Table of Contents

 



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended January 1,July 2, 2022

OR

 

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

 

For the transition period from                     to                     

 

Commission File Number 1-15583

 

DELTA APPAREL, INC.


(Exact name of registrant as specified in its charter)

 

Georgia

 

58-2508794

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

2750 Premier Parkway, Suite 100

 

 

Duluth, Georgia

 

30097

(Address of principal executive offices)

 

(Zip Code)

 

(678) 775-6900

 


(Registrant’s telephone number, including area code)

 


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

 

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

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.01

 

DLA

 

NYSE American

 

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

 

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

Yes ☑ No ☐

 

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

 

Large accelerated filer ☐

 

Accelerated filer ☑

 

Non-accelerated filer ☐

 

Smaller reporting company ☑

 

Emerging growth company ☐

 

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

 

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

 

As of January 27,July 19, 2022, there were outstanding 6,948,8736,914,939 shares of the registrant’s common stock, par value of $0.01 per share, which is the only class of outstanding common or voting stock of the registrant.

 



 

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets — December 2021June 2022 and September 2021

3

 

 

 

 

Condensed Consolidated Statements of Operations — Three and Nine months ended DecemberJune 2022 and June 2021 and December 2020

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Nine months ended DecemberJune 2022 and June 2021 and December 2020

5

 

 

 

 

Condensed Consolidated Statements of Shareholders' Equity — Three and Nine months ended DecemberJune 2022 and June 2021 and December 2020

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows — ThreeNine months ended DecemberJune 2022 and June 2021 and December 2020

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

Note A—Basis of Presentation and Description of Business

8

 Note B—Accounting Policies89
 Note C—New Accounting Standards89
 Note D—Revenue Recognition910
 Note E—Inventories911
 Note F—Debt1011
 Note G—Selling, General and Administrative Expense1011
 Note H—Stock-Based Compensation1012
 Note I—Purchase Contracts1012
 Note J—Business Segments1113
 Note K—Income Taxes1114
 Note L—Derivatives and Fair Value Measurements1214
 Note M—Legal Proceedings1215
 Note N—Repurchase of Common Stock1315
 Note O—Goodwill and Intangible Assets1316
 Note P—Subsequent Events1316
   

Item 2.

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

1417

   

Item 4.

Controls and Procedures

1520

 

 

 

PART II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

1520

 

 

 

Item 1A.Risk Factors1520
   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

1520

 

 

 

Item 5.

Other Information

1520

 

 

 

Item 6.

Exhibits

1521

 

 

 

Signatures

 

1622

 

 

 

Exhibits

 

 

EX-10.6.5EX-10.1 

EX-31.1

 

EX-31.2

 

EX-32.1

 

EX-32.2

 

 

 

 

PART 1.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

(Unaudited)

 

 

December 2021

 

September 2021

  

June 2022

 

September 2021

 

Assets

          

Cash and cash equivalents

 $6,379  $9,376  $542  $9,376 

Accounts receivable, less allowances of $183 and $251, respectively

 65,060  66,973 

Accounts receivable, less allowances of $91 and $251, respectively

 68,435  66,973 

Other receivables

 681  761  1,433  761 

Income tax receivable

 439 356  0 356 

Inventories, net

 183,058  161,703  227,671  161,703 

Prepaid expenses and other current assets

  5,162   3,794   3,798   3,794 

Total current assets

 260,779  242,963  301,879  242,963 
  

Property, plant and equipment, net of accumulated depreciation of $102,014 and $99,225, respectively

 66,350  67,564 

Property, plant and equipment, net of accumulated depreciation of $105,998 and $99,225, respectively

 75,144  67,564 

Goodwill

 37,897  37,897  37,897  37,897 

Intangibles, net

 25,766  26,291  24,627  26,291 

Deferred income taxes

 1,030  1,854  1,164  1,854 

Operating lease assets

 43,423  45,279  47,570  45,279 

Equity method investment

 10,202  10,433  10,277  10,433 

Other assets

  1,929   2,007   2,893   2,007 

Total assets

 $447,376  $434,288  $501,451  $434,288 
  

Liabilities and Equity

          

Liabilities:

          

Accounts payable

 $60,498  $52,936  $76,244  $52,936 

Accrued expenses

 22,823  29,949  25,936  29,949 

Income taxes payable

  356 379   666 379 

Current portion of finance leases

 6,581  6,621  8,265  6,621 

Current portion of operating leases

 8,197 8,509  8,044 8,509 

Current portion of long-term debt

 7,265  7,067  7,615  7,067 

Current portion of contingent consideration

  1,897   0   563   0 

Total current liabilities

 107,617  105,461  127,333  105,461 
  

Long-term income taxes payable

 3,186  3,220  2,841  3,220 

Long-term finance leases

 13,946  15,669  18,802  15,669 

Long-term operating leases

 37,208  38,546  40,940  38,546 

Long-term debt

 118,149  101,680  128,230  101,680 

Long-term contingent consideration

 0  1,897  0  1,897 

Other non-current liabilities

  2,289   3,621   1,591   3,621 

Total liabilities

 $282,395  $270,094  $319,737  $270,094 
  

Shareholder's equity:

          

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

 0  0  0  0 

Common stock - $0.01 par value, 15,000,000 authorized, 9,646,972 shares issued, and 6,976,888 and 6,974,660 shares outstanding as of December 2021 and September 2021, respectively

 96  96 

Common stock - $0.01 par value, 15,000,000 authorized, 9,646,972 shares issued, and 6,914,939 and 6,974,660 shares outstanding as of June 2022 and September 2021, respectively

 96  96 

Additional paid-in capital

 59,205  60,831  60,822  60,831 

Retained earnings

 150,505  146,860  166,882  146,860 

Accumulated other comprehensive loss

 (574) (786) (7) (786)

Treasury stock - 2,670,084 and 2,672,312 shares as of December 2021 and September 2021, respectively

  (43,618)  (42,149)

Treasury stock - 2,732,033 and 2,672,312 shares as of June 2022 and September 2021, respectively

  (45,432)  (42,149)

Equity attributable to Delta Apparel, Inc.

