sgc20180930_10q.htm
 

 

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 SECURITIESEXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to __________

 

Commission file number: 001-05869

 

Exact name of registrant as specified in its charter:

SUPERIOR GROUP OF COMPANIES, INC.

 

State or other jurisdiction of incorporation or organization:

I.R.S. Employer Identification No.:

Florida

11-1385670

 

Address of principal executive offices:

10055 Seminole Boulevard

Seminole, Florida 33772-2539

 

Registrant's telephone number, including area code:

727-397-9611

 

Former name, former address and former fiscal year, if changed since last report: ___________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

         

Yes [X]

No [_]

     
         

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

         

Yes [X]

No [_]

     
         

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

         

Large accelerated filer [_]

Accelerated filer [X]

 

Non-accelerated filer   [_]

(Do not check if a smaller reporting company)

Smaller Reporting Company

[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 October 22, 2018, the registrant had 15,272,807 shares of common stock outstanding, which is the registrant's only class of common stock.

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

THREE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

(In thousands, except shares and per share data)

 

   

2018

   

2017

 
                 

Net sales

  $ 95,870     $ 67,773  
                 

Costs and expenses:

               

Cost of goods sold

    62,070       42,984  

Selling and administrative expenses

    25,482       17,386  

Other periodic pension costs

    96       348  

Interest expense

    940       213  
      88,588       60,931  
                 

Income before taxes on income

    7,282       6,842  

Income tax expense

    1,160       1,880  
                 

Net income

  $ 6,122     $ 4,962  
                 
Weighted average number of shares outstanding during the period                

(Basic)

    15,010,660       14,573,813  

 (Diluted)

    15,499,894       15,229,722  

Per Share Data:

               

Basic

               

Net income

  $ 0.41     $ 0.34  

Diluted

               

Net income

  $ 0.39     $ 0.33  
                 

Other comprehensive income, net of tax:

               

Defined benefit pension plans:

               
                 

Recognition of net losses included in net periodic pension costs

    216       277  
                 

Loss on cash flow hedging activities

    (3 )     (5 )
                 

Foreign currency translation adjustment

    (180 )     66  
                 

Other comprehensive income

    33       338  
                 

Comprehensive income

  $ 6,155     $ 5,300  
                 

Cash dividends per common share

  $ 0.100     $ 0.095  

 

See accompanying notes to consolidated interim financial statements.

 

2

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

NINE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

(In thousands, except shares and per share data)

 

   

2018

   

2017

 
                 

Net sales

  $ 251,349     $ 194,365  
                 

Costs and expenses:

               

Cost of goods sold

    163,396       123,987  

Selling and administrative expenses

    69,991       51,809  

Other periodic pension costs

    289       1,046  

Interest expense

    1,974       593  
      235,650       177,435  
                 

Gain on sale of property, plant and equipment

    -       1,018  
                 
                 

Income before taxes on income

    15,699       17,948  

Income tax expense

    3,310       4,810  
                 

Net income

  $ 12,389     $ 13,138  
                 
Weighted average number of shares outstanding during the period                

(Basic)

    14,929,513       14,475,311  

(Diluted)

    15,505,642       15,066,616  

Per Share Data:

               

Basic

               

Net income

  $ 0.83     $ 0.91  

Diluted

               

Net income

  $ 0.80     $ 0.87  
                 

Other comprehensive income, net of tax:

               

Defined benefit pension plans:

               
                 

Recognition of net losses included in net periodic pension costs

    647       773  
                 

Gain (loss) on cash flow hedging activities

    209       (185 )
                 

Foreign currency translation adjustment

    (637 )     73  
                 

Other comprehensive income

    219       661  
                 

Comprehensive income

  $ 12,608     $ 13,799  
                 

Cash dividends per common share

  $ 0.290     $ 0.270  

 

See accompanying notes to consolidated interim financial statements.

 

3

 

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

 

   

September 30,

         
   

2018

   

December 31,

 
   

(Unaudited)

   

2017

 
ASSETS  
                 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 2,296     $ 8,130  

Accounts receivable, less allowance for doubtful accounts of $1,810 and $ 1,382, respectively

    65,023       50,569  

Accounts receivable - other

    2,249       1,848  

Inventories*

    65,057       64,979  

Contract assets

    49,605       -  

Prepaid expenses and other current assets

    10,756       11,011  

TOTAL CURRENT ASSETS

    194,986       136,537  
                 

PROPERTY, PLANT AND EQUIPMENT, NET

    28,961       26,844  

OTHER INTANGIBLE ASSETS, NET

    67,279       29,061  

GOODWILL

    33,835       16,032  

DEFERRED INCOME TAXES

    -       2,900  

OTHER ASSETS

    9,969       7,564  
    $ 335,030     $ 218,938  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY  
                 

CURRENT LIABILITIES:

               

Accounts payable

  $ 25,024     $ 19,752  

Other current liabilities

    14,804       12,409  

Current portion of long-term debt

    6,000       6,000  

Current portion of acquisition-related contingent liabilities

    791       3,061  

TOTAL CURRENT LIABILITIES

    46,619       41,222  
                 

LONG-TERM DEBT

    112,224       32,933  

LONG-TERM PENSION LIABILITY

    7,761       8,319  

LONG-TERM ACQUISITION-RELATED CONTINGENT LIABILITIES

    5,301       7,283  

DEFERRED INCOME TAXES

    8,525       -  

OTHER LONG-TERM LIABILITIES

    3,891       4,213  

COMMITMENTS AND CONTINGENCIES (NOTE 5)

               

SHAREHOLDERS' EQUITY:

               

Preferred stock, $.001 par value - authorized 300,000 shares (none issued)

            -  

Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding - 15,299,207and 15,081,947, respectively.

    15       15  

Additional paid-in capital

    55,692       49,103  

Retained earnings

    102,062       83,129  

Accumulated other comprehensive income (loss), net of tax:

               

Pensions

    (6,635 )     (7,282 )

Cash flow hedges

    119       (90 )

Foreign currency translation adjustment

    (544 )     93  

TOTAL SHAREHOLDERS' EQUITY

    150,709       124,968  
    $ 335,030     $ 218,938  

 

*  Inventories consist of the following:

 

   

September 30,

         
   

2018

   

December 31,

 
   

(Unaudited)

   

2017

 

Finished goods

  $ 54,702     $ 54,354  

Work in process

    868       604  

Raw materials

    9,487       10,021  
    $ 65,057     $ 64,979  

 

See accompanying notes to consolidated interim financial statements.

