Item 1: Financial Statements
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(all amounts in thousands)
|
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(unaudited)
|
|
(Note 1)
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,674
|
|
|
$
|
5,911
|
|
Accounts receivable, less allowance
|
|
|
32,616
|
|
|
|
20,021
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
29,936
|
|
|
|
33,972
|
|
Work in process
|
|
|
178
|
|
|
|
188
|
|
Raw materials and supplies
|
|
|
5,524
|
|
|
|
3,078
|
|
|
|
|
35,638
|
|
|
|
37,238
|
|
Prepaid expenses and other current assets
|
|
|
2,417
|
|
|
|
2,293
|
|
Total current assets
|
|
|
76,345
|
|
|
|
65,463
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
422
|
|
|
|
413
|
|
Buildings
|
|
|
6,100
|
|
|
|
5,669
|
|
Machinery and equipment
|
|
|
15,050
|
|
|
|
13,428
|
|
|
|
|
21,572
|
|
|
|
19,510
|
|
Less accumulated depreciation
|
|
|
12,495
|
|
|
|
11,537
|
|
|
|
|
9,077
|
|
|
|
7,973
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,948
|
|
|
|
3,948
|
|
Intangible assets, less accumulated amortization
|
|
|
19,227
|
|
|
|
13,988
|
|
Other assets
|
|
|
765
|
|
|
|
694
|
|
Total assets
|
|
$
|
109,362
|
|
|
$
|
92,066
|
|
See Notes to Condensed Consolidated Financial Statements
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(all amounts in thousands, except share amounts)
|
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(unaudited)
|
|
(Note 1)
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,498
|
|
|
$
|
7,339
|
|
Other accrued liabilities
|
|
|
5,215
|
|
|
|
5,481
|
|
Total current liabilities
|
|
|
12,713
|
|
|
|
12,820
|
|
Long-term debt
|
|
|
46,956
|
|
|
|
32,936
|
|
Other non-current liabilities
|
|
|
345
|
|
|
|
190
|
|
Total liabilities
|
|
|
60,014
|
|
|
|
45,946
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value $2.50:
|
|
|
|
|
|
|
|
|
authorized 8,000,000 shares;
|
|
|
|
|
|
|
|
|
issued - 4,835,963 shares in 2017 and 4,788,965 in 2016,
|
|
|
|
|
|
|
|
|
including treasury stock
|
|
|
12,089
|
|
|
|
11,972
|
|
Additional paid-in capital
|
|
|
8,509
|
|
|
|
8,493
|
|
Retained earnings
|
|
|
44,662
|
|
|
|
41,861
|
|
Treasury
stock, at cost - 1,464,010 shares in 2017 and 2016
|
|
|
(13,870
|
)
|
|
|
(13,870
|
)
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
(664
|
)
|
|
|
(664
|
)
|
Translation adjustment
|
|
|
(1,378
|
)
|
|
|
(1,672
|
)
|
|
|
|
(2,042
|
)
|
|
|
(2,336
|
)
|
Total stockholders’ equity
|
|
|
49,348
|
|
|
|
46,120
|
|
Total liabilities and stockholders’ equity
|
|
$
|
109,362
|
|
|
$
|
92,066
|
|
See Notes to Condensed Consolidated Financial Statements
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(all amounts in thousands, except per share amounts)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
|
$
|
38,849
|
|
|
$
|
40,997
|
|
|
$
|
66,595
|
|
|
$
|
66,285
|
|
Cost of goods sold
|
|
|
24,366
|
|
|
|
26,303
|
|
|
|
41,548
|
|
|
|
42,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,483
|
|
|
|
14,694
|
|
|
|
25,047
|
|
|
|
23,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
10,594
|
|
|
|
10,054
|
|
|
|
19,966
|
|
|
|
18,284
|
|
Operating income
|
|
|
3,889
|
|
|
|
4,640
|
|
|
|
5,081
|
|
|
|
5,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
321
|
|
|
|
211
|
|
|
|
583
|
|
|
|
395
|
|
Other (income) expense, net
|
|
|
(51
|
)
|
|
|
11
|
|
|
|
(60
|
)
|
|
|
(27
|
)
|
Total other expense, net
|
|
|
270
|
|
|
|
222
|
|
|
|
523
|
|
|
|
368
|
|
Income before income taxes
|
|
|
3,619
|
|
|
|
4,418
|
|
|
|
4,558
