Acme United Looks Forward To Growth in 2023

Acme United Corp. (US: ACU – $25.55) reached sales of $193.9 million in 2022, compared to $182.1 million the prior year, an increase of 7%, delivering its 13th consecutive year of record sales!

Despite the solid sales increase, the Company encountered a difficult macroeconomic environment last year as it faced supply chain issues at ports in Asia, the US and Europe; war in the Ukraine; rapidly increasing container expenses; product costs that continually increased; wage inflation; rising interest rates; and shortages of workers.

To counter these circumstances-beyond-its-control, the Company swiftly implemented cost reductions, which are expect to generate over $5.0 million in savings during 2023. These reductions relate to improved efficiency in production and warehouse facilities, reduced transportation costs, and lower spending in SG&A than in 2022.

Chairman and CEO Walter C. Johnsen was quoted saying, “We expect the combination of continued revenue growth, $5.0 million of cost and productivity savings, the normalization of supply chain expenses, and reduced debt to position the Company for a much improved year in 2023.”

Achievements in 2022

While Acme’s financial performance fell short of what it had planned, it achieved quite a lot of milestones that position the Company for growth in 2023 and beyond.

In the first aid area, which now accounts for 55% of Acme’s sales, it broadened its product lines, expanded distribution in the industrial and retail markets in the United States, and integrated the Med-Nap line of prep-pads and BZK wipes into the refills.

Acme also acquired Keene, New Hampshire based Safety Made in June 2022 entering the market for personalized medical and safety products. In September 2022, it acquired Ready 4 Kits and merged it into Safety Made.

In addition, a new generation of first aid cabinets was introduced, providing an easier option for replenishment of refills to customers. In fact, sales of refills in 2022 were a fast-growing annuity portion of the business.

The Westcott school and office line performed well in 2022, despite a very difficult retail environment. Westcott continues to be the largest supplier of scissors globally, and arguably is the world’s most recognized scissors brand. Also, the Westcott line of ceramic cutters to open boxes and packages was expanded.

Moreover, the Camillus hunting knife category was a solid contributor in 2022 and has gained new hardware and mass market distribution for 2023, while the Cuda fishing knife and tool product family has grown from its roots in the offshore fishing market to best-in-class freshwater tools developed for a rugged environment.

Segments: Tough Times Around The Globe

Acme United reports financial information on three separate business segments: the United States (including Asia), Canada and Europe. Exact revenues per segment for 2022 will be available in the 10-K report, which will be filed in a few days. However, Acme announced for each segment the percentage by which revenues increased or decreased compared with last year. Based on those numbers, we provide the following estimate.

	Year Ended December 31
Amounts in $000’s	2022	2021
U.S.	165,236	152,475
Canada	14,065	14,341
Europe	14,661	15,272
Estimated sales per segment for the year ended December 31, 2022 (Source: Smallcaps Investment Research) and actual sales per segment for the year ended December 31, 2021 (Source: Company Filing)

During the fourth quarter, sales in the U.S. segment decreased 2% in the quarter but increased 8% for the year ended December 31st. The decline in the quarter was mainly due to some large customers reducing their inventory. The growth for the year was primarily due to increased sales of first aid and medical products.

European sales for the three months ended December 31, 2022 were constant in U.S. dollars but increased 13% in local currency compared to the same period of 2021. Net sales for the year ended December 31, 2022 decreased 2% in U.S. dollars but increased 10% in local currency compared to the same period of 2021. The growth in the three and twelve months was mainly due to new customers in the office channel. In addition, the European team continues to gain market share in first aid and medical products and has secured new listings for 2023.

Net sales in Canada for the fourth quarter of 2022 decreased 22% in U.S. dollars and 16% in local currency compared to the same period in 2021. The sales decline in the fourth quarter was mainly due to reduced consumer demand for knives and fishing tools in comparison to the same period in 2021 when there were unusually high sales of these products driven by the pandemic. Customer inventory reductions also affected the fourth quarter. Net sales for the year ended December 31, 2022 decreased 4% in U.S. dollars and were constant in local currency compared to the same period in 2021.

In Canada, Acme also expanded its first aid and medical business through First Aid Central, which it acquired in 2020. The Company successfully introduced many of its US product lines to global customers in Canada and added major industrial distributors as well as retailers. In fact, at year end, Acme had to lease additional space to double its first aid production capacity in Canada.

Fourth Quarter Financials and Balance Sheet

Acme United’s net sales in the fourth quarter of 2022 were $44.1 million compared to $45.8 million in the same period of 2021, a decrease of 4% (2% in constant currency). The net loss for the fourth quarter of 2022 was $597,000 or minus $0.19 per diluted share compared to a net income of $2.3 million or $0.60 per diluted share for the same period of 2021.

