UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
WASHINGTON, D.C. 20549 |
FORM
|
(Mark One) |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the quarterly period ended September 30, | |||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the transition period from ________ to __________ |
Commission file number: 001-05869 |
Exact name of registrant as specified in its charter: |
SUPERIOR GROUP OF COMPANIES, INC. |
State or other jurisdiction of incorporation or organization: | I.R.S. Employer Identification No.: |
Florida | 11-1385670 |
Address of principal executive offices: | ||||||||
10055 Seminole Boulevard | ||||||||
Seminole, Florida 33772-2539 |
Registrant’s telephone number, including area code: | ||||||||
727-397-9611 |
Former name, former address and former fiscal year, if changed since last report: ___________________ |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock $0.001 par value per share | SGC | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☒ |
| |
Non-accelerated filer ☐ |
| Smaller Reporting Company ☒ | |
|
| Emerging Growth Company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock of the registrant outstanding as of October 26, 20212022 was 15,971,21116,335,940 shares.
EXPLANATORY NOTE
Superior Group of Companies, Inc. (the “Company,” “we,” “us” or “our”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 (the “Amendment” or “Form 10-Q/A”) to amend and restate certain financial information and related footnote and MD&A disclosures in its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 originally filed with the Securities and Exchange Commission (the “SEC”) on November 3, 2021 (the “Existing Quarterly Report” or “original Form 10-Q”). This Amendment also amends the disclosure regarding disclosure controls and procedures and internal control over financial reporting in Item 4 of Part I of the Existing Quarterly Report, amends the disclosure regarding Risk Factors in Item 1A of Part II of the Existing Quarterly Report, and includes as exhibits new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, from the Company's Chief Executive Officer and Chief Financial Officer dated as of the filing date of this Form 10-Q/A. Item 6 of Part II of the Existing Quarterly Report is amended to reflect the filing of these new certifications.
Background of Restatement
On March 21, 2022, the management and the Audit Committee of the Board of Directors of the Company concluded that, due to a failure to reverse deferred tax liabilities associated with the termination of the Company’s two qualified defined benefit pension plans in the second quarter 2021, the Company's previously issued unaudited interim condensed consolidated financial statements (collectively “financial statements,” and individually “statements of comprehensive income,” “balance sheets,” “statements of shareholders’ equity,” and “statements of cash flows”) as of and for the three and nine months ended September 30, 2021 included in the Existing Quarterly Report should be restated in this Form 10-Q/A. This restatement results in non-cash, non-operating financial statement corrections.
Specifically, management and the Audit Committee concluded that deferred tax liabilities on the Company’s balance sheet related to previous contributions to the pension plans in excess of book expense recognized should have been reversed when the Company recognized the $6.9 million pension termination charge in the second quarter 2021. The impact of this reversal on the Company’s:
• statement of comprehensive income for the nine months ended September 30, 2021 is an additional tax benefit of approximately $1.8 million, and
• balance sheet as of September 30, 2021 is an increase in deferred tax assets of approximately $0.4 million and a decrease in deferred tax liabilities of approximately $1.4 million.
With corresponding impacts on the statement of cash flows and statements of shareholders’ equity. Each of these adjustments is a non-cash item.
The financial information that has been previously filed or otherwise reported for this period is superseded by the information in this Form 10-Q/A, and the financial statements and related financial information contained in the Existing Quarterly Report should no longer be relied upon. On March 23, 2022, the Company filed a Current Report on Form 8-K disclosing the non-reliance on the financial statements included in the Existing Quarterly Report.
This Amendment amends and restates Items 1, 2 and 4 of Part I and Items 1A and 6 of Part II of the Existing Quarterly Report, and no other information included in the Existing Quarterly Report is amended hereby. The explanatory caption, if any, at the beginning of each item of this Amendment sets forth the nature of any revisions to that item.
All referenced amounts in this Amendment for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.
Except as described above, no other information included in the Existing Quarterly Report is being amended or updated by this Amendment and this Amendment does not purport to reflect any information or events subsequent to the Existing Quarterly Report.
This Amendment continues to describe the conditions as of the date of the Existing Quarterly Report and, except as expressly contained herein, we have not updated, modified or supplemented the disclosures contained in the Existing Quarterly Report. Accordingly, this Amendment should be read in conjunction with the Existing Quarterly Report and with our filings with the SEC subsequent to the Existing Quarterly Report.
Internal Control Considerations
In connection with the restatement, management has reevaluated the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting as of September 30, 2021. The Company’s management has concluded that in light of the error described above, a material weakness existed in the Company’s internal control over financial reporting related to accounting for income taxes as of September 30, 2021, and that the Company’s disclosure controls and procedures were not effective as of such date.
Remediation Efforts with Respect to the Material Weakness
The Company’s management, under the oversight of the Audit Committee, is in the process of developing a plan to remediate the material weakness which is expected to include the following measures:
• implement a tax reporting software solution to streamline our income tax process and enhance our state and federal income tax reporting capabilities;
• hire additional qualified personnel to bolster the Company's in-house tax capabilities and capacity; and
• evaluate and, if necessary, enhance the level of precision in the management review controls related to income taxes.
The material weakness will not be considered remediated until management completes the remediation plan above, the enhanced controls operate for a sufficient period of time, and management has concluded, through testing, that the related controls are effective. The Company will monitor the effectiveness of its remediation plan and will refine its remediation plan as appropriate.
For a discussion of management’s consideration of our disclosure controls and procedures, internal control over financial reporting, and the material weakness identified, see Part I, Item 4, “Controls and Procedures” of this Form 10-Q/A.
TABLE OF CONTENTS
SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(Unaudited) |
(In thousands, except shares and per share data) |
| Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
Net sales | $ | 123,326 | $ | 127,737 | $ | 138,703 | $ | 123,326 | ||||||||
Costs and expenses: | ||||||||||||||||
Cost of goods sold | 77,512 | 80,285 | 88,066 | 77,512 | ||||||||||||
Selling and administrative expenses | 35,059 | 34,917 | 43,815 | 35,059 | ||||||||||||
Goodwill impairment charge | 21,460 | - | ||||||||||||||
Other periodic pension costs | 459 | 212 | 528 | 459 | ||||||||||||
Interest expense | 320 | 239 | 1,794 | 320 | ||||||||||||
| 113,350 | 115,653 | 155,663 | 113,350 | |||||||||||||
Income before taxes on income | 9,976 | 12,084 | ||||||||||||||
Income tax expense | 1,780 | 2,140 | ||||||||||||||
Net income | $ | 8,196 | $ | 9,944 | ||||||||||||
Income (loss) before taxes on income | (16,960 | ) | 9,976 | |||||||||||||
Income tax expense (benefit) | (4,241 | ) | 1,780 | |||||||||||||
Net income (loss) | $ | (12,719 | ) | $ | 8,196 | |||||||||||
Net income per share: | ||||||||||||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | 0.53 | $ | 0.66 | $ | (0.80 | ) | $ | 0.53 | |||||||
Diluted | $ | 0.51 | $ | 0.63 | $ | (0.80 | ) | $ | 0.51 | |||||||
Weighted average shares outstanding during the period: | ||||||||||||||||
Basic | 15,528,534 | 15,084,300 | 15,806,852 | 15,528,534 | ||||||||||||
Diluted | 16,099,850 | 15,711,122 | 15,806,852 | 16,099,850 | ||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Defined benefit pension plans: | ||||||||||||||||
Recognition of net losses included in net periodic pension costs | $ | 278 | $ | 232 | $ | 319 | $ | 278 | ||||||||
Recognition of settlement loss included in net periodic pension costs | 0 | 62 | ||||||||||||||
Loss on cash flow hedging activities | (5 | ) | (5 | ) | (37 | ) | (5 | ) | ||||||||
Foreign currency translation adjustment | (570 | ) | (145 | ) | (521 | ) | (570 | ) | ||||||||
Other comprehensive income | (297 | ) | 144 | |||||||||||||
Comprehensive income | $ | 7,899 | $ | 10,088 | ||||||||||||
Other comprehensive loss | (239 | ) | (297 | ) | ||||||||||||
Comprehensive income (loss) | $ | (12,958 | ) | $ | 7,899 | |||||||||||
Cash dividends per common share | $ | 0.12 | $ | 0.20 | $ | 0.14 | $ | 0.12 | ||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements. |
SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
(Unaudited) |
(In thousands, except shares and per share data) |
Nine Months Ended September 30, | ||||||||||||||||
2021 | 2020 | Nine Months Ended September 30, | ||||||||||||||
| (Restated) | 2022 | 2021 | ||||||||||||||
Net sales | $ | 394,960 | $ | 381,341 | $ | 430,218 | $ | 394,960 | ||||||||
Costs and expenses: | ||||||||||||||||
Cost of goods sold | 252,945 | 244,500 | 281,667 | 252,945 | ||||||||||||
Selling and administrative expenses | 104,076 | 98,704 | 131,998 | 104,076 | ||||||||||||
Goodwill impairment charge | 45,918 | - | ||||||||||||||
Intangible assets impairment charge | 5,581 | - | ||||||||||||||
Other periodic pension costs | 1,328 | 830 | 1,584 | 1,328 | ||||||||||||
Pension plan termination charge | 6,945 | 0 | - | 6,945 | ||||||||||||
Interest expense | 925 | 1,732 | 2,676 | 925 | ||||||||||||
| 366,219 | 345,766 | 469,424 | 366,219 | |||||||||||||
Income before taxes on income | 28,741 | 35,575 | ||||||||||||||
Income tax expense | 3,690 | 7,090 | ||||||||||||||
Net income | $ | 25,051 | $ | 28,485 | ||||||||||||
Income (loss) before taxes on income | (39,206 | ) | 28,741 | |||||||||||||
Income tax expense (benefit) | (5,042 | ) | 3,690 | |||||||||||||
Net income (loss) | $ | (34,164 | ) | $ | 25,051 | |||||||||||
Net income per share: | ||||||||||||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | 1.63 | $ | 1.89 | $ | (2.17 | ) | $ | 1.63 | |||||||
Diluted | $ | 1.56 | $ | 1.85 | $ | (2.17 | ) | $ | 1.56 | |||||||
Weighted average shares outstanding during the period | ||||||||||||||||
Weighted average shares outstanding during the period: | ||||||||||||||||
Basic | 15,394,427 | 15,041,738 | 15,739,381 | 15,394,427 | ||||||||||||
Diluted | 16,059,686 | 15,361,035 | 15,739,381 | 16,059,686 | ||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Defined benefit pension plans: | ||||||||||||||||
Recognition of net losses included in net periodic pension costs | $ | 1,383 | $ | 712 | $ | 957 | $ | 1,383 | ||||||||
Recognition of settlement loss included in net periodic pension costs | 0 | 314 | ||||||||||||||
Recognition of net losses included in pension plan termination charges | 5,230 | 0 | - | 5,230 | ||||||||||||
Loss on cash flow hedging activities | (16 | ) | (16 | ) | (47 | ) | (16 | ) | ||||||||
Foreign currency translation adjustment | (184 | ) | (1,546 | ) | (422 | ) | (184 | ) | ||||||||
Other comprehensive income (loss) | 6,413 | (536 | ) | |||||||||||||
Comprehensive income | $ | 31,464 | $ | 27,949 | ||||||||||||
Other comprehensive income | 488 | 6,413 | ||||||||||||||
Comprehensive income (loss) | $ | (33,676 | ) | $ | 31,464 | |||||||||||
Cash dividends per common share | $ | 0.34 | $ | 0.30 | $ | 0.40 | $ | 0.34 | ||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||
| |||||||||
(In thousands, except share and par value data) |
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
| (Restated) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 6,408 | $ | 5,172 | $ | 18,908 | $ | 8,935 | ||||||||
Accounts receivable, less allowance for doubtful accounts of $5,852 and $7,667, respectively | 92,500 | 101,902 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $6,946 and $6,393, respectively | 103,273 | 107,053 | ||||||||||||||
Accounts receivable - other | 2,338 | 1,356 | 3,696 | 5,546 | ||||||||||||
Inventories | 103,371 | 89,766 | 135,947 | 120,555 | ||||||||||||
Contract assets | 37,575 | 39,231 | 48,085 | 38,018 | ||||||||||||
Prepaid expenses and other current assets | 15,633 | 11,030 | 18,819 | 19,162 | ||||||||||||
Total current assets | 257,825 | 248,457 | 328,728 | 299,269 | ||||||||||||
Property, plant and equipment, net | 46,928 | 36,644 | 55,103 | 49,690 | ||||||||||||
Operating lease right-of-use assets | 6,299 | 3,826 | 9,605 | 8,246 | ||||||||||||
| Deferred tax asset | 352 | 0 | 5,678 | - | ||||||||||||
Intangible assets, net | 59,414 | 58,746 | 57,090 | 60,420 | ||||||||||||
Goodwill | 38,557 | 36,116 | - | 39,434 | ||||||||||||
Other assets | 13,154 | 10,135 | 11,103 | 13,186 | ||||||||||||
Total assets | $ | 422,529 | $ | 393,924 | $ | 467,307 | $ | 470,245 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 38,096 | $ | 39,327 | $ | 44,936 | $ | 52,340 | ||||||||
Other current liabilities | 36,069 | 44,670 | 40,246 | 38,989 | ||||||||||||
Current portion of long-term debt | 15,286 | 15,286 | 4,688 | 15,286 | ||||||||||||
Current portion of acquisition-related contingent liabilities | 3,929 | 5,589 | 1,368 | 4,507 | ||||||||||||
Total current liabilities | 93,380 | 104,872 | 91,238 | 111,122 | ||||||||||||
Long-term debt | 80,882 | 72,372 | 156,461 | 100,845 | ||||||||||||
Long-term pension liability | 14,548 | 14,574 | 15,795 | 15,420 | ||||||||||||
Long-term acquisition-related contingent liabilities | 0 | 1,892 | 2,349 | 2,569 | ||||||||||||
Long-term operating lease liabilities | 2,189 | 1,599 | 4,573 | 3,729 | ||||||||||||
Deferred tax liability | 0 | 450 | - | 359 | ||||||||||||
Other long-term liabilities | 8,795 | 6,535 | 7,796 | 9,211 | ||||||||||||
Commitments and contingencies (Note 6) | ||||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Preferred stock, $.001 par value - authorized 300,000 shares (none issued) | 0 | 0 | ||||||||||||||
Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding 15,960,253 and 15,391,660 shares, respectively. | 16 | 15 | ||||||||||||||
Preferred stock, $.001 par value - authorized 300,000 shares (none issued) | - | - | ||||||||||||||
Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding 16,332,116 and 16,127,505 shares, respectively | 16 | 16 | ||||||||||||||
Additional paid-in capital | 66,996 | 61,844 | 71,746 | 69,351 | ||||||||||||
Retained earnings | 161,511 | 141,972 | 123,058 | 163,836 | ||||||||||||
Accumulated other comprehensive income (loss), net of tax: | ||||||||||||||||
Pensions | (4,285 | ) | (10,898 | ) | (3,620 | ) | (4,577 | ) | ||||||||
Cash flow hedges | 53 | 69 | - | 47 | ||||||||||||
Foreign currency translation adjustment | (1,556 | ) | (1,372 | ) | (2,105 | ) | (1,683 | ) | ||||||||
Total shareholders’ equity | 222,735 | 191,630 | 189,095 | 226,990 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 422,529 | $ | 393,924 | $ | 467,307 | $ | 470,245 | ||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements. |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
| THREE MONTHS ENDED September 30, |
(Unaudited) |
(In thousands, except shares and per share data) |
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Other | Other | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Comprehensive | Total | Additional | Comprehensive | Total | |||||||||||||||||||||||||||||||||||||||||||
Common | Common | Paid-In | Retained | (Loss) Income, | Shareholders’ | Common | Common | Paid-In | Retained | (Loss) Income, | Shareholders’ | |||||||||||||||||||||||||||||||||||||
Shares | Stock | Capital | Earnings | net of tax | Equity | Shares | Stock | Capital | Earnings | net of tax | Equity | |||||||||||||||||||||||||||||||||||||
Balance, July 1, 2020 | 15,231,781 | $ | 15 | $ | 58,381 | $ | 124,243 | $ | (8,164 | ) | $ | 174,475 | ||||||||||||||||||||||||||||||||||||
Common shares issued upon exercise of options, net | 109,168 | 1,540 | (166 | ) | 1,374 | |||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 729 | 729 | ||||||||||||||||||||||||||||||||||||||||||||||
Tax withheld on exercise of Stock Appreciation Rights (SARS) | (32 | ) | (32 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.20 per share) | (3,053 | ) | (3,053 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 9,944 | 9,944 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges, net of taxes of $1 | (5 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Pensions, net of taxes of $92 | 294 | 294 | ||||||||||||||||||||||||||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $0 | (145 | ) | (145 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2020 | 15,340,949 | $ | 15 | $ | 60,618 | $ | 130,968 | $ | (8,020 | ) | $ | 183,581 | ||||||||||||||||||||||||||||||||||||
| (Restated) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, July 1, 2021 | 15,824,530 | $ | 16 | $ | 65,578 | $ | 155,212 | $ | (5,491 | ) | $ | 215,315 | 15,824,530 | $ | 16 | $ | 65,578 | $ | 155,212 | $ | (5,491 | ) | $ | 215,315 | ||||||||||||||||||||||||
Common shares issued upon exercise of options and SARs, net | 31,446 | 330 | 0 | 330 | 31,446 | 330 | 330 | |||||||||||||||||||||||||||||||||||||||||
Restricted shares issued | 104,277 | 0 | 104,277 | - | ||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 1,088 | 1,088 | 1,088 | 1,088 | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.12 per share) | (1,897 | ) | (1,897 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.12 per share) | (1,897 | ) | (1,897 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 8,196 | 8,196 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges, net of taxes of $0 | (5 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Pensions, net of taxes of $96 | 278 | 278 | ||||||||||||||||||||||||||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $0 | (570 | ) | (570 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net income | 8,196 | 8,196 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges, net of taxes of $0 | (5 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Pensions, net of taxes of $96 | 278 | 278 | ||||||||||||||||||||||||||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $0 | (570 | ) | (570 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2021 | 15,960,253 | $ | 16 | $ | 66,996 | $ | 161,511 | $ | (5,788 | ) | $ | 222,735 | 15,960,253 | $ | 16 | $ | 66,996 | $ | 161,511 | $ | (5,788 | ) | $ | 222,735 | ||||||||||||||||||||||||
Balance, July 1, 2022 | 16,318,059 | $ | 16 | $ | 70,629 | $ | 137,986 | $ | (5,486 | ) | $ | 203,145 | ||||||||||||||||||||||||||||||||||||
Common shares issued upon exercise of options and SARs, net | 24,057 | 189 | 189 | |||||||||||||||||||||||||||||||||||||||||||||
Restricted shares issued, net of forfeitures | (10,000 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 928 | 928 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.14 per share) | (2,209 | ) | (2,209 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (12,719 | ) | (12,719 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges, net of taxes of $5 | (37 | ) | (37 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Pensions, net of taxes of $109 | 319 | 319 | ||||||||||||||||||||||||||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $0 | (521 | ) | (521 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2022 | 16,332,116 | $ | 16 | $ | 71,746 | $ | 123,058 | $ | (5,725 | ) | $ | 189,095 | ||||||||||||||||||||||||||||||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements. |
SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
| Nine MONTHS ENDED September 30, 2022 AND 2021 |
(Unaudited) |
(In thousands, except shares and per share data) |
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Other | Other | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Comprehensive | Total | Additional | Comprehensive | Total | |||||||||||||||||||||||||||||||||||||||||||
Common | Common | Paid-In | Retained | (Loss) Income, | Shareholders’ | Common | Common | Paid-In | Retained | (Loss) Income, | Shareholders’ | |||||||||||||||||||||||||||||||||||||
