Acme United Starts Off Year With Record First Quarter Earnings
Acme United (US: ACU – $19.50), the worldwide supplier of cutting devices, measuring instruments and first-aid products for school, home, office, industrial and hardware use, reported net income of $807,000 or $0.24 per diluted share, for its first quarter ended March 31, 2019 versus $764,000, or $0.21 per diluted share, for the comparable period last year. This is an increase of 6% in net income and 14% in diluted earnings per share. A solid performance, and in fact the highest first quarter earnings in the Company’s history.
The major contributor to this result was the cost savings program that Acme United implemented in the fourth quarter last year. For example, it let go of a number of people, which reduced personnel expenses by about $700,000 annually. In addition, third party sales reps were replaced by in-house people. Acme also cut back on print advertising and put more focus on social media, resulting in annual savings of $400,000. All these saving are going straight to the bottom line.
Net sales for the first quarter ended March 31, 2019 were $31.4 million compared to $31.7 million in the first quarter of 2018, a decrease of 1%, or even in constant currency. This slight drop was expected and due to a large initial order of first aid kits to a major foodservice distributor in the first quarter last year.
Although the Company did not anniversary the large order, it recorded excellent refill orders in the first aid market during Q1. In addition, Acme shipped Westcott glue guns and its new Westcott adjustable scissors with Glide technology to a large mass market retailer in the United States for initial placement. The Company also expanded its Camillus product offering to The Boy Scouts of America, and continued to gain market share in the hunting and fishing areas.
Finally, Acme pushed through some price increases in the first quarter, which also contributed to total revenues.
Gross margin was 37.6% in the first quarter of 2019 versus 38.2% in the first quarter of 2018. The lower gross margin this first quarter was primarily due to a better product mix last year. The Company expects following quarters to show improved gross margins versus comparable periods in 2018, because the product mix is expected to be better.
Chairman and CEO Walter C. Johnsen, said, “Our strategy to reduce expenses by $2.0 million this year in purchasing, advertising, selling, and distribution is on plan. Our business continues to be robust, including some promising new programs in the second and third quarters of 2019. We are pleased with the performance to date. Accordingly, we are reiterating financial guidance for 2019 of approximately $140 to $143 million in sales, net income of $5.0 to $5.3 million and $1.41 to $1.50 earnings per share.”
First Quarter Financials and Balance Sheet
SG&A expenses for the first quarter of 2019 were $10.3 million or 33% of net sales, compared with $10.8 million or 34% of net sales for the same period of 2018. Operating profit in the first quarter of 2019 increased 12% compared to the first quarter of 2018. The improved operating profit was primarily due to the cost-savings initiatives that were implemented in late 2018.
First Quarter Ended
|Amounts in $000’s|| |
|Net Sales|| |
|Cost of Goods Sold|| |
|S, G & A Expenses|| |
|Income From Operations|| |
|Interest Expense|| |
|Other Income (Expense)|| |
|Pre-Tax Income|| |
|Income Tax Expense (Benefit)|| |
|Net Income|| |
|Shares Outstanding – Diluted|| |
|Earnings Per Diluted Share|| |
Selected income statement data for the quarters ending March 31, 2019 and March 31, 2018. Source: Company Press Release
Acme’s bank debt less cash on March 31, 2019 reduced to $40.9 million compared to $43.7 million on March 31, 2018. During the twelve-month period ended March 31, 2019, the Company distributed $1.5 million in dividends on its common stock, repurchased $0.4 million in treasury stock and generated $5.5 million in free cash flow.
Acme is focused on reducing debt further in preparation for potential acquisitions, dividend increases, and share repurchases. Consequently, it expects to end 2019 with approximately $36 million of net debt and to generate $45 million in free cash flow.
First Quarter Ended
|Amounts in $000’s|| |
|Cash and Cash Equivalents|| |
|Accounts Receivable|| |
|Total Current Assets|| |
|Property and Equipment|| |
|Total Assets|| |
| || |
|Accounts Payable|| |
|Other Current Liabilities|| |
|Total Current Liabilities|| |
|Long Term Debt|| |
|Total Liabilities|| |
|Total Stockholder Equity|| |
Selected balance sheet data for the periods ended March 31, 2019 and March 31, 2018. Source: Company Press Release
Also noteworthy on the Company’s balance sheet is the reduction in inventory by $1.3 million from March 31, 2018 to March 31, 2019 despite projected sales growth in 2019.
European Segment Continues to Outperform
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 2019 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 provided the following estimate.
First Quarter Ended
|Amounts in $000’s|| |
Estimated sales per segment for the quarter ending March 31, 2019 (Source: Smallcaps Investment Research) and actual sales per segment for the quarter ended March 31, 2018 (Source: Company Filing)
For the first quarter of 2019, net sales in the U.S. segment decreased 1% compared to the same period in 2018. As mentioned before, the year-over-year sales decrease was due to a large initial order of first aid products to a major distributor to the food service industry that took place in the first quarter of 2018.
European net sales for the first quarter of 2019 increased 6% in U.S. dollars and 14% in local currency compared to the first quarter of 2018, mainly due to new customers in the office products channel and continued growth of DMT sharpening products. Looking at how both the Paperworld and IWA OutdoorClassics shows went in Europe, we expect this positive trend to continue in 2019.
Net sales in Canada for the first quarter of 2019 decreased 9% in U.S. dollars and 5% in local currency compared to the same period in 2018, primarily due to a large order from a new customer in the first quarter 2018 that did not repeat in the first quarter of 2019. The Company expects total sales in Canada to increase in 2019.
Acme United is clearly back on track. The stock already appreciated 30% this year, and we believe there is more to come.
For example, the Company has a number of programs with Amazon, which may lead to further online sales growth beyond current levels. These programs have started in the current quarter.
Also, Acme is again expanding production capacity at its DMT diamond sharpening plant to meet additional demand. Especially in Europe, a growing number of customers recognize the excellent quality of the sharpeners. The Company also has new Camillus knife initiatives that will hit the shelves of mass market retailers in the third and fourth quarters.
During the first quarter conference call, Mr. Johnsen confirmed that he’s actively searching for a new acquisition. In the past, the Company’s acquisition strategy has been highly successful. After the purchase of the DMT sharpener brand, for example, Acme quickly expanded its distribution to the hunting and fishing area, to the industrial segment, and online.
Spill Magic was a similar acquisition. Acme United didn’t have to change anything to the product itself, because that had already proven its value. Instead the Company focused on expanding distribution, which it quickly did to industrial distributors, online, Europe, and several mass market retailers where Acme had excellent contacts.
Moreover, the cost reductions that were implemented in the fourth quarter of 2018 are now in full force and will generate savings of over $2 million. Acme continues to implement new software and production equipment to generate additional savings.
Thanks to these cost savings, and a solid sales outlook, the Company is anticipating continued growth in the second and third quarter.
On Thursday, when Acme released its first quarter results, the stock jumped $1, or more than 5 percent. In light of the strong quarters ahead, we believe this is an excellent time to add some shares. Smallcaps recommendation: BUY.
|Smallcaps.us Advice: Buy||Price Target: $53.75||Latest Company Report (pdf)|
|For important disclosures, please read our disclaimer.|