Acme United’s Record First Quarter Results Set Stage For Strong 2017
Acme United (ACU – $28.00), the worldwide supplier of cutting devices, measuring instruments and first-aid products for school, home, office, industrial and hardware use, started off the year very strong.
During the first quarter, ended March 31, 2017, the Company achieved sales of $27.7 million, compared to $25.3 million in the first quarter of 2016, an increase of 10%. Net income was $659,000 or $0.18 per diluted share, for the quarter ended March 31, 2017, compared to $565,000 or $0.16 per diluted share for the comparable period last year, an increase of 17% in net income and 13% in earnings per share. Both sales and earnings set a new first quarter record.
The Westcott brand was again a solid contributor to these results. During the past quarter, Acme began shipping a very innovative line of Westcott glue guns (see video below) and glue sticks to retailers in the US. These guns have non-stick internal mechanisms so that the glue sticks don’t clog up the machines. Also, the tips of the guns have non-stick color changing coatings. That way, when the tip of the gun is hot, it turns red and users know not to touch it. When it’s red, it’s also ready to dispense the glue. And when the tip is cool, it’s gray.
The quality of the glue sticks are at, or above, competitive levels. And also the ergonomics of the guns are excellent. Consequently, These products have the potential to impact sales significantly later in the year as additional retailers begin to carry them. The Company expects this to be a multi-million dollar item this year. Even higher sales are expected for 2018.
Also the first aid and safety business saw strong growth through market share gains with Smart Compliance kits and robust first aid resales to online customers. Good to know is that the first aid refill app – which allows customers to reorder first aid supplies in a quick, convenient and user-friendly matter – was recently installed at 40 franchised restaurants. Initial results are very satisfying. The app will soon be installed at other customers as well.
In addition, distribution of Cuda fishing tools was expanded during the first quarter of 2017. Many new tools specifically designed for freshwater fishing, were recently launched in the US, Canada and Europe.
Moreover, the well-known sharpener brand DMT broadened its distribution channels into retail chains such as Walmart and Home Depot, and expanded its Amazon sales.
Finally, the Spill Magic brand, which was acquired early February of this year, already contributed $1.1 million in sales in the first quarter.
| First Quarter Ended March 31 | ||
| Amounts in $000’s | 2017 | 2016 |
| Net Sales | 27,745 | 25,288 |
| Cost of Goods Sold | 17,181 | 16,103 |
| S, G & A Expenses | 9,372 | 8,230 |
| Income From Operations | 1,192 | 955 |
| Interest Expense | 263 | 184 |
| Other Income (Expense) | 9 | 38 |
| Pre-Tax Income | 938 | 809 |
| Income Tax Expense (Benefit) | 279 | 244 |
| Net Income | 659 | 565 |
| Shares Outstanding – Diluted | 3,730 | 3,572 |
| Earnings Per Diluted Share | 0.18 | 0.16 |
| Most important income statement data for the quarters ending March 31, 2017 and March 31, 2016. Source: Company Press Release | ||
Gross margin was 38% in the first quarter of 2017 versus 36% in the comparable period last year. The higher gross margin was primarily due to efficiency improvements in the Company’s first aid operations and a better product mix.
Walter Johnsen, the Chairman and CEO of Acme United, reiterated the guidance for 2017 of approximately $137 million in revenues, up from $125 million last year and $6.7 million in net income, or $1.76 earnings per share, up from a $1.64 in 2016. If the Company can achieve those results, it would set its ninth record year in a row.
Note that the current EPS forecast is $0.02 lower than the guidance previously provided because share count is currently a bit higher.
Exceptional Performance by European 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 first quarter of 2017 will be available in the Company’s 10-Q, which will be filed mid-May. However, Acme announced for each segment the percentage by which revenues increased or decreased compared with the first quarter last year. Based on those numbers, we can give a fair estimation.
| First Quarter Ended March 31 | ||||
| Amounts in $000’s | 2017 | 2016 | ||
| U.S. | 24,453 | 22,526 | ||
| Canada | 1,393 | 1,389 | ||
| Europe | 1,899 | 1,373 | ||
| Estimated sales per segment for the quarter ending March 31, 2017 (Source: Smallcaps Investment Research) and actual sales per segment for the quarter ended March 31, 2016 (Source: Company Filing) | ||||
Net sales in the U.S. segment increased 9% in the first quarter of 2017 compared to the same period in 2016. Growth was especially driven by strong Westcott school and office products sales, the first aid business, DMT sharpeners and the initial contribution by the recently acquired Spill Magic.
