================================================================================
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 September 30, 2006
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 001-07698
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.)
60 ROUND HILL ROAD, 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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one).
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |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 October 17, 2006 the registrant had outstanding 3,496,833 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 September 30, 2006
and December 31, 2005........................................ 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2006 and 2005...... 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2006 and 2005................ 6
Notes to Condensed Consolidated Financial Statements............ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk......... 14
Item 4. Controls and Procedures........................................... 14
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................... 15
Item 1A. Risk Factors.................................................... 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 15
Item 3. Defaults Upon Senior Securities................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............. 15
Item 5. Other Information............................................... 15
Item 6. Exhibits........................................................ 15
Signatures................................................................ 16
(2)
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(all amounts in thousands, except per share amounts)
September 30 December 31
2006 2005
(unaudited) (Note 1)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,854 $ 1,076
Accounts receivable, less allowance 14,896 9,392
Inventories:
Finished goods 14,479 11,691
Work in process 74 116
Raw materials and supplies 1,092 723
----------- -----------
15,645 12,530
Prepaid expenses and other current assets 780 542
Deferred income taxes 325 325
----------- -----------
Total current assets 34,500 23,865
----------- -----------
Property, plant and equipment:
Land 161 152
Buildings 2,965 2,954
Machinery and equipment 7,035 6,525
----------- -----------
10,161 9,631
Less accumulated depreciation 7,570 6,845
----------- -----------
2,591 2,786
Other assets 1,544 1,454
Goodwill 89 89
----------- -----------
Total assets $ 38,724 $ 28,194
=========== ===========
See notes to condensed consolidated financial statements.
(3)
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(all amounts in thousands, except per share amounts)
September 30 December 31
2006 2005
(unaudited) (Note 1)
----------- -----------
LIABILITIES
Current liabilities:
Accounts payable $ 3,641 $ 2,174
Other accrued liabilities 4,137 5,356
Current portion of long-term debt - 10
----------- -----------
Total current liabilities 7,778 7,540
Deferred income taxes 131 141
Long-term debt, less current portion 12,124 5,577
Other 979 871
----------- -----------
Total liabilities 21,012 14,129
STOCKHOLDERS' EQUITY Common stock, par value $2.50:
authorized 8,000,000 shares;
issued 4,175,824 shares in 2006
and 4,161,824 in 2005, including treasury stock 10,438 10,405
Treasury stock, at cost - 678,991 shares in 2006
and 2005 (5,439) (5,439)
Additional paid-in capital 2,867 2,624
Retained earnings 10,726 7,547
Accumulated other comprehensive loss:
Translation adjustment 10 (182)
Minimum pension liability (890) (890)
----------- -----------
(880) (1,072)
----------- -----------
Total stockholders' equity 17,712 14,065
----------- -----------
Total liabilities and stockholders' equity $ 38,724 $ 28,194
=========== ===========
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 Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net sales $ 15,532 $ 13,400 $ 44,774 $ 38,887
Costs and expenses:
Cost of goods sold 8,908 7,234 25,170 21,129
Selling, general and administrative expenses 4,506 4,159 13,760 12,455
Provision for loss on property demolition - 1,500 - 1,500
------------ ------------ ------------ ------------
13,414 12,893 38,930 35,084
------------ ------------ ------------ ------------
Income before non-operating items 2,118 507 5,844 3,803
Non-operating items:
Interest expense 207 83 462 139
Other (income) expense, net (35) 86 (149) 232
------------ ------------ ------------ ------------
172 169 313 371
------------ ------------ ------------ ------------
Income before income taxes 1,946 338 5,531 3,432
Income tax expense 721 138 2,041 1,268
------------ ------------ ------------ ------------
Net income 1,225 200 3,490 2,164
============ ============ ============ ============
Basic earnings per share $ 0.35 $ 0.06 $ 1.00 $ 0.62
============ ============ ============ ============
Diluted earnings per share $ 0.33 $ 0.05 $ 0.94 $ 0.57
============ ============ ============ ============
Weighted average number of common shares outstanding-
denominator used for basic per share computations 3,496 3,542 3,490 3,517
Weighted average number of dilutive stock options
outstanding 241 298 238 296
------------ ------------ ------------ ------------
Denominator used for diluted per share computations 3,737 3,840 3,728 3,813
============ ============ ============ ============
Dividends declared per share 0.03 0.03 0.09 0.08
============ ============ ============ ============
See notes to condensed consolidated financial statements.
