UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 01-07698
ACME UNITED CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Connecticut
06-0236700
State or Other Jurisdiction of
I.R.S. Employer Identification No.
Incorporation or Organization
1 Waterview Drive, Shelton, Connecticut
06484
Address of Principal Executive Offices
Zip Code
Registrant's telephone number, including area code: (203) 254-6060
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
$2.50 par value Common Stock
ACU
NYSE American
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller Reporting Company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(s) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 USC. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Registrant had 3,525,002 shares of its $2.50 par value Common Stock outstanding as of August 5, 2022.
1
INDEX
Page
Number
Part I — FINANCIAL INFORMATION:
3
Item 1:
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2022 and December 31, 2021
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021
5
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021
6
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021
7
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021
9
Notes to Condensed Consolidated Financial Statements
10
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3:
Quantitative and Qualitative Disclosures about Market Risk
21
Item 4:
Controls and Procedures
Part II — OTHER INFORMATION:
22
Legal Proceedings
Item 1A:
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5:
Other Information
Item 6:
Exhibits
Signatures
23
2
Part I - FINANCIAL INFORMATION
Item 1: Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(all amounts in thousands)
June 30,
December 31,
2022
2021
(unaudited)
(Note 1)
ASSETS
Current assets:
Cash and cash equivalents
$
1,760
4,843
Accounts receivable, less allowance of $922 in 2022 and $1,007 in 2021
46,991
34,221
Inventories
65,039
53,552
Prepaid expenses and other current assets
3,647
2,635
Total current assets
117,437
95,251
Property, plant and equipment:
Land
1,977
1,761
Buildings
16,088
13,456
Machinery and equipment
30,493
29,760
48,558
44,977
Less: accumulated depreciation
22,281
20,950
Net property, plant and equipment
26,277
24,027
Operating lease right-of-use asset, net
2,787
3,130
Goodwill
8,189
4,800
Intangible assets, less accumulated amortization
21,625
17,231
Other assets - restricted cash
1,500
-
Total assets
177,815
144,439
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(all amounts in thousands, except share amounts)
LIABILITIES
Current liabilities:
Accounts payable
21,421
8,977
Operating lease liability - current portion
1,080
1,000
Current portion of mortgage payable
389
Other accrued liabilities
10,129
9,909
Total current liabilities
33,019
20,275
Non-current liabilities:
Long-term debt
50,263
33,037
Mortgage payable, net of current portion
10,897
11,081
Operating lease liability - non-current portion
1,944
2,365
Other non-current liabilities
1,869
599
Total liabilities
97,992
67,357
Commitments and Contingencies (see note 2)
STOCKHOLDERS' EQUITY
Common stock, par value $2.50:
authorized 8,000,000 shares;
5,066,245 shares issued and 3,521,373 shares outstanding in 2022 and
5,065,518 shares issued and 3,520,646 shares outstanding in 2022 and 2021
12,657
12,655
Additional paid-in capital
12,598
11,930
Retained earnings
72,491
69,873
Treasury stock, at cost - 1,544,872 shares in 2022 and 2021
(15,996
)
Accumulated other comprehensive loss:
Translation adjustment
(1,927
(1,380
Total stockholders’ equity
79,823
77,082
Total liabilities and stockholders’ equity
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(all amounts in thousands, except per share amounts)
Three Months Ended June 30,
Six Months Ended June 30,
Net sales
56,773
44,847
100,106
88,372
Cost of goods sold
38,225
28,694
66,590
56,632
Gross profit
18,548
16,153
33,516
31,740
Selling, general and administrative expenses
14,572
12,364
28,169
24,983
Operating income
3,976
3,789
5,347
6,757
Non-operating items:
Interest:
Interest expense
428
226
737
452
Interest income
(5
(3
(8
(9
Interest expense, net
423
223
729
443
PPP loan forgiveness
(3,508
Other expense (income), net
148
68
147
145
Total other expense (income), net
(3,440
(3,363
Income before income tax expense
3,405
7,006
4,471
9,677
Income tax expense (benefit)
667
(224
903
400
Net income
2,738
7,230
3,568
9,277
Basic earnings per share
0.78
2.16
1.01
2.72
Diluted earnings per share
0.71
1.82
0.93
2.34
