UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended March 31, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-05869
SUPERIOR UNIFORM GROUP, INC.
Incorporated - Florida | Employer Identification No. | |
11-1385670 |
10055 Seminole Boulevard
Seminole, Florida 33772-2539
Telephone No.: 727-397-9611
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 21, 2010 the registrant had 5,897,906 common shares outstanding, which is the registrants only class of common stock.
PART I - FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended March 31, | |||||||||
2010 | 2009 | ||||||||
Net sales |
$ | 25,979,862 | $ | 23,716,094 | |||||
Costs and expenses: |
|||||||||
Cost of goods sold |
17,048,374 | 16,309,134 | |||||||
Selling and administrative expenses |
8,120,797 | 8,070,128 | |||||||
Interest expense |
2,474 | 39,777 | |||||||
25,171,645 | 24,419,039 | ||||||||
Earnings (loss) before taxes on income |
808,217 | (702,945 | ) | ||||||
Income tax expense (benefit) |
300,000 | (200,000 | ) | ||||||
Net earnings (loss) |
$ | 508,217 | $ | (502,945 | ) | ||||
Weighted average number of shares outstanding during the period |
|||||||||
(Basic) |
5,908,054 | 6,049,182 | |||||||
(Diluted) |
5,960,009 | 6,049,182 | |||||||
Per Share Data: |
|||||||||
Basic |
|||||||||
Net earnings (loss) |
$ | 0.09 | $ | (0.08 | ) | ||||
Diluted |
|||||||||
Net earnings (loss) |
$ | 0.09 | $ | (0.08 | ) | ||||
Cash dividends per common share |
$ | 0.135 | $ | 0.135 | |||||
See accompanying notes to condensed consolidated interim financial statements.
2
SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2010 |
December 31, 2009 (1) |
|||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 3,337,426 | $ | 6,365,557 | ||||
Accounts receivable and other current assets |
21,532,975 | 20,708,963 | ||||||
Inventories* |
33,791,648 | 32,053,504 | ||||||
TOTAL CURRENT ASSETS |
58,662,049 | 59,128,024 | ||||||
PROPERTY, PLANT AND EQUIPMENT, NET |
10,894,889 | 10,868,296 | ||||||
OTHER INTANGIBLE ASSETS, NET |
1,199,700 | 1,295,859 | ||||||
DEFERRED INCOME TAXES |
2,290,000 | 2,060,000 | ||||||
OTHER ASSETS |
171,068 | 215,684 | ||||||
$ | 73,217,706 | $ | 73,567,863 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 5,170,251 | $ | 5,426,433 | ||||
Other current liabilities |
2,182,680 | 2,226,653 | ||||||
TOTAL CURRENT LIABILITIES |
7,352,931 | 7,653,086 | ||||||
LONG-TERM PENSION LIABILITY |
5,028,684 | 5,115,817 | ||||||
OTHER LONG-TERM LIABILITIES |
705,000 | 680,000 | ||||||
SHAREHOLDERS EQUITY: |
||||||||
Preferred stock, $1 par value - authorized 300,000 shares (none issued) |
| | ||||||
Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding -5,900,156 and 5,915,978, respectively. |
5,900 | 5,915 | ||||||
Additional paid-in capital |
15,797,011 | 15,436,945 | ||||||
Retained earnings |
48,060,847 | 48,483,697 | ||||||
Accumulated other comprehensive loss, net of tax: |
||||||||
Pensions |
(3,732,667 | ) | (3,807,597 | ) | ||||
TOTAL SHAREHOLDERS EQUITY |
60,131,091 | 60,118,960 | ||||||
$ | 73,217,706 | $ | 73,567,863 | |||||
* | Inventories consist of the following: |
March 31, 2010 |
December 31, 2009 | |||||
(Unaudited) | ||||||
Finished goods |
$ | 25,068,207 | $ | 24,770,636 | ||
Work in process |
160,552 | 169,961 | ||||
Raw materials |
8,562,889 | 7,112,907 | ||||
$ | 33,791,648 | $ | 32,053,504 | |||
(1) | The balance sheet as of December 31, 2009 has been derived from the audited balance sheet as of that date and has been condensed. |
See accompanying notes to condensed consolidated interim financial statements.
