Item 8. Financial Statements and Supplementary Data
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
The operations of Acme United Corporation (the “Company”) consist of three reportable segments. The operations of the Company are structured and evaluated based on geographic location. The three reportable segments operate in the United States (including Asian operations), Canada and Europe. Principal products across all segments are first aid kits and medical products, scissors, shears, knives, rulers and pencil sharpeners, which are sold primarily to wholesale, contract and retail stationery distributors, office supply super stores, mass market retailers, industrial distributors, school supply distributors, drug store retailers, sporting goods stores, hardware chains and wholesale florists.
2. Accounting Policies
Estimates – The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most sensitive and significant accounting estimates relate to customer rebates, valuation allowances for deferred income tax assets, obsolete and slow-moving inventories, potentially uncollectible accounts receivable, intangibles and stock-based compensation. Actual results could differ from those estimates.
Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned by the Company. All significant intercompany accounts and transactions are eliminated in consolidation.
Translation of Foreign Currency – For foreign operations whose functional currencies are not U.S. dollars, assets and liabilities are translated at rates in effect at the end of the year; revenues and expenses are translated at average rates in effect during the year. Resulting translation adjustments are made directly to accumulated other comprehensive income. Foreign currency transaction gains and losses are recognized in operating results. Included in other expense were foreign currency transaction losses of $288,191 and $239,753 in 2022 and 2021, respectively.
Cash Equivalents – Investments with an original maturity of three months or less, as well as time deposits and certificates of deposit that are readily redeemable at the date of purchase, are considered cash equivalents.
Accounts Receivable – Accounts receivable are shown less an allowance for doubtful accounts of $1,060,812 at December 31, 2022 and $1,007,187 at December 31, 2021.
Inventories – Inventories are stated at the lower of cost, or net realizable value, determined by the first-in, first-out method.
Property, Plant and Equipment, and Depreciation – Property, plant and equipment are recorded at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. The range of estimated useful lives of these assets are as follows: buildings useful lives range from 10 to 39 years; machinery and equipment useful lives range from 3 to 10 years. The Company tests its property, plant and equipment whenever events or changes in circumstances (triggering event) indicate that its carrying amount may not be recoverable. During 2022 and 2021, there were no triggering events that would indicate its carrying amount may not be recoverable. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives.
Intangible Assets and Goodwill – Intangible assets with finite useful lives are recorded at cost upon acquisition and amortized over the term of the related contract, if any, or useful life, as applicable. Intangible assets held by the Company with finite useful lives include patents and trademarks. Patents and trademarks are amortized over their estimated useful lives. The weighted average amortization period for intangible assets at December 31, 2022 was 9 years. The Company periodically reviews the values recorded for finite lived intangible assets whenever events or changes in circumstances (triggering event) indicate that its carrying amount may not be recoverable. During 2022 and 2021, there were no triggering event that would indicate its carrying amount may not be recoverable. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives. The Company annually reviews goodwill to assess recoverability from future operations whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. At December 31, 2022 and 2021, the Company assessed the recoverability of its intangible assets and goodwill and believed that there were no events or circumstances present that would require a test of recoverability on those assets. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives.
Contingent Consideration - As part of the acquisition of Safety Made, a $1.5 million payment will be due, contingent on the acquired business meeting certain revenue milestones over a two-year period, commencing on the date of the acquisition. The fair value of the contingent liability at each reporting date is based on certain estimates and judgements made by management. Those estimates are made from the most relevant data available at that time and include historical data and future projections. At December 31, 2022, the fair value of the contingent consideration was $1,330,000.
26
Deferred Income Taxes – Deferred income taxes are provided for the differences between the financial statement and tax bases of assets and liabilities, and on operating loss carryovers, using tax rates in effect in years in which the differences are expected to reverse.
Leases – 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.
Lessees and lessors may elect to apply a package of practical expedients permitting entities not to reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases; and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance. These practical expedients must be elected as a package and consistently applied. The Company has elected to apply the package of practical expedients upon adoption.
ROU assets and lease liabilities are recognized at the commencement date of the lease 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 the Company’s 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 arrangements 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.
Revenue Recognition – The Company's revenues result from the sale of goods or services and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). For its contracts with customers, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when (or as) the customer obtains control of that good or service. Depending on the contractual terms of each customer, revenue is recognized either at the time of shipment or upon delivery. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Customer rebates and incentives are earned based on promotional programs in place, volume of purchases or other factors are also estimated at the time of revenue recognition and recorded as a reduction of that revenue. Refer to Note 9 – Revenue from Contracts with Customers, for a more detailed discussion.