Weighted average number of common shares outstanding-denominator used for basic
per share computations
3,521
3,347
3,410
Weighted average number of dilutive stock options outstanding
320
617
323
551
Denominator used for diluted per share computations
3,841
3,964
3,844
3,961
Dividends declared per share
0.14
0.13
0.27
0.26
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
Six Months Ended
Other comprehensive (loss) income :
Foreign currency translation adjustment
(574
168
(547
(20
Comprehensive income
2,164
7,398
3,021
9,257
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended June 30, 2021
Outstanding Shares of Common Stock
Common Stock
Treasury
Stock
Additional Paid-In Capital
Accumulated
Other Comprehensive (Loss) Gain
Retained Earnings
Total
Balances, March 31, 2021
3,356,614
12,145
(14,522
8,375
(1,014
59,643
64,627
Other comprehensive income
Stock compensation expense
580
Distributions to shareholders
(458
Issuance of common stock
172,594
431
2,085
2,516
Cash settlement of stock options
(211
Balances June 30, 2021
3,529,208
12,576
10,829
(846
66,415
74,452
For the three months ended June 30, 2022
Balances, March 31, 2022
3,520,646
12,222
(1,353
70,245
77,773
Other comprehensive loss
368
(492
727
8
Balances June 30, 2022
3,521,373
For the six months ended June 30, 2021
Outstanding
Shares of
Common
Additional
Paid-In
Capital
Other
Comprehensive
Loss
Retained
Earnings
Balances, December 31, 2020
3,338,913
12,101
7,931
(826
58,033
62,717
886
(895
190,295
475
2,223
2,698
For the six months ended June 30, 2022
Balances, December 31, 2021
768
(950
(108
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation
1,339
1,176
Amortization of intangible assets
744
742
Non-cash lease expense
43
Provision for bad debt
50
54
Amortization of deferred financing costs
Changes in operating assets and liabilities:
Accounts receivable
(12,468
(9,072
(11,021
2,007
Prepaid expenses and other assets
(991
(593
12,651
346
182
(1,215
Total adjustments
(8,739
(9,134
Net cash (used in) provided by operating activities
(5,171
143
Cash flows from investing activities:
Purchase of property, plant and equipment
(2,761
(3,351
Acquisition of Safety Made
(9,609
Net cash used in investing activities
(12,370
Cash flows from financing activities:
Net borrowings of long-term debt
17,225
782
Repayments on mortgage
(192
(133
Proceeds from issuance of common stock
(915
(871
Net cash provided by financing activities
16,020
2,265
Effect of exchange rate changes on cash and cash equivalents
(62
16
Net change in cash and cash equivalents
(1,583
(927
Cash, cash equivalents and restricted cash at beginning of period
4,167
Cash, cash equivalents and restricted cash at end of period
3,260
3,240
Supplemental cash flow information:
Cash paid for income taxes
242
952
Cash paid for interest
661
440
Non-cash investing activities
Safety Made acquisition contingent consideration
1,270
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of Acme United Corporation (the “Company”). These adjustments are of a normal, recurring nature. However, the financial statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Company's Annual Report on Form 10-K. Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2021 for such disclosures. The condensed consolidated balance sheet as of December 31, 2021 was derived from the audited consolidated balance sheet as of that date. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s 2021 Annual Report on Form 10-K.
The Company has evaluated events and transactions subsequent to June 30, 2022 and through the date these condensed consolidated financial statements were issued.
2. Commitment and Contingencies
There are no pending material legal proceedings to which the Company is a party, or, to the actual knowledge of the Company, contemplated by any governmental authority.
3. Revenue from Contracts with Customers
Nature of Goods and Services
The Company recognizes revenue from the sales of a broad line of products that are grouped into two main categories: (a) first aid and medical; and (b) cutting, sharpening and measuring. The cutting, sharpening and measuring category includes scissors, knives, paper trimmers, pencil sharpeners and other sharpening tools. The first aid and medical category includes first aid kits and refills, over-the-counter medications and a variety of medical products. Revenue recognition is evaluated through the following five steps: (i) identification of the contract or contracts with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.
