Acme United Remains On Track For Record Sales in 2022

For the second quarter, ended June 30, 2022, Acme United (US:ACU – $28.80) reported the highest revenues in a quarter in the Company’s history. With net sales of $56.8 million, it achieved an increase of 27% over the second quarter of 2021.

Despite the strong surge in sales, the Company’s earnings for the second quarter were slightly lower compared with 2021 due to several economic and operational challenges. Net income for the quarter was $2.7 million, which was a decrease of 3% from last year after adjusting for a one-time tax credit of $900,000. Earnings per share without the tax credit in 2021, were $0.71 which is similar to 2022.

Westcott was once again a solid contributor to the second quarter results thanks to strong back-to-school sales

Challenges in Q2

The challenges that Acme United faced in the second quarter were plentiful and came in quick succession. The Chinese ports of Shenzhen and Shanghai abruptly closed due to COVID. As a result, a large number of containers had to be rerouted to Ningbo, which caused an extra expense of approximately $500,000 in the second quarter.

In the U.S. ports the situation wasn’t much better. The Los Angeles and Long Beach ports were overwhelmed with containers, while on the East Coast the Ever Forward container ship was stuck, causing week-long delays before containers could be shipped to Acme’s warehouses.

In addition, inland transportation costs grew rapidly due to diesel prices increasing from approximately $4 a gallon in March of 2022 to $5.60 a gallon at the second quarter’s end.

Another major event affecting the world during the past quarter is, of course, the war in Ukraine. Aside from the obvious humanitarian concerns, the war is having an impact on already strained supply chains and global inflation.

As the U.S. is rapidly raising interest rates to combat inflation, the Euro began a rapid decline against the U.S. dollar from about $1.14 to $1.02 to-date. Since Acme pays in dollars for products that are imported into Europe from China, the Company recognized an unanticipated expense of $160,000 in the second quarter.

Price Increases & Cost Reductions

In order to counter these challenges, Acme has taken several initiatives to improve its earnings. First, it has again increased selling prices in the U.S. and Europe.

Secondly, the Company is implementing significant productivity improvements. Last year, it installed new warehouse management software in its largest facility located in Rocky Mount, North Carolina. The Company now expects savings of over $300,000 annually, starting in June 2022, thanks to this new software.

In the Company’s Med-Nap facility in Florida, a robotic filling machine is being installed, which is expected to become operational in the fourth quarter of 2022. Med-Nap manufactures alcohol prep pads, alcohol wipes, benzalkonium chloride wipes (BZK), antiseptic wipes, and other first aid products. The $800,000 investment reduces the cost of buying alcohol wipes and pads abroad and has projected annual savings of $350,000. Even more importantly, it reduces production costs for many Med-Nap products so that potentially new business can be gained in the large domestic medical and defense markets.

Moreover, in the fourth quarter of this year, Acme will install new bottling equipment in its Spill Magic plant. Spill Magic manufactures a wide variety of spill pickup products that handle anything from liquid spills, hazardous material spills and even biohazard spills. This $580,000 investment is projected to generate annual savings of about $450,000 in 2023 and thereafter.

Thirdly, it remains the Company’s goal to reduce its reliance on Chinese manufacturing. About 10-years ago, Acme imported 80% of its products from China. Thanks to the acquisition of no less than seven North American manufacturers, the Company has reduced that number to 40%. For further acquisitions, Acme will continue to focus on targets in Western Europe, the U.S. and Canada.

Segments Hold Their Ground Despite Tough Market Circumstances

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

Exact revenues per segment for the second quarter of 2022 will be available in the Company’s 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. Based on those numbers, we provide the following estimate.

 
Three Months Ended
June 30
Amounts in $000’s
2022
2021
U.S.
48,910
36,840
Canada
3,875
3,990
Europe
3,988
4,017
Estimated sales per segment for the second quarter ended June 30, 2022 (Source: Smallcaps Investment Research) and actual sales per segment for the second quarter ended June 30, 2021 (Source: Company Filing)

For the three months ended June 30, 2022, net sales in the U.S. segment increased 33% compared to the same period in 2021 due to a combination of higher sales prices, increased volume, and the carryover of orders from our first quarter of 2022 which were unfilled because of supply chain disruptions. For the six months ended June 30, 2022, net sales in the U.S. segment increased 16% compared to the same period in 2021. The growth was primarily attributable to strong sales of first aid products and Westcott school and office products.

European net sales for the three months ended June 30, 2022, decreased 1% in U.S. dollars but increased 12% in local currency compared to the second quarter of 2021. Net sales for the six months ended June 30, 2022, decreased 2% in U.S. dollars but increased 7% in local currency compared to the first half of 2021. The growth in the three and six months was mainly due to new customers in the office channel.

Net sales in Canada for the three months ended June 30, 2022, decreased 3% in U.S. dollars and were constant in local currency compared to the same period in 2021. Net sales for the six months ended June 30, 2022, increased 2% in U.S. dollars and 4% in local currency compared to the first half of 2021.

Financials & Balance Sheet

Net income for the six months ended June 30, 2022, was $3.6 million, or $0.93 per diluted share, compared to $9.3 million, or $2.34 per diluted share, for the same period in 2021, a decrease of 62% in net income and 60% in diluted earnings per share.

