Executive Summary / Key Takeaways

• Acme United is strategically transforming its operations and supply chain, leveraging domestic manufacturing and global diversification to mitigate tariff impacts and capitalize on market disruptions.
• Record Q2 2025 earnings (excluding one-time gains) and robust free cash flow generation underscore the company's financial resilience and disciplined capital allocation, supporting continued dividend growth and opportunistic acquisitions.
• Technological innovations like SmartCompliance RFID first aid kits and patented DMT sharpeners provide significant competitive advantages, driving customer value, compliance, and market share gains in key segments.
• Aggressive investments in automation and facility expansion, including a new Spill Magic plant and robotic systems, are enhancing productivity and cost efficiency, positioning ACU for sustained earnings strength.
• While macroeconomic uncertainties and tariff volatility persist, ACU's proactive strategies and strong market positioning create opportunities for long-term growth and increased profitability.

Setting the Scene: Resilience Through Diversification and Innovation

Acme United Corporation, with roots tracing back to 1867 as the Acme Shear Company, has evolved into a global leader in cutting, measuring, first aid, and sharpening products. Serving a diverse array of markets from school and home to industrial and medical, the company's enduring presence is a testament to its strategic adaptability. Over the past eight years, Acme United has deliberately built a robust domestic manufacturing base through ten acquisitions in the United States and Canada, complementing this with a diversified global sourcing network spanning Thailand, Egypt, India, and the Philippines. This foundational strategy of localized production and broad sourcing has become a critical differentiator in today's volatile global trade environment.

The current macroeconomic landscape is characterized by persistent high inflation, elevated interest rates, and, most notably for Acme United, significant and unpredictable tariff changes. Tariffs on goods imported from China, which reached an exceptionally high 145% in Q2 2025, have created a challenging market. This volatility has led to customer order cancellations and delays, impacting sales across the industry. However, Acme United's proactive approach, including building inventory ahead of tariff changes and strategically shifting production, has allowed it to manage these disruptions more effectively than some competitors, who have reportedly experienced "disastrous" quarters.

In a competitive landscape featuring larger, more diversified players like Fiskars Corporation (FSKRS), Stanley Black & Decker, Inc. (SWK), and 3M Company (MMM), Acme United carves out its niche through specialized product offerings and a customer-centric approach. While companies like Stanley Black & Decker benefit from immense scale and 3M from deep R&D in advanced materials, Acme United leverages its market leadership in specific categories—being the largest scissor maker globally and a leading first aid brand in North America—to exert pricing power and maintain strong customer relationships. Its agility in responding to market shifts and its focus on cost-effective, high-utility products provide a distinct competitive edge, particularly against rivals whose larger, more complex supply chains may be less flexible in adapting to rapid tariff changes.

A cornerstone of Acme United's competitive moat lies in its technological differentiation and innovation. The company's SmartCompliance First Aid kits, introduced in 2024, utilize patented RFID technology to monitor real-time consumption and expiration of components. This system enables automatic replenishment of refills, offering customers "substantial savings" – approximately one-third to one-half of their annual refill costs – while ensuring compliance with OSHA and ANSI standards. This creates an annuity-like revenue stream and, notably, management states there are "no similar products from our competitors." Furthermore, the DMT sharpening tools, featuring patented auto-adjusting cones and utilizing DMT sharpening stones (made in Marlborough, MA, and "arguably the best in the world"), provide superior performance in the kitchen and culinary markets. These technological advancements are not merely product features; they are strategic assets that enhance customer value, drive recurring revenue, and solidify Acme United's market position against competitors.

Operational Excellence and Strategic Adaptation

Acme United's operational strategy is a direct response to the dynamic global trade environment. The company's reliance on imported items is "much less than some of our competitors" due to its expanded domestic manufacturing footprint. Facilities like Med-Nap in Brookfield, Florida, are producing alcohol and BZK wipes and other first aid items at record levels. First aid plants in Vancouver, Washington, and Rocky Mount, North Carolina, are running at full speed, while Spill Magic plants in Santa Ana, California, and Smyrna, Tennessee, operate multiple shifts. These domestic operations have directly benefited from increased tariffs, allowing Acme United to maintain supply and competitive pricing.

The company is also aggressively diversifying its global supply chain. It is shifting production from China to other locations, including Malaysia, Thailand, Vietnam, Egypt, and India, to mitigate tariff risks and ensure supply continuity. This multi-pronged approach involves working with suppliers to reduce costs, leveraging operating efficiencies, and implementing moderate, strategic price increases. This proactive management allowed Acme United to continue producing and storing finished goods in China even when tariffs reached 145%, supplying regular customers from domestic inventory and selectively assisting with private label needs.

