acme_10k123109.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.   20549
FORM 10-K

[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
OR
              
[     ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 01-07698
ACME UNITED CORPORATION
 Exact name of registrant as specified in its charter

 
 Connecticut  06-0236700
 (State or other jurisdiction of  (I.R.S. Employer
 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

Securities registered pursuant to Section 12(b) of the Act:
 
  Name of each exchange on
Title of each class which registered
$2.50 par value Common Stock NYSE Amex
 
Securities registered pursuant to Section 12 (g) of the Act:  None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
YES  [     ]   NO  [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  
YES  [     ]   NO  [ X ]
 
Indicate by check mark whether the registrant (l) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
YES  [ X ]    NO  [     ]


1


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 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  [     ]  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 ]
 
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was $21,960,360. Registrant had 3,174,109 shares of its $2.50 par value Common Stock outstanding as of March 2, 2010.

Documents Incorporated By Reference

(1) Certain portions of the Company’s Proxy Statement for the Annual Meeting scheduled for April 19, 2010 is incorporated into the Company’s 2009 Annual Report on Form 10-K, Part III.



2


 
 
  
Page
 
 Part I
  
   
     
        Item 1.    Business
  
4
 
     
        Item 1A.  Risk Factors
  
6
 
     
        Item 1B.  Unresolved Staff Comments
  
8
 
     
        Item 2.     Properties
  
9
 
     
        Item 3.    Legal Proceedings
  
9
 
     
        Item 4.    Reserved
  
9
 
     
 Part II
  
   
     
        Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
10
 
     
        Item 6.   Selected Financial Data
  
12
 
     
        Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
12
 
     
        Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
  
16
 
     
        Item 8.  Financial Statements and Supplementary Data
  
17
 
     
        Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
  
35
 
     
        Item 9A(T).  Controls and Procedures
  
35
 
       
        Item 9B.  Other Information
 
35
 
     
 Part III
  
   
     
        Item 10.  Directors, Executive Officers and Corporate Governance
  
36
 
     
        Item 11.  Executive Compensation
  
37
 
     
        Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
37
 
     
        Item 13.  Certain Relationships and Related Transactions, and Director Independence
  
37
 
     
        Item 14.  Principal Accountant Fees and Services
  
38
 
     
 Part IV
  
   
     
        Item 15.  Exhibits and Financial Statement Schedules
  
38
 
       
 Schedule II – Valuation and Qualifying Accounts
  
 
     
 Signatures
  
41
 

3


PART I
Item 1.  Business

General
Acme United Corporation (together with its subsidiaries, the "Company") was organized as a partnership in l867 and incorporated in l882 under the laws of the State of Connecticut.  The Company is a leading worldwide supplier of innovative cutting, measuring and safety products to the school, home, office, hardware and industrial markets.  The Company's operations are in the United States, Canada, Europe (located in Germany) and Asia (located in Hong Kong and China).  The operations in the United States, Canada and Europe are primarily involved in product development, marketing, sales, administrative and distribution activities.  The operations in Asia consist of sourcing, product development, production planning, quality control and sales activities.  Net sales in 2009 were: United States (including Asia) - $44.9 million, Canada - $7.0 million, and Europe - $7.2 million.

The Company has grouped its operations into three reportable segments based on the Company’s geographical organization and structure: (1) United States (which includes its Asian operations); (2) Canada and (3) Europe.  Refer to Note 10 of the Notes to Consolidated Financial Statements for additional segment information.

Business Strategy

The Company’s business strategy includes the following key elements:

·
a commitment to technological innovation achieved through consumer insight, creativity and speed to market;
·
a broad selection of products in both brand and private label;
·
prompt response and same-day shipping;
·
superior customer service; and
·
value pricing.

Principal Products

The Company markets and sells under four main brands - Westcott®, Clauss®,  Camillus® and PhysiciansCare®.

Cutting
Principal products within the cutting device category are scissors, shears, guillotine paper trimmers, rotary paper trimmers, rotary cutters, knives, hobby knives and blades, utility knives, manicure products, medical cutting instruments and pencil sharpeners. Products introduced in 2008 and 2009 included  Westcott Ultra Soft Handle anti-microbial scissors, True Professional™ sewing shears as well as a line of iPoint® pencil sharpeners utilizing the Company’s proprietary non-stick coating. The Company also added to its KleenEarth® family of recycled products by modifying the production process to allow for multi-colored products as opposed to the traditional black. Two years ago, the Company acquired the patents and intellectual property of Camillus Cutlery, the oldest knife company in the United States and in 2009, launched a new family of knives with proprietary designs and high performance titanium carbonitride coatings. Also, in 2008 the Company began shipping the Clauss Speedpak utility knife with replaceable cartridges.

Measuring
Principal products within the measuring instrument category are rulers, math tools and tape measures. Products introduced in 2009 included Westcott branded erasers, compasses and protractors. Products introduced in 2008 included Westcott anti-microbial rulers and math kits.

Safety
Principal products within the safety product category are first aid kits, personal protection products and over-the-counter medication refills.  Products introduced in 2009 included PhysiciansCare Emergency Care Responder Kits, Flu Care Kits and a line of safety products with Microban. Products introduced in 2008 included PhysiciansCare Ready Care Kits and Triage First Aid Stations.

4

 
Product Development
 
Our strong commitment to understanding our consumers and defining products that fulfill their needs through innovation drives our product development strategy, which we believe is and will be a key contributor to our success. The Company incurred research and development costs of $440,378 in 2009 and $529,685 in 2008.
 
Intellectual Property
 
The Company has many patents and trademarks that are important to its business. The Company’s success depends in part on its ability to maintain patent protection for its products, to preserve its proprietary technology and to operate without infringing upon the patents or proprietary rights of others. The Company generally files patent applications in the United States and foreign countries where patent protection for its technology is appropriate and available.  The Company also considers its trademarks important to the success of its business. The more significant trademarks include Westcott, Clauss, Camillus and PhysiciansCare.
 
Product Distribution

Independent manufacturer representatives and direct sales are primarily used to sell the Company’s line of consumer products to wholesale, contract and retail stationery distributors, office supply super stores, school supply distributors, industrial distributors, wholesale florists, mass market retailers and hardware chains.  In 2009, the Company had one customer that individually exceeded 10% of consolidated net sales and three customers that individually exceeded 10% of consolidated net sales in 2008. Net sales to these customers amounted to approximately 20% in 2009, 19%, 12% and 10% in 2008.  Sales to no other customer exceeded 10% of consolidated net sales in 2009 and 2008.

Competition

The Company competes with many companies in each market and geographic area.  The major competitor in the cutting category is Fiskars Corporation.  The major competitor in the measuring category is Helix International Ltd. The major competitor in the safety category is Johnson and Johnson.

Seasonality

Traditionally, the Company’s sales are stronger in the second and third quarters of the fiscal year due to the seasonal nature of the back-to-school business.
 
Compliance with Environmental Laws

The Company believes that it is in compliance with applicable environmental laws.  The Company believes that there are no environmental matters that could have a significant financial impact. The Company believes that no major adverse financial impact is expected to result from compliance with current environmental rules and regulations.  In December 2008, the Company sold property it owned in Bridgeport, CT. Under the terms of the sales agreement, the Company is responsible for environmental remediation on the property in accordance with the Connecticut Transfer Act. Please refer to Note 16 of the Notes to Consolidated Financial Statements for additional information regarding the sale of the Bridgeport property.

Employees

As of December 31, 2009, the Company employed 134 people, all of whom are full time and none of whom is covered by union contracts. Employee relations are considered good and no foreseeable problems with the work force are evident.

5

 
Available Information
 
The Company files its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the SEC electronically. The public may read or copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 on official business days during the hours of 10:00 a.m. and 3:00 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
 
You may obtain a free copy of the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the Company’s website at http://www.acmeunited.com or by contacting the Investor Relations Department at the Company’s corporate offices by calling (203) 254-6060. Such reports and other information are made available as soon as reasonably practicable after such material is filed with or furnished to the SEC.

