NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(Unaudited)
NOTE 1 – Summary of Significant Interim Accounting Policies:
The consolidated interim financial statements include the accounts of Superior Uniform Group, Inc. and its wholly-owned subsidiaries, The Office Gurus, LLC, SUG Holding, Fashion Seal Corporation, and BAMKO, LLC; 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”. Intercompany items have been eliminated in consolidation. The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These 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, 2015, 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.
The Company records revenue as products are shipped and title passes and as services are provided. A provision for estimated returns and allowances is recorded based on historical experience and current allowance programs.
|
c)
|
Recognition of costs and expenses
|
Costs and expenses other than product costs are charged to income in interim periods as incurred, or allocated among interim periods based on an estimate of time expired, benefit received or activity associated with the periods. Procedures adopted for assigning specific cost and expense items to an interim period are consistent with the basis followed by the registrant in reporting results of operations at annual reporting dates. However, when a specific cost or expense item charged to expense for annual reporting purposes benefits more than one interim period, the cost or expense item is allocated to the interim periods.
|
d)
|
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 $607,000 and $516,000 for the three-month periods ended September 30, 2016 and 2015, respectively, and $1,761,000 and $1,549,000 for the nine-month periods ended September 30, 2016 and 2015, respectively.
The Company expenses advertising costs as incurred. Advertising costs for the three-month periods ended September 30, 2016 and 2015, respectively were $23,000 and $11,000. Advertising costs for the nine-month periods ended September 30, 2016 and 2015, respectively were $55,000 and $101,000.
|
f)
|
Shipping and handling fees and costs
|
The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with in-bound and out-bound freight are generally recorded in cost of goods sold. Other shipping and handling costs such as labor and overhead are included in selling and
administrative expenses
and totaled $2,646,000 and $2,443,000 for the three months ended September 30, 2016 and 2015, respectively. Other shipping and handling costs included in selling and administrative expenses
totaled $7,798,000 and $7,069,000 for the nine months ended September 30, 2016 and 2015, respectively.
Inventories at interim dates are determined by using both perpetual records on a first-in, first-out basis and gross profit calculations.
|
h)
|
Accounting for income taxes
|
The provision for income taxes is calculated by using the effective tax rate anticipated for the full year.
|
i)
|
Employee benefit plan settlements
|
The Company recognizes settlement gains and losses in its financial statements when the cost of all settlements in a year is greater than the sum of the service cost and interest cost components of net periodic pension cost for the plan for the year.
Historical basic per share data is based on the weighted average number of shares outstanding. Historical diluted per share data is reconciled by adding to weighted average shares outstanding the dilutive impact of the exercise of outstanding stock options, stock appreciation rights, unvested shares, and performance shares.
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net earnings used in the computation of
basic and diluted earnings per share
|
|
$
|
4,386,000
|
|
|
$
|
4,031,000
|
|
|
$
|
9,721,000
|
|
|
$
|
9,698,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
14,118,354
|
|
|
|
13,833,561
|
|
|
|
14,055,345
|
|
|
|
13,716,376
|
|
Common stock equivalents
|
|
|
865,730
|
|
|
|
752,127
|
|
|
|
814,726
|
|
|
|
853,995
|
|
Weighted average shares outstanding - diluted
|
|
|
14,984,084
|
|
|
|
14,585,688
|
|
|
|
14,870,071
|
|
|
|
14,570,371
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
0.31
|
|
|
$
|
0.29
|
|
|
$
|
0.69
|
|
|
$
|
0.71
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
0.29
|
|
|
$
|
0.28
|
|
|
$
|
0.65
|
|
|
$
|
0.67
|
|
Awards to purchase approximately 150,000
and 144,000
shares of common stock with weighted average exercise prices of $18.65
and $17.71
per share were outstanding during the three-month periods ending September 30, 2016 and 2015, 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 shares of common stock.
Awards to purchase approximately 165,000
and 97,000
shares of common stock with weighted average exercise prices of $18.53 and $18.19
per share were outstanding during the nine-month periods ending September 30, 2016 and 2015, 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 shares of common stock.
|
k)
|
Derivative financial instruments
|
The Company uses certain financial derivatives to mitigate its exposure to volatility in interest rates. 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. 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. As of September 30, 2016, the Company’s derivative counterparty had investment grade credit ratings.