3
SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
(Unaudited)
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net earnings (loss) |
$ | 508,217 | $ | (502,945 | ) | |||
Adjustments to reconcile net earnings (loss) to net cash (used in) provided from operating activities: |
||||||||
Depreciation and amortization |
680,271 | 749,251 | ||||||
Provision for bad debts |
44,602 | 30,139 | ||||||
Share-based compensation expense |
381,704 | 178,706 | ||||||
Deferred income tax benefit |
(270,250 | ) | (303,750 | ) | ||||
Gain on sales of property, plant and equipment |
(37,937 | ) | (136,786 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable and other current assets |
(870,835 | ) | 1,786,149 | |||||
Inventories |
(1,738,144 | ) | 3,732,853 | |||||
Other assets |
39,211 | 22,870 | ||||||
Accounts payable |
(256,182 | ) | 191,790 | |||||
Accrued expenses |
(43,973 | ) | (357,955 | ) | ||||
Pension liability |
28,047 | 150,233 | ||||||
Other long-term liabilities |
25,000 | | ||||||
Net cash flows (used in) provided from operating activities |
(1,510,269 | ) | 5,540,555 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Additions to property, plant and equipment |
(616,924 | ) | (123,091 | ) | ||||
Disposals of property, plant and equipment |
44,156 | 318,823 | ||||||
Proceeds from note receivable collections |
7,626 | 3,412 | ||||||
Net cash (used in) provided from investing activities |
(565,142 | ) | 199,144 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from long-term debt |
3,035,000 | 11,917,000 | ||||||
Repayment of long-term debt |
(3,035,000 | ) | (15,946,604 | ) | ||||
Payment of cash dividends |
(797,847 | ) | (816,725 | ) | ||||
Proceeds received on exercise of stock options |
28,008 | | ||||||
Common stock reacquired and retired |
(182,881 | ) | (124,620 | ) | ||||
Net cash used in financing activities |
(952,720 | ) | (4,970,949 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(3,028,131 | ) | 768,750 | |||||
Cash and cash equivalents balance, beginning of year |
6,365,557 | 133,152 | ||||||
Cash and cash equivalents balance, end of period |
$ | 3,337,426 | $ | 901,902 | ||||
See accompanying notes to condensed consolidated interim financial statements.
4
SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
NOTE 1 Summary of Significant Interim Accounting Policies:
a) Basis of presentation
The condensed consolidated interim financial statements include the accounts of Superior Uniform Group, Inc. and its wholly owned subsidiaries Fashion Seal Corporation and Superior Office Solutions, and their jointly owned subsidiaries, The Office Gurus and The Office Masters. Intercompany items have been eliminated in consolidation. The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009 and filed with the Securities and Exchange Commission. The interim financial information contained herein is not certified or audited; it reflects all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the operating results for the periods presented, stated on a basis consistent with that of the audited financial statements. The unaudited financial information included in this report as of and for the three months ended March 31, 2010 has been reviewed by Grant Thornton LLP, independent registered public accounting firm, and their review report thereon accompanies this filing. Such review was made in accordance with established professional standards and procedures for such a review. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.
b) Revenue recognition
The Company records revenue as products are shipped and title passes. A provision for estimated returns and allowances is recorded based on historical experience and current allowance programs.
c) Recognition of costs and expenses
Costs and expenses other than product costs are charged to income in interim periods as incurred, or allocated among interim periods based on an estimate of time expired, benefit received or activity associated with the periods. Procedures adopted for assigning specific cost and expense items to an interim period are consistent with the basis followed by the registrant in reporting results of operations at annual reporting dates. However, when a specific cost or expense item charged to expense for annual reporting purposes benefits more than one interim period, the cost or expense item is allocated to the interim periods.
d) Advertising expenses
The Company expenses advertising costs as incurred. Advertising costs for the three-month periods ended March 31, 2010 and 2009, respectively, were $8,000 and $16,000.