 165,614  164,852  182,361  164,852 

Equity attributable to non-controlling interest

  (633)  (658)  (647)  (658)

Total equity

  164,981   164,194   181,714   164,194 

Total liabilities and equity

 $447,376  $434,288  $501,451  $434,288 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3

 

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations 

(Amounts in thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

  

Three Months Ended

  

Nine Months Ended

 
 

December 2021

  

December 2020

  

June 2022

  

June 2021

  

June 2022

  

June 2021

 
  

Net sales

 $110,746  $94,723  $126,875  $118,666  $369,319  $322,015 

Cost of goods sold

  87,743   74,434   96,182   88,427   282,100   246,677 

Gross profit

 23,003  20,289  30,693  30,239  87,219  75,338 
  

Selling, general and administrative expenses

 17,482  16,030  22,416  19,914  59,613  53,005 

Other (income) loss, net

  (395)  1,190 

Other (income), net

  (1,018)  (1,578)  (1,947)  (218)

Operating income

 5,916  3,069  9,295  11,903  29,553  22,551 
  

Interest expense, net

  1,598   1,654   1,971   1,735   5,370   5,225 

Earnings before provision for income taxes

 4,318  1,415  7,324  10,168  24,183  17,326 

Provision for income taxes

  648   572   1,087   2,019   4,149   4,032 

Consolidated net earnings

 3,670  843  6,237  8,149  20,034  13,294 

Net (income) loss attributable to non-controlling interest

  (25)  40 

Net (loss) income attributable to non-controlling interest

  (3)  (12)  11   (149)

Net earnings attributable to shareholders

 $3,645  $883  $6,240  $8,161  $20,023  $13,443 
  

Basic earnings per share

 $0.52  $0.13  $0.90  $1.17  $2.87  $1.93 

Diluted earnings per share

 $0.51  $0.13  $0.88  $1.14  $2.84  $1.90 
  

Weighted average number of shares outstanding

 6,999  6,920  6,946  6,975  6,966  6,956 

Dilutive effect of stock awards

  86   80   119   153   95   121 

Weighted average number of shares assuming dilution

  7,085   7,000   7,065   7,128   7,061   7,077 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4

 

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Amounts in thousands)

(Unaudited)

 

 

Three Months Ended

  

Three Months Ended

  

Nine Months Ended

 
 

December 2021

  

December 2020

  

June 2022

  

June 2021

  

June 2022

  

June 2021

 
  

Net earnings attributable to shareholders

 $3,645  $883  $6,240  $8,161  $20,023  $13,443 

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

  212   125   186   105   779   429 

Consolidated comprehensive income

 $3,857  $1,008  $6,426  $8,266  $20,802  $13,872 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5

 

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Amounts in thousands, except share amounts)

(Unaudited)

 

             

Accumulated

                         

Accumulated

            
       

Additional

    

Other

       

Non-

          

Additional

    

Other

       

Non-

   
 Common Stock Paid-In Retained Comprehensive Treasury Stock Controlling    Common Stock Paid-In Retained Comprehensive Treasury Stock Controlling   
 

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Shares

  

Amount

  

Interest

  

Total

  

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  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  -  0  0  883  0  -  0  0  883 

Other comprehensive income

 -  0  0  0  125  -  0  0  125  -  0  0  0  125  -  0  0  125 

Net loss attributable to non-controlling interest

 -  0  0  0  0  -  0  (40) (40) -  0  0  0  0  -  0  (40) (40)

Vested stock awards

 0  0  (2,117) 0  0  (84,542) 984  0  (1,133) 0  0  (2,117) 0  0  (84,542) 984  0  (1,133)

Stock based compensation

  -   0   676   0   0   -   0   0   676   -   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  9,646,972 $96 $59,564 $127,447 $(1,197) 2,672,312 $(42,149) $(564) $143,197 
                   

Net earnings

 - 0 0 4,398 0 - 0 0 4,398 

Other comprehensive income

 - 0 0 0 199 - 0 0 199 

Net loss attributable to non-controlling interest

 - 0 0 0 0 - 0 (97) (97)

Vested stock awards

 - 0 0 0 0 - 0 0 0 

Purchase of common stock

 - 0 0 0 0 - 0 0 0 

Stock based compensation

  -  0  278  0  0  -  0  0  278 

Balance as of March 2021

 9,646,972 $96 $59,842 $131,845 $(998) 2,672,312 $(42,149) $(661) $147,975 
                   

Net earnings

 - 0 0 8,161 0 - 0 0 8,161 

Other comprehensive income

 - 0 0 0 105 - 0 0 105 

Net loss attributable to non-controlling interest

 - 0 0 0 0 - 0 (12) (12)

Stock based compensation

  -  0  442  0  0  -  0  0  442 

Balance as of June 2021

  9,646,972 $96 $60,284 $140,006 $(893)  2,672,312 $(42,149) $(673) $156,671 

 

             

Accumulated

                         

Accumulated

            
       

Additional

    

Other

       

Non-

          

Additional

    

Other

       

Non-

   
 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury Stock

 

Controlling

    

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury Stock

 

Controlling

   
 

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Shares

  

Amount

  

Interest

  

Total

  

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

Net earnings

 -  0  0  3,645  0  -  0  0  3,645  -  0  0  3,645  0  -  0  0  3,645 

Other comprehensive income

 -  0  0  0  212  -  0  0  212  -  0  0  0  212  -  0  0  212 

Net income attributable to non-controlling interest

 -  0  0  0  0  -  0  25  25  -  0  0  0  0  -  0  25  25 

Purchase of common stock

 0 0 0 0 0 74,232 (2,143) 0 (2,143) 0 0 0 0 0 74,232 (2,143) 0 (2,143)

Vested stock awards

 0  0  (1,766) 0  0  (76,460) 674  0  (1,092) 0  0  (1,766) 0  0  (76,460) 674  0  (1,092)

Stock based compensation

  -   0   140   0   0   -   0   0   140   -   0   140   0   0   -   0   0   140 

Balance as of December 2021

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

Net earnings

 - 0 0 10,137 0 - 0 0 10,137 

Other comprehensive income

 - 0 0 0 381 - 0 0 381 

Net loss attributable to non-controlling interest

 - 0 0 0 0 - 0 (11) (11)

Purchase of common stock

 0 0 0 0 0 28,015 (846) 0 (846)

Stock based compensation

  -  0  714  0  0  -  0  0  714 

Balance as of March 2022

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

Net earnings

 - 0 0 6,240 0 - 0 0 6,240 

Other comprehensive income

 - 0 0 0 186 - 0 0 186 

Net loss attributable to non-controlling interest

 - 0 0 0 0 - 0 (3) (3)

Purchase of common stock

 0 0 0 0 0 33,934 (968) 0 (968)

Stock based compensation

  -  0  903  0  0  -  0  0  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.

 

6

 

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

 

Three Months Ended

  

Nine Months Ended

 
 

December 2021

  

December 2020

  

June 2022

  

June 2021

 

Operating activities:

  

Consolidated net earnings

 $3,670  $843  $20,034  $13,294 

Adjustments to reconcile net earnings to net cash used in operating activities:

  

Depreciation and amortization

 3,629  3,368  11,272  10,212 

Amortization of deferred financing fees

 81  81  244  244 

Provision for inventory market reserves

 851 (405) 1,484 1,447 

Change in reserves for allowances on accounts receivable, net

 (160) (511)

Provision for deferred income taxes

 754  740  488  912 

Non-cash stock compensation

 140  676  1,756  1,396 

Gain on disposal of equipment

 2  30 

Loss (gain) on disposal of equipment

 348  (2)

Other, net

 (390) (200) (2,263) (1,672)

Changes in operating assets and liabilities:

  

Accounts receivable, net

 1,993  (2,598) (1,251) (5,458)

Inventories, net

 (22,206) (2,601) (67,452) (8,244)

Prepaid expenses and other current assets

 (1,449) (797) 602  (2,136)