 

4

 

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

(In thousands)

 

   

2018

   

2017

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 12,389     $ 13,138  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    5,745       4,081  

Provision for bad debts - accounts receivable

    409       814  

Share-based compensation expense

    1,867       1,654  

Deferred income tax benefit

    (278 )     (586 )

Gain on sale of property, plant and equipment

    -       (1,018 )

Change in fair value of acquisition-related contingent liabilities

    (1,212 )     115  
                 

Changes in assets and liabilities, net of acquisition of business

               

Accounts receivable - trade

    (5,542 )     (1,746 )

Accounts receivable - other

    (401 )     931  

Contract assets

    (3,779 )     -  

Inventories

    5,742       3,270  

Prepaid expenses and other current assets

    (226 )     (189 )

Other assets

    (2,343 )     (2,756 )

Accounts payable and other current liabilities

    (1,077 )     (725 )

Long-term pension liability

    292       (529 )

Other long-term liabilities

    (283 )     977  

Net cash provided by operating activities

    11,303       17,431  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Additions to property, plant and equipment

    (3,881 )     (2,518 )

Acquisition of businesses, net of acquired cash

    (85,597 )     (766 )

Proceeds from disposals of property, plant and equipment

    -       2,858  

Net cash used in investing activities

    (89,478 )     (426 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Proceeds from long-term debt

    170,713       72,543  

Repayment of long-term debt

    (91,423 )     (75,707 )

Payment of cash dividends

    (4,335 )     (3,874 )

Payment of acquisition-related contingent liabilities

    (3,032 )     (1,800 )

Proceeds received on exercise of stock options

    432       1,218  

Purchase of common stock

    (268 )     -  

Tax benefit from vesting of acquisition-related restricted stock

    445       650  

Tax withholding on exercise of stock rights

    (17 )     (421 )
                 

Net cash provided by (used in) financing activities

    72,515       (7,391 )
                 

Effect of currency exchange rates on cash

    (174 )     46  
                 

Net (decrease) increase in cash and cash equivalents

    (5,834 )     9,660  
                 

Cash and cash equivalents balance, beginning of year

    8,130       3,649  
                 

Cash and cash equivalents balance, end of period

  $ 2,296     $ 13,309  

 

See accompanying notes to consolidated interim financial statements.

 

5

 

 

Superior Group of Companies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

(Unaudited)

 

 

NOTE 1 – Summary of Significant Interim Accounting Policies:

 

a) Basis of presentation

 

The consolidated interim financial statements include the accounts of Superior Group of Companies, Inc. and its wholly-owned subsidiaries, The Office Gurus, LLC, SUG Holding, Fashion Seal Corporation, BAMKO, LLC and CID Resources, Inc.; The Office Gurus, Ltda. de C.V., The Office Masters, Ltda., de C.V. and The Office Gurus, Ltd., each a subsidiary of Fashion Seal Corporation and SUG Holding; Power Three Web, Ltda. and Superior Sourcing, each a wholly-owned subsidiary of SUG Holding; BAMKO Importação, Exportação e Comércio de Brindes Ltda., a subsidiary of BAMKO, LLC and SUG Holding; Guangzhou Ben Gao Trading Limited, Worldwide Sourcing Solutions Limited, and BAMKO UK, Limited, each a direct or indirect subsidiary of BAMKO, LLC; and BAMKO India Private Limited, a 99%-owned subsidiary of BAMKO, LLC.  All of these entities are referred to collectively as “the Company”, “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, 2017, and filed with the Securities and Exchange Commission.  The interim financial information contained herein is not certified or audited; it reflects all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the operating results for the periods presented, stated on a basis consistent with that of the audited financial statements.  The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

 

b)  Revenue recognition and allowance for doubtful accounts

 

The Company recognizes revenue in accordance with ASC 606 effective January 1, 2018. Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the obligations under the terms of a contract with a customer are satisfied. This generally occurs when the goods are transferred to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for the goods. Sales taxes, sales discounts and customer rebates are also excluded from revenue. In accordance with ASC 606, revenue is recorded for goods that the customer is obligated to purchase under the termination terms of the contract which have no alternative use. Contract termination terms may involve variable consideration clauses such as discounts and rebates and revenue has been adjusted accordingly in our ASC 606 adjustment. Revenue from our Remote Staffing segment is recognized as services are delivered.  Variable consideration for estimated returns and allowances is recorded based upon historical experience and current allowance programs.  Judgments and estimates are used in determining the collectability of accounts receivable and in establishing allowances for doubtful accounts.  The Company analyzes specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances when evaluating the adequacy of the allowance for doubtful accounts. Changes in estimates are reflected in the period they become known.  Charge-offs of accounts receivable are made once all collection efforts have been exhausted.  If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

c) Recognition of costs and expenses

 

Costs and expenses other than product costs are charged to income in interim periods as incurred, or allocated among interim periods based on an estimate of time expired, benefit received or activity associated with the periods. Procedures adopted for assigning specific cost and expense items to an interim period are consistent with the basis followed by the registrant in reporting results of operations at annual reporting dates. However, when a specific cost or expense item charged to expense for annual reporting purposes benefits more than one interim period, the cost or expense item is allocated to the interim periods.

 

6

 

 

d)  Amortization of other finite-lived intangible assets

 

The Company amortizes identifiable finite-lived intangible assets on a straight-line basis over their expected useful lives.  Amortization expense was $1.0 million and $0.6 million for the three-month periods ended September 30, 2018 and 2017 respectively.  Amortization expense was $2.9 million and $1.7 million for the nine-month periods ended September 30, 2018 and 2017, respectively.

 

e)  Advertising expenses

 

The Company expenses advertising costs as incurred.  Advertising costs for the three-month periods ended September 30, 2018 and 2017 were $0.2 million and $0.1 million, respectively.  Advertising costs for the nine-month periods ended September 30, 2018 and 2017 were $0.4 million and $0.1 million, respectively.

 

f)  Shipping and handling fees and costs

 

The Company includes shipping and handling fees billed to customers in net sales.  Shipping and handling costs associated with in-bound and out-bound freight incurred for goods shipped to customers 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 $4.0 million and $2.7 million for the three-month periods ended September 30, 2018 and 2017, respectively.  Other shipping and handling costs such as labor and overhead are included in selling and administrative expenses and totaled $10.0 million and $8.1 million for the nine-month periods ended September 30, 2018 and 2017, respectively.

 

g)  Inventories

 

Inventories at interim dates are determined by using perpetual records on a first-in, first-out basis or average cost.

 

h) Accounting for income taxes

 

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

 

i) Employee benefit plan settlements

 

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

 

j) Earnings per share

 

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

 

k) Derivative financial instruments

 

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

 

7

 

 

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

 

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

 

On January 3, 2017, the Company entered into a foreign exchange forward contract to lock in the exchange rate on the Brazilian real to limit the risk of changes in foreign currency on the expected payment of a customer receivable. The amount of the contract was $1.8 million and settled on June 29, 2017. A loss of $0.1 million on this contract was recognized in the second quarter of 2017, which was included in selling and administrative expenses.

 

l) Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

m) Comprehensive income

 

Total comprehensive income represents the change in equity during a period from sources other than transactions with shareholders and, as such, includes net earnings. For the Company, the only other components of total comprehensive income are the change in pension costs, change in fair value of qualifying hedges, and foreign currency translation adjustments.

 

n) Operating segments

 

Accounting standards require disclosures of certain information about operating segments and about products and services, geographic areas in which the Company operates, and their major customers. The Company has evaluated its operations and has determined that it has three reportable segments - Uniforms and Related Products, Remote Staffing Solutions and Promotional Products. (See Note 8.)

 

o) Share-based compensation

 

The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. Historically, the Company has granted options, stock-settled stock appreciation rights, and restricted stock. In 2016, the Company began issuing performance shares as well.

 

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

 

8

 

 

p) Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02 that amends the accounting guidance on leases.  The primary change in this ASU requires lessees to recognize, in the balance sheet, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset over the lease term.  The amendments in this ASU are to be applied using a modified retrospective approach and are effective for fiscal years beginning after December 15, 2018.  The amendments are required to be adopted by the Company on January 1, 2019.  The Company is in the preliminary phases of assessing the effect of this ASU.  We have not yet determined the effect of this ASU on our results of operations, financial condition, or cash flows.

