Business Context and Reporting Period
Acme United Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company sells cutting, sharpening and measuring products, and first aid and safety products, through U.S., Canadian and European segments. Results reflect significant COVID-19-related changes in demand, operating costs and supply-chain conditions.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net sales | $43.3 million, versus $37.0 million | $123.1 million, versus $108.6 million |
| Gross profit | $15.0 million; 34.5% margin | $44.5 million; 36.2% margin |
| Operating income | $2.1 million, versus $1.7 million | $8.5 million, versus $7.0 million |
| Net income | $1.6 million, versus $1.1 million | $6.1 million, versus $4.5 million |
| Diluted EPS | $0.46, versus $0.30 | $1.75, versus $1.32 |
| Net interest expense | $0.2 million, versus $0.5 million | $0.7 million, versus $1.5 million |
| Dividends declared per share | $0.12 | $0.36 |
- Revenue increased 17% year over year in the quarter and 13% year to date. Gross margin declined from 35.5% to 34.5% in the quarter and from 36.6% to 36.2% year to date, primarily because of COVID-19-related costs.
- SG&A increased to $12.8 million in the quarter and $36.0 million year to date, driven by personnel, commissions, shipping, bad-debt provisions and First Aid Central costs, partly offset by lower travel and marketing expenses.
- Net cash provided by operating activities was $1.7 million year to date, compared with $7.3 million in 2019. Working-capital investment increased, including an $8.5 million use of cash for inventories and a $7.3 million use for receivables.
- Investing cash outflows were $4.2 million, including $2.1 million for capital expenditures and $2.1 million for the First Aid Central acquisition. Financing cash outflows were $1.5 million.
- Cash declined to $3.0 million at September 30, 2020, from $6.8 million at December 31, 2019.
- Working capital was $61.9 million and the current ratio was 3.61. Inventory was $48.4 million, up from $39.3 million at year-end, while accounts receivable was $32.2 million, up from $25.5 million.
- Revolving-credit borrowings were $30.7 million, down from $33.2 million at year-end, with $19.3 million available under the $50 million facility. Mortgage debt was approximately $3.2 million. The company also had a $3.5 million PPP loan outstanding, subject to potential forgiveness.
- Total liabilities were $62.4 million and stockholders’ equity was $60.6 million at September 30, 2020.
Material Changes Versus the Prior Comparable Period
- U.S. revenue increased 12% in the quarter and 11% year to date, led by first aid and safety products, industrial and safety channels, home improvement, mass-market and e-commerce channels.
- First aid and safety demand benefited from COVID-19-related stocking. COVID-related first aid sales were approximately $1.5 million in the quarter and $3.0 million year to date.
- Westcott craft products gained market share, while office and school products remained weaker because of retail, school and office closures and other restrictions.
- Canada revenue excluding First Aid Central increased 25% in the quarter but declined 10% year to date, reflecting lockdown effects earlier in the year. First Aid Central contributed approximately $1.2 million of quarterly sales and $3.3 million of year-to-date sales.
- European revenue increased 35% in the quarter and 17% year to date in U.S. dollars, supported by e-commerce sales of Westcott cutting products and Camillus knives and continued DMT product growth.
- Operating income increased overall, although U.S. segment operating income declined by $0.2 million in the quarter. Canadian and European operating income improved in both periods.
- Net interest expense declined substantially because of lower average interest rates and lower average revolving debt.
- On January 7, 2020, the company acquired First Aid Central for approximately $2.1 million in cash, allocating $1.3 million of the purchase price to intangible assets.
- The company repurchased 14,420 shares for approximately $0.3 million during the first nine months and paid $1.2 million in shareholder distributions.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal numerical revenue or earnings guidance.
- Management expects COVID-19-related demand shifts, higher product and labor costs, facility-cleaning costs, supply-chain inefficiencies and customer credit risks to continue affecting results in the near term.
- Management increased inventory and short-term manufacturing and sourcing capacity to mitigate potential supply disruptions and stated that it expects sufficient inventory to meet anticipated demand. A future decline in first aid and safety demand is possible if customers become overstocked.
- Customer receivable reserves increased from approximately $0.4 million at June 30, 2020 to approximately $0.8 million at September 30, 2020. Further increases or significant write-offs remain possible if customers experience financial distress.
- The company received a $3.5 million PPP loan at 1% interest. The lender approved the company’s application for forgiveness of the entire loan and submitted it to the SBA on August 26, 2020; SBA approval was pending at the filing date. No assurance was provided that forgiveness would be granted in whole or in part.
- The company stated that it believes it met PPP eligibility requirements, but could be required to repay the loan and potentially incur penalties if it is later determined to have been ineligible.
- Management believes operating cash flow, PPP proceeds and available revolving-credit capacity will be sufficient to fund operations for the twelve months following the filing, under current conditions.
- Principal risks include the duration and severity of COVID-19, renewed closures, supply-chain disruptions, customer credit deterioration, inventory-management challenges, tariffs and trade policy, competition, foreign-exchange movements, changing consumer demand and acquisition integration.
- The company reported no pending material legal proceedings, no defaults on senior securities and effective disclosure controls as of September 30, 2020.
Investor Verification Priorities
- Verify the SBA’s final decision on forgiveness of the $3.5 million PPP loan and any resulting accounting treatment.
- Assess whether elevated first aid and safety demand is recurring or reflects temporary pandemic stockpiling.
- Monitor inventory growth, inventory turnover, receivable aging and the adequacy of bad-debt reserves.
- Review available borrowing capacity, debt covenants and liquidity as operating cash flow remains below the prior-year level.
- Separate organic performance from the $2.1 million First Aid Central acquisition and evaluate integration results.
- Track gross-margin pressure from COVID-19 costs, labor and sourcing expenses, freight and potential inability to pass cost increases to customers.
- Evaluate the effect of continued weakness in office and school products and any renewed retail, school or workplace restrictions.