UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

X

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

OR

 

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

 

For the transition period from ________ to __________

 

Commission file number: 001-05869

 

Exact name of registrant as specified in its charter:

SUPERIOR UNIFORM GROUP, INC.

 

State or other jurisdiction of incorporation or organization:	I.R.S. Employer Identification No.:
Florida	11-1385670

 

Address of principal executive offices:

10055 Seminole Boulevard

Seminole, Florida 33772-2539

 

Registrant's telephone number, including area code:

727-397-9611 

 

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

 

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

 

Yes [X]           No [_]

 

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

 

Yes [X]           No [_]

 

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

 

Large accelerated filer [_]		Accelerated filer [X]
Non-accelerated filer   [_]	(Do not check if a smaller reporting company)	Smaller Reporting Company [  ]

 

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes [_]            No [X]

 

As of July 19, 2016, the registrant had 14,408,470 shares of common stock outstanding, which is the registrant's only class of common stock.

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

Three Months Ended June 30,

(Unaudited)

 

 

See accompanying notes to consolidated interim financial statements.

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

Six Months Ended June 30,

(Continued)

(Unaudited)

 

 

See accompanying notes to consolidated interim financial statements.

 

 

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

* Inventories consist of the following:

 

 

See accompanying notes to consolidated interim financial statements.

 

 

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,

(Unaudited)

 

 

See accompanying notes to consolidated interim financial statements.

 

 

 

SUPERIOR UNIFORM GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2016 AND 2015

 

(Unaudited)

 

 

 

 

 

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Certain matters discussed in this Form 10-Q are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified by use of the words “may”, “will”, “should”, “could”, “expect”, “anticipate”, “estimate”, “believe”, “intend”, “project”, “potential”, or “plan” or the negative of these words or other variations on these words or comparable terminology. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation: (1) projections of revenue, income, and other items relating to our financial position and results of operations, (2) statements of our plans, objectives, strategies, goals and intentions, (3) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (4) statements of expected industry and general economic trends. Such forward-looking statements are subject to certain risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the following: general economic conditions, including employment levels, in the areas of the United States in which the Company’s customers are located; changes in the healthcare, industrial, commercial, leisure and public safety industries where uniforms and service apparel are worn; the impact of competition; the price and availability of cotton and other manufacturing materials; our ability to successfully integrate operations following acquisitions; attracting and retaining senior management and key personnel and other factors described in the Company’s filings with the Securities and Exchange Commission, including those described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

Critical Accounting Policies

 

Our significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the estimates that we have made. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions.

 

Our critical accounting estimates are those that we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates, the underlying judgments and uncertainties used to make them and the likelihood that materially different estimates would be reported under different conditions or using different assumptions is as follows:

 

Allowance for Losses on Accounts Receivable

 

These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. An additional impairment in value of one percent of net accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $371,000.

 

Inventories

 

Inventories are stated at the lower of cost or market value. Judgments and estimates are used in determining the likelihood that new goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 

 

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; and

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

 

Goodwill is tested at a level of reporting referred to as "the reporting unit." The Company's reporting units are defined as each of its two reporting segments with all of its goodwill included in the Uniforms and Related Products segment.

 

An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The Company completed its assessment of the qualitative factors as of December 31, 2015 and determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying value.

 

Insurance

The Company self-insures for certain obligations related to health insurance programs. The Company also purchases stop-loss insurance policies to protect it from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for losses that have occurred, but have not been reported. The Company's estimates consider historical claim experience and other factors. The Company's liabilities are based on estimates, and, while the Company believes that the accrual for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. Changes in claim experience, the Company's ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.

 

Pensions 

 

The Company’s pension obligations are determined using estimates including those related to discount rates, asset values and changes in compensation. The discount rates used for the Company’s pension plans were determined based on the Citigroup Pension Yield Curve.  This rate was selected as the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date taking into account the nature and duration of the benefit obligations of the plans using high-quality fixed-income investments currently available (rated AA or better) and expected to be available during the period to maturity of the benefits. The 8% expected return on plan assets was determined based on historical long-term investment returns as well as future expectations given target investment asset allocations and current economic conditions.

