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 December 30, 2017
OR
☐ | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
toCommission File Number 1-15583
DELTA APPAREL, INC.
Georgia | 58-2508794 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) | |
322 South Main Street | ||
Greenville, SC | 29601 | |
(Address of principal executive offices) | (Zip Code) |
(864) 232-5200
(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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes
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 a “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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
As of
JanuaryEX-32.1 | ||
EX-32.2 | ||
FINANCIAL INFORMATION |
Item 1. | Financial Statements |
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
(Unaudited)
December 2020 | September 2020 | |||||||
| Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 10,255 | $ | 16,458 | ||||
Accounts receivable, less allowances of $854 and $684, respectively | 62,592 | 60,146 | ||||||
Other receivables | 1,054 | 854 | ||||||
| Income tax receivable | 1,180 | 983 | ||||||
Inventories, net | 148,521 | 145,515 | ||||||
Prepaid expenses and other current assets | 3,609 | 2,812 | ||||||
Total current assets | 227,211 | 226,768 | ||||||
Property, plant and equipment, net of accumulated depreciation of $93,283 and $92,123, respectively | 67,779 | 63,950 | ||||||
Goodwill | 37,897 | 37,897 | ||||||
Intangibles, net | 19,555 | 19,948 | ||||||
Deferred income taxes | 3,313 | 4,052 | ||||||
Operating lease assets | 52,171 | 54,645 | ||||||
Equity method investment | 10,462 | 10,573 | ||||||
Other assets | 2,233 | 2,398 | ||||||
Total assets | $ | 420,621 | $ | 420,231 | ||||
| Liabilities and Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 55,023 | $ | 49,800 | ||||
Accrued expenses | 18,130 | 20,174 | ||||||
| Income taxes payable | 383 | 379 | ||||||
Current portion of finance leases | 6,915 | 6,956 | ||||||
| Current portion of operating leases | 8,892 | 9,039 | ||||||
Current portion of long-term debt | 7,112 | 7,559 | ||||||
Current portion of contingent consideration | 0 | 2,120 | ||||||
Total current liabilities | 96,455 | 96,027 | ||||||
Long-term income taxes payable | 3,599 | 3,599 | ||||||
Long-term finance leases, less current maturities | 13,409 | 11,328 | ||||||
Long-term operating leases, less current maturities | 44,522 | 46,570 | ||||||
Long-term debt, less current maturities | 112,595 | 112,782 | ||||||
Long-term contingent consideration | 4,310 | 4,300 | ||||||
Other non-current liabilities | 2,534 | 2,939 | ||||||
Total liabilities | $ | 277,424 | $ | 277,545 | ||||
Shareholder's equity: | ||||||||
Preferred stock - $0.01 par value, 2,000,000 shares authorized, none issued and outstanding | 0 | 0 | ||||||
Common stock - $0.01 par value, 15,000,000 authorized, 9,646,972 shares issued, and 6,974,660 and 6,890,118 shares outstanding as of December 2020 and September 2020, respectively | 96 | 96 | ||||||
Additional paid-in capital | 59,564 | 61,005 | ||||||
Retained earnings | 127,447 | 126,564 | ||||||
Accumulated other comprehensive loss | (1,197 | ) | (1,322 | ) | ||||
Treasury stock - 2,672,312 and 2,756,854 shares as of December 2020, and September 2020, respectively | (42,149 | ) | (43,133 | ) | ||||
Equity attributable to Delta Apparel, Inc. | 143,761 | 143,210 | ||||||
Equity attributable to non-controlling interest | (564 | ) | (524 | ) | ||||
Total equity | 143,197 | 142,686 | ||||||
Total liabilities and equity | $ | 420,621 | $ | 420,231 | ||||
| December 30, 2017 | September 30, 2017 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 603 | $ | 572 | |||
| Accounts receivable, less allowances of $1,502 and $1,433, respectively | 51,010 | 47,557 | |||||
| Income tax receivable | 404 | 352 | |||||
| Inventories, net | 174,505 | 174,551 | |||||
| Note receivable | 1,031 | 2,016 | |||||
| Prepaid expenses and other current assets | 3,885 | 2,646 | |||||
| Total current assets | 231,438 | 227,694 | |||||
| Property, plant and equipment, net of accumulated depreciation of $69,320 and $67,780, respectively | 45,449 | 42,706 | |||||
| Goodwill | 19,917 | 19,917 | |||||
| Intangibles, net | 15,925 | 16,151 | |||||
| Deferred income taxes | 2,656 | 5,002 | |||||
| Other assets | 6,277 | 6,332 | |||||
| Total assets | $ | 321,662 | $ | 317,802 | |||
| Liabilities and Shareholders’ Equity | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 45,597 | $ | 47,183 | |||
| Accrued expenses | 13,503 | 17,704 | |||||
| Current portion of long-term debt | 6,600 | 7,548 | |||||
| Total current liabilities | 65,700 | 72,435 | |||||
| Long-term debt, less current maturities | 99,360 | 85,306 | |||||
| Income tax payable | 8,058 | — | |||||
| Other liabilities | 4,734 | 2,574 | |||||
| Contingent consideration | 1,300 | 1,600 | |||||
| Total liabilities | $ | 179,152 | $ | 161,915 | |||
| Shareholders’ 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 shares authorized, 9,646,972 shares issued, and 7,227,374 and 7,300,297 shares outstanding as of December 30, 2017, and September 30, 2017, respectively | 96 | 96 | |||||
| Additional paid-in capital | 59,856 | 61,065 | |||||
| Retained earnings | 117,402 | 127,358 | |||||
| Accumulated other comprehensive income (loss) | 51 | (35 | ) | ||||
| Treasury stock —2,419,598 and 2,346,675 shares as of December 30, 2017, and September 30, 2016, respectively | (34,895 | ) | (32,597 | ) | |||
| Total shareholders’ equity | 142,510 | 155,887 | |||||
| Total liabilities and shareholders' equity | $ | 321,662 | $ | 317,802 | |||
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended | ||||||||
December 2020 | December 2019 | |||||||
Net sales | $ | 94,723 | $ | 95,889 | ||||
Cost of goods sold | 74,434 | 75,996 | ||||||
Gross profit | 20,289 | 19,893 | ||||||
Selling, general and administrative expenses | 16,030 | 18,073 | ||||||
Other loss (income), net | 1,190 | (817 | ) | |||||
Operating income | 3,069 | 2,637 | ||||||
Interest expense, net | 1,654 | 1,802 | ||||||
Earnings before provision for income taxes | 1,415 | 835 | ||||||
Provision for income taxes | 572 | 44 | ||||||
Consolidated net earnings | 843 | 791 | ||||||
Net loss attributable to non-controlling interest | 40 | 132 | ||||||
Net earnings attributable to shareholders | $ | 883 | $ | 923 | ||||
Basic earnings per share | $ | 0.13 | $ | 0.13 | ||||
Diluted earnings per share | $ | 0.13 | $ | 0.13 | ||||
Weighted average number of shares outstanding | 6,920 | 6,950 | ||||||
Dilutive effect of stock awards | 80 | 122 | ||||||
Weighted average number of shares assuming dilution | 7,000 | 7,072 | ||||||
| Three Months Ended | |||||||
| December 30, 2017 | December 31, 2016 | ||||||
| Net sales | $ | 90,342 | $ | 85,335 | |||
| Cost of goods sold | 73,972 | 67,777 | |||||
| Gross profit | 16,370 | 17,558 | |||||
| Selling, general and administrative expenses | 14,979 | 17,311 | |||||
| Change in fair value of contingent consideration | (300 | ) | (100 | ) | |||
| Other income, net | (47 | ) | (122 | ) | |||
| Operating income | 1,738 | 469 | |||||
| Interest expense, net | 1,334 | 1,301 | |||||
| Income (loss) before provision for income taxes | 404 | (832 | ) | ||||
| Provision for (benefit from) income taxes | 10,356 | (225 | ) | ||||
| Net loss | $ | (9,952 | ) | $ | (607 | ) | |
| Basic loss per share | $ | (1.37 | ) | $ | (0.08 | ) | |
| Diluted loss per share | $ | (1.37 | ) | $ | (0.08 | ) | |
| Weighted average number of shares outstanding | 7,268 | 7,598 | |||||
| Dilutive effect of stock options and awards | — | — | |||||
| Weighted average number of shares assuming dilution | 7,268 | 7,598 | |||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Loss
(Amounts in thousands)
(Unaudited)
Three Months Ended | ||||||||
December 2020 | December 2019 | |||||||
