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Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 4.


Allowance for Losses on Accounts Receivable

Judgments and estimates are used in determining the collectability of accounts 
receivable. The Company analyzes specific accounts receivable and historical 
bad debt experience, customer credit worthiness, current economic trends and 
the age of outstanding balances when evaluating the adequacy of the allowance 
for doubtful accounts. Management judgments and estimates are used in 
connection with establishing the allowance in any accounting period. Changes in 
estimates are reflected in the period they become known. If the financial 
condition of the Company’s customers were to deteriorate, resulting in an 
impairment of their ability to make payments, additional allowances may be 
required. An additional impairment in value of one percent of net accounts 
receivable would require an increase in the allowance for doubtful accounts and 
would result in additional expense of approximately $428,000.

Inventories


Superior’s Uniforms and Related Products segment markets itself to its 
customers as a “stock house”. Therefore, Superior carries substantial 
inventories of raw materials (principally piece goods) and finished garments at 
all times. Inventories are stated at the lower of cost or market value. 
Judgments and estimates are used in determining the likelihood that new goods 
on hand can be sold to customers. Historical inventory usage and current 
revenue trends are considered in estimating both excess and obsolete 
inventories. If actual product demand and market conditions are less favorable 
than those projected by management, additional inventory write-downs may be 
required, which may be material.


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 31 and/or when an event occurs or circumstances change 
such that it is more likely than not that impairment may exist. Examples of 
such events and circumstances that the Company would consider include the 
following:


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

• industry and market considerations such as a deterioration in the environment 
in which the Company operates, an increased competitive environment, a decline 
in market-dependent multiples or metrics (considered in both absolute terms and 
relative to peers), a change in the market for the Company's products or 
services, or a regulatory or political development;

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

• overall financial performance such as negative or declining cash flows or a 
decline in actual or planned revenue or earnings compared with actual and 
projected results of relevant prior periods;

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



Goodwill is tested at a level of reporting referred to as the “reporting unit.” 
The Company's reporting units are defined as each of its three reporting 
segments. As of September 30, 2017, goodwill of $4,135,000 was included in the 
Uniforms and Related Products segment and $7,484,000 was included 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 assessment of the qualitative factors as of December 31, 
2016 and determined that it was not more likely than not that the fair value of 
the reporting unit was less than its carrying value.



Insurance



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



Pensions



The Company is the sponsor of two noncontributory qualified defined benefit 
pension plans, providing for normal retirement at age 65, covering all eligible 
employees (as defined). Periodic benefit payments on retirement are determined 
based on a fixed amount applied to service or determined as a percentage of 
earnings prior to retirement. The Company is also the sponsor of an unfunded 
supplemental executive retirement plan (SERP) in which several of its employees 
are participants. Pension plan assets for retirement benefits consist primarily 
of fixed income securities and common stock equities. Effective June 30, 2013, 
the Company no longer accrues additional benefits for future service or for 
future increases in compensation levels for the company’s primary defined 
benefit pension plans. Effective December 31, 2014, the Company no longer 
accrues additional benefits for future service for the Company’s hourly defined 
benefit plan.



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



Income Taxes



The Company is required to estimate and record income taxes payable for 
federal, state and foreign jurisdictions in which the Company operates. This 
process involves estimating actual current tax expense and assessing temporary 
differences resulting from differing accounting 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 earnings 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 other long-term 
liabilities on the accompanying consolidated balance sheet.



The Company elected to early adopt ASU 2016-09 “Compensation – Stock 
Compensation (Topic 718): Improvements to Employee Share-Based Payment 
Accounting”. The amendment requires that excess tax benefits for share-based 
payments be recorded as a reduction of income tax expense. The recognition of 
excess tax benefits in our provision for income taxes rather than 
paid-in-capital resulted in an income tax benefit of $97,000 for the three 
months ended September 30, 2017 and $60,000 for the three-month period ended 
September 30, 2016. The recognition of excess tax benefits in our provision for 
income taxes rather than paid-in-capital resulted in an income tax benefit of 
$725,000 for the nine months ended September 30, 2017 and $475,000 for the 
nine-month period ended September 30, 2016. For additional information please 
refer to “Note 1(p) – Recent Accounting Pronouncements” in the notes to the 
consolidated financial statements.