e) Shipping and handling fees and costs
The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with in-bound and out-bound freight are generally recorded in cost of goods sold. Other shipping and handling costs such as labor and overhead are included in selling and administrative expenses and totaled $1,603,000 and $1,686,000 for the three months ended March 31, 2010 and 2009, respectively.
f) Inventories
Inventories at interim dates are determined by using both perpetual records on a first-in, first-out basis and gross profit calculations.
g) Accounting for income taxes
The provision for income taxes is calculated by using the effective tax rate anticipated for the full year.
5
SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS(Continued)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
h) Employee benefit plan settlements
The Company recognizes settlement gains and losses in its financial statements when the cost of all settlements in a year is greater than the sum of the service cost and interest cost components of net periodic pension cost for the plan for the year.
i) Earnings per share
Historical basic per share data is based on the weighted average number of shares outstanding. Historical diluted per share data is reconciled by adding to weighted average shares outstanding the dilutive impact of the exercise of outstanding stock options and stock appreciation rights.
Three Months Ended March 31, | |||||||
2010 | 2009 | ||||||
Net earnings (loss) used in the computation of basic and diluted earnings per share |
$ | 508,217 | $ | (502,945 | ) | ||
Weighted average shares outstanding - basic |
5,908,054 | 6,049,182 | |||||
Common stock equivalents |
51,955 | | |||||
Weighted average shares outstanding - diluted |
5,960,009 | 6,049,182 | |||||
Per Share Data: |
|||||||
Basic |
|||||||
Net earnings (loss) |
$ | 0.09 | $ | (0.08 | ) | ||
Diluted |
|||||||
Net earnings (loss) |
$ | 0.09 | $ | (0.08 | ) | ||
Awards to purchase 608,000 and 1,080,000 shares of common stock with weighted average exercise prices of $11.61 and $11.38 per share were outstanding during the three-month periods ending March 31, 2010 and 2009, respectively, but were not included in the computation of diluted EPS because the awards exercise prices were greater than the average market price of the common shares.
j) Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
k) Comprehensive income
Total comprehensive income represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes net earnings. For the Company, the only other components of total comprehensive income are the change in the fair value of derivatives accounted for as cash flow hedges and pension costs.
Three Months Ended March 31, | |||||||
2010 | 2009 | ||||||
Net earnings (loss) |
$ | 508,217 | $ | (502,945 | ) | ||
Other comprehensive income: |
|||||||
Net unrealized gain during the period related to cash flow hedges |
| 5,000 | |||||
Pensions - reclassification to net earnings during the period |
74,930 | 109,362 | |||||
$ | 583,147 | $ | (388,583 | ) | |||
l) Operating Segments
Accounting standards require disclosures of certain information about operating segments and about products and services, geographic areas in which the Company operates, and their major customers. The Company has evaluated its operations and has determined that currently it operates in one segment, as defined in the standards.
6
SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS(Continued)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
m) Derivative Financial Instruments
The Company has had only limited involvement with derivative financial instruments. The Company had one interest rate swap agreement to hedge against the potential impact on earnings from increases in market interest rates associated with interest payments on a variable rate term loan.
This interest rate swap was accounted for as a cash flow hedge. This swap expired on April 1, 2009. Gains of $-0- and $5,000 were included in other comprehensive income for the three months ended March 31, 2010 and 2009, respectively. The original term of the contract was ten years.
n) Share-Based Compensation
The Company awards share-based compensation as an incentive for employees to contribute to the Companys long-term success. Historically, the Company has issued options and stock settled stock appreciation rights. At March 31, 2010, the Company had 1,580,125 shares of common stock authorized for awards of share-based compensation under its 2003 Incentive Stock and Awards Plan.
For the three months ended March 31, 2010 and 2009, respectively, the Company recognized $382,000 and $179,000 of share-based compensation recorded in selling and administrative expense in the Condensed Consolidated Statements of Earnings. This expense was offset by a $29,000 and a $9,000 deferred tax benefit for non-qualified share-based compensation for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, the Company had no unrecognized compensation cost expected to be recognized for prior share-based awards.
