Superior Group of Companies, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the same 2019 periods unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context
The company operates Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products businesses. COVID-19 drove substantial personal protective equipment (PPE) sales, while also weakening demand for some core uniform and branded merchandise products.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $127.7 | $89.5 | $381.3 | $268.3 |
| Gross profit / margin | $47.5 / 37.1% | $31.5 / 35.1% | $136.8 / 35.9% | $94.1 / 35.1% |
| Income before income taxes | $12.1 | $4.6 | $35.6 | $11.3 |
| Net income | $9.9 | $3.9 | $28.5 | $9.1 |
| Diluted EPS | $0.63 | $0.26 | $1.85 | $0.59 |
| Interest expense | $0.2 | $1.1 | $1.7 | $3.5 |
- Growth and profitability: Q3 sales rose 42.8% and nine-month sales rose 42.1%. Net income increased about 154% in Q3 and 214% year to date. Q3 net margin was 7.8%, versus 4.4%; nine-month net margin was 7.5%, versus 3.4%.
- Segment sales: Q3 Uniforms and Related Products revenue was $73.2 million (+33.2%), Remote Staffing Solutions was $11.6 million (+25.1%), and Promotional Products was $44.2 million (+67.0%). For nine months, segment revenue was $209.2 million (+19.9%), $30.2 million (+12.2%), and $145.8 million (+106.6%), respectively. Promotional Products’ growth was primarily PPE-related.
- Cash flow: Nine-month operating cash flow was $51.1 million, compared with $11.8 million; capital expenditures were $5.7 million, compared with $6.4 million. Cash flow benefited substantially from customer payments and a $29.2 million increase in accounts payable and other current liabilities. Financing used $48.2 million, largely reflecting net debt repayments of $42.6 million.
- Balance sheet and liquidity: At September 30, cash was $5.7 million, working capital was $122.0 million, and current assets and liabilities were $222.0 million and $100.0 million. Working capital was $142.4 million at December 31, 2019. Total borrowings were $77.3 million, down from $119.8 million; revolving-facility availability was $63.1 million. The company reported covenant compliance and expects operating cash flow plus revolver availability to cover anticipated working-capital needs for the next 12 months.
- Other measures: The nine-month effective tax rate was 19.9%, versus 19.4%. Cash dividends were $0.20 per share in Q3 versus $0.10 a year earlier; year-to-date dividends were $0.30 per share in both periods.
Material changes and management commentary
- PPE contributed $69.1 million to nine-month Promotional Products sales and $24.3 million to Uniforms and Related Products sales. Q3 PPE sales were $19.4 million in Promotional Products and $13.9 million in Uniforms and Related Products.
- Uniforms’ nine-month sales growth included $21.2 million from PPE and higher healthcare-apparel demand, partly offset by reduced demand for other uniforms. Management cited a $9.5 million year-to-date difference from timing of revenue recognition under ASC 606; the company’s non-GAAP Uniforms shipments measure rose to $210.8 million from $185.5 million.
- Promotional Products’ nine-month sales growth also reflected expansion of its customer base and PPE demand. Management said core promotional products had held up better than some competitors, with strength in delivery-related customers offsetting weakness in restaurant and entertainment markets.
- Remote Staffing benefited from continued work for customers added in 2019 and new customer onboarding; management noted pandemic disruption in March and April but more recent increased demand.
- Selling and administrative expense increased 38.2% in Q3 and 26.5% year to date. Drivers included sales-related compensation, higher bad-debt expense ($5.4 million increase year to date), and unfavorable fair-value adjustments to acquisition-related contingent liabilities ($3.1 million increase year to date). The allowance for doubtful accounts was $7.9 million, compared with $3.0 million at year-end 2019.
- Management described the pandemic’s duration and financial effects as uncertain. Expense controls, deferred certain debt payments in spring 2020, and delayed some non-essential capital spending. It expects longer-term growth opportunities in core businesses as conditions stabilize, but gave no specific numerical earnings or revenue guidance.
Risks, contingencies, and unusual items
- COVID-19 could continue to affect demand, customer ability to pay, staffing, operations, sourcing, and supply chains. The company relies heavily on China for fabrics and promotional-products raw materials; prolonged disruption could materially affect results and cash flows.
- Debt carries variable LIBOR-based rates. The company had $8.9 million of letters of credit outstanding under its revolver and an interest-rate swap with $10.5 million notional value. Management estimated that a 100-basis-point LIBOR increase would have added approximately $0.8 million of pre-tax interest expense for the nine-month period, excluding the swap.
- Estimated acquisition-related contingent consideration was $6.1 million at September 30, 2020; actual payments may differ materially. Ordinary-course legal matters were not expected by management to have a material effect.
- Nine-month foreign currency translation reduced other comprehensive income by $1.5 million, primarily due to movements in the Brazilian real. Management warned that prolonged economic stress could affect demand, creditworthiness, borrowing access, pension values, and goodwill or intangible-asset valuations.
Important facts for investors to verify
- How much future revenue and profit depends on pandemic-related PPE demand, and whether core uniform and promotional-product demand recovers as that demand changes.
- Whether the elevated receivables allowance and bad-debt expense reflect continued customer-credit deterioration; review collection trends and contract-liability balances.
- Cash conversion sustainability: operating cash flow benefited from customer advances and higher payables/current liabilities, while cash declined to $5.7 million.
- Debt repayment capacity, variable-rate exposure, covenant headroom, and the impact of future borrowing or LIBOR transition terms.
- Future remeasurement and payment of acquisition-related contingent liabilities, and continuing exposure to China sourcing and foreign-exchange movements.