Washington, D.C. 20549
FORM
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
DELTA APPAREL, INC.
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) hasIndicate 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
Indicate by check mark whether
the registrant is a large acceleratedfiler, an accelerated filer, a non-acceleratedfiler, a smaller reporting company, or an emerginggrowthLarge accelerated filer ☐ | Accelerated filer ☑ | Non-accelerated filer ☐ | Smaller reporting company ☑ | Emerging growth company ☐ |
If an emerging
growth company,indicate by checkmark if theregistrant has electednot to usethe extended transitionperiod for complyingwith any newor revisedIndicate by check mark whether the registrant is a shell company
As of
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.
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.
Condensed Consolidated Statements of Comprehensive (Loss) 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.
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.
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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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
We design and internally manufacture the majority
of our products, with morethanWe operate on a
For presentation purposes herein, all references to period
ended relate to the following fiscal years and dates:Period Ended | Fiscal Year | Date Ended |
June 2022 | Fiscal 2022 | July 2, 2022 |
September 2022 | Fiscal 2022 | October 1, 2022 |
December 2022 | Fiscal 2023 | December 31, 2022 |
March 2023 | Fiscal 2023 | April 1, 2023 |
June 2023 | Fiscal 2023 | July 1, 2023 |
We prepared the accompanying interim Condensed Consolidated
Financial Statements in accordancewith the instructions for FormOur Condensed Consolidated Financial Statements include the accounts of Delta
Apparel and its wholly-owned and majority-owned domestic and foreign subsidiaries.We make
available copies of materials we filewith, or furnish to, the SEC freeof charge at https://ir.deltaapparelinc.com.The information found on our website is notStandards Not Yet Adopted
In June 2016, the FASB
issued ASU No.Our Condensed Consolidated Statements of Operations
include revenue streams from retail salesat our branded retail stores; direct-to-consumerecommerce sales on ourThree 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 foreach 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 |
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 forthe Delta Group, undecoratedgarments for the DTG2Go business,and direct embellishment materialsfor theCredit Facility
On May 10,2016,we entered into
a Fifth Amendedand Restated Credit AgreementOn June 2,2022, the Borrowers entered into the EighthSeventh Amendment to
On FebruaryJanuary 3, 2023, the Borrowers entered into
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 addsan Accommodation Period beginningon the amendment dateand continuing through thedate followingOn 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 setThe Amended Credit Agreement allows us to borrow
up toAs of MarchJune 2023, we had
Honduran Debt
Since March 2011, we have
entered into term loans and arevolving credit facility with Banco Ficohsa, aHonduran bank, to finance investments in boththe operationsEl Salvador Debt
In September 2022, we entered into
a new term loan withaAdditional information about these loans and the outstanding balances
as ofJune 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 |
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
On February 6,2020, our shareholders approved the Delta Apparel, Inc. 2020 Stock Plan ("("2020Stock Plan") to replace the 2010 Stock Plan,
Compensation expense is recorded within SG&A in our Condensed Consolidated Statements of Operations over the vesting periods. During the MarchJune 2023 and March
During the December 2022 quarter, restricted
stock units representingDuring the
December 2022 quarter,performance stock unitsand restricted stockunits representingAs of MarchJune 2023, there was $
Yarn | $ | 19,123 | ||
Finished fabric | 1,952 | |||
Finished products | 7,542 | |||
$ | 28,617 |
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 areThe 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 theon-demand, direct-to-garment digital printand fulfillment industry,bringing technology and innovationto the supplychains of ourDelta Activewear is a preferred supplier of activewear
apparel to regional and global brands aswell asThe iconic Soffe brand offers activewear for spirit
makers and record breakers andis widely known for the original "cheershort" with the signature roll-down waistband.Our Global
Brands channelserves as akey supply chainpartner tolarge multi-nationalbrands, major brandedsportswear companies, trendyregional brands, andallOur Retail Direct
