Acme United’s Strong Earnings And Margins Give High Hopes for Back Half of Year

Acme United (US:ACU – $27.49) had an excellent second quarter of 2023, with net income increasing to $3.4 million, or $0.96 per diluted share, compared to net income of $2.7 million, or $0.71 per diluted share, for the same period of 2022, an increase of 26% in net income, and 35% in earnings per share.

The main reason for this significant improvement is a strong reduction in costs. In 2022, the cost of shipping a container from Shanghai to California increased sharply to as high as $19,000 while Acme had budgeted a cost $12,500 per container. This resulted in additional expenses in 2022 of approximately $4 million. In 2023, however, container costs have declined again to about $5,000 each. Moreover, the Company implemented a $5 million cost savings plan in September of 2022, and it is now reaping the rewards of that effort.

Acme United has become the second largest player in the first aid area in North America

Net sales for the quarter ended June 30, 2023 were $53.3 million compared to $56.8 million in the second quarter of 2022, a decrease of 6%. The decrease was anticipated as several of the Company’s largest customers are reducing their inventory, which they increased last year.

The gross margin was 37.5% in the second quarter of 2023 compared to 32.7% in 2022. The significantly higher gross margin was mainly due to the productivity improvement initiatives that began in Q4 of 2022, as well as lower transportation costs. Acme expects gross margins to remain stable in the second half of the year.

Acme United’s Chairman and CEO Walter C. Johnsen said, “I am very pleased with our strong increase in earnings in the second quarter. As anticipated, due to inventory rebalancing by some customers, back-to-school sales were less than in the second quarter of last year. At the same time, our gross margins improved 4.8 percentage points due to the successful implementation of our $5.0 million productivity plan for 2023, as well as lower container costs and other inbound shipping expenses.”

Solid Canadian Segment

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

Exact revenues per segment for the second quarter of 2023 will be available in the Company’s 10-Q, which will be filed mid-August. 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.

 
Three Months Ended
June 30
Amounts in $000’s
2023
2022
U.S.
45,197
48,905
Canada
4,377
3,876
Europe
3,762
3,992
Estimated sales per segment for the second quarter ended June 30, 2023 (Source: Smallcaps Investment Research) and actual sales per segment for the second quarter ended June 30, 2022 (Source: Company Filing)

For the three months ended June 30, 2023, net sales in the U.S. segment decreased 8% compared to the same period in 2022. Sales of first aid and medical products were strong. However, sales of school and office products sales were negatively impacted by customer reductions of inventory, as they were heavily purchased in the second quarter of last year.

European net sales for the three months ended June 30, 2023 decreased 6% in U.S. dollars and 7% in local currency compared to the second quarter of 2022. Net sales for the six months ended June 30, 2023 decreased 6% in U.S. dollars and 5% in local currency compared to the first half of 2022. The decline in net sales for the three and six month periods were mainly due to the economic recession in Europe.

In Canada, however, net sales for the three months ended June 30, 2023 increased 13% in U.S. dollars and 21% in local currency compared to the same period in 2022. Net sales for the six months ended June 30, 2023 increased 2% in U.S. dollars and 8% in local currency compared to the first half of 2022.

The growth in the three and six month periods was mainly due to higher sales of first aid products as the Company continues to gain market share. Acme Canada is introducing several new products, particularly in the industrial segment, and it offers better pricing than most of its Canadian competitors because it has the scale of purchase.

Financials & balance Sheet

Net sales for the six months ended June 30, 2023 were $99.2 million, compared to $100.1 million in the same period in 2022, a decrease of 1%.

Net income for the six months ended June 30, 2023 was $4.4 million, or $1.25 per diluted share, compared to $3.6 million, or $0.93 per diluted share, for the same period in 2022, an increase of 24% in net income and 34% in diluted earnings per share.

 
Three Months Ended
June 30
Six Months Ended
June 30
Amounts in $000’s
2023
2022
2023
2022
Net Sales
53,336
56,773
99,175
100,106
Cost of Goods Sold
33,314
38,225
62,872
66,590
S, G & A Expenses
14,772
14,572
28,865
28,169
Income From Operations
5,250
3,976
7,438
5,347
Interest Expense
832
423
1,734
729
Other Expense (Income)
(23)
148
(46)
147
Pre-Tax Income
4,441
3,405
5,750
4,471
Income Tax Expense (Benefit)
998
666
1,318
903
Net Income
3,443
2,739
4,432
3,568
Earnings Per Share
0.96
0.71
1.25
0.93
Shares Out. – Diluted
3,591
3,842
3,548
3,845
Selected income statement data for the quarters and six months ended June 30, 2023 and June 30, 2022. Source: Company Press Release

SG&A expenses for the second quarter of 2023 were $14.8 million or 28% of sales compared with $14.6 million or 26% of sales for the same period of 2022. SG&A expenses for the first six months of 2023 were $29 million or 29% of sales compared with $28 million or 28% of sales in 2022.

Operating profit in the second quarter increased 32% due to an improved gross margin and tight control of SG&A spending. Interest expense for the second quarter of 2023 was $830,000 compared to $420,000 in the second quarter of ’22. The increase was entirely due to higher interest rates, in fact average debt declined by $8 million in the second quarter of 2023 compared to Q2 of last year.

Acme’s overall average interest rate in the second quarter of 2023 was 6.4% compared to 2.9% for the second quarter of 2022.

Gross margin was 36.6% for the six month period ended June 30, 2023, compared to 33.5% for the same period in 2022. The increase was primarily due to productivity improvements in the Company’s manufacturing and distribution facilities, as well as lower ocean container costs and demurrage charges.

Amounts in $000’s
June 30, 2023
June 30, 2022
Cash and Cash Equivalents
3,401
1,760
Accounts Receivable
39,796
46,991
Inventories
55,944
65,039
Total Current Assets
103,471
117,453
Property and Equipment
27,263
26,277
Total Assets
161,846
177,815
 
 
 
Accounts Payable
10,724
21,421
Other Current Liabilities
13,013
10,129
Total Current Liabilities
25,341
33,019
Bank Debt
39,979
50,263
Mortgage Payable – Long Term
10,485
10,897
Total Liabilities
78,195
97,992
Total Stockholder Equity
83,651
79,823
Selected balance sheet data for the quarters ended June 30, 2023 and June 30, 2022. Source: Company Press Release

The Company’s bank debt less cash as of June 30, 2023 was $47.5 million compared to $59.8 million as of June 30, 2022. During the twelve-month period ended June 30, 2023, the Company distributed $2.0 million in dividends on its common stock and generated approximately $14.0 million in free cash flow, including a reduction in inventory of $9.0 million. Net debt declined $8 million from December 31, 2022.

The company began to reduce its inventory being careful not to impact unexpected customer requirements would it be unprepared for another interruption.

Outlook

Acme United has not yet provided guidance for 2023. However, the Company did mention that it anticipates performance in 2023 to far exceed that of 2022. Although sales in the second half of 2023 may still be somewhat impacted by continued inventory reductions, Mr. Johnsen did mention in the conference call that sales so far in July were up compared with last year. Moreover, earnings are expected to thrive because shipping costs have pretty much normalized and the Company’s cost savings program will be in full execution.

Acme United reduced its inventory by $9.1 million during the past 12 months. Thanks to the lower inventory, as well as its strong earnings, the Company was able to reduce its bank debt less cash by $12.3 million during the past year. As a result, the Company is in a strong position to pursue further growth opportunities, as well as a new acquisition. Smallcaps Recommendation: BUY.

Smallcaps.us Advice: BuyPrice Target: $54.84Latest Company Report (pdf)
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