10-Q 1 sgc20230630_10q.htm FORM 10-Q sgc20230630_10q.htm
0000095574 SUPERIOR GROUP OF COMPANIES, INC. false --12-31 Q2 2023 4,803 7,622 0.001 0.001 300,000 300,000 0 0 0.001 0.001 50,000,000 50,000,000 16,499,312 16,499,312 16,376,683 16,376,683 0.14 0 110 0 0.14 14 0 0.26 1 220 0 0.28 28 0 1 3 5 10 3 5 5 5 2.0 20.3 3 7 5 2 24.5 5.6 The weighted average grant date fair value of stock options granted was $4.36 per share. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

 

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

For the quarterly period ended June 30, 2023

 

 

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:

200 Central Avenue, Suite 2000

St. Petersburg, Florida 33701

 

Registrant’s telephone number, including area code:

727-397-9611

 

Former name, former address and former fiscal year, if changed since last report: 

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock $0.001 par value per share

 

SGC

 

NASDAQ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

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

 

Large accelerated filer  ☐    

Accelerated filer  ☒

 

Non-accelerated filer    ☐

 

Smaller Reporting Company  

 

 

Emerging Growth Company  

 

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

 

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

 

The number of shares of common stock of the registrant outstanding as of July 31, 2023 was 16,504,312 shares.

 

 

 

 

TABLE OF CONTENTS

 

 
   

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

3

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

3

Condensed Consolidated Balance Sheets (Unaudited)

5

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

6

Condensed Consolidated Statements of Cash Flows (Unaudited)

8

Notes to the Condensed Consolidated Financial Statements (Unaudited)

9

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

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

31

Item 4. Controls and Procedures

32

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

33

Item 1A. Risk Factors

33

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

34

Item 3. Defaults Upon Senior Securities

34

Item 4. Mine Safety Disclosures

34

Item 5. Other Information

34

Item 6. Exhibits

35

SIGNATURES

36

 

 
 
2

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.   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)

 

    Three Months Ended June 30,  
   

2023

   

2022

 

Net sales

  $ 129,162     $ 147,933  
                 

Costs and expenses:

               

Cost of goods sold

    81,566       99,800  

Selling and administrative expenses

    43,382       45,969  

Goodwill impairment charge

    -       24,458  

Intangible assets impairment charge

    -       5,581  

Other periodic pension costs

    214       528  

Interest expense

    2,624       583  
      127,786       176,919  

Income (loss) before income tax expense

    1,376       (28,986 )

Income tax expense (benefit)

    163       (2,311 )

Net income (loss)

  $ 1,213     $ (26,675 )
                 

Net income (loss) per share:

               

Basic

  $ 0.08     $ (1.70 )

Diluted

  $ 0.08     $ (1.70 )
                 

Weighted average shares outstanding during the period:

               

Basic

    15,987,007       15,732,264  

Diluted

    16,124,816       15,732,264  
                 

Other comprehensive income (loss), net of tax:

               

Recognition of net losses included in net periodic pension costs

  $ 41     $ 319  

Loss on cash flow hedging activities

    -       (5 )

Foreign currency translation adjustment

    277       (763 )

Other comprehensive income (loss)

    318       (449 )

Comprehensive income (loss)

  $ 1,531     $ (27,124 )
                 

Cash dividends per common share

  $ 0.14     $ 0.14  

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

3

 

 SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands, except shares and per share data)

 

   

Six Months Ended June 30,

 
   

2023

   

2022

 

Net sales

  $ 259,935     $ 291,515  
                 

Costs and expenses:

               

Cost of goods sold

    165,231       193,601  

Selling and administrative expenses

    86,761       88,183  

Goodwill impairment charge

    -       24,458  

Intangible assets impairment charge

    -       5,581  

Other periodic pension costs

    428       1,056  

Interest expense

    5,194       882  
      257,614       313,761  

Income (loss) before income tax expense

    2,321       (22,246 )

Income tax expense (benefit)

    220       (801 )

Net income (loss)

  $ 2,101     $ (21,445 )
                 

Net income (loss) per share:

               

Basic

  $ 0.13     $ (1.37 )

Diluted

  $ 0.13     $ (1.37 )
                 

Weighted average shares outstanding during the period:

               

Basic

    15,935,001       15,705,646  

Diluted

    16,121,573       15,705,646  
                 

Other comprehensive income (loss), net of tax:

               

