10-Q 1 acme_10q33103.txt FORM 10-Q ================================================================================ 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, 2003 OR |_| 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 Q4823 ACME UNITED CORPORATION (Exact name of registrant as specified in its charter) ------------------ CONNECTICUT 06-0236700 ----------- ----------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1931 BLACK ROCK TURNPIKE, Fairfield, Connecticut 06825 ------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 332-7330 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 |_| Registrant had 3,373,251 shares outstanding as of April 30, 2003 of its $2.50 par value Common Stock. (1) ACME UNITED CORPORATION Page ---- Part I-- FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets.......................... 3 Condensed Consolidated Statements of Operations and Comprehensive Income.................................... 5 Condensed Consolidated Statements of Cash Flows................ 6 Notes to Condensed Consolidated Financial Statements........... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 11 Item 4. Controls and Procedures.......................................... 11 Part II -- OTHER INFORMATION Item 1. Legal Proceedings................................................ 12 Item 2. Changes in Securities............................................ 12 Item 3. Defaults Upon Senior Securities.................................. 12 Item 4. Submission of Matters to a Vote of Security Holders.............. 12 Item 5. Other Information................................................ 12 Item 6. Exhibits and Reports on Form 8-K................................. 12 Signatures............................................................... 13 (2) PART I. FINANCIAL INFORMATION ACME UNITED CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (all amounts in thousands, except per share data)
March 31 December 31 2003 2002 --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 789 $ 597 Accounts receivable, less allowance 6,059 6,410 Inventories: Finished goods 5,791 5,307 Work in process 489 374 Raw materials and supplies 932 994 --------------- --------------- 7,212 6,675 Prepaid expenses and other current assets 571 517 Deferred income taxes 459 733 --------------- --------------- Total current assets 15,090 14,932 --------------- --------------- Property, plant and equipment: Land 205 198 Buildings 2,286 2,302 Machinery and equipment 5,251 5,801 --------------- --------------- 7,742 8,301 Less accumulated depreciation 5,473 6,019 --------------- --------------- 2,269 2,282 Other assets 286 311 Deferred income taxes 26 - Goodwill 89 89 --------------- --------------- Total assets $ 17,760 $ 17,614 =============== =============== See notes to condensed consolidated financial statements.
(3) ACME UNITED CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS - continued (UNAUDITED) (all amounts in thousands, except per share data)
March 31 December 31 2003 2002 --------------- --------------- LIABILITIES Current liabilities: Notes payable $ - $ 362 Accounts payable 1,206 1,296 Other accrued liabilities 1,587 2,027 Current portion of long-term debt 3,397 2,731 --------------- -------------- Total current liabilities 6,190 6,416 Long-term debt, less current portion 2,061 2,033 Other 732 685 --------------- --------------- Total liabilities 8,983 9,134 STOCKHOLDERS' EQUITY Common stock, par value $2.50: authorized 8,000,000 shares; issued 3,613,312 shares, including treasury stock 9,131 9,131 Treasury stock, at cost - 279,061 shares in 2003 and 269,061 shares in 2002 (1,184) (1,152) Additional paid-in capital 2,029 2,029 Retained earnings 866 788 Accumulated other comprehensive loss: Translation adjustment (1,116) (1,350) Minimum pension liability (949) (949) Derivative financial instrument - (17) --------------- --------------- (2,065) (2,316) --------------- --------------- Total stockholders' equity 8,777 8,480 --------------- --------------- Total liabilities and stockholders' equity $ 17,760 $ 17,614 =============== =============== See notes to condensed consolidated financial statements.