Item 1A.  Risk Factors

The Company is subject to a number of significant risks that might cause the Company’s actual results to vary materially from its forecasts, targets or projections, including:

·
achieving planned revenue and profit growth in each of the Company's business segments;

·
changes in customer requirements and in the volume of sales to principal customers;

·
the timing of orders and shipments;

·
emergence of new competitors or consolidation of existing competitors; and

·
industry demand fluctuations.

The Company’s expectations for both short- and long-term future net revenues are based on the Company’s estimates of future demand. Orders from the Company’s principal customers are ultimately based on demand from end-users and end-user demand can be difficult to predict. Low end-user demand would negatively affect orders the Company receives from distributors and other principal customers which could, in turn adversely affect the Company’s revenues in any fiscal period. If the Company’s estimates of sales are not accurate and the Company experiences unforeseen variability in its revenues and operating results, the Company may be unable to adjust its expense levels accordingly and its profit margins could be adversely affected.

A number of the Company’s products are sold through distributors and large retailers. No assurances can be given that any or all of such distributors or retailers will continue their relationships with the Company. Distributors and other significant retail customers cannot easily be replaced and the loss of revenues and the Company’s inability to reduce expenses to compensate for the loss of revenues could adversely affect the Company’s net revenues and profit margins.

Adverse conditions in the global economy and disruption of financial markets could negatively impact our ability to obtain financing.
Financial markets in the United States, Europe and Asia have experienced significant disruption during 2009, including, among other things, reduced consumer spending, fluctuations in foreign currency exchange rates, significant volatility in security prices, severely diminished liquidity and credit availability, and declines in asset valuation. While currently these conditions have not impaired our ability to access credit markets and finance our operations, there can be no assurance that any deterioration in financial markets in major economies will not have an impact on the Company’s ability to finance its operation.

The ongoing uncertainty in the global economy could negatively impact our business.
The ongoing uncertainty in the global economy could adversely affect our customers and our suppliers and businesses such as ours. In addition, the uncertainty could have a variety of negative effects on the Company such as reduction in revenues, increased costs, lower gross margin percentages, increased allowances for doubtful accounts and/or write-offs of accounts receivable and could otherwise have material adverse effects on our business, results of operations, financial condition and cash flows.

6

 
Loss of a major customer could result in a decrease in the Company’s future sales and earnings.
In 2009, the Company had one customer that individually exceeded 10% of consolidated net sales and three customers in 2008 that individually exceeded 10% of consolidated net sales. Net sales to these customers amounted to approximately 20% in 2009 and 19%, 12% and 10% in 2008. The Company anticipates that a limited number of customers may account for a substantial portion of its total net revenues for the foreseeable future. The loss of a major customer or a disruption in sales to such a customer could result in a decrease of the Company’s future sales and earnings.

Reliance on foreign suppliers could adversely affect the Company’s business.
The Company purchases the majority of its products from foreign manufacturing partners and, as a result, its business is exposed to risks due to:
·
Increases in transportation costs;
·
New or increased import duties;
·
Transportation delays;
·
Work stoppages;
·
Capacity constraints;
·
Poor quality; and
·
Inflation and exchange rate fluctuations that could increase the cost of foreign manufactured goods.

The loss of key management could adversely affect the Company’s ability to run its business.
The Company’s success depends, to a large extent, on the continued service of its executive management team, operating officers and other key personnel. The Company must therefore continue to recruit, retain and motivate management and operating personnel sufficient to maintain its current business and support its projected growth.

The Company’s inability to meet its staffing requirements in the future could adversely affect its results of operations.

Failure to protect the Company’s proprietary rights or the costs of protecting these rights could adversely affect its business.
The Company’s success depends in part on its ability to obtain patents and licenses and to preserve other intellectual property rights covering its products and processes. The Company obtained certain domestic and foreign patents, and intends to continue to seek patents on its inventions when appropriate. The process of seeking patent protection can be time consuming and expensive. There can be no assurance that pending patents related to any of the Company’s products will be issued, in which case the Company may not be able to legally prevent others from producing similar and/or compatible competing products. If other companies were to sell similar and/or compatible products, the Company’s results of operations could be adversely affected. Furthermore, there can be no assurance that the Company’s efforts to protect its intellectual property will be successful. Any infringement of the Company’s intellectual property or legal defense of such action could have a material adverse effect on the Company.

The Company may need to raise additional capital to fund its operations.
The Company’s management believes that, under current conditions,  the Company’s current cash and cash equivalents, cash generated by operations, together with the borrowing availability under its revolving loan agreement with Wachovia Bank, will be sufficient to fund planned operations for the next twelve months. However, if the Company is unable to generate sufficient cash from operations, it may be required to find additional funding sources. If adequate financing is unavailable or is unavailable on acceptable terms, the Company may be unable to maintain, develop or enhance its operations, products and services, take advantage of future opportunities or respond to competitive pressures.

The Company may not be able to maintain or to raise prices in response to inflation and increasing costs.
Future market and competitive pressures may prohibit the Company from raising prices to offset increased product costs, freight costs and other inflationary items. The inability to pass these costs through to the Company’s customers could have a negative effect on its results of operations.

7

 
The Company is subject to intense competition in all of the markets in which it competes.
The Company’s products are sold in highly competitive markets. The Company believes that the principal points of competition in these markets are product innovation, quality, price, merchandising, design and engineering capabilities, product development, timeliness and completeness of delivery, conformity to customer specifications and post-sale support. Competitive conditions may require the Company to match or better competitors’ prices to retain business or market shares. The Company believes that its competitive position will depend on continued investment in innovation and product development, manufacturing and sourcing, quality standards, marketing and customer service and support. The Company’s success will depend in part on its ability to anticipate and offer products that appeal to the changing needs and preferences of our customers in the various market categories in which it competes. The Company may not have sufficient resources to make the investments that may be necessary to anticipate those changing needs and the Company may not anticipate, identify, develop and market products successfully or otherwise be successful in maintaining its competitive position. There are no significant barriers to entry into the markets for most of the Company’s products.
 
Product liability claims or regulatory actions could adversely affect the Company's financial results and reputation.
Claims for losses or injuries allegedly caused by some of the Company’s products arise in the ordinary course of its business. In addition to the risk of substantial monetary judgments, product liability claims or regulatory actions could result in negative publicity that could harm the Company’s reputation in the marketplace or the value of its brands. The Company also could be required to recall possible defective products, which could result in adverse publicity and significant expenses. Although the Company maintains product liability insurance coverage, potential product liability claims are subject to a deductible or could be excluded under the terms of the policy.

The Company’s business is subject to risks associated with seasonality which could adversely affect its cash flow, financial condition, or results of operations.
The Company’s business, historically, has experienced higher sales volume in the second and third quarters of the calendar year, when compared to the first and fourth quarters. The Company is a major supplier of products related to the “back-to-school” season, which occurs principally during the months of May, June, July and August. If this typical seasonal increase in sales of certain portions of the Company’s product line does not materialize, the Company could experience a material adverse effect on its business, financial condition and results of operations.

To compete successfully, the Company must develop and commercialize a continuing stream of innovative new products that create consumer demand.
The Company’s long-term success in the current competitive environment depends on its ability to develop and commercialize a continuing stream of innovative new products that create and maintain consumer demand. The Company also faces the risk that its competitors will introduce innovative new products that compete with the Company’s products. The Company’s strategy includes increased investment in new product development and increased focus on innovation. There are, nevertheless, numerous uncertainties inherent in successfully developing and commercializing innovative new products on a continuing basis, and new product launches may not provide expected growth results.

The Company is subject to environmental regulation and environmental risks.
The Company is subject to national, state, provincial and/or local environmental laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal and management of, certain materials and waste. These environmental laws and regulations also impose liability for the costs of investigating and cleaning up sites, and certain damages resulting from present and past spills, disposals, or other releases of hazardous substances or materials. Environmental laws and regulations can be complex and may change often. Capital and operating expenses required to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties. In addition, environmental laws and regulations, such as the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, in the United States impose liability on several grounds for the investigation and cleanup of contaminated soil, ground water and buildings and for damages to natural resources on a wide range of properties. For example, contamination at properties formerly owned or operated by the Company, as well as at properties it will own and operate, and properties to which hazardous substances were sent by the Company, may result in liability for the Company under environmental laws and regulations. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future could have a material adverse effect on the Company’s financial condition or results of operations. Refer to Note 16 – Sale of Property of the Notes to Consolidated Financial Statements for further discussion on the environmental costs related to the sale of property.

