Acme United Corporation — Fiscal 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017, including fourth-quarter results. Acme United supplies cutting, measuring, first aid, sharpening, hardware and sporting-goods products through operations in the United States, Canada, Europe and Asia. Fiscal 2017 included the February acquisition of Spill Magic for approximately $7.2 million and the October purchase of the Vancouver, Washington facility for $4.0 million.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $130.55 million | $124.57 million | +4.8% |
| Gross profit | $47.90 million | $45.56 million | +5.1% |
| Gross margin | 36.7% | 36.6% | +0.1 percentage points |
| Operating income | $7.80 million | $8.44 million | -7.7% |
| Operating margin | 6.0% | 6.8% | Down |
| Net income | $4.05 million | $5.85 million | -30.7% |
| Diluted EPS | $1.09 | $1.64 | Down |
| Cash flow from operations | $4.81 million | $8.86 million | Down |
| Capital expenditures | $3.15 million | $1.81 million | Up |
Year-end cash and cash equivalents were $9.34 million, compared with $5.91 million in 2016. Accounts receivable increased to $26.01 million and inventories to $40.09 million. Total assets were $114.73 million and stockholders’ equity was $49.94 million.
Debt consisted primarily of $43.45 million outstanding under the HSBC revolving facility, with $6.55 million available, plus approximately $3.98 million outstanding under the Vancouver property mortgage. The revolver bears interest at LIBOR plus 2.0%; the mortgage bears interest at LIBOR plus 2.5%. The revolver matures on May 6, 2019, and the mortgage matures on October 31, 2024.
Annual dividends increased to $0.43 per share from $0.40 per share. No shares were repurchased during 2017, and 41,227 shares remained available under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- U.S. segment sales increased 4%, helped by approximately $6.5 million of Spill Magic sales; excluding Spill Magic, U.S. sales declined approximately $1.9 million, or 2%.
- Canada sales increased 2% in U.S. dollars but were flat in local currency. Europe sales increased 18% in U.S. dollars and 16% in local currency, supported by office-channel market share gains and higher DMT sales.
- SG&A increased 8% to $40.10 million, or 30.7% of sales versus 29.8%, driven by delivery costs, commissions, Spill Magic-related fixed costs and higher headcount.
- Net interest expense increased to $1.33 million from $0.87 million because of higher average borrowings and interest rates, primarily related to the Spill Magic acquisition.
- The fourth quarter generated sales of $30.17 million versus $26.38 million, but reported a net loss of $655,000 versus net income of $545,000 in the prior-year quarter.
- The 2017 net loss in the fourth quarter reflected a $1.245 million non-cash tax expense related to the Tax Cuts and Jobs Act, including a $1.170 million transition tax on foreign earnings and a $75,000 deferred-tax remeasurement charge. Excluding this charge, management reported non-GAAP net income of $5.30 million and adjusted diluted EPS of $1.42 for 2017.
Outlook, Liquidity, Risks and Unusual Items
Management provided no specific revenue or earnings guidance. It expects cash on hand, operating cash flow and available revolver capacity to fund planned operations for at least the next twelve months under current conditions. Management also expected 2018 capital expenditures to increase by approximately $0.7 million from 2017 to expand capacity and upgrade DMT, Spill Magic and first-aid facilities.
The company reported that approximately $5.8 million had been repatriated in early 2018 following tax reform, with proceeds used to reduce debt and planned for facility expansion and acquisitions.
The company initially exceeded its total-liabilities-to-tangible-net-worth covenant at December 31, 2017, with a ratio of 2.37:1 versus a 2.25:1 limit. HSBC subsequently amended the limit to 2.50:1 effective for the quarter ended December 31, 2017; the company reported compliance after the amendment. This covenant issue resulted solely from the Tax Act’s non-cash transition-tax charge.
Principal risks include customer concentration, seasonal demand and back-to-school execution, reliance on Asian suppliers and foreign currency exposure, transportation and customs disruptions, rising product and freight costs, variable-rate debt, competition, e-commerce execution, cybersecurity, product liability, environmental matters and the integration of acquisitions. Two customers each exceeded 10% of consolidated sales in both 2017 and 2016; together they represented approximately 27% of 2017 sales.
The company reported no material pending legal proceedings, no off-balance-sheet transactions and effective disclosure controls and internal control over financial reporting. The independent auditor issued unqualified opinions.
Most Important Facts to Verify
- Whether the Spill Magic acquisition produces sustained growth after contributing approximately $6.5 million of 2017 sales and $0.8 million of net income.
- Progress in reducing leverage and refinancing or repaying the $43.45 million revolver before its May 2019 maturity.
- Compliance with the amended debt covenants and sensitivity to LIBOR and other interest-rate increases.
- Whether the 2017 decline in U.S. legacy sales and operating income reverses, particularly in Westcott school and office products.
- The final tax effects of the Tax Cuts and Jobs Act and any adjustments to the provisional $1.245 million charge.
- Working-capital conversion, including the increase in receivables and inventories and the decline in operating cash flow.
- The company’s ability to maintain dividends while funding capital expenditures, acquisitions and debt reduction.