Acme United Corporation (ACU) Earnings Call Transcript

Good day, and welcome to the Acme United Third Quarter 2021 Financial Results Conference Call. At this time, I would like to turn the call over to Walter Johnsen Chairman and CEO. Please go ahead, sir.

Good morning. Welcome to the third quarter 2026 earnings conference call for Acme United Corporation. I'm Walter C. Johnsen, Chairman and CEO. With me is Paul Driscoll, our Chief Financial Officer, who will first read a safe harbor statement. Paul?

Forward-looking statements in this conference call, including, without limitation, statements related to the company's plans, strategy objectives, expectations, intentions and adequacy of capital and other resources are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, among others, those arising as a result of the challenging global macroeconomic environment characterized by continued high inflation, high interest rates and the imposition of new tariffs or changes in existing tariff rates. In addition, we have experienced supply chain disruptions, and we may experience these disruptions in the future. We are also subject to additional risks and uncertainties as described in our periodic filings with the Securities and Exchange Commission and in our current earnings release.

Thank you, Paul. Acme United had an excellent third quarter of 2026. Net sales were $58 million compared to $49.1 million in the third quarter of 2025 an increase of 18%. Net income was $3.4 million compared to $1.9 million in 2025, an increase of 80%. Earnings per share were $0.80 compared to $0.46, an increase of 74%. We received a tariff refund of $6 million, of which $4 million was brought into income offset by reserves for closure of our small DMT facility and variable compensation. The net impact was $1.2 million in pretax income and approximately $1 million in after-tax income. Excluding the $1 million net income -- I'm sorry, excluding the $1 million, net income was $2.4 million compared to $1.9 million, an increase of 24% and earnings per share were $0.55 compared to $0.46, an increase of 20%. Our net sales in the United States increased 20% with strong sales in both the first aid and Westcott cutting tool segments. Our back-to-school sales were excellent, reflecting new promotional activity and strong sell-through in the mass market channel. The mimetic acquisition performed as planned with net sales of $4 million in the quarter. The operating cash flow contribution was positive. The fourth quarter is expected to be seasonally strong in both sales and earnings. Our new business efforts in retail and industrial distribution are beginning to generate additional sales and we are building the momentum for 2027. The company introduced the latest SmartCompliance first aid kit in September at the National Safety Conference. This product includes integrated RFID technology and generates automatic replenishment orders for refills. Customer feedback has been encouraging, and we plan to begin shipping in January 2027. At the beginning of 2026, we reviewed our sites, their potential for expansion and where to allocate capital. We concluded that our DMT plant in Malbor, Massachusetts did not have sufficient scale or capacity to be a long-term asset. Most of our production of DMT sharpeners had been outsourced to China in previous years and production at the Marlboro site was not cost effective. We will close the plant during the fourth quarter and have reserved $1 million. Savings are expected to be over $1 million annually beginning in January 2027. The Spill Magic plant in Mt. Pleasant, Tennessee that we opened in March 2026, is now fully operational. It provides increased capacity that has resulted in growth of approximately 34% this year. We also installed highly automated production and filling equipment. It took about 6 months to complete the installation, and we now have a very efficient plant that we believe is poised for future growth. Our international businesses performed well in the third quarter. In Europe, net sales increased 7% in local currency, with strong earnings Sales in Canada grew 12% in local currency. And we are projecting a solid fourth quarter of 2026. As we look into 2027, we have already booked new business in first aid and are seeing continued strength in our cutting tool business. There have been increases in shipping costs, freight expenses and inflation which we are offsetting with improved efficiency from automation and new equipment. We've had strong cash generation in 2026, and our liquidity is excellent. We continue to review new acquisition opportunities. I will now turn the call to Paul.

Acme's net sales for the third quarter were $58 million compared to $49.1 million in 2025, an increase of 18%. Excluding mimetic, sales increased 10%. Sales for the 9 months ended September 30, 2026, were $173 million compared to $149 million in the same period in 2025, an increase of 16%. Excluding Mimanic, sales increased 8%. Net sales in the U.S. segment increased 20% in the quarter, excluding MiMedx sales increased 10%. Sales increased 17% for the 9 months ended embed excluding MiMedx sales increased 7%. The increases for both periods were driven by higher sales across all product lines. Net sales in local currency in Europe increased 7% and in the third quarter and 15% for the 9 months of 2026. The increases for both periods were partly due to the new line of cutting and sharpening tools, also Westcott and First aid had solid performances. Net sales in low currency for Canada increased 12% in the quarter and 8% for the year-to-date, mainly due to higher sales of first aid products. We received $6 million in EPA tariff refunds and in the third quarter of 2026, recognized $4 million of the refund as a reduction of cost of goods sold. The remaining $2 million was recorded as an accrued liability in the balance sheet. In the third quarter, we also recorded $1 million of variable compensation expense related to the refund included in SG&A. Additionally, in the third quarter of 2026, Cost of goods sold included $1.8 million of costs accrued related to closing our DMP sharpie facility. Net income for the 3 and 9 months ended September 30, also benefited from approximately $400,000 of tax benefits resulting from stock option exercises. The gross margin was 45.3% in the third quarter of 2026 compared to 39.1% in 2025. The gross margins for the third quarter included the benefit of approximately 690 basis points from a tariff refund, partially offset by approximately 310 basis points related to the DMT closure costs. The gross margin was 42.6% for the first 9 months of 2026 compared to 39.8% in 2025. Gross margin for the first 9 months of 2026 included a benefit of approximately 230 basis points from the tariff refund partially offset by approximately 105 basis points related to the DMT closure costs. Excluding the impact from tariff refunds and the DMT closure, the gross margin as a percentage of sales increase for both periods was mostly due to the favorable mix from higher margin direct-to-consumer MiMedx products. SG&A expenses for the third quarter of 2020 were $21.8 million of sales compared with $16.2 million or 32% of the sales for the same period of 2025. SG&A for the first 9 months of 2026 were $60.7 million or 35% of sales compared with $47.5 million or 32% of sales in 2025. The higher SG&A was primarily due to the addition of the MiMedx business, the higher percentage of sales was due to the higher amount of advertising needed for the direct-to-consumer mimetic business. The third quarter also included $1 million of variable compensation related to the tariff refund. Net income for the third quarter of 2026 was $3.4 million or $0.80 per diluted share compared to net income of $1.9 million or $0.46 per diluted share in 2025, an increase of 80% of net income and 74% in earnings per share. Net income for the first 9 months of 2026 was $9.5 million or $2.29 per diluted share compared to $8.3 million or $2.03 per diluted share in the comparable period last year, increases of 14% and 13%. And now to the balance sheet, net debt increased from $23.1 million at September 30, 2025 to $29.7 million at September 30, 2026. During the 12-month period ended September 30, we paid $14.5 million for the acquisition of the assets of MiMedx distributed approximately $2.4 million in dividends and purchased the cutting and sharpening line of products in Germany for $1.6 million. Additionally, we generated approximately $31 million in free cash flow, including $4 million in tariff refunds.

