Hopeful Outlook at Acme United Thanks to Cost Reductions & Growth Opportunities

Acme United Corporation (US: ACU – $24.27) had a tough third quarter, in which it faced higher costs for goods sold and higher interest expense. On the sales side, the Company still managed to set a new all-time third quarter record of $49.7 million, compared to $47.9 million in the same period of 2021, an increase of 4%.

Also nine months sales were never as high in Acme’s history as in 2022. They reached $149.8 million compared to $136.3 million in the same period in 2021, an increase of 10%.

Net income for the third quarter of 2022, however, was $64,000 or $0.02 per diluted share, compared to net income of $2 million or $0.50 per diluted share for the same period of 2021. This obviously also had its impact on the net income for the nine months ended September 30, 2022. They reached $3.6 million or $0.96 per diluted share. Excluding the impact of the PPP loan forgiveness of $3.5 million, net income was $7.8 million, or $1.97 per diluted share, in the nine months ended September 30, 2021.

Chairman and CEO Walter C. Johnsen commented, “Our earnings, like those of many companies in our sector, have been adversely impacted by the massive global supply chain issues that occurred earlier in the year. We are seeing substantial improvement in the supply chain now. The cost to ship containers has dropped to prior year levels, or even less. We are no longer incurring significant demurrage charges as congestion in the ports has declined significantly.”

Cost Reductions & Growth Opportunities

In response to these results, Acme has immediately implemented a series of cost reduction initiatives that are expected to generate over $5.0 million in savings in 2023. The Company has,
• Reduced selling expenses by $600,000;
• Implemented a wide range of productivity improvements in its manufacturing and distribution facilities, which will save $2.4 million; and
• Lowered labor costs by $800,000 annually.

Moreover, there are solid growth opportunities in 2023, including new first aid and medical placement in the industrial and retail markets, additional Westcott craft products in the mass and ecommerce markets, and expanded sales of Spill Magic to large mass market retailers.

In addition, the Company recently purchased the promotional business of a former competitor of Safety Made with annual sales of approximately $1.2 million.

Third Quarter and Nine Months Financials

 
Three Months Ended
September 30
Nine Months Ended
September 30
Amounts in $000’s
2022
2021
2022
2021
Net Sales
49,744
47,923
149,849
136,295
Cost of Goods Sold
33,819
30,918
100,374
87,550
S, G & A Expenses
14,972
14,044
43,176
39,028
Income From Operations
953
2,961
6,299
9,717
Interest Expense
714
228
1,442
671
Other Income (Expense)
209
68
355
213
PPP Loan Foriveness
3,508
3,508
Pre-Tax Income
30
2,665
4,502
12,341
Income Tax Expense (benefit)
(34)
619
870
1,019
Net Income
64
2,046
3,632
11,322
Earnings Per Share – Diluted
0.02
0.50
0.96
2.85
Shares Out. – Diluted
3,683
4,058
3,781
3,969
Selected income statement data for the quarters and nine months ended September 30, 2022 and September 30, 2021. Source: Company Press Release

The three and nine months results were impacted by the exceptional supply chain costs and higher interest expense.

The cost to ship a container from Asia to the U.S. more than doubled in a year, peaking at approximately $20,000. Also demurrage costs were unprecedented, as the containers stayed at the ports longer than contracted even though this was due to the ports’ inability to access them. Finally, a shortage of truck drivers to deliver the goods and high fuel costs caused freight costs to abnormally increase.

In total, commencing in the first quarter of 2022, the Company will have incurred $4.4 million in exceptional supply chain expenses, of which $1.3 million was recognized in the third quarter. Approximately $900,000 remains to be recognized in the fourth quarter of 2022, and $400,000 in the first quarter of 2023.

Fortunately, the supply chain issues have substantially improved. The cost to ship a container across the Pacific has fallen to less than $10,000. In addition, demurrage fees from the ports and the driver shortage have stabilized. As a result, Acme believes that the extra supply chain costs are largely a thing of the past.

Interest expense for the third quarter of 2022 was $720,000, compared to $230,000 and in the third quarter of 2021. Interest expense for the nine months ended September 30 was $1.4 million, compared to $670,000 for the same period of 2021. The increase for both periods was due to higher debt and higher interest rates.

Gross margin was 32.0% in the three months ended September 30, 2022 compared to 35.5% in the same period in 2021. Gross margin was 33.0% for the nine-month period ended September 30, 2022 compared to 35.8% for the same period in 2021. The declines in the three and nine months ended September 30, 2022 were again the exceptionally high ocean container costs and demurrage charges. The impact on gross margins due to the aforementioned supply chain expenses were 2.3% and 1.5% for the three and nine months ended September 30, 2022.

