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ACME UNITED CORP - Quarter Report: 2022 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from:                       to                 

Commission file number: 01-07698

ACME UNITED CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Connecticut

 

06-0236700

State or Other Jurisdiction of

 

I.R.S. Employer Identification No.

Incorporation or Organization

 

 

 

 

 

1 Waterview Drive, Shelton, Connecticut

 

06484

Address of Principal Executive Offices

 

Zip Code

 

Registrant's telephone number, including area code: (203) 254-6060

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

$2.50 par value Common Stock

ACU

NYSE American

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one).

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller Reporting Company

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(s) of the Exchange Act

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No  

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 USC. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes       No  

 

Registrant had 3,534,729 shares of its $2.50 par value Common Stock outstanding as of November 4, 2022.

1


ACME UNITED CORPORATION

INDEX

 

 

 

Page

Number

 

 

 

Part I — FINANCIAL INFORMATION:

3

Item 1:

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021

3

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021

5

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2022 and 2021

6

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021

7

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

9

 

Notes to Condensed Consolidated Financial Statements

10

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3: 

Quantitative and Qualitative Disclosures about Market Risk

21

Item 4: 

Controls and Procedures

21

 

 

 

Part II — OTHER INFORMATION:

22

Item 1:   

Legal Proceedings

22

Item 1A:

Risk Factors

22

Item 2:   

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3:   

Defaults Upon Senior Securities

22

Item 4:   

Mine Safety Disclosures

22

Item 5:   

Other Information

22

Item 6:  

Exhibits

22

Signatures

23

 

2


 

Part I - FINANCIAL INFORMATION

 

Item 1: Financial Statements

 

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(all amounts in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(unaudited)

 

 

(Note 1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,218

 

 

$

4,843

 

Accounts receivable, less allowance of $938 in 2022 and $1,007 in 2021

 

 

40,149

 

 

 

34,221

 

Inventories

 

 

66,210

 

 

 

53,552

 

Prepaid expenses and other current assets

 

 

3,989

 

 

 

2,635

 

Restricted cash

 

 

750

 

 

 

-

 

Total current assets

 

 

115,316

 

 

 

95,251

 

Property, plant and equipment:

 

 

 

 

 

 

 

 

Land

 

 

1,969

 

 

 

1,761

 

Buildings

 

 

16,282

 

 

 

13,456

 

Machinery and equipment

 

 

30,514

 

 

 

29,760

 

 

 

 

48,765

 

 

 

44,977

 

Less: accumulated depreciation

 

 

22,723

 

 

 

20,950

 

   Net property, plant and equipment

 

 

26,042

 

 

 

24,027

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use asset, net

 

 

2,891

 

 

 

3,130

 

Goodwill

 

 

8,189

 

 

 

4,800

 

Intangible assets, less accumulated amortization

 

 

21,296

 

 

 

17,231

 

Other assets - restricted cash

 

 

750

 

 

 

-

 

Total assets

 

$

174,484

 

 

$

144,439

 

 

 

See Notes to Condensed Consolidated Financial Statements.

3


ACME UNITED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(all amounts in thousands, except par value and share amounts)

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(unaudited)

 

 

(Note 1)

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,771

 

 

$

8,977

 

Operating lease liability - current portion

 

 

1,142

 

 

 

1,000

 

Current portion of mortgage payable

 

 

389

 

 

 

389

 

Other current liabilities

 

 

11,138

 

 

 

9,909

 

Total current liabilities

 

 

24,440

 

 

 

20,275

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

57,131

 

 

 

33,037

 

Mortgage payable, net of current portion

 

 

10,803

 

 

 

11,081

 

Operating lease liability - non-current portion

 

 

1,949

 

 

 

2,365

 

Other non-current liabilities

 

 

1,180

 

 

 

599

 

Total liabilities

 

 

95,503

 

 

 

67,357

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (see note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock, par value $2.50:

 

 

 

 

 

 

 

 

authorized 8,000,000 shares;

 

 

 

 

 

 

 

 

   5,079,601 shares issued and 3,534,729 shares outstanding in 2022 and

 

 

 

 

 

 

 

 

        5,065,518 shares issued and 3,520,646 shares outstanding in 2021

 

 

12,690

 

 

 

12,655

 

Additional paid-in capital

 

 

13,058

 

 

 

11,930

 

Retained earnings

 

 

72,060

 

 

 

69,873

 

Treasury stock, at cost - 1,544,872 shares in 2022 and 2021

 

 

(15,996

)

 

 

(15,996

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Translation adjustment

 

 

(2,831

)

 

 

(1,380

)

Total stockholders’ equity

 

 

78,981

 

 

 

77,082

 

Total liabilities and stockholders’ equity

 

$

174,484

 

 

$

144,439

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4


 

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(all amounts in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales

 

$

49,744

 

 

$

47,923

 

 

$

149,849

 

 

$

136,295

 

Cost of goods sold

 

 

33,819

 

 

 

30,918

 

 

 

100,374

 

 

 

87,550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

15,925

 

 

 

17,005

 

 

 

49,475

 

 

 

48,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

14,972

 

 

 

14,044

 

 

 

43,176

 

 

 

39,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

953

 

 

 

2,961

 

 

 

6,299

 

