Superior Group of Companies, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The company operates Branded Products, Healthcare Apparel, and Contact Centers businesses.
Financial performance
- Q2 revenue: $129.2 million, down 12.7% from $147.9 million. Branded Products fell 22.0%; Healthcare Apparel rose 6.8%; Contact Centers rose 6.0% before intersegment eliminations.
- Q2 earnings: Net income was $1.2 million, or $0.08 per diluted share, versus a net loss of $26.7 million, or $1.70 per share, in Q2 2022. Prior-year results included $30.0 million in goodwill and intangible-asset impairment charges.
- Q2 gross margin: 36.8%, up from 32.5%. Management attributed the improvement mainly to lower prior-year inventory write-downs and better Branded Products margins. Contact Centers margin declined amid higher employee costs.
- Q2 interest expense: $2.6 million versus $0.6 million; the weighted average borrowing rate was 7.2%, compared with 1.6%.
- First-half revenue and earnings: Revenue was $259.9 million, down 10.8%; net income was $2.1 million versus a $21.4 million loss. Gross margin was 36.4%, compared with 33.6%.
- Adjusted EBITDA, non-GAAP: $7.4 million for Q2 versus $4.8 million; $14.3 million for the first half versus $14.8 million. The filing cautions that this measure is not a substitute for GAAP results.
- Cash flow: First-half operating cash flow was $38.1 million, versus cash used of $7.6 million in 2022. Investing used $3.6 million and financing used $33.7 million, including $29.9 million of debt repayments and $4.6 million of dividends. Cash increased $1.0 million to $18.7 million.
- Liquidity and debt: Working capital was $205.3 million, down from $232.8 million at year-end 2022. Debt under the credit facilities totaled $127.3 million; $69.0 million was available on the revolving facility. Total debt less cash was approximately $108.5 million.
- Dividends: The quarterly dividend was $0.14 per share; first-half dividends were $0.28 per share versus $0.26 in 2022.
Changes and management commentary
- Branded Products weakness reflected softer customer advertising spending, timing of uniform programs, and reduced personal protective equipment sales. Guardian acquisition sales partly offset the decline.
- Healthcare Apparel benefited from digital sales, including a new direct-to-consumer website, but management said post-pandemic inventory saturation continued to weigh on market demand.
- Contact Centers revenue grew with new and expanded customer relationships; higher staffing and infrastructure investment pressured segment expense ratios and margins.
- Management said current cash, expected operating cash flow, and revolver availability should cover operating needs, contractual obligations, capital expenditures, dividends, and other general purposes for the next 12 months. No specific earnings or revenue guidance was provided.
- Management expects 2023 capital expenditures to be below 2022 levels. A new Phoenix warehouse lease has estimated total rental payments of $7.4 million.
Debt, risks, and unusual items
- A May 2023 credit amendment provides covenant relief through December 31, 2023, with quarterly maximum net leverage limits ranging from 4.5x to 4.8x before returning to 4.0x in Q4. It also limits capital expenditures, acquisitions, incremental loans, restricted payments, and certain investments. At June 30, the company reported a 3.7x net leverage ratio and 2.0x fixed-charge coverage ratio, in compliance with applicable requirements.
- Credit facilities bear variable SOFR-based interest; the reported weighted average rate was 7.2%. The filing estimates a 100-basis-point SOFR increase would have added approximately $0.7 million of pre-tax interest expense in the first half.
- Management disclosed a continuing material weakness in Contact Centers’ proprietary IT controls involving segregation of duties, change management, and user access. Disclosure controls were therefore deemed ineffective; remediation is underway but was not complete.
- Management identified inflation, higher borrowing costs, economic and geopolitical disruption, customer demand, labor costs, supply availability, and financial-sector liquidity as risks. The company has foreign-currency exposure and had no currency hedges outstanding at quarter-end.
- In July 2023, management agreed to settle the remaining Sutter’s Mill contingent consideration for $0.5 million, payable in Q1 2024. Guardian contingent consideration was estimated at $1.7 million at quarter-end, with $0.8 million expected in Q3.
- The company reported ordinary-course legal matters that management did not expect to materially affect results, cash flows, or financial position.
Important facts for investors to verify
- Whether Branded Products demand stabilizes and whether Contact Centers growth can offset its higher staffing costs.
- Progress in remediating the Contact Centers IT-control material weakness and management’s testing of the revised controls.
- Compliance with amended debt covenants, the cost of variable-rate borrowing, and remaining revolver availability.
- Cash generation and working-capital trends, including inventory levels, customer collections, and vendor payment timing.
- Future contingent-consideration payments, dividend capacity under credit-agreement restrictions, and execution and cost of the Phoenix warehouse lease.