# SUPERIOR GROUP OF COMPANIES, INC. (SGC) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SUPERIOR GROUP OF COMPANIES, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/95574/000143774924007685/sgc20231231_10k.htm
Accession: 0001437749-24-007685
Filing date: 2024-03-14
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SGC/
All MD&A years: /company/SGC/mda/
Previous year: /company/SGC/mda/fy2022/ (FY 2022)
Next year: /company/SGC/mda/fy2024/ (FY 2024)

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, 2023 and 2022, as well as our financial positions at December 31, 2023 and 2022, 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.

Recent Acquisitions

On May 1, 2022, the Company, through BAMKO, acquired substantially all of the assets of Guardian Products, Inc. (“Guardian”) based in Norcross, Georgia. Guardian is a branded merchandise company that is one of the leading providers of promotional products to automotive dealers nationwide. The purchase price for the acquisition consisted of the following: (a) $11.1 million in cash, (b) the issuance of 116,550 restricted shares of Superior’s common stock (the “Guardian Stock”) that vest ratably over a three-year period, and (c) estimated potential future payments of approximately $2.3 million in additional contingent consideration based on the results of the acquired business through April 2025. The Guardian Stock is subject to transfer restrictions over the three-year period following the closing of the acquisition.

Business Outlook

Superior is comprised of three reportable business segments: (1) Branded Products, (2) Healthcare Apparel and (3) Contact Centers. Beginning in the second quarter of 2022, the Company realigned its reportable segments to correspond with changes to its organizational responsibilities, management structure and operating model. Prior to implementing the current segment reporting, the Company’s Uniforms and Related Products segment included both healthcare apparel and uniforms. As part of the change in reportable segments, the branded portion of the uniforms business was combined with the previous Promotional Products segment to form the Branded Products segment, the healthcare apparel business became its own segment named Healthcare Apparel and income and expenses related to corporate functions that are not specifically attributable to an individual reportable segment are no longer presented in segment results. The previous Remote Staffing Solutions segment was renamed Contact Centers segment. All prior period segment information has been recast to reflect this change in reportable segments.

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 in recent years have altered the landscape in which we and other U.S. companies operate in a variety of ways. In response to inflationary pressures, the U.S. Federal Reserve repeatedly has raised interest rates, resulting in an increase in the cost of borrowing for us, our customers, our suppliers, and other companies relying on debt financing. 

World events, such as the Russian invasion of Ukraine and the resulting economic sanctions, have impacted the global economy, including by exacerbating inflationary and other pressures. In addition, the threat of a wider war in the Middle East after the Hamas terrorist attacks on Israel could affect oil prices and have other effects on the global economy. Both crises have potentially far-reaching impacts on energy and food markets and global trade.

An escalating war in the Middle East, prolonged inflationary conditions, high and/or increased interest rates, additional sanctions or retaliatory measures related to the Russia-Ukraine crisis, or other situations, could further negatively affect U.S. and international commerce and exacerbate or prolong the period of high energy prices. At this time, the extent and duration of these economic and political events and their effects on the economy and the Company are impossible to predict, but the impact on the Company’s business could be material.

Summary of Results

Net Income (loss)

The Company generated net income of $8.8 million during the year ended December 31, 2023 and a net loss of $32.0 million during the year ended December 31, 2022. The increase in net income during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to goodwill and indefinite-lived intangible asset impairment charges of $51.5 million incurred in the prior year period, a decrease in inventory write-downs of $11.2 million, partially offset by increases in income tax expense, Contact Centers selling and administrative expenses and interest expense.

Adjusted EBITDA

Adjusted EBITDA (a non-GAAP financial measure) was $33.5 million and $27.9 million during the years ended December 31, 2023 and 2022, respectively. Adjusted EBITDA during the year ended December 31, 2023 compared to the year ended December 31, 2022 increased primarily due to a decrease in inventory write-downs, partially offset by an increase in Contact Centers selling and administrative expenses. For a reconciliation of Adjusted EBITDA to net income (loss), its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Non-GAAP Financial Measure” below.

