UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
WASHINGTON, D.C. 20549 |
FORM 10-Q |
(Mark One) |
X | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||
For the quarterly period ended |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to __________ |
Commission file number: 001-05869 |
Exact name of registrant as specified in its charter: |
SUPERIOR GROUP OF COMPANIES, INC. |
State or other jurisdiction of incorporation or organization: | I.R.S. Employer Identification No.: |
Florida | 11-1385670 |
Address of principal executive offices: | ||||||||
10055 Seminole Boulevard | ||||||||
Seminole, Florida 33772-2539 |
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727-397-9611 |
Former name, former address and former fiscal year, if changed since last report: ___________________ |
Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock $0.001 par value per share | SGC | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ |
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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. |
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Large accelerated filer | Accelerated filer | ||
Non-accelerated filer |
| Smaller Reporting Company | |
Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ |
The number of shares of common stock of the registrant outstanding as of April 23, 2020 was 15,314,710 shares. |
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION |
ITEM 1. Financial Statements |
SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
|
(Unaudited) |
(In thousands, except shares and per share data) |
2019 | 2018 | Three Months Ended March 31, | ||||||||||||||
2020 | 2019 | |||||||||||||||
Net sales | $ | 92,270 | $ | 82,392 | $ | 94,245 | $ | 86,552 | ||||||||
Costs and expenses: | ||||||||||||||||
Cost of goods sold | 59,927 | 53,114 | 60,794 | 56,284 | ||||||||||||
Selling and administrative expenses | 26,885 | 23,327 | 27,489 | 25,863 | ||||||||||||
Other periodic pension costs | 547 | 96 | 285 | 259 | ||||||||||||
Interest expense | 1,259 | 758 | 1,060 | 1,170 | ||||||||||||
88,618 | 77,295 | 89,628 | 83,576 | |||||||||||||
Income before taxes on income | 3,652 | 5,097 | 4,617 | 2,976 | ||||||||||||
Income tax expense | 871 | 1,280 | 1,250 | 600 | ||||||||||||
Net income | $ | 2,781 | $ | 3,817 | $ | 3,367 | $ | 2,376 | ||||||||
Weighted average number of shares outstanding during the period | ||||||||||||||||
(Basic) | 14,952,802 | 14,956,221 | ||||||||||||||
(Diluted) | 15,287,357 | 15,559,404 | ||||||||||||||
Per Share Data: | ||||||||||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 0.22 | $ | 0.16 | ||||||||||||
Net income | $ | 0.19 | $ | 0.26 | ||||||||||||
Diluted | $ | 0.22 | $ | 0.16 | ||||||||||||
Net income | $ | 0.18 | $ | 0.25 | ||||||||||||
Weighted average shares outstanding during the period: | ||||||||||||||||
Basic | 15,024,851 | 14,927,341 | ||||||||||||||
Diluted | 15,200,898 | 15,262,654 | ||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Defined benefit pension plans: | ||||||||||||||||
Recognition of net losses included in net periodic pension costs | 256 | 215 | $ | 243 | $ | 247 | ||||||||||
Recognition of settlement loss included in net periodic pension costs | 246 | - | 105 | - | ||||||||||||
Loss (gain) on cash flow hedging activities | (6 | ) | 72 | |||||||||||||
Loss on cash flow hedging activities | (5 | ) | (5 | ) | ||||||||||||
Foreign currency translation adjustment | 49 | (509 | ) | (1,239 | ) | (28 | ) | |||||||||
Other comprehensive income (loss) | 545 | (222 | ) | (896 | ) | 214 | ||||||||||
Comprehensive income | $ | 3,326 | $ | 3,595 | $ | 2,471 | $ | 2,590 | ||||||||
Cash dividends per common share | $ | 0.100 | $ | 0.095 | $ | 0.10 | $ | 0.10 |
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2019 | 2018 | |||||||
Net sales | $ | 178,822 | $ | 155,479 | ||||
Costs and expenses: | ||||||||
Cost of goods sold | 116,211 | 101,326 | ||||||
Selling and administrative expenses | 52,748 | 44,509 | ||||||
Other periodic pension costs | 806 | 192 | ||||||
Interest expense | 2,429 | 1,035 | ||||||
172,194 | 147,062 | |||||||
Income before taxes on income | 6,628 | 8,417 | ||||||
Income tax expense | 1,471 | 2,150 | ||||||
Net income | $ | 5,157 | $ | 6,267 | ||||
Weighted average number of shares outstanding during the period | ||||||||
(Basic) | 14,940,072 | 14,888,940 | ||||||
(Diluted) | 15,275,006 | 15,508,517 | ||||||
Per Share Data: | ||||||||
Basic | ||||||||
Net income | $ | 0.35 | $ | 0.42 | ||||
Diluted | ||||||||
Net income | $ | 0.34 | $ | 0.40 | ||||
Other comprehensive income, net of tax: | ||||||||
Defined benefit pension plans: | ||||||||
Recognition of net losses included in net periodic pension costs | 503 | 431 | ||||||
Recognition of settlement loss included in net periodic pension costs | 246 | - | ||||||
Loss (gain) on cash flow hedging activities | (11 | ) | 212 | |||||
Foreign currency translation adjustment | 21 | (457 | ) | |||||
Other comprehensive income | 759 | 186 | ||||||
Comprehensive income | $ | 5,916 | $ | 6,453 | ||||
Cash dividends per common share | $ | 0.20 | $ | 0.19 |
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June 30, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 8,267 | $ | 5,362 | ||||
Accounts receivable, less allowance for doubtful accounts of $2,141 and $2,042, respectively | 70,927 | 64,017 | ||||||
Accounts receivable - other | 1,463 | 1,744 | ||||||
Inventories* | 63,370 | 67,301 | ||||||
Contract assets | 43,674 | 49,236 | ||||||
Prepaid expenses and other current assets | 12,090 | 9,552 | ||||||
TOTAL CURRENT ASSETS | 199,791 | 197,212 | ||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 31,448 | 28,769 | ||||||
OPERATING LEASE RIGHT-OF-USE ASSETS | 4,716 | - | ||||||
INTANGIBLE ASSETS, NET | 64,437 | 66,312 | ||||||
GOODWILL | 36,321 | 33,961 | ||||||
OTHER ASSETS | 10,299 | 8,832 | ||||||
TOTAL ASSETS | $ | 347,012 | $ | 335,086 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 25,903 | $ | 24,685 | ||||
Other current liabilities | 15,375 | 14,767 | ||||||
Current portion of long-term debt | 15,286 | 6,000 | ||||||
Current portion of acquisition-related contingent liabilities | 2,212 | 941 | ||||||
TOTAL CURRENT LIABILITIES | 58,776 | 46,393 | ||||||
LONG-TERM DEBT | 108,035 | 111,522 | ||||||
LONG-TERM PENSION LIABILITY | 8,532 | 8,705 | ||||||
LONG-TERM ACQUISITION-RELATED CONTINGENT LIABILITIES | 3,605 | 5,422 | ||||||
LONG-TERM OPERATING LEASE LIABILITIES | 2,864 | - | ||||||
DEFERRED TAX LIABILITY | 6,730 | 8,475 | ||||||
OTHER LONG-TERM LIABILITIES | 4,350 | 3,648 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 5) | ||||||||
SHAREHOLDERS' EQUITY: | ||||||||
Preferred stock, $.001 par value - authorized 300,000 shares (none issued) | - | - | ||||||
Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding - 15,255,694 and 15,202,387, respectively. | 15 | 15 | ||||||
Additional paid-in capital | 57,166 | 55,859 | ||||||
Retained earnings | 104,165 | 103,032 | ||||||
Accumulated other comprehensive income (loss), net of tax: | ||||||||
Pensions | (6,924 | ) | (7,673 | ) | ||||
Cash flow hedges | 102 | 113 | ||||||
Foreign currency translation adjustment | (404 | ) | (425 | ) | ||||
TOTAL SHAREHOLDERS' EQUITY | 154,120 | 150,921 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 347,012 | $ | 335,086 |
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June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Finished goods | $ | 53,202 | $ | 58,196 | ||||
Work in process | 703 | 650 | ||||||
Raw materials | 9,465 | 8,455 | ||||||
$ | 63,370 | $ | 67,301 |
See accompanying |
SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES | |||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||
(Unaudited) | |||||||||
(In thousands, except share and par value data) |
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,773 | $ | 9,038 | ||||
Accounts receivable, less allowance for doubtful accounts of $3,270 and $2,964, respectively | 73,551 | 79,746 | ||||||
Accounts receivable - other | 658 | 1,083 | ||||||
Inventories | 73,844 | 73,379 | ||||||
Contract assets | 38,234 | 38,533 | ||||||
Prepaid expenses and other current assets | 7,395 | 9,934 | ||||||
Total current assets | 199,455 | 211,713 | ||||||
Property, plant and equipment, net | 33,971 | 32,825 | ||||||
Operating lease right-of-use assets | 5,033 | 5,445 | ||||||
Intangible assets, net | 61,582 | 62,536 | ||||||
Goodwill | 36,096 | 36,292 | ||||||
Other assets | 8,469 | 10,122 | ||||||
Total assets | $ | 344,606 | $ | 358,933 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 24,660 | $ | 33,271 | ||||
Other current liabilities | 31,709 | 18,894 | ||||||
Current portion of long-term debt | 11,464 | 15,286 | ||||||
Current portion of acquisition-related contingent liabilities | 1,953 | 1,905 | ||||||
Total current liabilities | 69,786 | 69,356 | ||||||
Long-term debt | 89,662 | 104,003 | ||||||
Long-term pension liability | 10,092 | 10,253 | ||||||
Long-term acquisition-related contingent liabilities | 3,552 | 3,423 | ||||||
Long-term operating lease liabilities | 2,133 | 2,380 | ||||||
Deferred tax liability | 5,970 | 7,042 | ||||||
Other long-term liabilities | 5,021 | 4,922 | ||||||
Commitments and contingencies (Note 6) | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, $.001 par value - authorized 300,000 shares (none issued) | - | - | ||||||
Common stock, $.001 par value - authorized 50,000,000 shares, issued and outstanding 15,222,161 and 15,227,604 shares, respectively. | 15 | 15 | ||||||
Additional paid-in capital | 57,669 | 57,442 | ||||||
Retained earnings | 109,086 | 107,581 | ||||||
Accumulated other comprehensive income (loss), net of tax: | ||||||||
Pensions | (6,876 | ) | (7,224 | ) | ||||
Cash flow hedges | 86 | 91 | ||||||
Foreign currency translation adjustment | (1,590 | ) | (351 | ) | ||||
Total shareholders’ equity | 158,390 | 157,554 | ||||||
Total liabilities and shareholders’ equity | $ | 344,606 | $ | 358,933 |
See accompanying Notes to the Condensed Consolidated Financial Statements. |
SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF |
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(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, April 1, 2018 | 15,143,328 | $ | 15 | $ | 50,626 | $ | 95,296 | $ | (6,871 | ) | $ | 139,066 | ||||||||||||
Common shares issued upon exercise of options, net | 18,119 | 171 | (24 | ) | 147 | |||||||||||||||||||
Restricted shares issued in acquisition | 150,094 | 3,763 | 3,763 | |||||||||||||||||||||
Share-based compensation expense | 438 | 438 | ||||||||||||||||||||||
Cash dividends declared ($0.095 per share) | (1,425 | ) | (1,425 | ) | ||||||||||||||||||||
Comprehensive Income (Loss): | ||||||||||||||||||||||||
Net earnings | 3,817 | 3,817 | ||||||||||||||||||||||
Net change during the period related to: | ||||||||||||||||||||||||
Cash flow hedges, net of taxes of $23 | 72 | 72 | ||||||||||||||||||||||
Pensions, net of taxes of $67 | 215 | 215 | ||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $160 | (509 | ) | (509 | ) | ||||||||||||||||||||
