ACME UNITED CORP - Quarter Report: 2023 June (Form 10-Q)

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, 2023

☐ 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 ☒

Registrant had 3,568,006 shares of its $2.50 par value Common Stock outstanding as of August 3, 2023.

ACME UNITED CORPORATION

INDEX


		Page Number

Part I — FINANCIAL INFORMATION:		3
Item 1:	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022	5
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and 2022	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022	7
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	19
Item 4:	Controls and Procedures	19

Part II — OTHER INFORMATION:		20
Item 1:	Legal Proceedings	20
Item 1A:	Risk Factors	20
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3:	Defaults Upon Senior Securities	20
Item 4:	Mine Safety Disclosures	20
Item 5:	Other Information	20
Item 6:	Exhibits	20
Signatures		21

Part I - FINANCIAL INFORMATION

Item 1: Financial Statements

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(all amounts in thousands)


	June 30,		December 31,
	2023		2022
	(unaudited)		(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	3,401	$	6,100
Accounts receivable, less allowance of $842 in 2023 and $1,061 in 2022		39,796		32,604
Inventories		55,944		63,325
Prepaid expenses and other current assets		4,329		2,821
Restricted cash		-		750
Total current assets		103,470		105,600
Property, plant and equipment:
Land		1,982		1,979
Buildings		17,315		16,614
Machinery and equipment		33,124		31,492
		52,421		50,085
Less: accumulated depreciation		25,158		23,669
Net property, plant and equipment		27,263		26,416

Operating lease right-of-use asset, net		2,374		2,632
Goodwill		8,189		8,189
Intangible assets, less accumulated amortization		19,780		20,790
Other assets - restricted cash		750		750
Total assets	$	161,826	$	164,377

See Notes to Condensed Consolidated Financial Statements.

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

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


	June 30,			December 31,
	2023			2022
	(unaudited)			(Note 1)
LIABILITIES
Current liabilities:
Accounts payable	$	10,724		$	10,514
Operating lease liability - current portion		1,122			1,130
Current portion of mortgage payable		411			405
Other current liabilities		13,013			10,078
Total current liabilities		25,270			22,127
Non-current liabilities:
Long-term debt		39,979			49,916
Mortgage payable, net of current portion		10,485			10,694
Operating lease liability - non-current portion		1,407			1,683
Deferred income taxes		305			305
Other non-current liabilities		729			622
Total liabilities		78,175			85,347

Commitments and contingencies (see note 2)

STOCKHOLDERS' EQUITY
Common stock, par value $2.50:
authorized 8,000,000 shares;
5,112,878 shares issued and 3,568,006 shares outstanding in 2023 and
5,083,051 shares issued and 3,538,179 shares outstanding in 2022		12,773			12,699
Additional paid-in capital		14,333			13,448
Retained earnings		74,406			70,967
Treasury stock, at cost - 1,544,872 shares in 2023 and 2022		(15,996	)		(15,996	)
Accumulated other comprehensive loss:
Translation adjustment		(1,865	)		(2,088	)
Total stockholders’ equity		83,651			79,030
Total liabilities and stockholders’ equity	$	161,826		$	164,377

See Notes to Condensed Consolidated Financial Statements.

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,
	2023			2022			2023			2022
Net sales	$	53,336		$	56,773		$	99,175		$	100,106
Cost of goods sold		33,314			38,225			62,872			66,590

Gross profit		20,022			18,548			36,303			33,516

Selling, general and administrative expenses		14,772			14,572			28,865			28,169

Operating income		5,250			3,976			7,438			5,347

Non-operating items:
Interest:
Interest expense		860			428			1,779			737
Interest income		(28	)		(5	)		(45	)		(8	)
Interest expense, net		832			423			1,734			729
Other (income) expense, net		(23	)		148			(46	)		147
Income before income tax expense		4,441			3,405			5,750			4,471
Income tax expense		998			667			1,318			903
Net income	$	3,443		$	2,738		$	4,432		$	3,568

Basic earnings per share	$	0.97		$	0.78		$	1.25		$	1.01

Diluted earnings per share	$	0.96		$	0.71		$	1.25		$	0.93

Weighted average number of common shares outstanding-denominator used for basic per share computations		3,555			3,521			3,548			3,521
Weighted average number of dilutive stock options outstanding		36			320			-			323
Denominator used for diluted per share computations		3,591			3,841			3,548			3,844

Dividends declared per share	$	0.14		$	0.14		$	0.28		$	0.27

See Notes to Condensed Consolidated Financial Statements.