In July 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on a portion of the outstanding balance of the term loan was effectively converted to a fixed rate beginning July 1, 2014. The Company entered into this interest rate swap arrangement to mitigate future interest rate risk associated with its borrowings and has designated it as a cash flow hedge. (See Note 2).
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.
Total comprehensive income represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes earnings. For the Company, the only other components of total comprehensive income are the change in pension costs, change in fair value of qualifying hedges, and foreign currency translation adjustments.
Accounting standards
require disclosures of certain information about operating segments and about products and services, geographic areas in which the Company operates, and their major customers. The Company has evaluated its operations and has determined that it has two reportable segments – uniforms and related products and remote staffing solutions. (See Note 6).
|
o)
|
Share-Based Compensation
|
The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. Historically, the Company has granted options, stock settled stock appreciation rights, and restricted stock.
In 2016, the Company began granting performance shares as well.
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 September 30, 2016, the Company had 3,945,981 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 plan and the total related tax benefit for the periods presented:
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Stock options and SARS
|
|
$
|
237,000
|
|
|
$
|
251,000
|
|
|
$
|
1,070,000
|
|
|
$
|
1,079,000
|
|
Restricted stock
|
|
|
78,000
|
|
|
|
69,000
|
|
|
|
229,000
|
|
|
|
206,000
|
|
Performance shares
|
|
|
68,000
|
|
|
|
-
|
|
|
|
182,000
|
|
|
|
-
|
|
Total share-based compensation
expense
|
|
$
|
383,000
|
|
|
$
|
320,000
|
|
|
$
|
1,481,000
|
|
|
$
|
1,285,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related income tax benefit
|
|
$
|
55,000
|
|
|
$
|
25,000
|
|
|
$
|
267,000
|
|
|
$
|
195,000
|
|
Stock options and SARS
The Company grants stock options and stock settled SARS to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and SARS at the date of grant using the Black-Scholes valuation model.
All options and SARS vest immediately at the date of grant. Awards generally expire five years after the date of grant with the exception of options granted to outside directors, which expire ten years after the date of grant. The Company issues new shares upon the exercise of stock options and SARS.
A summary of stock option transactions during the nine months ended September 30, 2016 follows:
|
|
No. of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding December 31, 2015
|
|
|
946,546
|
|
|
$
|
8.39
|
|
Granted
|
|
|
172,862
|
|
|
|
16.53
|
|
Exercised
|
|
|
(178,179
|
)
|
|
|
7.55
|
|
Lapsed
|
|
|
(11,131
|
)
|
|
|
5.92
|
|
Cancelled
|
|
|
(3,260
|
)
|
|
|
17.53
|
|
Outstanding September 30, 2016
|
|
|
926,838
|
|
|
$
|
10.06
|
|
At September 30, 2016, options outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $9,276,000. The weighted-average remaining contractual term was 40 months.
Options exercised during the three-month periods ended September 30, 2016 and 2015 had intrinsic values of $301,000 and $519,000, respectively. Options exercised during the nine-month periods ended September 30, 2016 and 2015 had intrinsic values of $1,876,000 and $2,896,000, respectively. The weighted average grant date fair value of the Company’s 52,530 and 50,310 options granted during each of the three month periods ended September 30, 2016 and 2015 was $4.53 and $4.97, respectively. The weighted average grant date fair values of the Company’s 172,862 and 103,308 options granted during the nine-month periods ended September 30, 2016 and 2015 were $4.69 and $5.22, respectively.
During the three-month periods ended September 30, 2016 and 2015, respectively, the Company received $327,000 and $118,000 in cash from stock option exercises. Additionally, during the three-month periods ended September, 30, 2016 and 2015, respectively, the Company received 2,164 and 6,806 shares of its common stock as payment of the exercise price in the exercise of stock options for 5,568 and 22,792 shares.
No tax benefit was recognized for these exercises, as the options exercised were qualified incentive stock options.
