Acme United Corp: Form 10-Q for the period ended Jun 30, 2024

Forward-Looking Information

The Company may from time to time make written or oral “forward-looking statements” including statements contained in this report and in other communications by the Company, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on our beliefs as well as assumptions made by and information currently available to us. When used in this document, words like “may,” “might,” “will,” “except,” “anticipate,” “believe,” “potential,” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from our current expectations.

Forward-looking statements in this report, including without limitation, statements related to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may impact the Company’s business, operations and financial results.

These risks and uncertainties include, without limitation, the following: (i) changes in the Company’s plans, strategies, objectives, expectations and intentions, which may be made at any time at the discretion of the Company; (ii) the impact of uncertainties in global economic conditions, including the impact on the Company’s suppliers and customers; (iii) the continuing adverse impact of inflation, including product costs, transportation costs and interest rates; (iv) potential adverse effects on the Company, its customers, and suppliers resulting from the wars in Ukraine and the Middle East; (v) additional disruptions in the Company’s supply chains, whether caused by pandemics, natural disasters, including trucker shortages, port closures or otherwise; (vi) labor related costs the Company has and may continue to incur, including costs of acquiring and training new employees and rising wages and benefits; (vii) currency fluctuations including, for example, the fluctuation of the dollar against the euro; (viii) the Company’s ability to effectively manage its inventory in a rapidly changing business environment; (ix) changes in client needs and consumer spending habits; (x) the impact of competition; (xi) the impact of technological changes including, specifically, the growth of online marketing and sales activity; (xii) the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business it might acquire; (xiii) international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates; and (xiv) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission.

For a more detailed discussion of these and other factors affecting the Company, see the Risk Factors described in Item 1A included in the Company’s Annual Report on Form 10-K for the fiscal year December 31, 2023 and below under “Financial Condition”. All forward-looking statements in this report are based upon information available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

Critical Accounting Estimates

There have been no material changes to the Company’s critical accounting estimates as previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Results of Operations

Traditionally, the Company’s sales and profits are stronger in the second and third quarters and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature of the Westcott back-to-school market.

Net sales

Consolidated net sales for the three months ended June 30, 2024 were $55,425,000 compared to $53,336,000 in the same period in 2023, an increase of 4%. Excluding the impact of the Camillus and Cuda hunting and fishing product lines sold on November 1, 2023, sales for the second quarter of 2024 increased 8%, compared to the same period in 2023. Net sales for the six months ended June 30, 2024 were $100,382,000 compared to $99,175,000 in the same period in 2023, an increase of 1%. Excluding Camillus and Cuda, sales for the six months ended June 30, 2024 increased 5% compared to the same period in 2023.

Net sales in the U.S. for the three months ended June 30, 2024 increased 5% compared to the same period in 2023. Excluding the impact of Camillus and Cuda, net sales for the second quarter of 2024 increased 9% compared to the same period of 2023. The increase in net sales was primarily related to market share gains across multiple product lines. Net sales for the six months ended June 30, 2024 increased 2% compared to the same period in 2023. Excluding the impact of Camillus and Cuda, net sales for the six months ended June 30, 2024 increased 6% compared to the same period of 2023.

Net sales in Canada for the three months ended June 30, 2024 decreased 7% in both U.S. dollars and local currency compared to the same period in 2023. Excluding the impact of Camillus and Cuda, net sales for the second quarter of 2024 decreased 4% compared to the same period of 2023. Net sales for the six months ended June 30, 2024 decreased 7% in both U.S. dollars and local currency, compared to the same period in 2023. Excluding the impact of Camillus and Cuda, net sales for the six months ended June 30, 2024 decreased 2% compared to the same period of 2023. The decrease in net sales for the three and six months ended June 30, 2024 was mainly due to lower sales of school and office products which have been negatively impacted by a soft economy.

European net sales for the three months ended June 30, 2024 increased 4% in U.S. dollars (5% in local currency) compared to the same period in 2023. Excluding the impact of Camillus and Cuda, net sales for the second quarter of 2024 increased 9% compared to the same period of 2023. Net sales for the six months ended June 30, 2024 increased 5% in U.S. dollars and local currency compared to the same period in 2023. Excluding the impact of Camillus and Cuda, net sales for the six months ended June 30, 2024 increased 8% compared to the same period of 2023. The increases in net sales for the three and six months ended June 30, 2024 was due to market share gains in the office channel.

Gross profit

Gross profit for the three months ended June 30, 2024 was $22,627,000 (40.8% of net sales) compared to $20,022,000 (37.5% of net sales) in the same period in 2023. Gross profit for the six months ended June 30, 2024 was $40,024,000 (39.9% of net sales) compared to $36,303,000 (36.6% of net sales) in the same period in 2023. The increases in gross profit for the three and six months ended June 30, 2024 were primarily due to productivity improvements in the Company's manufacturing and distribution facilities.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2024 were $16,252,000 (29.3% of net sales) compared with $14,772,000 (27.7% of net sales) in the same period in 2023, an increase of $1,480,000. SG&A expenses for the six months ended June 30, 2024 were $31,090,000 (31.0% of net sales) compared with $28,865,000 (29.1% of net sales) in the same period in 2023, an increase of $2,225,000. The increases in SG&A expenses for the three and six months ended June 30, 2024 were primarily related to higher personnel related expenses.