Recognition of net losses included in net periodic pension costs

  $ 82     $ 638  

Loss on cash flow hedging activities

    -       (10 )

Foreign currency translation adjustment

    584       99  

Other comprehensive income

    666       727  

Comprehensive income (loss)

  $ 2,767     $ (20,718 )
                 

Cash dividends per common share

  $ 0.28     $ 0.26  

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

4

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

 

  

June 30,

  

December 31,

 
  

2023

  

2022

 
   (Unaudited)     

ASSETS

    

Current assets:

        

Cash and cash equivalents

 $18,749  $17,722 

Accounts receivable, less allowance for doubtful accounts of $4,803 and $7,622, respectively

  96,732   104,813 

Accounts receivable - other

  294   3,326 

Inventories

  114,419   124,976 

Contract assets

  47,614   52,980 

Prepaid expenses and other current assets

  14,645   14,166 

Total current assets

  292,453   317,983 

Property, plant and equipment, net

  50,849   51,392 

Operating lease right-of-use assets

  14,775   9,113 

Deferred tax asset

  10,691   10,718 

Intangible assets, net

  53,148   55,753 

Other assets

  13,364   11,982 

Total assets

 $435,280  $456,941 
         

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Current liabilities:

        

Accounts payable

 $47,879  $42,060 

Other current liabilities

  34,181   38,646 

Current portion of long-term debt

  3,750   3,750 

Current portion of acquisition-related contingent liabilities

  1,375   736 

Total current liabilities

  87,185   85,192 

Long-term debt

  122,479   151,567 

Long-term pension liability

  13,135   12,864 

Long-term acquisition-related contingent liabilities

  873   2,245 

Long-term operating lease liabilities

  9,678   3,936 

Other long-term liabilities

  8,691   8,538 

Total liabilities

  242,041   264,342 

Commitments and contingencies (Note 6)

          

Shareholders’ equity:

        

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

  -   - 

Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding 16,499,312 and 16,376,683 shares, respectively

  16   16 

Additional paid-in capital

  75,078   72,615 

Retained earnings

  120,490   122,979 

Accumulated other comprehensive loss, net of tax:

        

Pensions

  (1,032)  (1,113)

Foreign currency translation adjustment

  (1,313)  (1,898)

Total shareholders’ equity

  193,239   192,599 

Total liabilities and shareholders’ equity

 $435,280  $456,941 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

5

 

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED June 30, 2023 AND 2022

(Unaudited)

(In thousands, except shares and per share data)

 

                  

Accumulated

     
                  

Other

     
          

Additional

      

Comprehensive

  

Total

 
  

Common

  

Common

  

Paid-In

  

Retained

  

Income (Loss),

  

Shareholders’

 
  

Shares

  

Stock

  

Capital

  

Earnings

  

net of tax

  

Equity

 

Balance, April 1, 2022

  16,171,034  $16  $70,685  $166,914  $(5,037) $232,578 

Common shares issued upon exercise of options and SARs, net

  32,309   -   299   -   -   299 

Restricted shares issued, net of forfeitures

  (1,834)  -   -   -   -   - 

Restricted shares issued in conjunction with acquisition of business

  116,550   -   2,000   -   -   2,000 

Share-based compensation expense

  -   -   1,242   -   -   1,242 

Written put option

  -   -   (3,597)  -   -   (3,597)

Cash dividends declared ($0.14 per share)

  -   -   -   (2,253)  -   (2,253)

Comprehensive income (loss):

                        

Net loss

  -   -   -   (26,675)  -   (26,675)

Cash flow hedges, net of taxes of $0

  -   -   -   -   (5)  (5)

Pensions, net of taxes of $110

  -   -   -   -   319   319 

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

  -   -   -   -   (763)  (763)

Balance, June 30, 2022

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

Balance, April 1, 2023

  16,498,312  $16  $73,730  $121,572  $(2,663) $192,655 

Common shares issued upon exercise of options and SARs, net

  1,000   -   8   -   -   8 

Share-based compensation expense

  -   -   1,340   -   -   1,340 

Cash dividends declared ($0.14 per share)

  -   -   -   (2,295)  -   (2,295)

Comprehensive income:

                        

Net income

  -   -   -   1,213   -   1,213 

Pensions, net of taxes of $14

  -   -   -   -   41   41 

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

  -   -   -   -   277   277 

Balance, June 30, 2023

  16,499,312  $16  $75,078  $120,490  $(2,345) $193,239 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