Other non-current assets

 699  394  199  1,264 

Accounts payable

 7,584  387  23,390  (5,191)

Accrued expenses

 (7,572) (2,044) (1,737) 3,592 

Net operating lease liabilities

 206  279  409  543 

Income taxes

 (140) (193) 264  1,939 

Other liabilities

  (1,050)  (447)  (1,049)  (626)

Net cash used in operating activities

  (13,198)  (2,487)

Net cash (used in) provided by operating activities

  (13,422)  11,003 

Investing activities:

  

Purchases of property and equipment

 (1,822) (408) (10,931) (1,676)

Proceeds from equipment purchased under finance leases

 0 196  0 2,312 

Proceeds from sale of equipment

 0  2,312  33  422 

Cash paid for intangible asset

 (51) 0  (132) (6,655)

Cash paid for business

  (583)  (838)  (583)  (2,527)

Net cash (used in) provided by investing activities

  (2,456)  1,262 

Net cash used in investing activities

  (11,613)  (8,124)

Financing activities:

  

Proceeds from long-term debt

 138,543  112,506  411,600  346,841 

Repayment of long-term debt

 (121,293) (112,557) (383,919) (346,131)

Repayment of finance lease obligations

 (1,783) (1,684) (5,604) (5,415)

Payment of contingent consideration

 0  (2,110) 0  (2,110)

Payment of deferred financing cost

 (850) 0 

Repurchase of common stock

 (1,718) 0  (3,934) 0 

Payment of withholding taxes on stock awards

  (1,092)  (1,133)  (1,092)  (1,133)

Net cash provided by (used in) financing activities

  12,657   (4,978)  16,201   (7,948)

Net decrease in cash and cash equivalents

 (2,997) (6,203) (8,834) (5,069)

Cash and cash equivalents at beginning of period

  9,376   16,458   9,376   16,458 

Cash and cash equivalents at end of period

 $6,379  $10,255  $542  $11,389 
  

Supplemental cash flow information

  

Finance lease assets exchanged for finance lease liabilities

 $20 $3,976  $10,381 $12,290 

Operating lease assets exchanged for operating lease liabilities

 $1,401 $0  $6,869 $1,032 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

7

 

Delta Apparel, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note A— Description of Business and Basis of Presentation

 

Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and other subsidiaries, "Delta Apparel," "we," "us," "our," or the "Company") is a vertically-integrated, international apparel company. With approximately 8,7009,100 employees worldwide, we design, manufacture, source, and market a diverse portfolio of core activewear and lifestyle apparel products under our primary brands of Salt Life®, Soffe®, and Delta. We are a market leader in the on-demand, digital print and fulfillment industry, bringing DTG2Go's proprietary technology and innovation to the supply chain of our customers. We specialize in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants and e-retailers, the U.S. military, and through our business-to-business digital platform. Our products are also made available direct-to-consumer on our ecommerce sites and in our branded retail stores. Our diversified distribution model allows us to capitalize on our strengths to provide our activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail channels. 

 

We design and internally manufacture the majority of our products. More than 90% of the apparel units 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 Duluth, Georgia. 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 2022 fiscal year is a 52-week year and will end on October 1, 2022 ("fiscal 2022"). Accordingly, this Form 10-Q presents our firstthird quarter of fiscal 2022. Our 2021 fiscal year was a 52-week year and ended on October 2, 2021 ("fiscal 2021").

 

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

 

Period EndedFiscal YearDate Ended

December 2020

Fiscal 2021

January 3, 2021

March 2021Fiscal 2021April 3, 2021
June 2021Fiscal 2021July 3, 2021
September 2021

Fiscal 2021

October 2, 2021
December 2021Fiscal 2022January 1, 2022
March 2022Fiscal 2022April 2, 2022
June 2022Fiscal 2022July 2, 2022

 

We prepared the accompanying interim Condensed Consolidated Financial Statements in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. We believe these Condensed Consolidated Financial Statements include all normal recurring adjustments considered necessary for a fair presentation. Operating results for the three-month periodand nine-month periods ended December 2021June 2022are not necessarily indicative of the results that may be expected for our fiscal 2022. Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some seasonality, with sales in our June quarter generally being the highest and sales in our December quarter generally being the lowest. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for our fiscal 2021, filed with the United States Securities and Exchange Commission (“SEC”).

 

Our Condensed Consolidated Financial Statements include the accounts of Delta Apparel and its wholly-owned and majority-owned domestic and foreign subsidiaries. We apply the equity method of accounting for our investment in 31% of the outstanding capital stock of a Honduran company. During the threenine-months ended December 2021June 2022and December 2020,June 2021,we received dividends from the investment of $0.6$1.1 million and $0.3$0.9 million, respectively. Our Ceiba Textiles manufacturing facility is leased under an operating lease arrangement with this Honduran company. During the threenine-months ended December 2021,June 2022, we paid approximately $0.4$1.3 million under this arrangement. Payments of approximately $0.8$1.8 million were made during the threenine-months ended DecemberJune 20202021, which included payment of rent deferrals related to the June 2020 quarter as a result of the COVID pandemic.

 

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

 

 

8

 

Note B—Accounting Policies

 

Our accounting policies are consistent with those described in our Significant Accounting Policies in our Annual Report on Form 10-K for our fiscal 2021, filed with the SEC. See Note C for consideration of recently issued accounting standards.

 

Note C—New Accounting Standards

 

Recently Adopted Standards

 

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. The impact of the adoption of provision of ASU 2019-12 did not have a material impact to our financial condition, results of operations, cash flows, and disclosures.

 

Standards Not Yet Adopted

 

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

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting and financial reporting impacts of reference rate reform, including the expected transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This new guidance includes temporary optional practical expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met.  These transactions include contract modifications, hedging relationships and the sale or transfer of debt securities classified as held-to-maturity.  Entities may apply the provisions of the new standard at the beginning of the reporting period when the election is made. This guidance may be applied through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has yetdoes not currently intend to elect an adoption date.early adopt the new rules.

.

 

89

 

 

Note D—Revenue Recognition

 

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

 

 

Three Months Ended

  

Three Months Ended

 
 

December 2021

 

December 2020

  

June 2022

 

June 2021

 

Retail

 $2,903  3% $2,438  3% $4,412  3% $3,543  3%

Direct-to-consumer ecommerce

 1,345  1% 1,809  2% 1,145  1% 2,105  2%

Wholesale

  106,498  96%  90,476  95%  121,318  96%  113,018  95%

Net sales

 $110,746  100% $94,723  100% $126,875  100% $118,666  100%

  

Nine Months Ended

 
  

June 2022

  

June 2021

 

Retail

 $9,685   3% $8,429   3%

Direct-to-consumer ecommerce

  3,199   1%  5,393   2%

Wholesale

  356,435   96%  308,193   95%

Net sales

 $369,319   100% $322,015   100%

 

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

 

 

December 2021 Quarter

  

Three Months Ended June 2022

 
 

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

  

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

 

