Acme United Corporation — FY2020 Form 10-K Summary
Business context and reporting period
Acme United Corporation is a global supplier of first aid and safety products and cutting, sharpening and measuring products serving school, home, office, hardware, sporting goods and industrial markets. The filing covers the fiscal year ended December 31, 2020, including fourth-quarter results within the annual financial statements. Reportable segments are the United States, Canada and Europe.
- Products include first aid kits, safety supplies, scissors, knives, rulers, pencil sharpeners and sharpening tools.
- First aid and safety products represented approximately 49% of 2020 sales.
- E-commerce represented approximately 16% of 2020 net sales and was the fastest-growing distribution channel.
- The Company had 552 full-time employees at December 31, 2020.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $164.0 million | $142.5 million | +15.1% |
| Gross profit | $59.6 million | $52.0 million | +14.6% |
| Gross margin | 36.3% | 36.5% | -0.2 percentage points |
| SG&A expense | $48.2 million | $43.6 million | +10.6% |
| Operating income | $11.4 million | $8.4 million | +35.4% |
| Operating margin | 7.0% | 5.9% | +1.1 percentage points |
| Net income | $8.1 million | $5.5 million | +46.9% |
| Net margin | 4.9% | 3.9% | +1.0 percentage point |
| Diluted EPS | $2.31 | $1.60 | +44.4% |
| Net cash provided by operating activities | $5.7 million | $14.7 million | -$9.0 million |
| Capital expenditures | $2.6 million | $1.7 million | +$0.9 million |
Sales growth was driven primarily by first aid and safety products, e-commerce, industrial and home-improvement channels, and European sales. U.S. sales increased 12%, Canadian sales increased primarily because of First Aid Central, and European sales increased 25%. First Aid Central contributed approximately $4.6 million of sales and approximately $0.3 million of net income.
Operating income benefited from higher sales and lower interest expense. Net interest expense declined to $0.9 million from $1.8 million. Other expense increased to $0.7 million, primarily because of an approximately $0.75 million non-cash charge related to termination of the defined benefit pension plan.
Liquidity, balance sheet and capital allocation
- Cash and cash equivalents were $4.2 million at December 31, 2020, compared with $6.8 million at year-end 2019.
- Working capital increased by approximately $6.9 million. Inventory increased 29%, or approximately $11 million excluding acquisitions, reflecting anticipated growth and supply-chain protection measures.
- The allowance for slow-moving and obsolete inventory increased to $1.5 million from $0.5 million.
- Accounts receivable increased to $27.2 million, while the allowance for doubtful accounts increased to $1.15 million from $0.5 million, primarily due to COVID-19-related credit risk.
- Revolving credit borrowings were $38.8 million, with $11.2 million available under the $50 million HSBC facility. The facility expires May 24, 2023 and bears interest at Prime Rate less 1.25%.
- The Company received a $3.5 million PPP loan at 1% interest. The forgiveness application was pending SBA approval at filing; repayment could be required if forgiveness is denied.
- Mortgage debt was $3.2 million, with final maturity in October 2024.
- Total debt, including the PPP loan and mortgage, was approximately $44.4 million, excluding operating lease liabilities.
- The Company was in compliance with its revolving credit covenants at December 31, 2020.
- Cash distributions to shareholders totaled approximately $1.6 million, and the Company repurchased 14,420 shares for approximately $0.3 million.
Material changes versus the prior comparable period
- Net sales increased $21.5 million, or 15%, following eleven consecutive years of sales growth.
- First aid and safety demand rose significantly during the pandemic, while Westcott office and school product sales were pressured by school, office and retail closures.
- Gross margin was broadly stable but declined modestly to 36.3%.
- SG&A grew more slowly than sales, reducing SG&A as a percentage of sales to 29.4% from 30.6%.
- Operating income increased $3.0 million, and net income increased $2.6 million.
- Operating cash flow declined substantially because of a $10.0 million inventory investment and higher receivables, despite higher earnings.
- The Company acquired First Aid Central for $2.1 million in January 2020 and Med-Nap for $9.3 million in December 2020, funded with borrowings.
- Capital expenditures increased to $2.6 million from $1.7 million.
- The defined benefit pension plan was terminated through an insurance transaction, generating an approximately $0.8 million settlement charge and eliminating the reported pension liability.
Outlook, commentary, risks and unusual items
Management did not provide quantitative revenue or earnings guidance in the filing. Management stated that cash on hand, operating cash flow and available revolving-credit capacity were expected to fund planned operations for at least the next twelve months under current conditions.
- COVID-19 remains the principal uncertainty. Demand for first aid products could decline after customer stockpiling, while renewed disruptions could affect facilities, suppliers, labor and transportation.
- The Company expects to continue investing in e-commerce capabilities, distribution capacity, inventory and supply-chain continuity.
- Key risks include reliance on foreign suppliers, tariffs and trade policy, transportation and labor costs, foreign exchange, inflation, customer concentration, competition and variable interest rates.
- Two customers individually represented more than 10% of consolidated sales in 2020, accounting for approximately 18% and 13% of sales.
- The Company identified a material weakness in internal control over financial reporting related to inventory existence controls at its Rocky Mount, North Carolina warehouse. The independent auditor issued an adverse opinion on internal control effectiveness.
- A physical count of approximately $10 million of warehouse inventory in February and March 2021 resulted in a non-material $18,000 increase. Remediation includes a new inventory management system and additional personnel, with completion expected before the end of fiscal 2021.
- The financial statement audit opinion was unqualified, but disclosure controls were concluded to be ineffective as of December 31, 2020 because of the material weakness.
- No material legal proceedings or off-balance-sheet transactions were reported.
Most important facts for investors to verify
- Whether the $3.5 million PPP loan was ultimately forgiven and whether any repayment, penalties or audit findings resulted.
- Whether the Rocky Mount inventory-control material weakness was fully remediated and whether subsequent testing identified additional issues.
- Whether first aid and safety demand remains elevated or normalizes after pandemic-related stockpiling.
- Inventory turnover, obsolete-inventory reserves and operating cash flow after the substantial 2020 inventory build.
- Debt utilization, covenant headroom and exposure to variable interest rates as the revolving facility approaches its 2023 maturity.
- Integration results and earnings contribution from the First Aid Central and Med-Nap acquisitions.
- The Company’s ability to offset tariffs, freight, labor and supplier-cost inflation through pricing without reducing demand or margins.
- Customer concentration and the continuing growth, profitability and fulfillment requirements of the e-commerce channel.