Superior Uniform Group, Inc. — Q2 2013 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2013. 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, so HPI results are not included in the reported periods.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $30.854 million | $29.335 million | $61.839 million | $57.843 million |
| Gross profit | $11.178 million | $9.662 million | $22.491 million | $19.124 million |
| Gross margin | 36.2% | 32.9% | 36.4% | 33.1% |
| Income before tax | $2.068 million | $1.567 million | $3.817 million | $2.104 million |
| Net income | $1.438 million | $0.977 million | $2.667 million | $1.304 million |
| Diluted EPS | $0.23 | $0.16 | $0.43 | $0.21 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $3.210 million | $2.468 million |
Q2 sales rose 5.2% year over year; first-half sales rose 6.9%. First-half cash used in investing was $0.951 million, principally $0.965 million of capital expenditures. Financing provided $5.140 million, mainly from borrowings. Cash at June 30 was $10.953 million, including $5 million borrowed shortly before the prior revolver expired.
At June 30, current assets were $74.018 million and current liabilities $10.644 million (current ratio approximately 7.0). Long-term debt was $5 million; shareholders’ equity was $63.748 million. The July 1 financing included a new $30 million term loan and a renewed $15 million revolving facility.
Changes and management commentary
- Q2 net income increased about 47% and first-half net income more than doubled year over year. Gross margin improved, which management primarily attributed to lower raw-material costs after cotton-related cost pressures in 2012.
- Uniforms and Related Products sales increased 3.3% in Q2 and 5.0% for the first half. Remote Staffing Solutions sales, after intersegment eliminations, increased 86.7% and 85.5%, respectively; management attributed growth to market penetration.
- Selling and administrative expense rose to $9.102 million in Q2 from $8.088 million. Management cited higher incentive compensation, a $249,000 pension settlement loss, and $230,000 of HPI acquisition transaction costs, partly offset by higher sales and lower intangible amortization.
- Effective June 30, the company froze future benefit accruals and future compensation increases under its primary defined-benefit pension plan. It recorded a $1.991 million after-tax curtailment gain in other comprehensive income; the pension liability declined to $7.034 million from $10.468 million at year-end.
- No 2013 dividends were paid; the company said its December 2012 special dividend represented a prepayment of anticipated 2013 regular dividends. Management anticipated resuming dividends in 2014 and future repurchases as financial conditions permit.
Outlook, risks and unusual items
- Management expected further improvement in Uniforms and Related Products gross margins during the remainder of 2013 versus comparable 2012 periods. It also anticipated significant growth in Remote Staffing Solutions, while noting the segment’s added staffing and broker costs.
- The July 1 HPI acquisition had an approximate $32.5 million cash purchase price, subject to adjustment, approximately 209,000 restricted shares, and up to $7.2 million of contingent consideration through 2017, plus assumed liabilities. The preliminary purchase-price allocation is subject to change; pro forma results were not yet available.
- The amended credit agreement carries variable-rate debt at LIBOR plus 0.95%, is secured by substantially all operating assets, and includes leverage and fixed-charge covenants. The company stated it was in compliance and believed available cash flows and credit sources would meet foreseeable funding needs.
- Risks identified include challenging economic and employment conditions, customer location and headcount changes, competition, and the price and availability of cotton and other materials. Management said ordinary-course legal claims were not expected to have a material effect; no material risk-factor changes from the 2012 Form 10-K were reported.
Investor verification priorities
- Track post-acquisition HPI sales, earnings contribution, integration costs, and final allocation between identifiable intangibles and goodwill; the filing’s valuation was preliminary.
- Assess debt, interest-rate exposure, covenant headroom, and repayment requirements under the $30 million term loan and $15 million revolver.
- Verify that improved gross margins persist and that Remote Staffing Solutions growth translates into profitability given higher staffing and sales costs.
- Review the pension freeze’s longer-term effect on pension obligations and expense, and confirm the stated dividend and repurchase intentions as financial conditions evolve.