Delta Group

 $101,921  0.2% 0.3% 99.5% $106,020  0.1% 0.4% 99.5%

Salt Life Group

  8,825  30.4% 12.0% 57.6%  20,855  20.8% 3.4% 75.8%

Total

 $110,746           $126,875          

 

 

December 2020 Quarter

  

Three Months Ended June 2021

 
 

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

  

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

 

Delta Group

 $87,624  0.2% 0.4% 99.4% $102,562  0.2% 0.3% 99.5%

Salt Life Group

  7,099  31.4% 21.1% 47.5%  16,104  20.6% 11.1% 68.3%

Total

 $94,723           $118,666          

  

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             

  

Nine Months Ended June 2021

 
  

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

 

Delta Group

 $284,404   0.3%  0.3%  99.4%

Salt Life Group

  37,611   20.6%  12.1%  67.3%

Total

 $322,015             

 

10


Note E—Inventories

 

Inventories, net of reserves of $16.7$17.4 million and $15.9 million as of DecemberJune 2022 2021and September 2021, respectively, consisted of the following (in thousands):

 

 

December 2021

 

September 2021

  

June 2022

 

September 2021

 

Raw materials

 $23,760  $17,204  $23,660  $17,204 

Work in process

 23,418  20,954  23,005  20,954 

Finished goods

  135,880   123,545   181,006   123,545 
 $183,058  $161,703  $227,671  $161,703 

 

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.

9

 

Note F—Debt

 

Credit Facility

 

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

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

 

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

 

As of December 2021,June 2022, we had $116.0$122.8 million outstanding under our U.S. revolving credit facility at an average interest rate of 3.2%3.4%. Our cash on hand combined with the availability under the U.S. credit facility totaled $33.0 million.totaled $30.8 million. At December 2021June 2022 and September 2021 there was $18.6 millionwas $25.0 million and $19.0 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.

 

Promissory Note

 

On October 8, 2018, we acquired substantially all of the assets of Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services. In conjunction with the acquisition, we issued a promissory note in the principal amount of $7.0 million. The promissory note bearsbeared interest at 6% with quarterly installments, which began January 2, 2019, with the final installment due October 1, 2021. The final payment, in accordance with the promissory note agreement, was made during the three-months ended December 2021. 

 

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 at the time of settlement of $1.1 million and $9.5 million, respectively. Additionally, in May 2022, we entered into a new term loan with a five-year term with a principal amount of $3.7 million. Each of these new loans isare secured by a first-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. As the revolving credit facility permits us to re-borrow funds up to the amount repaid, subject to certain objective covenants, and we intend to re-borrow funds, subject to those covenants, the amounts have been classified as long-term debt. Additional information about these loans and the outstanding balances as of December 2021June 2022 is as follows (in thousands):

 

  

December 2021

 

Revolving credit facility established December 2020, interest at 7.25%, due August 2025

 $984 

Term loan established December 2020, interest at 7.5%, quarterly installments beginning September 2021 through December 2025

  8,114 

  

June 2022

 

Revolving credit facility established December 2020, interest at 7.25%, due August 2025

 $2,000 

Term loan established December 2020, interest at 7.5%, quarterly installments beginning September 2021 through December 2025

  7,100 

Term loan established May 2022, interest at 7.5%, quarterly installments beginning March 2023 through May 2027

  3,656 
 

Note G—Selling, General and Administrative Expense

 

We include in selling, general and administrative ("SG&A") expenses the costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking, packing, and shipping goods for delivery to our customers. Distribution costs included in SG&A expenses totaled $5.5$5.6 million and $5.2 million for the December 2021June 2022 and 20202021 quarters, respectively. Distribution costs included in SG&A expenses totaled $16.8 million and $15.6 million for the nine-months ended June 2022 and 2021, respectively. In addition, SG&A expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses and other general and administrative expenses.

 

11

 

Note H—Stock-Based Compensation

 

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

 

Compensation expense is recorded within SG&A in our Condensed Consolidated Statements of Operations over the vesting periods. During the December 2021June 2022 and 20202021 quarters, we recognized $0.4$1.1 million and $0.9$0.5 million in stock-based compensation expense, respectively. Associated with the compensation cost are income tax benefits recognized of $0.2 million and $0.1 million, and $0.3 millionrespectively, for each of the three-month periods ended DecemberJune 2022 and June 2021, respectively. During the nine-months ended June 2022 and December 2020,June 2021, respectively. we recognized $2.4 million and $2.0 million, respectively, in stock-based compensation expense. Associated with the compensation cost are income tax benefits recognized of $0.4 million and $0.5 million, respectively, for each of the nine-months periods ended June 2022 and June 2021. 

 

During the December 2021 quarter, performance stock units and restricted stock units representing 47,700 and 95,000 shares of our common stock, respectively, vested with the filing of our Annual Report on Form 10-K for fiscal 2021, and were issued in accordance with their respective agreements. Of these vested awards, 96,350 were payable in common stock and 46,350 were payable in cash.

 

During the December 2021 quarter, restrictiverestricted stock units representing 5,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2022 and are payable in common stock.

 

During the December 2021 quarter, performance stock units and restrictiverestricted stock units representing 59,625 and 59,625 shares of our common stock, respectively, were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2023. Of these shares, 64,625 are payable in common stock and 54,625 are payable in cash.

 

During the December 2021 quarter, restrictiverestricted stock units representing 13,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2024 and are payable in common stock.

 

During the March 2022 quarter, restricted stock units representing 42,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2023. Of these shares, 21,000 are payable in common stock and 21,000 are payable in cash.

During the March 2022 quarter, restricted stock units representing 42,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2024. Of these shares, 21,000 are payable in common stock and 21,000 are payable in cash.

During the June 2022 quarter, restricted stock units representing 10,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2022 and are payable in common stock. Additionally, restricted stock units representing 10,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2023. Of these shares, 5,000 are payable in common stock and 5,000 are payable in cash. Additionally, restricted stock units representing 10,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2024. Of these shares, 5,000 are payable in common stock and 5,000 are payable in cash.

During the June 2022 quarter, performance stock units representing 10,000 were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2023. Of these shares, 5,000 are payable in common stock and 5,000 are payable in cash. Additionally, performance stock units representing 10,000 were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2024. Of these shares, 5,000 are payable in common stock and 5,000 are payable in cash. 

As of December 2021,June 2022, there was $4.2 million$4.9 million of total unrecognized compensation cost related to unvested awards granted under the 2020 Stock Plan. This cost is expected to be recognized over a period of 2.92.4 years.

