ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain matters discussed in this Form 10-Q are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified by use of the words “may”, “will”, “should”, “could”, “expect”, “anticipate”, “estimate”, “believe”, “intend”, “project”, “potential”, or “plan” or the negative of these words or other variations on these words or comparable terminology.
Forward-looking statements in this Quarterly Report on Form 10-Q
may
include, without limitation: (1) projections of revenue, income, and other items relating to our financial position and results of operations, (2) statements of our plans, objectives, strategies, goals and intentions, (3) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (4) statements of expected industry and general economic trends.
Such forward-looking statements are subject to certain risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the following:
the impact of competition,
general economic conditions, including employment levels, in the areas of the United States in which the Company’s customers are located; changes in the healthcare, industrial, commercial, leisure and public safety industries where uniforms and service apparel are worn;
our ability to identify suitable acquisition targets, successfully integrate any acquired businesses, successfully manage our expanding operations, or failure to discover liabilities associated with such business during the diligence process;
the price and availability of cotton and other manufacturing materials; attracting and retaining senior management and key personnel and other factors described in the Company’s filings with the Securities and Exchange Commission,
including those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 201
7
. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances
, except as may be required by law.
Critical Accounting Policies
Our significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 and updated on this Form 10-Q in Note 1 for recently adopted accounting standards. Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the estimates that we have made. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting estimates are those that we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates, the underlying judgments and uncertainties used to make them and the likelihood that materially different estimates would be reported under different conditions or using different assumptions is as follows:
Allowance for Losses on Accounts Receivable
Judgments and estimates are used in determining the collectability of accounts receivable. The Company analyzes specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances when evaluating the adequacy of the allowance for doubtful accounts. Management judgments and estimates are used in connection with establishing the allowance in any accounting period. Changes in estimates are reflected in the period they become known. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. An additional impairment in value of one percent of net accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $0.5 million.
Inventories
The Company’s Uniforms and Related Products segment markets itself to its customers as a “stock house”. Therefore, Superior at all times carries substantial inventories of raw materials (principally piece goods) and finished garments. Inventories are stated at the lower of cost or market value. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which may be material.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company tests goodwill for impairment annually as of December 31st and/or when an event occurs or circumstances change such that it is more likely than not that impairment may exist. Examples of such events and circumstances that the Company would consider include the following:
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macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets;
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industry and market considerations such as a deterioration in the environment in which the Company operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for the Company's products or services, or a regulatory or political development;
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cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;
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overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;
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other relevant entity-specific events such as changes in management, key personnel, strategy, or customers.
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Goodwill is tested at a level of reporting referred to as the “reporting unit." The Company's reporting units are defined as each of its three reporting segments. As of March 31, 2018, goodwill of $4.1 million was included in the Uniforms and Related Products segment and $11.9 million was included in the Promotional Products segment.
An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary. The Company completed its assessment of the qualitative factors as of December 31, 2017 and determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying value.
Insurance
The Company self-insures for certain obligations related to health insurance programs. The Company also purchases stop-loss insurance policies to protect itself from catastrophic losses. Judgments and estimates are used in determining the potential value associated with both reported claims and for losses that have occurred, but have not been reported. The Company's estimates consider historical claim experience and other factors. The Company's liabilities are based on estimates, and, while the Company believes that the accrual for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. Changes in claim experience, the Company's ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.
Pensions
The Company is the sponsor of two noncontributory qualified defined benefit pension plans, providing for normal retirement at age 65, covering all eligible employees (as defined). Periodic benefit payments on retirement are determined based on a fixed amount applied to service or determined as a percentage of earnings prior to retirement. The Company is also the sponsor of an unfunded supplemental executive retirement plan (SERP) in which several of its employees are participants. Pension plan assets for retirement benefits consist primarily of fixed income securities and common stock equities. 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.
The Company’s pension obligations are determined using estimates including those related to discount rates and asset values. The discount rates used for the Company’s pension plans were determined based on the Citigroup Pension Yield Curve. This rate was selected as the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date taking into account the nature and duration of the benefit obligations of the plans using high-quality fixed-income investments currently available (rated AA or better) and expected to be available during the period to maturity of the benefits. The 8% expected return on plan assets was determined based on historical long-term investment returns as well as future expectations given target investment asset allocations and current economic conditions.