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The Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Operations

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

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,"],["","","2023","","","2022","","","% Change"],["Net sales:"],["Branded Products","","$","342,680","","","$","387,931","","","","(11.7","%)"],["Healthcare Apparel","","","113,878","","","","113,321","","","","0.5","%"],["Contact Centers","","","91,500","","","","84,218","","","","8.6","%"],["Net intersegment eliminations","","","(4,756",")","","","(6,639",")","","","(28.4","%)"],["Consolidated net sales","","","543,302","","","","578,831","","","","(6.1","%)"],["Gross margin:"],["Branded Products","","","114,627","","","","114,797","","","","(0.1","%)"],["Healthcare Apparel","","","42,281","","","","32,602","","","","29.7","%"],["Contact Centers","","","49,148","","","","49,779","","","","(1.3","%)"],["Net intersegment eliminations","","","(2,509",")","","","(3,819",")","","","(34.3","%)"],["Consolidated gross margin","","","203,547","","","","193,359","","","","5.3","%"],["Selling and administrative expenses:"],["Branded Products","","","88,225","","","","90,118","","","","(2.1","%)"],["Healthcare Apparel","","","38,209","","","","39,295","","","","(2.8","%)"],["Contact Centers","","","39,682","","","","33,631","","","","18.0","%"],["Intersegment Eliminations","","","(2,509",")","","","(3,819",")","","","(34.3","%)"],["Other","","","19,598","","","","17,095","","","","14.6","%"],["Consolidated selling and administrative expenses","","","183,205","","","","176,320","","","","3.9","%"],["Goodwill impairment charge","","","-","","","","45,918","","","","(100.0","%)"],["Intangible assets impairment charge","","","-","","","","5,581","","","","(100.0","%)"],["Other periodic pension cost","","","855","","","","2,116","","","","(59.6","%)"],["Interest expense","","","9,718","","","","4,894","","","","98.6","%"],["Gain on sale of property, plant and equipment","","","-","","","","3,435","","","","(100.0","%)"],["Income (loss) before income tax expense","","","9,769","","","","(38,035",")","","","(125.7","%)"],["Income tax expense (benefit)","","","997","","","","(6,065",")","","","(116.4","%)"],["Net income (loss)","","$","8,772","","","$","(31,970",")","","","(127.4","%)"]]
[[/GREPCENT_TABLE]]

Net Sales

Net sales for the Company decreased 6.1% from $578.8 million for the year ended December 31, 2022 to $543.3 million for the year ended December 31, 2023. The decrease was primarily driven by a net sales decline in Branded Products, partially offset by an increase in Healthcare Apparel and Contact Centers net sales.

Branded Products net sales decreased 11.7%, or $45.3 million, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily due to decreased demand during the first half of 2023 as a result of then-current market conditions that tightened our customers’ advertising spending, the timing of new branded uniform rollout programs for certain customers and a decrease of $6.3 million in net sales of personal protective equipment driven by the easing of the COVID-19 pandemic. These decreases were partially offset by an increase in net sales of $12.8 million attributable to the acquisition of Guardian in May 2022.

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Healthcare Apparel net sales increased 0.5%, or $0.6 million, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to an increase in digital sales, including the launch of a direct-to-consumer website during the year ended December 31, 2023, partially offset by challenging market conditions as a result of saturated inventory levels in the industry post-COVID-19 pandemic that led to a decrease in demand for healthcare apparel during 2023.

Contact Centers net sales increased 8.6% before intersegment eliminations and 11.8% after intersegment eliminations for the year ended December 31, 2023 compared to the year ended December 31, 2022. These increases were primarily attributed to onboarding of new customers in 2023.

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 37.5% for the year ended December 31, 2023 and 33.4% for the year ended December 31, 2022. The rate increase was primarily due to a decrease in inventory write-downs of $11.2 million and an improvement in gross margin rate for our Branded Products segment, the Company’s largest segment. Inventory write-downs during the year ended December 31, 2022 included write-downs of $11.4 million on excess and obsolete inventory related to discontinued styles and personal protective equipment within our Healthcare Apparel segment.

Gross margin rate for our Branded Products segment was 33.5% for the year ended December 31, 2023 and 29.6% for the year ended December 31, 2022. The rate increase was primarily driven by a favorable shift in the mix of pricing and customers, lower supply chain costs and a decrease in inventory write-downs of $1.4 million.