 

Note I—Purchase Contracts

 

We have entered into agreements, and have fixed prices, to purchase yarn, finished fabric, and finished apparel and headwear products. At December 2021,June 2022,minimum payments under these contracts were as follows (in thousands):

 

Yarn

 $28,071  $30,480 

Finished fabric

 7,808  7,620 

Finished products

  18,929   11,059 
 $54,808  $49,159 

 


12

 

Note J—Business Segments

 

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

 

The Delta Group is comprised of our business units primarily focused on core activewear styles, and includes our DTG2Go and Delta Activewear business units. We are a market leader in the on-demand, direct-to-garment digital print and fulfillment industry, bringing technology and innovation to the supply chain of our many customers.  We use highly-automated factory processes and our proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of our customers. Our Activewear business is organized around key customer channels and how they source their various apparel needs. Delta Activewear is a preferred supplier of activewear apparel to regional and global brands, direct to retail and through wholesale markets. We offer a broad portfolio of apparel and accessories under the Delta, Delta Platinum, Soffe, and sourced-branded products that we distribute utilizing our network of fulfillment centers. Delta Direct services key channels, such as the screen print, promotional, and eRetailer channels as well as the retail licensing channel, whose customers sell through to many mid-tier and mass market retailers.  In our Global Brands & Retail Direct business we serve our customers as their supply chain partner, from product development to shipment of their branded products, with the majority of products being sold with value-added services including embellishment, hangtags, and ticketing. We also serve retailers by providing our portfolio of products directly to their retail stores and through their ecommerce channels.  We sell our products to a diversified audience, including sporting goods and outdoor retailers, specialty and resort shops, farm and fleet stores, department stores, and mid-tier retailers. We also service custom apparel to major branded sportswear companies, trendy regional brands, and all branches of the United States armed forces. We also offer our Soffe products direct to consumers at www.soffe.com.

 

The Salt Life Group is comprised of our lifestyle brandsbrand focused on a broad range of apparel garments, headwear and related accessories to meet consumer preferences and fashion trends, and includes our Salt Life business unit. These products are sold through specialty and boutique shops, traditional department stores, and outdoor retailers, as well as direct-to-consumer through branded ecommerce sites and branded retail stores. Products in this segment are marketed under our lifestyle brandsbrand of Salt Life® 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, income taxes and special charges ("segment operating earnings"). Our segment operating earnings may not be comparable to similarly titled measures used by other companies. The accounting policies of our reportable segments are the same as those described in Note 2 in our Annual Report on Form 10-K for fiscal 2021, filed with the SEC. Intercompany transfers between operating segments are transacted at cost and have been eliminated within the segment amounts shown in the following table (in thousands).

 

 

Three Months Ended

  

Three Months Ended

  

Nine Months Ended

 
 

December 2021

  

December 2020

  

June 2022

  

June 2021

  

June 2022

  

June 2021

 

Segment net sales:

            

Delta Group

 $101,921  $87,624  $106,020  $102,562  $323,276  $284,404 

Salt Life Group

  8,825   7,099   20,855   16,104   46,043   37,611 

Total net sales

 $110,746  $94,723  $126,875  $118,666  $369,319  $322,015 
  

Segment operating earnings:

            

Delta Group (1)

 $8,438  $6,276  $10,701  $13,869  $33,557  $28,394 

Salt Life Group

  156   (136)  3,574   2,916   7,037   4,726 

Total segment operating earnings

 $8,594  $6,140  $14,275  $16,785  $40,594  $33,120 

 

(1) In fiscal 2021, the Delta Group operating earnings included $1.3 million of expense, reported within "Other loss (income), net", related to two catastrophic hurricanes that disrupted operations during the December 2020 quarter.

 

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

 

 

Three Months Ended

  

Three Months Ended

  

Nine Months Ended

 
 

December 2021

  

December 2020

  

June 2022

  

June 2021

  

June 2022

  

June 2021

 

Segment operating earnings

 $8,594  $6,140  $14,275  $16,785  $40,594  $33,120 

Unallocated corporate expenses

 2,678  3,071  4,980  4,882  11,041  10,569 

Unallocated interest expense

  1,598   1,654   1,971   1,735   5,370   5,225 

Consolidated earnings before provision for income taxes

 $4,318  $1,415  $7,324  $10,168  $24,183  $17,326 

 

13


Note K—Income Taxes

 

The Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) was enacted 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 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 deduction for business interest expense (“Section 163(j)"). GILTI is the excess of 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 included in our calculation of our effective tax rate the estimated 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 foreign subsidiaries.

 

Our effective income tax rate on operations for the threenine-months ended December 2021June 2022 was 15.1%17.2% compared to a rate of 39.3%23.1% in the same period of the prior year, and an effective rate of 21.9% for fiscal 2021. We generally benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates that are lower than those in the United States. As such, changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax jurisdictions can have a significant impact on our overall effective tax rate.


 

Note L—Derivatives and Fair Value Measurements

 

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 2021,June 2022, all of our other comprehensive income was attributable to shareholders; none related to the non-controlling interest.  Outstanding instruments as of December 2021June 2022 are as follows:

 

   

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 as of June 20212022 and September 20202021 (in thousands):

 

  

December 2021

  

September 2021

 

Deferred tax assets

 

$

195

  

$

266

 

Other non-current liabilities

  

(769

)

  

(1,052

)

Accumulated other comprehensive loss

 

$

(574

)

 

$

(786

)

  

June 2022

  

September 2021

 

Deferred tax assets

 

$

1

  

$

266

 

Other non-current liabilities

  

(8

)

  

(1,052

)

Accumulated other comprehensive loss

 

$

(7

)

 

$

(786

)

 

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. No such cotton contracts were outstanding at December 2021June 2022 and September 2021.

 

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 or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.

 

14

The following financial liabilities are measured at fair value on a recurring basis (in thousands):

 

 

Fair Value Measurements Using

    Fair Value Measurements Using 
    

Quoted Prices in

 

Significant Other

 

Significant

     

Quoted Prices in

 

Significant Other

 

Significant

 
    

Active Markets for

 

Observable

 

Unobservable

     

Active Markets for

 

Observable

 

Unobservable

 
    

Identical Assets

 

Inputs

 

Inputs

     

Identical Assets

 

Inputs

 

Inputs

 

Period Ended

 

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Interest Rate Swaps

                        

December 2021

 $(769) 0  $(769) 0 

June 2022

 $(8) 0  $(8) 0 

September 2021

 $(1,052) 0  $(1,052) 0  $(1,052) 0  $(1,052) 0 
                  

Contingent Consideration

                        

December 2021

 $(1,897) 0  0  $(1,897)

June 2022

 $(563) 0  0  $(563)

September 2021

 $(1,897) 0  0  $(1,897) $(1,897) 0  0  $(1,897)

 

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 2021June 2022 and September 2021, 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 DTG2Go acquisition purchase price consisted of additional payments contingent on the combined business’s achievement of certain performance targets related to sales and earnings before interest, taxes, depreciation and amortization ("EBITDA") for the period from April 1, 2018, through September 29, 2018, as well as for our fiscal years 2019, 2020, 2021 and 2022. The valuation of the fair value of the contingent consideration is based upon inputs into the Monte Carlo model, including projected results, which then are discounted to present value to derive the fair value.results. The fair value of the contingent consideration is sensitive to changes in our projected results and discount rates.  As of December 2021,June 2022, we estimate the fair value of contingent consideration to be $1.9$0.6 million, consistent with our estimate as ofa $1.3 million decrease from September 2021.2021

due to a change in projected results resulting in decreased estimated future earnout payments.

 

Note M—Legal Proceedings

 

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. 


