Acme United - 10-Q quarterly report FY

In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of Acme United Corporation (the “Company”).  These adjustments are of a normal, recurring nature.  However, the financial statements do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Company's Annual Report on Form 10-K. Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2009 for such disclosures.  The condensed consolidated balance sheet as of December 31, 2009 was derived from the audited consolidated balance sheet as of that date.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto, included in the Company’s 2009 Annual Report on Form 10-K.

The Company has evaluated events and transactions subsequent to June 30, 2010 and through the date these consolidated financial statements were included in this Form 10-Q and filed with the SEC.

The Company is involved from time to time in disputes and other litigation in the ordinary course of business and may encounter other contingencies, which may include environmental and other matters.  The Company presently believes that none of these matters, individually or in the aggregate, would be likely to have a material adverse impact on its financial position, results of operations or liquidity, as set forth in these financial statements.

In December 2008, the Company sold property it owned in Bridgeport, Connecticut to B&E Juices, Inc. for $2.5 million, of which $2.0 million is secured by a mortgage on the property.  The property consists of approximately four acres of land and 48,000 sq. feet of warehouse space.  The property was the site of the Company’s original scissor factory which opened in 1887 and was closed in 1996.

Under the terms of the sale agreement, and as required by the Connecticut Transfer Act, the Company is required to remediate any environmental contamination on the property. During 2008, the Company hired an independent environmental consulting firm to conduct environmental studies in order to identify the extent of the environmental contamination on the property and to develop a remediation plan. As a result of those studies and the estimates prepared by the independent environmental consulting firm, the Company recorded an undiscounted liability of approximately $1.8 million related to the remediation of the property. This accrual includes the costs of required investigation, remedial activities, and post-remediation operating and maintenance.

Remediation work on the project began in the third quarter of 2009 and a major portion of the work has been completed. At June 30, 2010, the Company had approximately $546,000 remaining in its accrual for environmental remediation, of which approximately $230,000 was classified as a current liability at that date.

In addition to the remediation work, the Company, with the assistance of its independent environmental consulting firm, must continue to monitor contaminant levels on the property to ensure they comply with set governmental standards. The Company expects that the monitoring period could last a minimum of three years from the completion of the remediation work.

In connection with the remediation work completed in the third quarter of 2009, the environmental study was updated by the independent environmental consulting firm. The results of this study produced a remedial action plan with a more narrow scope from the original plan, which allowed the Company, along with its environmental consulting firm, to refine the original project plan resulting in a new estimate of costs to complete the project. The change in estimated costs resulted in a benefit of approximately $460,000, which the Company recorded as other non-operating income during the three months ended September 30, 2009.

Also, as part of the sale, the Company provided the buyer with a mortgage loan of $2.0 million at six percent interest. The mortgage is payable in monthly installments of principal and interest with the outstanding balance due in full, one year after remediation  and monitoring on the property have been completed. It is estimated that the remediation project will be completed within five years from the date of the sale.

The Company’s revolving loan agreement, as amended, provides for borrowings up to $18 million, with all principal amounts outstanding thereunder required to be repaid in a single amount on February 1, 2012. In addition, the Company’s revolving loan agreement requires monthly interest payments.  As of June 30, 2010 and December 31, 2009, the Company had outstanding borrowings of $13,125,000 and $9,154,000, respectively, under the revolving loan agreement.

During the three and six months ended June 30, 2010, the Company issued 7,500 and 24,050 shares of common stock upon the exercise of outstanding stock options and received total proceeds of  $17,250 and $50,556, respectively.  During the three and six months ended June 30, 2010, the Company repurchased 65,450 shares of common stock for its treasury.  These shares were purchased at fair market value, with a total cost to the Company of $718,100.

The Company reports financial information based on the organization structure used by management for making operating and investment decisions and for assessing performance. The Company’s reportable business segments consist of (1) United States; (2) Canada and (3) Europe. The activities of the Company’s Asian operating segment are closely linked to those of the U.S. operating segment; accordingly, management reviews the financial results of both segments on a consolidated basis, and the results of the Asian operating segment have been aggregated with the results of the United States operating segment to form one reportable segment called the “United States operating segment”. Each reportable segment derives its revenue from the sales of cutting devices, measuring instruments and safety products for school, office, home and industrial use.

The chief operating decision maker evaluates the performance of each operating segment based on segment revenues and operating income. Segment amounts below are presented after converting to U.S. dollars and consolidating eliminations.