channel serves brickand mortar andonline retailers byproviding our portfolioof Delta, DeltaPlatinum, andSoffe products directlyto the retaillocationsThe Salt Life Group is
comprised of our Salt Life business, whichis built on the authentic, aspirational SaltLife lifestyle brand that represents a passionfor the ocean,Our Chief Operating Decision Makerchief operating decision maker and management evaluate performance
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 consolidatedThree 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 | ) | $ | 7,324 | $ | (23,100 | ) | $ | 24,183 |
The Tax
Cuts and Jobs Actof 2017 enacted onDecember 22,2017, significantly revised theU.S. corporate income tax codeby, amongother things, lowering federalOur effective income tax
rate on operations for theFrom 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
Notional | ||||||||
Effective Date | Amount | Fixed LIBOR Rate | Maturity Date | |||||
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 asJune 2023 | September 2022 | |||||||
Deferred tax assets | $ | (7 | ) | $ | (48 | ) | ||
Other assets | 28 |
| 189 |
| ||||
Accumulated other comprehensive gain | $ | 21 |
| $ | 141 |
|
From time to time, we may purchase
cotton option contracts to economicallyhedge the risk related to market fluctuationsin the cost of cotton used inour operations. WeASC 820,FairValueMeasurements andDisclosures (“ASC 820”), defines
fair value,establishes aframework formeasuring fairvalue andexpands disclosuresaboutfair value○ | 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 or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques. |
The following financial liabilities are measured at fair
value on a recurring basis (in thousands):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 | ||||||||||||||||
June 2023 | $ | 21 | — | $ | 21 | — | ||||||||||
September 2022 | $ | 141 | — | $ | 141 | — | ||||||||||
The fair value
of the interest rateswap agreements wasderived from a discountedcash flow analysisbased on theterms of the contractand the forwardinterest rate curvesAt times,
we areparty to variouslegal claims,actions andcomplaints. We believethat, asa resultof legaldefenses, insurancearrangements, andindemnification provisionsAs of September 28,2019,our Board of
Directors authorized management touse up toJune 2023 | September 2022 | |||||||||||||||||||||||||
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 | $ | 16,000 | $ | (5,251 | ) | $ | 10,749 | $ | 16,000 | $ | (4,851 | ) | $ | 11,149 | 20 – 30 yrs | |||||||||||
Customer relationships | 7,400 | (3,768 | ) | 3,632 | 7,400 | (3,213 | ) | 4,187 | 20 yrs | |||||||||||||||||
Technology | 10,083 | (3,284 | ) | 6,799 | 10,083 | (2,610 | ) | 7473 | 10 yrs | |||||||||||||||||
License agreements | 2,100 | (1,017 | ) | 1,083 | 2,100 | (940 | ) | 1,160 | 15 – 30 yrs | |||||||||||||||||
Non-compete agreements | 1,657 | (1,656 | ) | 1 | 1,657 | (1,600 | ) | 57 | 4 – 8.5 yrs | |||||||||||||||||
Total intangibles | $ | 37,240 | $ | (14,976 | ) | $ | 22,264 | $ | 37,240 | $ | (13,214 | ) | $ | 24,026 |
Goodwill represents the
acquired goodwill netof theDepending on the type
of intangible asset, amortization isrecorded under cost of goodssold or selling, general andadministrative expenses. Amortization expense forCautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-lookingstatements made by or on behalfof the Company. We may from time toForward-looking statements
are neitherhistorical factsnor assurancesof futureperformance. Instead,they arebased onour currentexpectations andare necessarily● | the general U.S. and international economic conditions; | |
● | the impact of the COVID-19 pandemic and government/social actions taken to contain its spread on our operations, financial condition, liquidity, and capital investments, including recent labor shortages, inventory constraints, and supply chain disruptions; |
● | 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 or in areas in which we, or our suppliers or vendors, operate; |
● | 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; |
● | the inability of suppliers or other third-parties, including those related to transportation, to fulfill the terms of their contracts with us; | |
● | 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 riskfactors that havethe potential tocause actual resultsto differ materiallyfrom our expectationsis set forthin Part 1under theWe are seeing indications of stabilizing demand in the activewear market and believe that the elevated inventory levels in the retail supply chain following last year’s heavy buying activity may be moderating. In addition, we continue to make steady progress towards a more normalized operating environment for our business, with our decision last year to reduce production levels to align with the lower demand environment and purchase less price-inflated cotton proving effective in positioning Delta Apparel for improved operating results going forward.