 

 

9,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

722

 

 

 

230

 

 

 

1,459

 

 

 

682

 

Interest income

 

 

(8

)

 

 

(2

)

 

 

(16

)

 

 

(11

)

Interest expense, net

 

 

714

 

 

 

228

 

 

 

1,443

 

 

 

671

 

PPP loan forgiveness

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,508

)

Other expense, net

 

 

209

 

 

 

68

 

 

 

354

 

 

 

213

 

Total other expense (income), net

 

 

209

 

 

 

68

 

 

 

354

 

 

 

(3,295

)

Income before income tax expense

 

 

30

 

 

 

2,665

 

 

 

4,502

 

 

 

12,341

 

Income tax (benefit) expense

 

 

(34

)

 

 

619

 

 

 

870

 

 

 

1,019

 

Net income

 

$

64

 

 

$

2,046

 

 

$

3,632

 

 

$

11,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.02

 

 

$

0.58

 

 

$

1.03

 

 

$

3.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.02

 

 

$

0.50

 

 

$

0.96

 

 

$

2.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding-denominator used for basic

   per share computations

 

 

3,530

 

 

 

3,542

 

 

 

3,525

 

 

 

3,449

 

Weighted average number of dilutive stock options outstanding

 

 

162

 

 

 

516

 

 

 

256

 

 

 

520

 

Denominator used for diluted per share computations

 

 

3,692

 

 

 

4,058

 

 

 

3,781

 

 

 

3,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.14

 

 

$

0.13

 

 

$

0.41

 

 

$

0.39

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

5


ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

(all amounts in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

64

 

 

$

2,046

 

 

$

3,632

 

 

$

11,322

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(904

)

 

 

(310

)

 

 

(1,451

)

 

 

(330

)

Comprehensive (loss) income

 

$

(840

)

 

$

1,736

 

 

$

2,181

 

 

$

10,992

 

 

See Notes to Condensed Consolidated Financial Statements.

6


ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

(all amounts in thousands, except share amounts)

 

 

 

    

For the three months ended September 30, 2021

 

 

Outstanding Shares of Common Stock

 

 

Common Stock

 

 

Treasury

Stock

 

 

Additional Paid-In Capital

 

 

Accumulated

Other Comprehensive Loss

 

 

Retained Earnings

 

 

Total

 

Balances, June 30, 2021

 

3,529,208

 

 

$

12,576

 

 

$

(14,522

)

 

$

10,829

 

 

$

(846

)

 

$

66,415

 

 

 

74,452

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,046

 

 

 

2,046

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(310

)

 

 

 

 

 

 

(310

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

455

 

 

 

 

 

 

 

 

 

 

 

455

 

Distributions to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(463

)

 

 

(463

)

Issuance of common stock

 

30,479

 

 

 

77

 

 

 

 

 

 

 

291

 

 

 

 

 

 

 

 

 

 

 

368

 

Balances September 30, 2021

 

3,559,687

 

 

$

12,653

 

 

$

(14,522

)

 

$

11,575

 

 

$

(1,156

)

 

$

67,998

 

 

$

76,548

 

 

 

For the three months ended September 30, 2022

 

 

Outstanding Shares of Common Stock

 

 

Common Stock

 

 

Treasury

Stock

 

 

Additional Paid-In Capital

 

 

Accumulated

Other Comprehensive Loss

 

 

Retained Earnings

 

 

Total

 

Balances, June 30, 2022

 

3,521,373

 

 

$

12,657

 

 

$

(15,996

)

 

$

12,598

 

 

$

(1,927

)

 

$

72,491

 

 

$

79,823

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64

 

 

 

64

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(904

)

 

 

 

 

 

 

(904

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

637

 

 

 

 

 

 

 

 

 

 

 

637

 

Distributions to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(495

)

 

 

(495

)

Issuance of common stock

 

5,239

 

 

 

13

 

 

 

 

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

68

 

Net share settlement of stock options

 

8,117

 

 

 

20

 

 

 

 

 

 

 

(232

)

 

 

 

 

 

 

 

 

 

 

(212

)

Balances September 30, 2022

 

3,534,729

 

 

$

12,690

 

 

$

(15,996

)

 

$

13,058

 

 

$

(2,831

)

 

$

72,060

 

 

$

78,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2021  

     

 

 

Outstanding

Shares of

Common

Stock

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Retained

Earnings

 

 

Total

 

Balances, January 1, 2021

 

 

3,338,913

 

 

$

12,101

 

 

$

(14,522

)

 

$

7,931

 

 

$

(826

)

 

$

58,033

 

 

$

62,717

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,322

 

 

 

11,322

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(330

)

 

 

 

 

 

 

(330

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,341

 

 

 

 

 

 

 

 

 

 

 

1,341

 

Distributions to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,357

)

 

 

(1,357

)

Issuance of common stock

 

 

220,774

 

 

 

552

 

 

 

 

 

 

 

2,514

 

 

 

 

 

 

 

 

 

 

 

3,066

 

Cash settlement of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(211

)

 

 

 

 

 

 

 

 

 

 

(211

)

Balances September 30, 2021

 

 

3,559,687

 

 

$

12,653

 

 

$

(14,522

)

 

$

11,575

 

 

$

(1,156

)