Comprehensive Income: | 3,595 | |||||||||||||||||||||||
Balance, June 30, 2018 | 15,311,541 | $ | 15 | $ | 54,998 | $ | 97,664 | $ | (7,093 | ) | $ | 145,584 | ||||||||||||
Balance, April 1, 2019 | 15,229,775 | $ | 15 | $ | 56,536 | $ | 102,945 | $ | (7,771 | ) | $ | 151,725 | ||||||||||||
Common shares issued upon exercise of options | 18,533 | 88 | (18 | ) | 70 | |||||||||||||||||||
Restricted shares issued | 10,000 | |||||||||||||||||||||||
Share-based compensation expense | 551 | 551 | ||||||||||||||||||||||
Cash dividends declared ($0.10 per share) | (1,508 | ) | (1,508 | ) | ||||||||||||||||||||
Common stock reacquired and retired | (2,614 | ) | (9 | ) | (35 | ) | (44 | ) | ||||||||||||||||
Comprehensive Income (Loss): | ||||||||||||||||||||||||
Net earnings | 2,781 | 2,781 | ||||||||||||||||||||||
Net change during the period related to: | ||||||||||||||||||||||||
Cash flow hedges, net of taxes of $1 | (6 | ) | (6 | ) | ||||||||||||||||||||
Pensions, net of taxes of $158 | 502 | 502 | ||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $12 | 49 | 49 | ||||||||||||||||||||||
Comprehensive Income: | 3,326 | |||||||||||||||||||||||
Balance, June 30, 2019 | 15,255,694 | $ | 15 | $ | 57,166 | $ | 104,165 | $ | (7,226 | ) | $ | 154,120 |
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 | 15,202,387 | $ | 15 | $ | 55,859 | $ | 103,032 | $ | (7,985 | ) | $ | 150,921 | ||||||||||||
Common shares issued upon exercise of options, net | 44,161 | 369 | (159 | ) | 210 | |||||||||||||||||||
Restricted shares issued | 38,829 | - | ||||||||||||||||||||||
Share-based compensation expense | 481 | 481 | ||||||||||||||||||||||
Cash dividends declared ($0.10 per share) | (1,515 | ) | (1,515 | ) | ||||||||||||||||||||
Tax benefit from vesting of acquisition-related restricted stock | 30 | 30 | ||||||||||||||||||||||
Shares reacquired and retired | (55,602 | ) | (203 | ) | (789 | ) | (992 | ) | ||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||
Net earnings | 2,376 | 2,376 | ||||||||||||||||||||||
Cash flow hedges, net of taxes of $1 | (5 | ) | (5 | ) | ||||||||||||||||||||
Pensions, net of taxes of $78 | 247 | 247 | ||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $5 | (28 | ) | (28 | ) | ||||||||||||||||||||
Balance, March 31, 2019 | 15,229,775 | $ | 15 | $ | 56,536 | $ | 102,945 | $ | (7,771 | ) | $ | 151,725 | ||||||||||||
Balance, January 1, 2020 | 15,227,604 | $ | 15 | $ | 57,442 | 107,581 | $ | (7,484 | ) | $ | 157,554 | |||||||||||||
Restricted shares issued, net | 38,015 | - | ||||||||||||||||||||||
Share-based compensation expense | 399 | 399 | ||||||||||||||||||||||
Cash dividends declared ($0.10 per share) | (1,521 | ) | (1,521 | ) | ||||||||||||||||||||
Tax provision from vesting of acquisition-related restricted stock | (13 | ) | (13 | ) | ||||||||||||||||||||
Common stock reacquired and retired | (43,458 | ) | (159 | ) | (341 | ) | (500 | ) | ||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||
Net earnings | 3,367 | 3,367 | ||||||||||||||||||||||
Cash flow hedges, net of taxes of $1 | (5 | ) | (5 | ) | ||||||||||||||||||||
Pensions, net of taxes of $109 | 348 | 348 | ||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $397 | (1,239 | ) | (1,239 | ) | ||||||||||||||||||||
Balance, March 31, 2020 | 15,222,161 | $ | 15 | $ | 57,669 | $ | 109,086 | $ | (8,380 | ) | $ | 158,390 |
See accompanying |
SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF |
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Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Additional | Comprehensive | Total | ||||||||||||||||||||||
Common | Common | Paid-In | Retained | (Loss) Income, | Shareholders’ | |||||||||||||||||||
Shares | Stock | Capital | Earnings | net of tax | Equity | |||||||||||||||||||
Balance, January 1, 2018 | 15,081,947 | $ | 15 | $ | 49,103 | $ | 83,129 | $ | (7,279 | ) | $ | 124,968 | ||||||||||||
ASC 606 adjustment to opening retained earnings | 11,245 | 11,245 | ||||||||||||||||||||||
Common shares issued upon exercise of options, net | 51,164 | 554 | (150 | ) | 404 | |||||||||||||||||||
Restricted shares issued | 24,908 | |||||||||||||||||||||||
Restricted shares issued in acquisition | 150,094 | 3,763 | 3,763 | |||||||||||||||||||||
Common shares issued upon exercise of Stock Appreciation Rights (SARs) | 3,428 | - | ||||||||||||||||||||||
Share-based compensation expense | 1,490 | 1,490 | ||||||||||||||||||||||
Tax withheld on exercise of Stock Appreciation Rights (SARs) | (17 | ) | (17 | ) | ||||||||||||||||||||
Tax benefit from vesting of acquisition related restricted stock | 105 | 105 | ||||||||||||||||||||||
Cash dividends declared ($0.19 per share) | (2,827 | ) | (2,827 | ) | ||||||||||||||||||||
Comprehensive Income (Loss): | ||||||||||||||||||||||||
Net earnings | 6,267 | 6,267 | ||||||||||||||||||||||
Net change during the period related to: | ||||||||||||||||||||||||
Cash flow hedges, net of taxes of $68 | 212 | 212 | ||||||||||||||||||||||
Pensions, net of taxes of $135 | 431 | 431 | ||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $169 | (457 | ) | (457 | ) | ||||||||||||||||||||
Comprehensive Income: | 6,453 | |||||||||||||||||||||||
Balance, June 30, 2018 | 15,311,541 | $ | 15 | $ | 54,998 | $ | 97,664 | $ | (7,093 | ) | $ | 145,584 | ||||||||||||
Balance, January 1, 2019 | 15,202,387 | $ | 15 | $ | 55,859 | $ | 103,032 | $ | (7,985 | ) | $ | 150,921 | ||||||||||||
Common shares issued upon exercise of options | 62,694 | 457 | (177 | ) | 280 | |||||||||||||||||||
Restricted shares issued | 48,829 | |||||||||||||||||||||||
Share-based compensation expense | 1,032 | 1,032 | ||||||||||||||||||||||
Tax benefit from vesting of acquisition related restricted stock | 30 | 30 | ||||||||||||||||||||||
Cash dividends declared ($0.20 per share) | (3,023 | ) | (3,023 | ) | ||||||||||||||||||||
Common stock reacquired and retired | (58,216 | ) | (212 | ) | (824 | ) | (1,036 | ) | ||||||||||||||||
Comprehensive Income (Loss): | ||||||||||||||||||||||||
Net earnings | 5,157 | 5,157 | ||||||||||||||||||||||
Net change during the period related to: | ||||||||||||||||||||||||
Cash flow hedges, net of taxes of $2 | (11 | ) | (11 | ) | ||||||||||||||||||||
Pensions, net of taxes of $235 | 749 | 749 | ||||||||||||||||||||||
Change in currency translation adjustment, net of taxes of $7 | 21 | 21 | ||||||||||||||||||||||
Comprehensive Income: | 5,916 | |||||||||||||||||||||||
Balance, June 30, 2019 | 15,255,694 | $ | 15 | $ | 57,166 | $ | 104,165 | $ | (7,226 | ) | $ | 154,120 |
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(Unaudited) |
(In thousands) |
2019 | 2018 | Three Months Ended March 31, | ||||||||||||||
2020 | 2019 | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net income | $ | 5,157 | $ | 6,267 | $ | 3,367 | $ | 2,376 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 4,211 | 3,646 | 1,869 | 2,060 | ||||||||||||
Provision for bad debts - accounts receivable | 361 | 323 | 865 | 138 | ||||||||||||
Share-based compensation expense | 1,032 | 1,490 | 399 | 481 | ||||||||||||
Deferred income tax benefit (provision) | (1,979 | ) | 302 | |||||||||||||
Deferred income tax benefit | (784 | ) | (1,182 | ) | ||||||||||||
Gain on sale of property, plant and equipment | (3 | ) | - | - | (3 | ) | ||||||||||
Change in fair value of acquisition-related contingent liabilities | 417 | (840 | ) | 175 | 201 | |||||||||||
Changes in assets and liabilities, net of acquisition of business: | ||||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable - trade | (7,230 | ) | (3,492 | ) | 4,940 | 309 | ||||||||||
Accounts receivable - other | 280 | (674 | ) | 425 | 312 | |||||||||||
Contract assets | 5,562 | (972 | ) | 299 | 1,876 | |||||||||||
Inventories | 2,113 | 2,953 | (831 | ) | 1,522 | |||||||||||
Prepaid expenses and other current assets | (2,625 | ) | 242 | 2,327 | (2,197 | ) | ||||||||||
Other assets | (2,102 | ) | (1,827 | ) | 1,410 | (1,503 | ) | |||||||||
Accounts payable and other current liabilities | (14 | ) | (7,368 | ) | 4,656 | (12 | ) | |||||||||
Long-term pension liability | 812 | 195 | 294 | 262 | ||||||||||||
Other long-term liabilities | 759 | (497 | ) | 134 | 1,099 | |||||||||||
Net cash provided by (used in) operating activities | 6,751 | (252 | ) | |||||||||||||
Net cash provided by operating activities | 19,545 | 5,739 | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
Additions to property, plant and equipment | (4,979 | ) | (2,414 | ) | (2,073 | ) | (1,723 | ) | ||||||||
Proceeds from disposals of property, plant and equipment | 3 | - | - | 3 | ||||||||||||
Acquisition of businesses, net of acquired cash | - | (85,597 | ) | |||||||||||||
Net cash used in investing activities | (4,976 | ) | (88,011 | ) | (2,073 | ) | (1,720 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Proceeds from long-term debt | 94,466 | 146,157 | ||||||||||||||
Repayment of long-term debt | (88,667 | ) | (56,289 | ) | ||||||||||||
Proceeds from borrowings of debt | 34,488 | 54,856 | ||||||||||||||
Repayment of debt | (52,672 | ) | (55,161 | ) | ||||||||||||
Payment of cash dividends | (3,023 | ) | (2,827 | ) | (1,521 | ) | (1,515 | ) | ||||||||
Payment of acquisition-related contingent liability | (961 | ) | (3,033 | ) | ||||||||||||
Proceeds received on exercise of stock options | 280 | 405 | - | 210 | ||||||||||||
Tax benefit from vesting of acquisition-related restricted stock | 30 | 105 | ||||||||||||||
Tax withholding on exercise of stock rights | - | (17 | ) | |||||||||||||
Tax (provision) benefit from vesting of acquisition-related restricted stock | (13 | ) | 30 | |||||||||||||
Common stock reacquired and retired | (1,036 | ) | - | (500 | ) | (992 | ) | |||||||||
Net cash provided by financing activities | 1,089 | 84,501 | ||||||||||||||
Net cash used in financing activities | (20,218 | ) | (2,572 | ) | ||||||||||||
Effect of currency exchange rates on cash | 41 | (204 | ) | (519 | ) | 15 | ||||||||||
Net increase (decrease) in cash and cash equivalents | 2,905 | (3,966 | ) | (3,265 | ) | 1,462 | ||||||||||
Cash and cash equivalents balance, beginning of year | 5,362 | 8,130 | ||||||||||||||
Cash and cash equivalents balance, beginning of period | 9,038 | 5,362 | ||||||||||||||
Cash and cash equivalents balance, end of period | $ | 8,267 | $ | 4,164 | $ | 5,773 | $ | 6,824 |
See accompanying |
Superior Group of Companies, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)(Unaudited)
NOTE 1 – Basis of Presentation:
a) 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 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, and BAMKO UK, Limited, each a direct or indirect subsidiary of BAMKO, LLC; and BAMKO India Private Limited, a 99%-owned subsidiary of BAMKO, LLC. All of these entities are referred to collectively as “the Company”, “Superior”, “we”, “our”,the “Company,” “Superior,” “we,” “our,” or “us”.“us.” Effective on May 3, 2018, Superior Uniform Group, Inc. changed its name to Superior Group of Companies, Inc.
