Acme United Sets New Earnings Record In Third Quarter 2023

Acme United Corporation (US: ACU – $30.40) made significant progress during the third quarter of 2023. In fact, the Company reached its highest third quarter income ever!

While net sales for the three months ended September 30, 2023 were $50.4 million, about flat compared to sales of $49.7 million in the same period of 2022, net income in Q3 2023 was $2.2 million, or $0.58 per diluted share, compared to $64,000, or $0.02 per diluted share, for the same period in 2022.

The Company’s sales growth of about 1% in the third quarter of 2023 is also an improvement from the prior quarter where revenues were 6% below last year. Although first aid sales were strong, there were still some inventory reductions by Westcott cutting tools customers. Remember that last year many Westcott customers bought large quantities of product, because they feared running out of stock due to port congestions and the difficulty of getting products out of China.

As a result, they had excess inventory that they first needed to sell before purchasing more from Acme. The good news however, is that during the past twelve months the actual underlying demand for school and office products was pretty consistent with prior years.

Even better news is that those Westcott customers are nearing the end of their inventory reductions and that sales from Acme will soon again reflect true demand.

The outstanding earnings in the third quarter reflect in-bound shipping costs which again declined to historical levels and the successful implementation of a productivity plan which is resulting in annual savings of more than $5 million.

Chairman and CEO of Acme United Walter C. Johnsen said, “I am pleased that sales at the end of the third quarter rebounded after more than a year of customer inventory reductions. In addition, we continued to aggressively reduce inventory. The Company paid down $26 million, or 41%, of its bank debt during the past 12 months.”

Mr. Johnsen continued, “We gained new product placement for 2024, including additional first aid and medical products at major drug and hardware chains, new Westcott cutting tools and DMT sharpeners at large retailers, and new customers for our Spill Magic clean up products. In summary, we believe we are strongly positioned for growth.”

Third Quarter and Nine Months Financials

Net sales for the nine months ended September 30, 2023 were $149.6 million compared to $149.8 million in the same period in 2022.

Net income for the nine months ended September 30, 2023 was $6.6 million, or $1.83 per diluted share, compared to $3.6 million, or $0.96 per diluted share, for the same period in 2022, an astonishing increase of 82% in net income and 91% in diluted earnings per share.

	Three Months Ended September 30		Nine Months Ended September 30
Amounts in $000’s	2023	2022	2023	2022
Net Sales	50,384	49,744	149,559	149,849
Cost of Goods Sold	30,881	33,819	93,752	100,374
S, G & A Expenses	15,846	14,972	44,711	43,176
Income From Operations	3,657	953	11,096	6,299
Interest Expense	784	714	2,517	1,442
Other Income (Expense)	(55)	(209)	(9)	(354)
Pre-Tax Income	2,818	30	8,569	4,502
Income Tax Expense (benefit)	666	(34)	1,984	870
Net Income	2,152	64	6,585	3,632
Earnings Per Share – Diluted	0.58	0.02	1.83	0.96
Shares Out. – Diluted	3,721	3,683	3,597	3,781
Selected income statement data for the quarters and nine months ended September 30, 2023 and September 30, 2022. Source: Company Press Release

Gross margin was 38.7% in the three months ended September 30, 2023 compared to 32.0% in the same period in 2022. This reflects shipping costs returning to normal levels and the impact of the productivity program which was initiated about a year ago. Remember that Acme incurred about $4.6 million in unusual shipping expenses last year due to container costs and port congestion. In addition, the productivity improvement initiatives that began in Q4 of 2022, were planned to save about $5 million annually, however Acme is currently projecting to exceed that plan by about $1 million annually.

Gross margin was 37.3% for the nine-month period ended September 30, 2023 compared to 33.0% for the same period in 2022.

SG&A expenses for the third quarter of 2023 were $15.8 million, or 31% of sales, compared with $15 million, or 30% of sales, for the same period of 2022. SG&A expenses for the first nine months of 2023 were $44.7 million, or 30% of sales, compared with $43.2 million, or 29% of sales, in 2022.

Operating profit in the third quarter increased no less than 280% due to improved gross margin and tight control of SG&A spending.

