See accompanying Notes to the Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
NOTE 1 – Description of Business, Basis of Presentation and Summary of Accounting Policies:
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 manufactured through third parties or in Superior’s own facilities, and are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, technology, transportation and other industries. The segment currently has sales offices in the United States, Canada, Brazil, the United Kingdom and Colombia, with support services in China and India.
Superior’s Healthcare Apparel segment, primarily through its signature marketing brands Fashion Seal Healthcare® and WonderWink® (also referred to as “Wink”), manufactures (through third parties or in 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.
Basis of presentation
The accompanying consolidated financial statements of Superior included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) (“U.S.” or “United States”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company refers to the 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.
Change in Reportable Segments
Beginning 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. 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 branded portion of 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 17 for additional information. Additionally, as a result of this re-segmentation, the Company performed a quantitative goodwill impairment test. Refer to Note 6 for additional information.
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 provided by operating activities and Note 6 and had no effect on reported total net cash provided by (used in) operating, financing and investing activities, statements of comprehensive income (loss), balance sheets or statements of shareholders’ equity.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses, as well as the disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.
Revenue recognition
Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. See Note 15 for further discussion on revenue recognition.
Accounts receivable and allowance for doubtful accounts
Judgments and estimates are used in determining the collectability of accounts receivable and in establishing allowances for doubtful accounts. The Company analyzes specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances when evaluating the adequacy of the allowance for doubtful accounts. Changes in estimates are reflected in the period they become known. Charge-offs of accounts receivable are made once all collection efforts have been exhausted. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Cost of goods sold and shipping and handling fees and costs
Cost of goods sold for our Branded Products segment and our Healthcare Apparel segment consist primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing, receiving and inspection costs. 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. The cost of occupancy and operating the Company’s distribution centers are included in selling and administrative expenses.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method or average cost) or net realizable value. Judgments and estimates are used in determining the likelihood that goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Major renewals and improvements are capitalized, while replacements, maintenance and repairs which do not improve or extend the life of the respective assets are expensed in the period incurred. Costs of assets sold or retired and the related accumulated depreciation are eliminated from accounts and the net gain or loss is reflected in the statements of comprehensive income (loss) within selling and administrative expenses. During the year ended December 31, 2022, the Company sold its corporate headquarters building and related assets for net proceeds of $4.8 million and realized a gain on sale of $3.4 million. This sale was part of management’s plan to relocate the Company’s corporate headquarters to St. Petersburg, Florida. This sale is presented within our statements of comprehensive income (loss) as a separate line item titled “gain on sale of property, plant and equipment.”
Property, plant and equipment is recorded at cost and depreciated using the straight-line method over its estimated useful life as follows:
Buildings (in years) | | 20 to 40 |
Improvements (in years) | | 5 to 40 |
Machinery, equipment and fixtures (in years) | | 3 to 10 |
Leasehold improvements are depreciated over the terms of the leases to the extent that such improvements have useful lives of at least the terms of the respective leases.
Impairment of long-lived assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. There were no impairments of long-lived assets for the years ended December 31, 2022 and 2021.
Goodwill and indefinite-lived intangible assets
The Company has made acquisitions in the past that included goodwill and indefinite-lived intangible assets. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets such as trade names are not amortized but are subject to an annual (or under certain circumstances more frequent) impairment test in the fourth quarter based on their estimated fair value. We test more frequently if there are indicators of impairment, or whenever such circumstances suggest that the carrying value of goodwill or trade names may not be recoverable. Examples of such events and circumstances that the Company would consider include the following:
• | macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets; |
• | industry and market considerations such as a deterioration in the environment in which the Company operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for the Company’s products or services, or a regulatory or political development; |
• | cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows; |
• | overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; and |
• | other relevant entity-specific events such as changes in management, key personnel, strategy, or customers. |
An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary. Goodwill and indefinite-lived intangible assets are tested at a level of reporting referred to as “the reporting unit.” The Company’s reporting units are defined as each of its three reporting segments.
For the year ended December 31, 2021, the Company completed its testing of goodwill and indefinite-lived intangible assets and determined that the fair value of each applicable reporting unit was more than its carrying value.
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 decrease in the Company’s stock price. During the third quarter of 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 goodwill impairment analysis and determined that the estimated fair value of the Branded Products segment was lower than its carrying value. Consequently, the Company recorded a non-cash goodwill impairment charge of $45.9 million during the year ended December 31, 2022. As of December 31, 2022, the Company had no remaining goodwill balance.
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 year ended December 31, 2022. As of December 31, 2022, indefinite-lived intangible assets of $13.6 million and $14.2 million were included in the Branded Products segment and the Healthcare Apparel segment, respectively.
Contingent Consideration
Contingent consideration relating to consideration transferred in exchange for an acquired business is recognized at its estimated fair value at the acquisition date. The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. Any changes in fair value are recognized each reporting period in non-cash changes in fair value of estimated contingent consideration in the accompanying statements of comprehensive income (loss).
SERP
The Company is the sponsor of an unfunded supplemental executive retirement plan (“SERP”) in which several of its current and former employees are participants. In calculating our obligations and related expense, we make various assumptions and estimates, after consulting with outside actuaries and advisors. The annual determination of expense involves calculating the estimated total benefits ultimately payable to plan participants. Significant assumptions related to the calculation of our obligations include the discount rates used to calculate the present value of benefit obligations to be paid in the future. We review these assumptions annually based upon currently available information, including information provided by our actuaries.
Insurance
The Company self-insures for certain obligations related to employee health programs. The Company also purchases stop-loss insurance policies to protect it from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for losses that have occurred, but have not been reported. The Company’s estimates consider historical claim experience and other factors. The Company’s liabilities are based on estimates, and, while the Company believes that the accrual for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. Changes in claim experience, the Company’s ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.
Taxes on income
Income taxes are provided for under the liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The calculation of the Company’s tax liabilities also involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain income tax positions based on estimates of whether, and the extent to which, additional taxes will be required. The Company also accrues interest and penalties related to uncertain income tax positions as income taxes. Refer to Note 9 for additional details.
Share-based compensation
The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. The Company grants options, stock-settled stock appreciation rights, restricted stock and performance shares. The Company recognizes share-based compensation expense for all awards granted to employees, which is based on the fair value of the award on the date of grant. Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the stock compensation awards and the Company’s common stock price volatility, risk free interest rate and dividend rate. The assumptions used in calculating the fair value of stock compensation awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary to use different assumptions, stock compensation expense could be materially different from what has been recorded in the current period.