 

Income Taxes

 

The Company is required to estimate and record income taxes payable for federal and state jurisdictions in which the Company operates. This process involves estimating actual current tax expense and assessing temporary differences resulting from differing accounting treatments between tax and book that result in deferred tax assets and liabilities. In addition, accruals are also estimated for federal and state tax matters for which deductibility is subject to interpretation. Taxes payable and the related deferred tax differences may be impacted by changes to tax laws, changes in tax rates and changes in taxable profits and losses. Federal income taxes are not provided on that portion of unremitted income of foreign subsidiaries that are expected to be reinvested indefinitely. Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it is properly reserved. We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in the total liability for unrecognized tax benefits.

 

 

Share-based Compensation

 

The Company recognizes expense for all share-based payments to employees, including grants of employee stock options, in the financial statements based on their fair values. Share-based compensation expense that was recorded in the six-month periods ended June 30, 2016 and 2015 includes the compensation expense for the share-based payments granted in those quarters. In the Company’s share-based compensation strategy we utilize (1) a combination of stock options and stock appreciation rights (“SARS”) that fully vest on the date of grant and (2) restricted stock grants that vest over time. Therefore, the fair value of the options and SARS granted is recognized as expense on the date of grant and the fair value of restricted stock grants is recognized as expense over the vesting period. The Company used the Black-Scholes-Merton valuation model to value any share-based compensation. Option valuation methods, including Black-Scholes-Merton, require the input of assumptions including the risk free interest rate, dividend rate, expected term and volatility rate. The Company determines the assumptions to be used based upon current economic conditions. The impact of changing any of the individual assumptions by 10% would not be material.

 

Business Outlook

 

Uniforms and Related Products

 

Historically, we have manufactured and sold a wide range of uniforms, career apparel and accessories, which comprises our Uniforms and Related Products segment. Our primary products are provided to workers employed by our customers and, as a result, our business prospects are dependent upon levels of employment and overall economic conditions, among other factors. Our revenues are impacted by our customers’ opening and closing of locations and reductions and increases in headcount. Additionally, between 2009 and 2013 voluntary employee turnover had declined significantly because fewer alternative jobs were available to employees of our customers.  While the current economic environment in the United States remains somewhat sluggish, we are continuing to see an improvement in the employment environment and voluntary employee turnover has been increasing.  We also continue to see an increase in the demand for employees in the healthcare sector as a result of the Affordable Care Act. These factors are expected to have positive impacts on our prospects for growth in net sales in 2016; however, recent volatility in global equity markets may reflect a decrease in investor confidence in the global economy.

 

We have continued our efforts to increase penetration of the direct health care market. We were awarded our first two group purchasing organization contracts in 2015 and increased the number of healthcare facilities that we are able to pursue for direct sales by at least 4,500. These contracts give us the ability to pursue these healthcare facilities as customers. We are actively working to acquire these potential customers and to grow our direct healthcare business over the next several years. We expect to be awarded additional agreements for other group purchasing organizations in the future.

 

We have been and continue to actively pursue acquisitions to increase our market share in the Uniforms and Related Products segment. During the first quarter of 2016 we acquired substantially all of the assets of BAMKO, Inc. to strengthen our position in the promotional products and branded merchandise market as we believe this product line is a synergistic fit with our uniform business.

 

Remote Staffing Solutions

 

We are pursuing a diversified business model to include growth of our Remote Staffing Solutions segment, operating in El Salvador, Belize, and the United States. This business segment was initially started to provide remote staffing services for the Company at a lower cost structure in order to improve our own operating results.   It has in fact enabled us to reduce our operating expenses in our Uniforms and Related Products segment and to more effectively service our customers’ needs in that segment.  We began selling remote staffing services to other companies at the end of 2009. We have grown this business from approximately $1,000,000 in net sales to outside customers in 2010 to approximately $12,000,000 in net sales to outside customers in 2015.  We have spent significant effort over the last several years improving the depth of our management infrastructure in this segment to support significant growth in this segment in 2016 and beyond.  We increased net sales to outside customers in this segment by approximately 49% in 2015 as compared to 2014 and by approximately 42% in 2014 as compared to 2013. 

