| 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 | |||||||
| 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: |
| 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.: |
| | |
| Address of principal executive offices: | ||||||||
| | ||||||||
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| Registrant’s telephone number, including area code: | ||||||||
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| 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 | ||
| | | |
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.
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).
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 ☐ | |
| |
| Non-accelerated filer ☐ |
| Smaller Reporting Company | |
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| 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
The number of shares of common stock of the registrant outstanding as of October 22, 2020 was
TABLE OF CONTENTS
| PART I - FINANCIAL INFORMATION |
| 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, | ||||||||
| 2020 | 2019 | |||||||
| Net sales | $ | $ | ||||||
| Costs and expenses: | ||||||||
| Cost of goods sold | ||||||||
| Selling and administrative expenses | ||||||||
| Other periodic pension costs | ||||||||
| Interest expense | ||||||||
| Income before taxes on income | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Net income per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Weighted average shares outstanding during the period: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Other comprehensive income (loss), net of tax: | ||||||||
| Defined benefit pension plans: | ||||||||
| Recognition of net losses included in net periodic pension costs | $ | $ | ||||||
| Recognition of settlement loss included in net periodic pension costs | ||||||||
| Loss on cash flow hedging activities | ( | ) | ( | ) | ||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||
| Other comprehensive income | ||||||||
| Comprehensive income | $ | $ | ||||||
| Cash dividends per common share | $ | $ | ||||||
| See accompanying Notes to the Condensed Consolidated Financial Statements. |
| SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| (Unaudited) |
| (In thousands, except shares and per share data) |
| Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Net sales | $ | $ | ||||||
| Costs and expenses: | ||||||||
| Cost of goods sold | ||||||||
| Selling and administrative expenses | ||||||||
| Other periodic pension costs | ||||||||
| Interest expense | ||||||||
| Income before taxes on income | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Net income per share: | ||||||||
| Basic | $ | $ | ||||||
| Diluted | $ | $ | ||||||
| Weighted average shares outstanding during the period | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Other comprehensive income (loss), net of tax: | ||||||||
| Defined benefit pension plans: | ||||||||
| Recognition of net losses included in net periodic pension costs | $ | $ | ||||||
| Recognition of settlement loss included in net periodic pension costs | ||||||||
| Loss on cash flow hedging activities | ( | ) | ( | ) | ||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||
| Other comprehensive income (loss) | ( | ) | ||||||
| Comprehensive income | $ | $ | ||||||
| Cash dividends per common share | $ | $ | ||||||
| See accompanying Notes to the Condensed Consolidated Financial Statements. |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
|||||||||
| (Unaudited) |
|||||||||
| (In thousands, except share and par value data) |
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, less allowance for doubtful accounts of and , respectively | ||||||||
| Accounts receivable - other | ||||||||
| Inventories | ||||||||
| Contract assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Other current liabilities | ||||||||
| Current portion of long-term debt | ||||||||
| Current portion of acquisition-related contingent liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt | ||||||||
| Long-term pension liability | ||||||||
| Long-term acquisition-related contingent liabilities | ||||||||
| Long-term operating lease liabilities | ||||||||
| Deferred tax liability | ||||||||
| Other long-term liabilities | ||||||||
| Commitments and contingencies (Note 6) | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, par value - authorized shares ( issued) | ||||||||
| Common stock, par value - authorized shares, issued and outstanding and shares, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income (loss), net of tax: | ||||||||
| Pensions | ( | ) | ( | ) | ||||
| Cash flow hedges | ||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
| See accompanying Notes to the Condensed Consolidated Financial Statements. |
| CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY |
| THREE MONTHS ENDED September 30, 2020 AND 2019 |
| (Unaudited) |
| (In thousands, except shares and per share data) |
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Additional | Comprehensive | Total | ||||||||||||||||||||||
| Common | Common | Paid-In | Retained | (Loss) Income, | Shareholders’ | |||||||||||||||||||
| Shares | Stock | Capital | Earnings | net of tax | Equity | |||||||||||||||||||
| Balance, July 1, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Common shares issued upon exercise of options, net | ||||||||||||||||||||||||
| Share-based compensation expense | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends declared ( per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock reacquired and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Cash flow hedges, net of taxes of | ( | ) | ( | ) | ||||||||||||||||||||
| Pensions, net of taxes of | ||||||||||||||||||||||||
| Change in currency translation adjustment, net of taxes of | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance, July 1, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Common shares issued upon exercise of options, net | ( | ) | ||||||||||||||||||||||
| Share-based compensation expense | ||||||||||||||||||||||||
| Tax withheld on exercise of Stock Appreciation Rights (SARS) | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends declared ( per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Cash flow hedges, net of taxes of | ( | ) | ( | ) | ||||||||||||||||||||
| Pensions, net of taxes of | ||||||||||||||||||||||||
| Change in currency translation adjustment, net of taxes of | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| 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, 2020 AND 2019
|
| (Unaudited) |
| (In thousands, except shares and per share data) |
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Additional | Comprehensive | Total | ||||||||||||||||||||||
| Common | Common | Paid-In | Retained | (Loss) Income, | Shareholders’ | |||||||||||||||||||
| Shares | Stock | Capital | Earnings | net of tax | Equity | |||||||||||||||||||
| Balance, January 1, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Common shares issued upon exercise of options, net | ( | ) | ||||||||||||||||||||||
| Restricted shares issued | - | |||||||||||||||||||||||
| Share-based compensation expense | ||||||||||||||||||||||||
| Tax benefit from vesting of acquisition-related restricted stock | ||||||||||||||||||||||||
| Cash dividends declared ( per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock reacquired and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Cash flow hedges, net of taxes of | ( | ) | ( | ) | ||||||||||||||||||||
| Pensions, net of taxes of | ||||||||||||||||||||||||
| Change in currency translation adjustment, net of taxes of | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Common shares issued upon exercise of options | ( | ) | ||||||||||||||||||||||
| Restricted shares issued | - | |||||||||||||||||||||||
| Share-based compensation expense | ||||||||||||||||||||||||
| Tax benefit from vesting of acquisition-related restricted stock | ( | ) | ( | ) | ||||||||||||||||||||
| Tax withheld on exercise of Stock Appreciation Rights (SARS) | ( | ) | ( | ) | ||||||||||||||||||||
| Cash dividends declared ( per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock reacquired and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Cash flow hedges, net of taxes of | ( | ) | ( | ) | ||||||||||||||||||||
| Pensions, net of taxes of | ||||||||||||||||||||||||
| Change in currency translation adjustment, net of taxes of | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| See accompanying Notes to the Condensed Consolidated Financial Statements. |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| (In thousands) |
| Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Provision for bad debts - accounts receivable | ||||||||
| Share-based compensation expense | ||||||||
| Deferred income tax benefit | ( | ) | ( | ) | ||||
| Gain on sale of property, plant and equipment | ( | ) | ||||||
| Change in fair value of acquisition-related contingent liabilities | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable - trade | ( | ) | ( | ) | ||||
| Accounts receivable - other | ( | ) | ||||||
| Contract assets | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable and other current liabilities | ||||||||
| Long-term pension liability | ||||||||
