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SUPERIOR GROUP OF COMPANIES, INC. - Quarter Report: 2020 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

 

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

For the quarterly period ended June 30, 2020

 

 

 

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 GROUP OF COMPANIES, 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: ___________________

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock $0.001 par value per share

 

SGC

 

NASDAQ

 

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 ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒  No ☐

 

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

 

Large accelerated filer  ☐    

Accelerated filer  ☒

 

Non-accelerated filer    ☐

 

Smaller Reporting Company  ☒

 

 

Emerging Growth Company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

The number of shares of common stock of the registrant outstanding as of July 22, 2020 was 15,324,330 shares.

 

 

 

 

 

 

TABLE OF CONTENTS

 

 
   

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

2

Condensed Consolidated Statements of Comprehensive Income (Unaudited) 

2

Condensed Consolidated Balance Sheets (Unaudited)

4

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

5

Condensed Consolidated Statements of Cash Flows (Unaudited)

7

Notes to the Condensed Consolidated Financial Statements (Unaudited)

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

Item 4. Controls and Procedures

29

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

29

Item 1A. Risk Factors

29

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

30

Item 3. Defaults Upon Senior Securities

30

Item 4. Mine Safety Disclosures

30

Item 5. Other Information

30

Item 6. Exhibits

31

SIGNATURES

32

 

 
1

 

 

 PART I - FINANCIAL INFORMATION

 

ITEM 1.   Financial Statements

 

 SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except shares and per share data)

 

  Three Months Ended June 30, 
  

2020

  

2019

 
Net sales $159,359  $92,270 
         

Costs and expenses:

        
Cost of goods sold  103,421   59,927 
Selling and administrative expenses  36,298   26,885 
Other periodic pension costs  333   547 
Interest expense  433   1,259 
   140,485   88,618 
Income before taxes on income  18,874   3,652 
Income tax expense  3,700   871 
Net income $15,174  $2,781 
         

Net income per share:

        
Basic $1.01  $0.19 
Diluted $1.00  $0.18 
         

Weighted average shares outstanding during the period:

        
Basic  15,016,062   14,952,802 
Diluted  15,171,086   15,287,357 
         

Other comprehensive income (loss), net of tax:

        

Defined benefit pension plans:

        
Recognition of net losses included in net periodic pension costs $237  $256 
Recognition of settlement loss included in net periodic pension costs  147   246 
Loss on cash flow hedging activities  (6)  (6)
Foreign currency translation adjustment  (162)  49 

Other comprehensive income

  216   545 
Comprehensive income $15,390  $3,326 
         
Cash dividends per common share $-  $0.10 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

2

 

 SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except shares and per share data)

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 

Net sales

  $ 253,604     $ 178,822  
                 

Costs and expenses:

               

Cost of goods sold

    164,215       116,211  

Selling and administrative expenses

    63,787       52,748  

Other periodic pension costs

    618       806  

Interest expense

    1,493       2,429  
      230,113       172,194  

Income before taxes on income

    23,491       6,628  

Income tax expense

    4,950       1,471  

Net income

  $ 18,541     $ 5,157  
                 

Net income per share:

               

Basic

  $ 1.23     $ 0.35  

Diluted

  $ 1.22     $ 0.34  
                 

Weighted average shares outstanding during the period

               

Basic

    15,020,457       14,940,072  

Diluted

    15,185,992       15,275,006  
                 

Other comprehensive income (loss), net of tax:

               

Defined benefit pension plans:

               

Recognition of net losses included in net periodic pension costs

  $ 480     $ 503  

Recognition of settlement loss included in net periodic pension costs

    252       246  

Loss on cash flow hedging activities

    (11 )     (11 )

Foreign currency translation adjustment

    (1,401 )     21  

Other comprehensive income (loss)

    (680 )     759  

Comprehensive income

  $ 17,861     $ 5,916  
                 

Cash dividends per common share

  $ 0.10     $ 0.20  

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

3

 

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and par value data)

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 

ASSETS

    

Current assets:

        

Cash and cash equivalents

 $5,102  $9,038 

Accounts receivable, less allowance for doubtful accounts of $6,693 and $2,964, respectively

  87,064   79,746 

Accounts receivable - other

  819   1,083 

Inventories

  72,462   73,379 

Contract assets

  35,129   38,533 

Prepaid expenses and other current assets

  11,046   9,934 

Total current assets

  211,622   211,713 

Property, plant and equipment, net

  35,656   32,825 

Operating lease right-of-use assets

  4,595   5,445 

Intangible assets, net

  60,634   62,536 

Goodwill

  36,071   36,292 

Other assets

  9,592   10,122 

Total assets

 $358,170  $358,933 
         

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Current liabilities:

        

Accounts payable

 $33,275  $33,271 

Other current liabilities

  39,348   18,894 

Current portion of long-term debt

  15,286   15,286 

Current portion of acquisition-related contingent liabilities

  2,786   1,905 

Total current liabilities

  90,695   69,356 

Long-term debt

  69,730   104,003 

Long-term pension liability

  9,932   10,253 

Long-term acquisition-related contingent liabilities

  1,742   3,423 

Long-term operating lease liabilities

  1,880   2,380 

Deferred tax liability

  4,405   7,042 

Other long-term liabilities

  5,311   4,922 

Commitments and contingencies (Note 6)

        

Shareholders’ equity:

        

Preferred stock, $.001 par value - authorized 300,000 shares (none issued)

  -   - 

Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding 15,231,781 and 15,227,604 shares, respectively.

  15   15 

Additional paid-in capital

  58,381   57,442 

Retained earnings

  124,243   107,581 
Accumulated other comprehensive income (loss), net of tax:        

Pensions

  (6,492)  (7,224)

Cash flow hedges

  80   91 

Foreign currency translation adjustment

  (1,752)  (351)

Total shareholders’ equity

  174,475   157,554 

Total liabilities and shareholders’ equity

 $358,170  $358,933 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

4

 

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

(In thousands, except shares and per share data)

 

                  

Accumulated

     
                  

Other

     
          

Additional

      

Comprehensive

  

Total

 
  

Common

  

Common

  

Paid-In

  

Retained

  

(Loss) Income,

  

Shareholders’

 
  

Shares

  

Stock

  

Capital

  

Earnings

  

net of tax

  

Equity

 

Balance, April 1, 2019

  15,229,775  $15  $56,536  $102,945  $(7,771) $151,725 

Common shares issued upon exercise of options, net

  18,533      88   (18)     70 
Restricted shares issued, net  10,000               - 

Share-based compensation expense

         551         551 

Cash dividends declared ($0.10 per share)

            (1,508)     (1,508)

Common stock reacquired and retired

  (2,614)     (9)  (35)     (44)

Comprehensive income (loss):

                        

Net earnings

            2,781      2,781 

Cash flow hedges, net of taxes of $1

               (6)  (6)

Pensions, net of taxes of $158

               502   502 

Change in currency translation adjustment, net of taxes of $12

               49   49 

Balance, June 30, 2019

  15,255,694  $15  $57,166  $104,165  $(7,226) $154,120 
                         

Balance, April 1, 2020

  15,222,161  $15  $57,669   109,086  $(8,380) $158,390 

Common shares issued upon exercise of options, net

  9,620      50   (17)     33 

Share-based compensation expense

        662         662 

Comprehensive income (loss):

                        

Net earnings

            15,174      15,174 

Cash flow hedges, net of taxes of $1

               (6)  (6)

Pensions, net of taxes of $121

               384   384 

Change in currency translation adjustment, net of taxes of $52

               (162)  (162)

Balance, June 30, 2020

  15,231,781  $15  $58,381  $124,243  $(8,164) $174,475 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

5

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(Unaudited)

(In thousands, except shares and per share data)

 

                  

Accumulated

     
                  

Other

     
          

Additional

      

Comprehensive

  

Total

 
  

Common

  

Common

  

Paid-In

  

Retained

  

(Loss) Income,

  

Shareholders’

 
  

Shares

  

Stock

  

Capital

  

Earnings

  

net of tax

  

Equity

 

Balance, January 1, 2019

  15,202,387  $15  $55,859  $103,032  $(7,985) $150,921 

Common shares issued upon exercise of options, net

  62,694      457   (177)     280 

Restricted shares issued

  48,829               - 

Share-based compensation expense

         1,032         1,032 

Tax benefit from vesting of acquisition-related restricted stock

         30         30 

Cash dividends declared ($0.20 per share)

            (3,023)     (3,023)

Common stock reacquired and retired

  (58,216)     (212)  (824)     (1,036)

Comprehensive income (loss):

                        