 

Results of Operations

 

Net sales increased 19.5% from $54,116,000 for the three months ended June 30, 2015 to $64,660,000 for the three months ended June 30, 2016.   The 19.5% aggregate increase in net sales is split between growth in our Uniforms and Related Products segment excluding net sales from BAMKO (contributing a decrease of 0.1%), the effect of the BAMKO acquisition (contributing 18.2%) and increases in net sales after intersegment eliminations from our Remote Staffing Solutions segment (contributing 1.4%). Intersegment eliminations reduce total net sales for sales of remote staffing solutions to the Uniforms and Related Products segment by the Remote Staffing Solutions segment. See Note 6 to the consolidated interim financial statements for more information and a reconciliation of segment net sales to total net sales.

 

 

Net sales increased 22.1% from $100,463,000 for the six months ended June 30, 2015 to $122,628,000 for the six months ended June 30, 2016. The 22.1% increase in net sales is split between growth in our Uniforms and Related Products segment excluding net sales from BAMKO (contributing 6.8%), the effect of the BAMKO acquisition (contributing 13.6%) and increases in net sales after intersegment eliminations from our Remote Staffing Solutions Segment (contributing 1.7%).

 

Uniforms and Related Products net sales increased 19.1% for the three months ended June 30, 2016, compared to the same period in the prior year. This increase in net sales is almost entirely due to the inclusion of net sales of BAMKO in the three month period ended June 30, 2016. BAMKO was acquired effective March 1, 2016.

 

Uniforms and Related Products net sales increased 21.6% from $95,044,000 for the six months ended June 30, 2015 to $115,545,000 for the six months ended June 30, 2016. 14.4% of the increase in net sales is due to the inclusion of net sales of BAMKO from the March 1, 2016 effective date of the acquisition, with the balance attributed to our continued market penetration as well as continued increases in voluntary employee turnover in the marketplace.

 

Remote Staffing Solutions net sales increased 19.0% before intersegment eliminations and 25.8% after intersegment eliminations for the three months ended June 30, 2016, compared to the same period in the prior year. These increases are attributed to continued market penetration in 2016, both with respect to new and existing customers.

 

Remote Staffing Solutions net sales increased 22.2% before intersegment eliminations and 30.7% after intersegment eliminations for the six months ended June 30, 2016, compared to the same period in the prior year. These increases are attributed to continued market penetration in 2016, both with respect to new and existing customers.

 

As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 67.4% for the three months ended June 30, 2016, and 66.8% in the comparable period for 2015. The percentage increase in 2016 is primarily attributed to an increase in direct product costs as a percentage of net sales on non BAMKO sales during 2016 (contributing 0.6%), an increase in overhead costs as a percentage of net sales on non BAMKO sales (contributing 0.3%), partially offset by lower cost of goods sold on BAMKO sales as a percentage of net sales (contributing 0.3%).

 

As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 67.0% for the six months ended June 30, 2016 and 66.9% for the comparable period in 2015. The increase as a percentage of net sales is not considered significant. 

 

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions Segment was 45.2% for the three months ended June 30, 2016, and 44.2% in the comparable period for 2015. The percentage increase in 2016 as compared to 2015 is primarily attributed to an increase in the percentage of segment revenue coming from the domestic portion of our Remote Staffing Solutions segment from 19.4% in the three month period ended June 30, 2015 to 27.7% in the comparable period of 2016. The hourly rates charged for domestic services are higher than for offshore services but the margin percentage earned is lower.

 

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 46.0% for the six months ended June 30, 2016, and 43.4% in the comparable period for 2015. The percentage increase in 2016 as compared to 2015 is primarily attributed to an increase in the percentage of segment revenue coming from the domestic portion of our Remote Staffing Solutions segment from 17.9% in the six month period ended June 30, 2015 to 30.6% in the comparable period of 2016. The hourly rates charged for domestic services are higher than for offshore services but the margin percentage earned is lower.

