Superior Uniform Group, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are identified below. The company operates Uniforms and Related Products and Remote Staffing Solutions. Share and per-share amounts reflect the 2-for-1 stock split effective February 4, 2015.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $210.317 million | $196.249 million |
| Gross profit | $71.433 million | $68.737 million |
| Income before taxes | $18.896 million | $17.529 million |
| Net income | $13.066 million | $11.349 million |
| Diluted EPS | $0.90 | $0.82 |
| Cash from operating activities | $8.352 million | $6.838 million |
| Capital expenditures | $8.069 million | $4.936 million |
- Sales rose 7.2%; net income rose 15.1%. Gross margin was approximately 34.0%, down from 35.0%; net margin increased to approximately 6.2% from 5.8%.
- Uniforms and Related Products sales increased 5.4% to $198.319 million. Remote Staffing Solutions sales increased 36.6% before intersegment eliminations, to $15.604 million; outside-customer sales were approximately $12 million and grew about 49% after eliminations.
- Cost of goods sold increased to $138.884 million from $127.512 million. Management attributed margin pressure in uniforms partly to the absence of a prior-year, higher-margin customer program rollout and to lower-margin new business. Remote staffing margin also faced mix pressure from a greater share of domestic services.
- Selling and administrative expenses were $52.018 million versus $50.724 million. Interest expense was $519,000 versus $484,000. The effective tax rate fell to 30.9% from 35.3%.
- Fourth quarter: Sales were $53.192 million versus $49.701 million; net income was $3.368 million versus $2.856 million; diluted EPS was $0.23 versus $0.20.
Cash, liquidity and debt
- Year-end cash was $1.036 million, down from $4.586 million. Operating cash flow of $8.352 million was more than offset by $8.045 million of investing outflows and $3.857 million of financing outflows.
- Working capital was approximately $79.380 million, with a current ratio of 4.2:1, compared with $77.191 million and 4.5:1 in 2014. Inventory increased 9.1% to $63.573 million; trade receivables increased 7.0% to $29.914 million.
- Total debt was $23.950 million, including $21.750 million on the term loan and $2.200 million on a revolving facility; $2.750 million was current. The company reported $25 million of revolving facilities available at year-end, with $2.2 million outstanding. It terminated the additional $10 million facility on February 10, 2016, stating it was no longer needed.
- The term loan matures July 1, 2018 and is secured by substantially all operating assets; debt agreements include leverage and fixed-charge coverage covenants. A swap hedged part of the variable-rate loan to a 2.53% net fixed rate; its year-end fair value was negative $114,000.
- Dividends paid were $4.255 million, or $0.315 per share, up from $3.663 million, or $0.285 per share. No shares were repurchased in 2015.
Outlook, risks and notable items
- Management expected improving employment and employee turnover, healthcare-sector demand, and new group purchasing organization contracts to support uniform sales growth in 2016. It reported two healthcare GPO awards, opening access to at least 4,500 additional facilities, but said customer acquisition and sales growth would take time.
- Management anticipated significant growth in remote staffing in 2016 and beyond. A new El Salvador call center, expected to be completed in mid-2016, was intended to approximately double capacity there. The company expected to spend about $2.5 million more on the project in 2016; the filing also describes an expected amount in excess of $3 million, so the estimate is not consistent throughout the text.
- Management said operating income and available trade and institutional credit were adequate to fund operations for the next 12 months and beyond. It also intended to continue dividends and consider future share repurchases, subject to board discretion and financial conditions.
- Key risks include competition and pricing pressure; changes in employment, customer demand and economic conditions; raw-material costs and availability; reliance on Central American sourcing (about 22% of products in both 2015 and 2014); customer order cancellations; acquisition integration; pension funding; and the continued trend toward outsourcing for remote staffing. The largest customer represented about 6.0% of sales.
- The pension plans were underfunded by $8.925 million, up from $8.084 million. Pension cost after settlements increased to $888,000 from $217,000; 2015 included a $460,000 settlement loss. The company contributed $1.0 million to the plans and planned a $500,000 contribution in 2016.
- The HPI acquisition earn-out liability was $5.653 million at year-end. The company paid $1.2 million during 2015 for 2014 performance; a further $1.8 million payment was expected in first-quarter 2016. The remaining liability is subject to remeasurement.
- Legal matters were described as ordinary-course claims not expected to have a material effect. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective.
Important facts for investors to verify
- Whether remote staffing growth and the El Salvador capacity expansion translate into profitable growth, given rising capital spending and segment mix changes.
- Whether uniform gross margins recover despite pricing competition, sourcing and labor costs, and the loss of the prior-year customer rollout comparison.
- Cash conversion and working-capital requirements, particularly the increase in inventory and low year-end cash balance.
- Debt repayment and covenant headroom, especially after termination of the additional revolving facility, and the remaining HPI earn-out payments.
- Future pension funding needs and the sensitivity of the underfunded obligation to discount rates and asset returns.