Income Taxes
The Company is required to estimate and record income taxes payable for federal, state and foreign jurisdictions in which the Company operates. This process involves estimating actual current tax expense and assessing temporary differences resulting from differing accounting treatment between tax and book that result in deferred tax assets and liabilities. In addition, accruals are also estimated for federal and state tax matters for which deductibility is subject to interpretation. Taxes payable and the related deferred tax differences may be impacted by changes to tax laws, changes in tax rates and changes in taxable profits and losses. The Tax Act was enacted on December 22, 2017, and has several key provisions impacting accounting for and reporting of income taxes. The most significant provision reduces the U.S. corporate statutory tax rate from 34% to 21% beginning on January 1, 2018. In addition, the Company no longer intends to permanently reinvest its historical foreign earnings and has recorded an additional deferred tax expense.
Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it is properly reserved. For the three-month periods ending March 31, 2018 and March 31, 2017, there was no change in total unrecognized tax benefits As of March 31, 2018, we had an accrued liability of $0.5 million for unrecognized tax benefits. We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in other long-term liabilities on the accompanying consolidated balance sheet.
The Company elected to early adopt ASU 2016-09 “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendment requires that excess tax benefits for share-based payments be recorded as a reduction of income tax expense. The recognition of excess tax benefits in our provision for income taxes rather than paid-in-capital resulted in an income tax benefit of $0.1 million for the three-month period ended March 31, 2018 and $0.2 million for the three-month period ended March 31, 2017. For additional information please refer to
“Note 1(
p
) – Recent Accounting Pronouncements”
in the notes to the consolidated financial statements included in this Form 10-Q.
Share-based Compensation
The Company recognizes expense for all share-based payments to employees, including grants of employee stock options, in the financial statements based on their fair values. Share-based compensation expense that was recorded in the three-month periods ended March 31, 2018 and 2017 includes the compensation expense for the share-based payments granted in those periods. In the Company’s share-based compensation strategy we utilize a combination of stock options and stock appreciation rights (“SARS”) that fully vest on the date of grant and restricted stock and performance shares that vest over time or if performance targets are met. The fair value of the options and SARS granted is recognized as expense on the date of grant. The Company used the Black-Scholes-Merton valuation model to value any share-based compensation. Option valuation methods, including Black-Scholes-Merton, require the input of highly complex and subjective assumptions including the risk free interest rate, dividend rate, expected term and common stock price volatility rate. The Company determines the assumptions to be used based upon current economic conditions. While different assumptions may result in materially different stock compensation expenses, changing any one of the individual assumptions by 10% would not have a material impact on the recorded expense. Expense for unvested shares of restricted stock and performance shares is recognized over the required service period.
Recent
Acquisition
s
On August 21, 2017, BAMKO acquired substantially all of the assets of PublicIdentity, Inc. (“Public Identity”). Public Identity is a promotional products and branded merchandise agency that provides promotional products and branded merchandise to corporate clients and universities. The purchase price 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.
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 $5.5 million in additional contingent consideration through 2021, and the assumption of certain liabilities of Tangerine.
Business Outlook
Uniforms and Related Products
Historically, we have manufactured and sold a wide range of uniforms, career apparel and accessories, which comprises our Uniforms and Related Products segment. Our primary products are provided to workers employed by our customers and, as a result, our business prospects are dependent upon levels of employment and overall economic conditions, among other factors. Our revenues are impacted by our customers’ opening and closing of locations and reductions and increases in headcount. Additionally, voluntary employee turnover at our customers can have a significant impact on our business. The current economic environment in the United States is continuing to see moderate improvement in the employment environment and voluntary employee turnover has been increasing. We also continue to see an increase in the demand for employees in the healthcare sector.
We have continued our efforts to increase penetration of the health care market. We have been and continue to pursue acquisitions to increase our market share in the Uniforms and Related Products segment.
