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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Financial Statements, which present our results of operations for the years ended December 31, 2020, 2019 and 2018, as well as our financial positions at December 31, 2020and 2019, contained elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Special Note Regarding Forward Looking Statements” and “Risk Factors” sections of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

The discussion that follows includes a comparison of the Company’s results of operations and liquidity and capital resources for the years ended December 31, 2020 and 2019. For the discussion of changes from the year ended December 31, 2018 to the year ended December 31, 2019 and other financial information related to the year ended December 31, 2018, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Form 10-K for the year ended December 31, 2019. That document was filed with the United States Securities and Exchange Commission on February 20, 2020.

Business Outlook

Superior is comprised of three reportable business segments: (1) Uniforms and Related Products, (2) Remote Staffing Solutions, and (3) Promotional Products.

COVID-19 Impact

The COVID-19 pandemic continues to affect our operations and financial performance, and likely will continue to do so for an undetermined period of time. International, federal, state and local efforts to contain the spread of COVID-19 have continued as government actions to address the situation remain in effect and new actions continue to be enacted, including safety requirements such as recommended or mandatory use of face masks and other personal protective equipment and related products, social distancing rules and guidelines, travel restrictions, temporary closures of non-essential businesses and other restrictive measures that prohibit many employees from going to work. With regard to personal protective equipment, the COVID-19 pandemic has created significant market demand from new and existing customers. In responding to the needs of our customers, we have sourced significant amounts of personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which contributed $82.7 million and $48.5 million to net sales during the year ended December 31, 2020 for our Promotional Products segment and Uniforms and Related Products segment, respectively.

However, the pandemic also had and could continue to have a number of adverse impacts on our business, including, but not limited to, 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.

We have and will continue to monitor and control our expense levels to protect our profitability. For example, on March 30, 2020, we entered into debt deferment agreements with Truist Bank (formerly known as Branch Banking and Trust Company) to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Additionally, we have proactively taken steps to increase available cash on hand by targeted reductions in discretionary operating expenses. Finally, we have and will continue to delay certain capital expenditures relating to non-essential projects until economic conditions begin to stabilize.

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Prolonged instability in the United States and global economies, and how the world reacts to them, could have long-term impacts on our business. These business impacts could negatively affect us in a number of ways, including, but not limited to, reduced demand for our core products and services, reductions to our revenue and profitability, costs associated with complying with new or amended laws and regulations affecting our business, declines in our stock price, reduced availability and less favorable terms of future borrowings, valuation of our pension assets and obligations, reduced credit-worthiness of our customers, and potential impairment of the carrying value of goodwill or other indefinite-lived intangible assets. The extent to which the COVID-19 pandemic ultimately impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments and success of efforts to deliver a vaccine on a timely basis, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. However, prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.

Uniforms and Related Products

In our Uniforms and Related Products segment, we manufacture and sell a wide range of uniforms, career apparel and accessories. Our primary products are service apparel, such as scrubs, lab coats, protective apparel and patient gowns, provided to the healthcare industry, and service apparel, such as uniforms, provided to workers employed by our customers in various industries, including retail, hotels, food service, transportation and other industries. We sell our brands of healthcare service apparel primarily to healthcare laundries, dealers, distributors and retailers. As a result of the COVID-19 pandemic, we have seen increased demand for healthcare service apparel from laundries, dealers and distributors that service hospitals and other medical facilities. From a long-term perspective, we expect that demand for our signature marketing brands, including Fashion Seal Healthcare® and WonderWink®, will continue to provide opportunities for growth and increased market share. Sales of uniforms are impacted by our customers’ opening and closing of locations and reductions, increases, and turnover of employees. The current economic environment in the United States has been significantly impacted by the COVID-19 pandemic, and as a result, we have seen reduced demand for uniform apparel in many of our customers’ industries, such as the restaurant, transportation and hospitality industries. This, however, has been more than offset by demand from customers in certain retail industries, such as grocery and pharmacy customers, and healthcare. Additionally, we have sourced much needed personal protective equipment for our customers, which has also offset the declines in sales of uniform apparel to certain customers. Based on the longer-term fundamentals of our uniforms business, we anticipate that we will have growth opportunities when market conditions in the United States stabilize and begin to improve.

Remote Staffing Solutions

This business segment (also known as “The Office Gurus”), which operates in El Salvador, Belize, Jamaica, and the United States, initially started to support the Company’s back office needs while improving overall efficiencies and lowering operating costs. After years of consistently improving key performance indicators, lowering costs and providing exceptional service to our Uniforms and Related Products segment in areas such as order entry, cash collections, vendor payables processing, customer service, sales, and others, The Office Gurus started selling their services to outside companies in 2009. The Office Gurus has become an award-winning global business process outsourcer offering inbound and outbound voice, email, text, chat and social media support. Although the COVID-19 pandemic has generated uncertainties for our customers and their industries, we have recently seen increased demand for our services. With an environment and career path designed to attract and maintain top talent across all sites, we believe The Office Gurus is positioned well to continue growing this business.

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Promotional Products

For more than a decade, we sold promotional products on a limited basis to our existing Uniforms and Related Products customer base. While there were substantial opportunities to sell promotional products to those customers, it was not an area of focus, specialization, or expertise for us. On March 1, 2016, that changed with our acquisition of substantially all of the assets of BAMKO, Inc. (“BAMKO”). BAMKO has many strengths, well-developed systems, and time-tested processes that offer significant competitive advantages. With a robust back-office support platform operated out of India, direct-to-factory sourcing operations based in China, and proprietary technological platforms and programming capabilities that we believe are competitive, BAMKO is well positioned in the promotional products industry and continues to be a platform for potential future acquisitions. We completed two additional acquisitions in this segment in late 2017, as well as an acquisition in February 2021, and remain open to additional acquisitions going forward. In recent years we have seen an increase in customer orders in our promotional products business and expect growth opportunities for our core promotional products business to continue once the current market environment stabilizes. As a result of the COVID-19 pandemic, we have seen significant short-term opportunities within the personal protective equipment market. In responding to the needs of our customers, the sourcing team within the Promotional Products segment sourced much needed personal protective equipment for our customers. These opportunities led to record revenue levels for the segment during the year ended December 31, 2020, despite the downturn in the branded merchandise industry that has experienced customer budget cuts and widespread event cancellations. Additionally, in our core promotional products business we have not experienced the same downturn that many of our competitors have experienced as the increase in activities from customers in certain industries, such as the delivery service industry, has more than offset reduced activities from customers in other industries, such as the restaurant and entertainment industries. From a long-term perspective, we believe that this segment’s synergistic fit with our uniforms business will create opportunities to cross-sell the products of each of these business segments to new and existing customers.

The Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

Operations

Net Sales (in thousands, except percentages):

For the Years Ended December 31,

Net intersegment eliminations (5,157 ) (4,854 ) 6.2 %

Net sales for the Company increased 39.8% from $376.7 million for the year ended December 31, 2019 to $526.7 million for the year ended December 31, 2020. The principal components of this aggregate increase in net sales were as follows: (1) an increase in the net sales of our Uniforms and Related Products segment (contributing 13.2%), (2) an increase in the net sales for our Promotional Products segment (contributing 25.1%), and (3) an increase in net sales for our Remote Staffing Solutions segment after intersegment eliminations (contributing 1.5%).

Uniforms and Related Products net sales increased 21.0%, or $49.8 million, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to increased demand for personal protective equipment, including face masks, isolation gowns, sanitizers and gloves, which contributed $44.6 million to the increase in net sales. Additionally, market demand in 2020 for healthcare service apparel contributed to the increase in net sales. These increases were partially offset by decrease in demand for uniform apparel experienced during 2020 primarily as a result of COVID-19.

Remote Staffing Solutions net sales increased 16.1% before intersegment eliminations and 17.6% after intersegment eliminations for the year ended December 31, 2020 compared to the year ended December 31, 2019. These increases were primarily attributed to providing continued services in 2020 to our customer base that was expanded during 2019 and the onboarding of new customers in 2020.

