Superior Group of Companies, Inc. — Q2 2022 Form 10-Q
Business context and period: The company sells branded promotional products and uniforms, healthcare apparel, and outsourced contact-center services. This unaudited quarterly report covers the three and six months ended June 30, 2022; comparisons are to the same 2021 periods. Beginning in Q2, the company reorganized its reporting segments and recast prior-period segment data.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $147.9 million | $130.8 million | $291.5 million | $271.6 million |
| Gross profit / margin | $48.1 million / 32.5% | $47.2 million / 36.1% | $97.9 million / 33.6% | $96.2 million / 35.4% |
| Net income (loss) | ($26.7 million) | $6.4 million | ($21.4 million) | $16.9 million |
| Diluted EPS | ($1.70) | $0.40 | ($1.37) | $1.05 |
| Operating cash flow | Not separately presented | Not separately presented | ($7.6 million) | ($3.0 million) |
Q2 and first-half results included $24.5 million of non-cash goodwill impairment and $5.6 million of non-cash trade-name impairment. Excluding neither charge, reported earnings were a loss. Cost of goods sold also included $4.5 million of inventory write-downs in Q2, principally for excess PPE and discontinued styles. Q2 interest expense was $0.6 million, up from $0.3 million; first-half interest expense was $0.9 million, up from $0.6 million.
Q2 sales grew 13.1%: Branded Products increased 28.8% to $102.0 million and Contact Centers increased 37.1% to $21.5 million, while Healthcare Apparel declined 30.2% to $26.3 million. First-half sales rose 7.3%; Branded Products rose 15.1% to $199.1 million, Contact Centers rose 37.5% to $39.4 million, and Healthcare Apparel fell to $56.9 million. The filing’s six-month segment table implies a 22.4% Healthcare Apparel decline, but the MD&A narrative gives a conflicting 30.2% decline.
Balance sheet, debt and liquidity
At June 30, 2022, cash was $10.3 million, working capital was $212.6 million, and current assets and current liabilities were $318.4 million and $105.8 million, respectively. Total debt was $149.2 million, comprising $101.7 million drawn on a $125 million revolving facility and $47.6 million in term loans. Revolver availability was $23.3 million. Debt increased from $116.8 million at year-end 2021. The debt carries variable LIBOR-based rates; the company reported compliance with its credit covenants at quarter-end.
First-half investing cash outflow was $18.2 million, including $11.2 million for acquisitions and $7.0 million of capital expenditures. Financing provided $27.2 million, including $32.5 million of net debt proceeds; cash increased $1.4 million to $10.3 million. The company paid $4.2 million in dividends during the first half. Management said operating cash flow and revolver availability should cover anticipated working-capital needs and capital expenditures for the next 12 months and beyond.
Changes, outlook and risks
- Branded Products growth reflected customer penetration and the Sutter’s Mill and Guardian acquisitions, partly offset by lower PPE sales. Healthcare Apparel faced weaker demand and a market oversupplied with inventory. Contact Centers grew through expanded services and new customers.
- Management expects PPE demand to continue declining. It cited continued global supply-chain delays, higher freight costs, inventory pressure, and inflation. COVID-19 effects, changing customer demand, and disruption in sourcing remain uncertain.
- Rising interest rates increase borrowing costs; the filing notes rates rose materially during Q2. The company also identified economic and political uncertainty, including Russia-Ukraine-related sanctions and inflationary pressures, as risks.
- No numerical full-year guidance is provided in the supplied filing text. Management’s liquidity outlook is subject to risks, and future financing may not be available on reasonable terms.
- A material weakness in income-tax accounting controls remained unremediated as of June 30. Planned remediation includes tax software, additional tax personnel, and stronger management review controls. Management nevertheless stated the financial statements fairly present the company’s results and position.
- Contingent acquisition consideration remains subject to remeasurement: estimated fair values were $2.9 million for Sutter’s Mill and $1.2 million for Guardian. Management does not expect ordinary-course legal matters to have a material effect.
Unusual disclosure discrepancies: The tax note reports a 3.6% effective tax rate for the first half of 2022, while the MD&A states 8.0%. The segment sales table reports a 22.4% first-half Healthcare Apparel decline, while the MD&A narrative states 30.2%.
Important facts for investors to verify
- Reconcile the MD&A’s conflicting first-half Healthcare Apparel growth rate and effective tax rate with the financial-statement notes and tables.
- Assess whether weak operating cash flow, elevated inventory and contract assets, and only $23.3 million of revolver availability are consistent with the company’s liquidity outlook.
- Monitor variable-rate debt, covenant headroom, and the effect of further rate increases on interest expense and refinancing risk.
- Evaluate the assumptions behind the $30.0 million of impairments, the expected benefits of BAMKO-centered rebranding, and the performance of the Healthcare Apparel business.
- Track progress in remediating the income-tax control material weakness and the final valuation and payments for acquisition-related contingent consideration.