The Company grants stock options and stock settled stock appreciation rights (SARS) to employees that allow them to purchase shares of the Companys common stock. Options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and SARS at the date of grant using the Black-Scholes valuation model.
All options and SARS vest immediately at the date of grant. Awards generally expire five years after the date of grant with the exception of options granted to outside directors, which expire ten years after the date of grant. The Company issues new shares upon the exercise of stock options and SARS.
During the three-month periods ended March 31, 2010 and 2009, respectively, the Company received $28,000 and $-0- in cash from stock option exercises. No tax benefit was recognized for these exercises, as the options exercised were qualified incentive stock options.
A summary of options transactions during the three months ended March 31, 2010 follows:
No. of Shares |
Weighted Average Exercise Price | |||||
Outstanding December 31, 2009 |
745,650 | $ | 10.65 | |||
Granted |
130,520 | 9.80 | ||||
Exercised |
(3,300 | ) | 8.49 | |||
Lapsed |
(68,200 | ) | 14.95 | |||
Cancelled |
(1,400 | ) | 11.55 | |||
Outstanding March 31, 2010 |
803,270 | $ | 10.16 | |||
At March 31, 2010, options outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $504,086.
Options exercised during the three-month period ended March 31, 2010 had an intrinsic value of $4,806. There were no options exercised in the three-month period ended March 31, 2009. The weighted average grant date fair value of the Companys options granted during the three month periods ended March 31, 2010 and 2009 was $2.29 and $1.05, respectively.
7
SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS(Continued)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
A summary of SARS transactions during the three months ended March 31, 2010 follows:
No. of Shares |
Weighted Average Exercise Price | |||||
Outstanding December 31, 2009 |
297,030 | $ | 12.08 | |||
Granted |
35,980 | 9.80 | ||||
Exercised |
| | ||||
Lapsed |
(82,000 | ) | 14.95 | |||
Cancelled |
| | ||||
Outstanding March 31, 2010 |
251,010 | $ | 10.81 | |||
At March 31, 2010, SARS outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $74,659.
There were no SARS exercised during the three month periods ended March 31, 2010 and 2009. The weighted average grant date fair value of the Companys SARS granted during the three months ended March 31, 2010 and 2009 was $2.29 and $1.05, respectively.
The following table summarizes significant assumptions utilized to determine the fair value of share-based compensation awards.
Three months ended March 31, |
SARS | Options | ||||||
Exercise price |
||||||||
2010 |
$ | 9.80 | $ | 9.80 | ||||
2009 |
$ | 7.89 | $ | 7.89 | ||||
Market price |
||||||||
2010 |
$ | 9.80 | $ | 9.80 | ||||
2009 |
$ | 7.89 | $ | 7.89 | ||||
Risk free interest rate (1) |
||||||||
2010 |
2.2 | % | 2.2 | % | ||||
2009 |
2.0 | % | 2.0 | % | ||||
Expected award life (2) |
5 years | 5 years | ||||||
Expected volatility (3) |
||||||||
2010 |
41.7 | % | 41.7 | % | ||||
2009 |
30.7 | % | 30.7 | % | ||||
Expected dividend yield (4) |
||||||||
2010 |
5.5 | % | 5.5 | % | ||||
2009 |
6.8 | % | 6.8 | % |
(1) | The risk-free interest rate is based on the yield of a U.S. treasury bond with a similar maturity as the expected life of the awards. |
(2) | The expected life in years for awards granted was based on the historical exercise patterns experienced by the Company when the award is made. |
(3) | The determination of expected stock price volatility for awards granted in each of the three-month periods ending March 31, was based on historical Superior common stock prices over a period commensurate with the expected life. |
(4) | The dividend yield assumption is based on the history and expectation of the Companys dividend payouts. |
NOTE 2 Recent Accounting Pronouncements:
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and Disclosures. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure the fair value using one or more of the following techniques: a valuation technique that uses the quoted price of the identical liability or similar liabilities when traded as an asset, which would be considered a Level 1 input, or another valuation technique that is consistent with ASC 820. This Update is effective for the first reporting period (including interim periods) beginning after issuance. Thus, we adopted this guidance as of September 30, 2009, which did not have a material impact on our consolidated financial statements.