Net earnings attributable to shareholders | $ | 883 | $ | 923 | ||||
Other comprehensive income related to unrealized gain on derivatives, net of income tax | 125 | 131 | ||||||
Consolidated comprehensive income | $ | 1,008 | $ | 1,054 | ||||
| Three Months Ended | |||||||
| December 30, 2017 | December 31, 2016 | ||||||
| Net loss | $ | (9,952 | ) | $ | (607 | ) | |
| Other comprehensive income related to unrealized gain on derivatives, net of income tax | 85 | 49 | |||||
| Comprehensive loss | $ | (9,867 | ) | $ | (558 | ) | |
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)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 2019 | 9,646,972 | $ | 96 | $ | 59,855 | $ | 136,937 | $ | (969 | ) | 2,725,555 | $ | (41,750 | ) | $ | (281 | ) | $ | 153,888 | |||||||||||||||||
Net earnings | - | 0 | 0 | 923 | 0 | - | 0 | 0 | 923 | |||||||||||||||||||||||||||
Other comprehensive income | - | 0 | 0 | 0 | 131 | - | 0 | 0 | 131 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | 0 | 0 | 0 | 0 | - | 0 | (132 | ) | (132 | ) | |||||||||||||||||||||||||
Vested stock awards | 0 | 0 | (1,615 | ) | 0 | 0 | (67,406 | ) | 631 | 0 | (984 | ) | ||||||||||||||||||||||||
| Stock based compensation | - | 0 | 585 | 0 | 0 | - | 0 | 0 | 585 | |||||||||||||||||||||||||||
| Balance as of December 2019 | 9,646,972 | $ | 96 | $ | 58,825 | $ | 137,860 | $ | (838 | ) | 2,658,149 | $ | (41,119 | ) | $ | (413 | ) | $ | 154,411 | |||||||||||||||||
| 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 2020 | 9,646,972 | $ | 96 | $ | 61,005 | $ | 126,564 | $ | (1,322 | ) | 2,756,854 | $ | (43,133 | ) | $ | (524 | ) | $ | 142,686 | |||||||||||||||||
| Net earnings | - | 0 | 0 | 883 | 0 | - | 0 | 0 | 883 | |||||||||||||||||||||||||||
| Other comprehensive income | - | 0 | 0 | 0 | 125 | - | 0 | 0 | 125 | |||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | 0 | 0 | 0 | 0 | - | 0 | (40 | ) | (40 | ) | |||||||||||||||||||||||||
| Vested stock awards | 0 | 0 | (2,117 | ) | 0 | 0 | (84,542 | ) | 984 | 0 | (1,133 | ) | ||||||||||||||||||||||||
| Stock based compensation | - | 0 | 676 | 0 | 0 | - | 0 | 0 | 676 | |||||||||||||||||||||||||||
| Balance as of December 2020 | 9,646,972 | $ | 96 | $ | 59,564 | $ | 127,447 | $ | (1,197 | ) | 2,672,312 | $ | (42,149 | ) | $ | (564 | ) | $ | 143,197 | |||||||||||||||||
| Three Months Ended | |||||||
| December 30, 2017 | December 31, 2016 | ||||||
| Operating activities: | |||||||
| Net loss | $ | (9,952 | ) | $ | (607 | ) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
| Depreciation and amortization | 2,433 | 2,415 | |||||
| Amortization of deferred financing fees | 76 | 78 | |||||
| Provision for deferred income taxes | 2,346 | (194 | ) | ||||
| Non-cash stock compensation | 437 | 369 | |||||
| Change in the fair value of contingent consideration | (300 | ) | (100 | ) | |||
| Loss on disposal of equipment | — | 5 | |||||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable, net | (3,453 | ) | 15,448 | ||||
| Inventories, net | 46 | (14,791 | ) | ||||
| Prepaid expenses and other assets | (1,252 | ) | (770 | ) | |||
| Other non-current assets | 61 | — | |||||
| Accounts payable | (1,902 | ) | 3,063 | ||||
| Accrued expenses | (4,290 | ) | (5,264 | ) | |||
| Income taxes | 8,007 | (150 | ) | ||||
| Other liabilities | (71 | ) | 44 | ||||
| Net cash used in operating activities | (7,814 | ) | (454 | ) | |||
| Investing activities: | |||||||
| Purchases of property and equipment, net | (2,162 | ) | (1,883 | ) | |||
| Proceeds from sale of Junkfood assets | 1,000 | — | |||||
| Proceeds from sale of fixed assets | 1 | — | |||||
| Net cash used in investing activities | (1,161 | ) | (1,883 | ) | |||
| Financing activities: | |||||||
| Proceeds from long-term debt | 119,529 | 115,707 | |||||
| Repayment of long-term debt | (106,424 | ) | (111,749 | ) | |||
| Repayment of capital financing | (257 | ) | (101 | ) | |||
| Repurchase of common stock | (2,897 | ) | (965 | ) | |||
| Payment of withholding taxes on stock awards | (945 | ) | (542 | ) | |||
| Net cash provided by financing activities | 9,006 | 2,350 | |||||
| Net increase in cash and cash equivalents | 31 | 13 | |||||
| Cash and cash equivalents at beginning of period | 572 | 397 | |||||
| Cash and cash equivalents at end of period | $ | 603 | $ | 410 | |||
| Supplemental cash flow information: | |||||||
| Cash paid during the period for interest | $ | 1,094 | $ | 1,209 | |||
| Cash paid during the period for income taxes | $ | 19 | $ | 94 | |||
| Non-cash financing activity - capital lease agreements | $ | 3,050 | $ | 1,619 | |||
See accompanying Notes to Condensed Consolidated Financial Statements.
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Three Months Ended | ||||||||
December 2020 | December 2019 | |||||||
Operating activities: | ||||||||
| Consolidated net earnings | $ | 843 | $ | 791 | ||||
Adjustments to reconcile net earnings to net cash used in operating activities: | ||||||||
Depreciation and amortization | 3,368 | 3,161 | ||||||
Amortization of deferred financing fees | 81 | 73 | ||||||
| Provision for inventory market reserves | (405 | ) | (385 | ) | ||||
Provision for deferred income taxes | 740 | 0 | ||||||
Non-cash stock compensation | 676 | 601 | ||||||
Loss (gain) on disposal of equipment | 30 | (37 | ) | |||||
Other, net | (200 | ) | (725 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | (2,598 | ) | 5,410 | |||||
Inventories, net | (2,601 | ) | (17,823 | ) | ||||
Prepaid expenses and other current assets | (797 | ) | 70 | |||||
Other non-current assets | 394 | (1,004 | ) | |||||
Accounts payable | 387 | 7,985 | ||||||
Accrued expenses | (2,044 | ) | (3,920 | ) | ||||
| Net operating lease liabilities | 279 | 931 | ||||||
Income taxes | (193 | ) | 16 | |||||
Other liabilities | (447 | ) | (1 | ) | ||||
| Net cash used in operating activities | (2,487 | ) | (4,857 | ) | ||||
Investing activities: | ||||||||
Purchases of property and equipment, net | (408 | ) | (3,747 | ) | ||||
| Proceeds from equipment under financed leases | 2,312 | 0 | ||||||
Proceeds from sale of equipment | 196 | 0 | ||||||
Cash paid for business | (838 | ) | (828 | ) | ||||
Net cash provided by (used in) investing activities | 1,262 | (4,575 | ) | |||||
Financing activities: | ||||||||
Proceeds from long-term debt | 112,506 | 117,763 | ||||||
Repayment of long-term debt | (112,557 | ) | (105,211 | ) | ||||
Repayment of capital financing | (1,684 | ) | (1,259 | ) | ||||
| Payment of contingent consideration | (2,110 | ) | 0 | |||||
Payment of deferred financing costs | 0 | (1,079 | ) | |||||
Payment of withholding taxes on stock awards | (1,133 | ) | (954 | ) | ||||
Net cash (used in) provided by financing activities | (4,978 | ) | 9,260 | |||||
| Net decrease in cash and cash equivalents | (6,203 | ) | (172 | ) | ||||
Cash and cash equivalents at beginning of period | 16,458 | 605 | ||||||
| Cash and cash equivalents at end of period | $ | 10,255 | $ | 433 | ||||
| Supplemental cash flow information | ||||||||
| Finance lease assets exchanged for finance lease liabilities | $ | 3,976 | $ | 3,037 | ||||
| Operating lease assets exchanged for operating lease liabilities | $ | 0 | $ | 531 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Delta Apparel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and Descriptionother subsidiaries, "Delta Apparel," "we," "us," "our," or the "Company") is a vertically-integrated, international apparel company. With approximately 7,700 employees worldwide, we design, manufacture, source, and market a diverse portfolio of Business
We design and internally manufacture the majority of our products. More than 90% of the apparel garments that we sell are sewn in our owned or leased 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 Greenville, South Carolina. Our common stock trades on the NYSE American under the symbol “DLA."
