End users like our products. We lead in market share. We are gaining market share globally. XYZ leads globally for market share in cutting, lunchbox and safety products. In the North American market, we have dominant shares in the markets for scissors and lunch boxes. We sell globally in seventy-three countries. Our product lines are gaining share in the markets in which we compete.
	We strongly pursue product innovation. We do a great deal of innovation. Many of our products are dramatically new. The design of others we refresh often. To the cutting edges of scissors, knives, pencil sharpeners and utility blades, we add innovative coatings. These coatings enhance either the performance of the blade or give them some other special qualities such as non-rusting or non-stick characteristics. For example, in our Kleaver line, we recently introduced cutting implements that have blades coated with titanium carbonitride. The coating makes blades several times harder than steel. The blades are sharper when new and stay sharper longer. They resist corrosion and rust. Through innovative design, our Knifty utility knife lets users change blades automatically, quickly, easily and safely without ever touching the blade. In our Gradgrind line, our Drop & Pop pencil sharpener has titanium blades. The cutting mechanism is mounted vertically. You drop a pencil in the top. The sharpener cuts the pencil automatically and then ejects it. In 2007, we introduced anti-microbial scissors, lunch boxes and pencil boxes into the global marketplace. These were developed primarily for school children. We blend an anti-microbial agent into the plastic from which the products are made. The agent permeates and is at the surface of the product. Throughout a product’s life, the antimicrobial agent disrupts cell activities of microorganisms so that they are unable to function, grow or reproduce. Our anti-microbial products have been accepted very well both in the U.S. and in Europe. They appeal especially to health-conscious customers. They contribute strongly to our back-to-school sales. Given our success with the anti-microbial agents in our Gradgrind line of products, we are adding them to our-first aid and safety products. Product innovation is one of our competitive strengths. We have a three-year pipeline of new products. We will be hitting the market with a number of new cutting products this year. In May we will introduce first at Staples a line of non-stick cutting implements that we think are terrific.
	We design our products to be beautiful. We design many of our handheld instruments to fit hands ergonomically. When you think of a utility knife, beauty may not be the first word to come to mind, but many of our customers value the beauty, look and feel of the instruments we make. In 2008, we won a good design award from the Olympus Society for our Knifty utility knife. The year before we won a similar award for our Drop & Pop pencil sharpener. Everyone would rather own and use a beautiful instrument than an ugly one. Attractive design adds impulse buying to our sales. It helps our products move off the displays of stores like Target, Home Depot and Wal-Mart.
	We have transformed XYZ from a company driven by manufacturing to a company driven by sales and marketing. When I became CEO in 2000, manufacturing drove XYZ Company. I recruited Mark Clark who had strong sales and executive accomplishments in the hardware industry. Mark— who is now our President and Chief Operating Officer— and I closed five factories globally and transformed the company into one driven by sales and marketing. We strengthened the marketing team and built the sales team into what is now the best in the industry. Today we distribute our products through mass-market and office superstores like Home Depot, Wal-Mart, Target, Office Depot, Office Max, Staples, Grainger, McMaster Carr, Lowe’s, Fred Meyer, Target, Schlecker and W.H. Smith. We sell to hardware and do-it-yourself stores throughout the world. We also sell to school-supply distributors, drugstore retailers and wholesale florists. Because many of our products have multiple uses, many stores sell them in multiple departments. The excellent relationships we have with mass-market and office superstores open doors for our product innovations. Without these relationships and our strong distribution channels we would find bringing our product innovations to market much more difficult. Our distribution network and relationships with customers are among our most valuable assets. Yet, they are intangible assets. They do not appear on our balance sheet.
	We continue to apply information-systems technology to our operations, to our distribution network, and to accounting and finances in increasingly sophisticated ways. To manage any business well, management needs to know much more than the basics of what the orders for products are, what manufacturing capacity and costs are and how much inventory is where. At any given point in time, we need to know how demand for our products is changing, how those changes ripple through distribution channels and how we need to adjust manufacturing output and the acquisition of raw materials. We need to be able to see how changes in any one part of our business affect not only individual accounting entries but a multitude of financial ratios. We need to be able to see how financial ratios are changing over time. To achieve these goals, we use sophisticated information technology that allows us to model our business in real time. As orders come in from superstores like Wal-Mart, Home Depot, Staples and other customers, that information flows into our model. Quickly we can ramp up or ramp down production and the purchase of raw materials. We can model how any changes anywhere are likely to affect accounts receivable, accounts payable, cash balances, our inventory turnover ratio, days sales outstanding, current ratio, quick ratio, total asset turnover, profit and other ratios. We can model how these ratios are changing over time. How the ratios are changing over time gives us an early warning of adjustments we need to make to keep all our financial ratios healthy and robust. The dollars we invest in our IT systems are dollars well spent. We get a very high return on that investment.

