Acme United(ACU) - 2021 Q1 - Quarterly Report

FORM 10-Q Filing Information This section details ACME UNITED CORPORATION's Form 10-Q filing information, including its filer status and outstanding common stock - ACME UNITED CORPORATION filed a Quarterly Report on Form 10-Q for the period ended March 31, 2021[1] - The registrant is an Accelerated Filer and a Smaller Reporting Company[2] - As of May 4, 2021, the company had 3,483,527 shares of its $2.50 par value Common Stock outstanding[2] Part I - FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1: Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Acme United Corporation, including balance sheets, statements of operations, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes. The statements reflect the company's financial position and performance for the quarter ended March 31, 2021, showing overall growth in sales and net income compared to the prior year, while also detailing accounting policies, debt, segment performance, and the status of the PPP loan Condensed Consolidated Balance Sheets This section covers condensed consolidated balance sheets Condensed Consolidated Balance Sheet Highlights | Metric | March 31, 2021 ($k) | December 31, 2020 ($k) | | :--------------------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $3,857 | $4,167 | | Accounts receivable, net | $31,592 | $27,173 | | Inventories | $49,389 | $50,704 | | Total current assets | $87,315 | $83,685 | | Net property, plant and equipment | $21,138 | $20,239 | | Total assets | $135,314 | $129,868 | | Total current liabilities | $20,673 | $20,201 | | Long-term debt | $40,626 | $38,767 | | Long-term debt - PPP Loan | $3,508 | $3,508 | | Total liabilities | $70,687 | $67,151 | | Total stockholders' equity | $64,627 | $62,717 | Condensed Consolidated Statements of Operations This section covers condensed consolidated statements of operations Condensed Consolidated Statements of Operations Highlights (Three months ended March 31) | Metric | 2021 ($k) | 2020 ($k) | YoY Change (k$) | YoY Change (%) | | :--------------------------------------------- | :--- | :--- | :-------------- | :------------- | | Net sales | $43,525 | $35,775 | $7,750 | 21.7% | | Cost of goods sold | $27,938 | $22,244 | $5,694 | 25.6% | | Gross profit | $15,587 | $13,531 | $2,056 | 15.2% | | Selling, general and administrative expenses | $12,619 | $11,521 | $1,098 | 9.5% | | Operating income | $2,968 | $2,010 | $958 | 47.7% | | Interest expense, net | $221 | $315 | $(94) | -29.8% | | Income before income tax expense | $2,670 | $1,652 | $1,018 | 61.6% | | Income tax expense | $624 | $375 | $249 | 66.4% | | Net income | $2,046 | $1,277 | $769 | 60.2% | | Basic earnings per share | $0.61 | $0.38 | $0.23 | 60.5% | | Diluted earnings per share | $0.52 | $0.36 | $0.16 | 44.4% | | Dividends declared per share | $0.13 | $0.12 | $0.01 | 8.3% | Condensed Consolidated Statements of Comprehensive Income This section covers condensed consolidated statements of comprehensive income Condensed Consolidated Statements of Comprehensive Income (Three months ended March 31) | Metric | 2021 ($k) | 2020 ($k) | | :---------------------------- | :--- | :--- | | Net income | $2,046 | $1,277 | | Foreign currency translation adjustment | $(188) | $(329) | | Comprehensive income | $1,858 | $948 | Condensed Consolidated Statement of Changes in Stockholders' Equity This section covers condensed consolidated statement of changes in stockholders' equity Changes in Stockholders' Equity (Three months ended March 31) | Item | 2021 ($k) | 2020 ($k) | | :---------------------------- | :--- | :--- | | Balances, December 31 | $62,717 | $55,705 | | Net income | $2,046 | $1,277 | | Other comprehensive loss | $(188) | $(329) | | Stock compensation expense | $306 | $243 | | Distributions to shareholders | $(436) | $(401) | | Issuance of common stock | $182 | - | | Purchase of treasury stock | - | $(214) | | Balances, March 31 | $64,627 | $55,824 | Condensed Consolidated Statements of Cash Flows This section covers condensed consolidated statements of cash flows Condensed Consolidated Statements of Cash Flows (Three months ended March 31) | Cash Flow Activity | 2021 ($k) | 2020 ($k) | | :--------------------------------------------- | :--- | :--- | | Net cash (used in) provided by operating activities | $(336) | $793 | | Net cash used in investing activities | $(1,480) | $(2,671) | | Net cash