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, 2018 for such disclosures. The condensed
consolidated balance sheet as of December 31, 2018 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 2018
Annual Report on Form 10-K.
The Company has evaluated
events and transactions subsequent to March 31, 2019 and through the date these condensed consolidated financial statements were
issued.
Recently Issued and Adopted Accounting Standards
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842),
associated with lease accounting. There have been further amendments, including practical expedients, with the issuance of ASU
2018-11,
Leases (Topic 842) Targeted Improvements,
in July 2018, and ASU 2018-20,
Leases (Topic 842) Narrow Scope
Improvements for Lessors,
in December 2018. The amended guidance requires the recognition of lease assets and lease liabilities
on the balance sheet for those leases with terms in excess of 12 months and currently classified as operating leases. Disclosure
of key information about leasing arrangements are also required. We elected the optional transition method which allows entities
to continue to apply historical accounting guidance in the comparative periods presented in the year of adoption.
At transition, lessees and lessors may
elect to apply a package of practical expedients permitting entities not to reassess: (i) whether any expired or existing contracts
are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) whether initial direct costs for
any expired or existing leases qualify for capitalization under the amended guidance. These practical expedients must be elected
as a package and consistently applied. We have elected to apply the package of practical expedients upon adoption. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities
on our balance sheet for operating leases and providing new disclosures about leasing activities. Upon adoption, the Company booked
a right-of-use asset of $2.9 million and a corresponding lease liability. See note 9 for additional information.
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. 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 adopted, this ASU effective January 1, 2019 and this resulted in a reclassification between retained earnings and AOCI.
The impact from this ASU increased retained earnings by approximately $0.1 million, with an offsetting increase to accumulated
other comprehensive loss for the same amount
.
In June
2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting
. ASU 2018-07 aligns the accounting for share-based payment awards issued to employees and non-employees. ASU 2018-07
is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The adoption
of this ASU on January 1, 2019 did not have a material effect on the consolidated financial position, results of operations or
cash flow of the Company.
In August
2018, the FASB issued ASU No. 2018-14,
Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20),
Disclosure Framework - Changes to the Disclosures Requirements for Defined Benefit Plans Income Statement - Reporting Comprehensive
Income (Topic 220)
. This ASU removes disclosures that no longer are considered cost beneficial, clarifies the specific requirements
of disclosures, and adds disclosure requirements identified as relevant. ASU 2018-14 is effective for fiscal years ending after
December 15, 2020. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial
statements.
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.
Components of net periodic benefit cost
are as follows (in thousands):
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
9
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
9
|
|
|
$
|
10
|
|
|
Expected return on plan assets
|
|
|
(14
|
)
|
|
|
(17
|
)
|
|
Amortization of actuarial loss
|
|
|
22
|
|
|
|
22
|
|
|
Total non-service cost
|
|
$
|
17
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
26
|
|
|
$
|
24
|
|
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 2019, the Company
is not required to contribute to the plan. As of March 31, 2019, the Company had not made any contributions to the plan.
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.
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, sharpening and other; and (ii) first aid and
safety. The cutting, sharpening and other 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. Payment terms typically are between 30 and 90 days, 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 receivable” 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,
Other Assets and Deferred Costs,
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:
For the
three months ended March 31, 2019
(amounts
in 000's)
|
|
|
U.S.
|
|
Canada
|
|
Europe
|
|
Total
|
|
Cutting, Sharpening and Other
|
|
$
|
13
,172
|
|
|
$
|
1,413
|
|
|
$
|
2,518
|
|
|
$
|
17,103
|
|
|
First Aid and Safety
|
|
|
14,267
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
27,439
|
|
|
$
|
1,413
|
|
|
$
|
2,518
|
|
|
$
|
31,370
|
|
For the
three months ended March 31, 2018
(amounts
in 000's)
|
|
|
U.S.
|
|
Canada
|
|
Europe
|
|
Total
|
|
Cutting, Sharpening and Other
|
|
$
|
12,496
|
|
|
$
|
1,552
|
|
|
$
|
2,380
|
|
|
$
|
16,428
|
|
|
First Aid and Safety
|
|
|
15,281
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
27,777
|
|
|
$
|
1,552
|
|
|
$
|
2,380
|
|
|
$
|
31,709
|
|
5. Debt and Shareholders’ Equity
On May 24, 2018, the Company amended its revolving
loan agreement with HSBC Bank, N.A. The amendment lowered the interest rate to LIBOR plus 1.75%; interest is payable monthly. In
addition, the expiration date of the credit facility was extended to May 24, 2023. The prior interest rate was LIBOR plus 2%. The
amount available for borrowing remains unchanged at $50 million. 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. The
facility is intended to provide liquidity for growth, share repurchases, dividends, acquisitions, and other business activities.
