Washington, D.C. 20549
FORM
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from________to ________
Commission File Number
DELTA APPAREL, INC.
Georgia | 58-2508794 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) | |
2750 Premier Parkway, Suite 100 | ||
Duluth, Georgia | 30097 | |
(Address of principal executive offices) | (Zip Code) |
(678) 775-6900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.01 | DLA | NYSE American |
Indicate by check mark whether the
registrant (1) hasIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
Indicate by check mark whether
the registrant is a largeaccelerated filer, an accelerated filer, a non-acceleratedfiler, a smaller reporting company, or an emerginggrowthLarge accelerated filer ☐ | Accelerated filer ☑ | Non-accelerated filer ☐ | Smaller reporting company ☑ | Emerging growth company ☐ |
If an emerging
growth company,indicate by checkmark if theregistrant has electednot to usethe extended transitionperiod for complyingwith any newor revisedIndicate by check mark whether the registrant is a shell company
As of January 27, 2023,
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
(Unaudited)
December 2023 | September 2023 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 377 | $ | 187 | ||||
Accounts receivable, less allowances of $136 and $119, respectively | 32,273 | 45,130 | ||||||
Other receivables | 837 | 1,350 | ||||||
Income tax receivable | 1,378 | 1,388 | ||||||
Inventories, net | 196,348 | 212,365 | ||||||
Prepaid expenses and other current assets | 3,526 | 2,542 | ||||||
Total current assets | 234,739 | 262,962 | ||||||
Property, plant and equipment, net | 62,598 | 65,611 | ||||||
Goodwill | 28,697 | 28,697 | ||||||
Intangibles, net | 21,125 | 21,694 | ||||||
Deferred income taxes | 7,822 | 7,822 | ||||||
Operating lease assets | 56,909 | 55,464 | ||||||
Equity method investment | 9,751 | 10,082 | ||||||
Other assets | 3,263 | 2,906 | ||||||
Total assets | $ | 424,904 | $ | 455,238 | ||||
Liabilities and Equity | ||||||||
Liabilities: | ||||||||
Accounts payable | $ | 58,382 | $ | 62,085 | ||||
Accrued expenses | 18,926 | 18,236 | ||||||
Income taxes payable | 700 | 710 | ||||||
Current portion of finance leases | 8,246 | 8,442 | ||||||
Current portion of operating leases | 9,741 | 9,124 | ||||||
Current portion of long-term debt | 117,275 | 16,567 | ||||||
Total current liabilities | 213,270 | 115,164 | ||||||
Long-term income taxes payable | 2,131 | 2,131 | ||||||
Long-term finance leases | 12,007 | 14,029 | ||||||
Long-term operating leases | 48,259 | 47,254 | ||||||
Long-term debt | 7,260 | 126,465 | ||||||
Total liabilities | $ | 282,927 | $ | 305,043 | ||||
Shareholder's equity: | ||||||||
Preferred stock - $0.01 par value, 2,000,000 shares authorized, none issued and outstanding | - | - | ||||||
Common stock - $0.01 par value, 15,000,000 authorized, 9,646,972 shares issued, and 7,051,150 and 7,001,020 shares outstanding as of December 2023 and September 2023, respectively | 96 | 96 | ||||||
Additional paid-in capital | 60,643 | 61,315 | ||||||
Retained earnings | 124,860 | 133,387 | ||||||
Accumulated other comprehensive income | - | - | ||||||
Treasury stock - 2,595,822 and 2,645,952 shares as of December 2023 and September 2023, respectively | (42,909 | ) | (43,896 | ) | ||||
Equity attributable to Delta Apparel, Inc. | 142,690 | 150,902 | ||||||
Equity attributable to non-controlling interest | (713 | ) | (707 | ) | ||||
Total equity | 141,977 | 150,195 | ||||||
Total liabilities and equity | $ | 424,904 | $ | 455,238 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended | ||||||||
December 2023 | December 2022 | |||||||
Net sales | $ | 79,934 | $ | 107,295 | ||||
Cost of goods sold | 71,187 | 93,672 | ||||||
Gross profit | 8,747 | 13,623 | ||||||
Selling, general and administrative expenses | 18,614 | 18,870 | ||||||
Other income, net | (4,921 | ) | (2,621 | ) | ||||
Operating loss | (4,946 | ) | (2,626 | ) | ||||
Interest expense, net | 3,577 | 2,890 | ||||||
Loss before provision for (benefit from) income taxes | (8,523 | ) | (5,516 | ) | ||||
Provision for (benefit from) income taxes | 10 | (1,917 | ) | |||||
Consolidated net loss | $ | (8,533 | ) | $ | (3,599 | ) | ||
Net loss attributable to non-controlling interest | (6 | ) | (34 | ) | ||||
Net loss attributable to shareholders | $ | (8,527 | ) | $ | (3,565 | ) | ||
Basic loss per share | $ | (1.22 | ) | $ | (0.51 | ) | ||
Diluted loss per share | $ | (1.22 | ) | $ | (0.51 | ) | ||
Weighted average number of shares outstanding | 7,003 | 6,954 | ||||||
Dilutive effect of stock awards | - | - | ||||||
Weighted average number of shares assuming dilution | 7,003 | 6,954 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Amounts in thousands)
(Unaudited)
Three Months Ended | ||||||||
December 2023 | December 2022 | |||||||
Net loss attributable to shareholders | $ | (8,527 | ) | $ | (3,565 | ) | ||
Other comprehensive income related to unrealized gain on derivatives, net of income tax | - | 69 | ||||||
Consolidated comprehensive loss | $ | (8,527 | ) | $ | (3,496 | ) | ||
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Shareholders’ Equity
(Amounts in thousands, except share amounts)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Non- | ||||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Treasury Stock | Controlling | |||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Interest | Total | ||||||||||||||||||||||||||||
Balance as of September 2023 | 9,646,972 | $ | 96 | $ | 61,315 | $ | 133,387 | $ | - | 2,645,952 | $ | (43,896 | ) | $ | (707 | ) | $ | 150,195 | ||||||||||||||||||
Net loss | - | - | - | (8,527 | ) | - | - | - | - | (8,527 | ) | |||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | - | (6 | ) | (6 | ) | |||||||||||||||||||||||||
Vested stock awards | - | - | (1,112 | ) | - | - | (50,130 | ) | 987 | - | (125 | ) | ||||||||||||||||||||||||
Stock based compensation | - | - | 440 | - | - | - | - | - | 440 | |||||||||||||||||||||||||||
Balance as of December 2023 | 9,646,972 | $ | 96 | $ | 60,643 | $ | 124,860 | $ | - | 2,595,822 | $ | (42,909 | ) | $ | (713 | ) | $ | 141,977 | ||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Non- | ||||||||||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Treasury Stock | Controlling | |||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Interest | Total | ||||||||||||||||||||||||||||
Balance as of September 2022 | 9,646,972 | $ | 96 | $ | 61,961 | $ | 166,600 | $ | 141 | 2,731,309 | $ | (45,420 | ) | $ | (656 | ) | $ | 182,722 | ||||||||||||||||||
Net loss | - | - | - | (3,565 | ) | - | - | - | - | (3,565 | ) | |||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 69 | - | - | - | 69 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | - | (34 | ) | (34 | ) | |||||||||||||||||||||||||
Vested stock awards | - | - | (2,067 | ) | - | - | (85,357 | ) | 1,524 | - | (543 | ) | ||||||||||||||||||||||||
Stock based compensation | - | - | 665 | - | - | - | - | - | 665 | |||||||||||||||||||||||||||
Balance as of December 2022 | 9,646,972 | $ | 96 | $ | 60,559 | $ | 163,035 | $ | 210 | 2,645,952 | $ | (43,896 | ) | $ | (690 | ) | $ | 179,314 | ||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Three Months Ended | ||||||||
