Acme United Corporation — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Acme United sells cutting devices, measuring instruments and safety products through its United States, Canada and Europe segments. Sales are seasonal, with stronger results generally occurring in the second and third quarters due to back-to-school demand.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $22.135 million | $20.363 million | $68.198 million | $64.835 million |
| Gross profit | $7.940 million | $7.426 million | $24.449 million | $23.191 million |
| Gross margin | 35.9% | 36.4% | 35.8% | 35.8% |
| Operating income | $1.409 million | $1.359 million | $5.115 million | $4.895 million |
| Net income | $0.959 million | $0.798 million | $3.479 million | $3.118 million |
| Diluted EPS | $0.29 | $0.26 | $1.07 | $1.00 |
| Dividends declared per share | $0.08 | $0.07 | $0.23 | $0.21 |
- Q3 sales increased 9%, while nine-month sales increased 5% year over year.
- Q3 operating income rose 4%; nine-month operating income also rose 4%.
- Q3 net income increased 20%; nine-month net income increased 12%. The effective tax rate declined to 28% from 37% in Q3 2012 and to 28% from 32% for the nine-month period.
- SG&A expense increased 8% in Q3 and 6% for the first nine months, primarily from higher personnel costs and increased new-product spending.
- Net interest expense increased to $99,000 in Q3 and $242,000 for nine months, primarily because of higher average borrowings.
Cash flow, liquidity and debt
- Cash provided by operating activities was $3.061 million for the first nine months of 2013, compared with cash used of $1.474 million in 2012.
- Capital expenditures were $3.394 million, including the acquisition of the Rocky Mount, North Carolina manufacturing and distribution center. The company also spent $67,000 on patents and trademarks.
- Proceeds from the sale of the Bridgeport mortgage were $1.727 million following early repayment by the purchaser.
- Cash increased to $11.809 million at September 30, 2013, from $9.750 million at December 31, 2012.
- Working capital was $50.178 million, compared with $46.679 million at year-end 2012. The current ratio improved to 5.88 from 4.98.
- Debt outstanding under the HSBC revolving facility was $25.031 million, leaving $14.969 million available. The facility limit was increased to $40 million from $30 million, bears interest at LIBOR plus 1.75%, and matures April 5, 2017. The company was in compliance with its financial covenants.
- Management stated that operating cash flow and available borrowing capacity were expected to be sufficient to fund planned operations for the next twelve months under current conditions.
Material changes versus the prior comparable period
- United States sales increased 11% in Q3 and 8% for nine months, supported by Camillus knives, back-to-school products, first-aid kits and the C-Thru acquisition.
- Canada sales decreased 18% in Q3 and 8% for nine months in U.S. dollars, reflecting weakness in the office-products industry and the Canadian economy.
- Europe sales increased 26% in Q3 but decreased 6% for nine months. The nine-month decline primarily reflected the loss of German customer Schlecker following its bankruptcy and liquidation.
- Direct-import sales represented approximately 15% of Q3 sales and 22% of nine-month sales, compared with 12% and 16%, respectively, in 2012.
- Q3 gross margin declined 50 basis points, while the nine-month gross margin was unchanged.
- On August 30, 2013, the company acquired a 340,000-square-foot facility on 33 acres in Rocky Mount, North Carolina for $2.8 million. It expected to invest approximately $1.0 million through the first quarter of 2014 to upgrade the facility and equipment and consolidate two distribution centers.
- The company issued 70,650 shares upon stock-option exercises during the first nine months, receiving $508,000. Share-based compensation expense increased to $388,000 from $326,000.
Guidance, outlook, risks and unusual items
- No specific revenue or earnings guidance was provided.
- Management highlighted economic conditions, supplier and customer impacts, currency fluctuations, consumer spending, competition, technological change, growth execution and integration of acquisitions as factors that could cause actual results to differ materially from expectations.
- The company expects to complete environmental monitoring related to its former Bridgeport, Connecticut property during the second half of 2014. The remaining remediation and monitoring accrual was approximately $54,000 at September 30, 2013, including approximately $34,000 classified as current.
- The company had contributed approximately $185,000 of an estimated $225,000 required 2013 contribution to its qualified pension plan as of September 30, 2013.
- There were no pending material legal proceedings reported. Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Facts investors should verify
- Whether the Rocky Mount facility produces the expected distribution efficiencies and whether the planned approximately $1.0 million upgrade remains within budget.
- The sustainability of U.S. sales growth and the effect of seasonal back-to-school demand on fourth-quarter results.
- Recovery prospects in Canada and the effect of the lost Schlecker business on European sales and profitability.
- Debt utilization, LIBOR-based interest expense and continued compliance with the HSBC facility covenants.
- Operating cash conversion, inventory turnover and the increase in days sales outstanding to 64 days from 61 days at year-end 2012.
- The timing and final cost of environmental monitoring and pension funding obligations.