SUPERIOR GROUP OF COMPANIES, INC. - Quarter Report: 2018 June (Form 10-Q)

 

 

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 quarterly period ended June 30, 2018
OR
		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number: 001-05869
Exact name of registrant as specified in its charter:
Superior Group of Companies, Inc.
State or other jurisdiction of incorporation or organization:					I.R.S. Employer Identification No.:
Florida					11-1385670
Address of principal executive offices:
10055 Seminole Boulevard
Seminole, Florida 33772-2539
Registrant's telephone number, including area code:
727-397-9611
Former name, former address and former fiscal year, if changed since last report: ___________________
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 [X]	No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_]						Accelerated filer [X]
Non-accelerated filer   [_]			(Do not check if a smaller reporting company)			Smaller Reporting Company  [ ]
						Emerging Growth Company [ ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_]	No [X]
As of July 23, 2018, the registrant had 15,311,541 shares of common stock outstanding, which is the registrant's only class of common stock.

 

 

 

		2018				2017
Net sales		$	82,392			$	65,604
Costs and expenses:
Cost of goods sold			53,114				42,230
Selling and administrative expenses			23,327				16,994
Other periodic pension costs			96				484
Interest expense			758				195
			77,295				59,903
Income before taxes on income			5,097				5,701
Income tax expense			1,280				1,360
Net income		$	3,817			$	4,341
Weighted average number of shares outstanding during the period
(Basic)			14,956,221				14,501,399
(Diluted)			15,559,404				15,040,431
Per Share Data:
Basic
Net income		$	0.26			$	0.30
Diluted
Net income		$	0.25			$	0.29
Other comprehensive income (loss), net of tax:
Defined benefit pension plans:
Recognition of net losses included in net periodic pension costs			215				320
Gain (loss) on cash flow hedging activities			72				(52	)
Foreign currency translation adjustment			(509	)			(43	)
Other comprehensive (loss) income			(222	)			225
Comprehensive income		$	3,595			$	4,566
Cash dividends per common share		$	0.0950			$	0.0875

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		2018				2017
Net sales		$	155,479			$	126,591
Costs and expenses:
Cost of goods sold			101,326				81,003
Selling and administrative expenses			44,509				34,423
Other periodic pension costs			192				698
Interest expense			1,035				379
			147,062				116,503
Gain on sale of property, plant and equipment			-				1,018
Income before taxes on income			8,417				11,106
Income tax expense			2,150				2,930
Net income		$	6,267			$	8,176
Weighted average number of shares outstanding during the period
(Basic)			14,888,940				14,426,060
(Diluted)			15,508,517				14,985,063
Per Share Data:
Basic
Net income		$	0.42			$	0.57
Diluted
Net income		$	0.40			$	0.55
Other comprehensive income, net of tax:
Defined benefit pension plans:
Recognition of net losses included in net periodic pension costs			431				496
Gain (loss) on cash flow hedging activities			212				(180	)
Foreign currency translation adjustment			(457	)			7
Other comprehensive income			186				323
Comprehensive income		$	6,453			$	8,499
Cash dividends per common share		$	0.1900			$	0.1750

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		June 30,
		2018				December 31,
		(Unaudited)				2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	4,164			$	8,130
Accounts receivable, less allowance for doubtful accounts of $1,722 and $1,382, respectively			63,269				50,569
Accounts receivable - other			2,522				1,848
Inventories*			67,852				64,979
Contract assets			46,826				-
Prepaid expenses and other current assets			10,830				11,011
TOTAL CURRENT ASSETS			195,463				136,537
PROPERTY, PLANT AND EQUIPMENT, NET			28,564				26,844
OTHER INTANGIBLE ASSETS, NET			66,338				29,061
GOODWILL			35,327				16,032
DEFERRED INCOME TAXES			-				2,900
OTHER ASSETS			9,470				7,564
		$	335,162			$	218,938
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	22,337			$	19,752
Other current liabilities			11,327				12,409
Current portion of long-term debt			6,000				6,000
Current portion of acquisition-related contingent liabilities			1,410				3,061
TOTAL CURRENT LIABILITIES			41,074				41,222
LONG-TERM DEBT			122,801				32,933
LONG-TERM PENSION LIABILITY			7,947				8,319
LONG-TERM ACQUISITION-RELATED CONTINGENT LIABILITIES			5,056				7,283
DEFERRED INCOME TAXES			8,900				-
OTHER LONG-TERM LIABILITIES			3,800				4,213
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value - authorized 300,000 shares (none issued)			-				-
Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding - 15,311,541 and 15,081,947, respectively.			15				15
Additional paid-in capital			54,998				49,103
Retained earnings			97,664				83,129
Accumulated other comprehensive income (loss), net of tax:
Pensions			(6,851	)			(7,282	)
Cash flow hedges			122				(90	)
Foreign currency translation adjustment			(364	)			93
TOTAL SHAREHOLDERS' EQUITY			145,584				124,968
		$	335,162			$	218,938

