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 Uniforms and Related Products segment, through its primary signature marketing brands Fashion Seal Healthcare®, HPI®, and WonderWink®, manufactures (through third parties or its own facilities) and sells a wide range of uniforms, corporate identity apparel, career apparel and accessories that are worn by employees in the hospital and healthcare fields; hotels; fast food and other restaurants; transportation; and the private security, industrial and commercial markets.
Superior services its Remote Staffing Solutions segment through multiple The Office Gurus® entities, including its subsidiaries in El Salvador, Belize, Jamaica, and the United States (collectively, “TOG”). TOG is primarily a near-shore premium provider of cost effective multilingual telemarketing and business process outsourced solutions.
The Promotional Products segment, through the BAMKO®, Public Identity®, Tangerine® and Gifts by Design brands, services customers that purchase primarily promotional and related products. The segment currently has sales offices in the United States, Brazil and Canada with support services in China, Hong Kong and India.
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, 2020, and filed with the Securities and Exchange Commission. Management believes that the information furnished includes all adjustments of a normal recurring nature that are necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.
We refer to the condensed consolidated financial statements collectively as “financial statements,” and individually as “statements of comprehensive income,” “balance sheets,” “statements of shareholders’ equity,” and “statements of cash flows” herein.
Recent Accounting Pronouncements
We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be not applicable.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. On January 1, 2021, the Company adopted this standard on a prospective basis. The Company’s adoption of this standard did not have a material impact on its financial statements.
9
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. In February 2020, the FASB issued ASU 2020-2, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” The update delayed the effective date of ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. Adoption will require a modified retrospective approach beginning with the earliest period presented. The Company is currently evaluating the potential impact this standard will have on its financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. This guidance includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This guidance may be applied through December 31, 2022. The Company will apply this guidance to transactions and modifications to contracts and hedging relationships that reference LIBOR.
NOTE 2 – Inventories:
Inventories consisted of the following amounts (in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Finished goods
|
|
$
|
86,455
|
|
|
$
|
73,979
|
|
|
Work in process
|
|
|
2,288
|
|
|
|
1,634
|
|
|
Raw materials
|
|
|
14,628
|
|
|
|
14,153
|
|
|
Inventories
|
|
$
|
103,371
|
|
|
$
|
89,766
|
|
Debt consisted of the following (in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Credit Facilities:
|
|
|
|
|
|
|
|
|
|
Revolving credit facility due February 2026
|
|
$
|
37,768
|
|
|
$
|
17,589
|
|
|
Term loan due February 2024 (“2017 Term Loan”)
|
|
|
16,500
|
|
|
|
21,000
|
|
|
Term loan due January 2026 (“2018 Term Loan”)
|
|
|
42,560
|
|
|
|
49,524
|
|
|
|
|
|
96,828
|
|
|
|
88,113
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Payments due within one year included in current liabilities
|
|
|
15,286
|
|
|
|
15,286
|
|
|
Debt issuance costs
|
|
|
660
|
|
|
|
455
|
|
|
Long-term debt less current maturities
|
|
$
|
80,882
|
|
|
$
|
72,372
|
|
The Company is party to a credit agreement with Truist Bank, consisting of a revolving credit facility, a term loan maturing in February 2024 (“2017 Term Loan”) and a term loan maturing in January 2026 (“2018 Term Loan”). The revolving credit facility, 2017 Term Loan and 2018 Term Loan are collectively referred to as the “Credit Facilities.”
On February 8, 2021, the Company entered into a Second Amended and Restated Credit Agreement with Truist Bank (the “Credit Agreement”), pursuant to which the maximum availability under the Company’s existing revolving credit facility was increased from $75.0 million to $125.0 million and its maturity date was extended until February 8, 2026. The 2017 Term Loan and the 2018 Term Loan remain outstanding with the same amortization schedules. The floor on LIBOR for the revolving credit facility was increased from zero to 0.25%, but the interest rates on the revolving credit facility and the term loans were not otherwise modified. Except as described above, the covenants, events of default and substantially all of the other terms that were contained in the Company’s prior credit agreement with Truist Bank remain unchanged in the Credit Agreement. The Credit Facilities continue to be secured by substantially all of the operating assets of the Company as collateral, and the Company’s obligations thereunder continue to be guaranteed by all of its domestic subsidiaries.
Obligations outstanding under the 2018 Term Loan have a variable interest rate of LIBOR plus a margin of between 0.85% and 1.65% (based on the Company’s funded debt to EBITDA ratio) (0.93% at September 30, 2021). Obligations outstanding under the revolving credit facility and the 2017 Term Loan generally have a variable interest rate of one-month LIBOR (with a 0.25% floor on LIBOR for the revolving credit facility) plus a margin of between 0.68% and 1.50% (based on the Company’s funded debt to EBITDA ratio) (0.93% for the revolving credit facility and 0.76% for the 2017 Term Loan at September 30, 2021). The Company is obligated to pay a commitment fee of 0.15% per annum on the average unused portion of the commitment under the revolving credit facility. The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of September 30, 2021, there were no outstanding letters of credit under the revolving credit facility.
Contractual principal payments for the 2017 Term Loan are as follows: remainder of 2021 - $1.5 million; 2022 through 2023 - $6.0 million per year; and 2024 - $3.0 million. Contractual principal payments for the 2018 Term Loan are as follows: remainder of 2021 - $2.3 million; 2022 through 2025 - $9.3 million per year; and 2026 - $3.1 million. The term loans do not contain pre-payment penalties.
The Company is a party to an interest rate swap with a total notional value of $7.5 million as of September 30, 2021 pursuant to which it makes fixed payments and receives floating payments. The Company entered into the interest rate swap to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. The Company’s interest rate swap expires in February 2024. The interest rate swap is not designated as a hedge transaction. Changes in fair value and gains and losses on settlement on the interest rate swap are recognized in interest expense in our statements of comprehensive income. No gain or loss was recognized on the interest rate swap during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, a loss of $0.3 million was recognized on the interest rate swap.
NOTE 4 – Periodic Pension Expense:
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). Effective June 30, 2013, the Company no longer accrues additional benefits for future service or for future increases in compensation levels for the Company’s primary defined benefit pension plan. Effective on December 31, 2014, the Company no longer accrues additional benefits for future service for the Company’s hourly defined benefit plan. As discussed below, the Company has terminated its two noncontributory qualified defined benefit pension plans.
The Company is also the sponsor of an unfunded supplemental executive retirement plan in which several of its employees are participants.