6

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Six MONTHS ENDED June 30, 2023 AND 2022

(Unaudited)

(In thousands, except shares and per share data)

 

                  

Accumulated

     
                  

Other

     
          

Additional

      

Comprehensive

  

Total

 
  

Common

  

Common

  

Paid-In

  

Retained

  

Income (Loss),

  

Shareholders’

 
  

Shares

  

Stock

  

Capital

  

Earnings

  

net of tax

  

Equity

 

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

  48,011   -   653   (158)  -   495 

Performance based shares issued

  11,707   -   -   -   -   - 

Restricted shares issued, net of forfeitures

  21,843   -   -   -   -   - 

Restricted shares issued in conjunction with acquisition of business

  116,550   -   2,000   -   -   2,000 

Share-based compensation expense

  -   -   2,454   -   -   2,454 

Tax withheld on vesting of restricted shares and performance based shares

  (7,557)  -   (232)  -   -   (232)

Written put option

  -   -   (3,597)  -   -   (3,597)

Cash dividends declared ($0.26 per share)

  -   -   -   (4,171)  -   (4,171)

Comprehensive income (loss):

                        

Net loss

  -   -   -   (21,445)  -   (21,445)

Cash flow hedges, net of taxes of $1

  -   -   -   -   (10)  (10)

Pensions, net of taxes of $220

  -   -   -   -   638   638 

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

  -   -   -   -   99   99 

Balance, June 30, 2022

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

Balance, January 1, 2023

  16,376,683  $16  $72,615  $122,979  $(3,011) $192,599 

Common shares issued upon exercise of options and SARs, net

  5,604   -   43   -   -   43 

Restricted shares issued, net of forfeitures

  117,025   -   -   -   -   - 

Share-based compensation expense

  -   -   2,420   -   -   2,420 

Cash dividends declared ($0.28 per share)

  -   -   -   (4,590)  -   (4,590)

Comprehensive income:

                        

Net income

  -   -   -   2,101   -   2,101 

Pensions, net of taxes of $28

  -   -   -   -   82   82 

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

  -   -   -   -   584   584 

Balance, June 30, 2023

  16,499,312  $16  $75,078  $120,490  $(2,345) $193,239 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

7

 

 

SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

  

Six Months Ended June 30,

 
  

2023

  

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES

        

Net income (loss)

 $2,101  $(21,445)

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

        

Depreciation and amortization

  6,816   6,103 

Goodwill impairment charge

  -   24,458 

Intangible assets impairment charge

  -   5,581 

Inventory write-downs

  144   4,795 

Provision for bad debts - accounts receivable

  (628)  1,282 

Share-based compensation expense

  2,420   2,454 

Deferred income tax provision (benefit)

  -   (2,018)

Change in fair value of acquisition-related contingent liabilities

  (733)  626 

Change in fair value of written put options

  (145)  - 

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

        

Accounts receivable

  8,854   (3,025)

Accounts receivable - other

  3,032   458 

Contract assets

  5,447   (8,176)

Inventories

  10,555   (9,377)

Prepaid expenses and other current assets

  (285)  (925)

Other assets

  (1,468)  1,812 

Accounts payable and other current liabilities

  1,280   (7,325)

Payment of acquisition-related contingent liabilities

  -   (3,346)

Long-term pension liability

  379   1,116 

Other long-term liabilities

  326   (693)

Net cash provided by (used in) operating activities

  38,095   (7,645)
         

CASH FLOWS FROM INVESTING ACTIVITIES

        

Additions to property, plant and equipment

  (3,643)  (7,039)

Acquisition of businesses

  -   (11,202)

Net cash used in investing activities

  (3,643)  (18,241)
         

CASH FLOWS FROM FINANCING ACTIVITIES

        

Proceeds from borrowings of debt

  1,000   117,790 

Repayment of debt

  (29,875)  (85,299)

Debt issuance costs

  (300)  - 

Payment of cash dividends

  (4,590)  (4,171)

Payment of acquisition-related contingent liabilities

  -   (1,416)

Proceeds received on exercise of stock options

  43   495 

Tax withholdings on vesting of restricted shares and performance based shares

  -   (232)

