Superior Group of Companies, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 20, 2020. The company supplies uniforms and related products, remote staffing services, and promotional products.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $376.7 million | $346.4 million | +8.8% |
| Gross profit | $128.9 million | $121.7 million | +5.9% |
| Gross margin | 34.2% | 35.1% | Down 0.9 percentage points |
| Income before tax | $15.3 million | $21.4 million | Down 28.6% |
| Net income | $12.1 million | $17.0 million | Down 28.9% |
| Diluted EPS | $0.79 | $1.10 | Down 28.2% |
| Operating cash flow | $20.0 million | $19.9 million | Nearly flat |
| Cash and cash equivalents | $9.0 million | $5.4 million | Up $3.6 million |
| Working capital | $142.4 million | $150.8 million | Down $8.4 million |
| Total debt outstanding | $119.8 million | $117.7 million | Up $2.1 million |
Net margin was approximately 3.2%, versus 4.9% in 2018. Capital expenditures were $9.7 million, up from $4.9 million. Dividends were $0.40 per share for the year; cash dividends paid totaled $6.0 million.
Segments and changes versus 2018
- Uniforms and Related Products: Sales were $237.6 million, down 0.3%. CID acquisition revenue helped offset declines in the legacy business and revenue-recognition timing effects. Excluding CID, reported shipments were $187.8 million, down from $194.8 million.
- Remote Staffing Solutions: Sales were $36.5 million, up 16.5%, attributed to growth with new and existing customers. Segment income before tax increased to $7.8 million from $6.7 million.
- Promotional Products: Sales were $107.5 million, up 32.9%, supported by sales-force expansion and improved market conditions. Segment income before tax rose to $3.4 million from $2.2 million.
Despite sales growth, pretax income declined as selling and administrative costs, interest expense, and pension costs increased. Interest expense rose to $4.4 million from $3.2 million; average borrowings also increased. The Uniforms segment recorded a $0.9 million CID-related inventory write-down. Promotional Products cost of goods sold rose to 73.6% of sales from 72.0%, reflecting customer and product mix.
Liquidity, debt, and capital allocation
At year-end, debt comprised $37.8 million under a revolving facility and $82.0 million in term loans. The facilities carry variable LIBOR-based rates; the company reported compliance with its financial covenants. In September 2019, the maximum funded-debt-to-EBITDA covenant was increased from 4.0:1 to 5.0:1, with tiered pricing if the ratio exceeds 4.0:1. Substantially all operating assets secure the facilities. Management reported $7.2 million of cash held by foreign subsidiaries.
The company repurchased 49,091 shares during 2019 under a 750,000-share authorization, with 700,909 shares remaining at year-end. Management anticipated continued dividends and possible repurchases as financial conditions permit, subject to board discretion and credit-agreement restrictions.
Outlook, risks, and unusual items
- Management described growth opportunities in healthcare uniforms, remote staffing, and promotional products, but provided no quantified financial guidance.
- The filing reported that coronavirus-related travel restrictions and supply-chain and labor constraints had already begun to negatively affect the business; the extent of future effects was unknown at filing.
- Tariffs on certain imports, particularly from China, had led to price increases and production shifts; most U.S.-China tariffs remained in effect despite the January 2020 “Phase One” agreement.
- Key exposures include competition and pricing pressure, customer order reductions, dependence on China-linked sourcing, raw-material and wage inflation, supply interruptions, cyber and privacy risks, acquisition integration, variable interest rates, and LIBOR transition uncertainty.
- Unfunded or underfunded pension obligations were approximately $10.4 million. The company recorded $1.1 million in noncash pension settlement losses, accelerating costs otherwise expected in future periods.
- ASC 606 timing affected reported Uniforms revenue: the company cited a $13.5 million year-over-year timing difference in its MD&A and presented a non-GAAP shipments measure to track customer demand. Verify reported revenue against this reconciliation.
- The company reported no material legal proceedings, no off-balance-sheet financing arrangements, and no goodwill or indefinite-lived intangible impairment for 2019. The auditor issued unmodified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether reported revenue growth translates into improved earnings, given the 2019 decline in net income and margins.
- Uniforms demand and the impact of ASC 606 timing, including shipments excluding CID and the contribution of CID.
- Promotional Products growth quality, margins, and reliance on major customers; its largest customer represented 17.8% of segment sales.
- Debt service capacity, covenant headroom, refinancing and LIBOR-transition terms, and sensitivity to higher rates.
- Effects of coronavirus disruption, China sourcing concentration, tariffs, and progress diversifying production.
- Pension funding requirements and the assumptions underlying benefit obligations.