 

Note N—Repurchase of Common Stock

 

As of September 28, 2019, our Board of Directors authorized management to use up to $60.0 million to repurchase stock in open market transactions under our Stock Repurchase Program.  During the December 2021June 2022 quarter, we purchased 74,23233,934 shares of our common stock for an aggregate of $2.1$1.0 million. Through DecemberJune 2022, 2021,we have purchased 3,673,1653,735,114 shares of our common stock for an aggregate of $54.6$56.4 million under our Stock Repurchase 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. As of December 2021,June 2022, $5.43.6 million remained available for future purchases under our Stock Repurchase Program, which does not have an expiration date.

 

15

 

Note O—Goodwill and Intangible Assets

 

Components of intangible assets consist of the following (in thousands):

 

 

December 2021

 

September 2021

    

June 2022

 

September 2021

   
 

Cost

 

Accumulated Amortization

 

Net Value

 

Cost

 

Accumulated Amortization

 

Net Value

 Economic Life  

Cost

 

Accumulated Amortization

 

Net Value

 

Cost

 

Accumulated Amortization

 

Net Value

 Economic Life 
                                  

Goodwill

 $37,897  $  $37,897  $37,897  $  $37,897 N/A  $37,897  $  $37,897  $37,897  $  $37,897 N/A 
                              

Intangibles:

                              

Tradename/trademarks

 $16,000  $(4,450) $11,550  $16,000  $(4,317) $11,683 

20 – 30 yrs

  $16,000  $(4,717) $11,283  $16,000  $(4,317) $11,683 

20 – 30 yrs

 

Customer relationships

 7,400  (2,658) 4,742  7,400  (2,473) 4,927 

20 yrs

  7,400  (3,028) 4,372  7,400  (2,473) 4,927 

20 yrs

 

Technology

 10,024  (1,937) 8087  9,952  (1,715) 8237 

10 yrs

  10,083  (2,385) 7,698  9,952  (1,715) 8237 

10 yrs

 

License agreements

 2,100  (862) 1,238  2,100  (837) 1,263 

15 – 30 yrs

  2,100  (914) 1,186  2,100  (837) 1,263 

15 – 30 yrs

 

Non-compete agreements

  1,657  (1,508) 149   1,657  (1,476) 181 

4 – 8.5 yrs

   1,657  (1,569) 88   1,657  (1,476) 181 

4 – 8.5 yrs

 

Total intangibles

 $37,181  $(11,415) $25,766  $37,109  $(10,818) $26,291    $37,240  $(12,613) $24,627  $37,109  $(10,818) $26,291   

 

Goodwill represents the acquired goodwill net of the $0.6 million impairment losses recorded in fiscal year 2011. As of December 2021,June 2022,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 under cost of goods sold or selling, general and administrative expenses. Amortization expense for intangible assets for the threeJune 2022 -months endedand DecemberJune 2021 and December 2020 quarters was $0.6 million and $0.4$0.5 million, respectively. Amortization for the nine-months ended June 2022 and June 2021 was $1.8 million and 1.2 million, respectively. Amortization expense is estimated to be approximately $1.6$2.3 million for the year ended September 2022, approximately $1.5$2.2 million for the year ended September 2023, and approximately $1.4$2.2 million for the years ended September 2024, 2025 and 2026.

 

On June 1, 2021, DTG2Go, LLC acquired specified net assets of Fan Print Inc., which primarily included its Autoscale.ai technology as well as immaterial net working capital. The costs to acquire the net assets were $8.0 million, of which $6.6 million was paid at closing through our existing U.S. credit facility and $1.4 million will be paid in three installments, one installment in our second, third and fourth quartersquarter of fiscal 2022.2022 and two installments remaining. The acquisition qualified as an asset acquisition in accordance with ASU 2017-01, Clarifying the Definition of a Business, as substantially all of the fair value of the net assets acquired or $8.1 million were assigned to the technology intangible asset with an estimated economic life of 10 years. The acquisition cost also consists of additional payments contingent on the adjusted operating profits resulting from the Autoscale.ai technology for the period from June 1, 2021 through October 2, 2021, as well as for our fiscal years 2022 through 2026. These contingent earnout liabilities are recognized when the contingency is probable and reasonably estimable, which generally results in recognition, if earned, during the fourth quarter of each fiscal year and which would increase the value of the technology intangible asset.

 

Note P—Subsequent Events

 

None.

 


16

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

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”, “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 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 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 risk factors that have the potential to cause actual results to differ materially from our expectations is set forth in Part 1 under the subheading "Risk Factors" in our Annual Report on Form 10-K for fiscal 2021, 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.

 

17

Business Outlook

 

We beganThe results of our third quarter fiscal 2022 reflect a streamlined organization, withcontinuation of the solid performance we achieved in the first half of fiscal 2022, which we believe has been driven by strong consumer demand for our products. While sales continue to grow year over year, our operating margin was negatively impacted by inflationary pressures, resulting in higher variable selling and distribution costs and lower operating margins. Our bottom line results achieved diluted earnings per share of $0.88 for the third quarter. 

Our five focused go-to-market strategies and our vertical manufacturing supply chain are driving growth across all the channels we serve. Our Delta Group segment operatingsaw 3% sales growth over the prior year across our diversified channels of distribution and as a fully-integratedresult of providing additional value-added services. Driven in large part by increased customer demand, our Activewear business, complemented by DTG2Go digital fulfillment solutions. Our Activewear business is organized around our key customer channels and how they source their diverse apparel needs.  Customers seeking our portfoliocomprised of Delta Delta Platinum, Soffe,Direct and sourced apparel products can purchase them directly from our Delta Direct business.  Delta Direct services key channels, including the screen print, promotional, and eRetailer channels together with the key retail licensing channel, whose customers sell through to many mid-tier and mass market retailers.    In our Global Brands & Retail Direct business, we are a supply chain partner to global brands, from product development of custom garments to shipment of their branded products, withsaw sales increase over the majority of products being sold with value-added services.  We also serve global retailers by providing our portfolio of Delta, Delta Platinum, and Soffe products directly to their retail stores and through their ecommerce channels. Our business is now organized including the Soffe business as part of Activewear, resulting in a more customer-centric sales and support team; a more proactive manufacturing, inventory planning, and distribution network; and a streamlined back-office support function. 

prior year third quarter. Our digital print business, DTG2Go, remains a competitive force inalso saw sales growth during the digital print and fulfillment market.  We believe we are differentiated in this market, considering our vertically-integrated supply chain, broad geographic network for fulfillment and distribution, proprietary technology, and broad and diverse customer relationships. We continue to see the transition of additional retailers and brands, many of whom are current Delta Group customers, to an on-demand digital fulfillment model.  One of the strategic benefits of being a vertically-integrated apparel supplier is that customers are able chose Delta blanks for the garments digital printing.  This often creates a more efficient operation, reduces garment costs for our customers, and lowers working capital needs in the business.