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, 2018,2019, and filed with the Securities and Exchange Commission. The interim financialManagement believes that the information contained herein is not certified or audited; it reflectsfurnished includes all adjustments (consisting of onlya normal recurring accruals) whichnature that are in the opinionnecessary to fairly present our consolidated financial position, results of management, necessary for a fair statement of the operating resultsoperations and cash flows for the periods presented, stated on a basis consistent with that of the audited financial statements.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, (loss)”, “balance sheets”,sheets,” “statements of stockholders’ equity”,shareholders’ equity,” and “statements of cash flows” herein.
b) 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) and July 2018,January 2017, the FASB issued ASU 2018-10,2017-04, Codification Improvements to Topic 842, Leases “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and ASU 2018-11, Targeted Improvements (collectively “Topic 842”). Topic 842 establishes a new lease model, referred to asseparate measure of the right-of-use (ROU) model that brings substantially all leases ontoactual impairment. Goodwill impairment charges, if any, would be determined by the balance sheet. This standard requires lessees to recognize leased assets (ROU Assets) and lease liabilities on the balance sheet and disclose key information about the leasing arrangements in their financial statements. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted Topic 842 effective on January 1, 2019 using the modified retrospective transition approach that allowsdifference between a reporting entity to use the effective date asunit's carrying value and its date of initial application and not restate the comparative periods in the period of adoption when transitioningfair value (impairment loss is limited to the new standard. Consequently, the requisite financial information and disclosures under the new standard are excluded for dates and periods prior to January 1, 2019. In addition, the Company elected to use a number of optional simplification and practical expedients (reliefs) permitted under the transition guidance within the new standard, including allowing the Company to combine fixed lease and non-lease components, apply the short-term lease exception to all leases of one year or less, and utilize the ‘package of practical expedients’, which permits the Company to not reassess prior accounting conclusions with respect to lease identification, lease classification and initial direct costs under Topic 842. The Company did not elect the use-of hindsight or the practical expedient pertaining to land easement; the latter not being applicable to the Company. Adoption of this new standard resulted in the recognition of $4.1 million of operating lease liabilities ($1.0 million in other current liabilities and $3.1 million in long-term operating lease liabilities) which represents the present value of the remaining lease payments of $4.6 million, discounted using the Company’s lease discount rate of 5.74% and $4.9 million of operating lease right-of-use assets, which represents the lease liability of $4.1 million adjusted for prepaid rent to $0.8 million that was previously presented within current prepaid expenses and other current assets and other assets on the accompanying balance sheet prior to adoption. Refer to Note 10 for the impact to the financial statements as of June 30, 2019.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows entities to elect to reclassify the income tax effects resulting from the Tax Cuts and Jobs Act (Tax Act) on items within accumulated other comprehensive income to retained earnings and requires additional related disclosures.carrying value). This standard is effective for fiscal yearsannual or any interim goodwill impairment tests beginning after December 15, 2018 and interim periods within those fiscal years, however, early adoption is permitted. The Company elected not to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings.2019. The Company’s adoption of this standard on January 1, 20192020 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. This update is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In August 2019, the FASB proposed an amendment to ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” that would delay the effective date 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 January 2017,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 2017-04, 2020-04, ““Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and a separate measureReference Rate Reform (Topic 848) Facilitation of the actual impairment. Goodwill impairment charges, if any, would be determined by the difference betweenEffects of Reference Rate Reform on Financial Reporting.” This update provides optional guidance for a reporting unit's carrying value and its fair value (impairment loss is limited period of time 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 is notease potential accounting impacts associated with transitioning away from reference rates that are expected to havebe 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 material impact on its financial statements.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):
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Finished goods | $ | 65,530 | $ | 65,413 | ||||
Work in process | 558 | 652 | ||||||
Raw materials | 7,756 | 7,314 | ||||||
Inventories | $ | 73,844 | $ | 73,379 |
Debt consisted of the following (in thousands):
June 30, | December 31, | |||||||
(In thousands) | 2019 | 2018 | ||||||
Note payable to BB&T, pursuant to revolving credit agreement, maturing May 2023 | $ | 34,035 | $ | 1,193 | ||||
Term loan payable to BB&T maturing January 2026 | 61,131 | - | ||||||
Term loan payable to BB&T maturing February 2024 | 28,500 | 31,500 | ||||||
Term loan payable to BB&T maturing May 2020 | - | 85,000 | ||||||
$ | 123,666 | $ | 117,693 | |||||
Less: | ||||||||
Payments due within one year included in current liabilities | 15,286 | 6,000 | ||||||
Debt issuance costs | 345 | 171 | ||||||
Long-term debt less current maturities | $ | 108,035 | $ | 111,522 |
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Credit Facilities: | ||||||||
Revolving credit facility due May 2023 | $ | 23,476 | $ | 37,838 | ||||
Term loan due February 2024 (“2017 Term Loan”) | 24,000 | 25,500 | ||||||
Term loan due January 2026 (“2018 Term Loan”) | 54,167 | 56,488 | ||||||
101,643 | 119,826 | |||||||
Less: | ||||||||
Payments due within one year included in current liabilities | 11,464 | 15,286 | ||||||
Debt issuance costs | 517 | 537 | ||||||
Long-term debt less current maturities | $ | 89,662 | $ | 104,003 |
Effective on February 28, 2017, theThe Company entered into a 7-yearis party to an amended and restated credit agreement with BB&T (the “Credit Agreement”) that providedwith Truist Bank (formerly known as Branch Banking and Trust Company), consisting of a $75 million revolving credit facility of $35 million which was to terminate on February 25, 2022, and providedexpiring in May 2023, a term loan maturing in February 2024 (“2017 Term Loan”) and a term loan maturing in January 2026 (“2018 Term Loan”).
Obligations outstanding under the 2018 Term Loan have a variable interest rate of $42 million, which matures on February 26, 2024. Both loans were based upon the one-month LIBOR rate for U.S. dollar based borrowings. Interest was payable for each loan at LIBOR (rounded up to the next 1/100thplus a margin of 1%) plus 0.75%. The Company pays a commitment fee of 0.10% per annumbetween 0.85% and 1.65% (based on the average unused portion of the commitment under the credit facility.
Effective on May 2, 2018, and concurrently with the closing of the CID Resources acquisition, the Company entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”), with BB&T pursuantCompany’s funded debt to which the Company’s existing revolving credit facility was increased from $35 million to $75 million and which provided an additional term loan in the principal amount of $85 million. No principal payments were due on the $85 million term loan prior to its maturity. The term of the revolving credit facility was extended until May 2023 and the $85 million term loan was to mature in May 2020. The Company’s existing term loan with the original principal amount of $42 million remains outstanding with a maturity date of February 2024 and with the same amortization schedule. Contractual principal payments for the $42 million term loan are as follows: 2019 through 2023 - $6.0 million per year; and 2024 - $1.5 million.
EBITDA ratio) (1.77% at March 31, 2020). Obligations outstanding under the revolving credit facility and the $42 million term loan2017 Term Loan generally have a variable interest rate of one-month LIBOR plus a margin of between 0.68% (3.08%and 1.50% (based on the Company’s funded debt to EBITDA ratio) (1.60% at June 30, 2019)March 31, 2020). The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of June 30, 2019,March 31, 2020, there were no outstanding letters of credit.
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 - $3.0 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 - $4.6 million; 2021 through 2025 - $9.3 million per year; and 2026 - $3.1 million. The term loans do not contain pre-payment penalties.
On January 22, 2019, the Company entered into a First Amendment to the Amended and Restated Credit Agreement pursuant to which the existing $85 million term loan was restructured. The Company used $20 million borrowed under its existing revolving credit facilityis a party to reduce the principal amount to $65 million. The maturity date on the loan was extended to January 22, 2026 and the interest rate was lowered to a variable interest rate of LIBOR plus 0.85% (3.25% at June 30, 2019). Contractual principal payments for the $65 million term loan are as follows: 2019 - $8.5 million, 2020 through 2025 - $9.3 million per year; and 2026 - $0.8 million. The revolving credit facility, $42 million term loan and $65 million term loan are collectively referred to as the “Credit Facilities”.
The Amended and Restated Credit Agreement, as amended, 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 Amended and Restated Credit Agreement, as amended, also requires the Company to maintain a fixed charge coverage ratio of at least 1.25:1 and a funded debt to EBITDA ratio not to exceed 4.0:1. As of June 30, 2019, 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 Amended and Restated Credit Agreement, as amended.
Effective on March 3, 2017, in order to reduce the interest rate risk on its future debt, the Company entered into an interest rate swap agreement (“original swap”) with BB&T that was designed to effectively convert or hedge the variable interest rate on a portion of its future borrowings to achieve a net fixed rate of 3.12% per annum, beginning March 1, 2018 with a total notional amountvalue of $18.0 million.$12.0 million as of March 31, 2020 pursuant to which it makes fixed payments and receives floating payments. The notional amount ofCompany entered into the interest rate swap to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. The Company’s interest rate swap expires in February 2024. The interest rate swap is reduced by $0.3 million per month beginning April 1, 2018 through February 26, 2024. Under the terms ofnot designated as a hedge transaction. Changes in fair value and gains and losses on settlement on the interest rate swap are recognized in interest expense in our statements of comprehensive income. During the Company will receive variable interest rate paymentsthree months ended March 31, 2020 and make fixed interest rate payments2019, a loss of $0.3 million and $0.1 million, respectively, was recognized on an amount equal to the notional amount at that time. Changes in the fair value of the interest rate swap designated as the hedging instrument that effectively offset the variability of cash flows associated with the variable rate, long-term debt obligation were recorded in other comprehensive income, net of related income tax effects. On May 2, 2018, in conjunction with the Amended and Restated Credit Agreement, the original swap was modified (“amended swap”) to achieve a net fixed rate of 3.05% per annum effective on May 1, 2018 and the remaining notional amount was $17.5 million. There were no other changes to the original swap. As a result of the change, the Company has discontinued hedge accounting for the original swap and has elected not to designate the amended swap. As of May 2, 2018, the fair value of the original swap was $0.1 million and is being amortized as interest expense over the remaining life of the amended swap. Changes to the fair value of the amended swap are recorded as interest expense. As of June 30, 2019, the negative fair value of the amended swap was $0.2 million and was included in other current liabilities.
NOTE 34 – Periodic Pension Expense:
The following table details the net periodic pension expense under the Company'sCompany’s plans for the periods presented (in thousands):
Three Months | Six Months | |||||||||||||||||||||||
Ended June 30, | Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Service cost - benefits earned during the period | $ | 29 | $ | 27 | $ | 58 | $ | 54 | $ | 38 | $ | 29 | ||||||||||||
Interest cost on projected benefit obligation | 271 | 243 | 542 | 485 | 216 | 271 | ||||||||||||||||||
Expected return on plan assets | (384 | ) | (430 | ) | (721 | ) | (859 | ) | (389 | ) | (337 | ) | ||||||||||||
Recognized actuarial loss | 324 | 283 | 649 | 566 | 320 | 325 | ||||||||||||||||||
Settlement loss | 336 | - | 336 | - | 138 | - | ||||||||||||||||||
Net periodic pension cost | $ | 576 | $ | 123 | $ | 864 | $ | 246 | ||||||||||||||||
Net periodic pension cost after settlements | $ | 323 | $ | 288 |
The pension settlement losses included in the table above relate toresulted 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.
There were $0.1 million and $0.1 million in contributions made to the Company’s defined benefit plans during the three months ended June 30, 2019 and 2018, respectively. There were $0.1 million and $0.1 million in contributions made to the Company’s defined benefit plans during the six months ended June 30, 2019 and 2018, respectively.
NOTE 45 – Net Sales:
On January 1, 2018,For our Uniforms and Related Products and Promotional Products segments, revenue is primarily generated from the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendmentssale of finished products to the ASU (collectively “ASC 606”) using the modified retrospective method to all contracts not completed as of January 1, 2018. The Company recorded a net increase to retained earnings of $11.2 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606.
customers. Revenue for our Uniforms and Related Products and Promotional Products segments is recognized when the earnings process is complete.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. Contract termination terms may involve variable consideration clauses such as discounts and rebates, and revenue has been adjusted accordingly for these provisions. 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. 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 asat the amount of consideration we expect to receive in exchange for the goods or services. Sales taxes,Variable consideration for estimated returns and allowances 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. 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 also excluded from revenue. 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.
Refer to Note 910 for the disaggregation of revenues by operating segment.
Contract Assets
The following table provides information about accounts receivables - trade, contract assets and contract assetsliabilities from contracts with customers (in thousands):
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Accounts receivable - trade | $ | 70,927 | $ | 64,017 | ||||
Current contract assets | 43,674 | 49,236 |
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
Accounts receivable - trade | $ | 73,551 | $ | 79,746 | ||||
Current contract assets | 38,234 | 38,533 | ||||||
Current contract liabilities | 17,646 | 1,821 |
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. A portion of the amounts included in contract assets on December 31, 2019 were transferred to accounts receivable during the three months ended March 31, 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 balances sheets. The increase in contract liabilities during the three months ended March 31, 2020 was primarily attributable to new customer contracts for the sourcing of personal protective equipment within the Promotional Products and Uniform and Related Products segments. During the three months ended March 31, 2020, $0.9 million of revenue was recognized from the contract liabilities balance as of December 31, 2019.