Other comprehensive income (loss)
Comprehensive income (loss) includes net income (loss) and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income (loss) consists of defined benefit pension plans activities, cash flow hedging activities and foreign currency translation adjustment. The related tax effects of these items are recorded in income tax expense (benefit) within the statements of operations, upon reclassification from accumulated other comprehensive income (loss), net of tax.
Foreign Currency Translations and Transactions
Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current rate of exchange on the last day of the reporting period. Changes in the carrying values of these assets and liabilities attributable to fluctuations in spot rates are recognized in net foreign currency translation adjustment, a component of accumulated other comprehensive income (loss), net of tax. Monetary assets and liabilities denominated in a currency that is different from a reporting entity’s functional currency are remeasured from the applicable currency to the reporting entity’s functional currency. Gains or losses resulting from transactions denominated in other currencies are recognized in net income (loss) each period. The majority of the Company’s transactions are settled in U.S. dollars.
Risks and concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk include cash in banks in excess of federally insured amounts. The Company manages this risk by maintaining all deposits in high quality financial institutions and periodically performing evaluations of the relative credit standing of the financial institutions. When assessing credit risk the Company considers whether the credit risk exists at both the individual and group level. Consideration is given to the activity, region and economic characteristics when assessing if there exists a group concentration risk. At December 31, 2022 and 2021, the Company had no customer with an accounts receivable balance greater than 10% of the total accounts receivable. At December 31, 2022 and 2021, the five largest customer accounts receivable balances totaled $21.4 million and $29.6 million, respectively, or approximately 20% and 28% of the respective total accounts receivable balances. The Branded Products segment has a substantial number of customers, none of which accounted for more than 10% of the segment’s 2022 net sales. No customer accounted for more than 10% of the Healthcare Apparel segment's 2022 net sales. The Contact Centers segment’s largest customer represented 12% of the segment’s 2022 net sales.
Principal raw materials 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.
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 December 31, 2022, the fair value of the written put options was $2.0 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 $1.6 million during the year ended December 31, 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 December 31, 2022, the Company’s remaining repurchase obligation under the written put options was 207,970 shares of its common stock.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, receivables and accounts payable approximated fair value as of December 31, 2022 and 2021, because of the relatively short maturities of these instruments. The carrying amount of the Company’s long-term debt approximated fair value as the rates are adjustable based upon current market conditions.
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 8, this guidance became not applicable to the Company.
Recently Issued Accounting Pronouncements Not Yet Adopted
The Company has considered all recent accounting pronouncements issued, but not yet effective, and does not expect any to have a material effect on its financial statements.
NOTE 2 - Allowance for Doubtful Accounts Receivable: |
|
The activity in the allowance for doubtful accounts receivable was as follows (in thousands): |
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Balance at the beginning of year |
|
$ |
6,393 |
|
|
$ |
7,667 |
|
Provision for bad debts |
|
|
2,891 |
|
|
|
2,260 |
|
Charge-offs |
|
|
(1,686 |
) |
|
|
(3,653 |
) |
Recoveries |
|
|
24 |
|
|
|
119 |
|
Balance at the end of year |
|
$ |
7,622 |
|
|
$ |
6,393 |
|
NOTE 3 - Reserve for Sales Returns and Allowances: |
|
The activity in the reserve for sales returns and allowances was as follows (in thousands): |
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Balance at the beginning of year |
|
$ |
2,636 |
|
|
$ |
3,365 |
|
Provision for returns and allowances |
|
|
4,512 |
|
|
|
4,911 |
|
Actual returns and allowances paid to customers |
|
|
(5,058 |
) |
|
|
(5,640 |
) |
Balance at the end of year |
|
$ |
2,090 |
|
|
$ |
2,636 |
|
Inventories consisted of the following amounts (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Finished goods |
|
$ |
94,228 |
|
|
$ |
90,395 |
|
Work in process |
|
|
401 |
|
|
|
1,351 |
|
Raw materials |
|
|
30,347 |
|
|
|
28,809 |
|
Inventories |
|
$ |
124,976 |
|
|
$ |
120,555 |
|
NOTE 5 - Property, Plant and Equipment, Net: |
Property, plant and equipment, net, consisted of the following (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Land |
|
$ |
2,494 |
|
|
$ |
3,085 |
|
Buildings, improvements and leaseholds |
|
|
18,652 |
|
|
|
19,558 |
|
Machinery, equipment and fixtures |
|
|
101,419 |
|
|
|
91,351 |
|
|
|
|
122,565 |
|
|
|
113,994 |
|
Accumulated depreciation |
|
|
(71,173 |
) |
|
|
(64,304 |
) |
Property, plant and equipment, net |
|
$ |
51,392 |
|
|
$ |
49,690 |
|
Depreciation expense was $7.9 million and $5.1 million in 2022 and 2021, respectively.
NOTE 6 - Goodwill and Intangible Assets: |
Goodwill
Beginning in the second quarter of 2022, the Company realigned its reportable segments to Branded Products, Healthcare Apparel and Contact Centers. Refer to Note 17 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 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 $45.9 million during the year ended December 31, 2022.