 

$

67,998

 

 

$

76,548

 

 

 

 

 

 

 

7


 

 

 

 

For the nine months ended September 30, 2022

 

 

 

 

Outstanding

Shares of

Common

Stock

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Retained

Earnings

 

 

Total

 

Balances, December 31, 2021

 

 

3,520,646

 

 

$

12,655

 

 

$

(15,996

)

 

$

11,930

 

 

$

(1,380

)

 

$

69,873

 

 

$

77,082

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,632

 

 

 

3,632

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,451

)

 

 

 

 

 

 

(1,451

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,405

 

 

 

 

 

 

 

 

 

 

 

1,405

 

Distributions to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,445

)

 

 

(1,445

)

Issuance of common stock

 

 

5,966

 

 

 

15

 

 

 

 

 

 

 

63

 

 

 

 

 

 

 

 

 

 

 

78

 

Cash settlement of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(108

)

 

 

 

 

 

 

 

 

 

 

(108

)

Net share settlement of stock options

 

 

8,117

 

 

 

20

 

 

 

 

 

 

 

(232

)

 

 

 

 

 

 

 

 

 

 

(212

)

Balances September 30, 2022

 

 

3,534,729

 

 

$

12,690

 

 

$

(15,996

)

 

$

13,058

 

 

$

(2,831

)

 

$

72,060

 

 

$

78,981

 

 

See Notes to Condensed Consolidated Financial Statements.

8


ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(all amounts in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,632

 

 

$

11,322

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

2,006

 

 

 

1,809

 

Amortization of intangible assets

 

 

1,298

 

 

 

1,111

 

Non-cash lease expense

 

 

-

 

 

 

170

 

Stock compensation expense

 

 

1,405

 

 

 

1,341

 

Provision for bad debt

 

 

75

 

 

 

79

 

PPP loan forgiveness

 

 

-

 

 

 

(3,508

)

Amortization of deferred financing costs

 

 

11

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,836

)

 

 

(9,060

)

Inventories

 

 

(12,807

)

 

 

1,678

 

Prepaid expenses and other assets

 

 

(1,393

)

 

 

(859

)

Accounts payable

 

 

3,048

 

 

 

(959

)

Other accrued liabilities

 

 

954

 

 

 

(145

)

Total adjustments

 

 

(11,239

)

 

 

(8,343

)

Net cash (used in) provided by operating activities

 

 

(7,607

)

 

 

2,979

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(3,299

)

 

 

(4,792

)

  Purchase of intellectual property

 

 

(300

)

 

 

-

 

  Acquisition of Safety Made

 

 

(9,609

)

 

 

-

 

Net cash used in investing activities

 

 

(13,208

)

 

 

(4,792

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net borrowings of long-term debt

 

 

24,094

 

 

 

1,687

 

Tax paid on net share settlement of stock options

 

 

(211

)

 

 

-

 

Cash settlement of stock options

 

 

(108

)

 

 

(211

)

Repayments on mortgage

 

 

(290

)

 

 

(200

)

Proceeds from issuance of common stock

 

 

78

 

 

 

3,066

 

Distributions to shareholders

 

 

(1,408

)

 

 

(1,329

)

Net cash provided by financing activities

 

 

22,155

 

 

 

3,013

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(465

)

 

 

(61

)

Net change in cash, cash equivalents and restricted cash

 

 

875

 

 

 

1,139

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

4,843

 

 

 

4,167

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash at end of period

 

$

5,718

 

 

$

5,306

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

242

 

 

$

1,070

 

Cash paid for interest

 

$

1,292

 

 

$

660

 

Non-cash investing activities

 

 

 

 

 

 

 

 

Safety Made acquisition contingent consideration

 

$

1,270

 

 

$

-

 

 

See Notes to Condensed Consolidated Financial Statements.

 

9


 

ACME UNITED CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of Acme United Corporation (the “Company”). These adjustments are of a normal, recurring nature. However, the financial statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Company's Annual Report on Form 10-K. Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2021 for such disclosures. The condensed consolidated balance sheet as of December 31, 2021 was derived from the audited consolidated balance sheet as of that date. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s 2021 Annual Report on Form 10-K.

The Company has evaluated events and transactions subsequent to September 30, 2022 and through the date these condensed consolidated financial statements were issued.

2. Commitment and Contingencies

There are no pending material legal proceedings to which the Company is a party, or, to the actual knowledge of the Company, contemplated by any governmental authority.

3. Revenue from Contracts with Customers

Nature of Goods and Services

The Company recognizes revenue from the sales of a broad line of products that are grouped into two main categories: (a) first aid and medical; and (b) cutting, sharpening and measuring. The cutting, sharpening and measuring category includes scissors, knives, paper trimmers, pencil sharpeners and other sharpening tools. The first aid and medical category includes first aid kits and refills, over-the-counter medications and a variety of medical products. Revenue recognition is evaluated through the following five steps: (i) identification of the contract or contracts with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.

