See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
The operations of Acme United Corporation
(the “Company”) consist of three reportable segments. The operations of the Company are structured and evaluated based
on geographic location. The three reportable segments operate in the United States (including Asian operations), Canada and Europe.
Principal products across all segments are scissors, shears, knives, rulers, pencil sharpeners, first aid safety kits, and related
products which are sold primarily to wholesale, contract and retail stationery distributors, office supply super stores, mass market
retailers, industrial distributors, school supply distributors, drug store retailers, sporting goods stores, hardware chains and
wholesale florists.
2. Accounting Policies
Estimates
– The preparation
of financial statements in conformity with generally accepted accounting principles in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. The most sensitive and significant accounting estimates relate to customer rebates, valuation allowances for deferred income
tax assets, obsolete and slow-moving inventories, potentially uncollectible accounts receivable, pension liability and accruals
for income taxes. Actual results could differ from those estimates.
Principles of Consolidation
–
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned by
the Company. All significant intercompany accounts and transactions are eliminated in consolidation.
Translation of Foreign Currency
– For foreign operations whose functional currencies are not U.S. dollars, assets and liabilities are translated at rates
in effect at the end of the year; revenues and expenses are translated at average rates in effect during the year. Resulting translation
adjustments are made directly to accumulated other comprehensive income. Foreign currency transaction gains and losses are recognized
in operating results. Included in other expense were foreign currency transaction losses of $7,458 in 2018 and foreign currency
transaction gains of $24,404 in 2017.
Cash Equivalents
– Investments
with an original maturity of three months or less, as well as time deposits and certificates of deposit that are readily redeemable
at the date of purchase, are considered cash equivalents.
Accounts Receivable
– Accounts
receivable are shown less an allowance for doubtful accounts of $462,132 at December 31, 2018 and $166,907 at December 31, 2017.
Inventories
– Inventories
are stated at the lower of cost, or net realizable value, determined by the first-in, first-out method.
Property, Plant and Equipment, and
Depreciation
– Property, plant and equipment is recorded at cost. Depreciation is computed by the straight-line method
over the estimated useful lives of the assets, which range from 3 to 30 years.
Intangible Assets
– Intangible
assets with finite useful lives are recorded at cost upon acquisition, and amortized over the term of the related contract or useful
life, as applicable. Intangible assets held by the Company with finite useful lives include patents and trademarks. Patents and
trademarks are amortized over their estimated useful lives. The weighted average amortization period for intangible assets at December
31, 2018 was 10 years. The Company periodically
reviews the values recorded for intangible
assets to assess recoverability from future operations whenever events or changes in circumstances indicate that their carrying
amounts may not be recoverable.
At December 31, 2018 and 2017, the Company assessed the recoverability of its long-lived
assets and believed that there were no events or circumstances present that would that would require a test of recoverability on
those assets. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful
lives.
Deferred Income Taxes
–
Deferred income taxes are provided for the differences between the financial statement and tax bases of assets and liabilities,
and on operating loss carryovers, using tax rates in effect in years in which the differences are expected to reverse.
Revenue Recognition
– Revenue
is recognized when the price is fixed, the title and risks and rewards of ownership have passed to the customer, and when collection
is reasonably assured. Depending on the contractual terms of each customer, revenue is recognized either at the time of shipment
or upon delivery. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Customer rebates
and incentives earned based on promotional programs in place, volume of purchases or other factors are also estimated at the time
of revenue recognition and recorded as a reduction of that revenue.
Refer to Note 10 –
Revenue from Contracts with Customers.
Research and Development
–
Research and development costs ($734,000 in 2018 and $752,000 in 2017) are expensed as incurred.
Shipping Costs
– The costs
of shipping product to our customers ($7,553,410 in 2018 and $6,595,544 in 2017) are included in selling, general and administrative
expenses.
Advertising Costs
– The Company
expenses the production costs of advertising the first time that the related advertising takes place. Advertising costs ($1,935,267
in 2018 and $1,997,113 in 2017) are included in selling, general and administrative expenses.
Subsequent Events
– The Company has evaluated events and transactions subsequent to December 31, 2018 through the date the consolidated financial
statements were included in this Form 10-K and filed with the SEC.
Concentration
– The Company
performs ongoing credit evaluations of its customers and generally does not require collateral for the extension of credit. Allowances
for credit losses are provided and have been within management's expectations. The Company had one customer in 2018 and two customers
in 2017 that individually exceeded 10% of consolidated net sales. In 2018, net sales to this one customer were approximately 13%,
of consolidated net sales. In 2017, net sales to the two customers were approximately 16% and 11%, respectively.
Recently Issued and Adopted Accounting
Standards
In August
2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, 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 consolidated financial position, results of operations or cash flows of the Company beyond the increase in the level of
disclosures. Refer to Note 10 – Revenue from Contracts with Customers.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation—Retirement
Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(“ASU
No. 2017-07”), which requires employers to disaggregate the service cost component from other components of net periodic
benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The
standard requires employers to report the service cost component in the same line item as other compensation costs and to report
the other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization
of prior service cost or credits and actuarial gains and losses) separately and outside a subtotal of operating income. The service
cost component of net periodic pension cost is included in selling, general and administrative expenses in the accompanying consolidated
statements of earnings and the other components of net periodic pension cost are included in other expense. The income statement
guidance requires application on a retrospective basis. The adoption of this ASU by the Company on January 1, 2018 did
not have a material effect on the consolidated financial position, results of operations or cash flows of the Company. Refer to
Note 6 – Pension and Profit Sharing.