Remote Staffing Solutions
This business segment, which operates in El Salvador, Belize and the United States, was initially started to provide remote staffing services for the Company at a lower cost structure in order to improve our own operating results. It has in fact enabled us to reduce our operating expenses in our Uniforms and Related Products segment and to more effectively service our customers’ needs in that segment. We began selling remote staffing services to other companies at the end of 2009. We have grown this business from approximately $1 million in net sales to outside customers in 2010 to approximately $19.3 million in net sales to outside customers in 2017. We have spent significant effort over the last several years improving the depth of our management infrastructure and expanding our facilities in this segment to support significant growth in this segment in 2018 and beyond.
Promotional Products
We have been involved in the sale of promotional products, on a limited basis, to our Uniforms and Related Products customers for over a decade. However, we lacked the scale and expertise needed to be a recognized name in this market prior to our acquisition of substantially all of the assets of BAMKO effective March 1, 2016. BAMKO has been operating in the promotional products industry for more than 16 years and we believe that BAMKO’s strong back office and support systems located in India, China and Hong Kong, as well as their “direct to factory” sourcing operations provide us with a competitive advantage. We believe that BAMKO has well developed systems and processes that can serve as a platform for additional acquisitions that we expect to complete in this highly fragmented market, such as the recent acquisitions of Public Identity and Tangerine Promotions. We formed the Promotional Products segment in 2016 as a result of the BAMKO acquisition; and we expect to strengthen our position in the promotional products and branded merchandise market as we believe this product line is a synergistic fit with our uniform business.
Operations
Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017
Net Sales
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Three Months Ended March 31,
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(in thousands)
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2018
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2017
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% Change
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Uniforms and Related Products
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$
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48,125
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$
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48,331
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(0.4
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)%
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Remote Staffing Solutions
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7,299
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4,663
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56.5
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Promotional Products
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18,676
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8,933
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109.1
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Net intersegment eliminations
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(1,013
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)
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(940
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)
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7.8
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Consolidated Net Sales
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$
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73,087
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$
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60,987
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19.8
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%
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Net Sales
Net sales for the Company increased 19.8% from $61.0 million for the three months ended March 31, 2017 to $73.1 million for the three months ended March 31, 2018. The aggregate increase in net sales is attributed to the acquisitions of Public Identity on August 21, 2017 and Tangerine on December 1, 2017 (contributing 14.2%), other increases from our Promotional Products segment (contributing 1.7%), an increase in net sales after intersegment eliminations of our Remote Staffing Solutions segment (contributing 4.2%), partially offset by a reduction in net sales of our Uniforms and Related Products segment (contributing a decrease of 0.3%).
Uniforms and Related Products net sales decreased 0.4% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The slight decrease in sales for this segment is attributed to several factors. One of our larger customers was acquired by one of its competitors in 2016. The acquiring company was serviced by a different uniform provider that has taken over this account. We will continue to service this customer at a reduced rate. The reduction in net sales from this customer was approximately $1.3 million. The segment also experienced reductions in sales of $2.2 million due to the timing of rollout patterns for several customers. These decreases were partially offset by the adoption of ASC 606 which resulted in recognizing an additional $3.0 million of net sales in the first quarter of 2018.
Remote Staffing Solutions net sales increased 56.5% before intersegment eliminations and 68.8% after intersegment eliminations for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. These increases are attributed to continued market penetration in 2018, with respect to both new and existing customers.
Promotional Products net sales increased 109.1% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase is primarily due to two acquisitions in the latter part of 2017 (contributing 97.1%), the adoption of ASC 606 (contributing 8.2%) and new customer acquisitions and expanded programs with existing customers (contributing 3.8%).
Cost of Goods Sold
Cost of goods sold consists primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing costs, and inspection costs for our Uniforms and Related Products and Promotional Products segments. Cost of goods sold for our Remote Staffing Solutions segment includes salaries and payroll related benefits for agents. 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 are included in selling and administrative expenses.
As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 65.6% for the three months ended March 31, 2018 and 64.9% for the three months ended March 31, 2017. The increase as a percentage of net sales is attributed to an increase in direct product cost as a percentage of net sales during the three months ended March 31, 2018 primarily due to customer mix.