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(all amounts in thousands)


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2023		2022			2023		2022
Net income	$	3,443	$	2,738		$	4,432	$	3,568
Other comprehensive income:
Foreign currency translation adjustment		114		(574	)		223		(547	)
Comprehensive income	$	3,557	$	2,164		$	4,656	$	3,021

See Notes to Condensed Consolidated Financial Statements.

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, 2022


	Outstanding Shares of Common Stock		Common Stock		Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			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 income											(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 three months ended June 30, 2023


	Outstanding Shares of Common Stock		Common Stock		Treasury Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balances, March 31, 2023		3,545,725	$	12,717	$	(15,996	)	$	13,914		$	(1,979	)	$	71,460		$	80,116
Net income															3,443			3,443
Other comprehensive income												114						114
Stock compensation expense									389									389
Distributions to shareholders															(497	)		(497	)
Issuance of common stock		15,702		40					189									229
Net share settlement of stock options		6,579		16					(159	)								(143	)
Balances June 30, 2023		3,568,006	$	12,773	$	(15,996	)	$	14,333		$	(1,865	)	$	74,406		$	83,651

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

For the six months ended June 30, 2023


	Outstanding Shares of Common Stock		Common Stock		Treasury Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balances, December 31, 2022		3,538,179	$	12,699	$	(15,996	)	$	13,448		$	(2,088	)	$	70,967		$	79,030
Net income															4,432			4,432
Other comprehensive loss												223						223
Stock compensation expense									813									813
Distributions to shareholders															(993	)		(993	)
Issuance of common stock		20,702		52					237									289
Net share settlement of stock options		9,125		22					(165	)								(143	)
Balances June 30, 2023		3,568,006	$	12,773	$	(15,996	)	$	14,333		$	(1,865	)	$	74,406		$	83,651

See Notes to Condensed Consolidated Financial Statements.

ACME UNITED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(all amounts in thousands)


	Six Months Ended
	June 30,
	2023			2022
Cash flows from operating activities:
Net income	$	4,432		$	3,568
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		1,440			1,339
Amortization of intangible assets		1,011			744
Non-cash lease adjustment		(12	)		-
Stock compensation expense		813			768
Provision for bad debt		51			50
Amortization of deferred financing costs		34			8
Changes in operating assets and liabilities:
Accounts receivable		(7,458	)		(12,468	)
Inventories		7,645			(11,021	)
Prepaid expenses and other assets		(762	)		(991	)
Accounts payable		189			12,651
Other accrued liabilities		3,160			182
Total adjustments		6,111			(8,739	)
Net cash provided by (used in) operating activities		10,543			(5,171	)

Cash flows from investing activities:
Purchase of property, plant and equipment		(2,271	)		(2,761	)
Contingent payment related to the acquisition of Safety Made		(750	)		(9,609	)
Net cash used in investing activities		(3,021	)		(12,370	)

Cash flows from financing activities:
Net borrowings of long-term debt		(9,963	)		17,225
Tax withholding on net share settlement of stock options		(143	)		-
Cash settlement of stock options		-			(108	)
Repayments on mortgage		(209	)		(192	)
Proceeds from issuance of common stock		289			10
Distributions to shareholders		(993	)		(915	)
Net cash (used in) provided by financing activities		(11,019	)		16,020

Effect of exchange rate changes on cash, cash equivalents and restricted cash		48			(62	)
Net change in cash, cash equivalents and restricted cash		(3,449	)		(1,583	)

Cash, cash equivalents and restricted cash at beginning of period		7,600			4,843

Cash, cash equivalents and restricted cash at end of period	$	4,151		$	3,260

Supplemental cash flow information:
Cash paid for income taxes	$	257		$	242
Cash paid for interest	$	1,786		$	661
Non-cash financing activity
Net share settlement of stock options	$	22		$	-

See Notes to Condensed Consolidated Financial Statements.

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 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, 2022 for such disclosures. The condensed consolidated balance sheet as of December 31, 2022 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 2022 Annual Report on Form 10-K.