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 January 1, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill |
|
$ |
15,793 |
|
|
$ |
20,323 |
|
|
$ |
36,116 |
|
Accumulated impairment losses |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net goodwill |
|
$ |
15,793 |
|
|
$ |
20,323 |
|
|
$ |
36,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
$ |
3,363 |
|
|
$ |
- |
|
|
$ |
3,363 |
|
Foreign currency translation |
|
|
(45 |
) |
|
|
- |
|
|
|
(45 |
) |
Net goodwill, December 31, 2021 |
|
$ |
19,111 |
|
|
$ |
20,323 |
|
|
$ |
39,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, December 31, 2022 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill |
|
$ |
25,595 |
|
|
$ |
20,323 |
|
|
$ |
45,918 |
|
Accumulated impairment losses |
|
|
(25,595 |
) |
|
|
(20,323 |
) |
|
|
(45,918 |
) |
Net goodwill |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
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 year ended December 31, 2022. The carrying amounts of indefinite-lived trade names as of December 31, 2021 and year ended December 31, 2022 are summarized as follows (dollars in thousands):
Indefinite-lived Intangible Assets |
Segment |
|
Carrying Amount, December 31, 2021 |
|
|
Impairment Charges |
|
|
Carrying Amount, December 31, 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 December 31, 2022 and December 31, 2021 are summarized as follows (dollars in thousands):
|
|
|
|
|
|
December 31, 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 |
|
|
$ |
(23,330 |
) |
|
$ |
45,198 |
|
|
$ |
(18,772 |
) |
Non-compete agreements (3-7 year life) |
|
|
5.4 |
|
|
|
1,712 |
|
|
|
(1,367 |
) |
|
|
1,536 |
|
|
|
(1,121 |
) |
Trademarks |
|
|
10.0 |
|
|
|
379 |
|
|
|
(72 |
) |
|
|
275 |
|
|
|
(37 |
) |
Trade names |
|
|
2.0 |
|
|
|
710 |
|
|
|
(237 |
) |
|
|
- |
|
|
|
- |
|
Total |
|
|
|
|
|
$ |
52,999 |
|
|
$ |
(25,006 |
) |
|
$ |
47,009 |
|
|
$ |
(19,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
|
|
|
$ |
27,760 |
|
|
|
|
|
|
$ |
33,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
80,759 |
|
|
$ |
(25,006 |
) |
|
$ |
80,350 |
|
|
$ |
(19,930 |
) |
Amortization expense for intangible assets for the years ended December 31, 2022 and 2021 was $5.1 million and $4.2 million, respectively.
Estimated future intangible amortization expense is as follows (in thousands):
2023 |
|
$ |
4,616 |
|
2024 |
|
|
3,716 |
|
2025 |
|
|
3,066 |
|
2026 |
|
|
3,058 |
|
2027 |
|
|
3,017 |
|
Thereafter |
|
|
10,520 |
|
Total |
|
$ |
27,993 |
|
NOTE 7 – Other Current Liabilities: |
Other current liabilities consisted of the following (in thousands)
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Salaries, wages, commissions and compensated absences |
|
$ |
14,316 |
|
|
$ |
17,374 |
|
Contract liabilities |
|
|
2,213 |
|
|
|
8,804 |
|
Accrued rebates |
|
|
2,090 |
|
|
|
2,526 |
|
Current operating lease liabilities |
|
|
3,135 |
|
|
|
2,088 |
|
Written put options |
|
|
2,032 |
|
|
|
- |
|
401K profit sharing accrual |
|
|
- |
|
|
|
880 |
|
Other accrued expenses |
|
|
14,860 |
|
|
|
7,317 |
|
Other current liabilities |
|
$ |
38,646 |
|
|
$ |
38,989 |
|
NOTE 8 – Long-Term Debt:
Debt consisted of the following (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Credit Facilities: | | | | | | | | |
Revolving credit facility due August 2027 | | $ | 83,000 | | | $ | - | |
Term loan due August 2027 | | | 73,125 | | | | - | |
Revolving credit facility due February 2026 | | | - | | | | 61,517 | |
Term loan due February 2024 | | | - | | | | 15,000 | |
Term loan due January 2026 | | | - | | | | 40,238 | |
| | $ | 156,125 | | | $ | 116,755 | |
Less: | | | | | | | | |
Payments due within one year included in current liabilities | | | 3,750 | | | | 15,286 | |
Debt issuance costs | | | 808 | | | | 624 | |
Long-term debt less current maturities | | $ | 151,567 | | | $ | 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 original 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 comprehensive income (loss).
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 6.2% at December 31, 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 December 31, 2022, there were no outstanding letters of credit under the revolving credit facility.
Contractual principal payments for the term loan are as follows: 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 Facilities are secured by substantially all of the operating assets of the Company, 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 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 (as defined in the Credit Agreement) 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 December 31, 2022, the Company was in compliance with these ratios as the Company’s fixed charge coverage and net leverage ratios were 1.73 to 1.0 and 3.85 to 1.0, respectively. Based on the Company’s forecast, it is more likely than not that the Company will exceed the net leverage ratio covenant during 2023. As a result, the Company has initiated good faith discussions with the lending agent on ways to address a potential amendment process, should an amendment be needed in order to maintain compliance throughout the year. Any such amendment or waiver would be subject to the applicable provisions of the Credit Agreement, including the approval of lenders constituting Required Lenders as defined under 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 years ended December 31, 2022 and 2021, a gain of $0.2 million and $0.1 million, respectively, was recognized on the interest rate swap.
Debt Maturity Schedule
Contractual maturities of debt (excluding interest to be accrued thereon) at December 31, 2022 are as follows (in thousands):
2023 | | $ | 3,750 | |
2024 | | | 4,688 | |
2025 | | | 5,625 | |
2026 | | | 6,562 | |
2027 | | | 135,500 | |
Thereafter | | | - | |
Total debt | | $ | 156,125 | |
NOTE 9 – Income Tax Expense (Benefit):
The components of income (loss) before taxes on income were as follows (in thousands):
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Domestic |
|
$ |
(59,407 |
) |
|
$ |
16,639 |
|
Foreign |
|
|
21,372 |
|
|
|
16,488 |
|
Income (loss) before taxes on income |
|
$ |
(38,035 |
) |
|
$ |
33,127 |
|
Aggregate income tax provisions consist of the following (in thousands):
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
3,580 |
|
|
$ |
4,035 |
|
State and local |
|
|
1,314 |
|
|
|
777 |
|
Foreign |
|
|
1,399 |
|
|
|
2,033 |
|
|
|
|
6,293 |
|
|
|
6,845 |
|
Deferred Taxes: |
|
|
|
|
|
|
|
|
Deferred tax benefit |
|
|
(12,358 |
) |
|
|
(3,158 |
) |
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
(6,065 |
) |
|
$ |
3,687 |
|
The significant components of the deferred income tax asset (liability) are as follows (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Pension accruals |
|
$ |
3,513 |
|
|
$ |
4,023 |
|
Operating reserves and other accruals |
|
|
7,962 |
|
|
|
5,520 |
|
Book carrying value in excess of tax basis of intangibles |
|
|
2,321 |
|
|
|
- |
|
Capitalized research expenses |
|
|
1,704 |
|
|
|
- |
|
Tax credits |
|
|
- |
|
|
|
527 |
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Book carrying value in excess of tax basis of property |
|
|
(4,183 |
) |
|
|
(4,814 |
) |
Book carrying value in excess of tax basis of intangibles |
|
|
- |
|
|
|
(5,076 |
) |
Deferred expenses |
|
|
(599 |
) |
|
|
(539 |
) |
Net deferred income tax asset (liability) |
|
$ |
10,718 |
|
|
$ |
(359 |
) |
The difference between the total statutory Federal income tax rate and the actual effective income tax rate is accounted for as follows:
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Statutory federal income tax rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
State and local income taxes, net of federal income tax benefit |
|
|
3.4 |
% |
|
|
1.4 |
% |
Rate impacts due to foreign operations |
|
|
4.3 |
% |
|
|
(6.7 |
%) |
Changes in uncertain tax positions |
|
|
- |
|
|
|
(0.5 |
%) |
Compensation related |
|
|
(0.8 |
%) |
|
|
(1.6 |
%) |
Pension termination |
|
|
(0.3 |
%) |
|
|
(1.8 |
%) |
R&D tax credits |
|
|
0.7 |
% |
|
|
(0.4 |
%) |
Impairment charge |
|
|
(11.7 |
%) |
|
|
- |
|
Other |
|
|
(0.7 |
%) |
|
|
(0.3 |
%) |
Effective income tax rate |
|
|
15.9 |
% |
|
|
11.1 |
% |
The Tax Cuts and Jobs Act enacted on December 22, 2017 imposed a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. In accordance with guidance issued by FASB, the Company made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred. Deferred income taxes are provided on undistributed earnings of foreign subsidiaries in the period in which the Company determines it no longer intends to permanently reinvest such earnings outside the United States. The Company expects to permanently reinvest the earnings from its wholly-owned Brazilian and UK subsidiaries, and accordingly, has not provided deferred taxes on the subsidiaries’ undistributed net earnings or basis differences. The Company believes that the tax liability that would be incurred upon repatriation of the earnings from its Brazilian and UK subsidiaries is immaterial at December 31, 2022.
