Business Context and Reporting Period
Acme United Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company sells cutting devices, measuring instruments, first-aid products and safety products through its United States, Canada and Europe segments. Sales are seasonal, with stronger second- and third-quarter results due to the back-to-school market.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2015 | Prior Year | Nine Months Ended September 30, 2015 | Prior Year |
|---|---|---|---|---|
| Net sales | $29.9 million | $30.0 million | $86.7 million | $82.6 million |
| Gross profit | $10.3 million | $10.6 million | $31.3 million | $29.2 million |
| Gross margin | 34.5% | 35.4% | 36.1% | 35.4% |
| Operating income | $2.0 million | $1.9 million | $6.7 million | $6.3 million |
| Net income | $1.2 million | $1.2 million | $4.4 million | $4.1 million |
| Diluted EPS | $0.33 | $0.34 | $1.18 | $1.18 |
- Net sales were approximately flat year over year in the third quarter, but increased 5% for the nine-month period, or 8% on a constant-currency basis.
- Operating margin was approximately 6.7% in the third quarter and 7.7% for the first nine months. SG&A was 27.9% of sales in the quarter and 28.4% year to date.
- Net cash used in operating activities was $0.7 million for the first nine months, compared with $1.3 million of cash provided in the prior-year period. Working-capital use included $4.2 million of additional receivables and $1.4 million of additional inventory cash use.
- Cash and cash equivalents were $4.6 million at September 30, 2015, compared with $2.3 million at December 31, 2014.
- Long-term debt was $28.6 million, up from $24.1 million at December 31, 2014. The company had $11.45 million available under its $40 million revolving credit facility.
- Working capital was $50.9 million, the current ratio was 4.65, and long-term debt to equity was 65.3% at September 30, 2015.
- The company declared dividends of $0.09 per share in the quarter and $0.27 per share for the first nine months, and repurchased 9,682 shares at an average price of $16.69.
Material Changes Versus the Prior Comparable Period
- Third-quarter gross profit and gross margin declined primarily because of approximately $150,000 of one-time moving and severance costs related to consolidating first-aid operations in Vancouver, Washington.
- Nine-month gross profit increased primarily from a more favorable product mix. Nine-month SG&A increased $1.7 million, principally because of First Aid Only-related costs, higher shipping expense and sales commissions.
- The First Aid Only acquisition increased sales and expenses and contributed to higher average borrowings and interest expense. The acquisition was completed in June 2014 for approximately $13.8 million.
- U.S. sales increased 1% in the quarter and 9% year to date, driven by Westcott products and first-aid products. Canada sales declined 24% in the quarter and 22% year to date in U.S. dollars, primarily because a large retail chain exited the Canadian market and economic conditions remained weak.
- Europe reported operating income of $86,000 for the first nine months versus an operating loss of $115,000 in the prior-year period, aided by higher sales and a third-quarter promotion.
- Direct-import sales increased to approximately 15% of third-quarter sales and 18% of nine-month sales, compared with 11% and 16%, respectively, in the prior-year periods.
- Foreign-currency translation reduced comprehensive income by $0.6 million for the first nine months.
Guidance, Outlook, Risks and Unusual Items
- No specific revenue or earnings guidance was provided. Management stated that expected operating cash flow and available revolving-credit capacity should be sufficient to fund planned operations for the next twelve months under current conditions.
- The HSBC facility bears interest at LIBOR plus 1.75%, matures April 5, 2017, and requires compliance with tangible-net-worth, debt-to-net-worth and fixed-charge-coverage covenants. The company was in compliance at September 30, 2015.
- Key disclosed risks include economic and political conditions, changes in customer needs and consumer spending, competition and technological change, loss of a major customer, integration of acquisitions, growth management and currency fluctuations.
- The company had approximately $80,000 remaining in its Fremont, North Carolina environmental remediation and monitoring accrual. Remediation was expected to be completed in 2015, with monitoring continuing through approximately 2020.
- No pending material legal proceedings were reported. The financial statements were prepared on an interim basis and results are not necessarily indicative of full-year results.
Important Facts for Investors to Verify
- Whether sales growth, particularly from First Aid Only and U.S. products, continues after the seasonal third quarter.
- Whether gross margin recovers after the first-aid consolidation costs and whether the favorable product mix is sustained.
- Receivables, inventory turnover and operating cash flow, which were pressured by working-capital investment.
- Debt repayment capacity, covenant compliance and availability under the revolving credit facility before its April 2017 maturity.
- The duration and ultimate cost of Fremont environmental monitoring obligations.
- The effect of Canadian market weakness, foreign-exchange movements and customer concentration on future results.