NOTE 56 – 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 $2.8 million as of March 31, 2020, of which $1.1 million is expected to be paid in the second quarter of 2020. The purchase price to acquire substantially all of the assets of Tangerine Promotions, Ltd. and Tangerine Promotions West, Inc. (collectively “Tangerine”) in 2017 included contingent consideration through 2021. The estimated fair value for Tangerine acquisition-related contingent consideration payable was $2.7 million as of March 31, 2020, of which $0.9 million is expected to be paid in the second quarter of 2020. The Company will continue to evaluate these liabilities for remeasurement at the end of each reporting period and any changes will be recorded in the Company’s statements of comprehensive income. The carrying amount of the liabilities may fluctuate significantly and actual amounts paid may be materially different from the estimated value of the liabilities.
The Company is involved in various legal actions and claims arising from the normal course of business. In the opinion of management, the ultimate outcome of these matters is not expected to have a material impact on the Company’s results of operations, cash flows, or financial position.
NOTE 67 – Share-Based Compensation:
In May 2013, the stockholders of the Company approved the 2013 Incentive Stock and Awards Plan (the “2013 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, performance shares and other stock based compensation. A total of 5,000,000 shares of common stock (subject to adjustment for expirations and cancellations of options outstanding from the previous plan) have been reserved for issuance under the 2013 Plan. All options and SARs have been or will be granted with exercise prices at least equal to the fair market value of the shares on the date of grant. At June 30, 2019, the Company had 3,307,485 shares of common stock available for grant of share-based compensation under the 2013 Plan.
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 June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Stock options and SARs | $ | 105 | $ | 121 | $ | 178 | $ | 944 | $ | 164 | $ | 73 | ||||||||||||
Restricted stock | 209 | 140 | 397 | 264 | 161 | 188 | ||||||||||||||||||
Performance shares | 237 | 177 | 457 | 282 | 74 | 220 | ||||||||||||||||||
Total share-based compensation expense | $ | 551 | $ | 438 | $ | 1,032 | $ | 1,490 | $ | 399 | $ | 481 | ||||||||||||
Related income tax benefit | $ | 67 | $ | 74 | $ | 125 | $ | 185 | $ | 54 | $ | 58 |
Stock options and SARs
The Company grants stock options and stock-settled SARs to employees that allow them to purchase shares of the Company’s common stock. OptionsStock 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 immediately attwo years after the date of grant or after a two-year period. Awards generallydate. Employee awards expire five years after the grant date, of grant with the exception of options grantedand those issued to outside directors which expire ten years after the date of grant.grant date. The Company issues new shares upon the exercise of stock options and SARs.
A summary of stock option transactions during the sixthree months ended June 30, 2019March 31, 2020 follows:
Weighted Average | ||||||||||||||||
No. of | Weighted Average | Remaining Life | Aggregate | |||||||||||||
Shares | Exercise Price | (in years) | Intrinsic Value | |||||||||||||
Outstanding, January 1, 2019 | 676,846 | $ | 15.70 | 2.99 | $ | 2,230 | ||||||||||
Granted(1) | 142,009 | 17.68 | ||||||||||||||
Exercised | (75,144 | ) | 6.70 | |||||||||||||
Cancelled | (54,148 | ) | 19.36 | |||||||||||||
Outstanding, June 30, 2019 | 689,563 | $ | 16.80 | 3.28 | $ | 1,243 | ||||||||||
Options exercisable, June 30, 2019 | 517,593 | $ | 16.42 | 2.75 | $ | 1,239 |
Weighted Average | ||||||||||||||||
No. of | Weighted Average | Remaining Life | Aggregate | |||||||||||||
Shares | Exercise Price | (in years) | Intrinsic Value | |||||||||||||
Outstanding, January 1, 2020 | 701,131 | $ | 16.82 | 2.95 | $ | 714 | ||||||||||
Granted(1) | 163,545 | 10.97 | ||||||||||||||
Exercised | - | - | ||||||||||||||
Lapsed or cancelled | (97,172 | ) | 18.00 | |||||||||||||
Outstanding, March 31, 2020 | 767,504 | 15.42 | 3.37 | 217 | ||||||||||||
Exercisable, March 31, 2020 | 421,123 | 16.12 | 2.45 | 217 |
(1) | The weighted average grant date fair value of stock options granted was |
As of June 30, 2019,March 31, 2020, the Company had $0.6 million in unrecognized compensation related to nonvested stock options to be recognized over the remaining weighted average vesting period of 1.51.4 years.
A summary of stock-settled SARs transactions during the sixthree months ended June 30, 2019March 31, 2020 follows:
Weighted Average | ||||||||||||||||
No. of | Weighted Average | Remaining Life | Aggregate | |||||||||||||
Shares | Exercise Price | (in years) | Intrinsic Value | |||||||||||||
Outstanding, January 1, 2019 | 182,894 | $ | 18.99 | 2.61 | $ | 89 | ||||||||||
Granted(1) | 42,841 | 17.77 | ||||||||||||||
Exercised | - | - | ||||||||||||||
Cancelled | (16,162 | ) | 20.01 | |||||||||||||
Outstanding, June 30, 2019 | 209,573 | $ | 18.66 | 2.57 | $ | 40 | ||||||||||
Options exercisable, June 30, 2019 | 168,478 | $ | 18.88 | 2.07 | $ | 40 |
Weighted Average | ||||||||||||||||
No. of | Weighted Average | Remaining Life | Aggregate | |||||||||||||
Shares | Exercise Price | (in years) | Intrinsic Value | |||||||||||||
Outstanding, January 1, 2020 | 206,700 | $ | 18.67 | 2.04 | $ | - | ||||||||||
Granted(1) | 153,822 | 10.97 | ||||||||||||||
Exercised | - | - | ||||||||||||||
Lapsed or cancelled | (68,501 | ) | 15.97 | |||||||||||||
Outstanding, March 31, 2020 | 292,021 | 15.25 | 3.41 | - | ||||||||||||
Exercisable, March 31, 2020 | 126,068 | 18.95 | 1.83 | - |
(1) | The weighted average grant date fair value of SARs granted was |
As of June 30, 2019,March 31, 2020, the Company had $0.1$0.3 million in unrecognized compensation related to nonvested SARs to be recognized over the remaining weighted average vesting period of 1.61.7 years.
Restricted Stock
The Company has granted restricted stock to directors and certain employees under the terms of the 2013 Plan which vest at a specified future date, generally after three years, or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan.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 sixthree months ended June 30, 2019March 31, 2020 follows:
Weighted Average | ||||||||
No. of | Grant Date | |||||||
Shares | Fair Value | |||||||
Outstanding, January 1, 2019 | 92,032 | $ | 19.46 | |||||
Granted | 48,829 | 17.41 | ||||||
Vested | - | - | ||||||
Cancelled | - | - | ||||||
Outstanding, June 30, 2019 | 140,861 | $ | 18.75 |
Weighted Average | ||||||||
No. of | Grant Date | |||||||
Shares | Fair Value | |||||||
Outstanding, January 1, 2020 | 151,166 | $ | 18.44 | |||||
Granted | 49,543 | 10.97 | ||||||
Vested | (34,619 | ) | 16.97 | |||||
Forfeited | (17,420 | ) | 14.24 | |||||
Outstanding, March 31, 2020 | 148,670 | 16.79 |
As of June 30, 2019,March 31, 2020, the Company had $1.5 million of unrecognized compensation cost related to nonvested restricted stock grants expected to be recognized over the remaining weighted average servicevesting period of 1.82.1 years.
Performance Shares
Under the terms of the grants, certainCertain 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 three to five years. Expense for these grants is based on the fair value on the date of the grant and is being recognized on a straight-line basis over the respective service period. The performance-based shares generally vest after five years if the performance and service targets are met. The Company evaluates the performance conditions associated with these grants each reporting period to determine the expected number of shares to be issued. Based upon this evaluation, expected expensesExpenses for these grants are based on the fair value on the date of the grant andperformance shares are being recognized on a straight-line basis over the respective service period.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 sixthree months ended June 30, 2019March 31, 2020 follows:
Weighted Average | ||||||||
No. of | Grant Date | |||||||
Shares | Fair Value | |||||||
Outstanding, January 1, 2019 | 194,378 | $ | 20.08 | |||||
Granted | 14,068 | 17.77 | ||||||
Vested | - | - | ||||||
Cancelled | (1,000 | ) | 17.75 | |||||
Outstanding, June 30, 2019 | 207,446 | $ | 19.93 |
Weighted Average | ||||||||
No. of | Grant Date | |||||||
Shares | Fair Value | |||||||
Outstanding, January 1, 2020 | 194,012 | $ | 19.77 | |||||
Granted | - | - | ||||||
Vested | (5,892 | ) | 16.97 | |||||
Forfeited | (8,952 | ) | 20.42 | |||||
Outstanding, March 31, 2020 | 179,168 | 19.83 |
As of June 30, 2019,March 31, 2020, the Company had $2.5$1.2 million of unrecognized compensation cost related to nonvested performance share grants expected to be recognized over the remaining weighted average service period of 2.31.4 years.
NOTE 78 – 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.
In addition, the effect of changes in enacted tax laws or rates, tax status, or judgment on the attainment of beginning-of-the-year deferred taxes in future years is recognized in the interim period in which the change occurs.
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, more experience is acquired, additional information is obtained or the tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.
For the three months ended June 30, 2019,March 31, 2020, the Company recorded a provision for income taxes of $0.9$1.3 million, which represents an effective tax rate of 23.8%27.1%. For the three months ended June 30, 2018,March 31, 2019, the Company recorded a provision for income taxes of $1.3$0.6 million, which represents an effective tax rate of 25.1%. For the six months ended June 30, 2019, the Company recorded a provision for income taxes of $1.5 million, which represents an effective tax rate of 22.2%. For the six months ended June 30, 2018, the Company recorded a provision for income taxes of $2.2 million, which represents an effective tax rate of 25.5%20.2%. The decreaseincrease in the effective tax rates israte was primarily due todriven by rate increases of 3.7% for foreign taxes, 0.9% for state income taxes and 1.6% for non-deductible losses recognized on assets associated with the expected 2.0% decrease in the Global Intangible Low Tax Income (“GILTI”) tax during the three and six months ended June 30, 2019, and a reduction in non-deductible acquisition expense of 2.8% and 1.7% during the three and six months ended June 30, 2018, respectively.Company’s Non-Qualified Deferred Compensation Plan.
The difference between the total statutory Federal income tax rate and the actual effective income tax rate is accounted for as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Statutory Federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||
State and local income taxes, net of Federal income tax benefit | 4.3 | % | 4.9 | % | 3.7 | % | 4.4 | % | ||||||||
Current year untaxed foreign income | (6.9 | %) | (9.1 | %) | (7.2 | %) | (8.1 | %) | ||||||||
Foreign taxes | 3.8 | % | 1.9 | % | 3.2 | % | 3.0 | % | ||||||||
GILTI tax | 1.6 | % | 4.2 | % | 1.7 | % | 3.7 | % | ||||||||
Compensation related | - | 1.6 | % | 0.1 | % | 1.3 | % | |||||||||
Non-deductible acquisition expense | - | 2.8 | % | - | 1.7 | % | ||||||||||
Federal tax credits | - | - | (0.5 | %) | (0.6 | %) | ||||||||||
Other | - | (2.2 | %) | 0.2 | % | (0.9 | %) | |||||||||
Effective income tax rate | 23.8 | % | 25.1 | % | 22.2 | % | 25.5 | % |
NOTE 89 – 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 six months ended June 30,March 31, 2020 and 2019 and 2018::
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Net income used in the computation of basic and diluted net income per share (in thousands) | $ | 2,781 | $ | 3,817 | $ | 5,157 | $ | 6,267 | $ | 3,367 | $ | 2,376 | ||||||||||||
Weighted average shares outstanding - basic | 14,952,802 | 14,956,221 | 14,940,072 | 14,888,940 | 15,024,851 | 14,927,341 | ||||||||||||||||||
Common stock equivalents | 334,555 | 603,183 | 334,934 | 619,577 | ||||||||||||||||||||
Dilutive common stock equivalents | 176,047 | 335,313 | ||||||||||||||||||||||
Weighted average shares outstanding - diluted | 15,287,357 | 15,559,404 | 15,275,006 | 15,508,517 | 15,200,898 | 15,262,654 | ||||||||||||||||||
Per Share Data: | ||||||||||||||||||||||||
Net income per share: | ||||||||||||||||||||||||
Basic | $ | 0.22 | $ | 0.16 | ||||||||||||||||||||
Net income | $ | 0.19 | $ | 0.26 | $ | 0.35 | $ | 0.42 | ||||||||||||||||
Diluted | $ | 0.22 | $ | 0.16 | ||||||||||||||||||||
Net income | $ | 0.18 | $ | 0.25 | $ | 0.34 | $ | 0.40 |
Awards to purchase approximately 316,095449,191 and 341,995 shares of common stock with a weighted average exercise priceprices of $20.95$19.07 and $20.99 per share were outstanding during the three months ended June 30,March 31, 2020 and 2019, respectively, but were not included in the computation of diluted EPSnet income per share because the awards’ exercise prices were greater than the average market price of the common shares.
