Superior Uniform Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The company sells uniforms and related products and provides remote staffing solutions. Results include HPI Direct, acquired July 1, 2013, for the first time in a comparable first-quarter comparison.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $41.027 million | $30.985 million |
| Gross profit | $14.056 million | $11.313 million |
| Gross margin | 34.3% | 36.5% |
| Income before taxes | $1.878 million | $1.749 million |
| Net income | $1.218 million | $1.229 million |
| Diluted EPS | $0.18 | $0.20 |
| Operating cash flow | $(7.257) million | $0.308 million |
| Capital expenditures | $0.809 million | $0.554 million |
- Sales grew 32.4%, while net income declined 0.9%. Higher sales did not translate into higher earnings, as gross margin fell and selling and administrative expenses rose to $12.083 million from $9.557 million.
- Interest expense increased to $95,000 from $7,000, reflecting acquisition-related borrowing and revolver usage.
- Cash and equivalents were $4.414 million at quarter-end, down $0.902 million from December 31, 2013. Working capital was $79.086 million; the current ratio was approximately 6.0.
- Total debt was $33.930 million, including $7.930 million drawn on the revolving facility, versus $26.250 million at year-end. Shareholders’ equity was $73.428 million.
- Operating cash use primarily reflected a $5.206 million inventory increase, higher prepaid expenses, and payment of annual incentive compensation. Financing provided $7.089 million net, including revolving borrowings; dividends paid were $0.833 million.
Changes and segment results
- Uniforms and Related Products sales rose 31.7%, primarily because HPI was included in 2014 but not 2013. Excluding HPI, existing uniform-product sales declined $1.282 million, partly attributed to difficult weather.
- Remote Staffing Solutions sales increased 25.9% before intersegment eliminations and 48.3% after eliminations. Segment income before taxes was $0.600 million, versus $0.543 million.
- Uniforms gross margin was pressured by competitive pricing, lower volume-related overhead absorption, and HPI’s higher cost-of-sales ratio. Remote Staffing cost of sales also rose as a percentage of sales, partly due to startup accounts.
- The HPI acquisition included approximately $32.5 million cash consideration, 209,000 restricted shares, and potential contingent consideration of up to $7.2 million. The recorded acquisition-related contingent liability was $6.838 million at March 31; its estimated value can change and actual payments may differ materially.
- The company began paying a quarterly dividend of $0.135 per common share. It also granted 50,000 restricted shares to executives, vesting after three years subject to continued employment.
Outlook, risks, and contingencies
- Management reported historically high backlogs and expected significant increases in sales and earnings beginning in Q2 2014, citing HPI market penetration and several customer-program rollouts. This is management’s expectation, not a quantified full-year forecast.
- Management expected continued significant growth in remote staffing and planned a new El Salvador facility, estimated to cost approximately $7 million, with completion expected in late 2014 or early 2015.
- Management said cash flows, other capital resources, and credit sources should meet funding requirements for the foreseeable future. The company reported compliance with its credit covenants. Its $15 million revolver and $30 million term loan mature July 1, 2018; substantially all operating assets secure the facility.
- Risks cited include employment and economic conditions, customer openings, closures and staffing levels, competition, and the price and availability of cotton and other materials. Higher working-capital needs, inventory demand, acquisition contingent payments, and interest-rate exposure are also relevant. A swap is intended to fix the rate on part of the term loan at 2.53% beginning July 1, 2014.
- The company is involved in ordinary-course legal claims; management did not expect a material effect. No material risk-factor changes from the 2013 Form 10-K were reported. Management identified estimation sensitivities in receivables, inventory, goodwill, insurance, pensions, taxes, and share-based compensation.
Important facts for investors to verify
- Whether the anticipated Q2 customer rollouts and high backlog convert to sales and earnings, and whether the decline in existing uniform-product sales reverses.
- Whether inventory and vendor deposits are shipped and collected as planned; operating cash flow was negative despite quarterly net income.
- HPI’s contribution to results and the potential range and timing of contingent consideration payments.
- Revolver availability, debt repayment requirements, covenant headroom, and the impact of variable rates before the swap takes effect.
- Whether the planned $7 million facility investment proceeds as expected and how it is funded.