Acme United Corporation — FY2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012; filed March 8, 2013. The filing is an annual report, with unaudited quarterly data included for the fourth quarter. Acme United supplies cutting, measuring, first aid and safety products through United States, Canada and Europe segments, with Asian operations included in the United States segment.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $84.37 million | $73.30 million | +15% reported; +16% constant currency |
| Gross profit | $29.75 million | $26.32 million | +13% |
| Gross margin | 35.3% | 35.9% | Down 0.6 percentage points |
| SG&A expense | $24.39 million | $22.04 million | +11% |
| Operating income | $5.36 million | $4.28 million | +25% |
| Net income | $3.55 million | $2.81 million | +26% |
| Diluted EPS | $1.13 | $0.91 | +$0.22 |
| Net cash from operating activities | $(1.27) million | $2.06 million | Declined $3.34 million |
| Cash and cash equivalents | $9.75 million | $7.85 million | +$1.90 million |
| Long-term debt | $24.32 million | $17.57 million | +$6.75 million |
Business and Operating Results
- United States segment sales increased 19% to approximately $67.5 million, primarily from pencil sharpeners, first aid products, C-Thru products and expanded Camillus knife distribution.
- Canada sales increased 3% to $8.8 million, or 5% in local currency, mainly due to Camillus knives.
- European sales decreased 1% in U.S. dollars to $8.1 million but increased 9% in local currency. Growth in mass-market sales was partly offset by the liquidation of major customer Schlecker.
- Operating income increased in the United States by approximately $0.9 million and in Europe by approximately $0.3 million, while Canada operating income declined approximately $0.15 million because of product mix and lower gross margins.
- SG&A increased due to $1.1 million of higher personnel costs, $0.8 million of higher delivery costs and commissions, and $0.25 million of increased product-development spending. SG&A declined to 29% of sales from 30%.
- Research and development expense was $573,000, compared with $536,000 in 2011.
Liquidity, Cash Flow and Capital Structure
- Working capital increased approximately $8.9 million to $46.7 million. The current ratio was 4.98, compared with 5.34 in 2011.
- Inventory increased $5.8 million to $30.3 million, largely because of new Camillus products and anticipated orders. Inventory turnover declined to 1.9 from 2.0.
- Receivables increased $3.5 million to $16.4 million as sales grew, while days sales outstanding improved to 61 days from 65 days.
- Operating cash flow was negative because accounts receivable, inventory and other operating assets absorbed cash. Investing cash outflows were $2.29 million, including $1.47 million for C-Thru assets, $0.68 million of capital expenditures and $0.13 million for patents and trademarks.
- Financing activities generated $5.39 million, principally from $6.75 million of additional borrowings, partially offset by shareholder distributions and share repurchases.
- The HSBC five-year revolving credit facility permits borrowings up to $30 million at LIBOR plus 1.75%; $24.32 million was outstanding and $5.68 million remained available at year-end. Principal is due in a lump sum on April 5, 2017.
- The Company was in compliance with its debt covenants at December 31, 2012. Management stated that cash, operating cash generation and available borrowing capacity should fund planned operations for at least the next twelve months under current conditions.
- The Company paid $1.09 million in shareholder distributions, including quarterly dividends of $0.07 per share, and repurchased 43,025 shares for $438,897.
Material Changes and Unusual Items
- On June 7, 2012, Acme acquired selected inventory and intellectual property of C-Thru Ruler Company for approximately $1.47 million, funded with revolver borrowings. The transaction added approximately $1.7 million of sales after acquisition and $1.05 million of intangible assets.
- Direct-import sales represented approximately 19% of consolidated sales, up from 15% in 2011.
- Schlecker filed for bankruptcy and liquidated most of its business. Schlecker represented approximately 2% of 2011 sales; management did not expect material receivable or inventory write-offs.
- The Company completed remediation of its former Bridgeport, Connecticut property during the third quarter of 2012. Approximately $124,000 remained accrued for environmental monitoring and related costs at year-end, with monitoring expected through approximately the end of 2014.
- The defined benefit pension plan remained underfunded by approximately $900,000. The Company contributed $221,000 in 2012 and expected to contribute approximately $230,000 in 2013.
- No impairment of long-lived assets was recorded, and no material off-balance-sheet transactions or pending material legal proceedings were reported.
Outlook and Principal Risks
Management did not provide specific revenue or earnings guidance. It expects capital expenditures in 2013 to be broadly consistent with recent years and expects available cash and credit capacity to support operations for at least twelve months under current conditions.
- Key risks include customer concentration, loss or consolidation of major distributors and retailers, unpredictable order timing, seasonal back-to-school demand and intense competition.
- The Company relies heavily on foreign suppliers and international operations, exposing results to freight costs, import duties, supply disruptions, foreign exchange and political or economic conditions.
- Growth through new products and acquisitions depends on successful product development, customer acceptance and integration of acquired businesses.
- Higher inventory and receivables, negative operating cash flow and increased leverage require monitoring, particularly if sales growth slows.
- Other risks include product liability, intellectual-property protection, environmental obligations, pension funding, cybersecurity and the Company’s ability to raise prices to offset cost inflation.
Important Facts for Investors to Verify
- Whether inventory converts to sales and operating cash flow returns to positive levels after the 2012 buildup.
- Whether the $30 million HSBC facility remains sufficient and whether the Company continues to satisfy its financial covenants.
- The sustainability of the lower gross margin and the effect of product mix, freight, sourcing and inflation on profitability.
- Sales concentration: two customers represented approximately 17% and 12% of 2012 consolidated sales.
- Performance and integration of the C-Thru acquisition, including intangible-asset amortization and customer retention.
- Progress and final cost of environmental monitoring and the remaining Bridgeport remediation liability.
- Future pension contributions and the effect of discount-rate and asset-return assumptions on the pension deficit.
- Foreign currency exposure and the impact of the loss of Schlecker on European sales.