Net cash provided by (used in) financing activities

  (33,722)  27,167 
         

Effect of currency exchange rates on cash

  297   89 

Net increase in cash and cash equivalents

  1,027   1,370 

Cash and cash equivalents balance, beginning of period

  17,722   8,935 

Cash and cash equivalents balance, end of period

 $18,749  $10,305 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

8

 

 

Superior Group of Companies, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 1 – Description of Business and Basis of Presentation:

 

Description of business

 

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

 

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

 

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

 

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

 

Basis of presentation

 

The accompanying 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, 2022, and filed with the Securities and Exchange Commission. Management believes that the information furnished includes all adjustments of a normal recurring nature that are necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

 

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

 

Recent Accounting Pronouncements

 

We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). There have been no new accounting pronouncements recently issued or newly effective that had, or are expected to have, a material impact on the Company’s financial statements.

 

9

 
 
 

NOTE 2 – Inventories:

 

Inventories consisted of the following amounts (in thousands):

 

   

June 30,

   

December 31,

 
   

2023

   

2022

 

Finished goods

  $ 83,815     $ 94,228  

Work in process

    615       401  

Raw materials

    29,989       30,347  

Inventories

  $ 114,419     $ 124,976  

 

 

NOTE 3 – Long-Term Debt:

 

Debt consisted of the following (in thousands):

 

  

June 30,

  

December 31,

 
  2023  2022 

Credit Facilities:

        

Revolving credit facility due August 2027

 $56,000  $83,000 

Term loan due August 2027

  71,250   73,125 
   127,250   156,125 

Less:

        

Payments due within one year included in current liabilities

  3,750   3,750 

Debt issuance costs

  1,021   808 

Long-term debt less current maturities

 $122,479  $151,567 

 

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

 

On May 4, 2023, the Company and its domestic subsidiaries entered into the First Amendment to its Credit Agreement with the Administrative Agent and the lenders, which (i) provides a covenant relief period through December 31, 2023, which the Company may opt to terminate during the fourth quarter of 2023 if it has a consolidated total net leverage ratio at or below 4.0 to 1.0 for the two preceding consecutive fiscal quarters; (ii) permits a maximum consolidated total net leverage ratio of 4.5 to 1.0, 4.8 to 1.0, 4.5 to 1.0 and 4.0 to 1.0 for the first, second, third and fourth quarters of 2023, respectively; (iii) amends the applicable margin pricing grid to add a tier of applicable margins (2.5% for secured overnight financing rate (“SOFR”) rate loans) if the consolidated total net leverage ratio is greater than or equal to 4.0 to 1.0, which tier would only apply during the covenant relief period; (iv) prohibits capital expenditures during the covenant relief period that exceed $10 million, with additional limitations imposed on a quarterly basis; (v) prohibits acquisitions and incremental loans during the covenant relief period; (vi) adds sale and leaseback transactions to the list of transactions that require the Company to use the net proceeds thereof to make a mandatory prepayment under the Credit Agreement; (vii) limits restricted payments to $20 million in any fiscal year, and no more than $10 million during the covenant relief period, with additional limitations imposed on a quarterly basis during the covenant relief period; and (viii) lowers the amount of permissible investments in non-loan party subsidiaries to $5 million during the covenant relief period.

 

10

 

Obligations outstanding under the Credit Facilities accrue interest at a variable rate equal to the SOFR plus an adjustment between 0.10% and 0.25% (depending on the applicable interest period) plus a margin between 1.0% and 2.0% (depending on the Company’s net leverage ratio). During the covenant relief period described above, the applicable margin may reach 2.5% for SOFR rate loans. The weighted average interest rate on our outstanding borrowings under the Credit Facilities was 7.2% at June 30, 2023. During the term of the revolving credit facility, the Company will pay a commitment fee on the unused portion of the revolving credit facility equal to between 0.125% and 0.250% (depending on the Company’s net leverage ratio). During the covenant relief period, the commitment fee may reach 0.300%. The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of June 30, 2023, there were no outstanding letters of credit under the revolving credit facility.