We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. Our 2021 fiscal year is a 52-week year and will end on October 2, 2021, ("fiscal 2021"). Accordingly, this Form 10-Q presents our first quarter of fiscal 2021. Our 2020 fiscal year was a 53-week year and ended on October 3, 2020, ("fiscal 2020"). For presentation purposes herein, all references to periods ended December 2020 and December 2019 relate to the fiscal periods ended on January 2, 2021, and December 28, 2019, respectively. References to September 2020 and September 2021 relate to information as of October 3, 2020 and October 2, 2021, respectively.
We prepared the accompanying interim condensed consolidated financial statementsCondensed Consolidated Financial Statements in accordance with the instructions for Form 10-Q10-Q and Article 10 of Regulation S-X.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-month periodthree-month periods ended
Our Condensed Consolidated Financial Statements include the “Company”, “we”, “us” and “our” are used interchangeably to refer toaccounts of Delta Apparel Inc. together with our domesticand its wholly-owned subsidiaries, including M.J. Soffe, LLC (“Soffe”), Culver City Clothing Company (f/k/a Junkfood Clothing Company) (“Junkfood”), Salt Life, LLC (“Salt Life”), and Art Gun, LLC (“Art Gun”), and other international subsidiaries, as appropriate to the context. On March 31, 2017, we sold substantially all of the assets comprising our Junkfood business to JMJD Ventures, LLC. See Note D—Divestitures, for further information on this transaction.
We make available copies of materials we file with, same-day shippingor furnish to, the SEC free of charge at https://ir.deltaapparelinc.com. The information found on our catalog productswebsite 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 weekly replenishments to retailers.
Our accounting policies are consistent with those described in our Significant Accounting Policies in our Annual Report on Form 10-K10-K for the fiscal year ended September 30, 2017,2020, filed with the SEC. See Note C for consideration of recently issued accounting standards.
Recently Adopted Standards
In July 2015, August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-11,
Standards Not Yet Adopted
In December 2019, the FASB issued ASU No.2019-12,Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification ("ASC") 740,Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective as of the beginning of our fiscal year 2022. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impacts of the provisions of ASU 2019-12 on our financial condition, results of operations, cash flows, and disclosures.
In June 2016, the FASB issued ASU No.2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of Inventory
Note D—Revenue from Contracts with Customers, ("ASU 2014-09"). This new guidance requires an entity to recognizeRecognition
Our revenue streams consist of retail stores, direct-to-consumer ecommerce, and wholesale channels which are included in our Condensed Consolidated Statements of Operations. The table below identifies the amount and percentage of revenue to which it expects to be entitlednet sales by distribution channel (in thousands):
Three Months Ended | ||||||||||||||||
December 2020 | December 2019 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
Retail | $ | 2,438 | 3 | % | $ | 1,234 | 1 | % | ||||||||
Direct-to-consumer ecommerce | 1,809 | 2 | % | 1,683 | 2 | % | ||||||||||
Wholesale | 90,476 | 95 | % | 92,972 | 97 | % | ||||||||||
Net sales | $ | 94,723 | 100 | % | $ | 95,889 | 100 | % | ||||||||
The table below provides net sales by reportable segment (in thousands) and the percentage of net sales by distribution channel for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 is effective for annual periods beginning after December 15, 2017, for public business entities and permits the use of either the retrospectiveeach reportable segment:
December 2020 Quarter | ||||||||||||||||
Net Sales | Retail | Direct-to-consumer ecommerce | Wholesale | |||||||||||||
Delta Group | $ | 87,624 | 0.2 | % | 0.4 | % | 99.4 | % | ||||||||
Salt Life Group | 7,099 | 31.4 | % | 21.1 | % | 47.5 | % | |||||||||
Total | $ | 94,723 | ||||||||||||||
December 2019 Quarter | ||||||||||||||||
Net Sales | Retail | Direct-to-consumer ecommerce | Wholesale | |||||||||||||
Delta Group | $ | 88,950 | 0.3 | % | 0.3 | % | 99.4 | % | ||||||||
Salt Life Group | 6,939 | 13.5 | % | 20.7 | % | 65.8 | % | |||||||||
Total | $ | 95,889 | ||||||||||||||
Inventories, net of $9.9reserves of $14.6 million and $9.8$15.0 million, in reserves, as of December 30, 2017, 2020 and September 30, 2017, 2020, respectively, consisted of the following (in thousands):
December 2020 | September 2020 | |||||||
Raw materials | $ | 15,047 | $ | 13,571 | ||||
Work in process | 12,415 | 13,984 | ||||||
Finished goods | 121,059 | 117,960 | ||||||
| $ | 148,521 | $ | 145,515 | |||||
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.
| December 30, 2017 | September 30, 2017 | ||||||
| Raw materials | $ | 8,639 | $ | 8,973 | |||
| Work in process | 16,179 | 18,543 | |||||
| Finished goods | 149,687 | 147,035 | |||||
| $ | 174,505 | $ | 174,551 | ||||
Credit Facility
On May 10, 2016, we entered into a Fifth Amended and Restated Credit Agreement (the(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, National Association and Regions Bank. Our subsidiaries M.J. Soffe, LLC, Culver City Clothing Company (f/k/a Junkfood Clothing Company), Salt Life, LLC, and DTG2Go, LLC (f/k/a Art Gun, LLC (together withLLC) (collectively, the Company, the “Companies”"Borrowers"), are co-borrowers under the Amended Credit Agreement.
The Amended Credit Agreement allows us to borrow up to $145$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
As of December 2020, we had $107.1 million outstanding under our U.S. revolving credit facility at an average interest rate of 3.4%. Our cash on hand combined with the availability under the U.S. credit facility totaled $43.7 million. At December 2020 and September 2020 there was $9.2 million and $8.8 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.
Promissory Note
On October 8, 2018, we acquired Salt Life andsubstantially all of the assets of Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services. In conjunction with the acquisition, we issued twoa promissory notesnote in the aggregate principal amount of $22.0 million, which included a one-time installment of $9.0 million that was due and paid as required on September 30, 2014, and$7.0 million. The promissory note bears interest at 6% with quarterly installments commencing on March 31, 2015, which began January 2, 2019, with the final installment due on June 30, 2019. The promissory notes are zero-interest notes and state that interest will be imputed as required under Section 1274October 1, 2021. As of the Internal Revenue Code. We imputed interest at 1.92%December 2020 there was $2.3 million outstanding on the promissory note that matured June 30, 2016, and was paid in full as required. We impute interest at 3.62% on the promissory note that matures on June 30, 2019. At December 30, 2017, the discounted value of the promissory note outstanding was $3.9 million.