provided by (used in) financing activities | $1,538 | $(526) | | Effect of exchange rate changes on cash and cash equivalents | $(32) | $(146) | | Net change in cash and cash equivalents | $(310) | $(2,550) | | Cash and cash equivalents at beginning of period | $4,167 | $6,822 | | Cash and cash equivalents at end of period | $3,857 | $4,272 | | Cash paid for income taxes | $45 | $319 | | Cash paid for interest | $218 | $340 | Notes to Condensed Consolidated Financial Statements This section covers notes to condensed consolidated financial statements 1. Basis of Presentation This section covers basis of presentation - The accompanying condensed consolidated financial statements are unaudited and include all necessary normal, recurring adjustments[26] - The adoption of ASU No. 2019-12 (Income Taxes) and ASU No. 2017-04 (Goodwill Impairment) did not have a material effect on the Company's consolidated financial statements[28][29] 2. Commitment and Contingencies This section covers commitment and contingencies - There are no pending material legal proceedings or contemplated governmental authority actions against the Company[30] 3. Revenue from Contracts with Customers This section covers revenue from contracts with customers - Revenue is recognized from sales of products grouped into two main categories: (i) cutting, sharpening and measuring; and (ii) first aid and safety[31] - Revenue is recognized when performance obligations are satisfied, typically at shipment or delivery, with consideration for customer rebates, promotional allowances, and freight allowance programs[32][33] External Net Sales Disaggregated by Product Category and Segment (Three months ended March 31) | Category / Segment | 2021 ($k) | 2020 ($k) | YoY Change (k$) | YoY Change (%) | | :--------------------------------------------- | :--- | :--- | :-------------- | :------------- | | Cutting, Sharpening and Measuring | | | | | | United States | $15,564 | $11,728 | $3,836 | 32.7% | | Canada | $1,549 | $1,422 | $127 | 8.9% | | Europe | $3,743 | $2,598 | $1,145 | 44.1% | | First Aid and Safety | | | | | | United States | $20,484 | $18,715 | $1,769 | 9.4% | | Canada | $1,784 | $1,000 | $784 | 78.4% | | Europe | $401 | $312 | $89 | 28.5% | | Total Net Sales | $43,525 | $35,775 | $7,750 | 21.7% | 4. Debt and Shareholders' Equity This section covers debt and shareholders' equity - Long-term debt primarily consists of borrowings under a $50 million revolving loan agreement with HSBC Bank, N.A. (expiring May 24, 2023) and a variable rate mortgage for the Vancouver, WA facility[42][43] - The Company was in compliance with all loan covenants as of March 31, 2021[42] Debt Outstanding | Debt Type | March 31, 2021 ($k) | December 31, 2020 ($k) | | :--------------------------------------------- | :------------- | :---------------- | | Long-term debt (revolving loan) | $40,626 | $38,767 | | Long-term debt - PPP Loan | $3,508 | $3,508 | | Mortgage payable, net of current portion | $2,844 | $2,911 | 5. Segment Information This section covers segment information - The Company operates in three reportable business segments: United States (including Asian operations), Canada, and Europe[44] - Direct import sales (Asia to U.S. retailers) represented approximately 7% of total net sales for Q1 2021, up from 6% in Q1 2020[45] Sales to External Customers by Segment (Three months ended March 31) | Segment | 2021 ($k) | 2020 ($k) | YoY Change (k$) | YoY Change (%) | | :---------------------------- | :--- | :--- | :-------------- | :------------- | | United States | $36,048 | $30,443 | $5,605 | 18.4% | | Canada | $3,333 | $2,422 | $911 | 37.6% | | Europe | $4,144 | $2,910 | $1,234 | 42.4% | | Consolidated | $43,525 | $35,775 | $7,750 | 21.7% | Operating Income by Segment (Three months ended March 31) | Segment | 2021 ($k) | 2020 ($k) | YoY Change (k$) | YoY Change (%) | | :---------------------------- | :--- | :--- | :-------------- | :------------- | | United States | $2,133 | $1,571 | $562 | 35.8% | | Canada | $370 | $205 | $165 | 80.5% | | Europe | $465 | $234 | $231 | 98.7% | | Consolidated | $2,968 | $2,010 | $958 | 47.7% | Assets by Segment | Segment | March 31, 2021 ($k) | December 31, 2020 ($k) | | :---------------------------- | :------------- | :---------------- | | United States | $118,158 | $113,831 | | Canada | $8,340 | $7,432 | | Europe | $8,816 | $8,605 | | Consolidated | $135,314 | $129,868 | 