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SUPERIOR GROUP OF COMPANIES, INC. - Quarter Report: 2022 September (Form 10-Q)

sgc20220930_10q.htm
 
 

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 September 30, 2022

 

 

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 October 26, 2022 was 16,335,940 shares.

 

1

 

 

TABLE OF CONTENTS

 

 
   

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

3

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) 

3

Condensed Consolidated Balance Sheets (Unaudited)

5

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

6

Condensed Consolidated Statements of Cash Flows (Unaudited)

8

Notes to the Condensed Consolidated Financial Statements (Unaudited)

9

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

26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

36

Item 4. Controls and Procedures

36

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

38

Item 1A. Risk Factors

38

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

39

Item 3. Defaults Upon Senior Securities

40

Item 4. Mine Safety Disclosures

40

Item 5. Other Information

40

Item 6. Exhibits

40

SIGNATURES

41

 

2

 

 

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 September 30, 
  

2022

  

2021

 

Net sales

 $138,703  $123,326 
         

Costs and expenses:

        

Cost of goods sold

  88,066   77,512 

Selling and administrative expenses

  43,815   35,059 

Goodwill impairment charge

  21,460   - 

Other periodic pension costs

  528   459 

Interest expense

  1,794   320 
   155,663   113,350 

Income (loss) before taxes on income

  (16,960)  9,976 

Income tax expense (benefit)

  (4,241)  1,780 

Net income (loss)

 $(12,719) $8,196 
         

Net income (loss) per share:

        

Basic

 $(0.80) $0.53 

Diluted

 $(0.80) $0.51 
         

Weighted average shares outstanding during the period:

        

Basic

  15,806,852   15,528,534 

Diluted

  15,806,852   16,099,850 
         

Other comprehensive income (loss), net of tax:

        

Recognition of net losses included in net periodic pension costs

 $319  $278 

Loss on cash flow hedging activities

  (37)  (5)

Foreign currency translation adjustment

  (521)  (570)

Other comprehensive loss

  (239)  (297)

Comprehensive income (loss)

 $(12,958) $7,899 
         

Cash dividends per common share

 $0.14  $0.12 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

3

 

 SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except shares and per share data)

 

   

Nine Months Ended September 30,

 
   

2022

   

2021

 

Net sales

  $ 430,218     $ 394,960  
                 

Costs and expenses:

               

Cost of goods sold

    281,667       252,945  

Selling and administrative expenses

    131,998       104,076  

Goodwill impairment charge

    45,918       -  

Intangible assets impairment charge

    5,581       -  

Other periodic pension costs

    1,584       1,328  

Pension plan termination charge

    -       6,945  

Interest expense

    2,676       925  
      469,424       366,219  

Income (loss) before taxes on income

    (39,206 )     28,741  

Income tax expense (benefit)

    (5,042 )     3,690  

Net income (loss)

  $ (34,164 )   $ 25,051  
                 

Net income (loss) per share:

               

Basic

  $ (2.17 )   $ 1.63  

Diluted

  $ (2.17 )   $ 1.56  
                 

Weighted average shares outstanding during the period:

               

Basic

    15,739,381       15,394,427  

Diluted

    15,739,381       16,059,686  
                 

Other comprehensive income (loss), net of tax:

               

Defined benefit pension plans:

               

Recognition of net losses included in net periodic pension costs

  $ 957     $ 1,383  

Recognition of net losses included in pension plan termination charges

    -       5,230  

Loss on cash flow hedging activities

    (47 )     (16 )

Foreign currency translation adjustment

    (422 )     (184 )

Other comprehensive income

    488       6,413  

Comprehensive income (loss)

  $ (33,676 )   $ 31,464  
                 

Cash dividends per common share

  $ 0.40     $ 0.34  

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

4

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

 

   

September 30,

   

December 31,

 
   

2022

   

2021

 
      (Unaudited)          

ASSETS

       

Current assets:

               

Cash and cash equivalents

  $ 18,908     $ 8,935  

Accounts receivable, less allowance for doubtful accounts of $6,946 and $6,393, respectively

    103,273       107,053  

Accounts receivable - other

    3,696       5,546  

Inventories

    135,947       120,555  

Contract assets

    48,085       38,018  

Prepaid expenses and other current assets

    18,819       19,162  

Total current assets

    328,728       299,269  

Property, plant and equipment, net

    55,103       49,690  

Operating lease right-of-use assets

    9,605       8,246  

Deferred tax asset

    5,678       -  

Intangible assets, net

    57,090       60,420  

Goodwill

    -       39,434  

Other assets

    11,103       13,186  

Total assets

  $ 467,307     $ 470,245  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

         

Current liabilities:

               

Accounts payable

  $ 44,936     $ 52,340  

Other current liabilities

    40,246       38,989  

Current portion of long-term debt

    4,688       15,286  

Current portion of acquisition-related contingent liabilities

    1,368       4,507  

Total current liabilities

    91,238       111,122  

Long-term debt

    156,461       100,845  

Long-term pension liability

    15,795       15,420  

Long-term acquisition-related contingent liabilities

    2,349       2,569  

Long-term operating lease liabilities

    4,573       3,729  

Deferred tax liability

    -       359  

Other long-term liabilities

    7,796       9,211  

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 16,332,116 and 16,127,505 shares, respectively

    16       16  

Additional paid-in capital

    71,746       69,351  

Retained earnings

    123,058       163,836  

Accumulated other comprehensive income (loss), net of tax:

               

Pensions

    (3,620 )     (4,577 )

Cash flow hedges

    -       47  

Foreign currency translation adjustment

    (2,105 )     (1,683 )

Total shareholders’ equity

    189,095       226,990  

Total liabilities and shareholders’ equity

  $ 467,307     $ 470,245  

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

5

 

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED September 30, 2022 AND 2021

(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, July 1, 2021

  15,824,530  $16  $65,578  $155,212  $(5,491) $215,315 

Common shares issued upon exercise of options and SARs, net

  31,446      330          330 

Restricted shares issued

  104,277                   - 

Share-based compensation expense

          1,088           1,088 

Cash dividends declared ($0.12 per share)

              (1,897)      (1,897)

Comprehensive income (loss):

                        

Net income

              8,196       8,196 

Cash flow hedges, net of taxes of $0

                  (5)  (5)

Pensions, net of taxes of $96

                  278   278 

Change in currency translation adjustment, net of taxes of $0

                  (570)  (570)

Balance, September 30, 2021

  15,960,253  $16  $66,996  $161,511  $(5,788) $222,735 
                         

Balance, July 1, 2022

  16,318,059  $16  $70,629  $137,986  $(5,486) $203,145 

Common shares issued upon exercise of options and SARs, net

  24,057       189           189 

Restricted shares issued, net of forfeitures

  (10,000)                  - 

Share-based compensation expense

          928           928 

Cash dividends declared ($0.14 per share)

              (2,209)      (2,209)

Comprehensive income (loss):

                        

Net loss

              (12,719)      (12,719)

Cash flow hedges, net of taxes of $5

                  (37)  (37)

Pensions, net of taxes of $109

                  319   319 

Change in currency translation adjustment, net of taxes of $0

                  (521)  (521)

Balance, September 30, 2022

  16,332,116  $16  $71,746  $123,058  $(5,725) $189,095 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

6

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Nine MONTHS ENDED September 30, 2022 AND 2021

(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, 2021

  15,391,660  $15  $61,844  $141,972  $(12,201) $191,630 

Common shares issued upon exercise of options and SARs, net

  261,604   1   2,629   (178)      2,452 

Performance based shares issued

  42,823                   - 

Restricted shares issued

  264,166                   - 

Share-based compensation expense

          2,757           2,757 

Tax withheld on vesting of performance based shares

          (405)          (405)

Tax benefit from vesting of acquisition-related restricted stock

          171           171 

Cash dividends declared ($0.34 per share)

              (5,334)      (5,334)

Comprehensive income (loss):

                        

Net income

            25,051      25,051 

Cash flow hedges, net of taxes of $2

                  (16)  (16)

Pensions, net of taxes of $2,737

                  6,613   6,613 

Change in currency translation adjustment, net of taxes of $0

                  (184)  (184)

Balance, September 30, 2021

  15,960,253  $16  $66,996  $161,511  $(5,788) $222,735 
                         

Balance, January 1, 2022

  16,127,505  $16  $69,351  $163,836  $(6,213) $226,990 

Cumulative-effect adjustment from adoption of ASU 2016-13

              (76)      (76)

Common shares issued upon exercise of options and SARs, net

  72,068       842   (158)      684 

Performance based shares issued

  11,707                   - 

Restricted shares issued, net of forfeitures

  11,843                   - 

Restricted shares issued in conjunction with acquisition of business

  116,550       2,000           2,000 

Share-based compensation expense

          3,382           3,382 

Tax withheld on vesting of restricted shares and performance based shares

  (7,557)      (232)          (232)

Written put options

         (3,597)        (3,597)

Cash dividends declared ($0.40 per share)

              (6,380)      (6,380)

Comprehensive income (loss):

                        

Net loss

            (34,164)     (34,164)

Cash flow hedges, net of taxes of $6

                  (47)  (47)

Pensions, net of taxes of $329

                  957   957 

Change in currency translation adjustment, net of taxes of $0

                  (422)  (422)

Balance, September 30, 2022

  16,332,116  $16  $71,746  $123,058  $(5,725) $189,095 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

7

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

    Nine Months Ended September 30,  
   

2022

   

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income (loss)

  $ (34,164 )   $ 25,051  

Adjustments to reconcile net income (loss) to net cash provided by (used) in operating activities:

               

Depreciation and amortization

    9,504       6,719  

Goodwill impairment charge

    45,918       -  

Intangible assets impairment charge

    5,581       -  

Inventory write-downs

    5,781       883  

Provision for bad debts - accounts receivable

    3,486       1,715  

Share-based compensation expense

    3,382       2,757  

Deferred income tax benefit

    (6,361 )     (2,927 )

Change in fair value of acquisition-related contingent liabilities

    284       2,310  

Change in fair value of written put options

    (1,791 )     -  

Pension plan termination charge

    -       6,945  

Changes in assets and liabilities, net of acquisition of businesses:

               

Accounts receivable

    1,600       7,544  

Accounts receivable - other

    978       (732 )

Contract assets

    (10,222 )     1,656  

Inventories

    (19,242 )     (14,550 )

Prepaid expenses and other current assets

    579       (4,445 )

Other assets

    2,677       (1,462 )

Accounts payable and other current liabilities

    (9,561 )     (12,287 )

Payment of acquisition-related contingent liabilities

    (3,346 )     (4,220 )

Long-term pension liability

    1,662       860  

Other long-term liabilities

    (1,249 )     2,344  

Net cash provided by (used in) operating activities

    (4,504 )     18,161  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Additions to property, plant and equipment

    (11,221 )     (14,455 )

Acquisition of businesses

    (11,202 )     (6,026 )

Net cash used in investing activities

    (22,423 )     (20,481 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Proceeds from borrowings of debt

    320,143       173,436  

Repayment of debt

    (274,898 )     (165,023 )

Debt issuance costs

    (869 )     -  

Payment of cash dividends

    (6,380 )     (5,334 )

Payment of acquisition-related contingent liabilities

    (1,416 )     (1,641 )

Proceeds received on exercise of stock options

    684       2,452  

Tax withholdings on vesting of restricted shares and performance based shares

    (232 )     (405 )

Tax benefit from vesting of acquisition-related restricted stock

    -       171  

Net cash provided by financing activities

    37,032       3,656  
                 

Effect of currency exchange rates on cash

    (132 )     (100 )

Net increase in cash and cash equivalents

    9,973       1,236  

Cash and cash equivalents balance, beginning of period

    8,935       5,172  

Cash and cash equivalents balance, end of period

  $ 18,908     $ 6,408  

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

8

 

 

Superior Group of Companies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 1 – Description of Business and Basis of Presentation:

 

Description of business

 

Superior Group of Companies, Inc. (together with its subsidiaries, “the Company,” “Superior,” “we,” “our,” or “us”) was organized in 1920 and was incorporated in 1922 as a New York company under the name Superior Surgical Mfg. Co., Inc. In 1998, the Company changed its name to Superior Uniform Group, Inc. and its state of incorporation to Florida. Effective on May 3, 2018, Superior Uniform Group, Inc. changed its name to Superior Group of Companies, Inc.