Share-based Compensation



The Company recognizes expense for all share-based payments to employees, 
including grants of employee stock options, in the financial statements based 
on their fair values. Share-based compensation expense that was recorded in the 
nine-month periods ended September 30, 2017 and 2016 includes the compensation 
expense for the share-based payments granted in those periods. In the Company’s 
share-based compensation strategy we utilize a combination of stock options and 
stock appreciation rights (“SARS”) that fully vest on the date of grant and 
restricted shares and performance shares of common stock that vest over time or 
if performance targets are met. The fair value of the options and SARS granted 
is recognized as expense on the date of grant. The Company used the 
Black-Scholes-Merton valuation model to value any share-based compensation. 
Option valuation methods, including Black-Scholes-Merton, require the input of 
highly complex and subjective assumptions including the risk free interest 
rate, dividend rate, expected term and common stock price volatility rate. The 
Company determines the assumptions to be used based upon current economic 
conditions. While different assumptions may result in materially different 
stock compensation expenses, changing any one of the individual assumptions by 
10% would not have a material impact on the recorded expense. Expense for 
unvested shares of restricted stock and performance shares is recognized over 
the required service period.



Recent Acquisitions



On March 8, 2016, the Company closed on the acquisition of substantially all of 
the assets of BAMKO with an effective date of March 1, 2016. BAMKO is a 
full-service merchandise sourcing and promotional products company based in Los 
Angeles, CA. The purchase price for the asset acquisition consisted of 
approximately $15,161,000 cash, net of cash acquired, the issuance of 
approximately 324,000 restricted shares of Superior’s common stock that will 
vest over a five-year period, the potential future payment of approximately 
$5,500,000 in additional contingent consideration through 2021, and the 
assumption of certain liabilities of BAMKO.



On August 21, 2017, BAMKO acquired substantially all of the assets and assumed 
certain liabilities of 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. Public Identity has established itself as an 
industry leader in the sales and marketing of collegiate licensed products. The 
purchase price for the acquisition consisted of $766,000 in cash, the issuance 
of approximately 54,000 restricted shares of Superior’s common stock and future 
payments of approximately $440,000 in additional consideration through 2020. 
The majority of the shares issued vest over a three-year period.



Primarily as a result of its acquisition of BAMKO, Superior realigned its 
organizational structure and updated its reportable operating segments. A new 
Promotional Products segment has been created and consists of sales to 
customers of promotional products. Superior is now comprised of three 
reportable business segments: (1) Uniforms and Related Products, (2) Remote 
Staffing Solutions, and (3) Promotional Products.



Business Outlook



Uniforms and Related Products



Historically, we have manufactured and sold a wide range of uniforms, career 
apparel and accessories, which comprises our Uniforms and Related Products 
segment. Our primary products are provided to workers employed by our customers 
and, as a result, our business prospects are dependent upon levels of 
employment and overall economic conditions, among other factors. Our revenues 
are impacted by our customers’ opening and closing of locations and reductions 
and increases in headcount. Additionally, voluntary employee turnover at our 
customers can have a significant impact on our business. The current economic 
environment in the United States is continuing to see moderate improvement in 
the employment environment and voluntary employee turnover has been increasing. 
We also continue to see an increase in the demand for employees in the 
healthcare sector.



We have continued our efforts to increase penetration of the health care 
market. We were awarded our first group purchasing organization contracts in 
2015 and increased the number of healthcare facilities that we are able to 
pursue for direct sales significantly. We are strategically working to acquire 
these potential customers and to grow our healthcare business over the next 
several years. We continue to refine our approach to this market as we gain 
additional experience and data in the market.



We continue to pursue acquisitions to increase our market share in the Uniforms 
and Related Products segment.



