Note 1 - Summary of Significant Interim Accounting Policies

9 Months Ended

Sep. 30, 2016

Significant Accounting Policies [Text Block]

NOTE 1 – Summary of Significant Interim Accounting Policies:

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, Fashion Seal Corporation, and BAMKO, LLC; The Office Gurus, Ltda, de C.V., The Office Masters, Ltda., de C.V. and The Office Gurus, Ltd., each a subsidiary of Fashion Seal Corporation and SUG Holding; and Power Three Web, Ltda. and Superior Sourcing, each a wholly-owned subsidiary of SUG Holding; BAMKO Importação, Exportação e Comércio

de Brindes Ltda., a subsidiary of BAMKO, LLC and SUG Holding; Guangzhou Ben Gao Trading Limited, Worldwide Sourcing Solutions Limited, and BAMKO UK, Limited, each a direct or indirect subsidiary of BAMKO, LLC, and BAMKO India Private Limited, a 99%-owned subsidiary of BAMKO, LLC. All of these entities are referred to collectively as “the Company”. Intercompany items have been eliminated in consolidation. The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, and filed with the Securities and Exchange Commission. The interim financial information contained herein is not certified or audited; it reflects all adjustments (consisting of only normal recurring accruals) which are, in the opinion of management, necessary for a fair statement of the operating results for the periods presented, stated on a basis consistent with that of the audited financial statements. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

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.

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.

Amortization of other intangible assets

The Company amortizes identifiable intangible assets on a straight-line basis over their expected useful lives. Amortization expense for other intangible assets was $607,000 and $516,000 for the three-month periods ended September 30, 2016 and 2015, respectively, and $1,761,000 and $1,549,000 for the nine-month periods ended September 30, 2016 and 2015, respectively.

Advertising expenses

The Company expenses advertising costs as incurred. Advertising costs for the three-month periods ended September 30, 2016 and 2015, respectively were $23,000 and $11,000. Advertising costs for the nine-month periods ended September 30, 2016 and 2015, respectively were $55,000 and $101,000.

Shipping and handling fees and costs

The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with in-bound and out-bound freight are generally recorded in cost of goods sold. Other shipping and handling costs such as labor and overhead are included in selling and

administrative expenses

and totaled $2,646,000 and $2,443,000 for the three months ended September 30, 2016 and 2015, respectively. Other shipping and handling costs included in selling and administrative expenses

totaled $7,798,000 and $7,069,000 for the nine months ended September 30, 2016 and 2015, respectively.

Inventories

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

Accounting for income taxes

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

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.

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.

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2016		2015		2016		2015
Net earnings used in the computation of basic and diluted earnings per share	$	4,386,000	$	4,031,000	$	9,721,000	$	9,698,000

Weighted average shares outstanding - basic		14,118,354		13,833,561		14,055,345		13,716,376
Common stock equivalents		865,730		752,127		814,726		853,995
Weighted average shares outstanding - diluted		14,984,084		14,585,688		14,870,071		14,570,371
Per Share Data:
Basic
Net earnings	$	0.31	$	0.29	$	0.69	$	0.71
Diluted
Net earnings	$	0.29	$	0.28	$	0.65	$	0.67

Awards to purchase approximately 150,000

and 144,000

shares of common stock with weighted average exercise prices of $18.65

and $17.71

per share were outstanding during the three-month periods ending September 30, 2016 and 2015, respectively, but were not included in the computation of diluted EPS because the awards’ exercise prices were greater than the average market price of the shares of common stock.

Awards to purchase approximately 165,000

and 97,000

shares of common stock with weighted average exercise prices of $18.53 and $18.19

per share were outstanding during the nine-month periods ending September 30, 2016 and 2015, respectively, but were not included in the computation of diluted EPS because the awards’ exercise prices were greater than the average market price of the shares of common stock.

Derivative financial instruments

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

The nature of the Company’s business activities involves the management of various financial and market risks, including those related to changes in interest rates. The Company does not enter into derivative instruments for speculative purposes. The Company manages market and credit risks associated with its derivative instruments by establishing and monitoring limits as to the types and degree of risk that may be undertaken, and by entering into transactions with high-quality counterparties. As of September 30, 2016, the Company’s derivative counterparty had investment grade credit ratings.

In July 2013, the Company entered into an interest rate swap agreement whereby the interest rate payable by the Company on a portion of the outstanding balance of the term loan was effectively converted to a fixed rate beginning July 1, 2014. The Company entered into this interest rate swap arrangement to mitigate future interest rate risk associated with its borrowings and has designated it as a cash flow hedge. (See Note 2).

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.

Comprehensive income

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

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 6).

Share-Based Compensation

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

In 2016, the Company began granting performance shares as well.

