in connection with our next annual impairment testing in the second quarter of fiscal year 2012 or prior to that, if any such change constitutes a triggering event outside of the quarter from when the annual impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

Employee Benefit Plans

We provide a range of benefits to our employees and retired employees, including pensions, post-retirement, post-employment and health care benefits. We record annual amounts relating to these plans based on calculations specified by accounting principles generally accepted in the U.S., which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. Actuarial assumptions are reviewed on an annual basis and modifications to these assumptions are made based on current rates and trends when it is deemed appropriate. As required by accounting principles generally accepted in the U.S., the effect of our modifications are generally recorded and amortized over future periods. We believe that the assumptions utilized in recording our obligations under the plans are reasonable based on our experience. The actuarial assumptions used to record our plan obligations could differ materially from actual results due to changing economic and market conditions, higher or lower withdrawal rates or other factors which may impact the amount of retirement related benefit expense recorded by us in future periods.

The discount rate assumptions used to determine the postretirement obligations of the benefit plans is based on a spot-rate yield curve that matches projected future benefit payments with the appropriate interest rate applicable to the timing of the projected future benefit payments. The assumed discount rates reflect market rates for high-quality corporate bonds currently available. The Company’s discount rates were determined by considering the average of pension yield curves constructed of a large population of high quality corporate bonds. The resulting discount rates reflect the matching of plan liability cash flows to the yield curves.

The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested based on our investment profile to provide for benefits included in the projected benefit obligations. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns over the last 10 years, and asset allocation and investment strategy.

Pension expenses were $6.9 million, $8.2 million and $6.3 million, respectively, in the years ended December 31, 2011, 2010 and 2009. Post-retirement expenses were $0.2 million, $0.0 million and $0.0 million, respectively, for the years ended December 31, 2011, 2010 and 2009. In 2012, we expect pension expenses of approximately $9.9 million and post-retirement expenses of approximately $0.2 million. On January 20, 2009, the Company’s Board of Directors approved plan amendments to temporarily freeze the Company’s U.S. pension and non-qualified supplemental retirement plans effective March 7, 2009. No additional benefits will accrue under these plans after that date until further action by the Board of Directors.

A 25-basis point change (0.25%) in our discount rate assumption would lead to an increase or decrease in our pension expense of approximately $1.7 million for 2012. A 25-basis point change (0.25%) in our long-term rate of return assumption would lead to an increase or decrease in pension expense of approximately $0.9 million for 2012.

Customer Program Costs

Customer programs and incentives are a common practice in the office products industry. We incur customer program costs to obtain favorable product placement, to promote sell-through of products and to maintain competitive pricing. Customer program costs and incentives, including rebates, promotional funds and volume allowances, are accounted for as a reduction to gross sales. These costs are recorded at the time of sale

 

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based on management’s best estimates. Estimates are based on individual customer contracts and projected sales to the customer in comparison to any thresholds indicated by contract. In the absence of a signed contract, estimates are based on historical or projected experience for each program type or customer. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in sales volume expectations or customer contracts).

Income Taxes

Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce deferred tax assets to an amount that is more likely than not to be realized. Facts and circumstances may change that cause the Company to revise the conclusions on its ability to realize certain net operating losses and other deferred tax attributes.

The amount of income taxes that we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are revised or resolved.

Deferred income taxes are not provided on certain undistributed earnings of foreign subsidiaries that are expected to be permanently reinvested in those companies, aggregating approximately $517 million at December 31, 2011 and $495 million at December 31, 2010. If these amounts were distributed to the U.S., in the form of a dividend or otherwise, the Company would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable.

Stock–Based Compensation

Stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. Determining the appropriate fair value model to use requires judgment. Determining the assumptions that enter into the model is highly subjective and also requires judgment, including long-term projections regarding stock price volatility, employee exercise, post-vesting termination, and pre-vesting forfeiture behaviors, interest rates and dividend yields. The grant date fair value of each award is estimated using the Black-Scholes option-pricing model.

We have utilized historical volatility for a pool of peer companies for a period of time that is comparable to the expected life of the option to determine volatility assumptions. The weighted average expected option term reflects the application of the simplified method, which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Forfeitures are estimated at the time of grant in order to calculate the amount of share-based payment awards ultimately expected to vest. The forfeiture rate is based on historical rates.

The use of different assumptions would result in different amounts of stock compensation expense. Holding all other variables constant, the indicated change in each of the assumptions below increases or decreases the fair value of an option (and hence, expense), as follows:

 

Assumption

   Change to
Assumption
     Impact on Fair Value
of Option
 

Expected volatility

     Higher         Higher   

Expected life

     Higher         Higher   

Risk-free interest rate

     Higher         Higher   

Dividend yield

     Higher         Lower   

 

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The pre-vesting forfeitures assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeitures assumption would not impact the total amount of expense ultimately recognized over the vesting period. Different forfeitures assumptions would only impact the timing of expense recognition over the vesting period. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.

Management is not able to estimate the probability of actual results differing from expected results, but believes our assumptions are appropriate, based upon our historical and expected future experience.

Recent Accounting Pronouncements

In June 2011 the Financial Accounting Standards Board (“FASB”) issued an update, Accounting Standards Update (“ASU”) No. 2011-5, to existing standards on comprehensive income (Accounting Standards Codification (“ASC”) Topic 220). ASU No. 2011-5 was issued to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-5 is effective for annual and interim periods beginning after December 15, 2011, and early adoption is permitted. In December 2011 the FASB issued an update to ASU No. 2011-5, ASU No. 2011-12, which was issued to defer the effective date for amendments to the reclassifications of items out of accumulated other comprehensive income in ASU No. 2011-05. The Company has adopted these new standards as of December 2011. The Company has provided the required disclosure in its Consolidated Statements of Comprehensive Income (Loss).

In September 2011, the FASB issued an update, ASU No. 2011-08, to existing standards on intangibles – goodwill and other ASC Topic 350. ASU No. 2011-08 was issued to simplify the testing of goodwill for impairment by allowing an optional qualitative factors test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test already included in ASC Topic 350. ASU No. 2011-08 is effective for annual and interim goodwill tests performed for fiscal years after December 15, 2011. The Company will adopt the standard in 2012, and it will not have a significant impact on its consolidated financial statements or results of operations.

In December 2011 the FASB issued an update, ASU No. 2011-11 to existing standards regarding the disclosures involving the offsetting of assets and liabilities relating to financial instruments. ASU No. 2011-11 was issued to improve disclosures regarding offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-011 is effective for annual and interim periods beginning on or after January 1, 2013. The Company is currently assessing the impact on its current disclosures.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The office products industry is concentrated in a small number of major customers, principally office products superstores, large retailers, wholesalers and contract stationers. Customer consolidation and share growth of private-label products continue to increase pricing pressures, which may adversely affect margins for the Company and its competitors. The Company is addressing these challenges through design innovations, value-added features and services, as well as continued cost and asset reduction.