The Company has evaluated events and transactions subsequent to June 30, 2023 and through the date these condensed consolidated financial statements were issued.

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”), which provides new authoritative guidance with respect to the measurement of credit losses on financial instruments. This update changes the impairment model for most financial assets and certain other instruments by introducing a current expected credit loss (“CECL”) model. The CECL model is a more forward-looking approach based on expected losses rather than incurred losses, requiring entities to estimate and record losses expected over the remaining contractual life of an asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for smaller reporting companies. The Company adopted ASU 2016-13 on January 1, 2023. The adoption did not have an impact on our condensed consolidated financial statements.

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, upon 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.

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.”

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, 2023


	United States		Canada		Europe		Total
Cutting, Sharpening and Measuring	$	16,533	$	1,982	$	3,484	$	21,999
First Aid and Medical		28,667		2,394		276		31,337

Total Net Sales	$	45,200	$	4,376	$	3,760	$	53,336

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 six months ended June 30, 2023


	United States		Canada		Europe		Total
Cutting, Sharpening and Measuring	$	30,616	$	3,387	$	6,845	$	40,848
First Aid and Medical		53,438		4,246		643		58,327

Total Net Sales	$	84,054	$	7,633	$	7,488	$	99,175

For the six months ended June 30, 2022


	United States		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

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. The revolving loan agreement provides for borrowings of up to $65 million at an interest rate of Secured Overnight Financing Rate (“SOFR”) plus 1.75%; interest is payable monthly. The credit facility has an expiration date of May 31, 2026. The Company must pay a facility fee, payable quarterly, in an amount equal to one eighth of one percent (.125%) per annum of the average daily unused portion of the revolving credit line. The facility is intended to provide liquidity for growth, acquisitions, dividends, share repurchases, and other operating 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 was in effect for four quarters commencing in the third quarter of 2022 and ending with the three months ended June 30, 2023. The amendment included an increase in the funded debt to EBITDA ratio for those four quarters ranging from a low of 4.75 to 1 to a high of 5.75 to 1. The amendment also increased the interest rate from SOFR +1.75% up to a high of SOFR + 2.35% on a basis that varies on a quarterly basis with the funded debt to EBITDA ratio. As of June 30, 2023, the Company was in compliance with the covenants under the revolving loan agreement, as amended.

As of June 30, 2023 and December 31, 2022, the Company had outstanding borrowings of $39,979,000 and $49,916,000, 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 June 30, 2023 and December 31, 2022, long-term debt related to the mortgage consisted of the following (amounts in ‘000’s):


	June 30, 2023			December 31, 2022

Mortgage payable - HSBC Bank N.A.	$	11,024		$	11,233
Less debt issuance costs		(128	)		(134	)
		10,896			11,099
Less current maturities		411			405
Long-term mortgage payable less current maturities	$	10,485		$	10,694

During the three and six months ended June 30, 2023, the Company issued a total of 15,702 and 20,702 shares of common stock and received aggregate proceeds of $229,000 and $289,000 upon exercise of employee stock options. Also, during the three and six months ended June 30, 2023, the Company issued 6,579 and 9,125 shares of common stock to optionees who had elected a net share 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 maker 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 maker reviews the financial results of 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, New Hampshire 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 products 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 7% of the Company’s total net sales for the three and six months ended June 30, 2023 compared to 12% and 9%, respectively for the same periods in 2022.

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.

The following table sets forth certain financial data by segment for the three and six months ended June 30, 2023 and 2022:

Financial data by segment:

(in thousands)


	Three Months Ended June 30,					Six Months Ended June 30,
Sales to external customers:	2023			2022		2023			2022
United States	$	45,200		$	48,905	$	84,054		$	84,646
Canada		4,376			3,876		7,633			7,491
Europe		3,760			3,992		7,488			7,969
Consolidated	$	53,336		$	56,773	$	99,175		$	100,106

Operating income:
United States	$	4,251		$	3,454	$	6,031		$	4,287
Canada		742			474		960			830
Europe		257			48		447			230
Consolidated	$	5,250		$	3,976	$	7,438		$	5,347

Interest expense, net		832			423		1,734			729
Other (income) expense, net		(23	)		148		(46	)		147
Consolidated income before income taxes	$	4,441		$	3,405	$	5,750		$	4,471

Assets by segment:

(in thousands)


	June 30,		December 31,
	2023		2022
United States	$	141,486	$	144,466
Canada		9,547		9,078
Europe		10,793		10,833
Consolidated	$	161,826	$	164,377

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 $389,000 and $813,000 for the three and six months ended June 30, 2023 compared to approximately $368,000 and $768,000 for the three and six months ended June 30, 2022.

