0001101396 DELTA APPAREL, INC false --09-30 Q3 2023 98 109 115,383 108,534 0.01 0.01 2,000,000 2,000,000 0 0 0 0 0.01 0.01 15,000,000 15,000,000 9,646,972 9,646,972 7,001,020 6,915,663 2,645,952 2,731,309 1.3 10,000,000 0 5 5 5 7.9 August 31, 2025 7.75 December 31, 2025 7.75 May 31, 2027 August 31, 2027 2 20.0 3.18 0 20 20 10 15 4 2.3 2.3 2.2 2.2 In fiscal 2021, the Delta Group operating earnings included $1.3 million of expense, reported within "Other loss (income), net", related to two catastrophic hurricanes that disrupted operations during the December 2020 quarter. 00011013962022-10-022023-07-01 xbrli:shares 00011013962023-08-04 iso4217:USD 00011013962023-07-01 00011013962022-10-01 iso4217:USDxbrli:shares 00011013962023-04-022023-07-01 00011013962022-04-032022-07-02 00011013962021-10-032022-07-02 0001101396us-gaap:CommonStockMember2022-10-01 0001101396us-gaap:AdditionalPaidInCapitalMember2022-10-01 0001101396us-gaap:RetainedEarningsMember2022-10-01 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Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 1, 2023

OR

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission File Number 1-15583

 

DELTA APPAREL, INC.

(Exact name of registrant as specified in its charter)

 

Georgia

 

58-2508794

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

2750 Premier Parkway, Suite 100

 

 

Duluth, Georgia

 

30097

(Address of principal executive offices)

 

(Zip Code)

 

(678) 775-6900

 

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report.)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.01

 

DLA

 

NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer ☐

 

Accelerated filer ☑

 

Non-accelerated filer ☐

 

Smaller reporting company ☑

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

As of August 4, 2023, there were outstanding 7,010,020 shares of the registrant’s common stock, par value of $0.01 per share, which is the only class of outstanding common or voting stock of the registrant.

 

 

 
Table of Contents
 

TABLE OF CONTENTS

 

 

 

Page

PART I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets — June 2023 and September 2022

3

 

 

 

 

Condensed Consolidated Statements of Operations — Three and Nine Months ended June 2023 and June 2022

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income — Three and Nine Months ended June 2023 and June 2022

5

 

 

 

 

Condensed Consolidated Statements of Shareholders' Equity — Three and Nine Months ended June 2023 and June 2022

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Nine Months ended June 2023 and June 2022

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

Note A—Basis of Presentation and Description of Business

8
  Note B—Accounting Policies 9
  Note C—New Accounting Standards 9
  Note D—Revenue Recognition 10
  Note E—Inventories 11
  Note F—Debt 11
  Note G—Selling, General and Administrative Expense 11
  Note H—Stock-Based Compensation 12
  Note I—Purchase Contracts 12
  Note J—Business Segments 13
  Note K—Income Taxes 14
  Note L—Derivatives and Fair Value Measurements 14
  Note M—Legal Proceedings 15
  Note N—Repurchase of Common Stock 15
  Note O—Goodwill and Intangible Assets 16
  Note P—Subsequent Events 16
     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17
     

Item 4.

Controls and Procedures

20

 

 

 

PART II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

20

 

 

 
Item 1A. Risk Factors 20
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

Item 5.

Other Information

20

 

 

 

Item 6.

Exhibits

21

 

 

 

Signatures

 

22

 

 

 

Exhibits

 

 
EX-10.1  

EX-31.1

 

EX-31.2

 

EX-32.1

 

EX-32.2

 

 

 
Table of Contents
 

PART 1.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share amounts and per share data)

(Unaudited)

 

  

June 2023

  

September 2022

 

Assets

        

Cash and cash equivalents

 $296  $300 

Accounts receivable, less allowances of $98 and $109, respectively

  41,733   68,215 

Other receivables

  889   1,402 

Income tax receivable

  1,898   1,969 

Inventories, net

  226,196   248,538 

Prepaid expenses and other current assets

  4,221   2,755 

Total current assets

  275,233   323,179 
         

Property, plant and equipment, net of accumulated depreciation of $115,383 and $108,534, respectively

  69,040   74,109 

Goodwill

  37,897   37,897 

Intangibles, net

  22,264   24,026 

Deferred income taxes

  3,105   1,342 

Operating lease assets

  54,054   50,275 

Equity method investment

  9,356   9,886 

Other assets

  2,020   2,967 

Total assets

 $472,969  $523,681 
         

Liabilities and Equity

        

Liabilities:

        

Accounts payable

 $63,897  $83,553 

Accrued expenses

  17,424   27,414 

Income taxes payable

  695   379 

Current portion of finance leases

  8,942   8,163 

Current portion of operating leases

  8,980   8,876 

Current portion of long-term debt

  10,180   9,176 

Total current liabilities

  110,118   137,561 
         

Long-term income taxes payable

  2,131   2,841 

Long-term finance leases

  15,871   16,776 

Long-term operating leases

  46,664   42,721 

Long-term debt

  131,461   136,750 

Deferred income taxes

  -   4,310 

Total liabilities

 $306,245  $340,959 
         

Shareholder's equity:

        

Preferred stock - $0.01 par value, 2,000,000 shares authorized, none issued and outstanding

  -   - 

Common stock - $0.01 par value, 15,000,000 authorized, 9,646,972 shares issued, and 7,001,020 and 6,915,663 shares outstanding as of June 2023 and September 2022, respectively

  96   96 

Additional paid-in capital

  61,448   61,961 

Retained earnings

  149,756   166,600 

Accumulated other comprehensive income

  21   141 

Treasury stock - 2,645,952 and 2,731,309 shares as of June 2023 and September 2022, respectively

  (43,896)  (45,420)

Equity attributable to Delta Apparel, Inc.

  167,425   183,378 

Equity attributable to non-controlling interest

  (701)  (656)

Total equity

  166,724   182,722 

Total liabilities and equity

 $472,969  $523,681 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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Table of Contents
 

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations 

(Amounts in thousands, except per share data)

(Unaudited)

 

   

Three Months Ended

    

Nine Months Ended

  
   

June 2023

    

June 2022

    

June 2023

    

June 2022

  
                                 

Net sales

   $ 106,319     $ 126,875     $ 323,949     $ 369,319  

Cost of goods sold

     92,384       96,182       280,181       282,100  

Gross profit

     13,935       30,693       43,768       87,219  
                                 

Selling, general and administrative expenses

     18,491       22,416       56,658       59,613  

Other (income), net

     (95 )     (1,018 )     (452 )     (1,947 )

Operating (loss) income

     (4,461 )     9,295       (12,438 )     29,553  
                                 

Interest expense, net

     4,049       1,971       10,662       5,370  

(Loss) earnings before (benefit from) provision for income taxes

     (8,510 )     7,324       (23,100 )     24,183  

(Benefit from) provision for income taxes

     (2,218 )     1,087       (6,214 )     4,149  

Consolidated net (loss) earnings

     (6,292 )     6,237       (16,886 )     20,034  

Net (loss) income attributable to non-controlling interest

     (5 )     (3 )     (45 )     11  

Net (loss) earnings attributable to shareholders

   $ (6,287 )   $ 6,240     $ (16,841 )   $ 20,023  
                                 

Basic (loss) earnings per share

   $ (0.90 )   $ 0.90     $ (2.41 )   $ 2.87  

Diluted (loss) earnings per share

   $ (0.90 )   $ 0.88     $ (2.41 )   $ 2.84  
                                 

Weighted average number of shares outstanding

     7,001       6,946       6,985       6,966  

Dilutive effect of stock awards

     -       119       -       95  

Weighted average number of shares assuming dilution

     7,001       7,065       6,985       7,061  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Amounts in thousands)

(Unaudited)

 

   

Three Months Ended

    

Nine Months Ended

  
   

June 2023

    

June 2022

    

June 2023

    

June 2022

  
                                 

Net (loss) earnings attributable to shareholders

   $ (6,287 )   $ 6,240     $ (16,841 )   $ 20,023  

Other comprehensive (loss) income related to unrealized (loss) gain on derivatives, net of income tax

     (159 )     186       (121 )     779  

Consolidated comprehensive (loss) income

   $ (6,446 )   $ 6,426     $ (16,962 )   $ 20,802  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Amounts in thousands, except share amounts)

(Unaudited)

 

                                   

Accumulated

                                  
                   

Additional

            

Other

                    

Non-

          
    Common Stock     Paid-In     Retained     Comprehensive     Treasury Stock     Controlling          
   

Shares

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Shares

    

Amount

    

Interest

    

Total

  

Balance as of September 2022

     9,646,972     $ 96     $ 61,961     $ 166,600     $ 141       2,731,309     $ (45,420 )   $ (656 )   $ 182,722  
                                                                         

Net loss

     -       -       -       (3,565 )     -       -       -       -       (3,565 )

Other comprehensive income

     -       -       -       -       69       -       -       -       69  

Net loss attributable to non-controlling interest

     -       -       -       -       -       -       -       (34 )     (34 )

Vested stock awards

     -       -       (2,067 )     -       -       (85,357 )     1,524       -       (543 )

Stock based compensation

     -       -       665       -       -       -       -       -       665  

Balance as of December 2022

     9,646,972     $ 96     $ 60,559     $ 163,035     $ 210       2,645,952     $ (43,896 )   $ (690 )   $ 179,314  
                                                                         

Net loss

     -       -       -       (6,992 )     -       -       -       -       (6,992 )

Other comprehensive loss

     -       -       -       -       (30 )     -       -       -       (30 )

Net loss attributable to non-controlling interest

     -       -       -       -       -       -       -       (6 )     (6 )

Stock based compensation

     -       -       353       -       -       -       -       -       353  

Balance as of March 2023

     9,646,972     $ 96     $ 60,912     $ 156,043     $ 180       2,645,952     $ (43,896 )   $ (696 )   $ 172,639  
                                                                         