| Other long-term liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Additions to property, plant and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposals of property, plant and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from borrowings of debt | ||||||||
| Repayment of debt | ( | ) | ( | ) | ||||
| Payment of cash dividends | ( | ) | ( | ) | ||||
| Payment of acquisition-related contingent liability | ( | ) | ( | ) | ||||
| Proceeds received on exercise of stock options | ||||||||
| Tax withholding on exercise of stock rights | ( | ) | ||||||
| Tax (provision) benefit from vesting of acquisition-related restricted stock | ( | ) | ||||||
| Common stock reacquired and retired | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Effect of currency exchange rates on cash | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents balance, beginning of period | ||||||||
| Cash and cash equivalents balance, end of period | $ | $ | ||||||
| See accompanying Notes to the Condensed Consolidated Financial Statements. |
Superior Group of Companies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 – Basis of Presentation:
Basis of presentation
The condensed consolidated financial statements include the accounts of Superior Group of Companies, Inc. and its wholly-owned subsidiaries, The Office Gurus, LLC, SUG Holding, Superior Group Holdings, Inc., Fashion Seal Corporation, BAMKO, LLC, The Office Gurus Limited, Superior Uniform Arkansas LLC, Superior Uniform Group, LLC, Superior Group Holdings (IL), LLC and CID Resources, Inc.; The Office Gurus, Ltda, de C.V., The Office Masters, Ltda., de C.V. and The Office Gurus, Ltd., each a subsidiary of Fashion Seal Corporation and SUG Holding; and Power Three Web, Ltda. and Superior Sourcing, each a wholly-owned subsidiary of SUG Holding; BAMKO Importação, Exportação e Comércio de Brindes Ltda., a subsidiary of BAMKO, LLC and SUG Holding; Guangzhou Ben Gao Trading Limited, Worldwide Sourcing Solutions Limited, BAMKO UK, Limited, and BAMKO Merch Inc., each a direct or indirect subsidiary of BAMKO, LLC; and BAMKO India Private Limited, a
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, 2019, and filed with the Securities and Exchange Commission. Management believes that the information furnished includes all adjustments of a normal recurring nature that are necessary to fairly present our consolidated financial position, results of operations and cash flows for the periods indicated. The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.
We refer to the condensed consolidated financial statements collectively as “financial statements,” and individually as “statements of comprehensive income,” “balance sheets,” “statements of shareholders’ equity,” and “statements of cash flows” herein.
Recent Accounting Pronouncements
We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be not applicable.
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by the difference between a reporting unit's carrying value and its fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company’s adoption of this standard on January 1, 2020 did not have a material impact on its financial statements.
In August 2018, the FASB issued ASU 2018-15, “Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update also requires an entity to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This update is effective for fiscal years beginning after December 15, 2019 and may be applied prospectively or retrospectively. On January 1, 2020, 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. In February 2020, the FASB issued ASU 2020-2, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” The update delayed the effective date of ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. Adoption will require a modified retrospective approach beginning with the earliest period presented. The Company is currently evaluating the potential impact this standard will have on its financial statements.
In 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. This update is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating this guidance to determine what impact it may have on its financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. This guidance includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This guidance may be applied through December 31, 2022. The Company will apply this guidance to transactions and modifications to contracts and hedging relationships that reference LIBOR.
NOTE 2 – Inventories:
Inventories consisted of the following amounts (in thousands):
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Finished goods | $ | $ | ||||||
| Work in process | ||||||||
| Raw materials | ||||||||
| Inventories | $ | $ | ||||||
Debt consisted of the following (in thousands):
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Credit Facilities: | ||||||||
| Revolving credit facility due May 2023 | $ | $ | ||||||
| Term loan due February 2024 (“2017 Term Loan”) | ||||||||
| Term loan due January 2026 (“2018 Term Loan”) | ||||||||
| Less: | ||||||||
| Payments due within one year included in current liabilities | ||||||||
| Debt issuance costs | ||||||||
| Long-term debt less current maturities | $ | $ | ||||||
The Company is party to an amended and restated credit agreement (the “Credit Agreement”) with Truist Bank (formerly known as Branch Banking and Trust Company), consisting of a $
Obligations outstanding under the 2018 Term Loan have a variable interest rate of LIBOR plus a margin of between
On March 30, 2020, the Company entered into debt deferment agreements with Truist Bank to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Contractual principal payments for the 2017 Term Loan are as follows: remainder of 2020 - $
The Company is a party to an interest rate swap with a total notional value of $
NOTE 4 – Periodic Pension Expense:
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, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Service cost - benefits earned during the period | $ | $ | $ | $ | ||||||||||||
| Interest cost on projected benefit obligation | ||||||||||||||||
| Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Recognized actuarial loss | ||||||||||||||||
| Settlement loss | ||||||||||||||||
| Net periodic pension cost after settlements | $ | $ | $ | $ | ||||||||||||
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 and did not increase the Company’s total pension expense over time, as the charge was an acceleration of costs that otherwise would be recognized as pension expense in future periods. The service cost component is included in selling and administrative expenses in our statements of comprehensive income and the other components of net periodic pension cost are included in other periodic pension costs in our statements of comprehensive income.
Effective on June 30, 2013, the Company no longer accrues additional benefits for future service or for future increases in compensation levels for the Company’s primary defined benefit pension plan.
Effective on December 31, 2014, the Company no longer accrues additional benefits for future service for the Company’s hourly defined benefit plan.
NOTE 5 – Net Sales:
For our Uniforms and Related Products and Promotional Products segments, revenue is primarily generated from the sale of finished products to customers. Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the performance obligations under the contract terms are satisfied. For certain contracts with customers in which the Company has an enforceable right to payment for goods with no alternative use, revenue is recognized over time upon receipt of finished goods into inventory. Revenue for goods that do have an alternative use or that the customer is not obligated to purchase under the terms of a contract is generally recognized when the goods are transferred to the customer. Revenue from the sale of personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, is generally recognized at a point in time when the goods are transferred to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contract. The Company includes shipping and handling fees billable to customers in net sales. Shipping and handling activities that occur after the transfer of promised goods are accrued as control is transferred to the customer rather than being treated as a separate performance obligation.
For our Remote Staffing segment, revenue is generated from providing our customers with staffing solution services. Revenue for our Remote Staffing segment is recognized as services are delivered.
Revenue is measured at the amount of consideration we expect to receive in exchange for the goods or services. Variable consideration for estimated returns, allowances and other price variances is recorded based upon historical experience and current allowance programs. Contract termination terms may involve variable consideration clauses such as sales discounts and customer rebates, and revenue is adjusted accordingly for these provisions. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The promised amount of consideration in a contract is not adjusted for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised good or service to a customer and when the customer pays for that product or service will be one year or less. Sales taxes are excluded from the measurement of a performance obligation’s transaction price. Sales commissions are expensed as incurred when we expect that the amortization period of such costs will be one year or less.