As of June 30, 2023, there was a total of $2,826,745 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 fair value of $705,000 which is recorded in other non-current liabilities on the condensed consolidated balance sheet as of June 30, 2023. Changes in the fair value of the liability are recorded in earnings. There was an increase in the liability of $75,000 and $125,000, respectively, during the three and six months ended June 30, 2023. During the three months ended June 30, 2023, the Company paid $750,000 of the $1.5 million held in escrow related to the contingent liability.

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.

Operating lease cost was $0.3 million for the three months ended June 30, 2023, of which $0.1 million was included in cost of goods sold and $0.2 million was included in selling, general and administrative expenses. Operating lease cost was $0.7 million for the six months ended June 30, 2023, of which $0.2 million was included in cost of goods sold and $0.5 million was 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:	June 30, 2023		June 30, 2022
Operating lease cost	$	344	$	308
Operating lease - cash flow	$	346	$	322

Non-cash activity:
ROU assets obtained in exchange for lease liabilities	$	-	$	-

	Six Months Ended		Six Months Ended
Operating cash flow information:	June 30, 2023		June 30, 2022
Operating lease cost	$	678	$	618
Operating lease - cash flow	$	693	$	645


Non-cash activity:
ROU assets obtained in exchange for lease liabilities	$	341	$	211


	June 30, 2023			June 30, 2022
Weighted-average remaining lease term	3.0 years			3.0 years
Weighted-average discount rate		5	%		5	%

Future minimum lease payments under non-cancellable leases as of June 30, 2023:


2023 (remaining)	$	650
2024		1,044
2025		816
2026		165

Total future minimum lease payments	$	2,675
Less: imputed interest		(146	)
Present value of lease liabilities - current		1,122
Present value of lease liabilities - non-current	$	1,407

9. Other Accrued Liabilities

Other current and non-current accrued liabilities consisted of (in thousands):


	June 30,		December 31,
	2023		2022
Customer rebates	$	6,753	$	5,534
Contingent liability - Safety Made		705		1,330
Accrued compensation		1,223		791
Dividend payable		496		495
Income tax payable		1,549		534
Other		3,016		2,016
Total:	$	13,742	$	10,700

10. Cash, Cash Equivalents and Restricted Cash

(in thousands):


	June 30, 2023		December 31, 2022
Cash and cash equivalents	$	3,401	$	6,100
Restricted Cash - current		-		750
Restricted Cash - non-current		750		750
Total cash, cash equivalents and restricted cash	$	4,151	$	7,600

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. During the three months ended June 30, 2023, the Company paid $750,000 related to the contingent liability associated with Safety Made acquisition.

11. Intangible Assets and Goodwill

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



	June 30,		December 31,
	2023		2022
Tradename	$	10,008	$	10,008
Customer list		18,502		18,502
Non-compete		1,248		1,248
Slice license agreement		380		380
Patents		2,272		2,272
Subtotal		32,409		32,409
Less: Accumulated amortization		12,630		11,619
Intangible assets	$	19,780	$	20,790
Goodwill	$	8,189	$	8,189
Total:	$	27,969	$	28,979

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

12. Inventories

Inventories consisted of (in thousands):



	June 30,		December 31,
	2023		2022
Finished goods	$	39,817	$	45,371
Work in process		307		408
Materials and supplies		15,820		17,546
	$	55,944	$	63,325

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

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.

These risks and uncertainties 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, including the impact on the Company’s suppliers and customers; (iii) additional disruptions in the Company’s supply chains, whether caused by pandemics, natural disasters, or otherwise, including trucker shortages, port closures and delays, and delays with container ships themselves; (iv) the continuing adverse impact of inflation, including product costs, and interest rates; (v) potential adverse effects on the Company, its customers, and suppliers resulting from the war in Ukraine; (vi) labor related costs the Company has and may continue to incur, including costs of acquiring and training new employees and rising wages and benefits; (vii) currency fluctuations including, for example, the fluctuation of the dollar against the euro; (viii) the Company’s ability to effectively manage its inventory in a rapidly changing business environment; (ix) changes in client needs and consumer spending habits; (x) the impact of competition; (xi) the impact of technological changes including, specifically, the growth of online marketing and sales activity; (xii) the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business it might acquire; (xiii) international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates; and (xiv) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission.