Net loss

     -       -       -       (6,287 )     -       -       -       -       (6,287 )

Other comprehensive loss

     -       -       -       -       (159 )     -       -       -       (159 )

Net loss attributable to non-controlling interest

     -       -       -       -       -       -       -       (5 )     (5 )

Stock based compensation

     -       -       536       -       -       -       -       -       536  

Balance as of June 2023

     9,646,972     $ 96     $ 61,448     $ 149,756     $ 21       2,645,952     $ (43,896 )   $ (701 )   $ 166,724  

 

                                   

Accumulated

                                  
                   

Additional

            

Other

                    

Non-

          
   

Common Stock

    

Paid-In

    

Retained

    

Comprehensive

    

Treasury Stock

    

Controlling

          
   

Shares

    

Amount

    

Capital

    

Earnings

     Income (Loss)    

Shares

    

Amount

    

Interest

    

Total

  

Balance as of September 2021

     9,646,972     $ 96     $ 60,831     $ 146,860     $ (786 )     2,672,312     $ (42,149 )   $ (658 )   $ 164,194  
                                                                         

Net income

     -       -       -       3,645       -       -       -       -       3,645  

Other comprehensive income

     -       -       -       -       212       -       -       -       212  

Net income attributable to non-controlling interest

     -       -       -       -       -       -       -       25       25  

Purchase of common stock

     -       -       -       -       -       74,232       (2,143 )     -       (2,143 )

Vested stock awards

     -       -       (1,766 )     -       -       (76,460 )     674       -       (1,092 )

Stock based compensation

     -       -       140       -       -       -       -       -       140  

Balance as of December 2021

     9,646,972     $ 96     $ 59,205     $ 150,505     $ (574 )     2,670,084     $ (43,618 )   $ (633 )   $ 164,981  
                                                                         

Net income

     -       -       -       10,137       -       -       -       -       10,137  

Other comprehensive income

     -       -       -       -       381       -       -       -       381  

Net loss attributable to non-controlling interest

     -       -       -       -       -       -       -       (11 )     (11 )

Vested stock awards

     -       -       -       -       -       -       -       -       -  

Purchase of common stock

     -       -       -       -       -       28,015       (846 )     -       (846 )

Stock based compensation

     -       -       714       -       -       -       -       -       714  

Balance as of March 2022

     9,646,972     $ 96     $ 59,919     $ 160,642     $ (193 )     2,698,099     $ (44,464 )   $ (644 )   $ 175,356  
                                                                         

Net income

     -       -       -       6,240       -       -       -       -       6,240  

Other comprehensive income

     -       -       -       -       186       -       -       -       186  

Net loss attributable to non-controlling interest

     -       -       -       -       -       -       -       (3 )     (3 )

Purchase of common stock

     -       -       -       -       -       33,934       (968 )     -       (968 )

Stock based compensation

     -       -       903       -       -       -       -       -       903  

Balance as of June 2022

     9,646,972     $ 96     $ 60,822     $ 166,882     $ (7 )     2,732,033     $ (45,432 )   $ (647 )   $ 181,714  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

   

Nine Months Ended

  
   

June 2023

    

June 2022

  

Operating activities:

                

Consolidated net (loss) earnings

   $ (16,886 )   $ 20,034  

Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities:

                

Depreciation and amortization

     11,397       11,272  

Amortization of deferred financing fees

     519       244  

Provision for inventory market reserves

     (3,707 )     1,484  

Change in reserves for allowances on accounts receivable

     (11 )     (160 )

(Benefit from) provision for deferred income taxes

     (6,033 )     488  

Non-cash stock compensation

     1,554       1,756  

Loss on disposal of equipment

     135       348  

Loss on impairment

     831       -  

Other, net

     (710 )     (2,263 )

Changes in operating assets and liabilities:

                

Accounts receivable

     27,006       (1,251 )

Inventories

     26,049       (67,452 )

Prepaid expenses and other current assets

     (1,985 )     602  

Other non-current assets

     2,023       199  

Accounts payable

     (19,524 )     23,390  

Accrued expenses

     (9,816 )     (1,737 )

Net operating lease liabilities

     268       409  

Income taxes

     (323 )     264  

Other liabilities

     -       (1,049 )

Net cash provided by (used in) operating activities

     10,787       (13,422 )

Investing activities:

                

Purchases of property and equipment

     (3,551 )     (10,931 )

Proceeds from sale/leaseback

     4,417       -  

Proceeds from sale of equipment

     19       33  

Cash paid for intangible asset

     -       (132 )

Cash paid for business

     -       (583 )

Net cash used in investing activities

     885       (11,613 )

Financing activities:

                

Proceeds from long-term debt

     363,438       411,600  

Repayment of long-term debt

     (367,723 )     (383,919 )

Repayment of finance lease obligations

     (6,849 )     (5,604 )

Payment of deferred financing cost

     -       (850 )

