Acme United(ACU) - 2022 Q1 - Quarterly Report

Part I — FINANCIAL INFORMATION Item 1: Financial Statements (Unaudited) This section presents the company's unaudited condensed consolidated financial statements for the reporting period Condensed Consolidated Balance Sheets Details the company's assets, liabilities, and stockholders' equity at the end of the reporting period ASSETS (in thousands) | ASSETS | March 31, 2022 (unaudited) | December 31, 2021 (Note 1) | | :--- | :--- | :--- | | Cash and cash equivalents | $5,307 | $4,843 | | Accounts receivable, net | 34,605 | 34,221 | | Inventories | 60,716 | 53,552 | | Total current assets | 104,438 | 95,251 | | Net property, plant and equipment | 23,887 | 24,027 | | Goodwill | 4,800 | 4,800 | | Intangible assets, net | 16,888 | 17,231 | | Total assets | $153,077 | $144,439 | LIABILITIES & EQUITY (in thousands) | LIABILITIES & EQUITY | March 31, 2022 (unaudited) | December 31, 2021 (Note 1) | | :--- | :--- | :--- | | Accounts payable | $10,939 | $8,977 | | Other accrued liabilities | 8,937 | 9,909 | | Total current liabilities | 21,377 | 20,275 | | Long-term debt | 40,151 | 33,037 | | Total liabilities | 75,304 | 67,357 | | Total stockholders' equity | 77,773 | 77,082 | | Total liabilities and stockholders' equity | $153,077 | $144,439 | Condensed Consolidated Statements of Operations Summarizes revenues, costs, and expenses to report the company's net income over the period Metric (in thousands, except per share) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net sales | $43,333 | $43,525 | | Cost of goods sold | 28,365 | 27,938 | | Gross profit | 14,968 | 15,587 | | Selling, general and administrative expenses | 13,597 | 12,619 | | Operating income | 1,371 | 2,968 | | Interest expense, net | 305 | 221 | | Income before income tax expense | 1,068 | 2,670 | | Income tax expense | 238 | 624 | | Net income | $830 | $2,046 | | Basic earnings per share | $0.24 | $0.61 | | Diluted earnings per share | $0.22 | $0.52 | | Dividends declared per share | $0.13 | $0.13 | Condensed Consolidated Statements of Comprehensive Income Reports net income and other comprehensive income, including foreign currency translation adjustments Metric (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net income | $830 | $2,046 | | Foreign currency translation adjustment | 27 | (188) | | Comprehensive income | $857 | $1,858 | Condensed Consolidated Statement of Changes in Stockholders' Equity Details the changes in the company's equity accounts during the first quarter of 2022 Stockholders' Equity (in thousands) | Stockholders' Equity | Balances, Dec 31, 2021 | Net Income | Other Comprehensive Loss | Stock Compensation Expense | Distributions to Shareholders | Cash Settlement of Stock Options | Balances, Mar 31, 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Common Stock | $12,655 | - | - | - | - | - | $12,655 | | Treasury Stock | $(15,996) | - | - | - | - | - | $(15,996) | | Additional Paid-In Capital | $11,930 | - | - | 400 | - | (108) | $12,222 | | Accumulated Other Comprehensive Loss | $(1,380) | - | 27 | - | - | - | $(1,353) | | Retained Earnings | $69,873 | 830 | - | - | (458) | - | $70,245 | | Total | $77,082 | 830 | 27 | 400 | (458) | (108) | $77,773 | Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities Cash Flow Activity (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(5,479) | $(336) | | Net cash used in investing activities | $(518) | $(1,480) | | Net cash provided by financing activities | 6,450 | 1,538 | | Effect of exchange rate changes on cash and cash equivalents | 11 | (32) | | Net change in cash and cash equivalents | 464 | (310) | | Cash and cash equivalents at beginning of period | 4,843 | 4,167 | | Cash and cash equivalents at end of period | $5,307 | $3,857 | Notes to Condensed Consolidated Financial Statements Provides supplementary details on accounting policies and specific financial statement items 1. Basis of Presentation The financial statements are unaudited and should be read with the 2021 Annual Report on Form 10-K - The accompanying condensed consolidated financial statements are unaudited and include all necessary normal, recurring adjustments[28] - The financial statements do not include all disclosures normally required by GAAP and should be read in conjunction with the Company's 2021 Annual Report on Form 10-K[28] - The Company evaluated events and transactions subsequent to March 31, 2022, through the issuance date of these financial statements[29] 2. Commitment and Contingencies There are no pending material legal proceedings involving the Company or contemplated by governmental authorities - There are no pending material legal proceedings to which the Company is a party or contemplated by any governmental authority[30] 3. Revenue from Contracts with Customers Details revenue recognition policies and disaggregates net sales by product category and geography - Revenue is recognized from sales of two main product categories: (a) first aid and medical; and (b) cutting, sharpening and