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ACU > SEC Filings for ACU > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for ACME UNITED CORP

Form 10-Q for ACME UNITED CORP


2-May-2014

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 or property 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, 2013. 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, 2013.

Results of Operations

On August 30, 2013, the Company purchased a manufacturing and distribution center in Rocky Mount, North Carolina for approximately $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 the Company's two distribution centers in North Carolina and to provide space for growth. The Company expects to invest approximately $1.3 million by the end of the first quarter of 2014 to upgrade the building and equipment. As of March 31, 2014, the Company paid approximately $900,000 towards upgrading the building.

Net Sales

Consolidated net sales for the three months ended March 31, 2014 were $19,152,000, compared with $17,651,000, in the same period in 2013, a 9% increase. Net sales in the U.S operating segment increased 13% principally due to sales resulting from the introduction of new lawn and garden products as well as increased sales of first aid kits. Net sales in the Canadian operating segment decreased 7% in U.S. dollars but increased 2% in local currency for the three months ended March 31, 2014. Net sales in Europe decreased by 15% in U.S. dollars and 21% in local currency for the three months ended March 31, 2014. The decrease in sales in Europe was primarily due to the timing of sales to mass market customers.

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, 2014 was $6,877,000 (36% of net sales), compared to $6,427,000 (36% of net sales) for the same period in 2013. The increase in gross profit for the first quarter was principally due to higher sales, while gross profit percentage remained consistent.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2014 were $6,252,000 (32.6% of net sales), compared with $5,914,000 (33.5% of net sales) for the same period of 2013, an increase of $338,000. The increase in SG&A expenses for the three months ended March 31, 2014, compared to the same period in 2013, was primarily due to higher personnel related expenses which include salaries and travel ($250,000), higher commission and delivery costs associated with higher sales and increased spending on new products.

Operating Income

Operating income for the three months ended March 31, 2014 was $625,000, compared with $513,000 in the same period of 2013, an increase of $112,000. Operating income in the U.S. operating segment increased by $112,000 for the three months ended March 31, 2014 compared to the same period of 2013. The increase was principally due to higher sales, as described above. Operating income in Canada increased by $42,000 in the three months ended March 31, 2014, compared to the same period of 2013. Operating income in Europe decreased by $42,000, in the first quarter of 2014 compared to the same period of 2013, primarily as a result of lower sales.

Interest Expense, net

Interest expense, net for the three months ended March 31, 2014, was $83,000, compared with $69,000 for the same period of 2013. The increase in interest expense, net, was primarily due to lower interest income as a result of repayment of the mortgage receivable in the third quarter of 2013which was partially offset by lower average borrowings under the Company's revolving loan agreement.

Other expense (income), net

Net other expense, consisting primarily of foreign currency transaction losses, was $19,000 in the first quarter of 2014, compared to expense of $3,000 in the first quarter of 2013. The change in other expense (income), net for the three months ended March 31, 2014 was primarily due to losses from foreign currency transactions.

Income Taxes

The Company's effective tax rate was 30% for the three months ended March 31, 2014 and 2013, respectively.

Financial Condition

Liquidity and Capital Resources

During the first three months of 2014, working capital decreased approximately $6.1 million compared to December 31, 2013. The decline in working capital is primarily due to the reduction in cash as the Company used it to pay down debt outstanding under its revolving loan agreement with HSBC, as described in more detail below. Inventory increased by approximately $758,000 at March 31, 2014 compared to December 31, 2013. Inventory turnover, calculated using a twelve month average inventory balance, was 2.0 for the period ended March 31, 2014 compared to 1.9 for the twelve months ended December 31, 2013. Receivables increased by approximately $482,000 at March 31, 2014 compared to December 31, 2013. The increase in accounts receivables occurred primarily due to the higher sales in the first quarter of 2014 compared to the previous quarter. The average number of days sales outstanding in accounts receivable was 62 days at March 31, 2014 compared to 64 days at December 31, 2013.

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

                                   March 31, 2014       December 31, 2013

Working capital                  $     41,031,309     $        47,108,636
Current ratio                                5.47                    5.77
Long term debt to equity ratio              49.3%                   65.5%

During the first three months of 2014, total debt outstanding under the Company's revolving credit facility decreased by approximately $5.6 million, compared to total debt thereunder at December 31, 2013 as described above. As of March 31, 2014, $17,285,829 was outstanding and $22,714,171 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. During the fourth quarter of 2013, the Company and HSBC agreed to make certain technical amendments to a covenant of the amended loan agreement to accommodate the purchase of the Rocky Mount facility. 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. At March 31, 2014 the Company was in compliance with the covenants then in effect under the new agreement with HSBC Bank.

As discussed in Note 2 to the Condensed Consolidated Financial Statements set forth in Item 1 above, at March 31, 2014 the Company had approximately $34,000 remaining in its accrual for environmental remediation and monitoring, all of which was classified as a current liability. Also, as noted above, during the third quarter of 2013, the Company received $1,726,888 from B&E Juice as early repayment of the outstanding balance on the mortgage on the Bridgeport property.

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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