SUPERIOR GROUP OF COMPANIES, INC. - Quarter Report: 2019 September (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 September 30, 2019

 

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: ___________________

Securities registered pursuant to Section 12(b) of the Act:

 

	Trading
Title of each class	Symbol(s)	Name of each exchange on which registered
Common Stock $0.001 par value per share	SGC	NASDAQ

 

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 ☒

No ☐

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted 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 such files).

 

Yes ☒

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  ☒
Non-accelerated filer    ☐		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 ☒

 

As of October 17, 2019, the registrant had 15,255,994 shares of common stock outstanding, which is the registrant’s only class of common stock.

 

 

 

		2019				2018
Net sales		$	89,466			$	95,870
Costs and expenses:
Cost of goods sold			58,015				62,070
Selling and administrative expenses			25,260				25,482
Other periodic pension costs			476				96
Interest expense			1,085				940
			84,836				88,588
Income before taxes on income			4,630				7,282
Income tax expense			709				1,160
Net income		$	3,921			$	6,122
Net income per share:
Basic		$	0.26			$	0.41
Diluted		$	0.26			$	0.39
Weighted average number of shares outstanding during the period
Basic			14,947,552				15,010,660
Diluted			15,266,850				15,499,894
Other comprehensive income, net of tax:
Defined benefit pension plans:
Recognition of net losses included in net periodic pension costs		$	236			$	216
Recognition of settlement loss included in net periodic pension costs			213				-
Gain on cash flow hedging activities			(5	)			(3	)
Foreign currency translation adjustment			(316	)			(180	)
Other comprehensive income			128				33
Comprehensive income		$	4,049			$	6,155
Cash dividends per common share		$	0.10			$	0.10

 

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		2019				2018
Net sales		$	268,288			$	251,349
Costs and expenses:
Cost of goods sold			174,226				163,396
Selling and administrative expenses			78,008				69,991
Other periodic pension costs			1,282				289
Interest expense			3,514				1,974
			257,030				235,650
Income before taxes on income			11,258				15,699
Income tax expense			2,180				3,310
Net income		$	9,078			$	12,389
Net income per share:
Basic		$	0.61			$	0.83
Diluted		$	0.59			$	0.80
Weighted average number of shares outstanding during the period
Basic			14,942,565				14,929,513
Diluted			15,272,287				15,505,642
Other comprehensive income, net of tax:
Defined benefit pension plans:
Recognition of net losses included in net periodic pension costs		$	739			$	647
Recognition of settlement loss included in net periodic pension costs			459				-
Loss (gain) on cash flow hedging activities			(16	)			209
Foreign currency translation adjustment			(295	)			(637	)
Other comprehensive income			887				219
Comprehensive income		$	9,965			$	12,608
Cash dividends per common share		$	0.30			$	0.29

 

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		September 30,				December 31,
		2019				2018
ASSETS
Current assets:
Cash and cash equivalents		$	5,452			$	5,362
Accounts receivable, less allowance for doubtful accounts of $2,259 and $2,042, respectively			75,597				64,017
Accounts receivable - other			1,262				1,744
Inventories*			66,076				67,301
Contract assets			38,030				49,236
Prepaid expenses and other current assets			16,481				9,552
Total current assets			202,898				197,212
Property, plant and equipment, net			31,725				28,769
Operating lease right-of-use assets			4,576				-
Intangible assets, net			63,491				66,312
Goodwill			36,252				33,961
Other assets			10,443				8,832
Total assets		$	349,385			$	335,086
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	30,768			$	24,685
Other current liabilities			16,110				14,767
Current portion of long-term debt			15,286				6,000
Current portion of acquisition-related contingent liabilities			1,374				941
Total current liabilities			63,538				46,393
Long-term debt			103,812				111,522
Long-term pension liability			8,422				8,705
Long-term acquisition-related contingent liabilities			3,753				5,422
Long-term operating lease liabilities			2,590				-
Deferred tax liability			6,620				8,475
Other long-term liabilities			4,230				3,648
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 15,240,317 and 15,202,387 shares, respectively.			15				15
Additional paid-in capital			57,077				55,859
Retained earnings			106,426				103,032
Accumulated other comprehensive income (loss), net of tax:
Pensions			(6,475	)			(7,673	)
Cash flow hedges			97				113
Foreign currency translation adjustment			(720	)			(425	)
Total shareholders’ equity			156,420				150,921
Total liabilities and shareholders’ equity		$	349,385			$	335,086

