# Acme United Corp: Form 10-Q for the period ended Jun 30, 2022

- Company: [Acme United Corp](/companies/acu.md) (CIK 2098)
- Form: 10-Q
- Filed: 2022-08-08
- Accepted by EDGAR: Aug 8, 2022, 16:33 ET
- Period: 2022-06-30
- Accession: 0001564590-22-028456
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/2098/000156459022028456/acu-10q_20220630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/2098/000156459022028456/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $56.8m | us-gaap:Revenues |
| Revenue | 6 months, 2022-01-01 to 2022-06-30 | $100.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2022-04-01 to 2022-06-30 | $38.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2022-01-01 to 2022-06-30 | $66.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-04-01 to 2022-06-30 | $18.5m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-01-01 to 2022-06-30 | $33.5m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-04-01 to 2022-06-30 | $14.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2022-01-01 to 2022-06-30 | $28.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-04-01 to 2022-06-30 | $4.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-01-01 to 2022-06-30 | $5.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $667.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | $903.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $2.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | $3.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.71 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.93 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.78 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | $1.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 3,841,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 3,844,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | −$5.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-01-01 to 2022-06-30 | $2.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2022-01-01 to 2022-06-30 | $915.0k | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2022-06-30 | $1.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-06-30 | $117.4m | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $177.8m | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $33.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $98.0m | us-gaap:Liabilities |
| Long-term debt | at 2022-06-30 | $50.3m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2022-06-30 | $79.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 18,140 characters.

### 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, including those risks and uncertainties resulting from the global COVID-19 pandemic, future waves of COVID-19, including through the Delta and Omicron variants and any new variant strains of the underlying virus; any future pandemics; the continuing effectiveness, global availability, and public acceptance of existing vaccines; the effectiveness, availability, and public acceptance of vaccines against variant strains of potential new viruses; and the heightened impact the pandemic has on many of the risks described herein, including, without limitation, risks relating to disruptions in our domestic and global supply chains, and labor shortages, any of which could materially adversely impact the Company’s ability to manufacture, source or distribute its products, both domestically and internationally.

These risks and uncertainties further 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, whether caused by COVID-19 or otherwise, including the impact on the Company’s suppliers and customers; (iii) additional disruptions in the Company’s supply chains, whether caused by COVID-19, the war in Ukraine, or otherwise, including trucker shortages, port closures and delays, and delays with container ships themselves; (iv) labor shortages and related costs the Company has and may continue to incur, including costs of acquiring and training new employees and rising wages and benefits; (v) the continuing adverse impact of inflation, including product costs, and transportation costs; (vi) currency fluctuations including, for example, the increasing strength of the dollar against the euro: the Company’s ability to effectively manage its inventory in a rapidly changing business environment, including the additional inventory the Company has acquired in anticipation of supply chain disruptions and uncertainties; (vii) changes in client needs and consumer spending habits; (viii) the impact of competition; (ix) the impact of technological changes including, specifically, the growth of online marketing and sales activity; (x) the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business it might acquire; (xi) 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 (xiii) 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, 2021 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 Policies

We discuss our critical accounting policies and estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

### 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, 2021.

### COVID-19 Pandemic and Macroeconomic Related Considerations

As noted above under “Forward-Looking Statements”, in response to the COVID-19 pandemic U.S. federal, state, local, and foreign governments adopted mitigation measures, creating significant uncertainties in the U.S. and global economies, including the shutdown of large portions of, or imposition of restrictions on, the U.S. and global economies. While there has been a general improvement in conditions and reduction of adverse effects from the pandemic, as of the present there continues to be significant uncertainty around the scope, severity, and duration of the pandemic, as well as the breadth and duration of business disruptions related to it and the overall impact on the U.S., global economies, and our operating results in future periods.

