ACME United Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2020, filed August 7, 2020. Acme United sells cutting, sharpening and measuring products and first aid and safety products through U.S., Canadian and European segments. Results were materially affected by COVID-19, including elevated demand for first aid and safety products and weaker school and office product demand.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $44.0 million | $40.2 million | $79.8 million | $71.6 million |
| Gross profit | $16.1 million | $14.8 million | $29.6 million | $26.6 million |
| Gross margin | 36.4% | 36.7% | 37.1% | 37.1% |
| Operating income | $4.4 million | $3.8 million | $6.4 million | $5.3 million |
| Operating margin | 10.0% | 9.4% | 8.0% | 7.4% |
| Net income | $3.2 million | $2.7 million | $4.5 million | $3.5 million |
| Diluted EPS | $0.92 | $0.77 | $1.28 | $1.01 |
- Q2 sales increased 10%; six-month sales increased 11%.
- Q2 and six-month net income increased 20% and 29%, respectively.
- Net interest expense declined to $234,000 in Q2 and $554,000 year to date, from $491,000 and $994,000, respectively, primarily due to lower rates and lower average revolving debt.
- Effective tax rates increased to 23% for Q2 and 21% year to date, compared with 18% and 19% in the comparable periods.
- Cash and cash equivalents were $5.2 million at June 30, 2020, compared with $6.8 million at December 31, 2019.
- Working capital was $65.1 million, the current ratio was 4.16, and long-term debt to equity was 71.7% at June 30, 2020.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was negative $2.4 million, compared with positive $0.9 million in 2019. Working-capital investment included an $8.6 million increase in receivables and a $4.7 million increase in inventory.
- Investing cash outflows were $3.4 million, including $1.3 million of capital expenditures and $2.1 million for the First Aid Central acquisition.
- Financing cash inflows were $4.2 million, including $2.5 million of net revolving-debt borrowings and $3.5 million of PPP Loan proceeds.
- At June 30, 2020, $35.7 million was outstanding and $14.3 million was available under the $50 million HSBC revolving credit facility. The facility expires May 24, 2023, and the Company was in compliance with its covenants.
- The PPP Loan totaled $3.5 million, bears interest at 1.0%, matures May 8, 2022, and may be forgiven in whole or in part subject to program requirements. The Company stated that it had used the proceeds consistently with forgiveness requirements, but no assurance was provided that forgiveness would be approved.
Material changes versus the prior comparable period
- First aid and safety sales increased substantially, driven by COVID-19-related demand, market-share gains and growth in industrial, safety, home improvement, mass-market and e-commerce channels.
- School and office product sales weakened because of retail-store, school and office closures, delayed or canceled orders and postponed promotions.
- Gross margin was broadly stable, declining 30 basis points in Q2 and remaining unchanged year to date. Operating margin improved due to operating leverage and lower interest costs, despite higher SG&A.
- SG&A increased 6% in Q2 and 9% year to date, primarily from higher commissions, shipping, bad-debt provisions and acquisition-related costs, partly offset by lower travel and marketing expenses.
- Accounts receivable increased by approximately $8.2 million and inventory by approximately $5.1 million from year-end. The allowance for doubtful accounts increased to $950,000 from $523,000.
- On January 7, 2020, the Company acquired First Aid Central for approximately $2.1 million. The acquisition contributed approximately $1.1 million of Q2 sales and $2.1 million of six-month sales.
- The Company repurchased 3,701 shares during Q2 for approximately $73,000; 203,579 shares remained authorized for future repurchase at June 30.
Outlook, commentary and risks
- The filing does not provide formal financial guidance.
- Management expected COVID-19-related demand shifts to continue in the immediate future but warned that first aid and safety demand could decline if customers became saturated with stockpiled products.
- The Company incurred higher spot-market sourcing costs, warehouse labor costs, facility-cleaning costs and other pandemic-related expenses. It stated that it had generally passed higher product costs to customers to date, but future pass-through was not assured.
- Supply-chain disruptions, particularly involving suppliers in China, could impair manufacturing, sourcing and distribution. The Company planned to increase inventory of certain products to mitigate potential disruptions.
- Management stated that cash from operations, the PPP Loan and available revolving-credit capacity should be sufficient to fund operations for the twelve months following the filing date under current conditions.
- Key risks include the duration and severity of COVID-19, renewed outbreaks, customer bankruptcies or credit deterioration, weaker consumer and business spending, inventory-management challenges, tariffs and trade policy, currency fluctuations, competition and acquisition integration.
- No material pending legal proceedings were reported. Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting.
Investor verification points
- Verify the sustainability of pandemic-driven first aid and safety demand and the timing of any normalization or inventory saturation.
- Assess receivables quality, the adequacy of the increased bad-debt reserve and potential customer-credit losses.
- Monitor inventory growth, turnover and potential excess or obsolescence as school and office demand remains uncertain.
- Confirm the amount of PPP Loan forgiveness ultimately approved and any repayment obligation or related penalties.
- Review covenant compliance, revolving-credit availability and liquidity if operating cash flow remains negative.
- Evaluate the final purchase-price allocation and ongoing contribution of First Aid Central, whose valuation remained preliminary.