SUPERIOR GROUP OF COMPANIES, INC. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the Condensed Consolidated Financial Statements in Part I, Item 1 (“Financial Statements”) of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023. Cautionary Note Regarding Forward Looking Statements Certain matters discussed in this Form 10-Q are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified by use of the words “may,” “will,” “should,” “could,” “expect,” "anticipate,” “estimate,” “believe,” “intend,” “project,” “potential,” or “plan” or the negative of these words or other variations on these words or comparable terminology. Forward-looking statements in this Quarterly Report on Form 10-Q may include, without limitation: (1) projections of revenue, income, and other items relating to our financial position and results of operations, including short term and long term plans for cash, (2) statements of our plans, objectives, strategies, goals and intentions, (3) statements regarding the capabilities, capacities, market position and expected development of our business operations and (4) statements of expected industry and general economic trends. Such forward-looking statements are subject to certain risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the following: the impact of competition; uncertainties related to supply disruptions, inflationary environment (including with respect to the cost of finished goods and raw materials and shipping costs), employment levels (including labor shortages) and general economic and political conditions in the areas of the world in which the Company operates or from which it sources its supplies or the areas of the United States of America (“U.S.” or “United States”) in which the Company’s customers are located; changes in the healthcare, retail chain, food service, transportation and other industries where uniforms and service apparel are worn; our ability to identify suitable acquisition targets, discover liabilities associated with such businesses during the diligence process, successfully integrate any acquired businesses, or successfully manage our expanding operations; the price and availability of raw materials; attracting and retaining senior management and key personnel; the effect of the Company ’ s previously disclosed material weakness in internal control over financial reporting; the Company ’ s ability to successfully remediate its material weakness in internal control over financial reporting and to maintain effective internal control over financial reporting ; and other factors described in the Company’s filings with the Securities and Exchange Commission, including those described in the “Risk Factors” section herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 . Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances, except as may be required by law. 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 chain, 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. 19 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 apparel. We sell our brands of healthcare service apparel to healthcare laundries, dealers, distributors, retailers and consumers 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® (within CID Resources), will continue to provide opportunities for growth and increased market share. 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. In response to inflationary pressures, the U.S. Federal Reserve has repeatedly 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, including 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 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. The effects of the Israel-Hamas war or a wider conflict in the Middle East, prolonged inflationary conditions, high and/or increased interest rates, additional sanctions or retaliatory measures related to the Russia-Ukraine crisis, the Middle East crisis, the civil unrest in Haiti, 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. Summary of Results Net Income The Company generated net income of $0.6 million and $1.2 million during the three months ended June 30, 2024 and 2023, respectively. The decrease in net income during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was primarily due to an increase in selling and administrative expenses, partially offset by an increase in gross margins in our Branded Products and Contact Centers segments and a decrease in interest expense. The Company generated net income of $4.5 million and $2.1 million during the six months ended June 30, 2024 and 2023, respectively. The increase in net income during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to increases in net sales and gross margins, particularly in our Branded Products and Contact Centers segments, and a decrease in interest expense, partially offset by an increase in selling and administrative expenses. 