(5)
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(all amounts in thousands)
Nine Months Ended
September 30
-----------------------------
2006 2005
-------------- --------------
Operating Activities:
Net income $ 3,490 $ 2,164
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation 598 400
Amortization 25 32
Stock compensation expense 222 -
Deferred income taxes - (133)
Loss on disposal/sale of assets - 61
Tax benefit on stock option exercise - 300
Changes in operating assets and liabilities:
Accounts receivable (5,508) (2,421)
Inventories (2,908) (3,448)
Prepaid expenses and other current assets (217) (118)
Accounts payable 1,453 (381)
Other accrued liabilities (1,156) 688
-------------- --------------
Total adjustments (7,491) (5,020)
-------------- --------------
Net cash used by operating activities (4,001) (2,856)
-------------- --------------
Investing Activities:
Purchase of property, plant, and equipment (357) (1,165)
Purchase of patents and trademarks (116) (134)
Proceeds from sale of property, plant, and equipment - 165
-------------- --------------
Net cash used by investing activities (473) (1,134)
-------------- --------------
Financing Activities:
Net long-term borrowings 6,539 5,160
Distribution to stockholders (324) (263)
Purchase of treasury stock - (3,201)
Proceeds from exercise of stock options 57 813
-------------- --------------
Net cash provided by financing activities 6,272 2,509
-------------- --------------
Effect of exchange rate changes (20) 111
-------------- --------------
Net change in cash and cash equivalents 1,778 (1,370)
Cash and cash equivalents at beginning of period 1,076 1,888
-------------- --------------
Cash and cash equivalents at end of period $ 2,854 $ 518
============== ==============
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 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, 2005 for such disclosures. The condensed consolidated balance
sheet as of December 31, 2005 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 the Management's Discussion and Analysis of Financial Condition
and Results of Operations and financial statements and notes thereto, included
in the Company's 2005 Form 10-K.
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. The Company presently believes that
none of these matters, individually or in the aggregate, would be likely to have
a material adverse impact on financial position, results of operations or
liquidity.
Note 3 -- Pension
Components of net periodic pension cost are as follows:
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
September 30 September 30 September 30 September 30
2006 2005 2006 2005
---------------- ---------------- ---------------- ----------------
Components of net periodic benefit cost:
Interest cost $ 46,974 $ 51,057 $ 140,922 $ 153,172
Service cost 7,500 8,750 22,500 26,250
Expected return on plan assets (57,149) (65,022) (171,447) (195,067)
Amortization of prior service costs 2,194 2,194 6,582 6,582
Amortization of actuarial gain 23,204 16,551 69,612 49,653
--------------------------------------------------------------------------
$ 22,723 $ 13,530 $ 68,169 $ 40,590
==========================================================================
Note 4 -- Long Term Debt and Capital Structure
The Company's revolving loan agreement, as amended, provides for borrowing
up to $15 million with all amounts outstanding to be repaid by June 30, 2009. At
September 30, 2006 and December 31, 2005, the Company had borrowings under the
revolving loan agreement of $12,018,000 and $5,544,500, respectively. Based on
the scheduled maturity date, the Company has classified these borrowings at
September 30, 2006 as long-term.
During the first nine months of 2006, the Company issued 14,000 shares of
common stock upon the exercise of outstanding stock options with proceeds of
$56,780.
(7)
Note 5-- Non-Recurring Charge
In the quarter ended September 30, 2005, the Company accrued a charge of
$1.5 million related to the estimated costs to demolish the Company's former
manufacturing facility located in Bridgeport, CT, and to remove certain
environmentally hazardous material contained in the buildings to be demolished.
The estimated costs were based on a third party contractor's estimate. During
the third quarter 2006, demolition of the buildings was completed and the
Company is currently exploring its options to sell the property.
