ACME United Corporation: 2012 Second-Quarter Form 10-Q
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2012, filed August 14, 2012. Acme United sells cutting devices, measuring instruments, safety products, first-aid kits, sharpeners, paper trimmers and related products through its United States, Canada and Europe segments. Results are seasonal, with stronger sales generally in the second and third quarters due to back-to-school demand.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $27.594 million, versus $24.029 million | $44.472 million, versus $38.430 million |
| Gross profit | $9.821 million; 35.6% margin | $15.765 million; 35.5% margin |
| Operating income | $3.078 million, versus $2.460 million | $3.536 million, versus $2.643 million |
| Net income | $2.061 million, versus $1.743 million | $2.320 million, versus $1.863 million |
| Diluted EPS | $0.66, versus $0.56 | $0.74, versus $0.60 |
| Net interest expense | $62,000 | $117,000 |
Gross margin declined from 36.1% to 35.6% in the quarter and from 36.4% to 35.5% year to date, primarily because of a less favorable product and customer mix. SG&A was $6.743 million, or 24.4% of sales, in the quarter and $12.229 million, or 27.5% of sales, year to date.
Cash and cash equivalents were $7.141 million at June 30, 2012, compared with $7.853 million at December 31, 2011. Six-month operating cash flow was negative $3.557 million, principally reflecting a $10.934 million increase in accounts receivable and a $1.914 million increase in inventory. Investing cash flow was negative $1.759 million, including $1.474 million for the C-Thru acquisition. Financing cash flow was positive $4.650 million.
Accounts receivable increased to $23.857 million and inventory to $26.681 million. Working capital was $43.959 million, the current ratio was 3.82, and average days sales outstanding remained 62 days.
Long-term debt was $23.005 million, compared with $17.569 million at year-end 2011. The company had $6.995 million available under its $30 million revolving credit facility. The new HSBC facility bears interest at LIBOR plus 1.75%, matures April 5, 2017, and is subject to tangible-net-worth, debt-service-coverage and fixed-charge-coverage covenants. The company reported compliance with all covenants at June 30, 2012.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 15% in U.S. dollars, or 16% in local currency; six-month sales increased 16%, or 17% in local currency.
- United States sales increased 22% for the quarter and 21% year to date, primarily from initial Camillus brand knife shipments and higher sales of iPoint sharpeners, paper trimmers and first-aid products.
- Canada sales were flat in U.S. dollars for the quarter and declined 4% year to date. Canadian operating income declined $78,000 in the quarter and $178,000 year to date.
- European second-quarter sales declined 21% in U.S. dollars, primarily because of the bankruptcy and liquidation of major customer Schlecker. Six-month European sales increased 4% in U.S. dollars and 13% in local currency, and segment operating income improved to $212,000 from a $89,000 loss.
- Operating income increased 25% in the quarter and 34% year to date, while net income increased 18% and 25%, respectively. The improvement was principally driven by higher sales.
- The company acquired certain inventory and intellectual property assets of The C-Thru Ruler Company on June 7, 2012 for approximately $1.47 million, funded with borrowings. The acquisition contributed no material sales or net income during the reported periods and added approximately $1.05 million of intangible assets.
- Direct import sales increased to 28% of quarterly sales and 22% of year-to-date sales, compared with 23% and 18%, respectively, in the prior-year periods.
Outlook, Risks, Contingencies and Unusual Items
Management expects cash generated from operations and available borrowing capacity to fund planned operations for the next twelve months under current conditions. The filing does not provide formal revenue or earnings guidance.
- Management identifies risks from economic and financial-market conditions, supplier and customer stability, labor shortages in southeast China, currency fluctuations, consumer spending, competition, technological change, growth management and acquisition integration.
- Schlecker represented approximately 2% of 2011 total sales. The company does not expect material future write-offs of related receivables or inventory.
- Environmental remediation at a former Bridgeport, Connecticut property is expected to be completed in the second half of 2012. The remaining accrual was approximately $188,000 at June 30, 2012, including $54,000 classified as current; monitoring may continue for at least three years after remediation.
- The company expects to contribute approximately $235,000 to its qualified pension plan during 2012 as required by applicable law.
- Foreign-currency losses increased other expense to $43,000 in the quarter and $86,000 year to date.
- The company reported no pending material legal proceedings and stated that ordinary-course contingencies are not expected to materially affect financial position, results or liquidity.
- Management concluded that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify whether the substantial increase in receivables and inventory converts into operating cash flow in subsequent quarters.
- Assess leverage, covenant headroom and refinancing risk under the HSBC revolving facility, including the April 2017 maturity.
- Track gross-margin recovery or further pressure as product and customer mix changes.
- Monitor the durability of Camillus-related U.S. sales and the integration and profitability of the C-Thru assets.
- Evaluate the effect of the Schlecker loss and broader European customer concentration on future sales.
- Confirm the timing and final cost of environmental remediation and subsequent monitoring.
- Reconcile reported segment trends with foreign-exchange movements and the increasing proportion of direct-import sales.