In February 2016, the FASB issued ASU
2016-02,
Leases
, associated with lease accounting. There have been further amendments, including practical expedients, with
the issuance of ASU 2018-01,
Leases (Topic 842): Land Easement Practical Expedient for
Transition to Topic 842,
in January 2018, 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 will also be 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. The Company has elected to apply the package of practical
expedients upon adoption.
Upon adoption of the
amended guidance, the Company expects to record operating lease right-of-use assets and related liabilities of
approximately $2.9 million, primarily related to real estate leases. The Company currently does not expect the amended
guidance to have any other material impacts on our consolidated financial statements.
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. For Acme, this ASU will be adopted effective January 1, 2019 and will result in a reclassification between
retained earnings and AOCI. The Company estimates that the impact from this ASU will increase 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 Company
does not expect the adoption of ASU 2018-07 to have a material impact on the consolidated financial statements.
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.
3. Inventories
Inventories consisted of:
|
|
December 31,
|
|
|
2018
|
|
2017
|
Finished goods
|
|
$
|
33,427,983
|
|
|
$
|
33,110,826
|
|
Work in process
|
|
|
141,646
|
|
|
|
193,557
|
|
Materials and supplies
|
|
|
7,762,508
|
|
|
|
6,782,488
|
|
Inventories, net:
|
|
$
|
41,332,137
|
|
|
$
|
40,086,871
|
|
Inventories are stated net of valuation
allowances for slow moving and obsolete inventory of $538,354 as of December 31, 2018 and $654,855 as of December 31, 2017.
4. Intangible Assets and Goodwill
The Company’s intangible assets
and goodwill consisted of:
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
First Aid Only Tradename
|
|
$
|
3,410,000
|
|
|
$
|
3,410,000
|
|
First Aid Only Customer List
|
|
|
5,500,010
|
|
|
|
5,500,010
|
|
DMT Trademarks
|
|
|
1,387,000
|
|
|
|
1,387,000
|
|
DMT
Customer List
|
|
|
1,369,000
|
|
|
|
1,369,000
|
|
DMT Non-Compete
|
|
|
183,000
|
|
|
|
183,000
|
|
Slice License Agreement
|
|
|
379,921
|
|
|
|
—
|
|
Patents
|
|
|
2,271,980
|
|
|
|
2,271,980
|
|
Trademarks
|
|
|
663,698
|
|
|
|
663,698
|
|
Pac-Kit Tradename, Customer List
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
Spill Magic Customer List
|
|
|
3,965,000
|
|
|
|
3,965,000
|
|
Spill Magic Trademarks
|
|
|
1,034,000
|
|
|
|
1,034,000
|
|
Spill Magic Non-Compete
|
|
|
67,111
|
|
|
|
67,111
|
|
C-Thru Customer List
|
|
|
1,050,000
|
|
|
|
1,050,000
|
|
Subtotal
|
|
|
22,780,720
|
|
|
|
22,400,799
|
|
Less: Accumulated Amortization
|
|
|
5,736,320
|
|
|
|
4,518,794
|
|
Subtotal Intangible Assets
|
|
|
17,044,400
|
|
|
|
17,882,005
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,696,370
|
|
|
|
4,696,370
|
|
Total:
|
|
$
|
21,740,770
|
|
|
$
|
22,578,375
|
|
Amortization
expense for patents and trademarks for the years ended December 31, 2018 and 2017 were $1,217,526 and $1,172,292, respectively.
The estimated aggregate amortization expense for each of the next five succeeding years, calculated on a similar basis, is as follows:
2019 - $1,241,417; 2020 - $1,236,796; 2021 - $1,234,971; 2022 - $1,231,686; and 2023 - $1,227,488.
5. Other Accrued Liabilities
The Company’s other current and
long-term accrued liabilities consisted of:
|
|
December 31,
|
|
|
2018
|
|
2017
|
Customer Rebates
|
|
$
|
3,395,511
|
|
|
$
|
3,733,472
|
|
Pension Liability
|
|
|
147,099
|
|
|
|
113,042
|
|
Accrued Compensation
|
|
|
370,477
|
|
|
|
339,474
|
|
Dividend Payable
|
|
|
402,158
|
|
|
|
371,207
|
|
Other
|
|
|
853,283
|
|
|
|
1,655,531
|
|
Total:
|
|
$
|
5,168,528
|
|
|
$
|
6,212,726
|
|
6. Pension and Profit Sharing
United States employees, hired prior to
July 1, 1993, are covered by a funded, defined benefit pension plan. The benefits of this pension plan are based on years of service
and the average compensation of the highest three consecutive years during the last ten years of employment. In December 1995,
the Company's Board of Directors approved an amendment to the 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,
Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost
, the Company has retrospectively revised the presentation of the non-service components
of periodic pension cost of $87,000 to “Other expense” in the consolidated statement of operations for the twelve months
ended December 31, 2017, while service cost remains in “Selling, general and administrative expenses.”
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 contributed $25,107 to the plan.
The plan asset weighted average allocation
at December 31, 2018 and December 31, 2017, by asset category, were as follows:
Asset Category:
|
|
2018
|
|
2017
|
Equity Securities
|
|
|
65
|
%
|
|
|
67
|
%
|
Fixed Income Securities
|
|
|
33
|
%
|
|
|
32
|
%
|
Other Securities / Investments
|
|
|
2
|
%
|
|
|
1
|
%
|
Total:
|
|
|
100
|
%
|
|
|
100
|
%
|
The Company’s investment policy
for the pension plan is to minimize risk by balancing investments between equity securities and fixed income securities. Plan funds
are invested in long-term obligations with a history of moderate to low risk.
