Business Context and Reporting Period
Acme United Corporation filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company sells cutting, sharpening and measuring products, as well as first aid and safety products, through reportable segments in the United States, Canada and Europe. Results are seasonal, with generally stronger second- and third-quarter sales due to the back-to-school market.
Financial Highlights
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $44.8 million | $44.0 million | $88.4 million | $79.8 million |
| Gross profit | $16.2 million | $16.1 million | $31.7 million | $29.6 million |
| Gross margin | 36.0% | 36.4% | 35.9% | 37.1% |
| Operating income | $3.8 million | $4.4 million | $6.8 million | $6.4 million |
| Net income | $7.2 million | $3.2 million | $9.3 million | $4.5 million |
| Diluted EPS | $1.82 | $0.92 | $2.34 | $1.28 |
Six-month net cash provided by operating activities was $0.1 million, compared with $2.4 million used in the prior-year period. Investing cash outflow was $3.4 million, primarily for capital expenditures, while financing activities provided $2.3 million, including $2.7 million from stock-option exercises. Cash declined to $3.2 million at June 30, 2021 from $4.2 million at December 31, 2020.
Accounts receivable increased to $36.3 million from $27.2 million at year-end, while inventory declined to $48.7 million from $50.7 million. Working capital was $71.0 million, the current ratio was 4.64, and long-term debt to equity was 57.1% at June 30, 2021.
Revolving-credit borrowings were $39.6 million, leaving approximately $10.5 million available under the $50 million facility, which expires May 24, 2023. Mortgage debt was approximately $3.2 million. The company reported compliance with its debt covenants. The $3.5 million PPP loan was fully forgiven in June 2021 and recognized as other income.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 2%; six-month sales increased 11%.
- Second-quarter operating income declined 14%, while six-month operating income increased 6%.
- Net income benefited materially from recognition of $3.5 million of PPP loan forgiveness income and a $0.9 million tax credit related to stock-based compensation.
- Gross margins declined because of product mix, higher ocean freight costs, port congestion and higher labor costs.
- Second-quarter U.S. sales declined 4%, partly because of shipping delays associated with installation of a new warehouse management system. Six-month U.S. sales increased 6%.
- Canadian sales increased 68% in the quarter and 53% for the six months in U.S. dollars, driven by First Aid Central products and recovery in school and office products.
- European sales increased 26% in the quarter and 34% for the six months in U.S. dollars, supported by office reopenings, e-commerce and DMT sharpening products.
- SG&A increased 6% in the quarter and 8% for the six months, primarily due to personnel-related costs, commissions, shipping costs and costs associated with Med Nap personnel.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific numerical revenue or earnings guidance. Management stated that operating cash flow and available revolving-credit capacity are expected to be sufficient to finance operations for the next twelve months under current conditions.
- COVID-19, including potential Delta or other variants, may affect demand, sourcing, manufacturing, distribution and labor availability.
- Office and school product sales remained weaker than before the pandemic, while craft, first aid, safety and e-commerce demand provided support.
- Labor shortages, higher wages, inflation, supply-chain disruption, container scarcity, port congestion, tariffs and currency fluctuations could pressure margins and liquidity.
- The company maintained elevated inventory levels to mitigate possible supply disruptions and reported higher turnover and operating inefficiencies than before the pandemic.
- The company disclosed a material weakness in internal control over financial reporting related to inventory existence and the Rocky Mount, North Carolina warehouse cycle-count program. Remediation efforts, including a new inventory management system and additional personnel, were ongoing; management expected remediation by December 31, 2021, subject to effective operation and testing of the controls.
- No material legal proceedings were reported.
Important Facts for Investors to Verify
- Separate recurring operating performance from the nonrecurring $3.5 million PPP forgiveness benefit and the stock-compensation tax credit.
- Monitor gross-margin effects from freight, labor, inflation, product mix and supply-chain conditions.
- Track accounts receivable growth, cash generation and the company’s approximately $10.5 million of remaining revolving-credit availability.
- Confirm continued compliance with debt covenants and the refinancing or repayment requirements associated with the May 2023 credit-facility expiration.
- Assess whether the Rocky Mount warehouse inventory-control material weakness was remediated and independently tested by year-end 2021.
- Evaluate the sustainability of Canadian and European growth and the recovery of U.S. school and office sales after pandemic-related disruptions.