Gross margin rate for our Healthcare Apparel segment was 37.1% for the year ended December 31, 2023 and 28.8% for the year ended December 31, 2022. The rate increase was primarily due to decrease in inventory write-downs of $9.8 million, partially offset by the impact of challenging market conditions and strategic efforts to right size inventory levels resulting in lower selling prices.

Gross margin rate for our Contact Centers segment was 53.7% for the year ended December 31, 2023 and 59.1% for the year ended December 31, 2022. The rate decrease was primarily due to increased employee related costs of our agents, partially offset by price increases.

Selling and Administrative Expenses

As a percentage of net sales, total selling and administrative expenses was 33.7% for the year ended December 31, 2023 and 30.5% for the year ended December 31, 2022. The rate increase was primarily attributed to expense deleverage resulting from the 11.7% decrease in Branded Products net sales, an increase in selling and administrative expenses for our Contact Centers segment and unrealized losses of $0.5 million recognized in 2023 compared to unrealized gains of $1.6 million recognized in 2022 on written put options, partially offset by a decrease in bad debt expense. For more information on the written put options, please refer to the disclosure in Note 1 to the Financial Statements, which is incorporated herein by reference.

As a percentage of net sales, selling and administrative expenses for our Branded Products segment was 25.7% for the year ended December 31, 2023 and 23.2% for the year ended December 31, 2022. The rate increase was primarily due to expense deleverage on the 11.7% decrease in net sales and costs incurred during 2023 to consolidate warehouse facilities related to promotional products inventory, partially offset by a decrease in bad debt expense of $2.3 million due to improved collection efforts.

As a percentage of net sales, selling and administrative expenses for our Healthcare Apparel segment was 33.6% for the year ended December 31, 2023 and 34.7% for the year ended December 31, 2022. The rate decrease was primarily driven by reductions in overhead costs. 

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As a percentage of net sales, selling and administrative expenses for our Contact Centers segment was 43.4% for the year ended December 31, 2023 and 39.9% for the year ended December 31, 2022. The rate increase was primarily attributed to increased employee related expenses, including pay rate increases and costs associated with employees returning to the office, and an increase in depreciation expense.

Goodwill Impairment Charge

In conjunction with the re-segmentation during the second quarter of 2022, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the previous Uniforms and Related Products segment was lower than its carrying value primarily as the result of current market conditions, decline in expected cash flows and decrease in the Company’s stock price. During the third quarter of 2022, the Company determined that a triggering event occurred in relation to the depressed market price of the Company’s common stock and corresponding significant decline in the Company’s market capitalization. As a result, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the Branded Products segment was lower than its carrying value. Consequently, the Company recorded a non-cash goodwill impairment charge of $45.9 million during the year ended December 31, 2022.

Intangible Assets Impairment Charge

In conjunction with the Company’s realignment of its reportable segments during the second quarter of 2022, the Company began an effort to centralize certain branding and go-to-market strategies under the BAMKO brand and determined that it would no longer use certain trade names associated with branded products. The Company’s rebranding efforts resulted in a $5.6 million impairment of indefinite-lived trade names related to its Branded Products segment during the year ended December 31, 2022.

Other Periodic Pension Plan Costs

Other periodic pension plan costs decreased to $0.9 million for the year ended December 31, 2023 from $2.1 million for the year ended December 31, 2022. This decrease was primarily due to a decrease in actuarial losses recognized on the supplemental executive retirement plan (“SERP”).

Gain on Sale of Property, Plant and Equipment

During the year ended December 31, 2022, the Company sold its corporate headquarters building and related assets for net proceeds of $4.8 million and realized a gain on the sale of $3.4 million. This sale was part of management’s plan to relocate the Company’s corporate headquarters to St. Petersburg, Florida.

Interest Expense

Interest expense increased to $9.7 million for the year ended December 31, 2023 from $4.9 million for the year ended December 31, 2022. This increase was primarily due to an increase in interest rates on our outstanding borrowings, partially offset by $0.5 million of expense relating to the write-off of unamortized debt issuance costs associated with our former senior secured credit facility in the third quarter of 2022 and a decrease in outstanding borrowings. The weighted average interest rate on our outstanding borrowings for the year ended December 31, 2023 was 7.0% compared to 2.4% for the year ended December 31, 2022.

