ACME United Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. The financial statements are unaudited and should be read with the 2011 Form 10-K. ACME United sells cutting devices, measuring instruments, and safety products through its United States, Canada, and Europe segments. Results are seasonally stronger in the second and third quarters due to back-to-school demand.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $20.363 million | $19.036 million | $64.835 million | $57.466 million |
| Gross profit | $7.426 million | $6.640 million | $23.191 million | $20.631 million |
| Gross margin | 36.4% | 34.9% | 35.8% | 35.9% |
| Operating income | $1.359 million | $1.120 million | $4.895 million | $3.763 million |
| Net income | $798,000 | $682,000 | $3.118 million | $2.545 million |
| Diluted EPS | $0.26 | $0.22 | $1.00 | $0.82 |
- Q3 sales increased 7% year over year, or 8% in local currency; nine-month sales increased 13%.
- Q3 operating income increased 21%, while nine-month operating income increased 30%.
- Q3 net margin was approximately 3.9%, versus 3.6% in the prior-year quarter. Nine-month net margin was approximately 4.8%, versus 4.4%.
- SG&A increased to $6.067 million in Q3 and $18.296 million for the nine months, primarily from higher freight, sales commissions, personnel costs, and new-product spending.
- Effective income tax rates were 37% for Q3 and 32% for the nine months, compared with 34% and 29%, respectively, in 2011.
Cash flow, liquidity, and capital structure
- Cash used in operating activities was $1.474 million for the first nine months of 2012, compared with $539,000 used in the prior-year period. The principal uses of cash were increases in inventory of $5.068 million and accounts receivable of $3.140 million.
- Cash used in investing activities was $2.093 million, including $1.474 million for the acquisition of C-Thru assets, $516,000 for property and equipment, and $103,000 for patents and trademarks.
- Financing activities provided $5.749 million, principally from $6.752 million of long-term borrowings. Dividends and other distributions totaled $654,000, and treasury-stock purchases totaled $370,000.
- Cash increased to $10.105 million at September 30, 2012, from $7.853 million at December 31, 2011.
- Working capital was $46.257 million, compared with $37.818 million at year-end 2011. The current ratio was 4.92 versus 5.34, and long-term debt to equity was 80.1% versus 63.2%.
- Long-term debt was $24.321 million at September 30, 2012, compared with $17.569 million at December 31, 2011. The company had $5.679 million of remaining availability under its $30 million revolving credit facility.
- The April 2012 HSBC facility bears interest at LIBOR plus 1.75%, matures April 5, 2017, and contains tangible-net-worth, debt-service-coverage, and fixed-charge-coverage covenants. The company reported compliance with all covenants at September 30, 2012.
Material changes and business developments
- On June 7, 2012, ACME acquired inventory and intellectual property of The C-Thru Ruler Company for approximately $1.47 million, funded with revolving debt. Approximately $420,000 was assigned to inventory and $1.05 million to intangible assets. C-Thru contributed approximately $1.0 million of Q3 sales and $1.1 million of nine-month sales; its net income contribution was not material.
- The United States segment led growth, with sales up 10% in Q3 and 17% for the nine months. Drivers included new Camillus knife distribution, C-Thru products, first-aid products, and the iPoint pencil sharpener.
- Canada sales increased 19% in Q3 and 2% for the nine months in U.S. dollars, primarily from Camillus knives.
- Europe sales declined 25% in Q3 and 6% for the nine months in U.S. dollars. The Q3 decline was primarily attributed to the liquidation of major customer Schlecker. Schlecker represented approximately 2% of 2011 total sales.
- Inventory increased approximately $5.5 million from year-end in preparation for new business, particularly Camillus products, pencil sharpeners, and first-aid products. Inventory turnover remained 2.0, while days sales outstanding improved to 62 days from 65 days.
Outlook, risks, contingencies, and unusual items
- The filing does not provide specific revenue, earnings, or margin guidance. Management stated that operating cash flow and available revolving-credit capacity are expected to fund planned operations for the next twelve months under current conditions.
- Key disclosed risks include domestic and global economic conditions, supplier and customer impacts, currency fluctuations, changes in consumer spending and customer needs, competition, technological change, and the ability to manage and integrate acquisitions.
- Remediation work at the former Bridgeport, Connecticut property was completed during Q3 2012. Approximately $148,000 remained accrued at September 30, 2012 for post-remediation monitoring and project closing costs, including approximately $30,000 classified as current. Monitoring is expected to last at least two years.
- The company expects no material future receivable or inventory charges related to the Schlecker liquidation.
- The company is involved in ordinary-course disputes and contingencies, but management does not believe these matters will have a material adverse effect on financial position, results, or liquidity. No material legal proceedings were reported.
- Internal disclosure controls were deemed effective, and no material changes to internal control over financial reporting were reported during the quarter.
Facts investors should verify
- Whether increased borrowing and inventory investment convert into sustained sales and cash flow, given nine-month operating cash use of $1.474 million.
- The company’s ability to reduce leverage and maintain compliance with HSBC credit covenants as debt approaches the $30 million facility limit.
- The performance and integration of the C-Thru acquisition and the contribution of Camillus and other new-product initiatives.
- The continuing effect of Schlecker’s liquidation on European revenue and operating profitability.
- The remaining environmental monitoring costs and the timing of repayment of the $2.0 million mortgage note receivable.
- Whether higher tax rates, freight, commissions, personnel costs, and product-development spending pressure future margins.