ACME United Corporation — 2023 Q3 Form 10-Q Summary
Business context and reporting period
ACME United sells first aid and medical products and cutting, sharpening, and measuring products through its United States, Canada, and Europe segments. This filing covers the three and nine months ended September 30, 2023, compared primarily with the corresponding 2022 periods. Results are seasonally influenced by stronger second- and third-quarter school-related sales.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $50.4 million | $49.7 million | $149.6 million | $149.8 million |
| Gross profit | $19.5 million | $15.9 million | $55.8 million | $49.5 million |
| Gross margin | 38.7% | 32.0% | 37.3% | 33.0% approximately |
| Operating income | $3.7 million | $1.0 million | $11.1 million | $6.3 million |
| Net income | $2.2 million | $0.1 million | $6.6 million | $3.6 million |
| Diluted EPS | $0.58 | $0.02 | $1.83 | $0.96 |
SG&A expense increased to $15.8 million in the quarter and $44.7 million year to date, primarily because of higher personnel costs. SG&A represented 31.4% of quarterly sales and 29.9% of nine-month sales. Net interest expense increased to $0.8 million in the quarter and $2.5 million year to date because of higher average borrowing rates. The nine-month effective tax rate was 23%, versus 19% in 2022.
Operating cash flow was $21.7 million for the first nine months, compared with cash used of $7.6 million in the prior-year period. The improvement reflected a $8.7 million inventory reduction, compared with a $12.8 million inventory increase in 2022, and higher accrued liabilities. Investing cash use was $4.5 million, including $3.5 million of capital expenditures and a $0.8 million Safety Made contingent payment. Financing cash use was $18.4 million, principally from $17.0 million of debt repayment and $1.5 million of shareholder distributions.
At September 30, 2023, cash and cash equivalents were $5.6 million, or $6.3 million including restricted cash. Working capital was $73.1 million, the current ratio was 3.87, and total stockholders’ equity was $85.9 million. Revolver borrowings were $33.0 million, with $32.0 million available under the $65.0 million facility; approximately $10.8 million remained outstanding under the 3.8% fixed-rate mortgage. Long-term debt to equity declined to 50.4% from 76.7% at December 31, 2022. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Quarterly sales increased 1%, while nine-month sales were essentially flat.
- First aid and medical sales increased, partly offsetting lower school, office, cutting, sharpening, and measuring sales in certain markets.
- Gross margin expanded materially because of manufacturing and distribution productivity improvements and lower inbound freight costs.
- Quarterly operating income increased $2.7 million, and nine-month operating income increased $4.8 million.
- U.S. operating income increased $2.7 million in the quarter and $4.4 million year to date. Canadian operating income declined, while European operating income improved.
- Inventory declined approximately $8.8 million from year-end as supply-chain disruption risks diminished. Days sales outstanding improved to 57 days from 62 days.
- Debt under the revolving facility declined approximately $17 million from December 31, 2022, despite higher interest rates.
Guidance, outlook, risks, contingencies, and unusual items
Management expects cost-reduction initiatives, including productivity improvements and lower SG&A, to generate more than $6.0 million of savings during 2023. Management believes operating cash flow and available revolver capacity will be sufficient to fund operations for the twelve months following the filing date under current conditions. No formal revenue or earnings guidance was provided.
Key risks include inflation and interest rates, economic weakness, supply-chain disruption, labor costs, currency movements, inventory management, consumer spending, competition, online sales trends, tariffs and trade policy, geopolitical conflicts, and the ability to integrate acquisitions.
The company had a $0.8 million Safety Made contingent liability at September 30, 2023 and paid $0.8 million from escrow during the first nine months. The company reported no pending material legal proceedings. On November 1, 2023, after the quarter-end, it sold the Camillus Cutlery and Cuda business lines for $19.8 million: $18.3 million was received at closing and $1.5 million is subject to a 12-month holdback primarily for indemnification claims.
The company adopted the current expected credit loss standard on January 1, 2023, with no material financial statement impact. Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether gross-margin expansion and the stated cost savings are sustainable after freight costs and supply-chain conditions normalize.
- The effect of higher SOFR-based borrowing costs on future earnings and cash flow.
- Debt covenant headroom and the remaining availability under the revolving credit facility.
- The accounting, cash proceeds, tax effects, and lost revenue or profit contribution associated with the post-quarter-end Camillus and Cuda divestiture.
- The resolution and final payment status of the remaining $1.5 million Safety Made holdback or contingent consideration.
- Demand recovery for school and office products, continued European weakness, and Canadian sales trends.
- Inventory turnover, customer rebates, receivables quality, and the company’s ability to maintain improved operating cash flow.