 

As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 26.3% for the three months ended June 30, 2016 and 24.0% for the comparable period in 2015. Excluding the effect of BAMKO’s results, selling and administrative expenses as a percentage of net sales would have been 25.0% for the three months ended June 30, 2016. Excluding this effect, the increase as a percentage of net sales is attributed primarily to higher medical costs from the Company’s self-insured medical plan in the current period (contributing 0.6%), startup costs associated with the new factory that opened in Haiti in 2016 (contributing 0.2%), higher ongoing pension and retirement plan expense (contributing 0.3%), and other minor net increases (contributing 0.4%), partially offset by lower pension settlement losses recognized in 2016 (contributing 0.5%).   BAMKO selling and administrative expenses for the three months ended June 30, 2016 were approximately $3,229,000. Included within these expenses was approximately $173,000 in expenses associated with the acquisition. Net of these acquisition-related expenses, BAMKO’s selling and administrative expenses as a percentage of BAMKO’s net sales would have been 31.1% for the three months ended June 30, 2016.

 

 

As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 27.4% for the six months ended June 30, 2016 and 25.5% for the comparable period in 2015. Excluding the effect of BAMKO’s results, selling and administrative expenses as a percentage of net sales would have been 26.0% for the six months ended June 30, 2016. Excluding this effect, the increase as a percentage of net sales is attributed primarily to increased salaries, wages and benefits exclusive of retirement plan expenses and medical costs as a result of the continuing growth in net sales (contributing 0.9%), higher medical costs from the Company’s self-insured medical plan in the current period (contributing 0.5%), startup costs associated with the new factory that opened in Haiti in 2016 (contributing 0.2%), higher ongoing pension and retirement plan expense (contributing 0.3%), and other minor net increases (contributing 0.5%), partially offset by higher net sales in 2016 to cover operating expenses (contributing 1.9%). BAMKO selling and administrative expenses included in operating results for the period from March 1, 2016, the effective date of the acquisition, through June 30, 2016 were approximately $5,205,000. Included within these expenses was approximately $1,072,000 in expenses associated with the acquisition. Net of these acquisition-related expenses, BAMKO’s selling and administrative expenses as a percentage of BAMKO’s net sales would have been 30.3% for the six months ended June 30, 2016.

 

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 33.1% for the three months ended June 30, 2016 and 34.3% for the comparable period in 2015. An increase in salaries, wages and benefits to support continuing growth (contributing 2.8%) was offset primarily by higher net sales to cover operating expenses.

 

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 32.7% for the six months ended June 30, 2016 and 33.3% for the comparable period in 2015. An increase in salaries, wages and benefits to support continuing growth (contributing 3.8%) was offset primarily by higher net sales to cover operating expenses.

 

Interest expense increased from $129,000 for the three months ended June 30, 2015 to $192,000 for the three months ended June 30, 2016. This increase is attributed primarily to higher average borrowings outstanding in the three months ended June 30, 2016.

          

Interest expense increased from $265,000 for the six months ended June 30, 2015 to $340,000 for the six months ended June 30, 2016. This increase is attributed primarily to higher average borrowings outstanding in the six months ended June 30, 2016.

                                       

The Company’s effective tax rate for the three months ended June 30, 2016 was 33.4% versus 32.8% for the three months ended June 30, 2015.  The 0.6% increase in the effective tax rate is attributed primarily to increases in the State rate (0.3%), Federal surcharge (0.2%) and other items (0.1%).

 

The Company’s effective tax rate for the six months ended June 30, 2016 was 33.5% versus 34.2% for the six months ended June 30, 2015.  The 0.7% decrease in such effective tax rate is attributed primarily to an increase in the tax benefit of foreign source income (0.8%) partially offset by the balance of other items (0.1%).

 

Liquidity and Capital Resources

 

Accounts receivable - trade increased 24.0% from $29,914,000 on December 31, 2015 to $37,091,000 on June 30, 2016. Approximately $5,000,000 of this increase is attributed to trade receivables acquired as part of the BAMKO acquisition effective March 1, 2016.  The balance of the increase is attributed primarily to higher sales in the last month of the current quarter versus the last month of the fourth quarter of 2015.

