Item 1. Financial Statements
ACME
UNITED CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(all
amounts in thousands)
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(unaudited)
|
|
(Note 1)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,272
|
|
|
$
|
2,426
|
|
Accounts receivable, less allowance
|
|
|
25,909
|
|
|
|
19,565
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
33,037
|
|
|
|
29,803
|
|
Work in process
|
|
|
535
|
|
|
|
170
|
|
Raw materials and supplies
|
|
|
4,545
|
|
|
|
5,535
|
|
|
|
|
38,117
|
|
|
|
35,508
|
|
Prepaid expenses and other current assets
|
|
|
1,995
|
|
|
|
2,135
|
|
Total current assets
|
|
|
72,293
|
|
|
|
59,634
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
420
|
|
|
|
417
|
|
Buildings
|
|
|
5,691
|
|
|
|
5,418
|
|
Machinery and equipment
|
|
|
13,084
|
|
|
|
10,254
|
|
|
|
|
19,195
|
|
|
|
16,089
|
|
Less accumulated depreciation
|
|
|
11,302
|
|
|
|
8,688
|
|
|
|
|
7,893
|
|
|
|
7,401
|
|
Goodwill
|
|
|
1,406
|
|
|
|
1,406
|
|
Intangible assets, less amortization
|
|
|
16,768
|
|
|
|
11,951
|
|
Other assets
|
|
|
1,012
|
|
|
|
1,029
|
|
Total assets
|
|
$
|
99,372
|
|
|
$
|
81,421
|
|
See
notes to condensed consolidated financial statements.
ACME
UNITED CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS (continued)
(all
amounts in thousands, except share amounts)
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(unaudited)
|
|
(Note 1)
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,748
|
|
|
$
|
6,664
|
|
Other accrued liabilities
|
|
|
6,597
|
|
|
|
5,273
|
|
Total current liabilities
|
|
|
13,345
|
|
|
|
11,937
|
|
Long-term debt
|
|
|
39,706
|
|
|
|
25,913
|
|
Other
|
|
|
574
|
|
|
|
388
|
|
Total liabilities
|
|
|
53,625
|
|
|
|
38,238
|
|
|
|
|
|
|
|
|
|
|
Committements and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value $2.50:
|
|
|
|
|
|
|
|
|
authorized 8,000,000 shares;
|
|
|
|
|
|
|
|
|
issued - 4,788,965 shares in 2016
|
|
|
|
|
|
|
|
|
and 4,751,060 shares in 2015,
|
|
|
|
|
|
|
|
|
including treasury stock
|
|
|
11,967
|
|
|
|
11,877
|
|
Additional paid-in capital
|
|
|
8,365
|
|
|
|
9,460
|
|
Retained earnings
|
|
|
41,648
|
|
|
|
37,340
|
|
Treasury stock, at cost - 1,464,010 shares in 2016 and
|
|
|
|
|
|
|
|
|
1,402,517 shares in 2015
|
|
|
(13,870
|
)
|
|
|
(12,963
|
)
|
Accumulated other comprehensive loss :
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
(948
|
)
|
|
|
(948
|
)
|
Translation adjustment
|
|
|
(1,415
|
)
|
|
|
(1,583
|
)
|
|
|
|
(2,363
|
)
|
|
|
(2,531
|
)
|
Total stockholders’ equity
|
|
|
45,747
|
|
|
|
43,183
|
|
Total liabilities and stockholders’ equity
|
|
$
|
99,372
|
|
|
$
|
81,421
|
|
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
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
31,913
|
|
|
$
|
29,903
|
|
|
$
|
98,198
|
|
|
$
|
86,694
|
|
Cost of goods sold
|
|
|
20,050
|
|
|
|
19,578
|
|
|
|
62,455
|
|
|
|
55,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,863
|
|
|
|
10,325
|
|
|
|
35,743
|
|
|
|
31,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
9,723
|
|
|
|
8,334
|
|
|
|
28,008
|
|
|
|
24,603
|
|
Operating income
|
|
|
2,140
|
|
|
|
1,991
|
|
|
|
7,735
|
|
|
|
6,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
247
|
|
|
|
149
|
|
|
|
642
|
|
|
|
420
|
|
Other expense , net
|
|
|
65
|
|
|
|
92
|
|
|
|
38
|
|
|
|
149
|
|
Total other expense
|
|
|
312
|
|
|
|
241
|
|
|
|
680
|
|
|
|
569
|
|
Income before income taxes
|
|
|
1,828
|
|
|
|
1,750
|
|
|
|
7,055
|
|
|
|
6,124
|
|
Income tax expense
|
|
|
355
|
|
|
|
542
|
|
|
|
1,750
|
|
|
|
1,771
|
|
Net income
|
|
$
|
1,473
|
|
|
$
|
1,208
|
|
|
$
|
5,305
|
|
|
$
|
4,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.36
|
|
|
$
|
1.59
|
|
|
$
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.40
|
|
|
$
|
0.33
|
|
|
$
|
1.49
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
denominator used for basic per share computations
|
|
|
3,324
|
|
|
|
3,354
|
|
|
|
3,329
|
|
|
|
3,328
|
|
Weighted average number of dilutive stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
317
|
|
|
|
345
|
|
|
|
233
|
|
|
|
370
|
|
Denominator used for diluted per share computations
|
|
|
3,641
|
|
|
|
3,699
|
|
|
|
3,562
|
|
|
|
3,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.10
|
|
|
$
|
0.09
|
|
|
$
|
0.30
|
|
|
$
|
0.27
|
|
See
notes to condensed consolidated financial statements.