Only tax positions that meet the more-likely-than-not recognition threshold are recognized in the financial statements. As of December 31, 2022 and 2021, we had $0.8 million and $0.8 million, respectively, of unrecognized tax benefits, all of which, if recognized, would favorably affect the annual effective income tax rate. We do not expect any significant amount of this liability to be paid in the next twelve months. Accordingly, the balance of $0.8 million as of December 31, 2022 is included in other long-term liabilities.
Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Balance at the beginning of year |
|
$ |
801 |
|
|
$ |
993 |
|
Additions based on tax positions related to the current year |
|
|
- |
|
|
|
94 |
|
Additions for tax positions of prior years |
|
|
129 |
|
|
|
23 |
|
Reductions due to lapse of statute of limitations |
|
|
(123 |
) |
|
|
(309 |
) |
Balance at the end of year |
|
$ |
807 |
|
|
$ |
801 |
|
We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in other long-term liabilities in our balance sheet. During the years ended December 31, 2022 and 2021, we recognized $0.2 million and $0.1 million, respectively, for interest and penalties, net of tax benefits. During the year ended 2022 there was no significant reduction to the liability for interest and penalties due to any lapses in statute of limitations. During the year 2021 we reduced the liability by $0.2 million, for interest and penalties due to lapse of statute of limitations. At December 31, 2022 and 2021, we had $0.2 million and $0.2 million, respectively, accrued for interest and penalties, net of tax benefit.
We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $0.2 million within the next twelve months due to the closure of tax years by expiration of the statute of limitations and audit settlements related to various state tax filing positions. The earliest year open to federal examinations is 2019 and significant state examinations is 2016.
NOTE 10 – Benefit Plans:
Defined Benefit Plans
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 accrued additional benefits for future service or for future increases in compensation levels for the Company’s primary defined benefit pension plan. Effective December 31, 2014, the Company no longer accrued additional benefits for future service for the Company’s hourly defined benefit plan. During the year ended December 31, 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 $14.3 million to eligible participants who elected to receive them and entering into an annuity purchase contract for the remaining liability of $3.1 million. Consequently, the Company recognized a settlement charge of $7.8 million during the year ended December 31, 2021, which represents the acceleration of deferred charges previously included within accumulated other comprehensive loss, the impact of remeasuring the plan assets and obligations at termination and additional benefits from asset surpluses paid and expected to be paid to plan participants. The pension plan terminations did not require a cash outlay by the Company.
The Company is also the sponsor of an unfunded supplemental executive retirement plan (“SERP”) in which several employees participate. The Company’s projected benefit obligation under the unfunded SERP was $13.0 million. Contributions to the plan are made in accordance with statutory funding requirements and any additional funding that may be deemed appropriate.
The following tables present the changes in the benefit obligations and the various plan assets, the funded status of the plans, and the amounts recognized in the Company’s balance sheets at December 31, 2022 and 2021 (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
SERP |
|
|
Pension Plans |
|
|
SERP |
|
|
Total |
|
Changes in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
15,523 |
|
|
$ |
18,778 |
|
|
$ |
14,337 |
|
|
$ |
33,115 |
|
Service cost |
|
|
203 |
|
|
|
- |
|
|
|
185 |
|
|
|
185 |
|
Interest cost |
|
|
401 |
|
|
|
171 |
|
|
|
337 |
|
|
|
508 |
|
Actuarial (gain) loss |
|
|
(3,031 |
) |
|
|
11 |
|
|
|
767 |
|
|
|
778 |
|
Benefits paid |
|
|
(103 |
) |
|
|
(127 |
) |
|
|
(103 |
) |
|
|
(230 |
) |
Lump sum benefits paid |
|
|
- |
|
|
|
(17,430 |
) |
|
|
- |
|
|
|
(17,430 |
) |
Amendments |
|
|
- |
|
|
|
711 |
|
|
|
- |
|
|
|
711 |
|
Effect of settlement/curtailment |
|
|
- |
|
|
|
(1,983 |
) |
|
|
- |
|
|
|
(1,983 |
) |
Benefit obligation at end of year |
|
|
12,993 |
|
|
|
131 |
|
|
|
15,523 |
|
|
|
15,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
- |
|
|
|
18,754 |
|
|
|
- |
|
|
|
18,754 |
|
Actual return on assets |
|
|
- |
|
|
|
(637 |
) |
|
|
- |
|
|
|
(637 |
) |
Employer contributions |
|
|
103 |
|
|
|
(14 |
) |
|
|
103 |
|
|
|
89 |
|
Benefits paid |
|
|
(103 |
) |
|
|
(127 |
) |
|
|
(103 |
) |
|
|
(230 |
) |
Lump sum benefits paid |
|
|
- |
|
|
|
(17,430 |
) |
|
|
- |
|
|
|
(17,430 |
) |
Fair value of plan assets at end of year |
|
|
- |
|
|
|
546 |
|
|
|
- |
|
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year |
|
$ |
(12,993 |
) |
|
$ |
415 |
|
|
$ |
(15,523 |
) |
|
$ |
(15,108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in balance sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
$ |
- |
|
|
$ |
415 |
|
|
$ |
- |
|
|
$ |
415 |
|
Other current liabilities |
|
|
(129 |
