Acme United - 10-Q quarterly report FY2012 Q2

Washington, D.C. 20549

 

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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, 2012

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

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Commission file number 001-07698

 

(Exact name of registrant as specified in its charter)

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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 7, 2012 the registrant had outstanding 3,103,227 shares of its $2.50 par value Common Stock.

 

 

 

 

 

 

 

 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, 2011 for such disclosures.  The condensed consolidated balance sheet as of December 31, 2011 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 2011 Annual Report on Form 10-K.

 

 

Recent accounting pronouncements

 

In June 2011, the FASB issued a new accounting standard on the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The standard was effective for our quarter ended March 31, 2012. The adoption of this standard was limited to a change in the presentation of our results, which we have elected to include as a separate Condensed Consolidated Statement of Comprehensive Income.

 

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 consisted of approximately four acres of land and 48,000 sq. feet of warehouse space.  The property was the site of the original Acme United 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 included the estimated costs of required investigation, remedial activities, and post-remediation operating and maintenance.

Remediation work on the project began in the third quarter of 2009. The Company expects the remediation work to be completed during the second half of 2012.  At June 30, 2012, the Company had approximately $188,000 remaining in its accrual for environmental remediation and monitoring, of which approximately $54,000 is classified as a current liability in the accompanying balance sheet.

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 three months ended June 30, 2012 follows (in thousands):

Note 3 — Pension

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

 

Under applicable laws and regulations, in 2012, the Company is required to contribute to its qualified plan approximately $235,000.  The Company expects to make contributions to the plan as required during the remainder of the year.

 

Note 4 —Debt and Shareholders Equity

 

On April 5, 2012, the Company entered into a new revolving loan agreement with HSBC Bank, N.A. In conjunction with signing the new revolving loan agreement, the Company ended its agreement with Wells Fargo and used funds borrowed under the new loan agreement to pay all amounts then outstanding under the revolving loan agreement with Wells Fargo Bank.

The new five-year credit facility provides for increased borrowings of up to an aggregate of $30 million at an interest rate of LIBOR plus 1.75%, which is 0.25% lower than the interest rate under the former loan agreement with Wells Fargo. All principal amounts outstanding under the agreement are required to be repaid in a single amount on April 5, 2017, the date the agreement expires; interest is payable monthly.  Funds borrowed under the agreement may be used for working capital, general operating expenses, share repurchases and certain other purposes.  Under the revolving loan agreement, the Company is required to maintain specific amounts of tangible net worth, a specified debt service coverage ratio, and a fixed charge coverage ratio. These financial covenants in the new loan agreement are similar to the covenants in the prior agreement with Wells Fargo. At June 30, 2012 the Company was in compliance with these covenants under the new agreement with HSBC Bank.

As of June 30, 2012 and December 31, 2011, the Company had outstanding borrowings of $23,004,777 and $17,568,484, respectively, under the respective revolving loan agreements.

During the first six months of 2012, the Company issued 5,000 shares of common stock and received proceeds of $21,000 upon the exercise of employee stock options.

Note 5— Segment Information

The Company reports financial information based on the organizational 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. As described below, the activities of the Company’s Asian operations are closely linked to those of the U.S. operations; accordingly, management reviews the financial results of both on a consolidated basis, and the results of the Asian operations have been aggregated with the results of the United States operations to form one reportable segment called the “United States segment” or “U.S. 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.

Domestic sales orders are filled from the Company’s distribution center in North Carolina. The Company is responsible for the costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products.  Orders filled from the Company’s inventory are generally for less than container-sized lots.

 

Direct import sales are products sold by the Company’s Asian subsidiary, directly to major U.S. retailers, who take ownership of the products in Asia. These sales are completed by delivering product to the customers’ common carriers at the shipping points in Asia. Direct import sales are made in larger quantities than domestic sales, typically full containers. Direct import sales represented approximately 28% and 22% of the Company’s total net sales for the three and six months ended June 30, 2012 compared to 23% and 18% for the comparable periods in 2011.

 

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

 

 

Financial data by segment:

 

(in thousands)

 

 

The Company recognizes share-based compensation at the fair value of the equity instrument on the grant date. Compensation expense is recognized over the required service period. Share-based compensation expense was $145,237 and $125,828 for the quarters ended June 30, 2012 and 2011, respectively. Share-based compensation expense was $232,753 and $209,438 for the six months ended June 30, 2012 and 2011, respectively. During the three months ended June 30, 2012, the Company issued 20,000 options with a weighted average fair value of $2.44 per share. During the six months ended June 30, 2012 the Company issued 84,938 options with a weighted average fair value of $2.28.