Income Taxes

The effective income tax rate was 10.2% and 15.9% for the years ended December 31, 2023 and 2022, respectively. Income tax expense and the effective tax rate for the year ended December 31, 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. Income tax expense and the effective tax rate for the year ended December 31, 2022 was impacted by a tax benefit of $7.0 million relating to the impairment of intangible assets and a nondeductible portion of the goodwill impairment charge totaling $21.1 million. For further discussion of changes in the effective tax rate, refer to Note 9 to the Financial Statements.

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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, 2023, approximately $16.8 million of our cash was held in our foreign subsidiaries, of which $11.6 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. The cost of borrowing increased in 2023, with the weighted average interest rate on outstanding borrowings under the revolving credit facility of 6.7% at December 31, 2023 compared to 6.2% at December 31, 2022. As of December 31, 2023, the Company had undrawn capacity of $100.0 million under the revolving credit facility.

In the future, the Company may continue to use credit facilities and other secured and unsecured borrowings as a source of liquidity. The Company may also begin relying on the issuance of equity or debt securities. There can be no assurance that any such financings would be available to us on reasonable terms. Any future issuances of equity securities or 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.

Working Capital

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 increased by $2.2 million to $19.9 million as of December 31, 2023 from $17.7 million on December 31, 2022. Working capital decreased to $178.8 million at December 31, 2023 from $232.8 million at December 31, 2022. The decrease in working capital was primarily due to decreases in inventories, prepaid expenses and other current assets and contract assets and increases in other current liabilities and accounts payable. The decrease in inventories was primarily related to right-sizing inventory levels within our Healthcare Apparel and Branded Products segments. The decrease in prepaid expenses and other current assets was primarily related to a decrease in prepaid taxes. The decrease in contract assets was primarily related to the timing of shipments to customers and receipts from suppliers for finished goods with no alternative use within our Branded Products segment. The increase in other current liabilities was primarily related to increases in contract liabilities associated with deferred revenue within our Branded Products segment and new facility leases. The increase in accounts payable was primarily driven by the timing of payments for inventory purchases within our segments.

Material Short-Term Plans for Cash

For the next twelve months, our primary capital requirements are for capital to maintain our operations, meet the contractual obligations shown in the column titled “2024” in the contractual obligations table below, and to fund capital expenditures, dividends and other general corporate purposes. We currently anticipate that we will spend more in capital expenditures in 2024 than we spent in 2023. 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.

Material Long-Term Plans for Cash

Beyond the next twelve months, our principal demand for funds will be for maintenance of our core business, to satisfy the requirements shown in the columns “2025-2026” and “2027-2028” in the contractual obligations table below, as well as the obligations described in footnote (3) to the table, and the continuation of 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. 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.

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Contractual Obligations

The following table sets forth a summary of our material contractual obligations as of December 31, 2023 (in thousands):

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["","","2024","","","2025-2026","","","2027-2028","","","Thereafter"],["Debt:"],["Revolving credit facility(1)","","$","-","","","$","-","","","$","25,000","","","$","-"],["Term Loan(1)","","","4,688","","","","12,187","","","","52,500","","","","-"],["Operating leases","","","4,315","","","","8,237","","","","5,998","","","","1,680"],["Acquisition-related contingent liabilities(2)","","","1,403","","","","557","","","","-","","","","-"],["Total long term contractual cash obligations(3)","","$","10,406","","","$","20,981","","","$","83,498","","","$","1,680"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Excludes estimates for interest payable as amounts are based on variable rates. See Note 8 to the Financial Statements."],["(2)","The amounts represent the expected cash payment. The amounts in our balance sheet are stated at fair value."],["(3)","Certain long-term liabilities have been excluded from this table as we cannot make a reasonable estimate of the period of cash settlement. These long-term liabilities include unrecognized tax benefits of $0.8 million, unfunded obligations related to the SERP of $13.6 million and deferred compensation liability of $7.9 million."]]
[[/GREPCENT_TABLE]]

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):

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,"],["","","2023","","","2022"],["Net cash provided by (used in):"],["Operating activities","","$","78,929","","","$","(2,604",")"],["Investing activities","","","(5,508",")","","","(17,425",")"],["Financing activities","","","(71,616",")","","","28,846"],["Effect of exchange rates on cash","","","369","","","","(30",")"],["Net increase in cash and cash equivalents","","$","2,174","","","$","8,787"]]
[[/GREPCENT_TABLE]]

Operating Activities. The increase in net cash provided by operating activities during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily attributable to decreases in cash outflows for inventory, accounts payable and other current liabilities and an increase in cash inflows from contract assets, partially offset by a decrease in net sales and an increase in interest paid. Working capital cash changes during the year ended December 31, 2023 included a decrease of $24.7 million in inventory, an increase of $13.3 million in accounts payable and other current liabilities and a decrease of $4.3 million in contract assets. Working capital cash changes during the year ended December 31, 2022 included an increase of $15.9 million in inventories, an increase of $15.1 million in contract assets and a decrease of $14.6 million in accounts payable and other current liabilities.

