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 Securities and Exchange Commission (the “SEC”), in our press releases, in oral statements, 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 “estimate”, “project”, “forecast”, “anticipate”, “expect”, “intend”, “believe” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.
The forward-looking statements in this Annual Report are based on our 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 also subject to a number of business risks and uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. The risks and uncertainties include, among others:
the general U.S. and international economic conditions;
deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our customers and suppliers;
interest rate fluctuations increasing our obligations under our variable rate indebtedness;
the ability to grow, achieve synergies and realize the expected profitability of acquisitions;
material disruptions in our information systems related to our business operations;
changes in or our ability to comply with safety, health and environmental regulations;
cost increases and reduction in future profitability due to recent healthcare legislation;
violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors;
price volatility in our shares and the general volatility of the stock market; and
the costs required to comply with the regulatory landscape regarding public company governance and disclosure.
A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our expectations is described in Part 1 under the heading of “Risk Factors.” Any forward-looking statements 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 Annual Report and we do not undertake publicly to update or revise the forward-looking statements even if it becomes clear that any such statements or any projected results will not be realized or that any contemplated strategic initiatives will not be implemented.
PART I
“Delta Apparel”, the “Company”, “we”, “us” and “our” are used interchangeably to refer to Delta Apparel, Inc. together with our domestic wholly-owned subsidiaries, including M.J. Soffe, LLC (“Soffe”), Junkfood Clothing Company (“Junkfood”), Salt Life, LLC (f/k/a To The Game, LLC) (“Salt Life”), Art Gun, LLC (“Art Gun”), and other international subsidiaries, as appropriate to the context.
We were incorporated in Georgia in 1999 and our headquarters is located at 322 South Main Street, Greenville, South Carolina 29601 (telephone number: 864-232-5200). Our common stock trades on the NYSE MKT under the symbol “DLA”.
We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. The 2016 and 2014 fiscal years were 52-week years that ended on October 1, 2016, and September 27, 2014, respectively. The 2015 fiscal year was a 53-week year that ended on October 3, 2015. The 2014 and 2013 fiscal years were 52-week years that ended on September 27, 2014, and June 29, 2013, respectively. The transition period resulting from the change in our fiscal year end was a 13-week quarter that ended on September 28, 2013, to coincide with the change in our fiscal year end. On August 26, 2013, our Board of Directors determined that the Company's fiscal year would begin on the Sunday closest to September 30th of each year and end on the Saturday closest to September 30th of each year.
OVERVIEW
Delta Apparel, Inc. is an international apparel design, marketing, manufacturing and sourcing company that features a diverse portfolio of lifestyle basics and branded activewear apparel, headwear and headwear.related accessory products. We specialize in selling casual and athletic products through a variety of distribution channels and distribution tiers, including specialty stores, boutiques, department stores, mid and mass channels, e-retailers, and the U.S. military. Our products are also made available direct-to-consumer on our websites at www.saltlife.com, www.soffe.com, www.junkfoodclothing.com, and www.deltaapparel.com.in our retail stores. We believe this diversified distribution allows us to capitalize on our strengths to provide casual activewear to consumers purchasing from most types of retailers.
We design and internally manufacture the majority of our products, which allows us to offer a high degree of consistency and quality controls as well as leverage scale efficiencies. One of our strengths is the speed with which we can reach the market from design to delivery. We have manufacturing operations located in the United States, El Salvador, Honduras and Mexico, and 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.
ACQUISITIONS
We became a diversified branded apparel company through acquisitions that added well-recognized brands and licensed properties to our portfolio, expanded our product offerings and broadened our distribution channels and customer base.
On August 27, 2013,30, 2016, we purchased substantially all of the assets of Salt Life Holdings, LLC, including all of its domestic and international trademark rights in the Salt Life brand.COAST Apparel ("Coast"). The Salt LifeCoast acquisition continues our strategy of building lifestyle brands that take advantage of our creative capabilities, direct-to-consumer infrastructure, vertical manufacturing platform and international sourcing competencies. Prior to the Salt Life acquisition, we sold Salt Life-branded products under exclusive license agreements which began in January 2011.
BUSINESS SEGMENTS
We operate our business in two distinct segments: brandedbasics and basics.branded. Although the two segments are similar in their production processes and regulatory environments, they are distinct in their economic characteristics, products, marketing and distribution methods.
The basics segment is comprised of our business units primarily focused on garment styles characterized by low fashion risk, and includes our Delta Activewear (which includes Delta Catalog and FunTees) and Art Gun business units. We market, distribute and manufacture unembellished knit apparel under the main brands of Delta Pro Weight® and Delta Magnum Weight® for sale to a diversified audience ranging from large licensed screen printers to small independent businesses. We also manufacture private label products for major branded sportswear companies, trendy regional brands, retailers, and sports licensed apparel marketers. Typically our private label products are sold with value-added services such as hangtags, ticketing, hangers, and embellishment so that they are fully ready for retail. Using digital print equipment and its proprietary technology, Art Gun embellishes garments to create private label, custom decorated apparel servicing the fast-growing e-retailer channels.
The branded segment is comprised of our business units which are focused on specialized apparel garments and headwear to meet consumer preferences and fashion trends, and includes our Salt Life, Junkfood, Soffe, and SoffeCoast business units as well as The Game business unit prior to its disposition on March 2, 2015. These branded embellished and unembellished products are sold through specialty and boutique shops, upscale and traditional department stores, mid-tier retailers, sporting goods stores, e-retailers and the U.S. military. Products in this segment are marketed under our lifestyle brands of Salt Life®, Junk Food®, Soffe®, and Soffe®COAST®, as well as other labels.
The basicsresults of the Coast business have been included in the branded segment is comprised of our business units primarily focusedsince acquisition on garment styles characterized by low fashion risk, and includes our Delta Activewear (which includes Delta Catalog and FunTees) and Art Gun business units. We market, distribute and manufacture for sale unembellished knit apparel under the main brands of Delta Pro Weight® and Delta Magnum Weight® for sale to a diversified audience ranging from large licensed screen printers to small independent businesses. We also manufacture private label products for major branded sportswear companies, retailers, corporate industry programs, e-retailers, and sports licensed apparel marketers. Art Gun produces custom private label garments through digital printing. Typically the private label products are sold with value-added services such as hangtags, ticketing, hangers, and embellishment so that they are fully ready for retail. August 30, 2016.
See Note 14 of the Notes to Consolidated Financial Statements for financial information regarding segment reporting, which information is incorporated herein by reference.
PRODUCTS
We specialize in the design, merchandising, sales, and marketing of a variety of casual and athletic products for men, women, juniors, youth and children at a wide range of price points through most distribution channels.
We market fashion apparel garments, headwear
and headwearaccessories under our primary brands of Salt Life®, Junk Food®, Soffe® and Soffe®COAST®, as well as other labels. We market our basic apparel garments under our Delta brand.
Salt Life is an authentic, aspirational and lifestyle apparel brand that embraces those who love the ocean and everything associated with it. From fishing, diving and surfing, to beach fun and sun-soaked relaxation, the Salt Life brand says "I live the Salt Life". Products consist of tee shirts, board shorts, technical fishing apparel, rash guards and performance clothing featuring our own trademarked UVAPOR fabrics. Salt Life's distribution includes surf shops, specialty stores, department stores, and sporting goods retailers.and outdoor retailers, and direct-to-consumer through retail doors and ecommerce.
Junk Food emerged in 1998 as the original vintage t-shirt brand. Known for its soft, comfortable fabrics and witty art, the Junk Food brand is a celebrity favorite carried in the top stores throughout the world, including branded collaborations with Bloomingdales, Nordstrom, Gap Inc. and other notable retailers. Also a licensing powerhouse, Junkfood has distribution rights to numerous pop-culture properties across multiple categories, including rock & roll, fictional characters, movies, sports, and foods and beverages. The Junk Food brand continues to expand beyond its iconic tee shirt collections with new apparel categories, accessories, and headwear. In fiscal year 2014, Junkfood openedheadwear, showcased in its first flagship retail store on Abbot Kinney in Venice, California. Junkfood's diversified business model includes both private and branded labels, with a portfolio that includes Junk Food®, Junk Food Art House, Wknd, Stray Heart®, K-38, The Neighborhood Thieves®K38®, Paint and Cloth®, Worn Rite®, Love + Art®, and True Vintage®.
Soffe is currently positioned in the marketplace as an All-Americana lifestyle activewear brand that designs, produces, and markets products for men, women, juniors, and children. Soffe’s “The Strength Is In Us” marketing campaign is targeted toward core consumers who lead active lifestyles and understand that, together, we can accomplish more than by ourselves. The women's product offerings are grounded in the brand's heritage in the cheerleading market and include a newly introduced performance segment that utilizesfeatures technical fabrics as well as crossover fun-fashion design influences. As a supplier to the military since 1946, the Soffe men's offeringsproducts are rooted in ourthis military heritage. Core items include both contract-drivenperformance garments issued garments as well as branded basics thatdirectly to enlisted soldiers which also have become enlisted-soldier must-haves. Soffe also offers Intensity by Soffe, a uniform collection that outfits competitive athletes on-the-field.broad appeal to young men who lead an active lifestyle. By incorporating trend-leading fits and an overall fashion-on-the-field sensibility, Intensity by Soffe creates performance uniforms, practice gear, and accessories. Soffe has a diverse distribution network that includes all military branches, big-box sporting goods retailers, mid-tier department stores, and an independent network of sales representatives that service independent sporting goods retailers, team dealers, screen printers, schools and schools.direct-to-consumer outlets.
Coast integrates the coastal experience of weekends and summers at the beach with everyday life throughout the year. Beginning with just a men’s polo shirt, Coast Apparel has since expanded into a full line of traditional, sports-casual attire, headwear and accessories. Coast Apparel primarily markets direct-to-consumer through two retail stores, located in Greenville, South Carolina and Pawley’s Island, South Carolina, and via its ecommerce site at www.coastapparel.com and can also be found at select independent retailers.
Delta offers a wide assortment of basic, high-quality apparel garments for the entire family under its primary brand names Delta Pro Weight® and Delta Magnum Weight®. Delta products are offered in a broad range of colors available in six-month infant to adult sizes up to 5X. The Pro Weight® line represents a diverse selection of mid-weight, 100% cotton silhouettes in a large color palette. The Magnum Weight® line is designed to give our customers a variety of silhouettes in a heavier-weight, 100% cotton fabric. In 2015,2016, we launchedbroadened our fashion basics line with a snow heather french terry hoodie and zip hoodie. Our fleece program, which includes a fashionable, light-weight Frenchand french terry line and a comfortable heavy-weight fleece. These unisex products help Delta meet the seasonal demands of our diversified customer base. New for 2016,2017, with the success of our Delta Dri brand, we are now expanding into a ladies line to accompany the existing mens and boys. In addition, we are adding trendy snowa line of pepper heathers and tri-blends to further extend the fleece line, along with other fashion basics.basics component of our line.
FunTees designs, markets and manufactures private label custom knit t-shirts primarily to major branded sportswear and lifestyle companies. The majority of this merchandise is manufactured, embellished and sold to our customers with a wide variety of packaging services so that products are shipped store-ready.
Art Gun is a leader in direct-to-garment printing, with one of the most highly automatedhighly-automated factory processes for delivering on-demand, direct-to-garment, digitally printed garments of all types. Art Gun prints single,individual, custom items and shipships products to consumers in over 40 countries worldwide.
A key to the success of our businesses is our ability to anticipate and quickly respond to changing consumer preferences. Our art team reviews trend reports, concepts and color trends to keep our products and designs in style. This information is used by our in-house designers and merchandisers, along with our sales and marketing personnel, who review market trends, sales results and the popularity of our latest products to design new merchandise to meet the expected future demands of our consumers.
TRADEMARKS AND LICENSE AGREEMENTS
We own several well-recognized trademarks that are important to our business. Salt Life® is an authentic, aspirational brand that embraces those who love the ocean and everything associated with living the "Salt Life". Soffe® has stood for quality and value in the athletic and activewear market for more than sixty years and Junk Food® has been known as a leading vintage t-shirt brand since 1998. Our other registered trademarks include COAST®, Intensity Athletics®, Kudzu®, Pro Weight®, Magnum Weight®, and the Delta Design, The Cotton Exchange®, Quail Hollow®, and Intensity Athletics®.Design. Our trademarks are valuable assets that differentiate the marketing of our products. We vigorously protect our trademarks and other intellectual property rights against infringement.
We have distribution rights to other trademarks through license agreements. The Soffe business unit is an official licensee for major colleges and universities. Junkfood has rights to distribute trademarked apparel across athletics (including the NFL and NBA), music, entertainment, foods and beverages, and numerous other pop-culture categories. We also have license agreements for motorsports
properties (including NASCAR), golf and various resort properties. Our license agreements are typically non-exclusive in nature and have terms that range from one to three years. Historically we have been able to renew our license agreements; however, the loss of certain license agreements could have a material adverse effect on our results of operations. Although we are not dependent on any single license, our license agreements collectively are of significant value to our branded segment.
SALES & MARKETING
Our sales and marketing function consists of both employed and independent sales representatives and agencies located throughout the country. In our branded segment, sales teams service specialty and boutique, upscale and traditional department store, sporting goods and outdoor retailer, and military customer bases. We also have an international presence with our Junk Food® products in Canada, Europe, Asia, and Dubai. Our brands leverage both in-house and outsourced marketing communications professionals to amplify their lifestyle statements. In our basics segment, we sell our knit apparel products primarily direct to large and small screen printers and into the promotional products markets. Our private label products are sold primarily to major branded sportswear companies.companies and regional, trendy brands.