 

Superior’s Branded Products segment, primarily through its signature marketing brands BAMKO® and HPI®, produces and sells customized merchandising solutions, promotional products and branded uniform programs. Branded products are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, tech, transportation and other industries. The segment currently has sales offices in the United States, Brazil and Canada, with support services in China and India.

 

Superior’s Healthcare Apparel segment, primarily through its signature marketing brands Fashion Seal Healthcare® and WonderWink®, manufactures (through third parties or its own facilities) and sells a wide range of healthcare apparel, such as scrubs, lab coats, protective apparel and patient gowns. This segment sells healthcare service apparel to healthcare laundries, dealers, distributors and retailers primarily in the United States.

 

Superior’s Contact Centers segment, through multiple The Office Gurus® entities, including subsidiaries in El Salvador, Belize, Jamaica, Dominican Republic and the United States (collectively, “TOG”), provides outsourced, nearshore business process outsourcing, contact and call-center support services to North American customers.

 

Change in Reportable Segments

 

Beginning with the second quarter of 2022, the Company realigned its reportable segments to correspond with changes to its organizational responsibilities, management structure and operating model. Prior to implementing the current segment reporting, the Company’s Uniforms and Related Products segment included healthcare apparel, uniforms and corporate overhead. As part of the change in reportable segments, the uniforms business was combined with the previous Promotional Products segment to form the Branded Products segment, the healthcare apparel business became its own segment named Healthcare Apparel and income and expenses related to corporate functions that are not specifically attributable to an individual reportable segment are no longer presented in segment results. The previous Remote Staffing Solutions segment was renamed Contact Centers segment. All prior period segment information has been recast to reflect this change in reportable segments. Refer to Note 10 for additional information. Additionally, as a result of this re-segmentation, the Company performed a quantitative goodwill impairment test. Refer to Note 11 for additional information.

 

Basis of presentation

 

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, 2021, 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.

 

The Company refers to the condensed consolidated financial statements collectively as “financial statements,” and individually as “statements of comprehensive income (loss),” “balance sheets,” “statements of shareholders’ equity,” and “statements of cash flows” herein.

 

9

 
 

Reclassifications

 

The accompanying financial statements for the previous year contain certain reclassifications to conform to the presentation used in the current period. Reclassifications only impact items within net cash used in operating activities and Note 11 and had no effect on reported total net cash provided by (used in) operating, financing and investing activities, statements of comprehensive income, balance sheets or statements of shareholders’ equity.

 

Written Put Options

 

During the second quarter of 2022, the Company entered into written put options with a former employee that, if exercised by the former employee, requires the Company to repurchase up to 207,970 shares of its common stock at fair market value (as defined in the agreement), subject to certain limitations. The written put options expire after twenty-four months and contain certain quarterly maximums. The written put options are liabilities under ASC 480, Distinguishing Liabilities from Equity, because the options embody obligations to repurchase the Company’s shares by paying cash. The original fair value of the written put options upon entering into the agreement was $3.6 million. As of September 30, 2022, the fair value of the written put options was $1.8 million. The fair value of the written put options is based directly on the Company’s stock price and included in other current liabilities in our balance sheets. The decrease in the fair value of the written put options resulted in the recognition of an unrealized gain of $1.8 million during the three and nine months ended September 30, 2022. Unrealized gains and losses from changes in the fair value of the written put options are included within selling and administrative expenses in our statements of comprehensive income (loss). At September 30, 2022, the Company’s remaining repurchase obligation under the written put options was 207,970 shares of its common stock. 

 

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 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. The Company adopted the new standard on January 1, 2022 using a modified retrospective transition approach by recognizing a cumulative-effect adjustment of $0.1 million to reduce our opening balance of retained earnings as of the adoption date. Prior period amounts have not been adjusted and continue to reflect our historical accounting.

 

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. The adoption of this guidance had no impact to the Company. As a result of the Company entering into a new credit agreement on August 23, 2022 discussed in Note 3, this guidance became not applicable to the Company.

 

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NOTE 2 – Inventories:

 

Inventories consisted of the following amounts (in thousands):

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Finished goods

 $103,527  $90,395 

Work in process

  912   1,351 

Raw materials

  31,508   28,809 

Inventories

 $135,947  $120,555 

 

 

NOTE 3 – Long-Term Debt:

 

Debt consisted of the following (in thousands):

 

  

September 30,

  

December 31,

 
  2022  2021 

Credit Facilities:

        

Revolving credit facility due August 2027

 $87,000  $- 

Term loan due August 2027

  75,000   - 

Revolving credit facility due February 2026

  -   61,517 

Term loan due February 2024

  -   15,000 

Term loan due January 2026

  -   40,238 
   162,000   116,755 

Less:

        

Payments due within one year included in current liabilities

  4,688   15,286 

Debt issuance costs

  851   624 

Long-term debt less current maturities

 $156,461  $100,845 

 

On August 23, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, the domestic subsidiaries of the Company, as guarantors, the lenders party thereto (the “Lenders”), and PNC Bank, National Association, as administrative agent for the Lenders (the “Administrative Agent”), pursuant to which the Lenders are providing the Company senior secured credit facilities maturing in August 2027 consisting of a revolving credit facility in the aggregate maximum principal amount of $125.0 million and a term loan in the aggregate principal amount of $75.0 million (collectively, the “Credit Facilities”), and the ability to request incremental revolving credit or term loan facilities in an aggregate amount of up to an additional $75.0 million, subject to obtaining additional lender commitments and satisfying certain other conditions. The Company incurred $0.9 million in transaction costs related to the Credit Facilities. These costs are included as a reduction of debt and amortized over the term of the Credit Facilities.

 

On August 23, 2022, in connection with entering into the Credit Agreement, the Company repaid all outstanding indebtedness owed under the Second Amended and Restated Credit Agreement dated as of February 8, 2021 between the Company and Truist Bank (the “Truist Credit Agreement”), consisting of a revolving credit facility with an outstanding balance of $118.5 million and term loans with an aggregate outstanding balance of $45.5 million, and terminated the Truist Credit Agreement. The Company did not incur any termination penalties in connection with the early termination of the Truist Credit Agreement. As a result of the termination of the Truist Credit Agreement, the Company expensed $0.5 million of unamortized debt issuance costs associated with our former senior secured credit facility in the third quarter of 2022, which is reflected in interest expense in our statements of operations.

 

11

 

Obligations outstanding under the Credit Facilities accrue interest at a variable rate equal to the secured overnight financing rate (“SOFR”) plus an adjustment of between 0.10% and 0.25% (depending on the applicable interest period) plus a margin of between 1.0% and 2.0% (depending on the Company’s net leverage ratio). The interest rate on outstanding borrowings under the Credit Facilities was 4.9% at September 30, 2022. During the term of the revolving credit facility, the Company will pay a commitment fee on the unused portion of the revolving credit facility equal to between 0.125% and 0.250% (depending on the Company’s net leverage ratio). The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of September 30, 2022, there were no outstanding letters of credit under the revolving credit facility.

 

Contractual principal payments for the term loan are as follows: remainder of 2022 - $1.9 million; 2023 - $3.7 million; 2024 - $4.7 million; 2025 - $5.6 million; 2026 - $6.6 million; and 2027 - $52.5 million. The term loan does not contain pre-payment penalties.

 

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 (including dividends and related distributions), liquidations, mergers, consolidations or acquisitions, affiliate transactions and sales of assets or subsidiaries. The Credit Agreement also requires the Company to comply with a fixed charge coverage ratio of at least 1.25 to 1.0 and a net leverage ratio not to exceed 4.0 to 1.0. The Company’s net leverage ratio is generally calculated as the ratio of (a) indebtedness minus unrestricted cash to (b) consolidated EBITDA for the four most recently ended fiscal quarters. 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.

 

The Company was previously a party to an interest rate swap pursuant to which it made fixed payments and received floating payments. In connection with entering into the Credit Agreement, the Company terminated the interest rate swap. During the nine months ended September 30, 2022, a gain of $0.2 million was recognized on the interest rate swap. No gain or loss was recognized on the interest rate swap during the nine months ended September 30, 2021.

 

 

NOTE 4 – Periodic Pension Expense:

 

The Company is the sponsor of an unfunded supplemental executive retirement plan in which several employees participate.

 

The Company had previously sponsored two noncontributory qualified defined benefit pension plans, providing for normal retirement at age 65, covering all eligible employees (as defined). During 2021, the Company completed the termination of its two noncontributory qualified defined benefit pension plans, which were fully funded.

 

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

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Service cost - benefits earned during the period

 $51  $46  $153  $138 

Interest cost on projected benefit obligation

  100   84   300   424 

Expected return on plan assets

  -   -   -   (597)

Recognized actuarial loss

  428   375   1,284   1,501 

Pension plan termination charge

  -   -   -   6,945 

Net periodic pension cost

 $579  $505  $1,737  $8,411 

 

The service cost component is included in selling and administrative expenses in our statements of comprehensive income (loss) and the other components of net periodic pension cost are included in other periodic pension costs in our statements of comprehensive income (loss).

 

In the second quarter of 2021, the Company terminated its two noncontributory qualified defined benefit pension plans, which were fully funded. Consequently, the Company recognized a settlement charge of $6.9 million during the nine months ended September 30, 2021, which represents the acceleration of deferred charges previously included within accumulated other comprehensive loss and the impact of remeasuring the plan assets and obligations at termination. The pension plan terminations did not require a cash outlay by the Company. 

