Superior Uniform Group, Inc. — Q2 2011 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2011. The company operates in one segment, selling uniforms and service apparel and providing call-center services. Financial statements are unaudited; Grant Thornton performed an interim review, not an audit.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $27.51m | $26.63m | $54.40m | $52.61m |
| Gross profit / margin | $9.93m / 36.1% | $9.38m / 35.2% | $19.78m / 36.4% | $18.32m / 34.8% |
| Earnings before tax | $1.43m | $1.53m | $2.37m | $2.34m |
| Net earnings / margin | $0.93m / 3.4% | $0.98m / 3.7% | $1.53m / 2.8% | $1.49m / 2.8% |
| Diluted EPS | $0.15 | $0.17 | $0.25 | $0.25 |
| Cash from operating activities | Not separately stated | Not separately stated | $(2.63)m | $3.27m |
Q2 sales rose 3.3%, while net earnings declined 5.2%. For the first half, sales increased 3.4% and net earnings increased 2.7%. Gross margin improved in both comparisons, but higher selling and administrative costs—including consulting, compensation and licensing amortization—pressured earnings. Dividends were $0.135 per share for Q2 and $0.27 for the first half, unchanged from 2010.
Liquidity, debt and cash flow
- Cash was $2.31m at June 30, down $6.80m from year-end 2010. Current assets were $61.84m and current liabilities $8.98m.
- First-half operating cash use of $2.63m reflected increases in receivables and other current assets ($3.56m) and inventories ($3.17m). Investing cash use was $2.78m, including $2.06m for intangible assets and approximately $0.71m of net capital expenditures. Financing cash use was $1.39m, including $1.62m of dividends and $0.28m of share repurchases.
- No borrowings were outstanding under the $15m revolving credit facility at June 30; no letters of credit were outstanding. The facility expires June 24, 2013. The company reported compliance with its covenants and said cash flows, other capital resources and credit sources should meet foreseeable funding needs.
Material changes, outlook and risks
- Call-center sales were approximately $1.24m in the first half, versus $0.24m a year earlier. Management cited call-center growth and image-apparel sales as contributors to revenue growth.
- In January, the company obtained a 42-month license to market garments using EyeLevel Interactive technology. The $2.86m capitalized cost included $2.0m cash, a warrant valued at $0.8m and $61,432 of expenses; amortization began in 2011. Royalties and potentially additional license fees are payable under the agreement.
- Management expected to begin sales of the licensed apparel line in Q4 2011 and described it as a potential growth opportunity. No specific company-wide revenue or earnings guidance was provided.
- Management warned that high cotton and other material costs could reduce gross margins in the remainder of 2011, despite partial customer price increases. Suppliers had also required larger purchase-order deposits to secure raw materials; management said these requirements were beginning to ease.
- Other risks cited include economic and employment conditions, changes in customer industries, competition, material availability and pricing, and estimates involving receivables, inventory, insurance, pensions and taxes. Management said routine legal matters were not expected to materially affect results, cash flows or financial position.
Important facts for investors to verify
- Whether higher material costs and supplier deposits continue to affect margins, working capital and cash.
- Whether call-center growth and the new licensed apparel product generate the anticipated sales and returns, including the effect of royalties and possible additional license fees.
- Whether operating cash flow improves as receivables and inventory levels normalize.
- The availability and covenant terms of the revolving credit facility, and the company’s capacity to sustain dividends and repurchases.