Record Sales and Earnings for Acme United Despite Tough Office Market

Despite being impacted by store closures at large office supply retail chains, Acme United (ACU – $18.00) set a new all-time quarterly sales and earnings record.

Sales for the three months ended June 30, 2015, reached $34.0 million, up 2% compared with sales of $33.4 million in the second quarter of 2014. Net income in the second quarter of 2015 rose by 6% to $2.7 million, or $0.74 per diluted share, versus $2.5 million, or $0.72 per diluted share, in the comparable quarter last year.

The second quarter benefited from new customers that were attracted and new product families that were launched. In particular, sales of first aid items, Cuda fishing tools, and Camillus knives overcame the weakness in the office channel. The fact that all of its brands are performing well is one of Acme United’s true strengths. If one brand performs a little softer, such as Westcott did in the past quarter, the other brands make up for it.

For the six months, ended June 30, 2015, net sales were $56.8 million, compared to $52.5 million in the same period in 2014, an increase of 8%. Net income for the nine months ended June 30, 2015 was $3.1 million or $0.85 per diluted share, compared to $2.9 million or $0.83 per diluted share in the comparable period last year, an 8% increase in net income.

During the conference call, following the announcement of the second quarter results, Walter C. Johnsen, Acme United’s Chairman and CEO, gave sales guidance for 2015 of $115 million, slightly down from between $118 and $120 million. And earnings per share are expected to reach between $1.40 and $1.42, down from between $1.45 to $1.50 per share. We believe these are somewhat conservative estimates, especially in light of the expected growth in the second half of the year. By comparison, in 2014 Acme had revenues of $107.2 million and earned $1.36.

 
Three Months Ended
June 30
Six Months Ended
June 30
Amounts in $000’s
2015
2014
2015
2014
Net Sales
33,954
33,396
56,791
52,548
Cost of Goods Sold
21,419
21,875
35,821
34,150
S, G & A Expenses
8,660
7,983
16,269
14,235
Income From Operations
3,875
3,538
4,702
4,163
Other Income (Expense)
123
(98)
329
4
Pre-Tax Income
3,752
3,636
4,373
4,159
Income Tax Expense
1,044
1,093
1,229
1,248
Net Income
2,708
2,543
3,144
2,911
Earnings Per Share
0.74
0.72
0.85
0.83
Shares Out. – Diluted
3,682
3,539
3,705
3,487
Most important income statement data for the quarters and six months ending June 30, 2015 and June 30, 2014. Source: Company Press Release

Margin growth was solid. In the second quarter of 2015, gross margins reached 36.9% compared to 35.1% in the 2014 period. And for the six months ended June 30, 2015, gross margins were 36.9% compared to 35.4% for last year’s period. The gross margin improvement for both periods was primarily due to a favorable product mix.

Impacted by Store Closures and Strong Dollar

Acme’s second quarter financials were impacted, because back-to-school sales of scissors, rulers, and pencil sharpeners were less than forecast. Especially sales to office retail chains were soft.

Consumers haven’t stopped buying, it’s just that some of these chains are closing hundreds of stores in 2015. For example, Target is closing 133 stores in Canada, Staples is shutting down 250 stores and Office Depot is reducing its number of locations by over a hundred. As a result, the inventory from these closed locations was sent to other sites, resulting in temporarily reduced purchases.

If Staples’ acquisition of Office Depot isn’t blocked by the Federal Trade Commission (FTC), we may see more store closures in the coming years. It’s very likely however that it will be blocked. It’s also important to note that although the number of physical stores may be declining, Acme’s online sales, at for example Amazon, are rapidly rising.

The strong appreciation of the U.S. dollar versus the Canadian dollar and euro also negatively influenced Acme’s second quarter. Because the Canadian and European segments buy their products in U.S. dollar, they have a hard time maintaining their margins. As a result, they have reduced costs with suppliers, trimmed expenses, and increased their selling prices to partially offset the depreciation of their currencies.

U.S. Making Up for Softer Canadian 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 the second quarter will be available in the 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’s second quarter. Based on those numbers, we can give a good estimation.