Shares | Stock | Capital | Earnings | net of tax | Equity | Shares | Stock | Capital | Earnings | net of tax | Equity | |||||||||||||||||||||||||||||||||||||
Balance, January 1, 2020 | 15,227,604 | $ | 15 | $ | 57,442 | $ | 107,581 | $ | (7,484 | ) | $ | 157,554 | ||||||||||||||||||||||||||||||||||||
Common shares issued upon exercise of options | 118,788 | 1,590 | (183 | ) | 1,407 | |||||||||||||||||||||||||||||||||||||||||||
Restricted shares issued | 38,015 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 1,790 | 1,790 | ||||||||||||||||||||||||||||||||||||||||||||||
Tax benefit from vesting of acquisition-related restricted stock | (13 | ) | (13 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Tax withheld on exercise of Stock Appreciation Rights (SARS) | (32 | ) | (32 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.30 per share) | (4,574 | ) | (4,574 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Common stock reacquired and retired | (43,458 | ) | (159 | ) | (341 | ) | (500 | ) | ||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 28,485 | 28,485 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges, net of taxes of $2 | (16 | ) | (16 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Pensions, net of taxes of $322 | 1,026 | 1,026 | ||||||||||||||||||||||||||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $449 | (1,546 | ) | (1,546 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2020 | 15,340,949 | $ | 15 | $ | 60,618 | $ | 130,968 | $ | (8,020 | ) | $ | 183,581 | ||||||||||||||||||||||||||||||||||||
| (Restated) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2021 | 15,391,660 | $ | 15 | $ | 61,844 | $ | 141,972 | $ | (12,201 | ) | $ | 191,630 | 15,391,660 | $ | 15 | $ | 61,844 | $ | 141,972 | $ | (12,201 | ) | $ | 191,630 | ||||||||||||||||||||||||
Common shares issued upon exercise of options and SARs, net | 261,604 | 1 | 2,629 | (178 | ) | 2,452 | 261,604 | 1 | 2,629 | (178 | ) | 2,452 | ||||||||||||||||||||||||||||||||||||
Performance based shares issued | 42,823 | 0 | 42,823 | - | ||||||||||||||||||||||||||||||||||||||||||||
Restricted shares issued | 264,166 | 0 | 264,166 | - | ||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 2,757 | 2,757 | 2,757 | 2,757 | ||||||||||||||||||||||||||||||||||||||||||||
Tax withheld on exercise of performance based shares | (405 | ) | (405 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Tax withheld on vesting of performance based shares | (405 | ) | (405 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Tax benefit from vesting of acquisition-related restricted stock | 171 | 171 | 171 | 171 | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.34 per share) | (5,334 | ) | (5,334 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.34 per share) | (5,334 | ) | (5,334 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings | 25,051 | 25,051 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges, net of taxes of $2 | (16 | ) | (16 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Pensions, net of taxes of $2,737 | 6,613 | 6,613 | ||||||||||||||||||||||||||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $0 | (184 | ) | (184 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net income | 25,051 | 25,051 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges, net of taxes of $2 | (16 | ) | (16 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Pensions, net of taxes of $2,737 | 6,613 | 6,613 | ||||||||||||||||||||||||||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $0 | (184 | ) | (184 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2021 | 15,960,253 | $ | 16 | $ | 66,996 | $ | 161,511 | $ | (5,788 | ) | $ | 222,735 | 15,960,253 | $ | 16 | $ | 66,996 | $ | 161,511 | $ | (5,788 | ) | $ | 222,735 | ||||||||||||||||||||||||
Balance, January 1, 2022 | 16,127,505 | $ | 16 | $ | 69,351 | $ | 163,836 | $ | (6,213 | ) | $ | 226,990 | ||||||||||||||||||||||||||||||||||||
Cumulative-effect adjustment from adoption of ASU 2016-13 | (76 | ) | (76 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Common shares issued upon exercise of options and SARs, net | 72,068 | 842 | (158 | ) | 684 | |||||||||||||||||||||||||||||||||||||||||||
Performance based shares issued | 11,707 | - | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted shares issued, net of forfeitures | 11,843 | - | ||||||||||||||||||||||||||||||||||||||||||||||
Restricted shares issued in conjunction with acquisition of business | 116,550 | 2,000 | 2,000 | |||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 3,382 | 3,382 | ||||||||||||||||||||||||||||||||||||||||||||||
Tax withheld on vesting of restricted shares and performance based shares | (7,557 | ) | (232 | ) | (232 | ) | ||||||||||||||||||||||||||||||||||||||||||
Written put options | (3,597 | ) | (3,597 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.40 per share) | (6,380 | ) | (6,380 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (34,164 | ) | (34,164 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges, net of taxes of $6 | (47 | ) | (47 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Pensions, net of taxes of $329 | 957 | 957 | ||||||||||||||||||||||||||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $0 | (422 | ) | (422 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2022 | 16,332,116 | $ | 16 | $ | 71,746 | $ | 123,058 | $ | (5,725 | ) | $ | 189,095 | ||||||||||||||||||||||||||||||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
(In thousands) |
| Nine Months Ended September 30, | ||||||||||||||||
2021 | 2020 | Nine Months Ended September 30, | ||||||||||||||
| (Restated) | 2022 | 2021 | ||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net income | $ | 25,051 | $ | 28,485 | ||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||
Net income (loss) | $ | (34,164 | ) | $ | 25,051 | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used) in operating activities: | ||||||||||||||||
Depreciation and amortization | 6,719 | 5,972 | 9,504 | 6,719 | ||||||||||||
Goodwill impairment charge | 45,918 | - | ||||||||||||||
Intangible assets impairment charge | 5,581 | - | ||||||||||||||
Inventory write-downs | 5,781 | 883 | ||||||||||||||
Provision for bad debts - accounts receivable | 1,715 | 6,099 | 3,486 | 1,715 | ||||||||||||
Share-based compensation expense | 2,757 | 1,790 | 3,382 | 2,757 | ||||||||||||
Deferred income tax benefit | (2,927 | ) | (3,654 | ) | (6,361 | ) | (2,927 | ) | ||||||||
Change in fair value of acquisition-related contingent liabilities | 2,310 | 2,759 | 284 | 2,310 | ||||||||||||
Change in fair value of written put options | (1,791 | ) | - | |||||||||||||
Pension plan termination charge | 6,945 | 0 | - | 6,945 | ||||||||||||
Changes in assets and liabilities, net of acquisition of business: | ||||||||||||||||
Changes in assets and liabilities, net of acquisition of businesses: | ||||||||||||||||
Accounts receivable | 7,544 | (12,225 | ) | 1,600 | 7,544 | |||||||||||
Accounts receivable - other | (732 | ) | (1,121 | ) | 978 | (732 | ) | |||||||||
Contract assets | 1,656 | 3,049 | (10,222 | ) | 1,656 | |||||||||||
Inventories | (13,667 | ) | (7,306 | ) | (19,242 | ) | (14,550 | ) | ||||||||
Prepaid expenses and other current assets | (4,445 | ) | (3,592 | ) | 579 | (4,445 | ) | |||||||||
Other assets | (1,462 | ) | 1 | 2,677 | (1,462 | ) | ||||||||||
Accounts payable and other current liabilities | (12,287 | ) | 29,167 | (9,561 | ) | (12,287 | ) | |||||||||
Payment of acquisition-related contingent liabilities | (4,220 | ) | 0 | (3,346 | ) | (4,220 | ) | |||||||||
Long-term pension liability | 860 | 864 | 1,662 | 860 | ||||||||||||
Other long-term liabilities | 2,344 | 779 | (1,249 | ) | 2,344 | |||||||||||
Net cash provided by operating activities | 18,161 | 51,067 | ||||||||||||||
Net cash provided by (used in) operating activities | (4,504 | ) | 18,161 | |||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
Additions to property, plant and equipment | (14,455 | ) | (5,711 | ) | (11,221 | ) | (14,455 | ) | ||||||||
Acquisition of business | (6,026 | ) | 0 | |||||||||||||
Acquisition of businesses | (11,202 | ) | (6,026 | ) | ||||||||||||
Net cash used in investing activities | (20,481 | ) | (5,711 | ) | (22,423 | ) | (20,481 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Proceeds from borrowings of debt | 173,436 | 137,559 | 320,143 | 173,436 | ||||||||||||
Repayment of debt | (165,023 | ) | (180,112 | ) | (274,898 | ) | (165,023 | ) | ||||||||
Debt issuance costs | (869 | ) | - | |||||||||||||
Payment of cash dividends | (5,334 | ) | (4,574 | ) | (6,380 | ) | (5,334 | ) | ||||||||
Payment of acquisition-related contingent liability | (1,641 | ) | (1,966 | ) | ||||||||||||
Payment of acquisition-related contingent liabilities | (1,416 | ) | (1,641 | ) | ||||||||||||
Proceeds received on exercise of stock options | 2,452 | 1,407 | 684 | 2,452 | ||||||||||||
Tax withholdings on exercise of performance based stock | (405 | ) | (32 | ) | ||||||||||||
Tax (provision) benefit from vesting of acquisition-related restricted stock | 171 | (13 | ) | |||||||||||||
Common stock reacquired and retired | 0 | (500 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 3,656 | (48,231 | ) | |||||||||||||
Tax withholdings on vesting of restricted shares and performance based shares | (232 | ) | (405 | ) | ||||||||||||
Tax benefit from vesting of acquisition-related restricted stock | - | 171 | ||||||||||||||
Net cash provided by financing activities | 37,032 | 3,656 | ||||||||||||||
Effect of currency exchange rates on cash | (100 | ) | (512 | ) | (132 | ) | (100 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | 1,236 | (3,387 | ) | |||||||||||||
Net increase in cash and cash equivalents | 9,973 | 1,236 | ||||||||||||||
Cash and cash equivalents balance, beginning of period | 5,172 | 9,038 | 8,935 | 5,172 | ||||||||||||
Cash and cash equivalents balance, end of period | $ | 6,408 | $ | 5,651 | $ | 18,908 | $ | 6,408 | ||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements. |
Superior Group of Companies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Throughout these notes to the restated condensed consolidated financial statements, all referenced amounts for the quarterly period ended September 30,2021 reflect the balances and amounts on a restated basis.
NOTE 1 – Description of Business and Basis of Presentation (Restated):
Description of business
Superior Group of Companies, Inc. (together with its subsidiaries, “the Company,” “Superior,” “we,” “our,” or “us”) was organized in 1920 and was incorporated in 1922 as a New York company under the name Superior Surgical Mfg. Co., Inc. In 1998, the Company changed its name to Superior Uniform Group, Inc. and its state of incorporation to Florida. Effective on May 3, 2018, Superior Uniform Group, Inc. changed its name to Superior Group of Companies, Inc.
Superior’s Uniforms and RelatedBranded Products segment, primarily through its primarysignature marketing brands BAMKO® and HPI®, produces and sells customized merchandising solutions, promotional products and branded uniform programs. Branded products are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, tech, transportation and other industries. The segment currently has sales offices in the United States, Brazil and Canada, with support services in China and India.
Superior’s Healthcare Apparel segment, primarily through its signature marketing brands Fashion Seal Healthcare®, HPI®, and WonderWink®, manufactures (through third parties or its own facilities) and sells a wide range of uniforms, corporate identityhealthcare apparel, careersuch as scrubs, lab coats, protective apparel and accessories that are worn by employeespatient gowns. This segment sells healthcare service apparel to healthcare laundries, dealers, distributors and retailers primarily in the hospital and healthcare fields; hotels; fast food and other restaurants; transportation; and the private security, industrial and commercial markets.United States.
Superior services its Remote Staffing SolutionsSuperior’s Contact Centers segment, through multiple The Office Gurus® entities, including its subsidiaries in El Salvador, Belize, Jamaica, Dominican Republic and the United States (collectively, “TOG”). TOG is primarily a near-shore premium provider of cost effective multilingual telemarketing and, provides outsourced, nearshore business process outsourced solutions.outsourcing, contact and call-center support services to North American customers.
The
Change in Reportable Segments
Beginning with the second quarter of 2022, the Company realigned its reportable segments to correspond with changes to its organizational responsibilities, management structure and operating model. Prior to implementing the current segment reporting, the Company’s Uniforms and Related Products segment included healthcare apparel, uniforms and corporate overhead. As part of the change in reportable segments, the uniforms business was combined with the previous Promotional Products segment throughto form the BAMKO®, Public Identity®, Tangerine®Branded Products segment, the healthcare apparel business became its own segment named Healthcare Apparel and Gifts by Design brands, services customersincome and expenses related to corporate functions that purchase primarily promotional and related products.are not specifically attributable to an individual reportable segment are no longer presented in segment results. The previous Remote Staffing Solutions segment currentlywas renamed Contact Centers segment. All prior period segment information has sales officesbeen recast to reflect this change in reportable segments. Refer to Note 10 for additional information. Additionally, as a result of this re-segmentation, the United States, Brazil and Canada with support services in China, Hong Kong and India.Company performed a quantitative goodwill impairment test. Refer to Note 11 for additional information.
Basis of presentation
The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Intercompany items have been eliminated in consolidation. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021, and filed with the Securities and Exchange Commission. Management believes that the information furnished includes all adjustments of a normal recurring nature that are necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.
We referThe Company refers to the condensed consolidated financial statements collectively as “financial statements,” and individually as “statements of comprehensive income (loss),” “balance sheets,” “statements of shareholders’ equity,” and “statements of cash flows” herein.
Restatement of Previously Issued Financial StatementsReclassifications
SubsequentThe accompanying financial statements for the previous year contain certain reclassifications to conform to the filingpresentation used in the current period. Reclassifications only impact items within net cash used in operating activities and Note 11 and had no effect on reported total net cash provided by (used in) operating, financing and investing activities, statements of its Form 10-Q, the Company identified an error in its accounting forcomprehensive income, taxes associated with the terminationbalance sheets or statements of the Company’s two qualified defined benefit pension plans inshareholders’ equity.
Written Put Options
During the second quarter of 2021.2022, Specifically, managementthe 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 Audit Committee concluded that deferred tax liabilitiesoptions embody obligations to repurchase the Company’s shares by paying cash. The original fair value of the written put options upon entering into the agreement was $3.6 million. As of September 30, 2022, the fair value of the written put options was $1.8 million. The fair value of the written put options is based directly on the Company’s stock price and included in other current liabilities in our balance sheet related to previous contributions to the pension plans in excess of book expense recognized should have been reversed when the Company recognized the $6.9 million pension termination chargesheets. The decrease in the second quarter 2021. The impactfair value of this reversal on the Company’s:
• statementwritten put options resulted in the recognition of comprehensive income for the nine months ended September 30,2021 is an additional tax benefitunrealized gain of approximately $1.8 million and
• balance sheet as of September 30, 2021 is an increase in deferred tax assets of approximately $0.4 million and a decrease in deferred tax liabilities of approximately $1.4 million.
With corresponding impacts on the statement of cash flows and statements of shareholders’ equity. Each of these adjustments is a non-cash item.
The following tables summarize the effects of the restatement on the statement of comprehensive income for the nine months ended September 30,2021, balance sheet as of September 30,2021, statement of cash flows for the nine months ended September 30,2021 and statements of shareholders’ equity forduring the three and nine months ended September 30, 2022. Unrealized gains and losses from changes in the fair value of the written put options are included within selling and administrative expenses in our statements of comprehensive income (loss). At September 30, 20222021 (in thousands, except per share data):, the Company’s remaining repurchase obligation under the written put options was 207,970 shares of its common stock.
Nine Months Ended September 30, 2021 | ||||||||||||
As Previously Reported | Restated Adjustment | As Restated | ||||||||||
Income tax expense | $ | 5,490 | $ | (1,800 | ) | $ | 3,690 | |||||
Net income | 23,251 | 1,800 | 25,051 | |||||||||
Comprehensive income | 29,664 | 1,800 | 31,464 | |||||||||
Net income per basic share | 1.51 | 0.12 | 1.63 | |||||||||
Net income per diluted share | 1.45 | 0.11 | 1.56 | |||||||||
As of September 30, 2021 | ||||||||||||
As Previously Reported | Restated Adjustment | As Restated | ||||||||||
Deferred tax asset | $ | 0 | $ | 352 | $ | 352 | ||||||
Total assets | 422,177 | 352 | 422,529 | |||||||||
| Deferred tax liability | 1,448 | (1,448 | ) | 0 | ||||||||
Retained earnings | 159,711 | 1,800 | 161,511 | |||||||||
Total shareholders’ equity | 220,935 | 1,800 | 222,735 | |||||||||
Total liabilities and shareholders’ equity | 422,177 | 352 | 422,529 | |||||||||
Nine Months Ended September 30, 2021 | ||||||||||||
As Previously Reported | Restated Adjustment | As Restated | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 23,251 | $ | 1,800 | $ | 25,051 | ||||||
Deferred income tax benefit | (1,127 | ) | (1,800 | ) | (2,927 | ) | ||||||
Three Months Ended September 30, 2021 | ||||||||||||
As Previously Reported | Restated Adjustment | As Restated | ||||||||||
| Balance, July 1, 2021: | ||||||||||||
| Retained earnings | $ | 153,412 | $ | 1,800 | $ | 155,212 | ||||||
| Total shareholders’ equity | 213,515 | 1,800 | 215,315 | |||||||||
| Balance, September 30, 2021: | ||||||||||||
| Retained earnings | 159,711 | 1,800 | 161,511 | |||||||||
| Total shareholders’ equity | 220,935 | 1,800 | 222,735 | |||||||||
Nine Months Ended September 30, 2021 | ||||||||||||
As Previously Reported | Restated Adjustment | As Restated | ||||||||||
| Net earnings: | ||||||||||||
| Retained earnings | $ | 23,251 | $ | 1,800 | $ | 25,051 | ||||||
| Total shareholders’ equity | 23,251 | 1,800 | 25,051 | |||||||||
| Balance, September 30, 2021: | ||||||||||||
| Retained earnings | 159,711 | 1,800 | 161,511 | |||||||||
| Total shareholders’ equity | 220,935 | 1,800 | 222,735 | |||||||||
Recent Accounting Pronouncements
We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be not applicable.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. On January 1, 2021, the Company adopted this standard on a prospective basis. The Company’s adoption of this standard did not have a material impact on its financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. InThe Company adopted the new standard on February 2020,January 1, 2022 the FASB issued ASU 2020-2, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.2016-02, Leases (Topic 842).” The update delayed the effective date of ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. Adoption will requireusing a modified retrospective transition approach beginning withby recognizing a cumulative-effect adjustment of $0.1 million to reduce our opening balance of retained earnings as of the earliestadoption date. Prior period presented. The Company is currently evaluating the potential impact this standard willamounts have on its financial statements.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. This guidance may be applied through December 31, 2022. The Company will applyadoption of this guidance had no impact to transactions and modificationsthe Company. As a result of the Company entering into a new credit agreement on August 23, 2022 discussed in Note 3, this guidance became not applicable to contracts and hedging relationships that reference LIBOR.the Company.