 

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

 

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

 

9

 

 

We recorded a net increase in opening retained earnings of $11.2 million as of January 1, 2018 due to the cumulative impact of ASC 606. The impact on revenues for the three months ended September 30, 2018 was an increase of $2.9 million as a result of ASC 606. The impact on revenues for the nine months ended September 30, 2018 was an increase of $3.7 million as a result of ASC 606.

 

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

 

Net sales

  $ 42,880  

Cost of goods sold

    27,397  

Selling and administrative expenses

    706  

Income before taxes on income

    14,777  

Income tax expense

    3,542  

Adjustment to opening retained earnings

  $ 11,235  

 

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

 

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

 

   

As Reported for
Three Months
Ended

   

Balances

Without

Adoption of

   

Effect of Change

 
   

9/30/2018

   

ASC 606

   

9/30/2018

 
                         

Uniform and Related Products

  $ 69,776     $ 66,610     $ 3,166  

Remote Staffing Solutions

    6,908       6,908       -  

Promotional Products

    19,186       19,427       (241 )
    $ 95,870     $ 92,945     $ 2,925  

 

   

As Reported for
Nine Months
Ended

   

Balances

Without

Adoption of

   

Effect of Change

 
   

9/30/2018

   

ASC 606

   

9/30/2018

 
                         

Uniform and Related Products

  $ 174,304     $ 171,736     $ 2,568  

Remote Staffing Solutions

    20,169       20,169       -  

Promotional Products

    56,876       55,729       1,147  
    $ 251,349     $ 247,634     $ 3,715  

 

Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the obligations under the terms of a contract with a customer are satisfied. This generally occurs when the goods are transferred to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for the goods. Sales taxes, sales discounts and customer rebates are also excluded from revenue. In accordance with ASC 606 revenue is recorded for goods that the customer is obligated to purchase under the termination terms of the contract which have no alternative use. Contract termination terms may involve variable consideration clauses such as discounts and rebates and revenue has been adjusted accordingly in our ASC 606 adjustment. Revenues from contracts containing termination provisions are recorded at terminal value if applicable and therefore do not represent the selling margins if the sale transaction occurred in the normal course of business.  Therefore, revenues recognized under this provision may not reflect the gross margins to be realized for transactions not affected by a contract termination. Revenue from our Remote Staffing segment is recognized as services are delivered and did not generate an ASC 606 adjustment in the three or nine-month periods ended September 30, 2018.

 

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

 

10

 

 

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

 

Balance Sheet

 

   

As Reported

   

Balances

Without

Adoption of

   

Effect of Change

 
   

9/30/2018

   

ASC 606

   

9/30/2018

 

Assets:

                       

Contract assets

  $ 49,605     $ -     $ 49,605  

Inventory

    65,057       93,770       (28,713 )

Deferred taxes

    (8,525 )     (5,639 )     (2,886 )
                         

Liabilities:

                       

Accounts payable

  $ 25,024     $ 22,239     $ 2,785  

Other current liabilites

    14,804       12,730       2,074  

 

In accordance with ASC 606, the Company has recognized contract assets of $49.6 million as of September 30, 2018 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.

 

   

As Reported for
Three Months
Ended

   

Balances

Without

Adoption

of

   

Effect of Change

 
   

9/30/2018

   

ASC 606

   

9/30/2018

 

Statement of comprehensive income:

                       

Net sales

  $ 95,870     $ 92,945     $ 2,925  

Cost of goods sold

    62,070       59,908       2,162  

Selling and administrative expenses

    25,482       25,527       (45 )

 

 

   

As Reported for
Nine Months
Ended

   

Balances

Without

Adoption of

   

Effect of Change

 
   

9/30/2018

   

ASC 606

   

9/30/2018

 

Statement of comprehensive income:

                       

Net sales

  $ 251,349     $ 247,634     $ 3,715  

Cost of goods sold

    163,396       160,551       2,845  

Selling and administrative expenses

    69,991       70,058       (67 )

 

 

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.

 

11

 

 

 

NOTE 2 - Long-Term Debt:

 

September 30,

   

December 31,

 

(In thousands)

 

2018

   

2017

 
                 

Note payable to BB&T, pursuant to revolving credit agreement, maturing May 2023

  $ 422     $ 1,475  
                 

Term loan payable to BB&T maturing February 26, 2024

  $ 33,000     $ 37,500  
                 

Term loan payable to BB&T maturing May 2020

  $ 85,000     $ -  
                 
    $ 118,422     $ 38,975  

Less:

               

Payments due within one year included in current liabilities

  $ 6,000     $ 6,000  

Debt issuance costs

  $ 198     $ 42  

Long-term debt less current maturities

  $ 112,224     $ 32,933  

 

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

 

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

 

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

 

Obligations outstanding under the revolving credit facility and the $42 million term loan generally have a variable interest rate of one-month LIBOR plus 0.68% (2.86% at September 30, 2018). Obligations outstanding under the new $85 million term loan generally have a variable interest rate of one-month LIBOR plus 0.93% for the first twelve months after the effective date (3.11% at September 30, 2018), 1.5% for the period from thirteen months through eighteen months after the effective date, and 1.75% thereafter. The Company is obligated to pay a commitment fee of 0.10% per annum on the average unused portion of the commitment under the revolving credit facility and a commitment fee of 0.25% on the outstanding balance of the $85 million term loan on June 1, 2019 and December 1, 2019. The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of September 30, 2018, there were no outstanding letters of credit.  The term loans do not contain pre-payment penalties.

 

12

 

 

The Amended and Restated Credit Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, restricted payments, and sales of assets. The Amended and Restated Credit Agreement also requires the Company to maintain a fixed charge coverage ratio of at least 1.25:1 and a funded debt to EBITDA ratio not to exceed 4.0:1.  As of September 30, 2018, 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.

 

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

 

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

 

Effective March 3, 2017, in order to reduce the interest rate risk on its future debt, the Company entered into an interest rate swap agreement (“original swap”) with BB&T that was designed to effectively convert or hedge the variable interest rate on a portion of its future borrowings to achieve a net fixed rate of 3.12% per annum, beginning March 1, 2018 with a notional amount of $18.0 million. The notional amount of the interest rate swap is reduced by $0.3 million per month beginning April 1, 2018 through February 26, 2024. Under the terms of the interest rate swap, the Company will receive variable interest rate payments and make fixed interest rate payments on an amount equal to the notional amount at that time. Changes in the fair value of the interest rate swap designated as the hedging instrument that effectively offset the variability of cash flows associated with the variable rate, long-term debt obligation are recorded in OCI, net of related income tax effects. On May 2, 2018, in conjunction with the Amended and Restated Credit Agreement, the original swap was modified (“amended swap”) to achieve a net fixed rate of 3.05% per annum effective May 1, 2018 and the remaining notional amount 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 will be amortized as interest expense over the remaining life of the amended swap. As of September 30, 2018, there was $0.1 million related to the original swap recorded within OCI. Changes to the fair value of the amended swap will be recorded as interest expense. As of September 30, 2018, the fair value of the amended swap was $0.2 million and was included in prepaid expenses and other current assets.