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Promotional Products net sales increased 88.0%, or $94.6 million, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to the sale of personal protective equipment, including face masks, sanitizers and gloves, which contributed $82.7 million to the increase in net sales during the year ended December 31, 2020. As a result of the COVID-19 pandemic, we have seen significant short-term opportunities within the personal protective equipment market. Additionally, continued product sales to our expanded customer base during 2020 also contributed to the net sales increase. In our core promotional products business we have not experienced the same downturn that many of our competitors have experienced as the increase in activities from customers in certain industries, such as the delivery service industry, has more than offset reduced activities from customers in other industries, such as the restaurant and entertainment industries.

Cost of Goods Sold

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 65.2% for the year ended December 31, 2020 and 65.4% for the year ended December 31, 2019. As a percentage of net sales, cost of goods sold remained relatively flat. The increase in cost of goods sold during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the net sales increase explained above.

As a percentage of net sales, cost of goods sold for our Remote Staffing Solutions segment was 42.6% for the year ended December 31, 2020 and 41.3% for the year ended December 31, 2019. The percentage increase was primarily driven by disruptions resulting from COVID-19 and costs associated with the onboarding of new customers in 2020.

As a percentage of net sales, cost of goods sold for our Promotional Products segment was 66.5% for the year ended December 31, 2020 and 73.6% for the year ended December 31, 2019. The percentage decrease was primarily the result of personal protective equipment sales during the year ended December 31, 2020 and differences in the mix of products and customers.

Selling and Administrative Expenses

Selling and administrative expenses increased 27.2%, or $29.2 million, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to an increase in sales commissions and other employee compensation as a result of record sales levels during the year ended December 31, 2020, an increase in bad debt expense of $5.4 million on outstanding accounts receivable and an increase in expense of $4.2 million on acquisition related contingent liabilities primarily driven by fair market value adjustments.

As a percentage of net sales, selling and administrative expenses for our Uniforms and Related Products segment was 28.9% for the year ended December 31, 2020 and 30.7% for the year ended December 31, 2019. The percentage decrease was primarily due to the increase in net sales explained above.

As a percentage of net sales, selling and administrative expenses for our Remote Staffing Solutions segment was 36.1% for the year ended December 31, 2020 and 37.4% for the year ended December 31, 2019. The percentage decrease was primarily related to the net sales increase explained above.

As a percentage of net sales, selling and administrative expenses for our Promotional Products segment was 20.5% for the year ended December 31, 2020 and 22.1% for the year ended December 31, 2019. The percentage decrease was primarily related to the net sales increase explained above.

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Other Periodic Pension Costs

During the years ended December 31, 2020 and 2019, the Company recorded $0.4 million and $1.1 million, respectively, in pension settlement losses that 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.

Gain on Sale of Property, Plant and Equipment

During the year ended December 31, 2020, we sold a building and related assets that were previously used as a Distribution Center within our Uniforms and Related Products segment for net proceeds of $5.3 million and realized a gain on sale of $2.2 million. This sale was part of management’s plan to transition the HPI Distribution Center operations to the Company’s largest and most technologically advanced semi-robotic worldwide distribution center, located in Eudora, Arkansas.

Interest Expense

Interest expense decreased to $2.0 million for the year ended December 31, 2020 from $4.4 million for the year ended December 31, 2019. This decrease was primarily due to a decrease in LIBOR rates on our outstanding borrowings and a significant reduction in outstanding borrowings.

Income Taxes

The effective income tax rate was 20.3% and 21.1% for the years ended December 31, 2020 and 2019, respectively. The decrease in the effective tax rate was primarily driven by decreases of 3.5% for state and local income taxes, net of Federal income tax benefit, and 1.5% in uncertain tax positions, partially offset by increases of 2.5% for compensation related items. For further discussion of changes in the effective tax rate, refer to the Note 7 to the Financial Statements.

Liquidity and Capital Resources

Overview

Management uses a number of standards in measuring the Company’s liquidity, such as: working capital, profitability ratios, cash flows from operating activities, and activity ratios. The Company’s balance sheet generally provides the ability to pursue acquisitions, invest in new product lines and technologies and invest in additional working capital as necessary. As of December 31, 2020, approximately $4.4 million of our cash was held in our foreign subsidiaries, of which $2.4 million of cash was held at foreign subsidiaries from which the Company plans to repatriate the funds as needed for liquidity.

The Company’s primary source of liquidity has been its net income and the use of credit facilities and term loans as described further below. In the future, the Company may continue to use credit facilities and other secured and unsecured borrowings as a source of liquidity. Management currently believes that cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the Company’s anticipated working capital requirements for the next twelve months. The Company has proactively taken steps to increase available cash on hand by targeted reductions in discretionary cash outflows. The Company may also begin relying on the issuance of equity or debt securities, and for that purpose has filed with the Securities and Exchange Commission a universal shelf registration statement (File No. 333-249760). There can be no assurance that any such financings would be available to us on reasonable terms. Any future issuances of equity securities or securities convertible into or exercisable for equity securities may be dilutive to our shareholders. Additionally, the cost of the Company’s future sources of liquidity may differ from the costs of the Company’s sources of liquidity to date.

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Working Capital

Superior’s Uniform and Related Products segment markets itself to its customers as a “stock house.” Therefore, Superior carries inventories of both raw materials and finished products, the practice of which requires substantial working capital, which we believe to be common in the industry.

Cash and cash equivalents decreased by $3.8 million to $5.2 million as of December 31, 2020 from $9.0 million on December 31, 2019. Excess cash generated from operating activities during the year ended December 31, 2020 was used to repay outstanding borrowings under the revolving credit facility. Working capital increased to $143.6 million at December 31, 2020 from $142.4 million at December 31, 2019. The increase in working capital was primarily due to increases in accounts receivable and inventories, partially offset by increases in other current liabilities, accounts payable and acquisition-related contingent liabilities expected to be paid in 2021. The increase in accounts receivable was primarily due to increased net sales of personal protective equipment and healthcare service apparel within our Uniforms and Related Products segment. The increases in inventories and accounts payable were primarily related to the timing of inventory purchases within our Uniforms and Related Products and Promotional Products segments. The increase in other current liabilities was primarily driven by new activities in 2020 relating to the increased sale of personal protective equipment within our Promotional Products and Uniforms and Related Products segments as a result of COVID-19, including increases in contract liabilities, accrued compensation and income taxes payable. The increase in the current portion of acquisition-related contingent liabilities was driven by the significant increase in earnings within our Promotional Products segment during 2020.

Cash Flows

Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized in the following table (in thousands):

For the Years Ended December 31,

Net cash provided by (used in):

Effect of exchange rates on cash (209 ) 46

Net increase (decrease) in cash and cash equivalents $ (3,866 ) $ 3,676

Operating Activities. The increase in net cash provided by operating activities during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily attributable to the receipt of payments from new customer contracts for the sourcing of personal protective equipment needed in response to COVID-19 within the Promotional Products and Uniforms and Related Products segments. Working capital cash changes during the year ended December 31, 2020 included an increase of $32.7 million in accounts payable and other current liabilities, an increase of $29.3 million in accounts receivable and an increase of $16.8 million in inventories. Working capital cash changes during the year ended December 31, 2019 included an increase of $17.1 million in accounts receivable, an increase of $10.9 million in accounts payable and other current liabilities and a decrease in contract assets of $10.7 million.

Investing Activities. The decrease in net cash used in investing activities during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily attributable to net proceeds received during the year ended December 31, 2020 of $5.3 million from the sale of a building and related assets that were previously used as a Distribution Center within our Uniforms and Related Products segment. This was partially offset by an increase in capital expenditures of $2.2 million in 2020 compared to 2019.

