Superior Uniform Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; interim financial statements are unaudited. The filing identifies the registrant as Superior Uniform Group, Inc. (not Superior Group of Companies).
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $56.662 million | $52.291 million | $157.125 million | $146.548 million |
| Gross profit | $19.224 million | $18.433 million | $53.551 million | $51.495 million |
| Gross margin | 33.9% | 35.3% | 34.1% | 35.1% |
| Income before taxes | $5.581 million | $5.168 million | $14.198 million | $12.913 million |
| Net income | $4.031 million | $3.368 million | $9.698 million | $8.493 million |
| Diluted EPS | $0.28 | $0.24 | $0.67 | $0.62 |
- Q3 sales rose 8.4% year over year; nine-month sales rose 7.2%. Net income increased 19.7% in Q3 and 14.2% year to date.
- Q3 cost of goods sold was 66.1% of sales, versus 64.7% a year earlier; the filing attributes segment-level margin pressure to lower-margin new uniform business and a higher domestic-services mix in remote staffing.
- Operating cash flow was $5.612 million for the nine months, compared with $4.064 million in 2014. Capital expenditures were $4.118 million, versus $4.334 million.
- Cash was $3.074 million at September 30, down from $4.586 million at December 31, 2014. Current assets were $108.318 million and current liabilities $28.600 million.
- Debt totaled $24.130 million, including $3.000 million due within one year, compared with $25.035 million at year-end 2014. The company reported compliance with all credit-agreement covenants.
Business, segments, and changes
- The company reports two segments: Uniforms and Related Products, and Remote Staffing Solutions. Q3 segment sales before eliminations were $53.392 million and $4.171 million, respectively; nine-month sales were $148.436 million and $11.419 million.
- Uniforms sales grew 6.2% in Q3 and 5.4% year to date, reflecting market penetration and increased employee turnover. Year-to-date growth was partly offset by prior-year customer uniform-program rollouts.
- Remote Staffing Solutions sales after intersegment eliminations increased 60.8% in Q3 and 50.5% year to date. Management cited growth from new and existing customers.
- Accounts receivable and inventory rose from year-end, by 25.4% and 6.9%, respectively; management linked the increases to higher sales and inventory needed to support volume. Accounts payable also increased, primarily due to purchase timing.
Outlook, risks, and notable items
- Management expected economic improvement, employment and healthcare demand, and new group-purchasing contracts to support uniform growth in 2015. It also expected remote staffing to continue growing. No specific numeric earnings or revenue guidance was provided.
- The company was building a call center in El Salvador, expected to be completed in 2016 and to approximately double local capacity; it expected to spend more than $7 million more to complete the project.
- The company paid a $1.2 million HPI acquisition earn-out during the quarter. Remaining acquisition-related contingent liability was $5.826 million and is subject to remeasurement.
- Nine-month pension expense included a $327,000 settlement loss, versus $60,000 in the prior-year period. The interest-rate swap had a negative fair value of $192,000 at quarter-end.
- Management said cash flows and available capital were adequate for foreseeable funding needs. Risks cited include economic and employment conditions, industry demand, competition, raw-material costs and availability, acquisition integration, and retention of key personnel. Legal claims in the normal course of business were not expected by management to have a material impact.
- The company was evaluating the new revenue-recognition standard, then scheduled for adoption beginning January 1, 2017; the effect had not yet been determined.
Investor verification priorities
- Verify whether margin pressure from lower-margin uniform contracts and the increased domestic staffing mix persists, and how it affects profitability.
- Track receivables, inventory, operating cash flow, and working-capital needs against continued sales growth.
- Review El Salvador project spending and completion timing, and assess the remaining HPI earn-out obligation and its remeasurement.
- Monitor debt maturities, revolving-credit availability, covenant compliance, and exposure to variable interest rates.
- Assess whether management’s growth expectations and new healthcare contracts translate into sustained segment sales and earnings.