When Performance Obligations Are Satisfied

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenue is generated by the sale of the Company’s products to its customers.  Sales contracts (purchase orders) generally have a single performance obligation that is satisfied at a point in time, with shipment or delivery, depending on the terms of the underlying contract. Revenue is measured based on the consideration specified in the contract. The amount of consideration we receive and revenue we recognize is impacted by incentives ("customer rebates"), including sales rebates, which are generally tied to sales volume levels, in-store promotional allowances, shared media and customer catalogue allowances and other cooperative advertising arrangements; freight allowance programs offered to our customers; and allowance for returns and discounts. We generally recognize customer rebate costs as a deduction to gross sales at the time that the associated revenue is recognized.

Significant Payment Terms

Payment terms for each customer are dependent on the agreed upon contractual repayment terms. Payment terms typically are between 30 and 90 days and vary depending on the size of the customer and its risk profile to the Company. Some customers receive discounts for early payment.

Product Returns

The Company accepts product returns in the normal course of business. The Company estimates reserves for returns and the related refunds to customers based on historical experience. Reserves for returned merchandise are included as a component of “Accounts receivable” in the condensed consolidated balance sheets.

Practical Expedient Usage and Accounting Policy Elections

For the Company’s contracts that have an original duration of one year or less, the Company uses the practical expedient in ASC 606-10-32-18 applicable to such contracts and does not consider the time value of money in relation to significant financing components.  The effect of applying this practical expedient election did not have an impact on the Company’s condensed consolidated financial statements.  

10


Per ASC 606-10-25-18B, the Company has elected to account for shipping and handling activities that occur after the customer has obtained control as a fulfilment activity instead of a performance obligation. Furthermore, shipping and handling activities performed before transfer of control of the product also do not constitute a separate and distinct performance obligation. The effect of applying this practical expedient election did not have an impact on the Company’s condensed consolidated financial statements.  

The Company has elected to exclude from the transaction price those amounts which relate to sales and other taxes that are assessed by governmental authorities and that are imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer.

Applying the practical expedient in ASC 340-40-25-4, Other Assets and Deferred Costs, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred. These costs are included in “Selling, general and administrative expenses.” The effect of applying this practical expedient did not have an impact on the Company’s condensed consolidated financial statements.

Disaggregation of Revenues

The following table represents external net sales disaggregated by product category, by segment (amounts in thousands):

For the three months ended September 30, 2022

 

 

 

United States

 

 

Canada

 

 

Europe

 

 

Total

 

Cutting, Sharpening and Measuring

 

$

17,934

 

 

$

1,799

 

 

$

2,792

 

 

$

22,525

 

First Aid and Medical

 

 

25,009

 

 

 

1,830

 

 

 

380

 

 

 

27,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales

 

$

42,943

 

 

$

3,629

 

 

$

3,172

 

 

$

49,744

 

 

For the three months ended September 30, 2021

 

 

 

United States

 

 

Canada

 

 

Europe

 

 

Total

 

Cutting, Sharpening and Measuring

 

$

18,769

 

 

$

1,932

 

 

$

2,863

 

 

$

23,564

 

First Aid and Medical

 

 

22,291

 

 

 

1,653

 

 

 

415

 

 

 

24,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales

 

$

41,060

 

 

$

3,585

 

 

$

3,278

 

 

$

47,923

 

 

For the nine months ended September 30, 2022

 

 

United States

 

 

Canada

 

 

Europe

 

 

Total

 

Cutting, Sharpening and Measuring

 

$

55,221

 

 

$

5,584

 

 

$

9,905

 

 

$

70,710

 

First Aid and Medical

 

 

72,368

 

 

 

5,536

 

 

 

1,235

 

 

 

79,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales

 

$

127,589

 

 

$

11,120

 

 

$

11,140

 

 

$

149,849

 

 

 

For the nine months ended September 30, 2021

 

 

 

United States

 

 

Canada

 

 

Europe

 

 

Total

 

Cutting, Sharpening and Measuring

 

$

50,507

 

 

$

5,571

 

 

$

10,271

 

 

$

66,349

 

First Aid and Medical

 

 

63,441

 

 

 

5,336

 

 

 

1,169

 

 

 

69,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales

 

$

113,948

 

 

$

10,907

 

 

$

11,440

 

 

$

136,295

 

 

 

4. Debt and Shareholders’ Equity

Long-term debt consists of (i) borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A.(“HSBC”) and (ii) amounts outstanding under the fixed rate mortgage 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 increased the amount available for borrowing from $50 million to $65 million, at an interest rate of Secured Overnight Financing Rate (“SOFR”) plus 1.75%; interest is payable monthly. In addition, the expiration date of the revolving loan agreement was extended to 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. 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 the four quarters

11


commencing in the third quarter of 2022 and includes an increase in the funded debt to EBITDA ratio for the 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 leverage ratio. The increase in the ratio brought the Company into compliance with the covenant as of September 30, 2022, and going forward, provides the Company with flexibility to conduct its business in light of current and anticipated economic conditions. As of September 30, 2022, the Company was in compliance with the covenants under the revolving loan agreement, as amended.

As of September 30, 2022 and December 31, 2021, the Company had outstanding borrowings of $57,131,000 and $33,037,000, respectively, under the Company’s revolving loan agreement with HSBC.

The Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA were financed by a fixed rate mortgage with HSBC at a fixed interest rate of 3.8%. The Company entered into the agreement on December 1, 2021.  Commencing on January 1, 2022, payments of principal and interest are due monthly, with all amounts outstanding due on maturity on December 1, 2031. As of September 30, 2022 and December 31, 2021, long-term debt related to the mortgage consisted of the following (amounts in ‘000’s):

 

 

September 30, 2022

 

December 31, 2021

 

 

 

 

 

 

 

 

Mortgage Payable - HSBC

 

$           11,331

 

 

$           11,620

 

Less debt issuance costs

 

(139

)

 

(150

)

 

 

11,192

 

 

11,470

 

Less current maturities

 

389

 

 

389

 

Long-term mortgage payable less current maturities

 

$           10,803

 

 

$           11,081

 

 

 

 

 

 

 

 

During the three and nine months ended September 30, 2022, the Company issued a total of 5,239 and 5,966 shares of common stock, respectively, and received aggregate proceeds of $67,658 and $77,658 upon exercise of employee stock options, respectively. During the nine months ended September 30, 2022, the Company, at its discretion, paid approximately $108,000 to optionees who had elected (subject to the approval of the Company) a net cash settlement of certain of their respective options. Also, during the three and nine months ended September 30, 2022, the Company issued 8,117 shares of common stock to optionees who had elected a net share settlement of certain of their respective option.

  

5. Segment Information

The Company reports financial information based on the organizational structure used by the Company’s chief operating decision makers for making operating and investment decisions and for assessing performance. The Company’s reportable business segments consist of: (1) United States; (2) Canada; and (3) Europe. As described below, the activities of the Company’s Asian operations are closely linked to those of the U.S. operations; accordingly, the Company’s chief operating decision makers review the financial results over both, on a consolidated basis, and as such, the results of the Asian operations have been aggregated with the results of the United States operations to form one reportable segment called the “United States segment” or “U.S. segment”. Each reportable segment derives its revenue from the sales of first aid and medical products, cutting and sharpening devices and measuring instruments for school, office, home, hardware, sporting and industrial use.

Domestic sales orders are filled primarily from the Company’s distribution centers in North Carolina, Washington, Massachusetts, Tennessee, Florida and California. The Company is responsible for the costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products. Orders filled from the Company’s inventory are generally for less than container-sized lots.

Direct import sales are products sold by the Company’s Asian subsidiary, directly to major U.S. retailers, who take ownership of the products in Asia. These sales are completed by delivering product to the customers’ common carriers at the shipping points in Asia. Direct import sales are made in larger quantities than domestic sales, typically full containers. Direct import sales represented approximately 8% and 9% of the Company’s total net sales for the three and nine months ended September 30, 2022, respectively, compared to 7% and 8% respectively, for the comparable periods in 2021.

The chief operating decision maker evaluates the performance of each operating segment based on segment revenues and operating income. Segment revenues are defined as total revenues, including both external customer revenue and inter-segment revenue. Segment operating earnings are defined as segment revenues, less cost of goods sold and operating expenses. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Inter-segment amounts are eliminated to arrive at consolidated financial results.

12


The following table sets forth certain financial data by segment for three and nine months ended September 30, 2022 and 2021:

Financial data by segment:

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Sales to external customers:

 

2022

 

 

2021

 

 

2022

 

 

2021

 

United States

 

$

42,943

 

 

$

41,060

 

 

$

127,589

 

 

$

113,948

 

Canada

 

 

3,629

 

 

 

3,585

 

 

 

11,120

 

 

 

10,907

 

Europe

 

 

3,172

 

 

 

3,278

 

 

 

11,140

 

 

 

11,440

 

Consolidated

 

$

49,744

 

 

$

47,923

 

 

$

149,849

 

 

$

136,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

767

 

 

$

2,425

 

 

$

5,032

 

 

$

7,231

 

Canada

 

 

354

 

 

 

418

 

 

 

1,214

 

 

 

1,452

 

Europe

 

 

(168

)

 

 

118

 

 

 

53

 

 

 

1,034

 

Consolidated

 

$

953

 

 

$

2,961

 

 

$

6,299

 

 

$

9,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

714

 

 

 

228

 

 

 

1,443

 

 

 

671

 

Other expense (income) , net

 

 

209

 

 

 

68

 

 

 

354

 

 

 

(3,295

)

Consolidated income before income taxes

 

$

30

 

 

$

2,665

 

 

$

4,502

 

 

$

12,341

 

 

Assets by segment:

(in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

United States

 

$

154,980

 

 

$

125,521

 

Canada

 

 

9,399

 

 

 

9,100

 

Europe

 

 

10,105

 

 

 

9,818

 

Consolidated

 

$

174,484

 

 

$

144,439

 

 

6. Stock Based Compensation

The Company recognizes share-based compensation at the fair value of the equity instrument on the grant date. Compensation expense is recognized over the required service period, which is generally the vesting period of the equity instrument. Share-based compensation expense was approximately $637,000 and $1,405,000 for the three and nine months ended September 30, 2022, respectively, compared to approximately $455,000 and $1,341,000 for the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022, there was a total of $3,995,873 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested share-based payments granted to the Company’s employees. As of that date, the remaining unamortized expense was expected to be recognized over a weighted average period of approximately three years.

