Business context and reporting period
Superior Uniform Group, Inc. (the registrant name in the filing; metadata identifies Superior Group of Companies, Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2018. Its three reportable segments are Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data. Comparisons are with Q1 2017.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $73.1 | $61.0 |
| Gross profit | $24.9 | $22.2 |
| Gross margin | 34.0% | 36.4% |
| Income before taxes | $3.3 | $5.4 |
| Net income | $2.5 | $3.8 |
| Diluted EPS | $0.16 | $0.26 |
| Operating cash flow | $(0.6) | $7.0 |
| Capital expenditures | $1.1 | $0.9 |
Reported sales rose 19.8%; adoption of ASC 606 added $3.7 million of Q1 revenue, so sales without that adoption effect were $69.4 million. Cash and cash equivalents were $10.4 million at March 31, versus $8.1 million at year-end 2017. Current assets were $154.3 million and current liabilities $35.7 million; the resulting current ratio was about 4.3, though current assets include $47.1 million of contract assets. Total debt was $46.0 million, including $6.0 million current and $39.9 million long-term, compared with $39.0 million at year-end. The $35 million revolving facility had approximately $25.0 million undrawn and no outstanding letters of credit. The stated borrowing rate was 2.56% at quarter-end. The quarterly dividend was $0.095 per share.
Material changes versus the prior period
- Segment sales: Uniforms and Related Products declined 0.4% to $48.1 million; Remote Staffing Solutions increased 56.5% to $7.3 million; Promotional Products increased 109.1% to $18.7 million. Promotional Products growth primarily reflected the 2017 Public Identity and Tangerine acquisitions.
- Profitability weakened despite higher sales: gross margin fell to 34.0% from 36.4%, and net income declined 36%. Promotional Products cost of goods sold rose to 74.0% of segment sales from 63.0%, in part because Tangerine has lower gross margins. Uniforms also faced higher product costs relative to sales.
- Q1 2017 included a $1.0 million gain on sale of a former call-center property; there was no comparable gain in 2018. Interest expense increased to $0.3 million from $0.2 million.
- Operating cash flow moved from $7.0 million provided to $0.6 million used. The filing cites working-capital movements, including payments of accrued compensation and a $3.8 million increase in contract assets, among the cash-flow changes.
- ASC 606 adoption on January 1, 2018 increased opening retained earnings by $11.2 million and recognized revenue over time for qualifying goods with no alternative use and an enforceable right to payment. It created $47.1 million of contract assets at quarter-end and reduced reported inventory. Management says adoption has no cash impact and does not change the economics of the underlying contracts.
Outlook, commentary, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management describes moderate improvement in U.S. employment conditions, increasing voluntary employee turnover, and continued healthcare-sector demand. It expects Remote Staffing Solutions to support significant growth in 2018 and beyond, and sees further growth opportunities in Promotional Products, including through acquisitions. Uniform sales remain sensitive to customer employment, location changes, and uniform-provider decisions.
Risks identified include competition; economic and employment conditions; customer demand and industry changes; cotton and other material costs and availability; acquisition identification, integration, and undiscovered liabilities; and attracting and retaining key personnel. Management also expects GILTI tax to affect 2018 and later results, potentially materially; its calculation remained subject to interpretation. A 100-basis-point LIBOR increase was estimated to add approximately $0.1 million of pretax interest expense for the quarter. About 1% of sales were outside the United States; the company reported no foreign-currency hedging contracts at quarter-end.
The company reported compliance with its credit agreement covenants. It disclosed routine legal claims but said management did not expect their outcome to materially affect results, cash flows, or financial position; Part II reports no legal proceedings. Acquisition-related contingent consideration remains subject to remeasurement, and actual payments may differ materially from estimates. Management reported effective disclosure controls and no material change in internal control other than ASC 606-related process and control updates.
Important facts for investors to verify
- How much reported sales growth reflects acquisitions and ASC 606 timing rather than underlying demand; ASC 606 added $3.7 million of Q1 revenue.
- Whether gross margins recover, particularly in Promotional Products and Uniforms, and whether Remote Staffing’s rapid growth is sustained.
- Drivers of negative operating cash flow and the collectability and timing of conversion of $47.1 million in contract assets to invoiced receivables and cash.
- Debt and liquidity trends, including revolver use, scheduled $6.0 million annual term-loan amortization through 2023, interest-rate exposure, and covenant headroom (not quantified in the filing).
- Potential tax effects of GILTI and the remaining estimates and payment obligations for acquisition-related contingent consideration.