The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rate changes. The Company enters into financial instruments to manage and reduce the impact of these risks, not for trading or speculative purposes. The counterparties to these financial instruments are major financial institutions.

 

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Foreign Exchange Risk Management

The Company enters into forward foreign currency and option contracts principally to hedge currency fluctuations in transactions (primarily anticipated inventory purchases and intercompany loans) denominated in foreign currencies, thereby limiting the risk that would otherwise result from changes in exchange rates. The majority of the Company’s exposure to local currency movements is in Europe, Australia, Japan and Canada. All of the existing foreign exchange contracts as of December 31, 2011 have maturity dates in 2012. Increases and decreases in the fair market values of the forward agreements are expected to be offset by gains/losses in recognized net underlying foreign currency transactions or loans. Notional amounts of outstanding foreign currency forward exchange contracts were $147.5 million and $185.6 million at December 31, 2011 and 2010, respectively. The net fair value of these foreign currency contracts was $2.5 million and $(1.8) million at December 31, 2011 and 2010, respectively. At December 31, 2011, a 10% unfavorable exchange rate movement in our portfolio of foreign currency forward contracts would have reduced our unrealized gains by $14.5 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, the Company believes these forward contracts and the offsetting underlying commitments do not create material market risk.

For more information related to outstanding foreign currency forward exchange contracts see Note 13, Fair Value of Financial Instruments and Note 12, Derivative Financial Instruments, to our consolidated financial statements contained in Item 8 of this report.

Interest Rate Risk Management

Our Senior Secured Notes and Senior Subordinated Notes have fixed interest rates and, accordingly, are not exposed to market risk resulting from changes in interest rates. However, the fair market value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. In addition, fair market values will also reflect the credit markets’ view of credit risk spreads. These interest rate changes may affect the fair market value of the fixed interest rate debt and any repurchases of these notes, but do not impact our earnings or cash flows.

Interest rates under the ABL Facility are based on the London Interbank Offered Rate (LIBOR). Pricing is subject to quarterly adjustment based on the average availability under the ABL Facility during the prior quarter. The range of borrowing costs under the pricing grid is LIBOR plus 3.75% to LIBOR plus 4.25% with a LIBOR rate floor of 1.50%. The Company is required to pay a quarterly commitment fee on the unused portion of the ABL facility ranging from 0.5% to 1.0%. There were no borrowings outstanding under the Company’s ABL Facility as of December 31, 2011.

The following table summarizes information about the Company’s major fixed rate debt components as of December 31, 2011, including the principal cash payments (excluding the original issue discount on the Senior Secured Notes) and interest rates.

Debt Obligations

 

     Stated Maturity Date            Fair
Value
 
     2012     2013     2014     2015     2016     Thereafter      Total    
(in millions)                                                  

Long term debt:

                 

Fixed rate (U.S. dollars) Senior Secured Notes (U.S. dollars)

   $      $      $      $ 425.1      $      $       $ 425.1      $ 472.9   

Average fixed interest rate

     10.63     10.63     10.63     10.63     10.63             10.63  

Senior Subordinated Notes (U.S. dollars)

   $      $      $      $ 246.3      $      $       $ 246.3      $ 252.5   

Average fixed interest rate

     7.63     7.63     7.63     7.63     7.63             7.63  

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     42   

Management’s Report on Internal Control Over Financial Reporting

     43   

Consolidated Balance Sheets as of December 31, 2011 and 2010

     44   

Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009

     45   

Consolidated Statements of Comprehensive Income (Loss) for the years ended December  31, 2011, 2010 and 2009

     46   

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

     47   

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December  31, 2011, 2010 and 2009

     48   

Notes to Consolidated Financial Statements

     49   

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of ACCO Brands Corporation:

We have audited the accompanying consolidated balance sheets of ACCO Brands Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we also audited the related consolidated financial statement schedule, Schedule II – Valuation and Qualifying Accounts and Reserves. We also have audited ACCO Brands Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ACCO Brands Corporation’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements and financial statement schedule referred to above present fairly, in all material respects, the financial position of ACCO Brands Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, ACCO Brands Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

Chicago, Illinois

February 23, 2012

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of ACCO Brands Corporation and its subsidiaries is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Section 404 of the Sarbanes-Oxley Act of 2002, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2011.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that appears herein.

 

/s/ ROBERT J. KELLER

 

/s/ NEAL V. FENWICK

Robert J. Keller   Neal V. Fenwick
Chairman of the Board and   Executive Vice President and
Chief Executive Officer   Chief Financial Officer
(principal executive officer)   (principal financial officer)
February 23, 2012   February 23, 2012

 

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ACCO Brands Corporation and Subsidiaries

Consolidated Balance Sheets

 

    December 31, 2011     December 31, 2010  
(in millions of dollars, except share data)            
Assets    

Current assets:

   

Cash and cash equivalents

  $ 121.2      $ 83.2   

Accounts receivable less allowances for discounts, doubtful accounts and returns of $13.9 and $15.6, respectively

    269.5        274.8   

Inventories

    197.7        205.9   

Deferred income taxes

    7.6        9.1   

Other current assets

    26.9        24.0   

Assets of discontinued operations

           23.7   
 

 

 

   

 

 

 

Total current assets

    622.9        620.7   

Total property, plant and equipment

    463.3        474.1   

Less accumulated depreciation

    (316.1     (310.9
 

 

 

   

 

 

 

Property, plant and equipment, net

    147.2        163.2   

Deferred income taxes

    16.7        10.6   

Goodwill

    135.0        136.9   

Identifiable intangibles, net of accumulated amortization of $102.3 and $96.4, respectively

    130.4        137.0   

Other non-current assets

    64.5        71.8   

Assets of discontinued operation

           9.4   
 

 

 

   

 

 

 

Total assets

  $ 1,116.7      $ 1,149.6   
 

 

 

   

 

 

 
Liabilities and Stockholders’ Deficit    

Current liabilities:

   

Current portion of long-term debt

  $ 0.2      $ 0.2   

Accounts payable

    127.1        110.3   

Accrued compensation

    24.2        23.9   

Accrued customer program liabilities

    66.8        72.8   

Accrued interest

    20.2        22.0   

Other current liabilities

    66.5        84.1   

Liabilities of discontinued operations

    1.1        14.6   
 

 

 

   

 

 

 

