Acme United Corporation — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2018, filed August 9, 2018. Acme United sells cutting and sharpening products and first aid and safety 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.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Net sales | $39.8 million | $38.8 million | $71.5 million | $66.6 million |
| Gross profit | $14.7 million | $14.5 million | $26.8 million | $25.0 million |
| Gross margin | 37.0% | 37.3% | 37.6% | 37.6% |
| Operating income | $3.6 million | $3.9 million | $5.0 million | $5.1 million |
| Net income | $2.4 million | $2.8 million | $3.2 million | $3.5 million |
| Diluted EPS | $0.67 | $0.75 | $0.88 | $0.94 |
Operating margins were approximately 9.1% for the quarter and 7.0% year to date, compared with approximately 10.1% and 7.7%, respectively, in the prior-year periods. SG&A expense was $11.1 million for the quarter and $21.8 million year to date, representing 27.9% and 30.6% of sales.
- Six-month net cash used in operating activities was $5.2 million, compared with $4.7 million used in the prior-year period.
- Operating cash flow was adversely affected by an $8.5 million increase in accounts receivable and a $2.6 million increase in inventory.
- Capital expenditures were $1.8 million in the first six months, compared with $1.6 million in 2017. The prior-year period also included $7.2 million for the Spill Magic acquisition.
- Cash and cash equivalents declined to $1.9 million at June 30, 2018 from $9.3 million at December 31, 2017.
- Revolving-credit borrowings were $44.3 million, up from $43.5 million at December 31, 2017. The $50 million facility had $5.7 million available at quarter-end.
- The company also had $3.6 million of mortgage debt, net of current portion. Total liabilities were $66.4 million and stockholders’ equity was $52.2 million.
- Working capital was $63.8 million and the current ratio was 4.62 at June 30, 2018.
- Dividends declared were $0.11 per share for the quarter and $0.22 per share year to date.
Material Changes Versus the Prior Comparable Period
- Sales increased 2% for the quarter and 7% year to date, primarily from U.S. first aid and safety market-share gains. European sales increased 13% for the quarter and 19% year to date in U.S. dollars, while Canadian quarterly sales declined 1%.
- Gross profit increased, but quarterly gross margin decreased modestly to 37.0% from 37.3%; year-to-date gross margin was unchanged at 37.6%.
- Operating income declined 7% for the quarter and 3% year to date, primarily because of higher sales and marketing personnel costs, recruiting, freight, commissions, and other SG&A.
- Interest expense increased $124,000 for the quarter and $267,000 year to date because of higher borrowing rates and interest on the Vancouver, Washington mortgage.
- Other expense increased, primarily from foreign-currency transaction losses.
- Net income and diluted EPS declined in both comparison periods. The 2017 results also included approximately $350,000 of excess tax benefits from share-based compensation; the 2018 effective tax rate was approximately 22%, benefiting from the Tax Cuts and Jobs Act.
- Foreign-currency translation produced a $253,000 comprehensive loss in the quarter and a $235,000 loss year to date, compared with gains in 2017.
- The company adopted ASC 606 revenue guidance on January 1, 2018 using the modified retrospective method; management reported no material impact on the financial statements.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide 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. Management also notes that online sales may shift revenue timing from the second quarter into the third quarter.
On May 24, 2018, the revolving loan agreement was amended to reduce pricing from LIBOR plus 2.00% to LIBOR plus 1.75% and extend maturity to May 24, 2023. The borrowing limit remained $50 million, and the company was in compliance with its debt covenants at June 30, 2018. The Vancouver property mortgage bears interest at LIBOR plus 2.5% and matures October 31, 2024.
- Key disclosed risks include global economic conditions, customer and consumer spending changes, competition, technological change, integration of acquisitions, currency fluctuations, rising interest rates, and uncertainties regarding the Tax Cuts and Jobs Act.
- The business is exposed to seasonal working-capital requirements, with receivables, inventory, and revolving debt typically increasing in the second and third quarters.
- No material pending legal proceedings were reported.
- The company had not made the $25,000 minimum required pension contribution as of June 30, 2018.
- Unrecognized share-based compensation was approximately $1.6 million, expected to be recognized over approximately three years.
Investor Verification Items
- Verify whether seasonal third-quarter sales and online-order timing offset the weak operating cash flow reported through June 30.
- Monitor accounts receivable, inventory, and revolving borrowings, given the low cash balance and only $5.7 million of remaining credit availability.
- Assess the effect of higher interest rates and variable-rate debt on future earnings and liquidity.
- Evaluate whether increased sales and marketing spending produces sustained revenue growth and restores operating leverage.
- Confirm compliance with revolving-loan covenants and the availability of borrowing capacity in subsequent filings.
- Track foreign-exchange effects, tax-rate changes, and the company’s ability to fund dividends, capital expenditures, and the required pension contribution.