10-Q 1 sgc20140930_10q.htm FORM 10-Q sgc20140930_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

                     
   

 

                     
                           

   

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES

     

EXCHANGE ACT OF 1934

                           

For the quarterly period ended September 30, 2014

 

OR

   

 

                     
   

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

     

EXCHANGE ACT OF 1934

     

 

Commission file number 001-05869

 

 

SUPERIOR UNIFORM GROUP, INC.

 

Incorporated - Florida

 

 

 

Employer Identification No.

 

 

 

 

11-1385670

 

 

10055 Seminole Boulevard

Seminole, Florida 33772-2539

Telephone No.: 727-397-9611

 

 

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 or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer [_]

 

 

 

Accelerated filer [_]

 

 

 

 

 

Non-accelerated filer [_]

 

(Do not check if a smaller reporting company)

 

Smaller Reporting Company [X]

 

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 20, 2014, the Registrant had 6,724,025 common shares outstanding, which is the registrant's only class of common stock.

 

 
1

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

THREE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

 

   

2014

   

2013

 
                 

Net sales

  $ 52,291,000     $ 44,184,000  
                 

Costs and expenses:

               

Cost of goods sold

    33,858,000       29,144,000  

Selling and administrative expenses

    13,121,000       12,817,000  

Interest expense

    144,000       95,000  
      47,123,000       42,056,000  
                 

Income before taxes on income

    5,168,000       2,128,000  

Income tax expense

    1,800,000       620,000  

Net income

  $ 3,368,000     $ 1,508,000  
                 

Weighted average number of shares outstanding during the period

               

(Basic)

    6,687,783       6,346,260  

(Diluted)

    7,002,101       6,403,893  

Per Share Data:

               

Basic

               

Net income

  $ 0.50     $ 0.24  

Diluted

               

Net income

  $ 0.48     $ 0.24  
                 

Other comprehensive income, net of tax:

               

Defined benefit pension plans:

               

Amortization of prior service costs included in net periodic pension costs

    -       2,000  
                 

Recognition of net losses included in net periodic pension costs

    53,000       120,000  
                 

Recognition of settlement loss included in net periodic pension costs

    39,000       133,000  
                 

Gain (loss) on cash flow hedging activities

    48,000       (88,000 )
                 

Other comprehensive income

  $ 140,000     $ 167,000  
                 

Comprehensive income

  $ 3,508,000     $ 1,675,000  
                 

Cash dividends per common share

  $ 0.15     $ 0.00  

 

See accompanying notes to consolidated interim financial statements.

 

 
2

 

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

NINE MONTHS ENDED SEPTEMBER 30, 

(Continued)

(Unaudited)

 

   

2014

   

2013

 
                 

Net sales

  $ 146,548,000     $ 106,023,000  
                 

Costs and expenses:

               

Cost of goods sold

    95,053,000       68,492,000  

Selling and administrative expenses

    38,230,000       31,476,000  

Interest expense

    352,000       110,000  
      133,635,000       100,078,000  
                 

Income before taxes on income

    12,913,000       5,945,000  

Income tax expense

    4,420,000       1,770,000  
                 

Net income

  $ 8,493,000     $ 4,175,000  
                 

Weighted average number of shares outstanding during the period

               

(Basic)

    6,618,719       6,197,921  

(Diluted)

    6,867,747       6,247,830  

Per Share Data:

               

Basic

               

Net income

  $ 1.28     $ 0.67  

Diluted

               

Net income

  $ 1.24     $ 0.67  
                 

Other comprehensive income, net of tax:

               

Defined benefit pension plans:

               

Amortization of prior service costs included in net periodic pension costs

    -       6,000  
                 

Recognition of net losses included in net periodic pension costs

    160,000       499,000  
                 

Recognition of settlement loss included in net periodic pension costs

    39,000       294,000  
                 

Current period gains

    -       1,991,000  
                 

Loss on cash flow hedging activities

    (14,000 )     (88,000 )
                 

Other comprehensive income

  $ 185,000     $ 2,702,000  
                 

Comprehensive income

  $ 8,678,000     $ 6,877,000  
                 

Cash dividends per common share

  $ 0.42     $ 0.00  

 

See accompanying notes to consolidated interim financial statements.

 

 
3

 

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   

September 30,

         
   

2014

   

December 31,

 
   

(Unaudited)

   

2013

 
                 
ASSETS                
                 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 3,023,000     $ 5,316,000  

Accounts receivable - trade, net

    29,685,000       22,735,000  

Accounts receivable - other

    3,603,000       4,133,000  

Prepaid expenses and other current assets

    5,404,000       6,012,000  

Inventories*

    55,444,000       49,486,000  

TOTAL CURRENT ASSETS

    97,159,000       87,682,000  
                 

PROPERTY, PLANT AND EQUIPMENT, NET

    16,164,000       13,160,000  

OTHER INTANGIBLE ASSETS, NET

    16,804,000       18,353,000  

GOODWILL

    4,135,000       4,135,000  

DEFERRED INCOME TAXES

    1,835,000       2,009,000  

OTHER ASSETS

    141,000       155,000  
    $ 136,238,000     $ 125,494,000  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               
                 

CURRENT LIABILITIES:

               

Accounts payable

  $ 11,281,000     $ 8,363,000  

Other current liabilities

    7,893,000       7,768,000  

Current portion of long-term debt

    2,375,000       1,750,000  

Current portion of acquisition-related contingent liability

    1,183,000       -  

TOTAL CURRENT LIABILITIES

    22,732,000       17,881,000  
                 

LONG-TERM DEBT

    22,750,000       24,500,000  

LONG-TERM PENSION LIABILITY

    3,382,000       3,617,000  

LONG-TERM ACQUISITION-RELATED CONTINGENT LIABILITY

    5,719,000       6,806,000  

OTHER LONG-TERM LIABILITIES

    560,000       625,000  

DEFERRED INCOME TAXES

    170,000       130,000  

COMMITMENTS AND CONTINGENCIES (NOTE 6)

               
                 

SHAREHOLDERS' EQUITY:

               

Preferred stock, $1 par value - authorized 300,000 shares (none issued)

    -       -  

Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding - 6,722,225 and 6,520,408 shares, respectively.

    7,000       6,000  

Additional paid-in capital

    28,974,000       25,828,000  

Retained earnings

    54,974,000       49,315,000  

Accumulated other comprehensive loss, net of tax:

               

Pensions

    (2,931,000 )     (3,129,000 )

Cash flow hedges

    (99,000 )     (85,000 )

TOTAL SHAREHOLDERS' EQUITY

    80,925,000       71,935,000  
    $ 136,238,000     $ 125,494,000  

 

*

Inventories consist of the following:

 

   

September 30,

         
   

2014

   

December 31,

 
   

(Unaudited)

   

2013

 

Finished goods

  $ 42,974,000     $ 37,259,000  

Work in process

    117,000       111,000  

Raw materials

    12,353,000       12,116,000  
    $ 55,444,000     $ 49,486,000  

 

 See accompanying notes to consolidated interim financial statements.