ACME
UNITED CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(all
amounts in thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,473
|
|
|
$
|
1,208
|
|
|
$
|
5,305
|
|
|
$
|
4,353
|
|
Other comprehensive (loss) income -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(26
|
)
|
|
|
(129
|
)
|
|
|
168
|
|
|
|
(591
|
)
|
Comprehensive income
|
|
$
|
1,447
|
|
|
$
|
1,079
|
|
|
$
|
5,473
|
|
|
$
|
3,762
|
|
See
notes to condensed consolidated financial statements.
ACME
UNITED CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(all
amounts in thousands)
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,305
|
|
|
$
|
4,353
|
|
Adjustments to reconcile net income
|
|
|
|
|
|
|
|
|
to net cash provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,097
|
|
|
|
970
|
|
Amortization
|
|
|
693
|
|
|
|
584
|
|
Stock compensation expense
|
|
|
306
|
|
|
|
442
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,145
|
)
|
|
|
(4,205
|
)
|
Inventories
|
|
|
(2,134
|
)
|
|
|
(1,392
|
)
|
Prepaid expenses and other current assets
|
|
|
219
|
|
|
|
(226
|
)
|
Accounts payable
|
|
|
21
|
|
|
|
(371
|
)
|
Other accrued liabilities
|
|
|
1,223
|
|
|
|
(844
|
)
|
Total adjustments
|
|
|
(3,720
|
)
|
|
|
(5,042
|
)
|
Net cash provided (used) by operating activities
|
|
|
1,585
|
|
|
|
(689
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant, and equipment
|
|
|
(1,320
|
)
|
|
|
(1,352
|
)
|
Purchase of patents and trademarks
|
|
|
(29
|
)
|
|
|
(52
|
)
|
Acquisition of certain assets of Diamond Machining Technology
|
|
|
(6,971
|
)
|
|
|
—
|
|
Proceeds from the sales of property, plant, and equipment
|
|
|
—
|
|
|
|
5
|
|
Net cash used by investing activities
|
|
|
(8,320
|
)
|
|
|
(1,399
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowing of long-term debt
|
|
|
13,793
|
|
|
|
4,404
|
|
Cash settlement of stock options
|
|
|
(1,700
|
)
|
|
|
—
|
|
Proceeds from issuance of common stock
|
|
|
390
|
|
|
|
1,139
|
|
Distributions to stockholders
|
|
|
(1,000
|
)
|
|
|
(895
|
)
|
Purchase of treasury stock
|
|
|
(907
|
)
|
|
|
(162
|
)
|
Net cash provided by financing activities
|
|
|
10,576
|
|
|
|
4,486
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
5
|
|
|
|
(63
|
)
|
Net change in cash and cash equivalents
|
|
|
3,846
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
2,426
|
|
|
|
2,286
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,272
|
|
|
$
|
4,621
|
|
See
notes to condensed consolidated financial statements.
Notes
to CONDENSED CONSOLIDATED Financial Statements
(UNAUDITED)
Note 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, 2015 for such disclosures. The condensed
consolidated balance sheet as of December 31, 2015 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 2015
Annual Report on Form 10-K.
The Company has evaluated
events and transactions subsequent to September 30, 2016 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
Financial Accounting Standards Board (FASB) issued accounting standards update (ASU) 2016-09,
Compensation – Stock Compensation:
Improvements to Employee Share Based Payment Accounting
. The guidance in this update addresses several aspects of the accounting
for share-based payments, including income tax consequences, classification of awards as either equity or liabilities and classification
on the statement of cash flows. The new standard is effective for the Company beginning on January 1, 2017. The Company is evaluating
the effect that ASU 2016-09 may have on its consolidated financial statements and related disclosures.