Thank you, Paul. I'll now open the call to questions.

[Operator Instructions] We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jim Marrone with Singular Research.

I have multiple questions. All related with one another. And then I'll begin with just with regards to the tariff refund. If you could kind of just share some insight on how it goes about being calculated, I would greatly appreciate it. with that. And to go along with the tariff refund, I'm just trying to get a sense of your rationale for the decisions on closing the Marlboro plant. And transferring that operation overseas. This seems like the U.S. segment has outperformed both Canada and Europe. And it kind of goes against the grain with what Other companies are doing by reinvesting in the U.S. in light of the tariffs. And so it just seems kind of against the grain of what the -- what other companies are doing. So I look forward to hearing your answers to that.

Okay, Jim. Those are good questions, and we appreciate them. The first is the tariff refund. How is it calculated? Well, the tariffs that we paid, we went back because we were the importer of record, we went back to invoices and payments through customs. And you total all those up, and you come up with a number and then you submit it to the EPA refunds and then it happens. The difficulty in that, of course, is that you've got to get your books really ordered if you got to figure it out. And there's a lot of variables. But in simple terms, you count up the amount that you paid. Now the rationale for closing Marlboro, that was a very difficult decision. It was the place where DMT started. It was -- it had modern equipment -- but honestly, although there's a lot of push to buy American and we support that, when the price of a product is just more expensive by a lot than in China to produce. Sometimes the economics just drive you to do that. This was a small facility, and it had less than 20 people. And the bulk of the production had already been shifted to China because the customers were demanding, for example, our new electronic pencil sharpeners, electronic sharpeners for tools. And it was getting good reception in the market as Chinese made. Other items that required expensive tooling in the United States could be done more cost effectively in China. So we produced it there. The net is it was a small plant. And when you look at where you're going to put your resources you put them where you have big value, not little. And so we closed it. Now having said that, the rationale for production in the United States is a good one. As you may recall, we bought a plant in not Pleasant Tennessee to produce our Spill Magic production. There was a 12-acre facility, 78,000 square feet room to double modern air conditions. We bought it at a very, very good price of $6 million. We invested about $1.5 million in equipment brought that to be fully automated and went live this quarter. And incidentally, the DMT of the Spill Magic product line increased 34% year-to-date because we get out of the capacity to make it, and we have the capacity to grow. So when you compare 2 plants, you see why one was struggling. It made sense to use the best resources you can in China. The other is reinvest in the U.S. where you had real leverage, and that's what we did.

Yes, that's very good insight. And so speaking of growth, where is the focus going forward then? Is it going to continue to be organic growth? Or Will there be a little more focus on acquisitions like you have in the past? So where do you see your attention?

Well, it's a combination. We've looked at a lot of deals this year, and we're continuing to evaluate them. You want them to be strategic. You want them to make a difference and you want them to have a high likelihood of being successful. And so being a little choosy and taking some time makes sense. In the meantime, we are building that balance sheet. And that means we're not highly levering our company. The organic growth has been good. We're looking forward to, as I mentioned in the call, a solid fourth quarter, and we're already booking business for 2027. So it's really a combination of both. And I would expect sometime in the next 12 months, there'll probably be another deal because every year, we wind up doing at least 1 but we're being careful.

And okay, if you're looking at growth and whether it's a deal or organically, is that more on the first aid side or on the cutting tools side? Where you tinker your focus will be?

Well, both segments are very important to us. And if there's a good deal in the Westcott side, of course, we'll buy it. And in the case of our German business last year, we bought a direct-to-consumer business in the sharpening and cutting area. And we'll continue to look at those for sure. The First Aid business lends itself to consolidation. We are the consolidator, -- and we're the natural buyer for many of our competitors and some of those that are half step away. And I would expect that there will be other opportunities in that segment. And -- if you look long term, I think the First Aid business has greater organic growth opportunities. And I think that given that it's 70% of our business, chances are it will continue to become increasingly important in the overall company.

Excellent. And a thank you so much for that, Walter.

Our next question is from Georgy Vashchenko with Freedom Brokers.