 

13

 

 

 

NOTE 3 – Periodic Pension Expense:

 

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

(In thousands)

 

   

Three Months

   

Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Service cost - benefits earned during the period

  $ 27     $ 17     $ 81     $ 49  

Interest cost on projected benefit obligation

    242       241       727       724  

Expected return on plan assets

    (429 )     (305 )     (1,288 )     (914 )

Recognized actuarial loss

    284       253       850       800  

Settlement loss

    -       158       -       435  

Net periodic pension cost

  $ 124     $ 364     $ 370     $ 1,094  

 

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.

 

The Company no longer accrues additional benefits for future service or for future increases in compensation levels for the Company’s primary or hourly defined benefit pension plans.

 

There were $0.1 million in contributions made to the Company’s defined benefit plans during the three-month period ended September 30, 2018. There were no contributions made to the Company’s defined benefit plans during the three-month period ended September 30, 2017. There were $0.1 million and $1.5 million in contributions made to the Company’s defined benefit plans during the nine-month period ended September 30, 2018 and 2017, respectively.

 

 

NOTE 4 - Supplemental Cash Flow Information:

 

Cash paid for income taxes was $0.7 million and $5.2 million, respectively, for the nine-month periods ended September 30, 2018 and 2017. Cash paid for interest was $1.7 million and $0.5 million, respectively for the nine-month periods ended September 30, 2018 and 2017.

 

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

 

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

 

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

 

 

NOTE 5 – Contingencies: 

 

The Company is involved in various legal actions and claims arising from the normal course of business. In the opinion of management, the ultimate outcome of these matters will not have a material impact on the Company’s results of operations, cash flows, or financial position.

 

14

 

 

 

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 September 30, 2018, the Company had 3,456,944 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:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

(In thousands)

   

(In thousands)

 
   

2018

   

2017

   

2018

   

2017

 

Stock options and SARS

  $ 16     $ 345     $ 960     $ 1,092  

Restricted stock

    140       80       404       243  

Performance shares

    221       121       503       319  

Total share-based compensation expense

  $ 377     $ 546     $ 1,867     $ 1,654  
                                 

Related income tax benefit

  $ 44     $ 29     $ 229     $ 197  

 

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.

 

Options and SARS vest immediately at the date of grant or after a two-year period.  Awards 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, 2018 follows:

 

   

No. of

   

Weighted Average

 
   

Shares

   

Exercise Price

 

Outstanding December 31, 2017

    633,877     $ 13.33  

Granted

    141,630       22.20  

Exercised

    (60,058 )     10.08  

Lapsed

    (1,800 )     5.88  

Cancelled

    (2,620 )     20.05  

Outstanding September 30, 2018

    711,029     $ 15.36  

 

At September 30, 2018, 667,784 options outstanding were fully vested and exercisable, and 43,245 options outstanding have a remaining vesting period of 1.84 years. The aggregate intrinsic value of outstanding options was $3.2 million and weighted-average remaining contractual term was 37 months.

 

15

 

 

Options exercised during the three-month period ended September 30, 2018 and 2017 had intrinsic values of $0.1 million and $0.4 million, respectively. Options exercised during the nine-month period ended September 30, 2018 and 2017 had intrinsic values of $0.9 million and $2.7 million, respectively.

 

During the three-month period ended September 30, 2018, 43,245 options were granted with a fair value of $4.39, but do not vest until August 3, 2020. During the three-month period ended September 30, 2017, 53,970 options were granted with a fair value of $6.40.  The weighted average fair values of the Company’s 141,630 and 155,142 options granted during each of the nine-month periods ending September 30, 2018 and 2017 were $5.93 and $5.56, respectively. As of September 30, 2018, the Company had $0.2 million in unrecognized compensation related to nonvested grants to be recognized over the remaining service period of 1.84 years.

 

During the three-month periods ended September 30, 2018 and 2017, respectively, the Company received $0.1 million and $0.4 million in cash from stock option exercises. Additionally, during the three-month periods ended September 30, 2018 and 2017, respectively, the Company received no shares of its common stock as payment of the exercise price in the exercise of stock options. During the nine-month periods ended September 30, 2018 and 2017, respectively, the Company received $0.4 million and $1.2 million in cash from stock option exercises. Additionally, during the nine-month periods ended September 30, 2018 and 2017, the Company received 6,894 and 43,841 shares of its common stock as payment of the exercise price in the exercise of stock options for 26,234 and 113,143 shares. The tax benefit recognized for these exercises during the three-month periods ended September 30, 2018 and 2017 was $0.1 million and $0.1 million, respectively. The tax benefit recognized for these exercises during the nine-month periods ended September 30, 2018 and 2017 was $0.1 million and $0.3 million, respectively.

 

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

 

               

Weighted Average

         

Range of

         

Remaining

   

Weighted Average

 

Exercise Price

 

Shares

   

Contractual Life (Years)

   

Exercise Price

 

$ 3.82

- $ 5.88     89,000     2.86     $ 5.33  

$ 7.36

- $10.38     126,767     1.55     $ 7.85  

$16.35

- $18.66     352,232     3.15     $ 17.49  

$21.63

- $24.28     143,030     4.58     $ 23.03  
                           

$ 3.82

- $24.28     711,029     3.12     $ 15.36  

 

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

 

   

No. of

   

Weighted Average

 
   

Shares

   

Exercise Price

 

Outstanding December 31, 2017

    146,504     $ 17.38  

Granted

    48,515       23.59  

Exercised

    (12,125 )     17.92  

Lapsed

    -       -  

Cancelled

    -       -  

Outstanding September 30, 2018

    182,894     $ 18.99  

 

At September 30, 2018, SARS outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $0.2 million. The weighted-average remaining contractual term was 34 months.

 

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

 

There were no SARS exercised during the three-month period ended September 30, 2018 and 2017, respectively.

 

16

 

 

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

 

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

 

               

Weighted Average

         

Range of

         

Remaining

   

Weighted Average

 

Exercise Price

 

Shares

   

Contractual Life (Years)

   

Exercise Price

 

$16.35

- $18.66     134,379     2.33     $ 17.33  

$23.59

- $23.59     48,515     4.33     $ 23.59  
                           

$16.35

- $23.59     182,894     2.86     $ 18.99  

 

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.

 

Three months ended

               

September 30,

 

SARS

   

Options

 
                 

Exercise price

               

2018

    N/A     $ 18.86  

2017

    N/A     $ 21.63  
                 

Market price

               

2018

    N/A     $ 18.86  

2017

    N/A     $ 21.63  
                 

Risk free interest rate1

               

2018

    N/A       2.7 %

2017

    N/A       1.8 %
                 

Expected award life (years)2

               

2018

    N/A       3  

2017

    N/A       5  
                 

Expected volatility3

               

2018

    N/A       35.4 %

2017

    N/A       37.2 %
                 

Expected dividend yield4

               

2018

    N/A       2.1 %

2017

    N/A       1.8 %

 

17

 

 

Nine months ended

                   

September 30,

 

SARS

   

Options

 
                     

Exercise price

                   

2018

  $ 23.59    

 

$18.86 - $24.28  

2017

  $ 16.97    

 

$16.97 - $21.63  
                     

Market price

                   

2018

  $ 23.59    

 

$18.86 - $24.28  

2017

  $ 16.97    

 

$16.97 - $21.63  
                     

Risk free interest rate1

                   

2018

    2.6 %     2.6% - 2.9%  

2017

    1.9 %     1.8% - 2.4%  
                     

Expected award life (years)2

                   

2018

    3       3 - 10  

2017

    5       5 - 10  
                     

Expected volatility3

                   

2018

    35.4 %     35.4% - 42.1%  

2017

    36.6 %     36.6% - 41.4%  
                     

Expected dividend yield4

                   

2018

    1.6 %     1.6% - 2.1%  

2017

    2.1 %     1.8% - 2.1%  

 

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 September 30, 2018 and 2017 was based on historical Superior common stock prices over a period commensurate with the expected life.