In Canada, net sales were constant in U.S. dollars and decreased 3% in local currency compared to the same period in 2016. The Canadian economy continues to be soft and Acme expects its Canadian business to come in about where it did in 2016. There might be a little bit of growth, but not significantly.
Net sales in Europe, on the other hand, increased 38% in both U.S. dollars and local currency compared to the first quarter of 2016 thanks to increased sales and market share gains of Westcott, Camillus, Cuda and DMT products.
Online sales are growing faster than expected in Europe. Although current sales are obviously still much smaller than in the US, there are an equal number of people living in Europe. So the potential is certainly there. Also margins are growing in this segment.
Solid Outlook for 2017
Acme United’s first quarter already showed significant strength, and more growth is expected in 2017.
At Westcott, for example, the new glue guns are available at the largest craft chain in the US. The Company is hopeful that by the end of the year, this will have become a multimillion dollar product, on which to build into 2018.
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.
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.
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.
In addition, the Company is expanding the productive capacity at DMT. The goal is to double the capacity by the end of 2017. Part of Acme’s capital spending this year is earmarked to make that happen.
Finally, 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 is doing very well online, because people are buying refills for their first aid kits at a substantial discount. Also the Westcott business is performing strong online.
Balance Sheet as of March 31, 2017
Three items stand out on Acme’s balance sheet. First, despite its achieved growth during the past 12 months and the acquisition of Spill Magic, the Company’s inventory slightly declined from $37.6 million, at the end of the first quarter last year, to $37.3 million this year.
Although it’s difficult to accomplish – given the uncertainties of unforecast customer requirements – the Company has been actively working to reduce the inventory by narrowing the number of product families, lowering the order quantities, and trying to more carefully align stocks to forecasts.
The goal is to reduce the inventory even further the following quarters. This is important as it also lowers Acme’s debt and increases its cash position.
| First Quarter Ended March 31 | ||||
| Amounts in $000’s | 2017 | 2016 | ||
| Cash and Cash Equivalents | 6,175 | 1,474 | ||
| Accounts Receivable | 21,251 | 19,118 | ||
| Inventories | 37,285 | 37,551 | ||
| Total Current Assets | 67,589 | 60,876 | ||
| Property and Equipment | 8,381 | 7,745 | ||
| Total Assets | 100,204 | 88,290 | ||
| | | |||
| Accounts Payable | 5,731 | 6,279 | ||
| Other Current Liabilities | 3,204 | 2,854 | ||
| Total Current Liabilities | 8,935 | 9,133 | ||
| Long Term Debt | 44,382 | 35,696 | ||
| Total Liabilities | 53,601 | 45,145 | ||
| Total Stockholder Equity | 46,603 | 43,145 | ||
| Most important balance sheet data for the periods ended March 31, 2017 and March 31, 2016. Source: Company Press Release | ||||
Second, the Company’s long-term debt increased from $35.7 million a year ago to $44.4 million on March 31, 2017. As a result, Acme’s bank debt less cash on March 31, 2017 was $38 million compared to $34 million on March 31, 2016.
It’s important to take into account though that during the twelve month period ended March 31, 2017, the Company paid approximately $7.2 million for the acquisition of the assets of Spill Magic and distributed $1.3 million in dividends on its common stock.
And finally, Acme’s cash position increased to 6.2 million, up over $4.7 million compared with a year ago.
It’s also nice to note that the Company’s assets for the first time exceeded the $100 million mark.
Conclusion
Acme United is executing its growth plans in an excellent manner. First quarter sales grew by 10 percent and earnings even by 17 percent, thanks to both organic and external growth.
The outlook for 2017 is bright and the Company seems to be well on its way for another record year. Buy recommendation.
| Smallcaps.us Advice: Buy | Price Target: $59.86 | Latest Company Report (pdf) |
| For important disclosures, please read our disclaimer. | ||