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ACME UNITED CORP - Quarter Report: 2015 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

 

FORM 10-Q

___________________________________

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

[X]  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)

__________________

 

CONNECTICUT 06-0236700
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

55 WALLS DRIVE, Fairfield, Connecticut

 

06824

(Address of principal executive offices) (Zip Code)

 

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 (Sec. 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  [_]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).

 

Large accelerated filer [_]     Accelerated filer [_]     Non-accelerated filer [_]     Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  [_]     No  [X]

 

As of May 3, 2015 the registrant had outstanding 3,315,852 shares of its $2.50 par value Common Stock.

 
 

 

ACME UNITED CORPORATION

    Page
   
Part I — FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited)  
  Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 3
 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014

5
  Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2015 and 2014 6
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 7
  Notes to Condensed Consolidated Financial Statements 8
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 16
Item 4.  Controls and Procedures 16
     
Part II — OTHER INFORMATION  
Item 1.    Legal Proceedings 17
Item 1A.  Risk Factors 17
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3.    Defaults Upon Senior Securities 17
Item 4.    Mine Safety Disclosures 17
Item 5.    Other Information 17
Item 6.   Exhibits 18
Signatures 19

 

2
 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(all amounts in thousands)

 

   March 31,  December 31,
   2015  2014
   (unaudited)  (Note 1)
           
ASSETS          
Current assets:          
  Cash and cash equivalents  $1,797   $2,286 
  Accounts receivable, less allowance   16,722    19,477 
  Inventories:          
     Finished goods   30,618    28,713 
     Work in process   598    522 
     Raw materials and supplies   4,708    4,436 
    35,924    33,671 
  Prepaid expenses and other current assets   2,476    2,077 
          Total current assets   56,919    57,511 
Property, plant and equipment:          
  Land   421    436 
  Buildings   5,377    5,126 
  Machinery and equipment   10,147    10,067 
    15,945    15,629 
  Less accumulated depreciation   8,785    8,698 
    7,160    6,931 
           
Goodwill   1,375    1,375 
Intangible assets, less amortization   12,374    12,555 
Other assets   972    936 
            Total assets  $78,800   $79,308 

 

See notes to condensed consolidated financial statements.

3
 

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(all amounts in thousands, except share amounts)

 

   March 31,  December 31,
   2015  2014
   (unaudited)  (Note 1)
           
LIABILITIES          
Current liabilities:          
  Accounts payable  $5,905   $7,773 
  Other accrued liabilities   5,564    7,590 
      Total current liabilities   11,468    15,363 
  Long-term debt   27,551    24,147 
  Other   314    370 
       Total liabilities   39,334    39,880 
           
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS' EQUITY          
  Common stock, par value $2.50:          
    authorized 8,000,000 shares;          
    issued - 4,675,424 shares in 2015 and 4,653,424 in 2014          
    including treasury stock   11,688    11,633 
  Additional paid-in capital   8,336    7,941 
  Retained earnings   33,925    33,784 
  Treasury stock, at cost - 1,362,072 shares in 2015 and 2014   (12,283)   (12,283)
  Accumulated other comprehensive (loss) income:          
Minimum pension liability   (895)   (895)
    Translation adjustment   (1,305)   (752)
    (2,200)   (1,647)
      Total stockholders’ equity   39,466    39,428 
        Total liabilities and stockholders’ equity  $78,800   $79,308 

 

See notes to condensed consolidated financial statements.

4
 

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(all amounts in thousands, except per share amounts)

       

   Three Months Ended
   March 31
   2015  2014
           
Net sales  $22,837   $19,152 
Cost of goods sold   14,402    12,275 
           
Gross profit   8,435    6,877 
           
Selling, general and administrative expenses   7,608    6,252 
Operating income   827    625 
           
Non-operating items:          
  Interest:          
    Interest expense   132    89 
    Interest income   (2)   (6)
  Interest expense, net   130    83 
  Other expense, net   76    19 
Total other expense, net   206    102 
Income before income taxes   621    523 
Income tax expense   185    155 
Net income  $436   $368 
           
Basic earnings per share  $0.13   $0.12 
           
Diluted earnings per share  $0.12   $0.11 
           
Weighted average number of common shares outstanding-          
  denominator used for basic per share computations   3,300    3,201 
Weighted average number of dilutive stock options          
  outstanding   404    242 
Denominator used for diluted per share computations   3,704    3,443 
           
Dividends declared per share  $0.09   $0.08 

 

See notes to condensed consolidated financial statements.

 

5
 

 ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

(all amounts in thousands)

 

   Three Months Ended
   March 31
   2015  2014
       
Net income  $436   $368 
Other comprehensive (loss)  -          
  Foreign currency translation adjustment   (553)   (203)
Comprehensive (loss) income  $(117)  $165 

 

See notes to condensed consolidated financial statements.      