 

Prepaid expenses and other current assets increased 79.4% from $6,214,000 on December 31, 2015 to $11,150,000 as of June 30, 2016. This increase is primarily attributed to an increase in prepaid income taxes of $776,000, assets acquired as part of the BAMKO acquisition effective March 1, 2016 of $3,186,000, with the balance primarily related to timing of payments for prepaid insurance and other miscellaneous prepaid expenses.

 

Inventories decreased 0.6% from $63,573,000 on December 31, 2015 to $63,161,000 as of June 30, 2016. This decrease is attributed to an effort to reduce overall inventory levels partially offset by the acquisition of $236,000 of inventory as part of the BAMKO acquisition.

 

Other intangible assets increased 71.8% from $14,222,000 on December 31, 2015 to $24,428,000 on June 30, 2016. This increase is attributed to other intangible assets acquired as part of the BAMKO acquisition effective March 1, 2016 of $11,360,000, partially offset by scheduled amortization of other intangible assets.

 

Accounts payable increased 30.8% from $11,775,000 on December 31, 2015 to $15,397,000 on June 30, 2016. This increase is primarily due to timing of inventory purchases and $1,324,000 in accounts payable assumed as part of the BAMKO acquisition.

 

 

Other current liabilities decreased 5.1% from $8,307,000 on December 31, 2015 to $7,883,000 on June 30, 2016. Accrued salaries, wages, incentive compensation and vacation decreased by approximately $1,574,000 primarily due to the payment of year-end annual incentive compensation during the first quarter of the year partially offset by $736,000 of other current liabilities assumed as part of the BAMKO acquisition and, an increase of $263,000 in accrued self-insured medical costs.

 

Current portion of acquisition related contingencies increased by 10.2% from $1,787,000 on December 31, 2015 to $1,969,000 on June 30, 2016 due to the payment of the 2015 contingent amount associated with the HPI acquisition during the first six months of 2016.

 

Long-term acquisition related contingencies increased by 90.4% from $3,866,000 on December 31, 2015 to $7,361,000 as of June 30, 2016. This increase is primarily due to $5,396,000 of contingent liability recorded as part of the BAMKO acquisition and the accretion of the liabilities as we move closer to the scheduled payment dates partially offset by the transfer of the $1,969,000 balance expected to be paid in April 2017 to current liabilities. The contingent liability recorded as part of the BAMKO acquisition reflects liabilities specified in the asset purchase agreement for contingent consideration subject to a number of conditions, including the acquired business exceeding specified earnings targets, which is subject to acceleration upon the occurrence of certain events specified in the asset purchase agreement.

 

The Company will continue to evaluate its contingent liabilities 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 contingent liabilities may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liability.

 

Cash and cash equivalents increased by $3,699,000 from $1,036,000 on December 31, 2015 to $4,735,000 as of June 30, 2016. During the six-months ended June 30, 2016, the Company generated cash of $7,626,000 in operating activities, used cash of $20,779,000 in investing activities, including $15,252,000, net of cash acquired, related to the acquisition of BAMKO; and used $5,527,000 for additions to property, plant and equipment, with approximately $3,483,000 related to the new building project in El Salvador and the balance related to normal recurring additions; and generated $16,770,000 from financing activities.

 

In the foreseeable future, the Company will continue its ongoing capital expenditure program designed to maintain and improve its facilities. As noted in prior periods, we are investing in a new call center building in El Salvador which was completed in June 2016 that almost triples our existing capacity there. We spent approximately $6,000,000 on the El Salvador project through December 31, 2015 and approximately $3,483,000 in the six-month period ended June 30, 2016. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions.

 

During the six-months ended June 30, 2016 and 2015, respectively, the Company paid cash dividends of $2,270,000 and $2,006,000.