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		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	6,267			$	8,176
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization			3,646				2,715
Provision for bad debts - accounts receivable			323				575
Share-based compensation expense			1,490				1,108
Deferred income tax provision (benefit)			302				(509	)
Gain on sale of property, plant and equipment			-				(1,018	)
Change in fair value of acquisition-related contingent liabilities			(840	)			81
Changes in assets and liabilities, net of acquistion of business
Accounts receivable - trade			(3,492	)			552
Accounts receivable - other			(674	)			674
Contract assets			(972	)			-
Inventories			2,953				1,632
Prepaid expenses and other current assets			242				(1,353	)
Other assets			(1,827	)			(1,784	)
Accounts payable and other current liabilities			(7,368	)			(2,223	)
Long-term pension liability			195				(894	)
Other long-term liabilities			(497	)			829
Net cash (used in) provided by operating activities			(252	)			8,561
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment			(2,414	)			(2,004	)
Acquistion of business, net of acquired cash			(85,597	)			-
Proceeds from disposals of property, plant and equipment			-				2,810
Net cash (used in) provided by investing activities			(88,011	)			806
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt			146,157				72,422
Repayment of long-term debt			(56,289	)			(74,088	)
Payment of cash dividends			(2,827	)			(2,490	)
Payment of acquisition-related contingent liabilities			(3,033	)			(1,800	)
Proceeds received on exercise of stock options			405				798
Tax benefit from vesting of acquisition-related restricted stock			105				70
Tax withholding on exercise of stock rights			(17	)			(421	)
Net cash provided by (used in) financing activities			84,501				(5,509	)
Effect of currency exchange rates on cash			(204	)			76
Net (decrease) increase in cash and cash equivalents			(3,966	)			3,934
Cash and cash equivalents balance, beginning of year			8,130				3,649
Cash and cash equivalents balance, end of period		$	4,164			$	7,583

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NOTE 1 – Summary of Significant Interim Accounting Policies:

 

a) Basis of presentation

 

The consolidated interim financial statements include the accounts of Superior Group of Companies, Inc. and its wholly-owned subsidiaries, The Office Gurus, LLC, SUG Holding, Fashion Seal Corporation, BAMKO, LLC and CID Resources, Inc.; The Office Gurus, Ltda. de C.V., The Office Masters, Ltda., de C.V. and The Office Gurus, Ltd., each a subsidiary of Fashion Seal Corporation and SUG Holding; Power Three Web, Ltda. and Superior Sourcing, each a wholly-owned subsidiary of SUG Holding; BAMKO Importação, Exportação e Comércio de Brindes Ltda., a subsidiary of BAMKO, LLC and SUG Holding; Guangzhou Ben Gao Trading Limited, Worldwide Sourcing Solutions Limited, and BAMKO UK, Limited, each a direct or indirect subsidiary of BAMKO, LLC; and BAMKO India Private Limited, a 99%-owned subsidiary of BAMKO, LLC. All of these entities are referred to collectively as “the Company”. Effective May 3, 2018 Superior Uniform Group, Inc. changed its name to Superior Group of Companies, Inc. 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 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 consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, 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 results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

 

b) Revenue recognition and allowance for doubtful accounts

 

