Acme United Q3 EPS Up 50%. Headed for Absolute Record Year

Acme United Corporation (US: ACU – $27.20) reached net sales of $43.3 million in the third quarter ended September 30, 2020, compared to $37.0 million for the same period of 2019, a solid increase of 17%. Net income for the three months ended September 30, 2020 was $1.57 million, or $0.46 per diluted share, compared to $1.05 million, or $0.30 per diluted share, for the comparable period in 2019, an astonishing increases of 49% and 53%, respectively.

The Company’s first aid and safety business was the true driver behind this success. Acme gained multi-million dollar contracts at a very large home improvement chain, as well as a huge wholesale club, resulting in third quarter first aid sales of about $20 million. Personal protection kits, for example, that include gloves, sanitizers, masks, wipes and thermometers, attracted many existing and new customers.

In addition, First Aid Central (FAC), which was acquired by Acme in January of 2020, contributed about US$1.1 million to third quarter revenues. FAC, which is based in Laval, Canada, expanded Acme‘s ability to provide safety products which meet Health Canada regulations through the Company’s existing Canadian customer base as well as its large multinational customers.

In addition, the Camillus hunting, Cuda fishing, and DMT sharpening product lines showed excellent growth. Because people seek more isolated activities, away from large crowds, these brands will remain strong performers as COVID-19 continues to spread. In fact, Acme is still increasing the production capacity of its DMT diamond sharpening business, which is helping to propel its growth.

DMT continues to increase production to satisfy growing demand

More surprisingly, sales of the Westcott school and office products brand were approximately even with last year’s third quarter. Sales to industrial and office customers, such as restaurants, hotels, and food service companies, were severely impacted as those businesses were mostly closed. Sales to the mass and e-commerce markets however, were at record highs. When schools reopened in August and September, sales truly boomed.

Remember, that there are approximately 3.8 million children born a year in the United States. They all need to be properly equipped each year when they’re headed off to school. Acme United started focusing on e-commerce sales many years ago with the result that the Company has gained significant knowledge and capabilities to be on the forefront at online platforms that matter.

Acme’s Chairman and CEO Walter C. Johnsen said, “We achieved very strong results in our third quarter by successfully managing and executing across all of our markets under very difficult circumstances. We have successfully shifted our business to support mass market and e-commerce customers, which has compensated for weak sales to offices, schools, restaurants, and other businesses adversely impacted by the COVID-19 pandemic.”

The Company gave no guidance, but knowing that in the first nine months of 2020 it achieved earnings per share (EPS) of $1.75, and also knowing that it reached EPS of $.28 in the fourth quarter last year, it is very realistic that Acme United will realize total fiscal year 2020 EPS of $2.10. This is an increase of more than 30% compared to 2019 earnings per share of $1.60.

Third Quarter and Nine Months Financials

Acme’s net sales for the nine months ended September 30, 2020, were $123.1 million compared to $108.6 million in the same period in 2019, an increase of 13%. Net income for the first nine months ended September 30, 2020 was $6.0 million, or $1.75 per diluted share, compared to $4.5 million or $1.32 per diluted share in the comparable period last year, both increases of about 33%.

Three Months Ended
September 30
Nine Months Ended
September 30
Amounts in $000’s
2020
2019
2020
2019
Net Sales
43,316
36,995
123,133
108,585
Cost of Goods Sold
28,360
23,861
78,594
68,877
S, G & A Expenses
12,832
11,408
36,023
32,679
Income From Operations
2,124
1,726
8,516
7,029
Interest Expense
168
469
722
1,463
Other Income (Expense)
35
(40)
(2)
52
Pre-Tax Income
1,991
1,217
7,792
5,514
Income Tax Expense
412
158
1,737
977
Net Income
1,579
1,059
6,055
4,537
Earnings Per Share
0.46
0.32
1.81
1.35
Shares Out. – Diluted
3,461
3,486
3,454
3,446
Selected income statement data for the quarters and nine months ended September 30, 2020 and September 30, 2019. Source: Company Press Release

Gross margin was 34.5% in the three months ended September 30, 2020, compared to 35.5% in the same period in 2019. Gross margin was 36.2% in the nine months ended September 30, 2020, compared to 36.6% in the same period in 2019.

Gross margins were impacted by COVID-19 expenses, such as payment of extra compensation to employees, and additional cleaning and maintenance at the Company’s facilities. Acme expects to continue to operate with higher COVI-19 related costs for at least the coming year.

SG&A expenses for the third quarter of 2020 were $12.8 million or 30% of sales compared with $11.4 million or 31% of sales for the same period of 2019. SG&A expenses for the first nine months of 2020 were $36 million or 29% of sales compared with $32.7 million or 30% of sales in 2019.

Also noteworthy is the significant drop in interest expenses. This is due to the sharp decline in interest rate on its $50 million line of credit with HSBC Bank. Acme currently borrows at around 2 percent.

Solid Third Quarter Results in All Segments

Acme United reports financial information on three separate business segments: the United States (including Asia), Canada and Europe.