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,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Service cost - benefits earned during the period
|
|
$
|
46
|
|
|
$
|
38
|
|
|
$
|
138
|
|
|
$
|
114
|
|
|
Interest cost on projected benefit obligation
|
|
|
84
|
|
|
|
216
|
|
|
|
424
|
|
|
|
648
|
|
|
Expected return on plan assets
|
|
|
-
|
|
|
|
(389
|
)
|
|
|
(597
|
)
|
|
|
(1,167
|
)
|
|
Recognized actuarial loss
|
|
|
375
|
|
|
|
305
|
|
|
|
1,501
|
|
|
|
938
|
|
|
Settlement loss
|
|
|
-
|
|
|
|
82
|
|
|
|
-
|
|
|
|
413
|
|
|
Pension plan termination charge
|
|
|
-
|
|
|
|
-
|
|
|
|
6,945
|
|
|
|
-
|
|
|
Net periodic pension cost after settlements
|
|
$
|
505
|
|
|
$
|
252
|
|
|
$
|
8,411
|
|
|
$
|
946
|
|
The pension settlement losses included in the table above resulted from lump sum pension payments made to various employees upon their retirement or termination during the periods specified. The pension settlement losses did not require a cash outlay by the Company. The service cost component is included in selling and administrative expenses in our statements of comprehensive income and the other components of net periodic pension cost are included in other periodic pension costs in our statements of comprehensive income.
In the second quarter of 2021, the Company completed the termination of its two noncontributory qualified defined benefit pension plans, which were fully funded. The Company settled its obligations under the plans by providing lump-sum payments of $13.8 million to eligible participants who elected to receive them and entering into an annuity purchase contract for the remaining liability of $3.0 million. 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. As of September 30, 2021, an asset surplus of $1.3 million remained undistributed in the pension plans that were terminated.
NOTE 5 – Net Sales:
For our Uniforms and Related Products and Promotional Products segments, revenue is primarily generated from the sale of finished products to customers. Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the performance obligations under the contract terms are satisfied. For certain contracts with customers in which the Company has an enforceable right to payment for goods with no alternative use, revenue is recognized over time upon receipt of finished goods into inventory. Revenue for goods that do have an alternative use or that the customer is not obligated to purchase under the terms of a contract is generally recognized when the goods are transferred to the customer. Revenue from the sale of personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, is generally recognized at a point in time when the goods are transferred to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contract. The Company includes shipping and handling fees billable to customers in net sales. Shipping and handling activities that occur after the transfer of promised goods are accrued as control is transferred to the customer rather than being treated as a separate performance obligation.
For our Remote Staffing segment, revenue is generated from providing our customers with staffing solution services. Revenue for our Remote Staffing segment is recognized as services are delivered.
Revenue is measured at the amount of consideration we expect to receive in exchange for the goods or services. Variable consideration for estimated returns, allowances and other price variances is recorded based upon historical experience and current allowance programs. Contract termination terms may involve variable consideration clauses such as sales discounts and customer rebates, and revenue is adjusted accordingly for these provisions. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The promised amount of consideration in a contract is not adjusted for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised good or service to a customer and when the customer pays for that product or service will be one year or less. Sales taxes are excluded from the measurement of a performance obligation’s transaction price. Sales commissions are expensed as incurred when we expect that the amortization period of such costs will be one year or less.
The following table presents disaggregated revenue by operating segment for the periods presented (in thousands):
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Uniforms and Related Products Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uniforms and related products
|
|
$
|
61,621
|
|
|
$
|
59,296
|
|
|
$
|
182,080
|
|
|
$
|
184,909
|
|
|
Personal protective equipment
|
|
|
269
|
|
|
|
13,938
|
|
|
|
18,571
|
|
|
|
24,269
|
|
|
Total Uniforms and Related Products Segment
|
|
$
|
61,890
|
|
|
$
|
73,234
|
|
|
$
|
200,651
|
|
|
$
|
209,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remote Staffing Solutions Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remote staffing solutions services
|
|
$
|
18,040
|
|
|
$
|
11,636
|
|
|
$
|
46,723
|
|
|
$
|
30,187
|
|
|
Net intersegment eliminations
|
|
|
(1,847
|
)
|
|
|
(1,309
|
)
|
|
|
(5,209
|
)
|
|
|
(3,834
|
)
|
|
Total Remote Staffing Solutions Segment
|
|
$
|
16,193
|
|
|
$
|
10,327
|
|
|
$
|
41,514
|
|
|
$
|
26,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promotional Products Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promotional products
|
|
$
|
44,296
|
|
|
$
|
24,769
|
|
|
$
|
136,682
|
|
|
$
|
76,719
|
|
|
Personal protective equipment
|
|
|
947
|
|
|
|
19,407
|
|
|
|
16,113
|
|
|
|
69,091
|
|
|
Total Promotional Products Segment
|
|
$
|
45,243
|
|
|
$
|
44,176
|
|
|
$
|
152,795
|
|
|
$
|
145,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Sales
|
|
$
|
123,326
|
|
|
$
|
127,737
|
|
|
$
|
394,960
|
|
|
$
|
381,341
|
|
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,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Accounts receivable
|
|
$
|
92,500
|
|
|
$
|
101,902
|
|
|
Current contract assets
|
|
|
37,575
|
|
|
|
39,231
|
|
|
Current contract liabilities
|
|
|
7,367
|
|
|
|
5,074
|
|
Contract assets relate to goods produced without an alternative use for which the Company has an enforceable right to payment but which have not yet been invoiced to the customer. The majority of the amounts included in contract assets on December 31, 2020 were transferred to accounts receivable during the nine months ended September 30, 2021. 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, 2021, $4.2 million of revenue was recognized from the contract liabilities balance as of December 31, 2020.
NOTE 6 – Contingencies:
The purchase price to acquire substantially all of the assets of BAMKO, Inc. (“BAMKO”) in 2016 included contingent consideration based on varying levels of BAMKO’s consolidated EBITDA in each measurement period through 2021. The estimated fair value for BAMKO acquisition-related contingent consideration payable as of September 30, 2021 was $2.7 million, which is expected to be paid in the second quarter of 2022. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $2.7 million and $3.2 million. The purchase price to acquire substantially all of the assets of Tangerine Promotions, Ltd. and Tangerine Promotions West, Inc. (collectively “Tangerine”) in 2017 included contingent consideration based on varying levels of Tangerine’s EBITDA in each measurement period through 2021. The estimated fair value for Tangerine acquisition-related contingent consideration payable as of September 30, 2021 was $1.2 million, which is expected to be paid in the second quarter of 2022. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $1.2 million and $1.4 million. The Company will continue to evaluate these liabilities for remeasurement at the end of each reporting period and any changes will be recorded in the Company’s statements of comprehensive income. The carrying amount of the liabilities may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liabilities.