20 EBITDA EBITDA (a non-GAAP financial measure) was $5.6 million and $7.4 million during the three months ended June 30, 2024 and 2023, respectively. EBITDA during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 decreased primarily due to higher selling and administrative expenses, partially offset by an increase in gross margins in our Branded Products and Contact Centers segments. EBITDA was $15.2 million and $14.3 million during the six months ended June 30, 2024 and 2023, respectively. EBITDA during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 increased primarily due to increases in net sales and gross margins, particularly in our Branded Products and Contact Centers segments, partially offset by higher selling and administrative expenses. 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. Operations Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 For the Three Months Ended June 30, 2024 2023 $ Change % Change Net sales: Branded Products $ 81,296 $ 79,592 $ 1,704 2.1 % Healthcare Apparel 26,592 28,072 (1,480 ) (5.3 %) Contact Centers 24,832 22,758 2,074 9.1 % Net intersegment eliminations (984 ) (1,260 ) 276 (21.9 %) Consolidated net sales 131,736 129,162 2,574 2.0 % Gross margin: Branded Products 28,126 25,640 2,486 9.7 % Healthcare Apparel 10,200 10,419 (219 ) (2.1 %) Contact Centers 12,961 12,204 757 6.2 % Net intersegment eliminations (532 ) (667 ) 135 (20.2 %) Consolidated gross margin 50,755 47,596 3,159 6.6 % Selling and administrative expenses: Branded Products 22,969 20,362 2,607 12.8 % Healthcare Apparel 9,879 9,466 413 4.4 % Contact Centers 10,533 9,614 919 9.6 % Intersegment Eliminations (532 ) (667 ) 135 (20.2 %) Other 5,526 4,607 919 19.9 % Consolidated selling and administrative expenses 48,375 43,382 4,993 11.5 % Other periodic pension cost 189 214 (25 ) (11.7 %) Interest expense 1,541 2,624 (1,083 ) (41.3 %) Income before income tax expense 650 1,376 (726 ) (52.8 %) Income tax expense 50 163 (113 ) (69.3 %) Net income $ 600 $ 1,213 $ (613 ) (50.5 %) 21 Net Sales Net sales for the Company increased 2.0%, or $2.6 million, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase was attributable to net sales increases in our Contact Centers and Branded Products segments, partially offset by a decrease in net sales in our Healthcare Apparel segment. Branded Products net sales increased 2.1%, or $1.7 million, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase was primarily due to higher order volume from larger customers driven by increased demand for our products, as well as increased pricing. Healthcare Apparel net sales decreased 5.3%, or $1.5 million, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The decrease was primarily due to lower volume from our store-based wholesale customers, partially offset by an increase in online sales volume from both our wholesale customers, as well as, from our direct-to-consumer website. The lower volume from our store-based wholesale customers was primarily driven by lower demand and timing of customer orders. Contact Centers net sales increased 9.1% or $2.1 million, before intersegment eliminations for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase was primarily attributable to sales growth from expanding services to existing customers. Gross Margin Gross margin rate for the Company was 38.5% for the three months ended June 30, 2024 and 36.8% for the three months ended June 30, 2023. The rate increase was due to an improvement in gross margin rates in our Branded Products and Healthcare Apparel segments, partially offset by a decrease in gross margin rate in our Contact Centers segment. Gross margin rate for our Branded Products segment was 34.6% for the three months ended June 30, 2024 and 32.2% for the three months ended June 30, 2023. The rate increase was primarily driven by an increase in sales volume from higher margin customers in the current year period. Gross margin rate for our Healthcare Apparel segment was 38.4% for the three months ended June 30, 2024 and 37.1% for the three months ended June 30, 2023. The rate increase was primarily driven by lower sourcing costs. Gross margin rate for our Contact Centers segment was 52.2% for the three months ended June 30, 2024 and 53.6% for the three months ended June 30, 2023. The rate decrease was primarily due to increased employee related costs of our agents including agent training resulting in an increase in non-billable hours during the current year period, partially offset by sales growth from existing customers. Selling and Administrative Expenses As a percentage of net sales, total selling and administrative expenses was 36.7% for the three months ended June 30, 2024 and 33.6% for the three months ended June 30, 2023. The rate increase was primarily driven by increases in employee related costs, third-party professional services and expenditures related to marketing and advertising activities. As a percentage of net sales, selling and administrative expenses for our Branded Products segment was 28.3% for the three months ended June 30, 2024 and 25.6% for the three months ended June 30, 2023. The rate increase was primarily driven by increased employee related costs, including sales commissions, and an increase in expense relating to acquisition-related contingent liabilities driven by fair market value adjustments in 2024 as compared to 2023. As a percentage of net sales, selling and administrative expenses for our Healthcare Apparel segment was 37.2% for the three months ended June 30, 2024 and 33.7% for the three months ended June 30, 2023. The rate increase was primarily driven by an increase in expenditures related to marketing and advertising activities. As a percentage of net sales, selling and administrative expenses for our Contact Centers segment was 42.4% for the three months ended June 30, 2024 and 42.2% for the three months ended June 30, 2023. The increase in selling and administrative expenses was primarily driven by increased employee related expenses, including both headcount and select pay rate increases to support sales growth. 