Superior Group of Companies, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results cover Uniforms and Related Products, Remote Staffing Solutions, and Promotional Products.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $89.5 million | $95.9 million | $268.3 million | $251.3 million |
| Gross profit | $31.5 million | $33.8 million | $94.1 million | $88.0 million |
| Gross margin | 35.2% | 35.3% | 35.1% | 35.0% |
| Income before taxes | $4.6 million | $7.3 million | $11.3 million | $15.7 million |
| Net income | $3.9 million | $6.1 million | $9.1 million | $12.4 million |
| Diluted EPS | $0.26 | $0.39 | $0.59 | $0.80 |
| Operating cash flow | Not reported for quarter | Not reported for quarter | $11.8 million | $11.3 million |
Q3 net margin was approximately 4.4%, versus 6.4% a year earlier; nine-month net margin was approximately 3.4%, versus 4.9%. Nine-month capital expenditures were $6.4 million, leaving approximately $5.4 million of operating cash flow after capital expenditures. Cash dividends paid were $4.5 million over the nine-month period.
At September 30, 2019, cash was $5.5 million and total borrowings under banking arrangements were $119.7 million. The company reported $41.1 million of undrawn revolving-credit capacity. Current assets were $202.9 million and current liabilities $63.5 million. Total assets were $349.4 million and shareholders’ equity $156.4 million.
Changes versus comparable periods
- Q3 sales declined 6.7%, while nine-month sales grew 6.7%. Nine-month growth reflected CID Resources, acquired in May 2018, and growth in Promotional Products and Remote Staffing Solutions.
- Q3 Uniforms and Related Products sales fell 21.2%; management attributed much of the reported decline to timing of revenue recognition for goods with no alternative use, delayed receipts and shipments, and customer program timing. Segment shipments, a company-defined non-GAAP demand measure, declined to $60.9 million from $66.6 million.
- Q3 Remote Staffing Solutions sales increased 17.3% and Promotional Products sales increased 37.9%. For the first nine months, those segments grew 15.8% and 24.1%, respectively.
- Despite higher nine-month revenue, net income declined 26.7%. Selling and administrative expense increased to $78.0 million from $70.0 million, and interest expense rose to $3.5 million from $2.0 million, primarily reflecting financing associated with CID.
- Operating cash flow increased to $11.8 million from $11.3 million. Cash was nearly unchanged from year-end; financing activities used $4.9 million, including dividends and share repurchases, partly offset by net debt borrowing.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management expects employment conditions and healthcare-sector demand to support uniform sales, and cites continued growth opportunities in remote staffing and promotional products. It also expects ongoing capital expenditures for facilities, technology and infrastructure.
- Management attributes revenue fluctuations in Uniforms partly to ASC 606 recognition timing: certain sales are recorded when finished goods are received from suppliers rather than when shipped to customers. It says shipments may better track demand, but shipments are non-GAAP and not a substitute for reported sales.
- On September 27, 2019, the credit agreement amendment raised the maximum funded-debt-to-EBITDA covenant from 4.0:1 to 5.0:1 and added tiered interest margins if that ratio exceeds 4.0:1. The company reported compliance with its financial covenants at quarter-end. Debt is variable-rate and secured by substantially all operating assets; a hypothetical 100-basis-point LIBOR increase was estimated to add about $0.9 million of pretax interest expense for the nine months, excluding the swap.
- Q3 included $0.3 million of pension settlement losses; nine-month settlement losses were $0.6 million. The filing says these were noncash accelerations of pension expense otherwise recognized in future periods. A $0.5 million reversal of previously recorded performance-award compensation was also recognized after certain targets were judged unlikely to be met. Acquisition-related contingent-liability fair-value adjustments reduced Q3 selling and administrative expense by $0.9 million.
- Risks identified include competition, economic and employment conditions, changes in end markets, raw-material availability and prices, acquisition integration and diligence, and retention of key personnel. Ordinary-course legal matters were not expected by management to have a material effect. The company reported no material changes to the risk factors in its 2018 Form 10-K.
- Adoption of the lease standard in 2019 brought operating lease right-of-use assets and liabilities onto the balance sheet. At quarter-end, lease assets were $4.6 million and lease liabilities approximately $4.0 million.
Important facts for investors to verify
- Whether the Uniforms segment’s shipment trends and reported revenue converge as timing differences and customer rollout delays normalize.
- Whether growth in Promotional Products and Remote Staffing Solutions translates into sustained operating profit, given product mix and continued investment in staffing infrastructure.
- Debt covenant headroom, variable-rate exposure, repayment requirements, and the effect of the amended pricing provisions.
- Working-capital conversion, particularly trade receivables, supplier advances, contract assets, and the timing of customer billings and collections.
- Future pension costs, contingent acquisition payments, and whether performance-award assumptions or other unusual adjustments recur.