Superior Group of Companies, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted. The company operates Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products businesses. It changed its name from Superior Uniform Group, Inc. effective May 3, 2018.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $82.4m | $65.6m | $155.5m | $126.6m |
| Gross profit | $29.3m | $23.4m | $54.2m | $45.6m |
| Gross margin | 35.5% | 35.6% | 34.8% | 36.0% |
| Income before taxes | $5.1m | $5.7m | $8.4m | $11.1m |
| Net income | $3.8m | $4.3m | $6.3m | $8.2m |
| Diluted EPS | $0.25 | $0.29 | $0.40 | $0.55 |
| Operating cash flow | Not presented by quarter | $(0.3)m | $8.6m |
Q2 sales rose 25.6%; six-month sales rose 22.8%. Growth principally reflected acquisitions, including CID Resources, Public Identity, and Tangerine. Despite higher sales, net income declined 12.1% in Q2 and 23.4% for the first half. Interest expense increased to $0.8m in Q2 and $1.0m for the half, mainly due to borrowing for CID. The prior-year six-month period included a $1.0m gain on sale of property and equipment.
Q2 basic/diluted EPS was $0.26/$0.25; six-month basic/diluted EPS was $0.42/$0.40. Cash dividends were $0.095 per share for Q2 and $0.19 for the first half, up from $0.0875 and $0.175, respectively.
Segments and material period changes
- Uniforms and Related Products: Q2 sales increased 8.2% to $56.4m; six-month sales increased 4.1% to $104.5m. CID contributed to growth, while prior customer losses, lower organic sales, and ASC 606 reduced reported sales. Q2 segment income before taxes was $2.2m versus $4.4m.
- Remote Staffing Solutions: Q2 sales before intersegment eliminations increased 43.9%; six-month sales increased 49.6%. Management attributed growth to deeper market penetration. Segment income before taxes was $1.9m in Q2 and $3.5m for the half.
- Promotional Products: Q2 sales increased 114.6% to $19.0m; six-month sales increased 111.8% to $37.7m, primarily from the 2017 acquisitions. Segment income before taxes was $1.0m in Q2 and $0.5m for the half. Management cautioned that quarterly sales fluctuate and margins vary with contract mix.
Overall, the company cited acquisition contributions and Remote Staffing growth, partly offset by organic sales declines in Uniforms and Promotional Products. Q2 consolidated selling and administrative expense was $23.3m versus $17.0m, reflecting acquired operations and CID-related costs. Q2 tax expense was $1.3m; the effective tax rate was 25.1%, compared with 23.9%.
Cash, debt, liquidity, and accounting changes
- Cash and equivalents were $4.2m at June 30, down from $8.1m at year-end. Current assets were $195.5m and current liabilities $41.1m; the reported current ratio was approximately 4.8, although current assets include substantial inventory and ASC 606 contract assets.
- Debt was approximately $129.0m at June 30, compared with $39.0m at December 31, 2017. Long-term debt, net of issuance costs and current maturities, was $122.8m. The company used new borrowing to finance CID.
- First-half operating cash flow was negative $0.3m, investing cash flow negative $88.0m (including $85.6m for CID and $2.4m of capital expenditures), and financing cash flow positive $84.5m.
- In May, the company amended its BB&T credit agreement: the revolver increased from $35m to $75m, and an $85m term loan maturing in May 2020 was added. The existing term loan matures in 2024. Rates are variable; stated rates at June 30 were 2.75% on the revolver and existing term loan and 3.00% on the new loan. Covenants require a fixed-charge coverage ratio of at least 1.25:1 and funded debt to EBITDA no greater than 4.0:1. The company reported covenant compliance.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $11.2m. It reduced Q2 revenue by $2.9m and increased first-half revenue by $0.8m. Adoption resulted in $46.8m of contract assets at June 30 for goods with no alternative use and an enforceable right to payment. Management said the change has no cash impact and does not change the economics of customer contracts.
Outlook, commentary, and risks
The filing provides no quantified company-wide revenue or earnings guidance. Management described moderate improvement in the U.S. employment environment, rising employee turnover, and continued healthcare-sector demand. It expects continued investment in Remote Staffing to support growth and views acquisitions as part of its strategy in uniforms and promotional products.
Principal stated risks include acquisition integration and valuation, customer and employment trends, competition, cotton and other material costs, and inventory obsolescence. The filing added exposure to proposed U.S. tariffs on certain Chinese imports: a potential 10% tariff could require price increases or relocation of sourcing, potentially harming sales, margins, or operations. The company also expects GILTI taxation to affect 2018 and beyond, possibly materially. A 100-basis-point LIBOR increase was estimated to add approximately $0.3m of pretax interest expense for the first half. Foreign sales were approximately 1% of total; no foreign-exchange hedging contracts were outstanding at June 30.
CID was acquired May 2 for preliminary total consideration of $90.7m, including $84.4m cash and $3.8m in shares, subject to adjustments. Purchase accounting remains preliminary; $19.4m of assigned goodwill is not tax deductible. Management said ongoing legal matters were not expected to materially affect results or financial position. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
Investor verification points
- Assess how much sales growth and future profitability are attributable to acquisitions versus organic performance, particularly in Uniforms and Promotional Products.
- Track operating cash flow, collections, inventory, and the conversion and invoicing of the $46.8m ASC 606 contract asset balance.
- Review debt paydown capacity, variable-rate exposure, covenant headroom, and the May 2020 maturity of the $85m term loan.
- Monitor CID integration costs and final purchase-price allocation, including acquired intangible amortization and non-deductible goodwill.
- Verify the effect of any enacted tariffs and the company’s ability to pass on costs or shift sourcing, and assess GILTI and other tax impacts.