Business Context and Reporting Period
Acme United Corporation filed its Form 10-K for the fiscal year ended December 31, 2018. The company supplies cutting, sharpening, measuring, first aid, and safety products under brands including Westcott, Clauss, Camillus, Cuda, DMT, First Aid Only, PhysiciansCare, Pac-Kit, and Spill Magic. Operations span the United States, Canada, Europe, Hong Kong, and China. The business is seasonal, with stronger sales generally in the second and third quarters and weaker sales in the first and fourth quarters.
The filing is an annual report; fourth-quarter information is presented as unaudited quarterly data.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $137.3 million | $130.6 million | +5.2% |
| Gross profit | $50.6 million | $47.9 million | +5.7% |
| Gross margin | 36.9% | 36.7% | +20 bps |
| SG&A expense | $43.2 million | $40.0 million | +8.0% |
| Operating income | $7.5 million | $7.9 million | -5.4% |
| Operating margin | 5.4% | 6.0% | Down |
| Net income | $4.6 million | $4.1 million | +13.5% |
| Diluted EPS | $1.30 | $1.09 | +19.3% |
| Net cash from operations | $4.5 million | $4.8 million | Down $0.3 million |
Net income benefited from lower income tax expense of $0.9 million versus $2.4 million in 2017. The 2017 tax expense included a $1.245 million non-cash charge related to the Tax Cuts and Jobs Act. Net interest expense increased to $1.9 million from $1.3 million, primarily due to higher average interest rates.
Fourth-quarter 2018 net sales were $31.1 million, gross profit was $11.4 million, net income was $0.6 million, basic EPS was $0.18, and diluted EPS was $0.19. Fourth-quarter 2017 net sales were $30.2 million and net income was a $0.7 million loss, primarily reflecting the tax-related charge.
Liquidity, Debt, Capital Allocation, and Balance Sheet
- Cash and cash equivalents declined to $4.4 million at December 31, 2018 from $9.3 million at year-end 2017.
- Accounts receivable were $25.1 million and inventories were $41.3 million. Inventory increased approximately 3%, while inventory turnover remained 2.1 times.
- Revolving credit debt was $40.3 million, with $9.7 million available under the $50 million facility. The facility matures May 24, 2023, bears interest at LIBOR plus 1.75%, and was subject to compliance with all stated covenants at year-end.
- The Vancouver, Washington mortgage had an outstanding principal balance of $3.7 million at year-end, bears interest at LIBOR plus 2.5%, and matures October 31, 2024.
- Total debt, including the mortgage, was approximately $44.0 million. Management stated that cash on hand, operating cash flow, and borrowing availability should fund planned operations for at least the next twelve months under current conditions.
- Capital expenditures were $2.9 million in 2018. The company repatriated approximately $7.8 million and used the proceeds to reduce debt and fund facility and production investments.
- The company paid approximately $1.5 million in shareholder distributions, repurchased 23,228 shares, and ended the year with 17,999 shares remaining under its repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven principally by strong U.S. first aid and safety sales and Camillus knife sales, as well as growth in Canada and Europe. European sales increased 13% in U.S. dollars and 9% in local currency.
- Gross margin improved modestly, but operating income declined because of increased sales and marketing personnel, compensation and recruiting costs, freight, and commissions.
- U.S. segment operating income declined approximately $0.7 million, while Canada increased approximately $0.1 million and Europe increased approximately $0.2 million.
- Operating cash flow decreased modestly as inventory increased and accounts payable and accrued liabilities declined.
- Debt declined by approximately $3.2 million from year-end 2017, and the company’s balance sheet liabilities decreased by approximately $7.6 million.
- E-commerce represented approximately 10% of 2018 net sales and remained the fastest-growing distribution channel. Direct import sales represented approximately 12% of total sales, compared with 11% in 2017.
- The company adopted ASC 606 revenue recognition guidance in 2018 without a material impact on financial statements.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide quantitative revenue or earnings guidance. Management expects current cash, operating cash generation, and available revolver capacity to fund planned operations for at least the next twelve months, subject to current conditions.
- A 10% U.S. tariff imposed in September 2018 affected approximately 10% of the company’s product purchases from China. The company implemented price increases to offset the impact, but additional tariffs could increase procurement costs, reduce demand, or pressure margins.
- Material risks include customer concentration, dependence on third-party distributors and retailers, foreign sourcing and currency fluctuations, freight and supply-chain disruptions, interest-rate increases, competition, cybersecurity incidents, product liability, environmental matters, and execution of e-commerce growth.
- One customer represented approximately 13% of consolidated 2018 net sales, compared with two customers representing approximately 16% and 11% in 2017.
- The company has significant variable-rate debt, exposing interest expense and cash flow to higher LIBOR and other interest-rate increases.
- There were no material pending legal proceedings, no off-balance-sheet transactions, and no impairment of goodwill or long-lived assets reported at December 31, 2018.
- The frozen U.S. pension plan was underfunded by approximately $0.1 million at year-end. The company expects approximately $87,000 of net actuarial loss and $543 of prior service cost in 2019 pension expense.
- The company expects adoption of the new lease standard to add approximately $2.9 million of operating lease right-of-use assets and related liabilities.
- Management and the independent auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion.
Important Facts for Investors to Verify
- Whether tariff-related price increases fully offset higher China-sourced procurement costs without materially reducing demand.
- Whether operating leverage improves as recent sales and marketing investments generate growth, given the 2018 decline in operating income.
- Revolver availability, variable-rate debt costs, covenant compliance, and the company’s ability to continue reducing debt.
- Customer concentration and the durability of sales through major retailers, distributors, and e-commerce channels.
- Inventory levels, turnover, and reserves for slow-moving or obsolete products.
- The sustainability of dividends and share repurchases, particularly in light of limited cash balances and debt obligations.
- Actual 2019 effects from lease accounting, pension funding, currency movements, tariffs, and international sourcing risks.