In 2003, the stockholders of the Company approved the 2003 Incentive Stock and Awards Plan (the “2003 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARS”), restricted stock, performance shares and other stock based compensation. This plan expired in May of 2013, at which time, the stockholders of the Company approved the 2013 Incentive Stock and Awards Plan (the “2013 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, SARS, restricted stock, performance shares and other stock based compensation. A total of 5,000,000 shares of common stock (subject to adjustment for expirations and cancellations of options outstanding from the 2003 Plan subsequent to its termination) have been reserved for issuance under the 2013 Plan. All options and SARS under both plans have been or will be granted with exercise prices at least equal to the fair market value of the shares on the date of grant. At September 30, 2016, the Company had 3,945,981 shares of common stock available for grant of share-based compensation under the 2013 Plan.

Share-based compensation is recorded in selling and administrative expense in the consolidated statements of comprehensive income. The following table details the share-based compensation expense by plan and the total related tax benefit for the periods presented:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Stock options and SARS	$	237,000	$	251,000	$	1,070,000	$	1,079,000
Restricted stock		78,000		69,000		229,000		206,000
Performance shares		68,000		-		182,000		-
Total share-based compensation expense	$	383,000	$	320,000	$	1,481,000	$	1,285,000

Related income tax benefit	$	55,000	$	25,000	$	267,000	$	195,000

Stock options and SARS

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

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

A summary of stock option transactions during the nine months ended September 30, 2016 follows:

	No. of			Weighted Average
	Shares			Exercise Price
Outstanding December 31, 2015		946,546		$	8.39
Granted		172,862			16.53
Exercised		(178,179	)		7.55
Lapsed		(11,131	)		5.92
Cancelled		(3,260	)		17.53
Outstanding September 30, 2016		926,838		$	10.06

At September 30, 2016, options outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $9,276,000. The weighted-average remaining contractual term was 40 months.

Options exercised during the three-month periods ended September 30, 2016 and 2015 had intrinsic values of $301,000 and $519,000, respectively. Options exercised during the nine-month periods ended September 30, 2016 and 2015 had intrinsic values of $1,876,000 and $2,896,000, respectively. The weighted average grant date fair value of the Company’s 52,530 and 50,310 options granted during each of the three month periods ended September 30, 2016 and 2015 was $4.53 and $4.97, respectively. The weighted average grant date fair values of the Company’s 172,862 and 103,308 options granted during the nine-month periods ended September 30, 2016 and 2015 were $4.69 and $5.22, respectively.

During the three-month periods ended September 30, 2016 and 2015, respectively, the Company received $327,000 and $118,000 in cash from stock option exercises. Additionally, during the three-month periods ended September, 30, 2016 and 2015, respectively, the Company received 2,164 and 6,806 shares of its common stock as payment of the exercise price in the exercise of stock options for 5,568 and 22,792 shares.

No tax benefit was recognized for these exercises, as the options exercised were qualified incentive stock options.

During the nine-month periods ended September 30, 2016 and 2015, respectively, the Company received $1,109,000 and $1,501,000 in cash from stock option exercises. Additionally, during the nine-month periods ended September 30, 2016 and 2015, respectively, the Company received 12,598 and 14,571 shares of its common stock as payment of the exercise price in the exercise of stock options for 35,984 and 50,224 shares of its common stock related to the exercise of stock options. No tax benefit was recognized for these exercises, as the options exercised were qualified incentive stock options.

A summary of SARS transactions during the nine months ended September 30, 2016 follows:

	No. of			Weighted Average
	Shares			Exercise Price
Outstanding December 31, 2015		381,566		$	8.14
Granted		58,108			16.35
Exercised		(75,792	)		6.12
Lapsed		-			-
Cancelled		-			-
Outstanding September 30, 2016		363,882		$	9.87

At September 30, 2016, SARS outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of $3,351,000. The weighted-average remaining contractual term was 27 months.

There were -0- and 54,208 SARS exercised during the three-month periods ended September 30, 2016 and 2015, respectively. SARS exercised during the three-month periods ended September 30, 2015 had an intrinsic value of $671,000.

There were 75,792 and 193,750 SARS exercised during the nine-month periods ended September 30, 2016 and 2015, respectively. SARS exercised during the nine-month periods ended September 30, 2016 and 2015, had intrinsic values of $928,000 and $2,602,000, respectively. There were 58,108 and 53,292 SARS granted during the nine-month periods ended September 30, 2016 and 2015, respectively. The weighted average grant date fair values of the Company’s SARS granted during the nine-month periods ended September 30, 2016 and 2015 were $4.49 and $5.20, respectively.

The following tables summarize significant assumptions utilized to determine the fair value of options and SARS.

