Superior Uniform Group, Inc. — Q2 2015 Form 10-Q
Business context and period. The filing covers the three and six months ended June 30, 2015. The issuer is identified in the filing as Superior Uniform Group, Inc. (the metadata names Superior Group of Companies, Inc.). Its reportable segments are Uniforms and Related Products and Remote Staffing Solutions. Share and per-share figures reflect the February 2015 2-for-1 stock split.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $54.116 million | $53.230 million | $100.463 million | $94.257 million |
| Gross profit | $18.531 million | $19.006 million | $34.327 million | $33.062 million |
| Income before taxes | $5.394 million | $5.867 million | $8.617 million | $7.745 million |
| Net income | $3.624 million | $3.907 million | $5.667 million | $5.125 million |
| Diluted EPS | $0.25 | $0.29 | $0.39 | $0.38 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $5.548 million | $(9.054) million |
- Q2 gross margin was approximately 34.2%, versus 35.7%; net margin was approximately 6.7%, versus 7.3%. For the first half, gross margin was approximately 34.2%, versus 35.1%, while net margin improved to approximately 5.6% from 5.4%.
- Q2 sales rose 1.7%, but net income fell about 7.2%; first-half sales increased 6.6% and net income increased about 10.6%.
- First-half capital expenditures were $2.099 million. Cash increased to $6.402 million from $4.586 million at year-end 2014.
- At June 30, cash was $6.402 million and total debt was $23.437 million, including $2.937 million current. Working capital was approximately $79.2 million; the current ratio was approximately 3.9. Total debt was $25.035 million at December 31, 2014.
- Cash dividends were $0.075 per share for Q2 and $0.15 per share for the first half, compared with $0.068 and $0.135, respectively, in 2014.
Material changes and management commentary
- Remote Staffing Solutions continued strong growth: segment sales after intersegment eliminations increased 53.9% in Q2 and 45.0% in the first half year over year. Management attributed growth to new and existing customers.
- Uniforms and Related Products sales declined 0.2% in Q2 but grew 5.0% in the first half. Q2 2014 included two large customer program rollouts, approximately $5.0 million and $2.5 million, which did not recur at comparable levels. Management said their absence weighed on Q2 comparison and contributed to a higher uniform-segment cost-of-goods-sold ratio.
- Management cited continued market penetration, improving employment conditions and employee turnover, and a new group purchasing organization contract effective February 1, 2015 that opens access to at least 3,000 healthcare facilities. It expected these factors to support 2015 sales growth; no numerical company-wide guidance was provided.
- The company expects its El Salvador call-center building to be completed in early 2016, approximately doubling local capacity. It spent about $2 million on the project in 2014 and expected to spend more than an additional $7 million to complete it.
- First-half operating cash flow improved substantially from the prior-year outflow, with working-capital movements including lower cash use from receivables and inventory and higher accounts payable. First-half cash used in investing was $2.099 million and cash used in financing was $1.633 million.
Debt, risks and unusual items
- The term loan matures July 1, 2018; the company reported no revolving-credit borrowings at June 30, 2015. The loan bears LIBOR plus 0.95% (1.14% at period-end); a swap fixes the rate on part of the borrowing at an effective 2.53%. The swap had a negative fair value of $173,000.
- Credit facilities are secured by substantially all operating assets and include leverage and fixed-charge covenants. The company reported compliance with all covenants and stated that operating cash generation and available credit should fund operations for the foreseeable future.
- Q2 pension expense included a $311,000 settlement loss; total net periodic pension cost was $440,000 for the quarter and $567,000 for the first half, versus $3,000 and $6,000 in the respective 2014 periods.
- Management said pending legal actions and claims arising in the normal course of business were not expected to have a material effect. The filing reports no material change in the risk factors from the 2014 annual report. Principal risks cited include economic and employment conditions, customer industries, competition, material costs and availability, acquisition integration, and retaining key personnel.
- The company was evaluating the effect of the new revenue-recognition standard, with adoption then required beginning January 1, 2017. Management also noted estimates and judgments around receivables, inventory, insurance claims, pensions, goodwill and taxes.
Important facts for investors to verify
- Whether Remote Staffing Solutions growth and the new healthcare channel can continue to offset uneven uniform-program sales.
- Gross-margin trends in the uniforms segment after the prior-year high-margin rollout comparison, and the effect of product costs and customer-service expenses.
- Execution, remaining cost and funding of the El Salvador facility project, including the expected additional spend of more than $7 million.
- Cash conversion and working-capital requirements, particularly inventory, receivables and vendor-payment timing.
- Debt repayment schedule, variable-rate exposure, covenant headroom and the effect of acquisition-related contingent liabilities.
- The effect of the pension settlement and future pension assumptions, and any developments in litigation or other contingencies.