SUPERIOR GROUP OF COMPANIES, INC. - Quarter Report: 2019 March (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 March 31, 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: ___________________

 

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  [X]
			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 April 23, 2019, the registrant had 15,244,692 shares of common stock outstanding, which is the registrant's only class of common stock.

 

 

 

		2019				2018
Net sales		$	86,552			$	73,087
Costs and expenses:
Cost of goods sold			56,284				48,212
Selling and administrative expenses			25,863				21,182
Other periodic pension costs			259				96
Interest expense			1,170				277
			83,576				69,767
Income before taxes on income			2,976				3,320
Income tax expense			600				870
Net income		$	2,376			$	2,450
Weighted average number of shares outstanding during the period
(Basic)			14,927,341				14,821,659
(Diluted)			15,262,654				15,457,629
Per Share Data:
Basic
Net income		$	0.16			$	0.17
Diluted
Net income		$	0.16			$	0.16
Other comprehensive income, net of tax:
Defined benefit pension plans:
Recognition of net losses included in net periodic pension costs			247				216
Loss (gain) on cash flow hedging activities			(5	)			140
Foreign currency translation adjustment			(28	)			52
Other comprehensive income			214				408
Comprehensive income		$	2,590			$	2,858
Cash dividends per common share		$	0.1000			$	0.0950

---

 

		March 31,
		2019				December 31,
		(Unaudited)				2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	6,824			$	5,362
Accounts receivable, less allowance for doubtful accounts of $2,004 and $2,042, respectively			63,610				64,017
Accounts receivable - other			1,431				1,744
Inventories*			65,753				67,301
Contract assets			47,359				49,236
Prepaid expenses and other current assets			11,488				9,552
TOTAL CURRENT ASSETS			196,465				197,212
PROPERTY, PLANT AND EQUIPMENT, NET			29,388				28,769
OPERATING LEASE RIGHT-OF-USE ASSETS			4,581				-
OTHER INTANGIBLE ASSETS, NET			65,389				66,312
GOODWILL			33,955				33,961
OTHER ASSETS			9,796				8,832
		$	339,574			$	335,086
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	24,802			$	24,685
Other current liabilities			15,703				14,767
Current portion of long-term debt			15,286				6,000
Current portion of acquisition-related contingent liabilities			941				941
TOTAL CURRENT LIABILITIES			56,732				46,393
LONG-TERM DEBT			101,931				111,522
LONG-TERM PENSION LIABILITY			8,643				8,705
LONG-TERM ACQUISITION-RELATED CONTINGENT LIABILITIES			5,622				5,422
OPERATING LEASE LIABILITIES			2,866				-
DEFERRED TAX LIABILITY			7,365				8,475
OTHER LONG-TERM LIABILITIES			4,690				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 - 15,229,775 and 15,202,387, respectively.			15				15
Additional paid-in capital			56,536				55,859
Retained earnings			102,945				103,032
Accumulated other comprehensive income (loss), net of tax:
Pensions			(7,426	)			(7,673	)
Cash flow hedges			108				113
Foreign currency translation adjustment			(453	)			(425	)
TOTAL SHAREHOLDERS' EQUITY			151,725				150,921
		$	339,574			$	335,086

---

 

																		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			33,045								383				(126	)							257
Restricted shares issued			24,908																				-
Common shares issued upon exercise of Stock Appreciation Rights (SARs)			3,428																				-
Share-based compensation expense											1,052												1,052
Tax withheld on exercise of Stock Appreciation Rights (SARs)											(17	)											(17	)
Tax benefit from vesting of acquisition related restricted stock											105												105
Cash dividends declared ($.095 per share)															(1,402	)							(1,402	)
Comprehensive Income (Loss):
Net earnings															2,450								2,450
Net change during the period related to:
Cash flow hedges, net of taxes of $45																			140				140
Pensions, net of taxes of $68																			216				216
Change in currency translation adjustment, net of taxes of $9																			52				52
Comprehensive Income:																							2,858
Balance, March 31, 2018			15,143,328				15			$	50,626			$	95,296			$	(6,871	)		$	139,066
Balance, January 1, 2019			15,202,387			$	15			$	55,859			$	103,032			$	(7,985	)		$	150,921
Common shares issued upon exercise of options			44,161								369				(159	)							210
Restricted shares issued			38,829																				-
Share-based compensation expense											481												481
Tax benefit from vesting of acquisition related restricted stock											30												30
Cash dividends declared ($ .10 per share)															(1,515	)							(1,515	)
Common stock reacquired and retired			(55,602	)							(203	)			(789	)							(992	)
Comprehensive Income (Loss):
Net earnings															2,376								2,376
Net change during the period related to:
Cash flow hedges, net of taxes of $1																			(5	)			(5	)
Pensions, net of taxes of $78																			247				247
Change in currency translation adjustment, net of taxes of $5																			(28	)			(28	)
Comprehensive Income:																							2,590
Balance, March 31, 2019			15,229,775			$	15			$	56,536			$	102,945			$	(7,771	)		$	151,725

