Superior Uniform Group, Inc. — Q3 2011 Form 10-Q
Business and period: The filing covers the three and nine months ended September 30, 2011. The company operated as a single segment, supplying image apparel and remote staffing services. Interim statements are unaudited and were reviewed by Grant Thornton LLP.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $30.73 million | $27.30 million | $85.13 million | $79.91 million |
| Gross margin | 36.4% | 36.4% | 36.4% | 35.4% |
| Earnings before income taxes | $2.60 million | $1.98 million | $4.97 million | $4.32 million |
| Net earnings | $1.88 million | $1.37 million | $3.41 million | $2.86 million |
| Diluted EPS | $0.31 | $0.23 | $0.56 | $0.48 |
Sales increased 12.6% in Q3 and 6.5% for the nine-month period. Net earnings rose approximately 37% and 19%, respectively. Net margin was approximately 6.1% for Q3 (5.0% prior year) and 4.0% for the nine months (3.6% prior year). The quarterly gross margin was flat year over year; the nine-month margin improved.
Cash flow and liquidity: Nine-month operating cash flow was negative $2.26 million, compared with positive $7.01 million in 2010, largely reflecting an $8.08 million inventory increase and higher receivables. Investing cash outflow was $2.85 million, including $2.06 million for acquired intangible assets. Financing cash outflow was $1.69 million. Cash fell to $2.31 million from $9.11 million at year-end 2010. September 30 current assets were $66.76 million and current liabilities $11.53 million; working capital was approximately $55.23 million.
Debt: Long-term debt was $800,000, with no letters of credit outstanding, under a $15 million revolving facility expiring June 2013. The company reported compliance with the facility’s covenants. It stated that cash flows, other capital resources, and credit sources should be adequate for foreseeable funding requirements.
Changes and notable items
- Image apparel accounted for most sales growth; remote staffing contributed 2.4 percentage points of Q3 growth and 2.0 points for the nine months. Remote staffing sales were approximately $2.16 million for the nine months, versus $503,000 a year earlier.
- Nine-month cost of goods sold declined as a share of sales, aided by prior price increases and growth in lower-direct-cost remote staffing. Management warned that cotton shortages and higher raw-material costs could pressure image-apparel margins going forward.
- Q3 selling and administrative expenses were 27.9% of sales, down from 29.1%; for the nine months they rose to 30.5% from 29.9%, reflecting salary and benefit costs, license amortization, and a completed strategic consulting project.
- Inventory rose 26% from December 2010 to $39.11 million, including a substantial increase in raw materials; management said it raised inventory to pursue potential sales growth.
- The January 2011 EyeLevel license cost $2.86 million, including $2.0 million cash, a warrant valued at $800,000 for 360,000 shares, and related expenses. The agreement also provides for sales-based royalties and could require an additional license fee if specified sales levels are achieved.
- Nine-month dividends were $2.43 million, or $0.405 per share, unchanged per share from 2010. The company repurchased 67,648 shares for $776,000 during the period.
Outlook, risks, and contingencies
Management gave no specific numerical earnings or revenue guidance. It expected to begin generating revenue from the licensed apparel product in Q4 2011 and described third-party remote staffing as a potential growth area. Management characterized the U.S. economic environment as challenging, citing customer employment, location openings and closures, and employee turnover as demand drivers. Other stated risks include competition, healthcare/resort/commercial industry changes, and the price and availability of cotton and other materials.
The company reported various ordinary-course legal claims and said their resolution was not expected to materially affect results, cash flows, or financial position. No material changes to the risk factors in its 2010 Form 10-K were reported. Management identified estimation risks involving receivables, inventory, self-insured claims, pensions, taxes, and share-based compensation.
Important facts for investors to verify
- Whether inventory and supplier advances convert into sales and cash, given the operating cash outflow and sharp inventory build.
- Whether cotton and other input-cost pressures affect future image-apparel margins.
- Actual sales, royalties, and any additional license fee arising from the EyeLevel product agreement.
- Progress and profitability of remote staffing, and whether the stated growth opportunity continues.
- Cash levels, use of the revolving facility, and continued compliance with its financial covenants.