As of September 30, 2006, the Company had approximately $275,000 remaining
in its accrual for demolition costs for the former manufacturing facility, which
the Company expects to pay during the fourth quarter of 2006. Please refer to
Company's Annual Report on Form 10-K for the year ended December 31, 2005 for a
more detailed discussion.
Note 6-- 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 include:
(1) United States; (2) Canada and (3) Europe. The activities of the Company's
Asian operating segment are closely linked to those of the U.S. operating
segment; consequently, management reviews the financial results of both segments
on a consolidated basis. Therefore, the results of the Asian operating segment
have been aggregated with the results of the United States operating segment to
form one reportable segment called the "United States" operating segment herein.
The determination of reportable segments is based on the guidance set forth in
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Each reportable segment derives its revenue from the sales of
cutting devices, measuring instruments and safety products for school, office,
home and industrial use.
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 Nine months ended
September 30 September 30
Sales to external customers: 2006 2005 2006 2005
------------- ------------- ------------- -------------
United States $ 11,999 $ 10,608 $ 34,916 $ 30,466
Canada 1,964 1,746 5,876 5,297
Europe 1,569 1,046 3,983 3,124
------------- ------------- ------------- -------------
Consolidated $ 15,532 $ 13,400 $ 44,774 $ 38,887
============= ============= ============= =============
Operating Income:
United States $ 2,070 $ 396 $ 5,797 $ 3,375
Canada 193 130 583 452
Europe (145) (19) (536) (24)
------------- ------------- ------------- -------------
Consolidated $ 2,118 $ 507 $ 5,844 $ 3,803
============= ============= ============= =============
September 30 December 31
Assets by segment 2006 2005
------------- -------------
United States $ 28,481 $ 21,735
Canada 6,174 3,900
Europe 4,069 2,559
------------- -------------
Consolidated $ 38,724 $ 28,194
============= =============
(8)
Note 7 - Stock Based Compensation
Effective January 1, 2006, the Company adopted the provisions of, and
accounted for stock-based compensation in accordance with, the Financial
Accounting Standards Board's ("FASB") Statement of Financial Accounting
Standards No. 123--revised 2004 ("SFAS 123R"), "Share-Based Payment" which
replaced Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees." Under the fair value
recognition provisions of SFAS 123R, stock-based compensation cost is measured
at the grant date based on the fair value of the award and is recognized as
expense over the requisite service period, which is generally the vesting
period. The Company adopted SFAS 123R using the modified-prospective methods,
under which prior periods are not restated for comparative purposes. The
valuation provisions of SFAS 123R apply to new grants and any grants that were
outstanding as of the effective date and are subsequently modified. Estimated
compensation for grants that were outstanding as of the effective date will be
recognized over the remaining service period using the compensation cost
estimated for pro forma disclosures.
The Company uses the Black-Scholes option pricing model to determine the
fair value of employee and non-employee director stock options. The
determination of the fair value of stock-based payment awards on the date of
grant, using an option-pricing model, is affected by our stock price as well as
assumptions regarding a number of complex and subjective variables. These
assumptions include estimating the length of time employees will retain their
vested stock options before exercising them ("expected term"), the estimated
volatility of the Company's common stock price over the expected term
("volatility") and the number of options that will not fully vest in accordance
with applicable vesting requirements ("forfeitures").
The Company estimates the expected term of options granted by evaluating
various factors including the vesting period, historical employee information as
well as current and historical stock prices and market conditions. The Company
estimates the volatility of its common stock by calculating historical
volatility based on the closing stock price on the last day of each of the
forty-eight months leading up to the month the option was granted. The risk-free
interest rate that the Company uses in the option valuation model is the
interest rate on U.S. Treasury zero-coupon issues with remaining terms similar
to the expected term of the options granted. Historical information was the
basis for calculating the dividend yield. The Company is required to estimate
forfeitures at the time of grant and to revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. The Company used a
mix of historical data and future assumptions to estimate pre-vesting option
forfeitures and to record stock-based compensation expense only for those awards
that are expected to vest. All stock-based payment awards are amortized over the
requisite service periods of the awards, which are generally the vesting
periods. In the third quarter of 2006, the Company modified its vesting schedule
for new grants. Grants issued after June 30, 2006 vest at a rate of 25% one day
after the first anniversary of the grant date and 25% one day after each of the
next three anniversaries. Options granted prior to July 1, 2006 vest at a rate
of 25% one day after the date of grant and 25% on the day after the anniversary
of the grant date in each of the next three years.