|
|
|
|
5,227
|
|
Income tax expense
|
|
|
773
|
|
|
|
1,151
|
|
|
|
1,052
|
|
|
|
1,395
|
|
Net income
|
|
$
|
2,846
|
|
|
$
|
3,267
|
|
|
$
|
3,506
|
|
|
$
|
3,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.85
|
|
|
$
|
0.98
|
|
|
$
|
1.05
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.75
|
|
|
$
|
0.91
|
|
|
$
|
0.94
|
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
denominator used for basic per share computations
|
|
|
3,353
|
|
|
|
3,323
|
|
|
|
3,342
|
|
|
|
3,331
|
|
Weighted average number of dilutive stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
427
|
|
|
|
260
|
|
|
|
402
|
|
|
|
229
|
|
Denominator used for diluted per share computations
|
|
|
3,780
|
|
|
|
3,583
|
|
|
|
3,744
|
|
|
|
3,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
$
|
0.21
|
|
|
$
|
0.20
|
|
See Notes to Condensed Consolidated Financial Statements
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(all amounts in thousands)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,846
|
|
|
$
|
3,267
|
|
|
$
|
3,506
|
|
|
$
|
3,832
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
209
|
|
|
|
(58
|
)
|
|
|
294
|
|
|
|
194
|
|
Comprehensive income
|
|
$
|
3,055
|
|
|
$
|
3,209
|
|
|
$
|
3,800
|
|
|
$
|
4,026
|
|
See Notes to Condensed Consolidated Financial Statements
ACME UNITED
CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(all amounts in thousands)
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,506
|
|
|
$
|
3,832
|
|
Adjustments to reconcile net income
|
|
|
|
|
|
|
|
|
to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
811
|
|
|
|
717
|
|
Amortization
|
|
|
575
|
|
|
|
455
|
|
Stock compensation expense
|
|
|
237
|
|
|
|
184
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(11,840
|
)
|
|
|
(13,898
|
)
|
Inventories
|
|
|
2,347
|
|
|
|
(2,432
|
)
|
Prepaid expenses and other assets
|
|
|
(107
|
)
|
|
|
(329
|
)
|
Accounts payable
|
|
|
141
|
|
|
|
4,856
|
|
Other accrued liabilities
|
|
|
(329
|
)
|
|
|
993
|
|
Total adjustments
|
|
|
(8,165
|
)
|
|
|
(9,454
|
)
|
Net cash used by operating activities
|
|
|
(4,659
|
)
|
|
|
(5,622
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(1,600
|
)
|
|
|
(752
|
)
|
Purchase of patents and trademarks
|
|
|
—
|
|
|
|
(29
|
)
|
Acquisition of businesses
|
|
|
(7,233
|
)
|
|
|
(6,971
|
)
|
Net cash used by investing activities
|
|
|
(8,833
|
)
|
|
|
(7,752
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net borrowings of long-term debt
|
|
|
14,010
|
|
|
|
14,908
|
|
Cash settlement of stock options
|
|
|
(732
|
)
|
|
|
(681
|
)
|
Proceeds from issuance of common stock
|
|
|
628
|
|
|
|
390
|
|
Distributions to stockholders
|
|
|
(666
|
)
|
|
|
(668
|
)
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(907
|
)
|
Net cash provided by financing activities
|
|
|
13,240
|
|
|
|
13,042
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
15
|
|
|
|
(7
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(237
|
)
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,911
|
|
|
|
2,426
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
5,674
|
|
|
$
|
2,087
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
175
|
|
|
$
|
531
|
|
Cash paid for interest
|
|
$
|
550
|
|
|
$
|
372
|
|
See Notes to
Condensed Consolidated Financial Statements
ACME
UNITED CORPORATION
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 June 30, 2017 and through the date these condensed consolidated financial statements were included in this Form 10-Q
and filed with the SEC.
