See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
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 March 31, 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.
9
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 March 31, 2023
|
|
United States |
|
|
Canada |
|
|
Europe |
|
|
Total |
|
Cutting, Sharpening and Measuring |
|
$ |
14,083 |
|
|
$ |
1,405 |
|
|
$ |
3,361 |
|
|
$ |
18,849 |
|
First Aid and Medical |
|
|
24,770 |
|
|
|
1,852 |
|
|
|
367 |
|
|
|
26,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
38,853 |
|
|
$ |
3,257 |
|
|
$ |
3,728 |
|
|
$ |
45,838 |
|
For the three months ended March 31, 2022
|
|
United States |
|
|
Canada |
|
|
Europe |
|
|
Total |
|
Cutting, Sharpening and Measuring |
|
$ |
15,333 |
|
|
$ |
1,593 |
|
|
$ |
3,558 |
|
|
$ |
20,484 |
|
First Aid and Medical |
|
|
20,408 |
|
|
|
2,022 |
|
|
|
419 |
|
|
|
22,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
35,741 |
|
|
$ |
3,615 |
|
|
$ |
3,977 |
|
|
$ |
43,333 |
|
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, share repurchases, dividends, acquisitions, and other business activities. Under the revolving loan agreement, the Company is required to maintain specific amounts of funded debt to EBITDA, a fixed charge coverage ratio and must have annual net income greater than $0, measured as of the end of each fiscal year. On November 8, 2022, the revolving loan agreement was amended to increase the ratio of funded debt to EBITDA. The amendment is in effect for four quarters commencing in the third quarter of 2022 and includes an increase in the funded debt to EBITDA ratio for those four quarters ranging from a low of 4.75 to 1 to a high of 5.75 to 1. The amendment also increases the interest rate from SOFR +1.75% up to a high of SOFR + 2.35% on a basis that varies on a quarterly basis with the funded debt to EBITDA ratio. As of March 31, 2023, the Company was in compliance with the covenants under the revolving loan agreement, as amended.
10
As of March 31, 2023 and December 31, 2022, the Company had outstanding borrowings of $40,135,000 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 March 31, 2023 and December 31, 2022, long-term debt related to the mortgage consisted of the following (amounts in ‘000’s):
|
March 31, 2023 |
|
December 31, 2022 |
|
|
|
|
|
|
|
|
Mortgage payable - HSBC Bank N.A. |
$ |
11,133 |
|
$ |
11,233 |
|
Less debt issuance costs |
|
(131 |
) |
|
(134 |
) |
|
|
11,002 |
|
|
11,099 |
|
Less current maturities |
|
405 |
|
|
405 |
|
Long-term mortgage payable less current maturities |
$ |
10,597 |
|
$ |
10,694 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2023, the Company issued a total of 5,000 shares of common stock and received aggregate proceeds of $61,350 upon exercise of employee stock options. Also, during the three months ended March 31, 2023, the Company issued 2,546 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 6% of the Company’s total net sales for the three months ended March 31, 2023 and 2022, 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 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.
11
The following table sets forth certain financial data by segment for the three months ended March 31, 2023 and 2022:
Financial data by segment:
(in thousands)
|
|
Three Months Ended March 31, |
|
|
Sales to external customers: |
|
2023 |
|
|
2022 |
|
|
United States |
|
$ |
38,853 |
|
|
$ |
35,741 |
|
|
Canada |
|
|
3,257 |
|
|
|
3,615 |
|
|
Europe |
|
|
3,728 |
|
|
|
3,977 |
|
|
Consolidated |
|
$ |
45,838 |
|
|
$ |
43,333 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,781 |
|
|
$ |
811 |
|
|
Canada |
|
|
217 |
|
|
|
386 |
|
|
Europe |
|
|
190 |
|
|
|
174 |
|
|
Consolidated |
|
$ |
2,188 |
|
|
$ |
1,371 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
902 |
|
|
|
305 |
|
|
Other income, net |
|
|
(23 |
) |
|
|
(2 |
) |
|
Consolidated income before income taxes |
|
$ |
1,309 |
|
|
$ |
1,068 |
|
|
Assets by segment:
(in thousands)
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
United States |
|
$ |
136,010 |
|
|
$ |
144,466 |
|
Canada |
|
|
10,720 |
|
|
|
9,078 |
|
Europe |
|
|
10,738 |
|
|
|
10,833 |
|
Consolidated |
|
$ |
157,468 |
|
|
$ |
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 $424,000 for the three months ended March 31, 2023 compared to approximately $400,000 for the three months ended March 31, 2022.
