Acme United’s Outstanding Performance in 2016 Paves Way for Further Growth

Acme United (ACU – $25.41), the worldwide supplier of cutting devices, measuring instruments and first-aid products for school, home, office, industrial and hardware use, achieved record sales and earnings in fiscal year 2016. More sales growth is expected in 2017 and beyond.

The Westcott school and office products brand saw strong growth in its scissors and pencil sharpener business. Thanks to over 100 new product introduction, such as ceramic box openers and a DIY tool line (Also see below), the brand again gained market share.

Camillus expanded its distribution at mass market and specialty shops. While the Cuda fishing product line was expanded with 30 new tools for both fresh and saltwater fishing.

The First Aid business grew with double digits and added many new industrial customers. The SmartCompliance cabinets and their refills have become very popular because they are cheaper and more convenient for businesses. The razor/razor blade model ensures a continuous sale of refills once the cabinets are installed. Late last year, Acme introduced a phone app, which makes it even more convenient for customers to reorder first aid supplies. Also in 2016, Wal-Mart equipped each of its stores, warehouses, offices, and trucks with a first aid kit from Acme United.

The DMT diamond sharpener business grew both in the US and abroad, thanks to new placement at physical and online stores. The goal is to double DMT’s production capacity by late summer 2017. In order to do, new equipment will be purchased and additional personnel will be hired.

Sales for the three months ended December 31, 2016, reached $26.4 million, up about 14% compared with sales of $23.1 million in the fourth quarter of 2015. Net income in the fourth quarter of 2016 was $551,000, or $.15 per diluted share, compared to $440,000, or $.12 per diluted share, for the comparable period of 2015, both increases of 25%.

As for fiscal year 2016, sales were $124.6 million, compared to $109.8 million in 2015, an increase of 13%. Net income for the year ended December 31, 2016 was $5.9 million, or $1.64 per diluted share compared to $4.8 million, or $1.30 per diluted share for the prior year.

 
Three Months Ended
December 31
Year Ended
December 31
Amounts in $000’s
2016
2015
2016
2015
Net Sales
26,376
23,118
124,574
109,812
Cost of Goods Sold
16,564
14,852
79,019
70,251
S, G & A Expenses
9,105
7,611
37,113
32,214
Income From Operations
707
655
8,442
7,347
Other Income (Expense)
(265)
(165)
(945)
(733)
Pre-Tax Income
442
490
7,497
6,614
Income Tax Expense (benefit)
(109)
50
1,646
1,820
Net Income
551
440
5,851
4,794
Earnings Per Share – Diluted
0.15
0.12
1.64
1.30
Shares Out. – Diluted
3,668
3,696
3,578
3,687
Most important income statement data for the quarters and full year ended December 31, 2016 and December 31, 2015. Source: Company Press Release

Gross margin was 37.2% in the fourth quarter of 2016 versus 35.8% in the comparable period last year. The higher gross margin was primarily due to a favorable product mix. Gross margin was 36.6% for the year ended December 31, 2016 compared to 36% in 2015.

Although Acme’s margins are already quite impressive, they are expected to continue to improve in 2017. The US dollar has strengthened against the Chinese yuan, which means that Acme should be able to source its products at a lower cost (about 60% of Acme’s products are manufactured in China). In addition, Acme United continues to drive down raw material costs. And finally, DMT and Spill Magic have higher margins than the Company’s other brands, which overall should have a positive effect.

Excellent Growth by US and European Segments

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

Exact revenues per segment for 2016 will be available in the 10-K, 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 an estimate.

 
Year Ended
December 31
Amounts in $000’s
2016
2015
U.S.
110,810
96,622
Canada
6,824
6,804
Europe
6,940
6,385
Estimated sales per segment for the year ended December 31, 2016 (Source: Smallcaps Investment Research) and actual sales per segment for the year ended December
31, 2015 (Source: Company Filing)

In the Company’s U.S. segment, net sales for the quarter ended December 31, 2016 increased 13% compared to the same period in 2015 due to strong sales of Camillus knives, Cuda fishing tools, and first aid kits. Revenues from the DMT acquisition contributed $1.7 million in the fourth quarter and $5.5 million since its acquisition in February 2016 through year-end. Net sales for the year ended December 31, 2016 grew 15% over the comparable period in 2015 due to strong sales of Westcott school and office products, and Camillus knives, Cuda fishing tools and first aid products.

Net sales in Canada for the quarter ended December 31, 2016 increased 12% in both U.S. dollars and local currency compared to the same period in 2015. Despite the soft Canadian economy, net sales for the year ended December 31, 2016 were constant in U.S. dollars and increased 4% in local currency. This was mainly due to growth in the Westcott cutting tools business and expanded distribution of Camillus hunting tools and knives. Further growth is expected in Canada thanks to additional Camillus and Cuda sales.