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

 

Restricted Stock

 

The Company has granted restricted stock to directors and certain employees under the terms of the 2013 Plan which vest at a specified future date, generally after three years, or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan. Expense for each of these grants is based on the fair value at the date of the grant and is being recognized on a straight-line basis over the respective service period. As of September 30, 2018, the Company had $0.9 million of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted average service period of 1.58 years.

 

A summary of restricted stock transactions during the nine months ended September 30, 2018 follows:

 

           

Weighted Average

 
   

No. of

   

Grant Date

 
   

Shares

   

Fair Value

 

Outstanding December 31, 2017

    61,378     $ 17.89  

Granted

    24,908       23.56  

Vested

    -       -  

Forfeited

    -       -  

Outstanding September 30, 2018

    86,286     $ 19.52  

 

18

 

 

Performance Shares

 

In the nine months ended September 30, 2018, the Compensation Committee of the Board of Directors approved grants of performance shares under the terms of the 2013 Plan.  Under the terms of the grants, certain employees received service-based or service-based and performance-based shares.  The service-based awards vest after the service period is met, which is generally three to five years.  Expense for these grants is based on the fair value on the date of the grant and is being recognized on a straight-line basis over the respective service period.  The performance-based shares generally vest after five years if the performance and service targets are met.  The Company evaluates the performance conditions associated with these grants each reporting period to determine the expected number of shares to be issued.  Based upon this evaluation, expected expenses for these grants are based on the fair value on the date of the grant and 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 September 30, 2018, the Company had $2.9 million of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted average service period of 2.93 years.

 

A summary of performance share transactions during the nine months ended September 30, 2018 follows:

 

           

Weighted Average

 
   

No. of

   

Grant Date

 
   

Shares

   

Fair Value

 

Outstanding December 31, 2017

    118,492     $ 17.84  

Granted

    84,838       24.56  

Vested

    -       -  

Forfeited

    (8,952 )     24.98  

Outstanding September 30, 2018

    194,378     $ 20.08  

 

 

 

NOTE 7 – Earnings Per Share:

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2018

   

2017

   

2018

   

2017

 

Net earnings used in the computation of basic and diluted earnings per share (in thousands)

  $ 6,122     $ 4,962     $ 12,389     $ 13,138  
                                 

Weighted average shares outstanding - basic

    15,010,660       14,573,813       14,929,513       14,475,311  

Common stock equivalents

    489,234       655,909       576,129       591,305  

Weighted average shares outstanding - diluted

    15,499,894       15,229,722       15,505,642       15,066,616  

Per Share Data:

                               

Basic

                               

Net earnings

  $ 0.41     $ 0.34     $ 0.83     $ 0.91  

Diluted

                               

Net earnings

  $ 0.39     $ 0.33     $ 0.80     $ 0.87  

 

Awards to purchase approximately 192,000 shares of common stock with a weighted average price of $23.17 per share were outstanding during the three-month period ending September 30, 2018, but were not included in the computation of diluted EPS because the awards’ exercise prices were greater than the average market price of the common shares. There were no such awards outstanding during the three-month period ending September 30, 2017.

 

Awards to purchase approximately 192,000 and 50,000 shares of common stock with weighted average exercise prices of $23.17 and $18.65 per share were outstanding during the nine-month periods ending September 30, 2018 and 2017, respectively, but were not included in the computation of diluted EPS because the awards’ exercise prices were greater than the average market price of the common shares.

 

 

NOTE 8 Operating Segment Information:

 

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

 

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

 

19

 

 

(In thousands)

                                       
   

Uniforms and

Related

Products

   

Remote

Staffing

Solutions

   

Promotional

Products

   

Intersegment

Eliminations

   

Total

 

As of and For the Three Months Ended

                                       

September 30, 2018

                                       

Net sales

  $ 69,776     $ 7,934     $ 19,186     $ (1,026 )   $ 95,870  
                                         

Gross margin

  $ 24,551     $ 4,588     $ 5,327     $ (666 )   $ 33,800  
                                         

Selling and administrative expenses

    18,731       2,856       4,561       (666 )     25,482  
                                         

Other periodic pension cost

    96                               96  
                                         

Interest expense

    593       -       347       -       940  
                                         

Income before taxes on income

  $ 5,131     $ 1,732     $ 419     $ -     $ 7,282  
                                         

Depreciation and amortization

  $ 1,510     $ 241     $ 348     $ -     $ 2,099  
                                         

Capital expenditures

  $ 885     $ 445     $ 137     $ -     $ 1,467  
                                         

Total assets

  $ 321,861     $ 27,626     $ 57,610     $ (72,067 )   $ 335,030  

 

 

   

Uniforms and

Related

Products

   

Remote

Staffing

Solutions

   

Promotional

Products

   

Intersegment

Eliminations

   

Total

 

As of and For the Three Months Ended

                                       

September 30, 2017

                                       

Net sales

  $ 51,854     $ 6,036     $ 10,810     $ (927 )   $ 67,773  
                                         

Gross margin

    18,640       3,267       3,482       (600 )     24,789  
                                         

Selling and administrative expenses

    13,007       2,023       2,956       (600 )     17,386  
                                         

Other periodic pension cost

    348       -       -       -       348  
                                         

Interest expense

    100       -       113       -       213  
                                         

Income before taxes on income

  $ 5,185     $ 1,244     $ 413     $ -     $ 6,842  
                                         

Depreciation and amortization

  $ 1,044     $ 200     $ 122     $ -     $ 1,366  
                                         

Capital expenditures

  $ 246     $ 178     $ 90     $ -     $ 514  
                                         

Total assets

  $ 177,103     $ 20,618     $ 34,945     $ (27,341 )   $ 205,325  

 

20

 

 

(In thousands)

                                       
   

Uniforms and

Related

Products

   

Remote

Staffing

Solutions

   

Promotional

Products

   

Intersegment

Eliminations

   

Total

 

As of and For the Nine Months Ended

                                       

September 30, 2018

                                       

Net sales

  $ 174,304     $ 23,234     $ 56,876     $ (3,065 )   $ 251,349  
                                         

Gross margin

  $ 61,268     $ 13,395     $ 15,297     $ (2,007 )   $ 87,953  
                                         

Selling and administrative expenses

    50,269       8,146       13,583       (2,007 )     69,991  
                                         

Other periodic pension cost

    289       -       -       -       289  
                                         

Interest expense

    1,147       -       827               1,974  
                                         

Income before taxes on income

  $ 9,563     $ 5,249     $ 887     $ -     $ 15,699  
                                         

Depreciation and amortization

  $ 4,024     $ 731     $ 990     $ -     $ 5,745  
                                         

Capital expenditures

  $ 2,278     $ 1,264     $ 339     $ -     $ 3,881  
                                         

Total assets

  $ 321,861     $ 27,626     $ 57,610     $ (72,067 )   $ 335,030  

 