NOTE 2 – Inventories:
Inventories consisted of the following amounts (in thousands):
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
Finished goods | $ | 86,455 | $ | 73,979 | $ | 103,527 | $ | 90,395 | ||||||||
Work in process | 2,288 | 1,634 | 912 | 1,351 | ||||||||||||
Raw materials | 14,628 | 14,153 | 31,508 | 28,809 | ||||||||||||
Inventories | $ | 103,371 | $ | 89,766 | $ | 135,947 | $ | 120,555 | ||||||||
Debt consisted of the following (in thousands):
September 30, | December 31, | September 30, | December 31, | |||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
Credit Facilities: | ||||||||||||||||
Revolving credit facility due August 2027 | $ | 87,000 | $ | - | ||||||||||||
Term loan due August 2027 | 75,000 | - | ||||||||||||||
Revolving credit facility due February 2026 | $ | 37,768 | $ | 17,589 | - | 61,517 | ||||||||||
Term loan due February 2024 (“2017 Term Loan”) | 16,500 | 21,000 | ||||||||||||||
Term loan due January 2026 (“2018 Term Loan”) | 42,560 | 49,524 | ||||||||||||||
Term loan due February 2024 | - | 15,000 | ||||||||||||||
Term loan due January 2026 | - | 40,238 | ||||||||||||||
| 96,828 | 88,113 | 162,000 | 116,755 | |||||||||||||
Less: | ||||||||||||||||
Payments due within one year included in current liabilities | 15,286 | 15,286 | 4,688 | 15,286 | ||||||||||||
Debt issuance costs | 660 | 455 | 851 | 624 | ||||||||||||
Long-term debt less current maturities | $ | 80,882 | $ | 72,372 | $ | 156,461 | $ | 100,845 | ||||||||
On August 23, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, the domestic subsidiaries of the Company, as guarantors, the lenders party thereto (the “Lenders”), and PNC Bank, National Association, as administrative agent for the Lenders (the “Administrative Agent”), pursuant to which the Lenders are providing the Company senior secured credit facilities maturing in August 2027 consisting of a revolving credit facility in the aggregate maximum principal amount of $125.0 million and a term loan in the aggregate principal amount of $75.0 million (collectively, the “Credit Facilities”), and the ability to request incremental revolving credit or term loan facilities in an aggregate amount of up to an additional $75.0 million, subject to obtaining additional lender commitments and satisfying certain other conditions. The Company incurred $0.9 million in transaction costs related to the Credit Facilities. These costs are included as a reduction of debt and amortized over the term of the Credit Facilities.
On August 23, 2022, in connection with entering into the Credit Agreement, the Company repaid all outstanding indebtedness owed under the Second Amended and Restated Credit Agreement dated as of February 8, 2021 between the Company and Truist Bank (the “Truist Credit Agreement”), consisting of a revolving credit facility with an outstanding balance of $118.5 million and term loans with an aggregate outstanding balance of $45.5 million, and terminated the Truist Credit Agreement. The Company did not incur any termination penalties in connection with the early termination of the Truist Credit Agreement. As a result of the termination of the Truist Credit Agreement, the Company expensed $0.5 million of unamortized debt issuance costs associated with our former senior secured credit facility in the third quarter of 2022, which is reflected in interest expense in our statements of operations.
The Company is party to a credit agreement with Truist Bank, consisting of a revolving credit facility, a term loan maturing in February 2024 (“2017 Term Loan”) and a term loan maturing in January 2026 (“2018 Term Loan”). The revolving credit facility, 2017 Term Loan and 2018 Term Loan are collectively referred to as the “Credit Facilities.”
On February 8, 2021, the Company entered into a Second Amended and Restated Credit Agreement with Truist Bank (the “Credit Agreement”), pursuant to which the maximum availability under the Company’s existing revolving credit facility was increased from $75.0 million to $125.0 million and its maturity date was extended until February 8, 2026. The 2017 Term Loan and the 2018 Term Loan remain outstanding with the same amortization schedules. The floor on LIBOR for the revolving credit facility was increased from zero to 0.25%, but the interest rates on the revolving credit facility and the term loans were not otherwise modified. Except as described above, the covenants, events of default and substantially all of the other terms that were contained in the Company’s prior credit agreement with Truist Bank remain unchanged in the Credit Agreement. The Credit Facilities continue to be secured by substantially all of the operating assets of the Company as collateral, and the Company’s obligations thereunder continue to be guaranteed by all of its domestic subsidiaries.
Obligations outstanding under the 2018 Term Loan haveCredit 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 rate of LIBORperiod) plus a margin of between 0.85%1.0% and 1.65% (based2.0% (depending on the Company’s funded debt to EBITDAnet leverage ratio) (0.93%. The interest rate on outstanding borrowings under the Credit Facilities was 4.9% at September 30, 20212022). Obligations outstanding underDuring the term of the revolving credit facility, and the 2017 Term Loan generally haveCompany will pay a variable interest rate of one-month LIBOR (with a 0.25% floor on LIBOR for the revolving credit facility) plus a margin of between 0.68% and 1.50% (basedcommitment fee on the Company’s funded debt to EBITDA ratio) (0.93% forunused portion of the revolving credit facility equal to between 0.125% and 0.76% for the 2017 Term Loan at September 30, 2021). The Company is obligated to pay a commitment fee of 0.15% per annum0.250% (depending on the average unused portion of the commitment under the revolving credit facility.Company’s net leverage ratio). The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of September 30, 20212022, there were 0no outstanding letters of credit under the revolving credit facility.
Contractual principal payments for the 2017 Term Loanterm loan are as follows: remainder of 20212022 - $1.5$1.9 million;2022 through 2023 - $6.0 million per year; and$3.7 million; 2024 - $3.0 million. Contractual principal payments for the 2018 Term Loan are as follows: remainder of 2021 - $2.3$4.7 million;2022 through 2025 - $9.3 million per year; and$5.6 million; 2026 - $3.1$6.6 million; and 2027 - $52.5 million. The term loans doloan does not contain pre-payment penalties.
The Credit Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, restricted payments (including dividends and related distributions), liquidations, mergers, consolidations or acquisitions, affiliate transactions and sales of assets or subsidiaries. The Credit Agreement also requires the Company to comply with a fixed charge coverage ratio of at least 1.25 to 1.0 and a net leverage ratio not to exceed 4.0 to 1.0. The Company’s net leverage ratio is generally calculated as the ratio of (a) indebtedness minus unrestricted cash to (b) consolidated EBITDA for the four most recently ended fiscal quarters. The Credit Facilities are secured by substantially all of the operating assets of the Company as collateral, and the Company’s obligations under the Credit Facilities are guaranteed by all of its domestic subsidiaries. The Company’s obligations under the Credit Facilities are subject to acceleration upon the occurrence of an event of default as defined in the Credit Agreement.
The Company was previously a party to an interest rate swap with a total notional value of $7.5 million as of September 30, 2021pursuant to which it makesmade fixed payments and receivesreceived floating payments. TheIn connection with entering into the Credit Agreement, the Company entered intoterminated the interest rate swap to offset changes in expected cash flows due to fluctuations inswap. During the associated variable interest rates. The Company’s interest rate swap expires in February 2024. The interest rate swap is notnine designated as months ended September 30, 2022, a hedge transaction. Changes in fair value and gains and losses on settlementgain of $0.2 million was recognized on the interest rate swap are recognized in interest expense in our statements of comprehensive income.swap. No gain or loss was recognized on the interest rate swap during the nine months ended September 30, 20212021.. During the nine months ended September 30, 2020, a loss of $0.3 million was recognized on the interest rate swap.
NOTE 4 – Periodic Pension Expense:
The Company is the sponsor of an unfunded supplemental executive retirement plan in which several employees participate.
The Company had previously sponsored two noncontributory qualified defined benefit pension plans, providing for normal retirement at age 65, covering all eligible employees (as defined). EffectiveDuring June 30, 2013, 2021,the Company no longer accrues additional benefits for future service or for future increases in compensation levels forcompleted the Company’s primary defined benefit pension plan. Effective on December 31, 2014, the Company no longer accrues additional benefits for future service for the Company’s hourly defined benefit plan. As discussed below, the Company has terminatedtermination of its two noncontributory qualified defined benefit pension plans.plans, which were fully funded.
The Company is also the sponsor of an unfunded supplemental executive retirement plan in which several of its employees are participants.
The following table details the net periodic pension expense under the Company’s plans for the periods presented (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Service cost - benefits earned during the period | $ | 46 | $ | 38 | $ | 138 | $ | 114 | $ | 51 | $ | 46 | $ | 153 | $ | 138 | ||||||||||||||||
Interest cost on projected benefit obligation | 84 | 216 | 424 | 648 | 100 | 84 | 300 | 424 | ||||||||||||||||||||||||
Expected return on plan assets | 0 | (389 | ) | (597 | ) | (1,167 | ) | - | - | - | (597 | ) | ||||||||||||||||||||
Recognized actuarial loss | 375 | 305 | 1,501 | 938 | 428 | 375 | 1,284 | 1,501 | ||||||||||||||||||||||||
Settlement loss | 0 | 82 | 0 | 413 | ||||||||||||||||||||||||||||
Pension plan termination charge | 0 | 0 | 6,945 | 0 | - | - | - | 6,945 | ||||||||||||||||||||||||
Net periodic pension cost after settlements | $ | 505 | $ | 252 | $ | 8,411 | $ | 946 | ||||||||||||||||||||||||
Net periodic pension cost | $ | 579 | $ | 505 | $ | 1,737 | $ | 8,411 | ||||||||||||||||||||||||
The pension settlement losses included in the table above resulted from lump sum pension payments made to various employees upon their retirement or termination during the periods specified. The pension settlement losses did not require a cash outlay by the Company. The service cost component is included in selling and administrative expenses in our statements of comprehensive income (loss) and the other components of net periodic pension cost are included in other periodic pension costs in our statements of comprehensive income.income (loss).
In the second quarter of 2021, the Company completed the termination ofterminated its two noncontributory qualified defined benefit pension plans, which were fully funded. The Company settled its obligations under the plans by providing lump-sum payments of $13.8 million to eligible participants who elected to receive them and entering into an annuity purchase contract for the remaining liability of $3.0 million. Consequently, the Company recognized a settlement charge of $6.9 million during the nine months ended September 30,2021,, which represents the acceleration of deferred charges previously included within accumulated other comprehensive loss and the impact of remeasuring the plan assets and obligations at termination. The pension plan terminations did not require a cash outlay by the Company. As of September 30,2021, an asset surplus of $1.3 million remained undistributed in the pension plans that were terminated.
NOTE 5 – Net Sales:
For our Uniforms and RelatedBranded Products and Promotional ProductsHealthcare Apparel segments, revenue is primarily generated from the sale of finished products to customers. RevenueRevenues for our Uniforms and RelatedBranded Products and Promotional ProductsHealthcare Apparel segments isare recognized when the performance obligations under the contract terms are satisfied. For certain contracts with customers in which the Company has an enforceable right to payment for goods with no alternative use, revenue is recognized over time upon receipt of finished goods into inventory. Revenue for goods that do have an alternative use or that the customer is not obligated to purchase under the terms of a contract is generally recognized when the goods are transferred to the customer. Revenue from the sale of personal protective equipment, including face masks,facemasks, isolation gowns, sanitizers, gloves and gloves,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 Remote StaffingContact Centers segment, revenue is generated from providing our customers with staffing solutioncontact center services. Revenue for our Remote StaffingContact 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 termination terms may involve variable consideration clauses such as sales discounts and customer rebates, and revenue is adjusted accordingly for these provisions. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The promised amount of consideration in a contract is not adjusted for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised good or service to a customer and when the customer pays for that product or service will be one year or less. Sales taxes are excluded from the measurement of a performance obligation’s transaction price. Sales commissions are expensed as incurred when we expect that the amortization period of such costs will be one year or less.
Consistent with the Company’s change in reportable segments described in Note 1410
, the Company has changed its presentation of disaggregated revenue to align with the new segment structure. The following table presents disaggregated revenue by operating segment for the periods presented (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Uniforms and Related Products Segment: | ||||||||||||||||
Uniforms and related products | $ | 61,621 | $ | 59,296 | $ | 182,080 | $ | 184,909 | ||||||||
Personal protective equipment | 269 | 13,938 | 18,571 | 24,269 | ||||||||||||
Total Uniforms and Related Products Segment | $ | 61,890 | $ | 73,234 | $ | 200,651 | $ | 209,178 | ||||||||
Remote Staffing Solutions Segment: | ||||||||||||||||
Remote staffing solutions services | $ | 18,040 | $ | 11,636 | $ | 46,723 | $ | 30,187 | ||||||||
Net intersegment eliminations | (1,847 | ) | (1,309 | ) | (5,209 | ) | (3,834 | ) | ||||||||
Total Remote Staffing Solutions Segment | $ | 16,193 | $ | 10,327 | $ | 41,514 | $ | 26,353 | ||||||||
Promotional Products Segment: | ||||||||||||||||
Promotional products | $ | 44,296 | $ | 24,769 | $ | 136,682 | $ | 76,719 | ||||||||
Personal protective equipment | 947 | 19,407 | 16,113 | 69,091 | ||||||||||||
Total Promotional Products Segment | $ | 45,243 | $ | 44,176 | $ | 152,795 | $ | 145,810 | ||||||||
Consolidated Net Sales | $ | 123,326 | $ | 127,737 | $ | 394,960 | $ | 381,341 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Branded Products Segment: | ||||||||||||||||
Branded products | $ | 86,064 | $ | 71,069 | $ | 280,309 | $ | 217,468 | ||||||||
Personal protective equipment | 705 | 582 | 5,582 | 27,196 | ||||||||||||
Total Branded Products Segment | $ | 86,769 | $ | 71,651 | $ | 285,891 | $ | 244,664 | ||||||||
Healthcare Apparel Segment: | ||||||||||||||||
Healthcare apparel | $ | 29,287 | $ | 34,848 | $ | 84,780 | $ | 101,294 | ||||||||
Personal protective equipment | 752 | 634 | 2,115 | 7,488 | ||||||||||||
Total Healthcare Apparel Segment | $ | 30,039 | $ | 35,482 | $ | 86,895 | $ | 108,782 | ||||||||
Contact Centers Segment: | ||||||||||||||||
Contact centers services | $ | 23,363 | $ | 18,040 | $ | 62,803 | $ | 46,723 | ||||||||
Net intersegment eliminations | (1,468 | ) | (1,847 | ) | (5,371 | ) | (5,209 | ) | ||||||||
Total Contact Centers Segment | $ | 21,895 | $ | 16,193 | $ | 57,432 | $ | 41,514 | ||||||||
Consolidated Net Sales | $ | 138,703 | $ | 123,326 | $ | 430,218 | $ | 394,960 | ||||||||
Contract Assets and Contract Liabilities
The following table provides information about accounts receivable, contract assets and contract liabilities from contracts with customers (in thousands):
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
Accounts receivable | $ | 92,500 | $ | 101,902 | $ | 103,273 | $ | 107,053 | ||||||||
Current contract assets | 37,575 | 39,231 | 48,085 | 38,018 | ||||||||||||
Current contract liabilities | 7,367 | 5,074 | 5,900 | 8,804 | ||||||||||||
Contract assets relate to goods produced without an alternative use for which the Company has an enforceable right to payment but which havehas not yet been invoiced to the customer. The majority of the amounts included in contract assets on December 31, 20202021 were transferred to accounts receivable during the nine months ended September 30, 20212022. Contract liabilities relate to payments received in advance of the Company completing its performance under a contract. Contract liabilities are included in other current liabilities in our balance sheets. During the nine months ended September 30, 20212022, $4.2$7.4 million of revenue was recognized from the contract liabilities balance as of December 31, 20202021.
NOTE 6 – Contingencies:
The purchase price to acquire substantially all of the assets of BAMKO,Sutter’s Mill Specialties, Inc. (“BAMKO”Sutter’s Mill”) in 2016December 2021 included contingent consideration based on varying levels of BAMKO’s consolidatedSutter’s Mill’s EBITDA in each measurement period throughfrom 2021.2022 to 2024. The estimated fair value for BAMKOof Sutter’s Mill acquisition-related contingent consideration payable as of September 30, 20212022 was $2.7$2.4 million, of which $0.8 million is expected to be paid in the second quarter of 2022.2023. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $2.7$2.3 million and $3.2$4.6 million. The purchase price to acquire substantially all of the assets of Tangerine Promotions, Ltd. and Tangerine Promotions West,Guardian Products, Inc. (collectively “Tangerine”(“Guardian”) in 2017May 2022 included contingent consideration based on varying levels of Tangerine’sGuardian’s EBITDA in each measurement period through 2021.April 2025. The estimated fair value for Tangerineof Guardian acquisition-related contingent consideration payable as of September 30, 20212022 was $1.2$1.3 million, of which $0.6 million is expected to be paid in the secondthird quarter of 2022.2023. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $1.2$1.5 million and $1.4$2.4 million. The Company will continue to evaluate these liabilitiesthis liability for remeasurement at the end of each reporting period and any changes will be recorded in the Company’s statements of comprehensive income.income (loss). The carrying amount of the liabilitiesliability may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liabilities.liability.
The Company is involved in various legal actions and claims arising from the normal course of business. In the opinion of management, the ultimate outcome of these matters is not expected to have a material impact on the Company’s results of operations, cash flows, or financial position.
NOTE 7 – Share-Based Compensation:
Share-based compensation is recorded in selling and administrative expense in the statements of comprehensive income.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):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Stock options and SARs | $ | 327 | $ | 412 | $ | 1,105 | $ | 921 | $ | 339 | $ | 327 | $ | 1,080 | $ | 1,105 | ||||||||||||||||
Restricted stock | 545 | 203 | 1,183 | 566 | 446 | 545 | 2,050 | 1,183 | ||||||||||||||||||||||||
Performance shares | 216 | 114 | 469 | 303 | 143 | 216 | 252 | 469 | ||||||||||||||||||||||||
Total share-based compensation expense | $ | 1,088 | $ | 729 | $ | 2,757 | $ | 1,790 | $ | 928 | $ | 1,088 | $ | 3,382 | $ | 2,757 | ||||||||||||||||
Stock optionsOptions and Stock Appreciation Rights (“SARs”)
The Company grants stock options and stock-settled SARs to employees that allow them to purchase shares of the Company’s common stock. Stock options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and SARs at the date of grant using the Black-Scholes valuation model.
All stock options and SARs granted prior to August 3, 2018 vested immediately when granted. Awards issued thereafter vest either one or two years after the grant date. Employee awards expire five years after the grant date, and those issued to directors expire ten years after the grant date. The Company issues new shares upon the exercise of stock options and SARs. Stock options and SARs granted in tandem with stock options are subject to accelerated vesting under certain circumstances as outlined in the 2013 Incentive Stock and Awards Plan (the “2013 Plan”). or 2022 Equity Incentive and Awards Plan (the “2022 Plan”), as applicable.
A summary of stock option transactions during the nine months ended September 30, 20212022 follows:
| Weighted Average | Aggregate | Weighted Average | Aggregate | |||||||||||||||||||||||||||||
No. of | Weighted Average | Remaining Life | Intrinsic Value | No. of | Weighted Average | Remaining Life | Intrinsic Value | |||||||||||||||||||||||||
Shares | Exercise Price | (in years) | (in thousands) | Shares | Exercise Price | (in years) | (in thousands) | |||||||||||||||||||||||||
Outstanding, January 1, 2021 | 970,022 | $ | 12.92 | 3.74 | $ | 11,128 | ||||||||||||||||||||||||||
Outstanding, January 1, 2022 | 779,938 | $ | 16.12 | 3.27 | $ | 5,097 | ||||||||||||||||||||||||||
Granted(1) | 143,543 | 25.02 | 149,433 | 19.42 | ||||||||||||||||||||||||||||
Exercised | (262,960 | ) | 10.10 | (77,474 | ) | 10.49 | ||||||||||||||||||||||||||
Lapsed or cancelled | (19,126 | ) | 14.90 | (38,632 | ) | 21.12 | ||||||||||||||||||||||||||
Outstanding, September 30, 2021 | 831,479 | 15.86 | 3.43 | 6,487 | ||||||||||||||||||||||||||||
Exercisable, September 30, 2021 | 487,161 | 14.66 | 2.83 | 4,231 | ||||||||||||||||||||||||||||
Outstanding, September 30, 2022 | 813,265 | 17.03 | 3.13 | 152 | ||||||||||||||||||||||||||||
Exercisable, September 30, 2022 | 533,589 | 14.35 | 2.42 | 152 | ||||||||||||||||||||||||||||
(1) | The weighted average grant date fair value of stock options granted was |
As of September 30, 20212022, the Company had $1.2$1.1 million in unrecognized compensation cost related to nonvestedunvested stock options to be recognized over the remaining weighted average vesting period of 1.41.2 years.