Note 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 has been completed.
The monitoring period is expected to be completed by the end of 2020.
The
change in the accrual for environmental remediation for the nine months ended September 30, 2016 follows (in thousands):
|
|
Balance
at
December 31, 2015
|
|
Payments
|
|
Balance
at
September 30, 2016
|
Fremont,
NC
|
|
$
|
80
|
|
|
$
|
(13
|
)
|
|
$
|
67
|
|
Total
|
|
$
|
80
|
|
|
$
|
(13
|
)
|
|
$
|
67
|
|
Note 3 — Pension
Components of net periodic benefit cost
are as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
15
|
|
|
$
|
15
|
|
|
$
|
44
|
|
|
$
|
44
|
|
Service cost
|
|
|
6
|
|
|
|
6
|
|
|
|
19
|
|
|
|
19
|
|
Expected return on plan assets
|
|
|
(23
|
)
|
|
|
(24
|
)
|
|
|
(69
|
)
|
|
|
(70
|
)
|
Amortization of prior service costs
|
|
|
2
|
|
|
|
2
|
|
|
|
7
|
|
|
|
7
|
|
Amortization of actuarial loss
|
|
|
28
|
|
|
|
36
|
|
|
|
84
|
|
|
|
92
|
|
|
|
$
|
28
|
|
|
$
|
35
|
|
|
$
|
85
|
|
|
$
|
92
|
|
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 2016, the Company is not required to contribute to the plan. As of September 30, 2016, the Company did
not make any contributions to the plan in 2016.
Note 4 —Debt and Shareholders’ Equity
On May 6, 2016, the Company amended its revolving credit loan agreement
with HSBC Bank, N.A. The amended facility provides for borrowings of up to an aggregate of $50 million at an interest rate of LIBOR
plus 2.0%. In addition, 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. 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 September 30, 2016, the Company
was in compliance with the covenants then in effect under the loan agreement.
As of September 30, 2016 and December 31, 2015, the Company had
outstanding borrowings of $39,706,009 and $25,912,652, respectively, under the Company’s revolving loan agreement with HSBC.
During
the three months ended September 30, 2016, the Company issued a total of 2,005 shares of common stock and received aggregate
proceeds of $30,376 upon exercise of employee stock options. During the nine months ended September 30, 2016, the Company
issued a total of 37,905 shares of common stock and received aggregate proceeds of approximately $420,376 upon exercise of
employee stock options. During the three and nine months ended September 30, 2016, the Company paid approximately $700,000
and $1,700,000 respectively, to settle employee stock options.
During the nine months ended September 30, 2016,
the Company repurchased 61,493 shares of its Common Stock at an average price of $14.76. As of September 30, 2016, there were 41,229
shares that may be purchased under the repurchase program announced in 2010. The Company’s purchases during the nine months
ended September 30, 2016 were effected pursuant to a Rule 10b5-1 plan.
Note 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 center in North Carolina. 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 15% and 19% of the Company’s
total net sales for the three and nine months ended September 30, 2016 compared to 15% and 18% for the comparable periods in 2015.
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.
Financial
data by segment:
(in
thousands)
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
Sales to external customers:
|
2016
|
|
2015
|
|
2016
|
|
2015
|
United States
|
|
$
|
28,489
|
|
|
$
|
26,160
|
|
|
$
|
87,311
|
|
|
$
|
75,943
|
|
Canada
|
|
|
1,585
|
|
|
|
1,669
|
|
|
|
5,623
|
|
|
|
5,726
|
|
Europe
|
|
|
1,839
|
|
|
|
2,074
|
|
|
|
5,264
|
|
|
|
5,025
|
|
Consolidated
|
|
$
|
31,913
|
|
|
$
|
29,903
|
|
|
$
|
98,198
|
|
|
$
|
86,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,974
|
|
|
$
|
1,849
|
|
|
$
|
7,165
|
|
|
$
|
6,405
|
|
Canada
|
|
|
148
|
|
|
|
30
|
|
|
|
558
|
|
|
|
202
|
|
Europe
|
|
|
18
|
|
|
|
112
|
|
|
|
12
|
|
|
|
86
|
|
Consolidated
|
|
$
|
2,140
|
|
|
$
|
1,991
|
|
|
$
|
7,735
|
|
|
$
|
6,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
247
|
|
|
|
149
|
|
|
|
642
|
|
|
|
420
|
|
Other expense, net
|
|
|
65
|
|
|
|
92
|
|
|
|
38
|
|
|
|
149
|
|
Consolidated income before income taxes
|
|
$
|
1,829
|
|
|
$
|
1,750
|
|
|
$
|
7,055
|
|
|
$
|
6,124
|
|
Assets by segment:
|
|
|
|
|
( in thousands )
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
United States
|
|
$
|
90,518
|
|
|
$
|
73,688
|
|
Canada
|
|
|
4,559
|
|
|
|
3,709
|
|
Europe
|
|
|
4,295
|
|
|
|
4,024
|
|
Consolidated
|
|
$
|
99,372
|
|
|
$
|
81,421
|
|
Note 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 $122,001 and $138,710 for the three months ended September 30, 2016 and 2015, respectively. Share-based
compensation expenses were $305,536 and $442,225 for the nine months ended September 30, 2016 and 2015, respectively. During the
nine months ended September 30, 2016, the Company issued 163,000 options with a weighted average fair value of $4.08 per share.
