Acme United(ACU) - 2020 Q3 - Quarterly Report

Filing Information This section provides basic filing details for ACME UNITED CORPORATION's Form 10-Q, including registrant classification and shares outstanding Form 10-Q Details This section details ACME UNITED CORPORATION's Form 10-Q filing, classifying it as an Accelerated Filer and Smaller Reporting Company with 3,338,913 shares outstanding as of November 3, 2020 - Filing Type: Quarterly Report (Form 10-Q) for the period ended September 30, 2020[1] - Registrant Classification: Accelerated Filer and Smaller Reporting Company[3] Shares Outstanding | Metric | Value | | :--- | :--- | | Common Stock Outstanding (as of Nov 3, 2020) | 3,338,913 shares | Part I - FINANCIAL INFORMATION Item 1: Financial Statements (Unaudited) This section presents Acme United Corporation's unaudited condensed consolidated financial statements, including balance sheets, income, comprehensive income, equity, and cash flows, for the period ended September 30, 2020 Condensed Consolidated Balance Sheets Presents key balance sheet figures, showing asset and liability changes from December 2019 to September 2020 Condensed Consolidated Balance Sheets (Selected Data, in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | ASSETS | | | | Total current assets | $85,678 | $73,146 | | Total assets | $123,017 | $110,749 | | LIABILITIES | | | | Total current liabilities | $23,741 | $16,583 | | Total liabilities | $62,421 | $55,045 | | STOCKHOLDERS' EQUITY | | | | Total stockholders' equity | $60,596 | $55,704 | | Total liabilities and stockholders' equity | $123,017 | $110,749 | - Total assets increased by $12.268 million (11.08%) from $110.749 million at December 31, 2019, to $123.017 million at September 30, 2020[5] - Total current assets increased by $12.532 million (17.13%) from $73.146 million to $85.678 million, primarily due to increases in accounts receivable and inventories[5] Condensed Consolidated Statements of Operations Summarizes the company's financial performance, including net sales, gross profit, operating income, and net income for the periods ended September 30, 2020 Condensed Consolidated Statements of Operations (Selected Data, in thousands, except per share) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $43,316 | $36,995 | $123,133 | $108,585 | | Gross profit | $14,956 | $13,134 | $44,539 | $39,708 | | Operating income | $2,124 | $1,726 | $8,516 | $7,029 | | Income before income tax expense | $1,991 | $1,217 | $7,792 | $5,514 | | Net income | $1,579 | $1,059 | $6,055 | $4,537 | | Basic earnings per share | $0.47 | $0.32 | $1.81 | $1.35 | | Diluted earnings per share | $0.46 | $0.30 | $1.75 | $1.32 | | Dividends declared per share | $0.12 | $0.12 | $0.36 | $0.36 | - Net sales increased by 17% for the three months and 13% for the nine months ended September 30, 2020, compared to the same periods in 2019[9] - Net income increased by 49.1% for the three months and 33.4% for the nine months ended September 30, 2020, compared to the same periods in 2019[9] Condensed Consolidated Statements of Comprehensive Income Details comprehensive income, including net income and foreign currency translation adjustments, for the periods ended September 30, 2020 Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income | $1,579 | $1,059 | $6,055 | $4,537 | | Foreign currency translation adjustment | $270 | $(254) | $142 | $(124) | | Comprehensive income | $1,849 | $805 | $6,197 | $4,413 | - Comprehensive income significantly increased by 129.7% for the three months and 40.4% for the nine months ended September 30, 2020, primarily due to higher net income and a positive foreign currency translation adjustment[10] Condensed Consolidated Statements of Changes in Stockholders' Equity Outlines changes in stockholders' equity, including net income, stock compensation, and distributions, for the periods ended September 30, 2020 Condensed Consolidated Statements of Changes in Stockholders' Equity (Selected Data, in thousands) | Metric | Sep 30, 2020 | Sep 30, 2019 | | :--- | :--- | :--- | | Total Stockholders' Equity (Nine Months) | $60,596 | $55,024 | | Net Income (Nine Months) | $6,055 | $4,537 | | Stock Compensation Expense (Nine Months) | $929 | $745 | | Distributions to Shareholders (Nine Months) | $(1,201) | $(1,213) | | Purchase of Treasury Stock (Nine Months) | $(287) | $0 | - Total stockholders' equity increased from $55.704 million at December 31, 2019, to $60.596 million at September 30, 2020, driven by net income and stock compensation expense, partially offset by distributions to shareholders and treasury stock purchases[7][15] Condensed Consolidated Statements of Cash Flows Presents cash flow activities from operations, investing, and financing, showing the net change in cash for the periods ended