Schmitt Industries (SMIT) has embarked on a transformative journey, shifting its focus to capitalize on the growing opportunities in the ice cream sector while reevaluating its legacy measurement solutions business. This strategic pivot aims to position the company for long-term success, leveraging its diverse capabilities and responding to the dynamic market conditions.
Ample Hills Acquisition: Diversifying into the Ice Cream Segment In July 2020, Schmitt Industries made a strategic move by acquiring Ample Hills, a renowned artisanal ice cream manufacturer based in Brooklyn, New York. This acquisition marked a significant diversification of the company's operations, as it ventured into the dynamic and growing ice cream industry.
Ample Hills, founded in 2011, has built a strong brand reputation for its high-quality, handcrafted ice cream products. The company operates a network of retail locations in New York, New Jersey, and California, catering to both local and nationwide customers through its e-commerce platform. Schmitt's decision to acquire Ample Hills was driven by the potential for synergies, brand recognition, and the opportunity to capitalize on the increasing consumer demand for premium ice cream offerings.
Refocusing on the Ice Cream Segment In April 2022, Schmitt Industries announced its intention to focus its efforts on the Ample Hills ice cream business as its core operation. This strategic shift is designed to accelerate the growth of the ice cream segment while streamlining the company's resources and reducing costs.
The company's decision to prioritize the ice cream business is a reflection of the segment's strong performance and growth potential. During the fiscal year ended May 31, 2022, the Ice Cream Segment generated $8.32 million in revenue, accounting for 84.1% of Schmitt's total revenue. This represents a significant increase of 105.7% compared to the prior fiscal year, underscoring the segment's momentum and the market's appetite for Ample Hills' products.
The Ice Cream Segment's gross margin improved to 53.4% in fiscal 2022, up from 39.4% in the prior year, as the company focused on driving operational efficiencies. Operating expenses for the Ice Cream Segment increased 27.7% to $12.02 million in fiscal 2022 to support the growth of the business. The company has opened several new Ample Hills retail locations over the past year and has plans for additional openings in the future.
Navigating Challenges in the Measurement Segment Alongside the strategic focus on the Ice Cream Segment, Schmitt Industries has initiated a review of its Measurement Segment, which includes the Acuity and Xact product lines. This segment, which provides precision measurement solutions and remote tank monitoring services, has faced its own set of challenges in recent years.
The Measurement Segment's revenue for the fiscal year ended May 31, 2022, was $1.58 million, a slight increase of 1.3% over the prior year. However, the segment's operating expenses have been a point of concern, increasing by 18.8% to $3.66 million during the same period.
Schmitt's management is actively exploring strategic options for the Measurement Segment, including potential divestitures or partnerships, to ensure the long-term viability and alignment with the company's refined focus on the ice cream business.
The Measurement Segment includes the Acuity and Xact product lines. Acuity products utilize both triangulation and time-of-flight measurement principles and are known for their speed and accuracy. They are used in a wide variety of industrial, commercial and research applications. The Xact product line includes satellite-focused remote tank monitoring products and related monitoring services for markets in the Internet of Things (IoT) environment. Xact systems can detect and communicate tank fill levels, along with other information, to customers through a satellite network and secure website.
Gross margin for the Measurement Segment was 40.7% in fiscal 2022, up from 30.4% in the prior year, driven by improved bill of material efficiencies. The increase in operating expenses was primarily due to a 67.7% increase in professional fees to $2.88 million.
Financials and Liquidity Challenges Schmitt Industries has faced financial headwinds in recent years, reporting net losses of $3.28 million and $8.09 million for the fiscal years ended May 31, 2022, and May 31, 2021, respectively. The company's working capital position has also deteriorated, with a net working capital deficit of $1.82 million as of May 31, 2022, compared to a surplus of $2.95 million a year earlier.
For the fiscal year ended May 31, 2022, SMIT reported annual revenue of $9.89 million, annual net income of -$3.71 million, annual operating cash flow of -$8.10 million, and annual free cash flow of -$9.04 million. In the most recent quarter, SMIT reported revenue of $1.32 million, net income of -$3.53 million, with quarterly operating cash flow and free cash flow figures not available. The company experienced year-over-year growth in revenue, which management attributed to continued growth in the Ice Cream segment.
To address these liquidity challenges, Schmitt has taken several measures, including the sale of its Portland, Oregon real estate for $3.27 million in net proceeds and securing a $1 million promissory note from an affiliated entity. Additionally, the company has filed a shelf registration statement for up to $100 million in debt and equity securities and entered into an at-the-market offering of up to $5 million in common stock.
SMIT's debt-to-equity ratio was 30.38 as of May 31, 2022. The company had $1.05 million in cash and cash equivalents as of the end of the fiscal year. The company's current ratio was 0.69 and quick ratio was 0.44 as of May 31, 2022, indicating potential short-term liquidity challenges.
These strategic actions aim to provide the necessary financial resources to support the company's ongoing operations and facilitate the transition towards a stronger focus on the Ice Cream Segment.
Navigating the Path Forward Schmitt Industries' strategic pivot to the ice cream business presents both opportunities and challenges. The company's ability to successfully integrate and scale the Ample Hills operation, while addressing the performance of the Measurement Segment, will be crucial in determining its long-term success.
As Schmitt navigates this transformative period, investors will be closely watching the company's execution, its ability to drive revenue growth in the Ice Cream Segment, and its efforts to optimize costs and streamline operations. The company's management team's ability to make prudent decisions and adapt to the evolving market dynamics will be key to unlocking Schmitt's full potential.
Geographic Performance and Business Overview SMIT's operations are primarily located in North America, with no material sales outside of the US. The company operates two business segments - the Measurement Segment, which focuses on precision measurement solutions, and the Ice Cream Segment, which encompasses the Ample Hills ice cream business acquired in 2020. The company has not reported any major scandals, short seller reports, or CEO departures.
On April 14, 2022, SMIT announced its intention to focus on the Ice Cream Segment as its core business and launch a strategic review of the Measurement Segment. This shift in strategy is intended to allow the company to accelerate growth in the Ice Cream business while reducing costs.
Conclusion Schmitt Industries' strategic shift towards the ice cream business represents a bold move to capitalize on the growing demand for premium, artisanal ice cream products. While the company faces lingering financial challenges, its focus on the Ice Cream Segment and the potential divestiture of the Measurement Segment could position Schmitt for long-term success.
Investors will closely monitor Schmitt's execution, its ability to integrate and scale the Ample Hills operation, and its efforts to address the performance of the Measurement Segment. The company's agility and strategic vision will be critical in navigating the evolving landscape and delivering value to shareholders.