Superior Group of Companies, Inc. — Q1 2020 Form 10-Q
Business and period: The company sells uniforms and related products, promotional products, and remote staffing services. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019. The company said COVID-19 had not materially affected Q1 results, but disruptions intensified in March.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $94.2 million | $86.6 million |
| Gross profit / margin | $33.5 million / 35.5% | $30.3 million / 35.0% |
| Income before taxes | $4.6 million | $3.0 million |
| Net income | $3.4 million | $2.4 million |
| Diluted EPS | $0.22 | $0.16 |
| Operating cash flow | $19.5 million | $5.7 million |
| Capital expenditures | $2.1 million | $1.7 million |
Sales rose 8.9%; gross margin was approximately 35.5%, and net margin approximately 3.6%. Q1 operating cash flow benefited substantially from advance customer payments for personal protective equipment (PPE) contracts and working-capital timing; it should not be assumed to represent a recurring run rate.
At March 31, 2020, cash was $5.8 million, working capital $129.7 million, and total debt approximately $101.6 million. The company reported $51.5 million of undrawn revolving-credit capacity and compliance with its credit-facility financial covenants. Total current assets were $199.5 million and current liabilities $69.8 million.
Changes versus Q1 2019
- Promotional Products sales increased 28.6% to $26.2 million, supported by expanded sales capacity and customers; segment pretax income rose to $0.8 million from $0.1 million.
- Uniforms and Related Products sales increased 2.4% to $60.1 million, but shipments, a company-defined non-GAAP demand measure, fell to $59.8 million from $60.4 million. Reported sales included a favorable $2.0 million timing effect from revenue recognition.
- Remote Staffing sales increased 7.0% to $9.2 million, while pretax income declined to $1.8 million from $1.9 million; March COVID-19 disruptions reduced billable hours.
- The effective tax rate increased to 27.1% from 20.2%. Interest expense decreased to $1.1 million from $1.2 million, partly reflecting lower LIBOR.
- Cash declined by $3.3 million during the quarter, versus a $1.5 million increase in Q1 2019. Debt declined from $119.8 million at December 31, 2019 to $101.6 million, principally through repayments.
Outlook, risks, and notable items
- No numerical revenue or earnings guidance was provided. Management said operating cash flows and revolver availability were expected to meet anticipated working-capital needs for the next 12 months, while noting uncertainty and possible need for future financing.
- COVID-19 could reduce customer demand, disrupt operations and supply chains, and affect customers’ ability to pay. Uniform demand faced near-term pressure in several end markets; remote staffing saw service disruption; promotional merchandise faced budget cuts and event cancellations. PPE sourcing contracts provided a partial offset.
- China is a major source of fabrics and promotional-product materials, creating sourcing and cost exposure. Management also cited possible effects on profitability, borrowing availability, pension valuations, and goodwill or intangible-asset impairment.
- Management targeted discretionary expense reductions and delayed nonessential capital spending. On March 30, the company deferred specified loan principal and interest payments due April 1–June 1 until loan maturity. The company also suspended its regular quarterly dividend pending clearer visibility on improved macroeconomic conditions; it had paid $0.10 per share in Q1.
- Q1 selling and administrative expenses included $0.9 million of deferred-compensation-plan investment losses, $0.9 million of bad-debt expense, and $0.4 million of severance; these were partly offset by $1.2 million of savings from foregoing the discretionary retirement-plan match. A $0.3 million interest-rate-swap loss was recognized in interest expense. Foreign-currency translation reduced other comprehensive income by $1.2 million.
- Acquisition-related contingent consideration had an estimated fair value of $5.5 million; approximately $2.0 million was expected to be paid in Q2. Management did not expect ordinary-course legal matters to have a material effect.
Investor verification points
- How much of the elevated operating cash flow came from advance PPE payments, and how do collections and contract liabilities develop?
- What are the duration, profitability, and cancellation or fulfillment terms of PPE contracts?
- How do post-quarter COVID-19 demand, staffing hours, customer credit quality, and China-related supply conditions affect results?
- Does the company maintain covenant compliance and sufficient liquidity as deferred payments and scheduled debt amortization come due?
- What drove the increase in bad-debt expense and deferred-compensation investment losses, and are these costs recurring?
- When, if at all, will the quarterly dividend resume?