There were no awards to purchase shares of common stock outstanding during the three months ended June 30, 2018 excluded from the computation of diluted EPS because the award’s exercise prices were greater than the average market price of the common shares.
Awards to purchase approximately 329,095 shares of common stock with a weighted average exercise price of $20.97 per share were outstanding during the six months ended June 30, 2019, but were not included in the computation of diluted EPS because the awards’ exercise prices were greater than the average market price of the common shares.
There were no awards to purchase shares of common stock outstanding during the six months ended June 30, 2018 excluded from the computation of diluted EPS because the award’s exercise prices were greater than the average market price of the common shares.
NOTE 910 – Operating Segment Information:
The Company classifies its businesses into three operating segments based on the types of products and services provided. The Uniforms and Related Products segment consists of the salesales to customers of uniforms and related items. The Remote Staffing Solutions segment consists of sales of staffing solutions. The Promotional Products segment consists of sales to customers of promotional products and other branded merchandise.
The Company evaluates the performance of each operating segment based on several factors of which the primary financial measures are net sales and income before taxes on income. Amounts for corporate expenses are included in the totals for the Uniforms and Related Products segment. FinancialTo better reflect the way in which management now reviews the Company’s operating results, in the third quarter of 2019, the Company changed the composition of total assets for each reportable segment to exclude intercompany balances. This change has been made to all periods presented within this Quarterly Report on Form 10-Q.
The following tables set forth financial information related to the Company'sCompany’s operating segments is set forth below.(in thousands):
(In thousands) | ||||||||||||||||||||||||||||||||||||||||
As of and For the Three Months Ended June 30, 2019 | Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | |||||||||||||||||||||||||||||||||||
Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | ||||||||||||||||||||||||||||||||||||
As of and For the Three Months Ended March 31, 2020: | ||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 60,745 | $ | 8,993 | $ | 23,744 | $ | (1,212 | ) | $ | 92,270 | $ | 60,102 | $ | 9,200 | $ | 26,178 | $ | (1,235 | ) | $ | 94,245 | ||||||||||||||||||
Cost of goods sold | 38,937 | 3,824 | 17,600 | (434 | ) | 59,927 | 38,672 | 3,988 | 18,599 | (465 | ) | 60,794 | ||||||||||||||||||||||||||||
Gross margin | $ | 21,808 | $ | 5,169 | $ | 6,144 | $ | (778 | ) | $ | 32,343 | 21,430 | 5,212 | 7,579 | (770 | ) | 33,451 | |||||||||||||||||||||||
Selling and administrative expenses | 18,779 | 3,448 | 5,436 | (778 | ) | 26,885 | 18,225 | 3,396 | 6,638 | (770 | ) | 27,489 | ||||||||||||||||||||||||||||
Other periodic pension cost | 547 | - | - | - | 547 | 285 | - | - | - | 285 | ||||||||||||||||||||||||||||||
Interest expense | 963 | - | 296 | - | 1,259 | 872 | - | 188 | - | 1,060 | ||||||||||||||||||||||||||||||
Income before taxes on income | $ | 1,519 | $ | 1,721 | $ | 412 | $ | - | $ | 3,652 | $ | 2,048 | $ | 1,816 | $ | 753 | $ | - | $ | 4,617 | ||||||||||||||||||||
Depreciation and amortization | $ | 1,582 | $ | 249 | $ | 320 | $ | - | $ | 2,151 | $ | 1,310 | $ | 217 | $ | 342 | $ | - | $ | 1,869 | ||||||||||||||||||||
Capital expenditures | $ | 2,997 | $ | 196 | $ | 63 | $ | - | $ | 3,256 | $ | 1,852 | $ | 166 | $ | 55 | $ | - | $ | 2,073 | ||||||||||||||||||||
Total assets | $ | 287,690 | $ | 29,161 | $ | 94,971 | $ | (64,810 | ) | $ | 347,012 | $ | 249,629 | $ | 22,436 | $ | 72,541 | $ | - | $ | 344,606 |
As of and For the Three Months Ended June 30, 2018 | Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | |||||||||||||||||||||||||||||||||||
Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | ||||||||||||||||||||||||||||||||||||
As of and For the Three Months Ended March 31, 2019: | ||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 56,403 | $ | 8,001 | $ | 19,014 | $ | (1,026 | ) | $ | 82,392 | $ | 58,679 | $ | 8,599 | $ | 20,359 | $ | (1,085 | ) | $ | 86,552 | ||||||||||||||||||
Cost of goods sold | 36,222 | 3,355 | 13,893 | (356 | ) | 53,114 | 38,361 | 3,560 | 14,733 | (370 | ) | 56,284 | ||||||||||||||||||||||||||||
Gross margin | $ | 20,181 | $ | 4,646 | $ | 5,121 | $ | (670 | ) | $ | 29,278 | 20,318 | 5,039 | 5,626 | (715 | ) | 30,268 | |||||||||||||||||||||||
Selling and administrative expenses | 17,399 | 2,778 | 3,820 | (670 | ) | 23,327 | 18,177 | 3,119 | 5,282 | (715 | ) | 25,863 | ||||||||||||||||||||||||||||
Other periodic pension cost | 96 | - | - | - | 96 | 259 | - | - | - | 259 | ||||||||||||||||||||||||||||||
Interest expense | 495 | - | 263 | - | 758 | 878 | - | 292 | - | 1,170 | ||||||||||||||||||||||||||||||
Income (loss) before taxes on income | $ | 2,191 | $ | 1,868 | $ | 1,038 | $ | - | $ | 5,097 | ||||||||||||||||||||||||||||||
Income before taxes on income | $ | 1,004 | $ | 1,920 | $ | 52 | $ | - | $ | 2,976 | ||||||||||||||||||||||||||||||
Depreciation and amortization | $ | 1,449 | $ | 253 | $ | 318 | $ | - | $ | 2,020 | $ | 1,488 | $ | 256 | $ | 316 | $ | - | $ | 2,060 | ||||||||||||||||||||
Capital expenditures | $ | 708 | $ | 554 | $ | 97 | $ | - | $ | 1,359 | $ | 1,158 | $ | 409 | $ | 156 | $ | - | $ | 1,723 | ||||||||||||||||||||
Total assets | $ | 303,099 | $ | 25,664 | $ | 60,142 | $ | (53,743 | ) | $ | 335,162 | |||||||||||||||||||||||||||||
Total assets(1) | $ | 255,949 | $ | 21,770 | $ | 61,855 | $ | - | $ | 339,574 |
(1) | Intercompany balances that were previously included in total assets for each reportable segment have been excluded. |
(In thousands) | ||||||||||||||||||||
As of and For the Six Months Ended June 30, 2019 | Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | |||||||||||||||
Net sales | $ | 119,424 | $ | 17,592 | $ | 44,103 | $ | (2,297 | ) | $ | 178,822 | |||||||||
Cost of goods sold | 77,298 | 7,384 | 32,333 | (804 | ) | 116,211 | ||||||||||||||
Gross margin | $ | 42,126 | $ | 10,208 | $ | 11,770 | $ | (1,493 | ) | $ | 62,611 | |||||||||
Selling and administrative expenses | 36,956 | 6,567 | 10,718 | (1,493 | ) | 52,748 | ||||||||||||||
Other periodic pension cost | 806 | - | - | - | 806 | |||||||||||||||
Interest expense | 1,841 | - | 588 | - | 2,429 | |||||||||||||||
Income before taxes on income | $ | 2,523 | $ | 3,641 | $ | 464 | $ | - | $ | 6,628 | ||||||||||
Depreciation and amortization | $ | 3,070 | $ | 505 | $ | 636 | $ | - | $ | 4,211 | ||||||||||
Capital expenditures | $ | 4,155 | $ | 605 | $ | 219 | $ | - | $ | 4,979 | ||||||||||
Total assets | $ | 287,690 | $ | 29,161 | $ | 94,971 | $ | (64,810 | ) | $ | 347,012 |
As of and For the Six Months Ended June 30, 2018 | Uniforms and Related Products | Remote Staffing Solutions | Promotional Products | Intersegment Eliminations | Total | |||||||||||||||
Net sales | $ | 104,528 | $ | 15,300 | $ | 37,690 | $ | (2,039 | ) | $ | 155,479 | |||||||||
Cost of goods sold | 67,811 | 6,493 | 27,720 | (698 | ) | 101,326 | �� | |||||||||||||
Gross margin | $ | 36,717 | $ | 8,807 | $ | 9,970 | $ | (1,341 | ) | $ | 54,153 | |||||||||
Selling and administrative expenses | 31,538 | 5,290 | 9,022 | (1,341 | ) | 44,509 | ||||||||||||||
Other periodic pension cost | 192 | - | - | - | 192 | |||||||||||||||
Interest expense | 555 | - | 480 | - | 1,035 | |||||||||||||||
Income (loss) before taxes on income | $ | 4,432 | $ | 3,517 | $ | 468 | $ | - | $ | 8,417 | ||||||||||
Depreciation and amortization | $ | 2,514 | $ | 490 | $ | 642 | $ | - | $ | 3,646 | ||||||||||
Capital expenditures | $ | 1,393 | $ | 819 | $ | 202 | $ | - | $ | 2,414 | ||||||||||
Total assets | $ | 303,099 | $ | 25,664 | $ | 60,142 | $ | (53,743 | ) | $ | 335,162 |
NOTE 1011 – Leases
The Company leases several of its operating and office facilities including factories, warehouses, call centers, office space and equipment for various terms under long-term, non-cancelable operating lease agreements. A right-of-use asset represents the Company’s right to use an underlying asset for the lease term and a lease liability represents the Company’s obligation to make lease payments arising from the lease. These leases generally have expected lease terms of one to eight years. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties. Options to renew lease terms are included in determining the right-of-use asset and lease liability when it is reasonably certain that the Company will exercise that option. Certain of the lease agreements include rental payments adjusted periodically for inflation and generally require the Company to pay real estate taxes, insurance, and repairs. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. The Company subleases certain insignificant office space to third parties. As of June 30, 2019, the Company had recognized $4.1 million of operating lease obligation ($1.2 million in other current liabilities and $2.9 million in long-term operating lease liabilities), which represents the present value of the remaining lease payments, and $4.7 million of operating lease right-of-use assets, which represents the lease liability of $4.1 million adjusted for the prepaid rent of $0.7 million. The depreciable-life of right-of-use assets is generally limited by the expected lease term. The Company does not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.
The components of lease cost were as follows (in thousands):
Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||
Lease costs: | ||||||||
Operating lease costs | $ | 397 | $ | 722 | ||||
Short-term lease costs | 97 | 205 | ||||||
Total lease costs, included in S&A | 494 | 927 |
Cash flow and noncash information related to our operating leases were as follows (in thousands):
Six Months Ended June 30, 2019 | ||||
Operating cash flows - cash paid for operating lease liabilities | $ | 619 | ||
Non-cash - Operating lease ROU assets obtained in exchange for new lease liabilities | $ | 514 |
Other supplemental information related to our operating leases was as follows:
| ||||
| ||||
| ||||
|
Maturities of operating lease liabilities as of June 30, 2019 were as follows (in thousands):
Operating | ||||
Leases | ||||
2019 (six months) | $ | 671 | ||
2020 | 1,303 | |||
2021 | 979 | |||
2022 | 814 | |||
2023 | 634 | |||
Thereafter | 123 | |||
Total lease payments | 4,524 | |||
Less imputed interest | 462 | |||
Present value of lease liabilities | $ | 4,062 |
NOTE 11 – Acquisition of BusinessesCOVID-19:
CID Resources
On May 2, 2018, the Company acquired CID Resources, Inc., a Delaware corporation (“CID”), which manufactures medical uniforms, lab coats,The COVID-19 pandemic continues to affect our operations and layers,financial performance, and sells its productslikely will continue to specialty uniform retailers, ecommerce medical uniform retailers, and other retailers.
