Outstanding Growth in Q4 2018 Operating Profit Sets Pace for Acme United in 2019

Acme United (ACU – $17.40), 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 8th consecutive year. Despite a setback in the online sales channel during Q2 and Q3 of 2018, the Company remarkably recovered in the last quarter of the year with a 39% increase in operating profit compared with the fourth quarter of 2017. Management expects this trend to continue in 2019.

Each year between 2013 and 2017, online sales at Acme United doubled. During that time, the Company increased its advertising, sponsorship and search optimization to achieve further growth. However, in Q2 and Q3 last year, online sales flattened, as Acme’s largest online customer changed some of its algorithms. However, Acme United’s spending was still at higher levels. This caused an unexpected earnings decline in both quarters.

Acme United Westcott Glide scissors

The brand new line of Westcott scissors that incorporate the glide technology were recently placed at major craft and retail chains.

Improved Efficiencies and Cost Reductions

To counter the softer online sales, Acme took decisive steps in Q4 of 2018 to reduce annual recurring costs by up to $1.3 million. 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.

Furthermore, substantial operational efficiencies were achieved at the Company’s major domestic distribution centre in Rocky Mount, NC after significant spending the past two years. New software modules were installed to improve the efficiencies of the pick line and the Company began building a mezzanine level to store the high volume products closer to the point of shipping.

The Company also worked hard to bring the two Spill Magic plants onto the Company’s common software platform. This generated leverage in the customer service, accounting, forecasting, and supply chain.

In 2019, the implemented savings and cost improvements may increase to over $2 million.

Moreover, Acme launched many new products that helped boost sales. For example, the Company introduced a new line of Westcott scissors that incorporate the glide technology. These scissors, which have a low friction pivot with adjustable tension, cut extremely fluidly and efficiently. The scissors were placed at major craft and retail chains. The Company also announced that its new ceramic box openers were well received by industrial safety customers and consumers.

The first aid business introduced the next generation safety hub ecosystem and a new line of modern first aid stations that can be customized with different industries. And Camillus knives expanded distribution to major retail chains.

Last but not least, Chairman and CEO Walter C. Johnsen mentioned during the fourth quarter conference call that programs are in place to accelerate online growth.

As a result of all of these efforts, Acme United is confident that it will have another record year in 2019. For the year, the Company’s management is providing guidance 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.

Fourth Quarter and Full Year Financials

Sales for the three months ended December 31, 2018, reached $31.1 million, up about 3% compared with sales of $30.2 million in the fourth quarter of 2017. Net income for the quarter ended December 31, 2018 was $591,000, or $0.17 per diluted share. This compares to a loss of $655,000, in the fourth quarter of 2017, which reflected tax charges in the amount of $1.2 million incurred under the December 2017 U.S. Tax Cuts and Jobs Act.

Remember that the Tax Cuts and Jobs Act, introduced under the Trump administration, allows US companies a one-time repatriation of untaxed foreign held earnings at a reduced tax rate. Acme United had approximately $9.3 million in cash held offshore at the end of 2017. As a result of the favorable tax treatment of such funds, the Company repatriated approximately $5.8 million early in 2018. Due to this repatriation, Acme retroactively recorded a provisional charge of $1.245 million in the fourth quarter of 2017.

Excluding these tax charges, Acme’s adjusted net income was $590,000, or $0.16 per diluted share, for the fourth quarter of 2017. Earnings per share increased 6% in the fourth quarter of 2018 over the adjusted earnings per share in the fourth quarter of 2017.

As for fiscal year 2018, sales were $137.3 million, compared to $130.5 million in 2017, an increase of 5%. Net income for the year ended December 31, 2018 was $4.6 million, or $1.30 per diluted share. This compares to net income in 2017 of $4.1 million, or $1.09 per diluted share. Adjusted net income for FY 2017 however, was $5.3 million, or $1.42 per diluted share. Consequently, on an adjusted basis, net income for 2018 decreased 13% and earnings per share decreased 8% year over year.