8

 
Item 1B. Unresolved Staff Comments

Not applicable to smaller reporting companies.
 
Item 2.  Properties
The Company is headquartered at 60 Round Hill Road, Fairfield, Connecticut in 7,500 square feet of leased space. The Company owns and leases manufacturing and warehousing facilities in the United States totaling 205,000 square feet, and leases 44,000 square feet of warehousing space in Canada. The Company also leases approximately 2,000 square feet of office space in Canada.  Distribution for Europe is presently being conducted at a 35,000 square foot facility owned by the Company in Solingen, Germany. The Company also leases office space in Hong Kong and Guangzhou, China.

Management believes that the Company's facilities, whether leased or owned, are adequate to meet its current needs and should continue to be adequate for the foreseeable future.

Item 3.  Legal Proceedings
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 its financial position, results of operations or liquidity.

Item 4.  Reserved
 
 

 

9

 

PART II
Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's Common Stock is traded on the NYSE Amex under the symbol "ACU". The following table sets forth the high and low sale prices on the NYSE Amex for the Common Stock for the periods indicated:

 
Year Ended December 31, 2009
 
High
   
Low
   
Dividends
Declared
 
Fourth Quarter
  $ 10.29     $ 8.11     $ .05  
Third Quarter
    9.30       7.82       .05  
Second Quarter
    8.24       6.53       .05  
First Quarter
    8.37       5.95       .05  
                         
 
Year Ended December 31, 2008
 
High
   
Low
   
Dividends
Declared
 
Fourth Quarter
  $ 12.30     $ 5.33     $ .05  
Third Quarter
    14.10       12.10       .05  
Second Quarter
    14.87       12.92       .04  
First Quarter
    14.40       12.60       .04  

As of March 3, 2010 there were approximately 1,225 holders of record of the Company's Common Stock.

 
Performance Graph
 
The graph compares the yearly cumulative total shareholder return on the Company’s Common Stock with the yearly cumulative total return of the following for the period 2005 to 2009: (a) the NYSE Amex Index and (b) a peer group of companies that, like the Company, (i) are currently listed on the NYSE Amex, and (ii) have a market capitalization of $30 million to $35 million.
 
The Company does not believe that it can reasonably identify a peer group of companies, on an industry or line-of-business basis, for the purpose of developing a comparative performance index.  While the Company is aware that some other publicly-traded companies market products in the Company’s line-of-business, none of these other companies provide most or all of the products offered by the Company, and many offer products or services not offered by the Company.  Moreover, some of these other companies that engage in the Company’s line-of-business do so through divisions or subsidiaries that are not publicly-traded.  Furthermore, many of these other companies are substantially more highly capitalized than the Company.  For these reasons, any such comparison would not, in the opinion of the Company, provide a meaningful index of comparative performance.
 
The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, the possible future performance of the Company’s Common Stock. [Missing Graphic Reference]
 
10

Graphic
 
 
Issuer Purchases of Equity Securities
 
During 2009, the Company announced a Common Stock repurchase program of 200,000 shares.  This program does not have an expiration date.  During the twelve months ended December 31, 2009, the Company repurchased 205,509 shares of its Common Stock at an average price of $8.46, of which 154,335 were purchased under a previously announced program and 51,174 were purchased under the program announced in 2009. As of December 31, 2009, there were 148,826 shares that may be purchased under this repurchase program announced in 2009.
 
Set forth in the table below is certain information regarding purchases of Common Stock by the Company during the quarter ended December 31, 2009.
 
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet be Purchased Under these Plans or Programs
October 1 - 31
   
                                     -
249,335
November 1 - 30
100,509
$8.65
100,509
148,826
December 1 - 31
   
                                     -
148,826
 
 
 
11 

 

Item 6.  Selected Financial Data
                             
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
                   
(All figures in thousands except per share data)
                   
                               
   
2009
   
2008
   
2007
   
2006
   
2005
 
                               
Net sales
  $ 59,149     $ 68,719     $ 63,173     $ 56,863     $ 49,947  
Net income
  $ 2,842     $ 4,467     $ 4,022     $ 3,886     $ 2,937  
Total assets
  $ 42,309     $ 45,424     $ 42,222     $ 35,021     $ 28,194  
Long-term debt, less current portion
  $ 9,154     $ 11,749     $ 10,187     $ 10,218     $ 5,577  
Net income
                                       
   Per share (Basic)
  $ 0.86     $ 1.28     $ 1.14     $ 1.11     $ 0.84  
   Per share (Diluted)
  $ 0.85     $ 1.24     $ 1.09     $ 1.05     $ 0.78  
Dividends per share
  $ 0.20     $ 0.18     $ 0.16     $ 0.12     $ 0.11  

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information
The Company may from time to time make written or oral “forward-looking statements” including statements contained in this report and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements of the Company’s plans, objectives, expectations, estimates and intentions, which are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, in addition to others not listed, could cause the Company’s actual results to differ materially from those expressed in forward looking statements: the strength of the domestic and local economies in which the Company conducts operations, the impact of current uncertainties in global economic conditions and the ongoing financial crisis affecting the domestic and foreign banking system and financial markets, including the impact on the Company’s suppliers and customers, 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.  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
The following discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.  The Company’s significant accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements. Certain accounting estimates are particularly important to the understanding of the Company’s financial position and results of operations and require the application of significant judgment by the Company’s management or can be materially affected by changes from period to period in economic factors or conditions that are outside the control of management.  The Company’s management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on historical operations, future business plans and projected financial results, the terms of existing contracts, the observance of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The following discusses the Company’s critical accounting policies and estimates.

Estimates.  Operating results may be affected by certain accounting estimates.  The most sensitive and significant accounting estimates in the financial statements relate to customer rebates, valuation allowances for deferred income tax assets, obsolete and slow moving inventories, potentially uncollectible accounts receivable, and accruals for income taxes.  Although the Company’s management has used available information to make judgments on the appropriate estimates to account for the above matters, there can be no assurance that future events will not significantly affect the estimated amounts related to these areas where estimates are required. However, historically, actual results have not been materially different than original estimates.

12

Revenue Recognition.  The Company recognizes revenue from the sales of its products when ownership transfers to the customers, which occurs either at the time of shipment or upon delivery based upon contractual terms with the customer.  The Company recognizes customer program costs, including rebates, cooperative advertising, slotting fees and other sales related discounts, as a reduction to sales.

Allowance for doubtful accounts.  The Company provides an allowance for doubtful accounts based upon a review of outstanding accounts receivable, historical collection information and existing economic conditions. The allowance for doubtful accounts represents estimated uncollectible accounts receivables associated with potential customer defaults on contractual obligations, usually due to potential insolvencies. The allowance includes amounts for certain customers where a risk of default has been specifically identified. In addition, the allowance includes a provision for customer defaults based on historical experience. The Company actively monitors its accounts receivable balances and its historical experience of annual accounts receivable write offs has been negligible.
 
Customer Rebates.  Customer rebates and incentives are a common practice in the office products industry. We incur customer rebate costs to obtain favorable product placement, to promote sell-through of products and to maintain competitive pricing. Customer rebate costs and incentives, including volume rebates, promotional funds, catalog allowances and slotting fees, are accounted for as a reduction to gross sales. These costs are recorded at the time of sale and are based on individual customer contracts. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when appropriate.
 
Obsolete and Slow Moving Inventory.  Inventories are stated at the lower of cost, determined on the first-in, first-out method, or market. An allowance is established to adjust the cost of inventory to its net realizable value. Inventory allowances are recorded for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions and specific identification of items, such as discontinued products. These estimates could vary significantly from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from expectations.
 
Income Taxes. Deferred income tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce deferred income tax assets to an amount that is more likely than not to be realized.
 