 

   

Uniforms and

Related

Products

   

Remote

Staffing

Solutions

   

Promotional

Products

   

Intersegment

Eliminations

   

Total

 

As of and For the Nine Months Ended

                                       

September 30, 2017

                                       

Net sales

  $ 152,297     $ 16,261     $ 28,602     $ (2,795 )   $ 194,365  
                                         

Gross margin

    53,795       8,819       9,581       (1,817 )     70,378  
                                         

Selling and administrative expenses

    39,681       5,489       8,456       (1,817 )     51,809  
                                         

Other periodic pension cost

    1,046       -       -       -       1,046  
                                         

Gain (loss) on sale of property, plant and equipment

    (2 )     1,020       -       -       1,018  
                                         

Interest expense

    311       -       282       -       593  
                                         

Income before taxes on income

  $ 12,755     $ 4,350     $ 843     $ -     $ 17,948  
                                         

Depreciation and amortization

  $ 3,143     $ 585     $ 353     $ -     $ 4,081  
                                         

Capital expenditures

  $ 1,890     $ 485     $ 143     $ -     $ 2,518  
                                         

Total assets

  $ 177,103     $ 20,618     $ 34,945     $ (27,341 )   $ 205,325  

 

21

 

 

 

NOTE 9 – Acquisition of Businesses:

 

CID Resources

 

On May 2, 2018, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with CID Resources, Inc., a Delaware corporation (“CID”), CID Resources Holdings LLC, a Delaware limited liability company (the “Seller”), and certain of the equityholders of the Seller (such signatories, the “Equityholders”). Pursuant to the Purchase Agreement, the Company acquired all of the issued and outstanding common stock and Series A preferred stock of CID effective as of May 2, 2018. CID, headquartered in Coppell, Texas, 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 consists 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 (the “Buyer Shares”). 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

 

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

 

 

Cash consideration at closing

  $ 84,430  
         

Superior common stock issued

    3,763  
         

Cash and working capital adjustment

    2,521  
         

Total Consideration

  $ 90,714  

 

 

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.

 

22

 

 

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

 

Cash

  $ 1,360  
         

Accounts receivable

    9,657  
         

Prepaid expenses and other current assets

    1,248  
         

Inventories

    30,692  
         

Property, plant and equipment

    1,134  
         

Contract assets

    2,535  
         

Identifiable intangible assets

    41,020  
         

Goodwill

    17,968  
         

Total assets

  $ 105,614  
         

Accounts payable

    4,472  
         

Deferred tax liability

    9,461  
         

Other current liabilities

    967  
         

Total liabilities

  $ 14,900  

 

The Company recorded $41.0 million in identifiable intangibles at fair value, consisting of $26.0 million in acquired customer relationships, $0.8 million in non-compete agreements 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 September 30, 2018 and $0.8 million for the nine-month period ended September 30, 2018.

 

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

 

On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the three months ended September 30, 2017 net sales would have increased approximately $17.6 million. Net income would have increased $1.5 million in 2017, or $0.10 per share.

 

On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the nine months ended September 30, 2017 net sales would have increased approximately $48.4 million. Net income would have increased $1.3 million in 2017, or $0.09 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.

 

23

 

 

Fair Value of Consideration Transferred

 

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

 
         

Cash consideration at closing, net of cash acquired

  $ 15,161  
         

Restricted shares of Superior common stock issued

    4,558  
         

Contingent consideration

    5,205  
         

Total Consideration

  $ 24,924  

 

Assets Acquired and Liabilities Assumed

 

The total purchase price was allocated to the acquired tangible and intangible assets and assumed liabilities of BAMKO, Inc. 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 allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and assumed liabilities of BAMKO, Inc. based on their fair values as of the effective date of the transaction.

 

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

 

Accounts receivable

  $ 4,885  
         

Prepaid expenses and other current assets

    3,200  
         

Inventories

    236  
         

Property, plant and equipment

    199  
         

Other assets

    100  
         

Identifiable intangible assets

    11,360  
         

Goodwill

    6,994  
         

Total assets

  $ 26,974  
         

Accounts payable

    1,314  
         

Other current liabilities

    736  
         

Total liabilities

  $ 2,050  

 

The Company recorded $11.4 million in identifiable intangibles at fair value, 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 estimated fair value for acquisition-related contingent consideration payable was $3.7 million as of September 30, 2018. The current portion of $0.8 million is expected to 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. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liability.

 

24

 

 

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 are being amortized for seven years beginning on March 1, 2016 and the non-compete agreement is being amortized for five years and ten months. 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 $0.1 million for the each of three-month periods ended September 30, 2018 and 2017 and $0.3 million for each of the nine-month periods ended September 30, 2018 and 2017.

 

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 upon 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 closed on the acquisition of 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.

 

Fair Value of Consideration Transferred

 

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

 
         

Cash consideration at closing

  $ 7,222  
         

Restricted shares of Superior common stock issued

    1,657  
         

Contingent consideration

    3,209  
         

Total Consideration

  $ 12,088  

 

 

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.

 

25

 

 

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):

 

Accounts receivable

  $ 5,051  
         

Prepaid expenses and other current assets

    969  
         

Property, plant and equipment

    131  
         

Identifiable intangible assets

    6,495  
         

Goodwill

    4,169  
         

Total assets

  $ 16,815  
         

Accounts payables

    3,374  
         

Other current liabilities

    1,353  
         

Total liabilities

  $ 4,727  

 

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 $2.4 million as of September 30, 2018. We currently do not expect to make a payment 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. 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 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-month period ended September 30, 2018, and $0.4 million for the nine-month period ended September 30, 2018.

 

On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the three months ended September 30, 2017 net sales would have increased approximately $9.3 million. Net income would have increased $0.2 million in 2017, or $0.1 per share.

 

On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the nine months ended September 30, 2017 net sales would have increased approximately $28.3 million. Net income would have decreased $0.6 million in 2017, or $0.4 per share.

 

26

 

 

 

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 businesses 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, 2017 and the “Risk Factors” section herin. 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 in Note 1 of this Form 10-Q 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 $0.7 million.

 

27

 

 

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.

 

Contract Assets

 

A contract asset is an enforceable right to payment for goods or services transferred to a customer if the right to payment is conditional on something other than the passage of time. In accordance with ASC 606, the Company recognizes contract assets for goods with no alternative use and the Company has an enforceable right to payment for performance completed to date.

 

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:

 

macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets;

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;

cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;

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;

other relevant entity-specific events such as changes in management, key personnel, strategy, or customers. 

 

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 September 30, 2018, goodwill of $22.1 million was included in the Uniforms and Related Products segment and $11.7 million was included in the Promotional Products segment. $18.0 million in goodwill is attributed to the CID acquisition and is not deductible for tax purposes.

 

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.

 

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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 nine-month periods ending September 30, 2018 and September 30, 2017, there was no change in total unrecognized tax benefits. As of September 30, 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.

