Acme United Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2020, filed May 8, 2020. Acme United sells cutting, sharpening and measuring products, as well as first aid and safety products, through its United States, Canada and Europe segments. Results are seasonally stronger in the second and third quarters because of the back-to-school market.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $35.775 million | $31.370 million | 14% increase |
| Gross profit | $13.531 million | $11.802 million | 15% increase |
| Gross margin | 37.8% | 37.6% | 20 basis-point increase |
| Operating income | $2.010 million | $1.534 million | 31% increase |
| Operating margin | 5.6% | 4.9% | Improved |
| Net income | $1.277 million | $0.807 million | 58% increase |
| Diluted EPS | $0.36 | $0.24 | Increase |
| Net cash from operating activities | $0.793 million | $(0.683) million | Improved |
SG&A increased to $11.521 million from $10.268 million, primarily because of higher commissions and shipping costs associated with increased sales, bad-debt provisions and personnel costs. Net interest expense declined to $0.315 million from $0.501 million. The effective tax rate was approximately 23%, compared with 22% in the prior-year quarter.
Cash and cash equivalents were $4.272 million at March 31, 2020, compared with $6.822 million at December 31, 2019. Capital expenditures were $0.597 million, and $2.074 million was spent to acquire First Aid Central. Total investing cash outflow was $2.671 million.
Revolving-credit borrowings were $33.853 million, leaving $16.147 million available under the $50 million facility. The facility expires May 24, 2023 and bears interest at Prime Rate less 1.25%. Mortgage debt was $3.378 million, including current and long-term portions. The company reported compliance with its debt covenants at March 31, 2020.
Working capital was $56.450 million, the current ratio was 5.21, and long-term debt to equity was 66.2%. Inventory declined by approximately $3.0 million from year-end, while receivables increased by approximately $1.9 million. The company declared dividends of $0.12 per share.
Material changes versus the prior comparable period
- First aid and safety sales increased materially, reflecting market-share gains, e-commerce and home-improvement demand, and a COVID-19-related surge in demand. First Aid and Safety revenue rose to $20.027 million from $14.569 million.
- Cutting, sharpening and measuring revenue declined to $15.748 million from $16.801 million, primarily reflecting weakness in office and school supplies.
- U.S. sales increased 11%; Canadian sales increased 71% as reported, including approximately $1.0 million of First Aid Central sales; and European sales increased 16% in U.S. dollars.
- Operating income increased in all three segments: U.S. to $1.571 million from $1.257 million, Canada to $0.205 million from $0.135 million, and Europe to $0.234 million from $0.142 million.
- On January 7, 2020, the company acquired First Aid Central, a Canadian first aid and safety supplier, for approximately $2.1 million. The acquisition contributed approximately $1.0 million of sales and $0.1 million of net income in the quarter. Purchase-price allocation remained preliminary.
- The company repurchased 10,719 shares for approximately $0.214 million and paid $0.400 million in shareholder distributions. Cash settlements of stock options totaled approximately $0.457 million.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management stated that demand trends continued into the second quarter through the filing date, but the outlook remains highly uncertain because of COVID-19.
- COVID-19 increased demand for first aid and safety products but reduced office and school-product sales because of retail, school and office closures. The company reported cancellations of orders and scheduled promotions for the second and third quarters.
- The company incurred higher spot-market product costs, warehouse labor costs, facility-cleaning costs and bad-debt reserves. Management stated that increased product costs had been passed to customers to date, but there is no assurance this will continue.
- Potential risks include supply-chain disruptions, facility or supplier outbreaks, market saturation after customer stockpiling, prolonged economic weakness, reduced consumer spending, foreign-currency volatility, tariffs and difficulty integrating acquisitions.
- Most manufacturing facilities, distribution centers and key suppliers remained open at the filing date. Management said it had increased short-term manufacturing and sourcing capacity for first aid and safety products and anticipated sufficient inventory for expected demand.
- On May 7, 2020, after quarter-end, the company received a $3.508 million Paycheck Protection Program loan bearing 1% interest and maturing May 8, 2022. Principal and interest payments were deferred for six months. Some or all of the loan may be forgiven, but forgiveness was not assured.
- Management believed operating cash flow, the PPP loan and available revolving-credit capacity would be sufficient to fund operations for the next twelve months under current conditions.
- No material legal proceedings were reported. Management concluded that disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19-related first aid demand was sustained or reversed because of customer stockpiling and market saturation.
- The effect of school and office closures, canceled promotions and weaker office-product demand on second- and third-quarter results.
- Collection performance of receivables and whether bad-debt reserves require further increases.
- Supply-chain availability, spot-market costs, labor expenses and the company’s ability to pass cost increases to customers.
- Final purchase-price accounting and ongoing contribution from the First Aid Central acquisition.
- Eligibility for, and the amount of, PPP loan forgiveness, as well as the resulting debt and cash-flow impact if forgiveness is denied.
- Compliance with revolving-credit covenants and available borrowing capacity as pandemic-related conditions evolve.