December 2023 | December 2022 | |||||||
Operating activities: | ||||||||
Consolidated net loss | $ | (8,533 | ) | $ | (3,599 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 3,632 | 3,844 | ||||||
Amortization of deferred financing fees | 120 | 84 | ||||||
Benefit from deferred income taxes | - | (2,101 | ) | |||||
Change in inventory market reserves | (795 | ) | 163 | |||||
Non-cash stock compensation | 440 | 665 | ||||||
Gain on sale of property, plant and equipment | (5,425 | ) | - | |||||
Loss on disposal of equipment | - | 58 | ||||||
Other, net | (310 | ) | (89 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 13,370 | 9,466 | ||||||
Inventories, net | 16,812 | (10,516 | ) | |||||
Prepaid expenses and other current assets | (633 | ) | (1,443 | ) | ||||
Other non-current assets | 263 | 1,188 | ||||||
Accounts payable | (4,307 | ) | (3,723 | ) | ||||
Accrued expenses | 565 | (5,030 | ) | |||||
Net operating lease liabilities | 177 | (35 | ) | |||||
Income taxes | - | (854 | ) | |||||
Net cash provided by (used in) operating activities | 15,376 | (11,922 | ) | |||||
Investing activities: | ||||||||
Purchases of property, plant and equipment, net | (285 | ) | (2,081 | ) | ||||
| Proceeds from equipment under finance leases | - | 4,417 | ||||||
Proceeds from the sale of property, plant and equipment | 6,219 | - | ||||||
Net cash provided by investing activities | 5,934 | 2,336 | ||||||
Financing activities: | ||||||||
Proceeds from long-term debt | 85,755 | 133,918 | ||||||
Repayment of long-term debt | (104,252 | ) | (121,431 | ) | ||||
Repayment of capital financing | (2,218 | ) | (2,332 | ) | ||||
Payment of deferred financing costs | (405 | ) | - | |||||
Payment of withholding taxes on stock awards | - | (542 | ) | |||||
Net cash (used in) provided by financing activities | (21,120 | ) | 9,613 | |||||
Net increase in cash and cash equivalents | 190 | 27 | ||||||
Cash and cash equivalents at beginning of period | 187 | 300 | ||||||
Cash and cash equivalents at end of period | $ | 377 | $ | 327 | ||||
Supplemental cash flow information | ||||||||
Cash paid during the period for interest | $ | 3,570 | $ | 2,972 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Delta Apparel, Inc. (collectively with DTG2Go, LLC, LLC; Salt Life, LLC,LLC; M.J. Soffe, LLC,LLC; and other subsidiaries, "Delta“Delta Apparel," "we," "us," "our,"” “we,” “us,” “our,” or the "Company"“the Company”) is
We design and internally manufacture the majority
We
For presentation purposes herein, all references to period
ended relate to the following fiscal years and dates:| Period Ended | Fiscal Year | Date Ended |
| December 2022 | Fiscal 2023 | December 31, 2022 |
| March 2023 | Fiscal 2023 | April 1, 2023 |
| June 2023 | Fiscal 2023 | July 1, 2023 |
| September 2023 | Fiscal 2023 | September 30, 2023 |
| December 2023 | Fiscal 2024 | December 30, 2023 |
We prepared the accompanying interim Condensed Consolidated
Financial Statements in accordancewith the instructions for FormOur Condensed Consolidated Financial Statements include the accounts of Delta
Apparel and its wholly-owned and majority-owned domestic and foreign subsidiaries.We apply the equity method of accounting for our investment
inWe make
available copies of materials we filewith, or furnish to, the SEC freeof charge at https://ir.deltaapparelinc.com.The information found on our website isnotGoing Concern
In January 2024, we were notified by certain of our suppliers that they would no longer allow extended credit in amounts or terms to the extent previously allowed and our ability to obtain raw materials from other suppliers became more limited. As such, we are not able purchase quantities of production inputs necessary to allow our manufacturing facilities to run at the levels required to meet our business plans. One or more of the financial covenants contained in our U.S. revolving credit facility require our financial results to improve at a rate faster than we are experiencing and at a faster rate than we expect to experience over the next 12 months. As a result, management believes it is probable that the Company will not be in compliance with one or more of the financial covenants in our U.S. revolving credit facility within the second quarter, which would constitute a breach of that agreement and an event of default if not cured in accordance with its terms. Any such default would allow the lenders under that credit facility to declare the principal and all other amounts owed to be immediately due and payable. Thus, the debt under our U.S. revolving credit facility is classified as current. In the event that the lenders do call such debt during the next 12 months as the result of a covenant breach, the Company does not forecast to have the readily available funds to repay the debt, which raises substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of the first quarter fiscal 2024 Condensed Consolidated Financial Statements. The Company has been and continues to be in communication with its lenders about potential options to address concerns related to meeting the covenant requirements in our U.S. revolving credit facility over the next 12 months. Management cannot, however, predict the results of such communications and related negotiations.
In connection with the above-referenced subsequent event, the Company identified that certain deferred tax assets may no longer be recoverable and impairment indicators may exist for goodwill and other long-lived assets. We are unable to estimate the amount of any potential valuation allowance or impairment to be recorded in the second quarter of fiscal 2024, as the Company is still evaluating the potential impact of the reduced availability of production inputs on forecasts of current year business performance.
Adopted Standards Not Yet Adopted
In June 2016, the FASB
Accounting Guidance Not Yet Adopted
In November 2023, the FASB issued ASU No.2023-07,Segment Reporting (Topic 280)—Improvements to Reportable Segment Disclosures, which enhances reportable segment disclosure requirements, including significant segment expenses and interim disclosures. The guidance allows for disclosure of multiple measures of a segment’s profit or loss, and it requires that public entities with a single reportable segment provide all disclosures required by the ASU and all existing disclosures in Topic 280. ASU 2023-07 is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, or our fiscal 2025. The amendments are to be applied retrospectively, and early adoption is permitted. The Company is currently assessing the impact of this update.
In December 2023, the FASB issued ASU No.2023-09,Income Taxes (Topic 740)—Improvement to Income Tax Disclosures, to update income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation and disaggregation of income taxes paid by jurisdiction. The amendments in the ASU also remove disclosures related to certain unrecognized tax benefits and deferred taxes. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, or our fiscal 2026. The amendments may be applied prospectively or retrospectively with early adoption permitted. The Company is currently assessing the impact of this update.
