Acme United Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2011, filed August 5, 2011. Acme United sells cutting devices, measuring instruments, and safety products through its United States, Canada, and Europe segments. Results are seasonal, with stronger sales typically in the second and third quarters due to back-to-school demand. The financial statements are unaudited.
Financial performance and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $24.029 million | $20.585 million | $38.430 million | $33.706 million |
| Gross profit | $8.683 million | $7.551 million | $13.991 million | $12.664 million |
| Gross margin | 36.1% | 36.7% | 36.4% | 37.6% |
| Operating income | $2.460 million | $1.946 million | $2.643 million | $2.247 million |
| Net income | $1.743 million | $1.567 million | $1.863 million | $1.780 million |
| Diluted EPS | $0.56 | $0.48 | $0.60 | $0.54 |
Q2 sales increased 17% year over year, or 14% in local currency; six-month sales increased 14%, or 12% in local currency. Q2 operating income rose 26%, while six-month operating income rose 18%. Net income increased 11% in Q2 and 5% for the first six months. The effective tax rate was 27% in both 2011 periods versus 17% in 2010.
For the first six months, operating cash flow was negative $3.704 million, compared with negative $4.800 million in 2010. The primary use was a $10.413 million increase in accounts receivable, reflecting seasonal sales. Investing cash flow was negative $3.473 million, including $3.127 million for the Pac-Kit acquisition. Financing cash flow was positive $4.758 million, principally from $5.079 million of additional long-term borrowings. Cash declined to $4.234 million from $6.601 million at December 31, 2010.
At June 30, 2011, working capital was $39.234 million, the current ratio was 3.94, and long-term debt to equity was 67.6%. Bank debt was $18.601 million versus $13.522 million at year-end 2010. The revolving facility had a $20 million limit, leaving $1.399 million available, and matures March 31, 2013. The facility requires compliance with tangible net worth, debt service coverage, and fixed charge coverage requirements.
Material changes versus the prior comparable period
- The United States segment grew 24% in Q2 and 18% for the first six months, benefiting from mass-market share gains and Pac-Kit sales.
- Canada grew 15% in Q2 and 16% for the first six months in U.S. dollars, supported by new products and improved gross margins.
- Europe declined 20% in Q2 and 10% for the first six months in U.S. dollars, primarily because mass-market shipments were expected later in 2011. European operating losses narrowed due to cost-cutting initiatives.
- Gross margin declined because Pac-Kit products generally carry lower margins than Acme United’s historical average.
- SG&A increased $618,000 in Q2 and $931,000 for the first six months due to Pac-Kit costs, higher freight, sales commissions, and personnel expenses. This included Pac-Kit integration and transaction costs of $25,000 and $125,000, respectively.
- Pac-Kit was acquired on February 28, 2011 for approximately $3.4 million, less $310,000 of liabilities assumed. The acquisition added approximately $1.5 million of intangible assets and was funded with revolving debt.
- Net interest expense increased to $74,000 in Q2 and $121,000 for the first six months, primarily because of higher average borrowings.
Guidance, outlook, risks, contingencies, and unusual items
Management expects cash generated from operations and available revolver capacity to be sufficient to fund planned operations over the next twelve months under current conditions. The filing provides no specific revenue or earnings guidance.
Accounts receivable rose to $23.481 million from $12.331 million at year-end, and days sales outstanding increased to 65 from 61. Inventory increased to $23.575 million, partly because of the Pac-Kit acquisition.
The Company had $301,000 remaining in its environmental remediation accrual related to a previously sold Bridgeport, Connecticut property, including approximately $150,000 classified as current. Remediation is expected to be completed within five years of the 2008 sale, followed by at least three years of monitoring. The Company believes ordinary-course litigation and other contingencies are not likely to materially affect financial position, results, or liquidity.
The Company must contribute approximately $250,000 to its qualified pension plan during 2011. It also had $636,000 of unrecognized share-based compensation expected to be recognized over approximately three years.
Principal risks identified include economic and financial-market conditions, supplier and customer effects, labor shortages in southeast China, currency fluctuations, consumer spending, competition, technological change, and the ability to manage growth and integrate acquisitions. Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether seasonal collections convert the substantial first-half accounts receivable balance into positive operating cash flow.
- Pac-Kit’s revenue, margins, integration progress, and contribution to consolidated earnings, given its lower gross margin and acquisition-related costs.
- Compliance with the revolving credit facility’s financial covenants and the limited $1.399 million borrowing availability.
- The effect of higher debt and interest expense on liquidity and future earnings.
- European sales recovery and the timing of mass-market shipments in the second half of 2011.
- Progress and ultimate cost of the Bridgeport environmental remediation and monitoring obligations.
- The impact of foreign-currency movements, supplier constraints, and broader economic conditions on reported results.