measuring[31] - Revenue is generally recognized at a point in time, with shipment or delivery, depending on contract terms[32] Net Sales by Product Category and Segment (in thousands) | Net Sales by Product Category and Segment | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Cutting, Sharpening and Measuring | | | | United States | $15,333 | $15,564 | | Canada | 1,593 | 1,549 | | Europe | 3,558 | 3,743 | | Total | $20,484 | $20,856 | | First Aid and Medical | | | | United States | 20,408 | 20,484 | | Canada | 2,022 | 1,784 | | Europe | 419 | 401 | | Total | $22,849 | $22,669 | | Total Net Sales | $43,333 | $43,525 | 4. Debt and Shareholders' Equity Outlines the composition of long-term debt, key credit facilities, and compliance with loan covenants - Long-term debt includes borrowings under a revolving loan agreement with HSBC Bank, N.A. (up to $50 million, expiring May 24, 2023) and a fixed-rate mortgage (3.8% interest, maturing December 1, 2031)[39][40] - The Company was in compliance with all covenants under the revolving loan agreement as of March 31, 2022[39] Debt (in thousands) | Debt | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Revolving loan outstanding | $40,151 | $33,037 | | Mortgage Payable - HSBC Bank N.A. | 11,522 | 11,620 | | Long-term mortgage payable less current maturities | 10,989 | 11,081 | 5. Segment Information Presents financial performance data for the company's three reportable geographic segments - The Company's reportable business segments are United States (including aggregated Asian operations), Canada, and Europe[43] Financial Data by Segment (in thousands) | Financial Data by Segment | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Sales to external customers: | | | | United States | $35,741 | $36,048 | | Canada | 3,615 | 3,333 | | Europe | 3,977 | 4,144 | | Consolidated | $43,333 | $43,525 | | Operating income: | | | | United States | $811 | $2,133 | | Canada | 386 | 370 | | Europe | 174 | 465 | | Consolidated | $1,371 | $2,968 | Assets by Segment (in thousands) | Assets by Segment | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | United States | $134,291 | $125,521 | | Canada | 9,327 | 9,100 | | Europe | 9,459 | 9,818 | | Consolidated | $153,077 | $144,439 | 6. Stock Based Compensation Discloses stock-based compensation expenses and unrecognized costs related to non-vested awards - As of March 31, 2022, there was $3,600,603 of unrecognized compensation cost related to non-vested share-based payments, expected to be recognized over approximately three years[50] Stock Compensation Expense (in thousands) | Stock Compensation Expense | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Stock compensation expense | $400 | $306 | 7. Fair Value Measurements The carrying value of the company's bank debt is considered a reasonable estimate of its fair value - The carrying value of the Company's bank debt is a reasonable estimate of fair value due to its payment terms and maturity[51] 8. Leases Details the company's operating leases, including costs, cash flows, and key assumptions - The Company has operating leases for office and warehouse space and equipment, with ROU assets and lease liabilities recognized at commencement date based on the present value of lease payments[52][53] Lease Information (in thousands) | Lease Information | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Operating lease cost | $311 | $336 | | Operating lease - cash flow | $322 | $294 | | ROU assets obtained in exchange for lease liabilities | $211 | $- | | Weighted-average remaining lease term | 3.0 years | 4.0 years | | Weighted-average discount rate | 5% | 5% | 9. Other Accrued Liabilities Provides a breakdown of other current accrued liabilities, which decreased during the quarter Other Accrued Liabilities (in thousands) | Other Accrued Liabilities | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Customer Rebates | $5,274 | $5,414 | | Accrued Compensation | 1,291 | 1,586 | | Dividend Payable | 458 | 458 | | Income Tax Payable | 813 | 564 | | Other | 1,101 | 1,887 | | Total | $8,937 | $9,909 | Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial performance, operational results, and liquidity Forward-Looking Information Contains forward-looking statements subject to risks and uncertainties under "safe harbor" provisions - The report contains forward-looking statements made pursuant to the 'safe harbor' provisions of the Private Securities Litigation Reform Act of 1995[62][63] - Actual results could differ materially due to risks from the COVID-19 pandemic, economic conditions, competition, and trade policies[63][64] Critical Accounting Policies Refers to the company's 2021 Annual Report for a discussion of 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 year ended December 31, 2021[66] COVID-19 Pandemic and Macroeconomic Related Considerations Discusses the adverse impact of supply chain disruptions and labor challenges on operations - During Q1 2022, the Company experienced significant supply chain issues due to new Omicron outbreaks