Business Context and Reporting Period
Acme United Corporation’s Form 10-K covers the fiscal year ended December 31, 2021, with comparative results for 2020. The Company supplies first aid and medical products, cutting, sharpening and measuring products to mass-market, e-commerce, industrial, office, school, sporting goods and hardware customers. Reportable segments are the United States, Canada and Europe; Asian operations are included in the United States segment.
First aid and safety products generated approximately $91.2 million of 2021 sales, while cutting, sharpening and measuring products generated approximately $90.9 million. The Company had 654 full-time employees and two customers individually representing more than 10% of consolidated sales.
Financial Performance and Liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $182.1 million | $164.0 million | +11.0% |
| Gross profit | $64.8 million | $59.6 million | +8.7% |
| Gross margin | 35.6% | 36.3% | -0.7 percentage points |
| SG&A expense | $52.0 million | $48.2 million | +8.0% |
| Operating income | $12.8 million | $11.4 million | +11.9% |
| Operating margin | 7.0% | 7.0% | Approximately flat |
| Net income | $13.7 million | $8.1 million | +68.6% |
| Diluted EPS | $3.45 | $2.31 | +49.4% |
| Cash flow from operations | $5.1 million | $5.7 million | -$0.6 million |
| Capital expenditures | $6.4 million | $2.6 million | +$3.8 million |
Net income benefited materially from $3.5 million of PPP loan forgiveness and a $1.4 million tax credit related to stock-based compensation. Excluding the disclosed tax credit and PPP-related income, management reported a 2021 effective tax rate of approximately 24%, compared with 21% in 2020.
Cash and cash equivalents were $4.8 million at December 31, 2021, compared with $4.2 million at year-end 2020. Working capital increased by approximately $11.5 million. Inventory increased 6% to $53.6 million, reflecting anticipated growth and efforts to protect against supply-chain disruptions; inventory turnover remained 2.3 times. Accounts receivable increased to $34.2 million, with days sales outstanding unchanged at 60 days.
At year-end, $33.0 million was outstanding under the $50.0 million HSBC revolving facility, leaving $17.0 million available. The facility bears interest at Prime less 1.25%, expires May 24, 2023, and is subject to financial covenants that the Company stated it was meeting. A new $11.6 million mortgage at a fixed 3.8% rate was secured by facilities in Rocky Mount, North Carolina and Vancouver, Washington, with final maturity in December 2031. Total debt, including the mortgage, was approximately $44.5 million before considering current classifications and debt issuance costs.
Material Changes Versus 2020
- Sales increased 11%, driven primarily by first aid and medical products, Westcott craft products, Canadian first aid sales and European e-commerce sales.
- U.S. sales increased 9%; Canada increased 31% in U.S. dollars and 22% in local currency; Europe increased 19% in U.S. dollars and 15% in local currency.
- Gross margin declined because of product-cost inflation and higher transportation costs. Price increases only partially offset these pressures.
- SG&A increased 8%, primarily because of higher commissions and shipping costs associated with higher sales, plus Med-Nap-related expenses.
- Operating income improved despite margin pressure. Canadian operating income benefited from the First Aid Central acquisition, while U.S. and European operating income benefited primarily from higher sales.
- Net income and EPS benefited from the one-time PPP loan forgiveness, the tax credit related to stock compensation and the absence of the approximately $750,000 non-cash pension-plan termination charge recorded in 2020.
- Capital expenditures increased to $6.4 million, including approximately $2 million for Rocky Mount HVAC improvements and approximately $1 million for a warehouse management system.
- The Company repurchased 43,214 shares and paid approximately $1.8 million in shareholder distributions during 2021.
Outlook, Commentary, Risks and Unusual Items
Management did not provide quantified 2022 revenue or earnings guidance. It expects cash on hand, operating cash flow and available revolving-credit capacity to fund planned operations for at least the next twelve months under current conditions. Management also expects warehouse-management-system implementation to improve efficiency in 2022 and intends to continue pursuing organic growth and potential strategic acquisitions.
COVID-19-related supply-chain disruptions, labor shortages, wage inflation, higher freight and product costs, shipping delays and operating inefficiencies affected 2021 results and may persist. The Company increased inventory by approximately 40% over the 21-month period ended December 31, 2021 to protect product availability.
- Customer concentration remains significant: two customers represented approximately 17% and 11% of 2021 sales.
- E-commerce represented approximately 18% of 2021 sales and is the fastest-growing distribution channel, but is exposed to forecasting, fulfillment, customer-promotion and channel-shift risks.
- The Company sources most products internationally, primarily from Asia, creating exposure to tariffs, currency movements, vendor disruptions, transportation costs and geopolitical or regulatory changes.
- Variable-rate revolving debt exposes the Company to higher interest costs if rates rise.
- The Company faces risks from inflation, labor availability, competition, seasonality, cybersecurity, product liability, FDA and other regulatory requirements, intellectual-property claims and environmental matters.
- A material weakness identified in 2020 relating to inventory cycle counts at the Rocky Mount warehouse was reported as remediated after a full physical inventory count in 2021. Management and the independent auditor issued unqualified opinions on internal control effectiveness.
- No material legal proceedings or off-balance-sheet transactions were reported. No goodwill or long-lived-asset impairment was recorded.
- The filing contains inconsistent references to the PPP loan amount: the financial statements and debt note state $3,508,047, while portions of the business discussion refer to $3,580,047. The financial statements appear to be the consistent amount, but the discrepancy should be verified.
Investor Verification Checklist
- Reconcile reported 2021 earnings to operating performance excluding PPP forgiveness and the stock-compensation tax credit.
- Verify the PPP loan amount and related accounting treatment because of the inconsistency within the filing.
- Monitor gross-margin recovery, pricing effectiveness and the impact of freight, labor, product and tariff costs.
- Assess inventory growth, turnover and the $1.55 million slow-moving and obsolete inventory reserve as supply-chain conditions normalize.
- Review customer concentration and the sustainability of e-commerce and first aid product growth.
- Confirm borrowing-base availability, covenant compliance, the variable-rate debt exposure and the May 2023 revolving-facility maturity.
- Evaluate whether operating cash flow can support capital expenditures, dividends, share repurchases and potential acquisitions.
- Track the effectiveness of the new warehouse management system and continued remediation of inventory controls.