Superior of panies(SGC) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Q2 2021 net income decreased due to a pension charge, while six-month net sales grew, assets and equity increased, and operating cash flow turned negative Condensed Consolidated Statements of Comprehensive Income Q2 2021 net sales and income decreased significantly due to a pension charge, while six-month net sales grew but income still fell due to the same charge Three Months Ended June 30 (in thousands, except per share data) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net sales | $130,787 | $159,359 | | Cost of goods sold | $83,629 | $103,421 | | Pension plan termination charge | $6,945 | $0 | | Net income | $4,577 | $15,174 | | Diluted EPS | $0.28 | $1.00 | Six Months Ended June 30 (in thousands, except per share data) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net sales | $271,634 | $253,604 | | Cost of goods sold | $175,433 | $164,215 | | Pension plan termination charge | $6,945 | $0 | | Net income | $15,055 | $18,541 | | Diluted EPS | $0.94 | $1.22 | Condensed Consolidated Balance Sheets Total assets and shareholders' equity increased as of June 30, 2021, driven by inventory and fixed asset growth, while total liabilities slightly decreased Balance Sheet Highlights (in thousands) | Metric | June 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total current assets | $265,648 | $248,457 | | Total assets | $428,746 | $393,924 | | Total current liabilities | $90,477 | $104,872 | | Long-term debt | $98,205 | $72,372 | | Total liabilities | $215,231 | $202,294 | | Total shareholders' equity | $213,515 | $191,630 | Condensed Consolidated Statements of Cash Flows Operating cash flow turned negative for the six-month period due to working capital changes, while investing activities increased and financing activities provided cash from higher borrowings Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(3,010) | $39,762 | | Net cash used in investing activities | $(17,352) | $(4,893) | | Net cash provided by (used in) financing activities | $22,583 | $(38,280) | | Net increase (decrease) in cash | $2,358 | $(3,936) | Notes to the Condensed Consolidated Financial Statements Notes detail business segments, recent acquisitions, debt structure, and accounting policies, highlighting a pension charge, credit facility amendment, and segment revenue shifts - The company operates in three segments: Uniforms and Related Products, Remote Staffing Solutions (The Office Gurus®), and Promotional Products (BAMKO®)[22][23][24] - On January 29, 2021, the company acquired Gifts By Design, Inc. for $6.0 million in cash, expanding its Promotional Products segment[72] - In Q2 2021, the company terminated its two noncontributory qualified defined benefit pension plans, resulting in a non-cash settlement charge of $6.9 million[41] - On February 8, 2021, the company amended its credit agreement, increasing the revolving credit facility from $75.0 million to $125.0 million and extending the maturity to 2026[33] Disaggregated Revenue by Segment - Six Months Ended June 30 (in thousands) | Segment | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Uniforms and Related Products | $138,761 | $135,944 | | Remote Staffing Solutions | $25,321 | $16,026 | | Promotional Products | $107,552 | $101,634 | | Consolidated Net Sales | $271,634 | $253,604 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 sales decline due to lower PPE demand, offset by growth in other segments, and highlights ongoing supply chain disruptions and sufficient liquidity despite decreased operating cash flow Business Outlook and COVID-19 Impact The company anticipates continued core segment growth but declining PPE sales, while actively managing significant global supply chain disruptions and increased costs - The company anticipates a decline in opportunities to supply personal protective equipment (PPE) as the pandemic evolves[84][86] - The Remote Staffing Solutions segment (The Office Gurus) is experiencing increased demand and is positioned for continued growth[85] - The company is experiencing significant supply disruptions and delays due to global supply chain issues like port congestion and increased demand for shipping capacity, leading to higher costs and inventory pressure[92][93] Results of Operations Q2 2021 consolidated net sales decreased due to lower PPE revenue, despite strong growth in Remote Staffing, while six-month sales increased, and a pension charge impacted income Net Sales Change - Three Months Ended June 30, 2021 vs 2020 (in millions) | Segment | 2021 Net Sales (M) | 2020 Net Sales (M) | % Change | | :--- | :--- | :--- | :--- | | Uniforms and Related Products | $68.2 | $75.8 | (10.1%) | | Remote Staffing Solutions | $15.7 | $9.4 | 67.4% | | Promotional Products | $48.7 | $75.5 | (35.5%) | | Consolidated | $130.8 | $159.4 | (17.9%) | - The decrease in Promotional Products sales in Q2 was primarily due to a $48.7 million drop in PPE sales, partially offset by a $22.0 million increase in the core promotional products business[98] Net Sales Change - Six Months Ended June 30, 2021 vs 2020 (in millions) | Segment | 2021 Net Sales (M) | 2020 Net Sales (M) | % Change | | :--- | :--- | :--- | :--- | | Uniforms and Related Products | $138.8 | $135.9 | 2.1% | | Remote Staffing Solutions | $28.7 | $18.6 | 54.6% | | Promotional Products | $107.6 | $101.6 | 5.8% | | Consolidated | $271.6 | $253.6 | 7.1% | - A one-time, non-cash pension plan termination charge of $6.9 million was recognized in Q2 2021[107] Liquidity and Capital Resources Liquidity is supported by an expanded credit facility despite decreased operating cash flow due to working capital changes, with increased capital expenditures and ongoing share repurchase capacity - Net cash used in operating activities was $3.0 million for the first six months of 2021, compared to $39.8 million provided in the same period of 2020, mainly due to payments of 2020 performance-related accruals[128] - Net cash used in investing activities increased due to the $6.0 million acquisition of Gifts by Design and a $6.4 million increase in capital expenditures, primarily for a distribution facility expansion in Arkansas[129] - The company amended its credit agreement, increasing the revolving credit facility to $125.0 million As of June 30, 2021, total outstanding borrowings were $114.2 million, with $73.1 million available under the revolver[131][132] - The company has remaining capacity to repurchase 657,451 shares under its approved program[136] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on variable-rate debt and foreign currency exchange risk, primarily from the Brazilian real, impacting comprehensive income - The company is subject to interest rate risk on its debt, which is tied to LIBOR A hypothetical 100 basis point increase in LIBOR from Jan 1, 2021, would have increased pre-tax interest expense by about $0.6 million for the six-month period[138] - The company has foreign currency exchange risk, with less than 5% of sales contracts not denominated in U.S. dollars Translation of foreign subsidiary results, particularly the Brazilian real, contributed to a $0.4 million gain in comprehensive income in H1 2021, compared to a $1.4 million loss in H1 2020[139][140] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal controls during the quarter - Management concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective[141] - No material changes to the company's internal control over financial reporting occurred during the second quarter of 2021[142] PART II. OTHER INFORMATION Legal Proceedings The company states that ongoing legal proceedings are not expected to have a material adverse effect on its financials - The company states that ongoing legal proceedings are not expected to have a material adverse effect on its financials[145] Risk Factors No material changes to risk factors except for expanded discussion on significant supply chain disruptions, increased costs, and potential manufacturing disruptions in Haiti - The company is experiencing significant supply disruptions, increased shipping times, and higher shipping prices, which are creating inventory pressure[147] - A majority of fabrics for the Uniforms segment and raw materials for the Promotional Products segment are sourced from China, creating a significant business disruption risk if this supply is interrupted[148] - Political and civil unrest in Haiti following the presidential assassination could cause manufacturing disruptions for the company and its suppliers[148] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales or share repurchases occurred during the quarter, with remaining capacity for 657,451 shares under the repurchase program - No shares of common stock were repurchased during the three months ended June 30, 2021[152] - The company has a remaining repurchase capacity of 657,451 shares under its stock repurchase program approved on May 2, 2019[152] Defaults Upon Senior Securities Not applicable - Not applicable[153] Mine Safety Disclosures Not applicable - Not applicable[154] Other Information None - None[155] Exhibits This section lists the exhibits filed with the Form 10-Q, including various employment and compensation agreements, CEO/CFO certifications (Sections 302 and 906), and Inline XBRL data files - Exhibits filed include employment agreements, change in control agreements, and various share-based compensation agreements[157] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[157]