		September 30,				December 31,
		2019				2018
Finished goods		$	57,413			$	58,196
Work in process			730				650
Raw materials			7,933				8,455
Inventories		$	66,076			$	67,301

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																		Accumulated
																		Other
										Additional								Comprehensive				Total
		Common				Common				Paid-In				Retained				(Loss) Income,				Shareholders’
		Shares				Stock				Capital				Earnings				net of tax				Equity
Balance, July 1, 2018			15,311,541			$	15			$	54,998			$	97,664			$	(7,093	)		$	145,584
Common shares issued upon exercise of options, net			2,000								27												27
Share-based compensation expense											378												378
Cash dividends declared ($0.10 per share)															(1,508	)							(1,508	)
Tax benefit from vesting of acquisition related restricted stock											340												340
Shares reacquired and retired			(14,334	)							(51	)			(216	)							(267	)
Comprehensive income (loss):
Net earnings															6,122								6,122
Cash flow hedges, net of taxes of $1																			(3	)			(3	)
Pensions, net of taxes of $68																			216				216
Change in currency translation adjustment, net of taxes of $55																			(180	)			(180	)
Balance, September 30, 2018			15,299,207			$	15			$	55,692			$	102,062			$	(7,060	)		$	150,709
Balance, July 1, 2019			15,255,694			$	15			$	57,166				104,165			$	(7,226	)		$	154,120
Common shares issued upon exercise of options			300								3												3
Share-based compensation expense											(35	)											(35	)
Cash dividends declared ($0.10 per share)															(1,510	)							(1,510	)
Common stock reacquired and retired			(15,677	)							(57	)			(150	)							(207	)
Comprehensive income (loss):
Net earnings															3,921								3,921
Cash flow hedges, net of taxes of $1																			(5	)			(5	)
Pensions, net of taxes of $141																			449				449
Change in currency translation adjustment, net of taxes of $100																			(316	)			(316	)
Balance, September 30, 2019			15,240,317			$	15			$	57,077			$	106,426			$	(7,098	)		$	156,420

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																		Accumulated
																		Other
										Additional								Comprehensive				Total
		Common				Common				Paid-In				Retained				(Loss) Income,				Shareholders’
		Shares				Stock				Capital				Earnings				net of tax				Equity
Balance, January 1, 2018			15,081,947			$	15			$	49,103			$	83,129			$	(7,279	)		$	124,968
ASC 606 adjustment to opening retained earnings															11,245								11,245
Common shares issued upon exercise of options, net			53,164								581				(150	)							431
Restricted shares issued			24,908																				-
Restricted shares issued in acquisition			150,094								3,763												3,763
Common shares issued upon exercise of Stock Appreciation Rights (SARs)			3,428																				-
Share-based compensation expense											1,868												1,868
Tax withheld on exercise of Stock Appreciation Rights (SARs)											(17	)											(17	)
Tax benefit from vesting of acquisition related restricted stock											445												445
Cash dividends declared ($0.29 per share)															(4,335	)							(4,335	)
Shares reacquired and retired			(14,334	)							(51	)			(216	)							(267	)
Comprehensive income (loss):
Net earnings															12,389								12,389
Cash flow hedges, net of taxes of $69																			209				209
Pensions, net of taxes of $203																			647				647
Change in currency translation adjustment, net of taxes of $224																			(637	)			(637	)
Balance, September 30, 2018			15,299,207			$	15			$	55,692			$	102,062			$	(7,060	)		$	150,709
Balance, January 1, 2019			15,202,387			$	15			$	55,859			$	103,032			$	(7,985	)		$	150,921
Common shares issued upon exercise of options			62,994								460				(177	)							283
Restricted shares issued			48,829																				-
Share-based compensation expense											997												997
Tax benefit from vesting of acquisition related restricted stock											30												30
Cash dividends declared ($0.30 per share)															(4,533	)							(4,533	)
Common stock reacquired and retired			(73,893	)							(269	)			(974	)							(1,243	)
Comprehensive income (loss):
Net earnings															9,078								9,078
Cash flow hedges, net of taxes of $3																			(16	)			(16	)
Pensions, net of taxes of $376																			1,198				1,198
Change in currency translation adjustment, net of taxes of $93																			(295	)			(295	)
Balance, September 30, 2019			15,240,317			$	15			$	57,077			$	106,426			$	(7,098	)		$	156,420

