Superior Uniform Group, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing identifies the registrant as Superior Uniform Group, Inc. (NASDAQ: SGC). Its two segments are Uniforms and Related Products and Remote Staffing Solutions.
Financial performance and liquidity
- Revenue: $151.5 million, up 26.8% from $119.5 million. Uniforms sales rose 25.7%; Remote Staffing Solutions sales rose 29.0% before intersegment eliminations.
- Profit: Net income was $5.85 million, versus $3.03 million; diluted EPS was $0.92, versus $0.49. Pretax income increased to $8.49 million from $4.62 million.
- Margins: Gross margin was approximately 34.7%, compared with 33.3%. Net margin was approximately 3.9%, compared with 2.5%. The effective tax rate fell to 31.1% from 34.4%.
- Cash flow: Operating cash flow was $8.4 million, down from $9.2 million. Cash increased by $1.8 million to $5.3 million. Investing used $34.1 million, including $32.5 million for HPI; financing provided $27.5 million.
- Debt and liquidity: Year-end term debt was $26.25 million, with $1.75 million current; cash was $5.3 million. A $15 million revolver was undrawn. Working capital was about $69.8 million and the current ratio was 4.9:1, compared with 6.6:1 in 2012. The company reported compliance with credit covenants.
- Other metrics: Total assets were $125.5 million, up from $78.9 million; shareholders’ equity was $71.9 million. Inventory was $49.5 million. The pension plans remained underfunded by $3.6 million, down from $10.5 million.
Material changes versus 2012
- The July 2013 HPI Direct acquisition contributed $21.1 million of revenue and $0.84 million of net income from its acquisition date. The transaction consideration included $32.5 million cash, about $1.6 million in restricted shares, and contingent consideration estimated at $6.7 million on acquisition (up to $7.2 million potentially payable through 2017). Purchase accounting was preliminary.
- HPI contributed materially to Uniforms segment growth; management attributed the rest primarily to greater market penetration. Remote Staffing outside-customer sales increased approximately 63% after intersegment eliminations, to $5.7 million.
- Debt rose from zero at year-end 2012 to $26.25 million after acquisition financing. Intangible assets and goodwill also increased substantially from HPI purchase accounting.
- Uniforms margins benefited from lower raw-material costs and higher volume. The 2012 results included a $1.226 million non-cash intangible impairment charge; no such charge was recorded in 2013.
- The company curtailed future benefit accruals in its primary defined-benefit pension plan, effective June 30, 2013. Pension liability fell following the curtailment gain, actuarial gains, and plan contributions.
Outlook, risks, and unusual items
- Management described the U.S. economic environment as challenging and noted that customer employment levels, headcount, store openings and closures, and employee turnover affect uniform demand. No numerical earnings or revenue guidance was provided.
- Management expected Remote Staffing Solutions to continue growing significantly in 2014 and beyond, while noting increased staffing and sales costs to support expansion. A new El Salvador facility was planned for completion in late 2014, at an expected cost exceeding $7 million.
- Key risks include competitive pricing, fabric and other input-cost changes, customer order reductions or cancellations, economic and employment weakness, Central American sourcing and operational disruptions, acquisition integration and contingent consideration, and restrictions or public opposition to offshore outsourcing. More than 50% of products are sold under the Fashion Seal Uniforms mark; Central American suppliers provided approximately 33% of products in 2013.
- Other exposures include pension funding, inventory obsolescence, supplier advances (including a $4.0 million receivable from a Haitian supplier), and customer concentration. The largest customer represented 6.7% of 2013 sales. Ordinary-course legal matters were not expected by management to have a material effect.
- The company paid $0.135 per share in 2013; the much higher 2012 total of $1.08 included a $0.54 special dividend and an early payment of the 2013 regular dividend. Future dividends and repurchases remain subject to board discretion and financial conditions.
Important facts for investors to verify
- HPI’s final purchase-price allocation, subsequent performance, integration costs, and contingent payments through 2017.
- Ability to generate cash after acquisition-related working-capital demands and fund the planned facility investment while meeting term-loan amortization and covenants.
- Remote Staffing growth, margins, and customer demand, including the costs and returns of planned capacity expansion.
- Quality and recoverability of inventory and the $4.0 million supplier receivable; concentration of sourcing in Central America and exposure to disruption.
- Future pension funding needs and the assumptions underlying the reduced reported pension liability.
- The filing reported an unqualified audit opinion on the 2013 financial statements and effective management controls; the auditor did not opine on internal-control effectiveness.