ACME United Corporation: 2019 Q1 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2019, filed May 9, 2019. The company sells cutting, sharpening and other products, as well as first-aid and safety products, through United States, Canadian and European segments. Sales are seasonal, with stronger second and third quarters due to the back-to-school market.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $31.370 million | $31.709 million |
| Gross profit | $11.802 million | $12.124 million |
| Gross margin | 37.6% | 38.2% |
| Operating income | $1.534 million | $1.365 million |
| Operating margin | 4.9% | 4.3% |
| Net income | $807 thousand | $764 thousand |
| Diluted EPS | $0.24 | $0.21 |
| Dividends declared per share | $0.12 | $0.11 |
| Net cash used in operating activities | $683 thousand | $4.575 million |
| Capital expenditures | $438 thousand | $897 thousand |
- Net sales decreased approximately 1%. Gross profit declined approximately 3%, primarily because of unfavorable product mix.
- SG&A decreased $491 thousand to $10.268 million, or 32.7% of sales, from 33.9% in the prior-year quarter. Management attributed the reduction primarily to lower commissions and shipping costs and its expense-reduction strategy.
- Interest expense, net increased $96 thousand to $501 thousand because of a higher average interest rate on the revolving credit facility.
- Cash and cash equivalents were $3.798 million at March 31, 2019, compared with $4.409 million at December 31, 2018. The company had working capital of $60.534 million and a current ratio of 6.34.
- Revolving-credit borrowings were $41.340 million, leaving $8.660 million available under the $50 million facility. Mortgage debt totaled approximately $3.645 million, including current and long-term portions.
- The company generated $505 thousand of net cash from financing activities, including $1.057 million of net debt borrowings, $405 thousand of shareholder distributions and $80 thousand of cash settlements for stock options.
Material changes versus the prior comparable period
- U.S. sales declined 1%, partly because first-quarter 2018 initial shipments of first-aid products to a major food-service distributor did not recur.
- Canadian sales declined 9% in U.S. dollars and 5% in local currency because a large initial order from a new customer in Q1 2018 did not repeat.
- European sales increased 6% in U.S. dollars and 14% in local currency, driven by new office-products customers and growth in DMT sharpening products.
- U.S. operating income increased $141 thousand, Canadian operating income decreased $4 thousand and European operating income increased $32 thousand.
- Operating lease right-of-use assets of $2.674 million and related lease liabilities were recognized following adoption of ASC 842. The company reported approximately $2.9 million of right-of-use assets at adoption.
- Adoption of ASU 2018-02 increased retained earnings by approximately $0.1 million, with an offsetting increase in accumulated other comprehensive loss. Adoption of ASU 2018-07 had no material effect.
Guidance, outlook, risks and unusual items
The filing does not provide specific revenue or earnings guidance. Management stated that expected operating cash flow and available borrowing capacity should be sufficient to fund planned operations for the twelve months following the filing, under current conditions.
- The revolving facility matures May 24, 2023, bears interest at LIBOR plus 1.75%, and is subject to tangible-net-worth, debt-to-net-worth, fixed-charge-coverage and profitability covenants. The company was in compliance at March 31, 2019.
- The company identifies risks from global economic conditions, customer and consumer demand, competition, growth and acquisition integration, currency fluctuations, rising interest rates, and changes in trade policies or tariffs.
- The company’s mortgage is variable-rate debt at LIBOR plus 2.5%, with principal payments of approximately $22 thousand per month and a maturity date of October 31, 2024.
- Operating leases expire at various dates through 2024; future minimum lease payments totaled $2.918 million, with lease liabilities recorded at a present value of $2.680 million.
- No material legal proceedings were pending, and management concluded that disclosure controls were effective. The filing states that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether improved operating income can continue despite lower sales and gross margin pressure from product mix.
- The effect of higher interest rates and variable-rate debt on earnings and cash flow.
- Available revolver capacity and compliance with debt covenants as seasonal working-capital needs increase.
- Whether European growth offsets weaker or nonrecurring customer comparisons in the United States and Canada.
- Seasonality and the company’s ability to convert second- and third-quarter sales into operating cash flow.
- Future tariff, currency, supplier-cost and consumer-demand developments.