The Company recognizes revenue in accordance with ASC 606 effective January 1, 2018. The majority of our revenues are recognized as goods are shipped and title passes and as services are provided. Under the new standard revenue is recognized for on hand inventory that is covered by a contract termination clause and has no alternative use. See Note 1(p). The Company collects sales tax for various taxing authorities. It is the Company’s policy to record revenues on a net basis. Therefore, sales taxes collected are not included in net sales for the Company. Variable consideration for estimated returns and allowances is recorded based upon historical experience and current allowance programs. Judgments and estimates are used in determining the collectability of accounts receivable and in establishing allowances for doubtful accounts. The Company analyzes specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances when evaluating the adequacy of the allowance for doubtful accounts. Changes in estimates are reflected in the period they become known. Charge-offs of accounts receivable are made once all collection efforts have been exhausted. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

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) Amortization of other intangible assets

 

The Company amortizes identifiable intangible assets on a straight line basis over their expected useful lives. Amortization expense for other intangible assets was $1.1 million and $0.6 million for the three-month periods ended June 30, 2018 and 2017 respectively. Amortization expense for other intangible assets was $1.8 million and $1.1 million for the six-month periods ended June 30, 2018 and 2017, respectively.

 

e) Advertising expenses

 

The Company expenses advertising costs as incurred. Advertising costs for the three-month periods ended June 30, 2018 and 2017 were $0.2 million and $0.1 million, respectively. Advertising costs for the six-month periods ended June 30, 2018 and 2017 were $0.2 million and $0.1 million, respectively.

 

f) 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 $3.3 million and $2.7 million for the three-month periods ended June 30, 2018 and 2017, respectively.  Other shipping and handling costs such as labor and overhead are included in selling and administrative expenses and totaled $6.0 million and $5.4 million for the six-month periods ended June 30, 2018 and 2017, respectively.

 

g) Inventories

 

Inventories at interim dates are determined by using both perpetual records on a first-in, first-out basis and gross profit calculations.

 

h) Accounting for income taxes

 

The provision for income taxes is calculated by using the effective tax rate anticipated for the full year.

 

i) 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.

 

j) 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, stock appreciation rights, unvested shares, and performance shares.

 

k) Derivative financial instruments

 

The Company uses certain financial derivatives to mitigate its exposure to volatility in interest rates and foreign currency. The Company records derivatives on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. On the date a derivative contract is entered into, the Company may elect to designate the derivative as a fair value hedge, a cash flow hedge, or the hedge of a net investment in a foreign operation. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative that is used in the hedging transaction is highly effective. For those instruments that are designated as a cash flow hedge and meet certain documentary and analytical requirements to qualify for hedge accounting treatment, changes in the fair value for the effective portion are reported in other comprehensive income (“OCI”), net of related income tax effects, and are reclassified to the income statement when the effects of the item being hedged are recognized in the income statement. The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, or management determines that designation of the derivative as a hedging instrument is no longer appropriate. In situations in which the Company does not elect hedge accounting or hedge accounting is discontinued and the derivative is retained, the Company carries or continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value through earnings.

 

 

The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in interest rates and foreign currency. The Company does not enter into derivative instruments for speculative purposes. The Company manages market and credit risks associated with its derivative instruments by establishing and monitoring limits as to the types and degree of risk that may be undertaken, and by entering into transactions with high-quality counterparties.

 

Effective March 3, 2017, in order to reduce the interest rate risk on its future debt, the Company entered into an interest rate swap agreement that was designed to effectively convert or hedge the variable interest rate on a portion of its future borrowings to achieve a net fixed rate beginning March 1, 2018 with a notional amount of $18.0 million. This agreement was amended on May 2, 2018.  (See Note 2.)

 

On January 3, 2017, the Company entered into a foreign exchange forward contract to lock in the exchange rate on the Brazilian real to limit the risk of changes in foreign currency on the expected payment of a customer receivable. The amount of the contract was $1.8 million and settled on June 29, 2017. For the three month and six month periods ended June 30, 2017 respectively the Company recognized a gain of $0.1 million and a loss of $0.1 million on this contract which were included in selling and administrative expenses. 

 

l) 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.

 

m) 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 pension costs, change in fair value of qualifying hedges, and foreign currency translation adjustments.

 

n) 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 it has three reportable segments - Uniforms and Related Products, Remote Staffing Solutions and Promotional Products. (See Note 8.)