The pension plan asset information included
below is presented at fair value. ASC 820 establishes a framework for measuring fair value and requires disclosures about assets
and liabilities measured at fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure
fair value into three levels as follows:
|
·
|
Level 1 – Inputs to the valuation methodology based on unadjusted quoted market prices in
active markets that are accessible at the measurement date.
|
|
·
|
Level 2 – Inputs to the valuation methodology that include quoted market prices that are
not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
|
|
·
|
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
|
The following tables present the pension
plan assets by level within the fair value hierarchy as of December 31, 2018 and 2017:
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Money Market Fund
|
|
$
|
4
|
|
|
$
|
17,320
|
|
|
$
|
—
|
|
|
$
|
17,324
|
|
Equity Common and Collected Funds
|
|
|
99,616
|
|
|
|
564,341
|
|
|
|
—
|
|
|
|
663,957
|
|
Fixed Income Common and Collected Funds
|
|
|
83,211
|
|
|
|
249,309
|
|
|
|
—
|
|
|
|
332,520
|
|
Total:
|
|
$
|
182,831
|
|
|
$
|
830,970
|
|
|
$
|
—
|
|
|
$
|
1,013,801
|
|
2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Money Market Fund
|
|
$
|
—
|
|
|
$
|
10,774
|
|
|
$
|
—
|
|
|
$
|
10,774
|
|
Equity Common and Collected Funds
|
|
|
125,451
|
|
|
|
711,143
|
|
|
|
—
|
|
|
|
836,594
|
|
Fixed Income Common and Collected Funds
|
|
|
100,430
|
|
|
|
302,001
|
|
|
|
—
|
|
|
|
402,431
|
|
Total:
|
|
$
|
225,881
|
|
|
$
|
1,023,918
|
|
|
$
|
—
|
|
|
$
|
1,249,799
|
|
Other
disclosures related to the pension plan follow:
|
|
2018
|
|
2017
|
Assumptions used to determine benefit obligation:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.87
|
%
|
|
|
3.14
|
%
|
Changes in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
(1,362,867
|
)
|
|
$
|
(1,499,798
|
)
|
Interest cost
|
|
|
(39,851
|
)
|
|
|
(48,161
|
)
|
Service cost
|
|
|
(33,000
|
)
|
|
|
(36,000
|
)
|
Actuarial gain (loss)
|
|
|
71,338
|
|
|
|
(20,289
|
)
|
Benefits and plan expenses paid
|
|
|
203,450
|
|
|
|
241,381
|
|
Benefit obligation at end of year:
|
|
$
|
(1,160,930
|
)
|
|
$
|
(1,362,867
|
)
|
Changes in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
1,249,825
|
|
|
$
|
1,294,727
|
|
Actual return on plan assets
|
|
|
(57,651
|
)
|
|
|
196,479
|
|
Employer contribution
|
|
|
25,107
|
|
|
|
—
|
|
Benefits and plan expenses paid
|
|
|
(203,450
|
)
|
|
|
(241,381
|
)
|
Fair value of plan assets at end of year
|
|
|
1,013,831
|
|
|
|
1,249,825
|
|
Funded status:
|
|
$
|
(147,099
|
)
|
|
$
|
(113,042
|
)
|
Amounts recognized in Accumulated Other Comprehensive Income:
|
|
|
|
|
Net actuarial loss
|
|
$
|
880,370
|
|
|
$
|
913,870
|
|
Prior service cost
|
|
|
1,082
|
|
|
|
1,625
|
|
Total:
|
|
$
|
881,452
|
|
|
$
|
915,495
|
|
Accrued
benefits costs are included in other accrued liabilities (non-current).
|
|
2018
|
|
2017
|
Assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.14
|
%
|
|
|
3.40
|
%
|
Expected return on plan assets
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Components of net benefit expense:
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
39,851
|
|
|
$
|
48,161
|
|
Service cost
|
|
|
33,000
|
|
|
|
36,000
|
|
Expected return on plan assets
|
|
|
(67,547
|
)
|
|
|
(69,465
|
)
|
Amortization of prior service costs
|
|
|
543
|
|
|
|
543
|
|
Amortization of actuarial loss
|
|
|
87,360
|
|
|
|
108,052
|
|
Net periodic benefit cost:
|
|
$
|
93,207
|
|
|
$
|
123,291
|
|
The Company employs a building block
approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical
relationships between equity securities and fixed income securities are preserved consistent with the widely-accepted capital
market principle that assets with higher volatility generate higher returns over the long run. Our expected 6% long-term
rate of return on plan assets is determined based on long-term historical performance of plan assets, current asset allocation
and projected long-term rates of return.
The following table discloses the change
recorded in other comprehensive income related to benefit costs:
|
|
2018
|
|
2017
|
Balance at beginning of the year
|
|
$
|
915,495
|
|
|
$
|
1,130,815
|
|
Change in net loss
|
|
|
53,860
|
|
|
|
(106,725
|
)
|
Amortization of actuarial loss
|
|
|
(87,360
|
)
|
|
|
(108,052
|
)
|
Amortization of prior service cost
|
|
|
(543
|
)
|
|
|
(543
|
)
|
Change recognized in other comprehensive income
|
|
|
(34,043
|
)
|
|
|
(215,320
|
)
|
Total recognized in other comprehensive income
|
|
$
|
881,452
|
|
|
$
|
915,495
|
|
The Company anticipates that in
2019, net periodic benefit cost will include approximately $87,000 of net actuarial loss and $543 of prior service cost.