During the nine-month periods ended September 30, 2016 and 2015, respectively, the Company received $1,109,000 and $1,501,000 in cash from stock option exercises. Additionally, during the nine-month periods ended September 30, 2016 and 2015, respectively, the Company received 12,598 and 14,571 shares of its common stock as payment of the exercise price in the exercise of stock options for 35,984 and 50,224 shares of its common stock related to the exercise of stock options. No tax benefit was recognized for these exercises, as the options exercised were qualified incentive stock options.
A summary of SARS transactions during the nine months ended September 30, 2016 follows:
|
|
No. of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding December 31, 2015
|
|
|
381,566
|
|
|
$
|
8.14
|
|
Granted
|
|
|
58,108
|
|
|
|
16.35
|
|
Exercised
|
|
|
(75,792
|
)
|
|
|
6.12
|
|
Lapsed
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding September 30, 2016
|
|
|
363,882
|
|
|
$
|
9.87
|
|
At September 30, 2016, SARS outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $3,351,000. The weighted-average remaining contractual term was 27 months.
There were -0- and 54,208 SARS exercised during the three-month periods ended September 30, 2016 and 2015, respectively. SARS exercised during the three-month periods ended September 30, 2015 had an intrinsic value of $671,000.
There were 75,792 and 193,750 SARS exercised during the nine-month periods ended September 30, 2016 and 2015, respectively. SARS exercised during the nine-month periods ended September 30, 2016 and 2015, had intrinsic values of $928,000 and $2,602,000, respectively. There were 58,108 and 53,292 SARS granted during the nine-month periods ended September 30, 2016 and 2015, respectively. The weighted average grant date fair values of the Company’s SARS granted during the nine-month periods ended September 30, 2016 and 2015 were $4.49 and $5.20, respectively.
The following tables summarize significant assumptions utilized to determine the fair value of options and SARS.
Three months ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
SARS
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
Exercise price
|
|
|
|
|
|
|
|
|
2016
|
|
|
N/A
|
|
|
|
$16.47
|
|
2015
|
|
|
N/A
|
|
|
|
$17.40
|
|
|
|
|
|
|
|
|
|
|
Market price
|
|
|
|
|
|
|
|
|
2016
|
|
|
N/A
|
|
|
|
$16.47
|
|
2015
|
|
|
N/A
|
|
|
|
$17.40
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
1
|
|
|
|
|
|
|
|
|
2016
|
|
|
N/A
|
|
|
|
1.1%
|
|
2015
|
|
|
N/A
|
|
|
|
1.6%
|
|
|
|
|
|
|
|
|
|
|
Expected award life (years)
2
|
|
|
N/A
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
3
|
|
|
|
|
|
|
|
|
2016
|
|
|
N/A
|
|
|
|
37.1%
|
|
2015
|
|
|
N/A
|
|
|
|
36.8%
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
4
|
|
|
|
|
|
|
|
|
2016
|
|
|
N/A
|
|
|
|
2.1%
|
|
2015
|
|
|
N/A
|
|
|
|
1.9%
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
SARS
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
Exercise price
|
|
|
|
|
|
|
|
|
2016
|
|
|
$16.35
|
|
|
$16.35
|
-
|
$18.55
|
2015
|
|
|
$18.66
|
|
|
$16.78
|
-
|
$18.66
|
|
|
|
|
|
|
|
|
|
Market price
|
|
|
|
|
|
|
|
|
2016
|
|
|
$16.35
|
|
|
$16.35
|
-
|
$18.55
|
2015
|
|
|
$18.66
|
|
|
$16.78
|
-
|
$18.66
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
1
|
|
|
|
|
|
|
|
|
2016
|
|
|
1.3%
|
|
|
1.1%
|
-
|
1.8%
|
2015
|
|
|
1.5%
|
|
|
1.5%
|
-
|
2.1%
|
|
|
|
|
|
|
|
|
|
Expected award life (years)
2
|
|
|
5
|
|
|
5
|
-
|
10
|
|
|
|
|
|
|
|
|
|
Expected volatility
3
|
|
|
|
|
|
|
|
|
2016
|
|
|
36.5%
|
|
|
36.5%
|
-
|
40.3%
|
2015
|
|
|
34.9%
|
|
|
34.9%
|
-
|
39.0%
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
4
|
|
|
|
|
|
|
|
|
2016
|
|
|
2.0%
|
|
|
1.8%
|
-
|
2.1%
|
2015
|
|
|
1.6%
|
|
|
1.6%
|
-
|
1.9%
|
1
|
The risk-free interest rate is based on the yield of a U.S. treasury bond with a similar maturity as the expected life of the awards.
