Acme United Corporation: FY2022 Form 10-K Summary
Business Context and Reporting Period
Acme United Corporation is a global supplier of first-aid and medical products, cutting tools, sharpening tools and measuring products. Its principal brands include First Aid Only, PhysiciansCare, Spill Magic, Westcott, Clauss, Camillus, Cuda and DMT. Operations span the United States, Canada, Europe and Asia, with products sold primarily through retailers, distributors, e-commerce channels and industrial customers.
This filing reports the fiscal year ended December 31, 2022, with comparisons to fiscal year 2021. The company reported approximately 619 full-time employees and three reportable segments: United States, Canada and Europe.
Financial Performance and Key Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $193.96 million | $182.09 million | Up 7% |
| Gross profit | $63.56 million | $64.80 million | Down 2% |
| Gross margin | 32.8% | 35.6% | Down 280 bps |
| Operating income | $6.27 million | $12.77 million | Down $6.50 million |
| Operating margin | 3.2% | 7.0% | Down approximately 380 bps |
| Net income | $3.03 million | $13.66 million | Down 78% |
| Basic diluted EPS | $0.86 / $0.82 | $3.93 / $3.45 | Both decreased |
| Net cash from operations | $2.89 million | $5.14 million | Down $2.25 million |
| Capital expenditures | $4.30 million | $6.37 million | Down $2.07 million |
First-aid and medical sales were approximately $104.6 million, or 54% of total sales, while cutting, sharpening and measuring sales were approximately $89.3 million. U.S. segment sales increased 8%; European sales declined 2% in U.S. dollars but increased 10% in local currency; and Canadian sales declined 4% in U.S. dollars and were flat in local currency.
Net income in 2021 benefited from $3.51 million of PPP loan forgiveness and a $1.4 million tax credit related to stock-based compensation. These items did not recur in 2022.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $6.10 million at December 31, 2022, compared with $4.84 million at year-end 2021. Including restricted cash, total cash, cash equivalents and restricted cash were $7.60 million.
- Inventories increased 18% to $63.33 million from $53.55 million, reflecting preparation for supply-chain disruption and higher product costs. Inventory turnover declined to 2.0 from 2.3.
- Total debt consisted primarily of $50.0 million outstanding under the revolving credit facility and $11.23 million of mortgage debt. Total debt increased materially from 2021.
- The revolving credit facility was increased from $50 million to $65 million and extended to May 31, 2026. Available borrowing was $15 million at year-end.
- The revolving facility bears interest based on SOFR plus a spread that can reach SOFR plus 2.35%, subject to leverage. The company was in compliance with its amended covenants at December 31, 2022.
- The company states that cash on hand, operating cash flow and available revolver capacity are expected to fund planned operations for at least the next twelve months under current conditions.
Material Changes Versus 2021
- Sales grew $11.87 million, primarily from first-aid and medical products, market-share gains and the Safety Made acquisition.
- Gross margin declined because of exceptional ocean-container, freight and demurrage costs, which had an approximately 1.7 percentage-point impact on gross margin, as well as adverse foreign-exchange effects in Canada and Europe.
- Exceptional supply-chain costs totaled approximately $4.0 million in 2022, including $3.3 million in the U.S. segment and $0.7 million in Europe.
- SG&A expenses increased 10.1% to $57.29 million, driven by personnel costs, commissions, shipping and fuel surcharges, and Safety Made operating expenses.
- Net interest expense increased to $2.36 million from $0.91 million because of higher average debt and interest rates; the weighted-average interest rate increased to 3.8% from 2.1%.
- Working capital increased approximately $8.5 million, principally due to higher inventory.
- The company acquired substantially all relevant assets of Safety Made on June 1, 2022, for approximately $11 million, including a contingent payment of up to $1.5 million. Safety Made contributed approximately $3.6 million of 2022 sales and $0.6 million of operating income.
- Operating cash flow declined because higher inventory absorbed approximately $9.6 million of cash. Investing cash outflows included $9.62 million for the Safety Made acquisition and $4.30 million of capital expenditures.
Guidance, Outlook, Risks and Unusual Items
Management expects cost-reduction initiatives implemented during the second half of 2022 to generate more than $5 million of savings in 2023. The company also plans to reduce inventory by approximately $5 million during 2023. No formal revenue or earnings guidance is provided in the filing.
- Key risks include inflation, inability to fully pass cost increases to customers, higher interest rates, foreign-exchange volatility, supply-chain disruption, labor shortages, tariffs and geopolitical instability related to the Russia-Ukraine conflict.
- The company relies heavily on overseas suppliers, particularly in Asia, and on third-party distributors and large retailers. Two customers each represented more than 10% of consolidated sales in 2022, accounting for approximately 15% and 10% of sales.
- E-commerce represented approximately 17% of 2022 net sales and creates demand-forecasting, fulfillment-capacity and inventory-availability risks.
- Seasonality remains significant: sales and profits are generally stronger in the second and third quarters and weaker in the first and fourth quarters because of the Westcott back-to-school cycle.
- The Safety Made contingent consideration was recorded at a fair value of $1.33 million at year-end and remains dependent on revenue milestones and other contractual conditions.
- The company reported no pending material legal proceedings, no off-balance-sheet transactions and no impairment of goodwill or intangible assets.
- Management and the independent auditor concluded that internal control over financial reporting was effective. The financial statement audit opinion was unqualified.
Most Important Facts for Investors to Verify
- Whether the planned 2023 cost savings exceed $5 million and translate into improved gross and operating margins.
- Whether inventory is reduced by the targeted $5 million without causing product shortages or requiring material obsolescence charges.
- Revolver utilization, SOFR-based borrowing costs, leverage covenant headroom and the company’s ability to reduce debt.
- Safety Made’s revenue and profitability performance, including the potential $1.5 million contingent payment.
- Customer concentration, e-commerce growth and the effect of any lost or reduced orders from major customers.
- Whether supply-chain costs, inflation, freight rates, tariffs and foreign-exchange movements continue to pressure profitability.
- The sustainability of dividends and the company’s ability to fund acquisitions, capital expenditures and working capital while maintaining liquidity.