Total current liabilities

    306.1        327.9   

Long-term debt

    668.8        727.4   

Deferred income taxes

    85.6        81.2   

Pension and post retirement benefit obligations

    106.1        74.9   

Other non-current liabilities

    12.0        12.7   

Liabilities of discontinued operations

           5.3   
 

 

 

   

 

 

 

Total liabilities

    1,178.6        1,229.4   
 

 

 

   

 

 

 

Stockholders’ deficit:

   

Preferred stock, $0.01 par value, 25,000,000 shares authorized; none issued and outstanding

             

Common stock, $0.01 par value, 200,000,000 shares authorized; 55,659,753 and 55,080,463 shares issued and 55,475,735 and 54,922,783 outstanding, respectively

    0.6        0.6   

Treasury stock, 184,018 and 157,680 shares, respectively

    (1.7     (1.5

Paid-in capital

    1,407.4        1,401.1   

Accumulated other comprehensive loss

    (131.0     (86.1

Accumulated deficit

    (1,337.2     (1,393.9
 

 

 

   

 

 

 

Total stockholders’ deficit

    (61.9     (79.8
 

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

  $ 1,116.7      $ 1,149.6   
 

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ACCO Brands Corporation and Subsidiaries

Consolidated Statements of Operations

 

     Year Ended December 31,  
(in millions of dollars, except per share data)    2011     2010     2009  

Net sales

   $ 1,318.4      $ 1,284.6      $ 1,233.3   

Cost of products sold

     903.7        887.5        868.7   
  

 

 

   

 

 

   

 

 

 

Gross profit

     414.7        397.1        364.6   

Operating costs and expenses:

      

Advertising, selling, general and administrative expenses

     293.9        281.2        263.0   

Amortization of intangibles

     6.3        6.7        7.1   

Restructuring (income) charges

     (0.7     (0.5     17.4   

Intangible asset impairment charges

     —          —          1.7   
  

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     299.5        287.4        289.2   
  

 

 

   

 

 

   

 

 

 

Operating income

     115.2        109.7        75.4   

Non-operating expense:

      

Interest expense, net

     77.2        78.3        67.0   

Equity in earnings of joint ventures

     (8.5     (8.3     (4.4

Other expense, net

     3.6        1.2        5.4   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     42.9        38.5        7.4   

Income tax expense

     24.3        30.7        126.0   
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     18.6        7.8        (118.6

Income (loss) from discontinued operations, net of income taxes

     38.1        4.6        (7.5
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 56.7      $ 12.4      $ (126.1
  

 

 

   

 

 

   

 

 

 

Per share:

      

Basic earnings (loss) per share:

      

Income (loss) from continuing operations

   $ 0.34      $ 0.14      $ (2.18

Income (loss) from discontinued operations

     0.69        0.08        (0.14
  

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share

   $ 1.03      $ 0.23      $ (2.32
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share:

      

Income (loss) from continuing operations

   $ 0.32      $ 0.14      $ (2.18

Income (loss) from discontinued operations

     0.66        0.08        (0.14
  

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ 0.98      $ 0.22      $ (2.32
  

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding:

      

Basic

     55.2        54.8        54.5   

Diluted

     57.6        57.2        54.5   

See notes to consolidated financial statements.

 

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ACCO Brands Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

 

     Year Ended December 31,  
(in millions of dollars)    2011     2010     2009  

Net income (loss)

   $ 56.7      $ 12.4        $ (126.1)   

Other comprehensive income (loss), before tax:

      

Unrealized gains (losses) on derivative financial instruments:

      

Losses arising during the period

     (0.3     (3.1     (4.4

Less: reclassification adjustment for losses included in net income (loss)

     4.9        1.8        0.3   

Foreign currency translation:

      

Foreign currency translation adjustments

     (8.9     11.0        26.7   

Less: reclassification adjustment for sale of GBC-Fordigraph Pty Ltd included in net income (loss)

     (6.1              

Pension and other postretirement plans:

      

Actuarial gain (loss) arising during the period

     (46.3     4.4        (9.7

Other

     0.9        3.0        (5.5

Less: amortization of actuarial loss and prior service cost included in net income (loss)

     7.8        7.0        4.1   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     (48.0     24.1        11.5   

Income tax (expense) benefit related to items of other comprehensive income (loss)

     3.1        (3.2     (1.0
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 11.8      $ 33.3      $ (115.6
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ACCO Brands Corporation and Subsidiaries

Consolidated Statements of Cash Flows

 

     Year Ended December 31,  
(in millions of dollars)    2011     2010     2009  

Operating activities

      

Net income (loss)

   $ 56.7      $ 12.4      $ (126.1

Deferred income tax provision

     3.9        12.3        112.7   

(Gain) loss on sale of assets

     (40.4     (1.5     0.8   

Depreciation

     26.5        29.6        32.1   

Intangible impairment charges and other non-cash charges

     0.1        0.7        6.3   

Amortization of debt issuance costs and bond discount

     8.2        6.3        6.5   

Amortization of intangibles

     6.4        6.9        7.2   

Stock based compensation

     6.3        4.2        3.0   

Loss on debt repurchase

     2.9               4.0   

Changes in balance sheet items:

      

Accounts receivable

     0.6        (18.5     41.5   

Inventories

     5.4        (9.8     78.7   

Other assets

     0.2        (5.1     10.2   

Accounts payable

     16.8        14.8        (54.9

Accrued expenses and other liabilities

     (27.8     (2.2     (37.5

Accrued taxes

     (1.1     7.7        (8.8

Equity in earnings of joint ventures, net of dividends received

     (2.9     (2.9     (4.2
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     61.8        54.9        71.5   

Investing activities

      

Additions to property, plant and equipment

     (13.5     (12.6     (10.3

Assets acquired

     (1.4     (1.1     (3.4

Proceeds (payments) from sale of discontinued operations

     53.5        (3.7     9.2   

Proceeds from the disposition of assets

     1.4        2.5        0.6   
  

 

 

   

 

 

   

 

 

 

Net cash provided (used) by investing activities

     40.0        (14.9     (3.9

Financing activities

      

Proceeds from long-term borrowings

     0.1        1.5        469.3   

Repayments of long-term debt

     (63.0     (0.2     (397.9

Borrowings (repayments) of short-term debt, net

            (0.5     (54.2

Payment of Euro debt hedge

                   (40.8

Cost of debt issuance

            (0.8     (20.6

Exercise of stock options and other

     (0.2     (0.1     (0.3
  

 

 

   

 

 

   

 

 

 

Net cash used by financing activities

     (63.1     (0.1     (44.5

Effect of foreign exchange rate changes on cash

     (0.7     (0.3     2.4   
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     38.0        39.6        25.5   

Cash and cash equivalents

      

Beginning of year

     83.2        43.6        18.1   
  

 

 

   

 

 

   

 

 

 

End of period

   $ 121.2      $ 83.2      $ 43.6   
  

 

 

   

 

 

   

 

 

 

Cash paid during the year for:

      

Interest

   $ 71.9      $ 70.6      $ 54.4   

Income taxes

   $ 27.7      $ 13.9      $ 19.7   

See notes to consolidated financial statements.