 

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		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	9,078			$	12,389
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			6,339				5,745
Provision for bad debts - accounts receivable			719				409
Share-based compensation expense			997				1,867
Deferred income tax benefit			(2,136	)			(278	)
Gain on sale of property, plant and equipment			(5	)			-
Change in fair value of acquisition-related contingent liabilities			(272	)			(1,212	)
Changes in assets and liabilities, net of acquisition of business:
Accounts receivable - trade			(12,251	)			(5,542	)
Accounts receivable - other			481				(401	)
Contract assets			11,206				(3,779	)
Inventories			(595	)			5,742
Prepaid expenses and other current assets			(7,051	)			(226	)
Other assets			(2,233	)			(2,343	)
Accounts payable and other current liabilities			5,523				(1,077	)
Long-term pension liability			1,292				292
Other long-term liabilities			750				(283	)
Net cash provided by operating activities			11,842				11,303
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment			(6,424	)			(3,881	)
Proceeds from disposals of property, plant and equipment			5				-
Acquisition of businesses, net of acquired cash			-				(85,597	)
Net cash used in investing activities			(6,419	)			(89,478	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings of debt			125,121				170,713
Repayment of debt			(123,600	)			(91,423	)
Payment of cash dividends			(4,533	)			(4,335	)
Payment of acquisition-related contingent liability			(961	)			(3,032	)
Proceeds received on exercise of stock options			283				432
Tax benefit from vesting of acquisition-related restricted stock			30				445
Tax withholding on exercise of stock rights			-				(17	)
Common stock reacquired and retired			(1,243	)			(268	)
Net cash provided by (used in) financing activities			(4,903	)			72,515
Effect of currency exchange rates on cash			(430	)			(174	)
Net increase (decrease) in cash and cash equivalents			90				(5,834	)
Cash and cash equivalents balance, beginning of year			5,362				8,130
Cash and cash equivalents balance, end of period		$	5,452			$	2,296

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NOTE 1 – Basis of Presentation:

 

a) Basis of presentation

 

The condensed consolidated financial statements include the accounts of Superior Group of Companies, Inc. and its wholly-owned subsidiaries, The Office Gurus, LLC, SUG Holding, Superior Group Holdings, Inc., 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; and 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”, “Superior”, “we”, “our”, or “us”. Effective on May 3, 2018, Superior Uniform Group, Inc. changed its name to Superior Group of Companies, Inc.

 

The accompanying unaudited 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. Intercompany items have been eliminated in consolidation. These condensed 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, 2018, 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.

 

We refer to the condensed consolidated financial statements collectively as “financial statements,” and individually as “statements of comprehensive income”, “balance sheets”, “statements of stockholders’ equity”, and “statements of cash flows” herein.