During fiscal year 20152016, we shipped our products to approximately 13,00011,000 customers, many of whom have numerous retail "doors". No single customer accounted for more than 10% of sales in fiscal years 2016, 2015 andor 2014, the transition period ended September 28, 2013, or fiscal year 2013, and our strategy is to not become dependent on any single customer. Revenues attributable to sales of our products in foreign countries, as a percentage of our consolidated net sales, represented approximately 2% in fiscal years 2016, 2015 and 2014, 4% in the transition period ended September 28, 2013, and 2% in fiscal year 2013.2014.
The majority of our apparel products are produced based on forecasts to permit quick shipments to our customers. Private label programs are generally made only to order or based on customer forecasts, and our headwear products are primarily sourced based on customer orders. We aggressively explore new ways to leverage our strengths and efficiencies to meet the quick-turn needs of our customers.
We have distribution facilities strategically located throughout the United States that carry in-stock inventory for shipment to customers, with most shipments made via third party carriers. To better serve customers, we allow products to be ordered by the piece, dozen, or full case quantities.quantity. Because a significant portion of our business consists of at-once replenishment and direct catalog orders, we believe that backlog order levels do not provide a general indication of future sales.
COMPETITION
We have numerous competitors with respect to the sale of apparel and headwear products in domestic and international markets, many of which have greater financial resources than we do.
We believe that competition within our branded segment is based primarily upon brand recognition, design, and consumer preference. We focus on sustaining the strong reputation of our brands by adapting our product offerings to changes in fashion trends and consumer preferences. We aim to keep our merchandise offerings fresh with unique artwork and new designs, and support the integrated lifestyle statement of our products through effective consumer marketing. We believe that our favorable competitive position stems from strong consumer recognition and brand loyalty, the high quality of our products, and our flexibility and process control, which drive product consistency. We believe that our ability to remain competitive in the areas of quality, price, design, marketing, product development, manufacturing, technology and distribution will, in large part, determine our future success.
Competition in our basics businesssegment is generally based upon price, service, delivery time and quality, with the relative importance of each factor depending upon the needs of the particular customers and the specific product offering. This business isThese businesses are highly price competitive and competitor actions can greatly influence pricing and demand for our products. While price is still important in the private label market, quality and service are generally more important factors for customer choice. Our ability to consistently service the needs of our private label customers greatly impacts future business with these customers.
SEASONALITY
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 fiscal quarter typically being the highest and sales in our December fiscal quarter typically being the lowest. As we continue to expand our product offerings, the seasonality in our business has become less pronounced. The percentage of net sales by quarter for the year ended October 3, 2015,1, 2016, was 21%, 25%, 27% and 27% for the first, second, third, and fourth fiscal quarters, respectively. Consumer demand for apparel is cyclical and dependent upon the overall level of demand for soft goods, which may or may not coincide with the overall level of discretionary consumer spending. These levels of demand change as regional, domestic and international economic conditions change. Therefore, the distribution of sales by quarter in fiscal year 20152016 may not be indicative of the distribution in future years.
MANUFACTURING
We have a vertically integrated manufacturing platform that supports both our brandedbasics and basicsbranded segments. Our manufacturing operations begin with the purchase of yarn and other raw materials from third-party suppliers. We manufacture fabrics in either our owned domestic textile facility located in Maiden, North Carolina or at Ceiba Textiles, our leased textile facility located near San Pedro Sula, Honduras.
Honduras, and purchase fabric domestically and internationally to supplement our internal production. The manufacturing process continues at one of our sevensix apparel manufacturing facilities where the products are ultimately sewn into finished garments. We either own these facilities or lease and operate them. These facilities are located domestically (two in North Carolina) and internationally (two in Honduras, one in El Salvador and twoone in Mexico). Our garments may also be embellished and prepared for retail sale (with any combination of services, including ticketing, hang tags, and hangers). TheseThe facilities that perform these operations are located domestically (one in Florida and one in North Carolina) and internationally (one in El Salvador and one in Mexico). In fiscal years 2016, 2015 and 2014, the transition period ended September 28, 2013, and fiscal year 2013, approximately 84%, 81%, 85%84% and 81%, respectively, of our manufactured products were sewn in company-operated locations. The remaining products were sewn by outside contractors located primarily in the Caribbean Basin.
At our 2016, 2015 and 2014 fiscal year-ends, the transition period ended September 28, 2013, and the 2013 fiscal year-end, our long-lived assets in Honduras, El Salvador and Mexico collectively comprised approximately 44%, 44%58%, 44%, and 42%44%, respectively, of our total net property, plant and equipment, with our long-lived assets in Honduras comprising 33%, 35%45%, 33%, and 31% ,35% of the total, respectively. See Item 1A. Risk Factors for a description of risks associated with our operations located outside of the United States.
To supplement our internal manufacturing platform, we purchase fabric, undecorated products and full-package products from independent sources throughout the world. In fiscal years 2016, 2015 and 2014, the transition period ended September 28, 2013, and fiscal year 2013, we sourced approximately 15%, 16%, 19%, 15% and 19%, respectively, of our products from third parties.
RAW MATERIALS
We have a supply agreement with Parkdale Mills, Inc. and Parkdale America, LLC (collectively "Parkdale") to supply our yarn requirements until December 31, 2018. Under the supply agreement, we purchase from Parkdale all of our yarn requirements for use in our manufacturing operations, excluding yarns that Parkdale does not manufacture or cannot manufacture due to temporary capacity constraints. The purchase price of yarn is based upon the cost of cotton plus a fixed conversion cost. If Parkdale’s operations are disrupted and it is not able to provide us with our yarn requirements, we may need to obtain yarn from alternative sources. Although alternative sources are presently available, we may not be able to enter into short-term arrangements with substitute suppliers on terms as favorable as our current terms with Parkdale. In addition, the cotton futures we have fixed with Parkdale may not be transferable to alternative yarn suppliers. Because there can be no assurance that we would be able to pass along the higher cost of yarn to our customers, this could have a material adverse effect on our results of operations.
We also purchase specialized fabrics that we currently do not have the capacity or capability to produce and may purchase other fabrics when it is cost-effective to do so. While these fabrics typically are available from various suppliers, there are times when certain yarns become limited in quantity, causing some fabrics to be difficult to source. This can result in higher prices or the inability to provide products to customers, which could negatively impact our results of operations. Dyes and chemicals are also purchased 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 results of operations.
EMPLOYEES AND SOCIAL RESPONSIBILITY
As of October 3, 2015,1, 2016, we employed approximately 7,4007,700 full time employees, of whom approximately 1,3001,000 were employed in the United States. Approximately 1,2001,220 employees at one of our facilities in San Pedro Sula, Honduras are party to a three-year collective bargaining agreement and approximately 1,4001,700 employees at a separate facility in San Pedro Sula, Honduras are party to a different three-year collective bargaining agreement. We have historically conducted our operations without significant labor disruptions and believe that our relations with our employees are good. We have invested significant time and resources in attempting to cause the working conditions in all of our facilities to meet or exceed the standards imposed by governing laws and regulations. We have obtained WRAP (Worldwide Responsible Accredited Production) certification for all of our manufacturing facilities that we operate in Honduras, El Salvador and Mexico and for our Maiden, North Carolina facility in the United States.Mexico. Delta Apparel, Inc., along with all of its affiliated businesses, is a participating company of the FLA (Fair Labor Association). This affiliation with FLA further enhances human rights compliance monitoring for our plants and our third party contractors. In addition, we have proactive programs to promote workplace safety, personal health, and employee wellness. We also support educational institutions and charitable organizations in the communities where we operate.
ENVIRONMENTAL AND 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. Our plants generate small quantities of hazardous waste, which are either recycled or disposed of off-site. Several of our plants are required to possess one or more environmental permits, and we believe that we are currently in compliance with the requirements of these permits.
The environmental regulations applicable to our business are becoming increasingly stringent and we incur capital and other expenditures annually to achieve compliance with environmental standards. We currently do not expect that the amount of expenditures required to comply with these environmental standards 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 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.
RESEARCH & DEVELOPMENT
Although we continually seek new products and brands to take to market via our diverse distribution network and customer base, there were no material amounts expended on research and development in the fiscal yearyears ended October 1, 2016, October 3, 2015,. and September 27, 2014.
AVAILABLE INFORMATION
Our corporate internet address is www.deltaapparelinc.com. We make available free of charge on our website our SEC reports, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. 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., 322 South Main Street, Greenville, South Carolina 29601. Requests can also be made by telephone to 864-232-5200 extension 6621, or via email at investor.relations@deltaapparel.com.
We operate in a rapidly changing, highly competitive business environment that involves substantial risks and uncertainties, including, but not limited to, the risks identified below. The following risks, as well as risks described elsewhere in this report or in our other filings with the SEC, could materially affect our business, financial condition or operating results and the value of Company securities held by investors and should be carefully considered in evaluating our Company and the forward-looking statements contained in this report or future reports. The risks described below are not the only risks facing Delta Apparel. Additional risks not presently known to us or that we currently do not view as material may become material and may impair our business operations. Any of these risks could cause, or contribute to causing, our actual results to differ materially from expectations. We expressly disclaim any obligation to publicly update or revise any risk factors, whether as a result of new information, future events or otherwise, except as required by law.
The price and availability of purchased yarn and other raw materials is prone to significant fluctuations and volatility. 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, and other factors that are generally unpredictable and beyond our control. As described under the heading “Raw Materials”, 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. The Company and the apparel industry as a whole experienced unprecedented increases in cotton prices and price volatility during the fiscal year ended June 30,in 2011 and 2012. We were unable to pass through to our customers thisthe higher cost of cotton and ultimately decided to take a $16.2 million inventory write-downthereby negatively impacting the gross margins in our basics segment by $16.2 million in the second quarter of our 2012 fiscal year. This second quarter inventory write-down was the primary factor in the Company's net loss for fiscal year 2012.
In addition, 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.
Current 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. Overall, consumer purchases of discretionary items tend to decline during recessionary periods when disposable income is lower. As such, deterioration in general economic conditions that creates uncertainty or alters discretionary consumer spending habits could reduce our sales. Sometimes, however, 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. Reductions in our
manufacturing operations may increase unit costs and lower our gross margins, causing a material adverse effect on our results of operations.
The apparel industry is highly competitive, and we face significant competitive threats to our business. The market for athletic and activewear apparel and headwear is highly competitive and includes many new competitors as well as increased competition from established companies, some of which are larger or more diversified and may have greater financial resources than we do. Many of our competitors have competitive advantages, including larger sales forces, better brand recognition among consumers, larger advertising budgets, and greater economies of scale. If we are unable to compete successfully with our competitors, our business and results of operations will be adversely affected.
We may be restricted in our ability to borrow under our revolving credit facility or service our indebtedness. Significant operating losses or significant uses of cash in our operations could cause us to default on our 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 and capital expenditure needs, to make acquisitions, to fund share repurchases under our Stock 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. Moreover, our credit facility includes a financial covenant that if the availability under our credit facility falls below the amounts specified in our credit agreement, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in our credit agreement) for the preceding 12-month period must not be less than 1.1 to 1.0. Although our availability at October 3, 2015,1, 2016, 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. Our credit facility also includes customary conditions to funding, representations and warranties, covenants, and events of default. The covenants include, among other things, limitations on asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with affiliates. 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. 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 make acquisitions as well as fund share repurchases and 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 materially adversely affecthave a material adverse effect on our financial position and results of operations.
The inability to successfully implement or achieve the expected cost savings associated with certain strategic initiatives could adversely affect our financial position and results of operations. In response to our financial performance and results of operations during our 2014 fiscal year, as well as our near-term view of apparel market conditions at the time, we initiated a reorganization of our administrative structure at all levels to streamline decision-making and information flow as well as reduce duplicative and excess fixed costs. Moreover, in 2016 we completed a large-scale expansion and realignment effort across both our domestic and international manufacturing platforms that is intended to maximize production at our lower-cost facilities, eliminate additional duplicative fixed costs, and leverage the latest dyeing and finishing technology. In addition, on March 2, 2015,conjunction with this, we shuttered and sold our The Game branded collegiate headwearMaiden, North Carolina textile facility and apparel businessbegan sourcing in-country fabric for use in our Mexico sew and wescreen-print facilities. We continue to evaluate other strategic initiatives focused on improving net profitability. These other initiatives include, among other things, (i) further restructuring our manufacturing platform to lower product costs and strategically reduce capacity on certain product lines, and (ii) a comprehensive rationalization of all business units, product lines and sales channels. The failure or inability to carry out any of these initiatives, any unexpected increases in the costs to carry out any of these initiatives, or the failure to achieve the cost savings or other financial or performance benefits expected from any of these initiatives could have a material adverse effect on our financial position or results of operations.
Deterioration in the financial condition of our customers or suppliers and changes in the operations and strategies of our customers or suppliers could adversely affect our financial position and results of operations. We extend credit to our customers, generally without requiring collateral. The extension of credit involves considerable judgment and is based on an evaluation of each customer’s financial condition and payment history. We monitor credit risk exposure by periodically obtaining credit reports and updated financial statements on our customers. Deterioration in the economy, declines in consumer purchases of apparel, or disruption in the ability of our customers to access liquidity could have an adverse effect on the financial condition of our customers. During the past several years, various retailers and other customers have experienced significant difficulties, including restructurings, bankruptcies and liquidations. The inability of these retailers and other customers to overcome these difficulties may increase due to the current worldwide economic conditions. We maintain an allowance for doubtful accounts for potential credit losses based upon current conditions, historical trends, estimates and other available information. The size of this allowance is the result of our making judgments and determinations in the context of imperfect information, and in retrospect the allowance may turn out to have been insufficient. The inability to collect on sales to significant customers or a group of customers could have a material adverse effect on our financial condition and results of operations. Significant changes in the financial condition of any of our suppliers or other parties with which we do business could result in disruption to our business and have a material adverse effect on our financial condition and results of operations. In addition, significant changes in the retail or operational strategies employed by our customers may result in decreased sales of our products to such customers and could have a material adverse effect on our financial condition and results of operations. Likewise, significant changes in the operations of any of our suppliers or other
parties with which we do business could result in disruption to our business and have a material adverse effect on our financial condition and results of operations.