 

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

 

The Credit Facilities are secured by substantially all of the operating assets of the Company, and the Company’s obligations under the Credit Facilities are guaranteed by all of its domestic subsidiaries. The Company’s obligations under the Credit Facilities are subject to acceleration upon the occurrence of an event of default as defined in the Credit Agreement. The Credit Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, restricted payments (including dividends and related distributions), liquidations, mergers, consolidations or acquisitions, affiliate transactions and sales of assets or subsidiaries. The Credit Agreement also requires the Company to comply with a fixed charge coverage ratio of at least 1.25 to 1.0 and a net leverage ratio not to exceed 4.0 to 1.0, except during the covenant relief period as described above. The Company’s net leverage ratio (as defined in the Credit Agreement) is generally calculated as the ratio of (a) indebtedness minus unrestricted cash to (b) consolidated EBITDA for the four most recently ended fiscal quarters. As of June 30, 2023, the Company was in compliance with these ratios as the Company’s fixed charge coverage and net leverage ratios were 2.0 to 1.0 and 3.7 to 1.0, respectively. 

 

 

NOTE 4 – Periodic Pension Cost:

 

The Company is the sponsor of an unfunded supplemental executive retirement plan ("SERP") which includes one active participant.

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2023

  

2022

  

2023

  

2022

 

Service cost on benefits earned during the period

 $-  $51  $21  $102 

Interest cost on projected benefit obligation

  159   100   318   200 

Recognized actuarial loss

  55   428   110   856 

Net periodic pension cost

 $214  $579  $449  $1,158 

 

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

 

 

NOTE 5 – Net Sales:

 

For our Branded Products and Healthcare Apparel segments, revenue is primarily generated from the sale of finished products to customers. Revenues for our Branded Products and Healthcare Apparel segments are recognized when the performance obligations under the contract terms are satisfied. For certain contracts with customers in which the Company has an enforceable right to payment for goods with no alternative use, revenue is recognized over time upon receipt of finished goods into inventory. Revenue for goods that do have an alternative use or that the customer is not obligated to purchase under the terms of a contract is generally recognized when the goods are transferred to the customer. Revenue from the sale of personal protective equipment, including facemasks, isolation gowns, sanitizers and gloves, is generally recognized at a point in time when the goods are transferred to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contract. The Company includes shipping and handling fees billable to customers in net sales. Shipping and handling activities that occur after the transfer of promised goods are accrued as control is transferred to the customer rather than being treated as a separate performance obligation.

 

11

 

For our Contact Centers segment, revenue is generated from providing our customers with contact center services. Revenue for our Contact Centers segment is recognized as services are delivered. 

 

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

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2023

  

2022

  

2023

  

2022

 

Branded Products Segment:

                

Branded products

 $79,539  $101,078  $161,269  $194,245 

Personal protective equipment

  53   961   174   4,877 

Total Branded Products Segment

 $79,592  $102,039  $161,443  $199,122 
                 

Healthcare Apparel Segment:

                

Healthcare apparel

 $27,338  $25,635  $54,873  $55,493 

Personal protective equipment

  734   653   1,353   1,363 

Total Healthcare Apparel Segment

 $28,072  $26,288  $56,226  $56,856 
                 

Contact Centers Segment:

                

Contact centers services

 $22,758  $21,466  $44,814  $39,440 

Net intersegment eliminations

  (1,260)  (1,860)  (2,548)  (3,903)

Total Contact Centers Segment

 $21,498  $19,606  $42,266  $35,537 
                 

Consolidated Net Sales

 $129,162  $147,933  $259,935  $291,515 

 

Contract Assets and Contract Liabilities

 

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

 

  

June 30,

  

December 31,

 
  

2023

  

2022

 

Accounts receivable

 $96,732  $104,813 

Current contract assets

  47,614   52,980 

Current contract liabilities

  2,304   2,213 

 

Contract assets relate to goods produced without an alternative use for which the Company has an enforceable right to payment but which has not yet been invoiced to the customer. The majority of the amounts included in contract assets on December 31, 2022 were transferred to accounts receivable during the six months ended June 30, 2023. 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 six months ended June 30, 2023, $2.0 million of revenue was recognized from the contract liabilities balance as of December 31, 2022.

 

12

 
 

NOTE 6 – Contingencies:

 

The purchase price to acquire substantially all of the assets of Sutter’s Mill Specialties, Inc. (“Sutter’s Mill”) in December 2021 included contingent consideration based on varying levels of Sutter’s Mill’s EBITDA in each measurement period from 2022 to 2024. In July 2023, management agreed to settle the remaining contingent consideration obligation associated with this acquisition for $0.5 million payable in the first quarter of 2024. The purchase price to acquire substantially all of the assets of Guardian Products, Inc. (“Guardian”) in  May 2022 included contingent consideration based on varying levels of Guardian’s EBITDA in each measurement period through  April 2025. The estimated fair value of Guardian acquisition-related contingent consideration payable as of June 30, 2023 was $1.7 million, of which $0.8 million is expected to be paid in the third quarter of 2023. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $1.9 million and $2.5 million. The Company will continue to evaluate the Guardian liability for remeasurement at the end of each reporting period and any changes will be recorded in the Company’s statements of comprehensive income (loss). The carrying amount of the liability may fluctuate significantly and actual amounts paid may be different from the estimated value of the liability.

