ACME United Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2013, filed August 13, 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; Asian operations are aggregated with the United States segment. Results are seasonal, with stronger sales generally in the second and third quarters because of the back-to-school market.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $28.412 million | $27.594 million | $46.063 million | $44.472 million |
| Gross profit | $10.081 million | $9.821 million | $16.509 million | $15.765 million |
| Gross margin | 35.5% | 35.6% | 35.8% | 35.5% |
| Operating income | $3.192 million | $3.078 million | $3.706 million | $3.536 million |
| Net income | $2.210 million | $2.061 million | $2.520 million | $2.320 million |
| Diluted EPS | $0.68 | $0.66 | $0.78 | $0.74 |
Q2 sales increased 3% year over year, or 4% in local currency. Six-month sales increased 4%, or 5% in local currency. Q2 operating margin was approximately 11.2%, versus 11.2% in the prior year; six-month operating margin was approximately 8.0%, versus 8.0%. SG&A increased to $6.889 million in Q2 and $12.803 million year to date, primarily because of higher shipping costs, sales commissions and additional sales and marketing personnel. Effective tax rates were approximately 29% in both 2013 periods, compared with 31% for Q2 2012 and 30% for the first six months of 2012.
Cash and cash equivalents were $8.458 million at June 30, 2013, compared with $9.750 million at December 31, 2012. Accounts receivable rose approximately $9.0 million to $25.420 million, while inventory declined approximately $0.8 million to $29.450 million. Working capital was $50.950 million, the current ratio was 4.52, and long-term debt to equity was 78.3% at quarter-end.
Operating cash flow was negative $2.576 million for the first six months of 2013, improving from negative $3.557 million in the comparable period. The cash outflow primarily reflected the increase in accounts receivable, partially offset by lower inventory and higher accounts payable. Investing cash flow was negative $0.513 million, primarily for capital expenditures. Financing cash flow was positive $1.794 million, including $1.692 million of additional borrowings and $0.322 million from stock-option exercises.
Long-term debt was $26.012 million at June 30, 2013, compared with $24.320 million at December 31, 2012. The amended HSBC revolving facility increased the borrowing limit from $30 million to $40 million, bears interest at LIBOR plus 1.75%, and matures April 5, 2017. Approximately $13.988 million remained available, and the Company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- U.S. sales increased 4% in Q2 and 7% year to date, helped by back-to-school demand, the C-Thru Ruler acquisition and higher Camillus brand knife sales.
- Canada sales declined 5% in Q2 and 4% year to date in U.S. dollars, primarily because of softness in the Canadian economy. Canadian operating income also declined.
- Europe sales increased 3% in Q2 but declined 18% year to date. The year-to-date decline was primarily attributed to the bankruptcy and liquidation of a large German customer in Q2 2012. European operating results shifted from a $30,000 loss to $16,000 of income in Q2, but remained a $24,000 loss year to date.
- Direct import sales represented approximately 27% of Q2 sales and 21% of six-month sales, compared with 28% and 22%, respectively, in the prior-year periods.
- Net interest expense increased because of higher average borrowings. Other expense declined primarily because of lower foreign-currency transaction losses.
- The quarterly dividend increased to $0.08 per share from $0.07; the six-month dividend was $0.15 versus $0.14.
Guidance, outlook, risks, contingencies and unusual items
Management did not provide specific numerical revenue or earnings guidance. Management stated that operating cash flow and borrowing availability under the amended revolving credit facility are expected to be sufficient to finance planned operations for the next twelve months under current conditions.
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 also notes that interim results may not be indicative of full-year results because of seasonality.
An environmental remediation project related to a former Bridgeport, Connecticut property was completed in the third quarter of 2012. Approximately $81,000 remained accrued at June 30, 2013 for post-remediation monitoring and project closing costs, including approximately $22,000 classified as current. The Company expects monitoring to continue for at least two years.
The Company expects to contribute approximately $235,000 to its qualified pension plan in 2013. There were no pending material legal proceedings, no material changes to critical accounting policies, and no material changes in internal control over financial reporting. The filing states that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether the substantial increase in accounts receivable and negative operating cash flow reverse as seasonal sales collections occur.
- Compliance with the HSBC facility’s tangible-net-worth, debt-related and fixed-charge coverage covenants, and the Company’s ability to refinance or repay the facility at its April 2017 maturity.
- The sustainability of U.S. sales growth and the effect of back-to-school seasonality on full-year results.
- The recovery prospects for Canadian and European operations, including customer concentration and the continuing impact of the German customer liquidation.
- The remaining environmental monitoring liability and the timing of payments under the $2.0 million mortgage note receivable from the former Bridgeport property.
- The Company’s stated forward-looking risks, particularly economic conditions, currency movements, competition, acquisition integration and consumer spending.