The Company is involved in various legal actions and claims arising from the normal course of business. In the opinion of management, the ultimate outcome of these matters is not expected to have a material impact on the Company’s results of operations, cash flows, or financial position.
NOTE 7 – Share-Based Compensation:
Share-based compensation is recorded in selling and administrative expense in the statements of comprehensive income. The following table details the share-based compensation expense by type of award and the total related tax benefit for the periods presented (in thousands):
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Stock options and SARs
|
|
$
|
327
|
|
|
$
|
412
|
|
|
$
|
1,105
|
|
|
$
|
921
|
|
|
Restricted stock
|
|
|
545
|
|
|
|
203
|
|
|
|
1,183
|
|
|
|
566
|
|
|
Performance shares
|
|
|
216
|
|
|
|
114
|
|
|
|
469
|
|
|
|
303
|
|
|
Total share-based compensation expense
|
|
$
|
1,088
|
|
|
$
|
729
|
|
|
$
|
2,757
|
|
|
$
|
1,790
|
|
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”).
A summary of stock option transactions during the nine months ended September 30, 2021 follows:
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
No. of
|
|
|
Weighted Average
|
|
|
Remaining Life
|
|
|
Intrinsic Value
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
Outstanding, January 1, 2021
|
|
|
970,022
|
|
|
$
|
12.92
|
|
|
|
3.74
|
|
|
$
|
11,128
|
|
|
Granted(1)
|
|
|
143,543
|
|
|
|
25.02
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(262,960
|
)
|
|
|
10.10
|
|
|
|
|
|
|
|
|
|
|
Lapsed or cancelled
|
|
|
(19,126
|
)
|
|
|
14.90
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2021
|
|
|
831,479
|
|
|
|
15.86
|
|
|
|
3.43
|
|
|
|
6,487
|
|
|
Exercisable, September 30, 2021
|
|
|
487,161
|
|
|
|
14.66
|
|
|
|
2.83
|
|
|
|
4,231
|
|
|
(1)
|
The weighted average grant date fair value of stock options granted was $9.91 per share.
|
As of September 30, 2021, the Company had $1.2 million in unrecognized compensation related to nonvested stock options to be recognized over the remaining weighted average vesting period of 1.4 years.
A summary of stock-settled SARs transactions during the nine months ended September 30, 2021 follows:
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
No. of
|
|
|
Weighted Average
|
|
|
Remaining Life
|
|
|
Intrinsic Value
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
Outstanding, January 1, 2021
|
|
|
317,128
|
|
|
$
|
13.47
|
|
|
|
3.36
|
|
|
$
|
2,031
|
|
|
Granted(1)
|
|
|
31,687
|
|
|
|
25.75
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(26,438
|
)
|
|
|
14.74
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2021
|
|
|
322,377
|
|
|
|
14.57
|
|
|
|
2.88
|
|
|
|
2,899
|
|
|
Exercisable, September 30, 2021
|
|
|
160,586
|
|
|
|
15.29
|
|
|
|
2.20
|
|
|
|
1,296
|
|
|
(1)
|
The weighted average grant date fair value of SARs granted was $10.09 per share.
|
As of September 30, 2021, the Company had $0.3 million in unrecognized compensation related to nonvested SARs to be recognized over the remaining weighted average vesting period of 1.2 years.
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, ratably 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. 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, 2021 follows:
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
No. of
|
|
|
Grant Date
|
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding, January 1, 2021
|
|
|
157,244
|
|
|
$
|
16.84
|
|
|
Granted
|
|
|
264,166
|
|
|
|
23.16
|
|
|
Vested
|
|
|
(24,908
|
)
|
|
|
23.55
|
|
|
Outstanding, September 30, 2021
|
|
|
396,502
|
|
|
|
20.63
|
|
As of September 30, 2021, the Company had $6.2 million of unrecognized compensation cost related to nonvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 3.6 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, 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, 2021 follows:
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
No. of
|
|
|
Grant Date
|
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding, January 1, 2021
|
|
|
186,264
|
|
|
$
|
18.28
|
|
|
Granted
|
|
|
116,405
|
|
|
|
22.13
|
|
|
Vested
|
|
|
(57,255
|
)
|
|
|
17.54
|
|
|
Forfeited
|
|
|
(36,141
|
)
|
|
|
15.19
|
|
|
Outstanding, September 30, 2021
|
|
|
209,273
|
|
|
|
21.16
|
|
As of September 30, 2021, the Company had $2.9 million of unrecognized compensation cost related to nonvested performance share grants expected to be recognized over the remaining weighted average service period of 4.1 years.
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, 2021, the Company recorded a provision for income taxes of $1.8 million, which represents an effective tax rate of 17.8%. For the three months ended September 30, 2020, the Company recorded a provision for income taxes of $2.1 million, which represents an effective tax rate of 17.7%. For the nine months ended September 30, 2021, the Company recorded a provision for income taxes of $5.5 million, which represents an effective tax rate of 19.1%. For the nine months ended September 30, 2020, the Company recorded a provision for income taxes of $7.1 million, which represents an effective tax rate of 19.9%. Income tax expense for the nine months ended September 30, 2021 was favorably impacted by $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. These benefits were offset by the non-deductible pension termination charge recognized during the three and nine months ended September 30, 2021.
NOTE 9 – Net Income Per Share:
The Company’s basic net income per share is computed based on the weighted average number of shares of common stock outstanding for the period. Diluted net income per share includes the effect of the Company’s outstanding stock options, stock appreciation rights, unvested shares of restricted stock and unvested performance shares, if the inclusion of these items is dilutive.
The following table presents a reconciliation of basic and diluted net income per share for the three and nine months ended September 30, 2021 and 2020:
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Net income used in the computation of basic and diluted net income per share (in thousands)
|
|
$
|
8,196
|
|
|
$
|
9,944
|
|
|
$
|
23,251
|
|
|
$
|
28,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
15,528,534
|
|
|
|
15,084,300
|
|
|
|
15,394,427
|
|
|
|
15,041,738
|
|
|
Dilutive common stock equivalents
|
|
|
571,316
|
|
|
|
626,822
|
|
|
|
665,259
|
|
|
|
319,297
|
|
|
Weighted average shares outstanding - diluted
|
|
|
16,099,850
|
|
|
|
15,711,122
|
|
|
|
16,059,686
|
|
|
|
15,361,035
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.53
|
|
|
$
|
0.66
|
|
|
$
|
1.51
|
|
|
$
|
1.89
|
|
|
Diluted
|
|
$
|
0.51
|
|
|
$
|
0.63
|
|
|
$
|
1.45
|
|
|
$
|
1.85
|
|
Awards to purchase 251,989 and 152,110 shares of common stock with weighted average exercise prices of $24.88 and $23.26 per share were outstanding during the three months ended September 30, 2021 and 2020, respectively, but were not included in the computation of diluted net income per share because the awards’ exercise prices were greater than the average market price of the common shares.