Commencing late in the first quarter of 2020 and continuing through the filing of this report, the COVID-19 pandemic and certain related challenges have affected the Company’s financial results and business operations. During the six months ended June 30, 2022, the Company experienced significant supply chain issues as a result of Omicron outbreaks which surfaced in China. These outbreaks occurred in February 2022 and led to factory closures and slowdowns, mass quarantines in certain Chinese cities, and the complete shutdown of two if its largest ports. While the Company had previously purchased and maintained surplus inventory in the United States to minimize the impact of any disruption in our supply chain, certain of our largest customers take delivery of large shipments directly at ports in China and we were unable to fulfill certain of these orders in the first quarter of 2022 due to the new COVID outbreak in China and the resulting factory and port shutdowns. However, we were able to fulfil these orders in the second quarter of 2022

The resurgence of the pandemic in China exacerbated the global supply chain issues that we had already been experiencing in recent quarters. As economies have re-opened, global supply chains have struggled to keep up with increasing demand, and the resulting supply chain disruptions were already, in certain cases, affecting our ability to ship products in a timely manner. Specifically, in the first and second quarter of 2022 we experienced significant delays in U.S. ports on both the East Coast and West Coast. These factors have also contributed to increased freight, labor and product costs, which in turn had an adverse effect on our operating margin in the first six months of 2022, and those disruptions and increased costs are likely to persist in the near term and potentially for the foreseeable future.

While we anticipate that the Company and its business partners will continue to experience supply chain disruptions, the Company believes that it has sufficient inventory of its products in the U.S. to at least partially offset near term supply chain disruptions against anticipated demand in the near future. However, any further increase in the duration or severity of the COVID-19 pandemic or a resurgence of the pandemic and the continuation of related supply chain and labor issues, might adversely affect the Company’s ability to manufacture, source or distribute its products both domestically and internationally. The occurrence of any of these factors could have a material adverse effect on the Company’s business, operations and financial condition.

Both domestic and international economies are experiencing significant inflation. In addition, the war in Ukraine is causing a slowdown in the European economy. The impact of these developments together with the continuing impact of the COVID-19 pandemic is highly uncertain and cannot be predicted.

### Results of Operations

Traditionally, the Company’s sales 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 back-to-school market.

#### Net sales

Consolidated net sales for the three months ended June 30, 2022 were $56,773,000 compared with $44,847,000 in the same period in 2021, a 27% increase. Consolidated net sales for six months ended June 30, 2022 were $100,106,000 compared with $88,372,000 in the same period in 2021, a 13% increase.

Sales in the U.S. for the three and six months ended June 30, 2022 increased 33% and 16%, respectively, compared to the same periods in 2021. The increase in sales for the three months compared to the same period in 2021 was due to a combination of higher sales prices, increased volume and the carryover of orders from our first quarter of 2022 which were unfilled because of supply chain disruptions. The increase in sales for the six months was primarily attributable to strong sales of first aid products and Westcott school and office products.

Net sales in Canada for the three and six months ended June 30, 2022 decreased 3% (constant in local currency) and increased 2% (4% in local currency), respectively, compared to the same periods last year.

European net sales for the three months ended June 30, 2022 decreased 1% in U.S. dollars but increased 12% in local currency compared to the same period in 2021. Net sales for the six months ended June 30, 2022 decreased 2% in U.S. dollars but increased 7% in local currency compared to the same period in 2021. The increase in net sales for the three and six months was mainly due to market share gains in the office channel.

#### Gross profit

Gross profit for the three months ended June 30, 2022 was $18,548,000 (32.7% of net sales) compared to $16,153,000 (36.0% of net sales) in the same period in 2021. Gross profit for the six months ended June 30, 2022 was $33,516,000 (33.5% of net sales) compared to $31,740,000 (35.9% of net sales) for the same period in 2021. The decline in the gross margin as a percentage of sales for the three and six months was primarily due to product cost inflation pressures as well as higher transportation and labor costs. Price increases partially offset cost increases.

#### Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2022 were $14,572,000 (25.7% of net sales) compared with $12,364,000 (27.6% of net sales) in the same period in 2021, an increase of $2,208,000. SG&A expenses for the six months ended June 30, 2022 were $28,169,000 (28.1% of net sales) compared with $24,983,000 (28.3% of net sales) for the same periods of 2021, an increase of $3,186,000. The increases in SG&A expenses for three and six months ended June 30, 2022, compared to the same period in 2021 were primarily due to higher personnel related costs and increased commissions and shipping costs related to higher sales.

