Superior Uniform Group, Inc. — Q2 2017 Form 10-Q
Business context and period. The unaudited filing covers the quarter and six months ended June 30, 2017. The company reports three segments: Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products. Prior-year segment results were restated to reflect the Promotional Products segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $65.604 million | $64.660 million | $126.591 million | $122.628 million |
| Gross profit | $23.374 million | $21.763 million | $45.588 million | $41.784 million |
| Income before taxes | $5.701 million | $4.615 million | $11.106 million | $8.025 million |
| Net income | $4.341 million | $3.308 million | $8.176 million | $5.750 million |
| Diluted EPS | $0.29 | $0.22 | $0.55 | $0.39 |
| Operating cash flow | Not separately provided | Not separately provided | $8.561 million | $8.041 million |
- Q2 sales increased 1.5%; net income rose 31.2%. Gross margin was approximately 35.6%, versus 33.7% a year earlier.
- First-half sales rose 3.2% and net income rose 42.2%. Gross margin was approximately 36.0%, versus 34.1%. First-half results included a $1.018 million gain on sale of property, plant and equipment; excluding that gain, pretax income was approximately $10.088 million.
- Q2 segment sales: Uniforms $52.112 million, up 1.7%; Remote Staffing $5.562 million, up 23.6%; Promotional Products $8.859 million, down 10.0%. First-half segment sales were $100.443 million, $10.225 million, and $17.792 million, respectively. Promotional Products’ first-half comparison includes two additional months of BAMKO sales in 2017.
- Six-month capital expenditures were $2.004 million. Net cash from investing was $0.806 million, including $2.808 million of proceeds from the El Salvador property sale. Financing activities used $5.509 million, including $2.490 million of dividends.
Liquidity and debt
- At June 30, cash was $7.583 million and current assets were $126.778 million versus current liabilities of $31.370 million (working capital: $95.408 million).
- Debt was approximately $40.5 million: a $42 million BB&T term loan with $6 million classified as current, and no revolver borrowings. The $35 million revolving facility was undrawn, with no letters of credit outstanding. Cash less debt was approximately negative $32.9 million.
- The new BB&T agreement took effect February 28, 2017; the term loan matures in 2024 and bears interest at one-month LIBOR plus 0.75% (1.92% at quarter-end). A swap is intended to fix the rate on $18 million of borrowings at 3.12% beginning March 2018. Management reported compliance with covenants.
Changes, outlook, and risks
- Uniforms first-half sales fell 1.4%, including approximately $1.4 million of lost recurring business following a customer acquisition and approximately $1.4 million from a customer’s decision not to repeat a uniform program. Q2 sales improved, which management attributed to market penetration and higher employee turnover at customers.
- Remote Staffing continued to grow, supported by new and existing customers. Promotional Products’ Q2 sales declined year over year; management cautioned that the segment’s quarterly sales can fluctuate.
- Management expected moderate U.S. employment improvement, rising voluntary turnover, and healthcare-sector demand to support 2017 Uniforms growth. It cited growth potential for Remote Staffing and BAMKO’s sourcing platform, but provided no quantified earnings or revenue guidance.
- Unusual items include the property-sale gain, pension settlement costs (Q2 $277,000 versus $52,000), and share-based compensation tax benefits of $405,000 in Q2 and $628,000 for the half year. These tax benefits increased reported earnings.
- The company recorded a $92,000 loss on a Brazilian-real forward contract that settled June 29; it reported no foreign-exchange hedging contracts at June 30. A 100-basis-point LIBOR increase was estimated to add about $190,000 of pretax interest expense for the first half.
- Risks include customer credit deterioration and inventory obsolescence, competition and raw-material costs, dependence on customer employment and turnover, acquisition integration, foreign-exchange and variable-rate exposure, and pension estimates. The company cited a customer bankruptcy and higher bad-debt expense. It said pending ordinary-course legal matters were not expected to materially affect results, cash flows, or financial position.
- The company was assessing revenue-recognition guidance effective January 1, 2018 and was in preliminary assessment of new lease accounting guidance. Management said disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus the $1.018 million property-sale gain and share-based compensation tax benefits.
- Whether Uniforms customer losses and the customer bankruptcy create further revenue or credit exposure; the allowance for doubtful accounts increased to $1.755 million from $1.276 million at year-end.
- Whether Remote Staffing growth can offset facility, payroll, and other operating-cost increases, and whether Promotional Products sales recover from Q2’s decline.
- Debt covenant headroom, floating-rate exposure before the swap begins in 2018, and scheduled principal repayments of $6 million annually from 2018 through 2023.
- Execution of BAMKO integration and contingent consideration: the estimated acquisition-related liability was $5.338 million at June 30, 2017 and may be remeasured.