 

o) Share-based compensation

 

The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success.  Historically, the Company has granted options, stock-settled stock appreciation rights, and restricted stock.  In 2016, the Company began issuing performance shares as well.  At June 30, 2018, the Company had 3,497,119 shares of common stock available for grant of awards of share-based compensation under its 2013 Incentive Stock and Awards Plan.

 

The Company recognizes share-based compensation expense for all awards granted to employees, which is based on the fair value of the award on the date of grant. Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the stock compensation awards and the Company’s common stock price volatility, risk free interest rate and dividend rate. The assumptions used in calculating the fair value of stock compensation awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary to use different assumptions, stock compensation expense could be materially different from what has been recorded in the current period.

 

 

p) Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02 that amends the accounting guidance on leases. The primary change in this ASU requires lessees to recognize, in the balance sheet, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset over the lease term. The amendments in this ASU are to be applied using a modified retrospective approach and are effective for fiscal years beginning after December 15, 2018. The Company is in the preliminary phases of assessing the effect of this ASU. We have not yet selected a transition date nor have we yet determined the effect of this ASU on our results of operations, financial condition, or cash flows.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting”.  This update was issued as part of FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees.  The amendment requires that excess tax benefits for share-based payments be recorded as a reduction of income tax expense and reflected within operating cash flows rather than being recorded in paid-in-capital and reflected within financing cash flows.  The standard also clarifies that all cash payments when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows and provides for an accounting policy election to account for forfeitures when they occur.  The amendments in this update were effective for annual and interim periods beginning after December 15, 2016.  Early adoption is permitted in any interim or annual period but must be reflected as of the beginning of the fiscal year.  The Company elected to early adopt the standard in the fourth quarter of 2016 which required us to reflect the adjustments as of January 1, 2016.  The Company has made an accounting policy election to account for forfeitures in compensation cost when they occur.  There was no material impact of this election in the three or six months ended June 30, 2018 or 2017.

 

In March 2017, the FASB issued ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The amendment requires the service cost component be presented in the same line item as compensation costs for the pertinent employees during the period. The other components of net pension cost must be presented outside a subtotal of income from operations, if one is presented. The amendments are effective for annual periods beginning after December 15, 2017 and must be applied retrospectively. The Company adopted ASU 2017-07 in the first quarter of 2018. As a result, we have added an additional line item to our consolidated statements of comprehensive income and restated our 2017 results to reflect the change in accounting principle. Service costs are included in selling and administrative expenses and other components of net pension cost are included in other periodic pension costs.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) that superseded most current revenue recognition guidance, including industry-specific guidance. The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Additionally, the guidance requires disaggregated disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. ASC 606 was adopted by the Company on January 1, 2018 using the modified retrospective method. The cumulative effect of applying the new standard was recorded as an adjustment to the opening balance of retained earnings, as further described below. The comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. For our Uniforms and Related Products and Promotional Products segments, our revenue is primarily generated from the sale of finished products to customers as products are shipped and title passes to the customers. For certain contracts with customers, the Company creates an asset with no alternative use to the Company, and the Company has an enforceable right to payment for performance completed to date. For these contracts, we have moved from a point in time model to an over time model in which our measure of progress is finished goods with no alternative use. We expect the new standard will have no cash impact and does not affect the economics of our underlying customer contracts.

 

 

We recorded a net increase in opening retained earnings of $11.2 million as of January 1, 2018 due to the cumulative impact of ASC 606. The impact on revenues for the three months ended June 30, 2018 was a decrease of $2.9 million as a result of ASC 606. The impact on revenues for the six months ended June 30, 2018 was an increase of $0.8 million as a result of ASC 606.

 

The opening retained earnings adjustment is as follows (in thousands):

 

 

Payment of the cumulative tax adjustment will be made over four years as a change in accounting method.

 

The following tables disaggregate our net sales by major source (in thousands):

 

 

 

Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the obligations under the terms of a contract with a customer are satisfied. This generally occurs when the goods are transferred to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for the goods. Sales taxes, sales discounts and customer rebates are also excluded from revenue. In accordance with ASC 606 revenue is recorded for goods that the customer is obligated to purchase under the termination terms of the contract which have no alternative use. Contract termination terms may involve variable consideration clauses such as discounts and rebates and revenue has been adjusted accordingly in our ASC 606 adjustment. Revenue from our Remote Staffing segment is recognized as services are delivered and did not generate an ASC 606 adjustment in the three or six month periods ended June 30, 2018.