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 zero, measured as of the end
of each fiscal year. At March 31, 2019, the Company was in compliance with the covenants of the loan agreement.
As of March 31, 2019 and December 31, 2018,
the Company had outstanding borrowings of $41,340,000 and $40,283,000, respectively, under the Company’s revolving loan agreement
with HSBC.
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, 2019,
the Company paid approximately $79,800 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, Massachusetts, Tennessee and California. 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 8%
of the Company’s total net sales for the three months ended March 31, 2019 and 7% for the comparable period in 2018.
The Chief Operating Decision Maker
evaluates the performance of each operating segment based on segment revenues and operating income. Segment revenues are defined
as total revenues, including both external customer revenue and inter-segment revenue. Segment operating earnings are defined as
segment revenues, less cost of goods sold and operating expenses. Identifiable assets by segment are those assets used in the respective
reportable segment’s operations. Inter-segment amounts are eliminated to arrive at consolidated financial results.
The following table sets forth certain
financial data by segment for the three months ended March 31, 2019 and 2018:
Financial data by segment:
(in thousands)
|
|
|
Three months ended
March 31,
|
|
Sales to external customers:
|
2019
|
|
2018
|
|
United States
|
|
$
|
27,439
|
|
|
$
|
27,777
|
|
|
Canada
|
|
|
1,413
|
|
|
|
1,552
|
|
|
Europe
|
|
|
2,518
|
|
|
|
2,380
|
|
|
Consolidated
|
|
$
|
31,370
|
|
|
$
|
31,709
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,257
|
|
|
$
|
1,116
|
|
|
Canada
|
|
|
135
|
|
|
|
139
|
|
|
Europe
|
|
|
142
|
|
|
|
110
|
|
|
Consolidated
|
|
$
|
1,534
|
|
|
$
|
1,365
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
501
|
|
|
|
405
|
|
|
Other income, net
|
|
|
(2
|
)
|
|
|
(13
|
)
|
|
Consolidated income before income taxes
|
|
$
|
1,035
|
|
|
$
|
973
|
|
|
Assets by segment:
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
United States
|
|
$
|
100,450
|
|
|
$
|
99,721
|
|
|
Canada
|
|
|
4,294
|
|
|
|
3,839
|
|
|
Europe
|
|
|
5,871
|
|
|
|
5,918
|
|
|
Consolidated
|
|
$
|
110,615
|
|
|
$
|
109,478
|
|
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 $211,759 and $168,351 for the three months ended March 31, 2019 and 2018, respectively.
As of March 31, 2019, there was a total of
$1,948,937 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. Leases
The Company has operating leases for office
and warehouse space and equipment under various arrangements which provide the right to use the underlying asset and require lease
payments for the lease term. The Company’s lease portfolio consists of operating leases which expire at various dates through
2024.
Certain of the Company’s lease arrangements
contain renewal provisions, exercisable at the Company's option. The Company’s lease agreements do not contain any material
residual value guarantees or material restrictive covenants.
The Company determines if an arrangement is
an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other
leases are recorded on the balance sheet with right-of-use (“ROU”) assets representing the right to use the underlying
asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease.
ROU assets and lease liabilities are recognized
at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate
the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using
our incremental borrowing rate based on the information available at the lease commencement date. Lease agreements with lease
and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense
is recognized on a straight-line basis over the lease term. Operating lease expense was $0.3 million for the period ending March
31, 2019 of which $0.1 million is included in cost of goods sold and $0.2 million is included in selling, general and administrative
expenses in the accompanying condensed consolidated statements of operations.
Information related to leases:
|
Operating lease cost
|
|
$
|
290
|
|
|
Operating lease - cash flow
|
|
$
|
284
|
|
|
Weighted-average remaining lease term
|
|
|
3.3 years
|
|
|
Weighted-average discount rate
|
|
|
5
|
%
|
Future minimum lease payments under non-cancellable
leases as of March 31, 2019 (in 000’s):
|
2019 (remaining)
|
|
$
|
819
|
|
|
2020
|
|
|
928
|
|
|
2021
|
|
|
573
|
|
|
2022
|
|
|
279
|
|
|
2023
|
|
|
255
|
|
|
Thereafter
|
|
|
64
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
2,918
|
|
|
Less: imputed interest
|
|
|
(238
|
)
|
|
Present value of lease liabilities
|
|
$
|
2,680
|
|
As most of our leases do not provide an implicit
rate, we use our incremental borrowing rate based on information available at the lease commencement date to determine the present
value of lease payments.