Financing Activities. The increase in net cash used in financing activities during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily attributable to net repayments of $31.7 million in debt during 2020 compared to net borrowings of $1.7 million in the prior year period. Excess cash generated from operating activities during the year ended December 31, 2020 was used to repay outstanding borrowings under the revolving credit facility.

Capital Expenditures

From a long-term perspective, the Company expects to continue its ongoing capital expenditure program designed to improve the effectiveness and capabilities of its facilities and technology. In the near term, the Company may continue to delay certain capital expenditures relating to non-essential projects until economic conditions begin to stabilize.

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Credit Facilities (See Note 6 to the Financial Statements)

As of December 31, 2020, the Company had approximately $88.1 million in outstanding borrowings under its amended and restated credit agreement (the “Credit Agreement”) with Truist Bank, consisting of $17.6 million outstanding under the revolving credit facility expiring in May 2023, $21.0 million outstanding under a term loan maturing in February 2024 (“2017 Term Loan”) and $49.5 million outstanding under a term loan maturing in January 2026 (“2018 Term Loan”). The revolving credit facility, 2017 Term Loan and 2018 Term Loan are collectively referred to as the “Credit Facilities.”

Obligations outstanding under the 2018 Term Loan have a variable interest rate of LIBOR plus a margin of between 0.85% and 1.65% (based on the Company’s funded debt to EBITDA ratio) (1.00% at December 31, 2020). Obligations outstanding under the revolving credit facility and the 2017 Term Loan generally have a variable interest rate of one-month LIBOR plus a margin of between 0.68% and 1.50% (based on the Company’s funded debt to EBITDA ratio) (0.83% at December 31, 2020). The available balance under the revolving credit facility is reduced by outstanding letters of credit. At December 31, 2020, the Company had undrawn capacity of $31.7 million under the revolving credit facility.

On March 30, 2020, the Company entered into debt deferment agreements with Truist Bank to: (i) defer contractual principal and interest payments due between April 1, 2020 and June 1, 2020 under the 2017 Term Loan and 2018 Term Loan until their respective maturity dates; and (ii) defer contractual interest payments due between April 1, 2020 and June 1, 2020 under the revolving credit facility until its maturity date. Contractual principal payments for the 2017 Term Loan are as follows: 2021 through 2023 - $6.0 million per year; and 2024 - $3.0 million. Contractual principal payments for the 2018 Term Loan are as follows: 2021 through 2025 - $9.3 million per year; and 2026 - $3.1 million. The term loans do not contain prepayment penalties.

The Credit Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, restricted payments, and sales of assets. The Credit Agreement also requires the Company to maintain a fixed charge coverage ratio (as defined in the Credit Agreement) of at least 1.25:1 and a funded debt to EBITDA ratio (as defined in the Credit Agreement) not to exceed 5.0:1. As of December 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 Credit Agreement.

On February 8, 2021, the Company entered into a Second Amended and Restated Credit Agreement with Truist Bank (the “Restated 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. The covenants, events of default and substantially all of the other terms that were contained in the Credit Agreement remain unchanged in the Restated 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. See Note 19 for further information on the Restated Credit Agreement.

Dividends and Share Repurchase Program

During the years ended December 31, 2020 and 2019, the Company paid cash dividends of $6.1 million and $6.0 million, respectively. The Company anticipates that it will continue to pay dividends in the future as financial conditions permit.

On May 2, 2019, the Company’s Board of Directors approved a stock repurchase program of up to 750,000 shares of Company’s outstanding common stock. There is no expiration date or other restriction governing the period over which the Company can make share repurchases under the program. All purchases under this program will be open market transactions. Under this program the Company reacquired and retired 43,458 shares of its common stock during the year ended December 31, 2020. At December 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.

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Contractual Obligations

The following table sets forth a summary of our material contractual obligations as of December 31, 2020 (in thousands):

Payments Due by Period

Debt:

Revolving credit facility(1) $ - $ 17,589 $ - $ -

Acquisition-related contingent liabilities(2) 5,865 2,355 - -

Off-Balance Sheet Arrangements

The Company does not engage in any off-balance sheet financing arrangements. In particular, we do not have any interest in variable interest entities, which includes special purpose entities and structured finance entities.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1 to the Financial Statements included in this Form 10-K. Our discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the estimates that we have made. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting estimates require our most difficult or subjective judgments or estimates about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates, the underlying judgments and uncertainties used to make them and the likelihood that materially different estimates would be reported under different conditions or using different assumptions is as follows:

Allowance for Losses on Accounts Receivable

Judgments and estimates are used in determining the collectability of accounts receivable and in establishing allowances for doubtful accounts. The Company analyzes specific trade accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances when evaluating the adequacy of the allowance for doubtful accounts. Management judgments and estimates are used in connection with establishing the allowance in any accounting period. Changes in estimates are reflected in the period they become known. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. An additional impairment in value of 5% of accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $5.1 million. During the year ended December 31, 2020, bad debt expense increased by $5.4 million, which was primarily driven by the COVID-19 pandemic. The Company’s concentration of risk is also monitored and as of December 31, 2020, two customers had a combined accounts receivable balance of 23% of the total accounts receivable and the five largest customer accounts receivables balances totaled $36.8 million.

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Revenue Recognition

Inventories

The Company’s Uniforms and Related Products segment markets itself to its customers as a “stock house.” Therefore, the Company at all times carries inventories of both raw materials and finished products. Inventories are stated at the lower of cost or net realizable value. Judgments and estimates are used in determining the likelihood that goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which may be material.

Goodwill and indefinite-lived intangible assets

The Company has made acquisitions in the past that included goodwill and indefinite-lived intangible assets. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets such as trade names are not amortized but are subject to an annual (or under certain circumstances more frequent) impairment test in the fourth quarter based on their estimated fair value. We test more frequently, if there are indicators of impairment, or whenever such circumstances suggest that the carrying value of goodwill or trade names may not be recoverable. Examples of such events and circumstances that the Company would consider include the following:

Goodwill and indefinite-lived intangible assets are tested at a level of reporting referred to as “the reporting unit.” The Company’s reporting units are defined as each of its three reporting segments. As of December 31, 2020, goodwill of $24.5 million and $11.6 million were included in the Uniforms and Related Products segment and the Promotional Products segment, respectively. As of December 31, 2020, indefinite-lived intangible assets of $18.8 million and $12.6 million were included in the Uniforms and Related Products segment and the Promotional Products segment, respectively.

An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary. For each of the years ended December 31, 2020, 2019 and 2018, the Company completed its testing of goodwill and indefinite-lived intangible assets and determined that the fair value of each applicable reporting unit was more than its carrying value.

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Contingent Consideration

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 $5.2 million as of December 31, 2020, of which $4.3 million is expected to be paid in the second quarter of 2021. The total estimated undiscounted remaining payments related to this contingent consideration payable is between $5.4 million and $5.7 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 $2.3 million as of December 31, 2020, of which $1.3 million is expected to be paid in the second quarter of 2021. The total estimated undiscounted remaining payments related to this contingent consideration payable is between $2.3 million and $2.8 million. The Company’s fair value estimate of contingent consideration is primarily derived from management’s forecasted EBITDA of each applicable entity. 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.

Insurance

The Company self-insures for certain obligations related to employee health programs. The Company also purchases stop-loss insurance policies to protect it from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for losses that have occurred, but have not been reported. The Company’s estimates consider historical claim experience and other factors. The Company’s liabilities are based on estimates, and, while the Company believes that the accrual for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. Changes in claim experience, the Company’s ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.

Pensions

The Company is the sponsor of two noncontributory qualified defined benefit pension plans, providing for normal retirement at age 65, covering all eligible employees (as defined). Periodic benefit payments on retirement are determined based on a fixed amount applied to service or determined as a percentage of earnings prior to retirement. Effective 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 plans.

The Company is also the sponsor of an unfunded supplemental executive retirement plan (“SERP”) in which several of its employees are participants. Pension plan assets for retirement benefits consist primarily of fixed income securities, money market securities and common stock equities.