8
SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS(Continued)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
NOTE 3 Long-Term Debt:
March
31, 2010 |
December 31, 2009 | |||||
Note payable to Wachovia, pursuant to a revolving credit agreement, maturing June 30, 2010 |
$ | | $ | | ||
On March 26, 1999, the Company entered into a 3-year credit agreement with Wachovia Bank that made available to the Company up to $15,000,000 on a revolving credit basis. Interest is payable at LIBOR plus 0.60% based upon the one-month LIBOR rate for U.S. dollar based borrowings (0.85% at March 31, 2010). The Company pays an annual commitment fee of 0.15% on the average unused portion of the commitment. The available balance under the credit agreement is reduced by outstanding letters of credit. As of March 31, 2010, there were no outstanding letters of credit. On March 27, 2001, on April 27, 2004, and again on June 25, 2007, the Company entered into agreements with Wachovia Bank to extend the maturity of the revolving credit agreement. The revolving credit agreement matures on June 30, 2010. At the option of the Company, any outstanding balance on the agreement at that date will convert to a one-year term loan. The remaining terms of the original revolving credit agreement remain unchanged. The Company also entered into a $12,000,000 10-year term loan on March 26, 1999 with the same bank. The term loan was paid in full on March 31, 2009. The term loan carried a variable interest rate of LIBOR plus 0.80% based upon the one-month LIBOR rate for U.S. dollar based borrowings. Concurrent with the execution of the term loan agreement, the Company entered into an interest rate swap with the bank under which the Company received a variable rate of interest on a notional amount equal to the outstanding balance of the term loan from the bank and the Company paid a fixed rate of 6.75% on a notional amount equal to the outstanding balance of the term loan to the bank. This swap agreement expired April 1, 2009.
The credit agreement with Wachovia contains restrictive provisions concerning liabilities to tangible net worth ratio (.75:1), other borrowings, capital expenditures, working capital ratio (2.5:1), and fixed charges coverage ratio (2.5:1). The Company is in full compliance with all terms, conditions and covenants of the various credit agreements.
NOTE 4 Periodic Pension Expense:
The following table presents the net periodic pension expense under our plans for the three month periods ended March 31:
2010 | 2009 | |||||||
Service cost - benefits earned during the period |
$ | 158,000 | $ | 181,000 | ||||
Interest cost on projected benefit obligation |
257,000 | 262,000 | ||||||
Expected return on plan assets |
(252,000 | ) | (211,000 | ) | ||||
Amortization of prior service cost |
7,000 | 7,000 | ||||||
Recognized actuarial loss |
108,000 | 161,000 | ||||||
Net periodic pension cost |
$ | 278,000 | $ | 400,000 | ||||
There were no contributions made to the Companys benefit plans during the periods ended March 31, 2010 or 2009.
NOTE 5 Supplemental Cash Flow Information:
Cash paid for income taxes was $26,000 for each of the three-month periods ended March 31, 2010 and 2009. Cash paid for interest was $12,000 and $43,000, respectively for the three-month periods ended March 31, 2010 and 2009.
NOTE 6 Contingencies:
The Company is involved in various legal actions and claims arising from the normal course of business. In the opinion of management, the ultimate outcome of these matters will not have a material impact on the Companys results of operations, cash flows, or financial position.
9
SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS(Continued)
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
NOTE 7 Related Party Transactions:
For the three-month periods ended March 31, 2010 and 2009, the Company expensed approximately $-0- and $33,000, respectively, to Alpert Business Consulting, LLC, a private corporation owned by the son-in-law of the Companys Chief Executive Officer, for consulting services.