 

6
 

 

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(all amounts in thousands)

 

   Three Months Ended
   March 31,
   2015  2014
Operating Activities:          
  Net income  $436   $368 
  Adjustments to reconcile net income          
      to net cash used by operating activities:          
        Depreciation   320    256 
        Amortization   181    65 
        Stock compensation expense   129    126 
        Changes in operating assets and liabilities:          
          Accounts receivable   2,833    (651)
          Inventories   (2,849)   (871)
          Prepaid expenses and other assets   (535)   (253)
          Accounts payable   (1,355)   (505)
          Other accrued liabilities   (2,441)   (140)
          Total adjustments   (3,717)   (1,973)
        Net cash used by operating activities   (3,281)   (1,605)
           
Investing Activities:          
  Purchase of property, plant, and equipment   (574)   (762)
  Purchase of patents and trademarks   —      (28)
        Net cash used by investing activities   (574)   (790)
           
Financing Activities:          
  Borrowing  (repayments) of long-term debt   3,404    (5,626)
  Proceeds from issuance of common stock   321    —   
  Distributions to stockholders   (296)   (256)
        Net cash provided (used) by financing activities   3,429    (5,882)
           
Effect of exchange rate changes   (63)   —   
Net decrease in cash and cash equivalents   (488)   (8,277)
           
Cash and cash equivalents at beginning of period   2,286    11,644 
           
Cash and cash equivalents at end of period  $1,797   $3,367 
           
Supplemental cash flow information          
          Cash paid for income taxes  $767   $305 
          Cash paid for interest expense  $127   $98 

 

See notes to condensed consolidated financial statements.

 

7
 

 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, 2014 for such disclosures. The condensed consolidated balance sheet as of December 31, 2014 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto, included in the Company’s 2014 Annual Report on Form 10-K.

 

The Company has evaluated events and transactions subsequent to March 31, 2015 and through the date these condensed 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. There are no pending material legal proceedings to which the registrant is a party, or, to the actual knowledge of the Company, contemplated by any governmental authority.

 

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 was 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 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 was 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 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 was completed during the third quarter of 2012. In addition to the completed remediation work, the Company, with the assistance of its independent environmental consulting firm, was required to monitor contaminant levels on the property to ensure they comply with applicable governmental standards. During the first quarter of 2015, the Company received notice from the Connecticut Department of Energy & Environmental Protection that it had accepted and approved the Company’s filing of its Form III Verification Report. As a result, the Company’s remediation obligations have been satisfied.

 

On April 7, 2014, the Company sold its Fremont, NC distribution facility for $850,000 in cash. The facility originally served as a manufacturing site for the Company’s scissors and rulers. Under the terms of the sale agreement, the Company is responsible to remediate any environmental contamination on the property. 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, and in conjunction with the sale of the property, the Company recorded a liability of $300,000 in the second quarter of 2014, related to the remediation of the property. The accrual includes the total estimated costs of remedial activities and post-remediation operating and maintenance costs.

 

8
 

Remediation work on the project began in the third quarter of 2014 and is expected to be completed in 2015. 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 applicable North Carolina laws and regulations. The Company expects that the monitoring period will last a period of five years after the completion of the remediation and be completed by the end of 2020.

 

The change in the accrual for environmental remediation for the three months ended March 31, 2015 follows (in thousands):

 

   Balance at
December 31, 2014
 

 

Estimated Costs

  Payments  Balance at
March 31, 2015
Fremont, NC  $260   $—     $(2)  $258 
Bridgeport, CT   6    —      (6)   —   
Total  $266   $—     $(8)  $258 

  

 

Note 3 — Pension

 

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

 

   Three Months Ended March 31,
   2015  2014
       
Components of net periodic benefit cost:          
Interest cost  $15   $16 
Service cost   6    10 
Expected return on plan assets   (23)   (17)
Amortization of prior service costs   2    2 
Amortization of actuarial loss   28    35 
   $28   $46 

  

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 2015, the Company is required to contribute approximately $200,000. As of March 31, 2015 the Company had contributed approximately $30,000 to the plan.

 

Note 4 —Debt and Shareholders’ Equity

 

On April 25, 2013, the Company amended its revolving 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. 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. 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 continues to be required to maintain specific amounts of tangible net worth, a debt/net worth ratio, and a fixed charge coverage ratio. At March 31, 2015, the Company was in compliance with these covenants.

 

As of March 31, 2015 and December 31, 2014, the Company had outstanding borrowings of $27,551,089 and $24,146,841, respectively, under the Company’s revolving loan agreement with HSBC.

 

9
 

During the three months ended March 31, 2015, the Company issued a total of 22,000 shares of common stock and received aggregate proceeds of $321,000 upon 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 first aid products for school, office, home, hardware, sporting and industrial markets.

