Superior Group of Companies, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited interim results. The company sells uniforms and related products, remote staffing services, and promotional products.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $95.9 million | $67.8 million | $251.3 million | $194.4 million |
| Gross profit / margin | $33.8 million / 35.3% | $24.8 million / 36.6% | $88.0 million / 35.0% | $70.4 million / 36.2% |
| Income before taxes | $7.3 million | $6.8 million | $15.7 million | $17.9 million |
| Net income | $6.1 million | $5.0 million | $12.4 million | $13.1 million |
| Diluted EPS | $0.39 | $0.33 | $0.80 | $0.87 |
| Interest expense | $0.9 million | $0.2 million | $2.0 million | $0.6 million |
Q3 sales rose 41.5% and net income rose 23.4% year over year; diluted EPS increased from $0.33 to $0.39. For the first nine months, sales grew 29.3%, while net income declined 5.7% and diluted EPS fell from $0.87 to $0.80. Gross margin narrowed in both comparisons. The nine-month 2017 period included a $1.0 million gain on sale of property and equipment.
Q3 effective tax rate was 15.9%, versus 27.5%; the nine-month rate was 21.1%, versus 26.8%. The filing attributes the lower rates primarily to the U.S. corporate tax-rate reduction, partly offset by GILTI and other tax items. Cash dividends were $0.10 per share in Q3 and $0.29 per share for the nine months.
Cash flow, liquidity and debt
- Operating cash flow for the nine months was $11.3 million, down from $17.4 million. Capital expenditures were $3.9 million.
- Investing cash outflow was $89.5 million, including $85.6 million for the CID acquisition. Financing provided $72.5 million.
- Cash declined from $8.1 million at year-end 2017 to $2.3 million at September 30, 2018. Current assets were $195.0 million and current liabilities $46.6 million; current assets include $49.6 million of contract assets.
- Debt totaled approximately $118.2 million carrying value, including $6.0 million current and $112.2 million long-term, compared with $39.0 million at December 31, 2017. The increase primarily funded the CID acquisition. The company reported compliance with its debt covenants.
- The amended BB&T facilities include a $75 million revolver and an $85 million term loan maturing May 2020, in addition to the existing term loan. The new term loan had a 3.11% variable rate at quarter-end; the existing term loan and revolver had a 2.86% rate. Substantially all operating assets secure the facilities.
Material changes and business developments
- The May 2, 2018 CID Resources acquisition expanded the medical-apparel business. Consideration was approximately $90.7 million, comprising $84.4 million cash, $3.8 million in shares, and a $2.5 million cash and working-capital adjustment. Purchase accounting remains preliminary.
- Q3 segment sales were $69.8 million for Uniforms and Related Products, $7.9 million for Remote Staffing Solutions, and $19.2 million for Promotional Products, before intersegment eliminations. Year-to-date segment sales were $174.3 million, $23.2 million, and $56.9 million, respectively.
- Management attributed much of sales growth to CID and the 2017 Public Identity and Tangerine acquisitions. Remote Staffing also grew through customer-market penetration. Promotional Products sales are more prone to quarterly fluctuation.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. It increased opening retained earnings by $11.2 million and reported sales by $2.9 million in Q3 and $3.7 million year to date. The company reported $49.6 million in contract assets for goods produced with no alternative use and an enforceable right to payment. Management says adoption has no cash impact and does not change the economics of underlying contracts; prior-period comparisons were not restated.
- Q3 cost pressures included higher freight and product/customer mix in Uniforms, and lower gross margins associated with Tangerine in Promotional Products. Remote Staffing’s gross margin improved with a larger share of offshore revenue. Increased borrowing and higher rates raised interest expense.
Outlook, risks and other items
- The filing provides no specific numeric revenue or earnings guidance. Management described moderate improvement in the U.S. employment environment, rising voluntary turnover, continued healthcare-apparel demand, and plans to pursue growth and acquisitions. Remote Staffing investment is intended to support expansion.
- Management cautioned that results depend on customer employment, economic and industry conditions, competition, acquisition integration, key personnel, and the price and availability of cotton and other inputs.
- Newly highlighted trade risk: U.S. tariffs on certain Chinese imports began at 10% in September 2018 and were scheduled to rise to 25% in January 2019. The company said tariffs could require price increases or production shifts, risking lost customers, added costs, or disruption.
- The company said GILTI may materially affect consolidated financial statements. Interest-rate exposure is also relevant: a hypothetical 100-basis-point LIBOR increase was estimated to add about $0.6 million of pretax interest expense for the nine-month period. Foreign-currency sales were about 1% of total sales; no foreign-currency hedging contracts were outstanding at quarter-end.
- Acquisition-related contingent liabilities and their fair-value estimates may fluctuate; actual payments may differ materially. The filing reports ordinary-course claims that management does not expect to have a material effect, and lists no legal proceedings. The company was assessing the impact of the lease-accounting standard effective for it in 2019.
- Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported during the quarter.
Key facts for investors to verify
- How much of reported growth and earnings reflects acquisitions and ASC 606 timing versus comparable underlying business performance.
- The quality and eventual billing and collection of the $49.6 million contract-asset balance, and the related effect on inventory and margins.
- CID’s finalized purchase-price allocation, integration costs, margins, and contribution to future results.
- Debt repayment capacity, interest-rate exposure, covenant headroom, and liquidity given $2.3 million of cash and the $85 million term loan’s May 2020 maturity.
- The impact of tariffs, freight and material costs, GILTI, and potential acquisition-contingent payments on margins and cash flow.