The following table presents disaggregated revenue by operating segment for the periods presented (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Uniforms and Related Products Segment: | ||||||||||||||||
| Uniforms and related products | $ | $ | $ | $ | ||||||||||||
| Personal protective equipment | ||||||||||||||||
| Total Uniforms and Related Products Segment | $ | $ | $ | $ | ||||||||||||
| Remote Staffing Solutions Segment: | ||||||||||||||||
| Remote staffing solutions services | $ | $ | $ | $ | ||||||||||||
| Net intersegment eliminations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Remote Staffing Solutions Segment | $ | $ | $ | $ | ||||||||||||
| Promotional Products Segment: | ||||||||||||||||
| Promotional products | $ | $ | $ | $ | ||||||||||||
| Personal protective equipment | ||||||||||||||||
| Total Promotional Products Segment | $ | $ | $ | $ | ||||||||||||
| Consolidated Net Sales | $ | $ | $ | $ | ||||||||||||
Contract Assets and Contract Liabilities
The following table provides information about accounts receivables - trade, contract assets and contract liabilities from contracts with customers (in thousands):
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Accounts receivable - trade | $ | $ | ||||||
| Current contract assets | ||||||||
| Current contract liabilities | ||||||||
Contract assets relate to goods produced without an alternative use for which the Company has an enforceable right to payment but which have not yet been invoiced to the customer. The majority of the amounts included in contract assets on December 31, 2019 were transferred to accounts receivable during the nine months ended September 30, 2020. 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. The increase in contract liabilities during the nine months ended September 30, 2020 was primarily attributable to new customer contracts for the sourcing of personal protective equipment within the Promotional Products segment. During the nine months ended September 30, 2020, $
NOTE 6 – Contingencies:
The purchase price to acquire substantially all of the assets of BAMKO, Inc. (“BAMKO”) in 2016 included contingent consideration through 2021. The estimated fair value for BAMKO acquisition-related contingent consideration payable was $
The Company is involved in various legal actions and claims arising from the normal course of business. In the opinion of management, the ultimate outcome of these matters is not expected to have a material impact on the Company’s results of operations, cash flows, or financial position.
NOTE 7 – Share-Based Compensation:
Share-based compensation is recorded in selling and administrative expense in the statements of comprehensive income. The following table details the share-based compensation expense by type of award and the total related tax benefit for the periods presented (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Stock options and SARs | $ | $ | $ | $ | ||||||||||||
| Restricted stock | ||||||||||||||||
| Performance shares(1) | ( | ) | ||||||||||||||
| Total share-based compensation expense | $ | $ | ( | ) | $ | $ | ||||||||||
| Related income tax benefit | $ | $ | $ | $ | ||||||||||||
| (1) | During the three and nine months ended September 30, 2019, the Company reversed $ |
Stock options and Stock Appreciation Rights (“SARs”)
The Company grants stock options and stock-settled SARs to employees that allow them to purchase shares of the Company’s common stock. Stock options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and SARs at the date of grant using the Black-Scholes valuation model.
All stock options and SARs granted prior to August 3, 2018 vested immediately when granted. Awards issued thereafter vest either one or two years after the grant date. Employee awards expire years after the grant date, and those issued to directors expire years after the grant date. The Company issues new shares upon the exercise of stock options and SARs.
A summary of stock option transactions during the nine months ended September 30, 2020 follows:
| Weighted Average | Aggregate | |||||||||||||||
| No. of | Weighted Average | Remaining Life | Intrinsic Value | |||||||||||||
| Shares | Exercise Price | (in years) | (in thousands) | |||||||||||||
| Outstanding, January 1, 2020 | $ | $ | ||||||||||||||
| Granted(1) | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Lapsed or cancelled | ( | ) | ||||||||||||||
| Outstanding, September 30, 2020 | ||||||||||||||||
| Exercisable, September 30, 2020 | ||||||||||||||||
| (1) | The weighted average grant date fair value of stock options granted was $ |
As of September 30, 2020, the Company had $
A summary of stock-settled SARs transactions during the nine months ended September 30, 2020 follows:
| Weighted Average | Aggregate | |||||||||||||||
| No. of | Weighted Average | Remaining Life | Intrinsic Value | |||||||||||||
| Shares | Exercise Price | (in years) | (in thousands) | |||||||||||||
| Outstanding, January 1, 2020 | $ | $ | ||||||||||||||
| Granted(1) | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Lapsed or cancelled | ( | ) | ||||||||||||||
| Outstanding, September 30, 2020 | ||||||||||||||||
| Exercisable, September 30, 2020 | ||||||||||||||||
| (1) | The weighted average grant date fair value of SARs granted was $ |
As of September 30, 2020, the Company had $
Restricted Stock
The Company has granted restricted stock to directors and certain employees which vest at a specified future date, generally after years, or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Incentive Stock and Awards Plan (the “2013 Plan”). Expense for each of these grants is based on the fair value at the date of the grant and is being recognized on a straight-line basis over the respective service period.
A summary of restricted stock transactions during the nine months ended September 30, 2020 follows:
| Weighted Average | ||||||||
| No. of | Grant Date | |||||||
| Shares | Fair Value | |||||||
| Outstanding, January 1, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Outstanding, September 30, 2020 | ||||||||
As of September 30, 2020, the Company had $
Performance Shares
Certain employees received service-based or service-based and performance-based shares, to which we collectively refer to as performance shares. The service-based awards vest after the service period is met, which is generally to 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 shares generally vest after 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 under certain circumstances as outlined in the 2013 Plan.
A summary of performance share transactions during the nine months ended September 30, 2020 follows:
| Weighted Average | ||||||||
| No. of | Grant Date | |||||||
| Shares | Fair Value | |||||||
| Outstanding, January 1, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Outstanding, September 30, 2020 | ||||||||
As of September 30, 2020, the Company had $
NOTE 8 – Income Taxes:
The Company calculates its interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, the Company makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date income or loss. The tax expense or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year and permanent and temporary differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.
For the three months ended September 30, 2020, the Company recorded a provision for income taxes of $
NOTE 9 – Net Income Per Share:
The Company’s basic net income per share is computed based on the weighted average number of shares of common stock outstanding for the period. Diluted net income per share includes the effect of the Company’s outstanding stock options, stock appreciation rights, unvested shares of restricted stock and unvested performance shares, if the inclusion of these items is dilutive.
The following table presents a reconciliation of basic and diluted net income per share for the three and nine months ended September 30, 2020 and 2019:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income used in the computation of basic and diluted net income per share (in thousands) | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding - basic | ||||||||||||||||
| Dilutive common stock equivalents | ||||||||||||||||
| Weighted average shares outstanding - diluted | ||||||||||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
Awards to purchase
Awards to purchase
NOTE 10 – Operating Segment Information:
The Company classifies its businesses into
The Company evaluates the performance of each operating segment based on several factors of which the primary financial measures are net sales and income before taxes on income. Amounts for corporate expenses are included in the totals for the Uniforms and Related Products segment.