 

12

 
 

NOTE 5 – Net Sales:

 

For our Branded Products and Healthcare Apparel segments, revenue is primarily generated from the sale of finished products to customers. Revenues for our Branded Products and Healthcare Apparel segments are 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 facemasks, isolation gowns, sanitizers, gloves and COVID-19 testing kits, 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 Contact Centers segment, revenue is generated from providing our customers with contact center services. Revenue for our Contact Centers 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 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.

 

Consistent with the Company’s change in reportable segments described in Note 10, the Company has changed its presentation of disaggregated revenue to align with the new segment structure. The following table presents disaggregated revenue by operating segment for the periods presented (in thousands):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Branded Products Segment:

                

Branded products

 $86,064  $71,069  $280,309  $217,468 

Personal protective equipment

  705   582   5,582   27,196 

Total Branded Products Segment

 $86,769  $71,651  $285,891  $244,664 
                 

Healthcare Apparel Segment:

                

Healthcare apparel

 $29,287  $34,848  $84,780  $101,294 

Personal protective equipment

  752   634   2,115   7,488 

Total Healthcare Apparel Segment

 $30,039  $35,482  $86,895  $108,782 
                 

Contact Centers Segment:

                

Contact centers services

 $23,363  $18,040  $62,803  $46,723 

Net intersegment eliminations

  (1,468)  (1,847)  (5,371)  (5,209)

Total Contact Centers Segment

 $21,895  $16,193  $57,432  $41,514 
                 

Consolidated Net Sales

 $138,703  $123,326  $430,218  $394,960 

 

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Contract Assets and Contract Liabilities

 

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

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

Accounts receivable

 $103,273  $107,053 

Current contract assets

  48,085   38,018 

Current contract liabilities

  5,900   8,804 

 

Contract assets relate to goods produced without an alternative use for which the Company has an enforceable right to payment but which has not yet been invoiced to the customer. The majority of the amounts included in contract assets on December 31, 2021 were transferred to accounts receivable during the nine months ended September 30, 2022. 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. During the nine months ended September 30, 2022, $7.4 million of revenue was recognized from the contract liabilities balance as of December 31, 2021.

 

 

NOTE 6 – Contingencies:

 

The purchase price to acquire substantially all of the assets of Sutter’s Mill Specialties, Inc. (“Sutter’s Mill”) in December 2021 included contingent consideration based on varying levels of Sutter’s Mill’s EBITDA in each measurement period from 2022 to 2024. The estimated fair value of Sutter’s Mill acquisition-related contingent consideration payable as of September 30, 2022 was $2.4 million, of which $0.8 million is expected to be paid in the second quarter of 2023. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $2.3 million and $4.6 million. The purchase price to acquire substantially all of the assets of Guardian Products, Inc. (“Guardian”) in May 2022 included contingent consideration based on varying levels of Guardian’s EBITDA in each measurement period through April 2025. The estimated fair value of Guardian acquisition-related contingent consideration payable as of September 30, 2022 was $1.3 million, of which $0.6 million is expected to be paid in the third quarter of 2023. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $1.5 million and $2.4 million. The Company will continue to evaluate this liability for remeasurement at the end of each reporting period and any changes will be recorded in the Company’s statements of comprehensive income (loss). The carrying amount of the liability may fluctuate significantly and actual amounts paid may be different from the estimated value of the liability.

 

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 (loss). The following table details the share-based compensation expense by type of award for the periods presented (in thousands):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Stock options and SARs

 $339  $327  $1,080  $1,105 

Restricted stock

  446   545   2,050   1,183 

Performance shares

  143   216   252   469 

Total share-based compensation expense

 $928  $1,088  $3,382  $2,757 

 

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Stock Options and Stock Appreciation Rights (“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. Stock options and SARs granted in tandem with stock options are subject to accelerated vesting under certain circumstances as outlined in the 2013 Incentive Stock and Awards Plan (the “2013 Plan”) or 2022 Equity Incentive and Awards Plan (the “2022 Plan”), as applicable. 

 

A summary of stock option transactions during the nine months ended September 30, 2022 follows:

 

        Weighted Average  Aggregate 
  

No. of

  

Weighted Average

  

Remaining Life

  

Intrinsic Value

 
  

Shares

  

Exercise Price

  

(in years)

  

(in thousands)

 

Outstanding, January 1, 2022

  779,938  $16.12   3.27  $5,097 

Granted(1)

  149,433   19.42         

Exercised

  (77,474)  10.49         

Lapsed or cancelled

  (38,632)  21.12         

Outstanding, September 30, 2022

  813,265   17.03   3.13   152 

Exercisable, September 30, 2022

  533,589   14.35   2.42   152 

 

(1)

The weighted average grant date fair value of stock options granted was $7.54 per share.

 

As of September 30, 2022, the Company had $1.1 million in unrecognized compensation cost related to unvested stock options to be recognized over the remaining weighted average vesting period of 1.2 years.

 

A summary of stock-settled SARs transactions during the nine months ended September 30, 2022 follows:

 

        Weighted Average  Aggregate 
  

No. of

  

Weighted Average

  

Remaining Life

  

Intrinsic Value

 
  

Shares

  

Exercise Price

  

(in years)

  

(in thousands)

 

Outstanding, January 1, 2022

  291,059  $14.99   2.65  $2,205 

Granted(1)

  37,297   20.13         

Exercised

  (24,836)  15.16         

Lapsed or cancelled

  (2,958)  18.84         

Outstanding, September 30, 2022

  300,562   15.58   2.37   27 

Exercisable, September 30, 2022

  232,228   13.48   1.93   27 

 

(1)

The weighted average grant date fair value of SARs granted was $7.84 per share.

 

As of September 30, 2022, the Company had $0.3 million in unrecognized compensation cost related to unvested SARs to be recognized over the remaining weighted average vesting period of 1.1 years.

 

15

 

Restricted Stock

 

The Company has granted shares of restricted stock to directors and certain employees, which vest at a specified future date, generally after three years, over five years or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan or 2022 Plan, as applicable. 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 nine months ended September 30, 2022 follows:

 

      

Weighted Average

 
  

No. of

  

Grant Date

 
  

Shares

  

Fair Value

 

Outstanding, January 1, 2022

  458,166  $19.51 

Granted

  30,343   19.97 

Vested

  (113,039)  15.22 

Forfeited

  (18,500)  14.68 

Outstanding, September 30, 2022

  356,970   21.16 

 

As of September 30, 2022, the Company had $4.8 million of unrecognized compensation cost related to unvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 2.7 years.

 

Performance Shares

 

The Company has granted performance shares, which either contain only service-based vesting conditions or service-based and performance-based vesting conditions. 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 awards 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 on a pro rata basis under certain circumstances as outlined in the 2013 Plan or 2022 Plan, as applicable, except in those circumstances in which award agreements or change in control agreements specify full vesting.

 

A summary of performance share transactions during the nine months ended September 30, 2022 follows:

 

      

Weighted Average

 
  

No. of

  

Grant Date

 
  

Shares

  

Fair Value

 

Outstanding, January 1, 2022

  193,523  $21.50 

Granted

  59,578   19.55 

Vested

  (15,750)  16.97 

Forfeited

  (47,300)  22.56 

Outstanding, September 30, 2022

  190,051   21.00 

 

As of September 30, 2022, the Company had $3.0 million of unrecognized compensation cost related to unvested performance share grants expected to be recognized over the remaining weighted average service period of 3.8 years.

 

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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 September 30, 2022, the Company recorded a benefit from income taxes of $4.2 million, which represents an effective tax rate of 25.0%. For the three months ended September 30, 2021, the Company recorded a provision for income taxes of $1.8 million, which represents an effective tax rate of 17.8%. For the nine months ended September 30, 2022, the Company recorded a benefit from income taxes of $5.0 million, which represents an effective tax rate of 12.9%. For the nine months ended September 30, 2021, the Company recorded a provision for income taxes of $3.7 million, which represents an effective tax rate of 12.8%. Income tax expense for the three months ended September 30, 2022 was impacted by a tax benefit of $4.3 million relating to the deductible portion of the goodwill impairment. The effective tax rate for the three months ended September 30, 2022 was impacted by the nondeductible portion of the goodwill impairment charge totaling $0.8 million. Income tax expense for the nine months ended September 30, 2022 was impacted by a tax benefit of $6.4 million relating to the impairment of intangible assets and a portion of the goodwill impairment. The effective tax rate for the nine months ended September 30, 2022 was impacted by the nondeductible portion of the goodwill impairment charge totaling $21.1 million. Income tax expense for the nine months ended September 30, 2021 was favorably impacted by a reversal of $1.8 million in deferred tax liabilities associated with the termination of the Company’s two qualified defined benefit pension plans, $0.8 million of windfall tax benefits from stock options exercised and $0.6 million of stranded tax benefits recognized as a result of the Company’s termination of its pension plans.

 

 

NOTE 9 – Net Income (Loss) 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 (loss) per share for the periods presented:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

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

 $(12,719) $8,196  $(34,164) $25,051 
                 

Weighted average shares outstanding - basic

  15,806,852   15,528,534   15,739,381   15,394,427 

Dilutive common stock equivalents

  -   571,316   -   665,259 

Weighted average shares outstanding - diluted

  15,806,852   16,099,850   15,739,381   16,059,686 

Net income (loss) per share:

                

Basic

 $(0.80) $0.53  $(2.17) $1.63 

Diluted

 $(0.80) $0.51  $(2.17) $1.56 

 

Diluted weighted average shares outstanding excludes shares of common stock of 389,915 and 455,774 for the three and nine months ended September 30, 2022, respectively, as their inclusion would have been antidilutive given the Company’s net loss.

 

Awards to purchase 683,499 and 251,989 shares of common stock with weighted average exercise prices of $21.37 and $24.88 per share were outstanding during the three months ended September 30, 2022 and 2021, 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.

 

17

 

Awards to purchase 577,478 and 176,713 shares of common stock with weighted average exercise prices of $22.17 and $25.35 per share were outstanding during the nine months ended September 30, 2022 and 2021, respectively, but were not included in the computation of diluted net income (loss) per share because the awards’ exercise prices were greater than the average market price of the common shares.

 

 

NOTE 10 Operating Segment Information:

 

As described in Note 1, effective in the second quarter of 2022, the Company realigned its reportable segments to correspond with changes to its organizational responsibilities, management structure and operating model. We have reclassified prior period segment disclosures to conform to the current period presentation. As a result of the change, the Company manages and reports the following segments:

 

Branded Products segment: Primarily through our signature marketing brands BAMKO® and HPI®, we produce and sell customized merchandising solutions, promotional products and branded uniform programs. Branded products are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, tech, transportation and other industries. The segment currently has sales offices in the United States, Brazil and Canada, with support services in China and India.

