ACME United Corporation — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2013, filed May 10, 2013. Acme United sells cutting devices, measuring instruments, and safety products for school, office, home, hardware, and industrial markets. Reportable segments are the United States, Canada, and Europe. Results are seasonally stronger in the second and third quarters because of back-to-school demand.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $17.651 million | $16.878 million | Up 5% |
| Gross profit | $6.427 million | $5.944 million | Up 8% |
| Gross margin | 36.4% | 35.2% | Up 120 basis points |
| Operating income | $513 thousand | $458 thousand | Up $55 thousand |
| Operating margin | 2.9% | 2.7% | Improved |
| Net income | $309 thousand | $260 thousand | Up 19% |
| Diluted EPS | $0.10 | $0.08 | Improved |
| Net interest expense | $69 thousand | $56 thousand | Up $13 thousand |
| Net cash used in operations | $869 thousand | $2.491 million | Improved by $1.622 million |
Cash and cash equivalents were $8.941 million at March 31, 2013, versus $9.750 million at December 31, 2012. Total assets were $65.494 million, compared with $67.828 million at year-end 2012. Working capital was approximately $47.034 million, with a current ratio of 6.12.
Long-term debt was $24.452 million at quarter-end, compared with $24.320 million at December 31, 2012. The company had $5.548 million available under its then-existing revolving credit facility. The facility carried interest at LIBOR plus 1.75% and was amended on April 25, 2013 to increase the borrowing limit from $30 million to $40 million; maturity remained April 5, 2017.
Capital expenditures were $155 thousand and purchases of patents and trademarks were $26 thousand. The company paid no stockholder distributions during the quarter, compared with $219 thousand in the prior-year quarter, and issued $100 thousand of common stock upon employee stock-option exercises.
Material Changes Versus the Prior Comparable Period
- U.S. segment sales increased 13%, driven principally by higher Camillus knife sales and incremental C-Thru Ruler Company sales.
- Canada sales decreased 2%, primarily due to weakness in the Canadian economy.
- Europe sales decreased 31%, primarily following the bankruptcy and liquidation of a large German customer in 2012.
- U.S. segment operating income increased by $398 thousand; Canadian operating income declined by $60 thousand; and European operating income declined by $283 thousand, resulting in a $41 thousand European operating loss.
- Gross margin improved because of the mix of customers and products sold.
- SG&A increased $428 thousand to $5.914 million, primarily from additional sales and marketing personnel and higher commission and delivery costs.
- Net other expense declined to $3 thousand from $42 thousand, primarily reflecting lower foreign-currency transaction losses.
- Operating cash use improved substantially, aided by a $1.411 million reduction in accounts receivable, although accounts payable and accrued liabilities also declined.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that cash expected from operations, together with availability under the amended revolving credit facility, should be sufficient to fund planned operations for the next twelve months under current conditions. No formal revenue or earnings guidance was provided.
Key risks identified include domestic and global economic conditions, consumer spending, competition and technological change, the ability to manage growth and integrate acquisitions, and currency fluctuations. The company noted that quarterly results are not necessarily indicative of full-year results because of seasonality.
The company had approximately $102 thousand remaining in its environmental remediation accrual at March 31, 2013, including approximately $43 thousand classified as current. Remediation work was completed in 2012, but monitoring was expected to continue for at least two years. The company also expects to contribute approximately $235 thousand to its qualified pension plan during 2013.
The company was in compliance with its revolving-credit covenants at March 31, 2013. There were no pending material legal proceedings reported, and management concluded that disclosure controls and procedures were effective with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the European sales decline and operating loss persist, particularly after the loss of the German customer.
- Whether U.S. growth from Camillus and the C-Thru acquisition offsets weakness in Canada and Europe.
- Debt utilization, covenant compliance, interest-rate exposure, and availability under the amended $40 million facility.
- Cash conversion and working-capital trends, including inventory turnover, receivable days, and continued operating cash use.
- The remaining environmental monitoring liability and the timing of repayment of the $2 million mortgage note receivable.
- The effect of seasonal back-to-school demand on subsequent-quarter revenue and profitability.
- The continuing pension funding requirement and foreign-currency effects on comprehensive income.