View:
Acme United Corporation
60 Round Hill Road
Fairfield, CT 06824
May 21, 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 March 26, 2009 comment letter relating to our
Form 10-K for the year ended December 31, 2007 and our responses to your
original letter dated December 29, 2008. Each of your comments accompanied by
our responses is provided below.
1. We have read your response and proposed revised disclosure to comments
1 and 2 in our letter dated December 29, 2008. Please ensure that your
revised disclosure in future filings discusses the following:
o Your policy for assessing the recoverability of intangible
assets should discuss how you have considered paragraph 15
of SFAS 142 and paragraph 8 of SFAS 144, specifically
addressing whether or not a triggering event resulted in a
formal impairment analysis being performed. Further, your
response states that cash flows are expected to recover the
carrying value of your intangible assets. Please discuss the
headroom between fair value and the carrying value of the
Company's assets and quantify the impact any material
changes to any of your assumptions would have on your
analysis. In this regard, we note the difference between
your market cap and stockholders' equity amount has
decreased over the past few quarters. Please ensure your
disclosure includes a discussion of this trend and how you
have considered this in your SFAS 142 and 144 analyses.
o Please tell us what consideration you have given to
including plant, property and equipment (PP&E) as a critical
accounting estimate. The estimates and judgments required by
management to assess recoverability of these long-lived
assets, which are material to your financial statements,
will provide investors greater insight into the quality and
variability of your financial position and operating
results.
(1)
Response
--------
In response to your first point, in future filings we will
specifically address whether or not a triggering event is present and
if it resulted in a formal impairment analysis. Also, in future
filings, if a formal impairment analysis is performed, the Company
will include in its disclosure a discussion on the carrying value and
fair market value of its intangible assets as well as perform a
sensitivity analysis of its significant assumptions. The Company notes
that the difference between its market cap and stockholders' equity
has decreased over the past few quarters; however, the market cap was
not below stockholders' equity at any reporting period presented.
Also, the Company believes that the decline in its market cap is
indicative of the overall economic environment. If the Company's
market cap goes below stockholders' equity at a future reporting
period the Company will include the required disclosure.
In response to your second point, the Company has considered property,
plant and equipment in its evaluation of critical accounting estimate
but does not consider the judgments and estimates around PP&E to be
significant. The net value of PP&E consists primarily of the value of
product tooling, general computer hardware and software and office
equipment, all of which are depreciated over a relatively short period
of time, typically three years.
2. We note you have a defined benefit pension plan that is underfunded at
December 31, 2008. Please tell us why your pension benefit obligation
and expense is not a critical accounting estimate. Please expand MD&A,
in future filings, to clearly explain the methods used to estimate
your obligations and the expense recognized, including the material
assumptions used to make these estimates and a sensitivity analysis of
those assumptions. Based on your footnote disclosures, it would appear
as though such assumptions include the discount rate and expected
return on plan assets of 8.25%. Refer to Section 501.14 of the
Financial Reporting Codification for guidance. Please provide us with
the disclosures you intend to include in future filings.
(2)
Response
--------
In December 1995, the Company's Board of Directors approved an
amendment to the pension plan that terminated all future benefit
accruals as of February 1, 1996. Therefore no new participants have
been or will be added to the plan and the benefits of all current
participants have been calculated and locked in as of February 1,
1996. The plan currently consists of approximately 100 retirees
receiving benefits and another 20 terminated and active employees who
have been or were with the Company prior to the amendment on February
1, 1996 and are entitled to future benefits. As discussed in Note 6 -
Pension and Profit Sharing, of the Company's 2008 Form 10-k, the
Company's pension obligation has been immaterial due to factors
described above. As a result, the Company did not believe that the
obligation and expense was a critical accounting estimate. However,
more recently, as a result of the global economic crisis and the
general decline in the stock market, the Company's plan assets have
experienced a decline resulting in an increase in our liability. The
Company still believes that the obligation and expense are not
significant to its operations and liquidity but will reassess their
significance at December 31, 2009 and make any necessary disclosures
in the Form 10-k for the year ended December 31, 2009. The disclosure
would be similar to the following:
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 x.x% to be appropriate as of
December 31, 2009, which is a decrease of 0.xx percentage points
from the rate used as of December 31, 2008. An increase of x.0%
in the discount rate would have decreased our plan liabilities as
of December 31, 2009 by $x.x million and a decrease of x.0% could
have increased our plan liabilities by $x.x million.
The expected long-term rate of return on assets is developed
with input from the Company's actuarial firm and also 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 x.x% for
2009.
(3)
For more information concerning these costs and obligations, see
the discussion in Note 6 - Pension and Profit Sharing, to the
Company's financial statements.
