Acme United Expects 20% Sales Growth in Second Half of 2017

Acme United Expects 20% Sales Growth in Second Half of 2017 post image

Although Acme United’s (ACU – $27.59) sales and earnings were down in the second quarter, the Company expects to more than make up for it in the third and fourth quarter. It is convinced that it can grow sales by more than 20% in the second half of this year compared with the same period in 2016.

Sales for the three months ended June 30, 2017, reached $38.8 million, a decrease of 5% compared with sales of $41.0 million in the second quarter of 2016. Net income in the second quarter of 2017 declined by 13% to $2.8 million, or $0.75 per diluted share, versus $3.3 million, or $0.91 per diluted share, in the comparable quarter last year.

Oddly enough, the major reason for the decline in both sales and earnings in the second quarter is the Company’s booming online sales activity. While Acme registered about $15 million in online sales in 2016, which was double from the previous year, they continue to grow at a strong pace.

The order and fulfillment patterns for online sales however are profoundly different compared with brick and mortar store sales. They actually differ so much that they are affecting the timing of the Company’s revenues.

Acme United’s second quarter has traditionally been the one in which a majority of the back-to-school products were shipped from the Asian factories to the distribution centers of major retailers. Those retailers would then receive the containers and distribute the products to their stores for sales in July and August.

With online sales though, Acme is receiving orders that closely match the timing of actual purchases by end users. Because in the U.S. and Europe most schools go back in session in August or early September, orders by online retailers, such as Amazon and Jet, are only received in the third quarter. Consequently, a significant part of Acme’s back-to-school business will be booked in the third quarter instead of the second.

Next to the sales shift, revenue was also down in the second quarter because last year there was a large promotion of Westcott products that did not repeat in 2017. However, the Company has a variety of new promotions lined up in the second half of this year, including new Camillus knives, Cuda fishing tools, Westcott glue guns and first aid kits. Those new promotions should more than compensate the loss of the Westcott order.

All in all, the Company is confident that it can grow its revenue with more than 20% in the second half of 2017 compared with the same period last year. This means that earnings will most likely increase even more thanks to the operating leverage.

Accordingly, Acme is reaffirming its guidance for 2017 of $137 million in revenues, $6.7 million net income, and $1.76 earnings per share.

For the six months, ended June 30, 2017, net sales were $66.6 million, compared to $66.3 million in the same period in 2016. Net income for the six months ended June 30, 2017 was $3.5 million or $0.94 per diluted share, compared to $3.8 million or $1.08 per diluted share in the comparable period last year, an 8% decline in net income.

 
Three Months Ended
June 30
Six Months Ended
June 30
Amounts in $000’s
2017
2016
2017
2016
Net Sales
38,849
40,997
66,595
66,285
Cost of Goods Sold
24,366
26,303
41,548
42,406
S, G & A Expenses
10,594
10,054
19,967
18,284
Income From Operations
3,889
4,640
5,080
5,595
Interest Expense
321
211
583
395
Other Income (Expense)
(51)
11
(60)
(27)
Pre-Tax Income
3,619
4,418
4,557
5,227
Income Tax Expense
773
1,151
1,052
1,395
Net Income
2,846
3,267
3,505
3,832
Earnings Per Share
0.85
0.98
1.05
1.15
Shares Out. – Diluted
3,780
3,583
3,744
3,560
Selected income statement data for the quarters and six months ended June 30, 2017 and June 30, 2016. Source: Company Press Release

Gross margin was 37% in the three months ended June 30, 2017, compared to 36% in the same period in 2016. Gross margin was 38% in the six months ended June 30, 2017, compared to 36% in the same period in 2016. The higher gross margin was primarily due to lower costs in the Company’s Vancouver, Washington first aid facility, and by stronger sales of high margin DMT Sharpeners and Spill Magic cleanup materials.

Latest Acquisitions Doing Very Well

Acme United’s latest acquisitions DMT and Spill Magic are both contributing strongly to the Company’s results.

Diamond Machining Technology (DMT) was acquired by Acme United in February 2016 and is the world’s leading innovator of manual diamond sharpening technology. It is renowned for its polka dot pattern diamond surface products.

DMT products are available at chains such as Home Depot, Bass Pro Shops, Grainger, Fastenal, and Amazon. DMT manufactures all its products in the United States and exports worldwide to nearly 50 countries.

Recently, new equipment and machinery was installed to double its production capacity. The business continues to grow in the U.S. and abroad and has high margins.

Spill Magic, a cutting edge manufacturer of absorbents, was acquired in February 2017 and continues to perform well. Its product line has been fully integrated into Acme’s existing first aid business, and it is actively selling products to industrial, retail, food service and school accounts.

One of Spill Magic’s best selling products remains its Spill Response System, which is being used thousands of times every day in national and regional grocery, retail, big box, and countless other retail stores in the United States.

Next to its regular absorbent, Spill Magic recently started offering a wider variety of spill removers. For example, it offers the Biohazard Cleanup Kit, which is an OSHA compliant solution to safely remove blood and bodily fluid spills. The Company recently landed a contract worth $1 million to supply these kits to a major retailer.

In addition, Spill Magic developed the Hazmat Cleanup Kit, which is a completely customizable kit to safely remove hazardous liquid spills. And also the Acid Absorbent Neutralizer, which is a lightweight high performance absorbent that provides quicker and safer response to acid spills.

Spill Magic contributed $1.8 million to Acme’s net sales in the second quarter, and $3.0 million year to date. All in all, the brand’s performance has been above last year’s and Acme’s internal budget.