The following tables set forth financial information related to the Company’s operating segments (in thousands):
| Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | ||||||||||||||||
| As of and For the Three Months Ended September 30, 2020: | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Cost of goods sold | ( | ) | ||||||||||||||||||
| Gross margin | ( | ) | ||||||||||||||||||
| Selling and administrative expenses | ( | ) | ||||||||||||||||||
| Other periodic pension cost | ||||||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Income before taxes on income | $ | $ | $ | $ | $ | |||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | |||||||||||||||
| Capital expenditures | $ | $ | $ | $ | $ | |||||||||||||||
| Total assets | $ | $ | $ | $ | $ | |||||||||||||||
| Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | ||||||||||||||||
| As of and For the Three Months Ended September 30, 2019: | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Cost of goods sold | ( | ) | ||||||||||||||||||
| Gross margin | ( | ) | ||||||||||||||||||
| Selling and administrative expenses | ( | ) | ||||||||||||||||||
| Other periodic pension cost | ||||||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Income before taxes on income | $ | $ | $ | $ | $ | |||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | |||||||||||||||
| Capital expenditures | $ | $ | $ | $ | $ | |||||||||||||||
| Total 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Cost of goods sold | ( | ) | ||||||||||||||||||
| Gross margin | ( | ) | ||||||||||||||||||
| Selling and administrative expenses | ( | ) | ||||||||||||||||||
| Other periodic pension cost | ||||||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Income before taxes on income | $ | $ | $ | $ | $ | |||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | |||||||||||||||
| Capital expenditures | $ | $ | $ | $ | $ | |||||||||||||||
| Total assets | $ | $ | $ | $ | $ | |||||||||||||||
| Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | ||||||||||||||||
| As of and For the Nine Months Ended September 30, 2019: | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Cost of goods sold | ( | ) | ||||||||||||||||||
| Gross margin | ( | ) | ||||||||||||||||||
| Selling and administrative expenses | ( | ) | ||||||||||||||||||
| Other periodic pension cost | ||||||||||||||||||||
| Interest expense | ||||||||||||||||||||
| Income before taxes on income | $ | $ | $ | $ | $ | |||||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | $ | |||||||||||||||
| Capital expenditures | $ | $ | $ | $ | $ | |||||||||||||||
| Total assets | $ | $ | $ | $ | $ | |||||||||||||||
NOTE 11 – COVID-19:
The COVID-19 pandemic continues to affect our operations and financial performance, and likely will continue to do so for an undetermined period of time. International, federal, state and local efforts to contain the spread of COVID-19 have continued as government actions to address the situation remain in effect and new actions continue to be enacted, including safety requirements such as recommended or mandatory use of face masks and other personal protective equipment and related products, social distancing rules and guidelines, travel restrictions, temporary closures of non-essential businesses and other restrictive measures that prohibit many employees from going to work. With regard to personal protective equipment, the COVID-19 pandemic has created significant market demand from new and existing customers. In responding to the needs of our customers, we have sourced significant amounts of personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which contributed $
The pandemic could have a number of adverse impacts on our business, including, but not limited to, additional 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.
The majority of the principal fabrics used in the manufacture of products within the Uniforms and Related Products segment are sourced from China and the vast majority of raw materials used in our Promotional Products segment are sourced from China, either directly by BAMKO or by its suppliers. If we are unable to continue to obtain affordable raw materials and finished products from China or if our suppliers are unable to source affordable raw materials from China, it could significantly disrupt our business. A prolonged pandemic, or the threat thereof, could significantly disrupt our product sourcing, which in turn, could significantly disrupt our business.
We have and will continue to monitor and control our expense levels to protect our profitability. For example, on March 30, 2020, we entered into debt deferment agreements with Truist Bank (formerly known as Branch Banking and Trust Company) to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Additionally, we have proactively taken steps to increase available cash on hand by targeted reductions in discretionary operating expenses. Finally, we have and will continue to delay certain capital expenditures relating to non-essential projects until economic conditions begin to stabilize.
Prolonged instability in the United States and global economies, and how the world reacts to them, could have long-term impacts on our business. These business impacts could negatively affect us in a number of ways, including, but not limited to, reduced demand for our core products and services, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, declines in our stock price, reduced availability and less favorable terms of future borrowings, valuation of our pension assets and obligations, reduced credit-worthiness of our customers, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets. The extent to which the COVID-19 pandemic ultimately impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments and success of efforts to find and deliver a suitable vaccine, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. However, prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the Condensed Consolidated Financial Statements in Part I, Item 1 (“Financial Statements”) of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.
Disclosure 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 current coronavirus (COVID-19) on our, our customers’, and our suppliers’ businesses, (2) projections of revenue, income, and other items relating to our financial position and results of operations, (3) statements of our plans, objectives, strategies, goals and intentions, (4) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (5) statements of expected industry and general economic trends.
Such forward-looking statements are subject to certain risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the following: the impact of competition; the effect of uncertainties related to the current coronavirus (COVID-19) pandemic on the U.S. and global markets, our business, operations, customers, suppliers and employees, including without limitation the length and scope of the restrictions imposed by various governments and success of efforts to find and deliver a suitable vaccine, among other factors; general economic conditions, including employment levels, in the areas of the United States of America (“United States”) in which the Company’s customers are located; changes in the healthcare, retail, hotels, food service, transportation and other industries where uniforms and service apparel are worn; our ability to identify suitable acquisition targets, successfully integrate any acquired businesses, successfully manage our expanding operations, or discover liabilities associated with such business during the diligence process; the price and availability of cotton and other manufacturing materials; attracting and retaining senior management and key personnel and other factors described in the Company’s filings with the Securities and Exchange Commission, including those described in the “Risk Factors” section herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. 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.
Business Outlook
Superior Group of Companies, Inc. (together with its subsidiaries, the “Company,” “Superior,” “we,” “our,” or “us”) is comprised of three reportable business segments: (1) Uniforms and Related Products, (2) Remote Staffing Solutions, and (3) Promotional Products.
COVID-19 Impact
The COVID-19 pandemic continues to affect our operations and financial performance, and likely will continue to do so for an undetermined period of time. International, federal, state and local efforts to contain the spread of COVID-19 have continued as government actions to address the situation remain in effect and new actions continue to be enacted, including safety requirements such as recommended or mandatory use of face masks and other personal protective equipment and related products, social distancing rules and guidelines, travel restrictions, temporary closures of non-essential businesses and other restrictive measures that prohibit many employees from going to work. With regard to personal protective equipment, the COVID-19 pandemic has created significant market demand from new and existing customers. In responding to the needs of our customers, we have sourced significant amounts of personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which contributed $69.1 million and $24.3 million to net sales during the nine months ended September 30, 2020 for our Promotional Products segment and Uniforms and Related Products segment, respectively.