Awards to purchase 176,713 and 348,077 shares of common stock with weighted average exercise prices of $25.35 and $19.68 per share were outstanding during the nine months ended September 30, 2021 and 2020, 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
NOTE 10 – Operating Segment Information:
The Company classifies its businesses into three operating segments based on the types of products and services provided. The Uniforms and Related Products segment consists of sales to customers of uniforms and related items. The Remote Staffing Solutions segment consists of sales of staffing solutions. The Promotional Products segment consists of sales to customers of promotional products and other branded merchandise.
The Company evaluates the performance of each operating segment based on several factors of which the primary financial measures are net sales and income before taxes on income. Amounts for corporate expenses are included in the totals for the Uniforms and Related Products segment.
The following tables set forth financial information related to the Company’s operating segments (in thousands):
|
|
|
Uniforms and Related Products
|
|
|
Remote Staffing Solutions
|
|
|
Promotional Products
|
|
|
Intersegment Eliminations
|
|
|
Total
|
|
|
As of and For the Three Months Ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
61,890
|
|
|
$
|
18,040
|
|
|
$
|
45,243
|
|
|
$
|
(1,847
|
)
|
|
$
|
123,326
|
|
|
Cost of goods sold
|
|
|
39,708
|
|
|
|
7,555
|
|
|
|
31,092
|
|
|
|
(843
|
)
|
|
|
77,512
|
|
|
Gross margin
|
|
|
22,182
|
|
|
|
10,485
|
|
|
|
14,151
|
|
|
|
(1,004
|
)
|
|
|
45,814
|
|
|
Selling and administrative expenses
|
|
|
19,244
|
|
|
|
6,576
|
|
|
|
10,243
|
|
|
|
(1,004
|
)
|
|
|
35,059
|
|
|
Other periodic pension cost
|
|
|
459
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
459
|
|
|
Interest expense
|
|
|
309
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
320
|
|
|
Income before taxes on income
|
|
$
|
2,170
|
|
|
$
|
3,909
|
|
|
$
|
3,897
|
|
|
$
|
-
|
|
|
$
|
9,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,487
|
|
|
$
|
398
|
|
|
$
|
461
|
|
|
$
|
-
|
|
|
$
|
2,346
|
|
|
Capital expenditures
|
|
$
|
1,214
|
|
|
$
|
1,733
|
|
|
$
|
182
|
|
|
$
|
-
|
|
|
$
|
3,129
|
|
|
Total assets
|
|
$
|
289,028
|
|
|
$
|
28,062
|
|
|
$
|
105,087
|
|
|
$
|
-
|
|
|
$
|
422,177
|
|
|
|
|
Uniforms and Related Products
|
|
|
Remote Staffing Solutions
|
|
|
Promotional Products
|
|
|
Intersegment Eliminations
|
|
|
Total
|
|
|
As of and For the Three Months Ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
73,234
|
|
|
$
|
11,636
|
|
|
$
|
44,176
|
|
|
$
|
(1,309
|
)
|
|
$
|
127,737
|
|
|
Cost of goods sold
|
|
|
48,715
|
|
|
|
4,653
|
|
|
|
27,424
|
|
|
|
(507
|
)
|
|
|
80,285
|
|
|
Gross margin
|
|
|
24,519
|
|
|
|
6,983
|
|
|
|
16,752
|
|
|
|
(802
|
)
|
|
|
47,452
|
|
|
Selling and administrative expenses
|
|
|
21,987
|
|
|
|
3,927
|
|
|
|
9,805
|
|
|
|
(802
|
)
|
|
|
34,917
|
|
|
Other periodic pension cost
|
|
|
212
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
212
|
|
|
Interest expense
|
|
|
210
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
|
|
239
|
|
|
Income before taxes on income
|
|
$
|
2,110
|
|
|
$
|
3,056
|
|
|
$
|
6,918
|
|
|
$
|
-
|
|
|
$
|
12,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,430
|
|
|
$
|
243
|
|
|
$
|
340
|
|
|
$
|
-
|
|
|
$
|
2,013
|
|
|
Capital expenditures
|
|
$
|
319
|
|
|
$
|
404
|
|
|
$
|
95
|
|
|
$
|
-
|
|
|
$
|
818
|
|
|
Total assets
|
|
$
|
269,776
|
|
|
$
|
22,719
|
|
|
$
|
74,743
|
|
|
$
|
-
|
|
|
$
|
367,238
|
|
|
|
|
Uniforms and Related Products
|
|
|
Remote Staffing Solutions
|
|
|
Promotional Products
|
|
|
Intersegment Eliminations
|
|
|
Total
|
|
|
As of and For the Nine Months Ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
200,651
|
|
|
$
|
46,723
|
|
|
$
|
152,795
|
|
|
$
|
(5,209
|
)
|
|
$
|
394,960
|
|
|
Cost of goods sold
|
|
|
131,730
|
|
|
|
19,233
|
|
|
|
104,273
|
|
|
|
(2,291
|
)
|
|
|
252,945
|
|
|
Gross margin
|
|
|
68,921
|
|
|
|
27,490
|
|
|
|
48,522
|
|
|
|
(2,918
|
)
|
|
|
142,015
|
|
|
Selling and administrative expenses
|
|
|
58,046
|
|
|
|
16,860
|
|
|
|
32,088
|
|
|
|
(2,918
|
)
|
|
|
104,076
|
|
|
Other periodic pension cost
|
|
|
1,328
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,328
|
|
|
Pension plan termination charge
|
|
|
6,945
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,945
|
|
|
Interest expense
|
|
|
862
|
|
|
|
-
|
|
|
|
63
|
|
|
|
-
|
|
|
|
925
|
|
|
Income before taxes on income
|
|
$
|
1,740
|
|
|
$
|
10,630
|
|
|
$
|
16,371
|
|
|
$
|
-
|
|
|
$
|
28,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
4,373
|
|
|
$
|
1,014
|
|
|
$
|
1,332
|
|
|
$
|
-
|
|
|
$
|
6,719
|
|
|
Capital expenditures
|
|
$
|
11,125
|
|
|
$
|
2,849
|
|
|
$
|
481
|
|
|
$
|
-
|
|
|
$
|
14,455
|
|
|
Total assets
|
|
$
|
289,028
|
|
|
$
|
28,062
|
|
|
$
|
105,087
|
|
|
$
|
-
|
|
|
$
|
422,177
|
|
|
|
|
Uniforms and Related Products
|
|
|
Remote Staffing Solutions
|
|
|
Promotional Products
|
|
|
Intersegment Eliminations
|
|
|
Total
|
|
|
As of and For the Nine Months Ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
209,178
|
|
|
$
|
30,187
|
|
|
$
|
145,810
|
|
|
$
|
(3,834
|
)
|
|
$
|
381,341
|
|
|
Cost of goods sold
|
|
|
135,324
|
|
|
|
12,880
|
|
|
|
97,748
|
|
|
|
(1,452
|
)
|
|
|
244,500
|
|
|
Gross margin
|
|
|
73,854
|
|
|
|
17,307
|
|
|
|
48,062
|
|
|
|
(2,382
|
)
|
|
|
136,841
|
|
|
Selling and administrative expenses
|
|
|
60,226
|
|
|
|
10,840
|
|
|
|
30,020
|
|
|
|
(2,382
|
)
|
|
|
98,704
|
|
|
Other periodic pension cost
|
|
|
830
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
830
|
|
|
Interest expense
|
|
|
1,420
|
|
|
|
-
|
|
|
|
312
|
|
|
|
-
|
|
|
|
1,732
|
|
|
Income before taxes on income
|
|
$
|
11,378
|
|
|
$
|
6,467
|
|
|
$
|
17,730
|
|
|
$
|
-
|
|
|
$
|
35,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
4,291
|
|
|
$
|
657
|
|
|
$
|
1,024
|
|
|
$
|
-
|
|
|
$
|
5,972
|
|
|
Capital expenditures
|
|
$
|
4,771
|
|
|
$
|
750
|
|
|
$
|
190
|
|
|
$
|
-
|
|
|
$
|
5,711
|
|
|
Total assets
|
|
$
|