Our Condensed Consolidated Statements of Operations
include revenue streams from retail salesat our branded retail stores; direct-to-consumerecommerce sales on ourThree Months Ended | ||||||||||||||||
December 2023 | December 2022 | |||||||||||||||
Retail | $ | 4,166 | 5 | % | $ | 3,455 | 3 | % | ||||||||
Direct-to-consumer ecommerce | 1,448 | 2 | % | 1,509 | 2 | % | ||||||||||
Wholesale | 74,320 | 93 | % | 102,331 | 95 | % | ||||||||||
Net sales | $ | 79,934 | 100 | % | $ | 107,295 | 100 | % | ||||||||
The table below provides net sales by reportable segment and
the percentage of net sales by distribution channel foreach reportable segment (in thousands):Three Months Ended December 2023 | ||||||||||||||||
Net Sales | Retail | Direct-to-consumer ecommerce | Wholesale | |||||||||||||
Delta Group | $ | 69,604 | 0.0 | % | 0.2 | % | 99.8 | % | ||||||||
Salt Life Group | 10,330 | 40.1 | % | 12.7 | % | 47.2 | % | |||||||||
Total | $ | 79,934 | ||||||||||||||
Three Months Ended December 2022 | ||||||||||||||||
Net Sales | Retail | Direct-to-consumer ecommerce | Wholesale | |||||||||||||
Delta Group | $ | 97,010 | 0.1 | % | 0.2 | % | 99.7 | % | ||||||||
Salt Life Group | 10,285 | 33.0 | % | 12.7 | % | 54.3 | % | |||||||||
Total | $ | 107,295 | ||||||||||||||
December 2023 | September 2023 | |||||||
Raw materials | $ | 16,402 | $ | 20,262 | ||||
Work in process | 11,934 | 17,695 | ||||||
Finished goods | 168,012 | 174,408 | ||||||
| $ | 196,348 | $ | 212,365 | |||||
Raw materials include finished
yarn and direct materials forthe Delta Group, undecoratedgarments for the DTG2Gobusiness, and direct embellishmentmaterials for theCredit Facility
On May 10, 2016,we entered into
a Fifth Amendedand Restated Credit AgreementOn November 19, 2019, the Borrowers entered into a SeventhConsent and Fourth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein (the “Fourth Amendment”). The Fourth Amendment, among other things, (i) increased the borrowing capacity under the Amended Credit Agreement from $145 million to $170 million (subject to borrowing base limitations), (ii) extended the maturity date from May 21, 2021 to November 19, 2024, (iii) reduced pricing on the revolver and first-in last-out “FILO” borrowing components by 25 basis points, and (iv) added 25% of the fair value of eligible intellectual property to the borrowing base calculation. In addition, the Fourth Amendment amended the definition of Fixed Charge Coverage Ratio to exclude up to $10 million of capital expenditures incurred by the Borrowers in connection with the expansion of their distribution facility located within the Town of Clinton, Anderson County, Tennessee.
On April 27, 2020, the Borrowers entered into a Fifth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo Bank (the “Agent”) and the
On August 28, 2020, the Borrowers entered into a Sixth Amendment to the Fifth Amended and Restated Credit Agreement with the Agent and the other lenders set forth therein (the “Sixth Amendment”). The Sixth Amendment, among other things, (i) maintained lower minimum availability thresholds from the amendment date through July 3, 2021, (ii) allowed for an additional 30 days of aged receivables from customers in the borrowing base through April 3, 2021, (iii) increased the advance rate to 70% of real estate assets in the borrowing base and commences amortization on October 4, 2020, (iv) ceased amortization of machinery and equipment assets in the borrowing base through April 3, 2021, (v) postponed amortization of trademark assets in the borrowing base until April 4, 2021, (vi) required the Applicable Margin to be set at Level III through July 3, 2021 and increased the Applicable Margin by 50 basis points across all Levels within the Applicable Margin table for the remaining term of the Amended Credit Agreement, and (vii) required continued weekly reporting of accounts receivable to the Agent through July 3, 2021.
On June 2, 2022, the Borrowers entered into a Seventh Amendment to the Fifth Amended and Restated Credit Agreement with the Agent and the other lenders set forth therein (the “Seventh Amendment”). The Seventh
On January 3, 2023, the Borrowers entered into an Eighth Amendment to the Fifth Amended and Restated Credit Agreement with the Agent and the other lenders set forth therein (the “Eighth Amendment”). The Eighth Amendment essentially clarifies the Amended Credit Agreement’s provisions regarding the inclusion of eligible in transit inventory in the borrowing base and amends the definition of Increased Reporting Event to include 12.5% of the lesser of the borrowing base and the maximum revolver amount as opposed to 12.5% of the line cap.
On February 3, 2023, the Borrowers entered into a Ninth Amendment to the Fifth Amended and Restated Credit Agreement with the Agent and the other lenders set forth therein (the “Ninth Amendment”). The Ninth Amendment, among other things, adds an Accommodation Period beginning on the amendment date and continuing through the date following September 30, 2023, upon which Borrowers satisfy minimum availability thresholds and during which: (i) the minimum borrowing availability thresholds applicable to the Amended Credit Agreement allowsare (a) through (and including) April 1, 2023, $7,500,000, (b) on and after April 2, 2023 through (and including) June 4, 2023, $9,000,000, (c) on and after June 5, 2023, through the date following September 30, 2023, upon which Borrowers satisfy minimum availability thresholds, $10,000,000; and (d) at all times thereafter, $0; (ii) the covenant requiring that our FCCR (as defined in our credit agreement) for the preceding 12-month period must not be less than 1.0 if the availability under our credit facility falls below the amounts specified in our credit agreement is suspended; (iii) Borrowers must maintain specified minimum EBITDA levels for trailing three-month periods starting March 4, 2023; (iv) the Applicable Margin with respect to loans under the Amended Credit Agreement is increased by 50 basis points; and (v) a Cash Dominion Trigger Event occurs if availability is less than $2,000,000.
On March 23, 2023, the Borrowers entered into a Tenth Amendment to the Fifth Amended and Restated Credit Agreement with the Agent and the other lenders set forth therein to account for specified costs and expenses in calculating EBITDA for purposes of the Amended Credit Agreement.
On October 6, 2023, the Borrowers entered into an Eleventh Amendment to the Fifth Amended and Restated Credit Agreement (the “Agreement”) with Wells Fargo Bank (the “Agent”) and the other lenders set forth therein (the “Eleventh Amendment”). The definitions of capitalized terms, if not so defined herein, may be found in the Agreement or the Eleventh Amendment. The Eleventh Amendment, among other things, extends the Accommodation Period established in the Ninth Amendment to the Agreement through the later of (x) November 4, 2023, and (y) the date upon which the Borrowers show Availability, as well as Average Availability for the preceding thirty (30) consecutive days, equal to or more than the greater of (i) seventeen and one-half percent (17.5%) of the lesser of (A) the Borrowing Base or (B) the Maximum Revolver Amount and (ii) $25,000,000. The Eleventh Amendment also, among other things, (i) requires the Borrowers to maintain a Fixed Charge Coverage Ratio of 1.00 to 1.00 for the immediately preceding twelve (12) month period as of the fiscal month ending November 4, 2023, and continuing with respect to the end of every fiscal month thereafter and (ii) eliminated the minimum EBITDA requirements established in the Ninth Amendment to the Agreement for the month ending September 2, 2023, and thereafter.
On December 5, 2023, the Borrowers entered into a Twelfth Amendment to the Agreement with the Agent and other lenders set forth therein (the “Twelfth Amendment”). The definitions of capitalized terms, if not so defined herein, may be found in the Agreement or the Twelfth Amendment. The Twelfth Amendment, among other things: (i) modifies the Applicable Margin during the period commencing on December 5, 2023, and ending on the date after certain real estate transactions have been consummated in accordance with the terms thereof; (ii) modifies the Availability Block upon consummation of certain real estate transactions and receipt of proceeds there from; (iii) reduces the Maximum Revolver Amount to $150,000,000; and (iv) provides that commencing with the fiscal month ending December 30, 2023, and as of the end of each fiscal month thereafter, if at any time (a) Availability (calculated without giving effect to the Availability Block) is less than $17,500,000 or (b) a Default or Event of Default exists or has occurred and is continuing, Borrowers will maintain a Fixed Charge Coverage Ratio, measured on a fiscal month-end basis for the immediately preceding 12 consecutive fiscal months, of not less than 1.00 to 1.00.