Excluding the impact of the PPP loan forgiveness and the tax credit referred to above, the Company’s adjusted net income for the six months ended June 30, 2021, was $4.9 million, or $1.23 per diluted share. Accordingly, net income for the six months ended June 30, 2022, decreased 27% compared to the adjusted net income for the same period in 2021, while diluted earnings per share decreased 25%.

The declines compared to adjusted net income and adjusted diluted earnings per share in 2021 were mainly due to lower gross margins as a percentage of sales in the respective periods.

 
Three Months Ended
June 30
Six Months Ended
June 30
Amounts in $000’s
2022
2021
2022
2021
Net Sales
56,773
44,847
100,106
88,372
Cost of Goods Sold
38,225
28,694
66,590
56,632
S, G & A Expenses
14,572
12,364
28,169
24,983
Income From Operations
3,976
3,789
5,347
6,757
Interest Expense
423
223
729
443
Other Expense (Income)
148
68
147
145
PPP Loan Forgiveness
3,508
3,508
Pre-Tax Income
3,405
7,006
4,471
9,677
Income Tax Expense (Benefit)
666
(224)
903
400
Net Income
2,739
7,230
3,568
9,277
Earnings Per Share
0.71
1.82
0.93
2.34
Shares Out. – Diluted
3,842
3,964
3,845
3,961
Selected income statement data for the quarters and six months ended June 30, 2022 and June 30, 2021. Source: Company Press Release

Note that the second quarter of 2021 included the forgiveness of the Company’s Paycheck Protection Program (PPP) loan in the amount of $3.5 million, and a non-recurring tax credit of $0.9 million related to stock-based compensation expense. Excluding these impacts, adjusted net income in the second quarter of 2021 was $2.8 million. Net income for the second quarter of 2022 was $2.7 million or $0.71 per diluted share, compared to the adjusted net income for the second quarter of $2.8 million or $0.71 per diluted share, a decrease of 3% in net income and constant for earnings per share.

SG&A expenses for the second quarter of 2022 were $14.6 million or 26% of sales, compared with $12.4 million or 28% of sales for the same period of 2021. SG&A expenses for the first six months of 2022 were $28 million or 28% of sales, compared with $25 million or 28% of sales in 2021.

Gross margin was 33% in the three months ended June 30, 2022, versus 36% in the comparable period last year. Gross margin was 34% for the six month period ended June 30, 2022, compared to 36% for the same period of 2021. The lower gross margin was mainly due to product cost, inflation pressures, higher transportation costs and higher labor costs. Price increases partially offset the cost increases.

Amounts in $000’s
June 30, 2022
June 30, 2021
Cash and Cash Equivalents
1,760
3,240
Accounts Receivable
46,991
36,270
Inventories
65,039
48,691
Total Current Assets
117,453
90,434
Property and Equipment
26,277
22,408
Total Assets
176,545
139,138
 
 
 
Accounts Payable
21,421
8,021
Other Current
Liabilities
10,333
10,374
Total Current Liabilities
33,223
19,581
Bank Debt
50,263
39,550
Mortgage Payable – Long Term
10,897
2,952
Total
Liabilities
96,723
64,686
Total Stockholder Equity
79,822
74,452
Selected balance sheet data for the quarters ended June 30, 2022 and June 30, 2021. Source: Company Press Release

The Company’s debt less cash on June 30, 2022 was $59.8 million, compared to $39.3 million on June 30, 2021. During the 12-month period, Acme paid $11 million for the Safety Made acquisition, spent $1.8 million on dividends and repurchased $1.5 million of common stock.

Inventory increased approximately $15 million, primarily due to anticipated growth in our business, higher costs and purchasing additional safety stock to offset the impact of potential supply chain disruptions related to COVID-19.

As far as the inventory is concerned, Acme is going to start to reduce its safety stock, because it believes that the supply chain issues will improve in the course of the next 12-months. The goal is to have generated an extra $4 million of cash from inventory by year end.

Acme also entered into a new loan with HSBC in the second quarter of 2022. The new facility is for $65 million, compared to the former one of $50 million on essentially the same terms. The interest rate is equal to SOFR plus 1.75%, or about 3.3% today and the term is 4 years.

Conclusion

The latest acquisition, Safety Made, which Acme bought last month performed well, and was immediately accretive in the second quarter. In 2021, Safety Made had revenues of approximately $5 million and pre-tax income of a little over $1.1 million.

In the coming months, the Company will reduce its inventory with approximately $4 million, as it foresees improvements in the global supply chain. This initiative will lower the Company’s debt.

Despite unprecedented economic and operational challenges, Acme United successfully produced record sales in the second quarter. While the overall operating environment remains tough, the Company is providing guidance of approximately $200 million in sales for 2022, which is up about 10% compared with last year. Moreover, Chairman and CEO Walter C. Johnsen said in the second quarter conference call that he sees annual sales growing with $20 million to $25 million for each of the next three years. Adding one or two more acquisitions, should bring total annual sales close to $300 million. Smallcaps Recommendation: BUY.

Smallcaps.us Advice: BuyPrice Target: $36.38Latest Company Report (pdf)
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