ACME United Corporation — 2014 Q2 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2014. ACME United sells cutting devices, measuring instruments, first-aid and safety products through United States, Canada and Europe segments. Results are seasonal, with stronger sales generally in the second and third quarters due to the back-to-school market.
On June 2, 2014, the company acquired certain assets of First Aid Only, Inc. for approximately $13.8 million, funded with borrowings under its HSBC revolving credit facility. The acquisition added Smart Compliance first-aid kits, refills and related safety products.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $33.4 million | $28.4 million | $52.5 million | $46.1 million |
| Gross profit | $11.7 million | $10.1 million | $18.6 million | $16.5 million |
| Gross margin | 35.0% | 35.5% | 35.4% | 35.8% |
| Operating income | $3.7 million | $3.2 million | $4.4 million | $3.7 million |
| Net income | $2.5 million | $2.2 million | $2.9 million | $2.5 million |
| Diluted EPS | $0.72 | $0.68 | $0.83 | $0.78 |
| Dividends declared per share | $0.08 | $0.08 | $0.16 | $0.15 |
Q2 net sales increased 18%, operating income increased 17%, and net income increased 15% year over year. Six-month net sales increased 14%, operating income increased 18%, and net income increased 16%. Q2 operating margin was approximately 11.2%, compared with 11.2% in the prior-year quarter; six-month operating margin was approximately 8.3%, compared with 8.0%.
SG&A was $8.0 million in Q2 and $14.2 million for the six months, compared with $6.9 million and $12.8 million, respectively, in the prior-year periods. The effective tax rate was 30.0% in both 2014 periods, compared with 28.5% for Q2 2013 and 28.7% for the first six months of 2013.
Cash flow, balance sheet, debt and liquidity
- Cash used in operating activities was $3.2 million for the first six months of 2014, compared with $2.6 million used in the prior-year period.
- Cash used in investing activities was $14.1 million, including $13.8 million for the First Aid Only acquisition and $1.0 million of capital expenditures.
- Cash provided by financing activities was $8.1 million, primarily from $8.4 million of net borrowings.
- Cash and cash equivalents declined to $2.4 million at June 30, 2014 from $11.6 million at December 31, 2013.
- Accounts receivable increased to $30.8 million from $15.6 million, while inventory increased to $30.9 million from $28.2 million.
- Total assets increased to $88.0 million from $68.1 million, including intangible assets of $14.3 million versus $4.1 million at year-end.
- Outstanding HSBC revolving credit borrowings were $31.3 million, compared with $22.9 million at December 31, 2013. The facility has a $40 million limit, leaving approximately $8.7 million available at June 30, 2014.
- The facility bears interest at LIBOR plus 1.75%, expires April 5, 2017, and requires repayment of principal at maturity. The company was in compliance with its debt covenants.
- Working capital was $47.6 million, the current ratio was 3.59, and long-term debt to equity was 82.8%, compared with 5.77 and 65.5%, respectively, at December 31, 2013.
Material changes versus the prior comparable period
- U.S. segment sales increased 19% in Q2 and 17% for the first six months, supported by back-to-school demand, first-aid products, new lawn and garden products, and the First Aid Only acquisition.
- Canadian sales increased 17% in Q2 and 9% for the first six months in U.S. dollars. European sales increased 4% in Q2 but declined 5% for the first six months, primarily due to shipment timing.
- Gross margin declined modestly because Q2 included approximately $250,000 of one-time moving, training and personnel costs associated with consolidating distribution operations at Rocky Mount, North Carolina. A $200,000 gain on the sale of the former Fremont facility partially offset those costs.
- SG&A increased due to First Aid Only expenses, higher shipping and sales commissions, personnel costs, and approximately $80,000 of acquisition integration and transaction costs.
- Net interest expense increased to $106,000 in Q2 and $188,000 for the first six months, reflecting higher debt levels.
- Europe reported an operating loss of $28,000 in Q2 and $112,000 for the first six months, compared with operating income of $16,000 and a loss of $24,000, respectively, in the prior-year periods.
- Direct import sales represented approximately 26% of Q2 sales and 20% of six-month sales, compared with 27% and 21% in the prior-year periods.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management stated that operating cash flow and available borrowing capacity are expected to be sufficient to finance planned operations over the next twelve months under current conditions.
- First Aid Only contributed approximately $1.8 million of sales during the three and six months ended June 30, 2014; its contribution to net income was not material. Pro forma combined sales assuming a January 1, 2014 acquisition date were approximately $36.7 million for Q2 and $59.6 million for the first six months.
- Purchase accounting for First Aid Only remained preliminary. Approximately $10.3 million was initially assigned to intangible assets, including trade names, customer lists and goodwill, and the final allocation could change.
- The company recorded a $300,000 environmental remediation liability related to the Fremont property sale. Remediation was expected to begin in Q3 2014 and finish in the first half of 2015, with monitoring expected through 2020. Total environmental remediation accruals were approximately $282,000 at June 30, 2014.
- The company had approximately $17,000 remaining for Bridgeport, Connecticut remediation and monitoring, expected to be completed by the end of 2014.
- Management identified risks including economic conditions, consumer spending, competition, technological change, growth and acquisition integration, and currency fluctuations. The filing states that there were no pending material legal proceedings.
- The company was required to contribute approximately $235,000 to its qualified pension plan in 2014 and had contributed approximately $160,000 as of June 30.
Important facts for investors to verify
- Whether First Aid Only achieves the expected revenue and profitability contribution after integration and final purchase accounting.
- The effect of increased borrowings, reduced cash, and the $8.7 million of remaining revolver capacity on liquidity and covenant headroom.
- Whether receivables and inventory growth converts into operating cash flow, given six-month operating cash use of $3.2 million.
- The final valuation of First Aid Only intangible assets and any resulting amortization or impairment exposure.
- The timing and ultimate cost of Fremont and Bridgeport environmental remediation and monitoring.
- Whether the European segment returns to profitability and whether gross margins recover after distribution-consolidation costs.