When Performance Obligations Are Satisfied
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Revenue is generated by the sale of the Company’s products to its customers. Sales contracts (purchase orders) generally have a single performance obligation that is satisfied at a point in time, with shipment or delivery, depending on the terms of the underlying contract. Revenue is measured based on the consideration specified in the contract. The amount of consideration we receive and revenue we recognize is impacted by incentives ("customer rebates"), including sales rebates, which are generally tied to sales volume levels, in-store promotional allowances, shared media and customer catalogue allowances and other cooperative advertising arrangements; freight allowance programs offered to our customers; and allowance for returns and discounts. We generally recognize customer rebate costs as a deduction to gross sales at the time that the associated revenue is recognized.
Significant Payment Terms
Payment terms for each customer are dependent on the agreed upon contractual repayment terms. Payment terms typically are between 30 and 90 days and vary depending on the size of the customer and its risk profile to the Company. Some customers receive discounts for early payment.
Product Returns
The Company accepts product returns in the normal course of business. The Company estimates reserves for returns and the related refunds to customers based on historical experience. Reserves for returned merchandise are included as a component of “Accounts receivable” in the condensed consolidated balance sheets.
Practical Expedient Usage and Accounting Policy Elections
For the Company’s contracts that have an original duration of one year or less, the Company uses the practical expedient in ASC 606-10-32-18 applicable to such contracts and does not consider the time value of money in relation to significant financing components. The effect of applying this practical expedient election did not have an impact on the Company’s condensed consolidated financial statements.
Per ASC 606-10-25-18B, the Company has elected to account for shipping and handling activities that occur after the customer has obtained control as a fulfilment activity instead of a performance obligation. Furthermore, shipping and handling activities performed before transfer of control of the product also do not constitute a separate and distinct performance obligation. The effect of applying this practical expedient election did not have an impact on the Company’s condensed consolidated financial statements.
The Company has elected to exclude from the transaction price those amounts which relate to sales and other taxes that are assessed by governmental authorities and that are imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer.
Applying the practical expedient in ASC 340-40-25-4, Other Assets and Deferred Costs, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred. These costs are included in “Selling, general and administrative expenses.” The effect of applying this practical expedient did not have an impact on the Company’s condensed consolidated financial statements.
Disaggregation of Revenues
The following table represents external net sales disaggregated by product category, by segment (amounts in thousands):
United States
Canada
Europe
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
16,162
2,091
3,677
21,930
20,678
1,899
340
22,917
36,840
3,990
4,017
U.S.
37,287
3,785
7,113
48,185
47,359
3,706
856
51,921
84,646
7,491
7,969
31,726
3,640
7,420
42,786
41,162
3,683
741
45,586
72,888
7,323
8,161
4. Debt and Shareholders’ Equity
Long-term debt consists of (i) borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A. and (ii) amounts outstanding under the fixed rate mortgage on the Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA. On May 31, 2022, the Company amended its revolving loan agreement with HSBC Bank, N.A. The amended agreement increases the amount available for borrowing to $65 million from $50 million, at an interest rate of SOFR plus 1.75%; interest is payable monthly. In addition, the expiration date of the credit facility was extended to May 31, 2026. The Company must pay a facility fee, payable quarterly, in an amount equal to one eighth of one percent (.125%) per annum of the average daily unused portion of the revolving credit line. The facility is intended to provide liquidity for growth, share repurchases, dividends, acquisitions, and other business activities. Under the revolving loan agreement, the Company is required to maintain specific amounts of funded debt to EBITDA, a fixed charge coverage ratio and must have annual net income greater than $0, measured as of the end of each fiscal year. As of June 30, 2022, the Company was in compliance with the covenants then in effect under the loan agreement.
11
As of June 30, 2022 and December 31, 2021, the Company had outstanding borrowings of $50,263,000 and $33,037,000, respectively, under the Company’s revolving loan agreement with HSBC.
The Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA were financed by a fixed rate mortgage with HSBC Bank, N.A. at a fixed interest rate of 3.8%. The Company entered into the agreement on December 1, 2021. Commencing on January 1, 2022, payments of principal and interest are due monthly, with all amounts outstanding due on maturity on December 1, 2031. As of June 30, 2022 and December 31, 2021, long-term debt related to the mortgage consisted of the following (amounts in ‘000’s):
June 30, 2022
December 31, 2021
Mortgage Payable - HSBC Bank N.A.
