Superior Group of Companies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Superior Group of Companies, Inc. and Subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by COSO.
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its evaluation of, and conclusion on, the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, CID Resources, Inc.’s internal control over financial reporting associated with total assets of $101,642,000 and total revenues of $42,012,000, included in the Company’s consolidated financial statements as of and for the year ended December 31, 2018. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2018. Accordingly, our audit also excluded an evaluation of CID Resources, Inc.’s internal control over financial reporting. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with customers as a result of the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers effective January 1, 2018, under the modified retrospective method. Our opinion is not modified with respect to this adoption.
Notes to Consolidated Financial Statements
NOTE
1
– Summary of Significant Accounting Policies:
a) Business description
Superior’s Uniforms and Related Products segment, through its primary signature marketing brands Fashion Seal Healthcare
®
, HPI™, and WonderWink
®
,
manufactures (through third parties or its own facilities) and sells a wide range of uniforms, corporate identity apparel, career apparel and accessories for the hospital and healthcare fields; hotels; fast food and other restaurants; transportation; and the private security, industrial and commercial markets.
Superior services its Remote Staffing Solutions segment through multiple The Office Gurus entities, including its subsidiaries in El Salvador, Belize, and the United States (collectively, “TOG”). TOG is a near-shore premium provider of cost effective multilingual telemarketing and total office support solutions.
The Promotional Products segment, through the BAMKO, Public Identity and Tangerine brands, services customers that purchase primarily promotional and related products. The segment currently has sales offices in the United States and Brazil with support services in China, Hong Kong and India.
b) Basis of presentation
The consolidated financial statements include the accounts of Superior Group of Companies, Inc. and its wholly-owned subsidiaries, The Office Gurus, LLC, SUG Holding, Fashion Seal Corporation, BAMKO, LLC and CID Resources, Inc.; The Office Gurus, Ltda, de C.V., The Office Masters, Ltda., de C.V. and The Office Gurus, Ltd., each a subsidiary of Fashion Seal Corporation and SUG Holding; 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”, “Superior”, “we”, “our”, or “us”. Effective
May 3,
2108,
Superior Uniform Group, Inc. changed its name to Superior Group of Companies, Inc. Intercompany items have been eliminated in consolidation.
c) Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of
three
months or less at the time of purchase to be cash equivalents.
d) Revenue recognition and allowance for doubtful accounts
The Company recognizes revenue in accordance with ASC 606 effective January 1, 2018. Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the earnings process is complete, for goods that have no alternative use, and the customer is obligated to purchase the goods under contract termination provisions. Contract termination terms may involve variable consideration clauses such as discounts and rebates. Revenue has been adjusted accordingly for these provisions. Revenue for goods that do have an alternative use for which the customer is not obligated to purchase under the terms of a contract is generally recognized when the goods are transferred to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for the goods. Sales taxes, sales discounts and customer rebates are also excluded from revenue. Revenue from our Remote Staffing segment is recognized as services are delivered. Variable consideration for estimated returns and allowances is recorded based upon historical experience and current allowance programs. Judgments and estimates are used in determining the collectability of accounts receivable and in establishing allowances for doubtful accounts. The Company analyzes specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances when evaluating the adequacy of the allowance for doubtful accounts. Changes in estimates are reflected in the period they become known. Charge-offs of accounts receivable are made once all collection efforts have been exhausted. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
e) Accounts receivable-other
The Company purchases raw materials and has them delivered to certain suppliers of the Company. The Company pays for the raw materials and then deducts the cost of these materials from payments to the suppliers at the time the related finished goods are invoiced to the Company by those suppliers.
f) Advertising expenses
The Company expenses advertising costs as incurred. Advertising costs for of the years ended
December 31, 2018,
2017
and
2016,
respectively, were
$0.7
million,
$0.1
million, and
$0.1
million.
g) Cost of goods sold and shipping and handling fees and costs
Cost of goods sold consists primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing, receiving and inspection costs, for our Uniforms and Related Products segment and our Promotional Products segment. Cost of goods sold for our Remote Staffing Solutions segment includes salaries and payroll related benefits for agents. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with out-bound freight are generally recorded in cost of goods sold. Other shipping and handling costs are included in selling and administrative expenses and totaled
$14.0
million,
$10.9
million and
$10.6
million for the years ended
December 31, 2018,
2017
and
2016,
respectively.
h) Inventories
Inventories are stated at the lower of cost (first-in, first-out method or average cost) or net realizable value. Judgments and estimates are used in determining the likelihood that 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.
i) Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Major renewals and improvements are capitalized, while replacements, maintenance and repairs which do
not
improve or extend the life of the respective assets are expensed on a current basis. Costs of assets sold or retired and the related accumulated depreciation and amortization are eliminated from accounts and the net gain or loss is reflected in the consolidated statements of comprehensive income within selling and administrative expenses.
j) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. The Company tests goodwill for impairment annually as of
December
31st
and/or when an event occurs or circumstances change such that it is more likely than
not
that impairment
may
exist. Examples of such events and circumstances that the Company would consider include the following:
•
|
macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets;
|
•
|
industry and market considerations such as a deterioration in the environment in which the Company operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for the Company's products or services, or a regulatory or political development;
|
•
|
cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;
|
•
|
overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;
|
•
|
other relevant entity-specific events such as changes in management, key personnel, strategy, or customers.
|
Goodwill is tested at a level of reporting referred to as "the reporting unit." The Company's reporting units are defined as each of its
three
reporting segments with its goodwill included in the Uniforms and Related Products segment of
$22.1
million and
$11.9
million in the Promotional Products segment.
An entity has the option to
first
assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than
not
(that is, a likelihood of more than
50%
) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is
not
more likely than
not
that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary. The Company completed its testing of goodwill as of
December 31, 2018
and determined that that the fair value of the reporting units was more than its carrying value.
k) Other intangible assets
Other intangible assets consist of customer relationships, non-compete agreements and trade names acquired in previous business acquisitions.
The cost, amortization and net value of customer relationships and non-compete agreement as of
December 31, 2018
and
2017
were as follows (In thousands):
|
|
Customer
Relationships
|
|
|
Weighted
Average Life
(years)
|
|
|
Non-Compete
Agreement
|
|
|
Weighted
Average Life
(years)
|
|
|
Customer
Backlog
|
|
|
Weighted
Average Life
(years)
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
41,530
|
|
|
|
10.8
|
|
|
$
|
1,411
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
|
-
|
|
Accumulated amortization
|
|
|
(7,762
|
)
|
|
|
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Net
|
|
$
|
33,768
|
|
|
|
|
|
|
$
|
1,085
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
15,530
|
|
|
|
8.8
|
|
|
$
|
5,551
|
|
|
|
5.1
|
|
|
$
|
122
|
|
|
|
0.5
|
|
Accumulated amortization
|
|
|
(4,782
|
)
|
|
|
|
|
|
|
(4,619
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
Net
|
|
$
|
10,748
|
|
|
|
|
|
|
$
|
932
|
|
|
|
|
|
|
$
|
112
|
|
|
|
|
|
Amortization expense for other intangible assets was
$3.8
million,
$2.4
million and
$2.3
million for the years ended
December 31, 2018,
2017
and
2016,
respectively. Amortization expense for other intangible assets is expected to be
$3.8
million in each of the years ending
December 31, 2019
through
2022;
$3.0
million in
2023;
$2.2
million in
2024;
and
$1.7
million in each of the years
2025
through
2034.
As part of the acquisition of HPI in
2013,
the Company recorded
$4.7
million as the fair value of the acquired trade name in other intangible assets. This asset is considered to have an indefinite life and as such is
not
being amortized.
As part of the acquisition of BAMKO in
2016,
the Company recorded
$8.9
million as the fair value of the acquired trade name in other intangible assets. This asset is considered to have an indefinite life and as such is
not
being amortized.
As part of the acquisitions of Public Identity and Tangerine in
2017,
the Company recorded
$0.5
million and
$3.2
million, respectively as the fair value of the acquired trade names in other intangible assets. These amounts are considered to have an indefinite life and as such are
not
being amortized.
As part of the acquisition of CID Resources in
2018,
the Company recorded
$14.2
million as the fair value of the acquired trade name in other intangible assets. This amount is considered to have an indefinite life and as such is
not
being amortized.
l) Depreciation and amortization
Plant and equipment are depreciated on the straight-line basis at
2.5%
to
5%
for buildings,
2.5%
to
20%
for improvements,
10%
to
33.33%
for machinery, equipment and fixtures and
20%
to
33.33%
for transportation equipment. Leasehold improvements are amortized over the terms of the leases inasmuch as such improvements have useful lives of at least the terms of the respective leases.
m) Employee benefits
Pension plan costs are funded currently based on actuarial estimates, with prior service costs amortized over
20
years. The Company recognizes settlement gains and losses in its consolidated 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.
n) Insurance
The Company self-insures for certain obligations related to employee health 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.
o) Taxes on income
Income taxes are provided for under the liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than
not
that some portion or all of the deferred tax assets will
not
be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The calculation of the Company’s tax liabilities also involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain income tax positions based on estimates of whether, and the extent to which, additional taxes will be required. The Company also reports interest and penalties related to uncertain income tax positions as income taxes. Refer to Note
7.
p) Impairment of long-lived assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may
not
be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. There was
no
impairment of long-lived assets for the years ended
December 31, 2018,
2017,
and
2016.
q) Share-based compensation
The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. The company grants options, stock-settled stock appreciation rights, restricted stock, and performance shares. At
December 31, 2018,
the Company had
3,498,367
shares of common stock available for grant of awards of share-based compensation under its
2013
Incentive Stock and Awards Plan.