As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 43.0% for the three months ended March 31, 2018 and 45.4% for the three months ended March 31, 2017. The percentage decrease in 2018 as compared to 2017 is primarily attributed to lower payroll related costs for new employees to support revenue growth. In certain locations, agents begin at a lower training wage and do not initially qualify for certain incentives.
As a percentage of net sales, cost of goods sold for our Promotional Products segment was 74.0% for the three months ended March 31, 2018 and 63.0% for the three months ended March 31, 2017. The increase as a percentage of net sales is primarily attributed to the acquisition of Tangerine, which has lower gross margins compared to the other operating divisions in the segment. In addition, cost of goods sold as a percentage of revenue for this segment can fluctuate in quarterly comparisons based on the service requirements of individual contracts that shipped during the quarter.
Selling and Administrative Expenses
As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment approximated 29.4% for the three months ended March 31, 2018 and 28.0% for the three months ended March 31, 2017. The increase as a percentage of net sales was primarily due to professional fees related to a special project (contributing 1.3%) and investment losses on life insurance contracts (contributing 0.3%). These increases were partially offset by decreased salaries, wages and benefits exclusive of retirement plan expenses and medical costs (contributing 0.4%).
As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment approximated 34.4% for the three months periods ended March 31, 2018 and 36.6% for the three months ended March 31, 2017. The decrease is primarily attributed to increased operating efficiencies with continued sales growth.
As a percentage of net sales, selling and administrative expenses for our Promotional Products segment were 27.8% for the three months ended March 31, 2018 and 31.4% for the three months ended March 31, 2017. The decrease is primarily related to higher net sales to cover operating costs for the three months ended March 31, 2018 and a loss on a foreign exchange contract in the three months ended March 31, 2017 (contributing 0.9%). These decreases were partially offset by higher amortization expense due to the acquisitions in 2017 (contributing 1.0%) and fair market value adjustments for the acquisition related contingent liabilities (contributing 0.9%).
Gain on Sale of Property, Plant and Equipment
In the quarter ended March 31, 2017, we sold our former call center building and related assets in El Salvador in our Remote Staffing Solutions segment for net proceeds of $2.8 million and realized a gain on sale of $1.0 million.
Interest Expense
Interest expense increased to $0.3 million for the three months ended March 31, 2018 from $0.2 million for the three months ended March 31, 2017.
Income Taxes
On December 22, 2017, the U.S. enacted the Tax Cuts and Job Acts (“Tax Act”) that instituted fundamental changes to the U.S. tax system. The Tax Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Act also permanently reduces the corporate tax rate from 34% to 21%, imposes a one-time mandatory transition tax on the historical earnings of foreign affiliates and implements a territorial style tax system. As a result of the transition tax under the Tax Act, the Company will no longer consider its undistributed earnings from foreign subsidiaries as indefinitely reinvested and has provided a deferred tax liability primarily for foreign withholding taxes that would be expected to apply when the foreign subsidiaries distribute such earnings as dividends to the Company in the United States. The Tax Act imposes a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is still subject to interpretation and additional clarifying guidance is expected, but is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. In accordance with guidance issued by FASB, the Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred. The Company does expect to be impacted by GILTI relative to the earnings of its foreign subsidiaries in 2018 and beyond, which may be material to our consolidated financial statements.
The effective income tax rate was 26.2% and 29.0% in the three months ended March 31, 2018 and 2017, respectively. The 2.8% decrease in the effective tax rate is attributed primarily to the reduction in corporate tax rate (13.8%), which was partially offset by the addition of the GILTI tax (3.0%), changes to executive compensation limits (0.9%), a decrease in the benefit of foreign sourced income (2.2%), a decrease in the excess tax benefit associated with share based compensation (3.4%), a decrease in state income taxes (0.9%) and other increases (0.6%).
The effective tax rate may vary from quarter to quarter due to unusual or infrequently occurring items, the resolution of income tax audits, changes in tax laws, the tax impact from employee share-based payments, taxes incurred in connection to the territorial style tax system, or other items.
Liquidity and Capital Resources
Balance Sheet
Accounts receivable - trade decreased 4.5% from $50.1 million on December 31, 2017 to $48.3 million on March 31, 2018. The decrease is primarily due to higher billings in the fourth quarter of 2017 compared to the first quarter of 2018.
