Acme United Corporation — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013; filed March 6, 2014. The company supplies cutting, measuring, knife, and first-aid products through the Westcott, Clauss, Camillus, PhysiciansCare, and Pac-Kit brands. Operations are reported across the United States, Canada, and Europe, with Asian sourcing and production activities included in the U.S. segment.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $89.6 million | $84.4 million | +6% |
| Gross profit | $31.8 million | $29.7 million | +7% |
| Gross margin | 35.5% | 35.3% | +0.2 percentage points |
| Operating income | $5.9 million | $5.4 million | +$0.5 million |
| Operating margin | 6.6% | 6.4% | Improved |
| Net income | $4.0 million | $3.5 million | +13% |
| Diluted EPS | $1.22 | $1.13 | +8% |
| Cash flow from operations | $6.5 million | $(1.3) million | Improved by $7.7 million |
| Cash and equivalents | $11.6 million | $9.7 million | +$1.9 million |
| Long-term debt | $22.9 million | $24.3 million | $(1.4) million |
Net margin was approximately 4.5% in 2013 versus 4.2% in 2012. The current ratio increased to 5.77 from 4.98, working capital increased to $47.1 million from $46.7 million, and long-term debt-to-equity declined to 65.5% from 78.8%.
Business and Segment Developments
- U.S. segment sales increased 9% to $73.6 million, driven primarily by Camillus knives, back-to-school products, and first-aid distribution. U.S. operating income increased approximately $0.7 million.
- Canada sales declined 8% to $8.1 million because of weakness in the office-products industry; operating income declined approximately $0.2 million.
- Europe sales declined 2% in U.S. dollars and 5% in local currency to $7.9 million, primarily reflecting the loss of the Schlecker customer. European operating income improved approximately $0.05 million due to better margins.
- The company purchased a 340,000-square-foot manufacturing and distribution facility in Rocky Mount, North Carolina, for approximately $2.8 million. It expected to invest approximately $1.3 million in upgrades through the first quarter of 2014; approximately $0.9 million had been spent by year-end.
- Research and development expense increased to $603,000 from $573,000. New 2013 products included the iPoint USB pencil sharpener, X-Ray scissors, titanium-bonded putty knives, and other branded product launches.
Cash Flow, Debt, and Liquidity
- Operating cash flow of $6.5 million benefited from lower inventory and receivables. Inventory declined approximately $2.1 million, while receivables declined approximately $0.8 million; days sales outstanding increased to 64 from 61.
- Capital expenditures were $4.6 million, compared with $0.7 million in 2012, largely reflecting the Rocky Mount facility and related investments.
- The HSBC revolving credit facility was increased from $30 million to $40 million. At December 31, 2013, borrowings were $22.9 million and approximately $17.1 million remained available. Interest was payable at LIBOR plus 1.75%, with maturity on April 5, 2017.
- The company was in compliance with applicable debt covenants at year-end and stated that cash from operations plus available borrowing capacity should fund planned operations for at least the next twelve months.
- Cash flow included a $1.7 million early repayment of a mortgage receivable. Financing activities included $0.7 million of shareholder distributions and $0.5 million of stock issuance proceeds.
Fourth-Quarter and Outlook Information
Fourth-quarter 2013 net sales were $21.4 million versus $19.5 million in the fourth quarter of 2012. Fourth-quarter net income was $0.5 million versus $0.4 million, and diluted EPS was $0.15 versus $0.13. Sales are historically stronger in the second and third quarters because of the back-to-school season.
The filing does not provide formal numerical revenue or earnings guidance. Management expected continued growth through organic initiatives and strategic acquisitions, supported by product innovation, expanded distribution, and consolidation of North Carolina facilities. Management stated that current liquidity was sufficient for planned operations for at least twelve months, subject to prevailing conditions.
Risks, Contingencies, and Unusual Items
- Customer concentration is material: two customers each exceeded 10% of consolidated sales, representing approximately 31% in aggregate in 2013 versus 29% in 2012.
- The company relies heavily on foreign suppliers and faces transportation, import-duty, quality, capacity, inflation, and foreign-exchange risks.
- Seasonality, customer order timing, consumer demand, intense competition, pricing pressure, and dependence on third-party distributors could materially affect revenue and margins.
- The company has exposure to global economic conditions, cybersecurity and data-protection incidents, product liability claims, recalls, intellectual-property disputes, and environmental liabilities.
- The Bridgeport, Connecticut environmental remediation project was completed in 2012, but monitoring continued. The remaining remediation liability was approximately $39,000 at December 31, 2013, with completion expected by the end of 2014.
- The frozen U.S. pension plan had an underfunded status of $183,000 at year-end. The company contributed $482,000 in 2013 and expected to contribute approximately $200,000 in 2014.
- No material legal proceedings or off-balance-sheet transactions were reported. Management concluded that disclosure controls and internal control over financial reporting were effective; the external auditor did not provide an internal-control attestation because the company qualified as a smaller reporting company.
Important Facts for Investors to Verify
- Whether U.S. growth, particularly in Camillus, back-to-school, and first-aid products, offset continued weakness in Canada and Europe.
- Progress, capital spending, operating efficiencies, and expected capacity benefits from the Rocky Mount facility consolidation.
- Customer concentration, distributor relationships, and the potential effect of losing a major customer.
- Revolver utilization, covenant compliance, LIBOR-related interest costs, and the April 2017 debt maturity.
- Inventory turnover, receivables aging, customer rebates, and the sustainability of the 2013 improvement in operating cash flow.
- Future pension contributions, environmental monitoring costs, foreign-currency effects, and the realization of deferred tax assets, including German tax-loss carryforwards.