 

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ACCO Brands Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

 

(in millions of dollars)    Common
Stock
    Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Accumulated
Deficit
    Total  

Balance at December 31, 2008

   $ 0.6      $ 1,394.8      $ (117.5   $ (1.1   $ (1,280.2   $ (3.4

Net loss

                                 (126.1     (126.1

Loss on derivative financial instruments, net of tax

                   (3.3                   (3.3

Translation impact, net of tax

                   26.7                      26.7   

Pension and postretirement adjustment, net of tax

                   (12.9                   (12.9

Stock-based compensation activity

            3.0               (0.3            2.7   

Other

     (0.1     (0.8                          (0.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

     0.5        1,397.0        (107.0     (1.4     (1,406.3     (117.2

Net income

                                 12.4        12.4   

Loss on derivative financial instruments, net of tax

                   (0.5                   (0.5

Translation impact, net of tax

                   11.0                      11.0   

Pension and postretirement adjustment, net of tax

                   10.4                      10.4   

Stock-based compensation activity

     0.1        4.2               (0.1            4.2   

Other

            (0.1                          (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     0.6        1,401.1        (86.1     (1.5     (1,393.9     (79.8

Net income

                                 56.7        56.7   

Income on derivative financial instruments, net of tax

                   3.7                      3.7   

Translation impact, net of tax

                   (15.0                   (15.0

Pension and postretirement adjustment, net of tax

                   (33.6                   (33.6

Stock-based compensation activity

            6.3               (0.2            6.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 0.6      $ 1,407.4      $ (131.0   $ (1.7   $ (1,337.2   $ (61.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares of Capital Stock

 

     Common
Stock
     Treasury
Stock
    Net
Shares
 

Shares at December 31, 2008

     54,382,762         (47,256     54,335,506   

Stock issuances—stock based compensation

     336,534         (99,849     236,685   
  

 

 

    

 

 

   

 

 

 

Shares at December 31, 2009

     54,719,296         (147,105     54,572,191   

Stock issuances—stock based compensation

     361,167         (10,575     350,592   
  

 

 

    

 

 

   

 

 

 

Shares at December 31, 2010

     55,080,463         (157,680     54,922,783   

Stock issuances—stock based compensation

     579,290         (26,338     552,952   
  

 

 

    

 

 

   

 

 

 

Shares at December 31, 2011

     55,659,753         (184,018     55,475,735   
  

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ACCO Brands Corporation and Subsidiaries

Notes to Consolidated Financial Statements

1. Basis of Presentation

The management of ACCO Brands Corporation is responsible for the accuracy and internal consistency of the preparation of the consolidated financial statements and notes contained in this annual report.

The consolidated financial statements include the accounts of ACCO Brands Corporation and its domestic and international subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Our investments in companies that are between 20% and 50% owned are accounted for using the equity method of accounting. ACCO Brands has equity investments in the following joint ventures: Pelikan-Artline Pty Ltd (“Pelikan-Artline”) — 50% ownership; and Neschen GBC Graphic Films, LCC (“Neschen”) — 50% ownership. The Company’s share of earnings from equity investments is included on the line entitled “Equity in earnings of joint ventures” in the consolidated statements of operations. Companies in which our investment exceeds 50% have been consolidated.

The Company’s former GBC-Fordigraph Pty Ltd (“GBC-Fordigraph Business”) and commercial print finishing businesses are reported in discontinued operations in the consolidated financial statements and related notes for all periods presented in the consolidated financial statements. For further information on the Company’s discontinued operations see Note 18, Discontinued Operations.

On November 17, 2011, the Company announced the signing of a definitive agreement to merge MeadWestvaco Corporation’s Consumer and Office Products business (“Mead C&OP Business”) into the Company in a transaction that was valued at approximately $860 million at the time the transaction was announced. The Mead C&OP Business is a leading manufacturer and marketer of school supplies, office products, and planning and organizing tools including the Mead®, Five Star®, Trapper Keeper®, AT-A-GLANCE®, Cambridge®, Day Runner®, Hilroy, Tilibra and Grafons brands in the U.S., Canada and Brazil. Upon completion of the transaction, MeadWestvaco shareholders will own 50.5% of the combined company. The transaction is subject to approval by the Company’s shareholders and the satisfaction of customary closing conditions and regulatory approvals, including a ruling from the U.S. Internal Revenue Service on the tax-free nature of the transaction for MeadWestvaco. The transaction is expected to be completed in the first half of 2012. The Company will be the accounting acquirer in the merger and will apply purchase accounting to the assets and liabilities acquired upon consummation of the merger. In connection with this transaction, for the year ended December 31, 2011, the Company has incurred expenses of $5.6 million, which are reported in advertising, selling, general and administrative expenses.

2. Significant Accounting Policies

Nature of Business

ACCO Brands is primarily involved in the manufacturing, marketing and distribution of office products —including traditional and computer-related office products, supplies, binding and laminating equipment and related consumable supplies, personal computer accessory products, paper-based time management products and presentation aids and products— selling primarily to large resellers. The Company’s subsidiaries operate principally in the U.S, Australia, the U.K. and Canada.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

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Notes to Consolidated Financial Statements (Continued)

 

Cash and Cash Equivalents

Highly liquid investments with an original maturity of three months or less are included in cash and cash equivalents.

Allowances for Doubtful Accounts, Discounts and Returns

Trade receivables are recorded at the stated amount, less allowances for discounts, doubtful accounts and returns. The allowance for doubtful accounts represents estimated uncollectible receivables associated with potential customer defaults on contractual obligations, usually due to customers’ potential insolvency. The allowances include amounts for certain customers where a risk of default has been specifically identified. In addition, the allowances includes a provision for customer defaults on a general formula basis when it is determined the risk of some default is probable and estimable, but cannot yet be associated with specific customers. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience and existing economic conditions.

The allowance for sales returns represents estimated uncollectible receivables associated with the potential return of products previously sold to customers, and is recorded at the time that the sales are recognized. The allowance includes a general provision for product returns based on historical trends. In addition, the allowance includes a reserve for currently authorized customer returns that are considered to be abnormal in comparison to the historical basis.