The Company recognizes share-based compensation expense for all awards granted to employees, which is based on the fair value of the award on the date of grant. Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the stock compensation awards and the Company’s common stock price volatility, risk free interest rate and dividend rate. The assumptions used in calculating the fair value of stock compensation awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary to use different assumptions, stock compensation expense could be materially different from what has been recorded in the current period.
r) 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-settled stock appreciation rights, restricted stock, and performance shares.
s) Comprehensive income
Other comprehensive income (loss) is defined as the change in equity during a period, from transactions and other events, excluding changes resulting from investments by owners (e.g., supplemental stock offering) and distributions to owners (e.g., dividends).
t) Operating segments
The Financial Accounting Standards Board (“FASB”) establishes standards for the way that public companies report information about operating segments in annual financial statements and establishes standards for related disclosures about product and services, geographic areas and major customers. The Company has reviewed the standard and determined that it has
three
reportable segments, Uniforms and Related Products, Remote Staffing Solutions and Promotional Products.
u) Risks and concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk include cash in banks in excess of federally insured amounts. The Company manages this risk by maintaining all deposits in high quality financial institutions and periodically performing evaluations of the relative credit standing of the financial institutions. When assessing credit risk the Company considers whether the credit risk exists at both the individual and group level. Consideration is given to the activity, region and economic characteristics when assessing if there exists a group concentration risk. At
December 31, 2018
and
2017,
the Company had
no
customers with an accounts receivable balance greater than
7.4%
of the total accounts receivable. At
December 31, 2018
and
2017,
the top
five
accounts receivable customer balances totaled
$12.8
million and
$14.2
million, respectively, or approximately
20.0%
and
28.0%
of the respective total accounts receivable balances. The Company’s largest customer for each of the years ended
December 31, 2018,
2017,
and
2016
had net sales of approximately
$20.1
million,
$20.6
million and
$19.3
million, respectively, or approximately
5.8%,
7.7%
and
7.6%
of the respective total net sales for the Company. The Company’s
five
largest customers for the years ended
December 31, 2018,
2017
and
2016
had net sales of approximately
$47.1
million,
$50.7
million and
$57.6
million, respectively, or approximately
13.6%,
19.0%
and
22.8%
of the respective total net sales for the Company.
Included in accounts receivable-other on the Company’s consolidated balance sheets at
December 31, 2018
and
2017
are receivable balances from a supplier in Haiti totaling
$1.6
million and
$1.5
million, respectively.
In 2018, 2017 and 2016, approximately 24%, 34% and 31%, respectively, of products for our Uniform and Related Products segment were sourced from China. In 2018, 2017 and 2016, approximately 25%, 34% and 32%, respectively, of products for our Uniform and Related Products segment were obtained from suppliers located in Central America and Haiti. In 2018, 2017 and 2016, approximately 28%, 67% and 59%, respectively, of products for our Promotional Products segment were sourced from China. Any inability by the Company to continue to obtain its products from these countries could significantly disrupt the Company’s business. Because the Company manufactures and sources products in various countries, the Company is affected by economic conditions in those countries, including increased duties, possible employee turnover, labor unrest and lack of developed infrastructure.
v) Fair value of financial instruments
The carrying amounts of cash and cash equivalents, receivables and accounts payable approximated fair value as of
December 31, 2018
and
2017,
because of the relatively short maturities of these instruments. The carrying amount of the Company’s long-term debt approximated fair value as the rates are adjustable based upon current market conditions.
w) 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 materially from those estimates.
x
) Recent Accounting Pronouncements
In
February 2016,
the Financial Accounting Standards Board (“FASB”) established Topic
842,
Leases, by issuing Accounting Standards Update (“ASU”)
No.
2016
-
02,
which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic
842
was subsequently amended by ASU
No.
2018
-
01,
Land Easement Practical Expedient for Transition to Topic
842;
ASU
No.
2018
-
10,
Codification Improvements to Topic
842,
Leases; and ASU
No.
2018
-
11,
Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than
12
months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The amendments are required to be adopted by the Company on
January 1, 2019.
A modified retrospective transition approach is required, applying the standard to all leases existing at the date of initial application. The Company elects to use its effective date as its date of initial application. Consequently, financial information will
not
be updated, and the disclosures required under the new standard will
not
be provided for dates and periods before
January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’, which permits the Company
not
to reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs. The Company does
not
expect to elect the use-of hindsight or the practical expedient pertaining to land easement; the latter
not
being applicable to the Company. The Company expects that this standard will
not
have a material effect on its financial statements. The Company continues to assess all of the effects of adoption, with the most significant effect relating to the recognition of new ROU assets and lease liabilities on our balance sheet for real estate operating leases. The Company expects to recognize additional operating liabilities ranging from
$2.0
million to
$4.0
million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operation leases.
In
August 2016,
the FASB issued ASU
2016
-
15,
“Statement of Cash Flows (Topic
230
): Classification of Certain Cash Receipts and Cash Payments”. The amendment provides guidance on the classification of contingent consideration payments made after a business combination and other cash receipts and payments. The amendments are effective for annual periods beginning after
December 15, 2017
and must be applied retrospectively. The Company adopted ASU
2017
-
07
in
2018.
As a result, we have reclassified cash payments in excess of the acquisition date fair values from financing activities to operating activities for all periods presented.
In
March 2017,
the FASB issued ASU
2017
-
07,
“Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The amendment requires the service cost component be presented in the same line item as compensation costs for the pertinent employees during the period. The other components of net pension cost must be presented outside a subtotal of income from operations, if
one
is presented. The amendments are effective for annual periods beginning after
December 15, 2017
and must be applied retrospectively. The Company adopted ASU
2017
-
07
in the
first
quarter of
2018.
As a result, we have added an additional line item to our consolidated statements of comprehensive income and restated our
2017
results to reflect the change in accounting principle. Service costs are included in selling and administrative expenses and other components of net pension cost are included in other periodic pension costs.
In
May 2014,
FASB issued ASU
2014
-
09,
Revenue from Contracts with Customers (Topic
606
) “ASC 606” that superseded previous revenue recognition guidance, including industry-specific guidance. The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard provides a
five
-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Additionally, the guidance requires disaggregated disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized. ASC
606
was adopted by the Company on
January 1, 2018
using the modified retrospective method. The cumulative effect of applying the new standard was recorded as an adjustment to the opening balance of retained earnings, as further described below. The comparative information for prior periods has
not
been restated and continues to be reported under the accounting standards in effect for those periods. For our Uniforms and Related Products and Promotional Products segments, our revenue is primarily generated from the sale of finished products to customers as products are shipped and title passes to the customers. For certain contracts with customers, the Company creates an asset with
no
alternative use to the Company, and the Company has an enforceable right to payment for performance completed to date. For these contracts, we have moved from a point in time model to an over time model in which our measure of progress is finished goods with
no
alternative use. The new standard has
no
cash impact and does
not
affect the economics of our underlying customer contracts.
We recorded a net increase in opening retained earnings of
$11.2
million as of
January 1, 2018
due to the cumulative impact of ASC
606.
The impact on revenues for the
twelve
months ended
December 31, 2018
was an increase of
$3.5
million as a result of ASC
606.
The opening retained earnings adjustment is as follows (in thousands):
|
|
|
|
|
|
|
Net sales
|
|
$
|
42,880
|
|
Cost of goods sold
|
|
|
27,397
|
|
Selling and administrative expenses
|
|
|
706
|
|
Income before taxes on income
|
|
|
14,777
|
|
Income tax expense
|
|
|
3,532
|
|
Adjustment to opening retained earnings
|
|
$
|
11,245
|
|
Payment of the cumulative tax adjustment will be made over
four
years as a change in accounting method.
The following table disaggregates our net sales by major source (in thousands):
|
|
As Reported for
|
|
|
Balances
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
Without
|
|
|
|
|
|
|
|
Ended
|
|
|
Adoption of
|
|
|
Effect of Change
|
|
|
|
12/31/2018
|
|
|
ASC 606
|
|
|
12/31/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uniform and Related Products
|
|
$
|
238,166
|
|
|
$
|
237,095
|
|
|
$
|
1,071
|
|
Remote Staffing Solutions
|
|
|
27,272
|
|
|
|
27,272
|
|
|
|
-
|
|
Promotional Products
|
|
|
80,912
|
|
|
|
78,514
|
|
|
|
2,398
|
|
|
|
$
|
346,350
|
|
|
$
|
342,881
|
|
|
$
|
3,469
|
|
Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the obligations under the terms of a contract with a customer are satisfied. This generally occurs when the goods are transferred to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for the goods. Sales taxes, sales discounts and customer rebates are also excluded from revenue. In accordance with ASC
606
revenue is recorded for goods that the customer is obligated to purchase under the termination terms of the contract which have
no
alternative use. Contract termination terms
may
involve variable consideration clauses such as discounts and rebates and revenue has been adjusted accordingly in our ASC
606
adjustment. Revenues from contracts containing termination provisions are recorded at terminal value if applicable and therefore do
not
represent the selling margins if the sale transaction occurred in the normal course of business. Therefore, revenues recognized under this provision
may
not
reflect the gross margins to be realized for transactions
not
affected by a contract termination. Revenue from our Remote Staffing segment is recognized as services are delivered and did
not
generate an ASC
606
adjustment in the
twelve
month period ended
December 31, 2018.
The Company does not have any remaining performance obligations as defined under ASC 606 related to revenue recorded for the year ended December 31, 2018.
The impact of adoption of ASC
606
on our consolidated balance sheet and statement of comprehensive income as of
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
Balances
|
|
|
|
|
|
|
|
|
|
|
|
Without
|
|
|
Effect of
|
|
|
|
As Reported
|
|
|
Adoption of
|
|
|
Change
|
|
|
|
12/31/2018
|
|
|
ASC 606
|
|
|
12/31/2018
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
49,236
|
|
|
$
|
-
|
|
|
$
|
49,236
|
|
Inventory
|
|
|
67,301
|
|
|
|
95,984
|
|
|
|
(28,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
24,685
|
|
|
$
|
21,981
|
|
|
$
|
2,704
|
|
Other current liabilities
|
|
|
14,767
|
|
|
|
12,798
|
|
|
|
1,969
|
|
Deferred taxes
|
|
|
8,475
|
|
|
|
5,589
|
|
|
|
2,886
|
|
In accordance with ASC
606,
the Company has recognized contract assets of
$49.2
million as of
December 31, 2018
for goods produced without an alternative use for which the Company has an enforceable right to payment but which have
not
yet been shipped or invoiced to the customer.
|
|
As Reported for
|
|
|
Balances
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
Without
|
|
|
Effect of
|
|
|
|
Ended
|
|
|
Adoption of
|
|
|
Change
|
|
|
|
12/31/2018
|
|
|
ASC 606
|
|
|
12/31/2018
|
|
Statement of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
346,350
|
|
|
$
|
342,881
|
|
|
$
|
3,469
|
|
Cost of goods sold
|
|
|
224,653
|
|
|
|
221,920
|
|
|
|
2,733
|
|
Selling and administrative expenses
|
|
|
96,710
|
|
|
|
96,758
|
|
|
|
(48
|
)
|
The cost of goods sold associated with our ASC
606
adjustment include the cost of the garments, alterations (if applicable) and shipping costs. Selling and administrative expenses consist of sales commissions.