The pandemic could have a number of adverse impacts on our business, including, but not limited to, additional 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.
The majority of the principal fabrics used in the manufacture of products within the Uniforms and Related Products segment are sourced from China and the vast majority of raw materials used in our Promotional Products segment are sourced from China, either directly by BAMKO or by its suppliers. If we are unable to continue to obtain affordable raw materials and finished products from China or if our suppliers are unable to source affordable raw materials from China, it could significantly disrupt our business. A prolonged pandemic, or the threat thereof, could significantly disrupt our product sourcing, which in turn, could significantly disrupt our business.
We have and will continue to monitor and control our expense levels to protect our profitability. For example, on March 30, 2020, we entered into debt deferment agreements with Truist Bank (formerly known as Branch Banking and Trust Company) to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Additionally, we have proactively taken steps to increase available cash on hand by targeted reductions in discretionary operating expenses. Finally, we have and will continue to delay certain capital expenditures relating to non-essential projects until economic conditions begin to stabilize.
Prolonged instability in the United States and global economies, and how the world reacts to them, could have long-term impacts on our business. These business impacts could negatively affect us in a number of ways, including, but not limited to, reduced demand for our core products and services, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, declines in our stock price, reduced availability and less favorable terms of future borrowings, valuation of our pension assets and 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 impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments and success of efforts to find and deliver a suitable vaccine, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. However, prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.
Uniforms and Related Products
In our Uniforms and Related Products segment, we manufacture and sell a wide range of uniforms, career apparel and accessories. Our primary products are service apparel, such as scrubs, lab coats, protective apparel and patient gowns, provided to workers in the healthcare industry, and service apparel, such as uniforms, provided to workers employed by our customers in various industries, including retail, hotels, food service, transportation and other industries. We sell our brands of healthcare service apparel primarily to healthcare laundries, dealers, distributors and retailers. As a result of the COVID-19 pandemic, we have seen increased demand for healthcare service apparel from laundries, dealers and distributors that service hospitals and other medical facilities. From a long-term perspective, we expect that demand for our signature marketing brands, including Fashion Seal Healthcare® and WonderWink®, will continue to provide opportunities for growth and increased market share. Sales of uniforms are impacted by our customers’ opening and closing of locations and reductions, increases, and turnover of employees. The current economic environment in the United States has been significantly impacted by the COVID-19 pandemic, and as a result, we have seen reduced demand for uniform apparel in many of our customers’ industries, some of which has been partially offset by demand from customers in certain retail industries, such as grocery and pharmacy customers, and healthcare. Additionally, we have sourced much needed personal protective equipment for our customers, which has more than offset the declines in sales of uniform apparel to certain customers. Based on the longer-term fundamentals of our uniforms business, we anticipate that we will have growth opportunities when market conditions in the United States stabilize and begin to improve.
Remote Staffing Solutions
This business segment (also known as “The Office Gurus”), which operates in El Salvador, Belize, Jamaica, and the United States, initially started to support the Company’s back office needs while improving overall efficiencies and lowering operating costs. After years of consistently improving key performance indicators, lowering costs and providing exceptional service to our Uniforms and Related Products segment in areas such as order entry, cash collections, vendor payables processing, customer service, sales, and others, The Office Gurus started selling their services to outside companies in 2009. The Office Gurus has become an award-winning global business process outsourcer offering inbound and outbound voice, email, text, chat and social media support. Although the COVID-19 pandemic has generated uncertainties for our customers and their industries, we have recently begun to see increased demand for our services. With an environment and career path designed to attract and maintain top talent across all sites, we believe The Office Gurus is positioned well to continue growing this business.
Promotional Products
For more than a decade, we sold promotional products on a limited basis to our existing Uniforms and Related Products customer base. While there were substantial opportunities to sell promotional products to those customers, it was not an area of focus, specialization, or expertise for us. On March 1, 2016, that changed with our acquisition of substantially all of the assets of BAMKO, Inc. (“BAMKO”). One of the top firms in the promotional products industry, BAMKO has a number of strengths, well-developed systems, and time-tested processes that offer significant competitive advantages. With a robust back-office support platform operated out of India, direct-to-factory sourcing operations based in China, and proprietary technological platforms and programming capabilities that we believe are very competitive, BAMKO is positioned to be a platform for potential future acquisitions in this industry. We completed two additional acquisitions in this segment in late 2017 and remain open to additional acquisitions going forward. In recent years we have seen an increase in customer orders in our promotional products business and expect growth opportunities for our core promotional products business to continue once the current market environment stabilizes. As a result of the COVID-19 pandemic, we have seen significant short-term opportunities within the personal protective equipment market. In responding to the needs of our customers, the sourcing team within the Promotional Products segment sourced much needed personal protective equipment for our customers. These opportunities led to record revenue levels during the nine months ended September 30, 2020, despite the downturn in the branded merchandise industry that has experienced customer budget cuts and widespread event cancellations. Additionally, in our core promotional products business we have not experienced the same downturn that many of our competitors have experienced as the increase in activities from customers in certain industries, such as the delivery service industry, has more than offset reduced activities from customers in other industries, such as the restaurant and entertainment industries. From a long-term perspective, we believe that this segment’s synergistic fit with our uniforms business will create opportunities to cross-sell the products of various business segments to new and existing customers.
| Results of Operations |
| Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 |
| Net Sales (in thousands): |
| Three Months Ended September 30, |
||||||||||||
| 2020 |
2019 |
% Change |
||||||||||
| Uniforms and Related Products | $ | 73,234 | $ | 54,979 | 33.2 | % | ||||||
| Remote Staffing Solutions | 11,636 | 9,305 | 25.1 | % | ||||||||
| Promotional Products | 44,176 | 26,460 | 67.0 | % | ||||||||
| Net intersegment eliminations | (1,309 | ) | (1,278 | ) | 2.4 | % | ||||||
| Consolidated Net Sales |
$ | 127,737 | $ | 89,466 | 42.8 | % | ||||||
Net sales for the Company increased 42.8% from $89.5 million for the three months ended September 30, 2019 to $127.7 million for the three months ended September 30, 2020. The principal components of this aggregate increase in net sales were as follows: (1) an increase in the net sales of our Uniforms and Related Products segment (contributing 20.4%, of which $6.0 million (contributing 6.7%) represented the effect of differences in timing of revenue recognized under ASC 606 between periods), (2) an increase in the net sales for our Promotional Products segment (contributing 19.8%), and (3) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 2.6%).
Uniforms and Related Products net sales increased 33.2%, or $18.3 million, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase was primarily due to increased demand for personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which contributed $13.1 million to the increase in net sales. Additionally, continued market demand in the current year period for healthcare service apparel contributed to the increase in net sales. Shipments by our Uniforms and Related Products segment increased from $60.9 million to $73.1 million comparing the three months ended September 30, 2020 with the prior year period. Shipments is a non-GAAP financial measure. For a reconciliation of shipments by our Uniforms and Related Products segment, see “Shipments (Non-GAAP Financial Measure)” below.