---

 

		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	2,376			$	2,450
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization			2,060				1,626
Provision for bad debts - accounts receivable			138				157
Share-based compensation expense			481				1,052
Deferred income tax benefit (provision)			(1,182	)			162
Gain on sale of property, plant and equipment			(3	)			-
Change in fair value of acquisition-related contingent liabilities			201				209
Changes in assets and liabilities:
Accounts receivable - trade			309				2,147
Accounts receivable - other			312				(259	)
Contract assets			1,876				(3,780	)
Inventories			1,522				3,742
Prepaid expenses and other current assets			(2,197	)			27
Other assets			(1,503	)			(1,564	)
Accounts payable and other current liabilities			(12	)			(7,132	)
Long-term pension liability			262				97
Other long-term liabilities			1,099				450
Net cash provided by (used in) operating activities			5,739				(616	)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment			(1,723	)			(1,055	)
Proceeds from disposals of property, plant and equipment			3				-
Net cash used in investing activities			(1,720	)			(1,055	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt			54,856				31,657
Repayment of long-term debt			(55,161	)			(24,642	)
Payment of cash dividends			(1,515	)			(1,402	)
Payment of acquisition-related contingent liability			-				(2,000	)
Proceeds received on exercise of stock options			210				257
Tax benefit from vesting of acquisition-related restricted stock			30				105
Tax withholding on exercise of stock rights			-				(17	)
Common stock reaquired and retired			(992	)			-
Net cash (used in) provided by financing activities			(2,572	)			3,958
Effect of currency exchange rates on cash			15				25
Net increase in cash and cash equivalents			1,462				2,312
Cash and cash equivalents balance, beginning of year			5,362				8,130
Cash and cash equivalents balance, end of period		$	6,824			$	10,442

---

 

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, 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 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, 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.

 

b) Cash and cash equivalents

 

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.

 

c) Revenue recognition

 

Effective January, 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. Results for reporting periods beginning after January 1 2018 are presented under ASC 606 while comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company recorded a net change in beginning retained earnings of $11.2 million as of January 1, 2018 due to the cumulative effect 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 we have moved from a point in time model to an over time model in which we recognize revenue 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 and/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. 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. The new standard has no cash impact and does not affect the economics of our underlying customer contracts.

 

Compared to the respective prior year quarter, the impact of adoption of ASC 606 was a $1.8 million reduction in revenues for the three months ended March 31, 2019, and a $3.8 million increase in revenues for the three months ended March 31, 2018. 

 

 

The impact of adoption of ASC 606 on our consolidated balance sheet and statement of comprehensive income as of March 31, 2019 is as follows (in thousands):

 

 

 

In accordance with ASC 606, the Company has recognized contract assets of $47.3 million as of March 31, 2019 for 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 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.

 

Revenue from our Remote Staffing segment is recognized as services are delivered.

 

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 $1.0 million and $0.8 million for the three-month periods ended March 31, 2019 and 2018, respectively.

 

e) Cost of goods sold and 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 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 $3.4 million and $2.7 million for the three-month periods ended March 31, 2019 and 2018, respectively.

 

 

f) Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method or average cost) or net realizable value. Judgments and estimates are used in determining the likelihood that goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 

g) Accounting for income taxes

 

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

 

h) Employee benefit plan settlements

 

The Company recognizes settlement gains and losses in its financial statements when the cost of all settlements in a year is greater than the sum of the service cost and interest cost components of net periodic pension cost for the plan for the year.

 

i) Earnings per share

 

Historical basic per share data is based on the weighted average number of shares outstanding. Historical diluted per share data is reconciled by adding to weighted average shares outstanding the dilutive impact of the exercise of outstanding stock options, stock-settled appreciation rights, restricted stock, and performance shares.

 

j) 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. 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 was $17.5 million. 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. Changes to the fair value of the amended swap are recorded as interest expense. 