) |
|
|
- |
|
|
|
(103 |
) |
|
|
(103 |
) |
Long-term pension liability |
|
|
(12,864 |
) |
|
|
- |
|
|
|
(15,420 |
) |
|
|
(15,420 |
) |
Net amount recognized |
|
$ |
(12,993 |
) |
|
$ |
415 |
|
|
$ |
(15,523 |
) |
|
$ |
(15,108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss consist of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
1,953 |
|
|
$ |
- |
|
|
$ |
6,698 |
|
|
$ |
6,698 |
|
Information for benefit plans with projected benefit obligation in excess of plan assets depicted as follows (in thousands): |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
SERP |
|
|
Pension Plans |
|
|
SERP |
|
|
Total |
|
Projected benefit obligation |
|
$ |
12,993 |
|
|
$ |
131 |
|
|
$ |
15,523 |
|
|
$ |
15,654 |
|
Fair value of plan assets |
|
|
- |
|
|
|
(546 |
) |
|
|
- |
|
|
|
(546 |
) |
Underfunded (Overfunded) |
|
$ |
12,993 |
|
|
$ |
(415 |
) |
|
$ |
15,523 |
|
|
$ |
15,108 |
|
Components of net periodic benefit cost related to pension plans were as follows (in thousands): |
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Interest cost on projected benefit obligation |
|
$ |
- |
|
|
$ |
171 |
|
Expected return on plan assets |
|
|
- |
|
|
|
(597 |
) |
Recognized actuarial loss |
|
|
- |
|
|
|
376 |
|
Settlement loss |
|
|
- |
|
|
|
- |
|
Pension plan termination charge |
|
|
- |
|
|
|
7,821 |
|
Net periodic pension cost after settlements |
|
$ |
- |
|
|
$ |
7,771 |
|
The termination of the Company’s two noncontributory qualified defined benefit pension plans in 2021 resulted in a non-cash charge of $7.8 million during the year ended December 31, 2021. 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 pension plan termination charge is presented as a separate line 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).
Components of net periodic benefit cost related to the SERP were as follows (in thousands):
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Service cost on benefits earned during the period |
|
$ |
203 |
|
|
$ |
185 |
|
Interest cost on projected benefit obligation |
|
|
401 |
|
|
|
337 |
|
Recognized actuarial loss |
|
|
1,715 |
|
|
|
1,499 |
|
Net periodic pension cost after settlements |
|
$ |
2,319 |
|
|
$ |
2,021 |
|
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). The estimated net actuarial loss for the SERP that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is $0.2 million.
The following table presents the weighted-average assumptions used to determine benefit obligations as of December 31, 2022 and 2021:
|
|
Discount Rate |
|
|
Long Term Rate of Return |
|
|
Salary Scale |
|
|
|
SERP |
|
|
SERP |
|
|
SERP |
|
2021 |
|
|
2.59 |
% |
|
|
N/A |
|
|
|
3.00 |
% |
2022 |
|
|
4.93 |
% |
|
|
N/A |
|
|
|
3.00 |
% |
The following table presents the weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, 2021 and 2022:
|
|
Discount Rate |
|
|
Long Term Rate of Return |
|
|
Salary Scale |
|
|
|
Pension Plans |
|
|
|
|
|
|
Pension Plans |
|
|
|
|
|
|
Pension Plans |
|
|
|
|
|
|
|
Corporate |
|
|
|
Plants |
|
|
|
SERP |
|
|
|
Corporate |
|
|
|
Plants |
|
|
|
SERP |
|
|
|
Corporate |
|
|
|
Plants |
|
|
|
SERP |
|
2021 |
|
|
2.36 |
% |
|
|
2.21 |
% |
|
|
2.36 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
3.00 |
% |
2022 |
|
|
N/A |
|
|
|
N/A |
|
|
|
2.59 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
3.00 |
% |
The following table includes projected benefit payments for the years indicated (in thousands):
|
|
|
Projected Benefit Payments |
|
Year |
|
|
SERP |
|
2023 |
|
|
$ |
132 |
|
2024 |
|
|
|
1,280 |
|
2025 |
|
|
|
673 |
|
2026 |
|
|
|
695 |
|
2027 |
|
|
|
706 |
|
2028-2032 |
|
|
|
4,916 |
|
Rabbi Trust
In connection with the Company’s unfunded SERP, we have life insurance contracts on the lives of designated individuals. The insurance contracts associated with the SERP are held in a Rabbi trust. The trust is the owner and beneficiary of such insurance contracts. The policies are being utilized to help offset the costs and liabilities of the SERP. The cash surrender value of the life insurance contracts was $3.9 million and $4.6 million at December 31, 2022 and 2021, respectively. The cash surrender value of these policies is included in other assets in the balance sheets. During the years ended December 31, 2022 and 2021 we recognized an investment loss of $0.8 million and an investment gain of $0.6 million, respectively, on the cash surrender value of these life insurance contracts.
In 2013, we initiated a Non-Qualified Deferred Compensation Plan, and we have purchased life insurance contracts on the lives of designated individuals. The insurance contracts associated with the Non-Qualified Deferred Compensation Plan are also held in a Rabbi trust. The trust is the owner and beneficiary of such insurance contracts. The policies are being utilized to help offset the costs and liabilities of the Non-Qualified Deferred Compensation Plan. The cash surrender value of the life insurance contracts was $7.7 million and $7.9 million at December 31, 2022 and 2021, respectively. The cash surrender value of these policies is included in other assets in the balance sheets. The liability for participant deferrals was $7.7 million and $7.8 million as of December 31, 2022 and 2021, respectively, and is included in other long-term liabilities in the balance sheets.