NOTE
2
- Allowance for Doubtful Accounts Receivable:
|
|
The activity in the allowance for doubtful accounts receivable was as follows (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance at the beginning of year
|
|
$
|
1,382
|
|
|
$
|
1,276
|
|
|
$
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for bad debts
|
|
|
867
|
|
|
|
1,002
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(210
|
)
|
|
|
(901
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
3
|
|
|
|
5
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of year
|
|
$
|
2,042
|
|
|
$
|
1,382
|
|
|
$
|
1,276
|
|
NOTE
3
- Reserve for Sales Returns and Allowances:
|
|
The activity in the reserve for sales returns and allowances was as follows (in thousands):
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance at the beginning of year
|
|
$
|
1,125
|
|
|
$
|
1,967
|
|
|
$
|
1,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for returns and allowances
|
|
|
4,908
|
|
|
|
2,789
|
|
|
|
4,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual returns and allowances paid to customers
|
|
|
(4,140
|
)
|
|
|
(3,631
|
)
|
|
|
(3,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of year
|
|
$
|
1,893
|
|
|
$
|
1,125
|
|
|
$
|
1,967
|
|
(In thousands)
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Finished goods
|
|
$
|
58,196
|
|
|
$
|
54,354
|
|
Work in process
|
|
|
650
|
|
|
|
604
|
|
Raw materials
|
|
|
8,455
|
|
|
|
10,021
|
|
|
|
$
|
67,301
|
|
|
$
|
64,979
|
|
NOTE
5
- Property, Plant and Equipment:
|
(In thousands)
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
3,635
|
|
|
$
|
3,635
|
|
Buildings, improvements and leaseholds
|
|
|
18,519
|
|
|
|
18,192
|
|
Machinery, equipment and fixtures
|
|
|
58,111
|
|
|
|
52,594
|
|
|
|
|
80,265
|
|
|
|
74,421
|
|
Accumulated depreciation and amortization
|
|
|
(51,496
|
)
|
|
|
(47,577
|
)
|
|
|
$
|
28,769
|
|
|
$
|
26,844
|
|
Depreciation and amortization charges were approximately
$4.1
million,
$3.3
million and
$2.6
million in
2018,
2017,
and
2016
respectively.
|
NOTE
6
- Long-Term Debt:
(In thousands)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Note payable to BB&T, pursuant to revolving credit agreement, maturing May 2023
|
|
$
|
1,193
|
|
|
$
|
1,475
|
|
|
|
|
|
|
|
|
|
|
Term loan payable to BB&T maturing February 26, 2024
|
|
$
|
31,500
|
|
|
$
|
37,500
|
|
|
|
|
|
|
|
|
|
|
Term loan payable to BB&T maturing May 2020
|
|
$
|
85,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117,693
|
|
|
$
|
38,975
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Payments due within one year included in current liabilities
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
$
|
171
|
|
|
$
|
42
|
|
Long-term debt less current maturities
|
|
$
|
111,522
|
|
|
$
|
32,933
|
|
Effective
March 8, 2016,
the Company entered into an amended and restated
5
-year credit agreement with Fifth Third Bank that increased its revolving credit facility from
$15
million to
$20
million and refinanced its then-existing term loan with a new
$45
million term loan to help finance the acquisition of substantially all of the assets of BAMKO, Inc. Both loans were based upon the
one
-month LIBOR rate for U.S. dollar based borrowings. Interest was payable on the term loan at LIBOR plus
0.85%
and on the revolving credit facility at LIBOR (rounded up to the next
1/8
th
of
1%
) plus
0.85%.
The Company paid a commitment fee of
0.10%
per annum on the average unused portion of the commitment under the revolving credit facility. The amounts outstanding under this credit agreement was paid in full on
February 28, 2017
with the proceeds from a new loan agreement with BB&T.
Effective
February 28, 2017,
the Company entered into a new
7
-year credit agreement with BB&T (the “Credit Agreement”) that provided a new revolving credit facility of
$35
million which was to terminate on
February 25, 2022,
and provided a new term loan of
$42
million the which matures on
February 26, 2024.
Both loans were based upon the
one
-month LIBOR rate for U.S. dollar based borrowings. Interest was payable for each loan at LIBOR (rounded up to the next
1/100
th
of
1%
) plus
0.75%.
The Company pays a commitment fee of
0.10%
per annum on the average unused portion of the commitment under the credit facility.
Effective
May 2, 2018,
and concurrently with the closing of the CID Resources acquisition, the Company entered into an Amended and Restated Credit Agreement, dated as of
May 2, 2018 (
the “Amended and Restated Credit Agreement”), with BB&T pursuant to which the Company’s existing revolving credit facility was increased from
$35
million to
$75
million and provided an additional term loan in the principal amount of
$85
million.
No
principal payments were due on the
$85
million term loan prior to its maturity. The term of the revolving credit facility was extended until
May 2023
and the
$85
million term loan matures in
May 2020.
The Company’s existing term loan with the original principal amount of
$42
million remains outstanding with a maturity date of
February 2024
and with the same amortization schedule. The scheduled amortization for the
$42
million term loan is as follows:
2019
through
2023
-
$6.0
million per year; and
2024
-
$1.5
million. The revolving credit facility,
$42
million term loan and
$85
million term loan are collectively referred to as the “Credit Facilities”.
Obligations outstanding under the revolving credit facility and the
$42
million term loan generally have a variable interest rate of
one
-month LIBOR plus
0.68%
(
3.14%
at
December 31, 2018).
Obligations outstanding under the
$85
million term loan generally have a variable interest rate of
one
-month LIBOR plus
0.93%
for the
first
twelve
months after the effective date (
3.39%
at
December 31, 2018),
1.5%
for the period from
thirteen
months through
eighteen
months after the effective date, and
1.75%
thereafter. The Company is obligated to pay a commitment fee of
0.10%
per annum on the averaged unused portion of the commitment under the revolving credit facility and a commitment fee of
0.25%
on the outstanding balance of the
$85
million term loan on
June 1, 2019
and
December 1, 2019.
The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of
December 31, 2018,
there were
no
outstanding letters of credit. The term loans do
not
contain pre-payment penalties.
The Amended and Restated Credit Agreement contains customary events of default and negative covenants, including but
not
limited to those governing indebtedness, liens, fundamental changes, investments, restricted payments, and sales of assets. The Amended and Restated Credit Agreement also requires the Company to maintain a fixed charge coverage ratio of at least
1.25:1
and a funded debt to EBITDA ratio
not
to exceed
4.0:1.
As of
December 31, 2018,
the Company was in compliance with these ratios. The Credit Facilities are secured by substantially all of the operating assets of the Company as collateral, and the Company’s obligations under the Credit Facilities are guaranteed by all of its domestic subsidiaries. The Company’s obligations under the Credit Facilities are subject to acceleration upon the occurrence of an event of default as defined in the Amended and Restated Credit Agreement.
In connection with the Credit Agreement and the Amended and Restated Credit Agreement, the Company incurred approximately
$0.1
million and
$0.2
million of debt financing costs respectively, which primarily consisted of a loan commitment fee and legal fees. These costs are being amortized over the life of both Credit Agreements as additional interest expense.
On
January 22, 2019,
the Company entered into a First Amendment to the Amended and Restated Credit Agreement pursuant to which the existing
$85
million term loan was restructured. The Company used
$20
million borrowed under its existing revolving credit facility to reduce the principal amount to
$65
million. The maturity date on the loan was extended to
January 22, 2026
and the interest rate was lowered to a variable interest rate of LIBOR plus
$0.85%.
The scheduled amortization for the
$65
million term loan is as follows:
2019
-
$8.5
million,
2020
through
2025
-
$9.3
million per year; and
2026
-
$0.8
million. The Company incurred approximately
$0.2
million of debt financing costs, which primarily consisted of a loan commitment fee and legal fees. These costs will be amortized over the life of the agreement as additional interest expense.
Effective
July 1, 2013,
in order to reduce interest rate risk on its debt, the Company entered into an interest rate swap agreement with Fifth Third Bank, N.A. that was designed to effectively convert or hedge the variable interest rate on a portion of its borrowings to achieve a net fixed rate of
2.53%
per annum, beginning
July 1, 2014
with a notional amount of
$14.3
million. The notional amount of the interest rate swap was reduced by the scheduled amortization of the principal balance of the original term loan of
$0.2
million per month through
July 1, 2015
and
$0.3
million per month through
June 1, 2018
with the remaining notional balance of
$3.3
million eliminated on
July 1, 2018.
Effective
March 8, 2016,
the fixed rate on the notional amount was reduced to
2.43%.
Effective
February 24, 2017,
this interest rate swap agreement was terminated. On this date the swap agreement had
$0.1
million in cumulative gains in OCI which was reversed to earnings.
Effective
March 3, 2017,
in order to reduce the interest rate risk on its future debt, the Company entered into an interest rate swap agreement (“original swap”) with BB&T that was designed to effectively convert or hedge the variable interest rate on a portion of its future borrowings to achieve a net fixed rate of
3.12%
per annum, beginning
March 1, 2018
with a notional amount of
$18.0
million. The notional amount of the interest rate swap is reduced by
$0.3
million per month beginning
April 1, 2018
through
February 26, 2024.
Under the terms of the interest rate swap, the Company will receive variable interest rate payments and make fixed interest rate payments on an amount equal to the notional amount at that time. Changes in the fair value of the interest rate swap designated as the hedging instrument that effectively offset the variability of cash flows associated with the variable rate, long-term debt obligation are recorded in OCI, net of related income tax effects. On
May 2, 2018,
in conjunction with the Amended and Restated Credit Agreement, the original swap was modified (“amended swap”) to achieve a net fixed rate of
3.05%
per annum effective
May 1, 2018
and the remaining notional amount was
$17.5
million. There were
no
other changes to the original swap. As a result of the change, the Company has discontinued hedge accounting for the original swap and has elected
not
to designate the amended swap. As of
May 2, 2018,
the fair value of the original swap was
$0.1
million and will be amortized as interest expense over the remaining life of the amended swap. As of
December 31, 2018,
there was
$0.1
million related to the original swap recorded within OCI. Changes to the fair value of the amended swap will be recorded as interest expense. As of
December 31 2018,
the fair value of the amended swap was
$0.1
million and was included in prepaid expenses and other current assets.