Investing Activities. The decrease in net cash used in investing activities during the year ended December 31, 2023 compared to the year ended December 31, 2022 was attributable to $11.1 million of cash paid for the acquisition of Guardian in 2022 and a decrease in capital expenditures of $6.1 million primarily related to the expansion of our distribution facility in Eudora, Arkansas in the previous year. Additionally, the year ended December 31, 2022 included $4.8 million in net proceeds from the sale of the Company’s corporate headquarters building and related assets.

Financing Activities. The increase in net cash used in financing activities during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily attributable to an increase in net payments of $61.8 million in debt in 2023 compared to net borrowings of $39.4 million in 2022. Excess cash generated from operating activities during the year ended December 31, 2023 was used to repay outstanding borrowings under the revolving credit facility.

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Credit Facilities (See Note 8 to the Financial Statements)

On August 23, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, the domestic subsidiaries of the Company, as guarantors, the lenders party thereto (the “Lenders”), and PNC Bank, National Association, as administrative agent for the Lenders (the “Administrative Agent”), pursuant to which the Lenders are providing the Company senior secured credit facilities maturing in August 2027 consisting of a revolving credit facility in the aggregate maximum principal amount of $125.0 million and a term loan in the original aggregate principal amount of $75.0 million (collectively, the “Credit Facilities”), 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. 

As of December 31, 2023, the Company had $94.4 million in outstanding borrowings under its Credit Facilities, consisting of $25.0 million outstanding under the revolving credit facility and $69.4 million outstanding under a term loan.

Obligations outstanding under the Credit Facilities accrue interest at a variable rate equal to the secured overnight financing rate (“SOFR”) plus an adjustment between 0.10% and 0.25% (depending on the applicable interest period) plus a margin between 1.0% and 2.0% (depending on the Company’s net leverage ratio). The weighted average interest rate on our outstanding borrowings under the Credit Facilities was 6.7% at December 31, 2023. During the term of the revolving credit facility, the Company will pay a commitment fee on the unused portion of the revolving credit facility equal to between 0.125% and 0.250% (depending on the Company’s net leverage ratio). The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of December 31, 2023, there were no outstanding letters of credit under the revolving credit facility. As of December 31, 2023, the Company had undrawn capacity of $100.0 million under the revolving credit facility.

Contractual principal payments for the term loan are as follows: 2024 - $4.6 million; 2025 - $5.6 million; 2026 - $6.6 million; and 2027 - $52.5 million. The term loan does not contain pre-payment penalties.

The Credit Facilities are secured by substantially all of the operating assets of the Company, 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. 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 (including dividends and related distributions), liquidations, mergers, consolidations or acquisitions, affiliate transactions and sales of assets or subsidiaries. The Credit Agreement also requires the Company to comply with a fixed charge coverage ratio of at least 1.25 to 1.0 and a net leverage ratio not to exceed 4.0 to 1.0. The Company’s net leverage ratio (as defined in the Credit Agreement) is generally calculated as the ratio of (a) indebtedness minus unrestricted cash to (b) consolidated EBITDA for the four most recently ended fiscal quarters. As of December 31, 2023, the Company was in compliance with these ratios. 

Dividends and Share Repurchase Program

During the years ended December 31, 2023 and 2022, the Company paid cash dividends of $9.2 million and $8.7 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 the 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. The Company did not reacquire and retire shares of its common stock under this program during the years ended December 31, 2023 and 2022. At December 31, 2023, 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 its expected future cash needs.