During our third quarter
We expect to complete a significant strategic initiative before the end of our fiscal year involving the transition of our more expensive offshore production capacity into our lower cost Central American platform. This initiative, along with several other recent restructuring activities, should generate annual cost savings of up to $6 million. We also made substantial progress during the quarter on inventory and debt reduction initiatives intended to counteract the challenging operating environment seen in recent periods, including record
Our Salt Life business continued to expand its direct-to-consumer footprint during the quarter, opening its 24th and 25th retail locations across the country. Salt Life’s branded retail footprint now extends across nine states including California, Texas, Alabama, Georgia, Florida, South Carolina, Delaware, New Jersey and, most recently, two locations in New York. In addition, Salt Life’s ecommerce business grew over 100% during the June quarter and achieved significant gains across key metrics including site traffic and conversion rates. Salt Life’s four new retail locations in the Northeast U.S. market are a great example of our omni-channel consumer strategy and data-driven approach to retail store site selection, with ecommerce order activity in New Jersey and New York and adjacent states consistently among the most active on our site in recent periods. We expect for Salt Life’s direct-to-consumer retail and ecommerce channels to continue to expand and anticipate additional sales growth at Salt Life going forward.
Our DTG2Go business recently achieved a variety of key milestones, including the recalibration of our entire “Digital First” technology fleet, a consumer satisfaction initiative involving the rationalization of size and DTG2Go with year-over-year
With two very significant cost-driving trends now moving behind us and a streamlined cost structure in place moving ahead, Delta Apparel is in an excellent position to take advantage of 16%favorable changes in demand as they arise across our five go-to-market channels. We expect to see steady improvement in our overall operating results as we close out our fourth quarter and 19%move into our next fiscal year. For fiscal year 2024, we currently anticipate net sales in a range of $410 to $425 million generating operating profit margins of 3.25% to 4.25%, respectively,with gross margins sequentially increasing into the low-to-mid 20% range and improving operating profit margins beginning in the second quarter, as well as double-digit salesrevenue growth in our Retail Direct
Results of Operations
Financial results included herein have been presented on a generally accepted accounting principles ("GAAP") basis.
Net sales were $110.3$106.3 million in the secondthird quarter of fiscal 2023, a
Net sales in the secondDelta Group segment declined 16% to $89.1 million in the third quarter of fiscal 2023
Net sales during the
Gross margins were 13.1% for the third quarter of fiscal 2023, a decline from 24.2% in the prior year third quarter driven by production curtailments to match manufacturing output with market demand as well as inflationary cotton costs (collectively "Production Curtailment & Cotton Costs"). Excluding these Production Curtailment & Cotton Costs, third quarter adjusted gross margins
The Delta Group segment gross margins were 5.9% for the third quarter of fiscal 2023 compared to 19.1% in the prior year third quarter. Excluding the Production Curtailment & Cotton Costs, adjusted gross margins were 17.4%. Gross margins for the first nine months of fiscal 2023 declined from 19.9%19.6% in
The Salt Life Group segment gross margins improved to 59.0%were 50.5% in
Selling, general, and administrative expenses ("SG&A") were
Other lossincome for the 2023
Operating loss in the second
The Delta Group segment experienced an operating loss of
The Salt Life Group
segmentNet interest expense for the second quarterthird quarters of fiscal year 2023 and 2022 was $3.7$4.0 million
Our effective tax rate on
operations for theNet loss attributable to shareholders for the secondthird fiscal
Accounts receivable were $62.0
Net inventory as of MarchJune 2023 was $243.2$226.2 million, a decrease of $5.4$22.3 million from September 2022 and an increase of $45.5 million from March 2022. The inventory
Total net debt, including capital lease financing and cash on hand, was $194.3$166.2 million at MarchJune 2023, an
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 our results, we also provide non-GAAP information that management believes is useful to investors. We discuss gross margins, operating income and net income 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 our 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 our ongoing performance. These non-GAAP measures have limitations 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 or our results as reported under U.S. GAAP. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
Reconciliation of GAAP gross margins to non-GAAP gross margins, GAAP operating income to non-GAAP operating income, and GAAP net income to non-GAAP net income are presented below. A description of the amounts excluded on a non-GAAP basis are provided in conjunction with the below information. Non-GAAP gross margin, non-GAAP operating income, and non-GAAP net income should be evaluated in light of the Company's financial statements prepared in accordance with GAAP.