Remote Staffing Solutions



This business segment, which operates in El Salvador, Belize and the United 
States, was initially started to provide remote staffing services for the 
Company at a lower cost structure in order to improve our own operating 
results. It has in fact enabled us to reduce our operating expenses in our 
Uniforms and Related Products segment and to more effectively service our 
customers’ needs in that segment. We began selling remote staffing services to 
other companies at the end of 2009. We have grown this business from 
approximately $1,000,000 in net sales to outside customers in 2010 to 
approximately $14,407,000 in net sales to outside customers in 2016. We have 
spent significant effort over the last several years improving the depth of our 
management infrastructure and expanding our facilities in this segment to 
support significant growth in this segment in 2017 and beyond.


Promotional Products



We have been involved in the sale of promotional products, on a limited basis, 
to our Uniforms and Related Products customers for over a decade. However, we 
lacked the scale and expertise needed to be a recognized name in this market 
prior to our acquisition of substantially all of the assets of BAMKO effective 
March 1, 2016. BAMKO has been operating in the promotional products industry 
for more than 15 years and we believe that BAMKO’s strong back office and 
support systems located in India, China and Hong Kong, as well as their “direct 
to factory” sourcing operations provide us with a competitive advantage. We 
believe that BAMKO has well developed systems and processes that can serve as a 
platform for additional acquisitions that we expect to complete in this highly 
fragmented market, such as the recent acquisition of Public Identity We formed 
the Promotional Products segment in 2016 as a result of the BAMKO acquisition; 
and we expect to strengthen our position in the promotional products and 
branded merchandise market as we believe this product line is a synergistic fit 
with our uniform business.


Operations


Three Months Ended September 30, 2017 Compared to Three Months Ended September 
30, 2016



Net Sales



Net sales increased 3.8% from $65,282,000 for the three months ended September 
30, 2016 to $67,773,000 for the three months ended September 30, 2017. The 
aggregate increase in net sales is driven by an increase in net sales after 
intersegment eliminations from our Remote Staffing Solutions segment 
(contributing 2.1%), an increase in net sales from our Promotional Products 
segment (contributing 7.0%), partially offset by a reduction in net sales of 
our Uniforms and Related Products segment (contributing a decrease of 5.3%).



Uniforms and Related Products net sales decreased 6.3% for the three months 
ended September 30, 2017 compared to the three months ended September 30, 2016. 
One of our larger customers was acquired by one of their competitors in 2016. 
The acquiring company was serviced by a different uniform provider that has 
taken over this account. We will continue to service them at a reduced rate. 
The net reduction from this customer was approximately $2,000,000. 
Additionally, one of our large customers elected not to repeat a large 
promotional uniform program in the third quarter that has been a part of their 
business for several years now. This resulted in a decrease in net sales of 
approximately $1,400,000. Finally, Hurricane Irma delayed some of our shipments 
in the month of September. While it is difficult to determine precisely what 
was hurricane related, we can specifically identify over $2 million in programs 
that would have delivered in the third quarter, which were delayed at the 
request of our customers. These decreases were partially offset by our 
continued market penetration and increases in voluntary turnover.



Remote Staffing Solutions net sales increased 30.5% before intersegment 
eliminations and 37.1% after intersegment eliminations for the three months 
ended September 30, 2017. These increases are attributed to continued market 
penetration in 2017, with respect to both new and existing customers.



Promotional Products net sales increased 73.9% for the three months ended 
September 30, 2017 compared to the three months ended September 30, 2016. The 
increase is primarily due to new customer acquisitions and expanded programs 
with existing customers. As we have noted in the past, net sales in this 
segment will tend to fluctuate more significantly than our Uniforms and Related 
Products segment from quarter to quarter. In addition, the Public Identity 
acquisition on August 21, 2017 contributed 7.7%.