Recently Adopted and Issued Accounting
Standards
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.
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. We do not expect that ASU 2017-01 will have a material impact
on our financial statements.
In March 2016, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (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 statements. The
new standard was effective for the Company beginning on January 1, 2017. The adoption of the new standard resulted in the
recognition of excess tax benefits in the amount of approximately $350,000 in our provision for income taxes within the
Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2017, rather than additional
paid-in capital.
Additionally, our Condensed Consolidated
Statement of Cash Flows now present excess tax benefits as an operating activity included in Other accrued
liabilities, adjusted prospectively.
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 will evaluate this guidance to determine its impact on the Company’s
results of operations, cash flows and financial position.
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 six months ended June 30, 2017 follows (in thousands):
|
|
Balance
at
December 31, 2016
|
|
|
Payments
|
|
Balance
at
June 30, 2017
|
Fremont, NC
|
|
$
|
57
|
|
|
$
|
(9
|
)
|
|
$
|
48
|
|
|
3.
Pension
Components of net periodic benefit cost
(income) are as follows (in thousands):
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit
Cost:
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
28
|
|
|
$
|
28
|
|
Service cost
|
|
|
9
|
|
|
|
9
|
|
|
|
18
|
|
|
|
18
|
|
Expected return on plan
assets
|
|
|
(20
|
)
|
|
|
(19
|
)
|
|
|
(40
|
)
|
|
|
(38
|
)
|
Amortization of prior
service costs
|
|
|
2
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
Amortization
of actuarial loss
|
|
|
26
|
|
|
|
31
|
|
|
|
52
|
|
|
|
62
|
|
|
|
$
|
31
|
|
|
$
|
35
|
|
|
$
|
62
|
|
|
$
|
70
|
|
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 June 30, 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. on a temporary basis in order to provide for the funding of the Company’s
acquisition of the assets of Spill Magic, Inc. as described in Note 8 below. 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 will return 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 June 30, 2017, the Company
was in compliance with the covenants then in effect under the loan agreement.
As of June 30, 2017 and December 31, 2016,
the Company had outstanding borrowings of $46,956,000 and $32,936,000, respectively, under the Company’s revolving loan agreement
with HSBC.
During the three months ended June
30, 2017, the Company issued a total of 34,498 shares of common stock and received aggregate proceeds of $442,366 upon
exercise of employee stock options. During the six months ended June 30, 2017, the Company issued a total of 46,998 shares of
common stock and received aggregate proceeds of $627,941 upon exercise of employee stock options. Also during the three and
six months ended June 30, 2017, the Company paid approximately $500,773 and $731,893, respectively, to optionees who 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 17% and
13% of the Company’s total net sales for the three and six months ended June 30, 2017 compared to 25% and 20% for the comparable
periods 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 and six months ended June 30, 2017 and 2016:
Financial data by segment:
(in thousands)
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
Sales to external customers:
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
|
$
|
34,140
|
|
|
$
|
36,296
|
|
|
$
|
58,615
|
|
|
$
|
58,821
|
|
Canada
|
|
|
2,503
|
|
|
|
2,646
|
|
|
|
3,895
|
|
|
|
4,039
|
|
Europe
|
|
|
2,206
|
|
|
|
2,055
|
|
|
|
4,085
|
|
|
|
3,425
|
|
Consolidated
|
|
$
|
38,849
|
|
|
$
|
40,997
|
|
|
$
|
66,595
|
|
|
$
|
66,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,267
|
|
|
$
|
4,246
|
|
|
$
|
4,375
|
|
|
$
|
5,191
|
|
Canada
|
|
|
503
|
|
|
|
377
|
|
|
|
535
|
|
|
|
410
|
|
Europe
|
|
|
119
|
|
|
|
17
|
|
|
|
171
|
|
|
|
(6
|
)
|
Consolidated
|
|
$
|
3,889
|
|
|
$
|
4,640
|
|
|
$
|
5,081
|
|
|
$
|
5,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
321
|
|
|
|
211
|
|
|
|
583
|
|
|
|
395
|
|
Other (income) expense, net
|
|
|
(51
|
)
|
|
|
11
|
|
|
|
(60
|
)
|
|
|
(27
|
)
|
Consolidated income before income taxes
|
|
$
|
3,619
|
|
|
$
|
4,418
|
|
|
$
|
4,558
|
|
|
$
|
5,227
|
|
Assets by segment:
( in thousands )
|
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
United States
|
|
$
|
99,945
|
|
|
$
|
84,104
|
|
Canada
|
|
|
4,806
|
|
|
|
3,882
|
|
Europe
|
|
|
4,611
|
|
|
|
4,080
|
|
Consolidated
|
|
$
|
109,362
|
|
|
$
|
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 $121,717 and $81,338 for the three months ended June 30, 2017 and 2016, respectively. Share-based
compensation expenses were $236,717 and $183,535 for the six months ended June 30, 2017 and 2016, respectively.
