Acme United Confirms Challenging Guidance for 2018 after Second Quarter
Acme United (ACU – $19.90), 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 three months ended June 30, 2018, reached $39.8 million, an increase of 2% compared with sales of $38.8 million in the second quarter of 2017.
Acme’s first aid business, along with its Cuda, Camillus, and DMT brands all recorded record sales in the second quarter. On the other hand, Westcott back-to-school sales, which historically make up a big chunk of total sales in the second and third quarter, declined 5%.
Even more than in the second quarter of last year, Acme is registering less back to school sales in the second quarter to brick and mortar stores and way more online purchases in the third quarter. This is a trend that is expected to become even stronger the following years.
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 is now booked in the third quarter instead of the second.
Accordingly, Walter C. Johnsen, Chairman and CEO of Acme United reaffirmed the Company’s guidance for 2018 of $140 million in revenues, $5.7 million in net income, and $1.53 earnings per share. This compares to sales of $130.6 million, non-GAAP net income of $5.3 million and earnings per diluted share of $1.42 for 2017. As previously reported, the Company’s GAAP net income of $4.1 million for 2017 reflected a $1.2 million non-cash tax charge related to the U.S. Tax Cuts and Jobs Act.
| Three Months Ended June 30 | Six Months Ended June 30 | |||
| Amounts in $000’s | 2018 | 2017 | 2018 | 2017 |
| Net Sales | 39,751 | 38,849 | 71,460 | 66,595 |
| Cost of Goods Sold | 25,039 | 24,366 | 44,624 | 41,548 |
| S, G & A Expenses | 11,087 | 10,572 | 21,846 | 19,922 |
| Income From Operations | 3,625 | 3,911 | 4,990 | 5,125 |
| Interest Expense | 445 | 321 | 850 | 583 |
| Other Income (Expense) | (74) | 29 | (61) | 16 |
| Pre-Tax Income | 3,106 | 3,619 | 4,079 | 4,558 |
| Income Tax Expense | 670 | 773 | 879 | 1,052 |
| Net Income | 2,436 | 2,846 | 3,200 | 3,506 |
| Earnings Per Share | 0.67 | 0.75 | 0.88 | 0.94 |
| Shares Out. – Diluted | 3,625 | 3,780 | 3,642 | 3,744 |
| Selected income statement data for the quarters and six months ended June 30, 2018 and June 30, 2017. Source: Company Press Release | ||||
Net income in the second quarter of 2018 was $2.4 million, or $0.67 per diluted share, compared to $2.8 million, or $0.75 per diluted share, for the same period in 2017, decreases of 14% and 11%, respectively.
For the six months, ended June 30, 2018, net sales were $71.5 million, compared to $66.6 million in the same period in 2017, an increase of 7%. Net income for the six months ended June 30, 2018 was $3.2 million or $0.88 per diluted share, compared to $3.5 million or $0.94 per diluted share in the comparable period last year, decreases of 9% and 6%, respectively.
The declines in net income for the three and six month periods resulted primarily from additions in sales and marketing personnel to accommodate the Company’s growth as well as higher interest rates on the variable rate credit facility.
Gross margin was 37% in the three months ended June 30, 2018, compared to 37% in the same period in 2017. Gross margin was 38% in the six months ended June 30, 2018, compared to 38% in the same period in 2017.
Important to note is that gross margin may improve in the second half of the year as the U.S. dollar has appreciated about 8% against the Chinese renminbi (RMB) since February of this year (see chart below). As a majority of Acme’s goods are manufactured in China and paid for in U.S. dollars, the Company may be able to negotiate some price declines with the Chinese factories.
European Segment Excels
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 | 2018 | 2017 | ||
| U.S. | 34,779 | 34,140 | ||
| Canada | 2,466 | 2,503 | ||
| Europe | 2,506 | 2,206 | ||
| Estimated sales per segment for the second quarter ended June 30, 2018 (Source: Smallcaps Investment Research) and actual sales per segment for the second quarter ended June 30, 2017 (Source: Company Filing) | ||||
In the U.S. segment, net sales for the three months ended June 30, 2018 increased 2% compared to the same period in 2017. Sales of first aid and safety products were $15.0 million, an increase 7%. As noted above, the sales of Westcott school products were lower than the second quarter sales last year due to the timing of shipments. Net sales for the first six months of 2018 in the U.S. segment increased 7% compared to the same period in 2017. Sales of first aid and safety products increased 17% due to market share gains.
Net sales in Canada for the three months ended June 30, 2018 decreased 1% in U.S. dollars and 5% in local currency compared to the same prior-year period. Net sales for the six months ended June 30, 2018 increased 3% in U.S. dollars and were constant in local currency compared to the same period in 2017.
Net sales in Europe for the three months ended June 30, 2018 increased 14% in U.S. dollars and 5% in local currency compared to the same 2017 period. Net sales for the six months ended June 30, 2018 increased 19% in U.S. dollars and 7% in local currency compared to the first half of 2017. Net sales for both periods increased mainly due to new customers in the office products channel, growth in sales of DMT products, and strong e-commerce demand for these products.
Balance Sheet as of June 30, 2018
The Company’s bank debt less cash on June 30, 2018 was $46.0 million compared to $41.3 million on June 30, 2017. During the twelve-month period ended June 30, 2018, the Company purchased its manufacturing and distribution facility in Vancouver, WA for $4.0 million and distributed $1.5 million in dividends on its common stock.
| Amounts in $000’s | June 30, 2018 | June 30, 2017 |
| Cash and Cash Equivalents | 1,894 | 5,674 |
| Accounts Receivable | 34,511 | 32,616 |
| Inventories | 42,510 | 35,638 |
| Total Current Assets | 81,439 | 76,345 |
| Property and Equipment | 14,576 | 9,077 |
| Total Assets | 118,578 | 109,362 |
| | | |
| Accounts Payable | 12,972 | 7,498 |
| Other Current Liabilities | 4,640 | 5,215 |
| Total Current Liabilities | 17,612 | 12,713 |
| Bank Debt | 44,318 | 46,956 |
| Total Liabilities | 66,354 | 60,014 |
| Total Stockholder Equity | 52,224 | 49,348 |
| Selected balance sheet data for the quarters ended June 30, 2018 and June 30, 2017. Source: Company Press Release | ||
Also noteworthy on the Company’s balance sheet is the increase in inventory from $35.6 million at the end of the second quarter last year to $42.5 million at the end of Q2 2018. This is mainly in anticipation of new business opportunities in the second half of the year.
At the end of 2018, the Company expects to have about $37 million in net debt and to generate approximately $4 million in free cash flow.
Conclusion
During the second quarter of 2018, Acme showed record sales performances in many categories and areas, including first aid and safety, Camillus and Cuda cutting products, DMT sharpening tools, Spill Magic absorbents, and the European business.
Although sales of Westcott back to school products were affected in the second quarter by an increasing shift from retail to online, they are expected to strongly rebound in the current quarter.
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!
Also in the third quarter, Acme will roll out its first aid and safety products to the largest industrial distributor. Moreover, Acme initiated a major distribution arrangement with a food service company that has started to take SmartCompliance throughout its entire customer base.
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 DMT, Camillus, and Cuda businesses continue to grow, and are expected to show a strong second half of the year. Furthermore, plenty of new tools will hit the market in the following months.
Mr. Johnsen concluded, “We had a very good first half of the year, and the second half is going to be even stronger”. Recommendation: BUY.
| Smallcaps.us Advice: Buy | Price Target: $59.86 | Latest Company Report (pdf) |
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