Superior Group of Companies, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY 2021. This is an annual filing, not a standalone fourth-quarter report. The company operates Branded Products, Healthcare Apparel and Contact Centers businesses.
Financial performance
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net sales | $578.8 million | $537.0 million |
| Gross profit / margin | $193.4 million / 33.4% | $186.0 million / 34.6% |
| Net income (loss) | $(32.0) million; $(2.03) per diluted share | $29.4 million; $1.83 per diluted share |
| Adjusted EBITDA | $27.9 million | $51.5 million |
| Cash from operating activities | $(2.6) million | $17.1 million |
| Cash and cash equivalents at year-end | $17.7 million | $8.9 million |
| Total debt at year-end | $156.1 million | $116.8 million |
Revenue increased 7.8%. Branded Products sales rose 13.9% to $387.9 million, including $44.2 million attributed to the Sutter’s Mill and Guardian acquisitions and organic growth; lower PPE sales partly offset growth. Healthcare Apparel sales fell 18.6% to $113.3 million amid inventory saturation and weaker demand. Contact Centers sales increased 31.0% to $84.2 million before intersegment eliminations, supported by expanded existing-customer services and new customers.
Gross margin declined to 33.4% from 34.6%; cost of goods sold was 66.6% of sales versus 65.4%. Selling and administrative expenses rose to $176.3 million, or 30.5% of sales, from $142.1 million, or 26.5%. Working capital was $232.8 million, compared with $188.1 million. The current ratio was approximately 3.7, based on reported current assets and liabilities.
Material changes and unusual items
- Net loss included $45.9 million of non-cash goodwill impairment and $5.6 million of non-cash indefinite-lived trade-name impairment. The company had no goodwill remaining at year-end.
- Inventory write-downs were $13.6 million, including $11.4 million in Healthcare Apparel, primarily for excess and obsolete inventory. Management estimated a further 5% inventory write-down would add about $6.0 million of expense.
- The company recorded a $3.4 million gain on the sale of its former headquarters, generating $4.8 million in net proceeds.
- Interest expense rose to $4.9 million from $1.2 million, reflecting higher borrowing rates, increased debt and a $0.5 million write-off of prior debt issuance costs. The year-end borrowing rate was 6.2%.
- In August 2022, the company refinanced under secured credit facilities maturing in 2027. It paid $0.54 per share in dividends during 2022, totaling $8.7 million.
- Reportable segments were realigned in the second quarter; prior-year segment information was recast. The company acquired Guardian in May 2022 for $11.1 million cash, restricted shares and contingent consideration.
Outlook, risks and contingencies
The filing gives no specific revenue or earnings guidance. Management expects 2023 capital expenditures to be lower than in 2022 and believes cash, operating cash flows and revolving-credit availability should fund anticipated needs for the next 12 months. However, management’s forecast indicated it was more likely than not the company would exceed its maximum 4.0 net-leverage covenant during 2023. The year-end ratio was 3.85; management had begun discussions with the lending agent about a possible amendment.
Key risks include supply-chain disruption and dependence on Chinese-sourced materials, inflation and tariffs, weaker demand or customer order reductions, acquisition integration, interest-rate exposure, and potential further inventory or asset impairment. The Contact Centers segment’s largest customer accounted for 12% of that segment’s 2022 sales. The company reported $13.0 million of unfunded SERP obligations and $7.7 million of deferred compensation liabilities. Management did not expect ordinary-course legal proceedings to have a material effect.
Controls and audit: The financial statements received an unqualified audit opinion, but the auditor issued an adverse opinion on internal control over financial reporting. A material weakness remained in segregation of duties, change management and user access in certain Contact Centers IT systems; management said it was implementing remediation. Previously reported weaknesses in income-tax controls and system change controls were deemed remediated.
Most important facts for investors to verify
- Whether the company obtains any covenant amendment or waiver and remains within credit-agreement limits during 2023.
- Whether operating cash flow improves after being negative in 2022, and whether inventory and contract assets convert to cash as expected.
- Whether Healthcare Apparel demand and margins recover, and whether additional inventory write-downs are required.
- Whether the Contact Centers control weakness is remediated and verified effective through testing.
- Whether acquisition contributions, integration and contingent payments meet expectations, and whether dividends remain supportable given debt and cash flow.