As of June 30, 2017, there was a total of $1,132,951
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 three 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
(a) Acquisition of the assets of Spill Magic, Inc.
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 within the required measurement period in accordance with Accounting Standards Codification Topic 805
“Business Combinations”.
Assuming Spill Magic assets were acquired on
January 1, 2017, unaudited pro forma combined net sales for the six months ended June 30, 2017 for the Company would have been
approximately $67.0 million. Unaudited pro forma combined net income for the six months ended June 30, 2017 for the Company would
have been approximately $3.6 million.
Net sales for the three and six months ended
June 30, 2017 attributable to Spill Magic products were approximately $1.8 million and $3.0 million, respectively. Net income for
the three and six months ended June 30, 2017 attributable to Spill Magic products was approximately $0.2 million and $0.3 million,
respectively.
Assuming Spill Magic assets were acquired on
January 1, 2016, unaudited proforma combined net sales for the three and six months ended June 30, 2016, for the Company would
have been approximately $42.8 million and $69.6 million, respectively. Unaudited proforma combined net income for the three and
six months ended June 30, 2016 for the Company would have been approximately $3.6 million and $4.3 million, respectively.
(b) Acquisition of the assets of Vogel Capital, Inc.
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 six months ended June 30, 2016 for the Company would have been
approximately $66.9 million. Unaudited pro forma combined net income for the six months ended June 30, 2016 for the Company would
have been approximately $3.9 million.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Item 2: Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
The Company may from time to time make
written or oral “forward-looking statements”, including statements contained in this report and in other communications
by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements include statements
of the Company’s plans, objectives, expectations, estimates and intentions, which are subject to change based on various
important factors (some of which are beyond the Company’s control). The following factors, in addition to others not listed,
could cause the Company’s actual results to differ materially from those expressed in forward looking statements: the strength
of the domestic and local economies in which the Company conducts operations, the impact of uncertainties in global economic conditions,
changes in client needs and consumer spending habits, the impact of competition and technological change on the Company, the impact
of any loss of a major customer, whether through consolidation or otherwise, the Company’s ability to manage its growth effectively,
including its ability to successfully integrate any business or assets which it might acquire, currency fluctuations and potential
increases in the cost of borrowings resulting from rising interest rates. For a more detailed discussion of these and other factors
affecting us, see the Risk Factors described in Item 1A included in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2016. All forward-looking statements in this report are based upon information available to the Company
on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events, or otherwise, except as required by law.
Critical Accounting Policies
There have been no material changes to the
Company’s critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2016.
Results of Operations
On February 1, 2017, the
Company purchased the assets of Spill Magic, Inc., located in Santa Ana, CA and Smyrna, TN. 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 Company purchased Spill Magic
assets for $7.2 million in cash using funds borrowed under its revolving credit facility with HSBC. Additional information concerning
the acquisition of Spill Magic assets is set forth in Note 8 – Business Combinations, in the Notes to Condensed Consolidated
Financial Statements.
On February 1, 2016, the
Company purchased certain assets of Vogel Capital, Inc., d/b/a Diamond Machining Technology (DMT), located in Marlborough, MA.