As of September 30, 2016, there was a total of $996,316 of unrecognized
compensation cost, adjusted for estimated forfeitures, related to non-vested share –based payments granted to the Company’s
employees. The remaining unamortized expense is expected to be recognized over a weighted average period of approximately 2 years.
Note 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.
Note 8 – Business Combination
On February 1, 2016, the Company acquired the
assets of Vogel Capital, Inc., d/b/a Diamond Machining Technology (DMT) for $6.97 million in cash.
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
|
|
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”.
Net sales for the three months ended September
30, 2016 attributable to DMT products were approximately $1.3 million. Net income for the three months ended September 30, 2016
attributable to DMT products was approximately $200,000.
Net sales for the nine months ended September
30, 2016 attributable to DMT products were approximately $3.6 million. Net income for the nine months ended September 30, 2016
attributable to DMT products was approximately $500,000.
Assuming DMT was acquired on January 1, 2016,
unaudited proforma combined net sales for the nine months ended September 30, 2016 for the Company would have been approximately
$98.8 million. Unaudited proforma combined net income for the nine months ended September 30, 2016 for the Company would have been
approximately $5.4 million.
Assuming DMT was acquired on January 1, 2015,
unaudited proforma combined net sales for the three and nine months ended September 30, 2015, for the Company would have been approximately
$31.2 million and $90.3 million, respectively. Unaudited proforma combined net income for the three and nine months ended September
30, 2015 for the Company would have been approximately $1.6 million and $5.6 million, respectively.
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, 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. 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.
Net sales
Consolidated net sales for the three months
ended September 30, 2016 were $31,913,000 compared with $29,903,000 in the same period in 2015, a 7% increase. Consolidated net
sales for the nine months ended September 30, 2016 were $98,198,000, compared with $86,694,000 for the same period in 2015, a 13%
increase.
Net sales for the three and nine months ended
September 30, 2016 in the U.S. segment increased 9% and 15%, respectively, compared with the same periods in 2015. Sales in the
U.S. for the three and nine month periods increased compared to the same periods last year, primarily due to higher sales of Westcott
school and office products, as well as higher sales of first aid products and incremental sales resulting from the acquisition
of DMT.
Net sales in Canada for the three months ended
September 30, 2016 decreased 5% in U.S. dollars (4% in local currency). Net sales in Canada for the nine months ended September
30, 2016 decreased 2% in U.S. dollars but increased 3% in local currency compared with the same period in 2015.
European net sales for the three months ended
September 30, 2016 declined 12% in both U.S. dollars and local currency compared with the same period in 2015. The decline in sales
was primarily due to the timing of a shipment of promotional products to a mass-market customer. In 2015, the promotion occurred
in the third quarter; in 2016, the promotion occurred in the second quarter. European net sales for the nine months ended September
30, 2016 increased 4% in both U.S. dollars and local currency. The increase in net sales for the nine months was primarily related
to market share gains in the office products channel.
Gross profit
Gross profit for the three months ended September
30, 2016 was $11,863,000 (37.2% of net sales) compared to $10,325,000 (34.5% of net sales) for the same period in 2015. The increase
in gross profit was primarily due to a favorable product mix. Also, in the third quarter of last year, the Company incurred approximately
$150,000 of one-time moving and severance costs associated with consolidating its first aid operations into its Vancouver, Washington
facility. Gross profit for the nine months ended September 30, 2016 was $35,743,000 (36.4% of net sales) compared to $31,296,000
(36.1% of net sales) in the same period in 2015.