269,776
|
|
|
$
|
22,719
|
|
|
$
|
74,743
|
|
|
$
|
-
|
|
|
$
|
367,238
|
|
NOTE 11 – 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.
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
|
|
|
Identifiable 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 brand name is considered an indefinite-life asset and as such is not being amortized. The Company recognized amortization expense on these acquired intangible assets of $0.2 million during the nine months ended September 30, 2021.
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.
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, 2020.
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) the projected impact of the COVID-19 pandemic on our, our customers’, and our suppliers’ businesses, (2) projections of revenue, income, and other items relating to our financial position and results of operations, (3) statements of our plans, objectives, strategies, goals and intentions, (4) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (5) statements of expected industry and general economic trends.
Such forward-looking statements are subject to certain risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the following: the impact of competition; the effect of uncertainties related to the COVID-19 pandemic, including existing and possible future variants, on the United States of America (“U.S.” or “United States”) and global markets, our business, operations, customers, suppliers and employees, including without limitation the length and scope of restrictions imposed by various governments and organizations and the success of efforts to deliver effective vaccines on a timely basis to a number of people sufficient to prevent or substantially lower the severity of incidents of infection or variants, among other factors; our ability to navigate successfully the challenges posed by current global supply disruptions; general economic conditions, including employment levels, in the areas of the United States in which the Company’s customers are located; changes in the healthcare, retail, hotels, food service, transportation and other industries where uniforms and service apparel are worn; our ability to identify suitable acquisition targets, successfully integrate any acquired businesses, successfully manage our expanding operations, or discover liabilities associated with such businesses during the diligence process; the price and availability of cotton and other manufacturing materials; attracting and retaining senior management and key personnel; and other factors described in the Company’s filings with the Securities and Exchange Commission, including those described in the “Risk Factors” section herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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 Acquisition
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.
Business Outlook
Superior Group of Companies, Inc. (together with its subsidiaries, the “Company,” “Superior,” “we,” “our,” or “us”) is comprised of three reportable business segments: (1) Uniforms and Related Products, (2) Remote Staffing Solutions, and (3) Promotional Products.
Uniforms and Related Products
In our Uniforms and Related Products segment, we manufacture and sell a wide range of uniforms, career apparel and accessories. Our primary products are service apparel, such as scrubs, lab coats, protective apparel and patient gowns, provided to the healthcare industry, and service apparel, such as uniforms, provided to workers employed by our customers in various industries, including retail, hotels, food service, transportation and other industries. We sell our brands of healthcare service apparel primarily to healthcare laundries, dealers, distributors and retailers. The COVID-19 pandemic created increased demand for healthcare service apparel from laundries, dealers and distributors that service hospitals and other medical facilities. From a long-term perspective, we expect that demand for our signature marketing brands, including Fashion Seal Healthcare® and WonderWink®, will continue to provide opportunities for growth and increased market share. Sales of uniforms are impacted by our customers’ opening and closing of locations and reductions, increases, and turnover of employees. The COVID-19 pandemic reduced demand for uniform apparel in many of our customers’ industries, such as the restaurant, transportation and hospitality industries. This, however, was partially offset by demand from customers in certain retail industries, such as grocery and pharmacy customers. The economic environment in the United States is beginning to return to pre-pandemic economic activity levels. While we continue to source some personal protective equipment for our customers, we anticipate that opportunities to supply personal protective equipment, including through our Uniforms and Related Products segment, will continue to decline. Based on the longer-term fundamentals of our uniforms business, we believe that we have growth opportunities to expand our market share.
Remote Staffing Solutions
This business segment (also known as “The Office Gurus”), which operates in El Salvador, Belize, Jamaica, and the United States, initially started to support the Company’s back office needs while improving overall efficiencies and lowering operating costs. After years of consistently improving key performance indicators, lowering costs and providing exceptional service to our Uniforms and Related Products segment in areas such as order entry, cash collections, vendor payables processing, customer service, sales, and others, The Office Gurus started selling their services to outside companies in 2009. The Office Gurus has become an award-winning business process outsourcer offering inbound and outbound voice, email, text, chat and social media support. Although the COVID-19 pandemic has generated uncertainties for our customers and their industries, we have recently seen increased demand for our services. 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.
