Annual Statements Open main menu

ACME UNITED CORP - Quarter Report: 2022 June (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: June 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 3,525,002 shares of its $2.50 par value Common Stock outstanding as of August 5, 2022.

1


ACME UNITED CORPORATION

INDEX

 

 

 

Page

Number

 

 

 

Part I — FINANCIAL INFORMATION:

3

Item 1:

Financial Statements (Unaudited)

3

 

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

3

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021

5

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021

6

 

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

7

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 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)

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(unaudited)

 

 

(Note 1)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,760

 

 

$

4,843

 

Accounts receivable, less allowance of $922 in 2022 and $1,007 in 2021

 

 

46,991

 

 

 

34,221

 

Inventories

 

 

65,039

 

 

 

53,552

 

Prepaid expenses and other current assets

 

 

3,647

 

 

 

2,635

 

Total current assets

 

 

117,437

 

 

 

95,251

 

Property, plant and equipment:

 

 

 

 

 

 

 

 

Land

 

 

1,977

 

 

 

1,761

 

Buildings

 

 

16,088

 

 

 

13,456

 

Machinery and equipment

 

 

30,493

 

 

 

29,760

 

 

 

 

48,558

 

 

 

44,977

 

Less: accumulated depreciation

 

 

22,281

 

 

 

20,950

 

   Net property, plant and equipment

 

 

26,277

 

 

 

24,027

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use asset, net

 

 

2,787

 

 

 

3,130

 

Goodwill

 

 

8,189

 

 

 

4,800

 

Intangible assets, less accumulated amortization

 

 

21,625

 

 

 

17,231

 

Other assets - restricted cash

 

 

1,500

 

 

 

-

 

Total assets

 

$

177,815

 

 

$

144,439

 

 

 

See Notes to Condensed Consolidated Financial Statements.

3


ACME UNITED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(all amounts in thousands, except share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(unaudited)

 

 

(Note 1)

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

21,421

 

 

$

8,977

 

Operating lease liability - current portion

 

 

1,080

 

 

 

1,000

 

Current portion of mortgage payable

 

 

389

 

 

 

389

 

Other accrued liabilities

 

 

10,129

 

 

 

9,909

 

Total current liabilities

 

 

33,019

 

 

 

20,275

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

50,263

 

 

 

33,037

 

Mortgage payable, net of current portion

 

 

10,897

 

 

 

11,081

 

Operating lease liability - non-current portion

 

 

1,944

 

 

 

2,365

 

Other non-current liabilities

 

 

1,869

 

 

 

599

 

Total liabilities

 

 

97,992

 

 

 

67,357

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (see note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock, par value $2.50:

 

 

 

 

 

 

 

 

authorized 8,000,000 shares;

 

 

 

 

 

 

 

 

   5,066,245 shares issued and 3,521,373 shares outstanding in 2022 and

 

 

 

 

 

 

 

 

        5,065,518 shares issued and 3,520,646 shares outstanding in 2022 and 2021

 

 

12,657

 

 

 

12,655

 

Additional paid-in capital

 

 

12,598

 

 

 

11,930

 

Retained earnings

 

 

72,491

 

 

 

69,873

 

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

 

 

(15,996

)

 

 

(15,996

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Translation adjustment

 

 

(1,927

)

 

 

(1,380

)

Total stockholders’ equity

 

 

79,823

 

 

 

77,082

 

Total liabilities and stockholders’ equity

 

$

177,815

 

 

$

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales

 

$

56,773

 

 

$

44,847

 

 

$

100,106

 

 

$

88,372

 

Cost of goods sold

 

 

38,225

 

 

 

28,694

 

 

 

66,590

 

 

 

56,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

18,548

 

 

 

16,153

 

 

 

33,516

 

 

 

31,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

14,572

 

 

 

12,364

 

 

 

28,169

 

 

 

24,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

3,976

 

 

 

3,789

 

 

 

5,347

 

 

 

6,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-operating items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

428

 

 

 

226

 

 

 

737

 

 

 

452

 

Interest income

 

 

(5

)

 

 

(3

)

 

 

(8

)

 

 

(9

)

Interest expense, net

 

 

423

 

 

 

223

 

 

 

729

 

 

 

443

 

PPP loan forgiveness

 

 

-

 

 

 

(3,508

)

 

 

-

 

 

 

(3,508

)

