Acme United Corporation: Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
Acme United Corporation designs, manufactures and distributes cutting, sharpening, measuring, first aid and safety products for school, office, home, hardware, sporting and industrial markets. This Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Sales are seasonally stronger in the second and third quarters because of the back-to-school market.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $47.9 million | $43.3 million | $136.3 million | $123.1 million |
| Gross profit | $17.0 million | $15.0 million | $48.7 million | $44.5 million |
| Gross margin | 35.5% | 34.5% | 35.8% | 36.2% |
| Operating income | $3.0 million | $2.1 million | $9.7 million | $8.5 million |
| Net income | $2.0 million | $1.6 million | $11.3 million | $6.1 million |
| Diluted EPS | $0.50 | $0.46 | $2.85 | $1.75 |
| Net cash from operations | Not separately provided | Not separately provided | $3.0 million | $1.7 million |
Q3 SG&A was $14.0 million, or 29.3% of sales, versus $12.8 million, or 29.6%, in the prior-year quarter. Nine-month SG&A was $39.0 million, or 28.6% of sales, versus $36.0 million, or 29.3%.
At September 30, 2021, cash and cash equivalents were $5.3 million, total current assets were $92.6 million, and current liabilities were $19.1 million. Working capital was $73.5 million and the current ratio was 4.84. Accounts receivable were $36.1 million and inventories were $48.8 million.
Revolving credit borrowings were $40.5 million, with $9.5 million available under the $50 million facility. Mortgage debt was approximately $3.0 million. Total liabilities were $64.9 million and stockholders’ equity was $76.5 million. The company stated that it was in compliance with its debt covenants at September 30, 2021.
Material Changes Versus the Prior Comparable Period
- Q3 and nine-month sales each increased 11%, primarily because of strong first aid and medical product sales.
- Q3 gross margin improved by 100 basis points, while the nine-month gross margin declined by 40 basis points.
- Q3 operating income increased 39% to $3.0 million; nine-month operating income increased 14% to $9.7 million.
- Q3 net income increased 30% to $2.0 million. Nine-month net income increased 87%, primarily reflecting $3.5 million of PPP loan forgiveness income recorded in the second quarter.
- U.S. sales increased 12% in Q3 and 8% for the nine-month period. Canada increased 6% in Q3 and 33% in U.S. dollars for nine months, while Europe was flat in Q3 and increased 22% for nine months in U.S. dollars.
- First Aid and Safety sales increased to $24.4 million in Q3 from $19.4 million and to $69.9 million for nine months from $59.7 million. Cutting, Sharpening and Measuring sales declined slightly in Q3 but increased for the nine-month period.
- Operating cash flow increased to $3.0 million from $1.7 million, but receivables used $9.1 million of cash. Capital expenditures increased to $4.8 million from $2.1 million.
- The company issued 220,774 shares upon employee stock-option exercises during the first nine months, generating approximately $3.1 million, and declared dividends of $0.39 per share versus $0.36.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that operating cash flow and available borrowing capacity should be sufficient to fund operations for the twelve months following the filing under current conditions. No specific revenue or earnings guidance was provided.
- COVID-19, the Delta variant and potential future variants continue to create supply-chain and labor risks. The company cited port, container and trucking shortages, labor shortages, higher wages, employee turnover and inflationary pressures.
- The company has maintained additional inventory to reduce supply-chain risk and believes inventory is sufficient to meet anticipated near-term demand. Further disruptions could materially affect manufacturing, sourcing, distribution, liquidity and financial results.
- The PPP loan of approximately $3.5 million was fully forgiven in June 2021 and recognized as income. This nonrecurring item materially increased nine-month pretax and net income.
- Internal control over financial reporting was not effective at September 30, 2021 because of an ongoing material weakness related to inventory existence controls at the Rocky Mount, North Carolina warehouse. Management stated that the weakness did not result in a financial-statement misstatement and expects remediation by December 31, 2021, subject to successful operation and testing of the controls.
- Management disclosed no pending material legal proceedings. The revolving credit facility expires May 24, 2023, and carries financial covenants.
Important Facts for Investors to Verify
- Whether the Rocky Mount warehouse inventory controls were remediated and validated as of December 31, 2021.
- The sustainability of sales growth and margins after the favorable first aid demand and seasonal back-to-school period.
- The effect of supply-chain constraints, labor shortages, freight costs, tariffs and inflation on gross margin and product availability.
- Future cash generation relative to capital expenditures, dividends and the $40.5 million of revolving debt.
- The extent to which nine-month earnings were affected by the one-time $3.5 million PPP forgiveness benefit and the $0.9 million stock-compensation tax credit.
- Compliance with revolving-credit covenants and the company’s refinancing or repayment plans before the May 2023 facility expiration.