 

The Company does not have any remaining performance obligations related to revenue recorded for ASC 606 for the quarter ended June 30, 2018.

 

 

The impact of adoption of ASC 606 on our consolidated balance sheet and statement of comprehensive income as of June 30, 2018 is as follows (in thousands):

 

Balance Sheet

 

 

In accordance with ASC 606, the Company has recognized contract assets of $46.8 million as of June 30, 2018 for goods produced without an alternative use which the Company has an enforceable right to payment but has not yet been invoiced to the customer. 

 

 

 

The cost of goods sold associated with our ASC 606 adjustment include the cost of the garments, alterations (if applicable) and shipping costs. Selling and administrative expenses consist of sales commissions.

 

 

 

 

Effective March 8, 2016, the Company entered into an amended and restated 5-year credit agreement with Fifth Third Bank that increased its revolving credit facility from $15 million to $20 million and refinanced its then-existing term loan with a new $45 million term loan to help finance the acquisition of substantially all of the assets of BAMKO, Inc. Both loans were based upon the one-month LIBOR rate for U.S. dollar based borrowings. Interest was payable on the term loan at LIBOR plus 0.85% and on the revolving credit facility at LIBOR (rounded up to the next 1/8^th of 1%) plus 0.85%.  The Company paid a commitment fee of 0.10% per annum on the average unused portion of the commitment under the revolving credit facility. This credit agreement was paid in full on February 28, 2017 with the proceeds from a new loan agreement with Branch Banking and Trust Company (“BB&T”).

 

Effective February 28, 2017, the Company entered into a new 7-year credit agreement with BB&T (the “Credit Agreement”) that provided a new revolving credit facility of $35 million which was to terminate on February 25, 2022, and provided a new term loan of $42 million (the “Term Loan”) which matures on February 26, 2024. Both loans were based upon the one-month LIBOR rate for U.S. dollar based borrowings. Interest was payable for each loan at LIBOR (rounded up to the next 1/100^th of 1%) plus 0.75%. The Company paid a commitment fee of 0.10% per annum on the average unused portion of the commitment under the revolving credit facility. 

 

Effective May 2, 2018, and concurrently with the closing of the CID Resources acquisition, the Company entered into an Amended and Restated Credit Agreement, dated as of May 2, 2018 (the “Amended and Restated Credit Agreement”), with its existing lender, BB&T pursuant to which the Company’s existing revolving credit facility was increased from $35 million to $75 million and provided an additional term loan in the principal amount of $85 million. No principal payments are due on the $85 million term loan prior to its maturity. The term of the revolving credit facility was extended until May 2023 and the $85 million term loan matures in May 2020. The Company’s existing term loan in the principal amount of $42 million remains outstanding with a maturity date of February 2024 and with the same amortization schedule. The scheduled amortization for the $42 million Term Loan is as follows: 2018 through 2023 - $6.0 million per year; and 2024 - $1.5 million. The revolving credit facility, $42 million term loan and $85 million term loan are collectively referred to as the “Credit Facilities.”

 

Obligations outstanding under the revolving credit facility and the $42 million term loan generally have a variable interest rate of one-month LIBOR plus 0.68% (2.75% at June 30, 2018). Obligations outstanding under the new $85 million term loan generally have a variable interest rate of one-month LIBOR plus 0.93% for the first twelve months after the effective date (3.00% at June 30, 2018), plus 1.5% for the period from thirteen months through eighteen months after the effective date, plus 1.75% thereafter. The Company is obligated to pay a commitment fee of 0.10% per annum on the average unused portion of the commitment under the revolving credit facility and a commitment fee of 0.25% on the outstanding balance of the $85 million term loan on June 1, 2019 and December 1, 2019. The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of June 30, 2018, there were no outstanding letters of credit.  The term loans do not contain pre-payment penalties.