7. Fair Value Measurements

The carrying value of the Company’s bank debt is a reasonable estimate of fair value because of the nature of its payment terms and maturity. The Company’s contingent liability related to the acquisition of Safety Made is recorded at its acquisition date fair value of approximately $1.3 million, of which $690,000 is recorded in other current liabilities and $580,000 is recorded in other non-current liabilities on the condensed consolidated balance sheet as of September 30, 2022. Changes in the fair value of the liability are recorded in earnings. There is no change during the three month period ended September 30, 2022.

8. Leases

The Company has operating leases for office and warehouse space and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists of operating leases which expire at various dates through 2026.

Certain of the Company’s lease arrangements contain renewal provisions, exercisable at the Company's option. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

13


The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet with right-of-use (“ROU”) assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. As most of our leases do not provide an implicit rate, the present value of lease payments is determined primarily using our incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term on an amount equal to the lease payments in a similar economic environment. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term.  For the three and nine months ended September 30, 2022 and 2021, lease expense in the amount of $0.1 million was included in cost of goods sold and $0.3 million and $0.2 million, respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.                             

Information related to leases (in thousands):

 

 

 

Three Months Ended

 

 

Three Months Ended

 

Operating cash flow information:

 

September 30, 2022

 

 

September 30, 2021

 

Operating lease cost

 

$

308

 

 

$

297

 

Operating lease - cash flow

 

$

319

 

 

$

236

 

 

 

 

 

 

 

 

 

 

Non-cash activity:

 

 

 

 

 

 

 

 

ROU assets obtained in exchange for lease liabilities

 

$

334

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

Operating cash flow information:

 

September 30, 2022

 

 

September 30, 2021

 

Operating lease cost

 

$

926

 

 

$

994

 

Operating lease - cash flow

 

$

964

 

 

$

796

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash activity:

 

 

 

 

 

 

 

 

ROU assets obtained in exchange for lease liabilities

 

$

545

 

 

$

1,575

 

 

 

 

September 30, 2022

 

 

September 30, 2021

 

Weighted-average remaining lease term

 

3.0 years

 

 

4.0 years

 

Weighted-average discount rate

 

 

5

%

 

 

5

%

 

Future minimum lease payments under non-cancellable leases as of September 30, 2022:

 

2022 (remaining)

 

$

324

 

2023

 

 

1,234

 

2024

 

 

914

 

2025

 

 

689

 

2026

 

 

155

 

Thereafter

 

 

-

 

 

 

 

 

 

Total future minimum lease payments

 

$

3,316

 

Less: imputed interest

 

 

(225

)

Present value of lease liabilities - current

 

 

1,142

 

Present value of lease liabilities - non-current

 

$

1,949

 

 

 

9. Business Combinations

 

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 over a two-year period. Based in Keene, NH, Safety Made is a leading manufacturer of first aid kits for the promotional products industry.

 

14


 

The purchase price was allocated to assets acquired as follows (in thousands):

 

Assets:

 

 

 

 

Accounts receivable

 

$

512

 

Inventory

 

 

944

 

Prepaid Expense

 

 

14

 

Property, plant and equipment

 

 

877

 

Intangible assets

 

 

5,143

 

Goodwill

 

 

3,389

 

Total assets

 

$

10,879

 

 

The acquisition was accounted for as a business combination, pursuant to ASC 805 – Business Combinations. All assets acquired in the acquisition are included in the Company’s United States operating segment. Management’s assessment of the valuation of intangible assets is preliminary and finalization of the Company’s purchase price accounting assessment may result in changes to the valuation of the identified intangible assets.  Intangible assets include Customer List, Trade Names, Non-Compete Agreements, and Goodwill. The useful lives of the identified intangible assets range from 5 years to 15 years.

 

The $1.5 million contingent payment that is being held in escrow is classified as restricted cash. Of this amount, $750,000 is recorded in current assets, with the remaining $750,000 reported in other long-term assets on the condensed consolidated balance sheet.

 

 

10. Other Accrued Liabilities

 

Other current accrued liabilities consisted of (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Customer Rebates

 

$

6,228

 

 

$

5,414

 

Accrued Compensation

 

 

1,465

 

 

 

1,586

 

Dividend Payable

 

 

495

 

 

 

458

 

Income Tax Payable

 

 

801

 

 

 

564

 

Other

 

 

2,149

 

 

 

1,887

 

Total:

 

$

11,138

 

 

$

9,909

 

 

 

 

 

 

 

 

 

 

 

 

11. Cash, Cash Equivalents and Restricted Cash

(in thousands):

 

 

September 30, 2022

 

December 31, 2021

 

Cash and cash equivalents

 

$

4,218

 

$

4,843

 

Restricted Cash - current

 

 

750

 

 

-

 

Restricted Cash - non-current

 

 

750

 

 

-

 

Total cash, cash equivalents and restricted cash

 

$

5,718

 

$

4,843

 

 

Restricted cash, which is reported within other short-term and long term assets in the condensed consolidated balance sheets consists of the contingent payment held in escrow related to the acquisition of Safety Made. See Note 9 for additional information related to the acquisition of Safety Made.