|
2
|
The expected life in years for awards granted was based on the historical exercise patterns experienced by the Company when the award was made.
|
3
|
The determination of expected stock price volatility for awards granted in each of the three and nine-month periods ended September 30, 2016 and 2015, was based on historical prices of Superior’s common stock over a period commensurate with the expected life.
|
4
|
The 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 confer the right to receive shares of the Company’s stock at a specified future date or when certain conditions are met. These grants generally vest after a three year period. 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 September 30, 2016, the Company had $188,000 of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted service period of 0.5 years.
A summary of restricted stock transactions during the nine months ended September 30, 2016 follows:
|
|
No. of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Grant Date Fair Value
|
|
Outstanding December 31, 2015
|
|
|
114,342
|
|
|
$
|
8.39
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(1,050)
|
|
|
|
21.92
|
|
Outstanding September 30, 2016
|
|
|
113,292
|
|
|
$
|
8.26
|
|
Performance Shares
In 2016, 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 being recognized based on the fair value on the date of the grant 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 September 30, 2016, the Company had $1,198,000 of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted average service period of 4.3 years.
A summary of performance share transactions during the nine months ended September 30, 2016 follows:
|
|
No. of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Grant Date Fair Value
|
|
Outstanding December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
101,000
|
|
|
|
16.36
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding September 30, 2016
|
|
|
101,000
|
|
|
$
|
16.36
|
|
On December 29, 2014, the Board of Directors declared a 2-for-1 stock split of the Company’s common stock. The record date of the split was January 12, 2015, and the stock split became effective February 4, 2015. All share and per share information in these consolidated interim financial statements have been restated for all periods presented, giving retroactive effect to the stock split. The Company revised certain historical amounts when it recorded the 2-for-1 stock split. The amounts were immaterial and reclassified within shareholders’ equity between par value and additional paid in capital.
|
q)
|
Recent Accounting Pronouncements
|
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) that will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Additionally, the guidance requires disaggregated disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. The amendments are required to be adopted by the Company on January 1, 2018. Transition to the new guidance may be done using either a full or modified retrospective method. The Company is currently evaluating the full effect that the adoption of this standard will have on the Company’s consolidated financial statements.
In April 2015, the FASB issued an ASU to simplify the presentation of debt issuance costs. The amendments in this ASU require debt issuance costs to be presented on the balance sheet as a reduction from the carrying amount of the related debt liability. The amendment in this ASU is to be applied retrospectively and is effective for interim and annual reporting periods beginning after December 15, 2015. The Company adopted this ASU retrospectively effective January 1, 2016, and has reclassified all debt issuance costs as a reduction from the carrying amount of the related debt liability for both the current and prior period. (See Note 2.)
In February 2016, the FASB issued an ASU that amends the accounting guidance on leases. The primary change in this ASU requires lessees to recognize, in the balance sheet, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset over the lease term. The amendments in this ASU are to be applied using a modified retrospective approach and are effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of the provisions of this ASU.
In March 2016, the FASB issued an ASU that amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification within the statement of cash flows. Certain of the amendments in this ASU are to be applied using a modified retrospective approach by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted, while other amendments can be applied prospectively or retrospectively. The amendments in this ASU are effective for periods beginning after December 15, 2016. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact of the provisions of this ASU.