Cost of Goods Sold



Cost of goods sold consists primarily of direct costs of acquiring inventory, 
including cost of merchandise, inbound freight charges, purchasing costs, and 
inspection costs for our Uniforms and Related Products and Promotional Products 
segments. Cost of goods sold for our Remote Staffing Solutions segment includes 
salaries and payroll related benefits for agents. The Company includes shipping 
and handling fees billed to customers in net sales. Shipping and handling costs 
associated with out-bound freight are generally recorded in cost of goods sold. 
Other shipping and handling costs are included in selling and administrative 
expenses.



As a percentage of net sales, cost of goods sold for our Uniforms and Related 
Products segment was 64.1% for the three months ended September 30, 2017 and 
65.6% for the three months ended September 30, 2016. The decrease as a 
percentage of net sales is primarily attributed to a decrease in direct product 
cost as a percentage of net sales during the three months ended September 30, 
2017.



As a percentage of net sales, cost of goods sold for our Remote Staffing 
Solutions segment was 45.9% for the three months ended September 30, 2017, and 
46.7% for the three months ended September 30, 2016. The percentage increase in 
2017 as compared to 2016 is primarily attributed to a change in customer mix.



As a percentage of net sales, cost of goods sold for our Promotional Products 
segment was 67.8% for the three months ended September 30, 2017 and 64.3% for 
the three months ended September 30, 2016. Cost of goods sold as a percentage 
of revenue for this segment can fluctuate in quarterly comparisons based on the 
service requirements of individual contracts that shipped during the quarter.



Selling and Administrative Expenses



As a percentage of net sales, selling and administrative expenses for our 
Uniforms and Related Products segment approximated 25.8% for the three months 
ended September 30, 2017 and 24.6% for the three months ended September 30, 
2016. The increase as a percentage of net sales was primarily due to lower net 
sales in 2017 to cover operating expenses (contributing 1.7%) and higher 
pension settlement costs in 2017 (contributing 0.1%) These increases were 
partially offset by decreased salaries, wages and benefits exclusive of 
retirement plan expenses and medical costs (contributing 0.1%), lower computer 
software maintenance expense (contributing 0.2%), and lower medical claims 
(contributing 0.3%).



As a percentage of net sales, selling and administrative expenses for our 
Remote Staffing Solutions segment approximated 33.5% for the three months 
periods ended September 30, 2017 and 2016. Higher net sales to cover operating 
expenses (contributing 10.2%), was offset by higher facilities costs and 
depreciation due to our expanded facility in El Salvador (contributing 1.4%), 
higher broker fees (contributing 1.0%), higher payroll related costs 
(contributing 2.1%) and other minor increases (contributing 5.7%).



As a percentage of net sales, selling and administrative expenses for our 
Promotional Products segment were 27.3% for the three months ended September 
30, 2017 and 38.4% for the three months ended September 30, 2016. The decrease 
is primarily related higher net sales to cover operating costs, partially 
offset by a lower gain on foreign currency (contributing 2.1%).



Interest Expense and Tax



Interest expense increased to $213,000 for the three months ended September 30, 
2017 from $172,000 for the three months ended September 30, 2016.



The effective income tax rate was 27.5% and 26.0% in the three months ended 
September 30, 2017 and 2016, respectively. The 1.5% increase in the effective 
tax rate is attributed primarily to a decrease in the benefit related to 
federal tax credits (1.7%), an increase in the state tax rate (1.5%), a 
decrease in the benefit of other items (2.2%), partially offset by an increase 
in the benefit of foreign sourced income (3.9%).


27



Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 
30, 2016


Net Sales



Net sales increased 3.4% from $187,910,000 for the nine months ended September 
30, 2016 to $194,365,000 for the nine months ended September 30, 2017. The 
aggregate increase in net sales is driven by the acquisitions of BAMKO 
effective March 1, 2016 and Public Identity on August 21, 2017 (contributing 
4.7%), increases in net sales after intersegment eliminations from our Remote 
Staffing Solutions segment (contributing 1.4%), partially offset by a reduction 
in net sales of our Uniforms and Related Products segment (contributing a 
decrease of 2.6%).



