Notes
to CONDENSED CONSOLIDATED Financial Statements
(UNAUDITED)
1. Basis of Presentation
In the opinion of management,
the accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial
position, results of operations and cash flows of Acme United Corporation (the “Company”). These adjustments are of
a normal, recurring nature. However, the financial statements do not include all of the disclosures normally required by accounting
principles generally accepted in the United States of America or those normally made in the Company's Annual Report on Form 10-K.
Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2016 for such disclosures. The condensed
consolidated balance sheet as of December 31, 2016 was derived from the audited consolidated balance sheet as of that date. The
results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The information
included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s 2016
Annual Report on Form 10-K.
The Company has evaluated
events and transactions subsequent to March 31, 2017 and through the date these condensed consolidated financial statements were
included in this Form 10-Q and filed with the SEC.
Recently Issued Accounting Guidance
In
March
2016,
the
FASB
issued
ASU
2016-09
to
improve
the accounting
for
employee
share-based
payments. This
standard simplifies several aspects
of
the accounting
for share-based
payment
award
transactions,
including
the
income
tax
consequences,
classification
of
awards as
either
equity
or
liabilities, and
classification
on
the
statement
of
cash flows, as part
of
FASB’s
simplification
initiative
to reduce cost
and
complexity
in
accounting
standards
while
maintaining
or
improving
the
usefulness
of
the
information
provided
to
the
users
of
financial
state. The new standard was effective for the Company beginning on January 1, 2017. The effect of ASU 2016-09
did not have a material impact on the consolidated financial statements for the three months ended March 31, 2017.
In
February
2016,
the FASB issued guidance that will change the
requirements
for accounting
for leases. The principal change
under
the
new
accounting guidance is that lessees
under
leases
classified
as operating
leases will recognize a right-of-use asset
and
a lease liability.
Current
lease accounting
does
not
require
lessees
to
recognize
assets
and
liabilities arising
under
operating
leases
on
the balance sheet.
Under
the
new guidance,
lessees (including lessees
under
leases
classified
as
finance leases
and operating
leases)
will recognize a right-to-use asset
and
a lease liability
on
the balance sheet, initially measured
as
the
present
value
of
lease payments
under
the lease.
Expense recognition
and
cash
flow presentation
guidance will
be
based
upon
whether
the lease is
classified
as an operating
lease
or
a finance lease (the
classification
criteria for distinguishing
between
finance leases
and
operating
leases is substantially similar
to
the
classification
criteria for distinguishing
between
capital leases
and
operating
leases
under
current guidance).
The standard is
effective
for
fiscal
years,
and
interim
periods
within those
fiscal
years,
beginning
after December
15,
2018.
Early
adoption
is permitted. The
new
standard
must
be adopted
using a modified retrospective transition
approach
for capital
and operating
leases existing at,
or
entered
into
after,
the
beginning of
the earliest comparative
period
presented in the financial statements; the guidance
provides certain practical expedients. The Company is currently evaluating this guidance
to
determine
its
impact
on
the Company’s
results
of
operations,
cash
flows
and
financial position.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent
measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new amendments, an entity should perform
its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity
should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. We adopted
this guidance prospectively at the beginning of first quarter 2017, which will simplify our future goodwill impairment testing.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance clarifies the definition of a business
in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or
businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years, with early adoption permitted. We are currently evaluating the impact of adopting this guidance. We do not
expect that ASU 2017-01 will have a material impact on our financial statements.
2. Contingencies
The Company is involved from time to time
in disputes and other litigation in the ordinary course of business and may encounter other contingencies, which may include environmental
and other matters. There are no pending material legal proceedings to which the registrant is a party, or, to the actual knowledge
of the Company, contemplated by any governmental authority.
In 2014, the Company sold its Fremont, NC distribution
facility for $850,000 in cash. Under the terms of the sale agreement, the Company is responsible to remediate any environmental
contamination on the property. In conjunction with the sale of the property, the Company recorded a liability of $300,000 in the
second quarter of 2014, related to the remediation of the property. The accrual includes the total estimated costs of remedial
activities and post-remediation monitoring costs.
Remediation work on the project was completed
in 2015. The monitoring period is expected to be completed by the end of 2020.