A summary of stock-settled SARs transactions during the nine months ended September 30, 20212022 follows:
| Weighted Average | Aggregate | |||||||||||||||
No. of | Weighted Average | Remaining Life | Intrinsic Value | |||||||||||||
Shares | Exercise Price | (in years) | (in thousands) | |||||||||||||
Outstanding, January 1, 2021 | 317,128 | $ | 13.47 | 3.36 | $ | 2,031 | ||||||||||
Granted(1) | 31,687 | 25.75 | ||||||||||||||
Exercised | (26,438 | ) | 14.74 | |||||||||||||
Outstanding, September 30, 2021 | 322,377 | 14.57 | 2.88 | 2,899 | ||||||||||||
Exercisable, September 30, 2021 | 160,586 | 15.29 | 2.20 | 1,296 | ||||||||||||
| Weighted Average | Aggregate | |||||||||||||||
No. of | Weighted Average | Remaining Life | Intrinsic Value | |||||||||||||
Shares | Exercise Price | (in years) | (in thousands) | |||||||||||||
Outstanding, January 1, 2022 | 291,059 | $ | 14.99 | 2.65 | $ | 2,205 | ||||||||||
Granted(1) | 37,297 | 20.13 | ||||||||||||||
Exercised | (24,836 | ) | 15.16 | |||||||||||||
Lapsed or cancelled | (2,958 | ) | 18.84 | |||||||||||||
Outstanding, September 30, 2022 | 300,562 | 15.58 | 2.37 | 27 | ||||||||||||
Exercisable, September 30, 2022 | 232,228 | 13.48 | 1.93 | 27 | ||||||||||||
(1) | The weighted average grant date fair value of SARs granted was |
As of September 30, 20212022, the Company had $0.3 million in unrecognized compensation cost related to nonvestedunvested SARs to be recognized over the remaining weighted average vesting period of 1.21.1 years.
Restricted Stock
The Company has granted shares of restricted stock to directors and certain employees, which vest at a specified future date, generally after three years, ratably over five years or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan.Plan or 2022 Plan, as applicable. Expense for each of these grants is based on the fair value at the date of the grant and is being recognized on a straight-line basis over the respective service period.
A summary of restricted stock transactions during the nine months ended September 30, 20212022 follows:
Weighted Average | Weighted Average | |||||||||||||||
No. of | Grant Date | No. of | Grant Date | |||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||
Outstanding, January 1, 2021 | 157,244 | $ | 16.84 | |||||||||||||
Outstanding, January 1, 2022 | 458,166 | $ | 19.51 | |||||||||||||
Granted | 264,166 | 23.16 | 30,343 | 19.97 | ||||||||||||
Vested | (24,908 | ) | 23.55 | (113,039 | ) | 15.22 | ||||||||||
Outstanding, September 30, 2021 | 396,502 | 20.63 | ||||||||||||||
Forfeited | (18,500 | ) | 14.68 | |||||||||||||
Outstanding, September 30, 2022 | 356,970 | 21.16 | ||||||||||||||
As of September 30, 20212022, the Company had $6.2$4.8 million of unrecognized compensation cost related to nonvestedunvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 3.62.7 years.
Performance Shares
The Company has granted performance shares, which either contain only service-based vesting conditions or service-based and performance-based vesting conditions. The service-based awards vest after the service period is met, which is generally three to five years. Expense for these grants is based on the fair value on the date of the grant and is being recognized on a straight-line basis over the respective service period. The performance-based awards generally vest after five years if the performance and service targets are met. The Company evaluates the performance conditions associated with these grants each reporting period to determine the expected number of shares to be issued. Expenses for grants of performance shares are recognized on a straight-line basis over the respective service period based on the grant date fair value and expected number of shares to be issued. The awards are subject to accelerated vesting on a pro rata basis under certain circumstances as outlined in the 2013 Plan or 2022 Plan, as applicable, except in those circumstances in which award agreements or change in control agreements specify full vesting.
A summary of performance share transactions during the nine months ended September 30, 20212022 follows:
Weighted Average | Weighted Average | |||||||||||||||
No. of | Grant Date | No. of | Grant Date | |||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||
Outstanding, January 1, 2021 | 186,264 | $ | 18.28 | |||||||||||||
Outstanding, January 1, 2022 | 193,523 | $ | 21.50 | |||||||||||||
Granted | 116,405 | 22.13 | 59,578 | 19.55 | ||||||||||||
Vested | (57,255 | ) | 17.54 | (15,750 | ) | 16.97 | ||||||||||
Forfeited | (36,141 | ) | 15.19 | (47,300 | ) | 22.56 | ||||||||||
Outstanding, September 30, 2021 | 209,273 | 21.16 | ||||||||||||||
Outstanding, September 30, 2022 | 190,051 | 21.00 | ||||||||||||||
As of September 30, 20212022, the Company had $2.9$3.0 million of unrecognized compensation cost related to nonvestedunvested performance share grants expected to be recognized over the remaining weighted average service period of 4.13.8 years.
NOTE 8 – Income Taxes (Restated):Taxes:
The Company calculates its interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, the Company makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date income or loss. The tax expense or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year and permanent and temporary differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.
For the three months ended September 30, 2022, the Company recorded a benefit from income taxes of $4.2 million, which represents an effective tax rate of 25.0%. For the three months ended September 30, 2021, the Company recorded a provision for income taxes of $1.8 million, which represents an effective tax rate of 17.8%. For the threenine months ended September 30, 20202022, the Company recorded a provision forbenefit from income taxes of $2.1$5.0 million, which represents an effective tax rate of 17.7%12.9%. For the nine months ended September 30, 2021, the Company recorded a provision for income taxes of $3.7 million, which represents an effective tax rate of 12.8%. ForIncome tax expense for the three months ended September 30, 2022 was impacted by a tax benefit of $4.3 million relating to the deductible portion of the goodwill impairment. The effective tax rate for the three months ended September 30, 2022 was impacted by the nondeductible portion of the goodwill impairment charge totaling $0.8 million. Income tax expense for the nine months ended September 30, 20202022, was impacted by a tax benefit of $6.4 million relating to the Company recordedimpairment of intangible assets and a provision for income taxesportion of $7.1 million, which represents anthe goodwill impairment. The effective tax rate for the nine months ended September 30, 2022 was impacted by the nondeductible portion of 19.9%.the goodwill impairment charge totaling $21.1 million. Income tax expense for the nine months ended September 30, 2021 was favorably impacted by a reversal of $1.8 million in deferred tax liabilities associated with the termination of the Company’s two qualified defined benefit pension plans, $0.8 million of windfall tax benefits from stock options exercised and $0.6 million of stranded tax benefits recognized as a result of the Company’s termination of its pension plans.
NOTE 9 – Net Income (Loss) Per Share (Restated):Share:
The Company’s basic net income per share is computed based on the weighted average number of shares of common stock outstanding for the period. Diluted net income per share includes the effect of the Company’s outstanding stock options, stock appreciation rights, unvested shares of restricted stock and unvested performance shares, if the inclusion of these items is dilutive.
The following table presents a reconciliation of basic and diluted net income (loss) per share for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net income (loss) used in the computation of basic and diluted net income (loss) per share (in thousands) | $ | (12,719 | ) | $ | 8,196 | $ | (34,164 | ) | $ | 25,051 | ||||||
Weighted average shares outstanding - basic | 15,806,852 | 15,528,534 | 15,739,381 | 15,394,427 | ||||||||||||
Dilutive common stock equivalents | - | 571,316 | - | 665,259 | ||||||||||||
Weighted average shares outstanding - diluted | 15,806,852 | 16,099,850 | 15,739,381 | 16,059,686 | ||||||||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | (0.80 | ) | $ | 0.53 | $ | (2.17 | ) | $ | 1.63 | ||||||
Diluted | $ | (0.80 | ) | $ | 0.51 | $ | (2.17 | ) | $ | 1.56 | ||||||
Diluted weighted average shares outstanding excludes shares of common stock of 389,915 and 455,774 for the three and nine months ended September 30, 2021 and 20202022,: respectively, as their inclusion would have been antidilutive given the Company’s net loss.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Net income used in the computation of basic and diluted net income per share (in thousands) | $ | 8,196 | $ | 9,944 | $ | 25,051 | $ | 28,485 | ||||||||
Weighted average shares outstanding - basic | 15,528,534 | 15,084,300 | 15,394,427 | 15,041,738 | ||||||||||||
Dilutive common stock equivalents | 571,316 | 626,822 | 665,259 | 319,297 | ||||||||||||
Weighted average shares outstanding - diluted | 16,099,850 | 15,711,122 | 16,059,686 | 15,361,035 | ||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.53 | $ | 0.66 | $ | 1.63 | $ | 1.89 | ||||||||
Diluted | $ | 0.51 | $ | 0.63 | $ | 1.56 | $ | 1.85 | ||||||||
Awards to purchase 251,989683,499 and 152,110251,989 shares of common stock with weighted average exercise prices of $24.88$21.37 and $23.26$24.88 per share were outstanding during the three months ended September 30, 20212022 and 2020, respectively, but were not included in the computation of diluted net income per share because the awards’ exercise prices were greater than the average market price of the common shares.
Awards to purchase 176,713 and 348,077 shares of common stock with weighted average exercise prices of $25.35 and $19.68 per share were outstanding during the nine months ended September 30, 2021and 2020, respectively, but were not included in the computation of diluted net income per share because the awards’ exercise prices were greater than the average market price of the common shares.
Awards to purchase 577,478 and 176,713 shares of common stock with weighted average exercise prices of $22.17 and $25.35 per share were outstanding during the nine months ended September 30, 2022 and 2021, respectively, but were not included in the computation of diluted net income (loss) per share because the awards’ exercise prices were greater than the average market price of the common shares.
NOTE 10 – Operating Segment Information (Restated):
TheAs described in Note 1, effective in the second quarter of 2022, the Company classifiesrealigned its businesses into 3reportable segments to correspond with changes to its organizational responsibilities, management structure and operating segments based onmodel. We have reclassified prior period segment disclosures to conform to the typescurrent period presentation. As a result of productsthe change, the Company manages and services provided. The Uniformsreports the following segments:
Branded Products segment: Primarily through our signature marketing brands BAMKO® and Related Products segment consists of sales to customers of uniformsHPI®, we produce and related items. The Remote Staffing Solutions segment consists of sales of staffing solutions. The Promotional Products segment consists of sales to customers ofsell customized merchandising solutions, promotional products and branded uniform programs. Branded products are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, tech, transportation and other branded merchandise.industries. The segment currently has sales offices in the United States, Brazil and Canada, with support services in China and India.
Healthcare Apparel segment: Primarily through our signature marketing brands Fashion Seal Healthcare® and WonderWink®, we manufacture (through third parties or our own facilities) and sell a wide range of healthcare apparel, such as scrubs, lab coats, protective apparel and patient gowns. This segment sells healthcare service apparel to healthcare laundries, dealers, distributors and retailers primarily in the United States.
Contact Centers: Through multiple The Office Gurus® entities, including our subsidiaries in El Salvador, Belize, Jamaica, Dominican Republic and the United States (collectively, “TOG”), we provide outsourced, nearshore business process outsourcing, contact and call-center support services to North American customers.
Intersegment eliminations include the elimination of revenues and costs from services provided by the Contact Centers segment to the Company’s two other segments. Such costs are recognized as selling and administrative expenses in the Branded Products and Healthcare Apparel segments. Income and expenses related to corporate functions that are not specifically attributable to an individual reportable segment are presented within Other in the tables below.
The Company evaluates the performance of each operating segment based on several factors of which the primary financial measures are net sales and income before taxes on income. Amounts for corporate expenses are included in the totals for the Uniforms and Related Products segment.
The following tables set forth financial information related to the Company’s operating segments (in thousands):
| Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | Branded Products | Healthcare Apparel | Contact Centers | Intersegment Eliminations | Other | Total | ||||||||||||||||||||||||||||||||||
As of and For the Three Months Ended September 30, 2021: | ||||||||||||||||||||||||||||||||||||||||||||
As of and For the Three Months Ended September 30, 2022: | ||||||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 61,890 | $ | 18,040 | $ | 45,243 | $ | (1,847 | ) | $ | 123,326 | $ | 86,769 | $ | 30,039 | $ | 23,363 | $ | (1,468 | ) | $ | - | $ | 138,703 | ||||||||||||||||||||
Cost of goods sold | 39,708 | 7,555 | 31,092 | (843 | ) | 77,512 | 60,600 | 18,609 | 9,453 | (596 | ) | - | 88,066 | |||||||||||||||||||||||||||||||
Gross margin | 22,182 | 10,485 | 14,151 | (1,004 | ) | 45,814 | 26,169 | 11,430 | 13,910 | (872 | ) | - | 50,637 | |||||||||||||||||||||||||||||||
Selling and administrative expenses | 19,244 | 6,576 | 10,243 | (1,004 | ) | 35,059 | 22,257 | 10,161 | 9,520 | (872 | ) | 2,749 | 43,815 | |||||||||||||||||||||||||||||||
Goodwill impairment charge | 21,460 | - | - | - | - | 21,460 | ||||||||||||||||||||||||||||||||||||||
Other periodic pension cost | 459 | 0 | 0 | 0 | 459 | - | - | - | - | 528 | 528 | |||||||||||||||||||||||||||||||||
Interest expense | 309 | 0 | 11 | 0 | 320 | 87 | 32 | - | - | 1,675 | 1,794 | |||||||||||||||||||||||||||||||||
Income before taxes on income | $ | 2,170 | $ | 3,909 | $ | 3,897 | $ | 0 | $ | 9,976 | ||||||||||||||||||||||||||||||||||
Income (loss) before taxes on income | $ | (17,635 | ) | $ | 1,237 | $ | 4,390 | $ | - | $ | (4,952 | ) | $ | (16,960 | ) | |||||||||||||||||||||||||||||
Depreciation and amortization | $ | 1,487 | $ | 398 | $ | 461 | $ | 0 | $ | 2,346 | $ | 1,724 | $ | 973 | $ | 653 | $ | - | $ | 51 | $ | 3,401 | ||||||||||||||||||||||
Capital expenditures | $ | 1,214 | $ | 1,733 | $ | 182 | $ | 0 | $ | 3,129 | $ | 2,062 | $ | 498 | $ | 1,622 | $ | - | $ | - | $ | 4,182 | ||||||||||||||||||||||
Total assets | $ | 289,380 | $ | 28,062 | $ | 105,087 | $ | 0 | $ | 422,529 | $ | 224,854 | $ | 160,919 | $ | 44,519 | $ | - | $ | 37,015 | $ | 467,307 | ||||||||||||||||||||||
| Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | Branded Products | Healthcare Apparel | Contact Centers | Intersegment Eliminations | Other | Total | ||||||||||||||||||||||||||||||||||
As of and For the Three Months Ended September 30, 2020: | ||||||||||||||||||||||||||||||||||||||||||||
As of and For the Three Months Ended September 30, 2021: | ||||||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 73,234 | $ | 11,636 | $ | 44,176 | $ | (1,309 | ) | $ | 127,737 | $ | 71,651 | $ | 35,482 | $ | 18,040 | $ | (1,847 | ) | $ | - | $ | 123,326 | ||||||||||||||||||||
Cost of goods sold | 48,715 | 4,653 | 27,424 | (507 | ) | 80,285 | 49,914 | 20,886 | 7,555 | (843 | ) | - | 77,512 | |||||||||||||||||||||||||||||||
Gross margin | 24,519 | 6,983 | 16,752 | (802 | ) | 47,452 | 21,737 | 14,596 | 10,485 | (1,004 | ) | - | 45,814 | |||||||||||||||||||||||||||||||
Selling and administrative expenses | 21,987 | 3,927 | 9,805 | (802 | ) | 34,917 | 16,860 | 8,984 | 6,576 | (1,004 | ) | 3,643 | 35,059 | |||||||||||||||||||||||||||||||
Other periodic pension cost | 212 | 0 | 0 | 0 | 212 | - | - | - | - | 459 | 459 | |||||||||||||||||||||||||||||||||
Interest expense | 210 | 0 | 29 | 0 | 239 | 11 | 18 | - | - | 291 | 320 | |||||||||||||||||||||||||||||||||
Income before taxes on income | $ | 2,110 | $ | 3,056 | $ | 6,918 | $ | 0 | $ | 12,084 | ||||||||||||||||||||||||||||||||||
Income (loss) before taxes on income | $ | 4,866 | $ | 5,594 | $ | 3,909 | $ | - | $ | (4,393 | ) | $ | 9,976 | |||||||||||||||||||||||||||||||
Depreciation and amortization | $ | 1,430 | $ | 243 | $ | 340 | $ | 0 | $ | 2,013 | $ | 1,131 | $ | 797 | $ | 398 | $ | - | $ | 20 | $ | 2,346 | ||||||||||||||||||||||
Capital expenditures | $ | 319 | $ | 404 | $ | 95 | $ | 0 | $ | 818 | $ | 1,017 | $ | 379 | $ | 1,733 | $ | - | $ | - | $ | 3,129 | ||||||||||||||||||||||
Total assets | $ | 269,776 | $ | 22,719 | $ | 74,743 | $ | 0 | $ | 367,238 | $ | 205,268 | $ | 164,748 | $ | 28,062 | $ | - | $ | 24,451 | $ | 422,529 | ||||||||||||||||||||||
Branded Products | Healthcare Apparel | Contact Centers | Intersegment Eliminations | Other | Total | |||||||||||||||||||
As of and For the Nine Months Ended September 30, 2022: | ||||||||||||||||||||||||
Net sales | $ | 285,891 | $ | 86,895 | $ | 62,803 | $ | (5,371 | ) | $ | - | $ | 430,218 | |||||||||||
Cost of goods sold | 202,422 | 56,066 | 25,438 | (2,259 | ) | - | 281,667 | |||||||||||||||||
Gross margin | 83,469 | 30,829 | 37,365 | (3,112 | ) | - | 148,551 | |||||||||||||||||
Selling and administrative expenses | 67,818 | 30,049 | 24,294 | (3,112 | ) | 12,949 | 131,998 | |||||||||||||||||
Goodwill impairment charge | 25,595 | 20,323 | - | - | - | 45,918 | ||||||||||||||||||
Intangible assets impairment charge | 5,581 | - | - | - | - | 5,581 | ||||||||||||||||||
Other periodic pension cost | - | - | - | - | 1,584 | 1,584 | ||||||||||||||||||
Interest expense | 205 | 84 | - | - | 2,387 | 2,676 | ||||||||||||||||||
Income (loss) before taxes on income | $ | (15,730 | ) | $ | (19,627 | ) | $ | 13,071 | $ | - | $ | (16,920 | ) | $ | (39,206 | ) | ||||||||
Depreciation and amortization | $ | 4,696 | $ | 2,942 | $ | 1,697 | $ | - | $ | 169 | $ | 9,504 | ||||||||||||
Capital expenditures | $ | 5,006 | $ | 1,748 | $ | 4,393 | $ | - | $ | 74 | $ | 11,221 | ||||||||||||
Total assets | $ | 224,854 | $ | 160,919 | $ | 44,519 | $ | - | $ | 37,015 | $ | 467,307 | ||||||||||||
Branded Products | Healthcare Apparel | Contact Centers | Intersegment Eliminations | Other | Total | |||||||||||||||||||
As of and For the Nine Months Ended September 30, 2021: | ||||||||||||||||||||||||
Net sales | $ | 244,664 | $ | 108,782 | $ | 46,723 | $ | (5,209 | ) | $ | - | $ | 394,960 | |||||||||||
Cost of goods sold | 169,307 | 66,696 | 19,233 | (2,291 | ) | - | 252,945 | |||||||||||||||||
Gross margin | 75,357 | 42,086 | 27,490 | (2,918 | ) | - | 142,015 | |||||||||||||||||
Selling and administrative expenses | 50,179 | 26,165 | 16,860 | (2,918 | ) | 13,790 | 104,076 | |||||||||||||||||
Other periodic pension cost | - | - | - | - | 1,328 | 1,328 | ||||||||||||||||||
Pension plan termination charge | - | - | - | - | 6,945 | 6,945 | ||||||||||||||||||
Interest expense | 63 | 136 | - | - | 726 | 925 | ||||||||||||||||||
Income (loss) before taxes on income | $ | 25,115 | $ | 15,785 | $ | 10,630 | $ | - | $ | (22,789 | ) | $ | 28,741 | |||||||||||
Depreciation and amortization | $ | 3,078 | $ | 2,545 | $ | 1,014 | $ | - | $ | 82 | $ | 6,719 | ||||||||||||
Capital expenditures | $ | 6,926 | $ | 4,680 | $ | 2,849 | $ | - | $ | - | $ | 14,455 | ||||||||||||
Total assets | $ | 205,268 | $ | 164,748 | $ | 28,062 | $ | - | $ | 24,451 | $ | 422,529 | ||||||||||||
Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | ||||||||||||||||
As of and For the Nine Months Ended September 30, 2021: | ||||||||||||||||||||
Net sales | $ | 200,651 | $ | 46,723 | $ | 152,795 | $ | (5,209 | ) | $ | 394,960 | |||||||||
Cost of goods sold | 131,730 | 19,233 | 104,273 | (2,291 | ) | 252,945 | ||||||||||||||
Gross margin | 68,921 | 27,490 | 48,522 | (2,918 | ) | 142,015 | ||||||||||||||
Selling and administrative expenses | 58,046 | 16,860 | 32,088 | (2,918 | ) | 104,076 | ||||||||||||||
Other periodic pension cost | 1,328 | 0 | 0 | 0 | 1,328 | |||||||||||||||
Pension plan termination charge | 6,945 | 0 | 0 | 0 | 6,945 | |||||||||||||||
Interest expense | 862 | 0 | 63 | 0 | 925 | |||||||||||||||
Income before taxes on income | $ | 1,740 | $ | 10,630 | $ | 16,371 | $ | 0 | $ | 28,741 | ||||||||||
Depreciation and amortization | $ | 4,373 | $ | 1,014 | $ | 1,332 | $ | 0 | $ | 6,719 | ||||||||||
Capital expenditures | $ | 11,125 | $ | 2,849 | $ | 481 | $ | 0 | $ | 14,455 | ||||||||||
Total assets | $ | 289,380 | $ | 28,062 | $ | 105,087 | $ | 0 | $ | 422,529 | ||||||||||
NOTE 11 – Goodwill and Intangible Assets:
Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | ||||||||||||||||
As of and For the Nine Months Ended September 30, 2020: | ||||||||||||||||||||
Net sales | $ | 209,178 | $ | 30,187 | $ | 145,810 | $ | (3,834 | ) | $ | 381,341 | |||||||||
Cost of goods sold | 135,324 | 12,880 | 97,748 | (1,452 | ) | 244,500 | ||||||||||||||
Gross margin | 73,854 | 17,307 | 48,062 | (2,382 | ) | 136,841 | ||||||||||||||
Selling and administrative expenses | 60,226 | 10,840 | 30,020 | (2,382 | ) | 98,704 | ||||||||||||||
Other periodic pension cost | 830 | 0 | 0 | 0 | 830 | |||||||||||||||
Interest expense | 1,420 | 0 | 312 | 0 | 1,732 | |||||||||||||||
Income before taxes on income | $ | 11,378 | $ | 6,467 | $ | 17,730 | $ | 0 | $ | 35,575 | ||||||||||
Depreciation and amortization | $ | 4,291 | $ | 657 | $ | 1,024 | $ | 0 | $ | 5,972 | ||||||||||
Capital expenditures | $ | 4,771 | $ | 750 | $ | 190 | $ | 0 | $ | 5,711 | ||||||||||
Total assets | $ | 269,776 | $ | 22,719 | $ | 74,743 | $ | 0 | $ | 367,238 | ||||||||||
Goodwill
Beginning with the second quarter of fiscal 2022, the Company realigned its reportable segments to Branded Products, Healthcare Apparel and Contact Centers. Refer to Note 10 for further information on the Company’s reportable segments. As a result of this re-segmentation, and in accordance with ASC 350, the Company performed a quantitative goodwill impairment test.
