ACME United Corporation: Q2 2015 Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2015. ACME United sells cutting devices, measuring instruments, first-aid products, fishing tools and knives through its United States, Canadian and European segments. Results are seasonally stronger in the second and third quarters because of back-to-school demand. All dollar amounts below are in thousands unless otherwise stated.
Financial Performance and Position
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net sales | $33,954 | $33,396 | $56,791 | $52,548 |
| Gross profit | $12,535 | $11,721 | $20,970 | $18,598 |
| Gross margin | 36.9% | 35.0% | 36.9% | 35.4% |
| Operating income | $3,875 | $3,738 | $4,701 | $4,363 |
| Net income | $2,710 | $2,542 | $3,146 | $2,911 |
| Diluted EPS | $0.74 | $0.72 | $0.85 | $0.83 |
- Q2 net sales increased 2% year over year, or 4% in local currency; six-month sales increased 8%, or 10% in local currency.
- Gross margin expanded primarily because of favorable product mix. Q2 operating margin was approximately 11.4%, versus 11.2% in the prior-year quarter.
- SG&A increased 8% in Q2 to $8,660 and 14% for the six months to $16,269. Increases reflected First Aid Only-related costs, shipping, sales commissions, personnel and recruiting expenses.
- Net interest expense increased to $141 in Q2 and $271 for the six months because of higher average borrowings.
- Cash flow from operations was negative $5,583 for the first six months, compared with negative $3,189 in the prior-year period, primarily reflecting increases in receivables and inventory.
- Capital expenditures were $867 for the first six months. Net cash used in investing activities was $870, compared with $14,118 in 2014, when the First Aid Only asset acquisition required $13,806 of cash.
- Financing activities provided $6,113, including $6,033 of new long-term borrowings and $675 from stock-option exercises, partly offset by $595 of distributions to stockholders.
- Cash and cash equivalents declined to $1,941 at June 30, 2015 from $2,286 at December 31, 2014.
- Working capital was $51,334, the current ratio was 4.14, and long-term debt to equity was 71.0%, compared with 3.74 and 61.2%, respectively, at year-end 2014.
- Revolving-credit borrowings were $30,179 at June 30, 2015, leaving $9,821 of availability under the $40 million facility. The facility bears interest at LIBOR plus 1.75% and matures April 5, 2017.
Material Changes Versus the Prior Comparable Period
- United States sales increased 6% in Q2 and 10% for the six months, supported by first-aid products, Cuda fishing tools, Camillus knives and Westcott scissors. Product diversification offset weakness among office superstores.
- Canadian sales declined 23% in Q2 and 22% for the six months in U.S. dollars, primarily because a large retail chain exited the Canadian market and economic conditions were weak. Canadian operating income declined by $245 in Q2 and $384 for the six months.
- European sales declined 19% in Q2 in U.S. dollars but increased 6% in local currency for the six months. Europe recorded operating income of $41 in Q2 and $4 for the six months, compared with losses in the prior-year periods.
- Direct-import sales represented approximately 27% of Q2 sales and 20% of six-month sales, compared with 26% and 20%, respectively, in 2014.
- Accounts receivable increased $7,646 from year-end to $27,123, while inventory increased $2,545 to $36,216, mainly due to seasonal purchases. Days sales outstanding improved to 61 from 63 at year-end.
- Debt increased approximately $6.0 million from year-end, primarily to fund higher receivables and inventory. The company remained in compliance with its debt covenants.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- The filing does not provide quantified earnings or revenue guidance. Management states that operating cash flow and available revolving-credit capacity are expected to be sufficient to finance planned operations for the next twelve months under current conditions.
- Key disclosed risks include economic conditions, consumer spending, competition and technological change, loss or consolidation of major customers, execution of growth initiatives and acquisitions, integration risk, and foreign-currency fluctuations.
- The company completed its Bridgeport, Connecticut environmental remediation obligations during the first quarter of 2015. A remaining Fremont, North Carolina remediation and monitoring accrual of approximately $246 remained at June 30, 2015; monitoring is expected to continue through 2020.
- No pending material legal proceedings were reported. The company states that there were no material changes to critical accounting policies and that disclosure controls were effective.
- The June 2014 First Aid Only asset acquisition contributed to year-over-year SG&A and amortization expense and increased borrowing needs. The acquisition was funded through the revolving credit facility.
- The company declared dividends of $0.09 per share in Q2 2015 and $0.18 per share for the six months, compared with $0.08 and $0.16, respectively, in 2014.
Important Facts for Investors to Verify
- Whether negative operating cash flow persists as receivables and seasonal inventory unwind.
- Debt reduction capacity, covenant headroom and the April 2017 revolving-credit maturity.
- The sustainability of gross-margin improvement and the effect of higher SG&A and amortization costs.
- Recovery prospects in Canada and continued growth from first-aid, fishing-tool and knife products.
- Progress and ultimate cost of Fremont environmental remediation and the associated monitoring obligations.
- Currency movements and their effect on reported Canadian and European sales and profitability.