September 30, 2020 Condensed Consolidated Statements of Cash Flows (Selected Data, in thousands) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,741 | $7,268 | | Net cash used in investing activities | $(4,155) | $(1,123) | | Net cash used in financing activities | $(1,463) | $(4,825) | | Net change in cash and cash equivalents | $(3,791) | $1,289 | | Cash and cash equivalents at end of period | $3,031 | $5,698 | - Net cash provided by operating activities decreased significantly from $7.268 million in 2019 to $1.741 million in 2020, primarily due to changes in accounts receivable and inventories[17] - Net cash used in investing activities increased to $4.155 million in 2020, mainly due to the acquisition of First Aid Central for $2.074 million[17] Notes to Condensed Consolidated Financial Statements This section provides detailed notes on financial statements, covering presentation, commitments, revenue, debt, equity, segments, compensation, fair value, leases, business combinations, and accrued liabilities 1. Basis of Presentation Outlines the basis for the condensed, unaudited financial statements and the expected impact of new accounting standards - The financial statements are condensed and unaudited, including normal, recurring adjustments, and should be read in conjunction with the 2019 Annual Report on Form 10-K[19] - The Company does not expect new accounting standards ASU 2018-14 and ASU 2019-12 to materially impact its consolidated financial statements[21][22] 2. Commitment and Contingencies Addresses the company's commitments and contingencies, specifically noting the absence of material legal proceedings - There are no pending material legal proceedings to which the Company is a party[23] 3. Revenue from Contracts with Customers Details revenue recognition policies and disaggregated net sales by product category and segment for the periods ended September 30, 2020 - Revenue is recognized from sales of cutting, sharpening, measuring, and first aid/safety products, with performance obligations typically satisfied at shipment or delivery[24] Net Sales Disaggregated by Product Category and Segment (in thousands) | Category | U.S. (3M 2020) | Canada (3M 2020) | Europe (3M 2020) | Total (3M 2020) | U.S. (9M 2020) | Canada (9M 2020) | Europe (9M 2020) | Total (9M 2020) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Cutting, Sharpening and Measuring | $18,656 | $2,199 | $3,013 | $23,868 | $50,088 | $4,860 | $8,505 | $63,453 | | First Aid and Safety | $18,000 | $1,174 | $274 | $19,448 | $55,488 | $3,315 | $877 | $59,680 | | Total Net Sales | $36,656 | $3,373 | $3,287 | $43,316 | $105,576 | $8,175 | $9,382 | $123,133 | - Direct import sales, where customers take ownership in Asia, represented approximately 12% of total net sales for the three months and 11% for the nine months ended September 30, 2020[42] 4. Debt and Shareholders' Equity Discusses changes in outstanding debt, the Paycheck Protection Program Loan, and common stock repurchases for the periods ended September 30, 2020 - Outstanding borrowings under the revolving loan agreement with HSBC Bank, N.A. decreased from $33.240 million at December 31, 2019, to $30.703 million at September 30, 2020[36] - The Company received a $3.508 million PPP Loan on May 7, 2020, which is unsecured and federally guaranteed, with an application for forgiveness pending SBA approval[38][61][63] - The Company repurchased 14,420 shares of common stock for approximately $287,000 during the nine months ended September 30, 2020[39] 5. Segment Information Provides financial data disaggregated by the Company's three reportable segments: United States, Canada, and Europe - The Company operates in three reportable segments: United States (including Asian operations), Canada, and Europe[40] Sales to External Customers by Segment (in thousands) | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | United States | $36,656 | $32,780 | $105,576 | $95,178 | | Canada | $3,373 | $1,775 | $8,175 | $5,402 | | Europe | $3,287 | $2,440 | $9,382 | $8,005 | | Consolidated | $43,316 | $36,995 | $123,133 | $108,585 | Operating Income by Segment (in thousands) | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | United States | $1,189 | $1,381 | $6,442 | $5,942 | | Canada | $600 | $280 | $1,173 | $746 | | Europe | $335 | $65 | $901 | $341 | | Consolidated | $2,124 | $1,726 | $8,516 | $7,029 | 6. Stock Based Compensation Reports stock-based compensation expense and unrecognized compensation costs for non-vested share-based payments Stock-Based Compensation Expense (in thousands) | Period | 2020 | 2019 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $327 | $247 | | Nine Months Ended Sep 30 | $929 | $745 | - Unrecognized compensation cost related to non-vested share-based payments was $2.101 million