 

 

 

 

 

 

 

15


 

 

 

 

 

12. Intangible Assets and Goodwill

The Company’s intangible assets and goodwill consisted of (in thousands):

 

September 30

 

 

December 31

 

 

2022

 

 

2021

 

Customer List

$

18,670

 

 

$

16,137

 

Tradenames

 

9,985

 

 

 

7,995

 

Patents

 

2,272

 

 

 

2,272

 

Non-Compete

 

1,170

 

 

 

250

 

License Agreement

 

380

 

 

 

380

 

     Subtotal

 

32,477

 

 

 

27,034

 

Less: Accumulated Amortization

 

11,181

 

 

 

9,803

 

Intangible Assets

$

21,296

 

 

$

17,231

 

 

 

 

 

 

 

 

 

Goodwill

$

8,189

 

 

$

4,800

 

Total:

$

29,485

 

 

$

22,031

 

 

The useful lives of the identified intangible assets range from 5 years to 15 years.

 

13. Inventories

Inventories consisted of (in thousands):

 

 

 

2022

 

 

2021

 

Finished goods

 

$

51,189

 

 

$

40,412

 

Work in process

 

 

724

 

 

 

89

 

Materials and supplies

 

 

14,297

 

 

 

13,051

 

Inventories:

 

$

66,210

 

 

$

53,552

 

 

Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-out method.

 

16


 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

 

Macroeconomic, Supply Chain and Related Considerations

 

The global macroeconomic environment has continued to be challenging in 2022, characterized by global inflation at multi-decade highs, rising interest rates, and significant currency fluctuations. These factors have exacerbated an economy that was struggling to recover from the COVID-19 pandemic.

During the nine months ended September 30, 2022, the Company experienced significant supply chain issues. In anticipation of potential supply chain disruptions, the Company had purchased and maintained additional inventory to minimize the impact of any disruption in our

17


supply chain. However, as economies have become less restricted by the COVID pandemic, global supply chains have struggled to keep up with increasing demand, and the resulting supply chain disruptions have significantly increased costs. The supply chain issues caused exceptional ocean and inland freight and demurrage costs. The freight and demurrage costs began to decrease in the third quarter of 2022 and we anticipate that they will continue to decrease in the fourth quarter of 2022, while still remaining above historical levels.  We recognize those expenses as products are sold and, as a result, the unusually high freight and demurrage costs continued to adversely impact our results for the quarter ended September 30, 2022 and had an overall adverse effect on our operating margin in the first nine months of 2022.

In addition, the war in Ukraine is causing a slowdown in the European economy. This softness, coupled with a historically low exchange rate for the Euro, has led to challenges in our European markets which we anticipate will continue for at least the near future.

Any continuation of supply chain issues, continued high inflation, currency fluctuations, high interest rates, and any further increase in the duration or severity of the COVID-19 pandemic or a resurgence of the pandemic might continue to adversely affect the Company’s business, operations and financial condition. The impact of these developments 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 September 30, 2022 were $49,744,000 compared with $47,923,000 in the same period in 2021, a 4% increase. Consolidated net sales for nine months ended September 30, 2022 were $149,849,000 compared with $136,295,000 in the same period in 2021, a 13% increase.

Sales in the U.S. for the three and nine months ended September 30, 2022 increased 4% and 12%, respectively, compared to the same periods in 2021. As a precaution against supply chain delays, customers accelerated purchases into the second quarter of 2022 from the third quarter of 2022. This reduced sales in the third quarter of 2022. The increase in sales for the nine months was primarily attributable to increased sales of first aid and medical products and Westcott school and office products.

Net sales in Canada for the three and nine months ended September 30, 2022 increased 1% (3% in local currency) and 2% (5% in local currency), respectively, compared to the same periods last year. The growth in the three and nine months ended September 30, 2022 was mainly due to higher sales of first aid products.    

European net sales for the three months ended September 30, 2022 decreased 3% in U.S. dollars but increased 13% in local currency compared to the same period in 2021. Net sales for the nine months ended September 30, 2022 decreased 3% in U.S. dollars but increased 9% in local currency compared to the same period in 2021. The increase in net sales for the three and nine months was mainly due to market share gains in the office channel.

 

Gross profit

 

Gross profit for the three months ended September 30, 2022 was $15,925,000 (32.0% of net sales) compared to $17,005,000 (35.5% of net sales) in the same period in 2021. Gross profit for the nine months ended September 30, 2022 was $49,475,000 (33.0% of net sales) compared to $48,745,000 (35.8% of net sales) for the same period in 2021. The decline in the gross margin for the three and nine months ended September 30, 2022 was primarily due to exceptionally high ocean container costs and demurrage charges. The impact on gross margins due to the aforementioned supply chain expense were 2.3% and 1.5% for the three and nine months ended September 30, 2022. Also contributing to the decline in gross profit were weaker currencies in Europe and Canada, where we purchase most of our inventory in U.S. dollars.

 

Selling, general and administrative expenses

 

Selling, general and administrative ("SG&A") expenses for the three months ended September 30, 2022 were $14,972,000 (30.1% of net sales) compared with $14,044,000 (29.3% of net sales) in the same period in 2021, an increase of $928,000. SG&A expenses for the nine months ended September 30, 2022 were $43,176,000 (28.8% of net sales) compared with $39,028,000 (28.6% of net sales) for the same periods of 2021, an increase of $4,148,000. The increases in SG&A expenses for three and nine months ended September 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. The increased shipping costs included fuel surcharges due to higher gas prices earlier in the year. Also, the Company incurred incremental expenses related to the acquisition and integration of the Safety Made assets.