 

Healthcare Apparel segment: Primarily through our signature marketing brands Fashion Seal Healthcare® and WonderWink®, we manufacture (through third parties or our own facilities) and sell a wide range of healthcare apparel, such as scrubs, lab coats, protective apparel and patient gowns. This segment sells healthcare service apparel to healthcare laundries, dealers, distributors and retailers primarily in the United States.

 

Contact Centers: Through multiple The Office Gurus® entities, including our subsidiaries in El Salvador, Belize, Jamaica, Dominican Republic and the United States (collectively, “TOG”), we provide outsourced, nearshore business process outsourcing, contact and call-center support services to North American customers.

 

Intersegment eliminations include the elimination of revenues and costs from services provided by the Contact Centers segment to the Company’s two other segments. Such costs are recognized as selling and administrative expenses in the Branded Products and Healthcare Apparel segments. Income and expenses related to corporate functions that are not specifically attributable to an individual reportable segment are presented within Other in the tables below.

 

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.

 

18

 

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

 

  

Branded Products

  

Healthcare Apparel

  

Contact Centers

  

Intersegment Eliminations

  

Other

  

Total

 

As of and For the Three Months Ended September 30, 2022:

                        

Net sales

 $86,769  $30,039  $23,363  $(1,468) $-  $138,703 

Cost of goods sold

  60,600   18,609   9,453   (596)  -   88,066 

Gross margin

  26,169   11,430   13,910   (872)  -   50,637 

Selling and administrative expenses

  22,257   10,161   9,520   (872)  2,749   43,815 

Goodwill impairment charge

  21,460   -   -   -   -   21,460 

Other periodic pension cost

  -   -   -   -   528   528 

Interest expense

  87   32   -   -   1,675   1,794 

Income (loss) before taxes on income

 $(17,635) $1,237  $4,390  $-  $(4,952) $(16,960)
                         

Depreciation and amortization

 $1,724  $973  $653  $-  $51  $3,401 

Capital expenditures

 $2,062  $498  $1,622  $-  $-  $4,182 

Total assets

 $224,854  $160,919  $44,519  $-  $37,015  $467,307 

 

  

Branded Products

  

Healthcare Apparel

  

Contact Centers

  

Intersegment Eliminations

  

Other

  

Total

 

As of and For the Three Months Ended September 30, 2021:

                        

Net sales

 $71,651  $35,482  $18,040  $(1,847) $-  $123,326 

Cost of goods sold

  49,914   20,886   7,555   (843)  -   77,512 

Gross margin

  21,737   14,596   10,485   (1,004)  -   45,814 

Selling and administrative expenses

  16,860   8,984   6,576   (1,004)  3,643   35,059 

Other periodic pension cost

  -   -   -   -   459   459 

Interest expense

  11   18   -   -   291   320 

Income (loss) before taxes on income

 $4,866  $5,594  $3,909  $-  $(4,393) $9,976 
                         

Depreciation and amortization

 $1,131  $797  $398  $-  $20  $2,346 

Capital expenditures

 $1,017  $379  $1,733  $-  $-  $3,129 

Total assets

 $205,268  $164,748  $28,062  $-  $24,451  $422,529 

 

19

 
  

Branded Products

  

Healthcare Apparel

  

Contact Centers

  

Intersegment Eliminations

  

Other

  

Total

 

As of and For the Nine Months Ended September 30, 2022:

                        

Net sales

 $285,891  $86,895  $62,803  $(5,371) $-  $430,218 

Cost of goods sold

  202,422   56,066   25,438   (2,259)  -   281,667 

Gross margin

  83,469   30,829   37,365   (3,112)  -   148,551 

Selling and administrative expenses

  67,818   30,049   24,294   (3,112)  12,949   131,998 

Goodwill impairment charge

  25,595   20,323   -   -   -   45,918 

Intangible assets impairment charge

  5,581   -   -   -   -   5,581 

Other periodic pension cost

  -   -   -   -   1,584   1,584 

Interest expense

  205   84   -   -   2,387   2,676 

Income (loss) before taxes on income

 $(15,730) $(19,627) $13,071  $-  $(16,920) $(39,206)
                         

Depreciation and amortization

 $4,696  $2,942  $1,697  $-  $169  $9,504 

Capital expenditures

 $5,006  $1,748  $4,393  $-  $74  $11,221 

Total assets

 $224,854  $160,919  $44,519  $-  $37,015  $467,307 

 

  

Branded Products

  

Healthcare Apparel

  

Contact Centers

  

Intersegment Eliminations

  

Other

  

Total

 

As of and For the Nine Months Ended September 30, 2021:

                        

Net sales

 $244,664  $108,782  $46,723  $(5,209) $-  $394,960 

Cost of goods sold

  169,307   66,696   19,233   (2,291)  -   252,945 

Gross margin

  75,357   42,086   27,490   (2,918)  -   142,015 

Selling and administrative expenses

  50,179   26,165   16,860   (2,918)  13,790   104,076 

Other periodic pension cost

  -   -   -   -   1,328   1,328 

Pension plan termination charge

  -   -   -   -   6,945   6,945 

Interest expense

  63   136   -   -   726   925 

Income (loss) before taxes on income

 $25,115  $15,785  $10,630  $-  $(22,789) $28,741 
                         

Depreciation and amortization

 $3,078  $2,545  $1,014  $-  $82  $6,719 

Capital expenditures

 $6,926  $4,680  $2,849  $-  $-  $14,455 

Total assets

 $205,268  $164,748  $28,062  $-  $24,451  $422,529 

 

20

 

NOTE 11 – Goodwill and Intangible Assets:

 

Goodwill

 

Beginning with the second quarter of fiscal 2022, the Company realigned its reportable segments to Branded Products, Healthcare Apparel and Contact Centers. Refer to Note 10 for further information on the Company’s reportable segments. As a result of this re-segmentation, and in accordance with ASC 350, the Company performed a quantitative goodwill impairment test.

 

During the third quarter of fiscal 2022, the Company determined that a triggering event occurred in relation to the depressed market price of the Company's common stock and corresponding significant decline in the Company’s market capitalization. As a result, the Company performed a quantitative goodwill impairment test.

 

The fair value of goodwill in each impairment test was determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to their respective present values, and a market approach. The valuation methodology and underlying financial information included in the Company’s determination of fair value required significant judgments by management. The principal assumptions used in the Company’s discounted cash flow analysis consisted of (a) long-term projections of financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates. Under the market approach, the principal assumption included an estimate of a control premium.

 

Based on the goodwill impairment analysis performed, the Company determined that the estimated fair values of the previous Uniforms and Related Products segment and current Branded Products segment were lower than their carrying value primarily as the result of current market conditions, decline in expected cash flows and/or decrease in the Company’s stock price. Consequently, the Company recorded a non-cash goodwill impairment charge of $21.5 million and $45.9 million during the three and nine months ended September 30, 2022, respectively. 

 

We have reclassified prior period goodwill disclosures to conform to the current period presentation. The following table presents the carrying amounts of goodwill attributable to each of the Company’s reportable segments (dollars in thousands):

 

  

Branded Products

  

Healthcare Apparel

  

Total

 

As of December 31, 2021:

            

Gross goodwill

 $19,111  $20,323  $39,434 

Accumulated impairment losses

  -   -   - 

Net goodwill

 $19,111  $20,323  $39,434 
             

Additions

 $6,463  $-  $6,463 

Impairment charge

  (25,595)  (20,323)  (45,918)

Foreign currency translation

  21   -   21 

Net goodwill, September 30, 2022

 $-  $-  $- 
             

As of September 30, 2022:

            

Gross goodwill

 $25,595  $20,323  $45,918 

Accumulated impairment losses

  (25,595)  (20,323)  (45,918)

Net goodwill

 $-  $-  $- 

 

21

 

Intangible Assets

 

In conjunction with the Company’s realignment of its reportable segments during the second quarter of 2022, the Company began an effort to centralize certain branding and go-to-market strategies under the BAMKO brand and determined that it would no longer use certain trade names associated with branded products. The Company’s rebranding efforts resulted in a $5.6 million impairment of indefinite-lived trade names related to its Branded Products segment during the nine months ended September 30, 2022. The carrying amounts of indefinite-lived trade names as of September 30, 2022 and December 31, 2021 are summarized as follows (dollars in thousands):

 

Indefinite-lived Intangible Assets

 

Segment

  Carrying Amount, December 31, 2021   Impairment Charges   Carrying Amount, September 30, 2022 

Trade names:

              

HPI

 

Branded Products

 $4,700  $-  $4,700 

BAMKO

 

Branded Products

  8,900   -   8,900 

Public Identity

 

Branded Products

  470   (470)  - 

Tangerine

 

Branded Products

  3,200   (3,200)  - 

Gifts By Design

 

Branded Products

  1,170   (1,170)  - 

Sutter’s Mill

 

Branded Products

  741   (741)  - 

CID Resources

 

Healthcare Apparel

  14,160   -   14,160 

Total

 $33,341  $(5,581) $27,760 

 

Intangible assets as of September 30, 2022 and December 31, 2021 are summarized as follows (dollars in thousands):

 

    

September 30, 2022

 

December 31, 2021

 

Item

Weighted Average Life (In years)

 

Gross Carrying Amount

 

Accumulated Amortization

 

Gross Carrying Amount

 

Accumulated Amortization

 

Definite-lived intangible assets:

               

Customer relationships (7-15 year life)

 11.7 $50,198 $(22,114)$45,198 $(18,772)

Non-compete agreements (3-7 year life)

 5.4  1,712  (1,303) 1,536  (1,121)

Trademarks

 10.0  332  (57) 275  (37)

Trade names

 2.0  710  (148) -  - 

Total

   $52,952 $(23,622)$47,009 $(19,930)
                

Indefinite-lived intangible assets:

               

Trade names

   $27,760    $33,341    
                

Total intangible assets

   $80,712 $(23,622)$80,350 $(19,930)

 

 

 

NOTE 12 – Acquisition of Businesses:

 

Gifts By Design, Inc.

 

On January 29, 2021, the Company, through BAMKO, acquired substantially all of the assets of Gifts By Design, Inc. (“Gifts by Design”) of Seattle, Washington. Gifts by Design is a promotional products and branded merchandise agency that is well-established as a developer and supplier of corporate awards, incentives, and recognition programs for some of the world’s biggest brands. The purchase price for the acquisition consisted of $6.0 million in cash at closing.

 

Assets Acquired and Liabilities Assumed

 

The total purchase price was allocated to the tangible and intangible assets and liabilities of Gifts by Design based on their estimated fair values as of the acquisition date. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was allocated to goodwill.

