SGC 10-Q Quarter ended March 31, 2021

NOTE 1 – Description of Business and Basis of Presentation :

Description of business

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

Superior’s Uniforms and Related Products segment, through its primary signature marketing brands Fashion Seal Healthcare®, HPI®, and WonderWink®, manufactures (through third parties or its own facilities) and sells a wide range of uniforms, corporate identity apparel, career apparel and accessories that are worn by employees in the hospital and healthcare fields; hotels; fast food and other restaurants; transportation; and the private security, industrial and commercial markets.

Superior services its Remote Staffing Solutions segment through multiple The Office Gurus® entities, including its subsidiaries in El Salvador, Belize, Jamaica, and the United States (collectively, “TOG”). TOG is primarily a near-shore premium provider of cost effective multilingual telemarketing and business process outsourced solutions.

The Promotional Products segment, through the BAMKO®, Public Identity®, Tangerine® and Gifts by Design brands, services customers that purchase primarily promotional and related products. The segment currently has sales offices in the United States, Brazil and Canada with support services in China, Hong Kong and India.

NOTE 2 – Inventories:

Inventories consisted of the following amounts (in thousands):

Debt consisted of the following (in thousands):

The Company is party to an amended and restated credit agreement with Truist Bank, consisting of a revolving credit facility, a term loan maturing in February 2024 ( “2017 Term Loan”) and a term loan maturing in January 2026 ( “2018 Term Loan”). The revolving credit facility, 2017 Term Loan and 2018 Term Loan are collectively referred to as the “Credit Facilities.”

On February 8, 2021, the Company entered into a Second Amended and Restated Credit Agreement with Truist Bank (the “Credit Agreement”), pursuant to which the maximum availability under the Company’s existing revolving credit facility was increased from $ 75.0 million to $ 125.0 million and its maturity date was extended until February 8, 2026. The 2017 Term Loan and the 2018 Term Loan remain outstanding with the same amortization schedules. The floor on LIBOR for the revolving credit facility was increased from zero to 0.25 %, but the interest rates on the revolving credit facility and the term loans were not otherwise modified. Except as described above, the covenants, events of default and substantially all of the other terms that were contained in the Company’s prior credit agreement with Truist Bank remain unchanged in the Credit Agreement. The Credit Facilities continue to be secured by substantially all of the operating assets of the Company as collateral, and the Company’s obligations thereunder continue to be guaranteed by all of its domestic subsidiaries.

Obligations outstanding under the 2018 Term Loan 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) ( 0.96 % at March 31, 2021 ). Obligations outstanding under the revolving credit facility and the 2017 Term Loan generally have a variable interest rate of one -month LIBOR (with a 0.25 % floor on LIBOR for the revolving credit facility) plus a margin of between 0.68 % and 1.50 % (based on the Company’s funded debt to EBITDA ratio) ( 0.93 % for the revolving credit facility and 0.79 % for the 2017 Term Loan at March 31, 2021 ). The Company is obligated to pay a commitment fee of 0.15 % per annum on the average unused portion of the commitment under the revolving credit facility. The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of March 31, 2021 , the Company had $ 0.5 million in outstanding letters of credit under the revolving credit facility.

Contractual principal payments for the 2017 Term Loan are as follows: remainder of 2021 - $ 4.5 million; 2022 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 2021 - $ 7.0 million; 2022 through 2025 - $ 9.3 million per year; and 2026 - $ 3.1 million. The term loans do not contain pre-payment penalties.

The Company is a party to an interest rate swap with a total notional value of $ 9.0 million as of March 31, 2021 pursuant to which it makes fixed payments and receives floating payments. The Company 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 not 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. No gain or loss was recognized on the interest rate swap during the three months ended March 31, 2021 . During the three months ended March 31, 2020, a loss of $ 0.3 million was recognized on the interest rate swap.

N OTE 4 – Periodic Pension Expense:

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.

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

The pension settlement losses included in the table above resulted from lump sum pension payments made to various employees upon their retirement or termination during the periods specified. The pension settlement losses did not require a cash outlay by the Company and did not increase the Company’s total pension expense over time, as the charge was an acceleration of costs that otherwise would be recognized as pension expense in future periods. The service cost component is included in selling and administrative expenses in our statements of comprehensive income and the other components of net periodic pension cost are included in other periodic pension costs in our statements of comprehensive income.

The Company is in the process of terminating its two noncontributory qualified defined benefit pension plans, which were fully funded as of March 31, 2021. In April 2021, the Company settled the majority of its obligations under the plans by providing lump-sum payments of $ 13.7 million to eligible participants who elected to receive them, and expects to settle the remaining future obligations under the plans through the purchase of annuity contracts from one or more highly rated insurance companies in the second quarter of 2021. We estimate that we will record a total non-cash pre-tax charge associated with the plan termination during the second quarter of 2021 of between $ 7.5 million and $ 8.5 million, which primarily represents the acceleration of deferred charges currently accrued in accumulated other comprehensive loss.

NOTE 5 – Net Sales:

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

For our Remote Staffing segment, revenue is generated from providing our customers with staffing solution services. Revenue for our Remote Staffing segment is recognized as services are delivered.

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

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

Contract Assets and Contract Liabilities

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

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, 2020 were transferred to accounts receivable during the three months ended March 31, 2021 . Contract liabilities relate to payments received in advance of the Company completing its performance under a contract. Contract liabilities are included in other current liabilities in our balance sheets. During the three months ended March 31, 2021 , $ 2.1 million of revenue was recognized from the contract liabilities balance as of December 31, 2020 .