Reconciliation of Gross Margin, Operating Income and Net Income to Non-GAAP Measures Adjusted Gross Margin, Adjusted Operating Income, and Adjusted Net Income
Unaudited
(in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||||
June 2023 | June 2022 | June 2023 | June 2022 | ||||||||||||||
| |||||||||||||||||
Gross Margin | $ | 13,935 | $ | 30,693 | $ | 43,768 | $ | 87,219 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 |
| - | ||||||||||||
Adjusted Gross Margin | $ | 24,181 | $ | 30,693 | $ | 73,384 | $ | 87,219 | |||||||||
Percent of Sales | 22.7% | 24.2% | 22.7% | 23.6% | |||||||||||||
Operating (Loss) Income | $ | (4,461) | $ | 9,295 | $ | (12,438) | $ | 29,553 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 | - | |||||||||||||
Restructuring Costs (3) | 32 | - | 3,344 |
| - | ||||||||||||
Adjusted Operating Income | $ | 5,817 | $ | 9,295 | $ | 20,522 | $ | 29,553 | |||||||||
Net (Loss) Income | $ | (6,287) | $ | 6,240 | $ | (16,841) | $ | 20,023 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 | - | |||||||||||||
Restructuring Costs (3) | 32 | - | 3.344 | - | |||||||||||||
Tax Impact | (2,775) | - | (8,950) |
| - | ||||||||||||
Adjusted Operating Income | $ | 1,216 | $ | 6,240 | $ | 7,169 | $ | 20,023 |
Reconciliation of Delta Group Segment Gross Margin and Operating Income to Delta Group Segment Adjusted Gross Margin and Adjusted Operating Income
Unaudited
(in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||||
June 2023 | June 2022 | June 2023 | June 2022 | ||||||||||||||
| |||||||||||||||||
Gross Margin | $ | 5,254 | $ | 20,227 | $ | 18,013 | $ | 63,470 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 |
| - | ||||||||||||
Adjusted Gross Margin | $ | 15,500 | $ | 20,227 | $ | 47,629 | $ | 63,470 | |||||||||
Percent of Sales | 17.4% | 19.1% | 17.2% | 19.6% | |||||||||||||
Operating (Loss) Income | $ | (3,621) | $ | 10,701 | $ | (10,979) | $ | 33,557 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 | - | |||||||||||||
Restructuring Costs (3) | 32 | - | 3,344 |
| - | ||||||||||||
Adjusted Operating Income | $ | 6,657 | $ | 10,701 | $ | 21,981 | $ | 33,557 | |||||||||
Percent of Sales | 7.5% | 10.1% | 7.9% | 10.4% |
(1) Production Curtailment Costs consist of unabsorbed fixed costs, temporary unemployment benefit payments, and other expense items resulting from the Company's decision to reduce production levels to better align with the significantly reduced consumer demand impacting our
(2) Cotton Costs consist of the amount of the cotton component of the Company's cost of sales in excess of the average price per pound of cotton over a recent 10-year period ($0.78 per pound) as well as inflationary input costs.
(3) Restructuring Costs consist of employee severance benefits paid in connection with the transition of our more expensive Mexico manufacturing capacity to our more efficient Central America manufacturing platform, employee severance benefits paid in connection of leadership restructuring, expenses incurred in connection with the closure of a legacy facility we acquired via acquisition and the absorption of the print capacity at that facility into our nationwide network of dual purpose digital print and blank garment distribution facilities, and additional cost items incurred from restructuring activities.
