ACME UNITED CORP quarterly report, Q1 FY2016

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ACME United Corporation — Form 10-Q Summary

Reporting period: Three months ended March 31, 2016. The unaudited interim financial statements cover the United States, Canada, and Europe segments. Results are seasonal, with sales generally stronger in the second and third quarters because of the back-to-school market.

Financial Performance and Position

  • Net sales: $25.288 million, up 11% from $22.837 million in Q1 2015. U.S. sales increased 12%, Canadian sales increased 12% in U.S. dollars, and European sales decreased 6% in U.S. dollars.
  • Gross profit: $9.185 million versus $8.435 million; gross margin declined to 36.3% from 36.9%, primarily because of product mix.
  • Operating income: $955,000 versus $827,000. SG&A increased $622,000 to $8.230 million, reflecting DMT-related fixed costs, higher personnel costs, shipping expense, and sales commissions.
  • Net income: $565,000 versus $436,000. Diluted EPS was $0.16 versus $0.12; basic EPS was $0.17 versus $0.13.
  • Effective tax rate: 30% in both periods.
  • Comprehensive income: $817,000 versus a comprehensive loss of $117,000, mainly reflecting a favorable foreign currency translation adjustment of $252,000 compared with a $553,000 loss in Q1 2015.
  • Cash flow: Operating activities used $2.355 million, compared with $3.281 million used in Q1 2015. Investing activities used $7.430 million, including $6.971 million for the DMT acquisition. Financing activities provided $8.823 million, primarily from $9.783 million of new borrowings.
  • Liquidity: Cash and equivalents were $1.474 million at March 31, 2016, down from $2.426 million at December 31, 2015. Working capital was $51.743 million, and the current ratio was 6.67.
  • Debt: Long-term debt was $35.696 million versus $25.913 million at year-end 2015. Approximately $4.304 million remained available under the then-existing $40 million revolving credit facility. The long-term-debt-to-equity ratio increased to 82.7% from 60.0%.
  • Balance sheet: Total assets increased to $88.290 million from $81.421 million, primarily due to acquired intangible assets and higher inventories. Stockholders’ equity was $43.145 million versus $43.183 million.

Material Changes Versus the Prior Comparable Period

  • Sales growth was driven by Westcott school and office products, increased first-aid distribution, DMT products, the Cuda fishing-tools line in Canada, and improved Canadian office-product demand.
  • U.S. segment operating income declined modestly to $945,000 from $971,000 despite higher sales. Canada improved to $32,000 of operating income from a $108,000 loss, while Europe’s operating loss narrowed to approximately $22,000 from $36,000.
  • Interest expense increased to $184,000 from $130,000 because of higher average borrowings used primarily to fund the DMT acquisition.
  • Inventory increased approximately $2.0 million, or 6%, from December 31, 2015, reflecting seasonal purchases and DMT inventory. Accounts receivable decreased approximately $450,000, and days sales outstanding improved to 63 days from 64 days.
  • The company repurchased 57,870 shares during the quarter for approximately $846,000 and declared dividends of $0.10 per share versus $0.09 in Q1 2015.

Acquisition, Debt Amendment, Outlook, and Risks

  • On February 1, 2016, the company acquired substantially all assets of Diamond Machining Technology for approximately $7.0 million in cash. DMT generated approximately $1.0 million of Q1 sales and $0.1 million of Q1 net income. Purchase-price allocation, including approximately $5.481 million of identified intangible assets, remained preliminary.
  • On May 6, 2016, after quarter-end, the revolving facility was amended to increase total borrowing capacity to $50 million, change pricing to LIBOR plus 2.0%, and extend maturity to May 5, 2019. The facility includes tangible-net-worth, debt-service-coverage, and fixed-charge-coverage requirements.
  • Management stated that operating cash flow plus available revolver capacity should be sufficient to finance planned operations for the twelve months following the filing, under current conditions. No formal revenue or earnings guidance was provided.
  • Management identifies risks from domestic and global economic conditions, consumer spending, competition and technological change, growth and acquisition integration, and currency fluctuations. Direct-import sales represented approximately 13% of Q1 2016 sales versus 10% in Q1 2015.
  • The company had approximately $80,000 remaining in its Fremont, North Carolina environmental-remediation accrual. Remediation was expected to be completed in 2016, with monitoring through 2020.
  • There were no pending material legal proceedings. Management reported effective disclosure controls and no material changes to internal control over financial reporting.

Important Facts for Investors to Verify

  1. Whether DMT’s preliminary purchase-price allocation and intangible-asset valuations are subsequently revised.
  2. The pace of debt reduction or further borrowing following the acquisition and the company’s compliance with the amended credit-facility covenants.
  3. Whether gross-margin pressure from product mix persists as DMT and other products become a larger portion of sales.
  4. Seasonal second- and third-quarter sales performance and the sustainability of the Q1 revenue increase.
  5. Cash conversion, inventory levels, and the company’s ability to fund dividends, share repurchases, acquisitions, and environmental obligations.
  6. Foreign-exchange effects on Canadian and European sales, earnings, and accumulated other comprehensive income.