 

k) 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.

 

 

l) Comprehensive income

 

Other comprehensive income (loss) is defined as the change in equity during a period, from transactions and other events, excluding changes resulting from investments by owners (e.g., supplemental stock offering) and distributions to owners (e.g., dividends). Components of comprehensive income include changes in foreign currency translation adjustments (net of tax), pension plan adjustments (net of tax), and changes in the fair value of cash flow hedges (net of tax).

 

m) Operating segments

 

The Financial Accounting Standards Board (“FASB”) establishes standards for the way that public companies report information about operating segments in annual financial statements and establishes standards for related disclosures about product and services, geographic areas and major customers. The Company has reviewed the standard and determined that it has three reportable segments, Uniforms and Related Products, Remote Staffing Solutions and Promotional Products.

 

n) Share-based compensation

 

The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. The Company grants options, stock-settled stock appreciation rights, restricted stock, and performance shares. At March 31, 2019, the Company had 3,308,588 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, either at the date of grant or over a subsequent vesting period, 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.

 

o) Recently Adopted Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) and July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 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 on 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 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 obligation liabilities ($1 million in other current liabilities and $3.1 million in operating lease liability) which represents 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 expense and other current assets and other assets on the accompanying condensed consolidated balance sheet prior to adoption. Refer to Note 10 for the impact to the financial statements as of March 31, 2019.

 

 

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 adoption of this standard is not expected to have a material impact on the consolidated condensed financial statements.

 

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, however, early adoption is permitted. The Company’s adoption of this standard on January 1, 2019 did not have a material impact on its consolidated financial statements.

 

No other new accounting pronouncement recently issued or newly effective had or is expected to have a material impact on the consolidated financial statements of Superior Group of Companies, Inc. and Subsidiaries.

 

 

 

 

Effective February 28, 2017, the Company entered into a 7-year credit agreement with BB&T (the “Credit Agreement”) that provided a revolving credit facility of $35 million which was to terminate on February 25, 2022, and provided a term loan of $42 million, 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 pays a commitment fee of 0.10% per annum on the average unused portion of the commitment under the 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 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. No principal payments were 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 was to mature in May 2020. The Company’s existing term loan with the original 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: 2019 through 2023 - $6.0 million per year; and 2024 - $1.5 million.

 

 

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% (3.17% at March 31, 2019). The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of March 31, 2019, there were no outstanding letters of credit. The term loans do not contain pre-payment penalties.

 

On January 22, 2019, the Company entered into a First Amendment to the Amended and Restated Credit Agreement pursuant to which the existing $85 million 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 on the loan was extended to January 22, 2026 and the interest rate was lowered to a variable interest rate of LIBOR plus 0.85% (3.34% at March 31, 2019). The scheduled amortization for the $65 million term loan is as follows: 2019 - $8.5 million, 2020 through 2025 - $9.3 million per year; and 2026 - $0.8 million. The revolving credit facility, $42 million term loan and $65 million term loan are collectively referred to as the “Credit Facilities”.

 

The Amended and Restated Credit Agreement, as amended, 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, as amended, also requires the Company to maintain a fixed charge coverage ratio of at least 1.25:1 and a funded debt to EBITDA ratio not to exceed 4.0:1. As of March 31, 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, as amended.

 

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 were 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 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 March 31 2019, the negative fair value of the amended swap was $0.1 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 three-month periods ended March 31:

(In thousands)

 

 

 

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 in contributions made to the Company’s defined benefit plans during the three-month periods ended March 31, 2019 and 2018, respectively.

 

 

 

NOTE 4 - Supplemental Cash Flow Information:

 

Cash paid for income taxes was $0.2 million and $0.4 million, respectively, for the three-month periods ended March 31, 2019 and 2018. Cash paid for interest was $1.0 million and $0.2 million, respectively for the three-month periods ended March 31, 2019 and 2018.

 

During the three months ended March 31, 2019 and 2018, respectively, the Company received 11,183 and 5,863 shares of its common stock as payment of the exercise price in the exercise of stock options for 27,172 and 20,234 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 an increase in deferred tax liabilities of $3.5 million.

 

As a result of the adoption of ASC 842 the following amounts were recorded on January 1, 2019: a $4.9 million operating lease right-of-use asset; a decrease in prepaid expenses and other current assets of $0.1 million; a reduction in other assets of $0.7 million; an increase in other current liabilities of $1.0 million; and an operating lease liability of $3.1 million.