 

22

 

The following table presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of Gifts by Design based on their estimated fair values as of the effective date of the transaction (in thousands):

 

Accounts receivable

 $251 

Prepaid expenses and other current assets

  196 

Property, plant and equipment

  60 

Intangible assets

  3,673 

Goodwill

  2,417 

Total assets

 $6,597 

Accounts payable

  199 

Other current liabilities

  372 

Total liabilities

 $571 

 

The Company recorded $3.7 million in identifiable intangibles at fair value, consisting of $2.5 million in acquired customer relationships and $1.2 million for the brand name. The intangible assets associated with the customer relationships are being amortized for seven years. The Gifts by Design trade name was fully impaired during the nine months ended September 30, 2022 as a result of the Company’s rebranding efforts during the second quarter of 2022. See Note 11 for further details. The difference between the fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded market opportunities. The acquisition of Gifts by Design was treated as an asset purchase for income tax purpose, and therefore, the resulting goodwill from this acquisition is deductible for U.S. income tax purposes. The goodwill associated with the Gifts by Design acquisition was fully impaired during the three and nine months ended September 30, 2022 as a result of the Company’s goodwill impairment test performed during the third quarter of 2022, which was triggered by the depressed market price of the Company's common stock and corresponding significant decline in the Company’s market capitalization. See Note 11 for further details.

 

Sutter’s Mill Specialties, Inc.

 

On December 2, 2021, the Company, principally through BAMKO, acquired substantially all of the assets of Sutter’s Mill Specialties, Inc. (“Sutter’s Mill”) of Tempe, Arizona. Sutter’s Mill is a vertically integrated manufacturer of high quality, decorated promotional products. Sutter’s Mill has the capability to print on demand and create customized promotional programs and products for customers of any size.

 

The purchase price of the acquisition consisted of the following: (a) approximately $10.5 million in cash, (b) the issuance of 45,620 restricted shares of Superior’s common stock that vest ratably over a three-year period, and (c) potential future payments of approximately $4.5 million in additional contingent consideration for calendar years 2022 through 2024 based on the results of the acquired business.

 

Fair Value of Consideration Transferred

 

A summary of the purchase price is as follows (in thousands):

 

Cash consideration

 $10,533 

Restricted shares of Superior common stock issued

  869 

Contingent consideration

  2,520 

Total Consideration

 $13,922 

 

Assets Acquired and Liabilities Assumed

 

The table below presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of Sutter’s Mill based on their estimated fair values as of the effective date of the transaction. The assets and liabilities of Sutter’s Mill shown below are based on our preliminary estimates of their acquisition date fair values. Our final fair value determination may be different than those shown below.

 

23

 

The following is our preliminary assignment of the aggregate consideration (in thousands):

 

Accounts receivable

 $4,701 

Inventories

  9,149 

Prepaid expenses and other current assets

  135 

Property, plant and equipment

  1,043 

Operating lease right-of-use assets

  648 

Intangible assets

  2,031 

Goodwill

  1,019 

Other assets

  41 

Total assets

 $18,767 

Accounts payable

  3,209 

Other current liabilities

  389 

Long-term debt

  758 

Long-term operating lease liabilities

  489 

Total liabilities

 $4,845 

 

In the first quarter of 2022, an adjustment to increase goodwill by $0.1 million was made to the initial amounts recorded, which relates to additional consideration paid by the Company to the seller.

 

The Company recorded $2.0 million in identifiable intangibles at fair value, consisting of $1.2 million in acquired customer relationships, $0.1 million for a non-compete agreement and $0.7 million for the Sutter’s Mill Specialties trade name. The intangible assets associated with the customer relationships are being amortized for seven years and the non-compete agreement is being amortized for five years. The Sutter’s Mill Specialties trade name was fully impaired during the nine months ended September 30, 2022 as a result of the Company’s rebranding efforts during the second quarter of 2022. See Note 11 for further details. The difference between the fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded market opportunities. The acquisition of Sutter’s Mill was treated as an asset purchase for income tax purpose, and therefore, the resulting goodwill from this acquisition is deductible for U.S. income tax purposes. The goodwill associated with the Sutter’s Mill acquisition was fully impaired during the three and nine months ended September 30, 2022 as a result of the Company’s goodwill impairment test performed during the third quarter of 2022, which was triggered by the depressed market price of the Company's common stock and corresponding significant decline in the Company’s market capitalization. See Note 11 for further details.

 

Guardian Products, Inc.

 

On May 1, 2022, the Company, through BAMKO, acquired substantially all of the assets of Guardian Products, Inc. (“Guardian”) of Norcross, Georgia. Guardian is a branded merchandise company that is one of the leading providers of promotional products to automotive dealers nationwide. The purchase price for the acquisition consisted of the following: (a) $11.1 million in cash at closing, subject to a working capital adjustment, (b) the issuance of 116,550 restricted shares of Superior’s common stock (the “Guardian Stock”) that vest ratably over a three-year period, and (c) estimated potential future payments of approximately $2.3 million in additional contingent consideration based on the results of the acquired business through April 2025. The Guardian Stock is subject to transfer restrictions over the three-year period following the closing of the acquisition.

 

Fair Value of Consideration Transferred

 

A summary of the purchase price is as follows (in thousands):

 

Cash consideration

 $11,077 

Restricted shares of Superior common stock issued

  2,000 

Contingent consideration

  1,119 

Total Consideration

 $14,196 

 

24

 

Assets Acquired and Liabilities Assumed

 

The table below presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of Guardian based on their estimated fair values as of the effective date of the transaction. The assets and liabilities of Guardian shown below are based on our preliminary estimates of their acquisition date fair values. Our final fair value determination may be different than those shown below.

 

The following is our preliminary assignment of the aggregate consideration (in thousands):

 

Accounts receivable

 $1,656 

Inventories

  621 

Prepaid expenses and other current assets

  272 

Property, plant and equipment

  15 

Intangible assets

  5,886 

Goodwill

  6,463 

Total assets

 $14,913 

Accounts payable

  533 

Other current liabilities

  184 

Total liabilities

 $717 

 

The Company recorded $5.9 million in identifiable intangibles at fair value, consisting of $5.0 million in acquired customer relationships, $0.2 million for a non-compete agreement and $0.7 million for the Guardian Products trade name. The intangible assets associated with the customer relationships are being amortized for seven years, the non-compete agreement is being amortized for five years and the trade name is being amortized for two years. The difference between the fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded market opportunities. The acquisition of Guardian was treated as an asset purchase for income tax purpose, and therefore, the resulting goodwill from this acquisition is deductible for U.S. income tax purposes. The goodwill associated with the Guardian acquisition was fully impaired during the three and nine months ended September 30, 2022 as a result of the Company’s goodwill impairment test performed during the third quarter of 2022, which was triggered by the depressed market price of the Company's common stock and corresponding significant decline in the Company’s market capitalization. See Note 11 for further details.

 

25

 

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, 2021.

 

Cautionary Note 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) projections of revenue, income, and other items relating to our financial position and results of operations, (2) statements of our plans, objectives, strategies, goals and intentions, (3) statements regarding the capabilities, capacities, market position and expected development of our business operations, (4) statements of expected industry and general economic trends and (5) the projected impact of the COVID-19 pandemic on our, our customers’, and our suppliers’ businesses.

 

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; uncertainties related to supply disruptions, inflationary environment, employment levels and general economic and political conditions in the areas of the world in which the Company operates or from which it sources its supplies or the areas of the United States of America (“U.S.” or “United States”) in which the Company’s customers are located; lingering effects of the COVID-19 pandemic, including existing and possible future variants, on the United States and global markets, our business, operations, customers, suppliers and employees, including the length and scope of restrictions imposed by various governments and organizations and the continuing success of efforts to deliver effective vaccines, among other factors; changes in the healthcare, retail, hotel, food service, transportation and other industries where uniforms and service apparel are worn; our ability to identify suitable acquisition targets, discover liabilities associated with such businesses during the diligence process, successfully integrate any acquired businesses, or successfully manage our expanding operations; the price and availability of cotton and other manufacturing materials; attracting and retaining senior management and key personnel; the effect of the Companys material weaknesses in internal control over financial reporting; the Companys ability to successfully remediate its material weaknesses in internal control over financial reporting and to maintain effective internal control over financial reporting; and other factors described in the Company’s filings with the Securities and Exchange Commission, including those described in the “Risk Factors” section herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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.

 

 

Recent Acquisitions

 

On January 29, 2021, the Company, through BAMKO, acquired substantially all of the assets of Gifts By Design, Inc. (“Gifts by Design”) of Seattle, Washington. Gifts by Design is a promotional products and branded merchandise agency that is well-established as a developer and supplier of corporate awards, incentives, and recognition programs for some of the world’s biggest brands. The purchase price for the acquisition consisted of $6.0 million in cash at closing.

 

26

 

On December 2, 2021, the Company, principally through BAMKO, acquired substantially all of the assets of Sutter’s Mill Specialties, Inc. (“Sutter’s Mill”) of Tempe, Arizona. Sutter’s Mill is a vertically integrated manufacturer of high quality, decorated promotional products. Sutter's Mill has the capability to print on demand and create customized promotional programs and products for customers of any size. The purchase price of the acquisition consisted of the following: (a) approximately $10.5 million in cash, (b) the issuance of 45,620 restricted shares of Superior’s common stock that vest ratably over a three-year period, and (c) potential future payments of approximately $4.5 million in additional contingent consideration for calendar years 2022 through 2024 based on the results of the acquired business.

 

On May 1, 2022, the Company, through BAMKO, acquired substantially all of the assets of Guardian Products, Inc. (“Guardian”) of Norcross, Georgia. Guardian is a branded merchandise company that is one of the leading providers of promotional products to automotive dealers nationwide. The purchase price for the acquisition consisted of the following: (a) $11.1 million in cash at closing, subject to a working capital adjustment, (b) the issuance of 116,550 restricted shares of Superior’s common stock (the “Guardian Stock”) that vest ratably over a three-year period, and (c) estimated potential future payments of approximately $2.3 million in additional contingent consideration based on the results of the acquired business through April 2025. The Guardian Stock is subject to transfer restrictions over the three-year period following the closing of the acquisition.

 

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) Branded Products, (2) Healthcare Apparel and (3) Contact Centers. Beginning with the second quarter of 2022, the Company realigned its reportable segments to correspond with changes to its organizational responsibilities, management structure and operating model. Prior to implementing the current segment reporting, the Company’s Uniforms and Related Products segment included both healthcare apparel and uniforms. As part of the change in reportable segments, the uniforms business was combined with the previous Promotional Products segment to form the Branded Products segment, the healthcare apparel business became its own segment named Healthcare Apparel and income and expenses related to corporate functions that are not specifically attributable to an individual reportable segment are no longer presented in segment results. The previous Remote Staffing Solutions segment was renamed Contact Centers segment. All prior period segment information has been recast to reflect this change in reportable segments.