22 Interest Expense Interest expense decreased to $1.5 million for the three months ended June 30, 2024 from $2.6 million for three months ended June 30, 2023. This decrease was due to a $52.8 million decrease in our weighted average outstanding borrowings along with a decrease in the weighted average interest rate on those borrowings from 7.2% for the three months ended June 30, 2023 to 6.5% for the three months ended June 30, 2024. Income Taxes Income tax expense decreased to $0.1 million for the three months ended June 30, 2024 from $0.2 million for the three months ended June 30, 2023. The effective tax rate was 7.7% and 11.8% for the three months ended June 30, 2024 and 2023, respectively. Income tax expense and the effective tax rate for the three months ended June 30, 2024 and June 30, 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 tax rate was further favorably impacted by the windfall benefits associated with the stock option exercises during the three months ended June 30, 2024. The effective tax rate may vary from quarter to quarter 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. Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023 For the Six Months Ended June 30, 2024 2023 $ Change % Change Net sales: Branded Products $ 168,364 $ 161,443 $ 6,921 4.3 % Healthcare Apparel 55,829 56,226 (397 ) (0.7 %) Contact Centers 48,384 44,814 3,570 8.0 % Net intersegment eliminations (1,999 ) (2,548 ) 549 (21.5 %) Consolidated net sales 270,578 259,935 10,643 4.1 % Gross margin: Branded Products 59,867 51,539 8,328 16.2 % Healthcare Apparel 21,710 20,519 1,191 5.8 % Contact Centers 25,605 23,993 1,612 6.7 % Net intersegment eliminations (1,110 ) (1,347 ) 237 (17.6 %) Consolidated gross margin 106,072 94,704 11,368 12.0 % Selling and administrative expenses: Branded Products 46,263 40,415 5,848 14.5 % Healthcare Apparel 19,691 18,968 723 3.8 % Contact Centers 20,954 19,278 1,676 8.7 % Intersegment Eliminations (1,110 ) (1,347 ) 237 (17.6 %) Other 11,326 9,447 1,879 19.9 % Consolidated selling and administrative expenses 97,124 86,761 10,363 11.9 % Other periodic pension cost 378 428 (50 ) (11.7 %) Interest expense 3,328 5,194 (1,866 ) (35.9 %) Income before income tax expense 5,242 2,321 2,921 125.9 % Income tax expense 730 220 510 231.8 % Net income $ 4,512 $ 2,101 $ 2,411 114.8 % Net Sales Net sales for the Company increased 4.1%, or $10.6 million, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase was attributable to net sales increases in our Branded Products and Contact Centers segments, slightly offset by a decrease in net sales in our Healthcare Apparel segment. 23 Branded Products net sales increased 4.3%, or $6.9 million, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase was primarily due to higher order volume from larger customers, as well as increased pricing. Healthcare Apparel net sales decreased 0.7%, or $0.4 million, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease was primarily due to lower volume from our store-based wholesale customers, partially offset by an increase in online sales volume from both our wholesale customers, as well as, from our direct-to-consumer website. Contact Centers net sales increased 8.0% or $3.6 million, before intersegment eliminations for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase in net sales was primarily attributed to sales growth from existing customers. Gross Margin Gross margin rate for the Company was 39.2% for the six months ended June 30, 2024 and 36.4% for the six months ended June 30, 2023. The rate increase was due to an improvement in gross margin rates in our Branded Products and Healthcare Apparel segments. Gross margin rate for our Branded Products segment was 35.6% for the six months ended June 30, 2024 and 31.9% for the six months ended June 30, 2023. The rate increase was primarily driven by a favorable shift in the mix of pricing and customers. Gross margin rate for our Healthcare Apparel segment was 38.9% for the six months ended June 30, 2024 and 36.5% for the six months ended June 30, 2023. The rate increase was primarily driven by lower supply chain costs, as well as, challenging market conditions experienced in the prior year period. Gross margin rate for our Contact Centers segment was 52.9% for the six months ended June 30, 2024 and 53.5% for the six months ended June 30, 2023. The rate decrease was primarily due to increased employee related costs of our agents, partially offset by sales growth from existing customers. Selling and Administrative Expenses As a percentage of net sales, total selling and administrative expenses was 35.9% for the six months ended