 

The Company is involved in various legal actions and claims arising from the normal course of business. In the opinion of management, the ultimate outcome of these matters is not expected to have a material impact on the Company’s results of operations, cash flows, or financial position.

 

 

NOTE 7 – Share-Based Compensation:

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2023

  

2022

  

2023

  

2022

 

Stock options and SARs

 $390  $381  $699  $741 

Restricted stock

  767   985   1,357   1,604 

Performance shares

  183   (124)  364   109 

Total share-based compensation expense

 $1,340  $1,242  $2,420  $2,454 

 

Stock Options and Stock Appreciation Rights (“SARs”)

 

The Company grants stock options and stock-settled SARs to employees that allow them to purchase shares of the Company’s common stock. Stock options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and SARs at the date of grant using the Black-Scholes valuation model.

 

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

 

13

 

A summary of stock option transactions during the six months ended June 30, 2023 follows:

 

        Weighted Average  Aggregate 
  

No. of

  

Weighted Average

  

Remaining Life

  

Intrinsic Value

 
  

Shares

  

Exercise Price

  

(in years)

  

(in thousands)

 

Outstanding, January 1, 2023

  962,775  $15.89   3.26  $301 

Granted(1)

  215,006   11.80         

Exercised

  (5,604)  7.66         

Lapsed or cancelled

  (133,173)  18.52         

Outstanding, June 30, 2023

  1,039,004   14.75   3.24   158 

Exercisable, June 30, 2023

  526,412   15.81   2.00   144 

 

(1)

The weighted average grant date fair value of stock options granted was $4.42 per share.

 

As of June 30, 2023, the Company had $1.5 million in unrecognized compensation cost related to nonvested stock options to be recognized over the remaining weighted average vesting period of 1.6 years.

 

A summary of stock-settled SARs transactions during the six months ended June 30, 2023 follows:

 

        Weighted Average  Aggregate 
  

No. of

  

Weighted Average

  

Remaining Life

  

Intrinsic Value

 
  

Shares

  

Exercise Price

  

(in years)

  

(in thousands)

 

Outstanding, January 1, 2023

  320,385  $15.23   2.23  $69 

Granted(1)

  51,209   12.04         

Exercised

  -   -         

Lapsed or cancelled

  (37,860)  23.62         

Outstanding, June 30, 2023

  333,734   13.79   2.41   43 

Exercisable, June 30, 2023

  225,471   13.47   1.54   43 

 

(1)

The weighted average grant date fair value of SARs granted was $4.58 per share.

 

As of June 30, 2023, the Company had $0.3 million in unrecognized compensation cost related to nonvested SARs to be recognized over the remaining weighted average vesting period of 1.5 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, over five years or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan or 2022 Plan, as applicable. Expense for each of these grants is based on the fair value at the date of the grant and is being recognized on a straight-line basis over the respective service period.

 

14

 

A summary of restricted stock transactions during the six months ended June 30, 2023 follows:

 

      

Weighted Average

 
  

No. of

  

Grant Date

 
  

Shares

  

Fair Value

 

Outstanding, January 1, 2023

  372,470  $20.45 

Granted

  117,025   12.04 

Vested

  (85,863)  15.81 

Forfeited

  -   - 

Outstanding, June 30, 2023

  403,632   19.00 

 

As of June 30, 2023, the Company had $4.7 million of unrecognized compensation cost related to nonvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 2.3 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. Expense for grants of performance shares is 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 six months ended June 30, 2023 follows:

 

      

Weighted Average

 
  

No. of

  

Grant Date

 
  

Shares

  

Fair Value

 

Outstanding, January 1, 2023

  199,451  $20.57 

Granted

  94,028   12.56 

Vested

  -   - 

Forfeited

  -   - 

Outstanding, June 30, 2023

  293,479   18.00 

 

As of June 30, 2023, the Company had $2.1 million of unrecognized compensation cost related to nonvested performance share grants expected to be recognized over the remaining weighted average service period of 3.1 years.

