Acme United Corp: Form 10-Q for the period ended Mar 31, 2025

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) The impact on the demand for certain of the Company’s products and its competitive position of the new 145% tariff on the goods sourced from China and other current and future changes in tariffs by the U.S. government (ii) changes in the Company’s plans, strategies, objectives, expectations and intentions, which may be made at any time at the discretion of the Company; (iii) the impact of uncertainties in global economic conditions, including the impact on the Company’s suppliers and customers; (iv) the continuing adverse impact of inflation, including product costs, transportation costs and interest rates; (v) potential adverse effects on the Company, its customers, and suppliers resulting from the wars in Ukraine and the Middle East; (vi) additional disruptions in the Company’s supply chains, whether caused by pandemics, natural disasters, including trucker shortages, port closures, port strikes or otherwise; (vii) labor related costs the Company has and may continue to incur, including costs of acquiring and training new employees and rising wages and benefits; (viii) changes in client needs and consumer spending habits; (ix) currency fluctuations; (x) the Company’s ability to effectively manage its inventory in a rapidly changing business environment; (xi) the impact of competition; (xii) the impact of technological changes including, specifically, the growth of online marketing and sales activity; (xiii) the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business it might acquire; ; 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, 2024 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, 2024.

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 March 31, 2025 were $45,958,000 compared to $44,956,000 in the same period in 2024, an increase of 2%.

Net sales in the U.S. for the three months ended March 31, 2025 increased 3% compared to the same period in 2024. The increase in net sales for the three months ended March 31, 2025 was primarily due to higher sales of first aid and medical products partially offset by lower sales of school and office products. The lower sales of school and office products was primarily due to a large initial order of craft products to a major mass market retailer that took place in the first quarter of 2024.

Net sales in Canada for the three months ended March 31, 2025 increased 5% in U.S. dollars and 12% in local currency compared to the same period in 2024. Sales of first aid products were strong, however sales of school and office products declined due to a continuing soft economy.

European net sales for the three months ended March 31, 2025 decreased 7% in U.S. dollars and 4% in local currency compared to the same period in 2024. The decrease in net sales for the three months ended March 31, 2025 was primarily due to a large promotion in the first quarter of 2024 that did not repeat this year.

Gross profit

Gross profit for the three months ended March 31, 2025 was $17,917,000 (39.0% of net sales) compared to $17,396,000 (38.7% of net sales) in the same period in 2024. The increase in gross profit for the three months ended March 31, 2025 was primarily due to higher sales.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2025 were $15,491,000 (33.7% of net sales) compared with $14,838,000 (33.0% of net sales) in the same period in 2024, an increase of $653,000. The increase in SG&A expenses for the three months ended March 31, 2025 was primarily related to higher personnel related expenses.

Operating income

Operating income for the three months ended March 31, 2025 was $2,426,000 compared with $2,558,000 in the same period of 2024.

Operating income in the U.S. segment increased by $20,000 for the three months ended March 31, 2025 compared to the same period in 2024.

Operating income in the Canadian segment increased by $2,000 for the three months ended March 31, 2025 compared to the same period in 2024.

Operating income in the European segment decreased by $154,000 for the three months ended March 31, 2025, compared to the same period in 2024. The decrease in operating income for the three months ended March 31, 2025 was primarily due to lower sales.

Interest expense, net

Interest expense, net for the three months ended March 31, 2025 was $397,000 compared with $443,000 in the same period of 2024, a $46,000 decrease. The decrease in interest expense for the three months ended March 31, 2025 resulted from lower average outstanding borrowings as well as lower average interest rates on the debt outstanding.

Other income, net

Other income, net was $90,000 in the three months ended March 31, 2025 compared to $44,000 in the same period of 2024.

Income taxes

The effective income tax rate for the three months ended March 31, 2025 was 22% compared to 24% in the same period of 2024.

Financial Condition

Liquidity and Capital Resources

During the first three months of 2025, working capital increased approximately $4.2 million. Inventory turnover, calculated using a twelve-month average inventory balance, was 2.1 at March 31, 2025 and December 31, 2024. Receivables increased approximately $2.6 million at March 31, 2025 compared to December 31, 2024. The average number of days sales outstanding in accounts receivable was 53 days at March 31, 2025 compared to 54 days at December 31, 2024. Accounts payable and other current liabilities decreased by approximately $2.8 million at March 31, 2025 compared to December 31, 2024.

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

16

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 March 31, 2025, the Company was in compliance with the covenants under the revolving loan agreement as then in effect.

During the first three months of 2025, total debt outstanding under the Company’s revolving credit facility increased by approximately $2.8 million, compared to total debt thereunder at December 31, 2024. As of March 31, 2025, $20,457,000 was outstanding and $44,543,000 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 March 31, 2025, there was approximately $10.3 million outstanding on the mortgage.

On May 23, 2024, the Company acquired the assets of Elite First Aid, Inc ("Elite First Aid") for approximately $7.1 million of which $1.0 million is subject to holdbacks as follows: (a) $500,000, the payment of which is contingent upon certain revenue milestones during an consecutive 12-month period from May 31, 2024 to December 31, 2025; and (b) $500,000, which is subject to a 13 month holdback as a non-exclusive source of recovery primarily to satisfy certain types of indemnification claims under the Asset Purchase Agreement. Based in Wake Forest, NC, Elite First Aid is a leading supplier of tactical, trauma and emergency medical products.

A significant portion of the products we sell (and components used in our products) are sourced from suppliers located in China. The United States government has imposed, and may continue to impose or adjust, significant tariffs on a range of Chinese goods. These tariffs have increased our costs of goods sold and could further escalate depending on changes in trade policy, negotiations, or retaliatory measures by China. The indirect impact on demand for our products as a result of these developments has become more uncertain. The Company expects to mitigate the potential impact on our business and operations through strategic sourcing adjustments, price adjustments and supply chain diversification, but there can be no assurance that such efforts will be successful or sufficient. While the impact on our operations to date have not been significant, any further increases of existing tariffs, the imposition of new tariffs, the potential modifications to existing trade agreements and other restrictions on free trade may adversely impact demand for our products, increase our costs, and disrupt our supply chain. These risks, in turn, could have a material adverse effect on our business, results of operations, and financial condition.

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 March 31, 2025. 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 March 31, 2025 as a result of an identified material weakness. As described in the Company's Form 10-K for the year ended December 31, 2024, the Company’s information technology general controls (ITGCs) related to logical security and privileged access management for a financially relevant system 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. The changes included removing the privileged access for the one individual identified as well as further limiting user with privileged access to ensure proper segregation of duties.

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, 2025.

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, 2024.