Business Context and Reporting Period
Acme United Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company sells cutting, sharpening, office, school, first aid, and safety products through its United States, Canada, and Europe segments. Results are seasonal, with sales typically stronger in the second and third quarters because of the back-to-school market.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Net sales | $40.220 million | $39.751 million | $71.590 million | $71.460 million |
| Gross profit | $14.771 million | $14.712 million | $26.574 million | $26.836 million |
| Gross margin | 36.7% | 37.0% | 37.1% | 37.6% |
| Operating income | $3.768 million | $3.625 million | $5.303 million | $4.990 million |
| Net income | $2.671 million | $2.436 million | $3.478 million | $3.200 million |
| Diluted EPS | $0.77 | $0.67 | $1.01 | $0.88 |
| Dividends declared per share | $0.12 | $0.11 | $0.24 | $0.22 |
Six-month operating margin was approximately 7.4%, compared with 7.0% in the prior-year period. Six-month net margin was approximately 4.9%, compared with 4.5% in 2018. SG&A expense declined to $21.271 million from $21.846 million, reflecting the company’s expense-reduction strategy.
Net cash provided by operating activities was $0.884 million in the first six months of 2019, compared with $5.247 million of cash used in operating activities in 2018. The company used $0.759 million for capital expenditures and $2.616 million in financing activities. Cash declined from $4.409 million at December 31, 2018 to $1.924 million at June 30, 2019.
Accounts receivable increased $10.4 million from year-end, while inventory decreased $1.7 million. Days sales outstanding improved to 65 days from 66 days. Working capital was $61.036 million, the current ratio was 4.38, and long-term debt to equity was 77.9% at June 30, 2019.
Revolving credit borrowings were $39.388 million, down from $40.283 million at December 31, 2018. The $50 million facility had $10.612 million available and expires May 24, 2023. Mortgage debt totaled approximately $3.578 million, including current and long-term portions. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 1%; six-month sales were essentially flat.
- First aid and safety sales increased, while school and office products, particularly pencil sharpeners, were weaker.
- Canada sales declined 10% in U.S. dollars for both the quarter and six-month period, primarily because of lower office-channel sales.
- Europe sales increased 22% for the quarter and 13% for the six-month period in U.S. dollars, aided by a major back-to-school promotion, new office-products customers, and growth in DMT sharpening products.
- Gross margin declined because of a product mix shift toward lower-margin products.
- Operating income increased despite lower gross margin, primarily because SG&A expenses declined.
- Net interest expense increased $46,000 for the quarter and $144,000 for the six-month period because of higher average borrowing rates, partly offset by lower debt.
- The effective tax rate declined to 18% from 22% for both comparable periods.
- The company adopted the lease standard effective January 1, 2019, recording a $2.9 million right-of-use asset and corresponding lease liability. At June 30, lease liabilities totaled $2.428 million.
- Cash settlements for employee stock options totaled $0.779 million during the first six months, compared with $0.242 million in 2018.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific quantitative earnings or revenue guidance. Management expects operating cash generation and available revolving-credit capacity to be sufficient to fund planned operations for the twelve months following the filing, under current conditions.
Key risks identified include global economic conditions, customer and consumer demand, competition and technological change, growth and acquisition integration, currency fluctuations, higher interest rates, and changes in international trade policies or tariffs. The company has variable-rate debt, including its revolving facility and mortgage, creating exposure to rising interest rates.
There were no pending material legal proceedings, no defaults upon senior securities, and no material changes in internal control over financial reporting. The company was not required to contribute to its pension plan in 2019 and made no pension contributions during the first six months.
Investor Verification Priorities
- Verify whether the substantial increase in accounts receivable and low operating cash generation are temporary seasonal effects or indicate collection or working-capital pressure.
- Monitor gross-margin performance and product mix, particularly the contribution of first aid and safety products and weaker school and office products.
- Confirm available borrowing capacity, covenant compliance, refinancing requirements, and sensitivity to LIBOR or other variable-rate increases.
- Assess whether European growth and the reported back-to-school promotion are repeatable and whether Canadian weakness persists.
- Review the effect of tariffs, trade policies, currency movements, and supplier conditions on costs and demand.
- Reconcile the effect of lease adoption, stock-option cash settlements, dividends, and other non-operating cash uses on liquidity.