The Company recognizes share-based compensation at fair value of the equity instrument on the grant date. Compensation expense is recognized over the required service period. Share-based compensation expense was $112,100 and $94,000 for the quarters ended June 30, 2010 and June 30, 2009, respectively. Share-based compensation expense was $189,200 and $146,400 for the six months ended June 30, 2010 and June 30, 2009, respectively. During the three months ended June 30, 2010, the Company issued 19,000 options with a weighted average fair value of $3.32 per share. During the six months ended June 30, 2010 the Company issued 89,000 options with a weighted average fair value of $2.96. During the three and six months ended June 30, 2009, the Company issued 12,250 options with a weighted average fair value of $3.86 per share. The assumptions used to value option grants for the three and six months ended June 30, 2010 and June 30, 2009 are as follows:

As of June 30, 2010, there was a total of $562,000 of unrecognized compensation cost related to non-vested share –based payments granted to the Company’s employees.  The remaining unamortized expense is expected to be recognized over a weighted average period of approximately 3 years.

The carrying values of cash and cash equivalents, accounts receivable, accounts payable and bank debt are a reasonable estimate of fair value because of their short term nature. The carrying value of the Company’s note receivable approximates fair value. Fair value was determined using a discounted cash flow analysis.

These forward-looking statements include statements of the Company’s plans, objectives, expectations, estimates and intentions, which are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, in addition to others not listed, could cause the Company’s actual results to differ materially from those expressed in forward looking statements: the strength of the domestic and local economies in which the Company conducts operations, the impact of current uncertainties in global economic conditions and the ongoing financial crisis affecting the domestic and foreign banking systems and financial markets, including the impact on the Company’s suppliers and customers, the continuing labor shortage in southeast China, currency fluctuations, changes in client needs and consumer spending habits, the impact of competition and technological change on the Company, and the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business which it might acquire. A more detailed discussion of risk factors is set forth in Item 1A, “Risk Factors”, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.  Allforward-looking statements in this report are based upon information available to the Company on the date of this report.  The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

 

During the first six months of 2010, working capital increased approximately $4.4 million compared to December 31, 2009. Inventory increased by approximately $570,000 at June 30, 2010 compared to December 31, 2009. Inventory turnover, calculated using a twelve month average inventory balance, was 2.2 at June 30, 2010 compared to 1.9 at December 31, 2009.  Accounts receivable increased by approximately $9.7 million at June 30, 2010 compared to December 31, 2009. The average number of days sales outstanding in accounts receivable was 59 days at June 30, 2010 compared to 61 days at December 31, 2009.

During the first six months of 2010, total debt outstanding under the Company’s recently modified credit facility, increased by $4.0 million compared to total debt at December 31, 2009. As of June 30, 2010, $13,125,000 was outstanding and $4,875,000 was available for borrowing under the Company’s credit facility.

On January 26, 2010, the Company modified its revolving loan agreement with Wachovia Bank; the amendments include (a) a decrease in the maximum borrowing amount from $20 million to $18 million; (b) an extension of the maturity date of the loan from June 30, 2010 to February 1, 2012; (c) an increase in the interest rate to LIBOR plus 2% (from LIBOR plus 7/8%) and (d) modification of certain covenant restrictions.  Funds borrowed under the credit facility may be used for working capital, general operating expenses, share repurchases and certain other purposes.

As discussed in Note 2, at June 30, 2010 the Company had approximately $546,000 remaining in its accrual for environmental remediation, with approximately $230,000 classified as a current liability. The Company intends to use cash flow from operations or borrowings under its revolving credit facility to pay for these costs. The Company does not believe that payment of such remediation costs will have a material adverse affect on the Company’s ability to implement its business plan. In addition, the Company has provided the buyer with a $2.0 million mortgage loan at 6 percent interest. Payments of principal and interest on the mortgage are due monthly and will also help fund the remediation.

As noted earlier, the Company was adversely affected by the ongoing labor shortages in southeast China. However, due to the seasonal nature of the back to school business and steps taken by management, the Company does not anticipate the same level of expedited freight costs in the third quarter as it had incurred in the second quarter.

Cash expected to be generated from operating activities, together with funds available under the Company’s revolving credit facility, and are expected, under current conditions, to be sufficient to finance the Company’s planned operations over the next twelve months.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

During the quarter ended June 30, 2010, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.