Acme United Corporation — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2014. Acme United sells cutting devices, measuring instruments and safety products through its United States, Canada and Europe segments. The company identifies the United States and Canada as its primary operating segments, while Europe remained loss-making during the quarter. Results are seasonal, with sales generally stronger in the second and third quarters due to the back-to-school market.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $19.152 million | $17.651 million |
| Gross profit | $6.877 million; 35.9% margin | $6.427 million; 36.4% margin |
| SG&A expense | $6.252 million; 32.6% of sales | $5.914 million; 33.5% of sales |
| Operating income | $625,000 | $513,000 |
| Income before taxes | $523,000 | $441,000 |
| Net income | $368,000 | $309,000 |
| Diluted EPS | $0.11 | $0.10 |
| Dividends declared per share | $0.08 | $0.07 |
Net sales increased 9%. The United States segment increased sales 13%, primarily from new lawn and garden products and higher first-aid-kit sales. Canada sales declined 7% in U.S. dollars but increased 2% in local currency. Europe sales declined 15% in U.S. dollars and 21% in local currency, primarily because of the timing of mass-market customer sales.
Gross margin was broadly stable at approximately 36%. SG&A increased $338,000, mainly from higher salaries and travel, commissions and delivery costs associated with increased sales, and new-product spending. The effective tax rate was 30% in both periods.
Net cash used in operating activities was $1.605 million, compared with $869,000 in the prior-year quarter. Investing cash use was $790,000, including $762,000 for property, plant and equipment. Financing cash use was $5.882 million, including $5.626 million of debt repayment and $256,000 of stockholder distributions. Cash declined to $3.367 million from $11.644 million at December 31, 2013.
At March 31, 2014, total assets were $61.781 million and stockholders’ equity was $35.039 million. Long-term debt was $17.286 million, down from $22.912 million at year-end. The company reported $22.714 million of borrowing availability under its $40 million HSBC revolving facility, a 5.47 current ratio and a 49.3% long-term-debt-to-equity ratio. Management stated that the company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales increased $1.501 million, or 9%, driven principally by U.S. product growth.
- Operating income increased $112,000, or approximately 22%.
- Net income increased $59,000, or approximately 19%.
- Gross margin remained approximately 36%, while SG&A declined as a percentage of sales.
- Operating cash flow worsened by $736,000, reflecting increased accounts receivable, inventory, prepaid expenses and other working-capital uses.
- Debt declined by approximately $5.6 million, but cash declined by approximately $8.3 million during the quarter.
- U.S. operating income increased $112,000, Canada improved from a $10,000 loss to $32,000 of income, and Europe’s operating loss widened from $41,000 to $83,000.
- Foreign-currency translation losses were $203,000, compared with $259,000 in the prior-year quarter, reducing comprehensive income to $165,000 from $50,000.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific earnings or revenue guidance. Management expects operating cash flow and available borrowing capacity under the amended revolving credit facility to be sufficient to finance planned operations for the next twelve months under current conditions.
The company purchased a 340,000-square-foot Rocky Mount, North Carolina facility in August 2013 for approximately $2.8 million to consolidate distribution centers and support growth. It expected to invest approximately $1.3 million in upgrades by the end of the first quarter; approximately $900,000 had been spent by March 31, 2014.
On April 7, 2014, after the reporting date, the company sold its Fremont, North Carolina distribution facility for $850,000. The company also had approximately $34,000 remaining in its environmental-remediation accrual at March 31, 2014 and expected monitoring and related work to be completed by the end of 2014. The company was required to contribute approximately $235,000 to its qualified pension plan in 2014.
Key disclosed risks include domestic and international economic conditions, consumer spending, competition and technological change, growth and acquisition integration, and currency fluctuations. The company reported no pending material legal proceedings, no defaults on senior securities, and no material changes in internal controls. Interim results may not be indicative of full-year performance.
Important Facts for Investors to Verify
- Whether U.S. product launches and first-aid sales can offset continued weakness or timing-related volatility in Europe.
- Whether operating cash flow improves as inventory and receivables normalize, given the quarter’s negative operating cash flow.
- The company’s liquidity after the substantial debt repayment and the amount of unused revolving capacity remaining.
- Compliance with all financial covenants and the April 5, 2017 maturity of the HSBC facility.
- Total spending, expected benefits and integration progress related to the Rocky Mount facility.
- Completion and final cost of the remaining environmental remediation and monitoring obligation.
- Potential effects of foreign-currency movements on sales, operating income and comprehensive income.