The following benefits are expected to
be paid:
2019
|
$ 168,000
|
2020
|
152,000
|
2021
|
136,000
|
2022
|
122,000
|
2023
|
108,000
|
Years 2024 - 2028
|
387,000
|
The Company also has a qualified, profit
sharing plan covering substantially all of its United States employees. Annual Company contributions to this profit sharing plan
are determined by the Company’s Compensation Committee. For the years ended December 31, 2018 and 2017, the Company contributed
50% of employee’s contributions, up to the first 6% contributed by each employee. Total contribution expense under this profit
sharing plan was $271,541 in 2018 and $236,993 in 2017.
7. Income Taxes
The amounts of income tax expense (benefit) reflected in operations
is as follows:
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(118,269
|
)
|
|
$
|
1,263,124
|
|
State
|
|
|
44,315
|
|
|
|
32,737
|
|
Foreign
|
|
|
618,930
|
|
|
|
693,297
|
|
Total:
|
|
$
|
544,976
|
|
|
$
|
1,989,158
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
311,608
|
|
|
$
|
431,454
|
|
State
|
|
|
76,290
|
|
|
|
20,206
|
|
Total:
|
|
|
387,898
|
|
|
|
451,660
|
|
Total Income Tax Expense:
|
|
$
|
932,874
|
|
|
$
|
2,440,818
|
|
The current state tax provision was comprised
of taxes on income, the minimum capital tax and other franchise taxes related to the jurisdictions in which the Company's facilities
are located.
A summary of United States and foreign
income before income taxes follows:
|
|
2018
|
|
2017
|
United States
|
|
$
|
1,928,627
|
|
|
$
|
2,477,871
|
|
Foreign
|
|
|
3,602,597
|
|
|
|
4,015,426
|
|
Total:
|
|
$
|
5,531,224
|
|
|
$
|
6,493,297
|
|
As discussed in Note 11 below, for segment
reporting, direct import sales are included in the United States segment. However, the revenues are earned by our Hong Kong subsidiary
and related income taxes are paid in Hong Kong whose rate approximates 16.5%. As such, income of the Asian subsidiary is included
in the foreign income before taxes.
The following schedule reconciles the
amounts of income taxes computed at the United States statutory rates to the actual amounts reported in operations:
|
|
2018
|
|
2017
|
Federal income taxes at 21%
|
|
|
|
|
|
|
|
|
statutory rate
|
|
$
|
1,083,174
|
|
|
$
|
2,322,741
|
|
State and local taxes, net of federal
|
|
|
|
|
|
|
|
|
income tax effect
|
|
|
95,278
|
|
|
|
39,783
|
|
Permanent items
|
|
|
(75,022
|
)
|
|
|
(370,978
|
)
|
Transition tax on deemed repatriation
|
|
|
|
|
|
|
|
|
of foreign earnings
|
|
|
—
|
|
|
|
1,169,263
|
|
Effect of federal rate change
|
|
|
|
|
|
|
|
|
on deferred taxes
|
|
|
(111,324
|
)
|
|
|
74,462
|
|
Foreign tax rate difference
|
|
|
(59,232
|
)
|
|
|
(699,047
|
)
|
Change in deferred income tax
|
|
|
|
|
|
|
|
|
valuation allowance
|
|
|
—
|
|
|
|
(95,406
|
)
|
Provision for income taxes:
|
|
$
|
932,874
|
|
|
$
|
2,440,818
|
|
The following summarizes deferred income
tax assets and liabilities:
|
|
2018
|
|
2017
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Plant, property and equipment
|
|
$
|
847,162
|
|
|
$
|
563,289
|
|
|
|
|
847,162
|
|
|
|
563,289
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Asset valuations
|
|
|
575,920
|
|
|
|
506,993
|
|
Pension
|
|
|
105,647
|
|
|
|
96,098
|
|
Other
|
|
|
278,948
|
|
|
|
469,844
|
|
|
|
|
960,515
|
|
|
|
1,072,935
|
|
Net deferred income tax asset:
|
|
$
|
113,353
|
|
|
$
|
509,646
|
|
The Tax Cuts and Jobs Act (the “Tax Act”)
was signed into law in December 2017 and includes a broad range of tax reforms, certain of which were required by GAAP to be recognized
upon enactment. The U.S. Securities and Exchange Commission has issued Staff Accounting Bulletin 118 (SAB 118), which provides
guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one
year from the enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must
reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that
a company’s accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate,
it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included
in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect
immediately before the enactment of the Act. As permitted by SAB 118, the Company has subsequently finalized its accounting analysis
based on the guidance, interpretations and data available as of December 31, 2018. There were no material adjustments to the Company’s
financial statements as a result.