NOTE 2 - Long-Term Debt:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Term loan payable to Fifth Third Bank, maturing
March 8, 2021
|
|
$
|
41,250,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to Fifth Third Bank, pursuant to revolving
credit agreement, maturing March 8, 2021
|
|
|
3,320,000
|
|
|
|
2,200,000
|
|
|
|
|
|
|
|
|
|
|
Term loan payable to Fifth Third Bank,
paid March 8, 2016
|
|
|
-
|
|
|
|
21,750,000
|
|
|
|
$
|
44,570,000
|
|
|
$
|
23,950,000
|
|
Less:
|
|
|
|
|
|
|
|
|
Payments due within one year included
in current liabilities
|
|
$
|
5,894,000
|
|
|
$
|
2,750,000
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
65,000
|
|
|
|
69,000
|
|
Long-term debt less current maturities
|
|
$
|
38,611,000
|
|
|
$
|
21,131,000
|
|
Effective July 1, 2013, the Company entered into an amended and restated 5-year credit agreement with Fifth Third Bank that made available to the Company up to $15,000,000 on a revolving credit basis (the “Initial Credit Facility”) in addition to a $30,000,000 term loan utilized to finance the acquisition of substantially all of the assets of HPI Direct, Inc.
Effective March 8, 2016, the Company entered into an amended and restated 5-year credit agreement with Fifth Third Bank (the “Amended Credit Agreement”) that increased its revolving credit facility from $15,000,000 to $20,000,000 (the “Amended Credit Facility”) and refinanced its then-existing term loan with a new $45,000,000 term loan to help finance the acquisition of substantially all of the assets of BAMKO, Inc. Interest is payable on the new term loan at LIBOR plus 0.85% (1.38% at September 30, 2016) and on the revolving credit facility at LIBOR (rounded up to the next 1/8
th
of 1%) plus 0.85% (1.48% at September 30, 2016). Both loans are based upon the one-month LIBOR rate for U.S. dollar based borrowings. The Company pays a commitment fee of 0.10% per annum on the average unused portion of the commitment under the Amended Credit Facility. The available balance under the Amended Credit Facility is reduced by outstanding letters of credit. As of September 30, 2016, there was $-0- outstanding under letters of credit.
In order to reduce interest rate risk on its debt, the Company entered into an interest rate swap agreement with Fifth Third Bank, N.A. in July 2013 that was designed to effectively convert or hedge the variable interest rate on a portion of its borrowings to achieve a net fixed rate of 2.53% per annum, beginning July 1, 2014 with a notional amount of $14,250,000. The notional amount of the interest rate swap is reduced by the scheduled amortization of the principal balance of the original term loan of $187,500 per month through July 1, 2015 and $250,000 per month through June 1, 2018 with the remaining notional balance of $3,250,000 to be eliminated on July 1, 2018. Effective at the inception of the new term loan, the fixed rate on the notional amount was reduced to 2.43%.
Under the terms of the interest rate swap, the Company receives variable interest rate payments and makes fixed interest rate payments on an amount equal to the notional amount at that time. Changes in the fair value of the interest rate swap designated as the hedging instrument that effectively offset the variability of cash flows associated with the variable-rate, long-term debt obligation are reported in OCI, net of related income tax effects. As a result of the acquisition of substantially all of the assets of BAMKO, Inc. on March 8, 2016, the original term loan associated with this hedge was paid in full and replaced with the new $45,000,000 term loan discussed above. At that time, the Company undesignated the original term loan as the hedged instrument and elected the new term loan as the designated hedged instrument. The negative fair value at that time of the interest rate swap of $152,000 is being amortized as an expense over the remaining life of the swap agreement. At September 30, 2016, the interest rate swap had a negative fair value of $95,000, which is presented within other current liabilities within the consolidated balance sheet. Approximately $38,000 of this cumulative loss has been recognized in earnings in the nine months ended September 30, 2016. The balance of $95,000, net of tax benefit of $34,000, since the inception of the hedge in July 2013 has been recorded within the OCI through September 30, 2016. The Company expects that approximately $65,000 of these losses will be reclassified into earnings over the subsequent twelve-month period.
The remaining scheduled amortization for the term loan is as follows: 2016 $1,071,000; 2017 through 2020 $6,429,000 per year; 2021 $14,463,000. The term loan does not include a prepayment penalty. In connection with the Amended Credit Agreement, the Company incurred approximately $70,000 of debt issuance costs, which primarily consisted of legal fees. These costs are being amortized over the life of the Amended Credit Agreement and are recorded as additional interest expense.