 

b) Recent Accounting Pronouncements

 

We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be not applicable.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) and July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Targeted Improvements (collectively “Topic 842”). Topic 842 establishes a new lease model, referred to as the right-of-use (ROU) model that brings substantially all leases onto the balance sheet. This standard requires lessees to recognize leased assets (ROU Assets) and lease liabilities on the balance sheet and disclose key information about the leasing arrangements in their financial statements. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted Topic 842 effective on January 1, 2019 using the modified retrospective transition approach that allows a reporting entity to use the effective date as its date of initial application and not restate the comparative periods in the period of adoption when transitioning to the new standard. Consequently, the requisite financial information and disclosures under the new standard are excluded for dates and periods prior to January 1, 2019. In addition, the Company elected to use a number of optional simplification and practical expedients (reliefs) permitted under the transition guidance within the new standard, including allowing the Company to combine fixed lease and non-lease components, apply the short-term lease exception to all leases of one year or less, and utilize the ‘package of practical expedients’, which permits the Company to not reassess prior accounting conclusions with respect to lease identification, lease classification and initial direct costs under Topic 842. The Company did not elect the use-of hindsight or the practical expedient pertaining to land easement; the latter not being applicable to the Company. Adoption of this new standard resulted in the recognition of $4.1 million of operating lease liabilities ($1.0 million in other current liabilities and $3.1 million in long-term operating lease liabilities) which represented the present value of the remaining lease payments of $4.6 million, discounted using the Company’s lease discount rate of 5.74% and $4.9 million of operating lease right-of-use assets, which represents the lease liability of $4.1 million adjusted for prepaid rent to $0.8 million that was previously presented within current prepaid expenses and other current assets and other assets on the accompanying balance sheet prior to adoption. Refer to Note 10 for the impact to the financial statements as of September 30, 2019.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows entities to elect to reclassify the income tax effects resulting from the Tax Cuts and Jobs Act (Tax Act) on items within accumulated other comprehensive income to retained earnings and requires additional related disclosures. This standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company elected not to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings. The Company’s adoption of this standard on January 1, 2019 did not have a material impact on its financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In August 2019, the FASB proposed an amendment to ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” that would delay the effective date for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. Adoption will require a modified retrospective approach beginning with the earliest period presented. The Company is currently evaluating the potential impact this standard will have on its financial statements.

 

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by the difference between a reporting unit's carrying value and its fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company’s adoption of this standard is not expected to have a material impact on its financial statements.

 

 

 

In August 2018, the FASB issued ASU 2018-15, “Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update also requires an entity to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This update is effective for fiscal years beginning after December 15, 2019 and may be applied prospectively or retrospectively. The Company’s adoption of this standard is not expected to have a material impact on its financial statements.

 

NOTE 2 - Long-Term Debt:

 

 

Effective on February 28, 2017, the Company entered into a credit agreement with Branch Banking and Trust Company (“BB&T”) (the “Credit Agreement”) that provided a revolving credit facility of $35 million maturing on February 25, 2022 and a term loan of $42 million maturing on February 26, 2024 (“2017 Term Loan”).

 

Effective on May 2, 2018, and concurrently with the closing of the CID Resources acquisition, the Company entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with BB&T pursuant to which the Company’s existing revolving credit facility was increased from $35 million to $75 million and which provided an additional term loan in the principal amount of $85 million due May 2020 (“2018 Term Loan”). The term of the revolving credit facility was extended until May 2023.

 

On January 22, 2019, the Company entered into a First Amendment to the Amended and Restated Credit Agreement pursuant to which the existing 2018 Term Loan was restructured. The Company used $20 million borrowed under its existing revolving credit facility to reduce the principal amount to $65 million. The maturity date of the 2018 Term Loan was extended to January 22, 2026.

 

On September 27, 2019, the Company entered into a Second Amendment to the Amended and Restated Credit Agreement, which (i) increased the Company’s maximum permitted funded debt to EBITDA ratio under the Amended and Restated Credit Agreement from 4.0:1 to 5.0:1 and (ii) applied a tiered interest rate structure to the Company’s existing loans in the event that its funded debt to EBITDA ratio exceeds 4.0:1. The interest rate on such loans will equal LIBOR plus a margin that adjusts quarterly and is based on the Company’s funded debt to EBITDA ratio.