Remote Staffing Solutions net sales increased 25.1% before intersegment eliminations and 28.7% after intersegment eliminations for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. These increases were primarily attributed to providing continued services in the current year period to our customer base that was expanded during 2019 and the onboarding of new customers in the current year period.
Promotional Products net sales increased 67.0%, or $17.7 million, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase was primarily due to the sale of personal protective equipment, including face masks, sanitizers and gloves, which resulted in net sales of $19.4 million during the three months ended September 30, 2020. As a result of the COVID-19 pandemic, we have seen significant short-term opportunities within the personal protective equipment market. Additionally, in our core promotional products business we have not experienced the same downturn that many of our competitors have experienced as the increase in activities from customers in certain industries, such as the delivery service industry, has helped to offset reduced activities from customers in other industries, such as the restaurant and entertainment industries.
Cost of Goods Sold
Cost of goods sold consists primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing costs, and inspection costs for our Uniforms and Related Products and Promotional Products segments. Cost of goods sold for our Remote Staffing Solutions segment includes salaries and payroll related benefits for agents. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with out-bound freight are recorded in cost of goods sold. Other shipping and handling costs are included in selling and administrative expenses.
As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 66.5% for the three months ended September 30, 2020 and 64.1% for the three months ended September 30, 2019. The percentage increase was primarily driven by the increase in personal protective equipment sales during the current year period, as discussed above.
As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 40.0% for the three months ended September 30, 2020 and 38.1% for the three months ended September 30, 2019. The percentage increase was primarily driven by costs associated with the onboarding of new customers in the current year period.
As a percentage of net sales, cost of goods sold for our Promotional Products segment was 62.1% for the three months ended September 30, 2020 and 74.2% for the three months ended September 30, 2019. The percentage decrease was primarily the result of personal protective equipment sales during the three months ended September 30, 2020 and differences in the mix of products and customers.
Selling and Administrative Expenses
Selling and administrative expenses increased 38.2%, or $9.6 million, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase was primarily due to an increase in sales commissions and other employee compensation as a result of record sales levels during the three months ended September 30, 2020, an increase in expense of $2.3 million related to fair market value adjustments on acquisition related contingent liabilities and an increase in bad debt expense of $1.2 million on outstanding trade accounts receivable.
As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 30.0% for the three months ended September 30, 2020 and 32.2% for the three months ended September 30, 2019. The percentage decrease was primarily due to the increase in net sales explained above.
As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 33.7% for the three months ended September 30, 2020 and 37.5% for the three months ended September 30, 2019. The percentage decrease was primarily due to the increase in net sales explained above.
As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 22.2% for the three months ended September 30, 2020 and 18.7% for the three months ended September 30, 2019. The percentage increase was primarily the result of fair market value adjustments on acquisition related contingent liabilities that increased selling and administrative expenses by $1.4 million for the three months ended September 30, 2020 and reduced selling and administrative expenses by $0.9 million for the three months ended September 30, 2019.
Interest Expense
Interest expense decreased to $0.2 million for the three months ended September 30, 2020 from $1.1 million for the three months ended September 30, 2019. This decrease was primarily due to a decrease in LIBOR rates on our outstanding borrowings and a significant reduction in outstanding borrowings.
Income Taxes
The effective income tax rate was 17.7% and 15.3% for the three months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate was primarily driven by an increase of 1.5% for compensation related items, an increase of 1.1% in uncertain tax positions and foreign tax credit adjustments recognized in the prior year period. 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, 2020 Compared to Nine Months Ended September 30, 2019 |
| Net Sales (in thousands): |
| Nine Months Ended September 30, |
||||||||||||
| 2020 |
2019 |
% Change |
||||||||||
| Uniforms and Related Products |
$ | 209,178 | $ | 174,403 | 19.9 | % | ||||||
| Remote Staffing Solutions |
30,187 | 26,897 | 12.2 | % | ||||||||
| Promotional Products |
145,810 | 70,563 | 106.6 | % | ||||||||
| Net intersegment eliminations |
(3,834 | ) | (3,575 | ) | 7.2 | % | ||||||
| Consolidated Net Sales |
$ | 381,341 | $ | 268,288 | 42.1 | % | ||||||
Net sales for the Company increased 42.1% from $268.3 million for the nine months ended September 30, 2019 to $381.3 million for the nine months ended September 30, 2020. The principal components of this aggregate increase in net sales were as follows: (1) an increase in the net sales of our Uniforms and Related Products segment (contributing 13.0%, of which $9.5 million (contributing 3.5%) represented the effect of differences in timing of revenue recognized under ASC 606 between periods), (2) an increase in the net sales for our Promotional Products segment (contributing 28.0%), and (3) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 1.1%).
Uniforms and Related Products net sales increased 19.9%, or $34.8 million, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily due to increased demand for personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which contributed $21.2 million to the increase in net sales. Additionally, market demand for healthcare service apparel increased, which contributed to the increase in net sales. These increases were partially offset by decrease in demand for uniform apparel experienced during the current year period primarily as a result of COVID-19. Shipments by our Uniforms and Related Products segment increased from $185.5 million to $210.8 million comparing the nine months ended September 30, 2020 with the prior year period. For a reconciliation of shipments by our Uniforms and Related Products segment, see “Shipments (Non-GAAP Financial Measure)” below.
Remote Staffing Solutions net sales increased 12.2% before intersegment eliminations and 13.0% after intersegment eliminations for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These increases were primarily attributed to providing continued services in the current year period to our customer base that was expanded during 2019 and the onboarding of new customers in the current year period. Despite the increase in net sales, overall growth during the nine months ended September 30, 2020 was negatively impacted by disruptions in March 2020 and April 2020 resulting from COVID-19.
Promotional Products net sales increased 106.6%, or $75.2 million, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily due to the sale of personal protective equipment, including face masks, sanitizers and gloves, which contributed $69.1 million to the increase in net sales during the nine months ended September 30, 2020. As a result of the COVID-19 pandemic, we have seen significant short-term opportunities within the personal protective equipment market. Additionally, continued product sales to our expanded customer base during the current year period also contributed to the net sales increase. In our core promotional products business we have not experienced the same downturn that many of our competitors have experienced as the increase in activities from customers in certain industries, such as the delivery service industry, has more than offset reduced activities from customers in other industries, such as the restaurant and entertainment industries.
Cost of Goods Sold
As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 64.7% for the nine months ended September 30, 2020 and 64.5% for the nine months ended September 30, 2019. As a percentage of net sales, cost of goods sold remained relatively flat. The increase in cost of goods sold during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to the net sales increase explained above.
As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 42.7% for the nine months ended September 30, 2020 and 40.6% for the nine months ended September 30, 2019. The percentage increase was primarily driven by disruptions resulting from COVID-19 and costs associated with the onboarding of new customers in the current year period.