Net earnings

            5,157      5,157 

Cash flow hedges, net of taxes of $2

               (11)  (11)

Pensions, net of taxes of $235

               749   749 

Change in currency translation adjustment, net of taxes of $7

               21   21 

Balance, June 30, 2019

  15,255,694  $15  $57,166  $104,165  $(7,226) $154,120 
                         

Balance, January 1, 2020

  15,227,604  $15  $57,442  $107,581  $(7,484) $157,554 

Common shares issued upon exercise of options

  9,620      50   (17)     33 

Restricted shares issued

  38,015               - 

Share-based compensation expense

         1,061         1,061 

Tax benefit from vesting of acquisition-related restricted stock

         (13)        (13)

Cash dividends declared ($0.10 per share)

            (1,521)     (1,521)

Common stock reacquired and retired

  (43,458)     (159)  (341)     (500)

Comprehensive income (loss):

                        

Net earnings

            18,541      18,541 

Cash flow hedges, net of taxes of $2

               (11)  (11)

Pensions, net of taxes of $230

               732   732 

Change in currency translation adjustment, net of taxes of $449

               (1,401)  (1,401)

Balance, June 30, 2020

  15,231,781  $15  $58,381  $124,243  $(8,164) $174,475 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

6

 

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

  Six Months Ended June 30, 
  

2020

  

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

        
Net income $18,541  $5,157 

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

        
Depreciation and amortization  3,959   4,211 
Provision for bad debts - accounts receivable  4,517   361 
Share-based compensation expense  1,061   1,032 
Deferred income tax benefit  (2,417)  (1,979)
Gain on sale of property, plant and equipment  -   (3)
Change in fair value of acquisition-related contingent liabilities  1,165   417 

Changes in assets and liabilities:

        
Accounts receivable - trade  (12,261)  (7,230)
Accounts receivable - other  264   280 
Contract assets  3,404   5,562 
Inventories  492   2,113 
Prepaid expenses and other current assets  (1,479)  (2,625)
Other assets  390   (2,102)
Accounts payable and other current liabilities  21,023   (14)
Long-term pension liability  639   812 
Other long-term liabilities  464   759 

Net cash provided by operating activities

  39,762   6,751 
         

CASH FLOWS FROM INVESTING ACTIVITIES

        
Additions to property, plant and equipment  (4,893)  (4,979)
Proceeds from disposals of property, plant and equipment  -   3 

Net cash used in investing activities

  (4,893)  (4,976)
         

CASH FLOWS FROM FINANCING ACTIVITIES

        
Proceeds from borrowings of debt  77,525   94,466 
Repayment of debt  (111,838)  (88,667)
Payment of cash dividends  (1,521)  (3,023)
Payment of acquisition-related contingent liability  (1,966)  (961)
Proceeds received on exercise of stock options  33   280 
Tax (provision) benefit from vesting of acquisition-related restricted stock  (13)  30 
Common stock reacquired and retired  (500)  (1,036)

Net cash provided by (used in) financing activities

  (38,280)  1,089 
         
Effect of currency exchange rates on cash  (525)  41 

Net increase (decrease) in cash and cash equivalents

  (3,936)  2,905 

Cash and cash equivalents balance, beginning of period

  9,038   5,362 

Cash and cash equivalents balance, end of period

 $5,102  $8,267 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

7

 

 

Superior Group of Companies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 1 – Basis of Presentation:

 

Basis of presentation

 

The condensed consolidated financial statements include the accounts of Superior Group of Companies, Inc. and its wholly-owned subsidiaries, The Office Gurus, LLC, SUG Holding, Superior Group Holdings, Inc., 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, BAMKO UK, Limited, and BAMKO Merch Inc., 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 on May 3, 2018, Superior Uniform Group, Inc. changed its name to Superior Group of Companies, Inc.

 

The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Intercompany items have been eliminated in consolidation. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and filed with the Securities and Exchange Commission. Management believes that the information furnished includes all adjustments of a normal recurring nature that are necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

 

We refer to the condensed consolidated financial statements collectively as “financial statements,” and individually as “statements of comprehensive income,” “balance sheets,” “statements of shareholders’ equity,” and “statements of cash flows” herein.

 

Recent Accounting Pronouncements

 

We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be not applicable.

 

Recently Adopted Accounting Pronouncements

 

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by the difference between a reporting unit's carrying value and its fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company’s adoption of this standard on January 1, 2020 did not have a material impact on its financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update also requires an entity to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This update is effective for fiscal years beginning after December 15, 2019 and may be applied prospectively or retrospectively. On January 1, 2020, the Company adopted this standard on a prospective basis. The Company’s adoption of this standard did not have a material impact on its financial statements.

 

8

 
 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13,Financial Instruments—Credit Losses (Topic 326). The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. In February 2020, the FASB issued ASU 2020-2,Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” The update delayed the effective date of ASU 2016-13,Financial Instruments—Credit Losses (Topic 326)” for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. Adoption will require a modified retrospective approach beginning with the earliest period presented. The Company is currently evaluating the potential impact this standard will have on its financial statements.

 

In December 2019, the FASB Issued ASU 2019-12,Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This update is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating this guidance to determine what impact it may have on its financial statements.

 

In March 2020, the FASB issued ASU 2020-04,Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. This guidance includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This guidance may be applied through December 31, 2022. The Company will apply this guidance to transactions and modifications to contracts and hedging relationships that reference LIBOR.

 

 

NOTE 2 – Inventories:

 

Inventories consisted of the following amounts (in thousands):

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 

Finished goods

  $ 59,335     $ 65,413  

Work in process

    1,032       652  

Raw materials

    12,095       7,314  

Inventories

  $ 72,462     $ 73,379  

 

 

NOTE 3 – Long-Term Debt:

 

Debt consisted of the following (in thousands):

 

  

June 30,

  

December 31,

 
  2020  2019 
Credit Facilities:        
Revolving credit facility due May 2023 $7,346  $37,838 
Term loan due February 2024 (“2017 Term Loan”)  24,000   25,500 
Term loan due January 2026 (“2018 Term Loan”)  54,167   56,488 
   85,513   119,826 

Less:

        
Payments due within one year included in current liabilities  15,286   15,286 
Debt issuance costs  497   537 

Long-term debt less current maturities

 $69,730  $104,003 

 

9

 

The Company is party to an amended and restated credit agreement (the “Credit Agreement”) with Truist Bank (formerly known as Branch Banking and Trust Company), consisting of a $75 million revolving credit facility expiring in May 2023, a term loan maturing in February 2024 (“2017 Term Loan”) and a term loan maturing in January 2026 (“2018 Term Loan”). 

 

Obligations outstanding under the 2018 Term Loan have a variable interest rate of LIBOR plus a margin of between 0.85% and 1.65% (based on the Company’s funded debt to EBITDA ratio) (1.03% at June 30, 2020). Obligations outstanding under the revolving credit facility and the 2017 Term Loan generally have a variable interest rate of one-month LIBOR plus a margin of between 0.68% and 1.50% (based on the Company’s funded debt to EBITDA ratio) (0.86% at June 30, 2020). The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of June 30, 2020, there were no outstanding letters of credit. 

 

On March 30, 2020, the Company entered into debt deferment agreements with Truist Bank to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Contractual principal payments for the 2017 Term Loan are as follows: remainder of 2020 - $3.0 million; 2021 through 2023 - $6.0 million per year; and 2024 - $3.0 million. Contractual principal payments for the 2018 Term Loan are as follows: remainder of 2020 - $4.6 million; 2021 through 2025 - $9.3 million per year; and 2026 - $3.1 million. The term loans do not contain pre-payment penalties.

 

The Company is a party to an interest rate swap with a total notional value of $11.3 million as of  June 30, 2020 pursuant to which it makes fixed payments and receives floating payments. The Company entered into the interest rate swap to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. The Company’s interest rate swap expires in February 2024. The interest rate swap is not designated as a hedge transaction. Changes in fair value and gains and losses on settlement on the interest rate swap are recognized in interest expense in our statements of comprehensive income. During the six months ended June 30, 2020 and 2019, a loss of $0.3 million and $0.2 million, respectively, was recognized on the interest rate swap.