 

As of June 30, 2012, there was a total of $645,000 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 7 – Fair Value Measurements

The carrying value of the Company’s bank debt and note receivable approximates fair value. Fair value was determined using a discounted cash flow analysis.

 

Note 8 – Business Combination

On June 7, 2012, the Company purchased certain assets of The C-Thru Ruler Company, a leading supplier of drafting, measuring, lettering and stencil products. The Company purchased inventory and intellectual property related to C-Thru’s lettering and ruler business for approximately $1.47 million using funds borrowed under its revolving loan agreement with HSBC. The Company recorded approximately $0.42 million for inventory, as well as approximately $1.05 million for intangible assets, consisting primarily of customer relationships.

On February 28, 2011, the Company purchased substantially all of the assets of The Pac-Kit Safety Equipment Company, a leading manufacturer of first aid kits for the industrial, safety, transportation and marine markets. The Company purchased the accounts receivable, inventory, equipment and intangible assets of Pac-Kit for approximately $3.4 million, less liabilities assumed of $310,000.

Assuming Pac-Kit was acquired on January 1, 2011, unaudited proforma net sales and net income for the six months ended June 30, 2011 attributable to Pac-Kit were approximately $3.2 million and $155,000, respectively.

 

 

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, 2011.  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

 

 

Net sales

 

 

Gross profit

 

 

Selling, general and administrative expenses

 

 

Operating income

 

 

 

Interest expense, net

 

 

Other expense (income), net

 

 

Income taxes

 

 

Financial Condition

 

Liquidity and Capital Resources

 

During the first six months of 2012, working capital increased approximately $6,141,000 compared to December 31, 2011. Inventory increased by approximately $2,186,000 at June 30, 2012 compared to December 31, 2011. Inventory turnover, calculated using a twelve month average inventory balance, was 2.2 at June 30, 2012 compared to 2.0 at December 31, 2011.  Receivables increased by approximately $10,953,000 at June 30, 2012 compared to December 31, 2011. The increase in accounts receivables occurred primarily due to the higher sales in the second quarter of 2012 compared to the fourth quarter of 2011.  The average number of days sales outstanding in accounts receivable was 62 days at June 30, 2012 and December 31, 2011.

 

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

During the first six months of 2012, total debt outstanding under the Company’s credit facility increased by approximately $5,437,000 compared to total debt thereunder at December 31, 2011. As of June 30, 2012, $23,004,777 was outstanding and $6,995,223 was available for borrowing under the Company’s credit facility.

 

On April 5, 2012, the Company entered into a new revolving loan agreement with HSBC Bank, N.A. In conjunction with signing the new agreement, the Company ended its agreement with Wells Fargo and used funds borrowed under the new loan agreement to pay all amounts then outstanding under the revolving loan agreement with Wells Fargo Bank.The new five-year credit facility provides for increased borrowings of up to an aggregate of $30 million at an interest rate of LIBOR plus 1.75%, which is 0.25% lower than the interest rate under our former loan agreement. All principal amounts outstanding under the agreement are required to be repaid in a single amount on April 5, 2017, the date the agreement expires; interest is payable monthly.  Funds borrowed under the agreement may be used for working capital, general operating expenses, share repurchases and certain other purposes.  Under the revolving loan agreement, the Company is required to maintain specific amounts of tangible net worth, a specified debt service coverage ratio, and a fixed charge coverage ratio. These financial covenants in the new loan agreement are similar to the covenants in the prior agreement with Wells Fargo. At June 30, 2012, the Company was in compliance with these financial covenants.

 

As discussed above, the Company lost the business of a large European customer due to its financial troubles.  Schlecker, once one of Germany’s largest drug store chains, filed for bankruptcy and is in the process of liquidating a majority of its business. Sales to Schlecker represented approximately 2% of the Company’s total net sales in 2011.  The Company has not incurred and does not expect to incur any future material charges related to the write-off of receivables or inventory related to the loss of the Schlecker business.

As discussed in Note 2, at June 30, 2012 the Company had approximately $188,000 remaining in its accrual for environmental remediation and monitoring, with approximately $54,000 classified as a current liability. The Company intends to use cash flow from operations , borrowings under its revolving credit facility and/or payments made to the company under the 2008 mortgage to pay for these costs.

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

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable.

 

Item 4. 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, 2012, 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 — Mine Safety Disclosures

 

Not Applicable

 

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.