The Company’s pension obligations are determined using estimates including those related to discount rates and asset values. The discount rates used for the Company’s pension plans of 3.02% to 3.12% were determined based on the Citigroup Pension Yield Curve. This rate was selected as the best estimate of the rate at which the benefit obligations could be effectively settled on the measurement date taking into account the nature and duration of the benefit obligations of the plan using high-quality fixed-income investments currently available (rated AA or better) and expected to be available during the period to maturity of the benefits.

At December 31, 2020, the Company's projected benefit obligations for the noncontributory qualified defined benefit pension plans approximated the fair value of the plans’ assets. The Company’s projected benefit obligation under the SERP exceeded the fair value of the plans’ assets by $14.3 million and thus the plan is underfunded. In 2020, a reduction in the expected return on plan assets of 0.25% would have resulted in additional expense of approximately $0.1 million, while a reduction in the discount rate of 0.25% would have resulted in additional expense of approximately $0.2 million and would have reduced the funded status by $1.3 million for the Company’s defined benefit pension plans. Interest rates and pension plan valuations may vary significantly based on worldwide economic conditions and asset investment decisions. For additional information on our benefit plans, please refer to Note 8 to the Financial Statements.

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Income Taxes

The Company is required to estimate and record income taxes payable for federal, state and foreign jurisdictions in which the Company operates. This process involves estimating actual current tax expense and assessing temporary differences resulting from differing accounting treatment between tax and book that result in deferred tax assets and liabilities. In addition, accruals are also estimated for federal and state tax matters for which deductibility is subject to interpretation. Taxes payable and the related deferred tax differences may be impacted by changes to tax laws, changes in tax rates and changes in taxable profits and losses. The Tax Cuts and Jobs Act (“Tax Act”) enacted on December 22, 2017 imposes a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. In accordance with guidance issued by FASB, the Company made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred. The Company was impacted by GILTI relative to the earnings of its foreign subsidiaries, and is expected to be impacted in future periods, which may be material to our financial statements. Deferred income taxes are provided on undistributed earnings of foreign subsidiaries in the period in which the Company determines it no longer intends to permanently reinvest such earnings outside the United States. The Company expects to permanently reinvest the earnings from its wholly-owned Brazilian and UK subsidiaries, and accordingly, has not provided deferred taxes on the subsidiaries’ undistributed net earnings or basis differences. The Company believes that the tax liability that would be incurred upon repatriation of the earnings from its Brazilian and UK subsidiaries is immaterial at December 31, 2020.

Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it is properly reserved. For the year ended December 31, 2020, there was an increase of $0.3 million in total unrecognized tax benefits. As of December 31, 2020, we had an accrued liability of $1.2 million for unrecognized tax benefits. We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in other long-term liabilities in our balance sheet.

Share-Based Compensation

The Company recognizes expense for all share-based payments to employees, including grants of employee stock options, in the financial statements based on their fair values. In the Company’s share-based compensation strategy we utilize a combination of stock options and stock-settled stock appreciation rights (“SARs”) that vest over time and restricted shares and performance shares of common stock that vest over time or if performance targets are met. The fair value of the options and SARs granted is recognized as expense on the date of grant or over the service period. The Company used the Black-Scholes valuation model to value any share-based compensation. Option valuation methods, including Black-Scholes, require the input of highly complex and subjective assumptions including the risk free interest rate, dividend rate, expected term and common stock price volatility rate. The Company determines the assumptions to be used based upon current economic conditions. While different assumptions may result in materially different stock compensation expenses, changing any one of the individual assumptions by 10% would not have a material impact on the recorded expense. Expense for unvested shares of restricted stock and performance shares is recognized over the required service period. For additional information on share-based compensation and the assumptions we use, please refer to Note 11 to the Financial Statements.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are subject to market risk exposure related to changes in interest rates on our debt. Interest on our Credit Facilities are based upon the one-month LIBOR rate. In order to reduce the interest rate risk on our debt, the Company entered into an interest rate swap agreement on a portion of its borrowings. Excluding the effect of the interest rate swap agreement, a hypothetical increase in the LIBOR rate of 100 basis points as of January 1, 2020 would have resulted in approximately $1.0 million in additional pre-tax interest expense for the year ended December 31, 2020. For further information regarding our debt instruments, see Note 6 to the Financial Statements.

Foreign Currency Exchange Risk

Sales to customers outside of the United States are subject to fluctuations in foreign currency exchange rates, which may negatively impact gross margin realized on our sales. Less than 5% of our sales are outside of the United States. We cannot predict the effect of exchange rate fluctuations on our operating results. In certain cases, we may enter into foreign currency cash flow hedges to reduce the variability of cash flows associated with our sales and expenses denominated in foreign currency. As of December 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, the Brazilian real and the Canadian dollar. These operations may also have net assets and liabilities not denominated in their functional currency, which exposes us to changes in foreign currency exchange rates that impact income. Excluding intercompany payables and receivables considered to be long-term investments, changes in exchange rates for assets and liabilities not denominated in their functional currency are reported as foreign currency gains (losses) within selling and administrative expenses in our statements of comprehensive income. During the years ended December 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 year ended December 31, 2020 included a foreign currency translation adjustment loss of $1.0 million primarily related to exchange rate movements of the Brazilian real.

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm 32

Consolidated Balance Sheets as of December 31, 2020 and 2019 36

Notes to the Consolidated Financial Statements 39

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Superior Group of Companies, Inc. and Subsidiaries

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Superior Group of Companies, Inc. and Subsidiaries (the “Company”) as of December 31, 2020and 2019, and the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). We have also audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

Basis for Opinion

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Adoption of New Accounting Standard

As discussed in Note 9 to the consolidated financial statements, the Company changed its method of accounting for leases as a result of the adoption of Accounting Standards Codification Topic 842, Leases effective January 1, 2019, under the modified retrospective method. Our opinion is not modified with respect to this adoption.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Accounts Receivable - Specific Reserve

As described in Notes 1 and Note 2 to the consolidated financial statements, the Company’s allowance for doubtful accounts receivable was approximately $7.7 million as of December 31, 2020. The allowance for doubtful accounts receivable consists of a general and a specific allowance. The specific allowance component represents reserves for losses estimated to have been incurred associated with accounts receivable specifically identified by management and evaluated based on factors such as the customer credit worthiness, the age of outstanding balances, and information obtained from discussions with the customer. If, based on management’s evaluation of these factors, it is expected that a loss has been incurred on the collection of an accounts receivable balance, a specific allowance is recognized based on management’s judgment regarding the incurred losses. We identified the estimate of incurred losses on the specific allowance component of the allowance for doubtful accounts receivable as a critical audit matter.

The principal considerations for our determination that performing procedures relating to the evaluation of the allowance for doubtful accounts receivable is a critical audit matter was the significant judgment by management when determining the estimated losses incurred for accounts receivable balances with a specific reserve, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating management’s significant assumptions related to the estimated incurred losses.

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The primary procedures we performed to address this critical audit matter included:

Income Tax Provision

As described in Notes 1 and 7 to the Company’s consolidated financial statements, the Company operates in multiple jurisdictions through its wholly-owned subsidiaries. The Company services customers from operating facilities located both inside and outside the United States “U.S.”. As a result, the Company is subject to income taxes in multiple domestic and foreign jurisdictions, each of which affect the Company’s provision for income taxes. The tax provision is an estimate based on management’s understanding of current enacted tax laws and tax rates of each tax jurisdiction. For the year ended December 31, 2020, the Company’s provision for income taxes was $10.4 million, including a deferred benefit of approximately $5.0 million.

We identified the evaluation of the Company’s deferred income tax benefit as a critical audit matter. Challenging auditor judgment and complexity was required in evaluating the accuracy of the Company’s deferred income taxes and deferred income tax benefit. There is complexity in the evaluation of the accuracy of the deferred tax assets, liabilities, and deferred tax benefit due to the significant number of deferred tax positions resulting from previous business combinations, multinational operations, application of foreign tax laws and regulations. As a result, there is a need to involve personnel with specialized skill and knowledge.