in China, leading to factory and port shutdowns[68][69] - These disruptions contributed to increased freight, labor, and product costs, adversely affecting operating margins[70] - The Company also faced labor-related challenges, including hiring difficulties, increased labor costs, and higher employee turnover[71] Results of Operations Analyzes the company's operational results for Q1 2022 compared to the prior year period - The Company's sales are traditionally stronger in the second and third quarters due to the back-to-school market[73] Metric (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Consolidated Net Sales | $43,333 | $43,525 | -0.44% | | U.S. Sales | Declined 1% | | | | Canada Net Sales | Increased 8% (U.S. & local currency) | | | | European Net Sales | Decreased 4% (U.S. dollars), Increased 3% (local currency) | | | | Gross Profit | $14,968 (34.5% of net sales) | $15,587 (35.8% of net sales) | -4.09% | | SG&A Expenses | $13,597 (31.4% of net sales) | $12,619 (29.0% of net sales) | +7.75% | | Operating Income | $1,371 | $2,968 | -53.74% | | U.S. Operating Income | Decreased by $1,322 | | | | Canadian Operating Income | Increased by $16 | | | | European Operating Income | Decreased by $291 | | | | Interest Expense, Net | $305 | $221 | +38.01% | | Income Tax Expense | 22% effective tax rate | 23% effective tax rate | -1.00% | Financial Condition Reviews the company's financial condition, focusing on liquidity and capital resources Liquidity and Capital Resources Working capital and debt increased to support inventory growth amid supply chain disruptions - Working capital increased by approximately $8.2 million during Q1 2022 compared to December 31, 2021[78] - Inventory increased by approximately $7.2 million, primarily to anticipate continued growth and mitigate potential supply chain disruptions[78] - Total debt outstanding under the revolving credit facility increased by approximately $7.1 million in Q1 2022, with $9,849,000 available for borrowing as of March 31, 2022[81] - The Company believes cash from operations and available credit will be sufficient to finance operations for the next twelve months[82] Financial Ratios (in thousands) | Financial Ratios | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Working capital | $83,061 | $74,976 | | Current ratio | 4.89 | 4.70 | | Long term debt to equity ratio | 65.8% | 57.2% | Item 3: Quantitative and Qualitative Disclosures about Market Risk This section states that market risk disclosures are not applicable for this reporting period - Quantitative and qualitative disclosures about market risk are not applicable[84] Item 4: Controls and Procedures Management concluded that disclosure controls and internal controls were effective as of March 31, 2022 (a) Evaluation of Internal Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2022[84] (b) Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter - There were no changes in internal control over financial reporting during the quarter ended March 31, 2022, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[84] Part II — OTHER INFORMATION Item 1: Legal Proceedings There are no pending material legal proceedings involving the company or governmental authorities - There are no pending material legal proceedings to which the registrant is a party, or contemplated by any governmental authority[86] Item 1A: Risk Factors Refers readers to the Risk Factors section in the company's 2021 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, 2021[86] Item 2: Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds during the period - None[86] Item 3: Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - None[86] Item 4: Mine Safety Disclosures This item is not applicable to the company - Not applicable[86] Item 5: Other Information There is no other information to report in this section - None[86] Item 6: Exhibits Lists the exhibits filed as part of the Form 10-Q, including certifications and XBRL documents Exhibit Number | Exhibit Number | Description | | :--- | :--- | | Exhibit 31.1 | Certification of Walter C. Johnsen pursuant to 18 U.S.C. Section 1350, as adopted pursuant Section 302 of the Sarbanes-Oxley Act of 2002 | | Exhibit 31.2 | Certification of Paul G. Driscoll pursuant to 18 U.S.C. Section 1350, as adopted pursuant Section 302 of the Sarbanes-Oxley Act of 2002 | | Exhibit 32.1 | Certification of Walter C. Johnsen pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Exhibit 32.2 | Certification of Paul G. Driscoll pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 101.INS | Inline XBRL Instance Document. | | 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | 104 | The cover page for the Company's Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101 | Signatures The report was duly signed by the CEO and CFO in accordance with the Securities Exchange Act of 1934 - The report was signed on May 9, 2022, by Walter C. Johnsen, Chairman of the Board and Chief Executive Officer, and Paul G. Driscoll, Vice President and Chief Financial Officer[89]