The purchase price in the acquisition consisteddo so for an undetermined period of the following: (a) approximately $84.4 million in cash at closing, (b) the issuance of 150,094 shares of the Company’s common stock to an equityholder of CID, and (c) $2.5 million in cash as a result of the cash and working capital adjustment.
Fair Value of Consideration Transferred
A Summary of the purchase price is as follows (in thousands): | ||||||||
Cash consideration at closing | $ | 84,430 | ||||||
Superior common stock issued | 3,763 | |||||||
Cash and working capital adjustment | 2,521 | |||||||
Total Considerations | $ | 90,714 |
Assets Acquired and Liabilities Assumed
The total purchase price was allocated to the tangible and intangible assets and liabilities of CID based on their estimated fair values as of May 2, 2018. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was allocated to goodwill.
The following table presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of CID based on their estimated fair values as of the effective date of the transaction (in thousands):
Cash | $ | 1,360 | ||
Accounts receivable | 9,657 | |||
Prepaid expenses and other current assets | 1,248 | |||
Inventories | 28,895 | |||
Property, plant and equipment | 1,134 | |||
Contract assets | 2,535 | |||
Identifiable intangible assets | 41,020 | |||
Goodwill | 20,323 | |||
Total assets | $ | 106,172 | ||
Accounts payables | 5,030 | |||
Deferred tax liability | 9,461 | |||
Other current liabilities | 967 | |||
Total liabilities | $ | 15,458 |
The amounts in the table above are reflective of measurement period adjustments madetime. While during the three and six months ended June 30, 2019, which mainly included an increase of $2.4 million to goodwill, a decrease of $1.8 million to inventory and an increase of $0.6 million to accounts payable. The measurement period adjustmentsMarch 31, 2020, the pandemic did not have a significantmaterial impact on the Company’s statementbusiness, international, federal, state and local efforts to contain the spread of COVID-19 intensified in March 2020 as governments enacted shelter in place orders, declared states of emergency, took steps to restrict travel, enacted temporary closures of non-essential businesses and took other restrictive measures that prohibit many employees from going to work. These government measures have begun to lead to changes in customer purchasing patterns and supply chains.
COVID-19 could continue to have a number of increasingly 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 Uniform and Related Products segment are sourced in China and the vast majority of raw materials used in our Promotional Products segment are predominantly sourced from China, either directly by BAMKO or 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 are proactively taking steps to increase available cash on hand by targeted reductions in discretionary operating expenses. Finally, we are delaying 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 products and services, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, further 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.flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The Company finalized the purchase price allocation of CID during the second quarter of 2019.
The Company recorded $41.0 million in identifiable intangibles at fair value, consisting of $26.0 million in acquired customer relationships, $0.8 million for a non-compete agreementlength and $14.2 million for the brand name.
Goodwill was calculated as the difference between the fair valuescope of the consideration transferredrestrictions imposed by various governments and success of efforts to find a suitable vaccine, among other factors, will determine the values assigned toultimate severity of the assets acquiredCOVID-19 impact on our business. However, it is likely that prolonged periods of difficult market conditions would have material adverse impacts on our business, financial condition, results of operations and liabilities assumed. This goodwill will not be deductible for tax purposes.
The intangible assets associated with the customer relationships are being amortized for fifteen years beginning on May 2, 2018 and the non-compete agreement is being amortized for five years. The trade name is considered an indefinite-life asset and as such is not being amortized.
The Company recognized amortization expense on these acquired intangible assets of $0.5 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively.
The Company recognized amortization expense on these acquired intangible assets of $1.0 million and $0.8 million for the six months ended June 30, 2019 and 2018, respectively.cash flows.
On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the three months ended June 30, 2018, net sales would have increased approximately $5.1 million. Net income would have increased $1.3 million in 2018, or $0.80 per share.
On a pro forma basis as if the results of this acquisition had been included in our consolidated results for the six months ended June 30, 2018, net sales would have increased approximately $22.3 million. Net income would have increased $2.6 million in 2018, or $0.17 per share.
Other Acquisitions of Businesses
BAMKO. On March 8, 2016, the Company closed on the acquisition of substantially all of the assets of BAMKO, Inc. The transaction had an effective date of March 1, 2016. The transaction also included the acquisition of BAMKO, Inc.’s subsidiaries in Hong Kong, China, Brazil and England as well as an affiliate in India. BAMKO is a promotional products, merchandise, and packaging company that serves the world’s most prominent brands. The purchase price included a potential future payment of approximately $5.5 million in additional contingent consideration through 2021. The estimated fair value for acquisition-related contingent consideration payable was $3.2 million as of June 30, 2019. The current portion of $1.2 million shall be paid in the second quarter of 2020. The Company will continue to evaluate this liability for remeasurement at the end of each reporting period and any change will be recorded in the Company’s statement of comprehensive income.
Public Identity. On August 21, 2017, BAMKO acquired substantially all of the assets and assumed certain liabilities of PublicIdentity, Inc. (“Public Identity”) of Los Angeles, CA. Public Identity is a promotional products and branded merchandise agency that provides innovative, high quality merchandise and promotional products to corporate clients and universities across the country. The purchase price included future payments of approximately $0.4 million in additional consideration through 2020.
Tangerine Promotions. On November 30, 2017, BAMKO acquired substantially all of the assets of Tangerine Promotions, Ltd and Tangerine Promotions West, Inc (collectively “Tangerine”). The transaction had an effective date of December 1, 2017. Tangerine is a promotional products and branded merchandise agency that serves many well-known brands. The company is one of the leading providers of Point-of-Purchase (POP) and Point-of-Sale (POS) merchandise in the country. The purchase price included potential future payments of approximately $3.2 million in additional contingent consideration through 2021. The estimated fair value for acquisition-related contingent consideration payable is $2.6 million as of June 30, 2019. The Company will continue to evaluate this liability for remeasurement at the end of each reporting period and any change will be recorded in the Company’s statement of comprehensive income.
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, 2018.2019.
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”,“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, (2)(3) statements of our plans, objectives, strategies, goals and intentions, (3)(4) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (4)(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;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 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, industrial, commercial, leisureretail, hotels, food service, transportation and public safetyother 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 of our Annual Report on Form 10-K for the fiscal year ended December 31, 20182019. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances, except as may be required by law.
Recent Acquisitions
On May 2, 2018, the Company acquired CID Resources, Inc., a Delaware corporation (“CID”) that manufactures uniforms, lab coats, and layers, and sells its products to specialty uniform retailers, ecommerce medical uniform retailers, and other retailers. The purchase price in the acquisition consisted of the following: (a) approximately $84.4 million in cash at closing, (b) the issuance of 150,094 shares of the Company’s common stock to an equityholder of CID, and (c) $2.5 million in cash as a result of the cash and working capital adjustment.
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. While during the three months ended March 31, 2020, the pandemic did not have a material impact on the Company’s business, international, federal, state and local efforts to contain the spread of COVID-19 intensified in March 2020 as governments enacted shelter in place orders, declared states of emergency, took steps to restrict travel, enacted temporary closures of non-essential businesses and took other restrictive measures that prohibit many employees from going to work. These government measures have begun to lead to changes in customer purchasing patterns and supply chains.
COVID-19 could continue to have a number of increasingly 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 Uniform and Related Products segment are sourced in China and the vast majority of raw materials used in our Promotional Products segment are predominantly sourced from China, either directly by BAMKO or 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 are proactively taking steps to increase available cash on hand by targeted reductions in discretionary operating expenses. Finally, we are delaying 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 products and services, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, further 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 a suitable vaccine, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. However, it is likely that prolonged periods of difficult market conditions would have material adverse impacts on our business, financial condition, results of operations and cash flows.
Uniforms and Related Products
Historically,In our Uniforms and Related Products segment, we have manufacturedmanufacture and soldsell a wide range of uniforms, career apparel and accessories, which comprises our Uniforms and Related Products segment.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 asother 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 anticipate increased sales of our business prospectshealthcare service apparel to laundries, dealers and distributors that service hospitals and other medical facilities; however, sales of healthcare apparel to retail markets may be negatively impacted. We are dependent upon levelscurrently working with our retailers to develop alternative strategies to ensure that our customers are able to take advantage of employmentthe increase in demand from medical professionals. From a long-term perspective, we expect that demand for our signature marketing brands, including Fashion Seal Healthcare® and overall economic conditions, among other factors. Our revenuesWonderWink®, will 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 increases in headcount. Additionally, voluntary employee turnover at our customers can have a significant impact on our business.of employees. The current economic environment in the United States is continuinghas been significantly impacted by the COVID-19 pandemic, and as a result, we expect to see moderate improvementreduced short-term demand for uniform apparel in many of our customers’ industries, some of which is expected to be offset by demand from customers in certain retail industries, such as grocery and pharmacy customers, and healthcare. Based on the longer-term fundamentals of our uniform business, we anticipate that we will have growth opportunities when market conditions in the employment environmentUnited States stabilize and voluntary employee turnover has been increasing. We also continuebegin to see an increase in the demand for employees in the healthcare sector and our acquisition of CID provides us with a market to sell Fashion Seal Healthcare apparel to retail stores and into the digital marketplace. These factors are expected to have positive impacts on our prospects for net sales growth in 2019.improve.
We have continued our efforts to increase penetration of the health care market. We have pursued, and continue to pursue, acquisitions to increase our market share in the Uniforms and Related Products segment.
Remote Staffing Solutions
This business segment (also known as “The Office Gurus”), which operates in El Salvador, Belize, Jamaica, and the United States, was initially started to provide remote staffing services forsupport the Company at a lower cost structure in orderCompany’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 improve our own operating results. It has in fact enabled us to reduce our operating expenses in our Uniforms and Related Products segment in areas such as order entry, cash collections, vendor payables processing, customer service, sales, and to more effectively service our customers’ needs in that segment. We beganothers, The Office Gurus started selling remote staffingtheir services to otheroutside companies atin 2009. Over the end of 2009. We have grown thispast 10 years, The Office Gurus has become an award-winning global business from approximately $1.0 millionprocess outsourcer offering inbound and outbound voice, email, text, chat and social media support. The COVID-19 pandemic has created certain disruptions in net salesour ability provide services to outsideour customers, and has resulted in 2010a reduction in billable hours charged to approximately $27.3 million in net salesour customers. The pandemic has also generated uncertainties for our customers and their industries. With an environment and career path designed to outside customers in 2018. We have spent significant effort over the last several years improving the depth of our management infrastructureattract and expanding our facilities in this segmentmaintain top talent across all sites, The Office Gurus is positioned well to support significant growth. Net salescontinue growth when market conditions begin to outside customers increased by approximately 15% for the six months ended June 30, 2019 compared to the same period last year.stabilize.
Promotional Products
We have been involved in the sale ofFor 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 over a decade. However, we lacked the scale and expertise needed to be a recognized name in this market prior tous. On March 1, 2016, that changed with our acquisition of substantially all of the assets of BAMKO, effective on March 1, 2016. BAMKO has been operatingInc. (“BAMKO”). One of the top firms in the promotional products industry, for more than 16 yearsBAMKO 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 that BAMKO’s strong back office and support systems located in India, China and Hong Kong, as well as their “directare very competitive, BAMKO is positioned to factory” sourcing operations provide us with a competitive advantage. We believe that BAMKO has well developed systems and processes that can serve asbe a platform for additionalpotential future acquisitions that we expect to complete in this highly fragmented market.industry. We completed two additional acquisitions in this segment in late 2017. We2017 and remain open to additional acquisitions going forward. In recent years we have seen an increase in customer orders and expect those growth opportunities to continue once the current market environment stabilizes. As a result of the COVID-19 pandemic, however, the branded merchandise industry has experienced customer budget cuts and widespread event cancellations that has led to customer orders being delayed or cancelled entirely. Our Promotional Products segment is experiencing reduced activities from customers in certain areas, such as the restaurant and entertainment industries. In responding to the needs of our customers, the sourcing team within the Promotional Products segment has recently focused on the sourcing of much needed personal protective equipment for our customers to help offset the shortfall in sales from our existing product lines. From a long-term perspective, we believe promotional products are athat this segment’s synergistic fit with our uniform business.business will create opportunities to cross-sell the products of various business segments to new and existing customers.