Shipping Costs – The costs of shipping product to the Company’s customers ($11,328,276 in 2022 and $10,071,710 in 2021) are included in selling, general and administrative expenses.
Advertising Costs – The Company expenses the production costs of advertising the first time that the related advertising takes place. Advertising costs ($1,563,477 in 2022 and $976,268 in 2021) are included in selling, general and administrative expenses.
Subsequent Events – The Company has evaluated events and transactions subsequent to December 31, 2022 through the date the consolidated financial statements were issued.
Concentration – The Company performs ongoing credit evaluations of its customers and generally does not require collateral for the extension of credit. Allowances for credit losses are provided and have been within management's expectations. The Company had two customers in 2022 and 2021, that individually exceeded 10% of consolidated net sales. Net sales to these customers were approximately 15% and 10% of consolidated net sales in 2022 and 17% and 11% in 2021.
Recently Issued and Adopted Accounting Standards
Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated financial statements.
3. Inventories
Inventories consisted of:
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Finished goods |
|
$ |
45,371,042 |
|
|
$ |
40,412,875 |
|
Work in process |
|
|
408,346 |
|
|
|
88,847 |
|
Materials and supplies |
|
|
17,545,818 |
|
|
|
13,050,532 |
|
Inventories: |
|
$ |
63,325,206 |
|
|
$ |
53,552,254 |
|
27
Inventories are stated net of valuation allowances for slow moving and obsolete inventory of $1,720,350 as of December 31, 2022 and $1,554,217 as of December 31, 2021.
4. Intangible Assets and Goodwill
The Company’s intangible assets and goodwill consisted of:
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Tradename |
|
$ |
10,007,698 |
|
|
$ |
7,994,698 |
|
Customer List |
|
|
18,502,207 |
|
|
|
16,066,973 |
|
Non-Compete |
|
|
1,247,536 |
|
|
|
320,256 |
|
Slice License Agreement |
|
|
379,921 |
|
|
|
379,921 |
|
Patents |
|
|
2,271,980 |
|
|
|
2,271,980 |
|
Subtotal |
|
|
32,409,342 |
|
|
|
27,033,828 |
|
Less: Accumulated Amortization |
|
|
11,618,807 |
|
|
|
9,803,299 |
|
Intangible Assets |
|
$ |
20,790,535 |
|
|
$ |
17,230,529 |
|
Goodwill |
|
$ |
8,188,829 |
|
|
$ |
4,799,829 |
|
Total: |
|
$ |
28,979,364 |
|
|
$ |
22,030,358 |
|
Amortization expense for intangible assets for the years ended December 31, 2022 and 2021 were $1,815,508 and $1,490,894, respectively. The estimated aggregate amortization expense for each of the next five years, calculated on a similar basis, is as follows: 2023 - $2,012,133; 2024 - $1,921,376; 2025 - $1,919,183; 2026 - $1,651,089; and 2027 - $1,322,225.
5. Other Accrued Liabilities
The Company’s other current and non-current accrued liabilities consisted of:
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Customer Rebates |
|
$ |
5,533,802 |
|
|
$ |
5,413,829 |
|
Contingent Liability - Safety Made |
|
|
1,330,000 |
|
|
|
— |
|
Accrued Compensation |
|
|
791,231 |
|
|
|
1,585,938 |
|
Dividend Payable |
|
|
495,406 |
|
|
|
457,745 |
|
Income Taxes Payable |
|
|
533,746 |
|
|
|
564,172 |
|
Other |
|
|
2,015,798 |
|
|
|
1,887,793 |
|
Total: |
|
$ |
10,699,983 |
|
|
$ |
9,909,477 |
|
6. Profit Sharing
The Company has a qualified, 401k plan covering substantially all of its United States employees. Annual Company contributions to this plan are determined by the Company’s Compensation Committee. For the years ended December 31, 2022 and 2021, the Company contributed 50% of employee’s contributions, up to the first 6% contributed by each employee. Total contribution expense under this 401k plan was $426,594 in 2022 and $419,298 in 2021.
7. Income Taxes
The amounts of income tax expense reflected in operations is as follows:
|
|
2022 |
|
|
2021 |
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
65,263 |
|
|
$ |
4,980 |
|
State |
|
|
192,215 |
|
|
|
153,937 |
|
Foreign |
|
|
664,766 |
|
|
|
870,739 |
|
Total: |
|
$ |
922,244 |
|
|
$ |
1,029,656 |
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
(238,408 |
) |
|
$ |
401,196 |
|
State |
|
|
(56,157 |
) |
|
|
88,403 |
|
Total: |
|
|
(294,565 |
) |
|
|
489,599 |
|
Total Income Tax Expense: |
|
$ |
627,679 |
|
|
$ |
1,519,255 |
|
28
The current state tax provision was comprised of taxes on income, the minimum capital tax and other franchise taxes related to the jurisdictions in which the Company's facilities are located.