 

 
4

 

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

NINE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

 

   

2014

   

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 8,493,000     $ 4,175,000  

Adjustments to reconcile net income to net cash provided from operating activities:

               

Depreciation and amortization

    2,842,000       1,620,000  

Provision for bad debts - accounts receivable

    141,000       86,000  

Share-based compensation expense

    1,338,000       789,000  

Deferred income tax provision (benefit)

    130,000       (584,000 )

Gain on sales of property, plant and equipment

    (91,000 )     (12,000 )

Accretion of acquisition-related contingent liability

    96,000       -  

Changes in assets and liabilities, net of acquisition of business:

               

Accounts receivable - trade

    (7,091,000 )     (4,134,000 )

Accounts receivable - other

    530,000       (201,000 )

Inventories

    (5,958,000 )     1,498,000  

Prepaid expenses and other current assets

    608,000       (58,000 )

Other assets

    14,000       (165,000 )

Accounts payable

    2,918,000       2,308,000  

Other current liabilities

    91,000       3,875,000  

Pension liability

    68,000       485,000  

Other long-term liabilities

    (65,000 )     (133,000 )
                 

Net cash provided from operating activities

    4,064,000       9,549,000  
                 
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Additions to property, plant and equipment

    (4,334,000 )     (1,122,000 )

Disposals of property, plant and equipment

    128,000       14,000  

Purchase of business

    -       (32,483,000 )

Net cash used in investing activities

    (4,206,000 )     (33,591,000 )
                 
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Proceeds from long-term debt

    46,197,000       44,740,000  

Repayment of long-term debt

    (47,322,000 )     (17,990,000 )

Payment of cash dividends

    (2,675,000 )     -  

Proceeds received on exercise of stock options

    1,461,000       319,000  

Excess tax benefit from exercise of stock options

    188,000       -  

Common stock reacquired and retired

    -       (162,000 )
                 

Net cash (used in) provided from financing activities

    (2,151,000 )     26,907,000  
                 

Net (decrease) increase in cash and cash equivalents

    (2,293,000 )     2,865,000  
                 

Cash and cash equivalents balance, beginning of year

    5,316,000       3,554,000  
                 

Cash and cash equivalents balance, end of period

  $ 3,023,000     $ 6,419,000  

 

See accompanying notes to consolidated interim financial statements.

 

 
5

 

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

 

(Unaudited)

 

NOTE 1 – Summary of Significant Interim Accounting Policies:

 

 

a)

Basis of presentation

 

The consolidated interim financial statements include the accounts of Superior Uniform Group, Inc. and its wholly-owned subsidiaries, The Office Gurus, LLC, SUG Holding and Fashion Seal Corporation; The Office Gurus, LTDA, De C.V., The Office Masters, LTDA, De C.V. and The Office Gurus, Ltd., each a subsidiary of Fashion Seal Corporation and SUG Holding; and Power Three Web Ltda. and Superior Sourcing, each a wholly-owned subsidiary of SUG Holding. All of these entities are referred to collectively as “the Company”. Intercompany items have been eliminated in consolidation. The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, 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

 

The Company records revenue as products are shipped and title passes and as services are provided. A provision for estimated returns and allowances is recorded based on historical experience and current allowance programs.

 

c)     Recognition of costs and expenses

 

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

 

d)    Amortization of other intangible assets

 

The Company amortizes identifiable intangible assets on a straight line basis over their expected useful lives. Amortization expense for other intangible assets was $516,000 and $504,000 for the three-month periods ended September 30, 2014 and 2013, respectively, and $1,549,000 and $577,000, for the nine-month periods ended September 30, 2014 and 2013, respectively.

 

e)     Advertising expenses

 

The Company expenses advertising costs as incurred. Advertising costs for the three-month periods ended September 30, 2014 and 2013, respectively were $28,000 and $11,000. Advertising costs for the nine-month periods ended September 30, 2014 and 2013, respectively were $92,000 and $66,000.

 

f)      Shipping and handling fees and costs

 

The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with in-bound and out-bound freight are generally recorded in cost of goods sold. Other shipping and handling costs such as labor and overhead are included in selling and administrative expenses and totaled $2,418,000 and $2,035,000 for the three months ended September 30, 2014 and 2013, respectively. Other shipping and handling costs included in selling and administrative expenses totaled $6,791,000 and $4,792,000 for the nine months ended September 30, 2014 and 2013, respectively.

 

 
6

 

  

g)     Inventories

 

Inventories at interim dates are determined by using both perpetual records on a first-in, first-out basis and gross profit calculations.

 

h)     Accounting for income taxes

 

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

 

              i)        Employee benefit plan settlements

 

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

 

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 and stock appreciation rights.

 

   

Three Months

   

Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2014

   

2013

   

2014

   

2013

 

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

  $ 3,368,000     $ 1,508,000     $ 8,493,000     $ 4,175,000  
                                 

Weighted average shares outstanding - basic

    6,687,783       6,346,260       6,618,719       6,197,921  

Common stock equivalents

    314,318       57,633       249,028       49,909  

Weighted average shares outstanding - diluted

    7,002,101       6,403,893       6,867,747       6,247,830  
                                 

Per Share Data :

                               

Basic

                               

Net earnings

  $ 0.50     $ 0.24     $ 1.28     $ 0.67  
                                 

Diluted

                               

Net earnings

  $ 0.48     $ 0.24     $ 1.24     $ 0.67  

 

Awards to purchase approximately 59,000 and 234,000 shares of common stock with weighted average exercise prices of $20.75 and $12.99 per share were outstanding during the three-month periods ending September 30, 2014 and 2013, respectively, but were not included in the computation of diluted EPS because the awards’ exercise prices were greater than the average market price of the common shares.

 

Awards to purchase approximately 23,000 and 297,000 shares of common stock with weighted average exercise prices of $20.06 and $12.75 per share were outstanding during the nine-month periods ending September 30, 2014 and 2013, 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.

 

k)     Derivative financial instruments

 

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

 

 
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. The Company does not enter into derivative instruments for speculative purposes. The Company manages market and credit risks associated with its derivative instruments by establishing and monitoring limits as to the types and degree of risk that may be undertaken, and by entering into transactions with high-quality counterparties. As of September 30, 2014, the Company’s derivative counterparty had investment grade credit ratings.

 

In July 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on a portion of the outstanding balance of the term loan was effectively converted to a fixed rate of 2.53% beginning July 1, 2014. The Company entered into this interest rate swap arrangement to mitigate future interest rate risk associated with its borrowings and has designated it as a cash flow hedge. (See Note 3.)

 

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 and the change in fair value of qualifying hedges.

 

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 two reportable segments – uniforms and related products and remote staffing solutions. (See Note 7)

 

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 and stock settled stock appreciation rights. In February 2014, the Company also granted restricted stock awards.

 

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, restricted stock, performance stock 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, stock appreciation rights, restricted stock, performance stock and other stock based compensation. A total of 2,500,000 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 under both plans have been or will be granted at prices at least equal to the fair market value of the shares on the date of grant. At September 30, 2014, the Company had 2,183,431 shares of common stock available for grants of share-based compensation awards under the 2013 Plan.

