Acme United Corporation — Q2 2023 Form 10-Q Summary
Business Context and Reporting Period
Acme United Corporation reported results for the three and six months ended June 30, 2023. The company sells first aid and medical products and cutting, sharpening and measuring products through its United States, Canada and Europe segments. Results are seasonally influenced by stronger second- and third-quarter sales of school, office and related products.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $53.3 million | $99.2 million |
| Gross profit | $20.0 million; 37.5% margin | $36.3 million; 36.6% margin |
| Operating income | $5.3 million; approximately 9.8% margin | $7.4 million; approximately 7.5% margin |
| Net income | $3.4 million | $4.4 million |
| Diluted earnings per share | $0.96 | $1.25 |
| Net cash provided by operating activities | Not separately reported | $10.5 million |
- Cash and cash equivalents were $3.4 million at June 30, 2023; cash, cash equivalents and restricted cash totaled $4.2 million.
- Accounts receivable were $39.8 million and inventories were $55.9 million, compared with $32.6 million and $63.3 million, respectively, at December 31, 2022.
- Revolving credit borrowings were $40.0 million, with $25.0 million available under the $65 million facility. Mortgage debt was approximately $10.9 million, including current maturities.
- Working capital was $78.2 million, the current ratio was 4.09, and long-term debt to equity was 60.3% at June 30, 2023.
- Dividends declared were $0.14 per share in the second quarter and $0.28 per share year to date.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 6.1% and year-to-date sales declined 0.9% versus 2022, primarily because customers reduced school and office inventories after building safety stock in 2022. First aid and medical sales partially offset the decline.
- Gross profit increased 7.9% in the quarter and 8.3% year to date. Gross margin improved from 32.7% to 37.5% in the quarter and from 32.7% to 36.6% year to date.
- Operating income increased 32.0% in the quarter and 39.1% year to date, driven by productivity improvements, cost savings and lower ocean container and demurrage costs.
- Net income increased 25.7% in the quarter and 24.2% year to date. Higher interest expense and a higher effective tax rate partially offset operating improvement.
- Net interest expense increased to $0.8 million in the quarter and $1.7 million year to date, principally because of higher average interest rates on revolving debt.
- Operating cash flow improved from a $5.2 million use in the first six months of 2022 to $10.5 million provided in the first six months of 2023. Inventory reductions contributed $7.6 million of operating cash flow.
- Debt under the revolving facility declined by approximately $10 million from December 31, 2022.
- Canada sales increased 13% in the quarter and 2% year to date in U.S. dollars; Europe sales declined 6% in both periods, primarily because of recessionary conditions.
Guidance, Outlook, Risks and Unusual Items
- Management expects cost-reduction initiatives, including manufacturing and distribution productivity improvements and lower SG&A, to generate more than $5.0 million of savings in 2023.
- The company believes operating cash flow and available revolving-credit capacity will be sufficient to fund operations for the next twelve months under current conditions. No formal revenue or earnings guidance was provided.
- The revolving facility matures May 31, 2026, bears interest based on SOFR plus an applicable spread, and includes funded-debt-to-EBITDA, fixed-charge-coverage and annual profitability covenants. The company was in compliance as of June 30, 2023.
- The temporary debt covenant amendment and higher interest-rate spread applied through June 30, 2023; the filing does not state whether any subsequent amendment was executed.
- The company paid $750,000 during the quarter toward the contingent Safety Made acquisition liability. The remaining recorded liability was $705,000, and $750,000 remained in restricted cash at June 30, 2023.
- Principal risks include inflation and interest rates, supply-chain disruption, labor costs, foreign-currency movements, inventory management, changing consumer demand, competition, tariffs and international trade policies, the war in Ukraine and European economic weakness.
- No pending material legal proceedings were reported. Management concluded that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether sales of school and office products recover after customer inventory reductions and how first aid and medical demand develops.
- Whether the announced 2023 savings exceed $5 million and are sustained without impairing revenue or service levels.
- The effect of variable-rate debt and SOFR changes on interest expense, covenant compliance and cash flow.
- Progressive repayment or refinancing of the revolving facility and the availability of the remaining $25.0 million borrowing capacity.
- The final amount and timing of the remaining Safety Made contingent payment and related restricted cash release.
- Foreign-exchange trends, European demand and potential supply-chain, tariff and labor-cost pressures.