The change in the accrual for environmental
remediation for the three months ended March 31, 2017 follows (in thousands):
|
|
Balance
at
December 31, 2016
|
|
|
Payments
|
|
Balance
at
March 31, 2017
|
Fremont, NC
|
|
$
|
57
|
|
|
$
|
(0
|
)
|
|
$
|
57
|
|
|
Total
|
|
$
|
57
|
|
|
$
|
(0
|
)
|
|
$
|
57
|
|
|
3. Pension
Components of net periodic benefit cost
are as follows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
14
|
|
|
$
|
14
|
|
Service cost
|
|
|
9
|
|
|
|
9
|
|
Expected return on plan assets
|
|
|
(20
|
)
|
|
|
(19
|
)
|
Amortization of prior service costs
|
|
|
2
|
|
|
|
—
|
|
Amortization of actuarial loss
|
|
|
26
|
|
|
|
31
|
|
|
|
$
|
31
|
|
|
$
|
35
|
|
The Company’s funding policy with
respect to its qualified plan is to contribute at least the minimum amount required by applicable laws and regulations. In 2017,
the Company is not required to contribute to the plan. As of March 31, 2017, the Company had not made any contributions to the
plan in 2017.
4. Debt and Shareholders’ Equity
On January 27, 2017, the Company amended its
revolving credit loan agreement with HSBC Bank, N.A. The amended facility provides for an increase in borrowings from $50 million
to $55 million for the period commencing on April 1, 2017 and ending on September 30, 2017. Commencing October 1, 2017, the maximum
amount outstanding at any time under the facility returns to $50 million. The interest rate on borrowings remains unchanged at
a rate of LIBOR plus 2.0%. The Company must pay a facility fee, payable quarterly, in an amount equal to two tenths of one percent
(.20%) per annum of the average daily unused portion of the revolving credit line. In addition, the amendment modified the debt
to net worth ratio covenant applicable during the same six month period. All principal amounts outstanding under the agreement
are required to be repaid in a single amount on May 6, 2019, the date the agreement expires; interest is payable monthly. Funds
borrowed under the agreement may be used for working capital, acquisitions, general operating expenses, share repurchases and certain
other purposes. Under the revolving loan agreement, the Company is required to maintain specific amounts of tangible net worth,
a specified debt to net worth ratio and a fixed charge coverage ratio and must have annual net income greater than $0,
measured
as of the end of each fiscal year.
At March 31, 2017, the Company was in compliance with the covenants then in effect under
the loan agreement.
As of March 31, 2017 and December 31, 2016,
the Company had outstanding borrowings of $44,382,000 and $32,936,000, respectively, under the Company’s revolving loan agreement
with HSBC.
During the three months ended March 31, 2017,
the Company issued a total of 12,500 shares of common stock and received aggregate proceeds of $185,575 upon exercise of employee
stock options. Also during the three month period ended March 31, 2017, the Company paid approximately $231,000 to optionees who
had elected a net cash settlement of their respective options.
5. Segment Information
The Company reports financial information based
on the organizational structure used by the Company’s chief operating decision makers for making operating and investment
decisions and for assessing performance. The Company’s reportable business segments consist of: (1) United States; (2) Canada;
and (3) Europe. As described below, the activities of the Company’s Asian operations are closely linked to those of the U.S.
operations; accordingly, the Company’s chief operating decision makers review the financial results of both on a consolidated
basis, and the results of the Asian operations have been aggregated with the results of the United States operations to form one
reportable segment called the “United States segment” or “U.S. segment”. Each reportable segment derives
its revenue from the sales of cutting devices, measuring instruments and safety products for school, office, home, hardware, sporting
and industrial use.
Domestic sales orders are filled primarily
from the Company’s distribution centers in North Carolina, Washington and Massachusetts. The Company is responsible for the
costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products. Orders filled from
the Company’s inventory are generally for less than container-sized lots.
Direct import sales are products sold
by the Company’s Asian subsidiary, directly to major U.S. retailers, who take ownership of the products in Asia. These sales
are completed by delivering product to the customers’ common carriers at the shipping points in Asia. Direct import sales
are made in larger quantities than domestic sales, typically full containers. Direct import sales represented approximately 7%
of the Company’s total net sales for the three months ended March 31, 2017 compared to 13% for the comparable period in 2016.
The chief operating decision maker
evaluates the performance of each operating segment based on segment revenues and operating income. Segment amounts are presented
after converting to U.S. dollars and consolidating eliminations.