European net sales for the quarter ended December 31, 2016 increased 25% in both U.S. dollars and local currency compared to the same period in 2015. Net sales for the year ended December 31, 2016 increased 9% in both U.S. dollars and local currency. The sales increases in Europe for both periods was due to:

  • Westcott gaining market share by winning new customers and placement;
  • Strong online sales growth; and
  • Added sales of DMT.

2017 should be strong in Europe. The team expects to double sales of DMT from approximately $400,000 to $800,000 thanks to growth through Amazon and Camillus customers.

Further Growth in 2017 and Beyond

The Company’s existing brands are performing very well. Based on the feedback that they received at recent trade shows, such as the SHOT Show and Paperworld, this trend is more than likely to continue.

In addition, Acme acquired Spill Magic earlier this month. The Santa Ana, California based manufacturer of cutting edge absorbents, had revenues in 2016 of $6.3 million and EBITDA of approximately $1.4 million, making it accretive from day one.

Moreover, Acme aims to increase sales from its latest acquisition by introducing the products to the Company’s office and industrial customers. Acme is also convinced that there’s a fair amount of cross selling opportunity between its existing first air business and the newly acquired Spill Magic.

Based on this strong outlook, Walter Johnsen, the Chairman and CEO of Acme United, gave guidance for 2017 of approximately $137 million in sales (+10% vs 2016), net income of $6.7 million (+14.5% vs 2016), and $1.78 earnings per share (+8.5% vs 2016). Remember though that in 2016 the guidance was increased twice.

In addition, Mr. Johnsen recently said at the Disruptive Growth & Healthcare Conference in New York that he feels that revenues of $160 million for 2018 are very realistic.

Continued Drive for Innovation

A substantial part of Acme’s success is its constant drive for innovation. In general, the markets for knives, scissors, rulers, and sharpeners are relative stable. Acme United though has turned that upside down, as it constantly introduces new products and advances existing designs.

Retailers like to replace older products with new ones on a regular basis, and consumers just love to buy the latest popular items.

The Westcott brand, for example, does an excellent job at following trends for school and office products. A while ago, it spotted the coloring-for-adults craze. Not long thereafter, Westcott developed an iPoint electric pencil sharpener with blades that have a non-stick coating, making them ideal to sharpen color pencils and crayons.

More recently, it launched the ProjectMate DIY craft tool line, as crafting is very popular these days. ProjectMade, basically a sub brand of Westcott, exclusively focusses on the crafts market with products such as compound action pliers, floral snips, diagonal cutters, a multi-purpose staple gun, etc.

The tools were initially launched at Michaels, and are now being offered to all major chains, as well as online stores.
The tools are made with high-grade steel – similar to a hardware item – giving them a sort of a masculine feel, while the green soft handles give them a feminine touch. An ideal combination for a crafting tool.

Robust Year-End Balance Sheet

Acme United’s balance sheet remains robust. The Company’s bank debt less cash and cash equivalents on December 31, 2016 was $27.0 million compared to $23.5 million on December 31, 2015.

During 2016, the Company paid approximately $7.0 million for the acquisition of the assets of DMT, spent $0.9 million on stock repurchases and paid $1.3 million in dividends on its common stock.

At the end of the 2016, Acme had close to $52.6 million in working capital and an impressive current ratio of 5.11.

 
Year Ended
December 31
Amounts in $000’s
2016
2015
Cash and Cash Equivalents
5,911
2,426
Accounts Receivable
20,021
19,565
Inventories
37,238
35,508
Total Current Assets
65,464
59,634
Property and Equipment
7,973
7,401
Total Assets
92,067
81,421
 
 
 
Accounts Payable
7,339
6,664
Other Current Liabilities
5,481
5,273
Total Current Liabilities
12,820
11,937
Long Term Debt
32,936
25,913
Total Liabilities
45,946
38,238
Total Stockholder Equity
46,121
43,184
Most important balance sheet data for the periods ended December 31, 2016 and December 31, 2015. Source: Company Press Release

Conclusion

2016 was the eighth consecutive year of record performance for Acme United. This strong achievement, along with the solid outlook for its brands, gives the Company confidence that sales and earnings will continue to grow in subsequent years.

All of the Company’s brands are launching new products. Westcott alone launched over 100 new scissors, trimmers, cutters, and pencil sharpeners in 2016. These continue to gain market share and placement.

Also the first aid brands are doing very well. With ever more kits installed, the refill business is becoming more important. In fact, revenues from refills are about equal to those of the actual kits.

Moreover, Acme recently acquired Spill Magic, a leader in absorbents that encapsulate spills into dry powders that can be safely disposed. With revenues in 2016 of $6.3 million and attractive margins, this will become another solid contributor to the Company’s financial results. Buy recommendation.

Smallcaps.us Advice: BuyPrice Target: $53.75Latest Company Report (pdf)
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