The assumptions used to value option grants for the three and nine months
ended September 30, 2006 and September 30, 2005 are as follows:
Three months ended Nine months ended
September 30 September 30
----------------------------------- ----------------------------------
2006 2005 2006 2005
----------------- ----------------- ----------------- -----------------
Expected life in years 5 5 4-5 5
Interest rate 4.91% 4.15% 4.32 - 4.91% 3.72 - 3.90%
Volatility 0.33 0.35 .33 - .34 0.35 - 0.39
Dividend yield 0.80% 0.70% 0.80 - 0.90% 0.70%
(9)
Total stock-based compensation recognized on the Company's consolidated
statement of operations for the three and nine months ended September 30, 2006
is $48,313 and $221,685, respectively. As of September 30, 2006, there was
approximately $423,967 of unrecognized compensation cost, adjusted for estimated
forfeitures, related to non-vested stock-based payments granted to the Company's
employees. As of September 30, 2006, the remaining unamortized expense is
expected to be recognized over a weighted average period of 1.9 years.
The pro forma effects of recognizing the estimated fair value of
stock-based compensation for the three and nine months ended September 30, 2005
has been disclosed previously in the Company's footnotes under provisions of
SFAS 123. The previously-disclosed pro forma information, as adjusted to reflect
a 36 month, instead of a 48 month option vesting schedule, is presented below.
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
------------------ ------------------
Net income, as reported $ 200,101 $ 2,164,000
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related income tax effects
------------------ ------------------
Pro forma net income $ 151,767 $ 1,863,962
================== ==================
Net income per share:
Basic-as reported $ 0.06 $ 0.62
Basic-pro forma $ 0.04 $ 0.53
Diluted-as reported $ 0.05 $ 0.57
Diluted-pro forma $ 0.04 $ 0.49
Note 8 - Comprehensive Income
Comprehensive income for the three and nine months ended September 30, 2006
and September 30, 2005 consisted of the following:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- --------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net Income 1,225 200 3,490 2,164
Other comprehensive (loss) income -
Foreign currency translation (31) 269 192 173
Change in fair value of derivative financial instrument (2) 55
------------ ------------ ------------ ------------
Comprehensive income $ 1,194 $ 467 $ 3,683 $ 2,392
============ ============ ============ ============
(10)
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, 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. See the more detailed discussion of such factors which is
set forth in Item 1A "Risk Factors", of Part 1 of the Company's Form 10-K. 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, 2005, except
as follows:
Accounting for Stock-Based Compensation. In the first quarter of 2006, the
Company began accounting for stock-based compensation in accordance with the
fair value recognition provisions of Statement of Financial Accounting Standards
No. 123R. ("SFAS 123R") The Company uses the Black-Scholes option - pricing
model, which requires the input of subjective assumptions. These assumptions
include estimating the length of time employees will retain their vested stock
options before exercising them ("expected term"), the estimated volatility of
the Company's common stock price over the expected term ("volatility") and the
number of options that will ultimately not complete their vesting requirements
("forfeitures"). Changes in the subjective assumptions can materially affect the
estimate of fair value stock-based compensation and, consequently, the related
amount recognized on the consolidated statements of operations. Refer to Note 7
"Stock Based Compensation" in the Notes to Condensed Consolidated Financial
Statements in this report for a more detailed discussion of the effects of SFAS
123R on our results of operations and financial condition.
