Acme United - 10-Q quarterly report FY2011 Q2

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Washington, D.C. 20549

 

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FORM 10-Q

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[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2011

 

OR

 

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

__________________

 

Commission file number 001-07698

 

ACME UNITED CORPORATION

(Exact name of registrant as specified in its charter)

__________________

 

Registrant’s telephone number, including area code:  (203) 254-6060

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]     No  [_]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [X]     No  [_]

 

 

As of August 5, 2011 the registrant had outstanding 3,101,587 shares of its $2.50 par value Common Stock.

ACME UNITED CORPORATION

 

See notes to condensed consolidated financial statements.

 

 

 

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

 

Note 1 — Basis of Presentation

 

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, 2010 for such disclosures.  The condensed consolidated balance sheet as of December 31, 2010 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 2010 Annual Report on Form 10-K.

 

The Company has evaluated events and transactions subsequent to June 30, 2011 and through the date these consolidated financial statements were included in this Form 10-Q and filed with the SEC.

Note 2 — Contingencies

 

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, 2011, the Company had approximately $301,000 remaining in its accrual for environmental remediation, of which approximately $150,000 was classified as a current liability at that date.  It is estimated that the remediation project will be completed within five years from the date of the sale.

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.

The change in the accrual for environmental remediation for the six months ended June 30, 2011 follows (in thousands):

 

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.

 

Note 3 — Pension

Components of net periodic benefit cost are as follows (in thousands):

 

The Company’s funding policy with respect to its qualified plan is to contribute at least the minimum amount required by applicable laws and regulations. In 2011, the Company is required to contribute approximately $250,000.  The Company expects to make contributions to the plan as required during the remainder of the year.

 

Note 4 —Debt and Shareholders Equity

 

The Company’s revolving loan agreement, as amended, provides for borrowings up to $20 million, with all principal amounts outstanding thereunder required to be repaid in a single amount on March 31, 2013. In addition, the Company’s revolving loan agreement requires monthly interest payments.  As of June 30, 2011 and December 31, 2010, the Company had outstanding borrowings of $18,601,000 and $13,522,000, respectively, under the revolving loan agreement.

 

During the three and six months ended June 30, 2011, the Company issued 13,000 and 42,250 shares of common stock upon the exercise of outstanding stock options and received total proceeds of  $41,100 and $145,925, respectively.

Note 5— Segment Information

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, hardware 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.

 

Financial data by segment:

 

(in thousands)

 

 

 

 

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 $125,828 and $112,100 for the quarters ended June 30, 2011 and June 30, 2010, respectively. Share-based compensation expense was $209,438 and $189,200 for the six months ended June 30, 2011 and June 30, 2010, respectively. During the three months ended June 30, 2011, the Company issued 18,500 options with a weighted average fair value of $2.28 per share. During the six months ended June 30, 2011 the Company issued 78,500 options with a weighted average fair value of $2.46.

 

As of June 30, 2011, there was a total of $636,000 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.

 

Note 8 – Fair Value Measurements

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.

 

                                                            

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

Item 2.  – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Information

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, 2010.  All forward-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.

Critical Accounting Policies

 

Results of Operations

 

 

 

Gross profit

 

 

Selling, general and administrative expenses

 

 

Operating income

 

 

 

 

Income taxes

 

 

 

Financial Condition

 

Liquidity and Capital Resources

 

During the first six months of 2011, working capital increased approximately $5.8 million compared to December 31, 2010. Inventory increased by approximately $1.3 million at June 30, 2011 compared to December 31, 2010.  The increase in inventory is principally due to the acquisition of Pac-Kit assets.  Inventory turnover, calculated using a twelve month average inventory balance, was 2.0 at June 30, 2011 compared to 2.1 at December 31, 2010.  Accounts receivable increased by approximately $11.2 million at June 30, 2011 compared to December 31, 2010 primarily as a result of the seasonal nature of the back to school business where sales are typically higher in the second and third quarters as compared to the first and fourth quarters. The average number of days sales outstanding in accounts receivable was 65 days at June 30, 2011 compared to 61 days at December 31, 2010.

 

The Company's working capital, current ratio and long-term debt to equity ratio follow:

During the first six months of 2011, total debt outstanding under the Company’s credit facility increased by $5.1 million, compared to total debt at December 31, 2010. The increase in the debt outstanding is primarily related to the acquisition of substantially all of the assets of The Pac-Kit Company for $3.4 million.  As of June 30, 2011, $18,601,000 was outstanding and $1,399,000 was available for borrowing under the Company’s credit facility.

 

 

 

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable.

 

Item 4T. Controls and Procedures

 

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, 2011, 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.

 

PART II.  OTHER INFORMATION

 

Item 1 — Legal Proceedings

 

 

Item 1A – Risk Factors

 

 

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  —Defaults Upon Senior Securities

 

None.

 

Item 4 — Removed and Reserved

 

 

Item 5 — Other Information

 

None.

 

Item 6 — Exhibits

 

 

Exhibit 31.1 Certification of Walter C. Johnsen pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 31.2 Certification of Paul G. Driscoll pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.