The Company’s obligations under the Amended Credit Agreement are secured by substantially all of the operating assets of Superior Uniform Group, Inc. and are guaranteed by all domestic subsidiaries of Superior Uniform Group, Inc. The agreement contains restrictive provisions concerning a maximum funded senior indebtedness to EBITDA ratio as defined in the agreement (3.5:1), a maximum funded indebtedness to EBITDA ratio as defined in the agreement (4.0:1) and fixed charge coverage ratio (1.25:1). The Company is in full compliance with all terms, conditions and covenants of the Amended Credit Agreement.
NOTE 3
– Periodic Pension Expense:
The following table presents the net periodic pension expense under the Company's plans for the following periods:
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost - benefits earned during the period
|
|
$
|
15,000
|
|
|
$
|
(16,000
|
)
|
|
$
|
43,000
|
|
|
$
|
36,000
|
|
Interest cost on projected benefit obligation
|
|
|
247,000
|
|
|
|
237,000
|
|
|
|
741,000
|
|
|
|
713,000
|
|
Expected return on plan assets
|
|
|
(297,000
|
)
|
|
|
(336,000
|
)
|
|
|
(891,000
|
)
|
|
|
(1,007,000
|
)
|
Recognized actuarial loss
|
|
|
253,000
|
|
|
|
199,000
|
|
|
|
776,000
|
|
|
|
598,000
|
|
Settlement loss
|
|
|
94,000
|
|
|
|
16,000
|
|
|
|
401,000
|
|
|
|
327,000
|
|
Net periodic pension cost
|
|
$
|
312,000
|
|
|
$
|
100,000
|
|
|
$
|
1,070,000
|
|
|
$
|
667,000
|
|
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 $500,000 and $1,000,000 in contributions made to the Company’s defined benefit plans during the nine-month periods ended September 30, 2016 and 2015, respectively.
NOTE 4
– Supplemental Cash Flow Information:
Cash paid for income taxes was $3,927,000
and $5,274,000, respectively, for the nine-month periods ended September 30, 2016 and 2015. Cash paid for interest was $512,000 and $357,000, respectively, for the nine-month periods ended September 30, 2016 and 2015.
During the nine months ended September 30, 2016 and 2015, respectively, the Company received 12,598 and 14,571 shares of its common stock as payment of the exercise price in the exercise of stock options for 35,984 and 50,224 shares.
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
–
Operating Segment Information
:
The Company classifies its businesses into two 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, including promotional products. The Remote Staffing Solutions segment consists of sales of staffing solutions.
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 income taxes. 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 Uniforms and Related Products segment totals. Information related to the operations of the Company's operating segments is set forth below.
|
|
Uniforms and
Related
Products
|
|
|
Remote
Staffing
Solutions
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
As of and For the Three
Months Ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
61,556,000
|
|
|
$
|
4,624,000
|
|
|
$
|
(898,000
|
)
|
|
$
|
65,282,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
21,263,000
|
|
|
|
2,465,000
|
|
|
|
(588,000
|
)
|
|
|
23,140,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
16,002,000
|
|
|
|
1,548,000
|
|
|
|
(588,000
|
)
|
|
|
16,962,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
172,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
$
|
5,089,000
|
|
|
$
|
917,000
|
|
|
$
|
-
|
|
|
$
|
6,006,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,150,000
|
|
|
$
|
133,000
|
|
|
$
|
-
|
|
|
$
|
1,283,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
880,000
|
|
|
$
|
184,000
|
|
|
$
|
-
|
|
|
$
|
1,064,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
182,096,000
|
|
|
$
|
19,211,000
|
|
|
$
|
(6,542,000
|
)
|
|
$
|
194,765,000
|
|
|
|
Uniforms and
Related
Products
|
|
|
Remote
Staffing
Solutions
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
As of and For the Three
Months Ended
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
53,392,000
|
|
|
$
|
4,171,000
|
|
|
$
|
(901,000
|
)
|
|
$
|
56,662,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
17,563,000
|
|
|
|
2,250,000
|
|
|
|
(589,000
|
)
|
|
|
19,224,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
12,764,000
|
|
|
|
1,338,000
|
|
|
|
(589,000
|
)
|
|
|
13,513,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
130,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
$
|
4,669,000
|
|
|
$
|
912,000
|
|
|
$
|
-
|
|
|
$
|
5,581,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
864,000
|
|
|
$
|
80,000
|
|
|
$
|
-
|
|
|
$
|
944,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
711,000
|
|
|
$
|
1,308,000
|
|
|
$
|
-
|
|
|
$
|
2,019,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
141,170,000
|
|
|
$
|
12,118,000
|
|
|
$
|
(1,326,000
|
)
|
|
$
|
151,962,000
|
|
|
|
Uniforms and
Related
Products
|
|
|
Remote
Staffing
Solutions
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
As of and For the Nine
Months Ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
