Superior of panies(SGC) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION The company's financial performance for Q1 2024 shows significant net income growth and strong operating cash flow, despite a slight decrease in total assets Financial Statements The company's financial statements for Q1 2024 reveal a substantial increase in net income to $3.9 million, driven by a 6.2% rise in net sales, alongside a slight decrease in total assets and liabilities Condensed Consolidated Statements of Comprehensive Income Net sales increased by 6.2% to $138.8 million, leading to a significant rise in net income to $3.9 million for the three months ended March 31, 2024 Q1 2024 vs Q1 2023 Income Statement Highlights (in thousands, except per share data) | Metric | Q1 2024 | Q1 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $138,842 | $130,773 | 6.2% | | Gross Profit* | $55,317 | $47,108 | 17.4% | | Income before income tax | $4,592 | $945 | 385.9% | | Net Income | $3,912 | $888 | 340.5% | | Diluted EPS | $0.24 | $0.06 | 300.0% | | Cash dividends per share | $0.14 | $0.14 | 0.0% | Condensed Consolidated Balance Sheets Total assets decreased to $408.5 million as of March 31, 2024, primarily due to reductions in accounts receivable and inventories, while total liabilities also decreased, leading to an increase in shareholders' equity Balance Sheet Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $22,040 | $19,896 | | Total Current Assets | $267,529 | $279,360 | | Total Assets | $408,481 | $422,450 | | Total Current Liabilities | $88,165 | $100,589 | | Long-term debt | $84,445 | $88,789 | | Total Liabilities | $207,660 | $224,812 | | Total Shareholders' Equity | $200,821 | $197,638 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $9.4 million in Q1 2024, primarily due to working capital changes, while investing and financing cash outflows also decreased Cash Flow Summary (in thousands) | Activity | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,447 | $25,050 | | Net cash used in investing activities | $(675) | $(2,114) | | Net cash used in financing activities | $(6,375) | $(14,198) | | Net increase in cash and cash equivalents | $2,144 | $8,878 | Notes to the Condensed Consolidated Financial Statements The notes detail the company's three business segments, long-term debt, segment performance, share-based compensation, and contingencies - The company operates through three main segments: Branded Products (customized merchandise and uniforms), Healthcare Apparel (scrubs, lab coats), and Contact Centers (outsourced business process services)[22][23][24] - As of March 31, 2024, total debt under the Credit Facilities was $90.4 million, with a weighted average interest rate of 6.6%, and the company was in compliance with all debt covenants[34][35][37] - In Q4 2023, the company changed its segment performance metric from 'income before income taxes' to 'Segment EBITDA' to better evaluate operational performance[70] Segment Performance for Q1 2024 (in thousands) | Segment | Net Sales | Segment EBITDA | | :--- | :--- | :--- | | Branded Products | $87,068 | $9,947 | | Healthcare Apparel | $29,237 | $2,635 | | Contact Centers | $23,552 | $2,946 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the 6.2% year-over-year revenue growth in Q1 2024 to increased sales across all three segments and improved gross margin, while maintaining solid liquidity Results of Operations Consolidated net sales increased by 6.2% to $138.8 million in Q1 2024, with significant gross margin improvement to 39.8% driven by favorable sales mix and lower costs Q1 2024 vs Q1 2023 Segment Net Sales (in thousands) | Segment | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Branded Products | $87,068 | $81,851 | $5,217 | 6.4% | | Healthcare Apparel | $29,237 | $28,154 | $1,083 | 3.8% | | Contact Centers | $23,552 | $22,056 | $1,496 | 6.8% | | Consolidated | $138,842 | $130,773 | $8,069 | 6.2% | - The gross margin rate for the Branded Products segment increased from 31.6% to 36.5% due to a favorable shift in pricing and customer mix, as well as lower costs[89] - The Healthcare Apparel segment's gross margin rate rose from 35.9% to 39.4%, driven by lower costs and improved manufacturing efficiencies in Haiti[90] - Interest expense decreased by $0.8 million (30.5%) due to a $53.7 million reduction in outstanding borrowings compared to the prior year[96] Liquidity and Capital Resources The company maintains solid liquidity with $22.0 million in cash and $103.0 million available under its revolving credit facility, deemed sufficient to meet operational and financial needs for the next twelve months - Working capital increased slightly to $179.4 million at March 31, 2024, from $178.8 million at December 31, 2023[101] - As of March 31, 2024, the company had $90.4 million in outstanding borrowings and $103.0 million of undrawn capacity under its revolving credit facility[109] - The company paid cash dividends of $2.3 million in Q1 2024 and has a remaining share repurchase capacity of 657,451 shares[113][114] Non-GAAP Financial Measure The company uses EBITDA as a non-GAAP measure to evaluate core operating performance, which increased to $9.6 million in Q1 2024, reflecting higher sales and improved gross margins Reconciliation of Net Income to EBITDA (in thousands) | | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net income | $3,912 | $888 | | Interest expense | $1,787 | $2,570 | | Income tax expense | $680 | $57 | | Depreciation and amortization | $3,252 | $3,388 | | EBITDA | $9,631 | $6,903 | Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from variable-rate debt and foreign currency exchange risk from international operations, though less than 5% of sales contracts are in foreign currencies - The company is subject to interest rate risk on its debt, which is based on the variable SOFR; a 1% (100 basis points) increase in SOFR would have resulted in an additional $0.2 million in pre-tax interest expense for Q1 2024[120] - The company has exposure to foreign currency risk, but less than 5% of sales contracts are denominated in foreign currencies; a foreign currency translation adjustment loss of $0.5 million was recorded in comprehensive income for Q1 2024[121][122] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of March 31, 2024, due to an un-remediated material weakness in IT controls within the Contact Centers segment - A material weakness related to IT controls (segregation of duties, change management, user access) in the Contact Centers segment, first identified in 2022, continues to exist as of March 31, 2024[125] - Ongoing remediation efforts include deploying enhanced change management software, reassessing authority levels, and implementing additional review and monitoring controls[127] - Despite the material weakness, management has determined that the financial statements included in the 10-Q are fairly presented in all material respects[126] PART II. OTHER INFORMATION This section covers legal proceedings, updated risk factors, equity security sales, and recent compensation committee actions Legal Proceedings The company is involved in various lawsuits in the ordinary course of business, which are not expected to have a material adverse effect on its financial position - The company states that ongoing legal proceedings are not expected to have a material adverse effect on its financial condition or results of operations[131] Risk Factors No material changes to risk factors, except for an update highlighting the risks associated with manufacturing facilities and warehouses in Haiti due to civil unrest - A specific risk factor has been highlighted concerning the company's manufacturing facilities in Haiti, which are at risk of disruption due to civil unrest, potentially interrupting manufacturing and adversely affecting the business[133] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or share repurchases during the quarter, retaining capacity for future repurchases - No shares were repurchased during the three months ended March 31, 2024[135] - The company has a remaining capacity to repurchase 657,451 shares under its board-approved stock repurchase program[135] Other Information Subsequent to the quarter end, the Compensation Committee approved grants of performance shares to the CEO and CFO, contingent on achieving specific stock price appreciation targets - Subsequent to the quarter end, on May 1, 2024, the company granted 125,000 performance shares to the CEO and 75,000 to the CFO[139] - Vesting of these performance shares is contingent on achieving significant stock price growth targets over a four-year period[139]