Business context and reporting period
Superior Uniform Group, Inc. (the filing’s issuer name; request metadata identifies Superior Group of Companies, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. Its two reportable segments are Uniforms and Related Products and Remote Staffing Solutions. Results include HPI Direct, acquired July 1, 2013, so year-over-year comparisons are not like-for-like.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Net sales | $53.230 million | $30.854 million | $94.257 million | $61.839 million |
| Gross profit / margin | $19.006 million / 35.7% | $11.178 million / 36.2% | $33.062 million / 35.1% | $22.491 million / 36.4% |
| Income before taxes | $5.867 million | $2.068 million | $7.745 million | $3.817 million |
| Net income | $3.907 million | $1.438 million | $5.125 million | $2.667 million |
| Diluted EPS | $0.57 | $0.23 | $0.75 | $0.43 |
- Sales rose 72.5% for the quarter and 52.4% for the first half. Net income rose approximately 172% and 92%, respectively. The filing attributes much of the growth to HPI, plus existing-customer programs and market penetration.
- Operating cash flow was negative $9.054 million for the first half, versus positive $3.210 million a year earlier. Capital expenditures were $1.097 million; investing cash flow was negative $0.993 million. Financing cash flow was positive $9.770 million, including net debt proceeds and $1.695 million of dividends paid.
- Cash was $5.039 million at June 30, down from $5.316 million at year-end. Current assets were $102.561 million and current liabilities $16.357 million. Trade receivables were $31.234 million and inventory $57.273 million.
- Total debt was $37.025 million, including $2.250 million current and $34.775 million long-term, versus $26.250 million at December 31, 2013. The May 2014 amendment added a $10 million revolving facility. Interest on the facilities was based on LIBOR plus 0.95%; the company reported compliance with its debt covenants.
- Cash dividends were $0.135 per share in the quarter and $0.27 per share for the first half. The reported effective tax rate was 33.4% for the quarter and 33.9% for the half-year.
Material changes versus prior comparable periods
- HPI contributed $17.557 million of second-quarter sales and $28.269 million of first-half sales in 2014; it was not included in the comparable 2013 periods. HPI’s second-quarter contribution included approximately $5 million from a new uniform program.
- Uniforms and Related Products sales increased 73.6% in the quarter and 52.6% for the first half. Remote Staffing Solutions sales after intersegment eliminations increased 47.2% and 47.7%, respectively.
- Gross margin declined year over year in both periods. Management cited competitive pricing and higher direct product costs; Remote Staffing Solutions’ cost of sales also rose as new customer accounts started up.
- Interest expense increased to $113,000 for the quarter and $208,000 for the half, mainly due to acquisition financing and revolver borrowing for inventory. Pension expense fell substantially after the primary defined-benefit plan was frozen to future service and compensation accruals effective June 30, 2013.
Outlook, commentary, risks and contingencies
- Management said uniform backlogs remained strong and reported continued market penetration. It expected Remote Staffing Solutions to continue growing significantly in the balance of 2014 and beyond, while noting the challenging economic environment and the sensitivity of uniform demand to customer employment, locations and employee turnover. No specific consolidated revenue or earnings guidance was provided.
- The company expected to reduce revolver borrowings in the third quarter as it collected receivables from uniform-program rollouts, and believed operating cash flow and available credit would meet foreseeable funding needs. This expectation depends on collections and working-capital conversion.
- A new building for the El Salvador staffing operation was planned for completion in 2015 at an expected total cost of approximately $7 million.
- An interest-rate swap was scheduled to fix the rate on a portion of the term loan at 2.53% beginning July 1, 2014. Its fair value was negative $228,000 at June 30, recorded in other current liabilities.
- Acquisition-related contingent consideration was carried at $6.870 million at June 30; its actual payment may differ materially from the estimate. Management said ordinary-course legal claims were not expected to materially affect results, cash flows or financial position; Part II reported no legal proceedings.
- Key disclosed risks include employment and economic conditions, customer activity, competition, and the price and availability of cotton and other materials. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of sales and earnings growth reflects HPI and specific customer programs versus recurring organic demand, and whether those programs continue after rollout.
- Whether receivables and inventory convert to cash as management expected, given the first-half operating cash outflow and increased revolver use.
- Gross-margin trends, especially competitive pricing, product costs and startup costs in Remote Staffing Solutions.
- Debt availability, covenant headroom, the contingent acquisition payment estimate, and the timing and funding of the planned $7 million facility.
- Whether the filing’s issuer name and the metadata company name refer to the intended registrant; the filing itself names Superior Uniform Group, Inc.