Intangible Assets.  Intangible assets with finite useful lives are recorded at cost upon acquisition and amortized over the term of the related contract, if any, or useful life, as applicable.  Intangible assets held by the Company with finite useful lives include patents and trademarks.  The weighted average amortization period for intangible assets at December 31, 2009 was 14 years.  The Company periodically reviews the values recorded for intangible assets to assess recoverability from future operations whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. At December 31, 2009 and 2008, the Company assessed the recoverability of its long-lived assets and believed that there were no events or circumstances present that would that would require a test of recoverability on those assets. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives. The net book value of the Company’s intangible assets increased to $1,863,648 as of December 31, 2009, from $1,845,391 as of December 31, 2008.
 
Pension Obligation. The pension benefit obligation is based on various assumptions used by third-party actuaries in calculating this amount.  These assumptions include discount rates, expected return on plan assets, mortality rates and other factors.  Revisions in assumptions and actual results that differ from the assumptions affect future expenses, cash funding requirements and obligations.  Our funding policy is to fund the Plan in accordance with the Internal Revenue Code and regulations.
 
These assumptions are reviewed annually and updated as required. The Company has a frozen defined benefit pension plan.   Two assumptions, the discount rate and the expected return on plan assets, are important elements of expense and liability measurement.
 
We determine the discount rate used to measure plan liabilities as of the December 31 measurement date. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. In estimating this rate, we look at rates of return on fixed-income investments of similar duration to the liabilities in the plan that receive high, investment grade ratings by recognized ratings agencies. Using these methodologies, we determined a discount rate of 5.06% to be appropriate as of December 31, 2009, which is a decrease of 1.13 percentage points from the rate used as of December 31, 2008. An increase of 1.0% in the discount rate would have decreased our plan liabilities as of December 31, 2009 by $0.2 million.
 
13

 
The expected long-term rate of return on assets considers the Company’s historical results and projected returns for similar allocations among asset classes. In accordance with generally accepted accounting principles, actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligation in future periods. For the U.S. pension plan, our assumption for the expected return on plan assets was 8.25% for 2009. For more information concerning these costs and obligations, see the discussion in Note 6 – Pension and Profit Sharing, in the Notes to the Company’s Consolidated Financial Statements.
 
Accounting for Stock-Based Compensation.  Stock based compensation cost is measured at the grant date fair value of the award and is recognized as expense over the requisite service period.  The Company uses the Black-Scholes option - pricing model to determine fair value of the awards, which involves certain 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 for which  vesting requirements will not be completed (“forfeitures”). Changes in the subjective assumptions can materially affect estimates of fair value stock-based compensation, and the related amount recognized on the consolidated statements of operations. Refer to Note 11 “Stock Option Plans” in the Notes to Consolidated Financial Statements in this report for a more detailed discussion.

Results of Operations 2009 Compared with 2008
 
Net Sales
 
Net sales decreased by $9,570,465 or 13.9% (17% in constant currency) in 2009 to $59,148,547 compared to $68,719,012 in 2008.  The U.S. segment sales decreased by $8,640,000 or 16.1% in 2009 compared to 2008.  Sales in Canada declined by $1,062,000 or 13.1% (6% in local currency) in 2009 compared to 2008.  European sales increased by $131,000 or 2% in U.S. dollars (8% in local currency) in 2009 compared to 2008.
 
The declines in net sales for the twelve months ended December 31, 2009 in the U.S. and Canadian segments were primarily due to a reduction in customer orders across all of our product lines as a result of the economic downturn.  The increase in net sales in Europe for the twelve months ended December 31, 2009 was primarily due to an increase in sales of manicure products, which include scissors, clippers and other related items.
 
Gross Profit
 
Gross profit was 37% of net sales in 2009 compared to 40% of net sales in 2008.  The gross margin decline for 2009 was primarily due to fixed costs spread over lower sales, the weaker Canadian dollar, which raised the cost of our products in our Canadian operating segment, and a product mix which consisted of a higher proportion of sales of our lower cost, lower margin products.

Selling, General and Administrative
 
Selling, general and administrative expenses were $19,046,864 in 2009 compared with $20,778,093 in 2008, a decrease of $1,731,229 or 8.3%.  SG&A expenses were 32% of net sales in 2009 compared to 30% in 2008.  The decrease in SG&A expenses was primarily related to the result of cost cutting initiatives, lower freight and commission costs as a result of lower sales and a lower impact from foreign currency translation as a result of a weaker Euro and Canadian dollar.
 
Operating Income
 
Operating income was $3,026,623 in 2009, compared with $6,878,794 in 2008, a decrease of $3,852,171.  Operating income in the U.S. segment declined by approximately $3,490,000. Operating income decreased in Canada by $371,000.  The declines in operating income for 2009 in the U.S. and Canadian segments are principally due to the lower sales and associated gross profits partially offset by lower selling, general and administrative costs. The European operating loss remained relatively constant compared to 2008.
 
14

 
Interest Expense, Net
 
Net interest expense for 2009 was $25,674, compared with $395,548 for 2008, a decrease of $369,874.  The decrease in interest expense, net was primarily the result of lower average interest rates under the Company’s bank revolving loan agreement combined with lower average borrowings.  The Company also received $118,550 of interest income related to the mortgage it holds on the Bridgeport property which it sold in 2008. Refer to Note 16 – Sale of Property, in the Notes to the Company’s Consolidated Financial Statements for further details related to the Bridgeport property.
 
Other Income, Net
 
Net other income was $452,005 in 2009 compared to $192,855 in 2008.  The increase in other income, net for 2009 was primarily related to a $460,000 benefit recorded for the change in estimated costs associated with the remediation of the Bridgeport property. Net other income in 2008 included a gain of $265,000 related to the sale of our Bridgeport property. Refer to Note 16 – Sale of Property, in the Notes to the Company’s Consolidated Financial Statements for further details related to the Bridgeport property.
 
Income Tax
 
The effective tax rate in 2009 was 18%, compared to 33% in 2008. The decrease in the effective tax rate for the year ended December 31, 2009 was primarily the result of approximately $500,000 of tax savings related to the Company’s donation of medical products to AmeriCares and the donation of land to the City of Bridgeport, CT. This donation of land, which occurred in December 2009, consisted of waterfront property adjacent to the property the Company sold in December 2008. Without these credits, the effective tax rate would have been approximately 32% for the year ended December 31, 2009.
 
Off-Balance Sheet Transactions

The Company did not engage in any off-balance sheet transactions during 2009.

Liquidity and Capital Resources

During 2009, the Company experienced the effects of the continuing global economic crisis. Demand for the Company’s products softened and sales and earnings were negatively impacted. In response, management took strong actions to control costs. Entering 2010, management believes that the market for its products is improving as sales in the fourth quarter of 2009 increased 7% over the same period in 2008.

During 2009, working capital decreased by approximately $0.9 million compared to December 31, 2008.  Inventory decreased by approximately $4.4 million principally due to the Company managing inventory levels to compensate for lower sales in the trailing twelve months ended December 31, 2009. Inventory turnover, calculated using a twelve month average inventory balance, decreased to 1.9 from 2.0 at December 31, 2008.

Receivables remained approximately the same at December 31, 2009 compared to December 31, 2008. The average number of days sales outstanding in accounts receivable was 61 days in 2009 compared to 64 days in 2008.
 
The Company's working capital, current ratio and long-term debt to equity ratio follow:
 
             
   
2009
   
2008
 
             
Working Capital
  $ 28,952,754     $ 29,819,680  
Current Ratio
    5.26       4.38  
Long-Term Debt to Equity Ratio
    37.3%       44.2%  
 
During 2009, total debt outstanding under the Company’s revolving credit facility, (referred to below) decreased by approximately $2.6 million compared to total debt at December 31, 2008. As of December 31, 2009, $9,154,000 was outstanding and $10,846,000 was available for borrowing under the revolving credit facility.
 