Exact revenues per segment for the third quarter will be available in the 10-Q, which will be filed mid-November. However, Acme announced for each segment the percentage by which revenues increased or decreased compared with last year’s third quarter. Based on those numbers, we can give a fair estimate.

Three Months Ended
September 30
Amounts in $000’s
2020
2019
U.S.
37,799
32,780
Canada
2,216
1,775
Europe
3,301
2,440
Estimated sales per segment for the third quarter ended September 30, 2020 (Source: Smallcaps Investment Research) and actual sales per segment for the third quarter ended September 30, 2019 (Source: Company Filing)

In the U.S. segment, net sales for the three months ended September 30, 2020 increased 12% compared to the same period in 2019. Net sales for the first nine months of 2020 in the U.S. segment increased 11% compared to the same period in 2019. The improvement was mainly attributable to strong sales of first aid and safety products, primarily due to continued market share gains in the industrial, safety, home improvement, mass market and e-commerce channels. In addition, there was a surge in demand for first aid and safety products related to COVID-19. These sales amounted to approximately $1.5 million in the third quarter and $3.0 million for the nine months ended September 30, 2020.

In Europe, sales for the third quarter of 2020 increased 35% in U.S. dollars and 32% in local currency compared to the third quarter of 2019. Net sales for the nine months ended September 30, 2020 increased 17% in both U.S. dollars and local currency compared to the first nine months of 2019. The sales increase for both periods was primarily due to increased sales of Westcott and Camillus product in the e-commerce channel as well as higher sales of DMT sharpening product.

Net sales in Canada, excluding First Aid Central products, for the third quarter of 2020 increased 25% in both U.S. dollars and local currency compared to the same period in 2019 primarily due to an easing of COVID-19 lockdown restrictions and a shift of back-to-school sales from the second quarter to the third quarter. However, year-to-date sales were impacted by the earlier office and store closings. As a result, sales for the nine months ended September 30, 2020 decreased 10% in both U.S. dollars and local currency compared to the first nine months of 2019. Including First Aid Central, sales in the Canadian segment increased 53% year-to-date.

It is very remarkable that Acme’s sales got a boost both in Europe and Canada after offices and schools reopened. The main reason for this might be that Acme United remained open and available for its customers during the lockdown, while many of its competitors temporarily shut their doors.

Balance Sheet as of September 30, 2020

The Company’s debt less cash on September 30, 2020 was $34.4 million compared to $35.9 million on September 30, 2019.

Amounts in $000’s
September
30, 2020
September
30, 2019
Cash and Cash Equivalents
3,031
5,698
Accounts Receivable
32,154
30,635
Inventories
48,351
38,970
Total Current Assets
85,678
77,090
Property and Equipment
14,341
14,006
Total Assets
123,017
114,224
 
 
 
Accounts Payable
9,251
7,217
Other Accrued Liabilities
13,376
8,202
Total Current Liabilities
23,741
16,606
Bank Debt
30,703
38,125
Total Liabilities
62,421
59,200
Total Stockholder Equity
60,596
55,024
Selected balance sheet data for the quarters ended September 30, 2020 and September 30, 2019. Source: Company Press Release

During the twelve-month period ended September 30, 2020, the Company paid approximately $2.1 million for the acquisition of the assets of First Aid Central, distributed $1.6 million in dividends on its common stock, and generated $6.5 million in free cash flow.

Inventory was increased by approximately $9 million in anticipation of further growth. Moreover, it provides a buffer to offset the impact of potential supply chain interruptions related to COVID-19. In case those interruptions don’t occur, Acme expects to sell the excess inventory during 2021 through normal sales.

At the end of the third quarter of 2020, Acme had close to $62 million in working capital and a solid current ratio of 3.60.

Conclusion

Acme United is truly running on all cylinders. The Company is achieving strong growth quarter after quarter and year after year, while many of its competitors are crumbling. It is doing so by being bold during these exceptional times.

While competitors are cutting back on advertising, cutting back on new product development, and firing people, Acme is doing the exact opposite. It is putting more money into online advertising, it has intensified product development, and is adding staff.

In short, the Company is executing its growth plan by aggressively seeking new business, while managing new and continuing problems related to the COVID-19 pandemic.

In addition, it continues to look for opportunistic acquisitions. Remember that Acme acquired the assets of First Aid Central in January 2020. So far, FAC has contributed approximately $3.3 million in sales in 2020. First Aid Central has the potential to become a major supplier of first aid products in Canada.

Over the years, Acme United has gained a strong reputation of finding attractive acquisition targets and integrating them quickly in the organization.

Acme’s shares reached a new 52-week high after these excellent financials were announced this week. This is certainly not the end of the ride, as the current and following quarters look to be strong as well. In fact, because Acme has remained available for customers worldwide during the lockdown, we feel that customers will remember when COVID is a thing of the past. Smallcaps Recommendation: BUY.

Smallcaps.us Advice: BuyPrice Target: $46.95Latest Company Report (pdf)
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