Other expense (income), net

 

 

148

 

 

 

68

 

 

 

147

 

 

 

145

 

Total other expense (income), net

 

 

148

 

 

 

(3,440

)

 

 

147

 

 

 

(3,363

)

Income before income tax expense

 

 

3,405

 

 

 

7,006

 

 

 

4,471

 

 

 

9,677

 

Income tax expense (benefit)

 

 

667

 

 

 

(224

)

 

 

903

 

 

 

400

 

Net income

 

$

2,738

 

 

$

7,230

 

 

$

3,568

 

 

$

9,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.78

 

 

$

2.16

 

 

$

1.01

 

 

$

2.72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.71

 

 

$

1.82

 

 

$

0.93

 

 

$

2.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   per share computations

 

 

3,521

 

 

 

3,347

 

 

 

3,521

 

 

 

3,410

 

Weighted average number of dilutive stock options outstanding

 

 

320

 

 

 

617

 

 

 

323

 

 

 

551

 

Denominator used for diluted per share computations

 

 

3,841

 

 

 

3,964

 

 

 

3,844

 

 

 

3,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.14

 

 

$

0.13

 

 

$

0.27

 

 

$

0.26

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

5


ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(all amounts in thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

2,738

 

 

$

7,230

 

 

$

3,568

 

 

$

9,277

 

Other comprehensive (loss) income :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(574

)

 

 

168

 

 

 

(547

)

 

 

(20

)

Comprehensive income

 

$

2,164

 

 

$

7,398

 

 

$

3,021

 

 

$

9,257

 

 

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 June 30, 2021

 

 

Outstanding Shares of Common Stock

 

 

Common Stock

 

 

Treasury

Stock

 

 

Additional Paid-In Capital

 

 

Accumulated

Other Comprehensive (Loss) Gain

 

 

Retained Earnings

 

 

Total

 

Balances, March 31, 2021

 

3,356,614

 

 

$

12,145

 

 

$

(14,522

)

 

$

8,375

 

 

$

(1,014

)

 

$

59,643

 

 

 

64,627

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,230

 

 

 

7,230

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

168

 

 

 

 

 

 

 

168

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

580

 

 

 

 

 

 

 

 

 

 

 

580

 

Distributions to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(458

)

 

 

(458

)

Issuance of common stock

 

172,594

 

 

 

431

 

 

 

 

 

 

 

2,085

 

 

 

 

 

 

 

 

 

 

 

2,516

 

Cash settlement of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

(211

)

 

 

 

 

 

 

 

 

 

 

(211

)

Balances June 30, 2021

 

3,529,208

 

 

$

12,576

 

 

$

(14,522

)

 

$

10,829

 

 

$

(846

)

 

$

66,415

 

 

$

74,452

 

 

 

For the three months ended June 30, 2022

 

 

Outstanding Shares of Common Stock

 

 

Common Stock

 

 

Treasury

Stock

 

 

Additional Paid-In Capital

 

 

Accumulated

Other Comprehensive (Loss) Gain

 

 

Retained Earnings

 

 

Total

 

Balances, March 31, 2022

 

3,520,646

 

 

$

12,655

 

 

$

(15,996

)

 

$

12,222

 

 

$

(1,353

)

 

$

70,245

 

 

$

77,773

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,738

 

 

 

2,738

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(574

)

 

 

 

 

 

 

(574

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

368

 

 

 

 

 

 

 

 

 

 

 

368

 

Distributions to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(492

)

 

 

(492

)

Issuance of common stock

 

727

 

 

 

2

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

10

 

Balances June 30, 2022

 

3,521,373

 

 

$

12,657

 

 

$

(15,996

)

 

$

12,598

 

 

$

(1,927

)

 

$

72,491

 

 

$

79,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2021  

     

 

 

Outstanding

Shares of

Common

Stock

 

 

Common

Stock

 

 

Treasury

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Retained

Earnings

 

 

Total

 

Balances, December 31, 2020

 

 

3,338,913

 

 

$

12,101

 

 

$

(14,522

)

 

$

7,931

 

 

$

(826

)

 

$

58,033

 

 

$

62,717

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,277

 

 

 

9,277

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

886

 

 

 

 

 

 

 

 

 

 

 

886

 

Distributions to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(895

)

 

 

(895

)

Issuance of common stock

 

 

190,295

 

 

 

475

 

 

 

 

