SUPERIOR GROUP OF COMPANIES, INC. (SGC) FY 2024 MD&A

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, 2024 and 2023, as well as our financial positions at December 31, 2024 and 2023, 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. Additionally, we use a non-GAAP financial measure to evaluate our results of operations. For important information regarding the use of such non-GAAP financial measure, including reconciliations to the most comparable GAAP measure, see the section titled “Non-GAAP Financial Measure” below.

Business Outlook

Superior Group of Companies, Inc. (together with its subsidiaries, the “Company,” “Superior,” “we,” “our,” or “us”) is comprised of three reportable business segments: (1) Branded Products, (2) Healthcare Apparel and (3) Contact Centers.

Branded Products

In our Branded Products segment, we produce and sell customized merchandising solutions, promotional products and branded uniform programs to our customers. As a strategic branding partner, we offer our customers customized branding solutions and strategies that generate favorable brand impressions, bolster customer retention and enhance employee engagement. Our products are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, technology, transportation and other industries. Sales volumes in this segment are impacted by a number of factors, including marketing programs of our customers and turnover of our customers’ employees, often times driven by the opening and closing of locations. From a long-term perspective, we believe that synergies within this segment will create opportunities to cross-sell products to new and existing customers.

Healthcare Apparel

In our Healthcare Apparel segment, we manufacture (through third parties or in our own facilities) and sell a wide range of healthcare apparel, such as scrubs, lab coats, protective apparel and patient gowns. We sell our brands of healthcare service apparel to healthcare laundries, dealers, distributors and retailers primarily in the United States. From a long-term perspective, we expect that demand for our signature marketing brands, including Fashion Seal Healthcare® and Wink®, will continue to provide opportunities for growth and increased market share.

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Contact Centers

In our Contact Centers segment (also known as “The Office Gurus”), which operates in El Salvador, Belize, Jamaica, Dominican Republic, and the United States, we provide outsourced, nearshore business process outsourcing, contact and call-center support services to North American customers. These services are also provided internally to the Company’s other two operating segments. The Office Gurus has become an award-winning business process outsourcer offering inbound and outbound voice, email, text, chat and social media support. The nearshore call-center market has grown as businesses look to reduce operating costs while maintaining high-quality customer support. Nearshore operators are able to provide comparable service to their U.S. counterparts at a fraction of the price. 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.

Global Economic and Political Conditions

Economic and political events over the past several years have altered the landscape in which we and other U.S. companies operate in a variety of ways. World events, including the Russian invasion of Ukraine and the resulting economic sanctions have impacted the global economy, including by exacerbating inflationary and other pressures. The ongoing conflict in the Middle East could continue to affect oil prices and have other negative effects on the global economy. Civil unrest in countries where we manufacture products, such as Haiti, may result in our facilities incurring damage or destruction that interrupts our manufacturing processes and adversely affects our reputation and our relationships with our customers. While inflation and interest rates decreased in 2024, the effects of the conflict in the Middle East, further fluctuations in inflationary conditions and interest rates, additional sanctions or retaliatory measures related to the Russia-Ukraine crisis or other situations, including deteriorating or prolonged diplomatic tension between the United States and China, could further negatively affect U.S. and international commerce and exacerbate or prolong the period of high energy prices.

Prolonged or recurring disruptions or instability in the United States and global economies, and how the world reacts to those disruptions or instability, 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 obligations, reduced credit-worthiness of our customers, and potential impairment of the carrying value of indefinite-lived intangible assets.

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The Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

Operations

The following table provides highlights of our financial performance (in thousands, except percentages):

(1) Please refer to "Non-GAAP Financial Measure" below for a reconciliation of EBITDA to net income.

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Net Income

The Company generated net income of $12.0 million during the year ended December 31, 2024 and net income of $8.8 million during the year ended December 31, 2023. The increase in net income during the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily due to increases in net sales and gross margins in all three of our reportable segments, and a decrease in interest expense, partially offset by an increase in selling and administrative expenses across all of our reportable segments.

EBITDA

EBITDA was $34.1 million and $33.5 million during the years ended December 31, 2024 and 2023, respectively. EBITDA for the year ended December 31, 2024 compared to the year ended December 31, 2023 increased primarily due to increased net sales and gross margins in all three of our reportable segments, partially offset by an increase in selling and administrative expenses across all of our reportable segments. For a reconciliation of EBITDA to net income, its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Non-GAAP Financial Measure” below.

