Superior Uniform Group, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The filing presents unaudited interim results. The company reports two segments: Uniforms and Related Products, and Remote Staffing Solutions.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $52.291 million | $44.184 million | $146.548 million | $106.023 million |
| Gross profit | $18.433 million | $15.040 million | $51.495 million | $37.531 million |
| Income before tax | $5.168 million | $2.128 million | $12.913 million | $5.945 million |
| Net income | $3.368 million | $1.508 million | $8.493 million | $4.175 million |
| Diluted EPS | $0.48 | $0.24 | $1.24 | $0.67 |
- Q3 sales grew 18.3%; nine-month sales grew 38.2%. Net income increased 123% and 103%, respectively.
- Gross margin was approximately 35.3% in Q3 versus 34.0% a year earlier; for nine months it was approximately 35.1% versus 35.4%. Net margin was approximately 6.4% and 5.8% for those periods, respectively, versus 3.4% and 3.9% in 2013.
- Operating cash flow was $4.064 million for the first nine months, down from $9.549 million. Capital expenditures were $4.334 million, leaving approximate operating cash flow less capital expenditures of negative $0.270 million. Cash declined $2.293 million to $3.023 million.
- At September 30, cash was $3.023 million and long-term debt, including current maturities, was $25.125 million (net debt approximately $22.102 million). Current assets were $97.159 million and current liabilities $22.732 million. The company reported compliance with its debt covenants.
- Q3 interest expense was $144,000, versus $95,000; nine-month expense was $352,000, versus $110,000. The effective tax rate was 34.8% in Q3 and 34.2% year to date.
Changes and business drivers
- Uniforms and Related Products sales rose 17.5% in Q3 and 37.9% year to date. The Q3 comparison included HPI Direct in both periods; the year-to-date increase partly reflects HPI being included for nine months in 2014 but only the third quarter in 2013. The company also cited market penetration and customer uniform programs.
- Remote Staffing Solutions sales after intersegment eliminations increased 42.6% in Q3 and 45.9% year to date, attributed to growth among new and existing customers. Startup accounts raised this segment’s cost of goods sold as a share of sales.
- Q3 profitability benefited from improved Uniforms segment cost ratios and lower selling and administrative expenses as a share of sales. Higher average borrowings increased interest expense. Nine-month other comprehensive income was $185,000, compared with $2.702 million, which included $1.991 million of current-period gains in 2013.
- The company paid $2.675 million in dividends during the first nine months of 2014; dividends were zero in the comparable 2013 period.
Outlook, risks and unusual items
- Management described the U.S. economic environment as challenging and said uniform demand depends in part on customer employment, locations and employee turnover. No numeric revenue or earnings guidance was provided.
- Management said it expected Remote Staffing Solutions to continue growing significantly and planned a new El Salvador facility, expected to be completed in 2015 at an estimated total cost of approximately $7 million. The company had purchased land for the project.
- The HPI acquisition included potential contingent consideration of up to $7.2 million through 2017. The recorded acquisition-related contingent liability was approximately $6.902 million at September 30, including current and long-term portions; remeasurement could affect earnings.
- The company uses variable-rate debt and an interest-rate swap that fixes the rate on a portion of the term loan at 2.53%. The swap had a negative fair value of $159,000. Debt is secured by substantially all operating assets and is subject to financial covenants.
- Management identified risks including economic conditions and employment, competition, and the price and availability of cotton and other materials. It stated that ordinary-course legal matters were not expected to materially affect results, cash flows or financial position; the filing reported no legal proceedings under Part II, Item 1.
- The company was evaluating the impact of the new revenue recognition standard, ASC 606. Management stated that cash flows and other capital resources were expected to meet funding needs for the remainder of 2014 and the foreseeable future.
Important facts for investors to verify
- How much of reported growth reflects HPI acquisition timing, versus organic sales growth and customer programs.
- Whether growth converts into operating cash flow, given increased receivables and inventory and lower year-to-date operating cash flow.
- The cost, timing and funding of the planned approximately $7 million El Salvador facility.
- The amount and timing of HPI contingent consideration and potential earnings effects from remeasurement.
- Debt amortization, available revolving-credit capacity, covenant headroom and exposure to variable interest rates.