 

 

NOTE 4 – Periodic Pension Expense:

 

The following table details the net periodic pension expense under the Company’s plans for the periods presented (in thousands):

 

       
  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Service cost - benefits earned during the period

 $38  $29  $76  $58 

Interest cost on projected benefit obligation

  216   271   432   542 

Expected return on plan assets

  (389)  (384)  (778)  (721)

Recognized actuarial loss

  313   324   633   649 

Settlement loss

  193   336   331   336 

Net periodic pension cost after settlements

 $371  $576  $694  $864 

 

The pension settlement losses included in the table above resulted from lump sum pension payments made to various employees upon their retirement or termination during the periods specified. The pension settlement losses did not require a cash outlay by the Company and did not increase the Company’s total pension expense over time, as the charge was an acceleration of costs that otherwise would be recognized as pension expense in future periods. The service cost component is included in selling and administrative expenses in our statements of comprehensive income and the other components of net periodic pension cost are included in other periodic pension costs in our statements of comprehensive income.

 

Effective on 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 on December 31, 2014, the Company no longer accrues additional benefits for future service for the Company’s hourly defined benefit plan.

 

10

 
 

NOTE 5 – Net Sales:

 

For our Uniforms and Related Products and Promotional Products segments, revenue is primarily generated from the sale of finished products to customers. Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the performance obligations under the contract terms are satisfied. For certain contracts with customers in which the Company has an enforceable right to payment for goods with no alternative use, revenue is recognized over time upon receipt of finished goods into inventory. Revenue for goods that do have an alternative use or that 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 from the sale of personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, is generally recognized at a point in time when the goods are transferred to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contract. The Company includes shipping and handling fees billable to customers in net sales. Shipping and handling activities that occur after the transfer of promised goods are accrued as control is transferred to the customer rather than being treated as a separate performance obligation.

 

For our Remote Staffing segment, revenue is generated from providing our customers with staffing solution services. Revenue for our Remote Staffing segment is recognized as services are delivered. 

 

Revenue is measured at the amount of consideration we expect to receive in exchange for the goods or services. Variable consideration for estimated returns, allowances and other price variances is recorded based upon historical experience and current allowance programs. Contract termination terms may involve variable consideration clauses such as sales discounts and customer rebates, and revenue is adjusted accordingly for these provisions. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The promised amount of consideration in a contract is not adjusted for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised good or service to a customer and when the customer pays for that product or service will be one year or less. Sales taxes are excluded from the measurement of a performance obligation’s transaction price. Sales commissions are expensed as incurred when we expect that the amortization period of such costs will be one year or less.

 

The following table presents disaggregated revenue by operating segment for the periods presented (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Uniforms and Related Products Segment:

                

Uniforms and related products

 $66,977  $59,945  $125,612  $117,192 

Personal protective equipment

  8,865   800   10,332   2,232 

Total Uniforms and Related Products Segment

 $75,842  $60,745  $135,944  $119,424 
                 

Remote Staffing Solutions Segment:

                

Remote staffing solutions services

 $9,351  $8,993  $18,551  $17,592 

Net intersegment eliminations

  (1,290)  (1,212)  (2,525)  (2,297)

Total Remote Staffing Solutions Segment

 $8,061  $7,781  $16,026  $15,295 
                 

Promotional Products Segment:

                

Promotional products

 $25,772  $23,744  $51,950  $44,103 

Personal protective equipment

  49,684   -   49,684   - 

Total Promotional Products Segment

 $75,456  $23,744  $101,634  $44,103 
                 

Consolidated Net Sales

 $159,359  $92,270  $253,604  $178,822 

 

11

 

Contract Assets and Contract Liabilities

 

The following table provides information about accounts receivables - trade, contract assets and contract liabilities from contracts with customers (in thousands):

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 

Accounts receivable - trade

 $87,064  $79,746 

Current contract assets

  35,129   38,533 
Current contract liabilities  8,472   1,821 

 

Contract assets relate to goods produced without an alternative use for which the Company has an enforceable right to payment but which have not yet been invoiced to the customer. The majority of the amounts included in contract assets on December 31, 2019 were transferred to accounts receivable during the six months ended June 30, 2020. Contract liabilities relate to payments received in advance of the Company completing its performance under a contract. Contract liabilities are included in other current liabilities in our balance sheets. The increase in contract liabilities during the six months ended June 30, 2020 was primarily attributable to new customer contracts for the sourcing of personal protective equipment within the Promotional Products and Uniforms and Related Products segments. During the six months ended June 30, 2020, $1.1 million of revenue was recognized from the contract liabilities balance as of December 31, 2019.

 

 

NOTE 6 – Contingencies:

 

The purchase price to acquire substantially all of the assets of BAMKO, Inc. (“BAMKO”) in 2016 included contingent consideration through 2021. The estimated fair value for BAMKO acquisition-related contingent consideration payable was $2.6 million as of June 30, 2020, of which $1.8 million is expected to be paid in the second quarter of 2021. The purchase price to acquire substantially all of the assets of Tangerine Promotions, Ltd. and Tangerine Promotions West, Inc. (collectively “Tangerine”) in 2017 included contingent consideration through 2021. The estimated fair value for Tangerine acquisition-related contingent consideration payable was $1.9 million as of June 30, 2020, of which $1.0 million is expected to be paid in the second quarter of 2021. The Company will continue to evaluate these liabilities for remeasurement at the end of each reporting period and any changes will be recorded in the Company’s statements of comprehensive income. The carrying amount of the liabilities  may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liabilities.

 

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 is not expected to have a material impact on the Company’s results of operations, cash flows, or financial position.

 

 

NOTE 7 – Share-Based Compensation:

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Stock options and SARs

 $345  $105  $510  $178 

Restricted stock

  203   209   363   397 

Performance shares

  114   237   188   457 

Total share-based compensation expense

 $662  $551  $1,061  $1,032 
                 

Related income tax benefit

 $75  $67  $129  $125 

 

12

 

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. Stock options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and SARs at the date of grant using the Black-Scholes valuation model.

 

All stock options and SARs granted prior to August 3, 2018 vested immediately when granted. Awards issued thereafter vest either one or two years after the grant date. Employee awards expire five years after the grant date, and those issued to directors expire ten years after the grant date. The Company issues new shares upon the exercise of stock options and SARs.

 

A summary of stock option transactions during the six months ended June 30, 2020 follows:

 

          

Weighted Average

     
  

No. of

  

Weighted Average

  

Remaining Life

  

Aggregate

 
  

Shares

  

Exercise Price

  

(in years)

  

Intrinsic Value

 

Outstanding, January 1, 2020

  701,131  $16.82   2.95  $714 

Granted(1)

  528,900   8.70         
Exercised  (14,000)  4.71         
Lapsed or cancelled  (111,668)  17.81         
Outstanding, June 30, 2020  1,104,363   12.98   3.84   3,405 
Exercisable, June 30, 2020  400,863   16.46   2.29   579 

 

(1)

The weighted average grant date fair value of stock options granted was $2.04 per share.

 

As of June 30, 2020, the Company had $1.2 million in unrecognized compensation related to nonvested stock options to be recognized over the remaining weighted average vesting period of 1.0 years.

 

A summary of stock-settled SARs transactions during the six months ended June 30, 2020 follows:

 

          

Weighted Average

     
  

No. of

  

Weighted Average

  

Remaining Life

  

Aggregate

 
  

Shares

  

Exercise Price

  

(in years)

  

Intrinsic Value

 

Outstanding, January 1, 2020

  206,700  $18.67   2.04  $- 
Granted(1)  225,625   10.08         

Exercised

  -   -         
Lapsed or cancelled  (68,501)  15.97         
Outstanding, June 30, 2020  363,824   13.85   3.46   316 
Exercisable, June 30, 2020  126,068   18.95   1.58   - 

 

(1)

The weighted average grant date fair value of SARs granted was $2.18 per share.

 

As of June 30, 2020, the Company had $0.4 million in unrecognized compensation related to nonvested SARs to be recognized over the remaining weighted average vesting period of 1.2 years.

 

13

 

Restricted Stock

 

The Company has granted restricted stock to directors and certain employees 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 as outlined in the 2013 Incentive Stock and Awards Plan (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.

 

A summary of restricted stock transactions during the six months ended June 30, 2020 follows:

 

      

Weighted Average

 
  

No. of

  

Grant Date

 
  

Shares

  

Fair Value

 

Outstanding, January 1, 2020

  151,166  $18.44 
Granted  49,543   10.97 

Vested

  (34,619)  16.97 

Forfeited

  (17,420)  14.24 
Outstanding, June 30, 2020  148,670   16.79 

 

As of June 30, 2020, the Company had $1.3 million of unrecognized compensation cost related to nonvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 1.9 years.

 

Performance Shares

 

Certain employees received service-based or service-based and performance-based shares, to which we collectively refer to as performance 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. Expenses for grants of performance shares are recognized on a straight-line basis over the respective service period based on the grant date fair value and expected number of shares to be issued. The awards are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan.