For a more detailed discussion of these and other factors affecting the Company, see the Risk Factors described in Item 1A included in the Company’s Annual Report on Form 10-K for the fiscal year December 31, 2022 and below under “Financial Condition”. All forward-looking statements in this report are based upon information available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

Critical Accounting Policies

We discuss our critical accounting policies and estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Critical Accounting Estimates

There have been no material changes to the Company’s critical accounting estimates as previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Results of Operations

Traditionally, the Company’s sales of its cutting, sharpening, and measuring products are stronger in the second and third quarters and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature of the back-to-school market.

Net sales

Consolidated net sales for the three and six months ended June 30, 2023 were $53,336,000 and $99,175,000 compared with $56,773,000 and $100,106,000 in the same periods in 2022, a 6% and 1% decrease, respectively.

Net Sales in the U.S. for the three and six months ended June 30, 2023 decreased 8% and 1%, compared to the same periods in 2022. The decrease in net sales for the three and six months, compared to the same period in 2022, is primarily due to lower sales of school and office products which were negatively impacted by customer reductions of their inventory. Customers acquired additional safety stock in the second quarter of 2022 to mitigate supply chain disruption concerns. These lower sales were partially offset by higher sales of first aid and medical products.

Net sales in Canada for the three and six months ended June 30, 2023 increased 13% (21% in local currency) and 2% (8% in local currency), compared to the same periods last year. The increases in net sales for the three and six months ended June 30, 2023 were mainly due to higher sales of first aid products.

European net sales for the three months ended June 30, 2023 decreased 6% (7% in local currency) compared to the same period in 2022. Net sales for the six months ended June 30, 2023 decreased 6% (5 in local currency) compared to the same period in 2022. The decline in net sales for the three and six month periods were mainly due to the economic recession in Europe.

Gross profit

Gross profit for the three months ended June 30, 2023 was $20,022,000 (37.5% of net sales) compared to $18,548,000 (32.7% of net sales) in the same period in 2022. Gross profit for the six months ended June 30, 2023 was $36,303,000 (36.6% of net sales) compared to $33,516,000 (32.7% of net sales) in the same period in 2022. The increases in gross profit for the three and six months were primarily due to cost saving initiatives and productivity improvements at our manufacturing and distribution facilities as well as lower ocean container costs and demurrage charges.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2023 were $14,772,000 (27.7% of net sales) compared with $14,572,000 (25.7% of net sales) in the same period in 2022, an increase of $200,000. SG&A expenses for the six months ended June 30, 2023 were $28,865,000 (29.1% of net sales) compared with $28,169,000 (28.1% of net sales) in the same period in 2022, an increase of $696,000. The increase in SG&A expenses for the six months ended June 30, 2023 is primarily related to higher personnel related expenses.

Operating income

Operating income for the three months ended June 30, 2023 was $5,250,000 compared with $3,976,000 in the same period of 2022. Operating income for the six months ended June 30, 2023 was $7,438,000 compared with $5,347,000 in the same period of 2022.

Operating income in the U.S. segment increased by $797,000 for the three months ended June 30, 2023, compared to the same period in 2022. Operating income in the U.S. segment increased by $1,744,000 for the six months ended June 30, 2023 compared to the same period in 2022. The increase in operating income for the three and six months ended June 30, 2023 was primarily due to productivity improvements at our manufacturing and distribution facilities, cost savings initiatives which included lowering SG&A expenses as well as lower ocean container costs and demurrage charges.

Operating income in the Canadian segment increased by $268,000 and $130,000 for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022. The increases in operating income are primarily due to higher sales.

Operating income in the European segment increased by $209,000 and $217,000 for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022. The increases in operating income for the three and six months ended June 30, 2023 were primarily due to higher gross margins as a result of lower ocean container costs.

