Acme United Corporation 2011 Form 10-K Summary
Business Context and Reporting Period
Acme United Corporation is a global supplier of cutting, measuring and safety products sold under brands including Westcott, Clauss, Camillus, PhysiciansCare and Pac-Kit. Operations span the United States, Canada, Europe and Asia and are reported through U.S., Canada and Europe segments. This filing covers the fiscal year ended December 31, 2011; the filing is an annual report, not a standalone fourth-quarter filing.
On February 28, 2011, the Company acquired substantially all assets of Pac-Kit Safety Equipment Company for approximately $3.4 million, net of liabilities assumed, financed with borrowings under its Wells Fargo revolving credit facility.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $73.3 million | $63.1 million | Up 16% |
| Gross profit | $26.3 million | $23.4 million | Up 13% |
| Gross margin | 36% | 37% | Down 1 percentage point |
| Operating income | $4.285 million | $2.980 million | Up $1.305 million |
| Net income | $2.811 million | $2.573 million | Up 9% |
| Diluted EPS | $0.91 | $0.81 | Up $0.10 |
| Net cash from operating activities | $2.063 million | $(1.135) million | Improved $3.198 million |
| Capital expenditures | $0.941 million | $0.937 million | Broadly stable |
| Cash and equivalents | $7.853 million | $6.601 million | Up $1.252 million |
| Long-term debt | $17.568 million | $13.522 million | Up $4.046 million |
Quarterly 2011 net sales were $14.4 million, $24.0 million, $19.0 million and $15.8 million in the first through fourth quarters, respectively. Fourth-quarter net income was $266,000, or $0.08 basic EPS and $0.09 diluted EPS.
Working capital increased to $37.8 million from $33.4 million, and the current ratio improved to 5.34 from 4.62. Inventory rose to $24.5 million from $22.3 million, while inventory turnover declined to 2.0 from 2.1. Accounts receivable days remained 65. Long-term debt to equity increased to 63.3% from 53.3%.
As of December 31, 2011, $17.568 million was outstanding under the revolving facility, with $2.432 million available. The facility was amended to increase its maximum from $18 million to $20 million and extend maturity to March 31, 2013. The Company reported compliance with all financial covenants.
Material Changes Versus 2010
- U.S. segment sales increased 20%, primarily reflecting approximately $5.2 million of Pac-Kit sales, stronger first-aid sales and mass-market share gains.
- Canada sales increased 10% in U.S. dollars, supported by new AirShoc lawn and garden products.
- European sales declined 2% in U.S. dollars and 8% in local currency, primarily because of shipment timing; the European operating loss improved from $487,000 to $124,000.
- Gross margin declined mainly because Pac-Kit products generally carried lower margins and reduced the consolidated margin by approximately 80 basis points.
- SG&A increased 8% to $22.0 million, but declined to 30% of sales from 32%.
- Net interest expense increased to $255,000 from $142,000 because of higher average borrowings, principally related to the Pac-Kit acquisition.
- The effective tax rate increased to 30% from 12%. The 2010 rate benefited from a $360,000 tax credit related to donated land; excluding that credit, the 2010 rate would have been approximately 24%.
- Intangible assets increased to $3.285 million from $1.866 million, primarily due to $1.5 million of Pac-Kit customer relationship and trade-name assets.
Outlook, Risks, Contingencies and Unusual Items
Management stated that cash from operations, existing cash and borrowing availability were expected to fund planned operations for the next twelve months under current conditions. Capital expenditures in 2012 were not expected to differ materially from recent years. No specific revenue or earnings guidance was provided.
- Sales are seasonal, with stronger second- and third-quarter activity tied to the back-to-school period.
- One customer represented approximately 20% of 2011 consolidated sales, compared with 21% in 2010, creating customer-concentration risk.
- The Company relies heavily on foreign manufacturing partners and faces transportation, duties, quality, capacity, inflation and currency risks.
- Competitive pricing pressure, changing customer demand, product development requirements and the potential loss of major distributors or retailers could affect revenue and margins.
- The Company had approximately $239,000 remaining in its Bridgeport environmental remediation accrual at year-end, including approximately $90,000 classified as current. Remediation was expected to finish in the second half of 2012, followed by at least three years of monitoring.
- The frozen U.S. pension plan was underfunded by approximately $1.013 million at year-end. The Company contributed approximately $240,000 in 2011 and expected to contribute approximately $230,000 in 2012.
- Operating lease commitments totaled approximately $1.403 million for 2012 through 2016 based on disclosed minimum annual commitments.
- The Company reported no material off-balance-sheet transactions and believed ordinary-course litigation and contingencies were not likely to have a material adverse effect.
- Pac-Kit contributed approximately $5.2 million of 2011 sales and incurred approximately $125,000 of integration and transaction costs. The filing does not provide a separately reported consolidated margin for Pac-Kit.
Important Facts for Investors to Verify
- Reconcile reported annual results with the quarterly schedule, particularly the relatively low fourth-quarter profit.
- Assess whether Pac-Kit growth and integration benefits offset its lower gross margin and acquisition-related leverage.
- Monitor the $20 million revolving facility, the March 31, 2013 maturity date, covenant compliance and limited remaining availability.
- Evaluate inventory growth, lower turnover and the Company’s ability to convert seasonal sales into operating cash flow.
- Review dependence on the customer representing approximately 20% of sales and on foreign suppliers.
- Track Bridgeport remediation costs, the post-remediation monitoring period and the pension funding requirement.
- Confirm the effect of currency movements on Canadian and European results and the sustainability of the improved European operating performance.