 

29

 

 

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 nine-month periods ended September 30, 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, stock appreciation rights (“SARS”),  restricted stock and performance shares that vest upon grant, 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 or over the vesting period.  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 Acquisitions

 

On May 2, 2018, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with CID Resources, Inc. (“CID”). Headquartered in Coppell, Texas, CID 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 consists 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 (representing approximately $3.8 million) to an Equityholder (the “Buyer Shares”). 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.

 

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.  We also continue to see an increase in the demand for employees in the healthcare sector.  The acquisition of CID also adds a new sales channel for the Company to sell healthcare apparel through retailers. 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.  

 

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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.

 

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

 

Net Sales

 

Three Months Ended September 30,

 
   

(in thousands)

 
   

2018

   

2017

   

% Change

 

Uniforms and Related Products

  $ 69,776     $ 51,854       34.6

%

Remote Staffing Solutions

    7,934       6,036       31.4  

Promotional Products

    19,186       10,810       77.5  

Net intersegment eliminations

    (1,026 )     (927 )     10.7  

Consolidated Net Sales

  $ 95,870     $ 67,773       41.5

%

 

Net Sales

 

 

Net sales for the Company increased 41.5% from $67.8 million for the three months ended September 30, 2017 to $95.9 million for the three months ended September 30, 2018.   The aggregate increase in net sales is attributed to the acquisitions of Public Identity on August 21, 2017, Tangerine on December 1, 2017 and CID Resources on May 2, 2018 (contributing 38.7%), an increase in net sales after intersegment eliminations of our Remote Staffing Solutions segment (contributing 2.7%) and the adoption of ASC 606 (contributing 4.4%); partially offset by other decreases from of our Uniforms and Related Products segment (contributing 4.3%). Excluding acquisitions, net sales from our Promotional Products segment were flat. 

 

Uniforms and Related Products net sales increased 34.6% for the three months ended September 30, 2018 compared to the three months ended September 30, 2017.  The increase is primarily due to the CID acquisition (contributing 34.0%) and the adoption of ASC 606 which resulted in increasing net sales $3.2 million (contributing 6.3%); partially offset by other decreases (contributing 5.7%).  

 

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Remote Staffing Solutions net sales increased 31.4% before intersegment eliminations and 35.2% after intersegment eliminations for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. These increases are attributed to continued market penetration in 2018, with respect to both new and existing customers.

 

Promotional Products net sales increased 77.5% for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The increase is primarily due to the two acquisitions in the latter part of 2017 (contributing 79.8%); partially offset by the adoption of ASC 606 (contributing 2.2%) and other decreases (contributing 0.1%). As we have noted in the past, net sales in this segment will tend to fluctuate more significantly than our Uniforms and Related Products segment from quarter to quarter.

 

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 64.8% for the three months ended September 30, 2018 and 64.1% for the three months ended September 30, 2017. The increase is primarily due to changes in customer and product mix, as well as higher freight costs. These are partially offset by the acquisition of CID which tends to have higher gross margins. Exclusive of the results from CID, our Uniform Segment would have had cost of goods sold as a percentage of net sales of 66.6% for the three months ended September 30, 2018.

 

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 42.2% for the three months ended September 30, 2018 and 45.9% for the three months ended September 30, 2017. The percentage decrease in 2018 as compared to 2017 is primarily attributed to an increase in the percentage of revenue coming from the offshore portion of revenue which has higher gross margins.

 

As a percentage of net sales, cost of goods sold for our Promotional Products segment was 72.2% for the three months ended September 30, 2018 and 67.8% for the three months ended September 30, 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. Exclusive of the results from Tangerine, our Promotional Products segment would have had cost of goods sold as a percentage of net sales of 69.1% for the three months ended September 31, 2018. 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 26.8% for the three months ended September 30, 2018 and 25.1% for the three months ended September 30, 2017.  Included within these expenses for 2018 was approximately $0.1 million associated with the CID acquisition.  CID’s selling and administrative expenses, excluding acquisition related expenses were approximately 32.3% of CID’s net sales for the three months ended September 30, 2018.  Due to the nature of CID’s business, it tends to have higher selling and administrative expenses.  Exclusive of acquisition related expenses and CID’s selling and administrative expenses, selling and administrative expenses for the Uniform and Related Products segment as a percentage of net sales would have been 24.7%.  This decrease is attributed to higher net sales to cover operating expenses (contributing 0.2%), lower amortization of non-compete agreements (contributing 0.7%) and other minor decreases (contributing 0.4%); partially offset by higher medical costs (contributing 0.9%). 

 

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment approximated 36.0% for the three months ended September 30, 2018 and 33.5% for the three months ended September 30, 2017. The increase is primarily attributed to investments in the business to support continued sales growth.

 

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As a percentage of net sales, selling and administrative expenses for our Promotional Products segment were 23.8% for the three months ended September 30, 2018 and 27.3% for the three months ended September 30, 2017. The decrease is primarily related to higher net sales to cover operating costs for the three months ended September 30, 2018. In addition, the decrease is a result of fair market value adjustments for the acquisition related contingent liabilities (contributing 2.1%). These decreases were partially offset by higher amortization expense due to the acquisitions in 2017 (contributing 1.2%).

 

Interest Expense

 

Interest expense increased to $0.9 million for the three months ended September 30, 2018 from $0.2 million for the three months ended September 30, 2017 primarily due to increased borrowings related to the May 2, 2018 acquisition of CID and higher interest rates.

 

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 15.9% and 27.5% in the three months ended September 30, 2018 and 2017, respectively. The 11.6% decrease in the effective tax rate in 2018 is attributed primarily to the reduction in corporate tax rate (13.0%), 2017 provision-to-return adjustments (5.4%), 2017 transition tax adjustments (2.4%) and other decreases (1.7%); partially offset by the addition of the GILTI tax (3.7%), a decrease in the benefit of foreign sourced income (2.2%), changes to executive compensation limits (0.9%), a decrease in the excess tax benefit associated with share based compensation (1.3%) and an increase in state income taxes (2.8%).

 

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.

 

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

 

Net Sales

 

Nine Months Ended September 30,

 
   

(in thousands)

 
   

2018

   

2017

   

% Change

 

Uniforms and Related Products

  $ 174,304     $ 152,297       14.5

%

Remote Staffing Solutions

    23,234       16,261       42.9  

Promotional Products

    56,876       28,602       98.9  

Net intersegment eliminations

    (3,065 )     (2,795 )     9.7  

Consolidated Net Sales

  $ 251,349     $ 194,365       29.3

%

 

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Net Sales

 

Net sales for the Company increased 29.3% from $194.4 million for the nine months ended September 30, 2017 to $251.3 million for the nine months ended September 30, 2018.   The aggregate increase in net sales is attributed to the acquisitions of Public Identity on August 21, 2017, Tangerine on December 1, 2017 and CID Resources on May 2, 2018 (contributing 29.4%), an increase in net sales after intersegment eliminations of our Remote Staffing Solutions segment (contributing 3.4%) and the adoption of ASC 606 (contributing 2.0%); partially offset by other decreases in our Uniforms and Related Products segment (contributing 4.5%) and our Promotional Products segment (contributing 1.0%).