The primary procedures we performed to address this critical audit matter included:

/s/ Mayer Hoffman McCann P.C.

We have served as the Company’s auditor since 2013.

Clearwater, Florida

March 3, 2021

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SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except shares and per share data)

Years Ended December 31,

Costs and expenses:

Gain on sale of property, plant and equipment 2,164 - -

Net income per share:

Weighted average shares outstanding during the period

Other comprehensive income (loss), net of tax:

Defined benefit pension plans:

Recognition of settlement loss included in net periodic pension costs 314 835 -

Gain (loss) on cash flow hedging activities (22 ) (22 ) 203

Foreign currency translation adjustment (1,021 ) 74 (518 )

Other comprehensive income (loss) (4,717 ) 501 (706 )

Cash dividends per common share $ 0.40 $ 0.40 $ 0.39

See accompanying Notes to the Consolidated Financial Statements.

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SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

December 31,

ASSETS

Current assets:

Cash and cash equivalents $ 5,172 $ 9,038

Prepaid expenses and other current assets 11,030 9,934

Operating lease right-of-use assets 3,826 5,445

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of acquisition-related contingent liabilities 5,589 1,905

Long-term acquisition-related contingent liabilities 1,892 3,423

Long-term operating lease liabilities 1,599 2,380

Commitments and contingencies (Note 10)

Shareholders’ equity:

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

Accumulated other comprehensive income (loss), net of tax:

Cash flow hedges 69 91

Foreign currency translation adjustment (1,372 ) (351 )

Total liabilities and shareholders’ equity $ 393,924 $ 358,933

See accompanying Notes to the Consolidated Financial Statements.

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SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(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

Common shares issued upon exercise of Stock Appreciation Rights (SARs) 3,428 -

Tax withheld on exercise of Stock Appreciation Rights (SARs) (17 ) (17 )

Tax benefit from vesting of acquisition-related restricted stock 445 445

Cash dividends declared ($0.39 per share) (5,836 ) (5,836 )

Comprehensive income (loss):

Cash flow hedges, net of taxes of $68 203 203

Change in currency translation adjustment, net of taxes of $189 (518 ) (518 )

Restricted shares issued 69,530 -

Share-based compensation expense 1,484 1,484

Tax benefit from vesting of acquisition-related restricted stock 30 30

Cash dividends declared ($0.40 per share) (6,046 ) (6,046 )

Comprehensive income (loss):

Cash flow hedges, net of taxes of $3 (22 ) (22 )

Change in currency translation adjustment, net of taxes of $23 74 74

Restricted shares issued 49,784 -

Share-based compensation expense 2,530 2,530

Tax withheld on exercise of Stock Appreciation Rights (SARs) (66 ) (66 )

Tax benefit from vesting of acquisition-related restricted stock (13 ) (13 )

Cash dividends declared ($0.40 per share) (6,111 ) (6,111 )

Comprehensive income (loss):

Cash flow hedges, net of taxes of $3 (22 ) (22 )

See accompanying Notes to the Consolidated Financial Statements.

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SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Years Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES

Provision for bad debts - accounts receivable 6,746 1,323 867

Gain on sale of property, plant and equipment (2,164 ) (5 ) -

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

Prepaid expenses and other current assets (1,474 ) (3,479 ) 2,622

CASH FLOWS FROM INVESTING ACTIVITIES

Additions to property, plant and equipment (11,857 ) (9,672 ) (4,869 )

Proceeds from disposals of property, plant and equipment 5,284 5 -

Acquisition of businesses, net of acquired cash - - (85,597 )

CASH FLOWS FROM FINANCING ACTIVITIES

Payment of acquisition-related contingent liabilities (1,966 ) (961 ) (2,861 )

Proceeds received on exercise of stock options 1,927 283 727

Tax withholdings on exercise of stock rights (66 ) - (17 )

Common stock reacquired and retired (500 ) (1,685 ) (2,906 )

Net cash provided by (used in) financing activities (38,443 ) (6,710 ) 68,138

Effect of currency exchange rates on cash (209 ) 46 (304 )

Net increase (decrease) in cash and cash equivalents (3,866 ) 3,676 (2,768 )

Cash and cash equivalents balance, beginning of period 9,038 5,362 8,130

Cash and cash equivalents balance, end of period $ 5,172 $ 9,038 $ 5,362

Supplemental disclosure of cash flow information:

See accompanying Notes to the Consolidated Financial Statements.

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Superior Group of Companies, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

NOTE 1 – Summary of Significant Accounting Policies:

Business description

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 for 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 a near-shore premium provider of cost effective multilingual telemarketing and business process outsourced solutions.

The Promotional Products segment, through the BAMKO®, Public Identity® and Tangerine® 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.

Basis of presentation

The accompanying consolidated financial statements of Superior included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) (“U.S.” or “United States”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company refers to the consolidated financial statements collectively as “financial statements,” and individually as “statements of comprehensive income,” “balance sheets,” “statements of shareholders’ equity,” and “statements of cash flows” herein.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses, as well as the disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date.

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.

Revenue recognition

Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. See Note 14 for further discussion on revenue recognition.

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Accounts receivable and allowance for doubtful accounts

Accounts receivable-other

The Company purchases raw materials and has them delivered to certain suppliers of the Company. The Company pays for the raw materials and then deducts the cost of these materials from payments to the suppliers at the time the related finished goods are invoiced to the Company by those suppliers.

Cost of goods sold and shipping and handling fees and costs

Cost of goods sold for our Uniforms and Related Products segment and our Promotional Products segment consist primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing, receiving and inspection costs. 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 generally recorded in cost of goods sold. Other shipping and handling costs are included in selling and administrative expenses and totaled $17.6 million, $14.5 million and $14.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method or average cost) or net realizable value. Judgments and estimates are used in determining the likelihood that goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Property, plant and equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Major renewals and improvements are capitalized, while replacements, maintenance and repairs which do not improve or extend the life of the respective assets are expensed on a current basis. Costs of assets sold or retired and the related accumulated depreciation and amortization are eliminated from accounts and the net gain or loss is reflected in the statements of comprehensive income within selling and administrative expenses. During the year ended December 31,2020, we sold a building and related assets that were previously used as a Distribution Center within our Uniforms and Related Products segment for net proceeds of $5.3 million and realized a gain on sale of $2.2 million. This sale is presented within our statements of comprehensive income as a separate line item titled “gain on sale of property, plant and equipment.” This sale was part of management’s plan to transition the HPI Distribution Center operations to the Company’s largest and most technologically advanced semi-robotic worldwide distribution center, located in Eudora, Arkansas.

Property, plant and equipment is recorded at cost and depreciated using the straight-line method over its estimated useful life as follows:

Buildings 20 to 40 years

Improvements 5 to 40 years

Machinery, equipment and fixtures 3 to 10 years

Transportation equipment 3 to 5 years

Leasehold improvements are amortized over the terms of the leases to the extent that as such improvements have useful lives of at least the terms of the respective leases.

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Intangible assets, net

Intangible assets consist of customer relationships, non-compete agreements and trade names acquired in previous business acquisitions.

Intangible assets as of December 31, 2020and 2019 are summarized as follows (dollars in thousands):

Definite-lived intangible assets:

Indefinite-lived intangible assets:

Amortization expense for intangible assets for each of the years ended December 31, 2020, 2019 and 2018 was $3.8 million.

Estimated future intangible amortization expense is as follows (in thousands):

Trade names:

As part of the acquisition of substantially all of the assets of HPI Direct, Inc. in 2013, the Company recorded $4.7 million as the fair value of the acquired trade name in intangible assets. As part of the acquisition of substantially all of the assets of BAMKO in 2016, the Company recorded $8.9 million as the fair value of the acquired trade name in intangible assets. As part of the acquisitions of substantially all of the assets of Public Identity and Tangerine in 2018, the Company recorded $0.5 million and $3.2 million, respectively as the fair value of the acquired trade names in intangible assets. As part of the acquisition of CID Resources in 2018, the Company recorded $14.2 million as the fair value of an acquired trade name in intangible assets. These assets are considered indefinite-lived assets, and as such, are not being amortized.