Promotional Products
For more than a decade, we sold promotional products on a limited basis to our existing Uniforms and Related Products customer base. While there were substantial opportunities to sell promotional products to those customers, it was not an area of focus, specialization, or expertise for us. On March 1, 2016, that changed with our acquisition of substantially all of the assets of BAMKO, Inc. (“BAMKO”). BAMKO has many strengths, well-developed systems, and time-tested processes that offer significant competitive advantages. With a robust back-office support platform operated out of India, direct-to-factory sourcing operations based in China, and proprietary technological platforms and programming capabilities that we believe are competitive, BAMKO is well positioned in the promotional products industry and continues to be a platform for potential future acquisitions. We completed two additional acquisitions in this segment in late 2017, as well as an acquisition in January 2021, and remain open to additional acquisitions going forward. In recent years we have seen an increase in customer orders in our promotional products business and expect growth opportunities for our core promotional products business to continue. The COVID-19 pandemic created significant opportunities for us within the personal protective equipment market. And although we will continue to source some personal protective equipment for our customers, we anticipate, based on supply and demand factors, that opportunities to supply personal protective equipment, including through our Promotional Products segment, will continue to decline. Our core promotional products business has not experienced the same downturn during the pandemic that many of our competitors experienced as increased activities from customers in certain industries, such as the delivery service industry, more than offset reduced activities from customers in other industries, such as the restaurant and entertainment industries. From a long-term perspective, we believe that this segment’s synergistic fit with our uniforms business will create opportunities to cross-sell the products of each of these business segments to new and existing customers.
COVID-19 Impact
The COVID-19 pandemic continues to affect our operations around the world and financial performance, and likely will continue to do so for an undetermined period of time. International, federal, state and local efforts to contain the spread of COVID-19 have continued. Government actions to address the situation remain in effect and new actions continue to be enacted or modified, including safety requirements such as recommended or mandatory use of face masks and other personal protective equipment and related products, recommended or mandated vaccinations, social distancing rules and guidelines, travel restrictions, temporary closures of non-essential businesses and other restrictive measures.
In responding to the needs of our customers, we have sourced personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which contributed $18.6 million and $16.1 million to net sales during the nine months ended September 30, 2021 for our Uniforms and Related Products segment and Promotional Products segment, respectively.
However, the pandemic also had and could continue to have a number of adverse impacts on our business, including, but not limited to, disruption to the economy and our customers’ willingness and/or ability to spend, temporary or permanent closures of businesses that consume our products and services, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable. Our employees and the employees and contractors of our suppliers and customers also could become ill, quarantined, or otherwise unable to work or travel due to health reasons or governmental restrictions.
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. The extent to which the COVID-19 pandemic ultimately impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time, including the delivery of effective vaccines on a timely basis to a number of people sufficient to prevent or substantially lower the severity of incidents of infection or possible future variants of the virus, the extent and effectiveness of containment actions, availability of widespread rapid testing and effective treatment alternatives. Prolonged or recurring periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.
Sourcing of Goods and Raw Materials
Along with many manufacturers that source goods and raw materials from abroad, we are currently experiencing continued significant supply disruptions and delays due to a variety of reasons. These changes are partially driven by interruptions in global supply chains (including as a result of port congestion) 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.
An interruption in any of our supply sources or facilities could temporarily adversely affect our results of operations until alternate sources or facilities can be secured. The Uniforms and Related Products segment’s principal fabrics used in the manufacture of its finished goods are cotton, polyester, cotton-synthetic and poly-synthetic blends. The majority of such fabrics are sourced in China. The Promotional Products segment relies on the supply of different types of raw materials as well as textiles, including plastic, glass, fabric and metal. The vast majority of these raw materials are principally sourced from China, either directly by BAMKO or its 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.
We currently believe challenges created by such supply chain disruptions are manageable. However, we have limited insight into the extent to which COVID-19 or other factors could further impair our sourcing of goods and materials.
|
Results of Operations
|
|
|
|
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
|
|
|
|
Net Sales (in thousands):
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
Uniforms and Related Products
|
|
$
|
61,890
|
|
|
$
|
73,234
|
|
|
|
(15.5
|
%)
|
|
Remote Staffing Solutions
|
|
|
18,040
|
|
|
|
11,636
|
|
|
|
55.0
|
%
|
|
Promotional Products
|
|
|
45,243
|
|
|
|
44,176
|
|
|
|
2.4
|
%
|
|
Net intersegment eliminations
|
|
|
(1,847
|
)
|
|
|
(1,309
|
)
|
|
|
41.1
|
%
|
|
Consolidated Net Sales
|
|
$
|
123,326
|
|
|
$
|
127,737
|
|
|
|
(3.5
|
%)
|
Net sales for the Company decreased 3.5% from $127.7 million for the three months ended September 30, 2020 to $123.3 million for the three months ended September 30, 2021. The principal components of this aggregate decrease in net sales were as follows: (1) a decrease in net sales for our Uniforms and Related Products segment (contributing (8.9%)), (2) an increase in net sales for our Promotional Products segment (contributing 0.8%), and (3) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 4.6%).
Uniforms and Related Products net sales decreased 15.5%, or $11.3 million, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The decrease was primarily due to a decrease of $13.7 million in sales of personal protective equipment driven by the progression of the COVID-19 pandemic. This decrease was partially offset by an increase in demand for uniform apparel as a number of our customers’ industries, such as the restaurant, transportation and hospitality industries, have begun to show signs of recovery from the effects of the COVID-19 pandemic.
Remote Staffing Solutions net sales increased 55.0% before intersegment eliminations and 56.8% after intersegment eliminations for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. These increases were primarily attributed to our providing continued services in the current year period to our customer base that was expanded during 2020 and the onboarding of new customers in 2021.
Promotional Products net sales increased 2.4%, or $1.1 million, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily due to an increase of $19.5 million in net sales in our core promotional products business and an increase of net sales of $4.4 million due to the acquisition of Gifts by Design on January 29, 2021, partially offset by a decrease of $18.5 million in net sales of personal protective equipment. The increase in net sales in our core promotional products business was primarily driven by the growth of our customer base through continued market penetration experienced in 2020 and 2021 and improved market conditions. The sale of personal protective equipment during the three months ended September 30, 2020 was driven by market demand as a result of the COVID-19 pandemic.
Cost of Goods Sold
Cost of goods sold consists primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing costs, and inspection costs for our Uniforms and Related Products and Promotional Products segments. Cost of goods sold for our Remote Staffing Solutions segment includes salaries and payroll related benefits for agents. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with out-bound freight are recorded in cost of goods sold. Other shipping and handling costs are included in selling and administrative expenses.
