Acme United Well Prepared for 2020 and… Coronavirus

What a year for Acme United (ACU – $23.22). The worldwide supplier of cutting devices, measuring instruments and first-aid products for school, home, office, industrial and hardware use, achieved record sales for the 9th consecutive year. Net sales for the year ended December 31, 2019 were $142.5 million, compared to $137.3 million in 2018, an increase of 4%.

Moreover, the decisive steps which Acme took in Q4 of 2018 to reduce annual recurring costs by up to $1.3 million had an astonishing result. Net income for the year ended December 31, 2019 was $5.5 million, or $1.60 per diluted share, compared to $4.6 million, or $1.30 per diluted share in 2018, increases of 20% and 23%, respectively!

Acme largely owes its growth to its first aid division. The First Aid Only brand introduced the next generation of SmartCompliance first aid cabinets, which gained traction thanks to their convenient automatic replenishment system. In addition, every time the Company places a new SmartCompliance unit, the SafetyHub app is capturing an increasing percentage of the refill business.

As more and more companies understand that they need to become, and stay, OSHA compliant, and can do so at a fraction of the cost of the “old” van delivery model, the choice is obvious. In 2019, SmartCompliance gained major distribution in the energy, industrial, food, retail markets.

The Company also noted strong sales of its new Westcott “Glide” scissors to mass market retailers, distributors and office supply companies. These particular scissors have adjustable tension and operate more smoothly than traditional scissors.

Also Camillus knives continued to gain market share in the U.S. and Canada. The Westcott glue guns gained distribution in the craft and mass markets, while the brand’s ceramic cutters were successfully sold to major distribution centers.

As for the fourth quarter, ended December 31, 2019, sales reached $33.9 million, compared to $31.1 million in the comparable period of 2018, an increase of 9%. Net income for the quarter ended December 31, 2019 was $977,000, or $0.28 per diluted share, compared to $591,000, or $0.17 per diluted share, an increase of 65% for both net income and earnings per share.

	Three Months Ended December 31		Year Ended December 31
Amounts in $000’s	2019	2018	2019	2018
Net Sales	33,873	31,130	142,457	137,321
Cost of Goods Sold	21,579	19,768	90,456	86,672
S, G & A Expenses	10,893	10,269	43,572	43,192
Income From Operations	1,401	1,093	8,429	7,457
Net Interest Expense	338	513	1,828	1,858
Pre-Tax Income	1,029	598	6,543	5,531
Income Tax Expense	52	7	1,030	933
Net Income (Loss)	977	591	5,513	4,598
Earnings Per Share – Diluted	0.29	0.17	1.65	1.30
Shares Out. – Diluted	3,495	3,421	3,453	3,542
Most important income statement data for the quarters and full year ended December 31, 2019 and December 31, 2018. Source: Company Press Release

 

Gross margin was 36.3% in the three months ended December 31, 2019 compared to 36.5% in the same period in 2018. Gross margin was 36.5% for the year ended December 31, 2019 compared to 36.9% for 2018.

Corona Could Become An… Opportunity

With parts of China under lockdown in an effort to contain the Coronavirus, exports have slowed dramatically from the country. As a result, inventory levels for many products might become under pressure. In addition, developing a supply chain response in the short term is extremely challenging.

Contrary to most other companies though, this sad situation might pose an opportunity for upside for Acme United.

First of all, Acme United has a large enough inventory to supply its existing and new clients – which may not be able to get products from their usual supplier. Undoubtedly, some of these new customers will continue to re-order at Acme even when their former supplier has stocked its inventory again.

Another positive given for Acme is that it has a diversified supply base. Currently, Acme sources products from manufacturers in countries such as Egypt, Italy, and Colombia.

Finally, domestic sourcing is gaining importance for the Company, as it purchased no less than four US based manufacturers since 2011. In 2011, Acme acquired Pac-Kit Safety Equipment Company in Norwalk, Connecticut. In 2014, it purchased First Aid Only in Vancouver, Washington. In 2016, the Company bought Diamond Machining Technology (DMT), which is located in Marlborough, Massachusetts. And early 2017, Spill Magic was acquired, which has facilities in Santa Ana, California and Smyrna, TN.