The Act introduced provisions that
fundamentally change the U.S. approach to taxation of foreign earnings. Under the Act, qualified dividends of foreign
subsidiaries are no longer subject to U.S. tax. Under the previously-existing tax rules, dividends from foreign operations
were subjected to U.S. tax, and if not considered permanently reinvested, the Company had recognized expense and recorded a
liability for the tax expected to be incurred upon receipt of the dividend of these foreign earnings. Although the Act
excludes dividends of foreign subsidiaries from taxation, it includes provisions for a mandatory deemed dividend of
undistributed foreign earnings at tax rates of 15.5% or 8% ("transition tax") depending on the nature of the
foreign operations' assets. Companies may utilize tax attributes (including net operating losses and tax credits) to offset
the transition tax. The estimated provisional net effect of applying the provisions of the Act on our 2017 results of
operations was a non-cash charge to tax expense of $1,170,000. This provisional amount could be revised as additional
guidance and interpretations are issued and as we continue to examine the details of the Act and the related
tax attributes.
On January 22, 2018, the FASB released guidance
on the accounting for tax on the global intangible low-taxed income (“GILTI”) provisions of the Act. The GILTI provisions
impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company considers any
potential GILTI as an expense in the period the tax is incurred.
Based on our historical
financial performance in the U.S., at December 31, 2017, the Company had a significant net deferred tax asset position. As
such, with the Act's reduction of the corporate tax rate from 35% to 21%, the Company re-measured its net deferred tax
assets at the lower corporate rate of 21% and recognized a $75,000 tax expense to adjust net deferred tax assets to the
reduced value.
The total effect in 2017 of applying the U.S.
tax reform provisions of the Act was tax expense of $1,245,000 increasing the effective rate for 2017 by 128%.
In 2018, the Company evaluated its tax positions
for years which remain subject to examination by major tax jurisdictions, in accordance with the requirements of ASC 740 and as
a result, concluded no adjustment was necessary. The Company files income tax returns in the U.S. federal jurisdiction, and various
state and foreign jurisdictions. The Company’s evaluation of uncertain tax positions was performed for the tax years ended
December 31, 2015 and forward, the tax years which remain subject to examination by major tax jurisdictions as of December 31,
2018.
Due to the uncertain nature of the realization
of the Company's deferred income tax assets based on past performance of its German subsidiary and carry forward expiration dates,
the Company has recorded a valuation allowance for the amount of deferred income tax assets which are not expected to be realized.
This valuation allowance, all of which is related to deferred tax assets resulting from net operating losses of the Company’s
German subsidiary, is subject to periodic review, and, if the allowance is reduced, the tax benefit will be recorded in future
operations as a reduction of the Company's tax expense.
8. Long-Term 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 December 31, 2018, the Company was in compliance with the covenants then in effect under the loan agreement.
Long
term debt consists of borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A. As of December 31, 2018,
$40,283,000 was outstanding and $9,717,000 was available for borrowing under the Company’s revolving loan agreement.
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.
Minimum annual mortgage payments are due as follows: 2019 - $266,664; 2020 - $266,664; 2021 - $266,664; 2022 - $266,664; 2023
- $266,664; and thereafter - $2,377,794.
During the twelve months ended December
31, 2018, the Company repurchased a total of 23,228 shares of its Common Stock. As of December 31, 2018, 17,999 shares may be purchased
in the future under the repurchase program announced in 2010.
9. Commitments and Contingencies
The Company leases certain office, manufacturing
and warehouse facilities and various equipment under non-cancelable operating leases. Total rent expense was $1,243,732 and $1,432,677
in 2018 and 2017, respectively. Minimum annual rental commitments under non-cancelable leases with remaining terms of one year
or more as of December 31, 2018 are as follows: 2019 - $1,064,585; 2020 - $927,681; 2021 - $572,344; 2022 - $278,797; 2023 - $255,122;
and thereafter - $64,248.
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.
10. 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 twelve months ended December 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, sharpening and measuring; 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 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 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 accordingly, 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 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 a material impact on the Company’s consolidated financial statements.
Disaggregation of Revenues
The following table represents external
net sales disaggregated by product category:
For the
twelve months ended December 31, 2018
(amounts
in 000's)
|
|
US
|
|
Canada
|
|
Europe
|
|
Total
|
Cutting, Sharpening and Measuring
|
|
$
|
64,271
|
|
|
$
|
6,973
|
|
|
$
|
9,103
|
|
|
$
|
80
,347
|
|
First Aid and Safety
|
|
|
56,974
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
121,245
|
|
|
$
|
6,973
|
|
|
$
|
9,103
|
|
|
$
|
137,321
|
|
11. 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 12% and
11% of the Company’s total net sales in 2018 and 2017, respectively.
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 fiscal years ended December 31, 2018 and 2017:
Financial data by segment:
(000’s omitted)
Year Ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Europe
|
|
Consolidated
|
Net sales
|
|
$
|
120,993
|
|
|
$
|
7,040
|
|
|
$
|
9,288
|
|
|
$
|
137,321
|
|
Operating income
|
|
|
6,103
|
|
|
|
884
|
|
|
|
470
|
|
|
|
7,457
|
|
Assets
|
|
|
99,720
|
|
|
|
3,839
|
|
|
|
5,918
|
|
|
|
109,477
|
|
Additions to property, plant and equipment
|
|
|
2,705
|
|
|
|
83
|
|
|
|
63
|
|
|
|
2,851
|
|
Depreciation and amortization
|
|
|
3,153
|
|
|
|
9
|
|
|
|
67
|
|
|
|
3,229
|
|
Year Ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Europe
|
|
Consolidated
|
Net sales
|
|
$
|
115,407
|
|
|
$
|
6,935
|
|
|
$
|
8,208
|
|
|
$
|
130,550
|
|
Operating income
|
|
|
6,788
|
|
|
|
775
|
|
|
|
320
|
|
|
|
7,883
|
|
Assets
|
|
|
104,431
|
|
|
|
4,926
|
|
|
|
5,373
|
|
|
|
114,730
|
|
Additions to property, plant and equipment
|
|
|
7,014
|
|
|
|
19
|
|
|
|
113
|
|
|
|
7,146
|
|
Depreciation and amortization
|
|
|
2,845
|
|
|
|
8
|
|
|
|
42
|
|
|
|
2,895
|
|
The following is a reconciliation of segment
operating income to consolidated income before taxes:
|
|
2018
|
|
2017
|
Total operating income
|
|
$
|
7,457
|
|
|
$
|
7,883
|
|
Interest expense, net
|
|
|
1,858
|
|
|
|
1,327
|
|
Other expense
|
|
|
67
|
|
|
|
63
|
|
Consolidated income before taxes
|
|
$
|
5,532
|
|
|
$
|
6,493
|
|
The table below presents revenue by geographic
area. Revenues are attributed to countries based on location of the customer.