On December 27, 2023, the Borrowers entered into a Thirteenth Amendment to the Agreement with the Agent and other lenders set forth therein (the “Thirteenth Amendment”). The definitions of capitalized terms, if not so defined herein, may be found in the Agreement or the Thirteenth Amendment. The Thirteenth Amendment (i) modifies the Availability Block such that (a) on and after the Ninth Amendment Date through and including April 1, 2023, it shall be $7,500,000, (b) on and after April 2, 2023 through and including June 4, 2023, it shall be $9,000,000, (c) on and after June 5, 2023 through and including December 4, 2023, it shall be $10,000,000, (d) on and after December 5, 2023 through and including January 18, 2024, it shall be $7,000,000, (d) on and after January 19, 2024 through and including and February 15, 2024, it shall be $8,500,000, and (e) on and after February 16, 2024 and at all times thereafter, it shall be $10,000,000; (ii) requires that, commencing with the fiscal month ending June 29, 2024, the Company must maintain a Fixed Charge Coverage Ratio for the immediately preceding 12 consecutive fiscal months of not less than 1.00 to 1.00 if (a) Availability is less than $17,500,000 or (b) a Default or Event of Default exists; and (iii) requires that Borrowers maintain specified minimum EBITDA levels measured on a cumulative month-to-date basis through the end of the fiscal month ending March 2, 2024, and for trailing three-month periods starting March 30, 2024. The Thirteenth Amendment also, among other things, removes the requirement that certain real estate transactions be consummated and also removes the occurrence of an Event of Default in the event such transactions are not consummated by certain dates. As of December 2023, we were in compliance with the applicable minimum EBITDA level for the month-to-date requirement.
At December 2023, the Amended Credit Agreement allowed us to borrow
up toAt December 2023, we had $110.9 million outstanding under the Amended Credit Agreement at an average interest rate of
Proceeds of the loans made pursuant to the Amended Credit Agreement may be used for permitted acquisitions (as defined in the Amended Credit Agreement), general operating expenses, working capital, other corporate purposes, and to finance credit facility totaled $
Honduran Debt
Since March 2011, we haveentered into term loans and arevolving credit facility with Banco Ficohsa, aHonduran bank, to finance investments in boththe operations
El Salvador Debt
In September 2022 we entered intoa new term loan witha
Additional information about these loans and the outstanding balances
and interest rates as of DecemberDecember 2023 | ||||
Revolving credit facility with Banco Ficohsa, a Honduran bank, with interest at 8.5%, due August 2025 | $ | 3,978 | ||
Term loan with Banco Ficohsa, a Honduran bank, with interest at 9.0% and; quarterly installments which began September 2021 and are due through December 2025. | 4,058 | |||
Term loan with Banco Ficohsa, a Honduran bank, with interest at 8.75% and; quarterly installments which began March 2023 and are due through May 2027. | 2,946 | |||
Term loan with Banco Ficohsa, a Panamanian bank, with interest at the prevailing market rate within the Panamanian Banking Market (interest at 9.8% on December 2023) and; monthly installments which began October 2022 and are due through August 2027. | 2,379 | |||
We include in selling, general and administrative ("(“SG&A"&A”) expenses the costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as
On February 6,2020, our shareholders approved the Delta Apparel, Inc. 2020 Stock Plan ("(“2020Stock Plan"Plan”) to replace the 2010 Stock Plan,
Compensation expense isrecorded within SG&Ain ourCondensed Consolidated Statementsof Operationsover thevesting periods.During theDecember 2023 and December 2022 and
During the December 2022 2023 quarter, restricted stock
During the December 2023 quarter, performance stock units representing 70,150 shares of our common stock were issued and are scheduled to vest with the filing of our Annual Report on Form 10-K for the fiscal year ended September 2025. Of these performance stock units, one-half are payable in common stock and one-half are payable in cash.
During the December 2023 quarter, restricted stock units representing 67,063 shares of our common stock vested with the filing ofour Annual Report on Form10-K10-K for
During theDecember 2022 2023 quarter,performance stock unitsand restricted stockunits representing 5,000and 18,00034,812 shares of ourcommon stock respectively,were
As of December2022,2023, there was $
Yarn | $ | 17,730 | ||
Finished fabric | 1,845 | |||
Finished products | 5,654 | |||
Total inventories, net | $ | 25,229 |
Our operations are managed and reported in
The Delta Group is comprised of the following business
units, which are primarily focused on core activewear styles:DTG2Go and Delta Activewear.DTG2Go is a
market leader in theon-demand, direct-to-garment digital printand fulfillment industry,bringing technology and innovationto the supplychains of ourDelta Activewear is a preferred supplier of
activewear apparel to regional and globalbrands as well as direct to retail andwholesale markets. The Delta Activewear businessisThe iconic Soffe brand offers activewear for spirit
makers and record breakers andis widely known for the originalOur Global
Brands channelserves as akey supply chainpartner tolarge multi-nationalbrands, major brandedsportswear companies, trendyregional brands, andallOur Retail Direct
channel serves brickand mortar andonline retailers byproviding our portfolioof Delta, DeltaPlatinum, andSoffe products directlyto the retaillocationsAs a
key element ofthe integrated DeltaGroup segment, eachof Activewear’sprimary channels offera seamlessSalt Life Group is
Our Salt Life business is organized around three Salt Life omnichannel markets - wholesale, ecommerce, and branded retail stores – that are distinct in their go-to-market strategies and how their respective customer bases source their various apparel needs. Salt Life’s wholesale channel allows consumers to seamlessly experience the Salt Life
brand through one of our retail partners,Our Chief Operating Decision Makerchief operating decision maker and management evaluate performance
Three Months Ended | ||||||||
December 2023 | December 2022 | |||||||
Segment net sales: | ||||||||
Delta Group | $ | 69,604 | $ | 97,010 | ||||
Salt Life Group | 10,330 | 10,285 | ||||||
Total net sales | $ | 79,934 | $ | 107,295 | ||||
Segment operating (loss) earnings: | ||||||||
Delta Group | $ | 492 | $ | 123 | ||||
Salt Life Group | (2,130 | ) | 218 | |||||
Total segment operating (loss) earnings | $ | (1,638 | ) | $ | 341 | |||
The following table reconciles the segment operating (loss) earnings
to the consolidatedThree Months Ended | ||||||||
December 2023 | December 2022 | |||||||
Segment operating (loss) earnings | $ | (1,638 | ) | $ | 341 | |||
Unallocated corporate expenses | 3,308 | 2,967 | ||||||
Unallocated interest expense | 3,577 | 2,890 | ||||||
Consolidated loss before provision for (benefit from) income taxes | $ | (8,523 | ) | $ | (5,516 | ) | ||
The Tax
Cuts and JobsAct of 2017The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, provided temporary changes to income and non-income based tax laws, including some provisions which were previously enacted under the 2017 Tax Legislation. The CARES Act revised the U.S. corporate income tax code on a temporary basis by, among other things, eliminating the 80% of taxable income limitation on net operating loss (“NOL”) carryforwards, allowing NOL carrybacks, and increasing the Section 163(j) interest limitation deduction from 30% to 50% of adjusted taxable income. We have included the estimated impact of these provisions in our effective tax rate calculation.