(4) ACME UNITED CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) (all amounts in thousands of dollars, except per share amounts)
Three Months Ended March 31 ----------------------- 2003 2002 ---------- ----------- Net sales $ 7,189 $ 6,754 Costs and expenses: Cost of goods sold 4,307 4,612 Selling, general and administrative expenses 2,301 1,943 ---------- ----------- 6,608 6,555 ---------- ----------- Income before non operating items 581 199 Non operating items: Interest expense 79 146 Other (income)expense 150 (84) ---------- ----------- 229 62 ---------- ----------- Income before income taxes 352 137 Income tax expense 274 15 ---------- ----------- Net income 78 122 Other comprehensive (expense) income - Foreign currency translation 234 (36) Change in fair value of derivative financial instrument less deferred income taxes of $9 in 2003 and $19 in 2002 17 31 ---------- ----------- Comprehensive income $ 329 $ 117 ========== =========== Basic earnings per share $ 0.02 $ 0.03 ========== =========== Diluted earnings per share $ 0.02 $ 0.03 ========== =========== Weighted average number of common shares outstanding- denominator used for basic per share computations 3,378 3,410 Weighted average number of dilutive stock options outstanding 102 202 ---------- ----------- Denominator used for diluted per share computations 3,480 3,612 ========== =========== See notes to condensed consolidated financial statements
(5) ACME UNITED CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (all amounts in thousands of dollars)
Three Months Ended March 31 ----------------------------- 2003 2002 -------------- -------------- Operating Activities: Net income $ 78 $ 122 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 104 125 Amortization 6 34 Deferred income taxes 274 Changes in operating assets and liabilities: Accounts receivable 391 (839) Inventories (410) 455 Prepaid expenses and other current assets 2 (157) Other assets 33 Accounts payable 117 (532) Other accrued liabilities (591) (382) -------------- -------------- Total adjustments (74) (1,296) -------------- -------------- Net cash provided (used) by operating activities 4 (1,174) -------------- -------------- Investing Activities: Purchase of plant, property and equipment (114) (54) Purchase of patents and trademarks (17) -------------- -------------- Net cash (used) by investing activities (131) (54) -------------- -------------- Financing Activities: Net short-term borrowings 321 1,248 Payments of long-term debt (29) Purchase of 10,000 shares of common stock in 2003 for treasury (32) -------------- -------------- Net cash provided by financing activities 289 1,219 -------------- -------------- Effect of exchange rate changes 30 (36) -------------- -------------- Net change in cash and cash equivalents 192 (45) Cash and cash equivalents at beginning of period 597 172 -------------- -------------- Cash and cash equivalents at end of period $ 789 $ 127 ============== ============== See notes to condensed consolidated financial statements
(6) 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. 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, 2002 for such disclosures. The condensed consolidated balance sheet as of December 31, 2002 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. Note 2 -- Contingencies The Company has been involved in certain environmental and other matters. Additionally, the Company has been involved in numerous legal actions relating to the use of certain latex products, which the Company distributes, but does not manufacture. The Company is one of many defendants. The Company has been released from the majority of the lawsuits. While one lawsuit remains, it is still in the preliminary stages and it has not been determined whether the Company's products were involved. Based on information available, the Company believes there will not be a material adverse impact on financial position, results of operations, or liquidity, from these matters, either individually or in aggregate. Note 3 -- Accounting for Stock-Based Compensation At March 31, 2003, the Company has one stock-based employee compensation plan. The Company has elected to adopt the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, and continues to measure costs for its employee stock compensation plans by using the accounting methods prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, which allows that no compensation cost be recognized unless the exercise price of the options granted is greater than the fair market value of the Company's stock at date of grant. Accordingly, no stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value method under SFAS No. 123, Accounting for Stock Based Compensation, to stock-based employee compensation.