 

Contractual principal payments for the 2017 Term Loan are as follows: 2019 through 2023 - $6.0 million per year; and 2024 - $1.5 million. Contractual principal payments for the 2018 Term Loan are as follows: 2019 - $8.5 million, 2020 through 2025 - $9.3 million per year; and 2026 - $0.8 million. The term loans do not contain pre-payment penalties.

 

Obligations outstanding under the 2018 Term Loan have a variable interest rate of LIBOR plus a margin of between 0.85% and 1.65% (based on the Company’s funded debt to EBITDA ratio) (2.89% at September 30, 2019). Obligations outstanding under the revolving credit facility and the 2017 Term Loan generally have a variable interest rate of one-month LIBOR plus a margin of between 0.68% and 1.50% (based on the Company’s funded debt to EBITDA ratio) (2.72% at September 30, 2019). The available balance under the revolving credit facility is reduced by outstanding letters of credit. At September 30, 2019, the Company had undrawn capacity of $41.1 million under the revolving credit facility.

 

The revolving credit facility, 2017 Term Loan and 2018 Term Loan are collectively referred to as the “Credit Facilities”.

 

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 maintain a fixed charge coverage ratio (as defined in the Amended and Restated Credit Agreement) of at least 1.25:1 and a funded debt to EBITDA ratio (as defined in the Amended and Restated Credit Agreement) not to exceed 5.0:1. As of September 30, 2019, the Company was in compliance with these ratios. 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.

 

Effective on 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, at that time, 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 were recorded in other comprehensive income, 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 on May 1, 2018 and the remaining notional amount was $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 is being amortized as interest expense over the remaining life of the amended swap. Changes to the fair value of the amended swap are recorded as interest expense. As of September 30, 2019, the negative fair value of the amended swap was $0.3 million and was included in other current liabilities.

 

 

 

NOTE 3 – Periodic Pension Expense:

 

The following table details the net periodic pension expense under the Company’s plans for the periods presented (in thousands):

 

 

The pension settlement losses included in the table above resulted from lump sum pension payments made to various employees upon their retirement or termination during the periods specified. The pension settlement losses did not require a cash outlay by the Company and did not increase the Company’s total pension expense over time, as the charge was an acceleration of costs that otherwise would be recognized as pension expense in future periods. The service cost component is included in selling and administrative expenses in our statements of comprehensive income and the other components of net periodic pension cost are included in other periodic pension costs in our statements of comprehensive income.

 

Effective on 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 on 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 $0.1 million in contributions made to the Company’s defined benefit plans during the nine months ended September 30, 2019 and 2018, respectively.

 

NOTE 4 – Net Sales:

 

On January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively “ASC 606”) using the modified retrospective method to all contracts not completed as of January 1, 2018. The Company recorded a net increase to retained earnings of $11.2 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606.

 

Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the earnings process is complete. For certain contracts with customers in which the Company has an enforceable right to payment for goods with no alternative use, revenue is recognized over time upon receipt of finished goods into inventory. Contract termination terms may involve variable consideration clauses such as discounts and rebates, and revenue has been adjusted accordingly for these provisions. Revenue for goods that do have an alternative use or that the customer is not obligated to purchase under the terms of a contract is generally recognized when the goods are transferred to the customer. The Company includes shipping and handling fees billable to customers in net sales. Shipping and handling activities that occur after the transfer of promised goods are accrued as control is transferred to the customer rather than being treated as a separate performance obligation. Revenue for our Remote Staffing segment is recognized as services are delivered. Revenue is measured as the amount of consideration we expect to receive in exchange for the goods or services. Sales taxes, sales discounts and customer rebates are also excluded from revenue. Refer to Note 9 for the disaggregation of revenues by operating segment.