 

A summary of performance share transactions during the six months ended June 30, 2020 follows:

 

      

Weighted Average

 
  

No. of

  

Grant Date

 
  

Shares

  

Fair Value

 

Outstanding, January 1, 2020

  194,012  $19.77 
Granted  -   - 

Vested

  (5,892)  16.97 
Forfeited  (8,952)  20.42 
Outstanding, June 30, 2020  179,168   19.83 

 

As of June 30, 2020, the Company had $1.1 million of unrecognized compensation cost related to nonvested performance share grants expected to be recognized over the remaining weighted average service period of 1.2 years.

 

14

 
 

NOTE 8 – Income Taxes:

 

The Company calculates its interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, the Company makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date income or loss. The tax expense or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.

 

The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year and permanent and temporary differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.

 

For the three months ended June 30, 2020, the Company recorded a provision for income taxes of $3.7 million, which represents an effective tax rate of 19.6%. For the three months ended June 30, 2019, the Company recorded a provision for income taxes of $0.9 million, which represents an effective tax rate of 23.8%. For the six months ended June 30, 2020, the Company recorded a provision for income taxes of $5.0 million, which represents an effective tax rate of 21.1%. For the six months ended June 30, 2019, the Company recorded a provision for income taxes of $1.5 million, which represents an effective tax rate of 22.2%. The decrease in the effective tax rate was primarily driven by foreign taxes and foreign tax credit decreases of 5.0%, partially offset by increases of 1.8% for compensation related items, 0.9% for state income taxes and 0.3% for changes in uncertain tax positions.

 

 

NOTE 9 – Net Income Per Share:

 

The Company’s basic net income per share is computed based on the weighted average number of shares of common stock outstanding for the period. Diluted net income per share includes the effect of the Company’s outstanding stock options, stock appreciation rights, unvested shares of restricted stock and unvested performance shares, if the inclusion of these items is dilutive.

 

The following table presents a reconciliation of basic and diluted net income per share for the three and six months ended June 30, 2020 and 2019:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net income used in the computation of basic and diluted net income per share (in thousands)

 $15,174  $2,781  $18,541  $5,157 
                 

Weighted average shares outstanding - basic

  15,016,062   14,952,802   15,020,457   14,940,072 

Dilutive common stock equivalents

  155,024   334,555   165,535   334,934 

Weighted average shares outstanding - diluted

  15,171,086   15,287,357   15,185,992   15,275,006 

Net income per share:

                

Basic

 $1.01  $0.19  $1.23  $0.35 

Diluted

 $1.00  $0.18  $1.22  $0.34 

 

Awards to purchase 442,931 and 316,095 shares of common stock with weighted average exercise prices of $19.06 and $20.95 per share were outstanding during the three months ended June 30, 2020 and 2019, respectively, but were not included in the computation of diluted net income per share because the awards’ exercise prices were greater than the average market price of the common shares.

 

Awards to purchase 446,061 and 329,095 shares of common stock with weighted average exercise prices of $19.07 and $20.97 per share were outstanding during the six months ended June 30, 2020 and 2019, respectively, but were not included in the computation of diluted net income per share because the awards’ exercise prices were greater than the average market price of the common shares.

 

15

 
 
 

NOTE 10 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 sales to customers 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 net sales and income before taxes on income. Amounts for corporate expenses are included in the totals for the Uniforms and Related Products segment. To better reflect the way in which management now reviews the Company’s operating results, in the third quarter of 2019, the Company changed the composition of total assets for each reportable segment to exclude intercompany balances. This change has been made to all periods presented within this Quarterly Report on Form 10-Q. 

 

The following tables set forth financial information related to the Company’s operating segments (in thousands):

 

  Uniforms and Related Products  Remote Staffing Solutions  Promotional Products  Intersegment Eliminations  Total 
As of and For the Three Months Ended June 30, 2020:               
Net sales $75,842  $9,351  $75,456  $(1,290) $159,359 
Cost of goods sold  47,937   4,239   51,725   (480)  103,421 
Gross margin  27,905   5,112   23,731   (810)  55,938 
Selling and administrative expenses  20,014   3,517   13,577   (810)  36,298 
Other periodic pension cost  333   -   -   -   333 
Interest expense  338   -   95   -   433 
Income before taxes on income $7,220  $1,595  $10,059  $-  $18,874 
                     
Depreciation and amortization $1,551  $197  $342  $-  $2,090 
Capital expenditures $2,600  $180  $40  $-  $2,820 
Total assets $252,503  $21,030  $84,637  $-  $358,170 

 

  Uniforms and Related Products  Remote Staffing Solutions  Promotional Products  Intersegment Eliminations  Total 
As of and For the Three Months Ended June 30, 2019:               

Net sales

 $60,745  $8,993  $23,744  $(1,212) $92,270 

Cost of goods sold

  38,937   3,824   17,600   (434)  59,927 

Gross margin

  21,808   5,169   6,144   (778)  32,343 

Selling and administrative expenses

  18,779   3,448   5,436   (778)  26,885 

Other periodic pension cost

  547   -   -   -   547 

Interest expense

  963   -   296   -   1,259 

Income before taxes on income

 $1,519  $1,721  $412  $-  $3,652 
                     

Depreciation and amortization

 $1,582  $249  $320  $-  $2,151 

Capital expenditures

 $2,997  $196  $63  $-  $3,256 
Total assets(1) $255,746  $23,614  $67,652  $-  $347,012 

 

(1)

Intercompany balances that were previously included in total assets for each reportable segment have been excluded.

 

16

 
  Uniforms and Related Products  Remote Staffing Solutions  Promotional Products  Intersegment Eliminations  Total 

As of and For the Six Months Ended June 30, 2020

               

Net sales

 $135,944  $18,551  $101,634  $(2,525) $253,604 

Cost of goods sold

  86,609   8,227   70,324   (945)  164,215 

Gross margin

  49,335   10,324   31,310   (1,580)  89,389 

Selling and administrative expenses

  38,239   6,913   20,215   (1,580)  63,787 

Other periodic pension cost

  618   -   -   -   618 

Interest expense

  1,210   -   283   -   1,493 

Income before taxes on income

 $9,268  $3,411  $10,812  $-  $23,491 
                     

Depreciation and amortization

 $2,861  $414  $684  $-  $3,959 

Capital expenditures

 $4,452  $346  $95  $-  $4,893 

Total assets

 $252,503  $21,030  $84,637  $-  $358,170 

 

  

Uniforms and Related Products

  

Remote Staffing Solutions

  

Promotional Products

  

Intersegment Eliminations

  

Total

 

As of and For the Six Months Ended June 30, 2019

                    

Net sales

 $119,424  $17,592  $44,103  $(2,297) $178,822 

Cost of goods sold

  77,298   7,384   32,333   (804)  116,211 

Gross margin

  42,126   10,208   11,770   (1,493)  62,611 

Selling and administrative expenses

  36,956   6,567   10,718   (1,493)  52,748 

Other periodic pension cost

  806   -   -   -   806 

Interest expense

  1,841   -   588   -   2,429 

Income before taxes on income

 $2,523  $3,641  $464  $-  $6,628 
                     

Depreciation and amortization

 $3,070  $505  $636  $-  $4,211 

Capital expenditures

 $4,155  $605  $219  $-  $4,979 

Total assets(1)

 $255,746  $23,614  $67,652  $-  $347,012 

 

(1)

Intercompany balances that were previously included in total assets for each reportable segment have been excluded.

 

17

 
 

NOTE 11 – COVID-19:

 

The COVID-19 pandemic continues to affect our operations and financial performance, and likely will continue to do so for an undetermined period of time. International, federal, state and local efforts to contain the spread of COVID-19 has continued to intensify as governments enacted shelter in place orders, declared states of emergency, enacted safety requirements such as recommended or mandatory use of face masks and other personal protective equipment and related products, took steps to restrict travel, enacted temporary closures of non-essential businesses and took other restrictive measures that prohibit many employees from going to work. With regard to personal protective equipment, the COVID-19 pandemic has created significant market demands from new and existing customers. In responding to the needs of our customers, our sourcing teams began sourcing much needed personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which resulted in an increase in net sales during the three months ended June 30, 2020 of $49.7 million and $8.1 million for our Promotional Products segment and Uniforms and Related Products segment, respectively.

 

The pandemic could have a number of adverse impacts on our business, including, but not limited to, additional disruption to the economy and our customers’ willingness and/or ability to spend, temporary or permanent closures of businesses that consume our products and services, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable. Our employees and the employees and contractors of our suppliers and customers also could become ill, quarantined, or otherwise unable to work or travel due to health reasons or governmental restrictions.