Repurchase of common stock

     -       (3,934 )

Payment of withholding taxes on stock awards

     (542 )     (1,092 )

Net cash (used in) provided by financing activities

     (11,676 )     16,201  

Net decrease in cash and cash equivalents

     (4 )     (8,834 )

Cash and cash equivalents at beginning of period

     300       9,376  

Cash and cash equivalents at end of period

   $ 296     $ 542  
                 

Supplemental cash flow information

                

Finance lease assets exchanged for finance lease liabilities

   $ 6,708     $ 10,381  

Operating lease assets exchanged for operating lease liabilities

   $ 11,039     $ 6,869  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Delta Apparel, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note A— Description of Business and Basis of Presentation

 

Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and other subsidiaries, "Delta Apparel," "we," "us," "our," or the "Company") is a vertically-integrated, international apparel company with approximately 7,100 employees worldwide. We design, manufacture, source, and market a diverse portfolio of core activewear and lifestyle apparel products under our primary brands of Salt Life®, Soffe®, and Delta. We are a market leader in the on-demand, digital print and fulfillment industry, bringing DTG2Go's proprietary technology and innovation to our customers' supply chains. We specialize in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants, eRetailers, the U.S. military, and through our business-to-business digital platform. Our products are also made available direct-to-consumer on our ecommerce sites and in our branded retail stores. Our diversified go-to-market strategy allows us to capitalize on our strengths in providing activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail channels.

 

We design and internally manufacture the majority of our products, with more than 90% of the apparel units that we sell sewn in our own facilities. This allows us to offer a high degree of consistency and quality, leverage scale efficiencies, and react quickly to changes in trends within the marketplace. We have manufacturing operations located in the United States, El Salvador, Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly replenishments to retailers. We were incorporated in Georgia in 1999, and our headquarters is located in Duluth, Georgia. Our common stock trades on the NYSE American exchange under the symbol “DLA."

 

We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30.  Our 2023 fiscal year is a 52-week year and will end on September 30, 2023 ("fiscal 2023"). Accordingly, this Quarterly Report on Form 10-Q presents our results for our third quarter of fiscal 2023. Our 2022 fiscal year was a 52-week year and ended on October 1, 2022 ("fiscal 2022").

 

For presentation purposes herein, all references to period ended relate to the following fiscal years and dates:

 

Period EndedFiscal YearDate Ended
June 2022Fiscal 2022 July 2, 2022
September 2022

Fiscal 2022

 October 1, 2022
December 2022Fiscal 2023 December 31, 2022
March 2023Fiscal 2023 April 1, 2023
June 2023Fiscal 2023 July 1, 2023

 

We prepared the accompanying interim Condensed Consolidated Financial Statements in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. We believe these Condensed Consolidated Financial Statements include all normal recurring adjustments considered necessary for a fair presentation. Operating results for the three and nine months ended June 2023 are not necessarily indicative of the results that may be expected for our fiscal 2023. Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some seasonality. By diversifying our product lines and go-to-market strategies over the years, we have reduced the overall seasonality of our business. Consumer demand for apparel is cyclical and dependent upon the overall level of demand for soft goods, which may or may not coincide with the overall level of discretionary consumer spending. These levels of demand change as regional, domestic and international economic conditions change. Therefore, the distribution of sales by quarter in fiscal 2023 may not be indicative of the distribution in future years. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for our fiscal 2022, filed with the United States Securities and Exchange Commission (“SEC”).

 

Our Condensed Consolidated Financial Statements include the accounts of Delta Apparel and its wholly-owned and majority-owned domestic and foreign subsidiaries. We apply the equity method of accounting for our investment in 31% of the outstanding capital stock of a Honduran company. During the nine months ended June 2023 and June 2022, we received dividends from this investment of $1.2 million and $1.1 million, respectively. Our Ceiba Textiles manufacturing facility is leased under an operating lease arrangement with this Honduran company. During the nine months ended June 2023 and June 2022, we paid approximately $1.3 million in rent under this arrangement.

 

We make available copies of materials we file with, or furnish to, the SEC free of charge at https://ir.deltaapparelinc.com. The information found on our website is not part of this, or any other, report that we file with, or furnish to, the SEC. In addition, we will provide upon request, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to: Investor Relations Department, Delta Apparel, Inc., 2750 Premiere Parkway, Suite 100, Duluth, Georgia 30097. Requests can also be made by telephone to 864-232-5200, or via email at investor.relations@deltaapparel.com.

 

 

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Note B—Accounting Policies

 

Our accounting policies are consistent with those described in our Significant Accounting Policies in our Annual Report on Form 10-K for our fiscal 2022, filed with the SEC. See Note C for consideration of recently issued accounting standards.
 