A summary of United States and foreign income before income taxes follows:
|
|
2022 |
|
|
2021 |
|
United States |
|
$ |
(142,095 |
) |
|
$ |
9,721,756 |
|
Foreign |
|
|
3,804,540 |
|
|
|
5,453,178 |
|
Total: |
|
$ |
3,662,445 |
|
|
$ |
15,174,934 |
|
As discussed in Note 10 below, for segment reporting, direct import sales are included in the United States segment. However, the revenues are earned by our Hong Kong subsidiary and related income taxes are paid in Hong Kong whose rate approximates 16.5%. As such, income of the Asian subsidiary is included in the foreign income before taxes.
The following schedule reconciles the amounts of income taxes computed at the United States statutory rates to the actual amounts reported in operations:
|
|
2022 |
|
|
2021 |
|
Federal income taxes at 21% statutory rate |
|
$ |
716,122 |
|
|
$ |
2,915,698 |
|
State and local taxes, net of federal income tax effect |
|
|
120,922 |
|
|
|
115,855 |
|
Permanent items |
|
|
(128,169 |
) |
|
|
(1,508,877 |
) |
Foreign tax rate difference |
|
|
(81,196 |
) |
|
|
(3,421 |
) |
Provision for income taxes: |
|
$ |
627,679 |
|
|
$ |
1,519,255 |
|
Income tax expense in 2021 included a $1.4 million tax credit for stock-based compensation.
The following summarizes deferred income tax assets and liabilities:
|
|
2022 |
|
|
2021 |
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
$ |
2,004,200 |
|
|
$ |
1,916,218 |
|
|
|
|
2,004,200 |
|
|
|
1,916,218 |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Asset valuations |
|
|
1,109,954 |
|
|
|
983,055 |
|
Other |
|
|
588,961 |
|
|
|
333,883 |
|
|
|
|
1,698,915 |
|
|
|
1,316,938 |
|
Net deferred income tax liability: |
|
$ |
305,285 |
|
|
$ |
599,280 |
|
In 2022, the Company evaluated its tax positions for years which remain subject to examination by major tax jurisdictions, in accordance with the requirements of ASC 740 and as a result, concluded no adjustment was necessary. The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company’s evaluation of uncertain tax positions was performed for the tax years ended December 31, 2020 and forward, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2022.
Due to the uncertain nature of the realization of the Company's deferred income tax assets based on past performance of its German subsidiary and net loss carry forward expiration dates, the Company has recorded a valuation allowance for the amount of deferred income tax assets which are not expected to be realized. This valuation allowance, all of which is related to deferred tax assets resulting from net operating losses of the Company’s German subsidiary of approximately $3.9 million, is subject to periodic review, and, if the allowance is reduced, the tax benefit will be recorded in future operations as a reduction of the Company's tax expense.
8. Long-Term 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 related to 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 amendment increases the amount available for borrowing to $65 million from $50 million, at an interest rate of the Secured Overnight Financing Rate (SOFR) plus 1.75%; interest is payable monthly. In addition, the expiration date of the revolving loan agreement was extended to May 31, 2026. The Company must pay a facility fee, payable quarterly, in an amount equal to one eighth of one percent (.125%) per annum of the average daily unused portion of the revolving credit line. The facility is intended to provide liquidity for growth, share repurchases, dividends, acquisition and other business activities. Under the revolving loan agreement, the Company is required to maintain specific amounts of funded debt to EBITDA, a fixed charge coverage ratio and must have annual net income greater than $0, measured as of the end of each fiscal year. On November 8, 2022, the revolving loan agreement was amended to increase the ratio of funded debt to EBITDA. The amendment is in effect for four quarters commencing in the third quarter of 2022 and includes an increase in the funded debt to EBITDA ratio for the four quarters ranging from a low
29
of 4.75 to 1 to a high of 5.75 to 1. The amendment also increases the interest rate from SOFR +1.75% up to a high of SOFR + 2.35% on a basis that varies on a quarterly basis with the funded debt to EBITDA ratio. As of December 31, 2022, the Company was in compliance with the covenants under the revolving loan agreement, as amended.
