Superior Group of Companies, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Filed November 7, 2022. Unless stated otherwise, financial amounts below are in U.S. dollars and millions.
Business context
Superior operates Branded Products (promotional merchandise and branded uniform programs), Healthcare Apparel, and Contact Centers (nearshore outsourcing services). In Q2 2022, it reorganized its reportable segments and recast prior-period segment information. The company also acquired Guardian Products in May 2022; Branded Products’ growth additionally reflects the Sutter’s Mill acquisition in December 2021.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $138.7 | $123.3 | $430.2 | $395.0 |
| Gross profit | $50.6 | $45.8 | $148.6 | $142.0 |
| Gross margin | 36.5% | 37.1% | 34.5% | 36.0% |
| Net income (loss) | ($12.7) | $8.2 | ($34.2) | $25.1 |
| Diluted EPS | ($0.80) | $0.51 | ($2.17) | $1.56 |
| Operating cash flow | Not separately presented | Not separately presented | ($4.5) | $18.2 |
- Revenue by segment, Q3: Branded Products $86.8 (+21.1%); Healthcare Apparel $30.0 (−15.3%); Contact Centers $23.4 (+29.5% before intersegment eliminations). Consolidated sales increased 12.5%.
- Revenue by segment, nine months: Branded Products $285.9 (+16.9%); Healthcare Apparel $86.9 (−20.1%); Contact Centers $62.8 (+34.4% before eliminations). Consolidated sales increased 8.9%.
- Margins and expenses: Cost of goods sold was 63.5% of sales in Q3, versus 62.9% a year earlier; nine-month cost of goods sold was 65.5% versus 64.0%. Selling and administrative expenses were 31.6% of Q3 sales versus 28.4%, and 30.7% for nine months versus 26.4%.
- Impairments and unusual costs: The company recorded $21.5 of Q3 goodwill impairment and $45.9 for nine months, eliminating all goodwill on the balance sheet. It also recorded $5.6 of indefinite-lived trade-name impairment in the nine-month period. These charges were noncash. Q3 interest expense rose to $1.8 from $0.3, including a $0.5 write-off of former facility debt issuance costs.
- Balance sheet and liquidity: At September 30, cash was $18.9, current assets $328.7, and current liabilities $91.2. Working capital was $237.5, up from $188.1 at year-end 2021. Inventory was $135.9, compared with $120.6 at year-end.
- Debt: Gross borrowings under the new credit facilities were $162.0: $87.0 drawn on a $125.0 revolving facility and a $75.0 term loan. The revolving facility had $38.0 of undrawn capacity. The facilities mature in August 2027, bear variable SOFR-based interest, and had a 4.9% rate at September 30. The company reported compliance with its financial covenants.
- Cash flows and shareholder returns: Nine-month investing cash use was $22.4, including $11.2 for acquisitions; financing provided $37.0, principally reflecting net borrowings. Cash dividends paid were $6.4 for the nine-month period; dividends declared were $0.40 per share. No shares were repurchased during Q3.
Material changes versus comparable periods
- Q3 sales growth was led by Branded Products and Contact Centers, while Healthcare Apparel declined amid market inventory saturation and weaker demand. Branded Products’ Q3 increase included $14.4 of sales attributed to the Sutter’s Mill and Guardian acquisitions.
- For the first nine months, Branded Products growth also reflected organic customer gains, but lower personal protective equipment sales partly offset growth. Healthcare Apparel sales fell with lower apparel and PPE demand. Contact Centers benefited from expanded work for existing customers and new customer onboarding.
- Profitability reversed to a loss, chiefly reflecting impairment charges, higher selling and administrative costs, increased interest expense, inventory write-downs, and lower Healthcare Apparel sales. Nine-month inventory write-downs included $5.8 in the cash-flow reconciliation; management attributed higher cost of goods sold in part to excess PPE and discontinued-style inventory.
- Operating cash flow turned negative, with cash tied up in inventory and contract assets and lower accounts payable and other current liabilities. Net cash increased by $10.0, principally supported by financing activity.
- The company refinanced its former facilities in August 2022 with a new, larger senior secured credit agreement. Borrowings are now subject to variable SOFR-based rates.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance is provided. Management said operating cash flows and revolving-credit availability were expected to cover anticipated working capital and capital expenditure needs for the next 12 months and beyond.
- Management expects PPE demand to continue declining. It described Healthcare Apparel demand as affected by market oversupply and noted ongoing freight delays, higher shipping costs, supply-chain interruptions, and inventory pressure.
- Management cited inflation, rising interest rates, geopolitical events and sanctions, COVID-19 effects, competition, customer demand, and sourcing dependence—including sourcing exposure to China—as risks that could affect demand, costs, margins, borrowing costs, or asset values.
- Credit agreement covenants include a minimum fixed-charge coverage ratio of 1.25:1 and a maximum net leverage ratio of 4.0:1. Debt is secured by substantially all operating assets; dividends and other restricted payments are subject to agreement terms.
- Acquisition-related contingent consideration remained outstanding: estimated fair values were $2.4 for Sutter’s Mill and $1.3 for Guardian. Actual payments may differ and liabilities are remeasured.
- Disclosure controls were ineffective at quarter-end due to material weaknesses in income-tax controls and IT system-change controls. The tax weakness remained unremediated; management said remediation work was underway. The company also disclosed that prior interim statements for Q2 and Q3 2021 had been restated due to a deferred-tax-liability error related to pension-plan termination.
- Management did not expect ordinary-course legal proceedings to have a material effect. The filing states that prolonged economic disruption could contribute to further goodwill or intangible-asset impairment.
Important facts for investors to verify
- Whether Branded Products and Contact Centers’ growth is sustainable and how much reflects acquisitions versus organic activity.
- Whether Healthcare Apparel demand recovers and the company reduces excess, slow-moving, or discontinued inventory without further material write-downs.
- Future operating cash flow, inventory and contract-asset conversion, and availability under the revolving credit facility.
- Exposure to higher SOFR-based borrowing costs and ongoing compliance with leverage and fixed-charge covenants.
- Progress in remediating both internal-control material weaknesses, including whether controls become effective after sufficient testing.
- Assumptions underlying the goodwill impairment tests and any subsequent changes in segment outlook, market capitalization, or estimated fair values.