ACME United Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2019, filed November 7, 2019. ACME United sells cutting, sharpening and other products, as well as first aid and safety products, primarily through its United States, Canada and Europe segments. Sales are seasonal, with stronger second- and third-quarter demand related to the back-to-school market.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $37.0 million | $34.7 million | $108.6 million | $106.2 million |
| Gross profit | $13.1 million | $12.5 million | $39.7 million | $39.3 million |
| Gross margin | 35.5% | 35.8% | 36.6% | 37.0% |
| Operating income | $1.7 million | $1.4 million | $7.0 million | $6.4 million |
| Net income | $1.1 million | $0.8 million | $4.5 million | $4.0 million |
| Diluted EPS | $0.30 | $0.23 | $1.32 | $1.12 |
| Dividends declared per share | $0.12 | $0.11 | $0.36 | $0.33 |
For the nine months ended September 30, 2019, operating cash flow was $7.3 million, compared with cash used in operations of $4.5 million in the prior-year period. Capital expenditures were $1.1 million, and ending cash was $5.7 million versus $4.0 million at September 30, 2018.
At September 30, 2019, current assets were $77.1 million and current liabilities were $16.6 million, producing working capital of $60.5 million and a current ratio of 4.64. Accounts receivable increased to $30.6 million from $25.1 million at December 31, 2018, while inventories declined to $39.0 million from $41.3 million.
Total debt included $38.1 million outstanding under the $50 million HSBC revolving credit facility, $3.5 million of mortgage debt, and $2.1 million of operating lease liabilities. The revolving facility had $11.9 million available at quarter-end and matures in 2023. The company reported compliance with all loan covenants.
Material changes versus the prior comparable period
- Q3 net sales increased 7%; nine-month sales increased 2%.
- Sales growth was led by first aid and safety products. School and office product sales were lower.
- Q3 operating income increased 26% to $1.7 million; nine-month operating income increased 10% to $7.0 million.
- Q3 SG&A increased $0.3 million, primarily from higher personnel costs, but declined $0.2 million for the nine-month period due to expense-reduction efforts.
- Gross margins declined modestly from 35.8% to 35.5% in Q3 and from 37.0% to 36.6% for the first nine months.
- Q3 net interest expense declined $0.03 million, while nine-month net interest expense increased $0.1 million due primarily to higher average borrowing rates.
- Canada sales increased in Q3 but declined 6% in U.S. dollars for the nine-month period. Europe sales increased 15% in Q3 and 14% for the nine-month period in U.S. dollars.
- Debt under the revolving facility declined approximately $2.2 million from December 31, 2018.
- The company adopted new lease accounting requirements in 2019, recording a right-of-use asset and lease liabilities. It also adopted ASU 2018-02, increasing retained earnings by approximately $0.1 million with an offsetting increase in accumulated other comprehensive loss.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management stated that operating cash generation and available revolving-credit capacity should be sufficient to fund planned operations for the next twelve months under current conditions.
- Management identified risks from global economic conditions, customer and consumer demand, competition, technology changes, acquisition integration, foreign-currency fluctuations, interest-rate increases and international trade policies, including tariffs.
- Direct-import sales represented approximately 14% of total sales in both the quarter and nine-month period, compared with 12% and 11%, respectively, in the prior-year periods.
- The company paid $1.3 million during the first nine months to employees who elected net cash settlement of stock options.
- Shareholder distributions totaled $1.2 million during the first nine months.
- Operating lease expense was $0.3 million in Q3 and $0.9 million for the first nine months. Future minimum non-cancellable lease payments totaled $2.3 million at September 30, 2019.
- No material legal proceedings were reported. Management concluded that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether first aid and safety growth can offset continued weakness in school and office products.
- Whether gross-margin pressure persists, particularly amid tariff, sourcing, freight and foreign-currency risks.
- Accounts-receivable growth and cash conversion, including the effect of seasonal sales.
- Revolving-facility covenant compliance, interest-rate exposure and the remaining $11.9 million borrowing capacity.
- The sustainability of operating cash flow after dividends, option settlements, capital expenditures and debt repayments.
- Future performance in Canada and Europe, including currency effects and the contribution from new customers and DMT sharpening products.