Results of Operations |
Three Months Ended |
Net Sales (in thousands): |
Three Months Ended June 30, | ||||||||||||
(in thousands) | ||||||||||||
2019 | 2018 | % Change | ||||||||||
Uniforms and Related Products | $ | 60,745 | $ | 56,403 | 7.7 | % | ||||||
Remote Staffing Solutions | 8,993 | 8,001 | 12.4 | |||||||||
Promotional Products | 23,744 | 19,014 | 24.9 | |||||||||
Net intersegment eliminations | (1,212 | ) | (1,026 | ) | 18.1 | |||||||
Consolidated Net Sales | $ | 92,270 | $ | 82,392 | 12.0 | % |
Three Months Ended March 31, | ||||||||||||
2020 | 2019 | % Change | ||||||||||
Uniforms and Related Products | $ | 60,102 | $ | 58,679 | 2.4 | % | ||||||
Remote Staffing Solutions | 9,200 | 8,599 | 7.0 | % | ||||||||
Promotional Products | 26,178 | 20,359 | 28.6 | % | ||||||||
Net intersegment eliminations | (1,235 | ) | (1,085 | ) | 13.8 | % | ||||||
Consolidated Net Sales | $ | 94,245 | $ | 86,552 | 8.9 | % |
Net sales for the Company increased 12.0%8.9% from $82.4$86.6 million for the three months ended June 30, 2018March 31, 2019 to $92.3$94.2 million for the three months ended June 30, 2019.March 31, 2020. The principal components of this aggregate increase in net sales were as follows: (1) the effect of the acquisition of CID on May 2, 2018 (contributing 6.4%), (2) a decreasean increase in the net sales of our Uniform and Related Products segment exclusive(contributing 1.6%, of CIDwhich $2.0 million (contributing (1.2)%2.3%) represented the effect of differences in timing of revenues recognized under ASC 606 between periods), (3)(2) an increase in the net sales for our Promotional Products segment (contributing 5.7%6.7%), and (4)(3) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 1.0%0.6%).
Uniforms and Related Products net sales increased 7.7%2.4%, or $4.3$1.4 million, for the three months ended June 30, 2019March 31, 2020 compared to the three months ended June 30, 2018.March 31, 2019. The increase was primarily due to the CID acquisition.timing of finished goods receipts for inventory items with no alternative use. Shipments by our Uniform and Related Products business without the effect of CIDsegment decreased from $49.3$60.4 million to $48.4$59.8 million comparing the three months ended June 30, 2019March 31, 2020 with the prior year period. For a reconciliation of shipments by our Uniform and Related Products business,segment, see “Shipments (Non-GAAP Financial Measure)” below.
Remote Staffing Solutions net sales increased 12.4%7.0% before intersegment eliminations and 11.6%6.0% after intersegment eliminations for the three months ended June 30, 2019March 31, 2020 compared to the three months ended June 30, 2018.March 31, 2019. These increases were primarily attributed to providing continued market penetrationservices in 2019, with respectthe current year period to both new and existing customers.our customer base that was expanded during 2019. Despite the increase in net sales, overall growth during three months ended March 31, 2020 was negatively impacted by disruptions in March 2020 resulting from COVID-19.
Promotional Products net sales increased 24.9%28.6% or $5.8 million, for the three months ended June 30, 2019March 31, 2020 compared to the three months ended June 30, 2018.March 31, 2019. The increase was primarily due to the expansion of our sales force in 2019 and the execution in the 2019 period on the increasedcontinued product sales order activityto our expanded customer base during the previous quarter.current year period.
Cost of Goods Sold
Cost of goods sold consists primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing costs, and inspection costs for our Uniforms and Related Products and Promotional Products segments. Cost of goods sold for our Remote Staffing Solutions segment includes salaries and payroll related benefits for agents. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with out-bound freight are recorded in cost of goods sold. Other shipping and handling costs are included in selling and administrative expenses.
As a percentage of net sales, cost of goods sold for our Uniforms and Related Products segment was 64.1%64.3% for the three months ended June 30, 2019March 31, 2020 and 64.2%65.4% for the three months ended June 30, 2018.March 31, 2019. As a percentage of net sales, cost of goods sold remained relatively flat. The increase in cost of goods sold during the three months ended June 30, 2019March 31, 2020 compared to the three months ended June 30, 2018March 31, 2019 was primarily due to the CID acquisition.revenue increase explained above.
As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 42.5%43.3% for the three months ended June 30, 2019March 31, 2020 and 41.9%41.4% for the three months ended June 30, 2018.March 31, 2019. The percentage increase in cost of goods sold during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 was primarily due to the revenue increase explained above.driven by disruptions in March 2020 resulting from COVID-19.
As a percentage of net sales, cost of goods sold for our Promotional Products segment was 74.1%71.0% for the three months ended June 30, 2019March 31, 2020 and 73.1%72.4% for the three months ended June 30, 2018.March 31, 2019. The percentage increasedecrease was primarily the result of differences in the mix of products and customers, with sales to lowerhigher margin contract clientscustomers representing a larger percentage of our overall sales during the three months ended June 30, 2019.March 31, 2020.
Selling and Administrative Expenses
Selling and administrative expenses were impacted by COVID-19 and the Company’s response to the pandemic. Selling and administrative expenses for three months ended March 31, 2020 included investment losses of $0.9 million recognized on assets associated with the Company’s Non-Qualified Deferred Compensation Plan, bad debt expense of $0.9 million on outstanding trade accounts receivable and severance expense of $0.4 million. These charges were partially offset by a reduction in expenses of $1.2 million resulting from forgoing the Company’s discretionary matching contribution under its defined contribution plan.
As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment approximated 30.9%was 30.3% for the three months ended June 30, 2019March 31, 2020 and 30.8%31.0% for the three months ended June 30, 2018. As aMarch 31, 2019. The percentage of net sales, selling and administrative expenses remained relatively flat. The increase in selling and administrative expensesdecrease was primarily due to the CID acquisitionincrease in May 2018 and severance expense of $0.4 million incurred during the current year period.net sales explained above.
As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment approximated 38.3%was 36.9% for the three months ended June 30, 2019March 31, 2020 and 34.7%36.3% for the three months ended June 30, 2018. TheMarch 31, 2019. As a percentage increase was primarily attributed to increased investment in organizational infrastructure, including facilitiesof net sales, selling and personnel, to support future growth of this business.administrative expenses remained relatively flat.
As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 22.9%25.4% for the three months ended June 30, 2019March 31, 2020 and 20.1%25.9% for the three months ended June 30, 2018.March 31, 2019. The percentage increasedecrease was primarily related to credits from fair market value adjustments on acquisition related contingent liabilities of $1.2 million in the prior year period.net sales increase explained above.
Interest Expense
Interest expense increaseddecreased to $1.3$1.1 million for the three months ended June 30, 2019March 31, 2020 from $0.8$1.2 million for the three months ended June 30, 2018.March 31, 2019. This increasedecrease was primarily due to a decrease in LIBOR rates, partially offset by a loss of $0.3 million recognized on our interest rate swap during the result of the Company entering into the Amended and Restated Credit Agreement on May 2, 2018 as a part of the acquisition of CID. See Note 2 to the Financial Statements.three months ended March 31, 2020.
Income Taxes
The effective income tax rate was 23.8%27.1% and 25.1%20.2% in the three months ended June 30,March 31, 2020 and 2019 and 2018,, respectively. The 1.3% decreaseincrease in the effective tax rate was primarily due to the reductiondriven by rate increases of the Global Intangible Low Tax Income (“GILTI”) tax (contributing (2.6)%)3.7% for foreign taxes, 0.9% for state income taxes and nondeductible acquisition costs in the prior year period (contributing (2.8)%), partially offset by a decrease in the benefit of foreign sourced income (contributing 2.2%).
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.
|
|
Six Months Ended June 30, | ||||||||||||
(in thousands) | ||||||||||||
2019 | 2018 | % Change | ||||||||||
Uniforms and Related Products | $ | 119,424 | $ | 104,528 | 14.3 | % | ||||||
Remote Staffing Solutions | 17,592 | 15,300 | 15.0 | |||||||||
Promotional Products | 44,103 | 37,690 | 17.0 | |||||||||
Net intersegment eliminations | (2,297 | ) | (2,039 | ) | 12.7 | |||||||
Consolidated Net Sales | $ | 178,822 | $ | 155,479 | 15.0 | % |
Net sales1.6% for the Company increased 15.0% from $155.5 million for the six months ended June 30, 2018 to $178.8 million for the six months ended June 30, 2019. The principal components of this aggregate increase in net sales were as follows: (1) the effect of the acquisition of CIDnon-deductible losses recognized on May 2, 2018 (contributing 13.8%), (2) a decrease in the net sales of our Uniform and Related Products segment exclusive of CID (contributing (4.2)%, of which (3.0)% represented the effect of differences in timing of revenues recognized under ASC 606 between periods), (3) an increase in the net sales for our Promotional Products segment (contributing 4.1%), and (4) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 1.3%).
Uniforms and Related Products net sales increased 14.3%, or $14.9 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increase was primarily due to the CID acquisition, partially offset by a negative $4.7 million effect of differences in the timing of revenues recognized due to ASC 606 between periods. Shipments by our Uniform and Related Products business without the effect of CID decreased from $94.4 million to $92.6 million comparing the quarter ended June 30, 2019assets associated with the prior year period. For a reconciliation of shipments by our Uniform and Related Products business, see “Shipments (Non-GAAP Financial Measure)” below.
Remote Staffing Solutions net sales increased 15.0% before intersegment eliminations and 15.3% after intersegment eliminations for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. These increases were attributed to continued market penetration in 2019, with respect to both new and existing customers.
Promotional Products net sales increased 17.0% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increase was primarily due to the expansion of our sales force and the execution in the 2019 period on the increased sales order activity over the last several quarters.
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 six months ended June 30, 2019 and 64.9% for the six months ended June 30, 2018. As a percentage of net sales, cost of goods sold remained relatively flat. The increase in cost of goods sold during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily due to the revenue increase explained above, including the effect of the CID acquisition.
As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 42.0% for the six months ended June 30, 2019 and 42.4% for the six months ended June 30, 2018. The percentage decrease was driven by higher sales in the 2019 period.
As a percentage of net sales, cost of goods sold for our Promotional Products segment was 73.3% for the six months ended June 30, 2019 and 73.5% for the six months ended June 30, 2018. As a percentage of net sales, cost of goods sold remained relatively flat. The increase in cost of goods sold during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily due to the revenue increase explained above.
Selling and Administrative Expenses
As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment approximated 30.9% for the six months ended June 30, 2019 and 30.2% for the six months ended June 30, 2018. The percentage increase was primarily due to the CID acquisition in May 2018 and severance expense of $0.4 million incurred during the current year period.
As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment approximated 37.3% for the six months ended June 30, 2019 and 34.6% for the six months ended June 30, 2018. The percentage increase was primarily attributed to increased investment in organizational infrastructure, including facilities and personnel, to support future growth of this business.
As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 24.3% for the six months ended June 30, 2019 and 23.9% for the six months ended June 30, 2018. The percentage increase was primarily related to credits from fair market value adjustments on acquisition related contingent liabilities of $1.2 million in the prior year period.
Interest Expense
Interest expense increased to $2.4 million for the six months ended June 30, 2019 from $1.0 million for the six months ended June 30, 2018. This increase was the result of the Company entering into the Amended and Restated Credit Agreement on May 2, 2018 as a part of the acquisition of CID. See Note 2 to the Financial Statements.
Income Taxes
The effective income tax rate was 22.2% and 25.5% in the six months ended June 30, 2019 and 2018, respectively. The 3.3% decrease in the effective tax rate was primarily due to the reduction of the GILTI tax (contributing (2.0)%) and nondeductible acquisition costs in the prior year period (contributing (1.7)%).