NOTE
7
– Taxes on Income:
Aggregate income tax provisions consist of the following (in thousands):
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,613
|
|
|
$
|
2,846
|
|
|
$
|
5,642
|
|
Tax Cut and Jobs Act
|
|
|
-
|
|
|
|
265
|
|
|
|
-
|
|
State and local
|
|
|
643
|
|
|
|
647
|
|
|
|
628
|
|
Foreign
|
|
|
789
|
|
|
|
338
|
|
|
|
-
|
|
|
|
|
5,045
|
|
|
|
4,096
|
|
|
|
6,270
|
|
Long Term:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Cut and Jobs Act
|
|
|
-
|
|
|
|
1,336
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (benefit) provision
|
|
|
(625
|
)
|
|
|
1,899
|
|
|
|
(1,010
|
)
|
Tax Cut and Jobs Act re-measurement
|
|
|
-
|
|
|
|
2,429
|
|
|
|
-
|
|
|
|
|
(625
|
)
|
|
|
4,328
|
|
|
|
(1,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,420
|
|
|
$
|
9,760
|
|
|
$
|
5,260
|
|
The significant components of the deferred income tax (liability) asset are as follows (in thousands):
|
|
2018
|
|
|
2017
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Pension accruals
|
|
$
|
2,729
|
|
|
$
|
2,606
|
|
Operating reserves and other accruals
|
|
|
1,984
|
|
|
|
2,174
|
|
Tax carrying value in excess of book basis of intangibles
|
|
|
-
|
|
|
|
866
|
|
Tax credits
|
|
|
748
|
|
|
|
255
|
|
Valuation allowance on tax credits
|
|
|
(748
|
)
|
|
|
(255
|
)
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Book carrying value in excess of tax basis of property
|
|
|
(1,495
|
)
|
|
|
(937
|
)
|
Book carrying value in excess of tax basis of intangibles
|
|
|
(6,906
|
)
|
|
|
-
|
|
Tax effect of revenue recognition standard ASC 606
|
|
|
(2,657
|
)
|
|
|
-
|
|
Deferred expenses
|
|
|
(2,130
|
)
|
|
|
(1,809
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax (liability) asset
|
|
$
|
(8,475
|
)
|
|
$
|
2,900
|
|
The difference between the total statutory Federal income tax rate and the actual effective income tax rate is accounted for as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Federal income tax rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State and local income taxes, net of Federal income tax benefit
|
|
|
2.0
|
|
|
|
1.5
|
|
|
|
1.9
|
|
Current year untaxed foreign income
|
|
|
(8.3
|
)
|
|
|
(6.5
|
)
|
|
|
(5.1
|
)
|
Foreign Taxes
|
|
|
2.6
|
|
|
|
1.4
|
|
|
|
-
|
|
GILTI Tax
|
|
|
2.7
|
|
|
|
-
|
|
|
|
-
|
|
Contingent liability adjustments
|
|
|
(1.4
|
)
|
|
|
-
|
|
|
|
-
|
|
Non-deductible share-based employee compensation expense
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
1.2
|
|
Excess tax benefit from stock compensation
|
|
|
(0.3
|
)
|
|
|
(7.2
|
)
|
|
|
(4.4
|
)
|
Excess executive compensation
|
|
|
0.9
|
|
|
|
-
|
|
|
|
-
|
|
Non-deductible acquisition expense
|
|
|
1.7
|
|
|
|
-
|
|
|
|
-
|
|
Federal tax credits
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
(0.8
|
)
|
Tax Cut and Jobs Act deferred tax re-measurement
|
|
|
-
|
|
|
|
6.9
|
|
|
|
-
|
|
Tax on undistributed foreign earnings
|
|
|
1.1
|
|
|
|
2.9
|
|
|
|
-
|
|
Transition tax (repatriation)
|
|
|
(0.8
|
)
|
|
|
5.9
|
|
|
|
-
|
|
Other items
|
|
|
(0.7
|
)
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
Effective income tax rate
|
|
|
20.7
|
%
|
|
|
39.4
|
%
|
|
|
26.4
|
%
|
On
December 22, 2017,
the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted fundamental changes to the U.S. tax system. The Tax Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Act also permanently reduces the corporate tax rate from
34%
to
21%,
imposes a
one
-time mandatory transition tax on the historical earnings of foreign affiliates and implements a territorial style tax system. In
2017,
income tax expense of
$9.8
million was unfavorably impacted by net discrete adjustments of
$4.0
million, due to a charge of
$3.3
million related to the enactment of the Tax Cut and Jobs Act (the “Tax Act”) in the United States and
$0.7 million
related to other miscellaneous discrete items.
Effective
January 1, 2018,
the Tax Act established a corporate income tax rate of
21%,
replacing the current
34%
rate, and creating a territorial tax system rather than a worldwide system, which generally eliminates the U.S. federal income tax on dividends from foreign subsidiaries. The transition to the territorial system included a
one
-time transition tax in
2017
on certain of our foreign earnings previously untaxed in the United States. In general, the
one
-time transition tax imposed by the Tax Act results in the taxation of our accumulated foreign earnings and profits (“E&P”) at a
15.5%
rate on liquid assets and
8%
on the remaining unremitted foreign E&P, both net of foreign tax credits. In addition, the Company
no
longer intends to permanently reinvest its historical foreign earnings and has recorded an additional deferred tax expense of
$0.9
million.
Effective
January 1, 2018,
The Tax Act imposes a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. In accordance with guidance issued by FASB, the Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred.
Only tax positions that meet the more-likely-than-not recognition threshold are recognized in the consolidated financial statements. As of December 31, 2018 and 2017, respectively, we have $0.6 and $0.5 million of unrecognized tax benefits, all of which, if recognized, would favorably affect the annual effective income tax rate. We do not expect any significant amount of this liability to be paid in the next twelve months. Accordingly, the balance of $0.6 million as of December 31, 2018 is included in other long-term liabilities.
Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Balance at the beginning of year
|
|
$
|
400
|
|
|
$
|
399
|
|
Additions based on tax positions related to the current year
|
|
|
56
|
|
|
|
59
|
|
Additions for tax positions of prior years
|
|
|
85
|
|
|
|
-
|
|
Reductions due to lapse of statute of limitations
|
|
|
(64
|
)
|
|
|
(58
|
)
|
Balance at the end of year
|
|
$
|
477
|
|
|
$
|
400
|
|
We recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. During each of the years
2018,
2017
and
2016,
we recorded
$0.1
million for interest and penalties, net of tax benefits. During each of the years
2018,
2017
and
2016,
we reduced the liability
$0.1
million for interest and penalties due to lapse of statute of limitations. At
December 31, 2018
and
2017,
we had
$0.1
million accrued for interest and penalties, net of tax benefit.
We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately
$0.1
million within the next
12
months due to the closure of tax years by expiration of the statute of limitations and audit settlements related to various state tax filing positions. The earliest year open to federal examinations is
2015
and significant state examinations is
2011.
NOTE
8
– Benefit Plans:
Defined Benefit Plans
The Company is the sponsor of
two
noncontributory qualified defined benefit pension plans, providing for normal retirement at age
65,
covering all eligible employees (as defined). Periodic benefit payments on retirement are determined based on a fixed amount applied to service or determined as a percentage of earnings prior to retirement. The Company is also the sponsor of an unfunded supplemental executive retirement plan (SERP) in which several of its employees are participants. Pension plan assets for retirement benefits consist primarily of fixed income securities and common stock equities.
Effective
June 30, 2013,
the Company
no
longer accrues additional benefits for future service or for future increases in compensation levels for the company’s primary defined benefit pension plan.
Effective
December 31, 2014,
the Company
no
longer accrues additional benefits for future service for the Company’s hourly defined benefit plan.
The Company recognizes the funded status of its defined benefit post retirement plans in the Company’s consolidated balance sheets.
At December 31, 2018, the fair value of plan assets for the noncontributory qualified defined benefit pension plans exceeded their projected benefit obligations by $1.7 million and thus the plans are overfunded. The Company’s projected benefit obligation under the SERP exceeded the fair value of the plans’ assets by $8.8 million and thus the plan is underfunded.
It is our policy to make contributions to the various plans in accordance with statutory funding requirements and any additional funding that
may
be deemed appropriate.
The following tables present the changes in the benefit obligations and the various plan assets, the funded status of the plans, and the amounts recognized in the Company's consolidated balance sheets
at
December
31,
2018
and
2017:
(In thousands)
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Changes in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
28,386
|
|
|
$
|
25,258
|
|
Service cost
|
|
|
108
|
|
|
|
65
|
|
Interest cost
|
|
|
970
|
|
|
|
965
|
|
Actuarial (gain) loss
|
|
|
(1,597
|
)
|
|
|
3,755
|
|
Benefits paid
|
|
|
(742
|
)
|
|
|
(1,657
|
)
|
Benefit obligation at end of year
|
|
|
27,125
|
|
|
|
28,386
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
22,145
|
|
|
|
15,791
|
|
Actual return on assets
|
|
|
(1,526
|
)
|
|
|
2,413
|
|
Employer contributions
|
|
|
103
|
|
|
|
5,598
|
|
Benefits paid
|
|
|
(742
|
)
|
|
|
(1,657
|
)
|
Fair value of plan assets at end of year
|
|
|
19,980
|
|
|
|
22,145
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(7,145
|
)
|
|
$
|
(6,241
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in consolidated balance sheet
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
1,663
|
|
|
$
|
2,181
|
|
Other current liabilities
|
|
|
(103
|
)
|
|
|
(103
|
)
|
Long-term pension liability
|
|
|
(8,705
|
)
|
|
|
(8,319
|
)
|
|
|
|
(7,145
|
)
|
|
|
(6,241
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income consist of:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
11,417
|
|
|
$
|
10,903
|
|
Information for pension plans with projected benefit obligation in excess of plan assets
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Projected benefit obligation
|
|
$
|
27,125
|
|
|
$
|
28,386
|
|
Fair value of plan assets
|
|
|
(19,980
|
)
|
|
|
(22,145
|
)
|
|
|
$
|
7,145
|
|
|
$
|
6,241
|
|
Components of net periodic benefit cost
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Service cost - benefits earned during the period
|
|
$
|
108
|
|
|
$
|
65
|
|
|
$
|
57
|
|
Interest cost on projected benefit obligation
|
|
|
970
|
|
|
|
965
|
|
|
|
988
|
|
Expected return on plan assets
|
|
|
(1,717
|
)
|
|
|
(1,218
|
)
|
|
|
(1,188
|
)
|
Recognized actuarial loss
|
|
|
1,132
|
|
|
|
1,042
|
|
|
|
1,027
|
|
Settlement loss
|
|
|
-
|
|
|
|
435
|
|
|
|
445
|
|
Net periodic pension cost after settlements
|
|
$
|
493
|
|
|
$
|
1,289
|
|
|
$
|
1,329
|
|
The pension settlement losses included in the table above relates to lump sum payments made to various employees upon their retirement or termination each year.
The estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is
$1.3
million.
The table below presents various assumptions used in determining the benefit obligation for each year and reflects the percentages for the various plans.
Weighted-average assumptions used to determine benefit obligations at
December 31,
|
|
|
|
|
|
|
|
|
|
Long Term Rate
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
of Return
|
|
|
Salary Scale
|
|
|
|
Corp.
|
|
|
Plants
|
|
|
Corp.
|
|
|
Plants
|
|
|
Corp.
|
|
|
Plants
|
|
2017
|
|
|
3.53
|
%
|
|
|
3.45
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
2018
|
|
|
4.14
|
%
|
|
|
4.06
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted-average assumptions used to determine net periodic benefit cost for years ending
December 31,
|
|
|
|
|
|
|
|
|
|
Long Term Rate
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
of Return
|
|
|
Salary Scale
|
|
|
|
Corp.
|
|
|
Plants
|
|
|
Corp.
|
|
|
Plants
|
|
|
Corp.
|
|
|
Plants
|
|
2016
|
|
|
4.19
|
%
|
|
|
4.09
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
2017
|
|
|
4.04
|
%
|
|
|
3.91
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
2018
|
|
|
3.53
|
%
|
|
|
3.45
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The methodology used to determine the expected rate of return on the pension plan assets was based on a review of actual returns in the past and consideration of projected returns based upon our projected asset allocation. Our strategy with respect to our investments in pension plan assets is to be invested with a long-term outlook. Therefore, the risk and return balance of our asset portfolio should reflect a long-term horizon. Our pension plan asset allocation at
December
31,
2018,
2017
and target allocation for
2019
are as follows:
|
|
Percentage of Plan
Assets at
December 31,
|
|
|
Target
Allocation
|
|
Investment description
|
|
201
8
|
|
|
201
7
|
|
|
201
9
|
|
Equity securities
|
|
|
59
|
%
|
|
|
52
|
%
|
|
|
60
|
%
|
Fixed income
|
|
|
40
|
%
|
|
|
29
|
%
|
|
|
40
|
%
|
Other
|
|
|
1
|
%
|
|
|
19
|
%
|
|
|
-
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The Company plans to contribute
$0.1
million to our defined benefit pension plans in
2019.
The following table includes projected benefit payments for the years indicated:
Year
|
|
Projected Benefit Payments
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
2019
|
|
$
|
1,612
|
|
2020
|
|
$
|
2,108
|
|
2021
|
|
$
|
2,000
|
|
2022
|
|
$
|
2,009
|
|
2023
|
|
$
|
1,471
|
|
2024-2028
|
|
$
|
8,590
|
|
Rabbi Trust
In connection with the Company’s unfunded SERP, we have life insurance contracts on the lives of designated individuals. The insurance contracts associated with the SERP are held in a Rabbi trust. The trust is the owner and beneficiary of such insurance contracts. The policies are being utilized to help offset the costs and liabilities of the SERP. The cash surrender value of the life insurance contracts was
$2.7
million and
$2.2
million at
December 31, 2018
and
2017
respectively. We recognized an investment loss on the cash surrender value of these life insurance contracts of
$0.3
million for the year ended
December 31, 2018.
We recognized an investment gain on the cash surrender value of these life insurance contracts of
$0.3
and
$0.1
million for the years ended
December 31, 2017
and
2016
respectively. The cash surrender value of these policies is included in other assets in the Consolidated Balance Sheets.
In
2013,
we initiated a Non-Qualified Deferred Compensation Plan, and we have purchased life insurance contracts on the lives of designated individuals. The insurance contracts associated with the Non-Qualified Deferred Compensation Plan are also held in a Rabbi trust. The trust is the owner and beneficiary of such insurance contracts. The policies are being utilized to help offset the costs and liabilities of the Non-Qualified Deferred Compensation Plan. The cash surrender value of the life insurance contracts was
$2.9
million and
$2.2
million at
December 31, 2018
and
2017
respectively. The cash surrender value of these policies is included in other assets in the Consolidated Balance Sheets. The liability for participant deferrals was
$2.9
million and
$2.2
million as of
December 31, 2018
and
2017
respectively and is included in other long-term liabilities in the Consolidated Balance Sheets.
Defined Contribution Plan
The Company provides a defined contribution plan covering qualified employees. The plan includes a provision that allows employees to make pre-tax contributions under Section
401
(k) of the Internal Revenue Code. The plan provides for the Company to make a guaranteed match equal to
25%
of each employee’s eligible contributions. The plan also provides the Company with the option of making an additional discretionary contribution to the plan each year. Currently the discretionary contribution is set at
3%
of eligible employees’ wages. The Company contributions for the years ended
December 31, 2018,
2017
and
2016
were approximately
$0.8
million,
$1.0
million and
$1.1
million, respectively.
NOTE
9
– Quarterly Results for
2018,
2017
and
2016
(Unaudited):
|
(In thousands, except shares and per share data)
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
73,087
|
|
|
$
|
82,392
|
|
|
$
|
95,870
|
|
|
$
|
95,001
|
|
Gross profit
|
|
$
|
24,875
|
|
|
$
|
29,278
|
|
|
$
|
33,800
|
|
|
$
|
33,744
|
|
Income before taxes on income
|
|
$
|
3,320
|
|
|
$
|
5,097
|
|
|
$
|
7,282
|
|
|
$
|
5,696
|
|
Net income
|
|
$
|
2,450
|
|
|
$
|
3,817
|
|
|
$
|
6,122
|
|
|
$
|
4,586
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
0.17
|
|
|
$
|
0.26
|
|
|
$
|
0.41
|
|
|
$
|
0.31
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
0.16
|
|
|
$
|
0.25
|
|
|
$
|
0.39
|
|
|
$
|
0.30
|
|
Average Outstanding Shares (Basic)
|
|
|
14,821,659
|
|
|
|
14,956,221
|
|
|
|
15,010,660
|
|
|
|
14,962,603
|
|
Average Outstanding Shares (Diluted)
|
|
|
15,457,629
|
|
|
|
15,990,404
|
|
|
|
15,449,894
|
|
|
|
15,371,606
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
60,987
|
|
|
$
|
65,604
|
|
|
$
|
67,773
|
|
|
$
|
72,450
|
|
Gross profit
|
|
$
|
22,214
|
|
|
$
|
23,374
|
|
|
$
|
24,789
|
|
|
$
|
25,975
|
|
Income before taxes on income
|
|
$
|
5,405
|
|
|
$
|
5,701
|
|
|
$
|
6,842
|
|
|
$
|
6,834
|
|
Net income
|
|
$
|
3,835
|
|
|
$
|
4,341
|
|
|
$
|
4,962
|
|
|
$
|
1,884
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
0.27
|
|
|
$
|
0.30
|
|
|
$
|
0.34
|
|
|
$
|
0.13
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
0.26
|
|
|
$
|
0.29
|
|
|
$
|
0.33
|
|
|
$
|
0.12
|
|
Average Outstanding Shares (Basic)
|
|
|
14,350,721
|
|
|
|
14,501,399
|
|
|
|
14,573,813
|
|
|
|
14,614,691
|
|
Average Outstanding Shares (Diluted)
|
|
|
14,929,695
|
|
|
|
15,040,431
|
|
|
|
15,229,722
|
|
|
|
15,275,222
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
|
(restated)
|
|
|
(restated)
|
|
|
(restated)
|
|
|
|
|
|
Net sales
|
|
$
|
57,968
|
|
|
$
|
64,660
|
|
|
$
|
65,282
|
|
|
$
|
64,686
|
|
Gross profit
|
|
$
|
20,021
|
|
|
$
|
21,763
|
|
|
$
|
23,140
|
|
|
$
|
22,058
|
|
Income before taxes on income
|
|
$
|
3,410
|
|
|
$
|
4,615
|
|
|
$
|
6,006
|
|
|
$
|
5,867
|
|
Net income
|
|
$
|
2,442
|
|
|
$
|
3,308
|
|
|
$
|
4,447
|
|
|
$
|
4,441
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
0.18
|
|
|
$
|
0.23
|
|
|
$
|
0.31
|
|
|
$
|
0.31
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
0.17
|
|
|
$
|
0.22
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
Average Outstanding Shares (Basic)
|
|
|
13,927,063
|
|
|
|
14,120,617
|
|
|
|
14,118,354
|
|
|
|
14,162,939
|
|
Average Outstanding Shares (Diluted)
|
|
|
14,668,658
|
|
|
|
14,957,469
|
|
|
|
14,984,084
|
|
|
|
14,979,746
|
|
On
December 22, 2017,
the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act’) that instituted fundamental changes to the U.S. tax system. In the
fourth
quarter of
2017,
income tax expense of
$5.0
million was unfavorably impacted by net discrete adjustments of
$4.0
million related to the enactment Tax Act. See Note
7.
The Company elected to early adopt ASU
2016
-
09
in the
fourth
quarter of
2016.
As a result, there was an increase in the income tax benefit of
$0.2
million for the
three
months ended
March 31, 2016,
$0.2
million for the
three
months ended
June 30, 2016,
and
$0.1
million for the
three
months ended
September 30, 2016,
from the previously reported income tax provisions in the consolidated statements of comprehensive income for the first, second, and
third
quarters of fiscal year
2016.
See Note
1
(
x
).
NOTE
10
– Rentals:
Aggregate rent expense, including month-to-month rentals, approximated
$2.1
million,
$1.1
million and
$1.1
million for the years ended
December 31, 2018,
2017,
and
2016,
respectively. Long-term lease commitments totaling
$5.8
million are as follows:
2019
-
2020
-
$2.9
million,
2021
–
2022
$1.9
million, and
2023
-
2025
$1.0
million.