Honduran Debt
Since March 2011, we have entered into term loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, to finance 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 of $1.1 million and $9.5 million, respectively. Each of these new loans is secured by a first-priorityfirst-priority lien on the assets of our Honduran operations and is 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. TheAs the revolving credit facility requires minimum payments during each six-month period of the 18-month term; however, the loan agreement permits additional drawdowns to the extent payments are made and certain objective covenants are met. The current revolving Honduran debt, by its nature, is not long-term, as it requires scheduled payments each six months. However, as the loan 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 have been classified as long-term debt.
December 2020 | ||||
Revolving credit facility established December 2020, interest at 7.25%, due August 2025 | $ | 1,000 | ||
Term loan established December 2020, interest at 7.5%, quarterly installments beginning September 2021 through December 2025 | 9,128 | |||
| December 30, 2017 | |||
| Revolving credit facility established March 2011, interest at 8.0% due March 2019 | $ | 4,804 | |
| Term loan established March 2011, interest at 7.0%, payable monthly with a seven-year term | 243 | ||
| Term loan established November 2014, interest at 7.5%, payable monthly with a six-year term | 1,850 | ||
| Term loan established June 2016, interest at 8.0%, payable monthly with a six-year term | 1,286 | ||
| Term loan established September 2017, interest at 8.0%, payable monthly with a six-year term | 3,817 | ||
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 $3.9$5.2 million and $3.5$4.9 million for the three-month periods ended December 30, 2017, 2020 and December 31, 2016,2019 quarters, respectively. In addition, SG&A expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses royalty payments on licensed products and other general and administrative expenses.
On February 4, 2015, 6, 2020, our shareholders re-approvedapproved the Delta Apparel, Inc. 20102020 Stock Plan ("2010("2020 Stock Plan") thatto replace the 2010 Stock Plan, which was originally approvedpreviously re-approved by our shareholders on November 11, 2010.
Compensation expense is recorded within SG&A in our Condensed Consolidated Statements of Operations over the vesting periods. During both the December 2020 and 2019 quarters, we recognized $0.9 million in stock-based compensation expense. Associated with the compensation cost are income tax benefits recognized of $0.3 million and $0.4 million for the December 2020 and 2019 quarters, respectively.
During the December 2020 quarter, performance stock units and restricted stock units representing 54,60242,000 and 92,06874,000 shares of our common stock, respectively, vested uponwith the filing of our Annual Report on Form 10-K10-K for the fiscal year ended September 30, 2017,2020, and were issued in accordance with their respective agreements. One-half of the restricted stock unitsAll vested awards were payablepaid in common stock and one-half were payable in cash. Of the performance units, 72,138 were payable in common stock and 19,930 were payable in cash.
As of December 30, 2017, 2020, there was $4.1$3.2 million of total unrecognized compensation cost related to unvested awards granted under the 20102020 Stock Plan. This cost is expected to be recognized over a period of 31.9 years.
We have entered into agreements, and have fixed prices, to purchase yarn, finished fabric, and finished apparel and headwear products. At December 30, 2017, 2020, minimum payments under these contracts were as follows (in thousands):
Yarn | $ | 12,878 | ||
Finished fabric | 2,955 | |||
Finished products | 16,420 | |||
| $ | 32,253 |
| Yarn | $ | 3,252 | |
| Finished fabric | 2,271 | ||
| Finished products | 21,995 | ||
| $ | 27,518 | ||
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 business in two distinct segments: branded and basics.
The basics segmentDelta Group is comprised of our business units primarily focused on garmentcore activewear styles, characterized by low fashion risk, and includes our DTG2Go,Delta Activewear, (which includes Delta Catalog and FunTees) and Art GunSoffe business units. We are a market distributeleader in the on-demand, digital print and manufacture unembellished knitfulfillment industry, bringing DTG2Go's proprietary technology and innovation to the supply chain of our customers. Delta Activewear is a preferred supplier of activewear apparel to the wholesale and private label markets. We offer a broad range of apparel and accessories through our catalog business under the mainDelta and Soffe brands as well as other brands that we distribute utilizing our digital platform and network of Delta Platinum™, Delta Dri®, Delta Magnum Weight®, and Delta Pro Weight® for salefulfillment centers. In addition to a diversified audience rangingour catalog business, we serve our customers as their supply chain partner, from large licensed screen printersproduct development to small independent businesses. We also manufacture private labelshipment of their branded products, for major branded sportswear companies, trendy regional brands, retailers, and sports-licensed apparel marketers. Typically our private labelwith the majority of products arebeing sold with value-added services such asincluding embellishment, hangtags, ticketing, hangers, and embellishmentticketing, so that
The branded segmentSalt Life Group is comprised of our business unitslifestyle brands focused on specializeda broad range of apparel garments, headwear and related accessories to meet consumer preferences and fashion trends, and includes our Salt Life Soffe, and Coast business units. Our branded segment also included our Junkfood business unit prior to its disposition on March 31, 2017. These branded products are sold through specialty and boutique shops, outdoor retailers and traditional department stores, and mid-tier retailers, sporting goods stores, e-retailers and the U.S. military, as well as direct-to-consumer through branded ecommerce sites and "brick and mortar"branded retail stores. Products in this segment are marketed under our lifestyle brands of Salt Life®, Soffe®, and COAST®, as well as other labels.
Our Chief Operating Decision Maker and management evaluate performance and allocate resources based on profit or loss from operations before interest, and 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-K10-K for the fiscal year ended September 30, 2017,2020, filed with the SEC.
| Three Months Ended | |||||||
| December 30, 2017 | December 31, 2016 | ||||||
| Segment net sales: | |||||||
| Basics | $ | 73,176 | $ | 60,838 | |||
| Branded | 17,166 | 24,497 | |||||
| Total net sales | $ | 90,342 | $ | 85,335 | |||
| Segment operating income (loss): | |||||||
| Basics | $ | 4,189 | $ | 4,684 | |||
| Branded | 458 | (1,000 | ) | ||||
| Total segment operating income | $ | 4,647 | $ | 3,684 | |||
Three Months Ended | ||||||||
December 2020 | December 2019 | |||||||
Segment net sales: | ||||||||
Delta Group | $ | 87,624 | $ | 88,950 | ||||
Salt Life Group | 7,099 | 6,939 | ||||||
Total net sales | $ | 94,723 | $ | 95,889 | ||||
Segment operating income (loss): | ||||||||
Delta Group (1) | $ | 6,276 | $ | 7,266 | ||||
Salt Life Group | (136 | ) | (668 | ) | ||||
Total segment operating income | $ | 6,140 | $ | 6,598 | ||||
(1) In fiscal 2021, the Delta Group operating income included $1.3 million of expense, reported within "Other loss/(income), net", related to two hurricanes that disrupted operations during the December 2020 quarter.