15


On January 26, 2010, the Company modified its revolving loan agreement with Wachovia Bank; the amendments include (a) a decrease in the maximum borrowing amount from $20 million to $18 million; (b) an extension of the maturity date of the loan from June 30, 2010 to February 1, 2012; (c) an increase in the interest rate to LIBOR plus 2% (from LIBOR plus 7/8%) and (d) modification of certain covenant restrictions.  Funds borrowed under the Modified Loan Agreement may be used for working capital, general operating expenses, share repurchases and certain other purposes.
 
Under the provisions of the Modified Loan Agreement, the Company, among other things, is restricted with respect to outside borrowings, investments and mergers.  Further, the Modified Loan Agreement requires the Company to maintain specific amounts of tangible net worth, a specified debt service coverage ratio and a fixed charge coverage ratio.  The Company was in compliance with all financial covenants under the revolving loan agreement as of and through December 31, 2009, and believes it will be able to continue to comply with these covenants under the Modified Loan Agreement for the remainder of the term of the credit facility.

Capital expenditures during 2009 and 2008 were $566,939 and $742,429, respectively, which were, in part, financed with debt.  Capital expenditures in 2010 are not expected to differ materially from recent years.

The Company believes that cash generated from operating activities, together with funds available under its current loan agreement, are expected, under current conditions, to be sufficient to finance the Company’s planned operations for the next twelve months.


Recently Issued Accounting Standards

In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC) 105, Generally Accepted Accounting Principles, which established the FASB Accounting Standards Codification as the sole source of authoritative generally accepted accounting principles. Pursuant to the provisions of the FASB ASC 105, the Company has updated references to GAAP in its financial statements. The adoption of FASB ASC 105 did not impact the Company’s financial position or results of operations.

In April 2009, the FASB issued authoritative guidance requiring publicly traded companies to include certain fair value disclosures related to financial instruments in their interim financial statements.  This guidance, which was incorporated into ASC Topic 825, “Financial Instruments,” was effective for interim periods ending after June 15, 2009.  The adoption did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued authoritative guidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.  This guidance, which was incorporated into ASC Topic 855, “Subsequent Events”, was effective for interim or annual financial periods ending after June 15, 2009. The adoption did not have any impact on the Company’s consolidated financial statements.


Item 7A. Quantitative and Qualitative Disclosure about Market Risk

Not applicable to smaller reporting companies.


16


Item 8. Financial Statements and Supplementary Data
       
             
Acme United Corporation and Subsidiaries
           
CONSOLIDATED STATEMENTS OF OPERATIONS
       
             
             
   
For the years ended
December 31,
 
   
2009
   
2008
 
             
Net sales
  $ 59,148,547     $ 68,719,012  
                 
Cost of goods sold
    37,075,060       41,062,125  
                 
Gross Profit
    22,073,487       27,656,887  
                 
Selling, general and administrative expenses
    19,046,864       20,778,093  
Operating income
    3,026,623       6,878,794  
                 
Non operating items:
               
Interest:
               
Interest expense
    (155,008 )     (497,308 )
Interest income
    129,334       101,760  
Interest expense, net
    (25,674 )     (395,548 )
Other income
    452,005       192,855  
Total other income (expense), net
    426,331       (202,643 )
Income before income tax expense
    3,452,954       6,676,101  
Income tax expense
    610,867       2,209,030  
Net income
  $ 2,842,087     $ 4,467,071  
                 
Earnings per share:
               
Basic
  $ 0.86     $ 1.28  
Diluted
  $ 0.85     $ 1.24  
                 
                 
See accompanying Notes to Consolidated Financial Statements.
         

  17

 
Acme United Corporation and Subsidiaries
           
CONSOLIDATED BALANCE SHEETS
           
   
December 31,
   
December 31,
 
   
2009
   
2008
 
ASSETS
           
Current assets:
           
   Cash and cash equivalents
  $ 6,519,065     $ 5,224,564  
   Accounts receivable, less allowance
    10,703,433       10,564,097  
   Inventories
    17,400,270       21,769,304  
   Deferred income taxes
    180,241       209,172  
   Prepaid expenses and other current assets
    952,946       879,222  
Total current assets
    35,755,955       38,646,359  
                 
Property, plant and equipment:
               
   Land
    171,660       167,003  
   Buildings
    2,558,572       2,515,641  
   Machinery and equipment
    8,169,641       7,454,662  
Total property, plant and equipment
    10,899,873       10,137,306  
Less: accumulated depreciation
    8,811,705       7,867,863  
Net plant, property and equipment
    2,088,168       2,269,443  
Note receivable
    1,891,604       2,000,000  
Intangible assets, less accumulated amortization
    1,863,648       1,845,391  
Deferred income taxes
    621,270       574,051  
Other assets
    88,828       88,828  
Total assets
  $ 42,309,473     $ 45,424,072  
                 
LIABILITIES
               
Current liabilities:
               
   Accounts payable
  $ 3,546,139     $ 3,668,689  
   Other accrued liabilities
    3,257,062       5,157,990  
Total current liabilities
    6,803,201       8,826,679  
Long-term debt
    9,154,000       11,719,000  
Other
    1,811,022       1,990,730  
Total liabilities
    17,768,223       22,536,409  
                 
STOCKHOLDERS' EQUITY
               
Common stock, par value $2.50: authorized 8,000,000
               
shares; issued - 4,313,024 shares in 2009 and  4,293,024 shares in 2008, including treasury stock
    10,782,555       10,732,555  
Treasury stock, at cost, 1,155,165 shares in 2009
               
    and 949,656 shares in 2008
    (10,144,325 )     (8,406,722 )
Additional paid-in capital
    4,208,112       3,906,000  
Accumulated other comprehensive loss
    (812,970 )     (1,663,361 )
Retained earnings
    20,507,878       18,319,191  
Total stockholders' equity
    24,541,250       22,887,663  
Total liabilities and stockholders' equity
  $ 42,309,473     $ 45,424,072  
                 
See accompanying Notes to Consolidated Financial Statements.
         

  18

 
Acme United Corporation and Subsidiaries
                         
                                           
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
             
                                           
                                           
   
Outstanding Shares of Common Stock
   
Common Stock
   
Treasury Stock
   
Additional Paid-In Capital
   
Accumulated Other Comprehensive Income (Loss)
   
Retained Earnings
   
Total
 
Balances, December 31, 2007
    3,552,883     $ 10,668,185     $ (5,929,999 )   $ 3,550,053     $ 285,842     $ 14,472,662     $ 23,046,743  
Net income
                                            4,467,071       4,467,071  
Translation adjustment
                                    (1,309,018 )             (1,309,018 )
Change in pension plan
                                                       
net prior service credit and
                                                       
actuarial losses, net of tax
                                                       
benefit of $373,575
                                    (640,185 )             (640,185 )
Comprehensive income
                                                    2,517,868  
Stock compensation expense
                            277,577                       277,577  
Tax benefit from exercise of
                                                       
employee stock options
                            9,928                       9,928  
Distribution to shareholders
                                            (620,542 )     (620,542 )
Issuance of common stock
    25,750       64,370               68,443                       132,813  
Purchase of treasury stock
    (235,265 )             (2,476,723 )                             (2,476,723 )
Balances, December 31, 2008
    3,343,368       10,732,555       (8,406,722 )     3,906,000       (1,663,361 )     18,319,191       22,887,663  
Net income
                                            2,842,087       2,842,087  
Translation adjustment
                                    709,421               709,421  
Change in pension plan
                                                       
net prior service credit and
                                                       
actuarial losses, net of tax
                                                       
of $82,218
                                    140,970               140,970  
Comprehensive income
                                                    3,692,478  
Stock compensation expense
                            308,337                       308,337  
Distribution to shareholders
                                            (653,400 )     (653,400 )
Issuance of common stock
    20,000       50,000               (6,225 )                     43,775  
Purchase of treasury stock
    (205,509 )             (1,737,603 )                             (1,737,603 )
Balances, December 31, 2009
    3,157,859     $ 10,782,555     $ (10,144,325 )   $ 4,208,112     $ (812,970 )   $ 20,507,878     $ 24,541,250  
                                                         
See accompanying Notes to Consolidated Financial Statements.
   