 

Branded Products

 

In our Branded Products segment, we produce and sell customized merchandising solutions, promotional products and branded uniform programs to our customers. As a strategic branding partner, we offer our customers customized branding solutions and strategies that generate favorable brand impressions, bolster customer retention and enhance employee engagement. Our products are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, tech, transportation and other industries. Sales volumes in this segment are impacted by a number of factors, including marketing programs of our customers and turnover of our customers’ employees, often times driven by the opening and closing of locations. The COVID-19 pandemic reduced demand for our products in many of our customers’ industries, such as the restaurant, transportation, hospitality and entertainment industries. This, however, was more than offset by demand from customers in the delivery service industry and certain retail industries, such as grocery and pharmacy. The COVID-19 pandemic initially also created significant opportunities for us within the personal protective equipment market; while we continue to source some personal protective equipment for our customers, we anticipate that demand for personal protective equipment will continue to decline. From a long-term perspective, we believe that synergies within this segment will create opportunities to cross-sell products to new and existing customers.

 

Healthcare Apparel

 

In our Healthcare Apparel segment, we manufacture (through third parties or our own facilities) and sell a wide range of healthcare apparel, such as scrubs, lab coats, protective apparel and patient gowns. We sell our brands of healthcare service apparel to healthcare laundries, dealers, distributors and retailers primarily in the United States, and recently, have begun expansion into the European market. The COVID-19 pandemic initially created increased demand for healthcare service apparel from laundries, dealers and distributors that service hospitals and other medical facilities. However, as a result of the pandemic the healthcare apparel market has been oversupplied creating a slowdown in recent demand. Additionally, the market demand for personal protective equipment has declined as a result of the progression of the COVID-19 pandemic. 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. 

 

27

 

Contact Centers

 

This business segment (also known as “The Office Gurus”), which operates in El Salvador, Belize, Jamaica, Dominican Republic, and the United States, provides outsourced, nearshore business process outsourcing, contact and call-center support services to North American customers. These services are also provided internally to the Company’s other two operating segments. The Office Gurus has become an award-winning business process outsourcer offering inbound and outbound voice, email, text, chat and social media support. The nearshore call-center market has experienced a period of growth as businesses look to reduce operating costs while maintaining high-quality customer support. Nearshore operators are able to provide comparable service to their U.S. counterparts at a fraction of the price. COVID-19 has acted as a catalyst for rapid transformation within the traditional business process outsourcing model. With an environment and career path designed to attract and maintain top talent across all sites, we believe The Office Gurus is positioned well to continue growing this business.

 

Global Economic and Political Conditions

 

Economic and political events this year have altered the landscape in which we and other U.S. companies operate in a variety of ways. In response to inflationary pressures, the U.S. Federal Reserve has raised interest rates, resulting in an increase in the cost of borrowing for us, our customers, our suppliers, and other companies relying on debt financing. World events, such as the Russian invasion of Ukraine and the resulting economic sanctions, have impacted the global economy, including by exacerbating inflationary and other pressures linked to COVID-related supply chain disruptions. Prolonged inflationary conditions, high and/or increased interest rates, and additional sanctions or retaliatory measures related to the Russia-Ukraine crisis, or other situations, could further negatively affect U.S. and international commerce and exacerbate or prolong the period of high energy prices and supply chain constraints. At this time, the extent and duration of these economic and political events and their effects on the economy and the Company are impossible to predict.

 

Prolonged or recurring disruptions or instability in the United States and global economies, and how the world reacts to those disruptions or instability, 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 obligations, reduced credit-worthiness of our customers, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets.

 

COVID-19 Impact

 

The COVID-19 pandemic continue to linger and affect our operations around the world and financial performance, although to a lesser extent than in the previous two years. Nonetheless, the cumulative impact of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows continues to depend on numerous factors that are difficult to predict. Prolonged or recurring periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows. 

 

In responding to the needs of our customers, we have sourced personal protective equipment, including facemasks, isolation gowns, sanitizers, gloves and COVID-19 testing kits, which contributed $5.6 million and $2.1 million to net sales during the nine months ended September 30, 2022 for our Branded Products segment and Healthcare Apparel segment, respectively. Personal protective equipment net sales for our Branded Products segment and Healthcare Apparel segment were $27.2 million and $7.5 million, respectively, during the nine months ended September 30, 2021.

 

Sourcing of Goods and Raw Materials

 

Along with many manufacturers that source goods and raw materials from abroad, we continue to experience supply disruptions and delays due to a variety of reasons. These changes are partially driven by interruptions in global supply chains and partially by a shift in customer buying habits to e-commerce, which has the effect of increasing demand for shipping capacity from Asia, leading to capacity constraints. Both factors have increased shipping times as well as the price of shipping, whether by sea, air, rail, or vehicle, this year. Shipping delays combined with significant increases in orders for our products have recently created, and are expected to continue to create, inventory pressure for us.

 

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An interruption in any of our supply sources or facilities could adversely affect our results of operations until alternate sources or facilities can be secured. Principal fabrics used in the manufacture of the Company’s finished goods include cotton, polyester, cotton-synthetic, poly-synthetic blends, textiles, plastic, glass, fabric and metal. The majority of such fabrics are sourced in China, either directly by us or our suppliers. If we are unable to continue to obtain our raw materials and finished products from China or if our suppliers are unable to source raw materials from China, it could significantly disrupt our business. Further, the Company and the Company’s suppliers generally source or manufacture finished goods in parts of the world that may be affected by economic uncertainty, political unrest, logistical challenges (such as port strikes and embargos), foreign currency fluctuations, labor disputes, health emergencies, or the imposition of duties, tariffs or other import regulations by the United States, any of which could result in additional cost or limit our supply of necessary goods and raw materials.

 

Results of Operations

 

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

 

Net Sales (in thousands):

   

Three Months Ended September 30,

         
   

2022

   

2021

   

% Change

 

Branded Products

  $ 86,769     $ 71,651       21.1 %

Healthcare Apparel

    30,039       35,482       (15.3 %)

Contact Centers

    23,363       18,040       29.5 %

Net intersegment eliminations

    (1,468 )     (1,847 )     (20.5 %)

Consolidated Net Sales

  $ 138,703     $ 123,326       12.5 %

 

Net sales for the Company increased 12.5% from $123.3 million for the three months ended September 30, 2021 to $138.7 million for the three months ended September 30, 2022. The principal components of this aggregate increase in net sales were as follows: (1) an increase in net sales for our Branded Products segment (contributing 12.3%), (2) a decrease in net sales for our Healthcare Apparel segment (contributing (4.4%)), and (3) an increase in net sales for our Contact Centers segment after intersegment eliminations (contributing 4.6%).


Branded Products net sales increased 21.1%, or $15.1 million, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily due to net sales of $14.4 million attributable to the acquisitions of Sutter’s Mill in December 2021 and Guardian in May 2022.

 

Healthcare Apparel net sales decreased 15.3%, or $5.4 million, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The decrease was primarily due to a decrease in demand for healthcare apparel resulting from market conditions in the current year period, most notably, a market saturated with inventory as the COVID-19 pandemic progressed.

 

Contact Centers net sales increased 29.5% before intersegment eliminations and 35.2% after intersegment eliminations for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. These increases were primarily attributed to providing expanded services to our existing customers and the onboarding of new customers in 2022.

 

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 Branded Products and Healthcare Apparel segments. Cost of goods sold for our Contact Centers 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.

 

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As a percentage of net sales, total cost of goods sold was 63.5% for the three months ended September 30, 2022 and 62.9% for the three months ended September 30, 2021.

 

As a percentage of net sales, cost of goods sold for our Branded Products segment was 69.8% for the three months ended September 30, 2022 and 69.7% for the three months ended September 30, 2021. As a percentage of net sales, cost of goods sold remained relatively flat.

 

As a percentage of net sales, cost of goods sold for our Healthcare Apparel segment was 61.9% for the three months ended September 30, 2022 and 58.9% for the three months ended September 30, 2021. The percentage increase was primarily driven by incremental inventory reserves of $0.8 million for slow-moving inventory items and manufacturing variances from lower production volume in our Haiti facilities.

 

As a percentage of net sales, cost of goods sold for our Contact Centers segment was 40.5% for the three months ended September 30, 2022 and 41.9% for the three months ended September 30, 2021. The percentage decrease was primarily due to costs associated with the onboarding of new customers in the prior year period.

 

Selling and Administrative Expenses

 

As a percentage of net sales, total selling and administrative expenses was 31.6% for the three months ended September 30, 2022 and 28.4% for the three months ended September 30, 2021. The increase was primarily due to expense deleverage resulting from the 15.3% decrease in Healthcare Apparel net sales, an increase in employee costs, which was mostly driven by an increase in headcount to support growth in our Branded Products and Contact Centers segments, and an increase in depreciation and amortization expense. These increases were partially offset by an unrealized gain of $1.8 million recognized during the current year period driven by a decrease in the fair value of written put options. For more information on the written put options, please refer to the disclosure in Note 1 to the Financial Statements, which is incorporated herein by reference.

 

As a percentage of net sales, selling and administrative expenses for our Branded Products segment was 25.7% for the three months ended September 30, 2022 and 23.5% for the three months ended September 30, 2021. The percentage increase was primarily attributed to increased investment to support future growth of this segment, including the expansion of our workforce, and increased commissions from improved gross margins.

 

As a percentage of net sales, selling and administrative expenses for our Healthcare Apparel segment was 33.8% for the three months ended September 30, 2022 and 25.3% for the three months ended September 30, 2021. The percentage increase was primarily attributed to the decrease in sales explained above and an increase in selling administrative expenses resulting from increased employee related costs, including payroll, severance and travel, and advertising activities.

 

As a percentage of net sales, selling and administrative expenses for our Contact Centers segment was 40.7% for the three months ended September 30, 2022 and 36.5% for the three months ended September 30, 2021. The percentage increase was primarily attributed to increased investment in organizational infrastructure, including facilities and personnel, to support future growth of this segment.

 

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Goodwill Impairment Charge

 

During the third quarter of 2022, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the Branded Products segment was lower than its carrying value primarily as the result of a decrease in the Company’s stock price. Consequently, the Company recorded a non-cash goodwill impairment charge of $21.5 million during the three months ended September 30, 2022. This charge was non-cash in nature and does not affect our liquidity or debt covenants.

 

Interest Expense

 

Interest expense increased to $1.8 million for the three months ended September 30, 2022 from $0.3 million for three months ended September 30, 2021. This increase was primarily due to an increase in interest rates on our outstanding borrowings and $0.5 million of expense relating to the write-off of unamortized debt issuance costs associated with our former senior secured credit facility in the third quarter of 2022. The weighted average interest rate on our outstanding borrowings for the three months ended September 30, 2022 was 3.1% compared to 0.9% for the three months ended September 30, 2021.

 

Income Taxes

 

The effective income tax rate was 25.0% and 17.8% for the three months ended September 30, 2022 and 2021, respectively. Income tax expense for the three months ended September 30, 2022 was impacted by a tax benefit of $4.3 million relating to the deductible portion of the goodwill impairment. The effective tax rate for the three months ended September 30, 2022 was impacted by the nondeductible portion of the goodwill impairment charge totaling $0.8 million. 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.