During the third quarter of fiscal 2022, the Company determined that a triggering event occurred in relation to the depressed market price of the Company's common stock and corresponding significant decline in the Company’s market capitalization. As a result, the Company performed a quantitative goodwill impairment test.
The fair value of goodwill in each impairment test was determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to their respective present values, and a market approach. The valuation methodology and underlying financial information included in the Company’s determination of fair value required significant judgments by management. The principal assumptions used in the Company’s discounted cash flow analysis consisted of (a) long-term projections of financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates. Under the market approach, the principal assumption included an estimate of a control premium.
Based on the goodwill impairment analysis performed, the Company determined that the estimated fair values of the previous Uniforms and Related Products segment and current Branded Products segment were lower than their carrying value primarily as the result of current market conditions, decline in expected cash flows and/or decrease in the Company’s stock price. Consequently, the Company recorded a non-cash goodwill impairment charge of $21.5 million and $45.9 million during the three and nine months ended September 30, 2022, respectively.
We have reclassified prior period goodwill disclosures to conform to the current period presentation. The following table presents the carrying amounts of goodwill attributable to each of the Company’s reportable segments (dollars in thousands):
Branded Products | Healthcare Apparel | Total | ||||||||||
As of December 31, 2021: | ||||||||||||
Gross goodwill | $ | 19,111 | $ | 20,323 | $ | 39,434 | ||||||
Accumulated impairment losses | - | - | - | |||||||||
Net goodwill | $ | 19,111 | $ | 20,323 | $ | 39,434 | ||||||
Additions | $ | 6,463 | $ | - | $ | 6,463 | ||||||
Impairment charge | (25,595 | ) | (20,323 | ) | (45,918 | ) | ||||||
Foreign currency translation | 21 | - | 21 | |||||||||
Net goodwill, September 30, 2022 | $ | - | $ | - | $ | - | ||||||
As of September 30, 2022: | ||||||||||||
Gross goodwill | $ | 25,595 | $ | 20,323 | $ | 45,918 | ||||||
Accumulated impairment losses | (25,595 | ) | (20,323 | ) | (45,918 | ) | ||||||
Net goodwill | $ | - | $ | - | $ | - | ||||||
Intangible Assets
In conjunction with the Company’s realignment of its reportable segments during the second quarter of 2022, the Company began an effort to centralize certain branding and go-to-market strategies under the BAMKO brand and determined that it would no longer use certain trade names associated with branded products. The Company’s rebranding efforts resulted in a $5.6 million impairment of indefinite-lived trade names related to its Branded Products segment during the nine months ended September 30, 2022. The carrying amounts of indefinite-lived trade names as of September 30, 2022 and December 31, 2021 are summarized as follows (dollars in thousands):
Indefinite-lived Intangible Assets | Segment | Carrying Amount, December 31, 2021 | Impairment Charges | Carrying Amount, September 30, 2022 | ||||||||||
Trade names: | ||||||||||||||
HPI | Branded Products | $ | 4,700 | $ | - | $ | 4,700 | |||||||
BAMKO | Branded Products | 8,900 | - | 8,900 | ||||||||||
Public Identity | Branded Products | 470 | (470 | ) | - | |||||||||
Tangerine | Branded Products | 3,200 | (3,200 | ) | - | |||||||||
Gifts By Design | Branded Products | 1,170 | (1,170 | ) | - | |||||||||
Sutter’s Mill | Branded Products | 741 | (741 | ) | - | |||||||||
CID Resources | Healthcare Apparel | 14,160 | - | 14,160 | ||||||||||
Total | $ | 33,341 | $ | (5,581 | ) | $ | 27,760 | |||||||
Intangible assets as of September 30, 2022 and December 31, 2021 are summarized as follows (dollars in thousands):
September 30, 2022 | December 31, 2021 | ||||||||||||||
Item | Weighted Average Life (In years) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||
Definite-lived intangible assets: | |||||||||||||||
Customer relationships (7-15 year life) | 11.7 | $ | 50,198 | $ | (22,114 | ) | $ | 45,198 | $ | (18,772 | ) | ||||
Non-compete agreements (3-7 year life) | 5.4 | 1,712 | (1,303 | ) | 1,536 | (1,121 | ) | ||||||||
Trademarks | 10.0 | 332 | (57 | ) | 275 | (37 | ) | ||||||||
Trade names | 2.0 | 710 | (148 | ) | - | - | |||||||||
Total | $ | 52,952 | $ | (23,622 | ) | $ | 47,009 | $ | (19,930 | ) | |||||
Indefinite-lived intangible assets: | |||||||||||||||
Trade names | $ | 27,760 | $ | 33,341 | |||||||||||
Total intangible assets | $ | 80,712 | $ | (23,622 | ) | $ | 80,350 | $ | (19,930 | ) | |||||
NOTE 1112 – Acquisition of Businesses:
Gifts By Design, Inc.
On January 29, 2021, the Company, through BAMKO, acquired substantially all of the assets of Gifts By Design, Inc. (“Gifts by Design”) of Seattle, Washington. Gifts by Design is a promotional products and branded merchandise agency that is well-established as a developer and supplier of corporate awards, incentives, and recognition programs for some of the world’s biggest brands. The purchase price for the acquisition consisted of $6.0 million in cash at closing.
Assets Acquired and Liabilities Assumed
The total purchase price was allocated to the tangible and intangible assets and liabilities of Gifts by Design based on their estimated fair values as of the acquisition date. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was allocated to goodwill.
The following table presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of Gifts by Design based on their estimated fair values as of the effective date of the transaction (in thousands):
Accounts receivable | $ | 251 | ||
Prepaid expenses and other current assets | 196 | |||
Property, plant and equipment | 60 | |||
Identifiable intangible assets | 3,673 | |||
Goodwill | 2,417 | |||
Total assets | $ | 6,597 | ||
Accounts payable | 199 | |||
Other current liabilities | 372 | |||
Total liabilities | $ | 571 |
The amounts in the table above are reflective of measurement period adjustments made during the nine months ended September 30, 2021 to previously provisional estimates, which included an increase of $2.3 million to goodwill and a decrease of $2.3 million to identifiable intangible assets. The measurement period adjustments did not have a significant impact on the Company’s statements of operations or cash flows.
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 brandGifts by Design trade name is considered an indefinite-life asset and as such is not being amortized. The Company recognized amortization expense on these acquired intangible assets of $0.2 millionwas fully impaired during the nine months ended September 30, 2021.
2022 as a result of the Company’s rebranding efforts during the second quarter of 2022. See Note 11 for further details. The difference between the fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded market opportunities. The acquisition of Gifts by Design was treated as an asset purchase for income tax purpose, and therefore, the resulting goodwill from this acquisition is deductible for U.S. income tax purposes. The goodwill associated with the Gifts by Design acquisition was fully impaired during the three and nine months ended September 30,2022 as a result of the Company’s goodwill impairment test performed during the third quarter of 2022, which was triggered by the depressed market price of the Company's common stock and corresponding significant decline in the Company’s market capitalization. See Note 11 for further details.
Sutter’s Mill Specialties, Inc.
On December 2, 2021, the Company, principally through BAMKO, acquired substantially all of the assets of Sutter’s Mill Specialties, Inc. (“Sutter’s Mill”) of Tempe, Arizona. Sutter’s Mill is a vertically integrated manufacturer of high quality, decorated promotional products. Sutter’s Mill has the capability to print on demand and create customized promotional programs and products for customers of any size.
The purchase price of the acquisition consisted of the following: (a) approximately $10.5 million in cash, (b) the issuance of 45,620 restricted shares of Superior’s common stock that vest ratably over a three-year period, and (c) potential future payments of approximately $4.5 million in additional contingent consideration for calendar years 2022 through 2024 based on the results of the acquired business.
Fair Value of Consideration Transferred
A summary of the purchase price is as follows (in thousands):
Cash consideration | $ | 10,533 | ||
Restricted shares of Superior common stock issued | 869 | |||
Contingent consideration | 2,520 | |||
Total Consideration | $ | 13,922 |
Assets Acquired and Liabilities Assumed
The table below presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of Sutter’s Mill based on their estimated fair values as of the effective date of the transaction. The assets and liabilities of Sutter’s Mill shown below are based on our preliminary estimates of their acquisition date fair values. Our final fair value determination may be different than those shown below.
The following is our preliminary assignment of the aggregate consideration (in thousands):
Accounts receivable | $ | 4,701 | ||
Inventories | 9,149 | |||
Prepaid expenses and other current assets | 135 | |||
Property, plant and equipment | 1,043 | |||
Operating lease right-of-use assets | 648 | |||
Intangible assets | 2,031 | |||
Goodwill | 1,019 | |||
Other assets | 41 | |||
Total assets | $ | 18,767 | ||
Accounts payable | 3,209 | |||
Other current liabilities | 389 | |||
Long-term debt | 758 | |||
Long-term operating lease liabilities | 489 | |||
Total liabilities | $ | 4,845 |
In the first quarter of 2022, an adjustment to increase goodwill by $0.1 million was made to the initial amounts recorded, which relates to additional consideration paid by the Company to the seller.
The Company recorded $2.0 million in identifiable intangibles at fair value, consisting of $1.2 million in acquired customer relationships, $0.1 million for a non-compete agreement and $0.7 million for the Sutter’s Mill Specialties trade name. The intangible assets associated with the customer relationships are being amortized for seven years and the non-compete agreement is being amortized for five years. The Sutter’s Mill Specialties trade name was fully impaired during the nine months ended September 30,2022 as a result of the Company’s rebranding efforts during the second quarter of 2022. See Note 11 for further details. The difference between the fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded market opportunities. The acquisition of Sutter’s Mill was treated as an asset purchase for income tax purpose, and therefore, the resulting goodwill from this acquisition is deductible for U.S. income tax purposes. The goodwill associated with the Sutter’s Mill acquisition was fully impaired during the three and nine months ended September 30,2022 as a result of the Company’s goodwill impairment test performed during the third quarter of 2022, which was triggered by the depressed market price of the Company's common stock and corresponding significant decline in the Company’s market capitalization. See Note 11 for further details.
Guardian Products, Inc.
On May 1, 2022, the Company, through BAMKO, acquired substantially all of the assets of Guardian Products, Inc. (“Guardian”) of Norcross, Georgia. Guardian is a branded merchandise company that is one of the leading providers of promotional products to automotive dealers nationwide. The purchase price for the acquisition consisted of the following: (a) $11.1 million in cash at closing, subject to a working capital adjustment, (b) the issuance of 116,550 restricted shares of Superior’s common stock (the “Guardian Stock”) that vest ratably over a three-year period, and (c) estimated potential future payments of approximately $2.3 million in additional contingent consideration based on the results of the acquired business through April 2025. The Guardian Stock is subject to transfer restrictions over the three-year period following the closing of the acquisition.
Fair Value of Consideration Transferred
A summary of the purchase price is as follows (in thousands):
Cash consideration | $ | 11,077 | ||
Restricted shares of Superior common stock issued | 2,000 | |||
Contingent consideration | 1,119 | |||
Total Consideration | $ | 14,196 |
Assets Acquired and Liabilities Assumed
The table below presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of Guardian based on their estimated fair values as of the effective date of the transaction. The assets and liabilities of Guardian shown below are based on our preliminary estimates of their acquisition date fair values. Our final fair value determination may be different than those shown below.
The following is our preliminary assignment of the aggregate consideration (in thousands):
Accounts receivable | $ | 1,656 | ||
Inventories | 621 | |||
Prepaid expenses and other current assets | 272 | |||
Property, plant and equipment | 15 | |||
Intangible assets | 5,886 | |||
Goodwill | 6,463 | |||
Total assets | $ | 14,913 | ||
Accounts payable | 533 | |||
Other current liabilities | 184 | |||
Total liabilities | $ | 717 |
The Company recorded $5.9 million in identifiable intangibles at fair value, consisting of $5.0 million in acquired customer relationships, $0.2 million for a non-compete agreement and $0.7 million for the Guardian Products trade name. The intangible assets associated with the customer relationships are being amortized for seven years, the non-compete agreement is being amortized for five years and the trade name is being amortized for two years. The difference between the fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to the assembled workforce and expanded market opportunities. The acquisition of Guardian was treated as an asset purchase for income tax purpose, and therefore, the resulting goodwill from this acquisition is deductible for U.S. income tax purposes. The goodwill associated with the Guardian acquisition was fully impaired during the three and nine months ended September 30,2022 as a result of the Company’s goodwill impairment test performed during the third quarter of 2022, which was triggered by the depressed market price of the Company's common stock and corresponding significant decline in the Company’s market capitalization. See Note 11 for further details.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in this Item 2 has been revised to reflect the restatement occurring subsequent to the filing of the original Form 10-Q.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the Condensed Consolidated Financial Statements in Part I, Item 1 (“Financial Statements”) of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Cautionary Note Regarding Forward Looking Statements
Certain matters discussed in this Form 10-Q are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified by use of the words “may,” “will,” “should,” “could,” “expect,” anticipate,” “estimate,” “believe,” “intend,” “project,” “potential,” or “plan” or the negative of these words or other variations on these words or comparable terminology. Forward-looking statements in this Quarterly Report on Form 10-Q may include, without limitation: (1) the projected impact of the COVID-19 pandemic on our, our customers’, and our suppliers’ businesses, (2) projections of revenue, income, and other items relating to our financial position and results of operations, (3)(2) statements of our plans, objectives, strategies, goals and intentions, (4)(3) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (5)(4) statements of expected industry and general economic trends.trends and (5) the projected impact of the COVID-19 pandemic on our, our customers’, and our suppliers’ businesses.
Such forward-looking statements are subject to certain risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the following: the impact of competition; the effect of uncertainties related to supply disruptions, inflationary environment, employment levels and general economic and political conditions in the COVID-19 pandemic, including existing and possible future variants, onareas of the world in which the Company operates or from which it sources its supplies or the areas of the United States of America (“U.S.” or “United States”) in which the Company’s customers are located; lingering effects of the COVID-19 pandemic, including existing and possible future variants, on the United States and global markets, our business, operations, customers, suppliers and employees, including without limitation the length and scope of restrictions imposed by various governments and organizations and the continuing success of efforts to deliver effective vaccines, on a timely basis to a number of people sufficient to prevent or substantially lower the severity of incidents of infection or variants, among other factors; our ability to navigate successfully the challenges posed by current global supply disruptions; general economic conditions, including employment levels, in the areas of the United States in which the Company’s customers are located;factors; changes in the healthcare, retail, hotels,hotel, food service, transportation and other industries where uniforms and service apparel are worn; our ability to identify suitable acquisition targets, successfully integrate any acquired businesses, successfully manage our expanding operations, or discover liabilities associated with such businesses during the diligence process;process, successfully integrate any acquired businesses, or successfully manage our expanding operations; the price and availability of cotton and other manufacturing materials; attracting and retaining senior management and key personnel; the effect of the Company’s material weaknessweaknesses in internal control over financial reporting and/or the restatement of its financial statements for the periods ended June 30 and September 30, 2021;reporting; the Company’s ability to successfully remediate its material weaknessweaknesses in internal control over financial reporting and to maintain effective internal control over financial reporting;and other factors described in the Company’s filings with the Securities and Exchange Commission, including those described in the “Risk Factors” section herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.2021. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances, except as may be required by law.