 

 

 

2,223

 

 

 

 

 

 

 

 

 

 

 

2,698

 

Cash settlement of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(211

)

 

 

 

 

 

 

 

 

 

 

(211

)

Balances June 30, 2021

 

 

3,529,208

 

 

$

12,576

 

 

$

(14,522

)

 

$

10,829

 

 

$

(846

)

 

$

66,415

 

 

$

74,452

 

 

 

 

 

 

 

 

7


 

 

 

For the six months ended June 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,568

 

 

 

3,568

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(547

)

 

 

 

 

 

 

(547

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

768

 

 

 

 

 

 

 

 

 

 

 

768

 

Distributions to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(950

)

 

 

(950

)

Issuance of common stock

 

 

727

 

 

 

2

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

10

 

Cash settlement of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(108

)

 

 

 

 

 

 

 

 

 

 

(108

)

Balances June 30, 2022

 

 

3,521,373

 

 

$

12,657

 

 

$

(15,996

)

 

$

12,598

 

 

$

(1,927

)

 

$

72,491

 

 

$

79,823

 

 

See Notes to Condensed Consolidated Financial Statements.

8


ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(all amounts in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,568

 

 

$

9,277

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

1,339

 

 

 

1,176

 

Amortization of intangible assets

 

 

744

 

 

 

742

 

Non-cash lease expense

 

 

-

 

 

 

43

 

Stock compensation expense

 

 

768

 

 

 

886

 

Provision for bad debt

 

 

50

 

 

 

54

 

PPP loan forgiveness

 

 

-

 

 

 

(3,508

)

Amortization of deferred financing costs

 

 

8

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(12,468

)

 

 

(9,072

)

Inventories

 

 

(11,021

)

 

 

2,007

 

Prepaid expenses and other  assets

 

 

(991

)

 

 

(593

)

Accounts payable

 

 

12,651

 

 

 

346

 

Other accrued liabilities

 

 

182

 

 

 

(1,215

)

Total adjustments

 

 

(8,739

)

 

 

(9,134

)

Net cash (used in) provided by  operating activities

 

 

(5,171

)

 

 

143

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(2,761

)

 

 

(3,351

)

  Acquisition of Safety Made

 

 

(9,609

)

 

 

-

 

Net cash used in investing activities

 

 

(12,370

)

 

 

(3,351

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net borrowings of long-term debt

 

 

17,225

 

 

 

782

 

Cash settlement of stock options

 

 

(108

)

 

 

(211

)

Repayments on mortgage

 

 

(192

)

 

 

(133

)

Proceeds from issuance of common stock

 

 

10

 

 

 

2,698

 

Distributions to shareholders

 

 

(915

)

 

 

(871

)

Net cash provided by financing activities

 

 

16,020

 

 

 

2,265

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(62

)

 

 

16

 

Net change in cash and cash equivalents

 

 

(1,583

)

 

 

(927

)

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

4,843

 

 

 

4,167

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash at end of period

 

$

3,260

 

 

$

3,240

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

242

 

 

$

952

 

Cash paid for interest

 

$

661

 

 

$

440

 

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 June 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 June 30, 2022

 

 

 

United States

 

 

Canada

 

 

Europe

 

 

Total

 

Cutting, Sharpening and Measuring

 

$

21,954

 

 

$

2,192

 

 

$

3,555

 

 

$

27,701

 

First Aid and Medical

 

 

26,951

 

 

 

1,684

 

 

$

437

 

 

 

29,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales

 

$

48,905

 

 

$

3,876

 

 

$

3,992

 

 

$

56,773

 

 

For the three months ended June 30, 2021

 

 

 

United States

 

 

Canada

 

 

Europe

 

 

Total

 

Cutting, Sharpening and Measuring

 

$

16,162

 

 

$

2,091

 

 

$

3,677

 

 

$

21,930

 

First Aid and Medical

 

 

20,678

 

 

 

1,899

 

 

 

340

 

 

 

22,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales

 

$

36,840

 

 

$

3,990

 

 

$

4,017

 

 

$

44,847

 

 

For the six months ended June 30, 2022

 

 

U.S.