As of December 31, 2022, $50,000,000 was outstanding and $15,000,000 was available for borrowing under the Company’s revolving loan agreement.
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. Long-term debt consisted of the following at December 31, 2022 and 2021:
|
|
|
|
|
|
|
|
December 31, 2022 |
|
December 31, 2021 |
|
Mortgage payable - HSBC Bank N.A. |
$ |
11,232,990 |
|
$ |
11,620,000 |
|
Less debt issuance costs |
|
(134,790 |
) |
|
(150,541 |
) |
|
|
11,098,200 |
|
|
11,469,459 |
|
Less current maturities |
|
404,588 |
|
|
388,536 |
|
Long-term mortgage payable less current maturities |
$ |
10,693,612 |
|
$ |
11,080,923 |
|
Minimum annual mortgage payments are due as follows: 2023 - $404,588; 2024 - $419,309; 2025 - $436,949; 2026 - $454,112; 2027 - $471,949; and thereafter - $8,911,293.
On November 14, 2019, the Company announced a Common Stock repurchase program of up to a total of 200,000 shares. The program does not have an expiration date. During the year ended December 31, 2022, the Company did not repurchase any shares of its Common Stock. As of December 31, 2022, a total of 160,365 shares may be purchased in the future under the repurchase program.
On May 7, 2020, the Company received a two-year loan (the “PPP Loan”) from HSBC Bank, N.A., the lender, in the amount of $3,508,047 under the Paycheck Protection Program established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act).
Under the CARES Act, all or a portion of the PPP Loan was eligible to be forgiven by the U.S. Small Business Administration (“SBA”) and the lender, upon application by the Company, provided that the Company shall have used the loan proceeds for certain eligible purposes. The PPP Loan was fully forgiven by the SBA and on June 9, 2021, payment in the amount of $3,508,047 was made by the SBA to the lender. The Company recorded the amount forgiven as income for the year ending December 31, 2021.
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.
9. 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: (i) first aid and medical; and (ii) cutting, sharpening and measuring. The first aid and medical category includes first aid kits and refills, over-the-counter medications and a variety of safety products. The cutting and sharpening category includes scissors, knives, paper trimmers, pencil sharpeners and other sharpening tools. 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. The Company generally recognizes 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. The repayment terms are typically between 30 and 90 days, but they vary dependent on the size of the customer and its risk profile to the Company. Some customers receive discounts for early payment.
30
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 receivables” in the 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 accordingly, 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 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 fulfillment 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 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:
For the year ended December 31, 2022
(amounts in 000's)
|
|
United States |
|
|
Canada |
|
|
Europe |
|
|
Total |
|
First Aid and Safety |
|
$ |
95,820 |
|
|
$ |
7,110 |
|
|
$ |
1,702 |
|
|
$ |
104,632 |
|
Cutting, Sharpening and Measuring |
|
|
69,385 |
|
|
|
6,669 |
|
|
|
13,276 |
|
|
|
89,330 |
|
Total Net Sales |
|
$ |
165,205 |
|
|
$ |
13,779 |
|
|
$ |
14,978 |
|
|
$ |
193,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in 000's) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
Canada |
|
|
Europe |
|
|
Total |
|
First Aid and Safety |
|
$ |
82,955 |
|
|
$ |
7,012 |
|
|
$ |
1,548 |
|
|
$ |
91,515 |
|
Cutting, Sharpening and Measuring |
|
|
69,520 |
|
|
|
7,329 |
|
|
|
13,724 |
|
|
|
90,573 |
|
Total Net Sales |
|
$ |
152,475 |
|
|
$ |
14,341 |
|
|
$ |
15,272 |
|
|
$ |
182,088 |
|
10. 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 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 cutting devices, measuring instruments and safety products for school, office, home, hardware, sporting and industrial use.
Domestic sales orders are filled primarily from the Company’s distribution centers and facilities in North Carolina, Washington, Massachusetts, Tennessee, Florida, California and New Hampshire. The Company is responsible for the costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products. Orders filled from the Company’s inventory are generally for less than container-sized lots.
Direct import sales are products sold by the Company’s Asian subsidiary, directly to major U.S. retailers who take ownership of the products in Asia. These sales are completed by delivering product to the customers’ common carriers at the shipping points in Asia. Direct import sales are made in larger quantities than domestic sales, typically full containers. Direct import sales represented approximately 8% and 9% of the Company’s total net sales in 2022 and 2021, respectively.
