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, 2017 for such disclosures. The condensed
consolidated balance sheet as of December 31, 2017 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 2017
Annual Report on Form 10-K.
The Company has evaluated
events and transactions subsequent to March 31, 2018 and through the date these condensed consolidated financial statements were
included in this Form 10-Q and filed with the SEC.
Recently Issued and Adopted Accounting
Standards
In February 2016, the Financial Accounting
Standards Board (“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 Company is currently evaluating this guidance to determine its impact on the
Company’s consolidated financial position, results of operations or cash flows of the Company.
In
August
2015,
the
FASB
issued
Accounting
Standards Update (“ASU”)
No.
2015-14,
which
defers
the
effective
date
of
ASU No.
2014-09,
Revenue
from
Contracts
with
Customers
(Topic
606),
by
one
year. ASU 2015-14 is a comprehensive new revenue recognition model requiring a
company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration
it expects to receive in exchange for those goods or services.
The Company has adopted the
new guidance as of January 1, 2018 using the modified retrospective method.
The adoption of the new guidance did not have
a
material effect on the condensed consolidated financial position, results of operations
or cash flows of the Company beyond the increase in the level of disclosures
. Refer to Note 4 – Revenue from Contracts
with Customers.
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 adopted ASU 2017-01 effective January 1, 2018.
The adoption of the new accounting standard did not have a material impact on the Company’s condensed consolidated financial
condition, results of operations or cash flows
.
In February 2018, the FASB issued ASU No. 2018-02
Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income.
ASU No. 2018-02 provides companies with an option to reclassify stranded tax effects within accumulated
other comprehensive income (“AOCI”) to retained earnings in each period in which the effect of the change in the U.S.
federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. ASU No. 2018-02 also requires
disclosure of a description of the accounting policy for releasing income tax effects from AOCI and whether an election was made
to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act. ASU No. 2018-02 is effective for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Companies can adopt the provisions
of ASU No. 2018-02 in either the period of adoption or retrospectively to each period (or periods) in which the effect of the change
in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is beginning to evaluate
the impact the adoption of ASU No. 2018-02 will have on the Company’s consolidated financial position, results of operations
and cash flows.
2. Contingencies
There are no pending material legal proceedings
to which the Company is a party, or, to the actual knowledge of the Company, contemplated by any governmental authority.
3. Pension
In December 1995, the Company’s
Board of Directors approved an amendment to the Company’s United States pension plan that terminated all future benefit accruals
as of February 1, 1996, without terminating the pension plan.
In accordance with the adoption of ASU 2017-07, the Company has
retrospectively revised the presentation of the non-service components of periodic pension cost of $22,000 to “Interest and
other expense, net” in the condensed consolidated statement of operations for the three months ended March 31, 2017, while
service cost remains in “Selling, general and administrative expense.”
Components of net periodic benefit cost
are as follows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
10
|
|
|
$
|
14
|
|
Expected return on plan assets
|
|
|
(17
|
)
|
|
|
(20
|
)
|
Amortization of prior service costs
|
|
|
—
|
|
|
|
2
|
|
Amortization of actuarial loss
|
|
|
22
|
|
|
|
26
|
|
Total non-service cost
|
|
$
|
15
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
24
|
|
|
$
|
31
|
|
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 2018,
the Company is not required to contribute to the plan. As of March 31, 2018, the Company had not made any contributions to the
plan in 2018.
4. Revenue from Contracts with Customers
On January 1,
2018, the Company adopted ASC 606 –
Revenue from Contracts with Customers
, using the modified retrospective method.
The new revenue standard requires recognition of revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
The adoption of this standard did not impact the timing of revenue recognition for customer sales in the quarter ended March 31,
2018.
Nature of Goods and Services
The Company recognizes revenue from the sales of a broad line of
products that are grouped into two main categories: (i) cutting and sharpening; and (ii) first aid and safety. The cutting and
sharpening category includes scissors, knives, paper trimmers, pencil sharpeners and other sharpening tools. The first aid and
safety category includes first aid kits and refills, over-the-counter medications and a variety of safety products. Revenue recognition
is evaluated through the following five steps: (i) identification of the contract or contracts with a customer; (ii) identification
of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction
price in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.
When Performance Obligations Are Satisfied
A performance obligation is a promise in a contract to transfer
a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance
obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenue is generated by the sale of
the Company’s products to its customers. Sales contracts (purchase orders) generally have a single performance
obligation that is satisfied at a point in time, with shipment or delivery, depending on the terms of the underlying contract.
Revenue is measured based on the consideration specified in the contract. The amount of consideration we receive and revenue we
recognize is impacted by incentives ("Customer Rebates"), including sales rebates, which are generally tied to sales
volume levels, in-store promotional allowances, shared media and customer catalog allowances and other cooperative advertising
arrangements; freight allowance programs offered to our customers; and allowance for returns and discounts. We generally recognize
Customer Rebate Costs as a deduction to gross sales at the time that the associated revenue is recognized.
Significant Payment Terms
Payment terms for each customer are dependent on the agreed upon
contractual repayment terms. Typically between 30 and 90 days but, they vary dependent on the size of the customer and its risk
profile to the Company. Some customers receive discounts for early payment.
Product Returns
The Company accepts product returns in the normal course of business.
The Company estimates reserves for returns and the related refunds to customers based on historical experience. Reserves for returned
merchandise are included as a component of “Accounts Receivables” in the condensed consolidated balance sheets.