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 Company purchased inventory, accounts receivable, equipment, patents, trademarks
and other intellectual property for $6.97 million using funds borrowed under its revolving credit facility with HSBC. Additional
information concerning the acquisition of DMT assets is set forth in Note 8 – Business Combinations, in the Notes to Condensed
Consolidated Financial Statements.
Traditionally, the Company’s sales are
stronger in the second and third quarters and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature
of the back-to-school market. Our online sales have been growing very rapidly in recent years, and their order and fulfillment
patterns are affecting the timing of our revenues. With our online sales we are receiving orders that closely match the timing
of actual purchases by end users, resulting in a shift in some sales from the second quarter to the third quarter.
Net Sales
Consolidated net sales for the three months
ended June 30, 2017 were $38,849,000 compared with $40,997,000 in the same period in 2016, a 5% decrease. Consolidated net sales
for the six months ended June 30, 2017 were $66,595,000, compared with $66,285,000 for the same period in 2016.
Net sales for the three
months ended June 30, 2017 in the U.S. segment decreased 6% and remained constant for the six months ended June 30, 2017, compared
with the same periods in 2016, respectively. Sales in the U.S. for the three month period decreased compared to the same period
last year, primarily due to a back-to-school promotion that did not repeat this year and the changes in timing of online back-to-school
sales as described above. Net sales of Spill Magic products were $1.8 million and $3.0 million for the three and six months ended
June 30, 2017.
Net sales in Canada for the three months ended
June 30, 2017 decreased 5% in U.S. dollars (2% in local currency), compared with the same period in 2016. Net sales in Canada for
the six months ended June 30, 2017 decreased 4% in U.S. dollars (2% in local currency) compared with the same period in 2016.
European net sales for the three months ended
June 30, 2017 increased 7% in U.S. dollars (10% in local currency), compared with the same period in 2016. Net sales for the six
months ended June 30, 2017 increased 19% in U.S. dollars (23% in local currency). The increases in net sales for the three and
six months ended June 30, 2017 were primarily due to new customers in the office products and sporting goods channels as well as
sales of DMT sharpening products.
Gross Profit
Gross profit for the three months ended June
30, 2017 was $14,483,000 (37.3% of net sales) compared to $14,694,000 (35.8% of net sales) for the same period in 2016. Gross profit
for the six months ended June 30, 2017 was $25,047,000 (37.6% of net sales) compared to $23,879,000 (36.0% of net sales) in the
same period in 2016. The decrease in gross profit for the three months ended June 30, 2017 was primarily due to lower net sales.
The increase in gross profit for the six months ended June 30, 2017 was primarily due improvements in manufacturing efficiencies
in the Company’s first aid operations and a favorable product mix which included increased sales of DMT sharpeners and Spill
Magic clean up products.
Selling, General and Administrative
Expenses
Selling, general and administrative
("SG&A") expenses for the three months ended June 30, 2017 were $10,594,000 (27.3% of net sales) compared with $10,054,000
(24.5% of net sales) for the same period of 2016, an increase of $540,000. SG&A expenses for the six months ended June 30,
2017 were $19,966,000 (30.0% of net sales) compared with $18,284,000 (27.6% of net sales) in the comparable period of 2016, an
increase of $1,682,000. The increases in SG&A expenses for the three and six months ended June 30, 2017, compared to the same
period in 2016, were primarily the result of certain costs incurred in connection with the acquisition of Spill Magic assets and
higher personnel related costs, which include compensation and recruiting costs, primarily from additional headcount.
Operating Income
Operating income for the
three months ended June 30, 2017 was $3,889,000 compared with $4,640,000 in the same period of 2016. Operating income for the six
months ended June 30, 2017 was $5,081,000 compared with $5,595,000 in the same period of 2016.
Operating income in the U.S.
segment decreased by approximately $1.0 million and $0.8 million for the three and six months ended June 30, 2017, respectively,
compared to the same periods in 2016. The decrease in operating income was principally due to lower sales.
Operating income in the Canadian
segment increased by approximately $125,000 for the three and six months ended June 30, 2017, respectively, compared to the same
periods in 2016.
Operating income in the European
segment increased by $102,000 and $177,000 for the three and six months ended June 30, 2017 compared to the same periods in 2016.