Three months ended
September 30,	SARS		Options

Exercise price
2016		N/A		$16.47
2015		N/A		$17.40

Market price
2016		N/A		$16.47
2015		N/A		$17.40

Risk free interest rate 1
2016		N/A		1.1%
2015		N/A		1.6%

Expected award life (years) 2		N/A		5

Expected volatility 3
2016		N/A		37.1%
2015		N/A		36.8%

Expected dividend yield 4
2016		N/A		2.1%
2015		N/A		1.9%

Nine months ended
September 30,	SARS		Options

Exercise price
2016		$16.35	$16.35	-	$18.55
2015		$18.66	$16.78	-	$18.66

Market price
2016		$16.35	$16.35	-	$18.55
2015		$18.66	$16.78	-	$18.66

Risk free interest rate 1
2016		1.3%	1.1%	-	1.8%
2015		1.5%	1.5%	-	2.1%

Expected award life (years) 2		5	5	-	10

Expected volatility 3
2016		36.5%	36.5%	-	40.3%
2015		34.9%	34.9%	-	39.0%

Expected dividend yield 4
2016		2.0%	1.8%	-	2.1%
2015		1.6%	1.6%	-	1.9%

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

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

3	The determination of expected stock price volatility for awards granted in each of the three and nine-month periods ended September 30, 2016 and 2015, was based on historical prices of Superior’s common stock over a period commensurate with the expected life.

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

Restricted Stock

The Company has granted restricted stock to directors and certain employees under the terms of the 2013 Plan which confer the right to receive shares of the Company’s stock at a specified future date or when certain conditions are met. These grants generally vest after a three year period. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan. Expense for each of these grants is based on the fair value at the date of the grant and is being recognized on a straight-line basis over the respective service period. As of September 30, 2016, the Company had $188,000 of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted service period of 0.5 years.

A summary of restricted stock transactions during the nine months ended September 30, 2016 follows:

	No. of		Weighted Average
	Shares		Grant Date Fair Value
Outstanding December 31, 2015		114,342	$	8.39
Granted		-		-
Vested		-		-
Forfeited		(1,050)		21.92
Outstanding September 30, 2016		113,292	$	8.26

Performance Shares

In 2016, the Compensation Committee of the Board of Directors approved grants of performance shares under the terms of the 2013 Plan. Under the terms of the grants, certain employees received service-based or service-based and performance-based shares. The service-based awards vest after the service period is met which is generally three to five years. Expense for these grants is based on the fair value on the date of the grant and is being recognized on a straight-line basis over the respective service period. The performance-based shares generally vest after five years if the performance and service targets are met. The Company evaluates the performance conditions associated with these grants each reporting period to determine the expected number of shares to be issued. Based upon this evaluation, expected expenses for these grants are being recognized based on the fair value on the date of the grant on a straight-line basis over the respective service period. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan. As of September 30, 2016, the Company had $1,198,000 of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted average service period of 4.3 years.

A summary of performance share transactions during the nine months ended September 30, 2016 follows:

	No. of		Weighted Average
	Shares		Grant Date Fair Value
Outstanding December 31, 2015		-	$	-
Granted		101,000		16.36
Vested		-		-
Forfeited		-		-
Outstanding September 30, 2016		101,000	$	16.36

Stock Split

On December 29, 2014, the Board of Directors declared a 2-for-1 stock split of the Company’s common stock. The record date of the split was January 12, 2015, and the stock split became effective February 4, 2015. All share and per share information in these consolidated interim financial statements have been restated for all periods presented, giving retroactive effect to the stock split. The Company revised certain historical amounts when it recorded the 2-for-1 stock split. The amounts were immaterial and reclassified within shareholders’ equity between par value and additional paid in capital.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) that will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Additionally, the guidance requires disaggregated disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. The amendments are required to be adopted by the Company on January 1, 2018. Transition to the new guidance may be done using either a full or modified retrospective method. The Company is currently evaluating the full effect that the adoption of this standard will have on the Company’s consolidated financial statements.

In April 2015, the FASB issued an ASU to simplify the presentation of debt issuance costs. The amendments in this ASU require debt issuance costs to be presented on the balance sheet as a reduction from the carrying amount of the related debt liability. The amendment in this ASU is to be applied retrospectively and is effective for interim and annual reporting periods beginning after December 15, 2015. The Company adopted this ASU retrospectively effective January 1, 2016, and has reclassified all debt issuance costs as a reduction from the carrying amount of the related debt liability for both the current and prior period. (See Note 2.)

In February 2016, the FASB issued an ASU that amends the accounting guidance on leases. The primary change in this ASU requires lessees to recognize, in the balance sheet, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset over the lease term. The amendments in this ASU are to be applied using a modified retrospective approach and are effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of the provisions of this ASU.

In March 2016, the FASB issued an ASU that amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification within the statement of cash flows. Certain of the amendments in this ASU are to be applied using a modified retrospective approach by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted, while other amendments can be applied prospectively or retrospectively. The amendments in this ASU are effective for periods beginning after December 15, 2016. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact of the provisions of this ASU.