Practical Expedient Usage and Accounting Policy Elections
The Company has determined to utilize the modified retrospective
approach which requires cumulative effect adjustment to the opening balance of retained earnings in the current year. This opening
adjustment is determined based on the impact of the new revenue standard’s application on contracts that were not completed
as of January 1, 2018, the date of initial application of the standard. This election did not have an impact on the Company’s
condensed consolidated financial statements.
For the Company’s contracts that have an original duration
of one year or less, the Company uses the practical expedient in ASC 606-10-32-18 applicable to such contracts and does not consider
the time value of money in relation to significant financing components. The effect of applying this practical expedient
election did not have an impact on the Company’s condensed consolidated financial statements.
Per ASC 606-10-25-18B, the Company has elected to account for shipping
and handling activities that occur after the customer has obtained control as a fulfillment activity instead of a performance obligation.
Furthermore, shipping and handling activities performed before transfer of control of the product also do not constitute a separate
and distinct performance obligation.
The Company has elected to exclude from the transaction price those
amounts which relate to sales and other taxes that are assessed by governmental authorities and that are imposed on and concurrent
with a specific revenue-producing transaction and collected by the Company from a customer.
Applying the practical expedient in ASC 340-40-25-4, the Company
recognizes the incremental costs of obtaining contracts as an expense when incurred. These costs are included in “Selling,
general and administrative expenses.” The effect of applying this practical expedient did not have an impact on the Company’s
condensed consolidated financial statements.
Disaggregation
of Revenues
The following table represents external net sales disaggregated
by product category:
|
|
US
|
|
Canada
|
|
Europe
|
|
Total
|
|
|
|
|
|
|
|
|
|
Cutting & Sharpening
|
|
$
|
12,496
|
|
|
$
|
1,552
|
|
|
$
|
2,380
|
|
|
$
|
16,428
|
|
First Aid & Safety
|
|
$
|
15,281
|
|
|
|
|
|
|
|
|
|
|
$
|
15,281
|
|
Total Net Sales
|
|
$
|
27,777
|
|
|
$
|
1,552
|
|
|
$
|
2,380
|
|
|
$
|
31,709
|
|
5. Debt and Shareholders’ Equity
Under its revolving loan agreement with HSBC
Bank, N.A., the Company can borrow up to $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 6, 2019, the date the facility expires; interest is payable
monthly. 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. Funds borrowed under the facility may be used for working capital,
general operating expenses, share repurchases, acquisitions 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, 2018, the Company was in compliance with the covenants of the loan agreement.
As of March 31, 2018 and December 31, 2017,
the Company had outstanding borrowings of $41,100,000 and $43,450,000, respectively, under the Company’s revolving loan agreement
with HSBC. The decrease in debt outstanding was primarily due to the Company repatriating approximately $5.8 million from its foreign
subsidiaries, a portion of which was used to pay down the debt under the Company’s credit facility.
On October 26, 2017, the Company exercised
its option to purchase its First Aid Only manufacturing and distribution center in Vancouver, WA for $4.0 million. The property
consists of 53,000 square feet of office, manufacturing and warehouse space on 2.86 acres. The purchase was financed by a variable
rate mortgage with HSBC Bank, N.A. at an interest rate of LIBOR plus 2.5%. Commencing on December 1, 2017, principal payments of
$22,222 are due monthly, with all amounts outstanding due on maturity on October 31, 2024.
During the three months ended March 31, 2018,
the Company paid approximately $44,610 to optionees who had elected a net cash settlement of their respective options.
6. 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, 2018 and for the comparable period in 2017.
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, 2018 and 2017:
Financial data by segment:
(in thousands)
|
|
Three months ended
March 31,
|
Sales to external customers:
|
|
2018
|
|
2017
|
United States
|
|
$
|
27,777
|
|
|
$
|
24,475
|
|
Canada
|
|
|
1,552
|
|
|
|
1,391
|
|
Europe
|
|
|
2,380
|
|
|
|
1,879
|
|
Consolidated
|
|
$
|
31,709
|
|
|
$
|
27,745
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,116
|
|
|
$
|
1,130
|
|
Canada
|
|
|
139
|
|
|
|
32
|
|
Europe
|
|
|
110
|
|
|
|
52
|
|
Consolidated
|
|
$
|
1,365
|
|
|
$
|
1,214
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
405
|
|
|
|
263
|
|
Other (income) expense, net
|
|
|
(13
|
)
|
|
|
13
|
|
Consolidated income before income taxes
|
|
$
|
973
|
|
|
$
|
938
|
|
Assets by segment:
|
|
March 31
|
|
December 31
|
|
|
2018
|
|
2017
|
United States
|
|
$
|
97,372
|
|
|
$
|
104,431
|
|
Canada
|
|
|
4,323
|
|
|
|
4,926
|
|
Europe
|
|
|
5,551
|
|
|
|
5,373
|
|
Consolidated
|
|
$
|
107,246
|
|
|
$
|
114,730
|
|
7. 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 $168,351 and $115,000 for the three months ended March 31, 2018 and 2017, respectively.
As of March 31, 2018, there was a total of
$1,751,650 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.
8. Fair Value Measurements
The carrying value of the Company’s bank
debt is a reasonable estimate of fair value because of the nature of its payment terms and maturity.
9. Business Combinations
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 the Spill
Magic 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
|
|
|
5,066
|
|
Goodwill
|
|
|
748
|
|
Total
assets
|
|
$
|
7,247
|
|
Assuming Spill Magic assets 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.