as of September 30, 2020, expected to be recognized over approximately three years[47] 7. Fair Value Measurements Addresses the fair value of the Company's financial instruments, specifically its bank debt - The carrying value of the Company's bank debt is considered a reasonable estimate of fair value due to its payment terms and maturity[48] 8. Leases Details the Company's operating lease arrangements for office, warehouse space, and equipment, including costs and cash flows - The Company has operating leases for office, warehouse space, and equipment, with terms expiring through 2026[49] Operating Lease Costs and Cash Flows (in thousands) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $284 | $275 | $899 | $856 | | Operating lease - cash flow | $272 | $270 | $839 | $840 | - The weighted-average remaining lease term is 4.0 years with a weighted-average discount rate of 5% as of September 30, 2020[53] 9. Business Combinations Describes the acquisition of First Aid Central, including the purchase price allocation and its contribution to net sales and income - On January 7, 2020, the Company acquired First Aid Central, a Canadian first aid and safety supplier, for approximately $2.1 million in cash[55] First Aid Central Acquisition - Purchase Price Allocation (in thousands) | Asset | Amount | | :--- | :--- | | Accounts receivable | $232 | | Inventory | $440 | | Prepaid Expense | $47 | | Equipment | $45 | | Intangible assets | $1,310 | | Total assets acquired | $2,074 | - First Aid Central contributed approximately $1.2 million in net sales and $0.1 million in net income for the three months ended September 30, 2020, and $3.3 million in net sales and $0.3 million in net income for the nine months ended September 30, 2020[59] 10. Paycheck Protection Program Loan Details the Company's Paycheck Protection Program Loan, including its terms, forgiveness application status, and usage of proceeds - The Company received a $3.508 million PPP Loan on May 7, 2020, with an interest rate of 1.00% and a maturity date of May 8, 2022[61] - An application for forgiveness of the entire PPP Loan was submitted in August 2020 and is currently pending SBA approval[63] - The Company used the loan proceeds for eligible purposes, primarily payroll, and believes it satisfied eligibility criteria, though full forgiveness is not assured[62][91][92] 11. Other Accrued Liabilities Presents a breakdown of other accrued liabilities, highlighting significant increases in customer rebates, compensation, and income tax payable Other Accrued Liabilities (in thousands) | Liability | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Customer Rebates | $5,870 | $4,849 | | Pension Liability | $60 | $45 | | Accrued Compensation | $2,488 | $1,695 | | Dividend Payable | $400 | $402 | | Income Tax Payable | $1,545 | $262 | | Other | $3,082 | $1,406 | | Total | $13,445 | $8,659 | - Total other accrued liabilities increased by $4.786 million (55.27%) from $8.659 million at December 31, 2019, to $13.445 million at September 30, 2020, primarily due to increases in customer rebates, accrued compensation, and income tax payable[64] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and COVID-19 impact, noting increased first aid demand, weak office/school sales, and associated operational challenges and costs Forward-Looking Information Highlights forward-looking statements and associated risks, including the ongoing impact of the COVID-19 pandemic and supply chain disruptions - The report contains forward-looking statements subject to risks and uncertainties, including the ongoing impact of the global COVID-19 pandemic on business, operations, and financial results[66][67] - Key risks include the pandemic's severity and duration, supply chain disruptions, changes in consumer spending, competition, technological changes, and the ability to manage growth and inventory[67][68] Critical Accounting Policies Refers to the critical accounting policies and estimates detailed in the Company's 2019 Annual Report on Form 10-K - Critical accounting policies and estimates are discussed in Item 7 of the Company's 2019 Annual Report on Form 10-K[70] COVID-19 Pandemic Related Considerations Examines the COVID-19 pandemic's impact on product demand, increased operational costs, and associated challenges for the Company - The COVID-19 pandemic led to a significant increase in demand for first aid and safety products, while sales of Westcott office and school supplies remained weak[71] - The Company incurred increased costs for product acquisition, inventory, labor, and facility cleaning due to the pandemic, and increased reserves for bad debt related to COVID-19 credit risks[73] - Operational challenges included travel restrictions, inefficiencies from remote work, social distancing in