We invest in digital print equipment to build production capacity, in addition to also making investments and improvements in our proprietary technology that will both provide our customers with an even better experience and provide us improved inventory planning. We leverage Autoscale technology in our DTG2Go business. Autoscale provides automated solutions for design creation, art & licensing management as well marketing spend enabling seamless connection with various online marketplaces. Using Autoscale innovative technology in our portfolio is part of our strategy to drive enterprise value over the long term by providing an automated, scalable, seamless solution for on-demand, decorated apparel – from design to fulfillment.  

Salt Life enthusiasts continue to actively engage with the authentic, aspirational lifestyle brand. Showing true omni-channel strength, sales grew over 25% compared to the firstthird quarter of fiscal 2021 with double-digit growth for each of our wholesale, retail, and ecommerce channels. Direct-to-consumer sales now make up approximately one-third of total sales in the December 2021 quarter, continuing to progress toward our long-term goal of two-thirds direct-to-consumer contributions.  We plan to open an additional six to eight stores in fiscal 2022. We continue to invest in this key sales channel and are looking to end the fiscal year with approximately 20 retail stores.

The Salt Life enthusiasts also actively engagedsegment exceeded the prior year third quarter with sales increasing by 30%. Our wholesale channel continued to demonstrate strength, and the Salt Life branded retail footprint was further expanded with the brand through all our online channels. In particular, viewershipopening of new locations in Foley, Alabama; Hilton Head, South Carolina; Boca Raton, Florida; and Rehoboth Beach, Delaware, bringing the number of retail doors to 20 locations across seven states. Our recent Salt Life content on YouTube continuesretail store openings have continued to increase while we continue to increasevalidate the frequencystrength of content publications on “The Dailythe Salt Life brand and our online publication.go-to-market strategy.

 

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 were $110.7$126.9 million in the firstthird quarter of fiscal 2022, an increase of 17%7% compared to the prior year firstthird quarter net sales of $94.7$118.7 million.   

 

Net sales in the Delta Group segment grew 16%3% to $101.9 million compared to $87.6$106.0 million in the first fiscalthird quarter of fiscal 2022 compared to $102.6 million in the prior year.year third quarter. Delta Direct, Retail Direct and Global Brands & Retail Direct grew 3% from prior year. Net sales for the first nine months of 2022 were $323.3 million, a 14% increase over 16%the prior year.

The Salt Life Group segment third quarter fiscal 2022 revenue grew 30% to $20.9 million compared to $16.1 million in the prior year third quarter. The segment’s growth was primarily driven by growth in our wholesale channel and retail stores. For the first nine months of 2022, net sales were $46.0 million, up over $8.4 million from the prior year first quarter.   DTG2Go sales grew by 17% over the prior year with new customer launches.

Salt Life segment net sales grew 24% from the first quarter of the prior year to $8.8$37.6 million. The sales growth is attributable to increased wholesale sales together with growth in the direct-to-consumer business with our branded retail stores.

Retail and total ecommerce sales represented 10% of total revenues for the both the December 2021 and 2020 quarters.

 

Gross margins were 20.8%24.2% for the firstthird quarter of fiscal 2022, lower than the 21.4% indeclining 130 basis points from the prior year largely driven by inflationary costs pressure.third quarter gross margin of 25.5%.

 

The Delta Group segment gross margins were 18.0%19.1% for the Decemberthird quarter of fiscal 2022, a decline of 260 basis points from the prior year Decemberthird quarter margins of 19.1%21.7%. Gross margins were negativelyprimarily impacted by increased input costs. Margins for the higher product costs flowing through costfirst nine months of fiscal 2022 declined from 20.2% in prior year to 19.6% of sales offset partially by increased selling prices.in the current year.

 

The Salt Life Group segment gross margins improved to 53.3%50.2% in the third quarter of fiscal 2022, an improvement of 50 basis points compared to 50.2%49.7% in the prior year Decemberthird quarter resulting from a favorable mix of sales, driven by theincluding increased Salt Life branded retail store sales. For the first nine months of fiscal year 2022, gross margins grew to 51.6% of sales from 47.9% in prior year.

 

Selling, general, and administrative expenses ("SG&A") were $17.5$22.4 million 15.8%in the third quarter of fiscal 2022, or 17.7% of sales, compared to $16.0$19.9 million, 16.9%16.8% of sales, in the prior year firstthird quarter.  The increase in SG&A expenses of $2.5 million compared to prior year firstthird quarter was primarily driven by higher variable selling and distribution costs. We benefited from leveraging fixed costs against higherSG&A expenses for the first nine months of 2022 were $59.6 million, or 16.1% of sales, compared to $53.0 million, or 16.5% of sales, in the first quarter as compared to the first quarter in the prior fiscal year.

Other income for the fiscal year 2022 and fiscal year 2021 Decemberthird fiscal quarters includes profits related to our HonduranGreen Valley Industrial Park equity method investment. Other income for the third fiscal quarter of 2022 also includes a valuation change in our contingent consideration liabilities of $0.8 million. The first quarternine months of 2022 other income was $1.9 million, including profits related to our Green Valley Industrial Park equity method investment and a valuation adjustment to our contingent consideration. Other expense in the prior year included $1.3first nine months of 2021 include $1.9 million of expenses related to the impact of two hurricanes that disrupted our Honduran manufacturing facilities in the firstDecember 2020 quarter in addition to $0.4 million of fiscal 2021.long-lived asset impairment charges as the result of a strategic decision in the June 2021 quarter to exit branded Soffe retail stores.

 

Operating profit in the third quarter of fiscal 2022 was $9.3 million. This is a decrease of 22% over the prior year third fiscal quarter of $11.9 million of operating profit. For the first quarter for thenine months of fiscal year 2022, increased to $5.9 million, compared to the prior year first quarter profit of $3.1operating income was $29.5 million.

 

The Delta Group segment had operating income of $8.4$10.7 million in the third fiscal quarter of 2022, or 8.3%10.1% of net sales, compared to $6.3$13.9 million, or 7.2%13.5% of net sales, in the prior year firstthird quarter. The increasedecrease in operating profit was driven by leveraging fixed costs against higherdeclining gross margins. Operating income was $33.6 million, or 10.4% of sales, as well as continuing cost controls.for the first nine months of fiscal 2022, compared to $28.4 million, or 10.0% of sales, in the prior year adjusted for $1.3 million of hurricane-related disruption costs.

 

The Salt Life Group segment had operating income of $0.1$3.6 million in the third fiscal quarter of 2022, or 1.5%17.1% of net sales, compared to a loss of $0.1$2.9 million, or 1.4%18.1% of sales, in the prior year firstthird quarter. The improvedincrease in operating profit was driven by a stronger direct-to-consumerhigher sales mix.volume and increased gross margins offset by higher selling and distribution costs. For the first nine months, operating income improved by $2.3 million to $7.0 million.

 

Net interest expense for the third quarters of fiscal year 2022 and 2021 was $1.6$2.0 million and $1.7 million, respectively. Net interest expense for the first fiscal quarternine months of 2022 was $5.4 million compared to $1.7$5.2 million in the prior year first fiscal quarter.nine months.

