Business context and reporting period
Superior Group of Companies, Inc. (NASDAQ: SGC) filed this unaudited Form 10-Q for the three months ended March 31, 2022. Its three segments are Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products. Unless otherwise noted, financial amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Net sales | $143.6 million | $140.8 million |
| Gross profit / gross margin | $49.8 million / 34.7% | $49.0 million / 34.8% |
| Income before taxes | $6.7 million | $13.2 million |
| Net income | $5.2 million | $10.5 million |
| Diluted EPS | $0.32 | $0.66 |
| Cash from operating activities | $(8.7) million | $(2.3) million |
| Cash and cash equivalents | $8.3 million | $8.9 million at December 31, 2021 |
| Working capital | $206.4 million | $188.1 million at December 31, 2021 |
| Debt outstanding | $130.6 million | $116.8 million at December 31, 2021 |
Cash used in investing activities was $4.3 million, including $4.2 million of capital expenditures. Financing activities provided $11.9 million, including net debt borrowings; cash declined $0.6 million during the quarter. The company declared cash dividends of $0.12 per share, versus $0.10 a year earlier.
Material changes versus the prior comparable period
- Consolidated sales increased 1.9%, but net income fell about 50%. Selling and administrative expenses rose 20.2% to $42.2 million, primarily due to employee costs, commissions, and higher depreciation and amortization.
- Uniforms and Related Products sales fell 11.8% to $62.2 million, mainly because personal protective equipment (PPE) sales declined $11.6 million; this was partly offset by recovering demand for uniforms.
- Remote Staffing Solutions sales rose 37.9% before intersegment eliminations, supported by existing and new customers.
- Promotional Products sales rose 11.1% to $65.4 million. Core promotional products sales increased $17.1 million, including $7.1 million contributed by Sutter’s Mill; PPE sales fell $10.5 million.
- Operating cash use increased as inventory cash outflows reached $8.7 million. Inventory on the balance sheet rose to $129.5 million from $120.6 million at year-end.
Outlook, commentary, risks and unusual items
- Management gave no specific numeric revenue or earnings guidance. It expects operating cash flows and revolver availability to cover anticipated working capital and capital expenditures. Management expects PPE demand to continue declining, while citing growth opportunities in core uniforms, staffing, and promotional products.
- Management described supply-chain disruptions, shipping delays and higher logistics costs as ongoing; these contributed to higher cost-of-sales ratios in the Uniforms and Promotional Products segments. The company said the challenges were manageable but noted limited visibility into further disruption.
- At March 31, debt included $79.2 million drawn on a $125 million revolving facility, with $45.8 million of undrawn capacity. Borrowings carry variable LIBOR-based rates. The company was compliant with its credit covenants; required ratios include fixed-charge coverage of at least 1.25:1 and funded debt to EBITDA no greater than 5.0:1.
- Disclosure controls were deemed ineffective because an income-tax accounting material weakness identified at year-end 2021 remained unremediated. Planned remediation includes tax software, additional qualified personnel, and stronger review controls. Management nevertheless stated the financial statements fairly present the company’s results and position.
- On May 1, 2022, after quarter-end, the company closed its acquisition of Guardian Products; the filing does not provide a clear purchase price. It also expected to pay $3.4 million and $1.4 million of remaining BAMKO and Tangerine contingent consideration, respectively, in Q2 2022. Sutter’s Mill contingent consideration had a $2.7 million estimated fair value.
- Other items include adoption of the expected-credit-loss standard, reducing opening retained earnings by $0.1 million, and a $0.1 million gain on an interest-rate swap. Ordinary-course legal proceedings were not expected by management to have a material effect.
Important facts for investors to verify
- Whether sales growth can offset declining PPE revenue and continued cost inflation, and whether margins recover.
- Inventory levels, working-capital needs, and the ability to improve operating cash flow.
- Debt balances, variable-rate exposure, covenant headroom, and the effect of additional borrowing or acquisitions.
- Progress and testing of remediation for the income-tax control weakness.
- Guardian acquisition terms and performance, along with contingent consideration payments and valuation estimates.