ACME UNITED CORP quarterly report, Q1 FY2021

Acme United Corporation: Q1 2021 Form 10-Q Summary

Business context and reporting period

Acme United Corporation reported unaudited results for the three months ended March 31, 2021. The company sells cutting, sharpening and measuring products and first aid and safety products through its United States, Canada and Europe segments. Results are seasonally weaker in the first and fourth quarters because of the back-to-school cycle.

Key financial metrics

Metric	Q1 2021	Q1 2020
Net sales	$43.525 million	$35.775 million
Gross profit	$15.587 million	$13.531 million
Gross margin	35.8%	37.8%
Operating income	$2.968 million	$2.010 million
Operating margin	6.8%	5.6%
Net income	$2.046 million	$1.277 million
Diluted EPS	$0.52	$0.36
Net cash from operating activities	$(0.336) million	$0.793 million

Basic EPS was $0.61 versus $0.38; dividends declared were $0.13 per share versus $0.12.
Cash and cash equivalents were $3.857 million at March 31, 2021, compared with $4.167 million at December 31, 2020.
Working capital was $66.642 million and the current ratio was 4.22, compared with $63.484 million and 4.14, respectively, at year-end 2020.
Accounts receivable increased to $31.592 million from $27.173 million at year-end; inventory declined to $49.389 million from $50.704 million.
Total liabilities were $70.687 million and stockholders’ equity was $64.627 million at March 31, 2021.
Revolving credit borrowings were $40.626 million, leaving $9.374 million available under the $50 million facility. PPP debt was $3.508 million, and mortgage debt was approximately $3.1 million.
The company was in compliance with its revolving credit covenants at March 31, 2021.

Material changes versus the prior comparable period

Net sales increased 22%. U.S. sales rose 18%, Canada increased 38% in U.S. dollars, and Europe increased 42% in U.S. dollars.
Growth was driven by Westcott cutting tools, first aid and safety products, First Aid Central products in Canada, and e-commerce and DMT sharpening products in Europe.
Gross profit increased 15%, but gross margin declined 200 basis points because of product mix and higher ocean freight costs caused by container shortages and port congestion.
SG&A increased $1.098 million to $12.619 million, primarily from higher personnel costs, commissions, shipping costs and incremental First Aid Central expenses. SG&A as a percentage of sales improved to 29.0% from 32.2%.
Operating income increased 48%, with improvement in all three segments: United States operating income increased $562,000, Canada increased $165,000 and Europe increased $231,000.
Net interest expense declined $94,000 to $221,000 because of lower average interest rates, partially offset by higher average revolving debt. Other expense increased to $77,000, primarily because of foreign currency losses.
Operating cash flow declined to an outflow of $336,000, mainly reflecting a $4.634 million increase in accounts receivable. Investing cash use was $1.480 million, primarily for property, plant and equipment.
Financing activities provided $1.538 million, including $1.859 million of net long-term borrowings, partially offset by $436,000 of shareholder distributions and $67,000 of mortgage repayments.

Guidance, outlook, risks and unusual items

The filing does not provide specific numerical revenue or earnings guidance. Management stated that cash from operations and available revolving credit capacity are expected to fund operations for the next twelve months under current conditions.
COVID-19 continued to cause weaker demand for office and school products, while first aid and safety demand remained strong. The company reported increased product, labor, cleaning and maintenance costs and maintained additional inventory to mitigate supply-chain disruption.
Management believes it has sufficient inventory for anticipated demand, but warned that a prolonged or renewed pandemic, supplier interruptions, tariffs, currency movements, changing consumer spending, competition and economic uncertainty could adversely affect results.
The company has increased short-term manufacturing and sourcing capacity for first aid and safety products, although management cautioned that strong demand may not continue and that increased costs may not remain fully recoverable from customers.
The $3.508 million PPP loan remained outstanding. The lender approved the company’s application for forgiveness and submitted it to the SBA, but SBA approval was still pending. The company could be required to repay some or all of the loan if forgiveness is denied or eligibility is challenged.
There were no pending material legal proceedings. The company adopted ASU 2019-12 without a material financial statement effect.
Disclosure controls and procedures were not effective as of March 31, 2021 because of a material weakness related to inventory existence controls at the Rocky Mount, North Carolina warehouse. The company stated that the weakness did not result in a financial statement misstatement.
Remediation includes changes to the warehouse cycle-count process, a new inventory management system expected by the end of the second quarter of 2021, and additional personnel. Management expects remediation to be completed by December 31, 2021, subject to successful operation and testing of the controls.

Important facts for investors to verify

Whether the SBA ultimately approves forgiveness of the entire PPP loan and whether any repayment or penalties arise.
Progress and final effectiveness testing of the Rocky Mount warehouse inventory controls, including the planned system implementation.
Whether elevated first aid and safety demand persists and whether office and school product demand recovers.
Trends in gross margin, ocean freight, product costs and the company’s ability to pass cost increases to customers.
Accounts receivable collections, customer credit exposure and the adequacy of elevated bad-debt reserves.
Revolving debt utilization, covenant compliance and liquidity as the company funds operations, capital expenditures, dividends and other activities.
Potential effects of COVID-19 developments, supply-chain disruption, tariffs, foreign exchange and port congestion on future results.