Our success depends, in part, on our ability to predict or effectively react to changing consumer preferences and trends. The success of our businesses depends on our ability to anticipate and respond quickly to changing consumer demand and preferences in apparel and headwear. We believe that our brands are recognized by consumers across many demographics. The popularity, supply and demand for particular products can change significantly from year to year based on prevailing fashion trends (particularly in our branded business) and on other factors and, accordingly, our ability to adapt to fashion trends in designing products is important to the success of our brands. If we are unable to quickly adapt to changes in consumer preferences in the design of products, our results of operations could be adversely affected. Moreover, because we and our customers project demand for our products based on estimated sales and fashion trends, the actual demand for our products sometimes falls short of what was projected. This can lead to higher inventory levels than desired. Excess inventory levels increase our working capital needs, and sometimes excess inventory must be sold at discounted prices, all of which could have an adverse impact on our business, financial condition and results of operations.
Our basics segment is subject to significant pricing pressures which may decrease our gross profit margins if we are unable to implement or achieve the expected cost savings associated with certain of our cost reduction strategies. We operate our basics segment in a highly competitive, price sensitive industry. Our strategy in this market environment is to be a low-cost producer and to differentiate ourselves by providing quality products and value-added services to our customers. To help achieve this goal, we began production in Ceiba Textiles, our Honduran textile facility, in fiscal year 2008. In the fourth quarter of fiscal year 2009, we closed our Soffe textile manufacturing facility in Fayetteville, North Carolina and moved this production to our Maiden, North Carolina and Ceiba Textiles plants. In fiscal year 2010, we began the expansion of Ceiba Textiles to increase internal manufacturing capacity and further leverage the fixed cost of the facility, and the expansion of manufacturing operations at that facility has continued in subsequent years. In fiscal year 2012, we moved several functions ofwithin our private label business to our El Salvador facility to better serve customers through an enhanced and efficient product development process. In conjunction with this, we began a modernization of our decoration equipment to expand capabilities and lower costs. In addition, we announced in 2013 the consolidation of our domestic screen print operations as part of our continued focus on more efficient manufacturing and distribution strategies. This consolidation resulted in the closing of the Wendell, North Carolina decoration facility operated by our Soffe business unit and the consolidation of those operations within Soffe's Fayetteville, North Carolina facility. Further, in June 2014, we announced plans to consolidate some domestic fabric production for our basic, blank t-shirt products into our Ceiba Textiles facility in Honduras and subsequently made investments intended to modernize and provide more flexibility within that manufacturing platform. In fiscal 2016, we further realigned our manufacturing operations by expanding production at our offshore facilities and closing our Maiden, North Carolina textile facility. These initiatives, along with continual improvements in our production and delivery of products, are expected to lower our product costs and improve our results of operations. However, any unexpected increases in the costs to carry out these initiatives or the failure to achieve the cost savings expected from these initiatives could have a material adverse effect on our results of operations.
Our operations are subject to political, social, economic, and climate risks in Honduras, El Salvador and Mexico. The majority of our products are manufactured in Honduras, El Salvador and Mexico, with a concentration in Honduras. These countries from time to time experience political, social and economic instability, and we cannot be certain of their future stability. Instability in a country can lead to protests, riots and labor unrest. New government leaders can change employment laws, thereby increasing our costs to operate in that country. In addition, fire or natural disasters such as hurricanes, earthquakes, or floods can occur in these countries. Any of these political, social, economic or climatic events or conditions could disrupt our supply chain or increase our costs, adversely affecting our financial position and results of operations.
Our success depends upon the talents and continued contributions of our key management. We believe our future success depends on our ability to retain and motivate our key management, our ability to attract and integrate new members of management into our operations and the ability of all personnel to work together effectively as a team. Our success is dependent in significant part on our ability to retain existing, and attract additional, qualified personnel to execute our business strategy.
Our business is influenced by weather patterns. Our business is susceptible to unseasonable weather conditions. For example, extended periods of unusually warm temperatures during the winter season or cooler weather during the spring and summer seasons could render portions of our inventory incompatible with weather conditions and influence consumers to alter their apparel purchasing habits. Reduced sales volumes from extreme or prolonged unseasonable weather conditions could adversely affect our business and results of operations.
We currently pay income taxes at lower than statutory rates and may incur additional tax liability. We are subject to income tax in the United States and in foreign jurisdictions in which we generate net operating profits. We benefit from a lower overall effective income tax rate due to the majority of our manufacturing operations being located in foreign tax-free locations. Our U.S. legal entity contracts with our foreign subsidiaries to manufacture products on its behalf, with the intercompany prices paid for the manufacturing services and manufactured products based on an arms-length standard and supported by an economic study. We have concluded that the profits earned in the tax-free locations will be considered permanently reinvested. Thus, no U.S. deferred tax liability is recorded on these profits, causing our effective tax rate to be significantly below U.S. statutory rates. Our effective tax rate could be adversely affected by changes in the mix of earnings between the U.S. and tax-free foreign jurisdictions. In addition, changes to U.S. tax laws impacting how U.S. multinational corporations are taxed on foreign earnings or a need or requirement for us to remit tax-free earnings back to the U.S. could also have a material adverse effect on our tax expense and cash flow.
Our variable rate debt subjects us to interest rate risk that could cause our debt service obligations to increase significantly. The debt we incur under our asset-based revolving credit facility is at variable rates of interest, which exposes us to interest rate risk. If interest rates increase, our obligations on this variable rate indebtedness would increase even though the amount borrowed remained the same, and there would be a corresponding decrease in our net income and cash flows, including cash available for servicing our debt.
We may need to raise additional capital to grow our business. The rate of our growth, especially through acquisitions, depends, in part, on the availability of debt and equity capital. We may not be able to raise capital on terms acceptable to us or at all. If new sources of financing are required, but are insufficient or unavailable, we may be required to modify our growth and operating plans based on available funding, which could adversely affect our ability to grow the business.
We have expanded our business through acquisitions that could result in diversion of resources, an inability to integrate acquired operations and extra expenses. A part of our growth strategy has involved acquiring businesses that complement our existing business. The negotiation of potential acquisitions and integration of acquired businesses could divert our management’s attention from our existing businesses, which could negatively impact our results of operations. In addition, if the integration of an acquired business is not successful or takes significantly longer than expected, or if we are unable to realize the expected benefits from an acquired business, it could adversely affect our financial condition and results of operations.
The price of energy and fuel costs are prone to significant fluctuations and volatility, which could adversely affect our results of operations. Our manufacturing operations require high inputs of energy, and therefore changes in energy prices directly impact our gross profits. In addition, we incur significant freight costs to transport goods between our offshore facilities and the United States, and our offshore facilities, along with transportation expenses to ship products to our customers. The cost of energy and fuel fluctuates due to a number of factors outside of our control, including government policy and regulation and weather conditions. We continue to focus on manufacturing methods that will reduce the amount of energy used in the productionmanufacture of products to mitigate risks of fluctuations in the cost of energy. In addition, we enter into forward contracts to fix a portion of our expected natural gas requirements for delivery in the future in order to mitigate potential increases in costs. However, significant increases in energy and fuel prices may make us less competitive compared to others in the industry, which may have a material adverse effect on our financial position and results of operations.
Our business operations rely on our information systems and any material disruption or slowdown of our systems could cause operational delays. We depend on information systems to manage our inventory, process transactions, respond to customer inquiries, purchase, sell and ship goods on a timely basis and maintain cost-effective operations. We have invested significant capital and expect future capital expenditures associated with the integration of our information technology systems across our businesses. This process involves the replacement and consolidation of technology platforms so that our businesses are served by fewer platforms, resulting in operational efficiencies and reduced costs. Our inability to effectively convert our operations to the new systems could cause delays in product fulfillment and reduced efficiency in our operations. In addition, we may experience operational problems with our information systems as a result of system failures, "cyber attack", computer viruses, security breaches, disasters or other causes. Any material disruption or slowdown of our information systems could cause operational delays that could have a material adverse effect on our business and results of operations.
Data security and privacy breaches could lead to liability and reputational damage. Our business involves the regular collection and use of sensitive and confidential information regarding customers and employees. These activities are subject to contractual requirements and are highly regulated. Privacy and information security laws are complex and constantly changing. Compliance with these laws and regulations may result in additional costs due to new systems and processes, and our non-compliance could lead to legal liability. Further, the methods used by third parties to obtain unauthorized access change frequently and may not be anticipated or immediately detected. Thus, despite the security measures we may have in place, an actual or perceived information security breach, whether due to "cyber attack", computer viruses or human error, could occur. Such a breach of customer, employee or company data could attract media attention, damage our customer or other business relationships and reputation, result in lost sales, fines, lawsuits or other costs and involve the loss of confidential company information, any or all of which could have a material adverse effect on our business, financial condition and results of operations.
Our business could be harmed if we are unable to deliver our products to the market due to casualty or other problems with our manufacturing operations or distribution network. We own or lease manufacturing facilities in the United States, Honduras, Mexico and El Salvador. We also own or lease distribution facilities located throughout the United States and maintain inventory at third-party distribution facilities in the United States. Any casualty or other circumstance that damages or destroys any of these material facilities or significantly limits their ability to function could materially affect our business in an adverse way. 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. 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.
Failure of our operations to comply with safety, health and environmental regulations could have a material adverse effect on our financial position and results of operations. Our operations must meet extensive federal, state and local regulatory standards in
the areas of safety, health and environmental pollution controls. There can be no assurance that interpretations of existing regulations, future changes in existing laws, or the enactment of new laws and regulations will not require substantial additional expenditures. Although we believe that we are in compliance in all material respects with existing regulatory requirements in these areas, the extent of our liability, if any, for the discovery of currently unknown problems or conditions, or 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 financial position and results of operations.
We are subject to periodic litigation in both domestic and international jurisdictions that may adversely affect our financial position and results of operations. From time to time we may be involved in legal or regulatory actions regarding product liability, employment practices, intellectual property infringement, bankruptcies and other litigation. Due to the inherent uncertainties of litigation in both domestic and foreign jurisdictions, we cannot accurately predict the ultimate outcome of any such proceedings. These proceedings could cause us to incur costs and may require us to devote resources to defend against these claims and could ultimately result in a loss or other remedies such as product recalls, which could adversely affect our financial position and results of operations. For a description of current material legal proceedings, see Part I, Item 3, Legal Proceedings.
We rely on the strength of our trademarks and could incur significant costs to protect these trademarks and our other intellectual property. Our trademarks, including Salt Life®, Soffe®, and Junk Food®, Coast®, Intensity Athletics®, Kudzu®, Pro Weight®, Magnum Weight®, and the Delta Design, among others, are important to our marketing efforts and have substantial value. We aggressively protect these trademarks and have incurred legal costs in the past to establish and protect these trademarks. We may in the future be required to expend significant additional resources to protect these trademarks and our other intellectual property. The loss or limitation of the exclusive right to use our trademarks or other intellectual property could adversely affect our sales and results of operations.
A significant portion of our business relies upon license agreements. We rely on licensed products for a significant part of our sales. We believe that our license agreements in the aggregate are of significant value to our business. The loss of or failure to obtain, renew or extend license agreements on favorable terms could adversely affect our sales and have a material adverse effect on our financial condition and results of operations.
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 October 1, 2016, and October 3, 2015, and September 27, 2014, our goodwill and other intangible assets were approximately $58.9$57.7 million and $60.2$58.9 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 20152016 third fiscal quarter. Based on the valuation, we concluded there was no impairment on the goodwill recorded on our financial statements. We also concluded that there are 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.
Changes in the regulations and laws regarding ecommerce could reduce the growth and lower the profitability of our internet sales. The ecommerce industry has undergone, and continues to undergo, rapid development and change. There have been continuing efforts to increase the legal and regulatory obligations of and restrictions on companies conducting commerce through the internet, primarily in the areas of taxation, consumer privacy and protection of consumer personal information. These laws and regulations could increase the costs and liabilities associated with our ecommerce activities, thereby negatively impacting our results of operations.
Significant changes to international trade regulations could adversely affect our results of operations. The majority of our products are manufactured in Honduras, El Salvador and Mexico. We therefore benefit from current free trade agreements and other duty preference programs, including the North American Free Trade Agreement (“NAFTA”) and the Central America Free Trade Agreement (“CAFTA”). Our claims for duty free or reduced duty treatment under CAFTA, NAFTA and other available programs are largely conditioned on our ability to produce or obtain accurate records (some of which are provided to us by third parties) about production processes and sources of raw materials. Subsequent repeal or modification of NAFTA or CAFTA, or the inadequacy or unavailability of supporting records, could have a material adverse effect on our results of operations. In addition, our products are subject to foreign competition, which in the past has been faced with significant U.S. government import restrictions. The extent of import protection afforded to domestic apparel producers has been, and is likely to remain, subject to political considerations. The elimination of import protections for domestic apparel producers could significantly increase global competition, which could adversely affect our business and results of operations.
Any failure to comply with international trade regulations could cause us to become subject to investigation resulting in significant penalties or claims or in our inability to conduct business, adversely affecting our results of operations. A complaint was filed in March
2012 with the U.S. Department of Labor's Office of Trade & Labor Affairs by the AFL-CIO and various Honduran union federations alleging that the Honduran government failed to enforce its labor laws in violation of the provisions of CAFTA. The complaint contains
various and sundry allegations of Honduran labor law violations by U.S.-based companies with Honduran operations, including our Ceiba Textiles operations. We contend that the allegations against Ceiba Textiles have no merit. The U.S. Department of Labor has initiated an investigation of the allegations in the complaint. We believe that the legal action, if any, that may result from this investigation would be an action by the U.S. government against Honduras under CAFTA, not a legal action against us related to the specific allegations contained in the complaint. However, an action against Honduras could result in sanctions or other penalties against Honduras under CAFTA or in other governmental action that could have a material negative effect on our ability to conduct business there.
