ACME United Corporation — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2018. ACME United sells cutting and sharpening products and first aid and safety products through United States, Canada, and Europe segments. Results are seasonally stronger in the second and third quarters because of the back-to-school market.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $31.709 million | $27.745 million |
| Gross profit | $12.124 million | $10.564 million |
| Gross margin | 38.2% | 38.1% |
| Operating income | $1.365 million | $1.214 million |
| Net income | $764,000 | $659,000 |
| Diluted EPS | $0.21 | $0.18 |
| Net cash used in operating activities | $(4.575) million | $(3.052) million |
| Capital expenditures | $897,000 | $504,000 |
SG&A was $10.759 million, or 33.9% of sales, compared with $9.350 million, or 33.7%, in the prior-year quarter. Net interest expense increased to $405,000 from $263,000. The effective tax rate declined to 22% from 30%, primarily because of the Tax Cuts and Jobs Act.
Cash and cash equivalents were $1.065 million at March 31, 2018, compared with $9.338 million at December 31, 2017. Working capital was $59.064 million, the current ratio was 6.30, and inventory was $41.900 million. Accounts receivable were $24.486 million and accounts payable plus accrued liabilities were $11.153 million.
Revolving credit debt was $41.100 million, down from $43.450 million at year-end, with $8.900 million available under the $50 million facility. Mortgage debt was $3.644 million, net of the current portion. The company was in compliance with its debt covenants. The revolving facility bears interest at LIBOR plus 2.0% and matures May 6, 2019.
Material Changes Versus the Prior Comparable Period
- Consolidated sales increased 14%, led by U.S. growth in first aid and safety, Westcott scissors, and Camillus, DMT, and Cuda products.
- U.S. sales increased 13%; Canada increased 12% in U.S. dollars and 8% in local currency; Europe increased 27% in U.S. dollars and 10% in local currency.
- Gross margin improved modestly to 38.2% from 38.1%, while operating income increased 12%.
- U.S. segment operating income declined slightly to $1.116 million from $1.130 million, while Canada and Europe improved to $139,000 and $110,000, respectively.
- Operating cash flow remained negative and declined by $1.523 million, primarily reflecting inventory growth and reductions in accounts payable and accrued liabilities.
- Interest expense increased because of higher average borrowing rates and the mortgage on the Vancouver, Washington facility.
- Cash used in investing activities decreased to $897,000 from $7.737 million because the prior-year period included the $7.233 million Spill Magic acquisition.
Outlook, Commentary, Risks, and Unusual Items
Management stated that cash expected from operations and available borrowing capacity should be sufficient to fund planned operations for the twelve months following the filing. No formal revenue or earnings guidance was provided.
The company adopted ASC 606 revenue recognition guidance on January 1, 2018 using the modified retrospective method. Adoption did not materially affect the financial statements or the timing of revenue recognition. The company was also evaluating the future lease accounting standard and ASU 2018-02.
Key risks identified include global economic conditions, customer and consumer demand, competition and technology changes, integration of acquisitions, currency fluctuations, higher borrowing costs, and uncertainty regarding interpretation and application of the Tax Cuts and Jobs Act. The company reported no pending material legal proceedings and no material changes in internal control over financial reporting.
Foreign subsidiary cash repatriation of approximately $5.8 million contributed to the reduction in revolving debt. The company also paid approximately $45,000 for cash settlements of stock options and declared dividends of $0.11 per share, compared with $0.10 in the prior-year quarter.
Facts Investors Should Verify
- Whether operating cash flow improves as inventory and working-capital balances normalize.
- The refinancing or repayment plan for the $41.1 million revolving facility before its May 6, 2019 maturity.
- Exposure to rising LIBOR and other variable-rate borrowing costs.
- Whether U.S. operating margins recover despite higher delivery, commission, and personnel costs.
- The sustainability of sales growth in first aid and safety, office products, and sharpening tools.
- The effect of seasonality, currency movements, and international demand on subsequent quarters.
- Future balance-sheet effects from adoption of the lease accounting standard.