Superior Uniform Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The unaudited consolidated statements cover three businesses: Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $67.8 million | $65.3 million | $194.4 million | $187.9 million |
| Gross profit | $24.8 million | $23.1 million | $70.4 million | $64.9 million |
| Income before taxes | $6.8 million | $6.0 million | $17.9 million | $14.0 million |
| Net income | $5.0 million | $4.4 million | $13.1 million | $10.2 million |
| Diluted EPS | $0.33 | $0.30 | $0.87 | $0.69 |
| Operating cash flow | Not separately stated | Not separately stated | $17.4 million | $6.6 million |
- Gross margin was approximately 36.6% for Q3, versus 35.4% a year earlier; nine-month gross margin was 36.2%, versus 34.5%. Net margin was approximately 7.3% and 6.8% for Q3, respectively, and 6.8% and 5.4% for the nine-month periods.
- Q3 sales rose 3.8%; nine-month sales rose 3.4%. Q3 diluted EPS increased 10%; nine-month diluted EPS increased 26%.
- Cash and cash equivalents were $13.3 million at September 30, 2017, versus $3.6 million at December 31, 2016. Current assets were $131.6 million and current liabilities $32.9 million, a current ratio of about 4.0.
- Debt totaled $39.0 million, consisting of the BB&T term loan; there were no revolver borrowings or outstanding letters of credit. Cash less debt was approximately negative $25.7 million. The term loan carried a 1.98% rate at quarter-end and is secured by substantially all operating assets. The company reported compliance with its covenants.
- Nine-month investing cash use was $0.4 million and financing cash use was $7.4 million. Capital expenditures were $2.5 million; dividends paid were $3.9 million. The company also received $2.8 million from selling its former El Salvador call center.
Material changes and segment trends
- Uniforms and Related Products sales declined 6.3% in Q3 and 3.1% for the first nine months. Management attributed the declines chiefly to a lost customer account and customers discontinuing promotional uniform programs. Hurricane Irma delayed shipments, including more than $2 million of identified programs in Q3.
- Remote Staffing Solutions sales rose 30.5% in Q3 and 20.6% for the nine months, before intersegment eliminations, reflecting customer growth.
- Promotional Products sales rose 73.9% in Q3 and 44.1% for the nine months. Results reflect BAMKO, growth in existing and new accounts, and Public Identity, acquired August 21, 2017. The prior-year nine-month comparison includes BAMKO only from March 1, 2016.
- The nine-month results included a $1.018 million gain on sale of property and equipment. Interest expense rose to $593,000 from $512,000 for the nine months, which management attributed primarily to higher average borrowings.
Outlook, risks, and unusual items
- No numerical revenue, earnings, or cash-flow guidance was provided. Management described plans to pursue healthcare uniform customers and acquisitions, expand remote staffing, and build the promotional-products business.
- Management expects ongoing capital spending to maintain and improve facilities. It said the new revenue-recognition standard, effective January 1, 2018, could materially change revenue timing for certain contracts by moving recognition from shipment to over time; it expects no cash impact and was still assessing adoption and disclosures.
- Principal disclosed business risks include economic and employment conditions, customer headcount and turnover, competition, availability and cost of materials, and successful integration of acquisitions. The filing also highlights customer credit and inventory obsolescence estimates; a 1% impairment of net receivables would add approximately $428,000 of expense.
- The company has variable-rate debt and an interest-rate swap intended to fix rates on $18 million of borrowings beginning March 2018. A hypothetical 100-basis-point LIBOR increase was estimated to add about $290,000 of pretax interest expense over the first nine months of 2017. Foreign-currency exposure remains; approximately 1% of sales were outside the United States, and no foreign-exchange hedges were outstanding at September 30.
- Public Identity acquisition consideration was preliminarily valued at approximately $2.3 million, including cash, restricted shares, and future consideration; final fair-value allocations could differ. BAMKO contingent consideration was estimated at $5.4 million and may fluctuate. Management said routine legal claims were not expected to materially affect results, cash flows, or financial position; the filing reports no legal proceedings in Part II.
Important facts for investors to verify
- Whether the uniform-account losses and Irma-related shipment delays affected subsequent-quarter sales or were recovered.
- How much reported growth and profitability came from acquisitions versus organic performance, especially in Promotional Products.
- The timing and potential earnings impact of adopting the new revenue-recognition standard.
- Receivables collectability, including the customer bankruptcy and increased doubtful-account allowance, and the risk of inventory write-downs.
- Debt covenant headroom, variable-rate exposure, and the valuation and payment timing of acquisition-related contingent liabilities.