As of March 31, 2023, there was a total of $3,214,002 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 approximately $1.4 million, of which $750,000 is recorded in other current liabilities and $630,000 is recorded in other non-current liabilities on the condensed consolidated balance sheet as of March 31, 2023. Changes in the fair value of the liability are recorded in earnings. There was an increase in the liability of $50,000 during the three month period ended March 31, 2023.
12
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 March 31, 2023 and 2022, of which $0.1 million was included in cost of goods sold and $0.2 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: |
|
March 31, 2023 |
|
|
March 31, 2022 |
|
Operating lease cost |
|
$ |
334 |
|
|
$ |
311 |
|
Operating lease - cash flow |
|
$ |
346 |
|
|
$ |
322 |
|
|
|
|
|
|
|
|
|
|
Non-cash activity: |
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease liabilities |
|
$ |
341 |
|
|
$ |
211 |
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
March 31, 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 March 31, 2023:
2023 (remaining) |
|
$ |
1,005 |
|
2024 |
|
|
1,041 |
|
2025 |
|
|
813 |
|
2026 |
|
|
165 |
|
|
|
|
|
|
Total future minimum lease payments |
|
$ |
3,024 |
|
Less: imputed interest |
|
|
(180 |
) |
Present value of lease liabilities - current |
|
|
1,216 |
|
Present value of lease liabilities - non-current |
|
$ |
1,628 |
|
9. Other Accrued Liabilities
Other current and non-current accrued liabilities consisted of (in thousands):
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
Customer rebates |
|
$ |
5,972 |
|
|
$ |
5,534 |
|
Contingent liability - Safety Made |
|
|
1,380 |
|
|
|
1,330 |
|
Accrued compensation |
|
|
1,556 |
|
|
|
791 |
|
Dividend payable |
|
|
496 |
|
|
|
495 |
|
Income tax payable |
|
|
776 |
|
|
|
534 |
|
Other |
|
|
2,288 |
|
|
|
2,016 |
|
Total: |
|
$ |
12,469 |
|
|
$ |
10,700 |
|
|
|
|
|
|
|
|
|
|
10. Cash, Cash Equivalents and Restricted Cash
13
(in thousands):
|
|
March 31, 2023 |
|
December 31, 2022 |
|
Cash and cash equivalents |
|
$ |
2,764 |
|
$ |
6,100 |
|
Restricted Cash - current |
|
|
750 |
|
|
750 |
|
Restricted Cash - non-current |
|
|
750 |
|
|
750 |
|
Total cash, cash equivalents and restricted cash |
|
$ |
4,264 |
|
$ |
7,600 |
|
Restricted cash, which is reported within other short-term and long term assets in the condensed consolidated balance sheets consists of the contingent payment held in escrow related to the acquisition of Safety Made.
11. Intangible Assets and Goodwill
The Company’s intangible assets and goodwill consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
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 |
|
|
12,136 |
|
|
|
11,619 |
|
Intangible assets |
|
$ |
20,273 |
|
|
$ |
20,790 |
|
Goodwill |
|
$ |
8,189 |
|
|
$ |
8,189 |
|
Total: |
|
$ |
28,462 |
|
|
$ |
28,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The useful lives of the identifiable intangible assets range from 5 years to 15 years.
12. Inventories
Inventories consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
Finished goods |
|
$ |
41,187 |
|
|
$ |
45,371 |
|
Work in process |
|
|
334 |
|
|
|
408 |
|
Materials and supplies |
|
|
16,967 |
|
|
|
17,546 |
|
|
|
$ |
58,488 |
|
|
$ |
63,325 |
|
Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-out method.
14