Superior Uniform Group, Inc. — Q3 2013 Form 10-Q
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2013, compared with the same 2012 periods. The company reports two segments: Uniforms and Related Products and Remote Staffing Solutions. On July 1, 2013, it acquired substantially all assets of HPI Direct, adding uniform sales and related assets. HPI contributed $9.0 million of revenue and $0.17 million of net income from acquisition through quarter-end.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Net sales | $44.2 million | $30.6 million | $106.0 million | $88.4 million |
| Gross profit | $15.0 million | $10.0 million | $37.5 million | $29.2 million |
| Income before tax | $2.1 million | $1.7 million | $5.9 million | $3.8 million |
| Net income | $1.5 million | $1.2 million | $4.2 million | $2.5 million |
| Diluted EPS | $0.24 | $0.20 | $0.67 | $0.41 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $9.5 million | $5.0 million |
Q3 gross margin was approximately 34.0%, versus 32.8% a year earlier; nine-month gross margin was approximately 35.4%, versus 33.0%. Cash and equivalents were $6.4 million at September 30, 2013, against $3.6 million at December 31, 2012. Current assets were $87.1 million and current liabilities $20.5 million. Debt totaled $26.75 million, including $1.69 million due within one year; the company also had a $15 million revolving facility with no balance outstanding. The resulting current ratio was approximately 4.2x.
Material changes versus prior comparable periods
- Q3 sales increased 44.4%; nine-month sales rose 19.9%. Growth reflected the HPI acquisition and increased market penetration. Remote Staffing Solutions sales after intersegment eliminations grew 58.3% in Q3 and 74.7% for the nine-month period.
- Net income increased 21.4% in Q3 and 64.0% for the first nine months. Lower material costs, improved volume leverage, and growth contributed; Q3 selling and administrative expense also included HPI transaction costs and a pension settlement loss.
- Operating cash flow rose to $9.5 million, but the HPI purchase drove investing outflows of $33.6 million. Financing provided $26.9 million, principally through borrowing for the acquisition.
- The HPI acquisition was funded with approximately $32.5 million cash and 208,617 restricted shares, with potential contingent consideration of up to $7.2 million. The preliminary fair-value allocation included $18.4 million of identifiable intangibles and $5.1 million of goodwill.
- The company stopped accruing future-service and future-compensation benefits under its primary defined benefit pension plan effective June 30, 2013. Pension liabilities fell, and a $1.991 million after-tax curtailment gain was recorded in other comprehensive income, not net income.
Outlook, risks, contingencies and unusual items
Management described the U.S. economic environment as challenging, citing employment levels, customer location openings and closures, and lower employee turnover as factors affecting uniform demand. It intends to pursue additional acquisitions in uniforms and expects Remote Staffing Solutions to continue growing; it reported 75% growth in external segment sales in the first nine months. No specific revenue or earnings guidance was provided. Management said operating cash flows and available capital resources should meet funding needs for the remainder of 2013 and the foreseeable future.
The July 2013 credit agreement provides a $30 million term loan and a $15 million revolver, secured by substantially all operating assets and subject to financial covenants. The company reported compliance with all covenants. A swap is intended to fix the rate on a portion of the term loan at 2.53% beginning July 1, 2014. Dividends paid during the first nine months of 2013 were zero; management anticipated resuming dividends in 2014, subject to conditions. The company also repurchased 13,211 shares for $162,000 during the nine-month period.
Risks include acquisition integration and valuation uncertainty, debt covenants and possible acceleration, fluctuations in raw-material prices and availability, customer credit and inventory estimates, pension assumptions, and competition and economic conditions. The HPI contingent-consideration liability is subject to remeasurement and actual payments may differ materially from the estimate. Management stated that ordinary-course legal matters were not expected to have a material effect. The EyeLevel license agreement was terminated in Q3 2013 after a $1.226 million impairment charge in Q4 2012.
Important facts for investors to verify
- HPI integration, performance, final purchase-price allocation, and the amount and timing of contingent payments.
- Whether acquisition-related growth translates into sustained margins and cash generation, given higher selling and administrative expenses and increased debt.
- Working-capital trends, particularly receivables and inventory, and the sustainability of operating cash flow.
- Compliance with debt covenants, scheduled term-loan repayments, and the effect of variable rates and the interest-rate swap.
- Management’s expected 2014 dividend resumption and the assumptions underlying its liquidity outlook.