March 31 March 31 2003 2002 ================================================================================================================== Net income, as reported $ 77,834 $ 121,677 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related income tax effects 18,977 23,025 ------------------------------------------------------------------------------------------------------------------ Pro forma net income $ 58,857 $ 98,652 ================================================================================================================== Basic-as reported $ 0.02 $ 0.03 Basic-pro forma $ 0.02 $ 0.03 Diluted-as reported $ 0.02 $ 0.03 Diluted-pro forma $ 0.02 $ 0.03
Note 4 -- Litigation Settlement As a result of significant developments in the first quarter of 2003 the Company's German subsidiary settled litigation for $175,000. This exceeded previous accruals by $153,000 and has been charged to expense. Note 5 -- Income taxes In 2002, the Company recognized a significant one-time income tax benefit associated with liquidating its UK business. The benefit recognized was substantially in excess of income taxes computed at the statutory rate. In 2003, consolidated income before income taxes includes losses of foreign subsidiaries with no income tax benefit resulting in a high effective income tax rate. (7) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Three Months Ended March 31, 2003 Results of Operations Net Sales 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 business specific to the back-to-school season. Consolidated net sales for the quarter ended March 31, 2003 were $7,189,000 compared with $6,755,000 for 2002, a 6% increase. Excluding the favorable effect of currency gains in Canada and Europe the net sales increase represented 4%. The sales increase was mainly driven by a 13% increase in the U.S. due to the success of new product launches. International sales were down 18% in local currency principally due to discontinuing certain product lines in the UK business and a weak economy in Germany. Gross Profit The gross profit for the first quarter of 2003 was $2,882,000 (40% of net sales) compared to $2,143,000 (32% of net sales) for the first quarter of 2002. The introduction of new products coupled with higher sales to a significant customer in the U.S., positive impacts from product rationalization efforts in Europe and overall productivity gains were the main reasons for the improved gross margins. The U.S. accounted for approximately 60% of the 8% point improvement. Gross margin is expected to vary in future quarters depending on product, customer and entity mix. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses for the first quarter of 2003 were $2,301,000 (32% of net sales) compared with $1,943,000 (29% of net sales) for the same period of 2002, an increase of $358,000. Major contributors to the increase were market research, new product development and the addition of sales executives in Canada and Europe. Interest Expense Interest expense for the first quarter of 2003 was $79,000, compared with $147,000 for 2002, a $68,000 decrease. This is mainly attributable to the decline in debt and lower interest rates. Total debt declined to $5,548,000 million at March 31, 2003 compared to $6,871,000 million at March 31, 2002. Other Expense Net other expense was $150,000 in the first quarter of 2003 compared to net other income of $84,000 in the first quarter of 2002. The change from 2002 relates to the settlement of a lawsuit in Germany in late March of 2003 and the gain on sale of equipment in 2002. Income Before Income Taxes Income before income taxes was $352,000 in the first quarter of 2003 compared with $137,000 in the first quarter of 2002, an increase of $215,000. Pretax income for North America was $730,000 compared to $312,000 in 2002. The European operations lost $378,000 including a one-time expense of $175,000 for settlement of a lawsuit. The pretax loss in Europe for the first quarter of 2002 was $175,000. Income Taxes Income tax expense for the first quarter of 2003 was $274,000 compared to $15,000 in the first quarter of 2002. In 2002, the Company recognized a significant one-time income tax benefit associated with liquidating its UK business. The benefit recognized was substantially in excess of income taxes computed at the statutory rate. In 2003, consolidated income before taxes includes losses in foreign subsidiaries with no income tax benefit resulting in a high effective income tax rate. (8) Net Income Net income for the first quarter of 2003 was $78,000, or 2 cents per share (diluted), compared to a net income of $122,000, or 3 cents per share (diluted) for the same period of 2002. (9) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued For the Three Months Ended March 31, 2003 Financial Condition Liquidity and Capital Resources The Company's working capital, current ratio and long-term debt to equity ratio follow: March 31, 2003 December 31, 2002 ------------------ ------------------ Working capital..................... $8,900,000 $8,516,000 Current ratio....................... 2.44 to 1 2.33 to 1 Long-term debt to equity ratio...... 