 

Contract Assets

 

The following table provides information about accounts receivables - trade and contract assets and contract liabilities from contracts with customers (in thousands):

 

 

Contract assets relate to goods produced without an alternative use for which the Company has an enforceable right to payment but which have not yet been invoiced to the customer. The decrease in contract assets during the nine months ended September 30, 2019 was primarily related to the timing of shipments to customers and receipts from suppliers for finished goods with no alternative use within the Uniforms and Related Products segment. The majority of the amounts included in contract assets on December 31, 2018 were transferred to accounts receivable during the nine months ended September 30, 2019. Contract liabilities relate to payments received in advance of the Company completing its performance under a contract. Contract liabilities are included in other current liabilities in our balances sheets.

 

 

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 is not expected to have a material impact on the Company’s results of operations, cash flows, or financial position.

 

NOTE 6 – Share-Based Compensation:

 

In May 2013, 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, stock appreciation rights (“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 previous plan) have been reserved for issuance under the 2013 Plan. All options and SARs 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 September 30, 2019, the Company had 3,320,743 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 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 (in thousands):

 

 

(1)	During the three and nine months ended September 30, 2019, the Company reversed $0.5 million of previously recognized expense for certain performance awards after determining that the performance conditions are not expected to be met.

 

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. 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 stock options and SARs granted prior to August 3, 2018 vested immediately when granted. Awards issued thereafter vest two years after the grant date. Employee awards expire five years after the grant date, and those issued to directors expire ten years after the grant date. The Company issues new shares upon the exercise of stock options and SARs.

 

A summary of stock option transactions during the nine months ended September 30, 2019 follows:

 

 

(1)	The weighted average grant date fair value of stock options granted was $3.96 per share.

 

 

As of September 30, 2019, the Company had $0.4 million in unrecognized compensation related to nonvested stock options to be recognized over the remaining weighted average vesting period of 1.3 years.

 

A summary of stock-settled SARs transactions during the nine months ended September 30, 2019 follows:

 

 

(1)	The weighted average grant date fair value of SARs granted was $3.97 per share.

 

As of September 30, 2019, the Company had $0.1 million in unrecognized compensation related to nonvested SARs to be recognized over the remaining weighted average vesting period of 1.3 years.

 

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.

 

A summary of restricted stock transactions during the nine months ended September 30, 2019 follows:

 

 

As of September 30, 2019, the Company had $1.3 million of unrecognized compensation cost related to nonvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 1.6 years.

 

Performance Shares

 

Under the terms of the grants, certain employees received service-based or service-based and performance-based shares, to which we collectively refer to as performance 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. During the three and nine months ended September 30, 2019, the Company reversed $0.5 million of previously recognized expense for certain awards after determining that the performance conditions are not expected to be met. Expenses for grants of performance shares are recognized on a straight-line basis over the respective service period based on the grant date fair value and expected number of shares to be issued. The awards are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan.

 

A summary of performance share transactions during the nine months ended September 30, 2019 follows:

 

 

As of September 30, 2019, the Company had $1.5 million of unrecognized compensation cost related to nonvested performance share grants expected to be recognized over the remaining weighted average service period of 2.1 years.

 

 

NOTE 7 – Income Taxes:

 

The Company calculates its interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, the Company makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date income or loss. The tax expense or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.

 

In addition, the effect of changes in enacted tax laws or rates, tax status, or judgment on the attainment of beginning-of-the-year deferred taxes in future years is recognized in the interim period in which the change occurs.

 

The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year and permanent and temporary differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or the tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.

 

For the three months ended September 30, 2019, the Company recorded a provision for income taxes of $0.7 million, which represents an effective tax rate of 15.3%. For the three months ended September 30, 2018, the Company recorded a provision for income taxes of $1.2 million, which represents an effective tax rate of 15.9%. For the nine months ended September 30, 2019, the Company recorded a provision for income taxes of $2.2 million, which represents an effective tax rate of 19.4%. For the nine months ended September 30, 2018, the Company recorded a provision for income taxes of $3.3 million, which represents an effective tax rate of 21.1%. The decreases in the effective tax rates were primarily due to a reduction in non-deductible acquisition expense and a decrease in the Global Intangible Low Tax Income (“GILTI”) tax, partially offset by the impact of lower contingent liability adjustments.