Inventories

Inventories are priced at the lower of cost (principally first-in, first-out with minor amounts at average) or market. A reserve is established to adjust the cost of inventory to its net realizable value. Inventory reserves are recorded for obsolete or slow-moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions and specific identification of items, such as product discontinuance or engineering/material changes. These estimates could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from expectations.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation is provided, principally on a straight-line basis, over the estimated useful lives of the assets. Gains or losses resulting from dispositions are included in operating income. Betterments and renewals, that improve and extend the life of an asset are capitalized; maintenance and repair costs are expensed. Purchased computer software is capitalized and amortized over the software’s useful life. The following table shows estimated useful lives of property, plant and equipment:

 

Buildings

   40 to 50 years

Leasehold improvements

   Lesser of lease term or the life of the asset

Machinery, equipment and furniture

   3 to 10 years

Long-Lived Assets

We test long-lived assets for impairment whenever events or changes in circumstances indicate that the assets’ carrying amount is not recoverable from its undiscounted cash flows. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the

 

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Notes to Consolidated Financial Statements (Continued)

 

asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate at the time of future cash flow, derived from the most recent business projections. If this comparison indicates that there is impairment, the amount of the impairment is typically calculated using discounted expected future cash flows. The discount rate applied to these cash flows is based on our weighted average cost of capital, computed by selecting market rates at the valuation dates for debt and equity that are reflective of the risks associated with an investment in the Company’s industry as estimated by using comparable publicly traded companies.

Intangible Assets

Intangible assets are comprised primarily of indefinite-lived intangible assets acquired and purchased intangible assets arising from the application of purchase accounting. Indefinite-lived intangible assets are not amortized, but are evaluated annually to determine whether the indefinite useful life is appropriate. Indefinite-lived intangibles are tested for impairment on an annual basis and written down where impaired. Certain of the Company’s trade names have been assigned an indefinite life as these trade names are currently anticipated to contribute cash flows to the Company indefinitely.

We review indefinite-lived intangibles for impairment annually, and whenever market or business events indicate there may be a potential impact on a particular intangible. We consider the implications of both external factors (e.g., market growth, pricing, competition, and technology) and internal factors (e.g., product costs, margins, support expenses, capital investment) and their potential impact on cash flows for each business in both the near and long term, as well as their impact on any identifiable intangible asset associated with the business. Based on recent business results, consideration of significant external and internal factors, and the resulting business projections, indefinite lived intangible assets are reviewed to determine whether they are likely to remain indefinite lived, or whether a finite life is more appropriate. Finite lived intangibles are amortized over 15, 23 or 30 years.

Goodwill

Goodwill has been recorded on the Company’s balance sheet and represents the excess of the cost of the acquisitions when compared to the fair value of the net assets acquired. The Company tests goodwill for impairment at least annually, normally in the second quarter and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. Recoverability of goodwill is evaluated using a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, the second step of the impairment test is performed in order to determine the implied fair value of a reporting unit’s goodwill. Determining the implied fair value of goodwill requires valuation of a reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future sales for the Company’s products, capital needs, economic trends and other factors.

Employee Benefit Plans

The Company and its subsidiaries provide a range of benefits to their employees and retired employees, including pension, postretirement, post-employment and health care benefits. The Company records annual

 

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Notes to Consolidated Financial Statements (Continued)

 

amounts relating to these plans based on calculations, which include various actuarial assumptions, including discount rates, assumed rates of return on plan assets, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of the modifications are generally recorded and amortized over future periods.

Income Taxes

Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce deferred tax assets to an amount that is more likely than not to be realized. Facts and circumstances may change that cause the Company to revise the conclusions on its ability to realize certain net operating losses and other deferred tax attributes.

The amount of income taxes that we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are revised or resolved.

Revenue Recognition

We recognize revenue from product sales when earned, net of applicable provisions for discounts, return and allowances. We consider revenue to be realized or realizable and earned when all of the following criteria are met: title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. We also provide for our estimate of potential bad debt at the time of revenue recognition.

Cost of Products Sold

Cost of products sold includes all manufacturing, product sourcing and distribution costs, including depreciation related to assets used in the manufacturing and distribution process, inbound and outbound freight, shipping and handling costs, purchasing costs associated with materials and packaging used in the production processes.

Advertising, Selling, General and Administrative Expenses

Advertising, selling, general and administrative expenses 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, etc.).

Customer Program Costs

Customer program costs include, but are not limited to, sales rebates which are generally tied to achievement of certain sales volume levels, in-store promotional allowances, shared media and customer catalog allowances and other cooperative advertising arrangements, and freight allowance programs. The Company

 

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Notes to Consolidated Financial Statements (Continued)

 

generally recognizes customer program costs as a deduction to gross sales at the time that the associated revenue is recognized. Certain customer incentives that do not directly relate to future revenues are expensed when initiated.

In addition, accrued customer program liabilities principally include, but are not limited to, sales volume rebates, promotional allowances, shared media and customer catalog allowances and other cooperative advertising arrangements, and freight allowances as discussed above.

Shipping and Handling

The Company reflects all amounts billed to customers for shipping and handling in net sales and the costs incurred from shipping and handling product (including costs to ship and move product from the seller’s place of business to the buyer’s place of business, as well as costs to store, move and prepare products for shipment) in cost of products sold.

Warranty Reserves

The Company offers its customers various warranty terms based on the type of product that is sold. Estimated future obligations related to products sold under these warranty terms are provided by charges to operations in the period in which the related revenue is recognized.

Advertising Costs

Advertising costs amounted to $98.1 million, $92.9 million and $92.7 million for the years ended December 31, 2011, 2010 and 2009, respectively. These costs include, but are not limited to, cooperative advertising and promotional allowances as described in “Customer Program Costs” above, and are principally expensed as incurred.

Research and Development

Research and development expenses, which amounted to $20.5 million, $24.0 million and $18.6 million for the years ended December 31, 2011, 2010 and 2009, respectively, are classified as general and administrative expenses and are charged to expense as incurred.

Stock-Based Compensation

Our primary types of share-based compensation consist of stock options, stock-settled appreciation rights, restricted stock unit awards, and performance stock unit awards. Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Where awards are made with non-substantive vesting periods (for example, where a portion of the award vests upon retirement eligibility), we estimate and recognize expense based on the period from the grant date to the date on which the employee is retirement eligible.

Foreign Currency Translation

Foreign currency balance sheet accounts are translated into U.S. dollars at the rates of exchange at the balance sheet date. Income and expenses are translated at the average rates of exchange in effect during the period. The related translation adjustments are made directly to a separate component of accumulated other

 

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Notes to Consolidated Financial Statements (Continued)

 

comprehensive income (loss) in stockholders’ equity. Some transactions are made in currencies different from an entity’s functional currency. Gains and losses on these foreign currency transactions are included in income as they occur.

