Business Context and Reporting Period
Acme United Corporation is a global supplier of cutting, sharpening, measuring, first aid and safety products sold under brands including Westcott, Clauss, Camillus, Cuda, DMT, First Aid Only and PhysiciansCare. Operations span the United States, Canada, Europe, Hong Kong and China, with substantial sourcing from Asia. This Form 10-K covers the fiscal year ended December 31, 2019; the filing also provides unaudited fourth-quarter data.
Sales are seasonal, generally strongest in the second and third quarters because of the back-to-school market. One customer represented approximately 17% of 2019 net sales, compared with 16% in 2018.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $142.5 million | $137.3 million | +4% |
| Gross profit | $52.0 million | $50.6 million | +3% |
| Gross margin | 36.5% | 36.9% | -0.4 percentage points |
| SG&A expense | $43.6 million | $43.2 million | +1% |
| Operating income | $8.4 million | $7.5 million | +13% |
| Net income | $5.5 million | $4.6 million | +20% |
| Diluted EPS | $1.60 | $1.30 | +23% |
| Net cash from operations | $14.7 million | $4.5 million | +$10.2 million |
| Capital expenditures | $1.7 million | $2.9 million | -$1.2 million |
Fourth-quarter 2019 net sales were $33.9 million and net income was $1.0 million, compared with $31.1 million and $0.6 million, respectively, in the fourth quarter of 2018. Fourth-quarter diluted EPS was $0.29 versus $0.17.
At December 31, 2019, cash and cash equivalents were $6.8 million, accounts receivable were $25.5 million, inventories were $39.3 million and total assets were $110.7 million. Total stockholders’ equity was $55.7 million.
Debt consisted primarily of $33.2 million outstanding under a $50 million HSBC revolving facility, leaving $16.8 million available. The company also had $3.4 million outstanding under a mortgage on its Vancouver, Washington facility. Total revolving debt decreased by approximately $7.0 million during 2019. The company was in compliance with its debt covenants at year-end.
Working capital decreased by approximately $3.1 million. Inventory declined 5%, inventory turnover improved to 2.3 from 2.1, and days sales outstanding improved to 64 days from 66 days. Quarterly dividends totaled $0.48 per share in 2019, compared with $0.45 in 2018.
Material Changes Versus the Prior Comparable Period
- Sales increased 4%, driven primarily by strong U.S. first aid and safety sales and growth in European office products, DMT sharpening products and e-commerce.
- U.S. segment sales increased approximately 4% and operating income increased approximately $1.1 million. Canada sales declined 5% in U.S. dollars, while European sales increased 8% in U.S. dollars.
- Gross margin narrowed to 36.5% from 36.9%, while SG&A as a percentage of sales improved to 30.6% from 31.5%.
- Operating income increased $1.0 million, aided by higher sales. Net interest expense declined $0.1 million because of lower average borrowings, partly offset by higher rates.
- Operating cash flow increased substantially, primarily reflecting inventory reductions and higher accrued liabilities.
- The company adopted lease accounting guidance and recorded approximately $2.9 million of operating lease right-of-use assets and related liabilities.
- Debt reduction was a stated 2019 accomplishment; the company made approximately $7.0 million of net revolving-debt repayments.
Outlook, Risks, Contingencies and Unusual Items
Management stated that cash on hand, operating cash flow and available revolving credit were expected to fund planned operations for at least the next twelve months. No formal quantitative revenue or earnings guidance was provided.
- COVID-19 was identified as an emerging risk in early 2020. The filing stated that there had not been significant disruption as of filing, but warned that the outbreak could impair manufacturing, sourcing, distribution and demand.
- Tariffs on certain Chinese imports affected approximately 10% of product purchases. The company implemented price increases to offset the impact, but warned that higher tariffs or broader coverage could reduce demand and margins.
- Major risks include dependence on foreign suppliers and third-party distributors, customer concentration, currency movements, freight and supply-chain disruptions, interest-rate exposure, cybersecurity, competition, product liability, seasonality and the ability to execute e-commerce growth.
- E-commerce represented approximately 12% of 2019 net sales and was described as the fastest-growing distribution channel.
- On January 7, 2020, the company acquired the assets of First Aid Central in Canada for $2.1 million in cash, funded with borrowings under the revolving credit facility.
- The company reported no material pending legal proceedings, no off-balance-sheet transactions and no impairment of goodwill or long-lived assets.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective.
Important Facts for Investors to Verify
- Assess the sustainability of sales growth and the effect of continued gross-margin pressure from tariffs, freight, sourcing costs and currency movements.
- Monitor customer concentration, particularly the customer representing approximately 17% of annual sales.
- Reconcile debt reduction and liquidity after the First Aid Central acquisition, including remaining revolver availability and covenant compliance.
- Evaluate COVID-19 effects on Asian sourcing, inventory availability, distribution and customer demand in 2020 and later periods.
- Review the quality and sustainability of the large improvement in operating cash flow, including the effects of inventory and accrued-liability changes.
- Verify dividend continuation and the unused capacity under the company’s 2010 and 2019 share-repurchase programs; no shares were repurchased during 2019.
- Review the integration prospects and financial contribution of the First Aid Central acquisition.