Changes in domestic or foreign employment regulations or changes in our relationship with our employees could adversely affect our results of operations. As of October 3, 2015,1, 2016, we employed approximately 7,4007,700 employees worldwide, with approximately 6,1006,700 of these employees being in Honduras, El Salvador orand Mexico. Changes in domestic and foreign laws governing our relationships with our employees, including wage and human resources laws and regulations, labor standards, overtime pay, unemployment tax rates, workers' compensation rates and payroll taxes, would likely have a direct impact on our operating costs. A significant increase in wage rates in the countries in which we operate could have a material adverse impact on our operating results. Approximately 1,2001,220 employees at one of our facilities in San Pedro Sula, Honduras are party to a three-year collective bargaining agreement and approximately 1,4001,700 employees at a separate facility in San Pedro Sula, Honduras are party to a three-year collective bargaining agreement. We have historically conducted our operations without significant labor disruptions and believe that our relations with our employees are good. However, if labor relations were to change, it could adversely affect the productivity and ultimate cost of our manufacturing operations.
Recent healthcare legislation may continue to increase our costs and reduce our future profitability. To attract and retain employees in our operations in the United States, we maintain a competitive health insurance program for those employees and their dependents. The Patient Protection and Affordable Care Act, signed into law in 2010, has increased our annual employee healthcare cost obligations and is expected to continue to increase our annual employee healthcare cost obligations going forward. We cannot predict the effect that this legislation, or any future state or federal healthcare legislation or regulation, will ultimately have on our business. However, these rising healthcare costs and universal healthcare coverage in the United States could result in significant long-term costs to us, which could adversely affect our future profitability and financial condition. Also, rising healthcare costs could force us to make changes to our benefits program, which could negatively impact our ability to attract and retain employees.
We are subject to foreign currency exchange rate fluctuations. We manufacture the majority of our products outside of the United States, exposing us to currency exchange rate fluctuations. In addition, movements in foreign exchange rates can affect transaction costs because we source products from various countries. We may seek to mitigate our exposure to currency exchange rate fluctuations, but our efforts may not be successful. Accordingly, changes in the relative strength of the United States dollar against other currencies could adversely affect our business.
The value of our brands, sales of our products and our licensing relationships could be impacted by negative publicity resulting from violations of manufacturing or employee safety standards or labor laws, or unethical business practices, by our suppliers and independent contractors. We are committed to ensuring that all of our manufacturing facilities comply with our strict internal code of conduct, applicable laws and regulations, and the codes and principles to which we subscribe, including those of Worldwide Responsible Accredited Production (WRAP) and the Fair Labor Association (FLA). In addition, we require our suppliers and independent contractors to operate their businesses in compliance with the laws and regulations that apply to them. However, we do not control these suppliers and independent contractors. A violation of our policies, applicable manufacturing or employee safety standards and codes of conduct, labor laws or other laws or regulations by our suppliers or independent contractors could interrupt or otherwise disrupt our operations. Negative publicity regarding the production or operating methods of any of our suppliers or independent contractors or their failure to comply with our policies, applicable manufacturing or employee safety standards and codes of conduct, labor laws or other laws or regulations could adversely affect our reputation, brands, sales and licensing relationships, which could adversely affect our business and results of operations.
The market price of our shares is affected by the illiquidity of our shares, which could lead to our shares trading at prices that are significantly lower than expected. Various investment banking firms have informed us that public companies with relatively small market capitalizations have difficulty generating institutional interest, research coverage or trading volume. This illiquidity can translate into price discounts as compared to industry peers or to the shares’ inherent value. We believe that the market perceives us to have a relatively small market capitalization. This could lead to our shares trading at prices that are significantly lower than our estimate of their inherent value.
As of November 20, 2015,15, 2016, we had 7,747,5797,579,255 shares of common stock outstanding. We believe that approximately 76%67% of our stock is beneficially owned by entities and individuals who each own more than 5% of the outstanding shares of our common stock. Included in the 76%67% are institutional investors that beneficially own more than 5% of the outstanding shares. These institutional investors own approximately 63%54% of the outstanding shares of our common stock. Sales of substantial amounts of our common stock in the public market by any of these large holders could adversely affect the market price of our common stock.
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, 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.
Efforts to comply with the evolving regulatory landscape regarding public company governance and disclosure could result in significant additional costs. We are committed to maintaining high standards for internal controls over financial reporting, corporate governance and public disclosure. However, evolving laws, regulations and standards relating to these issues such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act, and similar regulations have created significant additional compliance requirements for companies like us. We have devoted and will continue to devote significant resources, and our management team has devoted and will continue to devote substantial time, to comply with these standards. This may lead to increases in our cost structure, divert the attention of our management team from revenue generating activities to compliance efforts, and could have a material adverse effect on our business, financial condition and results of operations.
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
Our principal executive office is located in a leased facility in Greenville, South Carolina. We own and lease properties supporting our administrative, manufacturing, distribution and direct retail activities. The majority of our products are manufactured through a combination of facilities that we either own, or lease and operate. As of October 3, 20151, 2016, we owned or leased tennine manufacturing facilities (located in the United States, Honduras, El Salvador and Mexico) and sevennine distribution facilities (all within the United States). In the March 2014 quarter, we opened a third party-operated distribution facility in Dallas, Texas to better service a large market for undecorated tees with shorter shipping times and reduced freight costs. In addition, we operate three leased factory-direct stores, twofive flagship retail stores and twoa leased showrooms.showroom.
Our primary manufacturing and distribution facilities are as follows:
|
| | | | |
Location | | Utilization | | Segment |
Maiden Plant, Maiden, NC | | Knit/dye/finish/cut | | Basics and branded |
Ceiba Textiles, Honduras* | | Knit/dye/finish/cut | | Basics and branded |
Honduras Plant, San Pedro Sula, Honduras* | | Sew | | Basics and branded |
Cortes Plant, San Pedro Sula, Honduras* | | Sew | | Basics and branded |
Mexico Plant, Campeche, Mexico* | | Cut/sew | | Basics and branded |
Textiles LaPaz, La Paz, El Salvador* | | Cut/sew/decoration | | Basics and branded |
Campeche Sportswear, Campeche, Mexico* | | Sew/decorationDecoration | | Basics and branded |
Fayetteville Plant, Fayetteville, NC | | Sew/decoration | | Branded |
Rowland Plant, Rowland, NC | | Sew | | Basics and branded |
Art Gun, Miami, FL* | | Decoration/distribution | | Basics |
Distribution Center, Fayetteville, NC | | Distribution | | Branded |
Distribution Center, Clinton, TN | | Distribution | | Basics |
Distribution Center, Santa Fe Springs, CA* | | Distribution | | Basics and branded |
Distribution Center, Miami, FL* | | Distribution | | Basics and branded |
Distribution Center, Cranbury, NJ* | | Distribution | | Basics and branded |
Distribution Center, Dallas, TX** | | Distribution | | Basics |
Distribution Center, Chicago, IL*** | | Distribution | | Basics |
DC Annex, Fayetteville, NC* | | Distribution | | Branded |
**
** | Denotes third party-operated distribution facility |
*** | Denotes third party-operated distribution facility opened in September, 2016 |
We believe that all of our facilities are suitable for the purposes for which they are designed and are generally adequate to allow us to remain competitive. We continue to maintain a sharp focus on improving our supply chain, lowering our product costs and reducing the operating capital required in our business. We will also continue to take the necessary actions to balance capacities with demand as
needed. Substantially all of our assets are subject to liens in favor of our lenders under our U.S. asset-based secured credit facility and our Honduran loan.credit facility.
U.S. Consumer Product Safety Commission
We previously received an inquiry from the U.S. Consumer Product Safety Commission (“Commission”) regarding a children's drawstring hoodie product sourced, distributed and sold by Junkfood, and its compliance with applicable product safety standards. The Commission subsequently investigated the matter, including whether Junkfood complied with the reporting requirements of the Consumer Product Safety Act (“CPSA”), and the garments in question were ultimately recalled. On or about July 25, 2012, Junkfood subsequently received notification from the Commission staff alleging that Junkfood knowingly violated CPSA Section 15(b) and that the staff will recommend to the Commission a $900,000 civil penalty. We disputedisputed the Commission's allegations.
On August 27, 2012, Junkfoodallegations and subsequently responded to the Commission staff regarding its recommended penalty, setting forth a number of defenses and mitigating factors that could resulthave resulted in a much lower penalty, if any, ultimately imposed by a court shouldhad the matter proceedproceeded to litigation. While we will continue to defend against these allegations, we
We believe a risk of loss is probable. Based upon current information, including the terms of previously published Commission settlements and related product recall notices, shouldthat any claims brought by the Commission seekseeking enforcement of the recommended penalty would be time-barred under any reasonable interpretation of the applicable civil penaltystatute of limitations. Accordingly, we consider this matter to be resolved, and ultimately prevail on its claims at trial we believe there is a range of likely outcomes between $25,000 and an amount exceeding $900,000, along with interest and the Commission's costs and fees. Duringduring the quarter ended June 30, 2012,October 1, 2016, we reversed the liability previously recorded a liability for what we believe to be the most likely outcome withinin connection with this range, and this liability remains recorded as of October 3, 2015.
matter.
California Wage and Hour Litigation
We were served with a complaint in the Superior Court of the State of California, County of Los Angeles, on or about March 13, 2013, by a former employee of our Delta Activewear business unit at our Santa Fe Springs, California distribution facility alleging violations of California wage and hour laws and unfair business practices with respect to meal and rest periods, compensation and wage statements, and related claims (the "Complaint"). The Complaint iswas brought as a class action and seekssought to include all of our Delta Activewear business unit's current and certain former employees within California who are or were non-exempt under applicable wage and hour laws. The Complaint also namesnamed as defendants Junkfood, Soffe, an independent contractor of Soffe, and a former employee, and sought to include all current and certain former employees of Junkfood, Soffe and the Soffe independent contractor within California who are or were non-exempt under applicable wage and hour laws. Delta Apparel, Inc. is now the only remaining defendant in this case. The Complaint seekssought injunctive and declaratory relief, monetary damages and compensation, penalties, attorneys' fees and costs, and pre-judgment interest.
On or about August 22, 2014, we were served with an additional complaint in the Superior Court of the State of California, County of Los Angeles, by a former employee of Junkfood and two former employees of Soffe at our Santa Fe Springs, California distribution facility alleging violations of California wage and hour laws and unfair business practices the same or substantially similar to those alleged in the Complaint and seeking the same or substantially similar relief as sought in the Complaint. This complaint iswas brought as a class action and seekssought to include all current and certain former employees of Junkfood, Soffe, our Delta Activewear business unit, the Soffe independent contractor named in the Complaint and an individual employee of such contractor within California who are or were non-exempt under applicable wage and hour laws. Delta Apparel, Inc. and the contractor employee have since been voluntarily dismissed from the case and the remaining defendants are Junkfood, Soffe, and the Soffe contractor.
On September 17, 2015, an agreement in principle was reached between all parties to settle the above-referenced wage and hour matters. Pursuant to that agreement,matters, with the defendants in the matters have agreedagreeing to pay an aggregate amount of $300,000 in exchange for a comprehensive release of all claims at issue in the matters. Delta Apparel, Inc., Soffe and Junkfood have collectively agreed to contribute $200,000 towards the aggregate settlement amount, which isand we have this amount included in our accrued expenses as of October 1, 2016, and October 3, 2015. The settlement agreement requireswas approved by the approvalapplicable court and these matters have been finally resolved, with the agreed amounts funded subsequent to the 2016 fiscal year-end.
The Sports Authority Bankruptcy Litigation
Soffe is involved in several related litigation matters stemming from The Sports Authority's ("TSA") March 2, 2016, filing of a voluntary petition(s) for relief under Chapter 11 of the applicable courts before it canUnited States Bankruptcy Code (the "TSA Bankruptcy"). Prior to such filing, Soffe provided TSA with products to be finalizedsold on a consignment basis pursuant to a "pay by scan" agreement and the partieslitigation matters relate to Soffe's interest in the products it provided TSA on a consignment basis (the "Products") and the proceeds derived from the sale of such products (the "Proceeds").
TSA Stores, Inc. and related entities TSA Ponce, Inc. and TSA Caribe, Inc. filed an action against Soffe on March 16, 2016, in the United States Bankruptcy Court for the District of Delaware (the "TSA Action") essentially seeking a declaratory judgment that: (i) Soffe does not own the Products but rather has a security interest that is not perfected or senior and is avoidable; (ii) Soffe only has an unsecured claim against TSA; (iii) TSA and TSA's secured creditors have valid, unavoidable and senior rights in the Products and the Products are currentlythe property of TSA’s estate; (iv) Soffe does not have a perfected purchase money security interest in the Products; (v) Soffe is not entitled to a return of the Products; and (vi) TSA can continue to sell the Products and Soffe is not entitled to any proceeds from such sales other than as an unsecured creditor. The TSA Action also contains claims seeking to avoid Soffe's filing of a financing statement related to the Products as a preference and recover the value of that transfer as well as to disallow Soffe's claims until it has returned preferential transfers or their associated value. TSA also brings a claim for a permanent injunction barring Soffe from taking certain actions. We believe that many of the claims in the TSA Action, including TSA’s claim for injunction, are now moot as a result of Soffe’s agreement to permit TSA to continue selling the Products in TSA’s going-out-of-business sale.