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
31
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 fiscal years ended December 31, 2022 and 2021:
Financial data by segment:
(000’s omitted)
Year Ended December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
Canada |
|
|
Europe |
|
Consolidated |
|
Net sales |
$ |
165,205 |
|
|
$ |
13,779 |
|
|
$ |
14,978 |
|
$ |
193,962 |
|
Operating income |
|
4,783 |
|
|
|
1,136 |
|
|
|
354 |
|
|
6,273 |
|
Assets |
|
144,466 |
|
|
|
9,078 |
|
|
|
10,833 |
|
|
164,377 |
|
Additions to property, plant and equipment |
|
4,174 |
|
|
|
52 |
|
|
|
79 |
|
|
4,305 |
|
Depreciation and amortization |
|
4,398 |
|
|
|
96 |
|
|
|
84 |
|
|
4,578 |
|
Year Ended December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000's omitted) |
United States |
|
|
Canada |
|
|
Europe |
|
Consolidated |
|
Net sales |
$ |
152,475 |
|
|
$ |
14,341 |
|
|
$ |
15,272 |
|
$ |
182,088 |
|
Operating income |
|
9,521 |
|
|
|
1,893 |
|
|
|
1,356 |
|
|
12,770 |
|
Assets |
|
125,521 |
|
|
|
9,100 |
|
|
|
9,818 |
|
|
144,439 |
|
Additions to property, plant and equipment |
|
6,309 |
|
|
|
10 |
|
|
|
54 |
|
|
6,373 |
|
Depreciation and amortization |
|
3,822 |
|
|
|
147 |
|
|
|
80 |
|
|
4,049 |
|
The following is a reconciliation of segment operating income to consolidated income before taxes:
(000’s omitted)
|
|
2022 |
|
|
2021 |
|
Total operating income |
|
$ |
6,273 |
|
|
$ |
12,770 |
|
Interest expense, net |
|
|
2,364 |
|
|
|
908 |
|
Other expense (income) |
|
|
247 |
|
|
|
(3,313 |
) |
Consolidated income before taxes |
|
$ |
3,662 |
|
|
$ |
15,175 |
|
The table below presents revenue by geographic area. Revenues are attributed to countries based on location of the customer.
(000’s omitted)
Revenues |
|
2022 |
|
|
2021 |
|
United States |
|
$ |
163,546 |
|
|
$ |
151,205 |
|
International: |
|
|
|
|
|
|
|
|
Canada |
|
|
13,779 |
|
|
|
14,341 |
|
Europe |
|
|
14,978 |
|
|
|
15,272 |
|
Other |
|
|
1,659 |
|
|
|
1,270 |
|
Total International |
|
$ |
30,416 |
|
|
$ |
30,883 |
|
Total Revenues |
|
$ |
193,962 |
|
|
$ |
182,088 |
|
11. Stock Option Plans
The Company grants stock options under the 2022 Employee Stock Option Plan (the “2022 Employee Plan”) and under the 2017 Non-Salaried Director Stock Option Plan (the “2017 Director Plan”). The Company also has two plans under which the Company no longer grants options but under which certain options remain outstanding: the 2005 Non-Salaried Director Stock Option Plan (the “2005 Director Plan”) and the 2012 Employee Stock Option Plan (the “2012 Employee Plan”).
32
The 2022 Employee Plan, which was approved by the shareholders of the Company at the April 20, 2022, Annual Meeting, provides for the issuance of incentive and nonqualified stock options at an exercise price equal to the fair market value of the Common Stock on the date the option is granted. The terms of the options granted are subject to the provisions of the 2022 Employee Plan. Options granted under the 2022 Employee Plan vest 25% one day after the first anniversary of the grant date and 25% one day after each of the next three anniversaries. As of December 31, 2022, the number of shares available for grant under the 2022 Employee Plan is 166,750. Under the terms of the 2022 Employee Plan, no option may be granted under that plan after the tenth anniversary of the adoption of the plan.
The 2012 Employee Plan, which became effective April 23, 2012, provides for the issuance of incentive and nonqualified stock options at an exercise price equal to the fair market value of the Common Stock on the date the option is granted. The terms of the options granted are subject to the provisions of the 2012 Employee Plan. Options granted under the 2012 Employee Plan vest 25% one day after the first anniversary of the grant date and 25% one day after each of the next three anniversaries. Under the terms of the 2012 Employee Plan, no option may be granted under that plan after the tenth anniversary of the adoption of the plan.