 

 

 

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 March 31, 2019, the Company had 3,308,588 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 or after a two-year period. 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 three months ended March 31, 2019 follows:

 

 

At March 31, 2019, 568,498 options outstanding, all of which were fully vested and exercisable and 164,247 nonvested options, had an aggregate intrinsic value of $1.4 million. The weighted-average remaining contractual term was 40 months.

 

Options exercised during the three-month periods ended March 31, 2019 and 2018 had intrinsic values of $0.6 million and $0.6 million, respectively.

 

 

The weighted average fair values of the Company’s 128,259 and 87,385 options granted during the three-month periods ended March 31, 2019 and 2018 was $3.97 and $6.06, respectively. As of March 31, 2019, the Company had $0.6 million in unrecognized compensation related to nonvested grants to be recognized over the remaining weighted average vesting period of 1.6 years.

 

During the three-month periods ended March 31, 2019 and 2018, respectively, the Company received $0.2 million and $0.3 million in cash from stock option exercises. Additionally, during the three-month period ended March 31, 2019 and 2018, respectively, the Company received 11,183 and 5,863 shares of its common stock as payment of the exercise price in the exercise of stock options for 27,172 and 20,234 shares. The tax benefit recognized for exercises during the three-month period ended March 31, 2018 was $0.1 million. There were no tax benefits recognized for exercises during the three-month period ended March 31, 2019.

 

The following table summarizes information about stock options outstanding as of March 31, 2019:

 

 

 

A summary of stock-settled SARS transactions during the three months ended March 31, 2019 follows:

 

 

 

At March 31, 2019, 180,633 SARS outstanding, all of which were fully vested and exercisable and 41,968 nonvested options, had an aggregate intrinsic value of $0.1 million. The weighted-average remaining contractual term was 34 months.

 

The weighted average fair values of the Company’s 42,841 and 48,515 SARS granted during each of the three-month periods ended March 31, 2019 and 2018 was $3.97 and $6.06, respectively. As of March 31, 2019, the Company had $0.2 million in unrecognized compensation related to nonvested grants to be recognized over the remaining weighted average vesting period of 1.8 years.

 

There were 12,125 SARS exercised during the three-month period ended March 31, 2018. SARS exercised during the three-month period ended March 31, 2018 had an intrinsic value of $0.1 million. The tax benefit recognized for this exercise during the three-month period ended March 31, 2018 was $0.1 million. There were no SARS exercised during the three-month period ended March 31, 2019.

 

 

The following table summarizes information about SARS outstanding as of March 31, 2019:

 

 

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 March 31, 2019 and 2018 were 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 March 31, 2019, the Company had $1.5 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 three months ended March 31, 2019 follows:

 

 

Performance Shares

 

In the quarter ended March 31, 2019, 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 March 31, 2019, the Company had $2.7 million of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted average service period of 2.6 years.

 

A summary of performance share transactions during the three months ended March 31, 2019 follows:

 

 

 

 

 

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 March 31, 2019, the Company recorded a provision for income taxes of $0.6 million, which represents an effective tax rates of 20.2%. For the three months ended March 31, 2018, the Company recorded a provision for income taxes of $0.9 million, which represents an effective tax rates of 26.2%. The decrease in the effective tax rates is primarily due to the expected annual increase in excludable foreign income, and an expected annual reduction in non-deductible compensation.

 

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

 

 

 

 

NOTE 8 – 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.

 

 

 

Awards to purchase approximately 341,995 shares of common stock with a weighted average exercise price of $20.99 per share were outstanding during the three-month period ending March 31, 2019, 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 awards to purchase shares of common stock outstanding during the three-month period ending March 31, 2018 excluded from the computation of diluted EPS because the award’s 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 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.

 

 

 

 

 

NOTE 10 – Leases

 

The Company leases several of its operating and office facilities including warehouses, call centers, office space and equipment for various terms under long-term, non-cancelable operating lease agreements. These leases generally have expected lease terms at adoption 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. 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. The Company subleases certain office space to third parties. As of March 31, 2019 the Company had recognized $3.9 million of operating lease obligation ($1 million in other current liabilities and $2.9 million in operating lease liabilities) which represents the present value of the remaining lease payment of $4.3 million discounted using the Company’s lease discount rate of 5.74%; and, $4.6 million of operating right-of-use assets, which represents the lease liability of $3.9 million adjusted for the prepaid rent of $0.7 million that was previously presented within prepaid expenses and other current assets and other assets on the accompanying condensed consolidated balance sheet prior to the adoption. The depreciable-life of right-of-use assets is generally limited by the expected lease term.