Net sales for the year ended December 31, 2022 were $193.9 million compared to $182.1 million in the same period in 2021, an increase of 7% (8% in constant currency). Net income for fiscal year 2022 was $3 million, or $0.82 per diluted share. Excluding the impact of the PPP loan forgiveness of $3.5 million net income was $10.1 million, or $2.57 per diluted share for the year ended December 31, 2021.

The declines in net income and diluted earnings per share for the three and twelve months ended December 31, 2022 were mainly due to exceptionally high transportation costs and higher interest expense. In total, commencing in the first quarter of 2022, Acme incurred no less than $4.0 million in exceptional supply chain expenses, of which $0.9 million was recognized in the fourth quarter. Fortunately, many of the supply chain issues have now been subsided.

In addition, the fourth quarter of 2022 was impacted because several large retailers, such as Walmart, Target and Amazon, reduced their inventory. The Company is confident that most of the inventory reductions by major customers are in the past now.

	Three Months Ended December 31		Year Ended December 31
Amounts in $000’s	2022	2021	2022	2021
Net Sales	44,104	45,793	193,962	182,088
Cost of Goods Sold	30,021	29,737	130,403	117,287
S, G & A Expenses	14,110	12,999	57,285	52,030
Income (Loss) From Operations	(27)	3,057	6,274	12,771
Net Interest Expense	921	237	2,364	908
PPP Loan Forgiveness	–	–	–	3,508
Other Income (Expenses)	108	18	(246)	(196)
Pre-Tax Income	(839)	2,838	3,663	15,175
Income Tax Expense (Benefit)	(242)	500	628	1,519
Net Income (Loss)	(597)	2,338	3,035	13,656
Earnings Per Share – Diluted	(0.17)	0.60	0.82	3.45
Shares Out. – Diluted	3,537	3,915	3,719	3,955
Most important income statement data for the quarters and full year ended December 31, 2022 and December 31, 2021. Source: Company Press Release

Interest expense for the fourth quarter of 2022 was $920,000 compared to $240,000 in the fourth quarter of 2021. Interest expense for the year ended December 31 2022 was $2.4 million, compared to $900,000 for the same period of 2021. The increase for both periods was due to higher debt and higher interest rates.

Gross margin was 32% in the fourth quarter of 2022, compared to 35.1% in 2021. The gross margin for the year ended December 31, 2022 was 32.8% compared to 35.6% in 2021. The decline in both periods was primarily due to higher ocean freight and related transportation costs for imported goods. Also contributing to the decline were weaker currencies in Europe and Canada where Acme purchases most of its inventory in US dollars.

SG&A expenses for the fourth quarter of 2022 were $40 million or 32% of sales compared with $30 million or 28.4% of sales for the same period of 2021. SG&A expenses for the year ended December 31, 2022 were $57.3 million or 29.5% of sales compared with $52 million or 28.6% of sales in 2021.

	Year Ended December 31
Amounts in $000’s	2022	2021
Cash and Cash Equivalents	6,100	4,843
Accounts Receivable	32,603	34,221
Inventories	63,325	53,552
Total Current Assets	105,600	95,251
Property and Equipment	26,416	24,027
Total Assets	164,377	144,439
Accounts Payable	10,514	8,977
Other Current Liabilities	10,078	9,880
Total Current Liabilities	22,127	20,246
Long Term Debt	49,916	33,037
Total Liabilities	85,347	67,357
Total Stockholder Equity	79,030	77,082
Most important balance sheet data for the periods ended December 31, 2022 and December 31, 2021. Source: Company Press Release

The Company’s bank debt less cash as of December 31, 2022 was $55 million compared to $40 million as of December 31, 2021. During the year ended December 31, 2022, the Company paid approximately $11 million for the acquisition of the assets of Live Safely Products, LLC and paid $1.9 million in dividends on its common stock.

The Company increased its inventory during the 12-month period by approximately $10 million to prepare for continued growth and to be positioned to offset the impact of supply chain disruptions related to COVID-19. The increase in inventory was also a result of higher product costs. During the fourth quarter of 2022, Acme decreased its inventory by $2.9 million. The goal is to reduce inventory by another $5 million in 2023.

Conclusion

During 2022, Acme United initiated cost reductions that are anticipated to save over $5 million in 2023. These savings are due to improved efficiency in the production and warehouse facilities, reduced transportation costs and lower spending in SG&A than in 2022.

At the same time, the Company has plenty of growth opportunities in 2023, including new first aid and medical placements in the industrial and retail markets, new Westcott craft products in the mass and ecommerce markets, new customers and programs with Camillus hunting and camping tools and expanded sales of Spill Magic products to large mass market retailers.

While the Company is not providing any guidance for 2023 at this moment, Mr. Johnsen did mention during Thursday’s conference call that he expects growth over the 2022 level with much improved profitability. In fact, he said that he’s expecting a solid performance in the first and second quarter of 2023.

Despite the weaker numbers that were presented, the stock closed up on the day of the announcement of the results, showing believe by investors in a brighter 2023 for Acme United. Smallcaps Recommendation: BUY.

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