Acme United Corporation: Fiscal 2016 Form 10-K Summary
Business context and reporting period
Acme United Corporation is a global supplier of cutting, measuring, first aid, sharpening and related products sold under brands including Westcott, Clauss, Camillus, Cuda, DMT, First Aid Only, PhysiciansCare and Pac-Kit. Operations span the United States, Canada, Europe, Hong Kong and China. The filing covers the fiscal year ended December 31, 2016; fourth-quarter results are also presented.
Reportable segments were United States, Canada and Europe. Fiscal 2016 net sales were $124.6 million, including $110.8 million from the United States segment, $6.8 million from Canada and $7.0 million from Europe.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $124.6 million | $109.8 million | +13% |
| Gross profit | $45.6 million | $39.6 million | +15% |
| Gross margin | 36.6% | 36.0% | +0.6 percentage points |
| Operating income | $8.4 million | $7.3 million | +15% |
| Net income | $5.9 million | $4.8 million | +22% |
| Diluted EPS | $1.64 | $1.30 | +26% |
| Operating cash flow | $8.9 million | $1.1 million | + $7.8 million |
Operating margin was approximately 6.8% and net margin was approximately 4.7% in 2016. Selling, general and administrative expense increased 15% to $37.1 million, or 30% of sales, primarily because of DMT-related fixed costs, higher delivery costs, sales commissions and personnel expenses. Net interest expense increased to $869,000 from $565,000 because of higher average borrowings.
Fourth-quarter 2016 net sales were $26.4 million and net income was $545,000, compared with fourth-quarter 2015 sales of $23.1 million and net income of $440,000. Fourth-quarter diluted EPS was $0.15 versus $0.11.
At December 31, 2016, cash and cash equivalents were $5.9 million, accounts receivable were $20.0 million and inventory was $37.2 million. Total assets were $92.1 million and stockholders’ equity was $46.1 million. Accounts receivable days sales outstanding remained 64 days, while inventory turnover improved to 2.1 from 2.0.
Long-term debt was $32.9 million, compared with $25.9 million at year-end 2015. The revolving credit facility had a $50 million capacity, with $17.1 million available at year-end. The facility bears interest at LIBOR plus 2.0%, matures on May 6, 2019 and includes financial covenants. The company was in compliance with those covenants.
Capital expenditures were $1.8 million. The company paid approximately $1.3 million in shareholder distributions, repurchased 61,493 shares for approximately $907,000 and declared dividends of $0.40 per share for the year.
Material changes versus the prior comparable period
- Sales increased $14.8 million, led by higher Westcott, Camillus, Cuda and first aid sales. DMT contributed approximately $5.1 million of revenue in 2016.
- The company acquired substantially all principal assets of Diamond Machining Technology on February 1, 2016, for approximately $7.0 million in cash. DMT generated approximately $5.6 million of post-acquisition sales and $800,000 of post-acquisition net income.
- U.S. segment sales increased 15% and operating income increased approximately $622,000. Canada’s operating income increased approximately $510,000, while Europe’s operating income declined approximately $40,000 because of increased sales and logistics personnel investments.
- Gross margin improved to 36.6% from 36.0%, while SG&A as a percentage of sales increased to 30% from 29%.
- Operating cash flow increased substantially, primarily reflecting higher earnings and more favorable changes in receivables, payables and accrued liabilities, partly offset by inventory investment.
- The effective tax rate declined to 22% from 28%. Excluding the effect of a charitable product donation, the 2016 effective rate would have been approximately 25%.
- Intangible assets increased to $14.0 million from $12.0 million and goodwill increased to $3.9 million from $1.4 million, principally reflecting the DMT acquisition. No impairment was recorded.
Outlook, commentary, risks and unusual items
Management stated that cash on hand, cash generated from operations and available revolving-credit capacity should be sufficient to fund planned operations for at least the next twelve months under current conditions. Capital expenditures in 2017 were expected to increase by approximately $1.0 million over 2016 to expand capacity and upgrade equipment at the DMT and Spill Magic facilities.
On February 1, 2017, after year-end, the company acquired Spill Magic, Inc. assets for $7.2 million in cash. Spill Magic sells spill-absorbent products and safety kits and had facilities in California and Tennessee; 22 employees were retained.
Sales are seasonal, with stronger second- and third-quarter results due to back-to-school demand. Key risks include customer concentration, dependence on third-party distributors and retailers, foreign sourcing and China-related labor and currency exposure, freight and supply-chain disruptions, competitive pricing, interest-rate increases, product liability, environmental obligations, cybersecurity and the company’s ability to integrate acquisitions and manage growth.
Two customers each exceeded 10% of consolidated sales in 2016, representing approximately 14% and 11% of sales. The company had no pending material legal proceedings and no off-balance-sheet transactions. Environmental remediation at the former Fremont, North Carolina facility was complete, but monitoring is expected to continue through the end of 2020; the remaining liability was approximately $57,000 at year-end.
The company’s independent registered public accounting firm issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor was not required to provide a separate internal-control attestation because of the company’s smaller reporting company status.
Important facts for investors to verify
- Whether sales and earnings growth continue after adjusting for the DMT acquisition and incorporating the 2017 Spill Magic acquisition.
- The company’s ability to reduce leverage and manage the $32.9 million revolving-credit balance, variable LIBOR-based interest expense and 2019 maturity.
- Gross-margin trends, SG&A discipline and the effect of freight, labor, currency and product-cost inflation.
- Customer concentration and exposure to distributor, retailer and back-to-school demand fluctuations.
- Inventory growth, obsolete-inventory reserves and working-capital requirements as sales expand.
- Integration performance, capital requirements and goodwill or intangible-asset impairment risk related to acquisitions.
- Progress and final costs of Fremont environmental monitoring, pension obligations and other accrued liabilities.
- The effect of upcoming lease, share-based compensation, deferred-tax and revenue-recognition accounting standards.