This way, the Company has strategically diversified its portfolio of sourcing the past few years, while reducing its reliance on China.

U.S. and European Segments Excel

Acme United reports financial information on three separate business segments: the United States (including Asia), Canada and Europe. Exact revenues per segment for 2019 will be available in the 10-K report, which will be filed in a few days. 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.

	Year Ended December 31
Amounts in $000’s	2019	2018
U.S.	125,689	120,993
Canada	6,748	7,040
Europe	10,021	9,288
Estimated sales per segment for the year ended December 31, 2019 (Source: Smallcaps Investment Research) and actual sales per segment for the year ended December 31, 2018 (Source: Company Filing)

 

In the Company’s U.S. segment, net sales for the quarter ended December 31, 2019 increased 11% compared to the same period in 2018. Net sales for the year ended December 31, 2019 grew 4% over 2018. As mentioned above, the sales increase for both periods was mainly due to strong sales of first aid and safety products.

Net sales in Canada for the quarter ended December 31, 2019 decreased 4% in both U.S. dollars and local currency compared to the prior-year period. Net sales for the year ended December 31, 2019 decreased 5% in U.S. dollars and 3% in local currency compared to the same period in 2018. The sales decline was especially due to weakness in the office channel.

Net sales in Europe for the quarter ended December 31, 2019 decreased 10% in U.S. dollars and 7% in local currency compared to the same period in 2018. Net sales for the year ended December 31, 2019 increased 8% in U.S. dollars and 14% in local currency compared to last year. The sales decline in the quarter was mainly due to a large promotional sale in the fourth quarter of 2018 that did not repeat in 2019. Net sales for the year grew mainly due to new customers in the office products channel and growth in sales of DMT sharpening products. Also online sales grew significantly. In fact, Amazon.de – the German sister website of Amazon – is now Acme Europe’s biggest customer.

Balance Sheet as of December 31, 2019

The Company’s debt less cash on December 31, 2019 was $30.0 million compared to $39.6 million on December 31, 2018. During 2019, the Company distributed $1.6 million in dividends on its common stock and generated $13.0 million in free cash flow, including a $2.1 million reduction in inventory.

Acme now has $20 million in access borrowing capacity, enabling the Company to continue to finance its growth and make accretive acquisitions.

	Year Ended December 31
Amounts in $000’s	2019	2018
Cash and Cash Equivalents	6,822	4,409
Accounts Receivable	25,485	25,102
Inventories	39,261	41,332
Total Current Assets	73,146	73,372
Property and Equipment	14,036	14,543
Total Assets	110,749	109,478
Accounts Payable	6,693	7,983
Other Current Liabilities	8,626	5,382
Total Current Liabilities	16,633	13,365
Long Term Debt	33,240	40,283
Total Liabilities	55,044	57,145
Total Stockholder Equity	55,705	52,333
Most important balance sheet data for the periods ended December 31, 2019 and December 31, 2018. Source: Company Press Release

At the end of the 2019, Acme had more than $56.5 million in working capital and a solid current ratio of 4.39.

Conclusion

Acme United delivered an excellent year in 2019 from many different perspectives. The Company achieved its ninth consecutive year of record sales, generated strong cash flow, increased its dividend, and reduced net debt by almost $10 million.

Acme also began 2020 on a strong note, acquiring First Aid Central, a Canadian first aid and safety supplier, in early January. The acquisition expands the Company’s product offerings, global distribution capabilities and online presence. First Aid Central is doing well and is already contributing to Acme’s top and bottom line. Moreover, it could become a platform of growth and more acquisitions in a fragmented Canadian first aid market.

Chairman and CEO Walter C. Johnsen said, “With our continuing sales momentum in first aid and safety products, expanded line of Westcott cutting tools, increased capacity at DMT, and contributions from our recent acquisition of First Aid Central, we believe we are well positioned for growth in 2020.” Smallcaps Recommendation: BUY.

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