Business Context and Reporting Period
Company: Superior Uniform Group, Inc. (SGC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Superior manufactures and sells uniforms, career apparel, and accessories for healthcare, hospitality, food service, and industrial markets under brands including Fashion Seal, Martin's, Worklon, and Blade. The company operates as a single reportable segment. In 2010, the company expanded its business model to include call center services and entered a new licensing agreement for patented advertising apparel technology.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Sales | $105,877,854 | $102,801,921 |
| Cost of Goods Sold | $68,411,383 | $69,583,043 |
| Gross Profit | $37,466,471 | $33,218,878 |
| Gross Margin | 35.4% | 32.3% |
| Net Earnings | $3,807,000 | $1,966,882 |
| Earnings Per Share (Diluted) | $0.64 | $0.33 |
| Operating Cash Flow | $6,455,157 | $17,455,963 |
| Total Assets | $74,193,898 | $73,567,863 |
| Working Capital | $53,148,580 | $51,474,938 |
| Long-Term Debt | $0 | $0 |
| Cash and Cash Equivalents | $9,107,461 | $6,365,557 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.0% to $105.9 million. Growth was driven by the 2009 acquisition of Blade uniforms (contributing ~$5.2 million) and expansion of call center services (~$0.9 million increase), partially offset by the loss of a major customer's uniform program (~$2.9 million decrease).
- Profitability: Net earnings doubled to $3.8 million (EPS $0.64) compared to $2.0 million (EPS $0.33) in 2009. Gross margin improved to 35.4% from 32.3% due to better product sourcing.
- Expense Management: Selling and administrative expenses increased to 29.9% of sales (from 29.6%) primarily due to higher incentive compensation tied to improved operating results.
- Tax Rate: The effective income tax rate increased to 33.8% from 27.1%, largely due to a reduction in the benefit from untaxed foreign income.
- Liquidity: Cash and cash equivalents increased by $2.7 million. The company maintained a debt-free balance sheet with a $15 million revolving credit facility available.
Guidance, Outlook, and Risks
Outlook and Strategy: Management anticipates continued challenges from the economic environment, specifically reduced employee turnover among customers which lowers uniform demand. Strategies to mitigate this include pursuing acquisitions, expanding call center services, and launching a new product line utilizing patented advertising technology (expected to generate revenue in Q4 2011).
Risks and Contingencies:
- Raw Material Costs: Dramatic increases in cotton prices and supply disruptions are expected to negatively impact gross margins in 2011. The company has passed on some costs but faces pricing pressure.
- Supply Chain Concentration: Approximately 54% of products were sourced from Central America in 2010. Disruption in this region could significantly impact operations.
- Pension Obligations: The company has approximately $3.5 million in unfunded pension obligations. A $3 million contribution was made in 2010 to improve the funded status.
- Customer Concentration: The largest customer accounted for 5.4% of net sales in 2010. The five largest customers accounted for 22.4% of sales.
Investor Verification Checklist
- Cotton Price Exposure: Verify the extent to which rising cotton costs have been passed to customers versus absorbed in margins for 2011.
- Customer Retention: Assess the impact of the lost $2.9 million customer program and the stability of the remaining top 5 customers.
- New Product Viability: Monitor the rollout and initial revenue generation of the new advertising apparel technology licensed from EyeLevel Interactive.
- Pension Funding: Review future cash flow requirements for the $3.5 million unfunded pension liability.
- Share Repurchases: Note that 388,149 shares remain available under the repurchase program; monitor future buyback activity.