Acme United Again Raises 2016 Guidance After Strong Third Quarter
For the second quarter in a row, Acme United (ACU – $20.60) has increased its sales and earnings guidance for 2016. Thanks to an outstanding performance of all its brands in the first nine months of the year, the Company now expects to generate revenues of $124 million and earnings per share of $1.63 in 2016. This is up from the original forecast of $120 million in revenues and earnings per share of $1.47.
Sales in the third quarter, ended September 30, 2016, reached $31.9 million, up 7% compared with sales of $29.9 million in the third quarter of last year. Net income for the quarter ended September 30, 2016 was $1.5 million, or $0.40 per diluted share, compared to $1.2 million, or $0.33 per diluted share, for the 2015 period, a strong increase of 22% in net income and 21% in earnings per share.
Especially Westcott, the school, home and office products brand, continued to outperform. In fact, this year had the best back-to-school performance in the Company’s history. The brand again gained market share in the scissors and pencil sharpeners categories. And its ceramic box openers were an instant success.
Also, the new ergonomic Ergo Jr. kid scissors were well received. As we mentioned last week, we expect a lot more from them during next year’s back-to school season. In addition, the new Westcott Carbo line of scissors and trimmers, with a carbo-titanium coating, exceeded expectations.
Another strong performer was the first aid business, which continued to gain market share, particularly in the industrial and food service segments. For example, there are now SmartCompliance kits in 8,000 McDonald’s restaurants in the United States. And earlier this year, Wal-Mart equipped each store, warehouse, office, and truck with a first aid kit from Acme United. An added bonus to first aid sales is that they’re recurrent as products have to be reordered so that supplies never run out.
For the nine months, ended September 30, 2016, Acme’s net sales were $98.2 million, compared to $86.7 million in the same period in 2015, an increase of 13%. Net income for the nine months ended September 30, 2016 was $5.3 million, or $1.49 per diluted share, compared to $4.4 million, or $1.18 per diluted share, in last year’s comparable period, a 22% increase in net income and 26% in earnings per share.
The Clauss, Camillus, and Cuda brands added new products and customers. Clauss, for instance, introduced new high performance shears with a carbo-nitrite coating. And Camillus hunting knives sales benefitted from new distribution in the camping area. Finally, sales at DMT, which was acquired in February of this year, increased more than forecast due to successful placement of the sharpeners in Acme’s existing global distribution network. Also Acme’s online sales, especially at Amazon, continued to increase rapidly.
As for 2017, Acme’s Chairman and CEO Walter C. Johnsen mentioned during the third quarter conference call that it was a bit too soon for exact projections, but he expects a continued strong performance for the Company.
| Three Months Ended September 30 | Nine Months Ended September 30 | |||
| Amounts in $000’s | 2016 | 2015 | 2016 | 2015 |
| Net Sales | 31,913 | 29,903 | 98,198 | 86,694 |
| Cost of Goods Sold | 20,050 | 19,578 | 62,455 | 55,398 |
| S, G & A Expenses | 9,723 | 8,334 | 28,008 | 24,603 |
| Income From Operations | 2,140 | 1,991 | 7,735 | 6,693 |
| Other Income (Expense) | (312) | (241) | (680) | (569) |
| Pre-Tax Income | 1,828 | 1,750 | 7,055 | 6,124 |
| Income Tax Expense (benefit) | 355 | 542 | 1,750 | 1,771 |
| Net Income | 1,473 | 1,208 | 5,305 | 4,353 |
| Earnings Per Share – Diluted | 0.40 | 0.33 | 1.49 | 1.18 |
| Shares Out. – Diluted | 3,641 | 3,699 | 3,698 | 3,698 |
| Most important income statement data for the quarters and nine months ending September 30, 2016 and September 30, 2015. Source: Company Press Release | ||||
Gross margin was 37.2% in the three months ended September 30, 2016, compared to 34.5% in the same period in 2015. The higher gross margin was primarily due to a favorable product mix. Also, in the third quarter of last year, the Company incurred approximately $150,000 of one-time moving and severance costs associated with consolidating its first aid facilities. Gross margin was 36.4% for the nine months ended September 30, 2016 compared to 36.1% for last year’s period.
Acme’s Largest Customer
Amazon.com is quickly becoming one of Acme United’s most important customers. The Seattle based e-commerce giant will be Acme’s fourth largest customer in 2016, but Mr. Johnsen mentioned that it might move up to become the number three, or even two, as soon as next year.
Westcott, Camillus, Clauss, and DMT sell more products at Amazon almost on a month by month basis. It’s also showing significant strength in the first aid area. Noteworthy is that internally at Amazon they’re now using Acme’s first aid kits. A true validation of the brand!
In addition, the Company is working with Amazon on a number of projects to improve sales of first aid refills and SmartCompliance kits.
In Europe, the importance of Amazon.de – the German sister website of Amazon – is significantly growing as well. Part of the DMT product range was recently introduced there and has quickly moved to the top of the retailer’s search results thanks to good ratings and feedback.