 

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

 

Net Sales (in thousands):

 

Nine Months Ended September 30,

       
 

2022

 

2021

 

% Change

 

Branded Products

$ 285,891   $ 244,664     16.9 %

Healthcare Apparel

  86,895     108,782     (20.1 %)

Contact Centers

  62,803     46,723     34.4 %

Net intersegment eliminations

  (5,371 )   (5,209 )   3.1 %

Consolidated Net Sales

$ 430,218   $ 394,960     8.9 %

 

Net sales for the Company increased 8.9% from $395.0 million for the nine months ended September 30, 2021 to $430.2 million for the nine months ended September 30, 2022. The principal components of this aggregate increase in net sales were as follows: (1) an increase in net sales for our Branded Products segment (contributing 10.4%), (2) a decrease in net sales for our Healthcare Apparel segment (contributing (5.5%)), and (3) an increase in net sales for our Contact Centers segment after intersegment eliminations (contributing 4.0%).


Branded Products net sales increased 16.9%, or $41.2 million, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to net sales of $33.6 million attributable to the acquisitions of Sutter’s Mill in December 2021 and Guardian in May 2022 and organic growth through new customers and the expansion of existing customers. These increases were partially offset by a decrease of $21.6 million in net sales of personal protective equipment driven by the progression of the COVID-19 pandemic.

 

Healthcare Apparel net sales decreased 20.1%, or $21.9 million, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease was primarily due to a decrease in demand for healthcare apparel resulting from market conditions in the current year period, most notably, a market saturated with inventory as the COVID-19 pandemic progressed. Additionally, net sales of personal protective equipment decreased by $5.4 million. The sale of personal protective equipment during the nine months ended September 30, 2021 was driven by market demand as a result of the progression of the COVID-19 pandemic.

 

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Contact Centers net sales increased 34.4% before intersegment eliminations and 38.3% after intersegment eliminations for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. These increases were primarily attributed to providing expanded services to our existing customers and the onboarding of new customers in 2022.

 

Cost of Goods Sold

 

As a percentage of net sales, total cost of goods sold was 65.5% for the nine months ended September 30, 2022 and 64.0% for the nine months ended September 30, 2021. The percentage increase was primarily driven by $5.3 million in inventory write-downs of excess inventory related to personal protective equipment and discontinued styles.

 

As a percentage of net sales, cost of goods sold for our Branded Products segment was 70.8% for the nine months ended September 30, 2022 and 69.2% for the nine months ended September 30, 2021. The percentage increase was primarily driven by differences in the mix of products and customers, $1.3 million in inventory write-downs of personal protective equipment in the second quarter of 2022 and interruptions in global supply chains that led to higher logistical costs. For additional information related to logistical challenges, please refer to the section “ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Business Outlook Sourcing of Goods and Raw Materials.

 

As a percentage of net sales, cost of goods sold for our Healthcare Apparel segment was 64.5% for the nine months ended September 30, 2022 and 61.3% for the nine months ended September 30, 2021. The percentage increase was primarily driven by $4.0 million in inventory write-downs of excess inventory related to personal protective equipment and discontinued styles.

 

As a percentage of net sales, cost of goods sold for our Contact Centers segment was 40.5% for the nine months ended September 30, 2022 and 41.2% for the nine months ended September 30, 2021. As a percentage of net sales, cost of goods sold remained relatively flat.

 

Selling and Administrative Expenses

 

As a percentage of net sales, total selling and administrative expenses was 30.7% for the nine months ended September 30, 2022 and 26.4% for the nine months ended September 30, 2021. The increase was primarily due to expense deleverage resulting from the 20.1% decrease in Healthcare Apparel net sales, an increase in employee costs, which was mostly driven by an increase in headcount to support growth in our Branded Products and Contact Centers segments, an increase in depreciation and amortization expense and investment losses related to the Company’s supplemental executive retirement plan. These increases were partially offset by an unrealized gain of $1.8 million recognized during the current year period driven by a decrease in the fair value of written put options. For more information on the written put options, please refer to the disclosure in Note 1 to the Financial Statements, which is incorporated herein by reference.

 

As a percentage of net sales, selling and administrative expenses for our Branded Products segment was 23.7% for the nine months ended September 30, 2022 and 20.5% for the nine months ended September 30, 2021. The percentage increase was primarily attributed to increased investment to support future growth of this segment, including the expansion of our workforce, and a decrease in personal protective equipment net sales, which have disproportionately lower selling and administrative expenses associated with them.

 

As a percentage of net sales, selling and administrative expenses for our Healthcare Apparel segment was 34.6% for the nine months ended September 30, 2022 and 24.1% for the nine months ended September 30, 2021. The percentage increase was primarily attributed to the decrease in sales explained above and an increase in selling administrative expenses resulting from increased employee related costs, customer support costs, travel expenses and advertising activities. The decrease in sales included a decrease in personal protective equipment net sales, which have disproportionately lower selling and administrative expenses associated with them.

 

As a percentage of net sales, selling and administrative expenses for our Contact Centers segment was 38.7% for the nine months ended September 30, 2022 and 36.1% for the nine months ended September 30, 2021. The percentage increase was primarily attributed to increased investment in organizational infrastructure, including facilities and personnel, to support future growth of this segment.

 

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Goodwill Impairment Charge

 

In conjunction with the re-segmentation during the second quarter of 2022, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the previous Uniforms and Related Products segment was lower than its carrying value primarily as the result of current market conditions, decline in expected cash flows and/or decrease in the Company’s stock price. During the third quarter of 2022, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the Branded Products segment was lower than its carrying value primarily as the result of a decrease in the Company’s stock price. Consequently, the Company recorded a non-cash goodwill impairment charge of $45.9 million during the nine months ended September 30, 2022. This charge was non-cash in nature and does not affect our liquidity or debt covenants.

 

Intangible Assets Impairment Charge

 

In conjunction with the Company’s realignment of its reportable segments during the second quarter of 2022, the Company began an effort to centralize certain branding and go-to-market strategies under the BAMKO brand and determined that it would no longer use certain trade names associated with branded products. The Company’s rebranding efforts resulted in a $5.6 million impairment of indefinite-lived trade names related to its Branded Products segment during the nine months ended September 30, 2022. This charge was non-cash in nature and does not affect our liquidity or debt covenants.

 

Pension Plan Terminations

 

In the second quarter of 2021, the Company terminated its two noncontributory qualified defined benefit pension plans, which were fully funded. Consequently, the Company recognized a settlement charge of $6.9 million during the nine months ended September 30, 2021, which represents the acceleration of deferred charges previously included within accumulated other comprehensive loss and the impact of remeasuring the plan assets and obligations at termination. The pension plan terminations did not require a cash outlay by the Company.

 

Interest Expense

 

Interest expense increased to $2.7 million for the nine months ended September 30, 2022 from $0.9 million for nine months ended September 30, 2021. This increase was primarily due to an increase in interest rates on our outstanding borrowings, $0.5 million of expense relating to the write-off of unamortized debt issuance costs associated with our former senior secured credit facility in the third quarter of 2022 and an increase in outstanding borrowings. The weighted average interest rate on our outstanding borrowings for the nine months ended September 30, 2022 was 1.9% compared to 0.9% for the nine months ended September 30, 2021.

 

Income Taxes

 

The effective income tax rate was 12.9% and 12.8% for the nine months ended September 30, 2022 and 2021, respectively. Income tax expense for the nine months ended September 30, 2022 was impacted by a tax benefit of $6.4 million relating to the impairment of intangible assets and a portion of the goodwill impairment. The effective tax rate for the nine months ended September 30, 2022 was impacted by the nondeductible portion of the goodwill impairment charge totaling $21.1 million. Income tax expense for the nine months ended September 30, 2021 was favorably impacted by a reversal of $1.8 million in deferred tax liabilities associated with the termination of the Company’s two qualified defined benefit pension plans, $0.8 million of windfall tax benefits from stock options exercised and $0.6 million of stranded tax benefits recognized as a result of the Company’s termination of its pension plans. 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 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.

 

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The Company’s primary source of liquidity has been its net income and the use of credit facilities and term loan as described further below. 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 and capital expenditures for the next twelve months. Management also 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 and capital expenditures beyond the next twelve months. In the future, the Company may continue to use credit facilities and other secured and unsecured borrowings as a source of liquidity. The Company may also begin relying on the issuance of equity or debt securities, including under its universal shelf registration statement (File No. 333-249760), to the extent available. There can be no assurance that any such financings would be available to us on reasonable terms. Any future issuances of equity securities or securities convertible into or exercisable for equity securities 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

 

Superior’s Branded Products and Healthcare Apparel segments market themselves to their customers as a “stock house.” Therefore, Superior carries inventories of both raw materials and finished products, the practice of which requires substantial working capital, which we believe to be common in the industry.


Cash and cash equivalents increased by $10.0 million to $18.9 million as of September 30, 2022 from $8.9 million on December 31, 2021. Working capital increased to $237.5 million at September 30, 2022 from $188.1 million at December 31, 2021. The increase in working capital was primarily due to increases in inventory, contract assets and cash and cash equivalents and a decrease in current portion of long-term debt. The increase in inventory was primarily driven by inventory investment in our Healthcare Apparel segment. The increase 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 Branded Products segment. The increase in cash and cash equivalents was primary related to the timing of payments on outstanding borrowings. The decrease in current portion of long-term debt was the result of contractual obligations under the new credit agreement, which was entered into on August 23, 2022.


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):

 

   

Nine Months Ended September 30,

 
   

2022

   

2021

 

Net cash provided by (used in):

               

Operating activities

  $ (4,504 )   $ 18,161  

Investing activities

    (22,423 )     (20,481 )

Financing activities

    37,032       3,656  

Effect of exchange rates on cash

    (132 )     (100 )

Net increase (decrease) in cash and cash equivalents

  $ 9,973     $ 1,236  


Operating Activities. The increase in net cash used in operating activities during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to increases in cash outflows for selling and administrative expenses, contract assets and inventory. Working capital cash changes during the nine months ended September 30, 2022 included an increase of $19.2 million in inventory, an increase of $10.2 million in contract assets and a decrease of $9.6 million in accounts payable and other current liabilities. Working capital cash changes during the nine months ended September 30, 2021 included a decrease of $12.3 million in accounts payable and other current liabilities, an increase of $14.6 million in inventory and a decrease in accounts receivable of $7.5 million.

 

Investing Activities. The increase in net cash used in investing activities during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was attributable to $11.1 million of cash paid for the acquisition of Guardian in 2022, partially offset by $6.0 million of cash paid for the acquisition of Gifts by Design in 2021 and a decrease in capital expenditures of $3.2 million primarily related to the expansion of our distribution facility in Eudora, Arkansas, in 2021. 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.

 

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Financing Activities. The increase in net cash provided by financing activities during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to an increase in net borrowings of $36.8 million in debt, partially offset by a decrease of $1.8 million in proceeds received on exercise of stock options.