June 30, 2024 and 33.4% for the six months ended June 30, 2023. The rate increase was primarily driven by increased employee related costs, an increase in expense relating to acquisition-related contingent liabilities from a gain of $0.7 million in 2023 to a loss of $0.3 million in 2024, unrealized losses of $0.7 million recognized in 2024 compared to unrealized gains of $0.1 million recognized in the prior year period on written put options and increased expenditures related to marketing and advertising activities. As a percentage of net sales, selling and administrative expenses for our Branded Products segment was 27.5% for the six months ended June 30, 2024 and 25.0% for the six months ended June 30, 2023. The rate increase was primarily attributed to increased employee related costs, including sales commissions, and an increase in expense relating to acquisition-related contingent liabilities driven by fair market value adjustments in 2024 as compared to 2023. As a percentage of net sales, selling and administrative expenses for our Healthcare Apparel segment was 35.3% for the six months ended June 30, 2024 and 33.7% for the six months ended June 30, 2023. The rate increase was primarily attributable to an increase in expenditures related to marketing and advertising activities. As a percentage of net sales, selling and administrative expenses for our Contact Centers segment was 43.3% for the six months ended June 30, 2024 and 43.0% for the six months ended June 30, 2023. The increase in selling and administrative expenses was primarily driven by increased employee related expenses, including both headcount and select pay rate increases to support sales growth. Interest Expense Interest expense decreased to $3.3 million for the six months ended June 30, 2024 from $5.2 million for six months ended June 30, 2023. This decrease was due to a $55.1 million decrease in our weighted average outstanding borrowings along with a decrease in the weighted average interest rate on our outstanding borrowings from 6.9% for the six months ended June 30, 2023 to 6.6% for the six months ended June 30, 2024. 24 Income Taxes Income tax expense increased to $0.7 million for the six months ended June 30, 2024 from $0.2 million for the six months ended June 30, 2023. The effective tax rate was 13.9% and 9.5% for the six months ended June 30, 2024 and 2023, respectively. Income tax expense and the effective tax rate for the six months ended June 30, 2024 and June 30, 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 tax rate was further favorably impacted by the windfall benefits associated with the stock option exercises during the six months ended June 30, 2024 The effective tax rate may vary from quarter to quarter 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. 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. 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. 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 was $13.4 million as of June 30, 2024 and $19.9 million as of December 31, 2023. Working capital was $169.3 million at June 30, 2024 compared to $178.8 million at December 31, 2023. The decrease in working capital was primarily due to decreases in accounts receivable, cash and cash equivalents, and inventories, partially offset by a decrease in current liabilities and an increase in prepaid expenses and other current assets. The decrease in accounts receivable was primarily related to lower sales in our Branded Products segment during the six months ended June 30, 2024 compared to the six months ended December 31, 2023 and the collection of aged customer receivables. The decrease in cash and cash equivalents was driven by the repayment of outstanding borrowings with excess cash generated from operating activities during the six months ended June 30, 2024. The reduction of inventories was driven by the sale of existing inventory stock and the targeted reduction in certain inventory products within our Branded Products segment. The decreases in current liabilities include a reduction in accounts payable primarily driven by the timing of payments for inventory purchases within our Branded Products segment and a decrease in other current liabilities which was primarily related to employee-related accruals as of December 31, 2023 that were paid in 2024, including accrued bonus compensation, and the expiration of written put options. The increase in prepaid expenses and other current assets was driven by increases in prepaid income taxes and insurance. Material Short-Term Plans for Cash For the next twelve months, our primary capital requirements are to maintain our operations, meet contractual obligations, fund capital expenditures, pay dividends and for 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. 25 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 long term contractual obligations and the continuation of the Company’s ongoing capital expenditure program designed to improve the effectiveness and capabilities of our 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, acquisition-related contingent liabilities, unfunded supplemental executive retirement plan liabilities and non-qualified deferred compensation plan liabilities. 