 

The difference between the statutory Federal income tax rate and the actual effective income tax rate is accounted for as follows:

 

 

 

NOTE 8 – Net Income Per Share:

 

The Company’s basic net income per share is computed based on the weighted average number of shares of common stock outstanding for the period. Diluted net income per share includes the effect of the Company’s outstanding stock options, stock appreciation rights, unvested shares of restricted stock and unvested performance shares, if the inclusion of these items is dilutive.

 

The following table presents a reconciliation of basic and diluted net income per share for the three and nine months ended September 30, 2019 and 2018:

 

 

Awards to purchase approximately 568,471 and 192,000 shares of common stock with weighted average exercise prices of $19.02 and $23.17 per share were outstanding during the three months ended September 30, 2019 and 2018, 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.

 

Awards to purchase approximately 408,854 and 192,000 shares of common stock with weighted average exercise prices of $20.07 and $23.17 per share were outstanding during the nine months ended September 30, 2019 and 2018, 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.

 

 

 

 

NOTE 9 – 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 sales to customers 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 net sales and income before taxes on income. Amounts for corporate expenses are included in the totals for the Uniforms and Related Products segment. To better reflect the way in which management now reviews the Company’s operating results, in the third quarter of 2019, the Company changed the composition of total assets for each reportable segment to exclude intercompany balances. This change has been made to all periods presented within this Quarterly Report on Form 10-Q. 

 

The following tables set forth financial information related to the Company's operating segments (in thousands):

 

 

 

(1)	Intercompany balances that were previously included in total assets for each reportable segment have been excluded.

 

 

 

(1)	Intercompany balances that were previously included in total assets for each reportable segment have been excluded.

 

 

 

NOTE 10 – Leases:

 

The Company primarily leases factories, warehouses, call centers, office space and equipment for various terms under long-term, non-cancelable operating lease agreements. A right-of-use asset represents the Company’s right to use an underlying asset for the lease term and a lease liability represents the Company’s obligation to make lease payments arising from the lease. These leases generally have expected lease terms of one to eight years. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties. Options to renew lease terms are included in determining the right-of-use asset and lease liability when it is reasonably certain that the Company will exercise that option. Certain of the lease agreements include rental payments adjusted periodically for inflation and generally require the Company to pay real estate taxes, insurance, and repairs. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. As of September 30, 2019, the Company had recognized $4.0 million of operating lease obligation ($1.4 million in other current liabilities and $2.6 million in long-term operating lease liabilities), which represents the present value of the remaining lease payments, and $4.6 million of operating lease right-of-use assets, which represents the lease liability of $4.0 million adjusted for prepaid rent of $0.6 million. The depreciable-life of right-of-use assets is generally limited by the expected lease term. The Company does not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.

 

The components of lease cost were as follows (in thousands):

 

 

Cash flow and noncash information related to our operating leases were as follows (in thousands):

 

Other supplemental information related to our operating leases was as follows:

 

Maturities of operating lease liabilities as of September 30, 2019 were as follows (in thousands):

 

 

 

 

NOTE 11 – Acquisition of Businesses:

 

CID Resources

 

On May 2, 2018, the Company acquired CID Resources, Inc., a Delaware corporation (“CID”), which manufactures medical uniforms, lab coats, and layers, and sells its products to specialty uniform retailers, ecommerce medical uniform retailers, and other retailers.

 

The purchase price in the acquisition consisted of the following: (a) approximately $84.4 million in cash at closing, (b) the issuance of 150,094 shares of the Company’s common stock to an equity holder of CID, and (c) $2.5 million in cash as a result of the cash and working capital adjustment.