facilities, and higher turnover/training costs[73] Results of Operations Analyzes consolidated net sales, gross profit, SG&A expenses, operating income, and net interest expense for the periods ended September 30, 2020 Consolidated Net Sales (in thousands) | Period | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $43,316 | $36,995 | 17% | | Nine Months Ended Sep 30 | $123,133 | $108,585 | 13% | - U.S. segment sales increased by 12% (3 months) and 11% (9 months) due to strong first aid and safety product sales, market share gains, and COVID-19 related surge demand[75] - Canadian net sales (excluding First Aid Central) increased 25% (3 months) due to easing lockdowns and back-to-school shift, but decreased 10% (9 months) due to earlier store/office closings[76] - European net sales increased 35% (3 months) and 17% (9 months) driven by Westcott cutting products, Camillus knives in e-commerce, and DMT sharpening products[77] Gross Profit and SG&A Expenses (in thousands) | Metric | 3M 2020 | 3M 2019 | 9M 2020 | 9M 2019 | | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $14,956 | $13,134 | $44,539 | $39,708 | | Gross Profit % | 34.5% | 35.5% | 36.2% | 36.6% | | SG&A Expenses | $12,832 | $11,408 | $36,023 | $32,679 | | SG&A % of Net Sales | 29.6% | 30.8% | 29.3% | 30.1% | - Operating income increased by $398,000 (23.1%) for the three months and $1.487 million (21.2%) for the nine months ended September 30, 2020[80] - Net interest expense decreased by $301,000 (64.2%) for the three months and $741,000 (50.6%) for the nine months due to lower average interest rates and debt[82] Financial Condition Assesses the Company's financial health, including working capital, current ratio, debt levels, and liquidity outlook Key Financial Ratios | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Working capital | $61,937 | $56,563 | | Current ratio | 3.61 | 4.41 | | Long term debt to equity ratio | 61.4% | 65.4% | - Working capital increased by approximately $5.3 million, while the current ratio decreased from 4.41 to 3.61[85][86] - Total debt outstanding under the revolving credit facility decreased by approximately $2.5 million, with $19.3 million available for borrowing as of September 30, 2020[86] - The Company believes cash from operations, PPP Loan proceeds, and available credit will be sufficient to finance operations over the next twelve months[93] Item 3: Quantitative and Qualitative Disclosures about Market Risk This section confirms no quantitative or qualitative disclosures about market risk are applicable for the Company in this report - The Company has no quantitative and qualitative disclosures about market risk to report in this filing[93] Item 4: Controls and Procedures Management evaluated disclosure controls and procedures as effective on September 30, 2020, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2020[93] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2020[94] Part II - OTHER INFORMATION Item 1: Legal Proceedings The Company reports no pending material legal proceedings or those contemplated by any governmental authority - There are no pending material legal proceedings to which the Company is a party[96] Item 1A: Risk Factors The Company refers to its Annual Report on Form 10-K for the fiscal year ended December 31, 2019, for a comprehensive discussion of risk factors - Risk factors are detailed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019[96] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds The Company reports no unregistered sales of equity securities or use of proceeds - No unregistered sales of equity securities or use of proceeds to report[96] Item 3: Defaults Upon Senior Securities The Company reports no defaults upon senior securities - No defaults upon senior securities to report[97] Item 4: Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[97] Item 5: Other Information The Company reports no other information in this section - No other information to report[97] Item 6: Exhibits This section lists filed exhibits, including Sarbanes-Oxley Act certifications and Inline XBRL documents - Exhibits include certifications by Walter C. Johnsen and Paul G. Driscoll under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[97] - Inline XBRL documents (Instance, Schema, Presentation, Calculation, Label, Definition Linkbase Documents) are filed as part of the exhibits[97] Signatures The report is signed by Walter C. Johnsen (Chairman & CEO) and Paul G. Driscoll (VP & CFO) on November 6, 2020, certifying compliance with the Securities Exchange Act of 1934 Signatures The report is signed by Walter C. Johnsen (Chairman & CEO) and Paul G. Driscoll (VP & CFO) on November 6, 2020 - Report signed by Walter C. Johnsen (Chairman & CEO) and Paul G. Driscoll (VP & CFO) on November 6, 2020[99]