 

Uniforms and Related Products net sales increased 14.5% for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.  The increase is primarily due to the CID acquisition (contributing 18.5%) and the adoption of ASC 606 which resulted in increasing net sales $2.7 million (contributing 1.8%); partially offset by other decreases (contributing 5.8%). The other decreases in sales are 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 $4.4 million, including sales of remaining inventory in the second quarter of 2017.  The segment also experienced other net reductions in sales of $4.6 million.

 

Remote Staffing Solutions net sales increased 42.9% before intersegment eliminations and 49.8% after intersegment eliminations for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2018.  These increases are attributed to continued market penetration in 2018, with respect to both new and existing customers.

 

Promotional Products net sales increased 98.9% for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.  The increase is primarily due to the two acquisitions in the latter part of 2017 (contributing 101.5%) and the adoption of ASC 606 (contributing 4.0%); partially offset by other decreases (contributing 6.6%).  As we have noted in the past, net sales in this segment will tend to fluctuate more significantly than our Uniforms and Related Products segment from quarter to quarter.

 

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 64.8% for the nine months ended September 30, 2018 and 64.7% for the nine months ended September 30, 2017. Increases due to change in customer mix were offset by the impact of the acquisition of CID which tends to have higher gross margins. Exclusive of the results from CID, our Uniform Segment would have had cost of goods sold as a percentage of net sales of 65.9% for the nine months ended September 30, 2018.

 

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 42.3% for the nine months ended September 30, 2018 and 45.8% for the nine months ended September 30, 2017. The percentage decrease in 2018 as compared to 2017 is primarily attributed to an increase in the percentage of revenue coming from the offshore portion of revenue which has higher gross margins.

 

As a percentage of net sales, cost of goods sold for our Promotional Products segment was 73.1% for the nine months ended September 30, 2018 and 66.5% for the nine months ended September 30, 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. Exclusive of the results from Tangerine, our Promotional Products segment would have had cost of goods sold as a percentage of net sales of 68.4% for the nine months ended September 31, 2018. 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.

 

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Selling and Administrative Expenses

 

As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment approximated 28.8% for the nine months ended September 30, 2018 and 26.1% for the nine months ended September 30, 2017.  Included within these expenses for 2018 was approximately $2.1 million of expenses associated with the CID acquisition.  Net of these acquisition related expenses, selling and administrative expenses would have been 27.6% for the total Uniforms segment for the nine months ended September 30, 2018.  CID’s selling and administrative expenses, excluding acquisition related expenses were approximately 32.4% of net sales for the nine months ended September 30, 2018.  Due to the nature of CID’s business, it tends to have higher selling and administrative expenses.  Exclusive of acquisition related expenses and CID’s selling and administrative expenses, selling and administrative expenses for the Uniform and Related Products segment as a percentage of net sales would have been 26.7%  This increase is attributed to lower net sales to cover  operating expenses (contributing 1.1%), higher medical costs (contributing 0.4%) and other minor increases (contributing 0.4%), partially offset by decreased salaries, wages and benefits exclusive of retirement plan expenses and medical costs (contributing 0.9%) and lower amortization of non-compete agreements (contributing 0.4%)  

 

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment approximated 35.1% for the nine months ended September 30, 2018 and 33.8% for the nine months ended September 30, 2017.  The increase is primarily attributed to investments in the business to support continued sales growth.

 

As a percentage of net sales, selling and administrative expenses for our Promotional Products segment were 23.9% for the nine months ended September 30, 2018 and 29.6% for the nine months ended September 30, 2017. The decrease is primarily related to higher net sales to cover operating costs for the nine months ended September 30, 2018. In addition, the decrease is a result of fair market value adjustments for the acquisition related contingent liabilities (contributing 2.3%), and a loss on a foreign exchange contract in the nine months ended September 30, 2017 (contributing 0.3%). These decreases were partially offset by higher amortization expense due to the acquisitions in 2017 (contributing 1.1%).

 

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 the sale of $1.0 million.

 

Interest Expense

 

Interest expense increased to $2.0 million for the nine months ended September 30, 2018 from $0.6 million for the nine months ended September 30, 2017 primarily due to increased borrowings related to the May 2, 2018 acquisition of CID and higher interest rates.

 

 

Income Taxes

 

The effective income tax rate was 21.1% and 26.8% in the nine months ended September 30, 2018 and 2017, respectively. The 5.7% decrease in the effective tax rate is attributed primarily to the reduction in corporate tax rate (13.0%), 2017 provision-to-return adjustments (3.6%) and other decreases (2.7%); partially offset by the addition of the GILTI tax (3.7%), a decrease in the benefit of foreign sourced income (1.4%), changes to executive compensation limits (0.9%), a decrease in the excess tax benefit associated with share based compensation (3.7%), and an increase in state income taxes (2.1%) and nondeductible acquisition costs (1.8%).

 

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 increased 28.6% from $50.6 million on December 31, 2017 to $65.0 million on September 30, 2018. $10.6 million of the increase is due to the acquisition of CID.

 

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Inventories were $65.0 million on December 31, 2017 and as of September 30, 2018. An increase primarily related to the acquisition of CID of $29.3 million was mostly offset by the adoption of ASC 606, which reduced inventory by $27.2 million.

 

Contract assets of $49.6 million relate to the adoption of ASC 606 on January 1, 2018. See Note 1.

 

Other intangible assets increased from $29.1 million on December 31, 2017 to $67.3 million on September 30, 2018. The increase is due to the acquisition of CID offset by amortization.

 

Goodwill increased from $16.0 million on December 31, 2017 to $33.8 million on September 30, 2018. The increase is due to the acquisition of CID.

 

Deferred income taxes changed from a $2.9 million asset on December 31, 2017 to an $8.5 million liability on September 30, 2018. The change is primarily attributed to the acquisition of CID contributing $9.5 million and the tax effect of the cumulative effect of the adoption of ASC 606 on January 1, 2018 of $2.7 million.

 

Other assets increased 31.8% from $7.6 million on December 31, 2017 to $10.0 million on September 30, 2018. The increase is primarily due to higher investments in our Non-Qualified Deferred Compensation Plan due to higher employee contributions to the plan.

 

Accounts payable increased 26.7% from $19.8 million on December 31, 2017 to $25.0 million on September 30, 2018. This increase is primarily due to the acquisition of CID contributing $2.7 million and the adoption of ASC 606 contributing $2.8 million.

 

Current portion of acquisition-related contingent liabilities decreased from $3.1 million on December 31, 2017 to $0.8 million on September 30, 2018. This reduction was primarily due to the final payment for the HPI acquisition of $2.0 million which was made during the first quarter of 2018 and the payment for the BAMKO acquisition that was made during the second quarter of 2018 of $1.0 million. These decreases were partially offset by $0.8 million for the BAMKO payment due in the second quarter of 2019. We currently do not expect to make a payment for the Tangerine acquisition in 2019.

 

Long-term debt increased from $32.9 million on December 31, 2017 to $112.2 million on September 30, 2018. The increase is due to the new term loan to fund the acquisition of CID, partially offset by scheduled repayments on our other term loan and lower borrowings on our revolver loan. See Note 2.

 

Long-term acquisition-related contingent liabilities decreased from $7.3 million as of December 31, 2017 to $5.3 million on September 30, 2018. The decrease is primarily due reclassifications to current for the payments due in the second quarter of 2019 and adjustments to the fair value of contingent liabilities for BAMKO and Tangerine.

 

Cash Flows

 

Cash and cash equivalents decreased by