 

 

Canada

 

 

Europe

 

 

Total

 

Cutting, Sharpening and Measuring

 

$

37,287

 

 

$

3,785

 

 

$

7,113

 

 

$

48,185

 

First Aid and Medical

 

 

47,359

 

 

 

3,706

 

 

 

856

 

 

 

51,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales

 

$

84,646

 

 

$

7,491

 

 

$

7,969

 

 

$

100,106

 

 

 

For the six months ended June 30, 2021

 

 

 

U.S.

 

 

Canada

 

 

Europe

 

 

Total

 

Cutting, Sharpening and Measuring

 

$

31,726

 

 

$

3,640

 

 

$

7,420

 

 

$

42,786

 

First Aid and Medical

 

 

41,162

 

 

 

3,683

 

 

 

741

 

 

 

45,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Sales

 

$

72,888

 

 

$

7,323

 

 

$

8,161

 

 

$

88,372

 

 

 

4. Debt and Shareholders’ Equity

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. 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 eighth of one percent (.125%) per annum of the average daily unused portion of the revolving credit line. The facility is intended to provide liquidity for growth, share repurchases, dividends, acquisitions, and other business activities. Under the revolving loan agreement, the Company is required to maintain specific amounts of funded debt to EBITDA, a fixed charge coverage ratio and must have annual net income greater than $0, measured as of the end of each fiscal year. As of June 30, 2022, the Company was in compliance with the covenants then in effect under the loan agreement.  

11


As of June 30, 2022 and December 31, 2021, the Company had outstanding borrowings of $50,263,000 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 Bank, N.A. 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 June 30, 2022 and December 31, 2021, long-term debt related to the mortgage consisted of the following (amounts in ‘000’s):

 

 

June 30, 2022

 

December 31, 2021

 

 

 

 

 

 

 

 

Mortgage Payable - HSBC Bank N.A.

 

11,428

 

 

11,620

 

Less debt issuance costs

 

(142

)

 

(150

)

 

 

11,286

 

 

11,470

 

Less current maturities

 

389

 

 

389

 

Long-term mortgage payable less current maturities

 

10,897

 

 

11,081

 

 

 

 

 

 

 

 

During the three and six months ended June 30, 2022, the Company issued a total of 727 shares of common stock and received aggregate proceeds of $10,000 upon exercise of employee stock options.  During the six months ended June 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.  

  

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 a consolidated basis, and 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 12% and 9% of the Company’s total net sales for the three and six months ended June 30, 2022, respectively, compared to 10% 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 six months ended June 30, 2022 and 2021:

Financial data by segment:

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Sales to external customers:

 

2022

 

 

2021

 

 

2022

 

 

2021

 

United States

 

$

48,905

 

 

$

36,840

 

 

$

84,646

 

 

$

72,888

 

Canada

 

 

3,876

 

 

 

3,990

 

 

 

7,491

 

 

 

7,322

 

Europe

 

 

3,992

 

 

 

4,017

 

 

 

7,969

 

 

 

8,162

 

Consolidated

 

$

56,773

 

 

$

44,847

 

 

$

100,106

 

 

$

88,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

3,454

 

 

$

2,675

 

 

$

4,287

 

 

$

4,807

 

Canada

 

 

474

 

 

 

662

 

 

 

830

 

 

 

1,034

 

Europe

 

 

48

 

 

 

452

 

 

 

230

 

 

 

916

 

Consolidated

 

$

3,976

 

 

$

3,789

 

 

$

5,347

 

 

$

6,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

423

 

 

 

223

 

 

 

729

 

 

 

443

 

Other expense (income) , net

 

 

148

 

 

 

(3,440

)

 

 

147

 

 

 

(3,363

)

Consolidated income before income taxes

 

$

3,405

 

 

$

7,006

 

 

$

4,471

 

 

$

9,677

 

 

Assets by segment:

(in thousands)

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

United States

 

$

157,623

 

 

$

125,521

 

Canada

 

 

10,494

 

 

 

9,100

 

Europe

 

 

9,698

 

 

 

9,818

 

Consolidated

 

$

177,815

 

 

$

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 $368,000 and $768,000 for the three and six months ended June 30, 2022, respectively, compared to approximately $580,000 and $886,000 for the three and six months ended June 30, 2021, respectively.

As of June 30, 2022, there was a total of $3,237,101 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 it’s acquisition date fair value of approximately $1.3 million and is recorded in other non-current liabilities on the condensed consolidated balance sheet.  Changes in the fair value of the liability are recorded in earnings. There is no change during the three month period ended June 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.

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.