Our effective income tax rate on operations for the three-months
ASC 820,Fair ValueMeasurements and Disclosures (“ASC
820”), defines fair value,establishes a framework for measuringfair value and expandsdisclosures about○ | 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. |
At December 2023 and quoted prices for
At times,
we areparty to variouslegal claims,actions andcomplaints. We believethat, asa resultof legaldefenses, insurancearrangements, andindemnification provisionsAs of September 28,2019,our Board of
Directors authorized management touse up toDecember 2023 | September 2023 | |||||||||||||||||||||||||||
Cost | Accumulated Impairment Losses | Net Value | Cost | Accumulated Impairment Losses | Net Value | Economic Life | ||||||||||||||||||||||
Goodwill: | ||||||||||||||||||||||||||||
Delta Group | $ | 18,592 | $ | (9,812 | ) | $ | 8,780 | $ | 18,592 | $ | (9,812 | ) | $ | 8,780 | N/A | |||||||||||||
Salt Life Group | 19,917 | - | 19,917 | 19,917 | - | 19,917 | N/A | |||||||||||||||||||||
Total goodwill, net | $ | 38,509 | $ | (9,812 | ) | $ | 28,697 | $ | 38,509 | $ | (9,812 | ) | $ | 28,697 | ||||||||||||||
| December 2023 | September 2023 | |||||||||||||||||||||||||||
| Cost | Accumulated Amortization | Net Value | Cost | Accumulated Amortization | Net Value | |||||||||||||||||||||||
Intangibles: | ||||||||||||||||||||||||||||
Tradename/trademarks | $ | 16,000 | $ | (5,517 | ) | $ | 10,483 | $ | 16,000 | $ | (5,384 | ) | $ | 10,616 | 20 – 30 yrs | |||||||||||||
Customer relationships | 7,400 | (4,138 | ) | 3,262 | 7,400 | (3,953 | ) | 3,447 | 20 yrs | |||||||||||||||||||
Technology | 10,083 | (3,734 | ) | 6,349 | 10,083 | (3,509 | ) | 6574 | 10 yrs | |||||||||||||||||||
License agreements | 2,100 | (1,069 | ) | 1,031 | 2,100 | (1,043 | ) | 1,057 | 15 – 30 yrs | |||||||||||||||||||
Non-compete agreements | 1,657 | (1,657 | ) | - | 1,657 | (1,657 | ) | - | 4 – 8.5 yrs | |||||||||||||||||||
Total intangibles, net | $ | 37,240 | $ | (16,115 | ) | $ | 21,125 | $ | 37,240 | $ | (15,546 | ) | $ | 21,694 | ||||||||||||||
Goodwill represents the acquired goodwill net ofthe $
Depending on the type
of intangibleOn January 3,December 28, 2023, Delta Apparel, Inc.the Company completed a sale-leaseback agreement providing for the sale and its
There are no material subsequent events other lenders set forth
Item 2. Management'sManagement’s Discussion and Analysis of FinancialCondition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-lookingstatements made by or on behalfof the Company. We may from time toForward-looking statements
are neitherhistorical factsnor assurancesof futureperformance. Instead,they arebased onour currentexpectations andare necessarily| ● | the general U.S. and international economic conditions; | |
● | the impact of the COVID-19 pandemic and government/social actions taken to contain its spread on our operations, financial condition, liquidity, and capital investments, including recent labor shortages, inventory constraints, and supply chain disruptions; |
● | significant interruptions or disruptions within our manufacturing, distribution or other operations; |
● | deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our customers and suppliers; |
● | the volatility and uncertainty of cotton and other raw material prices and availability; |
● | the competitive conditions in the apparel industry; |
● | our ability to predict or react to changing consumer preferences or trends; |
● | our ability to successfully open and operate new retail stores in a timely and cost-effective manner; |
| ● | the ability to successfully implement our strategic plans and achieve our business strategies; | |
● | the ability to grow, achieve synergies and realize the expected profitability of acquisitions; |
● | changes in economic, political or social stability at our offshore locations or in areas in which we, or our suppliers or vendors, operate; |
● | our ability to attract and retain key management; |
● | the volatility and uncertainty of energy, fuel and related costs; |
● | material disruptions in our information systems related to our business operations; |
● | compromises of our data security; |
● | significant changes in our effective tax rate; |
● | significant litigation in either domestic or international jurisdictions; |
● | recalls, claims and negative publicity associated with product liability issues; |
● | the ability to protect our trademarks and other intellectual property; |
● | changes in international trade regulations; |
● | our ability to comply with trade regulations; |
● | changes in employment laws or regulations or our relationship with employees; |
● | negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors; |
| ● | the inability or refusal of suppliers or other third-parties, including those related to transportation, to fulfill the terms of their contracts with us; | |
| ● | our ability to continue as a going concern; | |
● | continued operating losses and restrictions on our ability to borrow capital or service our indebtedness; |
● | interest rate fluctuations increasing our obligations under our variable rate indebtedness; |
● | the ability to raise additional capital; |
● | the impairment of acquired intangible assets; |
● | foreign currency exchange rate fluctuations; |
● | the illiquidity of our shares; and |
● | price volatility in our shares and the general volatility of the stock market. |
A detailed discussion
of significant riskfactors that havethe potential tocause actual resultsto differ materiallyfrom our expectations isset forth inPart 1 undertheWith the unfavorable market dynamics we saw across many parts of our business throughout our last fiscal year persisting as we move further into our 2024 fiscal year, we continue to tightly manage our debt and working capital and look for areas where we can streamline our operations. Our overall debt was down 22% and our inventory levels were pleaseddown 24% at the end of our first quarter and we have made more progress on those fronts to start our 2023 fiscalsecond quarter. In addition, we have substantially completed the plan we initiated last year
Our overall operating results for the first quarter were challenged and, looking ahead, we believe that industry demand will remain comparable to last year and below pre-pandemic levels. These market dynamics resulted in more below-capacity production volume within our Activewear business’s manufacturing platform and associated de-leveraging of our significant fixed cost structure in the offshore countries where it is located. We continued to improve our quality, on-time delivery, and labor efficiency performance in our DTG2Go business during the quarter, but overall demand during the peak holiday season was below forecast. We also continue to see profitability in our DTG2Go business impacted by downward price pressure and elevated domestic labor costs.
Salt Life achieved sales growth across
With the start to add value to the supply chains of multi-national,
Results of Operations
Financial results included herein have been presented on a generally accepted accounting principles ("GAAP"(“GAAP”) basis.
Net sales were $107.3$79.9 million in the first quarter of fiscal
Net sales in the Delta Group segment declined 4.8% to $97.0were $69.6 million in the first quarter of fiscal 20232024 compared to $101.9$97.0 million in the prior year first quarter.
Net sales in our DTG2Go business and
Gross margins were 10.9% for the first quarter of fiscal 2024 compared to 12.7% in the prior year first quarter, and driven primarily by costs incurred in connection with production curtailments (collectively, “Production Curtailment Costs”). Adjusting for these Production Curtailment Costs, first quarter gross margin of 20.8%margins were 12.6%.
Delta Group segment gross margins were 8.0%
Salt Life Group segment gross margins improved to 57.0%were 45.4% in the first quarter of fiscal 2023, an improvement of 370 basis points2024 compared to 53.3%57.0% in the
Selling, general, and administrative expenses ("(“SG&A"&A”) weredeclined from $18.9 million in the prior year period to $18.6 million in the first
Other income for the 2024 first fiscal quarter includes a $5.4 million
Operating loss in the first quarter of fiscal 2023
Delta Group segment hadoperating income improved to $0.5 million in the first fiscal quarter of 2024 from operating income of $0.1 million in the first fiscal quarter of 2023, or 0.1% of net sales, compared to $8.4 million,
The Salt Life Group segment hadexperienced an operating loss of $2.1 million in the first fiscal quarter of 2024, or (20.6%) of sales, compared to prior year period net operating income of $0.3 million, in the first fiscal
EBITDA for the prior year first quarter.
