ACME United Corporation — 2017 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017. ACME United sells cutting devices, measuring instruments, first-aid and safety products, and related products through its United States, Canada and Europe segments. Results are seasonal, with sales typically stronger in the second and third quarters due to the back-to-school market.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $27.745 million | $25.288 million | +10% |
| Gross profit | $10.564 million | $9.185 million | +15% |
| Gross margin | 38.1% | 36.3% | +180 bps |
| Operating income | $1.192 million | $0.955 million | +25% |
| Operating margin | 4.3% | 3.8% | Improved |
| Net income | $0.659 million | $0.565 million | +17% |
| Diluted EPS | $0.18 | $0.16 | +13% |
| Net cash used in operating activities | $(3.052) million | $(2.355) million | Greater use of cash |
| Capital expenditures | $0.504 million | $0.449 million | Higher |
SG&A increased 14% to $9.372 million, or 33.8% of sales, from $8.230 million, or 32.5% of sales. The effective tax rate was 30% in both periods. Dividends declared were $0.10 per share in each period.
Cash and cash equivalents were $6.175 million at March 31, 2017, compared with $5.911 million at December 31, 2016. Total assets were $100.204 million and stockholders’ equity was $46.603 million. Working capital was $58.654 million and the current ratio was 7.56.
Long-term debt increased to $44.382 million from $32.936 million at year-end 2016. The company had $5.618 million available under its revolving credit facility at March 31, 2017. The facility bears interest at LIBOR plus 2.0% and matures May 6, 2019. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales increased primarily from higher U.S. first-aid sales, incremental Spill Magic sales and stronger European sales. U.S. segment sales rose 9%, Canadian sales were flat in U.S. dollars but declined 3% in local currency, and European sales rose 37%.
- Gross margin improved due primarily to manufacturing efficiencies in first-aid operations and favorable product mix.
- SG&A increased because of Spill Magic-related fixed costs, higher delivery costs and sales commissions, and increased personnel and recruiting costs.
- Net interest expense increased to $263,000 from $184,000 because of higher average borrowings.
- The company acquired Spill Magic assets on February 1, 2017 for $7.2 million in cash, funded with revolving-credit borrowings. Spill Magic contributed approximately $1.2 million of Q1 sales and $0.1 million of net income. The purchase-price allocation, including $5.8 million of intangible assets, remained preliminary.
- Cash flow was pressured by a $3.052 million operating cash outflow and $7.233 million of acquisition spending, partly offset by $11.436 million of net debt borrowings. Ending cash increased $264,000 during the quarter.
Guidance, outlook, risks and unusual items
No formal numerical earnings or revenue guidance is provided. Management expects cash generated from operations, together with available revolving-credit capacity, to fund planned operations for the next twelve months under current conditions.
- The company amended its credit facility to permit borrowings of up to $55 million from April 1 through September 30, 2017; the limit returns to $50 million on October 1, 2017.
- Key disclosed risks include economic conditions, consumer spending, competition and technological change, loss of major customers, integration of acquisitions, currency fluctuations and higher borrowing costs from rising interest rates.
- Environmental remediation and monitoring obligations related to the former Fremont, North Carolina facility totaled approximately $57,000 at March 31, 2017, with monitoring expected to continue through 2020.
- There were no pending material legal proceedings. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
- Adoption of ASU 2016-09 had no material first-quarter impact. The company was evaluating new lease guidance and did not expect ASU 2017-01 to have a material impact.
Important facts for investors to verify
- Confirm the final purchase-price allocation and ongoing earnings contribution of Spill Magic.
- Monitor debt reduction, interest-rate sensitivity, covenant compliance and available borrowing capacity as seasonal working-capital needs increase.
- Assess whether the improved gross margin is sustained and whether SG&A growth moderates relative to sales growth.
- Review operating cash conversion, receivables, inventory and accrued-liability movements, given the first-quarter operating cash outflow.
- Consider seasonality and the absence of formal full-year guidance when extrapolating first-quarter results.