 

The majority of the principal fabrics used in the manufacture of products within the Uniforms and Related Products segment are sourced in China and the vast majority of raw materials used in our Promotional Products segment are sourced from China, either directly by BAMKO or by its suppliers. If we are unable to continue to obtain affordable raw materials and finished products from China or if our suppliers are unable to source affordable raw materials from China, it could significantly disrupt our business. A prolonged pandemic, or the threat thereof, could significantly disrupt our product sourcing, which in turn, could significantly disrupt our business.

 

We have and will continue to monitor and control our expense levels to protect our profitability. For example, on March 30, 2020, we entered into debt deferment agreements with Truist Bank (formerly known as Branch Banking and Trust Company) to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Additionally, we have proactively taken steps to increase available cash on hand by targeted reductions in discretionary operating expenses. Finally, we have and will continue to delay certain capital expenditures relating to non-essential projects until economic conditions begin to stabilize.

 

Prolonged instability in the United States and global economies, and how the world reacts to them, could have long-term impacts on our business. These business impacts could negatively affect us in a number of ways, including, but not limited to, reduced demand for our core products and services, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, declines in our stock price, reduced availability and less favorable terms of future borrowings, valuation of our pension assets and obligations, reduced credit-worthiness of our customers, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets. The extent to which the COVID-19 pandemic impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments and success of efforts to find a suitable vaccine, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. However, prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.

 

18

 
 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the Condensed Consolidated Financial Statements in Part I, Item 1 (“Financial Statements”) of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Disclosure Regarding Forward Looking Statements

 

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 may include, without limitation: (1) the projected impact of the current coronavirus (COVID-19) on our, our customers’, and our suppliers’ businesses, (2) projections of revenue, income, and other items relating to our financial position and results of operations, (3) statements of our plans, objectives, strategies, goals and intentions, (4) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (5) 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: the impact of competition; the effect of uncertainties related to the current coronavirus (COVID-19) pandemic on the U.S. and global markets, our business, operations, customers, suppliers and employees, including without limitation the length and scope of the restrictions imposed by various governments and success of efforts to find a suitable vaccine, among other factors; general economic conditions, including employment levels, in the areas of the United States of America (“United States”) in which the Company’s customers are located; changes in the healthcare, retail, hotels, food service, transportation and other industries where uniforms and service apparel are worn; our ability to identify suitable acquisition targets, successfully integrate any acquired businesses, successfully manage our expanding operations, or discover liabilities associated with such business during the diligence process; the price and availability of cotton and other manufacturing materials; 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, 2019. 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, except as may be required by law.

 

Business Outlook

 

Superior Group of Companies, Inc. (together with its subsidiaries, the “Company,” “Superior,” “we,” “our,” or “us”) is comprised of three reportable business segments: (1) Uniforms and Related Products, (2) Remote Staffing Solutions, and (3) Promotional Products.

 

COVID-19 Impact

 

The COVID-19 pandemic continues to affect our operations and financial performance, and likely will continue to do so for an undetermined period of time. International, federal, state and local efforts to contain the spread of COVID-19 has continued to intensify as governments enacted shelter in place orders, declared states of emergency, enacted safety requirements such as recommended or mandatory use of face masks and other personal protective equipment and related products, took steps to restrict travel, enacted temporary closures of non-essential businesses and took other restrictive measures that prohibit many employees from going to work. With regard to personal protective equipment, the COVID-19 pandemic has created significant market demands from new and existing customers. In responding to the needs of our customers, our sourcing teams began sourcing much needed personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which resulted in an increase in net sales during the three months ended June 30, 2020 of $49.7 million and $10.3 million for our Promotional Products segment and Uniforms and Related Products segment, respectively.

 

19

 

The pandemic could have a number of adverse impacts on our business, including, but not limited to, additional disruption to the economy and our customers’ willingness and/or ability to spend, temporary or permanent closures of businesses that consume our products and services, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable. Our employees and the employees and contractors of our suppliers and customers also could become ill, quarantined, or otherwise unable to work or travel due to health reasons or governmental restrictions.

 

The majority of the principal fabrics used in the manufacture of products within the Uniforms and Related Products segment are sourced in China and the vast majority of raw materials used in our Promotional Products segment are sourced from China, either directly by BAMKO or by its suppliers. If we are unable to continue to obtain affordable raw materials and finished products from China or if our suppliers are unable to source affordable raw materials from China, it could significantly disrupt our business. A prolonged pandemic, or the threat thereof, could significantly disrupt our product sourcing, which in turn, could significantly disrupt our business.

 

We have and will continue to monitor and control our expense levels to protect our profitability. For example, on March 30, 2020, we entered into debt deferment agreements with Truist Bank (formerly known as Branch Banking and Trust Company) to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Additionally, we have proactively taken steps to increase available cash on hand by targeted reductions in discretionary operating expenses. Finally, we have and will continue to delay certain capital expenditures relating to non-essential projects until economic conditions begin to stabilize.

 

Prolonged instability in the United States and global economies, and how the world reacts to them, could have long-term impacts on our business. These business impacts could negatively affect us in a number of ways, including, but not limited to, reduced demand for our core products and services, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, declines in our stock price, reduced availability and less favorable terms of future borrowings, valuation of our pension assets and obligations, reduced credit-worthiness of our customers, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets. The extent to which the COVID-19 pandemic impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments and success of efforts to find a suitable vaccine, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. However, prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.

 

Uniforms and Related Products

 

In our Uniforms and Related Products segment, we manufacture and sell a wide range of uniforms, career apparel and accessories. Our primary products are service apparel, such as scrubs, lab coats, protective apparel and patient gowns, provided to workers in the healthcare industry, and service apparel, such as uniforms, provided to workers employed by our customers in various industries, including retail, hotels, food service, transportation and other industries. We sell our brands of healthcare service apparel primarily to healthcare laundries, dealers, distributors and retailers. As a result of the COVID-19 pandemic, we have seen increased demand for healthcare service apparel from laundries, dealers and distributors that service hospitals and other medical facilities. During the second quarter of 2020, we were able to service many of our customer needs with available healthcare service apparel inventory that we had on hand prior to the start of the pandemic. Additionally, we have implemented certain alternative strategies with our retailers to ensure that our customers are able to take advantage of the increase in demand from medical professionals. From a long-term perspective, we expect that demand for our signature marketing brands, including Fashion Seal Healthcare® and WonderWink®, will continue to provide opportunities for growth and increased market share. Sales of uniforms are impacted by our customers’ opening and closing of locations and reductions, increases, and turnover of employees. The current economic environment in the United States has been significantly impacted by the COVID-19 pandemic, and as a result, we have seen reduced short-term demand for uniform apparel in many of our customers’ industries, some of which has been partially offset by demand from customers in certain retail industries, such as grocery and pharmacy customers, and healthcare. Additionally, we recently began sourcing much needed personal protective equipment for our customers which has mitigated some of the declines in sales of uniform apparel to certain customers. Based on the longer-term fundamentals of our uniforms business, we anticipate that we will have growth opportunities when market conditions in the United States stabilize and begin to improve.

 

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Remote Staffing Solutions

 

This business segment (also known as “The Office Gurus”), which operates in El Salvador, Belize, Jamaica, and the United States, initially started to support the Company’s back office needs while improving overall efficiencies and lowering operating costs. After years of consistently improving key performance indicators, lowering costs and providing exceptional service to our Uniforms and Related Products segment in areas such as order entry, cash collections, vendor payables processing, customer service, sales, and others, The Office Gurus started selling their services to outside companies in 2009. Over the past 10 years, The Office Gurus has become an award-winning global business process outsourcer offering inbound and outbound voice, email, text, chat and social media support. The COVID-19 pandemic has generated uncertainties for our customers and their industries, and has resulted in a short-term slowdown of our revenue growth rates for this business. With an environment and career path designed to attract and maintain top talent across all sites, The Office Gurus is positioned well to continue growth when market conditions begin to stabilize. 