As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 64.2% for the three months ended September 30, 2021 and 66.5% for the three months ended September 30, 2020. The percentage decrease was primarily driven by the decrease in personal protective equipment sales, partially offset by higher logistical costs during the current year period. For additional information related to logistical challenges, please refer to the section “ITEM 2. Management’s 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 Remote Staffing Solutions segment was 41.9% for the three months ended September 30, 2021 and 40.0% for the three months ended September 30, 2020. The percentage increase was primarily due to costs associated with the onboarding of new customers in the current year period.
As a percentage of net sales, cost of goods sold for our Promotional Products segment was 68.7% for the three months ended September 30, 2021 and 62.1% for the three months ended September 30, 2020. The percentage increase was primarily the result of differences in the mix of products and customers.
Selling and Administrative Expenses
Selling and administrative expenses increased 0.4%, or $0.2 million, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 31.1% for the three months ended September 30, 2021 and 30.0% for the three months ended September 30, 2020. The percentage increase was primarily due to the decrease in net sales explained above.
As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 36.5% for the three months ended September 30, 2021 and 33.7% for the three months ended September 30, 2020. The percentage increase was primarily attributed to investments in the business to support continued sales growth.
As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 22.6% for the three months ended September 30, 2021 and 22.2% for the three months ended September 30, 2020. As a percentage of net sales, selling and administrative expenses remained relatively flat.
Interest Expense
Interest expense was $0.3 million and $0.2 million for the three months ended September 30, 2021 and 2020.
Income Taxes
The effective income tax rate was 17.8% and 17.7% for the three months ended September 30, 2021 and 2020, respectively. 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, 2021 Compared to Nine Months Ended September 30, 2020
Net Sales (in thousands):
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
Uniforms and Related Products
|
|
$
|
200,651
|
|
|
$
|
209,178
|
|
|
|
(4.1
|
%)
|
|
Remote Staffing Solutions
|
|
|
46,723
|
|
|
|
30,187
|
|
|
|
54.8
|
%
|
|
Promotional Products
|
|
|
152,795
|
|
|
|
145,810
|
|
|
|
4.8
|
%
|
|
Net intersegment eliminations
|
|
|
(5,209
|
)
|
|
|
(3,834
|
)
|
|
|
35.9
|
%
|
|
Consolidated Net Sales
|
|
$
|
394,960
|
|
|
$
|
381,341
|
|
|
|
3.6
|
%
|
Net sales for the Company increased 3.6% from $381.3 million for the nine months ended September 30, 2020 to $395.0 million for the nine months ended September 30, 2021. The principal components of this aggregate increase in net sales were as follows: (1) a decrease in net sales for our Uniforms and Related Products segment (contributing (2.2%)), (2) an increase in net sales for our Promotional Products segment (contributing 1.8%), and (3) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 4.0%).
Uniforms and Related Products net sales decreased 4.1%, or $8.5 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease was primarily due to a decrease of $5.7 million in sales of personal protective equipment and lower market demand for healthcare service apparel when compared to the spike in demand during the early phases of the COVID-19 pandemic that began in the second quarter of 2020. These decreases were partially offset by an increase in demand for uniform apparel.
Remote Staffing Solutions net sales increased 54.8% before intersegment eliminations and 57.5% after intersegment eliminations for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. These increases were primarily attributed to our providing continued services in the current year period to our customer base that was expanded during 2020, the onboarding of new customers in 2021 and the negative impact of disruptions experienced in 2020 resulting from COVID-19.
Promotional Products net sales increased 4.8%, or $7.0 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily due to an increase of $60.0 million in net sales in our core promotional products business, partially offset by a decrease of $53.0 million in the sale of personal protective equipment. The increase in net sales in our core promotional products business was driven by the timing of promotional programs launched for certain customers, growth of our customer base through continued market penetration experienced in 2020 and 2021 and improved market conditions. Additionally, the acquisition of Gifts by Design on January 29, 2021 resulted in an increase of net sales of $9.1 million during the nine months ended September 30, 2021. The robust personal protective equipment sales during the nine months ended September 30, 2020 was driven by market demand during the early phases of the COVID-19 pandemic.
Cost of Goods Sold
As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 65.7% for the nine months ended September 30, 2021 and 64.7% for the nine months ended September 30, 2020. The percentage increase was primarily driven by higher logistical costs during the current year period, partially offset by the decrease in personal protective equipment sales. For additional information related to logistical challenges, please refer to the section “ITEM 2. Management’s 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 Remote Staffing Solutions segment was 41.2% for the nine months ended September 30, 2021 and 42.7% for the nine months ended September 30, 2020. The percentage decrease was primarily driven by disruptions resulting from COVID-19 during the nine months ended September 30, 2020.
As a percentage of net sales, cost of goods sold for our Promotional Products segment was 68.2% for the nine months ended September 30, 2021 and 67.0% for the nine months ended September 30, 2020. The percentage increase was primarily the result of differences in the mix of products and customers.
Selling and Administrative Expenses
Selling and administrative expenses increased 5.4%, or $5.4 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily due to an increase in employee costs driven mostly by increased headcount and a reduction in expenses of $1.2 million in the prior year period that was the result of the Company’s decision to forgo its discretionary matching contribution under its defined contribution plan in 2020, partially offset by a decrease in bad debt expense of $4.4 million on outstanding trade accounts receivable.
As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 28.9% for the nine months ended September 30, 2021 and 28.8% for the nine months ended September 30, 2020. As a percentage of net sales, selling and administrative expenses remained relatively flat.
As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 36.1% for the nine months ended September 30, 2021 and 35.9% for the nine months ended September 30, 2020. As a percentage of net sales, selling and administrative expenses remained relatively flat.
As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 21.0% for the nine months ended September 30, 2021 and 20.6% for the nine months ended September 30, 2020. As a percentage of net sales, selling and administrative expenses remained relatively flat.
Pension Plan Terminations
In the second quarter of 2021, the Company completed the termination of 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 decreased to $0.9 million for the nine months ended September 30, 2021 from $1.7 million for the nine months ended September 30, 2020. This decrease was primarily due to a decrease in LIBOR rates on our outstanding borrowings and a loss of $0.3 million recognized on our interest rate swap during the nine months ended September 30, 2020.
Income Taxes
The effective income tax rate was 19.1% and 19.9% for the nine months ended September 30, 2021 and 2020, respectively. Income tax expense for the nine months ended September 30, 2021 was favorably impacted by $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. These benefits were offset by the non-deductible pension termination charge recognized during the nine months ended September 30, 2021. 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.