Operating income

Operating income for the three months ended June 30, 2024 was $6,375,000 compared with $5,250,000 in the same period of 2023. Operating income for the six months ended June 30, 2024 was $8,934,000 compared with $7,438,000 in the same period of 2023.

Operating income in the U.S. segment increased by $1,284,000 for the three months ended June 30, 2024 compared to the same period in 2023. Operating income in the U.S. segment increased by $1,842,000 for the six months ended June 30, 2024 compared to the same period in 2023. The increases in operating income for the three and six months ended June 30, 2024 were primarily due to higher net sales and productivity improvements at our manufacturing and distribution facilities.

Operating income in the Canadian segment decreased by $39,000 and $216,000 for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023. The decreases in operating income were primarily due to lower net sales of cutting, sharpening and measuring products.

Operating income in the European segment decreased by $120,000 and $130,000 for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023.

Interest expense, net

Interest expense, net for the three months ended June 30, 2024 was $539,000 compared with $832,000 in the same period of 2023, a $293,000 decrease. Interest expense, net for the six months ended June 30, 2024 was $982,000 compared with $1,734,000 in the same period of 2023, a $752,000 decrease. The decreases in interest expense for the three and six months ended June 30, 2024 resulted from lower average outstanding borrowings.

Other expense, net

Other expense, net was $28,000 in the three months ended June 30, 2024 compared to $23,000 in the same period of 2023. Other expense, net in the six months ended June 30, 2024 was $72,000 compared to $46,000 in the same period of 2023.

Income taxes

The effective income tax rate for the three and six months ended June 30, 2024 was 24% compared to 23% in the same period of 2023. The higher effective income tax rate for the three and six months ended June 30, 2024 was primarily due to higher earnings in jurisdictions with higher tax rates.

Financial Condition

Liquidity and Capital Resources

During the first six months of 2024, working capital increased approximately $12.1 million. As a result of the acquisition of Elite First Aid, Inc., inventory increased approximately $1.1 million during the six-month period. Inventory turnover, calculated using a twelve-month average inventory balance, was 2.1 at June 30, 2024 compared to 2.0 at December 31, 2023. Receivables increased approximately $13.8 million at June 30, 2024 compared to December 31, 2023. The average number of days sales outstanding in accounts receivable was 54 days at June 30, 2024 compared to 55 days at December 31, 2023. Accounts payable and other current liabilities increased by approximately $1.5 million at June 30, 2024 compared to December 31, 2023.

The Company's working capital, current ratio and long-term debt to equity ratio are as follows (dollar amounts in thousands):

Long-term debt consists of (i) borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A. and (ii) amounts outstanding under the fixed rate mortgage on the Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA. The revolving loan agreement provides for borrowings of up to $65 million, at an interest rate of SOFR plus 1.75%; interest is payable monthly. The loan agreement has an expiration date of May 31, 2026. The Company must pay a facility fee, payable quarterly, in an amount equal to one eighth of one percent (.125%) per annum of the average daily unused portion of the revolving credit line. The facility is intended to provide liquidity for growth, share repurchases, dividends, acquisitions, and other business activities. Under the revolving loan agreement, the Company is required to maintain specific amounts of funded debt to EBITDA, a fixed charge coverage ratio and must have annual net income greater than $0, measured as of the end of each fiscal year. As of June 30, 2024, the Company was in compliance with the covenants under the revolving loan agreement as then in effect.

During the first six months of 2024, total debt outstanding under the Company’s revolving credit facility increased by approximately $13.3 million, compared to total debt thereunder at December 31, 2023. As of June 30, 2024, $26,466,000 was outstanding and $38,534,000 was available for borrowing under the Company’s credit facility.

The Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA were financed by a fixed rate mortgage with HSBC Bank, N.A. at a rate of 3.8%. The Company entered into the agreement on December 1, 2021. Payments of principal and interest are due monthly, with all amounts outstanding due on maturity on December 1, 2031. At June 30, 2024, there was approximately $10.5 million outstanding on the mortgage.

The Company believes that cash generated from operating activities, together with funds available under its revolving loan agreement, will, under current conditions, be sufficient to finance the Company’s operations over the next twelve months from the filing of this report.

(a) Evaluation of Internal Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2024. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were not effective as of June 30, 2024 as a result of an identified material weakness. As described in the Company's Form 10-K for the year ended December 31, 2023, the Company’s information technology general controls (ITGCs) related to change management and logical controls were ineffective. The Company implemented changes to its Internal Controls Over Financial Reporting, as described in Item 4(b) below. Except as described below, there were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

(b) Changes in Internal Control over Financial Reporting

In response to the material weakness identified above, the Company has implemented changes to its internal control over financial reporting, including:

• The Company has acquired and implemented database change management and auditing software;
• The Company has designed and implemented associated management review procedures.

Management believes that, as a result of these changes, the material weakness, as described above, will be remediated. However, due to the nature of the material weakness, it will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed as of December 31, 2024.

See Risk Factors set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.