6. Stock Based Compensation This section covers stock based compensation - Share-based compensation expense was $306,385 for Q1 2021, up from $243,000 for Q1 2020[49] - As of March 31, 2021, $1,974,640 of unrecognized compensation cost remains, expected to be recognized over approximately three years[49] 7. Fair Value Measurements This section covers fair value measurements - The carrying value of the Company's bank debt is a reasonable estimate of fair value due to its payment terms and maturity[50] 8. Leases This section covers leases - The Company has operating leases for office and warehouse space and equipment, with terms expiring through 2026[51] Lease Information | Metric | March 31, 2021 ($k) | March 31, 2020 ($k) | | :---------------------------- | :------------- | :------------- | | Operating lease cost | $336 | $307 | | Operating lease - cash flow | $294 | $271 | | Weighted-average remaining lease term | 4.0 years | 4.0 years | | Weighted-average discount rate | 5% | 5% | 9. Paycheck Protection Program Loan This section covers paycheck protection program loan - The Company received a $3,508,047 PPP Loan on May 7, 2020, maturing on May 8, 2022, with a 1.00% interest rate[57] - An application for forgiveness of the entire PPP loan was submitted in August 2020 and is currently pending SBA approval[59] - No assurance can be given that the Company's application for loan forgiveness will be approved by the SBA, in whole or in part[59] 10. Other Accrued Liabilities This section covers other accrued liabilities Other Accrued Liabilities | Category | March 31, 2021 ($k) | December 31, 2020 ($k) | | :---------------------------- | :------------- | :---------------- | | Customer Rebates | $5,526 | $6,068 | | Accrued Compensation | $1,608 | $3,072 | | Dividend Payable | $436 | $435 | | Income Tax Payable | $1,035 | $460 | | Other | $2,718 | $1,425 | | Total | $11,323 | $11,460 | Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, highlighting the impact of the COVID-19 pandemic on sales and costs, and detailing the performance across segments. It also discusses liquidity, capital resources, and ongoing efforts to manage operational challenges and supply chain disruptions Forward-Looking Information This section covers forward-looking information - Forward-looking statements are subject to risks and uncertainties, including the ongoing impact of the global COVID-19 pandemic on business, operations, and financial results[66] - Key risks include the duration and severity of COVID-19, economic downturns, supply chain disruptions, changes in client needs and consumer spending habits, competition, and technological changes[66][67] Critical Accounting Policies This section covers critical accounting policies - Critical accounting policies and estimates are discussed in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020[69] COVID-19 Pandemic Related Considerations This section covers COVID-19 pandemic related considerations - The COVID-19 pandemic has caused weakness in sales of Westcott office and school supplies due to closures, while Westcott craft products gained market share and first aid/safety products saw strong demand[70][74] - The Company incurred increased costs for product acquisition, additional inventory, labor, and facility cleaning, and maintained elevated reserves for outstanding receivables due to credit risks[73] - Increased short-term manufacturing and sourcing capacity for first aid and safety products and other key components to minimize supply chain disruptions[74] Results of Operations This section covers results of operations - Consolidated net sales for Q1 2021 increased 22% to $43,525,000 compared to $35,775,000 in Q1 2020[75] - U.S. sales increased 18% due to growth in Westcott cutting tools and strong first aid/safety product sales - Canadian net sales increased 38% (31% in local currency) primarily due to higher First Aid Central e-commerce sales - European net sales increased 42% (31% in local currency) due to e-commerce growth across all product lines and DMT sharpening products[75][76] - Gross profit percentage decreased to 35.8% in Q1 2021 from 37.8% in Q1 2020, mainly due to product mix and higher ocean freight costs[78] - Operating income increased to $2,968,000 in Q1 2021 from $2,010,000 in Q1 2020, with all segments showing growth[80] - Interest expense, net, decreased by $94,000 due to a lower average interest