The following table reconciles the segment operating income to the consolidated income (loss)earnings before provision for (benefit from) income taxes (in thousands):
Three Months Ended | ||||||||
December 2020 | December 2019 | |||||||
Segment operating income | $ | 6,140 | $ | 6,598 | ||||
Unallocated corporate expenses | 3,071 | 3,961 | ||||||
Unallocated interest expense | 1,654 | 1,802 | ||||||
Consolidated earnings before provision for income taxes | $ | 1,415 | $ | 835 | ||||
| Three Months Ended | |||||||
| December 30, 2017 | December 31, 2016 | ||||||
| Segment operating income | $ | 4,647 | $ | 3,684 | |||
| Unallocated corporate expenses | 2,909 | 3,215 | |||||
| Unallocated interest expense | 1,334 | 1,301 | |||||
| Consolidated income (loss) before provision for (benefit from) income taxes | $ | 404 | $ | (832 | ) | ||
The Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) was enacted. The New Tax Legislationenacted on December 22, 2017, which significantly revised the U.S. corporate income tax code by, among other things, lowering federal corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax ("transition tax") on deemed repatriated cumulative earnings of foreign subsidiaries. Duringsubsidiaries which will be paid over eight years. In addition, new taxes were imposed related to foreign income, including a tax on global intangible low-taxed income (“GILTI”) as well as a limitation on the three-month period ended December 30, 2017, we recognized provisional amounts totaling $10.6 milliondeduction for business interest expense (“Section 163(j)"). GILTI is the excess of tax expense.the shareholder’s net controlled foreign corporations ("CFC") net tested income over the net deemed tangible income. GILTI income is eligible for a deduction of up to 50% of the income inclusion, but the deduction is limited to the amount of U.S. adjusted taxable income. The Section 163(j) limitation does not allow the amount of deductible interest to exceed the sum of the taxpayer's business interest income and 30% of the taxpayer’s adjusted taxable income. We have made reasonable estimatesincluded in our calculation of our effective tax rate the effectsestimated impact of GILTI and Section 163(j). We have elected to account for the tax on GILTI as a period cost and, therefore, do not record deferred taxes related to GILTI on our existing deferredforeign subsidiaries.
The Coronavirus Aid, Relief, and Economic Security (“CARES Act”), which was enacted on March 27, 2020, provided temporary changes to income and non-income-based tax balances and the one-time transition tax; however, these amounts may change as more information becomes available. We accounted for the $10.6 million provisional amount as a discrete item for tax provision purposes, recording tax expense on our best estimate of the effect oflaws, including some provisions which were previously enacted under the New Tax Legislation. ExcludingThe CARES Act revised the effectU.S. corporate income tax code on a temporary basis by, among other things, eliminating the 80% of this discrete item,taxable income limitation on net operating loss (“NOL”) carryforwards, allowing NOL carrybacks, and increasing the Section 163(j) interest limitation deduction from 30% to 50% of adjusted taxable income. We have included the estimated impact of these provisions in our effective tax rate calculation.
Our effective income tax rate on operations for the three-month period ended December 30, 2017,2020 quarter was (46.4%). This tax benefit relates39.3% compared to stock option excess benefits as a result from our adoption of ASU 2016-09. This compares to an effective income tax rate of 27.0% for4.6% in the same period inof the prior year, and 5.9%an effective rate of 23.6% for the fiscal year ended September 30, 2017.
From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. We have designated our interest rate swap contracts as cash flow hedges of our future interest payments. As a result, the gains and losses on the swap contracts are reported as a component of other comprehensive income and are reclassified into interest expense as the related interest payments are made. As of December 2020, all of our other comprehensive income was attributable to shareholders; none related to the non-controlling interest. Outstanding instruments as of December 30, 2017, 2020 are as follows:
Notional | ||||||||
Effective Date | Amount | Fixed LIBOR Rate | Maturity Date | |||||
Interest Rate Swap | July 19, 2017 | $ | ||||||
| 1.99% | May 10, 2021 | |||||||
Interest Rate Swap | July 25, 2018 | $20.0 million | 3.18% | July 25, 2023 |
The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheets for derivatives related to our interest swap agreements as of December 2020 and September 2020 (in thousands):
December 2020 | September 2020 | |||||||
Deferred tax assets | $ | 401 | $ | 442 | ||||
| Accrued expenses | (65) | (108 | ) | |||||
Other non-current liabilities | (1,533 | ) | (1,656 | ) | ||||
Accumulated other comprehensive loss | $ | (1,197 | ) | $ | (1,322 | ) | ||
From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized and unrealized gains and losses associated with them are recorded within cost of goods sold on the Condensed Consolidated Statement of Operations.
ASC 820,
Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:○ | Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
○ | Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less active. |
○ | Level 3 – Unobservable inputs that are supported by little ornomarket activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques. |
The following financial assets (liabilities)liabilities are measured at fair value on a recurring basis (in thousands):
| Fair Value Measurements Using | |||||||||||||||
| Period Ended | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
| Interest Rate Swaps | |||||||||||||||
| December 30, 2017 | $ | 83 | — | $ | 83 | — | |||||||||
| September 30, 2017 | (56 | ) | — | (56 | ) | — | |||||||||
| Cotton Options | |||||||||||||||
| December 30, 2017 | $ | (1 | ) | $ | (1 | ) | — | — | |||||||
| September 30, 2017 | (125 | ) | (125 | ) | — | — | |||||||||
| Contingent Consideration | |||||||||||||||
| December 30, 2017 | $ | (1,300 | ) | — | — | $ | (1,300 | ) | |||||||
| September 30, 2017 | (1,600 | ) | — | — | (1,600 | ) | |||||||||
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Period Ended | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Interest Rate Swaps | ||||||||||||||||
December 2020 | $ | (1,598 | ) | 0 | $ | (1,598 | ) | 0 | ||||||||
September 2020 | $ | (1,764 | ) | 0 | $ | (1,764 | ) | 0 | ||||||||
Contingent Consideration | ||||||||||||||||
December 2020 | $ | (4,310 | ) | 0 | 0 | $ | (4,310 | ) | ||||||||
September 2020 | $ | (6,420 | ) | 0 | 0 | $ | (6,420 | ) | ||||||||
The fair value of the interest rate swap agreements was derived from a discounted cash flow analysis based on the terms of the contract and the forward interest rate curves adjusted for our credit risk, which fall in Level 2 of the fair value hierarchy. At December 31, 2017,2020 and September 2020, book value for fixed rate debt approximates fair value based on quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities (a Level 2 fair value measurement).
The following table summarizesDTG2Go acquisition purchase price consisted of additional payments contingent on the fair value and presentation in the
| December 30, 2017 | September 30, 2017 | ||||||
| Other assets | $ | 83 | $ | — | |||
| Deferred tax assets | — | 21 | |||||
| Accrued expenses | — | (56 | ) | ||||
| Deferred tax liabilities | (32 | ) | — | ||||
| Accumulated other comprehensive income (loss) | $ | 51 | $ | (35 | ) | ||
At times we are party to various legal claims, actions and complaints. We believe that, as a result of legal defenses, insurance arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a material adverse effect on our operations, financial condition, or liquidity.
As of December 30, 2017, September 28, 2019, our Board of Directors authorized management to use up to $50.0$60.0 million to repurchase stock in open market transactions under our Stock Repurchase Program.