Inventories decreased 44.0% from $65.0 million on December 31, 2017 to $36.4 million as of March 31, 2018. The decrease is primarily related to the adoption of ASC 606 which reduced inventory by $27.3 million
Contract assets of $47.1 million relate to the adoption of ASC 606 on January 1, 2018. See Note 1.
Prepaid expenses and other current assets decreased 9.1% from $11.0 million on December 31, 2017 to $10.0 million on March 31, 2018. The decrease is primarily attributed to a reduction in prepaid taxes due to the adoption of ASC 606. The change represents the current portion of the tax effect of the cumulative effect of the adoption of the standard of $0.9 million.
Deferred income taxes decreased from $2.9 million on December 31, 2017 to $0.2 million on March 31, 2018. The decrease is primarily attributed to the tax effect of the cumulative effect of the adoption of ASC 606 on January 1, 2018 of $2.7 million.
Other assets increased 21.4% from $7.6 million on December 31, 2017 to $9.2 million on March 31, 2018. The increase is primarily due to higher investments in our Non-Qualified Deferred Compensation Plan due to higher employee contributions to the plan.
Other current liabilities decreased 24.4% from $12.4 million on December 31, 2017 to $9.4 million on March 31, 2018. This decrease is primarily due to lower accrued salaries and wages as a result of the payment of year-end annual incentive compensation during the first quarter of the year.
Current portion of acquisition-related contingent liabilities decreased from $3.1 million on December 31, 2017 to $1.1 million on March 31, 2018. This reduction was due to the final payment for the HPI acquisition which was made during the first quarter of 2018.
Long-term debt increased 21.3% from $32.9 million on December 31, 2017 to $39.9 million on March 31, 2018. The increase is primarily due to higher borrowings on our revolver loan to fund operations partially offset by scheduled repayments on our term loan.
Cash Flows
Cash and cash equivalents increased by $2.3 million from $8.1 million on December 31, 2017 to $10.4 million as of March 31, 2018. During the three months ended March 31, 2018, the Company used cash of $0.6 million for operating activities, used cash of $1.1 million for investing activities to fund capital expenditures, and provided $4.0 million from financing activities.
In the foreseeable future, the Company will continue its ongoing capital expenditure program designed to maintain and improve its facilities.
During the three months ended March 31, 2018 and 2017, the Company paid cash dividends of $1.4 million and $1.2 million, respectively.
Credit Agreement
Effective February 28, 2017, the Company entered into a new 7-year credit agreement with BB&T (the “Credit Agreement”) that provides a new revolving credit facility of $35.0 million (the “Credit Facility”) which terminates on February 25, 2022 and provides a new term loan of $42.0 million (the “Term Loan”) which matures on February 26, 2024. Both loans are based upon the one-month LIBOR rate for U.S. dollar based borrowings. Interest is payable for each loan at LIBOR (rounded up to the next 1/100
th
of 1%) plus 0.75% (2.56% at March 31, 2018). The Company pays a commitment fee of 0.10% per annum on the average unused portion of the commitment under the Credit Facility. The available balance under the Credit Facility is reduced by outstanding letters of credit. As of March 31, 2018, there were no outstanding letters of credit.
The scheduled amortization for the term loan is as follows: 2018 through 2023 - $6.0 million per year; and 2024 - $1.5 million. The term loan does not include
a prepayment penalty. The Company’s obligations under the 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 indebtedness to EBITDA ratio not to exceed 4.0:1 as defined in the agreement and a fixed charge coverage ratio of at least 1.25:1. See Note 2.
In connection with entering into the Credit Agreement, the Company terminated the Third Amended and Restated Credit Agreement, dated March 8, 2016, among Fifth Third Bank, N.A., as lender, the Company, as borrower, and other loan parties from time to time party thereto, which consisted of a $20 million revolving credit facility and a $45 million term loan, both of which were repaid in full on February 28, 2017. See Note 2.
Off-Balance Sheet Arrangements
The Company does not engage in any off-balance sheet financing arrangements. In particular, the Company does not have any interest in variable interest entities, which include special purpose entities and structured finance entities.