The 2017 Director Plan provides for the issuance of stock options for up to a total of 50,000 shares of the Company's common stock to non-salaried directors. Under the 2017 Director Plan, Directors elected after the effective date and at subsequent Annual Meetings who have not received any prior grant under the plan or previous plans shall receive an initial grant of an option to purchase 5,000 shares of Common Stock (the “Initial Option”). Each year, each elected non-salaried Director not receiving an Initial Option will receive an option to purchase 5,000 shares of Common Stock (the “Annual Option”). The Initial Option vests 25% on the date of grant and 25% on the anniversary of the grant date in each of the following 3 years. Each Annual Option becomes fully exercisable one day after the date of grant. The exercise price of each option granted equals the fair market value of the Common Stock on the date the option is granted and expires ten (10) years from the date of grant. The 2017 Director Plan provides that the Board of Directors has the authority to increase or decrease the number of shares of Common Stock which are the subject of the annual or initial option grants to directors. No options may be granted under the 2017 Director Plan after the tenth anniversary of the adoption of the Plan, i.e., after April 24, 2027. As of December 31, 2022, there were no shares available for grant under the 2017 Director Plan. Annual Options were customarily granted to non-salaried Directors on the date of the respective Annual Meeting of Shareholders. However, in 2022, there were then no options available for grant under the 2017 Director Plan. As a result, options were not granted to Directors in 2022. Because the Company did not make the customary annual grant of options to the non-salaried directors in 2022, the Company, instead, paid a cash fee to each of the non-salaried directors in an amount equal to $61,800.
The 2005 Director Plan, as amended, provided for the issuance of stock options for up to a total of 180,000 shares of the Company's common stock to non-salaried directors. Under the 2005 Director Plan, Directors elected on April 25, 2005 and at subsequent Annual Meetings who had not received any prior grant under this or previous plans received an initial grant of an option to purchase 5,000 shares of Common Stock (the “Initial Option”). Each year, each elected Director not receiving an Initial Option received a 5,000 share option (the “Annual Option”). The Initial Option vested 25% on the date of grant and 25% on the anniversary of the grant date in each of the following 3 years. Each Annual Option became fully exercisable one day after the date of grant. The exercise price of each option granted equalled the fair market value of the Common Stock on the date the option was granted and expired ten (10) years from the date of grant. As provided in the Director Plan, no options could be granted under the 2005 Director Plan after the tenth anniversary of the adoption of the Plan, i.e., after April 25, 2015.
The Company’s stock option plans for both employees and directors permit options to be exercised on a net basis and receive either cash or shares of the Company’s Common Stock. Specifically, optionees may, at the time of exercise of an option and subject to the consent of the Company, elect either (i) to receive from the Company cash in an amount equal to the number of shares of Common Stock subject to the option (or portion thereof) that is being exercised multiplied by the excess of (a) the fair market value per share over (b) the exercise price per share of the option (a “net cash settlement”); or (ii) to make payment of the exercise price of the option by reduction in the number of shares of Common Stock otherwise deliverable upon exercise of such option by the number of shares having an aggregate fair market value equal to the total exercise price of the option (or portion thereof). In 2022 and 2021, the Company paid a total of approximately $108,155 and $342,285 respectively, to optionees who had elected a net cash settlement of their respective share options. In 2022 and 2021, the Company issued 10,067 and 7,726 shares, respectively, to optionees who had elected a net share settlement.