No shares of our common stock for a total cost of $3.0 million.were repurchased in the December 2020 quarter. Through December 30, 2017, 2020, we have purchased 3,038,6113,598,933 shares of our common stock for an aggregate of $41.7$52.5 million since the inception ofunder our Stock Repurchase Program.Program since its inception. All purchases were made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-18.10b-18. As of December 30, 2017, $8.32020, $7.5 million remained available for future purchases under our Stock Repurchase Program, which does not have an expiration date.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans | Dollar Value of Shares that May Yet Be Purchased Under the Plans | ||||||||
| October 1, 2017 to November 4, 2017 | 29,081 | $21.04 | 29,081 | $10.7 | million | |||||||
| November 5, 2017 to December 2, 2017 | 46,444 | 20.67 | 46,444 | 9.7 | million | |||||||
| December 3, 2017 to December 30, 2017 | 69,599 | 20.56 | 69,599 | 8.3 | million | |||||||
| Total | 145,124 | $20.69 | 145,124 | $8.3 | million | |||||||
Components of intangible assets consist of the following (in thousands):
| December 30, 2017 | September 30, 2017 | ||||||||||||||||||||
| Cost | Accumulated Amortization | Net Value | Cost | Accumulated Amortization | Net Value | Economic Life | |||||||||||||||
| Goodwill | $ | 19,917 | $ | — | $ | 19,917 | $ | 19,917 | $ | — | $ | 19,917 | N/A | ||||||||
| Intangibles: | |||||||||||||||||||||
| Tradename/trademarks | $ | 16,090 | $ | (2,329 | ) | $ | 13,761 | $ | 16,090 | $ | (2,193 | ) | $ | 13,897 | 20 – 30 yrs | ||||||
| Technology | 1,220 | (978 | ) | 242 | 1,220 | (947 | ) | 273 | 10 yrs | ||||||||||||
| License agreements | 2,100 | (449 | ) | 1,651 | 2,100 | (423 | ) | 1,677 | 15 – 30 yrs | ||||||||||||
| Non-compete agreements | 1,037 | (766 | ) | 271 | 1,037 | (733 | ) | 304 | 4 – 8.5 yrs | ||||||||||||
| Total intangibles | $ | 20,447 | $ | (4,522 | ) | $ | 15,925 | $ | 20,447 | $ | (4,296 | ) | $ | 16,151 | |||||||
December 2020 | September 2020 | |||||||||||||||||||||||||
Cost | Accumulated Amortization | Net Value | Cost | Accumulated Amortization | Net Value | Economic Life | ||||||||||||||||||||
Goodwill | $ | 37,897 | $ | — | $ | 37,897 | $ | 37,897 | $ | — | $ | 37,897 | N/A | |||||||||||||
Intangibles: | ||||||||||||||||||||||||||
Tradename/trademarks | $ | 16,090 | $ | (3,956 | ) | $ | 12,134 | $ | 16,090 | $ | (3,820 | ) | $ | 12,270 | 20 – 30 yrs | |||||||||||
Customer relationships | 7,400 | (1,918 | ) | 5,482 | 7,400 | (1,733 | ) | 5,667 | 20 yrs | |||||||||||||||||
Technology | 1,720 | (1,396 | ) | 324 | 1,720 | (1,380 | ) | 340 | 10 yrs | |||||||||||||||||
License agreements | 2,100 | (759 | ) | 1,341 | 2,100 | (733 | ) | 1,367 | 15 – 30 yrs | |||||||||||||||||
Non-compete agreements | 1,657 | (1,383 | ) | 274 | 1,657 | (1,353 | ) | 304 | 4 – 8.5 yrs | |||||||||||||||||
Total intangibles | $ | 28,967 | $ | (9,412 | ) | $ | 19,555 | $ | 28,967 | $ | (9,019 | ) | $ | 19,948 | ||||||||||||
Goodwill represents the acquired goodwill net of the cumulative impairment losses recorded in fiscal year 2011 of $0.6 million. TheAs of December 2020, the Delta Group segment assets include $18.0 million of goodwill, and the Salt Life segment assets include $19.9 million.
Depending on the type of intangible asset, amortization is recorded on our financial statements is included in the branded segment.
On January 26, 2021, Belk, Inc. (“Belk”), a department store chain and Delta Apparel customer, announced that it has entered into a Restructuring Support Agreement with its majority owner, Sycamore Partners, as well as the majority of its lenders to recapitalize the business, significantly reduce debt by approximately $450 million, and extend maturities on all term loans to July 2025. Belk expects to complete the financial restructuring transaction through an expedited “pre-packaged” reorganization under Chapter 11 of the U.S. Bankruptcy Code by the end of February 2021. Per the announcement, suppliers will be unimpaired and will continue to be paid in the ordinary course for all goods and services provided to the company. At December 2020, we had approximately $1.1 million of accounts receivable from Belk. We have followed our normal policy of estimating reserves for doubtful accounts and have not established a specific reserve for this receivable based on our assessment of the customer’s ability to meet its financial obligations pursuant to this announcement.
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the SEC, in our press releases, and in other reports to our shareholders. All statements, other than statements of historical fact, which address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. The words “plan”, “estimate”, “project”, “forecast”, “outlook”, “anticipate”, “expect”, “intend”, “seek’“remain”, “seek", “believe”, “may”, “should” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current expectations and are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are subject to a number of business risks and inherent uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the following:
| ● | the general U.S. and international economic conditions: | |
● | the COVID-19 pandemic impact on our operations, financial condition, liquidity, and capital investments: |
● | significant interruptions or disruptions within our manufacturing, distribution or other operations; |
● | deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our customers and suppliers; |
● | the volatility and uncertainty of cotton and other raw material prices and availability; |
● | the competitive conditions in the apparel industry; |
● | our ability to predict or react to changing consumer preferences or trends; |
● | our ability to successfully open and operate new retail stores in a timely and cost-effective manner; |
● | the ability to grow, achieve synergies and realize the expected profitability of acquisitions; |
● | changes in economic, political or social stability at our offshore locations; |
● | our ability to attract and retain key management; |
● | the volatility and uncertainty of energy, fuel and related costs; |
● | material disruptions in our information systems related to our business operations; |
● | compromises of our data security; |
● | significant changes in our effective tax rate; |
● | significant litigation in either domestic or international jurisdictions; |
● | recalls, claims and negative publicity associated with product liability issues; |
● | the ability to protect our trademarks and other intellectual property; |
● | changes in international trade regulations; |
● | our ability to comply with trade regulations; |
● | changes in employment laws or regulations or our relationship with employees; |
● | negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors; |
● | restrictions on our ability to borrow capital or service our indebtedness; |
● | interest rate fluctuations increasing our obligations under our variable rate indebtedness; |
● | the ability to raise additional capital; |
● | the impairment of acquired intangible assets; |
● | foreign currency exchange rate fluctuations; |
● | the illiquidity of our shares; and |
● | price volatility in our shares and the general volatility of the stock market. |
A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our expectations is describedset forth in Part 1 under the subheading "Risk Factors" in our Annual Report on Form 10-K for our fiscal year ended September 30, 2017,2020, filed with the SEC. Any forward-looking statements in this Quarterly Report on Form 10-Q do not purport to be predictions of future events or circumstances and may not be realized. Further, any forward-looking statements are made only as of the date of this Quarterly Report on Form 10-Q, and we do not undertake to publicly update or revise the forward-looking statements, except as required by the federal securities laws.
Business Outlook
Our first quarter results including double-digit sales growth across all of our businesses and pre-tax profitability in what is seasonally our most challenging period, provide solid momentum as we move further intoprovided a strong start to deliver on our fiscal 2021 goals. Through a combination of strong order demand and impeccable manufacturing and operational execution at all levels, our December 2020 quarter sales were nearly flat with prior year 2018. That momentum, coupled with our recent efforts to rationalize our business, should have us well-positioned to take advantage of opportunities whereverlevels, despite the notable headwinds from inventory constraints, hurricane-related disruptions in Central America, and whenever they may arise.
DTG2Go remains a market leader in the on-demand, direct-to-garment digital print and fulfillment marketplace. We believe that the flexibility provided by the new facility, along with capacity expansions and new business opportunities, will enable Art Gun to continue to gain market share and further increase profitability as the year unfolds.
Digital print demand this holiday season was particularly strong in the retail channel with our Activewearnew 'On-Demand DC' service model, which provides retailers immediate access to utilize DTG2Go’s broad network of print and fulfillment facilities, while offering the scalability to integrate digital fulfillment within the retailer’s own distribution facility. With the launch of DTG2Go’s first ‘On-Demand DC’, our customer was able to more than double their on-demand business during the first quarter from a year ago, providing a better consumer experience while also benefiting from reduced shipping costs. We believe our 'On-Demand DC' solution is a compelling value proposition to traditional brick and mortal retailers and brands alike, offering their consumers limitless merchandise selections, personalization options, and seamless fulfillment across a broader supply chain with no excess inventory risk.
Our customers continue to realize the benefits of the seamless supply chain of Delta Apparel garments within our on-demand model, with DTG2Go’s usage of Delta Catalog blanks reaching a new record high of approximately 45% utilization in the December 2020 quarter compared to 28% in the prior year quarter. The improving conditionsThis trend is promising as it creates a more efficient operation, reduces garment costs for our customers, and lowers working capital needs in the business.
