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Acme United Corporation
60 Round Hill Road
Fairfield, CT 06824
February 26, 2009
Terence O'Brien, Accounting Branch Chief
Securities and Exchange Commission
Washington, D.C. 20549-0404
RE: Acme United Corporation
Dear Mr. O'Brien:
This letter is in response to your December 29, 2008 comment letter relating to
our Form 10-K for the year ended December 31, 2007 and our Form 10-Q for the
quarter ended September 30, 2008. Each of your comments accompanied by our
responses is provided below.
1. We note your statement that "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."
This disclosure does not convey to an investor the material assumptions used to
arrive at these estimates. The discussion in your critical accounting estimates
section should include a discussion of the material assumptions you made in
arriving at the critical estimate and to advise an investor of the financial
statement impact if actual results differ from the estimate made by management.
You should also consider commenting on your historical experience between
estimates made and actual results. It appears more detailed disclosures related
to each of these estimates are warranted in future filings. Please show us what
this future disclosure will look like.
Response
--------
The Company notes your comment and will revise its disclosure
accordingly in future filings. The revised disclosure will be included
in the Company's upcoming filing of Form 10-k for the year ended
December 31, 2008 as follows:
Allowance for doubtful accounts
The Company provides an allowance for doubtful accounts based upon a
review of outstanding receivables, historical collection information
and existing economic conditions. The allowance for doubtful accounts
represents estimated uncollectible receivables associated with
potential customer defaults on contractual obligations, usually due to
customers' potential insolvency. 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 the aging of its
receivables and historically customer defaults have 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 in accordance with EITF 01-09 and are recorded
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 circumstances indicate.
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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 for obsolete or
slow moving inventory is established to adjust the cost of inventory to
its net realizable value. The allowance recorded is based on
assumptions about future demand and marketability of products, the
impact of new product introductions and specific identification of
items, such as discontinued product. These estimates could vary
significantly from actual requirements if future economic conditions,
customer inventory levels or competitive conditions differ from
expectations.
Income Taxes
Deferred 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 tax assets to an amount that is more likely
than not to be realized.
Intangible Assets
Intangible assets with a finite useful life 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 a finite useful life include patents and trademarks.
Patents and trademarks are amortized over their estimated useful life.
The weighted average amortization period of intangible assets at
December 31, 2008 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. If circumstances
indicate a possible impairment we will evaluate recoverability based on
expected cash flows from the operating segments that the intangible
assets are attributable to. Cash flows from our operations have been
positive for several years and we fully expect to recover the carrying
value of our intangible assets. During 2008, the net book value of the
Company's intangible assets increased to $1,934,219 as of December 31,
2008, from $1,747,708 as of December 31, 2007.
2. Considering the decline in your stock price and market capitalization over
the past three months, we suggest that you include a critical accounting policy
for goodwill, intangible assets and property, plant and equipment, in future
filings, to provide an investor with sufficient information about management's
insights and assumptions with regard to the recoverability of these asset
balances. Please ensure your disclosures describe the steps that you perform to
review your goodwill and long-lived assets for recoverability, the assumptions
used and provide information as to known trends, uncertainties or other factors
that will result in, or are reasonable likely to result in, any material
impairment charges in future periods. For example, your policy note should
quantify the projected cash flows used in you analysis, the growth rate used in
projecting cash flows, quantify the discount rate, include terminal value
assumptions, and discuss how you assessed your reporting units under paragraph
30 and 31 of SFAS 142. Given the current economic conditions and the impact it
has had on your stock price and operations, this detailed information will
provide the reader with greater insight into the quality and variability of your
financial position and operating results. Refer to release No. 33-8350
"Interpretation: Commission Guidance Regarding Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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Response
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We will modify our critical accounting polices disclosure regarding
intangible assets as presented in our response to your first comment.
Management periodically assesses the recoverability of the Company's
intangible assets as events or changes in circumstances indicate that
the carrying amount of these assets is not recoverable. Management also
assesses the recoverability of goodwill on an annual basis and, as of
December 31, 2008 and 2007, management concluded that there were no
indications of impairment and no further analysis needed. We note your
comment and in the event a recoverability test is necessary we will
provide a more detailed disclosure. However, the Company's management
believes that the amount of goodwill recorded on its balance sheet
($89,000) is immaterial and is not a critical accounting estimate.
3. As noted above, your stock price has continued to decline from $14.12 as
December 31, 2007, to $6.85 at December 22, 2008. your market capitalization as
of December 22, 2008 is significantly less than total stockholders' equity,
which is an indicator your goodwill, intangible assets and other long-lived
assets may be impaired. Tell us whether or not this decline in market cap and
stock price has triggered an interim impairment test under SFAS 142 and SFAS
144. Explain how you determined goodwill, intangible assets and other long-lived
assets are recoverable in the current market environment.