 

The Company granted restricted stock awards, for a total of 50,000 shares, to certain executives in February, 2014. These restricted stock awards vest three years from the date of grant, provided the grantee remains employed by the Company at the vesting date. The fair value of these awards is equal to the market price of our common stock on the date of grant. Compensation expense is being recognized on a straight-line basis over the requisite three year service period.

 

For the three month periods ended September 30, 2014 and 2013, the Company recognized $384,000 and $170,000 of share-based compensation, recorded in selling and administrative expense in the Consolidated Statements of Comprehensive Income. These expenses were offset by $22,000 and $0 deferred tax benefit for non-qualified share-based compensation for the three-month periods ended September 30, 2014 and 2013, respectively.

 

 
8

 

  

For the nine months ended September 30, 2014 and 2013, respectively, the Company recognized $1,338,000 and $789,000 of share-based compensation, recorded in selling and administrative expense in the Consolidated Statements of Comprehensive Income. These expenses were offset by a $178,000 and a $72,000 deferred tax benefit for non-qualified share–based compensation for the nine-month periods ended September 30, 2014 and 2013, respectively. As of September 30, 2014, the Company had $572,000 of unrecognized compensation cost expected to be recognized in the future for prior share-based rewards.

 

The Company grants stock options and stock settled stock appreciation rights (“SARS”) to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and SARS at the date of grant using the Black-Scholes valuation model.

 

All options and SARS vest immediately at the date of grant. Awards generally expire five years after the date of grant with the exception of options granted to outside directors, which expire ten years after the date of grant. The Company issues new shares upon the exercise of stock options and SARS.

 

During the nine months ended September 30, 2014, the Company received 10,128 shares of its common stock as payment for the issuance of 20,408 shares of its common stock related to the exercise of stock option agreements.

 

A summary of options transactions during the nine months ended September 30, 2014 follows:

 

   

No. of

   

Weighted Average

 
   

Shares

   

Exercise Price

 

Outstanding December 31, 2013

    557,029     $ 11.51  

Granted

    198,609       16.59  

Exercised

    (148,109 )     11.22  

Lapsed

    (10,200 )     15.84  

Cancelled

    (6,250 )     12.85  

Outstanding September 30, 2014

    591,079     $ 13.21  

 

At September 30, 2014, options outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $4,992,000.

 

Options exercised during the three-month periods ended September 30, 2014 and 2013 had intrinsic values of $692,000 and $52,000, respectively. Options exercised during the nine-month periods ended September 30, 2014 and 2013 had intrinsic values of $977,000 and $92,000, respectively. The weighted average grant date fair value of the Company’s options granted during the three-month periods ended September 30, 2014 and 2013 was $5.48 and $3.19, respectively. The weighted average grant date fair value of the Company’s options granted during the nine-month periods ended September 30, 2014 and 2013 was $4.52 and $3.01, respectively.

 

A summary of SARS transactions during the nine months ended September 30, 2014 follows:

 

   

No. of

   

Weighted Average

 
   

Shares

   

Exercise Price

 

Outstanding December 31, 2013

    226,406     $ 11.52  

Granted

    68,691       14.72  

Exercised

    (34,085 )     11.70  

Lapsed

    -       -  

Cancelled

    -       -  

Outstanding September 30, 2014

    261,012     $ 12.33  

 

There were 22,646 SARS exercised during the three-month period ended September 30, 2014. There were no SARS exercised during the three-month period ended September 30, 2013. SARS exercised during the three-month period ended September 30, 2014 had an aggregate intrinsic value of $199,000. There were 34,085 SARS exercised during the nine-month period ended September 30, 2014. There were no SARS exercised during the nine-month period ended September 30, 2013. SARS exercised during the nine-month period ended September 30, 2014 had an aggregate intrinsic value of $275,000. There were 68,691 and 59,716 SARS granted during the nine-month periods ended September 30, 2014 and 2013, respectively. The weighted average grant date fair value of the Company’s SARS granted during the nine-month periods ended September 30, 2014 and 2013 was $4.04 and $2.97, respectively.

 

 
9

 

 

 

The following table summarizes significant assumptions utilized to determine the fair value of share-based compensation awards. 

 

   

Three Months Ended September 30,

 
   

SARS

   

Options

 
             

Exercise price

           

2014

 

N/A

    $20.75  

2013

 

N/A

    $11.76  
             

Market price

           

2014

 

N/A

    $20.75  

2013

 

N/A

    $11.76  
             

Risk free interest rate (1)

           

2014

 

N/A

    1.8%  

2013

 

N/A

    1.4%  
             

Expected award life (years) (2)

 

N/A

    5  
             

Expected volatility (3)

           

2014

 

N/A

    37.4%  

2013

 

N/A

    45.7%  
             

Expected dividend yield (4)

           

2014

 

N/A

    2.9%  

2013

 

N/A

    4.6%  

 

 

   

Nine Months Ended September 30,

 
   

SARS

   

Options

 
             

Exercise price

           

2014

  $14.72     $14.72 - $20.75  

2013

  $11.29     $11.29 - $11.76  
             

Market price

           

2014

  $14.72     $14.72 - $20.75  

2013

  $11.29     $11.29 - $11.76  
             

Risk free interest rate (1)

           

2014

  1.5%     1.5% - 2.6%  

2013

  0.9%     0.9% - 1.7%  
             

Expected award life (years) (2)

  5     5 - 10  
             

Expected volatility (3)

           

2014

  42.5%     37.3% - 42.5%  

2013

  46.0%     36.7% - 46.0%  
             

Expected dividend yield (4)

           

2014

  3.7%     2.9% - 3.7%  

2013

  4.8%     4.6% - 4.8%  

 

(1) The risk-free interest rate is based on the yield of a U.S. treasury bond with a similar maturity as the expected life of the awards.

(2) The expected life in years for awards granted was based on the historical exercise patterns experienced by the Company when the award is made.

(3) The determination of expected stock price volatility for awards granted in each of the three and nine-month periods ending September 30, was based on historical common stock prices for the Company over a period commensurate with the expected life.

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

 

 
10

 

  

p)     New Accounting Standards

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASC 606), which amends the guidance in ASC 605, Revenue Recognition.  The company is currently evaluating the impact of the provisions of ASC 606.

 

NOTE 2 Acquisition of Business:

 

On July 1, 2013, the Company acquired substantially all of the assets of HPI Direct, Inc. (“HPI”). Since 1993, HPI has built a stellar reputation for quality and responsiveness as a privately owned company specializing in the design, manufacture and distribution of uniforms to major domestic retailers, foodservice chains, transportation and other service industries throughout the United States. HPI’s award-winning image apparel is worn by some of the most prestigious brands in the markets that they serve. The purchase price for the asset acquisition consisted of approximately $32.5 million in cash, and inclusive of the real estate purchase described below, the issuance of approximately 209,000 restricted shares of Superior Uniform Group’s common stock, the potential future payment of up to $7.2 million in additional contingent consideration through 2017, and the assumption of certain liabilities of HPI. The transaction also included the acquisition of the corporate offices and warehouse distribution facility from an entity related to HPI.