On May 16, 2016, TSA lender Wilmington Savings Fund Society, FSB, as Successor Administrative and Collateral Agent ("WSFS"), intervened in the TSA Action seeking a declaratory judgment that: (i) WSFS has a perfected interest in the Products and Proceeds that is
senior to Soffe's interest; and (ii) the Proceeds paid to Soffe must be disgorged pursuant to an order previously issued by the court. WSFS's intervening complaint also contains a separate claim seeking the necessary approvals.disgorgement of all Proceeds paid to Soffe along with accrued and unpaid interest.
Soffe has asserted counterclaims against WSFS in the TSA Action essentially seeking a declaratory judgment that: (i) WSFS is not perfected in the Products; and (ii) WSFS's interest in the Products is subordinate to Soffe's interest.
On May 24, 2016, Soffe joined an appeal filed by a number of TSA consignment vendors in the United States District Court for the District of Delaware challenging an order issued in the TSA Bankruptcy that, should WSFS or TSA succeed in the TSA Action, granted TSA and/or WSFS a lien on all Proceeds received by Soffe and requiring the automatic disgorgement of such Proceeds. As of November 14, 2016, Soffe and another entity are the remaining consignment vendors pursuing this appeal.
Although we will continue to vigorously defend against the TSA Action and pursue the above-referenced counterclaims and appeal, should TSA and/or WSFS ultimately prevail on their claims, we could be forced to disgorge all Proceeds received and forfeit our ownership rights in any Products that remain in TSA's possession. We believe the range of possible loss in this matter is currently $0 to $3.3 million; however, it is too early to determine the probable outcome and, therefore, no amount has been accrued related to this matter.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information for Common Stock: The common stock of Delta Apparel, Inc. is listed and traded on the NYSE MKT under the symbol “DLA”. As of November 30, 2015,15, 2016, there were approximately 889868 record holders of our common stock.
The following table sets forth, for each of the periods indicated below, the high and low sales prices per share of our common stock as reported on the NYSE MKT.
| | | | High | | Low | | High | | Low |
| | | Sale Price | | Sale Price |
Fiscal Year 2016: | | |
September Quarter | | | $25.52 | | $15.31 |
June Quarter | | | $22.93 | | $17.01 |
March Quarter | | | $19.93 | | $11.61 |
December Quarter | | | $18.10 | | $13.70 |
| | Sale Price | | Sale Price | |
Fiscal Year 2015: | | |
September Quarter | | $19.44 | | $11.54 | | $19.44 | | $11.54 |
June Quarter | | $15.35 | | $11.91 | | $15.35 | | $11.91 |
March Quarter | | $12.45 | | $8.50 | | $12.45 | | $8.50 |
December Quarter | | $11.35 | | $8.35 | | $11.35 | | $8.35 |
| | |
Fiscal Year 2014: | | |
September Quarter | | $16.62 | | $8.21 | |
June Quarter | | $17.60 | | $13.25 | |
March Quarter | | $18.15 | | $14.37 | |
December Quarter | | $19.23 | | $15.23 | |
Dividends: Our Board of Directors did not declare, nor were any dividends paid, during fiscal years 20152016 and 2014.2015. Subject to the provisions of any outstanding blank check preferred stock (none of which is currently outstanding), the holders of our common stock are entitled to receive whatever dividends, if any, that may be declared from time to time by our Board of Directors in its discretion from funds legally available for that purpose. Pursuant to the terms of our credit facility, we are allowed to make cash dividends and stock repurchases if (i) as of the date of the payment or repurchase and after giving effect to the payment or repurchase, we have availability on that date of not less than $18.125 million15% of the lesser of the borrowing base or the commitment, and average availability for the 30-day period immediately preceding that date of not less than $18.125 million;15% of the lesser of the borrowing base or the commitment; and (ii) the aggregate amount of dividends and stock repurchases after May 27, 2011,10, 2016, does not exceed $19$10 million plus 50% of our cumulative net income (as defined in the Amended LoanCredit Agreement) from the first day of the third quarter of fiscal year 20122016 to the date of determination. At October 1, 2016, and October 3, 2015, and September 27, 2014, there was $7.3$10.7 million and $8.2$7.3 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.
Any future cash dividend payments will depend upon our earnings, financial condition, capital requirements, compliance with loan covenants and other relevant factors.
Purchases of our Own Shares of Common Stock: See Note 1415 - Repurchase of Common Stock and Note 89 - Debt, in Item 15, which is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans: The information required by Item 201(d) of Regulation S-K is set forth under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report, which information is incorporated herein by reference.
Comparison of Total Return Among Delta Apparel, Inc., CRSP NYSE MKT Index (US), and CRSP NYSE MKT Wholesale & Retail Trade Index: Our common stock began trading on the NYSE MKT (previously the NYSE Amex) on June 30, 2000, the last trading day of our fiscal year 2000. Prior to that date, no securities of Delta Apparel were publicly traded. Set forth below is a line graph comparing the yearly change in the cumulative total stockholder return, assuming dividend reinvestment, of our common stock with (1) the CRSP NYSE MKT Index (US) and (2) the CRSP NYSE MKT Wholesale and Retail Trade Index, which is comprised of all NYSE MKT companies with SIC codes from 5000 through 5999. This performance graph assumes that $100 was invested in the common stock of Delta Apparel and comparison groups on July 3, 2010,2, 2011, and that all dividends have been reinvested.
| | | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 |
Delta Apparel, Inc. | | $ | 100.00 |
| | $ | 123.89 |
| | $ | 97.99 |
| | $ | 101.15 |
| | $ | 63.13 |
| | $ | 128.77 |
| | $ | 100.00 |
| | $ | 79.10 |
| | $ | 81.64 |
| | $ | 50.96 |
| | $ | 103.94 |
| | $ | 95.31 |
|
CRSP NYSE MKT Index (US) | | $ | 100.00 |
| | $ | 126.28 |
| | $ | 121.87 |
| | $ | 121.92 |
| | $ | 157.20 |
| | $ | 122.03 |
| | $ | 100.00 |
| | $ | 96.51 |
| | $ | 96.55 |
| | $ | 124.48 |
| | $ | 96.63 |
| | $ | 99.94 |
|
CRSP NYSE MKT Wholesale & Retail Trade Index | | $ | 100.00 |
| | $ | 107.68 |
| | $ | 109.89 |
| | $ | 145.87 |
| | $ | 151.38 |
| | $ | 204.45 |
| | $ | 100.00 |
| | $ | 102.05 |
| | $ | 135.46 |
| | $ | 140.57 |
| | $ | 189.86 |
| | $ | 162.15 |
|
| |
ITEM 6. | SELECTED FINANCIAL DATA |
See information regarding our acquisitions within “Item 1. Business” under the heading “Acquisitions”. The selected financial data includes the financial position and results of operations of acquired businesses beginning on the date of acquisition. On August 30, 2016, we acquired Coast Apparel, and on August 27, 2013, we purchased substantially all of the assets of Salt Life Holdings, LLC, including all of its domestic and international trademark rights in the Salt Life brand. Prior to the acquisition of Salt Life, we sold Salt Life-branded products under exclusive license agreements which began in January 2011. The consolidated statements of operations data for the years ended July 2, 2011, and June 30, 2012, June 29, 2013, and the transition period ended September 28, 2013 and the consolidated balance sheet data as of July 2, 2011, June 30, 2012, June 29, 2013, and September 28, 2013, and September 27, 2014, are derived from, and are qualified by reference to, our audited consolidated financial statements not included in this document. The consolidated statement of operations data for the years ended June 29, 2013, September 27, 2014, and October 3, 2015, and October 1, 2016, and the consolidated balance sheet data as of September 27, 2014, and October 3, 2015, as well as the consolidated statement of operations data for the transition period ended September 28, 2013,and October 1, 2016, are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this document. We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. All fiscal years shown were 52-week years with the exception of fiscal year 2015, which was a 53-week year, and the 13-week transition period ended September 28, 2013. Historical results are not necessarily indicative of results to be expected in the future. The selected financial data should be read in conjunction with the Consolidated Financial Statements and the related notes as indexed on page F-1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
| | | Period Ended | Period Ended |
| October 3, 2015 | | September 27, 2014 | | September 28, 2013 | | June 29, 2013 | | June 30, 2012 | | July 2, 2011 | October 1, 2016 | | October 3, 2015 | | September 27, 2014 | | September 28, 2013* | | June 29, 2013 | | June 30, 2012 |
| (In thousands, except per share amounts) | (In thousands, except per share amounts) |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | |
Net sales | $ | 449,142 |
| | $ | 452,901 |
| | $ | 122,559 |
| | $ | 490,523 |
| | $ | 489,923 |
| | $ | 475,236 |
| $ | 425,249 |
| | $ | 449,142 |
| | $ | 452,901 |
| | $ | 122,559 |
| | $ | 490,523 |
| | $ | 489,923 |
|
Cost of goods sold | (360,823 | ) | | (367,160 | ) | | (95,439 | ) | | (381,014 | ) | | (406,200 | ) | | (359,001 | ) | (331,750 | ) | | (360,823 | ) | | (367,160 | ) | | (95,439 | ) | | (381,014 | ) | | (406,200 | ) |
Selling, general and administrative expenses | (81,086 | ) | | (86,275 | ) | | (26,588 | ) | | (94,944 | ) | | (89,973 | ) | | (91,512 | ) | (76,578 | ) | | (81,086 | ) | | (86,275 | ) | | (26,588 | ) | | (94,944 | ) | | (89,973 | ) |
Goodwill impairment | — |
| | — |
| | — |
| | — |
| | — |
| | (612 | ) | |
Restructuring costs | | (1,741 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Change in fair value of contingent consideration | 500 |
| | (200 | ) | | — |
| | — |
| | — |
| | 1,530 |
| 600 |
| | 500 |
| | (200 | ) | | — |
| | — |
| | — |
|
Gain on sale of business | 7,704 |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | 7,704 |
| | — |
| | — |
| | — |
| | — |
|
Other income (expense), net | 682 |
| | (927 | ) | | 24 |
| | (662 | ) | | 28 |
| | (345 | ) | 552 |
| | 682 |
| | (927 | ) | | 24 |
| | (662 | ) | | 28 |
|
Operating income (loss) | 16,119 |
| | (1,661 | ) | | 556 |
| | 13,903 |
| | (6,222 | ) | | 25,296 |
| 16,332 |
| | 16,119 |
| | (1,661 | ) | | 556 |
| | 13,903 |
| | (6,222 | ) |
Interest expense, net | 6,021 |
| | 5,792 |
| | 1,033 |
| | 3,997 |
| | 4,132 |
| | 2,616 |
| 5,287 |
| | 6,021 |
| | 5,792 |
| | 1,033 |
| | 3,997 |
| | 4,132 |
|
Earnings (loss) before income taxes | 10,098 |
| | (7,453 | ) | | (477 | ) | | 9,906 |
| | (10,354 | ) | | 22,680 |
| 11,045 |
| | 10,098 |
| | (7,453 | ) | | (477 | ) | | 9,906 |
| | (10,354 | ) |
Provision for (benefit from) income taxes | 2,005 |
| | (6,493 | ) | | (1,045 | ) | | 722 |
| | (7,907 | ) | | 5,353 |
| 2,081 |
| | 2,005 |
| | (6,493 | ) | | (1,045 | ) | | 722 |
| | (7,907 | ) |
Net earnings (loss) | $ | 8,093 |
| | $ | (960 | ) | | $ | 568 |
| | $ | 9,184 |
| | $ | (2,447 | ) | | $ | 17,327 |
| $ | 8,964 |
| | $ | 8,093 |
| | $ | (960 | ) | | $ | 568 |
| | $ | 9,184 |
| | $ | (2,447 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Basic earnings (loss) per common share: | $ | 1.03 |
| | $ | (0.12 | ) | | $ | 0.07 |
| | $ | 1.12 |
| | $ | (0.29 | ) | | $ | 2.04 |
| $ | 1.16 |
| | $ | 1.03 |
| | $ | (0.12 | ) | | $ | 0.07 |
| | $ | 1.12 |
| | $ | (0.29 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings (loss) per common share: | $ | 1.00 |
| | $ | (0.12 | ) | | $ | 0.07 |
| | $ | 1.08 |
| | $ | (0.29 | ) | | $ | 1.98 |
| $ | 1.12 |
| | $ | 1.00 |
| | $ | (0.12 | ) | | $ | 0.07 |
| | $ | 1.08 |
| | $ | (0.29 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Dividends declared per common share | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data (at year end): | | | | | | | | | | | | | | | | | | | | | | |
Working capital | $ | 140,401 |
| | $ | 156,258 |
| | $ | 171,681 |
| | $ | 173,435 |
| | $ | 187,029 |
| | $ | 160,646 |
| $ | 150,191 |
| | $ | 131,485 |
| | $ | 156,258 |
| | $ | 171,681 |
| | $ | 173,435 |
| | $ | 187,029 |
|
Total assets | 324,910 |
| | 354,578 |
| | 351,762 |
| | 311,910 |
| | 320,394 |
| | 311,865 |
| 344,652 |
| | 324,903 |
| | 354,578 |
| | 351,762 |
| | 311,910 |
| | 320,394 |
|
Total long-term debt, less current maturities | 93,872 |
| | 114,469 |
| | 131,030 |
| | 94,763 |
| | 110,949 |
| | 83,974 |
| 106,603 |
| | 93,872 |
| | 114,469 |
| | 131,030 |
| | 94,763 |
| | 110,949 |
|
Shareholders’ equity | 144,499 |
| | 138,207 |
| | 138,872 |
| | 141,066 |
| | 138,967 |
| | 141,965 |
| 152,015 |
| | 144,499 |
| | 138,207 |
| | 138,872 |
| | 141,066 |
| | 138,967 |
|
*Period ended September 28, 2013 was a 13-week transition period
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
BUSINESS OUTLOOK
In 2015, we began to see the benefits from the operational accomplishments completed during theDelta Apparel had solid operating results in fiscal year and the strategic initiatives we implemented2016 despite continuing sluggishness in the fourth quarter of fiscal 2014. These initiatives have proved successful in regard to cost savings, efficiency gains, profit growth, and better service to our customers.
apparel retail environment. During the year, we invested in areas ofcompleted a large-scale expansion and realignment effort across both our business where we expectdomestic and international manufacturing platforms that allows us to yield strong returns inmaximize production at our lower-cost facilities, eliminate duplicative fixed costs, and leverage the future.latest dyeing and finishing technology. We began the expansion ofincreasing fabric production in our more efficient Honduran textile facility Ceiba Textiles,in June 2016, have successfully increased output in that facility on schedule, and should be at full production levels by the end of calendar year 2016. We also completed the sale of our Maiden, North Carolina textile facility in September 2016, and are efficiently sourcing domestic fabric for our made-in-the-USA programs and sourcing in-country fabric to use in our Mexico sew and screen print facilities, which now serve as a quick-turn operation to support continued growth in our full-package catalog programs. This realignment effort is expected to improve gross margins and ultimately boost operating earnings by an estimated $8 million annually, or approximately $0.70 per diluted share.