Note C—New Accounting Standards

 

Standards Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires an entity to assess impairment of its financial instruments based on the entity's estimate of expected credit losses. Since the issuance of ASU 2016-13, the FASB released several amendments to improve and clarify the implementation guidance. These standards have been collectively codified within ASC Topic 326, Credit Losses (“ASC 326”). As a smaller reporting company as defined by the SEC, the provisions of ASC 326 are effective as of the beginning of our fiscal year 2024. We are currently evaluating the impacts of the provisions of ASC 326 on our financial condition, results of operations, cash flows, and disclosures. 

 
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Note D—Revenue Recognition

 

Our Condensed Consolidated Statements of Operations include revenue streams from retail sales at our branded retail stores; direct-to-consumer ecommerce sales on our consumer-facing websites; and sales from wholesale channels, which includes our business-to-business ecommerce and DTG2Go sales.  The table below identifies the amount and percentage of net sales by distribution channel (in thousands):

 

   

Three Months Ended

  
   

June 2023

    

June 2022

  

Retail

   $ 4,830       5 %   $ 4,412       3 %

Direct-to-consumer ecommerce

     1,870       2 %     1,145       1 %

Wholesale

     99,619       93 %     121,318       96 %

Net sales

   $ 106,319       100 %   $ 126,875       100 %

 

   

Nine Months Ended

  
   

June 2023

    

June 2022

  

Retail

   $ 11,441       4 %   $ 9,685       3 %

Direct-to-consumer ecommerce

     4,542       1 %     3,199       1 %

Wholesale

     307,966       95 %     356,435       96 %

Net sales

   $ 323,949       100 %   $ 369,319       100 %

 

The table below provides net sales by reportable segment and the percentage of net sales by distribution channel for each reportable segment (in thousands):

 

   

Three Months Ended June 2023

  
   

Net Sales

    

Retail

    

Direct-to-consumer ecommerce

    

Wholesale

  

Delta Group

   $ 89,118       0.0 %     0.4 %     99.6 %

Salt Life Group

     17,201       28.0 %     8.9 %     63.1 %

Total

   $ 106,319                          

 

   

Three Months Ended June 2022

  
   

Net Sales

    

Retail

    

Direct-to-consumer ecommerce

    

Wholesale

  

Delta Group

   $ 106,020       0.1 %     0.4 %     99.5 %

Salt Life Group

     20,855       20.8 %     3.4 %     75.8 %

Total

   $ 126,875                          

 

   

Nine Months Ended June 2023

  
   

Net Sales

    

Retail

    

Direct-to-consumer ecommerce

    

Wholesale

  

Delta Group

   $ 277,471       0.1 %     0.3 %     99.6 %

Salt Life Group

     46,478       24.4 %     8.2 %     67.4 %

Total

   $ 323,949                          

 

   

Nine Months Ended June 2022

  
   

Net Sales

    

Retail

    

Direct-to-consumer ecommerce

    

Wholesale

  

Delta Group

   $ 323,276       0.1 %     0.3 %     99.6 %

Salt Life Group

     46,043       20.3 %     5.0 %     74.7 %

Total

   $ 369,319                          

 

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Note E—Inventories

 

Inventories, net of reserves of $14.0 million and $17.7 million as of June 2023 and September 2022, respectively, consisted of the following (in thousands):

 

   

June 2023

    

September 2022

  

Raw materials

   $ 20,500     $ 22,603  

Work in process

     18,684       23,501  

Finished goods

     187,012       202,434  
    $ 226,196     $ 248,538  

 

Raw materials include finished yarn and direct materials for the Delta Group, undecorated garments for the DTG2Go business, and direct embellishment materials for the Salt Life Group.

 

 

Note F—Debt

 

Credit Facility

 

On May 10, 2016, we entered into a Fifth Amended and Restated Credit Agreement (as further amended, the “Amended Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, the Sole Lead Arranger and the Sole Book Runner, and the financial institutions named therein as Lenders, which are Wells Fargo, PNC Bank, and Regions Bank. Our subsidiaries M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC (collectively, the "Borrowers"), are co-borrowers under the Amended Credit Agreement. The Borrowers entered into amendments to the Amended Credit Agreement with Wells Fargo and the other lenders on November 27, 2017, March 9, 2018, October 8, 2018, November 19, 2019, April 27, 2020, August 28, 2020, June 2, 2022, January 3, 2023, February 3, 2023, and March 23, 2023.

 

On June 2, 2022, the Borrowers entered into the Seventh Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein (the “Seventh Amendment”). The Seventh Amendment, (i) removes LIBOR based borrowing and utilizes SOFR (Secured Overnight Financing Rate) as the primary pricing structure, (ii) amends the pricing structure based on SOFR plus a CSA (Credit Spread Adjustment) defined as 10 bps for 1 month and 15 bps for 3-month tenors, (iii) sets the SOFR floor to 0 bps, (iv) reloads the fair market value of real estate and intellectual property within the borrowing base calculation and resets their respective amortization schedules, (v) sets the maturity date to 5 years from the closing date, and (vi) updates the requirement for our Fixed Charge Coverage Ratio (“FCCR”) for the preceding 12-month period to not be less than 1.0 (previously 1.1).