 

Fair Value of Consideration Transferred

 

A Summary of the purchase price is as follows (in thousands):

 

 

Assets Acquired and Liabilities Assumed

 

The total purchase price was allocated to the tangible and intangible assets and liabilities of CID based on their estimated fair values as of May 2, 2018. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was allocated to goodwill.

 

The following table presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of CID based on their estimated fair values as of the effective date of the transaction (in thousands):

 

 

The amounts in the table above are reflective of measurement period adjustments made during the second quarter of 2019, which included an increase of $2.4 million to goodwill, a decrease of $1.8 million to inventory, and an increase of $0.6 million to accounts payable. The measurement period adjustments did not have a significant impact on the Company’s statements of operations or cash flows. The Company finalized the purchase price allocation of CID during the second quarter of 2019.

 

The Company recorded $41.0 million in identifiable intangibles at fair value, consisting of $26.0 million in acquired customer relationships, $0.8 million for a non-compete agreement and $14.2 million for the brand name. The intangible assets associated with the customer relationships are being amortized for fifteen years beginning on May 2, 2018 and the non-compete agreement is being amortized for five years. The trade name is considered an indefinite-life asset and as such is not being amortized. The Company recognized amortization expense on these acquired intangible assets of $0.5 million for each of the three months ended September 30, 2019 and 2018. The Company recognized amortization expense on these acquired intangible assets of $1.4 million and $0.8 million for the nine months ended September 30, 2019 and 2018, respectively.

 

Goodwill was calculated as the difference between the fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. This goodwill will not be deductible for tax purposes.

 

 

On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the nine months ended September 30, 2018, net sales would have increased by approximately $22.3 million and net income would have increased by approximately $2.6 million, or $0.17 per share.

 

Other Acquisitions of Businesses

 

BAMKO. On March 8, 2016, the Company closed on the acquisition of substantially all of the assets of BAMKO, Inc. The transaction had an effective date of March 1, 2016. The transaction also included the acquisition of BAMKO, Inc.’s subsidiaries in Hong Kong, China, Brazil and England as well as an affiliate in India. BAMKO is a promotional products, merchandise, and packaging company that serves the world’s most prominent brands. The purchase price included a potential future payment of approximately $5.5 million in additional contingent consideration through 2021. The estimated fair value for acquisition-related contingent consideration payable was $3.1 million as of September 30, 2019. The current portion of $1.1 million is expected to be paid in the second quarter of 2020. The Company will continue to evaluate this liability for remeasurement at the end of each reporting period and any change will be recorded in the Company’s statements of comprehensive income.

 

Public Identity. On August 21, 2017, BAMKO acquired substantially all of the assets and assumed certain liabilities of PublicIdentity, Inc. (“Public Identity”) of Los Angeles, CA. Public Identity is a promotional products and branded merchandise agency that provides innovative, high quality merchandise and promotional products to corporate clients and universities across the country. The purchase price included future payments of approximately $0.4 million in additional consideration through 2020. The estimated fair value for acquisition-related consideration payable was $0.1 million as of September 30, 2019.

 

Tangerine Promotions. On November 30, 2017, BAMKO acquired substantially all of the assets of Tangerine Promotions, Ltd and Tangerine Promotions West, Inc (collectively “Tangerine”). The transaction had an effective date of December 1, 2017. Tangerine is a promotional products and branded merchandise agency that serves many well-known brands, and is one of the leading providers of Point-of-Purchase (POP) and Point-of-Sale (POS) merchandise in the country. The purchase price included potential future payments of approximately $3.2 million in additional contingent consideration through 2021. The estimated fair value for acquisition-related contingent consideration payable was $2.0 million as of September 30, 2019. The current portion of $0.3 million is expected to be paid in the second quarter of 2020. The Company will continue to evaluate this liability for remeasurement at the end of each reporting period and any change will be recorded in the Company’s statements of comprehensive income.

 

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