Company’s Non-Qualified Deferred Compensation Plan. 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
Balance SheetOverview
Accounts receivable - trade increased 10.8%
Management uses a number of standards in measuring the Company’s liquidity, such as: working capital, profitability ratios, cash flows from $64.0operating 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 is proactively taking 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 $3.2 million to $5.8 million as of March 31, 2020 from $9.0 million on December 31, 20182019. Working capital decreased to $70.9$129.7 million on June 30, 2019.at March 31, 2020 from $142.4 million at December 31, 2019. The decrease in working capital was primarily due to an increase in other current liabilities and decreases in trade accounts receivable and prepaid expenses and other current assets, partially offset by decreases in accounts payable and current portion of long-term debt. The increase in other current liabilities was driven by an increase of $15.8 million in contract liabilities primarily resulting from new customer contracts for the sourcing of personal protective equipment needed in response to COVID-19 within the Promotional Products and Uniform and Related Products segments. The decrease in trade accounts receivable was primarily driven by an increase in revenue and the timing of shipments to customers for finished goods with no alternative use.
Inventories decreased 5.8% from $67.3 million on December 31, 2018 to $63.4 million as of June 30, 2019.billings within the Promotional Products segment. The decrease in prepaid expenses and other current assets was primarily related to the relative timing of shipments to customers, receipt of finished goods from suppliers, and measurement period adjustments relating to the CID acquisition that reduced inventory by $1.8 million.
Contract assets decreased 11.3% from $49.2 million on December 31, 2018 to $43.7 million on June 30, 2019.prepaid expenses. The decrease in accounts payable was primarily related to the timing of shipmentsorders and payments to customers for finished goods with no alternative use.suppliers within the Uniform and Related Products and Promotional Products segments. The majoritydecrease in current portion of the amounts included in contract assets on December 31, 2018 were transferred to accounts receivable during the six months ended June 30, 2019. The contract assets balance as of June 30, 2019 relates 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.
Operating lease right-of-use assets of $4.7 million as of June 30, 2019 resulted from the new lease standard that the Company adopted on January 1, 2019. Additionally as a result of the new lease standard, the Company recorded $4.1 million of operating lease obligation ($1.2 million in other current liabilities and $2.9 million in long-term operating lease liabilities) as of June 30, 2019. See Note 10 to the Financial Statements for more detail.
Goodwill increased 6.9% from $34.0 million on December 31, 2018 to $36.3 million as of June 30, 2019. The increase was due to measurement period adjustments made during the six months ended June 30, 2019. The Company finalized the purchase price allocation of CID during the second quarter of 2019.
Long-term debt decreased 3.1% from $111.5 million on December 31, 2018 to $108.0 million on June 30, 2019. The decrease was primarily due to the reclassificationdebt deferment agreements entered into in March 2020 that deferred contractual principal and interest payments on outstanding debt obligations due in the second quarter of scheduled repayments on2020 until maturity.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the Amendedstatements of cash flows, are summarized in the following table (in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 19,545 | $ | 5,739 | ||||
Investing activities | (2,073 | ) | (1,720 | ) | ||||
Financing activities | (20,218 | ) | (2,572 | ) | ||||
Effect of exchange rates on cash | (519 | ) | 15 | |||||
Net increase (decrease) in cash and cash equivalents | $ | (3,265 | ) | $ | 1,462 |
Operating Activities. The increase in net cash provided by operating activities during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily attributable to the receipt of advance payments from new customer contracts for the sourcing of personal protective equipment needed in response to COVID-19 within the Promotional Products and Restated Credit Agreement, as amended, from long termUniform and Related Products segments and the timing of advance payments made to vendors. Working capital cash changes during the three months ended March 31, 2020 included a decrease of $4.9 million in trade accounts receivable, an increase in accounts payable and other current liabilities asof $4.7 million and a resultdecrease in prepaid expenses and other current assets of its restructuring on January 22, 2019. This was partially offset by net borrowings of debt$2.3 million. Working capital cash changes during the sixthree months ended June 30, 2019.
Cash Flows
CashMarch 31, 2019 included a decrease of $2.2 million in prepaid expenses and other current assets.
Investing Activities. The increase in net cash equivalents increased by $2.9 million from $5.4 million on December 31, 2018 to $8.3 million as of June 30, 2019. Duringused in investing activities during the sixthree months ended June 30, 2019,March 31, 2020 compared to the Company provided cash of $6.8 million from operating activities, used cash of $5.0 million for investing activities to fund capital expenditures; and provided cash of $1.1 million in financing activities, principally in net borrowings of debt of $5.8 million partially offset cash used to pay of dividends and reacquire the Company’s common stock. During the sixthree months ended June 30, 2018, the Company used cashMarch 31, 2019 was attributable to an increase in capital expenditures of $85.6 million obtained from borrowings of$0.4 million. From a long-term debt for the acquisition of CID.
In the foreseeable future,perspective, the Company expects to continue its ongoing capital expenditure program designed to improve the effectiveness and expand the capabilities of its facilities and update its technology and infrastructure to support its growth.technology. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions.
During In the sixnear 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 three months ended June 30,March 31, 2020 compared to the three months ended March 31, 2019 and 2018, was primarily attributable to an increase in net repayments of $17.9 million in debt. Excess cash generated from operating activities during the Company paid cash dividends of $3.0 million and $2.8 million, respectively.
three months ended March 31, 2020 was used to repay outstanding borrowings under the revolving credit facility.
Credit AgreementFacilitiess (See Note 23 to the Financial Statements)
Effective on May 2, 2018, and concurrently with the closingAs of the CID Resources acquisition,March 31, 2020, the Company entered into an Amendedhad approximately $101.6 million in outstanding borrowings under its amended and Restated Credit Agreementrestated credit agreement (the “Amended and Restated Credit“Credit Agreement”), with BB&T pursuant to which the Company’s existing revolving credit facility was increased from $35Truist Bank, consisting of $23.5 million to $75 million and which provided an additional term loan in the principal amount of $85 million. No principal payments were due on the $85 million term loan prior to its maturity. The term ofoutstanding under the revolving credit facility was extended untilexpiring in May 2023, and the $85$24.0 million outstanding under a term loan was to maturematuring in May 2020. The Company’s existingFebruary 2024 (“2017 Term Loan”), and $54.2 million outstanding under a term loan with the original principal amount of $42 million matures on February 2024. The contractual principal payments for the $42 million term loan are as follows: maturing in January 2026 (“2018 through 2023 - $6.0 million per year; and 2024 - $1.5 million.
On January 22, 2019, the Company entered into a First Amendment to the Amended and Restated Credit Agreement pursuant to which the existing $85 million term loan was restructured. The Company used $20 million borrowed under its existing revolving credit facility to reduce the principal amount to $65 million. The maturity date on the loan was extended to January 22, 2026. The contractual principal payments for the $65 million term loan are as follows: 2019 - $8.5 million, 2020 through 2025 - $9.3 million per year; and 2026 - $0.8 million.Term Loan”). The revolving credit facility, $42 million term loan2017 Term Loan and $65 million term loan2018 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) (1.77% at March 31, 2020). Obligations outstanding under the revolving credit facility and $42 million term loanthe 2017 Term Loan generally have a variable interest rate of one-month LIBOR plus a margin of between 0.68% (3.08%and 1.50% (based on the Company’s funded debt to EBITDA ratio) (1.60% at June 30, 2019). Obligations outstanding under the $65 million term loan has a variable interest rate of one-month LIBOR plus 0.85% (3.25% at June 30, 2019)March 31, 2020). The available balance under the revolving credit facility is reduced by outstanding letters of credit. AsAt March 31, 2020, the Company had undrawn capacity of $51.5 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 30, 2019, there were no outstanding letters1, 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 credit.2020 - $3.0 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 - $4.6 million; 2021 through 2025 - $9.3 million per year; and 2026 - $3.1 million. The term loans do not contain pre-payment penalties.
The Amended and Restated Credit Agreement as amended, 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 Amended and Restated Credit Agreement as amended, 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 4.0:5.0:1. As of June 30, 2019,March 31, 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 AmendedCredit Agreement.
Dividends and Restated Credit Agreement, as amended.Share Repurchase Program
During each of the three months ended March 31, 2020 and 2019, the Company paid cash dividends of $1.5 million.
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 three months ended March 31, 2020. At March 31, 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.
Due to the anticipated continuing impact of the COVID-19 pandemic on the Company’s business, financial condition, results of operations and cash flows, the Company has elected to suspend its regular quarterly dividend until we have clearer visibility on improved macro conditions.
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 of America (“GAAP”). This non-GAAP financial measure is “shipments”,“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 uniform and promotionalrelated products businesses.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.
RECONCILIATION OF UNIFORM AND RELATED PRODUCTS SEGMENT (without CID) GAAP SALES TO SHIPMENTS | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Uniform and Related Product net sales, as reported | $ | 60,745 | $ | 56,403 | $ | 119,424 | $ | 104,528 | ||||||||
Less: CID sales | (15,888 | ) | (10,587 | ) | (32,023 | ) | (10,587 | ) | ||||||||
Uniform and Related Product net sales without CID | 44,857 | 45,816 | 87,401 | 93,941 | ||||||||||||
Adjustment: Recognition of revenue based on the timing of shipments for finished goods with no alternative use for | ||||||||||||||||
Uniform and Related Product net sales without CID | 3,573 | 3,503 | 5,167 | 503 | ||||||||||||
Uniform and Related Product shipments without CID | $ | 48,430 | $ | 49,319 | $ | 92,568 | $ | 94,444 |
The following tables reconcile net sales to shipments of our Uniform and Related Products segment (in thousands):
RECONCILIATION OF UNIFORM AND RELATED PRODUCTS SEGMENT GAAP SALES TO SHIPMENTS |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Uniform and Related Products net sales, as reported | $ | 60,102 | $ | 58,679 | ||||
Adjustment: Recognition of revenue based on the timing of shipments for finished goods with no alternative use for Uniform and Related Products net sales | (293 | ) | 1,711 | |||||
Uniform and Related Products shipments | $ | 59,809 | $ | 60,390 |
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, 20192020 would have resulted in approximately $0.6$0.3 million in additional pre-tax interest expense for the sixthree months ended June 30, 2019.March 31, 2020. See Note 23 to the Financial Statements.
Foreign Currency Exchange Risk
Sales to clientscustomers outside of the United States are subject to fluctuations in foreign currency exchange rates, which may negatively impact gross margin realized on our sales. Approximately 1%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 June 30, 2019,March 31, 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. ChangesThese 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 intercompany payablesassets and receivablesliabilities not considered to be long-termdenominated in their functional currency, are reported as foreign currency gains (losses) within selling and administrative expenses in our statements of comprehensive income. During the sixthree months ended June 30,March 31, 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 three months ended March 31, 2020 included a foreign currency translation adjustment loss of $1.2 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, Michael Attinella,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 June 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1.1. Legal Proceedings
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.
ITEM 1A.1A. Risk Factors
We are exposed to certain risks and uncertainties that could have a material adverse impact on our business, financial condition and operating results. ThereExcept 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, 2018.2019.
Our business has been adversely affected and could in the future be materially adversely impacted by the coronavirus (COVID-19) pandemic.
COVID-19 has been declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention. 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 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 begun to see 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 Uniform and Related Products segment are sourced in China and the vast majority of raw materials used in our Promotional Products segment are predominantly sourced from China, either directly by BAMKO or 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, further 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 2.2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the quarter ended June 30, 2019,March 31, 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 June 30, 2019.March 31, 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) | ||||||||||||
Month #1 (April 1, 2019 to April 30, 2019) | 2,614 | $17.02 | 2,614 | - | ||||||||||||
Month #2 (May 1, 2019 to May 31, 2019) | - | - | - | 750,000 | ||||||||||||
Month #3 (June 1, 2019 to June 30, 2019) | - | - | - | 750,000 | ||||||||||||
TOTAL | 2,614 | $17.02 | 2,614 | 750,000 |
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) | ||||||||||||
January 1, 2020 to January 31, 2020 | 1,958 | $ | 13.21 | 1,958 | ||||||||||||
February 1, 2020 to February 29, 2020 | 24,500 | 11.75 | 24,500 | |||||||||||||
March 1, 2020 to March 31, 2020 | 17,000 | 10.96 | 17,000 | |||||||||||||
Total | 43,458 | 11.51 | 43,458 | 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 Amended and Restated Credit Agreement, as amended, with Branch Banking and Trust Company,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 3.3. Defaults upon Senior Securities
Not applicable.
ITEM 4.4. Mine Safety Disclosures
Not applicable.
ITEM 5.5. Other Information
None.
ITEM 6.6. Exhibits
*This written statement is furnished andFiled herewith.
**Furnished, not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for the purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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: | SUPERIOR GROUP OF COMPANIES, INC. | ||
By | /s/ Michael Benstock | ||
Michael Benstock | |||
Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: | 2020 | ||
By | /s/ | ||
Andrew D. Demott, Jr. | |||
Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial |
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