Acme United Shows Strong Improvement in First Quarter

Acme United (US: ACU – $26.20), the leading consumer products company with a focus on first aid and safety products, as well as cutting solutions, reported an important improvement in its financial results for the quarter ended March 31, 2023.

Sales in Q1 2023 reached $45.8 million compared to $43.3 million last year, an increase of 6%. This result was achieved despite ongoing reductions in inventory levels by its customers. Even better, net income for the quarter ended March 31, 2023 was $990,000 versus $830,000 in 2022, an increase of 19%. Earnings per share were $0.28 versus $0.22 or a 27% increase.

Chairman and CEO Walter C. Johnsen commented, “We are successfully executing our growth and productivity plans. Our net sales growth reflects expansion of our customer base and new product introductions in the first aid and medical segment, offset in part by continued inventory reductions by some large mass market customers. We realized over $0.5 million in productivity savings during the quarter. The Company is on track to realize projected annual savings of $5.0 million in 2023 due to the many productivity improvements we have been implementing.”

Continued Inventory Reductions

The inventory reductions that Mr. Johnsen referred to are likely to continue in the current quarter. However, he believes that Acme’s customers will have essentially completed their reduction efforts by the third quarter.

The main reason for these reductions is the fact that Acme’s customers bought significant quantities of supplies in the second quarter of last year. In fact, in Q2 of 2022, Acme reported the highest quarterly revenue in the Company’s history. Customers bought all these products because they feared supply chain issues. Remember that in the first quarter of 2022, the ports of Shenzhen and Shanghai closed due to COVID; the war in Ukraine began; and the ports of Los Angeles, Long Beach and Rotterdam were overwhelmed and clogged.

Because customers are still reducing their inventory from those purchases, particularly for back-to-school items, sales in the second quarter of 2023 may not be as strong as last year. However, earnings are bound to go up as the Company faced several economic and operational challenges in Q2 of last year, which had a significant impact on earnings. These won’t reoccur this year.

First Quarter financials and Balance Sheet

The Company’s gross margin was 35.5% in the first quarter of 2023 versus 34.5% in the first quarter of 2022. The higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022.

	First Quarter Ended March 31
Amounts in $000’s	2023	2022
Net Sales	45,838	43,333
Cost of Goods Sold	29,557	28,365
S, G & A Expenses	14,093	13,597
Income From Operations	2,188	1,371
Interest Expense	919	309
Other Income (Expense)	(23)	(2)
Pre-Tax Income	1,309	1,068
Income Tax Expense (Benefit)	319	238
Net Income	990	830
Shares Outstanding – Diluted	3,541	3,848
Earnings Per Diluted Share	0.28	0.22
Selected income statement data for the quarters ending March 31, 2023 and March 31, 2022. Source: Company Press Release

SG&A expenses for the first quarter of 2023 were $14.1 million or 30.7% of net sales compared with $13.6 million or 31.4% of net sales for the same period of 2022.

Operating profit in the first quarter increased 60% due to higher sales, improved gross margin and lower SG&A spending as a percentage of sales.

Interest expense for the first quarter of 2023 was $900,000 compared to $300,000 in the first quarter of 2022. The increase was almost entirely due to higher interest rates. Acme’s overall average interest rate in the first quarter of 2023 was 6.4% compared to 2.4% for the first quarter of 2022.

	First Quarter Ended March 31
Amounts in $000’s	2023	2022
Cash and Cash Equivalents	2,764	5,307
Accounts Receivable	32,972	34,605
Inventories	58,488	60,716
Total Current Assets	99,185	104,438
Property and Equipment	26,397	23,887
Total Assets	157,468	153,077
Accounts Payable	10,597	10,939
Other Current Liabilities	11,816	8,937
Total Current Liabilities	24,034	21,377
Long Term Debt	40,135	40,151
Total Liabilities	77,351	75,304
Total Stockholder Equity	80,117	77,773
Selected balance sheet data for the periods ended March 31, 2023 and March 31, 2022. Source: Company Press Release

The Company’s bank debt less cash on March 31, 2023 was $48.4 million compared to $46.2 million on March 31, 2022. During the twelve-month period ended March 31, 2023, the Company paid approximately $11 million for the acquisition of the assets of Live Safely Products, LLC, paid $1.9 million in dividends on its common stock and generated approximately $11 million in free cash flow, including a reduction in inventory of $3 million.

Acme United has reduced its stock by approximately $5 million from December 31, 2022 to March 31, 2023, and anticipates further reductions during 2023. The Company is careful though not to reduce its inventory too quickly so that it remains in a position to meet unforeseen customer demand.

Strong US 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 first quarter of 2023 will be available in the Company’s 10-Q, which will be filed mid-May. 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.

	First Quarter Ended March 31
Amounts in $000’s	2023	2022
U.S.	38,815	35,741
Canada	3,268	3,615
Europe	3,755	3,977
Estimated sales per segment for the quarter ending March 31, 2023 (Source: Smallcaps Investment Research) and actual sales per segment for the quarter ended March 31, 2022 (Source: Company Filing)

For the first quarter of 2023, net sales in the U.S. segment increased 9% compared to the same period in 2022 mainly due to higher sales of first aid and medical products.

European net sales for the first quarter of 2023 decreased 6% in U.S. dollars and 2% in local currency compared to the first quarter of 2022.

Net sales in Canada for the first quarter of 2023 decreased 10% in U.S. dollars and 5% in local currency compared to the same period in 2022, mainly due to customer inventory reductions.

Possible Acquisition In 2023

Acme United is well-known to acquire smaller competitors that are active in one of its fields of expertise. Since 2011, the Company has purchased no less than seven North American-based manufacturers. This way, Acme has strategically diversified its portfolio of sourcing, while reducing its reliance on China.

During the conference call, following the announcement of the first quarter financials, Mr. Johnsen again alluded to a possible acquisition later this year. When asked about a new acquisition target, he mentioned, “We are completing the integration of last year’s acquisitions, we are getting all the systems in place and are looking for additional space when they’ve grown out of their existing manufacturing plant. We are looking at a pretty steady flow of new possibilities.”

Conclusion

During the first quarter, Acme’s gross margin benefited from productivity improvements. In addition, the expense reductions that the Company began in 2022 are becoming evident. With sales up and SG&A down, the Company’s operating income increased to an impressive 60% in Q1 of 2023.

We expect this trend to continue in the current quarter. We also foresee a significant rise in operating income in the second half of the year, as the Company incurred over $4 million in one-time expenses in 2022. These expenses were mostly related to supply chain issues at ports in Asia, the US and Europe; the war in Ukraine; rapidly increasing container expenses; product costs that continually increased; wage inflation; rising interest rates; and shortages of workers. Most of these issues have more or less stabilized or are largely in the past.

Although Acme is not providing guidance at this moment, it is looking forward to a stronger performance in 2023 than last year, while it continues to look for potential acquisitions. Smallcaps Recommendation: BUY.

Smallcaps.us Advice: Buy	Price Target: $60.01	Latest Company Report (pdf)
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