11,428
11,620
Less debt issuance costs
(142
(150
11,286
11,470
Less current maturities
Long-term mortgage payable less current maturities
During the three and six months ended June 30, 2022, the Company issued a total of 727 shares of common stock and received aggregate proceeds of $10,000 upon exercise of employee stock options. During the six months ended June 30, 2022, the Company, at its discretion, paid approximately $108,000 to optionees who had elected (subject to the approval of the Company) a net cash settlement of certain of their respective options.
5. Segment Information
The Company reports financial information based on the organizational structure used by the Company’s chief operating decision makers for making operating and investment decisions and for assessing performance. The Company’s reportable business segments consist of: (1) United States; (2) Canada; and (3) Europe. As described below, the activities of the Company’s Asian operations are closely linked to those of the U.S. operations; accordingly, the Company’s chief operating decision makers review the financial results over both a consolidated basis, and the results of the Asian operations have been aggregated with the results of the United States operations to form one reportable segment called the “United States segment” or “U.S. segment”. Each reportable segment derives its revenue from the sales of first aid and medical products, cutting and sharpening devices and measuring instruments for school, office, home, hardware, sporting and industrial use.
Domestic sales orders are filled primarily from the Company’s distribution centers in North Carolina, Washington, Massachusetts, Tennessee, Florida and California. The Company is responsible for the costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products. Orders filled from the Company’s inventory are generally for less than container-sized lots.
Direct import sales are products sold by the Company’s Asian subsidiary, directly to major U.S. retailers, who take ownership of the products in Asia. These sales are completed by delivering product to the customers’ common carriers at the shipping points in Asia. Direct import sales are made in larger quantities than domestic sales, typically full containers. Direct import sales represented approximately 12% and 9% of the Company’s total net sales for the three and six months ended June 30, 2022, respectively, compared to 10% and 8% respectively, for the comparable periods in 2021.
The chief operating decision maker evaluates the performance of each operating segment based on segment revenues and operating income. Segment revenues are defined as total revenues, including both external customer revenue and inter-segment revenue. Segment operating earnings are defined as segment revenues, less cost of goods sold and operating expenses. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Inter-segment amounts are eliminated to arrive at consolidated financial results.
12
The following table sets forth certain financial data by segment for three and six months ended June 30, 2022 and 2021:
Financial data by segment:
(in thousands)
Sales to external customers:
7,322
8,162
Consolidated
Operating income:
3,454
2,675
4,287
4,807
474
662
830
1,034
48
230
916
Other expense (income) , net
Consolidated income before income taxes
Assets by segment:
157,623
125,521
10,494
9,100
9,698
9,818
6. Stock Based Compensation
The Company recognizes share-based compensation at the fair value of the equity instrument on the grant date. Compensation expense is recognized over the required service period, which is generally the vesting period of the equity instrument. Share-based compensation expense was approximately $368,000 and $768,000 for the three and six months ended June 30, 2022, respectively, compared to approximately $580,000 and $886,000 for the three and six months ended June 30, 2021, respectively.
As of June 30, 2022, there was a total of $3,237,101 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested share-based payments granted to the Company’s employees. As of that date, the remaining unamortized expense was expected to be recognized over a weighted average period of approximately three years.
7. Fair Value Measurements
The carrying value of the Company’s bank debt is a reasonable estimate of fair value because of the nature of its payment terms and maturity. The Company’s contingent liability related to the acquisition of Safety Made is recorded at it’s acquisition date fair value of approximately $1.3 million and is recorded in other non-current liabilities on the condensed consolidated balance sheet. Changes in the fair value of the liability are recorded in earnings. There is no change during the three month period ended June 30, 2022.
8. Leases
The Company has operating leases for office and warehouse space and equipment under various arrangements which provide the right to use the underlying asset and require lease payments for the lease term. The Company’s lease portfolio consists of operating leases which expire at various dates through 2026.
Certain of the Company’s lease arrangements contain renewal provisions, exercisable at the Company's option. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet with right-of-use (“ROU”) assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease.
