Superior Group of Companies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results. Unless otherwise noted, dollar amounts are in millions.
Business context and reporting period
Superior operates three reportable segments: Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products. The May 2018 acquisition of CID Resources added medical-uniform products and materially affects year-over-year comparisons.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $86.6 | $73.1 | +18.4% |
| Gross profit | $30.3 | $24.9 | +21.7% |
| Gross margin | 35.0% | 34.0% | +1.0 percentage point |
| Income before taxes | $3.0 | $3.3 | −10.4% |
| Net income | $2.4 | $2.5 | −3.0% |
| Diluted earnings per share | $0.16 | $0.16 | Unchanged |
| Cash from operating activities | $5.7 | $(0.6) | Improved by $6.4 |
Net sales growth included CID, which contributed 22.0% to the reported increase, while lower sales in the legacy uniform business partly offset that contribution. Adoption of ASC 606 reduced Q1 2019 reported revenue by $1.8 million and increased Q1 2018 revenue by $3.8 million versus the respective amounts without the standard. Management’s non-GAAP shipment measure showed legacy Uniforms shipments of $44.1 million versus $45.1 million a year earlier.
Segment sales were $58.7 million for Uniforms and Related Products, $8.6 million for Remote Staffing Solutions, and $20.4 million for Promotional Products, before intersegment eliminations. Remote Staffing sales rose 17.8%; Promotional Products sales rose 9.0%. Uniforms sales rose 21.9%, largely because of CID, while legacy uniform shipments declined.
Liquidity, debt and cash flow
- Cash and cash equivalents were $6.8 million at March 31, compared with $5.4 million at year-end. Operating activities provided $5.7 million; capital expenditures used $1.7 million; financing activities used $2.6 million, including $1.5 million of dividends and $1.0 million of share repurchases.
- Debt totaled $117.6 million before debt issuance costs, comprising $24.1 million under the revolver and $93.5 million in term loans. The balance sheet reported $15.3 million current debt and $101.9 million long-term debt. The $75 million revolver had no outstanding letters of credit; reported borrowings imply approximately $50.9 million of remaining capacity.
- In January 2019, the $85 million term loan was restructured: $20 million was repaid using revolver borrowings, and the remaining $65 million loan’s maturity was extended to January 2026. At March 31, stated rates were 3.17% on the revolver and existing term loan and 3.34% on the restructured term loan.
- The company reported compliance with its minimum 1.25:1 fixed-charge coverage and maximum 4.0:1 funded-debt-to-EBITDA covenants. Debt is secured by substantially all operating assets and guaranteed by domestic subsidiaries.
- Current assets were $196.5 million and current liabilities $56.7 million. Current assets included $47.4 million in contract assets and $65.8 million in inventory. The company reported $3.9 million of operating lease liabilities at quarter-end following adoption of the new lease standard.
Material changes, outlook and risks
- Interest expense increased to $1.2 million from $0.3 million, primarily reflecting borrowing associated with the CID acquisition. Selling and administrative expense rose to $25.9 million from $21.2 million.
- The effective tax rate fell to 20.2% from 26.2%, which management attributed primarily to expected increases in excludable foreign income and reductions in nondeductible compensation.
- Management expected factors including improving U.S. employment conditions, healthcare demand, and CID’s retail and digital-market reach to support Uniforms growth in 2019. It cited continued market penetration for Remote Staffing and higher domestic and international sales for Promotional Products. The filing provides no specific full-year revenue or earnings guidance.
- Key risks discussed include economic and employment conditions, competition, raw-material prices and availability, customer demand, acquisition integration and diligence, and retention of key personnel. Inventory estimates and customer creditworthiness are also important judgments; management noted that less favorable demand could require additional inventory write-downs.
- Legal actions and claims were described as arising in the normal course of business; management did not expect them to materially affect results, cash flows, or financial position. Acquisition-related contingent consideration included a $0.9 million current portion due in Q2 2019. The company reported no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- How much reported growth and future performance depend on CID, and whether legacy uniform demand stabilizes; compare reported sales with the company’s shipments measure.
- Whether the large ASC 606 contract-asset balance converts to invoiced receivables and cash, and how revenue timing affects comparisons.
- Debt repayment capacity, revolver availability, interest-rate exposure, and covenant headroom; a 100-basis-point LIBOR increase was estimated to add about $0.3 million of pretax interest expense for the quarter.
- Inventory quality and obsolescence exposure, acquisition-related contingent payments, and execution of management’s growth expectations, for which no numerical guidance was provided.