 

The Amended and Restated Credit Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, restricted payments, and sales of assets. The Amended and Restated Credit Agreement also requires the Company to comply with a fixed charge coverage ratio of at least 1.25:1 and a funded debt to EBITDA ratio not to exceed 4.0:1.  The Credit Facilities are secured by substantially all of the operating assets of the Company as collateral, and the Company’s obligations under the Credit Facilities are guaranteed by all of its domestic subsidiaries. The Company’s obligations under the Credit Facilities are subject to acceleration upon the occurrence of an event of default as defined in the Amended and Restated Credit Agreement. The Company is in full compliance with all terms, conditions and covenants of the Amended and Restated Credit Agreement.

 

In connection with the Credit Agreement and the Amended and Restated Credit Agreement, the Company incurred approximately $0.1 million and $0.2 million of debt financing costs respectively, which primarily consisted of a loan commitment fee and legal fees. These costs are being amortized over the life of both Credit Agreements as additional interest expense.

 

 

Effective July 1, 2013, in order to reduce interest rate risk on its debt, the Company entered into an interest rate swap agreement with Fifth Third Bank, N.A. that was designed to effectively convert or hedge the variable interest rate on a portion of its borrowings to achieve a net fixed rate of 2.53% per annum, beginning July 1, 2014 with a notional amount of $14.3 million. The notional amount of the interest rate swap was reduced by the scheduled amortization of the principal balance of the original term loan of $0.2 million per month through July 1, 2015 and $0.3 million per month through June 1, 2018 with the remaining notional balance of $3.3 million to be eliminated on July 1, 2018. Effective March 8, 2016, the fixed rate on the notional amount was reduced to 2.43%. Effective February 24, 2017, this interest rate swap agreement was terminated. On this date the swap agreement had $0.1 million in cumulative gains in OCI which was reversed to earnings.

 

Effective March 3, 2017, in order to reduce the interest rate risk on its future debt, the Company entered into an interest rate swap agreement (“original swap”) with BB&T that was designed to effectively convert or hedge the variable interest rate on a portion of its future borrowings to achieve a net fixed rate of 3.12% per annum, beginning March 1, 2018 with a notional amount of $18.0 million.  The notional amount of the interest rate swap is reduced by $0.3 million per month beginning April 1, 2018 through February 26, 2024.  Under the terms of the interest rate swap, the Company will receive variable interest rate payments and make fixed interest rate payments on an amount equal to the notional amount at that time.  Changes in the fair value of the interest rate swap designated as the hedging instrument that effectively offset the variability of cash flows associated with the variable rate, long-term debt obligation are recorded in OCI, net of related income tax effects.   On May 2, 2018, in conjunction with the Amended and Restated Credit Agreement, the original  swap was modified (“amended swap”) to achieve a net fixed rate of 3.05% per annum effective May 1, 2018 and the remaining notional amount is $17.5 million.  There were no other changes to the original swap.  As a result of the change, the Company has discontinued hedge accounting for the original swap and has elected not to designate the amended swap.  As of May 2, 2018, the fair value of the original swap was $0.1 million  and will be amortized as interest expense over the remaining life of the amended swap.  Changes to the fair value of the amended swap will be recorded as interest expense.   As of June 30, 2018, there was $0.1 million related to the original swap recorded within OCI.

 

 

NOTE 3 – Periodic Pension Expense:

 

The following table details the net periodic pension expense under the Company's plans for the periods presented:

 

 

The service cost component is included in selling and administrative expenses and the other components are included in other periodic pension costs in our consolidated statements of comprehensive income.

 

Effective June 30, 2013, the Company no longer accrues additional benefits for future service or for future increases in compensation levels for the Company’s primary defined benefit pension plan.

 

Effective December 31, 2014, the Company no longer accrues additional benefits for future service for the Company’s hourly defined benefit plan.

 

There were $0.1 million and $1.5 million in contributions made to the Company’s defined benefit plans during the three-month period ended June 30, 2018 and 2017, respectively. There were $0.1 million and $1.5 million in contributions made to the Company’s defined benefit plans during the six-month period ended June 30, 2018 and 2017, respectively.

 

 

NOTE 4 - Supplemental Cash Flow Information:

 

Cash paid for income taxes was $0.7 million and $3.7 million, respectively, for the six-month periods ended June 30, 2018 and 2017. Cash paid for interest was $0.8 million and $0.3 million, respectively for the six-month periods ended June 30, 2018 and 2017.