 

On January 3, 2023, the Borrowers entered into the Eighth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein (the “Eighth Amendment”). The Eighth Amendment essentially clarifies the Amended Credit Agreement’s provisions regarding the inclusion of eligible in-transit inventory in the borrowing base and amends the definition of Increased Reporting Event to include 12.5% of the lesser of the borrowing base and the maximum revolver amount as opposed to 12.5% of the line cap. 

 

On February 3, 2023, the Borrowers entered into the Ninth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein (“Ninth Amendment”). The Ninth Amendment adds an Accommodation Period beginning on the amendment date and continuing through the date following September 30, 2023, upon which Borrowers satisfy minimum availability thresholds and during which: (i) the minimum borrowing availability thresholds applicable to the Amended Credit Agreement are (a) through (and including) April 1, 2023, $7,500,000, (b) on and after April 2, 2023 through (and including) June 4, 2023, $9,000,000, (c) on and after June 5, 2023, through the date following September 30, 2023, upon which Borrowers satisfy minimum availability thresholds, $10,000,000; and (d) at all times thereafter, $0; (ii) the FCCR covenant is suspended; (iii) Borrowers must maintain specified minimum EBITDA levels for trailing three-month periods starting March 4, 2023; (iv) the Applicable Margin with respect to loans under the Amended Credit Agreement is increased by 50 basis points; and (v) a Cash Dominion Trigger Event occurs if availability is less than $2,000,000.

 

On March 23, 2023, the Borrowers entered into the Tenth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein to account for specified costs and expenses in calculating EBITDA for purposes of the Amended Credit Agreement.

 

The Amended Credit Agreement allows us to borrow up to $170 million (subject to borrowing base limitations), including a maximum of $25 million in letters of credit. Provided that no event of default exists, we have the option to increase the maximum credit to $200 million (subject to borrowing base limitations), conditioned upon the Administrative Agent's ability to secure additional commitments and customary closing conditions. The Amended Credit Agreement contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in ASC 470, Debt) whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. We classify borrowings under the Amended Credit Agreement as long-term debt with consideration of current maturities.

 

As of June 2023, we had $126.4 million outstanding under our U.S. revolving credit facility at an average interest rate of 7.8%. Our cash on hand combined with the availability under the U.S. revolving credit facility totaled $14.4 million. At  June 2023 and September 2022, there was $16.4 million and $24.9 million, respectively, of retained earnings free of restrictions to make cash dividend payments or stock repurchases to the extent permitted under our U.S. revolving credit facility.

 

Honduran Debt

 

Since March 2011, we have entered into term loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, to finance investments in both the operations and capital expansion of our Honduran facilities. In December 2020, we entered into a new term loan and revolving credit facility with Banco Ficohsa, both with five-year terms, and simultaneously settled the prior term loans and revolving credit facility with outstanding balances at the time of settlement of $1.1 million and $9.5 million, respectively. Additionally, in May 2022, we entered into a new term loan with a five-year term with a principal amount of $3.7 million. These loans are secured by a first-priority lien on the assets of our Honduran operations and are not guaranteed by our U.S. entities. These loans are denominated in U.S. dollars, and the carrying value of the debt approximates its fair value. As the revolving credit facility permits us to re-borrow funds up to the amount repaid, subject to certain objective covenants, and we intend to re-borrow funds, subject to those covenants, the amounts borrowed are classified as long-term debt.

 

El Salvador Debt

 

In September 2022, we entered into a new term loan with a five-year term with a principal amount of $3.0 million with Banco Ficohsa, a Panamanian bank, to finance investments in our El Salvador operations. This loan is secured by a first-priority lien on the assets of our El Salvador operations and is not guaranteed by our U.S. entities. The loan is denominated in U.S. dollars, and the carrying value of the debt approximates its fair value. Information about this loan and the outstanding balance as of March 2023 is listed as part of the long-term debt schedule below.

 

Additional information about these loans and the outstanding balances as of  June 2023 is as follows (in thousands):

 

  

June 2023

 

Revolving credit facility with Banco Ficohsa, a Honduran bank, with interest at 7.9%, due August 2025

 $3,909 

Term loan with Banco Ficohsa, a Honduran bank, interest at 7.75%, quarterly installments which began September 2021 and are due through December 2025.

  5,072 

Term loan with Banco Ficohsa, a Honduran bank, interest at 7.75%, quarterly installments which began March 2023 and are due through May 2027.

  3,308 

Term loan with Banco Ficohsa, a Panamanian bank, interest at the prevailing market rate within the Panamanian Banking Market, monthly installments which began October 2022 and are due through August 2027.

  2,627 

  
 

Note G—Selling, General and Administrative Expense

 

We include in selling, general and administrative ("SG&A") expenses the costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking, packing, and shipping goods for delivery to our customers. Distribution costs included in SG&A expenses totaled $5.2 million and $5.6 million for the June 2023 and June 2022 quarters, respectively. Distribution costs included in SG&A expenses totaled $16.3 million and $16.8 million for the nine months ended June 2023 and June 2022, respectively. In addition, SG&A expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses, retail store build-outs, and other general and administrative expenses.