Recent AcquisitionAcquisitions
On January 29, 2021, the Company, through BAMKO, acquired substantially all of the assets of Gifts By Design, Inc. (“Gifts by Design”) of Seattle, Washington. Gifts by Design is a promotional products and branded merchandise agency that is well-established as a developer and supplier of corporate awards, incentives, and recognition programs for some of the world’s biggest brands. The purchase price for the acquisition consisted of $6.0 million in cash at closing.
On December 2, 2021, the Company, principally through BAMKO, acquired substantially all of the assets of Sutter’s Mill Specialties, Inc. (“Sutter’s Mill”) of Tempe, Arizona. Sutter’s Mill is a vertically integrated manufacturer of high quality, decorated promotional products. Sutter's Mill has the capability to print on demand and create customized promotional programs and products for customers of any size. The purchase price of the acquisition consisted of the following: (a) approximately $10.5 million in cash, (b) the issuance of 45,620 restricted shares of Superior’s common stock that vest ratably over a three-year period, and (c) potential future payments of approximately $4.5 million in additional contingent consideration for calendar years 2022 through 2024 based on the results of the acquired business.
On May 1, 2022, the Company, through BAMKO, acquired substantially all of the assets of Guardian Products, Inc. (“Guardian”) of Norcross, Georgia. Guardian is a branded merchandise company that is one of the leading providers of promotional products to automotive dealers nationwide. The purchase price for the acquisition consisted of the following: (a) $11.1 million in cash at closing, subject to a working capital adjustment, (b) the issuance of 116,550 restricted shares of Superior’s common stock (the “Guardian Stock”) that vest ratably over a three-year period, and (c) estimated potential future payments of approximately $2.3 million in additional contingent consideration based on the results of the acquired business through April 2025. The Guardian Stock is subject to transfer restrictions over the three-year period following the closing of the acquisition.
Business Outlook
Superior Group of Companies, Inc. (together with its subsidiaries, the “Company,” “Superior,” “we,” “our,” or “us”) is comprised of three reportable business segments: (1) Branded Products, (2) Healthcare Apparel and (3) Contact Centers. Beginning with the second quarter of 2022, the Company realigned its reportable segments to correspond with changes to its organizational responsibilities, management structure and operating model. Prior to implementing the current segment reporting, the Company’s Uniforms and Related Products (2)segment included both healthcare apparel and uniforms. As part of the change in reportable segments, the uniforms business was combined with the previous Promotional Products segment to form the Branded Products segment, the healthcare apparel business became its own segment named Healthcare Apparel and income and expenses related to corporate functions that are not specifically attributable to an individual reportable segment are no longer presented in segment results. The previous Remote Staffing Solutions and (3) Promotional Products.segment was renamed Contact Centers segment. All prior period segment information has been recast to reflect this change in reportable segments.
Uniforms and RelatedBranded Products
In our Uniforms and RelatedBranded Products segment, we produce and sell customized merchandising solutions, promotional products and branded uniform programs to our customers. As a strategic branding partner, we offer our customers customized branding solutions and strategies that generate favorable brand impressions, bolster customer retention and enhance employee engagement. Our products are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, tech, transportation and other industries. Sales volumes in this segment are impacted by a number of factors, including marketing programs of our customers and turnover of our customers’ employees, often times driven by the opening and closing of locations. The COVID-19 pandemic reduced demand for our products in many of our customers’ industries, such as the restaurant, transportation, hospitality and entertainment industries. This, however, was more than offset by demand from customers in the delivery service industry and certain retail industries, such as grocery and pharmacy. The COVID-19 pandemic initially also created significant opportunities for us within the personal protective equipment market; while we continue to source some personal protective equipment for our customers, we anticipate that demand for personal protective equipment will continue to decline. From a long-term perspective, we believe that synergies within this segment will create opportunities to cross-sell products to new and existing customers.
Healthcare Apparel
In our Healthcare Apparel segment, we manufacture (through third parties or our own facilities) and sell a wide range of uniforms, career apparel and accessories. Our primary products are servicehealthcare apparel, such as scrubs, lab coats, protective apparel and patient gowns, provided to the healthcare industry, and service apparel, such as uniforms, provided to workers employed by our customers in various industries, including retail, hotels, food service, transportation and other industries.gowns. We sell our brands of healthcare service apparel primarily to healthcare laundries, dealers, distributors and retailers.retailers primarily in the United States, and recently, have begun expansion into the European market. The COVID-19 pandemic initially created increased demand for healthcare service apparel from laundries, dealers and distributors that service hospitals and other medical facilities. However, as a result of the pandemic the healthcare apparel market has been oversupplied creating a slowdown in recent demand. Additionally, the market demand for personal protective equipment has declined as a result of the progression of the COVID-19 pandemic. From a long-term perspective, we expect that demand for our signature marketing brands, including Fashion Seal Healthcare® and WonderWink®, will continue to provide opportunities for growth and increased market share. Sales of uniforms are impacted by our customers’ opening and closing of locations and reductions, increases, and turnover of employees. The COVID-19 pandemic reduced demand for uniform apparel in many of our customers’ industries, such as the restaurant, transportation and hospitality industries. This, however, was partially offset by demand from customers in certain retail industries, such as grocery and pharmacy customers. The economic environment in the United States is beginning to return to pre-pandemic economic activity levels. While we continue to source some personal protective equipment for our customers, we anticipate that opportunities to supply personal protective equipment, including through our Uniforms and Related Products segment, will continue to decline. Based on the longer-term fundamentals of our uniforms business, we believe that we have growth opportunities to expand our market share.
Remote Staffing SolutionsContact Centers
This business segment (also known as “The Office Gurus”), which operates in El Salvador, Belize, Jamaica, Dominican Republic, and the United States, initially startedprovides outsourced, nearshore business process outsourcing, contact and call-center support services to supportNorth American customers. These services are also provided internally to the Company’s back office needs while improving overall efficiencies and loweringother two operating costs. After years of consistently improving key performance indicators, lowering costs and providing exceptional service to our Uniforms and Related Products segment in areas such as order entry, cash collections, vendor payables processing, customer service, sales, and others, The Office Gurus started selling their services to outside companies in 2009.segments. The Office Gurus has become an award-winning business process outsourcer offering inbound and outbound voice, email, text, chat and social media support. AlthoughThe nearshore call-center market has experienced a period of growth as businesses look to reduce operating costs while maintaining high-quality customer support. Nearshore operators are able to provide comparable service to their U.S. counterparts at a fraction of the price. COVID-19 pandemic has generated uncertaintiesacted as a catalyst for our customers and their industries, we have recently seen increased demand for our services.rapid transformation within the traditional business process outsourcing model. With an environment and career path designed to attract and maintain top talent across all sites, we believe The Office Gurus is positioned well to continue growing this business.
Promotional ProductsGlobal Economic and Political Conditions
For more thanEconomic and political events this year have altered the landscape in which we and other U.S. companies operate in a decade, we sold promotional products on a limited basisvariety of ways. In response to our existing Uniforms and Related Products customer base. While there were substantial opportunities to sell promotional products to those customers, it was not an area of focus, specialization, or expertise for us. On March 1, 2016, that changed with our acquisition of substantially all ofinflationary pressures, the assets of BAMKO, Inc. (“BAMKO”). BAMKOU.S. Federal Reserve has many strengths, well-developed systems, and time-tested processes that offer significant competitive advantages. With a robust back-office support platform operated out of India, direct-to-factory sourcing operations basedraised interest rates, resulting in China, and proprietary technological platforms and programming capabilities that we believe are competitive, BAMKO is well positioned in the promotional products industry and continues to be a platform for potential future acquisitions. We completed two additional acquisitions in this segment in late 2017, as well as an acquisition in January 2021, and remain open to additional acquisitions going forward. In recent years we have seen an increase in customer ordersthe cost of borrowing for us, our customers, our suppliers, and other companies relying on debt financing. World events, such as the Russian invasion of Ukraine and the resulting economic sanctions, have impacted the global economy, including by exacerbating inflationary and other pressures linked to COVID-related supply chain disruptions. Prolonged inflationary conditions, high and/or increased interest rates, and additional sanctions or retaliatory measures related to the Russia-Ukraine crisis, or other situations, could further negatively affect U.S. and international commerce and exacerbate or prolong the period of high energy prices and supply chain constraints. At this time, the extent and duration of these economic and political events and their effects on the economy and the Company are impossible to predict.
Prolonged or recurring disruptions or instability in the United States and global economies, and how the world reacts to those disruptions or instability, could have long-term impacts on our promotional productsbusiness. These business and expect growth opportunitiesimpacts could negatively affect us in a number of ways, including, but not limited to, reduced demand for our core promotional products and services, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, to continue. The COVID-19 pandemic created significant opportunities for us within the personal protective equipment market. And although we will continue to source some personal protective equipment fordeclines in our stock price, reduced availability and less favorable terms of future borrowings, valuation of our pension obligations, reduced credit-worthiness of our customers, we anticipate, based on supply and demand factors, that opportunities to supply personal protective equipment, including through our Promotional Products segment, will continue to decline. Our core promotional products business has not experiencedpotential impairment of the same downturn during the pandemic that manycarrying value of our competitors experienced as increased activities from customers in certain industries, such as the delivery service industry, more than offset reduced activities from customers ingoodwill or other industries, such as the restaurant and entertainment industries. From a long-term perspective, we believe that this segment’s synergistic fit with our uniforms business will create opportunities to cross-sell the products of each of these business segments to new and existing customers.indefinite-lived intangible assets.
COVID-19 Impact
The COVID-19 pandemic continuescontinue to linger and affect our operations around the world and financial performance, and likely will continuealthough to do so for an undetermined period of time. International, federal, state and local efforts to contain the spread of COVID-19 have continued. Government actions to address the situation remain in effect and new actions continue to be enacted or modified, including safety requirements such as recommended or mandatory use of face masks and other personal protective equipment and related products, recommended or mandated vaccinations, social distancing rules and guidelines, travel restrictions, temporary closures of non-essential businesses and other restrictive measures.
In responding to the needs of our customers, we have sourced personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which contributed $18.6 million and $16.1 million to net sales during the nine months ended September 30, 2021 for our Uniforms and Related Products segment and Promotional Products segment, respectively.
However, the pandemic also had and could continue to have a number of adverse impacts on our business, including, but not limited to, disruption to the economy and our customers’ willingness and/or ability to spend, temporary or permanent closures of businesses that consume our products and services, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable. Our employees and the employees and contractors of our suppliers and customers also could become ill, quarantined, or otherwise unable to work or travel due to health reasons or governmental restrictions.
Prolonged or recurring disruptions or instabilitylesser extent than in the United States and global economies, and howprevious two years. Nonetheless, the world reacts to those disruptions or instability, could have long-term impacts on our business. These business impacts could negatively affect us in a numbercumulative impact of ways, including, but not limited to, reduced demand for our core products and services, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, declines in our stock price, reduced availability and less favorable terms of future borrowings, valuation of our pension obligations, reduced credit-worthiness of our customers, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets. The extent to which the COVID-19 pandemic ultimately impactson our business, financial condition, results of operations orand cash flows willcontinues to depend on numerous evolving factors that we are unabledifficult to accurately predict at this time, including the delivery of effective vaccines on a timely basis to a number of people sufficient to prevent or substantially lower the severity of incidents of infection or possible future variants of the virus, the extent and effectiveness of containment actions, availability of widespread rapid testing and effective treatment alternatives.predict. Prolonged or recurring periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.
In responding to the needs of our customers, we have sourced personal protective equipment, including facemasks, isolation gowns, sanitizers, gloves and COVID-19 testing kits, which contributed $5.6 million and $2.1 million to net sales during the nine months ended September 30, 2022 for our Branded Products segment and Healthcare Apparel segment, respectively. Personal protective equipment net sales for our Branded Products segment and Healthcare Apparel segment were $27.2 million and $7.5 million, respectively, during the nine months ended September 30, 2021.
Sourcing of Goods and Raw Materials
Along with many manufacturers that source goods and raw materials from abroad, we are currently experiencing continued significantcontinue to experience supply disruptions and delays due to a variety of reasons. These changes are partially driven by interruptions in global supply chains (including as a result of port congestion) and partially by a shift in customer buying habits to e-commerce, which has the effect of increasing demand for shipping capacity from Asia, leading to capacity constraints. Both factors have increased shipping times as well as the price of shipping, whether by sea, air, rail, or vehicle, this year. Shipping delays combined with significant increases in orders for our products have recently created, and are expected to continue to create, inventory pressure for us.
An interruption in any of our supply sources or facilities could temporarily adversely affect our results of operations until alternate sources or facilities can be secured. The Uniforms and Related Products segment’s principalPrincipal fabrics used in the manufacture of itsthe Company’s finished goods areinclude cotton, polyester, cotton-synthetic, poly-synthetic blends, textiles, plastic, glass, fabric and poly-synthetic blends.metal. The majority of such fabrics are sourced in China. The Promotional Products segment relies on the supply of different types of raw materials as well as textiles, including plastic, glass, fabric and metal. The vast majority of these raw materials are principally sourced from China, either directly by BAMKOus or itsour suppliers. If we are unable to continue to obtain our raw materials and finished products from China or if our suppliers are unable to source raw materials from China, it could significantly disrupt our business. Further, the Company and the Company’s suppliers generally source or manufacture finished goods in parts of the world that may be affected by economic uncertainty, political unrest, logistical challenges (such as port strikes and embargos), foreign currency fluctuations, labor disputes, health emergencies, or the imposition of duties, tariffs or other import regulations by the United States, any of which could result in additional cost or limit our supply of necessary goods and raw materials.
We currently believe challenges created by such supply chain disruptions are manageable. However, we have limited insight into the extent to which COVID-19 or other factors could further impair our sourcing of goods and materials.
Results of Operations |
Three Months Ended September 30, |
Net Sales (in thousands): |
Three Months Ended September 30, | ||||||||||||
2021 | 2020 | % Change | ||||||||||
Uniforms and Related Products | $ | 61,890 | $ | 73,234 | (15.5 | %) | ||||||
Remote Staffing Solutions | 18,040 | 11,636 | 55.0 | % | ||||||||
Promotional Products | 45,243 | 44,176 | 2.4 | % | ||||||||
Net intersegment eliminations | (1,847 | ) | (1,309 | ) | 41.1 | % | ||||||
Consolidated Net Sales | $ | 123,326 | $ | 127,737 | (3.5 | %) | ||||||
Three Months Ended September 30, | ||||||||||||
2022 | 2021 | % Change | ||||||||||
Branded Products | $ | 86,769 | $ | 71,651 | 21.1 | % | ||||||
Healthcare Apparel | 30,039 | 35,482 | (15.3 | %) | ||||||||
Contact Centers | 23,363 | 18,040 | 29.5 | % | ||||||||
Net intersegment eliminations | (1,468 | ) | (1,847 | ) | (20.5 | %) | ||||||
Consolidated Net Sales | $ | 138,703 | $ | 123,326 | 12.5 | % | ||||||
Net sales for the Company decreased 3.5%increased 12.5% from $127.7 million for the three months ended September 30, 2020 to $123.3 million for the three months ended September 30, 2021.2021 to $138.7 million for the three months ended September 30, 2022. The principal components of this aggregate decreaseincrease in net sales were as follows: (1) an increase in net sales for our Branded Products segment (contributing 12.3%), (2) a decrease in net sales for our Uniforms and Related ProductsHealthcare Apparel segment (contributing (8.9%(4.4%)), (2) an increase in net sales for our Promotional Products segment (contributing 0.8%), and (3) an increase in net sales for our Remote Staffing SolutionsContact Centers segment after intersegment eliminations (contributing 4.6%).
Uniforms and RelatedBranded Products net sales decreased 15.5%increased 21.1%, or $11.3$15.1 million, for the three months ended September 30, 20212022 compared to the three months ended September 30, 2020.2021. The increase was primarily due to net sales of $14.4 million attributable to the acquisitions of Sutter’s Mill in December 2021 and Guardian in May 2022.
Healthcare Apparel net sales decreased 15.3%, or $5.4 million, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The decrease was primarily due to a decrease of $13.7 million in sales of personal protective equipment driven by the progression of the COVID-19 pandemic. This decrease was partially offset by an increase in demand for uniformhealthcare apparel asresulting from market conditions in the current year period, most notably, a number of our customers’ industries, suchmarket saturated with inventory as the restaurant, transportation and hospitality industries, have begun to show signs of recovery from the effects of the COVID-19 pandemic.pandemic progressed.
Remote Staffing SolutionsContact Centers net sales increased 55.0%29.5% before intersegment eliminations and 56.8%35.2% after intersegment eliminations for the three months ended September 30, 20212022 compared to the three months ended September 30, 2020.2021. These increases were primarily attributed to our providing continuedexpanded services in the current year period to our customer base that was expanded during 2020existing customers and the onboarding of new customers in 2021.
Promotional Products net sales increased 2.4%, or $1.1 million, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily due to an increase of $19.5 million in net sales in our core promotional products business and an increase of net sales of $4.4 million due to the acquisition of Gifts by Design on January 29, 2021, partially offset by a decrease of $18.5 million in net sales of personal protective equipment. The increase in net sales in our core promotional products business was primarily driven by the growth of our customer base through continued market penetration experienced in 2020 and 2021 and improved market conditions. The sale of personal protective equipment during the three months ended September 30, 2020 was driven by market demand as a result of the COVID-19 pandemic.2022.
Cost of Goods Sold
Cost of goods sold consists primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing costs, and inspection costs for our Uniforms and RelatedBranded Products and Promotional ProductsHealthcare Apparel segments. Cost of goods sold for our Remote Staffing SolutionsContact Centers segment includes salaries and payroll related benefits for agents. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with out-bound freight are recorded in cost of goods sold. Other shipping and handling costs are included in selling and administrative expenses.
As a percentage of net sales, total cost of goods sold for our Uniforms and Related Products segment was 64.2%63.5% for the three months ended September 30, 20212022 and 66.5%62.9% for the three months ended September 30, 2020.2021.
As a percentage of net sales, cost of goods sold for our Branded Products segment was 69.8% for the three months ended September 30, 2022 and 69.7% for the three months ended September 30, 2021. As a percentage of net sales, cost of goods sold remained relatively flat.
As a percentage of net sales, cost of goods sold for our Healthcare Apparel segment was 61.9% for the three months ended September 30, 2022 and 58.9% for the three months ended September 30, 2021. The percentage increase was primarily driven by incremental inventory reserves of $0.8 million for slow-moving inventory items and manufacturing variances from lower production volume in our Haiti facilities.
As a percentage of net sales, cost of goods sold for our Contact Centers segment was 40.5% for the three months ended September 30, 2022 and 41.9% for the three months ended September 30, 2021. The percentage decrease was primarily due to costs associated with the onboarding of new customers in the prior year period.
Selling and Administrative Expenses
As a percentage of net sales, total selling and administrative expenses was 31.6% for the three months ended September 30, 2022 and 28.4% for the three months ended September 30, 2021. The increase was primarily due to expense deleverage resulting from the 15.3% decrease in Healthcare Apparel net sales, an increase in employee costs, which was mostly driven by the decreasean increase in personal protective equipment sales,headcount to support growth in our Branded Products and Contact Centers segments, and an increase in depreciation and amortization expense. These increases were partially offset by higher logistical costsan unrealized gain of $1.8 million recognized during the current year period. period driven by a decrease in the fair value of written put options. For more information on the written put options, please refer to the disclosure in Note 1 to the Financial Statements, which is incorporated herein by reference.
As a percentage of net sales, selling and administrative expenses for our Branded Products segment was 25.7% for the three months ended September 30, 2022 and 23.5% for the three months ended September 30, 2021. The percentage increase was primarily attributed to increased investment to support future growth of this segment, including the expansion of our workforce, and increased commissions from improved gross margins.