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Superior Uniform Group, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of Superior Uniform Group, Inc. and subsidiaries (a Florida Corporation) as of March 31, 2010, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2010 and 2009. These interim financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009, and the related consolidated statements of earnings, stockholders equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.
/s/ GRANT THORNTON LLP
Tampa, Florida
April 23, 2010
11
ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Certain matters discussed in this Form 10-Q are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we believe, anticipate, expect or words of similar import. Similarly, statements that describe our future plans, objectives, strategies or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the following: general economic conditions in the areas of the United States in which the Companys customers are located; changes in the healthcare, resort and commercial industries where uniforms and service apparel are worn; the impact of competition; the availability of manufacturing materials, and other factors described in the Companys filings with the Securities and Exchange Commission, including those described in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to the consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the estimates that we have made. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting estimates are those that we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates, the underlying judgments and uncertainties used to make them and the likelihood that materially different estimates would be reported under different conditions or using different assumptions is as follows:
Allowance for Losses on Accounts Receivable
These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. If the financial condition of the Companys customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. An additional impairment in value of one percent of net accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $194,000.
Inventories
Inventories are stated at the lower of cost or market value. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Insurance
The Company self-insures for certain obligations related to health insurance programs. The Company also purchases stop-loss insurance policies to protect it from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for losses that have occurred, but have not been reported. The Companys estimates consider historical claim experience and other factors. The Companys liabilities are based on estimates, and, while the Company believes that the accrual for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. Changes in claim experience, the Companys ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.
Pensions
The Companys pension obligations are determined using estimates including those related to discount rates, asset values and changes in compensation. The discount rates used for the Companys pension plans were determined based on the Citigroup Pension Yield Curve. This rate was selected as the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date taking into account the nature and duration of the benefit obligations of the plan using high-quality fixed-income investments currently available (rated AA or better) and expected to be available during the period to maturity of the benefits. The 8% expected return on plan assets was determined based on historical long-term investment returns as well as future expectations given target investment asset allocations and current economic conditions.
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The 4.5% rate of compensation increase represents the long-term assumption for expected increases in salaries among continuing active participants accruing benefits under the plans. Interest rates and pension plan valuations may vary significantly based on worldwide economic conditions and asset investment decisions.
Income Taxes
The Company is required to estimate and record income taxes payable for federal and state jurisdictions in which the Company operates. This process involves estimating actual current tax expense and assessing temporary differences resulting from differing accounting treatments between tax and book that result in deferred tax assets and liabilities. In addition, accruals are also estimated for federal and state tax matters for which deductibility is subject to interpretation. Taxes payable and the related deferred tax differences may be impacted by changes to tax laws, changes in tax rates and changes in taxable profits and losses. Federal income taxes are not provided on that portion of unremitted earnings of foreign subsidiaries that are expected to be reinvested indefinitely. Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it is properly reserved. We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in the total liability for unrecognized tax benefits.
Share-based Compensation
The Company recognizes expense for all share-based payments to employees, including grants of employee stock options, in the financial statements based on their fair values. Share-based compensation expense that was recorded in 2010 and 2009 includes the compensation expense for the share-based payments granted in those years. In the Companys share-based compensation strategy we utilize a combination of stock options and stock appreciation rights (SARS) that fully vest on the date of grant. Therefore, the fair value of the options and SARS granted is recognized as expense on the date of grant. The Company used the Black-Scholes-Merton valuation model to value any share-based compensation. Option valuation methods, including Black-Scholes-Merton, require the input of assumptions including the risk free interest rate, dividend rate, expected term and volatility rate. The Company determines the assumptions to be used based upon current economic conditions. The impact of changing any of the individual assumptions by 10% would not have a material impact on the recorded expense.
Results of Operations
As a result of the significant declines in our revenues in 2009, we implemented aggressive cost reduction initiatives to limit the impact on our results of operations. These initiatives eliminated nonessential positions, streamlined our existing processes and shifted additional administrative positions to our Central American subsidiary.