Derivative Financial Instruments

The Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. If the derivative is designated as a fair value hedge and is effective, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings in the same period. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

Certain forecasted transactions, assets and liabilities are exposed to foreign currency risk. The Company continually monitors its foreign currency exposures in order to maximize the overall effectiveness of its foreign currency hedge positions. Principal currencies hedged include the U.S. dollar, Euro and Pound sterling.

Recent Accounting Pronouncements

In June 2011 the Financial Accounting Standards Board (“FASB”) issued an update, Accounting Standards Update (“ASU”) No. 2011-5, to existing standards on comprehensive income (Accounting Standards Codification (“ASC”) Topic 220). ASU No. 2011-5 was issued to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-5 is effective for annual and interim periods ending beginning after December 15, 2011, and early adoption is permitted. In December 2011 the FASB issued an update to ASU No. 2011-5, ASU No. 2011-12, which was issued to defer the effective date for amendments to the reclassifications of items out of accumulated other comprehensive income in ASU No. 2011-05. The Company has adopted these new standards as of December 2011. The Company has provided the required disclosure in its Consolidated Statements of Comprehensive Income.

In September 2011, the FASB issued an update, ASU No. 2011-08, to existing standards on intangibles – goodwill and other ASC Topic 350. ASU No. 2011-08 was issued to simplify the testing of goodwill for impairment by allowing an optional qualitative factors test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test already included in ASC Topic 350. ASU No. 2011-08 is effective for annual and interim goodwill tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the standard in 2012, and it will not have a significant impact on its consolidated financial statements or results of operations.

In December 2011 the FASB issued an update, ASU No. 2011-11 to existing standards regarding the disclosures involving the offsetting of assets and liabilities relating to financial instruments. ASU No. 2011-11 was issued to improve disclosures regarding offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-011 is effective for annual and interim periods beginning on or after January 1, 2013. The Company is currently assessing the impact on its current disclosures.

 

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Notes to Consolidated Financial Statements (Continued)

 

3. Long-term Debt and Short-term Borrowings

Notes payable and long-term debt consisted of the following at December 31, 2011 and 2010:

 

(in millions of dollars)    2011     2010  

Senior Secured Notes, due March 2015, net of discount(1) (fixed interest rate of 10.625%)

   $ 420.9      $ 454.3   

U.S. Dollar Senior Subordinated Notes, due August 2015 (fixed interest rate of 7.625%)

     246.3        271.3   

Other borrowings

     1.8        2.0   
  

 

 

   

 

 

 

Total debt

     669.0        727.6   

Less: current portion

     (0.2     (0.2
  

 

 

   

 

 

 

Total long-term debt

   $ 668.8      $ 727.4   
  

 

 

   

 

 

 

 

(1)

Represents unamortized original issue discount of $4.2 million and $5.7 million, as of December 31, 2011 and 2010, respectively, which is amortizable through March 15, 2015.

During 2011, the Company repurchased $34.9 million of its Senior Secured Notes and $25.0 million of its Senior Subordinated Notes. The Company paid a $3.0 million premium on the repurchase of the Company’s Senior Secured Notes, which is included in other expense, net in the Consolidated Statements of Operations.

Senior Secured Notes

On September 30, 2009, the Company issued an aggregate principal amount of $460.0 million of Senior Secured Notes with semi-annual interest payments payable March 15 and September 15 of each year. The Senior Secured Notes were issued at 98.5% of par value, equating to an effective yield to maturity of approximately 11%. The proceeds from the sale of the Senior Secured Notes were $453.1 million, after deducting an original issue discount of $6.9 million. The Senior Secured Notes were offered and sold in a private placement to qualified institutional buyers in the U.S. pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to non-U.S. persons outside the U.S under Regulation S under the Securities Act. In May, 2010 the Company completed an exchange offer for the Senior Secured Notes sold in the private placement for new Senior Secured Notes that have been registered under the Securities Act of 1933. The new notes have terms that are substantially identical to the old notes.

The indenture governing the Senior Secured Notes does not contain financial performance covenants. However, that indenture does contain covenants limiting, among other things, the ability to incur additional debt, create liens, pay dividends on capital stock or repurchase capital stock or indebtedness, make certain investments, enter into certain types of transactions with affiliates, restrict or limit dividend or other payments by our restricted subsidiaries to the Company or other restricted subsidiaries, use assets as security in other transactions, sell certain assets or enter into consolidations with or into other companies.

Guarantees and Security

The Senior Secured Notes are unconditionally guaranteed, jointly and severally, on a senior secured basis by all of our existing and future domestic subsidiaries, with certain exceptions. The Senior Secured Notes and the related guarantees will rank equally in right of payment with all existing and future senior debt and will rank senior in right of payment to all existing and future subordinated debt.

The Senior Secured Notes and the guarantees are secured on a first-priority basis by a lien on substantially all of the Company’s and the guarantors’ present and future assets (other than accounts receivable, inventory,

 

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Notes to Consolidated Financial Statements (Continued)

 

deposit accounts and certain other assets) and up to 65% of the present and future equity interests of certain of the Company’s and the guarantors directly owned foreign subsidiaries, in each case subject to certain exceptions and customary permitted liens. The Senior Secured Notes and the guarantees also are secured on a second-priority basis by a lien on the assets that secure the Company’s and the guarantors’ obligations under the ABL Facility, including accounts receivable, inventory, and other assets excluded as first-lien assets under the Senior Secured Notes.

Redemption Options

The Company may redeem the Senior Secured Notes, in whole or in part, at any time on or after (i) September 15, 2012, at a redemption price equal to 105.3% of the principal amount of the Senior Secured Notes redeemed, (ii) September 15, 2013, at a redemption price equal to 102.7% of the principal amount of the Senior Secured Notes redeemed, or (iii) September 15, 2014, at a redemption price equal to 100% of the principal amount of the Senior Secured Notes redeemed, in each case plus accrued and unpaid interest, including any additional interest. At any time on or before September 15, 2012, the Company may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with the net proceeds of qualified equity offerings at a redemption price of 110.6% plus accrued and unpaid interest, including any additional interest. At any time the Company may also repurchase the Senior Secured Notes through open market or privately negotiated repurchases.

Requirements to Offer to Repurchase

If the Company experiences certain change of control events, the Company must offer to repurchase the Senior Secured Notes at a repurchase price equal to 101% of the principal amount of the Senior Secured Notes repurchased plus accrued and unpaid interest to the repurchase date. If the Company or its subsidiaries sell assets under specified circumstances, the Company must offer to repurchase the Senior Secured Notes at a repurchase price equal to 100% of the principal amount of the Senior Secured Notes being repurchased, plus accrued and unpaid interest to the repurchase date.