Interest expense, net

Interest expense, net for the three months ended June 30, 2023 was $832,000 compared with $423,000 in the same period of 2022, a $409,000 increase. Interest expense, net for the six months ended June 30, 2023 was $1,734,000 compared with $729,000, in the same period of 2022, a $1,005,000 increase. The increases in interest expense for the three and six months ended June 30, 2023 resulted from a higher average interest rate on the outstanding debt under the Company’s revolving loan agreement.

Other (income) expense, net

Other income, net was $23,000 in the three months ended June 30, 2023 compared to other expense, net of $148,000 in the same period of 2022. Other income, net in the six months ended June 30, 2023 was $46,000 compared to other expense, net of $147,000 in the same period of 2022.

Income taxes

The effective income tax rate for the three and six months ended June 30, 2023 was 23% compared to 20% in the same periods of 2022. The higher effective income tax rate for the three and six month ended June 30, 2023 is primarily due to higher earnings in jurisdictions with higher tax rates.

Financial Condition

Liquidity and Capital Resources

During the first six months of 2023, working capital decreased approximately $5.3 million. Inventory decreased approximately $7.4 million during this six-month period. The decline in inventory is due to planned reductions as the risk of supply chain disruptions has diminished. Inventory turnover, calculated using a twelve-month average inventory balance, was 2.0 at June 30, 2023 and December 31, 2022. Receivables increased approximately $7.2 million at June 30, 2023 compared to December 31, 2022. The average number of days sales outstanding in accounts receivable was 59 days at June 30, 2023 compared to 62 days at December 31, 2022. Accounts payable and other current liabilities increased by approximately $3.2 million at June 30, 2023 compared to December 31, 2022.

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



	June 30,			December 31,
	2023			2022
Working capital	$	78,200		$	83,473
Current ratio		4.09			4.77
Long term debt to equity ratio		60.3	%		76.7	%

Long-term debt consists of (i) borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A. and (ii) amounts outstanding under the fixed rate mortgage on the Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA. The revolving loan agreement provides for borrowings of up to $65 million, at an interest rate of SOFR plus 1.75%; interest is payable monthly. The loan agreement has an expiration date of May 31, 2026. The Company must pay a facility fee, payable quarterly, in an amount equal to one eighth of one percent (.125%) per annum of the average daily unused portion of the revolving credit line. The facility is intended to provide liquidity for growth, share repurchases, dividends, acquisitions, and other business activities. Under the revolving loan agreement, the Company is required to maintain specific amounts of funded debt to EBITDA, a fixed charge coverage ratio and must have annual net income greater than $0, measured as of the end of each fiscal year.

On November 8, 2022, the revolving loan agreement was amended to increase the ratio of funded debt to EBITDA. The amendment was in effect for four quarters commencing in the third quarter of 2022 and ending with the three months ended June 30, 2023. The amendment included an increase in the funded debt to EBITDA ratio for those four quarters ranging from a low of 4.75 to 1 to a high of 5.75 to 1. The amendment also increased the interest rate from SOFR +1.75% up to a high of SOFR + 2.35% on a basis that varies on a quarterly basis with the funded debt to EBITDA ratio. As of June 30, 2023, the Company was in compliance with the covenants under the revolving loan agreement, as amended.

During the first six months of 2023, total debt outstanding under the Company’s revolving credit facility decreased by approximately $10 million, compared to total debt thereunder at December 31, 2022. As of June 30, 2023, $39,979,000 was outstanding and $25,021,000 was available for borrowing under the Company’s credit facility.

The Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA were financed by a fixed rate mortgage with HSBC Bank, N.A. at a fixed interest rate of 3.8%. The Company entered into the agreement on December 1, 2021. Payments of principal and interest are due monthly, with all amounts outstanding due on maturity on December 1, 2031. At June 30, 2023, there was approximately $10.9 million outstanding on the mortgage.

In response to the supply chain challenges encountered by the Company, 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 wide range of productivity improvements in our manufacturing and distribution facilities as well as a reduction of SG&A expenses.

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.

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, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

(b) Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2023, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1 — Legal Proceedings

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, 2022.

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 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

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, 2023


By	/s/ Paul G. Driscoll
	Paul G. Driscoll
	Vice President and
	Chief Financial Officer

Dated: August 8, 2023