Response
--------
Although the market capitalization has declined in recent months, our
market capitalization was in excess of our stockholders' equity as of
September 30, 2008 and December 31, 2008. Management believes that the
decline in the Company's current stock price is the result of the
current general market conditions and not related to entity specific
events or indicators and thus a triggering event has not occurred. As
such, we concluded that an interim impairment test under SFAS 142 and
SFAS 144 was not necessary as of September 30, 2008 and an impairment
charge not warranted.
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4. Further tell us and clarify in future filings, whether or not an impairment
test was actually performed on you long-lived assets under SFAS 144 at December
31, 2007. Please disclose the results of those tests, to the extent they were
performed and if no test was performed how you considered that one was not
necessary under paragraph 8 of SFAS 144. Note for future periods, disclosing
whether or not a SFAS 144 analysis was actually performed would clearly inform
investors whether the absence of impairment charges is due to management's
determination that the SFAS 144 test were not required as a result of no
triggering events or because there were triggering events present and
managements estimate of cash flow projections exceeded asset carrying values
resulting in no impairment charges.
Response
--------
Paragraph 8 of SFAS 144 states that "long-lived assets shall be tested
for recoverability whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable". SFAS 144 also cites
specific examples of such "triggering" events. At December 31, 2007,
management determined that there were no events or circumstances
present that would have triggered a test of recoverability on our long
lived assets. In future filings we will revise our disclosure to
explain the absence of any impairment charges, as appropriate.
5. You state the Company recognizes revenue from sales of its products where
ownership transfers to the customers. Please tell us and revise future filings
to disclose when such ownership transfers. In addition, we note that you sales
are net of returns. Tell us and disclose you return policy as well as any other
sales incentives you provide. For each period presented, please tell us and
disclose in MD&A how much you have recorded in provisions for each of the above
sales incentives and how these incentives have impacted operations. Also tell us
how you have considered EITF 01-09 with regard to the recognition, measurement
and classification of each of these provisions. We note your accrued liability
balance includes a significant balance for vendor rebates. Clarify whether or
not this account balance relates to sales incentives granted to customers.
Response
--------
We note your comment and will revise our disclosure accordingly in
future filings. The revised disclosure will be included in our upcoming
filing of Form 10-K for the year ended December 31, 2008. The updated
disclosure will appear as follows:
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The Company recognizes revenue from 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. When the right of return exists, the
Company recognizes revenue in accordance with FASB Statement
No. 48, Revenue Recognition When Right of Return Exists. The
Company recognizes customer rebates, including cooperative
advertising, slotting fees and other sales related discounts,
as a reduction to sales in accordance with EITF 01-09.
In response to your comment regarding disclosing in MD&A our provision
for returns and customer rebates, our business is seasonal in nature
with sales being the strongest in the second and third quarters.
Provisions for customer returns are immaterial to the financial
statements for each annual period presented in the 10-K and therefore
have not been specifically identified in the filing.
The Company provides its customers with various types of consideration
as described in the updated Critical Accounting Estimate disclosure
above. We have considered the guidance in EITF 01-09 and classify this
consideration as a reduction of gross sales.
The accrued liability for vendor rebates identified in Note 5 in the
10-K filing is specifically related to the consideration paid to
customers mentioned above.
6. Your discussion of results of operations addresses multiple factors
contributing to year over year changes in line items; however, your discussion
should quantify each of the factors. For example, you disclose gross profit
decreased as a result of greater sales of lower margin products, increased raw
materials and labor costs in China and higher costs as a result of the
appreciation of the Chinese currency against the U.S. dollar. However, your
disclosure does not quantify the impact.
Response
--------
We note your comment and will revise our disclosure accordingly in
future filings. However, management believes that disclosure of certain
detailed information could place the Company at a competitive
disadvantage. The Company will provide information to aid the reader in
understanding the results of operations while protecting its
competitive advantage. The revised disclosure will be included in our
upcoming filing of Form 10-K for the year ended December 31, 2008.
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7. You disclose that operating income for the Canada segment increased by 25%
during 2007 and 21% during 2006 but do not explain the factors that led to these
increases. In future filings include a discussion of the impact certain segments
had on certain financial statement line items and the factors that contributed
to these changes. Since your segment footnote discloses that management
evaluates various income statement line items, including sales and operating
income or loss by segment, please revise to provide related MD&A segment
discussion. Analysis of segment data where a segment contributes in a
disproportionate way to income or loss should be presented pursuant to Codified
FRR501.06.a.
Response
--------
We note your comment and will revise our disclosure accordingly in
future filings. The revised disclosure will be included in our upcoming
filing of Form 10-k for the year ended December 31, 2008.
8. During the nine months ended September 30, 2008, you had significant
increases in your accounts receivable and inventory balances. Given the
significant impact that receivables and inventory have on you liquidity, please
revise your MD&A and liquidity section to explain the reasons for theses
increases and any variances in the corresponding turnover ratios. In this
regard, we note your accounts receivable balance increased 26% during the first
nine months of 2008, whereas sales during the period only increased 13%.