Impairment of long-lived assets

Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. There was no impairment of long-lived assets for the years ended December 31, 2020, 2019 and 2018.

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Goodwill and indefinite-lived intangible assets

Contingent Consideration

The Company recognizes the fair value of estimated contingent consideration at the acquisition date as part of the consideration transferred in exchange for the acquired business. The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. Any changes in fair value are recognized each reporting period in non-cash changes in fair value of estimated contingent consideration in the accompanying statements of comprehensive income.

Employee benefits

Pension plan costs are funded currently based on actuarial estimates, with prior service costs amortized over 20 years. The Company recognizes settlement gains and losses in its financial statements when the cost of all lump sum settlements in a year is greater than the sum of the service cost and interest cost components of net periodic pension cost for the plan for the year.

Insurance

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Taxes on income

Income taxes are provided for under the liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The calculation of the Company’s tax liabilities also involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain income tax positions based on estimates of whether, and the extent to which, additional taxes will be required. The Company also reports interest and penalties related to uncertain income tax positions as income taxes. Refer to Note 7 for additional details.

Share-based compensation

The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. The Company grants options, stock-settled stock appreciation rights, restricted stock, and performance shares. The Company recognizes share-based compensation expense for all awards granted to employees, which is based on the fair value of the award on the date of grant. Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the stock compensation awards and the Company’s common stock price volatility, risk free interest rate and dividend rate. The assumptions used in calculating the fair value of stock compensation awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary to use different assumptions, stock compensation expense could be materially different from what has been recorded in the current period.

Other comprehensive income

Other comprehensive income (loss) is defined as the change in equity during a period, from transactions and other events, excluding changes resulting from investments by owners (e.g., supplemental stock offering) and distributions to owners (e.g., dividends).

Risks and concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk include cash in banks in excess of federally insured amounts. The Company manages this risk by maintaining all deposits in high quality financial institutions and periodically performing evaluations of the relative credit standing of the financial institutions. When assessing credit risk the Company considers whether the credit risk exists at both the individual and group level. Consideration is given to the activity, region and economic characteristics when assessing if there exists a group concentration risk. At December 31, 2020, the Company had two customers with a combined accounts receivable balance of 23% of the total accounts receivable. At December 31,2019, the Company had no customer with an accounts receivable balance greater than 10% of the total accounts receivable. At December 31, 2020and 2019, the five largest customer accounts receivables balances totaled $36.8 million and $18.6 million, respectively, or approximately 40% and 23% of the respective total accounts receivable balances. The Uniform and Related Products segment has a substantial number of customers, none of which accounted for more than 10% of that segment’s 2020 net sales. The Remote Staffing Solutions segment’s largest customer represented 14% of that segment’s 2020 external revenues. No customer accounted for more than 10% of the Promotional Products segment’s 2020 net sales.

The Uniform and Related Products segment’s principal fabrics used in the manufacture of its finished goods are cotton, polyester and cotton-synthetic blends. The majority of such fabrics are sourced in China. The Promotional Products segment relies on the supply of different types of raw materials as well as textiles, including plastic, glass, fabric and metal. The vast majority of these raw materials are principally sourced from China, either directly by BAMKO or its suppliers. If we are unable to continue to obtain our raw materials and finished products from China or if our suppliers are unable to source raw materials from China, it could significantly disrupt our business. Further, the Company’s suppliers generally source or manufacture finished goods in parts of the world that may be affected by economic uncertainty, political unrest, labor disputes, health emergencies, or the imposition of duties, tariffs or other import regulations by the United States.

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Fair value of financial instruments

The carrying amounts of cash and cash equivalents, receivables and accounts payable approximated fair value as of December 31, 2020and 2019, because of the relatively short maturities of these instruments. The carrying amount of the Company’s long-term debt approximated fair value as the rates are adjustable based upon current market conditions.

Recent Accounting Pronouncements

We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be not applicable.

Recently Adopted Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04,“Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the two-step process that required identification of potential impairment and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by the difference between a reporting unit's carrying value and its fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company’s adoption of this standard on January 1, 2020 did not have a material impact on its financial statements.

In August 2018, the FASB issued ASU 2018-15, “Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update also requires an entity to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This update is effective for fiscal years beginning after December 15, 2019 and may be applied prospectively or retrospectively. On January 1, 2020, the Company adopted this standard on a prospective basis. The Company’s adoption of this standard did not have a material impact on its financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. In February 2020, the FASB issued ASU 2020-2, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.2016-02, Leases (Topic 842).” The update delayed the effective date of ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)” for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. Adoption will require a modified retrospective approach beginning with the earliest period presented. The Company is currently evaluating the potential impact this standard will have on its financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This update is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company’s adoption of this standard is not expected to have a material impact on its financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. This guidance includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This guidance may be applied through December 31, 2022. The Company will apply this guidance to transactions and modifications to contracts and hedging relationships that reference LIBOR.

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NOTE 2 - Allowance for Doubtful Accounts Receivable:

Years Ended December 31,

Recoveries 44 - 3

NOTE 3 - Reserve for Sales Returns and Allowances:

Years Ended December 31,

Actual returns and allowances paid to customers (6,446 ) (4,115 ) (4,140 )

NOTE 4 - Inventories:

Inventories consisted of the following amounts (in thousands):

December 31,

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NOTE 5 - Property, Plant and Equipment, Net:

Property, plant and equipment, net, consisted of the following (in thousands):

December 31,

Buildings, improvements and leaseholds 15,972 18,745

Accumulated depreciation and amortization (59,319 ) (55,866 )

Property, plant and equipment, net $ 36,644 $ 32,825

NOTE 6 – Long-Term Debt:

Debt consisted of the following (in thousands):

December 31,

Credit Facilities:

Less:

Payments due within one year included in current liabilities 15,286 15,286

Long-term debt less current maturities $ 72,372 $ 104,003

The Company is party to an amended and restated credit agreement (the “Credit Agreement”) with Truist Bank (formerly known as Branch Banking and Trust Company), consisting of a $75 million revolving credit facility expiring in May 2023, 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.”

Obligations outstanding under the 2018 Term Loan have a variable interest rate of LIBOR plus a margin of between 0.85% and 1.65% (based on the Company’s funded debt to EBITDA ratio) (1.00% at December 31, 2020). Obligations outstanding under the revolving credit facility and the 2017 Term Loan generally have a variable interest rate of one-month LIBOR plus a margin of between 0.68% and 1.50% (based on the Company’s funded debt to EBITDA ratio) (0.83% at December 31, 2020). The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of December 31, 2020, there were $25.7 million of letters of credit outstanding.

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The Company is a party to an interest rate swap with a total notional value of $9.8 million as of December 31, 2020 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. During the years ended December 31, 2020 and 2019, a loss of $0.3 million and $0.2 million, respectively, was recognized on the interest rate swap.

