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ACU > SEC Filings for ACU > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for ACME UNITED CORP


10-May-2013

Quarterly Report


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

The Company may from time to time make written or oral "forward-looking statements" including statements contained in this report and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

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 uncertainties in global economic conditions, changes in client needs and consumer spending habits, the impact of competition and technological change on the Company, the Company's ability to manage its growth effectively, including its ability to successfully integrate any business which it might acquire, and currency fluctuations. For a more detailed discussion of these and other factors affecting us, see the Risk Factors described in Item 1A included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012. 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

There have been no material changes to the Company's critical accounting policies and estimates from the information provided in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Results of Operations

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 of customer relationships.

Net Sales

Consolidated net sales for the three months ended March 31, 2013 were $17,651,000, compared with $16,878,000, in the same period in 2012, a 5% increase. Net sales in the U.S operating segment increased 13% principally due to increased sales of Camillus knives and additional sales from the acquisition of the C-Thru Ruler Company. Net sales in the Canadian operating segment decreased 2% in both U.S. and local currency for the three months ended March 31, 2013primarily due to general weakness in the Canadian economy. Net sales in Europe decreased by 31% in both U.S. and local currency for the three months ended March 31, 2013. The decrease in sales in Europe was primarily due to the bankruptcy and liquidation of a large customer in Germany in the second quarter of 2012.

Traditionally, the Company's sales are stronger in the second and third quarters and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature of the back-to-school market.


Gross Profit

Gross profit for the three months ended March 31, 2013 was $6,427,000 (36.4% of net sales), compared to $5,944,000 (35.2% of net sales) for the same period in 2012. The increase in gross profit as a percentage of sales for the first quarter was principally due to the mix of customers and products sold in the quarter.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2013 were $5,914,000 (33.5% of net sales), compared with $5,486,000 (32.5% of net sales) for the same period of 2012, an increase of $428,000. The increase in SG&A expenses for the three months ended March 31, 2013, compared to the same period in 2012, was primarily due to the addition of sales and marketing personnel as well as higher commission and delivery costs associated with higher sales.

Operating Income

Operating income for the three months ended March 31, 2013 was $513,000, compared with $458,000 in the same period of 2012, an increase of $55,000. Operating income in the U.S. operating segment increased in that period by $398,000 compared to the same period of 2012. The increase was principally due to higher sales, as described above. Operating income in Canada decreased by $60,000 primarily due to the decrease in sales. Operating income in Europe decreased by $283,000, from net operating income of $242,000 in the first quarter of 2012 to a net operating loss of $41,000 in the same period of 2013, primarily as a result of lower sales, which resulted from the bankruptcy and liquidation of a large customer in the second quarter of 2012.

Interest Expense, net

Interest expense, net for the three months ended March 31, 2013, was $69,000, compared with $56,000 for the same period of 2012. The increase in interest expense was primarily the result of higher average borrowings under the Company's revolving loan agreement.

Other expense (income), net

Net other expense, consisting primarily of foreign currency transaction losses, was $3,000 in the first quarter of 2013, compared to expense of $42,000 in the first quarter of 2012. The change in other expense (income), net for the three months ended March 31, 2013 was primarily due to losses from foreign currency transactions.

Income Taxes

The Company's effective tax rate in the first quarter of 2013 was 30%, compared to 28% in the first quarter of 2012. The increase in the effective tax rate was caused primarily by the Company generating a higher proportion of earnings in the United States, which has a higher tax rate than the countries in which our subsidiaries operate.

Financial Condition

Liquidity and Capital Resources

During the first three months of 2013, working capital increased approximately $356,000 compared to December 31, 2012. Inventory increased by approximately $158,000 at March 31, 2013 compared to December 31, 2012. Inventory turnover, calculated using a twelve month average inventory balance, was 1.9 for the periods ended March 31, 2013 and December 31, 2012. Receivables decreased by approximately $1.5 million at March 31, 2013 compared to December 31, 2012. The decrease in accounts receivables occurred primarily due to the lower sales in the first quarter of 2013 compared to the previous quarter. The average number of days sales outstanding in accounts receivable was 62 days at March 31, 2013 compared to 61 days at December 31, 2012.


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

                                March 31, 2013   December 31, 2012

Working capital                 $   47,034,234      $   46,678,949
Current ratio                             6.12                4.98
Long term debt to equity ratio           79.1%               78.8%

During the first three months of 2013, total debt outstanding under the Company's revolving credit facility increased by approximately $132,000, compared to total debt thereunder at December 31, 2012. As of March 31, 2013, $24,451,828 was outstanding and $5,548,172 was available for borrowing under the Company's credit facility.

On April 25, 2013, the Company amended its loan agreement with HSBC Bank, N.A. dated April 5, 2012. The amendment increased the borrowing limit to $40 million from $30 million. The interest rate remains the same at LIBOR plus 1.75%. 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, acquisitions and certain other purposes. Under the amended loan agreement, the Company is required to maintain specific amounts of tangible net worth, a debt/net worth ratio, and a fixed charge coverage ratio.

As discussed in Note 2 to the Condensed Consolidated Financial Statements set forth in Item 1 above, at March 31, 2013 the Company had approximately $102,000 remaining in its accrual for environmental remediation and monitoring, with approximately $43,000 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 amended revolving credit facility are expected, under current conditions, to be sufficient to finance the Company's planned operations over the next twelve months.

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