 
Three Months Ended
December 31
Year Ended
December 31
Amounts in $000’s
2018
2017
2018
2017
Net Sales
31,130
30,170
137,321
130,550
Cost of Goods Sold
19,768
19,544
86,672
82,651
S, G & A Expenses
10,269
9,838
43,192
40,016
Income From Operations
1,093
788
7,457
7,883
Net Interest Expense
513
379
1,858
1,328
Pre-Tax Income
598
368
5,531
6,493
Income Tax Expense
7
1,023
933
2,441
Net Income (Loss)
591
(655)
4,598
4,052
Earnings Per Share – Diluted
0.17
(0.18)
1.30
1.09
Shares Out. – Diluted
3,421
3,676
3,542
3,725
Most important income statement data for the quarters and full year ended December 31, 2018 and December 31, 2017. Source: Company Press Release

Noteworthy in the table above is the strong improvement in operating profit in the fourth quarter of 2018 versus the comparable period in 2017. This was mainly achieved thanks to the strong cost reductions that were implemented.

Gross margin was 36.5% in the three months ended December 31, 2018 compared to 35.2% in the same period in 2017. The higher gross margin was primarily due to reduced promotional spending in the Company’s e-commerce business, cost cutting initiatives and product mix. Gross margin was 36.9% for the year ended December 31, 2018 compared to 36.7% for 2017.

European Segment Shows Strong Growth

Acme United reports financial information on three separate business segments: the United States (including Asia), Canada and Europe. Exact revenues per segment for 2018 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 the following estimate.

 
Year Ended
December 31
Amounts in $000’s
2018
2017
U.S.
120,951
115,407
Canada
7,080
6,935
Europe
9,290
8,208
Estimated sales per segment for the year ended December 31, 2018 (Source: Smallcaps Investment Research) and actual sales per segment for the year ended December 31, 2017 (Source: Company Filing)

In the Company’s U.S. segment, net sales for the quarter ended December 31, 2018 increased 3% compared to the same period in 2017. Net sales for the year ended December 31, 2018 grew 5% over 2017 in the U.S. segment. The sales increase for both periods was mainly due to strong sales of first aid and safety products as well as Camillus knives.

Net sales in Canada for the quarter ended December 31, 2018 decreased 4% in U.S. dollars and were constant in local currency compared to the prior-year period. Net sales for the year ended December 31, 2018 increased 2% in U.S. dollars and 1% in local currency compared to the same period in 2017.

Net sales in Europe for the quarter ended December 31, 2018 increased 13% in U.S. dollars and 17% in local currency compared to the same period in 2017. Net sales for the year ended December 31, 2018 increased 13% in U.S. dollars and 9% in local currency compared to last year. Net sales for both periods grew mainly due to new customers in the office products channel, growth in sales of DMT sharpening products, and strong e-commerce demand for these products.

Balance Sheet as of December 31, 2018

Acme United’s bank debt less cash on December 31, 2018 was $39.3 million compared to $37.8 million on December 31, 2017. During the twelve-month period ended December 31, 2018, they spent $1.5 million on dividends, $0.4 million on stock buybacks, and generated $1.6 million in free cash flow. For 2019, the Company expects to generate $4 to $5 million in free cash flow.

 
Year Ended
December 31
Amounts in $000’s
2018
2017
Cash and Cash Equivalents
4,409
9,338
Accounts Receivable
25,102
26,012
Inventories
41,332
40,087
Total Current Assets
73,372
78,101
Property and Equipment
14,543
13,728
Total Assets
109,478
114,730
 
 
 
Accounts Payable
7,983
11,151
Other Current Liabilities
5,382
5,632
Total Current Liabilities
13,365
16,783
Long Term Debt
40,283
43,450
Total Liabilities
57,145
64,792
Total Stockholder Equity
52,333
49,938
Most important balance sheet data for the periods ended December 31, 2018 and December 31, 2017. Source: Company Press Release

At the end of the 2018, Acme had more than $60 million in working capital and an impressive current ratio of 5.49.

Conclusion

Acme United’s solid increase in operating income during the fourth quarter of 2018 is very encouraging, as it clearly indicates that the cost cutting programs are paying off. These efforts will continue throughout 2019.

In addition, several sales initiatives should drive top line growth. Among the products expected to contribute to the 2019 sales results are various newly developed Westcott scissors and an array of safety cutters for opening boxes, new Camillus knife placements are planned at large mass market retailers and continued growth of the SmartCompliance First Aid kits and refills with industrial users.

As a result, the Company foresees approximately $140 to $143 million in sales, and $1.41 to $1.50 earnings per share in 2019. Consequently, we see no reason why Acme United’s stock price could not return to the mid-20s, levels that it reached when earnings were comparable with the 2019 guidance. Smallcaps Recommendation: BUY.

Smallcaps.us Advice: BuyPrice Target: $30.03Latest Company Report (pdf)
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