 

The foregoing description of the asset purchase agreement and real estate purchase agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of those agreements, which were filed as exhibits to the Quarterly Report on Form 10-Q for the period ended June 30, 2013 and are incorporated herein by reference. These agreements have been attached to such Form 10-Q to provide investors with information regarding their terms. It is not intended to modify or supplement any factual disclosures about the Company in its public reports filed with the Securities and Exchange Commission and it is not intended to be, and should not be relied upon as, disclosures regarding any facts and circumstances relating to the Company or HPI. In particular, the representations, warranties and covenants set forth in each agreement (a) were made solely for purposes of the agreement and solely for the benefit of the contracting parties, (b) may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made to a contracting party in connection with the agreement, (c) in certain cases, will survive for only a limited period of time, (d) are qualified in certain circumstances by a materiality standard which may differ from what may be viewed as material by investors, (e) were made only as of the date of the agreement or such other date as is specified in the agreement, and (f) may have been included in the agreement for the purpose of allocating risk between the parties rather than establishing matters as facts. Investors are not third-party beneficiaries under the agreements, and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or conditions of the parties. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the agreement, which subsequent information may or may not be fully reflected in subsequent public disclosures. Accordingly, the representations and warranties in the agreements should not be viewed or relied upon as statements of actual facts or the actual state of affairs of the Company or any of their its subsidiaries or affiliates. 

 

Cash consideration at closing

  $ 32,483,000  
         

Restricted shares of Superior common stock issued

    1,555,000  

Total Considerations

  $ 34,038,000  

 

Assets Acquired and Liabilities Assumed

 

The total purchase price was allocated to the acquired tangible and intangible assets and assumed liabilities of HPI based on their estimated fair values as of July 1, 2013. The excess of the purchase price over the estimated fair values of the assets acquired (net of 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 HPI based on their estimated fair values as of the closing date of the transaction.

 

The assets and liabilities of HPI shown below are based on our estimates of their acquisition date fair values.

 

 
11

 

  

The following is our assignment of the aggregate consideration:  

  

Accounts receivable

  $ 4,672,000  
         

Prepaid expenses and other current assets

    1,096,000  
         

Inventories

    10,374,000  
         

Property, plant and equipment

    4,284,000  
         

Identifiable intangible assets

    18,900,000  
         

Goodwill

    4,135,000  
         

Total assets

  $ 43,461,000  
         

Other current liabilities

  $ 2,680,000  
         

Future contingent liabilities

    6,743,000  
         

Total liabilities

  $ 9,423,000  

 

The Company recorded $18,900,000 in identifiable intangibles at fair value, consisting of $9,200,000 in acquired customer relationships, $5,000,000 in non-compete agreements from the former owners of HPI, and $4,700,000 for the acquired trade name.

 

At the closing of the acquisition, the estimated value for acquisition-related contingent consideration payable was $6,743,000. The Company will continue to evaluate this liability for remeasurement at the end of each reporting period and any change will be recorded in the Company's Consolidated Statement of Comprehensive Income. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liability. The change in the acquisition-related contingent liability during the three months ended September 30, 2014 was an increase of $32,000. The change in the acquisition-related contingent liability during the nine months ended September 30, 2014 was an increase of $96,000. These increases are recorded in selling and administrative expenses in the Consolidated Statement of Comprehensive Income.

 

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

 

The intangible assets associated with the customer relationships will be amortized for ten years beginning on July 1, 2013 and the non-compete agreement will be amortized for five 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 $480,000 and $1,440,000 for the three and nine-month periods, respectively, ended September 30, 2014.

 

Revenues and expenses of HPI Direct have been included in the Company’s consolidated financial statements beginning July 1, 2013.

 

 
12

 

 

NOTE 3 - Long-Term Debt:

 

   

September 30,

   

December 31,

 
   

2014

   

2013

 
                 

Term loan payable to Fifth Third Bank, maturing July 1, 2018

  $ 25,125,000     $ 26,250,000  

 

               

Note payable to Fifth Third Bank, pursuant to revolving credit agreement, maturing July 1, 2016

    -       -  
                 

Note payable to Fifth Third Bank, pursuant to revolving credit agreement, maturing July 1, 2018

    -       -  
                 
    $ 25,125,000     $ 26,250,000  

Less payments due within one year included in current liabilities

    2,375,000       1,750,000  
                 

Long-term debt less current maturities

  $ 22,750,000     $ 24,500,000  

 

Effective July 1, 2013, the Company entered into an amended and restated 5-year credit agreement with Fifth Third Bank that made available to the Company up to $15,000,000 on a revolving credit basis in addition to a $30,000,000 term loan utilized to finance the acquisition of substantially all of the assets of HPI Direct, Inc. as discussed in Note 2. Interest is payable on both the revolving credit agreement and the term loan at LIBOR (rounded up to the next 1/8th of 1%) plus 0.95% based upon the one-month LIBOR rate for U.S. dollar based borrowings (1.2% at September 30, 2014). The Company pays an annual commitment fee of 0.10% on the average unused portion of the commitment. The available balance under the credit agreement is reduced by outstanding letters of credit. As of September 30, 2014, there was $176,000 outstanding under letters of credit.

 

Effective October 22, 2013, the credit agreement was amended to, among other things, increase the amount of permitted investments in subsidiaries that are not parties to the credit and related agreements, from $1 million to $5 million.

 

On May 1, 2014, the credit agreement was amended to provide for an additional $10 million revolving credit facility with Fifth Third Bank (the “Add on Credit Facility”), pursuant to the Second Amendment to Second Amended and Restated Credit Agreement and Other Loan Documents, dated May 1, 2014. The Add on Credit Facility matures July 1, 2016. Interest is payable on the Add on Credit Facility at LIBOR (rounded up to the next 1/8th of 1%) plus 0.95% based upon the one-month LIBOR rate for U.S. dollar based borrowings (1.2% at September 30, 2014). The Company pays an annual commitment fee of 0.50% on the average unused portion of the commitment.

 

In order to reduce interest rate risk on the term loan, the Company entered into an interest rate swap agreement with Fifth Third Bank in July 2013 that was designed to effectively convert or hedge the variable interest rate on a portion of such borrowing to achieve a net fixed rate of 2.53% per annum, beginning July 1, 2014 with a notional amount of $14,250,000 that is adjusted to match the outstanding principal on the related debt. The notional amount of the interest rate swap is reduced by the scheduled amortization of the principal balance of the term loan of $187,500 per month through July 1, 2015 and $250,000 per month through June 1, 2018. The remaining notional balance of $3,250,000 will be eliminated at the maturity of the term loan on July 1, 2018.