Uniforms and Related Products net sales decreased 3.1% for the nine months 
ended September 30, 2017 compared to the nine months ended September 30, 2016. 
The decrease in net sales in this segment is attributed to several factors. One 
of our larger customers was acquired by one of their competitors in 2016. The 
acquiring company was serviced by a different uniform provider that has taken 
over this account. We will continue to service them at a reduced rate. The net 
reduction from this customer was approximately $4,000,000. The reduction of 
recurring sales to this customer was partially offset by sales of remaining 
inventory in the second quarter. Finally, one of our large customers elected 
not to repeat two large promotional uniform programs that have been a part of 
their business for several years now. This resulted in a decrease in net sales 
of approximately $2,900,000. These decreases were partially offset by continued 
market penetration and increases in voluntary employee turnover.



Remote Staffing Solutions net sales increased 20.6% before intersegment 
eliminations and 24.6% after intersegment eliminations for the nine months 
ended September 30, 2017. These increases are attributed to continued market 
penetration in 2017, both with respect to new and existing customers.



Promotional Products net sales increased 44.1% for the nine months ended 
September 30, 2017 compared to the period from the BAMKO acquisition date of 
March 1, 2016 through September 30, 2016. The increase is partially due to two 
additional months of sales in 2017 (contributing 32.2%) and the acquisition of 
Public Identity on August 21, 2017 (contributing 2.4%). The balance of the 
increase is primarily due to new customer acquisitions and expanded programs 
with existing customers



Cost of Goods Sold



As a percentage of net sales, cost of goods sold for our Uniforms and Related 
Products segment was 64.7% for the nine months ended September 30, 2017 and 
66.5% for the nine months ended September 30, 2016. The decrease as a 
percentage of net sales is primarily attributed to a decrease in direct product 
cost as a percentage of net sales during the nine months ended September 30, 
2017.



As a percentage of net sales, cost of goods sold for our Remote Staffing 
Solutions segment was 45.8% for the nine months ended September 30, 2017, and 
46.2% for the nine months ended September 30, 2016. The percentage decrease in 
2017 as compared to 2016 is primarily attributed to customer mix.



As a percentage of net sales, cost of goods sold for our Promotional Products 
segment was 66.5% for the nine months ended September 30, 2017 and 65.7% for 
the period from March 1, 2016 through September 30, 2016. The decrease is 
primarily due to a decrease in direct product cost as a percentage of net sales 
during the nine months ended September 30, 2017.



Selling and Administrative Expenses



As a percentage of net sales, selling and administrative expenses for our 
Uniforms and Related Products segment approximated 26.7% for the nine months 
ended September 30, 2017 and 25.5% for the nine months ended September 30, 
2016. The increase as a percentage of net sales was primarily due to lower net 
sales in 2017 to cover operating expenses (contributing 0.8%) and increased 
salaries, wages and benefits exclusive of medical costs (contributing 0.7%) and 
higher bad debt expense due to a customer bankruptcy (contributing 0.4%). These 
increases were partially offset by lower medical claims in 2017 (contributing 
0.3%), lower computer software maintenance expense (contributing 0.1%), and 
other minor decreases (contributing 0.3%).



As a percentage of net sales, selling and administrative expenses for our 
Remote Staffing Solutions segment approximated 33.8% for the nine months ended 
September 30, 2017 and 33.0% for the nine months ended September 30, 2016. The 
increase as a percentage of net sales is attributed primarily to higher 
facilities costs and depreciation due to our expanded facility in El Salvador 
(contributing 2.3%), higher broker fees (contributing 0.9%), higher payroll 
related costs (contributing 1.1%) and other minor increases (contributing 
3.4%). These increases were partially offset by higher net sales to cover 
operating expenses (contributing 6.9%).



