Superior Group of Companies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Dollar amounts below are in millions unless stated otherwise. The company operates Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products businesses.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Net sales | $92.3 | $82.4 | $178.8 | $155.5 |
| Gross profit | $32.3 | $29.3 | $62.6 | $54.2 |
| Income before tax | $3.7 | $5.1 | $6.6 | $8.4 |
| Net income | $2.8 | $3.8 | $5.2 | $6.3 |
| Diluted EPS | $0.18 | $0.25 | $0.34 | $0.40 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $6.8 | $(0.3) |
- Q2 revenue rose 12.0%; gross margin was approximately 35.0%, versus 35.5% a year earlier. H1 revenue rose 15.0%; gross margin was approximately 35.0%, versus 34.8%.
- Q2 net income declined about 27%; H1 net income declined about 18%. Interest expense rose to $1.3 million in Q2 and $2.4 million in H1, from $0.8 million and $1.0 million, respectively.
- H1 cash from operations was $6.8 million, compared with cash used of $0.3 million in H1 2018. Investing used $5.0 million, principally for $5.0 million of capital expenditures; financing provided $1.1 million. Cash increased $2.9 million to $8.3 million.
Liquidity, debt, and balance sheet
- At June 30, cash was $8.3 million, current assets $199.8 million, and current liabilities $58.8 million; the current ratio was approximately 3.4x.
- Debt carrying value was $123.3 million, comprising $15.3 million current and $108.0 million long-term. Gross borrowings before debt issuance costs were $123.7 million. The $75 million revolving facility had $34.0 million drawn and no outstanding letters of credit, implying about $41.0 million of undrawn capacity.
- The company restructured its $85 million term loan in January 2019: $20 million was funded through the revolver, and the remaining $65 million loan maturity was extended to January 2026. Debt obligations bear variable rates; reported rates at quarter-end were 3.08% on the revolver and existing term loan and 3.25% on the $65 million term loan.
- The company reported compliance with its credit covenants at June 30, 2019. The facilities are secured by substantially all operating assets and include restrictions and acceleration provisions upon default.
Changes and segment trends
- Q2 sales growth reflected CID Resources, acquired May 2, 2018, and gains in Promotional Products and Remote Staffing. CID contributed approximately 6.4 percentage points to consolidated Q2 growth. Uniforms sales excluding CID declined 1.2% on management’s stated sales-growth bridge.
- Q2 segment sales: Uniforms $60.7 million (+7.7%), Remote Staffing $9.0 million (+12.4%), and Promotional Products $23.7 million (+24.9%). Promotional Products growth was attributed to sales-force expansion and execution of prior-quarter orders; Remote Staffing growth to continued customer penetration.
- For H1, sales increased 15.0%, including a 13.8 percentage-point contribution from CID. Uniforms sales excluding CID were affected by a $4.7 million reduction associated with timing of revenue recognition under ASC 606. Management’s non-GAAP shipment measure for Uniforms excluding CID fell about 1.8% in Q2 and 2.0% in H1.
- Promotional Products Q2 cost of goods sold rose to 74.1% of segment sales from 73.1%, attributed to product and customer mix, including a larger share of lower-margin contract clients. Remote Staffing selling and administrative spending increased as a share of sales amid investment in facilities and personnel.
Outlook, risks, and notable items
- Management said employment conditions were moderately improving, employee turnover was increasing, and healthcare demand remained strong; it expected these factors and CID’s retail and digital-market access to support 2019 sales growth. No quantified full-year revenue or earnings guidance is provided in the filing.
- Planned spending includes continued capital investment in facilities, technology, and infrastructure. The company paid $3.0 million in dividends in H1 and has a board-authorized repurchase program for up to 750,000 shares; 2,614 shares were repurchased in Q2.
- Reported unusual or notable costs include a $0.3 million pension settlement loss in Q2, $0.4 million of severance expense, and higher pension costs. The CID purchase-price allocation was finalized in Q2; measurement-period adjustments included a $2.4 million increase to goodwill and a $1.8 million reduction to inventory, with no significant income-statement or cash-flow effect.
- Operating lease accounting adopted January 1, 2019 added $4.7 million of right-of-use assets and $4.1 million of lease liabilities at June 30. Legal claims arising in the ordinary course were not expected by management to have a material effect.
- Key disclosed risks include competition, economic and employment conditions, changes in customer industries, acquisition execution and integration, raw-material price and availability, and retention of key personnel. A 100-basis-point LIBOR increase was estimated to add approximately $0.6 million of pretax interest expense for H1, excluding the swap’s effect. About 1% of sales were outside the U.S.; no foreign-currency hedging contracts were outstanding.
Important facts for investors to verify
- How much of reported growth reflects CID and ASC 606 revenue timing versus underlying customer demand; review the shipment measure and its non-GAAP reconciliation.
- Whether revenue growth converts into improved earnings, given lower net income, higher interest expense, and expense investment in Remote Staffing.
- Debt capacity, variable-rate exposure, scheduled principal payments, covenant headroom, and the company’s ability to fund capital spending, dividends, and repurchases.
- Whether Promotional Products growth and margins are sustainable, particularly given customer and product mix and acquisition-related contingent liabilities.
- Management’s forward results against its qualitative 2019 outlook; this filing provides no numerical full-year guidance.