Net interest expense for the first quarters of each of fiscal years
Our effective tax rate on operations for the three-month period ended December 20222023 was 35.0%(0.1%). This compares
Net loss attributable to shareholders for the first fiscal quarter of 2023
Accounts receivable, net, were $57.8$32.3 million
Net inventory as of December 20222023 was
Total net debt, including capital lease financing and cash on hand,
wasNon-GAAP Financial Measures
We provide all information required in accordance with U.S. GAAP, but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only U.S. GAAP financial measures. In an effort to provide investors with additional information regarding our results, we also provide non-GAAP information that management believes is useful to investors. We discuss gross margins, operating income and net income performance measures that are, for comparison purposes, adjusted to eliminate items or results stemming from discrete events. We also discuss earnings before interest, taxes, depreciation and amortization (“EBITDA”) and adjusted EBITDA. 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 December 31, 2022,
Reconciliation of GAAP gross margins to non-GAAP gross margins, GAAP operating income to non-GAAP operating income, GAAP net income to non-GAAP net income, GAAP net income to non-GAAP EBITDA, GAAP net income to non-GAAP adjusted EBITDA, and $5.8 million from
Reconciliation of GAAP Measures Gross Margin, Operating Loss and Net Loss to Non-GAAP Measures Adjusted Gross Margin, Adjusted Operating (Loss) Income, and Adjusted Net Loss
Unaudited
(in thousands)
Three Months Ended | ||||||||
December 2023 | December 2022 | |||||||
| Gross Margin | $ | 8,747 | $ | 13,623 | ||||
| Production Curtailment Costs (1) | 1,348 | 3,370 | ||||||
Adjusted Gross Margin | $ | 10,095 | $ | 16,993 | ||||
| Percent of Sales | 12.6 | % | 15.8 | % | ||||
| Operating Loss | $ | (4,946 | ) | $ | (2,626 | ) | ||
| Production Curtailment Costs (1) | 1,348 | 3,370 | ||||||
Restructuring Costs (2) | 813 | - | ||||||
Adjusted Operating (Loss) Income | $ | (2,785 | ) | $ | 744 | |||
Net Loss | $ | (8,527 | ) | $ | (3,565 | ) | ||
| Production Curtailment Costs (1) | 1,348 | 3,370 | ||||||
| Restructuring Costs (2) | 813 | - | ||||||
Tax Impact | (216 | ) | (3,540 | ) | ||||
Adjusted Net Loss | $ | (6,582 | ) | $ | (3,735 | ) | ||
Reconciliation of GAAP Measures Delta Group Segment Gross Margin and Delta Group Segment Operating Income to Non-GAAP Measures Delta Group Segment Adjusted Gross Margin and Delta Group Segment Adjusted Operating Income
Unaudited
(in thousands)
Three Months Ended | ||||||||
December 2023 | December 2022 | |||||||
| Gross Margin | $ | 4,058 | $ | 7,760 | ||||
| Production Curtailment Costs (1) | 1,348 | 3,370 | ||||||
Adjusted Gross Margin | $ | 5,406 | $ | 11,130 | ||||
| Percent of Sales | 7.8 | % | 11.5 | % | ||||
| Operating Income | $ | 492 | $ | 123 | ||||
| Production Curtailment Costs (1) | 1,348 | 3,370 | ||||||
Restructuring Costs (2) | 813 | - | ||||||
Adjusted Operating Income | $ | 2,653 | $ | 3,493 | ||||
| Percent of Sales | 3.8 | % | 3.6 | % | ||||
Reconciliation of GAAP Measure Net Loss to Non-GAAP Measures Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), Adjusted Net Loss and Adjusted EBITDA
Unaudited
(in thousands)
| Three Months Ended | |||||
| December 2023 | |||||
| Net Loss | $ | (8,527 | ) | ||
| Interest Expense, Net | 3,577 | ||||
| Provision For Income Taxes | 10 | ||||
| Delta Group Segment Depreciation and Amortization | 3,041 | ||||
| Salt Life Group Segment Depreciation and Amortization | 534 | ||||
| Unallocated Depreciation and Amortization | 57 | ||||
| EBITDA | $ | (1,308 | ) | ||
| Production Curtailment Costs (1) | 1,348 | ||||
Restructuring Costs (2) | 813 | ||||
| Tax Impact | (216 | ) | |||
| Adjusted Net Loss | $ | (6,582 | ) | ||
| Interest Expense, Net | 3,577 | ||||
| Provision For Income Taxes | 226 | ||||
| Delta Group Segment Depreciation and Amortization | 3,041 | ||||
| Salt Life Group Segment Depreciation and Amortization | 534 | ||||
| Unallocated Depreciation and Amortization | 57 | ||||
| Adjusted EBITDA | $ | 853 |
Reconciliation of GAAP Measure Delta Group Segment Operating Income to Non-GAAP Measures Delta Group Segment EBITDA, Adjusted Delta Group Segment Operating Income, and Adjusted Delta Group Segment EBITDA
Unaudited
(in thousands)
| Three Months Ended | |||||
| December 2023 | |||||
Delta Group Segment Operating Income | $ | 492 | |||
| Delta Group Segment Depreciation and Amortization | 3,041 | ||||
| Delta Group Segment EBITDA | $ | 3,533 | |||
| Production Curtailment Costs (1) | 1,348 | ||||
Restructuring Costs (2) | 813 | ||||
| Adjusted Delta Group Segment Operating Income | $ | 2,653 | |||
| Delta Group Segment Depreciation and Amortization | 3,041 | ||||
| Adjusted Delta Group Segment EBITDA | $ | 5,694 |
Reconciliation of GAAP Measure Salt Life Group Segment Operating Loss to Non-GAAP Measure Salt Life Group Segment EBITDA
Unaudited
(in thousands)
| Three Months Ended | |||||
| December 2023 | |||||
Salt Life Group Segment Operating Loss | $ | (2,130 | ) | ||
| Salt Life Group Segment Depreciation and Amortization | 534 | ||||
| Salt Life Group Segment EBITDA | $ | (1,596 | ) |
(1) Production Curtailment Costs consist of unabsorbed fixed costs, temporary unemployment benefit payments, and other expense items resulting fromSeptember 2022 principally driven by investments the Company’s decision to reduce production levels to better align with the significantly reduced demand across the activewear industry due to high inventory levels stemming from the heavy replenishment activity following pandemic-related supply chain challenges.
(2) Restructuring Costs consist of employee severance benefits paid in connection with the
Liquidity and Capital Resources
We have funded our working capital requirements, capital expenditures, mergers, acquisitions and investments, restructuring activities, and stock repurchases from net cash provided by operating activities, borrowings under our credit facilities, and proceeds from the sale of property, plant and equipment removed from service, if any. See Note F - Debt to the Condensed Consolidated Financial Statements for detailed information regarding our debt.