 

Promotional Products

 

For more than a decade, we sold promotional products on a limited basis to our existing Uniforms and Related Products customer base. While there were substantial opportunities to sell promotional products to those customers, it was not an area of focus, specialization, or expertise for us. On March 1, 2016, that changed with our acquisition of substantially all of the assets of BAMKO, Inc. (“BAMKO”). One of the top firms in the promotional products industry, BAMKO has a number of strengths, well-developed systems, and time-tested processes that offer significant competitive advantages. With a robust back-office support platform operated out of India, direct-to-factory sourcing operations based in China, and proprietary technological platforms and programming capabilities that we believe are very competitive, BAMKO is positioned to be a platform for potential future acquisitions in this industry. We completed two additional acquisitions in this segment in late 2017 and remain open to additional acquisitions going forward. In recent years we have seen an increase in customer orders in our promotional products business and expect growth opportunities for our core promotional products business to continue once the current market environment stabilizes. As a result of the COVID-19 pandemic, we have seen significant short-term opportunities within the personal protective equipment market. In responding to the needs of our customers, the sourcing team within the Promotional Products segment began sourcing much needed personal protective equipment for our customers. These opportunities led to record revenue levels during the second quarter of 2020, despite the downturn in the branded merchandise industry that has experienced customer budget cuts and widespread event cancellations. Additionally, in our core promotional products business we have not experienced the same downturn that many of our competitors have experienced as the increase in activities from customers in certain industries, such as the delivery service industry, has more than offset reduced activities from customers in other industries, such as the restaurant and entertainment industries. From a long-term perspective, we believe that this segment’s synergistic fit with our uniforms business will create opportunities to cross-sell the products of various business segments to new and existing customers. 

 

Results of Operations

 

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

 

Net Sales (in thousands):

   

Three Months Ended June 30,

         
   

2020

   

2019

   

% Change

 
Uniforms and Related Products   $ 75,842     $ 60,745       24.9 %
Remote Staffing Solutions     9,351       8,993       4.0 %
Promotional Products     75,456       23,744       217.8 %
Net intersegment eliminations     (1,290 )     (1,212 )     6.4 %

Consolidated Net Sales

  $ 159,359     $ 92,270       72.7 %

 

Net sales for the Company increased 72.7% from $92.3 million for the three months ended June 30, 2019 to $159.4 million for the three months ended June 30, 2020. The principal components of this aggregate increase in net sales were as follows: (1) an increase in the net sales of our Uniforms and Related Products segment (contributing 16.4%, of which $1.4 million (contributing 1.6%) represented the effect of differences in timing of revenue recognized under ASC 606 between periods), (2) an increase in the net sales for our Promotional Products segment (contributing 56.0%), and (3) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 0.3%).

 

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Uniforms and Related Products net sales increased 24.9%, or $15.1 million, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase was primarily due to market demand for healthcare service apparel, which resulted in an increase in net sales of $17.1 million. Additionally, COVID-19 increased demand from our customers for personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which resulted in an increase in net sales of $8.1 million during the three months ended June 30, 2020. These increases were partially offset by decrease in demand for uniform apparel experienced during the current year period primarily as a result of COVID-19. Shipments by our Uniforms and Related Products segment increased from $64.3 million to $77.9 million comparing the three months ended June 30, 2020 with the prior year period. For a reconciliation of shipments by our Uniforms and Related Products segment, see “Shipments (Non-GAAP Financial Measure)” below.

 

Remote Staffing Solutions net sales increased 4.0% before intersegment eliminations and 3.6% after intersegment eliminations for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. These increases were primarily attributed to providing continued services in the current year period to our customer base that was expanded during 2019. Despite the increase in net sales, overall growth during the three months ended June 30, 2020 was negatively impacted by disruptions in April 2020 resulting from COVID-19.

 

Promotional Products net sales increased 217.8%, or $51.7 million, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase was primarily due to the sale of personal protective equipment, including face masks, sanitizers and gloves, which resulted in net sales of $49.7 million during the three months ended June 30, 2020. As a result of the COVID-19 pandemic, we have seen significant short-term opportunities within the personal protective equipment market. Additionally, in our core promotional products business we have not experienced the same downturn that many of our competitors have experienced as the increase in activities from customers in certain industries, such as the delivery service industry, has more than offset reduced activities from customers in other industries, such as the restaurant and entertainment industries.

 

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 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 63.2% for the three months ended June 30, 2020 and 64.1% for the three months ended June 30, 2019. As a percentage of net sales, cost of goods sold remained relatively flat. The increase in cost of goods sold during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily due to the net sales increase explained above.

 

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 45.3% for the three months ended June 30, 2020 and 42.5% for the three months ended June 30, 2019. The percentage increase was primarily driven by disruptions resulting from COVID-19.

 

As a percentage of net sales, cost of goods sold for our Promotional Products segment was 68.5% for the three months ended June 30, 2020 and 74.1% for the three months ended June 30, 2019. The percentage decrease was primarily the result of personal protective equipment sales during the three months ended June 30, 2020 and differences in the mix of products and customers.

 

Selling and Administrative Expenses

 

Selling and administrative expenses increased 35.0%, or $9.4 million, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase was primarily due to an increase in bad debt expense of $3.4 million on outstanding trade accounts receivable and an increase in sales commissions as a result of record sales levels during the three months ended June 30, 2020, as discussed above.

 

As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 26.4% for the three months ended June 30, 2020 and 30.9% for the three months ended June 30, 2019. The percentage decrease was primarily due to the increase in net sales explained above. 

 

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 37.6% for the three months ended June 30, 2020 and 38.3% for the three months ended June 30, 2019. As a percentage of net sales, selling and administrative expenses remained relatively flat.

 

22

 

As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 18.0% for the three months ended June 30, 2020 and 22.9% for the three months ended June 30, 2019. The percentage decrease was primarily related to the net sales increase explained above.

 

Interest Expense

 

Interest expense decreased to $0.4 million for the three months ended June 30, 2020 from $1.3 million for the three months ended June 30, 2019. This decrease was primarily due to a decrease in LIBOR rates on our outstanding borrowings and a significant reduction in outstanding borrowings.

 

Income Taxes

 

The effective income tax rate was 19.6% and 23.8% for the three months ended June 30, 2020 and 2019, respectively. The decrease in the effective tax rate was primarily driven by foreign taxes and foreign tax credit decreases of 7.7%, partially offset by increases of 1.9% for compensation related items, 0.6% for changes in uncertain tax positions and 0.3% for state income taxes. The effective tax rate may vary from quarter to quarter due to unusual or infrequently occurring items, the resolution of income tax audits, changes in tax laws, the tax impact from employee share-based payments, taxes incurred in connection to the territorial style tax system, or other items.

 

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 

 

Net Sales (in thousands):

 

   

Six Months Ended June 30,

         
   

2020

   

2019

   

% Change

 

Uniforms and Related Products

  $ 135,944     $ 119,424       13.8 %

Remote Staffing Solutions

    18,551       17,592       5.5 %

Promotional Products

    101,634       44,103       130.4 %

Net intersegment eliminations

    (2,525 )     (2,297 )     9.9 %

Consolidated Net Sales

  $ 253,604     $ 178,822       41.8 %

 

Net sales for the Company increased 41.8% from $178.8 million for the six months ended June 30, 2019 to $253.6 million for the six months ended June 30, 2020. The principal components of this aggregate increase in net sales were as follows: (1) an increase in the net sales of our Uniforms and Related Products segment (contributing 9.2%, of which $3.4 million (contributing 1.9%) represented the effect of differences in timing of revenue recognized under ASC 606 between periods), (2) an increase in the net sales for our Promotional Products segment (contributing 32.2%), and (3) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 0.4%).

 

Uniforms and Related Products net sales increased 13.8%, or $16.5 million, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase was primarily due to market demand for healthcare service apparel, which resulted in an increase in net sales of $17.7 million. Additionally, COVID-19 increased demand from our customers for personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which resulted in an increase in net sales of $8.1 million during the six months ended June 30, 2020. These increases were partially offset by decrease in demand for uniform apparel experienced during the current year period primarily as a result of COVID-19. Shipments by our Uniforms and Related Products segment increased from $124.7 million to $137.7 million comparing the six months ended June 30, 2020 with the prior year period. For a reconciliation of shipments by our Uniforms and Related Products segment, see “Shipments (Non-GAAP Financial Measure)” below.

 

Remote Staffing Solutions net sales increased 5.5% before intersegment eliminations and 4.8% after intersegment eliminations for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. These increases were primarily attributed to providing continued services in the current year period to our customer base that was expanded during 2019. Despite the increase in net sales, overall growth during the six months ended June 30, 2020 was negatively impacted by disruptions in March 2020 and April 2020 resulting from COVID-19.

 

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Promotional Products net sales increased 130.4%, or $57.5 million, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase was primarily due to the sale of personal protective equipment, including face masks, sanitizers and gloves, which resulted in net sales of $49.7 million during the six months ended June 30, 2020. As a result of the COVID-19 pandemic, we have seen significant short-term opportunities within the personal protective equipment market. Additionally, continued product sales to our expanded customer base during the current year period also contributed to the net sales increase. In our core promotional products business we have not experienced the same downturn that many of our competitors have experienced as the increase in activities from customers in certain industries, such as the delivery service industry, has more than offset reduced activities from customers in other industries, such as the restaurant and entertainment industries.