rate, partially offset by higher average debt outstanding[80] Financial Condition (Liquidity and Capital Resources) This section covers financial condition (liquidity and capital resources) - Working capital increased approximately $3.0 million during Q1 2021 compared to December 31, 2020[82] Key Financial Ratios | Metric | March 31, 2021 | December 31, 2020 | | :---------------------------- | :------------- | :---------------- | | Working capital | $66,642k | $63,484k | | Current ratio | 4.22 | 4.14 | | Long term debt to equity ratio | 72.7% | 72.0% | - Total debt outstanding under the revolving credit facility increased by approximately $1.8 million in Q1 2021, with $40,626,000 outstanding and $9,374,000 available for borrowing[85] - The Company believes that cash generated from operating activities, combined with available funds under its revolving credit facility, will be sufficient to finance operations for the next twelve months[93] Item 3: Quantitative and Qualitative Disclosures about Market Risk This section states that there are no material quantitative or qualitative disclosures about market risk applicable for this report - This item is marked as 'Not applicable', indicating no material quantitative or qualitative disclosures about market risk are being provided[95] Item 4: Controls and Procedures This section addresses the effectiveness of the Company's disclosure controls and procedures, identifying a material weakness related to inventory controls at a warehouse. It also outlines the remediation efforts underway to address this weakness, with expected completion by the end of 2021 Evaluation of Internal Controls and Procedures This section covers evaluation of internal controls and procedures - Disclosure controls and procedures were not effective as of March 31, 2021, due to a material weakness related to the inventory cycle count program at the Rocky Mount, NC warehouse[95] - The identified material weakness did not result in any misstatement of the Company's consolidated financial statements[96] Changes in Internal Control over Financial Reporting This section covers changes in internal control over financial reporting - The Company is evaluating and changing processes, procedures, and controls related to the Warehouse cycle count program - A new inventory management system is being implemented at the Warehouse, expected by the end of Q2 2021, to improve cycle count efficiency and effectiveness - Additional personnel resources are being allocated to the inventory cycle count program[96][97] - Remediation of the material weakness is expected to be completed as of December 31, 2021[98] Part II - OTHER INFORMATION This part provides other required information, including legal proceedings, risk factors, and exhibits Item 1 — Legal Proceedings This section confirms the absence of pending material legal proceedings or governmental actions against the Company - There are no pending material legal proceedings or contemplated governmental authority actions against the Company[100] Item 1A — Risk Factors This section refers readers to the comprehensive discussion of risk factors in the Company's Annual Report on Form 10-K - Risk Factors are set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019[100] Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds This section covers unregistered sales of equity securities and use of proceeds - No unregistered sales of equity securities and use of proceeds to report[100] Item 3 — Defaults Upon Senior Securities This section covers defaults upon senior securities - No defaults upon senior securities to report[100] Item 4 — Mine Safety Disclosures This section covers mine safety disclosures - Mine Safety Disclosures are not applicable[100] Item 5 — Other Information This section covers other information - No other information to report[100] Item 6 — Exhibits This section lists the documents filed as exhibits to the Form 10-Q, including certifications and XBRL documents - Exhibits include certifications under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and Inline XBRL documents[101] Signatures This section contains the signatures of authorized officers certifying the report on behalf of Acme United Corporation - The report was signed by Walter C. Johnsen, Chairman of the Board and Chief Executive Officer, and Paul G. Driscoll, Vice President and Chief Financial Officer, on May 7, 2021[103]