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Note H—Stock-Based Compensation

 

On February 6, 2020, our shareholders approved the Delta Apparel, Inc. 2020 Stock Plan ("2020 Stock Plan") to replace the 2010 Stock Plan, which was previously re-approved by our shareholders on February 4, 2015, and was scheduled to expire by its terms on September 14, 2020. The purpose of the 2020 Stock Plan is to continue to give our Board of Directors and its Compensation Committee the ability to offer a variety of compensatory awards designed to enhance the Company’s long-term success by encouraging stock ownership among its executives, key employees and directors. Under the 2020 Stock Plan, the Compensation Committee of our Board of Directors has the authority to determine the employees and directors to whom awards may be granted, and the size and type of each award and manner in which such awards will vest. The awards available under the plan consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, stock performance units, and other stock and cash awards. While employed by the Company or serving as a director, unvested awards become fully vested under certain circumstances as defined in the 2020 Stock Plan. Such circumstances include, but are not limited to, the participant’s death or disability. The Compensation Committee is authorized to establish the terms and conditions of awards granted under the 2020 Stock Plan, to establish, amend and rescind any rules and regulations relating to the 2020 Stock Plan, and to make any other determinations that it deems necessary. Similar to the 2010 Stock Plan, the 2020 Stock Plan limits the number of shares that may be covered by awards to any participant in a given calendar year and also limits the aggregate awards of restricted stock, restricted stock units and performance stock granted in a given calendar year. Shares are generally issued from treasury stock upon the vesting of the restricted stock units, performance units or other awards under the 2020 Stock Plan. On August 2, 2023, our Board of Directors, upon the recommendation of its Compensation Committee, approved a Declaration of Amendment to the 2020 Stock Plan. See Part II, Item 5 of this Quarterly Report on Form 10-Q for more information.

 

Compensation expense is recorded within SG&A in our Condensed Consolidated Statements of Operations over the vesting periods. During the June 2023 and June 2022 quarters, we recognized $0.6 million and $1.1 million in stock-based compensation expense, respectively. Associated with this compensation cost are income tax benefits recognized of $0.2 million and $0.2 million, respectively, for each of the three-month periods ended June 2023 and June 2022. During the nine-months ended June 2023 and June 2022, we recognized $1.6 million and $2.4 million respectively, in stock-based compensation expense. Associated with the compensation cost are income tax benefits recognized of $0.5 million and $0.4 million, respectively, for each of the nine-months periods ended June 2023 and June 2022.

 

During the December 2022 quarter, restricted stock units representing 105,000 shares of our common stock vested with the filing of our Annual Report on Form 10-K for fiscal 2022 and were issued in accordance with their respective agreements. Of these vested awards, all were payable in common stock.

 

During the December 2022 quarter, performance stock units and restricted stock units representing 5,000 and 18,000 shares of our common stock, respectively, were forfeited.

 

As of June 2023, there was $2.0 million of total unrecognized compensation cost related to unvested awards granted under the 2020 Stock Plan. This cost is expected to be recognized over a period of 2.4 years.
 

Note I—Purchase Contracts

 

We have entered into agreements, and have fixed prices, to purchase yarn, finished fabric, and finished apparel and headwear products. At June 2023, minimum payments under these contracts were as follows (in thousands):

 

Yarn

   $ 19,123  

Finished fabric

     1,952  

Finished products

     7,542  
    $ 28,617  

 

 

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Note J—Business Segments

 

Our operations are managed and reported in two segments, Delta Group and Salt Life Group, which reflect the manner in which the business is managed, and results are reviewed by the Chief Executive Officer, who is our chief operating decision maker.

 

The Delta Group is comprised of the following business units, which are primarily focused on core activewear styles: DTG2Go and Delta Activewear.

 

DTG2Go is a market leader in the on-demand, direct-to-garment digital print and fulfillment industry, bringing technology and innovation to the supply chains of our many customers. Our ‘On-Demand DC’ digital solution provides retailers and brands with immediate access to utilize DTG2Go’s broad network of print and fulfillment facilities, while offering the scalability to integrate digital fulfillment within the customer's own distribution facilities. We use highly-automated factory processes and our proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of our customers. Via our multi-facility fulfillment footprint across the United States, DTG2Go offers a robust digital supply chain shipping custom graphic products within 24 to 48 hours to consumers in the United States and to over 100 countries internationally. DTG2Go has made significant investments in its “digital first” retail model providing digital graphic prints that meet the high-quality standards of brands, retailers and intellectual property holders. Through integration with Delta Activewear, DTG2Go also services the eRetailer, ad-specialty, promotional and screen print marketplaces, among others.