13
ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. As most of our leases do not provide an implicit rate, the present value of lease payments is determined primarily using our incremental borrowing rate based on the information available at the lease commencement date. The incremental borrowing rate is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term on an amount equal to the lease payments in a similar economic environment. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term. For the three and six months ended June 30, 2022 and 2021, lease expense in the amount of $0.1 million was included in cost of goods sold and $0.3 million and $0.2 million, respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.
Information related to leases (in thousands):
Operating cash flow information:
June 30, 2021
Operating lease cost
308
336
Operating lease - cash flow
322
294
Non-cash activity:
ROU assets obtained in exchange for lease liabilities
618
672
645
588
211
1,575
Weighted-average remaining lease term
3.0 years
4.0 years
Weighted-average discount rate
%
Future minimum lease payments under non-cancellable leases as of June 30, 2022:
2022 (remaining)
629
2023
1,076
2024
738
2025
649
2026
155
Thereafter
Total future minimum lease payments
3,247
Less: imputed interest
(223
Present value of lease liabilities - current
Present value of lease liabilities - non-current
9. Business Combinations
On June 1, 2022, the Company purchased the assets of Live Safely Products, LLC (d/b/a “Safety Made”) for approximately $11 million, including $1.5 million which is contingent upon meeting certain financial targets. Based in Keene, NH, Safety Made is a leading manufacturer of first aid kits for the promotional products industry.
14
The purchase price was allocated to assets acquired as follows (in thousands):
Assets:
512
Inventory
944
Prepaid Expense
Property, plant and equipment
877
Intangible assets
5,143
3,389
10,879
The acquisition was accounted for as a business combination, pursuant to ASC 805 – Business Combinations. All assets acquired in the acquisition are included in the Company’s United States operating segment. Management’s assessment of the valuation of intangible assets is preliminary and finalization of the Company’s purchase price accounting assessment may result in changes to the valuation of the identified intangible assets. Intangible assets include Customer List, Trade Names, Non-Compete Agreements, and Goodwill. The useful lives of the identified intangible assets range from 5 years to 15 years.
The $1.5 million contingent payment that is being held in escrow is considered restricted cash and is reported in other long-term assets on the consolidated balance sheet.
The Company has not disclosed the amount of revenue and earnings from the sales of Safety Made products since the acquisition on June 1, 2022 because these amounts are not significant to the Company’s financial statements.
10. Other Accrued Liabilities
Other current accrued liabilities consisted of (in thousands):
Customer Rebates
5,892
5,414
Accrued Compensation
603
1,586
Dividend Payable
493
458
Income Tax Payable
1,203
564
1,938
1,887
Total:
Note 11. Cash, Cash Equivalents and Restricted Cash
Restricted Cash
Total cash, cash equivalents and restricted cash
Restricted cash, which is reported within other long term assets in the condensed consolidated balance sheets consists of the contingent payment held in escrow related to the acquisition of Safety Made.
15
12. Intangible Assets and Goodwill
June 30
December 31
Customer List
18,370,118
16,137,118
Tradenames
9,984,698
7,994,698
Patents
2,271,980
Non-Compete
1,170,111
250,111
License Agreement
379,921
Subtotal
32,176,828
27,033,828
Less: Accumulated Amortization
10,552,204
9,803,299
Intangible Assets
21,624,624
17,230,529
8,188,829
4,799,829
29,813,452
22,030,358
Intangible assets include Customer List, Tradenames, Non-Compete Agreements and Goodwill. The useful lives of the identified intangible assets range from 5 years to 15 years.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
The Company may from time to time make written or oral “forward-looking statements” including statements contained in this report and in other communications by the Company, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on our beliefs as well as assumptions made by and information currently available to us. When used in this document, words like “may,” “might,” “will,” “except,” “anticipate,” “believe,” “potential,” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from our current expectations.
Forward-looking statements in this report, including without limitation, statements related to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that may impact the Company’s business, operations and financial results, including those risks and uncertainties resulting from the global COVID-19 pandemic, future waves of COVID-19, including through the Delta and Omicron variants and any new variant strains of the underlying virus; any future pandemics; the continuing effectiveness, global availability, and public acceptance of existing vaccines; the effectiveness, availability, and public acceptance of vaccines against variant strains of potential new viruses; and the heightened impact the pandemic has on many of the risks described herein, including, without limitation, risks relating to disruptions in our domestic and global supply chains, and labor shortages, any of which could materially adversely impact the Company’s ability to manufacture, source or distribute its products, both domestically and internationally.