 
Three Months Ended
June 30
Amounts in $000’s
2015
2014
U.S.
29,571
27,870
Canada
2,855
3,673
Europe
1,528
1,853
Estimated sales per segment for the second quarter ending June 30, 2015 (Source: Smallcaps Investment Research) and actual sales per segment for the second quarter ending June 30, 2014 (Source: Company Filing)

In the U.S. segment, net sales for the quarter ended June 30, 2015 increased 6% compared to the same period in 2014 due to increased sales of first aid products, Camillus knives, and Cuda fishing tools. Year over year, net sales for the first six months of 2015 grew 13% due to increased sales of first aid products and Westcott scissors.

Net sales in Canada for the three months ended June 30, 2015 decreased 23% in U.S. dollars and 13% in local currency compared to the prior-year period. Year over year, net sales for the six months ended June 30, 2015 decreased 22% in U.S. dollars and 11% in local currency. These decreases were primarily due to Target closing all its stores..

Net sales in Europe for the three months ended June 30, 2015 decreased 19% in U.S. dollars but were constant in local currency compared to the 2014 period. Net sales for the first half of 2015 decreased 13% in U.S. dollars but rose 6% in local currency.

Balance Sheet

The Company’s bank debt less cash on June 30, 2015 was $28.2 million compared to $28.9 million on June 30, 2014. The Company expects this number to decline to approximately $20 million by year end.

Inventories are high due to the seasonality of the back-to-school season. This will correct itself in the coming months.

Amounts in $000’s
June 30, 2015
June 30, 2014
Cash and Cash Equivalents
1,941
2,426
Accounts Receivable
27,123
30,795
Inventories
36,217
30,885
Total Current Assets
67,706
66,075
Property and Equipment
7,195
6,577
Total Assets
89,421
87,987
 
 
 
Accounts Payable
9,332
10,919
Other Current Liabilities
7,039
7,466
Total Current Liabilities
16,371
18,385
Bank Debt
30,179
31,325
Total Liabilities
46,886
50,150
Total Stockholder Equity
42,535
37,838
Most important balance sheet data for the quarters ending June 30, 2015 and June 30, 2014. Source: Company Press Release

More Growth Expected in Second Half and Beyond

The second half of the year looks very solid for Acme United, as it’s gaining new business, launching several new products and benefitting from a number of cost savings.

Earlier this year, it won a major long-term scissors contract at a large office superstore chain. First shipments took place in June, but the bulk of it is now underway. And the Cuda fishing gear brand is growing rapidly. We heard that the past ICAST show in Orlando, Florida was highly successful and that distribution will be expanded.

As for new products, there are a number of new first aid, hunting, and office product tools that will be launched in the following quarters. And there’s a substantial pencil sharpener promotion at a large retail chain that ships this quarter. In addition, Camillus knife sales look to be strong for the fall and holiday season, and new first aid promotions with a hardware market are being prepared.

Finally, because production from Pac-Kit will be shifted to the First Aid Only facility in Vancouver, Washington, the lease on the current Pac-Kit manufacturing plant in South Norwalk, Connecticut won’t be renewed. This will, together with the plant’s other fixed costs that will be eliminated, such as heat and electricity, result in annual savings of about $500,000.

Conclusion

The second quarter didn’t meet management’s expectations. Especially the Westcott brand was impacted by the store closures. The other brands, such as Cuda, First Aid Only, and Camillus more than made up for Westcott’s softer performance. All in all, Acme was able to report an all-time quarterly sales and earnings record.

As for the following quarters, we expect Acme to resume its regular growth path. Westcott’s impact is never bigger than in the second quarter because of back-to-school. So even if the brand’s sales are still somewhat softer due to store closures, it won’t have the same influence on the Company’s financials as in the second quarter.

In addition, the Company has picked up a large new scissors account, for which deliveries have started late June. Many new tools are bound to hit the shelves and closing of the Pac-Kit facility will provide operating leverage in 2016 and beyond.

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