Revenues
|
|
2018
|
|
2017
|
United States
|
|
$
|
119,573
|
|
|
$
|
114,231
|
|
International:
|
|
|
|
|
|
|
|
|
Canada
|
|
|
7,040
|
|
|
|
6,935
|
|
Europe
|
|
|
9,288
|
|
|
|
8,208
|
|
Other
|
|
|
1,420
|
|
|
|
1,176
|
|
Total International
|
|
$
|
17,748
|
|
|
$
|
16,319
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
137,321
|
|
|
$
|
130,550
|
|
12. Stock Option Plans
The Company grants stock options under the
2012 Employee Stock Option Plan (the “2012 Employee Plan”) and under the 2017 Non-Salaried Director Stock Option Plan
(the “2017 Director Plan”). The Company also has two plans under which the Company no longer grants options but under
which certain options remain outstanding: the 2002 Employee stock Option Plan and the 2005 Non-Salaried Director Stock Option Plan
(the “2005 Director Plan”).
The 2012 Employee Plan, which became
effective April 23, 2012, provides for the issuance of incentive and nonqualified stock options at an exercise price equal to
the fair market value of the Common Stock on the date the option is granted. The terms of the options granted are subject to the
provisions of the 2012 Employee Plan. Options granted under the 2012 Employee Plan vest 25% one day after the first anniversary
of the grant date and 25% one day after each of the next three anniversaries. As of December 31, 2018, the number of shares available
for grant under the 2012 Employee Plan was 65,000. Under the terms of the Employee Plan, no option may be granted under that plan
after the tenth anniversary of the adoption of the plan. Options outstanding under the Company’s 2002 Employee Stock Option
Plan have the same vesting schedule as the 2012 Employee Plan.
The 2017 Director Plan provides for the
issuance of stock options for up to a total of 60,000 shares of the Company's common stock to non-salaried directors. Under the
Director Plan, Directors elected after the effective date and at subsequent Annual Meetings who have not received any prior grant
under this or previous plans shall receive an initial grant of an option to purchase 5,000 shares of Common Stock (the “Initial
Option”). Each year, each elected Director not receiving an Initial Option will receive an option to purchase 5,000 shares
of Common Stock (the “Annual Option”). The Initial Option vests 25% on the date of grant and 25% on the anniversary
of the grant date in each of the following 3 years. Each Annual Option becomes fully exercisable one day after the date of grant.
The exercise price of each option granted equals the fair market value of the Common Stock on the date the option is granted,
and expires ten (10) years from the date of grant. As provided in the Director Plan, no options may be granted under the Director
Plan after the tenth anniversary of the adoption of the Plan, i.e., after April 24, 2027. As of December 31, 2018, the number
of shares available for grant under the 2017 Director Plan was 20,000.
The 2005 Director Plan, as amended, provided
for the issuance of stock options for up to a total of 180,000 shares of the Company's common stock to non-salaried directors.
Under the Director Plan, Directors elected on April 25, 2005 and at subsequent Annual Meetings who had not received any prior grant
under this or previous plans received an initial grant of an option to purchase 5,000 shares of Common Stock (the “Initial
Option”). Each year, each elected Director not receiving an Initial Option received a 5,000 share option (the “Annual
Option”). The Initial Option vested 25% on the date of grant and 25% on the anniversary of the grant date in each of the
following 3 years. Each Annual Option became fully exercisable one day after the date of grant. The exercise price of each option
granted equaled the fair market value of the Common Stock on the date the option was granted, and expired ten (10) years from the
date of grant. As provided in the Director Plan, no options could be granted under the Director Plan after the tenth anniversary
of the adoption of the Plan, i.e., after April 25, 2015.
The Company has amended certain of its stock
option plans for both employees and directors to permit options to be exercised on a net basis and receive either cash or shares
of the Company’s Common Stock. Specifically, optionees may, at the time of exercise of an option and subject to the consent
of the Company, elect either (i) to receive from the Company cash in an amount equal to the number of shares of Common Stock subject
to the option (or portion thereof) that is being exercised multiplied by the excess of (a) the fair market value per share over
(b) the exercise price per share of the option ( a “net cash settlement”); or (ii) to make payment of the exercise
price of the option by reduction in the number of shares of Common Stock otherwise deliverable upon exercise of such option by
the number of shares having an aggregate fair market value equal to the total exercise price of the option (or portion thereof).