We continue to see a steep recovery in our Delta Activewear business with year-over-year sales growth in our December quarter, overcoming the challenges caused by inventory constraints. We are seeing notable strength in the retail licensing channel as well as our recently launched e-retailer channel. We also saw year-over-year growth in our private label business. The diversification of our customer base is serving us well, and we are a welcome contrastencouraged by the new programs we have secured in the direct-to-retail channel and future opportunities we see in this channel. In order to last year's customer de-stocking activity. We expectmeet the market penetrationbroad-based demand we have in Activewear, our team is focused on efficiently manufacturing and replenishing inventory levels, ultimately expecting to achieve all-time record-level production outputs in the back half of Catalog's higher-marginfiscal 2021.
Our Delta Group integration strategies, designed to foster sales growth and improve operating efficiencies, are on schedule. The recently published 2021 Delta Activewear print and digital editions of our catalog not only feature our Delta products, including our more fashion-forward Platinum lineCollection, but also for the first time includes our entire Soffe product line. With the inclusion of Soffe, we have expanded our activewear and athleisure product categories, with our Military Collection, including the Soffe ranger panties, our Fundamentals and Essentials, including the iconic Soffe short, and our Core Layers, which includes warm-ups and other fashion basicslayering products. We also highlight Intensity by Soffe, which focuses on outfitting the female athlete. Complementing the Delta and Soffe brands, we provide our customers with a broad range of product categories with nationally recognized branded products including polos, outerwear, headwear, bags and other accessories. As previously announced and to continuefurther leverage the one-stop shop offering, we have merged our Delta Catalog and Soffe sales, customer service, marketing, merchandising and inventory planning teams to better position Soffe for growth and to reduce redundant costs. During the December quarter, we began the transition of Soffe into our new Phoenix distribution facility, which will now serve as Soffe’s primary distribution center in addition to being a key Delta Catalog distribution location and DTG2Go digital print fulfillment center. We successfully launched the first phase of Soffe’s transition to the Activewear ERP system in early January, and anticipate completing all phases of the integration by the end of fiscal 2021. As this final piece is completed, the Soffe brand will be fully merged within the Activewear operations, creating opportunities to focus on the growth of the brand while benefitting from significant operating efficiencies.
Demand for the Salt Life brand remained strong during the fall season, resulting in growth for the December quarter compared to prior year. Consumers sought out the Salt Life brand through direct-to-consumer channels, which grew over 60% year-over-year in the quarter. Sales performance at its rapid pace asour recently opened branded retail stores in Destin, Estero, and Palm Beach Gardens, Florida, drove retail sales growth of over 150% compared to the prior year progresses. Moreover,December quarter. Salt Life enthusiasts actively engaged with the brand through all our online channels during the quarter, resulting in 13% more followers on social media and 50% more YouTube subscribers compared to the prior year. We also added over 150% more email subscribers during the December 2020 quarter than we are optimistic thatadded in the successes our FunTees business has achieved in diversifying its customer baseDecember 2019 quarter. As we prepare for the forthcoming spring and leveraging its design and manufacturing sophistication will continue.
We are encouraged by the latter half ofbroad-based demand we see across our businesses, and our proven ability to execute at the fiscal year.
Results of Operations
Financial results included herein have been presented on a generally accepted accounting principles ("GAAP") basis and, in certain limited instances, we have presented our financial results on a GAAP and non-GAAP (“adjusted”) basis, which is further described in the sections entitled “Non-GAAP Financial Measures.”
Net sales for the firstDecember quarter of fiscal year 2018 were $90.3$94.7 million compared to $85.3sales of $95.9 million in the prior year period. After adjusting for the $9.4 millionyear. Our direct-to-consumer sales channels, comprised of sales from the since-divested Junkfood businessconsumer-facing ecommerce sites and our branded retail stores, increased 13% in the prior yearcurrent quarter first quarter sales grew 19% year-over-year. Each business unit achieved double-digit sales growth overcompared to the prior year quarter.
Net sales in our direct-to-consumer retail and ecommerce salesthe Delta Group segment were $87.6 million compared to $89.0 million in the prior year. Sales orders in Activewear were strong for the quarter, but delivery was only 1.1%,hindered by inventory shortages and the impact of two major hurricanes in Central America. Our FunTees business had strong growth both within our traditional brand direct channel as the prior yearwell as our fast-growing retail direct channel. Catalog sales included ecommerce and retail sales of the since-divested Junkfood business. Excluding these sales from the since-divested Junkfood business in the prior year quarter, salescontinued to realize year-over-year growth in our direct-to-consumer retail and ecommerce channels was 9.7% year-over-year driven from increased sales on our Salt Life, Soffe, and Coast consumer ecommerce sites and in our new retail stores.
The change in fair value of contingent consideration was associated with the Salt Life acquisition. Based upon our updated analysis, the fair value of this liability decreased $0.3 million in the 2018Group segment first quarter revenue grew to $7.1 million compared to a decrease of $0.1$6.9 million in the prior year period. The change is principallysegment’s growth was driven by an increase in overall direct-to-consumer sales, with growth in both ecommerce and retail sales.
Gross margins improved 70 basis points from the prior year first quarter increasing to 21.4% of sales, with margin expansion in both business segments.
The Delta Group segment gross margins improved 50 basis points from the prior year to 19.1% driven by favorable product mix, lower raw material costs, and manufacturing efficiencies and process improvements.
The Salt Life Group segment gross margins improved 140 basis points to 50.2% driven by a stronger mix of direct-to-consumer sales.
Selling, general, and administrative expenses ("SG&A") were $16.0 million, or 16.9% of sales, compared to $18.1 million, 18.8% of sales, in the prior year. Expenses decreased due to cost reductions implemented during the pandemic that have continued, including lower personnel costs, reduced remaining timetravel expenses, and a more digitally-focused sales and marketing strategy.
Other expense includes $1.3 million of expenses related to the impact of two hurricanes that disrupted our Honduran manufacturing facilities in the measurement period.December 2020 quarter. In addition, the December 2020 quarter includes profits related to our Honduran equity method investment. The sales expectations for calendar yearDecember 2019 have been reduced from the sales expectations usedquarter included valuation changes in the valuation ofour contingent consideration at acquisition dueliabilities as well as profits related to our current view of the retail environment. Our expectations are consistent with those at September 30, 2017.
Operating profit in the first quarter we recorded $47 thousand in other incomeincreased 16% to $3.1 million compared to $0.1$2.6 million in the prior year. Operating income, adjusted for $1.3 million of hurricane-related expenses, was $4.4 million for the current quarter, an increase of 67% from the prior year.
The Delta Group segment had operating income in the current fiscal year period. quarter of $6.3 million, or 7.2% of net sales, compared to $7.3 million, or 8.2% of net sales, in the prior year. Adjusting for $1.3 million of hurricane-related disruption costs, operating income was $7.6 million, or 8.7% of sales, in the December 2020 quarter. The expanded operating profitability was driven by favorable gross margins as well as continuing cost controls.
The Salt Life Group segment incurred an operating loss of $0.1 million compared to the prior year loss of $0.7 million. Operating income improved due to the stronger mix of direct-to-consumer sales.
Net interest expense for the first quarter of each of fiscal years 2018 and 2017year 2021 was $1.3 million.
Our effective tax ratebenefit on operations for the three-month period ended December 30, 2017,quarter was (46.4%)39.3%. This tax benefit relates to stock option excess benefits as a result from our adoption of ASU 2016-09. This compares to an effective income tax rate of 27.0%4.6% for the same period in the prior year and 5.9% for the fiscal year ended September 30, 2017.
Net income for both the discrete tax expense associated with the New Tax Legislation, is currently expected to be approximately 12-13%. The change in the federal statutory rate from 34% to 21% as a result of the New Tax Legislation is effective at the beginning of our fiscal year. As such, the blended federal statutory tax rateDecember 2020 and 2019 quarters was $0.9 million, or $0.13 per diluted share. Adjusted for the fiscal year is anticipated to be approximately 24.3%. However, changes in the mix of U.S. taxable income compared to profits in tax-free$1.1 million after-tax expense, or lower-tax jurisdictions can have a significant impact on our overall effective tax rate. In addition, the$0.15 per diluted share, impact of the New Tax Legislation may differ from our initial provisional estimates, possibly materially, due to, among other things, changes in interpretations and assumptions made regarding the New Tax Legislation, guidance that may be issued and actions we may take as a result of the New Tax Legislation.