Operating Cash Flows
Operating activities resulted in a cash usage
Investing Cash Flows
Cash provided by investing activities totaled $5.9 million for the timing of payments from customers and to vendors, in addition to reduced inventory
Financing Activities
Financing activities resulted in 2023 as
Future Liquidity and Capital Resources
See Note F – Debt to the CondensedConsolidated Financial Statements for a discussionof our various financing arrangements,including the terms of our asset-based U.S. revolving U.S.
Our asset-based U.S. revolving credit facility as well asand cash flows
Our current liquidity position raises substantial doubt as to our ability to continue as a
Our term loan and revolving credit facility in
Honduras and our term loan in El Salvador allow the Company to finance both operations and capital expenses. Each of these loans are secured by a first-priority lien on the assets of our Honduran and El Salvador operations and is not guaranteed by our U.S. entities. The Honduran revolving creditShare Repurchase Program
We did notpurchase any shares underour previously announced sharerepurchase program in thefirst quarter of fiscal2023. December 2023 quarter. The total amountrepurchased
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
Adetailed discussionofcriticalaccounting policiesiscontained intheSignificantAccounting PoliciesincludedinNote 2totheAudited ConsolidatedFinancial
Environmental and Other Regulatory Matters
Weare subjectto variousfederal, stateand localenvironmental lawsand regulationsconcerning, amongother things,wastewater discharges,storm waterflows, air
The environmental and other regulations applicable to our business are becoming increasingly
stringent, and we incur capital and other expenditures annually to achieveDisclosure controls and procedures are controls and other procedures
that are designed to reasonably assure that informationrequired to be disclosed in the reports thatOur management, with the
participation of our ChiefExecutive Officer and principalaccounting officer, hasevaluated the effectiveness of ourdisclosure controls andChanges in Internal Control Over Financial Reporting
There were no changes during the December
OTHER INFORMATION |
Legal Proceedings |
See Note M—Legal Proceedings, in Part I, Item 1, which
is incorporated herein by reference.Risk Factors |
Investing in our common stock involves risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and the accompanying notes and the information included elsewhere in this Quarterly Report on Form 10-Q as well as the information contained in our Annual Report on Form 10-K filed on December 28, 2023, including but not limited to the section therein entitled “Risk Factors”, and our other public filings before deciding whether to invest in our common stock. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may also become important factors that adversely affect our business. If any of the following or above-referenced risks occur, our business, financial condition, operating results, and future prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
Our future success depends in part on our ability to successfully implement our strategic plans and achieve our business strategies. We continue to focus on strategic initiatives designed to enhance our capabilities and liquidity, strengthen the foundation of our Company, and accelerate profitable growth across our business segments. For example, we are committed to exploring opportunities to monetize our manufacturing and distribution campus in Fayetteville, North Carolina through a sale-leaseback transaction and our Board of Directors recently concluded a thorough review of our strategic options for Salt Life business and decided to continue negotiations with a selected entity. There can be no assurance that these or other future strategic initiatives will be successful to the extent we expect, or at all. Additionally, we are investing resources in these initiatives and the costs of the initiatives may outweigh their benefits. If we miscalculate the resources we need to complete these strategic initiatives or fail to implement them effectively, our business, operating results and liquidity position could be adversely affected.
Theavailability of our key raw materials or raw material price volatilitymay interrupt our supply chains and materially harm our business. Cotton is the primary raw material used in the manufacture of our apparel products. As is the case with other commodities, the price of cotton fluctuates and is affected by weather, consumer demand, speculation on the commodities market, inflation, the cost of labor and transportation, and other factors that are generally unpredictable and beyond our control. As described under the heading “Manufacturing, Sourcing, and Distribution,” the price of yarn purchased from Parkdale, our key supplier, is based upon the cost of cotton plus a fixed conversion cost. We set future cotton prices with purchase commitments as a component of the purchase price of yarn in advance of the shipment of finished yarn from Parkdale. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time we enter into the commitments. Thus, we are subject to the commodity risk of cotton prices and cotton price movements, which could result in unfavorable yarn pricing for us. In the past, the Company, and the apparel industry as a whole, has experienced periods of increased cotton costs and price volatility. By way of example, the price of cotton per pound increased almost 50% in a five-month period and reached a high of over $1.50 in our fiscal year 2022. In some instances, we were unable to pass through these higher costs to our customers, with the gross margins in our Activewear and other businesses negatively impacted as a result. In addition, sudden decreases in the price of cotton and other raw materials may result in the cost of inventory exceeding the cost of new production, which may result in downward selling price pressures, negatively impacting the gross margins in our Activewear and other businesses by significant amounts.
Additionally, if Parkdale’s operations are disrupted and Parkdale is not able to provide us with our yarn requirements, we may need to obtain yarn from alternative sources. We may not be able to enter into short-term arrangements with substitute suppliers on terms as favorable as our current terms with Parkdale, which could negatively affect our business. In addition, we may not be able to obtain sufficient quantities of yarn from alternative sources, which could require us to adjust manufacturing levels, negatively impacting our business and results of operations.
Our operations also require significant amounts of dyes and chemicals that we purchase from several third-party suppliers. While historically we have not had difficulty obtaining sufficient quantities of dyes and chemicals for manufacturing, the availability of products can change, which could require us to adjust dye and chemical formulations. In certain instances, these adjustments can increase manufacturing costs, negatively impacting our business and results of operations.
Our liquidity position has and may continue to prevent us from purchasing all of the yarn, dyes, chemicals and other production inputs required to supply our manufacturing facilities and allow them to run at the levels required to meet our business plans. When we operate our manufacturing facilities at below capacity levels and/or the levels required to meet our business plans, we can incur significant manufacturing variances due to lower fixed cost absorption rates that increase unit and other costs and lower our gross margins, causing a material adverse effect on our results of operations. When we operate our manufacturing facilities below the levels required to meet our business plans or needs, we also may be unable to fulfill demand for our products, which negatively impacts our business and results of operations and can potentially damage our reputation and customer relationships.
If we experience disruptions or interruptions within any of our facilities, operations,or distribution networks, we may be unable to deliver our products to the market and may lose sales and customers. We own or lease manufacturing facilities in the United States, Honduras, El Salvador and Mexico (our Mexico leases will terminate in early 2024 in connection with our decision to close our sewing and screenprint operations there). We also own or lease distribution facilities located throughout the United States and maintain inventory at certain third-party locations. Any casualty or other circumstance that damages or destroys any of these material facilities or significantly limits their ability to function could have a material adverse effect on our business. Similarly, any significant interruption in the operation of any of these facilities or our related sourcing and transportation logistics functions, whether within or outside of our control, may delay shipment of merchandise to our customers, potentially damaging our reputation and customer relationships and causing a loss of revenue. Moreover, in the event of a regional disruption where we manufacture our products, we may not be able to shift our operations to a different geographic region, and we may have to cease or curtail our operations in a selected area. This may cause us to lose sales and customers. The types of disruptions that may occur include foreign trade disruptions, import restrictions, labor disruptions, embargoes, government intervention, natural disasters, regional or global pandemics and political disruptions such as those referenced in the immediately preceding paragraph of this section as well as liquidity challenges that result in the inability to pay our suppliers. In addition, if we are unable to successfully coordinate the planning of inventory across these facilities and the related distribution activities, it could have a material adverse effect on our business, financial condition and results of operations.