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 back-to-school season. Consolidated net sales for the
three months ended September 30, 2006 were $15,532,000 compared with $13,400,000
in the same period of 2005, a 16% increase. Consolidated net sales for the nine
months ended September 30, 2006 were $44,774,000, compared with $38,887,000 for
the same period in 2005, a 15% increase (14% at constant currency). Net sales
for the three months ended September 30, 2006 in the U.S. operating segment
increased 13%. Net sales in the European and Canadian operating segments
increased 50% (43% at constant currency) and 12% (5% at constant currency),
respectively. Net sales for the nine months ended September 30, 2006 in the
U.S., European and Canadian operating segments increased 15%, 27% (29% at
constant currency) and 11% (2% at constant currency), respectively. The increase
in the U.S. segment is the result of sales initiatives with several major
retailers and superstores, entry into the pencil sharpener market and market
share gains. Sales in Europe were positively impacted by new sales to a large
pan-European superstore and an expanded product line with a major European
retailer.
(11)
Gross Profit
Gross profit for the three months ended September 30, 2006 was $6,624,000
(42.6% of net sales) compared to $6,166,000 (46.0% of net sales) for the same
period in 2005. Gross profit for the nine months ended September 30, 2006 was
$19,604,000 (43.8% of net sales), compared to $17,758,000 (45.7% of net sales)
in the same period of 2005. The lower margins for the three and nine months
ended September 30, 2006 are primarily the result of higher sales of items in
the highly competitive back to school market and the introduction of new private
label programs in the U.S. and Europe, which yield lower margins. Also
contributing to the decline were expedited freight costs and other expenses
associated with the new business in Europe.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months
ended September 30, 2006 were $4,506,000 (29.0% of net sales), compared with
$4,159,000 (31.0% of net sales) for the same period in 2005, an increase of
$347,000. SG&A expenses for the nine months ended September 30, 2006 were
$13,760,000 (30.7% of net sales) compared with $12,455,000 (32.0% of net sales)
in the comparable period of 2005. The increases in SG&A expenses for the three
and nine months ended September 30, 2006 are primarily the result of the
addition of sales, marketing, logistics and quality control personnel and higher
sales commissions and freight costs associated with higher sales. SG&A expense
includes stock compensation of $48,313 and $221,685 for the three and nine
months ended September 30, 2006, respectively.
Operating Income
Operating income for the three months ended September 30, 2006 was
$2,118,000, compared with $507,000 in the same period of 2005. Operating income
for the nine months ended September 30, 2006 was $5,844,000, as compared to
$3,803,000 in the same period of 2005; operating income in the U.S. segment for
the three and nine months ended September 30, 2006 increased by $1,674,000 and
$2,422,000, respectively. Excluding the $1,500,000 non-recurring charge in the
third quarter of 2005, operating income for the three and nine months ended
September 30, 2005 increased by $174,000 and $922,000, respectively; operating
income in Canada for the three and nine months ended September 30, 2006
increased by $63,000 and $131,000 or 49% and 29%, respectively, due to improved
gross margins. The European operating loss increased during the three and nine
months ended September 30, 2006 by $126,000 and $512,000, respectively,
primarily due to expedited freight costs and other expenses associated with the
launch of the new customer programs.
Interest Expense
Interest expense for the three months ended September 30, 2006 was
$207,000, compared with $83,000 for the same quarter of 2005, an increase of
$124,000. Interest expense for the nine months ended September 30, 2006 was
$462,000, as compared to $139,000 for the same period in 2005. The increases in
interest expense were primarily the result of higher borrowings under the
Company's bank revolving credit facility to fund inventory purchases, and to
demolish a former manufacturing site, and a higher applicable LIBOR interest
rate.
Other (Income) Expense, Net
Net other income was $35,000 in the third quarter of 2006 compared to net
other expense of $86,000 in the third quarter of 2005. Net other income was
$149,000 in the first nine months of 2006 compared to net other expense of
$232,000 in the first nine months of 2005. The change to income in the 2006
periods, from expense in the 2005 periods are primarily due to increased gains
from foreign currency transactions in the first nine months of 2006 compared to
losses from foreign currency transactions in the first nine months of 2005.
(12)
Income Taxes
The effective tax rate in the first nine months of 2006 and 2005 was 37%.