The following table sets forth certain
financial data by segment for the three months ended March 31, 2017 and 2016:
Financial
data by segment:
(in
thousands)
|
|
Three months ended
March 31,
|
Sales to external customers:
|
|
2017
|
|
2016
|
United States
|
|
$
|
24,475
|
|
|
$
|
22,526
|
|
Canada
|
|
|
1,391
|
|
|
|
1,389
|
|
Europe
|
|
|
1,879
|
|
|
|
1,373
|
|
Consolidated
|
|
$
|
27,745
|
|
|
$
|
25,288
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,108
|
|
|
$
|
945
|
|
Canada
|
|
|
32
|
|
|
|
32
|
|
Europe
|
|
|
52
|
|
|
|
(22
|
)
|
Consolidated
|
|
$
|
1,192
|
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
263
|
|
|
|
184
|
|
Other income, net
|
|
|
(9
|
)
|
|
|
(38
|
)
|
Consolidated income before income taxes
|
|
$
|
938
|
|
|
$
|
809
|
|
Assets by segment:
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
|
December 31
|
|
|
|
|
2017
|
|
|
|
2016
|
|
United States
|
|
$
|
91,891
|
|
|
$
|
84,104
|
|
Canada
|
|
|
3,903
|
|
|
|
3,882
|
|
Europe
|
|
|
4,410
|
|
|
|
4,080
|
|
Consolidated
|
|
$
|
100,204
|
|
|
$
|
92,066
|
|
6. Stock Based Compensation
The Company recognizes share-based compensation
at the fair value of the equity instrument on the grant date. Compensation expense is recognized over the required service period.
Share-based compensation expenses were $115,000 and $102,198 for the three months ended March 31, 2017 and 2016, respectively.
As of March 31, 2017, there was a total of
$1,274,233 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested share–based payments
granted to the Company’s employees. As of that date, the remaining unamortized expense is expected to be recognized over
a weighted average period of approximately 3 years.
7. Fair Value Measurements
The carrying value of the Company’s bank
debt approximates fair value. Fair value was determined using a discounted cash flow analysis.
8. Business Combination
On February 1, 2016, the Company acquired the
assets of Vogel Capital, Inc., d/b/a Diamond Machining Technology (“DMT”) based in Marlborough, MA for $6.97 million
in cash. The DMT products are leaders in sharpening tools for knives, scissors, chisels, and other cutting tools. The DMT products
use finely dispersed diamonds on the surfaces of sharpeners. The acquired assets include over 50 patents and trademarks.
The purchase price was allocated to assets
acquired and liabilities assumed as follows (in thousands):
Assets:
|
|
|
|
|
Accounts
Receivable
|
|
$
|
1,145
|
|
Inventory
|
|
|
280
|
|
Equipment
|
|
|
262
|
|
Prepaid
expenses
|
|
|
176
|
|
Intangible Assets
|
|
|
5,481
|
|
Total
assets
|
|
$
|
7,344
|
|
Liabilities
|
|
|
|
|
Accounts
Payable
|
|
$
|
192
|
|
Accrued
Expense
|
|
|
181
|
|
Total
liabilities
|
|
$
|
373
|
|
Assuming the assets of DMT were acquired on
January 1, 2016, unaudited pro forma combined net sales for the three months ended March 31, 2016 for the Company would have been
approximately $25.9 million. Unaudited pro forma combined net income for the three months ended March 31, 2016 for the Company
would have been approximately $0.6 million.
On February 1, 2017, the Company purchased
the assets of Spill Magic, Inc., located in Santa Ana, CA and Smyrna, TN for $7.2 million in cash. The Spill Magic products are
leaders in absorbents that encapsulate spills into dry powders that can be safely disposed. Many large retail chains use its products
to remove liquids from broken glass containers, oil and gas spills, bodily fluids and solvents.
The purchase price was allocated to assets
acquired as follows (in thousands):
Assets:
|
|
|
|
|
Accounts receivable
|
|
$
|
684
|
|
Inventory
|
|
|
453
|
|
Equipment
|
|
|
296
|
|
Intangible assets
|
|
|
5,800
|
|
Total
assets
|
|
$
|
7,233
|
|
Management’s assessment of the valuation
of intangible assets is preliminary and finalization of the Company’s purchase price accounting assessment may result in
changes to the valuation of the identified intangible assets. The Company will finalize the purchase price allocation as soon as
practicable within the measurement period in accordance with Accounting Standards Codification Topic 805 “Business Combinations”.
Assuming Spill Magic asset were acquired on
January 1, 2017, unaudited pro forma combined net sales for the three months ended March 31, 2017 for the Company would have been
approximately $28.1 million. Unaudited pro forma combined net income for the three months ended March 31, 2017 for the Company
would have been approximately $0.7 million.
Net sales for the three months ended March
31, 2017 attributable to Spill Magic products were approximately $1.2 million. Net income for the three months ended March 31,
2017 attributable to Spill Magic products was approximately $0.1 million.
Assuming Spill Magic assets were acquired on
January 1, 2016, unaudited proforma combined net sales for the three months ended March 31, 2016, for the Company would have been
approximately $26.8 million. Unaudited proforma combined net income for the three months ended March 31, 2016 for the Company would
have been approximately $0.7 million.