 

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 reported in Other Comprehensive Income (“OCI”), net of related income tax effects. At September 30, 2014, the interest rate swap had a negative fair value of $159,000, which is presented within other current liabilities within the Consolidated Balance Sheet. The aggregate change of $159,000, net of tax benefit of $60,000, since the inception of the hedge in July 2013 has been recorded within OCI through September 30, 2014. The Company does not currently expect any of those losses to be reclassified into earnings over the subsequent twelve-month period.

 

The remaining scheduled amortization for the term loan is as follows: 2014 $562,000; 2015 $2,563,000; 2016 $3,000,000; 2017 $3,000,000; and 2018 $16,000,000. The term loan does not include a prepayment penalty. In connection with the credit agreement, the Company incurred approximately $68,000 of debt financing costs, which primarily consisted of legal fees. These costs are being amortized over the life of the credit agreement and are recorded as additional interest expense.

 

The credit agreement with Fifth Third Bank is secured by substantially all of the operating assets of Superior Uniform Group, Inc. and is guaranteed by all domestic subsidiaries of Superior Uniform Group, Inc. The agreement contains restrictive provisions concerning a maximum funded senior indebtedness to EBITDA ratio as defined in the agreement (3.5:1), a maximum funded indebtedness to EBITDA ratio as defined in the agreement (4.0:1) and fixed charge coverage ratio (1.25:1). The Company is in full compliance with all terms, conditions and covenants of the credit agreement.

 

 
13

 

  

NOTE 4 – Periodic Pension Expense: 

 

The following table presents the net periodic pension expense under our plans for the following periods:

 

   

Three Months

   

Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Service cost - benefits earned during the period

  $ 20,000     $ 32,000     $ 60,000     $ 331,000  

Interest cost on projected benefit obligation

    250,000       252,000       751,000       773,000  

Expected return on plan assets

    (349,000 )     (332,000 )     (1,046,000 )     (998,000 )

Amortization of prior service cost

    -       3,000       -       9,000  

Recognized actuarial loss

    81,000       185,000       243,000       758,000  

Settlement loss

    60,000       208,000       60,000       457,000  

Net periodic pension cost

  $ 62,000     $ 348,000     $ 68,000     $ 1,330,000  

 

Effective June 30, 2013, the Company no longer accrues additional benefits for future service or for future increases in compensation levels for the Company’s primary defined benefit pension plan.

 

There were no contributions made to the Company’s benefit plans during the nine-month period ended September 30, 2014. Contributions of $1,000,000 were made to the Company’s benefit plans during the nine-month period ended September 30, 2013.

 

NOTE 5 – Supplemental Cash Flow Information:

 

Cash paid for income taxes was $3,284,000 and $1,533,000, respectively, for the nine-month periods ended September 30, 2014 and 2013. Cash paid for interest was $301,000 and $76,000, respectively, for the nine-month periods ended September 30, 2014 and 2013.

 

During the nine months ended September 30, 2014, the Company received 10,128 shares of its common stock as payment for the exercise of stock options for 20,408 shares.

 

NOTE 6 – Contingencies:

 

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

 

NOTE 7 Operating Segment Information:

 

The Company classifies its businesses into two operating segments based on the types of products and services provided. The Uniforms and Related Products segment consists of the sale of uniforms and related items. The Remote Staffing Solutions segment consists of sales of staffing solutions.

 

 
14

 

  

The Company evaluates the performance of each operating segment based on several factors of which the primary financial measures are operating segment net sales and income before income taxes. The accounting policies of the operating segments are the same as those described in Note 1 entitled Significant Interim Accounting Policies. Amounts for corporate expenses are included in the Uniforms and Related Products segment totals. Information related to the operations of the Company's operating segments is set forth below. Total assets are shown as of September 30, 2014 and 2013, respectively.

 

 

   

Uniforms and

Related

Products

   

Remote

Staffing

Solutions

   

Intersegment

Eliminations

   

Total

 

Three Months Ended

                               

September 30, 2014

                               

Net sales

  $ 50,257,000     $ 2,905,000     $ (871,000 )   $ 52,291,000  
                                 

Gross margin

    17,331,000       1,683,000       (581,000 )     18,433,000  
                                 

Selling and administrative expenses

    12,723,000       979,000       (581,000 )     13,121,000  
                                 

Interest expense

    144,000       -       -       144,000  
                                 

Income before income taxes

  $ 4,464,000     $ 704,000     $ -     $ 5,168,000  
                                 

Depreciation and amortization

  $ 890,000     $ 65,000     $ -     $ 955,000  
                                 

Capital expenditures

  $ 918,000     $ 2,319,000     $ -     $ 3,237,000  
                                 

Total assets

  $ 128,428,000     $ 9,104,000     $ (1,294,000 )   $ 136,238,000  

 

 

   

Uniforms and

Related

Products

   

Remote

Staffing

Solutions

   

Intersegment

Eliminations

   

Total

 

Three Months Ended

           

 

                 

September 30, 2013

                               

Net sales

  $ 42,758,000     $ 2,368,000     $ (942,000 )   $ 44,184,000  
                                 

Gross margin

    14,215,000       1,442,000       (617,000 )     15,040,000  
                                 

Selling and administrative expenses

    12,580,000       854,000       (617,000 )     12,817,000  
                                 

Interest expense

    95,000       -       -       95,000  
                                 

Income before income taxes

  $ 1,540,000     $ 588,000     $ -     $ 2,128,000  
                                 

Depreciation and amortization

  $ 858,000     $ 53,000     $ -     $ 911,000  
                                 

Capital expenditures

  $ 115,000     $ 42,000     $ -     $ 157,000  
                                 

Total assets

  $ 122,383,000     $ 6,373,000     $ (1,431,000 )   $ 127,325,000  

 

 
15

 

 

   

Uniforms and

Related

Products

   

Remote

Staffing

Solutions

   

Intersegment

Eliminations

   

Total

 

Nine Months Ended

                               

September 30, 2014

                               

Net sales

  $ 140,776,000     $ 8,315,000     $ (2,543,000 )   $ 146,548,000  
                                 

Gross margin

    48,410,000       4,771,000       (1,686,000 )     51,495,000  
                                 

Selling and administrative expenses

    36,987,000       2,929,000       (1,686,000 )     38,230,000  
                                 

Interest expense

    352,000       -       -       352,000  
                                 

Income before income taxes

  $ 11,071,000     $ 1,842,000     $ -     $ 12,913,000  
                                 

Depreciation and amortization

  $ 2,650,000     $ 192,000     $ -     $ 2,842,000  
                                 

Capital expenditures

  $ 1,759,000     $ 2,575,000     $ -     $ 4,334,000  
                                 

Total assets

  $ 128,428,000     $ 9,104,000     $ (1,294,000 )   $ 136,238,000  

 

 

   

Uniforms and

Related

Products

   

Remote

Staffing

Solutions

   

Intersegment

Eliminations

   

Total

 

Nine Months Ended

                               

September 30, 2013

                               