NOTE
11
– 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.
During
2005,
the Company entered into severance protection agreements with senior management. The terms of these agreements require the Company to potentially make certain payments to members of senior management in the event of a change in control of the Company.
NOTE
1
2
– Share-Based Compensation:
In
2003,
the stockholders of the Company approved the
2003
Incentive Stock and Awards Plan (the
“2003
Plan”), authorizing the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARS”), restricted stock, performance 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, 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
December 31, 2018,
the Company had
3,498,367
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:
|
|
Year Ended December 31,
|
|
|
|
(In thousands)
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Stock options and SARS
|
|
$
|
984
|
|
|
$
|
1,093
|
|
|
$
|
1,071
|
|
Restricted stock
|
|
|
551
|
|
|
|
331
|
|
|
|
317
|
|
Performance shares
|
|
|
729
|
|
|
|
240
|
|
|
|
250
|
|
Total share-based compensation expense
|
|
$
|
2,264
|
|
|
$
|
1,664
|
|
|
$
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related income tax benefit
|
|
$
|
282
|
|
|
$
|
229
|
|
|
$
|
325
|
|
Stock options and SARS
The Company grants stock options and stock settled SARS to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and SARS at the date of grant using the Black-Scholes valuation model.
Options and SARS vest immediately at the date of grant or after a
two
-year period. Awards 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
two
years ended
December 31, 2018
follows:
|
|
No. of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding December 31, 2016
|
|
|
825,251
|
|
|
$
|
10.46
|
|
Granted
|
|
|
155,142
|
|
|
|
18.67
|
|
Exercised
|
|
|
(336,726
|
)
|
|
|
8.71
|
|
Lapsed
|
|
|
(1,100
|
)
|
|
|
5.86
|
|
Cancelled
|
|
|
(8,690
|
)
|
|
|
15.82
|
|
Outstanding December 31, 2017
|
|
|
633,877
|
|
|
$
|
13.33
|
|
Granted
|
|
|
141,630
|
|
|
|
22.20
|
|
Exercised
|
|
|
(94,241
|
)
|
|
|
9.56
|
|
Lapsed
|
|
|
(1,800
|
)
|
|
|
5.88
|
|
Cancelled
|
|
|
(2,620
|
)
|
|
|
20.05
|
|
Outstanding December 31, 2018
|
|
|
676,846
|
|
|
$
|
15.70
|
|
At
December 31, 2018,
633,601
options outstanding were fully vested and exercisable and
43,245
options outstanding had a remaining vesting period of
1.59
years. The aggregate intrinsic value of outstanding options was
$2.2
million and weighted-average remaining contractual term was
36
months.
Options exercised during the years ended
December 31, 2018,
2017
and
2016
had intrinsic values of
$1.2
million,
$4.2
million and
$3.1
million respectively.
The weighted average fair values of the Company’s
141,630,
155,142
and
172,862
options granted during the years ended
December 31, 2018,
2017
and
2016
were
$5.93
and
$5.56
and
$4.69,
respectively. As of
December 31, 2018,
the Company had
$0.2
million in unrecognized compensation related to nonvested grants to be recognized over the remaining service period of
1.59
years.
During the years ended
December 31, 2018,
2017
and
2016,
respectively, the Company received
$0.7
million,
$1.9
million and
$1.5
million in cash from stock option exercises. Current tax benefits of
$0.1
million,
$0.8
million and
$0.4
million, respectively, were recognized for these exercises. Additionally, during the years ended
December 31, 2018,
2017
and
2016,
respectively, the Company received
6,894,
50,981
and
27,770
shares of its common stock as payment of the exercise price in the exercise of stock options for
26,234,
144,443
and
81,608
shares of its common stock.
The following table summarizes information about stock options outstanding as of
December 31, 2018:
Range of
|
|
|
|
|
|
Weighted Average Remaining
|
|
|
Weighted Average
|
|
Exercise Price
|
|
Shares
|
|
|
Contractual Life (Years)
|
|
|
Exercise Price
|
|
$ 3.82
|
-
|
$ 5.88
|
|
|
89,000
|
|
|
|
2.61
|
|
|
|
$5.33
|
|
$ 7.36
|
-
|
$10.38
|
|
|
97,344
|
|
|
|
1.67
|
|
|
|
$8.00
|
|
$16.35
|
-
|
$18.86
|
|
|
347,472
|
|
|
|
2.91
|
|
|
|
$17.50
|
|
$21.63
|
-
|
$24.28
|
|
|
143,030
|
|
|
|
4.33
|
|
|
|
$23.03
|
|
$ 3.82
|
-
|
$24.28
|
|
|
676,846
|
|
|
|
3.12
|
|
|
|
$15.70
|
|
A summary of stock-settled SARS transactions during the
two
years ended
December 31, 2018
follows:
|
|
|
No. of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding December 31, 2016
|
|
|
325,506
|
|
|
$
|
10.26
|
|
Granted
|
|
|
43,988
|
|
|
|
16.97
|
|
Exercised
|
|
|
(222,990
|
)
|
|
|
6.90
|
|
Lapsed
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2017
|
|
|
146,504
|
|
|
$
|
17.38
|
|
Granted
|
|
|
48,515
|
|
|
|
23.59
|
|
Exercised
|
|
|
(12,125
|
)
|
|
|
17.92
|
|
Lapsed
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2018
|
|
|
182,894
|
|
|
$
|
18.99
|
|
At
December 31, 2018,
SARS outstanding, all of which were fully vested and exercisable, had an aggregate intrinsic value of
$0.1
million. The weighted-average remaining contractual term was
31
months.
SARS exercised during the years ended
December 31, 2018,
2017
and
2016,
respectively, had intrinsic values of
$0.1
million,
$3.5
million and
$1.5
million respectively. Current tax benefits of
$0.1
million,
$1.3
million and
$0.5
million respectively, were recognized for these exercises. The weighted average grant date fair values of the Company’s SARS granted during the years ended
December 31, 2018,
2017
and
2016
was
$6.06,
$4.83
and
$4.49,
respectively.
The following table summarizes information about SARS outstanding as of
December 31, 2018:
Range of
|
|
|
|
|
|
Weighted Average Remaining
|
|
|
Weighted Average
|
|
Exercise Price
|
|
SARS
|
|
|
Contractual Life (Years)
|
|
|
Exercise Price
|
|
$16.35
|
-
|
$18.66
|
|
|
134,379
|
|
|
|
2.08
|
|
|
|
$17.33
|
|
$23.59
|
-
|
$23.59
|
|
|
48,515
|
|
|
|
4.08
|
|
|
|
$23.59
|
|
$16.35
|
-
|
$23.59
|
|
|
182,894
|
|
|
|
2.61
|
|
|
|
$18.99
|
|
At
December 31, 2018
shares available for grant as awards under the plan were
3,498,367.
Options and SARS have never been repriced by the Company in any year.
The following table summarizes significant assumptions utilized to determine the fair value of options and SARS:
Years ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
SARS
|
|
|
Options
|
|
Exercise price
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
$23.59
|
|
|
|
$18.86
|
-
|
$24.28
|
|
2017
|
|
|
$16.97
|
|
|
|
$16.97
|
-
|
$21.63
|
|
2016
|
|
|
$16.35
|
|
|
|
$16.35
|
-
|
$18.55
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
$23.59
|
|
|
|
$18.86
|
-
|
$24.28
|
|
2017
|
|
|
$16.97
|
|
|
|
$16.97
|
-
|
$21.63
|
|
2016
|
|
|
$16.35
|
|
|
|
$16.35
|
-
|
$18.55
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
1
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2.6%
|
|
|
|
2.6%
|
-
|
2.9%
|
|
2017
|
|
|
1.9%
|
|
|
|
1.8%
|
-
|
2.4%
|
|
2016
|
|
|
1.3%
|
|
|
|
1.1%
|
-
|
1.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected award life (years)
2
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
3
|
|
|
|
3
|
-
|
10
|
|
2017
|
|
|
5
|
|
|
|
5
|
-
|
10
|
|
2016
|
|
|
5
|
|
|
|
5
|
-
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
3
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
38.1%
|
|
|
|
35.4%
|
-
|
42.1%
|
|
2017
|
|
|
36.6%
|
|
|
|
36.6%
|
-
|
41.4%
|
|
2016
|
|
|
36.5%
|
|
|
|
36.5%
|
-
|
40.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
4
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
1.6%
|
|
|
|
1.6%
|
-
|
2.1%
|
|
2017
|
|
|
2.1%
|
|
|
|
1.8%
|
-
|
2.1%
|
|
2016
|
|
|
2.0%
|
|
|
|
1.8%
|
-
|
2.1%
|
|
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
years ended
December 31, 2018,
2017
and
2016
was based on historical Superior common stock prices 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 vest at a specified future date, generally after
three
years, or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances pursuant to 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
December 31, 2018,
the Company had
$1.0
million of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted average service period of
1.66
years.
A summary of restricted stock transactions during the two years ended
December 31, 2018
follows:
|
|
|
No. of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Grant Date Fair Value
|
|
Outstanding December 31, 2016
|
|
|
123,688
|
|
|
$
|
8.94
|
|
Granted
|
|
|
43,706
|
|
|
|
18.30
|
|
Vested
|
|
|
(106,016
|
)
|
|
|
7.62
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2017
|
|
|
61,378
|
|
|
$
|
17.89
|
|
Granted
|
|
|
37,930
|
|
|
|
21.63
|
|
Vested
|
|
|
(7,276
|
)
|
|
|
17.59
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2018
|
|
|
92,032
|
|
|
$
|
19.46
|
|
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
December 31, 2018,
the Company had
$2.7
million of unrecognized compensation cost related to nonvested grants expected to be recognized over the weighted average service period of
2.67
years.