If any of the third parties upon whom we rely to provide certain key equipment and Useservices fails or refuses to satisfy their obligations to us in the future, we may suffer a disruption to our business. We rely on certain key equipment and services provided by various third parties, including logistics partners and equipment suppliers. For example, we rely on third parties to provide certain inbound and outbound transportation and delivery services and other third parties to provide us with key equipment to support our manufacturing and fulfillment platforms, including our DTG2Go digital platform. If any of Proceeds
Economic conditions may adversely impact demand for our products. The apparel industry is cyclical and dependent upon the overall level of demand for soft goods, which may or may not coincide with the overall level of discretionary consumer spending. These levels of demand change as regional, domestic and international economic conditions change. These economic conditions include, but are not limited to, employment levels, energy costs, interest rates, tax rates, inflation, personal debt levels, and uncertainty about the future, with many of these factors outside of our control. Recent distress in global credit markets, rising interest rates, foreign exchange rate fluctuations, significant geopolitical conflicts, volatility in energy prices, constraints on the global supply chain, high inventory levels among retailers and their supply chains, and other factors continue to affect the global economy and the apparel industry and adversely impact demand for our products. In 2022 and 2023, the U.S. experienced significantly heightened inflationary pressures. We may not be able to fully mitigate the impact of inflation through price increases, productivity initiatives and cost savings, which could have a material adverse effect on our financial results. In addition, if the U.S. economy enters a recession, we may experience sales declines and may have to decrease prices, all of which could have a material adverse impact on our financial results. Historically, during recessionary periods, the demand for casual and activewear apparel has been strong and our business has performed well. However, there can be no assurances that this correlation will continue in future recessions. Sometimes, the timing of increases or decreases in consumer purchases of soft goods can differ from the timing of increases or decreases in the overall level of economic activity.
Weakening sales may require us to reduce manufacturing operations to match our output to demand or expected demand and reductions in our manufacturing operations may increase unit and other costs and lower our gross margins, causing a material adverse effect on our results of operations and liquidity position. For example, during fiscal year 2023 and the first quarter of our fiscal year 2024, we experienced significant reductions in demand across our Activewear business due to high inventory levels across the supply chain, including but not limited to channels serving mass retailers, and we made the decision to curtail our production levels to maintain balance with the declining demand. We incurred expenses in connection with our decision to reduce production that amounted to approximately $1.3 million in the first quarter of fiscal year 2024 and $8.0 million in excess cost during fiscal year 2023, with most of that cost driven by lower fixed cost absorption due to lower production volume and the payment of temporary unemployment benefits to idled employees at our offshore locations.
Operating losses could continue and we may be restricted in our ability to borrow under our revolving credit facility or service our indebtedness. We incurred operating losses in fiscal year 2023 as well as in the first quarter of our fiscal year 2024 and have financed our operations principally through borrowings under our U.S. asset-based revolving credit facility. Future profitability is difficult to predict with certainty given the current market environment and our liquidity position. Failure to achieve profitability could materially and adversely affect the value of our Company and our ability to effect additional financing. The success of our business depends on our ability to increase revenues to offset expenses and operate profitably. If we are unable to meet achieve our revenue targets and/or unable to reduce operating expenses, our business, financial condition and operating results will be materially adversely affected and we may incur additional operating losses.
Significant operating losses or significant uses of cash in our operations could cause us to default on our U.S. asset-based revolving credit facility. We rely on our credit facility, as well as on cash generated by our operations, to fund our working capital, capital expenditure and other operational needs, to make acquisitions, to fund repurchases under our share repurchase program and to pay dividends should we choose to do so in the future. Our working capital needs are generally greater in advance of the spring and summer selling seasons. Availability under our credit facility is primarily a function of the levels of our accounts receivable and inventory, as well as the uses of cash in our operations. A significant deterioration in our accounts receivable or inventory levels could restrict our ability to borrow additional funds or service our indebtedness. Cash on hand and availability under our U.S. revolving credit facility totaled $7.4 million at December 30, 2023. It is probable that we will not satisfy availability, EBITDA and/or other thresholds in our U.S. asset-based revolving credit facility. Moreover, if we fail to satisfy our minimum availability threshold, we would be required to maintain the minimum fixed charge coverage ration (FCCR) specified in our credit agreement, which we may not be able to maintain. The covenants in our credit facility include, among other things, limitations on asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with affiliates as well as requirements to complete transactions related to certain assets. Currently, the Company projects that a covenant violation of the credit facility is probable of occurring within the second quarter, which may lead to an event of default. If an event of default under our credit facility occurred or became imminent, we may request our credit agreement lenders to provide a waiver. If we were unsuccessful in that endeavor, we could explore alternative sources of capital, whether debt or equity, which would likely be more expensive than the costs we incur under our credit facility and may not be available. If we were unable to cure an un-waived event of default under our credit facility, we would be unable to borrow additional amounts under the facility, we could be unable to fund our working capital and capital expenditure needs, make acquisitions, fund share repurchases or pay dividends, and our lenders thereunder could accelerate our obligations under the agreement and foreclose on our assets subject to the liens in their favor. This circumstance would have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.
Our financial statements have been prepared assuming a going concern. Our financial statements as of December 30, 2023, were prepared under the assumption that we will continue as a going concern for the next 12 months from the date of issuance of these financial statements; however, there is substantial doubt regarding our ability to continue as a going concern for such period. We believe we will need to raise capital or obtain other liquidity in the near future to have sufficient resources to fund our operations and meet the obligations specified in our U.S. asset-based credit facility for the next 12 months. There can be no assurance, however, that we will be successful in raising the necessary capital or otherwise obtaining the necessary liquidity, that any such capital or liquidity will be available to us on terms acceptable to us, or at all, or that we will be successful in any of our other endeavors to become financially viable and continue as a going concern. Our inability to raise additional capital or obtain other liquidity on acceptable terms in the near future would have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition. Furthermore, any decline in the market price of our common stock could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
We may be subject to the impairment of acquired intangible assets. When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that is allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired. At December 2023 and September 2023, our goodwill and other intangible assets were approximately $49.8 million and $50.4 million, respectively. We conduct an annual review, and more frequent reviews if events or circumstances dictate, to determine whether goodwill is impaired. We also determine whether impairment indicators are present related to our identifiable intangible assets. If we determine that goodwill or intangible assets are impaired, we would be required to write down the value of these assets. We completed our annual impairment test of goodwill on the first day of our third fiscal quarter of fiscal year 2023 and concluded that there was no indication of impairment. However, based upon the subsequent operating results and projections for our DTG2Go business, during our fourth fiscal quarter we concluded that the goodwill associated with that business was impaired. Due to this impairment, we recorded an impairment charge of $9.2 million in fiscal year 2023.
At December 2023, we concluded based on the assessment performed that there was no additional indication of impairment on the goodwill to be recorded on our financial statements. We also concluded that there were no additional indicators of impairment related to our intangible assets. There can, however, be no assurance that we will not be required to take an impairment charge in the future, which could have a material adverse effect on our results of operations.
The market price of our shares may be highly volatile, and the stock market in general can be highly volatile. Fluctuations in our stock price may be influenced by, among other things, general economic and market conditions, conditions or trends in our industry or our business, our financial and liquidity position, and results of operations, changes in the market valuations of other apparel companies, announcements by us or our competitors of significant acquisitions, strategic partnerships or other strategic initiatives, and trading volumes. Many of these factors are beyond our control but may cause the market price of our common stock to decline, regardless of our operating performance.
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.Other Information |
During the first quarter of fiscal 2024,none of our directors or Section 16 officers adopted or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K).
Exhibits |
Exhibits
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the Fifth Amended and Restated
DELTA APPAREL, INC. (Registrant) | |||
Date | February 13, 2024 | By: | /s/ Nancy P. Bubanich |
Nancy P. Bubanich |