Superior Group of Companies, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted. The company operates Branded Products, Healthcare Apparel, and Contact Centers.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $136.1M | $138.7M | $396.1M | $430.2M |
| Gross margin | 39.1% | 36.5% | 37.3% | 34.5% |
| Income (loss) before tax | $3.3M | $(17.0)M | $5.6M | $(39.2)M |
| Net income (loss) | $3.1M | $(12.7)M | $5.2M | $(34.2)M |
| Diluted EPS | $0.19 | $(0.80) | $0.32 | $(2.17) |
| Adjusted EBITDA (non-GAAP) | $9.3M | $9.7M | $23.6M | $24.5M |
Q3 selling and administrative expense was $47.2M, or 34.7% of sales, versus $43.8M, or 31.6%, a year earlier. Interest expense was $2.5M in Q3 and $7.7M for the nine-month period; the nine-month weighted-average borrowing rate was 7.0%, versus 1.9% in 2022. The effective tax rates were 4.9% for Q3 and 6.8% year to date, affected primarily by the mix of domestic and foreign earnings.
Segment sales: Q3 Branded Products $83.5M (down 3.8%), Healthcare Apparel $29.6M (down 1.3%), and Contact Centers $24.1M (up 3.2%, before intersegment eliminations). For the nine months, sales were $245.0M (down 14.3%), $85.9M (down 1.2%), and $68.9M (up 9.8%), respectively, before eliminations.
Liquidity, cash flow, and debt
- Nine-month operating cash flow was $59.4M, compared with cash used of $4.5M in 2022. Investing cash outflow was $4.0M; financing cash outflow was $55.5M, primarily reflecting $47.8M of net debt repayments and $6.9M of dividends paid.
- Cash was $17.7M at September 30, 2023. Working capital was $190.7M, down from $232.8M at December 31, 2022.
- Outstanding borrowings were $108.3M: $38.0M under the revolver and $70.3M under the term loan. The company reported $87.0M of revolver availability. Net debt, using reported cash, was approximately $90.6M.
- The company reported a 2.9-to-1.0 net leverage ratio and a 2.1-to-1.0 fixed-charge coverage ratio at quarter-end, in compliance with its applicable covenants. Its credit amendment provides covenant relief through December 31, 2023, with restrictions including limits on capital expenditures, acquisitions, and restricted payments.
- Quarterly dividends were $0.14 per share; dividends totaled $0.42 per share for the nine months. The credit agreement restricts distributions in specified circumstances.
Material changes and management commentary
- Sales declined 1.9% in Q3 and 7.9% year to date. Branded Products was affected by customer advertising-spend pressure, timing of uniform rollouts, customer attrition, and reduced PPE sales. Healthcare Apparel continued to face soft demand and post-pandemic excess inventory. Contact Centers grew with new customers and expanded services.
- Gross margin improved, led by Branded Products pricing/customer mix and lower supply-chain costs, as well as lower inventory write-downs year to date. Contact Centers margins weakened due to higher employee-related costs.
- Prior-year comparisons include $21.5M of Q3 goodwill impairment and $51.5M of goodwill and intangible-asset impairments for the nine-month period. These non-cash charges explain much of the year-over-year improvement in GAAP net income; Adjusted EBITDA was lower in both comparison periods.
- Management expects cash on hand, operating cash flow, and revolver availability to meet requirements for the next twelve months, and anticipates 2023 capital expenditures below 2022 levels. The filing provides no specific revenue or earnings guidance.
- Management described demand, inflation, borrowing costs, supply disruptions, labor availability, geopolitical events, customer creditworthiness, and foreign exchange as risks. A 100-basis-point SOFR increase was estimated to add approximately $1.0M of pre-tax interest expense for the nine months ended September 30, 2023.
Risks, contingencies, and controls
- Disclosure controls were deemed ineffective because of an outstanding material weakness in Contact Centers proprietary IT systems involving segregation of duties, change management, user access, and related review controls. Management reported remediation efforts underway; the weakness was not yet considered remediated. Management nevertheless stated the financial statements fairly present the company’s results in all material respects.
- Acquisition-related contingent consideration remains, including an estimated $1.2M Guardian liability at quarter-end and a $0.5M settlement of Sutter’s Mill consideration payable in Q1 2024. Guardian’s remaining estimated undiscounted payments were $1.9M–$2.2M and may differ from estimates.
- The company disclosed ordinary-course legal matters that management does not expect to have a material effect. Written put options covering 170,448 shares remained outstanding, with a reported fair value of $1.6M.
- Credit facilities are secured by substantially all operating assets. Variable-rate debt, covenant restrictions, and the continuing control weakness are material matters for investors to monitor.
Important facts for investors to verify
- Whether sales and margins stabilize in Branded Products and Healthcare Apparel, and whether Contact Centers growth offsets weakness in product segments.
- Whether cash generation remains sufficient for debt service, dividends, and operating needs, and how variable interest rates affect earnings.
- Progress against credit covenants after the relief period, including leverage, capital spending, and restricted-payment limits.
- Remediation and testing of the Contact Centers IT-related material weakness.
- Actual acquisition-related contingent payments, the treatment of written put options, and any changes in legal or other contingencies.