Net sales

  $ 102,067,000     $ 6,708,000     $ (2,752,000 )   $ 106,023,000  
                                 

Gross margin

    35,211,000       4,137,000       (1,817,000 )     37,531,000  
                                 

Selling and administrative expenses

    30,825,000       2,468,000       (1,817,000 )     31,476,000  
                                 

Interest expense

    110,000       -       -       110,000  
                                 

Income before income taxes

  $ 4,276,000     $ 1,669,000     $ -     $ 5,945,000  
                                 

Depreciation and amortization

  $ 1,469,000     $ 151,000     $ -     $ 1,620,000  
                                 

Capital expenditures

  $ 940,000     $ 182,000     $ -     $ 1,122,000  
                                 

Total assets

  $ 122,383,000     $ 6,373,000     $ (1,431,000 )   $ 127,325,000  

 

 
16

 

 

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 as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect” or words of similar import. Similarly, statements that describe our future plans, objectives, strategies or goals are also forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation: (1) projections of revenue, income, and other financial items, (2) statements of our plans, objectives, and intentions, (3) statements regarding the capabilities, capacities, and expected development of our business operations, and (4) statements of expected future economic performance. 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: 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, resort and commercial industries where uniforms and service apparel are worn; the impact of competition; the price and availability of cotton and other manufacturing materials, 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, 2013. 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.

 

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, 2013. Our discussion and analysis of financial condition and results of operations are 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

These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. 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 $297,000.

 

Inventories

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.

  

 
17

 

 

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 two reporting segments with all of its goodwill included in the Uniforms and Related Products segment.

 

An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The Company completed its assessment of the qualitative factors as of December 31, 2013 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 it from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for losses that have occurred, but have not been reported. The Company's estimates consider historical claim experience and other factors. The Company's liabilities are based on estimates, and, while the Company believes that the accrual for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. Changes in claim experience, the Company's ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.

 

Pensions 

The Company’s pension obligations are determined using estimates including those related to discount rates, asset values and changes in compensation. 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 plan 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 and state 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. Federal income taxes are not provided on that portion of unremitted income of foreign subsidiaries that are expected to be reinvested indefinitely. 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. We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in the total liability for unrecognized tax benefits.

 

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 2014 and 2013 includes the compensation expense for the share-based payments granted in those years. In the Company’s share-based compensation strategy we utilize (1) a combination of stock options and stock appreciation rights (“SARS”) that fully vest on the date of grant and (2) restricted stock grants that vest over time. Therefore, the fair value of the options and SARS granted is recognized as expense on the date of grant and the fair value of restricted stock grants is recognized as expense 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 assumptions including the risk free interest rate, dividend rate, expected term and volatility rate. The Company determines the assumptions to be used based upon current economic conditions. The impact of changing any of the individual assumptions by 10% would not be material.

  

 
18

 

 

Business Outlook

The current economic environment in the United States remains challenging.  Our primary products are provided to workers employed by our customers and, as a result, our business prospects are dependent upon levels of employment among other factors.  Our revenues are impacted by our customers’ opening and closing of locations and reductions and increases in headcount. Additionally, although we are beginning to see signs that voluntary employee turnover is beginning to increase, the level of such turnover remains significantly below pre-recession levels.  Fewer available jobs coupled with less attrition results in decreased demand for our uniforms and service apparel. 

 

Our focus is geared towards mitigating these factors in the current economic environment and has included the following strategies.  First, we continue to pursue acquisitions to increase our market share in the Uniforms and Related Products segment.  As discussed in Note 2 to the consolidated interim financial statements, the Company completed the acquisition of substantially all of the assets of HPI Direct, Inc. on July 1, 2013.    Second, we diversified our business model to include the Remote Staffing Solutions segment.  This business segment was initially started to provide these services for the Company at a lower cost structure in order to improve the Company’s operating results.  

 

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. As noted above, we are pursuing acquisitions to increase our market share in the Uniforms and Related Products business and it is our intention to continue to seek additional acquisitions that fit into this business in the future.

 

We are continuing to increase our market penetration in this segment, as evidenced by our 17.5% growth in sales in this segment in the third quarter of 2014.

 

Remote Staffing Solutions

 

Our Remote Staffing Solutions segment, located in El Salvador, Belize, and the United States, has 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 added our Belize location at the end of 2012 and eliminated our Costa Rica location at the same time.  The Belize operation offers a more competitive cost structure for the Company as compared to Costa Rica.  We began selling these 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 $5.7 million in net sales to outside customers in 2013.  We continue to spend significant effort improving our management and other infrastructure in this segment to support the ongoing substantial growth in this segment.  Net sales to outside customers in this segment increased by approximately 63% in 2013 as compared to 2012 and by approximately 45.9% in the nine months ended September 30, 2014 compared to the comparable 2013 period.  We are aggressively marketing this service and we believe this sector will continue to grow significantly for the remainder of 2014 and beyond. We expect to make a significant investment in a new building to service our El Salvador location. This project is expected to be completed in 2015 and is expected to have a total cost of approximately $7 million.

 

Results of Operations

 

Net sales increased 18.3% from $44,184,000 for the three months ended September 30, 2013 to $52,291,000 for the three months ended September  30, 2014. The 18.3% aggregate increase in net sales is split between growth in our Uniforms and Related Products segment (contributing 17.0%) and an increase in net sales after intersegment eliminations from our Remote Staffing Solutions segment (contributing 1.3%). Intersegment eliminations reduce total net sales for sales of remote staffing solutions to the Uniforms and Related Products segment by the Remote Staffing Solutions segment. See Note 7 to Interim Consolidated Financial Statements for more information and a reconciliation of segment net sales to total net sales.

 

Net sales increased 38.2% from $106,023,000 for the nine months ended September 30, 2013 to $146,548,000 for the nine months ended September 30, 2014. The 38.2% aggregate increase in net sales is split between growth in our Uniforms and Related Products segment (contributing 36.5%) and increases in net sales after intersegment eliminations from our Remote Staffing Solutions segment (contributing 1.7%).

 

Uniforms and Related Products net sales increased 17.5% for the three months ended September 30, 2014 compared to the prior-year period.  This increase in net sales is primarily due to continued market penetration. The HPI acquisition was completed at the beginning of the third quarter in 2013 and as such, the three months ended September 30, 2014 represents the first quarter that includes HPI’s results of operations in both the current period and the prior year period .

 

Uniforms and Related Products net sales increased 37.9%, for the nine months ended September 30, 2014 compared to the prior-year period.  The largest reason for the increase in net sales was the inclusion of HPI’s operating results in the Company’s results of operations for the full nine months ended September 30, 2014, whereas the Company’s results of operations for the comparable 2013 period included HPI’s net sales for the third quarter only. In the first six months of 2014, HPI contributed net sales of $28,269,000 including approximately $5,000,000 for a new uniform program for one of its existing customers. The balance of the increase in net sales for the nine months ended September 30, 2014 compared to the prior-year period is attributed to continued market penetration and the rollout of a special promotional uniform program for one of our existing customers of approximately $2,500,000 in the second quarter of 2014.

 

 
19 

 

 

Remote Staffing Solutions net sales increased 22.7% before intersegment eliminations and 42.6% after intersegment eliminations for the three months ended September 30, 2014 compared to the prior-year period.  This increase is attributed to continued market penetration in 2014, both with respect to new and existing customers.