Net Sales

Net sales for the Company increased 4.1% or $22.4 million, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was attributable to net sales increases in all three of our reportable segments.

Branded Products net sales increased 3.1%, or $10.6 million, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was primarily due to the expansion of business within existing accounts and new client wins.

Healthcare Apparel net sales increased 4.7%, or $5.3 million, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was primarily due to higher digital sales from both our wholesale customers and our direct-to-consumer website, partially offset by lower volume from our store-based wholesale customers.

Contact Centers net sales increased 6.0% before intersegment eliminations and 7.4% after intersegment eliminations for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase in net sales was attributable to sales growth from both new and existing customers.

Gross Margin

Gross margin is defined as net sales less 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 Branded Products and Healthcare Apparel segments. Cost of goods sold for our Contact Centers 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. The cost of occupancy and operating the Company’s distribution centers are included in selling and administrative expenses. Gross margin rate is defined as gross margin divided by net sales.

Gross margin rate for the Company was 39.0% for the year ended December 31, 2024 up from 37.5% for the year ended December 31, 2023. The rate increase was primarily due to an improvement in gross margin rates in our Branded Products and Healthcare Apparel reportable segments.

Gross margin rate for our Branded Products segment was 35.3% for the year ended December 31, 2024 and 33.5% for the year ended December 31, 2023. The gross margin rate increased as compared to the prior year period primarily driven by sourcing mix resulting in lower product costs and pricing increases to existing customers.

Gross margin rate for our Healthcare Apparel segment was 38.4% for the year ended December 31, 2024 and 37.1% for the year ended December 31, 2023. The rate increase was primarily driven by lower supply chain costs.

Gross margin rate for our Contact Centers segment was 53.8% for the year ended December 31, 2024 and 53.7% for the year ended December 31, 2023. The rate remained flat year over year as cost increases kept pace with revenue increases.

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Selling and Administrative Expenses

As a percentage of net sales, total selling and administrative expenses was 35.3% for the year ended December 31, 2024 and 33.9% for the year ended December 31, 2023. The rate increase was primarily driven by increased commissions, employee related costs, increased expenditures related to marketing, advertising activities and the expiration of our written put option.

As a percentage of net sales, selling and administrative expenses for our Branded Products segment was 26.7% for the year ended December 31, 2024 and 25.7% for the year ended December 31, 2023. The rate increase was primarily due to increased employee related costs and sales commissions, partially offset by a decrease in bad debts expense for customer accounts.

As a percentage of net sales, selling and administrative expenses for our Healthcare Apparel segment was 34.5% for the year ended December 31, 2024 and 33.6% for the year ended December 31, 2023. The rate increase was primarily attributable to an increase in expenditures related to marketing and advertising activities along with employee related costs which were partially offset by expense leverage on increased net sales.

As a percentage of net sales, selling and administrative expenses for our Contact Centers segment was 44.4% for the year ended December 31, 2024 and 43.4% for the year ended December 31, 2023. The rate increase was primarily attributable to an increase in employee related expenses, including both headcount and select pay rate increases to support sales growth, as well as, an increase in bad debts expense.

Selling and administrative expenses for our Other segment, which represents unallocated Corporate costs, increased by $3.0 million, primarily driven by an increase in employee related costs, third party professional services and the fair value recognition of a written put option which expired in the second quarter of 2024.

Interest Expense

Interest expense decreased to $6.4 million for the year ended December 31, 2024 from $9.7 million for the year ended December 31, 2023. This decrease was due to a $30.7 million decrease in our weighted average outstanding borrowings along with a decrease in the weighted average interest rate on those borrowings from 6.7% for the year ended December 31, 2023 to 5.5% for the year ended December 31, 2024.

Income Taxes

Income tax expense increased to $2.3 million for the year ended December 31, 2024 from $1.0 million for the year ended December 31, 2023. The effective tax rate was 16.0% and 10.2% for the year ended December 31, 2024 and 2023, respectively. Income tax expense and the effective tax rate for the year ended December 31, 2024 and 2023 was primarily impacted by the variability in the mix of earnings across the Company’s foreign and domestic operations, subject to various statutory tax rates in those jurisdictions. The effective tax rate may vary from year to year due to discrete, unusual or non-recurring items, the resolution of income tax audits, changes in tax laws, the tax impact from employee share-based payments, or other items.