In 2018, the Company paid a total of approximately $768,075 to optionees who had elected a net cash settlement of their respective
options.
A summary of changes in options issued under the Company’s
stock option plans follows:
|
|
2018
|
|
2017
|
|
|
|
|
|
Options outstanding at the
|
|
|
|
|
|
|
|
|
beginning of the year
|
|
|
1,289,080
|
|
|
|
1,088,278
|
|
Options granted
|
|
|
232,200
|
|
|
|
313,900
|
|
Options forfeited
|
|
|
(11,500
|
)
|
|
|
(4,000
|
)
|
Options exercised
|
|
|
(75,500
|
)
|
|
|
(109,098
|
)
|
Options outstanding at
|
|
|
|
|
|
|
|
|
the end of the year
|
|
|
1,434,280
|
|
|
|
1,289,080
|
|
Options exercisable at the
|
|
|
|
|
|
|
|
|
end of the year
|
|
|
918,405
|
|
|
|
814,180
|
|
Common stock available for future grants at the end of the year
|
|
|
85,000
|
|
|
|
62,700
|
|
Weighted average exercise price per share:
|
|
|
|
|
|
|
|
|
Granted
|
|
$
|
22.75
|
|
|
$
|
24.87
|
|
Forfeited
|
|
|
23.07
|
|
|
|
19.12
|
|
Exercised
|
|
|
11.47
|
|
|
|
13.13
|
|
Outstanding
|
|
|
18.07
|
|
|
|
16.87
|
|
Exercisable
|
|
|
15.15
|
|
|
|
13.38
|
|
A summary of options outstanding as December 31, 2018 is as
follows:
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Range of Exercise Prices
|
|
|
|
Number Outstanding
|
|
|
|
Weighted-Average Remaining Contractual Life (Years)
|
|
|
|
Weighted-Average Exercise Price
|
|
|
|
Number Exercisable
|
|
|
|
Weighted-Average Exercise Price
|
|
|
$7.30 to $10.74
|
|
|
|
299,180
|
|
|
|
3
|
|
|
$
|
9.88
|
|
|
|
299,180
|
|
|
$
|
9.88
|
|
|
$10.75 to $16.82
|
|
|
|
262,750
|
|
|
|
4
|
|
|
|
13.62
|
|
|
|
262,750
|
|
|
|
13.62
|
|
|
$16.83 to $22.08
|
|
|
|
337,875
|
|
|
|
7
|
|
|
|
19.41
|
|
|
|
244,625
|
|
|
|
18.75
|
|
|
$22.09 to $23.97
|
|
|
|
228,200
|
|
|
|
10
|
|
|
|
22.79
|
|
|
|
20,000
|
|
|
|
22.66
|
|
|
$23.98 to $28.20
|
|
|
|
306,275
|
|
|
|
9
|
|
|
|
24.87
|
|
|
|
91,850
|
|
|
|
25.41
|
|
|
|
|
|
|
1,434,280
|
|
|
|
|
|
|
|
|
|
|
|
918,405
|
|
|
|
|
|
The weighted average remaining contractual
life of all outstanding stock options is 6 years.
Stock-Based Compensation
Stock-based compensation cost is measured at
the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally
the vesting period. The Company uses the Black-Scholes option pricing model to determine the fair value of employee and non-employee
director stock options. The determination of the fair value of stock-based payment awards on the date of grant, using an option-pricing
model, is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables.
These assumptions include estimating the length of time employees will retain their vested stock options before exercising them
(“expected term”), the estimated volatility of the Company’s Common Stock price over the expected term (“volatility”)
and the number of options that will not fully vest in accordance with applicable vesting requirements (“forfeitures”).
The Company estimates the expected term of
options granted by evaluating various factors, including the vesting period, historical employee information, as well as current
and historical stock prices and market conditions. The Company estimates the volatility of its common stock by calculating historical
volatility based on the closing stock price on the last day of each of the 60 months leading up to the month the option was granted.
The risk-free interest rate that the Company uses in the option valuation model is the interest rate on U.S. Treasury zero-coupon
bond issues with remaining terms similar to the expected term of the options granted. Historical information was the basis for
calculating the dividend yield. The Company is required to estimate forfeitures at the time of grant and to revise those estimates
in subsequent periods if actual forfeitures differ from those estimates. The Company used a mix of historical data and future assumptions
to estimate pre-vesting option forfeitures and to record stock-based compensation expense only for those awards that are expected
to vest. All stock-based payment awards are amortized over the requisite service periods of the awards, which are generally the
vesting periods.
The assumptions used to value option grants
for the twelve months ended December 31, 2018 and December 31, 2017 were as follows:
|
|
2018
|
|
2017
|
Expected life in years
|
|
|
5
|
|
|
|
5
|
|
Interest rate
|
|
|
2.43 - 3.02%
|
|
|
|
1.82 - 1.95%
|
|
Volatility
|
|
|
.287 - .316
|
|
|
|
.259 - .277
|
|
Dividend yield
|
|
|
1.8 - 2.75%
|
|
|
|
1.5 - 1.6%
|
|
Total stock-based compensation recognized
in the Company’s consolidated statements of operations for the years ended December 31, 2018 and 2017 was $869,055 and $684,351,
respectively. At December 31, 2018, there was approximately $2,151,417 of unrecognized compensation cost, adjusted for estimated
forfeitures, related to non-vested stock-based payments granted to the Company’s employees. As of December 31, 2018, the
remaining unamortized expense is expected to be recognized over a weighted average period of 3 years.