 

 

NOTE 8 – Income Taxes:

 

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

 

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

 

15

 

For the three months ended June 30, 2023, the Company recorded a provision for income taxes of $0.2 million, which represents an effective tax rate of 11.8%. For the three months ended  June 30, 2022, the Company recorded a benefit from income taxes of $2.3 million, which represents an effective tax rate of 8.0%. For the six months ended June 30, 2023 the Company recorded a provision for income taxes of $0.2 million, which represents an effective tax rate of 9.5%. For the six months ended June 30, 2022, the Company recorded a benefit from income taxes of $0.8 million, which represents an effective tax rate of 3.6%. 

 

The increase in income tax expense as well as the effective tax rate for the three and six months ended June 30, 2023 was impacted by the variability in the mix of earnings across the Company’s foreign and domestic operations subject to various statutory tax rates in those jurisdictions. Income tax expense for the three and six months ended June 30, 2022 was impacted by a federal tax benefit of $2.0 million relating to the impairment of intangible assets and a portion of the goodwill impairment. The effective tax rate for the three and six months ended June 30, 2022 was impacted by the nondeductible portion of the goodwill impairment charge totaling $20.3 million.

 

NOTE 9 – Net Income (Loss) Per Share:

 

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

 

The following table presents a reconciliation of basic and diluted net income per share for the periods presented:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2023

  

2022

  

2023

  

2022

 

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

 $1,213  $(26,675) $2,101  $(21,445)
                 

Weighted average shares outstanding - basic

  15,987,007   15,732,264   15,935,001   15,705,646 

Dilutive common stock equivalents

  137,809   -   186,572   - 

Weighted average shares outstanding - diluted

  16,124,816   15,732,264   16,121,573   15,705,646 

Net income (loss) per share:

                

Basic

 $0.08  $(1.70) $0.13  $(1.37)

Diluted

 $0.08  $(1.70) $0.13  $(1.37)

 

Diluted weighted average shares outstanding excludes shares of common stock of 491,168 and 488,705 for the three and six months ended June 30, 2022, respectively, as their inclusion would have been antidilutive given the Company’s net loss.

 

Awards to purchase 1,268,882 and 633,408 shares of common stock with weighted average exercise prices of $15.19 and $21.85 per share were outstanding during the three months ended June 30, 2023 and 2022, 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.

 

Awards to purchase 1,138,927 and 524,568 shares of common stock with weighted average exercise prices of $16.11 and $22.57 per share were outstanding during the six months ended June 30, 2023 and 2022, 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:

 

The Company manages and reports the following segments:

 

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

 

16

 

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

 

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

 

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

 

The Company evaluates the performance of each operating segment based on several factors of which the primary financial measures are net sales and income before income tax expense.

 

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

 

   

Branded Products

   

Healthcare Apparel

   

Contact Centers

   

Intersegment Eliminations

   

Other

   

Total

 

As of and For the Three Months Ended June 30, 2023:

                                               

Net sales

  $ 79,592     $ 28,072     $ 22,758     $ (1,260 )   $ -     $ 129,162  

Cost of goods sold

    53,952       17,653       10,554       (593 )     -       81,566  

Gross margin

    25,640       10,419       12,204       (667 )     -       47,596  

Selling and administrative expenses

    20,362       9,466       9,614       (667 )     4,607       43,382  

Other periodic pension cost

    -       -       -       -       214       214  

Interest expense

    -       -       -       -       2,624       2,624  

Income (loss) before income tax expense

  $ 5,278     $ 953     $ 2,590       -     $ (7,445 )   $ 1,376  
                                                 

Depreciation and amortization

  $ 1,710     $ 976     $ 662     $ -     $ 80     $ 3,428  

Capital expenditures

  $ 736     $ 64     $ 683     $ -     $ 46     $ 1,529  

 

   

Branded Products

   

Healthcare Apparel

   

Contact Centers

   

Intersegment Eliminations

   

Other

   

Total

 

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

                                               

Net sales

  $ 102,039     $ 26,288     $ 21,466     $ (1,860 )   $ -     $ 147,933  

Cost of goods sold

    72,954       18,904       8,692       (750 )     -       99,800  

Gross margin

    29,085       7,384       12,774       (1,110 )     -       48,133  

Selling and administrative expenses

    24,004       9,801       8,402       (1,110 )     4,872       45,969