33
A summary of changes in options issued under the Company’s stock option plans follows:
|
|
2022 |
|
|
2021 |
|
Options outstanding at the beginning of the year |
|
|
1,537,052 |
|
|
|
1,487,925 |
|
Options granted |
|
|
133,250 |
|
|
|
299,750 |
|
Options forfeited |
|
|
(6,562 |
) |
|
|
(5,525 |
) |
Options exercised |
|
|
(46,068 |
) |
|
|
(245,098 |
) |
Options outstanding at the end of the year |
|
|
1,617,672 |
|
|
|
1,537,052 |
|
Options exercisable at the end of the year |
|
|
1,132,174 |
|
|
|
971,568 |
|
Common stock available for future grants at the end of the year |
|
|
166,750 |
|
|
|
18,650 |
|
Weighted average exercise price per share: |
|
|
|
|
|
|
|
|
Granted |
|
$ |
29.35 |
|
|
$ |
38.38 |
|
Forfeited |
|
|
31.50 |
|
|
|
23.01 |
|
Exercised |
|
|
12.73 |
|
|
|
15.15 |
|
Outstanding |
|
|
25.30 |
|
|
|
24.60 |
|
Exercisable |
|
|
22.83 |
|
|
|
21.33 |
|
A summary of options outstanding as December 31, 2022 is as follows:
Options Outstanding |
|
|
|
|
Options Exercisable |
|
Range of Exercise Prices |
|
Number
Outstanding |
|
|
Weighted-
Average
Remaining
Contractual
Life (Years) |
|
Weighted-
Average
Exercise
Price |
|
|
|
|
Number
Exercisable |
|
|
Weighted-
Average
Exercise
Price |
|
$12.27 to $20.96 |
|
|
320,534 |
|
|
3 |
|
$ |
17.05 |
|
|
|
|
|
297,284 |
|
|
$ |
16.86 |
|
$20.97 to $22.86 |
|
|
334,875 |
|
|
5 |
|
|
22.09 |
|
|
|
|
|
333,125 |
|
|
|
22.10 |
|
$22.87 to $24.03 |
|
|
349,950 |
|
|
6 |
|
|
23.41 |
|
|
|
|
|
236,450 |
|
|
|
23.57 |
|
$24.04 to $31.00 |
|
|
315,875 |
|
|
7 |
|
|
26.92 |
|
|
|
|
|
172,125 |
|
|
|
25.21 |
|
$31.01 to $39.56 |
|
|
296,438 |
|
|
9 |
|
|
38.97 |
|
|
|
|
|
93,190 |
|
|
|
38.28 |
|
|
|
|
1,617,672 |
|
|
|
|
|
|
|
|
|
|
|
1,132,174 |
|
|
|
|
|
The weighted average remaining contractual life of all outstanding stock options is 6 years.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. The Company uses the Black-Scholes option pricing model to determine the fair value of employee and non-employee director stock options. The determination of the fair value of stock-based payment awards on the date of grant, using an option-pricing model, is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s Common Stock price over the expected term (“volatility”) and the number of options that will not fully vest in accordance with applicable vesting requirements (“forfeitures”).
The Company estimates the expected term of options granted by evaluating various factors, including the vesting period, historical employee information, as well as current and historical stock prices and market conditions. The Company estimates the volatility of its common stock by calculating historical volatility based on the closing stock price on the last day of each of the 84 months leading up to the month the option was granted. The risk-free interest rate that the Company uses in the option valuation model is the interest rate on U.S. Treasury zero-coupon bond issues with remaining terms similar to the expected term of the options granted. Historical information was the basis for calculating the dividend yield. The Company is required to estimate forfeitures at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company used a mix of historical data and future assumptions to estimate pre-vesting option forfeitures and to record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized over the requisite service periods of the awards, which are generally the vesting periods.
The assumptions used to value option grants for the years ended December 31, 2022 and 2021 were as follows:
|
|
2022 |
|
|
2021 |
Expected life in years |
|
7 |
|
|
6 - 7 |
Interest rate |
|
|
2.79 |
% |
|
.42 - 1.11% |
Volatility |
|
.413 |
|
|
.397 - .415 |
Dividend yield |
|
|
1.9% |
% |
|
1.3 - 1.8% |
34
Total stock-based compensation recognized in the Company’s consolidated statements of operations for the years ended December 31, 2022 and 2021 were $1,803,302 and $1,806,758, respectively. At December 31, 2022, there was approximately $3,599,153 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based payments granted to the Company’s employees. As of December 31, 2022, the remaining unamortized expense is expected to be recognized over a weighted average period of 3 years.
The weighted average fair value at the date of grant for options granted during 2022 and 2021 was $11.14 and $13.63 per option, respectively. The aggregate intrinsic value of outstanding options was $1,622,738 and $15,436,026 at December 31, 2022 and 2021, respectively. The aggregate intrinsic value of exercisable options was $1,565,553 and $12,128,507 at December 31, 2022 and 2021, respectively. The aggregate intrinsic value of options exercised during 2022 and 2021 was $747,730 and $6,582,918, respectively.
12. Earnings Per Share
The calculation of earnings per share is as follows:
|
|
2022 |
|
|
2021 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,034,766 |
|
|
$ |
13,655,679 |
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic earnings per share: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
3,527,626 |
|
|
|
3,471,374 |
|
Effect of diluted employee stock options |
|
|
191,624 |
|
|
|
483,861 |
|
Denominator for dilutive earnings per share |
|
|
3,719,250 |
|
|
|
3,955,235 |
|
Basic earnings per share |
|
$ |
0.86 |
|
|
$ |
3.93 |
|
Diluted earnings per share |
|
$ |
0.82 |
|
|
$ |
3.45 |
|
For 2022 and 2021, respectively, 296,438 and 229,250 stock options were excluded from diluted earnings per share calculations because they would have been anti-dilutive.
13. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss follow:
|
|
Foreign currency
translation
adjustment |
|
|
Total |
|
Balances, December 31, 2020 |
|
$ |
(825,967 |
) |
|
$ |
(825,967 |
) |
Translation adjustment |
|
|
(554,681 |
) |
|
|
(554,681 |
) |
Balances, December 31, 2021 |
|
$ |
(1,380,648 |
) |
|
$ |
(1,380,648 |
) |
Translation adjustment |
|
|
(707,251 |
) |
|
|
(707,251 |
) |
Balances, December 31, 2022 |
|
$ |
(2,087,899 |
) |
|
$ |
(2,087,899 |
) |
14. Cash, Cash Equivalents and Restricted Cash
(dollars in 000’s):
|
|
December 31, |
|
December 31, |
|
|
|
2022 |
|
2021 |
|
Cash and cash equivalents |
|
$ |
6,100 |
|
$ |
4,843 |
|
Restricted Cash - current |
|
|
750 |
|
|
- |
|
Restricted Cash - non-current |
|
|
750 |
|
|
- |
|
Total cash, cash equivalents and restricted cash |
|
$ |
7,600 |
|
$ |
4,843 |
|
Restricted cash, which is reported within other short-term and long-term assets in the consolidated balance sheets consists of the contingent payment held in escrow related to the acquisition of certain assets of Safety Made. See Note 16 – Business Combinations, for additional information related to the acquisition of certain assets of Safety Made.
15. 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.
35
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.
Operating lease cost was $1.2 million and $1.3 million for the year ended December 31, 2022 and 2021, respectively. For the year ended December 31, 2022 and 2021, $0.5 million was included in cost of goods sold and $0.7 million and $0.8 million, respectively, was included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Information related to leases (dollars in 000’s):
|
|
Year ended |
|
|
Year ended |
|
Operating cash flow information: |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
Operating lease cost |
|
$ |
1,239 |
|
|
$ |
1,265 |
|
Operating lease - cash flow |
|
$ |
1,281 |
|
|
$ |
1,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash activity: |
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease liabilities |
|
$ |
545 |
|
|
$ |
1,760 |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
|
December 31, 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 December 31, 2022:
(dollars in 000’s):
2023 |
|
$ |
1,239 |
|
2024 |
|
|
918 |
|
2025 |
|
|
691 |
|
2026 |
|
|
155 |
|
Total future minimum lease payments |
|
$ |
3,003 |
|
Less: imputed interest |
|
|
(190 |
) |
Present value of lease liabilities - current |
|
|
1,130 |
|
Present value of lease liabilities - non-current |
|
$ |
1,683 |
|
16. Business Combinations
On June 1, 2022, the Company purchased certain assets of Live Safely Products, LLC (d/b/a “Safety Made”) for approximately $11 million, including $1.5 million of which is contingent upon meeting certain annual financial targets during a two-year period. Based in Keene, NH, Safety Made is a leading manufacturer of first aid kits for the promotional products industry.
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 |
|
|
|
|
Backlog |
|
|
23 |
|
Non-Compete |
|
|
920 |
|
Tradename |
|
|
1,990 |
|
Customer list |
|
|
2,210 |
|
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. 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.
36
As part of the purchase agreement, there is a $1.5 million payment due to the owners that is contingent on certain revenue milestones being met and the owners being employed by the Company at the end of the two-year period. The $1.5 million will be held by the Escrow Agent in escrow for twenty-five (25) months after the closing date. After one year from the closing date, the Escrow Agent will disburse to the Seller a payment up to $750,000 or a portion thereof determined by the calculation outlined in the purchase agreement. After two years from the closing date, the Escrow Agent will disburse to the seller the remaining escrow amount, or a portion thereof determined by the calculation outlined in the agreement.
The $1.5 million contingent payment that is being held in escrow is classified as restricted cash. Of this amount, $750,000 is recorded in current assets, with the remaining $750,000 reported in other long-term assets on the consolidated balance sheet.
Net sales for the year ended December 31, 2022, attributable to the sales of Safety Made products were approximately $3.6 million. Income from operations for the year ended December 31, 2022, attributable to Safety Made products was approximately $0.6 million.
Assuming Safety Made assets were acquired on January 1, 2021, unaudited proforma combined net sales for the years ended December 31, 2022 and 2021 for the Company would have been approximately $195.8 million and $187.0 million, respectively. Unaudited proforma combined net income for the years ended December 31, 2022 and 2021 for the Company would have been approximately $3.4 million and $15.5 million.
37