 

Credit Facilities (See Note 3 to the Financial Statements)

 

On August 23, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, the domestic subsidiaries of the Company, as guarantors, the lenders party thereto (the “Lenders”), and PNC Bank, National Association, as administrative agent for the Lenders (the “Administrative Agent”), pursuant to which the Lenders are providing the Company senior secured credit facilities maturing in August 2027 consisting of a revolving credit facility in the aggregate maximum principal amount of $125.0 million and a term loan in the aggregate principal amount of $75.0 million (collectively, the “Credit Facilities”), and the ability to request incremental revolving credit or term loan facilities in an aggregate amount of up to an additional $75.0 million, subject to obtaining additional lender commitments and satisfying certain other conditions.

 

As of September 30, 2022, the Company had $162.0 million in outstanding borrowings under its Credit Facilities, consisting of $87.0 million outstanding under the revolving credit facility and $75.0 million outstanding under a term loan.

 

Obligations outstanding under the Credit Facilities accrue interest at a variable rate equal to the secured overnight financing rate (“SOFR”) plus an adjustment of between 0.10% and 0.25% (depending on the applicable interest period) plus a margin of between 1.0% and 2.0% (depending on the Company’s net leverage ratio). The interest rate on outstanding borrowings under the Credit Facilities was 4.9% at September 30, 2022. During the term of the revolving credit facility, the Company will pay a commitment fee on the unused portion of the revolving credit facility equal to between 0.125% and 0.250% (depending on the Company’s net leverage ratio). The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of September 30, 2022, the Company had undrawn capacity of $38.0 million under the revolving credit facility.

 

Contractual principal payments for the term loan are as follows: remainder of 2022 - $1.9 million; 2023 - $3.7 million; 2024 - $4.7 million; 2025 - $5.6 million; 2026 - $6.6 million; and 2027 - $52.5 million. The term loan does not contain pre-payment penalties.

 

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 (including dividends and related distributions), liquidations, mergers, consolidations or acquisitions, affiliate transactions and sales of assets or subsidiaries. The Credit Agreement also requires the Company to comply with a fixed charge coverage ratio of at least 1.25 to 1.0 and a net leverage ratio not to exceed 4.0 to 1.0. The Company’s net leverage ratio is generally calculated as the ratio of (a) indebtedness minus unrestricted cash to (b) consolidated EBITDA for the four most recently ended fiscal quarters. As of September 30, 2022, 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 nine months ended September 30, 2022 and 2021, the Company paid cash dividends of $6.4 million and $5.3 million, respectively. The Company anticipates that it will continue to pay dividends in the future as financial conditions permit.
 
On May 2, 2019, the Company’s Board of Directors approved a stock repurchase program of up to 750,000 shares of the 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. At September 30, 2022, 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 its expected future cash needs.

 

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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. As a result of the Company entering into a new credit agreement on August 23, 2022, interest on our Credit Facilities is based upon the secured overnight financing rate (“SOFR”). As SOFR is a relatively new reference rate with a limited history, there may or may not be more volatility than with other reference rates such as LIBOR, which may result in increased borrowing costs for the Company. A hypothetical increase in the SOFR of 100 basis points between August 23, 2022 and September 30, 2022 would have resulted in approximately $0.2 million in additional pre-tax interest expense. For further information regarding our debt instruments, 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 contracts are not denominated in U.S. dollars. We cannot predict the effect of exchange rate fluctuations on our operating results. In certain cases, we may enter into foreign currency cash flow hedges to reduce the variability of cash flows associated with our sales and expenses denominated in foreign currency. As of September 30, 2022, 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 Branded Products segment are denominated in their local currencies, which include the Hong Kong dollar, the Chinese renminbi, the British pound, the Indian rupee, the Brazilian real and the Canadian dollar. 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 (loss). During the nine months ended September 30, 2022 and 2021, 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 (loss) during the nine months ended September 30, 2022 and 2021 included a foreign currency translation adjustment loss of $0.4 million and $0.2 million, respectively.

 

 

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, Michael Koempel, 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 not effective because of the material weaknesses in the Company’s internal control over financial reporting described below and as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

As of December 31, 2021, management identified a material weakness relating to the accounting for income taxes principally related to the income tax provision and deferred tax accounts (liabilities and assets). The Company determined that management’s review controls over income taxes are not operating effectively to detect a material misstatement in the financial statements related to the completeness, accuracy, and presentation of the aforementioned areas of income taxes. As of September 30, 2022, this material weakness has not been remediated.

 

As of September 30, 2022, management identified a material weakness relating to the information technology system change controls within one of the Company’s primary systems. The Company determined that management’s review controls over certain system changes are not designed effectively to detect a material misstatement in the financial statements related to the completeness, accuracy, and presentation of the financial statements. 

 

36

 

Notwithstanding the identified material weaknesses, management, including the Company’s principal executive officer and principal financial officer, have determined, based on the procedures they have performed, that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows at the Evaluation Date, and for the periods presented, in accordance with U.S. GAAP.

 

Remediation Efforts with Respect to the Material Weaknesses

 

The Company’s management, under the oversight of the Audit Committee, is in the process of executing a plan to remediate the material weaknesses which includes the following measures:

 

Income Taxes

 

•  implement a tax reporting software solution to streamline our income tax process and enhance our state and federal income tax reporting capabilities;

 

•  hire additional qualified personnel to bolster the Company’s in-house tax capabilities and capacity; and

 

•  evaluate and, if necessary, enhance the level of precision in the management review controls related to income taxes.

 

While portions of the remediation plan have been implemented and we continue to work toward implementing the remainder, the material weakness will not be considered remediated until the enhanced controls operate for a sufficient period of time, and management has concluded, through testing, that the related controls are effective.

 

Information Technology

 

Since September 30, 2022, the Company has implemented automated system change control functionality that will more effectively facilitate the review and validation of system changes. The Company intends to design and implement additional enhanced review and monitoring controls. Though the new automated system change control functionality is operational, the material weakness will not be considered remediated until the additional enhanced review and monitoring controls are fully designed and implemented. The Company will monitor the effectiveness of its remediation plans and will refine its remediation plans as appropriate.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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, 2021.

 

Our results of operations could be adversely affected by economic and political conditions globally and the effects of these conditions on our customers’ businesses and levels of business activity.

 

Economic and political events this year have altered the landscape in which we and other U.S. companies operate in a variety of ways. In response to inflationary pressures, the U.S. Federal Reserve has raised interest rates, resulting in an increase in the cost of borrowing for us, our customers, our suppliers, and other companies relying on debt financing. World events, such as the Russian invasion of Ukraine and the resulting economic sanctions, have impacted the global economy, including by exacerbating inflationary and other pressures linked to COVID-related supply chain disruptions. Prolonged inflationary conditions, high and/or increased interest rates, and additional sanctions or retaliatory measures related to the Russia-Ukraine crisis, or other situations, could further negatively affect U.S. and international commerce and exacerbate or prolong the period of high energy prices and supply chain constraints. At this time, the extent and duration of these economic and political events and their effects on the economy and the Company are impossible to predict.

 

Our management and the Audit Committee of the Board of Directors decided to restate the Company’s interim financial statements for the periods ended June 30, 2021 and September 30, 2021. In connection with this decision, our management has concluded that certain of our disclosure controls and procedures were not effective as of June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022 due to a material weakness in our internal control over financial reporting for income taxes. Our management identified an additional material weakness as of September 30, 2022. If we are unable to remediate both material weaknesses and otherwise maintain an effective system of internal control over financial reporting, it could result in us not preventing or detecting on a timely basis a material misstatement of the Company’s financial statements.

 

Management and the Audit Committee of the Board of Directors concluded that it was appropriate to restate the Company’s previously issued unaudited interim financial statements included in the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2021 and September 30, 2021, filed with the SEC on July 28, 2021 and November 3, 2021, respectively, due to a failure to reverse deferred tax liabilities associated with the termination of the Company’s two qualified defined benefit pension plans in the second quarter 2021.

 

As part of that process, management identified a material weakness in the Company’s internal control over financial reporting as of June 30, 2021 and September 30, 2021. As further disclosed in “Part I – Item 4. Controls and Procedures” of this Quarterly Report on Form 10-Q, that material weakness continues to exist as of September 30, 2022. As of such date, management identified an additional material weakness relating to the Information Technology system change controls within one of the Company’s primary systems. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Although we are implementing plans to remediate these material weaknesses, we cannot be certain of the success of the plans. If our remedial measures are insufficient to address the material weaknesses, or if one or more additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, or our disclosure controls and procedures are again determined to be ineffective, we may not be able to prevent or identify irregularities or ensure the fair and accurate presentation of our financial statements included in our periodic reports filed with the U.S. Securities and Exchange Commission. Additionally, the occurrence of, or failure to remediate, a material weakness and any future material weaknesses in our internal control over financial reporting or determination that our disclosure controls and procedures are ineffective may have other consequences that could materially and adversely affect our business, including an adverse impact on the market price of our common stock, potential actions or investigations by the U.S. Securities and Exchange Commission or other regulatory authorities, shareholder lawsuits, a loss of investor confidence and damage to our reputation.

 

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

 

There were no unregistered sales of equity securities during the quarter ended September 30, 2022, that were not previously reported in a current report on Form 8-K.

 

The table below sets forth 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 common stock during the three months ended September 30, 2022.

 

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)

 

July 1, 2022 to July 31, 2022

    -     $ -       -          

August 1, 2022 to August 31, 2022

    -       -       -          

September 1, 2022 to September 30, 2022

    -       -       -          

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 the 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, 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.

 

39

 

ITEM 3.     Defaults upon Senior Securities

 

Not applicable.

 

ITEM 4.     Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.     Other Information

 

None.

 

ITEM 6.     Exhibits

 

Exhibit No.   Description
10.1   Credit Agreement, dated as of August 23, 2022, among Superior Group of Companies, Inc., the Guarantors party thereto, the Lenders party thereto, and PNC Bank, National Association, as administrative agent for the Lenders filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 24, 2022, and incorporated herein by reference.
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) 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+

 

Inline XBRL Instance Document.

101.SCH+

 

Inline XBRL Taxonomy Extension Schema.

101.CAL+

 

Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF+

 

Inline XBRL Taxonomy Extension Definition Linkbase.

101.LAB+

 

Inline XBRL Taxonomy Extension Label Linkbase.

101.PRE+

 

Inline XBRL Taxonomy Extension Presentation Linkbase.

104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*  Filed herewith.

**Furnished herewith.

+  Submitted electronically herewith.

 

40

 

 

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: November 7, 2022 SUPERIOR GROUP OF COMPANIES, INC.
     
                By /s/ Michael Benstock                           
    Michael Benstock
    Chief Executive Officer
    (Principal Executive Officer)
     
     
Date: November 7, 2022    
                By /s/ Michael Koempel                           
    Michael Koempel
   

Chief Financial Officer

(Principal Financial Officer)

 

41