Superior Uniform Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; interim financial statements are unaudited. The filing identifies the registrant as Superior Uniform Group, Inc.
Business context and results
The company reports two segments: Uniforms and Related Products, including promotional products, and Remote Staffing Solutions. Results include BAMKO from its March 1, 2016 acquisition date.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $64.660 million | $54.116 million | $122.628 million | $100.463 million |
| Gross profit | $21.763 million | $18.531 million | $41.784 million | $34.327 million |
| Net income | $3.075 million | $3.624 million | $5.335 million | $5.667 million |
| Diluted EPS | $0.21 | $0.25 | $0.36 | $0.39 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $7.626 million | $5.548 million |
Q2 sales rose 19.5%, while net income fell 15.2%. Gross margin was approximately 33.7% versus 34.2%; net margin was approximately 4.8% versus 6.7%. For the first six months, sales increased 22.1%, while net income declined 5.9%; gross margin was approximately 34.1% versus 34.2%. Selling and administrative expense was $16.956 million in Q2 and $33.419 million year to date. Interest expense was $192,000 in Q2 and $340,000 year to date.
Q2 sales growth reflected BAMKO’s contribution of 18.2 percentage points, a 1.4-point increase from Remote Staffing Solutions after eliminations, and a 0.1-point decline in the existing Uniforms and Related Products business. Year-to-date growth included 13.6 percentage points from BAMKO, 6.8 points from existing uniforms operations, and 1.7 points from Remote Staffing Solutions after eliminations.
Cash flow, liquidity and debt
- At June 30, cash was $4.735 million, current assets were $118.274 million and current liabilities were $31.678 million, for working capital of approximately $86.596 million.
- Six-month operating cash flow was $7.626 million. Investing used $20.779 million, including $15.252 million for BAMKO and $5.527 million of capital expenditures. Financing provided $16.770 million. Cash increased $3.699 million from year-end.
- Capital expenditures included approximately $3.483 million for the El Salvador call-center project, completed in June and described as nearly tripling existing capacity.
- Debt at June 30 comprised $6.429 million current and $36.898 million long-term, net of issuance costs. The new $45 million term loan was used in part to finance BAMKO; the company also has a $20 million revolving facility, with no revolving balance or letters of credit reported at June 30.
- Term-loan interest was 1.32% at June 30; revolving-facility interest was 1.35%. Debt is secured by substantially all operating assets and subject to leverage and fixed-charge covenants. The company reported compliance with all covenants.
- Cash dividends were $0.0825 per share in Q2 and $0.165 per share for the first half, up from $0.075 and $0.15, respectively, in 2015.
Material changes, outlook and risks
- BAMKO acquisition consideration was preliminarily valued at $19.810 million: $15.252 million cash, $4.558 million in restricted shares, and contingent consideration estimated at $5.396 million. The filing says purchase-price allocation remains preliminary. BAMKO contributed $9.839 million of Q2 sales and a $88,000 pretax profit for the quarter; from acquisition through June 30, it contributed $13.639 million of sales and a $410,000 pretax loss. Year-to-date acquisition-related expenses were approximately $1.072 million.
- Management cited improving employment and rising voluntary employee turnover, healthcare-sector demand, and expanded access to healthcare facilities through group purchasing organization contracts as potential support for uniform sales. It also cited continued market penetration and growth investment in Remote Staffing Solutions. No numerical full-year guidance is provided.
- Management said operating cash generation and external credit should be adequate for operations for the remainder of the year and foreseeable future. The company was investing in facilities and pursuing acquisitions.
- Margin pressures included higher product and overhead costs in uniforms, a higher domestic-service mix in Remote Staffing Solutions, increased self-insured medical costs, Haiti factory startup costs, and pension and retirement expenses. BAMKO’s acquisition expenses also weighed on results.
- Key stated risks include economic and employment conditions, competition, raw-material prices and availability, successful acquisition integration, retention of key personnel, and political and currency risks in international operations. Management noted that a 1% impairment of net trade receivables would add approximately $371,000 of bad-debt expense.
- Acquisition contingent consideration may be remeasured and actual payments may differ materially from estimates. The company also has pension obligations and variable-rate debt exposure, partly mitigated by an interest-rate swap.
Important facts for investors to verify
- Whether BAMKO integration, earnings targets and final purchase accounting support the reported goodwill, intangible assets and contingent-liability estimates.
- Whether underlying uniform sales and margins improve, excluding BAMKO’s acquisition contribution and related expenses.
- Whether Remote Staffing Solutions can sustain growth while managing its changing domestic-versus-offshore service mix and margin impact.
- Debt amortization, covenant headroom and liquidity needs alongside planned capital expenditures, dividends and contingent acquisition payments; covenant headroom is not quantified in the filing.
- Receivable collectability, inventory quality, and the potential effect of raw-material, medical-cost, pension and currency changes.