 

Delta Activewear is a preferred supplier of activewear apparel to regional and global brands as well as direct-to-retail and wholesale markets. The Activewear business is organized around three key customer channels – Delta Direct, Global Brands, and Retail Direct – that are distinct in their go-to-market strategies and how their respective customer bases source their various apparel needs. Our Delta Direct channel services the screen print, promotional, and eRetailer markets as well as retail licensing customers that sell through to many mid-tier and mass market retailers. Delta Direct products include a broad portfolio of apparel and accessories under the Delta, Delta Platinum, and Soffe brands as well as sourced items from select third party brands. Our fashion basics line includes our Platinum Collection, which offers fresh, fashionable silhouettes with a luxurious look and feel, as well as versatile fleece offerings. We offer innovative apparel products, including the Delta Dri line of performance shirts built with moisture-wicking material to keep athletes dry and comfortable; ringspun garments with superior comfort, style and durability; and Delta Soft, a collection with an incredible feel and price. We also offer our heritage, mid- and heavier-weight Delta Pro Weight® and Magnum Weight® tee shirts.

 

The iconic Soffe brand offers activewear for spirit makers and record breakers and is widely known for the original "cheer short" with the signature roll-down waistband. Soffe carries a wide range of activewear for the entire family. Soffe's heritage is anchored in the military, and we continue to be a proud supplier to both active duty and veteran United States military personnel worldwide. The Soffe men's assortment features the tagline "anchored in the military, grounded in training" and offers everything from physical training gear certified by the respective branches of the military, classic base layers that include the favored 3-pack tees, and the iconic "ranger panty." Complementing the Delta and Soffe brand apparel, we offer customers a broad range of nationally recognized branded products including polos, outerwear, headwear, bags and other accessories. Our Soffe products are also available direct to consumers at www.soffe.com.

 

Our Global Brands channel serves as a key supply chain partner to large multi-national brands, major branded sportswear companies, trendy regional brands, and all branches of the United States armed forces, providing services ranging from custom product development to the shipment of branded products with “retail-ready” value-added services including embellishment, hangtags, and ticketing.

 

Our Retail Direct channel serves brick and mortar and online retailers by providing our portfolio of Delta, Delta Platinum, and Soffe products directly to the retail locations and ecommerce fulfillment centers of a diversified customer base including sporting goods and outdoor retailers, specialty and resort shops, farm and fleet stores, department stores, and mid-tier and mass retailers. As a key element of the integrated Delta Group segment, each of Activewear’s primary channels offer a seamless solution for replenishment strategies, small-run decoration needs, and quick reaction programs with on-demand digital print services, powered by DTG2Go.

 

The Salt Life Group is comprised of our Salt Life business, which is built on the authentic, aspirational Salt Life lifestyle brand that represents a passion for the ocean, the salt air, and, more importantly, a way of life and all it offers, from surfing, fishing, and diving to beach fun and sun-soaked relaxation. The Salt Life brand combines function and fashion with a tailored fit for the active lifestyles of those that “live the Salt Life.” With increased worldwide appeal, Salt Life has continued to provide the cotton graphic tees and logo decals that originally drove awareness for the brand, and expanded into performance apparel, swimwear, board shorts, sunglasses, bags, and accessories. Consumers can also seamlessly experience the Salt Life brand through retail partners including surf shops, specialty stores, department stores, and outdoor merchants or by accessing our Salt Life ecommerce site at www.saltlife.com.

 

Our chief operating decision maker and management evaluate performance and allocate resources based on profit or loss from operations before interest, income taxes and special charges ("segment operating earnings"). Our segment operating earnings may not be comparable to similarly titled measures used by other companies. The accounting policies of our reportable segments are the same as those described in Note 2 in our Annual Report on Form 10-K for fiscal 2022, filed with the SEC. Intercompany transfers between operating segments are transacted at cost and have been eliminated within the segment amounts shown in the following table (in thousands).

 

 

   

Three Months Ended

    

Nine Months Ended

  
   

June 2023

    

June 2022

    

June 2023

    

June 2022

  

Segment net sales:

                                

Delta Group

   $ 89,118     $ 106,020     $ 277,471     $ 323,276  

Salt Life Group

     17,201       20,855       46,478       46,043  

Total net sales

   $ 106,319     $ 126,875     $ 323,949     $ 369,319  
                                 

Segment operating earnings:

                                

Delta Group

   $ (3,616 )   $ 10,701     $ (10,974 )   $ 33,557  

Salt Life Group

     1,642       3,574       6,509       7,037  

Total segment operating (loss) earnings

   $ (1,974 )   $ 14,275     $ (4,465 )   $ 40,594  

 

The following table reconciles the segment operating (loss) earnings to the consolidated earnings before (benefit from) provision for income taxes (in thousands):

 

   

Three Months Ended

    

Nine Months Ended

  
   

June 2023

    

June 2022

    

June 2023

    

June 2022

  

Segment operating (loss) earnings

   $ (1,974 )   $ 14,275     $ (4,465 )   $ 40,594  

Unallocated corporate expenses

     2,487       4,980       7,973       11,041  

Unallocated interest expense

     4,049       1,971       10,662       5,370  

Consolidated (loss) earnings before (benefit from) provision for income taxes

   $ (8,510 )