 

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 shipping points in Asia. Direct import sales are made in larger quantities than domestic sales, typically full containers. Direct import sales represented approximately 10% of the Company’s total net sales for the three months ended March 31, 2015 and 2014, respectively.

 

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)

   Three months ended
March 31
Sales to external customers:  2015  2014
United States  $20,134   $16,103 
Canada   1,244    1,511 
Europe   1,459    1,538 
Consolidated  $22,837   $19,152 
           
Operating income:          
United States  $971   $676 
Canada   (108)   32 
Europe   (36)   (83)
Consolidated  $827   $625 
           
Interest expense, net   130    83 
Other expense, net   76    19 
Consolidated income before income taxes  $621   $523 

 

10
 

 

   March 31  December 31
Assets by segment  2015  2014
United States  $70,917   $70,526 
Canada   4,090    4,363 
Europe   3,793    4,419 
Consolidated  $78,800   $79,308 

 

Note 6 – Stock Based Compensation

 

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 expenses were $128,752 and $126,000 for the quarters ended March 31, 2015 and 2014, respectively. During the three months ended March 31, 2015, the Company issued 15,000 options with a weighted average fair value of $3.67 per share.

 

As of March 31, 2015, there was a total of $993,246 of unrecognized compensation cost, adjusted for estimated forfeitures, 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 approximates fair value. Fair value was determined using a discounted cash flow analysis.

 

Note 8 – Business Combination

 

On June 2, 2014, the Company purchased certain assets of First Aid Only, Inc. (“First Aid Only”), a supplier of Smart Compliance® first aid kits, refills, and safety products that meet regulatory requirements for a broad range of industries. The Company purchased inventory, accounts receivable, equipment, patents, trademarks and other intellectual property for approximately $13.8 million using funds borrowed under its revolving credit facility with HSBC.

 

The purchase price was allocated to assets acquired and liabilities assumed as follows (in thousands):

 

Assets:     
Accounts Receivable  $2,544 
Inventory   1,704 
Equipment   463 
Prepaid expenses   110 
Customer Relationships   5,430 
Trade Name   3,410 
Covenant Not-to-Compete   70 
Goodwill   1,340 
Total assets  $15,071 

 

Liabilities     
Accounts Payable  $1,019 
Accrued Expense   252 
Total liabilities  $1,271 

 

 

11
 

Assuming First Aid Only was acquired on January 1, 2014, unaudited proforma combined net sales for the three months ended March 31, 2014 for the Company would have been approximately $23.0 million. Unaudited proforma combined net income for the three months ended March 31, 2014 for the Company would have been approximately $ 400,000.

 

 

12
 

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 assets 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, 2014. 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, 2014.

 

Results of Operations

 

On April 7, 2014, the Company sold its Fremont, NC distribution facility for $850,000 in cash. The facility originally served as a manufacturing site for the Company’s scissors and rulers. In connection with the sale and as part of the terms of the sale agreement, the Company is responsible to remediate any environmental contamination on the property. As a result, the Company recorded a $300,000 liability for environmental remediation in the second quarter of 2014. For more information related to the sale of the Fremont, NC facility and the required remediation, see Note 9 – Sale of Property in the Notes to Condensed Consolidated Financial Statements.

 

On June 2, 2014, the Company purchased certain assets of First Aid Only, Inc. (“First Aid Only”), located in Vancouver, WA, a supplier of Smart Compliance® first aid kits, refills, and safety products that meet regulatory requirements for a broad range of industries. The Company purchased inventory, accounts receivable, equipment, patents, trademarks and other intellectual property for approximately $13.8 million using funds borrowed under its revolving credit facility with HSBC. Additional information concerning the acquisition of First Aid Only assets is set forth in Note 8 – Business Combinations, in the Notes to Condensed Consolidated Financial Statements.

 

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 March 31, 2015 were $22,837,000 compared with $19,152,000 in the same period in 2014, a 19% increase. Net sales for the three months ended March 31, 2015 in the U.S. segment increased 25%, compared with the same period in 2014. Sales in the U.S. increased primarily due to strong sales of Westcott school and office products, the recently introduced Cuda brand fishing tools and First Aid Only products.

 

13
 

Net sales in Canada for the three months ended March 31, 2015 decreased 18% in U.S. dollars (8% in local currency). Lower sales in the office superstore market resulted primarily from weak economic conditions and were partially offset by sales growth to independent office product dealers.

 

European net sales for the three months ended March 31, 2015 decreased 5% in U.S. dollars but increased 14% in local currency compared with the same period in 2014. The increase in net sales for the three months ended March 31, 2015 was primarily due to strong office products sales.

 

Gross profit

 

Gross profit for the three months ended March 31, 2015 was $8,435,000 (37% of net sales) compared to $6,877,000 (36% of net sales) for the same period in 2014.