 

Remote Staffing Solutions net sales increased 24.0% before intersegment eliminations and 45.9% after intersegment eliminations for the nine months ended September 30, 2014 compared to the prior-year period.  This increase is attributed to continued market penetration in 2014, both with respect to new and existing customers.

 

As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 65.5% for the three months ended September 30, 2014 and 66.8% in the comparable period for 2013.  The percentage decrease in 2014 as compared to 2013 is primarily attributed to a decrease in direct product costs as a percentage of net sales during the current year (contributing 1.0%) as well as a reduction in overhead costs as a percentage of sales as a result of higher volume in the current period (contributing 0.3%).

 

As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 65.6% for the nine months ended September 30, 2014 and 65.5% in the comparable period for 2013.  The percentage increase in 2014 is not considered significant.

 

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 42.1% for the three months ended September 30, 2014 and 39.1% in the comparable period for 2013.  The percentage increase in 2014 as compared to 2013 is primarily attributed to taking on new startup accounts in the 2014 period.

 

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 42.6% for the nine months ended September 30, 2014, and 38.3% in the comparable period for 2013.  The percentage increase in 2014 as compared to 2013 is primarily attributed to taking on new startup accounts in the 2014 period.

 

As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 25.3% for the three months ended September 30, 2014 and 29.4% in the comparable period for 2013. The decrease as a percentage of sales is attributed primarily to the impact of higher net sales to cover operating expenses (contributing 4.0%), lower pension and retirement plan expense (contributing 0.4%) and lower professional and other fees related to the HPI acquisition in 2013 (contributing 2.1%), partially offset by higher incentive compensation expense as a result of higher earnings in the current year (contributing 0.8%), higher share-based compensation expense (contributing 0.6%) and other minor net increases (contributing 1.0%).

 

As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 26.3% for the nine months ended September 30, 2014 and 30.2% in the comparable period for 2013. Exclusive of HPI net sales and selling and administrative expenses, selling and administrative expenses as a percentage of net sales would have been 27.3% for the nine-months ended September 30, 2014 and 30.3% for the nine-months ended September 30, 2013. The decrease as a percentage of net sales, exclusive of HPI, is attributed primarily to the impact of higher net sales to cover operating expenses (contributing 1.5%), lower pension and retirement plan expense primarily as a result of the freeze of our main defined benefit pension plan effective June 30, 2013 (contributing 0.8%), lower professional and other fees related to the HPI acquisition in 2013 (contributing 1.0%) and other minor net decreases (contributing 0.6%), partially offset by higher incentive compensation expense as a result of higher earnings in the current year (contributing 0.3%) and higher share-based compensation expense (contributing 0.6%). HPI selling and administrative expenses as a percentage of HPI net sales was 23.9% for the nine months ended September 30, 2014 compared to 29.3% for the third quarter of 2013, which is the only period included in the Company’s operating results for the nine months ended September 30, 2013 that includes HPI’s operations. The significant decrease in HPI’s selling and administrative expenses as a percentage of net sales is attributed to the significant increase in HPI’s net sales.

 

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 33.7% for the three months ended September 30, 2014 and 36.1% in the comparable period for 2013. The decrease as a percentage of net sales is attributed primarily to a decrease in salaries, wages and benefits as a percentage of net sales (contributing 1.3%) as the growth in net sales outpaced the increase in staffing expense required to support significant growth of this segment, and other miscellaneous decreases including higher net sales to cover fixed operating expenses (contributing 1.1%).

 

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 35.2% for the nine months ended September 30, 2014 and 36.8% in the comparable period for 2013. The decrease as a percentage of sales is attributed primarily to a decrease in salaries, wages and benefits as a percentage of net sales (contributing 0.5%) as the growth in net sales outpaced the increase in staffing expense required to support significant growth of this segment, and other miscellaneous decreases including higher net sales to cover fixed operating expenses (contributing 1.1%).    

 

 
20 

 

 

Interest expense increased from $95,000 for the three months ended September 30, 2013 to $144,000 for the three months ended September 30, 2014. This increase is attributed primarily to higher average borrowings outstanding in the current period.

 

Interest expense increased from $110,000 for the nine months ended September 30, 2013 to $352,000 for the nine months ended September 30, 2014. This increase is attributed to higher average borrowings outstanding in the current period. The acquisition debt related to the HPI acquisition was only outstanding for the last three months of the period in 2013.

 

The Company’s effective tax rate for the three months ended September 30, 2014 was 34.8% versus 29.1% for the three months ended September 30, 2013. The 5.7% increase in such effective tax rate is attributed primarily to an increase in the state tax rate (contributing 3.8%), a decrease in the benefit for income from foreign operations (contributing 2.9%), partially offset by a net decrease in other items as a result of the significant increase in income in the current period (contributing 1.0%).

 

The Company’s effective tax rate for the nine months ended September 30, 2014 was 34.2% versus 29.8% for the nine months ended September 30, 2013. The 4.4% increase in such effective tax rate is attributed primarily to an increase in the state tax rate (contributing 1.6%), a decrease in the benefit for income from foreign operations (contributing 2.9%), partially offset by a net decrease in other items as a result of the significant increase in income in the current period (contributing 0.1%).

 

Liquidity and Capital Resources

 

Accounts receivable - trade increased 30.6% from $22,735,000 on December 31, 2013 to $29,685,000 on September 30, 2014 primarily due to the significant increase in net sales in the current period.

 

Inventories increased 12.0% from $49,486,000 on December 31, 2013 to $55,444,000 as of September 30, 2014.  This increase is due to higher inventory levels required to meet higher net sales volumes.

 

Other intangible assets decreased 8.4% from $18,353,000 on December 31, 2013 to $16,804,000 on September 30, 2014.  This decrease is attributed to scheduled amortization of existing intangible assets.

 

Accounts payable increased 34.9% from $8,363,000 on December 31, 2013 to $11,281,000 on September 30, 2014.  This increase is primarily due to the timing of inventory purchases and higher inventory levels required to meet higher net sales volumes.

 

Cash and cash equivalents decreased by $2,293,000 from $5,316,000 on December 31, 2013 to $3,023,000 as of September 30, 2014. The Company generated $4,064,000 in cash from operating activities, used $4,206,000 in investing activities with the balance primarily related to net fixed asset additions, and used $2,151,000 in financing activities. Fixed asset additions included approximately $2,000,000 for the purchase of land in El Salvador for the new facility project to provide increased capacity for our remote staffing business as discussed in our 10-K for 2013.

 

In the foreseeable future, the Company will continue its ongoing capital expenditure program designed to maintain and improve its facilities. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions.

 

During the nine months ended September 30, 2014 and 2013 respectively, the Company paid cash dividends of $2,675,000 and $0.