The weighted average fair value at the
date of grant for options granted during 2018 and 2017 was $5.77 and $4.83 per option, respectively. The aggregate intrinsic value
of outstanding options was $1,566,625 at December 31, 2018. The aggregate intrinsic value of exercisable options was $1,566,625
at December 31, 2018. The aggregate intrinsic value of options exercised during 2018 was $768,075.
13. Earnings Per Share
The calculation of earnings per share
follows:
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,598,350
|
|
|
$
|
4,052,479
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
3,370,744
|
|
|
|
3,356,383
|
|
Effect of dilutive employee stock options
|
|
|
171,166
|
|
|
|
368,220
|
|
Denominator for dilutive earnings per share
|
|
|
3,541,910
|
|
|
|
3,724,603
|
|
Basic earnings per share
|
|
$
|
1.36
|
|
|
$
|
1.21
|
|
Dilutive earnings per share
|
|
$
|
1.30
|
|
|
$
|
1.09
|
|
For 2018 and 2017, respectively, 692,600
and 205,500 stock options were excluded from diluted earnings per share calculations because they would have been anti-dilutive.
14. Accumulated Other Comprehensive
Loss
The components of accumulated other comprehensive
loss follow:
|
|
Foreign currency translation adjustment
|
|
Net prior service credit and actuarial losses
|
|
Total
|
Balances, December 31, 2016
|
|
$
|
(1,672,188
|
)
|
|
$
|
(664,012
|
)
|
|
$
|
(2,336,201
|
)
|
Change in net prior service credit
|
|
|
|
|
|
|
|
|
|
|
|
|
and actuarial losses, net of tax
|
|
|
|
|
|
|
87,461
|
|
|
|
87,461
|
|
Translation adjustment
|
|
|
614,741
|
|
|
|
|
|
|
|
614,741
|
|
Balances, December 31, 2017
|
|
$
|
(1,057,447
|
)
|
|
$
|
(576,551
|
)
|
|
$
|
(1,633,999
|
)
|
Change in net prior service credit
|
|
|
|
|
|
|
|
|
|
|
|
|
and actuarial losses, net of tax
|
|
|
|
|
|
|
37,388
|
|
|
|
37,388
|
|
Translation adjustment
|
|
|
(461,374
|
)
|
|
|
|
|
|
|
(461,374
|
)
|
Balances, December 31, 2018
|
|
$
|
(1,518,821
|
)
|
|
$
|
(539,163
|
)
|
|
$
|
(2,057,985
|
)
|
15. Financial Instruments
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.
16. Quarterly Data (unaudited)
Quarters (000’s omitted, except
per share data):
2018
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
Net sales
|
|
$
|
31,709
|
|
|
$
|
39,751
|
|
|
$
|
34,731
|
|
|
$
|
31,130
|
|
|
$
|
137,321
|
|
Cost of goods sold
|
|
|
19,585
|
|
|
|
25,039
|
|
|
|
22,281
|
|
|
|
19,767
|
|
|
|
86,672
|
|
Gross profit
|
|
|
12,124
|
|
|
|
14,712
|
|
|
|
12,450
|
|
|
|
11,363
|
|
|
|
50,649
|
|
Net income
|
|
|
764
|
|
|
|
2,436
|
|
|
|
807
|
|
|
|
591
|
|
|
|
4,598
|
|
Basic earnings per share
|
|
$
|
0.23
|
|
|
$
|
0.72
|
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
|
$
|
1.36
|
|
Diluted earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.67
|
|
|
$
|
0.23
|
|
|
$
|
0.19
|
|
|
$
|
1.30
|
|
Dividends per share
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.12
|
|
|
$
|
0.45
|
|
2017
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
Net sales
|
|
$
|
27,745
|
|
|
$
|
38,849
|
|
|
$
|
33,785
|
|
|
$
|
30,171
|
|
|
$
|
130,550
|
|
Cost of goods sold
|
|
|
17,181
|
|
|
|
24,366
|
|
|
|
21,559
|
|
|
|
19,545
|
|
|
|
82,651
|
|
Gross profit
|
|
|
10,564
|
|
|
|
14,483
|
|
|
|
12,226
|
|
|
|
10,626
|
|
|
|
47,899
|
|
Net income
|
|
|
659
|
|
|
|
2,846
|
|
|
|
1,202
|
|
|
|
(655
|
)
|
|
|
4,052
|
|
Basic earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.85
|
|
|
$
|
0.36
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.21
|
|
Diluted earnings per share
|
|
$
|
0.18
|
|
|
$
|
0.75
|
|
|
$
|
0.32
|
|
|
$
|
(0.16
|
)
|
|
$
|
1.09
|
|
Dividends per share
|
|
$
|
0.10
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.43
|
|
Earnings per share were computed
independently for each of the quarters presented. Therefore, the sum of the four quarterly earnings per share amounts may not
necessarily equal the earnings per share for the year.
17. Business Combinations
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. Customers, include many large retail chains, use Spill Magic 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.
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 twelve months ended December 31, 2017 for the Company would have
been approximately $131.0 million. Unaudited pro forma combined net income for the twelve months ended December 31, 2017 for the
Company would have been approximately $3.9 million.
Net sales for the twelve months ended December
31, 2017 attributable to Spill Magic products were approximately $6.5 million. Net income for the twelve months ended December
31, 2017 attributable to Spill Magic products was approximately $0.8 million.