18

 

Our effective tax rate on operations for the three-monthnine-month period ended December 2021June 2022 was 15.1%17.2%. This compares to an effective tax rate of 39.3%23.1% for the same period in the prior year and 21.9 % for the full fiscal year 2021. See Note K—Income taxes for more information. Changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax jurisdictions have driven this change in our effective tax rate.

 

We achieved net earningsNet income attributable to shareholders for the December 2021third fiscal quarter of $3.62022 were $6.2 million, or $0.51$0.88 per diluted share, compared to $0.9$8.2 million, or $0.13$1.14 per diluted share, in the prior yearyear. Net income attributable to shareholders for the first quarter.nine months of 2022 was $20.0 million, or $2.84 per diluted share, compared to $13.4 million, or $1.90 per diluted share, in the prior year.

 

Accounts receivable were $65.7$68.4 million at December 2021,June 2022, compared to $67.7$67.0 million as of September 2021. Days sales outstanding ("DSO") as of December 2021June 2022 were 49 days compared to 47 days at September 2021.

 

Net inventory as of December 2021June 2022 was $183.1$227.7 million, an increase of $21.4$66.0 million from September 2021 and $34.6$75.4 million from December 2020. We have increased production during the past year and are now producing at record manufacturing levels.June 2021. The temporary hurricane disruptions during the December 2020 quarter impacted the planned inventory build duringvalue is higher than both the prior third quarter and the fiscal year first quarter. end as a result of higher input costs impacting materials, transportation and labor combined with an increase in units on hand.

 

Total net debt, including capital lease financing and cash on hand, was $139.6$162.4 million at December 2021,June 2022, an increase of $18.0$40.6 million from September 2021. Cash on hand and availability under our U.S. revolving credit facility totaled $33.0$30.8 million at December 2021,June 2022, a $12.4$14.6 million decrease from September 2021 principally driven by investments in the business to support working capital needs.needs and increased input costs due to inflationary pressures.

 

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 operating income, net income and earnings per diluted share 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 imitations 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.

 

Liquidity and Capital Resources

 

Operating Cash Flows

 

Operating activities used $13.2resulted in a cash usage of $13.4 million for the nine months ended June 2022 compared to $11.0 million of cash for December 2021 quarter compared to $2.5 millionprovided in the prior year December quarter.   Netyear. The decrease in cash usedprovided in operating activities primarily increasedcash flows in the current year are due to a build in inventory as a result of higher inventory production in the current year.increased input costs and manufacturing output. This was partially offset by increased earnings in the increased operating income.business and change in timing of payments to suppliers in the current period.

 

Investing Cash Flows

 

Cash used in investing activities was $2.5outflows for capital expenditures were $10.9 million during the first quarternine months of fiscal year 2022 compared to cash provided by investing activities of $1.3$1.7 million forin the same period in the prior year. AsDuring the nine-months ended June 2022, there were $10.4 million of December 2021, there was $0.6 million in unpaid expenditures.  In the first quarter of fiscal 2021, we received proceeds of $2.3 million from financecapital expenditures financed under a capital lease arrangements related to prior year capital expenditure cash outflows.

arrangement. We anticipate our fiscal 2022 capital expenditures, including those financed under capital leases, to be approximately $20 million for fiscal 2022 and to be focused primarily on our distribution expansion, digital print equipment, manufacturing equipment, information technology, and direct-to-consumer investments, including additional Salt Life retail store openings.

 

Financing Activities

 

During the December 2021 quarter,nine months ended June 2022, cash provided by financing activities was $12.7$16.2 million whichand primarily related primarily to advances from our long-term debt used to fund operations,our operating activities, working capital needs, and repurchases of our stock.certain capital investments offset by scheduled loan principal payments.

 

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.

 

Our credit facility, as well as cash flows from operations, are intended to fund our day-to-day working capital needs, and along with capital lease financing arrangements, to fund our planned capital expenditures. However, any material deterioration in our results of operations, may result in the loss of our ability to borrow 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. Additionally, a significant deterioration in our business results could cause our availability to fall below minimum thresholds, thereby requiring us to maintain the minimum FCCR specified in our credit agreement, which we may not be able to maintain. 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 2021June 2022 was above the minimum thresholds specified in our credit agreement, a significant deterioration in our business could cause our availability to fall below such thresholds, thereby requiring us to maintain the minimum FCCR specified in our credit agreement.

Share Repurchase Program

During

In the December 2021third quarter weof fiscal 2022 under the previously announced share repurchase program, the Company purchased 74,23233,934 shares for $1.0 million, bringing the total amount repurchased to $56.4 million during the life of our common stock for $2.1 million (see Note N—Repurchasethe program. At the end of Common Stock). Asthe third quarter of December 2021, there was $5.4fiscal 2022, the Company had $3.6 million of remaining repurchase authorization remainingcapacity under our Stock Repurchase Program.its existing authorization.

19

 

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 fiscal 2021, and there have been no changes in those policies since the filing of that Annual Report on Form 10-K with the SEC, except as disclosed in Note C—New Accounting Standards related to the adoption of the cloud computing standard.


 

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 international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other anti-bribery laws applicable to our operations.

 

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 and regulations. We currently do not expect that the amount of expenditures required to comply with these environmental standards or other regulatory matters will have a material adverse effect 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 compliance with all applicable environmental and other regulatory requirements, the extent of our liability, if any, for past failures to comply with laws, regulations and permits applicable to our operations cannot be determined and could have a material adverse effect on our operations, financial condition and liquidity.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to reasonably assure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s requirements. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of period covered by this quarterly report ("the Evaluation Date") and, based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective as of the Evaluation Date.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes during the December 2021June 2022 quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

See Note M—Legal Proceedings, in Part I, Item 1, which is incorporated herein by reference.

 

 

Item 1A.

Risk Factors

 

None

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(c) Repurchases of Common Stock

 

See Note N—Repurchase of Common Stock, Part I, in Item 1, which is incorporated herein by reference.

 

Item 5.

Other Information

 

None

 

20

Item 6.

Exhibits

 

Exhibits

 

10.1Employment Agreement between Delta Apparel, Inc and Matthew J. Miller dated April 4, 2022: Incorporated by reference to Exhibit 10.1 to the Company's 10-Q filed on April 2, 2022
10.2Employment Agreement between Delta Apparel, Inc and Jeffrey N. Stillwell dated January 1, 2022.

31.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   
10.6.5Fifth Amendment to Yarn Supply Agreement dated as of December 27, 2018, between Delta Apparel, Inc. and Parkdale Mills, LLC, and Parkdale America, LLC. +
10.6.6Sixth Amendment to Yarn Supply Agreement dated as of December 27, 2021, between Delta Apparel, Inc. and Parkdale Mills, LLC, and Parkdale America, LLC: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 3, 2022. +
+Portions of this exhibit (indicated therein by asterisk) have been omitted for confidential treatment.

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)

 


21

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

DELTA APPAREL, INC.

(Registrant)

    

Date

February 8,August 4, 2022

By:

/s/Simone Walsh

 

 

 

Simone Walsh
Chief Financial Officer

 

1622