These risks and uncertainties further include, without limitation, the following: (i) changes in the Company’s plans, strategies, objectives, expectations and intentions, which may be made at any time at the discretion of the Company; (ii) the impact of uncertainties in global economic conditions, whether caused by COVID-19 or otherwise, including the impact on the Company’s suppliers and customers; (iii) additional disruptions in the Company’s supply chains, whether caused by COVID-19, the war in Ukraine, or otherwise, including trucker shortages, port closures and delays, and delays with container ships themselves; (iv) labor shortages and related costs the Company has and may continue to incur, including costs of acquiring and training new employees and rising wages and benefits; (v) the continuing adverse impact of inflation, including product costs, and transportation costs; (vi) currency fluctuations including, for example, the increasing strength of the dollar against the euro: the Company’s ability to effectively manage its inventory in a rapidly changing business environment, including the additional inventory the Company has acquired in anticipation of supply chain disruptions and uncertainties; (vii) changes in client needs and consumer spending habits; (viii) the impact of competition; (ix) the impact of technological changes including, specifically, the growth of online marketing and sales activity; (x) the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business it might acquire; (xi) international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates; and (xiii) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission.
For a more detailed discussion of these and other factors affecting the Company, see the Risk Factors described in Item 1A included in the Company’s Annual Report on Form 10-K for the fiscal year December 31, 2021 and below under “Financial Condition”. All forward-looking statements in this report are based upon information available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Critical Accounting Estimates
There have been no material changes to the Company’s critical accounting estimates as previously reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
COVID-19 Pandemic and Macroeconomic Related Considerations
As noted above under “Forward-Looking Statements”, in response to the COVID-19 pandemic U.S. federal, state, local, and foreign governments adopted mitigation measures, creating significant uncertainties in the U.S. and global economies, including the shutdown of large portions of, or imposition of restrictions on, the U.S. and global economies. While there has been a general improvement in conditions and reduction of adverse effects from the pandemic, as of the present there continues to be significant uncertainty around the scope, severity, and duration of the pandemic, as well as the breadth and duration of business disruptions related to it and the overall impact on the U.S., global economies, and our operating results in future periods.
Commencing late in the first quarter of 2020 and continuing through the filing of this report, the COVID-19 pandemic and certain related challenges have affected the Company’s financial results and business operations. During the six months ended June 30, 2022, the Company experienced significant supply chain issues as a result of Omicron outbreaks which surfaced in China. These outbreaks occurred in February 2022 and led to factory closures and slowdowns, mass quarantines in certain Chinese cities, and the complete shutdown of two if its largest ports. While the Company had previously purchased and maintained surplus inventory in the United States to minimize the impact of any disruption in our supply chain, certain of our largest customers take delivery of large shipments directly at ports in China and we were unable to fulfill certain of these orders in the first quarter of 2022 due to the new COVID outbreak in China and the resulting factory and port shutdowns. However, we were able to fulfil these orders in the second quarter of 2022
The resurgence of the pandemic in China exacerbated the global supply chain issues that we had already been experiencing in recent quarters. As economies have re-opened, global supply chains have struggled to keep up with increasing demand, and the resulting supply chain disruptions were already, in certain cases, affecting our ability to ship products in a timely manner. Specifically, in the first and second quarter of 2022 we experienced significant delays in U.S. ports on both the East Coast and West Coast. These factors have also contributed to increased freight, labor and product costs, which in turn had an adverse effect on our operating margin in the first six months of 2022, and those disruptions and increased costs are likely to persist in the near term and potentially for the foreseeable future.
While we anticipate that the Company and its business partners will continue to experience supply chain disruptions, the Company believes that it has sufficient inventory of its products in the U.S. to at least partially offset near term supply chain disruptions against anticipated demand in the near future. However, any further increase in the duration or severity of the COVID-19 pandemic or a resurgence of the pandemic and the continuation of related supply chain and labor issues, might adversely affect the Company’s ability to manufacture, source or distribute its products both domestically and internationally. The occurrence of any of these factors could have a material adverse effect on the Company’s business, operations and financial condition.