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Liquidity and Capital Resources

Liquidity Analysis

Short-Term Liquidity

For the next twelve months, our primary capital requirements are for capital to maintain our operations, meet contractual obligations, primarily consisting of our revolving credit facility, term loan, operating leases and acquisition-related contingent liabilities, and fund capital expenditures, dividends, stock repurchases, any potential merger and acquisition activity and other general corporate purposes. We currently anticipate that we will spend more in capital expenditures in 2025 than we spent in 2024. Management currently believes that the combination of our current cash level, cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the above requirements for the next twelve months.

Long-Term Liquidity

Beyond the next twelve months, our principal demand for funds will be for maintenance of our core business, to satisfy long-term contractual obligations, stock repurchases, any potential merger and acquisition activity and the Company’s ongoing capital expenditure program designed to improve the effectiveness and capabilities of its facilities and technology. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions. The Company's material contractual obligations include outstanding debt, operating leases, long-term pension liability and non-qualified deferred compensation plan liabilities in Other Liabilities. For additional details related to the Company’s long-term contractual obligations for long-term debt see Note 5, for contractual obligations for leases see Note 14 and for contractual obligations for acquisition-related contingent liabilities see Note 7. Management currently believes that the combination of our current cash level, cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the above requirements. Please refer to Notes 5 and 15 to our Consolidated Financial Statements located in Item 8 of this Annual Report on Form 10-K for our contractual obligations, including schedules of future minimum payments.

Cash Requirements

Working Capital Needs

The Company 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. The Company also requires working capital to invest in new product lines and technologies.

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Capital expenditures

Capital expenditures were $4.4 million and $5.0 million for the years ended December 31, 2024 and 2023, respectively.

Debt Service Obligations

In 2024 and 2023, we paid interest of $5.9 million and $9.6 million, respectively. The cost of borrowing decreased in 2024, with the weighted average interest rate on outstanding borrowings under our Credit Facilities of 5.5% at December 31, 2024 compared to 6.7% at December 31, 2023. As of December 31, 2024, the Company had undrawn capacity of $103.0 million under the revolving credit facility.

Sources of Capital and Liquidity

Cash on Hand

As of December 31, 2024, we had $18.8 million of cash on our balance sheet, of which $15.7 million of cash was held at foreign subsidiaries. Excess cash of $9.0 million from foreign operations may generally be transferred to operations in the US.

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Cash Flows from Operations

Net cash provided by operating activities primarily results from cash collected from customers for our promotional products, branded uniforms, healthcare apparel and accessories, offset by cash payments made for raw materials, salaries and payroll related benefits, leases and other general corporate expenditures.

In 2024, net cash provided by operating activities was $33.4 million. Cash collections from customers exceeded aggregate cash payments to vendors, lessors, employees and lenders primarily driven by the Company’s efforts to reduce outstanding receivable balances.

In 2023, net cash provided by operating activities was $78.9 million. Cash collections from customers exceeded aggregate cash payments to vendors, lessors, employees and lenders primarily driven by the Company’s collection of receivable balances coupled with positive non-cash add-backs for contract assets and decreases in cash outflows for inventory.

Credit Facilities and Debt Activity

The Company’s primary source of liquidity has been its net income and the use of credit facilities and term loans. The Company has access to a Revolving Credit Facility with a maximum principal amount of $125.0 million and a term loan in the original aggregate principal amount of $75.0 million and the ability to request incremental revolving credit or term loan facilities in an aggregate amount of up to an additional $75.0 million, subject to obtaining additional lender commitments and satisfying certain other conditions.

For the year ended December 31, 2024, the Company had $7.7 million of net debt payments, consisting of $50.0 million in payments on the revolving credit facility and $4.7 million of payments in the term loan. For the year ended December 31, 2023, the Company had $61.8 million in net debt payments, consisting of $64.0 million in payments on the revolving credit facility and $3.8 million in payments on the term loan. For the years ended December 31, 2024 and 2023, the Company had borrowings of $47.0 million and $6.0 million on the revolving credit facility, respectively. Both the debt payments and borrowings during 2024 and 2023 primarily related to the utilization of our revolving credit facility in the normal course of business.

In the future, the Company may continue to use credit facilities and other secured and unsecured borrowings as a source of liquidity. 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.

Please refer to Note 5 to our Consolidated Financial Statements located in Item 8 of Part II of this Annual Report on Form 10-K for additional details on our outstanding long-term debt.

