ACME United Corporation: Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
Acme United Corporation sells first aid and medical products, as well as cutting, sharpening and measuring products, primarily in the United States, Canada and Europe. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Sales are typically stronger in the second and third quarters because of back-to-school seasonality.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Net sales | $56.8 million | $44.8 million | $100.1 million | $88.4 million |
| Gross profit | $18.5 million | $16.2 million | $33.5 million | $31.7 million |
| Gross margin | 32.7% | 36.0% | 33.5% | 35.9% |
| Operating income | $4.0 million | $3.8 million | $5.3 million | $6.8 million |
| Net income | $2.7 million | $7.2 million | $3.6 million | $9.3 million |
| Diluted EPS | $0.71 | $1.82 | $0.93 | $2.34 |
- Second-quarter sales increased 27%; six-month sales increased 13%. U.S. sales rose 33% in the quarter and 16% year to date.
- Gross profit increased in dollars, but margins declined because of product-cost inflation and higher transportation and labor costs. Price increases partially offset these pressures.
- SG&A increased to $14.6 million in the quarter and $28.2 million year to date, primarily due to personnel, commissions and shipping costs.
- Net income and EPS declined substantially because the 2021 periods included a $3.5 million PPP loan forgiveness benefit and a $0.9 million stock-based compensation tax credit.
- Net interest expense increased to $0.4 million in the quarter and $0.7 million year to date, reflecting higher borrowings and interest rates.
- Six-month operating cash flow was negative $5.2 million, compared with positive $0.1 million in 2021. Working-capital investment included increases of approximately $11.4 million in inventory and $12.8 million in receivables.
- Cash used in investing activities was $12.4 million, including $9.6 million for the Safety Made acquisition and $2.8 million for capital expenditures.
- Financing activities provided $16.0 million, primarily from $17.2 million of net long-term borrowings.
- Cash and cash equivalents were $1.8 million at June 30, 2022, or $3.3 million including $1.5 million of restricted cash held for contingent acquisition consideration.
- Working capital was $84.4 million, the current ratio was 3.56, and long-term debt to equity was 76.6% at June 30, 2022.
Material Changes Versus the Prior Comparable Period
- Sales benefited from higher prices, increased volume and second-quarter fulfillment of orders delayed by first-quarter supply-chain disruptions.
- The gross margin declined 330 basis points in the quarter and 240 basis points year to date.
- Quarterly operating income increased modestly, but six-month operating income declined 21% because of cost pressures and weaker Canadian and European segment results.
- European operating income declined to $48,000 in the quarter and $230,000 year to date, compared with $452,000 and $916,000, respectively, in 2021. Management cited inflation, currency effects and broader economic conditions.
- Debt under the revolving credit facility increased from $33.0 million at December 31, 2021 to $50.3 million at June 30, 2022, primarily to fund the acquisition and higher inventory.
- The company acquired Safety Made on June 1, 2022 for approximately $11 million, including $1.5 million contingent on financial targets. The acquisition added approximately $5.1 million of intangible assets and $3.4 million of goodwill; the purchase-price allocation remained preliminary.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative revenue, earnings or margin guidance. Management stated that cash from operations and available borrowing capacity should be sufficient to finance operations for the next twelve months under current conditions.
- The HSBC revolving facility was amended to increase capacity from $50 million to $65 million, price borrowings at SOFR plus 1.75%, and extend maturity to May 31, 2026. The company had $14.7 million available under the facility and was in compliance with its covenants at June 30, 2022.
- Management expects supply-chain disruptions, labor constraints, inflation and higher freight, product and transportation costs to persist in the near term and potentially longer.
- COVID-19 outbreaks in China caused factory closures, quarantines and port shutdowns; U.S. port delays also affected shipments. The company believes its U.S. inventory provides some near-term mitigation.
- Additional risks include the war in Ukraine, European economic weakness, foreign-currency fluctuations, changing consumer demand, competition, tariffs, labor shortages and the ability to integrate acquisitions.
- The company reported no pending material legal proceedings and no material changes to internal control over financial reporting. Management concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether price increases and operational improvements can offset inflation, freight and labor costs and restore gross margins.
- The pace of inventory and receivables normalization and whether operating cash flow returns to positive levels.
- Revolving-debt balances, SOFR-driven interest costs, covenant headroom and remaining borrowing capacity.
- Safety Made revenue, earnings contribution, integration progress and the final purchase-price allocation, including the $1.5 million contingent payment.
- Exposure to China-related supply-chain disruptions, port delays, tariffs, currency movements and European weakness.
- The sustainability of reported earnings excluding the nonrecurring 2021 PPP forgiveness and tax benefit.