Both domestic and international economies are experiencing significant inflation. In addition, the war in Ukraine is causing a slowdown in the European economy. The impact of these developments together with the continuing impact of the COVID-19 pandemic is highly uncertain and cannot be predicted.
Results of Operations
Traditionally, the Company’s sales are stronger in the second and third quarters and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature of the back-to-school market.
Consolidated net sales for the three months ended June 30, 2022 were $56,773,000 compared with $44,847,000 in the same period in 2021, a 27% increase. Consolidated net sales for six months ended June 30, 2022 were $100,106,000 compared with $88,372,000 in the same period in 2021, a 13% increase.
Sales in the U.S. for the three and six months ended June 30, 2022 increased 33% and 16%, respectively, compared to the same periods in 2021. The increase in sales for the three months compared to the same period in 2021 was due to a combination of higher sales prices, increased volume and the carryover of orders from our first quarter of 2022 which were unfilled because of supply chain disruptions. The increase in sales for the six months was primarily attributable to strong sales of first aid products and Westcott school and office products.
Net sales in Canada for the three and six months ended June 30, 2022 decreased 3% (constant in local currency) and increased 2% (4% in local currency), respectively, compared to the same periods last year.
European net sales for the three months ended June 30, 2022 decreased 1% in U.S. dollars but increased 12% in local currency compared to the same period in 2021. Net sales for the six months ended June 30, 2022 decreased 2% in U.S. dollars but increased 7% in local currency compared to the same period in 2021. The increase in net sales for the three and six months was mainly due to market share gains in the office channel.
Gross profit for the three months ended June 30, 2022 was $18,548,000 (32.7% of net sales) compared to $16,153,000 (36.0% of net sales) in the same period in 2021. Gross profit for the six months ended June 30, 2022 was $33,516,000 (33.5% of net sales) compared to $31,740,000 (35.9% of net sales) for the same period in 2021. The decline in the gross margin as a percentage of sales for the three and six months was primarily due to product cost inflation pressures as well as higher transportation and labor costs. Price increases partially offset cost increases.
18
Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2022 were $14,572,000 (25.7% of net sales) compared with $12,364,000 (27.6% of net sales) in the same period in 2021, an increase of $2,208,000. SG&A expenses for the six months ended June 30, 2022 were $28,169,000 (28.1% of net sales) compared with $24,983,000 (28.3% of net sales) for the same periods of 2021, an increase of $3,186,000. The increases in SG&A expenses for three and six months ended June 30, 2022, compared to the same period in 2021 were primarily due to higher personnel related costs and increased commissions and shipping costs related to higher sales.
Operating income for the three months ended June 30, 2022 was $3,976,000 compared with $3,789,000 in the same period of 2021. Operating income for the six months ended June 30, 2022 was $5,347,000 compared with $6,757,000 in the same period of 2021. Operating income in the U.S. segment increased by $779,000 for the three months ended June 30, 2022 and decreased by $520,000 for the six months ended June 30, 2022, respectively, compared to the same periods in 2021.
Operating income in the Canadian segment decreased by $188,000 and $204,000 for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.
Operating income in the European segment decreased by $404,000 and $686,000 for the three and six months ended June 30, 2022, respectively, compared to the same period in 2021.
Interest expense, net for the three months ended June 30, 2022 was $423,000 compared with $223,000 in the same period of 2021, a $200,000 increase. Interest expense, net for the six months ended June 30, 2022 was $729,000 compared with $443,000 for the same period of 2021, a $286,000 increase. The increases in interest expense resulted from a higher average debt outstanding under the Company’s revolving credit facility as well as higher average interest rate on the outstanding debt.
Other expense, net
Other expense, net was $148,000 in the three months ended June 30, 2022 compared to $68,000 in the same period of 2021. Other expense, net was $147,000 in the six months ended June 30, 2022 compared to other expense of $145,000 in the same period of 2021. The increase in other expense, net in the three and six months ended June 30, 2022, was primarily due to losses from foreign currency transactions.
Income taxes
The effective income tax rate for the three and six months ended June 30, 2022 was 20%. Income tax expense for the three and six months ended June 30, 2021 included a $0.9 million tax credit for stock based compensation. The Company’s effective tax rates for the three and six months ended June 30, 2021, excluding the tax credit and the income from the PPP loan forgiveness, were 19% and 21%.