During fiscal year 2016, we also continued to invest in our brands, with allexpanded sales and marketing programs, in-store shops and point-of-sale displays. Our social media and other digital outreach programs continued to build consumer awareness of the new equipment having been orderedour brands, resulting in record e-commerce sales. Our acquisition of Coast Apparel adds to our brand portfolio. Coast’s full line of traditional, sports-casual attire, headwear and some having been received and installed. We expect this equipmentaccessories are primarily marketed direct-to-consumer through two retail stores, with a third retail store expected to be operationalopened in early calendar 2017.
We are working to improve our top-line growth by focusing on the first calendar quarter of 2016, and we should start seeing the benefits shortly thereafter. This expansion will extend our production capabilities into open-width fabric, reducing our reliance on purchased fabric. This should allow us to better serve our customers as well as expand our product offerings. We continue to maintain a sharp focus on lowering our product cost and improving our supply chain, while staying alignedbusiness units with the needs ofhighest immediate potential. Salt Life continued its strong growth trend in fiscal year 2016, including robust increases in direct-to-consumer sales. Sales increased 69% over the prior year on our customers.
Our ecommerce businesssite, www.saltlife.com. The Salt Life flagship store in Jacksonville, Florida, in operation for five years now, continues to grow and we believe investments in this areaincrease its sales, with growth of our business should drive top line growth. We have added several new functions to complement our ecommerce sites. We also invested in Art Gun, our digital print business. Art Gun's facility boasts cutting-edge equipment and industry-leading proprietary software geared to facilitate ecommerce business. Art Gun now has new equipment in place and is prepared for continued strong growthnearly 20% in fiscal 2016.
Sales in our Delta Activewear business increased approximately 6%year 2016 over the prior year. This was drivenOur Salt Life store in San Clemente opened in September and should help drive consumer enthusiasm on the West Coast. We plan on continuing to broaden our geographic reach by an increase inopening a few stores each year for the next several years to expand our private label products, where our service levels attracted new customers, and drove expandedconsumer engagement. We are also planning to further leverage cross-selling opportunities with the Art Gun business with existing customers. During the year, we also had success in new product categories such as fleece and our Delta-Dri performance products.
Soffe implemented a new marketing campaign, "The Strength is in Us", during fiscal year 2015. Salesunit. Art Gun, which has solidified its leadership position in the back half of the year were comparable to the prior year. The Soffe core short is trending well with consumers, and a number of major retailers are expanding doors with the short. Soffe has a large consumer fan group and its direct-to-consumer sales continued to increase, with 25% sales growth compared to the prior year.
Junkfood also continued itsdigital printing marketplace, realized strong growth in direct-to-consumer sales on its branded website, with sales up 53% during fiscal year 2015. Our new Junkfood store on the iconic Abbot Kinney Boulevard in Venice, California has attracted numerous national retailers and licensors who are able to witness the most effective ways to merchandise Junkfood products.
Salt Life sales, while hindered during the year by a necessary move of its distribution center, grew 10% in the September quarter. Gross margins remain strong and expanded 440 basis points from last year. Demand for Salt Life products remains strong and we anticipate a return to historicalnet sales growth in the 2016 fiscal 2016. We have a number of new Salt Life marketing programs driving brand awareness such as social media, the Salt Life You Tube channel, team ambassadorsyear, and the famous Salt Life stickers.we expect Art Gun to continue its double-digit growth in fiscal year 2017.
We completedanticipate gross margin expansion in the fiscal year 2017 driven by a number of specificmore profitable sales mix, and lower product costs. Margins should also be enhanced as we continue our direct-to-consumer focus across our business units. We expect the strategic initiatives overimplemented in the past two years, coupled with the positive momentum we are experiencing, to point us toward continued success in fiscal year to improve Delta Apparel. We expect these steps to provide growth and improved profitability in the upcoming year.2017.
RESULTS OF OPERATIONS
Our financial results have been presented on a GAAP basis. In certain limited instances, we have presented our financial results on a GAAP and non-GAAP (“adjusted”) basis, which is further described and reconciled in the section entitled “Non-GAAP Financial Measures.”
Overview
Net sales for the fiscal year ended October 3, 2015,1, 2016, were $425.2 million compared with prior year sales of $449.1 million, up 2.5%million. Sales declined 0.5% from the prior twelve months whenyear adjusted fornet sales, with basics segment sales flat with the second quarter sale of The Game business. prior year and branded segments sales down 1.5%.
Gross margins increased 80 basis pointswere 22.0% in fiscal year 2015, with2016, a 230 basis point improvement from 19.7% in the prior year. Adjusted gross margin improvements in all business units withmargins improved 250 basis points from the exception of Soffe. prior year driven primarily by the basics segment, resulting from a more profitable sales mix and lower product costs.
Our overall SG&A costselling, general and administrative costs decreased $5.2$4.5 million to 18.1%18.0% of sales, from 19%18.1% of sales in the prior year.
The gain on sale of We continue to invest in marketing efforts across our business units to build consumer awareness and market our products. During fiscal year 2016, we improved our distribution efficiency to better service our customers and reduce our expenses. This, coupled with continued reduction in discretionary spending, drove the improvement in our selling, general and administrative costs in fiscal year 2015 includes $14.92016.
We recorded a $0.6 million in proceeds fromgain during fiscal year 2016 as we lowered the sale of The Game business less the assets sold and direct liabilities resulting from, and selling costscontingent consideration expected to be paid associated with that transaction. See Note 3 - Sale of The Game, for further informationSalt Life based on this transaction. At October 3, 2015, we had $3.1 million accrued in contingent consideration relatedthe inputs to the Salt Life Acquisition, a $0.5 million reduction fromvaluation model, including the accrual at September 27, 2014. The reduction resulted from our current sales levels being lower thantime remaining as we originally anticipated andmove closer to the reduced remaining time of the2019 measurement period.date.
Net income inclusive of the gain on the sale of The Game, forin fiscal year 20152016 was $8.1$9.0 million, or $1.00$1.12 per diluted share, compared with a net lossincome in the prior year of $1.0$8.1 million, or $0.12$1.00 per diluted share. Adjusted earnings per diluted share were $1.41, a 147.4% increase from the prior year’s $0.57 adjusted earnings per diluted share.
Branded Segment
Net sales in the branded segment were $148.1 million in fiscal year 2016 compared to $166.7 million in the prior year. Sales in the branded segment declined $20.3$2.3 million, or 10.9%1.5%, fromwhen excluding the same period last year, to $166.7$16.3 million in fiscal year 2015. When adjusted for the sale ofsales related to since-divested The Game business and the decline was 4.8% compared tosince-discontinued Kentucky Derby license and the prior fiscal year.additional week of sales in 2015. Salt Life continued its sales growth, up nearly 8%27% for the year on a comparable 52-week basis, driven from its new product lines and expanded distribution. Salt Life sales growth was lower than its historical growth rates due to disruptions in shipping from moving the distribution center to Fayetteville, North Carolina. Junkfood
sales were up approximately 2% versus the prior year, driven from double-digit sales growth in boutiques and specialty retailers, partially offset by weaker sales through department stores. The Salt Life and Junkfood sales growth was offset by sales declines in our other branded business units. Operating income for the segment increased year-over-year to $6.4 million. This increase was primarily due to$7.0 million, when excluding the prior year $5.6 million gain, including related expenses, from the sale of The Game business generating a $5.6 million pre-tax gain, including associated indirect expenses. Additionally, gross margin expansion, coupled with a decline in general and administrative expenses, has improved operating results.business.
Basics Segment
Net sales in our basics segment were $277.1 million in fiscal year 2016 compared with $282.5 million in fiscal year 2015, a 6.2% increase from $265.9 million in2015. Net sales were flat with the prior year period due to increasesadjusted net sales, after reducing for the additional week of sales in fiscal 2015. Excluding the private label programs in Delta Activewear alongexpenses associated with new customers across our basics segment. Grossthe manufacturing initiative, gross margins as a percent of sales increased by 110480 basis points to 11.7%16.5% of sales, compared to 10.6%11.7% of sales for the prior fiscal year due to lower product costs.year. Operating income increased by $6.3$9.2 million, to 3.4%8.0% of sales, compared to $3.4$13.1 million, or 1.3%4.6% of sales, in fiscal year 2015. Adjusted for the same period last$2.8 million of manufacturing realignment expenses, adjusted operating income for fiscal year due to higher margins along with decreased fixed compensation.2016 was $25.1 million, or 9.1% of sales.
Quarterly Financial Data
For information regarding quarterly financial data, refer to Note 17 - Quarterly Financial Information (Unaudited) to the Consolidated Financial Statements, which information is incorporated herein by reference.
Fiscal Year 20152016 Versus Fiscal Year 2015
Net sales for fiscal year 2016 were $425.2 million compared with prior year sales of $449.1 million. Sales declined 0.5% from the prior year adjusted net sales. Our direct-to-consumer and ecommerce sales represented 5.3% of total revenues for the 2016 fiscal year, a 90 basis point increase over the prior year period, during which direct-to-consumer and ecommerce sales were 4.4% of total revenues.
Gross margins were 22.0% in fiscal year 2016 compared to 19.7% in the prior year. Adjusted gross margins improved 250 basis points from the prior year driven primarily from a more profitable sales mix and lower product costs in the basics segment, coupled with higher direct-to-consumer sales in the branded segment. Our gross margins may not be comparable to other companies, because some companies include costs related to their distribution network in cost of goods sold and we exclude them from gross profit and include them in selling, general and administrative expenses.
Fiscal year 2016 selling, general and administrative expenses were $76.6 million, or 18.0% of sales, compared to $81.1 million, or 18.1% of sales, in fiscal year 2015. The decrease in selling, general and administrative expenses is primarily due to lower selling costs and efficiency improvements in our distribution facilities, partially offset by higher incentive compensation costs resulting from our improved operating results in fiscal year 2016 from the prior year.
The change in fair value of contingent consideration is the remeasurement of the contingent consideration related to Salt Life. Based upon the current operating results and future projections, a $0.6 million reduction in contingent consideration was recorded, principally from the reduced remaining time in the measurement period.
Other income includes our income from our Honduran joint venture, along with sublease income. Other income decreased slightly to $0.6 million in fiscal year 2016 from $0.7 million in fiscal year 2015.
Fiscal year 2016 operating income was $16.3 million compared to $16.1 million in fiscal year 2015. Fiscal year 2016 adjusted operating income was $19.2 million, or 4.5% of sales, an $8.6 million, or 81.9%, increase over the prior year adjusted operating income of $10.5 million.
Interest expense for fiscal year 2016 decreased $0.7 million to $5.3 million compared to $6.0 million in fiscal year 2015. The decrease is due primarily to the lower average debt levels in fiscal year 2016 compared to the prior year, coupled with slightly lower interest rates on our U.S. credit facility.
Our fiscal year 2016 effective income tax rate was 18.8% compared to 19.9% in the prior fiscal year. We benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates lower than the United States.
Net income in fiscal year 2016 was $9.0 million, or $1.12 per diluted share, compared with a net income in the prior year of $8.1 million, or $1.00 per diluted share. Adjusted earnings per diluted share were $1.41, a 147.4% increase from the prior year’s $0.57 adjusted earnings per diluted share.
