Acme United Corporation — Q1 2012 Form 10-Q Summary
Business context and reporting period
Acme United Corporation filed a quarterly report for the three months ended March 31, 2012. The company 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. Results are unaudited and should be read with the 2011 Form 10-K. Sales are seasonally stronger in the second and third quarters because of the back-to-school market.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $16.878 million | $14.401 million |
| Gross profit | $5.944 million | $5.308 million |
| Gross margin | 35.2% | 36.9% |
| SG&A expense | $5.486 million | $5.125 million |
| Operating income | $458,000 | $183,000 |
| Income before taxes | $360,000 | $161,000 |
| Net income | $260,000 | $120,000 |
| Diluted EPS | $0.08 | $0.04 |
| Net cash used in operating activities | $(2.491) million | $(2.847) million |
| Cash and cash equivalents at March 31 | $4.078 million | $5.102 million |
Gross margin declined 170 basis points, principally because of product mix. SG&A represented 32.5% of sales versus 35.6% in the prior-year quarter. The effective tax rate was approximately 28%, compared with 26% in Q1 2011. Dividends declared increased to $0.07 per share from $0.06.
Operating cash flow was negative primarily because accounts receivable increased by $1.703 million and accounts payable declined by $1.441 million, partially offset by a $998,000 reduction in inventory. Capital expenditures were $75,000, and purchases of patents and trademarks were $29,000. Financing cash outflows included $649,000 of debt repayment, $219,000 of distributions to stockholders and $370,000 of treasury-stock purchases.
At March 31, 2012, total assets were $52.885 million, current assets were $44.327 million, total liabilities were $25.105 million and stockholders’ equity was $27.780 million. Long-term debt was $16.920 million. Working capital was $37.349 million, the current ratio was 6.35, and long-term debt to equity was 60.9%.
Material changes versus the prior comparable period
- Sales increased 17%, driven principally by higher U.S. sales of iPoint pencil sharpeners, Clauss professional cutting tools and first-aid products.
- U.S. sales increased 19%; Canadian sales decreased 11% in U.S. dollars, or 9% in local currency; European sales increased 32% in U.S. dollars, or 39% in local currency.
- Operating income increased $275,000. European operations improved to $242,000 of operating income from an $87,000 loss, while Canadian operating income declined $100,000.
- Net income more than doubled to $260,000, although net other expense increased to $42,000 from $25,000 of other income, primarily reflecting foreign-currency transaction results.
- Direct import sales represented approximately 10% of consolidated sales, compared with 8% in Q1 2011.
- Cash declined $3.775 million during the quarter. The company repurchased 36,750 shares in March at an average price of $10.07, and 149,440 shares remained available under the repurchase program at March 31.
Guidance, outlook, risks, contingencies and unusual items
Management expected gross margins to improve in the second quarter because of a more favorable product mix. The company stated that operating cash flow and availability under its revolving credit facility were expected to be sufficient to finance planned operations over the following twelve months under current conditions. No formal full-year earnings or sales guidance was provided.
On April 5, 2012, after quarter-end, the company replaced its Wells Fargo revolving facility with a five-year HSBC facility providing up to $30 million at LIBOR plus 1.75%. The new facility matures April 5, 2017, compared with the former facility’s March 31, 2013 maturity, and carries an interest rate 0.25 percentage points below the former facility. The company used the new facility to repay the Wells Fargo balance. Financial covenants require specified tangible net worth, debt-service coverage and fixed-charge coverage; management reported compliance at March 31.
The company retained an environmental remediation accrual of approximately $224,000 at March 31, including $71,000 classified as current. Remediation was expected to be completed in the second half of 2012, followed by at least three years of monitoring. The company also held a $1.750 million note receivable at March 31 related to a $2.0 million mortgage issued in connection with the property sale; the mortgage bears interest at 6% and is secured by the property.
The company is required to contribute approximately $235,000 to its qualified pension plan in 2012. Management stated that ordinary-course disputes and litigation, including environmental matters, were not expected to have a material adverse effect. Principal risks include economic conditions, consumer spending, competition, technology changes, supplier and customer conditions, acquisition integration, growth management and currency fluctuations. Disclosure controls and procedures were reported effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the improved sales trend and European profitability continue beyond the seasonally weaker first quarter.
- Whether gross-margin recovery occurs as anticipated and whether product mix, freight and commission costs affect margins.
- Accounts-receivable collection and operating cash conversion, given the $1.703 million quarterly receivables increase and negative operating cash flow.
- Availability, covenant compliance, interest costs and refinancing terms under the new HSBC credit facility.
- The timing and ultimate cost of the Bridgeport environmental remediation and the related mortgage receivable.
- The company’s ability to fund the required pension contribution, dividends, share repurchases and ongoing working-capital needs.
- The impact of foreign-currency movements, especially on Canada and Europe, and the sustainability of segment-level earnings improvements.