Asset-Based Revolving Credit Facility (ABL Facility)

On September 30, 2009, the Company, and certain domestic and foreign subsidiaries (collectively, the “Borrowers”) entered into a four-year senior secured asset-based revolving credit facility maturing in September 2013 with Deutsche Bank AG, as administrative agent, a co-collateral agent and a lender, and five other lenders, providing for revolving credit financing of up to $175.0 million, including a $40.0 million sub-limit for letters of credit and, subject to certain conditions, an optional $50.0 million additional credit capacity using an accordion feature. Amounts borrowed under the ABL Facility by the Company and its domestic subsidiaries are guaranteed by each of the Company’s domestic subsidiaries that guarantee the Senior Secured Notes, and amounts borrowed under the ABL Facility by the Company’s foreign subsidiaries are guaranteed by each of the Company, its domestic subsidiaries that guarantee the Senior Secured Notes and certain foreign subsidiaries.

The Borrowers’ ability to borrow under the ABL Facility is limited to a borrowing base equal to 85% of eligible accounts receivable plus up to the lesser of (1) 65% of the lower of cost or fair market value of eligible inventory and (2) 85% of the net orderly liquidation value of eligible inventory, and is subject to other conditions, limitations and reserve requirements.

Interest rates under the ABL Facility are based on the London Interbank Offered Rate (LIBOR). Pricing is subject to quarterly adjustment based on the average availability under the ABL Facility during the prior quarter. The range of borrowing costs under the pricing grid is LIBOR plus 3.75% to LIBOR plus 4.25% with a LIBOR rate floor of 1.50%. The Company is required to pay a quarterly commitment fee on the unused portion of the ABL facility ranging from 0.5% to 1.0%.

 

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Notes to Consolidated Financial Statements (Continued)

 

Borrowings under the ABL Facility are secured on a first priority basis by all accounts receivable, inventory and cash of the Company and its subsidiaries organized in the U.S. and certain foreign subsidiaries, and on a second priority basis by property and equipment of the Company and its subsidiaries organized in the U.S. and the other assets that secure the Senior Secured Notes on a first priority basis.

The ABL Facility contains customary terms and conditions, including among other things, limitations on liens and indebtedness, asset sales, repurchase of Senior Subordinated Notes, and intercompany transactions. A springing fixed charge financial covenant would be triggered if the excess availability under the ABL Facility falls below $20.0 million or 15% of total commitments. The ABL Facility also contains bank account restrictions that apply in the event that the Company’s excess availability fails to meet certain thresholds. As of December 31, 2011, the amount available for borrowings under the Company’s ABL Facility was $165.5 million (allowing for $9.5 million of letters of credit outstanding on that date). There were no borrowings outstanding under the Company’s ABL Facility as of December 31, 2011.

Senior Subordinated Notes

The indenture governing the Senior Subordinated Notes does not contain financial performance covenants. However, that indenture does contain covenants limiting, among other things, the Company’s and its subsidiaries ability to, incur additional debt, pay dividends on capital stock or repurchase capital stock or indebtedness, make certain investments, enter into certain types of transactions with affiliates, make dividend or other payments by our restricted subsidiaries to ACCO Brands, use assets as security in other transactions, sell certain assets or enter into consolidations with or into other companies.

Compliance with Loan Covenants

As of and for the year ended December 31, 2011, the Company was in compliance with all applicable loan covenants.

The Company’s ABL Facility would not be affected by a change in its credit rating.

4. Pension and Other Retiree Benefits

The Company has a number of pension plans, principally in the U.K. and the U.S. The plans provide for payment of retirement benefits, mainly commencing between the ages of 60 and 65, and also for payment of certain disability and severance benefits. After meeting certain qualifications, an employee acquires a vested right to future benefits. The benefits payable under the plans are generally determined on the basis of an employee’s length of service and earnings. Cash contributions to the plans are made as necessary to ensure legal funding requirements are satisfied.

The Company provides postretirement health care and life insurance benefits to certain employees and retirees in the U.S. and certain employee groups outside of the U.S. These benefit plans have been frozen to new participants. Many employees and retirees outside of the U.S. are covered by government health care programs.

On January 20, 2009, the Company’s Board of Directors approved plan amendments to temporarily freeze the Company’s U.S. pension and non-qualified supplemental retirement plans effective March 7, 2009. No additional benefits will accrue under these plans after that date until further action by the Board of Directors. As a result, the Company recognized a curtailment gain of $1.0 million in operating income during 2009.

 

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Notes to Consolidated Financial Statements (Continued)

 

The following table sets forth the Company’s defined benefit pension plans and other postretirement benefit plans funded status and the amounts recognized in the Company’s consolidated balance sheets:

 

     Pension Benefits     Postretirement  
     U.S.     International        
(in millions of dollars)    2011     2010     2011     2010     2011     2010  

Change in projected benefit obligation (PBO)

          

Projected benefit obligation at beginning of year

   $ 162.5      $ 154.4      $ 268.3      $ 271.1      $ 13.3      $ 13.4   

Service cost

                   2.1        2.3        0.2        0.2   

Interest cost

     8.6        8.9        14.7        14.6        0.6        0.7   

Actuarial loss

     9.5        7.5        14.2        5.1                 

Participants’ contributions

                   0.9        1.0        0.2        0.2   

Benefits paid

     (8.7     (8.3     (13.0     (11.2     (0.9     (1.0

Curtailment gain

                   (0.6                     

Foreign exchange rate changes

                   (2.0     (12.0            (0.2

Other items

                          (2.6              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Projected benefit obligation at end of year

     171.9        162.5        284.6        268.3        13.4        13.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets

            

Fair value of plan assets at beginning of year

     124.8        107.9        242.3        234.5                 

Actual return on plan assets

     (3.2     18.0        7.0        24.3                 

Employer contributions

     6.2        7.2        6.6        6.5        0.7        0.8   

Participants’ contributions

                   0.9        1.0        0.2        0.2   

Benefits paid

     (8.7     (8.3     (13.0     (11.2     (0.9     (1.0

Foreign exchange rate changes

                   (1.1     (10.2              

Other

                          (2.6              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of plan assets at end of year

     119.1        124.8        242.7        242.3                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funded status (Fair value of plan assets less PBO)

   $ (52.8   $ (37.7   $ (41.9   $ (26.0   $ (13.4   $ (13.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts recognized in the consolidated balance sheet consist of:

            

Other current liabilities

   $ 0.2      $ 0.2      $ 0.6      $ 0.6      $ 1.2      $ 1.3   

Accrued benefit liability

     52.6        37.5        41.3        25.4        12.2        12.0   

Components of accumulated other comprehensive income, net of tax:

            

Unrecognized prior service cost (benefit)

                   0.4        0.5               (0.1

Unrecognized actuarial (gain) loss

     56.1        36.9        62.2        48.4        (2.6     (3.2

All plans have projected benefit obligations in excess of plan assets.