The increases in operating income in the European segment were principally due to higher sales.
Interest Expense, net
Interest expense, net for
the three months ended June 30, 2017 was $321,000, compared with $211,000 for the same period of 2016, a $110,000 increase. Interest
expense, net for the six months ended June 30, 2017 was $583,000, compared with $395,000 for the same period of 2016, a $188,000
increase. The increase in interest expense resulted from higher average borrowings under the Company’s bank revolving credit
facility for the three and six months ended June 30, 2017. The higher borrowings were primarily the result of funding the acquisition
of assets of Spill Magic.
Other (Income) Expense, net
Other income, net was $51,000
in the three months ended June, 2017 compared to $11,000 of other expense, net in the same period of 2016. Other income, net was
$60,000 in the six months ended June, 2017 compared to $27,000 of other income, net in the same period of 2016. The change in other
(income) expense, net for the three and six months ended June 30, 2017 is primarily due to gains and losses from foreign currency
transactions.
Income Taxes
The Company’s effective tax rates
for the three and six month periods ended June 30, 2017 were 21% and 23%, respectively, compared to 26% and 27% during the same
periods in 2016. In the three and six months ended June 30, 2017, the Company recorded approximately $350,000 in excess tax benefits
resulting from the adoption of ASU 2016-09 in 2017. Excluding the impact of the tax benefit, the effective tax rate would have
been 31% for the three and six months ended June 30, 2017. In 2016, the Company donated school products to the Kids In Need Foundation.
Excluding the impact of the charitable donation in 2016, the effective tax rate for the three and six months ended June 30, 2016
would have been 30%.
Financial Condition
Liquidity and Capital Resources
During the first six months of
2017, working capital increased approximately $11.0 million compared to December 31, 2016. Inventory decreased by
approximately $1.6 million at June 30, 2017 compared to December 31, 2016. Inventory turnover, calculated using a twelve
month average inventory balance, was 2.1 at both June 30, 2017 and December 31, 2016. Receivables increased by
approximately $12.6 million at June 30, 2017 compared to December 31, 2016. The average number of days sales outstanding in
accounts receivable was 63 days at June 30, 2017 compared to 64 days at December 31, 2016. The increase in accounts
receivables is due to the seasonal nature of the Company’s back to school business. Sales are typically stronger in the
second and third quarters compared to the first and fourth quarters. Accounts payable and other current liabilities decreased
by approximately $107,000.
The Company's working capital,
current ratio and long-term debt to equity ratio are as follows:
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
63,632
|
|
|
$
|
52,643
|
|
Current ratio
|
|
|
6.01
|
|
|
|
5.11
|
|
Long term debt to equity ratio
|
|
|
95.2
|
%
|
|
|
71.4
|
%
|
During
the first six months of 2017, total debt outstanding under the Company’s revolving credit facility increased by approximately
$14.0 million, compared to total debt thereunder at December 31, 2016. As of June 30, 2017, $46,956,000 was outstanding and $8,044,000
was available for borrowing under the Company’s credit facility. The increase in the debt outstanding was primarily due to
borrowings to fund the acquisition of assets of Spill Magic on February 1, 2017, as well as to fund the increase in working capital.
Increases in accounts receivable, inventory and debt outstanding under the Company’s revolving credit facility typically
occur in the second and third quarter of each year due to the seasonal nature of the business.
On January 27, 2017, the Company amended its
revolving credit loan agreement with HSBC Bank, N.A. on a temporary basis in order to provide for the funding of the Company’s
acquisition of the assets of Spill Magic, Inc. as described in Note 8 above. 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 will return 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 June 30, 2017, the Company
was in compliance with the covenants then in effect under the loan agreement.
As discussed in Note 2 to the Condensed
Consolidated Financial Statements set forth in Item 1 above, at June 30, 2017 the Company had a total of approximately $48,000
remaining in its accruals for environmental remediation and monitoring, related to property it had owned in Fremont, NC.
The Company believes that cash expected
to be generated from operating activities, together with funds available under its revolving credit facility will, under current
conditions, be sufficient to finance the Company’s planned operations over the next twelve months from the filing of this
report.