Liquidity and Capital Resources
Operating Cash Flows
Operating activities resulted in a cash
Investing Cash Flows
Cash outflows for capital expenditures were $2.5$3.5 million during the first sixnine months of 2023 compared to $7.7$11.6 million in the same period in the
Financing Activities
During the sixnine months
Future Liquidity and Capital Resources
See Note F – Debt to the Condensed
Consolidated Financial Statements forOur credit facility, as well as cash flows
from operations, are intendedto fund our day-to-day workingcapital needs, and along withcapital lease financing arrangements,We
Share Repurchase Program
We did not purchase any
shares under our previously announced share repurchase programin theCritical 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
A
detailed discussionofcriticalaccounting policiesiscontained intheSignificantAccounting PoliciesincludedinNote 2totheAudited ConsolidatedFinancialEnvironmental and Other Regulatory Matters
We
are subjectto variousfederal, stateand localenvironmental lawsand regulationsconcerning, amongother things,wastewater discharges,storm waterflows, airThe environmental and other regulations applicable to our business are becoming increasingly
stringent, and we incur capital and other expenditures annually to achieveDisclosure controls and procedures are controls and other procedures
that are designed to reasonably assure that information requiredto be disclosed in the reports thatOur management, with the
participation of our ChiefExecutive Officer and principalaccounting officer, hasevaluated the effectiveness of ourdisclosure controls andChanges in Internal Control Over Financial Reporting
There were
no changes duringtheOTHER INFORMATION |
Legal Proceedings |
See Note M—Legal Proceedings, in Part I, Item 1, which
is incorporated herein by reference.See Note N—Repurchase of Common Stock, Part I, in Item
1, which is incorporated herein by reference.Other Information |
Amendment to Delta Apparel, Inc. 2020 Stock Plan to Include "Double Trigger" Vesting Provisions
On August 2, 2023 (“Effective Date”), the Board of Restricted Stock Unit and Performance Unit Agreement
The Amendment essentially operates to add “double trigger” vesting provisions to the Plan in the event of a Change in Control. More specifically, the Amendment replaces Section 9(c) of the Plan entirely with the following terms that apply to grants of Awards made to Participants after the Effective Date and in the event of a Change in Control: (i) to the extent a successor or surviving company does not assume or substitute an Award granted prior to the Change in Control, the Award shall become fully vested, exercisable (if applicable), earned and payable to the fullest extent of the original grant of the applicable Award, provided that, performance-based Awards shall be deemed earned at target unless otherwise provided in an individual Award Agreement; (ii) if a successor or surviving company assumes, continues, or substitutes an Award granted prior to the Change in Control on substantially similar terms and if the employment or Service of a Participant is terminated for Cause or Good Reason within one year after the effective date of the Change in Control, the Award will become fully vested, exercisable (if applicable), earned and payable to the fullest extent of the original grant of the applicable Award, provided that, performance-based Awards shall be deemed earned at target; (iii) definitions are provided for the terms Cause and Good Reason; and (iv) unless an individual Award Agreement states otherwise, if the Participant has entered into an employment agreement or similar agreement or arrangement, the Participant is entitled to the greater of benefits provided upon a Change in Control under the Plan or the respective employment agreement or similar agreement or arrangement. The Amendment also provides that Awards outstanding as of the Effective Date shall continue in accordance with their terms and are not affected by the Amendment.
The foregoing summary of the Amendment does not purport to be complete and is qualified in its entirety by reference to the text of the Amendment, which is filed herewith as Exhibit 10.1 to this Quarterly Report on Form 10-Q and which is incorporated herein by reference.
Exhibits |
Exhibits
10.1 | Exhibit 10.1 Declaration of Amendment of Delta Apparel, Inc. 2020 Stock Plan. | |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,as adopted pursuant to
DELTA APPAREL, INC. (Registrant) | |||
Date | August 9, 2023 | By: | /s/ Nancy P. Bubanich |
Nancy P. Bubanich |