3. We further note from page 24 that the pension plan assets are invested
in equity securities at 67% at December 31, 2008; however, you have
maintained the same expected return on plan assets for the two fiscal
years ended 2008. Please provide disclosures in MD&A in future filings
to explain to investors why your expected long-term rates of return
are reasonable given that the majority of the plan assets are invested
in equity securities and to discuss the impact the current economic
market environment has had and may have on your assumptions used to
estimate the net periodic benefit cost. Your disclosures should also
address the potential impact to your defined pension plans' funded
status and additional funding obligations you may have. Please provide
us with the disclosures you intend to include in future filings.
Response
--------
The expected long-term rate of return on assets is developed with
input from the Company's actuarial firm and also considers the
Company's historical experience with pension fund asset performance in
comparison with expected returns. The long-term nature of the pension
trusts make them well suited to bear the risk of added volatility
associated with equity securities. Accordingly, the asset allocations
reflect a higher allocation to equity securities as compared to
fixed-income securities. Based on these factors management believes
that the long-term rate of return used in its estimates is reasonable.
Please refer to our response to comment #2 for the related disclosure.
Revenue Recognition, page 13
- ----------------------------
4. We have read your response to comment 5 in our letter dated December
29, 2008. You indicate your provisions for customer returns and
rebates 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. However, we note that the accrued liability
for vendor rebates identified in Note 5 is material to the financial
statements as a whole and therefore we suggest that you quantify in
your disclosure the amount of provisions recorded during each period
or disclose the fact that these provisions are immaterial to the
financial statements as a whole.
Response
--------
To clarify our initial response, the accrued liability for customer
rebates is material to the financial statements and is specifically
identified in Note 5 - Other Accrued Liabilities. This amount is
disclosed for each reporting period presented. The Company does not
disclose the provision for customer rebates for competitive reasons.
(4)
Results of Operations, page 14
- ------------------------------
5. We note the sale of the Bridgeport property in December 2008 discussed
in Note 17. Please address the following comments:
o Please revise your future MD&A to identify and discuss this
material transaction. Specifically address the impact the
sale, mortgage and remediation costs will have on operations
and liquidity.
o Please tell us your basis for your statement on page 34 that
you do not expect the obligations related to the remediation
of the property to materially affect your results of
operations, financial condition or liquidity. We note the
undiscounted liability of $1.8 million accounts for 8% of
total liabilities at December 31, 2008, and the current
portion accounts for 16% of total current liabilities at
that date.
o On page 35, you state that as part of the sale, you provided
the buyer with a mortgage of $2.0 million at six percent
interest, which will be due in full one year after
remediation and monitoring on the property have been
completed. We assume this is the $2.0 million long term
receivable recorded on the balance sheet at December 31,
2008. Please tell us how you have presented the sale of the
property, the gain and the note receivable on your statement
of cash flows.
o You disclose on page 14 the gain from this transaction of
$265,000 is included in other income, net. Please tell us
your consideration of paragraph 45 of SFAS 144.
Response
--------
o In future filings we will provide the requested disclosures
in our MD&A.
o The $1.8 million liability was based on an estimate
developed by an independent environmental consulting firm
using the best information available at the time. The
Company has sufficient cash flow from operations as well as
borrowing capacity under its loan agreement with Wachovia
Bank that management believes payment of this obligation
will not have a material adverse affect on the Company's
ability to implement its business plan. In addition, funds
received from payments on the mortgage will also fund the
remediation.
o The Company received $500,000 in cash from the sale of the
property, all of which was used to pay for legal,
environmental and closing costs. The gain of $265,000 was
part of the reconciliation of net income to net cash
provided by operating activities.
o The Company concluded that it would be prudent to exclude
the gain from income from operations as the property sold
has not been used in our operations since 1996. Including
the gain in operating results would misrepresent our results
of operations.
(5)
Liquidity and Capital Resources, page 16
- ----------------------------------------
6. We have read your response to comment 9 in our letter dated December
29, 2008, as well as the revised disclosure herein. You state that
management has taken necessary actions to adjust its cost structure as
a response to the slow down in demand and in anticipation of future
decline. Please tell us and disclose the nature of these "necessary
actions" and describe the effect each action is expected to have on
your operations, financial position and liquidity.
Response
--------
The global economic slowdown has had a negative impact on the Company.
In response, the "actions" that management has taken was to review
expenses on a line item basis and make cuts where possible, including
cuts in incentive pay, travel, professional service fees and other
discretionary items. The Company has also implemented a freeze on
salary increases and the hiring of new employees.
(6)