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Non-GAAP Financial Measure

Adjusted EBITDA, which is a non-GAAP financial measure, is defined as net income (loss) excluding interest expense, income tax expense, depreciation and amortization expense, impairment charges and the other items described in the following sentence. The Company believes Adjusted 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, (iii) asset base (depreciation and amortization), (iv) the non-cash charges from asset impairments and (v) gains or losses on the sale of property, plant and equipment. The Company uses Adjusted EBITDA internally to monitor operating results and to evaluate the performance of its business. In addition, the compensation committee has used Adjusted EBITDA in evaluating certain components of executive compensation, including performance-based annual incentive programs.

Adjusted EBITDA is not a measure of financial performance under GAAP and should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities or any other measure determined in accordance with GAAP. The items excluded to calculate Adjusted EBITDA are significant components in understanding and assessing the Company’s results of operations. The presentation of the Company’s Adjusted 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 Adjusted EBITDA may not be comparable to a similarly titled measure of another company because other entities may not calculate Adjusted EBITDA in the same manner.

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

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2023","","","2022"],["Net income (loss)","","$","8,772","","","$","(31,970",")"],["Interest expense","","","9,718","","","","4,894"],["Income tax expense (benefit)","","","997","","","","(6,065",")"],["Depreciation and amortization","","","13,995","","","","13,004"],["Goodwill impairment charge","","","-","","","","45,918"],["Intangible assets impairment charge","","","-","","","","5,581"],["Gain on sale of property, plant and equipment","","","-","","","","(3,435",")"],["Adjusted EBITDA","","$","33,482","","","$","27,927"]]
[[/GREPCENT_TABLE]]

Critical Accounting Policies and 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. 

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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 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.

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. During the year ended December 31, 2023, the Company recognized a $2.4 million charge to cost of goods sold to write-down inventory to its net realizable value, of which $1.6 million related to our Healthcare Apparel segment and $0.8 million related to our Branded Products segment. During the year ended December 31, 2022, the Company recognized a $13.6 million charge to cost of goods sold to write-down inventory to its net realizable value, of which $11.4 million related to our Healthcare Apparel segment and $2.2 million related to our Branded Products segment. 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. An additional write-down in value of 5% of inventories would result in additional expense of approximately $5.0 million.

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:

[[GREPCENT_TABLE]]
[["\u2022","macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets;"],["\u2022","industry and market considerations such as a deterioration in the environment in which the Company operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for the Company\u2019s products or services, or a regulatory or political development;"],["\u2022","cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;"],["\u2022","overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; and"],["\u2022","other relevant entity-specific events such as changes in management, key personnel, strategy, or customers."]]
[[/GREPCENT_TABLE]]

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. 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.

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In conjunction with the re-segmentation during the second quarter of 2022, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the previous Uniforms and Related Products segment was lower than its carrying value primarily as the result of current market conditions, decline in expected cash flows and decrease in the Company’s stock price. During the third quarter of 2022, the Company determined that a triggering event occurred in relation to the depressed market price of the Company’s common stock and corresponding significant decline in the Company’s market capitalization. As a result, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the Branded Products segment was lower than its carrying value. Consequently, the Company recorded a non-cash goodwill impairment charge of $45.9 million during the year ended December 31, 2022. As of December 31, 2022, the Company had no remaining goodwill balance. The fair value of goodwill in each impairment test was determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to their respective present values, and a market approach. The valuation methodology and underlying financial information included in the Company’s determination of fair value required significant judgments by management. The principal assumptions used in the Company’s discounted cash flow analysis consisted of (a) long-term projections of financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates. Under the market approach, the principal assumption included an estimate of a control premium.

In conjunction with the Company’s realignment of its reportable segments during the second quarter of 2022, the Company began an effort to centralize certain branding and go-to-market strategies under the BAMKO brand and determined that it would no longer use certain trade names associated with branded products. The Company’s rebranding efforts resulted in a $5.6 million impairment of indefinite-lived trade names related to its Branded Products segment during the year ended December 31, 2022.

For the year ended December 31, 2023, the Company completed its testing of indefinite-lived intangible assets and determined that the fair value was more than its carrying value. As of December 31, 2023 and 2022, indefinite-lived intangible assets of $13.6 million and $14.2 million were included in the Branded Products segment and the Healthcare Apparel segment, respectively.

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, 2023.

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, 2023, there was no significant change in total unrecognized tax benefits. As of December 31, 2023, we had an accrued liability of $0.8 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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