As a percentage of net sales, cost of goods sold for our Promotional Products segment was 67.0% for the nine months ended September 30, 2020 and 73.6% for the nine months ended September 30, 2019. The percentage decrease was primarily the result of personal protective equipment sales during the nine months ended September 30, 2020 and differences in the mix of products and customers.
Selling and Administrative Expenses
Selling and administrative expenses increased 26.5%, or $20.7 million, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily due to an increase in sales commissions and other employee compensation as a result of record sales levels during the nine months ended September 30, 2020, an increase in bad debt expense of $5.4 million on outstanding trade accounts receivable and an increase in expense of $3.1 million related to fair market value adjustments on acquisition related contingent liabilities.
As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 28.8% for the nine months ended September 30, 2020 and 31.3% for the nine months ended September 30, 2019. The percentage decrease was primarily due to the increase in net sales explained above.
As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 35.9% for the nine months ended September 30, 2020 and 37.4% for the nine months ended September 30, 2019. The percentage decrease was primarily related to the net sales increase explained above.
As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 20.6% for the nine months ended September 30, 2020 and 22.2% for the nine months ended September 30, 2019. The percentage decrease was primarily related to the net sales increase explained above.
Interest Expense
Interest expense decreased to $1.7 million for the nine months ended September 30, 2020 from $3.5 million for the nine months ended September 30, 2019. This decrease was primarily due to a decrease in LIBOR rates on our outstanding borrowings and a significant reduction in outstanding borrowings.
Income Taxes
The effective income tax rate was 19.9% and 19.4% for the nine months ended September 30, 2020 and 2019, respectively. The increase in the effective tax rate was primarily driven by increases of 2.4% for compensation related items, 0.8% in uncertain tax positions, 0.4% in R&D credits, partially offset by decreases of 2.1% for state income taxes and 1.3% for foreign taxes and foreign tax credits. 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 strength of the Company’s balance sheet generally provides the ability to pursue acquisitions, invest in new product lines and technologies and invest in additional working capital as necessary.
The Company’s primary source of liquidity has been its net income and the use of credit facilities and term loans as described further below. In the future, the Company may continue to use credit facilities and other secured and unsecured borrowings as a source of liquidity. Management currently believes that cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the Company’s anticipated working capital requirements for the next twelve months. The Company has proactively taken steps to increase available cash on hand by targeted reductions in discretionary cash outflows. The Company may also begin relying on the issuance of equity or debt securities. There can be no assurance that any such financings would be available to us on reasonable terms. Any future issuances of equity securities or debt securities with equity features 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
Cash and cash equivalents decreased by $3.3 million to $5.7 million as of September 30, 2020 from $9.0 million on December 31, 2019. Excess cash generated from operating activities during the nine months ended September 30, 2020 was used to repay outstanding borrowings under the revolving credit facility. Working capital decreased to $122.0 million at September 30, 2020 from $142.4 million at December 31, 2019. The decrease in working capital was primarily due to an increase in other current liabilities, partially offset by increases in inventories and trade accounts receivable. The increase in other current liabilities was primarily driven by new activities in the current year period relating to the increased sale of personal protective equipment within our Promotional Products and Uniforms and Related Products segments as a result of COVID-19, including increases in contract liabilities, accrued compensation and income taxes payable. The increase in inventories was primarily related to the timing of inventory purchases within our Promotional Products segment. The increase in trade accounts receivable was primarily due to increased net sales of personal protective equipment and healthcare service apparel within our Uniforms and Related Products segment.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized in the following table (in thousands):
| Nine Months Ended September 30, |
||||||||
| 2020 |
2019 |
|||||||
| Net cash provided by (used in): |
||||||||
| Operating activities |
$ | 51,067 | $ | 11,842 | ||||
| Investing activities |
(5,711 | ) | (6,419 | ) | ||||
| Financing activities |
(48,231 | ) | (4,903 | ) | ||||
| Effect of exchange rates on cash |
(512 | ) | (430 | ) | ||||
| Net increase (decrease) in cash and cash equivalents |
$ | (3,387 | ) | $ | 90 | |||
Operating Activities. The increase in net cash provided by operating activities during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to the receipt of payments from new customer contracts for the sourcing of personal protective equipment needed in response to COVID-19 within the Promotional Products and Uniforms and Related Products segments. 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 trade accounts receivable. Working capital cash changes during the nine months ended September 30, 2019 included an increase of $12.3 million in trade accounts receivable, a decrease in contract assets of $11.2 million and an increase in prepaid expenses and other current assets of $7.1 million.
Investing Activities. The decrease in net cash used in investing activities during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was attributable to a decrease in capital expenditures of $0.7 million. 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. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions. In the near term, the Company expects to delay certain capital expenditures relating to non-essential projects until economic conditions begin to stabilize.
Financing Activities. The increase in net cash used in financing activities during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to net repayments of $42.6 million in debt during the current year period compared to net borrowings of $1.5 million in the prior year period. Excess cash generated from operating activities during the nine months ended September 30, 2020 was used to repay outstanding borrowings under the revolving credit facility.
Credit Facilities (See Note 3 to the Financial Statements)
As of September 30, 2020, the Company had approximately $77.3 million in outstanding borrowings under its amended and restated credit agreement (the “Credit Agreement”) with Truist Bank, consisting of $2.9 million outstanding under the revolving credit facility expiring in May 2023, $22.5 million outstanding under a term loan maturing in February 2024 (“2017 Term Loan”) and $51.8 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”.
Obligations outstanding under the 2018 Term Loan have a variable interest rate of LIBOR plus a margin of between 0.85% and 1.65% (based on the Company’s funded debt to EBITDA ratio) (1.00% at September 30, 2020). Obligations outstanding under the revolving credit facility and the 2017 Term Loan generally have a variable interest rate of one-month LIBOR plus a margin of between 0.68% and 1.50% (based on the Company’s funded debt to EBITDA ratio) (0.83% at September 30, 2020). The available balance under the revolving credit facility is reduced by outstanding letters of credit. At September 30, 2020, the Company had undrawn capacity of $63.1 million under the revolving credit facility.
On March 30, 2020, the Company entered into debt deferment agreements with Truist Bank to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Contractual principal payments for the 2017 Term Loan are as follows: remainder of 2020 - $1.5 million; 2021 through 2023 - $6.0 million per year; and 2024 - $3.0 million. Contractual principal payments for the 2018 Term Loan are as follows: remainder of 2020 - $2.3 million; 2021 through 2025 - $9.3 million per year; and 2026 - $3.1 million. The term loans do not contain pre-payment penalties.
The Credit Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, restricted payments, and sales of assets. The Credit Agreement also requires the Company to maintain a fixed charge coverage ratio (as defined in the Credit Agreement) of at least 1.25:1 and a funded debt to EBITDA ratio (as defined in the Credit Agreement) not to exceed 5.0:1. As of September 30, 2020, 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, 2020 and 2019, the Company paid cash dividends of $4.6 million and $4.5 million, respectively. The Company anticipates that it will continue to pay dividends in the future as financial conditions permit.