177,101,000
|
|
|
$
|
13,482,000
|
|
|
$
|
(2,673,000
|
)
|
|
$
|
187,910,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
59,421,000
|
|
|
|
7,247,000
|
|
|
|
(1,744,000
|
)
|
|
|
64,924,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
47,680,000
|
|
|
|
4,445,000
|
|
|
|
(1,744,000
|
)
|
|
|
50,381,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
512,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
512,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
$
|
11,229,000
|
|
|
$
|
2,802,000
|
|
|
$
|
-
|
|
|
$
|
14,031,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
3,285,000
|
|
|
$
|
317,000
|
|
|
$
|
-
|
|
|
$
|
3,602,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,775,000
|
|
|
$
|
3,821,000
|
|
|
$
|
-
|
|
|
$
|
6,596,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
182,096,000
|
|
|
$
|
19,211,000
|
|
|
$
|
(6,542,000
|
)
|
|
$
|
194,765,000
|
|
|
|
Uniforms and
Related
Products
|
|
|
Remote
Staffing
Solutions
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
As of and For the Nine
Months Ended
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
148,436,000
|
|
|
$
|
11,419,000
|
|
|
$
|
(2,730,000
|
)
|
|
$
|
157,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
49,004,000
|
|
|
|
6,356,000
|
|
|
|
(1,809,000
|
)
|
|
|
53,551,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
37,014,000
|
|
|
|
3,753,000
|
|
|
|
(1,809,000
|
)
|
|
|
38,958,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
395,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
395,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
$
|
11,595,000
|
|
|
$
|
2,603,000
|
|
|
$
|
-
|
|
|
$
|
14,198,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
2,612,000
|
|
|
$
|
222,000
|
|
|
$
|
-
|
|
|
$
|
2,834,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
1,973,000
|
|
|
$
|
2,145,000
|
|
|
$
|
-
|
|
|
$
|
4,118,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
141,170,000
|
|
|
$
|
12,118,000
|
|
|
$
|
(1,326,000
|
)
|
|
$
|
151,962,000
|
|
NOTE 7 – Acquisition of Business:
On March 8, 2016, the Company closed on the acquisition of substantially all of the assets of BAMKO, Inc. (“BAMKO”). The transaction had an effective date of March 1, 2016. BAMKO is a full-service merchandise sourcing and promotional products company based in Los Angeles, CA. With sales offices in the United States, England and Brazil, as well as support offices in China, Hong Kong, and India, BAMKO serves many of the world’s most successful brands. The purchase price for the asset acquisition consists of approximately $15,800,000 in cash, subject to adjustment, the issuance of approximately 324,000 restricted shares of Superior Uniform Group, Inc.’s common stock that will vest over a five year period, the potential future payment of approximately $5,500,000 in additional contingent consideration through 2021, and the assumption of certain liabilities of BAMKO. The transaction also includes the acquisition of BAMKO’s subsidiaries in Hong Kong, China, Brazil and England as well as an affiliate in India.
The foregoing description of the asset purchase agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the agreement, which is filed as an exhibit to the Quarterly Report on Form 10-Q filed on April 28, 2016. The agreement has been attached to provide investors with information regarding its terms. It is not intended to modify or supplement any factual disclosures about the Company in its public reports filed with the Securities and Exchange Commission and it is not intended to be, and should not be relied upon as, disclosure regarding any facts and circumstances relating to the Company or BAMKO. In particular, the representations, warranties and covenants set forth in the agreement (a) were made solely for purposes of the agreement and solely for the benefit of the contracting parties, (b) may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made to a contracting party in connection with the agreement, (c) in certain cases, will survive for only a limited period of time, (d) are qualified in certain circumstances by a materiality standard which may differ from what may be viewed as material by investors, (e) were made only as of the date of the agreement or such other date as is specified in the agreement, and (f) may have been included in the agreement for the purpose of allocating risk between the parties rather than establishing matters as facts. Investors are not third-party beneficiaries under the agreement, and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or conditions of the parties. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the agreement, which subsequent information may or may not be fully reflected in subsequent public disclosures. Accordingly, the representations and warranties in the agreement should not be viewed or relied upon as statements of actual facts or the actual state of affairs of the Company or any of its subsidiaries or affiliates.