Response
--------
Traditionally, the Company's sales are stronger in the second and third
quarters, and weaker in the first and fourth quarters of the fiscal
year, due to the seasonal nature of the back-to-school market, as noted
in the Net Sales section of our MD&A. Also, customers receive extended
payment terms for purchases made during the back to school season. As a
result, the accounts receivable balance as of September 30, 2008, may
seem disproportionately high as compared to the previous year end
balance. It should also be noted that sales in the third quarter of
2008 were approximately 29% higher than sales in the fourth quarter of
2007, resulting in a higher AR balance at September 30, 2008 as
compared to December 31, 2007. We note your comment and will revise our
disclosure accordingly in future filings to include an analysis of
material changes in our inventory turnover and days sales outstanding
ratios.
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9. We note your discussion on page 12 regarding the credit and equity market
crisis and the potential effects from the credit crisis on your business. Please
expand this discussion, in future filings, to clarify the specific impacts and
risks of recent economic events to your business. Explain how the market for you
products has been affected and the current expected future impact on your
operations, financial position and liquidity. This disclosure should provide
detailed information on your operations since September 30, your customer,
recent order activity, expected trends, management's response for managing these
events, potential future actions by management and other detailed information.
Expand your liquidity discussion to address the expected impact to current and
future cash flows and how you expect recent economic events, including the
credit shortage, may affect other sources of liquidity such as your current debt
instruments and related covenant compliance. In your response to this letter,
please provide a detailed description of proposed future disclosure.
Response
--------
We note your comment and will revise our disclosure accordingly in
future filings. Please note that to date, the Company does not have
material excess inventory issues, potentially unrecoverable accounts
receivable balances or supply issues with its third party manufacturers
as a result of the current economic crisis. Also, the Company has
available funds under its current revolving loan agreement and is in
compliance with its debt covenants and expects to be in compliance for
the duration of the agreement. However, we have updated our disclosure
and the revised disclosure below will be included in our upcoming
filing of Form 10-k for the year ended December 31, 2008.
The recent global economic crisis has had a negative impact on all of
the markets into which the Company sells. As demand has declined, our
customers have been negatively impacted and as a result, the Company
has experienced a slowdown in customer orders. Management believes that
such a slowdown in customer orders could continue as the Company's
customers take various actions, including adjusting inventory levels to
match current reduced demand, to deal with this economic crisis.
Management also has taken certain actions to adjust its cost structure
and working capital as a response to the slow down in demand which
began in the fourth quarter of 2008 and in anticipation of the
possibility of future declines in customer orders.
During 2008, working capital increased as compared to 2007 primarily
due to a 15% increase in inventory offset by a 17% decrease in
receivables. The increase in inventory was in anticipation of product
demand and an increase in customer specific inventory. Given the
lengthy lead times associated with product availability and our
customer requirements for complete and on-time delivery, the Company's
management decided to increase inventory levels. As a result, inventory
turnover, calculated using a twelve month average inventory balance,
decreased to 2.0 in 2008 from 2.1 in 2007. Receivables decreased as a
result of a decline in sales in the fourth quarter of 2008.
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Management continues to closely monitor its outstanding receivables and
in 2008 days sales outstanding decreased to 64 days from 66 days in
2007. Despite the current economic conditions, management believes that
cash generated from operations together with funds available under the
current loan agreement, are expected to be sufficient to finance the
Company's planned operations for the next twelve months.
10. We note that your chief executive officer and chief financial officer
concluded your disclosure controls and procedure "...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." This is an incomplete
definition of disclosure controls and procedure per Rules 13a-15(e) and
15d-15(c) of the Exchange Act. Please confirm to us and revise your disclosure
in future filings to clarify, if true, that your officer concluded that your
disclosure controls and procedures are effective to ensure that information
required to be disclosed by you in the reports that you file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms and to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Exchange Act is accumulated and communicated to your
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Otherwise in future filings, please
simply conclude that you disclosure controls and procedures are effective or
ineffective, whichever the case may be.
Response
--------
The Company notes your comment and will revise its disclosure
accordingly in future filings. The revised disclosure to be included in
the Company's upcoming filing of Form 10-K for the year ended December
31, 2008 is as follows:
"Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, we
have evaluated the effectiveness of our disclosure controls and
procedures as required by Exchange Act Rule 13a-15(b) as of the end of
the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective."
In connection with our response to the Staff's comments, Acme United Corporation
hereby acknowledges that:
o Acme United Corporation is responsible for the adequacy and accuracy
of the disclosures in the filing;
o Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o Acme United Corporation may not assert staff comments as a defense in
any proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
We will contact you the week of March 2, 2009 to ensure your receipt of this
letter and respond to any additional questions you may have.
Sincerely,
/s/ Paul G. Driscoll
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Paul G. Driscoll
Vice President and Chief Financial Officer
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