Financial Condition
Liquidity and Capital Resources
During the first six months of 2022, working capital increased approximately $9.5 million compared to December 31, 2021. Inventory increased approximately $11.4 million at June 30, 2022 compared to December 31, 2021. We increased inventory during that period to anticipate our continued growth and to be positioned to offset the impact of potential supply chain disruptions related to COVID-19. The increase also reflects higher product costs. Inventory turnover, calculated using a twelve-month average inventory balance, was 2.1 at June 30, 2022 compared to 2.3 at December 31, 2021. Receivables increased by approximately $12.8 million at June 30, 2022 compared to December 31, 2021. The average number of days sales outstanding in accounts receivable was 60 days at each of June 30, 2022 and December 31, 2021. Accounts payable and other current liabilities increased by approximately $12.7 million at June 30, 2022 compared to December 31, 2021. The increase in accounts payable is primarily related to the increase in inventory.
The Company's working capital, current ratio and long-term debt to equity ratio are as follows (dollar amounts in thousands):
Working capital
84,434
74,976
Current ratio
3.56
4.70
Long term debt to equity ratio
76.6
57.2
19
Long-term debt consists of (i) borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A. and (ii) amounts outstanding under the fixed rate mortgage related on the Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA. On May 31, 2022, the Company amended its revolving loan agreement with HSBC Bank, N.A. The amended agreement increases the amount available for borrowing to $65 million from $50 million, at an interest rate of SOFR plus 1.75%; interest is payable monthly. In addition, the expiration date of the credit facility was extended to May 31, 2026. The Company must pay a facility fee, payable quarterly, in an amount equal to one eight of one percent (.125%) per annum of the average daily unused portion of the revolving credit line. The facility is intended to provide liquidity for growth, share repurchases, dividends, acquisitions, and other business activities. Under the revolving loan agreement, the Company is required to maintain specific amounts of funded debt to EBITDA, a fixed charge coverage ratio and must have annual net income greater than $0, measured as of the end of each fiscal year. At June 30, 2022, the Company was in compliance with the covenants then in effect under the loan agreement.
During the first six months of 2022, total debt outstanding under the Company’s revolving credit facility increased by approximately $17.2 million, compared to total debt thereunder at December 31, 2021. As of June 30, 2022, $50,263,000 was outstanding and $14,737,000 was available for borrowing under the Company’s credit facility. The increase in debt outstanding was primarily related to the acquisition of Safety Made and the increase in inventory.
The Company’s manufacturing and distribution facilities in Rocky Mount, NC and Vancouver, WA were financed by a fixed rate mortgage with HSBC Bank, N.A. at a fixed interest rate of 3.8%. The Company entered into the agreement on December 1, 2021. Payments of principal and interest are due monthly, with all amounts outstanding due on maturity on December 1, 2031. At June 30, 2022, there was approximately $11.4 million outstanding on the mortgage.
The Company believes that cash generated from operating activities, together with funds available under its revolving credit facility, will, under current conditions, be sufficient to finance the Company’s operations over the next twelve months from the filing of this report.
20
Item 3: Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
Item 4: Controls and Procedures
(a)
Evaluation of Internal Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
(b)
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2022, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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, 2021.
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 — Defaults upon Senior Securities
Item 4 — Mine Safety Disclosures
Item 5 — Other Information
Item 6 — Exhibits
Documents filed as part of this report:
Exhibit 10.10(i)
Amendment No.8 to Revolving Loan Agreement with HSBC dated May 31, 2022
Exhibit 31.1
Certification of Walter C. Johnsen pursuant to 18 U.S.C. Section 1350, as adopted pursuant Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
Certification of Paul G. Driscoll pursuant to 18 U.S.C. Section 1350, as adopted pursuant Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
Certification of Walter C. Johnsen pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
Certification of Paul G. Driscoll pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
104
The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101
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.
By
/s/ Walter C. Johnsen
Walter C. Johnsen
Chairman of the Board and
Chief Executive Officer
Dated: August 8, 2022
/s/ Paul G. Driscoll
Paul G. Driscoll
Vice President and
Chief Financial Officer