Acme United Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2016. Acme United sells cutting devices, measuring instruments, safety products, and related products through its United States, Canada, and Europe segments. Results are seasonally stronger in the second and third quarters because of the back-to-school market. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Net sales | $31.913 million | $29.903 million | $98.198 million | $86.694 million |
| Gross profit | $11.863 million | $10.325 million | $35.743 million | $31.296 million |
| Gross margin | 37.2% | 34.5% | 36.4% | 36.1% |
| Operating income | $2.140 million | $1.991 million | $7.735 million | $6.693 million |
| Net income | $1.473 million | $1.208 million | $5.305 million | $4.353 million |
| Diluted EPS | $0.40 | $0.33 | $1.49 | $1.18 |
| Net cash from operating activities | Not separately provided | Not separately provided | $1.585 million | $(0.689) million |
Q3 operating margin was approximately 6.7%, compared with 6.7% in the prior-year quarter. First-nine-month operating margin was approximately 7.9%, compared with 7.7% in the prior-year period. Q3 net margin was approximately 4.6%, compared with 4.0% in 2015; first-nine-month net margin was approximately 5.4%, compared with 5.0%.
At September 30, 2016, cash and cash equivalents were $6.272 million, total current assets were $72.293 million, and total current liabilities were $13.345 million. Working capital was $58.948 million and the current ratio was 5.42. Revolving-credit borrowings were $39.706 million, with $10.294 million available under the $50 million facility. Long-term debt-to-equity was 86.8%, compared with 60.0% at December 31, 2015.
Cash increased by $3.846 million during the first nine months, from $2.426 million to $6.272 million. Investing cash use was $8.320 million, including $6.971 million for the DMT acquisition and $1.320 million for capital expenditures. Financing cash inflow was $10.576 million, primarily from $13.793 million of additional long-term borrowings.
Material changes versus the prior comparable period
- Q3 sales increased 7%; first-nine-month sales increased 13%. The U.S. segment increased 9% in Q3 and 15% year to date, driven by Westcott, first-aid products, and DMT sales.
- Canada sales declined 5% in Q3 in U.S. dollars but increased 3% in local currency for the first nine months. Europe declined 12% in Q3 because of promotional-shipment timing but increased 4% year to date.
- Gross margin improved in Q3 primarily because of favorable product mix and approximately $150,000 of prior-year moving and severance costs that did not recur.
- SG&A increased to $9.723 million in Q3 and $28.008 million year to date, primarily from DMT-related fixed costs, higher delivery costs, sales commissions, and personnel expenses.
- Interest expense increased to $247,000 in Q3 and $642,000 year to date because of higher average borrowings, principally to fund the DMT acquisition and working capital.
- The effective tax rate declined to 19% in Q3 and 25% year to date, compared with 31% and 29%, respectively, due to a greater proportion of earnings in lower-tax jurisdictions.
- Accounts receivable increased $6.3 million and inventory increased $2.6 million from December 31, 2015, reflecting strong seasonal sales, normal seasonal purchases, and DMT inventory.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide specific numerical earnings or revenue guidance. Management stated that operating cash flow and available revolving-credit capacity are expected to be sufficient to finance planned operations for the next twelve months under current conditions.
On February 1, 2016, the Company acquired selected DMT assets for $6.97 million in cash. DMT contributed approximately $1.3 million of Q3 sales and $200,000 of Q3 net income, and approximately $3.6 million of nine-month sales and $500,000 of nine-month net income. Purchase-price allocation remained preliminary, particularly the valuation of acquired intangible assets.
The HSBC revolving facility bears interest at LIBOR plus 2.0%, expires May 6, 2019, and contains tangible-net-worth, debt-ratio, fixed-charge-coverage, and annual-positive-net-income requirements. The Company was in compliance with applicable covenants at September 30, 2016.
Environmental remediation at the former Fremont, North Carolina facility was substantially completed, but monitoring is expected through the end of 2020. The remaining accrual was approximately $67,000. The Company reported no pending material legal proceedings. Principal disclosed risks include economic conditions, consumer spending, competition and technological change, loss of major customers, acquisition integration, growth management, and currency fluctuations.
The Company adopted no material change to its critical accounting policies during the period. ASU 2016-09 on share-based-payment accounting becomes effective January 1, 2017; the Company was evaluating its effect.
Facts investors should verify
- Whether DMT revenue and profitability continue to offset the added debt, interest expense, and SG&A burden.
- Available borrowing capacity, covenant compliance, and refinancing or repayment requirements as the May 2019 credit-facility maturity approaches.
- Whether receivables and inventory growth remains consistent with seasonal sales or creates working-capital pressure.
- The sustainability of the lower effective tax rate and the favorable gross-margin performance.
- The final purchase-price allocation and valuation of DMT intangible assets.
- Progress and ultimate cost of Fremont environmental monitoring through 2020.
- Exposure to seasonal demand, major-customer concentration, foreign currency movements, and European promotional timing.