19

 
Acme United Corporation and Subsidiaries
           
CONSOLIDATED STATEMENTS OF CASH FLOW
           
             
   
For the years ended December 31,
 
   
2009
   
2008
 
Operating activities:
           
Net income
  $ 2,842,087     $ 4,467,071  
Adjustments to reconcile net income to net
               
cash provided by operating activities
               
Depreciation
    803,902       899,142  
Amortization
    113,987       108,828  
Stock compensation expense
    308,337       277,577  
Deferred income taxes
    (280,188 )     (213,353 )
Change in estimated cost of environmental remediation
    (457,379 )     -  
Gain on disposal of property, plant and equipment
    -       (260,984 )
Tax benefit on exercise of stock options
    -       9,928  
Changes in operating assets and liabilities
               
Accounts receivable
    49,438       1,842,262  
Inventories
    4,668,500       (3,473,436 )
Prepaid expenses and other current assets
    43,310       254,127  
Accounts payable
    (149,341 )     (854,450 )
Other accrued liabilities
    (1,361,210 )     208,919  
Total adjustments
    3,739,356       (1,201,439 )
Net cash provided by operating activities
    6,581,443       3,265,632  
Investing activities:
               
Purchase of property, plant and equipment
    (566,939 )     (742,429 )
Purchase of patents and trademarks
    (132,244 )     (295,339 )
Net cash used by investing activities
    (699,183 )     (1,037,767 )
Financing activities:
               
Net (repayments) borrowings of long-term debt
    (2,565,000 )     1,568,825  
Distributions to shareholders
    (662,547 )     (594,631 )
Purchase of treasury stock
    (1,737,603 )     (2,476,723 )
Issuance of common stock
    43,775       132,813  
Net cash used by financing activities
    (4,921,375 )     (1,369,716 )
Effect of exchange rate changes
    333,616       (621,574 )
Net change in cash and cash equivalents
    1,294,501       236,573  
Cash and cash equivalents at beginning of year
    5,224,564       4,987,991  
Cash and cash equivalents at end of year
  $ 6,519,065     $ 5,224,564  
                 
Supplemental cash flow information
               
          Cash paid for income taxes
  $ 1,334,358     $ 1,700,324  
          Cash paid for interest expense
  $ 165,092     $ 495,113  
                 
See accompanying Notes to Consolidated Financial Statements.
   

20

 
Acme United Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Operations

The operations of Acme United Corporation (the “Company”) consist of three reportable segments. The operations of the Company are structured and evaluated based on geographic location.  The three reportable segments operate in the United States (including Asian operations), Canada and Germany.  Principal products across all segments are scissors, shears, knives, rulers, pencil sharpeners, first aid kits, and related products which are sold primarily to wholesale, contract and retail stationery distributors, office supply super stores, school supply distributors, drug store retailers, industrial distributors, wholesale florists, mass market retailers and hardware chains.

2.  Accounting Policies

Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most sensitive and significant accounting estimates relate to customer rebates, valuation allowances for deferred income tax assets, obsolete and slow-moving inventories, potentially uncollectible accounts receivable and accruals for income taxes.  Actual results could differ from those estimates.

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned by the Company.  All significant intercompany accounts and transactions are eliminated in consolidation.

Translation of Foreign Currency - For foreign operations, assets and liabilities are translated at rates in effect at the end of the year; revenues and expenses are translated at average rates in effect during the year.  Resulting translation adjustments are made directly to accumulated other comprehensive loss.  Foreign currency transaction gains and losses are recognized in operating results.  Foreign currency transaction losses, which are included in other income, net, were $35,519 in 2009 and $101,355 in 2008.

Cash Equivalents - Investments with an original maturity of three months or less at the date of purchase are considered cash equivalents.

Accounts Receivable - Accounts receivable are shown less an allowance for doubtful accounts of $71,629 in 2009 and $64,105 in 2008.

Inventories - Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market.

Property, Plant and Equipment and Depreciation – Property, plant and equipment is recorded at cost.  Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which range from 3 to 30 years.

Intangible Assets– Intangible assets with finite useful lives are recorded at cost upon acquisition, and amortized over the term of the related contract or useful life, as applicable.  Intangible assets held by the Company with finite useful lives include patents and trademarks.  Patents and trademarks are amortized over their estimated useful lives.  The weighted average amortization period for intangible assets at December 31, 2009 was 14 years.  The Company periodically reviews the values recorded for intangible assets to assess recoverability from future operations whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.  At December 31, 2009 and 2008, the Company assessed the recoverability of its long-lived assets and believed that there were no events or circumstances present that would that would require a test of recoverability on those assets. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives.
 
Deferred Income Taxes - Deferred income taxes are provided for the differences between the financial statement and tax bases of assets and liabilities, and on operating loss carryovers, using tax rates in effect in years in which the differences are expected to reverse.

21

 
Revenue Recognition – The Company recognizes revenue from the sales of its products when ownership transfers to the customers, which occurs either at the time of shipment or upon delivery based upon contractual terms with the customer.  The Company recognizes customer program costs, including rebates, cooperative advertising, slotting fees and other sales related discounts, as a reduction to sales.
 
Research and Development – Research and development costs ($440,378 in 2009 and $529,685 in 2008) are expensed as incurred.

Shipping Costs – Shipping costs ($2,529,743 in 2009 and $3,073,673 in 2008) are included in selling, general and administrative expenses.
 
Advertising Costs – The Company expenses the production costs of advertising the first time that the related advertising takes place.  Advertising costs ($1,066,860 in 2009 and $1,159,462 in 2008) are included in selling, general and administrative expenses.

Subsequent events - The Company has evaluated events and transactions subsequent to December 31, 2009 through the date our consolidated financial statements were included in this Form 10-K and filed with the SEC.
 
Concentrations – The Company performs ongoing credit evaluations of its customers and generally does not require collateral for the extension of credit. Allowances for credit losses are provided and have been within management's expectations.  In 2009, with respect to concentration risk related to accounts receivable, the Company had one customer that accounted for greater than 10% of total net receivables.  In 2009, the Company had one customer that individually exceeded 10% of consolidated net sales and three customers that individually exceeded 10% of consolidated net sales in 2008. Net sales to these customers amounted to approximately 20% in 2009, 19%, 12% and 10% in 2008.  Sales to no other customer exceeded 10% of consolidated net sales in 2009 and 2008.
 
3.  Inventories
           
Inventories consisted of:
 
2009
   
2008
 
Finished goods
  $ 16,337,034     $ 20,824,717  
Work in process
    97,297       21,151  
Materials and supplies
    965,939       923,436  
    $ 17,400,270     $ 21,769,304  
 
Inventories are stated net of valuation allowances for slow moving and obsolete inventory of $421,685 as of December 31, 2009 and $498,887 as of December 31, 2008.
 
4.  Intangible Assets
           
Intangible assets consisted of:
 
2009
   
2008
 
Patents
  $ 1,695,881     $ 1,577,580  
Trademarks
    534,058       520,115  
      2,229,939       2,097,695  
Accumulated amortization
    366,291       252,304  
    $ 1,863,648     $ 1,845,391  
 
Amortization expense for patents and trademarks for the years ended December 31, 2009, and 2008 were $113,987 and $108,828, respectively.   The estimated aggregate amortization expense for each of the next five succeeding years, calculated on a similar basis, is as follows:  2010 - $114,870; 2011 - $113,768; 2012 - $112,312; 2013 - $112,172; and 2014 - $100,406.

22

 
5.  Other Accrued Liabilities
           
Other current and long-term accrued liabilities consisted of:
 
   
2009
   
2008
 
Customer rebates
  $ 2,489,410     $ 2,506,807  
Remediation liability
    681,444       1,724,000  
Pension liability
    1,308,655       1,380,890  
Other
    588,575       1,537,022  
    $ 5,068,084     $ 7,148,720  
                 
The decline in other acccrued liabilities is primarily related to a decrease in income taxes payable.
 