 

 

During the three months ended June 30, 2018 and 2017, respectively, the Company received 1,031 and 27,341 shares of its common stock as payment of the exercise price in the exercise of stock options for 6,000 and 71,599 shares.

 

During the six months ended June 30, 2018 and 2017, respectively, the Company received 6,894 and 43,841 shares of its common stock as payment of the exercise price in the exercise of stock options for 26,234 and 113,143 shares.

 

As a result of the adoption of ASC 606 the following amounts were recorded on January 1, 2018: $43.3 million in contract assets, a reduction in inventory of $24.9 million, an increase in accounts payable of $2.6 million, an increase in other current liabilities of $1.1 million, and a decrease in deferred tax assets of $3.5 million.

 

In conjunction with the acquisition of CID, the Company issued 150,094 shares of its common stock with a fair value of $3.8 million as part of the purchase price. 

 

 

NOTE 5 – 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 Company’s results of operations, cash flows, or financial position.

 

 

NOTE 6 – Share-Based Compensation:

 

In 2003, the stockholders of the Company approved the 2003 Incentive Stock and Awards Plan (the “2003 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARS”), restricted stock, performance shares and other stock based compensation.  This plan expired in May of 2013, at which time, the stockholders of the Company approved the 2013 Incentive Stock and Awards Plan (the “2013 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, SARS, restricted stock, performance shares and other stock based compensation. A total of 5,000,000 shares of common stock (subject to adjustment for expirations and cancellations of options outstanding from the 2003 Plan subsequent to its termination) have been reserved for issuance under the 2013 Plan.  All options and SARS under both plans have been or will be granted with exercise prices at least equal to the fair market value of the shares on the date of grant. At June 30, 2018, the Company had 3,497,119 shares of common stock available for grant of share-based compensation under the 2013 Plan.

 

Share-based compensation is recorded in selling and administrative expense in the consolidated statements of comprehensive income. The following table details the share-based compensation expense by type of award and the total related tax benefit for the periods presented:

 

 

Stock options and SARS

 

The Company grants stock options and stock settled SARS to employees that allow them to purchase shares of the Company’s 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.

 

 

A summary of stock option transactions during the six months ended June 30, 2018 follows:

 

 

 

At June 30, 2018, options outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $4.1 million. The weighted-average remaining contractual term was 39 months.

 

Options exercised during the three-month period ended June 30, 2018 and 2017 had intrinsic values of $0.3 million and $1.7 million, respectively.  Options exercised during the six-month period ended June 30, 2018 and 2017 had intrinsic values of $0.9 million and $2.3 million, respectively.

 

The weighted average fair values of the Company’s 11,000 options granted during each of the three-month periods ended June 30, 2018 and 2017 were $10.98 and $7.41, respectively.  The weighted average fair values of the Company’s 98,385 and 101,012 options granted during each of the six-month periods ending June 30, 2018 and 2017 was $6.43 and $5.11, respectively.

 

During the three-month periods ended June 30, 2018 and 2017, respectively, the Company received $0.1 million and $0.7 million in cash from stock option exercises.  Additionally, during the three-month periods ended June 30, 2018 and 2017, respectively, the Company received 1,031 and 27,341 shares of its common stock as payment of the exercise price in the exercise of stock options for 6,000 and 71,599 shares.    During the six-month periods ended June 30, 2018 and 2017, respectively, the Company received $0.4 million and $0.8 million in cash from stock option exercises.  Additionally, during the six-month periods ended June 30, 2018 and 2017, the Company received 6,894 and 43,841 shares of its common stock as payment of the exercise price in the exercise of stock options for 26,234 and 113,143 shares.  The tax benefit recognized for these exercises during the three-month periods ended June 30, 2018 and 2017 was $0.1 million and $0.2 million, respectively.  The tax benefit recognized for these exercises during the six-month periods ended June 30, 2018 and 2017 was $0.1 million and $0.2 million, respectively.

 

The following table summarizes information about stock options outstanding as of June 30, 2018:

 

 

A summary of stock-settled SARS transactions during the six months ended June 30, 2018 follows:

 

 

 

At June 30, 2018, SARS outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $0.5 million. The weighted-average remaining contractual term was 37 months.