 

Effective July 1, 2013, the Company entered into an amended and restated 5-year credit agreement with Fifth Third Bank that made available to the Company up to $15,000,000 on a revolving credit basis (the “Initial Credit Facility”) in addition to a $30,000,000 term loan utilized to finance the acquisition of substantially all of the assets of HPI Direct, Inc.

 

Effective March 8, 2016, the Company entered into an amended and restated 5-year credit agreement with Fifth Third Bank (“the Amended Credit Agreement”) that increased its revolving credit facility from $15,000,000 to $20,000,000 (the “Amended Credit Facility”) and refinanced its then-existing term loan with a new $45,000,000 term loan to help finance the acquisition of substantially all of the assets of BAMKO, Inc. Interest is payable on the new term loan at LIBOR plus 0.85% (1.32% at June 30, 2016) and on the revolving credit facility at LIBOR (rounded up to the next 1/8^th of 1%) plus 0.85% (1.35% at June 30, 2016). Both loans are based upon the one-month LIBOR rate for U.S. dollar-based borrowings. The Company pays a commitment fee of 0.10% per annum on the average unused portion of the commitment under the Amended Credit Facility. The available balance under the Amended Credit Facility is reduced by outstanding letters of credit. As of June 30, 2016, there were no outstanding under letters of credit.

 

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. in July 2013 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 $14,250,000. The notional amount of the interest rate swap is reduced by the scheduled amortization of the principal balance of the original term loan of $187,500 per month through July 1, 2015 and $250,000 per month through June 1, 2018 with the remaining notional balance of $3,250,000 to be eliminated on July 1, 2018. Effective at the inception of the new term loan, the fixed rate on the notional amount was reduced to 2.43%.

 

 

Under the terms of the interest rate swap, the Company receives variable interest rate payment and makes fixed interest rate payments on an amount equal to the notional amount at that time. Changes in the fair value of the interest rate swap designated as the hedging instrument that effectively offset the variability of cash flows associated with the variable-rate, long-term debt obligation are reported in OCI, net of related income tax effects. As a result of the acquisition of BAMKO on March 8, 2016, the original term loan associated with this hedge was paid in full and replaced with the new $45,000,000 term loan discussed above. At that time, the Company undesignated the original term loan as the hedged instrument and elected the new term loan as the designated hedged instrument. The negative fair value of the interest rate swap at that time of $152,000 will be amortized as an expense over the remaining life of the swap agreement. At June 30, 2016, the interest rate swap had a negative fair value of $138,000, which is presented within other current liabilities within the consolidated balance sheet. Approximately $22,000 of this cumulative loss has been recognized in earnings in 2016. The balance of $138,000, net of tax benefit of $49,000, since the inception of the hedge in July 2013 has been recorded within OCI through June 30, 2016. The Company expects that approximately $65,000 of these losses will be reclassified into earnings over the subsequent twelve-month period.

 

The remaining scheduled amortization for the term loan is as follows: 2016 $3,214,000; 2017 through 2020 $6,429,000 per year; 2021 $14,463,000. The term loan does not include a prepayment penalty. In connection with the Amended Credit Agreement, the Company incurred approximately $70,000 of debt financing costs, which primarily consisted of legal fees. These costs are being amortized over the life of the Amended Credit Agreement and are recorded as additional interest expense.

 

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

 

The Company believes that income generated from operations and outside sources of credit, both trade and institutional, will be adequate to fund its operations for the remainder of the year and for the foreseeable future.

 

Off-Balance Sheet Arrangements

 

The Company does not engage in any off-balance sheet financing arrangements. In particular, we do not have any interest in variable interest entities, which include special purpose entities and structured finance entities.

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

ITEM 4.

Controls and Procedures

 

Disclosure Controls and Procedures

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2016, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

 

None.

 

ITEM 1A.

Risk Factors

 

We are exposed to certain risks and uncertainties that could have a material adverse impact on our business, financial condition and operating results. One Risk Factor described in Part I, Item 1A-Risk Factors in our annual report on Form 10-K for the year ended December 31, 2015 has materially changed and another has formed, both as reflected in italics below. Unless included below, Risk Factors contained in our annual report on Form 10-K for the year ended December 31, 2015 have not materially changed.

