Superior Uniform Group, Inc. — Q1 2013 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2013, for Superior Uniform Group, Inc. (the company’s name at the time). Its two reportable segments are Uniforms and Related Products and Remote Staffing Solutions. Financial statements are unaudited; Grant Thornton performed an interim review, not an audit.
Financial and operating results
- Revenue: $30.985 million, up 8.7% from $28.508 million in Q1 2012. Uniforms and Related Products revenue rose 6.8%; Remote Staffing Solutions revenue rose 33.0% before intersegment eliminations and 84.2% after eliminations.
- Profit: Net income was $1.229 million ($0.20 per basic and diluted share), versus $327,000 ($0.05 per share). Pretax income increased to $1.749 million from $537,000.
- Margins: Gross profit was $11.313 million, or approximately 36.5% of sales, compared with $9.462 million, or 33.2%, in Q1 2012. The filing attributes improvement to lower product costs, including lower raw-material costs, and higher volume; Remote Staffing also benefited from higher-margin accounts.
- Cash flow: Operating activities provided $308,000, compared with $565,000 in Q1 2012. Investing activities used $552,000, principally for property and equipment additions; financing activities provided $183,000. Cash declined $61,000 to $3.493 million.
- Liquidity and debt: Current assets were $66.128 million and current liabilities $9.089 million at March 31. The company had $120,000 outstanding on its $15 million revolving credit facility, versus no balance at year-end. The facility matures June 24, 2013; there were no letters of credit outstanding. The company reported covenant compliance.
- Other metrics: Inventory was $39.340 million, up slightly from year-end. Long-term pension liability was $10.545 million. Pension expense increased to $366,000 from $331,000. No cash dividends were paid in Q1 2013, versus $812,000 in Q1 2012.
Material changes versus Q1 2012
- Higher sales and improved gross margins drove substantially higher pretax and net income; the effective tax rate fell to 29.7% from 39.1%.
- Remote Staffing Solutions grew quickly, while its selling and administrative expenses as a share of segment sales increased, reflecting added staff and outside broker fees.
- Operating cash flow was lower, despite higher earnings, with working-capital movements including receivables and liabilities affecting cash generation.
- Share-based compensation expense decreased to $590,000 from $675,000. Weighted-average diluted shares rose to 6.169 million from 6.143 million.
Outlook, risks, and notable items
- Management expected further improvement in Uniforms and Related Products gross margins during the balance of 2013 versus comparable 2012 periods. It also said it believed Remote Staffing Solutions could continue to grow significantly; no numerical guidance was provided.
- Management described the U.S. economic environment as challenging. Demand is exposed to customers’ employment levels, openings and closures, and employee turnover. Other cited risks include competition and the price and availability of cotton and other materials.
- The company planned to pursue acquisitions and new product lines. Management said it expected to renew or replace the revolving credit agreement before expiry and believed available cash flows and credit resources would meet foreseeable funding needs.
- The company reported no significant revenue to date from its licensed image-apparel product and had not secured an extension of the license term; an extension on reasonable terms was not assured. A $1.226 million noncash impairment of the license asset was recorded in Q4 2012, not Q1 2013.
- Management said ordinary-course legal matters were not expected to materially affect results, cash flows, or financial position. The company reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
- A $0.54-per-share special dividend was paid on December 31, 2012, in lieu of anticipated 2013 regular quarterly dividends; management anticipated resuming dividends in 2014, subject to conditions.
Important facts for investors to verify
- Whether the credit facility was renewed or replaced before its June 24, 2013 maturity, and subsequent borrowing and covenant status.
- Whether reported revenue growth and gross-margin gains continued, particularly in the uniforms segment, and whether raw-material costs or demand changed.
- Whether Remote Staffing Solutions sustained growth while controlling staffing and sales-related expenses.
- Cash conversion and working-capital trends, including receivables and the high inventory balance.
- Developments in the image-apparel license, including extension terms, sales, and any further costs or impairment.
- Subsequent dividend decisions and the assumptions underlying management’s outlook. Interim results are not necessarily indicative of full-year results.