ACME United Corporation — Q1 2023 Form 10-Q Summary
Business context and reporting period
Acme United Corporation reported unaudited results for the three months ended March 31, 2023. The company sells first aid and medical products and cutting, sharpening and measuring products through reportable segments in the United States, Canada and Europe. Results are seasonal, with cutting, sharpening and measuring sales generally stronger in the second and third quarters because of the back-to-school market.
Financial results and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $45.8 million | $43.3 million | Up 6% |
| Gross profit | $16.3 million | $15.0 million | Up 9% |
| Gross margin | 35.5% | 34.5% | Up 100 basis points |
| Operating income | $2.2 million | $1.4 million | Up $0.8 million |
| Operating margin | 4.8% | 3.2% | Improved |
| Net income | $1.0 million | $0.8 million | Up 19% |
| Diluted EPS | $0.28 | $0.22 | Up $0.06 |
| Net cash from operating activities | $7.7 million | $(5.5) million | Improved $13.2 million |
SG&A expense increased to $14.1 million from $13.6 million, but declined to 30.7% of sales from 31.4%. Net interest expense increased to $0.9 million from $0.3 million because of higher average borrowing rates. The effective tax rate was 24%, compared with 22% in the prior-year quarter.
U.S. sales increased 9% to $38.9 million, primarily from higher first aid and medical sales. Canadian sales declined 10% to $3.3 million, and European sales declined 6% to $3.7 million. Customer inventory reductions affected certain back-to-school products in the U.S. and sales in Canada and Europe.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $2.8 million at March 31, 2023, compared with $6.1 million at December 31, 2022. Including restricted cash, total cash, cash equivalents and restricted cash was $4.3 million.
- Inventory declined $4.8 million to $58.5 million as the company reduced inventory accumulated in anticipation of supply-chain disruptions.
- Working capital was $75.2 million, down from $83.5 million, and the current ratio was 4.13 versus 4.77.
- Revolving credit borrowings declined $9.8 million to $40.1 million. The $65 million facility had $24.9 million available at March 31, 2023 and expires May 31, 2026.
- The revolving facility bears interest at SOFR plus a margin that can increase to SOFR plus 2.35% under the amended leverage terms. The separate mortgage had approximately $11.1 million outstanding at a fixed 3.8% rate and matures December 1, 2031.
- The company was in compliance with its debt covenants at March 31, 2023. Long-term debt to equity improved to 63.3% from 76.7% at year-end.
Material changes versus the prior comparable period
- Sales growth and cost-saving and productivity initiatives increased gross margin and operating income.
- Operating income in the U.S. segment increased $1.0 million, while Canadian segment operating income decreased $0.2 million and European segment operating income increased slightly.
- Operating cash flow shifted from an outflow of $5.5 million to an inflow of $7.7 million, primarily due to the inventory reduction and changes in accrued liabilities.
- Financing cash flow changed from a $6.5 million inflow to a $10.3 million outflow, primarily because the company repaid $9.8 million of revolving debt in Q1 2023.
- Dividends declared increased to $0.14 per share from $0.13 per share.
Guidance, outlook, risks and unusual items
Management expects cost-reduction initiatives, including lower SG&A and manufacturing and distribution productivity improvements, to generate more than $5.0 million of savings in 2023. The company believes operating cash flow and available revolver capacity will be sufficient to fund operations for the twelve months following the filing.
Key risks include inflation, higher interest rates, supply-chain disruptions, labor shortages and costs, global economic conditions, currency fluctuations, the war in Ukraine, tariffs and other trade policies, customer inventory adjustments, changing consumer spending, competition, e-commerce and the ability to manage growth and integrate acquisitions. The filing does not provide formal revenue or earnings guidance.
The company recorded a contingent liability related to the Safety Made acquisition of approximately $1.4 million at March 31, 2023, including $0.75 million in current liabilities and $0.63 million in non-current liabilities. The liability increased by $50,000 during the quarter, and $1.5 million of restricted cash was held in escrow for the contingent payment. There were no pending material legal proceedings. Adoption of the current expected credit loss standard on January 1, 2023 had no material impact.
Important facts for investors to verify
- Whether first aid and medical sales growth offsets continued customer inventory reductions in back-to-school products.
- Progress toward the stated 2023 cost savings of more than $5.0 million and whether savings persist without harming demand or service levels.
- Exposure to rising SOFR and compliance with the revolving facility’s leverage and fixed-charge covenants.
- Whether inventory reductions continue while maintaining adequate product availability and improving inventory turnover.
- The timing and final amount of the Safety Made contingent payment and related escrow release.
- The sustainability of improved operating cash flow, given the quarter’s benefit from inventory reductions and accrued-liability changes.