 

Effective July 1, 2013, the Company entered into an amended and restated 5-year credit agreement with Fifth Third Bank that made available to the Company up to $15,000,000 on a revolving credit basis in addition to a $30,000,000 term loan utilized to finance the acquisition of substantially all of the assets of HPI as discussed in Note 2 to the consolidated interim financial statements. Interest is payable on both the revolving credit agreement and the term loan at LIBOR (rounded up to the next 1/8th of 1%) plus 0.95% based upon the one-month LIBOR rate for U.S. dollar based borrowings (1.2% at September 30, 2014). The Company pays an annual commitment fee of 0.10% on the average unused portion of the commitment. The available balance under the credit agreement is reduced by outstanding letters of credit. As of September 30, 2014, there was $176,000 outstanding under letters of credit.

 

On October 22, 2013, the credit agreement was amended to, among other things, increase the amount of permitted investments in subsidiaries that are not parties to the credit and related agreements, from $1 million to $5 million.

 

 
21

 

  

On May 1, 2014, the credit agreement was amended to provide for an additional $10 million revolving credit facility with Fifth Third Bank (the “Add on Credit Facility”). The Add on Credit Facility matures July 1, 2016. Interest is payable on the Add on Credit Facility at LIBOR (rounded up to the next 1/8th of 1%) plus 0.95% based upon the one-month LIBOR rate for U.S. dollar based borrowings (1.2% at September 30, 2014). The Company pays an annual commitment fee of 0.50% on the average unused portion of the commitment.

 

In order to reduce interest rate risk on the term loan, the Company entered into an interest rate swap agreement with Fifth Third Bank in July 2013 that was designed to effectively convert or hedge the variable interest rate on a portion of such borrowing to achieve a net fixed rate of 2.53% per annum, beginning July 1, 2014 with a notional amount of $14,250,000 that is adjusted to match the outstanding principal on the related debt. The notional amount of the interest rate swap is reduced by the scheduled amortization of the principal balance of the term loan of $187,500 per month through July 1, 2015 and $250,000 per month through June 1, 2018. The remaining notional balance of $3,250,000 will be eliminated at the maturity of the term loan on July 1, 2018.

 

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 reported in OCI, net of related income tax effects. At September 30, 2014, the interest rate swap had a negative fair value of $159,000, which is presented within other current liabilities within the Consolidated Balance Sheet. The aggregate change of $159,000, net of tax benefit of $60,000, since the inception of the hedge in July 2013 has been recorded within OCI through September 30, 2014. The Company does not currently expect any of those losses to be reclassified into earnings over the subsequent twelve-month period.

 

As of September 30, 2014, the outstanding balance under the term loan was $25,125,000. The remaining scheduled amortization for the term loan is as follows: 2014 $562,000; 2015 $2,563,000; 2016 $3,000,000; 2017 $3,000,000; and 2018 $16,000,000. The term loan does not include a prepayment penalty. In connection with the credit agreement, the Company incurred approximately $68,000 of debt financing costs, which primarily consisted of legal fees. These costs are being amortized over the life of the credit agreement and are recorded as additional interest expense.

 

The amended and restated credit agreement with Fifth Third Bank is secured by substantially all of the operating assets of Superior Uniform Group, Inc. and is guaranteed by all domestic subsidiaries of Superior Uniform Group, Inc. The agreement contains restrictive provisions concerning a maximum funded senior indebtedness to EBITDA ratio as defined in the agreement (3.5:1), a maximum funded indebtedness to EBITDA ratio as defined in the agreement (4.0:1) and fixed charge coverage ratio (1.25:1). The Company is in full compliance with all terms, conditions and covenants of the credit agreement.

 

The Company believes that its cash flows from operating activities together with other capital resources and funds from credit sources will be adequate to meet all of its funding requirements for the remainder of the year and for the foreseeable future.

 

 

ITEM 3.          Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

ITEM 4.     Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company conducted an evaluation, under supervision and with the participation of the Company’s principal executive officer, Michael Benstock, and the Company’s principal financial officer, Andrew D. Demott, Jr., of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information the Company is required to disclose in its filings with the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 
22

 

  

PART II - OTHER INFORMATION

 

ITEM 1.     Legal Proceedings

 

None.

 

ITEM 1A.      Risk Factors

 

We are exposed to certain risks and uncertainties that could have a material adverse impact on our business, financial condition and operating results. There have been no material changes to the Risk Factors described in Part I, Item 1A-Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

ITEM 2.     Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no unregistered sales of equity securities during the quarter ended September 30, 2014 that were not previously reported in a current report on Form 8-K.

 

The table below sets forth the information with respect to purchases made by or on behalf of Superior Uniform Group, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common shares during the three months ended September 30, 2014. 

 

Period

(a) Total Number

of Shares

Purchased

(b) Average Price

Paid per Share

(c) Total Number of

Shares Purchased as Part

of Publicly Announced

Plans or Programs

(d) Maximum Number of

Shares that May Yet Be

Purchased Under the Plans

or Programs

 

Month #1

         

(July 1, 2014 to

-

-

-

   

July 31, 2014)

         

Month #2

         

(August 1, 2014 to

4,783 (2)

$20.91

N/A

 

 

August 31, 2014)

         

Month #3

         

(September 1, 2014 to

-

-

-

   

September 30, 2014)

         

TOTAL

4,783 (2)

$20.91

N/A

                                  261,675 

(1)

 

  (1)  On August 1, 2008, the Company’s Board of Directors approved an increase to the outstanding authorization to allow for the repurchase of 1,000,000 shares of the Company’s outstanding shares of common stock. There is no expiration date or other restriction governing the period over which the Company can make share repurchases under the program. All such purchases were open market transactions.
     
 

(2)

Represents shares surrendered by option holders as payment for the exercise of incentive stock options.

 

Under our credit agreement with Fifth Third, if an event of default exists, we may not make distributions to our shareholders. The Company is in full compliance with all terms, conditions and covenants of its credit agreement.

 

ITEM 3.     Defaults Upon Senior Securities

 

Not applicable.

 

ITEM 4.     Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.     Other Information

 

None.

 

ITEM 6.     Exhibits

 

See Exhibit Index.

 

 
23

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

SUPERIOR UNIFORM GROUP, INC. 

 

 

 

 

 

Date: October 23, 2014

By:

/s/ Michael Benstock

 

 

 

Michael Benstock

 

 

 

Chief Executive Officer (Principal Executive Officer)

 

       
Date: October 23, 2014 By: /s/ Andrew D. Demott, Jr.  
    Andrew D. Demott, Jr.  
   

Executive Vice President, Chief Financial Officer and

Treasurer (Principal Financial and Accounting Officer)

 

 

 
24

 

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

     

31.1

 

Certification by the Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

31.2

 

Certification by the Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     

32*

 

Certification of Periodic Report by the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS**  

 

XBRL Instance

     

101.SCH**  

 

XBRL Taxonomy Extension Schema

     

101.CAL**  

 

XBRL Taxonomy Extension Calculation

     

101.DEF**  

 

XBRL Taxonomy Extension Definition

     

101.LAB**  

 

XBRL Taxonomy Extension Labels

     

101.PRE**  

 

XBRL Taxonomy Extension Presentation

     

 

* This certification is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.