Business context and reporting period
Superior Uniform Group, Inc. (the registrant named in the filing) filed this Form 10-K for the fiscal year ended December 31, 2014. The company operates in Uniforms and Related Products and Remote Staffing Solutions. The filing presents annual results; fourth-quarter figures are also summarized below. Share and per-share data reflect the 2-for-1 stock split effective February 4, 2015.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $196.249 million | $151.496 million |
| Gross profit | $68.737 million | $52.558 million |
| Gross margin | 35.0% | 34.7% |
| Income before tax | $17.529 million | $8.490 million |
| Net income | $11.349 million | $5.850 million |
| Diluted EPS | $0.82 | $0.46 |
| Cash from operating activities | $6.838 million | $8.401 million |
| Capital expenditures | $4.936 million | $1.631 million |
- Annual sales rose 29.5%; net income rose 94.0%. Net margin increased to 5.8% from 3.9%. Interest expense increased to $484,000 from $195,000, and the effective tax rate increased to 35.3% from 31.1%.
- Fourth-quarter 2014 sales were $49.701 million versus $45.473 million in Q4 2013; net income was $2.856 million versus $1.675 million. Fourth-quarter diluted EPS was $0.20 versus $0.13.
- Uniforms and Related Products segment sales were $188.199 million, up 29.0%; Remote Staffing Solutions sales were $11.424 million, up 23.0% before intersegment eliminations. Segment pretax income was $15.072 million and $2.457 million, respectively.
- Year-end cash was $4.586 million; working capital was $77.191 million, with a 4.5:1 working-capital ratio. Current assets were $99.456 million and current liabilities $22.265 million.
- Total debt was $25.035 million, including $2.375 million current and $22.660 million long-term, compared with $26.250 million at year-end 2013. The company reported $25 million in revolving facilities, with $660,000 outstanding, and stated it complied with all credit covenants.
- Cash declined $730,000 during 2014. Dividends paid were $3.663 million; net repayments of borrowings were $1.215 million, partly offset by $1.855 million from option exercises. About $4.147 million of cash held by foreign subsidiaries could not be repatriated without federal tax.
Material changes versus the prior comparable period
- Growth was substantially affected by HPI Direct: acquired July 1, 2013, HPI was included for a full year in 2014 but only six months in 2013. Management attributed much of Uniforms segment growth to this additional period; HPI contributed $28.269 million of sales in the first half of 2014.
- Uniforms segment cost of goods sold improved to 65.7% of segment sales from 66.2%. Remote Staffing Solutions’ cost of goods sold increased to 43.2% from 38.4%, attributed to startup accounts. Selling and administrative expenses as a share of sales declined in both segments.
- Operating cash flow decreased despite higher earnings, principally alongside increased working-capital needs: inventories rose 17.8% to $58.282 million and trade receivables rose 23.0% to $27.956 million.
- The pension deficit increased to $8.084 million from $3.617 million, primarily reflecting lower discount rates. The primary defined-benefit plan had been frozen to future benefit accruals effective June 30, 2013.
Outlook, risks, contingencies, and unusual items
- Management expected improving employment, rising voluntary turnover, healthcare-sector demand, and new group-purchasing-organization access to support 2015 uniform sales. A contract effective February 1, 2015 was expected to expand the healthcare facilities available for direct sales by at least 3,000.
- Management expected Remote Staffing Solutions to grow significantly in 2015 and beyond. A new El Salvador call-center building, expected near year-end 2015, was intended to approximately double local capacity. About $2 million was spent in 2014, with more than $5 million of additional spending expected to complete it.
- Key risks include economic and employment weakness, competitive pricing, fabric and other input-cost volatility, customer order reductions or cancellations, supply disruption and exposure to Central American sourcing, and adverse weather. Outsourcing-related public opposition or legislation could also affect Remote Staffing Solutions.
- The HPI acquisition included up to $7.2 million in contingent consideration through 2017; $6.934 million was recorded as a liability at year-end, including $1.189 million current. Actual payments may differ from the estimate.
- The company reported $8.084 million of underfunded pension obligations and planned a $1 million pension contribution in 2015. A supplier receivable in Haiti was $3.758 million. Management said ordinary-course legal matters were not expected to have a material effect.
- The board declared a 2-for-1 stock split, effective February 4, 2015. The 2014 regular dividend totaled $0.285 per share. The independent auditor gave an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Separate underlying growth from the HPI acquisition’s partial-year comparison, and assess the sustainability of customer programs and promotional sales.
- Track operating cash conversion and working-capital requirements, especially inventory and receivables growth.
- Review the timing and funding of the planned call-center investment, expected capacity utilization, and returns from Remote Staffing Solutions growth.
- Monitor pension funding, discount-rate assumptions, HPI contingent consideration, and debt covenant headroom.
- Assess exposure to Central American sourcing and the Haiti supplier receivable, along with customer concentration and input-cost pass-through.
- Confirm future dividends and share repurchases against cash generation, capital spending, debt needs, and board discretion.