NOTE 6 – Contingencies:

The purchase price to acquire substantially all of the assets of BAMKO, Inc. (“BAMKO”) in 2016 included contingent consideration based on varying levels of BAMKO’s consolidated EBITDA in each measurement period through 2021. The estimated fair value for BAMKO acquisition-related contingent consideration payable was $ 6.3 million as of March 31, 2021 , of which $ 4.4 million is expected to be paid in the second quarter of 2021. The total estimated undiscounted remaining payments related to this contingent consideration payable are between $ 6.5 million and $ 6.9 million. 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 based on varying levels of Tangerine’s EBITDA in each measurement period through 2021. The estimated fair value for Tangerine acquisition-related contingent consideration payable was $ 2.4 million as of March 31, 2021 , of which $ 1.4 million is expected to be paid in the second quarter of 2021. The total estimated undiscounted remaining payments related to this contingent consideration payable are between $ 2.3 million and $ 2.8 million. The Company will continue to evaluate these liabilities for remeasurement at the end of each reporting period and any changes will be recorded in the Company’s statements of comprehensive income. 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 7 – Share-Based Compensation :

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

Stock options and Stock Appreciation Rights (“SARs”)

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

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

A summary of stock option transactions during the three months ended March 31, 2021 follows:

As of March 31, 2021 , the Company had $ 1.3 million in unrecognized compensation related to nonvested stock options to be recognized over the remaining weighted average vesting period of 1.6 years.

A summary of stock-settled SARs transactions during the three months ended March 31, 2021 follows:

As of March 31, 2021 , the Company had $ 0.4 million in unrecognized compensation related to nonvested SARs to be recognized over the remaining weighted average vesting period of 1.5 years.

Restricted Stock

The Company has granted shares of restricted stock to directors and certain employees, which vest at a specified future date, generally after three years, ratably over five years or when certain conditions are met. The shares are subject to accelerated vesting under certain circumstances as outlined in the 2013 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 three months ended March 31, 2021 follows:

As of March 31, 2021 , the Company had $ 4.3 million of unrecognized compensation cost related to nonvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 4.0 years.

Performance Shares

Certain employees received service-based or service-based and performance-based shares, to which we collectively refer to as performance shares. The service-based awards vest after the service period is met, which is generally 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. Expenses for grants of performance shares are recognized on a straight-line basis over the respective service period based on the grant date fair value and expected number of shares to be issued. The awards are subject to accelerated vesting under certain circumstances as outlined in the 2013 Plan.

A summary of performance share transactions during the three months ended March 31, 2021 follows:

As of March 31, 2021 , the Company had $ 0.8 million of unrecognized compensation cost related to nonvested performance share grants expected to be recognized over the remaining weighted average service period of 2.4 years.

NOTE 8 – Income Taxes:

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

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

For the three months ended March 31, 2021 , the Company recorded a provision for income taxes of $ 2.8 million, which represents an effective tax rate of 20.8 %. For the three months ended March 31, 2020 , the Company recorded a provision for income taxes of $ 1.3 million, which represents an effective tax rate of 27.1 %. The decrease in the effective tax rate was primarily driven by rate decreases of 4.1 % for taxes related to foreign operations and 1.9 % for state income taxes.

NOTE 9 – Net Income Per Share:

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

The following table presents a reconciliation of basic and diluted net income per share for the three months ended March 31, 2021 and 2020 :

Awards to purchase 132,200 and 449,191 shares of common stock with weighted average exercise prices of $ 25.75 and $ 19.07 per share were outstanding during the three months ended March 31, 2021 and 2020 , respectively, but were not included in the computation of diluted net income per share because the awards’ exercise prices were greater than the average market price of the common shares.

N OTE 10 – 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 sales 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.

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

NOTE 11 – Acquisition of Businesses:

Gifts By Design, Inc.

On January 29, 2021, the Company, through BAMKO, acquired substantially all of the assets of Gifts By Design, Inc. (“Gifts by Design”) of Seattle, Washington. Gifts by Design is a promotional products and branded merchandise agency that is well-established as a developer and supplier of corporate awards, incentives, and recognition programs for some of the world’s biggest brands. The purchase price for the acquisition consisted of $ 6.0 million in cash at closing, subject to working capital adjustments.

Assets Acquired and Liabilities Assumed

The total purchase price was allocated to the tangible and intangible assets and liabilities of Gifts by Design based on their estimated fair values as of the acquisition date. The excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed was allocated to goodwill.

The following table presents the allocation of the total fair value of consideration transferred, as shown above, to the acquired tangible and intangible assets and liabilities of Gifts by Design based on their estimated fair values as of the effective date of the transaction (in thousands):

The Company recorded $ 5.9 million in identifiable intangibles at fair value, consisting of $ 4.5 million in acquired customer relationships and $ 1.4 million for the brand name. The intangible assets associated with the customer relationships are being amortized for seven years. The brand 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 $ 0.1 million during the three months ended March 31, 2021.

NOTE 12 – Subsequent Events :

The Company is in the process of terminating its two noncontributory qualified defined benefit pension plans, which were fully funded as of March 31, 2021. In April 2021, the Company settled the majority of its obligations under the plans by providing lump-sum payments of $ 13.7 million to eligible participants who elected to receive them, and expects to settle the remaining future obligations under the plans through the purchase of annuity contracts from one or more highly rated insurance companies in the second quarter of 2021. We estimate that we will record a total non-cash pre-tax charge associated with the plan termination during the second quarter of 2021 of between $ 7.5 million and $ 8.5 million, which primarily represents the acceleration of deferred charges currently accrued in accumulated other comprehensive loss.