Superior Uniform Group, Inc. — Q1 2012 Form 10-Q
Business context and period. The filing is for the three months ended March 31, 2012, compared with the same quarter of 2011. The company operates in uniforms and related products and remote staffing solutions. The filing identifies the registrant as Superior Uniform Group, Inc.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $28.508 million | $26.899 million | +6.0% |
| Gross profit | $9.462 million | $9.851 million | −3.9% |
| Gross margin | 33.2% | 36.6% | −3.4 percentage points |
| Income before tax | $537,000 | $939,000 | −42.8% |
| Net income | $327,000 | $599,000 | −45.4% |
| Diluted earnings per share | $0.05 | $0.10 | Down $0.05 |
| Operating cash flow | $565,000 | $(4.220) million | Improved |
Sales growth did not translate into higher earnings: cost of goods sold rose to $19.046 million from $17.048 million, while selling and administrative expense was nearly unchanged at $8.914 million. Net margin was approximately 1.1%, versus 2.2% in Q1 2011. The effective tax rate was 39.1%, compared with 36.2%.
Segments: Uniforms and related products reported $27.820 million in sales, including intersegment activity, and $133,000 of pretax income; comparable sales were $26.323 million and pretax income was $290,000. Remote staffing reported $1.634 million in sales before $946,000 of intersegment eliminations and $404,000 of pretax income; comparable figures were $1.526 million, $950,000 of eliminations, and $649,000 of pretax income.
Liquidity, cash flow and debt
- Cash was $2.929 million at March 31, up $125,000 from year-end. Current assets were $65.252 million and current liabilities $8.285 million, implying a current ratio of about 7.9.
- Operating activities provided $565,000, versus $4.220 million used in Q1 2011. Investing used $422,000, primarily for $423,000 of capital expenditures. Financing used $18,000; it included $812,000 in dividends, partly offset by option exercise proceeds and net revolving-credit borrowings.
- Revolving debt was $1.160 million, up from $640,000 at December 31, 2011. The company had a $15 million revolving facility maturing June 24, 2013, with no letters of credit outstanding, and reported compliance with its covenants.
- Quarterly cash dividends were $0.135 per share, unchanged from Q1 2011. Long-term pension liability was $8.173 million; pension expense rose to $331,000 from $202,000.
Material changes, outlook and risks
- Uniforms sales grew, but segment gross margin fell: cost of goods sold was 67.2% of segment sales versus 64.0%, primarily due to higher raw-material costs and cotton shortages. Management expected cotton-related gross-margin pressure to continue into Q3 2012.
- Remote staffing sales rose 7.1% before intersegment eliminations and 19.4% after eliminations, according to management. Its cost and selling expense ratios increased, attributed to startup costs on new programs and hiring to support anticipated growth.
- Management described the U.S. economic environment as challenging, with customer employment, location openings and closures, and reduced employee turnover affecting uniform demand. It cited competition and raw-material price and availability as additional risks.
- The company was marketing a licensed apparel product intended to enable customer advertising. It had not generated significant revenue at the time of filing; management expected meaningful revenue during 2012. The remote staffing business was also identified as a growth area, without quantified guidance.
- Management believed operating cash flow, other capital resources and credit sources would meet funding needs for the remainder of 2012 and the foreseeable future. It anticipated continued capital spending, dividends and share repurchases as conditions permit.
- The company disclosed ordinary-course legal claims and said their outcome was not expected to materially affect results, cash flows or financial position. It reported no material changes to the risk factors in its 2011 Form 10-K. Grant Thornton reviewed, but did not audit, the interim financial statements and reported no material modifications identified.
Investor verification points
- Track whether raw-material costs and cotton availability continue to compress uniform-segment margins, and whether pricing offsets the pressure.
- Verify sales conversion and profitability of the licensed apparel product; management’s revenue expectation was forward-looking, not a reported result.
- Monitor remote staffing growth alongside startup costs, staffing expense and segment pretax income.
- Assess working-capital cash conversion, pension expense and funding needs, including revolving debt and the facility’s 2013 maturity.
- Confirm future dividend and repurchase capacity against earnings, cash flows and credit-agreement restrictions.