European Segment On a Roll

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-August. However, Acme announced for each segment the percentage by which revenues increased or decreased compared with last year’s second quarter. Based on those numbers, we can give a fair estimation.

 
Three Months Ended
June 30
Amounts in $000’s
2017
2016
U.S.
34,116
36,296
Canada
2,514
2,646
Europe
2,219
2,055
Estimated sales per segment for the second quarter ended June 30, 2017 (Source: Smallcaps Investment Research) and actual sales per segment for the second quarter ended June 30, 2016 (Source: Company Filing)

In the U.S. segment, net sales for the quarter ended June 30, 2017 decreased 6% compared to the same period in 2016 due to certain back-to-school promotions that did not repeat this year. Additionally, as noted above, the change from brick and mortar sales to online sales is causing some of the back-to-school business to move to the third quarter. Net sales for the first six months of 2017 were constant compared to the same period in 2016.

Net sales in Europe for the three months ended June 30, 2017 increased 8% in U.S. dollars and 10% in local currency compared to the same 2016 period. Net sales for the six months ended June 30, 2017 increased 20% in U.S. dollars and 23% in local currency compared to the first half of 2016. Net sales for both periods increased due to new customers in the office and sporting goods channels. Especially Westcott office products, Cuda fishing tools and DMT sharpening products sold well.

Net sales in Canada for the three months ended June 30, 2017 decreased 5% in U.S. dollars and 2% in local currency compared to the prior-year period. Net sales for the six months ended June 30, 2017 decreased 4% in U.S. dollars and 2% in local currency compared to the same period in 2016.

Solid Inventory Improvement

The Company’s long-term debt less cash on June 30, 2017 was $41.3 million compared to $38.7 million on June 30, 2016. This is a remarkable achievement knowing that during 12-month period, Acme purchased the assets of Spill Magic for $7.2 million and paid $1.3 million in dividends on its common stock. The Company generated $7.2 million in free cash flow.

Amounts in $000’s
June 30, 2017
June 30, 2016
Cash and Cash Equivalents
5,674
2,087
Accounts Receivable
32,616
34,646
Inventories
35,638
38,416
Total Current Assets
76,345
77,573
Property and Equipment
9,077
7,704
Total Assets
109,362
104,728
 
 
 
Accounts Payable
7,498
11,573
Other Current Liabilities
5,215
6,453
Total Current Liabilities
12,713
18,026
Bank Debt
46,956
40,821
Total Liabilities
60,014
59,202
Total Stockholder Equity
49,348
45,526
Selected balance sheet data for the quarters ended June 30, 2017 and June 30,
2016. Source: Company Press Release

Acme also succeeded in reducing its inventory. Since last year, it was reduced with almost $2.8 million or 7%, despite the acquisition of Spill Magic in the meantime. As this is an ongoing process, inventory might be cut even further.

Further Dividend Increase

More good news was announced earlier this month as the Company increased its quarterly cash dividend with 10% to $0.11 per share.

Walter C. Johnsen, Chairman and CEO of Acme United, said, “This is Acme United’s tenth dividend increase since 2004. The Company continues to make good business progress and we are delighted to provide this additional return to shareholders. Our balance sheet is strong and we are confident in the business.”

Conclusion

For those not paying close attention this might have been a disappointing quarter with both revenues and earnings down. However, knowing that a strong second half of 2017 with more than 20% revenue growth is expected, it looks like Acme is going to have another robust year.

Acme’s online sales are growing very rapidly, particularly at Amazon, and also at Jet, which is part of Walmart. The Company has a full team of people working on online content, reviews, and search optimization. This is paying off. In particular, the first aid area and the Westcott business are performing strong online.

As for Spill Magic, Acme aims to expand its distribution into the office channel, in chains such as Staples, Office Depot, United Stationers, or SP Richards. In Europe, it could be Aldi or Lidl, and in Canada, it could be any number of major retailers. The Spill Magic absorbents could also do well in the industrial market with distributors such as Granger, McMaster-Carr, Fastenal, as well as online markets such as Amazon.

In addition, the Company has recently doubled the productive capacity at DMT. The brand is growing in the United States and in Europe.

Also first aid continues to be one of Acme United’s growth drivers. The SmartCompliance business, for example, is becoming a big success. This is a typical razor/razorblade sales model, as Acme United initially benefits from the placement of the first aid kits, and then as people use the components, there’s a strong resale business. In fact, revenues from refills about equal sales of the kits.

Earlier this week, the Company officially launched its FAO SafetyHub app, which provides a platform to manage and refill First Aid Only SmartCompliance cabinets. Users can search and scan barcodes on individual first aid products, as well as place requisitions for ANSI & OSHA compliant first aid kits. This application allows requisitions to be saved, placed, or tracked from a mobile device or tablet.

Acme’s strategy to refill the kits through the internet is contrary to service people in delivery vans who will typically go into different locations to fill the first aid kits and then come back on a regular basis. The latter is obviously a time consuming and very expensive model, as the cost of the individual sales staff, the truck, the employee, and benefits have to be taken into account. Consequently, Acme United is clearly gaining share in this $600 million market segment.

Finally, the Company’s balance sheet is very healthy with increasing cash and an ongoing effort to reduce its inventory. Recommendation BUY.

Smallcaps.us Advice: BuyPrice Target: $30.25Latest Company Report (pdf)
For important disclosures, please read our disclaimer.

0 comments… add one

Leave a Comment