The current economic environment in the United States remains very challenging. While we are seeing increased activity, the employment outlook in the United States remains soft. Additionally, voluntary employee turnover at our customers has remained very low. The lack of job growth coupled with less voluntary attrition continues to weigh on the demand for our uniforms and service apparel. Despite these factors, net sales increased 9.5% from $23,716,000 for the three months ended March 31, 2009 to $25,980,000 for the three months ended March 31, 2010. Approximately two thirds of this increase in net sales is attributed to sales to customers acquired as result of our acquisition of Blade in the fourth quarter of 2009 with the balance coming from organic growth.
Cost of goods sold, as a percentage of sales, approximated 65.6% for the three-month period ended March 31, 2010 and 68.8% for the three-month period ended March 31, 2009. The decrease is primarily attributed to a reduction in direct product costs as a percentage of sales (1.3%) as well as more efficient operations in our value added services area (1.7%). The Companys gross margins may not be comparable with other entities, since some entities include all of the cost related to their distribution network in cost of goods sold. As disclosed in Note 1 to the Condensed Consolidated Financial Statements, the Company includes a portion of the costs associated with its distribution network in selling and administrative expenses. The amounts included in selling and administrative expenses for the quarters ended March 31, 2010 and 2009, respectively, were $1,603,000 and $1,686,000.
Selling and administrative expenses, as a percentage of sales approximated 31.3% for the first three months of 2010 as compared to 34.0% for the first three months of 2009. The decrease as a percentage of sales is attributed primarily to increased sales to cover operating expenses (2.9%); reduced salaries, wages and benefits, net of an increase of $203,000 for option expense in the current period, associated with our cost reduction initiatives, (0.9%); offset by the reduction in gain on sale of fixed assets (0.5%) and other net increases in operating expenses (0.6%).
Interest expense of $2,000 for the three-month period ended March 31, 2010 decreased 95% from $40,000 for the similar period ended March 31, 2009. This decrease is attributed to lower outstanding borrowings in the current period.
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The Companys effective tax rate for the three months ended March 31, 2010 was 37.1% versus 28.5% for the three months ended March 31, 2009. The 8.6% increase in such effective tax rate is attributed primarily to the following: an increase in the quarterly accrual for uncertain tax positions (3.1%), an increase in the rate from the impact of permanent differences between book and tax basis earnings related to share-based compensation (3.3%), and a reduction of the benefit for untaxed foreign income (2.7%), offset by the impact of other items (0.5%).
Liquidity and Capital Resources
Accounts receivable and other current assets increased 4.0% from $20,709,000 on December 31, 2009 to $21,533,000 on March 31, 2010. Accounts receivable, net of allowance increased by $1,468,000 primarily as a result of increased sales in the final month of the first quarter of 2010 in comparison with the final month of the fourth quarter of 2009. Other current assets decreased by $644,000 due to a reduction in prepaid income taxes attributed to application of the 2009 overpayment of $520,000 to the current tax provision for the first quarter of 2010. The remaining decrease in other current assets is attributed to timing of prepayments and is not considered significant.
Inventories increased 5.4% from $32,054,000 on December 31, 2009 to $33,792,000 as of March 31, 2010. This increase is due to planned increases in certain inventory levels initiated by management in order to service anticipated increases in revenues as the economy begins to rebound.
Accounts payable decreased 4.7% from $5,426,000 on December 31, 2009 to $5,170,000 on March 31, 2010. This decrease is primarily attributed to timing of inventory purchases and is not considered significant.
Cash and cash equivalents decreased by $3,029,000 from $6,366,000 on December 31, 2009 to $3,337,000 as of March 31, 2010. The Company used $1,510,000 in cash from operating activities, $565,000 in investing activities primarily related to fixed asset additions of $617,000 and $953,000 in financing activities. Financing activities included the payment of cash dividends and the reacquisition of $183,000 of the Companys common stock, as discussed below. The Company is in full compliance with all terms, conditions and covenants of the revolving credit facility.
In the foreseeable future, the Company will continue its ongoing capital expenditure program designed to maintain and improve its facilities. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions.
