Acme United Corp: Form 10-Q for the period ended Mar 31, 2023

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 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, natural disasters, or otherwise, including trucker shortages, port closures and delays, and delays with container ships themselves; (iv) labor 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 interest rates; (vi) potential adverse effects on the Company, its customers, and suppliers resulting from the war in Ukraine; (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, including the additional inventory the Company acquired in anticipation of supply chain disruptions and uncertainties; (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, 2022 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, 2022.

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, 2022.

Results of Operations

Traditionally, the Company’s sales of its cutting, sharpening, and measuring products 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 March 31, 2023 were $45,838,000 compared with $43,333,000 in the same period in 2022, a 6% increase.

Net Sales in the U.S. for the three months ended March 31, 2023 increased 9%, compared to the same period in 2022. The increase in net sales is primarily due to higher sales of first aid and medical products compared to the same period in 2022. Such increases were partially offset by inventory reductions by customers for certain back to school items.

Net sales in Canada for the three months ended March 31, 2023 decreased 10% (5% in local currency), compared to the same period last year. The decline in net sales in the three months ended March 31, 2023 was mainly due to retailer inventory reductions.

European net sales for the three months ended March 31, 2023 decreased 6% (2% in local currency) compared to the same period in 2022.

Gross profit

Gross profit for the three months ended March 31, 2023 was $16,281,000 (35.5% of net sales) compared to $14,968,000 (34.5% of net sales) in the same period in 2022. The increase was primarily due to (i) cost saving initiatives and (ii) productivity improvements implemented late in the third quarter of 2022 at our manufacturing and distribution facilities.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2023 were $14,093,000 (30.7% of net sales) compared with $13,597,000 (31.4% of net sales) in the same period in 2022, an increase of $496,000.

Operating income

Operating income for the three months ended March 31, 2023 was $2,188,000 compared with $1,371,000 in the same period of 2022.

Operating income in the U.S. segment increased by $970,000 for the three months ended March 31, 2023, compared to the same period in 2022. The increase in operating income for the three months ended March 31, 2023 was primarily due to increased sales and cost savings initiatives which included lowering SG&A expenses as well as productivity improvements in our manufacturing and distribution facilities.

Operating income in the Canadian segment decreased by $169,000 for the three months ended March 31, 2023, compared to the same period in 2022.

Operating income in the European segment increased by $16,000 for the three months ended March 31, 2023, compared to the same period in 2022.

Interest expense, net

Interest expense, net for the three months ended March 31, 2023 was $902,000 compared with $305,000 in the same period of 2022, a $597,000 increase. The increase in interest expense resulted from a higher average interest rate on the outstanding debt under the Company’s revolving loan agreement.

Other income, net

Other income, net was $23,000 in the three months ended March 31, 2023 compared to $2,000 in the same period of 2022.

Income taxes

The effective income tax rate for the three months ended March 31, 2023 was 24% compared to 22% in the same period of 2022.

Financial Condition

Liquidity and Capital Resources

During the first three months of 2023, working capital decreased approximately $8.3 million. Inventory decreased approximately $4.8 million during this three-month period. The decline in inventory is due to planned reductions as the risk of supply chain disruptions has diminished. Inventory turnover, calculated using a twelve-month average inventory balance, was 2.1 at March 31, 2023 compared to 2.0 at December 31, 2022. Receivables remained constant at March 31, 2023 compared to December 31, 2022. The average number of days sales outstanding in accounts receivable was 61 days at March 31, 2023 compared to 62 days at December 31, 2022. Accounts payable and other current liabilities increased by approximately $1.8 million at March 31, 2023 compared to December 31, 2022.

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 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.

On November 8, 2022, the revolving loan agreement was amended to increase the ratio of funded debt to EBITDA. The amendment is in effect for four quarters commencing in the third quarter of 2022 and includes an increase in the funded debt to EBITDA ratio for those four quarters ranging from a low of 4.75 to 1 to a high of 5.75 to 1. The amendment also increases the interest rate from SOFR +1.75% up to a high of SOFR + 2.35% on a basis that varies on a quarterly basis with the funded debt to EBITDA ratio. As of March 31, 2023, the Company was in compliance with the covenants under the revolving loan agreement, as amended.

During the first three months of 2023, total debt outstanding under the Company’s revolving credit facility decreased by approximately $9.8 million, compared to total debt thereunder at December 31, 2022. As of March 31, 2023, $40,135,000 was outstanding and $24,865,000 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 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 March 31, 2023, there was approximately $11.1 million outstanding on the mortgage.

In response to the challenges encountered by the Company commencing with the COVID-19 pandemic, the Company has implemented a series of cost reduction initiatives that are expected to generate over $5.0 million in savings in 2023. These initiatives have included a reduction of SG&A expenses and other costs and the implementation of a wide range of productivity improvements in our manufacturing and distribution facilities.

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, 2023. 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 March 31, 2023, 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.

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, 2022.