 
6.  Pension and Profit Sharing

United States employees, hired prior to July 1, 1993, are covered by a funded, defined benefit pension plan.  The benefits of this pension plan are based on years of service and the average compensation of the highest three consecutive years during the last ten years of employment.  In December 1995, the Company's Board of Directors approved an amendment to the United States pension plan that terminated all future benefit accruals as of February 1, 1996, without terminating the pension plan.

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 2009, the Company contributed $107,740 to the plan and expects to contribute approximately $265,000 during 2010.

The plan asset weighted average allocation at December 31, 2009 and December 31, 2008, by asset category, were as follows:
 
Asset Category
2009
2008
Equity Securities
70%
67%
Fixed Income Securities
30%
30%
Other Securities / Investments
0%
3%
Total
100%
100%
 
The Company’s investment policy for the pension plan is to minimize risk by balancing investments between equity securities and fixed income securities, utilizing a weighted average approach of 65% equity securities, 30% fixed income securities, and 5% cash investments.  Plan funds are invested in long-term obligations with a history of moderate to low risk.

As of each December 31, 2009 and 2008, equity securities in the pension plan included 10,000 shares of the Company's Common Stock, having a market value of $91,993 and $70,500, respectively.

The pension plan asset information included below is presented at fair value. ASC 820 establishes a framework for measuring fair value and requires disclosures about assets and liabilities measured at fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

·
Level 1 – Inputs to the valuation methodology based on unadjusted quoted market prices in active markets that are accessible at the measurement date.
·
Level 2 – Inputs to the valuation methodology that include quoted market prices that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
·
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table presents the pension plan assets by level within the fair value hierarchy as of December 31, 2009.

23


   
Level 1
   
Level 2
   
Level 3
   
Total
 
Money Market Fund
  $ 9,595     $ -     $ -     $ 9,595  
Acme United Common Stock
    91,993       -       -       91,993  
Equity Common and Collected Funds
    -       779,225       -       779,225  
Fixed Income Common and Collected Funds
    -       365,728       -       365,728  
Total
  $ 101,588     $ 1,144,953     $ -     $ 1,246,541  

             
 Other disclosures related to the pension plan follow:
           
             
   
2009
   
2008
 
Assumptions used to determine benefit obligation:
           
  Discount rate
    5.06 %     6.19 %
Changes in benefit obligation:
               
Benefit obligation at beginning of year
  $ (2,641,926 )   $ (2,919,276 )
Interest cost
    (151,990 )     (175,481 )
Service cost
    (25,000 )     (25,000 )
Amendment
    -       (6,508 )
Actuarial loss
    (99,923 )     (159,484 )
Benefits and plan expenses paid
    363,643       643,823  
Benefit obligation at end of year
    (2,555,196 )     (2,641,926 )
                 
Changes in plan assets:
               
Fair value of plan assets at beginning of year
    1,261,036       2,632,142  
Actual return on plan assets
    241,408       (727,283 )
Employer contribution
    107,740       -  
Benefits and plan expenses paid
    (363,643 )     (643,823 )
Fair value of plan assets at end of year
    1,246,541       1,261,036  
Funded status
  $ (1,308,655 )   $ (1,380,890 )
                 
           
Accrued benefits costs are included in other accrued liabilities (non-current).
         
 
   
2009
   
2008
 
Assumptions used to determine net periodic benefit cost:
           
  Discount rate
    6.19 %     6.25 %
  Expected return on plan assets
    8.25 %     8.25 %
Components of net benefit expense:
               
Interest cost
  $ 151,990     $ 175,481  
Service cost
    25,000       25,000  
Expected return on plan assets
    (94,951 )     (202,570 )
Amortization of prior service costs
    9,154       8,612  
Amortization of actuarial loss
    167,500       71,310  
Net periodic benefit cost
  $ 258,693     $ 77,833  
 
24

 
The Company employs a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equity securities and fixed income securities are preserved consistent with the widely-accepted capital market principle that assets with higher volatility generate higher returns over the long run.   Our expected 8.25% long-term rate of return on plan assets is determined based on long-term historical performance of plan assets, current asset allocation and projected long-term rates of return.
 
The following table discloses the change recorded in other comprehensive income related to benefit costs:
 
   
2009
   
2008
 
             
Balance at beginning of the year
  $ 2,148,797     $ 1,132,874  
Change in net loss
    (46,534 )     1,089,337  
Amortization of actuarial loss
    (167,500 )     (71,310 )
Amortization of prior service cost
    (9,154 )     (8,612 )
     Change recognized in other comprehensive income
    (223,188 )     1,015,923  
Total recognized in other comprehensive income
  $ 1,925,609     $ 2,148,797  
 

Amounts recognized in Accumulated Other Comprehensive Income:
           
Net actuarial loss
  $ 1,867,972     $ 2,082,006  
Prior service cost
    57,637       66,791  
Total
  $ 1,925,609     $ 2,148,797  
 
In 2010, net periodic benefit cost will include approximately $150,000 of net actuarial loss and $9,000 of prior service cost.

The following benefits are expected to be paid:
 
2010
  $ 325,000  
2011
    307,000  
2012
    292,000  
2013
    273,000  
2014
    262,000  
Years 2015 - 2019
    1,028,000  
 
The Company also has a qualified, profit sharing plan covering substantially all of its United States employees. Annual Company contributions to this profit sharing plan are determined by the Company’s Compensation Committee.  For the years ended December 31, 2009 and 2008, the Company contributed 50% of employee’s contributions, up to the first 6% of each employee’s contribution.  Total contribution expense under this profit sharing plan was $99,882 in 2009 and $97,666 in 2008.
 
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7.  Income Taxes
           
The amounts of income tax expense (benefit) reflected in operations follow:
 
   
2009
   
2008
 
Current:
           
Federal
  $ 246,910     $ 1,403,689  
    State
    28,055       216,310  
    Foreign
    630,500       813,298  
      905,465       2,433,307  
                 
Deferred:
               
Federal
    (257,441 )     (200,126 )
    State
    (22,747 )     (12,911 )
    Foreign
    (14,410 )     (11,240 )
      (294,598 )     (224,277 )
    $ 610,867     $ 2,209,030  
 
The current state tax provision was comprised of taxes on income, the minimum capital tax and other franchise taxes related to the jurisdictions in which the Company's facilities are located.

A summary of United States and foreign income before income taxes follows:
 
   
2009
   
2008
 
United States
  $ 814,582     $ 3,373,597  
Foreign
    2,638,372       3,302,504  
    $ 3,452,954     $ 6,676,101  
 
The following schedule reconciles the amounts of income taxes computed at the United States statutory rates to the actual amounts  reported in operations.
 
   
2009
   
2008
 
Federal income
           
taxes at
           
34% statutory rate
  $ 1,174,004     $ 2,269,874  
State and local
               
taxes, net of
               
federal income
               
tax effect
    3,503       135,059  
Permanent items
    39,505       255,332  
Charitable Donations
    (345,099 )     -  
Foreign tax rate difference
    (494,861 )     (175,726 )
Change in deferred income tax
               
 valuation allowance
    233,815       (275,509 )
 Provision for income taxes
  $ 610,867     $ 2,209,030  
 
26

 
The following summarizes deferred income tax assets and liabilities:
 
   
2009
   
2008
 
Deferred income tax liabilities:
           
Plant, property
           
and equipment
  $ 356,726     $ 203,727  
      356,726       203,727  
                 
Deferred income tax assets:
               
Asset valuations
    122,921       209,172  
Contribution carryforward
    373,925       -  
Operating loss
               
carryforwards and credits
    1,850,929       1,617,114  
Pension
    576,114       561,964  
Foreign tax credit
    142,000       242,000  
Other
    85,277       115,814  
      3,151,166       2,746,064  
Net deferred
               
income tax asset before valuation allowance
    2,794,440       2,542,337  
Valuation
               
 allowance
    (1,992,929 )     (1,759,114 )
Net deferred
               
 income tax asset
  $ 801,511     $ 783,223  
 
In 2009, the Company evaluated its tax positions, for years which remain subject to examination by major tax jurisdictions, in accordance with the requirements of ASC 740 and as a result concluded no adjustment was necessary. The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company’s evaluation of uncertain tax positions was performed for the tax years ended December 31, 2006 and forward, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2009.