On May 2, 2019, the Company’s Board of Directors approved a stock repurchase program of up to 750,000 shares of 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 this program the Company reacquired and retired 43,458 shares of its common stock during the nine months ended September 30, 2020. At September 30, 2020, the Company’s remaining repurchase capacity under its common stock repurchase program was 657,451 shares. Shares purchased under the common stock repurchase program are constructively retired and returned to unissued status. The Company considers several factors in determining when to make share repurchases, including among other things, the cost of equity, the after-tax cost of borrowing, the debt to total capitalization targets and the expected future cash needs.
Shipments (Non-GAAP Financial Measure)
In this management’s discussion and analysis, we use a supplemental measure of our performance, which is derived from our financial information, but which is not presented in our financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). This non-GAAP financial measure is “shipments,” and represents a primary metric by which our management evaluates customer demand.
We define shipments as net sales excluding, if applicable, sales recorded with respect to contracts with customers in which there is an enforceable right to the payment for goods with no alternative use in advance of the transfer of these goods to our customers. As recognized in accordance with ASC 606, net sales generated from such contracts are recorded as of the time at which we receive the goods from our suppliers rather than at the time we transfer them to our customers. For customers to which we sell goods that have an alternative use, or customers with whom we do not have an enforceable right to payment with no alternative use, shipments and net sales are identical performance measures.
We believe that sales recorded under ASC 606 are affected by changes in the Company’s purchasing patterns that may not be directly aligned with customer demand. We believe that shipments, as a supplemental performance measure, tracks customer demand more closely.
Shipments is not a measure determined in accordance with GAAP, and should not be considered in isolation or as a substitute for sales determined in accordance with GAAP. Shipments is used as a measurement of customer demand and we believe it to be a helpful measure for those evaluating performance of a company operating in the uniforms and related products business. However, there are limitations to the use of this non-GAAP financial measure. Our non-GAAP financial measure may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
The following tables reconcile net sales to shipments of our Uniforms and Related Products segment (in thousands):
| RECONCILIATION OF UNIFORMS AND RELATED PRODUCTS SEGMENT GAAP SALES TO SHIPMENTS |
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Uniforms and Related Products net sales, as reported |
$ | 73,234 | $ | 54,979 | $ | 209,178 | $ | 174,403 | ||||||||
| Adjustment: Recognition of revenue based on the timing of shipments for finished goods with no alternative use for Uniforms and Related Products net sales |
(121 | ) | 5,912 | 1,656 | 11,139 | |||||||||||
| Uniforms and Related Products shipments |
$ | 73,113 | $ | 60,891 | $ | 210,834 | $ | 185,542 | ||||||||
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. Interest on our Credit Facilities are based upon the one-month LIBOR rate. In order to reduce 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, a hypothetical increase in the LIBOR rate of 100 basis points as of January 1, 2020 would have resulted in approximately $0.8 million in additional pre-tax interest expense for the nine months ended September 30, 2020. 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 are outside of the United States. 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, 2020, 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 Promotional Products segment are denominated in their local currencies, which include the Hong Kong dollar, the Chinese renminbi, the British pound, the Indian rupee, and the Brazilian real. 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. During the nine months ended September 30, 2020 and 2019, 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 during the nine months ended September 30, 2020 included a foreign currency translation adjustment loss of $1.5 million primarily related to exchange rate movements of the Brazilian real.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
The Company conducted an evaluation, under supervision and with the participation of the Company’s principal executive officer, Michael Benstock, and the Company’s principal financial officer, Andrew D. Demott, Jr., of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information the Company is required to disclose in its filings with the SEC under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
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.
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, 2019.
Our business could be materially adversely impacted by the coronavirus (COVID-19) pandemic.
COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention in March of 2020. The global spread of COVID-19 has created significant volatility and uncertainty and economic disruption. The extent to which the COVID-19 pandemic impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we may not be able to accurately predict, including, without limitation: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and will be taken in response to the pandemic (including restrictions on travel and transport and workforce pressures); the effect on our suppliers and customers and customer demand for our core products and services; the effect on our sources of supply; the impact of the pandemic on economic activity and actions taken in response; closures of our and our suppliers’ and customers’ offices and facilities; the ability of our customers to pay for our products and services; financial market volatility; commodity prices; and the pace of recovery when the COVID-19 pandemic subsides.
The spreading of COVID-19 that is impacting global economic activity and market conditions could lead to changes in customer purchasing patterns. We have seen disruptions in our customers’ businesses, including, but not limited to, our customers’ willingness and ability to spend, layoffs and furloughs of our customers’ employees, and temporary or permanent closures of businesses that consume our products and services. Prolonged periods of difficult conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.
The majority of the principal fabrics used in the manufacture of products within the Uniforms and Related Products segment are sourced from China and the vast majority of raw materials used in our Promotional Products segment are sourced from China, either directly by BAMKO or by its suppliers. If we are unable to continue to obtain affordable raw materials and finished products from China or if our suppliers are unable to source affordable raw materials from China, it could significantly disrupt our business. A prolonged pandemic, or the threat thereof, could significantly disrupt our product sourcing, which in turn, could significantly disrupt our business.
The potential effects of COVID-19 also could impact us in a number of other ways, including, but not limited to, 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 assets and obligations, reduced credit-worthiness of our customers, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets.
Any of these events could materially adversely affect our business, financial condition, results of operations and cash flows.
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, 2020, 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, 2020.
| 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, 2020 to July 31, 2020 |
- | $ | - | - | ||||||||||||
| August 1, 2020 to August 31, 2020 |
- | - | - | |||||||||||||
| September 1, 2020 to September 30, 2020 |
- | - | - | |||||||||||||
| 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 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.
| Exhibit No. | Description | |
| 31.1* | Certification by the Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification by the Chief Financial Officer (Principal Financial Officer and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32** | Certification by the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS+ |
Inline XBRL Instance Document. |
|
| 101.SCH+ |
Inline XBRL Taxonomy Extension Schema. |
|
| 101.CAL+ |
Inline XBRL Taxonomy Extension Calculation Linkbase. |
|
| 101.DEF+ |
Inline XBRL Taxonomy Extension Definition Linkbase. |
|
| 101.LAB+ |
Inline XBRL Taxonomy Extension Label Linkbase. |
|
| 101.PRE+ |
Inline XBRL Taxonomy Extension Presentation Linkbase. |
|
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
*Filed herewith.
**Furnished, not filed.
+ Submitted electronically with this Quarterly Report.
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: October 29, 2020 | SUPERIOR GROUP OF COMPANIES, INC. | |
| By | /s/ Michael Benstock | |
| Michael Benstock | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: October 29, 2020 | ||
| By | /s/ Andrew D. Demott, Jr. | |
| Andrew D. Demott, Jr. | ||
| Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) |
||