Dividends and Share Repurchase Program

During the years ended December 31, 2024 and 2023, the Company paid cash dividends of $9.3 million and $9.2 million, respectively. The Company anticipates that it will continue to pay dividends in the future as financial conditions permit.

On August 9, 2024, the Company’s Board of Directors approved a new stock repurchase plan. Under the plan, the Company is authorized to repurchase up to $10 million of its common stock over a period of one year ending in August 2025. This plan replaces the May 2, 2019 plan, as amended, which authorized the repurchase of up to 750,000 shares. 92,549 shares had been repurchased under the May 2, 2019 plan as of August 9, 2024. No further shares will be repurchased under that plan. The new stock repurchase plan allows the Company to purchase common stock from time to time through, among other ways, open market purchases, privately negotiated transactions, block purchases, and/or pursuant to Rule 10b5-1 trading plans, subject to applicable securities laws and other legal requirements and relevant factors. The number of shares purchased and the timing of any purchases will depend upon a number of factors, including the price and availability of the Company’s stock and general market conditions. The stock repurchase plan may be modified, suspended or terminated at any time, without prior notice. Shares repurchased may be reissued later in connection with employee benefit plans and other general corporate purposes. Shares purchased under the common stock repurchase plan are constructively retired and returned to unissued status. See Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. As of December 31, 2024, 523,472 shares have been purchased under the new plan and $2.6 million remains available to repurchase shares under the $10 million authorized.

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Non-GAAP Financial Measure

EBITDA, which is a non-GAAP financial measure, is defined as net income excluding interest expense, income tax expense, depreciation and amortization expense and impairment charges. The Company believes EBITDA is an important measure of operating performance because it allows management, investors and others to evaluate and compare the Company’s core operating results from period to period by removing (i) the impact of the Company’s capital structure (interest expense from outstanding debt), (ii) tax consequences and (iii) asset base (depreciation and amortization). The Company uses EBITDA internally to monitor operating results and to evaluate the performance of its business. In addition, the compensation committee has used EBITDA in evaluating certain components of executive compensation, including performance-based annual incentive programs.

EBITDA is not a measure of financial performance under GAAP.  EBITDA should not be considered in isolation or as an alternative to net income, cash flows from operating activities or any other measure determined in accordance with GAAP. The items excluded to calculate EBITDA are significant components in understanding and assessing the Company’s results of operations. The presentation of the Company’s EBITDA may change from time to time, including as a result of changed business conditions, new accounting pronouncements or otherwise. If the presentation changes, the Company undertakes to disclose any change between periods and the reasons underlying that change. The Company’s EBITDA may not be comparable to a similarly titled measure of another company because other entities may not calculate EBITDA in the same manner.

The following table reconciles net income to EBITDA (in thousands):

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Critical Accounting Estimates

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. Our accounting policies are more fully described in Note 1 to the Financial Statements included in this Form 10-K. 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.

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We believe that the following critical accounting policies and estimates have a higher degree of inherent uncertainty and require our most significant judgments.

Revenue Recognition

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. 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.

Inventories

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, current revenue trends and market conditions are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, inventory write-downs may be required, which may be material. An additional write-down in value of 5% of inventories would result in additional expense of approximately $5.0 million.

Intangibles

Indefinite-lived intangible assets such as trade names are not amortized but are subject to an annual impairment test in the fourth quarter based or on an interim basis if there are indicators of impairment present.

During the third quarter of 2024, the Company performed an interim impairment test on certain of its indefinite-lived trade name intangible assets within the Healthcare segment which resulted in an immaterial impairment of $0.3 million. We conducted a quantitative assessment using the relief-from-royalty method, which we believe to be an acceptable methodology due to its common use by valuation specialists in determining the fair value of intangible assets. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these assets. The assumptions that have the most significant effect on the fair value calculations are the royalty rates, projected revenue growth rates, discount rates, and terminal values. Each royalty rate is determined based on the profitability of the trade name to which it relates.

In determining the fair value of our trade name indefinite lived intangible assets as of September 30, 2024, we used the following key assumptions:

• A weighted-average royalty rate of 2.8%;

• A long-term growth rate of 3.0%; and

• An assumed discount rate of 16.5%

The Company performed its annual impairment test for definite-lived intangible assets in the fourth quarter of 2024 and 2023. As part of our annual impairment assessments the Company determined the fair values were greater than the carrying values.

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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.

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, 2024.

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, 2024, there was no significant change in total unrecognized tax benefits. As of December 31, 2024, we had an accrued liability of $0.9 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.

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