As a percentage of net sales, selling and administrative expenses for our Healthcare Apparel segment was 33.8% for the three months ended September 30, 2022 and 25.3% for the three months ended September 30, 2021. The percentage increase was primarily attributed to the decrease in sales explained above and an increase in selling administrative expenses resulting from increased employee related costs, including payroll, severance and travel, and advertising activities.
As a percentage of net sales, selling and administrative expenses for our Contact Centers segment was 40.7% for the three months ended September 30, 2022 and 36.5% for the three months ended September 30, 2021. The percentage increase was primarily attributed to increased investment in organizational infrastructure, including facilities and personnel, to support future growth of this segment.
Goodwill Impairment Charge
During the third quarter of 2022, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the Branded Products segment was lower than its carrying value primarily as the result of a decrease in the Company’s stock price. Consequently, the Company recorded a non-cash goodwill impairment charge of $21.5 million during the three months ended September 30, 2022. This charge was non-cash in nature and does not affect our liquidity or debt covenants.
Interest Expense
Interest expense increased to $1.8 million for the three months ended September 30, 2022 from $0.3 million for three months ended September 30, 2021. This increase was primarily due to an increase in interest rates on our outstanding borrowings and $0.5 million of expense relating to the write-off of unamortized debt issuance costs associated with our former senior secured credit facility in the third quarter of 2022. The weighted average interest rate on our outstanding borrowings for the three months ended September 30, 2022 was 3.1% compared to 0.9% for the three months ended September 30, 2021.
Income Taxes
The effective income tax rate was 25.0% and 17.8% for the three months ended September 30, 2022 and 2021, respectively. Income tax expense for the three months ended September 30, 2022 was impacted by a tax benefit of $4.3 million relating to the deductible portion of the goodwill impairment. The effective tax rate for the three months ended September 30, 2022 was impacted by the nondeductible portion of the goodwill impairment charge totaling $0.8 million. The effective tax rate may vary from quarter to quarter due to unusual or infrequently occurring items, the resolution of income tax audits, changes in tax laws, the tax impact from employee share-based payments, taxes incurred in connection to the territorial style tax system, or other items.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 |
Net Sales (in thousands): |
Nine Months Ended September 30, | |||||||||
2022 | 2021 | % Change | |||||||
Branded Products | $ | 285,891 | $ | 244,664 | 16.9 | % | |||
Healthcare Apparel | 86,895 | 108,782 | (20.1 | %) | |||||
Contact Centers | 62,803 | 46,723 | 34.4 | % | |||||
Net intersegment eliminations | (5,371 | ) | (5,209 | ) | 3.1 | % | |||
Consolidated Net Sales | $ | 430,218 | $ | 394,960 | 8.9 | % | |||
Net sales for the Company increased 8.9% from $395.0 million for the nine months ended September 30, 2021 to $430.2 million for the nine months ended September 30, 2022. The principal components of this aggregate increase in net sales were as follows: (1) an increase in net sales for our Branded Products segment (contributing 10.4%), (2) a decrease in net sales for our Healthcare Apparel segment (contributing (5.5%)), and (3) an increase in net sales for our Contact Centers segment after intersegment eliminations (contributing 4.0%).
Branded Products net sales increased 16.9%, or $41.2 million, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to net sales of $33.6 million attributable to the acquisitions of Sutter’s Mill in December 2021 and Guardian in May 2022 and organic growth through new customers and the expansion of existing customers. These increases were partially offset by a decrease of $21.6 million in net sales of personal protective equipment driven by the progression of the COVID-19 pandemic.
Healthcare Apparel net sales decreased 20.1%, or $21.9 million, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease was primarily due to a decrease in demand for healthcare apparel resulting from market conditions in the current year period, most notably, a market saturated with inventory as the COVID-19 pandemic progressed. Additionally, net sales of personal protective equipment decreased by $5.4 million. The sale of personal protective equipment during the nine months ended September 30, 2021 was driven by market demand as a result of the progression of the COVID-19 pandemic.
Contact Centers net sales increased 34.4% before intersegment eliminations and 38.3% after intersegment eliminations for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. These increases were primarily attributed to providing expanded services to our existing customers and the onboarding of new customers in 2022.
Cost of Goods Sold
As a percentage of net sales, total cost of goods sold was 65.5% for the nine months ended September 30, 2022 and 64.0% for the nine months ended September 30, 2021. The percentage increase was primarily driven by $5.3 million in inventory write-downs of excess inventory related to personal protective equipment and discontinued styles.
As a percentage of net sales, cost of goods sold for our Branded Products segment was 70.8% for the nine months ended September 30, 2022 and 69.2% for the nine months ended September 30, 2021. The percentage increase was primarily driven by differences in the mix of products and customers, $1.3 million in inventory write-downs of personal protective equipment in the second quarter of 2022 and interruptions in global supply chains that led to higher logistical costs. For additional information related to logistical challenges, please refer to the section “ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Outlook – Sourcing of Goods and Raw Materials.”
As a percentage of net sales, cost of goods sold for our Remote Staffing SolutionsHealthcare Apparel segment was 41.9%64.5% for the threenine months ended September 30, 20212022 and 40.0%61.3% for the threenine months ended September 30, 2020. 2021. The percentage increase was primarily duedriven by $4.0 million in inventory write-downs of excess inventory related to costs associated with the onboarding of new customers in the current year period.personal protective equipment and discontinued styles.
As a percentage of net sales, cost of goods sold for our Promotional ProductsContact Centers segment was 68.7%40.5% for the threenine months ended September 30, 20212022 and 62.1%41.2% for the threenine months ended September 30, 2020. The2021. As a percentage increase was primarily the result of differences in the mixnet sales, cost of products and customers.goods sold remained relatively flat.
Selling and Administrative Expenses
SellingAs a percentage of net sales, total selling and administrative expenses increased 0.4%, or $0.2 million,was 30.7% for the threenine months ended September 30, 2021 compared to2022 and 26.4% for the threenine months ended September 30, 2020. 2021. The increase was primarily due to expense deleverage resulting from the 20.1% decrease in Healthcare Apparel net sales, an increase in employee costs, which was mostly driven by an increase in headcount to support growth in our Branded Products and Contact Centers segments, an increase in depreciation and amortization expense and investment losses related to the Company’s supplemental executive retirement plan. These increases were partially offset by an unrealized gain of $1.8 million recognized during the current year period driven by a decrease in the fair value of written put options. For more information on the written put options, please refer to the disclosure in Note 1 to the Financial Statements, which is incorporated herein by reference.
As a percentage of net sales, selling and administrative expenses for our Uniforms and RelatedBranded Products segment was 31.1%23.7% for the threenine months ended September 30, 20212022 and 30.0%20.5% for the threenine months ended September 30, 2020.2021. The percentage increase was primarily dueattributed to increased investment to support future growth of this segment, including the expansion of our workforce, and a decrease in personal protective equipment net sales, explained above.which have disproportionately lower selling and administrative expenses associated with them.
As a percentage of net sales, selling and administrative expenses for our Remote Staffing SolutionsHealthcare Apparel segment was 36.5%34.6% for the threenine months ended September 30, 20212022 and 33.7%24.1% for the threenine months ended September 30, 2020.2021. The percentage increase was primarily attributed to investmentsthe decrease in the business tosales explained above and an increase in selling administrative expenses resulting from increased employee related costs, customer support continuedcosts, travel expenses and advertising activities. The decrease in sales growth.included a decrease in personal protective equipment net sales, which have disproportionately lower selling and administrative expenses associated with them.
As a percentage of net sales, selling and administrative expenses for our Promotional ProductsContact Centers segment was 22.6% for the three months ended September 30, 2021 and 22.2% for the three months ended September 30, 2020. As a percentage of net sales, selling and administrative expenses remained relatively flat.
Interest Expense
Interest expense was $0.3 million and $0.2 million for the three months ended September 30, 2021 and 2020.
Income Taxes
The effective income tax rate was 17.8% and 17.7% for the three months ended September 30, 2021 and 2020, respectively. The effective tax rate may vary from quarter to quarter due to unusual or infrequently occurring items, the resolution of income tax audits, changes in tax laws, the tax impact from employee share-based payments, taxes incurred in connection to the territorial style tax system, or other items.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Net Sales (in thousands):
Nine Months Ended September 30, | ||||||||||||
2021 | 2020 | % Change | ||||||||||
Uniforms and Related Products | $ | 200,651 | $ | 209,178 | (4.1 | %) | ||||||
Remote Staffing Solutions | 46,723 | 30,187 | 54.8 | % | ||||||||
Promotional Products | 152,795 | 145,810 | 4.8 | % | ||||||||
Net intersegment eliminations | (5,209 | ) | (3,834 | ) | 35.9 | % | ||||||
Consolidated Net Sales | $ | 394,960 | $ | 381,341 | 3.6 | % | ||||||
Net sales for the Company increased 3.6% from $381.3 million38.7% for the nine months ended September 30, 2020 to $395.0 million2022 and 36.1% for the nine months ended September 30, 2021. The principal componentspercentage increase was primarily attributed to increased investment in organizational infrastructure, including facilities and personnel, to support future growth of this aggregate increase in net sales were as follows: (1)segment.
Goodwill Impairment Charge
In conjunction with the re-segmentation during the second quarter of 2022, the Company performed a decrease in net sales for ourgoodwill impairment analysis and determined that the estimated fair value of the previous Uniforms and Related Products segment (contributing (2.2%)), (2) an increasewas lower than its carrying value primarily as the result of current market conditions, decline in net sales for our Promotionalexpected cash flows and/or decrease in the Company’s stock price. During the third quarter of 2022, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the Branded Products segment (contributing 1.8%), and (3) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 4.0%).
Uniforms and Related Products net sales decreased 4.1%, or $8.5 million, forwas lower than its carrying value primarily as the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The decrease was primarily due toresult of a decrease of $5.7 million in sales of personal protective equipment and lower market demand for healthcare service apparel when compared to the spike in demand during the early phases of the COVID-19 pandemic that began in the second quarterCompany’s stock price. Consequently, the Company recorded a non-cash goodwill impairment charge of 2020. These decreases were partially offset by an increase in demand for uniform apparel.
Remote Staffing Solutions net sales increased 54.8% before intersegment eliminations and 57.5% after intersegment eliminations for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. These increases were primarily attributed to our providing continued services in the current year period to our customer base that was expanded during 2020, the onboarding of new customers in 2021 and the negative impact of disruptions experienced in 2020 resulting from COVID-19.
Promotional Products net sales increased 4.8%, or $7.0 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily due to an increase of $60.0 million in net sales in our core promotional products business, partially offset by a decrease of $53.0 million in the sale of personal protective equipment. The increase in net sales in our core promotional products business was driven by the timing of promotional programs launched for certain customers, growth of our customer base through continued market penetration experienced in 2020 and 2021 and improved market conditions. Additionally, the acquisition of Gifts by Design on January 29, 2021 resulted in an increase of net sales of $9.1$45.9 million during the nine months ended September 30, 2021.2022. This charge was non-cash in nature and does not affect our liquidity or debt covenants.
Intangible Assets Impairment Charge
In conjunction with the Company’s realignment of its reportable segments during the second quarter of 2022, the Company began an effort to centralize certain branding and go-to-market strategies under the BAMKO brand and determined that it would no longer use certain trade names associated with branded products. The robust personal protective equipment salesCompany’s rebranding efforts resulted in a $5.6 million impairment of indefinite-lived trade names related to its Branded Products segment during the nine months ended September 30, 20202022. This charge was driven by market demand during the early phases of the COVID-19 pandemic.non-cash in nature and does not affect our liquidity or debt covenants.
Cost of Goods Sold
As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 65.7% for the nine months ended September 30, 2021 and 64.7% for the nine months ended September 30, 2020. The percentage increase was primarily driven by higher logistical costs during the current year period, partially offset by the decrease in personal protective equipment sales. For additional information related to logistical challenges, please refer to the section “ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Outlook – Sourcing of Goods and Raw Materials.”
As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 41.2% for the nine months ended September 30, 2021 and 42.7% for the nine months ended September 30, 2020. The percentage decrease was primarily driven by disruptions resulting from COVID-19 during the nine months ended September 30, 2020.
As a percentage of net sales, cost of goods sold for our Promotional Products segment was 68.2% for the nine months ended September 30, 2021 and 67.0% for the nine months ended September 30, 2020. The percentage increase was primarily the result of differences in the mix of products and customers.
Selling and Administrative Expenses
Selling and administrative expenses increased 5.4%, or $5.4 million, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily due to an increase in employee costs driven mostly by increased headcount and a reduction in expenses of $1.2 million in the prior year period that was the result of the Company’s decision to forgo its discretionary matching contribution under its defined contribution plan in 2020, partially offset by a decrease in bad debt expense of $4.4 million on outstanding trade accounts receivable.
As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 28.9% for the nine months ended September 30, 2021 and 28.8% for the nine months ended September 30, 2020. As a percentage of net sales, selling and administrative expenses remained relatively flat.
As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 36.1% for the nine months ended September 30, 2021 and 35.9% for the nine months ended September 30, 2020. As a percentage of net sales, selling and administrative expenses remained relatively flat.
As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 21.0% for the nine months ended September 30, 2021 and 20.6% for the nine months ended September 30, 2020. As a percentage of net sales, selling and administrative expenses remained relatively flat.
Pension Plan Terminations
In the second quarter of 2021, the Company completed the termination ofterminated its two noncontributory qualified defined benefit pension plans, which were fully funded. Consequently, the Company recognized a settlement charge of $6.9 million during the nine months ended September 30, 2021, which represents the acceleration of deferred charges previously included within accumulated other comprehensive loss and the impact of remeasuring the plan assets and obligations at termination. The pension plan terminations did not require a cash outlay by the Company.
Interest Expense
Interest expense decreasedincreased to $0.9$2.7 million for the nine months ended September 30, 20212022 from $1.7$0.9 million for nine months ended September 30, 2021. This increase was primarily due to an increase in interest rates on our outstanding borrowings, $0.5 million of expense relating to the write-off of unamortized debt issuance costs associated with our former senior secured credit facility in the third quarter of 2022 and an increase in outstanding borrowings. The weighted average interest rate on our outstanding borrowings for the nine months ended September 30, 2020. This decrease2022 was primarily due1.9% compared to a decrease in LIBOR rates on our outstanding borrowings and a loss of $0.3 million recognized on our interest rate swap during0.9% for the nine months ended September 30, 2020.2021.
Income Taxes
The effective income tax rate was 12.8%12.9% and 19.9%12.8% for the nine months ended September 30, 2022 and 2021, respectively. Income tax expense for the nine months ended September 30, 2022 was impacted by a tax benefit of $6.4 million relating to the impairment of intangible assets and 2020, respectively.a portion of the goodwill impairment. The effective tax rate for the nine months ended September 30, 2022 was impacted by the nondeductible portion of the goodwill impairment charge totaling $21.1 million. Income tax expense for the nine months ended September 30, 2021 was favorably impacted by a reversal of $1.8 million in deferred tax liabilities associated with the termination of the Company’s two qualified defined benefit pension plans, $0.8 million of windfall tax benefits from stock options exercised and $0.6 million of stranded tax benefits recognized as a result of the Company’s termination of its pension plans. The effective tax rate may vary from quarter to quarter due to unusual or infrequently occurring items, the resolution of income tax audits, changes in tax laws, the tax impact from employee share-based payments, taxes incurred in connection to the territorial style tax system, or other items.
Liquidity and Capital Resources
Overview
Management uses a number of standards in measuring the Company’s liquidity, such as: working capital, profitability ratios, cash flows from operating activities, and activity ratios. The Company’s balance sheet generally provides the ability to pursue acquisitions, invest in new product lines and technologies and invest in additional working capital as necessary.
The Company’s primary source of liquidity has been its net income and the use of credit facilities and term loansloan as described further below. Management currently believes that cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the Company’s anticipated working capital requirements and capital expenditures for the next twelve months. Management also currently believes that cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the Company’s anticipated working capital requirements and capital expenditures beyond the next twelve months. In the future, the Company may continue to use credit facilities and other secured and unsecured borrowings as a source of liquidity. The Company may also begin relying on the issuance of equity or debt securities, including under its universal shelf registration statement (File No. 333-249760)., to the extent available. There can be no assurance that any such financings would be available to us on reasonable terms. Any future issuances of equity securities or securities convertible into or exercisable for equity securities may be dilutive to our shareholders. Additionally, the cost of the Company’s future sources of liquidity may differ from the costs of the Company’s sources of liquidity to date.
Working Capital
Superior’s UniformsBranded Products and Related Products segment markets itselfHealthcare Apparel segments market themselves to itstheir customers as a “stock house.” Therefore, Superior carries inventories of both raw materials and finished products, the practice of which requires substantial working capital, which we believe to be common in the industry.
Cash and cash equivalents increased by $1.2$10.0 million to $6.4$18.9 million as of September 30, 20212022 from $5.2$8.9 million on December 31, 2020.2021. Working capital increased to $164.4$237.5 million at September 30, 20212022 from $143.6$188.1 million at December 31, 2020.2021. The increase in working capital was primarily due to an increaseincreases in inventories,inventory, contract assets and cash and cash equivalents and a decrease in other current liabilities and an increase in prepaid expenses and other current assets, partially offset by a decrease in accounts receivable.portion of long-term debt. The increase in inventoriesinventory was primarily driven by the timing of inventory purchases withininvestment in our Promotional Products and Uniforms and Related Products segments. The decrease in other current liabilities was primarily related to significant accruals as of December 31, 2020, associated with the Company’s performance in 2020, that were paid in the current year period, including accrued compensation and income taxes.Healthcare Apparel segment. The increase in prepaid expenses and other currentcontract assets was primarily related to prepaid taxesthe timing of shipments to customers and insurance.receipts from suppliers for finished goods with no alternative use within our Branded Products segment. The increase in cash and cash equivalents was primary related to the timing of payments on outstanding borrowings. The decrease in accounts receivablecurrent portion of long-term debt was primarily driven by the timingresult of customer payments received within our Uniforms and Related Products segment.contractual obligations under the new credit agreement, which was entered into on August 23, 2022.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized in the following table (in thousands):
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 18,161 | $ | 51,067 | $ | (4,504 | ) | $ | 18,161 | |||||||
Investing activities | (20,481 | ) | (5,711 | ) | (22,423 | ) | (20,481 | ) | ||||||||
Financing activities | 3,656 | (48,231 | ) | 37,032 | 3,656 | |||||||||||
Effect of exchange rates on cash | (100 | ) | (512 | ) | (132 | ) | (100 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | $ | 1,236 | $ | (3,387 | ) | $ | 9,973 | $ | 1,236 | |||||||
Operating Activities. The decreaseincrease in net cash provided byused in operating activities during the nine months ended September 30, 20212022 compared to the nine months ended September 30, 20202021 was primarily attributable to payments madeincreases in cash outflows for selling and administrative expenses, contract assets and inventory. Working capital cash changes during the current year period related to significant accruals asnine months ended September 30, 2022 included an increase of December 31, 2020 associated with the Company’s performance$19.2 million in 2020, including accrued compensation and income taxes, advanced customer payments received on personal protective equipment contractsinventory, an increase of $10.2 million in the prior year periodcontract assets and a $4.2decrease of $9.6 million contingent consideration payment representing the excess of the total contingent consideration payment made in theaccounts payable and other current year period over the fair value of the liability estimated at the time of acquisition.liabilities. Working capital cash changes during the nine months ended September 30, 2021 included an increase of $13.7 million in inventories, a decrease of $12.3 million in accounts payable and other current liabilities, an increase of $14.6 million in inventory and a decrease in accounts receivable of $7.5 million in accounts receivable. Working capital cash changes during the nine months ended September 30, 2020 included an increase of $29.2 million in accounts payable and other current liabilities and an increase of $12.2 million in accounts receivable.million.
