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ACU > SEC Filings for ACU > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for ACME UNITED CORP


8-Nov-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 current uncertainties in global economic conditions and the related impact on the Company's suppliers and customers, 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 or properties 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, 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 our 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 our 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.

On August 30, 2013, the Company purchased a manufacturing and distribution center in Rocky Mount, North Carolina for $2.8 million. The Company acquired the facility in the bankruptcy liquidation of Roomstore, Inc. The property consists of approximately 340,000 square feet of office, manufacturing and warehouse space on 33 acres. The facility will be used to consolidate two distribution centers and to provide space for growth. The Company expects to invest approximately $1.0 million through the first quarter of 2014 to upgrade the building and equipment.

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.

Net sales

Consolidated net sales for the three months ended September 30, 2013 were $22,135,000 compared with $20,363,000 in the same period in 2012, a 9% increase. Consolidated net sales for the nine months ended September 30, 2013 were $68,198,000, compared with $64,835,000 for the same period in 2012, a 5% increase. Net sales for the three and nine months ended September 30, 2013 in the U.S. segment increased 11% and 8%, respectively, compared with the same periods in 2012. Sales in the U.S. for the three months ended September 30, 2013 increased primarily due to higher sales of Camillus knives and back to school products as well as increased distribution of first aid kits to the office and industrial markets. The increase in sales in the U.S. segment for the nine months ended September 30, 2013 was primarily due to additional sales resulting from the acquisition of certain assets of the C-Thru Ruler Company, increased back to school sales and higher sales of Camillus knives. Net sales in Canada for the three months ended September 30, 2013 decreased by 18% in U.S. dollars (15% in local currency) compared with the same period in 2012. Net sales in Canada for the nine months ended September 30, 2013 decreased by 8% in U.S. dollars (6% in local currency) compared with the same period in 2012. Sales in Canada decreased primarily due to general softness in the office products industry which resulted from continuing weakness in the Canadian economy. European net sales for the three months ended September 30, 2013 increased 26% in U.S. dollars (19% in local currency) compared with the same period in 2012. European net sales for the nine months ended September 30, 2013 decreased 6% in U.S. dollars (7% in local currency). The increase in sales for the three months ended September 30, 2013 compared to 2012 was primarily related to higher sales to mass market retailers. The decrease in net sales in Europe for the nine month period ended September 30, 2013 was primarily due to the loss of Schlecker, a major customer in Germany, due to its bankruptcy and liquidation in the second quarter of 2012.

Gross profit

Gross profit for the three months ended September 30, 2013 was $7,940,000 (35.9% of net sales) compared to $7,426,000 (36.4% of net sales) for the same period in 2012. Gross profit for the nine months ended September 30, 2013 was $24,449,000 (35.8% of net sales) compared to $23,191,000 (35.8% of net sales) in the same period in 2012.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses for the three months ended September 30, 2013 were $6,531,000 (29.5% of net sales) compared with $6,067,000 (29.8% of net sales) for the same period of 2012, an increase of $464,000. SG&A expenses for the nine months ended September 30, 2013 were $19,334,000 (28.3% of net sales) compared with $18,296,000 (28.2% of net sales) in the comparable period of 2012, an increase of $1,038,000. The increases in SG&A expenses for the three and nine months ended September 30, 2013, compared to the same periods in 2012, were primarily the result of higher personnel related expenses, which include salaries and recruiting, as well as increased spending on new products.

Operating income

Operating income for the three months ended September 30, 2013 was $1,409,000 compared with $1,359,000 in the same period of 2012, a 4% increase. Operating income for the nine months ended September 30, 2013 was $5,115,000 compared to $4,895,000 in the same period of 2012, a 4% increase. Operating income in the U.S. segment decreased by $57,000 for the three months and increased by $462,000 for the nine months ended September 30, 2013, compared to the same periods in 2012. The increase in operating income for the nine months ended September 30, 2013 was principally due to higher sales. Operating income in the Canadian segment decreased by $52,000 and $160,000 for the three and nine months ended September 30, 2013, compared to the same periods in 2012. The decline in operating profit was primarily the result of lower sales. Europe had operating income of $96,000 for the three months ended September 30, 2013 compared to a loss of $63,000 for to the same period in 2012. The increase in operating income for the three months was primarily due to higher sales. For the nine months ended September 30, 2013, Europe had operating income of $69,000 compared to $149,000 in the same period of 2012. The decline in operating income was primarily due to lower sales resulting from the loss of Schlecker, a major customer in Germany, due to their liquidation in the second quarter of 2012.

Interest expense, net

Interest expense, net for the three months ended September 30, 2013 was $99,000, compared with $83,000 for the same period of 2012, a $16,000 increase. Interest expense, net for the nine months ended September 30, 2013, was $242,000 compared to $200,000 for the same period in 2012, a $42,000 increase. The increases in interest expense, net for both the three and nine months ended September 30, 2013 were primarily the result of higher average borrowings under the Company's revolving credit facility.

Other (income) expense, net

Net other income was $13,000 for the three months ended September 30, 2013 compared to net other expense of $7,000 in the same period of 2012. Net other expense was $16,000 in the first nine months of 2013 compared to $93,000 in the first nine months of 2012. The changes in other (income) expense, net for the three and nine months ended September 30, 2013 were primarily due to gains/losses from foreign currency transactions.

Income taxes

The effective tax rate for the three and nine month periods ended September 30, 2013 was 28%, compared to 37% and 32%, respectively, in the same periods of 2012. The decrease in the effective tax rate for the three and nine months ended September 30, 2013 was due to a higher proportion of earnings in jurisdictions with lower tax rates.

Financial Condition

Liquidity and Capital Resources

During the first nine months of 2013, working capital increased approximately $3.5 million compared to December 31, 2012. Inventory decreased by approximately $1.0 million at September 30, 2013 compared to December 31, 2012. Inventory turnover, calculated using a twelve month average inventory balance, was 1.9 at September 30, 2013 and December 31, 2012. Accounts receivable increased by approximately $1.2 million at September 30, 2013 compared to December 31, 2012 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 64 days at September 30, 2013 compared to 61 days at December 31, 2012.

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

                                   September 30, 2013       December 31, 2012

Working capital                  $             50,178     $            46,679
Current ratio                                    5.88                    4.98
Long term debt to equity ratio                   72.7 %                  78.8 %

During the first nine months of 2013, total debt outstanding under the Company's revolving credit facility with HSBC, N.A. ("HSBC") increased by $711,000, compared to total debt at December 31, 2012. As of September 30, 2013, $25,031,000 was outstanding and $14,969,000 was available for borrowing under the Company's credit facility.

On April 25, 2013, the Company amended its loan agreement with HSBC 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 September 30, 2013 the Company had approximately $54,000 remaining in its accrual for environmental remediation and monitoring relating to the sale of its Bridgeport, CT property, with approximately $34,000 classified as a current liability. Also, as noted above, during the third quarter, the Company received $1,726,888 from B&E Juice as early repayment of the outstanding balance on the mortgage on the Bridgeport property.

As stated above, on August 30, 2013, the Company purchased a manufacturing and distribution center in Rocky Mount, North Carolina for $2.8 million. The Company expects to invest approximately $1.0 million over the next six months to upgrade the building and equipment.

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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