Superior Uniform Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; interim financial statements are unaudited. The filing describes the registrant as Superior Uniform Group, Inc. Its businesses are reported in Uniforms and Related Products and Remote Staffing Solutions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $65.282 million | $56.662 million | $187.910 million | $157.125 million |
| Gross profit | $23.140 million | $19.224 million | $64.924 million | $53.551 million |
| Gross margin | 35.5% | 33.9% | 34.5% | 34.1% |
| Income before tax | $6.006 million | $5.581 million | $14.031 million | $14.198 million |
| Net income | $4.386 million | $4.031 million | $9.721 million | $9.698 million |
| Diluted EPS | $0.29 | $0.28 | $0.65 | $0.67 |
| Interest expense | $172,000 | $130,000 | $512,000 | $395,000 |
- Q3 sales increased 15.2% year over year and net income increased 8.8%; diluted EPS rose to $0.29 from $0.28.
- Nine-month sales increased 19.6%, while net income was nearly flat and diluted EPS declined from $0.67 to $0.65.
- For the nine months, operating cash flow was $6.171 million versus $5.612 million. Capital expenditures were $6.596 million, implying cash flow after capital expenditures of approximately negative $425,000, before acquisition spending.
- Cash was $2.800 million at September 30, 2016, versus $1.036 million at year-end 2015. Current assets were $123.343 million and current liabilities $32.342 million (current ratio approximately 3.8).
- Total debt was $44.570 million, compared with $23.950 million at year-end 2015; cash-adjusted debt was approximately $41.770 million. Debt comprises a $41.250 million term loan and $3.320 million drawn on the revolving facility.
Material changes and business developments
- The March 2016 BAMKO acquisition added promotional products and branded merchandise operations. The company reports that BAMKO contributed 11.0 percentage points of Q3 sales growth and 12.6 percentage points of nine-month growth.
- BAMKO contributed $6.215 million of Q3 sales and $19.854 million from the acquisition’s March 1 effective date through September 30. Its reported pretax loss was $19,000 for Q3 and $428,000 for that acquisition-period, including acquisition-related expenses.
- Q3 Remote Staffing Solutions sales increased 10.9% before intersegment eliminations; nine-month sales increased 18.1%. Management attributed growth to market penetration and new and existing customers.
- Q3 gross margin improved year over year, while selling and administrative expense rose to $16.962 million from $13.513 million. The increase reflected acquisition costs and operating expenses, including medical and pension costs; the filing also cites staffing and facility costs in remote staffing.
- In March, the company amended its Fifth Third Bank credit agreement, raised the revolver limit from $15 million to $20 million, and refinanced with a new $45 million term loan to help fund BAMKO.
Outlook, risks, and contingencies
- Management expected factors including improving employment conditions, rising voluntary employee turnover, healthcare-market penetration, and BAMKO to support growth in 2016. It provided no specific numerical earnings or revenue guidance.
- Management said operating cash generation and access to trade and institutional credit should be adequate for operations in the remainder of 2016 and the foreseeable future.
- The credit agreement is secured by substantially all operating assets and includes leverage and fixed-charge coverage covenants. The company reported compliance at September 30, 2016. Interest rates are variable, with a swap hedging a portion of exposure.
- BAMKO contingent consideration was estimated at $5.205 million; the filing warns that remeasurement and actual payments may differ materially. Purchase-price allocation remained preliminary.
- Disclosed risks include economic and employment conditions, competition, raw-material and finished-goods price volatility, acquisition integration, and global political and currency risks. Management said ordinary-course legal matters were not expected to materially affect results, cash flows, or financial position.
- The company completed a new El Salvador call-center building in June 2016, nearly tripling capacity there. Nine-month spending on the project was approximately $3.562 million.
Important facts for investors to verify
- Whether BAMKO’s margins, operating costs, and contingent consideration develop in line with management’s expectations; reported BAMKO pretax results included acquisition-related expenses.
- Whether working-capital growth, especially receivables and inventory, converts into operating cash flow, given cash flow after capital expenditures was negative for the nine-month period.
- Debt amortization, variable-rate exposure, covenant headroom, and available capacity under the $20 million revolver.
- Whether higher selling and administrative expenses and pension costs continue to pressure earnings despite improved gross margin.
- How the stated employment, healthcare, raw-material, currency, and acquisition-integration risks affect future results; the filing’s outlook is qualitative rather than quantified.