Acme United Corporation — Q3 2011 Form 10-Q Summary
Business context and reporting period
Acme United Corporation filed an unaudited Form 10-Q for the three and nine months ended September 30, 2011. The company sells cutting devices, measuring instruments, safety products and first-aid products through its United States, Canada and Europe segments. Results are seasonal, with stronger sales generally occurring in the second and third quarters because of back-to-school demand.
On February 28, 2011, Acme United acquired substantially all assets of Pac-Kit Safety Equipment Company for approximately $3.4 million, financed with borrowings under its revolving credit facility.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Net sales | $19.036 million | $16.083 million | $57.466 million | $49.789 million |
| Gross profit | $6.640 million | $5.657 million | $20.631 million | $18.321 million |
| Gross margin | 34.9% | 35.2% | 35.9% | 36.8% |
| Operating income | $1.120 million | $0.657 million | $3.763 million | $2.903 million |
| Income before taxes | $1.030 million | $0.613 million | $3.574 million | $2.762 million |
| Net income | $0.682 million | $0.612 million | $2.545 million | $2.391 million |
| Diluted EPS | $0.22 | $0.19 | $0.82 | $0.74 |
- Q3 sales increased 18% reported, or 16% in local currency. Nine-month sales increased 15% reported, or 13% in local currency.
- Q3 operating margin was approximately 5.9%, compared with 4.1% in the prior-year quarter. Nine-month operating margin was approximately 6.5%, compared with 5.8%.
- Q3 net margin was approximately 3.6%, compared with 3.8% in Q3 2010. The nine-month net margin was approximately 4.4%, compared with 4.8%.
- Net interest expense increased to $70,000 in Q3 and $191,000 for the nine months, primarily because of higher average borrowings.
- The effective tax rate was 34% for Q3 and 29% for the first nine months, compared with 0% and 13%, respectively, in the comparable 2010 periods.
Cash flow, debt and liquidity
- Cash used by operating activities was $0.539 million in the first nine months of 2011, an improvement from $2.994 million used in the comparable 2010 period. Accounts receivable increased $3.817 million and accounts payable decreased $1.579 million during the period.
- Investing cash use was $3.807 million, including $3.127 million for the Pac-Kit acquisition, $0.599 million of capital expenditures and $0.081 million for patents and trademarks.
- Financing activities provided $4.078 million, including $4.584 million of debt borrowings. The company paid $0.555 million in distributions and repurchased $0.097 million of treasury stock.
- Cash and cash equivalents declined from $6.601 million at December 31, 2010 to $6.270 million at September 30, 2011.
- Bank debt was $18.106 million, compared with $13.522 million at year-end 2010. The revolving facility had a $20 million limit, leaving $1.894 million available at September 30, 2011. The facility matures March 31, 2013.
- Working capital was $38.507 million and the current ratio was 5.64, compared with $33.410 million and 4.62 at December 31, 2010. Long-term debt to equity increased to 65.8% from 53.3%.
- Management stated that cash on hand, operating cash flow and available revolver capacity were expected to fund planned operations for the next twelve months under current conditions. The company was in compliance with its debt covenants at September 30, 2011.
Material changes versus the prior comparable period
- United States sales increased 23% in Q3 and 20% for the first nine months, supported by mass-market share gains, Pac-Kit sales and strong first-aid demand.
- Canada sales increased 4% in Q3 and 13% for the nine months in U.S. dollars, although Q3 sales declined 3% in local currency. New products contributed to growth.
- Europe sales increased 4% in Q3 in U.S. dollars but declined 6% in local currency; nine-month sales declined 6% in U.S. dollars and 13% in local currency. Management attributed the nine-month decline principally to the timing of mass-market customer sales.
- Gross margin declined because Pac-Kit products generally carried lower margins than Acme United’s historical average.
- SG&A increased $0.520 million in Q3 and $1.450 million for the first nine months, reflecting Pac-Kit expenses, higher freight, sales commissions and personnel costs. Nine-month SG&A included approximately $0.125 million of Pac-Kit integration and transaction costs.
- Pac-Kit contributed approximately $1.6 million of Q3 sales and $4.0 million of nine-month sales on an unaudited basis. Assuming a January 1 acquisition, Pac-Kit would have contributed approximately $4.8 million of nine-month sales and $0.255 million of net income, according to the filing.
Guidance, outlook, risks and unusual items
- The filing provides no specific quantitative earnings or sales guidance.
- Management identified risks related to economic conditions, the financial markets, suppliers and customers, labor shortages in southeast China, currency fluctuations, consumer spending, competition, technological change, growth management and acquisition integration.
- The company had approximately $278,000 remaining in its environmental remediation accrual for a former Bridgeport, Connecticut property, including approximately $125,000 classified as current. Remediation and monitoring may continue for several years.
- Acme United holds a $2.0 million mortgage receivable from the buyer of the Bridgeport property at 6% interest. The remaining balance is due one year after remediation and monitoring are completed.
- The company expects to contribute approximately $250,000 to its pension plan during 2011 and had contributed approximately $193,389 through September 30.
- Management stated that ordinary-course litigation and other contingencies were not expected to have a material adverse effect on financial position, results or liquidity.
- Disclosure controls were assessed as effective, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether Pac-Kit integration produces the expected sales and profitability while improving or further pressuring consolidated gross margins.
- The company’s ability to reduce operating working-capital usage, particularly the elevated accounts receivable balance and inventory turnover of 2.0.
- Available borrowing capacity, covenant compliance and refinancing needs before the March 31, 2013 revolver maturity.
- The timing and ultimate cost of Bridgeport environmental remediation and related monitoring.
- Whether European sales recover after the delayed mass-market orders and whether currency movements materially affect reported results.
- The effect of higher tax rates and increased interest expense on future net income and cash generation.