23.0% 24.0% During the first three months of 2003, total debt increased by $332,000 compared to total debt at December 31, 2002 principally as a result of net additional short-term borrowings to fund inventory purchases in anticipation of next quarter's seasonal sales volume. The Company has a revolving loan agreement, which allows for borrowings up to a maximum of $10,000,000 based on a formula, which applies specific percentages to balances of accounts receivable and inventory. Interest is payable monthly and is charged at the LIBOR rate plus 1.75 percent. As of March 31, 2003, $4,481,612 was outstanding and $2,429,460 was available for borrowing under this agreement. Maturities of long-term debt follow: 2004 - $2,913,000, 2005 - $1,120,000, and 2006 - $448,612. All outstanding borrowings are due on July 31, 2005. Cash expected to be generated from operating activities, together with funds available under its existing loan agreement, are expected, under current conditions, to be sufficient to finance the Company's planned operations over the next twelve months. Over that same period, the Company does not expect to make significant investments in plant, property, and equipment. Safe Harbor for Forward-looking Statements Forward-looking statements in this report, including without limitation, statements related to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company's plans and results of operations will be affected by the Company's ability to manage its growth and inventory; and (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. (10) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued For the Three Months Ended March 31, 2003 Item 3. Quantitative and Qualitative Disclosure About Market Risk There are no material changes in market risks since our most recent filing on Form 10-K for the year ended December 31, 2002. Item 4. Controls and Procedures (a) Evaluation of Internal Controls and Procedures As of a date within 90 days prior to the date of the filing of this report, our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, which included inquiries made to certain other of our employees. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures are effective and sufficient to ensure that we record, process, summarize and report information required to be disclosed by us in our periodic reports filed under the Securities and Exchange Commission's rules and forms. (b) Changes in Internal Controls Subsequent to the date of their evaluation, there have not been any significant changes in our internal controls or in other factors that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses. (11) PART II. OTHER INFORMATION Item 1 -- Legal Proceedings None. Item 2 -- Changes in Securities None. Item 3. --Defaults Upon Senior Management None Item 4 -- Submission of Matters to a Vote of Security Holders A. The Annual Meeting was held on April 28, 2003. B. The following individuals were elected Directors at the Meeting and comprise the entire Board. Votes for Votes against Votes withheld --------- ------------- -------------- George R. Dunbar 3,213,194 156,219 177,892 Richmond Y. Holden, Jr. 3,213,873 155,540 177,892 Walter C. Johnsen 3,263,873 105,540 177,892 Wayne R. Moore 3,213,799 155,614 177,892 Susan H. Murphy 3,213,673 155,740 177,892 Brian Olschan 3,213,873 155,540 177,892 Gary D. Penisten 3,263,799 105,614 177,892 Stevenson E. Ward III 3,213,873 155,540 177,892 Votes for Votes against Votes withheld --------- ------------- -------------- 3,194,330 174,287 178,688 C. Approval of an Amendment to the Company's Certificate of Incorporation to broaden the indemnification of directors and officers to the fullest extent permitted by applicable law and limiting the liability of directors was approved. Item 5 -- Other Information None. Item 6 -- Exhibits and Reports on Form 8-K Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Form 8-K was filed by the Company on April 29, 2003. (12) 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 President and Chief Executive Officer Dated: April 30, 2003 By /s/ PAUL G. DRISCOLL ------------------------------ Paul G. Driscoll Vice President and Chief Financial Officer Dated: April 30, 2003 (13) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, WALTER C. JOHNSEN, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Acme United Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being reported; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to filing date of this quarterly report March 31, 2003; and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of March 31, 2003; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ WALTER C. JOHNSEN ------------------------------ Walter C. Johnsen President and Chief Executive Officer Dated: April 30, 2003 (14) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, PAUL G. DRISCOLL, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Acme United Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being reported; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date 90 days prior to filing date of this quarterly report March 31, 2003; and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of March 31, 2003; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ PAUL G. DRISCOLL ------------------------------ Paul G. Driscoll Vice President and Chief Financial Officer Dated: April 30, 2003 (15) Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned officer of Acme United Corporation (the "Company") hereby certifies to my knowledge that the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 2003 (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of section 13(a) or 15(b), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed to be a part of the Report or "filed" for any purpose whatsoever. By /s/ WALTER C. JOHNSEN ------------------------------ Walter C. Johnsen President and Chief Executive Officer Dated: April 30, 2003 By /s/ PAUL G. DRISCOLL ------------------------------ Paul G. Driscoll Vice President and Chief Financial Officer Dated: April 30, 2003 (16)