Non-GAAP Financial Measures
We provide all information required in accordance with generally accepted accounting principles (“GAAP”), but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. In an effort to provide investors with additional information regarding the Company's results as determined by GAAP, the Company also provides non-GAAP information
that management believes is useful to investors. The Company discusses adjusted net sales, adjusted gross margins, adjusted operating income, and adjusted earnings per diluted share, as performance measures because management uses these measures in evaluating the Company's underlying performance on a consistent basis across periods. Management also believes these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of the Company's ongoing performance. These non-GAAP measures have limitations as analytical tools, and securities analysts, investors and other interested parties should not consider any of these non-GAAP measures in isolation or as a substitute for analysis of the Company's results as reported under GAAP. These non-GAAP measures may not be comparable to similarly titled measures used by other companies. The table below reconciles net sales, gross margins, operating income and earnings per diluted share to the adjusted net sales, adjusted gross margins, adjusted operating income, and adjusted earnings per diluted share (in thousands, except per share amounts):
|
| | | | | | | | | | | |
| Year Ended |
| October 1, 2016 | October 3, 2015 |
Net sales | | $ | 425,249 | | $ | 449,142 |
|
Adjustment for: | | | |
53 weeks versus 52 weeks in fiscal year | | — | | (8,585 | ) |
Sales from the since-divested The Game business | | — | | (10,207 | ) |
Sales from the since-discontinued Kentucky Derby business | | — | | (2,889 | ) |
Adjusted net sales | | $ | 425,249 | | $ | 427,461 | |
| | | |
Gross profit | | $ | 93,499 | | $ | 88,319 | |
Adjustment for manufacturing realignment expenses | | 1,096 | | — | |
Adjusted gross profit | | $ | 94,595 | | $ | 88,319 | |
| | | |
Gross margins | | 22.0% | | 19.7 | % |
Adjustment for manufacturing realignment expenses | | 0.2% | | — | |
Adjusted gross margins | | 22.2% | | 19.7 | % |
| | | |
Operating income | | $ | 16,332 | | $ | 16,119 | |
Adjustment for manufacturing realignment expenses included in gross profit | | 1,096 | | — | |
Adjustment for manufacturing realignment expenses included in restructuring costs | | 1,741 | | — | |
Adjustment for gain, including related expenses, from the sale of The Game business | | — | | (5,582 | ) |
Adjusted operating income | | $ | 19,169 | | $ | 10,537 | |
| | | |
Earnings per diluted share | | $ | 1.12 | | $ | 1.00 | |
Adjustment for manufacturing realignment expenses | | 0.29 | | — | |
Adjustment for gain on the sale of The Game business | | — | | (0.43 | ) |
Adjusted earnings per diluted share | | $ | 1.41 | | $ | 0.57 | |
| | | |
Fiscal Year 2015 Versus Fiscal Year 2014
Net sales for fiscal year 2015 grew 2.5% compared with the prior year after adjusting for the sale of The Game business in March 2015. Our direct-to-consumer and ecommerce sales represented 4.4% of total revenues for the 2015 fiscal year, a 150 basis point increase over the prior year period, during which direct-to-consumer and ecommerce sales were 2.9% of total revenues.
Gross margins increased in fiscal 2015 by 80 basis points from fiscal 2014, to 19.7% of sales compared to 18.9% in fiscal 2014. Increases occurred in both the branded and basics segments, and across all operating units with the exception of Soffe. Gross margins improved due to customer and product mix along with improved manufacturing efficiencies and lower costs. Our gross margins may not be comparable to other companies, because some companies include costs related to their distribution network in cost of goods sold and we exclude them from gross profit and include them in selling, general and administrative expenses.
Fiscal year 2015 selling, general and administrative expenses were $81.1 million, or 18.1% of sales, compared to $86.3 million, or 19.0% of sales, in fiscal year 2014. The decrease in selling, general and administrative expenses is primarily due to lower fixed compensation and benefit costs, along with a decrease in variable selling costs and lower legal costs. Fiscal 2014 included $2.2 million of severance related expenses associated with our strategic initiatives during the fourth quarter of fiscal year 2014.
The change in fair value of contingent consideration is the remeasurement of the fair value of the contingent consideration related to the Salt Life Acquisition. Based upon the current operating results and future projections, a $0.5 million reduction in contingent consideration was recorded.
Our gain on sale of business was $7.7 million for fiscal year 2015. The gain on sale of business in fiscal year 2015 includes the $14.9 million in proceeds from the sale of The Game business less the assets sold, the direct liabilities resulting from, and the selling costs associated with,related to this transaction. Associated with the disposition of The Game, $2.1 million of indirect expenses were also recorded, resulting in a net gain, including indirect expenses, of $5.6 million. See Note 3 - Sale of The Game, for more information on this transaction.
Other income increased to $0.7 million in fiscal year 2015 from $0.9 million of expense in fiscal year 2014. This increase was due to an increase in income from our Honduran joint venture of $0.3 million, as well as a $0.1 million increase in sublease income.
Fiscal year 2015 operating income was $16.1 million, or 3.6% of sales, compared to an operating loss of $1.7 million, or 0.4% of sales, in fiscal year 2014. Operating income was $9.7 million in the basics segment and $6.4 million in the branded segment.
Interest expense for fiscal year 2015 was $6.0 million compared to $5.8 million in fiscal year 2014. The increase is due primarily to the higher interest rate on theour U.S. credit facility compared to the imputed interest on the Salt Life promissory note related to the $9.0 million Salt Life payment made at the beginning of the fiscal year, along with higher debt levels in the first half of the fiscal year.
Our fiscal year 2015 effective income tax rate was 19.9% compared to an effective tax rate of 87.1% in the prior fiscal year. The prior year rate was driven from a small overall loss encompassing foreign profits in non-tax jurisdictions and losses in the United States. We benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates lower than the United States.
Net income for fiscal year 2015 was $8.1 million, or $1.00 per diluted share, compared with a net loss in the prior fiscal year of $1.0 million or $0.12 per diluted share.
Fiscal Year 2014 Versus Fiscal Year 2013 and the Twelve-Month Period Ended September 28, 2013
Net sales for fiscal year 2014 were $452.9 million, a $37.6 million decline from fiscal year 2013 sales of $490.5 million and a $30.1 million, or 6.2%, decrease from the prior twelve-month period's sales of $483.0 million. Our direct-to-consumer and ecommerce sales represented 2.9% of total revenues, a 120 basis point and 80 basis point increase over fiscal year 2013 and the prior year period, during which direct-to-consumer and ecommerce sales were 1.7% and 2.1% of total revenues, respectively.
Gross margins decreased 340 and 280 basis points to 18.9% of net sales in fiscal year 2014 from 22.3 % and 21.7% of net sales from fiscal year 2013 and the prior twelve-month period, respectively. This decline was driven from a tougher retail environment with pressures on pricing as well as higher input costs. Additionally, there was $0.9 million in strategic initiative-related expenses impacting gross margins. Our gross margins may not be comparable to other companies because some companies include costs related to their distribution network in cost of goods sold and we exclude them from gross profit and include them in selling, general and administrative expenses.
Fiscal year 2014 selling, general and administrative expenses were $86.3 million, or 19.0% of sales, compared to $90.0 million and $95.7 million, or 18.3% and 19.8% of sales, in fiscal year 2013 and the prior twelve-month prior period, respectively. The decrease in selling, general and administrative expenses is primarily due to a decrease in variable selling costs and a decline in performance-based compensation expense resulting from decreased earnings in fiscal year 2014 compared to the prior fiscal year and the prior twelve-month period. We recorded $2.2 million of severance-related expenses associated with our strategic initiatives during the fourth quarter of fiscal year 2014. In addition, fiscal year 2013 included $1.2 million of costs associated with a previously disclosed internal investigation conducted by our Audit Committee related to fiscal year 2012.
Other expense increased to $1.1 million in fiscal year 2014 from $0.7 million and $0.4 million in fiscal year 2013 and the prior twelve months, respectively. This increase was due to impairment charges related to our strategic initiatives and change in contingent consideration.
Fiscal year 2014 operating loss, adjusted for the $4.0 million in costs related to the strategic initiatives, was $2.4 million of operating income, or 0.5% of sales, compared to $13.9 million and $8.6 million operating income, or 2.8% and 1.8% of sales, in fiscal year 2013 and the prior twelve-month period, respectively. Without this adjustment, fiscal year 2014 operating loss was $1.7 million, or 0.4% of sales, compared to $8.6 million in operating income, or 1.8% of sales, in the prior year period. Operating income of $3.4 million in the basics segment was offset by a $5.1 million loss in the branded segment. The decline in operating income was driven by lower sales in the Junkfood and Soffe businesses offset by higher Salt Life sales.
Interest expense for fiscal year 2014 was $5.8 million, an increase of $1.8 million from fiscal year 2013 and the prior year twelve-month period. The increase is due primarily to the increased debt related to the Salt Life Acquisition and the Honduran manufacturing expansion.
Our fiscal year 2014 effective income tax rate was 87.1% compared to an effective tax rate of 7.3% and 32.5% in the prior fiscal year and the prior twelve months, respectively. We benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates lower than the United States.
Net income for fiscal year 2014, adjusted for the $4.0 million pre-tax impact of strategic initiatives, was $1.5 million, or $0.19 per diluted share, compared with net income in the prior fiscal year and prior twelve-month period of $9.2 million and $6.2 million, or $1.12 and $0.74 per diluted share, respectively. Without adjustment for the impact of our strategic initiatives, our net loss for the year was $1.0 million, or $0.12 per diluted share.
The foregoing discussion of our results of operations includes references to certain non-GAAP financial measures, including adjusted net income and adjusted diluted EPS. Below is a reconciliation of each non-GAAP financial measure for the periods presented in the foregoing discussion to the most directly comparable GAAP financial measure. Non-GAAP financial measures should not be considered in isolation or as a substitute for comparable GAAP financial measures. The non-GAAP financial measures we have presented have limitations in that they do not reflect all of the amounts associated with the results of operations as determined in accordance with GAAP, and these non-GAAP financial measures should only be used to evaluate the results of operations in conjunction with the corresponding GAAP financial measures. We believe that the non-GAAP financial measures presented provide meaningful supplemental information regarding the operating results primarily because they exclude certain non-cash charges or items that we do not believe are reflective of ongoing operating results. We believe that these non-GAAP financial measures also facilitate the comparison by management and investors of results between periods and among peer companies. However, those companies may calculate similar non-GAAP financial measures differently, limiting their usefulness as comparative measures.
The table below reconciles net income and diluted earnings per share to the adjusted net income and adjusted diluted earnings per share (in thousands, except per share amounts):
|
| | | | | | | | |
| | Year Ended |
| | September 27, 2014 | | September 28, 2013 |
Net (loss) income | | $ | (960 | ) | | $ | 6,188 |
|
Adjustments for: | | | | |
Costs associated with strategic initiatives | | 4,021 |
| | — |
|
Income tax recovery on strategic initiative-related costs | | (1,548 | ) | | — |
|
Adjusted net income | | $ | 1,513 |
| | $ | 6,188 |
|
| | | | |
Basic (loss) earnings per share | | $ | (0.12 | ) | | $ | 0.76 |
|
Diluted (loss) earnings per share | | $ | (0.12 | ) | | $ | 0.74 |
|
Adjusted diluted earnings per share | | $ | 0.19 |
| | $ | 0.74 |
|
Three-Month Transition Period Ended September 28, 2013, Versus Three Months Ended September 29, 2012
Net sales for the three-month transition period ended September 28, 2013, were $122.6 million, a decrease of 6% compared to the prior year quarter net sales of $130.1 million. Net earnings were $568 thousand, or $0.07 per diluted share, compared with $3.6 million or $0.41 per diluted share, in the prior year quarter.
Sales within the branded segment were $60.2 million, down 5.2% compared with $63.5 million for the prior year's first quarter. The primary reason for the decrease was a 28% decline in Soffe sales, which was somewhat offset by strong revenue growth in other brands. Junkfood, Art Gun, and Salt Life all had double digit sales growth, with Art Gun sales more than doubling. Salt Life revenue growth exceeded our expectations, with sales up 44% over the prior year September quarter.
Net sales in our basics segment were down 6.4% to $62.3 million, compared with $66.6 million in the prior year period. Sales of undecorated tees started out strong in July 2013, but weakened in August and September as retail traffic and an earlier than expected build-up of inventories in the retail sector resulted in price discounting to drive volumes and lower than expected sales of undecorated tees as the period progressed. Our private label sales also slowed as our customers shifted their callouts to balance inventory from the lower sales at retail.
SG&A expenses were $26.6 million, or 21.7% of sales, for the transition period, compared to $25.9 million, or 19.9% of sales, for the prior year September quarter. This increase in SG&A was primarily due to expenses associated with the Salt Life Acquisition, higher than normal bad debt expense and the recording of a contingent liability associated with legal matters in California.
Our effective income tax rate for the three months ended September 28, 2013, was 219.1%, compared to an effective tax benefit of 25.1% for the prior year September quarter. We have a three-month tax year associated with the transition period. We benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates lower than the United States. The transition period benefited as overall operating profits were lower than normal, which lowered our U.S. taxable income while maintaining profits in the offshore taxable and tax-free jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facility and Other Financial Obligations
Delta Apparel, Soffe, Junkfood, Salt Life (f/k/On May 10, 2016, we amended our U.S. revolving credit facility and entered into a To The Game, LLC) and Art Gun are borrowers under the May 27, 2011, FourthFifth Amended and Restated LoanCredit Agreement (the "Amended Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as Administrative Agent, the Sole Lead Arranger and Security Agreement withthe Sole Book Runner, and the financial institutions named therein as Lenders, which are Wells Fargo, PNC Bank, National Association as Administrative Agent, Bank of America, N.A., as Syndication Agent, Wells Fargo Capital Finance,and Regions Bank. Our subsidiaries, M.J. Soffe, LLC, as Sole Lead Arranger, and Wells Fargo Capital Finance,Junkfood Clothing Company, Salt Life, LLC, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Bookrunners.Art Gun, LLC (together with the Company, the "Companies"), are co-borrowers under the Amended Credit Agreement.
PursuantThe Amended Credit Agreement allows us to the Amended Loan Agreement, the line of credit under our U.S. revolving credit facility isborrow up to $145 million (subject to borrowing base limitations), and matures on May 27, 2017.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 available under the facility to $200 million (subject to borrowing base limitations), conditioned upon the Administrative Agent's ability to secure additional commitments and customary closing conditions. The credit facility matures on May 10, 2021. We paid $1.0 million in financing costs associated with the Amended Credit Agreement. At October 3, 2015,1, 2016, we had $79.6$92.1 million outstanding under our U.S. revolving credit facility at an average interest rate of 2.7%, and had the ability to borrow an additional $31.9$32.8 million.
For further information regarding our U.S. asset-based secured credit facility, refer to Note 9 - Long-Term Debt to the Consolidated Financial Statements, which information is incorporated herein by reference.