Interest expense for the third quarter of 2023 was $820,000 compared to $720,000 in the third quarter of 2022. The increase was entirely due to higher interest rates. In fact, average debt declined by $20 million in the quarter compared to Q3 last year. Acme’s overall average interest rate in the third quarter of 2023 was 6.25% compared to 3.9% for the third quarter of 2022.

Amounts in $000’s	September 30, 2023	September 30, 2022
Cash and Cash Equivalents	5,567	4,218
Accounts Receivable	33,855	40,149
Inventories	54,575	66,210
Total Current Assets	98,526	114,567
Property and Equipment	27,708	26,042
Total Assets	156,269	174,484
Accounts Payable	9,976	11,771
Other Accrued Liabilities	13,873	11,138
Total Current Liabilities	25,429	24,440
Bank Debt	32,934	57,131
Total Liabilities	70,363	95,503
Total Stockholder Equity	85,906	78,981
Selected balance sheet data for the quarters ended September 30, 2023 and September 30, 2022. Source: Company Press Release

The Company’s bank debt less cash as of September 30, 2023 was $38 million compared to $64 million as of September 30, 2022. During the twelve-month period ended September 30, 2023, the Company paid $2 million in dividends on its common stock and generated approximately $27 million in free cash flow, including a reduction in inventory of $12 million.

Note that the Company has been actively reducing its inventory after increasing it purposefully during the pandemic. The inventory during the past three quarters has declined $9 million. Most of the cash flow from the inventory reductions and earnings during the past year were used to pay down debt. As a result, Acme’s balance sheet has improved substantially, and net debt at the end of the third quarter in 2023 was $38 million compared to $64 million at the same time last year, a decrease of 41% in debt!

The Company expects inventory to remain around these levels in 2024.

Solid U.S. Segment

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 provide the following estimate.

	Three Months Ended September 30
Amounts in $000’s	2023	2022
U.S.	43,677	42,943
Canada	3,311	3,629
Europe	3,396	3,172
Estimated sales per segment for the third quarter ended September 30, 2023 (Source: Smallcaps Investment Research) and actual sales per segment for the third quarter ended September 30, 2022 (Source: Company Filing)

For the three months ended September 30, 2023, net sales in the U.S. segment increased 2% compared to the same period in 2022. Sales of first aid and medical products were strong, while demand was softer for school and office products. For the nine months ended September 30, 2023, net sales were constant compared to the same period in 2022. The nine month sales for school and office products were impacted by customer reductions of inventory in the first half of 2023.

European net sales for the three months ended September 30, 2023 increased 7% in U.S. dollars but decreased 1% in local currency compared to the same period in 2022. Net sales for the nine months ended September 30, 2023 decreased 2% in U.S. dollars and 4% in local currency compared to the same period in 2022. The sales decrease for both periods was mainly due to the economic recession in Europe. However, the trend is improving.

Net sales in Canada for the three months ended September 30, 2023 decreased 9% in U.S. dollars and 7% in local currency compared to the same period in 2022. Net sales for the nine months ended September 30, 2023 decreased 2% in U.S. dollars but increased 3% in local currency compared to the same period in 2022. The growth in local currency in the nine months was mainly due to higher sales of first aid products.

Conclusion

In addition to the record breaking third quarter, Acme’s management also indicated that the fourth quarter has started strongly. Moreover, the Company is winning new business for 2024 in its Westcott and first aid businesses, as well as DMT sharpeners.

In September, Acme acquired Hawktree Solutions in Canada, which sells first aid and medical products and is the exclusive licensee of the Canadian Red Cross for many of the supplies used in their training programs and relief efforts. Hawktree will expand the Company’s product line to address devastating fires, floods, and earthquakes.

Acme is currently reactivating Hawktree’s website, moving the inventory to the Company’s Laval, Canada location and filling back orders. Next to being accretive to Acme’s bottom line as of the fourth quarter of 2023, the acquisition also brings plenty of opportunity to expand the Canadian business in general. Acme continues to be on the lookout for new acquisition opportunities.

The Company also continues to generate productivity improvements. The productivity plan, which was implemented late last year, and which was scheduled to save $5 million annually, is expanding to $6 million. This will undoubtedly also have a positive effect on margins.

All in all, Acme United’s future looks bright with expected top-line growth, expanding productivity improvements and growing margins. Smallcaps Recommendation: BUY.

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