Superior Group of Companies, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This annual filing reports full-year results, not standalone fourth-quarter figures. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
Superior operates three segments: Uniforms and Related Products, Remote Staffing Solutions (The Office Gurus), and Promotional Products (including BAMKO, Tangerine and PublicIdentity). The company sells apparel and protective equipment, outsourced contact-center services, and promotional merchandise.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $526.7 | $376.7 | +39.8% |
| Gross profit | $188.8 | $128.9 | +46.4% |
| Gross margin | 35.8% | 34.2% | +1.6 percentage points |
| Income before taxes | $51.5 | $15.3 | |
| Net income | $41.0 | $12.1 | |
| Diluted earnings per share | $2.65 | $0.79 | |
| Cash from operating activities | $41.4 | $20.0 |
Net margin was approximately 7.8%, versus 3.2% in 2019. Net income benefited in part from a $2.2 million gain on sale of a distribution-center property. Interest expense declined to $2.0 million from $4.4 million, principally due to lower LIBOR and reduced borrowings.
Segment sales: Uniforms and Related Products generated $287.3 million (+21.0%), Remote Staffing Solutions $42.4 million (+16.1%), and Promotional Products $202.2 million (+88.0%), before intersegment eliminations. COVID-related personal protective equipment (PPE) contributed $48.5 million to Uniforms sales and $82.7 million to Promotional Products sales—about one-quarter of consolidated revenue combined.
Cash, working capital and debt: Year-end cash was $5.2 million, down from $9.0 million; working capital was $143.6 million, up from $142.4 million. Total borrowings were $88.1 million, compared with $119.8 million a year earlier, including $17.6 million drawn on the revolver. The company reported $31.7 million of undrawn revolver capacity at year-end and compliance with its financial covenants. Investing activities used $6.6 million, including $11.9 million of capital expenditures, partly offset by $5.3 million of property-sale proceeds. Financing activities used $38.4 million, including $31.7 million of net debt repayments and $6.1 million of dividends.
Material changes versus 2019
- Revenue growth was led by PPE demand: PPE sales were $131.2 million in 2020, compared with $3.9 million in Uniforms and no reported PPE sales in Promotional Products in 2019.
- Core uniform-apparel demand weakened in sectors such as restaurants, transportation and hospitality, but healthcare, grocery and pharmacy demand and PPE sales more than offset the decline.
- Promotional Products revenue rose sharply, aided by PPE and expanded customer activity; management noted that branded merchandise markets were pressured by budget cuts and event cancellations.
- Gross margin improved, particularly in Promotional Products, where cost of goods sold fell to 66.5% of segment sales from 73.6%. Remote Staffing Solutions’ cost ratio increased to 42.6% from 41.3%, reflecting pandemic disruption and onboarding costs.
- Selling and administrative expenses increased 27.2% to $136.5 million. Drivers included higher compensation and commissions, a $5.4 million increase in bad-debt expense, and $4.2 million of additional expense related primarily to acquisition contingent-liability fair-value adjustments.
- Cash from operations more than doubled, while the company used operating cash to reduce revolving borrowings. Accounts receivable and inventory rose with higher sales and purchasing activity.
Outlook, risks and unusual items
- Outlook: Management gave no specific revenue or earnings guidance. It expects longer-term growth opportunities in its uniform and promotional businesses as markets stabilize, and reported recent increased demand for Remote Staffing Solutions. Management cautioned that COVID-19’s duration and financial effects remain uncertain.
- PPE and pandemic exposure: PPE materially boosted 2020 sales, but its future demand is uncertain. Further pandemic-related restrictions or supply-chain disruption could affect demand, costs and fulfillment.
- Receivables and customer risk: The allowance for doubtful accounts rose to $7.7 million from $3.0 million; 2020 bad-debt provision was $6.7 million. Two customers represented 23% of receivables, and the five largest receivable balances totaled $36.8 million. The auditor identified the specific receivables reserve as a critical audit matter.
- Supply chain and trade: Key fabrics and many promotional-product inputs are sourced from China. Tariffs, trade restrictions, political disruption, health emergencies, or supplier non-performance could raise costs or interrupt supply.
- Debt and rates: Borrowings are largely variable-rate and LIBOR-based; a 100-basis-point LIBOR increase, before the swap effect, was estimated to add about $1.0 million of annual pretax interest expense. The filing discusses LIBOR transition uncertainty. Debt is secured by substantially all operating assets and subject to covenants.
- Retirement obligations: The unfunded supplemental executive retirement plan (SERP) obligation was $14.3 million. The qualified pension plans’ obligations approximately matched plan assets at year-end.
- Unusual and subsequent events: The property sale generated a $2.2 million gain. Acquisition-related contingent liabilities were subject to remeasurement, with expected 2021 payments including $4.3 million for BAMKO and $1.3 million for Tangerine. After year-end, the company acquired Gifts By Design (effective February 1, 2021) and amended its credit agreement, increasing revolver availability from $75 million to $125 million and extending maturity to February 2026.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The other critical audit matter involved the deferred income tax benefit.
Important facts for investors to verify
- How much of 2020’s growth and profit is sustainable without exceptional PPE demand, and how quickly core uniform and promotional markets recover.
- Collection performance on the larger receivables balance, the adequacy of the $7.7 million allowance, and customer concentration exposure.
- Cash conversion and working-capital needs as PPE orders and associated receivables and inventory normalize.
- Debt-covenant headroom, variable-rate exposure and the effect of the amended revolving facility and LIBOR replacement terms.
- Actual contingent-consideration payments, Gifts By Design acquisition terms and integration results, and the funding outlook for the SERP.