A summary of performance share transactions during the year ended
December 31, 2018
follows:
|
|
|
No. of
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Grant Date Fair Value
|
|
Outstanding December 31, 2017
|
|
|
118,492
|
|
|
$
|
17.24
|
|
Granted
|
|
|
84,838
|
|
|
|
24.56
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(8,952
|
)
|
|
|
24.98
|
|
Outstanding December 31, 2018
|
|
|
194,378
|
|
|
$
|
20.08
|
|
NOTE
13
– Earnings Per Share:
|
|
The following table represents a reconciliation of basic and diluted earnings per share:
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings used in the computation of basic and diluted earnings per share (in thousands)
|
|
$
|
16,975
|
|
|
$
|
15,022
|
|
|
$
|
14,638
|
|
Weighted average shares outstanding - basic
|
|
|
14,937,786
|
|
|
|
14,510,156
|
|
|
|
14,082,243
|
|
Common stock equivalents
|
|
|
534,347
|
|
|
|
608,612
|
|
|
|
815,246
|
|
Total weighted average shares outstanding - diluted
|
|
|
15,472,133
|
|
|
|
15,118,768
|
|
|
|
14,897,489
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1.14
|
|
|
$
|
1.04
|
|
|
$
|
1.04
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1.10
|
|
|
$
|
0.99
|
|
|
$
|
0.98
|
|
Awards to purchase an average of
322,000
shares of common stock with a weighted average exercise price of
$21.34
per share were outstanding during
2018
but were
not
included in the computation of diluted EPS because the awards’ exercise prices were greater than the average market price of the common shares. Awards to purchase an average of
37,450
shares of common stock with a weighted average exercise price of
$18.65
per share were outstanding during
2017
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 an average of
124,000
shares of common stock with a weighted average exercise price of
$18.53
per share were outstanding during
2016
but were
not
included in the computation of diluted EPS because the awards’ exercise prices were greater than the average market price of the common shares.
NOTE
14
– Other Current Liabilities:
|
(In thousands)
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Salaries, wages, commissions and vacation pay
|
|
$
|
6,483
|
|
|
$
|
7,851
|
|
Accrued rebates
|
|
|
1,857
|
|
|
|
1,089
|
|
Income taxes payable
|
|
|
1,586
|
|
|
|
211
|
|
401K profit sharing accrual
|
|
|
961
|
|
|
|
912
|
|
Defined contribution plan accrual
|
|
|
103
|
|
|
|
104
|
|
Customer deposits
|
|
|
437
|
|
|
|
473
|
|
Other accrued expenses
|
|
|
3,340
|
|
|
|
1,769
|
|
|
|
$
|
14,767
|
|
|
$
|
12,409
|
|
NOTE
15
– Supplemental Cash Flow Information:
|
(In thousands)
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income taxes paid
|
|
$
|
1,088
|
|
|
$
|
7,173
|
|
|
$
|
5,076
|
|
Interest paid
|
|
$
|
2,724
|
|
|
$
|
727
|
|
|
$
|
694
|
|
During the years ended
December 31, 2018,
2017,
and
2016
the Company received
6,894,
50,981
and
27,770
shares, respectively, of its common stock as payment for the exercise of stock options for
26,234,
144,443
and
81,608
shares, respectively.
As a result of the adoption of ASC 606, the following amounts were recorded on January 1, 2018: $43.3 million in contract assets, a reduction in inventory of $24.9 million, an increase in accounts payable of $2.6 million, an increase in other current liabilities of $1.1 million, and an increase in deferred taxes liabilities of $3.5 million.
NOTE
16
– Stock Repurchase Plan:
On
August 1, 2008,
the Company’s Board of Directors approved an increase to the outstanding authorization under its common stock repurchase program to allow for the repurchase of
1,000,000
additional shares of the Company’s outstanding shares of common stock. Under this program the Company reacquired and retired
158,359,
-
0
- and
45,100
shares of its common stock in the years ended
December 31, 2018,
2017
and
2016,
respectively. At
December 31, 2018,
the Company had
58,216
shares remaining on its common stock repurchase program. Shares purchased under the common stock repurchase program are constructively retired and returned to unissued status. The Company considers several factors in determining when to make share repurchases, including among other things, the cost of equity, the after-tax cost of borrowing, the debt to total capitalization targets and the expected future cash needs. There is
no
expiration date or other restriction governing the period over which the Company can make its share repurchases under the program.
NOTE
1
7
–
Operating Segment Information
:
The Company classifies its businesses into
three
operating segments based on the types of products and services provided. The Uniforms and Related Products segment consists of the sale of uniforms and related items. The Remote Staffing Solutions segment consists of sales of staffing solutions. The Promotional Products segment consists of sales to customers of promotional products and other branded merchandise.
The Company evaluates the performance of each operating segment based on several factors of which the primary financial measures are operating segment net sales and earnings before income taxes. The accounting policies of the operating segments are the same as those described in Note
1
entitled Summary of Significant 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:
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uniforms and
Related
Products
|
|
|
Remote
Staffing
Solutions
|
|
|
Promotional
Products
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
Twelve Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
238,165
|
|
|
|
31,311
|
|
|
|
80,913
|
|
|
|
(4,039
|
)
|
|
$
|
346,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
83,728
|
|
|
|
17,907
|
|
|
|
22,671
|
|
|
|
(2,609
|
)
|
|
$
|
121,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
68,848
|
|
|
|
11,160
|
|
|
|
19,311
|
|
|
|
(2,609
|
)
|
|
|
96,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other periodic pension cost
|
|
|
385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,019
|
|
|
|
-
|
|
|
|
1,188
|
|
|
|
-
|
|
|
|
3,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
$
|
12,476
|
|
|
$
|
6,747
|
|
|
$
|
2,172
|
|
|
$
|
-
|
|
|
$
|
21,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
5,611
|
|
|
|
990
|
|
|
|
1,299
|
|
|
|
-
|
|
|
$
|
7,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,794
|
|
|
|
1,581
|
|
|
|
494
|
|
|
|
-
|
|
|
$
|
4,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
331,113
|
|
|
|
29,590
|
|
|
|
61,993
|
|
|
|
(87,610
|
)
|
|
$
|
335,086
|
|
|
|
Uniforms and
Related
Products
|
|
|
Remote
Staffing
Solutions
|
|
|
Promotional
Products
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
Twelve Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
204,644
|
|
|
$
|
23,021
|
|
|
$
|
42,904
|
|
|
$
|
(3,755
|
)
|
|
$
|
266,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
72,463
|
|
|
$
|
12,460
|
|
|
$
|
13,860
|
|
|
$
|
(2,431
|
)
|
|
$
|
96,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
52,967
|
|
|
|
7,877
|
|
|
|
12,179
|
|
|
|
(2,431
|
)
|
|
|
70,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other periodic pension cost
|
|
|
1,224
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of property, plant and equipment
|
|
|
(2
|
)
|
|
|
1,050
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
387
|
|
|
|
-
|
|
|
|
415
|
|
|
|
-
|
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
$
|
17,883
|
|
|
$
|
5,633
|
|
|
$
|
1,266
|
|
|
$
|
-
|
|
|
$
|
24,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
4,223
|
|
|
$
|
846
|
|
|
$
|
584
|
|
|
$
|
-
|
|
|
$
|
5,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,870
|
|
|
$
|
1,156
|
|
|
$
|
219
|
|
|
$
|
-
|
|
|
$
|
4,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
182,623
|
|
|
$
|
21,846
|
|
|
$
|
54,997
|
|
|
$
|
(40,528
|
)
|
|
$
|
218,938
|
|
|
|
Uniforms and
Related
Products
|
|
|
Remote
Staffing
Solutions
|
|
|
Promotional
Products
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
Twelve Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
210,373
|
|
|
$
|
17,953
|
|
|
$
|
27,816
|
|
|
$
|
(3,546
|
)
|
|
$
|
252,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
69,987
|
|
|
$
|
9,616
|
|
|
$
|
9,690
|
|
|
$
|
(2,311
|
)
|
|
$
|
86,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
|
50,953
|
|
|
|
6,096
|
|
|
|
10,386
|
|
|
|
(2,311
|
)
|
|
|
65,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other periodic pension cost
|
|
|
1,272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
462
|
|
|
|
-
|
|
|
|
226
|
|
|
|
-
|
|
|
|
688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income (loss)
|
|
$
|
17,300
|
|
|
$
|
3,520
|
|
|
$
|
(922
|
)
|
|
$
|
-
|
|
|
$
|
19,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
4,023
|
|
|
$
|
494
|
|
|
$
|
418
|
|
|
$
|
-
|
|
|
$
|
4,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
3,383
|
|
|
$
|
3,872
|
|
|
$
|
130
|
|
|
$
|
-
|
|
|
$
|
7,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
176,070
|
|
|
$
|
19,752
|
|
|
$
|
28,480
|
|
|
$
|
(27,454
|
)
|
|
$
|
196,848
|
|
NOTE
18
– Acquisition of Business
es
:
CID Resources
On May 2, 2018, the Company acquired CID Resources, Inc., a Delaware corporation (“CID”), which manufactures medical uniforms, lab coats, and layers, and sells its products to specialty uniform retailers, ecommerce medical uniform retailers, and other retailers.
The purchase price in the acquisition consisted of the following: (a) approximately
$84.4
million in cash, subject to adjustment for cash on hand, indebtedness, unpaid Seller expenses and working capital (excluding cash), in each case as of the closing date, and (b) the issuance of
150,094
shares of the Company’s common stock to an equityholder of CID. The working capital adjustment was based on the difference between working capital as of the closing date and a target amount of approximately
$39.5
million.
Fair Value of Consideration Transferred
A summary of the purchase price is as follows (in thousands):
Cash consideration at closing
|
|
$
|
84,430
|
|
|
|
|
|
|
Superior common stock issued
|
|
|
3,763
|
|
|
|
|
|
|
Cash and working capital adjustment
|
|
|
2,521
|
|
|
|
|
|
|
|
|
|
|
|
Total Consideration
|
|
$
|
90,714
|
|
Assets Acquired and Liabilities Assumed
The total purchase price was allocated to the tangible and intangible assets and liabilities of CID based on their estimated fair values as of
May 2, 2018.
The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was allocated to goodwill.
The following table presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of CID based on their estimated fair values as of the effective date of the transaction.
The assets and liabilities of CID shown below are based on our preliminary estimates of their acquisition date fair values. Our final fair value determination
may
be different than those shown below.