Defined Contribution Plan
The Company provides a defined contribution plan covering qualified employees. The plan includes a provision that allows employees to make pre-tax contributions under Section 401(k) of the Internal Revenue Code. The plan provides for the Company to make a guaranteed match equal to 25% of each employee’s eligible contributions. The plan also provides the Company with the option of making an additional discretionary contribution to the plan each year. The Company expensed employer matching contributions of $0.6 million and $1.6 million during the years ended December 31, 2022 and 2021, respectively.
NOTE 11 – Leases:
The Company primarily leases factories, warehouses, call centers, office space and equipment for various terms under long-term, non-cancelable operating lease agreements. A right-of-use asset represents the Company’s right to use an underlying asset for the lease term and a lease liability represents the Company’s obligation to make lease payments arising from the lease. The Company’s leases generally have expected lease terms of one to eight years. In the normal course of business, it is expected that the Company’s leases will be renewed or replaced by leases on other properties. Options to renew lease terms are included in determining the right-of-use asset and lease liability when it is reasonably certain that the Company will exercise that option. Certain of the lease agreements include rental payments adjusted periodically for inflation and generally require the Company to pay real estate taxes, insurance, and repairs. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. As of December 31, 2022, the Company had $7.0 million of operating lease liabilities ($3.1 million in other current liabilities and $3.9 million in long-term operating lease liabilities), which represents the present value of the remaining lease payments, and $9.1 million of operating lease right-of-use assets, which includes prepaid rent of $2.0 million. As of December 31, 2021, the Company had $5.8 million of operating lease liabilities ($2.1 million in other current liabilities and $3.7 million in long-term operating lease liabilities), which represents the present value of the remaining lease payments, and $8.2 million of operating lease right-of-use assets, which includes prepaid rent of $2.4 million. The depreciable-life of right-of-use assets is generally limited by the expected lease term. The Company does not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.
The components of lease cost were as follows (in thousands):
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Operating lease costs |
|
$ |
4,027 |
|
|
$ |
2,074 |
|
Short-term lease costs |
|
|
889 |
|
|
|
602 |
|
Total lease costs |
|
$ |
4,916 |
|
|
$ |
2,676 |
|
Cash flow and noncash information related to our operating leases were as follows (in thousands):
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Operating cash flows – cash paid for operating lease liabilities |
|
$ |
2,996 |
|
|
$ |
1,732 |
|
Non-cash – Operating lease right-of-use assets obtained in exchange for new lease liabilities |
|
$ |
4,089 |
|
|
$ |
4,945 |
|
Other supplemental information related to our operating leases was as follows:
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Weighted-average remaining lease term (in years) |
|
|
2.5 |
|
|
|
3.1 |
|
Weighted average discount rate |
|
|
5.66 |
% |
|
|
4.74 |
% |
Maturities of operating lease liabilities as of December 31, 2022 were as follows (in thousands):
|
|
Operating Leases |
|
2023 |
|
$ |
3,207 |
|
2024 |
|
|
2,105 |
|
2025 |
|
|
1,464 |
|
2026 |
|
|
830 |
|
2027 |
|
|
250 |
|
Thereafter |
|
|
- |
|
Total lease payments |
|
|
7,856 |
|
Less imputed interest |
|
|
785 |
|
Present value of lease liabilities |
|
$ |
7,071 |
|
NOTE 12 – 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 December 31, 2022 was $1.5 million, none of which is expected to be paid within the next twelve months. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $1.4 million and $3.0 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 December 31, 2022 was $1.5 million, of which $0.7 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 $1.8 million and $2.5 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 (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 13 – Share-Based Compensation:
In May 2013, the shareholders of the Company approved the 2013 Incentive Stock and Awards Plan (the “2013 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, performance shares and other stock based compensation. In May 2022, the shareholders of the Company approved the 2022 Equity Incentive and Awards Plan (the “2022 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, performance shares and other stock based compensation. A total of 2,000,000 shares of common stock have been reserved for issuance under the 2022 Plan. All options and SARs have been or will be granted with exercise prices at least equal to the fair market value of the shares on the date of grant. At December 31, 2022, the Company had 1,712,378 shares of common stock available for grant of share-based compensation under the 2022 Plan. The 2022 Plan replaced the 2013 Plan. No new awards will be granted under the 2013 Plan, but outstanding awards granted under the 2013 Plan will continue unaffected.
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 and the total related tax benefit for the periods presented (in thousands):
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Stock options and SARs |
|
$ |
1,472 |
|
|
$ |
1,420 |
|
Restricted stock |
|
|
2,598 |
|
|
|
2,241 |
|
Performance shares |
|
|
219 |
|
|
|
349 |
|
Total share-based compensation expense |
|
$ |
4,289 |
|
|
$ |
4,010 |
|
|
|
|
|
|
|
|
|
|
Related income tax benefit |
|
$ |
804 |
|
|
$ |
760 |
|
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. Assumptions regarding volatility, risk-free interest rate, expected term and dividend yield are required for the Black-Scholes model. The risk-free interest rate is based on the yield of a U.S. treasury bond with a similar maturity to the award’s expected life. The expected life for awards granted is based on the historical exercise patterns experienced by the Company when the award is made. The determination of expected stock price volatility for awards is based on historical Superior common stock prices over a period commensurate with the expected life. The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts.
The following table summarizes significant assumptions utilized to determine the fair value of stock options and SARs:
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Stock Options: |
|
|
|
|
|
|
|
|
Risk free interest rate |
|
|
1.6% -3.8 |
% |
|
|
0.2% -1.6 |
% |
Expected award life (years) |
|
|
3-10 |
|
|
|
3-10 |
|
Expected volatility |
|
|
46.8% -65.0 |
% |
|
|
46.9% -65.0 |
% |
Expected dividend yield |
|
|
2.4% -5.6 |
% |
|
|
1.6% -2.2 |
% |
Weighted average fair value per share at grant date |
|
$ |
5.39 |
|
|
$ |
9.91 |
|
|
|
|
|
|
|
|
|
|
SARs: |
|
|
|
|
|
|
|
|
Risk free interest rate |
|
|
1.6% -3.8 |
% |
|
|
0.2 |
% |
Expected award life (years) |
|
|
3-4 |
|
|
|
3 |
|
Expected volatility |
|
|
61.6% -64.8 |
% |
|
|
64.3 |
% |
Expected dividend yield |
|
|
2.4% -5.6 |
% |
|
|
1.6 |
% |
Weighted average fair value per share at grant date |
|
$ |
6.34 |
|
|
$ |
10.09 |
|
All stock options and SARs granted prior to August 3, 2018 vested immediately when granted. Awards issued thereafter vest between one and three 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 Plan and the 2022 Plan, as applicable.
