Business Context and Reporting Period
Company: Superior Uniform Group, Inc. (a Florida corporation)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2011
Business Overview: The Company operates in one segment, providing uniforms and service apparel ("image apparel") and call center services. It owns subsidiaries including Fashion Seal Corporation and Superior Office Solutions. The Company is a smaller reporting company with 5,993,039 common shares outstanding as of April 19, 2011.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales | $26,898,600 | $25,979,862 |
| Cost of Goods Sold | $17,047,681 | $17,048,374 |
| Gross Margin % | 36.6% | 34.4% |
| Selling & Admin Expenses | $8,905,850 | $8,120,797 |
| Net Earnings | $598,922 | $508,217 |
| Diluted EPS | $0.10 | $0.09 |
| Cash & Equivalents (End of Period) | $1,888,926 | $3,337,426 |
| Net Cash Used in Operating Activities | ($4,220,679) | ($1,510,269) |
| Long-Term Debt Outstanding | $0 | $0 |
Note: The Company has a $15,000,000 revolving credit facility with Fifth Third Bank, but no balances were outstanding as of March 31, 2011.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.5% year-over-year, driven by a 2.0% increase in call center operations and a 1.5% increase in image apparel sales.
- Profitability: Net earnings rose 17.9% to $598,922. Gross margin improved to 36.6% (from 34.4%) due to price increases and the higher-margin mix of call center sales.
- Operating Expenses: Selling and administrative expenses increased 9.7%, primarily due to higher share-based compensation ($788,021 vs. $381,704) and increased staffing for call center operations.
- Liquidity: Cash and cash equivalents decreased significantly by $7.2 million (78.7%) from the beginning of the year. This was driven by a $4.2 million use of cash in operating activities and a $2.4 million use in investing activities.
- Assets: Other intangible assets increased 281.1% to $3.47 million due to a new license agreement. Accounts receivable increased 26.1% due to higher sales volume in the final month of the quarter.
Outlook, Risks, and Unusual Items
Management Commentary and Guidance
- New Product Line: In January 2011, the Company entered a license agreement with EyeLevel Interactive, LLC for patented technology to create uniforms that serve as point-of-sale advertisements. Revenue from this line is expected to begin in Q4 2011.
- Call Center Growth: The Company is aggressively marketing third-party call center services, which grew from $68,000 in Q1 2010 to $575,000 in Q1 2011.
- Dividends and Buybacks: The Company paid cash dividends of $0.135 per share ($806,776 total) and repurchased 9,905 shares of common stock for $112,630.
Risks and Contingencies
- Raw Material Costs: Cotton prices have reached historical highs due to supply disruptions. While the Company has passed some costs to customers, further increases could negatively impact gross margins.
- Supplier Deposits: To secure raw materials, suppliers are requiring increased deposits, which has tied up cash in "other current assets."
- Economic Sensitivity: Demand is tied to employment levels and customer headcount. Reduced employee turnover in the current economy has decreased demand for new uniforms.
- Legal: The Company is involved in various legal actions but believes the outcome will not materially impact financial results.
Investor Verification Checklist
- Verify the sustainability of the gross margin improvement given the rising cost of cotton and raw materials.
- Monitor the cash burn rate; operating cash flow was negative $4.2 million, and cash reserves dropped to under $1.9 million.
- Assess the timeline and revenue potential of the new EyeLevel Interactive product line expected in Q4 2011.
- Review the impact of increased share-based compensation on future earnings as new grants vest.
- Confirm the Company's ability to maintain compliance with debt covenants (liabilities to tangible net worth ratio of 0.75:1) if cash reserves continue to decline.