Selling, general and
administrative expenses
Selling, general and
administrative ("SG&A") expenses for the three months ended September 30, 2016 were $9,723,000 (30.5% of net sales)
compared with $8,334,000 (27.9% of net sales) for the same period of 2015, an increase of $1,389,000. SG&A expenses for the
nine months ended September 30, 2016 were $28,008,000 (28.5% of net sales) compared with $24,603,000 (28.4% of net sales) in the
comparable period of 2015, an increase of $3,405,000. The increases in SG&A expenses for the three and nine months ended September
30, 2016, compared to the same period in 2015 were primarily the result of incremental fixed costs resulting from the acquisition
of DMT assets, increases in delivery costs and sales commissions which resulted from higher sales and higher personnel related
costs, which include compensation and recruiting costs.
Operating income
Operating income for
the three months ended September 30, 2016 was $2,140,000 compared with $1,991,000 in the same period of 2015. Operating income
for the nine months ended September 30, 2016 was $7,735,000 compared to $6,693,000 in the same period of 2015. Operating income
in the U.S. segment increased by $123,000 and $760,000 for the three and nine months ended September 30, 2016, respectively, compared
to the same periods in 2015. The increases in operating income were principally due to higher sales.
Operating income in
the Canadian segment increased by $118,000 and $356,000 for the three and nine months ended September 30, 2016, respectively, compared
to the same periods in 2015.
Operating income in
the European segment decreased by $94,000 and $74,000 for the three and nine months ended September 30, 2016, respectively, compared
to the same periods in 2015.
Interest expense, net
Interest expense, net
for the three months ended September 30, 2016 was $247,000, compared with $149,000 for the same period of 2015, a $98,000 increase.
Interest expense, net for the nine months ended September 30, 2016, was $642,000 compared to $420,000 for the same period in 2015,
an increase of $222,000. The increases in interest expense resulted from higher average borrowings under the Company’s bank
revolving credit facility for the three and nine months ended September 30, 2016. The higher borrowings were primarily the result
of the acquisition of assets of DMT, on February 1, 2016.
Other expense, net
Net other expense was
$65,000 in the three months ended September 30, 2016 compared to $92,000 in the same period of 2015. Net other expense was $38,000
in the first nine months of 2016 compared to $149,000 in the same period of 2015. The decrease in other expense for the three and
nine months ended September 30, 2015 was primarily due to lower losses from foreign currency transactions.
Income taxes
The Company’s effective tax rates
for both the three and nine month periods ended September 30, 2016 were 19% and 25%, respectively, compared to 31% and 29% in the
same periods of 2015. The decreases in the effective tax rate for the three and nine months ended September 30, 2016 were due to
the Company generating a higher proportion of earnings in jurisdictions with lower tax rates.
Financial Condition
Liquidity and Capital Resources
During the first nine months of 2016,
working capital increased approximately $11,251,000 compared to December 31, 2015. Inventory increased by approximately $2.6 million,
or 7%, at September 30, 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 2.1 at September 30, 2016, compared to 2.0 for the twelve months ended December 31, 2015. Receivables increased
by approximately $6.3 million at September 30, 2016 compared to December 31, 2015. The average number of days sales outstanding
in accounts receivable was 63 days at September 30, 2016 compared to 64 days at December 31, 2015. The increase in accounts receivables
was due to strong sales in the third quarter. Sales are typically stronger in the second and third quarters compared to the first
and fourth quarters. Accounts payable and other current liabilities increased by approximately $1.4 million.
The Company's working
capital, current ratio and long-term debt to equity ratio follow:
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
58,948
|
|
|
$
|
47,697
|
|
Current ratio
|
|
|
5.42
|
|
|
|
5.00
|
|
Long term debt to equity ratio
|
|
|
86.8
|
%
|
|
|
60.0
|
%
|
During the first nine months
of 2016, total debt outstanding under the Company’s revolving credit facility increased by approximately $13.8 million, compared
to total debt thereunder at December 31, 2015. As of September 30, 2016, $39,706,009 was outstanding and $10,293,991 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, 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 May 6, 2016, the Company amended its revolving credit loan agreement
with HSBC Bank, N.A. The amended facility provides for borrowings of up to an aggregate of $50 million at an interest rate of LIBOR
plus 2.0%. In addition, 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. 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 service coverage 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 September 30, 2016, the Company
was in compliance with the covenants then in effect under the loan agreement with HSBC.
As discussed in Note 2 to the Condensed Consolidated Financial
Statements set forth in Item 1 above, at September 30, 2016 the Company had a total of approximately $67,000 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.