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. 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): Six Months Ended June 30, 2024 2023 Net cash provided by (used in): Operating activities $ 16,300 $ 38,095 Investing activities (1,974 ) (3,643 ) Financing activities (20,013 ) (33,722 ) Effect of exchange rates on cash (835 ) 297 Net increase (decrease) in cash and cash equivalents $ (6,522 ) $ 1,027 Operating Activities. The decrease in net cash provided by operating activities during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily attributable to increases in cash outflows for accounts payable and other current liabilities and inventories and a decrease in cash inflows from contract assets, partially offset by an increase in net income. Working capital cash changes during the six months ended June 30, 2024 primarily included decreases of $10.6 million in accounts receivable, $6.4 million in accounts payable and other current liabilities and $3.9 million in inventories, and increases of $4.5 million in contract assets. Working capital cash changes during the six months ended June 30, 2023 primarily included increases of $10.6 million in inventories, $8.9 million in accounts receivable and $5.4 million in contract assets. Investing Activities. The decrease in net cash used in investing activities during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was attributable to a decrease of $1.7 million in capital expenditures. Financing Activities. The decrease in net cash used in financing activities during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily attributable to a decrease of $13.0 million in net repayments of debt. 26 Credit Facilities (See Note 3 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 June 30, 2024, the Company had $78.5 million in outstanding borrowings under its Credit Facilities, consisting of $11.0 million outstanding under the revolving credit facility and $67.5 million outstanding under a term loan. As of June 30, 2024, the Company had undrawn capacity of $114.0 million under the revolving credit facility. 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 6.4% as of June 30, 2024. 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 June 30, 2024, there were no outstanding letters of credit under the revolving credit facility. Contractual principal payments for the term loan are as follows: remainder of 2024 - $2.8 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 June 30, 2024, the Company was in compliance with these ratios. Dividends and Share Repurchase Program During the six months ended June 30, 2024 and 2023, the Company paid cash dividends of $4.7 million and $4.6 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. At June 30, 2024, 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. 27 Critical Accounting Estimates See Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2023. Non-GAAP Financial Measure EBITDA, which is a non-GAAP financial measure, is defined as net income excluding interest expense, income tax expense and depreciation and amortization expense. 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 and 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): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net income $ 600 $ 1,213 $ 4,512 $ 2,101 Interest expense 1,541 2,624 3,328 5,194 Income tax expense 50 163 730 220 Depreciation and amortization 3,368 3,428 6,620 6,816 EBITDA $ 5,559 $ 7,428 $ 15,190 $ 14,331 ITEM 3. Quantitati ve and Qualitative Disclosures a bout 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 is based upon the secured overnight financing rate (“SOFR”). As SOFR is a relatively new reference rate with a limited history, there may or may not be more volatility than with other reference rates such as LIBOR, which may result in increased borrowing costs for the Company. A hypothetical increase in the SOFR of 100 basis points as of January 1, 2024 would have resulted in approximately $0.4 million in additional pre-tax interest expense for the six months ended June 30, 2024. For further information regarding our debt instruments, see Note 3 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 contracts are denominated in foreign currencies. We cannot predict the effect of exchange rate fluctuations on our operating results. In certain cases, we may enter into foreign currency cash flow hedges to reduce the variability of cash flows associated with our sales and expenses denominated in foreign currency. As of June 30, 2024, 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. 28 Financial results of our foreign subsidiaries in the Branded 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, Colombian peso 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 transaction gains (losses) within selling and administrative expenses in our statements of comprehensive income. During the six months ended June 30, 2024 and 2023, 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 six months ended June 30, 2024 and 2023 included a foreign currency translation adjustment loss of $1.7 million and a foreign currency translation adjustment gain of $0.6 million, respectively.