 

Information about the Company’s total lease cost, cash flows, weighted-average remaining lease terms, discount rate assumptions and other quantitative information for operating leases are as follows (dollars in thousands):

 

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

(In thousands, except lease term and discount rate)

 

 

 

 

 

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, subject to adjustment for cash on hand, indebtedness, unpaid Seller expenses and working capital (excluding cash), in each case as of the closing date, and (b) the issuance of 150,094 shares of the Company’s common stock to an equityholder of CID. The working capital adjustment was based on the difference between working capital as of the closing date and a target amount of approximately $39.5 million.

 

 

Fair Value of Consideration Transferred

 

 

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.

 

The assets and liabilities of CID shown below are based on our preliminary estimates of their acquisition date fair values. Our final fair value determination may be different than those shown below.

 

The following is our preliminary assignment of the aggregate consideration (in thousands):

 

 

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.

 

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

 

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 the three-month period ended March 31, 2019.

 

On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the three months ended March 31, 2018, net sales would have increased approximately $19.2 million. Net income would have increased $2.0 million in 2018, or $0.13 per share.

 

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 purchase price for the asset acquisition consisted of approximately $15.2 million in cash, net of cash acquired, the issuance of approximately 324,000 restricted shares of Superior’s common stock that vests over a five-year period, potential future payment of approximately $5.5 million in additional contingent consideration through 2021, and the assumption of certain liabilities of BAMKO, Inc.  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.

 

 

The estimated fair value for acquisition-related contingent consideration payable was $4.1 million as of March 31, 2019. The current portion of $0.9 million shall be paid in the second quarter of 2019. 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 consolidated statement of comprehensive income. Based on the acquisition date fair values, we have recorded $11.4 million in identifiable intangibles, consisting of $2.1 million in acquired customer relationships, $0.4 million in non-compete agreements from the former owners of BAMKO, Inc., and $8.9 million for the acquired trade name. The intangible assets associated with the customer relationships are being amortized for seven years beginning on March 1, 2016 and the non-compete agreements are being amortized for five years and ten months. The trade name is considered an indefinite-life asset and as such will not be amortized.

 

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 for the acquisition consisted of $0.8 million in cash, the issuance of approximately 54,000 restricted shares of Superior’s common stock and future payments of approximately $0.4 million in additional consideration through 2020. The majority of the shares issued vest over a three-year period. The fair value of the consideration transferred is approximately $2.3 million. Based up on their acquisition date fair values, we have assigned approximately $1.7 million to identifiable intangible assets and approximately $0.6 million to goodwill.

 

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. The company is one of the leading providers of Point-of-Purchase (POP) and Point-of-Sale (POS) merchandise in the country. The purchase price for the asset acquisition consisted of approximately $7.2 million in cash, subject to adjustment, the issuance of approximately 83,000 restricted shares of Superior’s common stock that vests over a four-year period, the potential future payments of approximately $3.2 million in additional contingent consideration through 2021, and the assumption of certain liabilities.

 

 

Fair Value of Consideration Transferred

 

 

Assets Acquired and Liabilities Assumed

 

The total purchase price was allocated to the acquired tangible and intangible assets and assumed liabilities of Tangerine based on their estimated fair values as of December 1, 2017. 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 assumed liabilities of Tangerine based on their estimated fair values as of the effective date of the transaction.

 

 

The following is our assignment of the aggregate consideration (in thousands):

 

 

The Company recorded $6.5 million in identifiable intangibles at fair value, consisting of $3.1 million in acquired customer relationships, $0.2 million in non-compete agreements from the former owners of Tangerine, and $3.2 million for the acquired trade name.

 

The estimated fair value for acquisition-related contingent consideration payable is $2.5 million as of March 31, 2019. 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 consolidated statement of comprehensive income.

 

Goodwill was calculated as the difference between the fair value of the consideration and the values assigned to the assets acquired and liabilities assumed.

 

The intangible assets associated with the customer relationships will be amortized for seven years beginning on December 1, 2017 and the non-compete agreement will be amortized for seven years. The trade name is considered an indefinite-life asset and as such will not be amortized.

 

The Company recognized amortization expense on these acquired intangible assets of $0.1 million for the three months ended March 31, 2019, and 2018.

 

 

---

---

---

---

---

---

---

---

---

---