13


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 six months ended June 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 statement of operations.                             

Information related to leases (in thousands):

 

 

 

Three Months Ended

 

 

Three Months Ended

 

Operating cash flow information:

 

June 30, 2022

 

 

June 30, 2021

 

Operating lease cost

 

$

308

 

 

$

336

 

Operating lease - cash flow

 

$

322

 

 

$

294

 

 

 

 

 

 

 

 

 

 

Non-cash activity:

 

 

 

 

 

 

 

 

ROU assets obtained in exchange for lease liabilities

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

Six Months Ended

 

Operating cash flow information:

 

June 30, 2022

 

 

June 30, 2021

 

Operating lease cost

 

$

618

 

 

$

672

 

Operating lease - cash flow

 

$

645

 

 

$

588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash activity:

 

 

 

 

 

 

 

 

ROU assets obtained in exchange for lease liabilities

 

$

211

 

 

$

1,575

 

 

 

 

June 30, 2022

 

 

June 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 June 30, 2022:

 

2022 (remaining)

 

$

629

 

2023

 

 

1,076

 

2024

 

 

738

 

2025

 

 

649

 

2026

 

 

155

 

Thereafter

 

 

-

 

 

 

 

 

 

Total future minimum lease payments

 

$

3,247

 

Less: imputed interest

 

 

(223

)

Present value of lease liabilities - current

 

 

1,080

 

Present value of lease liabilities - non-current

 

$

1,944

 

 

 

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.  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 considered restricted cash and is reported in other long-term assets on the consolidated balance sheet.

 

The Company has not disclosed the amount of revenue and earnings from the sales of Safety Made products since the acquisition on June 1, 2022 because these amounts are not significant to the Company’s financial statements.

 

 

 

 

 

10. Other Accrued Liabilities

 

Other current accrued liabilities consisted of (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Customer Rebates

 

$

5,892

 

 

$

5,414

 

Accrued Compensation

 

 

603

 

 

 

1,586

 

Dividend Payable

 

 

493

 

 

 

458

 

Income Tax Payable

 

 

1,203

 

 

 

564

 

Other

 

 

1,938

 

 

 

1,887

 

Total:

 

$

10,129

 

 

$

9,909

 

 

 

 

 

 

 

 

 

 

 

Note 11. Cash, Cash Equivalents and Restricted Cash

 

 

 

June 30, 2022

 

December 31, 2021

 

Cash and cash equivalents

 

$

1,760

 

$

4,843

 

Restricted Cash

 

 

1,500

 

 

 

 

Total cash, cash equivalents and restricted cash

 

$

3,260

 

$

4,843

 

 

Restricted cash, which is reported within other long term assets in the condensed consolidated balance sheets consists of the contingent payment held in escrow related to the acquisition of Safety Made.

 

 

 

 

 

 

 

 

15


 

12. Intangible Assets and Goodwill

 

 

June 30

 

 

December 31

 

 

2022

 

 

2021

 

Customer List

$

18,370,118

 

 

$

16,137,118

 

Tradenames

 

9,984,698

 

 

 

7,994,698

 

Patents

 

2,271,980

 

 

 

2,271,980

 

Non-Compete

 

1,170,111

 

 

 

250,111

 

License Agreement

 

379,921

 

 

 

379,921

 

     Subtotal

 

32,176,828

 

 

 

27,033,828

 

Less: Accumulated Amortization

 

10,552,204

 

 

 

9,803,299

 

Intangible Assets

$

21,624,624

 

 

$

17,230,529

 

 

 

 

 

 

 

 

 

Goodwill

$

8,188,829

 

 

$

4,799,829

 

Total:

$

29,813,452

 

 

$

22,030,358

 

 

Intangible assets include Customer List, Tradenames, Non-Compete Agreements and Goodwill. The useful lives of the identified intangible assets range from 5 years to 15 years.

 

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.

 

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.  

 

17


 

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

 

18


 

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,

 

 

December 31,

 

 

 

2022

 

 

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.

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 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.

 

 

 

 

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(i)

 

Amendment No.8 to Revolving Loan Agreement with HSBC dated May 31, 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: August 8, 2022

 

 

By

/s/ Paul G. Driscoll

 

 

Paul G. Driscoll

 

 

Vice President and

 

 

Chief Financial Officer

 

 

 

 

Dated: August 8, 2022

 

 

23