Investing Activities. The increase in net cash used in investing activities during the nine months ended September 30, 20212022 compared to the nine months ended September 30, 20202021 was attributable to an increase$11.1 million of cash paid for the acquisition of Guardian in 2022, partially offset by $6.0 million of cash paid for the acquisition of Gifts by Design in 2021 and a decrease in capital expenditures of $8.7$3.2 million primarily related to the expansion of our distribution facility in Eudora, Arkansas, and $6.0 million of cash paid for the acquisition of Gifts by Design in 2021. From a long-term perspective, the Company expects to continue its ongoing capital expenditure program designed to improve the effectiveness and capabilities of its facilities and technology.
Financing Activities. The increase in net cash provided by financing activities during the nine months ended September 30, 20212022 compared to the nine months ended September 30, 20202021 was primarily attributable to an increase in net borrowings of $8.4$36.8 million in debt, during the current year period compared to net repayments in debtpartially offset by a decrease of $42.6$1.8 million in the prior year period.proceeds received on exercise of stock options.
Credit Facilities (See Note 3 to the Financial Statements)
On August 23, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, the domestic subsidiaries of the Company, as guarantors, the lenders party thereto (the “Lenders”), and PNC Bank, National Association, as administrative agent for the Lenders (the “Administrative Agent”), pursuant to which the Lenders are providing the Company senior secured credit facilities maturing in August 2027 consisting of a revolving credit facility in the aggregate maximum principal amount of $125.0 million and a term loan in the aggregate principal amount of $75.0 million (collectively, the “Credit Facilities”), and the ability to request incremental revolving credit or term loan facilities in an aggregate amount of up to an additional $75.0 million, subject to obtaining additional lender commitments and satisfying certain other conditions.
As of September 30, 2021,2022, the Company had approximately $96.8$162.0 million in outstanding borrowings under its credit facilities with Truist Bank,Credit Facilities, consisting of $37.8$87.0 million outstanding under the revolving credit facility $16.5and $75.0 million outstanding under a term loan maturing in February 2024 (“2017 Term Loan”) and $42.6 million outstanding under a term loan maturing in January 2026 (“2018 Term Loan”). The revolving credit facility, 2017 Term Loan and 2018 Term Loan are collectively referred to as the “Credit Facilities.”
On February 8, 2021, the Company entered into a Second Amended and Restated Credit Agreement with Truist Bank (the “Credit Agreement”), pursuant to which the maximum availability under the Company’s existing revolving credit facility was increased from $75.0 million to $125.0 million and its maturity date was extended until February 8, 2026. The 2017 Term Loan and the 2018 Term Loan remain outstanding with the same amortization schedules. The floor on LIBOR for the revolving credit facility was increased from zero to 0.25%, but the interest rates on the revolving credit facility and the term loans were not otherwise modified. Except as described above, the covenants, events of default and substantially all of the other terms that were contained in the Company’s prior credit agreement with Truist Bank remain unchanged in the Credit Agreement.loan.
Obligations outstanding under the 2018 Term Loan haveCredit 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 rate of LIBORperiod) plus a margin of between 0.85%1.0% and 1.65% (based2.0% (depending on the Company’s funded debt to EBITDAnet leverage ratio) (0.93%. The interest rate on outstanding borrowings under the Credit Facilities was 4.9% at September 30, 2021). Obligations outstanding under2022. During the term of the revolving credit facility, and the 2017 Term Loan generally haveCompany will pay a variable interest rate of one-month LIBOR (with a 0.25% floor on LIBOR for the revolving credit facility) plus a margin of between 0.68% and 1.50% (basedcommitment fee on the Company’s funded debt to EBITDA ratio) (0.93% forunused portion of the revolving credit facility equal to between 0.125% and 0.76% for the 2017 Term Loan at September 30, 2021). The Company is obligated to pay a commitment fee of 0.15% per annum0.250% (depending on the average unused portion of the commitment under the revolving credit facility.Company’s net leverage ratio). The available balance under the revolving credit facility is reduced by outstanding letters of credit. AtAs of September 30, 2021,2022, the Company had undrawn capacity of $87.2$38.0 million under the revolving credit facility, subject to the Company's compliance with the financial covenants described below.facility.
Contractual principal payments for the 2017 Term Loanterm loan are as follows: remainder of 20212022 - $1.5$1.9 million; 2022 through 2023 - $6.0 million per year; and$3.7 million; 2024 - $3.0 million. Contractual principal payments for the 2018 Term Loan are as follows: remainder of 2021 - $2.3$4.7 million; 2022 through 2025 - $9.3 million per year; and$5.6 million; 2026 - $3.1$6.6 million; and 2027 - $52.5 million. The term loans doloan does not contain pre-payment penalties.
The Credit Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, restricted payments (including dividends and related distributions), liquidations, mergers, consolidations or acquisitions, affiliate transactions and sales of assets.assets or subsidiaries. The Credit Agreement also requires the Company to maintaincomply with a fixed charge coverage ratio (as defined in the Credit Agreement) of at least 1.25:11.25 to 1.0 and a funded debt to EBITDAnet leverage ratio (as defined in the Credit Agreement) not to exceed 5.0:1.4.0 to 1.0. The Company’s net leverage ratio is generally calculated as the ratio of (a) indebtedness minus unrestricted cash to (b) consolidated EBITDA for the four most recently ended fiscal quarters. As of September 30, 2021,2022, the Company was in compliance with these ratios. The Credit Facilities are secured by substantially all of the operating assets of the Company as collateral, and the Company’s obligations under the Credit Facilities are guaranteed by all of its domestic subsidiaries. The Company’s obligations under the Credit Facilities are subject to acceleration upon the occurrence of an event of default as defined in the Credit Agreement.
Dividends and Share Repurchase Program
During the nine months ended September 30, 20212022 and 2020,2021, the Company paid cash dividends of $5.3$6.4 million and $4.6$5.3 million, respectively. The Company anticipates that it will continue to pay dividends in the future as financial conditions permit, but can provide no assurances to this effect.permit.
On May 2, 2019, the Company’s Board of Directors approved a stock repurchase program of up to 750,000 shares of the Company’s outstanding common stock. There is no expiration date or other restriction governing the period over which the Company can make share repurchases under the program. All purchases under this program will be open market transactions. At September 30, 2021,2022, the Company’s remaining repurchase capacity under its common stock repurchase program was 657,451 shares. Shares purchased under the common stock repurchase program are constructively retired and returned to unissued status. The Company considers several factors in determining when to make share repurchases, including among other things, the cost of equity, the after-tax cost of borrowing, the debt to total capitalization targets and theits expected future cash needs.
Off-Balance Sheet Arrangements
The Company does not engage in any off-balance sheet financing arrangements. In particular, the Company does not have any interest in variable interest entities, which include special purpose entities and structured finance entities.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are subject to market risk exposure related to changes in interest rates on our debt. InterestAs a result of the Company entering into a new credit agreement on August 23, 2022, interest on our Credit Facilities areis based upon the one-monthsecured overnight financing rate (“SOFR”). As SOFR is a relatively new reference rate with a limited history, there may or may not be more volatility than with other reference rates such as LIBOR, rate. In order to reducewhich may result in increased borrowing costs for the interest rate risk on our debt, the Company entered into an interest rate swap agreement on a portion of its borrowings. Excluding the effect of the interest rate swap agreement, aCompany. A hypothetical increase in the LIBOR rateSOFR of 100 basis points as of January 1, 2021between August 23, 2022 and September 30, 2022 would have resulted in approximately $0.9$0.2 million in additional pre-tax interest expense for the nine months ended September 30, 2021.expense. For further information regarding our debt instruments, see Note 3 to the Financial Statements.
Foreign Currency Exchange Risk
Sales to customers outside of the United States are subject to fluctuations in foreign currency exchange rates, which may negatively impact gross margin realized on our sales. Less than 5% of our sales contracts are not denominated in U.S. dollar.dollars. We cannot predict the effect of exchange rate fluctuations on our operating results. In certain cases, we may enter into foreign currency cash flow hedges to reduce the variability of cash flows associated with our sales and expenses denominated in foreign currency. As of September 30, 2021,2022, we had no foreign currency exchange hedging contracts. There can be no assurance that our strategies will adequately protect our operating results from the effect of exchange rate fluctuations.
Financial results of our foreign subsidiaries in the PromotionalBranded Products segment are denominated in their local currencies, which include the Hong Kong dollar, the Chinese renminbi, the British pound, the Indian rupee, the Brazilian real and the Canadian dollar. These operations may also have net assets and liabilities not denominated in their functional currency, which exposes us to changes in foreign currency exchange rates that impact income. Excluding intercompany payables and receivables considered to be long-term investments, changes in exchange rates for assets and liabilities not denominated in their functional currency are reported as foreign currency gains (losses) within selling and administrative expenses in our statements of comprehensive income.income (loss). During the nine months ended September 30, 20212022 and 2020,2021, foreign currency losses were not significant. We also have exposure to foreign currency exchange risk from the translation of foreign subsidiaries from the local currency into the U.S. dollar. Comprehensive income (loss) during the nine months ended September 30, 20212022 and 20202021 included a foreign currency translation adjustment loss of $0.4 million and $0.2 million, and $1.5 million, respectively, primarily related to exchange rate movements of the Brazilian real.respectively.
ITEM 4. Controls and Procedures
Information pertaining to controls and procedures in this Item 4 has been updated for events and developments occurring subsequent to the filing of the original Form 10-Q.
Disclosure Controls and Procedures
The Company conducted an evaluation, under supervision and with the participation of the Company’s principal executive officer, Michael Benstock, and the Company’s principal financial officer, Andrew D. Demott, Jr.,Michael Koempel, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). ThisBased on such evaluation, initially resulted in a determination by our Chief Executive Officerthe Company’s principal executive officer and Chief Financial Officerprincipal financial officer concluded that, our disclosure controls and procedures were effective as of the Evaluation Date.
In connection with the restatement, management has reevaluated the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting as of June 30, 2021 and as of the Evaluation Date. The Company’s management has concluded that in light of the Company’s failure to reverse deferred tax liabilities associated with the termination of the Company’s two qualified defined benefit pension plans in the second quarter 2021, a material weakness existed in the Company’s internal control over financial reporting related to accounting for income taxes as of June 30, 2021 and as of the Evaluation Date, and the Company’s disclosure controls and procedures were not effective because of the material weaknesses in the Company’s internal control over financial reporting described below and as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such date.that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As of December 31, 2021, management identified a material weakness relating to the accounting for income taxes principally related to the income tax provision and deferred tax accounts (liabilities and assets). The Company determined that management’s review controls over income taxes are not operating effectively to detect a material misstatement in the financial statements related to the completeness, accuracy, and presentation of the aforementioned areas of income taxes. As of September 30, 2022, this material weakness has not been remediated.
As of September 30, 2022, management identified a material weakness relating to the information technology system change controls within one of the Company’s primary systems. The Company determined that management’s review controls over certain system changes are not designed effectively to detect a material misstatement in the financial statements related to the completeness, accuracy, and presentation of the financial statements.
Notwithstanding the identified material weakness,weaknesses, management, including the Company’s principal executive officer and principal financial officer, have determined, based on the procedures they have performed, that the consolidated financial statements included in this Form 10-Q/A10-Q present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows at the Evaluation Date, and for the periods presented, in accordance with U.S. GAAP.
Remediation Efforts with Respect to the Material WeaknessWeaknesses
The Company’s management, under the oversight of the Audit Committee, is in the process of developingexecuting a plan to remediate the material weaknessweaknesses which is expected to includeincludes the following measures:
Income Taxes |
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The• implement a tax reporting software solution to streamline our income tax process and enhance our state and federal income tax reporting capabilities;
• hire additional qualified personnel to bolster the Company’s in-house tax capabilities and capacity; and
• evaluate and, if necessary, enhance the level of precision in the management review controls related to income taxes.
While portions of the remediation plan have been implemented and we continue to work toward implementing the remainder, the material weakness will not be considered remediated until management completes the remediation plan above, the enhanced controls operate for a sufficient period of time, and management has concluded, through testing, that the related controls are effective.
Information Technology
Since September 30, 2022, the Company has implemented automated system change control functionality that will more effectively facilitate the review and validation of system changes. The Company intends to design and implement additional enhanced review and monitoring controls. Though the new automated system change control functionality is operational, the material weakness will not be considered remediated until the additional enhanced review and monitoring controls are fully designed and implemented. The Company will monitor the effectiveness of its remediation planplans and will refine its remediation planplans as appropriate. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
Changes in Internal Control over Financial Reporting
There were no changes in ourthe Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended September 30, 20212022 that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting as the circumstances that led to the material weakness described above had not yet been identified. We are in the process of implementing changes to our internal control over financial reporting to remediate the material weakness, as more fully described above. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.reporting.
We are a party to certain lawsuits in the ordinary course of business. We do not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.
Information pertaining to our risk factors has been updated in connection with the restated condensed consolidated financial statements (collectively "financial statements") included herein.
We are exposed to certain risks and uncertainties that could have a material adverse impact on our business, financial condition and operating results. Except as set forth below, there have been no material changes to the Risk Factors described in Part I, Item 1A-Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020.2021.
ShortagesOur results of sourced goods or raw materials from suppliers, interruptions inoperations could be adversely affected by economic and political conditions globally and the effects of these conditions on our manufacturing,customers’ businesses and local conditions inlevels of business activity.
Economic and political events this year have altered the countrieslandscape in which we and other U.S. companies operate could adversely affect our results of operations.
Along with many manufacturers that source goods and raw materials from abroad, we are currently experiencing continued significant supply disruptions and delays due toin a variety of reasons. These changes are partially driven by interruptionsways. In response to inflationary pressures, the U.S. Federal Reserve has raised interest rates, resulting in global supply chains (including as a resultan increase in the cost of port congestion)borrowing for us, our customers, our suppliers, and partially by a shift in customer buying habits to e-commerce, which has the effect of increasing demand for shipping capacity from Asia, leading to capacity constraints. Both factors have increased shipping times as wellother companies relying on debt financing. World events, such as the priceRussian invasion of shipping, whetherUkraine and the resulting economic sanctions, have impacted the global economy, including by sea, air, rail, exacerbating inflationary and other pressures linked to COVID-related supply chain disruptions. Prolonged inflationary conditions, high and/or vehicle,increased interest rates, and additional sanctions or retaliatory measures related to the Russia-Ukraine crisis, or other situations, could further negatively affect U.S. and international commerce and exacerbate or prolong the period of high energy prices and supply chain constraints. At this year. Shipping delays combined with significant increases in orders for our products have recently created,time, the extent and duration of these economic and political events and their effects on the economy and the Company are expectedimpossible to continue to create, inventory pressure for us.predict.
An interruption in any of our supply sources or facilities could temporarily adversely affect our results of operations until alternate sources or facilities can be secured. The Uniforms and Related Products segment’s principal fabrics used in the manufacture of its finished goods are cotton, polyester, cotton-synthetic and poly-synthetic blends. The majority of such fabrics are sourced in China. The Promotional Products segment relies on the supply of different types of raw materials as well as textiles, including plastic, glass, fabric and metal. The vast majority of these raw materials are principally sourced from China, either directly by BAMKO or its suppliers. If we are unable to continue to obtain our raw materials and finished products from China or if our suppliers are unable to source raw materials from China, it could significantly disrupt our business. Further, the CompanyOur management and the Company’s suppliers generally source or manufacture finished goods in partsAudit Committee of the world that may be affected by economic uncertainty, political unrest, logistical challenges (such as port strikesBoard of Directors decided to restate the Company’s interim financial statements for the periods ended June 30, 2021 and embargos), foreign currency fluctuations, labor disputes, health emergencies, or the imposition of duties, tariffs or other import regulations by the United States. For example, political and civil unrest in Haiti may worsen, which could cause manufacturing disruptions in our Haiti facilities and those of our suppliers. The materialization of any of these risks could result in additional expense to us or limit our supply of necessary goods and raw materials, which effects may be material.
September 30, 2021. In connection with the recent restatement of our financial statements,this decision, our management has concluded that certain of our disclosure controls and procedures were not effective as of June30, 2021, September 30, 2021, December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 20212022 due to a material weakness in our internal control over financial reporting for income taxes. Our management identified an additional material weakness as of September 30, 2022. If we are unable to remediate theboth material weaknessweaknesses and otherwise maintain an effective system of internal control over financial reporting, it could result in us not preventing or detecting on a timely basis a material misstatement of the Company’sCompany’s financial statements.
Management and the Audit Committee of the Board of Directors concluded that it was appropriate to restate the Company’s previously issued unaudited interim financial statements included in the Company’s Quarterly ReportReports on Form 10-Q for the quarterly periodperiods ended June 30, 2021 and September 30, 2021, filed with the SEC on July 28, 2021 and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021, filed with the SEC on November 3, 2021, respectively, due to a failure to reverse deferred tax liabilities associated with the termination of the Company’s two qualified defined benefit pension plans in the second quarter 2021.
As part of that process, management identified a material weakness in the Company’s internal control over financial reporting.reporting as of June 30, 2021 and September 30, 2021. As further disclosed in “Part I – Item 4. Controls and Procedures” of this Quarterly Report on Form 10-Q, that material weakness continues to exist as of September 30, 2022. As of such date, management identified an additional material weakness relating to the Information Technology system change controls within one of the Company’s primary systems. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Although we intend to implement a planare implementing plans to remediate thisthese material weakness,weaknesses, we cannot be certain of the success of the plan.plans. If our remedial measures are insufficient to address the material weakness,weaknesses, or if one or more additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, or our disclosure controls and procedures are again determined to be ineffective, we may not be able to prevent or identify irregularities or ensure the fair and accurate presentation of our financial statements included in our periodic reports filed with the U.S. Securities and Exchange Commission. Additionally, the occurrence of, or failure to remediate, a material weakness and any future material weaknesses in our internal control over financial reporting or determination that our disclosure controls and procedures are ineffective may have other consequences that could materially and adversely affect our business, including an adverse impact on the market price of our common stock, potential actions or investigations by the U.S. Securities and Exchange Commission or other regulatory authorities, shareholder lawsuits, a loss of investor confidence and damage to our reputation.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the quarter ended September 30, 2021,2022, that were not previously reported in a current report on Form 8-K.
The table below sets forth the information with respect to purchases made by or on behalf of Superior Group of Companies, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our shares of common stock during the three months ended September 30, 2021.2022.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||
July 1, | - | $ | - | - | ||||||||||||
August 1, | - | - | - | |||||||||||||
September 1, | - | - | - | |||||||||||||
Total | - | - | - | 657,451 | ||||||||||||
(1) | On May 2, 2019, the Company’s Board of Directors approved a stock repurchase program of up to 750,000 shares of the Company’s outstanding common stock. There is no expiration date or other restriction governing the period over which the Company can make share repurchases under the program. All purchases under this program will be open market transactions. |
Under our Credit Agreement, as amended, with Truist Bank, if an event of default exists, we may not make distributions to our shareholders. The Company is in full compliance with all terms, conditions and covenants of such agreement.
ITEM 3. Defaults upon Senior Securities
Not applicable.
ITEM 4. Mine Safety Disclosures
Not applicable.
None.
The Chief Executive Officer and Chief Financial Officer certifications pursuant to Sections 302 and 906 of the Sarbanes Oxley Act of 2002 have been updated to reflect the date of filing of this Form 10-Q/A.
*Filed herewith.
**Furnished not filed.
***The certifications have been updated and no other changes were made.herewith.
+ Submitted electronically with this Quarterly Report.
++ Management contracts and compensatory plans and agreements.
# Portions omitted in accordance with Item 601(b) of Regulation S-K.herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: | SUPERIOR GROUP OF COMPANIES, INC. | |
| By | /s/ Michael Benstock | |
| Michael Benstock | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: | ||
| By | /s/ | |
(Principal Financial Officer) | ||