Acme United Corporation — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2016, filed August 15, 2016. Acme United sells cutting devices, measuring instruments, first-aid products and related products through its United States, Canada and Europe segments. Results are seasonal, with stronger sales generally occurring in the second and third quarters because of the back-to-school market.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $41.0 million vs. $34.0 million | $66.3 million vs. $56.8 million |
| Gross profit | $14.7 million vs. $12.5 million | $23.9 million vs. $21.0 million |
| Gross margin | 35.8% vs. 36.9% | 36.0% vs. 36.9% |
| Operating income | $4.6 million vs. $3.9 million | $5.6 million vs. $4.7 million |
| Net income | $3.3 million vs. $2.7 million | $3.8 million vs. $3.1 million |
| Diluted EPS | $0.91 vs. $0.74 | $1.08 vs. $0.85 |
- Six-month operating margin was approximately 8.4%, compared with 8.3% in the prior year; six-month net margin was approximately 5.8%, compared with 5.5%.
- Six-month net cash used in operating activities was $5.6 million, primarily reflecting a $13.9 million increase in accounts receivable and a $2.4 million increase in inventory.
- Capital expenditures were $0.8 million, and cash used for the DMT acquisition was $7.0 million.
- Cash provided by financing activities was $13.0 million, principally from $14.9 million of new long-term borrowings.
- Cash and cash equivalents were $2.1 million at June 30, 2016, compared with $2.4 million at December 31, 2015.
- Accounts receivable increased to $34.6 million from $19.6 million and inventories increased to $38.4 million from $35.5 million. Days sales outstanding improved slightly to 63 days from 64 days.
- Working capital was $59.5 million, compared with $47.7 million at year-end. The current ratio was 4.30 versus 5.00.
- Long-term debt was $40.8 million, compared with $25.9 million at December 31, 2015. The long-term debt-to-equity ratio increased to 89.7% from 60.0%.
- The amended HSBC revolving facility permits borrowings of up to $50 million at LIBOR plus 2.0%; $9.2 million remained available at June 30, 2016. The facility matures May 6, 2019, and the company was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Six-month sales increased 17%; management attributed the increase primarily to strong Westcott school and office products, Camillus knives and first-aid kits.
- United States sales increased 18% for the six-month period, Europe increased 15%, and Canada was flat in U.S. dollars but increased 5% in local currency.
- Gross margin declined 90 basis points for the six-month period because back-to-school products generally carry lower margins.
- SG&A increased 12% to $18.3 million for the six-month period, primarily because of incremental DMT-related fixed costs, higher delivery costs, sales commissions, personnel costs and recruiting costs. SG&A as a percentage of sales improved to 27.6% from 28.6%.
- Interest expense increased to $0.4 million from $0.3 million for the six-month period because of higher average borrowings, principally related to the DMT acquisition.
- On February 1, 2016, the company acquired selected assets of Diamond Machining Technology for $7.0 million in cash, funded with revolver borrowings. DMT contributed approximately $2.3 million of six-month sales and $0.3 million of six-month net income.
- The company repurchased 61,491 shares for approximately $0.9 million during the first six months and declared dividends of $0.20 per share, compared with $0.18 per share in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific full-year revenue, earnings or margin guidance. Management stated that operating cash flow and available revolver capacity should be sufficient to finance planned operations for the twelve months following the filing date under current conditions.
- Key risks identified include economic and consumer-spending conditions, global economic uncertainty, competition and technological change, loss or consolidation of major customers, management of growth and acquisitions, integration of acquired businesses, and currency fluctuations.
- The DMT purchase-price allocation remained preliminary, particularly the valuation of acquired intangible assets, and could change during the measurement period.
- The company had a $67,000 remaining environmental remediation and monitoring accrual related to its former Fremont, North Carolina facility. Remediation was expected to be completed in 2016, with monitoring expected through 2020.
- There were no pending material legal proceedings. The company was not required to contribute to its qualified pension plan in 2016.
- The company adopted no material changes to critical accounting policies. It was evaluating the potential effect of ASU 2016-09, effective for the company January 1, 2017.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether sales growth, particularly in U.S. school and office products, continues after the seasonal second and third quarters.
- Whether gross margins recover from the decline associated with lower-margin back-to-school products.
- The effect of DMT integration, intangible-asset valuation and acquired-product profitability on future results.
- Debt repayment capacity, revolver availability, interest-rate exposure and continued compliance with lending covenants.
- Working-capital conversion, especially the elevated accounts receivable balance and negative operating cash flow.
- Potential changes to the DMT purchase-price allocation and the remaining Fremont environmental obligation.