The following is our preliminary assignment of the aggregate consideration (in thousands):
Cash
|
|
$
|
1,360
|
|
|
|
|
|
|
Accounts receivable
|
|
|
9,657
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
1,248
|
|
|
|
|
|
|
Inventories
|
|
|
30,692
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
1,134
|
|
|
|
|
|
|
Contract assets
|
|
|
2,535
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
41,020
|
|
|
|
|
|
|
Goodwill
|
|
|
17,968
|
|
|
|
|
|
|
Total assets
|
|
$
|
105,614
|
|
|
|
|
|
|
Accounts payable
|
|
|
4,472
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
9,461
|
|
|
|
|
|
|
Other current liabilities
|
|
|
967
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
14,900
|
|
The Company recorded $41.0 million in identifiable intangibles at fair value, consisting of $26.0 million in acquired customer relationships, $0.8 million for a non-compete agreement and $14.2 million for the brand name.
Goodwill was calculated as the difference between the fair value of the consideration and the values assigned to the assets acquired and liabilities assumed. This goodwill will
not
be deductible for tax purposes.
The intangible assets associated with the customer relationships are being amortized for
fifteen
years beginning on
May 2, 2018
and the non-compete agreement is being amortized for
five
years. The trade name is considered an indefinite-life asset and as such is
not
being amortized.
The Company recognized amortization expense on these acquired intangible assets of
$1.3
million for the year ended
December 31, 2018.
For the year ended
December 31, 2018,
the Company incurred and expensed transaction related expenses of approximately
$2.1
million. This amount is included in selling and administrative expenses on the consolidated statements of comprehensive income.
On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the entire year ended
December 31, 2018
net sales would have increased approximately
$22.3
million. Net income would have increased
$2.7
million or
$0.17
per share.
On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the years ended
December 31, 2017
and
2016,
net sales would have increased approximately
$65.3
million and
$61.2
respectively. Net income would have increased
$0.4
million in or
$0.02
per share in
2017
and increased
$0.3
million and
$0.02
per share in
2016.
BAMKO
On
March 8, 2016,
the Company closed on the acquisition of substantially all of the assets of BAMKO, Inc. The transaction had an effective date of
March 1, 2016.
The purchase price for the asset acquisition consisted of approximately
$15.2
million in cash, net of cash acquired, the issuance of approximately
324,000
restricted shares of Superior’s common stock that vest over a
five
-year period, potential future payments of approximately
$5.5
million in additional contingent consideration through
2021,
and the assumption of certain liabilities of BAMKO, Inc. The transaction also included the acquisition of BAMKO, Inc.’s subsidiaries in Hong Kong, China, Brazil and England as well as an affiliate in India.
Fair Value of Consideration Transferred
|
A summary of the purchase price is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Cash consideration at closing, net of cash acquired
|
|
$
|
15,161
|
|
|
|
|
|
|
Restricted shares of Superior common stock issued
|
|
|
4,558
|
|
|
|
|
|
|
Contingent consideration
|
|
|
5,205
|
|
|
|
|
|
|
Total Consideration
|
|
$
|
24,924
|
|
Assets Acquired and Liabilities Assumed
The total purchase price was allocated to the acquired tangible and intangible assets and assumed liabilities of BAMKO, Inc. based on their estimated fair values as of
March 1, 2016.
The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was allocated to goodwill.
The following table presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and assumed liabilities of BAMKO based on their fair values as of the effective date of the transaction.
The following is our assignment of the aggregate consideration (in thousands):
Accounts receivable
|
|
$
|
4,885
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
3,200
|
|
|
|
|
|
|
Inventories
|
|
|
236
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
199
|
|
|
|
|
|
|
Other assets
|
|
|
100
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
11,360
|
|
|
|
|
|
|
Goodwill
|
|
|
6,994
|
|
|
|
|
|
|
Total assets
|
|
$
|
26,974
|
|
|
|
|
|
|
Accounts payables
|
|
|
1,314
|
|
|
|
|
|
|
Other current liabilities
|
|
|
736
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,050
|
|
The Company recorded
$11.4
million in identifiable intangibles at fair value, consisting of
$2.1
million in acquired customer relationships,
$0.4
million in non-compete agreements from the former owners of BAMKO, Inc., and
$8.9
million for the acquired trade name.
The estimated fair value for acquisition-related contingent consideration payable is
$4.0
million as of
December 31, 2018.
The current portion of
$0.9
million is expected to be paid in the
second
quarter of
2019.
The Company will continue to evaluate this liability for remeasurement at the end of each reporting period and any change will be recorded in the Company’s consolidated statement of comprehensive income. The carrying amount of the liability
may
fluctuate significantly and actual amounts paid
may
be materially different from the estimated value of the liability.
Goodwill was calculated as the difference between the fair value of the consideration and the values assigned to the assets acquired and liabilities assumed.
The intangible assets associated with the customer relationships will be amortized for
seven
years beginning on
March 1, 2016
and the non-compete agreement will be amortized for
five
years and
ten
months. The trade name is considered an indefinite-life asset and as such will
not
be amortized.
The Company recognized amortization expense on these acquired intangible assets of $0.4 million, $0.4 million and $0.3 million for the years ended December 31, 2018, 2017, and 2016, respectively.
For the year ended
December 31, 2016,
the Company incurred and expensed transaction related expenses of approximately
$1.1
million. This amount is included in selling and administrative expenses on the consolidated statements of comprehensive income.
On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the years ended
December 31, 2016
net sales would have increased approximately
$6.6
million. Net income would have increased
$1.1
million or
$0.08
per share for the year ended
December 31, 2016.
Public Identity
On
August 21, 2017,
BAMKO acquired substantially all of the assets and assumed certain liabilities of PublicIdentity, Inc. (“Public Identity”) of Los Angeles, CA. Public Identity is a promotional products and branded merchandise agency that provides innovative, high quality merchandise and promotional products to corporate clients and universities across the country.
The purchase price for the acquisition consisted of
$0.8
million in cash, the issuance of approximately
54,000
restricted shares of Superior’s common stock and future payments of approximately
$0.4
million in additional consideration through
2020.
The majority of the shares issued vest over a
three
-year period. The fair value of the consideration transferred is approximately
$2.3
million. Based up on their acquisition date fair values, we have assigned approximately
$1.7 million
to identifiable intangible assets and approximately
$0.6
million to goodwill.
Tangerine Promotions
On
November 30, 2017,
BAMKO closed on the acquisition of substantially all of the assets of Tangerine Promotions, Ltd. and Tangerine Promotions West, Inc. (collectively “Tangerine”). The transaction had an effective date of
December 1, 2017.
Tangerine is a promotional products and branded merchandise agency that serves many well-known brands. The company is
one
of the leading providers of Point-of-Purchase (POP) and Point-of-Sale (POS) merchandise in the country. The purchase price for the asset acquisition consisted of approximately
$7.2
million in cash, subject to adjustment, the issuance of approximately
83,000
restricted shares of Superior’s common stock that vests over a
four
-year period, the potential future payments of approximately
$5.5
million in additional contingent consideration through
2021,
and the assumption of certain liabilities.
The foregoing description of the asset purchase agreement does
not
purport to be complete and is subject to, and qualified in its entirety by, the full text of the agreement, which is filed as an exhibit to this Annual Report.
Fair Value of Consideration Transferred
|
A summary of the purchase price is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Cash consideration at closing
|
|
$
|
7,222
|
|
|
|
|
|
|
Restricted shares of Superior common stock issued
|
|
|
1,657
|
|
|
|
|
|
|
Contingent consideration
|
|
|
3,209
|
|
|
|
|
|
|
Total Consideration
|
|
$
|
12,088
|
|
Assets Acquired and Liabilities Assumed
The total purchase price was allocated to the acquired tangible and intangible assets and assumed liabilities of Tangerine based on their estimated fair values as of
December 1, 2017.
The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was allocated to goodwill.
The following table presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and assumed liabilities of Tangerine based on their estimated fair values as of the effective date of the transaction.
The following is our assignment of the aggregate consideration (in thousands):
Accounts receivable
|
|
$
|
5,051
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
969
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
131
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
6,495
|
|
|
|
|
|
|
Goodwill
|
|
|
4,169
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,815
|
|
|
|
|
|
|
Accounts payables
|
|
|
3,374
|
|
|
|
|
|
|
Other current liabilities
|
|
|
1,353
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
4,727
|
|
The Company recorded
$6.5
million in identifiable intangibles at fair value, consisting of
$3.1
million in acquired customer relationships,
$0.2
million in non-compete agreements from the former owners of Tangerine, and
$3.2
million for the acquired trade name.
The estimated fair value for acquisition-related contingent consideration payable is
$2.4
million as of
December 31, 2018.
We do
not
expect to make a payment in the
second
quarter of
2019.
The Company will continue to evaluate this liability for remeasurement at the end of each reporting period and any change will be recorded in the Company’s consolidated statement of comprehensive income. The carrying amount of the liability
may
fluctuate significantly and actual amounts paid
may
be materially different from the estimated value of the liability.
Goodwill was calculated as the difference between the fair value of the consideration and the values assigned to the assets acquired and liabilities assumed.
The intangible assets associated with the customer relationships will be amortized for
seven
years beginning on
December 1, 2017
and the non-compete agreement will be amortized for
seven
years. The trade name is considered an indefinite-life asset and as such will
not
be amortized.
The Company recognized amortization expense on these acquired intangible assets of
$0.6
million and
$0.1
million for the years ended
December 31, 2018
and
2017
respectively.
For the year ended
December 31, 2017,
the Company incurred and expensed transaction related expenses of approximately
$0.2
million. This amount is included in selling and administrative expenses on the consolidated statements of comprehensive income.
On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the entire year ended December 31, 2017 and year ended December 31, 2016, net sales would have increased approximately $35.1 million and $43.1 million respectively. Net income would have increased $0.1 million or $0.01 per share in 2017 and decreased $2.4 million or $0.17 per share in 2016.
NOTE
19
- Subsequent Events:
On January 22, 2019, the Company entered into a First Amendment to the Amended and Restated Credit Agreement pursuant to which the existing $85 million term loan was restructured. The Company used $20 million borrowed under its existing revolving credit facility to reduce the principal amount to $65 million. The maturity date on the loan was extended to January 22, 2026 and the interest rate was lowered to a variable interest rate of LIBOR plus 0.85%. The scheduled amortization for the $65 million term loan is as follows: 2019 - $8.5 million, 2020 through 2025 - $9.3 million per year; and 2026 - $0.8 million. The Company filed the First Amendment to the Amended and Restated Credit Agreement as Exhibit 10.1 to its Current Report on Form 8-K filed on January 25, 2019.