 

Cost of Goods Sold

 

As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 63.7% for the six months ended June 30, 2020 and 64.7% for the six months ended June 30, 2019. As a percentage of net sales, cost of goods sold remained relatively flat. The increase in cost of goods sold during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to the net sales increase explained above.

 

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 44.3% for the six months ended June 30, 2020 and 42.0% for the six months ended June 30, 2019. The percentage increase was primarily driven by disruptions resulting from COVID-19.

 

As a percentage of net sales, cost of goods sold for our Promotional Products segment was 69.2% for the six months ended June 30, 2020 and 73.3% for the six months ended June 30, 2019. The percentage decrease was primarily the result of personal protective equipment sales during the six months ended June 30, 2020 and differences in the mix of products and customers.

 

Selling and Administrative Expenses

 

Selling and administrative expenses increased 20.9%, or $11.1 million, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase was primarily due to an increase in bad debt expense of $4.2 million on outstanding trade accounts receivable and an increase in sales commissions as a result of record sales levels during the six months ended June 30, 2020, as discussed above.

 

As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 28.1% for the six months ended June 30, 2020 and 30.9% for the six months ended June 30, 2019. The percentage decrease was primarily due to the increase in net sales explained above. 

 

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 37.3% for the six months ended June 30, 2020 and 37.3% for the six months ended June 30, 2019.

 

As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 19.9% for the six months ended June 30, 2020 and 24.3% for the six months ended June 30, 2019. The percentage decrease was primarily related to the net sales increase explained above.

 

Interest Expense

 

Interest expense decreased to $1.5 million for the six months ended June 30, 2020 from $2.4 million for the six months ended June 30, 2019. This decrease was primarily due to a decrease in LIBOR rates on our outstanding borrowings and a significant reduction in outstanding borrowings.

 

24

 

Income Taxes

 

The effective income tax rate was 21.1% and 22.2% for the six months ended June 30, 2020 and 2019, respectively. The decrease in the effective tax rate was primarily driven by foreign taxes and foreign tax credit decreases of 5.0%, partially offset by increases of 1.8% for compensation related items, 0.9% for state income taxes and 0.3% for changes in uncertain tax positions. The effective tax rate may vary from quarter to quarter due to unusual or infrequently occurring items, the resolution of income tax audits, changes in tax laws, the tax impact from employee share-based payments, taxes incurred in connection to the territorial style tax system, or other items.

 

Liquidity and Capital Resources

 

Overview
 
Management uses a number of standards in measuring the Company’s liquidity, such as: working capital, profitability ratios, cash flows from operating activities, and activity ratios. The strength of the Company’s balance sheet generally provides the ability to pursue acquisitions, invest in new product lines and technologies and invest in additional working capital as necessary. 
 
The Company’s primary source of liquidity has been its net income and the use of credit facilities and term loans as described further below. In the future, the Company may continue to use credit facilities and other secured and unsecured borrowings as a source of liquidity. Management currently believes that cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the Company’s anticipated working capital requirements for the next twelve months. The Company has proactively taken steps to increase available cash on hand by targeted reductions in discretionary cash outflows. The Company may also begin relying on the issuance of equity or debt securities. There can be no assurance that any such financings would be available to us on reasonable terms. Any future issuances of equity securities or debt securities with equity features may be dilutive to our shareholders. Additionally, the cost of the Company’s future sources of liquidity may differ from the costs of the Company’s sources of liquidity to date.
 
Working Capital
 
Cash and cash equivalents decreased by $3.9 million to $5.1 million as of June 30, 2020 from $9.0 million on December 31, 2019. Excess cash generated from operating activities during the six months ended June 30, 2020 was used to repay outstanding borrowings under the revolving credit facility. Working capital decreased to $120.9 million at June 30, 2020 from $142.4 million at December 31, 2019. The decrease in working capital was primarily due to an increase in other current liabilities and a decrease in contract assets, partially offset by an increase in trade accounts receivable. The increase in other current liabilities was primarily driven by new activities in the current year period relating to the increased sale of personal protective equipment within our Promotional Products and Uniforms and Related Products segments as a result of COVID-19, including an increase in contract liabilities and increases in other liabilities correlated with such customer contracts. The decrease in contract assets was primarily related to the timing of shipments to customers and receipts from suppliers for finished goods with no alternative use within our Promotional Products and Uniforms and Related Products segments. The increase in trade accounts receivable was primarily due to increased net sales of personal protective equipment within our Promotional Products segment and healthcare service apparel within our Uniforms and Related Products segment.

 

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Cash Flows
 
Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized in the following table (in thousands):

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 

Net cash provided by (used in):

               

Operating activities

  $ 39,762     $ 6,751  

Investing activities

    (4,893 )     (4,976 )

Financing activities

    (38,280 )     1,089  

Effect of exchange rates on cash

    (525 )     41  

Net increase (decrease) in cash and cash equivalents

  $ (3,936 )   $ 2,905  

 

Operating Activities. The increase in net cash provided by operating activities during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to the receipt of payments from new customer contracts for the sourcing of personal protective equipment needed in response to COVID-19 within the Promotional Products and Uniforms and Related Products segments. Working capital cash changes during the six months ended June 30, 2020 included an increase of $21.0 million in accounts payable and other current liabilities and an increase of $12.3 million in trade accounts receivable. Working capital cash changes during the six months ended June 30, 2019 included an increase of $7.2 million in trade accounts receivable.
 
Investing Activities. Net cash used in investing activities during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 remained relatively flat. From a long-term perspective, the Company expects to continue its ongoing capital expenditure program designed to improve the effectiveness and capabilities of its facilities and technology. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions. In the near term, the Company expects to delay certain capital expenditures relating to non-essential projects until economic conditions begin to stabilize.
 
Financing Activities. The increase in net cash used in financing activities during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to an increase in net repayments of $34.3 million in debt during the current year period compared to net borrowings of $5.8 million in the prior year period. Excess cash generated from operating activities during the six months ended June 30, 2020 was used to repay outstanding borrowings under the revolving credit facility.

 

Credit Facilities (See Note 3 to the Financial Statements)

 

As of June 30, 2020, the Company had approximately $85.5 million in outstanding borrowings under its amended and restated credit agreement (the “Credit Agreement”) with Truist Bank, consisting of $7.3 million outstanding under the revolving credit facility expiring in May 2023, $24.0 million outstanding under a term loan maturing in February 2024 (“2017 Term Loan”), and $54.2 million outstanding under a term loan maturing in January 2026 (“2018 Term Loan”). The revolving credit facility, 2017 Term Loan and 2018 Term Loan are collectively referred to as the “Credit Facilities”.

 

Obligations outstanding under the 2018 Term Loan have a variable interest rate of LIBOR plus a margin of between 0.85% and 1.65% (based on the Company’s funded debt to EBITDA ratio) (1.03% at June 30, 2020). Obligations outstanding under the revolving credit facility and the 2017 Term Loan generally have a variable interest rate of one-month LIBOR plus a margin of between 0.68% and 1.50% (based on the Company’s funded debt to EBITDA ratio) (0.86% at June 30, 2020). The available balance under the revolving credit facility is reduced by outstanding letters of credit. At June 30, 2020, the Company had undrawn capacity of $67.7 million under the revolving credit facility.

 

On March 30, 2020, the Company entered into debt deferment agreements with Truist Bank to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Contractual principal payments for the 2017 Term Loan are as follows: remainder of 2020 - $3.0 million; 2021 through 2023 - $6.0 million per year; and 2024 - $3.0 million. Contractual principal payments for the 2018 Term Loan are as follows: remainder of 2020 - $4.6 million; 2021 through 2025 - $9.3 million per year; and 2026 - $3.1 million. The term loans do not contain pre-payment penalties.

 

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The 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 Credit Agreement also requires the Company to maintain a fixed charge coverage ratio (as defined in the Credit Agreement) of at least 1.25:1 and a funded debt to EBITDA ratio (as defined in the Credit Agreement) not to exceed 5.0:1. As of June 30, 2020, 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 Credit Agreement.

 

Dividends and Share Repurchase Program
 
During the six months ended June 30, 2020 and 2019, the Company paid cash dividends of $1.5 million and $3.0 million, respectively. Due to the anticipated continuing impact of the COVID-19 pandemic on the Company’s business, financial condition, results of operations and cash flows, the Company has elected to suspend its regular quarterly dividend until we have clearer visibility on improved macro conditions.
 