Amounts in $000’s
September 30, 2022
September 30, 2021
Cash and Cash Equivalents
4,218
5,306
Accounts Receivable
40,149
36,088
Inventories
66,210
48,795
Total Current Assets
114,567
92,647
Property and Equipment
26,042
23,181
Total Assets
174,484
141,430
 
 
 
Accounts Payable
11,771
6,695
Other Accrued Liabilities
11,113
11,215
Total Current Liabilities
24,415
19,122
Bank Debt
57,131
40,454
Total Liabilities
95,503
64,883
Total Stockholder Equity
78,981
76,548
Selected balance sheet data for the quarters ended September 30, 2022 and September 30, 2021. Source: Company Press Release

The Company’s bank debt less cash as of September 30, 2022 was $64 million compared to $38 million as of September 30, 2021. During the twelve-month period ended September 30, 2022, the Company paid approximately $11 million for the acquisition of the assets of Live Safely Products, LLC, paid $1.8 million in dividends on its common stock, and repurchased $1.5 million of common stock.

During the twelve-month period, inventory increased approximately $17 million, primarily due to anticipated growth in the business, higher cost and purchasing additional safety stock to offset the impact of potential supply chain disruptions related to COVID-19. Inventory is expected to decline by approximately $2 million by year-end.

Sales in All Three Segments Up

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

Exact revenues per segment for the third quarter will be available in the 10-Q, which will be filed mid-November. However, Acme announced for each segment the percentage by which revenues increased or decreased compared with last year’s third quarter. Based on those numbers, we provide the following estimate.

 
Three Months Ended
September 30
Amounts in $000’s
2022
2021
U.S.
42,933
41,047
Canada
3,613
3,585
Europe
3,198
3,291
Estimated sales per segment for the third quarter ended September 30, 2022 (Source: Smallcaps Investment Research) and actual sales per segment for the third quarter ended September 30, 2021 (Source: Company Filing)

For the three months ended September 30, 2022, net sales in the U.S. segment increased 4% compared to the same period in 2021. As a precaution against supply chain delays, customers increased purchases in the second quarter of 2022. This reduced sales in the third quarter of 2022. For the nine months ended September 30, 2022, net sales in the U.S. segment increased 12% compared to the same period in 2021. The growth was primarily attributable to increased sales of first aid and medical products and Westcott school and office products.

European net sales for the three months ended September 30, 2022 decreased 3% in U.S. dollars but increased 13% in local currency compared to the same period of 2021. Net sales for the nine months ended September 30, 2022, decreased 3% in U.S. dollars but increased 9% in local currency compared to the same period of 2021. The growth in the three and nine months was mainly due to new customers in the office channel.

Net sales in Canada for the three months ended September 30, 2022 increased 1% in U.S. dollars and 3% in local currency compared to the same period in 2021. Net sales for the nine months ended September 30, 2022 increased 2% in U.S. dollars and 5% in local currency compared to the same period in 2021. The growth in the three and nine months was mainly due to higher sales of first aid products.

Conclusion

For fiscal year 2022, the Company slightly decreased its sales target to between $190 million and $195 million, down from its earlier guidance of $200 million.

Beyond 2022, the Company is confident that it will be able to continue on its growth path. It has an excellent first aid and medical business with strong recurring revenues from resales. It has the largest global market share of scissors and shears, which benefits from the school, office, craft, industrial and home users. Moreover, it gained new craft placement in 2023 at major mass market retailers and continues to move forward in e-commerce.

In the coming months, it will be installing new automated packaging equipment in the Spill Magic plant and a new robotic filling machine in the Med-Nap facility.

In summary, Acme has in place the growth platform for 2023 and a $5 million cost savings and productivity plan that has been mostly implemented. In addition, the $4.4 million in exceptional supply chain expenses that significantly impacted results this year, won’t be an issue anymore in 2023.

The difficult environment that many companies are currently in, also create new opportunities. For example, in September, Acme United took over the sales of a small competitor of Safety Made by purchasing its inventory and intellectual property for $860,000. The additional annual revenues are forecast to be about $1.4 million with about $400,000 of EBITDA. Although small, it represents the kind of opportunistic situations that may arise.

All in all, we expect the combination of revenue growth, $5.0 million of cost and productivity savings, and the normalization of supply chain expenses to position the Company for solid growth. Smallcaps Recommendation: BUY.

Smallcaps.us Advice: BuyPrice Target: $36.38Latest Company Report (pdf)
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