Superior Uniform Group, Inc. — Q2 2012 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2012. The company operates two reportable segments: Uniforms and Related Products and Remote Staffing Solutions. Interim financial statements are unaudited and were reviewed by Grant Thornton LLP; the review is not an audit.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $29.335 million | $27.505 million | $57.843 million | $54.404 million |
| Gross profit | $9.662 million | $9.928 million | $19.124 million | $19.779 million |
| Gross margin | 32.9% | 36.1% | 33.1% | 36.4% |
| Income before taxes | $1.567 million | $1.432 million | $2.104 million | $2.371 million |
| Net income | $977,000 | $932,000 | $1.304 million | $1.531 million |
| Diluted EPS | $0.16 | $0.15 | $0.21 | $0.25 |
- Q2 sales rose 6.7%; net income increased 4.8%. For the first half, sales rose 6.3%, while net income declined 14.8%.
- Six-month operating cash flow was $2.468 million, compared with cash used of $2.633 million in the prior-year period. Investing activities used $674,000 and financing activities used $1.659 million. Cash increased $135,000 to $2.939 million.
- At June 30, current assets were $65.641 million and current liabilities $9.113 million; the current ratio was approximately 7.2. Total assets were $80.263 million and shareholders’ equity $61.845 million.
- Long-term debt was $520,000. The company had a $15 million revolving credit facility, with no letters of credit outstanding; it reported compliance with covenants. The facility was set to expire June 24, 2013.
- Cash dividends were $0.135 per share for Q2 and $0.27 per share for the first half, unchanged from comparable 2011 periods.
Material changes and management commentary
- Uniforms and Related Products sales increased 6.8% in Q2 and 6.2% for the first half, attributed to greater market penetration amid continued economic softness. Remote Staffing Solutions sales after intersegment eliminations increased 1.3% in Q2 and 9.7% for the first half; management said Q2 growth slowed during integration of new accounts and expected new accounts to begin generating revenue in Q3.
- Gross margin contracted as product costs rose, principally due to cotton shortages and higher raw-material costs. Management expected cotton-related pressure to continue into Q3 2012. Uniforms segment cost of goods sold was 67.6% of segment sales in Q2 versus 64.4% a year earlier; Remote Staffing’s was 41.2% versus 36.8%, reflecting startup costs for new programs.
- Lower Uniforms selling and administrative expense as a share of sales partly offset margin pressure, helped by higher volume, completion of a prior-year consulting project, and reduced depreciation. Remote Staffing expenses rose as a share of sales, mainly due to hiring and infrastructure costs.
- Management described the U.S. economic environment as challenging and linked uniform demand to customers’ employment, locations, and employee turnover. It cited acquisitions and new product lines as growth strategies, while noting that the licensed apparel concept had not yet generated significant revenue. Management believed operating cash flow, other capital resources, and credit sources would meet foreseeable funding requirements.
Risks, contingencies, and unusual items
- Stated risks include economic and employment conditions, changes in healthcare, resort, and commercial customer industries, competition, and the price and availability of cotton and other materials. The filing reported no material changes to the risk factors in the 2011 Form 10-K.
- Management identified estimation risks in receivables, inventories, self-insurance, pensions, taxes, and share-based compensation. It estimated that a 1% additional impairment in net trade receivables would require approximately $169,000 of additional expense.
- Six-month pension expense rose to $661,000 from $404,000, including higher recognized actuarial losses; the company contributed $550,000 to benefit plans in the 2012 period.
- The company disclosed ordinary-course legal actions and claims, which management did not expect to have a material impact. No material legal proceedings were reported in Part II.
- Share repurchases totaled $311,000 for the first half; 22,927 shares were repurchased in Q2 at an average $11.79 per share. The company also reported a warrant exercise related to its 2011 licensing agreement.
Investor verification points
- Track cotton and other input costs, gross-margin recovery, and the timing and economics of any customer price pass-throughs.
- Verify whether new Remote Staffing accounts launched in Q3 and whether segment growth improves after startup and integration costs.
- Monitor operating cash conversion, receivable quality, inventory levels, pension obligations and contributions, and the company’s low cash balance relative to ongoing needs.
- Confirm the status or renewal of the revolving credit facility before its June 2013 expiration, along with continued covenant compliance.
- Assess whether the licensed apparel initiative and acquisition strategy produce meaningful sales or returns; the filing provides no quantified earnings or revenue guidance.