A summary of stock option transactions during the year ended December 31, 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 |
|
|
324,091 |
|
|
|
14.41 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(85,840 |
) |
|
|
10.17 |
|
|
|
|
|
|
|
|
|
Lapsed or cancelled |
|
(55,414) |
|
|
|
19.34 |
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2022 |
|
|
962,775 |
|
|
|
15.89 |
|
|
|
3.26 |
|
|
|
301 |
|
Exercisable, December 31, 2022 |
|
|
512,161 |
|
|
|
14.48 |
|
|
|
2.19 |
|
|
|
282 |
|
Intrinsic value is the difference between the market value of our common stock and the exercise price of each stock option multiplied by the number of stock options outstanding for those stock options where the market value exceeds their exercise price. Options exercised during the years ended December 31, 2022 and 2021 had intrinsic values of $0.5 million and $4.5 million, respectively. During the years ended December 31, 2022 and 2021 the Company received $0.7 million and $2.7 million, respectively, in cash from stock option exercises. Current tax benefits of $0.9 million were recognized for these exercises during the year ended December 31, 2021. No current tax benefits on stock option exercises were recognized during the year ended December 31, 2022. Additionally, during the years ended December 31, 2022 and 2021 the Company received 9,738 and 17,365 shares, respectively, of its common stock as payment of the exercise price in the exercise of stock options for 11,784 and 24,591 shares, respectively, of its common stock. As of December 31, 2022, the Company had $1.4 million in unrecognized compensation related to nonvested stock options to be recognized over the remaining weighted average vesting period of 1.9 years.
A summary of stock-settled SARs transactions during the year ended December 31, 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 |
|
|
57,120 |
|
|
|
16.60 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(24,836 |
) |
|
|
15.16 |
|
|
|
|
|
|
|
|
|
Lapsed or cancelled |
|
|
(2,958 |
) |
|
|
18.84 |
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2022 |
|
|
320,385 |
|
|
|
15.23 |
|
|
|
2.23 |
|
|
|
69 |
|
Exercisable, December 31, 2022 |
|
|
232,228 |
|
|
|
13.48 |
|
|
|
1.60 |
|
|
|
67 |
|
SARs exercised during the years ended December 31, 2022 and 2021 had intrinsic values of $0.1 million and $0.8 million, respectively. Current tax benefits of $0.1 million were recognized for these exercises during the year ended December 31, 2021. No current tax benefits on SAR exercises were recognized during the year ended December 31, 2022. As of December 31, 2022, the Company had $0.2 million in unrecognized compensation related to nonvested SARs to be recognized over the remaining weighted average vesting period of 1.6 year.
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 and the 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 year ended December 31, 2022 follows:
|
|
|
|
|
|
Weighted Average |
|
|
|
No. of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Outstanding, January 1, 2022 |
|
|
458,166 |
|
|
$ |
19.51 |
|
Granted |
|
|
66,544 |
|
|
|
14.82 |
|
Vested |
|
|
(133,740 |
) |
|
|
15.24 |
|
Forfeited |
|
|
(18,500 |
) |
|
|
14.68 |
|
Outstanding, December 31, 2022 |
|
|
372,470 |
|
|
|
20.45 |
|
As of December 31, 2022, the Company had $4.6 million of unrecognized compensation cost related to nonvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 2.6 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 and the 2022 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 year ended December 31, 2022 follows:
|
|
|
|
|
|
Weighted Average |
|
|
|
No. of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Outstanding, January 1, 2022 |
|
|
193,523 |
|
|
$ |
21.50 |
|
Granted |
|
|
68,978 |
|
|
|
18.15 |
|
Vested |
|
|
(15,750 |
) |
|
|
16.97 |
|
Forfeited |
|
|
(47,300 |
) |
|
|
22.04 |
|
Outstanding, December 31, 2022 |
|
|
199,451 |
|
|
|
20.57 |
|
As of December 31, 2022, the Company had $2.4 million of unrecognized compensation cost related to nonvested performance share grants expected to be recognized over the remaining weighted average service period of 3.6 years.
NOTE 14 – 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 per share for the years ended December 31, 2022 and 2021:
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Net income used in the computation of basic and diluted net income per share (in thousands) |
|
$ |
(31,970 |
) |
|
$ |
29,440 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic |
|
|
15,764,859 |
|
|
|
15,438,849 |
|
Dilutive common stock equivalents |
|
|
- |
|
|
|
652,221 |
|
Weighted average shares outstanding - diluted |
|
|
15,764,859 |
|
|
|
16,091,070 |
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(2.03 |
) |
|
$ |
1.91 |
|
Diluted |
|
$ |
(2.03 |
) |
|
$ |
1.83 |
|
Diluted weighted average shares outstanding excludes shares of common stock of 400,381 for the year ended December 31, 2022 as their inclusion would have been antidilutive given the Company’s net loss.
Awards to purchase 687,117 and 171,522 shares of common stock with weighted average exercise prices of $21.06 and $25.42, were outstanding during the years ended December 31, 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.
NOTE 15 – 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 17, 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):
|
|
Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Branded Products Segment: |
|
|
|
|
|
|
|
|
Branded products |
|
$ |
381,363 |
|
|
$ |
309,906 |
|
Personal protective equipment |
|
|
6,568 |
|
|
|
30,581 |
|
Total Branded Products Segment |
|
$ |
387,931 |
|
|
$ |
340,487 |
|
|
|
|
|
|
|
|
|
|
Healthcare Apparel Segment: |
|
|
|
|
|
|
|
|
Healthcare apparel |
|
$ |
110,505 |
|
|
$ |
131,267 |
|
Personal protective equipment |
|
|
2,816 |
|
|
|
8,021 |
|
Total Healthcare Apparel Segment |
|
$ |
113,321 |
|
|
$ |
139,288 |
|
|
|
|
|
|
|
|
|
|
Contact Centers Segment: |
|
|
|
|
|
|
|
|
Contact centers services |
|
$ |
84,218 |
|
|
$ |
64,312 |
|
Net intersegment eliminations |
|
|
(6,639 |
) |
|
|
(7,101 |
) |
Total Contact Centers Segment |
|
$ |
77,579 |
|
|
$ |
57,211 |
|
|
|
|
|
|
|
|
|
|
Consolidated Net Sales |
|
$ |
578,831 |
|
|
$ |
536,986 |
|
Contract Assets and Contract Liabilities
The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers (in thousands):
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Accounts receivable |
|
$ |
104,813 |
|
|
$ |
107,053 |
|
Current contract assets |
|
|
52,980 |
|
|
|
38,018 |
|
Current contract liabilities |
|
|
2,213 |
|
|
|
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 year ended December 31, 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 year ended December 31, 2022, $7.7 million of revenue was recognized from the contract liabilities balance as of December 31, 2021.