 

The weighted average fair values of the Company’s 48,515 and 43,988 SARS granted during the six-month periods ended June 30, 2018 and 2017 was $6.06 and $4.83, respectively.

 

There were no SARS exercised during the three-month period ended June 30, 2018.  There were 68,698 SARS exercised during the three-month period ended June 30, 2017.  SARS exercised during the three-month period ended June 30, 2017 had an intrinsic value of $0.8 million.  The tax benefit recognized for the exercise during the three-month period ended June 30, 2017 was $0.3 million.

 

There were 12,125 and 128,062 SARS exercised during the six-month periods ended June 30, 2018 and 2017, respectively.  SARS exercised during the six-month periods ended June 30, 2018 and 2017 had intrinsic values of $0.1 million and $1.5 million, respectively.  The tax benefit recognized for these exercises during each of the six-month periods ended June 30, 2018 and 2017 was $0.1 million and $0.6 million, respectively.

 

The following table summarizes information about SARS outstanding as of June 30, 2018:

 

 

Options and SARS have never been repriced by the Company in any year.

 

 

The following table summarizes significant assumptions utilized to determine the fair value of options and SARS.

 

 

 

 

¹The 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.

²The expected life in years for awards granted was based on the historical exercise patterns experienced by the Company when the award is made.

³The determination of expected stock price volatility for awards granted in each of the periods ending June 30, 2018 and 2017 was based on historical Superior common stock prices over a period commensurate with the expected life.

⁴The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts.

 

 

Restricted Stock

 

The Company has granted restricted stock to directors and certain employees under the terms of the 2013 Plan which vest at a specified future date, generally after three years, or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan. Expense for each of these grants is based on the fair value at the date of the grant and is being recognized on a straight-line basis over the respective service period. As of June 30, 2018, the Company had $1.1 million of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted average service period of 1.83 years.

 

A summary of restricted stock transactions during the six months ended June 30, 2018 follows:

 

 

Performance Shares

 

In the six months ended June 30, 2018, the Compensation Committee of the Board of Directors approved grants of performance shares under the terms of the 2013 Plan. Under the terms of the grants, certain employees received service-based or service-based and performance-based shares. The service-based awards vest after the service period is met, which is generally three to five years. Expense for these grants is based on the fair value on the date of the grant and is being recognized on a straight-line basis over the respective service period. The performance-based shares generally vest after five years if the performance and service targets are met. The Company evaluates the performance conditions associated with these grants each reporting period to determine the expected number of shares to be issued. Based upon this evaluation, expected expenses for these grants are based on the fair value on the date of the grant are being recognized on a straight-line basis over the respective service period. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan. As of June 30, 2018, the Company had $2.9 million of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted average service period of 3.18 years.

 

A summary of performance share transactions during the six months ended June 30, 2018 follows:

 

 

 

 

NOTE 7 – 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, stock appreciation rights, unvested shares of restricted stock and performance shares.

 

 

There were no awards to purchase shares of common stock outstanding during the three-month period ending June 30, 2018 and June 30, 2017 excluded from the computation of diluted EPS because the award’s exercise prices were greater than the average market price of the common shares.

 

Awards to purchase approximately 149,800 shares of common stock with a weighted average exercise price of $18.65 per share were outstanding during the six-month period ending June 30, 2017, 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. There were no such awards outstanding during the six-month period ending June 30, 2018.

 

 

NOTE 8 – Operating Segment Information:

 

The Company classifies its businesses into three operating segments based on the types of products and services provided. The Uniforms and Related Products segment consists of the sale of uniforms and related items. The Remote Staffing Solutions segment consists of sales of staffing solutions. The Promotional Products segment consists of sales to customers of promotional products and other branded merchandise.

 

The Company evaluates the performance of each operating segment based on several factors of which the primary financial measures are operating segment net sales and income before taxes on income. The accounting policies of the operating segments are the same as those described in Note 1 entitled Summary of Significant Interim Accounting Policies. Amounts for corporate expenses are included in the totals for the Uniforms and Related Products segment. Information related to the operations of the Company's operating segments is set forth below.