ACME United Corporation — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015, compared with the first quarter of 2014. The company sells cutting devices, measuring instruments, first-aid products and related products through its United States, Canada and Europe segments. Sales are seasonally stronger in the second and third quarters due to the back-to-school market. The United States segment includes Asian operations.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $22.837 million | $19.152 million |
| Gross profit | $8.435 million; 36.9% margin | $6.877 million; 35.9% margin |
| Operating income | $827,000; 3.6% margin | $625,000; 3.3% margin |
| Net income | $436,000 | $368,000 |
| Diluted EPS | $0.12 | $0.11 |
| Cash flow from operations | $(3.281) million | $(1.605) million |
Net sales increased 19%. SG&A expense was $7.608 million, or 33.3% of sales, versus $6.252 million, or 32.6%, primarily reflecting First Aid Only acquisition costs, higher shipping, commissions and personnel expenses. Net interest expense increased to $130,000 from $83,000, and other expense increased to $76,000 from $19,000, primarily due to foreign-currency losses. The effective tax rate was 30% in both periods.
Cash and equivalents were $1.797 million at March 31, 2015, compared with $2.286 million at December 31, 2014. Current assets were $56.919 million and current liabilities were $11.468 million, producing working capital of approximately $45.451 million and a current ratio of 4.96. Inventory increased by approximately $2.3 million for seasonal purchases, while receivables declined approximately $2.8 million.
Long-term debt was $27.551 million, up from $24.147 million at year-end. The revolving credit facility has a $40 million borrowing limit, with $12.449 million available at March 31, 2015, bears interest at LIBOR plus 1.75%, and matures April 5, 2017. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- United States sales increased 25%, driven by Westcott school and office products, Cuda fishing tools and First Aid Only products. United States operating income increased to $971,000 from $676,000.
- Canada sales declined 18% in U.S. dollars, or 8% in local currency, and the segment reported an operating loss compared with operating income in the prior-year quarter.
- Europe sales declined 5% in U.S. dollars but increased 14% in local currency; the operating loss narrowed to $36,000 from $83,000.
- The First Aid Only asset acquisition, completed June 2, 2014 for approximately $13.8 million, contributed to sales and increased expenses, amortization and borrowings.
- Comprehensive income changed to a loss of $117,000 from income of $165,000, primarily because of a larger foreign-currency translation loss.
- Net cash used in operating activities increased to $3.281 million, while financing activities provided $3.429 million, including $3.404 million of additional debt and $321,000 from stock-option exercises.
Guidance, outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management expects cash generated from operations and available revolver capacity to fund planned operations for the next twelve months under current conditions. Management cautions that interim results may not indicate full-year performance because of seasonality.
Key cited risks include economic conditions, consumer spending, competition and technological change, growth and acquisition integration, and currency fluctuations. The company reported no pending material legal proceedings and stated that disclosure controls were effective.
The Bridgeport, Connecticut environmental remediation obligation was satisfied during the quarter after regulatory acceptance of the Form III Verification Report. Approximately $258,000 remained accrued at March 31, 2015 for Fremont, North Carolina remediation and monitoring; remediation was expected to be completed in 2015, with monitoring through approximately 2020. The company also expected to contribute approximately $200,000 to its qualified pension plan in 2015, of which approximately $30,000 had been contributed by March 31.
Important facts for investors to verify
- Whether First Aid Only sales and synergies offset its incremental SG&A, amortization, interest and integration costs.
- Progress in reducing operating cash burn and managing the seasonal inventory build.
- Debt levels, revolver availability, covenant compliance and the April 2017 maturity.
- Performance in Canada and the effect of foreign-exchange movements on reported results and comprehensive income.
- Remaining Fremont environmental remediation and monitoring costs, pension funding requirements and the company’s reliance on seasonal second- and third-quarter sales.