Financial Condition
Liquidity and Capital Resources
The Company's working capital, current ratio and long-term debt to equity ratio
follow:
September 30, 2006 December 31, 2005
---------------------------------------
Working capital $ 26,721,458 $ 16,325,098
Current ratio 4.44 3.17
Long term debt to equity ratio 68.4% 39.7%
During the first nine months of 2006, total debt outstanding under the
Company's modified revolving loan agreement increased by $6,473,000 compared to
total debt at December 31, 2005, principally as a result of the buildup of
inventory in anticipation of future business and payments associated with the
demolition of the Company's former manufacturing site located in Bridgeport, CT
(approximately $1.2 million). Also contributing to the increased borrowing was a
reduction in cash flow which resulted from the extended payment terms granted to
customers as part of the Company's Back to School program. Payments for sales of
product during that program are generally due October 1. Refer to Note 5
"Non-Recurring Charges" in the Notes to Condensed Consolidated Financial
Statements in this report for further information regarding the demolition of
the Company's former manufacturing facility.
On March 6, 2006, the Company modified its Revolving Loan Agreement (the
"Modified Loan Agreement") with Wachovia Bank. The amendments include an
increase in the maximum borrowing amount from $10 million to $15 million; an
extension of the maturity date from September 30, 2007 to June 30, 2009; a
decrease in the interest rate to LIBOR plus 1% from LIBOR plus 1.5%, as well as
the relaxation of certain covenant restrictions. Funds borrowed under the
Modified Loan Agreement will be used for working capital, general operating
expenses and other purposes. As of September 30, 2006, $12,018,000 was
outstanding and $2,982,000 was available for borrowing under the Modified Loan
Agreement. The remaining estimated demolition costs of approximately $275,000
related to the former manufacturing site will be paid with funds to be borrowed
under the Modified Loan Agreement.
The Company anticipates that cash generated from operating activities,
together with funds available under the Modified Loan Agreement, are expected,
under current conditions, to be sufficient to finance the Company's planned
operations over the next twelve months.
(13)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Continued
Recently Issued Accounting Standards
In September 2006, FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires an
employer to recognize the over-funded or under-funded status of a defined
benefit postretirement plan (other than a multi-employer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. SFAS 158 also requires the measurement of defined benefit plan assets
and obligations as of the date of the employer's fiscal year-end statement of
financial position (with limited exceptions). SFAS 158 is effective for the
fiscal year ending after December 15, 2006. The Company is currently evaluating
the impact SFAS 158 will have on our consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109 ("FIN
48"), which clarifies the accounting for uncertainty in income tax positions.
This Interpretation requires that the Company recognize in the consolidated
financial statements the impact of a tax position that is more likely than not
to be sustained upon examination based on the technical merits of the position.
The provisions of FIN 48 will be effective as of the beginning of the Company's
2007 fiscal year. The Company is currently evaluating the impact of adopting FIN
48 on the consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," to clarify that abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage) should
be recognized as current period charges, and that fixed production overhead
costs should be allocated to inventory based on normal capacity of production
facilities. This statement is effective for the Company's fiscal year 2006. The
adoption of this standard has not had a material effect on its financial
position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There are no material changes in market risks as disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2005.
Item 4. Controls and Procedures
(a) Evaluation of Internal Controls and Procedures
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, as of September 30, 2006, our disclosure controls and procedures
were 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 Control over Financial Reporting
During the quarter ended September 30, 2006, there were no changes in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, this internal control.
(14)
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
The Company is involved from time to time in disputes and other litigation
in the ordinary course of business, including certain environmental and other
matters. The Company presently believes that none of these matters, individually
or in the aggregate, would be likely to have a material adverse impact on its
financial position, results of operations, or liquidity from these matters.
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, 2005.
Item 2 -- Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
None.
Item 5 -- Other Information
None.
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 of Walter C. Johnsen pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Paul G. Driscoll pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(15)
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: November 7, 2006
By /s/ PAUL G. DRISCOLL
------------------------------
Paul G. Driscoll
Vice President and
Chief Financial Officer
Dated: November 7, 2006
(16)