Superior Group of Companies, Inc. — Q2 2020 Form 10-Q
Business context and period: The filing covers the three and six months ended June 30, 2020. Superior operates Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products. Results were significantly affected by COVID-19, which created strong demand for personal protective equipment (PPE) while disrupting demand for some core products and services.
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $159.4 | $92.3 | $253.6 | $178.8 |
| Gross profit / margin | $55.9 / 35.1% | $32.3 / 35.1% | $89.4 / 35.3% | $62.6 / 35.0% |
| Income before taxes | $18.9 | $3.7 | $23.5 | $6.6 |
| Net income | $15.2 | $2.8 | $18.5 | $5.2 |
| Diluted earnings per share | $1.00 | $0.18 | $1.22 | $0.34 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $39.8 | $6.8 |
- Q2 sales rose 72.7% year over year; six-month sales rose 41.8%. Q2 net income increased to $15.2 million from $2.8 million.
- Promotional Products sales were $75.5 million in Q2, up 217.8%, including $49.7 million of PPE sales. Uniforms and Related Products sales rose 24.9% to $75.8 million; Remote Staffing Solutions sales increased 4.0% to $9.4 million before intersegment eliminations.
- Consolidated gross margin was essentially unchanged in Q2. Selling and administrative expenses rose 35.0% to $36.3 million, primarily reflecting higher bad-debt expense (up $3.4 million) and sales commissions. The six-month provision for bad debts was $4.5 million versus $0.4 million a year earlier.
- Interest expense declined to $0.4 million in Q2 from $1.3 million, mainly due to lower LIBOR rates and reduced borrowings. The Q2 effective tax rate was 19.6%, compared with 23.8%.
Liquidity, debt and cash flows
- At June 30, cash was $5.1 million, working capital was $120.9 million, and current assets were $211.6 million against current liabilities of $90.7 million. Cash had declined from $9.0 million at year-end 2019.
- Debt borrowings totaled $85.5 million, down from $119.8 million at December 31, 2019; $7.3 million was drawn on the revolving facility, with $67.7 million of undrawn capacity. The company reported compliance with its credit-agreement financial covenants.
- Six-month operating cash flow of $39.8 million was substantially above the prior-year $6.8 million. Management attributed the increase primarily to receipts under new PPE customer contracts; accounts payable and other current liabilities provided $21.0 million of cash, while trade receivables used $12.3 million.
- Investing activities used $4.9 million, principally for capital expenditures. Financing activities used $38.3 million, including $34.3 million of net debt repayments.
Changes, outlook and risks
- COVID-19 effects: PPE demand supported record Promotional Products revenue and partially offset weaker uniform demand and remote-staffing growth disruptions. Management cautioned that the duration and business effects of the pandemic could not be reliably predicted.
- Liquidity actions: In March, the company deferred certain loan principal and interest payments due April through June until the applicable loan maturities. It also reduced discretionary spending and planned to delay non-essential capital expenditures. Management believed operating cash flow and revolver availability would meet anticipated requirements for the next 12 months.
- Shareholder returns: The regular quarterly dividend was suspended due to pandemic uncertainty. The company paid $1.5 million of dividends in the first half of 2020, versus $3.0 million in the prior-year period. No share repurchases were reported during Q2.
- Key risks: Further pandemic-related demand declines, customers’ ability to pay, supply-chain interruptions and reliance on China for significant materials and finished products could adversely affect results and liquidity. Management also cited potential impacts on borrowing availability, pension valuations and goodwill or intangible-asset values.
- Contingencies and controls: Management said ordinary-course legal matters were not expected to have a material effect. Acquisition-related contingent consideration had an estimated fair value of $4.5 million. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether PPE sales and associated customer advances are sustainable, and how results perform as pandemic-driven demand changes.
- Receivable collectability, including the elevated bad-debt provision and the increase in the allowance for doubtful accounts to $6.7 million from $3.0 million at year-end.
- Cash conversion and liquidity after the unusually strong first-half operating cash flow, including the effects of customer prepayments and current-liability movements.
- Debt repayment terms, covenant headroom and the status of the suspended dividend as economic conditions evolve.