In conjunction with theAugust 2013, we acquired Salt Life Acquisition, weand issued two promissory notes in the aggregate principal amount of $22.0 million, which included a one-time installment of $9.0 million that was due and paid as required on September 30, 2014, and quarterly installments commencing on March 31, 2015, with the final installment due on June 30, 2019. The promissory notes are zero-interest notes and state that interest will be imputed as required under Section 1274 of the Internal Revenue Code. We have imputed interest at 1.92% and 3.62% on the promissory notes that mature on June 30, 2016, and June 30, 2019, respectively. At October 3, 2015,1, 2016, the discounted value of the promissory notesnote was $10.8$8.1 million. Refer to Note 9 - Long Term Debt to the Consolidated Financial Statements for further information on these promissory notes.
We have loan agreements with Banco Ficohsa, a Honduran bank. This credit facility is secured by a first-priority lien on the assets of our Honduran operations and the loans are not guaranteed by our U.S. entities. As of October 3, 2015,1, 2016, we had a total of $11.9$15.5 million outstanding on these loans. For further information regarding our Honduran loans, refer to Note 9 - Long-Term Debt to the Consolidated Financial Statements, which information is incorporated herein by reference.
Our primary cash needs are for working capital and capital expenditures, as well as to fund share repurchases under our Stock Repurchase Program. In addition, in the future we may use cash to pay dividends.
Derivative Instruments
From time to time we may use derivative instruments to manage our exposure to interest rates. These financial instruments are not used for trading or speculation purposes. When we enter into a derivative instrument, we determine whether hedge accounting can be applied. Where hedge accounting can be applied, a hedge relationship is designated as either a fair value hedge or cash flow hedge. The hedge is documented at inception, detailing the particular risk objective and strategy considered for undertaking the hedge. The documentation identifies the specific asset or liability being hedged, the risk being hedged, the type of derivative used and how effectiveness of the hedge will be assessed.
During fiscal years 2016, 2015, 2014, 2013 and the transition period ended September 28, 2013,2014, the interest rate swap agreements had minimal ineffectiveness and were considered highly-effective hedges.
Changes in the derivatives’ fair values are deferred and are recorded as a component of accumulated other comprehensive income (“AOCI”), net of income taxes, until the underlying transaction is recorded. When the hedged item affects income, gains or losses are reclassified from AOCI to the Consolidated Statements of Operations as interest income/expense. Any ineffectiveness in our hedging relationships is recognized immediately in the Consolidated Statement of Operations. The changes in fair value of the interest rate swap agreements resulted in an AOCI gain, net of taxes, of $0.3 million for the year ended October 1, 2016, an AOCI loss, net of taxes, of $0.2 million for the year ended October 3, 2015, an AOCI gain, net of taxes of $0.3 million for the year ended September 27, 2014, an AOCI loss, net of taxes, of $0.5 million for the transition period ended September 28, 2013, and an AOCI gain, net of taxes, of $47 thousand for the year ended June 29, 2013.2014.
Operating Cash Flows
Cash provided by operating activities in fiscal year 20152016 was $22.32.2 million compared to $14.0$22.3 million for fiscal year 2014.2015. The increasedecrease from the prior year is primarily relateddue to increased earningsincreasing our inventory positions in the business. The increased earnings, alongorder to better service our customers with a reductionimmediate shipping in our accounts receivablebasics segment and inventory, was partially offset by increased paymentsweekly replenishments to our suppliers during the year.retailers.
Investing Cash Flows
Cash provided in investing activities in fiscal year 2015 was $7.6 million compared to $8.8 million used in investing activities in fiscal year 2014.2016 was $10.8 million compared to $7.6 million provided by investing activities in fiscal year 2015. Capital expenditures during fiscal year 20152016 were $7.8$12.3 million and included expenditures for the expansion of our textile operations that should decrease reliance on purchased fabric and reduce costs by leveraging internal operations. During fiscal year 2015, investing cash flows also included the $14.9 million in proceeds received from the sale of The Game assets. See Note 3 - Sale of The Game, for further information on this transaction. In fiscal year 2014,2015, we used $8.9$7.8 million in cash primarily related to the expansion of our textile operations, along with investments in our information technology systems.operations.
We expect to spend approximately $10 million in capital expenditures in fiscal year 2016,2017, primarily on manufacturing equipment, along with information technology, and direct-to-consumer investments.
Financing Activities
Cash usedprovided by financing activities was $30.28.7 million in fiscal year 20152016 compared to $5.4$30.2 million used in financing activities in fiscal year 2014.2015. In fiscal year 2015,2016, we utilized the cash was used primarilyproceeds from our credit facility as well as a new $5 million Honduran loan to lower our debt levels and repurchase sharesfund the expansion of our common stock.offshore operations, as well as the repurchase of stock throughout the year.
Future Liquidity and Capital Resources
Based on our current expectations, we believe that our credit facility should be sufficient to satisfy our foreseeable working capital needs, and that the cash flow generated by our operations and funds available under our credit facility should be sufficient to service our debt payment requirements, to satisfy our day-to-day working capital needs and to fund our planned capital expenditures. Any material deterioration in our results of operations, however, may result in our losing the ability to borrow under our revolving credit facility and
to issue letters of credit to suppliers, or may cause the borrowing availability under our 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, 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. Moreover, our credit facility includes a financial covenant that if the availability under our credit facility falls below the amounts specified in our credit agreement, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in our credit agreement) for the preceding 12-month period must not be less than 1.1 to 1.0. Although our availability at October 3, 2105,1, 2016, 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. As of October 3, 2015,1, 2016, our FCCR was above the minimum threshold specified in our credit agreement.
The following table summarizes our contractual cash obligations, as of October 3, 20151, 2016, by future period.
| | | Payments Due by Period (in thousands) | Payments Due by Period (in thousands) |
| Total | | Less than 1 year | | 1 - 3 years | | 3 – 5 years | | After 5 years | Total | | Less than 1 year | | 1 - 3 years | | 3 – 5 years | | After 5 years |
Contractual Obligations: | | | | | | | | | | | | | | | | | | |
Long-term debt (a) | $ | 104,257 |
| | $ | 8,823 |
| | $ | 86,619 |
| | $ | 8,185 |
| | $ | 630 |
| $ | 115,795 |
| | $ | 9,192 |
| | $ | 18,790 |
| | $ | 87,618 |
| | $ | 195 |
|
Operating leases | 20,507 |
| | 7,736 |
| | 8,065 |
| | 4,658 |
| | 48 |
| 39,935 |
| | 7,177 |
| | 12,832 |
| | 9,530 |
| | 10,396 |
|
Capital leases | 628 |
| | 147 |
| | 314 |
| | 167 |
| | — |
| 1,599 |
| | 410 |
| | 886 |
| | 303 |
| | — |
|
Minimum royalty payments | 574 |
| | 522 |
| | 52 |
| | — |
| | — |
| 1,310 |
| | 1,132 |
| | 178 |
| | — |
| | — |
|
Purchase obligations | 62,747 |
| | 62,747 |
| | — |
| | — |
| | — |
| 42,905 |
| | 42,905 |
| | — |
| | — |
| | — |
|
Total (b) | $ | 188,713 |
| | $ | 79,975 |
| | $ | 95,050 |
| | $ | 13,010 |
| | $ | 678 |
| $ | 201,544 |
| | $ | 60,816 |
| | $ | 32,686 |
| | $ | 97,451 |
| | $ | 10,591 |
|
______________________
| |
(a) | We include interest on our fixed rate debt as a component of our future obligations. However, we exclude interest payments on our debt since the majority is under a revolving credit facility andsince the cash outlay for the interest is unknown and cannot be reliably estimated. Interest payments will be determined based upon the daily outstanding balance of the revolving credit facility and the prevailing interest rate during that time. |
| |
(b) | We excluded deferred income tax liabilities of $9.1$10.5 million from the contractual cash obligations table because we believe inclusion would not be meaningful. Refer to Note 910 - Income Taxes to our Consolidated Financial Statements for more information on our deferred income tax liabilities. Deferred income tax liabilities are calculated based on temporary differences between tax bases of assets and liabilities and their respective book bases, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods and therefore would not relate to liquidity needs. As a result, including deferred income tax liabilities as payments due by period in the schedule could be misleading. |
Off-Balance Sheet Arrangements
As of October 3, 20151, 2016, we did not have any off-balance sheet arrangements that were material to our financial condition, results of operations or cash flows as defined by Item 303(a)(4) of Regulation S-K promulgated by the SEC other than the letters of credit, operating leases, and purchase obligations described in the table above. We have entered into derivative interest rate contracts as described and included below in “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of this report.
Dividends and Purchases of our Own Shares
Pursuant to the terms of our credit facility, we are allowed to make cash dividends and stock repurchases if (i) as of the date of the payment or repurchase and after giving effect to the payment or repurchase, we have availability on that date of not less than $18.125 million15% of the lesser of the borrowing base or the commitment, and average availability for the 30-day period immediately preceding that date of not less than $18.125 million;15% of the lesser of the borrowing base or the commitment; and (ii) the aggregate amount of dividends and stock repurchases after May 27, 2011,10, 2016, does not exceed $19$10 million plus 50% of our cumulative net income (as defined in the Amended LoanCredit Agreement) from the first day of the third quarter of fiscal year 20122016 to the date of determination. At October 1, 2016, and October 3, 2015, and September 27, 2014, there was $7.3$10.7 million and $8.2$7.3 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.
Our Board of Directors did not declare, nor were any dividends paid, during fiscal years 20152016 and 2014.2015. Any future cash dividend payments will depend upon our earnings, financial condition, capital requirements, compliance with loan covenants and other relevant factors.
As of October 3, 2015,1, 2016, our Board of Directors had authorized management to use up to $30.0$40.0 million to repurchase stock in open market transactions under our Stock Repurchase Program. On December 8, 2015, our Board of Directors authorized an additional $10.0 million for share repurchases, bringing the aggregate total authorized to $40.0 million. During fiscal years 2016, 2015 and 2014, the transition period ended September 28, 2013, and fiscal year 2013, we purchased 217,568 shares, 140,336 shares, 78,674 shares, 129,348 shares, and 544,576 shares, respectively, of our common stock for a total cost of $2.1 million, $1.2$3.5 million, $2.1 million, and $7.8$1.2 million, respectively. As of October
3, 2015, 1, 2016, we have purchased 2,262,5822,480,150 shares of common stock for an aggregate of $27.4$30.9 million since the inception of the Stock Repurchase Program. All purchases were made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-18. As of October 3, 2015, $2.61, 2016, $9.1 million remained available for future purchases under our Stock Repurchase Program, which does not have an expiration date.
The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of our 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. Our most critical accounting estimates, discussed below, pertain to revenue recognition, accounts receivable and related reserves, inventory and related reserves, the carrying value of goodwill, and the accounting for income taxes.
Note 2 to our Consolidated Financial Statements includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements.
In the normal course of business, we extend credit to our customers based upon defined credit criteria. Accounts receivable, as shown on our Consolidated Balance Sheets, are net of related reserves. We estimate the net collectibility of our accounts receivable and establish an allowance for doubtful accounts based upon this assessment. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, a specific reserve for bad debts is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other customers, reserves are determined through analysis of the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. In addition, reserves are established for other concessions that have been extended to customers, including advertising, markdowns and other accommodations, net of historical recoveries. These reserves are determined based upon historical deduction trends and evaluation of current market conditions. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness or further weakening in economic trends could have a significant impact on the collectibility of receivables and our operating results.
selling, general and administrative expenses, capital expenditures, cash flows and the selection of an appropriate discount rate, all of which are subject to inherent uncertainties and subjectivity. When we perform goodwill impairment testing, our assumptions are based on annual business plans and other forecasted results, which we believe represent those of a market participant. We select a discount rate, which is used to reflect market-based estimates of the risks associated with the projected cash flows, based on the best information available as of the date of the impairment assessment.
We established a valuation allowance related to certain of our state operating loss carryforward amounts in accordance with the provisions of ASC 740. We continually review the adequacy of the valuation allowance and recognize the benefits of deferred tax assets if reassessment indicates that it is more likely than not that the deferred tax assets will be realized based on earnings forecasts in the respective state tax jurisdictions. We had state net operating loss carryforwards (“NOLs”) as of October 3, 2015,1, 2016, of approximately $58.5$48.7 million. We had deferred tax assets of $2.4$1.9 million as of October 3, 2015,1, 2016, related to these state NOLs, with related valuation allowances against them of approximately $0.2$0.1 million. These state net loss carryforwards expire at various intervals from 2019 through 2035.2036.
For information regarding recently issued accounting standards, refer to Note 2(aa) and Note 2(bb)2(ab) to our Consolidated Financial Statements.
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. See Note 2(z) and Note 15(d)16(d) to the Consolidated Financial Statements for more information on our derivatives.
Our Consolidated Financial Statements for each of our fiscal years ended October 1, 2016, October 3, 2015, and September 27, 2014, and June 29, 2013, and the transition period ended September 28, 2013, together with the Reports of Independent Registered Public Accounting Firms thereon, are included in this report commencing on page F-1 and are listed under Part IV, Item 15 in this report.
Not applicable.
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 October 3, 2015,1, 2016, and, based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective at the evaluation date.
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 Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information that 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.
Management of Delta Apparel, Inc. is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The effectiveness of our internal control over financial reporting as of October 3, 2015,1, 2016, has been audited by KPMGErnst & Young, LLP ("EY"), our independent registered public accounting firm, who also audited our Consolidated Financial Statements. KPMG’sEY’s attestation report on our internal controls over financial reporting is included herein.
There was no change in our internal control over financial reporting during the fourth quarter of fiscal year 20152016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 20152016 fiscal year under the headings “Related Party Transactions” and "Corporate Governance".
The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 20152016 fiscal year under the heading “Proposal No. 4: Ratification of Appointment of Independent Registered Public Accounting Firm”.
Reports of Independent Registered Public Accounting Firms.
Notes to Consolidated Financial Statements.
The following consolidated financial statement schedule of Delta Apparel, Inc. and subsidiaries is included in Item 15(c):
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Columns omitted from schedules filed have been omitted because the information is not applicable.