On May 2, 2019, the Company’s Board of Directors approved a stock repurchase program of up to 750,000 shares of Company’s outstanding 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 purchases under this program will be open market transactions. Under this program the Company reacquired and retired 43,458 shares of its common stock during the six months ended June 30, 2020. At June 30, 2020, the Company’s remaining repurchase capacity under its common stock repurchase program was 657,451 shares. 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.

 

Shipments (Non-GAAP Financial Measure)

 

In this management’s discussion and analysis, we use a supplemental measure of our performance, which is derived from our financial information, but which is not presented in our financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). This non-GAAP financial measure is “shipments,” and represents a primary metric by which our management evaluates customer demand.

 

We define shipments as net sales excluding, if applicable, sales recorded with respect to contracts with customers in which there is an enforceable right to the payment for goods with no alternative use in advance of the transfer of these goods to our customers. As recognized in accordance with ASC 606, net sales generated from such contracts are recorded as of the time at which we receive the goods from our suppliers rather than at the time we transfer them to our customers. For customers to which we sell goods that have an alternative use, or customers with whom we do not have an enforceable right to payment with no alternative use, shipments and net sales are identical performance measures.

 

We believe that sales recorded under ASC 606 are affected by changes in the Company’s purchasing patterns that may not be directly aligned with customer demand. We believe that shipments, as a supplemental performance measure, tracks customer demand more closely.

 

Shipments is not a measure determined in accordance with GAAP, and should not be considered in isolation or as a substitute for sales determined in accordance with GAAP. Shipments is used as a measurement of customer demand and we believe it to be a helpful measure for those evaluating performance of a company operating in the uniforms and related products business. However, there are limitations to the use of this non-GAAP financial measure. Our non-GAAP financial measure may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

 

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The following tables reconcile net sales to shipments of our Uniforms and Related Products segment (in thousands):

 

RECONCILIATION OF UNIFORMS AND RELATED PRODUCTS SEGMENT GAAP SALES TO SHIPMENTS

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Uniforms and Related Products net sales, as reported

  $ 75,842     $ 60,745     $ 135,944     $ 119,424  

Adjustment: Recognition of revenue based on the timing of shipments for finished goods with no alternative use for Uniforms and Related Products net sales

    2,074       3,516       1,778       5,227  

Uniforms and Related Products shipments

  $ 77,916     $ 64,261     $ 137,722     $ 124,651  

 

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.

 

ITEM 3.          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 Credit Facilities 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. Excluding the effect of the interest rate swap agreement, a hypothetical increase in the LIBOR rate of 100 basis points as of January 1, 2020 would have resulted in approximately $0.5 million in additional pre-tax interest expense for the six months ended June 30, 2020. See Note 3 to the Financial Statements.

 

Foreign Currency Exchange Risk

 

Sales to customers outside of the United States are subject to fluctuations in foreign currency exchange rates, which may negatively impact gross margin realized on our sales. Less than 5% of our sales are outside of the United States. 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 June 30, 2020, we had no foreign currency exchange hedging contracts. There can be no assurance that our strategies will adequately protect our operating results from the effect of exchange rate fluctuations.

 

Financial results of 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. These operations may also have net assets and liabilities not denominated in their functional currency, which exposes us to changes in foreign currency exchange rates that impact income. Excluding intercompany payables and receivables considered to be long-term investments, changes in exchange rates for assets and liabilities not denominated in their functional currency are reported as foreign currency gains (losses) within selling and administrative expenses in our statements of comprehensive income. During the six months ended June 30, 2020 and 2019, foreign currency losses were not significant. We also have exposure to foreign currency exchange risk from the translation of foreign subsidiaries from the local currency into the U.S. dollar. Comprehensive income during the six months ended June 30, 2020 included a foreign currency translation adjustment loss of $1.4 million primarily related to exchange rate movements of the Brazilian real.

 

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ITEM 4.          Controls and Procedures

 

Disclosure Controls and Procedures

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2020 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

 

We are a party to certain lawsuits in the ordinary course of business. We do not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.

 

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. Except as set forth below, there have been no material changes to the Risk Factors described in Part I, Item 1A-Risk Factors in our annual report on Form 10-K for the year ended December 31, 2019.

 

Our business could be materially adversely impacted by the coronavirus (COVID-19) pandemic.

 

COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention in March of 2020. The global spread of COVID-19 has created significant volatility and uncertainty and economic disruption. The extent to which the COVID-19 pandemic impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we may not be able to accurately predict, including, without limitation: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and will be taken in response to the pandemic (including restrictions on travel and transport and workforce pressures); the effect on our suppliers and customers and customer demand for our core products and services; the effect on our sources of supply; the impact of the pandemic on economic activity and actions taken in response; closures of our and our suppliers’ and customers’ offices and facilities; the ability of our customers to pay for our products and services; financial market volatility; commodity prices; and the pace of recovery when the COVID-19 pandemic subsides. 

 

The spreading of COVID-19 that is impacting global economic activity and market conditions could lead to changes in customer purchasing patterns. We have seen disruptions in our customers’ businesses, including, but not limited to, our customers’ willingness and ability to spend, layoffs and furloughs of our customers’ employees, and temporary or permanent closures of businesses that consume our products and services. Prolonged periods of difficult conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.

 

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The majority of the principal fabrics used in the manufacture of products within the Uniforms and Related Products segment are sourced in China and the vast majority of raw materials used in our Promotional Products segment are sourced from China, either directly by BAMKO or by its suppliers. If we are unable to continue to obtain affordable raw materials and finished products from China or if our suppliers are unable to source affordable raw materials from China, it could significantly disrupt our business. A prolonged pandemic, or the threat thereof, could significantly disrupt our product sourcing, which in turn, could significantly disrupt our business.

 

The potential effects of COVID-19 also could impact us in a number of other ways, including, but not limited to, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, declines in our stock price, reduced availability and less favorable terms of future borrowings, valuation of our pension assets and obligations, reduced credit-worthiness of our customers, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets. 

 

Any of these events could materially adversely affect our business, financial condition, results of operations and cash flows.

 

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, 2020, 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 Group of Companies, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our shares of common stock during the three months ended June 30, 2020.

 

Period

 

Total Number of Shares Purchased

   

Average Price Paid per Share

   

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

   

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)

 

April 1, 2020 to April 30, 2020

    -     $ -       -          

May 1, 2020 to May 31, 2020

    -       -       -          

June 1, 2020 to June 30, 2020

    -       -       -          

Total

    -       -       -       657,451  

 

(1)

On May 2, 2019, the Company’s Board of Directors approved a stock repurchase program of up to 750,000 shares of Company’s outstanding 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 purchases under this program will be open market transactions.

 

Under our Credit Agreement, as amended, with Truist 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 such agreement.

 

ITEM 3.     Defaults upon Senior Securities

 

Not applicable.

 

ITEM 4.     Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.     Other Information

 

None.

 

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ITEM 6.     Exhibits

 

Exhibit No.   Description
10.1†*§   Employment Agreement by and between BAMKO, LLC (f/k/a Prime Acquisition I, LLC) and Philip Koosed, dated March 8, 2016.
10.2†*   Amendment to Employment Agreement by and between BAMKO, LLC (f/k/a Prime Acquisition I, LLC) and Philip Koosed, dated April 1, 2020.
10.3†*   Amendment No. 5 to Separation, General Release and Non-Compete Agreement with Gerald M. Benstock, dated November 2, 2019.
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 Officer 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 Document.

101.SCH+

 

XBRL Taxonomy Extension Schema.

101.CAL+

 

XBRL Taxonomy Extension Calculation Linkbase.

101.DEF+

 

XBRL Taxonomy Extension Definition Linkbase.

101.LAB+

 

XBRL Taxonomy Extension Label Linkbase.

101.PRE+

 

XBRL Taxonomy Extension Presentation Linkbase.

 

†Management contracts and compensatory plans and arrangements.

*Filed herewith.

**Furnished, not filed.

§Portions omitted in accordance with Item 601(b) of Regulation S-K.

+ Submitted electronically with this Quarterly Report.

 

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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 29, 2020 SUPERIOR GROUP OF COMPANIES, INC.
     
                By /s/ Michael Benstock                           
    Michael Benstock
    Chief Executive Officer
    (Principal Executive Officer)
     
     
Date: July 29, 2020    
                By /s/ Andrew D. Demott, Jr.                     
    Andrew D. Demott, Jr.
   

Chief Operating Officer, Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

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