   

Risks Relating To Our Industry

 

Increases in the price of finished goods and raw materials used to manufacture our products could materially increase our costs and decrease our profitability.

 

The principal fabrics used in our business are made from cotton, wool, silk, synthetic and cotton-synthetic blends. The prices we pay for these fabrics and our finished goods are dependent on the market price for the raw materials used to produce them, primarily cotton and chemical components of synthetic fabrics including raw materials such as chemicals and dyestuffs. We also sell products made from other materials, including glass and plastic. These finished goods and raw materials are subject to price volatility caused by weather, supply conditions, government regulations, economic climate, currency exchange rates, labor costs, and other unpredictable factors.  Fluctuations in petroleum prices also may influence the prices of related items such as chemicals, dyestuffs and polyester yarn.

 

For example, during the latter part of 2010, cotton prices began increasing dramatically and reached historically high levels during 2011 due to weather-related and other supply disruptions, which when combined with robust global demand, particularly in Asia, created concerns about availability and increased costs for our products.  While were able to pass on a portion of these price increases to our customers during most of 2011, we saw a negative impact on our gross margins from the fourth quarter of 2011 through 2012.

 

Any increase in raw material prices increases our cost of sales and can decrease our profitability unless we are able to pass the costs on to our customers in the form of higher prices. In addition, if one or more of our competitors is able to reduce their production costs by taking advantage of any reductions in raw material prices or favorable sourcing agreements, we may face pricing pressures from those competitors and may be forced to reduce our prices or face a decline in net sales, either of which could have a material adverse effect on our business, results of operations and financial condition.

 

Our growth is subject to global political and local currency-related risks.

 

We operate in many countries around the world. Our operations are subject to the effects of geopolitical risks. Political changes, some of which may be disruptive, can interfere with our supply chain and all of our activities in a particular location. Our operations are also affected by local currency volatility and currency controls. While some of the currency-related risks can be hedged using derivatives or other financial instruments, such attempts to mitigate these risks are costly and not always successful, and our ability to engage in such mitigation may decrease or become even more costly as a result of more volatile market conditions.

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no unregistered sales of equity securities during the quarter ended June 30, 2016, that were not previously reported in a current report on Form 8-K.

 

The table below sets forth the information with respect to purchases made by or on behalf of Superior Uniform Group, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)³ under the Exchange Act) of our common shares during the three months ended June 30, 2016.

 

Period		(a) Total Number of Shares Purchased				(b) Average Price Paid per Share				(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
Month #1 (April 1, 2016 to April 30, 2016)			-				-				-				-
Month #2 (May 1, 2016 to May 31, 2016)			-				-				-				-
Month #3 (June 1, 2016 to June 30, 2016)			-				-				-				-
TOTAL			-				-				-				261,675

 

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

   

Under our Amended Credit Agreement with Fifth Third Bank, if an event of default exists, we may not make distributions to our shareholders. The Company is in full compliance with all terms, conditions and covenants of the Amended Credit Agreement.

  

ITEM 3.

Defaults upon Senior Securities

 

Not applicable.

 

ITEM 4.

Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.

Other Information

 

None.

 

ITEM 6.

Exhibits

 

See Exhibit Index.

 

  

SIGNATURES

 

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

 

Date: July 21, 2016	SUPERIOR UNIFORM GROUP, INC.
	By:	/s/ Michael Benstock
		Michael Benstock
		Chief Executive Officer (Principal Executive Officer)

                    

Date: July 21, 2016	By:	/s/ Andrew D. Demott, Jr.
		Andrew D. Demott, Jr.
		Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

 

  

EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certification by the Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by the Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**		Certification by the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**+		XBRL Instance
101.SCH**+		XBRL Taxonomy Extension Schema
101.CAL**+		XBRL Taxonomy Extension Calculation
101.DEF**+		XBRL Taxonomy Extension Definition
101.LAB**+		XBRL Taxonomy Extension Labels
101.PRE**+		XBRL Taxonomy Extension Presentation

 

 

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

 

+Submitted electronically with this Report.

 

29