Superior Uniform Group, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. The company operates in Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $252.596 million | $210.317 million | +20.1% |
| Gross profit | $86.982 million | $71.433 million | +21.8% |
| Gross margin | 34.4% | 34.0% | +0.4 percentage points |
| Income before tax | $19.898 million | $18.896 million | +5.3% |
| Net income | $14.638 million | $13.066 million | +12.0% |
| Diluted EPS | $0.98 | $0.90 | +8.9% |
| Operating cash flow | $11.989 million | $9.913 million | +20.9% |
- Net margin was 5.8%, compared with 6.2% in 2015. The effective tax rate fell to 26.4% from 30.9%.
- 2016 Q4 sales were $64.686 million versus $53.192 million in Q4 2015; net income was $4.441 million versus $3.368 million.
- Cash and cash equivalents were $3.649 million at year-end. Working capital was $93.107 million; current assets were $125.011 million and current liabilities $31.904 million.
- Debt totaled $42.183 million at year-end, including $39.643 million on the term loan and $2.540 million drawn on the revolving facility. The company reported compliance with all credit-agreement covenants; approximately $17.460 million of the $20 million revolver remained undrawn.
- Capital expenditures were $7.385 million. Operating cash flow less capital expenditures was approximately $4.604 million, before acquisitions and other investing activity. Cash flow from investing was negative $22.546 million, including the BAMKO acquisition.
Material changes versus the prior period
- Superior acquired BAMKO effective March 1, 2016, adding the Promotional Products segment. BAMKO contributed $27.816 million in sales and a $0.922 million pretax loss for the reported period; that loss included $1.119 million of acquisition-related expenses.
- By segment, Uniforms and Related Products sales rose 6.1% to $210.373 million; Remote Staffing Solutions sales rose 15.1% to $17.953 million before intersegment eliminations; Promotional Products recorded $27.816 million in sales from the acquisition date.
- The acquisition was financed in part through a new $45 million term loan and an increase in the revolving facility from $15 million to $20 million. Year-end total debt rose from $23.950 million in 2015 to $42.183 million in 2016.
- Trade receivables rose 40.0% to $41.823 million and inventory rose 8.9% to $69.240 million. Management attributed much of the receivables increase to BAMKO and higher sales; inventory growth reflected higher sales requirements and acquired BAMKO inventory.
- Operating cash flow increased, but remained below net income; receivables and inventory growth used cash. Cash increased from $1.036 million to $3.649 million.
Outlook, risks and other notable items
- Management expected improving U.S. employment, increasing voluntary employee turnover, and healthcare-sector demand to support Uniforms and Related Products sales growth in 2017. It cited capacity and management investments as support for growth in Remote Staffing Solutions. No numerical revenue or earnings guidance was provided.
- Management intends to expand healthcare-market penetration and pursue acquisitions, including in the fragmented promotional-products market. Future results and acquisition benefits are uncertain.
- Key risks include intense price competition; dependence on customer orders and employment levels; changes in raw-material, labor, and freight costs; and sourcing concentration. In 2016, 59% of Promotional Products sourcing was from China; uniform products were sourced from or contained materials sourced from China (31%) and suppliers in Central America and Haiti (32%). Trade restrictions, tariffs, supply disruptions, and political or labor instability could affect costs and availability.
- The company reported underfunded pension obligations of $9.467 million, up from $8.925 million in 2015, and expected to contribute $1.5 million to pension plans in 2017. Scheduled pension benefit payments were $2.259 million for 2017.
- Acquisition-related contingent liabilities were $7.238 million on the balance sheet at year-end; estimated expected cash payments in the contractual-obligations table totaled $9.425 million. Actual payments may differ materially from estimates.
- Early adoption of share-based compensation guidance produced an $882,000 income-tax benefit for 2016, or $0.06 per share, contributing to the lower effective tax rate. The company also reported $2.543 million of cash held in foreign subsidiaries that could not be repatriated without federal tax.
- Auditors issued unqualified opinions on the financial statements and internal control. Management and the auditor excluded BAMKO’s internal controls from their 2016 assessment; the excluded business represented $28.480 million of assets and $27.816 million of revenue.
- Management said ordinary-course legal proceedings were not expected to have a material effect. No off-balance-sheet financing arrangements were reported. The company paid $0.34 per share in dividends during 2016 and anticipated continuing dividends and repurchases subject to financial conditions and board discretion.
Important facts for investors to verify
- Whether BAMKO can achieve profitable growth after the reported acquisition expenses and its 2016 pretax loss.
- How much of sales growth and cash generation is sustainable as receivables and inventory increase, and whether working-capital needs remain elevated.
- Debt repayment capacity, variable-rate exposure, and headroom under the credit agreement’s financial covenants.
- Progress on 2017 outlook and backlog: uniform backlog was approximately $6.614 million in February 2017, down from $9.300 million a year earlier; promotional-products backlog was approximately $12.800 million.
- Potential pension funding needs and the timing and amount of acquisition-contingent payments.
- Exposure to China, Central America, and Haiti sourcing, including any changes in trade duties, tariffs, or supply conditions.