 

Operating income

 

18


 

Operating income for the three months ended September 30, 2022 was $953,000 compared with $2,961,000 in the same period of 2021. Operating income for the nine months ended September 30, 2022 was $6,299,000 compared with $9,717,000 in the same period of 2021.

 

Operating income in the U.S. segment decreased by $1,658,000 and $2,198,000 for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The decline in operating income for the three and nine months ended September 30, 2022 was primarily due to increased supply chain costs which include exceptionally high ocean container costs and demurrage charges. $2.4 million of exceptional supply chain costs were recognized through September 30, 2022, of which $.9 million was recorded in the three months ended September 30, 2022.

 

Operating income in the Canadian segment decreased by $64,000 and $238,000 for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

 

Operating income in the European segment decreased by $286,000 and $981,000 for the three and nine months ended September 30, 2022, respectively, compared to the same period in 2021. The decline in operating income for the three and nine months ended September 30, 2022 was primarily due to increased supply chain costs as well as weaker currency in Europe where we purchase most of our inventory in U.S. dollars.  $0.6 million of exceptional supply chain costs were recognized through September 30, 2022, of which $0.2 million was recorded in the three months ended September 30, 2022.

 

Interest expense, net

 

Interest expense, net for the three months ended September 30, 2022 was $714,000 compared with $228,000 in the same period of 2021, a $486,000 increase. Interest expense, net for the nine months ended September 30, 2022 was $1,443,000 compared with $671,000 for the same period of 2021, a $772,000 increase. The increases in interest expense resulted from a higher average interest rate on the outstanding debt as well as higher average debt outstanding under the Company’s revolving loan agreement.

  

Total other expense (income), net

 

Total other expense, net was $209,000 in the three months ended September 30, 2022 compared to $68,000 in the same period of 2021. Total other expense, net was $354,000 in the nine months ended September 30, 2022 compared to total other expense, net of $213,000 (excluding income of $3,508,000 from PPP loan forgiveness) in the same period of 2021. The increase in total other expense, net in the three and nine months ended September 30, 2022, was due to losses from foreign currency transactions, primarily due to a declining Euro in our European business.

 

 

Income taxes

The effective income tax rate for the nine months ended September 30, 2022 was 19%. Income tax expense for the three and nine months ended September 30, 2021 included a $0.9 million tax credit for stock based compensation. The Company’s effective tax rates for the three and nine months ended September 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 nine months of 2022, working capital increased approximately $15.2 million compared to December 31, 2021. Inventory increased approximately $12.6 million at September 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 September 30, 2022 compared to 2.3 at December 31, 2021.  Receivables increased by approximately $5.9 million at September 30, 2022 compared to December 31, 2021.  The average number of days sales outstanding in accounts receivable was 62 days at September 30, 2022 compared to 60 days at December 31, 2021.  Accounts payable and other current liabilities increased by approximately $4.2 million at September 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Working capital

 

$

90,126

 

 

$

74,976

 

Current ratio

 

 

4.69

 

 

 

4.70

 

Long term debt to equity ratio

 

 

86.0

%

 

 

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 revolving loan agreement 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.

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 third quarter of 2022 and includes an increase in the funded debt to EBITDA ratio for the 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 leverage ratio. The increase in the ratio brought the Company into compliance with the covenant as of September 30, 2022, and going forward, provides the Company with the flexibility it needs to conduct its business in light of current and anticipated economic conditions. As of September 30, 2022, the Company was in compliance with the covenants under the revolving loan agreement, as amended.

During the first nine months of 2022, total debt outstanding under the Company’s revolving credit facility increased by approximately $24.1 million, compared to total debt thereunder at December 31, 2021. As of September 30, 2022, $57,131,000 was outstanding and $7,869,000 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 September 30, 2022, there was approximately $11.2 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 over a two-year period. Based in Keene, NH, Safety Made is a leading manufacturer of first aid kits for the promotional products industry.

 

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.

20


Item 3: Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

Item 4: Controls and Procedures

(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 September 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 September 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.

 

 

 

 

21


 

PART II. OTHER INFORMATION

There are no pending material legal proceedings to which the registrant is a party, or, to the actual knowledge of the Company, contemplated by any governmental authority.

Item 1A — Risk Factors

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.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 — Defaults upon Senior Securities

None.

Item 4 — Mine Safety Disclosures

Not applicable.

Item 5 — Other Information

None.

Item 6 — Exhibits

Documents filed as part of this report:

 

Exhibit 10.10(j)

 

Amendment No.9 to Revolving Loan Agreement with HSBC dated November 8, 2022

 

 

 

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

 

22


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ACME UNITED CORPORATION

 

 

 

By

/s/ Walter C. Johnsen

 

 

Walter C. Johnsen

 

 

Chairman of the Board and

 

 

Chief Executive Officer

 

 

 

 

Dated: November 9, 2022

 

 

By

/s/ Paul G. Driscoll

 

 

Paul G. Driscoll

 

 

Vice President and

 

 

Chief Financial Officer

 

 

 

 

Dated: November 9, 2022

 

 

23