Amazon is an increasingly important customer for Acme United. We wouldn’t be surprised if it became Acme’s largest account in a few years.
Outstanding US Segment
Acme United reports financial information on three separate business segments: the United States (including Asia), Canada and Europe.
Exact revenues per segment for the second quarter will be available in the 10-Q, which will be filed mid-November. However, Acme announced for each segment the percentage by which revenues increased or decreased compared with last year’s third quarter. Based on those numbers, we can give a fair estimation.
| Three Months Ended September 30 | ||||
| Amounts in $000’s | 2016 | 2015 | ||
| U.S. | 28,504 | 26,160 | ||
| Canada | 1,593 | 1,669 | ||
| Europe | 1,816 | 2,074 | ||
| Estimated sales per segment for the third quarter ending September 30, 2016 (Source: Smallcaps Investment Research) and actual sales per segment for the third quarter ending September 30, 2015 (Source: Company Filing) | ||||
In the U.S. segment, net sales for the quarter ended September 30, 2016 increased 9% compared to the same period in 2015 due to strong sales of Westcott school and office products, and first aid kits. DMT contributed $1.3 million in sales in the third quarter, and $3.6 million since February 2016. Net sales for the first nine months of 2016 grew 15% over the comparable period in 2015.
Net sales in Canada for the three months ended September 30, 2016 decreased 5% in U.S. dollars and 4% in local currency compared to the prior-year period. Net sales for the nine months ended September 30, 2016 decreased 2% in U.S. dollars but increased 3% in local currency compared to the same period in 2015. It’s clear the business has stabilized in Canada. Growth is again expected thanks to new product introductions.
Net sales in Europe for the three months ended September 30, 2016 decreased 12% in both U.S. dollars and local currency compared to the comparable period in 2015. The decline in sales was primarily due to the timing of a shipment of promotional products to a mass-market customer. In 2015, the promotion occurred in the third quarter, while in 2016 it occurred in the second quarter. Net sales for the nine months ended September 30, 2016 increased 4% in both U.S. dollars and local currency compared to last year’s period. The European segment has regained its growth and a solid performance is expected going forward.
Very Strong Balance Sheet
The Company’s long-term debt less cash on September 30, 2016 was $33.4 million compared to $23.9 million on September 30, 2015. By year-end, that number is expected to decline to about $29 million. This will mainly be achieved by a reduction of bank debt as inventories return back to more normal levels after the back to school season.
| Three Months Ended September 30 | ||||
| Amounts in $000’s | 2016 | 2015 | ||
| Cash and Cash Equivalents | 6,272 | 4,621 | ||
| Accounts Receivable | 25,909 | 23,587 | ||
| Inventories | 38,117 | 34,497 | ||
| Total Current Assets | 72,293 | 64,868 | ||
| Property and Equipment | 7,893 | 7,343 | ||
| Total Assets | 99,372 | 86,576 | ||
| | | |||
| Accounts Payable | 6,748 | 7,206 | ||
| Other Current Liabilities | 6,597 | 6,759 | ||
| Total Current Liabilities | 13,345 | 13,965 | ||
| Bank Debt | 39,706 | 28,551 | ||
| Total Liabilities | 53,625 | 42,878 | ||
| Total Stockholder Equity | 45,747 | 43,698 | ||
| Most important balance sheet data for the periods ending September 30, 2016 and September 30, 2015. Source: Company Press Release | ||||
During the twelve-month period ended September 30, 2016, the Company paid approximately $7.0 million for the acquisition of the assets of DMT, spent $1.4 million on stock repurchases and paid $1.3 million in dividends on its common stock.
At the end of the third quarter of 2016, Acme had close to $60 million in working capital and an impressive current ratio of 5.42.
Conclusion
Acme United’s brands excel across the board. The guidance for 2016 was increased for the second quarter in a row!
Meanwhile, new products are constantly being introduced, which lays the groundwork for continued growth in 2017. Westcott, for instances, is offering new school, home and office products, such as glue guns with ceramic coatings that are ideally suited for the craft, office and shipping work places. It has new heavy duty pencil sharpeners with proprietary titanium blades for the school market and it’s expanding the line of ceramic box cutters for heavier duty use.
Moreover, the first aid division introduced an app earlier this week at the National Safety Council Show in Anaheim, California, which allows customers to reorder first aid supplies in a quick, convenient and user-friendly matter. It received lots of positive responses at the conference and will be implemented in 2017.
Clauss, Cuda, Camillus and DMT products will continue to benefit from expanded distribution in the mass market and specialty stores. For Cuda, new freshwater fishing tools will be launched and several product line extensions, such as carbon fiber gaffs and nets, will be introduced.
On top of all that, Mr. Johnsen again indicated that the Company will be looking for more accretive acquisition candidates in 2017.
The Company continues to execute very well. Distribution is gained both online and off, gross margins are above 35%, the balance sheet is very healthy, and the dividend is increased every six to eight quarters. Buy recommendation.
| Smallcaps.us Advice: Buy | Price Target: $59.86 | Latest Company Report (pdf) |
| For important disclosures, please read our disclaimer. | ||