Acme United Corporation — 2022 Q1 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2022. Acme United sells first aid and medical products, as well as cutting, sharpening and measuring products, through its United States, Canada and Europe segments. Results are seasonally stronger in the second and third quarters due to the back-to-school market.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $43.333 million | $43.525 million |
| Gross profit | $14.968 million; 34.5% margin | $15.587 million; 35.8% margin |
| Operating income | $1.371 million | $2.968 million |
| Net income | $0.830 million | $2.046 million |
| Diluted EPS | $0.22 | $0.52 |
| Operating cash flow | $(5.479) million | $(0.336) million |
| Capital expenditures | $0.518 million | $1.480 million |
| Dividends declared per share | $0.13 | $0.13 |
- SG&A expense increased to $13.597 million from $12.619 million, representing 31.4% of sales versus 29.0%.
- Net interest expense increased to $305,000 from $221,000 because of higher average debt.
- Cash and cash equivalents were $5.307 million at March 31, 2022, compared with $4.843 million at December 31, 2021.
- Working capital was $83.061 million, the current ratio was 4.89, and long-term debt to equity was 65.8% at quarter-end.
- Inventory increased to $60.716 million from $53.552 million at year-end, primarily to support expected demand and mitigate supply-chain disruptions. Inventory turnover declined to 2.2 from 2.4.
- Revolving credit borrowings increased to $40.151 million from $33.037 million. The $50 million facility had $9.849 million available at March 31, 2022 and expires May 24, 2023. The company was in compliance with its debt covenants.
- Mortgage debt was approximately $11.4 million, at a fixed 3.8% rate, with maturity in December 2031.
Material changes versus the prior comparable period
- Sales decreased $192,000, or approximately 0.4%. U.S. sales declined 1%, Canada increased 8% in both U.S. dollars and local currency, and Europe decreased 4% in U.S. dollars but increased 3% in local currency.
- Gross profit declined $619,000 and gross margin contracted 130 basis points, primarily because of cost inflation and higher transportation costs. Price increases provided partial offset.
- Operating income fell $1.597 million, or approximately 54%, driven by lower U.S. and European operating income and higher SG&A.
- Net income declined $1.216 million, or approximately 59%, while diluted EPS decreased from $0.52 to $0.22.
- Operating cash flow deteriorated to an outflow of $5.479 million, primarily because inventory consumed $7.139 million of cash.
- Direct-import sales represented approximately 6% of total sales, compared with 7% in the prior-year quarter, primarily because of COVID-related disruptions in China.
Guidance, outlook, risks and unusual items
- The filing does not provide specific quantitative revenue, earnings or margin guidance.
- Management expects supply-chain disruptions, labor shortages, freight costs, product-cost inflation and operating inefficiencies to persist in the near term and potentially longer.
- Omicron-related factory closures, quarantines and port shutdowns in China constrained shipments, particularly to customers taking delivery directly at Chinese ports. Management believes U.S. inventory should at least partially offset near-term disruptions.
- Key risks include further pandemic disruption, global economic uncertainty, labor availability and wage pressure, inflation, inventory management, consumer spending changes, competition, currency movements, tariffs and international trade policy.
- Management believes operating cash flow and available revolving-credit capacity will be sufficient to finance operations for the twelve months following the filing.
- No material pending legal proceedings were reported. Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting.
- Stock-based compensation expense increased to approximately $400,000 from $306,000. Approximately $3.6 million of unrecognized compensation cost remained at March 31, 2022, expected to be recognized over approximately three years.
Important facts for investors to verify
- Whether supply-chain constraints, inflation and freight costs continue to pressure gross margin and operating income.
- Inventory levels, turnover and potential obsolescence or working-capital requirements as supply conditions normalize.
- Revolving-credit utilization, interest-rate exposure, covenant compliance and the May 2023 facility expiration.
- Whether price increases can offset higher product, labor and transportation costs without weakening demand.
- Cash conversion and the company’s ability to fund dividends, capital expenditures and growth while operating cash flow remains negative.
- Future performance by segment, particularly the recovery of U.S. and European operating income and the sustainability of Canadian growth.