During the three months ended March 31, 2010 and 2009, respectively, the Company paid cash dividends of $798,000 and $817,000. The Company reacquired 19,022 and 18,452 shares of its common stock at a total cost of $183,000 and $125,000 in the three-month periods ended March 31, 2010 and 2009, respectively, pursuant to its stock repurchase program. The Company anticipates that it will continue to pay dividends and that it will reacquire and retire additional shares of its common stock in the future as financial conditions permit.
The Company believes that its cash flows from operating activities together with other capital resources and funds from credit sources will be adequate to meet all of its funding requirements for the remainder of the year and for the foreseeable future.
Our revolving line of credit with Wachovia Bank matures on June 30, 2010. As of March 31, 2010, we had no balance outstanding on our revolving credit facility. We believe we will be able to successfully negotiate and extend our revolving line of credit at a commitment level sufficient to meet our working capital and investment needs when it matures.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
ITEM 4. | Controls and Procedures |
The Principal Executive Officer, Michael Benstock, and the Principal Financial Officer, Andrew D. Demott, Jr., evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report (the Evaluation Date), and, based on such evaluation, concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures were effective to ensure that information the Company is required to disclose in its filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commissions rules and forms, and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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There have been no changes in the Companys internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. | Legal Proceedings |
None.
ITEM 1A. | Risk Factors |
We are exposed to certain risks and uncertainties that could have a material adverse impact on our business, financial condition and operating results. There have been no material changes to the Risk Factors described in Part I, Item 1A-Risk Factors in our annual report on Form 10-K for the year ended December 31, 2009.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
ISSUER PURCHASES OF EQUITY SECURITIES
The table below sets forth information with respect to purchases made by or on behalf of Superior Uniform Group, Inc. or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common shares during the three months ended March 31, 2010.
Period |
(a) Total Number of Shares Purchased |
(b) Average Price Paid per Share |
(c) Total Number of Shares or Programs |
(d) Maximum Number of Plans or Programs (1) | ||||
Month #1 (January 1, 2010 to January 31, 2010) |
6,102 | $9.95 | 6,102 | |||||
Month #2 (February 1, 2010 to February 28, 2010) |
4,200 | $9.59 | 4,200 | |||||
Month #3 (March 1, 2010 to March 31, 2010) |
8,720 | $9.39 | 8,720 | |||||
TOTAL | 19,022 | $9.61 | 19,022 | 422,122 | ||||
(1) | In July 2002, the Companys Board of Directors authorized the Company to repurchase 750,000 shares of its common stock. Through May 4, 2006, the Company repurchased 728,098 shares of its common stock under such repurchase program. On May 5, 2006, the Companys Board of Directors approved additional repurchases of 750,000 shares of the Companys outstanding shares of common stock. Through July 31, 2008, the Company repurchased 625,881 shares of its common stock under such repurchase program. On August 1, 2008, the Companys Board of Directors approved an increase to the outstanding authorization to allow for the repurchase of 1,000,000 additional shares of the Companys outstanding shares of common stock. There is no expiration date or other restriction governing the period over which the Company can make share repurchases under the program. All such purchases were open market transactions. |
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Under our credit agreement with Wachovia, if an event of default exists, we may not make distributions to our shareholders. The Company is in full compliance with all terms, conditions and covenants of its credit agreement.
ITEM 3. | Defaults Upon Senior Securities |
Inapplicable.
ITEM 4. | Removed and Reserved |
ITEM 5. | Other Information |
None.
ITEM 6. | Exhibits |
See Exhibit Index.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 23, 2010 | SUPERIOR UNIFORM GROUP, INC. | |||||
By | /S/ MICHAEL BENSTOCK | |||||
Michael Benstock | ||||||
Chief Executive Officer (Principal Executive Officer) | ||||||
By | /S/ ANDREW D. DEMOTT, JR. | |||||
Andrew D. Demott, Jr. | ||||||
Sr. Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Exhibit No. |
Description | |
15 | Grant Thornton LLP Awareness Letter. | |
31.1 | Certification by the Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification by the Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification of Periodic Financial Report by the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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