Fair Value of Consideration Transferred
A summary of the purchase price is as follows:
Cash consideration at closing, net of cash acquired
|
|
$
|
15,161,000
|
|
|
|
|
|
|
Restricted shares of Superior common stock issued
|
|
|
4,558,000
|
|
|
|
|
|
|
Total Considerations
|
|
$
|
19,719,000
|
|
Assets Acquired and Liabilities Assumed
The total purchase price was allocated to the acquired tangible and intangible assets and assumed liabilities of BAMKO based on their estimated fair values as of March 1, 2016. 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 preliminary allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and assumed liabilities of BAMKO based on their estimated fair values as of the effective date of the transaction.
The assets and liabilities of BAMKO shown below are based on our preliminary estimates of their acquisition effective date fair values. Our final fair value determinations may be significantly different than those shown below.
The following is our preliminary assignment of the aggregate consideration:
Accounts receivable
|
|
$
|
4,885,000
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
3,200,000
|
|
|
|
|
|
|
Inventories
|
|
|
236,000
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
199,000
|
|
|
|
|
|
|
Other assets
|
|
|
100,000
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
11,360,000
|
|
|
|
|
|
|
Goodwill
|
|
|
6,994,000
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,974,000
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,314,000
|
|
|
|
|
|
|
Other current liabilities
|
|
|
736,000
|
|
|
|
|
|
|
Future contingent liabilities
|
|
|
5,205,000
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
7,255,000
|
|
The Company recorded $11,360,000 in identifiable intangibles at fair value, consisting of $2,090,000 in acquired customer relationships, $370,000 in non-compete agreements from the former owners of BAMKO, and $8,900,000 for the acquired trade name.
The estimated value for acquisition-related contingent consideration payable is $5,205,000. 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. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liability.
Goodwill was calculated as the difference between the fair value of the consideration and the preliminary values assigned to the assets acquired and liabilities assumed. The purchase price and goodwill allocation are expected to be finalized during the remainder of 2016 as the Company completes its process of evaluating all relevant data associated with the transaction.
The intangible assets associated with the customer relationships will be amortized for seven years beginning on March 1, 2016 and the non-compete agreement will be amortized for five years and ten months. 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 $90,000 and $211,000 for the three and nine-month periods ended September 30, 2016, respectively.
For the three and nine-month periods ended September 30, 2016, the Company incurred and expensed transaction related expenses of approximately $44,000 and $1,116,000, respectively. These amounts are included in selling and administrative expenses on the consolidated statements of comprehensive income.
Net revenues for BAMKO of $6,215,000 and $19,854,000, respectively, are included in the Company’s consolidated statements of comprehensive income for the three-month period ended September 30, 2016 and for the period from the effective date of the acquisition, March 1, 2016, through September 30, 2016, respectively. For the three-month period ended September 30, 2016, and for the period from the effective date of the acquisition, March 1, 2016, through September 30, 2016, respectively, income (loss) before taxes on income of ($19,000) and ($428,000), respectively are included in the Company’s consolidated statements of comprehensive income. These amounts are inclusive of the acquisition related expenses discussed above.
On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the entire nine-month periods ended September 30, 2016 and 2015, net sales would have increased approximately $6,587,000 in 2016 and $20,865,000 in 2015. Net income for the nine-month period ended September 30, 2016 would have increased approximately $1,021,000 and net income for the nine-month period ended September 30, 2015 would have decreased approximately $1,344,000 from our reported net income for these periods. Pre-tax acquisition related expenses of $1,116,000 have been recorded as though they were incurred as of January 1, 2015 for this comparison.