 

Selling, general and administrative expenses

 

Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2015 were $7,608,000 (33.3% of net sales) compared with $6,252,000 (32.6% of net sales) for the same period of 2014, an increase of $1,356,000. The increases in SG&A expenses for the three months ended March 31, 2015, compared to the same period in 2014, was primarily the result of incremental expenses from the acquisition of First Aid Only assets, increases in shipping expense and sales commissions which resulted from higher sales and higher personnel related costs.

 

Operating income

 

Operating income for the three months ended March 31, 2015 was $827,000 compared with $625,000 in the same period of 2014. Operating income in the U.S. segment increased by $295,000 for the three months ended March 31, 2015, compared to the same period in 2014. The increase in operating income was principally due to higher sales.

 

The Canadian segment had an operating loss of $106,000 for the three months ended March 31, 2015 compared to operating income of $32,000 in the same period in 2014. The increase in operating loss in Canada for the three months was principally due to the lower sales, as described above.

 

For the three months ended March 31, 2015, the operating loss in the European operating segment decreased by approximately $47,000 compared to the comparable period in 2014 due to higher sales as described above.

 

Interest expense, net

 

Interest expense, net for the three months ended March 31, 2015 was $130,000, compared with $83,000 for the same period of 2014, a $47,000 increase. The increase in interest expense resulted from higher average borrowings under the Company’s bank revolving credit facility for the three months ended March 31, 2015. The higher borrowings are primarily the result of the acquisition of assets of First Aid Only.

 

Other expense, net

 

Net other expense was $76,000 in the three months ended March 31, 2015 compared to $19,000 in the same period of 2014. The increase in other expense for the three months ended March 31, 2015 was primarily due to losses from foreign currency transactions.

 

Income taxes

 

The Company’s effective tax rates for the three months ended March 31, 2015 and 2014 were 30%.

 

14
 

Financial Condition

 

Liquidity and Capital Resources

 

During the first three months of 2015, working capital increased approximately $3,313,000 compared to December 31, 2014. Inventory increased by approximately $2.3 million at March 31, 2015 compared to December 31, 2014 primarily due to normal seasonal purchases. Inventory turnover, calculated using a twelve month average inventory balance, was 2.2 for the three months ended March 31, 2015, the twelve months ended December 31, 2014. Receivables decreased by approximately $2.8 million at March 31, 2015 compared to December 31, 2014. The average number of days sales outstanding in accounts receivable was 60 days at March 31, 2015 compared to 63 days at December 31, 2014. Accounts payable and other current liabilities decreased by approximately $3.9 million primarily due to the timing of payments for inventory purchases.

 

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

 

   March 31, 2015  December 31, 2014
           
Working capital  $45,451,130   $42,148,226 
Current ratio   4.96    3.74 
Long term debt to equity ratio   69.8%   61.2%

   

During the first three months of 2015, total debt outstanding under the Company’s revolving credit facility increased by approximately $3.4 million, compared to total debt thereunder at December 31, 2014 as described above. As of March 31, 2015, $27,551,089 was outstanding and $12,448,911 was available for borrowing under the Company’s credit facility. The increase in the debt outstanding was primarily due to borrowings to fund the acquisition of assets of First Aid Only on June 2, 2014.

 

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. 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. 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 continues to be required to maintain specific amounts of tangible net worth, a debt/net worth ratio, and a fixed charge coverage ratio. At March 31, 2015 the Company was in compliance with the covenants then in effect under the amended agreement with HSBC.

 

As discussed in Note 2 to the Condensed Consolidated Financial Statements set forth in Item 1 above, at March 31, 2015 the Company had a total of approximately $258,000 remaining in its accruals for environmental remediation and monitoring, related to property it owned in Fremont, NC.

 

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

 

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

(a)Evaluation of Internal 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.

 

(b)Changes in Internal Control over Financial Reporting

 

During the quarter ended March 31, 2015, 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.

 

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PART II. OTHER INFORMATION

 

Item 1 — Legal Proceedings

 

There are no pending material legal proceedings to which the registrant is a party, or, to the actual knowledge of the Company, contemplated by any governmental authority.

 

Item 1A – Risk Factors

 

See Risk Factors set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

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.

 

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Item 6 — Exhibits

 

Documents filed as part of this report.

 

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

 

 

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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.

 

 

ACME UNITED CORPORATION  
   
   
 By /s/ Walter C. Johnsen  
 

Walter C. Johnsen
Chairman of the Board and
Chief Executive Officer

 
     
Dated: May 13, 2015  

 

 

   
 By /s/ Paul G. Driscoll  
  Paul G. Driscoll
Vice President and
Chief Financial Officer
 
     
Dated: May 13, 2015  

 

 

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