Acme United Corporation — FY2015 Form 10-K Summary
Business context and reporting period
Acme United supplies cutting, measuring, first aid and sharpening products to school, home, office, hardware, sporting goods and industrial markets. Operations span the United States, Canada, Europe and Asia. This Form 10-K covers the fiscal year ended December 31, 2015; fourth-quarter results are included in the annual filing.
- 2015 net sales: $109.8 million.
- Reportable-segment sales: United States, including Asian operations, $96.6 million; Canada $6.8 million; Europe $6.4 million.
- Sales are seasonal, with stronger second- and third-quarter activity from the back-to-school business.
Financial performance and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $109.8 million | $107.2 million |
| Gross profit | $39.6 million; 36.0% margin | $38.2 million; 35.6% margin |
| Operating income | $7.3 million | $7.4 million |
| Net income | $4.8 million | $4.8 million |
| Basic diluted EPS | $1.44 / $1.30 | $1.48 / $1.36 |
| Net cash from operating activities | $1.1 million | $4.6 million |
| Capital expenditures | $1.8 million | $2.0 million |
| Cash and cash equivalents | $2.4 million | $2.3 million |
| Long-term debt | $25.9 million | $24.1 million |
- SG&A increased 5% to $32.2 million, or approximately 29% of sales, driven by First Aid Only expenses, higher delivery costs and commissions, and increased amortization.
- Income before taxes was $6.6 million; income tax expense was $1.8 million, producing a 28% effective tax rate versus 30% in 2014.
- Working capital increased approximately $5.5 million. Inventory rose 5% to $35.5 million, while inventory turnover declined to 2.0 from 2.2.
- Total assets were $81.4 million and stockholders’ equity was $43.2 million at year-end.
- The company declared dividends of $0.37 per share and repurchased 40,445 shares for approximately $0.7 million.
Material changes versus the prior comparable period
- Sales increased 2% year over year, or approximately 5% in constant currency. U.S. sales rose 6%, while Canada declined 23% in U.S. dollars and Europe declined 10% in U.S. dollars.
- U.S. growth primarily reflected higher first aid sales and the inclusion of the First Aid Only acquisition, completed in June 2014. First Aid Only integration was completed in 2015.
- Canadian sales were pressured by weak economic conditions and a large retailer exiting the Canadian market. European sales increased 7% in local currency, primarily from higher office-product sales and market share.
- Gross margin improved to 36.0% from 35.6%. The company incurred approximately $0.4 million of one-time severance, moving and production start-up costs related to consolidating first aid manufacturing in Vancouver, Washington; excluding those costs, gross margin was approximately 36.4%.
- Operating income declined modestly despite higher sales, as higher SG&A, interest expense and foreign-currency losses offset gross-profit growth.
- Operating cash flow fell to $1.1 million from $4.6 million, primarily due to inventory growth and reductions in accounts payable and accrued liabilities.
- Foreign-currency translation reduced other comprehensive income by $0.8 million, and total accumulated other comprehensive loss increased to $2.5 million.
Liquidity, debt, outlook and risks
- The HSBC revolving credit facility permits borrowings up to $40 million at LIBOR plus 1.75%. At December 31, 2015, borrowings were $25.9 million and availability was $14.1 million. The facility expires April 5, 2017, when outstanding principal is due in a single payment.
- Management stated that cash on hand, operating cash flow and available revolver capacity should fund planned operations for at least the next twelve months under current conditions. No specific revenue or earnings guidance was provided.
- On February 1, 2016, the company acquired the principal assets of Diamond Machining Technology for $7.0 million in cash. DMT expands the sharpening-tool portfolio and includes approximately 50 patents and trademarks.
- Key risks include customer concentration, reliance on third-party distributors and retailers, seasonal demand, foreign sourcing and currency movements, freight and supply-chain disruptions, rising China labor and transportation costs, competitive pricing pressure, product liability, environmental obligations, cybersecurity and the ability to integrate acquisitions.
- Two customers each represented approximately 12% of 2015 consolidated sales.
- The Fremont, North Carolina environmental remediation was completed in 2015, but monitoring is expected to continue through the end of 2020. The remaining remediation liability was approximately $80,000 at year-end.
- The company reported no pending material legal proceedings, no off-balance-sheet transactions and no impairment of goodwill or intangible assets in 2015.
Important facts for investors to verify
- Assess refinancing and repayment risk for the $25.9 million revolver maturing in April 2017, including covenant compliance and post-year-end borrowing.
- Evaluate whether operating cash flow can improve as inventory and working-capital requirements normalize, particularly after the DMT acquisition.
- Review the sustainability of gross-margin improvement after excluding the $0.4 million first-aid consolidation costs.
- Monitor Canadian customer losses, European currency exposure and the impact of foreign-exchange movements on sourcing costs and reported results.
- Review customer concentration and the company’s exposure to major distributors and retailers.
- Verify the purchase accounting, financing and operating contribution of the February 2016 DMT acquisition.
- Consider pension underfunding of approximately $0.4 million, ongoing Fremont environmental monitoring, and future lease commitments.