Superior Group of Companies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Superior operates Branded Products, Healthcare Apparel, and Contact Centers businesses. Amounts below are in millions, except per-share data and ratios.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $130.8 | $143.6 |
| Gross profit / gross margin | $47.1 / 36.0% | $49.8 / 34.7% |
| Selling and administrative expenses | $43.4 | $42.2 |
| Interest expense | $2.6 | $0.3 |
| Income before taxes | $0.9 | $6.7 |
| Income tax expense | $0.1 | $1.5 |
| Net income / diluted EPS | $0.9 / $0.06 | $5.2 / $0.32 |
| Operating cash flow | $25.1 | $(8.7) |
| Capital expenditures | $2.1 | $4.2 |
| EBITDA (non-GAAP) | $6.9 | $10.0 |
Revenue and material changes
- Consolidated sales fell 8.9% to $130.8 million. Branded Products sales declined 15.7% to $81.9 million, reflecting tighter customer advertising spending, timing of uniform programs, and lower personal protective equipment sales; Guardian contributed $6.5 million.
- Healthcare Apparel sales decreased 7.9% to $28.2 million amid post-pandemic excess inventory and softer demand. Contact Centers sales increased 22.7% before intersegment eliminations, to $22.1 million, driven by new customers and expanded services.
- Gross margin improved to 36.0%. Branded Products margin rose to 31.6% from 29.1%, while Healthcare Apparel fell to 35.9% from 39.3% and Contact Centers to 53.5% from 59.4%. Management cited product/customer mix benefits in Branded Products, lower pricing in Healthcare Apparel, and higher agent costs in Contact Centers.
- Net income fell substantially as lower sales, increased Contact Centers administrative expense, and higher interest costs outweighed lower tax expense. Interest costs rose primarily with borrowing rates; the weighted-average borrowing rate was 6.6% versus 0.9%.
Cash, debt, and liquidity
- Cash was $26.6 million at March 31, up from $17.7 million at year-end. Working capital was $220.6 million, down from $232.8 million.
- Operating cash flow of $25.1 million included favorable working-capital movements, notably a $10.2 million cash inflow from accounts receivable. Investing used $2.1 million; financing used $14.2 million, including $11.9 million of net debt repayments and $2.3 million of dividends.
- Credit-facility borrowings totaled $144.2 million: $72.0 million on the revolving facility and $72.2 million on the term loan. Revolver capacity available was $53.0 million. Debt is variable-rate and secured by substantially all operating assets.
- At March 31, the company reported compliance with then-applicable covenants: net leverage of 3.8x and fixed-charge coverage of 1.5x. Management said cash, operating cash flow, and revolver availability were expected to cover requirements for the next 12 months.
- Cash dividends were $0.14 per share, compared with $0.12 in Q1 2022. A new Phoenix warehouse lease signed in Q1 has estimated total rental payments of $7.4 million.
Outlook, risks, and notable items
- No quantified revenue or earnings guidance is provided. Management expects 2023 capital expenditures to be below 2022 levels and anticipates continuing dividends as financial conditions permit.
- On May 4, 2023, after quarter-end, the company amended its credit agreement to provide covenant relief through December 31, 2023. The amendment raises permitted leverage limits temporarily, may increase the SOFR margin to 2.5%, caps capital expenditures at $10 million during the relief period (with additional quarterly limits), prohibits acquisitions and incremental loans, and restricts certain payments and investments.
- Key business risks discussed include inflation, higher interest rates, supply and labor disruption, weaker demand, foreign exchange exposure, and financial-system liquidity concerns. A 100-basis-point increase in SOFR was estimated to add about $0.4 million of quarterly pretax interest expense based on the filing’s scenario.
- Disclosure controls were not effective because of an unremediated material weakness in Contact Centers’ proprietary IT systems, involving segregation of duties, change management, and user access. Management said the financial statements fairly present results; remediation work is ongoing and is not complete until controls operate effectively and are tested.
- Management did not expect ordinary-course legal proceedings to materially affect results, cash flows, or financial position. Acquisition-related contingent consideration remains subject to remeasurement; Guardian goodwill was fully impaired in 2022.
Important facts for investors to verify
- Whether sales and demand recover in Branded Products and Healthcare Apparel, and whether Contact Centers growth translates into improved profitability.
- Progress on the material-weakness remediation and the timing of a conclusion that controls are effective.
- Leverage, covenant headroom, borrowing costs, and compliance with the amended credit agreement during the relief period.
- Cash conversion and working-capital movements, including whether Q1’s strong operating cash flow is sustainable.
- Future dividend capacity, capital spending, and the cash impact of lease and acquisition-related commitments.