As a percentage of net sales, selling and administrative expenses for our 
Promotional Products segment were 29.6% for the nine months ended September 30, 
2017 and 38.2% from the BAMKO acquisition date of March 1, 2016 through 
September 30, 2016 Included within these expenses for 2016 was approximately 
$1,116,000 of expenses associated with the BAMKO acquisition. Net of these 
acquisition related expenses, selling and administrative expenses would have 
been 32.6% of net sales in 2016. The decrease is primarily related to higher 
sales to cover operating costs, partially offset by a lower gain on foreign 
currency (contributing 1.1%).



Gain on Sale of Property, Plant and Equipment



In the quarter ended March 31, 2017, we sold our former call center and related 
assets in El Salvador in our Remote Staffing Solutions segment for net proceeds 
of $2,808,000 and realized a gain on sale of $1,020,000.



Interest Expense and Tax



Interest expense increased to $593,000 for the nine months ended September 30, 
2017 from $512,000 for the nine months ended September 30, 2016. This increase 
is attributed primarily to higher average borrowings outstanding primarily due 
to the BAMKO acquisition.



The effective income tax rate was 26.8% and 27.3% in the nine months ended 
September 30, 2017 and 2016, respectively. The 0.5% decrease in the effective 
tax rate is attributed primarily to an increase in the benefit of foreign 
sourced income (1.3%), partially offset by an increase in the state tax rate 
(0.5%) and a decrease in the benefit of other items (0.3%).



Liquidity and Capital Resources



Accounts receivable - trade increased 2.2% from $41,823,000 on December 31, 
2016 to $42,765,000 on September 30, 2017. The increase is primarily due to 
higher revenues in the third quarter of 2017 compared to the fourth quarter of 
2016, partially offset by improved collection efforts and a higher allowance 
for doubtful accounts due to a customer bankruptcy.



Inventories decreased 4.7% from $69,240,000 on December 31, 2016 to $65,960,000 
as of September 30, 2017. The decrease is primarily due to sales of remaining 
inventory to a customer which will not be replenished.



Other intangible assets increased 1.2% from $23,238,000 on December 31, 2016 to 
$23,527,000 on September 30, 2017. This increase is attributed to the Public 
Identity acquisition partially offset by routine amortization.



Other assets increased 71.1% from $2,997,000 on December 31, 2016 to $5,128,000 
on September 30, 2017. The increase is primarily due to higher investments in 
our Non-Qualified Deferred Compensation plan due to higher employee 
contributions to the plan. There is a corresponding increase in other long-term 
liabilities. In addition, we made a contribution to the rabbi trust to support 
our supplemental executive retirement plan.


Accounts payable increased 1.3% from $13,507,000 on December 31, 2016 to 
$13,677,000 on September 30, 2017. This increase is not considered significant.



Other current liabilities decreased 5.9% from $10,716,000 on December 31, 2016 
to $10,088,000 on September 30, 2017. This decrease is primarily due to the 
timing of payments for customer rebates.



Long-term pension liability decreased 18.6% from 9,467,000 on December 31, 2016 
to $7,702,000 on September 30, 2017. The decrease is primarily due to 
$1,520,000 in contributions in the nine months ended September 30, 2017.



Long-term acquisition-related contingent liabilities decreased 42.1% from 
$7,238,000 on December 31, 2016 to $4,193,000 on September 30, 2017. This 
reduction was due to the final payment for the HPI acquisition and the first 
payment for the BAMKO acquisition being moved to current liabilities.



Other long-term liabilities increased 95.6% from $1,462,000 on December 31, 
2016 to $2,860,000 on September 30, 2017. The increase is primarily due to 
higher employee contributions to our Non-Qualified Deferred Compensation plan 
and the additional liability due to the Public Identity acquisition.



Cash and cash equivalents increased by $9,660,000 from $3,649,000 on December 
31, 2016 to $13,309,000 as of September 30, 2017. During the nine months ended 
September 30, 2017, the Company generated cash of $17,431,000 from operating 
activities, used cash of $426,000 for investing activities, (including 
$2,808,000 of proceeds from the sale of our building in El Salvador, more than 
offset by $2,518,000 used for additions to property, plant and equipment and 
$766,000 for the acquisition of a business) and used $7,391,000 for financing 
activities.