Debt Maturity Schedule

Contractual maturities of debt (excluding interest to be accrued thereon) at December 31, 2020 are as follows (in thousands):

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NOTE 7 – Income Tax Expense:

Aggregate income tax provisions consist of the following (in thousands):

Years Ended December 31,

Current:

Deferred Taxes:

Deferred tax (benefit) provision (5,009 ) (1,405 ) (625 )

The significant components of the deferred income tax (liability) asset are as follows (in thousands):

December 31,

Deferred income tax assets:

Operating reserves and other accruals 5,110 2,540

Valuation allowance on tax credits - (923 )

Deferred income tax liabilities:

Book carrying value in excess of tax basis of property (2,116 ) (1,544 )

Book carrying value in excess of tax basis of intangibles (5,780 ) (7,024 )

Tax effect of revenue recognition standard ASC 606 (1,021 ) (1,771 )

Net deferred income tax liability $ (450 ) $ (7,042 )

The difference between the total statutory Federal income tax rate and the actual effective income tax rate is accounted for as follows:

Years Ended December 31,

Statutory federal income tax rate 21.0 % 21.0 % 21.0 %

Rate impacts due to foreign operations (4.5 %) (3.9 %) (2.7 %)

Changes in uncertain tax positions 0.2 % 1.7 % 0.4 %

Compensation related 2.3 % (0.2 %) 1.4 %

R&D tax credits (0.3 %) (0.9 %) (0.4 %)

Effective income tax rate 20.3 % 21.1 % 20.7 %

The Tax Cuts and Jobs Act enacted on December 22, 2017 imposed a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. In accordance with guidance issued by FASB, the Company made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred. Deferred income taxes are provided on undistributed earnings of foreign subsidiaries in the period in which the Company determines it no longer intends to permanently reinvest such earnings outside the United States. The Company expects to permanently reinvest the earnings from its wholly-owned Brazilian and UK subsidiaries, and accordingly, has not provided deferred taxes on the subsidiaries’ undistributed net earnings or basis differences. The Company believes that the tax liability that would be incurred upon repatriation of the earnings from its Brazilian and UK subsidiaries is immaterial at December 31, 2020.

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Only tax positions that meet the more-likely-than-not recognition threshold are recognized in the financial statements. As of December 31, 2020and 2019, we had $1.2 million and $0.9 million, respectively, of unrecognized tax benefits, all of which, if recognized, would favorably affect the annual effective income tax rate. We do not expect any significant amount of this liability to be paid in the next twelve months. Accordingly, the balance of $1.2 million as of December 31, 2020 is included in other long-term liabilities.

Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):

December 31,

Balance at the beginning of year $ 681 $ 477

Additions based on tax positions related to the current year 134 128

Additions for tax positions of prior years 286 173

Reductions due to lapse of statute of limitations (108 ) (97 )

Balance at the end of year $ 993 $ 681

We recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. During the years ended December 31, 2020, 2019 and 2018, we recorded $0.2 million, $0.2 million and $0.1 million, respectively, for interest and penalties, net of tax benefits. During each of the years 2020, 2019 and 2018, we reduced the liability by $0.1 million for interest and penalties due to lapse of statute of limitations. At December 31, 2020and 2019, we had $0.2 million accrued for interest and penalties, net of tax benefit.

We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $0.3 million within the next twelve months due to the closure of tax years by expiration of the statute of limitations and audit settlements related to various state tax filing positions. The earliest year open to federal examinations is 2017 and significant state examinations is 2014.

NOTE 8 – Benefit Plans:

Defined Benefit Plans

The Company is the sponsor of two noncontributory qualified defined benefit pension plans, providing for normal retirement at age 65, covering all eligible employees (as defined). Periodic benefit payments on retirement are determined based on a fixed amount applied to service or determined as a percentage of earnings prior to retirement. The Company is also the sponsor of an unfunded supplemental executive retirement plan (“SERP”) in which several employees participate. Pension plan assets for retirement benefits consist primarily of fixed income securities, money market securities and common stock equities.

Effective 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 December 31, 2014, the Company no longer accrues additional benefits for future service for the Company’s hourly defined benefit pension plan.

The Company recognizes the funded status of its defined benefit post retirement plans in the Company’s balance sheets.

It is our policy to make contributions to the various plans in accordance with statutory funding requirements and any additional funding that may be deemed appropriate.

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The following tables present the changes in the benefit obligations and the various plan assets, the funded status of the plans, and the amounts recognized in the Company’s balance sheetsat December 31, 2020and 2019 (in thousands):

December 31,

Pension Plans SERP Total Pension Plans SERP Total

Changes in benefit obligation:

Changes in plan assets:

Amounts recognized in balance sheets:

Amounts recognized in accumulated other comprehensive income consist of:

December 31,

Pension Plans SERP Total Pension Plans SERP Total

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Years Ended December 31,

Interest cost on projected benefit obligation $ 541 $ 721 $ 675

Net periodic pension cost after settlements $ (62 ) $ 983 $ (516 )

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 estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $0.5 million.

Components of net periodic benefit cost related to the SERP were as follows (in thousands):

Years Ended December 31,

Service cost - benefits earned during the period $ 152 $ 117 $ 108

Interest cost on projected benefit obligation 322 363 295

Net periodic pension cost after settlements $ 1,169 $ 1,096 $ 1,009

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 estimated net actuarial loss for the SERP that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $0.7 million.

The tables below presents various assumptions used in determining the benefit obligation for each year and reflects the percentages for the various plans.

The following table presents the weighted-average assumptions used to determine benefit obligations as of December 31, 2019 and 2020:

Discount Rate Long Term Rate of Return Salary Scale

Pension Plans Pension Plans Pension Plans

Corporate Plants SERP Corporate Plants SERP Corporate Plants SERP

The following table presents the weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, 2018, 2019 and 2020:

Discount Rate Long Term Rate of Return Salary Scale

Pension Plans Pension Plans Pension Plans

Corporate Plants SERP Corporate Plants SERP Corporate Plants SERP

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The methodology used to determine the expected rate of return on the pension plan assets was based on a review of actual returns in the past and consideration of projected returns based upon our projected asset allocation. Our strategy with respect to our investments in pension plan assets is to be invested with a long-term outlook. Therefore, the risk and return balance of our asset portfolio should reflect a long-term horizon. Our pension plan asset allocation at December 31, 2020, 2019 and target allocation for 2021 are as follows:

Percentage of Plan Assets Target

December 31, Allocation

Equity securities - % 68 % 60 %

Money market 60 % - % - %

Other - % 1 % - %

The Company does not plan to contribute any significant amounts to our defined benefit pension plans in 2021.

The following table includes projected benefit payments for the years indicated (in thousands):

Projected Benefit Payments

Year Pension Plans SERP Total

Rabbi Trust

In connection with the Company’s unfunded SERP, we have life insurance contracts on the lives of designated individuals. The insurance contracts associated with the SERP are held in a Rabbi trust. The trust is the owner and beneficiary of such insurance contracts. The policies are being utilized to help offset the costs and liabilities of the SERP. The cash surrender value of the life insurance contracts was $4.0 million and $3.6 million at December 31, 2020and 2019, respectively. The cash surrender value of these policies is included in other assets in the balance sheets. During the years ended December 31, 2020, 2019 and 2018, we recognized an investment gain of $0.5 million, investment gain of $0.7 million and investment loss of $0.3 million, respectively, on the cash surrender value of these life insurance contracts.

In 2013, we initiated a Non-Qualified Deferred Compensation Plan, and we have purchased life insurance contracts on the lives of designated individuals. The insurance contracts associated with the Non-Qualified Deferred Compensation Plan are also held in a Rabbi trust. The trust is the owner and beneficiary of such insurance contracts. The policies are being utilized to help offset the costs and liabilities of the Non-Qualified Deferred Compensation Plan. The cash surrender value of the life insurance contracts was $5.0 million and $4.3 million at December 31, 2020and 2019, respectively. The cash surrender value of these policies is included in other assets in the balance sheets. The liability for participant deferrals was $4.8 million and $4.1 million as of December 31, 2020and 2019, respectively, and is included in other long-term liabilities in the balance sheets.

Defined Contribution Plan

The Company provides a defined contribution plan covering qualified employees. The plan includes a provision that allows employees to make pre-tax contributions under Section 401(k) of the Internal Revenue Code. The plan provides for the Company to make a guaranteed match equal to 25% of each employee’s eligible contributions. The plan also provides the Company with the option of making an additional discretionary contribution to the plan each year. The Company expensed employer matching contributions of $1.6 million and $1.0 million during years ended December 31, 2019 and 2018, respectively. As a response to the COVID-19 pandemic, the Company elected not to make any discretionary contributions for the fiscal year 2019, and as a result, $1.2 million of accrued discretionary contributions as of December 31, 2019 were reversed during 2020. As a result, the Company recorded a net reversal in expense of $0.3 million relating to employer matching contributions during year ended December 31, 2020.

