Superior Group of Companies, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 21, 2019. This summary covers the full fiscal year, with selected fourth-quarter results. The company operates Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products businesses.
Financial performance
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Net sales | $346.4 million | $266.8 million | Up 29.8%; management attributed most of the increase to acquisitions. |
| Gross profit / gross margin | $121.7 million / 35.1% | $96.4 million / 36.1% | Gross profit rose, while margin declined. |
| Income before taxes | $21.4 million | $24.8 million | Down 13.7%; 2017 included a $1.0 million property-sale gain. |
| Net income | $17.0 million | $15.0 million | Up 13.0%; lower tax expense offset weaker pretax income. |
| Diluted earnings per share | $1.10 | $0.99 | Up from prior year. |
| Operating cash flow | $19.9 million | $22.7 million | Down $2.9 million. |
| Cash and working capital | $5.4 million cash; $150.8 million working capital | $8.1 million cash; $95.3 million working capital | Working capital rose; cash declined. |
| Debt | $117.7 million gross debt at year-end | $39.0 million gross debt at year-end | Debt increased primarily to fund the CID acquisition. |
- Segment sales: Uniforms and Related Products $238.2 million, up 16.4%; Remote Staffing Solutions $31.3 million, up 36.0%; Promotional Products $80.9 million, up 88.6%. Promotional Products growth largely reflected the 2017 acquisitions; Uniforms growth included CID.
- Net sales included a $3.5 million increase from adopting ASC 606. The adoption also produced an $11.2 million increase to opening retained earnings and a $49.2 million contract asset at year-end.
- Interest expense rose to $3.2 million from $0.8 million, primarily due to acquisition borrowing and higher rates. The effective tax rate fell to 20.7% from 39.4%, with 2017 affected by Tax Act charges and remeasurement.
- Fourth-quarter 2018 sales were $95.0 million versus $72.5 million; net income was $4.6 million versus $1.9 million in fourth-quarter 2017.
Liquidity, financing and capital allocation
- Operating cash flow of $19.9 million was more than offset by $85.6 million of net cash paid for acquisitions and $4.9 million of capital expenditures. Financing activities provided $68.1 million; cash decreased $2.8 million for the year.
- The May 2018 CID acquisition had reported total consideration of $90.7 million, including $84.4 million cash at closing, stock, and a cash/working-capital adjustment. CID contributed $42.0 million of revenue from acquisition through year-end.
- At December 31, 2018, the company had a $75 million revolving facility and term loans. It reported compliance with required debt covenants. The facilities are secured by substantially all operating assets.
- On January 22, 2019, the $85 million term loan was restructured: $20 million was repaid using revolver borrowings, leaving $65 million; maturity was extended to January 2026 and the rate reset to LIBOR plus 0.85%. The company also reported an existing $42 million term loan, maturing in 2024.
- Cash dividends paid were $5.8 million; share repurchases totaled $2.9 million. The company stated it expects to continue dividends and repurchases as financial conditions permit, subject to board discretion and credit agreement restrictions.
Outlook, risks and notable items
- Management expected factors including healthcare employment demand, increasing voluntary turnover, and CID’s access to retail and digital channels to support Uniforms sales growth in 2019. No numerical revenue or earnings guidance was provided.
- Management cited ongoing growth opportunities in Remote Staffing and Promotional Products, including customer penetration and possible acquisitions. Promotional Products sales may fluctuate more from quarter to quarter.
- Key risks include competition and pricing pressure; cotton, other input and labor costs; tariffs and trade restrictions—particularly involving China; reliance on international sourcing and manufacturing; customer order reductions; acquisition integration; variable-rate debt and LIBOR transition; pension obligations; and cybersecurity and operational disruption.
- Unfunded or underfunded pension obligations were approximately $8.8 million. The company disclosed ordinary-course legal matters and did not expect them to have a material adverse effect.
- The 2018 audit opinion was unqualified, and the auditor and management concluded internal control over financial reporting was effective. However, CID’s controls were excluded from the 2018 evaluation and audit; CID represented $42.0 million of revenue and $101.6 million of assets as reported in the audit discussion.
- Management reported that Peter Benstock would cease serving as Executive Vice President but remain President of Fashion Seal Healthcare.
Important facts for investors to verify
- How much of sales and earnings growth is organic versus acquisition-driven, and whether CID integration delivers expected performance.
- Whether gross-margin pressure, especially in Promotional Products, persists and whether tariff-related costs can be passed on without losing customers.
- Debt repayment capacity, covenant headroom, interest-rate exposure, and the effect of the January 2019 refinancing on cash flow and liquidity.
- The quality and conversion timing of the $49.2 million ASC 606 contract asset, and the effect of the accounting change on comparability with prior periods.
- Whether customer concentration, sourcing exposure, pension funding needs, and acquisition-related contingent liabilities change materially.