NOTE 16 – Stock Repurchase Plan:
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. The Company did not reacquire and retire shares of its common stock under this program during the years ended December 31, 2022 and 2021. At December 31, 2022, the Company had 657,451 shares remaining under its common stock repurchase program. 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.
NOTE 17 – 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, technology, transportation and other industries. The segment currently has sales offices in the United States, Canada, Brazil, the United Kingdom and Colombia, 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 in 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. No customer accounted for more than 10% of the Company’s total net sales in 2022 or 2021.
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 Year Ended December 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
387,931 |
|
|
$ |
113,321 |
|
|
$ |
84,218 |
|
|
$ |
(6,639 |
) |
|
$ |
- |
|
|
$ |
578,831 |
|
Cost of goods sold |
|
|
273,134 |
|
|
|
80,719 |
|
|
|
34,439 |
|
|
|
(2,820 |
) |
|
|
- |
|
|
|
385,472 |
|
Gross margin |
|
|
114,797 |
|
|
|
32,602 |
|
|
|
49,779 |
|
|
|
(3,819 |
) |
|
|
- |
|
|
|
193,359 |
|
Selling and administrative expenses |
|
|
90,118 |
|
|
|
39,295 |
|
|
|
33,631 |
|
|
|
(3,819 |
) |
|
|
17,095 |
|
|
|
176,320 |
|
Goodwill impairment charge |
|
|
25,595 |
|
|
|
20,323 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
45,918 |
|
Intangible assets impairment charge |
|
|
5,581 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,581 |
|
Other periodic pension cost |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,116 |
|
|
|
2,116 |
|
Gain on sale of property, plant and equipment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,435 |
|
|
|
3,435 |
|
Interest expense |
|
|
288 |
|
|
|
118 |
|
|
|
- |
|
|
|
- |
|
|
|
4,488 |
|
|
|
4,894 |
|
Income (loss) before taxes on income |
|
$ |
(6,785 |
) |
|
$ |
(27,134 |
) |
|
$ |
16,148 |
|
|
$ |
- |
|
|
$ |
(20,264 |
) |
|
$ |
(38,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
6,465 |
|
|
$ |
3,946 |
|
|
$ |
2,373 |
|
|
$ |
- |
|
|
$ |
220 |
|
|
$ |
13,004 |
|
Capital expenditures |
|
$ |
4,643 |
|
|
$ |
1,169 |
|
|
$ |
4,876 |
|
|
$ |
- |
|
|
$ |
330 |
|
|
$ |
11,018 |
|
Total assets |
|
$ |
224,116 |
|
|
$ |
150,335 |
|
|
$ |
43,368 |
|
|
$ |
- |
|
|
$ |
39,122 |
|
|
$ |
456,941 |
|
|
|
Branded Products |
|
|
Healthcare Apparel |
|
|
Contact Centers |
|
|
Intersegment Eliminations |
|
|
Other |
|
|
Total |
|
As of and For the Year Ended December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
340,487 |
|
|
$ |
139,288 |
|
|
$ |
64,312 |
|
|
$ |
(7,101 |
) |
|
$ |
- |
|
|
$ |
536,986 |
|
Cost of goods sold |
|
|
240,331 |
|
|
|
87,142 |
|
|
|
26,671 |
|
|
|
(3,172 |
) |
|
|
- |
|
|
|
350,972 |
|
Gross margin |
|
|
100,156 |
|
|
|
52,146 |
|
|
|
37,641 |
|
|
|
(3,929 |
) |
|
|
- |
|
|
|
186,014 |
|
Selling and administrative expenses |
|
|
70,035 |
|
|
|
35,733 |
|
|
|
23,756 |
|
|
|
(3,929 |
) |
|
|
16,465 |
|
|
|
142,060 |
|
Other periodic pension cost |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,786 |
|
|
|
1,786 |
|
Pension plan termination charge |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,821 |
|
|
|
7,821 |
|
Interest expense |
|
|
73 |
|
|
|
154 |
|
|
|
- |
|
|
|
- |
|
|
|
993 |
|
|
|
1,220 |
|
Income before taxes on income |
|
$ |
30,048 |
|
|
$ |
16,259 |
|
|
$ |
13,885 |
|
|
$ |
- |
|
|
$ |
(27,065 |
) |
|
$ |
33,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
4,327 |
|
|
$ |
3,372 |
|
|
$ |
1,483 |
|
|
$ |
- |
|
|
$ |
109 |
|
|
$ |
9,291 |
|
Capital expenditures |
|
$ |
9,415 |
|
|
$ |
4,860 |
|
|
$ |
3,421 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
17,696 |
|
Total assets |
|
$ |
244,410 |
|
|
$ |
170,582 |
|
|
$ |
29,315 |
|
|
$ |
- |
|
|
$ |
25,938 |
|
|
$ |
470,245 |
|
NOTE 18 – 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.
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 |
|
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 Company recognized amortization expense on these acquired intangible assets of $0.4 million and $0.3 million during the years ended December 31, 2022 and 2021, respectively. The Gifts by Design trade name was fully impaired during the year ended December 31, 2022 as a result of the Company’s rebranding efforts during the second quarter of 2022. See Note 6 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 year ended December 31, 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 6 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) $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 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 Sutter’s Mill based on their estimated fair values as of the effective date of the transaction (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 Company recognized amortization expense on these acquired intangible assets of $0.2 million during the year ended December 31, 2022. The Sutter’s Mill Specialties trade name was fully impaired during the year ended December 31, 2022 as a result of the Company’s rebranding efforts during the second quarter of 2022. See Note 6 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 year ended December 31, 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 6 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, (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 |
|
Assets Acquired and Liabilities Assumed
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 Guardian based on their estimated fair values as of the effective date of the transaction (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 Company recognized amortization expense on these acquired intangible assets of $0.7 million during the year ended December 31, 2022. 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 year ended December 31, 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 6 for further details.