The Company’s primary source of liquidity has been its net income and the use of credit facilities and term loans as described further below. Management currently believes that cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the Company’s anticipated working capital requirements for the next twelve months. 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). 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 Uniforms and Related Products segment markets itself to its 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 $1.2 million to $6.4 million as of September 30, 2021 from $5.2 million on December 31, 2020. Working capital increased to $164.4 million at September 30, 2021 from $143.6 million at December 31, 2020. The increase in working capital was primarily due to an increase in inventories, a decrease in other current liabilities and an increase in prepaid expenses and other current assets, partially offset by a decrease in accounts receivable. The increase in inventories was primarily driven by the timing of inventory purchases within our Promotional Products and Uniforms and Related Products segments. The decrease in other current liabilities was primarily related to significant accruals as of December 31, 2020, associated with the Company’s performance in 2020, that were paid in the current year period, including accrued compensation and income taxes. The increase in prepaid expenses and other current assets was primarily related to prepaid taxes and insurance. The decrease in accounts receivable was primarily driven by the timing of customer payments received within our Uniforms and Related Products segment.
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,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
18,161
|
|
|
$
|
51,067
|
|
|
Investing activities
|
|
|
(20,481
|
)
|
|
|
(5,711
|
)
|
|
Financing activities
|
|
|
3,656
|
|
|
|
(48,231
|
)
|
|
Effect of exchange rates on cash
|
|
|
(100
|
)
|
|
|
(512
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
1,236
|
|
|
$
|
(3,387
|
)
|
Operating Activities. The decrease in net cash provided by operating activities during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to payments made in the current year period related to significant accruals as of December 31, 2020 associated with the Company’s performance in 2020, including accrued compensation and income taxes, advanced customer payments received on personal protective equipment contracts in the prior year period and a $4.2 million contingent consideration payment representing the excess of the total contingent consideration payment made in the current year period over the fair value of the liability estimated at the time of acquisition. Working capital cash changes during the nine months ended September 30, 2021 included an increase of $13.7 million in inventories, a decrease of $12.3 million in accounts payable and other current liabilities and a decrease of $7.5 million in accounts receivable. Working capital cash changes during the nine months ended September 30, 2020 included an increase of $29.2 million in accounts payable and other current liabilities and an increase of $12.2 million in accounts receivable.
Investing Activities. The increase in net cash used in investing activities during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was attributable to an increase in capital expenditures of $8.7 million primarily related to the expansion of our distribution facility in Eudora, Arkansas, and $6.0 million of cash paid for the acquisition of Gifts by Design 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.
Financing Activities. The increase in net cash provided by financing activities during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily attributable to net borrowings of $8.4 million in debt during the current year period compared to net repayments in debt of $42.6 million in the prior year period.
Credit Facilities (See Note 3 to the Financial Statements)
As of September 30, 2021, the Company had approximately $96.8 million in outstanding borrowings under its credit facilities with Truist Bank, consisting of $37.8 million outstanding under the revolving credit facility, $16.5 million outstanding under a term loan maturing in February 2024 (“2017 Term Loan”) and $42.6 million outstanding under a term loan maturing in January 2026 (“2018 Term Loan”). The revolving credit facility, 2017 Term Loan and 2018 Term Loan are collectively referred to as the “Credit Facilities.”
On February 8, 2021, the Company entered into a Second Amended and Restated Credit Agreement with Truist Bank (the “Credit Agreement”), pursuant to which the maximum availability under the Company’s existing revolving credit facility was increased from $75.0 million to $125.0 million and its maturity date was extended until February 8, 2026. The 2017 Term Loan and the 2018 Term Loan remain outstanding with the same amortization schedules. The floor on LIBOR for the revolving credit facility was increased from zero to 0.25%, but the interest rates on the revolving credit facility and the term loans were not otherwise modified. Except as described above, the covenants, events of default and substantially all of the other terms that were contained in the Company’s prior credit agreement with Truist Bank remain unchanged in the Credit Agreement.
Obligations outstanding under the 2018 Term Loan have a variable interest rate of LIBOR plus a margin of between 0.85% and 1.65% (based on the Company’s funded debt to EBITDA ratio) (0.93% at September 30, 2021). Obligations outstanding under the revolving credit facility and the 2017 Term Loan generally have a variable interest rate of one-month LIBOR (with a 0.25% floor on LIBOR for the revolving credit facility) plus a margin of between 0.68% and 1.50% (based on the Company’s funded debt to EBITDA ratio) (0.93% for the revolving credit facility and 0.76% for the 2017 Term Loan at September 30, 2021). The Company is obligated to pay a commitment fee of 0.15% per annum on the average unused portion of the commitment under the revolving credit facility. The available balance under the revolving credit facility is reduced by outstanding letters of credit. At September 30, 2021, the Company had undrawn capacity of $87.2 million under the revolving credit facility, subject to the Company's compliance with the financial covenants described below.
Contractual principal payments for the 2017 Term Loan are as follows: remainder of 2021 - $1.5 million; 2022 through 2023 - $6.0 million per year; and 2024 - $3.0 million. Contractual principal payments for the 2018 Term Loan are as follows: remainder of 2021 - $2.3 million; 2022 through 2025 - $9.3 million per year; and 2026 - $3.1 million. The term loans do 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, and sales of assets. The Credit Agreement also requires the Company to maintain a fixed charge coverage ratio (as defined in the Credit Agreement) of at least 1.25:1 and a funded debt to EBITDA ratio (as defined in the Credit Agreement) not to exceed 5.0:1. As of September 30, 2021, 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, 2021 and 2020, the Company paid cash dividends of $5.3 million and $4.6 million, respectively. The Company anticipates that it will continue to pay dividends in the future as financial conditions permit, but can provide no assurances to this effect.
On May 2, 2019, the Company’s Board of Directors approved a stock repurchase program of up to 750,000 shares of Company’s outstanding common stock. There is no expiration date or other restriction governing the period over which the Company can make share repurchases under the program. All purchases under this program will be open market transactions. At September 30, 2021, the Company’s remaining repurchase capacity under its common stock repurchase program was 657,451 shares. Shares purchased under the common stock repurchase program are constructively retired and returned to unissued status. The Company considers several factors in determining when to make share repurchases, including among other things, the cost of equity, the after-tax cost of borrowing, the debt to total capitalization targets and the expected future cash needs.
Off-Balance Sheet Arrangements
The Company does not engage in any off-balance sheet financing arrangements. In particular, the Company does not have any interest in variable interest entities, which include special purpose entities and structured finance entities.