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 Company’s
ability to manage its growth effectively, including its ability to successfully integrate any business or assets which it might
acquire, and currency fluctuations. 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, 2015. 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, 2015.
Results of Operations
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 Company purchased
inventory, accounts receivable, equipment, patents, trademarks and other intellectual property for approximately $7.0 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.
Net sales
Consolidated net sales for the three months
ended March 31, 2016 were $25,288,000 compared with $22,837,000 in the same period in 2015, an 11% increase. Net sales for the
three months ended March 31, 2016 in the U.S. segment increased 12%, compared with the same period in 2015. Sales in the U.S. increased
primarily due to strong sales of Westcott school and office products, increased distribution of first aid products and sales of
DMT products.
Net sales in Canada for the three months ended
March 31, 2016 increased 12% in U.S. dollars (22% in local currency). The increase in sales is primarily due to the introduction
of the Cuda line of fishing tools and an improvement in the office products market.
European net sales for the three months ended
March 31, 2016 decreased 6% in U.S. dollars (4% in local currency) compared with the same period in 2015. The decrease in net sales
for the three months ended March 31, 2016 was primarily due to the timing of shipments into the office products channel.
Gross profit
Gross profit for the three months ended March
31, 2016 was $9,185,000 (36.3% of net sales) compared to $8,435,000 (36.9% of net sales) for the same period in 2015. The lower
gross margin was primarily due to product mix.
Selling, general and
administrative expenses
Selling, general and
administrative ("SG&A") expenses for the three months ended March 31, 2016 were $8,230,000 (32.5% of net sales) compared
with $7,608,000 (33.3% of net sales) for the same period of 2015, an increase of $622,000. The increases in SG&A expenses for
the three months ended March 31, 2016, compared to the same period in 2015, was primarily the result of incremental fixed costs
resulting from the acquisition of DMT assets, higher personnel related costs and increases in shipping expense and sales commissions
which resulted from higher sales.
Operating income
Operating income for
the three months ended March 31, 2016 was $955,000 compared with $827,000 in the same period of 2015. Operating income in the U.S.
segment was $945,000 for the three months ended March 31, 2016 compared to $971,000 in the same period in 2015, a decrease of $26,000.
The Canadian segment
had an operating income of $32,000 for the three months ended March 31, 2016 compared to operating loss of $108,000 in the same
period in 2015. The operating income in Canada for the three months was principally due to the higher sales, as described above.
For the three months
ended March 31, 2016, the European operating segment had an operating loss of approximately $23,000 compared to a loss of $36,000
in the same period of 2015, a decrease of approximately $14,000.
Interest expense, net
Interest expense, net
for the three months ended March 31, 2016 was $184,000, compared with $130,000 for the same period of 2015, a $54,000 increase.
The increase in interest expense resulted from higher average borrowings under the Company’s bank revolving credit facility
for the three months ended March 31, 2016. The higher borrowings are primarily the result of the acquisition of assets of DMT.
Other expense, net
Net other income
was $38,000 in the three months ended March 31, 2016 compared to net other expense of $76,000 in the same period of 2015.
The change in other income for the three months ended March 31, 2016 was primarily due to gains from foreign currency
transactions in 2016 compared to losses from foreign currency transactions in 2015.
Income taxes
The Company’s effective tax rates
for the three months ended March 31, 2016 and 2015 were 30%.
Financial Condition
Liquidity and Capital Resources
During the first three months of 2016,
working capital increased approximately $4,046,000 compared to December 31, 2015. Inventory increased by approximately $2.0 million,
or 6%, at March 31, 2016 compared to December 31, 2015 primarily due to normal seasonal purchases as well as additional inventory
resulting from the acquisition of the assets of DMT on February 1, 2016. Inventory turnover, calculated using a twelve month average
inventory balance, was 2.0 for the three months ended March 31, 2016, and the twelve months ended December 31, 2015. Receivables
decreased by approximately $450,000 at March 31, 2016 compared to December 31, 2015. The average number of days sales outstanding
in accounts receivable was 63 days at March 31, 2016 compared to 64 days at December 31, 2015. Accounts payable and other current
liabilities decreased by approximately $2.8 million.
The Company's working
capital, current ratio and long-term debt to equity ratio follow:
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
51,743,269
|
|
|
$
|
47,697,000
|
|
Current ratio
|
|
|
6.67
|
|
|
|
5.00
|
|
Long term debt to equity ratio
|
|
|
82.7
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%
|
|
|
60.0
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%
|
During the first three months
of 2016, total debt outstanding under the Company’s revolving credit facility increased by approximately $9.8 million, compared
to total debt thereunder at December 31, 2015. As of March 31, 2016, $35,695,771 was outstanding and $4,304,229 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 DMT on February 1, 2016.
Under its revolving credit facility with HSBC Bank, N.A., the Company
was eligible to borrow up to $40 million at an interest rate of LIBOR plus 1.75%. All principal amounts outstanding under the agreement
are required to be repaid in a single amount on April 5, 2017, the date the facility expires; interest is payable monthly. Funds
borrowed under the facility may be used for working capital, general operating expenses, share repurchases, acquisitions and certain
other purposes. At March 31, 2016 the Company was in compliance with the covenants then in effect under the related loan agreement.
On May 6, 2016, the Company amended its revolving credit loan agreement
with HSBC Bank, N.A. The amended facility provides for increased borrowings of up to an aggregate of $50 million at an interest
rate of LIBOR plus 2.0%. All principal amounts outstanding under the agreement are required to be repaid in a single amount on
May 5, 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 service coverage ratio, and a fixed
charge coverage ratio.
As discussed in Note 2 to the Condensed Consolidated Financial
Statements set forth in Item 1 above, at March 31, 2016 the Company had a total of approximately $80,000 remaining in its accruals
for environmental remediation and monitoring, related to property it 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 issuance of
this quarterly report on Form 10-Q.