Significant investments in automation underscore Acme United's commitment to operational efficiency. In Q1 2025, the company installed its first robotic system in the Rocky Mount, NC plant. This system, costing $650,000, features four robots that process and package antiseptic packets, replacing seven employees with a payback period of less than two years. A second such system has been ordered for the Vancouver, WA plant. These initiatives aim to drive down costs, improve product consistency, and enhance overall productivity. Furthermore, the company acquired a new 77,000 square-foot manufacturing and distribution facility in Mount Pleasant, Tennessee, for approximately $6 million for its growing Spill Magic business. This facility, which will begin production in Q1 2026, is designed for expansion and will see investments in automated powder transfer and filling equipment, laying the groundwork for substantial material flow and packaging automation.

Financial Performance: A Story of Resilience

Acme United's financial performance reflects its strategic adaptations and operational effectiveness. In Q2 2025, the company achieved a quarterly record for earnings, excluding one-time gains from the 2021 PPP loan forgiveness and the 2023 Cuda and Camillus divestiture. Net income for the quarter was $4.8 million, up from $4.5 million in Q2 2024, with diluted earnings per share increasing to $1.16 from $1.09. For the first six months of 2025, net income rose to $6.4 million from $6.1 million in the comparable period of 2024, and diluted EPS increased to $1.57 from $1.47.

Despite a challenging tariff environment, consolidated net sales for Q2 2025 were $54.0 million, a modest decrease from $55.4 million in Q2 2024. Year-to-date net sales were $99.95 million, slightly down from $100.38 million in H1 2024. The U.S. segment experienced a 5% sales decrease in Q2 2025, primarily due to back-to-school order cancellations driven by high tariffs and a tough comparable from a large kitchen sharpener order in Q2 2024. However, U.S. operating income still increased by $79,000 in Q2 and $100,000 year-to-date, demonstrating effective cost management.

The Canadian segment showed robust growth, with net sales increasing 28% in Q2 2025 and 18% year-to-date (21% in local currency), driven by strong first aid product sales. This translated to a $169,000 increase in Canadian operating income for both periods. European net sales decreased 3% in Q2 and 5% year-to-date (6% in local currency) due to delayed shipments and a non-recurring promotion, leading to a decrease in operating income. However, management anticipates growth in Europe for Q3 2025.

Gross profit for Q2 2025 was $22.15 million (41.0% of net sales), compared to $22.63 million (40.8% of net sales) in Q2 2024. The slight decrease was primarily due to lower sales, but the gross margin percentage improved. Selling, General, and Administrative (SG&A) expenses decreased by $493,000 in Q2 2025 to $15.76 million (29.2% of net sales), reflecting cost reductions and reduced discretionary spending. Net interest expense decreased by $138,000 in Q2 2025 due to lower average outstanding borrowings and reduced interest rates. The effective income tax rate also improved to 22% in Q2 and H1 2025, down from 24% in 2024.

The company's liquidity and capital resources remain strong. Bank debt less cash stood at $23 million on June 30, 2025, an $11 million reduction from $33 million a year prior. Acme United generated approximately $12 million in free cash flow over the last 12 months, a record for the company. Its $65 million secured revolving credit facility with HSBC (HSBC) was extended to May 31, 2027, with $48.62 million available for borrowing as of June 30, 2025. The company is in compliance with all loan covenants. This robust financial position supports its recently raised dividend, which management is "very comfortable" with, and provides ample capacity for strategic growth initiatives.

Innovation as a Competitive Moat

Acme United’s commitment to innovation is a key driver of its competitive advantage and long-term growth. The SmartCompliance First Aid kits exemplify this, leveraging patented RFID technology to transform industrial first aid management. This system provides real-time data on component consumption and expiration, enabling automatic replenishment. The quantifiable benefit for customers is substantial, with potential savings of "about a third to a half" on annual refill costs. This not only drives customer loyalty but also creates a predictable, annuity-like revenue stream for Acme United, a significant moat in the industrial safety market where no similar competitor products are known. The latest generation of these kits can even be hardwired into customer systems for fully automated reordering, further embedding Acme United into its clients' operational workflows.

In the sharpening segment, the DMT sharpeners showcase another area of technological leadership. These sharpeners incorporate DMT sharpening stones, manufactured in Marlborough, Massachusetts, which are considered "arguably the best in the world" due to their superior diamond dispersion and flatness. The patented design allows the sharpening cones to "automatically adjust to the angle of the cutting edge of the blade," ensuring accuracy and effectiveness. This innovation has fueled "outstanding growth" in the kitchen and culinary markets and is expanding into Europe and major U.S. mass market retailers, demonstrating the power of superior product performance to capture market share.

Beyond product-specific innovations, Acme United is investing heavily in process automation to enhance its manufacturing and distribution capabilities. The installation of robotic systems in its Rocky Mount, NC, and Vancouver, WA, plants, along with plans for automated powder transfer and filling equipment at the new Spill Magic facility, are designed to drive down costs, improve product consistency, and increase overall productivity. For instance, the first robotic system in Rocky Mount, NC, costing $650,000, replaces seven employees and has a payback period of less than two years. These investments are critical for maintaining competitive pricing and improving margins, especially in a high-inflation environment, and for scaling operations to meet growing demand.

