Acme United Announces Acquisition and 2010 Results

Acme United Corp. (ACU – $9.75) surprised us with not one, but two major announcements this week. First it said that it acquired Pac-Kit Safety Equipment Company, a manufacturer of first aid kits, which is complementary with the Company’s existing PhysiciansCare brand. Next, Acme reported fiscal year 2010 results and explained the corporate goals and strategies for the current year.

2010 Results

Net sales for the year ended December 31, 2010 were $63.1 million, compared to $59.1 million in the same period in 2009, an increase of 7%. This was mainly due to market share gains with the Company’s new non-stick products and iPoint pencil sharpeners.

Net income for the fiscal year 2010 was $2,573,000, or $.81 per diluted share, compared to $2,842,000, or $.85 per diluted share, last year.

	Three Months Ended December 31		Twelve Months Ended December 31
Amounts in $000’s	2010	2009	2010	2009
Net Sales	13,360	13,422	63,149	59,149
Cost of Goods Sold	8,315	8,248	39,784	37,075
S, G & A Expenses	4,968	4,881	20,385	19,047
Income From Operations	77	293	2,980	3,027
Other Income (Expense)	108	(29)	(69)	426
Pre-Tax Income	148	266	2,911	3,453
Income Tax Expense (benefit)	(32)	(464)	338	611
Net Income	180	731	2,573	2,842
Earnings Per Share	0.06	0.22	0.81	0.85
Shares Out. – Diluted	3,121	3,305	3,194	3,353
Most important income statement data for the quarters and twelve months ending December 31, 2010 and December 31, 2009. Source: Company Press Release

* Note that the tax rate in 2010 was 12% and 18% in 2009. These low rates were due to tax credits associated with donating the Bridgeport property. Acme’s tax rate will return to more normal levels of about 30% in 2011.

What Happened With Earnings In 2010?

Although Acme remained solidly profitable in a difficult environment for office products, its net income for fiscal year 2010 decreased by about 9% compared with 2009. Two important items were responsible for this.

• First, the earnings for 2009 were higher due to a number of one-time items. In the third quarter of 2009 earnings included a one time pre-tax income of $458,000 because the remediation of the Company’s old Bridgeport property, which was sold in December 2008, went much better than originally projected. In the fourth quarter of 2010 another pre-tax income of about $100,000 was recorded for the same reason.

  Also, in the fourth quarter of 2009 the Company donated land to the City of Bridgeport, CT and medical products to Americares for Haitian relief. As a result it recorded a tax benefit of $464,000.

• Second, profits in 2010 were offset by unexpected airfreight expenses of more than $600,000. Acme had just completed inventory reductions when it was confronted with labor shortages and production constraints in the Asian factories during the back to school season. As a result, Acme had to quickly fly in the goods from China to be able to fulfill their orders.

  The Company has taken some decisive measures to tackle this issue. It increased its inventory by almost $5 million in preparation for back to school, it strengthened its operational leadership in Asia and it increased its capacity and demand planning.

Pac-Kit Acquisition

Pac-Kit today sells first aid kits, industrial stations and refills, emergency medical travel and recreational kits, etc. It is known for tailoring these items to meet user requirements and for rapid turnaround. Acme United purchased the accounts receivable, inventory, equipment, brands, historical records and photographs for $3.4 million. Pac-Kit’s revenues are expected to range between $4 and $4.5 million for the remaining 10 months of 2011.

As with other Acme brands, like Westcott and Camillus, Pac-Kit too has a long and vivid history dating back to the 19th century. Its early first aid kits were chosen by global explorers like Captain Robert Scott, Admiral Peary and Theodore Roosevelt on their expeditions.

Pac-Kit is anticipated to contribute $100,000 to $150,000 in earnings this year before operational efficiencies. In the short term, Acme’s management sees cost savings with the purchase of raw materials and with its direct sourcing capability in China whereas Pac-Kit had to use more intermediaries. In the longer term, Acme may integrate its North Carolina manufacturing facility (assembly of first aid kits) into the bigger Pac-Kit manufacturing facility in Connecticut.

2011 Outlook

Acme United aims at organic growth between $5 and $7 million for 2011, which is expected to come from:

• Continued strong iPoint pencil sharpener and non-stick products sales;
• The Clauss brand, which saw its sales increase by 40% in 2010. The same growth rate is expected this year;
• Camillus Knives that sees its sales rise month by month;
• The recently launched garden tools that receives enthusiastic first reactions from customers.

Pac-Kit, as described above, is to add $4 to $4.5 million in sales. With the expected cost savings, it should immediately be a nice contributor to earnings.

So in total, Acme’s sales estimate for 2011 is between $72 and $74.5 million.

Also, severe measures were taken to make the European segment profitable.

• Prices were raised, which most customers accepted;
• Although more salespeople were hired, total headcount was reduced by eight; and
• Expenses were reduced between 400,000 and 600,000 Euro.

Conclusion

Acme United still is very profitable and has a solid financial base. Earnings were lower compared with last year, but this was due to one-time items that were tackled head on and which shouldn’t re-occur in the future.

The past few years, Acme invested a lot in new product development (e.g. the Clauss garden tools took 2.5 years to develop). These products are now on the market, but it takes some time to grow them big enough to have an impact on total numbers. Camillus, for instance, entered the market in 2009 and is now growing every month and Clauss product sales are now growing 40% annually.

Finally, there are Acme’s Asian growth opportunities. The new middle-class in Thailand, the Philippines, Indonesia and China has enough money to spend on Acme’s products. That’s why the Company took the strategic decision, earlier this year, to dedicate more resources on increasing its revenues in Asia.

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