Superior Uniform Group, Inc. — Q3 2012 Form 10-Q
Business context and period: The filing covers the three and nine months ended September 30, 2012. The company operates in uniforms and related products and remote staffing solutions. Interim statements are unaudited and were reviewed by Grant Thornton LLP.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $30.599 million | $30.731 million | $88.442 million | $85.135 million |
| Gross profit | $10.032 million | $11.196 million | $29.156 million | $30.975 million |
| Gross margin | 32.8% | 36.4% | 33.0% | 36.4% |
| Income before taxes | $1.692 million | $2.600 million | $3.796 million | $4.971 million |
| Net income | $1.242 million | $1.880 million | $2.546 million | $3.411 million |
| Diluted EPS | $0.20 | $0.31 | $0.41 | $0.56 |
| Operating cash flow | Not separately presented | Not separately presented | $4.967 million | $(2.261) million |
- Q3 sales declined 0.4%, while net income fell 34.0%. For the first nine months, sales grew 3.9% but net income declined 25.4%.
- Cash and cash equivalents were $4.031 million at September 30, up from $2.804 million at December 31, 2011. Current assets were $66.997 million and current liabilities $9.369 million.
- Long-term debt was zero at September 30, compared with $640,000 at year-end 2011. The company had a $15 million revolving credit facility expiring June 24, 2013; no letters of credit were outstanding, and the company reported covenant compliance.
- For the nine months, investing cash outflow was $829,000 and financing cash outflow was $2.911 million, including $2.451 million in dividends and $437,000 in share repurchases.
Material changes and operating drivers
- Uniforms and related products sales increased 3.9% year to date but were slightly lower in Q3. Remote staffing sales increased 3.6% before intersegment eliminations year to date, while Q3 sales declined 0.7% before eliminations, primarily due to customer losses.
- Uniform-segment product costs and cotton-related raw-material pressures reduced gross margin. Management said the impact of higher raw-material costs continued into Q3 2012. Remote staffing’s year-to-date cost ratio also increased, attributed to startup costs for new programs.
- Pension expense increased to $992,000 for the first nine months from $606,000 a year earlier; the company contributed $550,000 to benefit plans in the period.
Outlook, risks and contingencies
- No specific numerical earnings or revenue guidance is provided. Management described the U.S. economic environment as challenging and linked demand to customers’ employment levels, locations and workforce turnover.
- Management said remote staffing customers lost in Q3 had been replaced and expected revenues to increase in Q4 2012. It viewed remote staffing as a growth area and continued pursuing uniform-business acquisitions and new product lines; the licensed apparel concept had not yet produced significant revenue.
- Management said operating cash flow, other capital resources and credit availability should be adequate for foreseeable funding needs. It anticipated continued dividends and share repurchases as financial conditions permit.
- Risks highlighted include economic and employment conditions, changes in customer industries, competition, and cotton and other material costs and availability. The company also noted estimation sensitivities around receivables, inventory, self-insured claims, pensions and taxes.
- The company disclosed ordinary-course legal claims and stated management did not expect them to materially affect results, cash flows or financial position. No material change to previously disclosed annual-report risk factors was reported.
Important facts for investors to verify
- Whether cotton and other input-cost pressures ease and restore uniform-segment margins.
- Whether the replaced remote-staffing customers translate into the expected Q4 revenue increase and whether new programs improve segment profitability.
- The status and renewal or replacement of the revolving credit facility ahead of its June 2013 expiration.
- Cash conversion and working-capital trends, especially trade receivables, inventory and pension obligations.
- The timing and commercial traction of the licensed apparel product and any acquisition plans.