10% Earnings Increase in Second Quarter Prepares Acme United for Solid Remainder of 2019

Acme United (US: ACU – $20.10), the worldwide supplier of cutting devices, measuring instruments and first-aid products for school, home, office, industrial and hardware use announced that sales for the second quarter ended June 30, 2019, reached $40.2 million, an increase of 1% compared with sales of $39.8 million in the second quarter of 2018.

Sales during the quarter benefited from strong performance of first aid products, Camillus hunting and camping items, and Cuda fishing tools. At the same time, sales of Westcott back to school items were softer than in last year’s period. The trend of lower back to school sales in the second quarter is becoming more obvious as more parents purchase school supplies online in the third quarter.

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 from online retailers, such as Amazon and Jet, are only received in the third quarter.

Despite sales growth being modest, net income in the second quarter of 2019 reached $2.7 million, or $0.77 per diluted share, compared to $2.4 million, or $0.67 per diluted share, for the same period in 2018, increases of 10% and 15%, respectively.

The major contributor to this result was the cost savings program that Acme United implemented in the fourth quarter last year. It let go of a number of people, which reduced personnel expenses by about $700,000 annually. In addition, third party sales reps were replaced by in-house people. Acme also cut back on print advertising and put more focus on social media, resulting in annual savings of $400,000. All these saving are going straight to the bottom line.

For the six months, ended June 30, 2019, net sales were $71.6 million, compared to $71.5 million in the same period in 2018, an increase of 1%. Net income for the six months ended June 30, 2019 was $3.5 million or $1.01 per diluted share, compared to $3.2 million or $0.88 per diluted share in the comparable period last year, increases of 9% and 15%, respectively.

Walter C. Johnsen, Chairman and CEO commented the following on the outlook for the second half of 2019, “Revenues for the next 6 months are forecast to have solid growth in first aid, Camillus and DMT products. Sales of Westcott school and office products are expected to be consistent with last year. Accordingly, we are reiterating our financial guidance for 2019 of approximately $140 to $143 million in sales, net income of $5.0 to $5.3 million and $1.41 to $1.50 earnings per share.”

 

	Three Months Ended June 30		Six Months Ended June 30
Amounts in $000’s	2019	2018	2019	2018
Net Sales	40,220	37,751	71,590	71,460
Cost of Goods Sold	25,449	25,039	45,016	44,624
S, G & A Expenses	11,003	11,087	21,271	21,846
Income From Operations	3,768	3,625	5,303	4,990
Interest Expense	491	445	994	850
Other Expense	14	74	12	61
Pre-Tax Income	3,263	3,106	4,297	4,079
Income Tax Expense	592	670	819	879
Net Income	2,671	2,436	3,478	3,200
Earnings Per Share	0.77	0.67	1.01	0.88
Shares Out. – Diluted	3,485	3,624	3,429	3,642
Selected income statement data for the quarters and six months ended June 30, 2019 and June 30, 2018. Source: Company Press Release

 

Gross margin was 36.7% in the three months ended June 30, 2019, compared to 37.0% in the same period in 2018. Gross margin was 37.1% in the six months ended June 30, 2019, compared to 37.6% in the same period in 2018.

Outstanding Performance in Europe

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 estimate.

 

	Three Months Ended June 30
Amounts in $000’s	2019	2018
U.S.	34,963	34,778
Canada	2,214	2,472
Europe	3,043	2,501
Estimated sales per segment for the second quarter ended June 30, 2019 (Source: Smallcaps Investment Research) and actual sales per segment for the second quarter ended June 30, 2018 (Source: Company Filing)

 

In the U.S. segment, net sales for the three months ended June 30, 2019 increased 1% compared to the same period in 2018. Sales of first aid and safety products were strong; however, there was softness in sales of certain school and office products in particular pencil sharpeners. On the other hand, the recently introduced Westcott glide scissors for precision cutting have been well-received. Net sales for the first six months of 2019 in the U.S. segment were constant compared to the same period in 2018.

Net sales in Canada for the three and six months ended June 30, 2019 decreased 10% in U.S. dollars and 6% in local currency compared to the same prior-year periods, due to a decline in the office channel.

Net sales in Europe for the three months ended June 30, 2019 increased 22% in U.S. dollars and 28% in local currency compared to the same 2018 period. The sales increase in the quarter was mainly due to a large back-to-school promotion to a major retailer. Net sales for the six months ended June 30, 2019 increased 13% in U.S. dollars and 22% in local currency compared to the first half of 2018 mainly due to new customers in the office products and first aid channels, and continued growth of DMT sharpening products.

Balance Sheet as of June 30, 2019

The Company’s bank debt less cash on June 30, 2019 was $41.0 million compared to $46.3 million on June 30, 2018. During the twelve-month period ended June 30, 2019, the Company distributed $1.5 million in dividends on its common stock, repurchased $0.4 million in treasury stock and generated $8.4 million in free cash flow, including a $2.9 million reduction in inventory.

 

Amounts in $000’s	June 30, 2019	June 30, 2018
Cash and Cash Equivalents	1,924	1,894
Accounts Receivable	35,462	34,511
Inventories	39,615	42,510
Total Current Assets	79,086	81,440
Property and Equipment	14,200	14,576
Total Assets	117,030	118,578
Accounts Payable	9,931	12,972
Other Current Liabilities	6,865	4,373
Total Current Liabilities	18,050	17,612
Bank Debt	39,388	44,318
Total Liabilities	62,228	66,354
Total Stockholder Equity	54,802	52,224
Selected balance sheet data for the quarters ended June 30, 2019 and June 30, 2018. Source: Company Press Release

 

The Company expects to end 2019 with approximately $36 million of net debt and to generate between $5 million and $6 million in free cash flow.

Cuda Impresses at ICAST Show

The International Convention of Allied Sportfishing Trades, better known as ICAST, is the world’s largest sport fishing industry trade show. ICAST is the ultimate showcase for the latest innovations in gear, accessories and apparel that help to make a day on the water both exciting and rewarding. Keeping up with that tradition, Cuda launched many new tools at the show with unique features and benefits. Most tools are scheduled to be available in stores from fall in the U.S., Canada, and Europe.

One of the most exciting new products at ICAST this year was the Cuda Bait Dehooker, which quickly and easily removes bait from Sabiki® rigs (click to see video). Featuring an ergonomic trigger handle for rapid bait release fishermen are able to safely control hooks and line while dehooking. The handle has the Cuda Scale Pattern, which provides a secure and comfortable grip in all environments and conditions.

The Cuda team had excellent meetings at the show with existing and potentially new customers. Mr. Johnsen commented, “It was probably the best ICAST we’ve ever had.”

Conclusion

Acme United again achieved a solid second quarter. Camillus, Cuda, and DMT businesses continue to grow, and are expected to show a strong second half of the year.

Especially DMT looks promising. The diamond sharpener brand recently expanded its production capacity and is beginning to fill significant back orders. Demand for DMT products have been particularly strong with industrial and hardware accounts in the U.S. and Europe.

Moreover, the SmartCompliance business 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.

Also, the Company has reduced its net debt by over $5.0 million during the past 12 months and continues to seek tuck-in acquisitions.

Mr. Johnsen concluded, “Our cash flow is strong and we plan to continue to pay down debt. We also continue to evaluate acquisition opportunities. They’ve helped the Company more than double since 2010. And we anticipate acquisitions to continue this trajectory in the future, building value for our shareholders in the process.” Smallcaps Recommendation: BUY.

Smallcaps.us Advice: Buy	Price Target: $59.86	Latest Company Report (pdf)
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