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NOTE 9 – Leases:

On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) and all subsequent amendments to the ASU (collectively “ASC 842”) retrospectively through a cumulative-effect adjustment as permitted under the specific transitional provisions in ASC 842. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts have not been adjusted and continue to be reported under the accounting standards in effect for the prior period.

The Company primarily leases 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. As of December 31, 2020, the Company had recognized $2.7 million of operating lease liabilities ($1.1 million in other current liabilities and $1.6 million in long-term operating lease liabilities), which represents the present value of the remaining lease payments, and $3.8 million of operating lease right-of-use assets, which includes prepaid rent of $1.5 million. As of December 31, 2019, the Company had recognized $3.7 million of operating lease liabilities ($1.3 million in other current liabilities and $2.4 million in long-term operating lease liabilities), which represents the present value of the remaining lease payments, and $5.4 million of operating lease right-of-use assets, which includes prepaid rent of $1.8 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):

Years Ended December 31,

Rent expense (prior to adoption of ASC 842) $ - $ - $ 2,149

Short-term lease costs 541 302 -

Cash flow and noncash information related to our operating leases were as follows (in thousands):

Years Ended December 31,

Operating cash flows – cash paid for operating lease liabilities $ 1,425 $ 1,320

Other supplemental information related to our operating leases was as follows:

Years Ended December 31,

Weighted-average remaining lease term (in years) 2.8 3.6

Weighted average discount rate 5.61 % 5.61 %

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Maturities of operating lease liabilities as of December 31, 2020 were as follows (in thousands):

Operating Leases

Thereafter -

Total lease payments 2,927

Less imputed interest 204

Present value of lease liabilities $ 2,723

NOTE 10 – 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 $5.2 million as of December 31, 2020, of which $4.3 million is expected to be paid in the second quarter of 2021. The total estimated undiscounted remaining payments related to this contingent consideration payable is between $5.4 million and $5.7 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 $2.3 million as of December 31, 2020, of which $1.3 million is expected to be paid in the second quarter of 2021. The total estimated undiscounted remaining payments related to this contingent consideration payable is 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 11 – Share-Based Compensation:

In May 2013, the shareholders 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 December 31, 2020, the Company had 2,675,107 shares of common stock available for grant of share-based compensation under the 2013 Plan.

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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):

Years Ended December 31,

Total share-based compensation expense $ 2,530 $ 1,485 $ 2,264

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. Assumptions regarding volatility, risk-free interest rate, expected term and dividend yield are required for the Black-Scholes model. The risk-free interest rate is based on the yield of a U.S. treasury bond with a similar maturity to the award’s expected life. The expected life for awards granted is based on the historical exercise patterns experienced by the Company when the award is made. The determination of expected stock price volatility for awards is based on historical Superior common stock prices over a period commensurate with the expected life. The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts.

The following table summarizes significant assumptions utilized to determine the fair value of stock options and SARs:

Years Ended December 31,

Stock Options:

Weighted average fair value per share at grant date $ 2.36 $ 3.96 $ 5.93

SARs:

Risk free interest rate 0.2% - 1.4% 2.4 % 2.6 %

Expected award life (years) 3 3 3

Expected dividend yield 3.6% - 5.3% 2.3 % 1.6 %

Weighted average fair value per share at grant date $ 2.18 $ 3.97 $ 6.06

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.

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A summary of stock option transactions during the year ended December 31, 2020follows:

Weighted Average Aggregate

No. of Weighted Average Remaining Life Intrinsic Value

Shares Exercise Price (in years) (in thousands)

Intrinsic value is the difference between the market value of our common stock and the exercise price of each stock option multiplied by the number of stock options outstanding for those stock options where the market value exceeds their exercise price. Options exercised during the years ended December 31, 2020, 2019 and 2018 had intrinsic values of $1.2 million, $0.8 million and $1.2 million, respectively. During the years ended December 31, 2020, 2019 and 2018, the Company received $1.9 million, $0.3 million and $0.7 million, respectively, in cash from stock option exercises. Current tax benefits of $0.2 million, $0.1 million and $0.1 million were recognized for these exercises during the years ended December 31, 2020, 2019 and 2018, respectively. Additionally, during the years ended December 31, 2020, 2019 and 2018, the Company received 13,237, 12,450 and 6,894 shares, respectively, of its common stock as payment of the exercise price in the exercise of stock options for 19,232, 33,172 and 26,234 shares, respectively, of its common stock. As of December 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 1.0 years.

Weighted Average Aggregate

No. of Weighted Average Remaining Life Intrinsic Value

Shares Exercise Price (in years) (in thousands)

SARs exercised during the years ended December 31, 2020 and 2018 had intrinsic values of $0.3 million and $0.1 million, respectively. There were no SARs exercised during the year ended December 31,2019. Current tax benefits of $0.1 million were recognized for these exercises during each of the years ended December 31,2020 and 2018. As of December 31, 2020, the Company had $0.2 million in unrecognized compensation related to nonvested SARs to be recognized over the remaining weighted average vesting period of 0.9 years.

Restricted Stock

The Company has granted restricted stock to directors and certain employees 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. 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.

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Weighted Average

No. of Grant Date

Shares Fair Value

As of December 31, 2020, the Company had $1.2 million of unrecognized compensation cost related to nonvested restricted stock grants expected to be recognized over the remaining weighted average vesting period of 1.6 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.

Weighted Average

No. of Grant Date

Shares Fair Value

As of December 31, 2020, the Company had $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 1.1 years.

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NOTE 12 – Earnings 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 years ended December 31, 2020, 2019 and 2018:

Years Ended December 31,

Net income per share:

Awards to purchase 271,507, 448,298 and 322,000 shares of common stock with weighted average exercise prices of $19.77, $19.73 and $22.02 were outstanding during the years ended December 31, 2020, 2019 and 2018, 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.

NOTE 13 – Other Current Liabilities:

Other current liabilities consisted of the following (in thousands)

December 31,

Salaries, wages, commissions and compensated absences $ 26,315 $ 7,292

Current operating lease liabilities 1,124 1,346

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NOTE 14 – 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):

Years Ended December 31,

Uniforms and Related Products Segment:

Remote Staffing Solutions Segment:

Promotional Products Segment:

Personal protective equipment 82,715 - -

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Contract Assets and Contract Liabilities

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

December 31,

Contract assets relate to goods produced without an alternative use for which the Company has an enforceable right to payment but which have not yet been invoiced to the customer. The majority of the amounts included in contract assets on December 31, 2019 were transferred to accounts receivable during the year ended December 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 balance sheets. The increase in contract liabilities during the year ended December 31, 2020 was primarily attributable to new customer contracts for the sourcing of personal protective equipment within the Promotional Products segment. During the year ended December 31, 2020, $1.4 million of revenue was recognized from the contract liabilities balance as of December 31, 2019.

NOTE 15 – Stock Repurchase Plan:

On August 1, 2008, the Company’s Board of Directors approved an increase to the outstanding authorization under its common stock repurchase program to allow for the repurchase of 1,000,000 additional shares of the Company’s outstanding shares of common stock. During the year ended December 31, 2018, the Company reacquired and retired the remaining 58,216 shares of its common stock under this program. 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 and 49,091 shares of its common stock during the years ended December 31, 2020 and 2019, respectively. At December 31, 2020, the Company had 657,451 shares remaining under its common stock repurchase program. 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.

NOTE 16 –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.

Superior Group of Companies, Inc. SGC US Equity

SGC · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Superior Group of Companies, Inc. SGC US Equity☆

SGC · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Superior Group of Companies, Inc. SGC US Equity