#### Operating income

Operating income for the three months ended June 30, 2022 was $3,976,000 compared with $3,789,000 in the same period of 2021. Operating income for the six months ended June 30, 2022 was $5,347,000 compared with $6,757,000 in the same period of 2021. Operating income in the U.S. segment increased by $779,000 for the three months ended June 30, 2022 and decreased by $520,000 for the six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Operating income in the Canadian segment decreased by $188,000 and $204,000 for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Operating income in the European segment decreased by $404,000 and $686,000 for the three and six months ended June 30, 2022, respectively, compared to the same period in 2021.

#### Interest expense, net

Interest expense, net for the three months ended June 30, 2022 was $423,000 compared with $223,000 in the same period of 2021, a $200,000 increase. Interest expense, net for the six months ended June 30, 2022 was $729,000 compared with $443,000 for the same period of 2021, a $286,000 increase. The increases in interest expense resulted from a higher average debt outstanding under the Company’s revolving credit facility as well as higher average interest rate on the outstanding debt.

#### Other expense, net

Other expense, net was $148,000 in the three months ended June 30, 2022 compared to $68,000 in the same period of 2021. Other expense, net was $147,000 in the six months ended June 30, 2022 compared to other expense of $145,000 in the same period of 2021. The increase in other expense, net in the three and six months ended June 30, 2022, was primarily due to losses from foreign currency transactions.

#### Income taxes

The effective income tax rate for the three and six months ended June 30, 2022 was 20%. Income tax expense for the three and six months ended June 30, 2021 included a $0.9 million tax credit for stock based compensation. The Company’s effective tax rates for the three and six months ended June 30, 2021, excluding the tax credit and the income from the PPP loan forgiveness, were 19% and 21%.

Financial Condition

Liquidity and Capital Resources

During the first six months of 2022, working capital increased approximately $9.5 million compared to December 31, 2021. Inventory increased approximately $11.4 million at June 30, 2022 compared to December 31, 2021. We increased inventory during that period to anticipate our continued growth and to be positioned to offset the impact of potential supply chain disruptions related to COVID-19. The increase also reflects higher product costs. Inventory turnover, calculated using a twelve-month average inventory balance, was 2.1 at June 30, 2022 compared to 2.3 at December 31, 2021. Receivables increased by approximately $12.8 million at June 30, 2022 compared to December 31, 2021. The average number of days sales outstanding in accounts receivable was 60 days at each of June 30, 2022 and December 31, 2021. Accounts payable and other current liabilities increased by approximately $12.7 million at June 30, 2022 compared to December 31, 2021. The increase in accounts payable is primarily related to the increase in inventory.

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

|  | June 30, 2022 | December 31, 2021 |
| --- | ---: | ---: |
| Working capital | $84,434 | $74,976 |
| Current ratio | 3.56 | 4.70 |
| Long term debt to equity ratio | 76.6% | 57.2% |

19

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 related on the Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA. On May 31, 2022, the Company amended its revolving loan agreement with HSBC Bank, N.A. The amended agreement increases the amount available for borrowing to $65 million from $50 million, at an interest rate of SOFR plus 1.75%; interest is payable monthly. In addition, the expiration date of the credit facility was extended to May 31, 2026. The Company must pay a facility fee, payable quarterly, in an amount equal to one eight 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. At June 30, 2022, the Company was in compliance with the covenants then in effect under the loan agreement.

During the first six months of 2022, total debt outstanding under the Company’s revolving credit facility increased by approximately $17.2 million, compared to total debt thereunder at December 31, 2021. As of June 30, 2022, $50,263,000 was outstanding and $14,737,000 was available for borrowing under the Company’s credit facility. The increase in debt outstanding was primarily related to the acquisition of Safety Made and the increase in inventory.

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 fixed interest 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, 2022, there was approximately $11.4 million outstanding on the mortgage.

On June 1, 2022, the Company purchased the assets of Live Safely Products, LLC (d/b/a “Safety Made”) for approximately $11 million, including $1.5 million which is contingent upon meeting certain financial targets. Based in Keene, NH, Safety Made is a leading manufacturer of first aid kits for the promotional products industry.

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

## Controls and procedures

As filed, 833 characters.

(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, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

(b) Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2022, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 134 characters.

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, 2021.

Filed Aug 8, 2022.
Source: SEC EDGAR, the filing index for accession 0001564590-22-028456. Last ingested by Listed: Nov 2, 2026, 19:43 ET. No prices; not investment advice.