	Demand for our products is down but shows signs of improving. We are fortunate that demand for our products is not as strongly affected by the economic downturn as it is for products of many other companies. Our products are not expensive. It’s not a capital spending decision to purchase some scissors. We have some demand factors operating in our favor. Because of layoffs globally, new home offices are being formed. People working at home are natural customers for many of our products. In first quarter 2009, demand for our products was soft. Our weakest month was February. In March we started to see an improvement in sales. Now back-to-school shipments are beginning. Hardware sales to super stores like Home Depot are beginning to generate re-orders. We are selling new products into the industrial and hardware markets. Sales to these markets are growing. We are getting some momentum back in sales and that gives us some confidence that perhaps the worst is behind us. The global slump in demand affects our competitors just as it does us. We are financially stronger than many of our competitors. We expect our share of the mass market to grow in 2009 as it did in 2008.
	We continue to take steps to adapt to the economic downturn. To compensate for softening demand, we reduced costs. Many of our people agreed to forgo their salary bonuses. We sold one of our factories for almost a million dollars of profit.
	XYZ generates lots of cash. The US$8 million in cash we have on our balance sheet gives us the buying power to acquire attractive product lines at bargain prices from companies crippled by the economic downturn. In an economic downturn, many companies fail because they are unable to generate positive cash flows. They run out of cash with which to pay bills as the bills come due. The economic downturn has crippled many of our competitors around the globe. To raise cash, some of our competitors may be forced to sell themselves or to sell product lines that we find attractive, that would fit well with our product mix and that would move well through our marketing and distribution channels. The way we run XYZ generates lots of cash. Today we have over US$8 million in cash. Our balance sheet is strong. Our cash gives us strength, staying power and buying power. Given the strength and liquidity of our balance sheet, we are keeping our eyes on multiple potential acquisition opportunities. We are not in a position to announce any transactions, but a number of situations could develop into something on which we would move aggressively. All of these are related in some way to our product lines. In each case, if we do acquire, we expect the acquisition to add to XYZ’s earnings.
	We have used some of our cash to buy back XYZ shares and to increase dividends to our shareholders. As you know, the return that you earn on a stock has two components: capital appreciation and dividends. In theory, the market price of a stock should reflect the present value of a company’s likely future earnings. Yet, with the onset and continuation of the global financial crisis, the price-to-earnings ratios of many stocks— ours included— dropped dramatically. To counter what we see as the undervaluing by the market of our likely future earnings, we have taken two actions: In December of 2008, our board of directors authorized us to buy back 250,000 shares of our own stock. During first quarter of 2009, we purchased approximately 40,000 shares. If we see XYZ stock selling at what we consider to be irrationally low price-to-earnings ratios, we are prepared to buy additional shares. We increased our quarterly dividend from two cents to ten cents per share. The dividend directly turns our earnings into shareholder earnings.

© 2008 by Jerry Marlow

Jerry Marlow, MBA
Freelance financial writer, marketing writer
(917) 817-8659
jerrymarlow@jerrymarlow.com
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