Superior Uniform Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The filing’s registrant name is Superior Uniform Group, Inc. The company reports two segments: Uniforms and Related Products, and Remote Staffing Solutions.
Financial highlights
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $57.968 million | $46.347 million; up 25.1% |
| Gross profit | $20.021 million; 34.5% margin | $15.796 million; 34.1% margin |
| Income before taxes | $3.410 million | $3.223 million |
| Net income | $2.260 million | $2.043 million; up 10.6% |
| Diluted EPS | $0.15 | $0.14 |
| Operating cash flow | $(2.913) million | $(1.114) million |
| Cash and equivalents | $2.289 million at March 31 | $1.036 million at December 31, 2015 |
| Debt | $48.120 million gross debt | $23.950 million at December 31, 2015 |
Net margin was approximately 3.9%, compared with 4.4% a year earlier. The effective tax rate declined to 33.7% from 36.6%. The quarterly dividend was $0.0825 per share, versus $0.075.
Material changes and operating results
- Sales growth reflected 14.9 percentage points from Uniforms and Related Products excluding BAMKO, 8.2 points from the BAMKO acquisition, and 2.0 points from Remote Staffing Solutions after intersegment eliminations.
- Uniforms and Related Products sales rose 24.4%, including BAMKO sales from its March 1 effective date. Segment cost of goods sold improved to 66.5% of sales from 67.1%.
- Remote Staffing Solutions sales increased 25.7% before eliminations and 36.2% after eliminations. Its cost of goods sold rose to 46.9% of sales from 42.4%, partly reflecting a larger domestic-services mix.
- Selling and administrative expense increased to $16.463 million from $12.437 million. The period included $898,000 of BAMKO acquisition-related expenses and $255,000 of pension settlement loss. Interest expense was $148,000, versus $136,000.
- On March 8, the company acquired substantially all BAMKO assets. Recorded consideration was $19.810 million, comprising $15.252 million net cash and $4.558 million in restricted shares; the preliminary allocation included $5.396 million of contingent consideration. BAMKO contributed $3.8 million revenue and a $498,000 net loss for March, including acquisition expenses. Purchase-price allocation remained preliminary.
Liquidity, debt and cash flow
- Operating activities used $2.913 million; investing activities used $17.959 million, including $15.252 million for BAMKO and $2.707 million of capital expenditures. Financing activities provided $22.095 million, mainly reflecting debt proceeds and repayments.
- Current assets were $116.583 million and current liabilities $24.547 million at quarter-end. Trade receivables increased to $38.554 million, partly from BAMKO and higher quarter-end sales; inventory decreased slightly to $62.810 million.
- The March 8 credit agreement refinanced the prior term loan with a $45 million term loan and increased the revolver to $20 million. Total debt was $48.120 million, including $3.120 million drawn on the revolver. Rates were 1.29% on the term loan and 1.35% on the revolver at quarter-end.
- The company reported compliance with its credit covenants. The agreement includes leverage and fixed-charge coverage limits and is secured by substantially all operating assets. A swap hedges part of the floating-rate exposure; its negative fair value was $145,000.
Outlook, risks and other matters
- Management expects improving employment and employee turnover, healthcare-market penetration, and BAMKO’s promotional-products business to support Uniforms growth. It cites continued customer acquisition and market response as support for Remote Staffing Solutions growth.
- The El Salvador call-center project, expected to be completed mid-2016 and approximately double existing local capacity, had about $1.8 million of Q1 spending; management expected another $1.5 million to complete it during 2016.
- No specific full-year revenue or earnings guidance was provided. Management believed operating cash generation and external credit sources would fund operations for the foreseeable future.
- Risks highlighted include economic and employment conditions, competition, raw-material prices and availability, acquisition integration, retention of key personnel, geopolitical and currency risks, and uncertainty in contingent acquisition payments. Management said the BAMKO contingent liability may fluctuate significantly and actual payments may differ materially from estimates.
- Management said ordinary-course legal matters were not expected to materially affect results or financial position. Disclosure controls were deemed effective, and no material change in internal control was reported.
Important facts for investors to verify
- How BAMKO performs after integration and whether its preliminary purchase-price allocation or contingent-consideration estimate changes.
- Whether revenue growth translates into improved net margins, given higher selling and administrative costs and acquisition-related expenses.
- Working-capital and operating-cash-flow trends, particularly receivables and the low cash balance.
- Debt amortization, covenant headroom, floating-rate exposure, and funding needs for planned capital expenditures.
- Progress toward healthcare customer wins and completion, cost, and utilization of the El Salvador facility.