In the foreseeable future, the Company will continue its ongoing capital 
expenditure program designed to maintain and improve its facilities.



During the nine months ended September 30, 2017 and 2016, the Company paid cash 
dividends of $3,874,000 and $3,487,000, respectively.



Effective February 28, 2017, the Company entered into a new 7-year credit 
agreement with BB&T (the “Credit Agreement”) that provides a new revolving 
credit facility of $35,000,000 (the “Credit Facility”) which terminates on 
February 25, 2022 and provides a new term loan of $42,000,000 (the “Term Loan”) 
which matures on February 26, 2024. Both loans are based upon the one-month 
LIBOR rate for U.S. dollar based borrowings. Interest is payable for each loan 
at LIBOR (rounded up to the next 1/100th of 1%) plus 0.75% (1.98% at September 
30, 2017). The Company pays a commitment fee of 0.10% per annum on the average 
unused portion of the commitment under the Credit Facility. The available 
balance under the Credit Facility is reduced by outstanding letters of credit. 
As of September 30, 2017, there were no amounts due under the Credit Facility 
and no outstanding letters of credit.



The remaining scheduled amortization for the Term Loan is as follows: 2017 - 
$1,500,000; 2018 through 2023 - $6,000,000 per year; and 2024 - $1,500,000. The 
Term Loan does not include a prepayment penalty. The Company’s obligations 
under the 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 indebtedness to EBITDA ratio not to 
exceed (4.0:1) as defined in the agreement and a fixed charge coverage ratio of 
at least (1.25:1). See Note 2 to our consolidated financial statements for a 
description of the related interest rate swap agreement.


In connection with entering into the Credit Agreement, the Company terminated 
the Third Amended and Restated Credit Agreement, dated March 8, 2016, among 
Fifth Third Bank, N.A., as lender, the Company, as borrower, and other loan 
parties from time to time party thereto, which consisted of a $20,000,000 
revolving credit facility and a $45,000,000 term loan, both of which were 
repaid in full on February 28, 2017.


Off-Balance Sheet Arrangements

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



Quantitative and Qualitative Disclosures about Market Risk



Interest Rate Risk

We are subject to market risk exposure related to changes in interest rates on 
our debt. Interest on our Term Loan and Credit Facility are based upon the 
one-month LIBOR rate. In order to reduce the interest rate risk on our debt, 
the Company entered into an interest rate swap agreement on a portion of its 
borrowings. A hypothetical increase in the LIBOR rate of 100 basis points as of 
January 1, 2017 would have resulted in approximately $290,000 in additional 
pre-tax interest expense for the nine months ended September 30, 2017. See Note 
2 to our consolidated financial statements.


Foreign Currency Exchange Risk

Sales to clients outside of the United States are subject to fluctuations in 
foreign currency exchange rates. Approximately 1% of our sales are outside of 
the United States. As the prices at which we sell our products are not 
routinely adjusted for exchange rate changes, the gross profit on our orders 
may be negatively affected. We cannot predict the effect of exchange rate 
fluctuations on our operating results. In certain cases, we may enter into 
foreign currency cash flow hedges to reduce the variability of cash flows 
associated with our sales and expenses denominated in foreign currency. As of 
September 30, 2017, we have no foreign currency exchange hedging contracts. See 
Note 1(k) to our consolidated financial statements. There can be no assurance 
that our strategies will adequately protect our operating results from the 
effect of exchange rate fluctuations.

Our foreign subsidiaries in the Promotional Products segment are denominated in 
their local currencies which include the Hong Kong dollar, the Chinese 
renminbi, the British pound, the Indian rupee, and the Brazilian real. Changes 
in exchange rates for intercompany payables and receivables not considered to 
be long-term are reported as transaction gains (losses) in our consolidated 
statements of comprehensive income. During the nine months ended September 30, 
2017, transaction losses were approximately $65,000 pre-tax.