Strategic Growth Initiatives and Outlook

Acme United's strategic growth initiatives are multifaceted, focusing on organic expansion, market share gains, and opportunistic acquisitions. Management anticipates "growth and continued earnings strength" for the remainder of 2025, with opportunities to gain market share in both Westcott cutting tools and the first aid business, particularly in retail and industrial markets. This outlook is predicated on the company's "low total costs and supply chain diversification," which positions it favorably against competitors grappling with tariff-induced cost pressures.

The current environment, marked by tariff uncertainty and potential working capital strain on competitors, is viewed as a fertile ground for accretive acquisitions. Acme United is actively pursuing targets in North America across both its cutting tool and first aid segments, including horizontal expansion and companies supplying first aid kit components. The company's strong balance sheet and proven track record in integrating acquisitions (e.g., the successful turnaround of Hawktree Solutions, a Canadian Red Cross supplier, acquired out of bankruptcy for approximately CAD $1 million and grown to a $2.5-$3 million profitable business) provide the "wherewithal to do that," even for potentially "larger deals."

International expansion is also a key focus. In Europe, Acme United is broadening its first aid and medical product line, establishing new distribution channels in Switzerland and the Netherlands, and strengthening its sales team in Germany, including plans for a first sales booth at the Medica Show in Dusseldorf. In Canada, the company doubled the space at its First Aid Central facility over the past 12 months to accommodate growth, particularly in first aid products. These regional efforts are designed to capitalize on local market opportunities and diversify revenue streams.

While management has refrained from providing specific quantitative sales guidance for the full year due to the extreme volatility of tariff levels, they are confident in their ability to implement price increases to match rising costs, aiming for "pretty close to margin breakeven" while delivering value. The expectation is for "growth in the third and fourth quarters, not declines, growth in sales," assuming demand continues. This cautious yet optimistic outlook reflects a company that is strategically positioned and operationally agile in a complex global market.

Risks and Challenges

Despite Acme United's strategic strengths, several risks and challenges warrant investor attention. The most significant is the volatility and unpredictability of tariffs, particularly those imposed on Chinese goods. The rapid shift to a 145% tariff rate in Q2 2025 caused immediate customer order cancellations, highlighting the direct impact on sales. While Acme United has diversified its sourcing and expanded domestic production, approximately 40% of its inventory is still sourced from China, leaving it exposed to sudden policy changes. The uncertainty surrounding future tariff levels makes accurate sales forecasting difficult, as acknowledged by management.

Demand uncertainty and potential recessionary headwinds also pose risks. General price increases across various consumer goods, partly driven by tariffs, could reduce overall consumer spending. Management expresses concern about this potential impact, particularly on the Westcott cutting tool segment, which is more exposed to consumer discretionary spending than the more resilient first aid business. A "soggy" industrial market, as observed in Q3 2024, could further dampen demand.

Supply chain disruptions remain an ongoing risk, whether from geopolitical tensions (e.g., wars in Ukraine and the Middle East), natural disasters, or logistical issues like port closures and trucker shortages. While Acme United has diversified its supply base, global events can still impact the availability and cost of raw materials and finished goods. Additionally, labor-related costs, including acquiring and training new employees and rising wages, could pressure profitability.

A notable internal control issue was identified: the ineffectiveness of information technology general controls (ITGCs) related to logical security and privileged access management for a financially relevant system, as reported in the 10-Q for Q2 2025. While the company has implemented remediation steps, including removing privileged access and limiting user permissions, the material weakness will not be considered fully remediated until controls operate effectively for a sufficient period and are tested, with full remediation expected by December 31, 2025. This indicates a need for continued vigilance in internal systems.

Finally, as a smaller player compared to industrial giants, Acme United "do[es] not have a voice at the table" in influencing trade policy. This means the company must remain reactive to policy changes, relying on its operational flexibility and market position rather than direct advocacy.

Conclusion

Acme United Corporation stands as a compelling investment narrative of strategic resilience and operational transformation in a turbulent global economy. The company's century-long history has culminated in a diversified business model, robust domestic manufacturing, and a global sourcing network that provides a critical buffer against the unpredictable tides of tariffs and inflation. Its record Q2 2025 earnings, strong free cash flow generation, and disciplined capital allocation underscore a financially healthy enterprise capable of sustaining its dividend and pursuing accretive acquisitions, even as competitors falter.

The core of Acme United's investment thesis is deeply rooted in its technological leadership and operational agility. Innovations like the SmartCompliance RFID first aid kits and the precision of DMT sharpeners not only differentiate its product offerings but also create sticky customer relationships and recurring revenue streams. Coupled with aggressive investments in automation and facility expansion, these technological advantages are driving cost efficiencies and productivity gains that are crucial for sustained earnings strength. While macroeconomic headwinds and tariff uncertainties persist, Acme United's proactive strategies, strong market positioning, and commitment to innovation position it to not just weather these storms, but to emerge stronger, capturing market share and delivering long-term value to its shareholders.