Of the amounts included within accumulated other comprehensive income, the Company expects to recognize the following pre-tax amounts as components of net periodic benefit cost during 2012:

 

     Pension Benefits      Postretirement  
(in millions of dollars)    U.S.      International     

Prior service cost

   $       $ 0.2       $   

Actuarial (gain) loss

     6.2         5.4         (0.5
  

 

 

    

 

 

    

 

 

 
   $ 6.2       $ 5.6       $ (0.5
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

ACCO Brands Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

The accumulated benefit obligation for all defined benefit pension plans was $443.6 million and $428.8 million at December 31, 2011 and 2010, respectively.

The following table sets out information for pension plans with an accumulated benefit obligation in excess of plan assets:

 

     U.S.      International  
(in millions of dollars)    2011      2010      2011      2010  

Projected benefit obligation

   $ 171.9       $ 162.5       $ 272.8       $ 62.1   

Accumulated benefit obligation

     171.9         162.5         260.2         60.3   

Fair value of plan assets

     119.1         124.8         230.9         46.0   

The following table sets out the components of net periodic benefit cost:

 

     Pension Benefits     Postretirement  
     U.S.     International        
(in millions of dollars)    2011     2010     2009     201 1     2010     2009     2011     2010     2009  

Service cost

   $      $      $ 1.3      $ 2.1      $ 2.3      $ 2.4      $ 0.2      $ 0.2      $ 0.1   

Interest cost

     8.6        8.9        9.1        14.7        14.6        13.7        0.6        0.7        0.8   

Expected return on plan assets

     (10.7     (10.4     (10.7     (16.0     (15.1     (12.8                     

Amortization of prior service cost

                          0.2        0.1        0.2                        

Amortization of net loss (gain)

     4.3        3.0        1.2        3.9        4.8        3.4        (0.6     (0.9     (0.9

Curtailment

                   (1.0     (0.2            (0.5                     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 2.2      $ 1.5      $ (0.1   $ 4.7      $ 6.7      $ 6.4      $ 0.2      $      $   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other changes in plan assets and benefit obligations that were recognized in other comprehensive income during the years ended December 31, 2011, 2010 and 2009, respectively, were as follows:

 

     Pension Benefits     Postretirement  
     U.S.     International                      
(in millions of dollars)    2011     2010     2009     2011     2010     2009     2011      2010      2009  

Current year actuarial (gain)/loss

   $ 23.5      $ (0.2   $ (16.1   $ 22.8      $ (4.2   $ 26.1      $       $       $ (0.3

Amortization of actuarial gain (loss)

     (4.3     (3.0     (1.2     (3.9     (4.8     (3.6     0.6         0.9         1.0   

Amortization of prior service cost

                          (0.2     (0.1     (0.3                       

Curtailment gain

                   0.2                                               

Exchange rate adjustment

                          (1.0     (3.2     5.8                0.1         (0.4

Total recognized in other comprehensive income

   $ 19.2      $ (3.2   $ (17.1   $ 17.7      $ (12.3   $ 28.0      $ 0.6       $ 1.0       $ 0.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total recognized in net periodic benefit cost and other comprehensive income

   $ 21.4      $ (1.7   $ (17.2   $ 22.4      $ (5.6   $ 34.4      $ 0.8       $ 1.0       $ 0.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

ACCO Brands Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

Assumptions

Weighted average assumptions used to determine benefit obligations for years ended December 31, 2011, 2010 and 2009 were:

 

     Pension Benefits     Postretirement  
     U.S.     International        
     2011     2010     2009     2011     2010     2009     2011     2010     2009  

Discount rate

     5.0     5.5     5.9     4.7     5.4     5.8     4.5     5.0     5.9

Rate of compensation increase

     N/A        N/A        N/A        3.6     4.4     4.5                     

Weighted average assumptions used to determine net cost for years ended December 31, 2011, 2010 and 2009 were:

 

     Pension Benefits     Postretirement  
     U.S.     International        
     2011     2010     2009     2011     2010     2009     2011     2010     2009  

Discount rate

     5.5     5.9     6.5     5.4     5.8     6.5     5.0     5.9     6.5

Expected long-term rate of return

     8.2     8.2     8.2     6.4     6.8     6.3                     

Rate of compensation increase

     N/A        N/A        4.0     4.4     4.5     3.6                     

Weighted average health care cost trend rates used to determine postretirement benefit obligations and net cost at December 31, 2011, 2010 and 2009 were:

 

     Postretirement Benefits  
     2011     2010     2009  

Health care cost trend rate assumed for next year

     7     8     7

Rate that the cost trend rate is assumed to decline (the ultimate trend rate)

     5     5     5

Year that the rate reaches the ultimate trend rate

     2020        2020        2020   

Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

 

     1-Percentage-      1-Percentage-  
(in millions of dollars)    Point Increase      Point Decrease  

Effect on total of service and interest cost

   $ 0.2       $ (0.2

Effect on postretirement benefit obligation

     1.3         (1.1

Plan Assets

The investment strategy for the Company is to optimize investment returns through a diversified portfolio of investments, taking into consideration underlying plan liabilities and asset volatility. Each plan has a different target asset allocation, which is reviewed periodically and is based on the underlying liability structure. The target asset allocation for our U.S. plan is 65% in equity securities, 20% in fixed income securities and 15% in alternate assets. The target asset allocation for non-U.S. plans is set by the local plan trustees.

 

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Table of Contents

ACCO Brands Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

 

The Company’s pension plan weighted average asset allocations at December 31, 2011 and 2010 were as follows:

 

     2011     2010  
     U.S.     International     U.S.     International  

Asset category

        

Equity securities

     63     48     68     48

Fixed income

     32        42        32        42   

Real estate

            4               4   

Other (1)

     5        6               6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Insurance contracts, multi-strategy hedge funds and cash and cash equivalents for certain of our plans.

U.S. Pension Plan Assets

Fair value measurements of our U.S. pension plan assets by asset category at December 31, 2011 are as follows:

 

(in millions of dollars)

  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Fair Value
as of
December 31,
2011
 
       
       
       
       
       

Common stocks

  $ 6.9      $      $      $ 6.9   

Mutual funds

    68.3                      68.3   

Government debt securities

           10.9               10.9   

Corporate debt securities

           8.0               8.0   

Asset-backed securities

           7.8               7.8   

Multi-strategy hedge funds

           5.4               5.4   

Government mortgage-backed securities

           4.0               4.0   

Common collective trust funds, collateralized mortgage obligations, mortgage backed securities, and other fixed income securities