Accounts receivable were $51.0 million compared to $48.2$63.6 million at December 31, 2016, and $47.62020, compared to $61.0 million as of September 30, 2017.2020. Days sales outstanding ("DSO") decreased from 53as of December 2020 were 57 days in the prior yearcompared to 48 days, and was in line with the 49
Net inventory as of December 30, 2017. Strong2020 was $148.5 million, an increase of $3 million from September 2020, but down $48.8 million from a year ago. The stronger than anticipated December 2020 quarter sales, inalong with the quarter offsettemporary hurricane disruptions, slowed the normal seasonal build of inventory during the quarter. We have already ramped up production at an accelerated pace in inventory that occursJanuary and expect to be producing at record levels in the December quarter.
Total net debt, including capital lease financing and cash on hand, increased $7.6 million during the first quarter of fiscal year 2018. Capital expenditures primarily relatedfrom September 2020 to machinery and equipment as well as investments in our direct-to-consumer business, including our retail stores, and enhancements to our information technology systems. Depreciation and amortization expense, including non-cash compensation, was $2.9 million for the first quarter of fiscal year 2018.
Non-GAAP Financial Measures
We provide all information required in accordance with U.S. GAAP, but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only U.S. GAAP financial measures. In an effort to provide investors with additional information regarding the Company'sour results, we also provide non-GAAP information that management believes is useful to investors. We discuss adjustedoperating income, adjustednet income and earnings per diluted share adjusted gross margin, adjusted selling general and administrative expenses performance measures that are, for comparison purposes, adjusted to eliminate items or results stemming from discrete events. We do this because management uses these measures in evaluating the Company'sour underlying performance on a consistent basis across periods. We also believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of the Company'sour ongoing performance. These non-GAAP measures have limitationsimitations as analytical tools, and securities analysts, investors and other interested parties should not consider any of these non-GAAP measures in isolation or as a substitute for analysis of the Company'sor our results as reported under U.S. GAAP. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
Liquidity and Capital Resources
Operating Cash Flows
Operating activities used $7.8$2.5 million and $0.5$4.9 million in cash in the first three months of fiscal years 2018December 2020 and 2017,2019 quarters, respectively. The increased use ofimproved operating cash fromflows in the priorcurrent year isare due to increased payments to suppliers to improve timing of payments and higher receivableslower inventory levels as manufacturing production was hampered by disruptions from our customers fromhurricanes during the higher sales compared toDecember 2020 quarter. This was offset by slower customer collections than the prior year. This is offset partially by the prior year having a larger seasonal inventory build.
Investing Cash Flows
Total capital expenditures for the December 2020 quarter were $6.9 million and primarily related to investments in digital printing capacity and our new Phoenix, Arizona distribution center. Cash outflows for capital expenditures were $0.4 million during the first three months of fiscal year 2018 were $2.2 millionDecember 2020 quarter compared to $1.9$3.7 million in the same period lastin the prior year. Capital expendituresAs of December 2020, there were $4.0 million in both periods primarily related to machinery and equipment, along with investments in our direct-to-consumer initiatives and information technology systems. There were $3.1 million incurrent year expenditures financed under a capital lease arrangement and
We anticipate our fiscal year 20182021 capital expenditures, including those financed under capital leases, to be approximately $13$20 million and to be focused primarily on our distribution expansion, digital print equipment, manufacturing equipment, along with information technology, and direct-to-consumer enhancements .
Financing Activities
During the three months ended December 30, 2017,2020 quarter, cash used by financing activities was $5.0 million and primarily related to the annual payment of the DTG2Go contingent consideration related to the fiscal year 2020 period. During the December 2019 quarter, cash provided by financing activities was $9.0$9.3 million compared to $2.4 million provided by financing activities for the three months ended December 31, 2016. The cash provided by our financing activities during the first three months of fiscal year 2018and was used to fund our operating activities as well as share repurchases.
Future Liquidity and Capital Resources
See Note F – Debt to the Condensed Consolidated Financial Statements for discussion of our various financing arrangements, including the terms of our revolving U.S. credit facility.
Prior to the amendments executed on April 27, 2020 and August 28, 2020 (collectively, the "Bridge Amendments"), our current expectations, we believe that ourU.S. revolving credit facility should be sufficient to satisfy our foreseeable working capital needs, andincluded a financial covenant that cash flow generated by our operations and funds availableif the availability under our credit facility shouldfalls below the amounts specified in our U.S. credit agreement, our fixed charge coverage ratio ("FCCR") for the preceding 12-month period must not be sufficientless than 1.1 to service1.0. The Bridge Amendments amend the financial covenant provisions from the amendment dates through July 3, 2021, including effectively lowering the minimum availability thresholds and removing the requirement that our debt paymentFCCR for the preceding 12-month period must not be less than 1.1 to 1.0. Our availability at December 2020 was above both the minimum availability threshold per the Bridge Amendments as well as the higher thresholds in the U.S. credit agreement that would trigger an FCCR covenant requirement. Had we been subject to the FCCR requirements at December 2020, we would have been in compliance with this covenant.
Our credit facility, as amended on August 28, 2020, as well as cash flows from operations, are intended to satisfyfund our day-to-day working capital needs, and along with finance lease arrangements, to fund our planned capital expenditures. AnyHowever, any material deterioration in our results of operations, however,such as those that could occur due to the COVID-19 pandemic, may result in the loss of our ability to borrow or issue letters of credit to suppliers under our U.S. revolving credit facility, and to issue letters of credit to suppliers, or may cause the borrowing availability under that facility to be insufficient for our needs. Availability under our credit facility is primarily a function of the levels of our accounts receivable and inventory. A significant deterioration in our accounts receivable or inventory levels could restrict our ability to borrow additional funds or service our indebtedness. Moreover, our credit facility includes a financial covenant that if the availability under our credit facility falls below the amounts specified in our U.S. credit agreement, our fixed charge coverage ratio (FCCR) for the preceding 12-month period must not be less than 1.1 to 1.0. While our availability at December 30, 2017, was above the minimum thresholds specified in our credit agreement,Additionally, a significant deterioration in our business results could cause our availability to fall below suchminimum thresholds, thereby requiring us to maintain the minimum FCCR specified in our credit agreement.
Purchases By Delta Apparel Of Its Own Shares
During the three months ended December 30, 2017,2020 quarter, we purchased 145,124did not purchase any shares of our common stock for an aggregate amount of $3.0 million (see Note N-RepurchaseN—Repurchase of Common Stock). As of December 30, 2017,2020, there was $8.3$7.5 million of repurchase authorization remaining under our Stock Repurchase Program. We evaluate current leverage, working capital requirements, our free cash flow outlook, stock valuation and future business opportunities to determine when we believe the repurchase of our stock is a sound investment opportunity that we can pursue without sacrificing future growth plans.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which were prepared in accordance with U.S. GAAP. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to revenue recognition, accounts receivable and related reserves, inventory and related reserves, the carrying value of goodwill, and the accounting for income taxes.
A detailed discussion of critical accounting policies is contained in the Significant Accounting Policies included in Note 2 to the Audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017,2020, and there have been no changes in those policies since the filing of that Annual Report on Form 10-K with the SEC.
Environmental and Other Regulatory Matters
We are subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions and solid waste disposal. The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the United States. Our plants generate small quantities of hazardous waste, whichinternational operations are either recycled or disposed of off-site.
The environmental and other regulations applicable to our business are becoming increasingly stringent, and we incur capital and other expenditures annually to achieve compliance with these environmental standards.standards and regulations. We currently do not expect that the amount of expenditures required to comply with these environmental lawsstandards or other regulatory matters will have a material adverse affecteffect on our operations, financial condition or liquidity. There can be no assurance, however, that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, while we believe that we are currently in material compliance with all applicable environmental and other regulatory requirements, the extent of our liability, if any, for past failures to