Superior Uniform Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. The filing presents unaudited consolidated interim results. The company reports three segments: Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $61.0 million | $58.0 million | +5.2% |
| Gross profit | $22.2 million | $20.0 million | +11.0% |
| Gross margin | 36.4% | 34.5% | +1.9 percentage points |
| Income before income taxes | $5.4 million | $3.4 million | +58.5% |
| Net income | $3.8 million | $2.4 million | +57.0% |
| Diluted EPS | $0.26 | $0.17 | +$0.09 |
| Operating cash flow | $7.0 million | $(2.7) million | Improved $9.7 million |
Selling and administrative expense increased to $17.6 million from $16.5 million. Interest expense rose to $184,000 from $148,000. The reported $1.018 million gain on property and equipment sales contributed to pretax income; excluding that gain, pretax income was approximately $4.4 million. The effective tax rate was 29.0%, compared with 28.4%. Q1 2017 tax expense included a $223,000 benefit from excess share-based compensation tax benefits.
Segments and drivers
- Uniforms and Related Products: Sales declined 4.6% to $48.3 million. Management cited an unusually strong Q1 2016, a customer account transition that reduced sales by about $1.7 million, and a discontinued customer uniform program that reduced sales by about $1.4 million. Cost of goods sold declined as a share of sales, but segment selling and administrative expense rose as a share of revenue.
- Remote Staffing Solutions: Sales rose 7.0% to $4.7 million, attributed to continued customer growth. The segment recorded about $1.02 million in gain from selling its former El Salvador call center and related assets.
- Promotional Products: Sales were $8.9 million versus $3.8 million. The comparison is not like-for-like: Q1 2017 includes three months of BAMKO, while Q1 2016 includes sales only from the March 1 acquisition date. Segment pretax income was $416,000 versus a $760,000 loss; Q1 2016 included $898,000 of acquisition-related expense.
Liquidity, cash flow and debt
- Cash increased to $9.4 million from $3.6 million at December 31, 2016. Current assets were $125.7 million and current liabilities $29.4 million; the current ratio was approximately 4.3.
- Operating cash flow was $7.0 million, including a $7.2 million cash benefit from the reduction in trade receivables. Investing activities provided $1.9 million, including $2.8 million of property-sale proceeds, partly offset by $930,000 of capital expenditures. Financing activities used $3.2 million, including $1.2 million of dividends and $1.8 million paid on acquisition-related contingent consideration.
- Debt totaled $42.0 million at March 31, 2017, including $6.0 million current and $36.0 million long-term. The company refinanced with BB&T on February 28, replacing the Fifth Third facilities with a $42.0 million term loan and a $35.0 million revolving facility. The revolver was undrawn at quarter-end; the reported loan rate was 1.68%.
- The BB&T agreement is secured by substantially all operating assets and includes leverage and fixed-charge coverage covenants. The company reported compliance. A new interest-rate swap is intended to fix the rate on $18.0 million of borrowings at 3.12% beginning March 2018. A Brazilian real forward contract had a negative fair value of $169,000 at quarter-end.
Outlook, risks and notable items
Management expected moderate U.S. employment improvement, rising employee turnover, and healthcare-sector hiring to support 2017 uniform sales growth. It described plans to expand healthcare-market penetration, grow remote staffing, and pursue further acquisitions in promotional products and uniforms. No quantified earnings or revenue guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
Key risks identified include economic and employment conditions, changes in customer industries and demand, competition, cotton and other material costs, and the ability to integrate acquisitions and retain key personnel. Management also highlighted estimation sensitivity for receivable allowances, inventory obsolescence, goodwill, insurance claims, pensions, and taxes. It said pending legal matters were not expected to materially affect results, cash flows, or financial position; no material risk-factor changes from the 2016 Form 10-K were reported.
Accounting developments: the company had early adopted the share-based compensation standard in 2016. It was evaluating the revenue-recognition standard, due for adoption January 1, 2018, and was in preliminary assessment of the lease standard. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Investor verification priorities
- Assess the sustainability of earnings growth after separating the $1.018 million property-sale gain and the $223,000 share-based tax benefit.
- Check whether the uniform customer transition and discontinued program effects conclude as expected, and whether segment sales stabilize.
- Compare promotional-products growth on a full-period basis, recognizing the uneven BAMKO comparison, and evaluate integration and acquisition plans.
- Review operating cash flow quality: receivables supplied a significant portion of Q1 cash generation; monitor collections, inventory, and working-capital needs.
- Track debt amortization, floating-rate exposure, swap effectiveness, covenant headroom, and contingent acquisition consideration, whose estimated fair value may change.