In accordance with the Company’s accounting policies, any interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
 
The Company provides deferred income taxes on foreign subsidiary earnings, which are not considered permanently reinvested.  Earnings permanently reinvested would become taxable upon the sale or liquidation of a foreign subsidiary or upon the remittance of dividends.  During 2009, the Company repatriated $1,000,000 of foreign earnings from its Canadian subsidiary. U.S. income taxes on those repatriated earnings have been offset by foreign tax credits. The Company plans to continue to repatriate future earnings of its Canadian subsidiary and will provide for U.S. income taxes accordingly.  Foreign subsidiary earnings of $7,220,529 and $5,729,313 are considered permanently reinvested as of December 31, 2009 and 2008, respectively, and no deferred income taxes have been provided on these foreign earnings.

Due to the uncertain nature of the realization of the Company's deferred income tax assets based on past performance and carry forward expiration dates, the Company has recorded a valuation allowance for the amount of deferred income tax assets which are not expected to be realized.  This valuation allowance is subject to periodic review, and if the allowance is reduced, the tax benefit will be recorded in future operations as a reduction of the Company's tax expense.

At December 31, 2009, the Company has tax operating loss carry forwards aggregating $6,078,072, all of which are applicable to Germany, and can be carried forward indefinitely.

27


8.  Debt
 
Long term debt consists of borrowings under the Company’s revolving loan agreement with Wachovia Bank. As of December 31, 2009, $9,154,000 was outstanding and $10,846,000 was available for borrowing under the Company’s revolving loan agreement.

Under the revolving loan agreement, the Company is required to maintain specific amounts of tangible net worth, a specified debt service coverage ratio, and a fixed charge coverage ratio.  The Company was in compliance with these financial covenants at December 31, 2009.

On January 26, 2010, the Company modified its revolving loan agreement with Wachovia Bank to amend certain provisions of the original agreement.  The amendments include (a) a decrease in the maximum borrowing amount from $20 million to $18 million; (b) an extension of the maturity date of the loan from June 30, 2010 to February 1, 2012; (c) an increase in the interest rate to LIBOR plus 2% (from LIBOR plus 7/8%) and (d) modification of certain covenant restrictions.  This Modified Loan Agreement continues to be secured by the assets of the U.S. parent company. Funds borrowed under the Modified Loan Agreement may be used for working capital, general operating expenses, share repurchases and certain other purposes.
 

9. Commitments and Contingencies

The Company leases certain office, manufacturing and warehouse facilities and various equipment under non-cancelable operating leases. Total rent expense was $668,297 and $643,162 in 2009 and 2008. Minimum annual rental commitments under non-cancelable leases with remaining terms of one year or more as of December 31, 2009:  2010 - $578,632; 2011 - $124,000; 2012 - $43,297; and 2013 - $30,642;.

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 effect on financial position, results of operations, or liquidity of the Company.


10. 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 financial results of the Company’s Asian operations have been aggregated with the results of its United States operations to form one reportable segment called the “United States segment”. Each reportable segment derives its revenue from the sales of cutting devices, measuring instruments and safety products for school, office, home, hardware and industrial use.
 
The Chief Operating Decision Maker evaluates the performance of each operating segment based on segment revenues and operating income. Segment revenues are defined as total revenues, including both external customer revenue and intersegment revenue. Segment operating earnings are defined as segment revenues, less cost of goods sold and operating expenses. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Intersegment amounts are eliminated to arrive at consolidated financial results.
 

28

 
Financial data by segment:
                       
                         
 
2009
                       
(000's omitted)
 
United States
   
Canada
   
Europe
   
Consolidated
 
Sales to unaffiliated customers
  $ 44,908     $ 7,033     $ 7,207     $ 59,149  
                                 
Operating income
    3,158       416       (547 )     3,027  
Assets
    31,377       5,606       5,326       42,309  
Additions to property, plant and equipment
    534       14       20       567  
Depreciation and amortization
    771       62       85       918  
                                 
 
2008
                               
                                 
Sales to unaffiliated customers
  $ 53,548     $ 8,095     $ 7,076     $ 68,719  
                                 
Operating income
    6,648       787       (556 )     6,879  
Assets
    33,719       5,890       5,815       45,424  
Additions to property, plant and equipment
    656       49       37       742  
Depreciation and amortization
    856       65       87       1,008  
 
The following is a reconciliation of segment operating income to consolidated income before taxes:
 
   
2009
   
2008
 
Total operating income
  $ 3,027     $ 6,879  
Interest (income) expense, net
    26       395  
Other income (expense), net
    452       193  
Consolidated income before taxes
  $ 3,453     $ 6,677  
                 
Net Income
  $ 2,842     $ 4,467  
 
11.  Stock Option Plans

The Company has two stock option plans: (1) the 2002 Employee Stock Option Plan, as amended (the “Employee Plan”) and (2) the 2005 Non-Salaried Director Stock Option Plan (the “Director Plan”).

The Employee Plan provides for the issuance of incentive and nonqualified stock options at an exercise price equal to the fair market value of the Common Stock on the date the option is granted.  The terms of the options granted are subject to the provisions of the Employee Plan. Options granted under the Employee Plan vest 25% one day after the first anniversary of the grant date and 25% one day after each of the next three anniversaries. As of December 31, 2009, the number of shares available for grant under the Employee Plan was 72,438.

The Director Plan provides for the issuance of stock options for up to 50,000 shares of the Company's common stock to non-salaried directors.  Under the Director Plan, Directors elected on April 25, 2005 and at subsequent Annual Meetings who have not received any prior grant under this or previous plans receive an initial grant of an option to purchase 5,000 shares of Common Stock (the “Initial Option”). Each year, each elected Director not receiving an Initial Option will receive a 2,500 share option (the “Annual Option”).  The Initial Option vests 25% on the date of grant and 25% on the anniversary of the grant date in each of the following 3 years. Each Annual Option becomes fully exercisable one day after the date of grant. The exercise price of all options granted equals the fair market value of the Common Stock on the date the option is granted and expires ten (10) years from the date of grant. As of December 31, 2009, the number of shares available for grant under the Director Plan was 26,500.

29


A summary of changes in options issued under the Company’s stock option plans follows:
 
   
2009
   
2008
 
             
Options outstanding  at the
           
beginning of the year
    608,500       565,750  
Options granted
    151,000       80,500  
Options forfeited
    (17,000 )     (12,000 )
Options exercised
    (20,000 )     (25,750 )
Options outstanding at
               
the end of the year
    722,500       608,500  
Options exercisable at the
               
end of the year
    482,125       439,688  
Common stock available for future grants at the end of the year
    98,938       82,938  
Weighted average exercise price per share:
         
Granted
  $ 7.84     $ 13.24  
Forfeited
    15.36       14.64  
Exercised
    2.19       5.19  
Outstanding
    9.96       10.38  
Exercisable
    9.62       8.91  

A summary of options outstanding at December 31, 2009 is as follows:
       
             
    Options Outstanding  
Options Exercisable
Range of Exercise Prices
Number Outstanding
Weighted-Average Remaining Contractual Life (Years)
Weighted-Average Exercise Price
 
Number Exercisable
Weighted-Average Exercise Price
$1.25 to $2.49
20,300
< 1
 $          1.90
 
20,300
 $        1.90
$2.50 to $3.65
125,200
2
3.10
 
125,200
3.10
$3.66 to $5.00
53,750
3
3.99
 
53,750
3.99
$5.01 to $7.99
159,000
7
7.71
 
24,000
6.67
$8.00 to $17.02
364,250
7
14.62
 
258,875
14.83
 
722,500
     
482,125
 
 
The weighted average remaining contractual life of all outstanding stock options is 6 years.

Stock Based Compensation
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 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 the Company’s 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”).
 
30

 
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 60 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 bond 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.
 
The assumptions used to value option grants for the twelve months ended December 31, 2009 and December 31, 2008 were as follows:
 
       
   
2009
   
2008
 
Expected life in years
    5       5